LANTHEUS HOLDINGS, INC. The following discussion and analysis of our financial condition and results of operations should be read together with Item 6, "Selected Financial Data" and the consolidated financial statements and the related notes included in Item 8 of this Annual Report on Form 10-K. This discussion contains forward-looking statements related to future events and our future financial performance that are based on current expectations and subject to risks and uncertainties. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of many factors, including those set forth in Part I-Item 1A. "Risk Factors" and "Cautionary Note Regarding Forward Looking Statements." included in this Annual Report on Form 10-K.
Overview
Our Business
We are an established leader and fully integrated provider committed to innovative imaging diagnostics, targeted therapeutics, and artificial intelligence solutions to Find, Fight and Follow serious medical conditions. We classify our products in three revenue categories: precision diagnostics, radiopharmaceutical oncology, and strategic partnerships and other revenue. Our leading precision diagnostic products assist HCPs Find and Follow diseases in non-oncologic conditions. Our radiopharmaceutical oncology diagnostics and therapeutics help HCPs Find, Fight and Follow cancer. Our strategic partnerships and other revenue category focuses on facilitating precision medicine through the use of biomarkers, digital solutions and radiotherapeutic platforms, and also includes our license of RELISTOR to Bausch. Our commercial products are used by cardiologists, internal medicine physicians, nuclear medicine physicians, oncologists, radiologists, sonographers, technologists and urologists working in a variety of clinical settings. We believe that our diagnostic products provide improved diagnostic information that enables HCPs to better detect and characterize, or rule out, disease, with the potential to achieve better patient outcomes, reduce patient risk and limit overall costs for payors and throughout the healthcare system. We produce and market our products throughout theU.S. , selling primarily to clinics, group practices, hospitals, integrated delivery networks and radiopharmacies. We sell our products outside theU.S. through a combination of direct distribution inCanada and third party distribution relationships inEurope ,Canada ,Australia ,Asia-Pacific ,Central America andSouth America .
Our headquarters are located in
In the first quarter of 2021, we completed the evaluation of our operating and reporting structure, including the impact on our business of the acquisition of Progenics, and the sale of ourPuerto Rico subsidiary, which resulted in a change in our operating segments to one reportable business segment.
Key Factors Affecting Our Results
Our 2021 financial performance reflects full year results of the Progenics
business, whereas the year ended
Our business and financial performance have been, and continue to be, affected by the following:
PYLARIFY Approval and Commercial Launch
OnMay 27, 2021 , we announced that theU.S. Food and Drug Administration ("FDA") had approved PYLARIFY, an F 18-labeled PET imaging agent targeting prostate-specific membrane antigen ("PSMA"). PYLARIFY is a product in our radiopharmaceutical oncology product category. We commercially launched PYLARIFY in theU.S. inJune 2021 . PYLARIFY is a radioactive diagnostic agent indicated for PET imaging of PSMA-positive lesions in men with prostate cancer with suspected metastasis who are candidates for initial definitive therapy and with suspected recurrence based on elevated serum prostate-specific antigen ("PSA") levels. PYLARIFY works by binding to PSMA, a protein that is overexpressed on the surface of more than 90% of primary and metastatic prostate cancer cells. PYLARIFY works with PET/CT technology to produce a combined PET/CT scan that enables the reader of the PET/CT scan to detect and locate the disease. According to theAmerican Cancer Society , prostate cancer is the second most common cancer in American men -- one in eight American men will be diagnosed with prostate cancer in their lifetimes and over 3.1 million American men are living with prostate cancer today. Based on estimates from third party sources regarding the incidence of prostate cancer in men in theU.S. , we believe the market potential for PSMA PET imaging agents could be up to 220,000 annual scans, comprised of 90,000 scans for patients with intermediate, unfavorable or high/very high risk of suspected metastases of prostate cancer and 130,000 scans for patients with 60
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suspected recurrence of prostate cancer. Because we are in the process of launching this imaging agent, we can give no assurance as to how clinical practice may evolve or what our ultimate market penetration may be.
The approval of PYLARIFY was based on data from two Company-sponsored pivotal
studies ("OSPREY" and "CONDOR") designed to establish the safety and diagnostic
performance of PYLARIFY across the prostate cancer disease continuum. Results
from OSPREY (Cohort A) demonstrated improvement in specificity and positive
predictive value of PYLARIFY PET imaging over conventional imaging in men at
risk for metastatic prostate cancer prior to initial definitive therapy. CONDOR
studied men with biochemical recurrent prostate cancer. In patients with
biochemical recurrent prostate cancer and non-informative baseline imaging,
PYLARIFY demonstrated high correct localization and detection rates, including
in patients with early recurrent disease with low, but rising, PSA blood levels
(median PSA 0.8 ng/mL).
Upon commercial launch in June 2021 , PYLARIFY was immediately available in
select parts of the U.S. Over the course of the remainder of 2021, PYLARIFY
availability expanded into additional regions and is now broadly available
nationwide. We continue to expand our geographic coverage, customer contracting
and market access coverage to serve our customers and the U.S. prostate cancer
community.
The commercial launch of PYLARIFY is complex and expensive. During 2021, we
hired additional employees to assist us with the commercialization of PYLARIFY,
including in sales, marketing, reimbursement, quality and medical affairs. To
manufacture PYLARIFY, we assembled and qualified a nationwide network of PMFs
with radioisotope-producing cyclotrons that make F 18, which has a 110-minute
half-life, so PYLARIFY is manufactured and distributed rapidly to end-users.
After being made on a cyclotron at a PMF, the F 18 is then combined with certain
chemical ingredients in specially designed chemistry synthesis boxes to
manufacture PYLARIFY. The finished PYLARIFY is then quality control tested and
transferred to a radiopharmacist who prepares and dispenses patient-specific
doses of the final product. Because each of the PMFs manufacturing these
products is deemed by the FDA to be a separate manufacturing site, each has to
be separately approved by the FDA. Although PYLARIFY is now broadly available
nationwide and we continue to qualify additional PMFs, we can give no assurance
that the FDA will continue to approve PMFs in accordance with our planned
roll-out schedule. If FDA approval of manufacturing sites is delayed or
withdrawn, our future business, results of operations, financial condition and
cash flows could be adversely affected.
In addition to the network of PMFs, we have also been working with academic
medical centers in the U.S. that have radioisotope-producing cyclotrons and
which have expressed an interest in manufacturing PYLARIFY. Under this
initiative, we would enter into a fee-for-service arrangement under which the
academic medical center's PMF would manufacture and supply batches of PYLARIFY,
and its radiopharmacy would prepare patient-ready unit doses, in each case for
and on behalf of us. We would then sell those unit doses to the academic medical
center's hospitals and clinics, and in some instances, to additional customers
in the academic medical center's geographic area, in each case, under separate
purchase agreements. The academic medical center's PMF's ability to manufacture
and supply batches of PYLARIFY will be subject to FDA approval, and we can give
no assurance that the FDA will approve such PMFs in accordance with our planned
roll-out schedule.
Our commercial launch also required obtaining adequate coding, coverage and
payment for PYLARIFY, including not only coverage from Medicare, Medicaid and
other government payors, as well as private payors, but also appropriate payment
levels, to adequately cover our customers' costs of using PYLARIFY in PET/CT
imaging procedures. We received notification that our HCPCS code, which enables
streamlined billing, went into effect as of January 1, 2022 . In addition,
effective January 1, 2022 , the CMS granted Transitional Pass-Through Payment
Status in the hospital outpatient setting ("TPT Status") for PYLARIFY, enabling
traditional Medicare to provide an incremental payment for PET/CT scans
performed with PYLARIFY in that setting. TPT Status for PYLARIFY is expected to
expire December 31, 2024 . After TPT Status expires, under current Medicare
rules, PYLARIFY, similar to other diagnostic radiopharmaceuticals, would not be
separately reimbursed in the hospital outpatient setting but rather would be
included as part of the facility fee a hospital otherwise receives for a PET/CT
imaging procedure, and the facility fee does not always cover the cost of a drug
used in the procedure. We can give no assurance that any CMS reimbursement in
the hospital outpatient setting that follows the expiration of TPT Status will
be adequate to cover the cost of PYLARIFY used in a PET/CT imaging procedure.
We actively pursue patents in connection with PYLARIFY, both in the U.S. and
internationally. In the U.S. for PYLARIFY, we have four Orange Book-listed
patents, including composition of matter patents, which expire in 2030 and 2037.
Outside of the U.S. , we are currently pursuing additional PYLARIFY patents to
obtain similar patent protection as in the U.S. PYLARIFY AI Clearance and Use
During 2021, we also announced that our subsidiary, EXINI, was granted 510(k) clearance by the FDA in theU.S. and received CE marking inEurope for aPROMISE. We commercially launched aPROMISE under the name PYLARIFY AI in theU.S. inNovember 2021 . 61
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PYLARIFY AI is artificial intelligence medical device software developed to assist with the reading and quantification of PYLARIFY scans. The technology automatically analyzes a PSMA PET/CT image to segment anatomical regions - 51 bones and 12 soft tissue organs. This image segmentation enables automated localization, detection and quantification of potential PSMA-avid lesions in a PSMA PET/CT image, which is then incorporated into a standardized report for physicians.
Anticipated Continued Growth of DEFINITY and Expansion of Our Ultrasound Microbubble Franchise
We believe the market opportunity for our ultrasound microbubble enhancing agent, DEFINITY, continues to be significant. DEFINITY has been our fastest growing and highest margin commercial product. We anticipate DEFINITY sales will continue to grow in the future. As we continue to educate the physician and healthcare provider community about the benefits and risks of DEFINITY, we believe we will be able to continue to grow the appropriate use of DEFINITY in suboptimal echocardiograms. In a U.S. market with three echocardiography ultrasound enhancing agents approved by the FDA, we estimate that DEFINITY had over 80% of the market as ofDecember 31, 2021 .
As we continue to pursue expanding our microbubble franchise, our activities include:
•Patents - We continue to actively pursue additional patents in connection with DEFINITY and DEFINITY RT, both in theU.S. and internationally. In theU.S. for DEFINITY, we have four Orange Book-listed method of use patents, one of which expires in 2035 and three of which expire in 2037, as well as additional manufacturing patents that are not Orange Book-listed expiring in 2023 and 2037. In theU.S. for DEFINITY RT, we have five Orange Book-listed patents, including a composition of matter patent which expires in 2035. Outside of theU.S. , we are currently pursuing additional DEFINITY and DEFINITY RT patents to obtain similar patent protection as in theU.S. The Orange Book-listed patents include a patent on the use of VIALMIX RFID which expires in 2037; we have submitted additional VIALMIX RFID patent applications in major markets throughout the world. Hatch-Waxman Act - Even though our longest duration Orange Book-listed DEFINITY patent extends untilMarch 2037 , because our Orange Book-listed composition of matter patent expired inJune 2019 , we may face generic DEFINITY challengers in the near to intermediate term. Under the Hatch-Waxman Act, the FDA can approve Abbreviated New Drug Applications ("ANDAs") for generic versions of drugs if the ANDA applicant demonstrates, among other things, that (i) its generic candidate is the same as the innovator product by establishing bioequivalence and providing relevant chemistry, manufacturing and product data, and (ii) either the marketing of that generic candidate does not infringe the Orange Book-listed patent(s) or the Orange Book-listed patent(s) is invalid. Similarly, the FDA can approve a Section 505(b)(2) NDA from an applicant that relies on some of the information required for marketing approval to come from studies which the applicant does not own or have a legal right of reference. With respect to the Orange Book-listed patent(s) covering an innovator product, the ANDA applicant or the Section 505(b)(2) applicant (if relying on studies related to the innovator product) (together, the "Applicant") must give a notice (a "Notice") to the innovator of its certification that its generic candidate will not infringe the innovator's Orange Book-listed patent(s) or that the Orange Book-listed patent(s) is invalid. The innovator can then file suit against the Applicant within 45 days of receiving the Notice, and FDA approval to commercialize the generic candidate will be stayed (that is, delayed) for up to 30 months (measured from the date on which a Notice is received) while the patent dispute between the innovator and the Applicant is resolved in court. The 30-month stay could potentially expire sooner if the courts determine that no infringement had occurred or that the challenged Orange Book-listed patent is invalid or if the parties otherwise settle their dispute. As of the date of filing of this Annual Report on Form 10-K, we have not received any Notice from an Applicant. If we were to (i) receive any such Notice in the future, (ii) bring a patent infringement suit against the Applicant within 45 days of receiving that Notice, and (iii) successfully obtain the full 30-month stay, then the Applicant would be precluded from commercializing a generic version of DEFINITY prior to the expiration of that 30-month stay period and, potentially, thereafter, depending on how the patent dispute is resolved. Solely by way of example and not based on any knowledge we currently have, if we received a Notice from an Applicant inMarch 2022 and the full 30-month stay were obtained, then the Applicant would be precluded from commercialization until at leastSeptember 2024 . If we received a Notice some number of months in the future and the full 30-month stay were obtained, the commercialization date would roll forward in the future by the same number of months. In the event a 505(b)(2) applicant does not rely on studies related to the innovator product, the 30-month stay would not apply, but additional clinical studies may be required. •DEFINITY RT - DEFINITY RT became commercially available in the fourth quarter of 2021. A modified formulation of DEFINITY that allows both storage and shipment at room temperature, DEFINITY RT provides clinicians an additional choice and allows for greater utility of this formulation in broader clinical settings. Given its physical characteristics, we believe DEFINITY RT is also well-suited for inclusion in kits requiring microbubbles for other indications and applications (including in kits developed by third parties of the type described in the paragraph entitled Microbubble below). •VIALMIX RFID - VIALMIX RFID, our next-generation activation device designed specifically for both DEFINITY and DEFINITY RT, became commercially available in the fourth quarter of 2021. The activation rate and time are controlled by VIALMIX RFID through the use of radio-frequency identification technology ("RFID") to ensure reproducible activation of 62
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DEFINITY and DEFINITY RT. The RFID tag, which is affixed to the vial label, enables the DEFINITY or DEFINITY RT vial to be appropriately activated with the VIALMIX RFID activation device.
Global Mo-99 Supply
We currently have Mo-99 supply agreements withInstitute for Radioelements ("IRE"), running throughDecember 31, 2022 , with auto-renewal provisions and terminable upon notice of non-renewal, and withNTP Radioisotopes ("NTP"), acting for itself and on behalf of its subcontractor, theAustralian Nuclear Science and Technology Organisation ("ANSTO"), running throughMarch 31, 2022 , and for which we are currently negotiating an extension. We also have a Xenon supply agreement with IRE which runs throughDecember 31, 2023 , with auto-renewal provisions and terminable upon notice of non-renewal. Although we have a globally diverse Mo-99 supply with IRE inBelgium , NTP inSouth Africa , and ANSTO inAustralia , we still face supplier and logistical challenges in our Mo-99 supply chain. The NTP processing facility had periodic outages in 2017, 2018 and 2019. When NTP was not producing, we relied on Mo-99 supply from both IRE and ANSTO to limit the impact of the NTP outages. In 2019 and 2020, ANSTO experienced multiple facility issues that resulted in ANSTO outages and volume limitations, during which time we relied on IRE and NTP to limit the impact of those outages and limitations. Because of the COVID-19 pandemic, we experienced challenges receiving regularly scheduled orders of Mo-99 from our global suppliers, particularly in the second quarter of 2020. We continue to manage these various supply chain challenges, but depending on reactor and processor schedules and operations, at times we have not been able to fill some or all of the demand for our TechneLite generators on certain manufacturing days. A prolonged disruption of service from one of our three Mo-99 processing sites or one of their main Mo-99-producing reactors could have a substantial negative effect on our business, results of operations, financial condition and cash flows. To augment our current supply of Mo-99, we have a strategic arrangement withSHINE Medical Technologies LLC ("SHINE") for the future supply of Mo-99. Under the terms of the supply agreement, entered into inNovember 2014 , SHINE will provide Mo-99 produced using its proprietary LEU-solution technology for use in our TechneLite generators once SHINE's facility becomes operational and receives all necessary regulatory approvals, which SHINE now estimates will occur in 2023. The term of this arrangement provides for three years of supply of Mo-99. However, we cannot assure you that SHINE will be able to produce commercial quantities of Mo-99 for our business, or that SHINE together with our current suppliers will be able to deliver a sufficient quantity of Mo-99 to meet our needs. Inventory Supply We obtain a substantial portion of our imaging agents from a third party supplier. JHS is currently a significant supplier of DEFINITY and our sole source manufacturer of NEUROLITE, Cardiolite and evacuation vials, the latter being an ancillary component for our TechneLite generators. In addition to JHS, we rely on SBL as our sole source manufacturer of DEFINITY RT. Our new manufacturing agreement with JHS relating to DEFINITY, NEUROLITE and Cardiolite expires inDecember 2027 . In 2021, we have constructed a specialized in-house manufacturing facility at ourNorth Billerica campus for purposes of producing DEFINITY and, potentially, other sterile vial products. OnFebruary 22, 2022 , we received FDA approval of our sNDA, authorizing commercial manufacturing of DEFINITY at our new facility. DEFINITY manufactured at this facility became commercially available onFebruary 23, 2022 . We believe this investment will allow us to better manage DEFINITY manufacturing and inventory, reduce our costs in a potentially more price competitive environment, and provide us with supply chain redundancy. Radiopharmaceuticals are decaying radioisotopes with half-lives ranging from a few hours to several days. These products cannot be kept in inventory because of their limited shelf lives and are subject to just-in-time manufacturing, processing and distribution, which takes place at our facilities inNorth Billerica, Massachusetts andSomerset, New Jersey .
COVID-19 Pandemic
The global COVID-19 pandemic has had, and may continue to have, a material impact on our business. Towards the end of the first quarter of 2020 we began to experience, and through the date of this filing we are continuing to experience, impacts to our business and operations related to the COVID-19 pandemic, including the impact of hospital staffing challenges, vaccination mandates, employee absences due to illness, and a decline in the volume of certain procedures and treatments using our products. Although some of the restrictions, including stay-at-home mandates, imposed in response to the COVID-19 pandemic have been lifted in much of theU.S. , and there has been a rapid rollout and development of multiple vaccines and boosters, the resurgence of COVID-19 infections continued to impact certain aspects of our business during the fourth quarter of 2021. For example, we believe sales of DEFINITY were impacted by hospital nursing and sonographer shortages, and sales of AZEDRA were impacted by treatment capacity constraints in hospitals, treatment deferrals and cancellations by patients, and access restrictions by hospitals. In addition, there has been a substantial reduction in pulmonary ventilation studies in which our product, Xenon, is used because of institutional concerns and professional society guidelines relating to the possible spread of COVID-19 to technicians and other patients, because 63
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Xenon is both inhaled and exhaled by the patient. Our Xenon sales through the fourth quarter of 2021 continued to be at reduced levels, we expect these reduced levels to continue for at least as long as COVID-19 precautions remain in place, and we can give no assurance that Xenon sales will return to historic levels. The pandemic could still have a future negative impact on our business, particularly if there are additional resurgences as a result of mutations or other variations to the virus that further increase its communicability or its impact on certain populations, geographic regions and the healthcare system, including elective procedures and hospital access.
Research and Development Expenses
To remain a leader in the marketplace, we have historically made and will continue to make substantial investments in new product development and lifecycle management for existing products.
•For PYLARIFY, our development of PYLARIFY resulted in approval by the FDA in
•For 1095, the ARROW Phase 2 study in mCRPC patients was paused to minimize risk to subjects and healthcare providers during the pandemic, and new enrollment in that study restarted inOctober 2020 . In the fourth quarter of 2021, we completed an interim analysis of the ARROW Phase 2 study and are continuing that study without modifications. We currently expect to complete enrollment in the ARROW Phase 2 study later in 2022. •For LMI 1195, we have commenced a Phase 3 clinical trial for the use of LMI 1195 for the diagnosis and management of neuroblastoma tumors in pediatric and adult populations. We expect to initiate approximately 20 clinical sites in theU.S. to enroll approximately 100 patients with known or suspected neuroblastoma.
•We are also exploring additional lifecycle management opportunities for some of our current products, including AZEDRA.
Our investments in these additional clinical activities and lifecycle management opportunities will increase our operating expenses and impact our results of operations and cash flow, and we can give no assurances as to whether any of these clinical development candidates or lifecycle management opportunities will be successful.
Strategic Partnerships and Other Revenue
We continue to seek ways to further expand our portfolio of products and product candidates and how best to optimize the value of our current assets, evaluating a number of different opportunities to collaborate with others or to acquire or in-license additional products, product candidates, businesses and technologies to drive our future growth. Oncology
As we continue to pursue expanding our strategic partnerships, our Pharma Services activities and strategic partnerships in oncology include:
•Prostate Cancer - We collaborate with pharmaceutical companies developing therapies and diagnostics in prostate cancer. InJanuary 2022 , we announced a collaboration with theProstate Cancer Clinical Trial Consortium ("PCCTC"), a premier multicenter clinical research organization that specializes in prostate cancer research. The intent of the strategic collaboration is to integrate our AI platform into PCCTC studies to advance the development and validation of novel AI-enabled biomarkers. InSeptember 2021 , we entered into a development and commercialization collaboration withRefleXion Medical, Inc. to evaluate the use of piflufolastat F 18 to enable real-time therapeutic guidance of biology-guided radiotherapy in prostate cancer using the RefleXion X1TM platform. Prior to 2021, we had also entered into several other agreements, including ones with Bayer, POINT Biopharma and Regeneron, under which we supply piflufolastat F 18 in connection with their clinical studies, and Curium, under which we licensed exclusive rights to Curium to develop and commercialize piflufolastat F 18 inEurope . •Immuno-Oncology - InMay 2019 , we entered into a strategic collaboration and license agreement with NanoMab, a privately-held biopharmaceutical company focused on the development of next generation radiopharmaceuticals for cancer precision medicine. •Pan-Oncology - InMarch 2021 , we acquired fromRatio Therapeutics LLC (previouslyNoria Therapeutics, Inc. ) exclusive, worldwide rights to NTI-1309, an innovative imaging biomarker that targets fibroblast activation protein, an emerging target with broad potential imaging applicability and use in oncology. Upon further clinical development, we will assess options to bring NTI-1309 to market as a diagnostic or potentially a therapeutic product.
Microbubble Franchise
In addition, as described above, we continue to expand our microbubble
franchise. In
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assisted non-viral gene transfer technology for the development of a proposed treatment of xerostomia. Xerostomia is a lack of saliva production leading to dry mouth and has a variety of causes, including radiotherapy and chemotherapy, the chronic use of drugs and rheumatic and dysmetabolic diseases. Prior to 2021, we entered into microbubble collaborations with the following parties: (i)Cerevast Medical, Inc. ("Cerevast"), in which our microbubbles will be used in connection withCerevast's ocular ultrasound device to improve blood flow in occluded retinal veins in the eye; (ii) CarThera SAS, for the use of our microbubbles in combination with SonoCloud, a proprietary implantable device in development for the treatment of recurrent glioblastoma; and (iii)Insightec Ltd. ("Insightec"), which will use our microbubbles in connection with the development ofInsightec's transcranial guided focused ultrasound device for the treatment of glioblastoma as well as other neurodegenerative conditions. Generally, our costs in connection with the strategic partnerships relate to the supply of drug and other ancillary expenses and the benefits can include possible supply, milestone and royalty payments, additional intellectual property rights and strategic relationships. We can give no assurance as to if or when or if any of these collaborations and other new initiatives will be successful or accretive to earnings.
Results of Operations
The following is a summary of our consolidated results of operations:
Year Ended
December 31, 2021 vs. 2020 2020 vs. 2019
Change Change Change Change
(in thousands) 2021 2020 2019 $ % $ %
Revenues $ 425,208 $ 339,410 $ 347,337 $ 85,798 25.3 % $ (7,927) (2.3) %
Cost of goods sold 237,513 200,649 172,526 36,864 18.4 % 28,123 16.3 %
Gross profit 187,695 138,761 174,811 48,934 35.3 % (36,050) (20.6) %
Operating expenses
Sales and marketing 68,422 40,901 41,888 27,521 67.3 % (987) (2.4) %
General and administrative 150,395 69,270 61,244 81,125 117.1 % 8,026 13.1 %
Research and development 44,966 32,788 20,018 12,178 37.1 % 12,770 63.8 %
Total operating expenses 263,783 142,959 123,150 120,824 84.5 % 19,809 16.1 %
Gain on sales of assets 15,263 - - 15,263 N/A - N/A
Operating (loss) income (60,825) (4,198) 51,661 (56,627) 1,348.9 % (55,859) (108.1) %
Interest expense 7,752 9,479 13,617 (1,727) (18.2) % (4,138) (30.4) %
(Gain) loss on
extinguishment of debt (889) - 3,196 (889) N/A (3,196) N/A
Other loss (income) 7,350 (2,198) 6,221 9,548 (434.4) % (8,419) (135.3) %
(Loss) income before
income taxes (75,038) (11,479) 28,627 (63,559) 553.7 % (40,106) (140.1) %
Income tax (benefit)
expense (3,759) 1,994 (3,040) (5,753) (288.5) % 5,034 (165.6) %
Net (loss) income $ (71,279) $ (13,473) $ 31,667 $ (57,806) 429.1 % $ (45,140) (142.5) %
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Comparison of the Periods Ended
Revenues
We classify our revenues into three product categories: precision diagnostics, radiopharmaceutical oncology, and strategic partnerships and other revenue. Precision diagnostics includes DEFINITY, TechneLite and other imaging diagnostic products. Radiopharmaceutical oncology consists primarily of PYLARIFY and AZEDRA. Strategic partnerships and other revenue includes partnerships that focus on facilitating precision medicine through the use of biomarkers, digital solutions and radiotherapeutic platforms, and on our other products, such as RELISTOR.
Revenues are summarized by product category on a net basis as follows:
Year Ended December 31, 2021 vs. 2020
(in thousands) 2021 2020(1) 2019(1) Change $ Change %
DEFINITY $ 232,759 $ 195,865 $ 202,398 $ 36,894 18.8 %
TechneLite 91,293 84,945 85,465 6,348 7.5 %
Other precision diagnostics 26,973 36,824 49,243 (9,851) (26.8) %
Total precision diagnostics 351,025 317,634 337,106 33,391 10.5 %
PYLARIFY 43,414 - - 43,414 100.0 %
Other radiopharmaceutical oncology 5,473 10,022 8,655 (4,549) (45.4) %
Total radiopharmaceutical oncology 48,887 10,022 8,655 38,865 387.8 %
Strategic Partnerships and other revenue 25,296 11,754 1,576 13,542 115.2 %
Total revenues $ 425,208 $ 339,410 $ 347,337 $ 85,798 25.3 %
________________________________
(1)We reclassified aggregate rebates and allowances of
The increase in revenues for the year endedDecember 31, 2021 , as compared to the prior year period, is primarily driven by the commercial launch of PYLARIFY, as well as increases in DEFINITY and TechneLite volume period over period as a result of the COVID-19 pandemic in the prior year, as well as the addition of the Progenics product portfolio, including RELISTOR. These increases are partially offset by continued COVID-19 related reduced volumes in our sales of Xenon throughout 2021 and the divestiture of ourPuerto Rico business during the first quarter of 2021. Rebates and Allowances Estimates for rebates and allowances represent our estimated obligations under contractual arrangements with third parties. Rebate accruals and allowances are recorded in the same period the related revenue is recognized, resulting in a reduction to revenue and the establishment of a liability which is included in accrued expenses. These rebates and allowances result from performance-based offers that are primarily based on attaining contractually specified sales volumes and growth, Medicaid rebate programs for our products, administrative fees of group purchasing organizations and certain distributor related commissions. The calculation of the accrual for these rebates and allowances is based on an estimate of the third party's buying patterns and the resulting applicable contractual rebate to be earned over a contractual period. An analysis of the amount of, and change in, reserves is summarized as follows: Rebates and (in thousands) Allowances Balance, January 1, 2021$ 9,350 Provision related to current period revenues 25,772 Adjustments relating to prior period revenues 14 Payments or credits made during the period (24,159) Balance, December 31, 2021$ 10,977 66
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Table of Contents Gross Profit The increase in gross profit for the year endedDecember 31, 2021 , as compared to the prior year period, is primarily due to an increase in volume of DEFINITY sales and the commercial launch of PYLARIFY in 2021, as well as an asset impairment loss of$7.3 million on other nuclear products that occurred in the prior year. These increases were offset, in part, by lower sales of our Xenon and increased radioisotope transportation costs, both due to COVID-19, as well as amortization expense of$2.7 million related to assets acquired in the Progenics Acquisition and accelerated recognition of asset retirement obligations of$5.4 million due to a change in useful life estimate.
Sales and Marketing
Sales and marketing expenses consist primarily of salaries and other related costs for personnel in field sales, marketing and customer service functions. Other costs in sales and marketing expenses include the development and preparation of advertising and promotional material, professional services, market research and sales meetings. Sales and marketing expenses increased$27.5 million for the year endedDecember 31, 2021 , as compared to the prior year period. This was primarily driven by preparation activities for the launch of PYLARIFY (including the hiring of additional employees) in 2021 and a full year of sales and marketing expenses related to AZEDRA, as well as the reduced level of marketing and promotional programs during the prior year period as a result of the COVID-19 pandemic.
General and Administrative
General and administrative expenses consist of salaries and other related costs for personnel in executive, finance, legal, information technology and human resource functions. Other costs included in general and administrative expenses are professional fees for information technology services, external legal fees, consulting and accounting services as well as bad debt expense, certain facility and insurance costs, including director and officer liability insurance. General and administrative expenses increased$81.1 million for the year endedDecember 31, 2021 compared to the prior year period. This was primarily driven by the$72.4 million fair value adjustment to the contingent asset and liabilities, including the CVRs (an increase of$74.4 million from the prior year period),$9.5 million impairment charge related to the sublease of office space in theWorld Trade Center , and higher headcount related costs following the Progenics Acquisition, offset by acquisition-related costs associated with the Progenics Acquisition in the prior year and synergy capture in the current year. Research and Development
Research and development expenses relate primarily to the development of new products to add to our portfolio and costs related to our medical affairs, medical information and regulatory functions.
Research and development expenses increased$12.2 million for the year endedDecember 31, 2021 as compared to the prior year period. This was primarily driven by additional research and development expenses related to 1095 and preparation activities for the launch of PYLARIFY, as well as higher employee-related costs in 2021 (including the hiring of additional employees) as compared to the prior year. The increase in research and development expenses during 2021 was offset by the filing fee paid in the prior year period related to the PYLARIFY New Drug Application.
Gain on Sale of Assets
We sold 100% of the stock of our
Interest Expense
Interest expense for the year endedDecember 31, 2021 decreased$1.7 million as compared to the prior year period due to lower interest rates on our long-term debt together with reduced debt as a result of the voluntary repayment of the outstanding principal on our$50.0 million loan agreement (the "Royalty-Backed Loan") between Progenics, through a wholly-owned subsidiaryMNTX Royalties Sub LLC ("MNTX Royalties"), and a fund managed byHealthCare Royalty Partners III, L.P. onMarch 31, 2021 .
Gain on Extinguishment of Debt
During the year ended
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Table of Contents Other (Income) Loss Other (income) loss changed by$9.5 million for the year endedDecember 31, 2021 as compared to the prior year, due to the reduction of indemnified receivables related to the release of uncertain tax positions.
Income Tax (Benefit) Expense
The income tax benefit of$3.8 million for the year endedDecember 31, 2021 was primarily due to incurred losses before tax, the release of a portion of our uncertain tax positions, stock compensation deductions, and tax credits, offset by non-deductible expenses related to the changes in fair value of contingent assets and liabilities, the accrual of interest associated with uncertain tax positions, and the impact of an increased effective state tax rate on our ending net deferred tax assets. In accordance with our accounting policy, the change in the tax liabilities, penalties and interest associated with our uncertain tax positions (net of any offsetting federal or state benefit) is recognized within income tax benefit. The majority of our uncertain tax positions are indemnified liabilities, in accordance with the Stock and Asset Purchase Agreement entered into with Bristol-Myers ('BMS') in 2008. Changes in the liability result in offsetting changes in the indemnification receivable. Changes in the indemnification receivable are recognized within other loss (income) in the consolidated statement of operations. Assuming that the receivable from BMS continues to be considered recoverable by us, there will be no effect on net income and no net cash outflows related to these liabilities. Refer to Note 5, Income Taxes. The income tax expense of$2.0 million for the year endedDecember 31, 2020 was primarily due to the accrual of interest associated with uncertain tax positions and the impact of non-deductible acquisition costs, offset by the tax benefits on losses generated in the period, the recognition of the deferred tax asset on held for sale assets, and tax credits. We regularly assess our ability to realize our deferred tax assets. Assessing the realizability of deferred tax assets requires management judgment. In determining whether our deferred tax assets are more-likely-than-not realizable, we evaluate all available positive and negative evidence, and weigh the objective evidence and expected impact. We continue to record a valuation allowance against certain of our foreign net deferred tax assets and a small component of our domestic deferred tax assets.
Our effective tax rate for each reporting period is presented as follows:
Year Ended
December 31,
2021 2020
Effective tax rate 5.0% (17.4)%
Our effective tax rate in fiscal 2021 differs from the U.S. statutory rate of
21% principally due to the impact of non-deductible expenses related to changes
in fair value of contingent assets and liabilities, releases of uncertain tax
position liabilities, and state effective tax rate changes that impacted our
ending net deferred tax assets.
The change in the effective income tax rate for the year ended December 31, 2021
as compared to the prior year period is primarily due to the reduction in tax
benefit resulting from the accrual of non-deductible expenses related to changes
in fair value of contingent assets and liabilities.
Comparison of the Periods Ended
For a comparison of our results of operations for the fiscal years endedDecember 31, 2020 andDecember 31, 2019 , see "Part II, Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" of our Annual Report on Form 10-K for the fiscal year endedDecember 31, 2020 , filed with theSEC onFebruary 25, 2021 .
Liquidity and Capital Resources
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The following table provides information regarding our cash flows:
Year Ended
December 31,
(in thousands) 2021 2020 2019
Net cash provided by operating activities $ 53,916 $ 16,396 $ 80,384
Net cash provided by (used in) investing activities $ 3,683 $ (4,912) $ (22,061)
Net cash used in financing activities $ (39,332) $
(21,861)
For a discussion of our liquidity and capital resources related to our cash flow activities for the fiscal year endedDecember 31, 2019 , see "Part II, Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" of our annual report on Form 10-K for the fiscal year endedDecember 31, 2020 , filed with theSEC onFebruary 25, 2021 .
Net Cash Provided by Operating Activities
Net cash provided by operating activities of$53.9 million was primarily comprised of net loss adjusted for the net effect of non-cash items such as the change in fair value of contingent assets and liabilities of$72.4 million (refer to Note 4, "Fair Value of Financial Instruments", for further details on contingent consideration liabilities, including CVRs). The primary working capital sources of cash were the timing of payments to large vendors as well as an increase in billings associated with PYLARIFY sales. The primary working capital use of cash were an increase in trade receivables from timing of sale orders and an increase in collection period as well as the timing of inventory purchases. Net cash provided by operating activities of$16.4 million in the year endedDecember 31, 2020 was driven primarily by a net loss of$13.5 million , a net decrease of$22.4 million related to movements in our working capital accounts during the period and a net decrease of$2.0 million in the fair value of contingent assets and liabilities offset by$24.7 million of depreciation, amortization and accretion expense, stock-based compensation expense of$14.1 million , impairment of long-lived assets of$9.9 million and a loss on disposal of assets of$2.3 million . The overall decreases in cash from our working capital accounts were primarily driven by the increase in accounts receivable due to the Progenics Acquisition and increase in collection period as well as change in inventory related to the COVID-19 impact on products and the timing of payments and payments of accruals related to general and administrative expenses in connection with the Progenics Acquisition.
Net Cash Provided by (Used in) Investing Activities
Net cash provided by investing activities during the year endedDecember 31, 2021 was primarily due to cash proceeds of$15.8 million received from the sale of ourPuerto Rico subsidiary, which was offset by$12.1 million of capital expenditures. Net cash used in investing activities during the year endedDecember 31, 2020 reflected$10.0 million in lending on a note receivable to Progenics prior to the acquisition and$12.5 million in capital expenditures offset by$17.6 million of acquired cash related to the Progenics Acquisition.
Net cash used in financing activities during the year endedDecember 31, 2021 is primarily attributable to the payments on long-term debt and other borrowings of$43.3 million related to the 2019 Term Facility and Royalty-Backed Loan, including a voluntary repayment of the outstanding principal on the Royalty-Backed Loan and payments for minimum statutory tax withholding related to net share settlement of equity awards of$2.0 million offset by proceeds of$5.3 million from stock option exercises. Net cash used in financing activities during the year endedDecember 31, 2020 is primarily attributable to the payments on long-term debt and other borrowings of$15.5 million related to the 2019 Term Facility and Royalty-Backed Loan (defined below), equity issuance costs related to the Progenics Acquisition of$3.8 million , and payments for minimum statutory tax withholding related to net share settlement of equity awards of$2.1 million .
External Sources of Liquidity
InJune 2019 , we refinanced our 2017$275.0 million five-year term loan facility with the 2019 Term Facility. In addition, we replaced our$75.0 million revolving facility with the 2019 Revolving Facility. The terms of the 2019 Term Facility are set forth in the Credit Agreement, dated as ofJune 27, 2019 , by and among us, the lenders from time to time party thereto andWells Fargo Bank, N.A. , as administrative agent and collateral agent (as amended, the "2019 Credit Agreement"). We have the right to request an increase to the 2019 Term Facility or request the establishment of one or more new incremental term loan facilities, in an aggregate principal amount of up to$100.0 million , plus additional amounts, in certain circumstances. 69
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We are permitted to voluntarily repay the 2019 Term Loans, in whole or in part, without premium or penalty. The 2019 Term Facility requires us to make mandatory prepayments of the outstanding 2019 Term Loans in certain circumstances. The 2019 Term Facility amortizes at 5.0% per year throughSeptember 30, 2022 and 7.5% thereafter, until itsJune 27, 2024 maturity date. Under the terms of the 2019 Revolving Facility, the lenders thereunder agreed to extend credit to us from time to time untilJune 27, 2024 consisting of revolving loans in an aggregate principal amount not to exceed$200.0 million at any time outstanding. The 2019 Revolving Facility includes a$20.0 million sub-facility for the issuance of letters of credit (the "Letters of Credit"). The 2019 Revolving Facility includes a$10.0 million sub-facility for swingline loans (the "Swingline Loans"). The Letters of Credit, Swingline Loans and the borrowings under the 2019 Revolving Facility are expected to be used for working capital and other general corporate purposes.
Please refer to Note 13, "Long-Term Debt, Net, and Other Borrowings" for further details on the 2019 Facility.
OnJune 19, 2020 , we amended our 2019 Credit Agreement (the "Amendment") as a result of the impact of the COVID-19 pandemic on our business and operations and the near-term higher level of indebtedness resulting from our decision not to immediately repay the Progenics debt secured by the RELISTOR royalties following the Progenics Acquisition. The Amendment provides for, among other things, modifications to our financial maintenance covenants. The covenant related to Total Net Leverage Ratio (as defined in the 2019 Credit Agreement) was waived from the date of the Amendment throughDecember 31, 2020 . The maximum total net leverage ratio and interest coverage ratio permitted by the financial covenant is displayed in the table below: 2019 Credit Agreement Period Total Net Leverage Ratio Q3 2021 and thereafter 3.50 to 1.00 Period Interest Coverage Ratio Q2 2021 and thereafter 3.00 to 1.00
As of
Under the 2019 Credit Agreement, loans bear interest at LIBOR plus a spread that ranges from 1.50% to 3.00% or the Base Rate plus a spread that ranges from 0.50% to 2.00%, and the commitment fee ranges from 0.15% to 0.40%, in each case based on our Total Net Leverage Ratio. OnJune 19, 2020 , as a result of the Progenics Acquisition, we assumed Progenics outstanding debt as of such date in the amount of$40.2 million . OnNovember 4, 2016 , Progenics, through MNTX Royalties, entered into the Royalty-Backed Loan. The Royalty-Backed Loan bore interest at an annual rate of 9.5% and was scheduled to mature onJune 30, 2025 . OnJune 22, 2020 , HCRP waived the automatic acceleration of the Royalty-Backed Loan that otherwise would have been triggered by the consummation of the Progenics Acquisition and MNTX Royalties agreed not to prepay the loan until afterDecember 31, 2020 .
On
Our ability to fund our future capital needs will be affected by our ability to
continue to generate cash from operations and may be affected by our ability to
access the capital markets, money markets or other sources of funding, as well
as the capacity and terms of our financing arrangements.
We may from time to time repurchase or otherwise retire our debt and take other
steps to reduce our debt or otherwise improve our balance sheet. These actions
may include prepayments of our term loans or other retirements or refinancing of
outstanding debt, privately negotiated transactions or otherwise. The amount of
debt that may be retired, if any, could be material and would be decided at the
sole discretion of our Board of Directors and will depend on market conditions,
our cash position and other considerations.
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Our future capital requirements will depend on many factors, including:
•The level of product sales and the pricing environment of our currently marketed products, particularly DEFINITY, PYLARIFY, as well as any additional products that we may market in the future, including decreased product sales resulting from the COVID-19 pandemic;
•Revenue mix shifts and associated volume and selling price changes that could result from contractual status changes with key customers and additional competition;
•The continued costs of the PYLARIFY commercial launch and our ability to successfully commercialize PYLARIFY;
•The costs of acquiring or in-licensing, developing, obtaining regulatory approval for, and commercializing, new products, businesses or technologies, together with the costs of pursuing opportunities that are not eventually consummated;
•Our investment in the further clinical development and commercialization of products and development candidates, including AZEDRA, 1095, and LMI 1195;
•The costs of investing in our facilities, equipment and technology infrastructure;
•The costs and timing of establishing or amending manufacturing and supply arrangements for commercial supplies of our products and raw materials and components;
•Our ability to have product manufactured and released from JHS and other manufacturing sites in a timely manner in the future, or to begin and ramp up our manufacturing of DEFINITY at our in-house manufacturing facility in an amount sufficient to meet our supply needs;
•The costs of further commercialization of our existing products, particularly in international markets, including product marketing, sales and distribution and whether we obtain local partners to help share such commercialization costs;
•The extent to which we choose to establish collaboration, co-promotion, distribution or other similar arrangements for our marketed products;
•The legal costs relating to maintaining, expanding and enforcing our intellectual property portfolio, pursuing insurance or other claims and defending against product liability, regulatory compliance, intellectual property or other claims;
•The cost of interest on any additional borrowings which we may incur under our financing arrangements; and
•The impact of sustained inflation on our costs of goods sold and operating expenses.
We are vulnerable to future supply shortages, especially for our single sourced products. Disruption in our financial performance could also occur if we experience significant adverse changes in product or customer mix, broad economic downturns, sustained inflation, adverse industry or company conditions or catastrophic external events, including pandemics such as COVID-19, natural disasters and political or military conflict. If we experience one or more of these events in the future, we may be required to further implement expense reductions, such as a delay or elimination of discretionary spending in all functional areas, as well as scaling back select operating and strategic initiatives. If our capital resources become insufficient to meet our future capital requirements, we would need to finance our cash needs through public or private equity offerings, debt financings, assets securitizations, sale-leasebacks or other financing or strategic alternatives, to the extent such transactions are permissible under the covenants of our 2019 Credit Agreement. Additional equity or debt financing, or other transactions, may not be available on acceptable terms, if at all. If any of these transactions require an amendment or waiver under the covenants in our 2019 Credit Agreement, which could result in additional expenses associated with obtaining the amendment or waiver, we will seek to obtain such a waiver to remain in compliance with those covenants. However, we cannot be assured that such an amendment or waiver would be granted, or that additional capital will be available on acceptable terms, if at all. AtDecember 31, 2021 , our only current committed external source of funds is our borrowing availability under our 2019 Revolving Facility. We had$98.5 million of cash and cash equivalents atDecember 31, 2021 . Our 2019 Facility, as amended, contains a number of affirmative, negative, reporting and financial covenants, in each case subject to certain exceptions and materiality thresholds. Incremental borrowings under the 2019 Revolving Facility, as amended, may affect our ability to comply with the covenants in the 2019 Facility, as amended, including the financial covenants restricting consolidated net leverage and interest coverage. Accordingly, we may be limited in utilizing the full amount of our 2019 Revolving Facility, as amended, as a source of liquidity. 71
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The CVRs we issued in the Progenics Acquisition entitle holders thereof to future cash payments of 40% of PYLARIFY net sales over (i)$100.0 million in 2022 and (ii)$150.0 million in 2023, which, if payable, we currently intend to fund from our then-available cash. In no event will our aggregate payments under the CVRs, together with any other non-stock consideration treated as paid in connection with the Progenics Acquisition, exceed 19.9% (which we currently estimate could be approximately$100.0 million ) of the total consideration we pay in the Progenics Acquisition. Refer to Note 4, "Fair Value of Financial Instruments", for further details on contingent consideration liabilities. Based on our current operating plans, including our prudent expense management in response to the COVID-19 pandemic, we believe our balance of cash and cash equivalents, which totaled$98.5 million as ofDecember 31, 2021 , along with cash generated by ongoing operations and continued access to our 2019 Revolving Facility, will be sufficient to satisfy our cash requirements over the next twelve months and beyond. Our material cash requirements include the following contractual and other obligations.
Debt
As ofDecember 31, 2021 , we had maturities of principal obligations related to our 2019 Term Facility for an aggregate principal amount of$175.0 million , with$11.3 million payable within twelve months. Future interest payments associated with the 2019 Term Facility total$8.3 million , with$3.6 million payable within twelve months. Leases We have operating lease arrangements for certain facilities, including corporate and manufacturing space. As ofDecember 31, 2021 , we had fixed operating lease payment obligations of$22.0 million , with$2.4 million payable within twelve months. We have lease arrangements for certain equipment. As ofDecember 31, 2021 , we had fixed finance lease payment obligations of$0.8 million , with$0.4 million payable within twelve months. Purchase Obligations We have purchase obligations that primarily consist of noncancelable obligations related to minimum quantities of goods or services that have been committed to be purchased on an annual basis. As ofDecember 31, 2021 , we had minimum purchase obligations of$6.5 million , with$3.5 million due within twelve months.
License Agreements
We have entered into license agreements in which fixed payments have been committed to be paid on an annual basis. As ofDecember 31, 2021 , we had fixed license payments of$0.3 million , with$0.1 million due within twelve months. These amounts do not include potential milestone or contractual payment obligations contingent upon the achievement or occurrence of future milestones or events under our license agreements, because they are contingent and the amounts and timing of such potential obligations are unknown or uncertain. We may be required to pay additional amounts up to approximately$170.5 million in contingent payments under our license agreements.
Other Long-Term Liabilities
Our other long-term liabilities in the consolidated balance sheet include the fair values of contingent consideration liabilities including CVRs and contingent consideration liabilities related to a previous acquisition completed by Progenics in 2013. We may be required to pay up to approximately$100.0 million related to the CVRs and approximately$85.0 million related to the contingent consideration. As ofDecember 31, 2021 , these contingent payments were not expected to be payable within twelve months due to the uncertainty around the timing of the future cash flows. Our other long-term liabilities in the consolidated balance sheet include unrecognized tax benefits and related interest and penalties. As ofDecember 31, 2021 , we had unrecognized tax benefits of$20.9 million , which included interest and penalties, classified as noncurrent liabilities. At this time, we are unable to make a reasonably reliable estimate of the timing of payments in individual years in connection with these tax liabilities.
Asset Retirement Obligation
We are required to provide theMassachusetts Department of Public Health and theNew Jersey Department of Environmental Protection financial assurance demonstrating our ability to fund the decommissioning of ourNorth Billerica, Massachusetts andSomerset, New Jersey production facilities upon closure, although we have no current plans to close the facilities. We have provided this financial assurance in the form of a$28.2 million surety bond (the "Surety Bond"). As ofDecember 31, 2021 , the liability, which was approximately$20.8 million , was measured at the present value of the obligation expected to be incurred of approximately$26.4 million . These contingent payments are not expected to be payable within twelve months due to the uncertainty around the timing of the future cash flows related to the decommissioning of our radioactive operations. 72
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Off-Balance Sheet Arrangements
As noted above, we have provided the Surety Bond to theMassachusetts Department of Public Health and New Jersey Department of Environmental Protection . Since inception, we have not engaged in any other off-balance sheet arrangements, including structured finance, special purpose entities or variable interest entities.
Effects of Inflation
We do not believe that inflation has had a significant impact on our revenues or results of operations. We expect our cost of product sales and other operating expenses will change in the future in line with periodic inflationary changes in price levels. Because we intend to retain and continue to use our property and equipment, we believe that the incremental inflation related to the replacement costs of those items will not materially affect our operations. However, the rate of inflation affects our expenses, such as those for employee compensation and contract services, which could increase our level of expenses and the rate at which we use our resources. While we generally believe that we will be able to offset the effect of price-level changes by adjusting our product prices and implementing operating efficiencies, any material unfavorable changes in price levels could have a material adverse effect on our financial condition, results of operations and cash flows. Recent Accounting Standards
Refer to Note 2, "Summary of Significant Accounting Policies," in the accompanying consolidated financial statements located under Item 8 of this Annual Report on Form 10-K for information regarding recently issued accounting standards that may have a significant impact on our business.
Critical Accounting Estimates
The discussion and analysis of our financial condition and results of operations are based on our consolidated financial statements, which have been prepared in accordance withU.S. GAAP. The preparation of these consolidated financial statements require us to make estimates and judgments that affect our reported assets and liabilities, revenues and expenses, and other financial information. Actual results may differ materially from these estimates under different assumptions and conditions. In addition, our reported financial condition and results of operations could vary due to a change in the application of a particular accounting standard.
We believe the following represent our critical accounting estimates used in the preparation of our financial statements.
Revenue from Contracts with Customers
Revenue is measured based on a consideration specified in a contract with a
customer, and excludes any sales incentives and amounts collected on behalf of
third parties. We recognize revenue when we satisfy our performance obligations
by transferring control over products or services to our customers. The amount
of revenue we recognize reflects the consideration to which we expect to be
entitled to receive in exchange for these goods or services. To achieve this
core principle, we apply the following five steps: (1) identify the contracts
with a customer; (2) identify the performance obligations in the contract; (3)
determine the transaction price; (4) allocate the transaction price to the
performance obligations in the contract; and (5) recognize revenue when (or as)
we satisfy performance obligations.
We derive our revenues through arrangements with customers for product sales as
well as licensing and royalty arrangements. We sell our products primarily to
clinics, distributors, group practices, hospitals, integrated delivery networks,
and radiopharmacies, and we consider customer purchase orders, which in some
cases are governed by master sales or group purchasing organization agreements,
to be contracts with our customers. In addition to these arrangements, we also
enter into licensing agreements under which we license certain rights to third
parties. The terms of these arrangements typically include payment to us of one
or more of the following: non-refundable, up-front license fees; development,
regulatory and commercial milestone payments; and royalties on net sales of
licensed products. We analyze various factors requiring management judgment when
applying the five-step model to our contracts with customers.
Our product revenues are recorded at the net sales price (transaction price),
which represents our sales price less estimates related to reserves which are
established for items such as discounts, returns, rebates and allowances that
may be provided for in certain contracts with our customers. Judgment is used in
determining and updating our reserves on an ongoing basis, and where
appropriate, these estimates take into consideration a range of possible
outcomes which are probability-weighted for relevant factors such as our
historical experience, current contractual and statutory requirements, specific
known market events and trends, industry data and forecasted customer buying and
payment patterns. Overall, these reserves reflect our best estimates of the
amount of consideration to which it is entitled based on the terms of the
contract. Actual amounts of consideration ultimately received may differ from
our estimates.
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For our licensing and royalty arrangements, we use judgment in determining the
number of performance obligations in a license agreement by assessing whether
the license is distinct or should be combined with another performance
obligation as well as the nature of the license. As part of the accounting for
these arrangements, we develop assumptions that require judgment to determine
the stand-alone selling price for each performance obligation identified in a
contract. These key assumptions may include market conditions, reimbursement
rates for personnel costs, development timelines and probabilities of regulatory
success.
Business Combinations
We account for business combinations using the acquisition method of accounting.
We recognize the assets acquired and liabilities assumed in business
combinations on the basis of their fair values at the date of acquisition. We
assess the fair value of assets acquired, including intangible assets, and
liabilities assumed using a variety of methods. Each asset acquired and
liability assumed is measured at fair value from the perspective of a market
participant. The method used to estimate the fair values of intangible assets
incorporates significant assumptions regarding the estimates a market
participant would make in order to evaluate an asset, including a market
participant's use of the asset and the appropriate discount rates. Acquired
in-process research and development ("IPR&D") is recognized at fair value and
initially characterized as an indefinite-lived intangible asset, irrespective of
whether the acquired IPR&D has an alternative future use. Any excess purchase
price over the fair value of the net tangible and intangible assets acquired is
allocated to goodwill. Transaction costs and restructuring costs associated with
a business combination are expensed as incurred.
The fair values assigned to tangible and intangible assets acquired and
liabilities assumed are based on our estimates and assumptions, as well as other
information we have compiled, including valuations that utilize customary
valuation procedures and techniques. If the actual results differ from the
estimates and assumptions used in these estimates, it could result in a possible
impairment of the intangible assets and goodwill, a required acceleration of the
amortization expense of finite-lived intangible assets or the recognition of
additional consideration, which would be expensed.
During the measurement period, which extends no later than one year from the
acquisition date, we may record certain adjustments to the carrying value of the
assets acquired and liabilities assumed with the corresponding offset to
goodwill. After the measurement period, all adjustments are recorded in the
consolidated statements of operations as operating expenses or income.
Intangible and Long-Lived Assets
We test intangible and long-lived assets for recoverability whenever events or changes in circumstances suggest that the carrying value of an asset or group of assets may not be recoverable. We measure the recoverability of assets to be held and used by comparing the carrying amount of the asset to future undiscounted net cash flows expected to be generated by the asset. If those assets are considered to be impaired, the impairment equals the amount by which the carrying amount of the assets exceeds the fair value of the assets. Any impairments are recorded as permanent reductions in the carrying amount of the assets. Long-lived assets, other than goodwill and other intangible assets, that are held for sale are recorded at the lower of the carrying value or the fair market value less the estimated cost to sell. Intangible assets, consisting of trademarks, customer relationships, currently marketed products, licenses and developed technology are amortized in a method equivalent to the estimated utilization of the economic benefit of the asset. Our IPR&D represents intangible assets acquired in a business combination that are used in research and development activities but have not yet reached technological feasibility, regardless of whether they have alternative future use. The primary basis for determining the technological feasibility or completion of these projects is whether we have obtained regulatory approval to market the underlying products in an applicable geographic region. Because obtaining regulatory approval can include significant risks and uncertainties, the eventual realized value of the acquired IPR&D projects may vary from their fair value at the date of acquisition. We classify IPR&D acquired in a business combination as an indefinite-lived intangible asset until the completion or abandonment of the associated research and development efforts. Upon completion of the associated research and development efforts, we will determine the useful life and begin amortizing the assets to reflect their use over their remaining lives. Upon permanent abandonment, we write-off the remaining carrying amount of the associated IPR&D intangible asset. We test our IPR&D assets at least annually or when a triggering event occurs that could indicate a potential impairment and we recognize any impairment loss in our consolidated statements of operations.
Contingent Consideration Liabilities
The Progenics Acquisition included certain contingent consideration liabilities,
including CVRs, as well as other contingent future payments. CVRs are based on
net sales generated by PYLARIFY in both 2022 and 2023. Other contingent future
payments are based on net sales targets for 1095 and AZEDRA and include a
commercialization milestone for 1095. The estimated fair value of contingent
consideration liabilities, initially measured and recorded on the acquisition
date, are considered to be a Level 3 instrument and are reviewed quarterly, or
whenever events or circumstances occur that indicate a change in fair value. The
contingent
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consideration liabilities are recorded at fair value at the end of each reporting period with changes in estimated fair values recorded in general and administrative expenses in the consolidated statements of operations.
The estimated fair value is determined based on probability adjusted discounted cash flows or Monte Carlo simulation models that include significant estimates and assumptions pertaining to the period of expected milestone achievement, probability of success, discount rates and sales targets. The most significant unobservable inputs are the probabilities of achieving regulatory approval of the development projects and subsequent commercial success. Significant changes in any of the probabilities of success would result in a significantly higher or lower fair value measurement. Significant changes in the probabilities as to the periods in which milestones will be achieved would result in a significantly lower or higher fair value measurement.
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