8-K - Segment Recast


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
_______________________________
FORM 8-K
_______________________________

CURRENT REPORT
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Date of Report (Date of Earliest Event Reported): May 8, 2018

_______________________________
ENDO INTERNATIONAL PLC
(Exact Name of Registrant as Specified in Its Charter)
_______________________________
Ireland
001-36326
68-0683755
(State or other jurisdiction
of incorporation)
(Commission File Number)
(IRS Employer
Identification No.)

First Floor, Minerva House, Simmonscourt Road, Ballsbridge, Dublin 4, Ireland
Not Applicable
(Address of principal executive offices)
(Zip Code)
Registrant's telephone number, including area code 011-353-1-268-2000
Not Applicable
Former name or former address, if changed since last report

Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions:
o    Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)
o    Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)
o    Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))
o    Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))
Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933 (§230.405 of this chapter) or Rule 12b-2 of the Securities Exchange Act of 1934 (§240.12b-2 of this chapter).
o    Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o





Item 8.01    Other Events.
Endo International plc (the Company) is filing this Current Report on Form 8-K to update the presentation of certain financial information and related disclosures included in the Company's Annual Report on Form 10-K for the year ended December 31, 2017, which was filed with the Securities and Exchange Commission (the SEC) on February 27, 2018 (the 2017 10-K).
In the 2017 10-K, the Company's three reportable business segments were: (1) U.S. Generic Pharmaceuticals, (2) U.S. Branded Pharmaceuticals and (3) International Pharmaceuticals. During the first quarter of 2018, the Company made changes to the way it manages and evaluates its business and, as a result, changed its reportable segments. The Company's Sterile Injectables product portfolio, which was part of the U.S. Generic Pharmaceuticals segment as of December 31, 2017, will now be presented as a new segment named “U.S. Branded - Sterile Injectables.” Additionally, the Company's U.S. Branded Pharmaceuticals segment has been renamed “U.S. Branded - Specialty & Established Pharmaceuticals.” Subsequent to this change, the Company's four reportable business segments are: (1) U.S. Branded - Specialty & Established Pharmaceuticals, (2) U.S. Branded - Sterile Injectables, (3) U.S. Generic Pharmaceuticals and (4) International Pharmaceuticals.
Exhibit 99.1 to this Current Report on Form 8-K contains the following items from the 2017 10-K, which have been updated as described below to reflect the foregoing segment changes, consistent with the presentation included in the Company's Quarterly Report on Form 10-Q for the three months ended March 31, 2018, which was filed with the SEC on May 8, 2018:
Part I, Item 1. Business;
Part II, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations;
Part II, Item 8. Financial Statements and Supplementary Data (the financial statements required by this item have been updated solely to reflect changes in Note 6 to the consolidated financial statements related to the change in segments described above); and
Part IV, Item 15. Exhibits, Financial Statement Schedules.
The information in this Current Report on Form 8-K (including Exhibit 99.1 hereto) supersedes what was in the 2017 10-K. Other information from the 2017 10-K is not being updated in connection with this Current Report on Form 8-K.
This information has been revised only as described above and has not been updated for events occurring after the filing of the 2017 10-K. Accordingly, this Current Report on Form 8-K does not purport to update the amounts or disclosures for any information, uncertainties, transactions, risks, events or trends occurring, or known to management, except as is related to the items described above. For other developments since the filing of the 2017 10-K, refer to the Company's Quarterly Report on Form 10-Q for the three months ended March 31, 2018 (the First Quarter 2018 10-Q) and other filings made by the Company subsequent to the filing of the 2017 10-K. Therefore, the information in this Current Report on Form 8-K (including Exhibit 99.1 hereto) should be read in conjunction with the 2017 10-K and the Company's filings made subsequent to the filing of the 2017 10-K, including the First Quarter 2018 10-Q, in which retrospective application of the Company’s new segments was presented for the quarterly periods ended March 31, 2018 and 2017.
Item 9.01.    Financial Statements and Exhibits.
(d)
Exhibits.
Number
Description
23.1
99.1
101
The following materials for the year ended December 31, 2017, formatted in XBRL (eXtensible Business Reporting Language): (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Operations, (iii) the Consolidated Statements of Comprehensive Loss, (iv) the Consolidated Statements of Shareholders' Equity, (v) the Consolidated Statements of Cash Flows and (vi) the Notes to Consolidated Financial Statements





SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, hereunto duly authorized.

 
 
ENDO INTERNATIONAL PLC
 
 
By:
/s/ Matthew J. Maletta
Name:
Matthew J. Maletta
Title:
Executive Vice President,
 
Chief Legal Officer
Dated: May 8, 2018


Ex 23.1 Consent
Exhibit 23.1

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

We hereby consent to the incorporation by reference in the Registration Statements on Form S‑8 (No. 333-194253, No. 333-204958 and No. 333-219806) and Form S-3 (No. 333-204657) of Endo International plc of our report dated February 27, 2018, except with respect to our opinion on the consolidated financial statements insofar as it relates to the effects of the change in the composition of reportable segments discussed in Note 6, as to which the date is May 8, 2018, relating to the financial statements, financial statement schedule and the effectiveness of internal control over financial reporting, which appears in this Current Report on Form 8-K.


/s/ PricewaterhouseCoopers LLP

Philadelphia, Pennsylvania
May 8, 2018


Ex 99.1 Recast

EXPLANATORY NOTE
As of December 31, 2017, the Company’s three reportable business segments in which it operated were: (1) U.S. Generic Pharmaceuticals, (2) U.S. Branded Pharmaceuticals and (3) International Pharmaceuticals. Differences in economic and other characteristics between our Sterile Injectables product portfolio, which was part of the Company’s U.S. Generic Pharmaceuticals segment, and the remaining U.S. Generic Pharmaceuticals segment products have been heightened by recent competitive pressures and other industry trends impacting sales and profitability. In response to these trends, during the first quarter of 2018, the Company made changes to the way it manages and evaluates its business. As a result, the Company’s Sterile Injectables product portfolio, which was part of its U.S. Generic Pharmaceuticals segment as of December 31, 2017, will now be presented as a new segment named “U.S. Branded - Sterile Injectables.” Additionally, the Company’s U.S. Branded Pharmaceuticals segment has been renamed “U.S. Branded - Specialty & Established Pharmaceuticals.” Subsequent to this change, the Company’s four reportable business segments are: (1) U.S. Branded - Specialty & Established Pharmaceuticals, (2) U.S. Branded - Sterile Injectables, (3) U.S. Generic Pharmaceuticals and (4) International Pharmaceuticals.
Prior period segment financial information has been recast to conform to the new presentation. See Note 6. Segment Results of the Consolidated Financial Statements included in Part IV, Item 15 of this report "Exhibits, Financial Statement Schedules" for segment financial information. Item 1. Business, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations, Item 8. Financial Statements and Supplementary Data and Item 15. Exhibits, Financial Statement Schedules set forth in this Exhibit 99.1 have been revised from the comparable sections in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017 to reflect retrospective application of the new reporting structure and reclassified historical results to conform to the new segment presentation. These sections, which are set forth below, have not been revised to reflect events or developments subsequent to February 27, 2018, the date that the Company filed its Annual Report on Form 10-K for the year ended December 31, 2017. Additionally, the financial statements required by Item 8. Financial Statements and Supplementary Data have been updated solely to reflect changes in Note 6. Segment Results related to the change in segments described above. For a discussion of events and developments subsequent to the filing date of the Annual Report on Form 10-K for the year ended December 31, 2017, please refer to the reports and other information the Company has filed with the Securities and Exchange Commission since that date, including the Company’s Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2018.
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 (Securities Act) and Section 21E of the Securities Exchange Act of 1934, as amended (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 in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2017 under the caption “Risk Factors,” 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 Part I, Item 1A 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.

1


PART I
Item 1.        Business
Overview
Unless otherwise indicated or required by the context, references throughout to “Endo,” the “Company,” “we,” “our” or “us” refer to financial information and transactions of Endo International plc and its subsidiaries.
Endo International plc is an Ireland-domiciled, global specialty pharmaceutical company focused on generic and branded pharmaceuticals. We aim to be the premier partner to healthcare professionals and payment providers, delivering an innovative suite of generic and branded drugs to meet patients’ needs. Endo International plc was incorporated in Ireland in 2013 as a private limited company and re-registered effective February 18, 2014 as a public limited company.
Our ordinary shares are traded on the NASDAQ Global Market (NASDAQ) under the ticker symbol “ENDP.” References throughout to “ordinary shares” refer to Endo International plc’s ordinary shares, 1,000,000,000 authorized, par value $0.0001 per share. In addition, we have 4,000,000 euro deferred shares outstanding, par value of $0.01 each.
Our global headquarters are located at Minerva House, Simmonscourt Road, Ballsbridge, Dublin 4, Ireland (telephone number: 011-353-1-268-2000) and our U.S. headquarters are located at 1400 Atwater Drive, Malvern, Pennsylvania 19355 (telephone number: 484-216-0000).
Across all of our businesses, we generated total revenues of $3.47 billion, $4.01 billion and $3.27 billion in 2017, 2016 and 2015, respectively.
Our focus is on pharmaceutical products and we target areas where we believe we can build leading positions. We use a differentiated operating model based on a lean and nimble structure, the rational allocation of capital and an emphasis on high-value research and development (R&D) targets. While our primary focus is on organic growth, we evaluate and, where appropriate, execute on opportunities to expand through the acquisition of products and companies in areas that serve patients and customers and that we believe will offer above average growth characteristics and attractive margins. We believe our operating model and the execution of our corporate strategy will enable us to create shareholder value over the long-term.
Our strategy with respect to branded products is to develop, acquire or license products that have inherent scientific, regulatory, legal and technical complexities and market such products under recognizable brand names that are trademarked. We submit and seek to obtain U.S. Food and Drug Administration (FDA) approvals on New Drug Applications (NDAs) or Biologics License Applications (BLAs), after completion of required clinical trials and testing. Upon FDA approval, patents included in the NDAs are listed in a publication referred to as the Orange Book. We believe that our patents, the protection of discoveries in connection with our development activities, our proprietary products, technologies, processes, trade secrets, know-how, innovations and all of our intellectual property are important to our business and achieving a competitive position. However, there can be no assurance that any of our patents, licenses or other intellectual property rights will afford us any protection from competition. Additional information is included throughout this Part I, Item 1.
With respect to generics products, which are the pharmaceutical and therapeutic equivalents of branded products and are generally marketed under their generic (chemical) names rather than by brand names, our strategy is to focus on high-barrier-to-entry products, including first-to-file or first-to-market opportunities that are difficult to formulate or manufacture or face complex legal and regulatory challenges. A first-to-file product, also known as a Paragraph IV product, refers to a generic product for which the Abbreviated New Drug Application (ANDA) containing a patent challenge to the corresponding branded product was the first to be filed with the U.S. Food and Drug Administration (FDA). A first-to-market product refers to a product that is the first marketed generic equivalent of a branded product for reasons apart from statutory marketing exclusivity, such as the generic equivalent of a branded product that is difficult to formulate or manufacture. First-to-file products offer the opportunity for 180 days of generic marketing exclusivity, except for competing authorized generic products, to the extent we are successful in litigating any patent challenges and receive final FDA approval of the products. First-to-market products allow us to mitigate risks from competitive pressure commonly associated with commoditized generic products. Additional information is included throughout this Part I, Item 1.
The four reportable business segments in which we operate are: (1) U.S. Branded - Specialty & Established Pharmaceuticals, (2) U.S. Branded - Sterile Injectables, (3) U.S. Generic Pharmaceuticals and (4) International Pharmaceuticals.
U.S. Branded - Specialty & Established Pharmaceuticals
Our U.S. Branded - Specialty & Established Pharmaceuticals segment, which accounted for 28%, 29% and 39% of total revenues in 2017, 2016 and 2015, respectively, includes a variety of branded prescription products to treat and manage conditions in urology, urologic oncology, endocrinology, pain and orthopedics. The products that are included in this segment include XIAFLEX®, SUPPRELIN® LA, TESTOPEL®, NASCOBAL® Nasal Spray, AVEED®, OPANA® ER, PERCOCET®, VOLTAREN® Gel, LIDODERM®, TESTIM® and FORTESTA® Gel, among others.

2


This segment consists of our legacy branded business together with the branded products obtained through our January 29, 2015 acquisition of Auxilium Pharmaceuticals, Inc. (Auxilium), a fully integrated specialty pharmaceutical company with a focus on developing and commercializing innovative products for specific patients’ needs in orthopedics, dermatology and other therapeutic areas, and our September 25, 2015 acquisition of Par Pharmaceutical Holdings, Inc. (Par).
U.S. Branded - Sterile Injectables
Our U.S. Branded - Sterile Injectables segment, which accounted for 22%, 14% and 4% of total revenues in 2017, 2016 and 2015, respectively, consists primarily of branded sterile injectable products such as VASOSTRICT®, ADRENALIN® and APLISOL®, among others, and certain generic sterile injectable products, including ephedrine sulfate injection and neostigmine methylsulfate injection, among others. These injectable products are manufactured in a sterile facility and are primarily sold through wholesalers, often via an arrangement with a group purchasing organization (GPO), in vial dosages prior to being administered at hospitals, clinics and long-term care facilities.
Our primary U.S. Branded - Sterile Injectables manufacturing site, which handles the production, assembly, quality assurance testing and packaging of our products, is located in Rochester, Michigan.
This segment consists primarily of sterile injectable products obtained through our September 25, 2015 acquisition of Par, which develops, licenses, manufactures, markets and distributes innovative and cost-effective pharmaceuticals that help improve patient quality of life.
U.S. Generic Pharmaceuticals
Our U.S. Generic Pharmaceuticals segment, which accounted for 44%, 50% and 48% of total revenues in 2017, 2016 and 2015, respectively, consists of a differentiated product portfolio including solid oral extended-release, solid oral immediate-release, abuse-deterrent products, liquids, semi-solids, patches, powders, ophthalmics and sprays and includes products in the pain management, urology, central nervous system disorders, immunosuppression, oncology, women’s health and cardiovascular disease markets, among others. Our U.S. Generic Pharmaceuticals segment is among the largest U.S. generics companies based on market share. Our largest U.S. Generic Pharmaceuticals manufacturing sites, which handle the production, assembly, quality assurance testing and packaging of our generic products, are located in Chestnut Ridge, New York; Irvine, California and Chennai, India.
This segment consists of our legacy generics business together with the generic pharmaceuticals products obtained through our September 25, 2015 acquisition of Par.
International Pharmaceuticals
The International Pharmaceuticals segment, which accounted for 7%, 7% and 10% of total revenues in 2017, 2016 and 2015, respectively, includes a variety of specialty pharmaceutical products sold outside the U.S., primarily in Canada through our operating company Paladin Labs Inc. (Paladin). This segment’s key products serve growing therapeutic areas, including attention deficit hyperactivity disorder (ADHD), pain, women’s health and oncology.
This segment also included: (i) our South African business, which was sold in July 2017 and consisted of Litha Healthcare Group Limited (Litha) and certain assets acquired from Aspen Holdings in October 2015 and (ii) our Latin American business consisting of Grupo Farmacéutico Somar, S.A.P.I. de C.V. (Somar), which was sold in October 2017. We expect this segment’s revenues to continue to decline in 2018 due to the divestitures of Litha and Somar.
Our Strategy
Our strategy is to focus on our core assets, a leading generics business and a branded pharmaceutical business, that deliver high quality medicines to patients through excellence in development, manufacturing and commercialization. Through a lean and efficient operating model, we are committed to serving patients and customers while continuing to innovate and provide products that make a difference in the lives of patients. We strive to maximize shareholder value by adapting to market realities and customer needs.
We are committed to driving organic growth at attractive margins by improving execution, optimizing cash flow and leveraging our market position, while maintaining a streamlined cost structure throughout each of our businesses. Specific areas of management’s focus include:
U.S. Branded - Specialty & Established Pharmaceuticals: Accelerating performance of organic growth drivers in our Specialty Products portfolio, expanding margin in our Established Products portfolio and investing in key pipeline development opportunities.
U.S. Branded - Sterile Injectables: Focusing on developing branded injectable products with inherent scientific, regulatory, legal and technical complexities, expanding the product portfolio to include other dosages and technologies or acquiring additional high-barrier-to-entry, generic injectable products that are difficult to manufacture.
U.S. Generic Pharmaceuticals: Focusing on developing or acquiring high-barrier-to-entry products, including first-to-file or first-to-market opportunities that are difficult to formulate or manufacture or face complex legal and regulatory challenges.

3


International Pharmaceuticals: Operating in regulated markets with durable revenue streams and where physicians play a significant role in choosing the course of therapy and expanding distribution of certain of our products outside of the U.S.
We remain committed to strategic R&D across each business unit. Going forward, while our primary focus will be on organic growth, we will evaluate and, where appropriate, execute on opportunities to expand through acquisitions of products and companies.
Our Competitive Strengths
To successfully execute our strategy, we must continue to capitalize on our following core strengths:
Experienced and dedicated management team. We have a highly skilled and customer-focused management team in critical leadership positions across all of Endo. Our senior management team has extensive experience in the pharmaceutical industry and a proven track record of developing businesses and value creation. This experience includes improving business performance through organic revenue growth and through the identification, consummation and integration of licensing and acquisition opportunities.
Focus on the differentiated products of our generics business and sterile injectables portfolio. We develop high-barrier-to-entry products, including first-to-file or first-to-market opportunities that are difficult to formulate or manufacture or face complex legal and regulatory challenges. We believe products with these characteristics will face a lesser degree of competition and therefore provide longer product life cycles and higher profitability than products without these characteristics. Our business model continues to focus on being a low cost producer of products in categories with higher barriers to entry and lower levels of competition by leveraging operational efficiency. Our strategy in the U.S. Branded - Sterile Injectables and U.S. Generic Pharmaceuticals segments includes focusing on categories where there are fewer challenges from low-cost operators.
Operational excellence. We have efficient, effective and high-quality manufacturing capabilities across a diversified array of dosage forms. We believe our comprehensive suite of technology, manufacturing and development competencies increases the likelihood of success in commercializing high-barrier-to-entry products and obtaining first-to-file and first-to-market status on future products, yielding more sustainable market share and profitability. For example, our capabilities in the rapidly growing U.S. market for sterile drug products and sterile vial and hormonal capabilities afford us with a broader and more diversified product portfolio and a greater selection of targets for potential development.
We believe that our competitive advantages include our integrated team-based approach to product development that combines our formulation, regulatory, legal, manufacturing and commercial capabilities; our ability to introduce new generic equivalents for brand-name drugs; our quality and cost-effective production; our ability to meet customer and/or patient expectations; and the breadth of our existing sterile injectables and generic product portfolio offerings. Through our recent strategic assessments, we have taken further steps to optimize our various product portfolios and now look to capitalize on a much stronger and durable in-line product portfolio and R&D pipeline. We are focused only on those marketed products that deliver acceptable returns on investment, thereby leveraging our existing platform to drive operational efficiency.
Growth of our branded Specialty Products portfolio while leveraging the strength of our Established Products portfolio. We have assembled a portfolio of branded prescription products offered by our U.S. Branded - Specialty & Established Pharmaceuticals segment to treat and manage conditions in urology, urologic oncology, endocrinology, pain and orthopedics. Our Specialty Products portfolio includes, among other products: XIAFLEX®, SUPPRELIN® LA, TESTOPEL®, NASCOBAL® Nasal Spray and AVEED®. Our Established Products portfolio includes, among other products: PERCOCET®, VOLTAREN® Gel, LIDODERM®, TESTIM® and FORTESTA® Gel. For additional detail, see “Products Overview.”
Continuing proactive diversification of our business. Our primary focus is on organic growth. However, we will evaluate and, where appropriate, execute on opportunities to expand through acquisitions of products and companies in areas that will serve patients and customers and that we believe will offer above average growth characteristics and attractive margins. In particular, we will look to continue to enhance our product lines by acquiring or licensing rights to additional products and regularly evaluating selective acquisition opportunities.
Research and development expertise. Our R&D efforts are focused on the development of a balanced, diversified portfolio of innovative and clinically differentiated products. The acquisition of Auxilium added multiple, strategically-aligned programs to our branded pharmaceutical R&D pipeline with the addition of collagenase clostridium histolyticum (CCH). Through our U.S. Branded - Sterile Injectables and U.S. Generic Pharmaceuticals businesses, we seek out and develop high-barrier-to-entry products, including first-to-file or first-to-market opportunities. We periodically review our generic products pipeline in order to better direct investment toward those opportunities that we expect will deliver the greatest returns. We remain committed to R&D across each business unit with a particular focus on assets with inherently lower risk profiles and clearly defined regulatory pathways. Our current R&D pipeline consists of products in various stages of development. For additional detail, see “Select Development Projects.”
Our R&D and regulatory affairs staff is based primarily in Chestnut Ridge, New York, Chennai, India, at our global headquarters in Dublin, Ireland and at our U.S. headquarters in Malvern, Pennsylvania.

4


Targeted sales and marketing infrastructure. Our sales and marketing activities are primarily based in the U.S. and Canada and focus on the promotion of our Specialty Products portfolio. We market our products directly to specialty physicians, including those specializing in urology, orthopedics, pediatric endocrinology and bariatric surgery. Our sales force also targets retail pharmacies and other healthcare professionals. We distribute our products through independent wholesale distributors, but we also sell directly to retailers, clinics, government agencies, doctors, independent retail and specialty pharmacies and independent specialty distributors. Our marketing policy is designed to provide physicians, pharmacies, hospitals, public and private payers and appropriate healthcare professionals with products and relevant, appropriate medical information. We work to gain access to healthcare authority, pharmacy benefit managers and managed care organizations’ formularies (lists of recommended or approved medicines and other products), including Medicare Part D plans and reimbursement lists, by demonstrating the qualities and treatment benefits of our products within their approved indications.
Products Overview
U.S. Branded - Specialty & Established Pharmaceuticals
The following table displays the product revenues to external customers in our U.S. Branded - Specialty & Established Pharmaceuticals segment for the years ended December 31, 2017, 2016 and 2015 (in thousands):
 
2017
 
2016
 
2015
Specialty Products:
 
 
 
 
 
XIAFLEX®
$
213,378

 
$
189,689

 
$
158,115

SUPPRELIN® LA
86,211

 
78,648

 
70,099

Other Specialty (1)
153,384

 
138,483

 
98,025

Total Specialty Products
$
452,973

 
$
406,820

 
$
326,239

Established Products:
 
 
 
 
 
OPANA® ER
$
83,826

 
$
158,938

 
$
175,772

PERCOCET®
125,231

 
139,211

 
135,822

VOLTAREN® Gel
68,780

 
100,642

 
207,161

LIDODERM®
51,629

 
87,577

 
125,269

Other Established (2)
175,086

 
273,106

 
314,344

Total Established Products
$
504,552

 
$
759,474

 
$
958,368

Total U.S. Branded - Specialty & Established Pharmaceuticals (3)
$
957,525

 
$
1,166,294

 
$
1,284,607

__________
(1)
Products included within Other Specialty include TESTOPEL®, NASCOBAL® Nasal Spray and AVEED®.
(2)
Products included within Other Established include, but are not limited to, TESTIM® and FORTESTA® Gel, including the authorized generics.
(3)
Individual products presented above represent the top two performing products in each product category and/or any product having revenues in excess of $100 million during the years ended December 31, 2017, 2016 or 2015.
Specialty Products Portfolio
Endo commercializes a number of products within the market served by specialty distributors and specialty pharmacies, and in which healthcare practitioners (HCPs) can purchase and bill payers directly (the buy and bill market). Our current offerings primarily relate to two distinct areas: (i) urology treatments, which focus mainly on Peyronie’s disease (PD) and testosterone replacement therapies (TRT) for hypogonadism; and (ii) orthopedics/pediatric endocrinology treatments, which focus on Dupuytren’s contracture (DC) and central precocious puberty (CPP).
Key product offerings in this category include the following:
XIAFLEX®, which is indicated for the treatment of adult patients with DC with an abnormal buildup of collagen in the fingers which limits or disables hand function. It is also indicated for the treatment of adult men with PD with a collagen plaque and a penile curvature deformity of thirty degrees or greater at the start of therapy. XIAFLEX® is the first and only FDA-approved non-surgical treatment for PD.
SUPPRELIN® LA, which is a soft, flexible 12-month hydrogel implant based on our hydrogel polymer technology that delivers histrelin acetate, a gonadotropin releasing hormone (GnRH) agonist and is indicated for the treatment of CPP in children.
TESTOPEL®, which is a unique, long-acting implantable pellet indicated for TRT in conditions associated with a deficiency or absence of endogenous testosterone.
NASCOBAL® Nasal Spray, which is a prescription medicine used as a supplement to treat vitamin B12 deficiency and is the only FDA-approved B12 nasal spray.
AVEED®, which is a novel, long-acting testosterone undecanoate for injection for the treatment of hypogonadism. AVEED® is dosed only five times per year after the first month of therapy.

5


Established Products Portfolio
Endo’s Established Products portfolio’s current treatment offerings primarily relate to two distinct areas: (i) pain management, including products in the opioid analgesics and osteoarthritis pain segments and for the treatment of pain associated with post-herpetic neuralgia; and (ii) urology, which focuses mainly on treatment of hypogonadism. The Company’s legacy pain portfolio products are managed as mature brands.
Key product offerings in this category include, among others, the following:
PERCOCET®, which is an opioid analgesic approved for the treatment of moderate-to-moderately-severe pain.
VOLTAREN® Gel, which is a topical prescription treatment for the relief of joint pain of osteoarthritis in the knees, ankles, feet, elbows, wrists and hands. VOLTAREN® Gel delivers effective pain relief with a favorable safety profile.
LIDODERM®, which is a topical patch product containing lidocaine, approved for the relief of pain associated with post-herpetic neuralgia, a condition thought to result after nerve fibers are damaged during a case of Herpes Zoster (commonly known as shingles).
TESTIM® (and its authorized generic), which is a topical gel indicated for TRT in conditions associated with a deficiency or absence of endogenous testosterone.
FORTESTA® Gel (and its authorized generic), which is a patented two percent (2%) testosterone transdermal gel and is a treatment for men suffering from hypogonadism.
Also included within this product portfolio is OPANA® ER, an opioid agonist indicated for the management of pain severe enough to require daily, around-the-clock, long-term opioid treatment and for which alternative treatment options are inadequate. In March 2017, we announced that the FDA’s Drug Safety and Risk Management and Anesthetic and Analgesic Drug Products Advisory Committees voted that the benefits of reformulated OPANA® ER (oxymorphone hydrochloride extended release) no longer outweigh its risks. In June 2017, we became aware of the FDA’s request that we voluntarily withdraw OPANA® ER from the market, and in July 2017, after careful consideration and consultation with the FDA, we decided to voluntarily remove OPANA® ER from the market. During the second quarter of 2017, we began to work with the FDA to coordinate an orderly withdrawal of the product from the market. By September 1, 2017, we ceased shipments of OPANA® ER to customers and we expect the New Drug Application will be withdrawn in the coming months.
U.S. Branded - Sterile Injectables
The following table displays the product revenues to external customers in our U.S. Branded - Sterile Injectables segment for the years ended December 31, 2017, 2016 and 2015 (in thousands):
 
2017
 
2016
 
2015
VASOSTRICT®
$
399,909

 
$
343,468

 
$
62,583

ADRENALIN®
76,523

 
22,172

 
3,094

Other Sterile Injectables (1)
274,039

 
210,759

 
49,042

Total U.S. Branded - Sterile Injectables (2)
$
750,471

 
$
576,399

 
$
114,719

__________
(1)
Products included within Other Sterile Injectables include, but are not limited to, APLISOL®, ephedrine sulfate injection and neostigmine methylsulfate injection.
(2)
Individual products presented above represent the top two performing products within the U.S. Branded - Sterile Injectables segment and/or any product having revenues in excess of $100 million during the years ended December 31, 2017, 2016 or 2015.
The U.S. Branded - Sterile Injectables segment includes a product portfolio of over 30 product families, including branded sterile injectable products that are protected by certain patent rights and have inherent scientific, regulatory, legal and technical complexities and generic injectable products that are difficult to formulate or manufacture or face complex legal and regulatory challenges. Sterile injectables in this segment are manufactured in a sterile facility, sold primarily in vial dosages and administered at hospitals, clinics and long-term care facilities. Key product offerings include the following:
VASOSTRICT®, which is indicated to increase blood pressure in adults with vasodilatory shock who remain hypotensive despite fluids and catecholamines. It is currently the first and only vasopressin injection with an NDA approved by the FDA. We have been issued five patents relating to VASOSTRICT® by the U.S. Patent and Trademark Office (PTO). These patents are listed in the Orange Book. The FDA requires any applicant (as further described below under the heading “Governmental Regulation”) seeking FDA approval for vasopressin prior to patent expiry and relying on VASOSTRICT® as the Reference Listed Drug, to notify us of its filing before the FDA will issue an approval.
ADRENALIN®, which is a non-selective alpha and beta adrenergic agonist indicated for emergency treatment of certain allergic reactions, including anaphylaxis.
APLISOL®, which is a sterile aqueous solution of a purified protein fraction for intradermal administration as an aid in the diagnosis of tuberculosis.
Ephedrine sulfate injection, which is an alpha and beta adrenergic agonist and a norepinephrine-releasing agent indicated for the treatment of clinically important hypotension occurring in the setting of anesthesia.

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Neostigmine methylsulfate injection, which is a cholinesterase inhibitor indicated for the reversal of the effects of non-depolarizing neuromuscular blocking agents after surgery.
U.S. Generic Pharmaceuticals
The U.S. Generic Pharmaceuticals segment includes a product portfolio of over 250 generic prescription product families including solid oral extended-release, solid oral immediate-release, abuse-deterrent products, liquids, semi-solids, patches (which are medicated adhesive patches designed to deliver the drug through the skin), powders, ophthalmics (which are sterile pharmaceutical preparations administered for ocular conditions) and sprays and includes products in the pain management, urology, central nervous system disorders, immunosuppression, oncology, women’s health and cardiovascular disease markets, among others.
Generic drugs are the pharmaceutical and therapeutic equivalents of branded products and are generally marketed under their generic (chemical) names rather than by brand names. Generic products are substantially the same as branded products in dosage form, safety, efficacy, route of administration, quality, performance characteristics and intended use, but are generally sold at prices below those of the corresponding branded products and thus represent cost-effective alternatives for consumers.
Typically, a generic drug may not be marketed until the expiration of applicable patent(s) on the corresponding branded product, unless a resolution of patent litigation results in an earlier opportunity to enter the market. For additional detail, see “Governmental Regulation.” However, our generics portfolio also contains certain authorized generics, which are generic versions of branded drugs licensed by brand drug companies under a New Drug Application (NDA) and marketed as generics. Authorized generics do not face regulatory barriers to introduction and are not prohibited from sale during the 180-day marketing exclusivity period granted to the first-to-file ANDA applicant. Our authorized generics include lidocaine patch 5% (LIDODERM®), budesonide (Entocort® EC), and diclofenac sodium gel (VOLTAREN® Gel), among others. We believe we are a partner of choice to larger brand companies seeking an authorized generics distributor for their branded products. We have been the authorized generic distributor for such companies as AstraZeneca plc, Bristol-Myers Squibb Company, Novartis AG (Novartis) and Merck & Co., Inc.
International Pharmaceuticals
Our International Pharmaceuticals segment includes a variety of specialty pharmaceutical products sold outside the U.S., primarily in Canada through our operating company Paladin Labs Inc. (Paladin). This segment’s key products serve growing therapeutic areas, including attention deficit hyperactivity disorder (ADHD), pain, women’s health and oncology.
Select Development Projects
Collagenase Clostridium Histolyticum
Collagenase clostridium histolyticum (CCH) is currently approved and marketed in the U.S. under the trademark XIAFLEX® for the treatment of both DC and PD (two separate indications). We are progressing the branded cellulite treatment development program for CCH. We completed a Phase 2b clinical trial for this program, the results of which were released in November 2016. An End of Phase 2 meeting with the FDA occurred in early 2017 and, in February 2018, we initiated two identical Phase 3 clinical trials for CCH for the treatment of cellulite. The multicenter, randomized, double-blind, placebo-controlled studies will evaluate the safety and ability of CCH to reduce the appearance of cellulite.
We have global marketing rights for CCH for the treatment of cellulite. We also have the right to further develop CCH for additional indications, including Dupuytren’s nodules, adhesive capsulitis, lateral hip fat, plantar fibromatosis and human and canine lipomas.
Other Pharmaceutical Pipeline
Our remaining pipeline consists mainly of a variety of pharmaceutical products in our U.S. Generic Pharmaceuticals and U.S. Branded - Sterile Injectables segments. Our primary approach to developing generic products, including injectables, is to target high-barrier-to-entry generic product opportunities, including first-to-file or first-to-market opportunities that are difficult to formulate or manufacture or face complex legal and regulatory challenges. We expect such product opportunities to result in products that are either the exclusive generic or have two or fewer generic competitors when launched, which we believe tends to lead to more sustainable market share and profitability for our product portfolio. In our U.S. Branded - Sterile Injectables business, we also focus on developing branded injectable products with inherent scientific, regulatory, legal and technical complexities and developing other dosage forms and technologies.
As of December 31, 2017, these two segments have over 175 products in their pipelines, which included approximately 100 ANDAs pending with the FDA representing approximately $30 billion of combined annual sales for the corresponding branded products in 2017. Of the 100 ANDAs, approximately 40 represent first-to-file opportunities or first-to-market opportunities. We periodically review our development projects in order to better direct investment toward those opportunities that we expect will deliver the greatest returns. This process can lead to decisions to discontinue certain R&D projects that may reduce the number of products in our previously reported pipeline.

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Competition
Branded Pharmaceuticals
Our branded pharmaceutical products compete with products manufactured by many other companies in highly competitive markets throughout the U.S. and internationally, primarily through Paladin.
We compete principally through targeted product development and our acquisition and in-licensing strategies. The competitive landscape in the acquisition and in-licensing of pharmaceutical products has intensified in recent years as a result of a reduction in the number of compounds available and an increase in competitors bidding on available assets. In addition to product development and acquisitions, other competitive factors in the pharmaceutical industry include product efficacy, safety, ease of use, price, demonstrated cost-effectiveness, marketing effectiveness, service, reputation and access to technical information.
Certain of the new products that we introduce must compete with other products already on the market or products that are later developed by competitors, including both competing brands and generic equivalents. If competitors introduce new products, delivery systems or processes with therapeutic or cost advantages, our products can be subject to progressive price reductions and/or decreased volume of sales. Accordingly, the competitive environment of the branded product business requires us to continually seek out technological innovations and to market our products effectively. To successfully compete for business of managed care and pharmacy benefits management organizations, we must often demonstrate that our products offer not only medical benefits but also cost advantages as compared with other forms of care.
Manufacturers of generic pharmaceuticals typically invest far less in R&D than research-based pharmaceutical companies and therefore can price their products significantly lower than branded products. Accordingly, when a branded product loses its market exclusivity, it normally faces intense price competition from generic forms of the product. Due to their significantly lower prices, generic versions, where available, may be substituted by pharmacies or required in preference to the branded version under third-party reimbursement programs.
U.S. Branded - Specialty & Established Pharmaceuticals
This segment’s major competitors, including Mylan N.V., Allergan plc (Allergan), Purdue Pharma, L.P. (Purdue), Jazz Pharmaceuticals plc (Jazz), Shire plc (Shire), Horizon Pharma plc (Horizon) and Mallinckrodt plc (Mallinckrodt), among others, vary depending on therapeutic and product category, dosage strength and drug-delivery systems.
Several of this segment’s products, including PERCOCET®, VOLTAREN® Gel, LIDODERM® and TESTIM®, face generic competition. In addition, we are aware of certain competitive activities involving certain of our branded products. For a description of these competitive activities, including the litigation related to Paragraph IV Certification Notices, see Note 14. Commitments and Contingencies in the Consolidated Financial Statements, included in Part IV, Item 15 of this report "Exhibits, Financial Statement Schedules".
U.S. Branded - Sterile Injectables
This segment’s major competitors, including Hospira Inc. (a division of Pfizer Inc.), Fresenius Kabi, Mylan N.V. and West-Ward Pharmaceuticals, vary by product. A significant portion of our sales, including sales to over 5,500 hospitals, clinics and long-term care facilities in the U.S., are controlled by a relatively small number of group purchasing organizations (GPOs), including HealthTrust Purchasing Group LP, Premier Inc. and Vizient Inc. Accordingly, it is important for us to have strong relationships with these GPOs and ensure on-time product launches in order to secure new bid opportunities.
Of the over 30 product families in our sterile injectables portfolio, 14 have fewer than two competitors and five have fewer than three competitors. Additional competitors increase the degree of price competition from generic forms of our products.
Generic Pharmaceuticals
In the generic pharmaceutical market, we face intense competition from other generic drug manufacturers, brand name pharmaceutical companies through authorized generics, existing brand equivalents and manufacturers of therapeutically similar drugs. Our major competitors in the generics market, including Teva Pharmaceutical Industries Limited (Teva), Mylan N.V., Sandoz (a division of Novartis AG) and Impax Laboratories, Inc. (Impax), vary by product.

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A significant portion of our sales are made through a relatively small number of drug wholesalers and retail drug store chains. These customers play a key role in the distribution chain of our pharmaceutical products. Drug wholesalers and retail drug store chains have undergone, and are continuing to undergo, significant consolidation, which has resulted in these groups gaining additional purchasing leverage that has increased the pricing pressures on our business. Additionally, the emergence of large buying groups representing independent retail pharmacies and other drug distributors, and the prevalence and influence of managed care organizations and similar institutions, enable those groups to demand larger price discounts on our products. For example, McKesson Corporation and Wal-Mart Stores, Inc. entered into an agreement to jointly source generic pharmaceuticals and Express Scripts, through a wholly owned subsidiary, Innovative Product Alignment, LLC, announced it will participate in Walgreens Boots Alliance Development GmbH group purchasing organization. As a result of these alliances, the consolidation among wholesale distributors and the growth of large retail drug store chains, a small number of purchasers control a significant share of purchases and have gained more purchasing power that has heightened competition among generic drug producers for the business of this consolidated customer base.
Newly introduced generic products with limited or no other generic competition typically garner higher prices relative to commoditized generic products. As such, our primary strategy is to compete in the generic product market with a focus on high-value, first-to-file or first-to-market opportunities, regardless of therapeutic category, and products that present significant barriers to entry for reasons such as complex formulation or regulatory or legal challenges. For additional detail, see “Our Competitive Strengths - Focus on the differentiated products of our generics business.”
At the expiration of any statutory generic exclusivity period, other competitors may enter the market, resulting in significant price declines. Consequently, maintaining profitable operations in generic pharmaceuticals depends, in part, on our continuing ability to select, develop, procure regulatory approvals of, overcome legal challenges to, launch and commercialize new generic products in a timely and cost efficient manner and to maintain efficient, high quality manufacturing capabilities. For additional detail, see “Our Competitive Strengths-Operational excellence.”
Seasonality
Although our business is affected by the purchasing patterns and concentration of our customers, our business is not materially impacted by seasonality.
Major Customers
We primarily sell our generic and branded pharmaceuticals to wholesalers, retail drug store chains, supermarket chains, mass merchandisers, distributors, mail order accounts, hospitals and government agencies. Our wholesalers and distributors purchase products from us and, in turn, supply products to retail drug store chains, independent pharmacies and managed health care organizations. Customers in the managed health care market include health maintenance organizations, nursing homes, hospitals, clinics, pharmacy benefit management companies and mail order customers. Total revenues from customers that accounted for 10% or more of our total consolidated revenues during the years ended December 31, 2017, 2016 and 2015 are as follows:
 
2017
 
2016
 
2015
Cardinal Health, Inc.
25
%
 
26
%
 
21
%
McKesson Corporation
25
%
 
27
%
 
31
%
AmerisourceBergen Corporation
25
%
 
25
%
 
23
%
Revenues from these customers are included within each of our segments.
As a result of consolidation among wholesale distributors and the growth of large retail drug store chains, a small number of large wholesale distributors control a significant share of the market, and the number of independent retail drug stores and small retail drug store chains has decreased. Some wholesale distributors have demanded that pharmaceutical manufacturers, including us, enter into distribution service agreements (DSAs) pursuant to which the wholesale distributors provide the pharmaceutical manufacturers with specific services, including the provision of periodic retail demand information and current inventory levels and other information. We have entered into certain of these agreements.

9


Patents, Trademarks, Licenses and Proprietary Property
As of February 20, 2018, we held approximately: 243 U.S. issued patents, 64 U.S. patent applications pending, 551 foreign issued patents, and 150 foreign patent applications pending. In addition, as of February 20, 2018, we have licenses for approximately 41 U.S. issued patents, 36 U.S. patent applications pending, 157 foreign issued patents and 72 foreign patent applications pending. The following table sets forth information as of February 20, 2018 regarding patents relating to each of our most significant products:
Patent No.
 
Patent Expiration*
 
Relevant Product
 
Ownership
 
Jurisdiction Where Granted
7,718,640
 
March 14, 2027
 
AVEED®
 
Exclusive License
 
USA
8,338,395
 
February 27, 2026
 
AVEED®
 
Exclusive License
 
USA
RE39,941
 
August 24, 2019
 
XIAFLEX®
 
Exclusive License
 
USA
6,022,539
 
June 3, 2019
 
XIAFLEX®
 
Exclusive License
 
USA
7,811,560
 
July 12, 2028
 
XIAFLEX®
 
Owned; Exclusive License
 
USA
7,229,636
 
August 1, 2024
 
NASCOBAL® Nasal Spray
 
Owned
 
USA
7,404,489
 
March 12, 2024
 
NASCOBAL® Nasal Spray
 
Owned
 
USA
7,879,349
 
August 1, 2024
 
NASCOBAL® Nasal Spray
 
Owned
 
USA
8,003,353
 
August 1, 2024
 
NASCOBAL® Nasal Spray
 
Owned
 
USA
8,940,714
 
February 26, 2024
 
NASCOBAL® Nasal Spray
 
Owned
 
USA
9,415,007
 
July 28, 2024
 
NASCOBAL® Nasal Spray
 
Owned
 
USA
9,375,478
 
January 30, 2035
 
VASOSTRICT®
 
Owned
 
USA
9,687,526
 
January 30, 2035
 
VASOSTRICT®
 
Owned
 
USA
9,744,209
 
January 30, 2035
 
VASOSTRICT®
 
Owned
 
USA
9,744,239
 
January 30, 2035
 
VASOSTRICT®
 
Owned
 
USA
9,750,785
 
January 30, 2035
 
VASOSTRICT®
 
Owned
 
USA
9,119,876
 
March 13, 2035
 
ADRENALIN®
 
Owned
 
USA
9,295,657
 
March 13, 2035
 
ADRENALIN®
 
Owned
 
USA
__________
*
Our license agreements for the patents in the table above extend to or beyond the patent expiration dates.
The effect of these issued patents is that they provide us with protection by virtue of our ability to exclude others from making, using, selling, offering for sale and importing that which is covered by their claims. The coverage claimed in a patent application can be significantly reduced before the patent is issued. Accordingly, we do not know whether any of the applications we acquire or license will result in the issuance of patents, or, if any patents are issued, whether they will provide significant proprietary protection or will be challenged, circumvented or invalidated. Because unissued U.S. patent applications are maintained in secrecy for a period of eighteen months and U.S. patent applications filed prior to November 29, 2000 are not disclosed until such patents are issued, and since publication of discoveries in the scientific or patent literature often lags behind actual discoveries, we cannot be certain of the priority of inventions covered by pending patent applications. Moreover, we may have to participate in interference and other inter parties proceedings declared by the PTO to determine priority of invention, or in opposition proceedings in a foreign patent office, either of which could result in substantial cost to us, even if the eventual outcome is favorable to us. There can be no assurance that any patents, if issued, will be held valid by a court of competent jurisdiction. An adverse outcome could subject us to significant liabilities to third parties, require disputed rights to be licensed from third parties or require us to cease using such technology.
We believe that our patents, the protection of discoveries in connection with our development activities, our proprietary products, technologies, processes, trade secrets, know-how and all of our intellectual property are important to our business. Many of our products are sold under trademarks. To achieve a competitive position, we rely on trade secrets, non-patented proprietary know-how and continuing technological innovation, where patent protection is not believed to be appropriate or attainable. In addition, as outlined above, we have a number of patent licenses from third parties, some of which may be important to our business. See Note 11. License and Collaboration Agreements in the Consolidated Financial Statements, included in Part IV, Item 15 of this report "Exhibits, Financial Statement Schedules". There can be no assurance that any of our patents, licenses or other intellectual property rights will afford us any protection from competition.
We rely on confidentiality agreements with our employees, consultants and other parties to protect, among other things, trade secrets and other proprietary technology. There can be no assurance that these agreements will not be breached, that we will have adequate remedies for any breach, that others will not independently develop equivalent proprietary information or that other third parties will not otherwise gain access to our trade secrets and other intellectual property.

10


We may find it necessary to initiate litigation to enforce our patent rights, to protect our intellectual property or trade secrets or to determine the scope and validity of the proprietary rights of others. Litigation is costly and time-consuming, and there can be no assurance that our litigation expenses will not be significant in the future or that we will prevail in any such litigation. See Note 14. Commitments and Contingencies in the Consolidated Financial Statements, included in Part IV, Item 15 of this report "Exhibits, Financial Statement Schedules".
Governmental Regulation
United States Food and Drug Administration and Drug Enforcement Administration
The pharmaceutical industry in the U.S. is subject to extensive and rigorous government regulation. The Federal Food, Drug, and Cosmetic Act (FFDCA), the Controlled Substances Act (CSA) and other federal and state statutes and regulations govern or influence the testing, manufacturing, packaging, labeling, storage, record keeping, approval, advertising, promotion, sale and distribution of pharmaceutical products. Noncompliance with applicable requirements can result in fines, recall or seizure of products, total or partial suspension of production and/or distribution, injunctions, refusal of the government to enter into supply contracts or to approve NDAs, ANDAs and Biologics License Applications (BLAs), civil penalties and criminal prosecution.
FDA approval is typically required before any new drug can be marketed. An NDA or BLA is a filing submitted to the FDA to obtain approval of new chemical entities and other innovations for which thorough applied research is required to demonstrate safety and effectiveness in use. The process generally involves:
Completion of preclinical laboratory and animal testing and formulation studies in compliance with the FDA’s Good Laboratory Practice (GLP) regulations;
Submission to the FDA of an Investigational New Drug (IND) application for human clinical testing, which must become effective before human clinical trials may begin in the U.S.;
Approval by an independent institutional review board (IRB) before each trial may be initiated, and continuing review during the trial;
Performance of human clinical trials, including adequate and well-controlled clinical trials in accordance with good clinical practices (GCPs) to establish the safety and efficacy of the proposed drug product for each intended use;
Submission of an NDA or BLA to the FDA;
Satisfactory completion of an FDA pre-approval inspection of the product’s manufacturing processes and facility or facilities to assess compliance with the FDA’s current Good Manufacturing Practice (cGMP) regulations, and/or review of the Chemistry, Manufacturing and Controls (CMC) section of the NDA or BLA to require that the facilities, methods and controls are adequate to preserve the drug’s identity, strength, quality, purity and potency;
Satisfactory completion of an FDA advisory committee review, if applicable; and
Approval by the FDA of the NDA or BLA.
Clinical trials are typically conducted in three sequential phases, although the phases may overlap.
Phase 1 trials generally involve testing the product for safety, adverse effects, dosage, tolerance, absorption, distribution, metabolism, excretion and other elements of clinical pharmacology.
Phase 2 trials typically involve a small sample of the intended patient population to assess the efficacy of the compound for a specific indication, to determine dose tolerance and the optimal dose range as well as to gather additional information relating to safety and potential adverse effects.
Phase 3 trials are undertaken in an expanded patient population at typically dispersed study sites, in order to determine the overall risk-benefit ratio of the compound and to provide an adequate basis for product labeling.
Each trial is conducted in accordance with certain standards under protocols that detail the objectives of the study, the parameters to be used to monitor safety and efficacy criteria to be evaluated. Each protocol must be submitted to the FDA as part of the IND.
Data from preclinical testing and clinical trials are submitted to the FDA in an NDA or BLA for marketing approval and to foreign government health authorities in a marketing authorization application, consistent with each health authority’s specific regulatory requirements. Clinical trials are also subject to regulatory inspections by the FDA and other regulatory authorities to confirm compliance with applicable regulatory standards. The process of completing clinical trials for a new drug may take many years and require the expenditures of substantial resources. See Item 1A. Risk Factors - “The pharmaceutical industry is heavily regulated, which creates uncertainty about our ability to bring new products to market and imposes substantial compliance costs on our business” in our Annual Report on Form 10-K for the year ended December 31, 2017 for further discussion on FDA approval. As a condition of approval, the FDA or foreign regulatory authorities may require further studies, including Phase 4 post-marketing studies or post-marketing data reporting. Results of post-marketing programs may limit or expand the further marketing of the products.

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For some drugs, the FDA may require a Risk Evaluation and Mitigation Strategy (REMS) to confirm a drug’s benefits outweigh its risks. REMS could include medication guides, physician communication plans or other elements. See Item 1A. Risk Factors - “The pharmaceutical industry is heavily regulated, which creates uncertainty about our ability to bring new products to market and imposes substantial compliance costs on our business” in our Annual Report on Form 10-K for the year ended December 31, 2017 for further discussion, including examples of products sold by us that have been impacted by REMS.
In most instances, FDA approval of an ANDA is required before a generic equivalent of an existing or reference-listed drug can be marketed. The ANDA process is abbreviated in that the FDA waives the requirement of conducting complete preclinical and clinical studies and generally instead relies principally on bioequivalence studies. Bioequivalence generally involves a comparison of the rate of absorption and levels of concentration of a generic drug in the body with those of the previously approved drug. When the rate and extent of absorption of systemically acting test and reference drugs are considered the same under the bioequivalence requirement, the two drugs are considered bioequivalent and are generally regarded as therapeutically equivalent, meaning that a pharmacist can substitute the product for the reference-listed drug. Under certain circumstances, an ANDA may also be submitted for a product authorized by approval of an ANDA suitability petition. Such petitions may be submitted to secure authorization to file an ANDA for a product that differs from a previously approved drug in active ingredient, route of administration, dosage form or strength. In September 2007 and July 2012, Congress re-authorized pediatric testing legislation, which now requires ANDAs approved via the suitability petition route to conduct pediatric testing. The timing of final FDA approval of ANDA applications depends on a variety of factors, including whether the applicant challenges any listed patents for the drug and whether the manufacturer of the reference listed drug is entitled to one or more statutory exclusivity periods, during which the FDA is prohibited from approving generic products. In certain circumstances, a regulatory exclusivity period can extend beyond the life of a patent, and thus block ANDAs from being approved until after the patent expiration date.
Certain of our products are or could become regulated and marketed as biologic products pursuant to BLAs. Our BLA-licensed products were licensed based on a determination by the FDA of safety, purity and potency as required under the Public Health Service Act (PHSA). Although the ANDA framework referenced above does not apply to generics of BLA-licensed biologics, there is an abbreviated licensure pathway for products deemed to be biosimilar to, or interchangeable with, FDA-licensed reference biological products pursuant to the Biologics Price Competition and Innovation Act of 2009 (BPCIA). Under the BPCIA, following the expiration of a 12-year reference exclusivity period, the FDA may license, under section 351(k) of the PHSA, a biologic that it determines is biosimilar to, or interchangeable with, a reference product licensed under section 351(a) of the PHSA. Biosimilarity is defined to mean that the section 351(k) product is highly similar to the reference product, notwithstanding minor differences in clinically inactive components, and that there are no clinically meaningful differences between the section 351(k) product and the reference product in terms of the safety, purity and potency. To be considered interchangeable, a product must be biosimilar to the reference product, be expected to produce the same clinical result as the reference product in any given patient and, if administered more than once to an individual, the risks in terms of safety or diminished efficacy of alternating or switching between use of the product and its reference product is not greater than the risk of using the reference product without such alternation or switch.
Once any regulatory exclusivity period for our BLA-licensed biologics expires, the FDA may approve another company’s BLA for a biosimilar or interchangeable version of our product. Although licensure of a biosimilar or interchangeable product is generally expected to require less than the full complement of product-specific preclinical and clinical data required for innovator products, the FDA has considerable discretion over the kind and amount of scientific evidence required to demonstrate biosimilarity and interchangeability.
Based on scientific developments, post-market experience or other legislative or regulatory changes, the current FDA standards of review for approving new pharmaceutical products are sometimes more stringent than those that were applied in the past, including for certain opioid products. As a result, the FDA does not have safety databases on these products that are as extensive as some products developed more recently. Accordingly, we believe the FDA has expressed an intention to develop such databases for certain of these products, including many opioids.
The 21st Century Cures Act (Cures Act) was signed into law on December 13, 2016. The Cures Act includes various provisions to accelerate the development and delivery of new treatments, such as those intended to expand the types of evidence manufacturers may submit to support FDA drug approval, to encourage patient-centered drug development, to liberalize the communication of healthcare economic information (HCEI) to payers and to create greater transparency with regard to manufacturer expanded access programs. Central to the Cures Act are provisions that enhance and accelerate the FDA’s processes for reviewing and approving new drugs and supplements to approved NDAs. These include, but are not limited to, provisions that (i) require the FDA to establish a program to evaluate the potential use of real world evidence to help to support the approval of a new indication for an approved drug and to help to support or satisfy post-approval study requirements, (ii) provide that the FDA may rely upon qualified data summaries to support the approval of a supplemental application with respect to a qualified indication for an already approved drug, (iii) require the FDA to issue guidance for purposes of assisting sponsors in incorporating complex adaptive and other novel trial designs into proposed clinical protocols and applications for new drugs and (iv) require the FDA to establish a process for the qualification of drug development tools for use in supporting or obtaining FDA approval for or investigational use of a drug.

12


The Cures Act also includes $1 billion in new funding to address what the act refers to as the “opioid abuse crisis.” Specifically, the Cures Act authorizes the awarding of grants to states for the purpose of addressing opioid abuse within each state, with preference to be given to states with an incidence or prevalence of opioid use disorders that is substantially higher relative to other states. Funding would be provided for states to supplement opioid abuse prevention and treatment activities, such as improving prescription drug monitoring programs, implementing prevention activities, providing training for health care providers and expanding access to opioid treatment programs. States receiving such grants would be required to report on activities funded by the grant in the substance abuse block grant report.
We cannot determine what effect changes in the FDA’s laws or regulations (including legal or regulator interpretations), when and if promulgated, or upcoming advisory committee meetings may have on our business in the future. Changes could, among other things, require expanded or different labeling, additional testing, the recall or discontinuance of certain products and additional record keeping. Such changes could have a material adverse effect on our business, financial condition, results of operations and cash flows. See Item 1A. Risk Factors - “The pharmaceutical industry is heavily regulated, which creates uncertainty about our ability to bring new products to market and imposes substantial compliance costs on our business” in our Annual Report on Form 10-K for the year ended December 31, 2017 for further discussion.
In September 2013, the FDA announced class-wide safety labeling changes and new post-market study requirements for all extended-release and long-acting (ER/LA) opioids. Among other things, the updated indication states that, because of the risks of addiction, abuse and misuse, even at recommended doses, and because of the greater risks of overdose and death, these drugs should be reserved for use in patients for whom alternative treatment options are ineffective, not tolerated or would be otherwise inadequate to provide sufficient management of pain; ER/LA opioid analgesics are not indicated for as-needed pain relief. The FDA is also requiring drug companies that make these products to conduct further studies and clinical trials to further assess the known serious risks of misuse, abuse, increased sensitivity to pain (hyperalgesia), addiction, overdose and death. It is not presently known what impact, if any, these changes to the indications for use or results from the post-marketing studies may have on our business, financial position, results of operations and cash flows.
A sponsor of an NDA is required to identify, in its application, any patent that claims the drug or a use of the drug subject to the application. Upon NDA approval, the FDA lists these patents in a publication referred to as the Orange Book. Any person that files an NDA under Section 505(b)(2) of the FFDCA must make a certification in respect to listed patents, the type of NDA that may rely upon the data in the application for which the patents are listed or an ANDA to secure approval of a generic version of this first, or listed drug. The FDA may not approve such an application for the drug until expiration of the listed patents unless (i) the generic applicant certifies that the listed patents are invalid, unenforceable or not infringed by the proposed generic drug and gives notice to the holder of the NDA for the listed drug of the basis upon which the patents are challenged and (ii) the holder of the listed drug does not sue the later applicant for patent infringement within 45 days of receipt of notice. Under the current law, if an infringement suit is filed, the FDA may not approve the later application until the earliest of: (i) 30 months after submission, (ii) entry of an appellate court judgment holding the patent invalid, unenforceable or not infringed, (iii) such time as the court may order or (iv) expiration of the patent.
One of the key motivators for challenging patents is the 180-day marketing exclusivity period granted to the developer of a generic version of a product that is the first to have its ANDA accepted for filing by the FDA and whose filing includes a certification that the applicable patent(s) are invalid, unenforceable and/or not infringed (a Paragraph IV certification) and that otherwise does not forfeit eligibility for the exclusivity. Under the Medicare Prescription Drug, Improvement, and Modernization Act of 2003 (2003 Medicare Act), with accompanying amendments to the Hatch-Waxman Act (Drug Price Competition and Patent Term Restoration Act), this marketing exclusivity would begin to run upon the earlier of the commercial launch of the generic product or upon an appellate court decision in the generic company’s favor or in favor of another ANDA applicant who had filed with a Paragraph IV certification and has tentative approval. In addition, the holder of the NDA for the listed drug may be entitled to certain non-patent exclusivity during which the FDA cannot approve an application for a competing generic product or 505(b)(2) NDA product.
The FDA also regulates pharmacies and outsourcing facilities that prepare “compounded” drugs pursuant to section 503A and 503B of the FFDCA, respectively. For instance, pharmacies may compound drugs for an identified individual based on the receipt of a valid prescription order, or notation approved by the prescribing practitioner, that a compounded product is necessary for the identified patient. Similarly, outsourcing facilities may compound drugs and sell them to healthcare providers, but not wholesalers or distributors. Although section 503A pharmacies and section 503B outsourcing facilities are subject to many regulatory requirements, compounded drugs are not subject to premarket review by FDA and, therefore, may not have the same level of safety and efficacy assurances of drugs subject to premarket review and approval by the FDA. Because they are not subject to premarket review, compounded drugs are frequently lower cost than either branded or generic drug products.
The FDA enforces regulations to require that the methods used in, and the facilities and controls used for, the manufacture, processing, packing and holding of drugs conform to cGMPs. The cGMP regulations the FDA enforces are comprehensive and cover all aspects of manufacturing operations. Compliance with the regulations requires a continuous commitment of time, money and effort in all operational areas.

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The FDA conducts pre-approval inspections of facilities engaged in the development, manufacture, processing, packing, testing and holding of the drugs subject to NDAs and ANDAs. In addition, manufacturers of both pharmaceutical products and active pharmaceutical ingredients (APIs) used to formulate the drug also ordinarily undergo a pre-approval inspection. Failure of any facility to pass a pre-approval inspection will result in delayed approval and could have a material adverse effect on our business, results of operations, financial condition and cash flows.
The FDA also conducts periodic inspections of drug facilities to assess the cGMP status of marketed products. Following such inspections, the FDA may issue an untitled letter as an initial correspondence that cites violations that do not meet the threshold of regulatory significance for a Warning Letter. FDA guidelines also provide for the issuance of Warning Letters for violations of “regulatory significance” for which the failure to adequately and promptly achieve correction may be expected to result in an enforcement action. Finally, the FDA could issue a Form 483 Notice of Inspectional Observations, which could cause us to modify certain activities identified during the inspection. If the FDA were to find serious cGMP non-compliance during such an inspection, it could take regulatory actions that could adversely affect our business, results of operations, financial condition and cash flows. Imported API and other components needed to manufacture our products could be rejected by U.S. Customs. In respect to domestic establishments, the FDA could initiate product seizures or request, or in some instances require, product recalls and seek to enjoin or otherwise limit a product’s manufacture and distribution. In certain circumstances, violations could support civil penalties and criminal prosecutions. In addition, if the FDA concludes that a company is not in compliance with cGMP requirements, sanctions may be imposed that include preventing that company from receiving the necessary licenses to export its products and classifying that company as an unacceptable supplier, thereby disqualifying that company from selling products to federal agencies.
Certain of our subsidiaries sell products that are “controlled substances” as defined in the CSA and implementing regulations, which establish certain security and record keeping requirements administered by the Drug Enforcement Administration (DEA). The DEA regulates controlled substances as Schedule I, II, III, IV or V substances, with Schedule I and II substances considered to present the highest risk of substance abuse and Schedule V substances the lowest risk. The active ingredients in some of our products are listed by the DEA as Schedule II or III substances under the CSA. Consequently, their manufacture, shipment, storage, sale and use are subject to a high degree of regulation.
The DEA limits the availability of the active ingredients that are subject to the CSA used in several of our products as well as the production of these products. We or our contract manufacturing organizations must annually apply to the DEA for procurement and production quotas in order to obtain and produce these substances. As a result, our quotas may not be sufficient to meet commercial demand or complete clinical trials. Moreover, the DEA may adjust these quotas from time to time during the year, although the DEA has substantial discretion in whether or not to make such adjustments. See Item 1A. Risk Factors - “The DEA limits the availability of the active ingredients used in many of our products as well as the production of these products, and, as a result, our procurement and production quotas may not be sufficient to meet commercial demand or complete clinical trials” in our Annual Report on Form 10-K for the year ended December 31, 2017 for further discussion on DEA regulations. To meet its responsibilities, the DEA conducts periodic inspections of registered establishments that handle controlled substances. Annual registration is required for any facility that manufactures, tests, distributes, dispenses, imports or exports any controlled substance. The facilities must have the security, control and accounting mechanisms required by the DEA to prevent loss and diversion of controlled substances. Failure to maintain compliance can result in enforcement action that could have a material adverse effect on our business, results of operations, financial condition and cash flows. The DEA may seek civil penalties, refuse to renew necessary registrations, or initiate proceedings to revoke or restrict those registrations. In certain circumstances, violations could result in criminal proceedings.
Individual states also regulate controlled substances and we, as well as our third-party API suppliers and manufacturers, are subject to such regulation by several states with respect to the manufacture and distribution of these products.
Government Benefit Programs
As described further in Item 1A. Risk Factors in our Annual Report on Form 10-K for the year ended December 31, 2017, statutory and regulatory requirements for government healthcare programs such as Medicaid, Medicare and TRICARE govern access and provider reimbursement levels, and provide for other cost-containment measures such as requiring pharmaceutical companies to pay rebates or refunds for certain sales of products reimbursed by such programs, or subjecting sales of their products to certain price ceilings. In addition to the cost-containment measures described in Item 1A. Risk Factors in our Annual Report on Form 10-K for the year ended December 31, 2017, drug sales to retail pharmacies under the TRICARE Retail Pharmacy Program are subject to certain price ceilings which require manufacturers to, among other things, pay refunds for prescriptions filled based on the applicable ceiling price limits. Beginning in the first quarter of 2017, pursuant to the Bipartisan Budget Act of 2015, drug manufacturers are required to pay additional rebates to state Medicaid programs if the prices of their non-innovator drugs rise at a rate faster than inflation (as continues to be the case for innovator products).

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The federal government may continue to pursue legislation aimed at containing or reducing payment levels for prescription pharmaceuticals paid for in whole or in part with government funds. As is the case in California and Nevada, the state governments also may continue to enact similar cost containment or transparency legislation. We cannot predict the nature of these or other such measures or their impact on our profitability and cash flows. These efforts could, however, have material consequences for the pharmaceutical industry and the Company.
From time to time, legislative changes are made to government healthcare programs that impact our business. Congress continues to examine various Medicare and Medicaid policy proposals that may result in a downward pressure on the prices of prescription drugs in these programs. See Item 1A. Risk Factors - “The availability of third party reimbursement for our products is uncertain, and thus we may find it difficult to maintain current price levels. Additionally, the market may not accept those products for which third party reimbursement is not adequately provided” in our Annual Report on Form 10-K for the year ended December 31, 2017 for further discussion on Medicare and Medicaid reimbursements.
Under the Patient Protection and Affordable Care Act (PPACA), pharmaceutical manufacturers of branded prescription drugs must pay an annual fee to the federal government. Each individual pharmaceutical manufacturer must pay a prorated share of the total industry fee (the fee was $3 billion for 2016 and is $4 billion for 2017, $4.1 billion for 2018 and $2.8 billion for years thereafter) based on the dollar value of its branded prescription drug sales to specified federal programs. PPACA also expanded health insurance coverage to many previously uninsured Americans, through a combination of federal subsidies for lower-income individuals who enrolled in health plans through health insurance exchanges and enabling states to expand Medicaid eligibility with the federal government paying a high share of the cost.
Following the November 2016 U.S. elections, uncertainty continues to exist about the future of federal subsidies and of insurance coverage expansion; the current administration and congressional leaders continue to express interest in repealing these PPACA provisions and replacing them with alternatives that may be less costly and provide state Medicaid programs and private health plans more flexibility. The recent U.S. tax reform legislation enacted by Congress and signed into law by President Trump, The Tax Cuts and Jobs Act of 2017, repealed the requirement that individuals maintain health insurance coverage or face a penalty (known as the “individual mandate”). The removal of this provision, coupled with the threat of the repeal of other PPACA provisions, threaten the stability of the insurance marketplace and may have consequences for the coverage and accessibility of prescription drugs.
Healthcare Fraud and Abuse Laws
We are subject to various federal, state and local laws targeting fraud and abuse in the healthcare industry, violations of which can lead to civil and criminal penalties, including fines, imprisonment and exclusion from participation in federal healthcare programs. These laws are potentially applicable to us as both a manufacturer and a supplier of products reimbursed by federal healthcare programs, and they also apply to hospitals, physicians and other potential purchasers of our products.
The federal Anti-Kickback Statute (42 U.S.C. § 1320a-7b(b)) prohibits persons from knowingly and willfully soliciting, receiving, offering or providing remuneration, directly or indirectly, to induce either the referral of an individual, or the furnishing, recommending, or arranging for a good or service, for which payment may be made under a federal healthcare program such as the Medicare and Medicaid programs. Remuneration is not defined in the federal Anti-Kickback Statute and has been broadly interpreted to include anything of value, including for example, gifts, discounts, coupons, the furnishing of supplies or equipment, credit arrangements, payments of cash, waivers of payments, ownership interests and providing anything at less than its fair market value. Under the federal Anti-Kickback Statute and the applicable criminal healthcare fraud statutes contained within 42 U.S.C. § 1320a-7b, a person or entity need not have actual knowledge of this statute or specific intent to violate it in order to have committed a violation. In addition, the government may assert that a claim, including items or services resulting from a violation of 42 U.S.C. § 1320a-7b, constitutes a false or fraudulent claim for purposes of the civil False Claims Act (discussed below) or the civil monetary penalties statute, which imposes fines against any person who is determined to have presented or caused to be presented claims to a federal healthcare program that the person knows or should know is for an item or service that was not provided as claimed or is false or fraudulent. The federal Anti-Kickback Statute and implementing regulations provide for certain exceptions for “safe harbors” for certain discounting, rebating or personal services arrangements, among other things. However, the lack of uniform court interpretation of the Anti-Kickback Statute makes compliance with the law difficult. Violations of the federal Anti-Kickback Statute can result in significant criminal fines, exclusion from participation in Medicare and Medicaid and follow-on civil litigation, among other things, for both entities and individuals.
Other federal healthcare fraud-related laws also provide criminal liability for violations. The Criminal Healthcare Fraud statute, 18 U.S.C. § 1347 prohibits knowingly and willfully executing a scheme to defraud any healthcare benefit program, including private third-party payers. Federal criminal law at 18 U.S.C. § 1001, among other sections, prohibits knowingly and willfully falsifying, concealing or covering up a material fact or making any materially false, fictitious or fraudulent statement in connection with the delivery of or payment for healthcare benefits, items or services. See Item 1A. Risk Factors - “We are subject to various regulations pertaining to the marketing of our products and services” in our Annual Report on Form 10-K for the year ended December 31, 2017 for further discussion on the Anti-Kickback Statute.

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The civil False Claims Act and similar state laws impose liability on any person or entity who, among other things, knowingly presents, or causes to be presented, a false or fraudulent claim for payment by a federal healthcare program. The qui tam provisions of the False Claims Act and similar state laws allow a private individual to bring civil actions on behalf of the federal or state government and to share in any monetary recovery. The Federal Physician Payments Sunshine Act and similar state laws impose reporting requirements for various types of payments to physicians and teaching hospitals. Failure to comply with required reporting requirements under these laws could subject manufacturers and others to substantial civil money penalties. In addition, government entities and private litigants have asserted claims under state consumer protection statutes against pharmaceutical and medical device companies for alleged false or misleading statements in connection with the marketing, promotion and/or sale of pharmaceutical and medical device products, including state investigations of the Company regarding the Company’s vaginal mesh devices and investigations and litigation by certain government entities regarding the Company’s marketing of opioid products.
International Regulations
Through our international operations, the Company is subject to laws and regulations that differ from those under which the Company operates in the U.S. In most cases, non-U.S. regulatory agencies evaluate and monitor the safety, efficacy and quality of pharmaceutical products, govern the approval of clinical trials and product registrations and regulate pricing and reimbursement. Certain international markets have differing product preferences and requirements and operate in an environment of government-mandated, cost-containment programs, including price controls. Certain governments have placed restrictions on physician prescription levels and patient reimbursements, emphasized greater use of generic drugs and enacted across-the-board price cuts as methods of cost control.
Whether or not FDA approval has been obtained for a product, approval of the product by comparable regulatory authorities of other governments must be obtained prior to marketing the product in those jurisdictions. The approval process may be more or less rigorous than the U.S. process and the time required for approval may be longer or shorter than is required in the U.S.
Service Agreements
We contract with various third parties to provide certain critical services including manufacturing, supply, warehousing, distribution, customer service, certain financial functions, certain research and development activities and medical affairs.
For a complete description of our significant manufacturing, supply and other service agreements, see Note 11. License and Collaboration Agreements and Note 14. Commitments and Contingencies in the Consolidated Financial Statements, included in Part IV, Item 15 of this report "Exhibits, Financial Statement Schedules".
We primarily purchase our raw materials for the production and development of our products in the open market from third party suppliers. However, some raw materials are only available from one source. We attempt, when possible, to mitigate our raw material supply risks through inventory management and alternative sourcing strategies. We are required to identify the suppliers of all raw materials for our products in the drug applications that we file with the FDA. If the raw materials from an approved supplier for a particular product become unavailable, we would be required to qualify a substitute supplier with the FDA, which would likely interrupt manufacturing of the affected product. See Item 1A. Risk Factors in our Annual Report on Form 10-K for the year ended December 31, 2017 for further discussion on the risks associated with the sourcing of our raw materials.
License & Collaboration Agreements and Acquisitions
We continue to seek to enhance our product line and develop a balanced portfolio of differentiated products through product acquisitions and in-licensing, or acquiring licenses to products, compounds and technologies from third parties. The Company enters into strategic alliances and collaborative arrangements with third parties, which give the Company rights to develop, manufacture, market and/or sell pharmaceutical products, the rights to which are primarily owned by these third parties. These alliances and arrangements can take many forms, including licensing arrangements, co-development and co-marketing agreements, co-promotion arrangements, research collaborations and joint ventures. Such alliances and arrangements enable us to share the risk of incurring all research and development expenses that do not lead to revenue-generating products; however, because profits from alliance products are shared with the counter-parties to the collaborative arrangement, the gross margins on alliance products are generally lower, sometimes substantially so, than the gross margins that could be achieved had the Company not opted for a development partner. For a discussion of material agreements and acquisitions, including agreement terms and status, see our disclosures in Note 5. Acquisitions and Note 11. License and Collaboration Agreements in the Consolidated Financial Statements, included in Part IV, Item 15 of this report "Exhibits, Financial Statement Schedules".

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Environmental Matters
Our operations are subject to substantial federal, state and local environmental laws and regulations concerning, among other matters, the generation, handling, storage, transportation, treatment and disposal of, and exposure to, hazardous substances. Violation of these laws and regulations, which frequently change, can lead to substantial fines and penalties. Many of our operations require environmental permits and controls to prevent and limit pollution of the environment. We believe that our facilities and the facilities of our third party service providers are in substantial compliance with applicable environmental laws and regulations and we do not believe that future compliance will have a material adverse effect on our financial condition or results of operations.
Employees
As of February 20, 2018, we have 3,039 employees, of which 484 are engaged in research and development and regulatory work, 398 in sales and marketing, 1,087 in manufacturing, 558 in quality assurance and 512 in general and administrative capacities. Our employees are generally not represented by unions, with the exception of certain production personnel in our Rochester, Michigan manufacturing facility. We believe that our relations with our employees are good.
Executive Officers of the Registrant
The following table sets forth information as of February 27, 2018 regarding each of our current executive officers:
Name
 
Age
 
Position and Offices
Paul V. Campanelli
 
55
 
President and Chief Executive Officer and Director
Blaise Coleman
 
44
 
Executive Vice President, Chief Financial Officer
Terrance J. Coughlin
 
52
 
Executive Vice President, Chief Operating Officer
Tony Pera
 
60
 
President, Par Pharmaceutical
Matthew J. Maletta
 
46
 
Executive Vice President, Chief Legal Officer
Patrick Barry
 
50
 
Executive Vice President and Chief Commercial Officer
Biographies
Our executive officers are briefly described below:
PAUL V. CAMPANELLI, 55, was appointed President, Chief Executive Officer and a Director effective September 23, 2016. Mr. Campanelli joined Endo in 2015 as the President of Par Pharmaceutical, leading Endo’s fully integrated U.S. generics business, following Endo’s acquisition of Par Pharmaceutical. Prior to joining Endo, he had served as Chief Executive Officer of Par Pharmaceutical Companies, Inc. following the company’s September 2012 acquisition by TPG. Prior to the TPG acquisition, Mr. Campanelli served as Chief Operating Officer and President of Par Pharmaceutical, Inc. from 2011 to 2012. At Par Pharmaceutical Inc., Mr. Campanelli had also served as Senior Vice President, Business Development & Licensing; Executive Vice President and President of Par Pharmaceutical, Inc.; and was named a Corporate Officer by its board of directors. He also served on the board of directors of Sky Growth Holdings Corporation from 2012 until 2015. Mr. Campanelli joined Par Pharmaceutical Companies Inc. in 2001. Prior to joining Par Pharmaceutical Companies Inc., Mr. Campanelli served as Vice President, Business Development at Dr. Reddy’s Laboratories Ltd. where he was employed from 1992 to 2001. Mr. Campanelli earned his Bachelor of Science degree from Springfield College.
BLAISE COLEMAN, 44, was appointed Executive Vice President and Chief Financial Officer effective December 19, 2016. Mr. Coleman was serving as Endo's Interim Chief Financial Officer since November 22, 2016. He joined Endo in January 2015 as Vice President of Corporate Financial Planning & Analysis, and was then promoted to Senior Vice President, Global Finance Operations in November 2015. Prior to joining Endo, Mr. Coleman held a number of finance leadership roles with AstraZeneca, a global biopharmaceutical company, most recently as the Chief Financial Officer of the AstraZeneca/Bristol-Myers Squibb US Diabetes Alliance from January 2013 until January 2015. Prior to that, he was the Head of Finance for the AstraZeneca Global Medicines Development organization based in Mölndal, Sweden from September 2011 to January 2013. Mr. Coleman joined AstraZeneca as Senior Director Commercial Finance for the US Cardiovascular Business in November 2007. He joined AstraZeneca from Centocor, a wholly owned subsidiary of Johnson & Johnson, where he held positions in both the Licenses & Acquisitions and Commercial Finance organizations. Mr. Coleman’s move to Centocor in early 2003 followed 7 years’ experience with the global public accounting firm, PricewaterhouseCoopers LLP. Mr. Coleman is a Certified Public Accountant; he holds a Bachelor of Science degree in accounting from Widener University and an M.B.A. from the Fuqua School of Business at Duke University.

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TERRANCE J. COUGHLIN, 52, was appointed Executive Vice President and Chief Operating Officer effective November 1, 2016. In this role, Mr. Coughlin has responsibility for Manufacturing and Technical Operations and R&D across the enterprise. Most recently, Mr. Coughlin served as Vice President, Operations of Par Pharmaceutical Companies, Inc., a subsidiary of Endo. Prior to Endo’s acquisition of Par in September 2015, Mr. Coughlin was the Chief Operating Officer of Par Pharmaceutical Companies, Inc. Prior to joining Par, Mr. Coughlin held a number of leadership roles with Glenmark Generics, Inc. USA/Glenmark Generics Limited latterly as the President and Chief Executive Officer of Glenmark Generics, Inc. USA/Glenmark Generics Limited. Prior to this, Mr. Coughlin had the overall responsibility for Glenmark’s North American, Western European and Eastern European generics businesses, as well as its global active pharmaceutical ingredient business and generics operations in India. Prior to joining Glenmark, Mr. Coughlin served as Senior Vice President at Dr. Reddy’s Laboratories, Inc. Mr. Coughlin began his career in 1988 with Wyckoff Chemical Company, Inc. Mr. Coughlin earned a B.S. in chemistry from Central Michigan University.
TONY PERA, 60, was named President, Par Pharmaceutical effective November 1, 2016. In this role, Mr. Pera leads Endo’s U.S. generics business including responsibility and oversight of Par Generic and Par Sterile sales teams, as well as Par’s marketing & business analytics group. Most recently, Mr. Pera served as Chief Commercial Officer of Par Pharmaceutical. He joined Par in February 2014 as part of Par’s acquisition of JHP Pharmaceutical, where he held a similar position. As Chief Commercial Officer, Mr. Pera was responsible for all sales, marketing, pricing and customer operations functions for Par. Prior to JHP and Par, Mr. Pera was Senior Vice President of Supply Chain Management for AmerisourceBergen (ABC), a major U.S. pharmaceutical wholesaler, for approximately five years. Prior to ABC, he held numerous senior leadership positions with generic drug companies including APP (now Fresenius Kabi), Bedford Laboratories and LyphoMed. Mr. Pera started his career as a sales representative for the parenteral products division of Baxter. Mr. Pera holds a B.S. in Business Administration from the University of Illinois in Champaign and an M.B.A. from DePaul University.
MATTHEW J. MALETTA, 46, was appointed Executive Vice President, Chief Legal Officer effective May 4, 2015. Prior to joining Endo, Mr. Maletta served as Vice President, Associate General Counsel and Corporate Secretary of Allergan, Inc. In this position, he served as an advisor to the CEO and Board of Directors and supervised several large M&A transactions and takeover defense activities, including Allergan’s acquisition of Inamed and Actavis’ acquisition of Allergan. Mr. Maletta first joined Allergan in 2002 as Corporate Counsel and Assistant Secretary and during his tenure, held various roles of increased responsibility. Prior to joining Allergan, Mr. Maletta was in private practice, focusing on general corporate matters, finance, governance, securities and transactions. He holds a B.A. degree in political science from the University of Minnesota, summa cum laude, and a J.D. degree, cum laude, from the University of Minnesota Law School.
PATRICK BARRY, 50, was appointed Executive Vice President and Chief Commercial Officer, U.S. Branded Business effective February 26, 2018. In this role, he has responsibility for all commercial activities for U.S. Branded - Specialty & Established Pharmaceuticals, including strategy, new product planning, marketing, sales as well as managed care and patient access responsibilities. Mr. Barry joined Endo in December 2016 as Senior Vice President, U.S. Branded Pharmaceuticals. Prior to joining Endo, Mr. Barry worked at Sanofi S.A. from April 1992 until December 2016, holding roles of increasing responsibility in areas such as Sales Leadership, Commercial Operations, Marketing, Launch Planning and Training and Leadership Development. Most recently, he served at Sanofi S.A. as its General Manager and Head of North America General Medicines starting in September 2015 and as Vice President and Head of U.S. Specialty from April 2014 until August 2015. During this time, Mr. Barry oversaw three complex and diverse businesses with responsibility for leading sales and marketing activities for branded and generic products across the U.S. and Canada. He has a diverse therapeutic experience including aesthetics and dermatology, oncology, urology, orthopedics and medical device and surgical experience. He has an M.B.A. from Cornell University, Johnson School of Management and a B.A. in Public Relations and Marketing from McKendree University.
We have employment agreements with each of our executive officers.
Available Information
Our internet address is www.endo.com. The contents of our website are not part of this Current Report on Form 8-K, and our internet address is included in this document as an inactive textual reference only. We make our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and all amendments to those reports available free of charge on our website as soon as reasonably practicable after we file such reports with, or furnish such reports to, the Securities and Exchange Commission.
You may also read and copy any materials we file with the SEC at the SEC’s Public Reference Room that is located at 100 F Street, N.E., Room 1580, Washington, DC 20549. Information about the operation of the Public Reference Room can be obtained by calling the SEC at 1-800-SEC-0330 or 1-202-551-8090. You can also access our filings through the SEC’s internet site: www.sec.gov (intended to be an inactive textual reference only).
You may also access copies of the Company’s filings with the Canadian Securities Administrators on SEDAR through their internet site: www.sedar.com (intended to be an inactive textual reference only).
PART II

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Item 7.        Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following Management’s Discussion and Analysis of Financial Condition and Results of Operations describes the principal factors affecting the results of operations, liquidity and capital resources and critical accounting estimates of Endo International plc. This discussion should be read in conjunction with our audited Consolidated Financial Statements and related notes thereto. Except for the historical information contained in this Report, including the following discussion, this Report contains forward-looking statements that involve risks and uncertainties. See the "Forward-Looking Statements" section above.
Unless otherwise indicated or required by the context, references throughout to “Endo,” the “Company,” “we,” “our” or “us” refer to financial information and transactions of Endo International plc and its subsidiaries.
The assets and liabilities of Litha, which was sold on July 3, 2017, are classified as held for sale in the Consolidated Balance Sheet as of December 31, 2016. The operating results of AMS are reported as Discontinued operations, net of tax in the Consolidated Statements of Operations for all periods presented. For additional information, see Note 3. Discontinued Operations and Assets and Liabilities Held for Sale in the Consolidated Financial Statements, included in Part IV, Item 15 of this report "Exhibits, Financial Statement Schedules".
EXECUTIVE SUMMARY
This executive summary provides highlights from the results of operations that follow:
Total revenues in 2017 decreased 14% from 2016 to $3,468.9 million as strong performance from our U.S. Branded - Sterile Injectables segment and our U.S. Branded - Specialty & Established Pharmaceuticals segment’s Specialty Products portfolio was more than offset by declines in our U.S. Generic Pharmaceuticals segment and our U.S. Branded - Specialty & Established Pharmaceuticals segment’s Established Products portfolio.
Gross margin percentage in 2017 increased to 35.8% from 34.3% in 2016. This increase was primarily attributable to a shift in product mix to higher margin products, the favorable margin impact from our manufacturing network restructuring initiatives, including product rationalization efforts, and decreased amortization expense.
Asset impairment charges in 2017 decreased to $1,154.4 million from $3,781.2 million in 2016.
During the year ended December 31, 2017, we recognized an income tax benefit of $250.3 million on $1,483.0 million of loss from continuing operations before income tax, compared to a tax benefit of $700.1 million on $3,923.9 million of loss from continuing operations before income tax during 2016. This reduction was primarily attributable to a benefit arising from a 2016 legal entity restructuring as part of our continuing integration of our acquired businesses that did not reoccur in 2017. This 2016 restructuring resulted in the realization of a $636.1 million tax benefit arising from an outside basis difference that was reduced by a $394.6 million charge for the establishment of a valuation allowance on a portion of the Company’s U.S. deferred tax assets.
Loss from continuing operations in 2017 was $1,232.7 million, compared to $3,223.8 million in 2016.
In January 2017, we announced a restructuring initiative as part of our ongoing organizational review intended to further integrate, streamline and optimize our operations by aligning certain corporate and R&D functions with our recently restructured U.S. generic pharmaceuticals and U.S. branded pharmaceuticals business units in order to create efficiencies and cost savings (the January 2017 Restructuring Initiative).
In March 2017, we announced that the FDA’s Drug Safety and Risk Management and Anesthetic and Analgesic Drug Products Advisory Committees voted that the benefits of reformulated OPANA® ER (oxymorphone hydrochloride extended release) no longer outweigh its risks. In June 2017, we became aware of the FDA’s request that we voluntarily withdraw OPANA® ER from the market, and in July 2017, after careful consideration and consultation with the FDA, we decided to voluntarily remove OPANA® ER from the market. During the second quarter of 2017, we began to work with the FDA to coordinate an orderly withdrawal of the product from the market. By September 1, 2017, we ceased shipments of OPANA® ER to customers and we expect the New Drug Application will be withdrawn in the coming months.
In April 2017, we issued $300.0 million in aggregate principal amount of 5.875% senior secured notes due 2024 and entered into a new senior secured credit agreement (the 2017 Credit Agreement) among the Company and certain of its subsidiaries, the lenders party thereto from time to time and JPMorgan Chase, Bank, N.A., as administrative agent, issuing bank and swingline lender, which provided for (i) a five-year senior secured revolving credit facility in a principal amount of $1,000.0 million (the 2017 Revolving Credit Facility) and (ii) a seven-year senior secured term loan facility in a principal amount of $3,415.0 million (the 2017 Term Loan Facility). We used the net proceeds from these instruments and cash on hand to repay all of our outstanding loans under our prior credit facilities and to pay related fees and expenses. Any proceeds from the 2017 Revolving Credit Facility are expected to be used for working capital, capital expenditures and general corporate purposes.

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Beginning in the second quarter of 2017, we aggressively pursued a settlement strategy in connection with mesh litigation. Consequently, we increased our mesh liability accrual by $775.5 million in the second quarter of 2017, which is expected to cover approximately 22,000 known U.S. mesh claims, subject to a claims validation process for all resolved claims, as well as all of the international mesh liability claims of which we were aware and other mesh-related matters. Although we believe we appropriately estimated the probable total amount of loss associated with mesh-related matters, it is reasonably possible that further claims may be filed or asserted or adjustments to our liability accrual may be required. This could have a material adverse effect on our business, financial condition, results of operations and cash flows. Charges related to mesh liability and associated legal fees and other expenses for all periods presented are reported in Discontinued operations, net of tax in our Consolidated Statements of Operations. See Note 14. Commitments and Contingencies in the Consolidated Financial Statements, included in Part IV, Item 15 of this report "Exhibits, Financial Statement Schedules" for further information.
As part of previously announced initiatives, we divested both Litha, our South African business, and Somar, our Latin American business in July 2017 and October 2017, respectively.
In July 2017, we announced that we will be ceasing operations and closing our manufacturing and distribution facilities in Huntsville, Alabama (the 2017 U.S. Generic Pharmaceuticals Restructuring Initiative).
In January 2018, the Company initiated a restructuring initiative that included a reorganization of its generic research and development network, a further simplification of the Company’s manufacturing networks and a company-wide unification of certain corporate functions (the January 2018 Restructuring Initiative).
CRITICAL ACCOUNTING ESTIMATES
The preparation of our Consolidated Financial Statements in conformity with accounting principles generally accepted in the U.S. (U.S. GAAP) requires us to make estimates and assumptions that affect the amounts and disclosures in our Consolidated Financial Statements, including the notes thereto, and elsewhere in this report. For example, we are required to make significant estimates and assumptions related to revenue recognition, including sales deductions, financial instruments, long-lived assets, goodwill, other intangibles, income taxes, contingencies and share-based compensation, among others. Some of these estimates can be subjective and complex. Although we believe that our estimates and assumptions are reasonable, there may be other reasonable estimates or assumptions that differ significantly from ours. Further, our estimates and assumptions are based upon information available at the time they were made. Actual results may differ significantly from our estimates.
Accordingly, in order to understand our Consolidated Financial Statements, it is important to understand our critical accounting estimates. We consider an accounting estimate to be critical if: (i) the accounting estimate requires us to make assumptions about matters that were highly uncertain at the time the accounting estimate was made and (ii) changes in the estimate that are reasonably likely to occur from period to period, or use of different estimates that we reasonably could have used in the current period, would have a material impact on our financial condition, results of operations or cash flows. Our most critical accounting estimates are described below:
Revenue recognition
Our revenue consists almost entirely of sales of our pharmaceutical products to customers, whereby we ship product to a customer pursuant to a purchase order, which typically corresponds and/or makes reference to a master agreement with that customer, and invoice the customer upon shipment. For sales such as these, we recognize revenue when title and risk of loss has passed to the customer, which is typically upon delivery to the customer, when estimated provisions for revenue reserves are reasonably determinable and when collectability is reasonably confirmed. The amount of revenue we recognize is equal to the selling price, adjusted for our estimates of a number of significant sales deductions, which are further described below.
Revenue from the launch of a new or significantly unique product may be deferred until such time that the product has achieved market acceptance. For these products, revenue is typically recognized based on dispensed prescription data and other information obtained prior to and during the period following launch.
We believe that speculative buying of product, particularly in anticipation of possible price increases, has been the historical practice of certain of our customers. The timing of purchasing decisions made by wholesaler and large retail chain customers can materially affect the level of our sales in any particular period. Accordingly, our sales may not correlate to the number of prescriptions written for our products based on external third-party data.
We have entered into DSAs with certain of our significant wholesaler customers that obligate the wholesalers, in exchange for fees paid by us, to: (i) manage the variability of their purchases and inventory levels within specified limits based on product demand and (ii) provide us with specific services, including the provision of periodic retail demand information and current inventory levels for our pharmaceutical products held at their warehouse locations.

20


Sales deductions
When we recognize revenue from the sale of our products, we simultaneously record an adjustment to revenue for estimated chargebacks, rebates, sales incentives and allowances, DSA and other fees for services, returns and allowances. These sales deductions, as described in greater detail below, are estimated based on historical experience, estimated future trends, estimated customer inventory levels, current contract sales terms with our direct and indirect customers and other competitive factors. We subsequently review our provisions for our various sales deductions based on new or revised information that becomes available to us and make revisions to our estimates if and when appropriate.
Where available, we have relied on information received from our wholesaler customers about the quantities of inventory held, including the information received pursuant to DSAs, which we have not independently verified. For other customers, we have estimated inventory held based on buying patterns. In addition, we have evaluated market conditions for products primarily through the analysis of wholesaler and other third party sell-through, as well as internally-generated information, to assess factors that could impact expected product demand at December 31, 2017. We believe that the estimated level of inventory held by our customers is within a reasonable range as compared to both: (i) historical amounts and (ii) expected demand for each respective product at December 31, 2017.
If the assumptions we use to calculate our provisions for sales deductions do not appropriately reflect future activity, our financial position, results of operations and cash flows could be materially impacted. The following table presents the activity and ending balances, excluding Discontinued operations, for our product sales provisions for the years ended December 31, 2017, 2016 and 2015 (in thousands):
 
Returns and Allowances
 
Rebates
 
Chargebacks
 
Other Sales Deductions
 
Total
Balance, January 1, 2015
$
174,940

 
$
497,362

 
$
217,402

 
$
25,380

 
$
915,084

Additions related to acquisitions
129,281

 
184,290

 
117,236

 
27,970

 
458,777

Current year provision
146,615

 
1,604,062

 
2,272,896

 
148,090

 
4,171,663

Prior year provision
4,070

 
(12,604
)
 
(7,011
)
 

 
(15,545
)
Payments or credits
(97,974
)
 
(1,449,953
)
 
(2,221,307
)
 
(154,638
)
 
(3,923,872
)
Balance, December 31, 2015
$
356,932

 
$
823,157

 
$
379,216

 
$
46,802

 
$
1,606,107

Current year provision
122,414

 
1,562,340

 
3,125,109

 
332,721

 
5,142,584

Prior year provision
(7,199
)
 
(18,705
)
 
4,707

 
311

 
(20,886
)
Payments or credits
(139,396
)
 
(1,878,602
)
 
(3,162,423
)
 
(312,829
)
 
(5,493,250
)
Balance, December 31, 2016
$
332,751

 
$
488,190

 
$
346,609

 
$
67,005

 
$
1,234,555

Current year provision
108,544

 
1,315,012

 
2,659,421

 
242,343

 
4,325,320

Prior year provision
(2,028
)
 
(21,442
)
 
1,224

 
(269
)
 
(22,515
)
Payments or credits
(147,100
)
 
(1,427,073
)
 
(2,750,546
)
 
(268,731
)
 
(4,593,450
)
Decreases due to business dispositions
(1,133
)
 

 

 

 
(1,133
)
Balance, December 31, 2017
$
291,034

 
$
354,687

 
$
256,708

 
$
40,348

 
$
942,777

Returns and Allowances
Consistent with industry practice, we maintain a return policy that allows our customers to return product within a specified period of time both subsequent to and, in certain cases, prior to the product’s expiration date. Our return policy generally allows customers to receive credit for expired products within six months prior to expiration and within one year after expiration. Our provision for returns and allowances consists of our estimates for future product returns, pricing adjustments and delivery errors. The primary factors we consider in estimating our potential product returns include:
the shelf life or expiration date of each product;
historical levels of expired product returns;
external data with respect to inventory levels in the wholesale distribution channel;
external data with respect to prescription demand for our products; and
the estimated returns liability to be processed by year of sale based on analysis of lot information related to actual historical returns.

21


In determining our estimates for returns and allowances, we are required to make certain assumptions regarding the timing of the introduction of new products and the potential of these products to capture market share. In addition, we make certain assumptions with respect to the extent and pattern of decline associated with generic competition. To make these assessments, we utilize market data for similar products as analogs for our estimations. We use our best judgment to formulate these assumptions based on past experience and information available to us at the time. We continually reassess and make the appropriate changes to our estimates and assumptions as new information becomes available to us.
Our estimate for returns and allowances may be impacted by a number of factors, but the principal factor relates to the level of inventory in the distribution channel. When we are aware of an increase in the level of inventory of our products in the distribution channel, we consider the reasons for the increase to determine whether we believe the increase is temporary or other-than-temporary. Increases in inventory levels assessed as temporary will not result in an adjustment to our provision for returns and allowances. Some of the factors that may be an indication that an increase in inventory levels will be temporary include:
recently implemented or announced price increases for our products; and
new product launches or expanded indications for our existing products.
Conversely, other-than-temporary increases in inventory levels may be an indication that future product returns could be higher than originally anticipated and, accordingly, we may need to adjust our provision for returns and allowances. Some of the factors that may be an indication that an increase in inventory levels will be other-than-temporary include:
declining sales trends based on prescription demand;
recent regulatory approvals to shorten the shelf life of our products, which could result in a period of higher returns related to older product still in the distribution channel;
introduction of new product or generic competition;
increasing price competition from generic competitors; and
changes to the National Drug Codes (NDCs) of our products, which could result in a period of higher returns related to product with the old NDC, as our customers generally permit only one NDC per product for identification and tracking within their inventory systems.
Rebates
Our provision for rebates, sales incentives and other allowances can generally be categorized into the following four types:
direct rebates;
indirect rebates;
governmental rebates, including those for Medicaid, Medicare and TRICARE, among others; and
managed-care rebates.
We establish contracts with wholesalers, chain stores and indirect customers that provide for rebates, sales incentives, DSA fees and other allowances. Some customers receive rebates upon attaining established sales volumes. Direct rebates are generally rebates paid to direct purchasing customers based on a percentage applied to a direct customer’s purchases from us, including fees paid to wholesalers under our DSAs, as described above. Indirect rebates are rebates paid to indirect customers which have purchased our products from a wholesaler under a contract with us.
We are subject to rebates on sales made under governmental and managed-care pricing programs based on relevant statutes with respect to governmental pricing programs and contractual sales terms with respect to managed-care providers and group purchasing organizations. For example, we are required to provide a 50% discount on our brand-name drugs to patients who fall within the Medicare Part D coverage gap, also referred to as the donut hole.
We participate in various federal and state government-managed programs whereby discounts and rebates are provided to participating government entities. For example, Medicaid rebates are amounts owed based upon contractual agreements or legal requirements with public sector (Medicaid) benefit providers after the final dispensing of the product by a pharmacy to a benefit plan participant. Medicaid reserves are based on expected payments, which are driven by patient usage, contract performance and field inventory that will be subject to a Medicaid rebate. Medicaid rebates are typically billed up to 180 days after the product is shipped, but can be as much as 270 days after the quarter in which the product is dispensed to the Medicaid participant. In addition to the estimates mentioned above, our calculation also requires other estimates, such as estimates of sales mix, to determine which sales are subject to rebates and the amount of such rebates. Periodically, we adjust the Medicaid rebate provision based on actual claims paid. Due to the delay in billing, adjustments to actual claims paid may incorporate revisions of this provision for several periods. Because Medicaid pricing programs involve particularly difficult interpretations of complex statutes and regulatory guidance, our estimates could differ from actual experience.

22


In determining our estimates for rebates, we consider the terms of our contracts, relevant statutes, historical relationships of rebates to revenues, past payment experience, estimated inventory levels of our customers and estimated future trends. Our provisions for rebates include estimates for both unbilled claims for end-customer sales that have already occurred and future claims that will be made when inventory in the distribution channel is sold through to end-customer plan participants. Changes in the level of utilization of our products through private or public benefit plans and group purchasing organizations will affect the amount of rebates that we owe.
Chargebacks
We market and sell products to both: (i) direct customers including wholesalers, distributors, warehousing pharmacy chains and other direct purchasing groups and (ii) indirect customers including independent pharmacies, non-warehousing chains, managed-care organizations, group purchasing organizations and government entities. We enter into agreements with certain of our indirect customers to establish contract pricing for certain products. These indirect customers then independently select a wholesaler from which to purchase the products at these contracted prices. Alternatively, we may pre-authorize wholesalers to offer specified contract pricing to other indirect customers. Under either arrangement, we provide credit to the wholesaler for any difference between the contracted price with the indirect customer and the wholesaler’s invoice price. Such credit is called a chargeback.
Our provision for chargebacks consists of our estimates for the credits described above. The primary factors we consider in developing and evaluating our provision for chargebacks include:
the average historical chargeback credits;
estimated future sales trends; and
an estimate of the inventory held by our wholesalers, based on internal analysis of a wholesaler’s historical purchases and contract sales.
Other sales deductions
We offer certain of our customers prompt pay cash discounts. Provisions for prompt pay discounts are estimated and recorded at the time of sale. We estimate provisions for cash discounts based on contractual sales terms with customers, an analysis of unpaid invoices and historical payment experience. Estimated cash discounts have historically been predictable and less subjective due to the limited number of assumptions involved, the consistency of historical experience and the fact that we generally settle these amounts within 30 to 60 days.
Shelf-stock adjustments are credits issued to our customers to reflect decreases in the selling prices of our products. These credits are customary in the industry and are intended to reduce a customer’s inventory cost to better reflect current market prices. The determination to grant a shelf-stock credit to a customer following a price decrease is at our discretion rather than contractually required. The primary factors we consider when deciding whether to record a reserve for a shelf-stock adjustment include:
the estimated number of competing products being launched as well as the expected launch date, which we determine based on market intelligence;
the estimated decline in the market price of our product, which we determine based on historical experience and customer input; and
the estimated levels of inventory held by our customers at the time of the anticipated decrease in market price, which we determine based upon historical experience and customer input.
Valuation of long-lived assets
As of December 31, 2017, our combined long-lived assets balance, including property, plant and equipment and finite-lived intangible assets, is approximately $4.5 billion.
Long-lived assets are assessed for impairment whenever events or changes in circumstances indicate the carrying amounts of the assets may not be recoverable. Recoverability of an asset that will continue to be used in our operations is measured by comparing the carrying amount of the asset to the forecasted undiscounted future cash flows related to the asset. In the event the carrying amount of the asset exceeds its undiscounted future cash flows and the carrying amount is not considered recoverable, impairment may exist. An impairment loss, if any, is measured as the excess of the asset’s carrying amount over its fair value, generally based on a discounted future cash flow method, independent appraisals or preliminary offers from prospective buyers. An impairment loss would be recognized in the Consolidated Statements of Operations in the period that the impairment occurs. As a result of the significance of our long-lived assets, any recognized impairment loss could have a material adverse impact on our financial position and results of operations.

23


Our reviews of long-lived assets during the three years ended December 31, 2017 resulted in certain impairment charges. The majority of these charges related to finite-lived intangible assets, which are described in Note 10. Goodwill and Other Intangibles in the Consolidated Financial Statements, included in Part IV, Item 15 of this report "Exhibits, Financial Statement Schedules". These impairment charges were generally based on fair value estimates determined using either discounted cash flow models or preliminary offers from prospective buyers. The discounted cash flow models include assumptions related to product revenue, growth rates and operating margin. These assumptions are based on management’s annual and ongoing budgeting, forecasting and planning processes and represent our best estimate of future product cash flows. These estimates are subject to the economic environment in which our segments operate, demand for our products and competitor actions. The use of different assumptions would have increased or decreased our estimated discounted future cash flows and the resulting estimated fair values of these assets, causing increases and/or decreases in the resulting asset impairment charges. The discount rates applied to these estimated cash flows ranged from 9.0% to 9.5% with respect to the long-lived assets impaired in 2017.
Events giving rise to impairment are an inherent risk in the pharmaceutical industry and cannot be predicted. Factors that we consider in deciding when to perform an impairment review include significant under-performance of a product line in relation to expectations, significant negative industry or economic trends and significant changes or planned changes in our use of the assets.
Our long-lived intangible assets, which consist of license rights and developed technology, are initially recorded at fair value upon acquisition. To the extent they are deemed to have finite lives, they are then amortized over their estimated useful lives using either the straight-line method or, in the case of certain developed technology assets, the economic benefit model. The values of these various assets are subject to continuing scientific, medical and marketplace uncertainty. Factors giving rise to our initial estimate of useful lives are subject to change. Significant changes to any of these factors may result in a reduction in the useful life of the asset and an acceleration of related amortization expense, which could cause our operating income, net income and net income per share to decrease. Amortization expense is not recorded on assets held for sale. Each category of long-lived intangible assets is described further below.
License Rights. Our license rights have useful lives ranging from 3 to 15 years, with a weighted average useful life of approximately 12 years. We determine amortization periods for licenses based on our assessment of various factors including the expected launch date of the product, the strength of the intellectual property protection of the product, contractual terms and various other competitive, developmental and regulatory issues.
Developed Technology. Our developed technology assets have useful lives ranging from 1 to 20 years, with a weighted average useful life of approximately 11 years. We determine amortization periods and method of amortization for developed technology assets based on our assessment of various factors impacting estimated useful lives and timing and extent of estimated cash flows of the acquired assets including the strength of the intellectual property protection of the product, contractual terms and various other competitive and regulatory issues.
Goodwill and indefinite-lived intangible assets
As of December 31, 2017, our combined goodwill and indefinite-lived intangible assets balance is approximately $4.8 billion.
We test goodwill and indefinite-lived intangible assets for impairment at least annually, but also perform tests whenever events or changes in circumstances indicate that the asset might be impaired. Our annual assessment is performed as of October 1st.
As further described in Note 2. Summary of Significant Accounting Policies of the Consolidated Financial Statements of Part IV, Item 15 of this report “Exhibits, Financial Statement Schedules”, effective January 1, 2017, we early adopted Accounting Standards Update (ASU) No. 2017-04 “Intangibles - Goodwill and Other (Topic 350): Simplifying the Accounting for Goodwill Impairment” (ASU 2017-04). Subsequent to adoption, we perform our goodwill impairment tests by comparing the fair value and carrying amount of each of our reporting units. Any goodwill impairment charge we recognize for a reporting unit is equal to the lesser of (i) the total goodwill allocated to that reporting unit and (ii) the amount by which that reporting unit’s carrying amount exceeds its fair value.
Similarly, we perform our indefinite-lived intangible asset impairment tests by comparing the fair value of each intangible asset with its carrying amount. If the carrying amount of an indefinite-lived intangible asset exceeds its fair value, an impairment loss is recognized in an amount equal to that excess.
The fair values of our reporting units and of identified indefinite-lived intangible assets are determined using an income approach that utilizes a discounted cash flow model, or, where appropriate, a market approach, or a combination thereof. The discounted cash flow models are dependent upon our estimates of future cash flows and other factors. Our estimates of future cash flows involve assumptions concerning (i) future operating performance, including future sales, long-term growth rates, operating margins, variations in the amount and timing of cash flows and the probability of achieving the estimated cash flows and (ii) future economic conditions, all which may differ from actual future cash flows.

24


Assumptions related to future operating performance are based on management’s annual and ongoing budgeting, forecasting and planning processes and represent our best estimate of the future results of operations across the Company as of a point in time. These estimates are subject to many assumptions, such as the economic environment in which our segments operate, demand for our products and competitor actions. Estimated future cash flows are discounted to present value using a market participant, weighted average cost of capital. The financial and credit market volatility directly impacts certain inputs and assumptions used to develop the weighted average cost of capital such as the risk-free interest rate, industry beta, debt interest rate and our market capital structure. These assumptions are based on significant inputs not observable in the market and thus represent Level 3 measurements within the fair value hierarchy. The use of different inputs and assumptions could increase or decrease our estimated discounted future cash flows, the resulting estimated fair values and the amounts of our related impairments, if any.
In order to assess the reasonableness of the calculated fair values of our reporting units, we also compare the sum of the reporting units’ fair values to Endo’s market capitalization and calculate an implied control premium (the excess sum of the reporting units’ fair values over the market capitalization) or an implied control discount (the excess sum of total invested capital over the sum of the reporting units’ fair values). The Company evaluates the implied control premium or discount by comparing it to control premiums or discounts of recent comparable market transactions, as applicable. If the control premium or discount is not reasonable in light of comparable recent transactions, or recent movements in the Company’s share price, we reevaluate the fair value estimates of the reporting units by adjusting discount rates and/or other assumptions. This re-evaluation could correlate to different implied fair values for certain or all of the Company’s reporting units.
On January 1, 2017, the Company had five reporting units: (1) Branded, (2) Generics, (3) Paladin, (4) Litha, which was eliminated effective July 3, 2017 upon the sale of Litha, and (5) Somar, which was eliminated effective October 25, 2017 upon the sale of Somar. As further discussed below, Endo performed interim goodwill tests for various reporting units during 2017. The critical accounting estimates used in connection with these tests are discussed below and a description of goodwill impairment charges is included in Note 10. Goodwill and Other Intangibles in the Consolidated Financial Statements, included in Part IV, Item 15 of this report "Exhibits, Financial Statement Schedules".
During the first six months of 2017, we initiated various interim goodwill tests for our Branded, Generics, Paladin and Somar reporting units. These tests resulted in goodwill impairment charges of $180.4 million, $82.6 million and $25.7 million for the Branded, Paladin and Somar reporting units, respectively, for the six months ended June 30, 2017. The interim test for the Generics reporting unit did not result in an impairment charge. The fair values of the Branded, Generics and Paladin reporting units were determined using an income approach with discount rates ranging from 9.0% to 10.0%. The fair value of the Somar reporting unit was determined using a market approach. For the Branded reporting unit interim test, a 50 basis point increase in the assumed discount rate utilized would have increased our goodwill impairment charge by approximately $100 million. For the Generics reporting unit interim test, a 50 basis point increase in the assumed discount rate utilized would not have changed the results of our analysis. For the Paladin reporting unit interim test, a 50 basis point increase in the assumed discount rate utilized would have increased our goodwill impairment charge by approximately $20 million. The Somar goodwill impairment charge represented the remaining carrying amount of goodwill.
Subsequent to these interim tests, Endo performed its annual goodwill and indefinite-lived intangible assets impairment test as of October 1, 2017. For the purpose of the 2017 annual test, the Company had four reporting units: (1) Branded, (2) Generics, (3) Paladin and (4) Somar, which was eliminated effective October 25, 2017 upon the sale of Somar. We did not record any goodwill impairment charges as a result of the annual tests. The fair values of our Branded, Generics and Paladin reporting units and associated indefinite-lived intangible assets were determined using an income approach with discount rates ranging from 9.5% to 12.5%, depending on the overall risk associated with the particular assets and other market factors. The fair values of the Somar reporting unit and associated other intangible assets were determined using a market approach. We believe the discount rates and other inputs and assumptions are consistent with those that a market participant would use. An increase of 50 basis points to our assumed discount rates used in testing any of these reporting units would not have changed the results of our analyses.

25


Income taxes
Our income tax expense, deferred tax assets and liabilities, income tax payable and reserves for unrecognized tax benefits reflect our best assessment of estimated current and future taxes to be paid. We are subject to income taxes in the U.S. and numerous other foreign jurisdictions in which we operate. Significant judgments and estimates are required in determining the consolidated income tax expense or benefit for financial statement purposes. Deferred income taxes arise from temporary differences, which result in future taxable or deductible amounts, between the tax basis of assets and liabilities and the corresponding amounts reported in our Consolidated Financial Statements. In assessing the ability to realize deferred tax assets, we consider, when appropriate, future taxable income by tax jurisdiction and tax planning strategies. Where appropriate, we record a valuation allowance to reduce our deferred tax assets to equal an amount that is more likely than not to be realized. In projecting future taxable income, we begin with historical results adjusted for the results of discontinued operations and incorporate assumptions about the amount of future earnings within a specific jurisdiction’s pretax operating income adjusted for material changes including in business operations. The assumptions about future taxable income require significant judgment and, while these assumptions rely heavily on estimates, such estimates are consistent with the plans we are using to manage the underlying businesses.
Future changes in tax laws and rates could also affect recorded deferred tax assets and liabilities, including further administrative or regulatory guidance related to the TCJA. As further discussed in Note 19. Income Taxes in the Consolidated Financial Statements, included in Part IV, Item 15 of this report "Exhibits, Financial Statement Schedules", our estimate of the impact of the TCJA has been recorded on a provisional basis based on currently available information and interpretations of the TCJA. Any adjustments to this estimate will be recorded as an income tax expense or benefit in the period the adjustment is determined.
The calculation of our tax liabilities often involves dealing with uncertainties in the application of complex tax laws and regulations in a multitude of jurisdictions across our global operations. A benefit from an uncertain tax position may be recognized when it is more likely than not that the position will be sustained on the basis of the technical merits upon examination, including resolutions of any related appeals or litigation processes. We first record unrecognized tax benefits as liabilities and then adjust these liabilities when our judgment changes as a result of the evaluation of new information not previously available at the time of establishing the liability. Because of the complexity of some of these uncertainties, the ultimate resolution may result in a payment, potentially including interest and penalties, that is materially different from our current estimate of the unrecognized tax benefit liabilities. These differences will be reflected as increases or decreases to income tax expense in the period in which new information becomes available. We classify interest and penalties arising from uncertain tax positions as a component of tax expense.
We make an evaluation at the end of each reporting period as to whether or not some or all of the undistributed earnings of our subsidiaries are indefinitely reinvested. While we may have concluded in the past that some of such undistributed earnings are indefinitely reinvested, facts and circumstances may change in the future. Changes in facts and circumstances may include a change in the estimated capital needs of our subsidiaries, or a change in our corporate liquidity requirements. Such changes could result in our management determining that some or all of such undistributed earnings are no longer indefinitely reinvested. In that event, we would be required to adjust our income tax provision in the period we determined that the earnings will no longer be indefinitely reinvested outside the relevant tax jurisdiction.
Contingencies
The Company is subject to various patent challenges, product liability claims, government investigations and other legal proceedings in the ordinary course of business. Material legal proceedings are discussed in Note 14. Commitments and Contingencies in the Consolidated Financial Statements, included in Part IV, Item 15 of this report "Exhibits, Financial Statement Schedules". Contingent accruals and legal settlements are recorded in the Consolidated Statements of Operations as Litigation-related and other contingencies, net (or Discontinued operations, net in the case of vaginal mesh matters) when the Company determines that a loss is both probable and reasonably estimable. Legal fees and other expenses related to litigation are expensed as incurred and included in Selling, general and administrative expenses in the Consolidated Statements of Operations (or Discontinued operations, net in the case of vaginal mesh matters).
Due to the fact that legal proceedings and other contingencies are inherently unpredictable, our estimates of the probability and amount of any such liabilities involve significant judgment regarding future events. The factors we consider in developing our liabilities for legal proceedings include the merits and jurisdiction of the proceeding, the nature and the number of other similar current and past proceedings, the nature of the product and the current assessment of the science subject to the proceeding, if applicable, and the likelihood of the conditions of settlement being met.

26


In order to evaluate whether a claim is probable of loss, we may rely on certain information about the claim. Without access to and review of such information, we may not be in a position to determine whether a loss is probable. Further, the timing and extent to which we obtain any such information, and our evaluation thereof, is often impacted by items outside of our control including, without limitation, the normal cadence of the litigation process and the provision of claim information to us by plaintiff’s counsel. The amount of our liabilities for legal proceedings may change as we receive additional information and/or become aware of additional asserted or unasserted claims. Additionally, there is a possibility that we will suffer adverse decisions or verdicts of substantial amounts or that we will enter into additional monetary settlements, either of which could be in excess of amounts previously accrued for. Any changes to our liabilities for legal proceedings could have a material adverse effect on our business, financial condition, results of operations and cash flows.
As of December 31, 2017, our reserve for loss contingencies totaled $1,298.2 million, of which $1,087.2 million relates to our liability accrual for vaginal mesh cases and other mesh-related matters. Although we believe there is a reasonable possibility that a loss in excess of the amount recognized exists, we are unable to estimate the possible loss or range of loss in excess of the amount recognized at this time.
RESULTS OF OPERATIONS
Consolidated Results Review
The following table displays our revenue, gross margin, gross margin percentage and other pre-tax expense or income for the years ended December 31, 2017, 2016 and 2015 (dollars in thousands):
 
 
 
 
 
 
 
% Change
 
2017
 
2016
 
2015
 
2017 vs. 2016

2016 vs. 2015
Total revenues
$
3,468,858

 
$
4,010,274

 
$
3,268,718

 
(14
)%
 
23
 %
Cost of revenues
2,228,530

 
2,634,973

 
2,075,651

 
(15
)%
 
27
 %
Gross margin
$
1,240,328

 
$
1,375,301

 
$
1,193,067

 
(10
)%
 
15
 %
Gross margin percentage
35.8
%
 
34.3
%
 
36.5
%
 
 
 
 
Selling, general and administrative
629,874

 
770,728

 
741,304

 
(18
)%
 
4
 %
Research and development
172,067

 
183,372

 
102,197

 
(6
)%
 
79
 %
Litigation-related and other contingencies, net
185,990

 
23,950

 
37,082

 
NM

 
(35
)%
Asset impairment charges
1,154,376

 
3,781,165

 
1,140,709

 
(69
)%
 
NM

Acquisition-related and integration items
58,086

 
87,601

 
105,250

 
(34
)%
 
(17
)%
Interest expense, net
488,228

 
452,679

 
373,214

 
8
 %
 
21
 %
Loss on extinguishment of debt
51,734

 

 
67,484

 
NM

 
(100
)%
Other (income) expense, net
(17,023
)
 
(338
)
 
63,691

 
NM

 
NM

Loss from continuing operations before income tax
$
(1,483,004
)
 
$
(3,923,856
)
 
$
(1,437,864
)
 
(62
)%
 
NM

__________
NM indicates that the percentage change is not meaningful or is greater than 100%.
Total Revenues. In 2017, total revenues decreased primarily due to declines in our U.S. Generic Pharmaceuticals segment’s product portfolio, driven by overall market trends and product rationalization, and our U.S. Branded - Specialty & Established Pharmaceuticals segment’s Established Products portfolio, driven by the impact of generic competition, the divestiture of STENDRA® in the third quarter of 2016 and actions taken with respect to OPANA® ER, which are further described below. Additionally, sales in our International Pharmaceuticals segment were negatively impacted by our July 3, 2017 divestiture of Litha and October 25, 2017 divestiture of Somar. These declines were partially offset by continued strong performance from our U.S. Branded - Sterile Injectables segment, including VASOSTRICT® and ADRENALIN®, and our U.S. Branded - Specialty & Established Pharmaceuticals segment’s Specialty Products portfolio, which includes XIAFLEX®.
In March 2017, we announced that the FDA’s Drug Safety and Risk Management and Anesthetic and Analgesic Drug Products Advisory Committees voted that the benefits of reformulated OPANA® ER (oxymorphone hydrochloride extended release) no longer outweigh its risks. In June 2017, we became aware of the FDA’s request that we voluntarily withdraw OPANA® ER from the market, and in July 2017, after careful consideration and consultation with the FDA, we decided to voluntarily remove OPANA® ER from the market. During the second quarter of 2017, we began to work with the FDA to coordinate an orderly withdrawal of the product from the market. By September 1, 2017, we ceased shipments of OPANA® ER to customers and we expect the New Drug Application will be withdrawn in the coming months. These actions had an adverse effect on the revenues and results of operations of our U.S. Branded - Specialty & Established Pharmaceuticals segment in 2017.

27


In 2016, total revenues increased primarily due to a full year of revenues related to our September 2015 acquisition of Par. This increase was partially offset by decreased revenues for certain products in our U.S. Branded - Specialty & Established Pharmaceuticals segment, driven mainly by decreased VOLTAREN® Gel, LIDODERM®, OPANA® ER and FROVA® revenues related to generic competition. In addition, we experienced decreased revenues in our U.S. Generic Pharmaceuticals business, which resulted from competitive pressure on commoditized generic products.
Our revenues are further described below under the heading “Business Segment Results Review”.
Cost of revenues and gross margin percentage. During the years ended December 31, 2017, 2016 and 2015, we incurred certain charges that impact the comparability of total Cost of revenues, including those related to acquisitions, separation benefits and restructurings initiatives, among others. The following table summarizes such amounts (in thousands):
 
2017
 
2016
 
2015
Amortization of intangible assets
$
773,766

 
$
876,451

 
$
561,302

Inventory step-up and certain manufacturing costs that will be eliminated pursuant to integration plans
$
390

 
$
124,349

 
$
249,464

Separation benefits and other cost reduction initiatives (1)
$
175,809

 
$
53,133

 
$
41,210

__________
(1)
Amounts primarily relate to certain employee separation costs, accelerated depreciation charges, product discontinuation charges, charges to increase excess inventory reserves related to restructurings and other cost reduction and restructuring charges. See Note 4. Restructuring of the Consolidated Financial Statements of Part IV, Item 15 of this report "Exhibits, Financial Statement Schedules" for discussion of our material restructuring initiatives.
In 2017, Cost of revenues decreased primarily due to the previously described decrease in total revenues, decreases to inventory step-up expense based on the timing of prior acquisitions and decreases to amortization expense. These savings were partially offset by increased restructuring charges included in Cost of revenues related to the 2017 U.S. Generic Pharmaceuticals Restructuring Initiative as described more fully in Note 4. Restructuring of the Consolidated Financial Statements included in Part IV, Item 15 of this report "Exhibits, Financial Statement Schedules".
Gross margin percentage increased in 2017 primarily due to the gross margin effects of the Cost of revenues decreases described above, together with the favorable margin impact of product rationalization efforts. These increases were partially offset by the margin effects of continued competitive pressure on the commoditized generic products in our U.S. Generic Pharmaceuticals segment.
In 2016, Cost of revenues increased primarily due to a full year of costs associated with our September 2015 acquisition of Par, which resulted in increased Cost of revenues related to sales and increased intangible asset amortization, partially offset by decreases in charges related to inventory step-up and certain manufacturing costs that will be eliminated pursuant to integration plans based on the timing of our acquisitions of Par and Auxilium.
Gross margin percentage decreased in 2016 primarily due to the gross margin effects of the Cost of revenues increases described above and changes to the mix of revenue toward lower margin generic pharmaceutical product sales as compared to the higher margin branded sales.
Selling, general and administrative expenses. In 2017, Selling, general and administrative expenses decreased primarily as a result of cost reductions that were implemented during 2016 and in the first half of 2017, including the impact of those related to various restructuring initiatives. Additionally, there was a decrease in restructuring charges included in Selling, general and administrative expense in 2017.
In 2016, Selling, general and administrative expenses increased primarily due to a full year of employee, facility and other selling, general and administrative expenses related to our September 2015 acquisition of Par. In addition, we incurred charges related to restructuring initiatives during 2016, including the 2016 U.S. Generic Pharmaceuticals Restructuring Initiative and the 2016 U.S. Branded Pharmaceuticals Restructuring Initiative, as described more fully in Note 4. Restructuring of the Consolidated Financial Statements included in Part IV, Item 15 of this report "Exhibits, Financial Statement Schedules". These increases were partially offset by a $37.6 million charge recorded upon our January 2015 acquisition of Auxilium related to the acceleration of Auxilium employee equity awards as well as 2015 restructuring charges related Auxilium and Par.
Our material restructuring initiatives are described more fully in Note 4. Restructuring of the Consolidated Financial Statements included in Part IV, Item 15 of this report "Exhibits, Financial Statement Schedules".
Research and development expenses. Our R&D efforts are focused on the development of a balanced, diversified portfolio of innovative and clinically differentiated products. The acquisition of Auxilium added multiple, strategically-aligned programs to our branded pharmaceutical R&D pipeline with the addition of CCH. We also seek out and develop high-barrier-to-entry generic products, including first-to-file or first-to-market opportunities. We periodically review our R&D pipeline in order to better direct investment toward those opportunities that we expect will deliver the greatest returns.

28


In 2017, R&D expense decreased due to a reduction in costs associated with post-marketing studies related to certain products in our U.S. Branded - Specialty & Established Pharmaceuticals segment and our Phase 2b cellulite trial, the results of which were announced in November 2016, cost savings resulting from the January 2017 Restructuring Initiative and lower development costs and filing fees related to new product launches in our U.S. Generic Pharmaceuticals segment. Partially offsetting the decrease were preliminary costs incurred in 2017 associated with the Phase 3 cellulite trials that began in early 2018. In 2018, we expect to continue to incur R&D costs related to the cellulite treatment development program. As a result of the January 2018 Restructuring Initiative and other cost reduction initiatives, we expect our U.S. Generic Pharmaceuticals segment’s R&D costs to begin to decline significantly in 2018. This expected decline primarily reflects decreases in costs associated with offshoring certain of our R&D activities to India and the prioritization of assets within our portfolio. However, there can be no assurance that we will achieve these results. Our material restructuring initiatives are described more fully in Note 4. Restructuring of the Consolidated Financial Statements included in Part IV, Item 15 of this report "Exhibits, Financial Statement Schedules".
In 2016, R&D expense increased primarily due to a full year of costs associated with our September 2015 acquisition of Par as well as additional investments in expanding our research and development capabilities. The increase was also driven by the U.S. Branded - Specialty & Established Pharmaceuticals segment’s 2016 R&D expenses, which were primarily attributable to costs incurred related to the Phase 2 cellulite trial.
Litigation-related and other contingencies, net. Our legal proceedings and other contingent matters are described in more detail in Note 14. Commitments and Contingencies of the Consolidated Financial Statements of Part IV, Item 15 of this report "Exhibits, Financial Statement Schedules".
Asset impairment charges. The following table presents the components of our total Asset impairment charges for the years ended December 31, 2017, 2016 and 2015 (in thousands):
 
2017
 
2016
 
2015
Goodwill impairment charges
$
288,745

 
$
2,676,350

 
$
759,280

Other intangible asset impairment charges
799,955

 
1,088,903

 
370,610

Property, plant and equipment impairment charges
65,676

 
15,912

 
10,819

Total asset impairment charges
$
1,154,376

 
$
3,781,165

 
$
1,140,709

A discussion of our impairment testing methodology and the critical accounting estimates made in connection with our various impairment tests is included above under the caption “CRITICAL ACCOUNTING ESTIMATES.” The factors leading to our material asset impairment tests, as well as the results of these tests, are further described in Note 9. Property, Plant and Equipment and Note 10. Goodwill and Other Intangibles of the Consolidated Financial Statements of Part IV, Item 15 of this report "Exhibits, Financial Statement Schedules".
Acquisition-related and integration items. In 2017, Acquisition-related and integration items, excluding amounts related to contingent consideration, decreased 87% to $8.1 million. In 2016, amounts decreased 63% to $63.8 million. The decreases in both periods related primarily to the timing of acquisition and integration costs directly associated with our January 2015 acquisition of Auxilium and our September 2015 acquisition of Par.
Net adjustments related to acquisition-related contingent consideration, which resulted from changes in market conditions impacting the commercial potential of the underlying products, were a charge of $49.9 million in 2017, a charge of $23.8 million in 2016 and a benefit of $65.6 million in 2015. See Note 7. Fair Value Measurements in the Consolidated Financial Statements, included in Part IV, Item 15 of this report "Exhibits, Financial Statement Schedules" for further discussion of our acquisition-related contingent consideration.
Interest expense, net. The components of Interest expense, net for the years ended December 31, 2017, 2016 and 2015 are as follows (in thousands):
 
2017
 
2016
 
2015
Interest expense
$
494,694

 
$
456,396

 
$
378,901

Interest income
(6,466
)
 
(3,717
)
 
(5,687
)
Interest expense, net
$
488,228

 
$
452,679

 
$
373,214

In 2017, the increase in interest expense was primarily due to increased interest rates following the refinancing that occurred on April 27, 2017, which is further described in Note 13. Debt in the Consolidated Financial Statements, included in Part IV, Item 15 of this report "Exhibits, Financial Statement Schedules".
In 2016, the increase in interest expense was primarily due to an increase in our average total outstanding indebtedness during the year. At December 31, 2016, 2015 and 2014, our principal amounts of total debt were $8.4 billion, $8.7 billion and $4.3 billion, respectively. Period-over-period average total outstanding indebtedness increased primarily due to the financing of the Par acquisition.

29


Loss on extinguishment of debt. Loss on extinguishment of debt during the year ended December 31, 2017 related to certain previously unamortized debt issuance costs that were charged to expense in connection with the April 2017 refinancing. There were no comparable charges in 2016. In 2015, charges primarily related to the early redemption of certain of our former senior notes.
Other (income) expense, net. The components of Other (income) expense, net for the years ended December 31, 2017, 2016 and 2015 are as follows (in thousands):
 
2017
 
2016
 
2015
Foreign currency (gain) loss, net
$
(2,801
)
 
$
2,991

 
$
(23,058
)
Equity loss (earnings) from investments accounted for under the equity method, net
898

 
(1,190
)
 
3,217

Other-than-temporary impairment of equity investment

 

 
18,869

Legal settlement

 

 
(12,500
)
Costs associated with unused financing commitments

 

 
78,352

Other miscellaneous, net
(15,120
)
 
(2,139
)
 
(1,189
)
Other (income) expense, net
$
(17,023
)
 
$
(338
)
 
$
63,691

Foreign currency (gain) loss, net results from the remeasurement of the Company’s foreign currency denominated assets and liabilities. In 2017, other miscellaneous, net includes a $10.1 million gain resulting from the sale of Litha, as further described in Note 3. Discontinued Operations and Assets and Liabilities Held for Sale in the Consolidated Financial Statements, included in Part IV, Item 15 of this report "Exhibits, Financial Statement Schedules". During 2015, the Company recognized an other-than-temporary impairment of its Litha joint venture investment, totaling $18.9 million, reflecting the excess carrying amount of this investment over its estimated fair value. In addition, the Company incurred $78.4 million during 2015 related to unused commitment fees primarily associated with financing for the Par acquisition.
Income tax benefit. The following table displays our Loss from continuing operations before income tax, Income tax benefit and effective tax rate for the years ended December 31, 2017, 2016 and 2015 (dollars in thousands):
 
2017
 
2016
 
2015
Loss from continuing operations before income tax
$
(1,483,004
)
 
$
(3,923,856
)
 
$
(1,437,864
)
Income tax benefit
$
(250,293
)
 
$
(700,084
)
 
$
(1,137,465
)
Effective tax rate
16.9
%
 
17.8
%
 
79.1
%
Our tax rate is affected by recurring items, such as tax rates in non-U.S. jurisdictions as compared to the notional U.S. federal statutory tax rate, and the relative amount of income or loss in those various jurisdictions. It is also impacted by certain items that may occur in any given year, but are not consistent from year to year. The following items had the most significant impact on the difference between the notional U.S. statutory federal income tax rate and our effective tax rate:
2017:
$1,648.8 million of tax expense or a 111.2% rate charge from recording net valuation allowances relating to the Company’s operations.
$1,350.8 million of net tax benefit or a 91.1% rate benefit associated with our geographical mix of earnings. As of December 31, 2017, no provision has been made for Irish taxes, as the majority of our undistributed earnings were considered to be permanently reinvested outside of Ireland.
$56.1 million of net tax benefit or 3.8% rate benefit associated with the divestiture of certain International Pharmaceuticals segment businesses.
$60.8 million of tax expense or a 4.1% rate charge resulting from the non-deductible portion of impaired goodwill.
2016:
$926.9 million tax expense or a 23.6% rate charge resulting from the non-deductible portion of impaired goodwill.
$762.6 million tax expense or a 19.4% rate charge from recording net valuation allowances relating to the Company’s operations.
$636.1 million net tax benefit or a 16.2% rate benefit associated with the recognition of outside basis differences in certain subsidiaries.
$301.7 million net tax benefit or a 7.7% rate benefit associated with our geographical mix of earnings. As of December 31, 2016, no provision has been made for Irish taxes, as the majority of our undistributed earnings were considered to be permanently reinvested outside of Ireland.
2015:
$786.1 million net tax benefit or a 54.7% rate benefit associated with the recognition of outside basis differences in certain subsidiaries.

30


$359.5 million net tax benefit or a 25.0% rate benefit associated with our geographical mix of earnings. As of December 31, 2015, no provision has been made for Irish taxes, as the majority of our undistributed earnings were considered to be permanently reinvested outside of Ireland.
$278.3 million tax expense or 19.4% rate charge resulting from the non-deductible portion of impaired goodwill.
Although the TCJA will reduce the notional U.S. federal statutory tax rate, because the Company has valuation allowances established against its U.S. deferred tax assets, as of December 31, 2017, we do not expect a significant reduction in our future tax expense. Moreover, we have valuation allowances established against our deferred tax assets in most other jurisdictions in which we operate, with the exception of Canada and India. Accordingly, it would be unlikely for future pre-tax losses to create a tax benefit that would be more likely than not to be realized.
For additional information on our income taxes, see Note 19. Income Taxes of the Consolidated Financial Statements of Part IV, Item 15 of this report "Exhibits, Financial Statement Schedules".
Discontinued operations, net of tax. As a result of the decision to sell our AMS business and wind down our Astora business, the operating results of these businesses are reported as Discontinued operations, net of tax in the Consolidated Statements of Operations for all periods presented. The results of our discontinued operations, net of tax, were losses of $802.7 million, $123.3 million and $1,194.9 million, during the years ended December 31, 2017, 2016 and 2015, respectively.
In 2017, the primary driver of the change was the after-tax impact of a $775.5 million second quarter 2017 charge related to mesh litigation that is further described in Note 14. Commitments and Contingencies of the Consolidated Financial Statements of Part IV, Item 15 of this report "Exhibits, Financial Statement Schedules". This compares to $20.1 million of litigation-related charges recorded during 2016. Also contributing to the period-over-period change was a decrease in revenue resulting from the wind-down of our Astora business following discontinuation of business operations on March 31, 2016. Partially offsetting these changes was an overall decrease in spending as well as a decrease in asset impairment charges of $21.3 million.
In 2016, the decrease in the loss was mainly due to decreases in both litigation-related charges of $1,087.6 million and asset impairment charges of $209.4 million, partially offset by a 2016 decrease in income from operations resulting from the sale of the Men’s Health and Prostate Health components in the third quarter of 2015, a $13.6 million gain on the sale recorded during the third quarter of 2015 that did not reoccur in 2016 and an income tax benefit of $157.4 million recognized in 2015 that did not reoccur in 2016 as a result of our recording of a full valuation allowance in 2016 on certain of our U.S. net deferred tax assets.
Business Segment Results Review
As of December 31, 2017, the four reportable business segments in which we operate are: (1) U.S. Branded - Specialty & Established Pharmaceuticals, (2) U.S. Branded - Sterile Injectables, (3) U.S. Generic Pharmaceuticals and (4) International Pharmaceuticals. These segments reflect the level at which the chief operating decision maker 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 from continuing operations before income tax, a financial measure not determined in accordance with U.S. GAAP, which we define as Loss from continuing operations before income tax and before certain upfront and milestone payments to partners; acquisition-related and integration items, including transaction costs, earn-out payments or adjustments, changes in the fair value of contingent consideration and bridge financing costs; cost reduction and integration-related initiatives such as separation benefits, retention payments, other exit costs and certain costs associated with integrating an acquired company’s operations; excess costs that will be eliminated pursuant to integration plans; asset impairment charges; amortization of intangible assets; inventory step-up recorded as part of our acquisitions; certain non-cash interest expense; litigation-related and other contingent matters; gains or losses from early termination of debt; foreign currency gains or losses on intercompany financing arrangements; and certain other items.
Certain of the corporate general and administrative expenses incurred by us are not attributable to any specific segment. Accordingly, these costs are not allocated to any of our segments and are included in the results below as “Corporate unallocated costs.” Interest income and expense are also considered corporate items and not allocated to any of our segments. Our consolidated adjusted income from continuing operations before income tax is equal to the combined results of each of our segments less these unallocated corporate items.

31


We refer to adjusted income from continuing operations before income tax in making operating decisions because we believe it provides meaningful supplemental information regarding our operational performance. For instance, we believe that this measure facilitates its internal comparisons to our historical operating results and comparisons to competitors’ results. We believe this measure is useful to investors in allowing for greater transparency related to supplemental information used in our financial and operational decision-making. In addition, we have historically reported similar financial measures to our investors and believe that the inclusion of comparative numbers provides consistency in our current financial reporting. Further, we believe that adjusted income from continuing operations before income tax may be useful to investors as we are aware that certain of our significant shareholders utilize adjusted income from continuing operations before income tax to evaluate our financial performance. Finally, adjusted income from continuing operations before income tax is utilized in the calculation of adjusted diluted income per share, which is used by the Compensation Committee of Endo’s Board of Directors in assessing the performance and compensation of substantially all of our employees, including our executive officers.
There are limitations to using financial measures such as adjusted income from continuing operations before income tax. Other companies in our industry may define adjusted income from continuing operations before income tax differently than we do. As a result, it may be difficult to use adjusted income from continuing operations before income tax or similarly named adjusted financial measures that other companies may use to compare the performance of those companies to our performance. Because of these limitations, adjusted income from continuing operations before income tax is not intended to represent cash flow from operations as defined by U.S. GAAP and should not be used as alternatives to net income as indicators of operating performance or to cash flows as measures of liquidity. We compensate for these limitations by providing reconciliations of our total segment adjusted income from continuing operations before income tax to our consolidated Loss from continuing operations before income tax, which is determined in accordance with U.S. GAAP and included in our Consolidated Statements of Operations.
Revenues. The following table displays our revenue by reportable segment for the years ended December 31, 2017, 2016 and 2015 (dollars in thousands):
 
 
 
 
 
 
 
% Change
 
2017
 
2016
 
2015
 
2017 vs. 2016
 
2016 vs. 2015
U.S. Branded - Specialty & Established Pharmaceuticals
$
957,525

 
$
1,166,294

 
$
1,284,607

 
(18
)%
 
(9
)%
U.S. Branded - Sterile Injectables
750,471

 
576,399

 
114,719

 
30
 %

NM

U.S. Generic Pharmaceuticals
1,530,530

 
1,988,214

 
1,557,697

 
(23
)%
 
28
 %
International Pharmaceuticals (1)
230,332

 
279,367

 
311,695

 
(18
)%
 
(10
)%
Total net revenues to external customers
$
3,468,858

 
$
4,010,274

 
$
3,268,718

 
(14
)%
 
23
 %
__________
NM indicates that the percentage change is not meaningful or is greater than 100%.
(1)
Revenues generated by our International Pharmaceuticals segment are primarily attributable to external customers located in Canada and, prior to the sale of Litha on July 3, 2017 and Somar on October 25, 2017, South Africa and Latin America.

32


U.S. Branded - Specialty & Established Pharmaceuticals. The following table displays the significant components of our U.S. Branded - Specialty & Established Pharmaceuticals revenues to external customers for the years ended December 31, 2017, 2016 and 2015 (dollars in thousands):
 
 
 
 
 
 
 
% Change
 
2017
 
2016
 
2015
 
2017 vs. 2016

2016 vs. 2015
Specialty Products:
 
 
 
 
 
 
 
 
 
XIAFLEX®
$
213,378

 
$
189,689

 
$
158,115

 
12
 %
 
20
 %
SUPPRELIN® LA
86,211

 
78,648

 
70,099

 
10
 %
 
12
 %
Other Specialty (1)
153,384

 
138,483

 
98,025

 
11
 %
 
41
 %
Total Specialty Products
$
452,973

 
$
406,820

 
$
326,239

 
11
 %
 
25
 %
Established Products:
 
 
 
 
 
 
 
 
 
OPANA® ER
$
83,826

 
$
158,938

 
$
175,772

 
(47
)%
 
(10
)%
PERCOCET®
125,231

 
139,211

 
135,822

 
(10
)%
 
2
 %
VOLTAREN® Gel
68,780

 
100,642

 
207,161

 
(32
)%
 
(51
)%
LIDODERM®
51,629

 
87,577

 
125,269

 
(41
)%
 
(30
)%
Other Established (2)
175,086

 
273,106

 
314,344

 
(36
)%
 
(13
)%
Total Established Products
$
504,552

 
$
759,474

 
$
958,368

 
(34
)%
 
(21
)%
Total U.S. Branded - Specialty & Established Pharmaceuticals (3)
$
957,525

 
$
1,166,294

 
$
1,284,607

 
(18
)%
 
(9
)%
__________
(1)
Products included within Other Specialty include TESTOPEL®, NASCOBAL® Nasal Spray and AVEED®.
(2)
Products included within Other Established include, but are not limited to, TESTIM® and FORTESTA® Gel, including the authorized generics.
(3)
Individual products presented above represent the top two performing products in each product category and/or any product having revenues in excess of $100 million during the years ended December 31, 2017, 2016 or 2015.
Specialty Products
The increase in net sales of XIAFLEX® in 2017 was primarily attributable to demand growth driven by the continued investment and promotional efforts behind XIAFLEX®, as well as price. The increase in net sales of XIAFLEX® in 2016 was primarily attributable to volume increases in addition to a full twelve months of product revenues following our January 29, 2015 acquisition of Auxilium.
The increase in net sales of SUPPRELIN® LA in 2017 was primarily attributable to price increases. The increase in net sales of SUPPRELIN® LA in 2016 was primarily attributable to both volume and price increases.
Net sales of Other Specialty Products increased in 2017, driven by increased net sales of NASCOBAL® Nasal Spray, AVEED® and TESTOPEL®, which all benefited from increased prices. NASCOBAL® Nasal Spray and AVEED® also benefited from improved volume. The increase in net sales of Other Specialty Products in 2016 was primarily attributable to increased net sales of NASCOBAL® Nasal Spray.
Established Products
As further described above, net sales of OPANA® ER decreased in 2017 as a result of the decision to cease shipments of OPANA® ER to customers by September 1, 2017, which had an adverse effect on the revenues and the results of operations of our U.S. Branded - Specialty & Established Pharmaceuticals segment during 2017. Prior to this decision, net sales of OPANA® ER were declining as a result of competing generic versions of OPANA® ER and general market declines. Net sales of OPANA® ER decreased in 2016 as a result of competing generic versions of OPANA® ER, which launched beginning in early 2013.
The decrease in net sales of PERCOCET® in 2017 was primarily attributable to volume decreases, partially offset by price increases. The increase in net sales of PERCOCET® in 2016 was primarily attributable to price increases, partially offset by volume decreases.
The decreases in net sales of VOLTAREN® Gel in both 2017 and 2016 were primarily attributable to the March 2016 launch of Amneal Pharmaceuticals LLC’s generic equivalent of VOLTAREN® Gel and our launch of the authorized generic of VOLTAREN® Gel in July 2016. Subject to FDA approval, it is possible one or more additional competing generic products could potentially enter the market, which could further impact future sales of VOLTAREN® Gel.

33


The decrease in net sales of LIDODERM® in 2017 was primarily attributable to volume decreases resulting from generic competition. The decrease in 2016 was attributable to volume decreases resulting from generic competition partially offset by an increase in price. Actavis plc (Actavis) (now Teva) launched a generic form of LIDODERM® in September 2013, our U.S. Generic Pharmaceuticals segment launched its authorized generic of LIDODERM® in May 2014, and Mylan, Inc. launched a generic form of LIDODERM® in August 2015. To the extent additional competitors are able to launch generic versions of LIDODERM®, our revenues could decline further.
The decrease in net sales of Other Established Products in 2017 was primarily attributable to volume decreases resulting from generic competition and certain other factors, as well as the divestiture of STENDRA® in the third quarter of 2016. The decrease in net sales of Other Established Products in 2016 was primarily attributable to decreased FROVA® revenues related to generic competition, partially offset by the acquisitions of Auxilium, which we acquired in January 2015, and Par, which we acquired in September 2015.
U.S. Branded - Sterile Injectables. The following table displays the significant components of our U.S. Branded - Sterile Injectables revenues to external customers for the years ended December 31, 2017, 2016 and 2015 (dollars in thousands):
 
 
 
 
 
 
 
% Change
 
2017
 
2016
 
2015
 
2017 vs. 2016
 
2016 vs. 2015
VASOSTRICT®
$
399,909

 
$
343,468

 
$
62,583

 
16
%
 
NM
ADRENALIN®
76,523

 
22,172

 
3,094

 
NM

 
NM
Other Sterile Injectables (1)
274,039

 
210,759

 
49,042

 
30
%
 
NM
Total U.S. Branded - Sterile Injectables (2)
$
750,471

 
$
576,399

 
$
114,719

 
30
%
 
NM
__________
NM indicates that the percentage change is not meaningful or is greater than 100%.
(1)
Products included within Other Sterile Injectables include, but are not limited to, APLISOL®, ephedrine sulfate injection and neostigmine methylsulfate injection.
(2)
Individual products presented above represent the top two performing products within the U.S. Branded - Sterile Injectables segment and/or any product having revenues in excess of $100 million during the years ended December 31, 2017, 2016 or 2015.
VASOSTRICT® is currently the first and only vasopressin injection with an NDA approved by the FDA. Net sales of VASOSTRICT® increased in 2017 due to increases in both volume and price. Net sales of VASOSTRICT® increased in 2016 primarily due to a full year of revenues from the acquisition of Par, which was acquired in September 2015.
Net sales of ADRENALIN® increased in 2017 due to increases in both volume and price. Net sales of ADRENALIN® increased in 2016 primarily due to a full year of revenues from the acquisition of Par, which was acquired in September 2015.
Net sales of Other Sterile Injectables increased in 2017 primarily due to the launch of ephedrine sulfate injection and neostigmine methylsulfate injection during the year. Net sales of Other Sterile Injectables increased in 2016 primarily due to a full year of revenues from the acquisition of Par, which was acquired in September 2015.
U.S. Generic Pharmaceuticals. The 2017 decrease in U.S. Generic Pharmaceuticals net sales was primarily due decreases in both price and volume resulting from continued competitive pressure on commoditized generic products and the impact of product rationalization actions resulting from the 2016 and 2017 U.S. Generic Pharmaceuticals segment restructuring initiatives. In addition, this segment includes ezetimibe tablets (generic version of Zetia®) and quetiapine ER tablets (generic version of Seroquel® XR). Both of these were first-to-file products launched in the fourth quarter of 2016. The marketing exclusivity periods for both ezetimibe tablets and quetiapine ER tablets expired in the second quarter of 2017. As a result, combined revenues for these products began to decline significantly during the second quarter of 2017. Combined sales for these two products totaled approximately $250 million in 2017, which related almost entirely to the first half of 2017, compared to approximately $290 million in 2016. We do not expect to record significant revenues related to these products in future years.
The increase in U.S. Generic Pharmaceuticals net sales in 2016 was primarily due to a full year of revenues from the acquisition of Par, which was acquired in September 2015, and increased revenue due to the launches of ezetimibe tablets and quetiapine ER tablets, as described above, partially offset by a decrease as a result of competitive pressure on commoditized generic products.
International Pharmaceuticals. The decrease in International Pharmaceuticals net sales in 2017 was primarily attributable to the divestitures of Litha in July 2017 and Somar in October 2017, partially offset by revenue increases in certain of the other international markets in which we operate in 2017. We expect this segment’s revenues to continue to decline in 2018 due to the second-half 2017 divestitures of Litha and Somar, which are described in more detail in Note 3. Discontinued Operations and Assets and Liabilities Held for Sale of the Consolidated Financial Statements of Part IV, Item 15 of this report "Exhibits, Financial Statement Schedules". The decrease during 2016 was primarily attributable to decreases in Litha revenues as a result of its divestiture of non-core assets during the first quarter of 2016 in addition to unfavorable fluctuations in foreign currency rates, partially offset by increased revenues from the acquisition of certain Aspen Holdings assets in the fourth quarter of 2015 (the Aspen Asset Acquisition).

34


Adjusted income from continuing operations before income tax. The following table displays our Adjusted income from continuing operations before income tax by reportable segment for the years ended December 31, 2017, 2016 and 2015 (dollars in thousands):
 
 
 
 
 
 
 
% Change
 
2017
 
2016
 
2015
 
2017 vs. 2016
 
2016 vs. 2015
U.S. Branded - Specialty & Established Pharmaceuticals
$
485,515

 
$
553,806

 
$
694,440

 
(12
)%
 
(20
)%
U.S. Branded - Sterile Injectables
563,103

 
426,170

 
76,627

 
32
 %
 
NM

U.S. Generic Pharmaceuticals
501,249

 
653,309

 
665,140

 
(23
)%
 
(2
)%
International Pharmaceuticals
58,308

 
84,337

 
81,789

 
(31
)%
 
3
 %
Total segment adjusted income from continuing operations before income tax
$
1,608,175

 
$
1,717,622

 
$
1,517,996

 
(6
)%
 
13
 %
U.S. Branded - Specialty & Established Pharmaceuticals. The decrease in adjusted income from continuing operations before income tax for the U.S. Branded - Specialty & Established Pharmaceuticals segment for 2017 was a result of decreased revenues related to generic competition impacting several products in this segment, actions taken with respect to OPANA® ER as discussed above and the divestiture of STENDRA® in the third quarter of 2016. These decreases were partially offset by targeted cost reductions in Selling, general and administrative expenses associated with our previously announced restructuring initiatives, as well as the reduction to Research and development costs described above. The decrease in 2016 was primarily attributable to decreased VOLTAREN® Gel, LIDODERM®, OPANA® ER and FROVA® revenues related to generic competition.
U.S. Branded - Sterile Injectables. The increase in adjusted income from continuing operations before income tax for the U.S. Branded - Sterile Injectables segment for 2017 was primarily driven by increased revenues and gross margin resulting from strong performance of a variety of products in this segment as described above. In 2016, revenues and gross margins increased primarily due to the September 2015 Par acquisition.
U.S. Generic Pharmaceuticals. The decrease in adjusted income from continuing operations before income tax for the U.S. Generic Pharmaceuticals segment for 2017 was primarily attributable to the impact of competitive pressure on commoditized generic products. Additionally, product rationalization actions and other restructuring initiatives had the effect of improving gross margin and reducing overall operating expenses. In 2016, revenues and gross margins increased primarily due to the September 2015 Par acquisition. These increases were more than offset by the impact of competitive pressure on commoditized generic products and increased charges related to excess inventory reserves due to the underperformance of certain products.
International Pharmaceuticals. The decrease in adjusted income from continuing operations before income tax for the International Pharmaceuticals segment for 2017 was primarily attributable to the July 3, 2017 divestiture of Litha and October 25, 2017 divestiture of Somar. The increase in 2016 was primarily attributable to an increase in gross margin resulting from the divestiture of certain lower margin products in the first quarter of 2016, increased revenues from the Aspen Asset Acquisition and decreased operating expenses, partially offset by unfavorable fluctuations in foreign currency rates.

35


The table below provides reconciliations of our consolidated Loss from continuing operations before income tax, which is determined in accordance with U.S. GAAP, to our total segment adjusted income from continuing operations before income tax for the years ended December 31, 2017, 2016 and 2015 (in thousands):
 
2017
 
2016
 
2015
Total consolidated loss from continuing operations before income tax
$
(1,483,004
)
 
$
(3,923,856
)
 
$
(1,437,864
)
Interest expense, net
488,228

 
452,679

 
373,214

Corporate unallocated costs (1)
165,298

 
189,043

 
171,242

Amortization of intangible assets
773,766

 
876,451

 
561,302

Inventory step-up and certain manufacturing costs that will be eliminated pursuant to integration plans
390

 
125,699

 
249,464

Upfront and milestone payments to partners
9,483

 
8,330

 
16,155

Separation benefits and other cost reduction initiatives (2)
212,448

 
107,491

 
125,407

Impact of VOLTAREN® Gel generic competition

 
(7,750
)
 

Acceleration of Auxilium employee equity awards at closing

 

 
37,603

Certain litigation-related and other contingencies, net (3)
185,990

 
23,950

 
37,082

Asset impairment charges (4)
1,154,376

 
3,781,165

 
1,140,709

Acquisition-related and integration items (5)
58,086

 
87,601

 
105,250

Loss on extinguishment of debt
51,734

 

 
67,484

Costs associated with unused financing commitments

 

 
78,352

Other-than-temporary impairment of equity investment

 

 
18,869

Foreign currency impact related to the remeasurement of intercompany debt instruments
(1,403
)
 
366

 
(25,121
)
Other, net
(7,217
)
 
(3,547
)
 
(1,152
)
Total segment adjusted income from continuing operations before income tax
$
1,608,175

 
$
1,717,622

 
$
1,517,996

__________
(1)
Amounts include certain corporate overhead costs, such as headcount and facility expenses and certain other income and expenses.
(2)
Amounts primarily relate to employee separation costs of $53.0 million, $57.9 million and $60.2 million in 2017, 2016 and 2015, respectively. Other amounts in 2017 include accelerated depreciation of $123.7 million, charges to increase excess inventory reserves of $13.7 million and other charges of $22.0 million, each of which related primarily to the 2017 U.S. Generic Pharmaceuticals Restructuring Initiative. Other amounts in 2016 primarily consist of charges to increase excess inventory reserves of $24.5 million and other restructuring costs of $25.1 million, consisting primarily of contract termination fees and building costs. Other amounts in 2015 primarily consist of $41.2 million of inventory write-offs and $13.3 million of building costs, including a $7.9 million charge recorded upon the cease use date of our Auxilium subsidiary’s former corporate headquarters. See Note 4. Restructuring of the Consolidated Financial Statements of Part IV, Item 15 of this report "Exhibits, Financial Statement Schedules" for discussion of our material restructuring initiatives.
(3)
Amounts include adjustments for Litigation-related and other contingencies, net as further described in Note 14. Commitments and Contingencies of the Consolidated Financial Statements of Part IV, Item 15 of this report "Exhibits, Financial Statement Schedules".
(4)
Amounts primarily relate to charges to impair goodwill and intangible assets as further described in Note 10. Goodwill and Other Intangibles of the Consolidated Financial Statements of Part IV, Item 15 of this report "Exhibits, Financial Statement Schedules" as well as charges to write down certain property, plant and equipment as further described in Note 4. Restructuring, Note 7. Fair Value Measurements and Note 9. Property, Plant and Equipment of the Consolidated Financial Statements of Part IV, Item 15 of this report "Exhibits, Financial Statement Schedules".
(5)
Amounts in 2017, 2016 and 2015 include costs directly associated with previous acquisitions of $8.1 million, $63.8 million and $170.9 million, respectively. In addition, in 2017 and 2016, there were charges due to changes in the fair value of contingent consideration of $49.9 million and $23.8 million, respectively. In 2015, there was a benefit due to changes in the fair value of contingent consideration of $65.6 million.
LIQUIDITY AND CAPITAL RESOURCES
Our principal source of liquidity is cash generated from operations. Our principal liquidity requirements are primarily for working capital for operations, licenses, milestone payments, capital expenditures, contingent liabilities, vaginal mesh liability payments and debt service payments. The Company’s working capital was $50.2 million at December 31, 2017 compared to a working capital deficit of $45.3 million at December 31, 2016. The amounts at December 31, 2017 and December 31, 2016 include restricted cash and cash equivalents of $313.8 million and $276.0 million, respectively, held in Qualified Settlement Funds (QSFs) for mesh-related matters. Although these amounts in QSFs are included in working capital, they are required to be used for mesh product liability settlement agreements that are expected to be paid to qualified claimants within the next twelve months.
Cash and cash equivalents, which primarily consisted of bank deposits, time deposits and money market accounts, totaled $986.6 million at December 31, 2017 compared to $517.3 million at December 31, 2016.

36


We expect cash generated from operations together with our cash, cash equivalents, restricted cash and the revolving credit facilities to be sufficient to cover cash needs for working capital and general corporate purposes, contingent liabilities, payment of contractual obligations, principal and interest payments on our indebtedness, capital expenditures, ordinary share repurchases and any regulatory and/or sales milestones that may become due over the next year. However, on a longer term basis, we may not be able to accurately predict the effect of certain developments on the rate of sales growth, such as the degree of market acceptance, patent protection and exclusivity of our products, pricing pressures (including those due to the impact of competition), the effectiveness of our sales and marketing efforts and the outcome of our current efforts to develop, receive approval for and successfully launch our product candidates. We may also face unexpected expenses in connection with our business operations, including expenses related to our ongoing and future legal proceedings and governmental investigations and other contingent liabilities. Furthermore, we may not be successful in implementing, or may face unexpected changes or expenses in connection with our strategic direction, including the potential for opportunistic corporate development transactions. Any of the above could adversely affect our future cash flows.
We may need to obtain additional funding to repay our outstanding indebtedness, for our future operational needs or for future transactions. We have historically had broad access to financial markets that provide liquidity; however, we cannot be certain that funding will be available on terms acceptable to us, or at all. Any issuances of equity securities or convertible securities could have a dilutive effect on the ownership interest of our current shareholders and may adversely impact net income per share in future periods. An acquisition may be accretive or dilutive and, by its nature, involves numerous risks and uncertainties. As a result of acquisition efforts, if any, we are likely to experience significant charges to earnings for merger and related expenses (whether or not the acquisitions are consummated) that may include transaction costs, closure costs or costs of restructuring activities.
We consider the undistributed earnings from the majority of our subsidiaries as of December 31, 2017 to be indefinitely reinvested outside of Ireland and, accordingly, neither income tax nor withholding taxes have been provided thereon. As of December 31, 2017, indefinitely reinvested earnings were approximately $169.8 million. We have historically repatriated funds on a tax-free basis to our parent company for stock repurchases and to our Irish and Luxembourg financing companies to repay debt. Accordingly, we do not anticipate incurring tax in deploying funds to satisfy liquidity needs arising in the ordinary course of our business.
Borrowings. At December 31, 2017, under the 2017 Credit Agreement, the Company had outstanding borrowings in an aggregate principal amount of $3,397.9 million and additional availability of approximately $996.8 million under the 2017 Revolving Credit Facility.
The 2017 Credit Agreement contains affirmative and negative covenants that the Company believes to be usual and customary for a senior secured credit facility. The negative covenants include, among other things, limitations on asset sales, mergers and acquisitions, indebtedness, liens, dividends and other restrictive payments, investments and transactions with the Company’s affiliates. As of December 31, 2017, we were in compliance with all such covenants.
At December 31, 2017, the Company’s indebtedness also includes senior notes with aggregate principal amounts totaling $5.0 billion. These notes mature between 2022 and 2025, subject to earlier repurchase or redemption in accordance with the terms of the respective indentures. Interest rates on these notes range from 5.375% to 7.25%. Other than the 5.875% Senior Secured Notes due 2024, these notes are senior unsecured obligations of the Company’s subsidiaries party to the applicable indenture governing such notes. These notes are issued by certain of our subsidiaries and are guaranteed on a senior unsecured basis by the subsidiaries of Endo International plc that also guarantee our 2017 Credit Agreement, except for a de minimis amount of the 7.25% Senior Notes due 2022, which are issued by Endo Health Solutions Inc. and guaranteed on a senior unsecured basis by the guarantors named in the Fifth Supplemental Indenture relating to such notes. The 5.875% Senior Secured Notes due 2024 are senior secured obligations of Endo International plc and its subsidiaries that are party to the indenture governing such notes. These notes are issued by certain of our subsidiaries and are guaranteed on a senior secured basis by Endo International plc and its subsidiaries that also guarantee our 2017 Credit Agreement.
The indentures governing our various senior notes contain affirmative and negative covenants that the Company believes to be usual and customary for similar indentures. The negative covenants, among other things, restrict the Company’s ability, and the ability of its restricted subsidiaries, to incur certain additional indebtedness and issue preferred stock, make certain investments and restricted payments, sell certain assets, enter into sale and leaseback transactions, agree to payment restrictions on the ability of restricted subsidiaries to make certain payments to Endo International plc or any of its restricted subsidiaries, create certain liens, merge, consolidate or sell all or substantially all of the Company’s assets or enter into certain transactions with affiliates. As of December 31, 2017, we were in compliance with all covenants.
The obligations of the borrowers under the 2017 Credit Agreement are guaranteed by the Company and the subsidiaries of the Company (with certain customary exceptions) (the “Guarantors” and, together with the Borrowers, the “Loan Parties”). The obligations (i) under the 2017 Credit Agreement and related loan documents and (ii) the indenture governing the 5.875% Senior Secured Notes due 2024 and related documents are secured on a pari passu basis by a perfected first priority (subject to permitted liens) lien on substantially all of the assets of the Loan Parties (subject to customary exceptions).

37


Working capital. The components of our working capital and our liquidity at December 31, 2017 and December 31, 2016 are below (dollars in thousands):
 
December 31, 2017
 
December 31, 2016
Total current assets
$
2,271,077

 
$
2,589,459

Less: total current liabilities
(2,220,909
)
 
(2,634,745
)
Working capital
$
50,168

 
$
(45,286
)
Current ratio
1.0:1

 
-1.0:1

Net working capital increased by $95.5 million from December 31, 2016 to December 31, 2017. This increase reflects the favorable impact to net current assets resulting from operations during the year ended December 31, 2017. In addition, the April 2017 refinancing reduced the principal amount of debt maturing in 2017 by $86.4 million, which had the effect of increasing working capital. We also sold Litha in the third quarter of 2017 and Somar in the fourth quarter of 2017, which resulted in increases to working capital of $39.5 million and $82.3 million, respectively. These increases during the year ended December 31, 2017 were partially offset by the unfavorable impact of mesh-related product liability charges, net of related reclassification adjustments from current to non-current liabilities, of $565.0 million, purchases of property, plant and equipment of $125.7 million, payments for deferred financing fees of $57.8 million and the elimination of a $24.1 million current deferred charge related to the adoption of ASU 2016-16, which was recorded as an adjustment to retained earnings.
The following table summarizes our Consolidated Statements of Cash Flows for the years ended December 31, 2017, 2016 and 2015 (in thousands):
 
2017
 
2016
 
2015
Net cash flow provided by (used in):
 
 
 
 
 
Operating activities
$
553,985

 
$
528,143

 
$
118,501

Investing activities
104,583

 
(177,552
)
 
(6,183,764
)
Financing activities
(166,993
)
 
(397,186
)
 
6,001,992

Effect of foreign exchange rate
2,515

 
436

 
(11,269
)
Movement in cash held for sale
11,744

 
(11,744
)
 
997

Net increase (decrease) in cash, cash equivalents, restricted cash and restricted cash equivalents
$
505,834

 
$
(57,903
)
 
$
(73,543
)
Net cash provided by operating activities. Net cash provided by operating activities was $554.0 million in 2017 compared to $528.1 million in 2016 and $118.5 million in 2015.
Net cash provided by operating activities represents the cash receipts and cash disbursements from all of our activities other than investing activities and financing activities. Changes in cash from operating activities reflect, among other things, the timing of cash collections from customers, payments to suppliers, managed care organizations, government agencies, collaborative partners and employees, as well as tax payments and refunds in the ordinary course of business.
The $25.8 million increase in Net cash provided by operating activities in 2017 compared 2016 was primarily the result of increased cash receipts generated by net sales of ezetimibe tablets and quetiapine ER tablets, which launched in the fourth quarter of 2016 and contributed to the $474.7 million decrease in Accounts receivable from December 31, 2016 to December 31, 2017. Cash outlays for mesh settlements decreased $491.1 million during 2017 compared to 2016. In addition, as a result of continued generic competition on certain legacy branded products and the discontinuation of certain generic products resulting from the 2016 U.S. Generic Pharmaceuticals Restructuring Initiative, cash outlays for customer rebates and chargebacks decreased during 2017 compared to 2016. These increases were partially offset by $760.0 million in U.S. federal income tax refunds received during 2016, compared to $29.8 million received in 2017, increased payments to partners during 2017 resulting from sales of ezetimibe tablets, which launched during the fourth quarter of 2016 and contributed to the $128.3 million decrease in accrued royalties and other distribution partner payables from December 31, 2016 to December 31, 2017 and the timing of payments related to certain other current liabilities.
The $409.6 million increase in Net cash provided by operating activities in 2016 compared to 2015 was primarily the result of $760.0 million in U.S. federal income tax refunds received during 2016, offset partially by the timing of cash collections and cash payments related to our operations.
Net cash provided by (used in) investing activities. Net cash provided by investing activities was $104.6 million in 2017 compared to $177.6 million used in investing activities in 2016 and $6,183.8 million used in investing activities in 2015.

38


This $282.1 million change in cash provided by investing activities in 2017 compared to cash used in investing activities in 2016 relates primarily to an increase in net proceeds from the sales of businesses and other assets of $212.4 million, including the sales of Litha in July 2017 and Somar in October 2017, and a decrease in purchases of property, plant and equipment of $13.2 million. In addition, 2016 activity included acquisitions, net of cash acquired of $30.4 million and payments for patent acquisition costs and license fees of $19.2 million, neither of which had comparable activity during 2017.
The $6,006.2 million decrease in cash used in investing activities in 2016 compared to cash used in investing activities in 2015 relates primarily to a decrease in cash used for acquisitions in 2016 of $7,617.7 million and a decrease in patent acquisition costs and license fees in 2016 of $24.8 million, which related primarily to the 2015 acquisitions of Par, Auxilium and certain Aspen Holdings assets. This amount was partially offset by a decrease of $1,577.9 million in proceeds from sales of businesses and other assets, primarily relating to the sale of the Men’s Health and Prostate Health components of the AMS business during the third quarter of 2015, and an increase in purchases of property, plant and equipment of $57.1 million.
Net cash (used in) provided by financing activities. Net cash used in financing activities was $167.0 million in 2017 compared to $397.2 million used in financing activities in 2016 and $6,002.0 million provided by financing activities in 2015.
Items contributing to the $230.2 million decrease in cash used in financing activities in 2017 compared to cash used in financing activities in 2016 include an increase in proceeds from issuance of term loans of $3,415.0 million, an increase in proceeds from issuance of notes of $300.0 million and a decrease in payments of revolving debt of $605.0 million, partially offset by an increase in principal payments on term loans of $3,627.3 million, a decrease in amounts of revolving debt drawn of $380.0 million, an increase in payments for deferred financing fees of $57.3 million and an increase in payments for contingent consideration of $29.1 million.
Items contributing to the $6,399.2 million change in cash used in financing activities in 2016 compared to cash provided by financing activities in 2015 include a decrease in proceeds from the issuance of notes of $2,835.0 million, a decrease in proceeds from the issuance of term loans of $2,800.0 million, a decrease in proceeds from the issuance of ordinary shares of $2,300.0 million, a decrease in proceeds from draw of revolving debt of $145.0 million and an increase in repayments of revolving debt of $305.0 million, partially offset by a decrease in principal payments on notes of $899.9 million, a decrease in principal payments on term loans of $369.8 million, a decrease in amounts for the repurchase of ordinary shares of $250.1 million, a decrease due to the repurchase of convertible notes of $247.8 million, a decrease resulting from payments for deferred financing fees of $124.6 million and a decrease in payments related to the issuance of ordinary shares of $67.0 million.
Research and development. Over the past few years, we have incurred significant expenditures related to conducting clinical studies to develop new products and expand the value of our existing products beyond what is currently approved in their respective labels.
As part of the Auxilium acquisition, the Company acquired Auxilium’s licensed rights covering certain indications of CCH, the active ingredient in XIAFLEX®. As a result, the Company has incurred R&D expense for certain indications of CCH in various stages of development, including a Phase 2b cellulite trial, the results of which were announced in November 2016, and Phase 3 cellulite clinical trials, which began in early 2018.
We expect to incur R&D expenditures related to the development and advancement of our current generic and branded product pipeline and any additional product candidates we may add via license, acquisition or organically. There can be no assurance that the results of any ongoing or future nonclinical or clinical trials related to these projects will be successful, that additional trials will not be required, that any drug, product or indication under development will receive regulatory approval in a timely manner or at all or that such drug, product or indication could be successfully manufactured in accordance with local current good manufacturing practices or marketed successfully, or that we will have sufficient funds to develop or commercialize any of our products.
Manufacturing, supply and other service agreements. We contract with various third party manufacturers, suppliers and service providers to supply our products, or materials used in the manufacturing of our products, and to provide additional services such as packaging, processing, labeling, warehousing, distribution and customer service support. Any interruption to the goods or services provided for by these and similar contracts could have an adverse effect on our business, financial condition, results of operations and cash flows.
License and collaboration agreements. We could become obligated to make certain contingent payments pursuant to our license, collaboration and other agreements. Payments under these agreements generally become due and payable only upon the achievement of certain developmental, regulatory, commercial and/or other milestones. In addition, we may be required to make sales-based royalty payments under certain arrangements if certain products are approved for marketing. Due to the fact that it is uncertain if and when these milestones will be achieved, such contingencies have not been recorded in our Consolidated Balance Sheets.

39


Acquisitions. Going forward, our primary focus will be on organic growth. However, we may consider and, as appropriate, make acquisitions of other businesses, products, product rights or technologies. Our cash reserves and other liquid assets may be inadequate to consummate such acquisitions and it may be necessary for us to issue ordinary shares or raise substantial additional funds in the future to complete future transactions. In addition, as a result of any acquisition efforts, we are likely to experience significant charges to earnings for merger and related expenses (whether or not our efforts are successful) that may include transaction costs, closure costs, integration costs and/or costs of restructuring activities.
Legal proceedings. We are subject to various patent challenges, product liability claims, government investigations and other legal proceedings in the ordinary course of business. Contingent accruals are recorded when we determine that a loss is both probable and reasonably estimable. Due to the fact that legal proceedings and other contingencies are inherently unpredictable, our assessments involve significant judgments regarding future events. For additional discussion of legal proceedings, see Note 14. Commitments and Contingencies of the Consolidated Financial Statements of Part IV, Item 15 of this report “Exhibits, Financial Statement Schedules”.
Contractual Obligations. The following table lists our enforceable and legally binding noncancelable obligations as of December 31, 2017.
 
 
Payment Due by Period (in thousands)
 
 
Total
 
2018
 
2019
 
2020
 
2021
 
2022
 
Thereafter
Long-term debt obligations (1)
 
$
8,382,980

 
$
34,205

 
$
34,150

 
$
34,150

 
$
34,150

 
$
1,134,150

 
$
7,112,175

Interest expense (2)
 
3,170,418

 
520,446

 
513,425

 
517,651

 
517,276

 
480,210

 
621,410

Capital lease obligations (3)
 
47,548

 
6,713

 
6,633

 
6,564

 
6,681

 
6,831

 
14,126

Operating lease obligations (4)
 
88,186

 
13,888

 
14,120

 
13,505

 
11,758

 
11,212

 
23,703

Purchase obligations (5)
 
65,740

 
22,093

 
15,016

 
11,343

 
11,586

 
1,150

 
4,552

Mesh-related product liability settlements (6)
 
602,689

 
392,239

 
210,450

 

 

 

 

Other obligations and commitments (7)
 
8,343

 
4,843

 
500

 
500

 
500

 
500

 
1,500

Total (8)
 
$
12,365,904

 
$
994,427

 
$
794,294

 
$
583,713

 
$
581,951

 
$
1,634,053

 
$
7,777,466

__________
(1)
Includes minimum cash payments related to principal associated with our indebtedness. A discussion of such indebtedness is included above under the caption “Borrowings”. Any outstanding amounts borrowed pursuant to the 2017 Credit Facility will immediately mature if certain of our senior notes (enumerated under the heading “April 2017 Refinancing” in Note 13. Debt of the Consolidated Financial Statements of Part IV, Item 15 of this report) (other than, in the case of the 2017 Revolving Credit Facility, the 5.375% Senior notes Due 2023 and the 6.00% Senior Notes due 2023) are not refinanced or repaid in full prior to the date that is 91 days prior to the respective stated maturity dates thereof. Accordingly, we may be required to repay or refinance senior notes with an aggregate principal amount of $1,100.0 million in 2021, despite such notes having stated maturities in 2022. Similarly, we may be required to repay or refinance senior notes with an aggregate principal amount of $750.0 million in 2022, despite such notes having stated maturities in 2023. The amounts in this table do not reflect any such early payment; rather, they reflect stated maturity dates.
(2)
These amounts represent future cash interest payments related to our existing debt obligations based on fixed and variable interest rates specified in the associated debt agreements. Payments related to variable debt are based on applicable rates at December 31, 2017 plus the specified margin in the associated debt agreements for each period presented.
(3)
Includes minimum cash payments related to certain fixed assets, primarily related to technology. In addition, includes minimum cash payments related to the direct financing arrangement for our U.S. headquarters in Malvern, Pennsylvania. We have entered into agreements to sublease certain properties. Most significantly, we sublease approximately 90,000 square feet of our Malvern, Pennsylvania headquarters and substantially all of our Chesterbrook, Pennsylvania facility. As of December 31, 2017, we expect to receive approximately $25.2 million in future minimum rental payments over the remaining terms of the Malvern and Chesterbrook subleases from 2018 until 2024. Amounts included in this table have not been reduced by the minimum sublease rentals.
(4)
Includes minimum cash payments related to our leased automobiles, machinery and equipment, facilities and other property not included in capital lease obligations. Any proceeds for sublease income are excluded from the table above.
(5)
Purchase obligations are enforceable and legally binding obligations for purchases of goods and services, including minimum inventory contracts.
(6)
The amounts included above represent contractual payments for mesh-related product liability settlements and reflect the earliest date that a settlement payment could be due and the largest amount that could be due on that date. These matters are described in more detail in Note 14. Commitments and Contingencies of the Consolidated Financial Statements of Part IV, Item 15 of this report.
(7)
Other obligations and commitments include agreements to purchase third-party assets, products and services and other minimum royalty obligations.
(8)
Total does not include contractual obligations already included in current liabilities on our Consolidated Balance Sheets, except for current portion of long-term debt, accrued interest, short-term capital lease obligations, the mesh-related product liability and certain purchase obligations, which are discussed below.

40


For purposes of the table above, obligations for the purchase of goods or services are included only for significant noncancelable purchase orders at least one year in length that are enforceable, legally binding and specify all significant terms, including fixed or minimum quantities to be purchased, fixed, minimum or variable price provisions and the timing of the obligation. In cases where our minimum obligations are variable based on future contingent events or circumstances, we estimate the minimum obligations based on information available to us at the time of disclosure. Our purchase orders are based on our current manufacturing needs and are typically fulfilled by our suppliers within a relatively short period. At December 31, 2017, we have open purchase orders that represent authorizations to purchase rather than binding agreements that are not included in the table above. In addition, we do not include collaboration agreements and potential payments under those agreements or potential payments related to contingent consideration.
As of December 31, 2017, our liability for unrecognized tax benefits amounted to $435.1 million (including interest and penalties). Due to the nature and timing of the ultimate outcome of these uncertain tax positions, we cannot make a reliable estimate of the amount and period of related future payments. Therefore, our liability has been excluded from the above contractual obligations table.
Fluctuations. Our quarterly results have fluctuated in the past and may continue to fluctuate. These fluctuations may be due to the timing of new product launches, purchasing patterns of our customers, market acceptance of our products, the impact of competitive products and pricing, certain actions taken by us which may impact the availability of our products, asset impairment charges, litigation-related charges, restructuring costs, including separation benefits, business combination transaction costs, upfront, milestone and certain other payments made or accrued pursuant to licensing agreements and changes in the fair value of financial instruments and contingent assets and liabilities recorded as part of business combinations. Further, a substantial portion of our total revenues are through three wholesale drug distributors who in turn supply our products to pharmacies, hospitals and physicians. Accordingly, we are potentially subject to a concentration of credit risk with respect to our trade receivables.
Growth opportunities. We continue to evaluate growth opportunities including investments, licensing arrangements, acquisitions of product rights or technologies, businesses and strategic alliances and promotional arrangements, any of which could require significant capital resources. We continue to focus our business development activities on further diversifying our revenue base through product licensing and company acquisitions, as well as other opportunities to enhance shareholder value. Through execution of our business strategy we focus on developing new products both internally and with contract and collaborative partners; expanding our product lines by acquiring new products and technologies, increasing revenues and earnings through sales and marketing programs for our innovative product offerings and effectively using our resources; and providing additional resources to support our businesses.
Non-U.S. operations. Fluctuations in foreign currency rates resulted in a net gain of $2.8 million in 2017. This compares to a net loss of $3.0 million in 2016 and a net gain of $23.1 million in 2015.
Inflation. We do not believe that inflation had a material adverse effect on our financial statements for the periods presented.
Off-balance sheet arrangements. We have no off-balance sheet arrangements as defined in Item 303(a)(4) of Regulation S-K.
Item 8.        Financial Statements and Supplementary Data
The information required by this item is contained in the financial statements set forth in Item 15. under the caption “Consolidated Financial Statements” as part of this filing.
PART IV
Item 15.     Exhibits, Financial Statement Schedules
(a) The following documents are filed as part of this report:
1.
The Consolidated Financial Statements:
Management’s Report on Internal Control Over Financial Reporting
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets as of December 31, 2017 and 2016
Consolidated Statements of Operations for the years ended December 31, 2017, 2016 and 2015
Consolidated Statements of Comprehensive Loss for the years ended December 31, 2017, 2016 and 2015
Consolidated Statements of Shareholders’ Equity for the years ended December 31, 2017, 2016 and 2015
Consolidated Statements of Cash Flows for the years ended December 31, 2017, 2016 and 2015
Notes to Consolidated Financial Statements
2.
Financial Statement Schedules

41


SCHEDULE II—VALUATION AND QUALIFYING ACCOUNTS
(in thousands)
 
Balance at Beginning of Period
 
Additions, Costs and Expenses
 
Deductions, Write-offs
 
Other (1)
 
Balance at End of Period
Valuation Allowance For Deferred Tax Assets:
 
 
 
 
 
 
 
 
 
Year Ended December 31, 2015
$
40,646

 
$
386,087

 
$
(17,106
)
 
$
17,364

 
$
426,991

Year Ended December 31, 2016
$
426,991

 
$
4,416,478

 
$
(2,039
)
 
$
(221
)
 
$
4,841,209

Year Ended December 31, 2017
$
4,841,209

 
$
3,811,982

 
$

 
$
(590,216
)
 
$
8,062,975

__________
(1)
Represents opening balances of businesses acquired in the period and, for the year ended December 31, 2017, changes in the statutory U.S. Federal corporate income tax rate.
All other financial statement schedules have been omitted because they are not applicable or the required information is included in the Consolidated Financial Statements or notes thereto.
3.
Exhibits:

42


 
 
Incorporated by Reference From:
Number
Description
File Number
Filing Type
Filing Date
2.1
001-36326
Quarterly Report on Form 10-Q
May 11, 2015
2.2
001-36326
Current Report on Form 8-K
May 21, 2015
2.3
001-36326
Quarterly Report on Form 10-Q
May 9, 2017
2.4
001-36326
Quarterly Report on Form 10-Q
August 8, 2017
3.1
001-36326
Current Report on Form 8-K12B
February 28, 2014
3.2
001-36326
Quarterly Report on Form 10-Q
August 8, 2017
4.1
333-194253
Form S-8
February 28, 2014
4.2
001-15989
Current Report on Form 8-K
June 9, 2011
4.3
001-15989
Annual Report on Form 10-K
March 3, 2014
4.4
001-36326
Current Report on Form 8-K
April 17, 2014
4.5
001-15989
Current Report on Form 8-K
December 19, 2013

43


 
 
Incorporated by Reference From:
Number
Description
File Number
Filing Type
Filing Date
4.6
001-36326
Current Report on Form 8-K12B
February 28, 2014
4.7
001-36326
Annual Report on Form 10-K
February 29, 2016
4.8
001-36326
Current Report on Form 8-K
May 7, 2014
4.9
001-36326
Annual Report on Form 10-K
February 29, 2016
4.10
001-36326
Current Report on Form 8-K
May 7, 2014
4.11