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ENDP-03.31.2020-10Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

____________________________________________________________________________________________

FORM 10-Q

____________________________________________________________________________________________

(Mark One)

☒QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2020

☐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 No.)

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)



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	☒

	No	☐



Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files).	Yes	☒

	No	☐



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	☒	Accelerated filer	☐
Non-accelerated filer	☐	Smaller reporting company	☐
		Emerging growth company	☐



If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.			☐



Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).	Yes	☐

	No	☒



Securities registered pursuant to Section 12(b) of the Exchange Act:

Title of each class	Trading symbol(s)	Name of each exchange on which registered
Ordinary shares, nominal value $0.0001 per share	ENDP	The Nasdaq Global Select Market

The number of Ordinary shares, nominal value $0.0001 per share outstanding as of April 30, 2020 was 229,704,840.

ENDO INTERNATIONAL PLC

INDEX



		Page
Forward-Looking Statements		i

PART I. FINANCIAL INFORMATION
Item 1.	Financial Statements	1
	Condensed Consolidated Balance Sheets (Unaudited)	1
	Condensed Consolidated Statements of Operations (Unaudited)	2
	Condensed Consolidated Statements of Comprehensive Income (Loss) (Unaudited)	3
	Condensed Consolidated Statements of Cash Flows (Unaudited)	4
	Notes to Condensed Consolidated Financial Statements (Unaudited)	5
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	27
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	39
Item 4.	Controls and Procedures	40

PART II. OTHER INFORMATION
Item 1.	Legal Proceedings	41
Item 1A.	Risk Factors	41
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	46
Item 3.	Defaults Upon Senior Securities	46
Item 4.	Mine Safety Disclosures	46
Item 5.	Other Information	46
Item 6.	Exhibits	47

Signatures		48

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). Forward-looking statements include, without limitation, estimated future results of operations, estimates of future revenues, future expenses, future net income and future net income per share, as well as statements regarding future financing activities, the impact of the novel strain of coronavirus referred to as COVID-19 on the health and welfare of our employees and on our business, including any response to COVID-19 such as anticipated return to historical purchasing decisions by customers, the economic impact of COVID-19, changes in consumer spending, decisions to engage in certain medical procedures, future governmental orders that could impact our operations and the ability of our manufacturing facilities and suppliers to fulfill their obligations to us, and any other statements that refer to Endo’s expected, estimated or anticipated future results. We have tried, whenever possible, to identify such statements by words such as “believe,” “expect,” “anticipate,” “intend,” “estimate,” “plan,” “project,” “forecast,” “will,” “may” or similar expressions. We have based these forward-looking statements on our current expectations, assumptions 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 including, without limitation, the risks related to the impact of COVID-19 (such as, without limitation, the scope and duration of the pandemic and the resulting economic crisis and levels of unemployment, governmental actions and restrictive measures implemented in response, material delays and cancellations of certain medical procedures, potential manufacturing and supply chain disruptions and other potential impacts to the business as a result of COVID-19) and the other risks and uncertainties 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, 2019 filed with the Securities and Exchange Commission (SEC) on February 26, 2020 (the Annual Report). These risks and uncertainties, many of which are outside of our control, and any other risks and uncertainties that we are not currently able to predict or identify, individually or in the aggregate, could have a material adverse effect on our business, financial condition, results of operations and cash flows and could cause our actual results to differ materially and adversely from those expressed in forward-looking statements contained or incorporated by reference in this document. Additionally, the prolonged impact of COVID-19 could heighten the impact of one or more of such risk factors.

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 laws. You are advised to consult any further disclosures we make on related subjects in our reports filed with the SEC and with securities regulators in Canada on the System for Electronic Document Analysis and Retrieval. Also note that, in Part II, Item 1A of this document and in Part I, Item 1A of the Annual Report, 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.

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PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

ENDO INTERNATIONAL PLC

CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)

(Dollars in thousands, except share and per share data)



	March 31, 2020			December 31, 2019
ASSETS
CURRENT ASSETS:
Cash and cash equivalents	$	1,531,538		$	1,454,531
Restricted cash and cash equivalents	200,666			247,457
Accounts receivable, net	536,903			467,953
Inventories, net	324,962			327,865
Prepaid expenses and other current assets	46,537			40,845
Income taxes receivable	94,729			47,567
Total current assets	$	2,735,335		$	2,586,218
PROPERTY, PLANT AND EQUIPMENT, NET	492,346			504,865
OPERATING LEASE ASSETS	49,349			51,700
GOODWILL	3,560,011			3,595,184
OTHER INTANGIBLES, NET	2,382,374			2,571,267
DEFERRED INCOME TAXES	114			2,192
OTHER ASSETS	86,351			78,101
TOTAL ASSETS	$	9,305,880		$	9,389,527
LIABILITIES AND SHAREHOLDERS' DEFICIT
CURRENT LIABILITIES:
Accounts payable and accrued expenses	$	854,958		$	899,949
Current portion of legal settlement accrual	442,233			513,005
Current portion of operating lease liabilities	11,512			10,763
Current portion of long-term debt	34,150			34,150
Income taxes payable	4,138			2,422
Total current liabilities	$	1,346,991		$	1,460,289
DEFERRED INCOME TAXES	27,024			31,703
LONG-TERM DEBT, LESS CURRENT PORTION, NET	8,354,920			8,359,899
OPERATING LEASE LIABILITIES, LESS CURRENT PORTION	45,057			48,299
OTHER LIABILITIES	269,705			355,881
COMMITMENTS AND CONTINGENCIES (NOTE 12)
SHAREHOLDERS' DEFICIT:
Euro deferred shares, $0.01 par value; 4,000,000 shares authorized and issued at both March 31, 2020 and December 31, 2019	44			45
Ordinary shares, $0.0001 par value; 1,000,000,000 shares authorized; 228,442,736 and 226,802,609 shares issued and outstanding at March 31, 2020 and December 31, 2019, respectively	23			23
Additional paid-in capital	8,917,927			8,904,692
Accumulated deficit	(9,422,284		)	(9,552,214		)
Accumulated other comprehensive loss	(233,527		)	(219,090		)
Total shareholders' deficit	$	(737,817	)	$	(866,544	)
TOTAL LIABILITIES AND SHAREHOLDERS' DEFICIT	$	9,305,880		$	9,389,527

See accompanying Notes to Condensed Consolidated Financial Statements.

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ENDO INTERNATIONAL PLC

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)

(Dollars and shares in thousands, except per share data)



	Three Months Ended March 31,
	2020			2019
TOTAL REVENUES, NET	$	820,405		$	720,411
COSTS AND EXPENSES:
Cost of revenues	388,799			391,909
Selling, general and administrative	166,768			151,123
Research and development	31,615			33,486
Litigation-related and other contingencies, net	(17,176		)	6
Asset impairment charges	97,785			165,448
Acquisition-related and integration items, net	12,462			(37,501		)
Interest expense, net	132,877			132,675
Gain on extinguishment of debt	—			(119,828		)
Other (income) expense, net	(13,974		)	4,802
INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAX	$	21,249		$	(1,709	)
INCOME TAX (BENEFIT) EXPENSE	(136,332		)	10,903
INCOME (LOSS) FROM CONTINUING OPERATIONS	$	157,581		$	(12,612	)
DISCONTINUED OPERATIONS, NET OF TAX (NOTE 3)	(27,651		)	(5,961		)
NET INCOME (LOSS)	$	129,930		$	(18,573	)
NET INCOME (LOSS) PER SHARE—BASIC:
Continuing operations	$	0.69		$	(0.06	)
Discontinued operations	(0.12		)	(0.02		)
Basic	$	0.57		$	(0.08	)
NET INCOME (LOSS) PER SHARE—DILUTED:
Continuing operations	$	0.68		$	(0.06	)
Discontinued operations	(0.12		)	(0.02		)
Diluted	$	0.56		$	(0.08	)
WEIGHTED AVERAGE SHARES:
Basic	227,198			224,594
Diluted	233,014			224,594

See accompanying Notes to Condensed Consolidated Financial Statements.

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ENDO INTERNATIONAL PLC

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (UNAUDITED)

(Dollars in thousands)



	Three Months Ended March 31,
	2020			2019
NET INCOME (LOSS)	$	129,930		$	(18,573	)
OTHER COMPREHENSIVE (LOSS) INCOME:
Net unrealized (loss) gain on foreign currency	$	(14,437	)	$	4,730
Total other comprehensive (loss) income	$	(14,437	)	$	4,730
COMPREHENSIVE INCOME (LOSS)	$	115,493		$	(13,843	)

See accompanying Notes to Condensed Consolidated Financial Statements.

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ENDO INTERNATIONAL PLC

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

(Dollars in thousands)



	Three Months Ended March 31,
	2020			2019
OPERATING ACTIVITIES:
Net income (loss)	$	129,930		$	(18,573	)
Adjustments to reconcile Net income (loss) to Net cash provided by (used in) operating activities:
Depreciation and amortization	141,588			162,733
Share-based compensation	17,645			24,733
Amortization of debt issuance costs and discount	4,339			5,586
Deferred income taxes	(911		)	(785		)
Change in fair value of contingent consideration	12,462			(37,501		)
Gain on extinguishment of debt	—			(119,828		)
Asset impairment charges	97,785			165,448
(Gain) loss on sale of business and other assets	(8,192		)	1,294
Changes in assets and liabilities which (used) provided cash:
Accounts receivable	(72,833		)	(14,389		)
Inventories	(324		)	(11,928		)
Prepaid and other assets	(3,581		)	5,059
Accounts payable, accrued expenses and other liabilities	(112,625		)	(258,202		)
Income taxes payable/receivable, net	(142,727		)	5,770
Net cash provided by (used in) operating activities	$	62,556		$	(90,583	)
INVESTING ACTIVITIES:
Purchases of property, plant and equipment, excluding capitalized interest	(19,638		)	(15,386		)
Capitalized interest payments	(492		)	(1,094		)
Proceeds from sale of business and other assets, net	4,167			103
Net cash used in investing activities	$	(15,963	)	$	(16,377	)
FINANCING ACTIVITIES:
Proceeds from issuance of notes, net	—			1,483,125
Repayments of notes	—			(1,499,998		)
Repayments of term loans	(8,537		)	(8,538		)
Repayments of other indebtedness	(1,184		)	(1,174		)
Payments for debt issuance and extinguishment costs	—			(211		)
Payments for contingent consideration	(364		)	(4,565		)
Payments of tax withholding for restricted shares	(4,398		)	(2,414		)
Proceeds from exercise of options	—			4
Net cash used in financing activities	$	(14,483	)	$	(33,771	)
Effect of foreign exchange rate	(1,894		)	537
NET INCREASE (DECREASE) IN CASH, CASH EQUIVALENTS, RESTRICTED CASH AND RESTRICTED CASH EQUIVALENTS	$	30,216		$	(140,194	)
CASH, CASH EQUIVALENTS, RESTRICTED CASH AND RESTRICTED CASH EQUIVALENTS, BEGINNING OF PERIOD	1,720,388			1,476,837
CASH, CASH EQUIVALENTS, RESTRICTED CASH AND RESTRICTED CASH EQUIVALENTS, END OF PERIOD	$	1,750,604		$	1,336,643
SUPPLEMENTAL INFORMATION:
Cash paid into Qualified Settlement Funds for mesh legal settlements	$	—		$	81,582
Cash paid out of Qualified Settlement Funds for mesh legal settlements	$	47,801		$	54,984
Other cash distributions for mesh legal settlements	$	17,819		$	10,239

See accompanying Notes to Condensed Consolidated Financial Statements.

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ENDO INTERNATIONAL PLC

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

FOR THE THREE MONTHS ENDED MARCH 31, 2020

NOTE 1. BASIS OF PRESENTATION

Endo International plc is an Ireland-domiciled specialty branded and generics pharmaceutical company that conducts business through its operating subsidiaries. Unless otherwise indicated or required by the context, references throughout to “Endo,” the “Company,” “we,” “our” or “us” refer to 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 (U.S. GAAP) for interim financial information and the instructions to Form 10-Q and Article 10 of Regulation S-X of the SEC for interim financial information. Accordingly, they do not include all of the information and footnotes required by U.S. 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 March 31, 2020 and the results of its operations and its cash flows for the periods presented. Operating results for the three months ended March 31, 2020 are not necessarily indicative of the results that may be expected for the year ending December 31, 2020. The year-end Condensed Consolidated Balance Sheet data as of December 31, 2019 was derived from audited financial statements but does not include all disclosures required by U.S. GAAP.

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 the Annual Report.

Certain prior period amounts have been reclassified to conform to the current period presentation.

NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Use of Estimates

The preparation of our Condensed Consolidated Financial Statements in conformity with U.S. GAAP requires us to make estimates that affect the amounts and disclosures in the Condensed Consolidated Financial Statements, including the notes thereto, and elsewhere in this report. Uncertainties related to the magnitude and duration of COVID-19, the extent to which it will impact our estimated future financial results, worldwide macroeconomic conditions including interest rates, employment rates, consumer spending and health insurance coverage, the speed of the anticipated recovery and governmental and business reactions to the pandemic have increased the complexity of developing these estimates, including the allowance for expected credit losses and the carrying amounts of long-lived assets, goodwill and other intangible assets. Actual results may differ significantly from our estimates, including as a result of COVID-19.

Significant Accounting Policies Added or Updated since December 31, 2019

Significant changes to our significant accounting policies since December 31, 2019 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 the Annual Report.

Accounts Receivable. The Company adopted Accounting Standards Codification (ASC) Topic 326, Financial Instruments-Credit Losses (ASC 326) on January 1, 2020. For further discussion of the adoption, refer to the “Recent Accounting Pronouncements Adopted or Otherwise Effective as of March 31, 2020” section below. Subsequent to the adoption of ASC 326, our accounts receivable balance is stated at amortized cost less an allowance for expected credit losses. In addition, our accounts receivable balance is reduced by certain sales deduction reserves where we have the right of offset with the customer. We generally do not require collateral.

Concentrations of Credit Risk and Credit Losses. Financial instruments that potentially subject us to significant concentrations of credit risk consist primarily of cash equivalents, restricted cash equivalents and accounts receivable. From time to time, we invest our excess cash in high-quality, liquid money market instruments maintained by major banks and financial institutions. We have not experienced any losses on our cash equivalents.

With respect to our accounts receivable, we have no history of significant losses. Approximately 89% and 88% of our gross trade accounts receivable balances represent amounts due from three customers (Cardinal Health, Inc., McKesson Corporation and AmerisourceBergen Corporation) at March 31, 2020 and December 31, 2019, respectively. We perform ongoing credit evaluations of these and our other customers based on information available to us. We consider these and other factors, including changes in the composition and aging of our accounts receivable, in developing our allowance for expected credit losses. The estimated allowance was not material to the Company’s Condensed Consolidated Financial Statements at March 31, 2020 or December 31, 2019, nor were the changes to the allowance during any of the periods presented.

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We do not currently expect our current or future exposures to credit losses to have a significant impact on us. However, our customers’ ability to pay us on a timely basis, or at all, could be affected by factors specific to their respective businesses and/or by economic conditions, including those related to the COVID-19 pandemic, the extent of which cannot be fully predicted.

Recent Accounting Pronouncements Adopted or Otherwise Effective as of March 31, 2020

In June 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2016-13, Measurement of Credit Losses on Financial Instruments (ASU 2016-13). ASU 2016-13, together with a series of subsequently-issued related ASUs, has been codified in ASC 326. ASC 326 establishes new requirements for companies to estimate expected credit losses when measuring certain financial assets, including accounts receivables. The Company adopted ASC 326 using a modified retrospective approach with an effective date of January 1, 2020. The adoption of ASC 326 did not have a material impact on the Company’s Condensed Consolidated Financial Statements.

NOTE 3. DISCONTINUED OPERATIONS

Astora

The operating results of the Company’s Astora business, which the Company’s board of directors (the Board) resolved to wind-down in 2016, 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 Discontinued operations, net of tax, for the three months ended March 31, 2020 and 2019 (in thousands):



	Three Months Ended March 31,
	2020			2019
Litigation-related and other contingencies, net	$	30,454		$	—
Loss from discontinued operations before income taxes	$	(33,517	)	$	(5,961	)
Income tax benefit	$	(5,866	)	$	—
Discontinued operations, net of tax	$	(27,651	)	$	(5,961	)

Loss from discontinued operations before income taxes includes Litigation-related and other contingencies, net, 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 $27.7 million and $6.0 million for the three months ended March 31, 2020 and 2019, respectively, and the impact of cash activity related to vaginal mesh cases. There were no material net cash flows related to Astora discontinued investing activities during the three months ended March 31, 2020 and 2019. There was no depreciation or amortization during the three months ended March 31, 2020 and 2019 related to Astora.

NOTE 4. SEGMENT RESULTS

The Company’s four reportable business segments are Branded Pharmaceuticals, Sterile Injectables, Generic Pharmaceuticals and International Pharmaceuticals. These segments reflect the level at which the chief operating decision maker (CODM) 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 segment adjusted income from continuing operations before income tax, which we define as Income (loss) from continuing operations before income tax and before certain upfront and milestone payments to partners; acquisition-related and integration items, including transaction costs and changes in the fair value of contingent consideration; cost reduction and integration-related initiatives such as separation benefits, continuity 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; certain legal costs; 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. Effective January 1, 2020, the Company revised its definition of segment adjusted income from continuing operations before income tax to exclude certain legal costs in order to reflect changes in how the CODM reviews segment performance. The Company believes that such costs are not indicative of business performance and that excluding them more accurately reflects each segment’s results and better enables management to compare financial results between periods. Prior period results have been adjusted to reflect this change. Specifically, for the three months ended March 31, 2019, certain legal costs of $16.3 million and $0.4 million have been excluded from our Branded Pharmaceuticals and Generic Pharmaceuticals segments, respectively, resulting in increases to the segment adjusted income from continuing operations before income tax for these segments. This change had no impact on our Total consolidated income (loss) from continuing operations before income tax.

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Certain of the corporate expenses incurred by the Company are not directly 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 total segment adjusted income from continuing operations before income tax is equal to the combined results of each of its segments.

Branded Pharmaceuticals

Our Branded 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, NASCOBAL^® Nasal Spray, AVEED^®, PERCOCET^®, EDEX^®, LIDODERM^® and TESTOPEL^®, among others.

Sterile Injectables

Our 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, the authorized generic of Merck Sharp & Dohme Corp.’s (Merck) Invanz^®, and ephedrine sulfate injection, among others.

Generic Pharmaceuticals

Our Generic Pharmaceuticals segment consists of a differentiated product portfolio including solid oral extended-release, solid oral immediate-release, 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). The key products of this segment serve various therapeutic areas, including attention deficit hyperactivity disorder, pain, women’s health and oncology.

The following represents selected information for the Company’s reportable segments for the three months ended March 31, 2020 and 2019 (in thousands):



	Three Months Ended March 31,
	2020		2019
Net revenues from external customers:
Branded Pharmaceuticals	$	204,073	$	203,525
Sterile Injectables	336,390		270,048
Generic Pharmaceuticals	251,283		218,526
International Pharmaceuticals (1)	28,659		28,312
Total net revenues from external customers	$	820,405	$	720,411
Segment adjusted income from continuing operations before income tax:
Branded Pharmaceuticals	$	98,422	$	95,283
Sterile Injectables	263,896		196,183
Generic Pharmaceuticals	57,327		50,411
International Pharmaceuticals	14,197		12,095
Total segment adjusted income from continuing operations before income tax	$	433,842	$	353,972

__________


(1)	Revenues generated by our International Pharmaceuticals segment are primarily attributable to external customers located in Canada.

There were no material revenues from external customers attributed to an individual country outside of the U.S. during any of the periods presented.

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The table below provides reconciliations of our Total consolidated income (loss) from continuing operations before income tax, which is determined in accordance with U.S. GAAP, to our total segment adjusted income from continuing operations before income tax for the three months ended March 31, 2020 and 2019 (in thousands):



	Three Months Ended March 31,
	2020			2019
Total consolidated income (loss) from continuing operations before income tax	$	21,249		$	(1,709	)
Interest expense, net	132,877			132,675
Corporate unallocated costs (1)	43,322			48,095
Amortization of intangible assets	117,237			145,599
Upfront and milestone payments to partners	1,750			939
Continuity and separation benefits and other cost reduction initiatives (2)	23,220			2,025
Certain litigation-related and other contingencies, net (3)	(17,176		)	6
Certain legal costs (4)	15,536			16,689
Asset impairment charges (5)	97,785			165,448
Acquisition-related and integration items, net (6)	12,462			(37,501		)
Gain on extinguishment of debt	—			(119,828		)
Foreign currency impact related to the remeasurement of intercompany debt instruments	(7,094		)	1,534
Other, net (7)	(7,326		)	—
Total segment adjusted income from continuing operations before income tax	$	433,842		$	353,972

__________


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

(2)

Amounts for the three months ended March 31, 2020 include $13.7 million of costs associated with certain continuity and transitional compensation arrangements for certain senior management of the Company. Other amounts in 2020 related primarily to certain cost reduction initiatives. Such amounts included accelerated depreciation of $6.6 million, employee separation costs of $0.1 million and other charges of $2.8 million. Amounts for the three months ended March 31, 2019 primarily relate to employee separation costs of $1.8 million and other charges of $0.2 million.


(3)	Amounts include adjustments to our accruals for litigation-related settlement charges and certain settlement proceeds related to suits filed by our subsidiaries. Our material legal proceedings and other contingent matters are described in more detail in Note 12. Commitments and Contingencies.


(4)	Amounts relate to opioid-related legal expenses.


(5)	Amounts primarily relate to charges to impair goodwill and intangible assets as further described in Note 8. Goodwill and Other Intangibles.


(6)	Amounts primarily relate to changes in the fair value of contingent consideration.


(7)	Amounts primarily relate to gains on sales of businesses and other assets, as further described in Note 15. Other (Income) Expense, 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.

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During the three months ended March 31, 2020 and 2019, the Company disaggregated 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 March 31,
	2020		2019
Branded Pharmaceuticals:
Specialty Products:
XIAFLEX®	$	89,072	$	68,507
SUPPRELIN® LA	19,720		22,056
Other Specialty (1)	25,505		24,403
Total Specialty Products	$	134,297	$	114,966
Established Products:
PERCOCET®	$	27,703	$	30,760
EDEX®	8,568		5,971
Other Established (2)	33,505		51,828
Total Established Products	$	69,776	$	88,559
Total Branded Pharmaceuticals (3)	$	204,073	$	203,525
Sterile Injectables:
VASOSTRICT®	$	202,904	$	139,137
ADRENALIN®	56,512		47,322
Ertapenem for injection	17,874		32,219
APLISOL®	9,867		12,381
Other Sterile Injectables (4)	49,233		38,989
Total Sterile Injectables (3)	$	336,390	$	270,048
Total Generic Pharmaceuticals (5)	$	251,283	$	218,526
Total International Pharmaceuticals (6)	$	28,659	$	28,312
Total revenues, net	$	820,405	$	720,411

__________


(1)	Products included within Other Specialty are NASCOBAL^®Nasal Spray and AVEED^®.


(2)	Products included within Other Established include, but are not limited to, LIDODERM^®and TESTOPEL^®.


(3)	Individual products presented above represent the top two performing products in each product category for the three months ended March 31, 2020 and/or any product having revenues in excess of $25 million during any quarterly period in 2020 or 2019.


(4)	Products included within Other Sterile Injectables include ephedrine sulfate injection and others.

(5)

The 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 three months ended March 31, 2019, colchicine tablets, the authorized generic of Takeda Pharmaceuticals U.S.A., Inc.’s (Takeda) Colcrys^®, which launched in July 2018, made up 6% 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 3% and 4% of consolidated total revenues during the three months ended March 31, 2020 and 2019, respectively, includes a variety of specialty pharmaceutical products sold outside the U.S., primarily in Canada through our operating company Paladin.

NOTE 5. FAIR VALUE MEASUREMENTS

Financial Instruments

The financial instruments recorded in our Condensed Consolidated Balance Sheets include cash and cash equivalents (including money market funds), restricted cash and cash equivalents, accounts receivable, equity 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), accounts receivable, accounts payable and accrued expenses approximate their fair values.

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The following table presents current and noncurrent restricted cash and cash equivalent balances at March 31, 2020 and December 31, 2019 (in thousands):



	March 31, 2020		December 31, 2019
Restricted cash and cash equivalents—current portion (1)	$	200,666	$	247,457
Restricted cash and cash equivalents—noncurrent portion (2)	18,400		18,400
Restricted cash and cash equivalents—total (3)	$	219,066	$	265,857

__________


(1)	These amounts are reported in our Condensed Consolidated Balance Sheets as Restricted cash and cash equivalents.


(2)	These amounts are reported in our Condensed Consolidated Balance Sheets as Other assets.


(3)	Approximately $195.7 million and $242.8 million of our restricted cash and cash equivalents are held in Qualified Settlement Funds (QSFs) for mesh-related matters at March 31, 2020 and December 31, 2019, respectively. The remaining restricted cash and cash equivalents primarily relates to other litigation-related matters. See Note 12. 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.

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. The estimates of fair value are uncertain and changes in any of the estimated inputs used as of the date of this report could have resulted in significant adjustments to fair value. See the “Recurring Fair Value Measurements” section below for additional information on acquisition-related contingent consideration.

Recurring Fair Value Measurements

The Company’s financial assets and liabilities measured at fair value on a recurring basis at March 31, 2020 and December 31, 2019 were as follows (in thousands):



	Fair Value Measurements at March 31, 2020 using:
	Level 1 Inputs		Level 2 Inputs		Level 3 Inputs		Total
Assets:
Money market funds	$	635,365	$	—	$	—	$	635,365
Liabilities:
Acquisition-related contingent consideration—current	$	—	$	—	$	8,459	$	8,459
Acquisition-related contingent consideration—noncurrent	$	—	$	—	$	30,480	$	30,480



	Fair Value Measurements at December 31, 2019 using:
	Level 1 Inputs		Level 2 Inputs		Level 3 Inputs		Total
Assets:
Money market funds	$	427,033	$	—	$	—	$	427,033
Liabilities:
Acquisition-related contingent consideration—current	$	—	$	—	$	6,534	$	6,534
Acquisition-related contingent consideration—noncurrent	$	—	$	—	$	23,123	$	23,123

At March 31, 2020 and December 31, 2019, money market funds include $37.4 million and $70.2 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 12. Commitments and Contingencies for further discussion of our product liability cases. At March 31, 2020 and December 31, 2019, the differences between the amortized cost and the fair value of our money market funds were not material, individually or in the aggregate.

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Fair Value Measurements Using Significant Unobservable Inputs

The following table presents changes to the Company’s liability for acquisition-related contingent consideration, which is measured at fair value on a recurring basis using significant unobservable inputs (Level 3), for the three months ended March 31, 2020 and 2019 (in thousands):



	Three Months Ended March 31,
	2020			2019
Beginning of period	$	29,657		$	116,703
Amounts settled	(2,461		)	(11,591		)
Changes in fair value recorded in earnings	12,462			(37,501		)
Effect of currency translation	(719		)	231
End of period	$	38,939		$	67,842

At March 31, 2020, the fair value measurements of the contingent consideration obligations were determined using risk-adjusted discount rates ranging from approximately 10.0% to 15.0% (weighted average rate of approximately 12.3%, weighted based on relative fair value). 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, net. Amounts recorded for the current and noncurrent 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 three months ended March 31, 2020 by acquisition (in thousands):



	Balance as of December 31, 2019		Changes in Fair Value Recorded in Earnings			Amounts Settled and Other			Balance as of March 31, 2020
Auxilium acquisition	$	13,207	$	(54	)	$	—		$	13,153
Lehigh Valley Technologies, Inc. acquisitions	6,800		12,897			(2,097		)	17,600
Other	9,650		(381		)	(1,083		)	8,186
Total	$	29,657	$	12,462		$	(3,180	)	$	38,939

Nonrecurring Fair Value Measurements

The Company’s financial assets and liabilities measured at fair value on a nonrecurring basis during the three months ended March 31, 2020 were as follows (in thousands):



	Fair Value Measurements during the Three Months Ended March 31, 2020 (1) using:						Total Expense for the Three Months Ended March 31, 2020
	Level 1 Inputs		Level 2 Inputs		Level 3 Inputs		Total Expense for the Three Months Ended March 31, 2020
Intangible assets, excluding goodwill (2)	$	—	$	—	$	24,377	$	(63,751	)
Certain property, plant and equipment	—		—		—		(1,248		)
Total	$	—	$	—	$	24,377	$	(64,999	)

__________


(1)	The fair value amounts are presented as of the date of the fair value measurement as these assets are not measured at fair value on a recurring basis. Such measurements generally occur in connection with our quarter-end financial reporting close procedures.

(2)

These fair value measurements were determined using risk-adjusted discount rates ranging from approximately 10.0% to 12.0% (weighted average rate of approximately 11.1%, weighted based on relative fair value). The Company also performed fair value measurements in connection with its goodwill impairment tests. Refer to Note 8. Goodwill and Other Intangibles for additional information on goodwill and other intangible asset impairment tests, including information about the valuation methodologies utilized.

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NOTE 6. INVENTORIES

Inventories consist of the following at March 31, 2020 and December 31, 2019 (in thousands):



	March 31, 2020		December 31, 2019
Raw materials (1)	$	115,436	$	124,171
Work-in-process (1)	67,983		65,392
Finished goods (1)	141,543		138,302
Total	$	324,962	$	327,865

__________

(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 is classified as noncurrent inventory and is not included in the table above. At March 31, 2020 and December 31, 2019, $31.1 million and $29.0 million, respectively, of noncurrent inventory was included in Other assets in the Condensed Consolidated Balance Sheets. As of March 31, 2020 and December 31, 2019, the Company’s Condensed Consolidated Balance Sheets included approximately $23.3 million and $17.6 million, respectively, of capitalized pre-launch inventories related to products that were not yet available to be sold.

NOTE 7. LEASES

The following table presents information about the Company's right-of-use (ROU) assets and lease liabilities at March 31, 2020 and December 31, 2019 (in thousands):



	Condensed Consolidated Balance Sheets Line Items	March 31, 2020		December 31, 2019
ROU assets:
Operating lease ROU assets	Operating lease assets	$	49,349	$	51,700
Finance lease ROU assets	Property, plant and equipment, net	54,482		56,793
Total ROU assets		$	103,831	$	108,493
Operating lease liabilities:
Current operating lease liabilities	Current portion of operating lease liabilities	$	11,512	$	10,763
Noncurrent operating lease liabilities	Operating lease liabilities, less current portion	45,057		48,299
Total operating lease liabilities		$	56,569	$	59,062
Finance lease liabilities:
Current finance lease liabilities	Accounts payable and accrued expenses	$	5,799	$	5,672
Noncurrent finance lease liabilities	Other liabilities	29,706		31,312
Total finance lease liabilities		$	35,505	$	36,984

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The following table presents information about lease costs and expenses and sublease income for the three months ended March 31, 2020 and 2019 (in thousands):



		Three Months Ended March 31,
	Condensed Consolidated Statements of Operations Line Items	2020			2019
Operating lease cost	Various (1)	$	3,992		$	3,499
Finance lease cost:
Amortization of ROU assets	Various (1)	$	2,311		$	2,296
Interest on lease liabilities	Interest expense, net	$	466		$	500
Other lease costs and income:
Variable lease costs (2)	Various (1)	$	2,658		$	2,089
Sublease income	Various (1)	$	(861	)	$	(964	)

__________


(1)	Amounts are included in the Condensed Consolidated Statements of Operations based on the function that the underlying leased asset supports. The following table presents the components of such aggregate amounts for the three months ended March 31, 2020 and 2019 (in thousands):



	Three Months Ended March 31,
	2020		2019
Cost of revenues	$	3,328	$	2,700
Selling, general and administrative	$	4,721	$	4,169
Research and development	$	51	$	51


(2)	Amounts represent variable lease costs incurred that were not included in the initial measurement of the lease liability such as common area maintenance and utilities costs associated with leased real estate and certain costs associated with our automobile leases.

The following table provides certain cash flow and supplemental noncash information related to our lease liabilities for the three months ended March 31, 2020 and 2019 (in thousands):



	Three Months Ended March 31,
	2020		2019
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash payments for operating leases	$	2,981	$	3,692
Operating cash payments for finance leases	$	648	$	473
Financing cash payments for finance leases	$	1,184	$	1,174

NOTE 8. GOODWILL AND OTHER INTANGIBLES

Goodwill

Changes in the carrying amount of our goodwill for the three months ended March 31, 2020 were as follows (in thousands):



	Branded Pharmaceuticals		Sterile Injectables		Generic Pharmaceuticals		International Pharmaceuticals			Total
Goodwill as of December 31, 2019	$	828,818	$	2,731,193	$	—	$	35,173		$	3,595,184
Effect of currency translation	—		—		—		(2,387		)	(2,387		)
Goodwill impairment charges	—		—		—		(32,786		)	(32,786		)
Goodwill as of March 31, 2020	$	828,818	$	2,731,193	$	—	$	—		$	3,560,011

The carrying amounts of goodwill at March 31, 2020 and December 31, 2019 are net of the following accumulated impairments (in thousands):



	Branded Pharmaceuticals		Sterile Injectables		Generic Pharmaceuticals		International Pharmaceuticals		Total
Accumulated impairment losses as of December 31, 2019	$	855,810	$	—	$	3,142,657	$	500,417	$	4,498,884
Accumulated impairment losses as of March 31, 2020	$	855,810	$	—	$	3,142,657	$	494,499	$	4,492,966

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Other Intangible Assets

Changes in the amount of other intangible assets for the three months ended March 31, 2020 were as follows (in thousands):



Cost basis:	Balance as of December 31, 2019			Acquisitions			Impairments			Effect of Currency Translation			Balance as of March 31, 2020
Indefinite-lived intangibles:
In-process research and development	$	93,900		$	—		$	—		$	—		$	93,900
Total indefinite-lived intangibles	$	93,900		$	—		$	—		$	—		$	93,900
Finite-lived intangibles:
Licenses (weighted average life of 14 years)	$	457,402		$	—		$	(8,700	)	$	—		$	448,702
Tradenames	6,409			—			—			—			6,409
Developed technology (weighted average life of 11 years)	5,844,439			—			(55,051		)	(19,839		)	5,769,549
Total finite-lived intangibles (weighted average life of 11 years)	$	6,308,250		$	—		$	(63,751	)	$	(19,839	)	$	6,224,660
Total other intangibles	$	6,402,150		$	—		$	(63,751	)	$	(19,839	)	$	6,318,560

Accumulated amortization:	Balance as of December 31, 2019			Amortization			Impairments			Effect of Currency Translation			Balance as of March 31, 2020
Finite-lived intangibles:
Licenses	$	(410,336	)	$	(2,429	)	$	—		$	—		$	(412,765	)
Tradenames	(6,409		)	—			—			—			(6,409		)
Developed technology	(3,414,138		)	(114,808		)	—			11,934			(3,517,012		)
Total other intangibles	$	(3,830,883	)	$	(117,237	)	$	—		$	11,934		$	(3,936,186	)
Net other intangibles	$	2,571,267											$	2,382,374

Amortization expense for the three months ended March 31, 2020 and 2019 totaled $117.2 million and $145.6 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, 2019 is as follows (in thousands):



2020	$	427,824
2021	$	389,418
2022	$	373,293
2023	$	331,379
2024	$	292,903

Impairments

Goodwill and indefinite-lived intangible assets are tested for impairment annually and when events or changes in circumstances indicate that the asset might be impaired. Our annual assessment is performed as of October 1.

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 including estimates of (i) future operating performance, including future sales, long-term growth rates, operating margins, discount 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.

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During the three months ended March 31, 2020 and 2019, the Company incurred the following goodwill and other intangible asset impairment charges (in thousands):



	Three Months Ended March 31,
	2020		2019
Goodwill impairment charges	$	32,786	$	86,000
Other intangible asset impairment charges	$	63,751	$	78,700

Except as described below, pre-tax non-cash asset impairment charges related 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.

As a result of certain business decisions that occurred during the first quarter of 2020, we tested the goodwill of our Paladin reporting unit for impairment as of March 31, 2020. The fair value of the reporting unit was estimated using an income approach that utilized a discounted cash flow model. The discount rate utilized in this test was 9.5%. This goodwill impairment test resulted in a pre-tax non-cash goodwill impairment charge of $32.8 million during the three months ended March 31, 2020, representing the remaining carrying amount. This impairment was primarily attributable to portfolio decisions and updated market expectations during the quarter.

As a result of certain competitive events that occurred during the first quarter of 2019, we tested the goodwill of our Generic Pharmaceuticals reporting unit for impairment as of March 31, 2019. The fair value of the reporting unit was estimated using an income approach that utilized a discounted cash flow model. The discount rate utilized in this test was 10.5%. This goodwill impairment test resulted in a pre-tax non-cash goodwill impairment charge of $86.0 million during the three months ended March 31, 2019, representing the excess of this reporting unit’s carrying amount over its estimated fair value. This Generic Pharmaceuticals impairment can be primarily attributed to the impact of the competitive events referenced above and an increase in the discount rate used in the determination of fair value.

We are closely monitoring the impact of COVID-19 on our business. It is possible that COVID-19 could result in reductions to the estimated fair values of our goodwill and other intangible assets, which could ultimately result in asset impairment charges that may be material.

NOTE 9. CONTRACT ASSETS AND LIABILITIES

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. Revenue contracts such as these do not generally give rise to contract assets or contract liabilities because: (i) the underlying contracts generally have only a single performance obligation and (ii) we do not generally receive consideration until the performance obligation is fully satisfied. At March 31, 2020, the unfulfilled performance obligations for these types of contracts relate to ordered but undelivered products. We generally expect to fulfill the performance obligations and recognize revenue within one week of entering into the underlying contract. Based on the short-term initial contract duration, additional disclosure about the remaining performance obligations is not required.

Certain of our other revenue-generating contracts, including license and collaboration agreements, may result in contract assets and/or contract liabilities. For example, we may recognize contract liabilities upon receipt of certain upfront and milestone payments from customers when there are remaining performance obligations.

The following table shows the opening and closing balances of contract assets and contract liabilities from contracts with customers (dollars in thousands):

March 31, 2020

December 31, 2019

$ Change

% Change

Contract assets, net (1)