The following discussion and analysis of our financial condition and results of
operations should be read in conjunction with our consolidated financial
statements and the accompanying notes included within this Annual Report on Form
10-K. The following discussion may contain forward-looking statements that
reflect our plans, estimates and beliefs and involve risks, uncertainties and
assumptions. Our actual results could differ materially from those discussed in
these forward-looking statements. Factors that could cause or contribute to
these differences include those discussed in Item 1A. Risk Factors and
"Forward-Looking Statements" included within this Annual Report on Form 10-K.

Overview


We are a global business consisting of multiple wholly owned subsidiaries that
develop, manufacture, market and distribute specialty pharmaceutical products
and therapies. Areas of focus include autoimmune and rare diseases in specialty
areas like neurology, rheumatology, nephrology, pulmonology and ophthalmology;
immunotherapy and neonatal respiratory critical care therapies; analgesics and
gastrointestinal products.
We operate our business in two reportable segments, which are further described
below:
• Specialty Brands includes innovative specialty pharmaceutical brands; and


• Specialty Generics includes niche specialty generic drugs and API(s).




During fiscal 2019, we experienced a change in our reportable segments, which
primarily served to move the results related to Amitiza to the Specialty Brands
segment from the Specialty Generics segment. All prior period segment
information has been recast to reflect the realignment of our reportable
segments on a comparable basis.
For further information on our business and products, refer to Item 1. Business
included within this Annual Report on Form 10-K.

Significant Events
Opioid-Related Matters
As a result of the greater awareness of the public health issue of opioid abuse,
there has been increased scrutiny of, and investigation into, the commercial
practices of opioid manufacturers by state and federal agencies. We, along with
other opioid manufacturers, have been the subject of federal and state
government investigations and enforcement actions, focused on the misuse and
abuse of opioid medications in the U.S. Similar investigations may be initiated
in the future. During fiscal 2019 and 2018, we incurred $56.2 million and $38.8
million in opioid defense costs, respectively, which are included in SG&A.
On September 30, 2019, we announced that Mallinckrodt plc, along with its wholly
owned subsidiaries Mallinckrodt LLC and SpecGx LLC, executed a definitive
settlement agreement and release with Cuyahoga and Summit Counties in Ohio in
connection with the MDL Track 1 Cases. The settlement fully resolved the Track 1
Cases against all named Mallinckrodt entities that were scheduled to go to trial
in October 2019 in the MDL. The Track 1 Cases asserted various claims related to
the opioid business operated by SpecGx LLC. Under the agreement, we paid $24.0
million in cash in October 2019. In addition, we will provide $6.0 million in
generic products, including addiction treatment products, and will also provide
a $0.5 million payment in two years in recognition of the counties' time and
expenses. Further, in the event of a comprehensive resolution of
government-related opioid claims, we have agreed that the two plaintiff counties
will receive the value they would have received under such a resolution, less
the payments described above. All named Mallinckrodt entities were dismissed
with prejudice from the lawsuit. The value of the settlement should not be
extrapolated to any other opioid-related cases or claims.
Litigation Settlement
On February 25, 2020, we, the Specialty Generics Subsidiaries and certain other
affiliates announced an agreement in principle on the terms of a global
settlement that would resolve all opioid-related claims against us, the
Specialty Generics Subsidiaries and our other subsidiaries. The Litigation
Settlement has been reached with a court-appointed plaintiffs' executive
committee representing the interests of thousands of plaintiffs in the MDL and
is supported by a broad-based group of 47 state and U.S. Territory Attorneys
General (the "Plaintiffs"). The Litigation Settlement contemplates the filing of
voluntary petitions under Chapter 11 by the Specialty Generics Subsidiaries and
the establishment of the Opioid Claimant Trust. Under the terms of the proposed
settlement, which would become effective upon the Specialty Generics
Subsidiaries' emergence from a contemplated Chapter 11 process, subject to court
approval and other conditions, we would (1) make cash payments of $1,600.0
million in structured payments over eight years, beginning upon the Specialty
Generics Subsidiaries' emergence from the completed Chapter 11 case, the
substantial majority of which is expected to be contributed to the Opioid
Claimant Trust and (2) issue warrants with an

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eight year term to the Opioid Claimant Trust exercisable at a strike price of
$3.15 per share to purchase our ordinary shares that would represent
approximately 19.99% of our fully diluted outstanding shares, including after
giving effect to the exercise of the warrants (the "Settlement Warrants"). As a
result of the Litigation Settlement, we recorded a charge of $1,643.4 million
attributed to the anticipated structured cash payments and the Settlement
Warrants to be issued upon effectiveness of the settlement.
The court-supervised process is also expected to provide a fair, orderly,
efficient and legally binding mechanism to resolve all opioid-related claims
against the Company, Specialty Generics, and all of our other subsidiaries and
related entities. Mallinckrodt plc and our Specialty Brands-related subsidiaries
would not be part of the Chapter 11 filing. It is expected that Mallinckrodt plc
would receive the benefit of a "channeling injunction" that would provide for
the release of all opioid-related claims that have been or could have been
asserted against Mallinckrodt plc or our subsidiaries related to Specialty
Generics' manufacture and sale of opioids prior to the time the Specialty
Generics Chapter 11 plan becomes effective. All of our subsidiaries, including
Specialty Generics, are operating as normal and are expected to continue
operating normally throughout the court-supervised process contemplated for
Specialty Generics. We currently expect that the Specialty Generics Subsidiaries
would continue to be an indirect, wholly owned subsidiary of Mallinckrodt plc
during and following emergence from the contemplated court-supervised process.
Further discussion of this Litigation Settlement is included in Note 24 of the
Notes to Consolidated Financial Statements included within Item 8. Financial
Statements and Supplementary Data of this Annual Report on Form 10-K.

Separation


In fiscal 2016, the Board of Directors began to explore a range of strategic
alternatives for our Specialty Generics business. Consistent with that strategy,
on December 6, 2018, we announced our plans to spin off to our shareholders a
new independent public company that would hold the Specialty Generics business.
On August 6, 2019, based on market conditions and developments, including
increasing uncertainties created by the opioid litigation, we announced the
suspension of our previously announced plans to spin off the Specialty Generics
business. Our long-standing goal remains to be an innovation-driven
biopharmaceutical company focused on improving outcomes for underserved patients
with severe and critical conditions. We hope that the Litigation Settlement will
help resolve opioid uncertainties and we will continue to evaluate strategic
options for the Specialty Generics business upon emergence from the contemplated
Chapter 11 process.
During fiscal 2019 and 2018, we incurred $63.9 million and $6.0 million in
separation costs, respectively. These costs, which are included in SG&A
expenses, primarily relate to professional fees, incremental costs incurred to
build out the corporate infrastructure of the previously planned Specialty
Generics business, costs incurred as we work to resolve opioid uncertainties, as
well as rebranding initiatives associated with the Specialty Brands ongoing
transformation.

Silence Therapeutics
In July 2019, we entered into a license and collaboration agreement with Silence
Therapeutics plc ("Silence") that will allow the companies to develop and
commercialize ribonucleic acid interference ("RNAi") drug targets designed to
inhibit the complement cascade, a group of proteins that are involved in the
immune system and that play a role in the development of inflammation. These
proteins are known to contribute to the pathogenesis of many diseases, including
autoimmune disease.
During fiscal 2019, we paid $20.0 million upfront, which was recorded within R&D
expense, and gained an exclusive worldwide license to Silence's C3 complement
asset, SLN500, with options to license up to two additional complement-targeted
assets in Silence's preclinical complement-directed RNAi development program.
The agreement also includes additional payments to Silence of up to $10.0
million in research milestones for SLN500, in addition to funding for Phase 1
clinical development including good manufacturing practices. Silence will be
responsible for preclinical activities, and for executing the development
program of SLN500 until the end of Phase 1, after which we will assume clinical
development and responsibility for global commercialization. If approved,
Silence could receive up to $563.0 million in commercial milestone payments and
tiered low double-digit to high-teen royalties on net sales for SLN500.
In addition to the aforementioned agreement, in July 2019 we acquired an equity
investment of $5.0 million in Silence, which was valued at $26.2 million and
included within other assets in the consolidated balance sheet as of December
27, 2019. The unrealized gain on this investment of $20.2 million was recognized
in the fiscal 2019 consolidated statement of operations. Further information
regarding this investment is included in Note 20 of the Notes to Consolidated
Financial Statements included within Item 8. Financial Statements and
Supplementary Data of this Annual Report on Form 10-K.

BioVectra


In November 2019, we completed the sale of BioVectra Inc. ("BioVectra") to an
affiliate of H.I.G. Capital with total consideration of up to $250.0 million
including an upfront payment of $135.0 million and contingent consideration of
$115.0

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million based on the long-term performance of the business. During fiscal 2019,
the Company recorded a loss on the sale of $33.5 million, which excluded any
potential proceeds from future milestones, in the event they are achieved. The
financial results of BioVectra's operations are presented within continuing
operations as this divestiture did not meet the criteria for discontinued
operations classification.

Medicaid Lawsuit
In May 2019, we filed a lawsuit in federal district court against the HHS and
CMS (together with the HHS, the "Agency"). This lawsuit is in response to a
decision by CMS to require that we revert to the original base date AMP used to
calculate Medicaid drug rebates for Acthar Gel, which has the practical effect
of imposing a prospective reduction in Acthar Gel net sales of $90.0 million to
$100.0 million, which corresponds with the approximate amount of annualized
Medicaid net sales for Acthar Gel. While we believe that our lawsuit has strong
factual and legal bases, as of December 27, 2019, the potential for retroactive
non-recurring charges could range from zero to approximately $630.0 million.
Further discussion of this matter is included in Note 19 to the Noted to
Consolidated Financial Statements included within Item 8. Financial Statements
and Supplementary Data of this Annual report on Form 10-K.

Tax Matters
On August 5, 2019, the IRS proposed an adjustment to the taxable income of
Mallinckrodt Hospital Products Inc. ("MHP") as a result of its findings in the
audit of MHP's tax year ended September 26, 2014. MHP, formerly known as Cadence
Pharmaceuticals, Inc. ("Cadence"), was acquired as a U.S. subsidiary on March
19, 2014. Following the acquisition of Cadence, we transferred certain rights
and risks in Ofirmev® intellectual property ("Transferred IP") to one of our
wholly owned non-U.S. subsidiaries. The transfer occurred at a price ("Transfer
Price") determined in conjunction with our external advisors, in accordance with
applicable Treasury Regulations and with reference to the $1,329.0 million
taxable consideration we paid to the shareholders of Cadence. The IRS asserts
the value of the Transferred IP exceeds the value of the acquired Cadence shares
and, further, partially disallows our control premium subtraction. The proposed
adjustment to taxable income of $871.0 million, excluding potential associated
interest and penalties, is proposed as a multi-year adjustment and may result in
a non-cash reduction of our U.S. Federal net operating loss carryforward of
$782.0 million. We strongly disagree with the proposed increase to the Transfer
Price and intend to contest it through all available administrative and judicial
remedies, which may take a number of years to conclude. The final outcome cannot
be reasonably quantified at this time, however, the proposed adjustment may be
material. We believe our reserve for income tax contingencies is adequate.
Reorganization of Intercompany Financing and Legal Entity Ownership
During fiscal 2019, we completed a reorganization of our intercompany financing
and associated legal entity ownership in response to the changing global tax
environment. As a result, during fiscal 2019, we recognized current income tax
expense of $26.2 million and a deferred income tax benefit of $239.0 million
with a corresponding reduction to net deferred tax liabilities. The reduction in
net deferred tax liabilities was comprised of a decrease in interest-bearing
deferred tax obligations, which resulted in the elimination of the December 28,
2018 balance of $227.5 million, a $29.7 million increase in various other net
deferred tax liabilities, a $28.7 million increase to a deferred tax asset
related to excess interest carryforwards and a $12.5 million increase to a
deferred tax asset related to tax loss and credit carryforwards net of valuation
allowances. The elimination of the interest-bearing deferred tax obligation also
eliminated the annual Internal Revenue Code section 453A interest expense. The
reorganization involved the interpretation of multi-jurisdictional tax laws and
regulations, supported by third party opinions. Interpretation of tax laws can
be inherently uncertain and can be subject to potential challenges by the
relevant tax authorities, both of which were considered in assessing our
reserves for uncertain tax positions.

Business Factors Influencing the Results of Operations



Specialty Brands
Net sales of Acthar Gel for fiscal 2019 decreased $157.4 million, or 14.2%, to
$952.7 million driven primarily by continued reimbursement challenges impacting
new and returning patients and continued payer scrutiny on overall specialty
pharmaceutical spending. This was partially offset by continued strength in
Ofirmev, INOmax and Therakos and an increase in net sales related to Amitiza,
which was acquired in the first quarter of 2018.


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Research and Development
We devote significant resources to R&D of products and proprietary drug
technologies. During fiscal 2019, we incurred R&D expenses of $349.4 million. We
expect to continue to pursue targeted investments in R&D activities, both for
existing products and the development of new portfolio assets. We intend to
focus our R&D investments in the specialty pharmaceuticals areas, specifically
investments to support our Specialty Brands portfolio, where we believe there is
the greatest opportunity for growth and profitability.
We have completed the Phase 3 clinical studies for two of our development
programs, terlipressin for the treatment of HRS type 1 and StrataGraft for the
treatment of deep partial thickness burns, both of which had positive top line
results. We expect to submit to the FDA the NDA filing for terlipressin and the
BLA filing for StrataGraft in the first half of 2020. Upon approval we would be
responsible for a one-time milestone payment related to terlipressin of $12.5
million. As part of the contingent consideration included in our acquisition of
StrataGraft, we are responsible for a $20.0 million payment upon submission and
another $20.0 million upon approval.

Non-restructuring Impairment Charges
During the three months ended June 28, 2019, we recognized a full impairment on
our in-process research and development ("IPR&D") asset related to stannsoporfin
of $113.5 million as we are no longer pursuing this development product.
During the three months ended December 27, 2019, we recognized a full impairment
on our IPR&D asset related to VTS-270 of $274.5 million, primarily driven by
continued regulatory challenges. The Company will continue to engage with the
FDA and assess future opportunities for the development program.

Specialty Generics
After experiencing contraction over the last several years, the Specialty
Generics business returned to growth in fiscal 2019, as compared to 2018,
primarily driven by share recapture in specialty generic products, partially
offset by opioid market contraction. Net sales from the Specialty Generics
segment were $738.7 million for fiscal 2019 compared to $718.9 million for
fiscal 2018.

Results of Operations
Fiscal Year Ended December 27, 2019 Compared with Fiscal Year Ended December 28,
2018
Net Sales
Net sales by geographic area are as follows (dollars in millions):
                                     Fiscal Year
                                                          Percentage
                                  2019         2018         Change
U.S.                           $ 2,765.6    $ 2,834.5       (2.4 )%
Europe, Middle East and Africa     281.8        256.8        9.7
Other                              115.1        124.3       (7.4 )
Net sales                      $ 3,162.5    $ 3,215.6       (1.7 )



Net sales in fiscal 2019 decreased $53.1 million, or 1.7%, to $3,162.5 million,
compared with $3,215.6 million in fiscal 2018. This decrease was driven by our
Specialty Brands segment primarily due to Acthar Gel, as the brand continues to
face reimbursement challenges impacting new and returning patients while
navigating continued payer scrutiny on overall specialty pharmaceutical
spending. In addition, we experienced lower net sales in Other branded products
primarily due to the sale of Recothrom during the first quarter of 2018, as well
as a decrease in net sales from BioVectra largely driven by the sale of this
business in November 2019. These decreases were partially offset by continued
strength in Ofirmev, INOmax and Therakos and the increase in net sales related
to Amitiza, which was acquired in the first quarter of 2018. In addition, we
continue to experience increased net sales in the Specialty Generics segment due
to share recapture in specialty generic products, partially offset by opioid
market contraction. For further information on changes in our net sales, refer
to "Business Segment Results" within this Item 7. Management's Discussion and
Analysis of Financial Condition and Results of Operations.
Operating Loss
Gross profit. Gross profit for fiscal 2019 decreased $49.8 million, or 3.4%, to
$1,421.4 million, compared with $1,471.2 million in fiscal 2018, due in part to
the $53.1 million decrease in net sales, as discussed above. Gross profit margin
was 44.9% for

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fiscal 2019, compared with 45.8% in fiscal 2018. The decrease in gross profit
and gross profit margin was primarily attributable to a change in product mix
driven by the decrease in Acthar Gel net sales and an additional $107.3 million
of amortization for the Ofirmev intangible asset resulting from a change in
amortization method on day 1 of fiscal 2019, as discussed further in Note 13 of
the Notes to the Consolidated Financial Statements included within Item 8.
Financial Statements and Supplementary Data of this Annual Report on Form 10-K.
The additional amortization was partially offset by a decrease in the
amortization of the inventory fair value adjustment related to Amitiza, which
was fully amortized during the first quarter of 2019.
Selling, general and administrative expenses. SG&A expenses for fiscal 2019 were
$831.0 million, compared with $834.1 million for fiscal 2018, a decrease of $3.1
million, or 0.4%. This decrease is attributable to cost benefits gained from
restructuring actions, including lower employee compensation costs and a $60.2
million decrease in the fair value of our contingent consideration liabilities
in fiscal 2019, compared to a $50.2 million decrease in fiscal 2018. These
decreases were partially offset by a $57.9 million increase in separation costs,
an increase in legal expense, primarily related to opioid defense costs, and an
increase in legal settlements driven by the $28.2 million charge associated with
the settlement of the MDL Track 1 Cases during fiscal 2019. As a percentage of
our net sales, SG&A expenses were 26.3% and 25.9% in fiscal 2019 and 2018,
respectively.
Research and development expenses. R&D expenses decreased $11.7 million, or
3.2%, to $349.4 million in fiscal 2019, compared with $361.1 million in fiscal
2018. This decrease was driven by the completion of certain development
programs, partially offset by the $20.0 million upfront payment made to Silence
during fiscal 2019. The Company continues to focus current R&D activities on
performing clinical studies and publishing clinical and non-clinical experiences
and evidence that support health economic activities and patient outcomes. As a
percentage of our net sales, R&D expenses were 11.0% and 11.2% in fiscal 2019
and 2018, respectively.
Restructuring and related charges, net. During fiscal 2019, we recognized a net
benefit of $1.7 million of restructuring and related charges, net. During fiscal
2019, we finalized the settlement of the contract termination costs related to
the production of Raplixa resulting in a $14.1 million reversal of the
associated restructuring reserve that was previously established in fiscal 2018.
This was partially offset by restructuring charges related to employee severance
and benefits. During fiscal 2018, we recorded $108.2 million of restructuring
and related charges, net, of which $5.2 million related to accelerated
depreciation and was included in cost of sales. The remaining $103.0 million
primarily related to the estimated contract termination costs related to the
production of Raplixa, exiting certain facilities and employee severance and
benefits.
Non-restructuring impairment charges. Non-restructuring impairment charges were
$388.0 million for fiscal 2019 resulting from the $274.5 million full impairment
related to our VTS-270 intangible asset and the $113.5 million full impairment
related to our stannsoporfin intangible asset, both as previously discussed.
Non-restructuring impairment charges were $3,893.1 million for fiscal 2018
primarily related to the $3,672.8 million full goodwill impairment and the
$218.3 million full impairment related to our MNK-1411 intangible asset.
Losses on divestiture. During fiscal 2019, we completed the sale of BioVectra
for a loss of $33.5 million. During fiscal 2018, we sold a portion of our
Hemostasis business, inclusive of our PreveLeak and Recothrom products. As a
result of this sale, we recorded a loss of $0.8 million.
Opioid-related litigation settlement charge. During fiscal 2019, we recorded a
charge of $1,643.4 million attributed to the anticipated structured cash
payments and the Settlement Warrants to be issued upon effectiveness of the
settlement. For further information, refer to Note 24 of the Notes to the
Consolidated Financial Statements included within Item 8. Financial Statements
and Supplementary Data of this Annual Report on Form 10-K.
Non-Operating Items
Interest expense and interest income. During fiscal 2019 and fiscal 2018, net
interest expense was $299.5 million and $362.0 million, respectively. This $62.5
million decrease was attributable to a lower average outstanding debt balance
during fiscal 2019 that yielded a decrease in interest expense of $26.6 million,
a $23.7 million decrease in interest accrued on deferred tax liabilities
associated with our previously outstanding installment notes and the recognition
of an $8.6 million benefit to interest expense during fiscal 2019 due to a lapse
of certain statute of limitations. For further information, refer to Note 19 of
the Notes to the Consolidated Financial Statements included within Item 8.
Financial Statements and Supplementary Data of this Annual Report on Form 10-K.
Additionally, non-cash interest expense decreased by $2.4 million over the
comparable period. Interest income increased to $9.5 million during fiscal 2019,
compared to $8.2 million during fiscal 2018, primarily related to interest on
preferred equity certificates received as contingent consideration associated
with the sale of the Nuclear Imaging business.
Gains on debt extinguishment, net. During fiscal 2019 and 2018, we recorded
gains on debt extinguishment, net, of $466.6 million and $8.5 million,
respectively. During fiscal 2019 we completed a private exchange of our senior
unsecured notes resulting in a gain of $377.4 million, net of the write-off of
associated deferred financing fees of $4.9 million. For further information,
refer to Note 14 of the Notes to the Consolidated Financial Statements included
within Item 8. Financial Statements and Supplementary Data of this Annual Report
on Form 10-K. Fiscal 2019 also included a gain of $98.6 million on debt
repurchases that aggregated to a total principal amount of $492.1 million,
partially offset by the write-off of associated deferred financing fees of $9.4
million.

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Fiscal 2018 included a gain of $12.7 million on debt repurchases that aggregated
to a total principal amount of $81.8 million, partially offset by the write-off
of associated deferred financing fees of $4.2 million.
Other income, net. During fiscal 2019 and 2018, we recorded other income, net,
of $63.6 million and $22.4 million, respectively. This was primarily driven by a
$23.5 million increase in royalty income related to our license agreement with
Advanced Accelerator Applications ("AAA") for net sales of their Lutathera
product. In addition, we recorded an unrealized gain on investment of $20.2
million related to our equity investment in Silence. The remaining amounts in
both fiscal years represented non-service pension expense and other items,
including gains and losses on intercompany financing, foreign currency
transactions and related hedging instruments.
Benefit from income taxes. During fiscal 2019, we recognized an income tax
benefit of $584.3 million on a loss from continuing operations before income
taxes of $1,591.5 million. The fiscal 2019 income tax benefit was comprised of
$21.8 million of current tax expense and $606.1 million of deferred tax benefit,
which was predominantly related to previously acquired intangibles, the
opioid-related litigation settlement charge, the generation of tax loss and
credit carryforwards net of valuation allowances, the non-restructuring
impairment charge, as well as the reorganization of our intercompany financing
and associated legal entity ownership, which eliminated the interest-bearing
deferred tax obligation. During fiscal 2018, we recognized an income tax benefit
of $430.1 million on a loss from continuing operations before income taxes of
$4,052.0 million. The fiscal 2018 income tax benefit was comprised of $112.8
million of current tax expense and $542.9 million of deferred tax benefit, which
was predominantly related to the reorganization of our intercompany financing
and associated legal entity ownership and generation of net operating losses.
Our effective tax rate was 36.7% and 10.6% for fiscal 2019 and 2018,
respectively. Our effective tax rate for fiscal 2019 was most significantly
impacted by the recognition of $212.8 million tax benefit associated with the
reorganization of our intercompany financing and associated legal entity
ownership. Further impacts include receiving $211.9 million of tax benefit
associated with the $1,643.4 million opioid-related litigation settlement
charge, $71.9 million of tax benefit associated with the $386.3 million of
restructuring costs and non-restructuring impairment charges, $18.7 million of
tax benefit associated with accrued income tax liabilities and uncertain tax
positions, $13.5 million of tax benefit primarily associated with U.S. tax
credits, $11.4 million of tax benefit associated with separation costs of $63.9
million, $10.2 million of tax expense associated with a gain on debt
extinguishment of $466.6 million, $8.0 million of tax benefit associated with a
legal settlement charge of $28.2 million, $7.6 million of tax expense associated
with $60.2 million of income from the decrease in the fair value of contingent
consideration liabilities and zero tax impact associated with a $33.5 million
loss associated with the sale of BioVectra. Any remaining impacts were related
to the impact of recent acquisitions. Our effective tax rate for fiscal 2018 was
most significantly impacted by the recognition of $256.0 million tax benefit
associated with the reorganization of our intercompany financing and associated
legal entity ownership; partially offset by a decrease to tax benefit of $73.2
million associated with accrued income tax liabilities and uncertain tax
positions. Further impacts include receiving $60.9 million of tax benefit
associated with the $4,001.3 million of restructuring costs and
non-restructuring impairment charges, $25.9 million of tax benefit primarily
associated with U.S. tax credits, $2.7 million of tax benefit associated with a
$0.8 million loss associated with the sale of our PreveLeak and Recothrom
assets, and $2.2 million of tax expense associated with $50.2 million of income
from the decrease in the fair value of contingent consideration liabilities. Any
remaining impacts were related to the impact of recent acquisitions and the
reduction in the U.S. federal corporate statutory rate from U.S. Tax Reform.
Income from discontinued operations, net of income taxes. We recorded income of
$10.7 million and $14.9 million on discontinued operations, net of income taxes,
during fiscal 2019 and 2018, respectively. During fiscal 2019 and 2018, the
income from discontinued operations included $9.0 million and $13.6 million of
income, net of tax, respectively, from the receipt of contingent consideration
related to the sale of the Nuclear Imaging business. The remaining amounts in
both periods represented various post-sale adjustments associated with our
previous divestitures.

Fiscal Year Ended December 28, 2018 Compared with Fiscal Year Ended December 29,
2017
Net Sales
Net sales by geographic area are as follows (dollars in millions):
                                     Fiscal Year
                                                          Percentage
                                  2018         2017         Change
U.S.                           $ 2,834.5    $ 2,899.0       (2.2 )%
Europe, Middle East and Africa     256.8        242.3        6.0
Other                              124.3         80.3       54.8
Net sales                      $ 3,215.6    $ 3,221.6       (0.2 )



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Net sales in fiscal 2018 decreased $6.0 million, or 0.2%, to $3,215.6 million,
compared with $3,221.6 million in fiscal 2017. This decrease was driven by our
Specialty Brands segment primarily due to Acthar Gel as the brand continued to
face reimbursement challenges impacting new and returning patients while
navigating growing payer scrutiny on overall specialty pharmaceutical spending.
In addition, we experienced lower net sales in Other branded products primarily
due to the sale of Recothrom during the first quarter of 2018. These decreases
were partially offset by the strength in Ofirmev, INOmax and Therakos and the
acquisition of the Amitiza product in the first quarter of 2018. The Specialty
Generics segment experienced increased competition and customer consolidation,
which resulted in downward pricing pressure. For further information on changes
in our net sales, refer to "Business Segment Results" within this Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations.
Operating (Loss) Income
Gross profit. Gross profit for fiscal 2018 decreased $186.3 million, or 11.2%,
to $1,471.2 million, compared with $1,657.5 million in fiscal 2017. Gross profit
margin was 45.8% for fiscal 2018, compared with 51.4% in fiscal 2017. The
decrease in gross profit and gross profit margin was primarily attributable to
the amortization of the Amitiza intangible asset and expense recognition of the
inventory fair value adjustment associated with the product.
Selling, general and administrative expenses. SG&A expenses for fiscal 2018 were
$834.1 million, compared with $849.7 million for fiscal 2017, a decrease of
$15.6 million, or 1.8%. Fiscal 2018 included a $49.9 million decrease in fair
value of the contingent consideration liabilities related to stannsoporfin and
MNK-1411 and cost benefits gained from restructuring actions, including lower
employee compensation costs. These decreases were partially offset by increased
legal fees and provisions for settlement agreements. As a percentage of our net
sales, SG&A expenses were 25.9% and 26.4% of net sales for fiscal 2018 and 2017,
respectively.
Research and development expenses. R&D expenses increased $84.2 million, or
30.4%, to $361.1 million in fiscal 2018, compared with $276.9 million in fiscal
2017. The increase was attributable to higher spend in the Specialty Brands
segment, where our pipeline products are concentrated. This increase was
partially offset by lower spend in the Specialty Generics segment. R&D
activities focused on performing clinical studies and publishing clinical and
non-clinical experiences and evidence to support health economic and patient
outcomes. As a percentage of our net sales, R&D expenses were 11.2% and 8.6% in
fiscal 2018 and 2017, respectively.
Restructuring and related charges, net. During fiscal 2018, we recorded $108.2
million of restructuring and related charges, net, of which $5.2 million related
to accelerated depreciation and was included in cost of sales and SG&A. The
remaining $103.0 million was primarily attributable to the estimated contract
termination costs related to the production of Raplixa, exiting certain
facilities and employee severance and benefits. During fiscal 2017, we recorded
$36.4 million of restructuring and related charges, net, of which $5.2 million
related to accelerated depreciation and was included in cost of sales. The
remaining $31.2 million primarily related to exiting certain facilities and
employee severance and benefits.
Non-restructuring impairment charges. Non-restructuring impairment charges were
$3,893.1 million for fiscal 2018 primarily related to the $3,672.8 million full
goodwill impairment and the $218.3 million full impairment related to our
MNK-1411 intangible asset, both as previously discussed. Non-restructuring
impairment charges were $63.7 million for fiscal 2017 related to the Raplixa
intangible asset.
Losses (gains) on divestiture. During fiscal 2018, we sold a portion of our
Hemostasis business, inclusive of our PreveLeak and Recothrom products. As a
result of this sale, we recorded a loss of $0.8 million. In fiscal 2017, we
recorded a $56.6 million gain associated with the sale of our Intrathecal
Therapy business.
Non-Operating Items
Interest expense and interest income. During fiscal 2018 and fiscal 2017, net
interest expense was $362.0 million and $364.5 million, respectively. This
decrease was primarily driven by a $3.6 million increase in interest income
related to higher interest earned on our money market funds. This increase was
partially offset by the $1.1 million increase in interest expense which included
an increase of $48.1 million due to our higher average outstanding debt balance
in fiscal 2018 following the close of the Sucampo Pharmaceuticals Inc.
("Sucampo") acquisition compared to fiscal 2017, partially offset by a $45.6
million decrease in interest accrued on deferred tax liabilities associated with
outstanding installment notes primarily due to the reorganization of our legal
entity ownership and the Tax Cut and Jobs Act of 2017 ("TCJA") that reduced the
interest-bearing U.S. deferred tax liabilities balance during late fiscal 2017.
Gains on debt extinguishment, net. During fiscal 2018 we recorded an $8.5
million gain consisting of a $12.7 million gain on debt repurchases that
aggregated to a total principal amount of $81.8 million, partially offset by a
$4.2 million write-off of associated deferred financing fees. During fiscal 2017
we recorded a gain of $8.3 million consisting of a $9.4 million gain on debt

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repurchases that aggregated to a total principal amount of $66.9 million,
partially offset by a $1.1 million write-off of associated deferred financing
fees.
Other income (expense), net. During fiscal 2018 and 2017, we recorded other
income, net, of $22.4 million and other expense, net, of $75.1 million,
respectively. Fiscal 2018 included royalty income of $15.5 million and fiscal
2017 included a $70.5 million charge from recognition of previously deferred
losses on the settlement of obligations associated with the termination of six
defined benefit pension plans and a $10.0 million charge associated with the
refinancing of our term loan. The remaining amounts in both fiscal years
represented non-service pension expense and other items, including gains and
losses on intercompany financing, foreign currency transactions and related
hedging instruments.
Benefit from income taxes. In fiscal 2018, we recognized an income tax benefit
of $430.1 million on a loss from continuing operations before income taxes of
$4,052.0 million. The fiscal 2018 income tax benefit was comprised of $112.8
million of current tax expense and $542.9 million of deferred tax benefit which
was predominantly related to the reorganization of our intercompany financing
and associated legal entity ownership and generation of net operating losses. In
fiscal 2017, income tax benefit was $1,709.6 million on income from continuing
operations before income taxes of $61.6 million. The fiscal 2017 income tax
benefit was comprised of $38.1 million of current tax expense and $1,747.7
million of deferred tax benefit which was predominantly related to the
reorganization of our legal entity ownership, TCJA and acquired intangibles.
Our effective tax rate was 10.6% and negative 2,775.3% for fiscal 2018 and 2017,
respectively. Our effective tax rate for fiscal 2018 was most significantly
impacted by the recognition of $256.0 million tax benefit associated with the
reorganization of our intercompany financing and associated legal entity
ownership; partially offset by a decrease to tax benefit of $73.2 million
associated with accrued income tax liabilities and uncertain tax positions.
Further impacts include receiving $60.9 million of tax benefit associated with
the $4,001.3 million of restructuring costs and non-restructuring impairment
charges, $25.9 million of tax benefit primarily associated with U.S. tax
credits, $2.7 million of tax benefit associated with a $0.8 million loss
associated with the sale of our PreveLeak and Recothrom assets, and $2.2 million
of tax expense associated with $50.2 million of income from the decrease in the
fair value of contingent consideration liabilities. Any remaining impacts were
related to the impact of recent acquisitions and the reduction in the U.S.
federal corporate statutory rate from U.S. Tax Reform. Our effective tax rate
for fiscal 2017 was most significantly impacted by the recognition of $1,054.8
million tax benefit associated with the reorganization of our legal entity
ownership and $456.9 million of tax benefit associated with the TCJA. Further
impacts included receiving $5.5 million of tax benefit associated with $100.1
million of restructuring costs and non-restructuring impairment charges, $0.7
million of tax expense associated with $41.4 million of income from the decrease
in the fair value of contingent consideration liabilities, $28.3 million of tax
benefit associated with $70.5 million from the termination and settlement of our
funded U.S. pension plans, $38.9 million of tax expense associated with a $56.6
million gain associated with the sale of our Intrathecal Therapy business and
$13.8 million of tax benefit primarily associated with U.S. tax credits.
Income from discontinued operations, net of income taxes. We recorded income of
$14.9 million and $363.2 million on discontinued operations, net of income
taxes, during fiscal 2018 and 2017, respectively. During fiscal 2018, the income
from discontinued operations included $13.6 million of income, net of tax, from
the receipt of contingent consideration related to the sale of the Nuclear
Imaging business. During fiscal 2017, the income from discontinued operations
included a $361.7 million gain on divestiture and $4.1 million of income from
operating results, both net of tax, associated with the Nuclear Imaging
business. The remaining amounts in both periods represented various post-sale
adjustments associated with our previous divestitures.

Business Segment Results
Management measures and evaluates our operating segments based on segment net
sales and operating income. Management excludes corporate expenses from segment
operating income. In addition, certain amounts that management considers to be
non-recurring or non-operational are excluded from segment operating income
because management evaluates the operating results of the segments excluding
such items. These items include, but are not limited to, intangible asset
amortization, net restructuring and related charges, non-restructuring
impairments and separation costs. Although these amounts are excluded from
segment operating income, as applicable, they are included in reported
consolidated operating (loss) income and in the reconciliations presented below.
Selected information by business segment is as follows:


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Fiscal Year Ended December 27, 2019 Compared with Fiscal Year Ended December 28, 2018

Net Sales
Net sales by segment are shown in the following table (dollars in millions):
                         Fiscal Year
                                              Percentage
                      2019         2018         Change
Specialty Brands   $ 2,423.8    $ 2,496.7       (2.9 )%
Specialty Generics     738.7        718.9        2.8
Net sales          $ 3,162.5    $ 3,215.6       (1.7 )


Specialty Brands. Net sales for fiscal 2019 decreased $72.9 million, or 2.9%, to
$2,423.8 million, compared with $2,496.7 million for fiscal 2018. This decrease
was primarily driven by a $157.4 million, or 14.2%, decrease in Acthar Gel net
sales driven primarily by continued reimbursement challenges impacting new and
returning patients and continued payer scrutiny on overall specialty
pharmaceutical spending, a $13.7 million, or 40.4%, decrease in Other product
sales primarily attributable to the sale of Recothrom during the first quarter
of 2018 and a $13.0 million or 24.5% decrease in net sales related to BioVectra,
which was sold in November 2019. These decreases were partially offset by
continued strength in Ofirmev, INOmax, and Therakos, as well as an increase in
net sales related to Amitiza, which was acquired in the first quarter of 2018.
Net sales for Specialty Brands by geography are as follows (dollars in
millions):
                                     Fiscal Year
                                                          Percentage
                                  2019         2018         Change
U.S.                           $ 2,164.3    $ 2,246.7       (3.7 )%

Europe, Middle East and Africa 161.4 144.2 11.9 Other

                               98.1        105.8       (7.3 )
Net sales                      $ 2,423.8    $ 2,496.7       (2.9 )


Net sales for Specialty Brands by key products are as follows (dollars in
millions):
                       Fiscal Year
                    2019         2018       Percentage Change
Acthar Gel       $   952.7    $ 1,110.1            (14.2 )%
INOmax               571.4        542.7              5.3
Ofirmev              384.0        341.9             12.3
Therakos             246.9        231.2              6.8
Amitiza              208.5        183.8             13.4
BioVectra             40.1         53.1            (24.5 )
Other                 20.2         33.9            (40.4 )
Specialty Brands $ 2,423.8    $ 2,496.7             (2.9 )


Specialty Generics. Net sales for fiscal 2019 increased $19.8 million, or 2.8%,
to $738.7 million, compared to $718.9 million for fiscal 2018. The increase in
net sales was driven by increased net sales of $10.4 million or 15.8% and $8.8
million or 13.3% for hydrocodone-related products and oxycodone-related
products, respectively, along with an increase of $8.7 million or 2.5% related
to net sales of other controlled substances. These increases were partially
offset by decreased net sales of $5.3 million or 10.5% related to other product
net sales primarily due to decreases from our supply agreement with the acquirer
of our contrast media and delivery systems ("CMDS") business.

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Net sales for Specialty Generics by geography are as follows (dollars in
millions):
                                   Fiscal Year
                                                      Percentage
                                 2019       2018        Change
U.S.                           $ 601.3    $ 587.8        2.3  %

Europe, Middle East and Africa 120.4 112.6 6.9 Other

                             17.0       18.5       (8.1 )
Net sales                      $ 738.7    $ 718.9        2.8


Net sales for Specialty Generics by key products are as follows (dollars in millions):


                                                            Fiscal Year
                                                        2019          2018  

Percentage Change Hydrocodone (API) and hydrocodone-containing tablets $ 76.3 $ 65.9

              15.8  %
Oxycodone (API) and oxycodone-containing tablets          74.9          66.1              13.3
Acetaminophen (API)                                      189.9         192.7              (1.5 )
Other controlled substances                              352.5         343.8               2.5
Other                                                     45.1          50.4             (10.5 )
Specialty Generics                                   $   738.7     $   718.9               2.8



Operating (Loss) Income
Operating income by segment and as a percentage of segment net sales for fiscal
2019 and 2018 is shown in the following table (dollars in millions):
                                                               Fiscal Year
                                                       2019                  2018
Specialty Brands (1)                            $  1,174.5   48.5 %   $  1,093.1   43.8 %
Specialty Generics                                   108.1   14.6           89.3   12.4
Segment operating income                           1,282.6   40.6        1,182.4   36.8
Unallocated amounts:
Corporate and allocated expenses                    (137.8 )              (155.8 )
Intangible asset amortization                       (853.4 )              (740.2 )
Restructuring and related charges, net (2)             1.7                (108.2 )
Non-restructuring impairment charges                (388.0 )            (3,893.1 )
Separation costs                                     (63.9 )                (6.0 )
R&D upfront payment (3)                              (20.0 )                   -
Opioid-related litigation settlement charge (4)   (1,643.4 )                   -
Total operating loss                            $ (1,822.2 )          $ (3,720.9 )


(1)       Includes $10.0 million and $118.8 million of inventory fair-value step
          up expense, primarily related to Amitiza during fiscal 2019 and 2018,
          respectively.

(2) Includes restructuring-related accelerated depreciation.

(3) Represents R&D expense incurred related to an upfront payment made to

Silence in connection with the license and collaboration agreement


          entered into in July 2019.


(4)       For further information, refer to Note 24 of the Notes to the

Consolidated Financial Statements included within Item 8. Financial

Statements and Supplementary Data of this Annual Report on Form 10-K.




Specialty Brands. Operating income for fiscal 2019 increased $81.4 million to
$1,174.5 million, compared with $1,093.1 million for fiscal 2018. Operating
margin increased to 48.5% for fiscal 2019, compared with 43.8% for fiscal 2018.
The increase in operating income and margin includes a $39.4 million increase in
gross profit primarily driven by an additional $110.8 million of expense
recorded during fiscal 2018 related to the inventory fair value adjustment for
Amitiza, which was fully amortized in the first quarter of 2019. The increase in
operating income and margin was also attributable to a $19.4 million decrease in
R&D spending and a $23.3 million decrease in SG&A expenses compared to fiscal
2018, primarily due to cost benefits gained from restructuring actions,
including lower employee compensation costs. These changes were partially offset
by changes in product mix, primarily driven by the decrease in Acthar Gel net
sales.

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Specialty Generics. Operating income for fiscal 2019 increased $18.8 million to
$108.1 million, compared with $89.3 million for fiscal 2018. Operating margin
increased to 14.6% for fiscal 2019, compared with 12.4% for fiscal 2018. The
increase in operating income and margin was impacted by a $21.2 million increase
in gross profit primarily due to product mix as well as a $13.2 million decrease
in R&D spending, partially offset by a $15.6 million increase in SG&A primarily
due to higher legal expense related to opioid litigation defense costs and
increased consulting and professional fees.
Corporate and allocated expenses. Corporate and allocated expenses were $137.8
million and $155.8 million for fiscal 2019 and 2018, respectively. Fiscal 2019
included a $33.5 million loss on the divestiture of BioVectra and a $28.2
million charge associated with the settlement of the MDL Track 1 Cases,
partially offset by a $60.2 million decrease in the fair value of our contingent
consideration liabilities. Fiscal 2018 included a $50.2 million decrease in the
fair value of our contingent consideration liabilities, as well as an $11.8
million reduction in the accrual associated with our Lower Passaic River, New
Jersey environmental remediation liability. The remaining decrease was primarily
driven by cost benefits gained from restructuring actions, including lower
employee compensation costs, partially offset by increased professional fees.

Fiscal Year Ended December 28, 2018 Compared with Fiscal Year Ended December 29,
2017
Net Sales
Net sales by segment are shown in the following table (dollars in millions):
                         Fiscal Year
                                             Percentage
                      2018         2017        Change
Specialty Brands   $ 2,496.7    $ 2,352.0         6.2  %
Specialty Generics     718.9        869.6       (17.3 )
Net sales          $ 3,215.6    $ 3,221.6        (0.2 )


Specialty Brands. Net sales for fiscal 2018 increased $144.7 million, or 6.2%,
to $2,496.7 million, compared with $2,352.0 million for fiscal 2017. This
increase was primarily driven by net sales of $183.8 million from Amitiza
acquired in the first quarter of fiscal 2018 coupled with increases of $39.4
million, or 13.0%, $37.5 million, or 7.4%, and $16.3 million, or 7.6%, in net
sales of Ofirmev, INOmax and Therakos, respectively, driven by increased demand
during the year. These increases were partially offset by a decrease in Acthar
Gel net sales of $85.0 million, or 7.1%, driven by the residual impact of
previously reported patient withdrawal issues from fiscal 2017 while navigating
growing payer scrutiny on overall specialty pharmaceutical spending and a
decrease of $45.7 million, or 57.4%, in sales of Other products. The decrease in
Other product sales was primarily attributable to a $42.9 million decrease in
net sales related to the sale of Recothrom during the first quarter of 2018 and
a $7.8 million decrease in net sales related to the sale of the Intrathecal
Therapy business during the first quarter of 2017.
Net sales for Specialty Brands by geography are as follows (dollars in
millions):
                                     Fiscal Year
                                                         Percentage
                                  2018         2017        Change
U.S.                           $ 2,246.7    $ 2,216.9         1.3 %
Europe, Middle East and Africa     144.2         73.0        97.5
Other                              105.8         62.1        70.4
Net sales                      $ 2,496.7    $ 2,352.0         6.2



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Net sales for Specialty Brands by key products are as follows (dollars in
millions):
                       Fiscal Year
                    2018         2017       Percentage Change
Acthar Gel       $ 1,110.1    $ 1,195.1             (7.1 )%
INOmax               542.7        505.2              7.4
Ofirmev              341.9        302.5             13.0
Therakos             231.2        214.9              7.6
Amitiza              183.8            -                -
BioVectra             53.1         54.7             (2.9 )
Other                 33.9         79.6            (57.4 )
Specialty Brands $ 2,496.7    $ 2,352.0              6.2


Specialty Generics. Net sales for fiscal 2018 decreased $150.7 million, or
17.3%, to $718.9 million, compared with $869.6 million for fiscal 2017. The
decrease in net sales was driven by decreases of $21.9 million, or 24.9%, and
$19.4 million, or 22.7%, in net sales of oxycodone-related products and
hydrocodone-related products, respectively. These decreases were due to
increased competition and customer consolidation, which resulted in downward
pricing pressure. Other controlled substances products also decreased by $68.2
million, or 16.6%, primarily attributable to a $31.2 million decrease in
Methylphenidate ER due to the FDA's 2014 reclassification of these products to
therapeutically inequivalent status. Other products also decreased $48.4
million, or 49.0%, primarily due to a $33.8 million decrease from our supply
agreement with the acquirer of our CMDS business. These decreases were partially
offset by an increase of $7.2 million in net sales of acetaminophen products
compared to fiscal 2017.
Net sales for Specialty Generics by geography are as follows (dollars in
millions):
                                   Fiscal Year
                                                     Percentage
                                 2018       2017       Change
U.S.                           $ 587.8    $ 682.1       (13.8 )%

Europe, Middle East and Africa 112.6 169.3 (33.5 ) Other

                             18.5       18.2         1.6
Net sales                      $ 718.9    $ 869.6       (17.3 )


Net sales for Specialty Generics by key products are as follows (dollars in millions):


                                                            Fiscal Year
                                                        2018          2017  

Percentage Change Hydrocodone (API) and hydrocodone-containing tablets $ 65.9 $ 85.3

             (22.7 )%
Oxycodone (API) and oxycodone-containing tablets          66.1          88.0             (24.9 )
Acetaminophen (API)                                      192.7         185.5               3.9
Other controlled substances                              343.8         412.0             (16.6 )
Other                                                     50.4          98.8             (49.0 )
Specialty Generics                                   $   718.9     $   869.6             (17.3 )



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Operating (Loss) Income
Operating income by segment and as a percentage of segment net sales for fiscal
2018 and 2017 is shown in the following table (dollars in millions):
                                                         Fiscal Year
                                                  2018                  2017
Specialty Brands (1)                       $  1,093.1   43.8 %   $ 1,146.3   48.7 %
Specialty Generics                               89.3   12.4         266.4   30.6
Segment operating income                      1,182.4   36.8       1,412.7   43.9
Unallocated amounts:
Corporate and allocated expenses               (155.8 )             (125.2 )
Intangible asset amortization                  (740.2 )             (694.5 )
Restructuring and related charges, net (2)     (108.2 )              (36.4 )
Non-restructuring impairment charges         (3,893.1 )              (63.7 )
Separation costs                                 (6.0 )                  -
Total operating (loss) income              $ (3,720.9 )          $   492.9


(1)       Includes $118.8 million of inventory fair-value step up expense,
          primarily related to Amitiza during fiscal 2018.


(2) Includes restructuring-related accelerated depreciation.





Specialty Brands. Operating income for fiscal 2018 decreased $53.2 million to
$1,093.1 million, compared with $1,146.3 million for fiscal 2017. Operating
margin decreased to 43.8% for fiscal 2018, compared with 48.7% for fiscal 2017.
The decrease in operating income was impacted by an increase of $95.7 million in
R&D expenses related to the increased investment in our pipeline products. This
was partially offset by a decrease of $42.8 million in SG&A expenses as compared
to fiscal 2017, primarily due to cost benefits gained from restructuring
actions, including lower employee compensation costs and stock compensation
expense, lower legal and advertising and promotion fees and various minor
increases and decreases.
Specialty Generics. Operating income for fiscal 2018 decreased $177.1 million to
$89.3 million, compared with $266.4 million for fiscal 2017. Operating margin
decreased to 12.4% for fiscal 2018, compared with 30.6% for fiscal 2017. The
decrease in operating income was impacted by a $134.4 million decrease in gross
profit, primarily due to the previously discussed decrease in net sales of
oxycodone-related products, hydrocodone-related products and other controlled
substances due to channel consolidation and increased pricing pressure. The
decrease in operating income was also impacted by a $51.4 million increase in
SG&A expenses, primarily due to higher legal expense related to opioid
litigation defense costs and higher professional fees, partially offset by lower
employee compensation costs and stock compensation expense.
Corporate and allocated expenses. Corporate and allocated expenses were $155.8
million and $125.2 million for fiscal 2018 and 2017, respectively. Fiscal 2018
included $19.7 million of provisions for legal matters, offset by a $50.2
million decrease in the fair value of our contingent consideration liabilities.
Fiscal 2017 included a $56.6 million gain associated with the sale of our
Intrathecal Therapy business and $54.6 million of income resulting from the
decrease in fair value of the contingent liability related to Raplixa. The
remaining $50.4 million decrease was primarily attributable to cost benefits
gained from restructuring actions, including lower employee compensation costs,
lower professional fees and various minor increases and decreases.

Liquidity and Capital Resources
Significant factors driving our liquidity position include cash flows generated
from operating activities, financing transactions, capital expenditures, cash
paid in connection with acquisitions and licensing agreements and cash received
as a result of our divestitures. We have historically generated and expect to
continue to generate positive cash flows from operations.
Our ability to fund our capital needs is impacted by our ongoing ability to
generate cash from operations and access to capital markets. We believe that our
future cash from operations and access to capital markets will provide adequate
resources to fund our working capital needs, capital expenditures and strategic
investments for the foreseeable future.
As previously discussed, on February 25, 2020, we announced the Litigation
Settlement. If the Litigation Settlement is not fully implemented or
consummated, we or our subsidiaries may become subject to some or all of the
liabilities that would have otherwise been settled, which could have a material
and adverse effect on our business, financial condition, results of operations
and cash flows. Further information on these risks are described in Part I, Item
1A. "Risk Factors".

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Furthermore, from time to time, we may seek to enter into certain transactions
to extend the maturities of our outstanding indebtedness. For example, on
February 25, 2020, we announced certain financing activities that are aimed at
addressing our near-term debt maturities, as discussed further in "Debt and
Capitalization" within this Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations.
In fiscal 2020, we intend to fund capital expenditures with cash generated from
operations. At December 27, 2019, we had capital expenditure commitments of $1.0
million.
A summary of our cash flows from operating, investing and financing activities
is provided in the following table (dollars in millions):
                                                                    Fiscal 

Year


                                                          2019         2018 

2017


Net cash provided by (used in):
Operating activities                                   $  742.9     $   665.5     $  727.3
Investing activities                                       (8.3 )      (480.3 )      318.4
Financing activities                                     (280.1 )    (1,095.0 )     (130.2 )
Effect of currency exchange rate changes on cash            0.6          (1.8 )        2.5
Net increase (decrease) in cash, cash equivalents and
restricted cash                                        $  455.1     $  (911.6 )   $  918.0



Operating Activities
Net cash provided by operating activities of $742.9 million for fiscal 2019
included a loss from continuing operations, as adjusted for non-cash items
including a $466.6 million gain on debt extinguishment, net and a $388.0 million
adjustment for non-cash impairment charges, both as previously discussed. The
loss from continuing operations adjusted for non-cash items was offset by a
$1,451.6 million inflow from net changes in working capital, primarily driven by
the portion of the opioid-related litigation settlement liability related to the
structured cash payments of $1,600.0 million with the remaining $43.4 million
related to the Settlement Warrants reflected as a non-cash item. This was
partially offset by a $161.5 million net outflow from other assets and
liabilities primarily driven by cash outflows related to separation costs, one
time legal settlement payments of $24.0 million and $15.4 million related to the
settlement of the MDL Track 1 Cases and the Questcor Pharmaceuticals, Inc.
("Questcor") DOJ settlement, respectively, a $26.5 million decrease in accrued
restructuring charges, a $16.3 million decrease in payroll related accruals and
decreases in other accrual balances attributable to cost benefits gained from
restructuring actions.
Net cash provided by operating activities of $665.5 million for fiscal 2018 was
primarily attributable to income from continuing operations, as adjusted for
non-cash items including a $3,893.1 million adjustment for non-cash impairment
charges, as previously discussed, and a $46.4 million inflow from net investment
in working capital. The working capital inflow was primarily attributable to a
$99.0 million cash inflow from net tax related balances, a $63.1 million
decrease in inventory balances, a $24.6 million increase in accounts payable,
net, and a $5.5 million net inflow related to other assets and liabilities,
offset by a $145.8 million increase in accounts receivable, net.
Net cash provided by operating activities of $727.3 million for fiscal 2017 was
primarily attributable to income from continuing operations, as adjusted for
non-cash items including an outflow of $1,744.1 million of deferred income taxes
related to the reduction in our deferred tax liabilities primarily as a result
of the reorganization of our legal entity ownership and the TCJA. The income
from continuing operations, as adjusted for non-cash items, was offset by a
$188.8 million outflow from net investment in working capital. The working
capital outflow included cash payments of $102.0 million for the settlement with
the FTC and the settling states, $35.0 million for settlement of the DEA
investigation, a $62.3 million contribution to terminated pension plans that
were settled during the period, a $34.2 million outflow from net tax related
balances, a $25.8 million decrease in accounts payable, net, and a $70.5 million
net inflow related to other assets and liabilities.

Investing Activities
Net cash used in investing activities of $8.3 million for fiscal 2019 was
primarily attributable to capital expenditures of $133.0 million, partially
offset by $95.1 million in proceeds received related to the sale of BioVectra,
net of cash, as well as proceeds from other long-term asset disposals.
Net cash used in investing activities of $480.3 million for fiscal 2018 was
primarily attributable to cash outflows related to the Sucampo acquisition of
$698.0 million and capital expenditures of $127.0 million, partially offset by
the $159.0 million of proceeds received, net of transaction costs, from the
divestiture of a portion of the Hemostasis business, inclusive of the PreveLeak
and Recothrom products; proceeds received of $154.0 million related to the note
receivable from the purchaser of the Intrathecal Therapy business that was sold
during fiscal 2017; and a $25.5 million cash inflow related to the sale of our
investment in Mesoblast Limited ("Mesoblast") during fiscal 2018.

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Net cash provided by investing activities of $318.4 for fiscal 2017 included
$576.9 million of proceeds received from the divestiture of the Nuclear Imaging
and Intrathecal Therapy businesses during fiscal 2017, partially offset by
capital expenditures of $186.1 million; payments, net of cash acquired, of $36.8
million and $39.5 million related to the acquisitions of InfaCare and Ocera,
respectively; and $21.5 million related to the investment in Mesoblast that was
made in fiscal 2017.
Under our term loan credit agreement, the proceeds from the sale of assets and
businesses must be either reinvested into capital expenditures or business
development activities within one year of the respective transaction or we are
required to make repayments on our term loan.

Financing Activities
Net cash used in financing activities was $280.1 million for fiscal 2019,
compared with $1,095.0 million for fiscal 2018. The $814.9 million decrease was
primarily attributable to a $748.5 million decrease in debt repayments and a
$54.9 million decrease in shares repurchased. The significant components of our
current year debt repayments included aggregate debt repayments of $286.4
million on our variable-rate term loans, open market debt repurchases that
aggregated to a total principal amount of $492.1 million and a repayment of
$250.0 million on the receivable securitization program. These repayments were
partially offset by a net draw of $680.0 million on our revolving credit
facility.
Net cash used in financing activities was $1,095.0 million for fiscal 2018,
compared with $130.2 million for fiscal 2017. The $964.8 million increase in
cash outflows was attributable to a $776.4 million increase in debt repayments
and $774.7 million less cash provided by issuance of external debt, offset by a
$594.2 million decrease in shares repurchased. The significant components of our
current year debt repayments included $680.0 million related to our revolving
credit facility, a $225.0 million repayment of the variable-rate term loan
maturing in 2024, repayment of $366.0 million of assumed debt from the Sucampo
acquisition, a $300.0 million repayment of fully matured unsecured fixed rate
notes and open market debt repurchases that aggregated to a total principal
amount of $81.8 million.

Inflation


Inflationary pressures have had an adverse effect on us through higher raw
material and fuel costs. We have entered into commodity swap contracts in the
past to mitigate the impact of rising prices and may do so in the future. If
these contracts are not effective or we are not able to achieve price increases
on our products, we may continue to be impacted by these increased costs.

Concentration of Credit and Other Risks
Financial instruments that potentially subject us to concentrations of credit
risk primarily consist of accounts receivable. We generally do not require
collateral from customers. A portion of our accounts receivable outside the U.S.
includes sales to government-owned or supported healthcare systems in several
countries, which are subject to payment delays. Payment is dependent upon the
financial stability and creditworthiness of those countries' national economies.

Debt and Capitalization
In November 2015, our Board of Directors authorized us to reduce our outstanding
debt at our discretion. As market conditions warrant, we may from time to time
repurchase debt securities issued by us, in the open market, in privately
negotiated transactions, by tender offer or otherwise. Such repurchases, if any,
will depend on prevailing market conditions, our liquidity requirements and
other factors. The amounts involved may be material. During fiscal 2019, we
repurchased debt that aggregated to a principal amount of $492.1 million.
As of December 27, 2019, total debt principal was $5,422.8 million compared with
$6,156.7 million as of December 28, 2018, with total debt reduction of $733.9
million during fiscal 2019. Total debt principal at December 27, 2019 is
comprised of the following:
                              December 27, 2019
Variable-rate instruments:
Term loan due September 2024 $           1,520.8
Term loan due February 2025                403.6
Revolving credit facility                  900.0
Fixed-rate instruments                   2,598.4
Debt principal               $           5,422.8



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The variable-rate term loan interest rates are based on LIBOR, subject to a
minimum LIBOR level of 0.75% with interest payments generally expected to be
payable every 90 days, and requires quarterly principal payments equal to 0.25%
of the original principal amount. As of December 27, 2019, our fixed-rate
instruments had a weighted-average interest rate of 6.0% and pay interest at
various dates throughout the fiscal year. As of December 27, 2019, we were fully
drawn on our $900.0 million revolving credit facility.
In December 2019, upon the terms and conditions set forth in a confidential
offering memorandum dated November 5, 2019, Mallinckrodt International Finance
S.A. and Mallinckrodt CB LLC (the "Issuers") completed private offers to
exchange (the "2019 Exchange Offers") (i) $83.2 million 2020 Notes issued by the
Issuers for $70.2 million of new 10.00% Second Lien Senior Secured Notes due
April 2025 to be issued by the Issuers (the "2025 Notes") and (ii) $52.9 million
of the 5.75% senior unsecured notes due August 2022 (the "2022 Notes"), $216.4
million of the 4.75% senior unsecured notes due April 2023, $144.7 million of
the 5.625% senior unsecured notes due October 2023 (the "October 2023 Notes")
and $208.9 million of the 2025 Notes issued by the Issuers (collectively, and
together with the 2020 Notes, the "Existing Notes") for $252.7 million of 2025
Notes. The 2019 Exchange Offers were accounted for as a debt extinguishment,
which resulted in the extinguishment of $383.2 million of principal of Existing
Notes and the transfer of $322.9 million of Existing Notes to the 2025 Notes.
The exchanges also resulted in the capitalization of $10.1 million of deferred
financing fees related to the 2025 Notes. In conjunction with the exchanges, we
recorded a gain on debt extinguishment of $377.4 million primarily associated
with retiring a portion of our Existing Notes at less than face value, net of
the write-off of associated deferred financing fees of $4.9 million.
As of December 27, 2019, $634.5 million of our total debt is classified as
current as these payments are due within the next fiscal year, including $614.8
million of the 2020 Notes. On February 25, 2020, we announced certain financing
activities that are aimed at addressing our near term-debt maturities. We and
the Issuers have entered into a support agreement with certain of our existing
term lenders, as well as certain of our existing noteholders, as new lenders,
relating to an amendment to our existing credit agreement on terms consistent
with an agreed term sheet (the "Amendment"), which, if effected on the terms
contemplated by the term sheet, will (i) provide for a commitment to provide a
new $800.0 million term loan with a four-year term and (ii) implement certain
other amendments on the terms described in the term sheet. The proceeds of the
new term loan will be used to fund the redemption or repayment of all of our
outstanding 2020 Notes, and additionally to partially repay loans and terminate
corresponding commitments under the revolving credit facility in respect of
revolving lenders who agree to extend their loans and commitments to March 2024.
The amendments to the existing credit agreement would provide for, among other
things, certain changes to the covenants, including the financial covenant, a
rate increase of 100 basis points for existing term loans, and an increase in
amortization on the existing term loans. Conditions to the effectiveness of the
Amendment, include, among other things, (i) the consent by certain thresholds of
the existing term lenders and revolving lenders (which condition has not yet
been satisfied as of this date) and (ii) the commencement of an exchange offer
with respect to our 2022 Notes pursuant to the Exchange Agreement (as described
below). However, we cannot guarantee that we will satisfy the conditions, and in
such event, we could experience heightened risks related to short-term liquidity
constraints, which could adversely affect our ability to fulfill our other
financial obligations and jeopardize the consummation of the Litigation
Settlement.
We and the Issuers entered into a support and exchange agreement with Aurelius
Capital Master, Ltd., Franklin Advisers, Inc. and Capital Research and
Management Company (the "Exchange Agreement") pursuant to which, among other
things, the Issuers agreed to use commercially reasonable efforts to commence,
by no later than March 20, 2020, a private offer to exchange any and all of the
2022 Notes held by such noteholders for an equal principal amount of new second
lien secured notes (such new notes, the "Exchange Offer Notes" and, such private
offer to exchange, the "2022 Exchange Offer") at a rate of $1,000 of Exchange
Offer Notes for every $1,000 of 2022 Notes exchanged, subject to the terms and
conditions set forth in the Exchange Agreement. Pursuant to the Exchange
Agreement, the Issuers also agreed to use commercially reasonable efforts to
commence, by no later than March 20, 2020, a solicitation of consents from
holders of the 2022 Notes to certain amendments to eliminate or waive
substantially all of the restrictive covenants contained in the 2022 Notes and
the applicable indenture, and eliminate certain events of default, modify
covenants regarding mergers and the transfer of assets, and modify and eliminate
certain other provisions, including covenants regarding future guarantors and
certain provisions relating to defeasance (such solicitation of consents, the
"2022 Consent Solicitation"). The closing of the 2022 Exchange Offer will be
conditioned on, among other things, the absence of events materially and
adversely affecting the ability to implement the Litigation Settlement, and the
funding of the new term loans and the effectiveness of the Amendment. The
noteholders have agreed to tender in the 2022 Exchange Offer all of their 2022
Notes, deliver their consents in the 2022 Consent Solicitation and, if the
aggregate principal amount of Exchange Offer Notes issued pursuant to the 2022
Exchange Offer is less than approximately $610.3 million (the "Exchange Cap"),
exchange the outstanding October 2023 Notes held by the noteholders party to the
Exchange Agreement for an amount of Exchange Offer Notes equal to the excess, if
any, by which the Exchange Cap exceeds the aggregate principal amount of
Exchange Offer Notes to be issued pursuant to the 2022 Exchange Offer, at a rate
of $900 of Exchange Offer Notes for every $1,000 of October 2023 Notes exchanged
by each noteholder. The noteholders collectively hold approximately $271.0
million aggregate principal amount of the 2022 Notes and approximately $255.0
million aggregate principal amount of the October 2023 Notes. Additionally,
pursuant to the Exchange Agreement, the noteholders have consented, in their
capacity as holders of the 2020 Notes, to the adoption of an amendment to the
2020 Notes and the indenture governing the 2020 Notes to provide for the
reduction of the optional redemption notice period from 30 days to three
business days. The 2022 Exchange Offer will be subject to

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the satisfaction or waiver of certain conditions, and the failure to consummate
the 2022 Exchange Offer could adversely affect the implementation and
consummation of the Litigation Settlement.
The risks associated with the failure to consummate the Litigation Settlement
are further described in the risk factor "The Litigation Settlement is subject
to certain contingencies and may not go into effect in its current form or at
all, as a result of which our business prospects may be adversely impacted." in
Part I, Item 1A. "Risk Factors."
As of December 27, 2019, we were, and expect to remain, in compliance with the
provisions and covenants associated with our debt agreements.
For additional information regarding our debt agreements, refer to Note 14 of
the Notes to Consolidated Financial Statements included within Item 8. Financial
Statements and Supplementary Data of this Annual Report on Form 10-K.

Capitalization


Shareholders' equity was $1,940.7 million at December 27, 2019 compared with
$2,887.3 million at December 28, 2018. The decrease in shareholders' equity is
primarily attributed to the fiscal 2019 net loss.
From time to time, the Company's Board of Directors have authorized share
repurchase programs. We did not make any share repurchases during fiscal 2019,
compared to $55.2 million in fiscal 2018, due to our shift to debt reduction as
one of our primary focuses of our capital allocation strategy for fiscal 2019.
For further information, refer to Note 16 of the Notes to the Consolidated
Financial Statements included within Item 8. Financial Statements and
Supplementary Data of this Annual Report on Form 10-K.

Dividends


We currently do not anticipate paying any cash dividends for the foreseeable
future, as we intend to retain earnings to finance acquisitions, R&D and the
operation and expansion of our business, while executing disciplined capital
allocation. The recommendation, declaration and payment of dividends in the
future by us will be subject to the sole discretion of our Board of Directors
and will depend upon many factors, including our financial condition, earnings,
capital requirements of our operating subsidiaries, covenants associated with
certain of our debt obligations, legal requirements, regulatory constraints and
other factors deemed relevant by our Board of Directors. Moreover, if we
determine to pay dividends in the future, there can be no assurance that we will
continue to pay such dividends.

Commitments and Contingencies
Contractual Obligations
The following table summarizes our contractual obligations as of December 27,
2019 (dollars in millions):
                                                             Payments Due By Period
                                                Less than 1                                         More than 5
                                    Total          year          1 - 3 years       3 - 5 years         years
Long-term debt obligations       $ 5,422.8     $     634.5     $     1,560.1     $     2,135.0     $   1,093.2
Interest on long-term debt
obligations (1)                    1,083.2           268.5             483.7             301.6            29.4
Operating lease obligations (2)      104.2            23.5              31.6              21.0            28.1
Purchase obligations (3)              73.4            63.4               3.4               3.3             3.3
Total contractual obligations    $ 6,683.6     $     989.9     $     2,078.8     $     2,460.9     $   1,154.0


(1)       Interest on long-term debt obligations are projected for future periods
          using interest rates in effect as of December 27, 2019. Certain of
          these projected interest payments may differ in the future based on
          changes in market interest rates.

(2) Refer to Note 12 of the Notes to Consolidated Financial Statements


          included within Item 8. Financial Statements and Supplementary Data of
          this Annual Report on Form 10-K for further information.

(3) Purchase obligations consist of commitments for purchases of goods and

services made in the normal course of business to meet operational and

capital requirements.




The preceding table does not include other liabilities of $2,219.1 million,
primarily consisting of the opioid-related litigation settlement liability of
$1,643.4 million and obligations under our pension and postretirement benefit
plans, unrecognized tax benefits for uncertain tax positions and related accrued
interest and penalties, contingent consideration liabilities, environmental
liabilities and asset retirement obligations, because the timing of their future
cash outflow is uncertain. The most significant of these liabilities, other than
the opioid-related settlement liability discussed in Note 24 of the Notes to the
Consolidated Financial Statements included within Item 8. Financial Statements
and Supplementary Data of this Annual Report on Form 10-K, are discussed below.
As part of our acquisitions, we are subject to contractual arrangements to pay
contingent consideration to former owners of these businesses. The payment of
obligations under these arrangements are uncertain, and even if payments are
expected to be made the

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timing of these payments may be uncertain as well. As of December 27, 2019, we
have accrued $69.3 million for these potential payments, of which $11.5 million
is considered to be long-term. For further information on our contingent
consideration arrangements, refer to Note 20 of the Notes to Consolidated
Financial Statements included within Item 8. Financial Statements and
Supplementary Data of this Annual Report on Form 10-K.
As part of our divestitures and licensing agreements, we have the potential to
earn in excess of $250.0 million in milestone payments in the future. During
fiscal 2019, we received royalty income of $39.0 million and preferred equity
certificates of $9.0 million. During fiscal 2018, we received royalty income of
$15.5 million, milestone payments of $6.0 million and preferred equity
certificates of $9.0 million. For further information, refer to Notes 5 and 6 of
the Notes to Consolidated Financial Statements included within Item 8. Financial
Statements and Supplementary Data of this Annual Report on Form 10-K.
We are obligated to pay royalties under certain agreements with third parties.
During fiscal 2019, 2018 and 2017, we made payments under these arrangements of
$95.7 million, $106.4 million and $86.0 million, respectively. The timing and
amounts to be paid in future periods are uncertain as they are dependent upon
net sales generated in future periods.
Non-current income taxes payable, primarily related to unrecognized tax
benefits, is included within other income tax liabilities on the consolidated
balance sheet and, as of December 27, 2019, was $227.1 million. Payment of these
liabilities is uncertain and, even if payments are determined to be necessary,
they are subject to the timing of rulings by the Internal Revenue Service
related to tax positions we take. For further information on income tax related
matters, refer to Note 8 of the Notes to Consolidated Financial Statements
included within Item 8. Financial Statements and Supplementary Data of this
Annual Report on Form 10-K.
As of December 27, 2019, we had net unfunded pension and postretirement benefit
obligations of $27.0 million and $40.5 million, respectively. The timing and
amounts of long-term funding requirements for pension and postretirement
obligations are uncertain. We do not anticipate making material involuntary
contributions in fiscal 2020, but may elect to make voluntary contributions to
our defined pension plans or our postretirement benefit plans during fiscal
2020. We settled all outstanding obligations associated with our six U.S.
qualified pension plans during fiscal 2017 and made contributions of $62.3
million associated with the unfunded portion of these obligations.
We are involved in various stages of investigation and cleanup related to
environmental remediation matters at a number of sites. The ultimate cost of
cleanup and timing of future cash outlays is difficult to predict given
uncertainties regarding the extent of the required cleanup, the interpretation
of applicable laws and regulations and alternative cleanup methods. As of
December 27, 2019, we believe that it is probable that we will incur
investigation and remediation costs of approximately $61.9 million, of which
$1.9 million is included in accrued and other current liabilities on our
consolidated balance sheet at December 27, 2019. Note 19 of the Notes to
Consolidated Financial Statements included within Item 8. Financial Statements
and Supplementary Data of this Annual Report on Form 10-K provides additional
information regarding environmental matters.

Legal Proceedings
We are subject to various legal proceedings and claims, including present and
former operations, including those described in Part I, Item 3. Legal
Proceedings and in Note 19 of the Notes to Consolidated Financial Statements
included within Item 8. Financial Statements and Supplementary Data of this
Annual Report on Form 10-K, which are incorporated by reference into this Part
II, Item 7. We believe these legal proceedings and claims likely will be
resolved over an extended period of time. Although it is not feasible to predict
the outcome of these matters, we believe, unless otherwise indicated, given the
information currently available, that their ultimate resolution should not have
a material adverse effect on our business, financial condition, results of
operations and cash flows.

Guarantees


In disposing of assets or businesses, we have historically provided
representations, warranties and indemnities to cover various risks and
liabilities, including unknown damage to the assets, environmental risks
involved in the sale of real estate, liability to investigate and remediate
environmental contamination at waste disposal sites and manufacturing
facilities, and unidentified tax liabilities related to periods prior to
disposition. We assess the probability of potential liabilities related to such
representations, warranties and indemnities and adjust potential liabilities as
a result of changes in facts and circumstances. We believe, given the
information currently available, that our ultimate resolution will not have a
material adverse effect on our financial condition, results of operations and
cash flows. These representations, warranties and indemnities are discussed in
Note 18 of the Notes to Consolidated Financial Statements included within Item
8. Financial Statements and Supplementary Data of this Annual Report on Form
10-K.

Off-Balance Sheet Arrangements
As of December 27, 2019, we had various other letters of credit and guarantee
and surety bonds totaling $35.2 million and restricted cash of $12.8 million
held in segregated accounts primarily to collateralize surety bonds for the
Company's environmental liabilities.

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Critical Accounting Policies and Estimates
The consolidated financial statements have been prepared in U.S. dollars and in
accordance with GAAP. The preparation of the consolidated financial statements
in conformity with GAAP requires management to make estimates and assumptions
that affect the reported amount of assets and liabilities, disclosure of
contingent assets and liabilities and the reported amounts of revenues and
expenses. The following accounting policies are based on, among other things,
judgments and assumptions made by management that include inherent risks and
uncertainties. Management's estimates are based on the relevant information
available at the end of each period.

Revenue Recognition
Product Sales Revenue
We sell products through independent channels, including direct to retail
pharmacies, end user customers and through distributors who resell our products
to retail pharmacies, institutions and end user customers, while certain
products are sold and distributed directly to hospitals. We also enter into
arrangements with indirect customers, such as health care providers and payers,
wholesalers, government agencies, institutions, managed care organizations and
GPOs to establish contract pricing for certain products that provides for
government-mandated and/or privately-negotiated rebates, sale incentives,
chargebacks, distribution service agreement fees, fees for services and
administration fees and discounts with respect to the purchase of our products.
Reserve for Variable Considerations
Product sales are recorded at the net sales price (transaction price), which
includes estimates of variable consideration for which reserves are established.
These reserves result from estimated chargebacks, rebates, product returns and
other sales deductions that are offered within contracts between us and our
customers, health care providers and payers relating to the sale of our
products. These reserves are based on the amounts earned or to be claimed on the
related sales and are classified as reductions of accounts receivable (if the
amount is payable to the customer) or a current liability (if the amount is
payable to a party other than a customer). Where appropriate, these estimates
take into consideration a range of possible outcomes that are
probability-weighted for relevant factors such as our historical experience,
estimated future trends, estimated customer inventory levels, current contracted
sales terms with customers, level of utilization of our products and other
competitive factors. Overall, these reserves reflect our best estimate of the
amount of consideration to which we are entitled based on the terms of the
contract. The amount of variable consideration that is included in the
transaction price may be constrained (reduced), and is included in the net sales
price only to the extent that it is probable that a significant reversal in the
amount of the cumulative revenue recognized will not occur in a future period.
We adjust reserves for chargebacks, rebates, product returns and other sales
deductions to reflect differences between estimated and actual experience. Such
adjustments impact the amount of net sales recognized in the period of
adjustment.
The following table reflects activity in our sales reserve accounts (dollars in
millions):
                                             Rebates and                               Other Sales
                                             Chargebacks        Product Returns        Deductions           Total
Balance as of December 30, 2016           $       349.1        $         31.4       $       10.8        $     391.3
Provisions                                      1,897.2                  38.7               72.6            2,008.5
Payments or credits                            (1,918.9 )               (35.6 )            (68.7 )         (2,023.2 )
Balance as of December 29, 2017                   327.4                  34.5               14.7              376.6
Provisions                                      2,281.3                  39.3               66.9            2,387.5
Payments or credits                            (2,254.4 )               (39.8 )            (64.5 )         (2,358.7 )
Balance as of December 28, 2018                   354.3                  34.0               17.1              405.4
Provisions                                      2,347.3                  22.2               68.2            2,437.7
Payments or credits                            (2,405.8 )               (27.8 )            (72.1 )         (2,505.7 )
Balance as of December 27, 2019           $       295.8        $         

28.4 $ 13.2 $ 337.4




Provisions presented in the table above are recorded as reductions to net sales.
For our presentation of net sales by product family, refer to Note 21 of the
Notes to Consolidated Financial Statements included within Item 8. Financial
Statements and Supplementary Data of this Annual Report on Form 10-K
Total provisions for fiscal 2019 increased $50.2 million compared with fiscal
2018. The increase in rebates and chargebacks of $66.0 million primarily related
to an increase in $49.3 million in the Specialty Generics segment as our
distributors incurred higher chargebacks as compared to our direct customers,
coupled with a $16.7 million increase in Specialty Brands. Provisions for
returns decreased $17.1 million driven the Specialty Generics segment primarily
related to discontinuation of select products in fiscal 2019, and other sales
deductions increased by $1.3 million from fiscal 2018 to fiscal 2019.

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Total provisions for fiscal 2018 increased $379.0 million compared with fiscal
2017. The increase in rebates and chargebacks of $384.1 million primarily
related to a $350.4 million increase in the Specialty Generics products as
additional indirect customers were added to our distributors' customer base
resulting in additional chargebacks, coupled with a $33.7 million increase in
Specialty Brands. Provisions for returns increased $0.6 million and other sales
deductions decreased by $5.7 million from fiscal 2017 to fiscal 2018, due to
increased competition within the Specialty Generics segment.
Product sales are recognized when the customer obtains control of our product.
Control is transferred either at a point in time, generally upon delivery to the
customer site, or in the case of certain of our products, over the period in
which the customer has access to the product and related services. Revenue
recognized over time is based upon either consumption of the product or passage
of time based upon our determination of the measure that best aligns with how
the obligation is satisfied. Our considerations of why such measures provide a
faithful depiction of the transfer of our products are as follows:
For those contracts whereby revenue is recognized over time based upon
consumption of the product, we either have:
1.              the right to invoice the customer in an amount that 

directly


                corresponds with the value to the customer of our

performance to


                date, for which the practical expedient to recognize in
                proportion to the amount it has the right to invoice has been
                applied, or


2.              the remaining goods and services to which the customer is
                entitled is diminished upon consumption.


For those contracts whereby revenue is recognized over time based upon the
passage of time, the benefit that the customer receives from unlimited access to
our product does not vary, regardless of consumption. As a result, our
obligation diminishes with the passage of time; therefore, ratable recognition
of the transaction price over the contract period is the measure that best
aligns with how the obligation is satisfied.
Costs to obtain a contract
As the majority of our contracts are short-term in nature, sales commissions are
generally expensed when incurred as the amortization period would have been less
than one year. These costs are recorded within SG&A. For contracts that extend
beyond one year, the incremental expense recognition matches the recognition of
related revenue.
Costs to fulfill a contract
We capitalize the costs associated with the devices used in our portfolio of
drug-device combination products, which are used in satisfaction of future
performance obligations. Capital expenditures for these devices represent cash
outflows for our cost to produce the asset, which is classified in property,
plant and equipment, net on the consolidated balance sheets and expensed to cost
of sales over the useful life of the equipment.
Product Royalty Revenues
We license certain rights to Amitiza to a third party in exchange for royalties
on net sales of the product. We recognize such royalty revenue as the related
sales occur.
Contract Balances
Accounts receivable are recorded when the right to consideration becomes
unconditional. Payments received from customers are typically based upon payment
terms of between 30 to 90 days depending on the customer. We do not maintain
contract asset balances aside from the accounts receivable balance as presented
on the consolidated balance sheets as costs to obtain a contract are expensed
when incurred as the amortization period would have been less than one year.
These costs are recorded within SG&A.
Contract liabilities are recorded when cash payments are received in advance of
our performance, including amounts which are refundable.
For additional information, refer to Note 4 of the Notes to Consolidated
Financial Statements included within Item 8. Financial Statements and
Supplementary Data of this Annual Report on Form 10-K.

Goodwill and Other Intangible Assets
During fiscal 2018, our annual goodwill impairment analysis resulted in the
recognition of a full goodwill impairment of $3,672.8 million related to our
Specialty Brands reporting unit. As a result, we did not have a goodwill balance
during fiscal 2019. Prior to this full impairment, we tested goodwill on the
first day of the fourth quarter of each year for impairment or whenever events
or changes in circumstances indicated that the carrying value may not be
recoverable. In performing goodwill assessments, management relies on a number
of factors including operating results, business plans, economic projections,
internally developed cash flows, transactions and market place data. There are
inherent uncertainties related to these factors and judgment in applying them to
the analysis of goodwill impairment. Since judgment is involved in performing
goodwill valuation analyses, there is risk that the carrying value of our
goodwill may be overstated or understated. The impairment test is comprised of
comparing the carrying value of a reporting unit to its estimated fair value. We
estimate the fair value of a reporting unit through internal analyses and
valuation, utilizing an income

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approach (a level three measurement technique) based on the present value of
future cash flows. This approach incorporates many assumptions including future
growth rates, discount factors and income tax rates. The fair value of our
reporting units is reconciled to our share price and market capitalization as a
corroborative step. If the carrying value of a reporting unit exceeds its fair
value, we recognize the excess of the carrying value over the fair value as a
goodwill impairment loss.
Intangible assets include completed technology, licenses, trademarks and IPR&D.
Intangible assets acquired in a business combination are recorded at fair value,
while intangible assets acquired in other transactions are recorded at cost.
Finite-lived intangible assets are amortized, generally using the straight-line
method over five to thirty years. We assess the remaining useful life and the
recoverability of finite-lived intangible assets whenever events or
circumstances indicate that the carrying value of an asset may not be
recoverable. When a triggering event occurs, we evaluate potential impairment of
finite-lived intangible assets by first comparing undiscounted cash flows
associated with the asset to its carrying value. If the carrying value is
greater than the undiscounted cash flows, the amount of potential impairment is
measured by comparing the fair value of the assets with their carrying value.
Indefinite-lived intangible assets are tested annually for impairment, or
whenever events or changes in circumstances indicate that the carrying value may
not be recoverable by either a qualitative or income approach. We compare the
fair value of the assets with their carrying value and record an impairment when
the carrying value exceeds the fair value. The fair value of the intangible
asset is estimated using an income approach, using similar assumptions as used
in our goodwill valuation. If the fair value is less than the carrying value of
the intangible asset, the amount recognized for impairment is equal to the
difference between the carrying value of the asset and the present value of
future cash flows. Changes in economic and operating conditions impacting these
assumptions could result in intangible asset impairment in future periods.
For more information on our goodwill and intangible impairment analyses and the
results thereof, refer to Notes 2 and 13 of the Notes to Consolidated Financial
Statements included within Item 8. Financial Statements and Supplementary Data
of this Annual Report on Form 10-K.

Acquisitions


For acquisitions that meet the criteria for business combination accounting, the
amounts paid are allocated to the tangible assets acquired and liabilities
assumed based on their estimated fair values at the date of acquisition. We then
allocate the purchase price in excess of net tangible assets acquired to
identifiable intangible assets, including purchased research and development.
The fair value of identifiable intangible assets is based on detailed
valuations. These valuations rely on a number of factors including operating
results, business plans, economic projections, anticipated future cash flows,
transactions and market place data. There are inherent uncertainties related to
these factors and judgment in applying them to estimate the fair value of
individual assets acquired in a business combination. Due to these inherent
uncertainties, there is risk that the carrying value of our recorded intangible
assets and goodwill may be overstated, which may result in an increased risk of
impairment in future periods. We perform our intangible asset valuations using
an income approach based on the present value of future cash flows. This
approach incorporates many assumptions including future growth rates, discount
factors and income tax rates. Changes in economic and operating conditions
impacting these assumptions could result in impairment in future periods.
Our purchased research and development represents the estimated fair value as of
the acquisition date of in-process projects that have not reached technological
feasibility. The primary basis for determining technological feasibility of
these projects is obtaining regulatory approval.
The fair value of IPR&D is determined using the discounted cash flow method. In
determining the fair value of IPR&D, we consider, among other factors,
appraisals, the stage of completion of the projects, the technological
feasibility of the projects, whether the projects have an alternative future use
and the estimated residual cash flows that could be generated from the various
projects and technologies over their respective projected economic lives. The
discount rate used includes a rate of return that accounts for the time value of
money, as well as risk factors that reflect the economic risk that the cash
flows projected may not be realized.
The fair value attributable to IPR&D projects at the time of acquisition is
capitalized as an indefinite-lived intangible asset and tested annually for
impairment until the project is completed or abandoned. Upon completion of the
project, the indefinite-lived intangible asset is then accounted for as a
finite-lived intangible asset and amortized on a straight-line basis over its
estimated useful life. If the project is abandoned, the indefinite-lived
intangible asset is charged to expense.
Certain asset acquisitions or license agreements may not meet the criteria for a
business combination. We account for these transactions as an asset acquisition
and recognize the identifiable assets acquired, the liabilities assumed and any
noncontrolling interest in the acquired entity. Any initial up-front payments
incurred in connection with the acquisition or licensing of IPR&D product
candidates that do not meet the definition of a business are treated as research
and development expense.

Contingent Consideration
As part of certain acquisitions, we are subject to contractual arrangements to
pay contingent consideration to former owners of these businesses. The payment
of obligations under these arrangements are uncertain, and even if payments are
expected to be made

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the timing of these payments may be uncertain as well. These contingent
consideration obligations are required to be recorded at fair value within the
consolidated balance sheet and adjusted at each respective balance sheet date,
with changes in the fair value being recognized in the consolidated statement of
operations. The determination of fair value is dependent upon a number of
factors, which include projections of future revenues, the probability of
successfully achieving certain regulatory milestones, competitive entrants into
the marketplace, the timing associated with the aforementioned criteria and
market place data (e.g., interest rates). Several of these assumptions require
projections several years into the future. Due to these inherent uncertainties,
there is risk that the contingent consideration liabilities may be overstated or
understated. Changes in economic and operating conditions impacting these
assumptions are expected to impact future operating results, with the magnitude
of the impact tied to the significance in the change in assumptions. For
additional information, refer to Note 20 of the Notes to Consolidated Financial
Statements included within Item 8. Financial Statements and Supplementary Data
of this Annual Report on Form 10-K.

Contingencies


We are involved, either as a plaintiff or a defendant, in various legal
proceedings that arise in the ordinary course of business, including, without
limitation, patent infringement claims, product liability matters, government
investigations, environmental matters, employment disputes, contractual disputes
and other commercial disputes, and other legal proceedings as further discussed
in Note 19 of Notes to Consolidated Financial Statements included within Item 8.
Financial Statements and Supplementary Data of this Annual Report on Form 10-K.
Accruals recorded for various contingencies, including legal proceedings,
self-insurance and other claims, are based on judgment, the probability of
losses and, where applicable, the consideration of opinions of internal and/or
external legal counsel, internal and/or external technical consultants and
actuarially determined estimates. When a range is established but a best
estimate cannot be made, we record the minimum loss contingency amount. These
estimates are often initially developed substantially earlier than the ultimate
loss is known, and the estimates are reevaluated each accounting period as
additional information becomes available. When we are initially unable to
develop a best estimate of loss, we record the minimum amount of loss, which
could be zero. As information becomes known, additional loss provisions are
recorded when either a best estimate can be made or the minimum loss amount is
increased. When events result in an expectation of a more favorable outcome than
previously expected, our best estimate is changed to a lower amount. We record
receivables from third-party insurers up to the amount of the related liability
when we have determined that existing insurance policies will provide
reimbursement. In making this determination, we consider applicable deductibles,
policy limits and the historical payment experience of the insurance carriers.
Receivables are not netted against the related liabilities for financial
statement presentation.

Income Taxes
In determining income for financial statement purposes, we must make certain
estimates and judgments. These estimates and judgments affect the calculation of
certain tax liabilities and the determination of the recoverability of certain
of the deferred tax assets, which arise from temporary differences between the
tax and financial statement recognition of revenue and expense.
Deferred tax assets are reduced by a valuation allowance if, based on the weight
of available evidence, it is more likely than not that some or all of the
deferred tax assets will not be realized. In evaluating our ability to recover
our deferred tax assets, we consider all available positive and negative
evidence including our past operating results, the existence of cumulative
losses in the most recent years and our forecast of future taxable income. In
estimating future taxable income, we develop assumptions including the amount of
future state, federal and international pre-tax operating income, the reversal
of temporary differences, and the implementation of feasible and prudent tax
planning strategies. These assumptions require significant judgment about the
forecasts of future taxable income and are consistent with the plans and
estimates we use to manage the underlying businesses.
We believe that we will generate sufficient future taxable income in the
appropriate jurisdictions to realize the tax benefits related to the net
deferred tax assets on our consolidated balance sheets. However, any reduction
in future taxable income, including any future restructuring activities, may
require that we record an additional valuation allowance against our deferred
tax assets. An increase in the valuation allowance would result in additional
income tax expense in such period and could have a significant impact on our
future earnings. Our income tax expense recorded in the future may also be
reduced to the extent of decreases in our valuation allowances.
We determine whether it is more likely than not that a tax position will be
sustained upon examination. The tax benefit of any tax position that meets the
more-likely-than-not recognition threshold is calculated as the largest amount
that is more than 50.0% likely of being realized upon resolution of the
uncertainty. To the extent a full benefit is not realized on the uncertain tax
position, an income tax liability is established. We adjust these liabilities as
a result of changing facts and circumstances; however; due to the complexity of
some of these uncertainties, the ultimate resolution may result in a payment
that is materially different from our current estimate of the tax liabilities.
The calculation of our tax liabilities involves dealing with uncertainties in
the application of complex tax regulations in a multitude of jurisdictions
across our global operations. Changes in tax laws and rates could affect
recorded deferred tax assets and

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liabilities in the future. Management is not aware of any such changes, however, which would have a material adverse effect on our competitive position, business, financial condition, results of operations and cash flows.

Recently Issued Accounting Standards Refer to Note 3 of Notes to Consolidated Financial Statements included within

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