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ENDP-9.30.2018-10Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 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 SEPTEMBER 30, 2018

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
Securities registered pursuant to Section 12(g) of the Act:
None
____________________________________________________________________________________________
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 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 þ
No o
 
 
Indicate by check mark 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 þ
No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company" and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer
þ
Accelerated filer
o
 
 
 
 
Non-accelerated filer
o  (Do not check if a smaller reporting company)
Smaller reporting company
o
 
 
 
 
Emerging Growth Company
o
 
 
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
 
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).
Yes o
No þ
Indicate the number of shares outstanding of each of the issuer’s classes of ordinary shares, as of the latest practicable date.
Ordinary shares, $0.0001 par value
Number of ordinary shares outstanding as of November 1, 2018:
224,344,760


ENDO INTERNATIONAL PLC
INDEX
 
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


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 (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 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, 2017, 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, 2018, 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 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, 2017, 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, 2018, and as otherwise enumerated herein, 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)
 
September 30, 2018
 
December 31, 2017
ASSETS
 
 
 
CURRENT ASSETS:
 
 
 
Cash and cash equivalents
$
1,118,885

 
$
986,605

Restricted cash and cash equivalents
289,667

 
320,453

Accounts receivable
467,156

 
517,436

Inventories, net
332,787

 
391,437

Prepaid expenses and other current assets
50,697

 
43,098

Income taxes receivable
16,407

 
12,048

Total current assets
$
2,275,599

 
$
2,271,077

MARKETABLE SECURITIES
1,693

 
1,456

PROPERTY, PLANT AND EQUIPMENT, NET
495,546

 
523,971

GOODWILL
4,056,668

 
4,450,082

OTHER INTANGIBLES, NET
3,624,216

 
4,317,684

DEFERRED INCOME TAXES
6

 
11,582

OTHER ASSETS
67,934

 
59,728

TOTAL ASSETS
$
10,521,662

 
$
11,635,580

LIABILITIES AND SHAREHOLDERS' (DEFICIT) EQUITY
 
 
 
CURRENT LIABILITIES:
 
 
 
Accounts payable and accrued expenses
$
1,019,004

 
$
1,096,825

Current portion of legal settlement accrual
966,633

 
1,087,793

Current portion of long-term debt
34,150

 
34,205

Income taxes payable
1,681

 
2,086

Total current liabilities
$
2,021,468

 
$
2,220,909

DEFERRED INCOME TAXES
43,630

 
43,131

LONG-TERM DEBT, LESS CURRENT PORTION, NET
8,228,612

 
8,242,032

LONG-TERM LEGAL SETTLEMENT ACCRUAL, LESS CURRENT PORTION
35,450

 
210,450

OTHER LIABILITIES
411,961

 
434,178

COMMITMENTS AND CONTINGENCIES (NOTE 14)


 


SHAREHOLDERS' (DEFICIT) EQUITY:
 
 
 
Euro deferred shares, $0.01 par value; 4,000,000 shares authorized and issued at both September 30, 2018 and December 31, 2017
46

 
48

Ordinary shares, $0.0001 par value; 1,000,000,000 shares authorized; 224,288,553 and 223,331,706 shares issued and outstanding at September 30, 2018 and December 31, 2017, respectively
22

 
22

Additional paid-in capital
8,830,351

 
8,791,170

Accumulated deficit
(8,833,024
)
 
(8,096,539
)
Accumulated other comprehensive loss
(216,854
)
 
(209,821
)
Total shareholders' (deficit) equity
$
(219,459
)
 
$
484,880

TOTAL LIABILITIES AND SHAREHOLDERS' (DEFICIT) EQUITY
$
10,521,662

 
$
11,635,580

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 September 30,
 
Nine Months Ended September 30,
 
2018
 
2017
 
2018
 
2017
TOTAL REVENUES
$
745,466

 
$
786,887

 
$
2,160,689

 
$
2,700,218

COSTS AND EXPENSES:
 
 
 
 
 
 
 
Cost of revenues
412,965

 
514,522

 
1,198,468

 
1,722,885

Selling, general and administrative
163,791

 
135,880

 
478,615

 
468,675

Research and development
39,683

 
39,644

 
160,431

 
123,522

Litigation-related and other contingencies, net
(1,750
)
 
(12,352
)
 
15,370

 
(14,016
)
Asset impairment charges
142,217

 
94,924

 
613,400

 
1,023,930

Acquisition-related and integration items
1,288

 
16,641

 
13,284

 
31,711

OPERATING LOSS FROM CONTINUING OPERATIONS
$
(12,728
)
 
$
(2,372
)
 
$
(318,879
)
 
$
(656,489
)
INTEREST EXPENSE, NET
131,847

 
127,521

 
385,896

 
361,267

LOSS ON EXTINGUISHMENT OF DEBT
—

 
—

 
—

 
51,734

OTHER INCOME, NET
(1,507
)
 
(2,097
)
 
(33,216
)
 
(10,843
)
LOSS FROM CONTINUING OPERATIONS BEFORE INCOME TAX
$
(143,068
)
 
$
(127,796
)
 
$
(671,559
)
 
$
(1,058,647
)
INCOME TAX EXPENSE (BENEFIT)
3,003

 
(28,109
)
 
24,729

 
(97,517
)
LOSS FROM CONTINUING OPERATIONS
$
(146,071
)

$
(99,687
)

$
(696,288
)
 
$
(961,130
)
DISCONTINUED OPERATIONS, NET OF TAX (NOTE 3)
(27,134
)
 
3,017

 
(43,273
)
 
(705,886
)
NET LOSS
$
(173,205
)
 
$
(96,670
)
 
$
(739,561
)
 
$
(1,667,016
)
NET (LOSS) INCOME PER SHARE—BASIC:
 
 
 
 
 
 
 
Continuing operations
$
(0.65
)
 
$
(0.45
)
 
$
(3.11
)
 
$
(4.31
)
Discontinued operations
(0.12
)
 
0.02

 
(0.19
)
 
(3.16
)
Basic
$
(0.77
)
 
$
(0.43
)
 
$
(3.30
)
 
$
(7.47
)
NET (LOSS) INCOME PER SHARE—DILUTED:
 
 
 
 
 
 
 
Continuing operations
$
(0.65
)
 
$
(0.45
)
 
$
(3.11
)
 
$
(4.31
)
Discontinued operations
(0.12
)
 
0.02

 
(0.19
)
 
(3.16
)
Diluted
$
(0.77
)
 
$
(0.43
)
 
$
(3.30
)
 
$
(7.47
)
WEIGHTED AVERAGE SHARES:
 
 
 
 
 
 
 
Basic
224,132

 
223,299

 
223,829

 
223,157

Diluted
224,132

 
223,299

 
223,829

 
223,157

See Notes to Condensed Consolidated Financial Statements.

2
Table of Contents

ENDO INTERNATIONAL PLC
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS (UNAUDITED)
(In thousands)
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2018
 
2017
 
2018
 
2017
NET LOSS
 
 
$
(173,205
)
 
 
 
$
(96,670
)
 
 
 
$
(739,561
)
 
 
 
$
(1,667,016
)
OTHER COMPREHENSIVE INCOME (LOSS):
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net unrealized gain on securities, net of tax:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Unrealized gain arising during the period
$
—

 
 
 
$
188

 
 
 
$
—

 
 
 
$
333

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

 
—

 
—

 
188

 
—

 
—

 
—

 
333

Net unrealized gain (loss) on foreign currency:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Foreign currency translation gain (loss) arising during the period
$
4,735

 
 
 
$
9,941

 
 
 
$
(7,033
)
 
 
 
$
35,415

 
 
Less: reclassification adjustments for loss realized in net loss
—

 
4,735

 
29,325

 
39,266

 
—

 
(7,033
)
 
29,325

 
64,740

OTHER COMPREHENSIVE INCOME (LOSS)
 
 
$
4,735

 
 
 
$
39,454

 
 
 
$
(7,033
)
 
 
 
$
65,073

COMPREHENSIVE LOSS
 
 
$
(168,470
)
 
 
 
$
(57,216
)
 
 
 
$
(746,594
)
 
 
 
$
(1,601,943
)
See Notes to Condensed Consolidated Financial Statements.

3
Table of Contents

ENDO INTERNATIONAL PLC
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(In thousands)
 
Nine Months Ended September 30,
 
2018
 
2017
OPERATING ACTIVITIES:
 
 
 
Net loss
$
(739,561
)
 
$
(1,667,016
)
Adjustments to reconcile Net loss to Net cash provided by operating activities:





Depreciation and amortization
556,503


742,936

Inventory step-up
261


281

Share-based compensation
43,722


40,252

Amortization of debt issuance costs and discount
15,289


17,698

Deferred income taxes
13,118


(239,174
)
Change in fair value of contingent consideration
11,731


23,574

Loss on extinguishment of debt
—


51,734

Asset impairment charges
613,400


1,023,930

Gain on sale of business and other assets
(29,859
)

(5,074
)
Changes in assets and liabilities which provided (used) cash:





Accounts receivable
31,634


471,448

Inventories
52,499


91,047

Prepaid and other assets
993


11,626

Accounts payable, accrued expenses and other liabilities
(367,979
)
 
(159,245
)
Income taxes payable/receivable
(4,759
)

18,145

Net cash provided by operating activities
$
196,992


$
422,162

INVESTING ACTIVITIES:
 
 
 
Purchases of property, plant and equipment, excluding capitalized interest
(56,544
)
 
(94,102
)
Capitalized interest payments
(2,569
)
 
—

Decrease in notes receivable
—

 
7,000

Proceeds from sale of business and other assets, net
43,753

 
96,066

Other investing activities
1,678

 
—

Net cash (used in) provided by investing activities
$
(13,682
)
 
$
8,964


4
Table of Contents

 
Nine Months Ended September 30,
 
2018
 
2017
FINANCING ACTIVITIES:
 
 
 
Proceeds from issuance of notes
—

 
300,000

Proceeds from issuance of term loans
—

 
3,415,000

Principal payments on term loans
(25,614
)
 
(3,722,413
)
Principal payments on other indebtedness
(3,921
)
 
(4,912
)
Deferred financing fees
—

 
(57,358
)
Payments for contingent consideration
(28,664
)
 
(63,712
)
Payments of tax withholding for restricted shares
(5,082
)
 
(1,958
)
Exercise of options
473

 
—

Net cash used in financing activities
$
(62,808
)
 
$
(135,353
)
Effect of foreign exchange rate
(608
)
 
3,983

Movement in cash held for sale
—

 
(1,450
)
NET INCREASE IN CASH, CASH EQUIVALENTS, RESTRICTED CASH AND RESTRICTED CASH EQUIVALENTS
$
119,894

 
$
298,306

CASH, CASH EQUIVALENTS, RESTRICTED CASH AND RESTRICTED CASH EQUIVALENTS, BEGINNING OF PERIOD
1,311,014

 
805,180

CASH, CASH EQUIVALENTS, RESTRICTED CASH AND RESTRICTED CASH EQUIVALENTS, END OF PERIOD
$
1,430,908

 
$
1,103,486

SUPPLEMENTAL INFORMATION:
 
 
 
Cash paid into Qualified Settlement Funds for mesh legal settlements
$
216,770

 
$
623,128

Cash paid out of Qualified Settlement Funds for mesh legal settlements
$
248,485

 
$
545,379

Other cash distributions for mesh legal settlements
$
17,114

 
$
3,625

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 NINE MONTHS ENDED SEPTEMBER 30, 2018
NOTE 1. BASIS OF PRESENTATION
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.
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 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 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 for a fair statement of the Company’s financial position as of September 30, 2018 and the results of our operations and our cash flows for the periods presented. Operating results for the three and nine months ended September 30, 2018 are not necessarily indicative of the results that may be expected for the year ending December 31, 2018. The year-end Condensed Consolidated Balance Sheet data as of December 31, 2017 was derived from audited financial statements.
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, 2017.
Certain prior period amounts have been reclassified to conform to the current period presentation as a result of our fourth-quarter 2017 adoption of Accounting Standards Update (ASU) No. 2016-18 “Statement of Cash Flows (Topic 230) - Restricted Cash” (ASU 2016-18). The table below presents the effects of ASU 2016-18 on the Company’s Condensed Consolidated Statement of Cash Flows for the nine months ended September 30, 2017 (in thousands):
 
Prior to Adoption
 
Impact of Adoption
 
Subsequent to Adoption
Net cash provided by operating activities
$
424,062

 
$
(1,900
)
 
$
422,162

Net cash (used in) provided by investing activities
(69,802
)
 
78,766

 
8,964

Net cash used in financing activities
(135,353
)
 
—

 
(135,353
)
Effect of foreign exchange rate
3,686

 
297

 
3,983

Movement in cash held for sale
(1,450
)
 
—

 
(1,450
)
Net change (1)
$
221,143

 
$
77,163

 
$
298,306

Beginning-of-period balance (2)
517,250

 
287,930

 
805,180

End-of-period balance (2)
$
738,393

 
$
365,093

 
$
1,103,486

__________
(1)
This line refers to the “Net increase in cash and cash equivalents” prior to the adoption of ASU 2016-18 and the “Net increase in cash, cash equivalents, restricted cash and restricted cash equivalents” after the adoption.
(2)
These lines refer to the beginning or end of period amounts of “Cash and cash equivalents” prior to the adoption of ASU 2016-18 and the beginning or end of period amounts of “Cash, cash equivalents, restricted cash and restricted cash equivalents” after the adoption.
Additionally, the information in this Quarterly Report on Form 10-Q has been retrospectively recast to reflect the change in reportable segments referenced in Note 6. Segment Results.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Significant Accounting Policies Updated since December 31, 2017
Significant changes to our significant accounting policies since December 31, 2017 are detailed below. For additional discussion of the Company’s significant accounting policies, see Note 2. Summary of Significant Accounting Policies in the Consolidated Financial Statements, included in Part IV, Item 15 of our Annual Report on Form 10-K for the year ended December 31, 2017, filed with the Securities and Exchange Commission on February 27, 2018.

6
Table of Contents

Revenue Recognition. The Company adopted Accounting Standards Codification Topic 606, Revenue from Contracts with Customers (ASC 606) on January 1, 2018 using the modified retrospective method for all revenue-generating contracts, including modifications thereto, that were not completed contracts at the date of adoption. For further discussion of the impact of adoption, refer to the “Recent Accounting Pronouncements Adopted or Otherwise Effective as of September 30, 2018” section below. ASC 606 applies to contracts with commercial substance that establish the payment terms and each party’s rights regarding the goods or services to be transferred, to the extent collection of substantially all of the related consideration is probable. Under ASC 606, we recognize revenue for contracts meeting these criteria when (or as) we satisfy our performance obligations for such contracts by transferring control of the underlying promised goods or services to our customers. The amount of revenue we recognize reflects our estimate of the consideration we expect to be entitled to receive, subject to certain constraints, in exchange for such goods or services. This amount is referred to as the transaction price.
Our revenue consists almost entirely of sales of our pharmaceutical products to customers, whereby we ship products to a customer pursuant to a purchase order and invoice the customer upon shipment. For contracts such as these, revenue is recognized when our contractual performance obligations have been fulfilled and control has been transferred to the customer pursuant to the contract’s terms, which is generally upon delivery to the customer. The amount of revenue we recognize is equal to the fixed amount of the transaction price, adjusted for our estimates of a number of significant variable components including, but not limited to, estimates for chargebacks, rebates, sales incentives and allowances, distribution service agreement (DSA) and other fees for services, returns and allowances. The Company utilizes the expected value method when estimating the amount of variable consideration to include in the transaction price with respect to each of the foregoing variable components and the most likely amount method when estimating the amount of variable consideration to include in the transaction price with respect to future potential milestone payments that do not qualify for the sales- and usage-based royalty exception. Variable consideration is included in the transaction price only to the extent that it is probable that a significant revenue reversal will not occur when the uncertainty associated with the variable consideration is resolved. Payment terms for these types of contracts generally fall within 30 to 90 days of invoicing. Our most significant components of variable consideration are further described below. Our estimates for these components are based on factors such as historical experience, estimated future trends, estimated customer inventory levels, current contract sales terms with our direct and indirect customers and other competitive factors.
Returns and Allowances. Consistent with industry practice, we maintain a return policy that allows our customers to return products within a specified period of time both subsequent to and, in certain cases, prior to the products’ 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.
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.
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.

7
Table of Contents

New Significant Accounting Policies Added since December 31, 2017
Contract Assets and Contract Liabilities. Contract assets represent the Company’s right to consideration in exchange for goods or services that the Company has transferred to a customer when that right is conditioned on something other than the passage of time including, for example, the entity’s future performance. The Company records revenue and a corresponding contract asset when it fulfills a contractual performance obligation, but must also fulfill one or more additional performance obligations before being entitled to payment. Once the Company’s right to consideration becomes unconditional, the contract asset amount is reclassified as Accounts receivable.
Contract liabilities represent the Company’s obligation to transfer goods or services to a customer. The Company records a contract liability generally upon receipt of consideration in advance of fulfilling one or more of its contractual performance obligations. Upon completing the corresponding performance obligation, the contract liability amount is reversed and revenue is recognized.
Contract assets and liabilities related to rights and obligations arising from a single contract, or a series of contracts combined and accounted for as a single contract, are generally presented on a net basis. Contract assets and liabilities are further described in Note 11. Contract Assets and Liabilities.
Recent Accounting Pronouncements
Recently Issued Accounting Pronouncements Not Yet Adopted as of September 30, 2018
In February 2016, the Financial Accounting Standards Board (FASB) issued ASU No. 2016-02, “Leases (Topic 842)” (ASU 2016-02) to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. Under the new guidance, lessees are required to recognize a lease liability, which represents the discounted obligation to make future minimum lease payments, and a corresponding right-of-use asset on the balance sheet for most leases. In July 2018, the FASB issued ASU No. 2018-10, “Codification Improvements to Topic 842, Leases” (ASU 2018-10), which provides narrow amendments to clarify how to apply certain aspects of the new lease standard, and ASU No. 2018-11, “Leases (Topic 842) - Targeted Improvements” (ASU 2018-11), which addresses implementation issues related to the new lease standard. This guidance will be effective for the Company beginning in the first quarter of 2019, with early application permitted. The Company plans to adopt this guidance in the first quarter of 2019 using the modified retrospective approach and will recognize a cumulative-effect adjustment to the opening balance of Accumulated deficit in that period. This guidance includes a number of optional practical expedients that the Company may elect to apply, including an expedient that permits lease agreements that are twelve months or less to be excluded from the balance sheet. The Company is continuing to evaluate the impact that this new guidance will have on its consolidated financial statements, including its disclosures. It is expected that the primary impact upon adoption will be the recognition, on a discounted basis, of the Company’s minimum commitments under noncancelable operating leases as right of use assets and obligations on the consolidated balance sheets. This will result in a significant increase in assets and liabilities on the Company’s consolidated balance sheets. In preparation for the adoption of this guidance, the Company is continuing the process of identifying and validating the Company’s lease information and evaluating the impact that this new guidance will have on its processes and controls.
In February 2018, the FASB issued ASU No. 2018-02, “Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income” (ASU 2018-02). ASU 2018-02 allows for a reclassification from accumulated other comprehensive income or loss to retained earnings or accumulated deficit for stranded tax effects resulting from the Tax Cuts and Jobs Act of 2017 (TCJA). ASU 2018-02 also requires certain related disclosures. ASU 2018-02 is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2018 and should be applied either in the period of adoption or retrospectively to each period in which the effect of the change in the U.S. federal corporate income tax rate in the TCJA is recognized. Early adoption is permitted. The Company is currently evaluating the impact of ASU 2018-02 on the Company’s consolidated results of operations and financial position.
In July 2018, the FASB issued ASU No. 2018-09, “Codification Improvements” (ASU 2018-09). ASU 2018-09 makes changes to a variety of topics to clarify, correct errors in or make minor improvements to the Accounting Standards Codification. Certain of these provisions are effective immediately; however, these provisions did not have a material impact on the Company’s financial statements or disclosures. The remaining provisions are generally effective for public business entities for annual periods, and interim periods within those annual periods, beginning after December 15, 2018. The Company is currently evaluating the impact of these remaining provisions of ASU 2018-09 on the Company’s consolidated results of operations and financial position.
In August 2018, the FASB issued ASU No. 2018-13, “Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement” (ASU 2018-13). ASU 2018-13 modifies the disclosure requirements on fair value measurements in Topic 820, Fair Value Measurement. ASU 2018-13 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. Certain aspects of ASU 2018-13 require prospective treatment, while others require retrospective treatment. Early adoption is permitted. The Company is currently evaluating the impact of ASU 2018-13 on the Company’s disclosures.

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In August 2018, the FASB issued ASU No. 2018-15, “Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract” (ASU 2018-15). ASU 2018-15 aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (including hosting arrangements where a software license is deemed to exist). ASU 2018-15 also requires the customer to expense any such capitalized implementation costs over the term of the hosting arrangement and to apply the existing impairment guidance for long-lived assets to such capitalized costs. Additionally, ASU 2018-15 sets forth required disclosures and guidance on financial statement classification for expenses, cash flows and balances related to implementation costs within the scope of ASU 2018-15. ASU 2018-15 is effective for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. ASU 2018-15 may be applied either retrospectively or prospectively to all implementation costs incurred after the date of adoption and early adoption is permitted. The Company is currently evaluating the impact of ASU 2018-15 on the Company’s consolidated results of operations, financial position and disclosures.
In November 2018, the FASB issued ASU No. 2018-18, “Clarifying the Interaction Between Topic 808 and Topic 606” (ASU 2018-18). The main provisions of ASU 2018-18 include: (i) clarifying that certain transactions between collaborative arrangement participants should be accounted for as revenue when the collaborative arrangement participant is a customer in the context of a unit of account and (ii) precluding the presentation of transactions with collaborative arrangement participants that are not directly related to sales to third parties together with revenue. ASU 2018-18 is effective for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. ASU 2018-18 should generally be applied retrospectively to the date of initial application of Topic 606 (January 1, 2018 for the Company) and early adoption is permitted. The Company is currently evaluating the impact of ASU 2018-18 on the Company’s consolidated results of operations, financial position and disclosures.
Recent Accounting Pronouncements Adopted or Otherwise Effective as of September 30, 2018
In May 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers” (ASU 2014-09), which was subsequently amended and supplemented by several additional ASUs including:
•
ASU No. 2015-14, “Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date,” (issued in August 2015), which deferred the effective date of ASU 2014-09 by one year, such that ASU 2014-09 became effective for Endo for annual and interim reporting periods beginning after December 15, 2017;
•
ASU No. 2016-08, “Revenue from Contracts with Customers (Topic 606): Principal versus Agent Consideration (Reporting Revenue Gross versus Net)” (issued in March 2016), which clarified the guidance on reporting revenue as a principal versus agent;
•
ASU No. 2016-10, “Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing” (issued in April 2016), which clarified the guidance on identifying performance obligations and accounting for intellectual property licenses; and
•
ASU No. 2016-12, “Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients” and ASU No. 2016-20, “Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers,” (issued in May 2016 and December 2016, respectively), which amended certain narrow aspects of Topic 606.
These ASUs have generally been codified in Accounting Standards Codification Topic 606 “Revenue from Contracts with Customers”, and are collectively referred to herein as ASC 606. ASC 606 supersedes the revenue recognition requirements in Topic 605 “Revenue Recognition” (ASC 605), and requires entities to recognize revenue when control of promised goods or services is transferred to customers at an amount that reflects the consideration to which entities expect to be entitled in exchange for those goods or services.
The Company adopted ASC 606 on January 1, 2018 using the modified retrospective method for all revenue-generating contracts, including modifications thereto, that were not completed contracts at the date of adoption. Under the modified retrospective method, results beginning on January 1, 2018 are presented under ASC 606, while the comparative prior period results continue to be presented under ASC 605 based on the accounting standards originally in effect for such periods. As a result of adopting ASC 606, the Company recorded a net decrease of $3.1 million to its accumulated deficit at January 1, 2018, representing the cumulative impact of adopting ASC 606.

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The current period impact of adoption on our Condensed Consolidated Statements of Operations and Condensed Consolidated Balance Sheets is as follows (in thousands, except per share amounts):
 
Three Months Ended September 30, 2018
 
Nine Months Ended September 30, 2018
Statement of Operations:
Amounts reported under ASC 606
 
Amounts assuming continued application of ASC 605
 
Effect of adoption of ASC 606 (1)
 
Amounts reported under ASC 606
 
Amounts assuming continued application of ASC 605
 
Effect of adoption of ASC 606 (1)
Total revenues
$
745,466

 
$
747,571

 
$
(2,105
)
 
$
2,160,689

 
$
2,160,132

 
$
557

Cost of revenues
$
412,965

 
$
414,430

 
$
(1,465
)
 
$
1,198,468

 
$
1,199,042

 
$
(574
)
Other income, net
$
(1,507
)
 
$
(1,507
)
 
$
—

 
$
(33,216
)
 
$
(32,216
)
 
$
(1,000
)
Loss from continuing operations
$
(146,071
)
 
$
(145,431
)
 
$
(640
)
 
$
(696,288
)
 
$
(698,419
)
 
$
2,131

Net loss
$
(173,205
)
 
$
(172,565
)
 
$
(640
)
 
$
(739,561
)
 
$
(741,692
)
 
$
2,131

Net loss per share—Basic:
 
 
 
 
 
 
 
 
 
 
 
Continuing operations
$
(0.65
)
 
$
(0.65
)
 
$
—

 
$
(3.11
)
 
$
(3.12
)
 
$
0.01

Total basic
$
(0.77
)
 
$
(0.77
)
 
$
—

 
$
(3.30
)
 
$
(3.31
)
 
$
0.01

Net loss per share—Diluted:
 
 
 
 
 
 
 
 
 
 
 
Continuing operations
$
(0.65
)
 
$
(0.65
)
 
$
—

 
$
(3.11
)
 
$
(3.12
)
 
$
0.01

Total diluted
$
(0.77
)
 
$
(0.77
)
 
$
—

 
$
(3.30
)
 
$
(3.31
)
 
$
0.01

__________
(1)
Amounts may not add due to rounding.
 
At September 30, 2018
Balance Sheet:
Amounts reported under ASC 606
 
Amounts assuming continued application of ASC 605
 
Effect of adoption of ASC 606
Assets:
 
 
 
 
 
Inventories, net
$
332,787

 
$
341,189

 
$
(8,402
)
Prepaid expenses and other current assets
$
50,697

 
$
40,368

 
$
10,329

Other assets
$
67,934

 
$
64,972

 
$
2,962

Liabilities:
 
 
 
 
 
Accounts payable and accrued expenses
$
1,019,004

 
$
1,019,322

 
$
(318
)
Shareholders' (deficit) equity:
 
 
 
 
 
Accumulated deficit
$
(8,833,024
)
 
$
(8,838,231
)
 
$
5,207

In May 2017, the FASB issued ASU No. 2017-09 “Compensation - Stock Compensation” (ASU 2017-09). ASU 2017-09 provides guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting. It is intended to reduce both (1) diversity in practice and (2) cost and complexity when accounting for changes to the terms or conditions of share-based payment awards. ASU 2017-09 is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2017. The Company adopted the new standard on January 1, 2018 and the amendments in this update will be applied prospectively to any award modified on or after the adoption date.

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NOTE 3. DISCONTINUED OPERATIONS AND DIVESTITURES
Astora
The Company’s Astora business ceased business operations on March 31, 2016. The operating results of Astora are reported as Discontinued operations, net of tax in the Condensed Consolidated Statements of Operations for all periods presented. The following table provides the operating results of Astora for the three and nine months ended September 30, 2018 and 2017 (in thousands):
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2018
 
2017
 
2018
 
2017
Litigation-related and other contingencies, net
$
19,000

 
$
—

 
$
19,000

 
$
775,684

Loss from discontinued operations before income taxes
$
(27,134
)
 
$
(8,957
)
 
$
(43,273
)
 
$
(813,442
)
Income tax benefit
$
—

 
$
(11,974
)
 
$
—

 
$
(107,556
)
Discontinued operations, net of tax
$
(27,134
)
 
$
3,017

 
$
(43,273
)
 
$
(705,886
)
Amounts reported in the table above as Litigation-related and other contingencies, net relate to charges for vaginal-mesh-related matters. Loss from discontinued operations before income taxes also includes mesh-related legal defense costs and certain other items.
The cash flows from discontinued operating activities related to Astora included the impact of net losses of $43.3 million and $705.9 million for the nine months ended September 30, 2018 and 2017, respectively, and the impact of cash activity related to vaginal mesh cases. There was no net cash used in discontinued investing activities related to Astora during the nine months ended September 30, 2018 or 2017. There was no depreciation or amortization during the nine months ended September 30, 2018 or 2017 related to Astora.
Refer to Note 14. Commitments and Contingencies for amounts and additional information relating to vaginal mesh-related matters.
Litha
During the fourth quarter of 2016, the Company initiated a process to sell its Litha Healthcare Group Limited and related Sub-Sahara African business assets (Litha) and, on February 27, 2017, the Company entered into a definitive agreement to sell Litha to Acino Pharma AG (Acino). The sale closed on July 3, 2017 and the Company received net cash proceeds of approximately $94.2 million, after giving effect to cash and net working capital purchase price adjustments, as well as a short-term receivable of $4.4 million, which was subsequently collected in October 2017. No additional gain or loss was recognized upon sale. However, in December 2017, Acino became obligated to pay $10.1 million of additional consideration to the Company related to the settlement of certain contingencies set forth in the purchase agreement, which was subsequently paid to the Company in January 2018. In December 2017, the Company recorded a short-term receivable and a gain on the sale of Litha for this amount. The gain was recorded in Other income, net in the Condensed Consolidated Statements of Operations. Litha was part of the Company’s International Pharmaceuticals segment. Litha does not meet the requirements for treatment as a discontinued operation.
Somar
On June 30, 2017, the Company entered into a definitive agreement to sell Grupo Farmacéutico Somar, S.A.P.I. de C.V. (Somar) and all of the securities thereof, to AI Global Investments (Netherlands) PCC Limited acting for and on behalf of the Soar Cell (the Purchaser). The sale closed on October 25, 2017 and the Purchaser paid an aggregate purchase price of approximately $124 million in cash, after giving effect to estimated cash, debt and net working capital purchase price adjustments. The Company recognized a $1.3 million loss upon sale. Somar was part of the Company’s International Pharmaceuticals segment. Somar does not meet the requirements for treatment as a discontinued operation.
NOTE 4. RESTRUCTURING
January 2017 Restructuring Initiative
On January 26, 2017, the Company announced a restructuring initiative implemented as part of its ongoing organizational review (the January 2017 Restructuring Initiative). This restructuring was intended to further integrate, streamline and optimize the Company’s operations by aligning certain corporate and research and development (R&D) functions with its recently restructured U.S. generics and U.S. branded business units in order to create efficiencies and cost savings. As part of this restructuring, the Company undertook certain cost reduction initiatives, including a reduction of approximately 90 positions of its workforce, primarily related to corporate and branded R&D functions in Malvern, Pennsylvania and Chestnut Ridge, New York, a streamlining of general and administrative expenses, an optimization of commercial spend and a refocusing of research and development efforts.

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The Company did not incur any pre-tax charges during the three and nine months ended September 30, 2018 as a result of the January 2017 Restructuring Initiative. During the nine months ended September 30, 2017, the Company incurred total pre-tax charges of approximately $15.1 million related to employee separation and other benefit-related costs. Of the total charges incurred, $6.9 million was included in the U.S. Branded - Specialty & Established Pharmaceuticals segment, $4.9 million was included in Corporate unallocated costs and $3.3 million was included in the U.S. Generic Pharmaceuticals segment. These charges were included in Selling, general and administrative expenses in the Condensed Consolidated Statements of Operations. There were no charges related to this restructuring initiative for the three months ended September 30, 2017. The Company does not expect to incur additional material pre-tax restructuring-related expenses related to this initiative. Substantially all cash payments were made by the end of 2017 and substantially all of the actions associated with this restructuring were completed by the end of April 2017.
2017 U.S. Generic Pharmaceuticals Restructuring Initiative
On July 21, 2017, the Company announced that after completing a comprehensive review of its manufacturing network, the Company would be ceasing operations and closing its manufacturing and distribution facilities in Huntsville, Alabama (the 2017 U.S. Generic Pharmaceuticals Restructuring Initiative). The closure of the facilities was completed in June 2018. Employee separation, retention and certain other employee benefit-related costs are expensed ratably over the requisite service period. Other costs including, but not limited to, contract termination fees and product technology transfer costs, are expensed as incurred.
As a result of the 2017 U.S. Generic Pharmaceuticals Restructuring Initiative, the Company incurred pre-tax charges of $4.8 million and $59.6 million during the three and nine months ended September 30, 2018, respectively. During the three months ended September 30, 2018, the expenses consisted of employee separation and other benefit-related costs of $2.1 million and certain other charges of $2.7 million. During the nine months ended September 30, 2018, the expenses consisted of charges relating to accelerated depreciation of $35.2 million, employee separation, retention and other benefit-related costs of $9.8 million, asset impairment charges of $2.6 million and certain other charges of $12.0 million.
During the three and nine months ended September 30, 2017, the Company incurred pre-tax charges of $94.2 million and $203.7 million, respectively, related to the 2017 U.S. Generic Pharmaceuticals Restructuring Initiative. The amounts incurred during the three months ended September 30, 2017 included accelerated depreciation charges of $59.8 million, employee separation, retention and other benefit-related costs of $19.5 million, certain property, plant and equipment impairment charges of $14.2 million and certain other charges of $0.6 million. The amounts incurred during the nine months ended September 30, 2017 included accelerated depreciation charges of $59.8 million, employee separation, retention and other benefit-related costs of $19.5 million, certain intangible asset and property, plant and equipment impairment charges of $103.7 million, charges to increase excess inventory reserves of $7.9 million and certain other charges of $12.7 million. In the third quarter of 2017, the Company recorded a correcting entry to increase Property, plant and equipment impairment charges resulting from certain assets that should have been impaired during the second quarter of 2017. The pre-tax impact for the three months ended September 30, 2017 includes a correcting adjustment of $14.2 million, which had a corresponding decrease to Property, plant and equipment, net. The Company determined that the impact to the prior period and the current period are not material to the quarterly periods presented and have no impact on 2017 full year results.
These charges are included in the U.S. Generic Pharmaceuticals segment. Accelerated depreciation and employee separation, retention and other benefit-related costs are included in Cost of revenues. Certain other charges are included in both Cost of revenues and Selling, general and administrative expenses in the Condensed Consolidated Statements of Operations. The Company does not expect to incur additional material pre-tax restructuring-related expenses related to this initiative. Substantially all cash payments are expected to be made by the end of the third quarter in 2019.
The liability related to the 2017 U.S. Generic Pharmaceuticals Restructuring Initiative is primarily included in Accounts payable and accrued expenses in the Condensed Consolidated Balance Sheets. Changes to this liability during the nine months ended September 30, 2018 were as follows (in thousands):
 
Employee Separation and Other Benefit-Related Costs
 
Other Restructuring Costs
 
Total
Liability balance as of January 1, 2018
$
22,975

 
$
1,610

 
$
24,585

Expenses
9,779

 
9,341

 
19,120

Cash distributions
(22,518
)
 
(10,951
)
 
(33,469
)
Liability balance as of September 30, 2018
$
10,236

 
$
—

 
$
10,236

January 2018 Restructuring Initiative
In January 2018, the Company initiated a restructuring initiative that included a reorganization of its U.S. Generic Pharmaceuticals segment’s 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).

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As a result of the January 2018 Restructuring Initiative, the Company incurred pre-tax charges of $23.8 million during the nine months ended September 30, 2018. The expenses consisted primarily of employee separation, retention and other benefit-related costs of $22.1 million and certain other charges of $1.7 million. Of the total charges incurred, $10.8 million are included in the U.S. Generic Pharmaceuticals segment, $5.2 million are included in Corporate unallocated costs, $4.0 million are included in the U.S. Branded - Sterile Injectables segment, $3.1 million are included in the International Pharmaceuticals segment and $0.7 million are included in the U.S. Branded - Specialty & Established Pharmaceuticals segment. The Company did not incur material charges related to this restructuring initiative during the three months ended September 30, 2018.
Employee separation, retention and other benefit-related costs are included in Cost of revenues, Selling, general and administrative and Research and development expenses in the Condensed Consolidated Statements of Operations. Certain other charges are primarily included in Selling, general and administrative expenses in the Condensed Consolidated Statements of Operations. The Company does not expect to incur additional material pre-tax restructuring-related expenses related to this initiative. Substantially all cash payments are expected to be made by the end of the second quarter in 2019.
The liability related to the January 2018 Restructuring Initiative is primarily included in Accounts payable and accrued expenses in the Condensed Consolidated Balance Sheets. Changes to this liability during the nine months ended September 30, 2018 were as follows (in thousands):
 
Employee Separation and Other Benefit-Related Costs
 
Other Restructuring Costs
 
Total
Liability balance as of January 1, 2018
$
—

 
$
650

 
$
650

Expenses
22,087

 
1,705

 
23,792

Cash distributions
(18,439
)
 
(1,949
)
 
(20,388
)
Liability balance as of September 30, 2018
$
3,648

 
$
406

 
$
4,054

NOTE 5. ACQUISITIONS
On April 26, 2018, the Company entered into a Membership Interest and Asset Purchase Agreement (the Somerset Purchase Agreement) with Mendham Holdings, LLC (the Seller) and certain other Seller related parties in connection with the acquisition of all of the limited liability company membership interests (the LLC Interests) of Somerset Therapeutics, LLC (Somerset) and certain of Somerset’s assets, including intellectual property, product Abbreviated New Drug Applications (ANDAs) and inventory (the Somerset Assets). Somerset is a specialty pharmaceutical company that develops and markets sterile injectable and ophthalmic drugs for the U.S. market. The Somerset acquisition is contingent upon the closing of the acquisition of the Indian-based Wintac business (as defined below).
Pursuant to the terms of the Somerset Purchase Agreement, the Company will acquire 100% of the LLC Interests of Somerset and the Somerset Assets for an aggregate cash purchase price of approximately $160 million, subject to customary adjustments for cash, net working capital and indebtedness as described in the Somerset Purchase Agreement. The Somerset Purchase Agreement contains certain customary representations, warranties and covenants and provides for indemnification rights of the parties in respect of inaccuracies or breaches of certain representations, warranties and covenants, subject to the limitations set forth in the Somerset Purchase Agreement.
The Somerset acquisition is expected to close in the first quarter of 2019, subject to satisfaction of customary closing conditions, including required regulatory approvals and the closing of the acquisition of the Wintac business. In connection with the Somerset acquisition, the Company’s Indian subsidiary has entered into separate agreements to acquire the entire business of Somerset’s Indian-based contract development and manufacturing affiliate, Wintac Limited (Wintac), including certain real property in Bangalore, India and the manufacturing plants thereon and to assume certain debt of Wintac for the expected aggregate amount of the rupee equivalent of approximately $30 million, subject to customary adjustments for net working capital.
NOTE 6. SEGMENT RESULTS
As of January 1, 2018, we made changes to our reportable segments. Following these changes, 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. Previously, we had three reportable segments: (1) U.S. Generic Pharmaceuticals, (2) U.S. Branded Pharmaceuticals and (3) International Pharmaceuticals. The updates to our reportable segments were made based on first quarter 2018 changes to the way we manage and evaluate our business.

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Our new U.S. Branded - Sterile Injectables segment consists of our sterile injectables product portfolio, which was previously part of our former U.S. Generic Pharmaceuticals segment. Our new U.S. Generic Pharmaceuticals segment represents the remainder of our former U.S. Generic Pharmaceuticals segment. Additionally, our former U.S. Branded Pharmaceuticals segment has been renamed “U.S. Branded - Specialty & Established Pharmaceuticals.”
Our 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, 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; asset impairment charges; amortization of intangible assets; inventory step-up recorded as part of our acquisitions; litigation-related and other contingent matters; gains or losses from early termination of debt; gains or losses from the sales of businesses and other assets; foreign currency gains or losses on intercompany financing arrangements; and certain other items.
Certain of the corporate 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 costs.” Interest income and expense are also considered corporate items and not allocated to any of the Company’s segments. 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 items.
U.S. Branded - Specialty & Established Pharmaceuticals
Our U.S. Branded - Specialty & Established Pharmaceuticals segment includes a variety of branded prescription products to treat and manage conditions in urology, urologic oncology, endocrinology, pain and orthopedics. The products in this segment include XIAFLEX®, SUPPRELIN® LA, TESTOPEL®, NASCOBAL® Nasal Spray, AVEED®, PERCOCET®, VOLTAREN® Gel, LIDODERM®, EDEX®, TESTIM® and FORTESTA® Gel, among others.
U.S. Branded - Sterile Injectables
Our U.S. Branded - Sterile Injectables segment consists primarily of branded sterile injectable products such as VASOSTRICT®, ADRENALIN® and APLISOL®, among others, and certain generic sterile injectable products, including ertapenem for injection and ephedrine sulfate injection, among others.
U.S. Generic Pharmaceuticals
Our U.S. Generic Pharmaceuticals segment 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.
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. This segment also included: (i) our South African Litha business, which was sold in July 2017, and (ii) our Latin American Somar business, which was sold in October 2017.

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Table of Contents

The following represents selected information for the Company’s reportable segments for the three and nine months ended September 30, 2018 and 2017 (in thousands):
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2018
 
2017
 
2018
 
2017
Net revenues from external customers:
 
 
 
 
 
 
 
U.S. Branded - Specialty & Established Pharmaceuticals
$
220,100

 
$
233,803

 
$
632,972

 
$
729,150

U.S. Branded - Sterile Injectables
237,150

 
201,905

 
670,847

 
554,365

U.S. Generic Pharmaceuticals
257,969

 
294,749

 
748,445

 
1,227,584

International Pharmaceuticals (1)
30,247

 
56,430

 
108,425

 
189,119

Total net revenues from external customers
$
745,466

 
$
786,887

 
$
2,160,689

 
$
2,700,218

Adjusted income from continuing operations before income tax:
 
 
 
 
 
 
 
U.S. Branded - Specialty & Established Pharmaceuticals
$
84,891


$
123,754


$
262,454


$
380,841

U.S. Branded - Sterile Injectables
170,329


150,531


513,082


417,060

U.S. Generic Pharmaceuticals
82,555


86,236


247,137


415,172

International Pharmaceuticals
13,377


17,434


45,594


47,128

Total segment adjusted income from continuing operations before income tax
$
351,152


$
377,955


$
1,068,267


$
1,260,201

__________
(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.
There were no material revenues from external customers attributed to an individual country outside of the United States during any of the periods presented. There were no material tangible long-lived assets in an individual country other than the United States as of September 30, 2018 or December 31, 2017.
The table below provides reconciliations of our consolidated Loss from continuing operations before income tax, which is determined in accordance with U.S. generally accepted accounting principles (U.S. GAAP), to our total segment adjusted income from continuing operations before income tax for the three and nine months ended September 30, 2018 and 2017 (in thousands):
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2018
 
2017
 
2018
 
2017
Total consolidated loss from continuing operations before income tax
$
(143,068
)
 
$
(127,796
)
 
$
(671,559
)
 
$
(1,058,647
)
Interest expense, net
131,847

 
127,521

 
385,896

 
361,267

Corporate unallocated costs (1)
49,187

 
33,035

 
144,693

 
114,655

Amortization of intangible assets
161,275

 
161,413

 
471,662

 
615,490

Inventory step-up
71

 
66

 
261

 
281

Upfront and milestone payments to partners
4,731

 
775

 
43,027

 
6,952

Separation benefits and other cost reduction initiatives (2)
4,001

 
80,693

 
82,141

 
127,977

Certain litigation-related and other contingencies, net (3)
(1,750
)
 
(12,352
)
 
15,370

 
(14,016
)
Asset impairment charges (4)
142,217

 
94,924

 
613,400

 
1,023,930

Acquisition-related and integration items (5)
1,288

 
16,641

 
13,284

 
31,711

Loss on extinguishment of debt
—

 
—

 
—

 
51,734

Foreign currency impact related to the remeasurement of intercompany debt instruments
1,528

 
3,005

 
(1,560
)
 
(2,922
)
Other, net (6)
(175
)
 
30

 
(28,348
)
 
1,789

Total segment adjusted income from continuing operations before income tax
$
351,152

 
$
377,955

 
$
1,068,267

 
$
1,260,201

__________
(1)
Amounts include certain corporate overhead costs, such as headcount and facility expenses and certain other income and expenses.

15
Table of Contents

(2)
Amounts for the three and nine months ended September 30, 2018 relate to employee separation costs of $2.1 million and $32.7 million, respectively, charges to increase excess inventory reserves of $0.2 million and $2.8 million, respectively, and other charges of $1.7 million and $11.4 million, respectively, each of which related primarily to our restructuring initiatives. Also included in the amount for the nine months ended September 30, 2018 is accelerated depreciation of $35.2 million, which related to the 2017 U.S. Generic Pharmaceuticals Restructuring Initiative. During the three and nine months ended September 30, 2017, amounts primarily relate to employee separation costs of $19.8 million and $41.3 million, accelerated depreciation of $59.8 million and $60.2 million, other charges of $1.1 million and $18.5 million, respectively, and charges to increase excess inventory reserves of $7.9 million during the nine months ended September 30, 2017. These charges were related primarily to the 2017 U.S. Generics Pharmaceuticals restructuring initiative. See Note 4. Restructuring 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.
(4)
Amounts primarily relate to charges to impair goodwill and intangible assets as further described in Note 9. Goodwill and Other Intangibles as well as charges to write down certain property, plant and equipment as further described in Note 7. Fair Value Measurements.
(5)
Amounts during the three and nine months ended September 30, 2018 are primarily related to charges due to changes in the fair value of contingent consideration of $0.8 million and $11.7 million, respectively. Amounts during the three and nine months ended September 30, 2017 include charges due to changes in the fair value of contingent consideration of $15.4 million and $23.6 million, respectively. All other amounts are directly related to costs associated with acquisition and integration efforts.
(6)
Amounts during the three and nine months ended September 30, 2018 primarily relate to gains on sales of businesses and other assets, as further described in Note 17. Other income, net.
Asset information is not reviewed or included within our internal management reporting. Therefore, the Company has not disclosed asset information for each reportable segment.
The Company disaggregates its revenue from contracts with customers into the categories included in the table below (in thousands). The Company believes these categories depict how the nature, timing and uncertainty of revenue and cash flows are affected by economic factors.

Three Months Ended September 30,

Nine Months Ended September 30,

2018

2017

2018

2017
U.S. Branded - Specialty & Established Pharmaceuticals:
 
 
 
 
 
 
 
Specialty Products:
 
 
 
 
 
 
 
XIAFLEX®
$
64,214

 
$
52,511

 
$
184,855

 
$
152,113

SUPPRELIN® LA
20,408

 
20,638

 
60,948

 
63,468

Other Specialty (1)
43,576

 
40,634

 
114,202

 
113,407

Total Specialty Products
$
128,198

 
$
113,783

 
$
360,005

 
$
328,988

Established Products:
 
 
 
 
 
 
 
PERCOCET®
$
30,730

 
$
31,349

 
$
93,539

 
$
93,183

VOLTAREN® Gel
15,057

 
19,102

 
44,185

 
53,646

OPANA® ER
—

 
14,756

 
—

 
82,056

Other Established (2)
46,115

 
54,813

 
135,243

 
171,277

Total Established Products
$
91,902

 
$
120,020

 
$
272,967

 
$
400,162

Total U.S. Branded - Specialty & Established Pharmaceuticals (3)
$
220,100

 
$
233,803

 
$
632,972

 
$
729,150

U.S. Branded - Sterile Injectables:
 
 
 
 
 
 
 
VASOSTRICT®
$
112,333


$
105,741


$
332,387


$
300,649

ADRENALIN®
35,460


25,335


101,858


50,464

Ertapenem for injection
25,798

 
—

 
25,798

 
—

Other Sterile Injectables (4)
63,559


70,829


210,804


203,252

Total U.S. Branded - Sterile Injectables (3)
$
237,150


$
201,905


$
670,847


$
554,365

Total U.S. Generic Pharmaceuticals (5)
$
257,969

 
$
294,749

 
$
748,445

 
$
1,227,584

Total International Pharmaceuticals (6)
$
30,247

 
$
56,430

 
$
108,425

 
$
189,119

Total Revenues
$
745,466

 
$
786,887

 
$
2,160,689

 
$
2,700,218

__________
(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, LIDODERM®, EDEX®, 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 $25 million during any quarterly period in 2018 or 2017.
(4)
Products included within Other Sterile Injectables include, but are not limited to, APLISOL® and ephedrine sulfate injection.

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(5)
The U.S. Generic Pharmaceuticals segment is comprised of a portfolio of products that are generic versions of branded products, are distributed primarily through the same wholesalers, generally have no intellectual property protection and are sold within the U.S. During the nine months ended September 30, 2017, combined sales of ezetimibe tablets and quetiapine ER tablets, for which we lost temporary marketing exclusivity during the second quarter of 2017, made up 9% of consolidated total revenue. No other individual product within this segment has exceeded 5% of consolidated total revenues for the periods presented.
(6)
The International Pharmaceuticals segment, which accounted for 4% and 5% of consolidated total revenues during the three and nine months ended September 30, 2018, respectively, and 7% of consolidated total revenues during both the three and nine months ended September 30, 2017, 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 also included: (i) our South African business, which was sold in July 2017 and consisted of Litha and certain assets acquired from Aspen Holdings in October 2015 and (ii) our Latin American business consisting of Somar, which was sold in October 2017.
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 pay dividends that generally reflect short-term interest rates. 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.
At September 30, 2018 and December 31, 2017, the Company had combined restricted cash and cash equivalents of $312.0 million and $324.4 million, respectively, of which $289.7 million and $320.5 million, respectively, are classified as current assets and reported in our Condensed Consolidated Balance Sheets as Restricted cash and cash equivalents. The remaining amounts, which are classified as non-current assets, are reported in our Condensed Consolidated Balance Sheets as Other assets. Approximately $283.8 million and $313.8 million of our restricted cash and cash equivalents are held in qualified settlement funds (QSFs) for mesh-related matters at September 30, 2018 and December 31, 2017, respectively. The remaining amount of restricted cash and cash equivalents at September 30, 2018 primarily relates to other litigation-related matters. See Note 14. Commitments and Contingencies for further information.
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 September 30, 2018 and December 31, 2017.
Acquisition-Related Contingent Consideration
The fair value of contingent consideration liabilities is determined using unobservable inputs; hence these instruments represent Level 3 measurements within the above-defined fair value hierarchy. 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. Changes in any of these estimated inputs used as of the date of this report could have resulted in significant adjustments to fair value. See Recurring Fair Value Measurements below for additional information on acquisition-related contingent consideration.

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Recurring Fair Value Measurements
The Company’s financial assets and liabilities measured at fair value on a recurring basis at September 30, 2018 and December 31, 2017 were as follows (in thousands):
 
Fair Value Measurements at Reporting Date using:
September 30, 2018
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
$
691,579

 
$
—

 
$
—

 
$
691,579

Equity securities
1,693

 
—

 
—

 
1,693

Total
$
693,272

 
$
—

 
$
—

 
$
693,272

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

 
$
—

 
$
42,261

 
$
42,261

Acquisition-related contingent consideration—long-term
—

 
—

 
86,209

 
86,209

Total
$
—

 
$
—

 
$
128,470

 
$
128,470

 
Fair Value Measurements at Reporting Date using:
December 31, 2017
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
$
439,831

 
$
—

 
$
—

 
$
439,831

Time deposits
—

 
303,410

 
—

 
303,410

Equity securities
1,456

 
—

 
—

 
1,456

Total
$
441,287

 
$
303,410

 
$
—

 
$
744,697

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

 
$
—

 
$
70,543

 
$
70,543

Acquisition-related contingent consideration—long-term
—

 
—

 
119,899

 
119,899

Total
$
—

 
$
—

 
$
190,442

 
$
190,442

At September 30, 2018 and December 31, 2017, money market funds include $57.0 million and $35.6 million, respectively, in QSFs to be disbursed to mesh-related or other product liability claimants. Amounts in QSFs are considered restricted cash equivalents. See Note 14. Commitments and Contingencies for further discussion of our product liability cases. The differences between the amortized cost and fair value of our money market funds and equity securities were not material, individually or in the aggregate, at September 30, 2018 or December 31, 2017, nor were any of the related gross unrealized gains or losses.
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 nine months ended September 30, 2018 and 2017 (in thousands):
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2018
 
2017
 
2018
 
2017
Beginning of period
$
152,098

 
$
210,460

 
$
190,442

 
$
262,113

Amounts settled
(24,564
)
 
(31,617
)
 
(73,298
)
 
(91,927
)
Changes in fair value recorded in earnings
769

 
15,440

 
11,731

 
23,574

Effect of currency translation
167

 
504

 
(405
)
 
1,027

End of period
$
128,470

 
$
194,787

 
$
128,470

 
$
194,787


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At September 30, 2018, the fair value measurements of the contingent consideration obligations were determined using risk-adjusted discount rates ranging from approximately 10% to 22% (weighted average rate of approximately 14.1%). 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 Accounts payable and 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 nine months ended September 30, 2018 by acquisition (in thousands):
 
Balance as of December 31, 2017
 
Fair Value Adjustments and Accretion
 
Payments and Other
 
Balance as of September 30, 2018
Auxilium acquisition
$
13,061

 
$
(263
)
 
$
(1,844
)
 
$
10,954

Lehigh Valley Technologies, Inc. acquisitions
63,001

 
11,169

 
(39,469
)
 
34,701

VOLTAREN® Gel acquisition
98,124

 
3,839

 
(30,923
)
 
71,040

Other
16,256

 
(3,014
)
 
(1,467
)
 
11,775

Total
$
190,442

 
$
11,731

 
$
(73,703
)
 
$
128,470

Nonrecurring Fair Value Measurements
The Company’s financial assets and liabilities measured at fair value on a nonrecurring basis during the nine months ended September 30, 2018 were as follows (in thousands):
 
Fair Value Measurements at Reporting Date using:
 
Total Expense for the Nine Months Ended September 30, 2018
 
Quoted Prices in Active Markets for Identical Assets (Level 1)
 
Significant Other Observable Inputs (Level 2)
 
Significant Unobservable Inputs (Level 3)
 
Assets:
 
 
 
 
 
 
 
Intangible assets, excluding goodwill (Note 9)
$
—

 
$
—

 
$
239,857

 
$
(217,576
)
Certain property, plant and equipment (1)
—

 
—

 
—

 
(4,824
)
Total
$
—

 
$
—

 
$
239,857

 
$
(222,400
)
__________
(1)
Amount includes $2.6 million related to the 2017 U.S. Generic Pharmaceuticals Restructuring Initiative, which is described further in Note 4. Restructuring.
Additionally, the Company recorded aggregate goodwill impairment charges during the nine months ended September 30, 2018 of $391.0 million. Refer to Note 9. Goodwill and Other Intangibles for further description, including the valuation methodologies utilized.
NOTE 8. INVENTORIES
Inventories consist of the following at September 30, 2018 and December 31, 2017 (in thousands):
 
September 30, 2018
 
December 31, 2017
Raw materials (1)
$
119,627

 
$
124,685

Work-in-process (1)
83,665

 
109,897

Finished goods (1)
129,495

 
156,855

Total
$
332,787

 
$
391,437

__________
(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 September 30, 2018 and December 31, 2017, $13.3 million and $17.1 million, respectively, of long-term inventory was included in Other assets in the Condensed Consolidated Balance Sheets. As of September 30, 2018 and December 31, 2017, the Company’s Condensed Consolidated Balance Sheets included approximately $13.6 million and $5.9 million, respectively, of capitalized pre-launch inventories related to generic products that were not yet available to be sold.

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NOTE 9. GOODWILL AND OTHER INTANGIBLES
Goodwill
Changes in the carrying amount of our goodwill for the nine months ended September 30, 2018 were as follows (in thousands):
 
U.S. Branded - Specialty & Established Pharmaceuticals
 
U.S. Branded - Sterile Injectables
 
U.S. Generic Pharmaceuticals
 
International Pharmaceuticals
 
Total
Goodwill as of December 31, 2017
$
828,818

 
$
—

 
$
3,531,301

 
$
89,963

 
$
4,450,082

Allocation to current segments (1)
—

 
2,731,193

 
(2,731,193
)
 
—

 
—

Effect of currency translation
—

 
—

 
—

 
(2,414
)
 
(2,414
)
Goodwill impairment charges
—

 
—

 
(391,000
)
 
—

 
(391,000
)
Goodwill as of September 30, 2018
$
828,818

 
$
2,731,193

 
$
409,108

 
$
87,549

 
$
4,056,668

__________
(1)
This allocation relates to the change in segments described in Note 6. Segment Results. The amount of goodwill initially attributed to the new U.S. Branded - Sterile Injectables and U.S. Generic Pharmaceuticals segments was determined using a relative fair value methodology in accordance with U.S. GAAP.
The carrying amounts of goodwill at September 30, 2018 and December 31, 2017 are net of the following accumulated impairments (in thousands):

U.S. Branded - Specialty & Established Pharmaceuticals
 
U.S. Branded - Sterile Injectables
 
U.S. Generic Pharmaceuticals
 
International Pharmaceuticals
 
Total
Accumulated impairment losses as of December 31, 2017
$
855,810

 
$
—

 
$
2,342,549

 
$
463,545

 
$
3,661,904

Accumulated impairment losses as of September 30, 2018
$
855,810

 
$
—

 
$
2,733,549

 
$
451,209

 
$
4,040,568


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Table of Contents

Other Intangible Assets
Changes in the amount of other intangible assets for the nine months ended September 30, 2018 are set forth in the table below (in thousands).
Cost basis:
Balance as of December 31, 2017
 
Acquisitions
 
Impairments
 
Other (1)
 
Effect of Currency Translation
 
Balance as of September 30, 2018
Indefinite-lived intangibles:
 
 
 
 
 
 
 
 
 
 
 
In-process research and development
$
347,200

 
$
—

 
$
(87,900
)
 
$
(165,400
)
 
$
—

 
$
93,900

Total indefinite-lived intangibles
$
347,200

 
$
—

 
$
(87,900
)
 
$
(165,400
)
 
$
—

 
$
93,900

Finite-lived intangibles:
 
 
 
 
 
 
 
 
 
 
 
Licenses (weighted average life of 12 years)
$
457,402

 
$
—

 
$
—

 
$
—

 
$
—

 
$
457,402

Tradenames
6,409

 
—

 
—

 
—

 
—

 
6,409

Developed technology (weighted average life of 11 years)
6,187,764

 
—

 
(129,676
)
 
154,753

 
(7,447
)
 
6,205,394

Total finite-lived intangibles (weighted average life of 11 years)
$
6,651,575

 
$
—

 
$
(129,676
)
 
$
154,753

 
$
(7,447
)
 
$
6,669,205

Total other intangibles
$
6,998,775

 
$
—

 
$
(217,576
)
 
$
(10,647
)
 
$
(7,447
)
 
$
6,763,105

 
 
 
 
 
 
 
 
 
 
 
 
Accumulated amortization:
Balance as of December 31, 2017
 
Amortization
 
Impairments
 
Other (1)
 
Effect of Currency Translation
 
Balance as of September 30, 2018
Finite-lived intangibles:
 
 
 
 
 
 
 
 
 
 
 
Licenses
$
(370,221
)
 
$
(21,262
)
 
$
—

 
$
—

 
$
—

 
$
(391,483
)
Tradenames
(6,409
)
 
—

 
—

 
—

 
—

 
(6,409
)
Developed technology
(2,304,461
)
 
(450,400
)
 
—

 
10,647

 
3,217

 
(2,740,997
)
Total other intangibles
$
(2,681,091
)
 
$
(471,662
)
 
$
—

 
$
10,647

 
$
3,217

 
$
(3,138,889
)
Net other intangibles
$
4,317,684

 
 
 
 
 
 
 
 
 
$
3,624,216

__________
(1)
Other adjustments relate to reclassification adjustments of $165.4 million for certain developed technology intangible assets, previously classified as in-process research and development, that were placed in service during the nine months ended September 30, 2018 and the removal of certain fully amortized intangible assets.
Amortization expense for the three and nine months ended September 30, 2018 totaled $161.3 million and $471.7 million, respectively. Amortization expense for the three and nine months ended September 30, 2017 totaled $161.4 million and $615.5 million, respectively. Amortization expense is included in Cost of revenues in the Condensed Consolidated Statements of Operations. Estimated amortization of intangibles for the five fiscal years subsequent to December 31, 2017 is as follows (in thousands):
2018
$
622,384

2019
$
552,516

2020
$
481,300

2021
$
447,157

2022
$
420,786

Impairments
Endo tests goodwill and indefinite-lived intangible assets for impairment annually, or more frequently whenever events or changes in circumstances indicate that the asset might be impaired. Our annual assessment is performed as of October 1st.

21
Table of Contents

As part of our goodwill and intangible asset impairment assessments, we estimate the fair values of our reporting units and our intangible assets using an income approach that utilizes a discounted cash flow model or, where appropriate, a market approach. The discounted cash flow models are dependent upon our estimates of future cash flows and other factors. These estimates of future cash flows involve assumptions concerning (i) future operating performance, including future sales, long-term growth rates, operating margins, tax rates, variations in the amount and timing of cash flows and the probability of achieving the estimated cash flows and (ii) future economic conditions. These assumptions are based on significant inputs not observable in the market and thus represent Level 3 measurements within the fair value hierarchy. The discount rates applied to the estimated cash flows are based on the overall risk associated with the particular assets and other market factors. We believe the discount rates and other inputs and assumptions are consistent with those that a market participant would use. Any impairment charges resulting from annual or interim goodwill and intangible asset impairment assessments are recorded to Asset impairment charges in our Condensed Consolidated Statements of Operations.
During the three and nine months ended September 30, 2018 and 2017, the Company incurred the following goodwill and other intangible asset impairment charges:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2018
 
2017
 
2018
 
2017
Goodwill impairment charges
$
—

 
$
—

 
$
391,000

 
$
288,745

Other intangible asset impairment charges
$
140,609

 
$
78,300

 
$
217,576

 
$
674,177

A summary of significant goodwill and other intangible asset impairment tests and related charges is included below. Other intangible asset impairment charges that are not included in the below narrative totaled $140.6 million and $78.3 million during the three months ended September 30, 2018 and 2017, respectively, and $217.6 million and $461.1 million during the nine months ended September 30, 2018 and 2017, respectively. These charges relate primarily to certain in-process research and development and/or developed technology intangible assets that were tested for impairment following changes in market conditions and certain other factors impacting recoverability.
Our first quarter 2018 change in segments described in Note 6. Segment Results resulted in changes to our reporting units for goodwill impairment testing purposes, including the creation of a new U.S. Branded - Sterile Injectables reporting unit, which was previously part of our Generics reporting unit. As a result of these changes, under U.S. GAAP, we tested the goodwill of the former Generics reporting unit immediately before the segment realignment and the goodwill of both the new U.S. Branded - Sterile Injectables and U.S. Generic Pharmaceuticals reporting units immediately after the segment realignment. These goodwill tests were performed using an income approach that utilizes a discounted cash flow model. The results of these goodwill impairment tests were as follows:
•
The former Generics reporting unit’s estimated fair value (determined using a discount rate of 9.5%) exceeded its carrying amount, resulting in no related goodwill impairment charge.
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The new U.S. Branded - Sterile Injectables reporting unit’s estimated fair value (determined using a discount rate of 9.5%) exceeded its carrying amount, resulting in no related goodwill impairment charge.
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The new U.S. Generic Pharmaceuticals reporting unit’s carrying amount exceeded its estimated fair value (determined using a discount rate of 9.5%), resulting in a pre-tax non-cash goodwill impairment charge of $391.0 million.
In March 2017, we announced that the Food and Drug Administration’s (FDA) 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®