ALLERGAN PLC The following discussion contains forward-looking statements that are subject to known and unknown risks, uncertainties and other factors that may cause actual results to differ materially from those expressed or implied by such forward-looking statements. We discuss such risks, uncertainties and other factors throughout this report and specifically under the caption "Cautionary Note Regarding Forward-Looking Statements" under "ITEM 1A. RISK FACTORS" in this document. In addition, the following discussion of financial condition and results of operations should be read in conjunction with the Consolidated Financial Statements and Notes thereto included elsewhere in this document. The results ofWarner Chilcott Limited are consolidated into the results ofAllergan plc . Due to the de minimis activity betweenAllergan plc andWarner Chilcott Limited , references throughout this section relate to bothAllergan plc andWarner Chilcott Limited . EXECUTIVE SUMMARY OverviewAllergan plc is a global pharmaceutical leader. Allergan is focused on developing, manufacturing and commercializing branded pharmaceutical, device, biologic, surgical and regenerative medicine products for patients around the world. Allergan markets a portfolio of leading brands and best-in-class products primarily focused on four key therapeutic areas including medical aesthetics, eye care, central nervous system and gastroenterology. As a part of its approach to deliver innovation for better patient care, Allergan has built one of the broadest pharmaceutical and device research and development pipelines in the industry. The Company has operations in more than 100 countries.Warner Chilcott Limited is an indirect wholly-owned subsidiary ofAllergan plc and has the same principal business activities.
Significant Business Developments
Refer to the Business Development section in ITEM 1. BUSINESS for the
significant transactions that were completed or announced in the years ended
Transaction Agreement with AbbVie Inc.
OnJune 25, 2019 , the Company announced that it entered into a transaction agreement (the "AbbVie Agreement") under which AbbVie Inc. ("AbbVie"), a global, research-driven biopharmaceutical company, would acquireAllergan plc in a stock and cash transaction (the "AbbVie Transaction"), valued at$188.24 per Allergan share, or approximately$63.0 billion , based on AbbVie's then-current stock price at the time the AbbVie Transaction was announced. At the closing of the proposed AbbVie Transaction, Company shareholders will receive 0.8660 shares of AbbVie common stock and$120.30 in cash for each of their existing shares. OnOctober 14, 2019 , the Company's shareholders voted to approve the AbbVie Transaction. The AbbVie Transaction is subject to customary regulatory approvals and other customary closing conditions. OnOctober 25, 2019 , in connection with the AbbVie Transaction, AbbVie commenced offers to exchange all Allergan Senior Notes issued by Allergan and maturing fromSeptember 15, 2020 throughMarch 15, 2045 for up to approximately$19.6 billion aggregate principal amount of new notes to be issued by AbbVie and cash. In conjunction with the exchange offer, AbbVie solicited and obtained consents from eligible holders of the Allergan Senior Notes to amend each of the indentures governing the Allergan Senior Notes to eliminate substantially all of the restrictive covenants in such indentures and eliminate any guarantees of the related Allergan Senior Notes. Consummation of the exchange offer is conditioned upon, among other things, the closing of the AbbVie Transaction. The exchange offers are expected to close, and such amendments are expected to become operative, on or about the closing date of the AbbVie Transaction. OnJanuary 27, 2020 , in connection with the AbbVie Transaction, Allergan announced that it entered into definitive agreements to divest (a) brazikumab, an IL-23 inhibitor currently being evaluated in a phase IIb/III study as a potential treatment for Crohn's Disease and in a phase II study for ulcerative colitis, and (b) Zenpep®, a product approved for treating exocrine pancreatic insufficiency due to cystic fibrosis and other conditions, and Viokace®, another pancreatic enzyme preparation. These agreements were made in conjunction with the ongoing regulatory approval process for the AbbVie Transaction. AstraZeneca plc will acquire brazikumab, including global development and commercial rights. Nestle SA will acquire Zenpep® and Viokace®. The closing of the divestiture of brazikumab is contingent upon receipt ofU.S. Federal Trade Commission andEuropean Commission approval, the closing of the divestitures of Zenpep® and Viokace® is contingent upon receipt of ofU.S. Federal Trade Commission approval, and closings of both divestitures are contingent upon the closing of the AbbVie Transaction and the satisfaction of other customary closing conditions. 50 --------------------------------------------------------------------------------
Segments
The Company's businesses are organized into the following segments: US
Specialized Therapeutics, US General Medicine and International. In addition,
certain revenues and shared costs, and the results of corporate initiatives, are
managed outside of the three segments. During the second quarter of 2019, the
Company changed the operational and management structure for its in-development
calcitonin gene-related peptide ("CGRP") receptors, Ubrogepant and Atogepant.
These development products were previously reported within the US Specialized
Therapeutics segment and have been transferred to the US General Medicine
segment to align these development products with the management structure and
reporting. There were no revenues and cost of sales related to these products in
the prior periods and any selling and marketing expenses and general and
administrative expenses were de minimis and therefore it was not necessary to
recast prior periods.
The operating segments are organized as follows:
• The US Specialized Therapeutics segment includes sales and expenses
relating to branded products within the
Aesthetics, Medical Dermatology through
Neuroscience and Urology therapeutic products.
• The US General Medicine segment includes sales and expenses relating to
branded products within the
Therapeutics business units, including Central Nervous System,
Gastrointestinal, Women's Health , Anti-Infectives and Diversified Brands.
• The International segment includes sales and expenses relating to products
sold outside the
The Company evaluates segment performance based on segment contribution. Segment contribution for our segments represents net revenues less cost of sales (defined below), selling and marketing expenses, and select general and administrative expenses. The Company does not evaluate the following items at the segment level:
• Revenues and operating expenses within cost of sales, selling and
marketing expenses, and general and administrative expenses that result
from the impact of corporate initiatives. Corporate initiatives primarily
include integration, restructuring, divestitures, acquisitions, certain
milestones and other shared costs.
• General and administrative expenses that result from sharedinfrastructure, including certain expenses located within the United
States.
• Other select revenues and operating expenses including R&D expenses,
amortization, IPR&D impairments, goodwill impairments and asset sales and
impairments, net as not all such information has been accounted for at the
segment level, or such information has not been used by all segments.
• Total assets including capital expenditures.
The Company defines segment net revenues as product sales and other revenue derived from our products or licensing agreements.
Cost of sales within segment contribution includes standard production and packaging costs for the products we manufacture, third party acquisition costs for products manufactured by others, profit-sharing or royalty payments for products sold pursuant to licensing agreements and finished goods inventory reserve charges. Cost of sales within segment contribution excludes non-standard production costs, such as non-finished goods inventory obsolescence charges, manufacturing variances and excess capacity utilization charges, where applicable. Cost of sales does not include amortization or impairment costs for acquired product rights or other acquired intangibles.
Selling and marketing expenses consist mainly of personnel-related costs, product promotion costs, distribution costs, professional service costs, insurance, depreciation and travel costs.
General and administrative expenses consist mainly of personnel-related costs,
facilities costs, transaction costs, insurance, depreciation, litigation costs
and professional services costs which are general in nature and attributable to
the segment.
51
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Operating Results for the Years Ended
Results of operations, including segment net revenues, segment operating
expenses and segment contribution consisted of the following for the years ended
Year Ended December 31, 2019
US Specialized US General
Therapeutics Medicine International Total
Net revenues $ 6,820.0 $ 5,834.9 $ 3,402.0 $ 16,056.9
Operating expenses:
Cost of sales(1) 578.2 954.8 548.3 2,081.3
Selling and marketing 1,490.4 978.2 934.7 3,403.3
General and administrative 190.1 160.7 117.0 467.8
Segment contribution $ 4,561.3 $ 3,741.2 $ 1,802.0 $ 10,104.5
Contribution margin 66.9 % 64.1 % 53.0 % 62.9 %
Corporate(2) 2,452.2
Research and development 1,812.0
Amortization 5,856.6
Goodwill impairments 3,552.8
In-process research and
development impairments 436.0
Asset sales and impairments, net 440.2
Operating (loss) $ (4,445.3 )
Operating margin (27.7 )%
(1) Excludes amortization and impairment of acquired intangibles including products rights, as well as indirect
cost of sales not attributable to segment results.
(2) Corporate includes net revenues of
Year Ended December 31, 2018
US Specialized US General
Therapeutics Medicine International Total
Net revenues $ 6,920.3 $ 5,322.9 $ 3,504.7 $ 15,747.9
Operating expenses:
Cost of sales(1) 565.2 799.1 537.1 1,901.4
Selling and marketing 1,348.3 924.6 928.7 3,201.6
General and administrative 205.3 156.4 141.7 503.4
Segment contribution $ 4,801.5 $ 3,442.8 $ 1,897.2 $ 10,141.5
Contribution margin 69.4 % 64.7 % 54.1 % 64.4 %
Corporate(2) 1,067.3
Research and development 2,266.2
Amortization 6,552.3
Goodwill impairments 2,841.1
In-process research and
development impairments 804.6
Asset sales and impairments, net 2,857.6
Operating (loss) $ (6,247.6 )
Operating margin (39.7 )%
(1) Excludes amortization and impairment of acquired intangibles including products rights, as well as indirect
cost of sales not attributable to segment results.
(2) Corporate includes net revenues of
52
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Year Ended December 31, 2017
US Specialized US General
Therapeutics Medicine International Total
Net revenues $ 6,803.6 $ 5,796.2 $ 3,319.5 $ 15,919.3
Operating expenses:
Cost of sales(1) 495.4 843.9 478.7 1,818.0
Selling and marketing 1,369.5 1,084.1 913.8 3,367.4
General and administrative 208.2 177.3 120.6 506.1
Segment contribution $ 4,730.5 $ 3,690.9 $ 1,806.4 $ 10,227.8
Contribution margin 69.5 % 63.7 % 54.4 % 64.2 %
Corporate(2) 1,471.8
Research and development 2,100.1
Amortization 7,197.1
In-process research and
development impairments 1,452.3
Asset sales and impairments, net 3,927.7
Operating (loss) $ (5,921.2 )
Operating margin (37.2 )%
(1) Excludes amortization and impairment of acquired intangibles including products rights, as well as indirect
cost of sales not attributable to segment results.
(2) Corporate includes net revenues of
OnJuly 24, 2019 , the Company announced a voluntary worldwide recall of BIOCELL® textured breast implants and tissue expanders as a precaution following notification of recently updated global safety information concerning the uncommon incidence of breast implant-associated anaplastic large cell lymphoma (BIA-ALCL) provided by theU.S. Food and Drug Administration ("FDA"). In connection with the voluntary recall, the Company recorded an unfavorable adjustment to operating income of$118.0 million . Of this amount,$37.9 million related to estimated customer returns of product previously sold and was recorded as a reduction of net revenues,$68.1 million related to write-offs of inventory and other costs and was recorded in cost of sales, and$12.0 million related to the estimated penalties and costs to undertake the voluntary recall was recorded in selling, general and administrative expense. No country outside ofthe United States represents ten percent or more of net revenues. The US Specialized Therapeutics and US General Medicine segments are comprised solely of sales withinthe United States . 53 --------------------------------------------------------------------------------
US Specialized Therapeutics Segment
The following table presents top product sales and net contribution for the US Specialized Therapeutics segment for the years endedDecember 31, 2019 , 2018 and 2017 ($ in millions): Years Ended December 31, 2019 vs 2018 2018 vs 2017 $ % $ % 2019 2018 2017 Change Change Change Change Total Eye Care$ 2,182.4 $ 2,235.7 $ 2,460.2 $ (53.3 ) (2.4 )%$ (224.5 ) (9.1 )% Restasis® 1,138.4 1,197.0 1,412.3 (58.6 ) (4.9 )% (215.3 ) (15.2 )% Alphagan®/Combigan® 360.0 375.4 377.3 (15.4 ) (4.1 )% (1.9 ) (0.5 )% Lumigan®/Ganfort® 269.2 291.8 317.5 (22.6 ) (7.7 )% (25.7 ) (8.1 )% Eye Drops 230.4 202.7 199.5 27.7 13.7 % 3.2 1.6 % Ozurdex® 125.5 111.0 98.4 14.5 13.1 % 12.6 12.8 % Other Eye Care 58.9 57.8 55.2 1.1 1.9 % 2.6 4.7 % Total Medical Aesthetics 2,772.0 2,774.6 2,449.2 (2.6 ) (0.1 )% 325.4 13.3 % Facial Aesthetics 1,606.2 1,487.3 1,362.8 118.9 8.0 % 124.5 9.1 % Botox® Cosmetics 991.3 907.3 812.2 84.0 9.3 % 95.1 11.7 % Juvederm® Collection 587.5 548.2 501.1 39.3 7.2 % 47.1 9.4 % Kybella® 27.4 31.8 49.5 (4.4 ) (13.8 )% (17.7 ) (35.8 )% Plastic Surgery 254.4 263.0 242.6 (8.6 ) (3.3 )% 20.4 8.4 % Breast Implants 254.4 263.0 242.6 (8.6 ) (3.3 )% 20.4 8.4 % Regenerative Medicine 505.3 523.9 433.9 (18.6 ) (3.6 )% 90.0 20.7 % Alloderm® 395.9 407.3 321.2 (11.4 ) (2.8 )% 86.1 26.8 % Other Regenerative Medicine 109.4 116.6 112.7 (7.2 ) (6.2 )% 3.9 3.5 % Body Contouring 248.1 361.6 256.7 (113.5 ) (31.4 )% 104.9 40.9 % Coolsculpting ® Consumables 185.3 235.3 150.1 (50.0 ) (21.2 )% 85.2 56.8 % Coolsculpting ® Systems & Add On Applicators 62.8 126.3 106.6 (63.5 ) (50.3 )% 19.7 18.5 % Skin Care (3) 158.0 138.8 153.2 19.2 13.8 % (14.4 ) (9.4 )% Total Medical Dermatology 44.0 115.5 273.6 (71.5 ) (61.9 )% (158.1 ) (57.8 )% Aczone® 9.3 55.1 166.3 (45.8 ) (83.1 )% (111.2 ) (66.9 )% Other Medical Dermatology(4) 34.7 60.4 107.3 (25.7 ) (42.5 )% (46.9 ) (43.7 )% Total Neuroscience and Urology 1,762.7 1,720.4 1,550.3 42.3 2.5 % 170.1 11.0 % Botox® Therapeutics 1,739.2 1,638.5 1,442.2 100.7 6.1 % 196.3 13.6 % Rapaflo® 23.5 81.9 108.1 (58.4 ) (71.3 )% (26.2 ) (24.2 )% Other revenues 58.9 74.1 70.3 (15.2 ) (20.5 )% 3.8 5.4 % Net revenues$ 6,820.0 $ 6,920.3 $ 6,803.6 $ (100.3 ) (1.4 )%$ 116.7 1.7 % Operating expenses: Cost of sales(1) 578.2 565.2 495.4 13.0 2.3 % 69.8 14.1 % Selling and marketing 1,490.4 1,348.3 1,369.5 142.1 10.5 % (21.2 ) (1.5 )% General and administrative 190.1 205.3 208.2 (15.2 ) (7.4 )% (2.9 ) (1.4 )% Segment contribution$ 4,561.3 $ 4,801.5 $ 4,730.5 $ (240.2 ) (5.0 )% $ 71.0 1.5 % Segment margin 66.9 % 69.4 % 69.5 % (2.5 )% (0.1 )% Segment gross margin(2) 91.5 % 91.8 % 92.7 % (0.3 )% (0.9 )% (1) Excludes amortization and impairment of acquired intangibles including product rights, as well as indirect cost of sales not attributable to segment results. (2) Defined as net revenues less segment related cost of sales as a percentage of net revenues. (3) Includes SkinMedica® and Latisse®. (4) Includes Tazorac® sales of$25.4 million and$65.4 million which were previously disclosed separately in the year endedDecember 31, 2018 and 2017, respectively. 54
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The Zeltiq Acquisition and LifeCell Acquisition contributed the following to the
segment in the years ended
Year Ended December 31, 2018 Year Ended December 31, 2017
Combined Combined
LifeCell Zeltiq Contribution LifeCell Zeltiq Contribution
Net revenues $ 526.1 $ 361.7 $ 887.8 $ 436.0 $ 256.8 $ 692.8
Operating expenses:
Cost of sales 112.6 101.0 213.6 107.5 70.7 178.2
Selling and 112.3 159.7 272.0 97.8 96.1 193.9
marketing
General and 10.6 7.2 17.8 11.4 10.7 22.1
administrative
Net Revenues
Years Ended
The decrease in net revenues in the year endedDecember 31, 2019 was primarily driven by decreases in Restasis®, Lumigan®/Ganfort® , Body Contouring, Rapaflo® and the divestiture of our Medical Dermatology business during the third quarter of 2018, partially offset by growth in Botox® Cosmetics, Botox® Therapeutics and Juvederm® Collection. The declines in Restasis® and Lumigan®/Ganfort® revenues were primarily due to price and volume declines. As a result of theU.S. District Court for the Eastern District of Texas issuing an adverse trial decision finding inOctober 2017 that the four asserted patents covering Restasis® (Cyclosporine Ophthalmic Emulsion) 0.05% are invalid, there is a potential risk for future declines in Restasis® revenues. Body Contouring decreased versus the prior year period primarily due to a lower volume of system sales and procedures. Rapaflo® revenues declined primarily due to a loss of exclusivity. Botox® Cosmetics, Botox® Therapeutics and Juvederm® Collection increased versus the prior year period primarily due to demand growth. Within Total Medical Aesthetics, the voluntary worldwide recall of textured breast implants and tissue expanders announced onJuly 24, 2019 also lowered revenues by$3.0 million for the year ended December, 31 2019.
Years Ended
The increase in net revenues in the year endedDecember 31, 2018 was primarily driven by the Zeltiq Acquisition and the LifeCell Acquisition and growth in Botox® Therapeutics and Botox® Cosmetics, partially offset by decreases in Restasis® and the divestiture of our Medical Dermatology business. Botox® Therapeutics and Botox® Cosmetics increased versus the prior year period primarily driven by demand growth. The decline in Restasis® revenues was due to both price declines and volume declines as a result of changes in promotional efforts ahead of an anticipated launch of a generic. The decline in Aczone® revenues prior to divestiture was due to genericization of the branded acne market, increased discounts to maintain formulary access and a generic launch of Aczone 5%. Cost of Sales
Years Ended
The increase in cost of sales in the year ended
Years Ended
The decrease in segment gross margin was due in part to the Zeltiq Acquisition and the LifeCell Acquisition. Excluding Zeltiq Acquisition and the LifeCell Acquisition in both periods, segment gross margin decreased to 94.2% in the year endedDecember 31, 2018 versus 94.8% in the prior year period primarily due to product mix, including a decline in Restasis® sales.
Selling and Marketing Expenses
Years Ended
The increase in selling and marketing expenses in the year endedDecember 31, 2019 was primarily related to increased promotional costs and sales force expansion for Facial Aesthetics products, additional promotional expenses for anticipated launches and an increase in the charge for the non-tax deductible Branded Prescription Drug Fee on a year over year basis. 55 --------------------------------------------------------------------------------
Years Ended
The decrease in selling and marketing expenses in the year endedDecember 31, 2018 was primarily related to lower headcount in the Eye Care and Medical Dermatology field forces due to the Company's restructuring initiatives, lower promotional costs and a decrease in the charge for the non-tax deductible Branded Prescription Drug Fee, offset in part by the impact of theZeltiq Acquisition and the LifeCell Acquisition.
General and Administrative Expenses
Years Ended
General and administrative expenses decreased
Years Ended
General and administrative expenses remained consistent period over period.
56
--------------------------------------------------------------------------------US General Medicine Segment
The following table presents top product sales and net contribution for the US General Medicine segment for the years endedDecember 31, 2019 , 2018 and 2017 ($ in millions): Years Ended December 31, 2019 vs 2018 2018 vs 2017 $ % $ % 2019 2018 2017 Change Change Change Change Total Central Nervous System (CNS)$ 1,516.3 $ 1,156.0 $ 1,359.9 $ 360.3 31.2 %$ (203.9 ) (15.0 )% Vraylar® 857.5 487.1 287.8 370.4 76.0 % 199.3 69.2 % Viibryd®/Fetzima® 412.1 342.4 333.2 69.7 20.4 % 9.2 2.8 % Saphris® 135.3 139.7 155.2 (4.4 ) (3.1 )% (15.5 ) (10.0 )% Namzaric® 88.6 115.8 130.8 (27.2 ) (23.5 )% (15.0 ) (11.5 )% Namenda®(3) 22.8 71.0 452.9 (48.2 ) (67.9 )% (381.9 ) (84.3 )% Total Gastrointestinal (GI) 1,634.2 1,723.7 1,695.0 (89.5 ) (5.2 )% 28.7 1.7 % Linzess® 803.2 761.1 701.1 42.1 5.5 % 60.0 8.6 % Zenpep® (5) 288.0 237.3 212.3 50.7 21.4 % 25.0 11.8 % Carafate®/Sulcrate® 212.5 217.8 235.8 (5.3 ) (2.4 )% (18.0 ) (7.6 )% Viberzi® 187.9 176.5 156.6 11.4 6.5 % 19.9 12.7 %
Canasa®/Salofalk® 31.5 169.2 162.7 (137.7 ) (81.4 )% 6.5 4.0 % Asacol®/Delzicol® 76.7 130.8 195.5 (54.1 ) (41.4 )% (64.7 ) (33.1 )% Other GI 34.4 31.0 31.0 3.4 11.0 % - 0.0 %Total Women's Health 895.7 786.8 1,044.2 108.9 13.8 % (257.4 ) (24.7 )% Lo Loestrin® 588.9 527.7 459.3 61.2 11.6 % 68.4 14.9 % Liletta® 79.1 50.9 37.6 28.2 55.4 % 13.3 35.4 % Other Women's Health (4) 227.7 208.2 547.3 19.5 9.4 % (339.1 ) (62.0 )% Total Anti-Infectives 377.1 304.4 257.3 72.7 23.9 % 47.1 18.3 % Teflaro® 147.0 128.0 121.9 19.0 14.8 % 6.1 5.0 % Avycaz® 116.7 94.6 61.2 22.1 23.4 % 33.4 54.6 % Dalvance® 81.9 56.1 53.9 25.8 46.0 % 2.2 4.1 % Other Anti-Infectives 31.5 25.7 20.3 5.8 22.6 % 5.4 26.6 % Diversified Brands 1,202.8 1,156.0 1,242.6 46.8 4.0 % (86.6 ) (7.0 )% Bystolic® / Byvalson® 600.6 583.8 612.2 16.8 2.9 % (28.4 ) (4.6 )% Armour Thyroid 218.5 198.8 169.1 19.7 9.9 % 29.7 17.6 % Savella® 88.5 85.0 98.2 3.5 4.1 % (13.2 ) (13.4 )% Other Diversified Brands 295.2 288.4 363.1 6.8 2.4 % (74.7 ) (20.6 )% Other revenues 208.8 196.0 197.2 12.8 6.5 % (1.2 ) (0.6 )% Net revenues$ 5,834.9 $ 5,322.9 $ 5,796.2 $ 512.0 9.6 %$ (473.3 ) (8.2 )% Operating expenses: Cost of sales(1) 954.8 799.1 843.9 155.7 19.5 % (44.8 ) (5.3 )% Selling and marketing 978.2 924.6 1,084.1 53.6 5.8 % (159.5 ) (14.7 )% General and administrative 160.7 156.4 177.3 4.3 2.7 % (20.9 ) (11.8 )% Segment contribution$ 3,741.2 $ 3,442.8 $ 3,690.9 $ 298.4 8.7 %$ (248.1 ) (6.7 )% Segment margin 64.1 % 64.7 % 63.7 % (0.6 )% 1.0 % Segment gross margin(2) 83.6 % 85.0 % 85.4 % (1.4 )% (0.4 )% (1) Excludes amortization and impairment of acquired intangibles including product rights, as well as indirect cost of sales not attributable to segment results. (2) Defined as net revenues less segment related cost of sales as a percentage of net revenues. (3) Includes Namenda XR® and Namenda® IR. (4) Includes Estrace® Cream sales of$49.0 million and$366.6 million which were previously disclosed separately in the years endedDecember 31, 2018 andDecember 31, 2017 , respectively. Includes Minastrin® 24 sales of$9.5 million and$61.4 million which were previously disclosed separately in the years endedDecember 31, 2018 andDecember 31, 2017 , respectively. (5) OnJanuary 27, 2020 the Company has announced an agreement to divest Zenpep® and Viokace® in connection with the proposed AbbVie Transaction with any such divestiture contingent on the closing of the AbbVie Transaction. 57 --------------------------------------------------------------------------------
Net Revenues
Years Ended
The increase in net revenues in the year endedDecember 31, 2019 was primarily due to growth inCNS and Women's Health , offset, in part, by a decline in GI revenues. CNS revenues increased primarily due to strong demand growth for Vraylar® and Viibryd®, offset, in part, by the decline in Namenda® as a result of loss of exclusivity.Women's Health revenues increased primarily due to an increase in demand for Lo Loestrin®. GI was negatively affected by the generic impact on Canasa®/Salofalk® and Asacol®, offset, in part, by an increase in demand growth for Linzess® and Zenpep®.
Years Ended
The decrease in net revenues in the year endedDecember 31, 2018 was primarily due to a decline in products that lost exclusivity, including Namenda XR®, Estrace® Cream, and Minastrin® 24, as well as a decline in Other Diversified Brands, offset, in part, by growth in Vraylar®, Lo Loestrin® and Linzess®. CNS revenues declined primarily due to the decline in Namenda XR® as a result of loss of exclusivity, offset, in part, by strong demand growth for Vraylar®.Women's Health revenues declined primarily due to the loss of exclusivity on Estrace® Cream and Minastrin® 24, offset, in part, by growth for Lo Loestrin® driven by higher average selling prices and increased demand. GI revenues increased primarily due to growth for Linzess® resulting from increased demand which more than offset negative pricing pressure on the product. GI was negatively affected by the generic impact on Asacol®.
Cost of Sales
Years Ended
The increase in cost of sales in the year endedDecember 31, 2019 was primarily due to an increase in net revenues. Segment gross margin was 83.6% in the year endedDecember 31, 2019 compared to 85.0% in the prior year period as a result of product mix and the favorable impact of$29.9 million Linzess® profit share true-up in the prior year period.
Years Ended
The decrease in cost of sales in the year endedDecember 31, 2018 was primarily due to lower product sales and product mix in addition to the favorable impact of a$29.9 million Linzess® profit share true-up. Segment gross margin was 85.0% in the year endedDecember 31, 2018 compared to 85.4% in the prior year period as a result of product mix including the impact of generics on sales of Estrace® Cream.
Selling and Marketing Expenses
Years Ended
The increase in selling and marketing expenses in the year ended
Years Ended
The decrease in selling and marketing expenses in the year ended
General and Administrative Expenses
Years Ended
General and administrative expenses remained consistent period over period.
Years Ended
General and administrative expenses in the year ended
58
--------------------------------------------------------------------------------International Segment
The following tables present top product sales and net contribution for the International segment for the years endedDecember 31, 2019 , 2018 and 2017 ($ in millions): Years Ended December 31, Change $ $ $ % % % Overall Operational Currency Overall Operational Currency 2019 2018 Change Change (3) Change Change Change (3) Change Total Eye Care$ 1,251.1 $ 1,294.6 $ (43.5 ) $ 31.4$ (74.9 ) (3.4 )% 2.4 % (5.8 )% Lumigan®/Ganfort® 360.8 392.6 (31.8 ) (12.0 ) (19.8 ) (8.1 )% (3.1 )% (5.0 )% Eye Drops 235.8 279.7 (43.9 ) (30.2 ) (13.7 ) (15.7 )% (10.8 )% (4.9 )% Ozurdex® 274.6 187.7 86.9 103.8 (16.9 ) 46.3 % 55.3 % (9.0 )% Alphagan®/Combigan® 162.0 176.0 (14.0 ) (4.6 ) (9.4 ) (8.0 )% (2.6 )% (5.4 )% Restasis® 50.2 64.5 (14.3 ) (10.7 ) (3.6 ) (22.2 )% (16.6 )% (5.6 )% Other Eye Care 167.7 194.1 (26.4 ) (14.9 ) (11.5 ) (13.6 )% (7.7 )% (5.9 )% Total Medical Aesthetics 1,480.8 1,533.3 (52.5 ) 25.9 (78.4 ) (3.4 )% 1.7 % (5.1 )% Facial Aesthetics 1,331.1 1,262.3 68.8 143.2 (74.4 ) 5.5 % 11.3 % (5.8 )% Botox® Cosmetics 671.7 641.2 30.5 71.5 (41.0 ) 4.8 % 11.2 % (6.4 )% Juvederm® Collection 656.1 614.8 41.3 74.5 (33.2 ) 6.7 % 12.1 % (5.4 )% Belkyra® (Kybella®) 3.3 6.3 (3.0 ) (2.8 ) (0.2 ) (47.6 )% (44.4 )% (3.2 )% Plastic Surgery 1.8 131.5 (129.7 ) (129.2 ) (0.5 ) (98.6 )% (98.3 )% (0.3 )% Breast Implants 0.6 130.1 (129.5 ) (129.0 ) (0.5 ) (99.5 )% (99.2 )% (0.3 )% Other Plastic Surgery 1.2 1.4 (0.2 ) (0.2 ) - (14.3 )% (14.3 )% 0.0 % Regenerative Medicine 14.6 16.8 (2.2 ) (1.7 ) (0.5 ) (13.1 )% (10.1 )% (3.0 )% Alloderm® 7.9 8.0 (0.1 ) (0.0 ) (0.1 ) (1.3 )% 0.0 % (1.3 )% Other Regenerative Medicine 6.7 8.8 (2.1 ) (1.7 ) (0.4 ) (23.9 )% (19.3 )% (4.6 )% Body Contouring 118.7 107.5 11.2 13.9 (2.7 ) 10.4 % 12.9 % (2.5 )% Coolsculpting ® Consumables 76.3 64.2 12.1 13.5 (1.4 ) 18.8 % 21.0 % (2.2 )%
Coolsculpting ® Systems & Add On
Applicators 42.4 43.3 (0.9 ) 0.4 (1.3 ) (2.1 )% 0.9 % (3.0 )% Skin Care 14.6 15.2 (0.6 ) (0.3 ) (0.3 ) (3.9 )% (2.0 )% (1.9 )% Botox® Therapeutics and Other 603.0 611.5 (8.5 ) 21.5 (30.0 ) (1.4 )% 3.5 % (4.9 )% Botox® Therapeutics 389.1 390.4 (1.3 ) 21.2 (22.5 ) (0.3 )% 5.4 % (5.7 )% Asacol®/Delzicol® 36.1 45.7 (9.6 ) (8.2 ) (1.4 ) (21.0 )% (17.9 )% (3.1 )% Constella® 23.8 24.1 (0.3 ) 0.5 (0.8 ) (1.2 )% 2.1 % (3.3 )% Other Products 154.0 151.3 2.7 8.0 (5.3 ) 1.8 % 5.3 % (3.5 )% Other revenues 67.1 65.3 1.8 2.4 (0.6 ) 2.8 % 3.7 % (0.9 )% Net revenues$ 3,402.0 $ 3,504.7 $ (102.7 ) $ 81.2$ (183.9 ) (2.9 )% 2.3 % (5.2 )% Operating expenses: Cost of sales(1) 548.3 537.1 11.2 34.7 (23.5 ) 2.1 % 6.5 % (4.4 )% Selling and marketing 934.7 928.7 6.0 55.1 (49.1 ) 0.6 % 5.9 % (5.3 )% General and administrative 117.0 141.7 (24.7 ) (21.2 ) (3.5 ) (17.4 )% (15.0 )% (2.4 )% Segment contribution$ 1,802.0 $ 1,897.2 $ (95.2 ) $ 12.6$ (107.8 ) (5.0 )% 0.7 % (5.7 )% Segment margin 53.0 % 54.1 % (1.1 )% Segment gross margin(2) 83.9 % 84.7 % (0.8 )% (1) Excludes amortization and impairment of acquired intangibles including product rights, as well as indirect cost of sales not attributable to segment results. (2) Defined as net revenues less segment related cost of sales as a percentage of net revenues. (3) Defined as overall change excluding foreign exchange impact. 59 --------------------------------------------------------------------------------
Years Ended December 31, Change
$ $ $ % % %
Overall Operational Currency Overall Operational Currency
2018 2017 Change Change (3) Change Change Change (3) Change
Total Eye Care $ 1,294.6 $ 1,282.1 $ 12.5 $ 19.4 $ (6.9 ) 1.0 % 1.5 % (0.5 )%
Lumigan®/Ganfort® 392.6 371.5 21.1 15.2 5.9 5.7 % 4.1 % 1.6 %
Eye Drops 279.7 281.0 (1.3 ) 3.7 (5.0 ) (0.5 )% 1.3 % (1.8 )%
Ozurdex® 187.7 213.4 (25.7 ) (32.2 ) 6.5 (12.0 )% (15.0 )% 3.0 %
Alphagan®/Combigan® 176.0 175.1 0.9 5.8 (4.9 ) 0.5 % 3.3 % (2.8 )%
Restasis® 64.5 61.3 3.2 5.9 (2.7 ) 5.2 % 9.6 % (4.4 )%
Other Eye Care 194.1 179.8 14.3 21.0 (6.7 ) 8.0 % 11.7 % (3.7 )%
Total Medical Aesthetics 1,533.3 1,366.6 166.7 185.6 (18.9 ) 12.2 % 13.6 % (1.4 )%
Facial Aesthetics 1,262.3 1,104.5 157.8 178.0 (20.2 ) 14.3 % 16.1 % (1.8 )%
Botox® Cosmetics 641.2 557.0 84.2 96.6 (12.4 ) 15.1 % 17.3 % (2.2 )%
Juvederm® Collection 614.8 540.7 74.1 81.9 (7.8 ) 13.7 % 15.1 % (1.4 )%
Belkyra® (Kybella®) 6.3 6.8 (0.5 ) (0.5 ) (0.0 ) (7.4 )% (7.4 )% (0.0 )%
Plastic Surgery 131.5 158.6 (27.1 ) (28.7 ) 1.6 (17.1 )% (18.1 )% 1.0 %
Breast Implants 130.1 156.9 (26.8 ) (28.5 ) 1.7 (17.1 )% (18.2 )% 1.1 %
Other Plastic Surgery 1.4 1.7 (0.3 ) (0.2 ) (0.1 ) (17.6 )% (11.7 )% (5.9 )%
Regenerative Medicine 16.8 16.5 0.3 (0.1 ) 0.4 1.8 % (0.6 )% 2.4 %
Alloderm® 8.0 7.5 0.5 0.4 0.1 6.7 % 5.4 % 1.3 %
Other Regenerative Medicine 8.8 9.0 (0.2 ) (0.5 ) 0.3 (2.2 )% (5.5 )% 3.3 %
Body Contouring 107.5 73.7 33.8 35.0 (1.2 ) 45.9 % 47.5 % (1.6 )%
Coolsculpting ® Consumables 64.2 41.6 22.6 23.1 (0.5 ) 54.3 % 55.5 % (1.2 )%
Coolsculpting ® Systems & Add On
Applicators 43.3 32.1 11.2 11.9 (0.7 ) 34.9 % 37.1 % (2.2 )% Skin Care 15.2 13.3 1.9 1.4 0.5 14.3 % 10.5 % 3.8 % Botox® Therapeutics and Other 611.5 587.4 24.1 22.7 1.4 4.1 % 3.9 % 0.2 % Botox® Therapeutics 390.4 357.5 32.9 34.9 (2.0 ) 9.2 % 9.8 % (0.6 )% Asacol®/Delzicol® 45.7 50.2 (4.5 ) (5.9 ) 1.4 (9.0 )% (11.8 )% 2.8 % Constella® 24.1 21.9 2.2 1.8 0.4 10.0 % 8.2 % 1.8 % Other Products 151.3 157.8 (6.5 ) (8.1 ) 1.6 (4.1 )% (5.1 )% 1.0 % Other revenues 65.3 83.4 (18.1 ) (18.5 ) 0.4 (21.7 )% (22.2 )% 0.5 % Net revenues$ 3,504.7 $ 3,319.5 $ 185.2 $ 209.2$ (24.0 ) 5.6 % 6.3 % (0.7 )% Operating expenses: Cost of sales(1) 537.1 478.7 58.4 66.2 (7.8 ) 12.2 % 13.8 % (1.6 )% Selling and marketing 928.7 913.8 14.9 14.9 0.0 1.6 % 1.6 % 0.0 % General and administrative 141.7 120.6 21.1 25.6 (4.5 ) 17.5 % 21.2 % (3.7 )% Segment contribution$ 1,897.2 $ 1,806.4 $ 90.8 $ 102.5$ (11.7 ) 5.0 % 5.6 % (0.6 )% Segment margin 54.1 % 54.4 % (0.3 )% Segment gross margin(2) 84.7 % 85.6 % (0.9 )% (1) Excludes amortization and impairment of acquired intangibles including product rights, as well as indirect cost of sales not attributable to segment results. (2) Defined as net revenues less segment related cost of sales as a percentage of net revenues. (3) Defined as overall change excluding foreign exchange impact. 60
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The following tables present our revenue disaggregated by geography for our International segment ($ in millions):
Years Ended December 31,
$ $ % %
Overall Operational Overall Operational
2019 2018 Change Change Change Change
Europe $ 1,471.7 $ 1,482.6 $ (10.9 ) $ 78.7 (0.7 )% 5.3 %
Asia Pacific, Middle 1,075.1
East and Africa 1,089.9 (14.8 ) 28.9 (1.4 )% 2.7 %
Latin America and 772.9
Canada 862.4 (89.5 ) (40.4 ) (10.4 )% (4.7 )%
Other* 82.3 69.8 12.5 14.0 17.9 % 20.1 %
Total International $ 3,402.0 $ 3,504.7 $ (102.7 ) $ 81.2 (2.9 )% 2.3 %*Includes royalty and other revenue
Years Ended December 31,
$ $ % %
Overall Operational Overall Operational
2018 2017 Change Change Change Change
Europe $ 1,482.6 $ 1,439.2 $ 43.4 $ 22.1 3.0 % 1.5 %
Asia Pacific, Middle 1,089.9
East and Africa 929.9 160.0 156.0 17.2 % 16.8 %
Latin America and 862.4
Canada 863.3 (0.9 ) 48.9 (0.1 )% 5.7 %
Other* 69.8 87.1 (17.3 ) (17.8 ) (19.9 )% (20.4 )%209.2 5.6 % 6.3 %
*Includes royalty and other revenue
The Zeltiq Acquisition contributed the following to the segment in the years
ended
For the Years Ended December 31,
2018 2017
Net revenues $ 107.5 $ 73.7
Operating expenses:
Cost of sales 39.2 25.6
Selling and marketing 54.0 39.0
General and administrative 3.5 -
.
Net Revenues
Years Ended
The decrease in net revenues in the year endedDecember 31, 2019 was primarily due to a decline in Plastic Surgery, offset, in part, by operational growth in Facial Aesthetics and Ozurdex®. Plastic Surgery decreased versus the prior year period, primarily driven by the voluntary worldwide recall of textured breast implants and tissue expanders announced onJuly 24, 2019 which lowered revenues in the year endedDecember 31, 2019 by$34.9 million . The operational growth in Facial Aesthetics was due to an increase in demand growth.
Years Ended
The increase in net revenues in the year endedDecember 31, 2018 was primarily due to the operational growth of total Facial Aesthetics and Botox® Therapeutics, as well as the Zeltiq Acquisition. Within Facial Aesthetics, the increase in sales of Botox® Cosmetics was driven primarily by demand growth and higher average prices. The increase in sales of Botox® Therapeutics was driven primarily by demand growth. Juvederm® Collection revenues increased versus the prior year period, primarily resulting from demand growth. Within totalEye Care , Ozurdex® decreased versus the prior year period, primarily driven by the third quarter product recall and the temporary period of not shipping product. Plastic Surgery decreased versus the prior year period, primarily driven by a fourth quarter suspension of sales and withdrawal of the remaining textured breast implants from the market inEurope . This suspension and withdrawal followed the non-renewal of our textured breast implant CE Mark licenses inEurope pending a request for additional information by LNE-GMED, the notified body responsible for certification of our breast implants. Sales returns reserves recorded for the recalls totaled$56.7 million in the year endedDecember 31, 2018 . 61
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Cost of Sales
Years Ended
The increase in cost of sales in the year endedDecember 31, 2019 was primarily due to higher costs related to the voluntary worldwide recall of textured breast implants and tissue expanders of$32.2 millions , offset, in part, by the impact from foreign currency.
Years Ended
The increase in cost of sales in the year endedDecember 31, 2018 was primarily due to the increase in net revenues and the Zeltiq Acquisition and the LifeCell Acquisition. Excluding the Zeltiq Acquisition and the LifeCell Acquisition in both periods, segment gross margin was 85.5% in the year endedDecember 31, 2018 compared to 86.1% in the prior year period.
Selling and Marketing Expenses
Years Ended
The increase in selling and marketing expenses in the year ended
Years Ended
The increase in selling and marketing expenses in the year endedDecember 31, 2018 was due in part to the Zeltiq Acquisition as well as increased promotional spending in Medical Aesthetics.
General and Administrative Expenses
Years Ended
General and administrative expenses decreased$24.7 million in the year endedDecember 31, 2019 primarily due to$12.4 million of contract tender costs associated with the Ozurdex® and textured breast implants recalls in the year endedDecember 31, 2018 .
Years Ended
General and administrative expenses increased due in part to$12.4 million of contract tender costs associated with the Ozurdex and textured breast implants recalls. Corporate
Corporate represents the results of corporate initiatives as well as the impact
of select revenues and shared costs. The following represents the Corporate
amounts for the years ended
Year Ended December 31, 2019
Non-
Acquisition
Integration / Related Fair Value Effect of Purchase Revenues and
Divestiture Restructuring Adjustments Accounting Other Shared Costs Total
Net revenues $ - $ - $ - $ - $ - $ 32.0 $ 32.0
Operating expenses:
Cost of sales(1) 4.8 8.3 44.6 0.9 0.2 353.0 411.8
Selling and 51.4 4.0 - 2.8 - 0.2 58.4
marketing
General and
administrative 111.0 4.3 - 0.9 1,168.5 729.3 2,014.0
Contribution $ (167.2 ) $ (16.6 ) $ (44.6 ) $ (4.6 ) $ (1,168.7 ) $ (1,050.5 ) $ (2,452.2 ) (1) Excludes amortization and impairment of acquired intangibles including product rights.
62
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Year Ended December 31, 2018
Non-
Acquisition
Integration / Related Fair Value Effect of Purchase Revenues and
Divestiture Restructuring Adjustments Accounting Other Shared Costs Total
Net revenues $ - $ - $ - $ - $ - $ 39.5 $ 39.5
Operating expenses:
Cost of sales(1) 1.3 33.7 (111.7 ) 2.1 (0.1 ) 364.7 290.0
Selling and 1.5 38.8 - 8.6 - 0.1 49.0
marketing
General and
administrative 50.9 5.4 - 2.9 58.8 649.8 767.8
Contribution $ (53.7 ) $ (77.9 ) $ 111.7 $ (13.6 ) $ (58.7 ) $ (975.1 ) $ (1,067.3 )
(1) Excludes amortization and impairment of acquired intangibles including product rights.
Year Ended December 31, 2017
Non-
Acquisition
Integration / Related Fair Value Effects of Purchase Revenues and
Divestiture Restructuring Adjustments Accounting Other Shared Costs Total
Net revenues $ - $ - $ - $ - $ - $ 21.4 $ 21.4
Operating expenses:
Cost of sales(1) 8.0 61.5 (183.2 ) 136.3 12.5 314.9 350.0
Selling and 29.5 80.8 - 33.1 0.5 3.5 147.4
marketing
General and
administrative 138.8 32.8 - 49.0 97.4 677.8 995.8
Contribution $ (176.3 ) $ (175.1 ) $ 183.2 $ (218.4 ) $ (110.4 ) $ (974.8 ) $ (1,471.8 ) (1) Excludes amortization and impairment of acquired intangibles including product rights.
Integration / Divestiture
Years Ended
In the year endedDecember 31, 2019 , AbbVie Transaction-related costs which include legal, consulting and personnel costs were$141.2 million . Additionally, integration and restructuring charges included costs related to the integration ofLifeCell Corporation ("LifeCell') and Zeltiq®Aesthetics, Inc. ("Zeltiq") which were recorded in the years endedDecember 31, 2019 , 2018 and 2017.
Non-Acquisition Related Restructuring
Years Ended
In the years endedDecember 31, 2018 and 2017, the Company incurred charges related to the restructuring of its internal infrastructure. In the year endedDecember 31, 2018 , the restructuring programs included charges associated with scaling our manufacturing plants and changes in the international commercial promotional focus in certain markets which include a reduction of approximately 200 sales representatives internationally. In the year endedDecember 31, 2017 , restructuring programs included a mid-year commercial initiative as well as aDecember 2017 program. As part of these initiatives, the Company reduced its employee headcount within selling and marketing by approximately 350 as ofDecember 31, 2017 . A reduction of approximately 900 employees within cost of sales, selling and marketing and general and administrative was reserved for in the year endedDecember 31, 2017 . 63 --------------------------------------------------------------------------------
Fair Value Adjustments
Years Ended
In the year endedDecember 31, 2019 , the expense in cost of sales primarily related to an increase in commercial sales forecasts for Liletta®. Fair value adjustments primarily relate to changes in estimated contingent liabilities for future amounts to be paid based on achievement of sales levels for the respective products. In the year endedDecember 31, 2018 , the income in cost of sales primarily reflects the reduction of the contingent liability for True Tear® when the product did not achieve a milestone event, as well as a corresponding decrease in commercial forecasts. The income recorded in the year endedDecember 31, 2017 primarily related to reduced or delayed revenue forecasts for select products including Rhofade® and Liletta®.
Effect of Purchase Accounting
Years Ended
The Company incurred charges related to the purchase accounting impact on share-based compensation related to theZeltiq and Allergan Acquisitions in the years endedDecember 31, 2019 , 2018 and 2017, and the Forest Acquisition in the years endedDecember 31, 2018 and 2017, which increased cost of sales, selling and marketing and general and administrative expenses. A cash stock-based compensation charge of$31.5 million associated with the Zeltiq Acquisition was also included in the year endedDecember 31, 2017 . In the year endedDecember 31, 2017 , the Company incurred purchase accounting effects of$131.7 million in cost of sales related to the fair value inventory step-up from the LifeCell Acquisition and the Zeltiq Acquisition as products were sold to the Company's third-party customers.
Other
Years Ended
In the years endedDecember 31, 2019 , 2018 and 2017, general and administrative costs included legal settlement charges of$1,167.3 million ,$56.8 million , and$96.5 million , respectively. For additional information refer to "NOTE 26 - Commitments and Contingencies."
Revenues and Shared Costs
Years Ended
Shared costs primarily include above site and unallocated costs associated with running our global manufacturing facilities and corporate general and administrative expenses.
In each of the years ended
In the year endedDecember 31, 2018 , the increase in cost of goods sold within revenues and shared costs was primarily due to unfavorable inventory variances due to third-party manufacturing delays, an increase in compensation costs and$15.8 million of inventory write-offs associated with the Ozurdex® and textured breast implants product recalls versus the prior year.
In the years ended
Research and Development Expenses
R&D expenses consist predominantly of personnel-related costs, active pharmaceutical ingredient costs, contract research, license and milestone fees, biostudy and facilities costs associated with product development.
64
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R&D expenses consisted of the following in the years ended
Years Ended December 31, 2019 vs 2018 2018 vs 2017
$ % $ %
2019 2018 2017 Change Change Change Change
Ongoing operating expenses $ 1,708.6 $ 1,574.5 $ 1,598.8 $ 134.1 8.5 % $ (24.3 ) (1.5 )%
Milestone expenses and upfront
license payments 83.2 678.9 391.8 (595.7 ) (87.7 )% 287.1 73.3 %
Acquisition accounting fair
value adjustment
to share-based compensation 1.1 4.8 18.3 (3.7 ) (77.1 )% (13.5 ) (73.8 )%
Acquisition, integration, and
restructuring charges 9.6 2.9 41.2 6.7 n.m. (38.3 ) (93.0 )%
Contingent consideration
adjustments, net 9.5 5.1 50.0 4.4 86.3 % (44.9 ) (89.8 )%
Total R&D Expenses $ 1,812.0 $ 2,266.2 $ 2,100.1 $ (454.2 ) (20.0 )% $ 166.1 7.9 %
Operating Expenses
Years Ended
The increase in ongoing operating expenses in the year endedDecember 31, 2019 versus the year endedDecember 31, 2018 was mainly due to increased product development spending in early stage development programs and for the gastrointestinal, medical aesthetics, and eye care therapeutic areas, offset, in part, by lower spending in the Central Nervous System therapeutics area due to product approvals.
Years Ended
The decrease in ongoing operating expenses in the year endedDecember 31, 2018 versus the year endedDecember 31, 2017 , was mainly due to decreased product development spending in early stage development campaigns and the Eye Care therapeutic area as well as lower personnel costs offset, in part, by increased spending in the Central Nervous System and Gastrointestinal therapeutic areas.
Milestone Expenses and Upfront License Payments
The following represents milestone expenses, asset acquisitions and upfront
license payments in the years ended
Years Ended December 31,
2019 2018 2017
Bonti, Inc. $ - $ 196.6 $ -
Merck & Co. - 115.0 -
Elastagen Pty Ltd - 96.1 -
AstraZeneca plc - 90.0 -
Chase Pharmaceuticals Corporation - 75.0 -
Editas Medicine, Inc. - 40.0 90.0
Repros Therapeutics, Inc. - 33.2 -
Lysosomal Therapeutics, Inc. - - 145.0
Assembly Biosciences, Inc. - - 50.0
Akarna Therapeutics, Ltd. 10.0 - 39.6
Lyndra, Inc. - - 15.0
Heptares Therapeutics, Ltd. - - 15.0
RetroSense Therapeutics, LLC 20.0 - -
Other 53.2 33.0 37.2
Total $ 83.2 $ 678.9 $ 391.8
65
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Acquisition, Integration, and Restructuring Charges
Year Ended
Acquisition, integration and restructuring charges in the year endedDecember 31, 2017 included$37.1 million of severance and restructuring costs related to a planned internal reduction of approximately 200 R&D employees and reduction of headcount due to the integration of acquired businesses.
Contingent Consideration Adjustments, Net
Years Ended
In the year ended
In the year endedDecember 31, 2018 , the net adjustment to contingent consideration primarily related to the progression of R&D projects relating to the Tobira Acquisition offset by a reduction in ForSight Acquisition contingent consideration. In the year endedDecember 31, 2017 , the adjustment to contingent consideration primarily related to the advancement of the Company's True Tear® product and products acquired as part of the Tobira Acquisition. Amortization Amortization in the years endedDecember 31, 2019 , 2018 and 2017 was as follows ($ in millions): Years Ended December 31, 2019 vs 2018 2018 vs 2017 $ % $ % 2019 2018 2017 Change
Change Change Change
Amortization
Years Ended
Amortization for the year ended December, 31, 2019 decreased compared to the year endedDecember 31, 2018 primarily due to products that reached the end of their life cycle. Amortization for the year endedDecember 31, 2018 decreased as compared to the year endedDecember 31, 2017 primarily as a result of a decrease in amortization for Restasis® due to a reduced book value and remaining life as a result of an anticipated launch of a generic.
Years Ended December 31, 2019 vs 2018 2018 vs 2017
$ % $ %
2019 2018 2017 Change Change Change Change Goodwill impairments
$ 3,552.8 $ 2,841.1 $ -$ 711.7 25.1 %$ 2,841.1 n.a. CMP impairments 314.0 1,831.4 3,876.0 (1,517.4 ) (82.9 )% (2,044.6 ) (52.8 )% IPR&D impairments 436.0 804.6 1,452.3
(368.6 ) (45.8 )% (647.7 ) (44.6 )% Asset sales and impairments, net 126.2 1,026.2 51.7
(900.0 ) (87.7 )% 974.5 n.m.
Years Ended
Refer to "NOTE 17 -Goodwill , Product Rights and Other Intangible Assets" for the description of the goodwill impairments, impairments of currently marketed products, IPR&D impairments and asset sales and impairments, net related to the Anti-Infectives business that the Company recorded in the years endedDecember 31, 2019 , 2018 and 2017. 66
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Refer to "NOTE 5 - Business Developments" for asset sales recorded in the years
ended
Interest Income
Interest income in the years ended
Years Ended December 31, 2019 vs 2018 2018 vs 2017
$ % $ %
2019 2018 2017 Change Change Change Change
Interest income $ 76.8 $ 45.2 $ 67.7 $ 31.6 69.9 % $ (22.5 ) (33.2 )%
Years Ended
Interest income represents interest earned on cash and cash equivalents and marketable securities held during the respective periods. Interest income for the year endedDecember 31, 2019 increased as compared to the year endedDecember 31, 2018 primarily due to an increase in marketable securities. Interest income for the year endedDecember 31, 2018 decreased as compared to the year endedDecember 31, 2017 primarily due to a decline in marketable securities.
Interest Expense
Interest expense consisted of the following in the years ended
Years Ended December 31, 2019 vs 2018 2018 vs 2017
$ % $ %
2019 2018 2017 Change Change Change Change
Fixed Rate Notes $ 691.4 $ 827.2 $ 1,030.5 $ (135.8 ) (16.4 )% $ (203.3 ) (19.7 )%
Euro Denominated Notes 57.6 37.5 19.8 20.1 53.6 % 17.7 89.4 %
Floating Rate Notes 18.6 20.8 25.9 (2.2 ) (10.6 )% (5.1 ) (19.7 )%
Other 15.4 25.7 19.4 (10.3 ) (40.1 )% 6.3 32.5 %
Interest expense $ 783.0 $ 911.2 $ 1,095.6 $ (128.2 ) (14.1 )% $ (184.4 ) (16.8 )%
Years Ended
Interest expense in the year ended
Years Ended
Interest expense in the year endedDecember 31, 2018 decreased versus the year endedDecember 31, 2017 due to scheduled maturities and early debt extinguishment of senior secured notes period-over-period, as well as the impact from debt refinancing in the year endedDecember 31, 2018 versus the year endedDecember 31, 2017 . 67
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Other Income / (Expense), Net
Other income / (expense), net consisted of the following in the years ended
Years Ended December 31, 2019 vs 2018 2018 vs 2017
$ % $ %
2019 2018 2017 Change Change Change Change
Teva Share Activity $ - $ 60.9 $ (3,269.3 ) $ (60.9 ) (100.0 )% $ 3,330.2 n.m.
Sale of businesses - 182.6 - (182.6 ) (100.0 )% 182.6 n.m.
Debt extinguishment costs as part
of the
debt tender offer - - (161.6 ) - n.a. 161.6 (100.0 )%
Debt extinguishment other (0.2 ) 15.6 (27.6 ) (15.8 ) n.m. 43.2 n.m.
Other-than-temporary impairments - - (26.1 ) - n.a. 26.1 (100.0 )%
Dividend income - - 85.2 - n.a. (85.2 ) (100.0 )%
Naurex recovery - - 20.0 - n.a. (20.0 ) (100.0 )%
Forward sale of Teva shares - - (62.9 ) - n.a. 62.9 (100.0 )%Other (expense) / income, net 33.0 (2.4 ) 5.0
35.4 n.m. (7.4 ) n.m.
Other income / (expense), net
Years Ended
Refer to "NOTE 11 - Other Income / (Expense), Net" for further details regarding the components of other income / (expense), net.
Provision / (Benefit) for Income Taxes
Provision / (Benefit) for income taxes in the years ended
Years Ended December 31, 2019 vs 2018 2018 vs 2017
$ % $ %
2019 2018 2017 Change Change Change Change
Provision / (Benefit) for income
taxes $ 146.4 $ (1,770.7 ) $ (6,670.4 ) $ 1,917.1 (108.3 )% $ 4,899.7 (73.5 )%
Effective tax rate 2.9 % (25.8 )% (64.2 )%
The Company's effective tax rate for the twelve months ended December 31, 2019 ,
2018 and 2017 was a detriment of 2.9%, a benefit of 25.8% and a benefit of
64.2%, respectively. The reconciliations between the statutory Irish tax rates
for Allergan plc and the effective income tax rates were as follows:
Allergan plc
Years Ended December 31,
2019 2018 2017
Statutory rate (12.5 )% (12.5 )% (12.5 )%
Earnings subject to U.S. taxes (1) (2) 1.3 % (1.8 )% (17.4 )%
Earnings subject to rates different than the
statutory rate (1)(2) (5.3 )% (3.4 )% 2.1 %
Impact of U.S. tax reform enactment (3) 0.0 % (0.2 )% (27.2 )%
Tax reserves and audit outcomes 2.1 % 2.6 % 0.4 %
Non-deductible expenses (4) 12.6 % 7.4 % 0.2 %
Impact of acquisitions and reorganizations (5) (2.6 )% (15.3 )% (9.3 )%
Tax credits and U.S. special deductions (2.0 )% (0.9 )% (1.5 )%
Rate changes (6) 0.3 % 2.2 % (1.2 )%
Valuation allowances (7) 8.7 % (3.7 )% 2.2 %
Other 0.3 % (0.2 )% 0.0 %
Effective income tax rate 2.9 % (25.8 )% (64.2 )%
68
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The material drivers of the period-over-period tax rate movements are as follows:
Years Ended
(1) The
effective tax rate as compared to a benefit of
effective tax rate, primarily driven by decreases of approximately
billion in impairment charges and amortization expense. The remaining rate
differential is driven by non-
Irish statutory rate.
(2) The Company recorded amortization expense of
impairment charges of
million to the 2019 effective tax rate. In 2018, the Company recorded
amortization expense of
impacting the 2018 effective tax rate as compared to 2019.
(3) Not applicable for the year ended December 31, 2019 .
(4) In 2019, the Company recorded charges of $3.6 billion for goodwill
impairment and
tax benefit, resulting in a tax detriment of
effective tax rate. In 2018, the Company recorded a goodwill impairment
charge of $3.5 billion with no corresponding tax benefit, resulting in a
tax detriment of $432.9 million .
(5) In 2019, the Company recorded a tax benefit of
the tax effects of integration and the recognition of outside basis
differences. In 2018, the Company recorded a tax benefit of
million related to the tax effects of integration and the recognition of
outside basis differences. This resulted in a more favorable impact in
2018 as compared to 2019.
(6) As a result of statutory and other tax rate changes applied to certain
deferred tax assets and liabilities, the Company recorded a detriment of
million, favorably impacting the 2019 rate as compared to 2018.
(7) In 2019, the Company recorded a tax detriment of $444.9 million toestablish a valuation allowance on deferred tax assets related to certain
tax attributes, which are not expected to be realized. In 2018, the
Company recorded a tax benefit of
valuation allowance related to the Company's foreign tax credit and
partial release related to non-
Years Ended
(1) The benefit to the 2018 effective tax rate was lower as compared to 2017
due to fewer losses in jurisdictions with tax rates higher than the Irish
statutory rate, the reduction of the
Tax Reform and the net impact of GILTI, which is being treated as a period
cost in 2018 and was not included in 2017.
(2) In 2018, the Company recorded amortization expense of
intangible impairment charges of
of
jurisdictions with tax rates higher than the Irish statutory
rate. Comparatively, in 2017, the Company recorded amortization expense of
Activity, resulting in a net tax benefit of
impacting the 2017 effective tax rate as compared to 2018.
(3) In 2017, as part of the enactment of the TCJA, the Company recorded a
provisional net deferred tax benefit of
in tax rates applicable to our deferred tax liabilities, the net reversal
of amounts previously accrued for taxes on unremitted earnings of certain
non-
Deferred Foreign Earnings of certain non-
Adjustments were recorded in 2018 at the close of the measurement period
under SAB 118, but were not material.
(4) In 2018, the Company recorded goodwill impairments of $3.5 billion
(including a portion allocated to assets held for sale) with no
corresponding tax benefit, resulting in a tax detriment of
to the 2018 effective tax rate.
(5) In 2018, the Company recorded a tax benefit of $1,047.8 million for
deferred taxes related to the tax effects of integration and the
recognition of outside basis differences. This resulted in a more
favorable impact on the effective tax rate as compared to 2017.
(6) As a result of statutory and other tax rate changes applied to certain
deferred tax assets and liabilities, the Company recorded a detriment of
(7) In 2018, the Company recorded a tax benefit of
release of a valuation allowance related to the Company's foreign tax
credit and partial release related to non-U.S. net operating loss
carryforwards.
69
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Discontinued Operations
OnAugust 2, 2016 , the Company completed the Teva Transaction for$38.3 billion of cash and Teva shares. OnOctober 3, 2016 , the Company completed the divestiture of theAnda Distribution business to Teva for$500.0 million . The Company recognized a combined gain on the sale of theAnda Distribution business and the Teva Transaction of$15,932.2 million in the year endedDecember 31, 2016 . InOctober 2016 , pursuant to our agreement with Teva, Teva provided the Company with its proposed estimated adjustment to the closing date working capital balance. The Company disagreed with Teva's proposed adjustment, and, pursuant to our agreement with Teva, each of the Company's and Teva's proposed adjustments were submitted to arbitration (the "Working Capital Arbitration") to determine the working capital amount in accordance with GAAP as applied by the Company consistent with past practice. OnJanuary 31, 2018 ,Allergan plc and Teva entered into an agreement pursuant to which the Company made a one-time payment of$700.0 million to Teva. As a result, the Company recorded a pre-tax charge of$466.0 million as a component of other (expense) / income, net from discontinued operations relating to the settlement in the year endedDecember 31, 2017 . The one-time payment of$700.0 million , which represents a refund of purchase price, is shown in the Consolidated Statement of Cash Flows as both a cash outflow in investing activities of$466.0 million and a cash outflow in financing cash flows of$234.0 million for the portion of the payment which was outstanding greater than one year in the year endedDecember 31, 2018 . As a result of the Teva Transaction and the divestiture of the Company'sAnda Distribution business, and in accordance with FASB ASU No. 2014-08 "Presentation of Financial Statements (Topic 205) and Property, Plant and Equipment (Topic 360): Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity", the financial results of the businesses held for sale were reclassified to discontinued operations for all periods presented in our consolidated financial statements. Financial results of the global generics business and theAnda Distribution business are presented as "(Loss) / income from discontinued operations, net of tax" on the Consolidated Statements of Operations for the years endedDecember 31, 2017 .
The following table presents key financial results of the global generics
business and the
2017
Net revenues $ -
Operating expenses: Cost of sales (excludes amortization and impairment of acquired intangibles including product rights)
-
Research and development -
Selling and marketing -
General and administrative 18.8
Amortization -
Asset sales and impairments, net 1.2
Total operating expenses 20.0
Operating (loss) (20.0 )
Other (expense) / income, net (470.4 )
(Benefit) for income taxes (87.5 )
(Loss) from discontinued operations, net of tax $ (402.9 )
70
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LIQUIDITY AND CAPITAL RESOURCES
Working Capital Position
Working capital atDecember 31, 2019 and 2018 is summarized as follows ($ in millions): December 31, December 31, Increase 2019 2018 (Decrease) Current assets: Cash and cash equivalents$ 2,503.3 $ 880.4 $ 1,622.9 Marketable securities 3,411.6 1,026.9 2,384.7 Accounts receivable, net 3,192.3 2,868.1 324.2 Inventories 1,133.1 846.9 286.2 Current assets held for sale - 34.0 (34.0 ) Prepaid expenses and other current assets 886.4 819.1 67.3 Total current assets 11,126.7 6,475.4 4,651.3 Current liabilities: Accounts payable and accrued expenses 6,348.7 4,787.2 1,561.5 Income taxes payable 65.1 72.4 (7.3 ) Current portion of long-term debt and capital leases 4,532.5 868.3 3,664.2 Current portion of lease liability - operating 124.4 - 124.4 Total current liabilities 11,070.7 5,727.9 5,342.8 Working Capital $ 56.0$ 747.5 $ (691.5 ) Current Ratio 1.01 1.13
Working capital movements for the year ended
• The Company generated cash flows from operations of
• The Company paid dividends of
shares of
• The Company repaid the scheduled maturity of the €700.0 million floating
rate notes due
senior notes through open market debt purchases and had senior notes of
maturity date as of
Cash Flows
The Company's cash flows are summarized as follows ($ in millions):
Years Ended December 31, 2019 vs 2018
2019 2018 $ Change
Net cash provided by operating activities $ 7,238.7 $ 5,640.1 $ 1,598.6
Net cash provided by / (used in) investing
activities $ (2,858.8 ) $ 3,098.5 $ (5,957.3 )
Net cash (used in) / provided by financing
activities $ (2,766.1 ) $ (9,680.1 ) $ 6,914.0
Cash flows from operations represent net income adjusted for certain non-cash
items and changes in assets and liabilities. Cash provided by operating
activities increased $1,598.6 million in the year ended December 31, 2019 versus
the prior year period as a result of the Company receiving a one-time tax refund
during the third quarter of 2019 of $1.6 billion of capital gains taxes
previously paid and attributable to tax losses recorded in prior periods.
Management expects that available cash balances will provide sufficient resources to fund our operating liquidity needs and expected capital expenditure funding requirements for at least the next twelve months.
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Investing cash flows for the year ended December 31, 2019 reflect the net cash
used for investments of $2,388.4 million and the cash used in acquisitions of
businesses of $80.6 million . Investing cash flows for the year ended December
31, 2018 reflect the net cash provided by the sale of businesses of $663.0
million and the net sale of investments of $3,124.6 million offset, in part, by
payments to settle Teva related matters of $466.0 million .
Financing cash flows consist primarily of borrowings and repayments of debt,
repurchases of ordinary shares, dividend payments and proceeds from the exercise
of stock options. Cash used in financing activities in the year ended December
31, 2019 primarily related to the repayment of indebtedness of $1,044.9 million ,
the repurchase of ordinary shares of $840.6 million and the payment of dividends
of $974.4 million . Cash used in financing activities in the year ended December
31, 2018 primarily related to the repayment of indebtedness of $8,804.5 million ,
the repurchase of ordinary shares of $2,775.4 million , the payment of dividends
of $1,049.8 million , and payments to settle Teva-related matters of $234.0
million , which was outstanding greater than one year, offset, in part, by
borrowings under the revolving credit facility of $700.0 million , the Euro
senior note issuance of $1,919.7 million and other borrowings and proceeds from
the forward sale of Teva shares of $465.5 million .
Debt and Borrowing Capacity
Refer to "NOTE 18 - Long-Term Debt" for further details regarding the components of debt.
Long-term Obligations The following table lists certain of our enforceable and legally binding obligations as ofDecember 31, 2019 . Certain amounts included herein are based on management's estimates and assumptions about these obligations, including their duration, the possibility of renewal, anticipated actions by third parties and other factors. Because these estimates and assumptions are necessarily subjective, the enforceable and legally binding obligation we will actually pay in future periods may vary from those reflected in the table ($ in millions): Payments Due
by Period (Including Interest on Debt)
Total 2020 2021-2022 2023-2024 Thereafter
Long-term debt(1) $ 22,666.6 $ 4,460.9 $ 7,069.2 $ 2,732.3 $ 8,404.2
Cash interest(1) 5,736.6 682.2 1,090.6 758.0 3,205.8
Future lease obligations(2) 637.1 131.6 205.4 108.0 192.1
Sales based and other milestone
obligations(3) 10,201.4 41.5 57.0 175.0 9,927.9
R&D / approval milestone
obligations(3) 5,986.7 432.8 621.8 242.0 4,690.1
Other obligations and
commitments(4) 1,690.0 190.3 1,000.3 307.2 192.2
Total $ 46,918.4 $ 5,939.3 $ 10,044.3 $ 4,322.5 $ 26,612.3 (1) Amounts represent total minimum cash payments and anticipated interest payments, as applicable, assuming scheduled repayments under the
Company's existing notes. Amounts exclude fair value adjustments, discounts or premiums on outstanding debt obligations.
(2) Amounts represent property leases for our global business.
(3) Amounts represent contingent consideration obligations, including accretion resulting from various acquisitions. The table above
reflects the anticipated timing of R&D and approval related milestones and sales based milestones. Certain agreements also include royalties
based on commercial sales which are excluded from the table above.
(4) Other obligations and commitments include the liabilities for income tax associated with uncertain tax positions and the
72
--------------------------------------------------------------------------------The following are contractual commitments relating to the R&D and approval related milestones and sales based milestones ($ in millions):
Sales Based and
Maximum R&D / Approval Other
Transaction Product Milestones Milestones Milestones
Heptares
Therapeutics,
Ltd. Neurological disorders $ 3,224.5 $ 649.5 $ 2,575.0
Assembly Gastrointestinal
Biosciences, Inc. products 2,459.0 1,069.0 1,390.0
AstraZeneca plc
License Brazikumab (1) 1,250.0 210.0 1,040.0
Akarna
Therapeutics, Inflammatory and
Ltd. fibrotic diseases 965.0 590.0 375.0
Tobira
Therapeutics,
Inc. Cenicriviroc 800.1 400.1 400.0
Chase
Pharmaceuticals Neurodegenerative
Corporation disorders 800.0 250.0 550.0
Merck & Co. Ubrogepant & Atogepant 750.0 320.0 430.0
Retrosense
Therapeutics, LLC RST-001 475.0 225.0 250.0
AqueSys, Inc. Xen Gel Stent 300.0 - 300.0Topokine Therapeutics, Inc. XAF5 260.0 110.0 150.0 Oculeve, Inc. True Tear® 150.0 50.0 100.0 ForSight VISION5, Inc. Bimatoprost Ring 125.0 125.0 - All Other 4,629.5 1,988.1 2,641.4 Total$ 16,188.1 $ 5,986.7 $ 10,201.4
(1) The Company continues to develop brazikumab, a gastrointestinal development
project for indications of Crohn's disease and ulcerative colitis. On
announced that it entered into a definitive agreement to divest brazikumab.
This agreement was made in conjunction with the ongoing regulatory approval
process for the AbbVie Transaction. AstraZeneca plc will acquire
brazikumab, including global development and commercial rights. The closing
of the divestiture of brazikumab is contingent upon receipt of
Transaction and the satisfaction of other customary closing conditions.
Such milestone payments will only be payable in the event that the Company achieves contractually defined, success-based milestones, such as:
• the advancement of the specified research and development programs;
• the receipt of regulatory approval for the specified compounds or
products; and/or
• reaching a sales threshold of the specified compounds or products.
Off-Balance Sheet Arrangements
We do not have any material off-balance sheet arrangements that have, or are reasonably likely to have, a current or future effect on our financial condition, changes in financial condition, net revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.
CRITICAL ACCOUNTING ESTIMATES
Our consolidated financial statements are prepared in accordance with accounting principles generally accepted inthe United States ("GAAP"). These accounting principles require us to make certain estimates, judgments and assumptions. We believe that the estimates, judgments and assumptions are reasonable based upon information available to us at the time that these estimates, judgments and assumptions are made. These estimates, judgments and assumptions can affect the reported amounts of assets and liabilities as of the date of the financial statements, as well as the reported amounts of revenues and expenses during the periods presented. To the extent there are material differences between these estimates, judgments or assumptions and actual results, our financial statements will be affected. The significant accounting estimates that we believe are important to aid in fully understanding and evaluating our reported financial results include the following: • Revenue Recognition • Product Rights and Other Definite Lived Intangible Assets •Goodwill and Intangible Assets with Indefinite Lives 73
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• Allocation of Acquisition Fair Values to Assets Acquired and Liabilities
Assumed
• Income Taxes
• Contingent Consideration and Other Commitments
In many cases, the accounting treatment of a particular transaction is
specifically dictated by GAAP and requires management's best estimates of the
underlying data in its application. There are also areas in which management's
judgment in selecting among available GAAP alternatives would not produce a
materially different result.
Revenue Recognition
On January 1, 2018 , we adopted ASU No. 2014-09, "Revenue from Contracts with
Customers" ("Topic 606"), using the modified retrospective method applied to
those contracts which were not completed as of January 1, 2018 . Results for
reporting periods beginning after January 1, 2018 are presented under Topic 606,
while prior period amounts are not adjusted and continue to be reported in
accordance with our historical accounting practices. The impact to revenues for
the year ended December 31, 2018 was not significant as a result of the
adoption. The adoption of this guidance did not have a material impact on the
Company's financial position or results of operations as the Company's sales
primarily are governed by standard ship and bill terms of pharmaceutical
products to customers.
The Company applies the "practical expedient" as defined in Topic 606 to
recognize the incremental costs of obtaining contracts as an expense when
incurred if the amortization period of the assets that the Company otherwise
would have recognized is one year or less. These costs which are included in
selling, general, and administrative expenses are consistent with the accounting
prior to the adoption of Topic 606. The Company also elected to use the
practical expedient to not adjust the promised amount of consideration for the
effects of the time value of money for contracts in which the anticipated period
between when the Company transfers the goods or services to the customer and
when the customer pays is equal to one year or less.
General
Topic 606 provides that revenues are recognized when control of the promised
goods under a contract is transferred to a customer, in an amount that reflects
the consideration we expect to be entitled to in exchange for those goods as
specified in the underlying terms with the customer. The Company warrants
products against defects and for specific quality standards, permitting the
return of products under certain circumstances. Product sales are recorded net
of all sales-related deductions including, but not limited to: chargebacks,
trade discounts, commercial and government rebates, customer loyalty programs,
fee-for-service arrangements with certain distributors, returns, and other
allowances which we refer to in the aggregate as sales returns and allowances
("SRA").
The Company's performance obligations are primarily achieved when control of the
products is transferred to the customer. Transfer of control is based on
contractual performance obligations, but typically occurs upon receipt of the
goods by the customer as that is when the customer has obtained control of
significantly all of the economic benefits.
Prior to the achievement of performance obligations, shipping and handling costs
associated with outbound freight for a product to be transferred to a customer
are accounted for as a fulfillment cost and are included in selling and
marketing expenses. When the Company sells a business and future royalties are
considered as part of the consideration, the Company recognizes the royalties as
a component of "other income / (expense), net".
Other revenues earned are mainly comprised of royalty income from licensing of intellectual property. Royalty income is recognized when the licensee's subsequent sale occurs.
Refer to "ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS" for our revenues disaggregated by product and segment
and our revenues disaggregated by geography for our international segment. We
believe this level of disaggregation best depicts how the nature, amount, timing
and uncertainty of our revenue and cash flows are affected by economic factors.
Significant Payment Terms
A contract with a customer states the final terms of the sale, including the
description, quantity, and price of each product purchased. The Company's
payment terms vary by the type and location of the customer and the products
offered. A customer agrees to a stated rate and price in the contract and given
that most of the products sold contain variable consideration, the amount of
revenue recognized incorporates adjustments for SRAs as appropriate.
74
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Determining the Transaction Price
The Company offers discounts and rebates to certain customers who participate in various programs that are referred to as SRA allowances as described further below in the section "Provisions for SRAs". Such discounting and rebating activity is included as part of the Company's estimate of the transaction price and is accounted for as a reduction to gross sales. At time of sale, the Company records the related SRA adjustments. The Company performs validation activities each period to assess the adequacy of the liability or contra receivable estimates recorded to reflect actual activity and will adjust the reserve balances accordingly. Provisions for SRAs As is customary in the pharmaceutical industry, certain customers may receive cash-based incentives or credits, which are variable consideration accounted for as SRAs. The Company estimates SRA amounts based on the expected amount to be provided to customers, which reduces the revenues recognized. The Company believes that there will not be significant changes to our estimates of variable consideration. The Company uses a variety of methods to assess the adequacy of the SRA reserves to ensure that our financial statements are fairly stated. These provisions are estimated based on historical payment experience, the historical relationship of the deductions to gross product revenues, government regulations, estimated utilization or redemption rates, estimated customer inventory levels and current contract sales terms. The estimation process used to determine our SRA provisions has been applied on a consistent basis and no material revenue adjustments to total reported revenues have been necessary to increase or decrease our reserves for SRA as a result of a significant change in underlying estimates. Chargebacks - A chargeback represents an amount payable in the future to a wholesaler for the difference between the invoice price paid by such wholesaler customer for a particular product and the negotiated contract price that the wholesaler's customer pays for that product. The chargeback provision and related reserve varies with changes in product mix, changes in customer pricing and changes to estimated wholesaler inventories. The provision for chargebacks also takes into account an estimate of the expected wholesaler sell-through levels to indirect customers at certain contract prices. The Company validates the chargeback accrual quarterly through a review of the inventory reports obtained from our largest wholesale customers. This customer inventory information is used to verify the estimated liability for future chargeback claims based on historical chargeback and contract rates. These large wholesalers represent the vast majority of the recipients of the Company's chargeback credits. We continually monitor current pricing trends and wholesaler inventory levels to ensure the contra-receivable for future chargebacks is fairly stated. Rebates - Rebates include volume related incentives to direct and indirect customers, third-party managed care and Medicare Part D rebates, Medicaid rebates and other government rebates. Rebates are accrued based on an estimate of claims to be paid for product sold into trade by the Company. Volume rebates are generally contractually offered to customers as an incentive to use the Company's products and to encourage greater product sales. These rebate programs include contracted rebates based on customers' purchases made during an applicable monthly, quarterly or annual period. The provision for third-party rebates is estimated based on our customers' contracted rebate programs and the Company's historical experience of rebates paid. Any significant changes to our customer rebate programs are considered in establishing the provision for rebates. The provisions for government rebates are based, in part, upon historical experience of claims submitted by the various states and authorities, contractual terms and government regulations. We monitor legislative changes to determine what impact such legislation may have on our provision. Cash Discounts - Cash discounts are provided to customers that pay within a specific time period. The provision for cash discounts is estimated based upon invoice billings and historical customer payment experience. The Company's experience of payment history is fairly consistent and most customer payments qualify for a cash discount.
Returns and Other Allowances - The Company's provision for returns and other allowances include returns, promotional allowances and loyalty cards.
Consistent with industry practice, the Company maintains a returns policy that allows customers to return product for a credit. In accordance with the Company's policy, credits for customer returns of products are applied against outstanding account activity or are settled in cash. Product exchanges are generally not permitted. Customer returns of product are generally not resalable. The Company's estimate of the provision for returns is based upon historical experience and current trends of actual customer returns. Additionally, we consider other factors when estimating the current period returns provision, including levels of inventory in the distribution channel, as well as significant market changes which may impact future expected returns.
Promotional allowances are credits with no discernable benefit offered to Allergan that are issued in connection with a product launch or as an incentive for customers to carry our product. The Company establishes a reserve for promotional allowances based upon contractual terms.
Loyalty cards allow end-user patients a discount per prescription and are accrued based on historical experience, contract terms and the volume of product and cards in the distribution channel.
75
--------------------------------------------------------------------------------The following table summarizes the activity from continuing operations in the Company's major categories of SRA ($ in millions):
Returns
and
Other Cash
Chargebacks Rebates Allowances Discounts Total
Balance at December 31, 2017 $ 77.2 $ 1,799.2 $ 517.6 $ 36.5 $ 2,430.5
Provision related to sales in
2018 1,117.7 5,464.7 1,725.3 322.2 8,629.9
Credits and payments (1,133.1 ) (5,355.4 ) (1,676.3 ) (328.0 ) (8,492.8 )
Balance at December 31, 2018 $ 61.8 $ 1,908.5 $ 566.6 $ 30.7 $ 2,567.6
Provision related to sales in
2019 1,123.5 6,153.8 1,625.1 337.3 9,239.7
Credits and payments (1,117.5 ) (5,959.0 ) (1,559.3 ) (331.0 ) (8,966.8 )
Balance at December 31, 2019 $ 67.8 $ 2,103.3 $ 632.4 $ 37.0 $ 2,840.5
Contra accounts receivable at
December 31, 2019 $ 67.8 $ 101.5 $ 35.7 $ 37.0 $ 242.0
Accounts payable and accrued
expenses at
December 31, 2019 $ - $ 2,001.8 $ 596.7 $ - $ 2,598.5 The majority of rebates pertain to incentives to indirect customers, including third-party managed care and Medicare Part D rebates and Medicaid rebates.
The following table summarizes the balance sheet classification of our SRA
reserves ($ in millions):
December 31, 2019 December 31, 2018
Contra accounts receivable $ 242.0 $ 207.7
Accounts payable and accrued expenses 2,598.5 2,359.9
Total $ 2,840.5 $ 2,567.6
The SRA provisions recorded to reduce gross product sales to net product sales, excluding discontinued operations, were as follows ($ in millions):
Years Ended December 31,
2019 2018 2017
Gross product sales $ 24,968.8 $ 24,056.9 $ 23,688.4
Provisions to reduce gross product sales
to net products sales (9,239.7 ) (8,629.9 ) (8,120.0 )
Net product sales $ 15,729.1 $ 15,427.0 $ 15,568.4
Percentage of SRA provisions to gross
sales 37.0 % 35.9 % 34.3 %
Collectability Assessment
At the time of contract inception or customer account set-up, the Company
performs a collectability assessment on the creditworthiness of such customer.
The Company assesses the probability that the Company will collect the
consideration to which it will be entitled in exchange for the goods sold. In
evaluating collectability, the Company considers the customer's ability and
intention to pay consideration when it is due. On a recurring basis, the Company
estimates the amount of receivables considered uncollectible after sale to the
customer to reflect allowances for doubtful accounts. Provision for bad debts,
included in general and administrative expenses, were $35.8 million , $18.5
million and $11.6 million in the years ended December 31, 2019 , 2018 and 2017,
respectively.
Practical Expedients and Exemptions
The Company generally expenses sales commissions when incurred because the amortization period is one year or less. These costs are recorded within selling and marketing expenses.
The Company does not adjust the promised amount of consideration for the effects
of the time value of money for contracts in which the anticipated period between
when the Company transfers the goods or services to the customer and when the
customer pays is equal to one year or less.
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--------------------------------------------------------------------------------The Company has chosen not to elect the remaining practical expedients.
Product Rights and Other Definite Lived Intangible Assets
Our product rights and other definite lived intangible assets are stated at cost, less accumulated amortization, and are amortized using the economic benefit model or the straight-line method, if results are materially aligned, over their estimated useful lives. We determine amortization periods for product rights and other definite lived intangible assets based on our assessment of various factors impacting estimated cash flows. Such factors include the product's position in its life cycle, the existence or absence of like products in the market, various other competitive and regulatory issues, and contractual terms. Significant changes to any of these factors may result in an impairment, a reduction in the intangibles useful life or an acceleration of related amortization expense, which could cause our net results to decline. Product rights and other definite lived intangible assets are tested periodically for impairment when events or changes in circumstances indicate that an asset's carrying value may not be recoverable. The impairment testing involves comparing the carrying amount of the asset to the forecasted undiscounted pre-tax future cash flows over its useful life, including any salvage value. In the event the carrying value of the asset exceeds the undiscounted future cash flows, the carrying value is considered not recoverable and an impairment exists. An impairment loss is measured as the excess of the asset's carrying value over its fair value, calculated using discounted future cash flows. The computed impairment loss is recognized in net (loss) / income in the period that the impairment occurs. Assets which are not impaired may require an adjustment to the remaining useful lives for which to amortize the asset. Our projections of discounted cash flows use a discount rate determined by our management to be commensurate with the risk inherent in our business model. Our estimates of future cash flows attributable to our other definite lived intangible assets require significant judgment based on our historical and anticipated results and are subject to many factors. Different assumptions and judgments could materially affect the calculation of the undiscounted cash flows of the other definite lived intangible assets which could trigger impairment.
General
The Company tests goodwill and intangible assets with indefinite lives for impairment annually in the second quarter. Additionally, the Company may perform interim tests if an event occurs or circumstances change that could potentially reduce the fair value of a reporting unit or an indefinite lived intangible asset below its carrying amount such as those first quarter 2019 triggering events relating to the Company's General Medicine Reporting Unit as discussed in "NOTE 17 -Goodwill , Product Rights and Other Intangible Assets". The carrying value of each reporting unit is determined by assigning the assets and liabilities, including the existing goodwill and intangible assets, to those reporting units. The Company tests goodwill for impairment by either performing a qualitative evaluation or a quantitative test. The qualitative evaluation is an assessment of factors, including Reporting Unit specific operating results as well as industry, market and general economic conditions, to determine whether it is more likely than not that the fair values of a Reporting Unit is less than its carrying amount, including goodwill. The Company may elect to bypass this qualitative assessment for some or all of its Reporting Units and perform a quantitative test as of the measurement date of the test.Goodwill is considered impaired if the carrying amount of the net assets exceeds the fair value of the reporting unit. Fair value is estimated by management using a discounted cash flow model. Management's cash flow projections include significant judgments and assumptions related to the discount rate, revenue forecasts, operating margins, impact of research and development pipeline events, and the long-term revenue growth rate. Impairment, if any, would be recorded in operating income / (loss) and this could result in a material impact to net income / (loss) and income / (loss) per share. Prior to Allergan's 2018 annual impairment test, the Company adopted the new guidance under Accounting Standard Update No. 2017-04, Intangibles -Goodwill and Other (Topic 350): Simplifying the Accounting for Goodwill Impairment which eliminated step 2 of the goodwill impairment test, which required a hypothetical purchase price allocation to measure goodwill impairment loss as ofJanuary 1, 2018 . A goodwill impairment loss under the new guidance is instead measured using a single step test based on the amount by which a reporting unit's carrying amount exceeds its fair value, not to exceed the carrying amount of goodwill. 77
-------------------------------------------------------------------------------- Acquired IPR&D intangible assets represent the value assigned to R&D projects acquired in a business combination that, as of the date acquired, represent the right to develop, use, sell and/or offer for sale a product or other intellectual property that has not been completed or approved. The IPR&D intangible assets are subject to impairment testing until completion or abandonment of each project. Upon abandonment, the assets are impaired if there is no future alternative use or ability to sell the asset. Impairment testing requires management to develop significant estimates and assumptions involving the determination of the fair value of the IPR&D asset, including estimated revenues, the probability of success of the project, determination of the appropriate discount rate, assessment of the asset's life, potential regulatory risks, and net revenue growth curve assumptions. The major risks and uncertainties associated with the timely and successful completion of IPR&D projects include legal risk, market risk and regulatory risk. Changes in our assumptions could result in future impairment charges. No assurances can be given that the underlying assumptions used to prepare the discounted cash flow analysis will not change or the timely completion of each project and commercial success will occur. For these and other reasons, actual results may vary significantly from estimated results.
Upon successful completion of each project and approval of a product, we will make a separate determination of the useful life of the intangible asset, transfer the amount to currently marketed products ("CMP") and amortization expense will be recorded over the estimated useful life.
Allocation of Acquisition Fair Values to Assets Acquired and Liabilities Assumed
We account for acquired businesses using the acquisition method of accounting, which requires that assets acquired and liabilities assumed be recorded at the date of acquisition at their respective fair values. The consolidated financial statements and results of operations reflect an acquired business after the completion of the acquisition. The fair value of the consideration paid, including contingent consideration, is assigned to the underlying net assets of the acquired business based on their respective fair values as determined using a market participant concept. Any excess of the purchase price over the estimated fair values of the net assets acquired is recorded as goodwill.
The most material line items impacted by the allocation of acquisition fair values are:
• Intangible assets (including IPR&D assets upon successful completion of
the project and approval of the product) which are amortized to
amortization expense over the expected life of the asset. Significant
judgments are used in determining the estimated fair values assigned to
the assets acquired and liabilities assumed and in determining estimates
of useful lives of long-lived assets. Fair value determinations and useful
life estimates are based on, among other factors, estimates of expected
future net cash flows, estimates of appropriate discount rates used to
present value expected future net cash flow streams, the timing of
approvals and the probability of success for IPR&D projects and the timing
of related product launch dates, the assessment of each asset's life
cycle, the impact of competitive trends on each asset's life cycle and
other factors. These judgments can materially impact the estimates used to
allocate acquisition date fair values to assets acquired and liabilities
assumed and the future useful lives. For these and other reasons, actual
results may vary significantly from estimated results.
• Inventory is recorded at fair market value factoring in selling price and
costs to dispose. Inventory acquired is typically valued higher than
replacement cost.
Income Taxes
Income taxes are accounted for using an asset and liability approach that
requires the recognition of deferred tax assets and liabilities for the expected
future tax consequences of temporary differences between the financial statement
and tax basis of assets and liabilities at the applicable tax rates. A valuation
allowance is provided when it is more likely than not that some portion or all
of the deferred tax assets will not be realized. The Company evaluates the
realizability of its deferred tax assets by assessing its valuation allowance
and by adjusting the amount of such allowance, if necessary. The factors used to
assess the likelihood of realization include the Company's forecast of future
taxable income and available tax planning strategies that could be implemented
to realize the net deferred tax assets. Failure to achieve forecasted taxable
income in applicable tax jurisdictions could affect the ultimate realization of
deferred tax assets and could result in an increase in the Company's effective
tax rate on future earnings.
Income tax positions must meet a more-likely-than-not recognition threshold to
be recognized. Income tax positions that previously failed to meet the
more-likely-than-not threshold are recognized in the first financial reporting
period in which that threshold is met. Previously recognized tax positions that
no longer meet the more-likely-than-not threshold are derecognized in the first
financial reporting period in which that threshold is no longer met. Inherent in
these tax positions are various assumptions, including management's judgments as
to the interpretation of tax law, management's expectations regarding the
outcome of tax authority examinations, as well as the ultimate measurement of
potential liabilities. The Company recognizes potential accrued interest and
penalties related to unrecognized tax benefits within the consolidated
statements of operations as income tax expense.
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The TCJA introduced an additional U.S. tax on certain non-U.S. subsidiaries'
earnings which are considered to be Global Intangible Low Taxed Income (referred
to as "GILTI"). Under this provision, the amount of GILTI included by a U.S.
shareholder will be taxed at a rate of 10.5% for tax years beginning after
December 31, 2017 (increasing to 13.125% for tax years beginning after December
31, 2025 ) with a partial offset for foreign tax credits. After consideration of
the relevant guidance and completing the accounting for the tax effects of the
TCJA, the Company has elected to treat GILTI as a period cost.
Contingent Consideration and Other Commitments
We determine the acquisition date fair value of contingent consideration
obligations for business acquisitions based on a probability-weighted income
approach derived from revenue estimates, post-tax gross profit levels and a
probability assessment with respect to the likelihood of achieving contingent
obligations including contingent payments such as milestone obligations, royalty
obligations and contract earn-out criteria, where applicable. The fair value
measurement is based on significant inputs not observable in the market and thus
represents a Level 3 measurement as defined using the fair value concepts
defined in ASC Topic 820 "Fair Value Measurement," ("ASC 820"). The resultant
probability-weighted cash flows are discounted using an appropriate effective
annual interest rate. At each reporting date, the contingent consideration
obligation will be revalued to estimated fair value and changes in fair value
will be reflected as income or expense in our consolidated statement of
operations. Changes in the fair value of the contingent consideration
obligations may result from changes in discount periods and rates, changes in
the timing and amount of future revenue estimates and changes in probability
assumptions with respect to the likelihood of achieving the various contingent
payment obligations. Changes in assumptions utilized in our contingent
consideration fair value estimates could result in an increase or decrease in
our contingent consideration obligation and a corresponding charge or reduction
to operating results.
We are involved in various legal proceedings in the normal course of our
business, including product liability litigation, intellectual property
litigation, employment litigation and other litigation. We record reserves
related to these legal matters when losses related to such litigation or
contingencies are both probable and reasonably estimable. Refer to "NOTE 26 -
Commitments and Contingencies" in the accompanying "Notes to the Consolidated
Financial Statements" in this document for a description of our significant
current legal proceedings.
Recent Accounting Pronouncements
InDecember 2019 , the FASB issued ASU No. 2019-12, Income Taxes (Topic 740) that simplifies the accounting for income taxes by eliminating certain exceptions to the guidance in ASC 740 related to the approach for intra-period tax allocation, the methodology for calculating income taxes in an interim period and the recognition of deferred tax liabilities for outside basis differences. The new guidance also simplifies aspects of the accounting for franchise taxes and enacted changes in tax laws or rates and clarifies the accounting for transactions that result in a step-up in the tax basis of goodwill. It also provides a policy election to not allocate consolidated income taxes when a member of a consolidated tax return is not subject to income tax. The ASU is effective for fiscal years, and interim periods within those fiscal years, beginning afterDecember 15, 2020 . Early adoption is permitted. The Company is evaluating the impact, if any, that this pronouncement will have on our financial position and results of operations. InNovember 2018 , the FASB issued ASU No. 2018-18, Collaborative Arrangements (Topic 808): Clarifying the Interaction Between Topic 808 and Topic 606. The ASU provides more comparability in the presentation of revenue for certain transactions between collaborative arrangement participants and only allows a company to present units of account in collaborative arrangements that are within the scope of the revenue recognition standard together with revenue accounted for under the revenue recognition standard. The parts of the collaborative arrangement that are not in the scope of the revenue recognition standard should be presented separately from revenue accounted for under the revenue recognition standard. The amendments in ASU No. 2018-18 are effective for fiscal years beginning afterDecember 15, 2019 , and interim periods within those fiscal years. The adoption of this guidance is not anticipated to have a material impact on the Company's financial position and results of operations. 79
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InAugust 2018 , the FASB issued ASU No. 2018-15, Intangibles -Goodwill and Other -Internal-Use Software (Subtopic 350-40), relating to a customer's accounting for implementation, set-up, and other upfront costs incurred in a cloud computing arrangement that is hosted by a vendor (i.e. a service contract). Under the new guidance, a customer will apply the same criteria for capitalizing implementation costs as it would for an arrangement that has a software license. The new guidance also prescribes the balance sheet, income statement, and cash flow classification of the capitalized implementation costs and related amortization expense, and requires additional quantitative and qualitative disclosures. The ASU is effective for fiscal years, and interim periods within those fiscal years, beginning afterDecember 15, 2019 . Early application is permitted. The Company will adopt the new guidance prospectively to eligible costs incurred on or after the date this guidance is first applied. The Company evaluated the impact of this pronouncement. The guidance is not expected to have a material impact on our financial position and results of operations. InAugust 2018 , the FASB issued ASU No. 2018-14, Compensation - Retirement Benefits - Defined Benefit Plans - General (Subtopic 715-20) - Disclosure Framework - Changes to the Disclosure Requirements for Defined Benefit Plans, which amends ASC 715 to add, remove, and clarify disclosure requirements related to defined benefit pension and other postretirement plans. The revisions to the disclosure requirements affect only the year-end financial statements of plan sponsors, as there are no changes related to interim financial statements. The ASU is effective for fiscal years, and interim periods within those fiscal years, beginning afterDecember 15, 2020 . Early application is permitted. The ASU provisions will be applied on a retrospective basis to all periods presented. InAugust 2018 , the FASB issued ASU No. 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework-Changes to the Disclosure Requirements for Fair Value Measurement, which removes, adds and modifies certain disclosure requirements for fair value measurements in Topic 820. The Company will no longer be required to disclose the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy, and the valuation processes of Level 3 fair value measurements. However, the Company will be required to additionally disclose the changes in unrealized gains and losses included in other comprehensive income for recurring Level 3 fair value measurements, and the range and weighted average of assumptions used to develop significant unobservable inputs for Level 3 fair value measurements. The ASU is effective for fiscal years, and interim periods within those fiscal years, beginning afterDecember 15, 2019 . The amendments relating to additional disclosure requirements will be applied prospectively for only the most recent interim or annual period presented in the initial year of adoption. All other amendments will be applied retrospectively to all periods presented upon their effective date. InJune 2016 , the FASB issued ASU No. 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. The ASU is intended to improve financial reporting by requiring timelier recording of credit losses on loans and other financial instruments held by financial institutions and other organizations. The ASU requires the measurement of all expected credit losses for financial assets including trade receivables held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. Financial institutions and other organizations will now use forward-looking information to better inform their credit loss estimates. The ASU is effective for fiscal years, and interim periods within those fiscal years, beginning afterDecember 15, 2019 . Early application will be permitted for all organizations for fiscal years, and interim periods within those fiscal years, beginning afterDecember 15, 2018 . The Company evaluated the impact of this pronouncement and concluded that the guidance is not expected to have a material impact on our financial position and results of operations.
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