ENDP-03.31.2014-10Q
Table of Contents

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549  
_______________________________
FORM 10-Q
_______________________________ 
(Mark One)
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2014
OR
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.
FOR THE TRANSITION PERIOD FROM              TO
Commission file number: 001-36326  
_______________________________
ENDO INTERNATIONAL PLC
(Exact Name of Registrant as Specified in Its Charter)  
_______________________________
Ireland
Not Applicable
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification Number)
 
 
33 Fitzwilliam Square, Dublin 2 Ireland
Not Applicable
(Address of Principal Executive Offices)
(Zip Code)
011-353-1-669-6634
(Registrant’s Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Name of each exchange on which registered
Ordinary shares, nominal value $0.0001 per share
The NASDAQ Global Market, The Toronto Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
None
_______________________________
Indicate by check whether the registrant: (1) has filed all reports required to be filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes x    No   o
Indicate by check whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes x     No   o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a smaller reporting company. See definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer
x
Accelerated filer
o
 
 
 
 
Non-accelerated filer
o  (Do not check if a smaller reporting company)
Smaller reporting company
o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).    YES  o    NO   x
Indicate the number of shares outstanding of each of the issuer’s classes of ordinary shares, as of the latest practical date.
Ordinary shares, $.0001 par value
Number of ordinary shares outstanding as of
May 2, 2014
:
152,264,569



ENDO INTERNATIONAL PLC
INDEX

 
 
Page
Forward-Looking Statements
 
 
PART I. FINANCIAL INFORMATION
 
 
Item 1.
 
 
 
 
 
Item 2.
Item 3.
Item 4.
 
 
 
PART II. OTHER INFORMATION
 
 
 
Item 1.
Item 1A.
Item 2.
Item 3.
Item 4.
Item 5.
Item 6.
 
 
 
Exhibit Index
 
 
 



Table of Contents

FORWARD-LOOKING STATEMENTS
Statements contained or incorporated by reference in this document contain information that includes or is based on "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, or the Securities Act, and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act. These statements, including estimates of future revenues, future expenses, future net income and future net income per share, contained in the section titled "Management's Discussion and Analysis of Financial Condition and Results of Operations," which is included in this document, are subject to risks and uncertainties. Forward-looking statements include the information concerning our possible or assumed results of operations. We have tried, whenever possible, to identify such statements by words such as "believes," "expects," "anticipates," "intends," "estimates," "plan," "projected," "forecast," "will," "may" or similar expressions. We have based these forward-looking statements on our current expectations and projections about the growth of our business, our financial performance and the development of our industry. Because these statements reflect our current views concerning future events, these forward-looking statements involve risks and uncertainties. Investors should note that many factors, as more fully described under the caption "Risk Factors" in Item 1A. of this document and in Part I, Item 1A. under the caption "Risk Factors" of our Annual Report on Form 10-K for the year ended December 31, 2013, supplement, and as otherwise enumerated herein, could affect our future financial results and could cause our actual results to differ materially from those expressed in forward-looking statements contained or incorporated by reference in this document.
We do not undertake any obligation to update our forward-looking statements after the date of this document for any reason, even if new information becomes available or other events occur in the future, except as may be required under applicable securities law. You are advised to consult any further disclosures we make on related subjects in our reports filed with the Securities and Exchange Commission (SEC) and with securities regulators in Canada on the System for Electronic Document Analysis and Retrieval (SEDAR). Also note that, in Item 1A. of this document and in Part I, Item 1A. under the caption "Risk Factors" of our Annual Report on Form 10-K for the year ended December 31, 2013, we provide a cautionary discussion of the risks, uncertainties and possibly inaccurate assumptions relevant to our business. These are factors that, individually or in the aggregate, we think could cause our actual results to differ materially from expected and historical results. We note these factors for investors as permitted by Section 27A of the Securities Act and Section 21E of the Exchange Act. You should understand that it is not possible to predict or identify all such factors. Consequently, you should not consider this to be a complete discussion of all potential risks or uncertainties.

i

Table of Contents

PART I. FINANCIAL INFORMATION
Item 1.         Financial Statements
ENDO INTERNATIONAL PLC
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(In thousands, except share and per share data)
 
March 31,
2014
 
December 31,
2013
ASSETS
 
 
 
CURRENT ASSETS:
 
 
 
Cash and cash equivalents
$
1,041,280

 
$
526,597

Restricted cash and cash equivalents
67,505

 
770,000

Marketable securities
74,279

 

Accounts receivable
790,508

 
725,827

Inventories, net
464,099

 
374,439

Prepaid expenses and other current assets
87,822

 
39,402

Income taxes receivable
47,126

 

Deferred income taxes
217,572

 
257,985

Assets held for sale (NOTE 3)

 
160,257

Total current assets
$
2,790,191

 
$
2,854,507

MARKETABLE SECURITIES
2,396

 
2,979

PROPERTY, PLANT AND EQUIPMENT, NET
381,452

 
372,077

GOODWILL
3,522,651

 
1,372,832

OTHER INTANGIBLES, NET
2,662,676

 
1,872,926

OTHER ASSETS
168,603

 
96,535

TOTAL ASSETS
$
9,527,969

 
$
6,571,856

LIABILITIES AND SHAREHOLDERS’ EQUITY
 
 
 
CURRENT LIABILITIES:
 
 
 
Accounts payable
$
298,099

 
$
263,241

Accrued expenses
1,323,839

 
979,964

Current portion of long-term debt
402,245

 
414,929

Acquisition-related contingent consideration
3,877

 
3,878

Income taxes payable

 
3,089

Liabilities related to assets held for sale (NOTE 3)

 
31,571

Total current liabilities
$
2,028,060

 
$
1,696,672

DEFERRED INCOME TAXES
250,872

 
310,764

ACQUISITION-RELATED CONTINGENT CONSIDERATION
882

 
869

LONG-TERM DEBT, LESS CURRENT PORTION, NET
3,495,646

 
3,323,844

OTHER LIABILITIES
715,146

 
654,491

COMMITMENTS AND CONTINGENCIES (NOTE 12)


 


SHAREHOLDERS’ EQUITY:
 
 
 
Euro deferred shares, $0.01 par value; 4,000,000 shares authorized; 4,000,000 issued
55

 

Ordinary shares, $0.0001 and $0.01 par value; 1,000,000,000 and 350,000,000 shares authorized; 152,205,074 and 144,413,074 shares issued; 152,205,074 and 115,354,393 shares outstanding at March 31, 2014 and December 31, 2013, respectively
15

 
1,444

Additional paid-in capital
3,278,121

 
1,166,375

(Accumulated deficit) retained earnings
(310,678
)
 
126,234

Accumulated other comprehensive loss
(178
)
 
(4,915
)
Treasury stock, zero and 29,058,681 shares at March 31, 2014 and December 31, 2013, respectively

 
(763,120
)
Total Endo International plc shareholders’ equity
$
2,967,335

 
$
526,018

Noncontrolling interests (NOTE 3)
70,028

 
59,198

Total shareholders’ equity
$
3,037,363

 
$
585,216

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY
$
9,527,969

 
$
6,571,856

See Notes to Condensed Consolidated Financial Statements.

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Table of Contents

ENDO INTERNATIONAL PLC
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(In thousands, except share and per share data)
 
Three Months Ended March 31,
 
2014
 
2013
 REVENUES:
 
 
 
Net pharmaceutical product sales
$
430,960

 
$
535,744

Devices revenues
123,767

 
122,652

Other revenues
39,882

 
98

 TOTAL REVENUES
$
594,609

 
$
658,494

 COSTS AND EXPENSES:
 
 
 
Cost of revenues
251,961

 
254,381

Selling, general and administrative
226,704

 
227,232

Research and development
41,680

 
38,769

Litigation-related and other contingencies
626,151

 
68,232

Asset impairment charges

 
1,100

Acquisition-related and integration items
45,269

 
558

 OPERATING (LOSS) INCOME FROM CONTINUING OPERATIONS
$
(597,156
)
 
$
68,222

 INTEREST EXPENSE, NET
53,398

 
44,276

 LOSS ON EXTINGUISHMENT OF DEBT
9,596

 
11,312

 OTHER INCOME, NET
(6,032
)
 
(18,269
)
 (LOSS) INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAX
$
(654,118
)
 
$
30,903

 INCOME TAX
(215,421
)
 
9,250

 (LOSS) INCOME FROM CONTINUING OPERATIONS
(438,697
)
 
21,653

 DISCONTINUED OPERATIONS, NET OF TAX (NOTE 3)
5,419

 
4,950

 CONSOLIDATED NET (LOSS) INCOME
$
(433,278
)
 
$
26,603

 Less: Net income attributable to noncontrolling interests
3,634

 
11,254

 NET (LOSS) INCOME ATTRIBUTABLE TO ENDO INTERNATIONAL PLC
$
(436,912
)
 
$
15,349

 NET (LOSS) INCOME PER SHARE ATTRIBUTABLE TO ENDO INTERNATIONAL PLC ORDINARY SHAREHOLDERS—BASIC:
 
 
 
Continuing operations
$
(3.42
)
 
$
0.19

Discontinued operations
$
0.01

 
$
(0.05
)
Basic
$
(3.41
)
 
$
0.14

 NET (LOSS) INCOME PER SHARE ATTRIBUTABLE TO ENDO INTERNATIONAL PLC ORDINARY SHAREHOLDERS—DILUTED:
 
 
 
Continuing operations
$
(3.42
)
 
$
0.19

Discontinued operations
$
0.01

 
$
(0.05
)
Diluted
$
(3.41
)
 
$
0.14

 WEIGHTED AVERAGE SHARES:
 
 
 
Basic
128,135

 
111,216

Diluted
128,135

 
113,189

See Notes to Condensed Consolidated Financial Statements.

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ENDO INTERNATIONAL PLC
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME (UNAUDITED)
(In thousands)
 
Three Months Ended March 31,
 
2014
 
2013
 CONSOLIDATED NET (LOSS) INCOME
 
 
$
(433,278
)
 
 
 
$
26,603

 OTHER COMPREHENSIVE INCOME (LOSS), NET OF TAX:
 
 
 
 
 
 
 
 Net unrealized (loss) gain on securities:
 
 
 
 
 
 
 
Unrealized (losses) gains arising during the period
$
(340
)
 
 
 
$
497

 
 
Less: reclassification adjustments for (gains) losses realized in net (loss) income

 
(340
)
 

 
497

Foreign currency translation gain (loss)
 
 
5,077

 
 
 
(3,180
)
Fair value adjustment on derivatives designated as cash flow hedges:
 
 
 
 
 
 
 
Fair value adjustment on derivatives designated as cash flow hedges arising during the period

 
 
 
250

 
 
Less: reclassification adjustments for cash flow hedges settled and included in net (loss) income

 

 
69

 
319

 OTHER COMPREHENSIVE INCOME (LOSS)
 
 
$
4,737

 
 
 
$
(2,364
)
 CONSOLIDATED COMPREHENSIVE (LOSS) INCOME
 
 
$
(428,541
)
 
 
 
$
24,239

Less: Comprehensive income attributable to noncontrolling interests
 
 
3,634

 
 
 
11,254

 COMPREHENSIVE (LOSS) INCOME ATTRIBUTABLE TO ENDO INTERNATIONAL PLC
 
 
$
(432,175
)
 
 
 
$
12,985

See Notes to Condensed Consolidated Financial Statements.

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ENDO INTERNATIONAL PLC
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(In thousands)
 
Three Months Ended March 31,
 
2014
 
2013
OPERATING ACTIVITIES:
 
 
 
Consolidated net (loss) income
$
(433,278
)
 
$
26,603

Adjustments to reconcile consolidated net (loss) income to Net cash used in operating activities:
 
 
 
Depreciation and amortization
74,588

 
66,819

Share-based compensation
7,595

 
15,331

Amortization of debt issuance costs and premium / discount
9,952

 
9,776

Provision for bad debts
775

 
744

Selling, general and administrative expenses paid in shares of ordinary shares
86

 
69

Deferred income taxes
(186,222
)
 
8,644

Net loss on disposal of property, plant and equipment
875

 
213

Change in fair value of acquisition-related contingent consideration
12

 
40

Loss on extinguishment of debt
9,596

 
11,312

Asset impairment charges

 
1,100

Gain on sale of business
(1,545
)
 

Changes in assets and liabilities which (used) provided cash:
 
 
 
Accounts receivable
43,889

 
(21,989
)
Inventories
(6,643
)
 
(27,153
)
Prepaid and other assets
12,636

 
1,476

Accounts payable
(59,916
)
 
(136,323
)
Accrued expenses
298,229

 
(94,160
)
Other liabilities
37,489

 
86,922

Income taxes payable/receivable
(55,061
)
 
(8,171
)
Net cash used in operating activities
$
(246,943
)
 
$
(58,747
)
INVESTING ACTIVITIES:
 
 
 
Purchases of property, plant and equipment
(20,837
)
 
(23,956
)
Proceeds from sale of property, plant and equipment
19

 
311

Acquisitions, net of cash acquired
(113,464
)
 
(3,645
)
Proceeds from sale of marketable securities
15,167

 

Patent acquisition costs and license fees

 
(10,000
)
Proceeds from sale of business, net
55,271

 

Settlement escrow
3,148

 

Decrease in restricted cash and cash equivalents
702,495

 

Net cash provided by (used in) investing activities
$
641,799

 
$
(37,290
)

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Three Months Ended March 31,
 
2014
 
2013
FINANCING ACTIVITIES:
 
 
 
Capital lease obligations repayments
(25
)
 
(89
)
Direct financing arrangement repayments
(910
)
 
(857
)
Proceeds from issuance of Term Loans
1,525,000

 

Proceeds from other indebtedness

 
223

Principal payments on Term Loans
(1,396,019
)
 
(100,000
)
Payment on AMS Convertible Notes
(5
)
 

Principal payments on other indebtedness
(2,194
)
 

Deferred financing fees
(38,435
)
 
(7,251
)
Payment for contingent consideration

 
(5,000
)
Tax benefits of share awards
23,861

 
1,998

Payments of tax withholding for restricted shares
(21,475
)
 

Exercise of options
21,593

 
12,826

Payments related to the issuance of common stock
(4,800
)
 

Issuance of ordinary shares related to the employee stock purchase plan
1,178

 
1,557

Cash distributions to noncontrolling interests
(5,285
)
 
(12,832
)
Cash buy-out of noncontrolling interests, net of cash contributions
(82
)
 
(1,525
)
Net cash provided by (used in) financing activities
$
102,402

 
$
(110,950
)
Effect of foreign exchange rate
12

 
(412
)
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
$
497,270

 
$
(207,399
)
LESS: NET DECREASE IN CASH AND CASH EQUIVALENTS OF DISCONTINUED OPERATIONS
(17,413
)
 
(4,722
)
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS OF CONTINUING OPERATIONS
$
514,683

 
$
(202,677
)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD
526,597

 
529,689

CASH AND CASH EQUIVALENTS, END OF PERIOD
$
1,041,280

 
$
327,012

SUPPLEMENTAL INFORMATION:
 
 
 
Cash paid for interest
$
40,719

 
$
40,714

Cash paid for income taxes
$
14,235

 
$
993

SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
 
 
 
Purchases of property, plant and equipment financed by capital leases
$
4

 
$

Acquisition financed by ordinary shares
$
2,844,279

 
$

Accrual for purchases of property, plant and equipment
$
5,589

 
$
4,083

See Notes to Condensed Consolidated Financial Statements.

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Table of Contents

ENDO INTERNATIONAL PLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
FOR THE THREE MONTHS ENDED MARCH 31, 2014
NOTE 1. BASIS OF PRESENTATION
The accompanying unaudited Condensed Consolidated Financial Statements of Endo International plc, which we refer to herein as the "Company", "Endo", "we", "our" or" us", have been prepared in accordance with U.S. generally accepted accounting principles (GAAP) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X of the Securities and Exchange Commission for interim financial information. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, the accompanying Condensed Consolidated Financial Statements of Endo and its subsidiaries, which are unaudited, include all normal and recurring adjustments considered necessary to present fairly the Company’s financial position as of March 31, 2014 and the results of our operations and our cash flows for the periods presented. Operating results for the three months ended March 31, 2014 are not necessarily indicative of the results that may be expected for the year ending December 31, 2014.
Endo International plc was incorporated in Ireland on October 31, 2013 as a private limited company and re-registered effective February 18, 2014 as a public limited company. It was established for the purpose of facilitating the business combination between Endo Health Solutions Inc. (EHSI) and Paladin Labs Inc. (Paladin).
On February 28, 2014, pursuant to an arrangement agreement, dated November 5, 2013 (the Arrangement Agreement), among EHSI, Endo International Limited, Endo Limited (formerly known as Sportwell II Limited), Endo U.S. Inc. (formerly known as ULU Acquisition Corp.), RDS Merger Sub, LLC (Merger Sub), 8312214 Canada Inc. and Paladin (a) Endo International Limited indirectly acquired all of the outstanding common shares of Paladin pursuant to a plan of arrangement under Canadian law (the Arrangement); and (b) Merger Sub merged with and into Endo, with Endo as the surviving corporation in the merger (the Merger and, together with the Arrangement, the Transactions). Following consummation of the Transactions, each of EHSI and Paladin became indirect wholly owned subsidiaries of Endo International plc.
Pursuant to the Arrangement, (a) former Paladin shareholders received C$1.16 in cash, 1.6331 newly issued Endo International ordinary shares and one common share of Knight Therapeutics Inc., a newly formed corporation incorporated under the laws of Canada that was separated from Paladin as part of the Transactions, in exchange for each Paladin common share held by such former shareholders; (b) all options to acquire Paladin common shares were settled on a cashless exercise basis for Endo International ordinary shares and common shares of Knight Therapeutics Inc. in an amount reflecting the arrangement consideration; and (c) unvested rights to receive additional common shares under Paladin’s share purchase plan were settled for a cash amount based on the Paladin common share price immediately prior to the effective time of the Arrangement. At the effective time of the Merger, each share of EHSI common stock was cancelled and automatically converted into the right to receive one Endo International plc ordinary share.
The issuance of Endo International plc ordinary shares in connection with the Transactions was registered under the Securities Act of 1933, as amended, pursuant to Endo International plc’s registration statement on Form S-4 (File No. 333-192760) (the Registration Statement) filed with the Securities and Exchange Commission (SEC) and declared effective on January 24, 2014. The definitive proxy statement/prospectus of Endo International and EHSI, dated January 24, 2014, that forms a part of the Registration Statement contains additional information about the Transactions and the other transactions contemplated by the Arrangement Agreement, including a description of the treatment of equity awards and information concerning the interests of directors, executive officers and affiliates of EHSI and Paladin in the Transactions.
Pursuant to Rule 12g-3(a) under the Securities Exchange Act of 1934, as amended (the Exchange Act), Endo International plc is the successor issuer to EHSI. Endo International plc’s ordinary shares are deemed to be registered under Section 12(b) of the Exchange Act, and Endo International plc is subject to the informational requirements of the Exchange Act, and the rules and regulations promulgated thereunder. Endo International plc’s ordinary shares were approved for listing on (a) The NASDAQ Global Market (NASDAQ) and trade under the symbol "ENDP" and (b) Toronto Stock Exchange (TSX) and trade under the symbol "ENL."
Prior to the Transactions, EHSI’s common shares were registered pursuant to Section 12(b) of the Exchange Act and listed on NASDAQ, and Paladin’s common shares were listed on TSX. EHSI’s common shares were delisted from trading on NASDAQ as of close of business on February 28, 2014, and Paladin’s common shares were delisted from trading on the TSX as of close of business on February 28, 2014. References throughout to "ordinary shares" refer to EHSI’s common shares, 350,000,000 authorized, par value $0.01 per share, prior to the consummation of the transactions and to Endo International plc's ordinary shares, 1,000,000,000 authorized, par value $0.0001 per share, subsequent to the consummation of the transactions. In addition, on February 11, 2014 the Company issued 4,000,000 euro deferred shares of $0.01 each at par.

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The operating results of Paladin from and including February 28, 2014 are included in the accompanying Condensed Consolidated Statements of Operations for the three months ended March 31, 2014. The Condensed Consolidated Balance Sheets as of March 31, 2014 reflect the acquisition of Paladin effective February 28, 2014.
References throughout to "we," "our," "us," the "Company" or "Endo" refer to financial information and transactions of Endo Health Solutions Inc. prior to February 28, 2014 and Endo International plc thereafter.
Following the Transactions, the Company changed the name of its three reporting segments. The Endo Pharmaceuticals segment became "U.S. Branded Pharmaceuticals," Qualitest became "U.S. Generic Pharmaceuticals" and AMS became "Devices." As a result of the acquisition of Paladin, a fourth segment was added, known as "International Pharmaceuticals."
On December 28, 2013 EHSI's Board of Directors (the Board) approved a plan to sell the HealthTronics business and the Company entered into a definitive agreement to sell the business on January 9, 2014 to Altaris Capital Partners LLC for an upfront cash payment of $85.0 million, subject to cash and other working capital adjustments. In addition, the Company received rights to additional cash payments of up to $45.0 million based on the future operating performance of HealthTronics for a total consideration of up to $130.0 million. The sale was completed on February 3, 2014.
Until it was sold on February 3, 2014, the assets of this business segment and related liabilities were classified as held for sale in the Condensed Consolidated Balance Sheet. Depreciation and amortization expense were not recorded on assets held for sale. The operating results of this business segment are reported as Discontinued operations, net of tax in the Condensed Consolidated Statements of Operations for all periods presented.
The Company, through Paladin and its subsidiaries, owns majority controlling interests in certain entities. Additionally, prior to the sale of our HealthTronics business in February 2014, HealthTronics, Inc. owned interests in various partnerships and limited liability corporations where HealthTronics, Inc., as the general partner or managing member, exercised effective control. Accordingly, in accordance with the accounting consolidation principles, we consolidate various entities which neither we nor our subsidiaries own 100%. Net income attributable to noncontrolling interests relates to the portion of the net income of these entities not attributable, directly or indirectly, to our ownership interests.
On August 28, 2013, EHSI announced that it had entered into a definitive agreement to acquire Boca Pharmacal LLC (Boca), a specialty generics company that focuses on niche areas, commercializing and developing products in categories that include controlled substances, semisolids and solutions. On February 3, 2014, EHSI announced that it had completed the acquisition of Boca for approximately $232.7 million in cash.
The operating results of Boca from and including February 3, 2014 are included in the accompanying Condensed Consolidated Statements of Operations for the three months ended March 31, 2014. The Condensed Consolidated Balance Sheets as of March 31, 2014 reflect the acquisition of Boca effective February 3, 2014.
The information included in this Quarterly Report on Form 10-Q should be read in conjunction with our Consolidated Financial Statements and accompanying notes included in our Annual Report on Form 10-K for the year ended December 31, 2013.
NOTE 2. RECENT ACCOUNTING PRONOUNCEMENTS
In April 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update No. 2014-08, “Reporting Discontinued Operations and Disclosures of Disposals of an Entity” (ASU 2014-08). ASU 2014-08 changes the requirements for reporting discontinued operations by limiting discontinued operations reporting to disposals of components of an entity that represent strategic shifts that have (or will have) a major effect on an entity's operations and financial results. The disclosure requirements for discontinued operations under ASU 2014-08 will be expanded in order to provide users of financial statements with more information about the assets, liabilities, revenues and expenses of discontinued operations. ASU 2014-08 is effective on a prospective basis for (1) all disposals (or classifications as held for sale) of components of an entity that occur within annual periods beginning on or after December 15, 2014, and interim periods within those years, and (2) all businesses that are classified as held for sale on acquisition that occur within annual periods beginning on or after December 15, 2014 and interim periods within those years. The Company is currently evaluating the impact of ASU 2014-08 on the Company's consolidated results of operations and financial position.
NOTE 3. DISCONTINUED OPERATIONS
On December 28, 2013, the Board approved a plan to sell the HealthTronics business and the Company entered into a definitive agreement to sell the business on January 9, 2014 to Altaris Capital Partners LLC for an upfront cash payment of $85.0 million, subject to cash and other working capital adjustments. In addition, EHSI received rights to additional cash payments of up to $45.0 million based on the future operating performance of HealthTronics, of which no value has been recognized in the accompanying

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Condensed Consolidated financial statements, for a total consideration of up to $130.0 million. Additional cash payments, if any will be recorded when earned. The sale was completed on February 3, 2014.
As previously disclosed, prior to the sale, at September 30, 2013, the Company had determined that a sale of the HealthTronics business was more-likely-than-not to occur over the next twelve months. Accordingly, we initiated an interim goodwill impairment analysis of the HealthTronics reporting units' goodwill balances as of September 30, 2013. The fair value of the Urology Services and ITS reporting units were estimated using a number of factors including the fair value currently implied by the ongoing sales process and previously prepared discounted cash flow analyses. As a result of this analysis, the Company determined that the net book value of both our Urology Services reporting unit and our HITS reporting unit exceeded their estimated fair value. The Company prepared a preliminary analysis to estimate the amount of an impairment charge as of September 30, 2013, and determined that an impairment was probable and reasonably estimable. The preliminary fair value assessments were performed by the Company taking into consideration a number of factors including the preliminary results of a hypothetical purchase price allocation. As a result of the preliminary analysis, the Company recorded a combined estimated goodwill impairment charge of $38.0 million in the Condensed Consolidated Statements of Operations during the three months ended September 30, 2013, representing the difference between the estimated implied fair value of the HealthTronics reporting units' goodwill and their respective net book values. The Company finalized the impairment analysis in the fourth quarter of 2013 when it recorded charges of $118.9 million to write down the book value of the reporting units' assets to fair value less costs to sell. Subsequently, at the time of the sale in February 2014, the Company recorded a gain of approximately $1.5 million, representing the amount of the net proceeds received in excess of the net book value of the assets sold.
Until it was sold on February 3, 2014, the assets of this business segment, previously known as the HealthTronics segment, and related liabilities were classified as held for sale in the Condensed Consolidated Balance Sheet. Depreciation and amortization expense were not recorded on assets held for sale. The operating results of this business segment are reported as Discontinued operations, net of tax in the Condensed Consolidated Statements of Operations for all periods presented. Financial results are only related to disposed of or to-be-disposed of businesses.

The following table provides the operating results of Discontinued operations, net of tax for the three months ended March 31, 2014 and 2013 (in thousands):
 
Three Months Ended March 31,
 
2014
 
2013
Revenue
$
14,442

 
$
50,025

Income from discontinued operations before income taxes
$
4,398

 
$
5,642

Income taxes
(1,021
)
 
692

Discontinued operations, net of tax
$
5,419

 
$
4,950

The following table provides the components of Assets held for sale and Liabilities related to assets held for sale as of December 31, 2013 (in thousands):
 
December 31, 2013
Current assets
$
69,131

Property, plant and equipment
23,461

Goodwill and other intangibles, net
58,761

Other assets
8,904

      Assets held for sale
$
160,257

Current liabilities
$
27,656

Long term debt, less current portion, net
3,354

Other liabilities
561

     Liabilities related to assets held for sale
$
31,571

The table above does not include Noncontrolling interests related to HealthTronics of $59.2 million as of December 31, 2013.

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NOTE 4. RESTRUCTURING
June 2013 Restructuring Initiative
On June 4, 2013, the Board approved certain strategic, operational and organizational steps for EHSI to take to refocus its operations and enhance shareholder value. These actions were the result of a comprehensive assessment of the Company's strengths and challenges, its cost structure and execution capabilities, and its most promising opportunities to drive future cash flow and earnings growth. The cost reduction initiatives include a reduction in headcount of approximately 15% worldwide, streamlining of general and administrative expenses, optimizing commercial spend and refocusing research and development efforts.
As a result of the June 2013 restructuring initiative, the Company incurred minimal expenses during the three months ended March 31, 2014. The Company anticipates there will be additional pre-tax restructuring expenses of $1.0 million, primarily attributable to certain facility exit costs and employee severance and other benefit-related costs which will be incurred throughout 2014. The majority of these restructuring costs are included in Selling, general and administrative expense in the Condensed Consolidated Statements of Operations.
The liability related to the June 2013 restructuring initiative totaled $5.2 million and $12.3 million at March 31, 2014 and December 31, 2013, respectively. This liability is included in Accrued expenses in the Condensed Consolidated Balance Sheets. The change in the liability relates primarily to cash payments made during 2014.
Of the $1.0 million of additional pre-tax restructuring expenses the Company expects to incur, $0.8 million relates to the Devices segment and $0.2 million relates to corporate. Segment operating results do not include restructuring expenses as segment performance is evaluated excluding such expenses. See further discussion in Note 6. Segment Results.
Other Restructuring Initiatives
During 2014 and 2013, EHSI and certain of its subsidiaries undertook certain other restructuring initiatives that were individually not material to the Company's Condensed Consolidated Financial Statements for any of the periods presented. On an aggregate basis, the Company recorded charges related to these initiatives totaling $4.3 million during the three months ended March 31, 2014, which primarily consisted of employee severance and other benefit-related costs. The Company recorded charges related to these initiatives totaling $9.3 million during the three months ended March 31, 2013, which primarily consisted of lease-exit costs of $7.8 million recognized upon the cease use dates of our Chadds Ford, Pennsylvania and Westbury, New York properties. In addition, the Company recognized employee severance and other benefit-related costs during the three months ended March 31, 2013. The majority of these costs are included in Selling, general and administrative expense in the Condensed Consolidated Statements of Operations.
The liability related to these initiatives totaled $12.7 million and $16.1 million at March 31, 2014 and December 31, 2013, respectively. This liability is included in Accrued expenses in the Condensed Consolidated Balance Sheets. The change in the liability relates primarily to cash payments made during 2013, partially offset by the recognition of the expenses mentioned in the preceding paragraph.
NOTE 5. ACQUISITIONS
Paladin Labs Inc. Acquisition
On November 5, 2013, EHSI announced that it had reached a definitive agreement to acquire Paladin in a stock and cash transaction and on February 28, 2014 (Paladin Acquisition Date) the transaction closed and each of EHSI and Paladin was acquired by Endo International plc, a newly-formed Irish holding company.
Under the terms of the transaction, former Paladin shareholders received 1.6331 shares of Endo International stock, or approximately 35.5 million shares, and C$1.16 in cash, for total consideration of $2.9 billion as of February 28, 2014. On the Paladin Acquisition Date, each then current EHSI shareholder received one ordinary share of Endo International plc for each share of EHSI common stock owned upon closing. Immediately following the closing of the transaction, former EHSI shareholders owned approximately 79% of Endo International plc, and former Paladin shareholders owned approximately 21%.

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The acquisition consideration is as follows (in thousands of U.S. dollars, except for per share amounts):
Number of Paladin Shares paid through the delivery of Endo International common stock
20,765

 
 
Exchange ratio
1.6331

 
 
Number of shares of Endo International common stock—as exchanged
33,912

 
 
Endo common stock price on February 28, 2014
$
80.00

 
 
Fair value of common shares of Endo International issued to Paladin Shareholders
 
 
$
2,712,956

Number of Paladin Shares paid in cash
20,765

 
 
Per share cash consideration for Paladin shares (1)
$
1.09

 
 
Cash distribution to Paladin shareholders
 
 
22,647

Fair value of the vested portion of Paladin stock options outstanding—1.3 million at February 28, 2014 (2)
 
 
131,323

Total acquisition consideration
 
 
$
2,866,926

__________
(1)
Represents the cash consideration per the Arrangement Agreement of C$1.16 per Paladin share translated into U.S. dollars utilizing an exchange rate of $0.9402.
(2)
Represents the fair value of vested Paladin stock option awards attributed to pre-combination services that were outstanding on the Paladin Acquisition Date.
Paladin is a specialty pharmaceutical company headquartered in Montreal, Canada, focused on acquiring or in-licensing innovative pharmaceutical products for the Canadian and world markets. Key products serve growing drug markets including attention deficit hyperactivity disorder (ADHD), pain, urology and allergy. In addition to its Canadian operations, Paladin owns a controlling interest in Laboratorios Paladin de Mexico S.A. in Mexico and in publicly traded Litha Healthcare Group Limited in South Africa.
Paladin’s stable and growing cash flows and strong Canadian franchise complement Endo's existing portfolio and further diversify Endo's pharmaceutical product mix and geographic reach. The Company believes the transaction will generate operational and tax synergies and will create a financial platform to facilitate organic growth with broader options for future strategic activity.
While the Paladin acquisition was primarily equity based, Endo also made changes to its existing debt structure to complete the transaction. See Note 11. Debt.
The operating results of Paladin from and including February 28, 2014 are included in the accompanying Condensed Consolidated Statements of Operations for the three months ended March 31, 2014. The Condensed Consolidated Balance Sheets as of March 31, 2014 reflect the acquisition of Paladin, effective February 28, 2014.

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The following table summarizes the fair values of the assets acquired and liabilities assumed at the Paladin Acquisition Date (in thousands):
 
February 28,
2014
Cash and cash equivalents
$
113,571

Marketable securities
89,420

Accounts receivable
93,832

Inventories
62,095

Prepaid expenses and other current assets
32,605

Deferred income tax assets, current
11,719

Property, plant and equipment
7,299

Intangible assets
676,000

Other assets
56,289

Total identifiable assets
$
1,142,830

Accounts payable and accrued expenses
$
124,321

Income taxes payable
22,524

Deferred income taxes
160,620

Debt
23,826

Other liabilities
9,578

Total liabilities assumed
$
340,869

Net identifiable assets acquired
$
801,961

Noncontrolling interests
$
(69,600
)
Goodwill
2,134,565

Net assets acquired
$
2,866,926

The estimated fair value of the Paladin assets acquired and liabilities assumed are provisional as of March 31, 2014 and are based on information that is currently available to the Company. Additional information is being gathered to finalize these provisional measurements, particularly with respect to certain acquired equity and cost method investments, property, plant and equipment, intangible assets, contingent assets and liabilities, deferred income taxes and noncontrolling interests. Accordingly, the measurement of the Paladin assets acquired and liabilities assumed may change significantly upon finalization of the Company’s valuations and completion of the purchase price allocation, both of which are expected to occur no later than one year from the acquisition date.
As of March 31, 2014, the Company has provisionally assigned the goodwill arising from the Paladin acquisition to the International Pharmaceuticals segment. The Company expects multiple reporting units to benefit, directly or indirectly, from the synergies arising from the acquisition. Accordingly, in conjunction with our purchase price allocation, the Company is assessing whether a portion of the goodwill recognized in this acquisition should be assigned to multiple reporting units and if so, the appropriate allocation methodology to assign such goodwill. As part of this assessment, the Company is also evaluating the recoverability of goodwill recognized from the Paladin acquisition that arose, in part, based on the requirement in GAAP to measure the value of Company shares issued in the acquisition based on the quoted market price of the shares on the date that the acquisition closed which was significantly higher than the quoted market price on the date the acquisition was announced. The results of that assessment could impact our financial position and results of operations.

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The valuation of the intangible assets acquired and related amortization periods are as follows:
 
Valuation
(in millions) 
 
Amortization
Period
(in years)  
Developed Technology:
 
 
 
Canada Base Prescription
$
345.0

 
12
Canada OTC
40.0

 
11
Canada Other
55.0

 
11
Litha
60.0

 
12
Latin America
45.0

 
11
Licenses not renewed
4.5

 
3
Total
$
549.5

 

In Process Research & Development:
 
 
 
Serelaxin
$
115.0

 
n/a
Other
11.5

 
n/a
Total
$
126.5

 
n/a
Total other intangible assets
$
676.0

 
n/a
The preliminary fair values of the developed technology and IPR&D were estimated using a discounted present value income approach. Under this method, an intangible asset’s fair value is equal to the present value of the incremental after-tax cash flows (excess earnings) attributable solely to the intangible asset over its remaining useful life. To calculate fair value, the Company used cash flows discounted at rates considered appropriate given the inherent risks associated with each type of asset. The Company believes that the level and timing of cash flows appropriately reflect market participant assumptions. This analysis is preliminary and is subject to further adjustment as additional information becomes available.
The goodwill recognized is attributable primarily to strategic and synergistic opportunities related to existing pharmaceutical businesses, expected corporate synergies, the assembled workforce of Paladin and other factors. The amount of goodwill deductible for income tax purposes associated with the Paladin acquisition is not expected to be material. However, this expectation is preliminary and is subject to further adjustment as additional information becomes available and as additional analyses are performed.
Deferred tax assets and liabilities are related primarily to the difference between the book basis and tax basis of identifiable intangible assets.
The Company recognized $36.8 million of Paladin acquisition-related and integration costs that were expensed during the three months ended March 31, 2014. These costs are included in Acquisition-related and integration items, net in the accompanying Condensed Consolidated Statements of Operations consist of the following items (in thousands):
 
Three Months Ended March 31,
 
2014
Bank fees
$
14,232

Legal, separation, integration, and other costs
22,614

Total
$
36,846

Transaction costs directly associated with the closing of the acquisition in 2014 and included in the table above totaled $33.4 million.

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The amounts of revenue and Net income attributable to Endo International plc of Paladin included in the Company’s Condensed Consolidated Statements of Operations from and including February 28, 2014 to March 31, 2014 are as follows (in thousands, except per share data):
Revenue
$
24,822

Net income attributable to Endo International plc
$
3,685

Basic and diluted net income per share (1)
$
0.03

__________
(1)
Because the Company reported a Net loss from continuing operations attributable to Endo International plc during the three months ended March 31, 2014, the diluted net income per share of Paladin included in the Company’s Condensed Consolidated Statements of Operations was calculated assuming no share dilution, as any potentially dilutive instruments would be anti-dilutive in a period of loss.
The following supplemental unaudited pro forma information presents the financial results as if the acquisition of Paladin had occurred on January 1, 2013 for the three months ended March 31, 2014 and 2013. This supplemental pro forma information has been prepared for comparative purposes and does not purport to be indicative of what would have occurred had the acquisition been made on January 1, 2013, nor are they indicative of any future results.
 
Three Months Ended March 31, 2014
 
Three Months Ended March 31, 2013
Unaudited pro forma consolidated results (in thousands, except per share data):
 
 
 
Revenue
$
637,161

 
$
775,480

Net (loss) income attributable to Endo International plc
$
(449,987
)
 
$
7,035

Basic net (loss) income per share
$
(3.51
)
 
$
0.06

Diluted net (loss) income per share
$
(3.51
)
 
$
0.06

These amounts have been calculated after applying the Company’s accounting policies and adjusting the results of Paladin to reflect factually supportable adjustments that give effect to events that are directly attributable to the Paladin Acquisition, including borrowings to finance the acquisition as well as the additional amortization that would have been charged assuming the fair value adjustments primarily to inventory and intangible assets had been applied on January 1, 2013, together with the consequential tax effects.
Boca Pharmacal LLC Acquisition
On August 28, 2013, Endo announced that it had entered into a definitive agreement to acquire Boca Pharmacal LLC (Boca), a specialty generics company that focuses on niche areas, commercializing and developing products in categories that include controlled substances, semisolids and solutions. On February 3, 2014, the Company announced that it had completed the acquisition of Boca for approximately $232.7 million in cash.
The preliminary fair values of the net identifiable assets acquired totaled approximately $221.8 million, resulting in goodwill of approximately $10.8 million, which is expected to be assigned to our U.S. Generics International segment. The estimated fair value of the Boca net assets acquired are provisional as of March 31, 2014 and are based on information that is currently available to the Company. Additional information is being gathered to finalize these provisional measurements. Accordingly, the measurement of the Boca assets acquired and liabilities assumed may change upon finalization of the Company’s valuations and completion of the purchase price allocation, both of which are expected to occur no later than one year from the acquisition date.
The operating results of Boca from and including February 3, 2014 are included in the accompanying Condensed Consolidated Statements of Operations for the three months ended March 31, 2014. The Condensed Consolidated Balance Sheets as of March 31, 2014 reflect the acquisition of Boca, effective February 3, 2014.
NOTE 6. SEGMENT RESULTS
On December 28, 2013, EHSI's Board of Directors approved a plan to sell its HealthTronics business segment and the Company entered into a definitive agreement to sell the business segment on January 9, 2014. Until it was sold on February 3, 2014, the assets of this business segment and related liabilities were classified as held for sale in the Condensed Consolidated Balance Sheet. Depreciation and amortization expense was not recorded on assets held for sale. The operating results of this business segment are reported as discontinued operations, net of tax in the Condensed Consolidated Statements of Operations for all periods presented. For additional information, see Note 3. Discontinued Operations.

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Concurrent with the February 28, 2014 acquisition of Paladin, the Company changed the names of its reportable segments. This change to our segments had no impact on the Company’s unaudited Condensed Consolidated Financial Statements for all periods presented. In addition, the International Pharmaceuticals segment was added, which is comprised solely of the operations of the acquired Paladin business.
The four reportable business segments in which the Company now operates are: (1) U.S. Branded Pharmaceuticals (f/k/a Endo Pharmaceuticals), (2) U.S. Generic Pharmaceuticals (f/k/a Qualitest), (3) Devices (f/k/a AMS) and (4) International Pharmaceuticals. These segments reflect the level at which executive management regularly reviews financial information to assess performance and to make decisions about resources to be allocated. Each segment derives revenue from the sales or licensing of its respective products and is discussed in more detail below.
We evaluate segment performance based on each segment’s adjusted income (loss) from continuing operations before income tax, which we define as (loss) income from continuing operations before income tax before certain upfront and milestone payments to partners, acquisition-related and integration items, cost reduction and integration-related initiatives, asset impairment charges, amortization of intangible assets related to marketed products and customer relationships, inventory step-up recorded as part of our acquisitions, non-cash interest expense, litigation-related and other contingent matters and certain other items that the Company believes do not reflect its core operating performance.
Certain of the corporate general and administrative expenses incurred by the Company are not attributable to any specific segment. Accordingly, these costs are not allocated to any of the Company's segments and are included in the results below as "Corporate unallocated". The Company's consolidated adjusted income from continuing operations before income tax is equal to the combined results of each of its segment less these unallocated corporate costs.
U.S. Branded Pharmaceuticals
The U.S. Branded Pharmaceuticals segment includes a variety of branded prescription products related to treating and managing pain as well as our urology, endocrinology and oncology products. The marketed products that are included in this segment include Lidoderm®, Opana® ER, Voltaren® Gel, Percocet®, Frova®, Fortesta® Gel, Supprelin® LA, Vantas®, Valstar® and AveedTM.
U.S. Generic Pharmaceuticals
The U.S. Generic Pharmaceuticals segment has historically focused on selective generics related to pain that have one or more barriers to market entry, such as complex formulation, regulatory or legal challenges or difficulty in raw material sourcing. The product offerings of this segment include products in the pain management, urology, CNS disorders, immunosuppression, oncology, women’s health and hypertension markets, among others.
Devices
The Devices segment focuses on providing technology solutions to physicians treating men’s and women’s pelvic health conditions and operates in the following business lines: men’s health, women’s health, and benign prostatic hyperplasia (BPH or prostate health) therapy. AMS distributes devices through its direct sales force and independent sales representatives in the U.S., Canada, Australia and Western Europe. Additionally, AMS distributes devices through foreign independent distributors, primarily in Europe, Asia, and South America, who then sell the products to medical institutions. None of AMS's customers or distributors accounted for 10% or more of our total revenues during the three months ended March 31, 2014 and 2013. Foreign subsidiary sales are predominantly to customers in Canada, Australia and Western Europe.

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International Pharmaceuticals
The International Pharmaceuticals segment includes a variety of specialty pharmaceutical products for the Canadian and world markets, which we acquired from Paladin. Key products serve growing drug markets including ADHD, pain, urology and allergy.
The following represents selected information for the Company’s reportable segments for the three months ended March 31, 2014 and 2013 (in thousands):
 
Three Months Ended March 31,
 
2014
 
2013
Net revenues to external customers:
 
 
 
U.S. Branded Pharmaceuticals
$
234,165

 
$
357,589

U.S. Generic Pharmaceuticals
211,855

 
178,253

Devices (1)
123,767

 
122,652

International Pharmaceuticals (2)
24,822

 

Total consolidated net revenues to external customers
$
594,609

 
$
658,494

Adjusted income (loss) from continuing operations before income tax:
 
 
 
U.S. Branded Pharmaceuticals
$
134,417

 
$
174,407

U.S. Generic Pharmaceuticals
73,797

 
47,112

Devices
39,705

 
31,644

International Pharmaceuticals
9,295

 

Corporate unallocated
(79,191
)
 
(83,017
)
Total consolidated adjusted income from continuing operations before income tax
$
178,023

 
$
170,146

__________
(1)
The following table displays our Devices segment revenue by geography for the three months ended March 31, 2014 and 2013 (in thousands):
 
Three Months Ended March 31,
 
2014
 
2013
Devices:
 
 
 
United States
$
77,459

 
$
78,367

International
46,308

 
44,285

Total Devices revenues
$
123,767

 
$
122,652

(2)
Revenues generated by our International Pharmaceuticals segment are primarily attributable to Canada and South Africa.
The table below provides reconciliations of our consolidated adjusted income from continuing operations before income tax to our consolidated (loss) income from continuing operations before income tax, which is determined in accordance with U.S. GAAP, for the three months ended March 31, 2014 and 2013 (in thousands):

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Table of Contents

 
Three Months Ended March 31,
 
2014
 
2013
Total consolidated adjusted income from continuing operations before income tax:
$
178,023

 
$
170,146

Upfront and milestone payments to partners
(11,155
)
 
(2,574
)
Asset impairment charges

 
(1,100
)
Acquisition-related and integration items (1)
(45,269
)
 
(558
)
Separation benefits and other cost reduction initiatives (2)
(277
)
 
(13,694
)
Excise tax expense (3)
(60,000
)
 

Amortization of intangible assets
(55,194
)
 
(47,250
)
Inventory step-up
(3,581
)
 

Non-cash interest expense
(5,969
)
 
(5,450
)
Loss on extinguishment of debt
(9,596
)
 
(11,312
)
Watson litigation settlement income, net

 
19,227

Certain litigation-related charges (4)
(641,100
)
 
(76,532
)
Total consolidated (loss) income from continuing operations before income tax
$
(654,118
)
 
$
30,903

__________
(1)
Acquisition-related and integration-items include costs directly associated with the closing of certain acquisitions, changes in the fair value of contingent consideration and the costs of integration activities related to both current and prior period acquisitions.
(2)
Separation benefits and other cost reduction initiatives include employee separation costs of $5.0 million and $0.8 million for the three months ended March 31, 2014 and 2013, respectively. Refer to Note 4. Restructuring for discussion of our material restructuring initiatives. These amounts are partially offset by changes in estimates related to certain cost reduction initiative accruals. Additionally, the amount of separation benefits and other cost reduction initiatives during the three months ended March 31, 2013 includes an expense recorded upon the cease use date of our Chadds Ford, Pennsylvania properties in the first quarter of 2013, representing the liability for our remaining obligations under the respective lease agreements of $7.2 million. These expenses were primarily recorded as Selling, general and administrative and Research and development expense in our Condensed Consolidated Statements of Operations.
(3)
This amount represents charges for the excise tax pursuant to Section 4985 now that the Company expects the merger between Endo and Paladin to be taxable to U.S. shareholders of EHSI as a result of the shareholder gain from the transaction. The final determination is subject to the Company completing its shareholder basis study, which is expected to be finalized later in 2014.
(4)
These amounts includes charges for Litigation-related and other contingencies, consisting primarily of mesh-related product liability charges, as well as mesh litigation-related defense costs for the three months ended March 31, 2014 and 2013.

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The following represents additional selected financial information for our reportable segments for the three months ended March 31, 2014 and 2013 (in thousands):
 
Three Months Ended March 31,
 
2014
 
2013
Depreciation expense:
 
 
 
U.S. Branded Pharmaceuticals
$
4,037

 
$
6,305

U.S. Generic Pharmaceuticals
7,569

 
3,170

Devices
2,086

 
2,802

International Pharmaceuticals
141

 

Corporate unallocated
1,894

 
2,465

Total depreciation expense
$
15,727

 
$
14,742

 
Three Months Ended March 31,
 
2014
 
2013
Amortization expense:
 
 
 
U.S. Branded Pharmaceuticals
$
20,723

 
$
21,280

U.S. Generic Pharmaceuticals
18,614

 
10,881

Devices
15,524

 
15,239

International Pharmaceuticals
$
4,000

 
$

Total amortization expense
$
58,861

 
$
47,400

Interest income and expense are considered corporate items and are not allocated to our segments. Asset information is not accounted for at the segment level and consequently is not reviewed or included within our internal management reporting. Therefore, the Company has not disclosed asset information for each reportable segment.
NOTE 7. FAIR VALUE MEASUREMENTS
Financial Instruments
The financial instruments recorded in our Condensed Consolidated Balance Sheets include cash and cash equivalents, restricted cash and cash equivalents, accounts receivable, marketable securities, equity and cost method investments, accounts payable and accrued expenses, acquisition-related contingent consideration and debt obligations. Included in cash and cash equivalents and restricted cash and cash equivalents are money market funds representing a type of mutual fund required by law to invest in low-risk securities (for example, U.S. government bonds, U.S. Treasury Bills and commercial paper). Money market funds are structured to maintain the fund’s net asset value at $1.00 per unit, which assists in providing adequate liquidity upon demand by the holder. Money market funds pay dividends that generally reflect short-term interest rates. Thus, only the dividend yield fluctuates. Also included in cash and cash equivalents are investments in guaranteed investment certificates (GICs) with original maturities of less than three months. GICs are interest-bearing Canadian deposit securities with defined maturities and are redeemable on demand. Due to their short-term maturity, the carrying amounts of non-restricted and restricted cash and cash equivalents (including money market funds), accounts receivable, accounts payable and accrued expenses approximate their fair values.
At the time of purchase, we classify our marketable securities as either available-for-sale securities or trading securities, depending on our intent at that time. Available-for-sale and trading securities are carried at fair value with unrealized holding gains and losses recorded within other comprehensive income or net income, respectively. Fair value is determined based on a variety of approaches as described in more detail below. The Company reviews unrealized losses associated with available-for-sale securities to determine the classification as a “temporary” or “other-than-temporary” impairment. A temporary impairment results in an unrealized loss being recorded in other comprehensive income. An impairment that is viewed as other-than-temporary is recognized in net income. The Company considers various factors in determining the classification, including the length of time and extent to which the fair value has been less than the Company’s cost basis, the financial condition and near-term prospects of the issuer or investee, and the Company’s ability to hold the investment for a period of time sufficient to allow for any anticipated recovery in market value.
The following table presents the carrying amounts and estimated fair values of our other financial instruments at March 31, 2014 and December 31, 2013 (in thousands):
 
March 31, 2014
 
December 31, 2013
 
Carrying
Amount
 
Fair Value
 
Carrying
Amount 
 
Fair Value
Current assets:
 
 
 
 
 
 
 
Guaranteed investment certificates—original maturities of three months or more
$
49,712

 
$
49,712

 
$

 
$

Commercial paper
14,752

 
14,752

 

 

Bonds
9,816

 
9,816

 

 

Current portion of loans receivable
30,283

 
30,283

 

 

 
$
104,563

 
$
104,563

 
$

 
$

Long-term assets:
 
 
 
 
 
 
 
Equity securities
$
2,396

 
$
2,396

 
$
2,979

 
$
2,979

Loans receivable from joint venture
10,463

 
10,463

 

 

Other loans receivable, less current portion
8,177

 
8,177

 

 

Equity and cost method investments
43,752

 
N/A

 
15,654

 
N/A

 
$
64,788

 
 
 
$
18,633

 
 
Current liabilities:
 
 
 
 
 
 
 
Acquisition-related contingent consideration—short-term
$
3,877

 
$
3,877

 
$
3,878

 
$
3,878

Current portion of 1.75% Convertible Senior Subordinated Notes Due 2015, net
351,728

 
375,091

 
345,421

 
372,481

Current portion of New Term Loan A Facility Due 2019
41,250

 
41,250

 

 

Current portion of New Term Loan B Facility Due 2021
4,250

 
4,250

 

 

Current portion of Term Loan A Facility Due 2018

 

 
69,375

 
69,375

3.25% AMS Convertible Notes due 2036
22

 
22

 
22

 
22

4.00% AMS Convertible Notes due 2041
106

 
106

 
111

 
111

Current portion of Paladin debt
4,889

 
4,889

 

 

Minimum Voltaren® Gel royalties due to Novartis—short-term
29,260

 
29,260

 
28,935

 
28,935

Other
1,000

 
1,000

 
9,000

 
9,000

 
$
436,382

 
$
459,745

 
$
456,742

 
$
483,802

Long-term liabilities:
 
 
 
 
 
 
 
Acquisition-related contingent consideration—long-term
$
882

 
$
882

 
$
869

 
$
869

New Term Loan A Facility Due 2019, less current portion
1,058,750

 
1,058,998

 

 

New Term Loan B Facility Due 2021, less current portion
420,750

 
421,020

 

 

Term Loan A Facility Due 2018, less current portion

 

 
1,266,094

 
1,265,970

Term Loan B Facility Due 2018

 

 
60,550

 
60,686

7.00% Senior Notes Due 2019
500,000

 
540,938

 
500,000

 
536,563

7.00% Senior Notes Due 2020, net
397,279

 
432,500

 
397,200

 
430,500

7.25% Senior Notes Due 2022
400,000

 
436,750

 
400,000

 
431,750

5.75% Senior Notes Due 2022
700,000

 
719,250

 
700,000

 
703,500

Paladin debt, less current portion
18,867

 
18,867

 

 

Minimum Voltaren® Gel royalties due to Novartis—long-term

 

 
7,392

 
7,392

Other
7,593

 
7,593

 
8,443

 
8,443

 
$
3,504,121

 
$
3,636,798

 
$
3,340,548

 
$
3,445,673


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Fair value guidance establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value. These tiers include:
Level 1—Quoted prices in active markets for identical assets or liabilities.
Level 2—Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
Level 3—Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.
Our investments in GICs, commercial paper and bonds mature throughout 2014 and 2015 and are held with highly rated financial institutions. Our investments in GICs with original maturities of more than three months are included within marketable securities in our Condensed Consolidated Balance Sheets. They are carried at the deposited value, which is a reasonable approximation of fair value, and are considered to be valued using Level 2 inputs within the fair value hierarchy. Our investments in commercial paper are based on broker quotes provided by our portfolio managers. We consider these investments to be valued using Level 2 inputs within the fair value hierarchy. Our investments in bonds consist of both corporate and Canadian government bonds and are valued using broker quotes, representing Level 2 measurements within the fair value hierarchy.
Our loans receivable at March 31, 2014 relate primarily to a $30.0 million secured debenture between Paladin and Bioniche Life Sciences Inc. (Bioniche), related to Paladin's 2013 acquisition of certain product rights from Bioniche. The full amount of this receivable was collected in April 2014. Based on the short-term nature of this debenture, we believe the carrying amount of this receivable is a reasonable approximation of fair value. Our loans receivable at March 31, 2014 also includes loans totaling $10.5 million to our joint venture owned through our Litha Healthcare Group Limited subsidiary. The joint venture investment is further described below. The majority of this amount is secured by certain of the assets of our joint venture. We believe the carrying amount of this receivable is a reasonable approximation of fair value.
Equity securities consist of investments in the stock of publicly traded companies, the values of which are based on a quoted market prices and thus represent Level 1 measurements within the fair value hierarchy, as defined below. These securities are not held to support current operations and are therefore classified as non-current assets. Equity securities are included in marketable securities in the Condensed Consolidated Balance Sheets at March 31, 2014 and December 31, 2013.
We have various investments which we account for using the equity or cost method of accounting, including a $24.3 million joint venture investment in the Biologicals and Vaccines Institute of Southern Africa (Pty) Limited, owned through our Litha Healthcare Group Limited subsidiary, which is accounted for as an equity method investment. The fair value of the equity method and cost method investments is not readily available nor have we estimated the fair value of these investments and disclosure is not required. The Company is not aware of any identified events or changes in circumstances that would have a significant adverse effect on the carrying value of any of our equity or cost method investments included in our Condensed Consolidated Balance Sheets at March 31, 2014 and December 31, 2013.
Acquisition-related contingent consideration is measured at fair value on a recurring basis using unobservable inputs, hence these instruments represent Level 3 measurements within the fair value hierarchy. See Recurring Fair Value Measurements below for additional information on the fair value methodology used for the acquisition-related contingent consideration.
The fair value of our 1.75% Convertible Senior Subordinated Notes (Convertible Notes) is based on an income approach, which incorporates certain inputs and assumptions, including scheduled coupon and principal payments, the conversion feature inherent in the Convertible Notes, the put feature inherent in the Convertible Notes, and share price volatility assumptions based on historic volatility of the Company’s ordinary shares and other factors. These fair value measurements are based on significant inputs not observable in the market and thus represent Level 3 measurements within the fair value hierarchy.
The fair values of the various term loan facilities and senior notes were based on market quotes and transactions proximate to the valuation date. Based on this valuation methodology, we determined these debt instruments represent Level 2 measurements within the fair value hierarchy.
The fair values of the Minimum Voltaren® Gel royalties due to Novartis were determined using an income approach (present value technique) taking into consideration the level and timing of expected cash flows and an assumed discount rate. These assumptions are based on significant inputs not observable in the market and thus represent Level 3 measurements within the fair value hierarchy. The liability is currently being accreted up to the expected minimum payments, less payments made to date. We believe the carrying amount of this minimum royalty guarantee at March 31, 2014 and December 31, 2013 represents a reasonable approximation of the price that would be paid to transfer the liability in an orderly transaction between market participants at the measurement date. Accordingly, the carrying value approximates fair value as of March 31, 2014 and December 31, 2013.

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Recurring Fair Value Measurements
The Company’s financial assets and liabilities measured at fair value on a recurring basis at March 31, 2014 and December 31, 2013 were as follows (in thousands):
 
Fair Value Measurements at Reporting Date using:
March 31, 2014
Quoted Prices in
Active Markets
for Identical
Assets (Level 1)
 
Significant Other
Observable
Inputs (Level 2)  
 
Significant
Unobservable
Inputs (Level 3)
 
Total
Assets:
 
 
 
 
 
 
 
Money market funds
$
698,750

 
$

 
$

 
$
698,750

Guaranteed investment certificates—original maturities of less than three months

 
18,815

 

 
18,815

Guaranteed investment certificates—original maturities of three months or more

 
49,712

 

 
49,712

Commercial paper

 
14,752

 

 
14,752

Bonds

 
9,816

 

 
9,816

Equity securities
2,396

 

 

 
2,396

Total
$
701,146

 
$
93,095

 
$

 
$
794,241

Liabilities:
 
 
 
 
 
 
 
Acquisition-related contingent consideration—short-term
$

 
$

 
$
3,877

 
$
3,877

Acquisition-related contingent consideration—long-term

 

 
882

 
882

Total
$

 
$

 
$
4,759

 
$
4,759

 
 
Fair Value Measurements at Reporting Date using:
December 31, 2013
Quoted Prices in
Active Markets
for Identical
Assets (Level 1) 
 
Significant Other
Observable
Inputs (Level 2)
 
Significant
Unobservable
Inputs (Level 3)
 
Total
Assets:
 
 
 
 
 
 
 
Money market funds
$
843,390

 
$

 
$

 
$
843,390

Equity securities
2,979

 

 

 
2,979

Total
$
846,369

 
$

 
$

 
$
846,369

Liabilities:
 
 
 
 
 
 
 
Acquisition-related contingent consideration—short-term
$

 
$

 
$
3,878

 
$
3,878

Acquisition-related contingent consideration—long-term

 

 
869

 
869

Total
$

 
$

 
$
4,747

 
$
4,747

Acquisition-Related Contingent Consideration
On November 30, 2010 (the Qualitest Pharmaceuticals Acquisition Date), our subsidiary Endo Pharmaceuticals Inc. (EPI) acquired Generics International (US Parent), Inc. (doing business as Qualitest Pharmaceuticals), which was party to an asset purchase agreement with Teva Pharmaceutical Industries Ltd (Teva) (the Teva Agreement). Pursuant to this agreement, Qualitest Pharmaceuticals purchased certain pipeline generic products from Teva and could be obligated to pay consideration to Teva upon the achievement of certain future regulatory milestones (the Teva Contingent Consideration).
The current range of the undiscounted amounts the Company could be obligated to pay in future periods under the Teva Agreement is between zero and $7.5 million after giving effect to the first quarter 2013 payment. The Company is accounting for the Teva Contingent Consideration in the same manner as if it had entered into that arrangement with respect to its acquisition of Qualitest Pharmaceuticals. Accordingly, the fair value was estimated based on a probability-weighted discounted cash flow model (income approach). The resultant probability-weighted cash flows were then discounted using a discount rate of U.S. Prime plus 300 basis points. Using this valuation technique, the fair value of the contractual obligation to pay the Teva Contingent Consideration was determined to be approximately $4.8 million at March 31, 2014 and $4.7 million at December 31, 2013. The increase in the balance primarily relates to the changes in the fair value of the liability, primarily reflecting changes to the present value assumptions associated with our valuation model.

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Fair Value Measurements Using Significant Unobservable Inputs
The following table presents changes to the Company’s financial liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the three months ended March 31, 2014 (in thousands):
 
Acquisition-related
Contingent
Consideration  
Liabilities:
 
January 1, 2014
$
(4,747
)
Amounts (acquired) sold / (issued) settled, net

Transfers in and/or (out) of Level 3

Changes in fair value recorded in earnings
(12
)
March 31, 2014
$
(4,759
)
The following table presents changes to the Company’s financial assets and liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the three months ended March 31, 2013 (in thousands):     
 
Acquisition-related
Contingent  Consideration
Liabilities:
 
January 1, 2013
$
(8,924
)
Amounts (acquired) sold / (issued) settled, net
5,000

Transfers in and/or (out) of Level 3

Changes in fair value recorded in earnings
(40
)
March 31, 2013
$
(3,964
)
The following is a summary of available-for-sale securities held by the Company at March 31, 2014 and December 31, 2013 (in thousands):
 
Available-for-sale  
 
Amortized
Cost  
 
Gross
Unrealized
Gains
 
Gross
Unrealized
(Losses) 
 
Fair Value  
March 31, 2014
 
 
 
 
 
 
 
Money market funds
$
698,750

 
$

 
$

 
$
698,750

Guaranteed investment certificates—original maturities of less than three months
18,815

 

 

 
18,815

Total included in cash and cash equivalents
$
710,065

 
$

 
$

 
$
710,065

Total included in restricted cash and cash equivalents
$
7,500

 
$

 
$

 
$
7,500

Guaranteed investment certificates—original maturities of three months or more
$
49,712

 
$

 
$

 
$
49,712

Commercial paper
14,728

 
24

 

 
14,752

Bonds
9,846

 

 
(30
)
 
9,816

Total other short-term available-for-sale securities
$
74,286

 
$
24

 
$
(30
)
 
$
74,280

Equity securities
$
1,766

 
$
630

 
$

 
$
2,396

Long-term available-for-sale securities
$
1,766

 
$
630

 
$

 
$
2,396



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Available-for-sale  
 
Amortized
Cost
 
Gross
Unrealized
Gains 
 
Gross
Unrealized
(Losses)  
 
Fair Value  
December 31, 2013
 
 
 
 
 
 
 
Money market funds
$
843,390

 
$

 
$

 
$
843,390

Total included in cash and cash equivalents
$
73,390

 
$

 
$

 
$
73,390

Total included in restricted cash and cash equivalents
$
770,000

 
$

 
$

 
$
770,000

Equity securities
$
1,766

 
$
1,213

 
$

 
$
2,979

Long-term available-for-sale securities
$
1,766

 
$
1,213

 
$

 
$
2,979

At March 31, 2014, the unrealized loss positions related to our investments in commercial paper and bonds were not material, individually or in the aggregate. At March 31, 2014 and December 31, 2013, our equity securities consisted of investments in the stock of publicly traded companies. As of March 31, 2014, one investment had been in an unrealized loss position for less than twelve months and one had been in an unrealized loss position for more than twelve months. As of December 31, 2013, one investment had been in an unrealized loss position for less than twelve months and one had been in an unrealized loss position for more than twelve months. The Company does not believe the remaining unrealized losses are other-than-temporary at March 31, 2014 or December 31, 2013 primarily because the Company has both the ability and intent to hold these investments for a period of time we believe will be sufficient to recover such losses.
NOTE 8. INVENTORIES
Inventories are comprised of the following at March 31, 2014 and December 31, 2013 (in thousands):
 
March 31, 2014
 
December 31, 2013
Raw materials
$
127,159

 
$
101,790

Work-in-process
54,133

 
51,100

Finished goods
282,807

 
221,549

Total
$
464,099

 
$
374,439

Inventory amounts in the table above are shown net of obsolescence. Our reserve for obsolescence is not material to the Condensed Consolidated Balance Sheets and therefore has not been separately disclosed.
NOTE 9. GOODWILL AND OTHER INTANGIBLES
Goodwill
Changes in the carrying amount of our goodwill for the three months ended March 31, 2014 were as follows:  
 
Carrying Amount
 
U.S. Branded Pharmaceuticals
 
U.S. Generic Pharmaceuticals
 
Devices
 
International Pharmaceuticals
 
Total Consolidated
Balance as of December 31, 2013:
 
 
 
 
 
 
 
 
 
Goodwill
$
290,793

 
$
275,201

 
$
1,795,366

 
$

 
$
2,361,360

Accumulated impairment losses

 

 
(988,528
)
 

 
(988,528
)
 
$
290,793

 
$
275,201

 
$
806,838

 
$

 
$
1,372,832

Goodwill acquired during the period

 
11,611

 

 
2,134,565

 
2,146,176

Effect of currency translation

 

 
346

 
3,297

 
3,643

Goodwill impairment charges

 

 

 

 

Balance as of March 31, 2014:
 
 
 
 
 
 
 
 
 
Goodwill
290,793

 
286,812

 
1,795,712

 
2,137,862

 
4,511,179

Accumulated impairment losses

 

 
(988,528
)
 

 
(988,528
)
 
$
290,793

 
$
286,812

 
$
807,184

 
$
2,137,862

 
$
3,522,651


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Other Intangible Assets
The following is a summary of other intangibles held by the Company at March 31, 2014 and December 31, 2013 (in thousands):
 
March 31,
2014
 
December 31,
2013
Indefinite-lived intangibles:
 
 
 
In-process research and development
$
225,600

 
$
73,400

Total indefinite-lived intangibles
$
225,600

 
$
73,400

Definite-lived intangibles:
 
 
 
Licenses (weighted average life of 9 years)
$
627,127

 
$
587,127

Less accumulated amortization
(376,938
)
 
(357,439
)
Licenses, net
$
250,189

 
$
229,688

Customer relationships (weighted average life of 16 years)
158,433

 
158,258

Less accumulated amortization
(28,121
)
 
(25,574
)
Customer relationships, net
$
130,312

 
$
132,684

Tradenames (weighted average life of 24 years)
77,000

 
77,000

Less accumulated amortization
(10,841
)
 
(9,934
)
Tradenames, net
$
66,159

 
$
67,066

Developed technology (weighted average life of 15 years)
2,376,694

 
1,720,428

Less accumulated amortization
(386,278
)
 
(350,340
)
Developed technology, net
$
1,990,416

 
$
1,370,088

Total definite-lived intangibles, net (weighted average life of 14 years)
$
2,437,076

 
$
1,799,526

Other intangibles, net
$
2,662,676

 
$
1,872,926

As of March 31, 2014, the weighted average amortization period for our definite-lived intangible assets in total was approximately 14 years.
Amortization expense for the three months ended March 31, 2014 and 2013 totaled $58.9 million and $47.4 million, respectively. Estimated amortization of intangibles for the five years subsequent to December 31, 2013 is as follows (in thousands):
2014
$
197,687

2015
$
236,831

2016
$
212,306

2017
$
186,773

2018
$
186,257

Changes in the gross carrying amount of our other intangible assets for the three months ended March 31, 2014 were as follows (in thousands):
 
Gross
Carrying
Amount  
December 31, 2013
$
2,616,213

Aveed™ approval milestone
5,000

Paladin acquisition
676,000

Boca acquisition
165,900

Effect of currency translation
1,741

March 31, 2014
$
3,464,854

The December 31, 2013 amounts above related to both the gross amount and related accumulated amortization for license intangible assets within the Other Intangible Assets summary and the total other intangible gross amount within the Gross Carrying Amount roll-forward have been revised from amounts previously disclosed within the December 31, 2013 Form 10-K. The purpose of this revision was to remove approximately $47.1 million from both the gross amount and corresponding accumulated amortization for

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intangible assets that were fully amortized as of December 31, 2013. These adjustments had no impact on the reported net other intangible assets and the revision did not impact the Condensed Consolidated Balance Sheets, Condensed Consolidated Statements of Operations, Condensed Consolidated Statements of Comprehensive (Loss) Income or Condensed Consolidated Statements of Cash Flows as of and for the year ended December 31, 2013.
NOTE 10. LICENSE AND COLLABORATION AGREEMENTS
Our subsidiaries have entered into certain license, collaboration and discovery agreements with third parties for the development of pain management and other products. These agreements require our subsidiaries to share in the development costs of such products and grant marketing rights to our subsidiaries for such products.
Our subsidiaries have also licensed from universities, corporations and other similar institutions, rights to certain technologies or intellectual property, generally in the field of pain management. They are generally required to make upfront payments as well as other payments upon successful completion of regulatory or sales milestones. In addition, these agreements generally require our subsidiaries to pay royalties on sales of the products arising from these agreements. These agreements generally permit our subsidiaries to terminate the agreement with no significant continuing obligation.
For additional disclosure of our subsidiaries' material license and collaboration agreements at December 31, 2013, refer to our Annual Report on Form 10-K for the year ended December 31, 2013, filed with the Securities and Exchange Commission on March 3, 2014.
Commercial Products
Novartis AG and Novartis Consumer Health, Inc.
On March 4, 2008, our subsidiary Endo Pharmaceuticals Inc. (EPI) entered into a License and Supply Agreement (the Voltaren® Gel Agreement) with and among Novartis AG and Novartis Consumer Health, Inc. (Novartis) to obtain the exclusive U.S. marketing rights for the prescription medicine Voltaren® Gel (Voltaren® Gel or the Licensed Product). Voltaren® Gel received regulatory approval in October 2007 from the U.S. Food and Drug Administration (FDA), becoming the first topical prescription treatment for use in treating pain associated with osteoarthritis and the first new product approved in the U.S. for osteoarthritis since 2001. Voltaren® Gel was granted marketing exclusivity in the U.S. as a prescription medicine until October 2010.
Under the terms of the Voltaren® Gel Agreement, which had an initial term of five years, EPI made an upfront cash payment of $85.0 million. EPI agreed to pay royalties to Novartis on annual Net Sales of the Licensed Product, subject to certain thresholds as defined in the Voltaren® Gel Agreement. In addition, EPI agreed to make certain guaranteed minimum annual royalty payments of $30.0 million per year payable in the 4th and 5th year of the Voltaren® Gel Agreement, which could be reduced under certain circumstances, including Novartis’s failure to supply the Licensed Product, subject to certain limitations including the launch of a generic to the Licensed Product in the U.S. These guaranteed minimum royalties were creditable against royalty payments on an annual basis such that EPI's obligation with respect to each year is to pay the greater of (i) royalties payable based on annual net sales of the Licensed Product or (ii) the guaranteed minimum royalty for such Voltaren® Gel Agreement year. Novartis is also eligible to receive a one-time milestone payment of $25.0 million if annual net sales of Voltaren® Gel exceed $300.0 million in the U.S. To date, annual net sales have not exceeded this threshold and, therefore, this milestone payment has not been paid.
The $85.0 million upfront payment and the present value of the guaranteed minimum royalties was initially capitalized as an intangible asset in the amount of $129.0 million, representing the fair value of the exclusive license to market Voltaren® Gel over the initial contract term. We amortized this intangible asset into Cost of revenues over an estimated five-year useful life. Due to Novartis’s failure to supply Voltaren® Gel during the first quarter of 2012 resulting from the shutdown of its Lincoln, Nebraska manufacturing facility, EPI was not obligated to make any first quarter 2012 royalty payment, including the $7.5 million minimum royalty. Accordingly, during the first quarter of 2012, we recorded a reduction to the associated liability and a decrease in the intangible asset. Voltaren® Gel royalties incurred during the three months ended March 31, 2014 and 2013 were $7.5 million and $7.5 million, respectively, representing minimum royalties pursuant to the Voltaren® Gel Agreement.
EPI is solely responsible to commercialize the Licensed Product during the term of the Voltaren® Gel Agreement. With respect to each year during the term of the Voltaren® Gel Agreement, subject to certain limitations, EPI is required to incur a minimum amount of annual advertising and promotional expenses (A&P Expenditures) on the commercialization of the Licensed Product, which may be reduced under certain circumstances including Novartis’s failure to supply the Licensed Product. In addition, EPI is required to perform a minimum number of face-to-face one-on-one discussions with physicians and other healthcare practitioners (Details) for the purpose of promoting the Licensed Product within its approved indication during each year of the Voltaren® Gel Agreement, which may be reduced under certain circumstances including Novartis’s failure to supply the Licensed Product. Further, during the term of the Voltaren® Gel Agreement, EPI will share in the costs of certain clinical studies and development activities initiated at the request of the FDA or as considered appropriate by Novartis and EPI. On December 31, 2012, EPI and Novartis entered into an amendment to the Voltaren® Gel Agreement (the Voltaren® Gel Amendment) which reduced the minimum number of Details required to be

23

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conducted by EPI and the minimum amount of annual advertising and promotional expenses required to be spent by EPI on the commercialization of Voltaren® Gel during each remaining year of the Voltaren® Gel Agreement.
During the fifth Voltaren® Gel Agreement Year beginning on July 1, 2012 and extending through June 30, 2013, EPI agreed to spend approximately $4.5 million on A&P Expenditures. During the first renewal term year beginning on July 1, 2013 and extending through June 30, 2014, EPI agreed to spend approximately $5.9 million on A&P Expenditures. In subsequent Agreement Years, the minimum A&P Expenditures set forth in the Voltaren® Gel Agreement are determined based on a percentage of net sales of Voltaren® Gel, which may be reduced under certain circumstances, including Novartis’s failure to supply Voltaren® Gel.
Amounts incurred for such A&P Expenditures were $2.1 million and $2.1 million for the three months ended March 31, 2014 and 2013, respectively.
During the term of the Voltaren® Gel Agreement, EPI has agreed to purchase all of its requirements for the Licensed Product from Novartis. The price was fixed for the first year and subject to annual changes based upon changes in the producer price index and raw materials. The Voltaren® Gel Amendment reduced the supply price of Voltaren® Gel otherwise payable under the Agreement.
Novartis has the exclusive right, at its sole discretion, to effect a switch of the Licensed Product from a prescription product to an over-the-counter (OTC) product in the U.S. (an OTC Switch) by filing an amendment or supplement to the Licensed Product New Drug Application or taking any other action necessary or advisable in connection therewith to effect the OTC Switch, and thereafter to commercialize such OTC product. Notwithstanding the foregoing, Novartis shall not launch an OTC equivalent product prior to a time specified in the Voltaren® Gel Agreement, and Novartis shall not take any action that results in the loss of the prescription product status for the Licensed Product prior to such time. Novartis is obligated to notify EPI if it submits a filing to the FDA in respect of an OTC equivalent product. In the event that Novartis gains approval of an OTC equivalent product that results in the Licensed Product being declassified as a prescription product, then Novartis will make certain royalty payments to EPI on net sales of such OTC equivalent product in the U.S. by Novartis, its affiliates and their respective licensees or sublicensees as set forth in the Voltaren® Gel Agreement. As a condition to the payment of any and all such royalties, net sales of the Licensed Product in the U.S. must have exceeded a certain threshold prior to the launch of the OTC equivalent product by Novartis or its affiliates.
The initial term of the Voltaren® Gel Agreement expired on June 30, 2013. In December 2012, pursuant to the provisions of the Voltaren® Gel Agreement which had provided EPI with an option to extend the term of the agreement for two successive one year terms, the term was renewed for an additional one-year period. As a result, we capitalized, as an intangible asset, $21.3 million representing the present value of the guaranteed minimum royalties we expected to pay to Novartis AG over the renewal term.
The subsequent term of the Voltaren® Gel Agreement will expire on June 30, 2014. In December 2013, pursuant to the provisions of the Voltaren® Gel Agreement which had provided EPI with an option to extend the term of the agreement for a one year term, the term was renewed for an additional one-year period. As a result, we capitalized, as an intangible asset, $21.5 million, representing the present value of the guaranteed minimum royalties we expected to pay to Novartis AG over the renewal term.
The Voltaren® Gel Agreement will remain in place unless either (i) EPI provides written notice of non-renewal to the other party at least six months prior to the expiration of the first renewal term or any renewal term thereafter, (ii) Novartis provides written notice of non-renewal to the other party at least six months prior to the expiration of the second renewal term or any renewal term thereafter, or (iii) the Voltaren® Gel Agreement is otherwise terminated in accordance with its terms. Upon extension, EPI is again obligated to make certain guaranteed minimum annual royalty payments of $30.0 million per year during each successive one-year renewal term, subject to certain limitations including the launch of a generic to the Licensed Product in the U.S. These guaranteed minimum annual royalty payments may be reduced under certain circumstances, including Novartis’s failure to supply the Licensed Product. These guaranteed minimum royalties will be creditable against royalty payments on an annual basis such that EPI’s obligation with respect to each year is to pay the greater of (i) royalties payable based on annual net sales of the Licensed Product or (ii) the guaranteed minimum royalty for such Voltaren® Gel Agreement year.
Among other standard and customary termination rights granted under the Voltaren® Gel Agreement, the Voltaren® Gel Agreement can be terminated by either party upon reasonable written notice and if either party has committed a material breach that has not been remedied within 90 days from the giving of written notice. EPI may terminate the Voltaren® Gel Agreement by written notice upon the occurrence of several events, including the launch in the U.S. of a generic to the Licensed Product. Novartis may terminate the Voltaren® Gel Agreement upon reasonable written notice (1) if EPI fails to deliver a set percentage of the minimum Details in a certain six-month period under the Voltaren® Gel Agreement; or (2) on or after the launch in the U.S. of an OTC equivalent product by Novartis, its affiliates or any third party that does not result in the declassification of the Licensed Product as a prescription product, following which net sales in a six-month period under the Voltaren® Gel Agreement are less than a certain defined dollar amount.
BayerSchering
In July 2005, Indevus (now, Endo Pharmaceuticals Solutions Inc. or EPSI) licensed exclusive U.S. rights from Schering AG, Germany, now BayerSchering Pharma AG (BayerSchering) to market a long-acting injectable testosterone preparation for the

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treatment of male hypogonadism that we refer to as AveedTM (the BayerSchering Agreement). EPSI is responsible for the development and commercialization of AveedTM in the U.S. BayerSchering is responsible for manufacturing and supplying EPSI with finished product. As part of the BayerSchering Agreement, Indevus agreed to pay to BayerSchering up to $30.0 million in up-front, regulatory milestone, and commercialization milestone payments, including a $5.0 million payment due upon approval by the FDA to market AveedTM. Indevus also agreed to pay to BayerSchering 25% of net sales of AveedTM to cover both the cost of finished product and royalties. The BayerSchering Agreement expires on the later of the patent expiration or ten years from the first commercial sale of AveedTM.
In October 2006, Indevus entered into a supply agreement with BayerSchering pursuant to which BayerSchering agreed to manufacture and supply Indevus with all of its requirements for AveedTM for a supply price based on net sales of AveedTM. The supply price is applied against the 25% of net sales owed to BayerSchering pursuant to the BayerSchering Agreement. The BayerSchering Agreement expires on the later of the patent expiration or ten years from the first commercial sale of AveedTM. Either party may also terminate the BayerSchering Agreement in the event of a material breach by the other party.
On March 6, 2014, we announced that the FDA approved AveedTM for the treatment of hypogonadism (commonly known as Low-T) in adult men, which is associated with a deficiency or absence of the male hormone testosterone. AveedTM became available in early March. Upon approval, EPSI became obligated to pay a milestone payment of $5.0 million to BayerSchering. The approval milestone was recorded as an intangible asset and is being amortized into cost of revenues on a straight-line basis over its estimated useful life. 
Products in Development
BioDelivery Sciences International, Inc.
In January 2012, EPI signed a worldwide license and development agreement (the BioDelivery Agreement) with BioDelivery Sciences International, Inc. (BioDelivery) for the exclusive rights to develop and commercialize BEMA® Buprenorphine. BEMA® Buprenorphine is a transmucosal form of buprenorphine, a partial mu-opiate receptor agonist, which incorporates a bioerodible mucoadhesive (BEMA®) technology. BEMA® Buprenorphine is currently in Phase III trials for the treatment of moderate to severe chronic pain. EPI made an upfront payment to BioDelivery for $30.0 million, which was expensed as Research and development in the first quarter of 2012. During the first quarter of 2012, $15.0 million of additional costs were incurred related to the achievement of certain regulatory milestones and were recorded as Research and development expense. EPI paid this amount in the second quarter of 2012. During the first quarter of 2014, $10.0 million of additional milestones were incurred related to the achievement of certain clinical milestones and were recorded as Research and development expense. In the future, EPI could be obligated to pay royalties based on net sales of BEMA® Buprenorphine and commercial and regulatory milestone payments of up to approximately $125.0 million. Pursuant to its rights under the terms of the BioDelivery Agreement, BioDelivery elected in November 2013 to have a portion of the BEMA® development costs, above a certain amount, paid by EPI. Any such amounts paid by EPI shall be credited against future milestone payments, as defined in the BioDelivery Agreement. EPI may terminate the BioDelivery Agreement at any time upon six months' written notice. Unless terminated earlier, the BioDelivery Agreement shall expire, on a country-by-country basis, upon the later to occur of 10 years from the date of first commercial sale in a particular country or the date on which the last valid claim of the applicable BioDelivery patents in a particular country has expired or been invalidated or found unenforceable.

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NOTE 11. DEBT
The following is a summary of the Company's total indebtedness at March 31, 2014 and December 31, 2013 (in thousands):
 
March 31, 2014
 
December 31, 2013
1.75% Convertible Senior Subordinated Notes due 2015
$
379,500

 
$
379,500

Unamortized discount on 1.75% Convertible Senior Subordinated Notes due 2015
(27,772
)
 
(34,079
)
1.75% Convertible Senior Subordinated Notes due 2015, net
$
351,728

 
$
345,421

7.00% Senior Notes due 2019
$
500,000

 
$
500,000

7.00% Senior Notes due 2020
400,000

 
400,000

Unamortized initial purchaser’s discount
(2,721
)
 
(2,800
)
7.00% Senior Notes due 2020, net
$
397,279

 
$
397,200

7.25% Senior Notes due 2022
$
400,000

 
$
400,000

5.75% Senior Notes due 2022
700,000

 
700,000

3.25% AMS Convertible Notes due 2036
22

 
22

4.00% AMS Convertible Notes due 2041
106

 
111

New Term Loan A Facility Due 2019
1,100,000

 

New Term Loan B Facility Due 2021
425,000

 

Term Loan A Facility Due 2018

 
1,335,469

Term Loan B Facility Due 2018

 
60,550

Paladin debt
23,756

 

Total long-term debt, net
$
3,897,891

 
$
3,738,773

Less current portion, net
$
402,245

 
$
414,929

Total long-term debt, less current portion, net
$
3,495,646

 
$
3,323,844

Credit Facility
Upon closing of the Paladin acquisition on February 28, 2014, the Company entered into a new credit facility with Deutsche Bank AG New York Branch and Royal Bank of Canada and certain other lenders, which replaced Endo’s prior credit facility. The prior credit facility was terminated and canceled, with the outstanding indebtedness of $1.4 billion repaid and all liens terminated and released. The new credit facility consists of a five-year senior secured Term Loan A facility of $1.1 billion, a seven-year senior secured Term Loan B facility of $425.0 million, and a five-year revolving credit facility with an initial borrowing capacity of up to $750.0 million. The new credit facility contains an uncommitted expansion provision which permits up to $1.0 billion (or an unlimited amount if the secured leverage ratio, as defined in the new credit facility, is less than or equal to 2.75x) of additional revolving or term loan commitments from one or more of the lenders under the new credit facility or other lenders.
Under the new credit facility, $50.0 million is available for letters of credit and up to $50.0 million is available for swing line loans on same-day notice, both of which may be increased to up to $75.0 million, subject to consents as described in the new credit facility. The borrowers’ obligations under the new credit facility are guaranteed by all of Endo’s direct and indirect wholly-owned material restricted subsidiaries and secured by substantially all of the borrowers’ assets and those of the guarantors.
The new credit facility contains affirmative and negative covenants that the Company believes to be usual and customary for a senior secured credit agreement. The negative covenants include, among other things, limitations on capital expenditures, asset sales, mergers and acquisitions, indebtedness, liens, dividends, investments and transactions with the Company’s affiliates. To the best of our knowledge, as of March 31, 2014, we are in compliance with all covenants in our credit facility.
As set forth in the new credit agreement, borrowings under this credit facility incur interest at an amount equal to a rate calculated based on the type of borrowing and the Company’s leverage ratio, as defined in the new credit agreement. For the Term Loan A facility and revolving credit facility, the Company could elect to pay interest based on an adjusted London Inter-Bank Offer Rate (LIBOR) plus between 1.50% and 2.25% or an Alternate Base Rate (as defined in the new credit agreement) plus between 0.50% and 1.25%. For the Term Loan B Facility, the Company could elect to pay interest based on an adjusted LIBOR (with a floor of 0.75%) plus 2.50% or an Alternate Base Rate plus 1.50%. The Company will pay a commitment fee of between 30 to 50 basis points, payable quarterly, on the average daily unused amount of the Revolving Credit Facility.
In connection with our entering into the 2014 credit agreement, we incurred new debt issuance costs of approximately $27.7 million, $26.7 million of which was deferred and will be amortized over the term of the new credit agreement. The remaining debt issuance costs of $1.0 million and previously deferred debt issuance costs of $8.6 million associated with the prior credit facility were

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charged to expense. These expenses were included in the Condensed Consolidated Statements of Operations as a Loss on extinguishment of debt.
In addition, in connection with the Paladin transaction, the Company assumed approximately $23.8 million of previously existing debt entered into by Paladin's subsidiary, Litha Healthcare Group Limited.
On December 2, 2013, following the completion of consent solicitations, Endo, certain guarantors party thereto and Wells Fargo Bank, National Association, as trustee, entered into supplemental indentures to the 2019, 2020 and 2022 Notes Indentures, providing, among other things, that the Paladin transaction will not constitute a change of control under the Indentures.
On March 26, 2013, we made a prepayment of $100.0 million on our Term Loan B facility. In accordance with the applicable accounting guidance for debt modifications and extinguishments, approximately $2.2 million of the remaining unamortized financing costs was written off in connection with this prepayment and included in the Condensed Consolidated Statements of Operations as a Loss on extinguishment of debt.
On March 26, 2013, we entered into an amendment and restatement agreement, pursuant to which we amended and restated our then existing credit agreement to extend its term by approximately two years and modify its covenants to provide us with greater financial and operating flexibility. Until it was replaced by the credit facility entered into in connection with the Paladin acquisition, the amended and restated agreement (the 2013 Credit Agreement) extended the maturity dates of our $500.0 million revolving credit facility and our Term Loan A facility which, at the time of the amendment and restatement, had a remaining principal balance of $1.4 billion, to March 15, 2018. The 2013 Credit Agreement provided the Company with greater flexibility under certain of its affirmative and negative covenants, including, without limitation, the designation of unrestricted subsidiaries, capital expenditures, asset sales, indebtedness and restricted payments.
The 2013 Credit Agreement kept in place the Company’s Term Loan B facility which had a maturity of June 17, 2018 and, at the time of the amendment and restatement, had a remaining principal balance of $60.6 million. The 2013 Credit Agreement also permitted additional revolving or term loan commitments up to $500.0 million (or an unlimited amount in certain circumstances) from one or more of the existing lenders or other lenders with the consent of the Administrative Agent without the need for consent from any of the existing lenders under our credit facility.
In connection with the 2013 Credit Agreement, we incurred new debt issuance costs of approximately $8.1 million, $7.6 million of which was deferred and will be amortized over the term of the 2013 Credit Agreement. The remaining $0.5 million and previously deferred debt issuance costs of $8.6 million associated with the 2011 Credit Agreement were charged to expense upon the amendment and restatement of the 2013 Credit Agreement. These expenses were included in the Condensed Consolidated Statements of Operations as a Loss on extinguishment of debt.
5.75% Senior Notes Due 2022
On December 19, 2013, we issued $700.0 million in aggregate principal amount of 5.75% Senior Notes due 2022 (the New 2022 Notes) at an issue price of par. The notes have not been registered under the Securities Act of 1933, as amended, or the Securities Act, or the securities laws of any other jurisdiction, and we have no intention to register the notes in the future. We are not required to, nor do we intend to, offer to exchange the notes for a new issue of substantially identical notes registered under the Securities Act or otherwise register the notes for resale under the Securities Act. The notes may be offered only in transactions that are exempt from registration under the Securities Act or the securities laws of any other jurisdiction. Accordingly, we offered the notes in the United States only to "qualified institutional buyers" (as defined in Rule 144A under the Securities Act) and outside the United States to non-U.S. persons in compliance with Regulation S under the Securities Act. The New 2022 Notes are senior unsecured obligations of the Company and are guaranteed on a senior unsecured basis by certain of the Company’s domestic subsidiaries. Interest on the New 2022 Notes is payable semiannually in arrears on January 15 and July 15 of each year, beginning on July 15, 2014. The New 2022 Notes will mature on January 15, 2022, subject to earlier repurchase or redemption in accordance with the terms of the Indenture incorporated by reference herein. We received proceeds of $700.0 million from the issuance. Costs associated with this offering, including costs related to investment bankers, of $12.8 million were deferred and are included in Prepaid expenses and other current assets on our Condensed Consolidated Balance Sheets.
At December 31, 2013, the proceeds of the issuance of the New 2022 Notes were restricted and held in escrow and were not able to be utilized by the Company until the Paladin transaction closed. These proceeds were released upon the closing of the Paladin transaction on February 28, 2014.
1.75% Convertible Senior Subordinated Notes Due 2015
At March 31, 2014, our indebtedness included $379.5 million in aggregate principal amount of 1.75% Convertible Senior Subordinated Notes due April 15, 2015 (the Convertible Notes). The Convertible Notes became convertible at the option of holders beginning October 1, 2013. The conversion right was triggered on September 17, 2013, when the closing sale price of the Company's stock on the NASDAQ Stock Exchange exceeded $37.96 (130% of the conversion price of $29.20) for the 20th trading day in the 30

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consecutive trading days ending on September 30, 2013 and the Convertible Notes remain convertible at March 31, 2014. We are permitted to deliver cash, ordinary shares or a combination of cash and shares, at our election, to satisfy any future conversions of the Convertible Notes. It is our current intention to settle the principal amount of any conversion consideration in cash. Holders of the Convertible Notes may also surrender their notes for conversion after October 15, 2014 at any time prior to the close of business on the second business day immediately preceding the stated maturity date. Accordingly, the Company will treat the Convertible Notes as short-term in nature hereafter. In the event that a holder exercises the right to convert his Convertible Notes, the Company will write-off a ratable portion of the associated debt issuance costs. There have been no conversions as of the date of this filing.
Concurrently with the issuance of the Convertible Notes, we entered into a privately negotiated convertible note hedge transaction with affiliates of the initial purchasers. Pursuant to the hedge transaction we purchased ordinary share call options intended to reduce the potential dilution to our ordinary shares upon conversion of the Convertible Notes by effectively increasing the initial conversion price of the Convertible Notes to $40.00 per share, representing a 61.1% conversion premium over the closing price of our ordinary shares on April 9, 2008 of $24.85 per share. The call options allow us to purchase up to approximately 13.0 million shares of our ordinary shares at an initial strike price of $29.20 per share. The call options expire on April 15, 2015 and must be net-share settled. The cost of the call option was approximately $107.6 million. In addition, we sold warrants to affiliates of certain of the initial purchasers whereby they have the option to purchase up to approximately 13.0 million shares of our ordinary shares at an initial strike price of $40.00 per share. The warrants expire on various dates from July 14, 2015 through October 6, 2015 and must be net-share settled. We received approximately $50.4 million in cash proceeds from the sale of these warrants. The warrant transaction could have a dilutive effect on our net income per share to the extent that the price of our ordinary shares exceeds the strike price of the warrants at exercise.
As discussed in Note 18. Net (Loss) Income Per Share, in periods in which our ordinary shares price exceeds the conversion price of the Convertible Notes or the strike price of the warrants, we include the effects of the additional shares that may be issued in our diluted net (loss) income per share calculation using the treasury stock method.
Other than as described above, there have been no material changes to our other indebtedness from what was disclosed in our Annual Report on Form 10-K for the year ended December 31, 2013, filed with the Securities and Exchange Commission on March 3, 2014.
NOTE 12. COMMITMENTS AND CONTINGENCIES
Manufacturing, Supply and Other Service Agreements
Our subsidiaries contract with various third party manufacturers, suppliers and service providers to provide raw materials used in our subsidiaries' products and semi-finished and finished goods, as well as certain packaging and labeling services. The most significant of these agreements are with Novartis Consumer Health, Inc. and Novartis AG (collectively, Novartis), Teikoku Seiyaku Co., Ltd., Noramco, Inc., Grünenthal GmbH, Sharp Corporation, and UPS Supply Chain Solutions, Inc. If, for any reason, our subsidiaries are unable to obtain sufficient quantities of any of the finished goods or raw materials or components required for their products or services needed to conduct their business, it could have a material adverse effect on our business, financial condition, results of operations and cash flows.
In addition to the manufacturing and supply agreements described above, our subsidiaries have agreements with various companies for clinical development services. Although we have no reason to believe that the parties to these agreements will not meet their obligations, failure by any of these third parties to honor their contractual obligations may have a materially adverse effect on our business, financial condition, results of operations and cash flows.
For additional discussion of our material manufacturing, supply and other service agreements at December 31, 2013, refer to our Annual Report on Form 10-K for the year ended December 31, 2013, filed with the Securities and Exchange Commission on March 3, 2014.
Novartis License and Supply Agreement
Pursuant to the March 2008 Voltaren® Gel License and Supply Agreement (the Voltaren® Gel Agreement) with Novartis AG and Novartis Consumer Health, Inc., which is described further in Note 10. License and Collaboration Agreements, our Endo Pharmaceuticals Inc. (EPI) subsidiary has agreed to purchase from Novartis all of its requirements for Voltaren® Gel during the entire term of the Voltaren® Gel Agreement. The price of product purchased under the Voltaren® Gel Agreement is fixed for the first year and subject to annual changes based upon changes in the producer price index and raw materials.

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Teikoku Seiyaku Co., Ltd.
Under the terms of EPI's agreement (the Teikoku Agreement) with Teikoku Seiyaku Co. Ltd. (Teikoku), a Japanese manufacturer, Teikoku manufactures Lidoderm® at its two Japanese facilities, located on adjacent properties, for commercial sale by EPI in the U.S. EPI also has an option to extend the supply area to other territories. On April 24, 2007, EPI amended the Teikoku agreement (the Amended Agreement). The material components of the Amended Agreement are as follows:
EPI agreed to purchase a minimum number of patches per year through 2012, representing the noncancelable portion of the Amended Agreement.
Teikoku agreed to fix the supply price of Lidoderm® for a period of time after which the price will be adjusted at future dates certain based on a price index defined in the Amended Agreement. The minimum purchase requirement shall remain in effect subsequent to 2012. EPI met its minimum purchase requirement for 2013.
Following cessation of EPI's obligation to pay royalties to Hind Healthcare Inc. (Hind) under the Sole and Exclusive License Agreement dated as of November 23, 1998, as amended, between Hind and EPI (the Hind Agreement), EPI began to pay to Teikoku annual royalties based on annual net sales of Lidoderm®.
The Amended Agreement will expire on December 31, 2021, unless terminated in accordance with its terms. Either party may terminate the Teikoku Agreement, upon 30 days' written notice, in the event that EPI fails to purchase the annual minimum quantity for each year after 2012 (e.g., 2013 through 2021). Notwithstanding the foregoing, after December 31, 2021, the Amended Agreement shall be automatically renewed on the first day of January each year unless (i) EPI and Teikoku agree to terminate the Amended Agreement upon mutual written agreement or (ii) either EPI or Teikoku terminates the Amended Agreement with 180-day written notice to the other party, which notice shall not in any event be effective prior to July 1, 2022.
EPI is the exclusive licensee for any authorized generic for Lidoderm®.
On January 6, 2010, the parties amended the Teikoku Agreement, effective December 16, 2009. Pursuant to the amendment, Teikoku has agreed to supply Lidoderm® at a fixed price for a period of time after which the price will be adjusted at certain future dates based on a price index defined in the amendment.
Effective November 1, 2010, the parties again amended the Teikoku Agreement. Pursuant to this amendment, Teikoku agreed to supply certain quantities of additional Lidoderm® at no cost to EPI in each of 2011, 2012 and 2013 in the event EPI’s firm orders of Lidoderm® exceeded certain thresholds in those years.
On November 23, 2011, EPI's obligation to pay royalties to Hind under the Hind Agreement ceased. Accordingly, on November 23, 2011, pursuant to the terms of the Teikoku Agreement, EPI began to incur royalties to Teikoku based on annual net sales of Lidoderm®