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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
_______________________________
FORM 10-Q
_______________________________
(Mark One)
x    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2016
OR
o    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
                    FOR THE TRANSITION PERIOD FROM              TO
Commission file number: 001-36326
____________________________________________________________________________________________
ENDO INTERNATIONAL PLC
(Exact Name of Registrant as Specified in Its Charter)
____________________________________________________________________________________________
Ireland
68-0683755
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification Number)
 
 
First Floor, Minerva House, Simmonscourt Road, Ballsbridge, Dublin 4, Ireland
Not applicable
(Address of Principal Executive Offices)
(Zip Code)
011-353-1-268-2000
(Registrant’s Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Name of each exchange on which registered
Ordinary shares, nominal value $0.0001 per share
The NASDAQ Global Market, The Toronto Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
None
____________________________________________________________________________________________
Indicate by check whether the registrant: (1) has filed all reports required to be filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes x    No   o
Indicate by check whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes x     No   o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a smaller reporting company. See definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer
x
Accelerated filer
o
 
 
 
 
Non-accelerated filer
o  (Do not check if a smaller reporting company)
Smaller reporting company
o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).    YES  o    NO   x
Indicate the number of shares outstanding of each of the issuer’s classes of ordinary shares, as of the latest practical date.
Ordinary shares, $0.0001 par value
Number of ordinary shares outstanding as of
August 2, 2016
:
222,766,688




ENDO INTERNATIONAL PLC

INDEX
 
 
Page
Forward-Looking Statements
 
 
PART I. FINANCIAL INFORMATION
 
Item 1.
Financial Statements
 
Condensed Consolidated Balance Sheets as of June 30, 2016 (Unaudited) and December 31, 2015
 
Condensed Consolidated Statements of Operations (Unaudited) Three and Six Months Ended June 30, 2016 and 2015
 
Condensed Consolidated Statements of Comprehensive Income (Loss) (Unaudited) Three and Six Months Ended June 30, 2016 and 2015
 
Condensed Consolidated Statements of Cash Flows (Unaudited) Six Months Ended June 30, 2016 and 2015
 
Notes to Condensed Consolidated Financial Statements (Unaudited)
Item 2.
Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
Item 4.
Controls and Procedures
 
 
 
PART II. OTHER INFORMATION
 
Item 1.
Legal Proceedings
Item 1A.
Risk Factors
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
Item 3.
Defaults Upon Senior Securities
Item 4.
Mine Safety Disclosures
Item 5.
Other Information
Item 6.
Exhibits
 
 
 
Signatures
Exhibit Index
 


Table of Contents

FORWARD-LOOKING STATEMENTS
Statements contained or incorporated by reference in this document contain information that includes or is based on “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, or the Securities Act, and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act. These statements, including estimates of future revenues, future expenses, future net income and future net income per share, contained in the section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” which is included in this document, are subject to risks and uncertainties. Forward-looking statements include the information concerning our possible or assumed results of operations. We have tried, whenever possible, to identify such statements by words such as “believes,” “expects,” “anticipates,” “intends,” “estimates,” “plan,” “projected,” “forecast,” “will,” “may,” or similar expressions. We have based these forward-looking statements on our current expectations and projections about the growth of our business, our financial performance, and the development of our industry. Because these statements reflect our current views concerning future events, these forward-looking statements involve risks and uncertainties. Investors should note that many factors, as more fully described under the caption “Risk Factors” in Part II, Item 1A. of this document and in Part I, Item 1A. of our Annual Report on Form 10-K for the year ended December 31, 2015, as supplemented and amended by risk factors previously disclosed by us in Part II, Item 1A. under the caption “Risk Factors” of our Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2016, 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 and with securities regulators in Canada on the System for Electronic Document Analysis and Retrieval. Also note that, under the caption “Risk Factors” in Part II, Item 1A. of this document and in Part I, Item 1A. of our Annual Report on Form 10-K for the year ended December 31, 2015, as supplemented and amended by the risk factors previously disclosed by us in Part II, Item 1A. under the caption “Risk Factors” of our Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2016, we provide a cautionary discussion of the risks, uncertainties and possibly inaccurate assumptions relevant to our business. These are factors that, individually or in the aggregate, we think could cause our actual results to differ materially from expected and historical results. We note these factors for investors as permitted by Section 27A of the Securities Act and Section 21E of the Exchange Act. You should understand that it is not possible to predict or identify all such factors. Consequently, you should not consider this to be a complete discussion of all potential risks or uncertainties.

i
Table of Contents

PART I. FINANCIAL INFORMATION
Item 1.        Financial Statements
ENDO INTERNATIONAL PLC
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(In thousands, except share and per share data)
 
June 30,
2016
 
December 31,
2015
ASSETS
 
 
 
CURRENT ASSETS:
 
 
 
Cash and cash equivalents
$
667,822

 
$
272,348

Restricted cash and cash equivalents
388,560

 
585,379

Marketable securities
33

 
34

Accounts receivable
875,058

 
1,014,808

Inventories, net
626,320

 
752,493

Prepaid expenses and other current assets
45,992

 
55,052

Income taxes receivable
46,631

 
735,901

Assets held for sale (NOTE 3)
—

 
36,522

Total current assets
$
2,650,416

 
$
3,452,537

MARKETABLE SECURITIES
2,206

 
3,855

PROPERTY, PLANT AND EQUIPMENT, NET
673,294

 
675,624

GOODWILL
7,417,237

 
7,299,354

OTHER INTANGIBLES, NET
7,096,659

 
7,828,942

DEFERRED INCOME TAXES
9,532

 
10,423

OTHER ASSETS
86,191

 
79,601

TOTAL ASSETS
$
17,935,535

 
$
19,350,336

LIABILITIES AND SHAREHOLDERS’ EQUITY
 
 
 
CURRENT LIABILITIES:
 
 
 
Accounts payable
$
318,459

 
$
347,503

Accrued expenses
1,040,519

 
1,162,612

Current portion of legal settlement accrual
1,455,259

 
1,606,726

Current portion of long-term debt
117,454

 
328,705

Income taxes payable
7,149

 
8,551

Liabilities held for sale (NOTE 3)
—

 
20,215

Total current liabilities
$
2,938,840

 
$
3,474,312

DEFERRED INCOME TAXES
142,089

 
871,040

LONG-TERM DEBT, LESS CURRENT PORTION, NET
8,199,888

 
8,251,657

LONG-TERM LEGAL SETTLEMENT ACCRUAL, LESS CURRENT PORTION, NET
155,474

 
549,098

OTHER LIABILITIES
237,706

 
236,253

COMMITMENTS AND CONTINGENCIES (NOTE 12)


 


SHAREHOLDERS’ EQUITY:
 
 
 
Euro deferred shares, $0.01 par value; 4,000,000 shares authorized and issued
44

 
43

Ordinary shares, $0.0001 par value; 1,000,000,000 shares authorized; 222,765,414 and 222,124,282 shares issued and outstanding at June 30, 2016 and December 31, 2015, respectively
22

 
22

Additional paid-in capital
8,719,074

 
8,693,385

Accumulated deficit
(2,131,506
)
 
(2,341,215
)
Accumulated other comprehensive loss
(326,096
)
 
(384,205
)
Total Endo International plc shareholders’ equity
$
6,261,538

 
$
5,968,030

Noncontrolling interests
—

 
(54
)
Total shareholders’ equity
$
6,261,538

 
$
5,967,976

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY
$
17,935,535

 
$
19,350,336

See Notes to Condensed Consolidated Financial Statements.

1
Table of Contents

ENDO INTERNATIONAL PLC
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(In thousands, except per share data)
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2016
 
2015
 
2016
 
2015
 TOTAL REVENUES
$
920,887

 
$
735,166

 
$
1,884,426

 
$
1,449,294

 COSTS AND EXPENSES:
 
 
 
 
 
 
 
Cost of revenues
632,218

 
438,858

 
1,320,923

 
823,124

Selling, general and administrative
193,070

 
154,491

 
371,425

 
366,069

Research and development
50,589

 
18,984

 
92,281

 
36,881

Litigation-related and other contingencies, net
5,259

 
6,875

 
10,459

 
19,875

Asset impairment charges
39,951

 
70,243

 
169,576

 
77,243

Acquisition-related and integration items
48,171

 
44,225

 
60,725

 
78,865

 OPERATING (LOSS) INCOME FROM CONTINUING OPERATIONS
$
(48,371
)
 
$
1,490

 
$
(140,963
)
 
$
47,237

 INTEREST EXPENSE, NET
111,919

 
80,611

 
228,712

 
153,750

 LOSS ON EXTINGUISHMENT OF DEBT
—

 
—

 
—

 
980

 OTHER EXPENSE, NET
5,175

 
24,493

 
3,268

 
12,498

 LOSS FROM CONTINUING OPERATIONS BEFORE INCOME TAX
$
(165,465
)
 
$
(103,614
)
 
$
(372,943
)
 
$
(119,991
)
 INCOME TAX BENEFIT
(555,277
)
 
(12,720
)
 
(673,992
)
 
(179,589
)
 INCOME (LOSS) FROM CONTINUING OPERATIONS
$
389,812

 
$
(90,894
)
 
$
301,049

 
$
59,598

 DISCONTINUED OPERATIONS, NET OF TAX (NOTE 3)
(46,216
)
 
(159,632
)
 
(91,324
)
 
(385,842
)
 CONSOLIDATED NET INCOME (LOSS)
$
343,596

 
$
(250,526
)
 
$
209,725

 
$
(326,244
)
 Less: Net income (loss) attributable to noncontrolling interests
18

 
(107
)
 
16

 
(107
)
 NET INCOME (LOSS) ATTRIBUTABLE TO ENDO INTERNATIONAL PLC
$
343,578

 
$
(250,419
)
 
$
209,709

 
$
(326,137
)
 NET INCOME (LOSS) PER SHARE ATTRIBUTABLE TO ENDO INTERNATIONAL PLC ORDINARY SHAREHOLDERS—BASIC:
 
 
 
 
 
 
 
Continuing operations
$
1.75

 
$
(0.49
)
 
$
1.35

 
$
0.34

Discontinued operations
(0.21
)
 
(0.86
)
 
(0.41
)
 
(2.18
)
Basic
$
1.54

 
$
(1.35
)
 
$
0.94

 
$
(1.84
)
 NET INCOME (LOSS) PER SHARE ATTRIBUTABLE TO ENDO INTERNATIONAL PLC ORDINARY SHAREHOLDERS—DILUTED:
 
 
 
 
 
 
 
Continuing operations
$
1.75

 
$
(0.49
)
 
$
1.35

 
$
0.33

Discontinued operations
(0.21
)
 
(0.86
)
 
(0.41
)
 
(2.11
)
Diluted
$
1.54

 
$
(1.35
)
 
$
0.94

 
$
(1.78
)
 WEIGHTED AVERAGE SHARES:
 
 
 
 
 
 
 
Basic
222,667

 
185,328

 
222,485

 
177,490

Diluted
222,863

 
185,328

 
223,021

 
182,822

See Notes to Condensed Consolidated Financial Statements.

2
Table of Contents

ENDO INTERNATIONAL PLC
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (UNAUDITED)
(In thousands)
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2016
 
2015
 
2016
 
2015
 CONSOLIDATED NET INCOME (LOSS)
 
 
$
343,596

 
 
 
$
(250,526
)
 
 
 
$
209,725

 
 
 
$
(326,244
)
OTHER COMPREHENSIVE (LOSS) INCOME, NET OF TAX:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net unrealized (loss) gain on securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Unrealized (loss) gain arising during the period
$
(147
)
 
 
 
$
201

 
 
 
$
(1,007
)
 
 
 
$
1,714

 
 
Less: reclassification adjustments for loss (gain) realized in net income (loss)
—

 
(147
)
 
—

 
201

 
—

 
(1,007
)
 
—

 
1,714

Foreign currency translation (loss) gain
 
 
(21,609
)
 
 
 
8,001

 
 
 
59,154

 
 
 
(123,347
)
OTHER COMPREHENSIVE (LOSS) INCOME
 
 
$
(21,756
)
 
 
 
$
8,202

 
 
 
$
58,147

 
 
 
$
(121,633
)
 CONSOLIDATED COMPREHENSIVE INCOME (LOSS)
 
 
$
321,840

 
 
 
$
(242,324
)
 
 
 
$
267,872

 
 
 
$
(447,877
)
Less: Net income (loss) attributable to noncontrolling interests
 
 
18

 
 
 
(107
)
 
 
 
16

 
 
 
(107
)
Less: Other comprehensive income (loss) attributable to noncontrolling interests
 
 
(18
)
 
 
 
57

 
 
 
38

 
 
 
(549
)
COMPREHENSIVE INCOME (LOSS) ATTRIBUTABLE TO ENDO INTERNATIONAL PLC
 
 
$
321,840

 
 
 
$
(242,274
)
 
 
 
$
267,818

 
 
 
$
(447,221
)
See Notes to Condensed Consolidated Financial Statements.

3
Table of Contents

ENDO INTERNATIONAL PLC
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(In thousands)
 
Six Months Ended June 30,
 
2016
 
2015
OPERATING ACTIVITIES:
 
 
 
Consolidated net income (loss)
$
209,725

 
$
(326,244
)
Adjustments to reconcile consolidated net income (loss) to Net cash provided by (used in) operating activities:
 
 
 
Depreciation and amortization
476,911

 
249,181

Inventory step-up
87,970

 
84,253

Share-based compensation
29,585

 
24,753

Amortization of debt issuance costs and discount
14,483

 
10,580

Provision for bad debts
8,082

 
1,141

Deferred income taxes
(670,615
)
 
(244,152
)
Net loss (gain) on disposal of property, plant and equipment
1,310

 
(132
)
Change in fair value of contingent consideration
13,204

 
(3,328
)
Loss on extinguishment of debt
—

 
980

Asset impairment charges
190,904

 
318,865

Gain on sale of business and other assets
(735
)
 
—

Changes in assets and liabilities which (used) provided cash:
 
 
 
Accounts receivable
133,654

 
(124,681
)
Inventories
29,830

 
(22,425
)
Prepaid and other assets
21,846

 
(8,940
)
Accounts payable
(22,067
)
 
4,349

Accrued expenses
(260,352
)
 
235,867

Other liabilities
(395,126
)
 
(228,938
)
Income taxes payable/receivable
686,091

 
(48,615
)
Net cash provided by (used in) operating activities
$
554,700

 
$
(77,486
)
INVESTING ACTIVITIES:
 
 
 
Purchases of property, plant and equipment
(53,705
)
 
(38,621
)
Proceeds from sale of intellectual property and property, plant and equipment
2,523

 
—

Acquisitions, net of cash acquired
—

 
(915,945
)
Proceeds from sale of marketable securities and investments
—

 
24

Proceeds from notes receivable
—

 
17

Patent acquisition costs and license fees
(13,000
)
 
—

Proceeds from sale of business, net
4,108

 
4,712

Increase in restricted cash and cash equivalents
(327,359
)
 
(381,223
)
Decrease in restricted cash and cash equivalents
524,438

 
424,695

Net cash provided by (used in) investing activities
$
137,005

 
$
(906,341
)

4
Table of Contents

 
Six Months Ended June 30,
 
2016
 
2015
FINANCING ACTIVITIES:
 
 
 
Proceeds from issuance of notes
—

 
1,200,000

Principal payments on term loans
(48,375
)
 
(26,188
)
Proceeds from draw of revolving debt
—

 
175,000

Repayments of revolving debt
(225,000
)
 
(175,000
)
Principal payments on other indebtedness, net
(3,365
)
 
(3,231
)
Repurchase of convertible senior subordinated notes
—

 
(247,760
)
Deferred financing fees
(500
)
 
(25,696
)
Payment for contingent consideration
(18,646
)
 
(7,383
)
Tax benefits of share awards
3,911

 
20,079

Payments of tax withholding for restricted shares
(10,396
)
 
(12,570
)
Exercise of options
1,952

 
23,440

Issuance of ordinary shares
2,729

 
2,302,281

Payments related to the issuance of ordinary shares
—

 
(66,956
)
Cash buy-out of noncontrolling interests
—

 
(39,608
)
Net cash (used in) provided by financing activities
$
(297,690
)
 
$
3,116,408

Effect of foreign exchange rate
$
1,459

 
$
(11,599
)
NET INCREASE IN CASH AND CASH EQUIVALENTS
$
395,474

 
$
2,120,982

CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD
272,348

 
408,753

CASH AND CASH EQUIVALENTS, END OF PERIOD
$
667,822

 
$
2,529,735

SUPPLEMENTAL INFORMATION:
 
 
 
Cash received from income taxes, net
$
698,584

 
$
50,535

Cash paid into Qualified Settlement Funds for mesh legal settlements
$
326,795

 
$
377,074

Cash paid out of Qualified Settlement Funds for mesh legal settlements
$
524,438

 
$
385,087

Other cash distributions for mesh legal settlements
$
5,438

 
$
10,829

SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
 
 
 
Purchases of property, plant and equipment financed by capital leases
$
658

 
$
54

Accrual for purchases of property, plant and equipment
$
2,363

 
$
2,072

Acquisition financed by ordinary shares
$
—

 
$
1,519,318

Repurchase of convertible senior subordinated notes financed by ordinary shares
$
—

 
$
625,483

See Notes to Condensed Consolidated Financial Statements.

5
Table of Contents

ENDO INTERNATIONAL PLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2016

NOTE 1. BASIS OF PRESENTATION
The accompanying unaudited Condensed Consolidated Financial Statements of Endo International plc and its subsidiaries have been prepared in accordance with United States (U.S.) generally accepted accounting principles (GAAP) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X of the Securities and Exchange Commission for interim financial information. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, the accompanying Condensed Consolidated Financial Statements of Endo International plc and its subsidiaries, which are unaudited, include all normal and recurring adjustments necessary to a fair statement of the Company’s financial position as of June 30, 2016 and the results of our operations and our cash flows for the periods presented. Operating results for the three and six months ended June 30, 2016 are not necessarily indicative of the results that may be expected for the year ending December 31, 2016. The year-end Condensed Consolidated Balance Sheet data as of December 31, 2015 was derived from the audited financial statements.
Certain prior period amounts within the operating activities section of our Condensed Consolidated Statements of Cash Flows have been reclassified to conform to the current period presentation. These reclassifications had no impact on our Condensed Consolidated Balance Sheets or our Condensed Consolidated Statements of Operations.
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 branded and generic pharmaceuticals.
The information included in this Quarterly Report on Form 10-Q should be read in conjunction with our Consolidated Financial Statements and accompanying notes included in our Annual Report on Form 10-K for the year ended December 31, 2015.

NOTE 2. RECENT ACCOUNTING PRONOUNCEMENTS
In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards update (ASU) No. 2014-09, “Revenue from Contracts with Customers” (ASU 2014-09). ASU 2014-09 represents a comprehensive new revenue recognition model that requires a company to recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which a company expects to be entitled to receive in exchange for those goods or services. This ASU sets forth a new five-step revenue recognition model which replaces the prior revenue recognition guidance in its entirety and is intended to eliminate numerous industry-specific pieces of revenue recognition guidance that have historically existed. In August 2015, the FASB issued ASU No. 2015-14, “Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date,” which defers the effective date of ASU 2014-09 by one year, but permits companies to adopt one year earlier if they choose (i.e., the original effective date). As such, ASU 2014-09 will be effective for annual and interim reporting periods beginning after December 15, 2017 and the Company currently plans to adopt it on January 1, 2018. In March and April 2016, the FASB issued ASU No. 2016-08 “Revenue from Contracts with Customers (Topic 606): Principal versus Agent Consideration (Reporting Revenue Gross versus Net)” and ASU No. 2016-10 “Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing,” respectively, which clarifies the guidance on reporting revenue as a principal versus agent, identifying performance obligations and accounting for intellectual property licenses. In addition, in May 2016, the FASB issued ASU No. 2016-12 “Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients,” which amends certain narrow aspects of Topic 606. The Company is currently evaluating the impact of these standards on the Company’s consolidated results of operations and financial position, including possible transition alternatives.
In July 2015, the FASB issued ASU No. 2015-11, “Simplifying the Measurement of Inventory” (ASU 2015-11). ASU 2015-11 states that an entity should measure inventory at the lower of cost or net realizable value. Net realizable value is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. For public entities, ASU 2015-11 is effective for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years. The amendments in this update should be applied prospectively and early application is permitted. The Company is currently evaluating the impact of ASU 2015-11 on the Company’s consolidated results of operations and financial position.

6
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In February 2016, the FASB issued ASU No. 2016-02, “Leases (Topic 842)” (ASU 2016-02). ASU 2016-02 establishes the principles to report transparent and economically neutral information about the assets and liabilities that arise from leases. This guidance results in a more faithful representation of the rights and obligations arising from operating and capital leases by requiring lessees to recognize the lease assets and lease liabilities that arise from leases in the statement of financial position and to disclose qualitative and quantitative information about lease transactions, such as information about variable lease payments and options to renew and terminate leases. ASU 2016-02 is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. The Company is currently evaluating the impact of ASU 2016-02 on the Company’s consolidated results of operations and financial position.
In March 2016, the FASB issued ASU No. 2016-09 “Improvements to Employee Share-Based Payment Accounting” (ASU 2016-09). ASU 2016-09 changes how companies account for certain aspects of share-based payments to employees including: (a) requiring all income tax effects of awards to be recognized in the income statement, rather than in additional paid in capital, when the awards vest or are settled, (b) eliminating the requirement that excess tax benefits be realized before companies can recognize them, (c) requiring companies to present excess tax benefits as an operating activity on the statement of cash flows rather than as a financing activity, (d) increasing the amount an employer can withhold to cover income taxes on awards and still qualify for the exception to liability classification for shares used to satisfy the employer’s statutory income tax withholding obligation, (e) requiring an employer to classify the cash paid to a tax authority when shares are withheld to satisfy its statutory income tax withholding obligation as a financing activity on its statement of cash flows and (f) electing whether to account for forfeitures of share-based payments by (1) recognizing forfeitures of awards as they occur or (2) estimating the number of awards expected to be forfeited and adjusting the estimate when it is likely to change, as is currently required. ASU 2016-09 is effective for fiscal years beginning after December 15, 2016, and interim periods within those fiscal years. Early adoption is permitted in any interim or annual period but all of ASU 2016-09 must be adopted in the same period. The Company is currently evaluating the impact of ASU 2016-09 on the Company’s consolidated results of operations and financial position.
NOTE 3. DISCONTINUED OPERATIONS AND HELD FOR SALE
American Medical Systems
On February 24, 2015, the Company’s Board of Directors (Board of Directors) approved a plan to sell the Company’s American Medical Systems Holdings, Inc. (AMS) business, which comprised the entirety of our former Devices segment. The AMS business was comprised of the Men’s Health and Prostate Health business as well as the Women’s Health business (referred to herein as Astora). On August 3, 2015, the Company sold the Men’s Health and Prostate Health business to Boston Scientific Corporation (Boston Scientific) for $1.65 billion, with $1.60 billion paid upfront in cash and $50.0 million in cash contingent on Boston Scientific achieving certain product revenue milestones in the Men’s Health and Prostate Health business in 2016.
In addition to selling the Men’s Health and Prostate Health business in 2015, as of December 31, 2015 and continuing into 2016, the Company was actively pursuing a sale of the Astora business with the Company in active negotiations with multiple potential buyers. The majority of the remaining assets and liabilities of the AMS business, which were related to the Astora business, were classified as held for sale in the Consolidated Balance Sheet as of December 31, 2015 in the Company’s Form 10-K filed with the Securities and Exchange Commission on February 29, 2016. Certain of AMS’s assets and liabilities, primarily with respect to its product liability accrual related to vaginal mesh cases, the related Qualified Settlement Funds and certain intangible and fixed assets, were not classified as held for sale based on management’s expectation that these assets and liabilities would remain with the Company.
On February 24, 2016, the Board of Directors resolved to wind down the Company’s Astora business as it did not align with the Company’s strategic direction and to reduce the additional exposure to mesh-related product liability. The Company conducted a wind down process to transition physicians to alternative products during the first quarter of 2016. The Company ceased business operations of Astora on March 31, 2016 and exited its AMS business. As a result, as of March 31, 2016 and periods thereafter, the remaining assets and liabilities of the AMS business, which were related to the Astora business, were no longer classified as held for sale in the Condensed Consolidated Balance Sheets. In accordance with applicable accounting guidance, the Company also reclassified the Astora assets and liabilities previously presented as held for sale as of December 31, 2015 to held and used on its Condensed Consolidated Balance Sheets.
The operating results of the AMS business are reported as Discontinued operations, net of tax in the Condensed Consolidated Statements of Operations for all periods presented.

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The following table provides the operating results of the Discontinued operations, net of tax for the three and six months ended June 30, 2016 and 2015 (in thousands):
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2016
 
2015
 
2016
 
2015
Revenue
$
863

 
$
119,940

 
$
29,714

 
$
238,605

Litigation related and other contingencies, net
$
—

 
$
268,552

 
$
2,450

 
$
273,752

Asset impairment charges
$
149

 
$
—

 
$
21,328

 
$
222,753

Loss from discontinued operations before income taxes
$
(22,492
)
 
$
(257,642
)
 
$
(91,324
)
 
$
(487,500
)
Income tax expense (benefit)
$
23,724

 
$
(98,010
)
 
$
—

 
$
(101,658
)
Discontinued operations, net of tax
$
(46,216
)
 
$
(159,632
)
 
$
(91,324
)
 
$
(385,842
)
As a result of the Astora wind down initiative announced in the first quarter of 2016, the Company incurred asset impairment charges of $0.1 million and $21.3 million during the three and six months ended June 30, 2016, respectively. See below for discussion of our material wind down initiatives.
The following table provides the Depreciation and amortization and Purchases of property, plant and equipment of AMS for the six months ended June 30, 2016 and 2015 (in thousands):
 
Six Months Ended June 30,
 
2016
 
2015
Cash flows from discontinued operating activities:
 
 
 
Net loss
$
(91,324
)
 
$
(385,842
)
Depreciation and amortization
$
—

 
$
11,555

Net cash used in discontinued investing activities:
 
 
 
Purchases of property, plant and equipment
$
(138
)
 
$
(2,182
)
Astora Restructuring
The Astora wind down process includes a restructuring initiative implemented during the three months ended March 31, 2016, which includes the reduction of the Astora workforce consisting of approximately 250 employees. Under this restructuring initiative, separation costs are expensed over the requisite service period, if any, while retention is being expensed ratably over the respective retention period.
As a result of the Astora restructuring initiative, the Company incurred expenses of $6.0 million and $66.6 million during the three and six months ended June 30, 2016, respectively, consisting of employee separation, retention and other benefit-related costs, asset impairment charges, contract termination charges and other general restructuring costs. There were no restructuring expenses related to this initiative during the three and six months ended June 30, 2015. The Company anticipates there will be additional pre-tax restructuring expenses of $4.3 million related to employee separation, retention and other benefit-related costs, contract termination charges and other restructuring costs and the majority of these actions are expected to be completed by September 30, 2016, with substantially all cash payments made by the end of 2016. These restructuring costs are included in Discontinued operations in the Condensed Consolidated Statements of Operations.
A summary of expenses related to the Astora restructuring initiative is included below for the three and six months ended June 30, 2016 (in thousands):
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2016
 
2016
Employee separation, retention and other benefit-related costs
$
5,317

 
$
21,466

Asset impairment charges
149

 
21,328

Contract termination charges
(424
)
 
9,800

Other wind down costs
909

 
14,030

Total
$
5,951

 
$
66,624


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The liability related to the Astora restructuring initiative totaled $21.4 million as of June 30, 2016 and is included in Accrued expenses in the Condensed Consolidated Balance Sheets. Changes to this accrual during the six months ended June 30, 2016 were as follows (in thousands):
 
Employee Separation, Retention and Other Benefit-Related Costs
 
Contract Termination Charges
 
Other Restructuring Costs
 
Total
Liability balance as of January 1, 2016
$
—

 
$
—

 
$
—

 
$
—

Expenses
21,466

 
9,800

 
7,351

 
38,617

Cash distributions
(7,763
)
 
(5,342
)
 
(4,068
)
 
(17,173
)
Liability balance as of June 30, 2016
$
13,703

 
$
4,458

 
$
3,283

 
$
21,444

NOTE 4. RESTRUCTURING
U.S. Generic Pharmaceuticals Restructuring
2015 U.S Generic Pharmaceuticals Restructuring
In connection with the acquisition of Par Pharmaceutical Holdings, Inc. (Par) on September 25, 2015, we implemented cost-rationalization and integration initiatives to capture operating synergies and generate cost savings across the Company. These measures included realigning the Company’s U.S. Generic Pharmaceuticals segment sales, sales support, management activities and staffing, which resulted in separation benefits to certain U.S. Generic Pharmaceuticals employees. The cost reduction initiatives included a reduction in headcount of approximately 6% of the U.S. Generic Pharmaceuticals workforces. Under this restructuring initiative (the 2015 U.S. Generic Pharmaceuticals restructuring initiative), separation costs are expensed over the requisite service period, if any, while retention is being expensed ratably over the respective retention period.
As a result of the 2015 U.S. Generic Pharmaceuticals restructuring initiative, the Company incurred restructuring expenses of $1.1 million and $4.6 million during the three and six months ended June 30, 2016, consisting of employee separation, retention and other benefit-related costs. The Company anticipates there will be additional pre-tax restructuring expenses of approximately $0.6 million related to employee separation, retention and other benefit-related costs and these actions are expected to be completed by October 31, 2016, with substantially all cash payments made by the end of 2016. In addition, the Company anticipates there will be additional pre-tax restructuring expenses of approximately $7.4 million related to accelerated depreciation on certain assets. These restructuring costs are allocated to the U.S. Generic Pharmaceuticals segment, and are primarily included in Selling, general and administrative costs and expenses in the Condensed Consolidated Statements of Operations.
The liability related to the 2015 U.S. Generic Pharmaceuticals restructuring initiative totaled $12.6 million and $17.9 million at June 30, 2016 and December 31, 2015, respectively. At June 30, 2016, this liability is included in Accrued expenses in the Condensed Consolidated Balance Sheets. Changes to this accrual during the six months ended June 30, 2016 were as follows (in thousands):
 
Total
Liability balance as of January 1, 2016
$
17,914

Expenses
4,588

Cash distributions
(9,906
)
Liability balance as of June 30, 2016
$
12,596

2016 U.S Generic Pharmaceuticals Restructuring
As part of the ongoing U.S. Generic Pharmaceuticals integration efforts, in May 2016 we announced a restructuring initiative to optimize our product portfolio and rationalize our manufacturing sites to expand product margins (the 2016 U.S. Generic Pharmaceuticals restructuring initiative). These measures include certain cost savings initiatives, including a reduction in headcount and the closing of our Charlotte, North Carolina manufacturing facility.

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As a result of the 2016 U.S. Generic Pharmaceuticals restructuring initiative, the Company expects to incur total restructuring-related expenses of approximately $200 million, consisting of asset impairment charges, charges to increase excess inventory reserves, employee separation, retention and other benefit-related costs and certain other charges. The Company anticipates these actions will be completed by September 2017, with substantially all cash payments made by the end of 2017. Under this restructuring initiative, separation costs will be expensed ratably over the requisite service period, if any. As a result of the 2016 U.S. Generic Pharmaceuticals restructuring initiative, the Company incurred pre-tax charges of $18.9 million and $146.2 million during the three and six months ended June 30, 2016, respectively. These charges consist of certain intangible asset impairment charges of $100.3 million during the six months ended June 30, 2016, charges to increase excess inventory reserves of $6.4 million and $33.3 million during the three and six months ended June 30, 2016, respectively, charges relating to employee separation, retention and other benefit-related costs of $6.4 million, accelerated depreciation of $3.4 million and other charges of $2.7 million during both the three and six months ended June 30, 2016. These charges are included in the U.S. Generic Pharmaceuticals segment, and are included in Asset impairment charges, Cost of revenues, and Selling, general and administrative costs and expenses in the Condensed Consolidated Statements of Operations.
The liability related to the 2016 U.S. Generic Pharmaceuticals restructuring initiative totaled $6.4 million at June 30, 2016 and is included in Accrued expenses in the Condensed Consolidated Balance Sheets. Changes to the accrual during the six months ended June 30, 2016 were as follows (in thousands):
 
Total
Liability balance as of January 1, 2016
$
—

Expenses
6,431

Cash payments
—

Liability balance as of June 30, 2016
$
6,431

Auxilium Restructuring
In connection with the acquisition of Auxilium Pharmaceuticals, Inc. (Auxilium) on January 29, 2015, the Company implemented cost-rationalization and integration initiatives to capture operating synergies and generate cost savings across the Company. These measures included realigning our sales, sales support, management activities and staffing, which included separation benefits to former Auxilium employees, in addition to the closing of duplicative facilities. The cost reduction initiatives included a reduction in headcount of approximately 40% of the former Auxilium workforce. For former Auxilium employees that agreed to continue employment with the Company for a merger transition period, the separation costs payable upon completion of their retention period was expensed over their respective retention period. The Company does not anticipate there will be additional material pre-tax restructuring expenses related to this initiative. The Company anticipates that substantially all employee separation, retention and other benefit-related costs cash payments relating to this initiative will be made by the end of 2016. The remainder of the cash payments will be made over the remaining lease term of Auxilium’s former corporate headquarters in Chesterbrook, Pennsylvania. These restructuring costs are included in the U.S. Branded Pharmaceuticals segment, and are primarily included in Selling, general and administrative costs and expenses in the Condensed Consolidated Statements of Operations.
The liability related to the Auxilium restructuring initiative totaled $6.7 million and $12.3 million at June 30, 2016 and December 31, 2015, respectively, and is included in Accrued expenses and Other liabilities in the Condensed Consolidated Balance Sheets. Changes to this accrual during the six months ended June 30, 2016 were as follows (in thousands):
 
Employee Separation, Retention and Other Benefit-Related Costs
 
Other Restructuring Costs
 
Total
Liability balance as of January 1, 2016
$
5,353

 
$
6,910

 
$
12,263

Cash distributions
(4,837
)
 
(760
)
 
(5,597
)
Liability balance as of June 30, 2016
$
516

 
$
6,150

 
$
6,666

NOTE 5. ACQUISITIONS
For each of the acquisitions described below, except for Auxilium, the estimated fair values of the net assets acquired are provisional as of June 30, 2016 and are based on information that is currently available to the Company. Additional information is being gathered to finalize these provisional measurements. Accordingly, the measurement of the assets acquired and liabilities assumed may change upon finalization of the Company’s valuations and completion of the purchase price allocations, all of which are expected to occur no later than one year from the respective acquisition dates.

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Auxilium Pharmaceuticals, Inc.
On January 29, 2015 (the Auxilium Acquisition Date), the Company acquired all of the outstanding shares of common stock of Auxilium, a fully integrated specialty biopharmaceutical company emerging as a leader in the men’s healthcare sector with a strategically focused product portfolio and pipeline in orthopedics, dermatology and other therapeutic areas, in a transaction valued at $2.6 billion. The Company believed that Auxilium would be highly complementary to its branded pharmaceuticals business with significant opportunities to leverage Auxilium’s leading presence in men’s health, as well as the Company’s R&D capabilities and financial resources, to accelerate the growth of Auxilium’s XIAFLEX® and its other products.
The operating results of Auxilium are included in the accompanying Condensed Consolidated Statements of Operations for the three and six months ended June 30, 2016 and the operating results from the Auxilium Acquisition Date are included in the accompanying Condensed Consolidated Statements of Operations for the three and six months ended June 30, 2015.
The Company recognized no acquisition-related transaction costs associated with the Auxilium acquisition during the six months ended June 30, 2016. The Company recognized acquisition-related transaction costs associated with the Auxilium acquisition during the six months ended June 30, 2015 totaling $23.1 million. These costs, which related primarily to bank fees, legal and accounting services, and fees for other professional services, are included in Acquisition-related and integration items in the accompanying Condensed Consolidated Statements of Operations.
The amounts of Auxilium Revenue and Net loss attributable to Endo International plc included in the Company’s Condensed Consolidated Statements of Operations from and including January 29, 2015 to June 30, 2015 are as follows (in thousands, except per share data):
Revenue
$
155,367

Net loss attributable to Endo International plc
$
(110,838
)
Basic net loss per share
$
(0.62
)
Diluted net loss per share
$
(0.61
)
The following supplemental unaudited pro forma information presents the financial results as if the acquisition of Auxilium had occurred on January 1, 2015 for the six months ended June 30, 2015. This supplemental pro forma information has been prepared for comparative purposes and does not purport to be indicative of what would have occurred had the acquisition been made on January 1, 2015, nor are they indicative of any future results.
 
Six Months Ended June 30, 2015
Unaudited pro forma consolidated results (in thousands, except per share data):
 
Revenue
$
1,472,869

Net loss attributable to Endo International plc
$
(333,583
)
Basic net loss per share
$
(1.88
)
Diluted net loss per share
$
(1.82
)
These amounts have been calculated after applying the Company’s accounting policies and adjusting the results of Auxilium to reflect factually supportable adjustments that give effect to events that are directly attributable to the Auxilium acquisition assuming the Auxilium acquisition had occurred on January 1, 2015. These adjustments mainly include adjustments to interest expense and additional intangible amortization. The adjustments to interest expense, net of tax, related to borrowings to finance the acquisition increased the expense by $1.1 million for the six months ended June 30, 2015. In addition, the adjustments include additional intangible amortization, net of tax, which would have been charged assuming the Company’s estimated fair value of the intangible assets. The adjustment to the amortization expense for the six months ended June 30, 2015 increased the expense by $8.8 million.
Acquisition of Par Pharmaceutical Holdings, Inc.
On September 25, 2015 (Par Acquisition Date), the Company acquired Par, a specialty pharmaceutical company that develops, licenses, manufactures, markets and distributes innovative and cost-effective pharmaceuticals with a focus on high-barrier-to-entry products that are difficult to formulate, for total consideration of $8.14 billion, including the assumption of Par debt. The consideration included the Company’s 18,069,899 ordinary shares valued at $1.33 billion.
The operating results of Par are included in the accompanying Condensed Consolidated Statements of Operations for the three and six months ended June 30, 2016. There are no results included in the accompanying Condensed Consolidated Statements of Operations for the three and six months ended June 30, 2015.

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The following table summarizes the fair values of the assets acquired and liabilities assumed at the Par Acquisition Date, including measurement period adjustments since the fair values presented in the Company’s Form 10-K for the year ended December 31, 2015 filed with the Securities and Exchange Commission on February 29, 2016, (in thousands):
 
September 25, 2015
 
Measurement period adjustments
 
September 25, 2015
(As adjusted)
Cash and cash equivalents
$
215,612

 
$
—

 
$
215,612

Accounts and other receivables
530,664

 
(13,500
)
 
517,164

Inventories
330,406

 
(1,849
)
 
328,557

Prepaid expenses and other current assets
31,124

 
—

 
31,124

Deferred income tax assets, current
14,652

 
660

 
15,312

Property, plant and equipment
256,293

 
4,744

 
261,037

Intangible assets
3,627,000

 
(154,500
)
 
3,472,500

Other assets
8,477

 
—

 
8,477

Total identifiable assets
$
5,014,228

 
$
(164,445
)
 
$
4,849,783

Accounts payable and accrued expenses
$
551,614

 
$
(13,500
)
 
$
538,114

Deferred income tax liabilities
1,093,779

 
(60,995
)
 
1,032,784

Other liabilities
16,057

 
—

 
16,057

Total liabilities assumed
$
1,661,450

 
$
(74,495
)
 
$
1,586,955

Net identifiable assets acquired
$
3,352,778

 
$
(89,950
)
 
$
3,262,828

Goodwill
4,782,876

 
89,950

 
4,872,826

Net assets acquired
$
8,135,654

 
$
—

 
$
8,135,654

The estimated fair value of the Par assets acquired and liabilities assumed are provisional as of June 30, 2016 and are based on information that is currently available to the Company. Additional information is being gathered to finalize these provisional measurements, particularly with respect to intangible assets, accrued expenses, deferred income taxes and income taxes payable. Accordingly, the measurement of the Par assets acquired and liabilities assumed may change significantly upon finalization of the Company’s valuations and completion of the purchase price allocation, both of which are expected to occur no later than one year from the Par Acquisition Date. As a result of the measurement period adjustments recorded above, the Company recorded a reduction of $3.8 million of expense, $3.1 million related to the amortization of intangible assets and $0.7 million related to the amortization of inventory step-up, during the six months ended June 30, 2016. There were no adjustments of expense recorded during the three months ended June 30, 2016.

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The valuation of the intangible assets acquired and related amortization periods are as follows:
 
Valuation (in millions) 
 
Amortization period (in years)  
Developed Technology:
 
 
 
Vasostrict®
$
556.0

 
8
Aplisol®
312.4

 
11
Developed - Other - Non-Partnered (Generic Non-Injectable)
230.4

 
7
Developed - Other - Partnered (Combined)
164.4

 
7
Nascobal®
118.3

 
9
Developed - Other - Non-Partnered (Generic Injectable)
116.4

 
10
Other
517.9

 
9
Total
$
2,015.8

 
 
In Process Research & Development (IPR&D):
 
 
 
IPR&D 2019 Launch
$
401.0

 
n/a
IPR&D 2018 Launch
283.8

 
n/a
Ezetimibe
147.6

 
n/a
IPR&D 2016 Launch
133.3

 
n/a
Ephedrine Sulphate
128.6

 
n/a
Neostigmine vial
118.6

 
n/a
Other
243.8

 
n/a
Total
$
1,456.7

 
n/a
Total other intangible assets
$
3,472.5

 
n/a
The preliminary fair values of the developed technology and IPR&D assets were estimated using a discounted present value income approach. Under this method, an intangible asset’s fair value is equal to the present value of the incremental after-tax cash flows (excess earnings) attributable solely to the intangible asset over its remaining useful life. To calculate fair value, the Company used cash flows discounted at rates ranging from 9% to 10.5%, which were considered appropriate given the inherent risks associated with each type of asset. The Company believes that the level and timing of cash flows appropriately reflect market participant assumptions.
The goodwill recognized is attributable primarily to strategic and synergistic opportunities related to existing pharmaceutical businesses, the assembled workforce of Par and other factors. Approximately $34.2 million of goodwill is expected to be deductible for income tax purposes.
Deferred tax assets and liabilities are related primarily to the difference between the book basis and tax basis of identifiable intangible assets and inventory step-up.
The following supplemental unaudited pro forma information presents the financial results as if the acquisition of Par had occurred on January 1, 2015 for the three and six months ended June 30, 2015. This supplemental pro forma information has been prepared for comparative purposes and does not purport to be indicative of what would have occurred had the acquisition been made on January 1, 2015, nor are they indicative of any future results.
 
Three Months Ended June 30, 2015
 
Six Months Ended June 30, 2015
Unaudited pro forma consolidated results (in thousands, except per share data):
 
 
 
Revenue
$
1,067,387

 
$
2,140,759

Net loss attributable to Endo International plc
$
(291,174
)
 
$
(391,636
)
Basic net loss per share
$
(1.57
)
 
$
(2.21
)
Diluted net loss per share
$
(1.57
)
 
$
(2.14
)

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These amounts have been calculated after applying the Company’s accounting policies and adjusting the results of Par to reflect factually supportable adjustments that give effect to events that are directly attributable to the Par acquisition assuming the Par acquisition had occurred on January 1, 2015. These adjustments mainly include adjustments to interest expense and additional intangible amortization. The adjustments to interest expense, net of tax, related to borrowings to finance the acquisition had no material impact for the three months ended June 30, 2015, and increased the expense by $6.8 million for the six months ended June 30, 2015. In addition, the adjustments include additional intangible amortization, net of tax, that would have been charged assuming the Company’s estimated fair value of the intangible assets. An adjustment to the amortization expense for the three and six months ended June 30, 2015 increased the expense by $46.2 million and $84.4 million, respectively.
Aspen Holdings
On October 1, 2015, the Company acquired a broad portfolio of branded and generic injectable and established products focused on pain, anti-infectives, cardiovascular and other specialty therapeutic areas from a subsidiary of Aspen Holdings, a leading publicly-traded South African company that supplies branded and generic products in more than 150 countries, and from GlaxoSmithKline plc (GSK) for total consideration of approximately $135.6 million. The transaction expanded the Company’s presence in South Africa.
The fair values of the net identifiable assets acquired totaled $127.8 million, resulting in goodwill of $7.8 million, which was assigned to our International Pharmaceuticals segment. The amount of net identifiable assets acquired in connection with the Aspen Holdings acquisition includes $118.4 million of intangible assets to be amortized over an average life of approximately 19 years, and inventory of $9.4 million.
The operating results of Aspen Holdings are included in the accompanying Condensed Consolidated Statements of Operations for the three and six months ended June 30, 2016. There are no results included in the accompanying Condensed Consolidated Statements of Operations for the three and six months ended June 30, 2015.
Pro forma results of operations have not been presented because the effect of the Aspen Holdings acquisition was not material.
NOTE 6. SEGMENT RESULTS
The reportable business segments in which the Company operates are: (1) U.S. Branded Pharmaceuticals, (2) U.S. Generic Pharmaceuticals and (3) 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 (loss) from continuing operations before income tax, 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 activities; foreign currency gains or losses on intercompany financing arrangements; and certain other items that the Company believes do not reflect its core operating performance.
Certain of the corporate general and administrative expenses incurred by the Company are not attributable to any specific segment. Accordingly, these costs are not allocated to any of the Company’s segments and are included in the results below as “Corporate unallocated.” The Company’s consolidated adjusted income from continuing operations before income tax is equal to the combined results of each of its segments less these unallocated corporate costs.
U.S. Branded Pharmaceuticals
Our U.S. Branded Pharmaceuticals segment includes a variety of branded prescription products related to treating and managing pain as well as our urology and men’s health, endocrinology and orthopedic products. The marketed products that are included in this segment include Lidoderm®, OPANA® ER, Voltaren® Gel, Percocet®, BELBUCA™, Aveed®, Supprelin® LA, and XIAFLEX®, among others.
U.S. Generic Pharmaceuticals
Our U.S. Generic Pharmaceuticals segment consists of a differentiated product portfolio including high barrier-to-entry products, first-to-file or first-to-market opportunities, which are difficult to formulate, difficult to manufacture or face complex legal and regulatory challenges. The product offerings of this segment include products in the pain management, urology, central nervous system disorders, immunosuppression, oncology, women’s health and cardiovascular disease markets, among others.

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International Pharmaceuticals
Our International Pharmaceuticals segment includes a variety of specialty pharmaceutical products for the Canadian, Mexican, South African and world markets. Paladin, based in Canada, has a portfolio of products serving growing therapeutic areas, including ADHD, pain, women’s health and oncology. Somar, based in Mexico, develops, manufactures and markets high-quality generic, branded generic and over-the-counter products across key market segments including dermatology and anti-infectives. Litha, based in South Africa, is a diversified healthcare group providing services, products and solutions to public and private hospitals, pharmacies, general and specialist practitioners, as well as government healthcare programs.
The following represents selected information for the Company’s reportable segments for the three and six months ended June 30, 2016 and 2015 (in thousands):
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2016
 
2015
 
2016
 
2015
Net revenues to external customers:
 
 
 
 
 
 
 
U.S. Branded Pharmaceuticals
$
288,342

 
$
315,913

 
$
597,155

 
$
600,420

U.S. Generic Pharmaceuticals
565,358

 
338,326

 
1,148,748

 
695,288

International Pharmaceuticals (1)
67,187

 
80,927

 
138,523

 
153,586

Total net revenues to external customers
$
920,887

 
$
735,166

 
$
1,884,426

 
$
1,449,294

 
 
 
 
 
 
 
 
Adjusted income from continuing operations before income tax:
 
 
 
 
 
 
 
U.S. Branded Pharmaceuticals
$
122,420

 
$
169,067

 
$
291,201

 
$
327,861

U.S. Generic Pharmaceuticals
$
214,968

 
$
146,089

 
$
426,736

 
$
329,546

International Pharmaceuticals
$
20,615

 
$
19,201

 
$
42,369

 
$
35,767

__________
(1)
Revenues generated by our International Pharmaceuticals segment are primarily attributable to Canada, Mexico and South Africa.
In 2015, we realigned certain costs amongst our International Pharmaceuticals segment, U.S. Branded Pharmaceuticals segment and Corporate unallocated costs based on how our chief operating decision maker currently reviews segment performance. As a result of this realignment, certain expenses included in our consolidated adjusted income (loss) from continuing operations before income tax for the three and six months ended June 30, 2015 have been reclassified among our various segments to conform to current period presentation. The net impact of these reclassification adjustments increased U.S. Branded Pharmaceuticals segment and Corporate unallocated costs by $0.5 million and $5.9 million, respectively, with an offsetting $6.4 million decrease to International Pharmaceuticals segment costs for the three months ended June 30, 2015 and increased U.S. Branded Pharmaceuticals segment and Corporate unallocated costs by $1.1 million and $13.5 million respectively, with an offsetting $14.6 million decrease to International Pharmaceuticals segment costs for the six months ended June 30, 2015.
There were no material revenues from external customers attributed to an individual country outside of the United States during the three and six months ended June 30, 2016 or 2015.

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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 segment adjusted income from continuing operations before income tax for the three and six months ended June 30, 2016 and 2015 (in thousands):
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2016
 
2015
 
2016
 
2015
Total consolidated loss from continuing operations before income tax
$
(165,465
)

$
(103,614
)

$
(372,943
)

$
(119,991
)
Corporate unallocated costs (1)
161,737


115,050


314,810


226,118

Upfront and milestone payments to partners
2,688


2,135


4,105


4,802

Asset impairment charges (2)
39,951


70,243


169,576


77,243

Acquisition-related and integration items (3)
48,171


44,225


60,725


78,865

Separation benefits and other cost reduction initiatives (4)
22,174


5,780


60,630


47,587

Amortization of intangible assets
212,844


116,987


424,513


212,256

Inventory step-up and certain manufacturing costs that will be eliminated pursuant to integration plans
29,103


48,948


97,579


88,864

Non-cash interest expense related to the 1.75% Convertible Senior Subordinated Notes
—


253


—


1,632

Loss on extinguishment of debt
—

 
—

 
—

 
980

Impact of Voltaren® Gel generic competition
—

 
—

 
(7,750
)
 
—

Certain litigation-related charges, net (5)
5,259


6,875


10,459


19,875

Costs associated with unused financing commitments
—


2,261


—


14,071

Acceleration of Auxilium employee equity awards at closing
—


—


—


37,603

Other than temporary impairment of equity investment
—


18,869


—


18,869

Foreign currency impact related to the remeasurement of intercompany debt instruments
417


2,792


1,672


(18,298
)
Other, net
1,124


3,553


(3,070
)

2,699

Total segment adjusted income from continuing operations before income tax:
$
358,003


$
334,357


$
760,306


$
693,175

__________
(1)
Corporate unallocated costs include interest expense, net, certain corporate overhead costs, such as headcount and facility expenses and certain other income and expenses.
(2)
Asset impairment charges primarily related to charges to write down intangible assets as further described in Note 9. Goodwill and Other Intangibles.
(3)
Acquisition-related and integration items include costs directly associated with previous acquisitions of $24.3 million and $47.5 million for the three and six months ended June 30, 2016, respectively, compared to $46.7 million and $82.2 million for the comparable 2015 periods. In addition, during the three and six months ended June 30, 2016, there is also a charge for changes in fair value of contingent consideration of $23.9 million and $13.2 million, respectively. During the three and six months ended June 30, 2015, acquisition-related and integration costs are net of a benefit due to changes in the fair value of contingent consideration of $2.5 million and $3.3 million, respectively.
(4)
Separation benefits and other cost reduction initiatives include charges to increase excess inventory reserves of $6.4 million and $33.3 million related to the 2016 U.S. Generic Pharmaceuticals restructuring initiative, employee separation costs of $8.4 million and $15.2 million and other restructuring costs of $7.1 million and $11.8 million for the three and six months ended June 30, 2016, respectively. Amounts in the comparable 2015 periods include employee separation costs of $4.8 million and $37.2 million, respectively, and a $7.9 million charge recorded during the six months ended June 30, 2015, upon the cease use date of our Auxilium subsidiary’s former corporate headquarters, representing the liability for our remaining obligations under the respective lease agreement, net of estimated sublease income. These amounts were primarily recorded as Cost of revenues and Selling, general and administrative expense in our Condensed Consolidated Statements of Operations. See Note 4. Restructuring for discussion of our material restructuring initiatives.
(5)
These amounts include charges for Litigation-related and other contingencies, net as further described in Note 12. Commitments and Contingencies.
Interest income and expense are considered corporate items and included in Corporate unallocated. Asset information is not reviewed or included within our internal management reporting. Therefore, the Company has not disclosed asset information for each reportable segment.

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NOTE 7. FAIR VALUE MEASUREMENTS
Financial Instruments
The financial instruments recorded in our Condensed Consolidated Balance Sheets include cash and cash equivalents (including money market funds and time deposits), restricted cash and cash equivalents, accounts receivable, marketable securities, equity and cost method investments, accounts payable and accrued expenses, acquisition-related contingent consideration and debt obligations. Included in cash and cash equivalents and restricted cash and cash equivalents are money market funds representing a type of mutual fund required by law to invest in low-risk securities (for example, U.S. government bonds, U.S. Treasury Bills and commercial paper). Money market funds are structured to maintain the fund’s net asset value at $1.00 per unit, which assists in providing adequate liquidity upon demand by the holder. Money market funds pay dividends that generally reflect short-term interest rates. Thus, only the dividend yield fluctuates. Due to their short-term maturity, the carrying amounts of non-restricted and restricted cash and cash equivalents (including money market funds and time deposits), accounts receivable, accounts payable and accrued expenses approximate their fair values.
Fair value guidance establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value. These tiers include:
•
Level 1—Quoted prices in active markets for identical assets or liabilities.
•
Level 2—Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
•
Level 3—Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.
Marketable Securities
Equity securities consist of investments in the stock of publicly traded companies, the values of which are based on quoted market prices and thus represent Level 1 measurements within the above-defined fair value hierarchy. These securities are not held to support current operations and are therefore classified as non-current assets. Equity securities are included in Marketable securities in our Condensed Consolidated Balance Sheets at June 30, 2016 and December 31, 2015.
At the time of purchase, we classify our marketable securities as either available-for-sale securities or trading securities, depending on our intent at that time. Available-for-sale and trading securities are carried at fair value with unrealized holding gains and losses recorded within other comprehensive income or net income, respectively. The Company reviews unrealized losses associated with available-for-sale securities to determine the classification as a “temporary” or “other-than-temporary” impairment. A temporary impairment results in an unrealized loss being recorded in other comprehensive income. An impairment that is viewed as other-than-temporary is recognized in net income. The Company considers various factors in determining the classification, including the length of time and extent to which the fair value has been less than the Company’s cost basis, the financial condition and near-term prospects of the issuer or investee, and the Company’s ability to hold the investment for a period of time sufficient to allow for any anticipated recovery in market value.
Equity and Cost Method Investments
As of June 30, 2016, we have investments that we account for using the equity or cost method of accounting totaling $6.0 million. The Company divested a joint venture investment owned through its Litha subsidiary during the three months ended March 31, 2016. The Company classified this joint venture investment as Assets held for sale as of December 31, 2015 in our Condensed Consolidated Balance Sheets.
With respect to our other equity or cost method investments, which are included in Other Assets in our Condensed Consolidated Balance Sheets at June 30, 2016 and December 31, 2015, the Company did not recognize any other-than-temporary impairments. We considered various factors, including the operating results of our equity method investments and the lack of an unrealized loss position on our cost method investments.
Acquisition-Related Contingent Consideration
The fair value of contingent consideration liabilities is determined using unobservable inputs. These inputs include the estimated amount and timing of projected cash flows, the probability of success (achievement of the contingent event) and the risk-adjusted discount rate used to present value the probability-weighted cash flows. Subsequent to the acquisition date, at each reporting period, the contingent consideration liability is remeasured at current fair value with changes recorded in earnings. Acquisition-related contingent consideration is measured at fair value on a recurring basis using unobservable inputs; hence these instruments represent Level 3 measurements within the above-defined fair value hierarchy. See Recurring Fair Value Measurements below for additional information on acquisition-related contingent consideration.

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Table of Contents

Recurring Fair Value Measurements
The Company’s financial assets and liabilities measured at fair value on a recurring basis at June 30, 2016 and December 31, 2015 were as follows (in thousands):
 
Fair Value Measurements at Reporting Date using:
June 30, 2016
Quoted Prices in
Active Markets
for Identical
Assets (Level 1)
 
Significant Other
Observable
Inputs (Level 2)
 
Significant
Unobservable
Inputs (Level 3)
 
Total
Assets:
 
 
 
 
 
 
 
Money market funds
$
212,532

 
$
—

 
$
—

 
$
212,532

Time deposits
—

 
165,000

 
—

 
165,000

Equity securities
2,239

 
—

 
—

 
2,239

Total
$
214,771

 
$
165,000

 
$
—

 
$
379,771

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

 
$
—

 
$
51,211

 
$
51,211

Acquisition-related contingent consideration—long-term
—

 
—

 
84,585

 
84,585

Total
$
—

 
$
—

 
$
135,796

 
$
135,796

At June 30, 2016, money market funds include $47.5 million in Qualified Settlement Funds to be disbursed to mesh-related product liability claimants. See Note 12. Commitments and Contingencies for further discussion of our product liability cases.
 
Fair Value Measurements at Reporting Date using:
December 31, 2015
Quoted Prices in
Active Markets
for Identical
Assets (Level 1) 
 
Significant Other
Observable
Inputs (Level 2)
 
Significant
Unobservable
Inputs (Level 3)
 
Total
Assets:
 
 
 
 
 
 
 
Money market funds
$
51,145

 
$
—

 
$
—

 
$
51,145

Equity securities
3,889

 
—

 
—

 
3,889

Total
$
55,034

 
$
—

 
$
—

 
$
55,034

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

 
$
—

 
$
65,265

 
$
65,265

Acquisition-related contingent consideration—long-term
—

 
—

 
78,237

 
78,237

Total
$
—

 
$
—

 
$
143,502

 
$
143,502

At December 31, 2015, money market funds include $51.1 million in Qualified Settlement Funds to be disbursed to mesh-related product liability claimants. See Note 12. Commitments and Contingencies for further discussion of our product liability cases.
Fair Value Measurements Using Significant Unobservable Inputs
The following table presents changes to the Company’s liability for acquisition-related contingent consideration, which was measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the three and six months ended June 30, 2016 and 2015 (in thousands):
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2016
 
2015
 
2016
 
2015
Beginning of period
$
124,511

 
$
184,261

 
$
143,502

 
$
46,005

Amounts acquired
—

 
18,435

 
—

 
166,535

Amounts settled
(12,646
)
 
(3,851
)
 
(22,120
)
 
(8,574
)
Transfers (in) and/or out of Level 3
—

 
—

 
—

 
—

Measurement period adjustments
—

 
(7,243
)
 
—

 
(11,556
)
Changes in fair value recorded in earnings
23,892

 
(2,520
)
 
13,204

 
(3,328
)
Effect of currency translation
39

 
—

 
1,210

 
—

End of period
$
135,796

 
$
189,082

 
$
135,796

 
$
189,082


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Table of Contents

The fair value measurement of the contingent consideration obligations was determined using risk-adjusted discount rates ranging from 3.0% to 22.0%. Changes in fair value recorded in earnings related to acquisition-related contingent consideration are included in our Condensed Consolidated Statements of Operations as Acquisition-related and integration items, and amounts recorded for the short-term and long-term portions of acquisition related contingent consideration are included in Accrued expenses and Other liabilities, respectively, in our Condensed Consolidated Balance Sheets.
The following table presents changes to the Company’s liability for acquisition-related contingent consideration during the six months ended June 30, 2016 by acquisition (in thousands):
 
Balance as of December 31, 2015
 
Acquisitions
 
Fair Value Adjustments and Accretion
 
Payments and Other
 
Balance as of June 30, 2016
Qualitest acquisition
$
1,137

 
$
—

 
$
(1,137
)
 
$
—

 
$
—

Sumavel acquisition
631

 
—

 
55

 
—

 
686

Auxilium acquisition
26,435

 
—

 
661

 
(6,986
)
 
20,110

Lehigh Valley Technologies, Inc. acquisitions
97,003

 
—

 
12,831

 
(15,134
)
 
94,700

Other
18,296

 
—

 
2,004

 
—

 
20,300

Total
$
143,502

 
$
—

 
$
14,414

 
$
(22,120
)
 
$
135,796

The following is a summary of available-for-sale securities held by the Company at June 30, 2016 and December 31, 2015 (in thousands):
 
Available-for-sale
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
(Losses) 
 
Fair Value
June 30, 2016
 
 
 
 
 
 
 
Money market funds
$
212,532

 
$
—

 
$
—

 
$
212,532

Total included in cash and cash equivalents
$
165,001

 
$
—

 
$
—

 
$
165,001

Total included in restricted cash and cash equivalents
$
47,531

 
$
—

 
$
—

 
$
47,531

Equity securities
$
26

 
$
7

 
$
—

 
$
33

Total other short-term available-for-sale securities
$
26

 
$
7

 
$
—

 
$
33

Equity securities
$
1,766

 
$
440

 
$
—

 
$
2,206

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

 
$
440

 
$
—

 
$
2,206


 
Available-for-sale
 
Amortized
Cost
 
Gross
Unrealized
Gains 
 
Gross
Unrealized
(Losses)
 
Fair Value
December 31, 2015
 
 
 
 
 
 
 
Money market funds
$
51,145

 
$
—

 
$
—

 
$
51,145

Total included in cash and cash equivalents
$
3

 
$
—

 
$
—

 
$
3

Total included in restricted cash and cash equivalents
$
51,142

 
$
—

 
$
—

 
$
51,142

Equity securities
$
24

 
$
10

 
$
—

 
$
34

Total other short-term available-for-sale securities
$
24

 
$
10

 
$
—

 
$
34

Equity securities
$
1,766

 
$
2,089

 
$
—

 
$
3,855

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

 
$
2,089

 
$
—

 
$
3,855


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Table of Contents

Nonrecurring Fair Value Measurements
The Company’s financial assets and liabilities measured at fair value on a nonrecurring basis as of June 30, 2016 were as follows (in thousands):
 
Fair Value Measurements at Reporting Date using:
 
Total Expense for the Six Months Ended June 30, 2016
 
Quoted Prices in
Active Markets
for Identical Assets
(Level 1)
 
Significant Other
Observable Inputs
(Level 2)
 
Significant
Unobservable Inputs
(Level 3)
 
Assets:
 
 
 
 
 
 
 
Certain Astora property, plant and equipment (Note 3)
$
—

 
$
—

 
$
—

 
$
(5,041
)
Certain U.S. Generic Pharmaceuticals intangible assets (Note 9)
—

 
—

 
50,459

 
(169,576
)
Certain Astora intangible assets (Note 3)
—

 
—

 
—

 
(16,287
)
Total
$
—

 
$
—

 
$
50,459

 
$
(190,904
)
NOTE 8. INVENTORIES
Inventories consist of the following at June 30, 2016 and December 31, 2015 (in thousands):
 
June 30, 2016
 
December 31, 2015
Raw materials (1)
$
222,808

 
$
210,038

Work-in-process (1)
97,323

 
177,821

Finished goods (1)
306,189

 
364,634

Total
$
626,320

 
$
752,493

(1) The components of inventory shown in the table above are net of allowance for obsolescence.
Inventory that is in excess of the amount expected to be sold within one year, which relates primarily to XIAFLEX® inventory, is classified as long-term inventory and is not included in the table above. At June 30, 2016 and December 31, 2015, $30.2 million and $24.9 million, respectively, of long-term inventory was included in Other assets in the Condensed Consolidated Balance Sheets.
The Company capitalizes inventory costs associated with certain generic products prior to regulatory approval and product launch, when it is reasonably certain, based on management’s judgment of reasonably certain future commercial use and net realizable value, that the pre-launch inventories will be saleable. The determination to capitalize is made once the Company (or its third party development partners) has filed an Abbreviated New Drug Application (ANDA) that has been acknowledged by the U.S. Food and Drug Administration (the FDA) as containing sufficient information to allow the FDA to conduct its review in an efficient and timely manner and management is reasonably certain that all regulatory and legal requirements will be cleared. This determination is based on the particular facts and circumstances relating to the expected FDA approval of the generic drug product being considered, and accordingly, the time frame within which the determination is made varies from product to product. The Company could be required to write down previously capitalized costs related to pre-launch inventories upon a change in such judgment, or due to a denial or delay of approval by regulatory bodies, or a delay in commercialization, or other potential factors. As of June 30, 2016 and December 31, 2015, the Company had approximately $29.9 million and $12.0 million, respectively, in inventories related to generic products that were not yet available to be sold.

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Table of Contents

NOTE 9. GOODWILL AND OTHER INTANGIBLES
Goodwill
Changes in the carrying amount of our goodwill for the six months ended June 30, 2016 were as follows (in thousands):
 
Carrying Amount
 
U.S. Branded Pharmaceuticals
 
U.S. Generic Pharmaceuticals
 
International Pharmaceuticals
 
Total
Balance as of December 31, 2015:
 
 
 
 
 
 
 
Goodwill
$
1,676,276

 
$
5,789,934

 
$
592,424

 
$
8,058,634

Accumulated impairment losses
(673,500
)
 
—

 
(85,780
)
 
(759,280
)
Balance as of December 31, 2015
$
1,002,776

 
$
5,789,934

 
$
506,644

 
$
7,299,354

Measurement period adjustments
—

 
89,950

 
1,366

 
91,316

Effect of currency translation on gross balance
—

 
—

 
29,025

 
29,025

Effect of currency translation on accumulated impairment
—

 
—

 
(2,458
)
 
(2,458
)
Balance as of June 30, 2016:
 
 
 
 
 
 
 
Goodwill
$
1,676,276

 
$
5,879,884

 
$
622,815

 
$
8,178,975

Accumulated impairment losses
(673,500
)
 
—

 
(88,238
)
 
(761,738
)
 
$
1,002,776

 
$
5,879,884

 
$
534,577

 
$
7,417,237


21
Table of Contents

Other Intangible Assets
The following is a summary of other intangible assets held by the Company at June 30, 2016 and December 31, 2015 (in thousands):
Cost basis:
Balance as of December 31, 2015
 
Acquisitions
(1)
 
Impairments
(2)
 
Other
(3)
 
Effect of Currency Translation
 
Balance as of June 30, 2016
Indefinite-lived intangibles:
 
 
 
 
 
 
 
 
 
 
 
In-process research and development
$
1,742,880

 
$
(114,200
)
 
$
(55,100
)
 
$
(5,156
)
 
$
3,208

 
$
1,571,632

Total indefinite-lived intangibles
$
1,742,880

 
$
(114,200
)
 
$
(55,100
)
 
$
(5,156
)
 
$
3,208

 
$
1,571,632

Definite-lived intangibles:
 
 
 
 
 
 
 
 
 
 
 
Licenses (weighted average life of 12 years)
$
676,867

 
$
—

 
$
—

 
$
(211,147
)
 
$
—

 
$
465,720

Customer relationships (weighted average life of 15 years)
11,318

 
—

 
(3,460
)
 
(7,858
)
 
—

 
—