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OFFON

ENDO INTERNATIONAL PLC

(ENDP)
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ENDO INTERNATIONAL : Management's Discussion and Analysis of Financial Condition and Results of Operations (form 10-Q)

05/07/2021 | 10:24am EDT
The following Management's Discussion and Analysis of Financial Condition and
Results of Operations describes the principal factors affecting the results of
operations, liquidity and capital resources and critical accounting estimates of
Endo International plc. This discussion should be read in conjunction with the
accompanying quarterly unaudited Condensed Consolidated Financial Statements and
related Notes thereto and the Annual Report. The Annual Report includes
additional information about our significant accounting policies, practices and
the transactions that underlie our financial results, as well as a detailed
discussion of the most significant risks and uncertainties associated with our
financial and operating results. Except for the historical information contained
in this report, including the following discussion, this report contains
forward-looking statements that involve risks and uncertainties. See
"Forward-Looking Statements" beginning on page i of this report.
Unless otherwise indicated or required by the context, references throughout to
"Endo," the "Company," "we," "our" or "us" refer to Endo International plc and
its subsidiaries.
RESULTS OF OPERATIONS
Our quarterly results have fluctuated in the past and may continue to fluctuate.
These fluctuations are primarily due to (1) the timing of new product launches,
(2) purchasing patterns of our customers, (3) market acceptance of our products,
(4) the impact of competitive products and products we recently acquired, (5)
pricing of our products, (6) the timing of mergers, acquisitions, divestitures
and other related activity, (7) other actions taken by the Company which may
impact the availability of our products and (8) more recently, the impact of
COVID-19. These fluctuations are also attributable to charges incurred for
compensation related to share-based payments, amortization of intangible assets,
asset impairment charges, charges related to litigation, restructuring charges
and certain upfront, milestone and other payments made or accrued pursuant to
acquisition or licensing agreements. The following summary highlights certain
recent developments that have resulted in and/or could in the future result in
fluctuations in our results of operations and/or changes in our liquidity and
capital resources:
•In December 2019, COVID-19 was reported to have surfaced in Wuhan, China. In
March 2020, the World Health Organization declared the COVID-19 outbreak a
pandemic. Many countries and localities announced aggressive actions to reduce
the spread of the disease, including limiting non-essential gatherings of
people, suspending all non-essential travel, ordering certain businesses and
government agencies to cease non-essential operations at physical locations and
issuing shelter-in-place orders (subject to limited exceptions). Since then,
developments have evolved rapidly and are likely to continue to do so. While
there has been loosening of restrictions, an increase in diagnosed cases may
lead to the reinstatement of various restrictions. The impact on our results
from COVID-19 and related changes in economic conditions, including changes to
consumer spending resulting from the rapid rise in local and national
unemployment rates, are highly uncertain and, in many instances, outside of our
control. The duration and severity of the direct and indirect effects of
COVID-19 are evolving rapidly and in ways that are difficult to anticipate.
There are numerous uncertainties related to the COVID-19 pandemic that have
impacted our ability to forecast our future operations. The extent to which
COVID-19 will affect our business, financial position and operating results in
the future cannot be predicted with certainty; however, any such impact could be
material. In addition, the impacts from COVID-19 on our consolidated results and
the results of our business segments to date may not be directly comparable to
any historical period and are not necessarily indicative of its impact on our
results for any future periods. COVID-19 could also increase the degree to which
our results, including the results of our business segments, fluctuate in the
future.
•In June 2020, we completed a series of financing transactions, collectively
referred to herein as the June 2020 Refinancing Transactions, which are further
discussed in Note 12. Debt of the Condensed Consolidated Financial Statements
included in Part I, Item 1.
•In September 2020, we announced that we had entered into a non-exclusive
agreement with Novavax, Inc. to provide fill-finish manufacturing services for
its COVID-19 vaccine candidate (NVX-CoV2373).
•In November 2020, we announced the initiation of several strategic actions,
collectively referred to as the 2020 Restructuring Initiative, to further
optimize operations and increase overall efficiency. We have recorded and expect
to record certain charges to complete these activities in anticipation of
realizing annualized cost savings. For further discussion of this initiative,
including a discussion of related charges and expected future charges, refer to
Note 4. Restructuring of the Condensed Consolidated Financial Statements
included in Part I, Item 1.
•In December 2020, we completed our acquisition of BioSpecifics Technologies
Corp (BioSpecifics). Prior to this acquisition, we had a strategic relationship
with BioSpecifics since 2004 pursuant to which BioSpecifics was, among other
things, entitled to a royalty stream from us related to our collagenase-based
therapies, including XIAFLEX® and QWO® (collagenase clostridium
histolyticum-aaes). Subsequent to the acquisition, BioSpecifics became our
wholly-owned consolidated subsidiary. As a result, beginning in December 2020,
the BioSpecifics acquisition had the effect of reducing royalty payments
recognized in Cost of revenues.
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•In March 2021, we completed a series of financing transactions, collectively
referred to herein as the March 2021 Refinancing Transactions, which are further
discussed in Note 12. Debt of the Condensed Consolidated Financial Statements
included in Part I, Item 1.
•In July 2020, we received FDA approval for QWO® for the treatment of moderate
to severe cellulite in the buttocks of adult women. During 2020, we put in place
a U.S. aesthetics commercial team and the capabilities that enabled us to launch
QWO® in March 2021.
COVID-19 Update and Other Key Trends
We are closely monitoring the impact of COVID-19 on all aspects of our business,
the pharmaceutical industry and the economy as a whole, including how it has and
will continue to impact our workforce, our customers and the patients they
serve, our manufacturing and supply chain operations, our research and
development (R&D) programs and regulatory approval processes and our liquidity
and access to capital. In addition to our existing business continuity plans,
our Senior Executive Team has developed and implemented a range of proactive
measures to address the risks, uncertainties and operational challenges
associated with COVID-19. We continue to closely monitor the rapidly evolving
situation and implement plans intended to limit the impact of COVID-19 on our
business so that we can continue to produce the critical care medicines that
hospitals and healthcare providers need to treat patients, including those with
COVID-19. Actions we have taken to date and expected key trends are further
described below.
Workforce. We have taken, and will continue to take, proactive measures to
provide for the well-being of our workforce around the globe while continuing to
safely produce products upon which patients and their healthcare providers rely.
We have implemented alternative working practices and work-from-home
requirements for appropriate employees, inclusive of our executive leadership
team, and are continuing to pay full wages to our workforce. We have limited
international and domestic travel, increased our already-thorough cleaning
protocols throughout our facilities and prohibited non-essential visitors from
our sites. We have also implemented temperature screenings, health
questionnaires, social distancing, modified schedules, shift rotation and other
similar policies at our manufacturing facilities. We launched a hybrid approach
selling model as of June 1, 2020 for our field employees, which allows virtual
and/or live engagement with healthcare providers and other customers. Certain of
these measures have resulted in increased costs and, as further described below,
resulted in the prioritization of certain products in our production plans.
Customers and the Patients They Serve. We have experienced, and expect to
continue to experience, changes in customer demand as the COVID-19 pandemic
continues to evolve, which are difficult to predict. Beginning in late
first-quarter 2020 and into early second-quarter 2020, we experienced an
increase in sales volumes for some of our critical care products, including
VASOSTRICT®. These higher volumes resulted from significant channel inventory
stocking of these products in anticipation of treating certain patients infected
with COVID-19 including, in the case of VASOSTRICT®, for the treatment of
patients with vasodilatory shock. This increase in sales volume was followed by
significant inventory destocking for the remainder of the second quarter of
2020. Sales volumes returned toward pre-COVID-19 levels during the third quarter
of 2020; however, during the fourth quarter of 2020 and continuing into the
first quarter of 2021, we again experienced increased sales volumes based on a
resurgence of COVID-19 cases in certain parts of the U.S. Additionally,
beginning during the last two weeks of the first quarter of 2020 and continuing
into the second quarter of 2020, certain of our products that are physician
administered, including XIAFLEX® and SUPPRELIN® LA, began experiencing
significantly decreased sales volumes due to reduced physician office activity
and patient office visits compared to the prior year because of the COVID-19
pandemic. Since then, sales volumes for these products have been recovering
toward pre-COVID-19 levels as physician office activity and patient office
visits have increased. Future changes in the COVID-19 pandemic could further
impact future revenues for these and/or other products.
Manufacturing and Supply Chain Operations. As of the date of this report, our
business has not experienced any material supply issues related to COVID-19 and
our manufacturing facilities across the globe have continued to operate. We have
taken, and plan to continue to take, commercially practical measures to keep
these facilities open as they are critical to our ability to reliably supply
required critical care and medically necessary products. These measures,
including the implementation of temperature screenings, health questionnaires,
social distancing, modified schedules, shift rotation and other similar policies
at our manufacturing facilities, as well as changes in our workforce
availability have impacted our manufacturing and supply chain productivity at
certain of our facilities and resulted in the prioritization of certain
products, such as VASOSTRICT®, in our production plans to provide for their
continued availability during and after the pandemic. We believe that our
diversified manufacturing footprint, which includes a combination of Endo owned
and leased facilities located in the U.S. and India, supply agreements and
strong business relationships with numerous contract manufacturing organizations
throughout the world, including in the U.S., Canada, Europe and India, and our
proven ability to be a preferred partner of choice to large pharmaceutical
companies seeking authorized generic distributors for their branded products, is
a critical factor to mitigate significant risks related to manufacturing and
supply chain disruption. This footprint, overseen by our global quality and
supply chain teams in Ireland, combined with a skilled management team with
significant experience in manufacturing and supply chain operations, has enabled
us to respond quickly and effectively to the evolving COVID-19 pandemic to date.
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Clinical and Development Programs. We have a number of ongoing clinical trials.
We are committed to the safety of our patients, employees and others involved in
these trials. We are monitoring COVID-19 closely and continue to partner with
the FDA on our ongoing clinical trials, regulatory applications and other R&D
activities. Based on an assessment of our R&D programs, including our clinical
trials, we have developed a plan and timeline for each study in order to enhance
communication with patients, sites and vendors. To date, the impacts of COVID-19
have resulted in modest delays and could continue to cause delays to certain of
our clinical trials and product development and commercialization programs,
including obtaining adequate patient enrollment, receiving regulatory approvals
and successfully bringing product candidates to market. Additionally, as a
result of COVID-19 and its impact on medical aesthetics physician office
closures and consumer spending, we moved the product launch of QWO® to spring
2021.
Key Trends. Since the first quarter of 2020, we, and our industry as a whole,
have been impacted by COVID-19 and may experience an impact going forward. The
most significant trends we face as a result of the COVID-19 pandemic include:
(i) decreases in demand for certain of our physician administered products due
to physician office closures and a decline in patients electing to be treated
because of the COVID-19 pandemic, (ii) potential temporary decreases to the
supply of certain of our products due to modified production schedules to safely
maintain operations in response to COVID-19 and other factors including, without
limitation, workforce availability, (iii) potential idle capacity charges based
on implementation of certain of the policies described above at our
manufacturing facilities and (iv) potential delays in our ability to launch some
new products due to production prioritization and economic conditions and other
factors outside of our control.
Our estimated revenue trends for the full year 2021 compared to the full year
2020 are set forth below. These estimated revenue trends reflect the current
expectations of our management team based on information currently available to
them. Our estimates are subject to significant risks and uncertainties that
could cause our actual results to differ materially from those indicated below,
including, among other things, our assumptions about the duration and severity
of COVID-19 and the impact of any related governmental, business or other
actions, any of which could cause the impact of COVID-19 to be more significant
than our current expectations.
•For the full year 2021, we expect an increase in revenues from the Specialty
Products portfolio of our Branded Pharmaceuticals segment as compared to 2020,
primarily driven by increased revenues of XIAFLEX®. This expected increase in
XIAFLEX® revenues is primarily driven by an anticipated increase in demand
driven by our investments in and promotional efforts behind this product.
Additionally, we expect physician office activity and patient office visits to
increase in 2021 compared to 2020. We also launched QWO® in March 2021, which we
expect will contribute to the overall increase in Branded Pharmaceuticals
segment revenues in 2021.
•For the full year 2021, we expect revenues from the Established Products
portfolio of our Branded Pharmaceuticals segment and from our Sterile
Injectables, Generic Pharmaceuticals and International Pharmaceuticals segments
to decline as compared to 2020, primarily driven by competitive pressures
impacting these product portfolios.
Consolidated Results Review
The following table displays our revenue, gross margin, gross margin percentage
and other pre-tax expense or income for the three months ended March 31, 2021
and 2020 (dollars in thousands):
                                                                         

Three Months Ended

                                                                             March 31,              % Change
                                                                                   2021               2020           2021 vs. 2020
Total revenues, net                                                            $ 717,919          $ 820,405                 (12) %
Cost of revenues                                                                 305,293            388,799                 (21) %
Gross margin                                                                   $ 412,626          $ 431,606                  (4) %
Gross margin percentage                                                             57.5  %            52.6  %
Selling, general and administrative                                            $ 187,174          $ 166,768                  12  %
Research and development                                                          29,739             31,615                  (6) %
Litigation-related and other contingencies, net                                      637            (17,176)                    NM
Asset impairment charges                                                           3,309             97,785                 (97) %
Acquisition-related and integration items, net                                    (5,022)            12,462                     NM
Interest expense, net                                                            134,341            132,877                   1  %
Loss on extinguishment of debt                                                    13,753                  -                     NM
Other expense (income), net                                                          912            (13,974)                    NM
Income from continuing operations before income tax                            $  47,783          $  21,249                     NM


__________

NM indicates that the percentage change is not meaningful or is greater than 100%.

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Total revenues, net. Total revenues for the three months ended March 31, 2021
decreased as compared to the prior year period as revenue increases from
VASOSTRICT® and the Specialty Products portfolio of our Branded Pharmaceuticals
segment were more than offset by revenue declines from our Generic
Pharmaceuticals and International Pharmaceuticals segments, the Established
Products portfolio of our Branded Pharmaceuticals segment and certain products
in our Sterile Injectables segment. Our revenues are further disaggregated and
described below under the heading "Business Segment Results Review."
Cost of revenues and gross margin percentage. During the three months ended
March 31, 2021 and 2020, we incurred certain charges that impact the
comparability of total Cost of revenues, including those related to amortization
expense and continuity and separation benefits and other cost reduction
initiatives. The following table summarizes such amounts (in thousands):
                                                                         Three Months Ended
                                                                             March 31,
                                                                                   2021               2020
Amortization of intangible assets (1)                                       

$ 95,130 $ 117,237


Continuity and separation benefits and other cost reduction
initiatives (2)                                                                $  15,296          $   6,238


__________
(1)Amortization expense fluctuates based on changes in the total amount of
amortizable intangible assets and the rate of amortization in effect for each
intangible asset, both of which can vary based on factors such as the amount and
timing of acquisitions, dispositions, asset impairment charges, transfers
between indefinite- and finite-lived intangibles assets, changes in foreign
currency rates and changes in the composition of our intangible assets impacting
the weighted average useful lives and amortization methodologies being utilized.
The decrease during the three months ended March 31, 2021 was primarily driven
by prior asset impairment charges and decreases in the rate of amortization
expense for certain assets, partially offset by the impact of certain in-process
research and development assets previously put into service.
(2)Amounts primarily relate to certain employee separation, continuity and other
benefit-related costs, charges to increase excess inventory reserves and
accelerated depreciation charges. For further discussion of our material
restructuring initiatives, including a discussion of related charges and
expected future charges, refer to Note 4. Restructuring of the Condensed
Consolidated Financial Statements included in Part I, Item 1.
The decrease in Cost of revenues for the three months ended March 31, 2021 was
primarily due to decreased revenues, decreased amortization expense and
favorable changes in product mix as described below, partially offset by
increased expenses related to continuity and separation benefits and other cost
reduction initiatives.
Gross margin percentage increased for the three months ended March 31, 2021 as a
result of favorable changes in product mix and decreased amortization expense,
partially offset by increased expenses related to continuity and separation
benefits and other cost reduction initiatives. The favorable change in product
mix for the three months ended March 31, 2021 primarily resulted from increased
VASOSTRICT® revenues and decreased Generic Pharmaceuticals segment revenues.
Additionally, as further discussed above, beginning in December 2020, the
BioSpecifics acquisition had the effect of reducing royalty payments recognized
in Cost of revenues.
Selling, general and administrative expenses. The increase for the three months
ended March 31, 2021 was primarily due to increased costs associated with our
commercial launch of QWO®, our investment and promotional efforts behind
XIAFLEX® and certain legal matters, as well as a higher branded prescription
drug fee, partially offset by decreased long-term incentive compensation costs.
Additionally, Selling, general and administrative expenses have been and may in
the future be impacted by the 2020 Restructuring Initiative. Refer to Note 4.
Restructuring of the Condensed Consolidated Financial Statements included in
Part I, Item 1 for discussion of this initiative, including the related charges
and expected future charges.
We expect Selling, general and administrative expenses to increase as compared
to amounts in 2020, primarily as a result of increased costs associated with our
commercial launch of QWO®, significantly increased investment and promotional
efforts behind XIAFLEX® and increased legal costs associated with certain
matters.
R&D expenses. The amount of R&D expense we record in any period varies depending
on the nature and stage of development of our R&D programs and can also vary in
periods in which we incur significant upfront or milestone charges related to
agreements with third parties.
Our R&D efforts are focused on the development of a diversified portfolio of
innovative and clinically differentiated product candidates. We have been
progressing and expect to continue to progress our cellulite treatment
development programs for QWO®, which was approved by the FDA for the treatment
of moderate to severe cellulite in the buttocks of adult women in July 2020. In
early 2020, we announced that we had initiated our XIAFLEX® development programs
for the treatment of plantar fibromatosis and adhesive capsulitis, which are
continuing to progress. We also expect to continue to focus investments in
ready-to-use and other product candidates in our Sterile Injectables segment,
potentially including license and commercialization agreements such as our
Nevakar, Inc. agreement. In 2019, Endo initiated an open-label Phase 1
pharmacokinetic (PK) study of VASOSTRICT® in healthy volunteers, studying plasma
clearance with TT genotype versus AA/AT genotype. Based on the study results, we
were issued two new patents by the U.S. Patent and Trademark Office (PTO), both
of which expire in 2040. Endo also submitted a Prior Approval Supplement (PAS)
application for VASOSTRICT® to the FDA, which was subsequently accepted by the
agency and is under review. The timing and outcome of the FDA's review of the
PAS application are within the FDA's discretion. As our development programs
progress, it is possible that our R&D expenses could increase.
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  Table     of     Contents
The decrease in R&D expense for the three months ended March 31, 2021 was
primarily driven by decreased costs associated with our Generic Pharmaceuticals
segment, certain post-marketing R&D commitments and our development programs for
QWO®, partially offset by increased costs associated with our Sterile
Injectables segment and our XIAFLEX® development programs.
Additionally, R&D expenses have been and may in the future be impacted by the
2020 Restructuring Initiative. Refer to Note 4. Restructuring of the Condensed
Consolidated Financial Statements included in Part I, Item 1 for discussion of
this initiative, including the related charges and expected future charges.
Litigation-related and other contingencies, net. Included within
Litigation-related and other contingencies, net are changes to our accruals for
litigation-related settlement charges and certain settlement proceeds related to

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