ENDO INTERNATIONAL PLC 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 ofEndo International plc . This discussion should be read in conjunction with the accompanying quarterly unaudited Condensed Consolidated Financial Statements and the 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 toEndo International plc and its subsidiaries. 46
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RESULTS OF OPERATIONS
Our quarterly results have fluctuated in the past and may continue to fluctuate. These fluctuations may be due to the business and financial statement effects of, among other things, new product launches by us or our competitors; market acceptance of our products; purchasing patterns of our customers; changes in pricing; changing inflation and interest rates; changes in the availability of our products; litigation-related and other contingencies; mergers, acquisitions, divestitures and other related activity; restructurings and other cost-reduction initiatives; bankruptcy proceedings and strategic review initiatives; financing activities; COVID-19; acquired in-process research and development charges; asset impairment charges; share-based and other long-term incentive compensation; and changes in the fair value of financial instruments. 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: •Since 2019, developments related to COVID-19 have continued to evolve rapidly and are likely to continue to do so. The duration and severity of the direct and indirect effects of COVID-19 on our results remain difficult to anticipate and, in many instances, outside of our control. As such, 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, and the evolving nature of the COVID-19 pandemic could increase the degree to which our results, including the results of our business segments, fluctuate in the future. Additionally, the numerous uncertainties related to COVID-19 have impacted our ability to forecast our future operations; however, any future impact could be material. •InNovember 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, which we have been progressing. 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 amounts recognized and expected future charges, refer to Note 5. Restructuring of the Condensed Consolidated Financial Statements included in Part I, Item 1. •InMarch 2021 , we completed a series of financing transactions, collectively referred to herein as theMarch 2021 Refinancing Transactions, which are further discussed in Note 14. Debt of the Condensed Consolidated Financial Statements included in Part I, Item 1. •InMarch 2021 , we launched QWO® (collagenase clostridium histolyticum-aaes) for the treatment of moderate to severe cellulite in the buttocks of adult women. We have been advancing and expect to continue to advance our cellulite treatment development programs for QWO®. For example, during the second quarter of 2022, we launched a new multi-cohort, open-label study relevant to the use of QWO® for the treatment of moderate to severe cellulite in the buttocks of adult women. This study, which is designed to test different interventions to assess their potential impact on reduction of bruising, has been created with the flexibility to add cohorts in order to test additional interventions over time if desired. •InNovember 2021 , ourPSP LLC subsidiary entered into a cooperative agreement with theU.S. government to expand our Sterile Injectables segment's fill-finish manufacturing production capacity and capabilities at ourRochester, Michigan plant to support theU.S. government's national defense efforts regarding production of critical medicines advancing pandemic preparation. Refer to Note 16. Commitments and Contingencies in the Consolidated Financial Statements included in Part IV, Item 15 of the Annual Report for additional discussion of the terms of this agreement. •During the first quarter of 2022, multiple competitive generic alternatives to VASOSTRICT® were launched, beginning with a generic that was launched at risk and began shipping toward the end ofJanuary 2022 . Since then, additional competitive alternatives have entered the market, including authorized generics. These launches began to significantly impact both Endo's market share and product price toward the middle of the first quarter of 2022, and the effects of competition have since increased and are likely to continue to increase throughout 2022 and beyond. Additionally, beginning late in the first quarter of 2022, COVID-19-related hospital utilization levels began to decline, resulting in significantly decreased market volumes for both branded and competing generic alternatives to VASOSTRICT®. As a result of these factors, we experienced a period of significant VASOSTRICT® vial destocking beginning during the second quarter of 2022, which resulted in significant reductions to VASOSTRICT® revenues. •InFebruary 2022 , we launched VASOSTRICT® in a ready-to-use bottle, representing the first and only ready-to-use formulation of the drug. While we have seen some market conversion to the bottle since its launch, the factors described in the preceding bullet point have had and could continue to have a material adverse effect on our business, financial condition, results of operations and cash flows. •InApril 2022 , we communicated the initiation of certain actions, collectively referred to as the 2022 Restructuring Initiative, to streamline and simplify certain functions, including our commercial organization, to increase our overall organizational effectiveness and better align with current and future needs. We have recorded and expect to record certain charges to complete these actions in anticipation of realizing annualized cost savings. For further discussion of this initiative, including a discussion of amounts recognized and expected future charges, refer to Note 5. Restructuring of the Condensed Consolidated Financial Statements included in Part I, Item 1. 47 -------------------------------------------------------------------------------- Table of Contents •InMay 2022 , we announced that ourEndo Ventures Limited subsidiary had entered into an agreement to acquire six development-stage ready-to-use injectable product candidates fromNevakar Injectables, Inc. , a subsidiary ofNevakar, Inc. , for an upfront cash payment of$35.0 million , which was recorded as an Acquired in-process research and development charge in the Condensed Consolidated Statements of Operations in the second quarter of 2022. For further discussion of this agreement, see Note 11. License, Collaboration and Asset Acquisition Agreements of the Condensed Consolidated Financial Statements included in Part I, Item 1. •InJune 2022 , we announced that ourEndo Ventures Limited subsidiary had entered into an agreement withTLC to commercialize TLC599. During the second quarter of 2022, we made an upfront cash payment of$30.0 million toTLC , which was recorded as an Acquired in-process research and development charge in the Condensed Consolidated Statements of Operations in the second quarter of 2022. For further discussion of this agreement, see Note 11. License, Collaboration and Asset Acquisition Agreements of the Condensed Consolidated Financial Statements included in Part I, Item 1. •Beginning inJune 2022 , we elected to enter certain 30-day grace periods related to senior notes interest payments that were originally due to be paid betweenJune 30, 2022 andAugust 1, 2022 . Certain of these payments were subsequently paid prior to the expiration of the applicable grace periods; others were not. Refer to Note 1. Basis of Presentation and Note 14. Debt of the Condensed Consolidated Financial Statements included in Part I, Item 1 for further discussion. •On the Petition Date, the Debtors filed voluntary petitions for relief under the Bankruptcy Code, which constituted an event of default that accelerated our obligations under substantially all of our then-outstanding debt instruments. However, section 362 of the Bankruptcy Code stays the creditors from taking any action to enforce the related financial obligations and the creditors' rights of enforcement in respect of the debt instruments are subject to the applicable provisions of the Bankruptcy Code. Refer to Note 1. Basis of Presentation, Note 2. Bankruptcy Proceedings and Note 14. Debt of the Condensed Consolidated Financial Statements included in Part I, Item 1 for further discussion. •In addition to our other legal proceedings, we, along with others, are the subject of various legal proceedings regarding the sale, marketing and/or distribution of prescription opioid medications. We have not been able to settle most of the opioid claims made against us and, as a result, there are opioid-related claims pending against us at various stages in the litigation process. Notwithstanding any relief that may be available as a result of our bankruptcy proceedings, it is possible that our legal proceedings, including those relating to opioid claims, could have a material adverse effect on our business, financial condition, results of operations and cash flows, including in the short term. For further discussion, refer to Note 1. Basis of Presentation, Note 2. Bankruptcy Proceedings and Note 15. Commitments and Contingencies of the Condensed Consolidated Financial Statements included in Part I, Item 1, as well as Part II, Item 1A. "Risk Factors."
Consolidated Results Review
The following table displays our revenue, gross margin, gross margin percentage
and other pre-tax expense or income for the three and nine months ended
Three Months Ended September 30, % Change Nine Months Ended September 30, % Change
2022 2021 2022 vs. 2021 2022 2021 2022 vs. 2021
Total revenues, net $ 541,690 $ 772,028 (30) % $ 1,763,063 $ 2,203,777 (20) %
Cost of revenues 261,232 286,068 (9) % 798,233 909,841 (12) %
Gross margin $ 280,458 $ 485,960 (42) % $ 964,830 $ 1,293,936 (25) %
Gross margin percentage 51.8 % 62.9 % 54.7 % 58.7 %
Selling, general and
administrative $ 192,221 $ 246,864 (22) % $ 600,212 $ 611,657 (2) %
Research and development 31,885 25,616 24 % 97,803 85,024 15 %
Acquired in-process research and
development 800 - NM 68,700 5,000 NM
Litigation-related and other
contingencies, net 419,376 83,495 NM 444,738 119,327 NM
Asset impairment charges 150,200 42,155 NM 1,951,216 50,393 NM
Acquisition-related and
integration items, net (1,399) (1,432) (2) % (951) (6,357) (85) %
Interest expense, net 74,753 142,958 (48) % 349,486 418,852 (17) %
Loss on extinguishment of debt - - NM - 13,753 (100) %
Reorganization items, net 124,212 - NM 124,212 - NM
Other income, net (3,998) (5,955) (33) % (22,147) (4,671) NM
(Loss) income from continuing
operations before income tax $ (707,592) $ (47,741) NM $ (2,648,439) $ 958 NM
__________NM indicates that the percentage change is not meaningful or is greater than 100%.
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Total revenues, net. The decreases in revenues for the three and nine months endedSeptember 30, 2022 were primarily due to revenue decreases related to VASOSTRICT®, ourBranded Pharmaceuticals segment and ourInternational Pharmaceuticals segment, partially offset by increased revenues from ourGeneric Pharmaceuticals 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 and nine months endedSeptember 30, 2022 and 2021, Cost of revenues includes certain amounts that impact its comparability among periods, as well as the comparability of gross margin percentage, including amortization expense and amounts related to continuity and separation benefits, cost reductions and strategic review initiatives. The following table summarizes such amounts (in thousands): Three Months Ended
September
30,
Nine Months Ended
2022 2021 2022 2021
Amortization of intangible assets (1)
Amounts related to continuity and separation benefits, cost reductions and strategic review initiatives (2)$ 2,809 $ (10,259) $ 23,653 $ 10,007 __________ (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 decreases during the three and nine months endedSeptember 30, 2022 were 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 include, among other things, certain accelerated depreciation charges, inventory adjustments and employee separation, continuity and other benefit-related costs, including amounts related to restructurings. Amounts during the third quarter of 2021 include a pre-tax reversal of accrued employee separation charges related to certain site sales. For further discussion of our restructuring initiatives, including a discussion of amounts recognized and expected future charges, refer to Note 5. Restructuring of the Condensed Consolidated Financial Statements included in Part I, Item 1. The decreases in Cost of revenues for the three and nine months endedSeptember 30, 2022 were primarily due to decreased revenues and decreased amortization expense, partially offset by unfavorable changes in product mix resulting primarily from decreased VASOSTRICT® revenues, as well as increased costs for amounts related to continuity and separation benefits, cost reductions and strategic review initiatives.
The decreases in gross margin percentage for the three and nine months ended
Selling, general and administrative. The decreases for the three and nine months endedSeptember 30, 2022 were primarily due to decreased costs associated with certain legal matters and the timing and amount of patient assistance contributions. Additionally, during the nine months endedSeptember 30, 2022 , Selling, general and administrative expenses reflected the recovery of certain previously-incurred opioid-related legal expenses. These decreases were partially offset by increased costs associated with our investment in consumer marketing efforts supporting XIAFLEX® and certain strategic review initiatives, restructuring and/or other cost reduction initiatives, including costs incurred in connection with our bankruptcy proceedings, which are included in Selling, general and administrative expenses until the Petition Date and in Reorganization items, net thereafter. Refer to Note 5. Restructuring of the Condensed Consolidated Financial Statements included in Part I, Item 1 for further discussion of certain restructuring initiatives, including a discussion of amounts recognized and expected future charges. Research and development. Our research and development (R&D) efforts are focused on the development of a diversified portfolio of innovative and clinically differentiated product candidates. 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, certain of which are further described below. We continue to invest in ourBranded Pharmaceuticals segment. In early 2020, we announced that we had initiated our XIAFLEX® development program for the treatment of plantar fibromatosis, for which we subsequently initiated a Phase 2 study in the fourth quarter of 2021. We have also been advancing and expect to continue to advance our cellulite treatment development programs for QWO®, which was launched inMarch 2021 for the treatment of moderate to severe cellulite in the buttocks of adult women. For example, during the second quarter of 2022, we launched a new multi-cohort, open-label study relevant to the use of QWO® for the treatment of moderate to severe cellulite in the buttocks of adult women. This study, which is designed to test different interventions to assess their potential impact on reduction of bruising, has been created with the flexibility to add cohorts in order to test additional interventions over time if desired. We also expect to continue to focus investments in ready-to-use and other product candidates in our Sterile Injectables segment, potentially including acquisitions and/or license and commercialization agreements such as the 2022 Nevakar Agreement that is further described in Note 11. License, Collaboration and Asset Acquisition Agreements of the Condensed Consolidated Financial Statements included in Part I, Item 1. 49
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The increases in R&D expense for the three and nine months endedSeptember 30, 2022 were primarily driven by increased costs associated with our XIAFLEX® development programs, certain restructuring and other cost reduction initiatives and certain post-marketing commitments. Refer to Note 5. Restructuring of the Condensed Consolidated Financial Statements included in Part I, Item 1 for further discussion of certain restructuring initiatives, including a discussion of amounts recognized and expected future charges.
As our development programs progress, it is possible that our R&D expenses could increase.
Acquired in-process research and development. We recognize Acquired in-process research and development charges in periods in which we acquire in-process research and development from third parties or incur (up to the point of regulatory approval) expenses related to upfront or milestone payments to third parties. The increase in Acquired in-process research and development charges for the nine months endedSeptember 30, 2022 was primarily driven by the incurrence, during the second quarter of 2022, of expenses related to upfront payments associated with the 2022 Nevakar Agreement and the TLC Agreement of$35.0 million and$30.0 million , respectively, which are further described in Note 11. License, Collaboration and Asset Acquisition Agreements of the Condensed Consolidated Financial Statements included in Part I, Item 1. To the extent we enter into agreements to acquire in-process research and development in the future and/or incur expenses related to upfront or milestone payments to third parties associated with existing or potential future agreements, Acquired in-process research and development charges could increase in the future, and the amounts of any increases could be material. Litigation-related and other contingencies, net. Included within Litigation-related and other contingencies, net are changes to our accruals for litigation-related charges. Our material legal proceedings and other contingent matters are described in more detail in Note 15. Commitments and Contingencies of the Condensed Consolidated Financial Statements included in Part I, Item 1. Notwithstanding any relief that may be available as a result of our bankruptcy proceedings, it is possible that our legal proceedings, including those relating to opioid claims, could have a material adverse effect on our business, financial condition, results of operations and cash flows, including in the short term. For further discussion, refer to Note 1. Basis of Presentation, Note 2. Bankruptcy Proceedings and Note 15. Commitments and Contingencies of the Condensed Consolidated Financial Statements included in Part I, Item 1. Asset impairment charges. The following table presents the components of our total Asset impairment charges for the three and nine months endedSeptember 30, 2022 and 2021 (in thousands): Three Months Ended September 30, Nine Months Ended September 30, 2022 2021 2022 2021 Goodwill impairment charges$ 97,000 $ -$ 1,845,000 $ - Other intangible asset impairment charges 53,200 - 103,153 7,811 Property, plant and equipment impairment charges - - 3,063 427 Disposal group impairment charges - 42,155 - 42,155 Total asset impairment charges$ 150,200 $ 42,155
For additional information, refer to Note 4. Discontinued Operations, Note 7. Fair Value Measurements and Note 10.Goodwill and Other Intangibles of the Condensed Consolidated Financial Statements included in Part I, Item 1, as well as the "CRITICAL ACCOUNTING ESTIMATES" section herein. Acquisition-related and integration items, net. Acquisition-related and integration items, net primarily consist of the net benefit from changes in the fair value of acquisition-related contingent consideration liabilities resulting from changes to our estimates regarding the timing and amount of the future revenues of the underlying products and changes in other assumptions impacting the probability of incurring, and extent to which we could incur, related contingent obligations. See Note 7. Fair Value Measurements of the Condensed Consolidated Financial Statements included in Part I, Item 1 for further discussion of our acquisition-related contingent consideration.
Interest expense, net. The components of Interest expense, net for the three and
nine months ended
Three Months Ended September
30, Nine Months Ended September 30,
2022 2021 2022 2021
Interest expense $ 74,931 $ 142,994 $ 349,937 $ 419,334
Interest income (178) (36) (451) (482)
Interest expense, net $ 74,753 $ 142,958 $ 349,486 $ 418,852
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The decreases in interest expense for the three and nine months endedSeptember 30, 2022 were primarily attributable to the fact that we ceased the recognition of interest expense related to our indebtedness beginning on the Petition Date as a result of the Chapter 11 Cases. Additionally, when compared to the prior year periods, there have been decreases to interest expense resulting from reductions in the aggregate principal amount of our indebtedness, which were primarily attributable to the partial repayment of the Revolving Credit Facility inOctober 2021 , theJanuary 2022 Senior Notes Repayments and certain quarterly payments made on the Term Loan Facility. These decreases in interest expense were partially offset by increases in the weighted average interest rate applicable to our total indebtedness through the Petition Date. Beginning during the third quarter of 2022, we also became obligated to make certain adequate protection payments as a result of the Chapter 11 Cases, which are currently being accounted for as a reduction of the carrying amount of the related debt instruments. Some or all of the adequate protection payments may later be recharacterized as interest expense depending upon certain developments in the Chapter 11 Cases, which could result in increases in interest expense in future periods that may be material. Refer to Note 14. Debt of the Condensed Consolidated Financial Statements included in Part I, Item 1 for further discussion. Interest income varies primarily based on the amounts of our interest-bearing investments, such as money market funds, as well as changes in the corresponding interest rates. Loss on extinguishment of debt. The amount during the nine months endedSeptember 30, 2021 relates to theMarch 2021 Refinancing Transactions. Refer to Note 14. Debt of the Condensed Consolidated Financial Statements included in Part I, Item 1 for further discussion. Reorganization items, net. Amounts relate to the net expense or income recognized during our bankruptcy proceedings required to be presented as Reorganization items, net under ASC 852. Refer to Note 2. Bankruptcy Proceedings of the Condensed Consolidated Financial Statements included in Part I, Item 1 for further details. Costs related to our bankruptcy proceedings that were incurred prior to the Petition Date are generally reflected as Selling, general and administrative expenses in our Condensed Consolidated Statements of Operations.
Other income, net. The components of Other income, net for the three and nine
months ended
Three Months Ended September
30, Nine Months Ended September 30,
2022 2021 2022 2021
Net (gain) loss on sale of business and other
assets $ (15) $ 107 $ (11,760) $ 198
Foreign currency (gain) loss, net (3,984) (754) (4,552) 1,507
Net loss from our investments in the equity
of other companies 71 89 297 399
Other miscellaneous, net (70) (5,397) (6,132) (6,775)
Other income, net $ (3,998) $ (5,955) $ (22,147) $ (4,671) For additional information on the components of Other income, net, refer to Note 18. Other Income, Net of the Condensed Consolidated Financial Statements included in Part I, Item 1.
Income tax expense. The following table displays our (Loss) income from continuing operations before income tax, Income tax expense and Effective tax rate for the three and nine months endedSeptember 30, 2022 and 2021 (dollars in thousands): Three Months Ended September 30, Nine Months Ended September 30, 2022 2021 2022 2021 (Loss) income from continuing operations before income tax$ (707,592) $ (47,741) $ (2,648,439) $ 958 Income tax expense $ 10,680$ 1,548 $ 16,016$ 13,372 Effective tax rate (1.5) % (3.2) % (0.6) % 1,395.8 % Our tax rate is affected by recurring items, such as tax rates in non-U.S. jurisdictions as compared to the notionalU.S. federal statutory tax rate, and the relative amount of income or loss in those various jurisdictions. It is also impacted by certain items that may occur in any given period but are not consistent from period to period. The change in Income tax expense for the three months endedSeptember 30, 2022 compared to the prior year period primarily relates to an increase in accrued interest on uncertain tax positions, changes in the geographic mix of pre-tax earnings and a discrete tax benefit primarily associated with the filing of the Company'sU.S. federal income tax return. The change in Income tax expense for the nine months endedSeptember 30, 2022 compared to the prior year period primarily relates to the 2021 discrete tax expense related to Canadian uncertain tax positions and changes in the geographic mix of pre-tax earnings. 51
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As previously disclosed, the Company concluded that there was substantial doubt about its ability to continue as a going concern within one year after the date of issuance of the Condensed Consolidated Financial Statements included in the Second Quarter 2022 Form 10-Q. The Company considered this in determining that certain net deferred tax assets were no longer more likely than not realizable. As a result, an immaterial increase in valuation allowance on the Company's net deferred tax assets was recorded in various jurisdictions during the second quarter of 2022. The Company maintains a full valuation allowance against the net deferred tax assets in theU.S. , Luxembourg and certain other foreign tax jurisdictions as ofSeptember 30, 2022 . It is possible that within the next 12 months there may be sufficient positive evidence to release a portion or all of the valuation allowance. Release of these valuation allowances would result in a benefit to income tax expense for the period the release is recorded, which could have a material impact on net earnings. The timing and amount of the potential valuation allowance release are subject to significant management judgment and prospective earnings. We are incorporated inIreland and also maintain subsidiaries in, among other jurisdictions, theU.S. ,Canada ,India , theUnited Kingdom and Luxembourg. TheIRS and other taxing authorities may continue to challenge our tax positions. TheIRS presently is examining certain of our subsidiaries'U.S. income tax returns for fiscal years ended betweenDecember 31, 2011 andDecember 31, 2015 and, in connection with those examinations, is reviewing our tax positions related to, among other things, certain intercompany arrangements, including the level of profit earned by ourU.S. subsidiaries pursuant to such arrangements, and a product liability loss carryback claim. For additional information, including a discussion of related recent developments and their potential impact on us, refer to Note 19. Income Taxes of the Condensed Consolidated Financial Statements included in Part I, Item 1. During the third quarter of 2020, theIRS opened an examination into certain of our subsidiaries'U.S. income tax returns for fiscal years ended betweenDecember 31, 2016 andDecember 31, 2018 . TheIRS will likely examine our tax returns for other fiscal years and/or for other tax positions. Similarly, other tax authorities are currently examining our non-U.S. tax returns. Additionally, other jurisdictions where we are not currently under audit remain subject to potential future examinations. Such examinations may lead to proposed or actual adjustments to our taxes that may be material, individually or in the aggregate. See the risk factor "TheIRS and other taxing authorities may continue to challenge our tax positions and we may not be able to successfully maintain such positions" in Part I, Item 1A. "Risk Factors" in the Annual Report for more information. Discontinued operations, net of tax. The operating results of the Company's Astora business, which the Board resolved to wind down in 2016, are reported as Discontinued operations, net of tax in the Condensed Consolidated Statements of Operations for all periods presented. The following table provides the operating results of Astora Discontinued operations, net of tax, for the three and nine months endedSeptember 30, 2022 and 2021 (in thousands): Three Months Ended September 30, Nine Months Ended September 30, 2022 2021 2022 2021 Litigation-related and other contingencies, net $ -$ 25,000 $ -$ 25,000 Loss from discontinued operations before income taxes$ (3,897) $ (31,306) $ (15,115) $ (43,400) Income tax benefit $ -$ (3,388) $ -$ (4,631) Discontinued operations, net of tax$ (3,897) $
(27,918)
Amounts included in the Litigation-related and other contingencies, net line of the table above are for mesh-related litigation. The remaining pre-tax amounts during the three and nine months endedSeptember 30, 2022 and 2021 were primarily related to mesh-related legal defense costs and certain other items. For additional discussion of mesh-related matters, refer to Note 15. Commitments and Contingencies of the Condensed Consolidated Financial Statements included in Part I, Item 1.
Business Segment Results Review
Revenues, net. The following table displays our revenue by reportable segment for the three and nine months endedSeptember 30, 2022 and 2021 (dollars in thousands): Three Months Ended September 30, % Change Nine Months Ended September 30, % Change 2022 2021 2022 vs. 2021 2022 2021 2022 vs. 2021 Branded Pharmaceuticals$ 203,501 $ 230,977 (12) % $ 627,314$ 665,652 (6) % Sterile Injectables 118,693 343,653 (65) % 481,892 946,998 (49) % Generic Pharmaceuticals 201,435 174,306 16 % 590,756 522,451 13 %International Pharmaceuticals (1) 18,061 23,092 (22) % 63,101 68,676 (8) % Total net revenues from external customers$ 541,690 $ 772,028
(30) %$ 1,763,063 $ 2,203,777 (20) % __________
(1)Revenues generated by our
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Branded Pharmaceuticals . The following table displays the significant components of ourBranded Pharmaceuticals revenues from external customers for the three and nine months endedSeptember 30, 2022 and 2021 (dollars in thousands): Three Months Ended September 30, % Change Nine Months Ended September 30, % Change 2022 2021 2022 vs. 2021 2022 2021 2022 vs. 2021 Specialty Products: XIAFLEX®$ 104,014 $ 105,509 (1) %$ 324,376 $ 312,266 4 % SUPPRELIN® LA 31,283 30,069 4 % 84,852 85,665 (1) % Other Specialty (1) 11,033 26,339 (58) % 50,023 74,407 (33) % Total Specialty Products$ 146,330 $ 161,917 (10) %$ 459,251 $ 472,338 (3) % Established Products: PERCOCET®$ 25,052 $ 26,914 (7) %$ 77,483 $ 78,695 (2) % TESTOPEL® 9,430 11,686 (19) % 28,331 32,314 (12) % Other Established (2) 22,689 30,460 (26) % 62,249 82,305 (24) % Total Established Products$ 57,171 $ 69,060 (17) %$ 168,063 $ 193,314 (13) %Total Branded Pharmaceuticals (3)$ 203,501 $ 230,977 (12) %$ 627,314 $ 665,652 (6) %
__________
(1)Products included within Other Specialty include AVEED®, NASCOBAL® Nasal Spray and QWO®. (2)Products included within Other Established include, but are not limited to, EDEX®. (3)Individual products presented above represent the top two performing products in each product category for either the three or nine months endedSeptember 30, 2022 , and/or any product having revenues in excess of$25 million during any completed quarterly period in 2022 or 2021.
Specialty Products
Certain of our products that are physician administered, including XIAFLEX®, have generally experienced decreased sales volumes during the COVID-19 pandemic due to reduced physician office activity and patient office visits because of the COVID-19 pandemic. While these products have generally been recovering since early 2020, they have at times continued to be impacted by COVID-19-related and, more recently, other market conditions for specialty product office-based procedures, including medical and administrative staff shortages in physicians' offices, reduced physician office activity and lower numbers of in-person patient office visits. The pandemic and other market conditions have also created a high backlog of demand for non-elective urology procedures, which has in certain cases reduced the utilization of XIAFLEX® by healthcare providers. Additionally, we believe that concerns by healthcare providers regarding economic uncertainty have impacted purchasing patterns of XIAFLEX®. Changes in market conditions could have a material adverse effect on our business, financial condition, results of operations and cash flows. The decrease in XIAFLEX® revenues for the three months endedSeptember 30, 2022 was primarily attributable to lower volumes resulting from a disruption experienced by our third-party specialty pharmacy provider, as well as decreases in demand as a result of the market conditions described above. These factors were partially offset by increased net price. The increase in XIAFLEX® revenues for the nine months endedSeptember 30, 2022 was primarily attributable to increased net price, partially offset by lower volumes resulting primarily from the factors described above. The increase in SUPPRELIN® LA revenues for the three months endedSeptember 30, 2022 was primarily attributable to increased net price, partially offset by decreased volumes. The decrease in SUPPRELIN® LA revenues for the nine months endedSeptember 30, 2022 was primarily attributable to decreased volumes, partially offset by increased net price. The decreases in Other Specialty revenues for the three and nine months endedSeptember 30, 2022 were primarily attributable to decreased NASCOBAL® Nasal Spray and QWO® revenues. Established Products
The decreases in TESTOPEL® revenues for the three and nine months ended
The decreases in PERCOCET® revenues for the three and nine months ended
The decreases in Other Established revenues for the three and nine months endedSeptember 30, 2022 were primarily attributable to ongoing competitive pressures impacting this product portfolio and certain other factors. 53
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Sterile Injectables. The following table displays the significant components of our Sterile Injectables revenues from external customers for the three and nine months endedSeptember 30, 2022 and 2021 (dollars in thousands): Three Months Ended September 30, % Change Nine Months Ended September 30, % Change 2022 2021 2022 vs. 2021 2022 2021 2022 vs. 2021 VASOSTRICT®$ 33,697 $ 255,697 (87) %$ 225,217 $ 676,764 (67) % ADRENALIN® 24,917 28,722 (13) % 85,514 88,136 (3) % Other Sterile Injectables (1) 60,079 59,234 1 % 171,161 182,098 (6) % Total Sterile Injectables (2)$ 118,693 $ 343,653 (65) %$ 481,892 $ 946,998 (49) % __________ (1)Products included within Other Sterile Injectables include ertapenem for injection, APLISOL® and others. (2)Individual products presented above represent the top two performing products within the Sterile Injectables segment for either the three or nine months endedSeptember 30, 2022 , and/or any product having revenues in excess of$25 million during any completed quarterly period in 2022 or 2021. The decreases in VASOSTRICT® revenues for the three and nine months endedSeptember 30, 2022 were primarily driven by decreases to both net price and volumes, which were primarily attributable to the impact of generic competition as well as lower overall market demand as COVID-19-related hospital utilization levels declined. During the first quarter of 2022, multiple competitive generic alternatives to VASOSTRICT® were launched, beginning with a generic that was launched at risk and began shipping toward the end ofJanuary 2022 . Since then, additional competitive alternatives have entered the market, including authorized generics. These launches began to significantly impact both Endo's market share and product price toward the middle of the first quarter of 2022, and the effects of competition have since increased and are likely to continue to increase throughout 2022 and beyond. Additionally, beginning late in the first quarter of 2022, COVID-19-related hospital utilization levels began to decline, resulting in significantly decreased market volumes for both branded and competing generic alternatives to VASOSTRICT®. As a result of these factors, we experienced a period of significant VASOSTRICT® vial destocking beginning during the second quarter of 2022, which resulted in significant reductions to VASOSTRICT® revenues. InFebruary 2022 , we launched VASOSTRICT® in a ready-to-use bottle, representing the first and only ready-to-use formulation of the drug. While we have seen some market conversion to the bottle since its launch, the factors described above have had and could continue to have a material adverse effect on our business, financial condition, results of operations and cash flows. For additional information, refer to Note 15. Commitments and Contingencies of the Condensed Consolidated Financial Statements included in Part I, Item 1 under the heading "Patent Matters." The decrease in ADRENALIN® revenues for the three months endedSeptember 30, 2022 was primarily attributable to decreased volumes. The decrease in ADRENALIN® revenues for the nine months endedSeptember 30, 2022 was primarily attributable to decreased net price, partially offset by increased volumes. The increase in Other Sterile Injectables revenues for the three months endedSeptember 30, 2022 was primarily attributable to increased volumes, partially offset by decreased price. The decrease in Other Sterile Injectables revenues for the nine months endedSeptember 30, 2022 was primarily attributable to decreased price, partially offset by increased volumes.Generic Pharmaceuticals . The increases inGeneric Pharmaceuticals revenues for the three and nine months endedSeptember 30, 2022 were primarily attributable to revenues from varenicline tablets (our generic version of Pfizer Inc.'s Chantix®), which launched inSeptember 2021 , partially offset by competitive pressures on certain generic products. The timing and extent to which we could face competition on varenicline tablets cannot be predicted with certainty; however, competition could occur at any time, including in the near term, which could have a material adverse effect on our business, financial condition, results of operations and cash flows.International Pharmaceuticals . The decreases inInternational Pharmaceuticals revenues for the three and nine months endedSeptember 30, 2022 were primarily attributable to competitive pressures and the expiration of a product agreement. Segment adjusted income from continuing operations before income tax. The following table displays our Segment adjusted income from continuing operations before income tax (the measure we use to evaluate segment performance) by reportable segment for the three and nine months endedSeptember 30, 2022 and 2021 (dollars in thousands): Three Months Ended September 30, % Change Nine Months Ended September 30, % Change 2022 2021 2022 vs. 2021 2022 2021 2022 vs. 2021 Branded Pharmaceuticals$ 84,940 $ 105,849 (20) %$ 251,219 $ 301,277 (17) % Sterile Injectables$ 58,633 $ 282,300 (79) %$ 318,284 $ 751,922 (58) % Generic Pharmaceuticals$ 87,675 $ 34,010 NM$ 237,394 $ 89,036 NM International Pharmaceuticals$ 4,296 $ 6,764 (36) %$ 17,149 $ 24,337 (30) % __________
NM indicates that the percentage change is not meaningful or is greater than 100%.
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Branded Pharmaceuticals . The decreases in Segment adjusted income from continuing operations before income tax for the three and nine months endedSeptember 30, 2022 were primarily attributable to the gross margin effects of the decreased revenues further described above, as well as increased costs associated with our investment in consumer marketing efforts supporting XIAFLEX® and certain legal matters. Sterile Injectables. The decreases in Segment adjusted income from continuing operations before income tax for the three and nine months endedSeptember 30, 2022 were primarily attributable to the gross margin effects of the decreased revenues further described above.Generic Pharmaceuticals . The increases in Segment adjusted income from continuing operations before income tax for the three and nine months endedSeptember 30, 2022 were primarily attributable to the gross margin effects of the increased revenues further described above and favorable changes in product mix.International Pharmaceuticals . The decreases in Segment adjusted income from continuing operations before income tax for the three and nine months endedSeptember 30, 2022 were primarily attributable to the gross margin effects of the decreased revenues further described above.
LIQUIDITY AND CAPITAL RESOURCES
On the Petition Date, the Debtors filed voluntary petitions for relief under the Bankruptcy Code, which constituted an event of default that accelerated our obligations under substantially all of our then-outstanding debt instruments. However, section 362 of the Bankruptcy Code stays the creditors from taking any action to enforce the related financial obligations and the creditors' rights of enforcement in respect of the debt instruments are subject to the applicable provisions of the Bankruptcy Code. Refer to Note 1. Basis of Presentation, Note 2. Bankruptcy Proceedings and Note 14. Debt of the Condensed Consolidated Financial Statements included in Part I, Item 1 for further discussion. Our principal source of liquidity is cash generated from operations. Cash and cash equivalents, which primarily consisted of bank deposits and money market accounts, totaled$1,053.9 million atSeptember 30, 2022 compared to$1,507.2 million atDecember 31, 2021 . Our principal liquidity requirements are primarily for working capital for operations, licenses, capital expenditures, mergers and acquisitions (including upfront and milestone payments to third parties), income taxes, litigation-related and other contingent liabilities, debt service payments (including adequate protection payments on our First Lien Debt Instruments) and other amounts related to our bankruptcy proceedings. Our business is exposed to a variety of material risks as further described herein and in the Annual Report. For example, we may face decreased revenues as a result of COVID-19 and, to the extent COVID-19 has resulted in any increase to our Cash and cash equivalents, including as a result of any increase in revenues, such increase could be temporary. We may face unexpected costs in connection with our business operations, our ongoing and future legal proceedings, governmental investigations and other contingent liabilities (including potential costs related to settlements and judgments, as well as legal defense costs), our ongoing bankruptcy proceedings and the implementation of our COVID-19 related policies and procedures. On a longer-term basis, we may not be able to accurately predict the effect of certain developments on our sales and gross margins, such as the degree of market acceptance, patent protection and exclusivity of our products, pricing pressures (including those due to the impact of competition), the effectiveness of our sales and marketing efforts and the outcome of our current efforts to develop, receive approval for and successfully launch our product candidates. Furthermore, we may not be successful in implementing, or may face unexpected changes or expenses in connection with, our strategic direction, including the potential for opportunistic corporate development transactions. Additionally, as further discussed in Note 1. Basis of Presentation of the Condensed Consolidated Financial Statements included in Part I, Item 1, management has concluded that there is substantial doubt regarding our ability to continue as a going concern. Any of the above could have a material adverse effect on our business, financial condition, results of operations and cash flows and require us to seek additional sources of liquidity and capital resources as described below. To the extent we are required or choose to seek third-party financing in the future, there can be no assurance that we would be able to obtain any such required financing on a timely basis or at all, particularly in light of our ongoing bankruptcy proceedings and the corresponding event of default on our existing debt instruments. Additionally, any future financing arrangements could include terms that are not commercially beneficial to us, which could further restrict our operations and exacerbate any impact on our results of operations and liquidity that may result from any of the factors described above or other factors. Indebtedness. The Company and certain of its subsidiaries are party to the Credit Agreement governing the Credit Facilities and the indentures governing our various senior secured and senior unsecured notes. Refer to Note 2. Bankruptcy Proceedings and Note 14. Debt of the Condensed Consolidated Financial Statements included in Part I, Item 1 of this report and Note 15. Debt in the Consolidated Financial Statements included in Part IV, Item 15 of the Annual Report for additional information about our indebtedness, including information about amounts currently outstanding, maturities, interest rates, security, priority, certain recent debt financing transactions and the effects of bankruptcy-related proceedings and the corresponding event of default. 55
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Working capital. The components of our working capital and our liquidity at
September 30, December 31,
2022 2021
Total current assets $ 2,054,162 $ 2,714,586
Less: total current liabilities 543,053 1,629,962
Working capital $
1,511,109
3.8:1 1.7:1
Net working capital increased by $426.5 million from December 31, 2021 to
September 30, 2022 . During this period, working capital benefited from the
favorable impacts to net current assets resulting from revenues and gross
margins, which are further described above. These benefits were partially offset
by, among other things, the following current period activity: (i) Capital
expenditures, excluding capitalized interest, net of Proceeds from the U.S.
Government Agreement, of $64.3 million ; (ii) Acquired in-process research and
development charges of $68.7 million ; and (iii) certain expenses incurred in
connection with our bankruptcy proceedings and certain restructuring and other
cost reduction initiatives.
Our bankruptcy proceedings have also resulted in adjustments to the
classification of certain assets and liabilities in our Condensed Consolidated
Balance Sheets during the nine months ended September 30, 2022 , which have
resulted in significant changes to our working capital. For example, many
liabilities previously included in current liabilities have been reclassified as
Liabilities subject to compromise and are therefore no longer part of our
working capital. The classification of our assets and liabilities in our
Condensed Consolidated Balance Sheets may continue to change significantly
during bankruptcy proceedings, which could result in material changes to our
working capital in future periods. Refer to Note 2. Bankruptcy Proceedings and
Note 14. Debt of the Condensed Consolidated Financial Statements included in
Part I, Item 1 of this report for additional information.
The following table summarizes our Condensed Consolidated Statements of Cash
Flows for the nine months ended
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