00008855902021FYfalsehttp://fasb.org/us-gaap/2021-01-31#AccountingStandardsUpdate201613MemberP30DP1YP1Y0.5http://fasb.org/us-gaap/2021-01-31#OtherAssetsNoncurrenthttp://fasb.org/us-gaap/2021-01-31#OtherAssetsNoncurrenthttp://fasb.org/us-gaap/2021-01-31#AccruedLiabilitiesCurrenthttp://fasb.org/us-gaap/2021-01-31#AccruedLiabilitiesCurrenthttp://fasb.org/us-gaap/2021-01-31#OtherLiabilitiesNoncurrenthttp://fasb.org/us-gaap/2021-01-31#OtherLiabilitiesNoncurrent UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_____________________________
|
| | | | | | | |
ý☒ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended Fiscal Year Ended | December 31, 20172021 |
| 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 numberFile Number: 001-14956
VALEANT PHARMACEUTICALS INTERNATIONAL, INC.Bausch Health Companies Inc.
(Exact Name of Registrant as Specified in its Charter)
|
| | | | | | | | | | | | | | | | | | | | | | |
BRITISH COLUMBIA, CANADA
British Columbia | , | Canada | 98-0448205 |
| (State or other jurisdiction of incorporation or organization organization) | 98-0448205
(I.R.S. Employer Identification No.) |
2150 St. Elzéar Blvd. West
Laval, Québec
Canada, H7L 4A8
(Address of principal executive offices)
|
2150 St. Elzéar Blvd. West, Laval, Québec, Canada H7L 4A8
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code (514) 744-6792
Securities registered pursuant to Section 12(b) of the Act:
|
| | | | | | | | | | | | | |
Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
| Common Shares, No Par Value | BHC | New York Stock Exchange | , | Toronto Stock Exchange |
Securities registered pursuant to section 12(g) of the Act:
None
(Title of class)
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ý No o
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o No ý
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or Section 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 ý 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 during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ý No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”filer,” “smaller reporting company,” and “smaller reporting“emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Large accelerated filer | x | Accelerated filer | o☐ | Non-accelerated filer
(Do not check if a smaller
reporting company) | o☐ | 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
☐ |
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 has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☒
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o☐ No ý☒
The aggregate market value of the common shares held by non-affiliates of the registrant as of the last business day of the registrant’s most recently completed second fiscal quarter was $5,331,597,000$8,713,713,918based on the last reported sale price on the New York Stock Exchange on June 30, 2017.2021.
The number of outstanding shares of the registrant’s common stock as of February 22, 201817, 2022 was 348,837,730.359,646,496.
DOCUMENTS INCORPORATED BY REFERENCE
Part III incorporates certain information by reference from the registrant’s proxy statement for the 20182022 Annual Meeting of Shareholders. Such proxy statement will be filed no later than 120 days after the close of the registrant’s fiscal year ended December 31, 2017.2021.
TABLE OF CONTENTS
GENERAL INFORMATION
|
| | | | | | | | | | | | | |
| | | | Page |
| PART I |
| Item 1. | | Business | | |
| Item 1A. | | Risk Factors | | |
| Item 1B. | | Unresolved Staff Comments | | |
| Item 2. | | Properties | | |
| Item 3. | | Legal Proceedings | | |
| Item 4. | | Mine Safety Disclosures | | |
| PART II |
| Item 5. | | Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities | | |
| Item 6. | | Selected Financial DataReserved | | |
| Item 7. | | Management’s Discussion and Analysis of Financial Condition and Results of Operations | | |
| Item 7A. | | Quantitative and Qualitative Disclosures About Market Risk | | |
| Item 8. | | Financial Statements and Supplementary Data | | |
| Item 9. | | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure | | |
| Item 9A. | | Controls and Procedures | | |
| Item 9B. | | Other Information | | |
PART IIIItem 9C. | | Disclosure Regarding Foreign Jurisdictions that Prevent Inspections | | |
| PART III |
| Item 10. | | Directors, Executive Officers and Corporate Governance | | |
| Item 11. | | Executive Compensation | | |
| Item 12. | | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters | | |
| Item 13. | | Certain Relationships and Related Transactions, and Director Independence | | |
| Item 14. | | Principal Accounting Fees and Services | | |
| PART IV |
| Item 15. | | Exhibits and Financial Statement Schedules | | |
| Item 16. | | Form 10-K Summary | | |
| SIGNATURES | | |
| | | | |
Basis of Presentation
General
Except where the context otherwise requires, all references in this Annual Report on Form 10-K (“Form 10-K”) to the “Company”, “we”, “us”, “our” or similar words or phrases are to Valeant Pharmaceuticals International,Bausch Health Companies Inc. and its subsidiaries, taken together. In this Form 10-K, references to “$” or “USD” are to United States dollars, references to “€” are to Euros, and references to “CAD” are to Canadian dollars. Unless otherwise indicated, the statistical and financial data contained in this Form 10-K are presented as of December 31, 2017.2021.
Trademarks
The following words are some of the trademarks in our Company’s trademark portfolio and are the subject of either registration, or application for registration, in one or more of Canada, the United States of America (the “U.S.”) or certain other jurisdictions: ACANYAAERGEL®, AERGEL®, AKREOS®, ALDARAALAWAY®, ALREX®, ALTRENO™®, AMMONUL®, AMYTAL®, ANTIGRIPPIN®, APLENZIN®, APRISO®, AQUALOX™, ARAZLO®, ARESTIN®, ARTELAC®, ATIVAN®, ATRALIN®, B&L & L®, B+B + L®, BAUSCH & LOMB®, BAUSCH + LOMB®, BAUSCH + LOMB INFUSE®, BAUSCH + LOMB ULTRA®, BAUSCH HEALTH®, BAUSCH HEALTH COMPANIES®, BEDOYECTA®, BENZACLIN®, BEPREVE®, BESIVANCE®, BIOTRUE®, BIOVAILBISOCARD®, BOSTON®, CARACBRYHALI®, BUPAP®, CARDIZEM®, CLEAR + BRILLIANT®, CLEARVISC™, CLINDAGEL®, COLD-FX®, COMFORTMOIST®, CRYSTALENS®, CUPRIMINE®, DEMSER®, DIASTAT®, DUOBRII™®, EDECRIN®, ENVISTA®, ESPAVEN®, FRAXEL®, GLUMETZA®, IPRIVASKINFUSE®, ISTALOL®, JEMDEL™IVEXTERM®, JUBLIA®, LIPOSONIXLIBRAX®, LOTEMAX®, LUMIFY™, LUZU®, MEDICIS®, MEPHYTON®, MESTINON®, MIGRANAL®, MINOCINMINIMS®, MOISTURESEAL®, MYSOLINE®, NEUTRASAL®, NORITATE®, OCUDOSE®, OCUVITE®, ONEXTON®, OPTICALIGN™®, ORAFITTM, ORTHO DERMATOLOGICS®, PRESERVISION®, PROLENSA®, PUREVISION®, RELISTOR®, RENU®, RENU MULTIPLUS®, RETIN-A®, RETIN-A MICRO®, SCLERAFILSALIX®, SECONAL®, SECONAL SODIUM®, SHOWER TO SHOWER®, SILIQ™SILIQ®, SILSOFT®, SIMPLIFEYE®, SOFLENS®, SOLODYN®, SOLTA MEDICAL®, STELLARIS®, STELLARIS ELITE™, STORZ®, SUBLINOX®, SYNERGETICS®, SYPRINE®, TARGRETIN®, TASMAR®, THERMAGE®, THERMAGE CPTFLX®, TRASER™THROMBO ASS®, TIMOPTIC®, TRULANCE®, TRULIGN®, UCERIS®, VALEANT®, VALEANT V & DESIGNVASERLIPO®, VALEANT PHARMACEUTICALS & DESIGN®, VANOS®, VICTUS®, VIRAZOLE®, VITESSE™, VYZULTA™®, XENAZINE®, YELLOX®, ZEGERID®, ZELAPAR®, ZIANA®, and ZYLET®.
In addition to the trademarks previously noted, we have filed trademark applications and/or obtained trademark registrations for many of our other trademarks in the U.S., Canada and in other jurisdictions and have implemented, on an ongoing basis, a trademark protection program for new trademarks.
WELLBUTRIN®, WELLBUTRIN XL® and ZOVIRAX® are trademarks of GlaxoSmithKline LLC and are used by us under license. ELIDEL® and XERESE® are registered trademarks of Meda Pharma SARL and are used by us under license. EMERADE® is a registered trademark of Medeca Pharma AB and is used by us under license. DEFLUXISUPREL® and SOLESTANITROPRESS® are registered trademarks of Nestlé Skin Health S.A. and are used by us under license. ISUPREL® and NITROPRESS® are registered trademarks of Hospira, Inc. and are used by us under license. XIFAXAN® is a registered trademark of Alfa Wasserman S.P.A.Alfasigma S.p.A. and is used by us under license. PEPCIDMOVIPREP® is a brandregistered trademark of McNeil Consumer PharmaceuticalsVelinor AG and is used by us under license. MOVIPREPPLENVU® and PLENVU® are is a registered trademarkstrademark of Velinor AG and areis used by us under license. LOCOID® is a registered trademark of Leo Pharma A/S and is used by us under license. TANGIBLE® and HYDRA-PEG® are registered trademarks of Tangible Science, LLC and are used by us under license. XIPERE™ is a trademark of Clearside Biomedical, Inc. and is used by us under license. CONTRAVE® and MYSIMBA® are used by us under license.
Forward-Looking Statements
Caution regarding forward-looking information and statements and “Safe-Harbor” statements under the U.S. Private Securities Litigation Reform Act of 1995:1995 and applicable Canadian securities laws:
To the extent any statements made in this Form 10-K contain information that is not historical, these statements are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, and may be forward-looking information within the meaning defined under applicable Canadian securities legislationlaws (collectively, “forward-looking statements”).
These forward-looking statements relate to, among other things: our business strategy, business plans and prospects and forecasts and changes thereto,thereto; product pipeline, prospective products orand product approvals, expected launches of new products, product development and distribution plans, future performance orand results of current and anticipated products; anticipated revenues for our products, including the Significant Seven; anticipated compounding growth in our Ortho Dermatologics business;products; expected research and development ("R&D&D") and marketing spend; our expected primary cash and working capital requirements for 2022 and beyond; the Company's plans for continued improvement in operational efficiency and the anticipated impact of such plans; our liquidity and our ability to satisfy our debt maturities as they become due; our ability to reduce debt levels; our ability to comply with the financial and other covenants contained in our Fourth Amended and Restated Credit and Guaranty Agreement, as amended by the First Incremental Amendment to the Restated Credit Agreement, dated as of November 27, 2018 (the "Restated Credit Agreement"), and senior notes indentures; the impact of our distribution,
fulfillment and other third partythird-party arrangements; proposed pricing actions; exposure to foreign currency exchange rate changes and interest rate changes; the outcome of contingencies, such as litigation, subpoenas, investigations, reviews, audits and regulatory proceedings; the anticipated impact of the adoption of new accounting standards; general market conditions; our expectations regarding our financial performance, including revenues, expenses, gross margins and income taxes; our ability to meet the financial and other covenants contained in our Third Amended and Restated
Credit and Guaranty Agreement, as amended (the "Credit Agreement") and indentures; and our impairment assessments, including the assumptions used therein and the results thereof.thereof; the anticipated impact of the evolving COVID-19 pandemic and related responses from governments and private sector participants on the Company, its supply chain, third-party suppliers, project development timelines, costs, revenues, margins, liquidity and financial condition, the anticipated timing, speed and magnitude of recovery from these COVID-19 pandemic related impacts and the Company’s planned actions and responses to this pandemic; the Company’s plan to separate its eye-health business, including the structure and timing of completing such separation transaction; and the proposed initial public offering (“IPO”) of the Company’s Solta aesthetic medical device business, including the timing of such IPO.
Forward-looking statements can generally be identified by the use of words such as “believe”, “anticipate”, “expect”, “intend”, “estimate”, “plan”, “continue”, “will”, “may”, “could”, “would”, “should”, “target”, “potential”, “opportunity”, “tentative”, “positioning”, “designed”, “create”, “predict”, “project”, “forecast”, “seek”, “strive”, “ongoing”, “increase”,"decrease" or “upside”“increase” and variations or other similar expressions. In addition, any statements that refer to expectations, intentions, projections or other characterizations of future events or circumstances are forward-looking statements. These forward-looking statements may not be appropriate for other purposes. Although we have previously indicated certain of these statements set out herein, all of the statements in this Form 10-K that contain forward-looking statements are qualified by these cautionary statements. These statements are based upon the current expectations and beliefs of management. Although we believe that the expectations reflected in such forward-looking statements are reasonable, such statements involve risks and uncertainties, and undue reliance should not be placed on such statements. Certain material factors or assumptions are applied in making such forward-looking statements, including, but not limited to, factors and assumptions regarding the items previouslyoutlined.outlined, those factors, risks and uncertainties outlined below and the assumption that none of these factors, risks and uncertainties will cause actual results or events to differ materially from those described in such forward-looking statements. Actual results may differ materially from those expressed or implied in such statements. Important factors, risks and uncertainties that could cause actual results to differ materially from these expectations include, among other things, the following:
•the risks and uncertainties caused by or relating to the evolving COVID-19 pandemic, the fear of that pandemic, the availability and effectiveness of vaccines for COVID-19 (including with respect to current or future variants), COVID-19 vaccine immunization rates, the emergence of variant strains of COVID-19, the evolving reaction of governments, private sector participants and the public to that pandemic, and the potential effects and economic impact of the pandemic and the reaction to it, the severity, duration and future impact of which are highly uncertain and cannot be predicted, and which may have a significant adverse impact on the Company, including but not limited to its supply chain, third-party suppliers, project development timelines, employee base, liquidity, stock price, financial condition and costs (which may increase) and revenue and margins (both of which may decrease);
•with respect to the proposed separation of the Company’s eye-health business, the risks and uncertainties include, but are not limited to, the expected benefits and costs of the separation transaction, the expected timing of completion of the separation transaction and its terms, (including the Company’s expectation that it will launch the IPO of the Bausch + Lomb entity when financial market conditions are favorable, subject to receipt of regulatory, stock exchange and other approvals, and the Company’s expectation that the separation transaction will be completed following the expiry of customary lock-ups related to the B+L IPO and achievement of targeted debt leverage ratios, subject to receipt of applicable shareholder and other necessary approvals), the Company’s ability to complete the separation transaction considering the various conditions to the completion of the separation transaction (some of which are outside the Company’s control, including conditions related to regulatory matters and a possible shareholder vote, if applicable), that market or other conditions are no longer favorable to completing the transaction, that any stock exchange, regulatory or other approval (if required) is not obtained on the terms or timelines anticipated or at all, business disruption during the pendency of or following the separation transaction, diversion of management time on separation transaction-related issues, retention of existing management team members, the reaction of customers and other parties to the separation transaction, the qualification of the separation transaction as a tax-free transaction for Canadian and/or U.S. federal income tax purposes (including whether or not an advance ruling from the Canada Revenue Agency will be sought or obtained), the ability of the Company and the separated entity to satisfy the conditions required to maintain the tax-free status of the separation transaction (some of which are beyond their control), the potential dissynergy costs resulting from the separation transaction, the impact of the separation transaction on relationships with customers, suppliers, employees and other business counterparties, general economic conditions, conditions in the markets the Company is engaged in, behavior of customers, suppliers and competitors, technological developments, as well as legal and regulatory rules affecting the Company’s business. In particular, the Company can offer no assurance that any IPO or separation will occur at all, or that any such transaction will occur on the timelines anticipated by the Company;
•with respect to the proposed IPO of the Company’s Solta aesthetic medical device business, the risks and uncertainties include, but are not limited to, risks relating to the expected timing of completion of such transaction (including the Company’s expectation that it will launch such IPO when financial market conditions are favorable, subject to receipt of regulatory, stock exchange and other approvals) and the Company’s ability to complete such transaction, that market or other conditions are no longer favorable to completing the transaction on a timely basis or at all, the receipt of (or failure to receive) any shareholder, stock exchange, regulatory and other approvals required in connection with the transaction and the timing of receipt of such approvals, business disruption during the pendency of or following such transaction, diversion of management time on transaction-related issues, retention of Solta aesthetic medical device management team members, the reaction of customers and other parties to such transaction, the impact of such transaction on relationships with customers, suppliers, employees and other business counterparties, and other events that could adversely impact the completion of such transaction, including industry or economic conditions outside of Bausch Health’s control. In particular, the Company can offer no assurance that any IPO will occur at all, or that any such transaction will occur on the timelines anticipated by the Company;
•the expense, timing and outcome of legal and governmental proceedings, investigations and information requests relating to, among other matters, our past distribution, marketing, pricing, disclosure and accounting practices (including with respect to our former relationship with Philidor Rx Services, LLC ("Philidor")), including pending investigations by the U.S. Attorney's Office for the District of Massachusetts, the U.S. Attorney's Office for the Southern District of New York and the State of North Carolina Department of Justice, the pending investigations by the U.S. Securities and Exchange Commission (the “SEC”) of the Company, the request for documents and information received by the Company from the Autorité des marchés financiers (the “AMF”) (the Company’s principal securities regulator in Canada), the pending investigation by the California Department of Insurance, a number of pending putativenon-class securities litigations (including certain pending opt-out actions in the U.S. related to the previously settled securities class action litigations(which remains subject to an objector's appeal of the Court's final approval order) and certain opt-out actions in Canada relating to the U.S. (including related opt-out actions) and Canada and purportedrecently settled class actions under the federal RICO statuteaction in Canada), certain pending lawsuits and other claims, investigations or proceedings that may be initiated or that may be asserted;
•potential additional litigation and regulatory investigations (and any costs, expenses, use of resources, diversion of management time and efforts, liability and damages that may result therefrom), negative publicity and reputational harm on our Company, products and business that may result from the past and ongoing public scrutiny of our past distribution, marketing, pricing, disclosure and accounting practices and from our former relationship with Philidor, including any claims, proceedings, investigationsPhilidor;
•the past and liabilities we may face as a result of any alleged wrongdoing by Philidor and/or its management and/or employees;
the currentongoing scrutiny of our legacy business practices, including with respect to pricing, (including the investigations by the U.S. Attorney's Offices for the District of Massachusetts and the Southern District of New York, and the State of North Carolina Department of Justice) and any pricing controls or price adjustments that may be sought or imposed on our products as a result thereof;
| |
• | pricing decisions that we have implemented, or may in the future elect to implement, whether as a result of recent scrutiny or otherwise, such as the decision of the Company to take no further price increases on our Nitropress® and Isuprel® products and to implement an enhanced rebate program for such products, our decision on the price of our Siliq™ product, the Patient Access and Pricing Committee’s commitment that the average annual price increase for our branded prescription pharmaceutical products will be set at no greater than single digits and below the 5-year weighted average of the increases within the branded biopharmaceutical industry or any future pricing actions we may take following review by our Patient Access and Pricing Committee (which is responsible for the pricing of our drugs);
|
•pricing decisions that we have implemented, or may in the future elect to implement, such as the Patient Access and Pricing Committee’s historic practice of limiting the average annual price increase for our branded prescription pharmaceutical products to single digits, or any future pricing actions we may take in 2022 or beyond following review by our Patient Access and Pricing Committee (which is responsible for the pricing of our drugs);
•legislative or policy efforts, including those that may be introduced and passed by the U.S. Congress, designed to reduce patient out-of-pocket costs for medicines, which could result in new mandatory rebates and discounts or other pricing restrictions, controls or regulations (including mandatory price reductions);
•ongoing oversight and review of our products and facilities by regulatory and governmental agencies, including periodic audits by the U.S. Food and Drug Administration (the "FDA") and equivalent agencies outside of the U.S. and the results thereof;
•actions by the FDA or other regulatory authorities with respect to our products or facilities;
•compliance with the legal and regulatory requirements of our marketed products;
•our substantial debt (and potential additional future indebtedness) and current and future debt service obligations, our ability to reduce our outstanding debt levels and the resulting impact on our financial condition, cash flows and results of operations;
•our ability to meetcomply with the financial and other covenants contained in our Restated Credit Agreement, senior notes indentures, 2023 Revolving Credit Facility (as defined below) and other current or future credit and/or debt agreements and the limitations, restrictions and prohibitions such covenants impose or may impose on the way we conduct our business, including prohibitions on incurring additional debt if certain financial covenants are not met, limitations on the amount of additional debtobligations we are able to incur where not prohibited,pursuant to other covenants, our ability to draw under our 2023 Revolving Credit Facility and restrictions on our ability to make certain investments and other restricted payments;
•any default under the terms of our senior notes indentures or Restated Credit Agreement (and other current or future credit and/or debt agreements) and our ability, if any, to cure or obtain waivers of such default;
any delay in the filing of any future financial statements or other filings and any default under the terms of our senior notes indentures or Credit Agreement as a result of such delays;
•any further downgrade by rating agencies in our credit ratings, which may impact, among other things, our ability to raise debt and the cost of capital for additional debt issuances;
•any reductions in, or changes in the assumptions used in, our forecasts for fiscal year 20182022 or beyond, including as a result of the impacts of the COVID-19 pandemic on our business and operations, which could lead to, among other things: (i) a failure to meet the financial and/or other covenants contained in our Restated Credit Agreement and/or senior notes indentures (and other current or future credit and/or debt agreements) and/or (ii) impairment in the goodwill associated with certain of our reporting units or impairment charges related to certain of our products or other intangible assets, which impairments could be material;
•changes in the assumptions used in connection with our impairment analyses or assessments, which would lead to a change in such impairment analyses and assessments and which could result in an impairment in the goodwill associated with any of our reporting units or impairment charges related to certain of our products or other intangible assets;
•the uncertainties associated with the acquisition and launch of new products, assets and businesses, including, but not limited to, our ability to provide the time, resources, expertise and funds required for the commercial launch of new products, the acceptance and demand for new products, and the impact of competitive products and pricing, which could lead to material impairment charges;
•our ability or inability to extend the profitable life of our products, including through line extensions and other life-cycle programs;
•our ability to retain, motivate and recruit executives and other key employees;
•our ability to implement effective succession planning for our executives and key employees;
•factors impacting our ability to stabilize and reposition our Ortho Dermatologics business to generate additional value, including the success of recently launched products and the approval of pipeline products (and the timing of such approvals);
•factors impacting our ability to achieve anticipated revenues for our products, including changes in anticipated marketing spend on such products and launch of competing products;
•factors impacting our ability to achieve anticipated market acceptance for our products, including acceptance of the pricing, effectiveness of promotional efforts, reputation of our products and launch of competing products;
•the challenges and difficulties associated with managing a large complex business, which has, in the past, grown rapidly;
•our ability to compete against companies that are larger and have greater financial, technical and human resources than we do, as well as other competitive factors, such as technological advances achieved, patents obtained and new products introduced by our competitors;
•our ability to effectively operate and grow our businesses in light of the challenges that the Company has faced and market conditions, including with respect to its substantial debt, pending investigations and legal proceedings, scrutiny of our past pricing and other practices, limitations on the way we conduct business imposed by the covenants contained in our Restated Credit Agreement, senior notes indentures and the agreements governing our other indebtedness, and the impacts of the COVID-19 pandemic;
•the extent to which our products are reimbursed by government authorities, pharmacy benefit managers ("PBMs") and other third-party payors; the impact our distribution, pricing and other practices may have on the decisions of such government authorities, PBMs and other third-party payors to reimburse our products; and the impact of obtaining or maintaining such reimbursement on the price and sales of our products;
•the inclusion of our products on formularies or our ability to achieve favorable formulary status, as well as the impact on the price and sales of our products in connection therewith;
•the consolidation of wholesalers, retail drug chains and other customer groups and the impact of such industry consolidation on our business;
•our ability to maintain strong relationships with physicians and other healthcare professionals;
•our eligibility for benefits under tax treaties and the continued availability of low effective tax rates for the business profits of certain of our subsidiaries;
•the implementation of the Organisation for Economic Co-operation and Development inclusive framework on Base Erosion and Profit Shifting, including the global minimum corporate tax rate, by the countries in which we operate;
•the outcome of any additionalaudits by taxation authorities, which outcomes may differ from the estimates and assumptions that we may use in determining our consolidated tax provisions and accruals;
•the actions of our third-party partners or service providers of research, development, manufacturing, marketing, distribution or other services, including their compliance with applicable laws and contracts, which actions may be beyond our control or influence, and the impact of such actions on our Company;
•the risks associated with the international scope of our operations, including our presence in emerging markets and the challenges we face when entering and operating in new and different geographic markets (including the challenges created by new and different regulatory regimes in such countries and the need to comply with applicable anti-bribery and economic sanctions laws and regulations);
•adverse global economic conditions and credit markets and foreign currency exchange uncertainty and volatility in certain of the countries in which we do business;
•the trade conflict between the United States and China;
•the potential conflict between Russia and Ukraine and any restrictive actions that may be taken by the U.S. and/or other countries in response thereto, such as sanctions or export controls;
•our ability to obtain, maintain and license sufficient intellectual property rights over our products and enforce and defend against challenges to such intellectual property (such as in connection with the filing by Norwich Pharmaceuticals Inc. (“Norwich”) of its Abbreviated New Drug Application (“ANDA”) for Xifaxan® (rifaximin) 550 mg tablets and the Company’s related lawsuit filed against Norwich in connection therewith);
•the introduction of generic, biosimilar or other competitors of our branded products and other products, including the introduction of products that compete against our products that do not have patent or data exclusivity rights;
•our ability to identify, finance, acquire, close and integrate acquisition targets successfully and on a timely basis and the difficulties, challenges, time and resources associated with the integration of acquired companies, businesses and products;
•any divestitures of our assets or businesses and our ability to successfully complete any such divestitures on commercially reasonable terms and on a timely basis, or at all, and the impact of any such divestitures on our Company, including the reduction in the size or scope of our business or market share, loss of revenue, any loss on sale, including any resultant write-downsimpairments of goodwill or other assets, or any adverse tax consequences suffered as a result of any such divestitures;
our shift in focus to much lower business development activity through acquisitions for the foreseeable future as we focus on reducing our outstanding debt levels and as a result of the restrictions imposed by our Credit Agreement that restrict us from, among other things, making acquisitions over an aggregate threshold (subject to certain exceptions) and from incurring debt to finance such acquisitions, until we achieve a specified leverage ratio;
the uncertainties associated with the acquisition and launch of new products, including, but not limited to, our ability to provide the time, resources, expertise and costs required for the commercial launch of new products, the acceptance and demand for new pharmaceutical products, and the impact of competitive products and pricing, which could lead to material impairment charges;
our ability to retain, motivate and recruit executives and other key employees, including subsequent to retention payments being paid out and as a result of the reputational challenges we face and may continue to face;
our ability to implement effective succession planning for our executives and key employees;
factors impacting our ability to achieve anticipated compounding growth in our Ortho Dermatologics business, including approval of pending and pipeline products (and the timing of such approvals), expected geographic expansion, changes in estimates on market potential for dermatology products and continued investment in and success of our sales force;
factors impacting our ability to achieve anticipated revenues for our Significant Seven products, including the approval of pending products in the Significant Seven (and the timing of such approvals), changes in anticipated marketing spend on such products and launch of competing products;
the challenges and difficulties associated with managing a large complex business, which has, in the past, grown rapidly;
our ability to compete against companies that are larger and have greater financial, technical and human resources than we do, as well as other competitive factors, such as technological advances achieved, patents obtained and new products introduced by our competitors;
our ability to effectively operate, stabilize and grow our businesses in light of the challenges that the Company currently faces, including with respect to its substantial debt, pending investigations and legal proceedings, scrutiny of our pricing, distribution and other practices, reputational harm and limitations on the way we conduct business imposed by the covenants in our Credit Agreement, indentures and the agreements governing our other indebtedness;
the extent to which our products are reimbursed by government authorities, pharmacy benefit managers ("PBMs") and other third party payors; the impact our distribution, pricing and other practices (including as it relates to our current relationship with Walgreen Co. ("Walgreens")) may have on the decisions of such government authorities, PBMs and other third party payors to reimburse our products; and the impact of obtaining or maintaining such reimbursement on the price and sales of our products;
the inclusion of our products on formularies or our ability to achieve favorable formulary status, as well as the impact on the price and sales of our products in connection therewith;
our eligibility for benefits under tax treaties and the continued availability of low effective tax rates for the business profits of certain of our subsidiaries;
the actions of our third party partners or service providers of research, development, manufacturing, marketing, distribution or other services, including their compliance with applicable laws and contracts, which actions may be beyond our control or influence, and the impact of such actions on our Company, including the impact to the Company of our former relationship with Philidor and any alleged legal or contractual non-compliance by Philidor;
the risks associated with the international scope of our operations, including our presence in emerging markets and the challenges we face when entering and operating in new and different geographic markets (including the challenges created by new and different regulatory regimes in such countries and the need to comply with applicable anti-bribery and economic sanctions laws and regulations);
adverse global economic conditions and credit markets and foreign currency exchange uncertainty and volatility in the countries in which we do business (such as the current or recent instability in Brazil, Russia, Ukraine, Argentina, Egypt, certain other countries in Africa and the Middle East, the devaluation of the Egyptian pound, and the adverse economic impact and related uncertainty caused by the United Kingdom's decision to leave the European Union (Brexit));
our ability to obtain, maintain and license sufficient intellectual property rights over our products and enforce and defend against challenges to such intellectual property;
the introduction of generic, biosimilar or other competitors of our branded products and other products, including the introduction of products that compete against our products that do not have patent or data exclusivity rights;
if permitted under our Credit Agreement, and to the extent we elect to resume business development activities through acquisitions, our ability to identify, finance, acquire, close and integrate acquisition targets successfully and on a timely basis;
factors relating to the acquisition and integration of the companies, businesses and products that have been acquired by the Company and that may in the future be acquired by the Company (if permitted under our Credit Agreement and to the extent we elect to resume business development activities through acquisitions), such as the time and resources required to integrate such companies, businesses and products, the difficulties associated with such integrations (including potential disruptions in sales activities and potential challenges with information technology systems integrations), the difficulties and challenges associated with entering into new business areas and new geographic markets, the difficulties, challenges and costs associated with managing and integrating new facilities, equipment and other assets, the risks associated with the acquired companies, businesses and products and our ability to achieve the anticipated benefits and synergies from such acquisitions and integrations, including as a result of cost-rationalization and integration initiatives. Factors impacting the achievement of anticipated benefits and synergies may include greater than expected operating costs, the difficulty in eliminating certain duplicative costs, facilities and functions, and the outcome of many operational and strategic decisions;
•the expense, timing and outcome of pending or future legal and governmental proceedings, arbitrations, investigations, subpoenas, tax and other regulatory audits, examinations, reviews and regulatory proceedings against us or relating to us and settlements thereof;
•our ability to negotiate the terms of or obtain court approval for the settlement of certain legal and regulatory proceedings;
•our ability to obtain components, raw materials or finished products supplied by third parties (some of which may be single-sourced) and other manufacturing and related supply difficulties, interruptions and delays;
•the disruption of delivery of our products and the routine flow of manufactured goods;
•economic factors over which the Company has no control, including changes in inflation, interest rates, foreign currency rates, and the potential effect of such factors on revenues, expenses and resulting margins;
•interest rate risks associated with our floating rate debt borrowings;
•our ability to effectively distribute our products and the effectiveness and success of our distribution arrangements, including the impactarrangements;
•our ability to effectively promote our own products and those of our arrangements with Walgreens;co-promotion partners;
•the success of our fulfillment arrangements with Walgreens,Walgreen Co. including market acceptance of, or market reaction to, such arrangements (including by customers, doctors, patients, PBMs, third partythird-party payors and governmental agencies), and the continued compliance of such arrangements with applicable laws, and our ability to successfully negotiate any improvements to our arrangements with Walgreens;laws;
•our ability to secure and maintain third partythird-party research, development, manufacturing, licensing, marketing or distribution arrangements;
•the risk that our products could cause, or be alleged to cause, personal injury and adverse effects, leading to potential lawsuits, product liability claims and damages and/or recalls or withdrawals of products from the market;
•the mandatory or voluntary recall or withdrawal of our products from the market and the costs associated therewith;
•the availability of, and our ability to obtain and maintain, adequate insurance coverage and/or our ability to cover or insure against the total amount of the claims and liabilities we face, whether through third partythird-party insurance or self-insurance;
•our indemnity agreements, which may result in an obligation to indemnify or reimburse the relevant counterparty, which amounts may be material;
•the difficulty in predicting the expense, timing and outcome within our legal and regulatory environment, including with respect to approvals by the FDA, Health Canada, European Medicines Agency ("EMA") and similar agencies in other countries, legal and regulatory proceedings and settlements thereof, the protection afforded by our patents and other intellectual and proprietary property, successful generic challenges to our products and infringement or alleged infringement of the intellectual property of others;
•the results of continuing safety and efficacy studies by industry and government agencies;
•the success of preclinical and clinical trials for our drug development pipeline or delays in clinical trials that adversely impact the timely commercialization of our pipeline products, as well as other factors impacting the commercial success of our products, which could lead to material impairment charges;
•uncertainties around the successful improvement and modification of our existing products and development of new products, which may require significant expenditures and efforts;
•the results of management reviews of our research and development portfolio (including following the receipt of clinical results or feedback from the FDA or other regulatory authorities), which could result in terminations of specific projects which, in turn, could lead to material impairment charges;
•the seasonality of sales of certain of our products;
•declines in the pricing and sales volume of certain of our products that are distributed or marketed by third parties, over which we have no or limited control;
•compliance by the Company or our third partythird-party partners and service providers (over whom we may have limited influence), or the failure of our Company or these third parties to comply, with health care “fraud and abuse” laws and other extensive regulation of our marketing, promotional and business practices (including with respect to pricing), worldwide anti-bribery laws (including the U.S. Foreign Corrupt Practices Act and the Canadian Corruption of Foreign Public Officials Act), worldwide economic sanctions and/or export laws, worldwide environmental laws and regulation and privacy and security regulations;
•the impacts of the Patient Protection and Affordable Care Act, as amended by the Health Care and Education Reconciliation Act of 2010 (the “Health Care Reform Act”) and potential amendment thereof and other legislative and regulatory health care reforms in the countries in which we operate, including with respect to recent government inquiries on pricing;
•the impact of any changes in or reforms to the legislation, laws, rules, regulation and guidance that apply to the Company and its businessbusinesses and products or the enactment of any new or proposed legislation, laws, rules, regulations or guidance that will impact or apply to the Company or its businesses or products;
•the impact of changes in federal laws and policy that may be undertaken under consideration by the Trump administration and Congress, including the effect that such changes will have on fiscal and tax policies, the potential revision of all or portions of the Health Care Reform Act, international trade agreements and policies and policy efforts designed to reduce patient out-of-pocket costs for medicines (which could result in new mandatory rebates and discounts or other pricing restrictions);Biden administration;
•illegal distribution or sale of counterfeit versions of our products; and
•interruptions, breakdowns or breaches in our information technology systems.systems; and
•risks in Item 1A. “Risk Factors” in this Form 10-K.
Additional information about these factors and about the material factors or assumptions underlying such forward-looking statements may be found elsewhere in this Form 10-K, under Item 1A. "Risk Factors" and in the Company's other filings with the SECU.S. Securities and Exchange Commission (the “SEC”) and the Canadian Securities Administrators (the “CSA”). When relying on our forward-looking statements to make decisions with respect to the Company, investors and others should carefully consider the foregoing factors and other uncertainties and potential events. These forward-looking statements speak only as of the date made. We undertake no obligation to update or revise any of these forward-looking statements to reflect events or circumstances after the date of this Form 10-K or to reflect actual outcomes, except as required by law. We caution that, as it is not possible to predict or identify all relevant factors that may impact forward-looking statements, the foregoing list of important factors that may affect future results is not exhaustive and should not be considered a complete statement of all potential risks and uncertainties.
PART I
Item 1. Business
Biovail Corporation (“Biovail”) was formed under the Business Corporations Act (Ontario) on February 18, 2000, as a result of the amalgamation of TXM Corporation and Biovail Corporation International. Biovail was continued under the Canada Business Corporations Act (the “CBCA”) effective June 29, 2005. In connection with the acquisition of Valeant Pharmaceuticals International (“Valeant”) in September 2010, Biovail was renamed “Valeant Pharmaceuticals International, Inc.”
Effective August 9, 2013, we continued from the federal jurisdiction of Canada to the Province of British Columbia, meaning that we became a company registered under the laws of the Province of British Columbia as if we had been incorporated under the laws of the Province of British Columbia. As a result of this continuance, our legal domicile became the Province of British Columbia, the Canada Business Corporations Act ceased to apply to us and we became subject to the British Columbia Business Corporations Act.
Introduction
We areBausch Health Companies Inc. is a global company whose mission is to improve people’s lives with our health care products. We develop, manufacture and market, primarily in the therapeutic areas of eye-health, gastroenterology (“GI”) and dermatology, a broad range ofof: (i) branded pharmaceuticals, (ii) generic and branded generic pharmaceuticals, (iii) over-the-counter (“OTC”) products and (iv) medical devices (contact lenses, intraocular lenses, ophthalmic surgical equipment and aesthetics devices) and over-the-counter (“OTC”) products, primarily, which are marketed directly or indirectly in the therapeutic areas of eye-health, gastroenterology and dermatology. We are delivering on our commitments as we build an innovative company dedicated to advancing global health.approximately 100 countries.
The Company'sOur portfolio of products falls into threefive operating and reportable segments: (i) Bausch + Lomb/Lomb, (ii) Salix, (iii) International (ii) Branded Rx, (iv) Ortho Dermatologics and (iii) U.S.(v) Diversified Products.
•The Bausch + Lomb/Lomb segment consists of global sales of Bausch + Lomb Vision Care, Consumer, Surgical and Ophthalmic Pharmaceuticals products.
•The Salix segmentconsists of sales in the U.S. of GI products.
•The International Rx segmentconsists of sales, with the exception of sales of Bausch +Lomb products and Solta aesthetic medical devices, outside the U.S and Puerto Rico of branded pharmaceutical products, branded generic pharmaceutical and OTC products.
•The Ortho Dermatologicssegment consists of: (i) sales in the U.S. of pharmaceutical products, OTC products and medical device products, primarily comprised of Bausch + Lomb products, with a focus on the Vision Care, Surgical, Consumer and Ophthalmology RxOrtho Dermatologics (dermatological) products and (ii) global sales in Canada, Europe, Asia, Australia and New Zealand, Latin America, Africa and the Middle East of branded pharmaceutical products, branded generic pharmaceutical products, OTC products,Solta aesthetic medical device products, and Bausch + Lomb products.
devices.•The Branded Rx segment consists of sales in the U.S. of: (i) Salix products (gastrointestinal (“GI”) products), (ii) Ortho Dermatologics (dermatological products) and (iii) oncology (or Dendreon), dentistry and women’s health products (or Sprout). As a result of the divestiture of the Company's equity interest in Dendreon Pharmaceuticals LLC (“Dendreon”) on June 28, 2017 and Sprout Pharmaceuticals, Inc. (“Sprout”) on December 20, 2017, the Company has exited the oncology and women's health business, respectively.
The U.S. Diversified Products segment consists of sales in the U.S. of: (i) pharmaceutical products, OTC products and medical device products in the areas of neurology and certain other therapeutic classes, including aesthetics which includes(ii) generic products and (iii) dentistry products.
For additional discussion of our reportable segments, see the Solta businessdiscussion in Item 1. "Business — Segment Information" and the Obagi business (the Obagi Sale was completed on November 9, 2017) and (ii) authorized generic (“AG”) products.
See Note 23,22, "SEGMENT INFORMATION" to our audited Consolidated Financial Statements for further details on these reportable segments.
On August 6, 2020, we announced our plan to separate our eye-health business into an independent publicly traded entity, Bausch + Lomb Corporation ("Bausch + Lomb") from the remainder of Bausch Health Companies Inc. (the "B+L Separation"). On August 3, 2021, we announced our plan to conduct an initial public offering ("IPO") of our aesthetic medical device business, Solta Medical ("Solta") (the "Solta IPO"). We believe separating our pharmaceutical, eye-health and aesthetics medical device businesses is an opportunity to unlock value across our portfolio of assets by creating three highly attractive but dissimilar businesses. Since making these announcements, we began executing on those plans and, at the end of 2021, had substantially completed the internal objectives to facilitate the IPOs and related separation of these businesses. We continue to monitor market conditions and aim to launch the Bausch + Lomb IPO (the "B+L IPO") and the Solta IPO when financial market conditions are favorable (subject to receipt of regulatory, stock exchange and other approvals). However, there can be no assurance as to when we will complete either IPO, if at all. Until such time, we continue to manage these businesses along with our pharmaceutical portfolio of gastrointestinal, dermatology, neurology and other therapeutics, with our continued commitment to bring out additional value for our shareholders. Following the B+L IPO, we expect to complete the separation of Bausch + Lomb after the expiry of customary lockups related to the B+L IPO and achievement of targeted debt leverage ratios, subject to the receipt of applicable shareholder and other necessary approvals and market conditions. Subject to market conditions and receipt of regulatory, stock exchange and other approvals, we expect to launch the B+L IPO and the Solta IPO sometime in the first half of 2022. Nothing in this Form 10-K shall constitute an offer to sell or the solicitation of an offer to buy any securities of the Bausch + Lomb or Solta Medical entities.
COVID-19 Pandemic
We continue to closely monitor the impacts of the COVID-19 pandemic and related responses from governments and private sector participants on the Company, our customers, supply chain, third-party suppliers, project development timelines, costs, revenue, margins, liquidity and financial condition and our planned actions and responses to this pandemic. We believe we have responded quickly to the human and commercial challenges brought on by the COVID-19 pandemic and that our early actions have, so far, enabled us to keep our employees safe and our supply lines largely intact and we believe these actions have laid the foundation for us to work our way through the uncertainties to come. To date, the Company has been able to continue its operations with limited disruptions in supply and manufacturing. Although our revenues were adversely affected by the impacts of the COVID-19 pandemic, particularly during the second quarter of 2020, our revenues returned to pre-pandemic
levels for many of our businesses and geographies in 2021 and, at the current pace of recovery, we expect the COVID-19 pandemic to have a minimal impact on the remaining businesses and geographies in 2022.
See Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Overview — Impacts of COVID-19” of this Form 10-K for additional information on the impacts of the COVID-19 pandemic and Item 1A. “Risk Factors — Risk Relating to COVID-19” of this Form 10-K for additional risks relating to the COVID-19 pandemic.
Business Strategy
Our strategy is to focus our business on core therapeutic classes and geographies that offer attractive growth opportunities. Within our chosen therapeutic classes, we prioritize durable products which we believe have the potential for strong operating margins and evidence of growth opportunities. We believe this strategy has reduced complexity in our operations and maximizes the value of our: (i) eye-health, (ii) GI and (iii) dermatology businesses, which collectively represent a substantial portion of our revenues. We have found and continue to believe that there is significant opportunity in the: (i) eye-health, (ii) GIeach of these businesses and (iii) dermatology businesses. Wewe believe that our existing portfolio, commercial footprint and pipeline of product development projects position us to successfully compete in these markets and provide us with the greatest opportunity to build value for our shareholders.
As we continue to prepare for the separation of our eye-health and medical device aesthetics businesses, we remain focused on expanding and deepening our geographic reach of all our businesses.We identify these businesses as “core”, meaning thatcontinue to search out new markets where our portfolio of products would expect to flourish, while continually revisiting our existing geographies where our portfolio of pharmaceuticals would help fill unmet needs.As we believe we are best positioned to grow and develop them. We include our globalprepare for the separations of the Bausch + Lomb businessand Solta businesses, we are looking to right size our presence in our Bausch + Lomb/International segmentthese geographies, make additional investments in sales force and our GI and dermatology businessesadvertising, to create a greater presence in our Branded Rx segment. By narrowing our focus, we have the opportunity to reduce complexity in our operations and maximize the value of our core businesses. In order to focus our efforts, we performed a review of our portfolio of assets within these core businesses to identify those productsgeographies where we believe we have, and can maintain, a competitive advantage and we continue to define and shape our operations and business strategies around these assets.
As we are committed to our core businesses, we began analyzing what to do with those business units and assets that fall outside our definition of “core”. Although these businesses and assets may be solid, the focus of their product pipelines and geographic footprint were not fully aligned with the focus of our core businesses, and they were, therefore, at a disadvantage when
competing against our core activities for resources and capital within the Company. In order to focuscapitalize on our objectives, we divested certain of these businessesexisting and assets, primarily in 2017, which in each case, were not aligned withfuture product portfolios to meet unmet needs and generate future revenue streams and value for our core business objectives. This step allowed us to better focus our internal resources on our Bausch + Lomb, GI and dermatology businesses and provided us with significant sources of capital.
As a result of the improvement in our core businesses and the divestitures of businesses not aligned with our core business objectives, as well as reduced sales of products in other segments facing loss of exclusivity, we are seeing a greater portion of our revenues driven by our core businesses. In 2017 and 2016, our Bausch + Lomb, GI and dermatology revenues collectively represented approximately 66% and 62% of our total revenues, respectively. We expect this percentage to increase in 2018, as our recent and expected product launches are focused on these core businesses, and we expectthe year-over-year comparison to widen as a result of 2017 divestitures. We believe that the increase in this percentage in 2017 demonstrates our convictions in our core businesses.company.
We believe that we have a well-established diversified product portfolio that is diversified withinacross all our core businesses andthat provides a sustainable revenue stream to fund our operations. Our long-termcontinued success is dependent upon our ability to continually refresh our pipeline and bring new product solutions to provide innovative product launchesthe market that meet new and changing demands and replace other products that have lost momentum. We have a robust pipeline that we believe not only provides for the next generation of our existing products, but is also poised to bring new productand innovative solutions to market. Our R&D organization focuses on the development of products through clinical trials and, as of December 31, 2021, included approximately 1,300 dedicated R&D and quality assurance employees in 25 R&D facilities.
We believehave focused our increased focus on innovative new products will allow usR&D to maximize our profitability and bolster future growth. We develop these innovative new products through our output-focused research andadvance development (“R&D”) model, whichprograms that we believe allows us to advance certain development programs towill drive future commercial growth in our core businesses, while creating efficiencies in our R&D efforts. This is achievedefforts and expenses. Although we primarily by:
focusingrely on innovation through our internal R&D selectedorganization to build-out and refresh our product portfolio, to supplement those efforts, we continually seek out opportunities, such as co-promotions, licensing agreements and strategic acquisitions, to leverage our commercial footprint, particularly our sales force, by strategically aligning ourselves with other innovative product solutions that, when coupled with our existing product portfolio, address specific needs in the market. See Item 7. “Management’s Discussion and in-licensing;Analysis of Financial Condition and Results of Operations — Overview — Focus on Core Businesses” of this Form 10-K.
focusing on critical skills and capabilities needed to bring new technologies to the market;
pursuing life-cycle management programs for currently marketed products to increase such products’ value during their commercial lives; and
acquiring dossiers and registrations for branded generic products in emerging markets, which require limited manufacturing start-up and development activities.
Segment Information
Our revenues for 2017, 20162021, 2020 and 20152019 were $8,724$8,434 million, $9,674$8,027 million and $10,447$8,601 million, respectively. We have approximately 1,6001,200 products in our portfolio of products, which fall into threefive operating and reportable segments: (i) Bausch + Lomb/Lomb, (ii) Salix, (iii) International (ii) Branded Rx, (iv) Ortho Dermatologics and (iii) U.S.(v) Diversified Products. Segment revenues for the years 2021, 2020 and 2019 were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 2021 | | 2020 | | 2019 |
| (in millions) | | Amount | | Pct. | | Amount | | Pct. | | Amount | | Pct. |
| Bausch + Lomb | | $ | 3,765 | | | 45 | % | | $ | 3,415 | | | 42 | % | | $ | 3,778 | | | 44 | % |
| Salix | | 2,074 | | | 24 | % | | 1,904 | | | 24 | % | | 2,022 | | | 23 | % |
| International Rx | | 1,166 | | | 14 | % | | 1,181 | | | 15 | % | | 1,154 | | | 13 | % |
| Ortho Dermatologics | | 564 | | | 7 | % | | 548 | | | 7 | % | | 560 | | | 7 | % |
| Diversified Products | | 865 | | | 10 | % | | 979 | | | 12 | % | | 1,087 | | | 13 | % |
| Total revenues | | $ | 8,434 | | | 100 | % | | $ | 8,027 | | | 100 | % | | $ | 8,601 | | | 100 | % |
Comparative segment information for 2017, 20162021, 2020 and 20152019 is further presented in Note 23,22, "SEGMENT INFORMATION" to our audited Consolidated Financial Statements.
Bausch + Lomb/InternationalLomb
TheOur Bausch + Lomb/InternationalLomb segment includes our global Bausch + Lomb eye-health business. Our global Bausch + Lomb eye-health business includes our Global Vision Care, Global Surgical, Global Consumer and Global Ophthalmic Pharmaceuticals products, which in aggregate accounted for approximately 45%, 42% and 44% of our Company's revenues for 2021, 2020 and 2019, respectively.
As previously discussed, on August 6, 2020, we announced our plan to separate our eye-health business into an independent publicly traded entity, Bausch + Lomb Corporation, from the remainder of Bausch Health Companies Inc. Since making that announcement, we have been executing on this plan and, at the end of 2021, had substantially completed the internal objectives to facilitate the B+L Separation. As of the date of this filing, we continue to execute on our plan for the B+L Separation and aim to launch the B+L IPO when market conditions are favorable and subject to receipt of regulatory, stock exchange and other approvals. Following the B+L IPO, we expect to complete the B+L Separation after the expiry of customary lockups related to the B+L IPO and the achievement of targeted debt leverage ratios, subject to receipt of applicable shareholder and other necessary approvals and market conditions. Nothing in this Form 10-K shall constitute an offer to sell or the solicitation of an offer to buy any securities.
Our Bausch + Lomb business is a fully integrated eye-health business, which we believe is critical to maintaining and further developing its position in the global eye-health market. We maintain a fully integrated eye care portfolio of established lines of contact lenses, intraocular lenses and other medical devices, surgical systems and devices, vitamin and mineral supplements, lens care products, prescription eye-medications and other consumer products, to holistically approach solving eye-health problems and keep us in a position to compete in all areas of the eye-health market. Since our beginnings in 1853 as an optical goods shop in Rochester, New York, we have remained focused on advancing eye-health for people all over the world. As part of our longstanding commitment to eye care professionals and the patients they serve, we invest in physician training, patient and customer education, disease prevention and other initiatives through both traditional and digital platforms to continue to advance eye-health.
As part of our global Bausch + Lomb business strategy, we continually look for key trends in the eye-health market to meet changing consumer/patient needs and identify areas for investment and growth. We believe that the gap between evolving eye-health needs and effective treatments represents a significant growth opportunity, and we believe that we have the ability to increase demand for our products by educating customers and capturing the rising consumerism in our available markets. For example, it is estimated that more than 17 million people suffer from visual impairment in China, of which 8 million are blind, yet only 450 cataract surgeries are performed for every 1 million people each year in China. Myopia represents another significant growth opportunity. We estimate that myopia affects approximately 25 million children in the United States, and 2.9 billion people globally had some degree of myopia in 2020. According to the World Health Organization, this population is expected to rise globally by more than 60% between 2020 and 2050. To increase adoption of our products, we intend to continue our focus on patient, consumer and eye care professional education. In addition, we believe that we can grow our market opportunity by expanding into emerging therapeutic areas and researching and securing other indications for our products. We intend to leverage our global regulatory and commercial capabilities to accelerate product approvals and launches across current and future markets.
Currently our principal products in the eye-health business include:
Consumer
Our Consumer eye care business consists of: (i) salesof contact lens care products, OTC eye drops and eye vitamins. Our eye vitamin products include our patented formulas and mineral supplements that address various conditions including eye allergies, conjunctivitis, dry eye, redness and relief. Key Consumer eye care brands include:
•PreserVision® AREDS 2 is a patented eye vitamin formula that contains the exact nutrient formula recommended by the National Eye Institute for people with moderate to advanced age-related macular degeneration ("AMD") following the landmark AREDS 2 clinical study.
•Ocuvite® is a vitamin and mineral supplement for the eye that contains lutein and zeaxanthin (antioxidant carotenoids), a nutrient that supports macular health by helping filter harmful blue light.
•Biotrue® multi-purpose solution helps prevent certain tear proteins from denaturing and fights germs for healthy contact lens wear. Biotrue® multi-purpose solution uses a lubricant found in eyes and is pH balanced to match healthy tears.
•Bausch + Lomb Renu® Advanced Formula multi-purpose solution was launched in 2017 and is a novel soft and silicone hydrogel contact lenses solution that makes use of three disinfectants and two moisture agents.
•Boston® solution is a specialty cleansing solution design for gas permeable contact lenses.
•Artelac® is an eye moisturizer eye drop which enables quick wetting of dry eyes. Artelac® contains hyaluronic Acid (sodium hyaluronate), a natural lubricant which instantly refreshes and hydrates the eyes. Artelac® is particularly suitable for alleviating mild symptoms of dry eyes and can also be used to moisten hard contact lenses while being worn.
•LUMIFY® (brimonidine tartrate ophthalmic solution, 0.025%) is an OTC eye drop developed as an ocular redness reliever. LUMIFY® was launched in the U.S. in May 2018.
Vision Care
Our Vision Care portfolio includes contact lenses that span the spectrum of pharmaceutical products, OTC productswearing modalities, including daily disposable and medical device products, primarily comprised of frequently replaced contact lenses, and contact lenses that are indicated for therapeutic use and that can also provide optical correction during healing, if required. Key Vision Care brands include:
•Bausch + Lomb products,INFUSE® (known as BAUSCH + LOMB ULTRA® ONE DAY in Canada, Australia and Hong Kong), a silicone hydrogel daily disposable contact lens designed with a focus on the Vision Care, Surgical, Consumernext generation material infused with ProBalance TechnologyTM to help maintain ocular surface homeostasis and Ophthalmology Rx products and (ii) sales in Canada, Europe, Asia, Australia and New Zealand, Latin America, Africa and the Middle Easthelp reduce symptoms of branded pharmaceutical products, branded generic pharmaceutical products, OTC products, medical device products, andcontact lens dryness. Bausch + Lomb products. INFUSE® was launched in the United States in August 2020 and BAUSCH + LOMB ULTRA® ONE DAY was launched in Canada, Australia, and Hong Kong in November 2020.
•AQUALOXTM in Japan, a silicone hydrogel daily disposable contact lens designed to provide clear vision throughout the day. Product validation was completed in June 2018 and SiHy Daily AQUALOXTM was launched in Japan in September 2018.
•Bausch + Lomb ULTRA®, a silicone hydrogel frequent replacement contact lens for patients with myopia or hyperopia that uses our proprietary MoistureSeal® technology, which allows the contact lens to retain 95% of moisture after 16 hours of wear, limiting lens dryness and resulting symptoms.
•Bausch + Lomb ULTRA® for Astigmatism, a monthly planned replacement contact lens for astigmatic patients developed using our proprietary MoistureSeal® technology. Bausch + Lomb ULTRA® for Astigmatism lenses integrate an OpticAlign® design engineered for lens stability and to promote a successful wearing experience for the astigmatic patient.
•Bausch + Lomb ULTRA® for Presbyopia, a monthly planned replacement contact lens for presbyopic patients developed using the Company’s proprietary MoistureSeal® technology. Bausch + Lomb ULTRA® for Presbyopia lenses integrate our 3-Zone Progressive™ multifocal design with seamless transitions between near, far and intermediate distances for clear, comfortable vision across all distances.
•Bausch + Lomb ULTRA® multifocal for astigmatism, a monthly planned replacement multifocal toric lens combining our 3-Zone ProgressiveTM multifocal design with the stability of its OpticAlign® toric design to address the lifestyle and vision needs of patients with both astigmatism and presbyopia.
•Biotrue® ONEday daily disposable contact lenses for patients with myopia or hyperopia, which are made of a unique material inspired by the natural biology of the eye and feature Surface Active TechnologyTM, a patented dehydration barrier. The lens contains 78% water, more moisture than any other soft contact lens and the same water content as the cornea, and maintains nearly 100% of its moisture for up to 16 hours.
•Biotrue® ONEday for Astigmatism, a daily disposable contact lens for astigmatic patients developed using the Company’s proprietary Surface Active TechnologyTM. Biotrue® ONEday for Astigmatism includes evolved peri-ballast geometry designed to work with natural blink patterns to deliver stability, clear vision and comfort for the astigmatic patient.
•Biotrue® ONEday for Presbyopia daily disposable contact lens for presbyopic patients developed using the Company’s proprietary Surface Active Technology. Biotrue® ONEday for Presbyopia integrates the Company’s 3-Zone Progressive™ design with seamless transitions between near, far and intermediate distances for clear, comfortable vision across all distances.
•PureVision®, a silicone hydrogel frequent replacement contact lens using AerGel® technology lens material to allow natural levels of oxygen to reach the eye as well as resist protein buildup. The lens also incorporates an aspheric optical design that reduces spherical aberration.
•SofLens® Daily Disposable Contact Lenses, which use ComfortMoist® Technology (a combination of thin lens design and moisture-rich packaging solution) and High Definition Optics™ which is an aspheric design that reduces spherical aberration over a range of powers, especially in low light.
Ophthalmic Pharmaceuticals
Our principalOphthalmic Pharmaceuticals business consists of a broad line of proprietary pharmaceutical products in this segmentfor post-operative treatments and treatments for a number of eye conditions, such as glaucoma, eye inflammation, ocular hypertension, dry eyes and retinal diseases. Key ophthalmic pharmaceutical brands include:
Pharmaceutical
| |
• | Lotemax® Gel is a topical corticosteroid indicated for the treatment of inflammation and pain following ocular surgery. This formulation is a technology that allows the drug to adhere to the ocular surface and offers dose uniformity, which eliminates the need to shake the product in order to ensure the drug is in suspension. The product contains a low concentration of preservative and two known moisturizers.
|
Vyzulta™•Vyzulta® (latanoprostene bunod ophthalmic solution, 0.024%) is an intraocular pressure lowering single-agent eye drop with dual activity dosed once daily for patients with open angle glaucoma or ocular hypertension and was launched in the U.S. in December 2017.
Consumer
| |
• | PreserVision® AREDS 2 is an eye vitamin formula for those with moderate-to-advanced age related macular degeneration.
|
| |
• | Ocuvite® is a vitamin and mineral supplement for the eye that contains lutein (an antioxidant carotenoid), a nutrient that supports macular health by helping filter harmful blue light.
|
| |
• | Bausch + Lomb Renu® Advanced Formula multi-purpose solution was launched in 2017 and is a novel soft and silicone hydrogel contact lenses solution that makes use of three disinfectants and two moisture agents.
|
| |
• | Biotrue® multi-purpose solution helps prevent certain tear proteins from denaturing and fights germs for healthy contact lens wear. Biotrue® multi-purpose solution uses a lubricant found in eyes and is pH balanced to match healthy tears.
|
| |
• | Boston® solution is a specialty cleansing solution design for gas permeable contact lenses.
|
| |
• | Bausch + Lomb ScleralFil® solution is a novel contact lens care solution that we launched in 2017 and makes use of a preservative free buffered saline solution for use with the insertion of scleral lenses.
|
Devices
| |
• | SofLens® Daily Disposable Contact Lenses use ComfortMoist® Technology (a combination of thin lens design and moisture-rich packaging solution) and High Definition Optics™ which is an aspheric design that reduces spherical aberration over a range of powers, especially in low light.
|
| |
• | PureVision® is a silicone hydrogel frequent replacement contact lens using AerGel® technology lens material to allow natural levels of oxygen to reach the eye as well as resist protein buildup. The lens also incorporates an aspheric optical design that reduces spherical aberration.
|
| |
• | The Stellaris Elite™ Vision Enhancement System is our next generation phacoemulsification cataract platform, which offers new innovations, as well as the opportunity to add upgrades and enhancements every one to two years. Stellaris Elite™ is the first phacoemulsification platform on the market to offer Adaptive Fluidics™, which combines aspiration control with predictive infusion management to create a responsive and controlled surgical environment for efficient cataract lens removal. Our Stellaris Elite™ Vision Enhancement System was launched in April 2017.
|
| |
• | VitesseTM is a hypersonic vitrectomy system for the removal of the vitreous humor gel that fills the eye cavity to provide better access to the retina and allow for a variety of repairs, including the removal of scar tissue, laser repair of retinal detachments and treatment of macular holes. Available exclusively on the Stellaris Elite system, VitesseTM liquefies tissue in a highly-localized zone at the edge of the port to increase the level of surgical control and precision to vitrectomies. VitesseTM was launched in October 2017.
|
| |
• | Biotrue® ONEday daily disposable contact lenses are made of a unique material that works like the eye to form a dehydration barrier. The lens maintains over 98% of its moisture for up to 16 hours, it matches the water content of the cornea at 78%, and allows for the oxygen a healthy eye needs.
|
| |
• | Biotrue® ONEday for Astigmatism is a daily disposable contact lens for astigmatic patients. The Biotrue® ONEday lenses incorporates Surface Active Technology™ to provide a dehydration barrier. The Biotrue® ONEday for Astigmatism also includes evolved peri-ballast geometry to deliver stability and comfort for the astigmatic patient. We launched this product in December 2016 and launched the complete extended power range in 2017.
|
| |
• | Bausch + Lomb ULTRA® is a silicone hydrogel frequent replacement contact lens that uses the proprietary MoistureSeal® technology which allows the contact lens to retain 95% of moisture after 16 hours of wear, limiting lens dryness and resulting symptoms.
|
| |
• | Bausch + Lomb ULTRA® for Astigmatism is a monthly planned replacement contact lens for astigmatic patients. The Bausch + Lomb ULTRA® for Astigmatism lens was developed using the proprietary MoistureSeal® technology. In addition, the Bausch + Lomb ULTRA® for Astigmatism lens integrates an OpticAlign™ design engineered for lens stability and to promote a successful wearing experience for the astigmatic patient. We launched this product and the extended power range for this product throughout 2017.
|
| |
• | Bausch + Lomb ULTRA® for Presbyopia is a monthly planned replacement contact lens for presbyopic patients. The Bausch + Lomb ULTRA® for Presbyopia lens was developed using the proprietary MoistureSeal® technology. In addition, the Bausch + Lomb ULTRA® for Presbyopia lens integrates a 3 zone progressive design for near, intermediate and distance vision. We launched expanded parameters of this product throughout 2017.
|
| |
• | Medical device systems for aesthetic applications including the Thermage CPT® system that provides non-invasive treatment options using radiofrequency energy for skin tightening.
|
| |
• | A portfolio of ophthalmic surgical products, including: (i) intraocular lenses such as Akreos®, enVista®, Crystalens® and Trulign®, (ii) a suite of surgical instruments including Storz® and Synergetics® and (iii) surgical equipment for cataract, refractive, and vitreoretinal surgery, such as Stellaris® PC, a vitreoretinal and cataract surgery system, VersaVIT2.0 for vitreoretinal surgery and the VICTUS® femtosecond laser for cataract surgery.
|
Branded Rx•Lotemax® SM (loteprednol etabonate ophthalmic gel 0.38%), a new gel drop formulation of loteprednol etabonate, which was designed with novel SubMicron (SM) technology for efficient penetration to key ocular tissues at a low preservative (BAK) level (3.5-10) and a pH close to human tears, indicated for the treatment of postoperative inflammation and pain following ocular surgery.
•Lotemax® Suspension (loteprednol etabonate ophthalmic suspension, 0.5%) is a topical corticosteroid indicated for the treatment of steroid responsive inflammatory conditions of the palpebral and bulbar conjunctiva, cornea, and anterior segment of the globe and for the treatment of post-operative inflammation following ocular surgery.
•Lotemax® Gel is a topical corticosteroid indicated for the treatment of inflammation and pain following ocular surgery. This formulation is a technology that allows the drug to adhere to the ocular surface and offers dose uniformity, which eliminates the need to shake the product in order to ensure the drug is in suspension. The Branded Rxproduct contains a low concentration of preservative and two known moisturizers. We also have an ointment formulation (Lotemax® Ointment) without any preservatives.
•Alrex® (loteprednol etabonate ophthalmic suspension, 0.2%) is indicated for the temporary relief of the signs and symptoms of seasonal allergic conjunctivitis.
•Besivance® (besifloxacin ophthalmic suspension, 0.6%) is the first and only chloro-fluoroquinolone indicated for the treatment of bacterial conjunctivitis. It is a new generation potent quinolone antibiotic specifically designed for the ophthalmic use and has no systemic formulation.
•Zylet® (loteprednol etabonate 0.5% and tobramycin 0.3% ophthalmic suspension) indicated for the steroid-responsive inflammatory ocular conditions for which a corticosteroid is indicated and where superficial bacterial ocular infection or a risk of bacterial ocular infection exists.
•Minims® portfolio including ocular anaesthetics, corticosteroids, mydriatics, cycloplegics, artificial tears, irrigating solutions and diagnostic stain products.
•Prolensa® (bromfenac ophthalmic solution) 0.07% is a nonsteroidal anti-inflammatory drug (NSAID) indicated to treat inflammation and reduce eye pain in patients after cataract surgery. In international markets, we market Yellox® (bromfenac ophthalmic solution, 0.9%) which is indicated for the treatment of postoperative ocular inflammation following cataract extraction.
Surgical
Our Surgical business consists of medical device equipment, consumables and instrumental tools and technologies for the treatment of corneal, cataracts, and vitreous and retinal eye conditions, and includes intraocular lenses ("IOLs") and delivery systems, phacoemulsification equipment and other surgical instruments and devices necessary for cataract surgery. Key Surgical brands include:
•Vitreoretinal Surgery
◦Stellaris® PC, a combined system with vitreoretinal and cataract surgery capability.
•Cataract Surgery and Laser Systems
◦The Stellaris Elite® vision enhancement system is our next generation phacoemulsification cataract platform, Stellaris Elite® is the first phacoemulsification platform on the market to offer Adaptive FluidicsTM, which combines aspiration control with predictive infusion management to create a responsive and controlled surgical environment for efficient cataract lens removal. Our Stellaris Elite® vision enhancement system was launched in the United States in 2017 and internationally in 2018.
◦VICTUS® femtosecond laser for cataract, corneal and refractive surgery, which delivers multi- mode versatility for cataract and corneal procedures on a single platform. This single laser platform enables surgeons to perform capsulotomies, fragmentation, arcuate incisions, corneal incisions, and LASIK flaps.
◦Teneo VICTUS® femtosecond laser for cataract, corneal and refractive surgery and Teneo® Excimer Laser for refractive surgery.
◦Excimer Laser for refractive surgery.
•Intraocular Lenses
◦A portfolio of ophthalmic surgical IOLs, including implantable IOLs such as Akreos®, enVista®, Crystalens® and Trulign®.
•Surgical Instruments
◦Storz Ophthalmic instruments are our suite of surgical instruments which include precision microsurgical instruments, diamond knives and single-use surgical instruments, as well as instruments customized for individual surgeons under the Storz Ophthalmic Instrument brand, including Synergetics®, and surgical equipment for cataract, refractive and vitreoretinal surgery.
Salix
The Salix segment consists of sales in the U.S. of:of GI products and includes our Xifaxan® product. We have been making investments in our Salix business since 2017, including: (i) hiring 200 trained and experienced sales force representatives to expand the commercial field force for Xifaxan®, (ii) increasing the focus on the development of next generation formulations of our Salix products (GI products)to address new indications, (iii) completing the strategic acquisition of certain assets of Synergy Pharmaceuticals Inc. (“Synergy”), which included the Trulance® product, and (iv) increasing the number of sales force representatives for Trulance®. In addition, we have entered into licensing agreements for investigational products, which, once developed and if approved by the FDA, will be new treatments for certain GI and liver diseases and we anticipate will contribute to our future growth. Each of these opportunities potentially provides us with the ability to expand our GI portfolio and allows us to leverage our existing GI sales force, supply channel and distribution channel.
Currently our principal products in the Salix segment (including products of our third-party co-promotion partners) include:
•Xifaxan® which includes: (i) tablets indicated for the treatment of irritable bowel syndrome with diarrhea ("IBS-D") in adults and for the reduction in risk of overt hepatic encephalopathy recurrence in adults and (ii) Ortho Dermatologics (dermatological products)tablets indicated for
the treatment of travelers’ diarrhea caused by noninvasive strains of Escherichia coli in patients 12 years of age and (iii) oncology (or Dendreon), dentistryolder. Our Xifaxan® product accounted for revenues of $1,644 million, $1,482 million and women’s health products (or Sprout). As a result$1,452 million for 2021, 2020 and 2019, respectively.
•Glumetza® (metformin hydrochloride) extended release tablets are indicated as an adjunct to diet and exercise to improve glycemic control in adults with type 2 diabetes mellitus.
•Relistor® (methylnaltrexone) is given to adults who use narcotic medicine to treat severe chronic pain that is not caused by cancer to prevent constipation without reducing the pain-relieving effects of the divestiturenarcotic.
•Trulance® (plecanatide) is a once-daily tablet for adults with chronic idiopathic constipation, or CIC, and irritable bowel syndrome with constipation, or IBS-C.
International Rx
Our International Rx business, with the exception of our Solta products, includes sales in Canada, Europe, Asia, Australia, Latin America, Africa and the Middle East of branded pharmaceutical products, branded generic pharmaceutical products and OTC products, which in aggregate accounted for approximately 14%, 15% and 13% of our Company's equity interest in Dendreon on June 28, 2017revenues for 2021, 2020 and Sprout on December 20, 2017, the Company has exited the oncology and women's health business,2019, respectively. Our principal products in this segment include:
GI•Bisocard® (bisoprolol fumarate) is an orally administered tablet dosed once daily for patients with hypertension, angina pectoris or heart failure and is a leading brand in Poland.
| |
• | Xifaxan® which includes: (i) tablets indicated for the treatment of irritable bowel syndrome with diarrhea ("IBS-D") in adults and for the reduction in risk of overt hepatic encephalopathy recurrence in adults and (ii) tablets indicated for the treatment of travelers’ diarrhea caused by noninvasive strains of Escherichia coli in patients 12 years of age and older.
|
| |
• | Glumetza® (metformin hydrochloride) extended release tablets are indicated as an adjunct to diet and exercise to improve glycemic control in adults with type 2 diabetes mellitus.
|
| |
• | Apriso® is an aminosalicylate anti-inflammatory drug used to treat ulcerative colitis, proctitis, and proctosigmoiditis. Apriso is also used to prevent the symptoms of ulcerative colitis from recurring.
|
| |
• | Uceris® (budesonide) extended release tablets, are a prescription corticosteroid medicine used to help get mild to moderate ulcerative colitis under control (induce remission).
|
| |
• | Relistor® (methylnaltrexone) is given to adults who use narcotic medicine to treat severe chronic pain that is not caused by cancer to prevent constipation without reducing the pain-relieving effects of the narcotic.
|
Dermatology•Thrombo ASS® (gastroprotective coated form of acetylsalicylic acid 50mg and 100mg) is an antithrombotic agent dosed once daily for secondary prophylaxis of thrombotic complications after such events as a stroke or heart attack. Thrombo ASS® is a leading brand in Russia.
| |
• | Jublia® (efinaconazole 10% topical solution), is a topical azole approved for the treatment of onychomycosis of the toenails (toenail fungus).
|
Siliq™ (brodalumab)•Contrave®/Mysimba® is a fixed-dose combination prolonged-release tablet for the treatment of obesity. Used alongside diet and exercise, it is designed to help manage weight in adults who are obese or overweight. The formulation is designed to initiate weight loss and sustain it over a longer period of time by switching off natural compensatory mechanisms involved in the typical weight loss plateau stage. Contrave® / Mysimba® is commercialized in Canada, Greece, and Central Eastern Europe.
•Jublia® (efinaconazole 10% topical solution) is a topical azole approved for the treatment of onychomycosis of the toenails (toenail fungus). Jublia® is commercialized in Canada (the only market outside the U.S.).
•Ivexterm® (Ivermectin 6 mg tablets) is an antiparasitic drug, which is commercialized in Mexico and Central America, and is currently under investigational studies for treating COVID-19 patients.
•Espaven® (Dimethicone tablets, drops, suspension) is a complete line of gastrointestinal treatments for diverse digestive indications such as: antiflatulence, dyspepsia, absolute or relative enzyme deficiency, steatorrhea, irritable colon syndrome, pancreatic insufficiency and poor fat digestion. Espaven® is commercialized primarily in Mexico and South America.
•Bedoyecta® is a multivitamin that is used to obtain sufficient energy and have optimal performance during the day, by avoiding deficiencies of the nutrients that the body requires to function properly.
Ortho Dermatologics
The Ortho Dermatologics segment consists of: (i) sales in the U.S. of Ortho Dermatologics (dermatological products) and (ii) global sales of Solta aesthetic medical devices.
The Ortho Dermatologics business is our medical dermatology business dedicated to the treatment of a range of therapeutic areas, including aesthetics, psoriasis, actinic keratosis, acne, atopic dermatitis, onychomycosis and other dermatoses. As part of our business strategy for the Ortho Dermatologics segment, we continue to look for investments to build out our product portfolios, where we see the greatest opportunities, with a focus on topical gel and lotion products over injectable biologics. We continue to support the use of injectable biologics; however, we believe some patients prefer topical products as an alternative to injectable biologics. Further, as topical products can, in many cases, defer the use of injectable biologics that often come with associated risk/benefit profiles, a topical product is usually readily adopted by payors, is less expensive and can be more cost-effective than injectable biologics. Therefore, we believe topical products represent alternative treatments for physicians, payors and patients, and as the preferred choice of treatment, have the potential to drive greater volumes, generate better margins and potentially be a key contributing factor of our Ortho Dermatologics business.
Currently our principal products in the U.S. Ortho Dermatologics business include:
•Jublia® (efinaconazole 10% topical solution) is a topical azole approved for the treatment of onychomycosis of the toenails (toenail fungus).
•Arazlo® (tazarotene) Lotion, 0.045% is an acne product containing lower concentration of tazarotene in a lotion form to help reduce irritation while maintaining efficacy and was launched in the U.S. in June 2020.
•Duobrii® was launched in the U.S. in June 2019 and is the first and only topical lotion that contains a unique combination of halobetasol propionate and tazarotene for the treatment of moderate-to-severe plaque psoriasis in adults.
•Siliq® was launched in the U.S. in 2017 and is an IL-17 receptor blocker monoclonal antibody for patients with moderate-to-severe plaque psoriasis.
| |
• | Elidel® is used to treat certain skin conditions such as eczema (atopic dermatitis) which is an allergic-type condition that causes red, irritated, and itchy skin.
|
| |
• | An Acne franchise, which includes Solodyn®, a prescription oral antibiotic approved to treat only•Targretin® (bexarotene) capsules and gel are prescription medicines used to treat the skin problems arising from the disease cutaneous T-cell lymphoma, or CTCL, in patients who have not responded well to other treatments. •Bryhali® was launched in the red, pus-filled pimples of moderate to severe acne in patients 12 years of age and older, as well as Retin-A®, Ziana®, Clindagel®, Acanya®, Atralin®, and Onexton® Gel, a fixed combination 1.2% clindamycin phosphate and 3.75% benzoyl peroxide medication for the once-daily treatment of comedonal (non-inflammatory) and inflammatory acne in patients 12 years of age and older. |
Dentistry
| |
• | Arestin® (minocycline hydrochloride) is a subgingival sustained-release antibiotic. Arestin® is indicated as an adjunct to scaling and root planing ("SRP") procedures for reduction of pocket depth in patients with adult periodontitis. Arestin® may be used as part of a periodontal maintenance program, which includes good oral hygiene and SRP.
|
U.S. in November 2018 and is a novel product that contains a unique, lower concentration of halobetasol propionate for the treatment of moderate-to-severe psoriasis.
•An acne franchise, which includes Altreno® (tretinoin 0.05%), launched in the U.S. in October 2018 and is a lotion approved for the topical treatment of acne vulgaris in patients 9 years of age and older, and Solodyn®, a prescription oral antibiotic approved to treat only the red, pus-filled pimples of moderate to severe acne in patients 12 years of age and older, as well as Retin-A®, Clindagel® and Onexton® Gel, a fixed combination 1.2% clindamycin phosphate and 3.75% benzoyl peroxide medication for the once-daily treatment of comedonal (non-inflammatory) and inflammatory acne in patients 12 years of age and older.
Our Solta business is dedicated to the development of innovative treatment technologies that provide proven and effective aesthetic medical and therapeutic benefits to consumers.
On August 3, 2021, we announced our plan to conduct an IPO of our aesthetic medical device business, Solta Medical. Since making that announcement, we have been executing on this plan and, at the end of 2021, had substantially completed the internal objectives to facilitate the IPO of Solta Medical. As of the date of this filing, we continue to monitor market conditions and aim to launch the Solta IPO when market conditions are favorable and subject to receipt of regulatory, stock exchange and other approvals. Nothing in this Form 10-K shall constitute an offer to sell or the solicitation of an offer to buy any securities.
Global Solta revenues were $308 million, $253 million and $194 million for 2021, 2020 and 2019, respectively. The increase in revenue is primarily attributable to Next Generation Thermage FLX®, a fourth-generation non-invasive treatment option using a radiofrequency platform designed to optimize key functional characteristics and improve patient outcomes. Next Generation Thermage FLX® was launched in the U.S., Hong Kong, Japan, Korea, Chinese Taipei, Philippines, Singapore, Indonesia, Malaysia, China, Thailand, Vietnam, Australia and various parts of Europe as part of our Solta aesthetic medical devices portfolio. These launches have been successful as Next Generation Thermage FLX® revenues for 2021, 2020 and 2019 were $154 million, $142 million and $77 million, respectively. We plan to continue to expand into other regions, paced by country-specific regulatory registrations.
Currently our principal products in the Solta business include:
•Thermage® is a non-invasive radiofrequency treatment that can smooth, tighten and contour skin for an overall younger-looking appearance.
•Fraxel® is a treatment that improves tone, texture and radiance for aging, sun damaged or scarred skin.
•Clear + Brilliant® is a laser treatment that can help prevent the visible signs of aging and address the overall effects time and the environment can have on skin.
•VASERlipo® for minimally-invasive aesthetic body contouring that yields dramatic results with less pain and downtime of traditional liposuction.
Diversified Products
The U.S. Diversified Products segment consists of sales in the U.S. of: (i) pharmaceutical products OTC products and medical device products in the areas of neurology and certain other therapeutic classes, including aesthetics which includes(ii) generic products and (iii) dentistry products. The Company utilizes the Solta businessDiversified Products segment to extend the long-term cash flows from a number of assets that are expected to decline over time due to the loss of exclusivity, by launching and the Obagi Medical Products, Inc. ("Obagi") business (the saleselling authorized generic versions of the Obagi business was completed on November 9, 2017) and (ii) AG products.certain branded assets. Our principal products in this segment include:
Pharmaceutical
| |
• | Wellbutrin XL® is an extended-release•Wellbutrin XL® is an extended release formulation of bupropion indicated for the treatment of major depressive disorder in adults. |
| |
• | Xenazine® is indicated for the treatment of chorea associated with Huntington’s disease. In the U.S., Xenazine® is distributed for us by Lundbeck LLC under an exclusive marketing, distribution and supply agreement.
|
| |
• | Isuprel® (Isoproterenol hydrochloride) injections is indicated for: (i) mild or transient episodes of heart block that do not require electric shock or pacemaker therapy, (ii) for serious episodes of heart block and Adams-Stokes attacks (except when caused by ventricular tachycardia or fibrillation), (iii) for use in cardiac arrest until electric shock or pacemaker therapy, the treatments of choice, is available and (iv) for bronchospasm occurring during anesthesia.
|
| |
• | Cuprimine® and Syprine® which are used to treat Wilson's disease (a condition in which high levels of copper in the body cause damage to the liver, brain, and other organs). Cuprimine® is also used to treat cystinuria (a condition which leads to cystine stones in the kidneys) and is used in the treatment of patients with severe, active rheumatoid arthritis who have failed to respond to an adequate trial of conventional therapy.
|
| |
• | Nitropress® (sodium nitroprusside) is indicated for the immediate reduction of blood pressure of patients in hypertensive crises.
|
Generics
| |
• | Zegerid® is used to treat certain stomach and esophagus problems (such as acid reflux and ulcers) by decreasing the amount of acid your stomach makes. It belongs to a class of drugs known as proton pump inhibitors.
|
Tobramycin and Dexamethasone ophthalmic suspension are indicated for steroid responsive inflammatory ocular conditions where superficial bacterial ocular infectionthe treatment of major depressive disorder in adults.
•Aplenzin® (bupropion hydrobromide extended release tablets) is indicated for the treatment of major depressive disorder, and for the prevention of seasonal major depressive episodes in patients with a diagnosis of seasonal affective disorder.
•Cuprimine® is a treatment for Wilson's disease (a condition in which high levels of copper in the body cause damage to the liver, brain, and other organs), cystinuria (a condition which leads to cystine stones in the kidneys) and for patients with severe rheumatoid arthritis who have failed to respond to an adequate trial of conventional therapy.
•Mysoline® (Primidone) is an anticonvulsant drug used to control seizures.
•Ativan® (lorazepam) is indicated for the management of anxiety disorders or for the short-term relief of the symptoms of anxiety or anxiety associated with depressive symptoms.
•Xenazine® is indicated for the treatment of chorea associated with Huntington’s disease. In the U.S., Xenazine® is distributed for us by Lundbeck LLC under an exclusive marketing, distribution and supply agreement.
•Syprine® is a risk of bacterial ocular infection exists.
Latanoprost is one of a group of medicinestreatment for Wilson's disease in patients who cannot take the medication known as prostaglandinspenicillamine.
•Librax® (chlordiazepoxide and clidinium) is indicated to treatcontrol emotional and somatic factors in gastrointestinal disorders. Librax® may also be used as adjunctive therapy in the treatment of peptic ulcer and in the treatment of the irritable bowel syndrome (irritable colon, spastic colon, mucous colitis) and acute enterocolitis.
Generics
•Diastat® authorized generic (“AG”) (diazepam rectal gel) is a typegel formulation of glaucoma called open angle glaucomadiazepam intended for rectal administration for certain patients with epilepsy who are already taking antiepileptic medications, and also ocular hypertension.who require occasional use of diazepam to control bouts of increased seizure activity.
Other Revenues •Uceris® AG(budesonide) extended release tablets are a prescription corticosteroid medicine used to help get mild to moderate ulcerative colitis under control (induce remission).
We generate alliance revenue•Elidel® AG (pimecrolimus) is a second-line therapy for short term and service revenueintermittent long-term therapy of mild to moderate atopic dermatitis.
Dentistry
•Arestin® (minocycline hydrochloride) is a subgingival sustained-release antibiotic. Arestin® is indicated as an adjunct to scaling and root planing ("SRP") procedures for reduction of pocket depth in patients with adult periodontitis. Arestin® may be used as part of a periodontal maintenance program, which includes good oral hygiene and SRP.
•NeutraSal® is indicated for dryness of the mouth (hyposalivation, xerostomia) and dryness of the oral mucosa due to drugs that suppress salivary secretion.
•OSSIX® is a line of cross-linked collagen regenerative products that provide biocompatibility and bio-durability to perform a diverse range of guided bone and tissue regeneration procedures.
•OraFitTM is a custom clear aligner treatment to permanently correct crooked and misaligned teeth using high-performance materials in a three-layer design to provide a balance of strength and comfort, while staying clear and crack-resistant, which we launched in the U.S. in February 2022.
In connection with the planned separation of its Solta business into an independent publicly traded entity from the licensingremainder of productsBausch Health Companies Inc., on February 23, 2022, the Company announced its plan to change its segment structure in a manner which is consistent with the organizational structure of the two separate entities as proposed by the Solta IPO during the first quarter of 2022. The new segment structure will not impact the Company’s reporting units but will realign the two reporting units of the Ortho Dermatologics segment whereby its medical dermatology reporting unit (Ortho Dermatologics) will now be managed by the CODM as part of the Diversified Products segment and from contract services mainly in the areasSolta reporting unit will be managed by the CODM as its own operating and reportable segment. Accordingly, the Company expects to begin reporting under the following reporting segments on a retrospective basis beginning with its first quarter of dermatology2022 as follows: Bausch + Lomb, Salix, International Rx, Solta and topical medication. Contract service revenue is derived primarily from contract manufacturing for third parties.Diversified Products.
Research and Development
Our R&D organization focuses on the development of products through clinical trials. Currently, we have approximately 100200 R&D projects in the pipeline and we launched and/or relaunched over 120 products globally during 2017. our pipeline. As of December 31, 2017,2021, approximately 1,0001,300 dedicated R&D and quality assurance employees in 2325 R&D facilities were involved in our R&D efforts.
Our R&D expenses for 2017, 20162021, 2020 and 2015,2019, were $361$465 million, $421$452 million and $334$471 million, respectively. In 2016, we increased our R&D expenditures as we transitioned away from the Company's previous strategy of growth by acquisition and moved toward our current strategy of organic growth supported by investment in R&D.
Although R&D expense in 2017 was lower when compared to 2016 by $60 million, R&D expenseexpenses as a percentage of revenue waswere approximately 4%6% in 20172021 and 2016. The decrease2020, as compared to approximately 5% in dollars spent in 2017 is attributable to year over year phasing, as we completed the R&D investment in SiliqTM and other recently launched products requiring investment in 2016, removed projects related to businesses divested in 2017 and2019. We have rebalanced our portfolio to better align with our long-term plans and focus on our Bausch + Lomb, GI and dermatologycore businesses.
Our investment in R&D reflects our commitment to drive organic growth through internal development of new products, a pillar of our new strategy. In 2018, we anticipate R&D expenseWe further supplement these efforts by continually seeking out other opportunities, such as a percentage of revenue to exceed 4%, which demonstrates our consistent commitment to our organic growth supported by investment in R&D strategy. In the U.S. alone, we have 71 projects focused on our core businesses in our pipelineco-promotions, licensing agreements and anticipate submitting over 60% of those projects for FDA approval in 2018 and 2019.
For more information regarding our products in clinical development, seestrategic acquisitions. See Item 77. “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Overview — Our Transformation”Focus on Core Businesses” of this Form 10-K.
Trademarks, Patents, Exclusivity and Proprietary RightsKnow-How
We rely on a combination of contractual provisions, confidentiality policies and procedures and patent, trademark, copyright and trade secrecy laws to protect the proprietary aspects of our technology and business. Our policy is to vigorously protect, enforce and defend our rights to our intellectual property and proprietary rights, as appropriate. See Item 1A1A. “Risk Factors” of this Form 10-K for additional information on the risks associated with our intellectual property and proprietary rights.
Trademarks
We believe that trademark protection is an important part of establishing product and brand recognition. We own or license a number of registered trademarks and trademark applications in the U.S., Canada and in various other countries throughout the world. U.S. federal registrations for trademarks remain in force for 10 years and may be renewed every 10 years after issuance, provided the mark is still being used in commerce. Trademark registrations in Canada issued on or before June 17, 2019 remain in force for 15 years and may be renewed for 10-year terms, provided that, as in the case of U.S. federal trademark registrations, the mark is still being used in commerce. Trademark registrations in Canada issued after June 17, 2019 remain in force for 10 years and may be renewed every 1510 years after issuance, provided that, as in the case of U.S. federal trademark registrations, the mark is still being used in commerce. Other countries generally have similar but varying terms and renewal policies with respect to trademarks registered in those countries.
Data and Patent Exclusivity
For certain of our products, we rely on a combination of regulatory and patent rights to protect the value of our investment in the development of these products.
A patent is the grant of a property right which allows its holder to exclude others from, among other things, selling the subject invention in, or importing such invention into, the jurisdiction that granted the patent. In the U.S., Canada and the European Union (“EU”), generally patents expire 20 years from the date of application. We have obtained, acquired or in-licensed a number of patents and patent applications covering key aspects of certain of our principal products. In the aggregate, our patents are of material importance to our business taken as a whole. However, we do not consider any single patent material to our business as a whole.
In the U.S., the Hatch-Waxman Act provides non-patent regulatory exclusivity for five years from the date of the first FDA approval of a new drug compound in a New Drug Application (“NDA”). The FDA, with one exception, is prohibited during those five years from accepting for filing a generic, or an Abbreviated New Drug Application (“ANDA”), that references the NDA. In reference to the foregoing exception, if a patent is indexed in the FDA Orange Book for the new drug compound, a generic may file an ANDA four years from the NDA approval date if it also files a Paragraph IV Certification with the FDA challenging the patent. Protection under the Hatch-Waxman Act will not prevent the filing or approval of another full NDA. However, the NDA applicant would be required to conduct its own pre-clinical and adequate and well-controlled clinical trials to independently demonstrate safety and effectiveness.
A similar data exclusivity scheme exists in the EU, whereby only the pioneer drug company can use data obtained at the pioneer’s expense for up to eight years from the date of the first approval of a drug by the European Medicines Agency (“EMA”) and no generic drug can be marketed for ten years from the approval of the innovator product. Under both the U.S. and the EU data exclusivity programs, products without patent protection can be marketed by others so long as they repeat the clinical trials necessary to show safety and efficacy. Canada employs a similar data exclusivity regulatory regime for innovative drugs.
In the U.S., the Biologics Price Competition and Innovation Act ("BPCIA") allows companies to seek FDA approval to manufacture and sell biosimilar or interchangeable versions of brand name biological products. Due to the size and complexity of biological products, as compared to small molecule drugs, a biosimilar must be “highly similar” to the reference product with “no clinically meaningful differences” in safety, purity and potency between the two. The BPCIA provides reference product sponsors with 12 years (potential(with potential for 6six additional months of pediatric exclusivity) of market exclusivity, but unlike the Hatch-Waxman Act which covers small molecules, it does not require reference product sponsors to list patents in an Orange Book equivalent and does not include an automatic 30-month stay of FDA approval upon the timely filing of a lawsuit. The BPCIA, however, does provide pre-litigation procedures for the parties to follow, including identification of relevant patents and each party’s basis for infringement and invalidity. A biosimilar patent application cannot be filed until four years after the reference product is first licensed and a biosimilar cannot be launched, at the earliest (assumes no patent litigation or an adverse decision on all patents), until the expiration of the twelve years of data exclusivity from the approval of the reference product.
Under the Orphan Drug Act, the FDA may designate a product as an orphan drug if it is a drug intended to treat a disease or condition that affects populations of fewer than 200,000 individuals in the U.S. or a disease whose incidence rates number more than 200,000 where the sponsor establishes that it does not realistically anticipate that its product sales will be sufficient to recover its costs. The sponsor that obtains the first marketing approval for a designated orphan drug for a given rare disease is eligible to receive marketing exclusivity for use of that drug for the orphan indication for a period of seven years.
In Canada, the Patented Medicines (Notice of Compliance) Regulations (“PM(NOC) Regulations”) create a regime analogous to the U.S. Hatch-Waxman Act, and link the regulatory approval process for generic and biosimilar drugs to the adjudication of innovator patent rights. To be eligible for protection under the PM(NOC) Regulations, patents must first be listed on the Patent Register in connection with an innovator’s drug submission to Health Canada. A generic or biosimilar manufacturer must then provide notice to the innovator of its plans to market a drug that it compared to the innovator’s patented drug in the Health Canada approval process. Within 45 days of receiving such a notice of allegation, an innovator drug company may commence patent infringement proceedings against the generic or biosimilar manufacturer. The commencement of an action by the innovator under the PM(NOC) Regulations may stay Health Canada’s regulatory approval of the generic or biosimilar drug for a period of 24 months.
Canada also employs a data exclusivity regime for innovative drugs that provides an eight-year period of data protection from the date of market approval by Health Canada. An additional six months of data exclusivity is provided for drugs studied in clinical trials relating to use in pediatric populations. Drug submissions seeking approval based on a comparison to an innovative drug cannot be filed during the first six years of the data exclusivity period. Generic or biosimilar drug submissions remain on hold until expiry of the innovator’s data protection term, unless the innovative product is a patented drug subject to further protection under the PM(NOC) Regulations. Canada has no distinct drug submission process for biosimilar or orphan drug products.
Proprietary Know-How
We also rely upon unpatented proprietary know-how, trade secrets and technological innovation in the development and manufacture of many of our principal products. We protect our proprietary rights through a variety of methods, including confidentiality and non-disclosure agreements and proprietary information agreements with vendors, employees, consultants and others who may have access to proprietary information.
Government Regulations
Government authorities in the U.S., at the federal, state and local level, in Canada, in the EU and in all other countries extensively regulate, among other things, the research, development, testing, approval, manufacturing, labeling, post-approval monitoring and reporting, packaging, advertising and promotion, storage, distribution, marketing and export and import of pharmaceutical products and medical devices. As such, our products and product candidates are subject to extensive regulation both before and after approval. The process of obtaining regulatory approvals and the subsequent compliance with applicable federal, state, local and foreign statutes and regulations require the expenditure of substantial time and financial resources. Failure to comply with these regulations could result in, among other things, warning letters, civil penalties, delays in approving or refusal to approve a product candidate, product recall, product seizure, interruption of production, operating restrictions, suspension or withdrawal of product approval, injunctions or criminal prosecution.
Prior to human use, FDA approval (drugs (in the form of an NDA or ANDA for generic equivalents), biologics (in the form of a Biologics License Application (“BLA”)) and some medical devices) or marketing clearance (other devices) must be obtained in the U.S., approval by Health Canada must be obtained in Canada, EMA approval (drugs) or a CE Marking (devices) and/or registration under the European Commission's Medical Device Regulation ("MDR") 2017/745, must be obtained for countries that are part of the EU and approval must be obtained from comparable agencies in other countries prior to manufacturing or marketing new pharmaceutical products or medical devices. Generally, preclinical studies and clinical trials of the products must first be conducted and the results submitted to the applicable regulatory agency (such as the FDA) for approval.
Regulation by other federal agencies, such as the Drug Enforcement Administration, (“DEA”), and state and local authorities in the U.S., and by comparable agencies in certain foreign countries, is also required. In the U.S., the Federal Trade Commission (the “FTC”), the FDA and state and local authorities regulate the advertising of medical devices, prescription drugs, OTC drugs and cosmetics. The Federal Food, Drug and Cosmetic Act, as amended and the regulations promulgated thereunder, and other federal and state statutes and regulations, govern, among other things, the testing, manufacture, safety, effectiveness, labeling, storage, record keeping, approval, sale, distribution, advertising and promotion of our products. The FDA requires a Boxed Warning (sometimes referred to as a “Black Box” Warning) for products that have shown a significant risk of severe or life-threatening adverse events and similar warnings are also required to be displayed on the product in certain other jurisdictions.
In addition, with respect to medical devices, in May 2017, the European Commission published the MDR, which replaced the Medical Device Directive (MDD). Pursuant to the terms of the new regulations, in order to continue to market medical device products in the EU, such products must achieve compliance with these new regulations and be re-registered in the EU within a specified transition period, which, for a portion of products, ended as early as May 26, 2021. While EU law is applicable in Northern Ireland, the UK Medical Devices Regulations 2002/68 also need to be complied with in Great Britain. Medical device manufacturers who have CE marked devices will be able to continue to place them on the market in the whole of the United Kingdom (the “UK”) until July 1, 2023 without a change in labeling. After that, devices destined for Great Britain will be required to follow the UK regulatory regime and to be labeled with the UKCA mark. Northern Ireland will, however, continue to accept CE marked devices. There are some extra hurdles for manufacturers who are based outside the UK, such as the requirement to appoint a UK Responsible Person (“UKRP”) to take on certain regulatory responsibilities with respect to the Medicines and Healthcare products Regulatory Agency (“MHRA”) and users or customers in the UK. To enable devices to be placed on the market in the UK after January 1, 2021 (even for CE marked devices), a UK manufacturer must register with the MHRA, as must a UKRP for an overseas manufacturer. Such registering entity will then register each of the devices for which they are responsible for placing on the market in the UK, whether in Great Britain or Northern Ireland. Until May 25, 2021, our products bearing a CE mark could be exported from the EEA to Switzerland. However, as of May 26, 2021, the EU no longer applies the Mutual Recognition Agreement between the EEA and Switzerland. Accordingly, legal manufacturers in Switzerland will be required to appoint a European Union authorized representative, and manufacturers outside of Switzerland will be required to appoint a Swiss authorized representative in compliance with the Medical Device Ordinance. As a consequence, we will be required to appoint an authorized representative in Switzerland in order to export our CE-marked medical devices to Switzerland beginning in January 2022 through August 2022, depending on the class of the device or system in question. Additionally, the name and address of the Swiss authorized representative must be placed on the packaging.
Manufacturers of pharmaceutical products and medical devices are required to comply with manufacturing regulations, including current good manufacturing practices and quality system management requirements, enforced by the FDA and Health
Canada, in the U.S. and Canada respectively, and similar regulations enforced by regulatory agencies in other countries and we face annual audits of our facilities and plants and those of our contract manufacturers by the FDA and such other regulatory agencies. In addition, we are subject to price control restrictions on our pharmaceutical products in many countries in which we operate.
We are also subject to extensive U.S. federal and state health care marketing and fraud and abuse regulations, such as the federal False Claims Act, federal and provincial marketing regulationregulations in Canada and similar regulations in foreign countries in which we may conduct our business. The federal False Claims Act imposes civil and criminal liability on individuals or entities who submit (or cause the submission of) false or fraudulent claims for payment to the government. The U.S. federal Anti-Kickback Statute prohibits persons or entities from knowingly and willfully soliciting, receiving, offering or providing remuneration, directly or indirectly, to induce either the referral of an individual, or the furnishing, recommending, or arranging for a good or service, for which payment may be made under a federal or state health care program such as the Medicare and Medicaid programs. This statute has been interpreted to apply to arrangements between pharmaceutical or medical device manufacturers, on the one hand, and prescribers, purchasers, formulary managers and other health care related professionals, on the other hand. Some state anti-kickback laws also prohibit such conduct where commercial insurance, rather than federal or state, programs are involved. Due to recent legislative changes, violationsViolations of the U.S. federal Anti-Kickback Statute also carry potential federal False Claims Act liability. In addition, in the U.S., Canada and Canada,various other countries, companies may not promote drugs or medical devices for “off-label” uses - that is, uses that are not described in the product’s labeling and that differ from those that were approved or cleared by the FDA, or Health Canada respectivelyor applicable regulatory agency in such other countries - and “off-label promotion” in the U.S. has also formed the predicate for False Claims Act liability resulting in significant financial settlements. These and other laws and regulations, rules and policies may significantly impact the manner in which we are permitted to market our products. If our operations are found to be in violation of any of these laws, regulations, rules or policies or any other law or governmental regulation, or if interpretations of the foregoing change, we may be subject to civil and criminal penalties, damages, fines, exclusion from the Medicare and Medicaid programs, and the curtailment or restructuring of our operations.operations or other sanctions, including consent orders or corporate integrity agreements.
In addition, the U.S. Department of Health and Human Services Office of Inspector General recommends, and increasingly states require pharmaceutical companies to have comprehensive compliance programs. Moreover, the Physician Payment Sunshine Act enacted in 2010 imposes reporting and disclosure requirements on device and drug manufacturers for any “transfer of value” made or distributed to prescribers and other health care providers. Failure to submit this required information may result in significant civil monetary penalties.
We mayare also besubject to the U.S. Foreign Corrupt Practices Act ("FCPA"), the Canadian Corruption of Foreign Public Officials Act and similar worldwide anti-bribery laws, which generally prohibit companies and their intermediaries from making improper payments to officials for the purpose of obtaining or retaining business. Violations of these laws could result in criminal or civil penalties or remedial measures.
We are also subject to various state, federal and international laws and regulations governing the collection, transmission, dissemination, use, privacy, confidentiality, security, retention, availability, integrity and security regulations,other processing of health-related and other sensitive and personal information, including, but not limited to, the Health Insurance Portability and Accountability Act of 1996, as amended by the Health Information Technology for Economic and Clinical Health Act of 2009 (collectively, "HIPAA"“HIPAA”). HIPAA mandates, among other things, the adoption of uniform standards for the electronic exchange of information in common health care transactions (e.g., health care claims information and plan eligibility, referral certification and authorization, claims status, plan enrollment, coordination of benefits and related information), as well as standards relating to the privacy and security of individually identifiable health information. These standards require the adoption of administrative, physical and technical safeguards to protect such information. In addition, manyMany states in which we operate have enacted comparable laws addressingthat protect the privacy and security of healthsensitive and personal information, some of which areincluding health-related information. Certain state laws may be more stringent or broader in scope, or offer greater individual rights, with respect to sensitive and personal information than HIPAA.federal, international or other state laws, and such laws may differ from each other, which may complicate compliance efforts. For example, the California Consumer Privacy Act of 2018 (the “CCPA”), which went into effect on January 1, 2020, imposes stringent data privacy and security requirements and obligations with respect to the personal information of California residents, including, among other things, new disclosures to California consumers and providing such consumers new data protection and privacy rights, including the ability to opt out of certain sales of personal information. The CCPA provides for civil penalties for violations, as well as a private right of action for certain data breaches that result in the loss of personal data that may increase the likelihood of, and risks associated with, data breach litigation. State laws are changing rapidly and there is discussion in Congress of a new federal data protection and privacy law to which we may be subject. For instance, the California Privacy Rights Act (“CPRA”) was passed in November 2020. When it takes effect in January 2023, it will maintain the core framework of the CCPA, while also making a number of substantive changes.
Additionally, some statutory requirements, both in the U.S. and abroad, include obligations for companies to notify individuals of security breaches involving particular personal information, which could result from breaches experienced by us or our service providers. For example, laws in all 50 U.S. states require businesses to provide notice to customers whose
personal data has been disclosed as a result of a data breach. The laws are not consistent, and compliance in the event of a widespread data breach is difficult and may be costly. Moreover, states have been frequently amending existing laws, requiring attention to changing regulatory requirements.
Internationally, laws and regulations in many jurisdictions apply broadly to the collection, transmission, dissemination, use, privacy, confidentiality, security, retention, availability, integrity and other processing of health-related and other sensitive and personal information. For example, in the European Economic Area (the “EEA”) and, for the duration of the transition period (as defined below), the United Kingdom, the collection and use of personal data, including clinical trial data, is governed by the provisions of the General Data Protection Regulation (the “GDPR”). The GDPR became effective on May 25, 2018, repealing its predecessor directive and increasing responsibility and liability of companies in relation to the processing of personal data of EU data subjects. The GDPR, together with national legislation, regulations and guidelines of the EU member states and the United Kingdom governing the processing of personal data, impose strict obligations and restrictions on the ability to collect, analyze, store, transfer and otherwise process personal data, including health data from clinical trials and adverse event reporting. In particular, the GDPR includes obligations and restrictions concerning the consent and rights of the individuals to whom the personal data relates, the transfer of personal data out of the EEA or the United Kingdom, security breach notifications and the security and confidentiality of personal data. The GDPR authorizes fines for certain violations of up to 4% of global annual revenue or €20 million, whichever is greater. European data protection authorities may interpret the GDPR and national laws differently and impose additional requirements, which contributes to the complexity of processing personal data in or from the EEA or United Kingdom. Guidance on implementation and compliance practices is often updated or otherwise revised. We are also subject to Canada's federal Personal Information Protection and Electronic Documents Act and substantially similar equivalents at the provincial level with respect to the collection, use and disclosure of personal information in Canada. Such federal and provincial legislation impose data privacy and security obligations on our processing of personal information of Canadian residents. The federal and Alberta legislation include mandatory data breach notification requirements. Canada’s Anti-Spam Legislation (“CASL”) also applies to the extent that we send commercial electronic messages from Canada or to electronic addresses in Canada. CASL contains prescriptive consent, form, content and unsubscribe mechanism requirements. Penalties for non-compliance with CASL are up to CAD 10 million per violation. These laws and regulations may be interpreted and applied differently over time and from jurisdiction to jurisdiction, and it is possible they will be interpreted and applied in ways that will materially and adversely affect our business. The regulatory framework for data privacy, data security and data transfers worldwide is rapidly evolving and is likely to remain uncertain for the foreseeable future. Complying with all of these laws and regulations involves costs to our business, and failure to comply with these laws and regulations can result in the imposition of significant civil and criminal penalties.penalties, as well as litigation.
Successful commercialization of our products may depend, in part, on the availability of governmental and third partythird-party payor reimbursement for the cost of our products. Third partyThird-party payors may include government health administration authorities, private health insurers and other organizations. In the U.S., the E.U. and other significant or potentially significant markets for our products and product candidates, government authorities and third partythird-party payors are increasingly attempting to limit or regulate the price of medical products and services, which has resulted in lower average realized prices. In the U.S., these pressures can arise from rules and practices of managed care groups, judicial decisions and governmental laws and regulations related to Medicare, Medicaid and health care reform, pharmaceutical reimbursement policies and pricing in general. In particular, sales of our products may be subject to discounts from list price and rebate obligations, as well as formulary coverage decisions impacting or limiting the types of patients for whom coverage will be provided. Various U.S. health care and other laws regulate our interactions with government agencies, private insurance companies and other third partythird-party payors regarding coverage and reimbursement for our products. Failure to comply with these laws could subject us to civil, criminal and administrative sanctions. In countries outside the U.S., the success of our products may depend, at least in part, on obtaining and maintaining government reimbursement because, in many countries, patients are unlikely to use prescription drugs that are not reimbursed by their governments. In addition, negotiating prices with certain governmental authorities for newly developed products can delay commercialization. In Canada and many international markets, governments control the prices of prescription pharmaceuticals, including through the implementation of reference pricing, price cuts, rebates, revenue-related taxes, tenders and profit control, and they expect prices of prescription pharmaceuticals to decline over the life of the product or as volumes increase.
In the U.S. and certain foreign jurisdictions, there have been a number of legislative and regulatory proposals to change the health care system in ways that could impact our ability to sell our products profitably. The Patient Protection and Affordable Care Act (the “PPACA”), as amended by the Health Care Reform Act, may affect the operational results of companies in the pharmaceutical and medical device industries, including the Company and other health care related industries, by imposing on them additional costs. Effective January 1, 2010, the Health Care Reform Act increased the minimum Medicaid drug rebates for pharmaceutical companies, expanded the 340B drug discount program, and made changes to affect the Medicare Part D coverage gap, or “donut hole.” The law also revised the definition of “average manufacturer price” for reporting purposes, which may affect the amount of our Medicaid drug rebates to states. Beginning in 2011, the law imposed a significant annual fee on companies that manufacture or import branded prescription drug products. More recently, the
Bipartisan Budget Act of 2018 amended the Patient Protection and Affordable Care Act, effective January 1, 2019, to close the donut hole in most Medicare drug plans. In addition, in April 2018, the Centers for Medicare & Medicaid Services published a final rule that gives states greater flexibility in setting benchmarks for insurers in the individual and small group marketplaces, which may have the effect of relaxing the essential health benefits required under the Patient Protection and Affordable Care Act for plans sold through such marketplaces.
Although efforts at replacing the Health Care Reform Act have stalled in Congress, there could still be changes to this legislation in the near term. Additionally, policy efforts designed specifically to reduce patient out-of-pocket costs for medicines could result in new mandatory rebates and discounts or other pricing restrictions. Legislative efforts relating to drug pricing, the cost of prescription drugs under Medicare, the relationship between pricing and manufacturer patient programs, and government program reimbursement methodologies for drugs have been proposed and considered at the U.S. federal and state level. At the federal level, the Trump Administration’s budget proposal for fiscal year 2019 contained further drug price control measures that could be enacted in future legislation, including, for example, measures to permit Medicare Part D plans to negotiate the price of certain drugs under Medicare Part B, to allow some states to negotiate drug prices under Medicaid and to eliminate cost sharing for generic drugs for low-income patients. While any proposed measures will require authorization through additional legislation to become effective, Congress and the Biden Administration have each indicated an intent to continue to seek new legislative or administrative measures to control drug costs. At the state level, legislatures have increasingly passed legislation and implemented regulations designed to control pharmaceutical product pricing, including price or patient reimbursement constraints, discounts, restrictions on certain product access and marketing cost disclosure and transparency measures, and, in some cases, designed to encourage importation from other countries and bulk purchasing. We also anticipate that Congress, state legislatures, and third-party payors may continue to review and assess alternative health care delivery and payment systems and may in the future propose and adopt legislation or policy changes or implementations effecting additional fundamental changes in the health care delivery system.
See Item 1A1A. “Risk Factors” of this Form 10-K for additional information on the risks associated with these regulations and related matters.
Environmental and Other Regulation
Our facilities and operations are subject to a broad range of federal, state and local environmental and occupational health and safety laws and regulations in both the U.S. and countries outside the U.S. (including Canada), including those governing the dischargesdischarge of substances into the air, water and land, the handling, treatment, storage and disposal of hazardous substances and wastes, wastewater and solid waste, the cleanup of contaminated properties and other environmental matters. Certain of our development and manufacturing activities involve the controlled use of hazardous substances. If we fail to comply with these environmental, health and safety laws and regulations, including failing to obtain any necessary permits, we could incur substantial civil or criminal fines or penalties or enforcement actions, including regulatory or judicial orders enjoining or curtailing our operations or requiring us to conduct or fund remedial or corrective measures, install pollution control equipment, reformulate or cease the marketing of our products or perform other actions. Under certain laws, we may be subject to joint and several liability for environmental investigations and cleanups, including at properties that we currently or previously owned or operated, or at sites at which waste we generated was disposed, even if the contamination was not caused by us or was legal at the time it occurred. We are also subject to extensive and evolving regulations regarding the manufacturing, processing, distribution, importing, exporting and labeling of our products and their raw materials. In the EU, the REACH regulations came into effect in 2007, with implementation rolling out over time. Registered chemicals then can be subject to further evaluation and potential restrictions. Since the promulgation of REACH, other countries have enacted or are in the process of implementing similar comprehensive chemical regulations. These laws and regulations may materially affect our operations by subjecting our products or raw materials to testing or reporting requirements or restrictions, moratoria, phase outs or other limitations on their sale or use. In particular, some of our products might be characterized as nanomaterials and then be subject to evolving, new nanomaterial regulations.
We believe we are in compliance in all material respects with applicable environmental and occupational health and safety laws and regulations. We are not aware of any pending environmental or occupational health and safety litigation or significant financial obligations arising from current or past environmental practicesliabilities that are likely to have a material adverse effect on our financial position. We cannot assure, however, that environmental liabilities relating to us or facilities owned, leased or operated by us will not develop in the future, and we cannot predict whether any such liabilities, if they were to develop, would require significant expenditures on our part. In addition, we are unable to predict what environmental or and occupational health and safety legislation or regulations may be adopted or enacted in the future. See Item 1A1A. “Risk Factors” of this Form 10-K for additional information.
Customers and CustomersMarketing
Our top four geographic markets by country, based on 2017 revenue, are:In 2021, the U.S. and Puerto Rico accounted for approximately 58% and China Canada and Japan, which represent 60%, 4%, 4% and 3%accounted for approximately 6% of our total revenue, respectively. No other country accounted for the year ended December 31, 2017, respectively.more than 5%. See Note 22, "SEGMENT INFORMATION" to our audited Consolidated Financial Statements for revenues by geographic area.
Customers that accounted for 10% or more of our total revenue for the years ended December 31, 2017, 20162021, 2020 and 20152019 are as follows:
|
| | | | | | |
| | | 2017 | | 2016 | | 2015 |
| McKesson Corporation | | 19% | | 21% | | 20% |
| AmerisourceBergen Corporation | | 15% | | 13% | | 14% |
| Cardinal Health, Inc. | | 13% | | 15% | | 12% |
No other customer generated over 10% of our total revenues.
| | | | | | | | | | | | | | | | | | | | |
| | 2021 | | 2020 | | 2019 |
| AmerisourceBergen Corporation | | 18% | | 17% | | 16% |
| McKesson Corporation | | 16% | | 17% | | 17% |
| Cardinal Health, Inc. | | 12% | | 13% | | 14% |
We currently promote our pharmaceutical products to physicians, hospitals, pharmacies and wholesalers through our own sales force and sell through wholesalers. In some markets, we additionally sell directly to physicians, hospitals and large drug store chains and we sell through distributors in countries where we do not have our own sales staff. As part of our marketing program for pharmaceuticals, we use direct to customer advertising, direct mailings, advertise in trade, social media and medical periodicals, exhibit products at medical conventions and sponsor medical education symposia.
Competition
Competitive Landscape for Products and Products in Development
The pharmaceutical and medical device industries are highly competitive. Our competitors include specialty and other large pharmaceutical companies, medical device companies, biotechnology companies, OTC companies and generic manufacturers, in the U.S., Canada, Europe, Asia, Latin America, Middle East, Africa and in other countries in which we market our products. The dermatology competitive landscape is highly fragmented, with a large number of mid-size and smaller companies competing in both the prescription sector and the OTC and cosmeceutical sectors. With respect to the GI market, generic entrants continue to capture significant share for treatment of many GI conditions. In the area of irritable bowel syndrome ("IBS") and opioid induced constipation ("OIC"), competitors have recently launched new competing products, which should increase the size of these markets and intensify competition. The market for Bausch + Lomb products is very competitive, both across product categories and geographies. In addition to larger diversified pharmaceutical and medical device companies, we face competition in the eye-health market from mid-size and smaller, regional and entrepreneurial companies with fewer products in niche areas or regions.
Our competitors are pursuing the development and/or acquisition of pharmaceuticals, medical devices and OTC products that target the same diseases and conditions that we are targeting in dermatology, GI, eye-health and other therapeutic areas. Academic and other research and development institutions may also develop products or technologies that compete with our products, which technologies and products may be acquired or licensed by our competitors. These competitors may have greater financial, R&D or marketing resources than we do. If competitors introduce new products, delivery systems or processes with therapeutic or cost advantages, our products can be subject to progressive price reductions or decreased volume of sales, or both. Most new products that we introduce must compete with other products already on the market or products that are later developed by competitors.
We sell a broad range of products, and competitive factors vary by product line and geographic area in which the products are sold. The principal methods of competition for our products include quality, efficacy, market acceptance, price and marketing and promotional efforts.
Generic Competition and Loss of Exclusivity
We face increased competition from manufacturers of generic pharmaceutical products when patents covering certain of our currently marketed products expire or are successfully challenged or when the regulatory exclusivity for our products expires or is otherwise lost. Generic versions are generally significantly less expensive than branded versions, and, where available, may be required to be utilized before or in preference to the branded version under third partythird-party reimbursement programs, or substituted by pharmacies. Accordingly, when a branded product loses its market exclusivity, it normally faces intense price competition from generic forms of the product. To successfully compete for business with managed care and pharmacy benefits management organizations, we must often demonstrate that our products offer not only medical benefits, but also cost advantages as compared with other forms of care.
For details regarding products that are facing generic competition, products that arecould potentially facingface generic competition, the corresponding potential revenue impact and infringement proceedings we initiated against potential generic
competition, see Item 77. “Management’s Discussion and Analysis of Financial Condition and Results of Operations — OverviewBusiness Trends — Our Transformation”Generic Competition and Loss of Exclusivity” of this Form 10-K. See Note 21,20, "LEGAL PROCEEDINGS" to our audited Consolidated Financial Statements for further details regarding certain infringement proceedings. See Item 1A1A. “Risk Factors” of this Form 10-K for additional information on our competition risks.
Manufacturing
We currently operate approximately 4036 manufacturing plants worldwide. Allsites worldwide and continue to make capital investments in these facilities as discussed in Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Overview — Focus on Core Businesses” of this Form 10-K.
In the normal course of business, our products, devices and facilities are the subject of ongoing oversight and review by regulatory and governmental agencies, including general, for cause and pre-approval inspections by the relevant competent authorities where we have business operations. Through the date of this filing, all of our global operations and facilities have the relevant operational good manufacturing facilities that require certification frompractices certificates and all Company products and operating sites are in good compliance standing with all relevant notified bodies and global health authorities. Further, all sites under FDA jurisdiction are rated as either No Action Indicated (where there was no Form 483 observation) or Voluntary Action Indicated (“VAI”) (where there was a Form 483 with one or more observations). In the case of VAI inspection outcomes, the FDA Health Canada or foreign agencieshas accepted our responses to the issues cited, which will be verified when the agency makes its next inspection of those specific facilities. A Form 483 is issued at the end of each inspection when FDA investigators have obtained such approval.observed any condition that in their judgment may constitute violations of current good manufacturing practices.
We also subcontract the manufacturing of certain of our products, including products manufactured under the rights acquired from other pharmaceutical companies. Products representing approximately 40%20% of our product sales for 20172021 are produced in total, or in part, by third partythird-party manufacturers under manufacturing arrangements.
In some cases, the principal raw materials, including active pharmaceutical ingredient,ingredients, used by us (or our third partythird-party manufacturers) for our various products are purchased in the open market or are otherwise available from several sources. However, some of the active pharmaceutical ingredients and other raw materials used in our products and some of the finished products themselves are currently only available from a single source; or others may in the future become available from only one source. For example, with respect to some of our largest or most significant products, the supply of the finished product for each of our Siliq™®, Duobrii®, Bryhali®, Lumify®, Trulance®, Vyzulta™®, SofLens®, Wellbutrin XL®, OccuviteOcuvite®, PreserVision®, Renu®, Isuprel®, Xenazine®, UcerisAplenzin® tablet,, Relistor® Oral and PureVision® products are only available from a single source and the supply of active pharmaceutical ingredient for each of our Siliq™®,IsuprelDuobrii®, XenazineBryhali®, RelistorTrulance® Oral, Vyzulta®,Xenazine®, Aplenzin®, and UcerisRelistor® tablet Oral products are also only available from a single source. Any disruption in the supply of any such single-sourced active pharmaceutical ingredient, other raw material or finished product or an increase in the cost of such materials or products could adversely impact our ability to manufacture or sell such products, the ability of our third partythird-party manufacturers to supply us with such products, or our profitability. We attempt to manage the risks associated with reliance on single sources of active pharmaceutical ingredient, other raw materials or finished products by carrying additional inventories or, where possible, developing second sources of supply. See Item 1A1A. “Risk Factors” of this Form 10-K for additional information on the risks associated with our manufacturing arrangements.
Our global supply team worked diligently to stay ahead of the challenges presented by the COVID-19 pandemic once it appeared in Asia. See Item 7. "Management's Discussion and Analysis — Impacts of COVID-19 Pandemic" for further information. Employees
Human Capital Resources
In order to achieve our vision of being a trusted health care partner, we strive to ensure our employees around the world feel proud to be a part of Bausch Health Companies Inc.
As of December 31, 2017,2021, we had approximately 20,700 employees. These19,600 employees (of which 19,100 were full-time employees), which included approximately 10,7009,900 in production, 7,5007,000 in sales and marketing, 1,5001,400 in general and administrative positions and 1,0001,300 in R&D. These employees are located around the world, with 7,380 in the United States and Canada, 6,820 in Europe, 2,420 in Asia-Pacific countries, 2,120 in Latin America, 640 in Russia and Commonwealth of Independent State countries and 220 in the Middle East and Africa.
Collective bargaining exists for some employees in a number ofseveral countries in which we do business. We consider our relations with our employees to be good and have not experienced any work stoppages, slowdowns or other serious labor problems that have materially impeded our business operations.
In the beginning of 2021, our voluntary turnover rate trended higher than in 2020, but in line with what most companies were experiencing in the industries and geographies in which we operate; the voluntary turnover rate has since leveled off and is closer to or at targeted rate. We have not experienced any significant disruption to date as a result of turnover.
Health, Safety and Wellness
Our employees' health, safety, and wellness are important to us. With the COVID-19 outbreak, a continued focus in 2021 was protecting the health and safety of our employees and their families. We continued to make available our remote work policies, which had been broadened in 2020 to enable our global employees to work from home wherever possible. In circumstances where remote work was not possible (such as at our manufacturing and distribution facilities), we continued to implement safety measures, which had been introduced in 2020 to help prevent the spread of COVID-19 in the workplace, such as mandatory face coverings, social distancing, hand hygiene, plexiglass barriers, limited face-to-face meetings and other procedures as prescribed by global public health organizations, such as the WHO and U.S. Centers for Disease Control and Prevention.
On an ongoing basis, we measure how well we are fostering the health and safety of our employees through our Days Away Rate ("DAR"), which is a standard used in our industry to capture the number of days that our employees are away from work as a result of a work-related injury or illness. For the year 2021, our DAR was 6 days per 100 employees. This was favorable when compared to the goal we established for DAR of less than 12 days per 100 employees and was favorable to our industry’s average DAR of 24 days per 100 employees.
We also recognize that physical, emotional and financial wellbeing are significant contributors to our employees success at work and home. We aim to support our employees in their everyday life by centering programs and activities around these three pillars of wellbeing. Across each of these pillars, we offer a range of resources to help our employees be healthy and feel successful in both their professional and personal lives, including through employee assistance programs.
Diversity and Inclusion
We are dedicated to fostering an inclusive work environment where everyone feels welcomed, supported and valued for their talents and contributions. Our Bausch Health Diversity, Equity & Inclusion ("DE&I") strategy centers on connecting our employees to our Company, each other, and our communities to cultivate a sense of trust, respect and belonging for all. We have a DE&I Council that is led by our Company's Executive Committee members sponsored by our Chief Human Resources Officer, General Counsel, and Chief Medical Officer/President R&D that provides oversight for our DE&I strategy and initiatives.
We strive to advance candid conversations among our employees about diversity and inclusion and expanding training and education on those issues. Specifically, we have provided all employees with educational tools and resources to understand how to talk about these topics at work and, in 2020, have introduced training aimed at helping employees become more aware of unconscious biases.
We are focused on continuing to expand our Employee Resource Groups ("ERGs"), providing opportunities for professional growth, development and informal networking. Our ERGs include the following: Asian Heritage, Black & African Heritage, LGBTQ+, Military, and the Women's Inclusive Network. In 2021, these ERGs have helped strengthen our focus on DE&I by promoting opportunities for professional growth, development, and informal networking, and providing forums to voice concerns, and multiple perspectives. Another essential pillar of our ERG program is to establish connections with charities whose missions align with those of our individual ERGs and give back to these communities, which we plan to continue in 2022 and beyond.
Talent Development
We are committed to the development of our employees and believe that our success coincides with our employees’ achievements of personal and professional goals.
Through our Employee Development Framework, we endeavor to support our employees’ interests to grow to their full potential, achieve career goals, and contribute to the success of our Company. We empower employees to explore roles that are of interest and gain insights into their strengths and development needs. We provide a variety of development programs to support our employees at every stage of their career and incorporate individual development plans that aim to help our employees reach their career goals.
We also have a robust, global succession planning process that allows us to define talent needs based on business strategy, identify talent and drive their development and growth, strengthen the pipeline for critical leadership positions, and optimize talent deployment across the business. As detailed in its charter, the Talent and Compensation Committee of the Board of Directors assists the Board with oversight of our Company’s talent management and succession planning process. The
Board of Directors reviews succession planning progress and specifically the plans for Executive Committee roles. To support this process, the Board interacts with leaders and managers throughout the organization during the year to get to know these employees and their work.
Total Rewards
Our Company’s total rewards philosophy is designed to attract, retain, motivate, and engage our employees. We provide comprehensive and market competitive compensation and benefit programs across our geographies, aligning these programs with the interests of our shareholders and balancing appropriate risk taking. Collectively, these programs comprise our Total Rewards package.
Our compensation program includes base pay, short-term incentives, and long-term incentives. We provide the opportunity for our employees to earn more when we deliver against objectives – both as a total company and individually. We also provide competitive benefit programs based on local practice in the countries where our employees work. Our programs include medical coverage, retirement benefits, paid time off, and life and other insurances. Based on local market practice in the geographies in which we operate, we also offer family planning benefits to our employees such as adoption and surrogacy assistance programs.
Corporate Social Responsibility
In 2017, we established The Bausch Foundation, which supports initiatives aimed at disease prevention, improving patient outcomes, and community support related to our core businesses. Additionally, it supports global relief efforts and those who need help in the communities in which we live and work.
We are committed to supporting patients who have lost employment health benefits due to the COVID-19 pandemic, and because it is essential that our patients continue their prescribed treatments, we are proud to offer certain of our prescription medicines through our Bausch Health Patient Assistance Program. In the face of the COVID-19 pandemic, some people have financial obstacles that keep them from obtaining and continuing their prescribed treatments. The purpose of the Bausch Health Patient Assistance Program is to provide eligible unemployed patients in the U.S., who meet stated qualifications and have lost their health insurance due to the COVID-19 pandemic, with certain of our prescription products where their financial circumstances or insurance status would otherwise interfere with their ability to access such products. If approved, patients receive their Bausch Health Companies Inc. prescription product(s) at no cost to them for up to one year, and may be able to reapply to the program annually if they continue to meet eligibility requirements and have a valid prescription.
See Item 7. “Management's Discussion and Analysis — Overview — Focus on Core Businesses — Improve Patient Access” for additional discussion regarding Company programs to address the affordability and availability of our products.
Product Liability Insurance
Since March 31, 2014, we have self-insured substantially all of our product liability risk for claims arising after that date. In the future, we will continue to re-evaluate our decision to self-insure and may purchase additional product liability insurance to cover product liability risk. See Item 1A1A. “Risk Factors” of this Form 10-K for additional information.
Seasonality of Business
Historically, revenues from our business tend to be weighted toward the second half of the year. Sales in the first quarter tend to be lower as patient co-pays and deductibles reset at the beginning of each year. Sales in the fourth quarter tend to be higher based on consumer and customer purchasing patterns associated with health care reimbursement programs. However, there are no assurances that these historical trends will continue in the future.
Geographic Areas
A significant portion of our revenues is generated from operations or otherwise earned outside the U.S. and Canada. All of our foreign operations are subject to risks inherent in conducting business abroad, including price and currency exchange controls, fluctuations in the relative values of currencies, political and economic instability and restrictive governmental actions including possible nationalization or expropriation. Changes in the relative values of currencies may materially affect our results of operations. For a discussion of these risks, see Item 1A1A. “Risk Factors” of this Form 10-K.
See Note 23,22, "SEGMENT INFORMATION" to our audited Consolidated Financial Statements for revenues and long-lived assets by geographic area.
In 2017, a significantA portion of our revenue and income was earned in IrelandCanada and Luxembourg,Ireland, which have low effective tax rates. See Item 1A1A. “Risk Factors” of this Form 10-K relating to tax rates.rates for more information.
Available Information
Our Internet address is www.valeant.comwww.bauschhealth.com. We post links on our website to the following filings as soon as reasonably practicable after they are electronically filed or furnished to the SEC: annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and any amendment to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended. All such filings are available through our website free of charge. The information on our Internet website is not incorporated by reference into this Form 10-K or our other securities filings and is not a part of such filings. The SEC also maintains an Internet website at www.sec.gov that contains reports, proxy and information statements, and other information regarding issuers, including us, that file electronically with the SEC.
We are also required to file reports and other information with the securities commissions in all provinces in Canada. You are invited to read and copy any reports, statements or other information, other than confidential filings, that we file with the provincial securities commissions. These filings are also electronically available from the Canadian System for Electronic Document Analysis and Retrieval (“SEDAR”) (http://www.sedar.com)at www.sedar.com, the Canadian equivalent of the SEC’s electronic document gathering and retrieval system.
Our filings may also be read and copied at the SEC’s Public Reference Room at 100 F Street, N.E., Room 1580, Washington, DC 20549. Information on the operation of the Public Reference Room may be obtained by calling the SEC at 1-800-SEC-0330. The SEC also maintains an Internet website at www.sec.gov that contains reports, proxy and information statements, and other information regarding issuers, including us, that file electronically with the SEC.
Item 1A. Risk Factors
Our business, financial condition, cash flows and results of operations are subject to various risks and uncertainties. You should carefully consider the risks and uncertainties described below, together with all of the other information in this Form 10-K, including those risks set forth under the heading entitled “Forward-Looking Statements” and in other documents that we file with the SEC and the CSA, before making any investment decision with respect to our common shares or debt securities. If any of the risks or uncertainties actually occur or develop, our business, financial condition, cash flows, results of operations and/or future growth prospects could change, and such change could be materially adverse. Under these circumstances, the market value of our common shares and/or debt securities could decline, and you could lose all or part of your investment in our common shares and/or debt securities.
Summary of Risk Factors
The following is a summary of the risk factors our business faces. The list below is not exhaustive, and investors should read this “Risk Factors” section in full. Some of the risks we face include:
•the effect of the COVID-19 pandemic on our business, financial condition, cash flows, and results of operations;
•the impact on our business from the separation of our eye-health business into an independent publicly traded entity, including the impact of a failure to maintain the tax-free treatment of such transaction, the continued reliance on Bausch + Lomb employees for certain transitional services, a failure to obtain replacement contracts, any actual or perceived conflict of interest of our directors and officers who also serve roles in Bausch + Lomb and the cross-indemnification obligations on us and Bausch + Lomb;
•the impact on our business from the proposed Solta IPO, including the continued reliance on any Solta employees for certain transitional services, a failure to obtain replacement contracts, any actual, potential or perceived conflict of interest of our directors and officers who also serve roles in Solta and the cross-indemnification obligations on us and Solta;
•the ongoing legal proceedings, investigations, and inquiries respecting certain of our historical distribution, marketing, pricing, disclosure and accounting practices;
•the impact of changes to our pricing practices, whether imposed, legislated or voluntary;
•the potential adverse impact of legal proceedings, litigation, and government investigations;
•our dependence on third parties to meet their contractual, legal, regulatory, and other obligations;
•the impact of product recalls and related product liability claims;
•our ability to comply with extensive regulation concerning marketing, promotional and business practices;
•our ability to comply with restrictive covenants in our debt agreements;
•our ability to generate cash in order to service our debt;
•the impact on our business of restrictions imposed by our significant indebtedness;
•the effect of interest rate changes, including the discontinuation of the London Interbank Offered Rate ("LIBOR");
•our ability to manage the transition of our key management positions;
•our ability to recruit and retain executives and key personnel;
•the potential increase of our effective tax rates, including as a result of proposed changes to applicable tax laws;
•our ability to compete with generic competitors in products that represent a significant amount of our revenue;
•our ability to obtain, maintain, enforce or defend the intellectual property rights required to conduct our business;
•the impact of potential intellectual property litigation;
•our ability to develop or acquire more effective or less costly pharmaceutical or OTC products or medical devices than our competitors;
•the effect of our commitment to the cessation of or limitation on pricing increases for certain of our products;
•the impact of divestitures of certain of our assets and business;
•the potential adverse effect of acquisitions of assets, products and businesses;
•our ability to maintain and provide appropriate training in our products to our health care providers;
•our ability to successfully commercialize our pipeline products;
•our ability to comply with ongoing regulatory review of our marketed drugs, including our dietary products;
•the impact on our business of interruptions in our manufacturing processes;
•our dependence on a limited number of sources for certain of our finished products and raw materials;
•the effect of changes in inventory levels or fluctuations in buying patterns by our large distributor and retail customers;
•our ability to achieve or maintain expected levels of market acceptance for our new products;
•our dependence on reimbursements from governmental and other third-party payors;
•the impact of a failure to be included in formularies developed by managed care organizations and third-party payors;
•the failure of our fulfillment arrangements with Walgreens and our dermatology cash-pay prescription program;
•the impact of catastrophic events that may disrupt our business;
•the illegal distribution and sale of counterfeit versions of our products;
•the reduction of profits due to imports from countries where our products are available at lower prices;
•the reduction of revenues in future fiscal periods due to our policies regarding returns, allowances, and chargebacks;
•the decline in sales volumes or prices of our products as the result of the concentration of sales to wholesalers;
•the decline in pricing and/or volume of our products in our distribution agreements with other companies;
•risks associated with the international scope of our operations;
•foreign currency exposure on the translation into U.S. dollars of the financial results of our international operations;
•the breakdown, interruption, breach or other compromise of our information technology systems;
•our ability to comply with applicable laws and regulations and prevail in any litigation related to noncompliance;
•the impact that reforms of the health care system may have on our ability to sell our products profitably;
•our ability to comply with environmental laws and regulations and environmental remediation obligations;
•the potential adverse effect of shareholder activism;
•the impact on our profitability from the potential impairment of goodwill and other intangible assets;
•our ability to effectively monitor and respond to expectations regarding environmental, social and governance matters;
•our potential obligations under our indemnity agreements and arrangements; and
•the fluctuation of our operating results and financial condition from quarter to quarter.
Risks Relating to COVID-19
The ongoing COVID-19 pandemic, the rapidly evolving reaction of governments, private sector participants and the public to that pandemic and/or the associated economic impact of the pandemic and the reactions to it, could adversely and materially impact our business, financial condition, cash flows and results of operations.
The ongoing COVID-19 pandemic, including the emergence of new variants such as Delta and Omicron, and the rapidly evolving reaction of governments, private sector participants and the public in an effort to contain the spread of COVID-19 (and
variants thereof) and/or address its impacts have intensified and have had significant direct and indirect effects on businesses and commerce generally, including disruption to supply chains, employee base and transactional activity, facilities closures and production suspensions, and significantly increased demand for certain goods and services, such as pandemic-related medical services and supplies, alongside decreased demand for others, such as retail, hospitality, travel and elective surgery.
As a result of the impact of COVID-19, we have experienced and may continue to experience delays in and postponement of our clinical trial programs, reduced demand for certain of our products due to the deferral of elective medical procedures and of doctor and dentist visits and restrictions on outpatient surgery and other medical procedures, and if such issues recur in the future, our results of operations may be adversely impacted as a result. In addition, certain of our facilities were temporarily closed in connection with the COVID-19 pandemic, and we have also experienced some disruptions to our supply chain as a result of challenges associated with the COVID-19 pandemic. Although we are not currently experiencing these effects, depending on future developments with respect to COVID-19, we may continue to experience those effects as a result of the pandemic, the emergence of new variants (such as Delta and Omicron), the reactions of governments, private sector participants and the public to the pandemic and the associated disruption to business and commerce generally.
For example, we have experienced and/or, in the future, may experience:
•further material closures or disruptions to our manufacturing sites (for example, we experienced closures at our Milan, Italy, Bothell, Washington U.S. sites and our two sites in China in 2020);
•lack of availability of active pharmaceutical ingredients ("API"), and intermediates, or other supply chain disruptions, including for some of our key products;
•continued alternative working arrangements, including personnel working remotely and additional physical distancing, cleaning or sterilization protocols at our production facilities, which could negatively impact our business should such arrangements remain for an extended period of time;
•interruption or delays in the operations of the FDA, the EMA and other regulatory authorities, which may impact review and approval timelines for our planned trials and launches;
•delays or difficulties in enrolling patients in our clinical trials;
•delays or difficulties in clinical site initiation, including difficulties in recruiting clinical site investigators and clinical site staff;
•diversion of health care resources away from the conduct of clinical trials, including the diversion of hospitals serving as our clinical trial sites and hospital staff supporting the conduct of our clinical trials;
•interruption or postponement of key clinical trial activities, such as clinical trial site data monitoring, due to limitations on travel imposed or recommended by national, federal, state or local governments, employers and others or interruption of clinical trial subject visits and study procedures, which may impact the integrity of subject data and clinical study endpoints;
•limitations on employee resources that would otherwise be focused on our business and operations, such as the conduct of our preclinical studies and clinical trials, including because of sickness of employees or their families or the desire of employees to avoid contact with large groups of people;
•delays in or postponements of our clinical trial programs as a result of “stay at home” orders affecting our research facilities or the closure of such research facilities, which may impact the timing, approval and launch of the affected clinical trial programs;
•recurrence of deferral of elective medical procedures and of doctor and dentist visits, and reduced usage of contact lens, which may reduce demand for certain of the Company’s products, including our contact lens products and certain branded pharmaceutical products in our eye-care, dermatology, GI and dentistry businesses;
•delays or difficulties in our and our business partners’ ability to access physicians, which may in turn impact our ability to train physicians to use our devices and provide needed services; and
•adverse effects on the regional economies in which we operate which could reduce demand for certain of the Company’s products.
The extent and duration of the pandemic, the reactions of governments, private sector participants and the public to that pandemic and the associated disruption to business and commerce generally, and the extent to which these may impact our business, financial condition, cash flows and results of operations in particular, will depend on future developments which are highly uncertain and many of which are outside our control and cannot be predicted with confidence. Such developments
include the ultimate geographic spread and duration of the pandemic, the availability and effectiveness of vaccines for COVID-19, vaccine hesitancy, the extent and duration of a resurgence of the COVID-19 virus and variant strains thereof, including the Delta and Omicron variants, new information which may emerge concerning the severity of COVID-19, the effectiveness and intensity of measures to contain COVID-19 and/or address its impacts, and the economic impact of the pandemic and the reactions to it. Such developments, among others, depending on their nature, duration and intensity, could have a significant adverse effect on our business, financial condition, cash flows and results of operations and could cause the market value of our common shares and/or debt securities to decline and may exacerbate other risk factors disclosed in this Item 1A. “Risk Factors.”
Developments such as those described above, among others, depending on their nature, duration and intensity, could have a significant adverse effect on the Company's business, financial condition, cash flows and results of operations.
Risks Relating to the B+L Separation and the Solta IPO
Our plan to separate our eye-health business into an independent publicly traded entity from the remainder of the Company is subject to various risks and uncertainties and may not be completed in accordance with the expected plans or anticipated timeline, or at all, and will involve significant time, expense, and distraction, which could disrupt or have a material adverse effect on our business, financial condition, cash flows and results of operations and could cause the market value of our common shares and/or debt securities to decline.
On August 6, 2020, we announced that we intend to separate our eye-health business into an independent publicly traded entity from the remainder of Bausch Health Companies Inc. The B+L Separation will establish a separate fully integrated eye-health company which will consist of our Bausch + Lomb Global Vision Care, Global Surgical, Global Consumer and Global Ophthalmology Rx businesses. It is anticipated that the B+L Separation will involve (i) an initial public offering of a portion of the shares of Bausch + Lomb and (ii) following the completion of the B+L IPO, the expiry of customary lockups related to the B+L IPO and achievement of targeted debt leverage ratios (and subject to receipt of regulatory, stock exchange and other approvals and market conditions), a distribution of all or a portion of our remaining equity interest in Bausch + Lomb to our shareholders (the “Distribution”). It is currently anticipated that the Distribution will take the form of a transfer of all or a portion of the remaining equity interest in Bausch + Lomb to our shareholders by way of a plan of arrangement under applicable corporate law (the “Arrangement”).
The anticipated B+L Separation is subject to regulatory approvals and certain conditions, including final approval by the Company’s Board of Directors, any shareholder vote requirements that may be applicable, compliance with (including completion of all necessary filings required by) U.S. and Canadian securities laws and stock exchange rules, receipt of any applicable opinions and/or rulings with respect to the Canadian federal income tax treatment of the Separation, determination of the pro forma capitalizations of the two separate companies, the existence of satisfactory market conditions, the receipt of and compliance with any necessary court orders relating to the B+L Separation and approvals of the NYSE and TSX. There can be no certainty, nor can we provide any assurance, that all of the required conditions to the B+L Separation will be satisfied or, if permissible, waived, or, if satisfied or waived, when they will be satisfied or waived. The failure to satisfy all of the required conditions, many of which are outside of our control, could delay the completion of the B+L Separation (including either or both of the B+L IPO and Distribution) for a significant period of time or prevent it from occurring at all or result it being restructured in a manner that may be more or less advantageous to the Company and its shareholders. In addition, we announced a refinancing of our existing Restated Credit Agreement in January 2022 which is intended to facilitate the B+L Separation by, among other things, permitting us to designate Bausch + Lomb as an “unrestricted” subsidiary under the New Restated Credit Agreement (as defined herein) covenants upon achievement of a 7.60:1.00 pro forma “Remainco Total Leverage Ratio.” There can be no assurance that the Credit Agreement Refinancing (as defined herein) will occur on the anticipated terms or at all. If we are unable to consummate the Credit Agreement Refinancing, we may be unable to complete the B+L Separation on the anticipated terms or timeline.
Unanticipated developments, including disruptions to business and commerce induced by the COVID-19 pandemic, changes in market conditions, possible delays in obtaining any necessary shareholder, stock exchange, regulatory or other approval or the failure to obtain any such approvals, possible delays in obtaining any required tax opinions or rulings or the failure to obtain any such tax opinions or rulings, negotiating challenges, the uncertainty of the financial markets, changes in the law, and other challenges in executing the B+L Separation, could delay or prevent the completion of the B+L Separation (including either or both of the B+L IPO and Distribution), result in changes to the anticipated structure of the B+L Separation, or cause the B+L Separation to occur on terms or conditions that are different or less favorable than expected. Any changes to the B+L Separation or delay in completing the B+L Separation could cause us not to realize some or all of the expected benefits, or realize them on a different timeline than expected. Further, our Board of Directors could decide, either because of a failure to satisfy conditions or because of market or other factors, to delay, abandon or alter the structure or terms of the B+L Separation. No assurance can be given as to whether and when the B+L Separation will occur, on what terms the B+L
Separation will occur or whether the B+L Separation will achieve the benefits we expect. As a result, there can be no assurance as to the timing of the completion of the B+L Separation or its structure or terms.
Even if the B+L Separation is completed, we may not be able to achieve the full strategic and financial benefits expected to result from the B+L Separation. The B+L Separation is expected to unlock value by creating an independent business and distinct investment identity with enhanced strategic and management focus that allows more efficient allocation of resources and capital. In addition, proceeds from the B+L IPO are expected to facilitate further reductions in the aggregate amount of our outstanding indebtedness. We may not achieve these and other anticipated benefits for a variety of reasons, including, among others: (i) Bausch + Lomb may prove to be less valuable on an independent basis than we anticipate, including because it is more susceptible to economic downturns and other adverse events than if it were still a part of the Company and because its business will be less diversified than the Company’s business prior to the B+L Separation and (ii) other actions required to separate the respective businesses could disrupt our operations.
Executing the B+L Separation has and will continue to require significant resources, time and attention from our senior management and employees, which could cause distractions and divert attention and resources away from other projects and the day-to-day operation of our business. We may also experience increased difficulties in attracting, retaining, and motivating management and employees during the pendency of the B+L Separation and following its completion. For more information on these and other related risks, see Item 1A. “Risk Factors—Employment-related Risks” of this Form 10-K. The B+L Separation, whether or not completed, may also have an adverse impact on our relationships with our customers, suppliers and other business counterparties. The price of our common shares could also fluctuate significantly in response to developments or market speculation related to the proposed B+L Separation. The B+L Separation, if completed, may also have the effect of exacerbating other risk factors disclosed in this Item 1A. “Risk Factors.”
We have already incurred expenses in connection with the B+L Separation, and expect that the process of completing the B+L Separation will be time-consuming and involve significant additional costs and expenses, which may not yield a discernible benefit if the B+L Separation is not completed on the timeline and terms currently anticipated or at all. In addition, if the B+L Separation is not completed or if it is delayed or restructured, we will still be required to pay certain costs and expenses incurred in connection therewith, such as legal, accounting, and other professional and advisory fees. Furthermore, the B+L Separation, if completed, is expected to result in dyssynergy costs, which may be greater than we anticipate and/or may be significant. In addition, we could be subject to legal proceedings or other claims challenging the B+L Separation, which could result in substantial costs and liability and also divert management's attention and resources, any of which could harm our business.
Any of the above factors could cause the B+L Separation (or the failure to consummate the B+L Separation) to have a material adverse effect on our business, financial condition, cash flows and results of operations and could cause the market value of our common shares and/or debt securities to decline.
If the Distribution proceeds pursuant to the Arrangement, to preserve the tax-free treatment of certain transactions related to the Distribution, we may not be able to engage in certain transactions. In such case, we could incur significant tax liabilities, or be liable to Bausch + Lomb, if certain transactions occur which result in these transactions or the Distribution being subject to tax. The application of certain requirements of the public company “butterfly reorganization” rules in Section 55 of the Canadian Tax Act depend on events that may not be within our control.
We currently expect that the Distribution will be effected pursuant to the public company “butterfly reorganization” rules in Section 55 of the Income Tax Act (Canada) (the “Canadian Tax Act”). If the Distribution is effected pursuant to the public company “butterfly reorganization” rules in Section 55 of the Tax Act as currently anticipated, we and Bausch + Lomb will recognize a taxable gain on the Distribution if (a) within three years of the Distribution, Bausch + Lomb engages in a subsequent spin-off or split-up transaction under Section 55 of the Canadian Tax Act or the Company engages in a split-up (but not spin-off) transaction under Section 55 of the Canadian Tax Act; (b) a “specified shareholder” as defined for purposes of the “butterfly reorganization” rules in Section 55 of the Canadian Tax Act disposes of our shares or shares of Bausch + Lomb, or property that derives 10% or more of its value from such shares and an unrelated person or partnership acquires such property or property substituted therefore as part of the “series of transactions” which includes the Distribution; (c) there is an acquisition of control of the Company or Bausch + Lomb that is part of the “series of transactions” that includes the Distribution; or (d) certain persons acquire shares in the capital of Bausch + Lomb (other than in specified permitted transactions) in contemplation of and as part of the “series of transactions” that includes, the Distribution. If any of the above events, certain of which are outside the control of the Company and Bausch + Lomb, were to occur and to cause the Distribution to be taxable to us and/or to Bausch + Lomb, then we or Bausch + Lomb, as applicable, and, in some cases, both us and Bausch + Lomb, would be liable for a substantial amount of tax.
Given these potentially significant tax consequences, if the Arrangement is pursued, it is anticipated that we will agree with Bausch + Lomb to certain tax-related covenants, which may restrict us from taking certain actions that we might otherwise
choose to take, some of which could be material, and the nature, extent and effect of these restrictions will depend on the manner in which the Distribution is effected. Furthermore, if we breach any of these tax-related covenants, we may be required to indemnify Bausch + Lomb against any taxes or other losses suffered or incurred from or in connection with such breach, which loss may include the taxable gain recognized by Bausch + Lomb if the Separation were to be taxable, as further described above.
Our plan to pursue an IPO of our Solta medical device aesthetics business is subject to various risks and uncertainties and may not be completed in accordance with the expected plans or anticipated timeline, or at all, and will involve significant time, expense, and distraction, which could disrupt or have a material adverse effect on our business, financial condition, cash flows and results of operations and could cause the market value of our common shares and/or debt securities to decline.
On August 3, 2021, we announced that we intend to pursue an IPO of Solta Medical. The proposed Solta IPO would establish Solta Medical as a separate publicly traded company that consists of our medical aesthetics business. The proposed Solta IPO is subject to regulatory approvals and certain conditions, including final approval by our Board of Directors and compliance with (including completion of all necessary filings required by) U.S. securities laws and stock exchange rules. The failure to satisfy all of the required conditions could delay the completion of the Solta IPO for a significant period of time or prevent it from occurring at all.
Unanticipated developments, including disruptions to business and commerce induced by the COVID-19 pandemic, unfavorable market conditions, possible delays in obtaining any necessary stock exchange, regulatory or other approval or the failure to obtain any such approvals, negotiating challenges, the uncertainty of the financial markets, changes in the laws and regulations (both in the U.S. and in other jurisdictions, including China), reactions of customers and other parties, industry or economic conditions outside of the Company’s control, and other challenges in executing the Solta IPO, could delay or prevent the completion of the Solta IPO, or cause the Solta IPO to occur on terms or conditions that are different or less favorable than expected. Any changes to the Solta IPO or delay in completing the Solta IPO could cause us not to realize some or all of the expected benefits, or realize them on a different timeline than expected. Further, our Board of Directors could decide, either because of a failure to satisfy conditions or because of market or other factors, to abandon the Solta IPO. No assurance can be given as to whether and when the Solta IPO will occur or whether the Solta IPO will achieve the benefits we expect. As a result, there can be no assurance as to the timing of the completion of the Solta IPO or its terms. Any changes with respect to the timing of the Solta IPO or the terms and conditions on which the Solta IPO occurs could also delay the B+L Separation or cause the B+L Separation to occur on terms or conditions that are different or less favorable than expected.
Even if the Solta IPO is completed, we may not be able to achieve the full strategic and financial benefits expected to result from the Solta IPO. The Solta IPO is expected to unlock value by creating an independent business and distinct investment identity with enhanced strategic and management focus that allows more efficient allocation of resources and capital. In addition, proceeds from the Solta IPO are expected to facilitate further reductions in the aggregate amount of our outstanding indebtedness. We may not achieve these and other anticipated benefits for a variety of reasons, including, among others: (i) following the Solta IPO, Solta may prove to be less valuable on an independent basis than we anticipate, including because it is more susceptible to economic downturns and other adverse events than if it were still a part of the Company and because its business will be less diversified than the Company’s business prior to the Solta IPO and (ii) other actions required to separate the respective businesses could disrupt our operations.
Executing the Solta IPO will require significant resources, time and attention from our senior management and employees, which senior management and employees are already expending significant resources, time and attention on the B+L Separation. The Solta IPO could cause further distractions and further divert attention and resources away from other projects and the day-to-day operation of our business. Both we and Solta may also experience increased difficulties in attracting, retaining, and motivating management and employees during the pendency of the Solta IPO and following its completion. For more information on these and other related risks, see Item 1A. “Risk Factors—Employment-related Risks” of this Form 10-K. The Solta IPO, whether or not completed, may also have an adverse impact on our relationships with our customers, suppliers and other business counterparties. The price of our common shares could also fluctuate significantly in response to developments or market speculation related to the proposed Solta IPO. The Solta IPO, if completed, may also have the effect of exacerbating other risk factors disclosed in this Item 1A. “Risk Factors.”
We have already incurred expenses in connection with the Solta IPO, and expect that the process of completing the Solta IPO will be time-consuming and involve significant additional costs and expenses, which may not yield a discernible benefit if the Solta IPO is not completed or is not completed on the timeline or terms anticipated. In addition, if the Solta IPO is not completed, we will still be required to pay certain costs and expenses incurred in connection therewith, such as legal, accounting, and other professional and advisory fees. Furthermore, the Solta IPO, if completed, is expected to result in dyssynergy costs, which may be greater than we anticipate and/or may be significant. In addition, we could be subject to legal
proceedings or other claims challenging the Solta IPO, which could result in substantial costs and liability and also divert management’s attention and resources, any of which could harm our business.
Any of the above factors could cause the Solta IPO (or the failure to consummate the Solta IPO) to have a material adverse effect on our business, financial condition, cash flows and results of operations and could cause the market value of our common shares and/or debt securities to decline.
In connection with the B+L Separation and the Solta IPO, we will continue to rely on Bausch + Lomb and, to a lesser degree, Solta for certain services, which services may not be sufficient to meet our needs, which may result in increased costs and otherwise adversely affect our business.
In connection with the B+L Separation, we anticipate that we and Bausch + Lomb will provide to each other certain services for a transitional period in exchange for certain agreed-upon fees. In addition, in connection with the Solta IPO, we anticipate that we and Solta may provide to each other certain services for a transitional period in exchange for certain agreed-upon fees. If we no longer receive these services from Bausch + Lomb and/or Solta due to the termination or expiration of these transitional services, we may not be able to perform these services ourselves and/or find appropriate third-party arrangements at a reasonable cost (and any such costs may be higher than those charged by Bausch + Lomb or Solta). In addition, in connection with the B+L Separation and the Solta IPO, we expect that a number of the employees that support our business (which number of employees may be significant) will be employed by legal entities that are owned by Bausch + Lomb or Solta and not by us.
Certain contracts used in our business may need to be replaced in connection with the B+L Separation or Solta IPO and failure to obtain such replacement contracts could increase our expenses or otherwise adversely affect our results of operations.
In connection with the B+L Separation and the Solta IPO, we may be required to replace certain shared contracts. It is possible that, in connection with the replacement process, some parties may seek more favorable contractual terms from us. If we are unable to obtain such replacement contracts, the loss of these contracts could increase our expenses or otherwise materially adversely affect our business, results of operations and financial condition.
In connection with the B+L Separation and Solta IPO, some of our directors and officers may have actual or potential conflicts of interest because of their equity ownership in Bausch + Lomb or Solta, respectively, and/or because they also serve as officers or directors of Bausch + Lomb or Solta.
Because of their anticipated positions with Bausch + Lomb, in connection with the B+L Separation, and/or with Solta, in connection with the Solta IPO, some of our directors and executive officers may own common shares of Bausch + Lomb and/or Solta or have options to acquire shares of Bausch + Lomb and/or Solta, and the individual holdings may be significant for some of these individuals compared to their total assets. In addition, in connection with the B+L Separation, certain of our current or former officers and directors will also serve as officers or directors of Bausch + Lomb and, in connection with the Solta IPO, certain of our current or former officers and directors will also serve as officers or directors of Solta. A director who has a material interest in a matter before our Board of Directors or any committee on which he or she serves is required to disclose such interest as soon as the director becomes aware of it in accordance with applicable law. In situations where a director has a material interest in a matter to be considered by our Board of Directors or any committee on which he or she serves, such director may be required to excuse himself or herself from the meeting while discussions and voting with respect to the matter are taking place. Although all transactions with related parties will be approved by independent members of our Board of Directors that may meet in the absence of senior executive officers or non-independent directors, the ownership of Bausch + Lomb or Solta equity or service to Bausch + Lomb or Solta may create the appearance of conflicts of interest when the Bausch + Lomb-affiliated or Solta-affiliated directors and officers are faced with decisions that could have different implications for Bausch + Lomb, Solta or us. For example, potential conflicts of interest could arise in connection with the resolution of any dispute that may arise between Bausch + Lomb and us regarding the terms of the B+L Separation or between Solta and us regarding the terms of the Solta IPO. Potential conflicts of interest could also arise if we enter into commercial arrangements with Bausch + Lomb or Solta in the future. As a result of these actual or apparent conflicts, we may be precluded from pursuing certain growth initiatives. While the Board of Directors believes that, given its size and structure, such actual or potential conflicts of interest can be managed adequately, including that the independent members of our Board of Directors may meet in the absence of senior executive officers or non-independent directors in respect of the relevant matter, the actual or perceived conflicts of interest that may arise could cause reputational or other harm.
In connection with both the B+L Separation and the Solta IPO and the various separation-related agreements to be entered into by us and Bausch + Lomb or Solta in connection with those proposed transactions, it is anticipated that we will agree to indemnify Bausch + Lomb and Solta, respectively, for certain liabilities, and Bausch + Lomb and Solta will agree to indemnify us for certain liabilities. However, there can be no assurance that Bausch + Lomb’s or Solta’s indemnity will be
sufficient to insure us against the full amount of such liabilities, or that Bausch + Lomb’s or Solta’s ability to satisfy its indemnification obligation will not be impaired in the future.
It is anticipated that, in connection with the various separation-related agreements to be entered into between Bausch + Lomb and us in connection with the Separation and between Solta and us in connection with the Solta IPO, Bausch + Lomb and Solta, respectively, will agree to indemnify us for certain liabilities. However, there can be no assurance that the indemnity from Bausch + Lomb or Solta, as the case may be, will be sufficient to protect us against the full amount of such liabilities, or that Bausch + Lomb or Solta, as the case may be, will be able to fully satisfy its indemnification obligations in the future. Even if we ultimately succeed in recovering from Bausch + Lomb or Solta, as the case may be, any amounts for which we are held liable, we may be temporarily required to bear these losses. Each of these risks could negatively affect our business, financial condition, results of operations and cash flows. Furthermore, any indemnification claim against us either by Bausch + Lomb, including for a breach of the tax-related covenants described above, or by Solta could be substantial, may not be able to be satisfied and may have a material adverse effect on us. Each of these risks could also negatively affect our business, financial condition, results of operations and cash flows.
Legal and Reputational Risks
We are the subject of a number of ongoing legal proceedings, investigations and inquiries respecting certain of our historichistorical distribution, marketing, pricing, disclosure and accounting practices, including our former relationship with Philidor, which have had and could continue to have a material adverse effect on our reputation, business, financial condition, cash flows and results of operations, could result in additional claims and material liabilities, and could cause the market value of our common shares and/or debt securities to decline.
WeWhile we have beensuccessfully settled or are currently the subject ofotherwise resolved a number of ongoinglegacy legal proceedings, and investigations and inquiries by governmental agencies, including the following: (i) investigations by the U.S. Attorney’s Offices for the District of Massachusetts and the Southern District of New York relating to, certain matters, includingamong other things, our patient assistance programs (including financial support provided to patients),disclosure and accounting practices and our former relationship with Philidor, including the securities class action litigation matters in both the U.S. and other pharmacies, our accounting treatment for sales by specialty pharmacies, information provided to the Centers for Medicare and Medicaid Services, our pricing (including discounts and rebates), marketing and distribution of our products, our compliance program, and employee compensation; (ii)Canada, the investigation by the SEC, of the Company relating to certain matters, including our former relationship with Philidor, our accounting practices and policies and our public disclosures; (iii) an investigation by the State of North Carolina Department of Justice relating to certain matters, including the production, marketing, distribution, sale and pricing of, and patient assistance programs covering, our Nitropress®, Isuprel® and Cuprimine® products and our pricing decisions for certain of our other products; (iv) a request for documents and other information received by the Companyorder from the Autorité des marches financiers (the “AMF”) (our principal securities regulator in Canada) relating to certain matters, including with respect to our former relationship with Philidor and our accounting practices and policies; (v) the pending investigation by the California Department of Insurance relating to our former relationship with Philidor and certain California-based pharmacies,derivative lawsuits, we are currently still the marketing and distributionsubject of our products in California, the billing of insurers for our products being used by California residents, and other matters; (vi) a number of purported class actionother ongoing legal proceedings and investigations and inquiries by governmental agencies, including, but not limited to, the following: (i) a number of pending securities litigations, including certain opt-out actions in the U.S. (including related opt-out actions)(related to the U.S. Securities Litigation which has been settled, but remains subject to an objector's appeal of the final court approval), and in Canada (related to the securities class action litigation in Canada which has been settled), have been instituted, the allegations of which relate to, among other things, allegedly false and misleading statements by the Company and/or failures to disclose information about our business and prospects, including relating to drug pricing, our policies and accounting practices, our use of specialty pharmacies, and our former relationship with Philidor, and (vii) purported class actions under(ii) a lawsuit brought against the federal RICO statute on behalfCompany in the Superior Court of third-party payors arising outNew Jersey asserting claims for common law fraud, negligent misrepresentation, and violations of our pricingthe New Jersey Racketeer Influenced and use of specialty pharmacies, and our former relationship with Philidor.Corrupt Organizations Act. In addition, we could, in the future, face additional legal proceedings and investigations and inquiries by governmental agencies relating to these or similar matters. Philidor and certain of its executives and employees are also subject to disputes with third party payors and governmental investigations related to Philidor's business practices and relationship with the Company which may result in claims being asserted against the Company. For more information regarding legal proceedings, see Note 21,20, "LEGAL PROCEEDINGS" to our audited Consolidated Financial Statements.
We are unable to predict how long such proceedings, investigations and inquiries will continue, but we anticipate that we will continue to incur significant costs in connection with some or all of these matters and that some or all of these proceedings, investigations and inquiries will result in a substantial distraction of management’s time, regardless of the outcome. TheseSome or all of these proceedings, investigations and inquiries maywill likely result in damages, settlement payments (such as the $1,210 million payment to be made by the Company in connection with the previously settled U.S. Securities Litigation (subject to an objector's appeal of the final court approval)), fines, penalties, consent orders or other administrative sanctions (including exclusion from federal programs) against the Company and/or certain of our directors and officers, any of which could be material, or in changes to our business practices, which, in turn, may result in or may contribute to an inability by us to meet the financial covenantscovenant contained in our Restated Credit Agreement.Agreement (or that may be contained in our New Restated Credit Agreement, as defined below). Furthermore, publicity surrounding these proceedings, investigations and inquiries or any enforcement action as a result thereof, even if ultimately resolved favorably for us coupled with the ongoing intensified public scrutiny of our Company and certain of its practices, could result in additional investigations and legal proceedings. As a result, these proceedings, investigations and inquiries could have a material adverse effect on our reputation, business, financial condition, cash flows and results of operations and could cause the market value of our common shares and/or debt securities to decline.
Our historical business practices, including with respect to past pricing practices, are under scrutiny. Any changes to our practices relating to pricing or the current prices of products, whether imposed, legislated or voluntary, could have a material adverse effect on our business, financial condition, cash flows and results of operations and could cause the market value of our common shares and/or debt securities to decline.
We are under scrutiny with respect to our historical business historical practices (including with respect to past pricing practices), including investigations by the U.S. Attorney’s Offices for the District of Massachusetts and the Southern District of New York, the State of North Carolina Department of Justice, various purported class action suits against ussecurities litigations, including certain opt-out actions in the U.S. (including related opt-out actions)(related to the previously settled securities class action (subject to an objector's appeal of the final court approval)) and in Canada (related to the settled securities class action), and purported class actions under the federal RICO statute on behalf of third-party payors.certain other lawsuits. We are unable to predict how such proceedings, investigations and inquiries will impact our current business practices, including with respect to pricing, or the prices of our products, including whether we will be required to impose pricing freezes or controls, pricing reductions (including on a retroactive basis) or other price regulation for some or all of our products.
In addition, in recent years, in the U.S., state and federal governments have considered implementing legislation that would control or regulate the prices of drugs, and the new administration has expressed support for lowering the cost of drug prices.drugs. Other countries have announced or implemented measures on pricing, including suspensions on price increases, prospective and possibly retroactive price reductions and other recoupments. These measures and proposed measures vary by country. These measures and these proposed measures and legislation, if implemented, could lead to impairment of certain of our intangible assets which could be significant, and/or could have a material adverse effect on our business, financial condition, cash flows and results of operations and could cause the market value of our common shares and/or debt securities to decline.
We are involved in various other legal and governmental proceedings that are uncertain, costly and time-consuming and could have a material adverse effect on our business, financial condition, cash flows and results of operations and could cause the market value of our common shares and/or debt securities to decline.
We are involved in a number of other legal and governmental proceedings and may be involved in additional litigation in the future. These proceedings are complex and extended and occupy the resources of our management and employees. These proceedings are also costly to prosecute and defend and may involve substantial awards or damages payable by us if not found in our favor. We may also be required to pay substantial amounts or grant certain rights on unfavorable terms in order to settle such proceedings. Defending against or settling such claims and any unfavorable legal decisions, settlements or orders could have a material adverse effect on our business, financial condition, cash flows and results of operations and could cause the market value of our common shares and/or debt securities to decline. For more information regarding legal proceedings, see Note 21,20, "LEGAL PROCEEDINGS" to our audited Consolidated Financial Statements.
For example, the pharmaceutical industry, andincluding our Company, in particular, has been the focus of both private payor and governmental concern regarding pricing of pharmaceutical products. Related actions, including Congressional and other governmental investigations and litigation, are costly and time-consuming, and adverse resolution of such actions or changes in our business practices, such as our approach to the pricing of our pharmaceutical products, could adversely affect our business, financial condition, cash flows and results of operations and could cause the market value of our common shares and/or debt securities to decline.
Further, the pharmaceutical and medical device industries historically have generated substantial litigation concerning the manufacture, use and sale of products and we expect this litigation activity to continue. As a result, we expect that patents related to our products will be routinely challenged, (as is the case with the patent infringement proceeding commenced in connection with our Xifaxan® product and related patents), and the validity or enforceability of our patents may not be upheld. In order to protect or enforce patent rights, we may initiate litigation against third parties. Our patents may also be challenged in administrative proceedings in the United States Patent and Trademark Office and patent offices outside of the United States. If we are not successful in defending an attack on our patents and maintaining exclusive rights to market one or more of our products still under patent protection, we could lose a significant portion of sales in a very short period. Even in cases where we prevail in an infringement claim, legal remedies available for harm caused to us may not be sufficient to make us whole. We may also become subject to, or threatened with, legal proceedings and infringement claims by third parties and may have to defend against charges that we infringed, misappropriated or otherwise violated patents or the intellectual property or proprietary rights of third parties. Third parties may also request a preliminary or permanent injunction from a court of law to prevent us from marketing a product. Even if we believe third-party intellectual property claims are without merit, there is no assurance that a court would find in our favor on questions of infringement, validity, enforceability or priority. If we are found to infringe, misappropriate or otherwise violate the intellectual property rights of others, we could lose our right to develop, manufacture or sell products, including our generic products, or could be required to pay monetary damages or royalties to license proprietary rights from third parties, which could be substantial.substantial and include treble damages and attorneys’ fees, if we are found to willfully infringe any intellectual property rights of others. However, we may not be able to obtain any required license on commercially reasonable terms or at all. Any of the foregoing events could have a material adverse effect on our business, financial condition, cash flows and results of operations and could cause the market value of our common shares and/or debt securities to decline.
In addition, in the U.S., it has become increasingly common for patent infringement actions to prompt claims that antitrust laws have been violated during the prosecution of the patent or during litigation involving the defense of that patent. Such claims by direct and indirect purchasers and other payers are typically filed as class actions. The relief sought may include treble damages and restitution claims. Similarly, antitrust claims may be brought by government entities or private parties
following settlement of patent litigation, alleging that such settlements are anti-competitive and in violation of antitrust laws. In the U.S. and Europe, regulatory authorities have continued to challenge as anti-competitive so-called “reverse payment” settlements between branded and generic drug manufacturers. We may also be subject to other antitrust litigation involving competition claims unrelated to
patent infringement and prosecution. For example, we are currently defending a class action complaint alleging that defendants engaged in an anticompetitive scheme to eliminate price competition on certain contact lens lines through the use of unilateral pricing policies. For more information regarding legal proceedings, see Note 21,20, "LEGAL PROCEEDINGS" to our audited Consolidated Financial Statements. A successful antitrust claim by a private party or government entity against us could have a material adverse effect on our business, financial condition, cash flows and results of operations and could cause the market value of our common shares and/or debt securities to decline.
We depend on third parties to meet their contractual, legal, regulatory, and other obligations.
We rely on distributors, suppliers, contract research organizations, vendors, service providers, business partners and other third parties to research, develop, manufacture, distribute, market and sell many of our products, as well as perform other services relating to our business. We rely on these third parties to meet their contractual, legal, regulatory and other obligations. A failure to maintain these relationships or poor performance by these third parties could negatively impact our business. In addition, we cannot guarantee that the contractual terms and protections and compliance controls, policies and procedures we have put in place will be sufficient to ensure that such third parties will meet their legal, contractual and regulatory obligations or that these terms, controls, policies, procedures and other protections will protect us from acts committed by our agents, contractors, distributors, suppliers, service providers or business partners that violate contractual obligations or the laws or regulations of the jurisdictions in which we operate, including matters respecting anti-corruption, fraud, bribery and kickbacks and false claims, pricing, sales and marketing practices, privacy laws and other legal obligations. Any failure of such third parties to meet these legal, contractual and regulatory obligations or any improper actions by such third parties or even allegations of such non-compliance or actions could damage our reputation, adversely impact our ability to conduct business in certain markets and subject us to civil or criminal legal proceedings and regulatory investigations, monetary and non-monetary damages and penalties and could cause us to incur significant legal and investigatory fees and, as a result, could have a material adverse effect on our business, financial condition, cash flows and results of operations and could cause the market value of our common shares and/or debt securities to decline. For example, the allegations about the activities of Philidor and our former relationship with Philidor have resulted in a number of investigations, inquiries and legal proceedings against us, which have damaged and may further damage our reputation and result in damages, fines, penalties or administrative sanctions against the Company and/or certain of our officers. For more information regarding legal proceedings, see Note 21,20, "LEGAL PROCEEDINGS" to our audited Consolidated Financial Statements.
If our products cause, or are alleged to cause, serious or widespread personal injury, we may have to withdraw those products from the market and/or incur significant costs, including payment of substantial sums in damages, and we may be subject to exposure relating to product liability claims. In addition, our product liability self-insurance program may not be adequate to cover future losses.
We face an inherent business risk of exposure to significant product liability and other claims in the event that the use of our products caused, or is alleged to have caused, adverse effects. For example, we have been named as a defendant (along with other entities) in certain lawsuits in the United States and Canada in which the plaintiffs have made certain product liability claims respecting Shower to Shower® (a product we acquired in 2012). For more information regarding legal proceedings, see Note 21, "LEGAL PROCEEDINGS" to our audited Consolidated Financial Statements. These and other product liability proceedings may be costly to prosecute and defend and may involve substantial awards or damages payable by us if not found in our favor.
Furthermore, our products may cause, or may appear to have caused, adverse side effects (including death) or potentially dangerous drug interactions that we may not learn about or understand fully until the drug has been administered to patients for some time. The withdrawal of a product following complaints and/or incurring significant costs, including the requirement to pay substantial damages in personal injury cases or product liability cases, could have a material adverse effect on our business, financial condition, cash flows and results of operations and could cause the market value of our common shares and/or debt securities to decline.
In addition, since March 31, 2014, we have self-insured substantially all of our product liability risk for claims arising after that date. We periodically evaluate and adjust our claims reserves to reflect trends in our own experience, as well as industry trends. However, historical loss trends may not be adequate to cover future losses, as historical trends may not be indicative of future losses. If ultimate results exceed our estimates, this would result in losses in excess of our reserved amounts. If we were required to pay a significant amount on account of these liabilities for which we self-insure, this could have a material adverse effect on our business, financial condition, cash flows and results of operations and could cause the market value of our common shares and/or debt securities to decline.
Our marketing, promotional and business practices, as well as the manner in which sales forces interact with purchasers, prescribers and patients, are subject to extensive regulation and any material failure to comply could result in significant sanctions against us.
The marketing, promotional and business practices of pharmaceutical and medical device companies, as well as the manner in which companies’ in-house or third partythird-party sales forces interact with purchasers, prescribers, and patients, are subject
to extensive regulation, enforcement of which may result in the imposition of civil, regulatory and/or criminal penalties, injunctions, and/or limitations on marketing practice for some of our products and/or pricing restrictions or mandated price reductions for some of our products. Many companies, including us, have been the subject of claims related to these practices asserted by federal authorities. These claims have resulted in fines and other consequences, such as entering into corporate integrity agreements with the U.S. government. Companies may not promote drugs or devices for “off-label” uses-that is, uses that are not described in the product’s labeling and that differ from those approved by the FDA, Health Canada, EMA or other applicable regulatory agencies. A company that is found to have improperly promoted off-label uses may be subject to significant liability, including civil and administrative remedies (such as entering into corporate integrity agreements with the U.S. government), as well as criminal sanctions. In addition, management’s attention could be diverted from our business operations and our reputation could be damaged. For more information regarding legal proceedings, see Note 21,20, "LEGAL PROCEEDINGS" to our audited Consolidated Financial Statements.
Debt-related Risks
Our Restated Credit Agreement and the indentures governing our senior notes impose restrictive and financial covenants on us. Our failure to comply with these covenants could trigger events, which could result in the acceleration of the related debt, a cross-default or cross-acceleration to other debt, foreclosure upon any collateral securing the debt and termination of any commitments to lend, each of which would have a material adverse effect on our business, financial condition, cash flows and results of operations and would cause the market value of our common shares and/or debt securities to decline and could lead to bankruptcy or liquidation.
Our Restated Credit Agreement and the various indentures governing our senior notes contain covenants that restrict the way we conduct business and require us to satisfy certain financial tests in order to incur debt or take other actions. Additionally,For example, our Restated Credit Agreement contains a financial covenantscovenant that for example, requirerequires us to maintain a certain financial ratiosratio at fiscal quarter end.
The Company’s Restated Credit Agreement contains a specified quarterly financial maintenance covenantscovenant (consisting of a securedfirst lien leverage ratio and an interest coverage ratio). As of December 31, 2017,2021, we were in compliance with allthis financial maintenance covenants related to our outstanding debt.covenant. However, we can make no assurance that we will be able to comply with the restrictive and financial covenants contained in the Restated Credit Agreement and indentures in the future. Based on our current forecast for the next twelve months from the date of issuance of this Form 10-K, we expect to remain in compliance with thesethis financial maintenance covenantscovenant and meet our debt obligations over that same period. In the event that we perform below our forecasted levels, we willmay also implement certain additional cost-efficiency initiatives, such as rationalization of selling, general and administrative expenses ("SG&A") and R&D spend, which would allow us to continue to comply with the financial maintenance covenants. Wecovenant. The Company may consider taking other actions, including divesting other businesses, and refinancing debt, issuing equity or equity-linked securities as deemed appropriate, to provide additional coverage in complying with the financial maintenance covenant and meeting its debt service obligations, or may negotiate with the applicable lenders for an amendment or modification to such covenant, as deemed appropriate. However, we cannot guarantee that any of the above-noted actions would be achieved. If we perform below our forecasted levels and the actions referenced above are not effective, we would fail to comply with one or both of theseour financial maintenance covenants.covenant. In that instance, we would be in default, and our lenders would be permitted to accelerate our debt unless we could obtain an amendment. If our debt was accelerated, we would not have sufficient funds to repay our debt absent a refinancing, and we cannot provide assurance that we willwould be able to obtain a refinancing.
Our inability to comply with the covenants in our debt instruments could lead to a default or an event of default under the terms thereof, for which we may need to seek relief from our lenders and noteholders in order to waive the associated default or event of default and avoid a potential acceleration of the related indebtedness or cross-default or cross-acceleration to other debt. There can be no assurance that we would be able to obtain such relief on commercially reasonable terms or otherwise and we may be required to incur significant additional costs. In addition, the lenders under our Restated Credit Agreement and holders of our senior notes may impose additional operating and financial restrictions on us as a condition to granting any such waiver. If an event of default is not cured or is not otherwise waived, a majority of lenders in principal amount under our Restated Credit Agreement or the trustee or holders of at least 25% in principal amount of a series of our senior notes may accelerate the maturity of the related debt under these agreements, foreclose upon any collateral securing the debt and terminate any commitments to lend, any of which would have a material adverse effect on our business, financial condition, cash flows and results of operations and would cause the market value of our common shares and/or debt securities to decline. Furthermore, under these circumstances, we may not have sufficient funds or other resources to satisfy all of our obligations and we may be unable to obtain alternative financing on terms acceptable to us or at all. In such circumstances, we could be forced into bankruptcy or liquidation and, as a result, investors could lose all or a portion of their investment in our securities.
On January 18, 2022, we announced our intention to refinance our existing Restated Credit Agreement with an amended Restated Credit Agreement (the “New Restated Credit Agreement” and such refinancing, the “Credit Agreement Refinancing”). The New Restated Credit Agreement is expected to consist of approximately $2,500 million of term B loans and a $975 million
revolving credit facility. The Credit Agreement Refinancing is expected to occur only upon the completion of the B+L IPO and a related debt financing by Bausch + Lomb, and is expected to, among other things, permit us to designate Bausch + Lomb as an “unrestricted” subsidiary of the New Restated Credit Agreement covenants upon achievement of a 7.60:1.00 pro forma “Remainco Total Leverage Ratio.” The Credit Agreement Refinancing is intended to facilitate the B+L Separation. However, no definitive documentation for the Credit Agreement Refinancing has been executed, and accordingly there can be no assurance that the Credit Agreement Refinancing will occur on the anticipated terms or at all. If we are unable to consummate the Credit Agreement Refinancing, we may be unable to complete the B+L Separation on the anticipated terms or timeline.
To service our debt, we will be required to generate a significant amount of cash. Our ability to generate cash depends on a number of factors, some of which are beyond our control, and any failure to meet our debt obligations would have a material adverse effect on our business, financial condition, cash flows and results of operations and could cause the market value of our common shares and/or debt securities to decline.
We have a significant amount of indebtedness. For details regarding our debt and the maturity dates thereof, see Note 11,10, "FINANCING ARRANGEMENTS" to our audited Consolidated Financial Statements. Our ability to satisfy our debt obligations, including any special mandatory redemption of our February 2027 Secured Notes (as defined herein) if the B+L IPO has not occurred on or prior to August 15, 2022, will depend principally upon our future operating performance. As a result, prevailing economic conditions and financial, business and other factors, many of which are beyond our control, may affect our ability to make payments on our debt. If we do not generate sufficient cash flow to satisfy our debt obligations, we may have to undertake alternative financing plans, such as refinancing or restructuring our debt, selling assets, reducing or delaying capital investments or seeking to raise additional capital. Alternatively, as we have done in the past, we may also elect to refinance certain of our debt, for example, to extend maturities. Our ability to restructure or refinance our debt will depend on the capital markets and our financial condition at such time. If we are unable to access the capital markets, whether because of the condition of those capital markets or our own financial condition or reputation within such capital markets, we may be unable to refinance our debt. In addition, any refinancing of our debt could be at higher interest rates and may require us to comply with more onerous covenants, which could further restrict our business operations. Further, given our capital structure, any refinancing of our senior unsecured debt may be with secured debt, thereby increasing our first lien and/or secured leverage ratio.ratios. Our inability to generate sufficient cash flow to satisfy our debt obligations or to refinance our obligations on commercially reasonable terms, or at all, could have a material adverse effect on our business, financial condition, cash flows and results of operations and could cause the market value of our common shares and/or debt securities to decline.
Repayment of our indebtedness is dependent on the generation of cash flow by our subsidiaries and their ability to make such cash available to us, by dividend, debt repayment or otherwise. Our subsidiaries may not be able to, or may not be permitted to, make distributions to enable us to make payments in respect of our indebtedness. Each subsidiary is a distinct legal entity and, under certain circumstances, legal and contractual restrictions may limit our ability to obtain cash from our subsidiaries. Certain non-guarantor subsidiaries include non-U.S. subsidiaries that may be prohibited by law or other regulations from distributing funds to us and/or we may be subject to payment of taxes and withholdings on such distributions. In the event that we do not receive distributions from our subsidiaries or receive cash via services rendered, loans and intellectual property licensed, we may be unable to make required principal and interest payments on our indebtedness.
Our ability to continue to reduce our indebtedness will depend upon factors including our future operating performance, our ability to access the capital markets to refinance existing debt and prevailing economic conditions and financial, business and other factors, many of which are beyond our control. Additionally, our ability to reduce our indebtedness using the proceeds of the B+L IPO and the Solta IPO will be subject to the risks and uncertainties relating to those transactions, as previously discussed. We can provide no assurance of the amount by which we will reduce our debt, if at all. In addition, servicing our debt will result in a reduction in the amount of our cash flow available for other purposes, including operating costs and capital expenditures that could improve our competitive position and results of operations.
We have incurred significant indebtedness, which restricts the manner in which we conduct business.
We have incurred significant indebtedness, including in connection with our prior acquisitions. We may incur additional long-term debt and working capital lines of credit to meet future financing needs, subject to certain restrictions and prohibitions under the agreements governing our indebtedness, which would increase our total debt. This additional debt may be substantial and some of this indebtedness may be secured.
The agreements governing our indebtedness contain restrictive covenants which impose certain limitations on the way we conduct our business, including limitations on the amount of additional debt we are able to incur, prohibitions on incurring additional debt if certain financial covenants are not met and restrictions on our ability to make certain investments and other restricted payments. Any additional debt, to the extent we are able to incur it, may further restrict the manner in which we conduct business. Such restrictions, prohibitions and limitations could impact our ability to implement elements of our strategy, including in the following ways:
▪our flexibility to plan for, or react to, competitive challenges in our business and the pharmaceutical and medical device industries may be compromised;
▪we may be put at a competitive disadvantage relative to competitors that do not have as much debt as we have, and competitors that may be in a more favorable position to access additional capital resources;
▪our ability to make acquisitions and execute business development activities through acquisitions will be limited and may, in future years, continue to be limited; and
▪our ability to resolve regulatory and litigation matters may be limited.
In the past, our credit ratings have been downgraded. Any further downgrade in our corporate credit ratings or other credit ratings may increase our cost of borrowing and may negatively impact our ability to raise additional debt capital.
We are exposed to risks related to interest rates.
Our senior secured credit facilities bear interest based on U.S. dollar London Interbank Offering Rates or U.S. Prime Rate, or Federal Funds effective rate.rate (for U.S. dollar loans) and Canadian Prime Rate or Canada Bankers’ Acceptance Rate (for Canadian dollar loans). Thus, a change in the short-term interest rate environment (especially a material change) could have a materialan adverse effect on our business, financial condition, cash flows and results of operations (which adverse effect could be material) and could cause the market value of our common shares and/or debt securities to decline. As of December 31, 2017,2021, we did not have any outstanding interest rate swap contracts.
In July 2017, the head of the United Kingdom Financial Conduct Authority announced the desire to phase out the use of LIBOR by the end of 2021. In March 2021, ICE Benchmark Administration Limited, the administrator of LIBOR, extended the transition dates of all USD LIBOR settings (other than the one week and two-month USD LIBOR settings) to June 30, 2023, after which USD LIBOR settings will cease to be published. If LIBOR ceases to exist, we will need to endeavor, with the administrative agent thereunder, to amend the credit facilities to substitute LIBOR with an alternative rate of interest that gives due consideration to the then-prevailing market convention for syndicated loans in the U.S., subject to notice to all lenders and the absence of objection by the “required lenders,” or pay interest based on the "base rate" until we can otherwise renegotiate our Senior Secured Credit Facilities to include a LIBOR replacement. Any change in accordance with the aforementioned procedures, or the conversion of loans to base rate or U.S. prime rate loans, could have an adverse impact on our cost of capital. Currently, there is no definitive information regarding the future utilization of LIBOR or of any particular replacement rate. As such, the potential effect of any such event on our business, financial condition, cash flows and results of operations cannot yet be determined. However, any such event could have a material adverse effect on our business, financial condition, cash flows and results from operations and could cause the market value of our common shares and/or debt securities to decline.
Employment-related Risks
The transition of our key management positions in connection with the B+L IPO and the Solta IPO will be critical to our success, and the failure to successfully manage this transition could adversely impact our business.
In connection with the B+L IPO and the Solta IPO, we have announced the appointment of a new chief executive officer, chief financial officer, general counsel and other executives and key employees. The departure of key leadership personnel often results in the loss of significant knowledge and experience, and the ability of our new management to quickly expand their knowledge of our business will be critical to their ability to make informed decisions about our strategy and operations.
Any significant leadership change or senior management transition involves inherent risks, and any future changes to our management that may occur during the transition could cause significant disruption to the Company and its operations. The failure to adequately manage succession of senior management and other key personnel or the failure of key employees to successfully transition into new roles could cause further disruption to our business. In addition, changes in senior management may create uncertainty among investors, employees, business partners and others concerning the Company’s future direction and performance. Any disruption in our operations or adverse impacts from such uncertainty could have a material adverse effect on our business, financial condition, cash flows and results of operations.
The loss of the services of, or our inability to recruit, retain or motivate, our executives and other key employees could have a material adverse effect on our business, financial condition, cash flows and results of operations and could cause the market value of our common shares and/or debt securities to decline.
We must continue to retain and motivate our executives and other key employees, and to recruit other executives and employees, in order to strengthen our management team and workforce. Our ability to retain or recruit executive and other key employees may be hindered or delayed by, among other things, competition from other employers who may be able to offer more attractive compensation packages, the reputational challenges the Company currently faceshas faced as a result of historical issues and may in the future continue to face.face and the perceived or actual uncertainty created by the proposed B+L Separation and Solta IPO, and the changes to our executive team in connection with the proposed B+L IPO and Solta IPO. A failure by us to retain,
motivate and recruit executives and other key employees or the unanticipated loss of the services of any of these executives or key employees for any reason, whether temporary or permanent, could create disruptions in our business, could cause concerns and instability for management and employees, current and potential customers, credit rating agencies and other third parties with whom we do business and our shareholders and debt holders and could cause concern regarding our ability to execute our business strategy or to manage operations in the manner previously conducted and, as a result, could have a material adverse effect on our business, financial condition, cash flows and results of operations and could cause the market value of our common shares and/or debt securities to decline. Furthermore, as a result of any failure to retain, or loss of, any executives or key employees, we may experience increased costs in order to identify and recruit a suitable replacement in a timely manner (and, even if we are able to hire a qualified successor, the search process and transition period may be difficult to manage and result in additional periods of uncertainty), which could have a material adverse effect on our business, financial condition, cash flows and results of operations and could cause the market value of our common shares and/or debt securities to decline. In addition, once identified and recruited, the transition of new executives and key employees may be difficult to manage and we cannot guarantee that new executives and employees will efficiently transition into their roles or ultimately be successful in their roles. Finally, as a result of changes in our executives and key employees, there may be changes in the way we conduct our business, as well as changes to our business strategy. We cannot predict what these changes may involve or the timing of any such changes and how they will impact our product sales, revenue, business, financial condition, cash flows or results of operation,operations, but any such changes could have a material adverse effect on our business, financial condition, cash flows and results of operations and could cause the market value of our common shares and/ordebt securitiesto decline. Any of these factors could have a material adverse effect on our business, financial condition, cash flows and results of operations and could cause the market value of our common shares and/or debt securities to decline.
Tax-related Risks
Our effective tax rates may increase.
We have operations in various countries that have differing tax laws and rates. Our tax reporting is supported by current domestic tax laws in the countries in which we operate and the application of tax treaties between the various countries in which we operate. Our income tax reporting is subject to audit by domestic and foreign authorities. Our effective tax rate may change from year to year based on changes in the mix of activities and income earned among the different jurisdictions in which we operate; changes in tax laws in these jurisdictions; changes in the tax treaties between various countries in which we operate; changes in our eligibility for benefits under those tax treaties; and changes in the estimated values of deferred tax assets and liabilities. Tax laws, regulations, and administrative practices in various jurisdictions may be subject to significant change, with or without notice, due to economic, political, and other conditions, and significant judgment is required in evaluating and estimating our provision and accruals for these taxes. Such changes could result in a substantial increase in the effective tax rate on all or a portion of our income.
A significant portion of our business is conducted through U.S. subsidiaries. On December 22, 2017, the Tax Cuts and Jobs Act (the “Tax Act”“TCJA”) significantly revised U.S. federal corporate income tax law by, among other things, reducing the U.S. federal corporate income tax rate to 21%, limiting the tax deduction for interest expense to 30% of adjusted earnings, allowing immediate expensing for certain new investments, implementing a modified territorial tax system that includes a one-time transition tax on deemed repatriated earnings of foreignnon-U.S. subsidiaries of U.S. persons, imposing an additional U.S. tax on certainsuch non-U.S. subsidiaries’ earnings which are considered to be Global Intangible Low Taxed Income (referred to as “GILTI”) and imposing an alternative “base erosion and anti-abuse tax” (“BEAT”) on domesticU.S. corporations that make deductible payments to foreign related persons in excess of specified amounts and, effective for net operating losses (“NOLs”) arising in taxable years
beginning after December 31, 2017, eliminating net operating loss carrybacks, permitting indefinite net operating loss carryforwards and limiting the use of net operating loss carryforwards to 80% of current year taxable income.
There are a number of uncertainties and ambiguities as to the interpretation and application of many of the provisions in the Tax Act,TCJA, including the provisions relating to the modified territorial tax system, the one-time transition tax and the BEAT. While the U.S. Treasury Department and the Internal Revenue Service have issued proposed and final regulations and other guidance on many provisions in the TCJA that address some of these uncertainties and ambiguities, there are still no final regulations or other definitive guidance addressing other uncertainties and ambiguities in the TCJA. In the absence of guidance on these issues, we will use what we believe are reasonable interpretations and assumptions in interpreting and applying the Tax ActTCJA for purposes of determining our U.S. subsidiaries’ cash tax liabilities and results of operations, which may change as we receive additional clarification and implementation guidance and as the interpretation of the Tax ActTCJA evolves over time. It is possible that the Internal Revenue Service could issue subsequent guidance or take positions on audit that differ from the interpretations and assumptions that we previously made, which could have a material adverse effect on our cash tax liabilities, results of operations and financial condition.
Proposed changes to tax law in the U.S. and outside of the U.S. could affect our corporate tax rate.
In April 2021, U.S. President Joseph Biden proposed changes to the U.S. tax system. Since that date, both houses of Congress have released their own proposals for changes to the U.S. tax system, which proposals differ in a number of respects from the President’s proposal. The proposals under discussion have included changes to the U.S. corporate tax system that would increase U.S. corporate tax rates, although the most recent proposals do not include any such rate increase, and changes that would raise the tax rate on and make other changes to the taxation of GILTI earned by foreign subsidiaries. Also under consideration are modifications to the BEAT, which would tax certain payments, including some that are related to inventory, made to affiliates that are subject to an effective tax rate of less than specified rates. Certain proposals also include limitations on the participation exemption for foreign dividends received and interest expense. In addition, certain proposals include limitations on the deduction of interest expense and carryforwards of unused interest expense, as well as an excise tax on certain pharmaceutical products that are non-compliant with the proposed drug pricing legislation. We are unable to predict which, if any, U.S. tax reform proposals will be enacted into law, and what effects any enacted legislation might have on our liability for U.S. corporate tax. However, it is possible that the enactment of changes in the U.S. corporate tax system could have a material adverse effect on our liability for U.S. corporate tax and our consolidated effective tax rate.
On October 8, 2021, the Organisation for Economic Co-operation and Development (“OECD”)/G20 inclusive framework on Base Erosion and Profit Shifting (the “Inclusive Framework”) published a statement updating and finalizing the key components of a two-pillar plan on global tax reform originally agreed on July 1, 2021, and a timetable for implementation by 2023. The Inclusive Framework plan has now been agreed to by 141 OECD members, including several countries which did not agree to the initial plan. Under pillar one, taxing rights over multinational businesses with global turnover above €20 billion and a profit margin above 10% will generally be re-allocated to market jurisdictions. Under pillar two, the Inclusive Framework has agreed on a global minimum corporate tax rate of 15% for companies with revenue above €750 million, calculated on a country-by-country basis. On October 30, 2021, the G20 formally endorsed the new global minimum corporate tax rate rules. The Inclusive Framework agreement must now be implemented by the OECD Members who have agreed to the plan, effective in 2023. On December 20, 2021, the OECD published model rules to implement the pillar two rules, which are generally consistent with agreement reached by the Inclusive Framework in October 2021. Additional guidance is expected to be published in 2022. We will continue to monitor the implementation of the Inclusive Framework agreement by the countries in which we operate. While we currently expect our effective tax rate to be in the range of 12-14% over the long-term, we are unable to predict when and how the Inclusive Framework agreement will be enacted into law in these countries, and it is possible that the implementation of the Inclusive Framework agreement, including the global minimum corporate tax rate could have a material effect on our liability for corporate taxes and our consolidated effective tax rate.
Our provision for income taxes is based on certain estimates and assumptions made by management. Our consolidated income tax rate is affected by the amount of pre-tax income earned in our various operating jurisdictions, the availability of benefits under tax treaties, and the rates of taxes payable in respect of that income. We enter into many transactions and arrangements in the ordinary course of business in respect of which the tax treatment is not entirely certain. We therefore make estimates and judgments based on our knowledge and understanding of applicable tax laws and tax treaties, and the application of those tax laws and tax treaties to our business, in determining our consolidated tax provision. For example, certain countries could seek to tax a greater share of income than we will allocate to our business in such countries. The final outcome of any audits by taxation authorities may differ from the estimates and assumptions that we may use in determining our consolidated tax provisions and accruals. This could result in a material adverse effect on our consolidated income tax provision, financial condition and the net income for the period in which such determinations are made. See Note 17, “INCOME TAXES” to our audited Consolidated Financial Statements for a discussion of the tax audits, examinations, and other proceedings currently being conducted with respect to the Company and its subsidiaries.
Our deferred tax liabilities, deferred tax assets and any related valuation allowances are affected by events and transactions arising in the ordinary course of business, acquisitions of assets and businesses, and non-recurring items. The assessment of the appropriate amount of a valuation allowance against the deferred tax assets is dependent upon several factors, including estimates of the realization of deferred income tax assets, which realization will be primarily based on future taxable income, including the reversal of existing taxable temporary differences. Significant judgment is applied to determine the appropriate amount of valuation allowance to record. Changes in the amount of any valuation allowance required could materially increase or decrease our provision for income taxes in a given period.
See Note 18,17, "INCOME TAXES" to our audited Consolidated Financial Statements.
Risks Relating to Intellectual Property and Exclusivity
Products representing a significant amountThe expiration or loss of our revenue are not protected by patent protection or marketing or dataregulatory exclusivity rights or are nearing the end of their exclusivity period.for our key products could adversely impact our business. In addition, we have faced generic competition in the past and expect to face additional generic competition in the future. Competitors (including generic and biosimilar competitors) of our products could have a material adverse effect on our business, financial condition, cash flows and results of operations and could cause the market value of our common shares and/or debt securities to decline.
The development of new and innovative products, as well as protecting the underlying intellectual property of our product portfolio, is important to our success in all areas of our business. A significant number of the products we sell either: (i) have no meaningful exclusivity protection via patent or marketing or data exclusivity rights or (ii) are protected by patents or regulatory exclusivity periods that will be expiring in the near future. These products represent a significant amount of our revenues (See Item 1 “Business -7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Business Trends — Generic Competition - Generic Competition”and Loss of Exclusivity” in this Form 10-K for a list of some of these products). The expiration or loss of patent protection or regulatory exclusivity rights for our key products could adversely impact our business. In addition, even for our products that have patent protection or exclusivity rights, we face competition from similar products in the markets in which we participate. As a result, we face significant competition with respect to a substantial majority of our products.
Without exclusivity protection, competitors and other third parties (including generics and biosimilars) face fewer barriers in introducing competing products. Upon the expiration or loss of patent exclusivity or regulatory exclusivity for our products or otherwise upon the introduction of generic, biosimilar or other competitors (which may be sold at significantly lower prices than our products), we could lose a significant portion of sales and market share of that productthe applicable products in a very short period and, as a result, our revenues could be lower. In addition, the introduction of generic and biosimilar competitors may have a significant downward pressure on the pricing of our branded products which compete with such generics and biosimilars. Where we have the rights, we may elect to launch an authorized generic of such product (either ourselves or through a third party) prior to, upon or following generic entry, which may mitigate the anticipated decrease in product sales; however, even with the launch of an authorized generic, the decline in product sales of such product would still be expected to be significant, and the effect on our future revenues could be material. The introduction of competing products (including generic products and biosimilars) could have a material adverse effect on our business, financial condition, cash flows and results of operations and could cause the market value of our common shares and/or debt securities to decline.
We may fail to obtain, maintain, license, enforce or defend the intellectual property and proprietary rights required to conduct our business, or third parties may allege that we are infringing, misappropriating or otherwise violating their intellectual property rights, which could have a material adverse effect on our business, financial condition, cash flows and results of operations and could cause the market value of our common shares and/or debt securities to decline.
We strive to acquire, maintain, enforce and defend patent, trademark and other intellectual property and proprietary protections over our products and the processes used to manufacture these products. However, we may not be successful in obtaining such protections, or the patent, trademark and other intellectual property and proprietary rights we do obtain may not be sufficient in breadth and scope to fully protect our products or prevent competing products, or such patent and intellectual property rights may be susceptible to third partythird-party challenges, which could result in the loss of such intellectual property rights or the narrowing of scope of protection afforded by such rights. Our intellectual property and proprietary rights may also be circumvented by third parties. The failure to obtain, maintain, enforce or defend such intellectual property and proprietary rights, for any reason, could allow third parties to manufacture and sell products that compete with our products or may impact our ability to develop, manufacture and market our own products, which could have a material adverse effect on our business, financial condition, cash flows and results of operations and could cause the market value of our common shares and/or debt securities to decline.
Further, the pharmaceutical and medical device industries historically have generated substantial litigation concerning the manufacture, use and sale of products and we expect this litigation activity to continue. As a result, we expect that patents related to our products will be routinely challenged, and the validity or enforceability of our patents may not be upheld. In order to protect or enforce patent rights, we may initiate litigation against third parties. Our patents may also be challenged in administrative proceedings in the United States Patent and Trademark Office and patent offices outside of the United States. If we are not successful in defending an attack on our patents and maintaining exclusive rights to market one or more of our products still under patent protection, we could lose a significant portion of sales in a very short period. Even in cases where we prevail in an infringement claim, legal remedies available for harm caused to us may not be sufficient to make us whole. We may also become subject to, or threatened with, legal proceedings and infringement claims by third parties and may have to defend against charges that we infringed, misappropriated or otherwise violated patents or the intellectual property or proprietary rights of third parties. Third parties may also request a preliminary or permanent injunction from a court of law to prevent us from marketing a product. Even if we believe third-party intellectual property claims are without merit, there is no assurance that a court would find in our favor on questions of infringement, validity, enforceability or priority. If we are found to infringe, misappropriate or otherwise violate the intellectual property rights of others, we could lose our right to develop, manufacture or sell products, including our generic products, or could be required to pay monetary damages or royalties to license proprietary rights from third parties, which could be substantial and include treble damages and attorneys’ fees, if we are found to willfully infringe any intellectual property rights of others. However, we may not be able to obtain any required license from any third party on commercially reasonable terms or at all. Any of the foregoing events could have a material adverse effect on our business, financial condition, cash flows and results of operations and could cause the market value of our common shares and/or debt securities to decline.
For certain of our products and manufacturing processes, we rely on trade secrets and other proprietary information, which we seek to protect, in part, through information technology systems discussed in more detail in the following section, and, in part, by confidentiality and nondisclosure agreements with our employees, consultants, advisors and partners. Trade secrets and proprietary information are difficult to protect. We also attempt to enter into agreements whereby such employees, consultants, advisors and partners assign to us the rights in any intellectual property they develop.develop in the course of their engagement with us. These agreements may be breached, and we may not have adequate remedies for any breach. There can be no assurance that these agreements will be self-executing or otherwise provide meaningful protection for our trade secrets or other intellectual property or proprietary information. These agreements may not effectively prevent disclosure or misappropriation of such information and disputes may still arise with respect to the ownership of intellectual property. In addition, third parties may independently develop the same or similar proprietary information.information or otherwise gain access to our trade secrets or disclose our technology. Further, we have employed and expect to employ individuals who were previously employed at universities or other companies, including our competitors or potential competitors. Although we try to ensure that our employees, consultants, advisors and partners do not use the proprietary information or know-how of others in their work for us, we may be subject to claims that we or such persons have inadvertently or otherwise used or disclosed intellectual property, including trade secrets or other proprietary information of their former employers or other third parties, or to claims that we have improperly used or obtained such trade secrets. Litigation may be necessary to defend against these claims. If we fail in defending any such claims, in addition to paying monetary damages, we may lose valuable intellectual property rights and face increased competition to our business. The unauthorized access to or disclosure of suchour proprietary information or the loss of such intellectual property rights may impact our ability to develop, manufacture and market our own products or may assist competitors in the development, manufacture and sale of competing products, which could have a material adverse effect on our revenues, financial condition, cash flows or results of operations and could cause the market value of our common shares and/or debt securities to decline.
For a number of our commercialized products and pipeline products, including Xifaxan®, Siliq®, Lumify®, Plenvu®, Vyzulta®, Relistor®, Jublia® and Relistor®the pipeline products that are the subject of our recently announced licenses with Eyenovia, Inc., Novaliq GmbH, BHVI and Clearside Biomedical, Inc., we rely on licenses to patents and other technologies, know-how and intellectual property and proprietary rights held by third parties. Any loss, expiration, termination or suspension of our rights to such licensed intellectual property would result in our inability to continue to develop, manufacture and market ourthe applicable products or product candidates and, as a result, could have a material adverse effect on our business, financial condition, cash flows and results of operations and could cause the market value of our common shares and/or debt securities to decline. If these licenses are terminated, or if the underlying patents fail to provide the intended exclusivity, third parties, including our competitors, could have the freedom to seek regulatory approval of, and to market, products identical or similar to ours, and we may be required to cease our development and commercialization of certain of our products. Under some license agreements, we may not control the preparation, filing, prosecution or maintenance of the licensed intellectual property, or may not have the first right to enforce the intellectual property. In those cases, we may not be able to adequately influence patent prosecution or enforcement, or prevent inadvertent lapses of coverage due to failure to pay maintenance fees and we cannot be certain that these patents and patent applications will be prepared, filed, prosecuted, maintained, enforced and defended in a manner consistent with the best interests of our business and that does not compromise the patent rights. In the future, we may also need to obtain such licenses from third parties to develop, manufacture, market or continue to develop, manufacture or market our products. If we are unable to timely obtain these licenses on commercially reasonable terms or at all, our ability to develop, manufacture and market our products may be inhibited or prevented, which could have a material adverse effect on our business, financial condition, cash flows and results of operations and could cause the market value of our common shares and/or debt securities to decline.
Intellectual property litigation could cause us to spend substantial resources, distract our personnel from their normal responsibilities and cause the value of our common shares to decline.
Even if resolved in our favor, litigation or other legal proceedings relating to intellectual property claims may cause us to incur significant expenses, and could distract our technical and management personnel from their normal responsibilities. Furthermore, because of the substantial amount of discovery required in connection with intellectual property litigation, there is a risk that some of our confidential information could be compromised by disclosure during this type of litigation. In addition, there could be public announcements of the results of hearings, motions or other interim proceedings or developments and if securities analysts or investors perceive these results to be negative, it could have a substantial adverse effect on the value of our common shares. Such litigation or proceedings could substantially increase our operating losses and reduce the resources available for development activities or any future sales, marketing or distribution activities. We may not have sufficient financial or other resources to conduct such litigation or proceedings adequately. Some of our competitors or other third parties may be able to sustain the costs of such litigation or proceedings more effectively than we can because of their greater financial resources. Uncertainties resulting from the initiation and continuation of patent litigation or other proceedings could compromise our ability to compete in the marketplace, including compromising our ability to raise the funds necessary to continue our clinical trials, continue our research programs, license necessary technology from third parties or enter into
development collaborations that would help us commercialize our product candidates, if approved. Any of the foregoing events would harm our business, financial condition, results of operations and prospects and could cause the market value of our common shares and/or debt securities to decline.
Competitive Risks
We operate in extremely competitive industries. If competitors develop or acquire more effective or less costly pharmaceutical or OTC products or medical devices for our target indications, it could have a material adverse effect on our business, financial condition, cash flows and results of operations and could cause the market value of our common shares and/or debt securities to decline.
The pharmaceutical, OTC and medical device industries are extremely competitive. Our success and future growth depend, in part, on our ability to develop, license or acquire products that are more effective than those of our competitors or that incorporate the latest technologies and our ability to effectively manufacture and market those products. New market entrants and existing competitors are also challenging distribution models with innovation in non-traditional, disruptive models such as direct-to-consumer, Internet and other e-commerce sales opportunities. Many of our competitors, particularly larger pharmaceutical, OTC and medical device companies, have substantially greater financial, technical and human resources than we do.
Many of our competitors spend significantly more on research and development related activities than we do. Others may succeed in developing or acquiring products and technologies that are more effective, more advanced or less costly than those currently marketed or proposed for development by us. In addition, academic institutions, government agencies and other public and private organizations conducting research may seek patent protection with respect to potentially competitive products and may also establish exclusive collaborative or licensing relationships with our competitors. These competitors and the introduction of competing products (that may be more effective or less costly than our products) could make our products less competitive or obsolete, which could have a material adverse effect on our business, financial condition, cash flows and results of operations and could cause the market value of our common shares and/or debt securities to decline.
We cannot predict the timing or impact of the introduction of competitive products, including new market entries, “generic” versions of our approved products, or private label products that treat the same conditions as those of our products. In addition, the introduction of alternatives in medical devices and medical prescriptions could also alter the market and impede our sales growth. Our ability to respond to these competitive pressures will depend on our ability to decrease our costs and maintain gross margins and operating results and to introduce new products successfully and on a timely basis, and to achieve manufacturing efficiencies and sufficient manufacturing capacity and capabilities for such products.
Risks Relating to Our Shift in Business Strategy
Historically, a significant part of our business strategy has been business development through acquisitions. However, we expect the volume and size of acquisitions to be much lower for the foreseeable future and this could have a material adverse effect on our business, financial condition, cash flows and results of operations and could cause the market value of our common shares and/or debt securities to decline.
A significant part of our business strategy has historically been the acquisition of companies, businesses and products. However, we expect the volume and size of acquisitions to be much lower for the foreseeable future, as we focus on reducing our outstanding
debt levels. In addition, as a result of the recent amendments to our Credit Agreement, we are prohibited from making acquisitions, subject to certain exceptions, in excess of the aggregate Transaction Cap, until our leverage ratio (the ratio, as of the last day of any fiscal quarter, of Consolidated Total Debt (as defined in the Credit Agreement) as of such day to Consolidated Adjusted EBITDA (as defined in the Credit Agreement) for the four fiscal quarter period ending on such date) is less than 4.50 to 1.00. In addition, during this period, we will also be restricted from incurring debt to finance such acquisitions. See “-Debt-related Risks-we have incurred significant indebtedness, which restricts the manner in which we conduct business.” Furthermore, while we anticipate business development through acquisitions may be a component of our long-term strategy, we cannot predict if or when we will shift our focus back to more significant business development activities through acquisitions. This shift in focus away from business development through acquisitions and the restrictions on making acquisitions imposed on us by the Credit Agreement could have a material adverse effect on our business, financial condition, cash flows and results of operations, and could cause the market value of our common shares and/or debt securities to decline.
We have made commitments and public statements with respect to the cessation of or limitation on pricing increases for certain of our products.products, and we may implement or recommend similar measures in the future. These pricing decisions could have a material adverse effect on our business, financial condition, cash flows and results of operations and could cause the market value of our common shares and/or debt securities to decline.
In May 2016, we formed a new Patient Access and Pricing Committee responsible for the pricing of our drugs. The new committee’s first action was a recommendation, which we implemented, for an enhanced rebate program to all hospitals in the U.S. to reduce the price of our Nitropress® and Isuprel® products. In addition, the Patient Access and Pricing Committee made a commitment that the average annual price increase for our branded prescription pharmaceutical products will be set at no greater than single digits and below the 5-year weighted average of the increases within the branded biopharmaceutical industry.digits. Historically, this commitment has been reaffirmed in subsequent years. All future pricing actions will be subject to review by the Patient Access and Pricing Committee and we expect that the Patient Access and Pricing Committee will implement or recommend additional price changes and/or new programs to enhance patient access to our drugs. For example, following the evaluation and approval of the Patient Access and Pricing Committee, the Company made the decision to list its recently launched SILIQ™ (brodalumab) product, at $3,500 per month, which made SILIQ™ the lowest injectable biologic psoriasis treatment based on total annual costs when launched.
At this time, we cannot predict what specific pricing changes the committee will make for 2022 or beyond nor can we predict what other changes in our business practices we may implement with respect to pricing (such as imposing limits or prohibitions on the amount of pricing increases we may take on certain of our products or taking retroactive or future price reductions). We also cannot predict the impact such pricing decisions or changes will or would have on our business. However, any such changes could have a material adverse effect on our business, financial condition, cash flows and results of operations and could cause the market value of our common shares and/or debt securities to decline.
For example, any pricing changes and programs could affect the average realized prices for our products and may have a significant impact on our revenue trends. In addition, limiting or eliminating price increases on certain of our products will result in fewer or lower price appreciation credits from certain of our wholesalers. Price appreciation credits are generated when we increase a product’s wholesaler acquisition cost (“WAC”) under our contracts with certain wholesalers. Under such contracts, we are entitled to credits from such wholesalers for the impact of that WAC increase on inventory currently on hand
at the wholesalers. SuchIn wholesaler contracts, such credits, which can be significant, are used to offset against the total distribution service fees we pay on all of our products to each wholesaler. As a result, to the extent we decide to cease or limit price increases, we will have fewer or lower price appreciation credits to use to offset against our distribution fees owing to these wholesalers. In addition, under certain of our agreements with our wholesaler customers, we have price protection or price depreciation provisions, pursuant to which we have agreed to adjust the value of any on-hand or in-transit inventory with such customers in the event we reduce the price of any of our products. As a result, to the extent we reduce the WAC price for any of our products, we may owe a payment to such customers (or such customers may earn a credit to be offset against any amounts owing to us) equal to the amount of such inventory multiplied by the difference between the price at which they acquired the product inventory and the new reduced price.
As part of our change in business strategy,In prior years, we have undertaken a number of divestitures orof certain of our assets and business. We may, in the future, seek to divest additional assetassets and/or businesses, some of which may be material and/or transformative, which could adversely affect our business, prospects and opportunities for growth.
As partIn recent years, we have completed a number of the change indivestitures of our business strategy, we announced our intent to divest or otherwise dispose of assets, products or businesses that were not considered core to our ongoing operations or the needs of our primary-customer base. Pursuant to this strategy, in 2017, we completed a number of divestitures,base, including the divestitures of our Obagi Medical Products business, our iNova Pharmaceuticals business, our Dendreon Pharmaceuticals subsidiary, our Sprout Pharmaceuticals subsidiary, and the CeraVe®, AcneFree™ and AMBI® skincare brands. brands and our Amoun Pharmaceutical subsidiary. We may, in the future, seek to complete additional divestitures.
Each of these divestitures has been time-consuming and has diverted management’s attention. As a result of these divestitures (and others we may complete in the future complete)future), we may experience lower revenue and lower cash flows from operations. In addition, as was the case with our sale of our Sprout Pharmaceuticals subsidiary, we may recognize a loss on sale in connection with such
divestitures. We may also suffer adverse tax consequences as a result of such divestitures, including capital gains tax or the accelerated use of net operating lossesNOLs or other attributes. Furthermore, divesting certain of our businesses or assets may require us to incur restructuring charges, and we may not be able to achieve the cost savings that we expect from any such restructuring efforts or divestitures. Any such divestiture could reduce the size or scope of our business, our market share in particular markets, our opportunities with respect to certain markets, products or therapeutic categories or our ability to compete in certain markets and therapeutic categories. Furthermore, until we have achieved the applicable specified leverage ratio, we will be required to use the net proceeds (or substantial portions thereof) from certain asset sales to repay the term loans under the Restated Credit Agreement, and, as a result, will not be ablesubject to invest such proceeds into our business.certain reinvestment rights.
In addition, should we seek to divest other of our assets and business, we may be unable to dispose of such businesses and assets on satisfactory or commercially reasonable terms within our anticipated timeline. In addition, our ability to identify, enter into and/or consummate divestitures may be limited by competition we face from other companies in pursuing similar transactions in the pharmaceutical industry. Any divestiture or other disposition we pursue, whether we are able to complete it or not, may be complex, time consuming and expensive, may divert the management’s attention, have a negative impact on our customer relationships, cause us to incur costs associated with maintaining the business of the targeted divestiture during the disposition process and also to incur costs of closing and disposing the affected business or transferring the operations of the business to other facilities. The divestiture process may also further expose us to operational inefficiencies. In addition, if such transactions are not completed for any reason, the market price of our common shares may reflect a market assumption that such transactions will occur, and a failure to complete such transactions could result in a negative perception by the market of us generally and a decline in the market price of our common shares.
As a result of these factors, any divestiture (whether or not completed) could have a material adverse effect on our business, financial condition, cash flows and results of operations and could cause the market value of our common shares and/or debt securities to decline.
As part of our business strategy, we seek to identify and acquire certain assets, products and businesses.
Historically, part of our business strategy included acquiring and integrating complementary businesses, products, technologies or other assets. As part of our current business strategy, we again are seeking to complete certain acquisitions of assets, products and businesses, including by way of in-license arrangements, although not at the volume and pace that we did historically. Acquisitions or similar arrangements may be complex, time consuming and expensive. We may not consummate some negotiations for acquisitions or other arrangements, which could result in significant diversion of management and other employee time, as well as substantial out-of-pocket costs. In addition, there are a number of risks and uncertainties relating to our closing transactions. If such transactions are not completed for any reason, we will be subject to several risks, including the following: (i) the market price of our common shares may reflect a market assumption that such transactions will occur, and a failure to complete such transactions could result in a negative perception by the market of us generally and a decline in the market price of our common shares; and (ii) many costs relating to such transactions may be payable by us whether or not such transactions are completed.
If an acquisition is consummated, the integration of the acquired business, product or other assets into our Company may also be complex and time-consuming and, if such businesses, products and assets are not successfully integrated, we may not achieve the anticipated benefits, cost-savings or growth opportunities. Potential difficulties that may be encountered in the integration process include the following: integrating personnel, operations and systems, while maintaining focus on selling and promoting existing and newly-acquired products; coordinating geographically dispersed organizations; distracting management and employees from operations; retaining existing customers and attracting new customers; maintaining the business relationships the acquired company has established, including with health care providers; and managing inefficiencies associated with integrating the operations of the Company and the acquired business, product or other assets.
Furthermore, we may incur restructuring and integration costs and a number of non-recurring transaction costs associated with these acquisitions, combining the operations of the Company and the acquired company and achieving desired synergies. These fees and costs may be substantial. Non-recurring transaction costs include, but are not limited to, fees paid to legal, financial and accounting advisors, filing fees and printing costs. Additional unanticipated costs may be incurred in the integration of the businesses of the Company and the acquired company. There can be no assurance that the elimination of certain duplicative costs, as well as the realization of other efficiencies related to the integration of the acquired business, will offset the incremental transaction-related costs over time. Therefore, any net benefit may not be achieved in the near term, the long term or at all.
Finally, these acquisitions and other arrangements, even if successfully integrated, may fail to further our business strategy as anticipated or to achieve anticipated benefits and success, expose us to increased competition or challenges with respect to our products or geographic markets, and expose us to additional liabilities associated with an acquired business, product, technology or other asset or arrangement. Any one of these challenges or risks could impair our ability to realize any benefit from our acquisition or arrangement after we have expended resources on them.
If we fail to maintain our relationships with, and provide appropriate training in our products to, health care providers, including physicians, eyecare professionals, hospitals, large drug store chains, wholesale distributors, pharmacies, government entities and group purchasing organizations, customers may not buy certain of our products and our sales and profitability may decline.
We market our pharmaceutical products to physicians, hospitals, pharmacies and wholesalers through our own sales force and sell through wholesalers. In some markets, we additionally sell directly to physicians, hospitals and large drug store chains and we sell through distributors in countries where we do not have our own sales staff. We have developed and strive to maintain strong relationships with members of each of these groups who assist in product research and development and advise us on how to satisfy the full range of consumer needs. We rely on these groups to educate their patients and other members of their organizations regarding our products. Consumers in the pharmaceutical industry, particularly the contact lens and lens care customers in the eye-health industry, have a tendency not to switch products regularly and are repeat consumers.
We have historically benefitted from our strong relationships with these physicians, hospitals, pharmacies and wholesalers. Our ability to maintain strong relationships is essential to our future performance; however, we may not be able to maintain these relationships in the future. The success of certain of our products, particularly our vision care products, is impacted by a physician's initial recommendation of such products and a consumer's initial choice to use such products. As a result, the failure of certain of our products, particularly in our vision care business, to retain the support of pharmaceutical professionals, hospitals or group purchasing organizations and to retain the support of the end-users and the distributors and retailers to whom we sell such products, could have a material adverse effect on our sales and profitability.
Development and Regulatory Risks
The successful development of our pipeline products is highly uncertain and requires significant expenditures and time. In addition, obtaining necessary government approvals is time-consuming and not assured. The failure to commercialize certain of our pipeline products could have a material adverse effect on our business, financial condition, cash flows and results of operations and could cause the market value of our common shares and/or debt securities to decline.
We currently have a number of pipeline products in development. We and our development partners, as applicable, conduct extensive preclinical studies and clinical trials to demonstrate the safety and efficacy in humans of our pipeline products in order to obtain regulatory approval for the sale of our pipeline products. Preclinical studies and clinical trials are expensive, complex, can take many years and have uncertain outcomes. None of, or only a small number of, our research and development programs may actually result in the commercialization of a product. We will not be able to commercialize our pipeline products if preclinical studies do not produce successful results or if clinical trials do not demonstrate safety and efficacy in humans. Furthermore, success in preclinical studies or early-stage clinical trials does not ensure that later stage clinical trials will be successful nor does it ensure that regulatory approval for the product candidate will be obtained. In addition, the process for the completion of pre-clinical and clinical trials is lengthy and may be subject to a number of delays for
various reasons, which would delay the commercialization of any successful product. If our development projects are not successful or are significantly delayed, we may not recover our substantial investments in the pipeline product and our failure to bring these pipeline products to market on a timely basis, or at all, could have a material adverse effect on our business, financial condition, cash flows and results of operations and could cause the market value of our common shares and/or debt securities to decline.
In addition, FDA and Health Canada approval must be obtained in the U.S. and Canada, respectively, EMA approval (drugs) and CE Marking (devices) and/or registration under the European Commission’s Medical Device Regulation (“MDR”) 2017/745 must be obtained in countries in the EU and similar approvals must be obtained from comparable agencies in other countries, prior to marketing or manufacturing new pharmaceutical and medical device products for use by humans. Obtaining such regulatory approvals for new products and devices and manufacturing processes can take a number of years and involves the expenditure of substantial resources. We may face additional challenges with respect to EMA approval and CE Marking in the EU as a result of additional requirements for approval in the EU that may be more burdensome than those required by the FDA and Health Canada.
Even if such products appear promising in development stages, regulatory approval may not be achieved and no assurance can be given that we will obtain approval in those countries where we wish to commercialize such products. Nor can any assurance be given that if such approval is secured, the approved labeling will not have significant labeling limitations, including limitations on the indications for which we can market a product, or require onerous risk management programs. Furthermore, from time to time, changes to the applicable legislation, regulations or policies may be introduced that change these review and approval processes for our products, which changes may make it more difficult and costly to obtain or maintain regulatory approvals.
Our marketed drugs will be subject to ongoing regulatory review.
Following initial regulatory approval of any products, we or our partners may develop or acquire, we will be subject to continuing regulatory review by various government authorities in those countries where our products are marketed or intended to be marketed, including the review of adverse drug events and clinical results that are reported after product candidates become commercially available. In addition, we are subject to ongoing audits and investigations of our facilities and products by the FDA, as well as other regulatory agencies in and outside the U.S.
If we fail to comply with the regulatory requirements in those countries where our products are sold, we could lose our marketing approvals or be subject to fines or other sanctions. Also, as a condition to granting marketing approval of a product, the applicable regulatory agencies may require a company to conduct additional clinical trials or remediate Current Good Manufacturing Practice ("CGMP") issues, the results of which could result in the subsequent loss of marketing approval, changes in product labeling or new or increased concerns about side effects or efficacy of a product.
In April 2017, the European Union adopted MDR, which repeals and replaces the Medical Device Directive (“MDD”) and Active Implantable Medical Devices Directive (“AIMDD”) 90/385/EEC. The MDR, for most parts, became applicable on May 26, 2021. Under the MDR, several transitional measures apply to medical devices that are certified under the MDD or AIMDD prior to May 26, 2021 or, for class I devices, for which a declaration of conformity was drawn up prior to May 26, 2021, allowing these devices to be placed on the market after May 26, 2021 under certain conditions for a transitional period. However, if we make any significant changes in the design or intended purpose of our devices, they will no longer benefit from such transitional periods. Generally, the MDR imposes stricter requirements on manufacturers, importers and distributors of medical devices. Moreover, the requirements to provide clinical data for medical devices has become stricter and as a result we may need to conduct new time consuming and costly clinical investigations with our existing medical devices to meet the new requirements, including to obtain CE certificates under the MDR. We may, or may not, be able to provide this data in time to obtain MDR certifications in a timely fashion when our existing certificates expire. These new regulations impact all of our existing and pipeline medical device products being sold in the EEA for which we are legal manufacturer, importer and/or distributor, including contact lens, lens care, eye health, aesthetic and surgical areas, as well as certain of our products outside the EEA, which rely on the EEA registration to support registration in those other countries. These products, in the aggregate, account for a meaningful portion of our net revenue in this region. While we are working to ensure compliance with these new regulations for all impacted products, we may not be able to achieve compliance for all products within the applicable transition period. If we fail to achieve compliance, we will not be able to market and sell the non-compliant products in the EEA, nor will we be able to rely on the non-compliant registration for such products in regions outside of the EEA, which could have a material adverse effect on our business, financial condition, cash flows and results of operations in the EEA and, possibly, on a consolidated basis, and could cause the market value of our common shares to decline.
While EU law is applicable in Northern Ireland, the UK Medical Devices Regulations 2002/68 also need to be complied with in Great Britain. Medical device manufacturers who have CE marked devices will be able to continue to place them on the market in the whole of the United Kingdom (the “UK”) until July 1, 2023 without a change in labeling. After that, devices
destined for Great Britain will be required to follow the UK regulatory regime and to be labeled with the UKCA mark. Northern Ireland will, however, continue to accept CE marked devices. There are some extra hurdles for manufacturers who are based outside the UK such as the requirement to appoint a UK Responsible Person (“UKRP”) to take on certain regulatory responsibilities with respect to the Medicines and Healthcare products Regulatory Agency (“MHRA”) and users or customers in the UK. To enable devices to be placed on the market in the UK after January 1, 2021 (even for CE marked devices), a UK manufacturer must register with the MHRA, as must a UKRP for an overseas manufacturer. Such registering entity will then register each of the devices for which they are responsible for placing on the market in the UK, whether in Great Britain or Northern Ireland. This may create added expense and challenges as explained below.
Until May 25, 2021, our products bearing a CE mark could be exported from the EEA to Switzerland. However, as of May 26, 2021, the EU no longer applies the Mutual Recognition Agreement between the EEA and Switzerland. Accordingly, legal manufacturers in Switzerland will be required to appoint a European Union authorized representative, and manufacturers outside of Switzerland will be required to appoint a Swiss authorized representative in compliance with the Medical Device Ordinance. As a consequence, we are or will be required to appoint an authorized representative in Switzerland in order to export our CE-marked medical devices to Switzerland beginning in January 2022 through August 2022, depending on the class of the device or system in question.
In addition, incidents of adverse drug reactions, unintended side effects or misuse relating to our products could result in additional regulatory controls or restrictions, or even lead to the regulatory authority requiring us to recall or withdraw the product from the market. Further, if faced with these incidents of adverse drug reactions, unintended side effects or misuse relating to our products, we may elect to voluntarily implement a recall or market withdrawal of our product. A recall or market withdrawal, whether voluntary or required by a regulatory authority, may involve significant costs to us, potential disruptions in the supply of our products to our customers and reputational harm to our products and business, all of which could harm our ability to market our products and could have a material adverse effect on our business, financial condition, cash flows and results of operations and could cause the market value of our common shares and/or debt securities to decline.
Complying with existing government regulation of dietary supplements, including our eye vitamins and mineral supplements, in the U.S., Canada and elsewhere could increase our costs significantly and adversely affect our financial results.
The manufacturing, formulation, packaging, labeling and advertising of the Company’s dietary supplement products are also subject to regulation by certain federal, state and foreign agencies, including the FDA, the Federal Trade Commission (the “FTC”), and the Consumer Product Safety Commission, in the U.S., and by Health Canada in Canada. The FDA has authority in the U.S. over the adulteration or misbranding of dietary supplements. There are requirements relating to ingredient safety, new dietary ingredient notifications, labeling, claims notifications, and adverse event reporting among other requirements. While we believe our products comply with those requirements, the FDA may challenge positions we have taken with respect to the formulation or labeling of a dietary supplement product. We are also subject to risks relating to evolving regulations of dietary supplement products, including our eye vitamins and mineral supplements, as the FDA and other applicable agencies have in the past and may in the future consider additional or more stringent regulations of dietary supplements and other products. Such developments could require reformulation of certain of our products to meet new standards, additional record-keeping obligations, increased documentation of the properties of certain products, additional or different labeling, additional scientific substantiation, adverse event reporting or similar obligations, or could result in recalls or the discontinuance of certain of our products that are not able to be reformulated. Any such developments could increase our costs significantly. In addition, the FDA also has comprehensive regulations for CGMP for those who manufacture, package or hold dietary supplement products. These regulations focus on practices that ensure the identity, purity, quality, strength and composition of dietary supplements that are manufactured. We or our contract manufacturers may not be able to comply with such regulations without incurring additional expenses, which could be significant.
Manufacturing and Supply Risks
If we or our third-party manufacturers are unable to manufacture our products or the manufacturing process is interrupted due to failure to comply with regulations or for other reasons, the interruption of the manufacture of our products could adversely affect our business. Other manufacturing and supply difficulties or delays may also have a material adverse effect on our business, financial condition, cash flows and results of operations and could cause the market value of our common shares and/or debt securities to decline.
Our manufacturing facilities and those of our contract manufacturers must be inspected and found to be in full compliance with CGMP, quality system management requirements or similar standards before approval for marketing. Compliance with CGMP regulations requires the dedication of substantial resources and requires significant expenditures. In addition, while we attempt to build in certain contractual obligations on our third-party manufacturers, we may not be able to ensure that such third-parties comply with these obligations. Our failure or that of our contract manufacturers to comply with
CGMP regulations, quality system management requirements or similar regulations outside of the U.S. could result in enforcement action by the FDA or its foreign counterparts, including, but not limited to, warning letters, fines, injunctions, civil or criminal penalties, recall or seizure of products, total or partial suspension of production or importation, suspension or withdrawal of regulatory approval for approved or in-market products, refusal of the government to renew marketing applications or approve pending applications or supplements, refusal of certificates for export to foreign jurisdictions, suspension of ongoing clinical trials, imposition of new manufacturing requirements, closure of facilities and criminal prosecution. These enforcement actions could lead to a delay or suspension in production, which could have a material adverse effect on our competitive position, business, financial condition, results of operations and cash flows and could cause the market value of our common shares and/or debt securities to decline.
In addition, our manufacturing and other processes use complicated and sophisticated equipment, which sometimes requires a significant amount of time to obtain and install. Manufacturing complexity, testing requirements and safety and security processes combine to increase the overall difficulty of manufacturing these products and resolving manufacturing problems that we may encounter. Although we endeavor to properly maintain our equipment (and require our contract manufacturers to properly maintain their equipment), including through on-site quality control and experienced manufacturing supervision, and have key spare parts on hand, our business could suffer if certain manufacturing or other equipment, or all or a portion of our or their facilities, were to become inoperable for a period of time. We could experience substantial production delays or inventory shortages in the event of any such occurrence until we or they repair such equipment or facility or we or they build or locate replacement equipment or a replacement facility, as applicable, and seek to obtain necessary regulatory approvals for such replacement. For example, in 2021, a third-party supplier of sterilization services for our lens care solution bottles and caps at our Milan, Italy facility notified us of inconsistencies in the sterilization data versus certificates of conformance previously submitted to us by that supplier. Although we determined that this issue did not affect the safety or performance of any of our products and was limited to a specific number of lots for certain of our products, out of an abundance of caution, in conjunction with the appropriate notified body and responsible health authorities, we contained and/or recalled down to the consumer level the limited number of affected lots of products, which resulted in $8 million of manufacturing variances and $6 million of returns. Further, due to the limited availability of qualified materials caused by this issue, production at the Milan facility could not keep up with demand (even with leveraging increased production at another of our manufacturing facilities to support some of the demand), which negatively impacted our sales for the affected products in this region during 2021. Any interruption in our manufacture of products could adversely affect the sales of our current products or introduction of new products and could have a material adverse effect on our business, financial condition, cash flows and results of operations and could cause the market value of our common shares and/or debt securities to decline.
The supply of our products to our customers (or, in some cases, supply from our contract manufacturers to us) is subject to and dependent upon the use of transportation services. Disruption of transportation services (including as a result of weather conditions) could have a material adverse effect on our business, financial condition, cash flows and results of operations and could cause the market value of our common shares and/or debt securities to decline. In addition, any prolonged disruption in the operations of our existing distribution facilities, whether due to technical, labor or other difficulties, weather conditions, equipment malfunction, contamination, failure to follow specific protocols and procedures, destruction of or damage to any facility or other reasons, could have a material adverse effect on our business, financial condition, cash flows and results of operations and could cause the market value of our common shares and/or debt securities to decline.
For some of our finished products and raw materials, we obtain supply from one or a limited number of sources. If we are unable to obtain components or raw materials, or products supplied by third parties, our ability to manufacture and deliver our products to the market would be impeded, which could have a material adverse effect on our business, financial condition, cash flows and results of operations and could cause the market value of our common shares and/or debt securities to decline.
Some components and raw materials used in our manufactured products, and some finished products sold by us, are currently available only from one or a limited number of domestic or foreign suppliers. For example, with respect to some of our largest or most significant products, the supply of the finished product for each of our Siliq®, Duobrii®, Bryhali®, Lumify®, Trulance®, Vyzulta®, SofLens®, Wellbutrin XL®, Ocuvite®, PreserVision®, Renu®, Aplenzin®, Xenazine®, Relistor® Oral and PureVision® products are only available from a single source and the supply of active pharmaceutical ingredient for each of our Siliq®, Duobrii®, Bryhali®, Trulance®, Vyzulta®, Xenazine®, Aplenzin® and Relistor® Oral products are also only available from a single source. In the event an existing supplier fails to supply product on a timely basis and/or in the requested amount, supplies product that fails to meet regulatory requirements, becomes unavailable through business interruption or financial insolvency or loses its regulatory status as an approved source or we are unable to renew current supply agreements when such agreements expire and we do not have a second supplier, we may be unable to obtain the required components, raw materials or products on a timely basis or at commercially reasonable prices. We attempt to mitigate these risks by maintaining safety stock of these products, but such safety stock may not be sufficient. In addition, in some cases, only a single source of active pharmaceutical ingredient is identified in filings with regulatory agencies, including the FDA, and cannot be changed without
prior regulatory approval, which would involve time and expense to us. A prolonged interruption in the supply of a single-sourced raw material, including the active pharmaceutical ingredient, or single-sourced finished product could have a material adverse effect on our business, financial condition, cash flows and results of operations and could cause the market value of our common shares and/or debt securities to decline. In addition, these third-party manufacturers may have the ability to increase the supply price payable by us for the manufacture and supply of our products, in some cases without our consent.
As a result, our dependence upon others to manufacture and supply our products may adversely affect our profit margins and our ability to obtain approval for and produce our products on a timely and competitive basis, which could have a material adverse effect on our business, financial condition, cash flows and results of operations and could cause the market value of our common shares and/or debt securities to decline.
Changes in inventory levels or fluctuations in buying patterns by our large distributor and retail customers may adversely affect our sales and earnings and add to sales variability from quarter to quarter.
We balance the need to maintain inventory levels that are sufficient to ensure competitive lead times against the risk of inventory obsolescence because of changing customer requirements, fluctuating commodity prices, changes to our products, product transfers or the life-cycle of our products. In order to successfully manage our inventories, we must estimate demand from our customers and produce products that substantially correspond to that demand. If we fail to adequately forecast demand for any new or existing product, or fail to determine the appropriate product mix for production purposes, we may face production capacity issues in manufacturing sufficient quantities of a given product. In addition, failures in our information technology systems or human error could also lead to inadequate forecasting of our overall demand or product mix.
We have a significant number of unique products, and we anticipate that number will continue to grow over time. As a result, the demand forecasting precision required for us to avoid production capacity issues will also increase, which could increase the risk of product unavailability and lost sales. Additionally, an increasing number of unique products could increase global inventory requirements, negatively impacting our working capital performance and leading to write-offs due to obsolescence and expired products.
Due to the lead times necessary to obtain and install new equipment and ramp up production of product lines, if we fail to adequately forecast the need for additional manufacturing capacity, whether for new or existing products, we may be unable to scale production in a timely manner to meet demand for our products. In addition, the technically complex manufacturing processes required to manufacture many of our products increase the risk of production failures, and can increase the cost of producing our goods. As a result, because the production process for many of our products is complex and sensitive, the cost of production and the chance of production failures and lengthy supply interruptions is increased, which can have a substantial impact on our inventory levels.
Finally, a significant portion of our products are sold to major health care distributors and major retail chains in Canada, the United States and abroad. Consequently, our sales and quarterly growth comparisons, as well as our estimates for required inventory levels, may be affected by fluctuations in the buying patterns of major distributors, retail chains and other trade buyers. These fluctuations may result from seasonality, pricing, large retailers' and distributors' buying decisions or other factors. If we overestimate demand and produce too much of a particular product, we face a risk of inventory obsolescence, leaving us with inventory that we cannot sell profitably or at all. In addition, we may have to write down such inventory if we are unable to sell it for its recorded value. Conversely, if we underestimate demand and produce insufficient quantities of a product, we could be forced to produce that product at a higher price and forego profitability in order to meet customer demand. For example, if a competitor initiates a recall and there is an unexpected increase in the demand for our products, we may not be able to meet such increased demand. Insufficient inventory levels may lead to shortages that result in loss of sales opportunities altogether as potential end-customers turn to competitors' products that are readily available. If any of these situations occur frequently or in large volumes or if we are unable to effectively manage our inventory and that of our distribution partners, this could have a material adverse effect on our business, financial condition, cash flows and results of operations and could cause the market value of our common shares and/or debt securities to decline.
Commercialization Risks
Our approved products may not achieve or maintain expected levels of market acceptance.
Even if we are able to obtain and maintain regulatory approvals for our pharmaceutical and medical device products, generic or branded, the success of these products is dependent upon achieving and maintaining market acceptance. Launching and commercializing products is time consuming, expensive and unpredictable. The commercial launch of a product takes significant time, resources, personnel and expertise, which we may not have in sufficient levels to achieve success, and is subject to various market conditions, some of which may be beyond our control. There can be no assurance that we will be able to, either by ourselves or in collaboration with our partners or through our licensees or distributors, successfully launch and commercialize new products or gain market acceptance for such products. New product candidates that appear promising in development may fail to reach the market or may have only limited or no commercial success. While we have been successful in launching some of our products, we may not achieve the same level of success with respect to all of our new products (such as our Siliq™ product (brodalumab)).products. Our inability to successfully launch our new products may negatively impact the commercial success of such product, which could have a material adverse effect on our business, financial condition, cash flows and results of operations and could cause the market value of our common shares and/or debt securities to decline. Our inability to successfully launch our new products could also lead to material impairment charges.
Levels of market acceptance for our new products (such as our Siliq™ product) could be impacted by several factors, some of which are not within our control, including but not limited to the following:
▪safety, efficacy, convenience and cost-effectiveness of our products compared to products of our competitors;
▪scope of approved uses and marketing approval;
▪availability of patent or regulatory exclusivity;
▪timing of market approvals and market entry;
▪ongoing regulatory obligations following approval, such as the requirement to conduct a Risk Evaluation and Mitigation Strategy ("REMS") programs;
▪any restrictions or “black box” warnings required on the labeling of such products;
▪availability of alternative products from our competitors;
▪acceptance of the price of our products;
▪effectiveness of our sales forces and promotional efforts;
▪the level of reimbursement of our products;
▪acceptance of our products on government and private formularies;
▪ability to market our products effectively at the retail level or in the appropriate setting of care; and
▪the reputation of our products.
Further, the market perception and reputation of our products and their safety and efficacy are important to our business and the continued acceptance of our products. Any negative publicity about our products, such as the discovery of safety issues with our products, adverse events involving our products, or even public rumors about such events, could have a material adverse effect on our business, financial condition, cash flows or results of operation or could cause the market value of our common shares and/or debt securities to decline. In addition, the discovery of significant problems with a product similar to one of our products that implicate (or are perceived to implicate) an entire class of products or the withdrawal or recall of such similar products could have a material adverse effect on sales of our products. Accordingly, new data about our products, or products similar to our products, could cause us reputational harm and could negatively impact demand for our products due to real or perceived side effects or uncertainty regarding safety or efficacy and, in some cases, could result in product withdrawal.
If our products fail to gain, or lose, market acceptance, our revenues would be adversely impacted and we may be required to take material impairment charges, all of which could have a material adverse effect on our business, financial condition, cash flows and results of operations and could cause the market value of our common shares and/or debt securities to decline.
For certain of our products, we depend on reimbursement from governmental and other third partythird-party payors and a reduction in reimbursement could reduce our product sales andand/or revenue. In addition, failure to be included in formularies developed by managed care organizations and coverage by other organizations may negatively impact the utilization of our products, which could harm our market share and could have a material adverse effect on our business, financial condition, cash flows and results of operations and could cause the market value of our common shares and/or debt securities to decline.
Sales of certain of our products are dependent, in part, on the availability and extent of reimbursement from government health administration authorities, private health insurers, pharmacy benefit managers and other organizations of the costs of our products and the continued reimbursement and coverage of our products in such programs. Changes in government regulations
or private third partythird-party payors’ reimbursement policies may reduce reimbursement for our products. In addition, such third partythird-party payors may otherwise make the decision to reduce reimbursement of some or all our products or fail to cover some or all our products in such programs or assert that reimbursements were not in accordance with applicable requirements. For example, these decisions may be based on the price of our products or our current or former pricing practices and decisions. Any reduction or elimination of such reimbursement or coverage could result in a negative impact on the utilization of our products and, as a result, could have a material adverse effect on our business, financial condition, cash flows and results of operations and could cause the market value of our common shares and/or debt securities to decline.
Managed care organizations and other third partythird-party payors try to negotiate the pricing of medical services and products to control their costs. Managed care organizations and pharmacy benefit managers typically develop formularies to reduce their cost for medications. Formularies can be based on the prices and therapeutic benefits of the available products. Due to their lower costs, generic products are often favored. The breadth of the products covered by formularies varies considerably from one managed care organization to another, and many formularies include alternative and competitive products for treatment of particular medical conditions. Failure to be included in such formularies or to achieve favorable formulary status may negatively impact the utilization and market share of our products. If our products are not included within an adequate number of formularies or adequate reimbursement levels are not provided, or if those policies increasingly favor generic products, this could have a material adverse effect on our business, financial condition, cash flows and results of operations or result in additional pricing pressure on our products and could cause the market value of our common shares and/or debt securities to decline.
Our fulfillment arrangements with Walgreens and our dermatology cash-pay prescription program may not be successful.
At the beginning of 2016, we launched a brand fulfillment arrangement with Walgreen Co. ("Walgreens"),Walgreens, pursuant to which we have made certain of our dermatology and ophthalmology products available to eligible patients through a patient access and co-pay program available at Walgreens U.S. retail pharmacy locations, as well as participating independent retail pharmacies. We have, in the past, experienced certain operational and other issues respecting this arrangement, and, during 2016 and 2017, we experiencedincluding lower than anticipated average realized prices associated with these products through this arrangement. In July 2019, we entered into an amendment to the existing fulfillment agreement to address some of these issues. We cannot guarantee that these arrangementsthis arrangement will continue to be successful in the future, nor can we guarantee that additional operational issues will not be encountered, nor can we guarantee that we will be able to successfully negotiate with Walgreens any improvements or amendments to this arrangement we identify as necessary or desired. In addition, we cannot predict how the market, including customers, doctors, patients, pharmacy benefit managers and third partythird-party payors, or governmental agencies, will continue to react to these arrangements and programs. If these arrangementsthis arrangement or programs fail,program fails, if they do not achieve sufficient success and market acceptance, if we face retaliation from third parties as a result of these arrangementsthis arrangement and programsprogram (for example, in the form of limitations on or exclusions from the reimbursement of our products) or if any part of these arrangementsthis arrangement is found to be non-compliant with applicable law or regulations, this could have a material adverse effect on our business, financial condition, cash flows and results of operations and could cause the market value of our common shares and/or debt securities to decline.
In addition, in February 2019, we launched Dermatology.com, a cash-pay product acquisition program offering certain branded Ortho Dermatologics products directly to patients. In March 2020, the name Dermatology.com was removed as the cash-pay product program name, with the name Dermatology.com limited to only online usage, including future digital teledermatology and e-commerce offerings. This program is designed to address the affordability and availability of certain branded dermatology products, when insurers and pharmacy benefit managers are no longer offering those branded prescription pharmaceutical products under their designated pharmacy benefit offerings. We cannot guarantee that this program will be successful or that we will continue to add new products to the program. In addition, we cannot predict how the market, including customers, doctors and patients will react to this program. If this program fails, if it does not achieve sufficient success and market acceptance or if any part of this program is found to be non-compliant with applicable law or regulations, this could have a material adverse effect on our business, financial condition, cash flows and results of operations and could cause the market value of our common shares and/or debt securities to decline.
Catastrophic events may disrupt our business.
We have operations and facilities which sell and distribute our products in many parts of the world. Natural events (such as a hurricane or major earthquake), terrorist attacks, pandemics or other catastrophic events, including adverse weather events, could cause delays in developing, manufacturing or selling our products. Such events that occur in major markets where we sell our products could reduce the demand for our products in those areas and, as a result, impact our sales into those markets. In either case, any such disruption could have a material adverse effect on our business, financial condition and results of operations and could cause the market value of our common shares and/or debt securities to decline.
The illegal distribution and sale of counterfeit versions of our products may reduce demand for our products or have a negative impact on the reputation of our products, which could have a material adverse effect on our business, financial condition, cash flows and results of operations and could cause the market value of our common shares and/or debt securities to decline.
Third parties may illegally distribute and sell counterfeit versions of our products, which do not meet or adhere to the rigorous quality, safety, manufacturing, storage and handling standards and regulations that apply to our products. The prevalence of counterfeit products is a growing industry-wide issue due to the widespread use of the Internet, which has greatly facilitated the ease by which counterfeit products can be advertised, purchased and delivered. The discovery of safety or efficacy issues, adverse events or even death or personal injury associated with or caused by counterfeit products may be attributed to our products and may cause reputational harm to our products or the Company. We may not be able to detect or, if detected, prevent or prohibit the sale of such counterfeit products. As a result, the illegal sale or distribution of counterfeit products may negatively impact the demand for and sales of our products, which could have a material adverse effect on our business, financial condition, cash flows and results of operations and could cause the market value of our common shares and/or debt securities to decline.
Our revenues and profits could be reduced by imports from countries where our products are available at lower prices.
Prices for our products are based on local market economics and competition and differ from country to country. Our sales in countries with relatively higher prices may be reduced if products can be imported into those or other countries from lower price markets. If this happens with our products, our revenues and profits may be adversely affected, which could have a material adverse effect on our business, financial condition, cash flows and results of operations and could cause the market value of our common shares and/or debt securities to decline.
Our policies regarding returns, allowances and chargebacks, and marketing programs adopted by wholesalers, may reduce our revenues in future fiscal periods.
We provide certain rebates, allowances, chargebacks and other credits to our customers with respect to certain of our products. For example, we make payments or give credits to certain wholesalers for the difference between the invoice price paid to us by our wholesaler customer for a particular product and the negotiated price that such wholesaler sells such products to its hospitals, group purchasing organizations, pharmacies or other retail customers. We also give certain of our customers credits on our products that such customers hold in inventory after we have decreased the WAC prices of such products, such credit being for the difference between the old and new price. In addition, we also implement and maintain returns policies, pursuant to which our customers may return product to us in certain circumstances in return for a credit. Although we establish reserves based on our prior experience, wholesaler data, then-current on-hand inventory, our best estimates of the impact that these policies may have in subsequent periods and certain other considerations, we cannot ensure that our reserves are adequate or that actual product returns, rebates, allowances and chargebacks will not exceed our estimates, which could have a material adverse effect on our business, financial condition, cash flows and results of operations and could cause the market value of our common shares and/or debt securities to decline.
We may experience declines in sales volumes or prices of certain of our products as the result of the concentration of sales to wholesalers and the continuing trend towards consolidation of such wholesalers and other customer groups and this could have a material adverse effect on our business, financial condition, cash flows and results of operations and could cause the market value of our common shares and/or debt securities to decline.
For certain of our products, a significant portion of our sales are to a relatively small number of customers. If our relationship with one or more of such customers is disrupted or changes adversely or if one or more of such customers experience financial difficulty or other material adverse changes in their businesses, it could materially and adversely affect our sales and financial results, which could have a material adverse effect on our business, financial condition, cash flows and results of operations and could cause the market value of our common shares and/or debt securities to decline.
In addition, wholesalers and retail drug chains have undergone, and are continuing to undergo, significant consolidation. This consolidation may result in these groups gaining additional purchasing leverage and consequently increasing the product pricing pressures facing our business. The result of these developments could have a material adverse effect on our business, financial condition, cash flows and results of operations and could cause the market value of our common shares and/or debt securities to decline.
We have entered into distribution agreements with other companies to distribute certain of our products at supply prices based on net sales. Declines in the pricing and/or volume, over which we have no or limited control, of such products, and therefore the amounts paid to us, could have a material adverse effect on our business, financial condition, cash flows and results of operations and could cause the market value of our common shares and/or debt securities to decline.
Certain of our products are the subject of third-party distribution or sublicense agreements, pursuant to which we may manufacture and sell products to other companies, which distribute such products in return for a royalty or a supply price, in both cases which are often based on net sales. Our ability to control pricing and volume of these products may be limited and, in some cases, these companies make all distribution and pricing decisions independently of us. If the pricing or volume of such products declines, our revenues would be adversely impacted which could have a material adverse effect on our business, financial condition, cash flows and results of operations and could cause the market value of our common shares and/or debt securities to decline.
Manufacturing and Supply Risks Relating
If we or our third-party manufacturers are unable to manufacture our products or the International Scopemanufacturing process is interrupted due to failure to comply with regulations or for other reasons, the interruption of the manufacture of our Business
Ourproducts could adversely affect our business. Other manufacturing and supply difficulties or delays may also have a material adverse effect on our business, financial condition, cash flows and results of operations are subject to risks arising fromand could cause the international scopemarket value of our operations.common shares and/or debt securities to decline.
We conduct a significant portionOur manufacturing facilities and those of our business outsidecontract manufacturers must be inspected and found to be in full compliance with CGMP, quality system management requirements or similar standards before approval for marketing. Compliance with CGMP regulations requires the U.S.dedication of substantial resources and Canada and may,requires significant expenditures. In addition, while we attempt to build in the future, expandcertain contractual obligations on our operations into new countries, including emerging markets. We sell our pharmaceutical and medical device products in many countries around the world. All of our foreign operations are subject to risks inherent in conducting business abroad, including, among other things:
difficulties in coordinating and managing foreign operations, including ensuring that foreign operations comply with foreign laws as well as Canadian and U.S. laws applicable to Canadian companies with U.S. and foreign operations, such as export laws and the U.S. Foreign Corrupt Practices Act (“FCPA”), the Canadian Corruption of Foreign Public Officials Act, and other applicable worldwide anti-bribery laws;
price and currency exchange controls;
restrictions on the repatriation of funds;
scarcity of hard currency, including the U.S. dollar, which may require a transfer or loan of funds to the operations in such countries, which theythird-party manufacturers, we may not be able to repayensure that such third-parties comply with these obligations. Our failure or that of our contract manufacturers to comply with
CGMP regulations, quality system management requirements or similar regulations outside of the U.S. could result in enforcement action by the FDA or its foreign counterparts, including, but not limited to, warning letters, fines, injunctions, civil or criminal penalties, recall or seizure of products, total or partial suspension of production or importation, suspension or withdrawal of regulatory approval for approved or in-market products, refusal of the government to renew marketing applications or approve pending applications or supplements, refusal of certificates for export to foreign jurisdictions, suspension of ongoing clinical trials, imposition of new manufacturing requirements, closure of facilities and criminal prosecution. These enforcement actions could lead to a delay or suspension in production, which could have a material adverse effect on a timely basis;our competitive position, business, financial condition, results of operations and cash flows and could cause the market value of our common shares and/or debt securities to decline.
political and economic instability;
compliance with multiple regulatory regimes;
compliance with economic sanctions lawsIn addition, our manufacturing and other lawsprocesses use complicated and sophisticated equipment, which sometimes requires a significant amount of time to obtain and install. Manufacturing complexity, testing requirements and safety and security processes combine to increase the overall difficulty of manufacturing these products and resolving manufacturing problems that applywe may encounter. Although we endeavor to properly maintain our activitiesequipment (and require our contract manufacturers to properly maintain their equipment), including through on-site quality control and experienced manufacturing supervision, and have key spare parts on hand, our business could suffer if certain manufacturing or other equipment, or all or a portion of our or their facilities, were to become inoperable for a period of time. We could experience substantial production delays or inventory shortages in the countries whereevent of any such occurrence until we operate;
less established legalor they repair such equipment or facility or we or they build or locate replacement equipment or a replacement facility, as applicable, and seek to obtain necessary regulatory regimesapprovals for such replacement. For example, in 2021, a third-party supplier of sterilization services for our lens care solution bottles and caps at our Milan, Italy facility notified us of inconsistencies in the sterilization data versus certificates of conformance previously submitted to us by that supplier. Although we determined that this issue did not affect the safety or performance of any of our products and was limited to a specific number of lots for certain jurisdictions, including as relatesof our products, out of an abundance of caution, in conjunction with the appropriate notified body and responsible health authorities, we contained and/or recalled down to enforcementthe consumer level the limited number of anti-briberyaffected lots of products, which resulted in $8 million of manufacturing variances and anti-corruption laws and$6 million of returns. Further, due to the reliabilitylimited availability of qualified materials caused by this issue, production at the Milan facility could not keep up with demand (even with leveraging increased production at another of our manufacturing facilities to support some of the judicial systems;
differing degreesdemand), which negatively impacted our sales for the affected products in this region during 2021. Any interruption in our manufacture of protection for intellectual property;
unexpected changes in foreign regulatory requirements, including quality standardsproducts could adversely affect the sales of our current products or introduction of new products and other certification requirements;
new export license requirements;
adverse changes in tariff and trade protection measures;
differing labor regulations;
potentially negative consequences from changes in or interpretations of tax laws;
restrictive governmental actions;
possible nationalization or expropriation;
credit market uncertainty;
differing local practices, customs and cultures, some of which may not align or comply with our Company practices and policies or U.S. laws and regulations;
difficulties with licensees, contract counterparties, or other commercial partners; and
differing local product preferences and product requirements.
Any of these factors, or any other international factors, could have a material adverse effect on our business, financial condition, cash flows and results of operations and could cause the market value of our common shares and/or debt securities to decline.
Similarly, adverse economic conditions impacting our customers in these countries or uncertainty about global economic conditions could cause purchasesThe supply of our products to decline, which would adversely affect our revenuescustomers (or, in some cases, supply from our contract manufacturers to us) is subject to and operating results. Moreover, our projected revenues and operating results are based on assumptions concerning certain levelsdependent upon the use of customer spending. Any failure to attain our projected revenues and operating resultstransportation services. Disruption of transportation services (including as a result of weather conditions) could have a material adverse economic effect on our business, financial condition, cash flows and results of operations and could cause the market value of our common shares and/or marketdebt securities to decline. In addition, any prolonged disruption in the operations of our existing distribution facilities, whether due to technical, labor or other difficulties, weather conditions, equipment malfunction, contamination, failure to follow specific protocols and procedures, destruction of or damage to any facility or other reasons, could have a material adverse effect on our business, financial condition, cash flows and results of operations and could cause the market value of our common shares and/or debt securities to decline.
DueFor some of our finished products and raw materials, we obtain supply from one or a limited number of sources. If we are unable to obtain components or raw materials, or products supplied by third parties, our ability to manufacture and deliver our products to the large portion of our business conducted in currency other than U.S. dollars, we have significant foreign currency risk.
We face foreign currency exposure on the translation into U.S. dollars of the financial results of our operations in Europe, Canada, Latin America, Asia, Africa and the Middle East and other regions. Where possible, we manage foreign currency risk by managing same currency revenue in relation to same currency expenses. We face foreign currency exposure in those countries where we have revenue denominated in the local foreign currency and expenses denominated in other currencies. Both favorable and unfavorable foreign currency impacts to our foreign currency-denominated operating expenses are mitigated to a certain extent by the natural, opposite impact on our foreign currency-denominated revenue. In addition, the repurchase of our U.S. dollar denominated debt may result in foreign exchange gains or losses for Canadian income tax purposes. One half of any foreign exchange gains or losses willmarket would be included in our Canadian taxable income. Any foreign exchange gain will result in a corresponding reduction in our available Canadian tax attributes.
In addition, in November 2016, as a result of the Egyptian government’s decision to float the Egyptian pound and un-peg it to the U.S. Dollar, the Egyptian pound was significantly devalued. Our exposure to the Egyptian pound is primarily with respect to Amoun Pharmaceutical Company S.A.E.,impeded, which we acquired in October 2015, and which represented approximately 2% of our total 2017 and 2016 revenues. Further strengthening of the U.S. dollar and/or the devaluation of other countries' currencies could have a negative impact on our reported international revenue.
Development and Regulatory Risks
The successful development of our pipeline products is highly uncertain and requires significant expenditures and time. In addition, obtaining necessary government approvals is time-consuming and not assured. The failure to commercialize certain of our pipeline products could have a material adverse effect on our business, financial condition, cash flows and results of operations and could cause the market value of our common shares and/or debt securities to decline.
WeSome components and raw materials used in our manufactured products, and some finished products sold by us, are currently available only from one or a limited number of domestic or foreign suppliers. For example, with respect to some of our largest or most significant products, the supply of the finished product for each of our Siliq®, Duobrii®, Bryhali®, Lumify®, Trulance®, Vyzulta®, SofLens®, Wellbutrin XL®, Ocuvite®, PreserVision®, Renu®, Aplenzin®, Xenazine®, Relistor® Oral and PureVision® products are only available from a single source and the supply of active pharmaceutical ingredient for each of our Siliq®, Duobrii®, Bryhali®, Trulance®, Vyzulta®, Xenazine®, Aplenzin® and Relistor® Oral products are also only available from a single source. In the event an existing supplier fails to supply product on a timely basis and/or in the requested amount, supplies product that fails to meet regulatory requirements, becomes unavailable through business interruption or financial insolvency or loses its regulatory status as an approved source or we are unable to renew current supply agreements when such agreements expire and we do not have a number of pipeline products in development. We and our development partners, as applicable, conduct extensive preclinical studies and clinical trials to demonstrate the safety and efficacy in humans of our pipeline products in ordersecond supplier, we may be unable to obtain regulatory approval for the sale of our pipeline products. Preclinical studies and clinical trials are expensive, complex, can take many years and have uncertain outcomes. None of,required components, raw materials or only a small number of, our research and development programs may actually result in the commercialization of a product. We will not be able to commercialize our pipeline products if preclinical studies do not produce successful results or if clinical trials do not demonstrate safety and efficacy in humans. Furthermore, success in preclinical studies or early-stage clinical trials does not ensure that later stage clinical trials will be successful nor does it ensure that regulatory approval for the product candidate will be obtained. In addition, the process for the completion of pre-clinical and clinical trials is lengthy and may be subject to a number of delays for various reasons, which would delay the commercialization of any successful product. If our development projects are not successful or are significantly delayed, we may not recover our substantial investments in the pipeline product and our failure to bring these pipeline products to market on a timely basis or at commercially reasonable prices. We attempt to mitigate these risks by maintaining safety stock of these products, but such safety stock may not be sufficient. In addition, in some cases, only a single source of active pharmaceutical ingredient is identified in filings with regulatory agencies, including the FDA, and cannot be changed without
prior regulatory approval, which would involve time and expense to us. A prolonged interruption in the supply of a single-sourced raw material, including the active pharmaceutical ingredient, or single-sourced finished product could have a material adverse effect on our business, financial condition, cash flows and results of operations and could cause the market value of our common shares and/or debt securities to decline. In addition, these third-party manufacturers may have the ability to increase the supply price payable by us for the manufacture and supply of our products, in some cases without our consent.
As a result, our dependence upon others to manufacture and supply our products may adversely affect our profit margins and our ability to obtain approval for and produce our products on a timely and competitive basis, which could have a material adverse effect on our business, financial condition, cash flows and results of operations and could cause the market value of our common shares and/or debt securities to decline.
Changes in inventory levels or fluctuations in buying patterns by our large distributor and retail customers may adversely affect our sales and earnings and add to sales variability from quarter to quarter.
We balance the need to maintain inventory levels that are sufficient to ensure competitive lead times against the risk of inventory obsolescence because of changing customer requirements, fluctuating commodity prices, changes to our products, product transfers or the life-cycle of our products. In order to successfully manage our inventories, we must estimate demand from our customers and produce products that substantially correspond to that demand. If we fail to adequately forecast demand for any new or existing product, or fail to determine the appropriate product mix for production purposes, we may face production capacity issues in manufacturing sufficient quantities of a given product. In addition, failures in our information technology systems or human error could also lead to inadequate forecasting of our overall demand or product mix.
We have a significant number of unique products, and we anticipate that number will continue to grow over time. As a result, the demand forecasting precision required for us to avoid production capacity issues will also increase, which could increase the risk of product unavailability and lost sales. Additionally, an increasing number of unique products could increase global inventory requirements, negatively impacting our working capital performance and leading to write-offs due to obsolescence and expired products.
Due to the lead times necessary to obtain and install new equipment and ramp up production of product lines, if we fail to adequately forecast the need for additional manufacturing capacity, whether for new or existing products, we may be unable to scale production in a timely manner to meet demand for our products. In addition, the technically complex manufacturing processes required to manufacture many of our products increase the risk of production failures, and can increase the cost of producing our goods. As a result, because the production process for many of our products is complex and sensitive, the cost of production and the chance of production failures and lengthy supply interruptions is increased, which can have a substantial impact on our inventory levels.
Finally, a significant portion of our products are sold to major health care distributors and major retail chains in Canada, the United States and abroad. Consequently, our sales and quarterly growth comparisons, as well as our estimates for required inventory levels, may be affected by fluctuations in the buying patterns of major distributors, retail chains and other trade buyers. These fluctuations may result from seasonality, pricing, large retailers' and distributors' buying decisions or other factors. If we overestimate demand and produce too much of a particular product, we face a risk of inventory obsolescence, leaving us with inventory that we cannot sell profitably or at all. In addition, we may have to write down such inventory if we are unable to sell it for its recorded value. Conversely, if we underestimate demand and produce insufficient quantities of a product, we could be forced to produce that product at a higher price and forego profitability in order to meet customer demand. For example, if a competitor initiates a recall and there is an unexpected increase in the demand for our products, we may not be able to meet such increased demand. Insufficient inventory levels may lead to shortages that result in loss of sales opportunities altogether as potential end-customers turn to competitors' products that are readily available. If any of these situations occur frequently or in large volumes or if we are unable to effectively manage our inventory and that of our distribution partners, this could have a material adverse effect on our business, financial condition, cash flows and results of operations and could cause the market value of our common shares and/or debt securities to decline.
Commercialization Risks
Our approved products may not achieve or maintain expected levels of market acceptance.
Even if we are able to obtain and maintain regulatory approvals for our pharmaceutical and medical device products, generic or branded, the success of these products is dependent upon achieving and maintaining market acceptance. Launching and commercializing products is time consuming, expensive and unpredictable. The commercial launch of a product takes significant time, resources, personnel and expertise, which we may not have in sufficient levels to achieve success, and is subject to various market conditions, some of which may be beyond our control. There can be no assurance that we will be able to, either by ourselves or in collaboration with our partners or through our licensees or distributors, successfully launch and commercialize new products or gain market acceptance for such products. New product candidates that appear promising in development may fail to reach the market or may have only limited or no commercial success. While we have been successful in launching some of our products, we may not achieve the same level of success with respect to all of our new products. Our inability to successfully launch our new products may negatively impact the commercial success of such product, which could have a material adverse effect on our business, financial condition, cash flows and results of operations and could cause the market value of our common shares and/or debt securities to decline. Our inability to successfully launch our new products could also lead to material impairment charges.
Levels of market acceptance for our new products could be impacted by several factors, some of which are not within our control, including but not limited to the following:
▪safety, efficacy, convenience and cost-effectiveness of our products compared to products of our competitors;
▪scope of approved uses and marketing approval;
▪availability of patent or regulatory exclusivity;
▪timing of market approvals and market entry;
▪ongoing regulatory obligations following approval, such as the requirement to conduct Risk Evaluation and Mitigation Strategy ("REMS") programs;
▪any restrictions or “black box” warnings required on the labeling of such products;
▪availability of alternative products from our competitors;
▪acceptance of the price of our products;
▪effectiveness of our sales forces and promotional efforts;
▪the level of reimbursement of our products;
▪acceptance of our products on government and private formularies;
▪ability to market our products effectively at the retail level or in the appropriate setting of care; and
▪the reputation of our products.
Further, the market perception and reputation of our products and their safety and efficacy are important to our business and the continued acceptance of our products. Any negative publicity about our products, such as the discovery of safety issues with our products, adverse events involving our products, or even public rumors about such events, could have a material adverse effect on our business, financial condition, cash flows or results of operation or could cause the market value of our common shares and/or debt securities to decline. In addition, the discovery of significant problems with a product similar to one of our products that implicate (or are perceived to implicate) an entire class of products or the withdrawal or recall of such similar products could have a material adverse effect on sales of our products. Accordingly, new data about our products, or products similar to our products, could cause us reputational harm and could negatively impact demand for our products due to real or perceived side effects or uncertainty regarding safety or efficacy and, in some cases, could result in product withdrawal.
If our products fail to gain, or lose, market acceptance, our revenues would be adversely impacted and we may be required to take material impairment charges, all of which could have a material adverse effect on our business, financial condition, cash flows and results of operations and could cause the market value of our common shares and/or debt securities to decline.
For certain of our products, we depend on reimbursement from governmental and other third-party payors and a reduction in reimbursement could reduce our product sales and/or revenue. In addition, failure to be included in formularies developed by managed care organizations and coverage by other organizations may negatively impact the utilization of our products, which could harm our market share and could have a material adverse effect on our business, financial condition, cash flows and results of operations and could cause the market value of our common shares and/or debt securities to decline.
Sales of certain of our products are dependent, in part, on the availability and extent of reimbursement from government health administration authorities, private health insurers, pharmacy benefit managers and other organizations of the costs of our products and the continued reimbursement and coverage of our products in such programs. Changes in government regulations
or private third-party payors’ reimbursement policies may reduce reimbursement for our products. In addition, such third-party payors may otherwise make the decision to reduce reimbursement of some or all our products or fail to cover some or all our products in such programs or assert that reimbursements were not in accordance with applicable requirements. For example, these decisions may be based on the price of our products or our current or former pricing practices and decisions. Any reduction or elimination of such reimbursement or coverage could result in a negative impact on the utilization of our products and, as a result, could have a material adverse effect on our business, financial condition, cash flows and results of operations and could cause the market value of our common shares and/or debt securities to decline.
Managed care organizations and other third-party payors try to negotiate the pricing of medical services and products to control their costs. Managed care organizations and pharmacy benefit managers typically develop formularies to reduce their cost for medications. Formularies can be based on the prices and therapeutic benefits of the available products. Due to their lower costs, generic products are often favored. The breadth of the products covered by formularies varies considerably from one managed care organization to another, and many formularies include alternative and competitive products for treatment of particular medical conditions. Failure to be included in such formularies or to achieve favorable formulary status may negatively impact the utilization and market share of our products. If our products are not included within an adequate number of formularies or adequate reimbursement levels are not provided, or if those policies increasingly favor generic products, this could have a material adverse effect on our business, financial condition, cash flows and results of operations or result in additional pricing pressure on our products and could cause the market value of our common shares and/or debt securities to decline.
Our fulfillment arrangements with Walgreens and our dermatology cash-pay prescription program may not be successful.
At the beginning of 2016, we launched a brand fulfillment arrangement with Walgreens, pursuant to which we have made certain of our dermatology and ophthalmology products available to eligible patients through a patient access and co-pay program available at Walgreens U.S. retail pharmacy locations, as well as participating independent retail pharmacies. We have, in the past, experienced certain operational and other issues respecting this arrangement, including lower than anticipated average realized prices associated with these products through this arrangement. In July 2019, we entered into an amendment to the existing fulfillment agreement to address some of these issues. We cannot guarantee this arrangement will continue to be successful in the future, nor can we guarantee that additional operational issues will not be encountered, nor can we guarantee that we will be able to successfully negotiate with Walgreens any improvements or amendments to this arrangement we identify as necessary or desired. In addition, we cannot predict how the market, including customers, doctors, patients, pharmacy benefit managers and third-party payors, or governmental agencies, will continue to react to these arrangements and programs. If this arrangement or program fails, if they do not achieve sufficient success and market acceptance, if we face retaliation from third parties as a result of this arrangement and program (for example, in the form of limitations on or exclusions from the reimbursement of our products) or if any part of this arrangement is found to be non-compliant with applicable law or regulations, this could have a material adverse effect on our business, financial condition, cash flows and results of operations and could cause the market value of our common shares and/or debt securities to decline.
In addition, FDAin February 2019, we launched Dermatology.com, a cash-pay product acquisition program offering certain branded Ortho Dermatologics products directly to patients. In March 2020, the name Dermatology.com was removed as the cash-pay product program name, with the name Dermatology.com limited to only online usage, including future digital teledermatology and Health Canada approval muste-commerce offerings. This program is designed to address the affordability and availability of certain branded dermatology products, when insurers and pharmacy benefit managers are no longer offering those branded prescription pharmaceutical products under their designated pharmacy benefit offerings. We cannot guarantee that this program will be obtained in the U.S. and Canada, respectively, EMA approval (drugs) and CE Marking (devices) must be obtained in countries in the EU and similar approvals must be obtained from comparable agencies in other countries, prior to marketingsuccessful or manufacturing new pharmaceutical and medical device products for use by humans. Obtaining such regulatory approvals for new products and devices and manufacturing processes can take a number of years and involves the expenditure of substantial resources. Even if such products appear promising in development stages, regulatory approval may not be achieved and no assurance can be given that we will obtain approval in those countries where we wishcontinue to commercialize such products. Nor can any assurance be given that if such approval is secured, the approved labeling will not have significant labeling limitations, including limitations on the indications for which we can market a product, or require onerous risk management programs. Furthermore, from time to time, changesadd new products to the applicable legislation or regulations may be introduced that change these review and approval processes for our products, which changes may make it more difficult and costly to obtain or maintain regulatory approvals.
Our marketed drugs will be subject to ongoing regulatory review.
Following initial regulatory approval of any products, we or our partners may develop or acquire, we will be subject to continuing regulatory review by various government authorities in those countries where our products are marketed or intended to be marketed, including the review of adverse drug events and clinical results that are reported after product candidates become commercially available.program. In addition, we are subject to ongoing audits and investigations of our facilities and products by the FDA, as well as other regulatory agencies in and outside the U.S. For example, as a result of an inspection by the FDA at our manufacturing facility in Tampa, Florida, we received a complete response letter from the FDA, in which the FDA raised concerns pertaining to a Current Good Manufacturing Practice (“CGMP”) at such facility and identified certain deficiencies, which we were required to remediate.
If we fail to comply with the regulatory requirements in those countries where our products are sold, we could lose our marketing approvals or be subject to fines or other sanctions. Also, as a condition to granting marketing approval of a product, the applicable regulatory agencies may require a company to conduct additional clinical trials or remediate CGMP issues, the results of which could result in the subsequent loss of marketing approval, changes in product labeling or new or increased concerns about side effects or efficacy of a product.
In May 2017, the European Commission published the Medical Device Regulation (MDR) 2017/745, which replaced the Medical Device Directive (MDD). Pursuant to the terms of the new regulations, in order to continue to market medical device products in the EU, such products must achieve compliance with these new regulations and be re-registered in the EU within a specified transition period, which, for a portion of products, will end as early as May 26, 2020. These new regulations impact all of our existing and pipeline medical device products being sold in the EU for which we are legal manufacturer and/or distributor,
including contact lens, lens care, eye-health, aesthetic and surgical areas, as well as certain of our products outside the EU, which rely on the EU registration to support registration in those other countries. These products, in the aggregate, account for a meaningful portion of our net revenue in this region. While we are working to ensure compliance with these new regulations for all impacted products, we may not be able to achieve compliance for all products within the applicable transition period. If we fail to achieve compliance, we will not be able to market and sell the non-compliant products in the EU, nor will we be able to rely on the non-compliant registration for such products in regions outside of the EU, which could have a material adverse effect on our business, financial condition, cash flows and results of operations in the EU and, possibly, on a consolidated basis, and could causecannot predict how the market, valueincluding customers, doctors and patients will react to this program. If this program fails, if it does not achieve sufficient success and market acceptance or if any part of our common shares and/this program is found to be non-compliant with applicable law or debt securities to decline.
In addition, incidents of adverse drug reactions, unintended side effects or misuse relating to our products could result in additional regulatory controls or restrictions, or even lead to the regulatory authority requiring us to withdraw the product from the market. Further, if faced with these incidents of adverse drug reactions, unintended side effects or misuse relating to our products, we may elect to voluntarily implement a recall or market withdrawal of our product. A recall or market withdrawal, whether voluntary or required by a regulatory authority, may involve significant costs to us, potential disruptions in the supply of our products to our customers and reputational harm to our products and business, all of which could harm our ability to market our products andregulations, this could have a material adverse effect on our business, financial condition, cash flows and results of operations and could cause the market value of our common shares and/or debt securities to decline.
Catastrophic events may disrupt our business.
We have operations and facilities which sell and distribute our products in many parts of the world. Natural events (such as a hurricane or major earthquake), terrorist attacks, pandemics or other catastrophic events, including adverse weather events, could cause delays in developing, manufacturing or selling our products. Such events that occur in major markets where we sell our products could reduce the demand for our products in those areas and, as a result, impact our sales into those markets. In either case, any such disruption could have a material adverse effect on our business, financial condition and results of operations and could cause the market value of our common shares and/or debt securities to decline.
The illegal distribution and sale of counterfeit versions of our products may reduce demand for our products or have a negative impact on the reputation of our products, which could have a material adverse effect on our business, financial condition, cash flows and results of operations and could cause the market value of our common shares and/or debt securities to decline.
Third parties may illegally distribute and sell counterfeit versions of our products, which do not meet or adhere to the rigorous quality, safety, manufacturing, storage and handling standards and regulations that apply to our products. The prevalence of counterfeit products is a growing industry-wide issue due to the widespread use of the Internet, which has greatly facilitated the ease by which counterfeit products can be advertised, purchased and delivered. The discovery of safety or efficacy issues, adverse events or even death or personal injury associated with or caused by counterfeit products may be attributed to our products and may cause reputational harm to our products or the Company. We may not be able to detect or, if detected, prevent or prohibit the sale of such counterfeit products. As a result, the illegal sale or distribution of counterfeit products may negatively impact the demand for and sales of our products, which could have a material adverse effect on our business, financial condition, cash flows and results of operations and could cause the market value of our common shares and/or debt securities to decline.
Our revenues and profits could be reduced by imports from countries where our products are available at lower prices.
Prices for our products are based on local market economics and competition and differ from country to country. Our sales in countries with relatively higher prices may be reduced if products can be imported into those or other countries from lower price markets. If this happens with our products, our revenues and profits may be adversely affected, which could have a material adverse effect on our business, financial condition, cash flows and results of operations and could cause the market value of our common shares and/or debt securities to decline.
Our policies regarding returns, allowances and chargebacks, and marketing programs adopted by wholesalers, may reduce our revenues in future fiscal periods.
We provide certain rebates, allowances, chargebacks and other credits to our customers with respect to certain of our products. For example, we make payments or give credits to certain wholesalers for the difference between the invoice price paid to us by our wholesaler customer for a particular product and the negotiated price that such wholesaler sells such products to its hospitals, group purchasing organizations, pharmacies or other retail customers. We also give certain of our customers credits on our products that such customers hold in inventory after we have decreased the WAC prices of such products, such credit being for the difference between the old and new price. In addition, we also implement and maintain returns policies, pursuant to which our customers may return product to us in certain circumstances in return for a credit. Although we establish reserves based on our prior experience, wholesaler data, then-current on-hand inventory, our best estimates of the impact that these policies may have in subsequent periods and certain other considerations, we cannot ensure that our reserves are adequate or that actual product returns, rebates, allowances and chargebacks will not exceed our estimates, which could have a material adverse effect on our business, financial condition, cash flows and results of operations and could cause the market value of our common shares and/or debt securities to decline.
We may experience declines in sales volumes or prices of certain of our products as the result of the concentration of sales to wholesalers and the continuing trend towards consolidation of such wholesalers and other customer groups and this could have a material adverse effect on our business, financial condition, cash flows and results of operations and could cause the market value of our common shares and/or debt securities to decline.
For certain of our products, a significant portion of our sales are to a relatively small number of customers. If our relationship with one or more of such customers is disrupted or changes adversely or if one or more of such customers experience financial difficulty or other material adverse changes in their businesses, it could materially and adversely affect our sales and financial results, which could have a material adverse effect on our business, financial condition, cash flows and results of operations and could cause the market value of our common shares and/or debt securities to decline.
In addition, wholesalers and retail drug chains have undergone, and are continuing to undergo, significant consolidation. This consolidation may result in these groups gaining additional purchasing leverage and consequently increasing the product pricing pressures facing our business. The result of these developments could have a material adverse effect on our business, financial condition, cash flows and results of operations and could cause the market value of our common shares and/or debt securities to decline.
We have entered into distribution agreements with other companies to distribute certain of our products at supply prices based on net sales. Declines in the pricing and/or volume, over which we have no or limited control, of such products, and therefore the amounts paid to us, could have a material adverse effect on our business, financial condition, cash flows and results of operations and could cause the market value of our common shares and/or debt securities to decline.
Certain of our products are the subject of third-party distribution or sublicense agreements, pursuant to which we may manufacture and sell products to other companies, which distribute such products in return for a royalty or a supply price, in both cases which are often based on net sales. Our ability to control pricing and volume of these products may be limited and, in some cases, these companies make all distribution and pricing decisions independently of us. If the pricing or volume of such products declines, our revenues would be adversely impacted which could have a material adverse effect on our business, financial condition, cash flows and results of operations and could cause the market value of our common shares and/or debt securities to decline.
Manufacturing and Supply Risks
If we or our third partythird-party manufacturers are unable to manufacture our products or the manufacturing process is interrupted due to failure to comply with regulations or for other reasons, the interruption of the manufacture of our products could adversely affect our business. Other manufacturing and supply difficulties or delays may also have a material adverse effect on our business, financial condition, cash flows and results of operations and could cause the market value of our common shares and/or debt securities to decline.
Our manufacturing facilities and those of our contract manufacturers must be inspected and found to be in full compliance with CGMP, quality system management requirements or similar standards before approval for marketing. Compliance with CGMP regulations requires the dedication of substantial resources and requires significant expenditures. In addition, while we attempt to build in certain contractual obligations on our third partythird-party manufacturers, we may not be able to ensure that such third partiesthird-parties comply with these obligations. Our failure or that of our contract manufacturers to comply with
CGMP regulations, quality system management requirements or similar regulations outside of the U.S. could result in enforcement action by the FDA or its foreign counterparts, including, but not limited to, warning letters, fines, injunctions, civil or criminal penalties, recall or seizure of products, total or partial suspension of production or importation, suspension or withdrawal of regulatory approval for approved or in-market products, refusal of the government to renew marketing applications or approve pending applications or supplements, refusal of certificates for export to foreign jurisdictions, suspension of ongoing clinical trials, imposition of new manufacturing requirements, closure of facilities and criminal prosecution. These enforcement actions could lead to a delay or suspension in production, which could have a material adverse effect on our competitive position, business, financial condition, results of operations and cash flows.flows and could cause the market value of our common shares and/or debt securities to decline.
In addition, our manufacturing and other processes use complicated and sophisticated equipment, which sometimes requires a significant amount of time to obtain and install. Manufacturing complexity, testing requirements and safety and security processes combine to increase the overall difficulty of manufacturing these products and resolving manufacturing problems that we may encounter. Although we endeavor to properly maintain our equipment (and require our contract manufacturers to properly maintain their equipment), including through on-site quality control and experienced manufacturing supervision, and have key spare parts on hand, our business could suffer if certain manufacturing or other equipment, or all or a portion of our or their facilities, were to become inoperable for a period of time. We could experience substantial production delays or inventory shortages in the event of any such occurrence until we or they repair such equipment or facility or we or they build or locate replacement equipment or a replacement facility, as applicable, and seek to obtain necessary regulatory approvals for such replacement. For example, in 2021, a third-party supplier of sterilization services for our lens care solution bottles and caps at our Milan, Italy facility notified us of inconsistencies in the sterilization data versus certificates of conformance previously submitted to us by that supplier. Although we determined that this issue did not affect the safety or performance of any of our products and was limited to a specific number of lots for certain of our products, out of an abundance of caution, in conjunction with the appropriate notified body and responsible health authorities, we contained and/or recalled down to the consumer level the limited number of affected lots of products, which resulted in $8 million of manufacturing variances and $6 million of returns. Further, due to the limited availability of qualified materials caused by this issue, production at the Milan facility could not keep up with demand (even with leveraging increased production at another of our manufacturing facilities to support some of the demand), which negatively impacted our sales for the affected products in this region during 2021. Any interruption in our manufacture of products could adversely affect the sales of our current products or introduction of new products and could have a material adverse effect on our business, financial condition, cash flows and results of operations and could cause the market value of our common shares and/or debt securities to decline.
The supply of our products to our customers (or, in some case,cases, supply from our contract manufacturers to us) is subject to and dependent upon the use of transportation services. Disruption of transportation services (including as a result of weather conditions) could have a material adverse effect on our business, financial condition, cash flows and results of operations and could cause the market value of our common shares and/or debt securities to decline. In addition, any prolonged disruption in the operations of our existing distribution facilities, whether due to technical, labor or other difficulties, weather conditions, equipment malfunction, contamination, failure to follow specific protocols and procedures, destruction of or damage to any facility or other
reasons, could have a material adverse effect on our business, financial condition, cash flows and results of operations and could cause the market value of our common shares and/or debt securities to decline.
For some of our finished products and raw materials, we obtain supply from one or a limited number of sources. If we are unable to obtain components or raw materials, or products supplied by third parties, our ability to manufacture and deliver our products to the market would be impeded, which could have a material adverse effect on our business, financial condition, cash flows and results of operations and could cause the market value of our common shares and/or debt securities to decline.
Some components and raw materials used in our manufactured products, and some finished products sold by us, are currently available only from one or a limited number of domestic or foreign suppliers. For example, with respect to some of our largest or most significant products, the supply of the finished product for each of our Siliq™®, Duobrii®, Bryhali®, Lumify®, Trulance®, Vyzulta™®, SofLens®, Wellbutrin XL®, OccuviteOcuvite®, PreserVision®, Renu®, IsuprelAplenzin®, Xenazine®, UcerisRelistor® tablet, Relistor® Oral and PureVision® products are only available from a single source and the supply of active pharmaceutical ingredient for each of our Siliq™®,Isuprel Duobrii®, Bryhali®, Trulance®, Vyzulta®, Xenazine®, RelistorAplenzin® Oral and UcerisRelistor® tablet Oral products are also only available from a single source. In the event an existing supplier fails to supply product on a timely basis and/or in the requested amount, supplies product that fails to meet regulatory requirements, becomes unavailable through business interruption or financial insolvency or loses its regulatory status as an approved source or we are unable to renew current supply agreements when such agreements expire and we do not have a second supplier, we may be unable to obtain the required components, raw materials or products on a timely basis or at commercially reasonable prices. We attempt to mitigate these risks by maintaining safety stock of these products, but such safety stock may not be sufficient. In addition, in some cases, only a single source of active pharmaceutical ingredient is identified in filings with regulatory agencies, including the FDA, and cannot be changed without
prior regulatory approval, which would involve time and expense to us. A prolonged interruption in the supply of a single-sourced raw material, including the active pharmaceutical ingredient, or single-sourced finished product could have a material adverse effect on our business, financial condition, cash flows and results of operations and could cause the market value of our common shares and/or debt securities to decline. In addition, these third partythird-party manufacturers may have the ability to increase the supply price payable by us for the manufacture and supply of our products, in some cases without our consent.
As a result, our dependence upon others to manufacture and supply our products may adversely affect our profit margins and our ability to obtain approval for and produce our products on a timely and competitive basis, which could have a material adverse effect on our business, financial condition, cash flows and results of operations and could cause the market value of our common shares and/or debt securities to decline.
Changes in inventory levels or fluctuations in buying patterns by our large distributor and retail customers may adversely affect our sales and earnings and add to sales variability from quarter to quarter.
We balance the need to maintain inventory levels that are sufficient to ensure competitive lead times against the risk of inventory obsolescence because of changing customer requirements, fluctuating commodity prices, changes to our products, product transfers or the life-cycle of our products. In order to successfully manage our inventories, we must estimate demand from our customers and produce products that substantially correspond to that demand. If we fail to adequately forecast demand for any new or existing product, or fail to determine the appropriate product mix for production purposes, we may face production capacity issues in manufacturing sufficient quantities of a given product. In addition, failures in our information technology systems or human error could also lead to inadequate forecasting of our overall demand or product mix.
We have a significant number of unique products, and we anticipate that number will continue to grow over time. As a result, the demand forecasting precision required for us to avoid production capacity issues will also increase, which could increase the risk of product unavailability and lost sales. Additionally, an increasing number of unique products could increase global inventory requirements, negatively impacting our working capital performance and leading to write-offs due to obsolescence and expired products.
Due to the lead times necessary to obtain and install new equipment and ramp up production of product lines, if we fail to adequately forecast the need for additional manufacturing capacity, whether for new or existing products, we may be unable to scale production in a timely manner to meet demand for our products. In addition, the technically complex manufacturing processes required to manufacture many of our products increase the risk of production failures, and can increase the cost of producing our goods. As a result, because the production process for many of our products is complex and sensitive, the cost of production and the chance of production failures and lengthy supply interruptions is increased, which can have a substantial impact on our inventory levels.
Finally, a significant portion of our products are sold to major health care distributors and major retail chains in Canada, the United States and abroad. Consequently, our sales and quarterly growth comparisons, as well as our estimates for required inventory levels, may be affected by fluctuations in the buying patterns of major distributors, retail chains and other trade buyers. These fluctuations may result from seasonality, pricing, large retailers' and distributors' buying decisions or other factors. If we overestimate demand and produce too much of a particular product, we face a risk of inventory obsolescence, leaving us with inventory that we cannot sell profitably or at all. In addition, we may have to write down such inventory if we are unable to sell it for its recorded value. Conversely, if we underestimate demand and produce insufficient quantities of a product, we could be forced to produce that product at a higher price and forego profitability in order to meet customer demand. For example, if a competitor initiates a recall and there is an unexpected increase in the demand for our products, we may not be able to meet such increased demand. Insufficient inventory levels may lead to shortages that result in loss of sales opportunities altogether as potential end-customers turn to competitors' products that are readily available. If any of these situations occur frequently or in large volumes or if we are unable to effectively manage our inventory and that of our distribution partners, this could have a material adverse effect on our business, financial condition, cash flows and results of operations and could cause the market value of our common shares and/or debt securities to decline.
Commercialization Risks
Our approved products may not achieve or maintain expected levels of market acceptance.
Even if we are able to obtain and maintain regulatory approvals for our pharmaceutical and medical device products, generic or branded, the success of these products is dependent upon achieving and maintaining market acceptance. Launching and commercializing products is time consuming, expensive and unpredictable. The commercial launch of a product takes significant time, resources, personnel and expertise, which we may not have in sufficient levels to achieve success, and is subject to various market conditions, some of which may be beyond our control. There can be no assurance that we will be able to, either by ourselves or in collaboration with our partners or through our licensees or distributors, successfully launch and commercialize new products or gain market acceptance for such products. New product candidates that appear promising in development may fail to reach the market or may have only limited or no commercial success. While we have been successful in launching some of our products, we may not achieve the same level of success with respect to all of our new products. Our inability to successfully launch our new products may negatively impact the commercial success of such product, which could have a material adverse effect on our business, financial condition, cash flows and results of operations and could cause the market value of our common shares and/or debt securities to decline. Our inability to successfully launch our new products could also lead to material impairment charges.
Levels of market acceptance for our new products could be impacted by several factors, some of which are not within our control, including but not limited to the following:
▪safety, efficacy, convenience and cost-effectiveness of our products compared to products of our competitors;
▪scope of approved uses and marketing approval;
▪availability of patent or regulatory exclusivity;
▪timing of market approvals and market entry;
▪ongoing regulatory obligations following approval, such as the requirement to conduct Risk Evaluation and Mitigation Strategy ("REMS") programs;
▪any restrictions or “black box” warnings required on the labeling of such products;
▪availability of alternative products from our competitors;
▪acceptance of the price of our products;
▪effectiveness of our sales forces and promotional efforts;
▪the level of reimbursement of our products;
▪acceptance of our products on government and private formularies;
▪ability to market our products effectively at the retail level or in the appropriate setting of care; and
▪the reputation of our products.
Further, the market perception and reputation of our products and their safety and efficacy are important to our business and the continued acceptance of our products. Any negative publicity about our products, such as the discovery of safety issues with our products, adverse events involving our products, or even public rumors about such events, could have a material adverse effect on our business, financial condition, cash flows or results of operation or could cause the market value of our common shares and/or debt securities to decline. In addition, the discovery of significant problems with a product similar to one of our products that implicate (or are perceived to implicate) an entire class of products or the withdrawal or recall of such similar products could have a material adverse effect on sales of our products. Accordingly, new data about our products, or products similar to our products, could cause us reputational harm and could negatively impact demand for our products due to real or perceived side effects or uncertainty regarding safety or efficacy and, in some cases, could result in product withdrawal.
If our products fail to gain, or lose, market acceptance, our revenues would be adversely impacted and we may be required to take material impairment charges, all of which could have a material adverse effect on our business, financial condition, cash flows and results of operations and could cause the market value of our common shares and/or debt securities to decline.
For certain of our products, we depend on reimbursement from governmental and other third-party payors and a reduction in reimbursement could reduce our product sales and/or revenue. In addition, failure to be included in formularies developed by managed care organizations and coverage by other organizations may negatively impact the utilization of our products, which could harm our market share and could have a material adverse effect on our business, financial condition, cash flows and results of operations and could cause the market value of our common shares and/or debt securities to decline.
Sales of certain of our products are dependent, in part, on the availability and extent of reimbursement from government health administration authorities, private health insurers, pharmacy benefit managers and other organizations of the costs of our products and the continued reimbursement and coverage of our products in such programs. Changes in government regulations
or private third-party payors’ reimbursement policies may reduce reimbursement for our products. In addition, such third-party payors may otherwise make the decision to reduce reimbursement of some or all our products or fail to cover some or all our products in such programs or assert that reimbursements were not in accordance with applicable requirements. For example, these decisions may be based on the price of our products or our current or former pricing practices and decisions. Any reduction or elimination of such reimbursement or coverage could result in a negative impact on the utilization of our products and, as a result, could have a material adverse effect on our business, financial condition, cash flows and results of operations and could cause the market value of our common shares and/or debt securities to decline.
Managed care organizations and other third-party payors try to negotiate the pricing of medical services and products to control their costs. Managed care organizations and pharmacy benefit managers typically develop formularies to reduce their cost for medications. Formularies can be based on the prices and therapeutic benefits of the available products. Due to their lower costs, generic products are often favored. The breadth of the products covered by formularies varies considerably from one managed care organization to another, and many formularies include alternative and competitive products for treatment of particular medical conditions. Failure to be included in such formularies or to achieve favorable formulary status may negatively impact the utilization and market share of our products. If our products are not included within an adequate number of formularies or adequate reimbursement levels are not provided, or if those policies increasingly favor generic products, this could have a material adverse effect on our business, financial condition, cash flows and results of operations or result in additional pricing pressure on our products and could cause the market value of our common shares and/or debt securities to decline.
Our fulfillment arrangements with Walgreens and our dermatology cash-pay prescription program may not be successful.
At the beginning of 2016, we launched a brand fulfillment arrangement with Walgreens, pursuant to which we have made certain of our dermatology and ophthalmology products available to eligible patients through a patient access and co-pay program available at Walgreens U.S. retail pharmacy locations, as well as participating independent retail pharmacies. We have, in the past, experienced certain operational and other issues respecting this arrangement, including lower than anticipated average realized prices associated with these products through this arrangement. In July 2019, we entered into an amendment to the existing fulfillment agreement to address some of these issues. We cannot guarantee this arrangement will continue to be successful in the future, nor can we guarantee that additional operational issues will not be encountered, nor can we guarantee that we will be able to successfully negotiate with Walgreens any improvements or amendments to this arrangement we identify as necessary or desired. In addition, we cannot predict how the market, including customers, doctors, patients, pharmacy benefit managers and third-party payors, or governmental agencies, will continue to react to these arrangements and programs. If this arrangement or program fails, if they do not achieve sufficient success and market acceptance, if we face retaliation from third parties as a result of this arrangement and program (for example, in the form of limitations on or exclusions from the reimbursement of our products) or if any part of this arrangement is found to be non-compliant with applicable law or regulations, this could have a material adverse effect on our business, financial condition, cash flows and results of operations and could cause the market value of our common shares and/or debt securities to decline.
In addition, in February 2019, we launched Dermatology.com, a cash-pay product acquisition program offering certain branded Ortho Dermatologics products directly to patients. In March 2020, the name Dermatology.com was removed as the cash-pay product program name, with the name Dermatology.com limited to only online usage, including future digital teledermatology and e-commerce offerings. This program is designed to address the affordability and availability of certain branded dermatology products, when insurers and pharmacy benefit managers are no longer offering those branded prescription pharmaceutical products under their designated pharmacy benefit offerings. We cannot guarantee that this program will be successful or that we will continue to add new products to the program. In addition, we cannot predict how the market, including customers, doctors and patients will react to this program. If this program fails, if it does not achieve sufficient success and market acceptance or if any part of this program is found to be non-compliant with applicable law or regulations, this could have a material adverse effect on our business, financial condition, cash flows and results of operations and could cause the market value of our common shares and/or debt securities to decline.
Catastrophic events may disrupt our business.
We have operations and facilities which sell and distribute our products in many parts of the world. Natural events (such as a hurricane or major earthquake), terrorist attacks, pandemics or other catastrophic events, including adverse weather events, could cause delays in developing, manufacturing or selling our products. Such events that occur in major markets where we sell our products could reduce the demand for our products in those areas and, as a result, impact our sales into those markets. In either case, any such disruption could have a material adverse effect on our business, financial condition and results of operations and could cause the market value of our common shares and/or debt securities to decline.
The illegal distribution and sale of counterfeit versions of our products may reduce demand for our products or have a negative impact on the reputation of our products, which could have a material adverse effect on our business, financial condition, cash flows and results of operations and could cause the market value of our common shares and/or debt securities to decline.
Third parties may illegally distribute and sell counterfeit versions of our products, which do not meet or adhere to the rigorous quality, safety, manufacturing, storage and handling standards and regulations that apply to our products. The prevalence of counterfeit products is a growing industry-wide issue due to the widespread use of the Internet, which has greatly facilitated the ease by which counterfeit products can be advertised, purchased and delivered. The discovery of safety or efficacy issues, adverse events or even death or personal injury associated with or caused by counterfeit products may be attributed to our products and may cause reputational harm to our products or the Company. We may not be able to detect or, if detected, prevent or prohibit the sale of such counterfeit products. As a result, the illegal sale or distribution of counterfeit products may negatively impact the demand for and sales of our products, which could have a material adverse effect on our business, financial condition, cash flows and results of operations and could cause the market value of our common shares and/or debt securities to decline.
Our revenues and profits could be reduced by imports from countries where our products are available at lower prices.
Prices for our products are based on local market economics and competition and differ from country to country. Our sales in countries with relatively higher prices may be reduced if products can be imported into those or other countries from lower price markets. If this happens with our products, our revenues and profits may be adversely affected, which could have a material adverse effect on our business, financial condition, cash flows and results of operations and could cause the market value of our common shares and/or debt securities to decline.
Our policies regarding returns, allowances and chargebacks, and marketing programs adopted by wholesalers, may reduce our revenues in future fiscal periods.
We provide certain rebates, allowances, chargebacks and other credits to our customers with respect to certain of our products. For example, we make payments or give credits to certain wholesalers for the difference between the invoice price paid to us by our wholesaler customer for a particular product and the negotiated price that such wholesaler sells such products to its hospitals, group purchasing organizations, pharmacies or other retail customers. We also give certain of our customers credits on our products that such customers hold in inventory after we have decreased the WAC prices of such products, such credit being for the difference between the old and new price. In addition, we also implement and maintain returns policies, pursuant to which our customers may return product to us in certain circumstances in return for a credit. Although we establish reserves based on our prior experience, wholesaler data, then-current on-hand inventory, our best estimates of the impact that these policies may have in subsequent periods and certain other considerations, we cannot ensure that our reserves are adequate or that actual product returns, rebates, allowances and chargebacks will not exceed our estimates, which could have a material adverse effect on our business, financial condition, cash flows and results of operations and could cause the market value of our common shares and/or debt securities to decline.
We may experience declines in sales volumes or prices of certain of our products as the result of the concentration of sales to wholesalers and the continuing trend towards consolidation of such wholesalers and other customer groups and this could have a material adverse effect on our business, financial condition, cash flows and results of operations and could cause the market value of our common shares and/or debt securities to decline.
For certain of our products, a significant portion of our sales are to a relatively small number of customers. If our relationship with one or more of such customers is disrupted or changes adversely or if one or more of such customers experience financial difficulty or other material adverse changes in their businesses, it could materially and adversely affect our sales and financial results, which could have a material adverse effect on our business, financial condition, cash flows and results of operations and could cause the market value of our common shares and/or debt securities to decline.
In addition, wholesalers and retail drug chains have undergone, and are continuing to undergo, significant consolidation. This consolidation may result in these groups gaining additional purchasing leverage and consequently increasing the product pricing pressures facing our business. The result of these developments could have a material adverse effect on our business, financial condition, cash flows and results of operations and could cause the market value of our common shares and/or debt securities to decline.
We have entered into distribution agreements with other companies to distribute certain of our products at supply prices based on net sales. Declines in the pricing and/or volume, over which we have no or limited control, of such products, and therefore the amounts paid to us, could have a material adverse effect on our business, financial condition, cash flows and results of operations and could cause the market value of our common shares and/or debt securities to decline.
Certain of our products are the subject of third-party distribution or sublicense agreements, pursuant to which we may manufacture and sell products to other companies, which distribute such products in return for a royalty or a supply price, in both cases which are often based on net sales. Our ability to control pricing and volume of these products may be limited and, in some cases, these companies make all distribution and pricing decisions independently of us. If the pricing or volume of such products declines, our revenues would be adversely impacted which could have a material adverse effect on our business, financial condition, cash flows and results of operations and could cause the market value of our common shares and/or debt securities to decline.
Risks Relating to the International Scope of our Business
Our business, financial condition, cash flows and results of operations are subject to risks arising from the international scope of our operations.
We conduct a significant portion of our business outside the U.S. and Canada and may, in the future, expand our operations into new countries, including emerging markets. We sell our pharmaceutical and medical device products in many countries around the world. All of our foreign operations are subject to risks inherent in conducting business abroad, including, among other things:
▪difficulties in coordinating and managing foreign operations, including ensuring that foreign operations comply with foreign laws as well as Canadian and U.S. laws applicable to Canadian companies with U.S. and foreign operations, such as export and sanctions laws and the U.S. Foreign Corrupt Practices Act (“FCPA”), the Canadian Corruption of Foreign Public Officials Act, and other applicable worldwide anti-bribery laws;
▪price and currency exchange controls;
▪restrictions on the repatriation of funds;
▪scarcity of hard currency, including the U.S. dollar, which may require a transfer or loan of funds to the operations in such countries, which they may not be able to repay on a timely basis;
▪political and economic instability;
▪compliance with multiple regulatory regimes;
▪compliance with economic sanctions laws and other laws that apply to our activities in the countries where we operate;
▪less established legal and regulatory regimes in certain jurisdictions, including as relates to enforcement of anti-bribery and anti-corruption laws and the reliability of the judicial systems;
▪differing degrees of protection for intellectual property;
▪unexpected changes in foreign regulatory requirements, including quality standards and other certification requirements;
▪new export license requirements;
▪adverse changes in tariff and trade protection measures;
▪differing labor regulations;
▪potentially negative consequences from changes in or interpretations of tax laws;
▪restrictive governmental actions;
▪possible nationalization or expropriation;
▪credit market uncertainty;
▪restrictions on business activities and other challenges associated with pandemics, including the ongoing COVID-19 pandemic;
▪differing local practices, customs and cultures, some of which may not align or comply with our Company practices and policies or U.S. or Canadian laws and regulations;
▪difficulties with licensees, contract counterparties, or other commercial partners; and
▪differing local product preferences and product requirements.
As a result of changes to U.S. trade policy, there may be changes to existing trade agreements and greater restrictions on trade generally. On November 30, 2018, the United States, Canada and Mexico signed the United States-Mexico-Canada Agreement (“USMCA”) as an overhaul and update to the North American Free Trade Agreement. The USMCA was subsequently revised on December 10, 2019 and fully ratified on March 13, 2020. It is difficult to anticipate the full impact of this agreement on our business, financial condition, cash flows and results of operations.
Notwithstanding the USMCA, support for protectionism and rising anti-globalization sentiment in the United States and other countries may slow global growth. In particular, a protracted and wide-ranging trade conflict between the United States and China could adversely affect global economic growth. Concerns also remain around the social, political and economic impacts of the changing political landscape in Europe. In addition, there are growing concerns over an economic slowdown in emerging markets in light of capital outflows in favor of developed markets and expected interest rate increases. Broader geopolitical tensions remained high amongst the U.S., Russia, Ukraine, China, and across the Middle East. For example, in
response to potential conflict between Russia and Ukraine, the U.S. and/or other countries in which we operate may impose sanctions or other restrictive actions against governmental or other entities in Russia.
Given the international scope of our operations, any of the above factors, including sanctions, export controls, tariffs, trade wars and other governmental actions, could have a material adverse effect on our business, financial condition, cash flows and results of operations and could cause the market value of our common shares and/or debt securities to decline.
Similarly, adverse economic conditions impacting our customers in these countries or uncertainty about global economic conditions could cause purchases of our products to decline, which would adversely affect our revenues and operating results. Moreover, our projected revenues and operating results are based on assumptions concerning certain levels of customer spending. Any failure to attain our projected revenues and operating results as a result of adverse economic or market conditions could have a material adverse effect on our business, financial condition, cash flows and results of operations and could cause the market value of our common shares and/or debt securities to decline.
Due to the large portion of our business conducted in currency other than U.S. dollars, we have significant foreign currency risk.
We face foreign currency exposure on the translation into U.S. dollars of the financial results of our operations in Europe, Canada, Latin America, Asia, Africa and the Middle East and other regions. Where possible, we manage foreign currency risk by managing same currency revenue in relation to same currency expenses. We may also use derivative financial instruments from time to time to mitigate our foreign currency risk and not for trading or speculative purposes. We face foreign currency exposure in those countries where we have revenue denominated in the local foreign currency and expenses denominated in other currencies. Both favorable and unfavorable foreign currency impacts to our foreign currency-denominated operating expenses are mitigated to a certain extent by the natural, opposite impact on our foreign currency-denominated revenue. In addition, the repurchase of our U.S. dollar denominated debt may result in foreign exchange gains or losses for Canadian income tax purposes. One half of any foreign exchange gains or losses will be included in our Canadian taxable income. Any foreign exchange gain will result in a corresponding reduction in our available Canadian tax attributes. Further strengthening of the U.S. dollar and/or the devaluation of other countries' currencies could have a negative impact on our reported international revenue.
Risks Relating to Information Technology
We have become increasingly dependent on information technology systems and infrastructure and any breakdown, interruption, breach or other compromise of our or our third-party service providers’ information technology systems could compromise sensitive information related to our business or prevent us from accessing critical information and subject us to liability or interrupt the operation of our business, which could have a material adverse effect on our business, financial condition, cash flows and results of operations and could cause the market value of our common shares and/or debt securities to decline.
We are increasingly dependent upon our information technology systems and infrastructure, as well as those of third parties with whom we interact, and internal and public internet sites, data hosting and processing facilities, cloud-based services and hardware, social media sites and mobile technology, in connection with the conduct of our business.
We must constantly update our information technology systems and infrastructure and undertake investments in new information technology systems and infrastructure. However, we cannot provide assurance that the information technology systems and infrastructure on which we depend, including those of third parties, will continue to meet our current and future business needs or adequately safeguard our operations. Furthermore, modification, upgrade or replacement of such systems and infrastructure may be costly or out of our control.
Any failure to so modify, upgrade or replace such systems and infrastructure, any disruptions that occur during the process of such modification, upgrade or replacement and/or any breakdown, interruption or corruption of the information technology systems and infrastructure on which we rely could create system disruptions, shutdowns, delays in generating or the corruption of data and information or other disruptions that could result in negative financial, operational, business or reputational consequences for us.
The size and complexity of the information technology systems and infrastructure on which we rely makes such systems and infrastructure potentially vulnerable to internal or external inadvertent or intentional security breaches, including as a result of private or state-sponsored cybercrimes, terrorism, war, malware, ransomware, human error, system malfunction, telecommunication and electrical failures, natural disaster, fire, misplaced or lost data, socially engineered breaches or other similar events.
In addition, during the normal course of our business operations, including through the use of information technology systems and infrastructure, we are involved in the collection, transmission, use, retention and other processing of sensitive, confidential, non-public or personal data and information in Canada, the United States and abroad.
Cyber-attacks are increasing in frequency, sophistication and intensity and are made by groups and individuals with a wide range of motives and expertise. Cyber-attacks could include the deployment of harmful malware, ransomware, denial-of-service attacks, worms, social engineering, improper modification of information, fraudulent “phishing” e-mails and other means to affect service reliability or threaten data confidentiality, integrity or availability. Techniques used in these attacks are often highly sophisticated, change frequently and may be difficult to detect for long periods of time.
We have established (i) physical, electronic and organizational measures intended to safeguard and secure our systems to prevent a compromise and (ii) policies and procedures designed to provide for the timely investigation of cybersecurity incidents and the timely disclosure of cybersecurity incidents consistent with our legal and contractual obligations. We also rely on commercially available systems, software, tools and monitoring to provide security for the processing, transmission and storage of digital information.
While we attempt to take appropriate security and cybersecurity measures to protect our information technology systems and infrastructure (including any trade secrets, confidential or other sensitive information) and to prevent and detect breakdowns, unauthorized breaches and cyber-attacks, we cannot guarantee that such measures will be successful and that breakdowns and breaches of, or attacks on, our systems and data, or those of third parties upon which we rely, will be prevented. Such breakdowns and breaches of, or attacks on, our systems and infrastructure, or the public perception that we or any third party upon which we rely have suffered a cybersecurity incident or breakdown, may cause business interruption and could have a material adverse effect on our business, financial condition, cash flows and results of operations, damage our reputation with customers, employees and third parties with whom we do business and cause the market value of our common shares and/or debt securities to decline, and we may suffer financial damage or other loss, including fines or criminal penalties or may be subject to litigation, including potentially class action lawsuits because of lost or misappropriated information.
While we maintain insurance against some of these risks, this insurance may not be sufficient to cover the financial, legal, business or reputational losses that may result from a breakdown, breach, cyber-attack or other compromise of or interruption to our information technology systems and infrastructure or confidential and other sensitive information.
In addition, we provide confidential and other sensitive information to third parties when necessary to pursue our business objectives. While we obtain assurances that these third parties will protect this information and, where appropriate, monitor the protections employed by these third parties, there is a risk that the confidentiality of information held by third parties, including trade secrets and sensitive personal information, may be compromised, including as a result of cybersecurity breaches, breakdowns or other incidents. If personal information of our customers or employees is misappropriated, our reputation with our customers and employees may be injured, resulting in loss of business and/or morale. Any such incidents could require us to incur costs to remediate possible injury to our customers and employees, to further improve our protective measures or to pay fines or take other action with respect to litigation, judicial or regulatory actions arising out of such incidents, which may be significant. We also cannot ensure that any limitation of liability or indemnity provisions in our contracts, including with vendors and service providers, for a security lapse or breach or other security incident would be enforceable or adequate or would otherwise protect us from any liabilities or damages with respect to any particular claim.
Any of the foregoing could have a material adverse effect on our business, financial condition, cash flows and results of operations and could cause the market value of our common shares and/or debt securities to decline.
Risks Relating to Specific Legislation and Regulations
We are subject to various laws and regulations, including “fraud and abuse” laws, anti-bribery laws, environmental laws and privacy and security regulations,laws, and a failure to comply with such laws and related regulations or prevail in any litigation related to noncompliance could have a material adverse effect on our business, financial condition, cash flows and results of operations and could cause the market value of our common shares and/or debt securities to decline.
Pharmaceutical and medical device companies have faced lawsuits and investigations pertaining to violations of health care “fraud and abuse” laws, such as the federal False Claims Act, the federal Anti-Kickback Statute (“AKS”) and other state and federal laws and regulations. The AKS prohibits, among other things, knowingly and willfully offering, paying, soliciting or receiving remuneration to induce or in return for purchasing, leasing, ordering or arranging for the purchase, lease or order of any healthcarehealth care item or service reimbursable under federally financed healthcarehealth care programs. This statute has been interpreted to apply to arrangements between pharmaceutical or medical device manufacturers, on the one hand, and prescribers, purchasers, formulary managers and other health care related professionals, on the other hand. More generally, the federal False Claims Act, among other things, prohibits any person from knowingly presenting, or causing to be presented, a false claim for payment to the federal government. Pharmaceutical and medical device companies have been prosecuted or faced civil liability under
these laws for a variety of alleged promotional and marketing activities, including engaging in off-label promotion that caused claims to be submitted for non-covered off-label uses. If we are in violation of any of these requirements or any such actions are instituted against us, and we are not successful in defending ourselves or asserting our rights, this could have a significant impact on our business, including the imposition of significant criminal and civil fines and penalties, exclusion from federal healthcarehealth care programs or other sanctions, including consent orders or corporate integrity agreements.
We also face increasingly strict data privacy and security laws inIn addition, the U.S. and in other countries, the violation of which could result in fines and other sanctions. The U.S. Department of Health and Human Services Office of Inspector General recommends, and increasingly states require pharmaceutical companies to have comprehensive compliance programs. In addition,Moreover, the Physician Payment Sunshine Act enacted in 2010 imposes reporting and disclosure requirements on device and drug manufacturers for any “transfer of value” made or distributed to prescribers and other healthcarehealth care providers. Failure to submit this required information may result in significant civil monetary penalties. While we have developed corporate compliance programs based on what we believe to be current best practices, we cannot provide assurance that we or our employees or agents are or will be in compliance
with all applicable federal, state or foreign regulations and laws. If we are in violation of any of these requirements or any such actions are instituted against us, and we are not successful in defending ourselves or asserting our rights, those actions could have a significant impact on our business, including the imposition of significant criminal and civil fines and penalties, exclusion from federal healthcarehealth care programs or other sanctions, including consent orders or corporate integrity agreements.
The U.S. FCPA, the Canadian Corruption of Foreign Public Officials Act and similar worldwide anti-bribery laws generally prohibit companies and their intermediaries from making improper payments to officials for the purpose of obtaining or retaining business. Our policies mandate compliance with these anti-bribery laws. We operate in many parts of the world that have experienced governmental corruption and in certain circumstances, strict compliance with anti-bribery laws may conflict with local customs and practices or may require us to interact with doctors and hospitals, some of which may be state controlled, in a manner that is different than in the U.S. and Canada. We cannot provide assurance that our internal control policies and procedures will protect us from reckless or criminal acts committed by our employees, consultants, distributors, third party contractors or agents. Violations of these laws, or allegations of such violations, could disrupt our business and result in criminal or civil penalties or remedial measures, any of which could have a material adverse effect on our business, financial condition, cash flows and results of operations and could cause the market value of our common shares and/or debt securities to decline.
We are also subject to various state, federal and international laws and regulations concerninggoverning the environment, safety matters,collection, transmission, dissemination, use, privacy, confidentiality, security, retention, availability, integrity and other processing of health-related and other sensitive and personal information, including HIPAA. Many states in which we operate have laws that protect the privacy and security of sensitive and personal information, including health-related information. Certain state laws may be more stringent or broader in scope, or offer greater individual rights, with respect to sensitive and personal information than federal, international or other state laws, and such laws may differ from each other, which may complicate compliance efforts. For example, the California Consumer Privacy Act of 2018 ("CCPA") imposes stringent data privacy and security requirements and obligations with respect to the personal information of California residents and provides for civil penalties for violations, as well as a private right of action for certain data breaches that result in the loss of personal data that may increase the likelihood of, and risks associated with, data breach litigation. The effects on our business of the CCPA and other similar state laws are potentially significant. State laws are changing rapidly and there is discussion in Congress of a new federal data protection and privacy law to which we may be subject. For instance, the California Privacy Rights Act (“CPRA”) was passed in November 2020. When it takes effect in January 2023, it will maintain the core framework of the CCPA, while also making a number of substantive changes. Since these data security regimes are evolving, uncertain and complex, especially for a global business such as ours, we will need to update or enhance our compliance measures from time to time and these updates or enhancements will require further implementation costs. Any failure, or perceived failure, by us to comply with current and future regulatory or customer-driven privacy, data protection, and information security requirements, or to prevent or mitigate security breaches, cyberattacks, or improper access to, use of, or disclosure of data, or any security issues or cyber-attacks affecting our business, could result in significant liability, costs (including the costs of mitigation and recovery), a material loss of revenue resulting from the adverse impact on its reputation and brand, loss of proprietary information and data, disruption to its business and relationships, and diminished ability to retain or attract customers and business partners. Such events may result in governmental enforcement actions and prosecutions, private litigation, fines and penalties or adverse publicity, and could cause customers and business partners to lose trust in us, which could have an adverse effect on our reputation and business.
Internationally, laws and regulations in many jurisdictions apply broadly to the collection, transmission, dissemination, use, privacy, confidentiality, security, retention, availability, integrity and other processing of health-related and other sensitive and personal information. For example, the EU’s General Data Protection Regulation (“GDPR,”), and the UK’s General Data Protection Regulation (“UK GDPR”) together with national legislation, regulations and guidelines of the EU member states and the UK governing the processing of personal data, impose strict obligations and restrictions on the ability to collect, analyze, store, transfer and otherwise process personal data, including health data from clinical trials and adverse event reporting. The
GDPR authorizes fines for certain violations of up to 4% of global annual revenue or €20 million, (or GBP 17.5 million under the UK GDPR), whichever is greater. European data protection authorities may interpret the GDPR and national laws differently and impose additional requirements, which contributes to the complexity of processing personal data in or from the EEA or the UK. Guidance on implementation and compliance practices is often updated or otherwise revised. These laws require data controllers to implement stringent operational requirements, including, for example, transparent and expanded disclosure to data subjects about how their personal data is collected and processed, grant rights for data subjects to access, delete or object to the processing of their data, mandatory data breach notification requirements (and in certain cases, affected individuals), set limitations on retention of information and outline significant documentary requirements to demonstrate compliance through policies, procedures, training and audits. The GDPR also provides that EU member states may introduce further conditions, including limitations, and make their own laws and regulations, further limiting the processing of ‘special categories of personal data,’ including personal data related to health, biometric data used for unique identification purposes and genetic information, which could limit our ability to collect, use and share EU data, and could cause our compliance costs to increase, ultimately having an adverse impact on our business, and harm our business and financial condition.
The withdrawal of the UK from the European Union ("Brexit") also has created uncertainty with regard to the regulation of chemicals and product safetydata protection in the countries whereUK. Since January 1, 2021, when the transitional period following Brexit expired, we manufacturehave been required to comply with the GDPR as well as the UK GDPR (combining the GDPR and sell our products or otherwise operate our business. These requirements include, among other matters, regulationthe UK’s Data Protection Act of the handling, manufacture, transportation, storage, use2018), which exposes us to two parallel regimes, each of which authorizes similar fines and disposal of materials, including the discharge of pollutants into the environment. In the normal course of our business, hazardous substances may be released into the environment, which could cause environmental or property damage or personal injuries, and which could subject us to remediation obligations regarding contaminated soilincreased compliance risk based on differing, and groundwaterpotentially inconsistent or potential liability for damage claims. Under certainconflicting, interpretation and enforcement by regulators and authorities (particularly, if the laws we may be requiredare amended in the future in divergent ways). With respect to remediate contamination at certaintransfers of our properties regardless of whetherpersonal data from the contamination was caused by us or by previous occupantsEEA, on June 28, 2021, the European Commission issued an adequacy decision in respect of the propertyUK’s data protection framework, enabling data transfers from EU member states to the UK to continue without requiring organizations to put in place contractual or by others andother measures in order to lawfully transfer personal data between the territories. While it is intended to last for at third-party sites where we send waste. In recentleast four years, the operations of all companies have become subjectEuropean Commission may unilaterally revoke the adequacy decision at any point, and if this occurs, it could lead to increasingly stringent legislationadditional costs and regulation related to occupational safety and health, product registration and environmental protection. Such legislation and regulations are complex and constantly changing, and future changes in laws or regulations may require us to install additional controls for certain ofincrease our emission sources, undertake changes in our manufacturing processes or remediate soil or groundwater contamination at facilities where such cleanup is not currently required.overall risk exposure.
We are also subject to variousCanada's federal Personal Information Protection and Electronic Documents Act and substantially similar equivalents at the provincial level with respect to the collection, use and disclosure of personal information in Canada. Such federal and provincial legislation impose data privacy and security obligations on our processing of personal information of Canadian residents. The federal and Alberta legislation include mandatory data breach notification requirements. Canada’s Anti-Spam Legislation (“CASL”) also applies to the extent that we send commercial electronic messages from Canada or to electronic addresses in Canada. CASL contains prescriptive consent, form, content and unsubscribe mechanism requirements. Penalties for non-compliance with CASL are up to CAD $10 million per violation. These laws and regulations including but not limitedmay be interpreted and applied differently over time and from jurisdiction to HIPAA. HIPAA mandates, among other things, the adoption of uniform standardsjurisdiction, and it is possible they will be interpreted and applied in ways that will materially and adversely affect our business. The regulatory framework for data privacy, data security and data transfers worldwide is rapidly evolving and is likely to remain uncertain for the electronic exchangeforeseeable future. Complying with all of information in common health care transactions (e.g., health care claims informationthese laws and plan eligibility, referral certificationregulations involves costs to our business, and authorization, claims status, plan enrollment, coordination of benefits and related information), as well as standards relating to the privacy and security of individually identifiable health information, which require the adoption of administrative, physical and technical safeguards to protect such information. In addition, many states have enacted comparable laws addressing the privacy and security of health information, some of which are more stringent than HIPAA. Failurefailure to comply with these laws and regulations can result in the imposition of significant civil and criminal penalties. The costspenalties, as well as litigation, all of compliance with these laws and the potential liability associated with the failure to comply with these lawswhich could have a material adverse effect on our business, financial condition, cash flows and results of operations and could cause the market value of our common shares and/or debt securities to decline. For more information regarding applicable data privacy and security laws and regulations, see Item 1. “Business — Government Regulations” of this Form 10-K.
We are also subject to U.S. federal laws regarding reporting and payment obligations with respect to our participation in federal health care programs, including Medicare and Medicaid. Because our processes for calculating applicable government prices and the judgments involved in making these calculations involve subjective decisions and complex methodologies, these calculations are subject to risk of errors and differing interpretations. In addition, they are subject to review and challenge by the applicable governmental agencies, and it is possible that such reviews could result in changes that could have material adverse legal, regulatory, or economic consequences.
Legislative or regulatory reform of the healthcarehealth care system may affect our ability to sell our products profitably and could have a material adverse effect on our business, financial condition, cash flows and results of operations and could cause the market value of our common shares and/or debt securities to decline.
In the U.S. and certain foreign jurisdictions, there have been a number of legislative and regulatory proposals to change the healthcarehealth care system in ways that could impact our ability to sell our products profitably. The Patient Protection and Affordable Care Act, as amended by the Health Care Reform Act, may affect the operational results of companies in the pharmaceutical and medical device industries, including the Company and other healthcarehealth care related industries, by imposing on them additional costs. Effective January 1, 2010, the Health Care Reform Act increased the minimum Medicaid drug rebates for pharmaceutical companies, expanded the 340B drug discount program, and made changes to affect the Medicare Part D coverage gap, or “donut hole.” The law also revised the definition of “average manufacturer price” for reporting purposes,
which may affect the amount of our Medicaid drug rebates to states. Beginning in 2011, the law imposed a significant annual fee on companies that manufacture or import
branded prescription drug products. The law also imposed an annual tax on manufacturersMore recently, the Bipartisan Budget Act of certain medical devices. The tax was deferred until2018 amended the Patient Protection and Affordable Care Act, effective January 1, 2020.2019, to close the donut hole in most Medicare drug plans. In addition, in April 2018, the Centers for Medicare & Medicaid Services published a final rule that gives states greater flexibility in setting benchmarks for insurers in the individual and small group marketplaces, which may have the effect of relaxing the essential health benefits required under the Patient Protection and Affordable Care Act for plans sold through such marketplaces.
AlthoughAlthough efforts at replacing the Health Care Reform Act have stalled in Congress, there could still be changes to this legislation in the near term. We cannot predict what those changes will be or when they will take effect, and we could face additional risks arising from such changes or changed interpretations of our obligations under the legislation.changes. Because of this continued uncertainty, including the potential for further legal challenges or repeal of that legislation, we cannot quantify or predict with any certainty the likely impact of the Health Care Reform Actthis legislation or its repeal on our business model, prospects, financial condition or results of operations, in particular on the pricing, coverage or reimbursement of any of our product candidates that may receive marketing approval. Additionally, policy efforts designed specifically to reduce patient out-of-pocket costs for medicines could result in new mandatory rebates and discounts or other pricing restrictions. Legislative efforts relating to drug pricing, the cost of prescription drugs under Medicare, the relationship between pricing and manufacturer patient programs, and government program reimbursement methodologies for drugs have been proposed and considered at the U.S. federal and state level. At the federal level, the administration’s budget proposal for fiscal year 2019 contained further drug price control measures that could be enacted in future legislation, including, for example, measures to permit Medicare Part D plans to negotiate the price of certain drugs under Medicare Part B, to allow some states to negotiate drug prices under Medicaid and to eliminate cost sharing for generic drugs for low-income patients. While any proposed measures will require authorization through additional legislation to become effective, Congress and the administration have each indicated an intent to continue to seek new legislative or administrative measures to control drug costs. At the state level, legislatures have increasingly passed legislation and implemented regulations designed to control pharmaceutical product pricing, including price or patient reimbursement constraints, discounts, restrictions on certain product access and marketing cost disclosure and transparency measures, and, in some cases, designed to encourage importation from other countries and bulk purchasing. We also anticipate that Congress, state legislatures, and third-party payors may continue to review and assess alternative healthcarehealth care delivery and payment systems and may in the future propose and adopt legislation or policy changes or implementations effecting additional fundamental changes in the healthcarehealth care delivery system. We cannot provide assurance as to the ultimate content, timing, or effect of changes, nor is it possible at this time to estimate the impact of any such potential legislation.
In 2019, the U.S. Health and Human Services Administration announced a preliminary plan to allow for the importation of certain lower-cost drugs from Canada. The preliminary plan excludes insulin, biological drugs, controlled substances and intravenous drugs. The preliminary plan relies on individual states to develop proposals for safe importation of those drugs from Canada and submit those proposals to the federal government for approval. Although the preliminary plan has some support from the current administration, at this time, studies to evaluate the related costs and benefits, evaluate the reasonableness of the logistics, and measure the public reaction of such a plan have not been performed. We cannot provide assurance as to the ultimate content, timing, effect or impact of such a plan.
In 2019, the Government of Canada (Health Canada) published in the Canada Gazette the new pricing regulation for patented drugs. These regulations were scheduled to become effective on July 1, 2021, but have been delayed until July 1, 2022. The new regulations will, among other things, change the mechanics of establishing the pricing for products submitted for approval after August 21, 2019 and the number and composition of reference countries used to determine if a drug’s price is excessive. While we do not believe this will have a significant impact on our future cash flows, as additional facts materialize, we cannot provide assurance as to the ultimate content, timing, effect or impact of such regulations.
The Health Care Reform Act and further changes to health care laws or regulatory framework that reduce our revenues or increase our costs could also have a material adverse effect on our business, financial condition, cash flows and results of operations and could cause the market value of our common shares and/or debt securities to decline.
We are subject to a broad range of environmental laws and regulations and may be subject to environmental remediation obligations under such safety and related laws and regulations. The impact of these obligations and the Company’s ability to respond effectively to them may have a material adverse effect on our business, financial condition, cash flows and results of operations and could cause the market value of our common shares and/or debt securities to decline.
We are subject to a broad range of federal, state, provincial and local environmental laws and regulations concerning the environment, safety matters, regulation of chemicals and product safety in the countries where we manufacture and sell our products or otherwise operate our business. These requirements include, among other matters, regulation of the handling, manufacture, transportation, storage, use and disposal of materials, including the discharge of pollutants, hazardous substances and waste into the environment. Compliance with environmental, health and safety laws and regulations could require us to
incur significant operating or capital expenditures or result in significant restrictions on our operations. If we fail to comply with these environmental, health and safety laws and regulations, including failing to obtain or comply with any necessary permits, we could incur substantial civil or criminal fines or penalties or enforcement actions, including regulatory or judicial orders enjoining or curtailing our operations or requiring us to conduct or fund remedial or corrective measures, install pollution control equipment, reformulate or cease the marketing of our products or perform other actions. In the normal course of our business, regulated substances and waste may be released into the environment, which could cause environmental or property damage or personal injuries, and which could subject us to remediation obligations regarding contaminated soil and groundwater, potential liability for damage claims or to social or reputational harm and other similar adverse impacts. Under certain laws, we may be subject to joint and several liability for environmental investigations and cleanups, including at properties that we currently or previously owned or operated, or at sites at which waste we generated was disposed, even if the contamination was not caused by us or was legal at the time it occurred.
We are subject to extensive and evolving regulations regarding the manufacturing, processing, distribution, importing, exporting and labeling of our products and their raw materials. In the EU, the REACH regulations came into effect in 2007, with implementation rolling out over time. Registered chemicals then can be subject to further evaluation and potential restrictions. Since the promulgation of REACH, other countries have enacted or are in the process of implementing similar comprehensive chemical regulations. These laws and regulations may materially affect our operations by subjecting our products or raw materials to testing or reporting requirements or restrictions, moratoria, phase outs or other limitations on their sale or use. In particular, some of our products might be characterized as nanomaterials and then be subject to evolving, new nanomaterial regulations.
In recent years, legislation and regulation related to environmental protection have become increasingly stringent. Such legislation and regulations are complex and constantly changing. In particular, legislation and regulation relating to climate change, sustainability and product stewardship including greenhouse gas emissions, are at various stages of consideration and implementation. Future events, such as changes in existing laws or regulations or the enforcement thereof or the discovery of contamination at our facilities may, among other things, require us to install additional controls for certain of our emission sources, undertake changes in our manufacturing processes, remediate soil or groundwater contamination at facilities where such cleanup is not currently required, take action to address social expectations or concerns arising from or relating to such changes and our response to such changes or adversely impact our suppliers. These impacts may be significant and could have a material adverse effect on our business, financial condition, cash flows and results of operations and could cause the market value of our common shares and/or debt securities to decline.
Other Risks
Our business and operations could be negatively affected by shareholder activism, which could cause us to incur significant expenses, hinder execution of our business strategy and impact our share price.
In recent years, shareholder activism involving corporate governance, fiduciary duties of directors and officers, strategic direction and operations has become increasingly prevalent. One of our investors, which currently owns approximately 9.49% of our outstanding common shares, filed a Schedule 13D with the SEC in February 2021, in which it was indicated that the investor intended to engage in discussions with our management and board regarding ways to enhance shareholder value, including our ongoing strategic review and that it may also seek board representation. We subsequently entered into a Director Appointment and Nomination Agreement with such investor, pursuant to which they have appointed two members to our Board of Directors. Another of our investors, which currently owns approximately 4.75% of our outstanding common shares, filed a Schedule 13D with the SEC in July 2020, in which it indicated that it intended to consider, explore and/or develop plans and/or make proposals respecting, among other things, our businesses, assets, operations, and strategy, and to explore ways to strengthen the Company and enhance shareholder value. In February 2021, this investor also sent the Company a public letter, in which it stated its views on the timing of the completion of the B+L Separation and recommended, among other things, the divestiture of certain of our businesses and assets.
In the event such investors continue to pursue such proposals or we become the subject of additional shareholder activism, this may create a significant distraction for our management and employees. This could negatively impact our ability to execute our business plans (including the B+L Separation) and may require our management to expend significant time, resources and costs, including legal fees and other expenses incurred in connection with any proxy contest that may result from any such shareholder activism. Furthermore, when individuals are elected to our Board with a specific agenda, it may adversely affect our ability to effectively implement our business strategy and create additional value for our shareholders and could lead us to adopt other plans that we cannot predict and which could focus on short-term benefits with longer-term costs or that may not be in the best interests of the Company. Such shareholder activism may also create uncertainties with respect to our financial position and operations, may adversely affect our ability to attract and retain key employees and may result in loss of potential business opportunities with our current and potential customers and business partners, any of which could have a material adverse effect on our business, financial condition, cash flows and results of operations. In addition, such shareholder
activism may cause significant fluctuations in our share price based on temporary or speculative market perceptions, uncertainties or other factors that do not necessarily reflect the underlying fundamentals and prospects of our business, and could cause the market value of our common shares to decline. While we will remain responsive to shareholder demands, there is no assurance that we will achieve their objectives, or that doing so will decrease the likelihood of activist shareholder engagement in the future.
We have significant goodwill and other intangible assets and potential impairment of goodwill and other intangibles may have a significant adverse impact on our profitability.
Goodwill and intangible assets represent a significant portion of our total assets. Finite-lived intangible assets are subject to an impairment analysis whenever events or changes in circumstances indicate the carrying amount of the asset may not be recoverable. Goodwill and indefinite-lived intangible assets are tested for impairment annually, or more frequently if events or changes in circumstances indicate that the asset may be impaired. If impairment exists, we would be required to take an impairment charge with respect to the impaired asset.
For example, in in 20172021, 2020 and 2016,2019, we recognized goodwill impairments to finite-lived and indefinite-lived intangible assets of $312$146 million, $18 million and $1,077$75 million, respectively, whichrespectively. These asset impairments were primarily attributable to revisions in sales forecasts associated with discontinuances, generic competition and other market forces. In addition to impairments to finite-lived and indefinite-lived intangible assets, in 2021, we recognized a $469 million impairment to the goodwill of our Ortho Dermatologics reporting unit. This impairment to goodwill was primarily the result of revisions to our long-term forecasts for the Ortho Dermatologics reporting unit due to changing business dynamics and market conditions. There were no goodwill impairments in 2020 and 2019.
The Company conducted its annual goodwill impairment testing triggered when certain assetstest as of a reporting unit were reclassified as held for sale during the three months ended September 30, 2017 and our reporting segment structure was realigned during the three months ended September 30, 2016, respectively.
In January 2017, the FASB issued guidance which simplifies the subsequent measurement of goodwill by eliminating “Step 2” fromOctober 1, 2021. No impairment to the goodwill impairment test. Instead, goodwill impairment will be measured as the amount by which a reporting unit's carrying value exceeds its fair value. The FASB also eliminated the requirements forof any reporting unit with a zerowas identified. If market conditions deteriorate, or negative carrying amountif the Company is unable to perform a qualitative assessment. The guidance is effective for annual periods beginning after December 15, 2019, and interim periods within those annual periods, with early adoption permitted. The Companyexecute its strategies, it may electbe necessary to adopt this standard effectiverecord impairment charges in the first quarter of 2018. Once adopted, this guidance is expected to have a significant impact on the Company’s financial position, results of operations, and disclosures with respect to the Salix reporting unit. While the fair value of a reporting unit is subject to update for events occurring subsequent to the date of impairment testing, at October 1, 2017, the Salix reporting unit had an estimated fair value of $10,660 million and a carrying value of $13,404 million, including goodwill of $5,127 million.future.
See Note 6, "FAIR VALUE MEASUREMENTS" and Note 9,8, "INTANGIBLE ASSETS AND GOODWILL" to our audited Consolidated Financial Statements for further information on these impairment charges.
Events giving rise to impairment are difficult to predict, including the uncertainties associated with the launch of new products, and are an inherent risk in the pharmaceutical and medical device industries. As a result of the significance of goodwill and intangible assets, our financial condition and results of operations in a future period could be negatively impacted should such an impairment of goodwill or intangible assets occur, which could cause the market value of our common shares and/or debt securities to decline. We may be required to take additional impairment charges in the future and such impairment charges may be material.
WeThe Company’s ability to effectively monitor and respond to the rapid and ongoing developments and expectations relating to environmental, social and governance (“ESG”) matters, including related social expectations and concerns, may impose unexpected costs on the Company or result in reputational or other harm to the Company that could have become increasingly dependenta material adverse effect on information technologyour business, financial condition, cash flows and any breakdown, interruption or breachresults of operations and could cause the market value of our information technology systems could subject uscommon shares and/or debt securities to liability or interruptdecline.
There are rapid and ongoing developments and changing expectations relating to ESG matters and factors such as the operationimpact of our operations on climate change, water and waste management, our practices relating to sustainability and product stewardship, product safety, access to health care and affordable drugs, management of business ethics and human capital development, which may result in increased regulatory, social, investor or other scrutiny on us. If we are not able to adequately recognize and respond to such developments and governmental, investor and social expectations, including expectations of lenders, investors and other stakeholders relating to ESG matters, we may miss corporate opportunities for the Company, become subject to additional regulatory, social, investor or other scrutiny, incur unexpected costs or experience damage to the reputation of the Company or its various brands with governments, customers, employees, investors, third parties and the communities in which we operate, in each case that could have a material adverse effect on our business, financial condition, cash flows and results of operations and could cause the market value of our common shares and/or debt securities to decline.
We are increasingly dependent upon sophisticated information technology systemshave various indemnity agreements and infrastructureindemnity arrangements in connection withplace, which may result in an obligation to indemnify or reimburse the conduct of our business. We must constantly update our information technology infrastructure and we cannot provide assurance
that our various current information technology systems throughout the organization will continue to meet our current and future business needs. Furthermore, modification, upgrade or replacement of such systemsrelevant counterparty, which amounts may be costly.material.
DueAll directors and/or officers of the Company, and each of its various subsidiary entities, are indemnified by the Company in respect of their service as directors and/or officers, subject to the size and complexity of these systems, any breakdown, interruption, corruption or unauthorized access to or cyber-attack on these systems could create system disruptions, shutdowns or unauthorized disclosure of confidential information. Cyber-attacks are increasing in frequency, sophistication and intensity. Cyber-attacks could include the deployment of harmful malware, denial-of-service attacks, worms, social engineering and other means to affect service reliability and threaten data confidentiality, integrity and availability.certain restrictions. We have established physical, electronicalso purchased directors’ and organizational measuresofficers’ liability insurance to safeguard and secure our systems to prevent a data compromise, and rely on commercially available systems, software, tools, and monitoring to provide security formitigate the processing, transmission and storagecost of digital information. While we attempt to take appropriate security and cyber-security measures to protect our data and information technology systems and to prevent such breakdowns and unauthorized breaches and cyber-attacks, weany potential future lawsuits or actions. The maximum amount of any potential future payment cannot guarantee that these measures will be successful and that these breakdowns and breaches in, or attacks on, our systems and data will be prevented. Such breakdowns, breaches in or attacks on our systems and data may cause business interruption andreasonably estimated but could have a material adverse effect on ourthe Company.
In the normal course of business, financial condition, cash flowswe have entered or may enter into agreements that include indemnities in favor of third parties, such as purchase and resultssale agreements, license agreements, engagement letters with advisors and consultants and various product and service agreements. These indemnification arrangements may require us to compensate counterparties for losses incurred by the counterparties as a result of operationsbreaches in representations, covenants and could cause the market valuewarranties provided by us or as a result of our common shares and/or debt securities to decline, and we may suffer financial damagelitigation or other loss, including finesthird-party claims or criminal penalties because of lost or misappropriated information.
In addition, we provide confidential, proprietary and personal information to third parties when necessary to pursue our business objectives. While we obtain assurancesstatutory sanctions that these third parties will protect this information and, where appropriate, monitor the protections employed by these third parties, there is a risk that the confidentiality of data held by third parties may be compromised. If personal informationsuffered by the counterparties as a consequence of our customersthe relevant transaction. In some instances, the terms of these indemnities are not explicitly defined. We, whenever possible, try to limit this potential liability within the particular agreement or employees is misappropriated, our reputation with our customers and employees maycontract, but due to the unpredictability of future events the maximum amount of any potential reimbursement cannot be injured, resulting in loss of business and/or morale, and we may incur costs to remediate possible injury to our customers and employees or be required to pay fines or take other action with respect to judicial or regulatory actions arising out of such incidents.reasonably estimated, but could have a material adverse effect on the Company.
General Risk Factors
Our operating results and financial condition may fluctuate.
Our operating results and financial condition may fluctuate from quarter to quarter for a number of reasons. In addition, our stock price iscan be volatile. The following events or occurrences, among others, could cause fluctuations in our financial performance and/or stock price from period to period:
•the impact of COVID-19;
•development and launch of new competitive products;
•the timing and receipt of FDA and other regulatory approvals or lack of approvals;
•costs related to business development transactions;
•changes in the amount we spend to promote our products;
•delays between our expenditures to acquire new products, technologies or businesses and the generation of revenues from those acquired products, technologies or businesses;
•changes in treatment practices of physicians that currently prescribe certain of our products;
•increases in the cost of raw materials used to manufacture our products;
•actions by the FDA or other regulatory actions relating to our manufacturers;manufacturers or suppliers;
•manufacturing and supply interruptions;
•our responses to price competition;
•new legislation that would control or regulate the prices of drugs;
•a protracted and wide-ranging trade conflict between the United States and China;
•expenditures as a result of legal actions (and settlements thereof), including the defense of our patents and other intellectual property;
•market acceptance of our products;
•the timing of wholesaler and distributor purchases and success of our wholesaler and distributor arrangements;
•general economic and industry conditions, including potential fluctuations in interest rates;
•changes in seasonality of demand for certain of our products;
•foreign currency exchange rate fluctuations;
•the timing, structure and terms of the B+L Separation and the Solta IPO;
•changes to, or the confidence in, our business strategy;
•changes to, or the confidence in, our management; and
•expectations for future growth.
As a result, we believe that quarter-to-quarter comparisons of results from operations, or any other similar period-to-period comparisons, shouldmay not be construed as reliable indicators of our future performance. In any quarterly period, our results may be below the expectations of market analysts and investors, which could cause the market value of our common shares and/or debt securities to decline.
The restatement of our previously issued financial statements was time-consuming and expensive and could expose us to additional risks that could have a material adverse effect on our business, financial condition, cash flows and results of operations and could cause the market value of our common shares and/or debt securities to decline.
We restated our previously issued audited financial statements for the year ended December 31, 2014 and the unaudited financial information for the quarters ended December 31, 2014 and March 31, 2015. This restatement and the review of the misstatements that necessitated the restatement was time consuming and expensive and could expose us to potential claims and additional risks that could have a material adverse effect on our business, financial condition, cash flows and results of operations and could cause the market value of our common shares and/or debt securities to decline. In particular, we could be subject to further shareholder litigation and additional governmental investigations and proceedings in connection with the restatements or related other matters. If we do not prevail in any such proceedings, we could be required to pay substantial damages or settlement costs. In addition, although the remediation of the material weaknesses in our internal control over financial reporting that contributed to the material misstatements in the consolidated financial statements previously described has been completed, if our remedial measures were insufficient to properly and fully address the material weaknesses, or if additional material weaknesses in our internal controls are discovered or occur in the future, it may materially adversely affect our ability to report our financial condition and results of operations in a timely and accurate manner and there will continue to be an increased risk of future misstatements.
To the extent we resume business development activities through acquisitions, we may be unable to identify, acquire, close or integrate acquisition targets successfully.
Part of our historic business strategy has included the acquisition of businesses, products, technologies or other assets. Although we expect the volume and size of acquisitions to be much lower for the foreseeable future as compared to prior periods, we anticipate that business development through acquisitions may continue to be a component of our long-term strategy. Should we elect to engage in any acquisitions in the future, acquisitions or similar arrangements may be complex, time consuming and expensive. We may not consummate some negotiations for acquisitions or other arrangements, which could result in significant diversion of management and other employee time, as well as substantial out-of-pocket costs. If such transactions are not completed for any reason, we will be subject to several risks, including the following: (i) the market price of our common shares may reflect a market assumption that such transactions will occur, and a failure to complete such transactions could result in a negative perception by the market of us generally and a decline in the market price of our common shares and (ii) many costs relating to the such transactions may be payable by us whether or not such transactions are completed. If an acquisition is consummated, the integration of the acquired business, product or other assets into our Company may also be complex and time-consuming and, if such businesses, products and assets are not successfully integrated, we may not achieve the anticipated benefits, cost-savings or growth opportunities. Furthermore, we have incurred, and may incur in the future, restructuring and integration costs and a number of non-recurring transaction costs associated with these acquisitions, combining the operations of the Company and the acquired company and achieving desired synergies. These fees and costs may be substantial. These acquisitions and other arrangements, even if successfully integrated, may fail to further our business strategy as anticipated. We may also fail to achieve the anticipated benefits and successes of such acquisitions.
We have entered into distribution agreements with other companies to distribute certain of our products at supply prices based on net sales. Declines in the pricing and/or volume, over which we have no or limited control, of such products, and therefore the amounts paid to us, could have a material adverse effect on our business, financial condition, cash flows and results of operations and could cause the market value of our common shares and/or debt securities to decline.
Certain of our products are the subject of third party distribution or sublicense agreements, pursuant to which we may manufacture and sell products to other companies, which distribute such products in return for a royalty or a supply price, in both cases which are often based on net sales. Our ability to control pricing and volume of these products may be limited and, in some cases, these companies make all distribution and pricing decisions independently of us. If the pricing or volume of such products declines, our revenues would be adversely impacted which could have a material adverse effect on our business, financial condition, cash flows and results of operations and could cause the market value of our common shares and/or debt securities to decline.
The illegal distribution and sale of counterfeit versions of our products may reduce demand for our products or have a negative impact on the reputation of our products, which could have a material adverse effect on our business, financial condition, cash flows and results of operations and could cause the market value of our common shares and/or debt securities to decline.
Third parties may illegally distribute and sell counterfeit versions of our products, which do not meet or adhere to the rigorous quality, safety, manufacturing, storage and handling standards and regulations that apply to our products. The prevalence of counterfeit products is a growing industry-wide issue due to the widespread use of the Internet, which has greatly facilitated the ease by which counterfeit products can be advertised, purchased and delivered. The discovery of safety or efficacy issues, adverse events or even death or personal injury associated with or caused by counterfeit products may be attributed to our products and may cause reputational harm to our products or the Company. We may not be able to detect or, if detected, prevent or prohibit the sale of such counterfeit products. As a result, the illegal sale or distribution of counterfeit products may negatively impact the demand for and sales of our products, which could have a material adverse effect on our business, financial condition, cash flows and results of operations and could cause the market value of our common shares and/or debt securities to decline.
Our revenues and profits could be reduced by imports from countries where our products are available at lower prices.
Prices for our products are based on local market economics and competition and differ from country to country. Our sales in countries with relatively higher prices may be reduced if products can be imported into those or other countries from lower price markets. If this happens with our products, our revenues and profits may be adversely affected, which could have a material adverse effect on our business, financial condition, cash flows and results of operations and could cause the market value of our common shares and/or debt securities to decline.
Our policies regarding returns, allowances and chargebacks, and marketing programs adopted by wholesalers, may reduce our revenues in future fiscal periods.
We provide certain rebates, allowances, chargebacks and other credits to our customers with respect to certain of our products. For example, we make payments or give credits to certain wholesalers for the difference between the invoice price paid to us by our wholesaler customer for a particular product and the negotiated price that such wholesaler sells such products to its hospitals, group purchasing organizations, pharmacies or other retail customers. We also give certain of our customers credits on our products that such customers hold in inventory after we have decreased the WAC prices of such products, such credit being for the difference between the old and new price. In addition, we also implement and maintain returns policies, pursuant to which our customers may return product to us in certain circumstances in return for a credit. Although we establish reserves based on our prior experience, wholesaler data, then-current on-hand inventory, our best estimates of the impact that these policies may have in subsequent periods and certain other considerations, we cannot ensure that our reserves are adequate or that actual product returns, rebates, allowances and chargebacks will not exceed our estimates, which could have a material adverse effect on our business, financial condition, cash flows and results of operations and could cause the market value of our common shares and/or debt securities to decline.
We may experience declines in sales volumes or prices of certain of our products as the result of the concentration of sales to wholesalers and the continuing trend towards consolidation of such wholesalers and other customer groups and this could have a material adverse effect on our business, financial condition, cash flows and results of operations and could cause the market value of our common shares and/or debt securities to decline.
For certain of our products, a significant portion of our sales are to a relatively small number of customers. If our relationship with one or more of such customers is disrupted or changes adversely or if one or more of such customers experience financial difficulty or other material adverse changes in their businesses, it could materially and adversely affect our sales and financial results, which could have a material adverse effect on our business, financial condition, cash flows and results of operations and could cause the market value of our common shares and/or debt securities to decline.
In addition, wholesalers and retail drug chains have undergone, and are continuing to undergo, significant consolidation. This consolidation may result in these groups gaining additional purchasing leverage and consequently increasing the product pricing pressures facing our business. The result of these developments could have a material adverse effect on our business, financial condition, cash flows and results of operations and could cause the market value of our common shares and/or debt securities to decline.
Item 1B. Unresolved Staff Comments
None.
Item 2. Properties
We own and lease a number of important properties. Our headquarters and one of our manufacturing facilities are located in Laval, Quebec. We haveown several manufacturing facilities throughout the U.S. We also own or have an interest in manufacturing plants or other properties outside the U.S., including in Canada, Mexico, and certain countries in Europe, North Africa, Asia and South America.
We consider our facilities to be in satisfactory condition and suitable for their intended use, although some limited investments to improve our manufacturing and other related facilities are contemplated, based on the needs and requirements of our business. Our administrative, marketing, research/laboratory, distribution and warehousing facilities are located in various
parts of the world. We co-locate our R&D activities with our manufacturing at the plant level in a number of facilities. Our scientists, engineers, quality assurance/quality control professionals and manufacturing technicians work side-by-side in designing and manufacturing products that fit the needs and requirements of our customers, regulators and business units.
We believe that we have sufficient facilities to conduct our operations during 2018.2022. Our facilities in aggregate are approximately 10 million square feet and include, among others, the following list of principal properties by segment:
|
| | | | | | | | | | | | | | | | | | | |
| Location | | Purpose | | Owned
or
Leased
| | Approximate
Square
Footage
|
| Laval, Quebec, Canada | | Corporate headquarters, R&D, manufacturing and warehouse facility | | Owned | | 337,000338,000 |
|
Bridgewater, New Jersey(1) | | Administration | | Leased | | 310,000 |
|
Bausch + Lomb/InternationalRochester, New York | | Offices, R&D and manufacturing facility | | Owned | | 953,000 | |
| San Juan del Rio, Mexico | | Offices and manufacturing facility | | Owned | | 853,000 | |
| Jelenia Gora, Poland | | Offices, R&D, manufacturing and warehouse facility | | Owned | | 1,710,000521,000 |
|
Rochester, New YorkWaterford, Ireland | | Offices, R&D and manufacturing facility | | Owned | | 953,000500,000 |
|
San Juan del Rio, MexicoWoodruff, South Carolina | | Distribution facility | | Leased | | 432,000 | |
| Jinan, China | | Offices and manufacturing facility | | Owned | | 853,000418,000 |
|
El Obour City, EgyptRzeszow, Poland | | Offices, R&D, manufacturing and warehouse facility | | Owned | | 628,000380,000 |
|
Waterford, IrelandBerlin, Germany | | R&DManufacturing, distribution and manufacturingoffice facility | | Owned | | 487,000339,000 |
|
| Greenville, South Carolina | | DistributionManufacturing and distribution facility | | LeasedOwned | | 432,000314,000 |
|
Jinan, ChinaSteinbach, Canada | | Offices, manufacturing and manufacturingwarehouse facility | | Owned | | 420,000241,000 |
|
Rzeszow, PolandChattanooga, Tennessee | | Distribution facility | | Leased | | 240,000 | |
| Aubenas, France | | Offices, manufacturing and warehouse facility | | Owned | | 148,000 | |
| Macherio, Italy | | Offices, R&D, manufacturing and warehouse facility | | Owned | | 415,000119,000 |
|
Berlin, GermanyBeijing, China | | Manufacturing, distribution and office facility | | Owned | | 339,000 |
|
Chattanooga, Tennessee | | Distribution facility | | Leased | | 240,000 |
|
Greenville, South Carolina | | Manufacturing and distribution facility | | Owned | | 225,000 |
|
Amsterdam, Netherlands | | Offices and warehouse facility | | Leased | | 217,000 |
|
Mexico City, Mexico | | Offices and manufacturing facility | | Owned | | 191,000 |
|
Tampa, Florida | | R&D and manufacturing facility | | Owned | | 176,000 |
|
Belgrade, Serbia | | Offices and manufacturing facility | | Owned | | 161,000 |
|
Aubenas, France | | Offices, manufacturing and warehouse facility | | Owned | | 149,000 |
|
St. Louis, Missouri | | Manufacturing facility | | Owned | | 140,000102,000 |
|
Myslowice, Poland | | Warehouse facility | | Leased | | 136,000 |
|
Mancherio, Italy | | Offices, R&D, manufacturing and warehouse facility | | Owned | | 134,000 |
|
Lynchburg, Virginia | | Distribution facility | | Owned | | 116,000 |
|
Clearwater, Florida | | Manufacturing facility | | Owned | | 102,000 |
|
Beijing, China | | Warehouse facility and distribution | | Leased | | 100,000 |
|
Medellin, Colombia | | Offices, R&D, manufacturing and warehouse facility | | Leased | | 97,000 |
|
Beijing, China | | Offices and manufacturing facility | | Owned | | 96,000 |
|
Cheonan, Korea | | Offices and manufacturing facility | | Owned | | 62,000 |
|
Branded Rx | | | | | | |
Steinbach, Manitoba, Canada | | Offices, manufacturing and warehouse facility | | Owned | | 250,000 |
|
Vaughn, Ontario, Canada | | Offices, warehouse facility and distribution | | Leased | | 65,000 |
|
(1) — A lease for a second building in Bridgewater, New Jersey was signed in 2015 and was not included in the square footage shown in the table above as the Company has never occupied the second building. In 2016, the Company concluded that it would not occupy the second building and recognized the appropriate charge for all future rents due, net of the anticipated sub-let income associated with the second building.
Item 3. Legal Proceedings
See Note 21,20, "LEGAL PROCEEDINGS" to our audited Consolidated Financial Statements for details on legal proceedings.
Item 4. Mine Safety Disclosures
Not applicable.
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Market Information
Our common shares are traded on the New York Stock Exchange (“NYSE”) and on the Toronto Stock Exchange (“TSX”) under the symbol “VRX”“BHC”. The following table sets forth the high and low the market price of our common shares on the NYSE and TSX during the periods indicated.
|
| | | | | | | | |
| | | NYSE in USD | | TSX in CAD |
| | | High | | Low | | High | | Low |
| 2017 | | | | | | | | |
| First quarter | | 17.55 | | 10.35 | | 23.14 | | 13.82 |
| Second quarter | | 18.25 | | 8.31 | | 23.75 | | 11.20 |
| Third quarter | | 18.17 | | 12.89 | | 22.69 | | 15.83 |
| Fourth quarter | | 22.81 | | 10.94 | | 29.28 | | 14.01 |
| 2016 | | | | | | | | |
| First quarter | | 105.93 | | 25.75 | | 149.01 | | 32.35 |
| Second quarter | | 38.50 | | 18.55 | | 50.18 | | 24.32 |
| Third quarter | | 32.74 | | 19.61 | | 42.25 | | 25.55 |
| Fourth quarter | | 24.89 | | 13.00 | | 32.70 | | 17.42 |
_______________Sources: NYSE.net, TSX Historical Data Access
Market Price Volatility of Common Shares
Market prices for the securities of pharmaceutical, medical devices and biotechnology companies, including our securities, have historically been highly volatile, and the market has experienced significant price and volume fluctuations that are unrelated to the operating performance of particular companies. Factors such as fluctuations in our operating results, the aftermath of public announcements by us or by others about us, changes in our executive management, changes in our business strategy, concern as to the safety of drugs and medical devices, the commencement or outcome of legal or governmental proceedings, changes in our ability to access credit markets, changes in the cost of capital, investigations or inquiries, and general market conditions can have an adverse effect on the market price of our common shares and other securities. For example, during 2015 and 2016, we experienced significant fluctuations and decreases in the market price of our common shares as a result of, among other things, legal and governmental proceedings and investigations with respect to certain of our distribution, marketing, pricing, disclosure and accounting practices, rising interest rates and certain public allegations made by short sellers and other third parties relating to certain of these matters. See Item 1A1A. “Risk Factors” of this Form 10-K for additional information.
Holders
The approximate number of holders of record of our common shares as of February 22, 201817, 2022 was 3,064.1,815.
Performance Graph
The following performance graph compares the cumulative total return on a $100 investment on January 1, 2013,December 31, 2016, assuming reinvestment of all dividends, in: (i) our common shares, (ii) the S&P 500 Index, (iii) the S&P/TSX Composite Index, and (iv) a 2021 composite peer group of 1210 major U.S. basedpharmaceutical companies and (v) a 2022 composite peer group of 14 major pharmaceutical companies for the five years ended December 31, 2017.2021. The 2021 composite peer group of 1210 major U.S. based pharmaceutical companies consists of Allergan PLC,Amgen Inc, Biogen Inc, Bristol-Myers Squibb Company, Eli Lilly and Company, Endo International plc, Jazz Pharmaceuticals plc, Mallinckrodt plc, Perrigo Company plc, United Therapeutics Corporation and Zoetis Inc. As a result of certain mergers involving our peer group, the Company completed an assessment to review its current peers and search for potential new peers. This resulted in the 2022 composite peer group of 14 major pharmaceutical companies, which consists of Alcon Inc., Amgen Inc., BiogenBaxter International Inc., Bristol-Myers Squibb Co, Celgene Corp, Danaher Corp,Biogen Inc, Cooper Companies Inc., Eli Lilly And Co, Gilead Sciencesand Company, Endo International plc, Jazz Pharmaceuticals plc, Perrigo Company plc, Teva Pharmaceutical Industries Ltd., United Therapeutics Corporation, Viatris Inc., Mylan NV, Perrigo Company PLC, Shire PLCZoetis Inc. and Vertex PharmaceuticalsZimmer Biomet Holdings Inc.
| | | | | | | | | | | | | | | As of December 31, |
| | | 2012 | | 2013 | | 2014 | | 2015 | | 2016 | | 2017 | | | 2016 | | 2017 | | 2018 | | 2019 | | 2020 | | 2021 |
| Valeant Pharmaceuticals International, Inc. | | 100 | | 196 | | 239 | | 170 | | 24 | | 35 | |
| Bausch Health Companies Inc. | | Bausch Health Companies Inc. | | $100 | | $143 | | $127 | | $206 | | $143 | | $190 |
| S&P 500 | | 100 | | 132 | | 151 | | 153 | | 171 | | 208 | S&P 500 | | $100 | | $122 | | $116 | | $153 | | $181 | | $233 |
| S&P/TSX Composite | | 100 | | 113 | | 125 | | 115 | | 139 | | 151 | S&P/TSX Composite | | $100 | | $109 | | $99 | | $122 | | $129 | | $161 |
| Peer Group | | 100 | | 162 | | 210 | | 227 | | 190 | | 206 | |
| 2021 Peer Group | | 2021 Peer Group | | $100 | | $118 | | $133 | | $166 | | $185 | | $247 |
| 2022 Peer Group | | 2022 Peer Group | | $100 | | $114 | | $116 | | $144 | | $165 | | $200 |
Dividends
No dividends were declared or paid in 2017, 20162021, 2020 or 2015.2019. While our Board of Directors will review our dividend policy periodically, we currently do not intend to pay any cash dividends in the foreseeable future. In addition, our Restated Credit Agreement and indentures include restrictions on the payment of dividends. See Note 11,10, "FINANCING ARRANGEMENTS" to our audited Consolidated Financial Statements for further details regarding these restrictions.
Restrictions on Share Ownership by Non-Canadians
There are no limitations under the laws of Canada or in our organizational documents on the right of foreigners to hold or vote securities of our Company, except that the Investment Canada Act (Canada) (the “Investment Canada Act”) may require review and approval by the Minister of Innovation, Science and Economic Development (Canada)Industry(Canada) (the “Minister”) of an acquisition of “control” of our Company by a “non-Canadian”.
Investment Canada Act
An acquisition of control of a Canadian business by a non-Canadian is either reviewable (a “Reviewable Transaction”), in which case it is subject to both a reporting obligation and an approval process, or notifiable, in which case it is subject to only a reporting obligation. In the case of a Reviewable Transaction, the non-Canadian acquirer must submit an application for review with the prescribed information. The Minister is then required to determine whether the Reviewable Transaction is likely to be of net benefit to Canada, taking into account the assessment factors specified in the Investment Canada Act and any written undertakings that may have been given by the non-Canadian acquirer.
The Investment Canada Act provides that any investment by a non-Canadian in a Canadian business, even where control has not been acquired, can be reviewed on grounds of whether it may be injurious to national security. Where an investment is determined to be injurious to national security, Cabinet can prohibit closing or, if closed, can order the investor to divest control. Short of a prohibition or divestment order, Cabinet can impose terms or conditions on the investment or can require the investor to provide binding undertakings to remove the national security concern.
Competition Act
Part IX of the Competition Act (Canada) (the “Competition Act”) requires that a pre-merger notification filing be submitted to the Commissioner of Competition (the “Commissioner”) in respect of certain classes of merger transactions that exceed certain prescribed thresholds. If a proposed transaction exceeds such thresholds, subject to certain exceptions, the notification filing must be submitted to the Commissioner and the statutory waiting period must expire or be terminated early or waived by the Commissioner before the transaction can be completed.
All mergers, regardless of whether they are subject to Part IX of the Competition Act, are subject to the substantive mergers provisions under Section 92 of the Competition Act. In particular, the Commissioner may challenge a transaction before the Competition Tribunal where the transaction prevents or lessens, or is likely to prevent or lessen, competition substantially in a market. The Commissioner may not make an application to the Competition Tribunal under Section 92 of the Competition Act more than one year after the merger has been substantially completed.
Exchange Controls
Canada has no system of exchange controls. There are no Canadian exchange restrictions on the repatriation of capital or earnings of a Canadian public company to non-resident investors. There are no laws in Canada orCanadian exchange restrictions affecting the remittance of dividends, profits, interest, royalties and other payments to non-resident holders of our securities, except as discussed in “Taxation” below.securities.
Taxation
Canadian Federal Income Taxation
The following discussion is a summary of the principal Canadian federal income tax considerations generally applicable to a holder of our common shares who, at all relevant times, for purposes of the Income Tax Act (Canada) and the Income Tax Regulations (collectively, the “Canadian Tax Act”) deals at arm’s-length with, and is not affiliated with, our Company, beneficially owns its common shares as capital property, does not use or hold and is not deemed to use or hold such common shares in carrying on a business in Canada, does not with respect to common shares enter into a “derivative forward agreement” as defined in the IncomeCanadian Tax Act, and who, at all relevant times, for purposes of the application of the Canadian Tax Act and the Canada-U.S. Income Tax Convention (1980, as amended) (the “U.S. Treaty”), is resident in the U.S., is not, and is not deemed to be, resident in Canada and is eligible for benefits under the U.S. Treaty (a “U.S. Holder”). Special rules, which are not discussed in the summary, may apply to a non-resident holder that is an insurer that carries on an insurance business in Canada and elsewhere or that is an “authorized foreign bank” as defined in the Canadian Tax Act.
The U.S. Treaty includes limitation on benefits rules that restrict the ability of certain persons who are resident in the U.S. to claim any or all benefits under the U.S. Treaty. Furthermore, limited liability companies (“LLCs”) that are not taxed as corporations pursuant to the provisions of the U.S. Internal Revenue Code of 1986, as amended (the “Code”) do not generally qualify as resident in the U.S. for purposes of the U.S. Treaty. Under the U.S. Treaty, a resident of the U.S. who is a member of such an LLC and is otherwise eligible for benefits under the U.S. Treaty may generally be entitled to claim benefits under the
U.S. Treaty in respect of income, profits or gains derived through the LLC. Residents of the U.S. should consult their own tax advisors with respect to their eligibility for benefits under the U.S. Treaty, having regard to these rules.
This summary is based upon the current provisions of the U.S. Treaty and the Canadian Tax Act and our understanding of the current administrative policies and assessing practices of the Canada Revenue Agency published in writing prior to the date hereof. This summary takes into account all specific proposals to amend the U.S. Treaty and the Canadian Tax Act publicly announced by or on behalf of the Minister of Finance (Canada) prior to the date hereof. This summary does not otherwise take into account or anticipate changes in law or administrative policies and assessing practices, whether by judicial, regulatory, administrative or legislative decision or action, nor does it take into account provincial, territorial or foreign tax legislation or considerations, which may differ from those discussed herein.
This summary is of a general nature only and is not intended to be, nor should it be construed to be, legal or tax advice generally or to any particular holder. Holders should consult their own tax advisors with respect to their own particular circumstances.
Gains on Disposition of Common Shares
In general, a U.S. Holder will not be subject to tax under the Canadian Tax Act on capital gains arising on the disposition of such holder’s common shares unless the common shares are “taxable Canadian property” to the U.S. Holder and are not “treaty-protected property”.
As long as the common shares are then listed on a “designated stock exchange”, which currently includes the NYSE and TSX, the common shares generally will not constitute taxable Canadian property of a U.S. Holder, unless: (a) at any time during the 60-month period preceding the disposition, the U.S. Holder, persons not dealing at arm’s length with such U.S. Holder or the U.S. Holder together with all such persons, owned 25% or more of the issued shares of any class or series of the capital stock of the Company and (b) more than 50% of the fair market value of the common shares was derived, directly or indirectly, from any combination of: (i) real or immoveable property situated in Canada, (ii) “Canadian resource property” (as such term is defined in the Canadian Tax Act), (iii) “timber resource property” (as such term is defined in the Canadian Tax Act) or (iv) options in respect of, or interests in, or for civil law rights in, any such properties whether or not the property exists or the common shares are otherwise deemed to be taxable Canadian property.
Common shares will be treaty-protected property where the U.S. Holder is exempt from income tax under the Canadian Tax Act on the disposition of common shares because of the U.S. Treaty. Common shares owned by a U.S. Holder will generally be treaty-protected property where the value of the common shares is not derived principally from real property situated in Canada, as defined in the U.S. Treaty.
Dividends on Common Shares
Dividends paid or credited on the common shares or deemed to be paid or credited on the common shares to a U.S. Holder that is the beneficial owner of such dividends will generally be subject to non-resident withholding tax under the Canadian Tax Act and the U.S. Treaty at the rate of: (a) 5% of the amounts paid or credited if the U.S. Holder is a company that owns (or is deemed to own) at least 10% of our voting stock or (b) 15% of the amounts paid or credited in all other cases. The rate of withholding under the Canadian Tax Act in respect of dividends paid to non-residents of Canada is 25% where no tax treaty applies.
Securities Authorized for Issuance under Equity Compensation Plans
Information required under this Item will be included in our definitive proxy statement for the 20182022 Annual Meeting of Shareholders expected to be filed with the SEC no later than 120 days after the end of the fiscal year covered by this Form 10-K (the “2018“2022 Proxy Statement”), and such required information is incorporated herein by reference.
Purchases of Equity Securities by the Company and Affiliated Purchases
There were no purchases of equity securities by the Company during the fourth quarter of the year ended December 31, 2017.2021.
Item 6. Selected Financial Data
The following tables of selected consolidated financial data of our Company have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”). The data is qualified by reference to, and should be read in conjunction with our audited Consolidated Financial Statements and related notes thereto prepared in accordance with U.S. GAAP. See Item 15 “Exhibits and Financial Statement Schedules” and the discussion in Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” to this Form 10-K.
|
| | | | | | | | | | | | | | | | | | | | |
| | | Years Ended December 31, |
| (in millions, except per share data) | | 2017 | | 2016 | | 2015 | | 2014 | | 2013 |
| Consolidated operating data: | | | | | | | | | | |
| Revenues | | $ | 8,724 |
| | $ | 9,674 |
| | $ | 10,447 |
| | $ | 8,206 |
| | $ | 5,770 |
|
| Operating income (loss) | | $ | 102 |
| | $ | (566 | ) | | $ | 1,527 |
| | $ | 2,001 |
| | $ | (410 | ) |
| Net income (loss) attributable to Valeant Pharmaceuticals International, Inc. | | $ | 2,404 |
| | $ | (2,409 | ) | | $ | (292 | ) | | $ | 881 |
| | $ | (866 | ) |
| Earnings (loss) per share attributable to Valeant Pharmaceuticals International, Inc. | | | | | | | | | | |
| Basic | | $ | 6.86 |
| | $ | (6.94 | ) | | $ | (0.85 | ) | | $ | 2.63 |
| | $ | (2.70 | ) |
| Diluted | | $ | 6.83 |
| | $ | (6.94 | ) | | $ | (0.85 | ) | | $ | 2.58 |
| | $ | (2.70 | ) |
| Cash dividends declared per share | | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
|
|
| | | | | | | | | | | | | | | | | | | | |
| | | At December 31, |
| (in millions) | | 2017 | | 2016 | | 2015 | | 2014 | | 2013 |
| Consolidated balance sheet information: | | | | | | | | | | |
| Cash and cash equivalents | | $ | 720 |
| | $ | 542 |
| | $ | 597 |
| | $ | 323 |
| | $ | 600 |
|
| Working capital | | $ | 478 |
| | $ | 1,468 |
| | $ | 194 |
| | $ | 1,423 |
| | $ | 1,373 |
|
| Total assets | | $ | 37,497 |
| | $ | 43,529 |
| | $ | 48,965 |
| | $ | 26,305 |
| | $ | 27,933 |
|
| Long-term debt, including current portion | | $ | 25,444 |
| | $ | 29,846 |
| | $ | 31,088 |
| | $ | 15,229 |
| | $ | 17,330 |
|
| Common shares | | $ | 10,090 |
| | $ | 10,038 |
| | $ | 9,897 |
| | $ | 8,349 |
| | $ | 8,301 |
|
| Valeant Pharmaceuticals International, Inc. shareholders’ equity | | $ | 5,849 |
| | $ | 3,152 |
| | $ | 5,910 |
| | $ | 5,279 |
| | $ | 5,119 |
|
| | | | | | | | | | | |
| Number of common shares issued and outstanding | | 348.7 |
| | 347.8 |
| | 342.9 |
| | 334.4 |
| | 333.0 |
|
The following are the significant items affecting the comparability of the selected financial information for the periods presented:
Acquisitions - The Company completed a series of mergers and acquisitions, the most significant, of which, were the acquisition of Amoun Pharmaceutical Company S.A.E. (October 19, 2015), the acquisition of Sprout Pharmaceuticals, Inc. ("Sprout") (the "Sprout Acquisition") (October 1, 2015), the acquisition of Salix Pharmaceuticals, Ltd. (April 1, 2015) and the acquisition of Bausch & Lomb Holdings Incorporated (August 5, 2013). The assets, liabilities and results of operations of these and other acquisitions are included in the reported amounts effective upon the respective acquisition dates. See Note 3, "ACQUISITIONS" to our audited Consolidated Financial Statements for additional information.
Divestitures - In order to better focus on our core businesses, we have divested businesses that were not considered core to our ongoing operations or the needs of our primary-customer base. The most significant of these divestitures include the divestitures of the Obagi Medical Products, Inc. business (November 9, 2017), the iNova Pharmaceuticals business (September 29, 2017), the Company's equity interest in Dendreon Pharmaceuticals LLC (June 28, 2017) and the Company's interests in the CeraVe®, AcneFree™ and AMBI® skincare brands (March 3, 2017). The assets, liabilities and results of operations of these and other divestitures and discontinuances are included in the reported amounts through the date of the respective divestiture and discontinuance dates. See Note 4, "DIVESTITURES" to our audited Consolidated Financial Statements for additional information.
Restructuring and Integration Costs - In connection with certain acquisitions previously noted, the Company incurred cost-rationalization and integration initiatives in order to capture operating synergies, which generated cost savings across the Company. In 2017, 2016, 2015, 2014 and 2013, Restructuring and integration costs were $52 million, $132 million, $362 million, $382 million and $462 million, respectively. See Note 5, "RESTRUCTURING AND INTEGRATION COSTS" to our audited Consolidated Financial Statements for additional information.
Goodwill Impairments - In 2017 and 2016, Operating income included Goodwill impairments of $312 million and $1,077 million, respectively. These Goodwill impairments were the result of goodwill impairment testing triggered when certain assets of a reporting unit were reclassified as held for sale during the three months ended September 30, 2017 and our reporting segment structure was realigned during the three months ended September 30, 2016, respectively.
Net Gains on Sales of Assets - In 2017, Operating income includes the net gains on sales of assets of $580 million related to the 2017 divestitures previously discussed. In 2014, Operating income includes the net gains on sales of assets of $251 million, primarily driven by a $324 million gain related to the divestiture of facial aesthetic fillers and toxins.
Benefit from Income Taxes - In 2017, Net income (loss) attributable to Valeant Pharmaceuticals International, Inc. includes non-cash deferred income tax benefits of approximately $4,145 million related to: (i) adjustments to previously recorded outside basis differences as a result of the Company’s internal corporate restructuring, and (ii) the accounting for the U.S. Tax Cuts and Jobs Act of 2017.
Debt Issuance, Refinancing, Interest Expense, and Loss on Extinguishment of Debt - We completed a series of transactions which allowed us to obtain the necessary financing to fund the acquisitions previously discussed and refinance certain of our debt arrangements under our Senior Secured Credit Facilities and our Senior Unsecured Notes to extend the maturities of the refinanced debt. See Note 11, "FINANCING ARRANGEMENTS" to our audited Consolidated Financial Statements for additional information. These transactions impacted Net income (loss) attributable to Valeant Pharmaceuticals International, Inc. for the periods presented as follows:
Interest Expense was $1,840 million, $1,836 million, $1,563 million, $971 million and $844 million in 2017, 2016, 2015, 2014 and 2013, respectively. The increase in interest expense over this time is reflective of the additional debt obtained to finance the acquisitions previously discussed and, to a lesser extent, increases in the stated rates of interest for our debt obligations.Reserved
Loss on extinguishment of debt was $122 million, $0, $20 million, $130 million and $65 million in 2017, 2016, 2015, 2014 and 2013, respectively, and was incurred in connection with the refinancing of our debt obligations.61
Weighted average stated rate of interest was 6.07%, 5.75%, 5.10%, 5.20% and 5.35%, as of as of December 31, 2017, 2016, 2015, 2014 and 2013, respectively.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
INTRODUCTION
This “Management’s Discussion and Analysis of Financial Condition and Results of Operations” has been updated through February 28, 201823, 2022 and should be read in conjunction with the audited Consolidated Financial Statements and the related notes thereto included elsewhere in this Annual Report on Form 10-K. The matters discussed in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” contain certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, and that may be forward-looking information within the meaning defined under applicable Canadian securities laws (collectively, “Forward-Looking Statements”). See “Forward-Looking Statements” at the end of this discussion. Additional company information, including this Form 10-K, is available on SEDAR at www.sedar.com and on the U.S. Securities and Exchange Commission (the “SEC”) website at www.sec.gov. All currency amounts are expressed in U.S. dollars, unless otherwise noted.
OVERVIEW
Valeant Pharmaceuticals International,Bausch Health Companies Inc. (“we”, “us”, “our” or the “Company”) is a global company whose mission is to improve people’s lives with our health care products. We develop, manufacture and market, primarily in the therapeutic areas of eye-health, gastroenterology (“GI”) and dermatology, a broad range ofof: (i) branded pharmaceuticals, (ii) generic and branded generic pharmaceuticals, (iii) over-the-counter (“OTC”) products and (iv) medical devices (contact lenses, intraocular lenses, ophthalmic surgical equipment and aesthetics devices) and over-the-counter (“OTC”) products, primarily, which are marketed directly or indirectly in the therapeutic areas of eye-health, gastroenterology and dermatology.approximately 100 countries.
We generated revenues for 2017, 20162021, 2020 and 2015,2019, of $8,724$8,434 million, $9,674$8,027 million and $10,447$8,601 million, respectively. Our portfolio of products falls into threefive operating and reportable segments: (i) Bausch + Lomb/Lomb, (ii) Salix, (iii) International (ii) Branded Rx, (iv) Ortho Dermatologics and (iii) U.S.(v) Diversified Products. These segments are discussed in detail in Note 23,22, "SEGMENT INFORMATION" to our audited Consolidated Financial Statements. The following is a brief description of the Company’s segments:
•The Bausch + Lomb/Lomb segment consists of global sales of Bausch + Lomb Vision Care, Consumer, Surgical and Ophthalmic Pharmaceuticals products.
•The Salix segmentconsists of sales in the U.S. of GI products.
•The International Rx segmentconsists of sales, with the exception of sales of Bausch +Lomb products and Solta aesthetic medical devices, outside the U.S and Puerto Rico of branded pharmaceutical products, branded generic pharmaceutical and OTC products.
•The Ortho Dermatologicssegment consists of: (i) sales in the U.S. of pharmaceutical products, OTC products and medical device products, primarily comprised of Bausch + Lomb products, with a focus on the Vision Care, Surgical, Consumer and Ophthalmology RxOrtho Dermatologics (dermatological) products and (ii) global sales in Canada, Europe, Asia, Australia and New Zealand, Latin America, Africa and the Middle East of branded pharmaceutical products, branded generic pharmaceutical products, OTC products,Solta aesthetic medical device products and Bausch + Lomb products.
devices.•The Branded Rx segment consists of sales in the U.S. of: (i) Salix products (gastrointestinal (“GI”) products), (ii) Ortho Dermatologics (dermatological products) and (iii) oncology (or Dendreon), dentistry and women’s health products (or Sprout). As a result of the divestiture of the Company's equity interest in Dendreon Pharmaceuticals LLC (“Dendreon”) on June 28, 2017 and Sprout Pharmaceuticals, Inc. (“Sprout”) on December 20, 2017, the Company has exited the oncology and women's health business, respectively.
The U.S. Diversified Products segment consists of sales in the U.S. of: (i) pharmaceutical products, OTC products and medical device products in the areas of neurology and certain other therapeutic classes, including aesthetics which includes the Solta business(ii) generic products and the Obagi Medical Products, Inc. (“Obagi”) business (the sale of the Obagi business was completed on November 9, 2017) and (ii) authorized generic (“AG”)(iii) dentistry products.
We are focused on the therapeutic areas of eye-health, gastroenterology and dermatology which we believe have the potential for strong operating margins and offer growth opportunities. We identify these businesses as “core”, meaning that we believe we are best positioned to grow and develop them. Through our output-focused R&D (“R&D”) model previously discussed in the section "Business Strategy", we have advanced certain development programs to drive commercial growth, while creating efficiencies in our R&D efforts and expenses. These R&D projects include certain products that we have dubbed our "Significant Seven", which are products recently launched or expected to launch in the near term pending completion of testing and receiving FDA approval. Our Significant Seven are: (i) Vyzulta™ (Bausch + Lomb), (ii) Siliq™ (psoriasis), (iii) Jemdel™ (psoriasis), (iv) Lumify™ (Bausch + Lomb), (v) Duobrii™ (psoriasis), (vi) Relistor® (GI) and (vii) the Bausch + Lomb ULTRA® product lines (Bausch + Lomb). As outlined later in theFor additional discussion of our transformation, althoughreportable segments, see the 2017 revenues associated with our Significant Seven are not material, we believe the prospects for this group of products over the next five years are substantial.
History
Following the Company’s (then named Biovail Corporation) acquisition of Valeant Pharmaceuticals International on September 28, 2010, we supplemented our internal R&D efforts with strategic acquisitions to expand our portfolio offeringsdiscussion in Item 1. "Business — Segment Information" and geographic footprint. In 2013, we acquired Bausch & Lomb Holdings Incorporated (“B&L”) (the “B&L Acquisition”), a global eye-health company that focuses on developing, manufacturing and marketing eye-health products, including contact lenses, contact lens care solutions, ophthalmic pharmaceuticals and ophthalmic surgical products. In 2015, we acquired Salix Pharmaceuticals, Ltd. (“Salix”) (the “Salix Acquisition”), a specialty pharmaceutical company dedicated to developing and commercializing prescription drugs and medical devices used in treatment of a variety of GI disorders with a portfolio of over 20 marketed products, including Xifaxan®, Uceris®, Apriso®, Glumetza® and Relistor®. In 2015, we acquired the exclusive licensing rights to develop and commercialize brodalumab, an IL-17 receptor monoclonal antibody for patients with moderate-to-severe
plaque psoriasis for which, following internal development work, on February 15, 2017, we received approval from the U.S. Food and Drug Administration (“FDA”). On July 27, 2017, we launched this product in the U.S., marketed as Siliq™. We believe the investments we have made in B&L, Salix, brodalumab and other acquisitions, as well as our ongoing investments in our internal R&D efforts, are helping us to capitalize on the core geographies and therapeutic classes that have the potential for strong operating margins and offer attractive growth opportunities. While business development through acquisitions may continue to be a component of our long-term strategy, we have made minimal acquisitions since 2015 and expect the volume and size of acquisitions to be low in the foreseeable future. See Note 3, "ACQUISITIONS"22, "SEGMENT INFORMATION" to our audited Consolidated Financial Statements for additionalfurther details regarding acquisitions.on these reportable segments.
Our TransformationFocus on Value
Prior to 2016, we had completed a series of mergers and acquisitions which were in-line with the Company’s previous strategy for growth. However, in response to changing business dynamics within our Company, we recognized the need to change our focus in order to build a world-class health care organization. In 2016, we retained a new executive team which immediately implemented a multi-year plan designed to stabilize, turnaroundtransform and bring out value in our Company. The multi-year plan increased our focus on, among other factors, our: product portfolio, infrastructure, geographic footprint, capital structure and risk management. Since that time, we have been executing and continue to execute on our commitments to transform the Company.Company and generate value. As discussed below, under the multi-year plan, we have taken actions that among other things included: (i) divesting non-core assets, (ii) making strategic investments in our core businesses and (iii) making measurable progress in improving our capital structure. These measures gave us operating flexibility and put us in a strong position to unlock the additional value to be found in our specific businesses. We believe that these and other positive actions we took to transform our Company, have helped to focus our operations, and improve our capital structure. These positive actions also presented us with an opportunity to unlock potential value across our portfolio of assets by separating our pharmaceutical, eye-health and skincare businesses, and, in 2020 and 2021, we set out to create three highly attractive but dissimilar businesses. Although management believes these transactions will bring out additional value, there can be no assurance that either the B+L Separation or the Solta IPO will be successful in doing so.
In 2016
Separation of the new executive team: (i) identifiedBausch + Lomb Eye-Health Business and retainedthe Solta Medical Business
On August 6, 2020, we announced our plan to separate our eye-health business consisting of our Bausch + Lomb Global Vision Care, Global Consumer, Global Surgical and Global Ophthalmic Pharmaceuticals businesses into an independent publicly traded entity, Bausch + Lomb from the remainder of Bausch Health Companies Inc (the “B+L Separation”).
At the time of our announcement, we have previously emphasized that it is important that the post-separation entities be well capitalized, with appropriate leverage and with access to additional capital, if and when needed, to provide each entity with the ability to independently allocate capital to areas that will strengthen their own competitive positions in their respective lines of business and position each entity for sustainable growth. Therefore, we see the appropriate capitalization and leverage of these businesses post-separation as a new leadership team, (ii) enhancedkey to maximizing value across our portfolio of assets and, so, it is a primary objective of our plan of separation. We also previously stated that all options for achieving the Company's focusappropriate capitalization and leverage for these entities post-separation were being considered. Management remains focused on core assets, which enabledthe capitalizations of the post-separation entities and has considered and continues to consider alternative means of achieving the appropriate outcome, including dispositions in our business that we believe represent attractive opportunities for the Company and are in line with our plan of separation. This informed our decision to recruitdivest Amoun Pharmaceutical Company S.A.E. ("Amoun") on July 26, 2021 and, retain stronger talent for its sales initiativesas discussed below, use the net proceeds to repay certain debt obligations. It has also informed, in part, our decision to pursue an initial public offering of our Solta aesthetic medical device business (“Solta Medical”) (the “Solta IPO”), which we announced on August 3, 2021. We believe that the Solta IPO, when and (iii) realignedif complete, will allow us to unlock the Company’s operationsvalue of this high-growth business and give us ownership of a valuable financial asset that would compare more favorably to improve transparencyother aesthetic medical device companies.
Since announcing the B+L Separation and operational efficiency and better support the Company's sales force. Once in place, the new leadership teamSolta IPO, we began executing on those plans and, at the turnaround phaseend of 2021, had substantially completed the internal objectives necessary to facilitate the IPOs and related separation of those businesses. We continue to monitor market conditions and aim to launch the B+L IPO and the Solta IPO when financial market conditions are favorable (subject to receipt of regulatory, stock exchange and other approvals). However, there can be no assurance as to when we will complete either IPO, if at all. Until such time, we continue to manage these businesses along with our diverse portfolio of gastrointestinal, dermatology, neurology and other therapeutics, with our commitment to bring out additional value for our shareholders. Following the B+L IPO, we expect to complete the separation of Bausch + Lomb following the expiry of customary lockups related to the B+L IPO and achievement of targeted debt leverage ratios, subject to the receipt of applicable shareholder and other necessary approvals and market conditions.
We intend to use the proceeds from the B+L Separation and the Solta IPO to repay, to the extent possible, a portion of our existing debt, thereby improving our capitalization and leverage. We believe the B+L Separation and the Solta IPO provide us with an attractive opportunity for liquidity to support the appropriate capitalization and leverage of the multi-year action planBausch + Lomb entity, the Solta Medical entity and deliveringthe remainder of Bausch Health Companies Inc., which we refer to as “Bausch Pharma” and will assume a new name upon completion of the B+L Separation. However, management continues to consider the forms of the B+L Separation and the Solta IPO and is exploring a number of alternative capitalization structures in order to properly capitalize the three entities.
The B+L Separation and the Solta IPO will establish three separate companies that include:
•Bausch + Lomb - a fully integrated, pure play eye-health company built on commitmentsthe iconic Bausch + Lomb brand and long history of innovation;
•Solta Medical - a leading global aesthetic medical device company focused on the development, manufacture and sale of innovative technologies that provide aesthetic and therapeutic benefits; and
•Bausch Pharma - a diversified pharmaceutical company with leading positions in gastroenterology, dermatology, neurology and international pharmaceuticals. The remaining pharmaceutical entity will comprise a diversified portfolio of our leading durable brands across the Salix, International Rx, dentistry, neurology, medical dermatology and generics businesses.
We believe these transactions will result in three highly attractive but dissimilar businesses. As separate entities, management believes that each company will be better positioned to individually focus on its core businesses to drive additional growth, more effectively allocate capital and better manage its respective capital needs. Further, these transactions allow us and the market to compare the operating results of each entity with other “pure play” peer companies. Although management believes these transactions will bring out additional value, there can be no assurance that either the B+L Separation or the Solta IPO will be successful in doing so.
In January and February 2022, we took certain actions to, and announced others that we believe will, bring us closer in reaching our targeted capitalization of the post-separation entities. These actions are discussed in more detail in Item “—
Liquidity and Capital Resources — Liquidity and Debt — Long-term Debt” and Note 23, "SUBSEQUENT EVENTS" to our audited Consolidated Financial Statements. Although an IPO of the Bausch + Lomb and Solta Medical businesses are among the alternate capital structures being considered, this Form 10-K does not constitute an offer to sell, or the solicitation of an offer to buy, any securities of the Bausch + Lomb or Solta Medical entities. As of the date of this filing, the determination of the capitalization of the three entities continues to evolve, and we do not have a definitive timetable to finalize the respective capital structures. We continue to monitor market conditions and aim to launch the B+L IPO and Solta IPO when financial market conditions are favorable (and subject to receipt of regulatory, stock exchange, and other regulatory approvals).
In addition to the capitalization and leverage ratios of each entity, there are considerations, approvals and conditions, including market conditions, that will determine the ultimate timing and structure of these transactions, including regulatory approvals, final approval by our board of directors, any shareholder vote requirements that may be applicable, compliance with U.S. and Canadian securities laws and stock exchange rules, receipt of any applicable opinions and/or rulings with respect to the Canadian and U.S. federal income tax treatment of such transactions and determination of the pro forma capitalization of each of the three entities. The failure to satisfy all of the required conditions could delay the completion of these transactions for a significant period of time or prevent them from occurring at all. In addition to our internal organization and structure work, we will need to complete a number of additional steps that will depend on the ultimate structure of the transactions (in addition to obtaining the regulatory approvals and satisfying the conditions described above) before we can launch the B+L IPO, complete the B+L Separation and/or launch the Solta IPO. As a result, there can be no assurance as to the timing of the completion of any of these transactions or their terms, and the information in this Form 10-K relating to each transaction is preliminary and may change as the transactions progress and any such changes and their impact on the Company, or any of the companies that result from the consummation of any of these transactions, may be material.
See Item 1A. “Risk Factors — Risk Relating to the B+L Separation” of this Form 10-K for additional risks relating to the B+L Separation and the Solta IPO.
Setting Up Our Company to Unlock Value
To position ourselves to unlock the value we see in our individual businesses, we have sought to right-size our portfolio of assets and provide financial flexibility. The Company has focused on the following growth drivers, that remain a focus of our growth strategies today:
•divested non-core assets in order to narrow the Company's activities to our core businesses where we believe we have an existing and sustainable competitive edge and the ability to identifygenerate operational efficiencies. To date, we received approximately $4,100 million in net proceeds from these divestitures, which includes the sale of Amoun (the "Amoun Sale") which we divested on July 26, 2021, as discussed below;
•made strategic investments in our core businesses in order to support recent revenue growth and prepare for additional growth opportunities we plan to capitalize on for our core businesses;
•made measurable progress in improving our capital structure as we have repaid approximately $10,000 million in debt obligations (net of additional borrowings, amounts refinanced and excluding the $1,210 million financing of the U.S. Securities Litigation settlement discussed below) during the period of January 1, 2016 through December 31, 2021 using the proceeds from the divestiture of non-core assets, cash generated from our operations and improved working capital management. This includes approximately $1,300 million of repayments (net of additional borrowings) during 2021 using cash on hand, cash generated from operations and the net proceeds from the Amoun Sale; and
•resolved many of the Company's legacy litigation matters originating back to 2015 and prior, including the most significant legacy legal matter, the U.S. Securities Litigation settlement discussed below, significantly reducing related possible disruptions and other uncertainties to our operations.
We believe that these and other positive actions we have taken to transform our Company have helped focus our operations, unlocked value across our product portfolios, improved our capital structure and mitigated certain risks associated with legacy litigation matters. We believe that these measures, along with our continued commitment to improving people's lives through our health products, help position us to unlock potential value across our portfolio of assets by separating our pharmaceutical, eye-health and skincare businesses.
Divest Assets to Improve Our Capital Structure and Simplify Our Business
In order to better focus on our core businesses, we continue to evaluate opportunities to simplify our operations and improve operational efficienciesour capital structure, including dispositions of various assets. For example, on July 26, 2021, we completed the sale of Amoun for total gross consideration of approximately $740 million, subject to certain adjustments. Amoun, which was part of
the International Rx segment, manufactures, markets and distributes branded generics of human and animal health products. Revenues associated with Amoun were $157 million for the period of January 1, 2021 through July 26, 2021 and were $247 million and $220 million for the years 2020 and 2019, respectively. Following the completion of the Amoun Sale, the Company made aggregate payments of $600 million, to repay $469 million of its June 2025 Term Loan B Facility and $131 million of its November 2025 Term Loan B Facility, using the net proceeds from the Amoun Sale and cash on hand.
We will continue to consider further dispositions of various assets in line with this strategy. While we anticipate that any future divestiture activities will be on non-core assets, consistent with our duties to our shareholders and other stakeholders, we will consider dispositions in core areas that we believe represent attractive opportunities for the Company. See Note 3, "ACQUISITIONS, LICENSING AGREEMENTS AND DIVESTITURE" to our audited Consolidated Financial Statements for additional information.
Impacts of COVID-19 Pandemic
The unprecedented nature of the COVID-19 pandemic has, and continues to, adversely impact the global economy. The COVID-19 pandemic and the reactions of governments, private sector participants and the public in an effort to contain the spread of the COVID-19 virus and/or address its impacts have had significant direct and indirect effects on businesses and commerce. This includes, but is not limited to, disruption to supply chains, employee base and transactional activity, facility closures and production suspensions. We believe we responded quickly to these and other human and commercial challenges brought on by the COVID-19 pandemic and that our actions allowed us to: (i) maintain a reliable supply of our products, (ii) protect the health, safety and well-being of our employees, (iii) reduce operating expenses and preserve cash through profit protection measures initiated in response to the COVID-19 pandemic, (iv) limit the disruptions to our product development pipeline and (v) ensure affordability of and access to our products. We will continue to monitor the impacts of the COVID-19 pandemic and related responses from governments and private sector participants on the Company, our customers, supply chain, third-party suppliers, project development timelines, costs, revenue, margins, liquidity and financial condition and our capital structure.planned actions and responses to this pandemic.
TurnaroundOur 2020 revenues were most negatively impacted during our second quarter by certain social restrictions and other precautionary measures taken in response to the COVID-19 pandemic. However, as governments began lifting social restrictions, allowing offices of certain health care providers to reopen and certain surgeries and elective medical procedures to proceed, the negative trend in the revenues of certain businesses began to level off and stabilize prior to our third quarter of 2020. After the launch of effective vaccines in December 2020, infection rates began to decline, signaling the beginning of a recovery from the COVID-19 pandemic.
Throughout 2017Our revenues were $8,434 million for 2021, as compared to $8,027 million for 2020, a year-over-year increase of $407 million, or 5%, and into 2018,primarily reflects the positive impacts of the recovery from the COVID-19 pandemic, partially offset by the impact of our divestiture of Amoun on July 26, 2021. The increase in revenue also represents an improving trend over the decreases in year-over-year revenues for the three-month periods ended June 30, 2020, September 30, 2020 and December 31, 2020 of 23%, 3% and less than 1%, respectively. Presuming there continues to be increased availability of effective vaccines and any resurgence of the COVID-19 virus and variant strains thereof, such as the delta and omicron variants, do not have a material adverse impact on efforts to contain the COVID-19 virus, the Company continuesanticipates an ongoing, gradual global recovery from the significant macroeconomic and health care impacts of the pandemic. Our revenues returned to executepre-pandemic levels for many of our businesses and geographies in 2021 and, at the current pace of recovery, we anticipate the COVID-19 pandemic to have a minimal impact on its commitmentsthe remaining businesses and geographies in 2022. However, the rates of recovery for each business will vary by geography and will be dependent upon, among other things, the availability and effectiveness of vaccines for the COVID-19 virus and variant strains thereof, government responses, rates of economic recovery, precautionary measures taken by patients and customers, the rate at which remaining social restrictions are lifted and, once lifted, the presumption that social restrictions will not be materially reenacted in the event of a resurgence of the virus or variant strains thereof and other actions taken in response to stabilizethe COVID-19 pandemic.
Although we put in place procedures to mitigate the risks associated with closures and turnarounddisruptions at our manufacturing facilities, the Company. DuringCOVID-19 pandemic temporarily impacted the manner in which we managed our inventories and inventory levels. The negative impact of the COVID-19 pandemic on the demand for many of our products necessitated that we, among other things, shorten production runs during 2020 to reduce inventories and mitigate inventory losses. The shorter production runs, the costs associated with idling certain facilities during government mandated lockdowns and the costs of the precautionary measures taken at our manufacturing facilities in response to the COVID-19 pandemic resulted in manufacturing variances, which temporarily depressed our contribution margins in 2020. However, in 2021, as demand increased and our retailers and distributors replenished their inventories, the pressures on our manufacturing processes experienced during 2020 have been alleviated and we have avoided many of the COVID-19 pandemic-induced manufacturing variances during 2021.
As we monitor the direction and pace of the recovery in each business and geography, we are also continually monitoring the effectiveness of the profit protection measures we initiated to manage and reduce our operating expenses and preserve cash during the COVID-19 pandemic. These profit protection measures were successful in expanding the profit margins in many of our businesses, as referenced in the discussion of our operating results below. In 2021, we began allocating more resources to selling and other promotional activities in support of our existing products, product launches and products in development. As a result, our SG&A and R&D expenses increased 11% and 3% during 2021 as compared to 2020, respectively.
We believe our diverse portfolio of durable products and strong brands has served us well through the COVID-19 pandemic and we continue to be well-positioned to grow market share and return to growth as the world recovers. However, this time, we:situation remains fluid and we continue to monitor the availability and effectiveness of vaccines and any resurgence of the COVID-19 virus and outbreaks of variant strains thereof, such as the delta and omicron variants, on our operations, businesses and primary goals. Given these circumstances, we continue to focus on: (i) have better definedrevising our go-to-market and sales force strategies to address the changing business dynamics created by the COVID-19 pandemic, (ii) building out our e-commerce presence to enable us to reach customers in new ways, (iii) investing in our key promoted brands and product launches to increase market share, (iv) optimizing our cost structure and (v) looking for key trends in the market to meet changing consumer/patient needs and identify areas for investment and growth. We believe focusing on these priorities will best enable us to effectively manage the changing business dynamics created by the COVID-19 pandemic, prepare us for a possible resurgence of the virus and any variant strains thereof and return us to growth during the recovery from the COVID-19 pandemic.
For a further discussion of these and other COVID-19 related risks, see Item 1A. "Risk Factors— Risks Relating to COVID-19" of this Form 10-K.
Focus on Core Businesses
In order to continue to focus on our core businesses we have: (i) directed capital allocation to drive growth within our core businesses, (ii) made measurable progress in improvingeffectively managing our capital structure, (iii) increased our efforts to improve patient access and (iii)(iv) continued to invest in sustainable growth drivers to position us for long-term growth.
Direct Capital Allocation to Drive Growth Within Our Core Businesses
Our capital allocation is driven by our long-term growth strategies. We have been aggressively addressing and resolving certain legacy mattersallocating resources to eliminate disruptions to our operations.
Focus on Core Businesses
We have found and continue to believe that there is significant opportunity in the: (i) eye-health, (ii) GI and (iii) dermatology businesses. We believe that our existing portfolio, commercial footprint and pipeline of product development projects position us to successfully compete in these markets and provide us with the greatest opportunity to build value for our shareholders. We identify these businesses as “core”, meaning that we believe we are best positioned to grow and develop them. By narrowing our focus, we have the opportunity to reduce complexity in our operations and maximize the value of our core businesses. In order to focus our efforts, we performed a review of our portfolio of assets within these core businesses to identify those products where we believe we have, and can maintain, a competitive advantage and we continue to define and shape our operations and business strategies around these assets.
Once we committed to our core businesses, we began analyzing what to do with those business units and assets that fall outside our definition of “core”. In order to focus on our objectives, we began divesting businesses and assets, which in each case, were not aligned with our core business objectives. This step not only allowed us to better focus our internal resources on our eye-health, GI and dermatology businesses, but also provided us with significant sources of capital which we used to reduce our debt and improve our capital structure.
As a result of the focus on our core businesses and the divestitures of businesses not aligned with our core business objectives, as well as reduced sales of products in other segments due to the loss of exclusivity, we are seeing a greater portion of our revenues driven by our core businesses. In 2017 and 2016, our Bausch + Lomb, GI and dermatology revenues collectively represented approximately 66% and 62% of our total revenues, respectively. We expect this percentage to increase in 2018, as our recent and expected product launches are focused on these core businesses, and the year-on-year comparison to widen as a result of the impact of 2017 divestitures of non-core businesses. The increase in this percentage demonstrates our convictions in these businesses.
Begin Redirecting the Allocation of Capital to Drive Growth
The ranking of our business units during 2016 changed our view of how capital should be allocated across our activities. In support of our core activities, our leadership team aggressively reallocated resources to: (i) promote our core businesses globally through: (i) strategic acquisitions, (ii) makeR&D investment, (iii) strategic licensing agreements and (iv) strategic investments in our infrastructure and (iii) direct R&D to our Bausch + Lomb, GI and dermatology businesses to drive growth.infrastructure. The outcome of this process allows us to better drive value in our product portfolio and generate operational efficiencies.
Promotion ofStrategic Acquisitions
We remain very selective when considering any acquisition and pursue only those opportunities that we believe align well with our Core Businesses - To position the Companycurrent organization and strategic plan. We sometimes refer to drive the value ofthese opportunities as "bolt on" acquisitions. In being selective, we seek to enter into only those acquisitions that provide us with significant synergies with our existing business, thereby minimizing risks to our core businesses and providing long-term growth opportunities. Recently, we have entered into transactions that although not immediately impactful to our operating results, are expected to be accretive to our bottom line in future years and contribute to our long-term growth strategies.
In March 2019, we completed the acquisition of certain assets of Synergy whereby we madeacquired the worldwide rights to the Trulance® (plecanatide) product, a number of leadership changesonce-daily tablet for adults with chronic idiopathic constipation, or CIC, and took steps to increase our promotional and sales force efforts, particularly in our GI and dermatology businesses.
In support of our GI business, we initiated a significant sales force expansion program in December 2016 to reach potential primary care physician (“PCP”) prescribers of Xifaxan® for irritable bowel syndrome with diarrhea (“IBS-D”constipation, or IBS-C. We believe that the Trulance® product complements our existing Salix products and allows us to effectively leverage our existing GI sales force. In order to drive growth of the Trulance® product, we have increased the number of sales force representatives for the Trulance® product. We believe this has been successful as Trulance® revenues were $103 million and $82 million for the years 2021 and 2020, respectively.
In February 2019, we acquired the U.S. rights to EM-100 (an investigational preservative-free formulation eye drop) from Eton Pharmaceuticals, Inc. On September 25, 2020, the Company announced that the FDA had approved Alaway® Preservative Free (ketotifen fumarate) ophthalmic solution, 0.035%, antihistamine eye drops (EM-100) as the first OTC preservative-free formulation eye drop approved to temporarily relieve itchy eyes due to pollen, ragweed, grass, animal hair and dander. Alaway® Preservative Free was launched in February 2021 and is expected to complement our broad range of Bausch + Lomb integrated eye-health products.
We are considering further acquisition opportunities within our core therapeutic areas, some of which could be material in size.
R&D Investment
We continuously search for new product opportunities through internal development and strategic licensing agreements, that if successful, will allow us to leverage our commercial footprint, particularly our sales force, and supplement our existing product portfolio and address specific unmet needs in the market.
Our internal R&D organization focuses on the development of products through clinical trials. As of December 31, 2021, approximately 1,300 dedicated R&D and quality assurance employees in 25 R&D facilities were involved in our R&D efforts internally.
We have approximately 200 projects in our global pipeline. Certain core internal R&D projects that have received a significant portion of our R&D investment in current and prior periods are listed below. However, due to the challenges of the COVID-19 pandemic, most notably those attributable to "stay at home" orders and travel restrictions, certain of our R&D activities were forced to pause in 2020. Clinical trials that started prior to governmental shutdowns remained enrolled and existing patients progressed, while new patient enrollments were paused as most trial sites were not able to accept new patients. However, during our third quarter of 2020, we saw the pace of new patient enrollments increase, and, although certain of our projects are moving slower than we would like due to the impacts of the COVID-19 pandemic, through the date of this filing we have not had to make changes to our development timelines that would have a material impact on our current or future operating results.
We continue to monitor the timing and completion of our ongoing and anticipated clinical trial programs. As of the date of this filing, the delays in our clinical trials have not had a material impact on our operating results; however, a resurgence of the virus significant enough to necessitate reenacting certain social restrictions could result in unanticipated delays in our ability to conduct new patient enrollments. Other possible COVID-19 pandemic and resurgence related challenges include, but are not limited to, facility closures, delays by third-party service providers, deferrals of doctor visits, postponement of elective medical procedures and surgeries and changes in prioritization by the FDA and other regulatory authorities. Delays, if any, caused by the COVID-19 pandemic and a possible resurgence of the virus or variant strains thereof such as these and others will likely adversely affect the timely approval, launch and commercialization and the commercial success of our products, particularly those in early stage clinical trials. As a result, our estimates regarding the timing and success of our R&D efforts (some of which are set out below), including as it relates to study initiation, enrollment and completion, availability of study results, regulatory submissions, regulatory approvals and commercial launches, may change.
Bausch + Lomb
•SiHy Daily - A silicone hydrogel daily disposable contact lens designed to provide clear vision throughout the day. In September 2018, we launched SiHy Daily in Japan under the branded name AQUALOX™ ONE DAY. In August 2020, we launched SiHy Daily in the U.S. under the branded name Bausch + Lomb INFUSE® SiHy Daily Disposable contact lens. In the fourth quarter of 2020, SiHy Daily was launched in Australia, Hong Kong and Canada under the branded name Bausch + Lomb Ultra® ONE DAY. SiHy Daily has also received regulatory approval in China, New Zealand, Japan, South Korea, Europe, Singapore and Malaysia, where it will be branded as Bausch + Lomb Ultra® ONE DAY, and, in the second quarter of 2021, we launched SiHy Daily in South Korea and Singapore as Bausch + Lomb Ultra® ONE DAY.
•Lumify® (brimonidine tartrate ophthalmic solution, 0.025%) - An OTC eye drop developed as an ocular redness reliever. We launched this product in the U.S. in May 2018. Currently, we have several line extensions under development and Relistorexpect Phase 3 clinical studies to commence in 2022.
•Biotrue® tablets ONEday for opioid induced constipation (“OIC”Astigmatism - A daily disposable contact lens for astigmatic patients. The Biotrue® ONEday contact lens incorporates Surface Active Technology™ to provide a dehydration barrier. The Biotrue® ONEday for Astigmatism also includes evolved peri-ballast geometry to deliver stability and comfort for the astigmatic patient. We launched this product in December 2016 and launched an extended power range and further extended power ranges in each of the years 2017 through 2020. Biotrue® ONEday for Astigmatism has also received regulatory approval in China.
•New Ophthalmic Viscosurgical Device ("OVD"). product - A formulation to protect corneal endothelium during phacoemulsification process during a cataract surgery and to help chamber maintenance and lubrication during intraocular lens delivery. In January 2020, we commenced an FDA clinical study for the cohesive OVD product which has now achieved its enrollment target, despite COVID-19-related slowdowns, and we expect results in the first quarter of 2017,2022. In addition, in March 2021, we hired approximately 250 trainedreceived Premarket Approval from the FDA for Clearvisc™ dispersive OVD, which we launched in the U.S. in June 2021.
•enVista® Trifocal intraocular lens - An innovative lens design. We initiated an investigative device exemption study for this product in May 2018 and experienced sales force representativesinitiated the last phase of this three phase study in the fourth quarter of 2020. We completed enrollment during the first quarter of 2022 for the Canadian study and managersexpect to create, bolstercomplete enrollment during the first half of 2022 for the U.S. study.
•SimplifEYE® preloaded intraocular lens injector platform for enVista intraocular lens - We have received approvals from the European Union and sustain deep relationshipsCanada and received FDA clearance for the injector and launched this platform in October 2020.
•Extended depth of focus intraocular lens - Currently under development, however, the timing and completion of which has been delayed due to COVID-19 pandemic related matters. Once development is completed, and if approved, we anticipate that this product could be launched in 2024.
•Bausch + Lomb ULTRA® monthly silicone hydrogel lens - Specifically designed to address the lifestyle and vision needs of patients with PCPs. With approximately 70 percentMoistureSeal® technology which maintains 95% of IBS-Dcontact lens moisture for a full 16 hours. In the second quarter of 2020, Bausch + Lomb ULTRA® received a seven day extended wear indication approval from the European Union andreceived regulatory approvalfrom the NationalMedical Products Administration in China.
•Bausch + Lomb ULTRA® Multifocal for Astigmatism contact lens - The first and only multifocal toric lens available as a standard offering in the eye care professional's fit set. The new monthly silicone hydrogel lens, which was specifically designed to address the lifestyle and vision needs of patients initially presenting symptomswith both astigmatism and presbyopia, combines the Company's unique 3-Zone Progressive™ multifocal design with the stability of its OpticAlign® toric with MoistureSeal® technology to provide eye care professionals and their patients an advanced contact lens technology that offers the convenience of same-day fitting during the initial lens exam. Bausch + Lomb ULTRA® Multifocal for Astigmatism was launched in June 2019 and received European Union regulatory approval in the second quarter of 2020. In July 2021, we launched an extended parameter range of this product.
•Renu® Advanced Multi-Purpose Solution (“MPS”) - Contains a PCP,triple disinfectant system that kills 99.9% of germs, and has a dual surfactant system that provides up to 20 hours of moisture. Renu® Advanced MPS is FDA cleared with indications for use to condition, clean, remove protein, disinfect, rinse and store soft contact lenses including those composed of silicone hydrogels. Renu® Advanced MPS has gained regulatory approvals in Korea, India, Mexico, Indonesia, Malaysia, Singapore and, during the second quarter of 2020, the European Union. In 2021, Renu® Advanced MPS was launched in Greece and gained regulatory approvals in China and Taiwan.
•Zen™ Multifocal Scleral Lens for presbyopia - In January 2019, we launched this product exclusively available with Zenlens™ and Zen™ RC scleral lenses and will allow eye care professionals to fit presbyopic patients with regular and irregular corneas and those with ocular surface disease, such as dry eye. The Zen™ Multifocal Scleral Lens incorporates decentered optics, enabling the near power to be positioned over the visual axis.
•Tangible® Hydra-PEG® - A high-water polymer coating that is bonded to the surface of a contact lens and designed to address contact lens discomfort and dry eye. We launched this product in March 2019. Tangible® Hydra-PEG® coating technology in combination with our Boston® materials and Zenlens™ family of scleral lenses will help eye care professionals provide a better lens wearing experience for their patients with challenging vision needs.
Gastrointestinal
•Rifaximin - Top line results from a Phase 2 study for the treatment of overt hepatic encephalopathy with a new formulation (SSD IR) of rifaximin showed a treatment benefit. Patients receiving 40 mg twice daily showed a statistically significant separation from placebo. The top line results from this Phase 2 study will help inform further research on potential new indications for rifaximin; this included the commencement of a Phase 3 study (RED-C) in 2021 to seek an indication for the prevention of the first episode of Hepatic Encephalopathy.
•Rifaximin - Rifaximin recently received orphan drug designation for sickle cell anemia. A novel dosage formulation is planned to be studied for the treatment of sickle cell anemia and clinical sites began enrolling into the trial at the end of 2021.
•Rifaximin - Development of a fit for purpose Patient Reported Outcomes tool for small intestinal bacterial overgrowth, or "SIBO", is continuing in 2022.
•Rifaximin - We have entered into an agreement with Cedars Sinai Medical Center to evaluate a new formulation of rifaximin for the treatment of IBS-D. Two preclinical studies have been completed. A Proof of Concept study that was paused due to COVID-19 pandemic related factors, has recommenced and is fully enrolled. Based on recent FDA comments dated February 10, 2022, the program is being assessed and related timelines reviewed.
•Envive™ - In October 2020, we launched, on a limited basis, a probiotic supplement that was developed to address gastrointestinal disturbances. In April 2021, we expanded the launch to additional territories in the U.S.
•Amiselimod (S1P modulator) - We commenced a Phase 2 study during the first half of 2021 to evaluate Amiselimod (S1P modulator) for the treatment of mild to moderate ulcerative colitis.
Dermatology
•Arazlo® (tazarotene) Lotion, 0.045% (formerly Internal Development Project ("IDP") 123) - In June 2020, we launched this acne product containing lower concentration of tazarotene in a lotion form to help reduce irritation while maintaining efficacy.
•IDP-120 - An acne product with a fixed combination of mutually incompatible ingredients: benzoyl peroxide and tretinoin. Phase 3 clinical studies have been completed and met the primary endpoints. We are currently evaluating next steps for this project.
•IDP-126 - An acne product with a fixed combination of benzoyl peroxide, clindamycin phosphate and adapalene. Phase 3 clinical studies initiated in December 2019 were paused due to COVID-19 pandemic related factors, but resumed in June 2020. Both Phase 3 studies have been completed and have met their primary endpoints. A comparative bridging safety and efficacy study was delayed until 2021 due to COVID-19. The bridging study is ongoing. We anticipate filing a New Drug Application ("NDA") in the second half of 2022.
•Clear + Brilliant® Touch - Next generation Clear + Brilliant® laser that is designed to deliver a customized and more comprehensive treatment protocol by providing patients of all ages and skin types the benefits of two wavelengths. This product was launched in the U.S. in March 2021.
Strategic Licensing Agreements
To supplement our internal R&D initiatives and to build-out and refresh our product portfolio, we also search for opportunities to augment our pipeline through arrangements that allow us to gain access to unique products and investigational treatments, by strategically aligning ourselves with other innovative product solutions.
In the normal course of business, the Company will enter into select licensing and collaborative agreements for the commercialization and/or development of unique products primarily in the U.S. and Canada. These products are sometimes investigational treatments in early stage development that target unique conditions. The ultimate outcome, including whether the product will be: (i) fully developed, (ii) approved by the FDA or other regulators, (iii) covered by third-party payors or (iv) profitable for distribution, is highly uncertain. Under certain agreements, the Company may be required to make payments contingent upon the achievement of specific developmental, regulatory, or commercial milestones.
In October 2020, we announced that we had entered into two exclusive license agreements which present us with unique developmental opportunities to address the unmet need of treatment for myopia in children. The first of these two licensing agreements is with Eyenovia, Inc. for the development and commercialization in the United States and Canada of an investigational microdose formulation of atropine ophthalmic solution, which is being investigated for the reduction of pediatric myopia progression, also known as nearsightedness, in children ages 3-12. We expect to complete enrollment for a Phase 3 study during the second half of 2022. If approved by the FDA, we believe this investigational product could potentially change the treatment paradigm for the reduction of myopia progression in children. The second is an exclusive global licensing agreement with BHVI for a myopia control contact lens design developed by BHVI. The Company plans to pair BHVI's novel contact lens design with our leading contact lens technologies to develop potential contact lens treatments designed to slow the progression of myopia in children.
In December 2019, we announced that we had acquired an exclusive license from Novaliq GmbH for the dedicated PCP sales force will be positionedcommercialization and development in the U.S. and Canada of the investigational treatment NOV03 (perfluorohexyloctane), a first-in-class investigational drug with a novel mechanism of action to reach more patients in need of IBS-D treatment. The investment in these additional sales resources, including an increase intreat dry eye disease ("DED") associated promotional costs, was in excess of $50 million in 2017. We consider these amounts well spent as they have allowed us to better capitalize on the potential of Xifaxan®with Meibomian gland dysfunction ("MGD"). In addition,an Open Label Safety study, NOV03 has achieved its enrollment target. In April 2021, we have expanded our dedicated pain sales representatives to strengthen our positionannounced statistically significant topline data from the first of two Phase 3 studies and, in September 2021, we announced statistically significant topline data from the second Phase 3 study. We anticipate filing an NDA in the OIC market,first half of 2022. If approved by the FDA, we believe the addition of this investigational treatment for DED will help build upon our strong portfolio of integrated eye- health products.
In October 2019, we acquired an exclusive license from Clearside Biomedical, Inc. ("Clearside") for the commercialization and establisheddevelopment of Xipere™ (triamcinolone acetonide suprachoroidal injectable suspension) in the U.S. and Canada. Xipere™ is a nurse educator teamproprietary suspension of the corticosteroid triamcinolone acetonide formulated for suprachoroidal
administration via Clearside's proprietary SCS Microinjector. In October 2021, the FDA approved Xipere™ for suprachoroidal use for the treatment of macular edema associated with uveitis. We launched Xipere™ in the first quarter of 2022.
In April 2019, we entered into two licensing agreements which presented us with unique developmental opportunities to educate clinical staff within top institutions.address unmet needs of individuals suffering with certain GI and liver diseases. The first of these two licensing agreements was with the University of California for certain intellectual property relating to an investigational compound targeting the pituitary adenylate cyclase receptor 1 in non-alcoholic fatty liver disease (“NAFLD”), nonalcoholic steatohepatitis (“NASH”) and other GI and liver diseases. However, as some early non-clinical (in-vitro) development work did not meet our internal expectations, in September 2021, we made the decision to terminate this license agreement and notified the University of California accordingly. The second is an exclusive licensing agreement with Mitsubishi Tanabe Pharma Corporation to develop and commercialize MT-1303 (amiselimod), a late-stage oral compound that targets the sphingosine 1-phosphate receptor that plays a role in autoimmune diseases, such as inflammatory bowel disease and ulcerative colitis. We have completed a thorough QTC study, which evaluated the cardiac safety profile of the compound. Topline results were positive, and we commenced a Phase 2 study in the first half of 2021.
Strategic Investments in our Infrastructure -
In support of our core businesses, we have and continue to make strategic investments in our infrastructure, with the most significant investments seenof which are at our Waterford facility in Ireland, and our Rochester facility in New York. The investments at these facilities were made primarily in support of our Biotrue® ONEday and Bausch + Lomb ULTRA® contact lens businesses globallyYork and our Bausch + Lomb Aqualox® contact lens businessLynchburg facility in Japan.Virginia.
Waterford Facility Expansion
Our Bausch + Lomb Waterford facility is a multi-functional site, serving as one ofTo meet the forecasted demand for our biggest production facilities for contact lenses and R&D facilities for the developmentBiotrue® ONEday range of contact lenses, with advanced development and analytical laboratories. Products developed in Waterford are exported globally with approximately 50% of the lenses shipped to Japan and Asia; 20% to countries within the Europe, Middle East and Africa; and 30% to North and South America. As a result, the Waterford facility is regulated and audited by a number of global regulatory agencies, including the FDA, the Japanese Ministry of Health, the Irish Medicines Board and the Health Products Regulatory Authority of Ireland.
In July 2017, we placed into service a multi-year, $175 million multi-year strategic expansion project which increased the size of the Waterford facility by approximately 120,000 square feet and introduced new production lines that significantly increased the facility’s production capacity.facility. The emphasis of the expansion project was to: (i) develop new technology to manufacture, automatically inspect and package contact lenses, (ii) bring that technology to full validation and (iii) increase the size of the Waterford site to meetfacility.
To address the forecasted demand for our new daily disposal contact lens Biotrue® ONEday, which was developed and brought to market from Waterford. As a result of the increased production capacity and in support of our core Bausch + Lomb business, we added approximately 300 production employees since the project’s inception and succeeded in increasing production, which, in 2017, was over 30% higher than it was in 2015 at the facility. To meet the forecasted demand for our Biotrue® ONEday lenses, we continue to invest in this facility, budgeting an additional $30 million to bring up additional production lines, which we expect to have operational in 2018.
Rochester Facility Upgrades
The Rochester facility has been serving as our production site for a significant portion of our Bausch + Lomb planned replacement contact lens products. In connection with our new emphasis on our Key Seven Products, we needed to create a designated production facility to meet the expected global demand for our Bausch + Lomb ULTRA® range of contact lens business globally and our Bausch + Lomb Aqualox® contact lens businesslenses, in Japan.
In December 2017, we completed a multi-year, $200$220 million strategic project, which provided substantial upgradesupgrade to our Rochester facility and significantlyfacility. The upgrade increased its production capacity. The emphasis of the project was to: (i) update the facility's infrastructure, manufacturing technology and equipment, (ii) increase the facility’s production capacity in support of our Bausch + Lomb Ultra® and Bausch + Lomb Aqualox®SiHy Daily AQUALOX™ product lines and (iii) better supportsupports the production of other well established products lines,well-established contact lenses, such as our PureVision®, PureVision®2 (SVS, Toric, and Multifocal), SofLens®38 and SilSoft®.
To address the expected global demand for our SiHy Daily disposable contact lenses, in November 2018, we initiated $300 million of additional projects to add multiple production lines to our Rochester and Waterford facilities. These production lines have recently been completed and we expect to start production of our latest contact lenses, Bausch + Lomb INFUSE® and Bausch + Lomb ULTRA® ONE DAY, at these facilities in early 2022.
To further help us meet the anticipated demand of our contact lenses, in 2020, we initiated an expansion of the Company's Lynchburg distribution center. The new facility is expected to create new jobs over the next five years and expand the overall site to 200,000 square feet, which will provide distribution capabilities for medical devices, primarily contact lens products, and be the main point of distribution for these products in the U.S. This expansion program is expected to be completed in the first half of 2022.
InJuly 2021, we announced plans to invest an additional $90 million to increase capacity at our Waterford facility to meet the expected demand for our Biotrue® ONEday range of daily disposable contact lenses. As a resultThe new production lines are expected to be completed in 2023.
If completed as planned, the recently announced expansion of our Waterford facility will be the increase in production capacity andfifth major expansion of our Bausch + Lomb manufacturing facilities in support of our core Bausch + Lomb business, we added approximately 120 production employees sinceefforts to increase market share in the project’s inception and succeededcontact lens market in increasing production at this facility. To meet the forecasted demand for our Bausch + Lomb ULTRA® and Bausch + Lomb Aqualox® lenses and our other existing Bausch + Lomb products, we continue to invest in this facility, budgeting an additional $23 million to continue to enhance our production technologies and capacity at the facility, much of which we expect to bring on line in 2018.
seven years ending 2023. We believe the investments in our Waterford, Rochester and RochesterLynchburg facilities and related expansion of labor forces further demonstrates the growth potential we see in our Bausch + Lomb branded products.products and our eye- health business.
Direct R&D Investment to our Bausch + Lomb, GI and Dermatology Businesses to Drive Growth -Effectively Managing Our R&D organization focuses on the development of products through clinical trials. Currently, we have approximately 100 R&D projects in our global pipeline and we launched and/or relaunched over 120 products globally during 2017. As of December 31, 2017, approximately 1,000 dedicated R&D and quality assurance employees in 23 R&D facilities were involved in our R&D efforts.
Our R&D expenses for 2017, 2016 and 2015, were $361 million, $421 million and $334 million, respectively. In 2016, we increased our R&D expenditures as we transitioned away from the Company's previous strategy of growth by acquisition and moved toward our current strategy of organic growth supported by investment in R&D.
Although R&D expense in 2017 was lower when compared to 2016 by $60 million, R&D expense as a percentage of revenue was approximately 4% in 2017 and 2016. The decrease in dollars spent in 2017 is attributable to year over year phasing, as we completed the R&D investment in SiliqTM and other recently launched products requiring investment in 2016, removed projects related to businesses divested in 2017 and rebalanced our portfolio to better align with our long-term plans and focus on our Bausch + Lomb, GI and dermatology businesses.
Our investment in R&D reflects our commitment to drive organic growth through internal development of new products, a pillar of our new strategy. In 2018, we anticipate R&D expense as a percentage of revenue to exceed 4%, which demonstrates our consistent commitment to our organic growth supported by investment in R&D strategy. In the U.S. alone, we have 71 projects focused on our core businesses in our pipeline and anticipate submitting over 60% of those projects for FDA approval in 2018 and 2019.
Core assets that have received a significant portion of our R&D investment are listed below.
| |
• | Dermatology - Duobrii™ (provisional name), under development as IDP-118, is the first and only topical lotion that contains a unique combination of halobetasol propionate and tazarotene for the treatment of moderate-to-severe plaque psoriasis in adults. Halobetasol propionate and tazarotene are each approved to treat plaque psoriasis when used separately, but are limited in duration of use. Halobetasol propionate may be used for up to two weeks and tazarotene may be limited due to irritation. Based on existing data from clinical studies, the combination of these ingredients in Duobrii™ with a dual mechanism of action, potentially allows for expanded duration of use, with reduced adverse events. On November 2, 2017, we announced that the FDA accepted for review our New Drug Application (“NDA”) for Duobrii™ and set a Prescription Drug User Fee Act (“PDUFA”) action date of June 18, 2018.
|
| |
• | Dermatology - Jemdel™ (provisional name), under development as IDP-122, is a novel product that contains a unique, lower concentration of halobetasol propionate for the treatment of moderate-to-severe psoriasis. Halobetasol propionate is approved to treat plaque psoriasis, but is limited in duration of use. Based on existing data from clinical studies, this novel formulation potentially allows for expanded duration of use. On February 14, 2018, we announced that the FDA accepted for review our NDA for Jemdel™ and set a PDUFA action date of October 5, 2018.
|
| |
• | Bausch + Lomb - Bausch + Lomb ULTRA® for Astigmatism is a monthly planned replacement contact lens for astigmatic patients. The Bausch + Lomb ULTRA® for Astigmatism lens was developed using the proprietary MoistureSeal® technology. In addition, the Bausch + Lomb ULTRA® for Astigmatism lens integrates an OpticAlign™ design engineered for lens stability and to promote a successful wearing experience for the astigmatic patient. We launched this product and the extended power range for this product in 2017.
|
| |
• | Dermatology - On July 27, 2017, we launched Siliq™ in the U.S. Siliq™ is an IL-17 receptor blocker monoclonal antibody biologic for treatment of moderate-to-severe plaque psoriasis, which we estimate to be an over $5,000 million market in the U.S. The FDA approved the Biologics License Application (“BLA”) for Siliq™ injection for subcutaneous use for the treatment of moderate-to-severe plaque psoriasis in adult patients who are candidates for systemic therapy or phototherapy and have failed to respond or have lost response to other systemic therapies. Siliq™ has a Black Box Warning for the risks in patients with a history of suicidal thoughts or behavior and was approved with a Risk Evaluation and Mitigation Strategy involving a one-time enrollment for physicians and one-time informed consent for patients.
|
| |
• | Bausch + Lomb - Vyzulta™ (latanoprostene bunod ophthalmic solution, 0.024%) is an intraocular pressure lowering single-agent eye drop dosed once daily for patients with open angle glaucoma or ocular hypertension and was launched in December 2017.
|
Dermatology - IDP-126 is an acne product with a fixed combination of benzoyl peroxide, clindamycin phosphate and adapalene, currently in Phase 2 testing.
Bausch + Lomb - Lumify™ (brimonidine tartrate ophthalmic solution, 0.025%) eye drops was developed as an ocular redness reliever and was approved by the FDA in December 2017 and is expected to launch in April 2018.
Gastrointestinal - A new formulation of rifaximin, which we acquired as part of the Salix Acquisition, is in progress.
| |
• | Dermatology - Altreno™ (provisional name) is the first lotion (rather than a gel or cream) product containing tretinoin for the treatment of acne. The FDA has accepted for review our NDA for Altreno™ and set a PDUFA action date of August 27, 2018.
|
Dermatology - IDP-120 is an acne product with a fixed combination of mutually incompatible ingredients; benzoyl peroxide and tretinoin. We plan to begin Phase 3 testing of this product in the first half of 2018.
Dermatology - IDP-123 is an acne product containing lower concentration of tazarotene in a lotion form to help reduce irritation while keeping efficacy, currently in Phase 3 testing.
| |
• | Gastrointestinal - NER1006 (provisionally named Plenvu®) is a novel, lower-volume polyethylene glycol-based bowel preparation that has been developed to help provide complete bowel cleansing, with an additional focus on the ascending colon. NER1006 was licensed to Salix in August 2016 by Norgine B.V. In June 2017, we announced that the FDA accepted for review our NDA for NER1006. In February 2018, we announced that the FDA had extended the PDUFA action date to May 13, 2018 to allow the FDA more time to review additional data that we had recently provided at its request. We continue to expect a FDA decision in 2018
|
| |
• | Bausch + Lomb - In April 2017, we launched our Stellaris Elite™ Vision Enhancement System. The Stellaris Elite™ Vision Enhancement System is our next generation phacoemulsification cataract platform, which offers new innovations, as well as the opportunity to add upgrades and enhancements every one to two years. Stellaris Elite™ is the first phacoemulsification platform on the market to offer Adaptive Fluidics™, which combines aspiration control with predictive infusion management to create a responsive and controlled surgical environment for efficient cataract lens removal.
|
| |
• | Bausch + Lomb - VitesseTM is a hypersonic vitrectomy system for the removal of the vitreous humor gel that fills the eye cavity to provide better access to the retina and allow for a variety of repairs, including the removal of scar tissue, laser repair of retinal detachments and treatment of macular holes. Available exclusively on the Stellaris Elite system, VitesseTM liquefies tissue in a highly-localized zone at the edge of the port to increase the level of surgical control and precision to vitrectomies. We launched this product on a limited basis in October 2017.
|
| |
• | Dermatology - Next Generation Thermage FLXTM is a fourth-generation non-invasive treatment option using a radiofrequency platform designed to optimize key functional characteristics, expand clinical indication set and improve patient outcomes. On September 22, 2017, we received 510(k) clearance from the FDA and launched this product on a limited basis as part of our Solta business.
|
| |
• | Bausch + Lomb - We have filed a Premarket Approval application with the FDA on October 31, 2017 for 7-day extended wear for our Bausch + Lomb ULTRA® monthly planned replacement contact lenses.
|
| |
• | Bausch + Lomb - Biotrue® ONEday for Astigmatism is a daily disposable contact lens for astigmatic patients. The Biotrue® ONEday lenses incorporates Surface Active TechnologyTM to provide a dehydration barrier. The Biotrue® ONEday for Astigmatism also includes evolved peri-ballast geometry to deliver stability and comfort for the astigmatic patient. We launched this product in December 2016 and launched the complete extended power range in 2017.
|
| |
• | Bausch + Lomb - Bausch + Lomb ULTRA® for Presbyopia is a monthly planned replacement contact lens for presbyopic patients. The Bausch + Lomb ULTRA® for Presbyopia lens was developed using the proprietary MoistureSeal® technology. In addition, the Bausch + Lomb ULTRA® for Presbyopia lens integrates a 3 zone progressive design for near, intermediate and distance vision. We launched expanded parameters of this product throughout 2017.
|
| |
• | Bausch + Lomb - Bausch + Lomb ScleralFil® solution is a novel contact lens care solution that makes use of a preservative free buffered saline solution for use with the insertion of scleral lenses and was launched in 2017.
|
| |
• | Bausch + Lomb - Bausch + Lomb Renu® Advanced Formula multi-purpose solution is a novel soft and silicone hydrogel contact lens solution that makes use of three disinfectants and two moisture agents and was launched in May 2017.
|
Bausch + Lomb - We are developing a new Ophthalmic Viscosurgical Device product, with a formulation to protect corneal endothelium during Phaco emulsification process during a cataract surgery and to help chamber maintenance and
lubrication during interocular lens delivery. The planned investigative device exemption (“IDE”) study is scheduled to begin in the first half of 2018.
| |
• | Dermatology - Traser™ is an energy-based platform device with significant versatility and power capabilities to address various dermatological conditions, including vascular and pigmented lesions. We are planning to launch this product in the second half of 2019 as part of our Solta business.
|
Bausch + Lomb - Loteprednol Gel 0.38% is a new formulation for the treatment of post-operative ocular inflammation and pain with lower drug concentration and less frequent dosing. We have completed Phase III testing and expect to file an NDA for this product in the first half of 2018.
| |
• | Bausch + Lomb - enVista® Trifocal intraocular lens is an innovative lens design and expect to initiate an IDE study for this product in 2018.
|
Improve Capital Structure
By executing our strategies during 2017, we have made measurable progress in improvingWe continue to effectively manage our capital structure by: (i) executing on our plan for the B+L Separation and Solta IPO, (ii) reducing our debt through repayments, (iii) extending the maturities of debt reductionthrough refinancing and extending(iv) improving our credit ratings.
Since announcing our plans for the B+L Separation and the Solta IPO, we emphasized that it is important that the post-separation entities be well capitalized, with appropriate leverage and with access to additional capital, if and when needed, to provide each entity with the ability to independently allocate capital to areas that will strengthen their own competitive positions in their respective lines of business and position each entity for sustainable growth. Therefore, we see the appropriate
capitalization and leverage of these businesses post-separation as a key to maximizing value across our portfolio of assets and, so, it is a primary objective of our plan of separation.
Debt Repayments and Other Financing Transactions — In 2016, our new executive team committed to improving our Company's capital structure and since that time we have been executing and continue to execute on that commitment. As a result of a series of debt maturities. Using cash generated from operations,repayments and transactions since making that commitment, the Company positioned itself to add value through the B+L Separation and Solta IPO while at the same time providing for the appropriate capitalization and leverage of these businesses post-separation.
Excluding the impact of the $1,210 million financing of the U.S. Securities Litigation settlement (discussed in the subsequent section titled "OFF-BALANCE SHEET ARRANGEMENTS AND CONTRACTUAL OBLIGATIONS"), we have repaid (net of additional borrowings) approximately $10,000 million of long-term debt during the period January 1, 2016 through December 31, 2021 using the net cash proceeds from divestitures of non-core assets, cash generated from operations and cash generated from tighter working capital management, we repaidmanagement. This includes approximately $1,300 million of repayments (net of additional borrowings) over $5,800 million of long-term debt during 20172021 using cash on hand, cash generated from operations and 2016, in the aggregate. In January 2018, we also made a $200 million payment of our Series F Tranche B Term Loan Facility, which we directed to be applied to satisfy (in part) payment of the expected $206 million Consolidated Excess Cash Flow payment for the year 2017. Under our Senior Secured Credit Facilities, subject to certain exceptions and reductions, we are required to make mandatory annual principal prepayments equal to 50% of the Company’s Consolidated Excess Cash Flow, if any, as defined in its Credit Agreement.
We accessed the credit markets in March, October, November and December of 2017, and completed a series of refinancing transactions to improve our capital structure, whereby we extended the maturities of certain debt obligations originally scheduled to mature in the years 2018 through 2022 out to March 2022 through December 2025. Furthermore, we extended $1,190 million of commitments under our revolving credit facility, originally set to expire in April 2018, out to April 2020.
As a result of these debt repayments and refinancing transactions, we have eliminated all mandatory scheduled principal long-term debt repayments through March 2020, providing us with additional liquidity and greater flexibility to execute our business plans. Our reduced debt levels and improved debt portfolio will translate to lower payments of principal over the next three years, which, in turn, will permit more cash flow to be directed toward developing our core assets and repaying additional debt amounts.
Divestitures - During 2017, we divested businesses and assets not aligned with our core business objectives which simplified our operating model and generated over $3,200 million of net cash proceeds that we used to improve our capital structure. The most significant of these divestitures were as follows.
In March 2017, we completed the sale of the CeraVe®, AcneFree™ and AMBI® skincare brands to a global beauty company for $1,300 million in cash (the “Skincare Sale”). Aggregate annual revenue associated with these skincare brands was less than $200 million. Over the course of the first half of 2017, using the net proceeds from the Skincare Sale and the divestiture of a manufacturing facility in Brazil, the Company repaid $1,306 million, of its Series F Tranche B Term Loan Facility. Amoun Sale.
In June 2017, we completed the sale of our equity interests in Dendreon Pharmaceuticals LLC (formerly Dendreon Pharmaceuticals, Inc.) (“Dendreon”) for $845 million in cash (the “Dendreon Sale”), as adjusted through December 31, 2017. Dendreon’s only commercialized product, Provenge®, is an autologous cellular immunotherapy (vaccine) for prostate cancer treatment approved by the FDA in April 2010. Revenues from Provenge® were $164 million, $303 million and $250 million in 2017, 2016 and 2015, respectively. With this sale completed, we have exited the oncology business, which was not core to our objectives. On July 3, 2017, using the net proceeds from the Dendreon Sale, the Company repaid $811 million of its Series F Tranche B Term Loan Facility.
In September 2017, we completed the sale of our Australian-based iNova Pharmaceuticals (“iNova”) business for $938 million in cash (the “iNova Sale”), as adjusted, and subject to the finalization of certain working capital provisions. iNova markets a diversified portfolio of weight management, pain management, cardiology and cough and cold prescription and OTC products in more than 15 countries, with leading market positions in Australia and South Africa, as well as an established platform in Asia. iNova revenues were $196 million, $246 million and $252 million in 2017, 2016 and 2015, respectively. With the iNova Sale completed, we have less exposure to the OTC and prescription medicines markets in the geographies noted above, which are not core to our objectives. However, we will continue to maintain a footprint in these geographies through our core Bausch + Lomb
franchise. On October 5, 2017, using the net proceeds from the iNova Sale, the Company repaid $923 million of its Series F Tranche B Term Loan Facility.
As the Skincare Sale, Dendreon Sale and iNova Sale represented positive returnsOur Focus on our investments, we took the opportunity to monetize these non-core assets to help improve our capital structure today, as opposed to making investments into the development and marketing of these brands over an extended period of time.
In November 2017, we completed the sale of our Obagi business for $190 million in cash (the “Obagi Sale”). Obagi is a specialty skin care pharmaceutical business with products focused on premature skin aging, skin damage, hyperpigmentation, acne and sun damage which are primarily available through dermatologists, plastic surgeons, and other skin care professionals. Obagi revenues were $63 million, $71 million and $91 million in 2017, 2016 and 2015, respectively. As the nature and profit marginsCapitalization of the Obagi product lines do not align with our U.S. Diversified Products segment and differ from our dermatology portfolio, which is focused on treatments for psoriasis and acne, Obagi was not core to our objectives. On November 10, 2017, using the net proceeds from the Obagi Sale, the Company repaid $181 million of its Series F Tranche B Term Loan Facility.Post-separation Entities
In December 2017, we completed the sale of Sprout to a buyer affiliated with certain former shareholders of Sprout (the “Sprout Sale”), in exchange for a 6% royalty on global sales of Addyi® (flibanserin 100 mg) beginning June 2019. In connection with the Sprout Sale,B+L Separation and Solta IPO, we have emphasized that it is important that the termspost-separation entities be well capitalized, with appropriate leverage and with access to additional capital, if and when needed, to provide each entity with the ability to independently allocate capital to areas that will strengthen their own competitive positions in their respective lines of business and position each entity for sustainable growth. Therefore, we see the appropriate capitalization and leverage of these new entities post-separation as a key to bringing out the maximum value across our portfolio of assets and, so, it is a primary objective of our plan of separation.
We continue to monitor market conditions and aim to launch the B+L IPO and Solta IPO when financial market conditions are favorable, subject to receipt of regulatory, stock exchange and other approvals and, in January and February 2022, took certain actions to, and announced others that we believe will, bring us closer in reaching our targeted capitalizations of the October 2015 merger agreement relating to our acquisition of Sprout were amended to terminate our ongoing obligation to make future royalty payments associated with the Addyi® product, as well as certain related provisions (including the obligation to make certain marketingpost-separation entities. These actions are discussed in more detail in Item “— Liquidity and other expenditures). In connection with the Sprout Sale, the litigation against the Company, initiated on behalf of the former shareholders of Sprout, which disputed our compliance with certain contractual terms of that same merger agreement with respect to the use of certain diligent efforts to developCapital Resources — Liquidity and commercialize the Addyi® product (including a disputed contractual term with respect to the spend of no less than $200 million in certain expenditures), has been dismissed with prejudice. In connection with the Sprout Sale, the Company has issued the buyer a five-year $25 million loan for initial operating expenses. Addyi®, a once-daily, non-hormonal tablet approved for the treatment of acquired, generalized hypoactive sexual desire disorder in premenopausal women, is the only approvedDebt — Long-term Debt” and commercialized product of Sprout and did not align with the core assets of our Branded Rx segment. The Sprout Sale provided us the opportunity to divest a business not core to our objectives, while allowing us to resolve an ongoing legal matter.
Reducing and Refinancing our Debt - In 2017, we completed a series of transactions that reduced our outstanding debt balance.
Using the net cash proceeds from the sales of certain non-core assets and cash on hand, we repaid $4,641 million of debt principal during 2017. In addition, by accessing the credit markets, we: (i) refinanced $9,562 million that was due to mature in 2018 through 2022, which we extended out to 2022 through 2025, (ii) extended $1,190 million of commitments under our revolving credit facility, originally set to expire in April 2018, out to April 2020 and (iii) obtained less stringent loan financial maintenance covenants under our Senior Secured Credit Facilities (on February 13, 2012, the Company and certain of its subsidiaries as guarantors entered into the “Senior Secured Credit Facilities” under the Company’s Third Amended and Restated Credit and Guaranty Agreement, as amended (the “Credit Agreement”) with a syndicate of financial institutions and investors), including the removal of the financial maintenance covenants from our term loans. As a result, the financial maintenance covenants apply only with respect to our revolving loans and can be waived or amended without the consent of the term loan lenders under the Credit Agreement. These refinancing transactions and debt repayments have had the effect of lowering our cash requirements for principal debt repayments through 2020 by more than $10,600 million. Further, as a result of the changes in our debt portfolio, approximately 85% or our debt is fixed rate debt as of December 31, 2017 as compared to approximately 65% as of December 31, 2016.
Debt repayments - We used the proceeds from the sale of non-core assets, including the Skincare Sale, iNova Sale, Dendreon Sale and Obagi Sale, and made unscheduled prepayments using cash on hand to prepay $3,680 million of term loans under our Senior Secured Credit Facilities during 2017. Using cash on hand, we repurchased $500 million of our 6.75% Senior Unsecured Notes due August 2018 (the “August 2018 Unsecured Notes”), made mandatory scheduled principal repayments under our Series F Tranche B Term Loan Facility of $86 million and paid down amounts outstanding under our revolving credit facility by $375 million during 2017.
Refinancing - On March 21, 2017, we completed a series of transactions that provided us with additional borrowings, which we used to: (i) repay $4,962 million of term loans, representing all outstanding amounts of our senior secured: (a) Series A-3 Tranche A Term Loan Facility originally due October 2018, (b) Series A-4 Tranche A Term Loan Facility originally due April 2020, (c) Series D-2 Tranche B Term Loan Facility originally due February 2019, (d) Series C-2 Tranche B Term Loan Facility originally due December 2019 and (e) Series E-1 Tranche B Term Loan Facility originally due August 2020, (ii) repay $250 million of amounts outstanding under our revolving credit facility and (iii) repurchase, at a purchase price of 103%, $1,100 million of August 2018 Unsecured Notes. The sources of funds for the repayments and repurchase of the aforementioned debt obligations
and the related fees and expenses were obtained through: (i) a comprehensive amendment and refinancing of our Credit Agreement, which, among other matters, provided for incremental term loans under our Series F Tranche B Term Loan Facility of $3,060 million maturing April 2022 (the “Series F-3 Tranche B Term Loan”), (ii) issuance of $1,250 million aggregate principal amount of 6.50% Senior Secured Notes due March 2022 (the “March 2022 Secured Notes”), (iii) issuance of $2,000 million aggregate principal amount of 7.00% Senior Secured Notes due March 2024 (the “March 2024 Secured Notes”) and (iv) the use of cash on hand (collectively, the “March 2017 Refinancing Transactions”).
On October 17, 2017, the Company issued $1,000 million aggregate principal amount of 5.50% Senior Secured Notes due November 2025 (the “November 2025 Secured Notes”) in a private placement, the proceeds of which were used to: (i) repurchase $569 million in principal amount of our existing 6.375% Senior Unsecured Notes due October 2020 (the “6.375% October 2020 Unsecured Notes) and (ii) repurchase $431 million in principal amount of our existing 7.00% Senior Unsecured Notes due October 2020 (the “7.00% October 2020 Unsecured Notes”) (collectively, the “October 2017 Refinancing Transactions”). The related fees and expenses were paid using cash on hand.
On November 21, 2017, the Company issued $750 million aggregate principal amount of November 2025 Secured Notes in a private placement the proceeds, of which were used to prepay $750 million of our Series F Tranche B Term Loan Facility. These are additional notes that form part of the same series as the Company’s existing November 2025 Secured Notes. The related fees and expenses were paid using cash on hand (collectively, the “November 2017 Refinancing Transactions”).
On November 21, 2017, the Company entered into Amendment No. 16 to the Credit Agreement (“Amendment No. 16”) to, among other things, reprice the Series F Tranche B Term Loan Facility. The applicable margins for borrowings under the Series F Tranche B Term Loan Facility, as modified by the repricing, are 2.50% with respect to base rate borrowings and 3.50% with respect to LIBO rate borrowings. Any prepayment of the Series F Tranche B Term Loan Facility in connection with certain refinancings thereof prior to May 21, 2018 will require a prepayment premium of 1.0% of such loans prepaid.
On December 18, 2017, the Company issued $1,500 million aggregate principal amount of 9.00% Senior Unsecured Notes due December 2025 (the “December 2025 Unsecured Notes”) in a private placement, the proceeds of which were used to: (i) repurchase $1,021 million in principal amount of the 6.375% October 2020 Unsecured Notes, (ii) repurchase $291 million in principal amount of our existing 5.375% Senior Unsecured Notes due March 2020 (the “March 2020 Unsecured Notes”) and (iii) repurchase $188 million in principal amount of our 7.00% October 2020 Unsecured Notes. The related fees and expenses were paid using cash on hand (collectively, the “December 2017 Refinancing Transactions”) (the December 2017 Refinancing Transactions together with the March 2017 Refinancing Transactions, the October 2017 Refinancing Transactions and the November 2017 Refinancing Transactions, the “2017 Refinancing Transactions”).
The aforementioned repayments and refinancings have had an impact on our debt portfolio. The table below summarizes our debt portfolio as of December 31, 2017 and 2016.
|
| | | | | | | | | | | | | | | | | | |
| | | | | 2017 | | 2016 |
| (in millions) | | Maturity | | Principal Amount | | Net of Discounts and Issuance Costs | | Principal Amount | | Net of Discounts and Issuance Costs |
| Senior Secured Credit Facilities: | | | | | | | | | | |
| Revolving Credit Facility | | April 2018 | | $ | — |
| | $ | — |
| | $ | 875 |
| | $ | 875 |
|
| Revolving Credit Facility | | April 2020 | | 250 |
| | 250 |
| | — |
| | — |
|
| Series A-3 Tranche A Term Loan Facility | | October 2018 | | — |
| | — |
| | 1,032 |
| | 1,016 |
|
| Series A-4 Tranche A Term Loan Facility | | April 2020 | | — |
| | — |
| | 668 |
| | 658 |
|
| Series D-2 Tranche B Term Loan Facility | | February 2019 | | — |
| | — |
| | 1,068 |
| | 1,048 |
|
| Series C-2 Tranche B Term Loan Facility | | December 2019 | | — |
| | — |
| | 823 |
| | 805 |
|
| Series E-1 Tranche B Term Loan Facility | | August 2020 | | — |
| | — |
| | 2,456 |
| | 2,429 |
|
| Series F Tranche B Term Loan Facility | | April 2022 | | 3,521 |
| | 3,420 |
| | 3,892 |
| | 3,815 |
|
| Senior Secured Notes: | | | | | | | | | | |
| 6.50% Secured Notes | | March 2022 | | 1,250 |
| | 1,235 |
| | — |
| | — |
|
| 7.00% Secured Notes | | March 2024 | | 2,000 |
| | 1,975 |
| | — |
| | — |
|
| 5.50% Secured Notes | | November 2025 | | 1,750 |
| | 1,729 |
| | — |
| | — |
|
| Senior Unsecured Notes: | | | | | | | | | | |
| 6.75% | | August 2018 | | — |
| | — |
| | 1,600 |
| | 1,593 |
|
| 5.375% | | March 2020 | | 1,708 |
| | 1,699 |
| | 2,000 |
| | 1,985 |
|
| 7.00% | | October 2020 | | 71 |
| | 71 |
| | 690 |
| | 689 |
|
| 6.375% | | October 2020 | | 661 |
| | 656 |
| | 2,250 |
| | 2,231 |
|
| 9.00% | | December 2025 | | 1,500 |
| | 1,464 |
| | — |
| | — |
|
| All other Senior Unsecured Notes | | July 2021 through April 2025 | | 13,026 |
| | 12,930 |
| | 12,803 |
| | 12,690 |
|
| Other | | Various | | 15 |
| | 15 |
| | 12 |
| | 12 |
|
| Total long-term debt and other | | | | $ | 25,752 |
| | $ | 25,444 |
| | $ | 30,169 |
| | $ | 29,846 |
|
The weighted average stated interest rate of the Company's outstanding debt as of December 31, 2017 and 2016 was 6.07% and 5.75%, respectively.
The aforementioned repayments and refinancings have also had an impact on our cash requirements for principal debt repayment over the next five years. The scheduled principal repayments of our debt obligations as of December 31, 2017 as compared with December 31, 2016 were as follows:
|
| | | | | | | | |
| (in millions) | | December 31, 2017 | | December 31, 2016 |
| 2018 | | $ | 209 |
| | $ | 3,738 |
|
| 2019 | | — |
| | 2,122 |
|
| 2020 | | 2,690 |
| | 7,723 |
|
| 2021 | | 3,175 |
| | 3,215 |
|
| 2022 | | 5,115 |
| | 4,281 |
|
| Thereafter | | 14,563 |
| | 9,090 |
|
| Gross maturities | | $ | 25,752 |
| | $ | 30,169 |
|
On January 30, 2018, we repaid $200 million of our Series F Tranche B Term Loan Facility, which we directed to be applied to satisfy (in part) payment of the expected $206 million Consolidated Excess Cash Flow payment for the year 2017. Also due in 2018, is $3 million which consists of (i) short-term loan obligations and (ii) lines of credit assumed from certain acquisitions prior to 2016 and are not related to the Senior Secured Credit Facility, Senior Secured Notes or Senior Unsecured Notes. As the table
above demonstrates, as a result of these debt repayments and refinancing transactions, we have eliminated all mandatory scheduled principal long-term debt repayments through March 2020, providing us with additional liquidity and greater flexibility to execute our business plans.
See Note 11, "FINANCING ARRANGEMENTS"23, "SUBSEQUENT EVENTS" to our audited Consolidated Financial Statements for further detailsStatements.
Continue to Manage our Capital Structure
We continue to monitor our capital structure and “Management's Discussion and Analysis - Liquidity and Capital Resources: Long-term Debt” for additional discussion of these matters.
Improving Working Capital - Due in part to our focus on our core businesses and divestitures of non-core businesses, we have reduced our inventory days and working capital days during 2017. Further, we have simplified our supply chain by reducing the number of manufacturing sites and are in the process of discontinuing more than 1,900 stock keeping units or SKUs. We estimate these operational improvements andevaluate other cash management efforts generated over $800 million of additional cash from changes in working capital during 2017. Although we continually drive for operational excellence across our organization, we cannot predict that our working capital management efforts will be as successful in generating similar cash amounts in future years. However, we do believe we have right-sized the Company's working capitalopportunities to a level that fitssimplify our business size and needs.
Refocusimprove our capital structure, giving us the Ortho Dermatologics Business
During 2017, we took a number of actions which we believe will help our efforts to stabilize our dermatology business, which included: (i) rebranding our dermatology business, (ii) recruiting a new experienced leadership team, (iii) made significant investment in the dermatology pipeline, (iv) adjusted the size of the dermatology sales force and (v) reorganized that sales force around roughly 150 territories, as we work to rebuild relationships with prescribers of our products.
In July 2017, we rebranded our dermatology business as Ortho Dermatologics, dedicated to helping patients in the treatment of a range of therapeutic areas including actinic keratosis, acne, atopic dermatitis, psoriasis, cold sores, athlete's foot, nail fungus and other dermatoses. The Ortho Dermatologics portfolio includes several leading acne, anti-fungal and anti-infective products. The name change to Ortho Dermatologics is part of a larger rebranding initiative for the dermatology business.
During 2017, the new leadership team directed significant R&D resources to our Ortho Dermatologics business. As previously discussed, Siliq™ was launched in the U.S. in July 2017. Then, on November 2, 2017, we announced that the FDA had accepted our NDA for Duobrii™ for review, and set a PDUFA action date of June 18, 2018. Siliq™ and Duobrii™ (if approved) are treatments for moderate-to-severe plaque psoriasis and are two of our Significant Seven, which we believe will provide significant revenues over the next five years.
Address Legacy Legal Matters
During 2016, the Company was burdened with addressing certain ongoing legal matters, some of which were inherited as part of the acquisitions we completed in 2015 and prior. In orderability to better focus on our core activitiesbusinesses. Also, the Company regularly evaluates market conditions, its liquidity profile and simplify our operations, we vigorously addressed these matters during 2017various financing alternatives for opportunities to enhance its capital structure. If the Company determines that conditions are favorable, the Company may refinance or repurchase existing debt or issue additional debt, equity or equity-linked securities.
See Note 10, "FINANCING ARRANGEMENTS" and we have achieved dismissals and other positive outcomes in more than 80 historical litigations and investigations, as we continue to actively address others. The significant matters are fully discussed in Note 21, "LEGAL PROCEEDINGS"23, "SUBSEQUENT EVENTS" to our audited Consolidated Financial Statements and include:
Salix Securities Litigation - Beginning on November 7, 2014, three putative class action lawsuits were filed by shareholders of Salix, each of which generally alleged that SalixItem “— Liquidity and certain of its former officersCapital Resources — Liquidity and directors violated federal securities laws in connection with Salix’s disclosuresDebt — Long-term Debt” for further details and additional discussion regarding certain products,these matters. Cash requirements for future debt repayments including with respect to disclosures concerning historic wholesaler inventory levels, business prospects and demand, reserves and internal controls. On February 8, 2017, we reached an agreement to settle the outstanding consolidated action. The settlement was subsequently approved by the court and, in accordance with the agreement, we made a payment of $210 million in the second quarter of 2017. Subsequently, we received $60 million in insurance reimbursements related to this matter.
Allergan Litigation - On December 28, 2017, all parties agreed to settle the ongoing, Allergan shareholder class actions for a total of $290 million. The complaints had asserted violations of Section 14(e) of the Exchange Act and rules promulgated by the SEC thereunder and Section 20A of the Exchange Act by the Company and the other defendants, as well as violations of Section 20(a) of the Exchange Act by certain defendants, and had sought, among other relief, money damages, equitable relief, and attorneys’ fees and costs. The settlement is subject to Court approval; however, on January 16, 2018, following a hearing on this settlement, the Court vacated the trial dates and indicated its preliminary approval of the settlement, subject to submissions of final papers and associated hearings. Under the terms of the proposed settlement, the Company is responsible for paying $96 million, or 33% of the settlement amount. We are pursuing recovery of the settlement amount and the costs of defense under our insurance policies, although recovery is not assured.
Sprout Litigation - On or about November 2, 2016, we were named as defendants in a lawsuit filed by the shareholder representative of the former shareholders of Sprout. The plaintiffinterest can be found in this action alleged, among other things, breach of contract with respect to certain terms of the merger agreement relating to the Company's acquisition of Sprout, including a disputed contractual term respecting the use of certain diligent efforts to developItem “— Off-Balance Sheet Arrangements and commercialize the Addyi® product (including a disputed contractual term respecting the spend of no less than $200 million in certain expenditures). The plaintiff in this action sought unspecified compensatory and other damages and attorneys’ fees, as well as an order requiring Valeant to perform its obligations under the merger agreement. On December 20, 2017, we completed the Sprout Sale. In connection with the closing of the Sprout Sale, this action has been dismissed with prejudice. The Sprout Sale provided us the opportunity to divest a business not core to our business objectives while allowing us to resolve an ongoing legal matter which was requiring significant capital and business resources.Contractual Obligations.”
Solodyn® Antitrust Class Actions - Beginning in July 2013, we were named as co-defendants in a number of civil antitrust class action suits alleging that the defendants engaged in an anticompetitive scheme to exclude competition from the market for minocycline hydrochloride extended release tablets, a prescription drug for the treatment of acne marketed by our subsidiary, Medicis Pharmaceutical Corporation, under the brand name Solodyn®. The plaintiffs sought declaratory and injunctive relief and, where applicable, treble, multiple, punitive and/or other damages, including attorneys’ fees. In February 2018, we agreed to resolve the class action litigation with the End Payor and Direct Payor classes for an amount of $58 million, subject to Court approval, and have resolved related litigation with opt-out retailers for additional consideration.
Address Regulatory Matters
In the normal course of business, our products, devices and facilities are the subject of ongoing oversight and review, by regulatory and governmental agencies, including general, for cause and pre-approval inspections by the FDA. In 2016, FDA inspections of our Rochester, New York and Tampa, Florida facilities resulted in observations that we needed to address. In 2017, we resolved these matters with the FDA and have eliminated manufacturing uncertainties related to our current and upcoming regulatory submissions. This has cleared the way for new product approvals and the continued shipment of our products to countries outside the U.S.
Rochester, New York Facility - On November 3, 2016, we were issued a Warning Letter by the FDA identifying violations of Current Good Manufacturing Practices ("CGMP"), for two device products acquired from other companies and currently managed at our Rochester, New York facility. The acquired products did not fully meet design control requirements and had not been completely resolved at the time of the inspection. The FDA did not identify any issue with the manufacturing or quality controls of either the drugs or the B&L devices manufactured by us at the Rochester facility. Nevertheless, we are committed to the quality of any product or device distributed by us and welcome these inspections as an opportunity to demonstrate that commitment and improve on the current processes. The Company immediately issued a formal Warning Letter Response and began rigorously addressing the identified matters. In May 2017, the NY FDA District Office performed a Warning Letter Response Verification inspection to assess the effectiveness of the corrective actions we had taken. The three day inspection resulted in no observations and the FDA has since removed the Official Action Indicated status. On June 13, 2017, the FDA posted on its official compliance status website that the November 3, 2016 Warning Letter was successfully closed.
Separately, the FDA completed a drug inspection at our Rochester facility in March 2017. Shortly after, we received notice from the FDA NY District Office that two observations identified had been adequately addressed. The inspection focused on the testing and laboratory controls of our drug stability program. The notice identified no observations by the FDA investigators during their inspection and confers a compliant status for the Rochester facility's drug testing and quality operations.
Tampa, Florida Facility - In September 2015, we announced that the FDA had accepted for review the NDA for Vyzulta™ and set a PDUFA action date of July 21, 2016. On July 22, 2016, we announced that we had received a Complete Response Letter ("CRL") from the FDA regarding the NDA for this product. On February 24, 2017, we refiled the NDA and, on August 7, 2017, we received another CRL from the FDA regarding the NDA for this product. The concerns raised by the FDA in both CRLs pertained to the findings of CGMP inspections at our manufacturing facility in Tampa, Florida, where certain deficiencies were identified by the FDA. However, neither CRL identified any efficacy or safety concerns with respect to this product or additional clinical trials needed for the approval of the NDA. On August 16, 2017, we announced that the FDA confirmed that all issues related to the CGMP inspection at the Tampa, Florida facility were being satisfactorily resolved, and a Voluntary Action Indicated inspection classification has since been issued by the FDA for this facility. On November 2, 2017, we announced that the FDA approved the NDA for Vyzulta™. We launched Vyzulta™ in December 2017.
Following the resolution of these matters and the completion of U.S. FDA inspections of our other facilities going back to February 2017, all Valeant and Bausch + Lomb facilities are currently in good compliance standing with the FDA. With these
confirmations, we have eliminated manufacturing uncertainties related to our current and upcoming regulatory submissions and have cleared the way for new product approvals and the continued shipment of our products to countries outside the U.S.
All Valeant and Bausch + Lomb facilities are now rated either as No Action Indicated (or NAI, where there was no Form 483 observation) or Voluntary Action Indicated (or VAI, where there was a Form 483 with one or more observations). In the case of the VAI inspection outcome, the FDA has accepted our responses to the issues cited in the Form 483, which will be verified when the agency makes its next inspection of those specific facilities. (A Form 483 is issued at the end of each inspection when FDA investigators have observed any condition that in their judgment may constitute violations of CGMP.)
Address Operational Matters
Beginning in 2016 and through 2017, the new leadership team addressed a number of issues affecting performance and other operational matters. These operational matters included:
Improve Patient Access and Pricing Committee and New Pricing Actions -
Improving patient access to our products, as well as making them more affordable, is an importanta key element of our turnaround.business strategy.
Patient Access and Pricing Committee - In May 2016, we formed the Patient Access and Pricing Committee which is responsible for setting, changing and monitoring the pricing of our Branded Rxproducts and other pharmaceutical products. In October 2016,evaluating contract arrangements that determine the placement of our products on drug formularies. The Patient Access and Pricing Committee considers new to market product pricing, price changes and their impact across channels on patient accessibility and affordability. Since its inception, the Patient Access and Pricing Committee approved 2% to 9% increases to our gross selling price (wholesale acquisition cost or “WAC”) for products in our neurology, GI and urology portfolios. The changes are aligned with the Patient Access and Pricing Committee's commitment thathas limited the average annual price increase for our branded prescription pharmaceutical products will be set at no greater thanto single digits and below the 5-year weighted average of the increases within the branded biopharmaceutical industry. On April 21, 2017, the Company announced that following the evaluation and approval of the Patient Access and Pricing Committee, it had decided to list Siliq™ (brodalumab) injection at $3,500 per month, which represented the lowest-priced injectable biologic psoriasis treatment based on total annual costs on the market at the time of the announcement. We expect that the Patient Access and Pricing Committee will continue to implement or recommend additional price changes and/or new programs to enhance patient access to our drugs and that thesedigits. Future pricing changes and programs could affect the average realized pricing for our products and may have a significant impact on our revenue trends.revenues and profits.
Bausch Health Patient Assistance Program - We are committed to supporting patients who have lost employment health benefits due to the COVID-19 pandemic, and because it is essential that our patients continue their prescribed treatments, we are proud to offer certain of our prescription medicines through our Bausch Health Patient Assistance Program. In 2018the face of the COVID-19 pandemic, some people have financial obstacles that keep them from obtaining and beyond,continuing their prescribed treatments. The purpose of the Bausch Health Patient Assistance Program is to provide eligible unemployed patients in the U.S., who meet stated qualifications and have lost their health insurance due to the COVID-19 pandemic, with certain of our prescription products where their financial circumstances or insurance status would otherwise interfere with their ability to access such products. If approved, patients receive their Bausch Health Companies Inc. prescription product(s) at no cost to them for up to one year, and may be able to reapply to the program annually if they continue to meet eligibility requirements and have a valid prescription.
Cash-pay Prescription Program - In February 2019, we expectlaunched Dermatology.com, a cash-pay product acquisition program offering certain branded Ortho Dermatologics products directly to patients. In March 2020, the Patient Accessname Dermatology.com was removed as the cash-pay product program name, with the name Dermatology.com limited to only online usage, including future digital teledermatology and Pricing Committeee-commerce offerings. The cash-pay program is designed to continue its commitment to maintain average annual price increase for ouraddress the affordability and availability of certain branded dermatology products, when insurers and pharmacy benefit managers are no longer offering those branded prescription pharmaceutical products at no greater than single digits to ensure value is delivered directly to our customers.under their designated pharmacy benefit offerings.
Walgreens Fulfillment Arrangements - In the beginning of 2016, we launched a brand fulfillment arrangement with Walgreen Co. ("Walgreens") and extended these programs to additional participating independent retail pharmacies.. Under the terms of the brand fulfillment arrangement, as amended in July 2019, we made available certain of ourdermatology and ophthalmology products available to eligible patients through a patient access and co-pay program availableassistance programs at Walgreens U.S. retail pharmacy locations, as well as participating independent retail pharmacies. The program under this 20-year agreement initially covers certain of our dermatology products, including Jublia®, Luzu®, Solodyn®, Retin-A Micro® Gel 0.08% and 0.06%, Onexton® and Acanya® Gel, certain of our ophthalmology products, including Vyzulta™, Besivance®, Lotemax®, Alrex®, Prolensa®, Bepreve®, and Zylet®. The Company continues
Invest in Sustainable Growth Drivers to explore options to modify the Walgreens arrangement to improve the distribution and sales of our products.
Transform
With our business objectives now set and our leadership team in place, we look ahead to 2018 and beyond and continue to monitor our progress toward our transformation.
Increase the Focus of our PipelinePosition us for Long-Term Growth
We are constantly challenged by the changing dynamics of our industry to innovate and bring new products to market. Now that weWe have divested certain businesses where we saw limited growth opportunities, so that we can redirect thebe more aggressive in redirecting our R&D spend and other corporate investments to innovate within our core businesses where we had in those businesses, to innovation focused on ourbelieve we can be most profitable businessesand where we aim to be an industry leader.
We believe that we have a well-established product portfolio that is diversified within our core businesses and provides a sustainable revenue stream to fund our operations. However, theour future success of our transformation is also dependent upon our ability to continually refresh our pipeline, to provide a rotation of product launches that meet new and changing demands and replace other products that have lost momentum. We believe we have a robust pipeline that not only provides for the next generation of our existing products, but is also poised to bring new product solutionsproducts to market.
During 2017, we launched and/or relaunched over 120 products globally, which contributed to organic growthInvest in mostour Eye- Health Business - As part of our core businesses. We currently have approximately 100 R&D projects in our global pipeline. These R&D projects include members of whatBausch + Lomb business strategy, we have dubbed our "Significant Seven", which are products we have recently launched or we expect to launch
continually look for key trends in the near term pending completioneye-health market to meet changing consumer/patient needs and identify areas for investment to extend our market share through new launches and effective pricing. For instance, there is an increasing rate of testingmyopia, and receiving FDA approval. Our Significant Seven are: (i) Vyzulta™ (Bausch + Lomb), (ii) Siliq™ (psoriasis), (iii) Jemdel™ (psoriasis), (iv) Lumify™ (Bausch + Lomb), (v) Duobrii™(psoriasis), (vi) Relistor® (GI)importantly, myopia as a potential risk factor for glaucoma, macular degeneration and (vii)retinal detachment. We continue to see increased demand for new eye- health products that address conditions brought on by factors such as increased screen time, lack of outdoor activities and academic pressures, as well as conditions brought on by an aging population (for example, as more and more baby-boomers in the U.S. are reaching the age of 65). To extend our market share in eye- health, we continually seek to identify new products tailored to address these key trends for development internally with our own R&D team to generate organic growth. Recent product launches include Biotrue® ONEday daily disposable contact lenses, the next generation of Bausch + Lomb ULTRA® contact lenses, SiHy Daily contact lenses (branded as AQUALOX™ ONE DAY in Japan, Bausch + Lomb INFUSE® SiHy Daily Disposable in the U.S. and Bausch + Lomb Ultra® ONE DAY in Australia, Hong Kong and Canada), Lumify® (an eye redness treatment), Vyzulta® (a pressure lowering eye drop for patients with angle glaucoma or ocular hypertension), Ocuvite® Eye Performance (vitamins to protect the eye from stressors such as sunlight and blue light emitted from digital devices) and SimplifEYE® (preloaded intraocular lens injector platform for enVista intraocular lens).
We also license selective molecules or technology in leveraging our own R&D expertise through development, as well as seek out external product lines (Bausch + Lomb). Descriptions of these products and relevant launch dates and/or stages of testing were previously discussed. Revenues for our Significant Seven were less than $100 million in 2017; however, we believe the prospects for this group of products over the next five years to be substantial and anticipate devoting significant marketing efforts toward their promotion. We believe that the strength of these launches and the impact of these products on their respective markets will demonstrate the effectiveness of our pipeline and R&D strategies and inspire further innovation in our businesses.
Continue to Recruit and Retain Talent
development opportunities. As previously discussed, we acquired a global exclusive license for a myopia control contact lens design developed by BHVI, which we plan to pair with our leading contact lens technologies to develop potential contact lens treatments designed to slow the progression of myopia in December 2016, we initiatedchildren, and exclusive licenses for the commercialization and development in the U.S. and Canada of: a significant GI sales force expansion programmicrodose formulation of atropine ophthalmic solution, which is being investigated for the reduction of pediatric myopia progression in children ages 3-12; Xipere™ which was approved by the FDA in October 2021 and launched in the first quarter of 2022, and is the first treatment available in the U.S. that utilizes the suprachoroidal space to treat patients suffering from macular edema associated with uveitis; and NOV03, an investigational drug with a novel mechanism of action to treat DED associated with MGD. which has demonstrated statistically significant topline data in two Phase 3 studies. We also acquired the U.S. rights to EM-100, which was launched as Alaway® Preservative-
Free and is the first OTC preservative-free formulation eye drop for the temporary relief of itchy eyes due to pollen, ragweed, grass, animal hair, and dander in adults and children 3 years of age and older. We believe investments in these investigational treatments, if approved by the FDA, will complement, and help build upon, our strong portfolio of integrated eye-health products.
As previously discussed, we have also made strategic investments in our infrastructure, the most significant of which were at our Waterford facility in Ireland to meet the forecasted demand for our Biotrue® ONEday lenses, our Rochester facility in New York to address the expected global demand for our Bausch + Lomb ULTRA® contact lens and our Lynchburg facility in Virginia to be our main point of distribution for medical devices in the U.S. During late 2018, we began investing in additional expansion projects at the Waterford and Rochester facilities in order to address the expected global demand for our SiHy Daily disposable contact lenses, which we launched in Japan in September 2018, under the branded name AQUALOX™ ONE DAY, in the U.S. in August 2020, under the branded name Bausch + Lomb INFUSE® SiHy Daily Disposable contact lens, and in Australia, Hong Kong and Canada in the fourth quarter of 2020, under the branded name Bausch + Lomb Ultra® ONE DAY.
We believe our recent product launches, licensing arrangements and the investments in our Waterford, Rochester and Lynchburg facilities demonstrate the growth potential we see in our Bausch + Lomb products and our eye-health business and that these investments will position us to further extend our market share in the eye- health market.
Leveraging our Salix Infrastructure - We strongly believe in our GI product portfolio and we have implemented initiatives, including increasing our marketing presence and identifying additional opportunities outside our existing GI portfolio, to further capitalize on the value of the infrastructure we built around these products to extend our market share.
In the first quarter of 2017, we hired approximately 250 trained and experienced sales force representatives and managers to create, bolster and sustain deep relationships with primary care physicians (“PCP”). With approximately 70% of IBS-D patients initially presenting symptoms to a PCP, we continue to believe that the dedicated PCP sales force is better positioned to reach more patients in supportneed of our Xifaxan® for IBS-D and Relistor® tablets for OIC products. treatment.
This initiative provided us with positive results, as we experienced consistent growth in demand for theseour GI products throughout 2017 through 2021 which was evident by our growth in Salix revenues of 32% when comparing 2021 to 2017. These results encouraged us to seek out ways to bring out further value through leveraging our existing sales force and, in the balancelater portion of 2017.2018 and in 2019, we identified and executed on certain opportunities which we describe below.
In December 2017, encouragedStrategic Acquisition - As previously discussed, in March 2019, we completed the acquisition of certain assets of Synergy, whereby we acquired the worldwide rights to the Trulance® product, a once-daily tablet for adults with chronic idiopathic constipation, or CIC and irritable bowel syndrome with constipation, or IBS-C. We believe that the Trulance® product complements our existing Salix products and allows us to effectively leverage our existing GI sales force.
Licensing Arrangements - As previously discussed, in April 2019, we entered into a licensing agreement to develop and commercialize MT-1303 (amiselimod), a late-stage oral compound that targets the sphingosine 1-phosphate receptor that plays a role in autoimmune diseases, such as inflammatory bowel disease and ulcerative colitis. This license presents a unique developmental opportunity to address unmet needs of individuals suffering with certain GI and liver diseases and if developed and approved by the success ofFDA, will allow us to further utilize our 2016 GIexisting sales force expansionand infrastructure to extend our market share in the future and create value.
Investment in Next Generation Formulations - Revenues from our Xifaxan® product increased approximately 11%, 2% and 22% in 2021, 2020 and 2019, respectively. In order to extend the growth in Xifaxan®, we continue to directly invest in next generation formulations of Xifaxan® and rifaximin, the principal semi-synthetic antibiotic used in our Xifaxan® product. In addition to three R&D programs in progress, we have another R&D program we committedplanned for a next generation formulation of Xifaxan® (rifaximin) which would address a new indication.
We believe that the acquisition and licensing opportunities discussed above will be accretive to increasing our business by providing us access to products and investigational compounds that are a natural pairing to our Xifaxan® business, allowing us to effectively leverage our existing infrastructure and sales force. We believe these opportunities, coupled with our investment in next generation formulations, will allow our GI franchise to continue to further extend market share.
Reposition the Ortho Dermatologics sales force by more than 25%, in supportBusiness to Generate Additional Value - As of our growth initiatives for our Ortho Dermatologics business. We believeJanuary 2022, we have positioned the additional sales force is vitalSolta Medical business to meetmove forward with the demand we expect from our recently launched products and those we expect to launch in the near future pending FDA approval.Solta IPO. We continue to monitor market conditions and aim to launch the Solta IPO when financial market conditions are favorable subject to receipt of regulatory, stock exchange and other approvals. However, there can be no assurance as to when we will complete the Solta IPO, if at all. Until such time, we continue to manage our pipelineSolta business and our medical dermatology business with our continued commitment to bring out additional value for other near term launches that will create opportunity needsour shareholders. We continue to make investments in our other core businesses requiring usSolta portfolio and anticipate building out our Solta sales force,
particularly in Europe, to retain peopleaddress the growing demand for additional leadership and sales force roles.
Continue the Turnaround ofour Solta aesthetic medical devices. Our Ortho Dermatologics Businessbusiness continues to work towards improving the treatment options for medical dermatology patients needing topical acne and psoriasis products. We also continue to explore additional strategic e-commerce and partnership expansion opportunities which can enable increased accessibility for patients and we continue to invest in our on-market products and evaluate various opportunities for our key medical dermatology pipeline products.
We remainIn support of the complete dermatology portfolio, we continue to take a number of actions that we believe will help our efforts to stabilize our dermatology business. These actions include: (i) building on trackour legacy brands to turnaroundimprove and meet today’s physician relevance and customer service, (ii) appointing new leadership, (iii) making key investments in our core medical device and dermatological products portfolios, (iv) optimizing our go to market strategy by building on our relationships with prescribers of our products to balance our sales portfolio with the business' profitability, (v) refocusing our operational and promotional resources and (vi) improving patient access to our Ortho Dermatologics business and believeproducts through our cash-pay prescription program previously discussed.
During the three months ended March 31, 2021, we have identified new products that, if approved, will help complete the turnaround. In additional to expanding ourlaunches of certain Ortho Dermatologics sales force by 25%, weproducts which were not going to achieve their trajectories as forecasted once the social restrictions associated with the COVID-19 pandemic began to ease in the U.S. and offices of health care professionals could reopen. In addition, insurance coverage pressures within the U.S. continued to persist, limiting patient access to topical acne and psoriasis products. In light of these developments, during the first quarter of 2021, the Company began taking steps to: (i) redirect its R&D spend to eliminate projects it has identified as high cost and high risk, (ii) redirect a portion of its marketing and product development outside the U.S. to geographies where there is better patient access and (iii) reduce its cost structure to be more competitive.
Investment in Our Core Dermatology Portfolio - We have made significant investments to build out our aesthetics, psoriasis and acne product portfolios, which are the markets within dermatology where we see the greatest opportunities. We believe narrowingopportunities to extend our focus on these specific markets, will generate growth inmarket share.
Aesthetics - In 2017, we launched our Ortho Dermatologics business and make us a category leadernext generation Thermage FLX® product in the dermatology market.U.S., a fourth-generation non-invasive treatment option using a radiofrequency platform designed to optimize key functional characteristics and improve patient outcomes. Next generation Thermage FLX® was launched in the U.S., Hong Kong, Japan, Korea, Chinese Taipei, Philippines, Singapore, Indonesia, Malaysia, China, Thailand, Vietnam, Australia and various parts of Europe as part of our Solta aesthetic medical devices portfolio. These launches have been successful as next generation Thermage FLX® revenues were $154 million, $142 million and $77 million for the years ended December 31, 2021, 2020 and 2019, respectively. We plan to continue to expand into other regions, paced by country-specific regulatory registrations. Consistent with our business strategy to continually update and improve our technology, in 2021, we launched, our next generation Clear + Brilliant®Touch system in the U.S., which is designed to deliver a customized and more comprehensive treatment protocol by providing patients of all ages and skin types the benefits of two wavelengths. The launch of our next generation Clear + Brilliant®Touch system in the U.S. is expected to serve as a foundation for future launches in Asia and Europe.
Psoriasis - In 2018, we will begin reallocating a substantial portion of our existing Ortho Dermatologics resources specifically toward our psoriasis business. Asresponse to the increasing number of reported cases of psoriasis in the U.S. has increased over recent years,, we believe there islaunched Duobrii® in June 2019 and launched Bryhali® in November 2018, which align well with our topical portfolio of psoriasis treatments. Although, we continue to support a need to make further investments in this marketdiverse portfolio of topical and injectable biologics, in order to maximize our opportunity and supplement our current psoriasis product portfolio. In addition to getting FDA approval for the recently launched SiliqTM (July 2017) and Retin-A Micro® 0.06% (January 2018) products, we have filed NDAs with the FDA for other new psoriasis products including DuobriiTM (PDUFA action date of June 18, 2018) and JemdelTM, which we expect to launch in the near term pending FDA approval. We believe that each of these products will line up well with the growing demand in the psoriasis market. In addition to these recent launches and continued commitment to our complete portfolioprovide a diverse choice of psoriasis treatments to doctors and patients; we believe some patients prefer topical products on February 27, 2018, we announced that we entered into an exclusive license agreement with Kaken Pharmaceutical Co., Ltd. to develop and commercialize products containing a new chemical entity, KP-470, which is an investigational compound for the topical treatment of psoriasis. If approved, KP-470 will represent a novel drug withas an alternative mechanism of action in the topical treatment of psoriasis. to injectable biologics.
Acne - In support of our established acne product portfolio, we have been developingdeveloped and launched several products, which are in various stages of development, which includes AltrenoTM. Recently the FDA has accepted the NDA for AltrenoTM with a PDUFA action date of August 27, 2018.
Bolstered by the new product opportunities we are creating in our psoriasis and acne product lines and the increased focus on our sales force, we believe we have set the groundwork for the potential to achieve compounding growth in our Ortho Dermatologics business as we look out over the next five years.
Continue to Manage Our Capital Structure
In 2017, we completed a series of transactions which reduced our debt levels and improved our capital structure. As a result of these debt repayments and refinancing transactions, we have eliminated all mandatory scheduled principal long-term debt repayments through March 2020, providing us with additional liquidity and greater flexibility to execute our business plans. Our reduced debt levels and improved debt portfolio will translate to lower repayments of principal over the next three years, which, in turn, will permit more cash flows to be directed toward developing our core assets and repay additional debt amounts. In addition, as a result of the changes in our debt portfolio, approximately 85% or our debt is fixed rate debt as of December 31, 2017, as compared to approximately 65% as of December 31, 2016.
While we currently have no definitive plans to divest additional assets during 2018, we continue to monitor our capital structure and to evaluate other opportunities to simplify our business and improve our capital structure giving us the ability to better focus on our core businesses. While we anticipate focusing any future divestiture activities on non-core assets, we would consider dispositions in core areas that we believe represent attractive opportunities for the Company. Also, the Company regularly evaluates market conditions, its liquidity profile, and various financing alternatives for opportunities to enhance its capital structure. If opportunities are favorable, the Company may refinance or repurchase existing debt.
Managing Generic Competition and Loss of Exclusivity
Certain of our products face the expiration of their patent or regulatory exclusivity in 2018 or in later years, following which we anticipate generic competition of these products. In addition, in certain cases, as a result of negotiated settlements of some of our patent infringement proceedings against generic competitors, we have granted licenses to such generic companies, which will permit them to enter the market with their generic products prior to the expiration of our applicable patent or regulatory exclusivity. Finally, for certain of our products that lost patent or regulatory exclusivity in prior years, we anticipate that generic competitors may launch in 2018 or in later years. Following a loss of exclusivity of and/or generic competition for a product, we would anticipate that product sales from such product would decrease significantly shortly following such loss of exclusivity or the entry of a generic competitor. Where we have the rights, we may elect to launch an authorized generic of such product (either ourselves or through a third party) prior to, upon or following generic entry, which may mitigate the anticipated decrease in product sales; however, even with launch of an authorized generic, the decline in product sales of such product would still be expected to be significant, and the effect on our future revenues could be material.
A number of our products already face generic competition. In the U.S., these products include among others, AmmonulArazlo®, Atralin®, Carac®, Edecrin®, Glumetza®, Istalol®, Isuprel®, Locoid® Cream, Nitropress®, certain strengths of Retin-A Micro®, certain strengths of Solodyn®, Syprine®, Targretin® capsules, Tasmar®, Vanos®, Virazole®, Wellbutrin XL®, Xenazine®, Zegerid®, Ziana® and Zovirax® ointment. In Canada, these products include, among others, Aldara®, Glumetza®, Sublinox® and Wellbutrin® XL.
Based on current patent expiration dates, settlement agreements and/or competitive information, we believe that our key products facing a potential loss of exclusivity and/or generic competition in the five year period from 2018 to and including 2022 include, among others (this is not an exhaustive list of products), the following key products in the U.S.: in 2018, Cuprimine®, Elidel®, Locoid®(tazarotene) Lotion Lotemax® Gel, Lotemax® Suspension, Mephyton®, and certain products subject to settlement agreements, which in aggregate represented 8% and 8% of our U.S. and Puerto Rico revenues for 2017 and 2016; in 2019, Zovirax® cream and certain products subject to settlement agreements, which in aggregate represented 2% and 2% of our U.S. and Puerto Rico revenues for 2017 and 2016; in 2020, Clindagel® and Migranal® which represented 0% and 1% of our U.S. and Puerto Rico revenues for 2017 and 2016; in 2021, Luzu®, PreserVision® and certain products subject to settlement agreements, which represented 4% and 3% of our U.S. and Puerto Rico revenue for 2017 and 2016, respectively. We currently have not identified any products with significant revenues facing a potential loss of exclusivity and/or generic competition in the year 2022. These dates may change based on, among other things, successful challenge to our patents, settlement of existing or future patent litigation and at-risk generic launches.
In addition, for a number of our products (including Apriso®, Carac®, Cardizem®, Onexton®, Prolensa®, Uceris®, Relistor® and Xifaxan®(launched in the U.S. and Wellbutrin® XL and Glumetza®in Canada)June 2020), we have commenced (or anticipate commencing) infringement proceedings against potential generic competitorsAltreno® (launched in the U.S. in October 2018), the first lotion (rather than a gel or cream) product containing tretinoin for the treatment of acne, and Canada. If we are not successfulRetin-A Micro® 0.06% (launched in these proceedings, we may face increased generic competition for these products. See Note 21, "LEGAL PROCEEDINGS" to our audited Consolidated Financial Statements for further details regarding certain infringement proceedings.
The risks of generic competition are a fact of the health care industry and are not specific to our operations or product portfolio. These risks are not avoidable, but they are manageable. To manage these risks, our leadership team continually evaluates the impact that the loss of future revenues from generic competition will have on future profitability and operations. In addition to aggressively defending our patents and the Company's other intellectual properties, the leadership of the Company makes operational and investment decisions regarding these products and businesses at risk, not the least of which are the decisions regarding our pipeline. Our leadership team actively manages the Company's pipelineU.S. in order to identify the proper projects to pursue. Innovative and realizable projects aligned with our core businesses that are expected to provide incremental and sustainable revenues and growth into the future. We believe that our current pipeline is strong enough to meet these objectives and provide future sources of revenues, in our core businesses, sufficient enough to sustain our growth and corporate health as other products in our established portfolio face generic competition and lose momentum.
We believe that we have a well-established product portfolio that is diversified within our core businesses.January 2018). We also have a robustunique acne project in our pipeline that, not only provides forif approved by the next generation of our existing products, but also brings new solutions into the market.
Revenues for our Significant Seven were less than $100 million in 2017, as several of these products have only recently been launched and others are yet to be launched. However,FDA, we believe will further innovate and advance the potential revenues for our Significant Seven over the next five years to be substantial and will positively impact our revenues and operating results. We are confident that revenues from our Significant Seven, our existing pipeline and newly identified projects during the next five years will exceed the anticipated losstreatment of revenues from those products identified as facing loss of exclusivity during that same period.acne.
See Item 1A “Risk Factors” of this Form 10-K for additional information on our competition risks.
Business Trends
In addition to the acquisition and divestiture actions previously outlined, the following events described below have affected and are expected tomay affect our business trends:trends. The matters discussed in this section contain Forward-Looking Statements. Please see “Forward-Looking Statements” for additional information.
U.S. Tax Reform
In April 2021, U.S. President Joseph Biden proposed changes to the U.S. tax system. Since that date, both houses of Congress have released their own proposals for changes to the U.S. tax system, which differ in a number of respects from the President’s proposal. The proposals under discussion have included changes to the U.S. corporate tax system that would
increase U.S. corporate tax rates, although the most recent proposals do not include any such rate increase, and changes that would raise the tax rate on and make other changes to the taxation of Global Intangible Low Tax Income earned by foreign subsidiaries. Also under consideration are modifications to the Base Erosion and Anti-Abuse Tax, which would tax certain payments, including some that are related to inventory, made to affiliates that are subject to an effective tax rate of less than specified rates. Certain proposals also include limitations on the participation exemption for foreign dividends received and interest expense. In addition, certain proposals include limitations on the deduction of interest expense and carryforwards of unused interest expense, as well as an excise tax on certain pharmaceutical products that are non-compliant with the proposed drug pricing legislation.
We are unable to predict which, if any, U.S. tax reform proposals will be enacted into law, and what effects any enacted legislation might have on our liability for U.S. corporate tax. However, it is possible that the enactment of changes in the U.S. corporate tax system could have a material adverse effect on our liability for U.S. corporate tax and our consolidated effective tax rate.
Global Minimum Corporate Tax Rate
On October 8, 2021, the Organisation for Economic Co-operation and Development ("OECD")/G20 inclusive framework on Base Erosion and Profit Shifting (the "Inclusive Framework") published a statement updating and finalizing the key components of a two-pillar plan on global tax reform originally agreed on July 1, 2021, and a timetable for implementation by 2023. The Inclusive Framework plan has now been agreed to by 141 OECD members, including several countries which did not agree to the initial plan. Under pillar one, a portion of the residual profits of multinational businesses with global turnover above €20 billion and a profit margin above 10% will be allocated to market countries where such allocated profits would be taxed. Under pillar two, the Inclusive Framework has agreed on a global minimum corporate tax rate of 15% for companies with revenue above €750 million, calculated on a country-by-country basis. On October 30, 2021, the G20 formally endorsed the new global minimum corporate tax rate rules. The Inclusive Framework agreement must now be implemented by the OECD Members who have agreed to the plan, effective in 2023. On December 20, 2021, the OECD published model rules to implement the pillar two rules, which are generally consistent with the agreement reached by the Inclusive Framework in October 2021. Additional guidance is expected to be published in 2022. We will continue to monitor the implementation of the Inclusive Framework agreement by the countries in which we operate. While we are unable to predict when and how the Inclusive Framework agreement will be enacted into law in these countries, and it is possible that the implementation of the Inclusive Framework agreement, including the global minimum corporate tax rate could have a material effect on our liability for corporate taxes and our consolidated effective tax rate.
Health Care Reform
The U.S. federal and state governments continue to propose and pass legislation designed to regulate the health care industry. In March 2010, the Patient Protection and Affordable Care Act (the “ACA”) was enacted in the U.S. The ACA contains several provisions that impact our business, including: (i) an increase in the minimum Medicaid rebate to states participating in the Medicaid program, (ii) the extension of the Medicaid rebates to Managed Care Organizations that dispense drugs to Medicaid beneficiaries, (iii) the expansion of the 340(B) Public Health Services drug pricing program, which provides outpatient drugs at reduced rates, to include additional hospitals, clinics and health care centers and (iv) a fee payable to the federal government based on our prior-calendar-year share relative to other companies of branded prescription drug sales to specified government programs.
In addition, in 2013: (i)2013 federal subsidies began to be phased in for brand-name prescription drugs filled in the Medicare Part D cover gap and (ii) the law requires the medical device industry to subsidize health care reform in the form of a 2.3% excise tax on U.S. sales of most medical devices. However, the Consolidated Appropriations Act, 2016 (Pub. L. 114-113), signed into law on December 18, 2015, included a two-year moratorium on the medical device excise tax. On January 22, 2018, with the passage of continuing appropriations through February 8, 2018 (HR 195), the moratorium on the medical device excise tax was further extended until January 1, 2020.coverage gap. The ACA also included provisions designed to increase the number of Americans covered by health insurance. In 2014, the ACA's private health insurance exchanges began to operate. The ACA also allows states to expand Medicaid coverage with most of the expansion’s cost paid for by the federal government.
For 2017, 20162021, 2020 and 2015,2019, we incurred costs of $48$13 million, $36$21 million and $28$20 million, respectively, related to the annual fee assessed on prescription drug manufacturers and importers that sell branded prescription drugs to specified U.S. government programs (e.g., Medicare and Medicaid). For 2017, 20162021, 2020 and 2015,2019, we also incurred costs of $106$94 million, $128$131 million and $104$137 million, respectively, on Medicare Part D utilization incurred by beneficiaries whose prescription drug costs cause them to be subject to the Medicare Part D coverage gap (i.e., the “donut hole”). The increase in Medicare Part D coverage gap liability is mainly due to Xifaxan®. Under legislation, which provided for a moratorium on the medical device excise tax beginning January 1, 2016 as previously discussed, the Company incurred medical device excise taxes for 2017, 2016 and 2015 of $0, $0 and $5 million, respectively.
On July 28, 2014, the Internal Revenue Service issued final regulations related to the branded pharmaceutical drug annual fee pursuant to the ACA. Under the final regulations, an entity’s obligation to pay the annual fee is triggered by qualifying sales in the current year, rather than the liability being triggered upon the first qualifying sale of the following year. We adopted this guidance in the third quarter of 2014, and it did not have a material impact on our financial position or results of operations.
The financial impact of the ACA will be affected by certain additional developments over the next few years, including pending implementation guidance and certain health care reform proposals. Additionally, policy efforts designed specifically to reduce patient out-of-pocket costs for medicines could result in new mandatory rebates and discounts or other pricing restrictions. Also, it is possible, as discussed further below, that under the current administration, legislation will be passed by the Republican-controlled Congress repealing the ACA in whole or in part. Adoption of legislation at the federal or state level could materially affect demand for, or pricing of, our products.
Beginning in 2011, the law imposed a significant annual fee on companies that manufacture or import branded prescription drug products. More recently, the Bipartisan Budget Act of 2018 amended the Patient Protection and Affordable Care Act, effective January 1, 2019, to close the donut hole in most Medicare drug plans. In addition, in April 2018, the Centers for Medicare & Medicaid Services published a final rule that gives states greater flexibility in setting benchmarks for insurers in the individual and small group marketplaces, which may have the effect of relaxing the essential health benefits required under the Patient Protection and Affordable Care Act for plans sold through such marketplaces.
In 2018, we facefaced uncertainties due to federal legislative and administrative efforts to repeal, substantially modify or invalidate some or all of the provisions of the ACA. However, we believe there is low likelihood of repeal of the ACA, given the recent failure of the Senate’s multiple attempts to repeal various combinations of ACA provisions.provisions and the recent change in administration. There is no assurance that any replacement or administrative modifications of the ACA will not adversely affect our business and financial results, particularly if the replacing legislation reduces incentives for employer-sponsored insurance coverage, and we cannot predict how future federal or state legislative or administrative changes relating to the reform will affect our business.
In 2019, the U.S. Department of Health and Human Services announced a preliminary plan to allow for the importation of certain lower-cost drugs from Canada. The preliminary plan excludes insulin, biological drugs, controlled substances and intravenous drugs. The preliminary plan relies on individual states to develop proposals for safe importation of those drugs from Canada and submit those proposals to the federal government for approval. Although the preliminary plan has some support from the prior administration, at this time, studies to evaluate the related costs and benefits, evaluate the reasonableness of the logistics, and measure the public reaction of such a plan have not been performed. While we do not believe this will have a significant impact on our future cash flows, we cannot provide assurance as to the effect or impact of such a plan.
In 2019, the Government of Canada (Health Canada) published in the Canada Gazette the new pricing regulation for patented drugs. These regulations were scheduled to become effective on July 1, 2021, but have been delayed until July 1, 2022. The new regulations will, among other things, change the mechanics of establishing the pricing for products submitted for approval after August 21, 2019 and the number and composition of reference countries used to determine if a drug’s price is excessive. While we do not believe this will have a significant impact on our future cash flows, as additional facts materialize, we cannot provide assurance as to the ultimate content, timing, effect or impact of such regulations.
In July 2020, former U.S. President Donald Trump signed four Executive Orders related to drug pricing, including orders addressing: (i) Part D rebate reform, (ii) the provision of deeply discounted insulin and/or an EpiPen to patients of Federally Qualified Health Centers, (iii) drug importation from Canada and (iv) most favored nation pricing for Medicare. In November 2020, former U.S. President Donald Trump announced the Most Favored Nation Model for Medicare Part B Payment which was to be implemented by the Centers for Medicare & Medicaid Services Innovation Center on January 1, 2021; however, it has not been implemented, as it is currently being challenged in court. It is also uncertain whether the Biden administration intends to reverse these measures or adopt similar policy initiatives. However, U.S. President Joseph Biden and several members of the current U.S. Congress have indicated that lowering drug prices is a legislative and political priority, and some have introduced proposals that seek to address drug pricing.
In December 2020, as part of a series of drug pricing-related rules issued by the Trump Administration, the Center for Medicare & Medicaid Services issued a Final Rule that makes significant modifications to the Medicaid Drug Rebate Program regulations in several areas, including with respect to the definition of key terms “line extension” and “new formulation” and best price reporting relating to certain value-based purchasing arrangements (which took effect on January 1, 2022) and the price reporting treatment of manufacturer-sponsored patient benefit programs (which take effect on January 1, 2023).
In March 2021, the U.S. Congress enacted the American Rescue Plan Act of 2021. One of the provisions included within the American Rescue Plan Act of 2021 eliminated the Maximum Rebate Amount for Single Source drugs and Innovator Multiple Source drugs in the Medicaid Drug Rebate Program. We are currently reviewing this legislation, the impact of which is uncertain at this time.
Other legislative efforts relating to drug pricing have been proposedenacted and consideredothers have been proposed at the U.S. federal and state level.levels. For instance, certain states have enacted legislation related to prescription drug pricing transparency. Several states have passed importation legislation and Florida is working with the U.S. government to implement an importation program from Canada. We also anticipate that Congress, state legislatures and third-party payors may continue to review and assess alternative health care delivery and payment systems and may in the future propose and adopt legislation or policy changes or implementations affecting additional fundamental changes in the health care delivery system.
We continually review newly enacted and proposed U.S. Tax Reform
On December 22, 2017, the Tax Cutsfederal and Jobs Act of 2017 (the “Tax Act”) was signed into law which includes a number of changes to existing U.S. tax laws. Among the tax law changes affecting the Company are a reduction instate legislation, as well as proposed rulemaking and guidance published by the U.S. corporate federal statutory tax rate from 35% to 21%, limitationsDepartment of Health and Human Services and the FDA; however, at this time, it is unclear the effect these matters may have on our businesses.
Generic Competition and Loss of Exclusivity
Certain of our products face the tax deduction for interest expense to 30%expiration of adjusted earnings and other reductionstheir patent or eliminationsregulatory exclusivity in 2022 or in later years, following which we anticipate generic competition of business deductions and credits. The Tax Act also implements a modified territorial tax system that includes a one-time transition tax on the accumulated previously untaxed earnings of foreign subsidiaries (the “Transition Toll Tax”) equal to 15.5% (reinvestedthese products. In addition, in liquid assets) or 8% (reinvested in non-liquid assets). At the taxpayer's election, the Transition Toll Tax can be paid over an eight-year period without interest, beginning in 2018.
The Tax Act also includes two new U.S. tax base erosion provisions: (i) the base-erosion and anti-abuse tax (“BEAT”) and (ii) the global intangible low-taxed income (“GILTI”). BEAT provides a minimum tax on deductible payments made to related foreign parties. GILTI requires an entity to include in its U.S. taxable income the earnings of its foreign subsidiaries in excess of an allowable return on each foreign subsidiary’s depreciable tangible assets. Recently issued accounting guidance provides that the impacts of this provision can be included in the consolidated financial statements either by recording the impacts in the period in which GILTI has been incurred or by adjusting deferred tax assets or liabilities related to basis differences expected to reversecertain cases, as a result of negotiated settlements of some of our patent infringement proceedings against generic competitors, we have granted licenses to such generic companies, which will permit them to enter the GILTI provisions in future years. The Company has provisionally elected to provide for the GILTI tax in the period in which it is incurred and therefore, the 2017 benefit for income taxes does not include a provision for GILTI.
In December 2017, the SEC issued guidance in situations where the accounting for certain elements of the Tax Act cannot be completedmarket with their generic products prior to the releaseexpiration of our applicable patent or regulatory exclusivity. Finally, for certain of our products that lost patent or regulatory exclusivity in prior years, we anticipate that generic competitors may launch in 2022 or in later years. Following a loss of exclusivity ("LOE") of and/or generic competition for a product, we would anticipate that product sales for such product would decrease significantly shortly following the LOE or entry of a generic competitor. Where we have the rights, we may elect to launch an authorized generic of such product (either ourselves or through a third-party) prior to, upon or following generic entry, which may mitigate the anticipated decrease in product sales; however, even with launch of an entity's financial statements. Forauthorized generic, the elementsdecline in product sales of such product would still be expected to be significant, and the effect on our future revenues could be material.
A number of our products already face generic competition. Prior to and during 2021, in the U.S., these products include, among others, Ammonul®, Apriso®, Benzaclin®, Bepreve®, Bupap®, Cuprimine®, Demser®, Edecrin®, Elidel®, Glumetza®, Istalol®, Isuprel®, Locoid® Lotion, Lotemax® Gel, Lotemax® Suspension, Mephyton®, Migranal®, MoviPrep®, Nitropress®, Solodyn®, Syprine®, Timoptic® in Ocudose®, Uceris® Tablet, Virazole®, Wellbutrin XL®, Xenazine®,Zegerid® and Zovirax® cream. In Canada, these products include, among others, Glumetza®, Wellbutrin® XL and Zovirax® ointment.
2021 LOE Branded Products- Branded products that began facing generic competition in the U.S. during 2021 included Lotemax® Gel, Bepreve®, Clindagel® and certain other products. These products accounted for less than 1% of our total revenues in 2020. We believe the entry into the market of generic competition generally would have an adverse impact on the volume and/or pricing of the Tax Act where a reasonable estimateaffected products, however we are unable to predict the magnitude or timing of this impact.
2022 through 2026 LOE Branded Products - Based on current patent expiration dates, settlement agreements and/or competitive information, we have identified branded products that we believe could begin facing potential LOE and/or generic competition in the U.S. during the years 2022 through 2026. These products and year of expected LOE include, but are not limited to, Noritate® (2022), Targretin® Gel (2022), Xerese® (2022)and certain other products that are subject to settlement agreements which could impact their exclusivity during the years 2022 through 2026. In aggregate, these products accounted for 2% of our total revenues in 2021. These dates may change based on, among other things, successful challenge to our patents, settlement of existing or future patent litigation and at-risk generic launches. We believe the entry into the market of generic competition generally would have an adverse impact on the volume and/or pricing of the tax effects couldaffected products, however we are unable to predict the magnitude or timing of this impact.
In addition, for a number of our products (including Xifaxan® 550mg, Bryhali®, Duobrii®, Trulance®, Lumify® and Relistor® Injection in the U.S and Jublia® in Canada.), we have commenced (or anticipate commencing) and have (or may have) ongoing infringement proceedings against potential generic competitors in the U.S. and Canada. If we are not successful in these proceedings, we may face increased generic competition for these products.
Bryhali® Lotion, 0.01% (Glenmark) - In December 2019, the Company announced that it had reached an agreement to resolve the outstanding intellectual property litigation with Glenmark Pharmaceuticals, Ltd. ("Glenmark"). Under the terms of the agreement, the Company will grant Glenmark a non-exclusive license to its intellectual property relating to Bryhali® in the U.S. and, beginning in 2026 (or earlier under certain circumstances), Glenmark will have the option to market a royalty-free generic version of Bryhali® Lotion, should it receive approval from the FDA. The parties have agreed to dismiss all litigation related to Bryhali® Lotion, and all intellectual property protecting Bryhali® Lotion remains intact.
Bryhali® Lotion, 0.01% (Padagis) - On March 20, 2020, the Company received a Notice of Paragraph IV Certification from Perrigo Israel Pharmaceuticals, Ltd. (now Padagis LLC) ("Padagis"), in which Padagis asserted that certain U.S. patents, each of which is listed in the FDA’s Orange Book for Bryhali® (halobetasol propionate) lotion, 0.01% are either invalid, unenforceable and/or will not be completed priorinfringed by the commercial manufacture, use or sale of Padagis' generic halobetasol propionate lotion, for which an Abbreviated New Drug Application ("ANDA") has been filed by Padagis. On May 1, 2020, the Company filed suit against Padagis pursuant to the releaseHatch-Waxman Act, alleging infringement by Padagis of one or more claims of the Bryhali® patents, thereby triggering a 30-month stay of the approval of the Padagis ANDA for halobetasol propionate lotion. On September 3, 2020, this action was consolidated with the action between the Company and Padagis described below, regarding Padagis' ANDA for generic Duobrii® (halobetasol propionate and tazarotine) lotion. The Company remains confident in the strength of the Bryhali® patents and intends to vigorously pursue this matter and defend its intellectual property.
Duobrii® Lotion (Padagis) - On July 23, 2020, the Company received a Notice of Paragraph IV Certification from Padagis, in which Padagis asserted that certain U.S. patents, each of which is listed in the FDA's Orange Book for Duobrii® (halobetasol propionate and tazarotine) lotion, are either invalid, unenforceable and/or will not be infringed by the commercial
manufacture, use or sale of Padagis' generic lotion, for which an ANDA has been filed by Padagis. On August 28, 2020, the Company filed suit against Padagis pursuant to the Hatch-Waxman Act, alleging infringement by Padagis of one or more claims of the Duobrii® Patents, thereby triggering a 30-month stay of the approval of the Padagis ANDA. On September 3, 2020, this action was consolidated with the action between the Company and Padagis described above, regarding Padagis' ANDA for generic Bryhali® (halobetasol propionate) lotion. We remain confident in the strength of the Duobrii® patents and will vigorously defend our intellectual property.
Xifaxan® 550mg Patent Litigation (Actavis) - On March 23, 2016, the Company initiated litigation against Actavis Laboratories FL, Inc.’s ("Actavis"), which alleged infringement by Actavis of one or more claims of each of the Xifaxan® patents. On September 12, 2018, we announced that we had reached an agreement with Actavis that resolved the existing litigation and eliminated the pending challenges to our intellectual property protecting Xifaxan® (rifaximin) 550 mg tablets. As part of the agreement, the parties agreed to dismiss all litigation related to Xifaxan® (rifaximin), Actavis acknowledged the validity of the licensed patents for Xifaxan® (rifaximin) 550 mg tablets and all intellectual property protecting Xifaxan® (rifaximin) 550 mg tablets will remain intact and enforceable until expiry in 2029. The agreement also grants Actavis a non-exclusive license to the intellectual property relating to Xifaxan® (rifaximin) 550 mg tablets in the United States beginning January 1, 2028 (or earlier under certain circumstances). The Company will not make any financial statements,payments or other transfers of value as part of the agreement. In addition, under the terms of the agreement, beginning January 1, 2028 (or earlier under certain circumstances), Actavis will have the option to: (1) market a royalty-free generic version of Xifaxan® tablets, 550 mg, should it receive approval from the FDA on its ANDA, or (2) market an authorized generic version of Xifaxan® tablets, 550 mg, in which case, we will recognizereceive a share of the resulting tax effectseconomics from Actavis on its sales of such an authorized generic. Actavis will be able to commence such marketing earlier if another generic rifaximin product is granted approval and such other generic rifaximin product begins to be sold or distributed before January 1, 2028.
Xifaxan® 550mg Patent Litigation (Sandoz) - In October 2019, the Company announced that it and its licensor, Alfasigma had commenced litigation against Sandoz Inc. ("Sandoz"), a Novartis division, alleging patent infringement of 14 patents by Sandoz's filing of its ANDA for Xifaxan® (rifaximin) 550 mg tablets. On May 6, 2020, the Company announced that an agreement had been reached with Sandoz that resolved this litigation. Under the terms of the agreement, the parties agreed to dismiss all litigation related to Xifaxan® (rifaximin), Sandoz acknowledged the validity of the licensed patents for Xifaxan® (rifaximin) 550 mg tablets and all intellectual property protecting Xifaxan® (rifaximin) 550 mg tablets will remain intact and enforceable until expiry in October 2029. The agreement also grants Sandoz a non-exclusive license to the intellectual property relating to Xifaxan® (rifaximin) 550 mg tablets in the period our assessmentUnited States beginning January 1, 2028 (or earlier under certain circumstances). Under the terms of the agreement, beginning January 1, 2028 (or earlier under certain circumstances), Sandoz will have the right to market a royalty-free generic version of Xifaxan® (rifaximin) 550 mg tablets, should it receive approval from the FDA on its ANDA. Sandoz will be able to commence such marketing earlier if another generic rifaximin product is complete. granted approval and such other generic rifaximin product begins to be sold or distributed in the U.S. before January 1, 2028.The Company did not identify itemsmake any financial payments or other transfers of value as part of this agreement with Sandoz.
Xifaxan® 550mg Patent Litigation (Norwich) - On March 26, 2020, the Company and its licensor Alfasigma filed suit against Norwich Pharmaceuticals Inc. (“Norwich”), alleging infringement by Norwich of one or more claims of the 23 Xifaxan® patents by Norwich’s filing of its ANDA for Xifaxan® (rifaximin) 550 mg tablets. On November 13, 2020, an additional three patents alleged to be infringed by Norwich were added to the suit. Xifaxan® 550mg is protected by 26 patents covering the composition of matter and the use of Xifaxan® listed in the FDA’s Approved Drug Products with Therapeutic Equivalence Evaluations, or the Orange Book. A 3-day bench trial is scheduled to begin March 21, 2022. The Company remains confident in the strength of the Xifaxan® patents and will continue to vigorously pursue this matter and defend its intellectual property.
Xifaxan® 200mg and 550mg Patent Litigation (Sun) - In April 2019, the Company and its licensor, Alfasigma, commenced litigation against Sun Pharmaceutical Industries Ltd. (“Sun”), alleging patent infringement by Sun’s filing of its ANDA for Xifaxan® (rifaximin) 200 mg tablets. This suit had been filed following receipt of a Notice of Paragraph IV Certification from Sun, in which Sun asserted that the U.S. patents listed in the FDA's Orange Book for the Company’s Xifaxan® tablets, 200 mg, were either invalid, unenforceable and/or would not be infringed by the commercial manufacture, use or sale of Sun’s generic rifaximin tablets, 200 mg. Subsequently, on August 10, 2020, the Company received an additional Notice of Paragraph IV Certification from Sun, in which Sun asserted that the U.S. patents listed in the FDA's Orange Book for the Company’s Xifaxan® tablets, 550 mg, were either invalid, unenforceable and/or would not be infringed by the commercial manufacture, use or sale of Sun’s generic rifaximin tablets, 550 mg, for which an ANDA had been filed by Sun. On September 22, 2020, the income tax effectsCompany announced that an agreement had been reached with Sun that resolved the outstanding intellectual property disputes with Sun regarding Xifaxan® (rifaximin) 200 mg and 550 mg tablets. Under the terms of the Tax Actagreement, the parties agreed to dismiss all litigation related to Xifaxan® (rifaximin) and all intellectual property protecting Xifaxan® (rifaximin) 200 mg and 550 mg tablets will remain intact and enforceable until expiry in July and October 2029, respectively.
The agreement also grants Sun a non-exclusive license to the intellectual property relating to Xifaxan® (rifaximin) 200 mg and 550 mg tablets in the U.S. beginning January 1, 2028 (or earlier under certain circumstances). Under the terms of the agreement, beginning January 1, 2028 (or earlier under certain circumstances), Sun will have the right to market royalty-free generic versions of Xifaxan® (rifaximin) 200 mg and 550 mg tablets, should it receive approval from the FDA on its ANDAs. Sun will be able to commence such marketing earlier if another generic rifaximin product is granted approval and such other generic rifaximin product begins to be sold or distributed in the U.S. before January 1, 2028.
Relistor® Tablets Patent Litigation (Actavis) - On December 6, 2016, the Company initiated litigation against Actavis, which alleged infringement by Actavis of one or more claims of U.S. Patent No. 8,524,276 (the “‘276 Patent”), which protects the formulation of RELISTOR® tablets. Actavis had challenged the validity of such patent and alleged non-infringement by its generic version of such product. In July 2019, we announced that the U.S. District Court of New Jersey had upheld the validity of and determined that Actavis infringed the ‘276 Patent, expiring in March 2031. Actavis has appealed this decision to the U.S. Court of Appeals for the Federal Circuit. In March 2021, the Company and Actavis reached a settlement agreement and the appeal was dismissed.
Relistor® Injection Patent Litigation (Gland) - On February 22, 2022, the Company commenced litigation against Gland Pharma Limited (“Gland”) alleging patent infringement by Gland’s filing of its ANDA No. 216836, referencing Relistor® (methynaltrexone bromide injection, vials) and its ANDA No. 216965, referencing Relistor® (methynaltrexone bromide injection, pre-filled syringes). This suit had been filed following receipt of two Notices of Paragraph IV Certification from Gland, in which it had asserted that the U.S. patents listed in the FDA's Orange Book for the Company’s Relistor® methynaltrexone bromide injection, were either invalid, unenforceable and/or would not be infringed by the commercial manufacture, use or sale of its generic methynaltrexone bromide injection. The filing of this suit triggered a 30-month stay of the approval of the Gland ANDA for its methynaltrexone bromide injection. The Company remains confident in the strength of the Relistor® patents and will continue to vigorously pursue this matter and defend its intellectual property.
Trulance® 3mg Tablets Patent Litigation (MSN and Mylan) - In March 2021, the Company received Notices of Paragraph IV Certification from MSN Laboratories Private Ltd. (“MSN”) and Mylan Pharmaceuticals Inc., (“Mylan”) in which MSN and Mylan asserted that certain U.S. patents, each of which is listed in the FDA’s Orange Book for Trulance® (plecanatide) 3mg tablets, are either invalid, unenforceable and/or will not be infringed by the commercial manufacture, use or sale of their generic plecanatide tablets, for which each of MSN and Mylan had filed an ANDA. In April 2021, the Company filed suit against MSN and Mylan, alleging infringement of one or more claims of the patents listed for Trulance® in the FDA’s Approved Drug Products with Therapeutic Equivalence Evaluations, or the Orange Book. The Company remains confident in the strength of the Trulance® patents and will continue to vigorously pursue this matter and defend its intellectual property.
Lumify® Ophthalmic Solution Patent Litigation (Slayback) - In September 2021, the Company commenced litigation against Slayback Pharma LLC and Slayback Pharma India LLP (together, “Slayback”) alleging patent infringement by Slayback Pharma LLC’s filing of its ANDA No. 216361, referencing Lumify® (0.025% brimonidine tartrate ophthalmic solution). This suit had been filed following receipt of a Notice of Paragraph IV Certification from Slayback Pharma LLC, in which it had asserted that the U.S. patents listed in the FDA's Orange Book for the Company’s Lumify® brimonidine tartrate ophthalmic solution, were either invalid, unenforceable and/or would not be infringed by the commercial manufacture, use or sale of its generic brimonidine tartrate solution. The filing of this suit triggered a 30-month stay of the approval of the Slayback ANDA for its brimonidine tartrate solution. The Company remains confident in the strength of the Lumify® patents and will continue to vigorously pursue this matter and defend its intellectual property.
Lumify® Ophthalmic Solution Patent Litigation (Lupin) – On February 2, 2022 the Company commenced litigation against Lupin Pharmaceuticals, Inc. (“Lupin”) alleging patent infringement by Lupin’s filing of its ANDA No. 216716, referencing Lumify® (0.025% brimonidine tartrate ophthalmic solution). This suit had been filed following receipt of a Notice of Paragraph IV Certification from Lupin, in which it had asserted that the U.S. patents listed in the FDA's Orange Book for the Company’s Lumify® brimonidine tartrate ophthalmic solution, were either invalid, unenforceable and/or would not be infringed by the commercial manufacture, use or sale of its generic brimonidine tartrate solution. The filing of this suit triggered a 30-month stay of the approval of the Lupin ANDA for its brimonidine tartrate solution. The Company remains confident in the strength of the Lumify® patents and will continue to vigorously pursue this matter and defend its intellectual property.
Generic Competition to Uceris® - In July 2018, a generic competitor launched a product which will directly compete with our Uceris® Tablet product. As disclosed in our prior filings, the Company initiated various infringement proceedings against this generic competitor. The Court construed the claims of the asserted patents on August 2, 2019 and, on October 24, 2019, the Company agreed to a judgment that the asserted patents did not cover the generic tablets under the Court’s claim construction, while reserving its right to appeal the claim construction. On November 22, 2019, the Company filed a Notice of Appeal with respect to the claim construction in the Court of Appeals for the Federal Circuit. On December 18, 2020, the Court of Appeals for the Federal Circuit affirmed the District Court’s claim construction. The ultimate impact of this generic competitor on our
future revenues cannot be predicted; however, Uceris® Tablet revenues for 2021, 2020 and 2019 were approximately $10 million, $15 million and $20 million, respectively.
Generic Competition to Jublia® - On June 6, 2018, the U.S. Patent and Trial Appeal Board (“PTAB”) completed its inter partes review for an Orange Book-listed patent covering Jublia® (U.S. Patent No 7,214,506 (the “506 Patent”)) and issued a written determination invalidating such patent. On March 13, 2020, the Court of Appeals for the Federal Circuit reversed this decision and remanded the matter back to the PTAB for further proceedings. As a result of a settlement, a joint motion to terminate the proceedings was filed on November 12, 2020 and, on January 8, 2021, the PTAB granted this motion. The ‘506 Patent, therefore, remains valid and enforceable and expires in 2026. Jublia® revenues for 2021, 2020 and 2019 were approximately $100 million, $111 million and $110 million, respectively. Jublia® is covered by fourteen additional Orange Book-listed patents owned by the Company or its licensor, which expire in the years 2028 through 2035. In August and September 2018, the Company received notices of the filing of a number of ANDAs with paragraph IV certification, and has timely filed patent infringement suits against these ANDA filers, and, in addition, the Company has also commenced certain patent infringement proceedings in Canada against four separate defendants. All cases in the U.S. regarding Jublia® have been completedsettled. In Canada, two lawsuits remain pending against Apotex, Inc.
PreserVision®Patent Litigation - PreserVision® AREDS and PreserVision® AREDS 2 are OTC eye vitamin and mineral supplements containing nutrient formulas recommended by the National Eye Institute to reduce the risk of progression of intermediate to advanced AMD. PreserVision® products accounted for 3% of our total revenues in 2021. The PreserVision® U.S. formulation patent expired in March 2021, but a patent covering methods of using the formulation remains in force into 2026. The Company has filed patent infringement proceedings against 16 defendants claiming infringement of these patents and, in certain circumstances, related unfair competition and false advertising causes of action. Eleven of these proceedings were subsequently settled; two resulted in entry of a default. One defendant filed a declaratory judgment action after the Company did not identify items for which the accountingfiled its suit, seeking declaratory judgment related to patent claims as well as false advertising and a reasonable estimate could not be determined asunfair competition claims. As of December 31, 2017. As the Tax Act was only recently passed, full guidance associated with its impacts have not yet been provided from the relevant state and federal jurisdictions. As such we have used all available information to form appropriate accounting estimates for the changes within the law but have not completed any aspects of the implementation of the law in expectation of further guidance.
We have provided for income taxes, including the impacts of the Tax Act, in accordance with the accounting guidance issued through the date of this filing.filing, there are four unresolved actions. The tax benefit for 2017 is $4,145 million, which includes provisional net tax benefitsCompany remains confident in the strength of $975 million attributablethese patents and will continue to vigorously pursue these matters and defend its intellectual property. While the Tax Act. The accounting forCompany cannot predict the Tax Act includes eachmagnitude or timing of the following provisional amounts: (i)impact from the re-measurement of certain deferred tax assetsPreserVision® patent expiry, this is an OTC product and liabilities based onthus, the rates at which they areimpact is not expected to reverse inbe as significant as the futureLOE of $774 million, (ii) the one-time Transition Toll Tax of $88 million and (iii) the decrease in deferred tax assets attributable to certain legal accruals, the deductibility of which is uncertain for U.S. federal income tax purposes, of $10 million. We have provisionally utilized net operating losses (“NOLs”) to offset the provisionally determined $88 million Transition Toll Tax and therefore no amount is recorded as payable. We have previously provided for residual U.S. federal income tax on its outside basis differences in certain foreign subsidiaries; however, as our residual U.S. tax liability was $299 million prior to the law change, we recognized a deferred tax benefit of $299 million in the fourth quarter of 2017.
The provisional amounts included in our 2017 Benefit from income taxes, including the Transition Toll Tax, will be finalized when a full assessment can be completed, and the resulting tax effects will be recognized in the period finalized, as additional income tax provision or benefit. The effects of the Tax Act were recorded as provisional estimated, in part, because of potential future guidance from the SEC, the US Internal Revenue Service, and various state and local governments. Our assessment must be finalized within one year of the enactment of the Tax Act, December 22, 2018. Differences between the provisional benefit from income taxes as provided and the benefit or provision for income taxes when finalized are expected, and those differences could be material.branded pharmaceutical product.
See Note 2, "SIGNIFICANT ACCOUNTING POLICIES" and Note 18, "INCOME TAXES"20, "LEGAL PROCEEDINGS" to our audited Consolidated Financial Statements as well as the sub-heading "Income Taxes" below, for further details.
details regarding certain infringement proceedings.
SELECTED FINANCIAL INFORMATION
Organic RevenuesThe risks of generic competition are a fact of the health care industry and Organic Growth Rates
Organic growth, a non-GAAP metric, is defined as an increase on a period-over-period basis in revenues on a constant currency basis (if applicable) excludingare not specific to our operations or product portfolio. These risks are not avoidable, but we believe they are manageable. To manage these risks, our leadership team continually evaluates the impact that generic competition may have on future profitability and operations. In addition to aggressively defending the Company's patents and other intellectual property, our leadership team makes operational and investment decisions regarding these products and businesses at risk, not the least of recent acquisitions, divestitureswhich are decisions regarding our pipeline. Our leadership team actively manages the Company's pipeline in order to identify innovative and discontinuations. Organic revenue growth is growth in GAAP Revenue (its most directly comparable GAAP financial measure) adjusted for certain items, ofrealizable projects aligned with our core businesses that are expected to provide incremental and sustainable revenues and growth into the future. We believe that our current pipeline is strong enough to meet these objectives and provide future sources of revenues, in our core businesses, sufficient enough to sustain our growth and corporate health as other products in our established portfolio face generic competition and lose momentum.
We believe that we have been owneda well-established product portfolio that is diversified within our core businesses. We also believe that we have a robust pipeline that not only provides for the next generation of our existing products, but also brings new solutions into the market.
See Item 1A. “Risk Factors” of this Form 10-K for additional information on our competition risks.
Regulatory Matters
In the normal course of business, our products, devices and facilities are the subject of ongoing oversight and review by regulatory and governmental agencies, including general, for cause and pre-approval inspections by the relevant competent authorities where we have business operations. Through the date of this filing, all of our global operations and facilities have the relevant operational good manufacturing practices certificates and all Company products and operating sites are in good compliance standing with all relevant notified bodies and global health authorities. Further, all sites under FDA jurisdiction are rated as either No Action Indicated (where there was no Form 483 observation) or Voluntary Action Indicated (“VAI”) (where there was a Form 483 with one or more years. The Company uses organic revenue and organic revenue growth to assess performanceobservations). In the case of its reportable segments, andVAI inspection outcomes, the Company in total, without the impact of foreign currency exchange fluctuations and recent acquisitions, divestitures and product discontinuations. The Company believes that such measures are useful to investors as it provides a supplemental period-to-period comparison.
Organic revenue growth reflects adjustments for: (i) the impact of period-over-period changes in foreign currency exchange rates on revenues and (ii) the revenues associated with acquisitions, divestitures and discontinuations of businesses divested and/or discontinued. These adjustments are determined as follows:
Foreign currency exchange rates: Although changes in foreign currency exchange rates are part ofFDA has accepted our business, they are not within management’s control. Changes in foreign currency exchange rates, however, can mask positive or negative trends in the business. The impact for changes in foreign currency exchange rates is determined as the difference in the current period reported revenues at their current period currency exchange rates and the current period reported revenues revalued using the monthly average currency exchange rates during the comparable prior period.
Acquisitions, divestitures and discontinuations: In order to present period-over-period organic revenues (non-GAAP) on a comparable basis, revenues associated with acquisitions, divestitures and discontinuations are adjusted to include only revenues from those businesses and assets owned during both periods. Accordingly, organic revenue (non-GAAP) growth excludes from the current period, revenues attributable to each acquisition for twelve months subsequentresponses to the dayissues cited, which will be verified when the agency makes its next inspection of acquisition, as there are no revenues from those businesses and assets included in the comparable prior period. Organic revenue (non-GAAP) growth excludes from the prior period (but not the current period), all revenues attributable to each divestiture and discontinuance during the twelve months prior to the day of divestiture or discontinuance, as there are no revenues from those businesses and assets included in the comparable current period.specific facilities.
Please refer to the tables of organic revenues (non-GAAP) and organic revenue growth rates presented in the subsequent section titled “Reportable Segment Revenues and Profits” for a reconciliation of GAAP revenues to organic revenues (non-GAAP).
FINANCIAL PERFORMANCE HIGHLIGHTS
The following table provides selected financial informationperformance highlights for each of the last three years:
| | | | | Years Ended December 31, | | Change | | | Years Ended December 31, | | Change |
| (in millions, except per share data) | | 2017 | | 2016 | | 2015 | | 2016 to 2017 | | 2015 to 2016 | (in millions, except per share data) | | 2021 | | 2020 | | 2019 | | 2020 to 2021 | | 2019 to 2020 |
| Revenues | | $ | 8,724 |
| | $ | 9,674 |
| | $ | 10,447 |
| | $ | (950 | ) | | $ | (773 | ) | Revenues | | $ | 8,434 | | | $ | 8,027 | | | $ | 8,601 | | | $ | 407 | | | $ | (574) | |
| Operating income (loss) | | $ | 102 |
| | $ | (566 | ) | | $ | 1,527 |
| | $ | 668 |
| | $ | (2,093 | ) | Operating income (loss) | | $ | 450 | | | $ | 676 | | | $ | (203) | | | $ | (226) | | | $ | 879 | |
| Loss before (benefit from) provision for income taxes | | $ | (1,741 | ) | | $ | (2,435 | ) | | $ | (155 | ) | | $ | 694 |
| | $ | (2,280 | ) | |
| Net income (loss) | | $ | 2,404 |
| | $ | (2,408 | ) | | $ | (288 | ) | | $ | 4,812 |
| | $ | (2,120 | ) | |
| Net income (loss) attributable to Valeant Pharmaceuticals International, Inc. | | $ | 2,404 |
| | $ | (2,409 | ) | | $ | (292 | ) | | $ | 4,813 |
| | $ | (2,117 | ) | |
| Earnings (loss) per share attributable to Valeant Pharmaceuticals International, Inc. | | | | | | | | | | | |
| Loss before benefit from income taxes | | Loss before benefit from income taxes | | $ | (1,024) | | | $ | (934) | | | $ | (1,837) | | | $ | (90) | | | $ | 903 | |
| Net loss | | Net loss | | $ | (937) | | | $ | (559) | | | $ | (1,783) | | | $ | (378) | | | $ | 1,224 | |
| Net loss attributable to Bausch Health Companies Inc. | | Net loss attributable to Bausch Health Companies Inc. | | $ | (948) | | | $ | (560) | | | $ | (1,788) | | | $ | (388) | | | $ | 1,228 | |
| Loss per share attributable to Bausch Health Companies Inc. | | Loss per share attributable to Bausch Health Companies Inc. | |
| Basic | | $ | 6.86 |
| | $ | (6.94 | ) | | $ | (0.85 | ) | | $ | 13.80 |
| | $ | (6.09 | ) | Basic | | $ | (2.64) | | | $ | (1.58) | | | $ | (5.08) | | | $ | (1.06) | | | $ | 3.50 | |
| Diluted | | $ | 6.83 |
| | $ | (6.94 | ) | | $ | (0.85 | ) | | $ | 13.77 |
| | $ | (6.09 | ) | Diluted | | $ | (2.64) | | | $ | (1.58) | | | $ | (5.08) | | | $ | (1.06) | | | $ | 3.50 | |
Financial Performance
Summary of 20172021 Compared with 20162020
Our revenueRevenues for 20172021 and 2016 was $8,7242020 were $8,434 million and $9,674$8,027 million, respectively, an increase of $407 million, or 5%. The increase was primarily driven by: (i) a net increase in volumes and (ii) the favorable impact of foreign currencies, primarily in Europe, Asia and Canada. These increases were partially offset by: (i) our divestiture of Amoun on July 26, 2021 and (ii) a decrease in net realized pricing. The net increase in volumes was primarily due to the positive impacts from the recovery from the COVID-19 pandemic and the easing of $950 million, or 10%. The decrease was drivencertain social restrictions, as previously discussed, primarily during the three months ended June 30, 2021, partially offset by divestitures and discontinuations, lower volumes in our U.S. Diversified segment as a resultthe impact of the loss of exclusivity for a number of products and lower volumes in our Branded Rx segment as a result of challenging market dynamics, particularly in dermatology. Revenues were also negatively affected, to a lesser extent, by foreign exchange. These decreases were partially offset by increased volumes in our Bausch + Lomb / International segment, primarily driven by the U.S.
Bausch + Lomb Consumer business, and increased international pricing in our Bausch + Lomb / International segment.certain products. The changes in our segment revenues and segment profits are discussed in further detail in the subsequent section titled “Reportable Segment Revenues and Profits”.
Operating income was $450 million and $676 million for 2017 was $102 million, as compared to operating loss for 2016 of $566 million, an increase of $668 million. Our operating income for 2017 compared to2021 and 2020, respectively, a decrease in our operating loss for 2016results of $226 million which reflects, among other factors:
•an increase in contribution (product sales revenue less cost of goods sold, exclusive of amortization and impairments of intangible assets) of $259 million. The increase was primarily driven by: (i) the increase in volumes, as previously discussed, and (ii) the favorable impact of foreign currencies, partially offset by: (i) the impact of our divestiture of Amoun on July 26, 2021 and (ii) the decrease in net realized pricing;
•an increase in Selling, general, and administrative (“SG&A”) expenses of $257 million, primarily attributable to: (i) the impacts of the non-recurrence of certain profit protection measures taken in 2020 to manage and reduce operating expenses during the COVID-19 pandemic, as previously discussed, (ii) Separation-related and IPO-related costs incurred in 2021 and (iii) the impact of foreign currencies;
•an increase in R&D of $13 million primarily attributable to the non-recurrence of the temporary suspension in certain R&D activities and clinical trials in 2020, partially offset by a rebalancing of our portfolio within the Ortho Dermatologics business;
•a decrease in Amortization of intangible assets of $270 million primarily attributable to fully amortized intangible assets no longer being amortized in 2021;
•Goodwill impairments of $469 million related to the impairment to the goodwill of the Ortho Dermatologics reporting unit during the three months ended March 31, 2021 as a result of revised forecasts due to: (i) certain products that continued to experience longer launch cycles than originally anticipated, in part due to COVID-19 pandemic factors, and (ii) other changes to its product pipeline;
•an increase in Asset impairments, including loss on assets held for sale of $120 million, primarily attributable to: (i) higher impairments to certain products and (ii) additional losses during 2021 related to assets classified as held for sale; and
•a decrease in Other expense, net of $129 million, primarily attributable: (i) higher insurance recoveries related to certain litigation matters in 2021 as compared to 2020 and (ii) decreases in charges for Acquisition-related contingent consideration and Acquired in-process research and development costs.
Operating income was $450 million and $676 million for 2021 and 2020, respectively, and includes non-cash charges for Depreciation and amortization of intangible assets of $1,552 million and $1,825 million, Asset impairments, including loss on assets held for sale of $234 million and $114 million, Goodwill impairments of $469 million and $0 and Share-based compensation of $128 million and $105 million for 2021 and 2020, respectively.
Our Loss before benefit from income taxes for 2021 and 2020 was $1,024 million and $934 million, respectively, an increase in our Loss before benefit from income taxes of $90 million. The increase in our Loss before benefit from income taxes is primarily attributable to the decrease in our operating results of $226 million, as previously discussed, partially offset by: (i) a decrease in Interest expense of $108 million and (ii) the favorable net change in Foreign exchange and other of $37 million.
Net loss attributable to Bausch Health Companies Inc. for 2021 and 2020 was $948 million and $560 million, respectively, a decrease in our results of $388 million. The decrease in our results was primarily due to: (i) a decrease in the Benefit from income taxes of $288 million, primarily attributable to the release of a portion of our valuation allowance against deferred tax assets in 2020 and (ii) the increase in Loss before benefit from income taxes of $90 million, as previously discussed.
Summary of 2020 Compared with 2019
Revenues for 2020 and 2019 were $8,027 million and $8,601 million, respectively, a decrease of $574 million, or 7%. The decrease was primarily driven by: (i) lower volumes driven by: (a) social restrictions and other precautionary measures taken in response to the COVID-19 pandemic, as previously discussed, and (b) the impact of the LOE of certain products, (ii) the unfavorable effect of foreign currencies, primarily in Latin America, and (iii) the impact of divestitures and discontinuations. These decreases in our revenues were partially offset by the incremental sales of our Trulance® product, which we added to our portfolio in March 2019 as part of the acquisition of certain assets of Synergy. Net realized pricing was flat with increases in our Diversified Products, International Rx and Bausch + Lomb segments being offset by decreases in our Salix and Ortho Dermatologics segments. The changes in our segment revenues and segment profits are discussed in further detail in the subsequent section titled “Reportable Segment Revenues and Profits”.
Operating income for 2020 was $676 million compared to Operating loss for 2019 of $203 million, an increase in our operating results of $879 million which reflects, among other factors:
•a decrease in contribution (product sales revenue less cost of goods sold, exclusive of amortization and impairments of intangible assets) of $875 million,$470 million. The decrease was primarily driven by: (i) lower volumesthe decrease in revenues, as previously discussed and (ii) higher manufacturing variances primarily due to the impactimpacts of divestitures and discontinuances;the COVID-19 pandemic. The decrease was partially offset by lower third-party royalty costs;
•a decrease in selling, general, and administrativeSG&A expenses (“SG&A”) of $228$187 million, primarily attributable to: (i) a net decrease in advertisingto profit protection measures taken to manage and promotionalreduce operating expenses (ii) higher severance and other benefits in 2016 associated with exiting executives and on-boarding a new executive team and other key employees, (iii) termination benefits associated with our former Chief Executive Officer in 2016 and (iv)during the impact of divestitures. These factors were partially offset by an increase in professional fees;COVID-19 pandemic;
•a decrease in R&D of $60$19 million dueprimarily attributable to social restrictions and other precautionary measures taken in response to the year over year phasingCOVID-19 pandemic, as we completed the R&D investmentpreviously discussed;
•a decrease in Siliq™ and other newly launched products requiring investment in the prior year, removed projects related to divested businesses and rebalanced our portfolio to better focus on its core assets;
an increase in Amortization of intangible assets of $17$252 million driven by changesprimarily attributable to the estimated remaining useful livesfully amortized intangible assets no longer being amortized in 2020;
•an increase in Asset impairments, including loss on assets held for sale of $39 million. Asset impairments, including loss on assets held for sale in 2020 were primarily related to: (i) reclassifying a business within our International Rx segment as held for sale and (ii) certain products and the Salix brand name, partially offset by lower amortizationproduct lines as a result of impairmentschanges to intangible assets and divestitures and discontinuances offorecasted sales. Impairments during 2019 were primarily related to: (i) certain product lines during 2017as a result of changes to forecasted sales due to generic competition and 2016,other factors and (ii) impairments related to assets being classified as the Company focuses on its core assets;
held for sale; and•a decrease in Goodwill impairmentsOther expense, net of $765 million. In 2016, we recognized Goodwill impairments of $1,077$924 million, primarily attributable the decrease in connection with the realignment of our reporting segment structure during the three months ended September 30, 2016. In 2017, we recognized Goodwill impairments of $312 millionnet charges to Litigation and other matters. The decrease in connection with a reporting unit during the three months ended September 30, 2017;
an increase in Asset impairments of $292 million,Litigation and other matters was primarily related to the Sproutsettlement of a legacy U.S. securities class action matter (which is subject to an objector's appeal of the final court approval) in 2019, to which the Company and Obagi businesses;
a decrease in Restructuring and integration costs of $80 millionthe other settling defendants admitted no liability as the integration of acquisitions in 2015 and prior is substantially complete;
| |
• | a decrease in Acquisition-related contingent consideration of $276 million, primarily due to a fair value adjustment of $312 million reflecting a decrease in forecasted sales for the Addyi® product prior to the Sprout Sale, which impacted the expected future royalty payments; and
|
an increase in Other income, net of $426 million, primarily due to the increase in net gains on salesclaims against it and denied all allegations of businesses and other assets of $574 million, partially offset by higher charges for accruals for Litigation and other matters of $167 million.wrongdoing.
Operating income for 2017 of $1022020 was $676 million andcompared to Operating loss for 20162019 of $566$203 million and includes non-cash charges for Depreciation and amortization of intangible assets of $2,858$1,825 million and $2,866$2,075 million, Asset impairments, including loss on assets held for sale of $714$114 million and $422$75 million and Share-based compensation of $87$105 million and $165$102 million for 2020 and 2019, respectively.
Our Loss before (benefit from) provision forbenefit from income taxes for 20172020 and 20162019 was $1,741$934 million and $2,435$1,837 million, respectively, a decreasean increase in our results before benefit from income taxes of $694$903 million. The decrease in our Loss before (benefit from) provision forbenefit from income taxes is primarily attributable to: (i) the increase in Operating incomeour operating results of $668$879 million, as previously discussed, and (ii) a favorabledecrease in Interest expense of $78 million as a result of: (a) a lower weighted average stated rate of interest, (b) lower interest as a result of debt repayments during the year and (c) a benefit related to the Company's cross-currency swaps. These decreases in Interest expense were partially offset by the interest associated with $1,210 million of additional financing in December 2019 relating to the U.S. Securities Litigation. The decrease in our Loss before benefit from income taxes was partially offset by: (i) an unfavorable net change in Foreign exchange and other of $148 million. These changes$38 million and (ii) an increase in Loss before (benefit from) provision for income taxes were partially offset by the Loss on extinguishment of debt of $122$17 million.
Net income attributable to Valeant Pharmaceuticals International, Inc. for 2017 was $2,404 million as compared to Net loss attributable to Valeant Pharmaceuticals International,Bausch Health Companies Inc. for 2016 of $2,4092020 and 2019 was $560 million and $1,788 million, respectively, an increase in our results of $4,813$1,228 million. The increase in Net income attributable to Valeant Pharmaceuticals International, Inc.our results was primarily due to: (i) the increasedecrease in Loss before benefit from income taxes of $903 million, as previously discussed, and (ii) the favorable net change in the Benefit from income taxes of $4,118$321 million, which in 2017 includes non-cash income tax benefits related to the Company’s internal corporate restructuring and the accounting for the Tax Act and (ii) the decrease in Loss before (benefit from) provision for income taxes of $694 million previously described. See Note 18, "INCOME TAXES" to our audited Consolidated Financial Statements for further details.
Summary of 2016 Compared with 2015
Our revenue for 2016 and 2015 was $9,674 million and $10,447 million, respectively, a decrease of $773 million, or 7%. The decrease was primarily driven by the decreases in the Branded Rx segment and U.S. Diversified Products segment revenues. The changes in our segment revenues and segment profits are discussed in detail in the subsequent section titled "Reportable Segment Revenues and Profits".
Operating loss for 2016 was $566 million as compared to operating income for 2015 of $1,527 million, a decrease of $2,093 million. Our 2016 operating loss compared to our 2015 operating income reflects, among other factors:
a decrease in contribution of $796 million. The decrease is primarily driven by: (i) lower average realized pricing and (ii) lower volumes. The decreases in contribution were partially offset by the incremental contributions from the Salix Acquisition, the acquisition of Amoun Pharmaceutical Company S.A.E. ("Amoun") (the "Amoun Acquisition") and other acquisitions;
an increase in SG&A of $110 million primarily attributable to: (i) the incremental SG&A from the Salix Acquisition and other acquisitions, (ii) severance and other benefits associated with exiting executives, (iii) professional fees in connection with legal and governmental proceedings, investigations and information requests and (iv) on-boarding our new executive team and other key employees;
an increase in R&D of $87 million primarily within the Branded Rx and Bausch + Lomb/International segments to enhance our core assets and support of our new growth strategy;
an increase in Amortization of intangible assets of $416 million, as we amortized intangible assets acquired in 2015 for the full year 2016;
an increase in Goodwill impairments of $1,077 million primarily in connection with the realignment of our segment structure that took place during the three months ended September 30, 2016;
| |
• | an increase in Asset impairments of $159 million primarily in connection with Ruconest®which was divested on December 7, 2016;
|
a decrease in Restructuring and integration costs of $230 million as the integration of acquisitions in 2015 and prior is substantially complete;
a decrease in in-process R&D costs of $72 million which was primarily related to a $100 million upfront payment to acquire certain multi-year licensing rights to brodalumab, marketed as Siliq™, expensed in 2015; and
Other expense, net in 2015 includes post-combination compensation expenses of $183 million associated with two acquisitions in 2015 that did not occur in 2016.
Operating loss for 2016 of $566 million and Operating income for 2015 of $1,527 million includes non-cash charges for Depreciation and amortization of intangible assets of $2,866 million and $2,467 million, Asset impairments of $422 million and $304 million and Share-based compensation of $165 million and $140 million, respectively.
Our Loss before (benefit from) provision for income taxes for 2016 and 2015 was $2,435 million and $155 million, respectively, an increase of $2,280 million. The increase in our Loss before (benefit from) provision for income taxes is primarily attributable to: (i) the decrease in operating income of $2,093 million previously described and (ii) an increase in interest expense of $273 million primarily driven by the increase in our debt level in the second half of 2015 offset in part by the pay down of debt during 2016. These increases in our loss before income taxes were partially offset by: (i) lower foreign exchange loss and other in 2016 of $62 million and (ii) the loss on the extinguishment of debt of $20 million in 2015 which did not occur in 2016.
Net loss attributable to Valeant Pharmaceuticals International, Inc. for 2016 and 2015 was $2,409 million and $292 million, respectively, an increase of $2,117 million. The increase in Net loss attributable to Valeant Pharmaceuticals International, Inc. is primarily attributable to the increaserelease of a portion of our valuation allowance against deferred tax assets in loss before income taxes of $2,280 million previously described, partially offset by the increase in the Benefit from income taxes of $160 million.2020.
RESULTS OF OPERATIONS
Our operating results for each of the last three years 2021, 2020 and 2019 were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Years Ended December 31, | | Change |
| (in millions) | 2021 | | 2020 | | 2019 | | 2020 to 2021 | | 2019 to 2020 |
| Revenues | | | | | | | | | |
| Product sales | $ | 8,342 | | | $ | 7,924 | | | $ | 8,489 | | | $ | 418 | | | $ | (565) | |
| Other revenues | 92 | | | 103 | | | 112 | | | (11) | | | (9) | |
| 8,434 | | | 8,027 | | | 8,601 | | | 407 | | | (574) | |
| Expenses | | | | | | | | | |
| Cost of goods sold (excluding amortization and impairments of intangible assets) | 2,361 | | | 2,202 | | | 2,297 | | | 159 | | | (95) | |
| Cost of other revenues | 33 | | | 47 | | | 53 | | | (14) | | | (6) | |
| Selling, general and administrative | 2,624 | | | 2,367 | | | 2,554 | | | 257 | | | (187) | |
| Research and development | 465 | | | 452 | | | 471 | | | 13 | | | (19) | |
| Amortization of intangible assets | 1,375 | | | 1,645 | | | 1,897 | | | (270) | | | (252) | |
| Goodwill impairments | 469 | | | — | | | — | | | 469 | | | — | |
| Asset impairments, including loss on assets held for sale | 234 | | | 114 | | | 75 | | | 120 | | | 39 | |
| Restructuring, integration, separation and IPO costs | 50 | | | 22 | | | 31 | | | 28 | | | (9) | |
| Other expense, net | 373 | | | 502 | | | 1,426 | | | (129) | | | (924) | |
| 7,984 | | | 7,351 | | | 8,804 | | | 633 | | | (1,453) | |
| Operating income (loss) | 450 | | | 676 | | | (203) | | | (226) | | | 879 | |
| Interest income | 7 | | | 13 | | | 12 | | | (6) | | | 1 | |
| Interest expense | (1,426) | | | (1,534) | | | (1,612) | | | 108 | | | 78 | |
| Loss on extinguishment of debt | (62) | | | (59) | | | (42) | | | (3) | | | (17) | |
| Foreign exchange and other | 7 | | | (30) | | | 8 | | | 37 | | | (38) | |
| Loss before benefit from income taxes | (1,024) | | | (934) | | | (1,837) | | | (90) | | | 903 | |
| Benefit from income taxes | 87 | | | 375 | | | 54 | | | (288) | | | 321 | |
| Net loss | (937) | | | (559) | | | (1,783) | | | (378) | | | 1,224 | |
| Net income attributable to noncontrolling interest | (11) | | | (1) | | | (5) | | | (10) | | | 4 | |
| Net loss attributable to Bausch Health Companies Inc. | $ | (948) | | | $ | (560) | | | $ | (1,788) | | | $ | (388) | | | $ | 1,228 | |
A detailed discussion of the year-over-year changes of the Company’s 2020 results compared with that of 2019 can be found under "Management’s Discussion and Analysis of Financial Condition and Results of Operations with Retrospective Segment Changes of the 2020 Form 10-K" in Exhibit 99.1 of our Form 8-K filed on May 4, 2021.
|
| | | | | | | | | | | | | | | | | | | | |
| | | Years Ended December 31, | | Change |
| (in millions, except per share data) | | 2017 | | 2016 | | 2015 | | 2016 to 2017 | | 2015 to 2016 |
| Revenues | | | | | | | | | | |
| Product sales | | $ | 8,595 |
| | $ | 9,536 |
| | $ | 10,292 |
| | $ | (941 | ) | | $ | (756 | ) |
| Other revenues | | 129 |
| | 138 |
| | 155 |
| | (9 | ) | | (17 | ) |
| | | 8,724 |
| | 9,674 |
| | 10,447 |
| | (950 | ) | | (773 | ) |
| Expenses | | | | | | | | | | |
Cost of goods sold (exclusive of amortization and impairments
of intangible assets) | | 2,506 |
| | 2,572 |
| | 2,532 |
| | (66 | ) | | 40 |
|
| Cost of other revenues | | 42 |
| | 39 |
| | 53 |
| | 3 |
| | (14 | ) |
| Selling, general and administrative | | 2,582 |
| | 2,810 |
| | 2,700 |
| | (228 | ) | | 110 |
|
| Research and development | | 361 |
| | 421 |
| | 334 |
| | (60 | ) | | 87 |
|
| Amortization of intangible assets | | 2,690 |
| | 2,673 |
| | 2,257 |
| | 17 |
| | 416 |
|
| Goodwill impairments | | 312 |
| | 1,077 |
| | — |
| | (765 | ) | | 1,077 |
|
| Asset impairments | | 714 |
| | 422 |
| | 304 |
| | 292 |
| | 118 |
|
| Restructuring and integration costs | | 52 |
| | 132 |
| | 362 |
| | (80 | ) | | (230 | ) |
| Acquired in-process research and development costs | | 5 |
| | 34 |
| | 106 |
| | (29 | ) | | (72 | ) |
| Acquisition-related contingent consideration | | (289 | ) | | (13 | ) | | (23 | ) | | (276 | ) | | 10 |
|
| Other (income) expense, net | | (353 | ) | | 73 |
| | 295 |
| | (426 | ) | | (222 | ) |
| | | 8,622 |
| | 10,240 |
| | 8,920 |
| | (1,618 | ) | | 1,320 |
|
| Operating income (loss) | | 102 |
| | (566 | ) | | 1,527 |
| | 668 |
| | (2,093 | ) |
| Interest income | | 12 |
| | 8 |
| | 4 |
| | 4 |
| | 4 |
|
| Interest expense | | (1,840 | ) | | (1,836 | ) | | (1,563 | ) | | (4 | ) | | (273 | ) |
| Loss on extinguishment of debt | | (122 | ) | | — |
| | (20 | ) | | (122 | ) | | 20 |
|
| Foreign exchange and other | | 107 |
| | (41 | ) | | (103 | ) | | 148 |
| | 62 |
|
| Loss before (benefit from) provision for income taxes | | (1,741 | ) | | (2,435 | ) | | (155 | ) | | 694 |
| | (2,280 | ) |
| (Benefit from) provision for income taxes | | (4,145 | ) | | (27 | ) | | 133 |
| | (4,118 | ) | | (160 | ) |
| Net income (loss) | | 2,404 |
| | (2,408 | ) | | (288 | ) | | 4,812 |
| | (2,120 | ) |
| Less: Net income attributable to noncontrolling interest | | — |
| | 1 |
| | 4 |
| | (1 | ) | | (3 | ) |
| Net income (loss) attributable to Valeant Pharmaceuticals International, Inc. | | $ | 2,404 |
| | $ | (2,409 | ) | | $ | (292 | ) | | $ | 4,813 |
| | $ | (2,117 | ) |
2017
2021 Compared with 20162020
Revenues
Our primary sources of revenues are primarily generated from product sales, principally in the saletherapeutic areas ofpharmaceutical products, eye-health, GI and dermatology, that consist of: (i) branded pharmaceuticals, (ii) generic and branded generic pharmaceuticals, (iii) OTC products and (iv) medical devices.devices (contact lenses, intraocular lenses, ophthalmic surgical equipment and aesthetics devices). Other revenues include alliance and service revenue from the licensing and co-promotion of products and contract service revenue primarily in the areas of dermatology and topical medication. Contract service revenue is derived primarily from contract manufacturing for third parties and is not material. See Note 22, "SEGMENT INFORMATION" to our audited Consolidated Financial Statements for the disaggregation of revenues which depicts how the nature, amount, timing and uncertainty of revenue and cash flows are affected by the economic factors of each category of customer contracts.
Our revenue was $8,724revenues were $8,434 million and $9,674$8,027 million for 20172021 and 2016,2020, respectively, a decreasean increase of $950$407 million, or 10%5%. The decreaseincrease was due to: (i) a net increase in volumes of $471 million primarily drivenin our Bausch + Lomb, Salix, Ortho Dermatologics and International Rx segments and (ii) the favorable impact of foreign currencies of $95 million primarily in Europe, Asia and Canada. These increases were partially offset by: (i) the impact of divestitures and discontinuations of $459$132 million, primarily attributable to our divestiture of Amoun on July 26, 2021 and (ii) a declinedecrease in revenuesnet realized pricing of $403$27 million primarily the result of higher sales deductions. The net increase in volumes was primarily due to lower volumes in our U.S. Diversified segmentthe positive impacts of the recovery from the COVID-19 pandemic and the easing of certain social restrictions, as a resultpreviously discussed, partially offset by: (i) the impact of the loss of exclusivity for a number of certain products and lower volumesprimarily in our Branded Rx segment asDiversified Products, Bausch + Lomb and Ortho Dermatologics segments and (ii) the impacts of a resultquality issue at a third-party supplier on the revenues of challenging market dynamics, particularly in dermatology, partially offset by increased volumescertain Consumer products included in our Bausch + Lomb / International segment, primarily drivenas discussed below.
Our 2020 revenues were most negatively impacted during our second quarter by the U.S. Bausch + Lomb Consumer businesssocial restrictions and increased international pricingother precautionary measures taken in our Bausch + Lomb / International segment and (iii) the unfavorable impact of foreign currencies of $78 million which is primarily attributableresponse to the Egyptian pound.COVID-19 pandemic. However, as governments began lifting social restrictions, allowing offices of certain health care providers to reopen and certain surgeries and elective medical procedures to proceed, the negative trend in the revenues of certain businesses began to level off and stabilize prior to our third quarter of 2020. Our revenues returned to pre-pandemic levels for many of our businesses and geographies in 2021 and, at the current pace of recovery, we anticipate the COVID-19 pandemic to have a minimal impact on the remaining businesses and geographies in 2022.
OurThe changes in our segment revenues and segment profits, including the impacts of COVID-19 pandemic related matters, are discussed in further detail in the respective subsequent section titled "Reportable“ — Reportable Segment Revenues and Profits"Profits”.
Cash Discounts and Allowances, Chargebacks and Distribution Fees
As is customary in the pharmaceutical industry, gross product sales are subject to a variety of deductions in arriving at net product sales. Provisions for these deductions are recognized concurrentconcurrently with the recognition of gross product sales. These provisions include cash discounts and allowances, chargebacks, and distribution fees, which are paid or credited to direct customers, as well as rebates and returns, which can be paid or credited to direct and indirect customers. As more fully discussed in Note 2, "SIGNIFICANT ACCOUNTING POLICIES" to our audited Consolidated Financial Statements, the Company continually monitors the provisions for these deductions and evaluates the estimates used as additional information becomes available. Price appreciation credits are generated when we increase a product’s wholesaler acquisition cost (“WAC”) under our contracts with certain wholesalers. Under such contracts, we are entitled to credits from such wholesalers for the impact of that WAC increase on inventory on hand at the wholesalers. SuchIn wholesaler contracts, such credits are offset against the total distribution service fees we pay on all of our products to each such wholesaler. Net product sales on these credits are recognized on the date that the wholesaler is notifiedIn addition, some payor contracts require discounting if a price increase or series of the price increase.increases in a contract period exceeds a negotiated threshold. Provision balances relating to amounts payable to direct customers are netted against trade receivables and balances relating to indirect customers are included in accrued liabilities.
We actively manage these offerings, focusing on the incremental costs of our patient assistance programs, the level of discounting to non-retail accounts and identifying opportunities to minimize product returns. We also concentrate on managing our relationships with our payors and wholesalers, reviewing the ranges of our offerings and being disciplined as to the amount and type of incentives we negotiate.
Provisions recorded to reduce gross product sales to net product sales and revenues for the years ended December 31, 20172021 and 20162020 were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Years Ended December 31, |
| | 2021 | | 2020 |
| (in millions) | | Amount | | Pct. | | Amount | | Pct. |
| Gross product sales | | $ | 13,770 | | | 100.0 | % | | $ | 12,960 | | | 100.0 | % |
| Provisions to reduce gross product sales to net product sales | | | | | | | | |
| Discounts and allowances | | 625 | | | 4.5 | % | | 621 | | | 4.8 | % |
| Returns | | 131 | | | 1.0 | % | | 120 | | | 0.9 | % |
| Rebates | | 2,462 | | | 17.9 | % | | 2,174 | | | 16.8 | % |
| Chargebacks | | 1,999 | | | 14.5 | % | | 1,925 | | | 14.9 | % |
| Distribution service fees | | 211 | | | 1.5 | % | | 196 | | | 1.5 | % |
| | 5,428 | | | 39.4 | % | | 5,036 | | | 38.9 | % |
| Net product sales | | $ | 8,342 | | | 60.6 | % | | $ | 7,924 | | | 61.1 | % |
|
| | | | | | | | | | | | | |
| | | Years Ended December 31, |
| | | 2017 | | 2016 |
| (in millions) | | Amount | | Pct. | | Amount | | Pct. |
| Gross product sales | | $ | 14,825 |
| | 100 | % | | $ | 16,047 |
| | 100% |
| Provisions to reduce gross product sales to net product sales | | | | | | | | |
| Discounts and allowances | | 829 |
| | 6 | % | | 789 |
| | 5% |
| Returns | | 423 |
| | 3 | % | | 460 |
| | 3% |
| Rebates | | 2,545 |
| | 17 | % | | 2,521 |
| | 16% |
| Chargebacks | | 2,145 |
| | 14 | % | | 2,318 |
| | 14% |
| Distribution service fees | | 288 |
| | 2 | % | | 423 |
| | 3% |
| | | 6,230 |
| | 42 | % | | 6,511 |
| | 41% |
| Net product sales | | $ | 8,595 |
| | 58 | % | | $ | 9,536 |
| | 59% |
Cash discountsDiscounts and allowances, returns, rebates, chargebacks and distribution fees as a percentage of gross product sales were 42% and 41% in 2017 and 2016, respectively, an increase of 1% primarily driven by:
| |
• | an increase in discounts and allowances as a percentage of product sales primarily associated with the generic release of Glumetza® AG partially offset by lower sales of Zegerid® AG due to generic competition;
|
| |
• | returns as a percentage of gross product sales was unchanged as higher return rates for products with generic launches in 2017, such as Nitropress® and Glumetza®, were substantially offset by decreases from lower year over year sales and return rates associated with certain products, primarily Zegerid® AG which was launched in 2016,and Retin® AG which was impacted by multiple generics in 2016;
|
| |
• | rebates as a percentage of product sales was higher as increased sales of products that carry higher contractual rebates and co-pay assistance programs, including the impact of gross price increases where customers receive incremental rebates based on contractual price increase limitations. The comparisons were impacted primarily by higher provisions for rebates and the co-pay assistance programs for promoted products, such as Xifaxan®, Wellbutrin® and Apriso®.
|
These increases were offset by decreases in rebates for Glumetza®, Solodyn®, Jublia®, Carac®, Ziana® and other products as generic competition caused a decline in volume year over year;
| |
• | chargebacks as a percentage of gross product sales was unchanged as increases in chargebacks from higher year over year sales of certain generic drugs such as Glumetza® AG, Targretin® AG and Xenazine® AG and certain branded drugs such as Nifedical™, Xifaxan® and Ofloxacin were substantially offset by decreases in chargebacks associated with: (i) lower utilization by the U.S. government of certain products such as Minocin®, Ativan® and Mysoline®, (ii) lower year over year sales of Zegerid® AG, Nitropress® and Anusol™ and other drugs due to generic competition and Provenge® which was divested with the Dendreon Sale and (iii) better contract pricing as a result of the Company's pricing discipline. During much of 2016, the Company was subject to higher chargeback rates as a result of its 2015 pricing strategies. As a result of corrective actions taken by the Company, and its continued pricing discipline during 2016, the previous chargeback rates, which were substantial, are no longer effective during 2017; and
|
a decrease in distribution service fees as a percentage of gross product sales were 39.4% and 38.9% in 2021 and 2020, respectively, an increase of 0.5% percentage points and includes:
•discounts and allowances as a percentage of gross product sales were lower primarily due to lower discount rates and gross product sales for certain generic products, such as Migranal® AG, Elidel® AG and Diastat® AG, partially offset by the impact of higher discount rates for and lower sales of Glumetza® AG;
•returns as a percentage of gross product sales were higher and represent the impacts of: (i) higher sales of certain products, primarily Xifaxan® and (ii) returns associated with a quality issue at a third-party supplier on the revenues of certain Consumer products included in partour Bausch + Lomb segment, as discussed below, offset by improving sales returns experience in 2021 as compared to 2020. Over the last several years, the Company has increased its focus on maximizing operational efficiencies and continues to take actions to reduce product returns, including, but not limited to: (i) monitoring and reducing customer inventory levels, (ii) instituting disciplined pricing policies and (iii) improving contracting. These actions have had the effect of improving the sales return experience, related to branded and generic products. Included in the product returns provision for 2021 and 2020 are reductions in variable consideration for sales returns related to past sales of approximately $28 million and $38 million, respectively. See Note 2, "SIGNIFICANT ACCOUNTING POLICIES" to our audited Consolidated Financial Statements regarding further details related to product sales provisions;
•rebates as a percentage of gross product sales were higher offsetting price appreciation creditsprimarily due the impact of: (i) an increase in gross product sales of certain branded products with higher rebate rates, such as Xifaxan®, Prolensa®, Jublia® and better contract terms with our distributors.Trulance® and (ii) an increase in rebates due to the launch of Arazlo® (June 2020) and was partially offset by lower gross product sales for certain branded products, such as Duobrii®, Apriso® and Lotemax® Gel;
•chargebacks as a percentage of gross product sales were lower primarily due to the impacts of: (i) lower chargeback rates and gross product sales for certain products, such as Glumetza® AG and Wellbutrin® and (ii) lower gross product sales for certain products, such as Targretin® AG, partially offset by higher chargeback rates and gross product sales for certain products, such as Glumetza® SLX, Syprine® AG and Mysoline®; and
•distribution service fees as a percentage of gross product sales were unchanged. Price appreciation credits arewere offset against the distribution service fees we paypaid wholesalers and were $21$17 million and $13$15 million for 20172021 and 2016,2020, respectively.
Operating Expenses
Cost of Goods Sold (exclusive of(excluding amortization and impairments of intangible assets)
Cost of goods sold primarily includes: manufacturing and packaging; the cost of products we purchase from third parties; royalty payments we make to third parties; depreciation of manufacturing facilities and equipment; and lower of cost or marketnet
realizable value adjustments to inventories. Cost of goods sold typically vary between periods as a result of product mix, volume, royalties, changes in foreign currency and inflation. Cost of goods sold excludes the amortization and impairments of intangible assets.
Cost of goods sold was $2,506$2,361 million and $2,572$2,202 million for 20172021 and 2016,2020, respectively, a decreasean increase of $66$159 million, or 3%7%. The decreaseincrease was primarily driven by: (i) lowerthe net increase in volumes, from revenues,as previously discussed, (ii) the impact of divestitures and discontinuations, (iii) lower amortization of acquisition accounting adjustments related to inventories of $38 million and (iv) the favorableunfavorable impact of foreign currencies of $22 million.and (iii) higher manufacturing variances, primarily the result of: (a) charges related to a quality issue at a third-party supplier, as discussed below, and (b) inflationary pressures related to certain manufacturing costs. These decreasesincreases were partially offset by: (i) an increasethe impact of $21 million in certain maintenance coststhe divestiture of Amoun on July 26, 2021 and (ii) higher third-party royaltya reduction in third party royalties.
As the recovery from the COVID-19 pandemic continues and businesses reopen, many companies are reporting increases for certain costs, such as labor, materials, shipping and utilities. The increased costs have resulted in additional manufacturing variances and have had a negative impact on certain drugs.
Effective July 1, 2017,our contribution margins during 2021. Through the date of this filing, we began classifying certain maintenance costs as costs of sales which in previous periods were included in R&D expenses. The costs incurred for the period July 1, 2017 through December 31, 2017 was $21 million. No adjustments were madeare unable to prior periods based on materiality.determine if these inflationary factors are transitory or should be expected to continue over a medium or long term.
Cost of goods sold as a percentage of Product sales revenue was 29%28.3% and 27%27.8% for 20172021 and 2016,2020, respectively, an increase of 20.5 percentage points and was primarily driven by an unfavorable change in our product mix. In 2017, a greater percentage of our revenue was attributable to the year-over-year changes in product mix.
We were notified by a third-party supplier of sterilization services for our lens care solution bottles and caps at our Milan, Italy facility, of inconsistencies in the sterilization data versus certificates of conformance previously submitted to us by that supplier. Based on our internal Health and Safety Analysis, it was determined that this issue did not affect the safety or performance of any of our products and is limited to a specific number of lots for certain Consumer products within our Bausch + Lomb/International segment, which generally has lower gross margins thanLomb segment. However, out of an abundance of caution and working with the appropriate notified body and responsible health authorities, we have contained and/or recalled down to the consumer level the limited number of affected lots of products resulting in $8 million of manufacturing variances and $6 million of returns. Further, although our remaining product portfolio. The shift toward a lower gross margin is also partlyGreenville, South Carolina facility increased production to support some of the demand in the near term, due to the losslimited availability of exclusivity acrossqualified materials, production at the Milan facility could not keep up with demand, which negatively impacted our portfolio. These increasessales for the affected products in costs of goods sold as a percentage of product sales revenue were partially offset by acquisition accounting adjustments relatedthis region during 2021. At this time, we have removed this supplier from our Approved Supplier List and qualified another sterilization supplier, who, along with an existing secondary supplier, have and will provide bottle sterilization, thereby allowing our Milan facility to inventories expensed in 2016 of $38 million. Our segment revenues and segment profits are discussed in detail in the subsequent section titled “Reportable Segment Revenues and Profits”.return to full production capacity. Although it is possible additional charges may be incurred, at this time we believe no additional charges will be necessary.
Selling, General and Administrative Expenses
SG&A expenses primarily include: employee compensation associated with sales and marketing, finance, legal, information technology, human resources and other administrative functions; certain outside legal fees and consultancy costs; product promotion expenses; overhead and occupancy costs; depreciation of corporate facilities and equipment; separation-related and IPO-related costs; and other general and administrative costs. The Company has incurred, and will incur, Separation-related and IPO-related costs which are incremental costs indirectly related to the B+L Separation and Solta IPO. Separation-related and IPO-related costs include, but are not limited to: (i) IT infrastructure and software licensing costs, (ii) rebranding costs and (iii) costs associated with facility relocation and/or modification.
SG&A was $2,582expenses were $2,624 million and $2,810$2,367 million for 20172021 and 2016,2020, respectively, a decreasean increase of $228$257 million, or 8%11%. The decreaseincrease was primarily driven by:attributable to: (i) a net decreasethe impacts of the non-recurrence of certain profit protection measures taken in advertising2020 to manage and promotionalreduce operating expenses primarily driven by decreasesduring the COVID-19 pandemic, (ii) an increase in direct to consumer advertising in supportSeparation-related and IPO-related costs of our Jublia®, Xifaxan®, Bausch + Lomb ULTRA® contact lenses$111 million and other branded products, (ii) a net decrease in compensation expense as we incurred higher personnel costs in 2016 resulting from changes in our senior management team and employee retention costs, (iii) termination benefits associated with our former Chief Executive Officer in 2016 consisting of: (a) the pro-rata vesting of performance-based restricted stock units (“RSUs”) (no shares were issued on vesting of these performance-based RSUs because the associated market-based performance condition was not attained), (b) a cash severance payment and (c) a pro-rata annual cash bonus, (iv) lower expenses due to the impact of divestitures, (v) the favorable impact of foreign currencies and (vi) a net decrease in third-party consulting fees.currencies. These factorsincreases were partially offset by an increasethe impact of the Amoun Sale on July 26, 2021.
During 2020, the Company took certain profit protection measures to manage and reduce operating expenses during the COVID-19 pandemic, which resulted in professional fees incurredyear-over-year increases primarily in connection with: (i) legalselling expenses and governmental proceedings, investigationsadvertising and information
requests relatingpromotion expenses. These profit protection measures were successful in expanding the profit margins in many of our businesses as previously discussed. As the pace of recovery in each geography accelerated, we continued to amongallocate more resources to selling and other matters,promotional activities to drive our distribution, marketing, pricing, disclosurereturn to sustainable revenue and accounting practices, (ii) the execution onprofit growth and as a result our key initiatives and (iii) other ongoing corporate and business matters.operating expenses for 2021 exceeded our operating expenses in 2020.
Research and Development Expenses
Included in Research and development are costs related to our product development and quality assurance programs. Expenses related to product development include: employee compensation costs; overhead and occupancy costs; depreciation of research and development facilities and equipment; clinical trial costs; clinical manufacturing and scale-up costs; and other third party
third-party development costs. Quality assurance are the costs incurred to meet evolving customer and regulatory standards and include: employee compensation costs; overhead and occupancy costs; amortization of software; and other third partythird-party costs.
R&D expenses were $361$465 million and $421$452 million for 20172021 and 2016,2020, respectively, a decreasean increase of $60$13 million, or 14%3%. The decreaseincrease was primarily due to: (i)attributable to the year over year phasing as we completednon-recurrence of the temporary suspension in certain R&D investmentactivities and clinical trials in Siliq™2020 due to social restrictions and other newly launched products requiring investmentprecautionary measures taken in response to the prior year, removed projects related to divested businesses and rebalancedCOVID-19 pandemic, as previously discussed, partially offset by the impact of rebalancing our portfolio to better focus on its core assets as this is not representative of our current product development activities and (ii) $21 million of certain maintenance costs classified as cost of sales in 2017 that in previous periods were included in R&D expenses as previously discussed.
Although R&D expenses in 2017 were lower when compared to 2016 by $60 million,within the Ortho Dermatologics business. R&D expenses as a percentage of revenue wasProduct sales were approximately 4%6% and 6% for 2021 and 2020, respectively.
In 2020, certain of our R&D activities were limited and others, including new patient enrollments in 2017clinical trials, were temporarily paused primarily during our second quarter, as most trial sites were not able to accept new patients due to government-mandated shutdowns. However, during our third quarter of 2020, many of these trial sites began to reopen and 2016 and demonstrateswe saw the pace of new patient enrollments increase, although at this time certain of our consistent commitmentprojects are moving slower than we would like due to the impacts of the COVID-19 pandemic. As of the date of this filing, we have not had to make material changes to our investmentdevelopment timelines and the pause in our R&D strategy. The decrease in dollars spent in 2017 is attributable to year over year phasing as we completed the R&D investment in SiliqTM and other recently launched products requiring investment in 2016, removed projects related to businesses divested in 2017 and rebalanced our portfolio to better align with our long-term plans and focusclinical trials has not had a material impact on our Bausch + Lomb, GIoperating results; however, a resurgence of the virus could result in unanticipated delays in our ability to conduct new patient enrollments and dermatology businesses.create other delays, which could have a significant adverse effect on our future operating results.
Amortization of Intangible Assets
Intangible assets with finite lives are amortized using the straight-line method over their estimated useful lives, generally 2 to 20 years.
Amortization of intangible assets was $2,690 million and $2,673 million for 2017 and 2016, respectively, an increase of $17 million, or 1%. The increase in amortization is driven by changes to the estimated remaining useful lives of certain products and the Salix brand name, partially offset by lower amortization as a result impairments to intangible assets and divestitures and discontinuances of product lines during 2017 and 2016 as the Company focuses on its core assets. Management continually assesses the useful lives related to the Company's long-lived assets to reflect the most current assumptions. In review
Amortization of the Company’s finite-lived intangible assets management revised the estimated useful liveswas $1,375 million and $1,645 million for 2021 and 2020, respectively, a decrease of certain$270 million, or 16%. The decrease was primarily attributable to fully amortized intangible assets no longer being amortized in the third and fourth quarters of 2017. As a result, the useful lives of certain product brands, with an aggregate carrying value of $7,618 million as of December 31, 2017, were revised from an average of seven years2021.
See Note 8, "INTANGIBLE ASSETS AND GOODWILL" to four years, primarily dueour audited Consolidated Financial Statements for further details related to each product expected to lose its exclusivity. In addition, the useful life of the Salix brand, with a carrying value of $569 million as of December 31, 2017, was revised from seventeen years to ten years due to revisions in the forecasted sales of its product portfolio.our intangible assets.
Goodwill Impairments
Goodwill is not amortized but is tested for impairment at least annually at the reporting unit level. An interim goodwill impairment test in advance of the annual impairment assessment may be required if events occur that indicate an impairment might be present. A reporting unit is the same as, or one level below, an operating segment. The fair value of a reporting unit refers to the price that would be received to sell the unit as a whole in an orderly transaction between market participants. The Company estimates the fair values of all reporting units using a discounted cash flow model, which utilizes Level 3 unobservable inputs.
Goodwill impairments was $312were $469 million and $1,077 million$0 for 20172021 and 2016,2020, respectively.
During the three months ended September 30, 2017,March 31, 2021, management identified launches of certain Ortho Dermatologics products which were not going to achieve their trajectories as forecasted once the Sprout business was classifiedsocial restrictions associated with the COVID-19 pandemic began to ease in the U.S. and offices of health care professionals could reopen. In addition, insurance coverage pressures within the U.S. continued to persist limiting patient access to topical acne and psoriasis products. In light of these developments, during the first quarter of 2021, the Company began taking steps to: (i) redirect its R&D spend to eliminate projects it has identified as held for sale. As the Sprout business represented onlyhigh cost and high risk, (ii) redirect a portion of its marketing and product development outside the U.S. to geographies where there is better patient access and (iii) reduce its cost structure to be more competitive. As a Branded Rx reporting unit, we assessed the remaining reporting unit for impairment and determined and recorded a goodwill impairment charge of $312 millionresult, during the three months ended September 30, 2017.
Commencing in the three months ended September 30, 2016,March 31, 2021, the Company operates in three operating segments: (i) Bausch + Lomb/International, (ii) Branded Rx and (iii) U.S. Diversified Products. The realignmentrevised its long-term forecasts for the Ortho Dermatologics reporting unit. Management believed that these events were indicators that there is less headroom as of the segment structure resulted in changes in the Company’s reporting units. In the third and fourth quarter of 2016, goodwill impairment testing was performed under the former reporting unit structure immediately priorMarch 31, 2021 as compared to the change and underheadroom calculated on the then-current reporting unit structure immediately subsequent to the change.
Under the former reporting unit structure, thedate goodwill was last tested for impairment (October 1, 2020). Therefore, a quantitative fair value of each reporting unit exceeded its carrying value by more than 15%, except for the former U.S. reporting unit whose carrying value exceeded its fair value by 2%. As a result, the Company proceeded to perform step two of the goodwill impairment test for the former U.S.Ortho Dermatologics reporting unit was performed. The quantitative fair value test utilized the Company's most recent cash flow projections as revised in the first quarter of 2021 to reflect the business changes previously discussed, including a range of potential outcomes, along with a long-term growth rate of 1.0% and determined thata range of discount rates between 9.0% and 10.0%. Based on the quantitative fair value test, the carrying value of the unit's goodwill exceeded its implied fair value, which resulted in a goodwill impairment charge of $905 million, as adjusted through December 31, 2016. The goodwill impairment was primarily driven by changes to the Company's forecasted performance, which resulted in a lower fair value of the U.S. businesses, mainly the Salix business.
Under the then-current reporting unit structure, the carrying value of the SalixOrtho Dermatologics reporting unit exceeded its fair value as updates to the unit's forecast resulted in a lower estimated fair value for the business. As a result,at March 31, 2021, and the Company proceeded to perform step two of the goodwill impairment test for the Salix reporting unit and determined that the carrying value of the unit's goodwill exceeded its implied fair value, which resulted inrecognized a goodwill impairment charge of $172 million, as adjusted through December 31, 2016.$469 million.
See Note 9,8, "INTANGIBLE ASSETS AND GOODWILL" to our audited Consolidated Financial Statements forregarding further details related to our goodwill impairment analysis.
Asset Impairmentsimpairments, including loss on assets held for sale
Long-lived assets with finite lives are tested for impairment whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. Impairment charges associated with these assets are included in Asset impairments in the Consolidated Statement of Operations. The Company continues to monitor the recoverability of its finite-lived intangible assets and tests the intangible assets for impairment if indicators of impairment are present.
Asset impairments, including loss on assets held for sale were $714$234 million and $114 million for 20172021 and included:2020, respectively, an increase of $120 million. Asset impairments, including loss on assets held for sale for 2021 includes: (i) impairments of $105 million, in aggregate, due to decreases in forecasted sales of certain product lines, (ii) an impairment$88 million loss on assets held for sale in connection with the Amoun Sale, (iii) impairments of $351$23 million, in aggregate, related to the discontinuance of certain product lines and (iv) $18 million related to a portion of an IT infrastructure improvement project no longer being utilized. Asset impairments, including loss on assets held for sale for 2020 includes: (i) a $96 million adjustment to reduce the Sproutcarrying value of the Amoun business classifiedto its estimated fair value less costs to sell due to classifying the business as held for sale, (ii) impairments of $151$16 million, reflectingin aggregate, due to decreases in forecasted sales for otherof certain product lines, (iii) impairments of $114$1 million, to other assets classified as held for sale, primarilyin aggregate, related to the Obagi business, (iv) impairments of $95 million, in aggregate, to certain product/patent assets associated with the discontinuance of specificcertain product lines not aligned with the focus of the Company's core businessbusinesses and (v) impairments of $3(iv) $1 million related to acquired IPR&D.
Asset impairments were $422 million for 2016Acquired in-process research and included: (i) $199 million related to Ruconest® which was divested on December 7, 2016, (ii) $25 million related to intangible assets associated with IBSChek™ and was attributable to declining sales trends, (iii) $14 million related to the termination of the development program for Cirle 3-dimensional surgical navigation technology and (iv) impairment to other assets that individually were not material.in service.
See Note 4, "DIVESTITURES" and Note 9,8, "INTANGIBLE ASSETS AND GOODWILL" to our audited Consolidated Financial Statements regardingfor further details related to our intangible assets.
Restructuring, Integration, Separation and IntegrationIPO Costs
Restructuring, integration, separation and IPO costs were $50 million and $22 million for 2021 and 2020, respectively, an increase of $28 million.
Restructuring and integration costs
The Company evaluates opportunities to improve its operating results and implements cost savings programs to streamline its operations and eliminate redundant processes and expenses. Restructuring and integration costs are expenses associated with the implementation of these cost savings programs and include expenses associated with: (i) reducing headcount, (ii) eliminating real estate costs associated with unused or under-utilized facilities and (iii) implementing contribution margin improvement and other cost reduction initiatives.
Restructuring and integration costs were $52$18 million and $132$11 million for 20172021 and 2016, respectively. We have substantially completed the integration2020, respectively, an increase of the businesses acquired prior to 2016.$7 million. The Company continues to evaluate opportunities to streamline its operations and identify additional cost savings globally andglobally. Although a specific plan does not exist at this time, the Company may identify and take additional exit and cost-rationalization restructuring actions in the future, the costs of which could be material.
Separation and IPO costs
In addition to the Separation-related and IPO-related costs, which are incremental costs indirectly related to the B+L Separation and Solta IPO and included in Selling, general and administrative expenses, as previously discussed, the Company has incurred, and will incur, costs directly associated with activities to effectuate the B+L Separation and the Solta IPO. These activities include: (i) separating the Bausch + Lomb and Solta Medical businesses from the remainder of the Company and (ii) registering the Bausch + Lomb and Solta Medical businesses as independent publicly traded entities. Separation and IPO costs are incremental costs directly related to the B+L Separation and Solta IPO and include, but are not limited to: (i) legal, audit and advisory fees, (ii) talent acquisition costs and (iii) costs associated with establishing a new board of directors and related board committees for the Bausch + Lomb and Solta Medical entities. Separation and IPO costs were $32 million and $11 million for 2021 and 2020, respectively.
At the end of 2021, we had substantially completed the internal objectives necessary to facilitate the B+L Separation and Solta IPO and related separation of these businesses. We continue to monitor market conditions and aim to launch the B+L IPO and the Solta IPO when financial market conditions become favorable (subject to receipt of regulatory, stock exchange and other approvals). Until such time, we continue to manage these businesses along with our pharmaceutical portfolio of gastrointestinal, dermatology, neurology and other therapeutics, with our continued commitment to bring out additional value for our shareholders.
See Note 5,4, "RESTRUCTURING, INTEGRATION, SEPARATION AND INTEGRATIONIPO COSTS" to our audited Consolidated Financial Statements for further details regarding these actions.
Acquired In-Process Research
Other expense, net
Other expense, net for 2021 and Development Costs
Acquired in-process research and development costs represents costs associated with compounds, new indications, or line extensions under development that have not received regulatory approval for marketing at the time of acquisition. IPR&D acquired through an asset acquisition is expensed at the acquisition date if the assets have no alternative use in the future. IPR&D acquired in a business combination is capitalized as indefinite-lived intangible assets (irrespective of whether these assets have an alternative future use) until completion or abandonment2020 consists of the related researchfollowing:
| | | | | | | | | | | | | | |
| (in millions) | | 2021 | | 2020 |
| Litigation and other matters | | $ | 356 | | | $ | 422 | |
| Acquired in-process research and development costs | | 8 | | | 32 | |
| Net gain on sales of assets | | (2) | | | (1) | |
| Acquisition-related contingent consideration | | 11 | | | 48 | |
| Other, net | | — | | | 1 | |
| Other expense, net | | $ | 373 | | | $ | 502 | |
Litigation and development activities. Period costs associated with the development of acquired IPR&D assets are expensed in the period incurred.
Acquired in-process research and development costs were $34 millionother matters for 2016 and was primarily2021, includes adjustments related to a $25 million license payment.
Acquisition-Related Contingent Consideration
Acquisition-related contingent consideration primarily consists of potential milestone payments and royalty obligations associated with businesses and assets we acquired in the past. These obligations are recorded in the consolidated balance sheet at their estimated fair values at the acquisition date, in accordance with the acquisition method of accounting. The fair value of the
acquisition-related contingent consideration is remeasured each reporting period, with changes in fair value recorded in the consolidated statements of operations. The fair value measurement is based on significant inputs not observable in the market and thus represents a Level 3 measurement as defined in fair value measurement accounting.
Acquisition-related contingent consideration was a net gain of $289 million for 2017 which included: (i) a fair value adjustment of $312 million reflecting a decrease in forecasted sales for the Addyi® product, which impacted the expected future payments and (ii) net fair value adjustments of $31 million. These net gains wereGlumetza Antitrust Litigation, partially offset by accretion for the time valueinsurance recoveries of money of $54 million.
Acquisition-related contingent consideration was a net gain of $13$213 million for the 2016, which included net fair value adjustments of $105 million which, were partially offset by accretion for the time value of money of $92 million.
related to certain litigation matters. See Note 6, "FAIR VALUE MEASUREMENTS"20, "LEGAL PROCEEDINGS" to our audited Consolidated Financial Statements for further details.
Other (income) expense, net
Other (income) expense, net for 2017 and 2016 consists of the following:
|
| | | | | | | | |
| (in millions) | | 2017 | | 2016 |
| Gain on the Skincare Sale | | $ | (309 | ) | | $ | — |
|
| Gain on the iNova Sale | | (309 | ) | | — |
|
| Gain on the Dendreon Sale | | (97 | ) | | — |
|
| Loss on the Sprout Sale | | 98 |
| | — |
|
| Net loss (gain) on other sales of assets | | 37 |
| | (6 | ) |
| Litigation and other matters | | 226 |
| | 59 |
|
| Other, net | | 1 |
| | 20 |
|
| Other (income) expense, net | | $ | (353 | ) | | $ | 73 |
|
In 2017, Litigation and other matters includes: (i) $96 million for the estimated settlement of the Allergan shareholder class actions, (ii) the estimated settlement of the Solodyn® antitrust class actions litigation and (iii) the potential partial summary judgment related to the Mimetogen Pharmaceuticals litigation.
In 2016, Litigation and other matters includes: (i) an unfavorable adjustment of $90 million from the proposed settlement of the Salix securities litigation and (ii) a favorable adjustment of $39 million from the settlement of the investigation into Salix's pre-acquisition sales and promotional practices for the Xifaxan®, Relistor® and Apriso® products. Net gain on other sales of assets includes: (i) a gain of $20 million from an amendment to a license agreement terminating the Company's right to develop and commercialize brodalumab in Europe and (ii) a loss of $22 million from the divestiture of Ruconest®.details regarding these matters.
Litigation and other matters for 2020, includes amounts provided foradjustments related to an SEC investigation into the Company and its former relationship with Philidor Rx Services, LLC, its accounting practices and policies, its public disclosures and other matters (which investigation has now been settled) (the “SEC Investigation”) and the U.S. Securities Litigation and the Canadian Securities Litigation and related opt-outs of each. Litigation and other matters also includes an insurance recovery related to a certain matters discussed inlitigation matter. See Note 21,20, "LEGAL PROCEEDINGS" to our audited Consolidated Financial Statements.Statements for further details regarding certain of these matters.
Acquired in-process research and development costs primarily consists of costs associated with the upfront payments to enter into certain exclusive licensing agreements.
Non-Operating Income and Expense
Interest Expense
Interest expense primarily consists of interest payments due, and amortization of debt premiums, discounts and deferred financingissuance costs on indebtedness under our credit facilities and notes. notes and the amortization of amounts excluded from the assessment of hedge effectiveness over the term of the Company's cross-currency swaps.
Interest expense was $1,840$1,426 million and $1,836$1,534 million and included non-cash amortization and write-offs of debt discounts and deferred financing costs of $151$55 million and $118$61 million for 20172021 and 2016,2020, respectively. The increaseInterest expense decreased $108 million, or 7%, in interest expense is2021 as compared to 2020, primarily due to: (i) higher amortization and write-offs of debt discounts and deferred financing costs of $33 million which was substantially due to accelerated amortization in connection with the prepayment of term loans during 2017 and (ii) higher interest rates associated with the March 2017 Refinancing Transactions and amendments to our Credit Agreement. These increases were partially offset by a decrease in interest expense as a result of lower outstanding principal amounts of long term debt. As previously discussed, during 2017, we repaid $4,641 million of long term debt which reduced our interest expense.balances. The weighted average stated rate of interest as of December 31, 20172021 and 20162020 was 6.07%5.88% and 5.75%6.02%, respectively.
See Note 11,10, "FINANCING ARRANGEMENTS" to our audited Consolidated Financial Statements for further details.
Loss on Extinguishment of Debt
Loss on extinguishment of debt was $122 million for 2017. In March 2017, October 2017, November 2017 and December 2017, we completed a series of transactions which allowed us to refinance a portion of our debt arrangements. In August 2017, we repurchased the remaining $500 million of our August 2018 Unsecured Notes. Losses representingrepresents the differences between the amounts paid to settle the extinguished debts and the carrying value of the related extinguished debts (the debts' stated principal netdebt. Loss on extinguishment of unamortized debt discountwas $62 million and debt issuance costs) were recognized.$59 million for 2021 and 2020, respectively, primarily associated with certain refinancing transactions that occurred each year.
See Note 11,10, "FINANCING ARRANGEMENTS" to our audited Consolidated Financial Statements for further details.
Foreign Exchange and Other
Foreign exchange and other was a net gain of $107$7 million for 2017 and includes: (i) a foreign exchange gain related2021 as compared to a euro-denominatedloss of $30 million for 2020, a favorable net change of $37 million primarily due to: (i) translation gains/losses on intercompany loanloans and third-party liabilities and (ii) netthe gain/loss due to foreign currency exchange gains related to intercompany transactions within our European operations.
Foreign exchange and other was a net loss of $41 million for 2016 and includes: (i) a foreign exchange loss related to a euro-denominated intercompany loan and (ii) net foreign exchange losses related to intercompany transactions within our European operations.contracts.
Income Taxes
Income taxes are accounted for under the liability method. Deferred tax assets and liabilities are recognized for the temporary differences between the financial statement and income tax bases of assets and liabilities, and for operating losses and tax credit carryforwards. Deferred tax assets for outside basis differences in investments in subsidiaries are only recognized if the difference will be realized in the foreseeable future. AsBenefit from income taxes was $87 million and $375 million in 2021 and 2020, respectively, an unfavorable net change of $288 million, primarily attributable to the release of a resultportion of the
Company's valuation allowance against deferred tax assets in 2020 in excess of the Tax Act,release of its valuation allowance in 2021. In 2021, the Company's valuation allowance decreased by $30 million primarily attributable to the impact of book taxable income in Canada, change in deferred tax assets in Canada and use of deferred tax assets in the U.S. in connection with internal restructurings. In 2020, our valuation allowance decreased by $579 million primarily attributable to the impact of taxable losses in Canada, partially offset by the impact of internal restructurings which resulted in reductions to our deferred tax assets and liabilities were re-measured to reflect the reduction in the U.S. corporate income tax rate from 35% to 21%.assets.
Our consolidated foreign rate differential reflects the net total tax cost or benefit on income earned or losses incurred in jurisdictions outside of Canada as compared to the net total tax cost or benefit of such income (on a jurisdictional basis) at the Canadian statutory rate of 26.9%. Tax costs below the Canadian statutory rate generate a beneficial foreign rate differential as do tax benefits generated in jurisdictions where the statutory tax rate exceeds the Canadian statutory tax rate. The net total foreign rate differentials generated in each jurisdiction in which we operate is not expected to bear a direct relationship to the net total amount of foreign income (or loss) earned outside of Canada.
BenefitIn 2021 and 2020, our effective tax rate differs from income taxes was $4,145 million and $27 million for 2017 and 2016, respectively.
We have provided for income taxes, including the impacts of the Tax Act, in accordance with the accounting guidance issued through the date of this filing. The 2017statutory Canadian income tax benefit includes provisional net tax benefits of $975 million attributable to the Tax Act. The accounting for the Tax Act includes each of the following provisional amounts:rate primarily due to: (i) the re-measurementrecording of certain deferredvaluation allowance on entities for which no tax assets and liabilities based onbenefit of losses is expected, (ii) the rates at which they are expected to reverse in the futuretax benefit generated from our annualized mix of $774 million, (ii) a charge for the one-time Transition Toll Tax of $88 millionearnings by jurisdiction and (iii) the decreasediscrete treatment of certain tax matters, primarily related to: (a) changes in deferreduncertain tax assets attributable to certain legal accruals, the deductibilitypositions, (b) impairment of which is uncertain for United States generally accepted accounting principles (“U.S. federal income tax purposes of $10 million. We have provisionally utilized net operating losses (“NOLs”GAAP”) to offset the provisionally determined $88 million Transition Toll Tax and therefore no amount is recorded as payable. We have previously provided for residual U.S. federal income tax on its outside basis differences in certain foreign subsidiaries; however, as our residual U.S. tax liability was $299 million prior to the law change, we recognized a deferred tax benefit of $299 million in the fourth quarter of 2017.
In 2017, the Company liquidated its top U.S. subsidiary (Biovail Americas Corp.) (“BAC”) in a taxable transaction, resulting in a taxable loss which was of a character that would offset certain gains fromgoodwill, (c) internal restructurings, and third party divestitures, the excess of which was, under U.S. tax law, able to be carried back to offset previously recognized gains in 2016, 2015 and 2014. This carryback resulted in an increase(d) changes in the Company’s deferred tax asset for net operating losses previously utilized against such gains. The largest result of this transaction formanner in which the Company has recorded a benefit, is the reversal of a previously established deferred tax liability of approximately $1,900 million and a net benefit of approximately $400 million primarily related to the carryback of losses.an outside basis difference will be recovered in future periods.
We record a valuation allowance against our deferred tax assets to reduce thetheir net carrying value to an amount that we believe is more likely than not to be realized. In determining our deferred tax asset valuation allowance, we estimate our ability to utilize future sources of income to realize the benefits of our temporary income tax differences including: (i) net operating loss carryforwards in each jurisdiction, primarily in Canada, the U.S. and Ireland, (ii) research and development tax credit carryforwards, (iii) scientific research and experimental development pool carryforwards and (iv) investment tax credit carryforwards. When we establishestablish/increase or reducereduce/decrease the valuation allowance, against our deferred tax assets, the provision for income taxes will increase or decrease, respectively, in the period such determination is made. The majority of the decrease in 2017 is due to changes in theOur valuation allowance against deferred tax asset balance in Canada,assets as of December 31, 2021 and foreign tax credits recorded in the U.S. In determining the amount2020 was $2,222 million and $2,252 million, respectively, a decrease of the valuation allowance that was necessary, we considered the amount of U.S. tax loss carryforwards,
U.S. research and development tax credits, Canadian tax loss carryforwards, scientific research and experimental development pool, and investment tax credits that we would more likely than not be able to utilize based on future sources of income. Our taxes payable is impacted by our ability to use net operating losses on a current basis.
In 2017, our effective tax rate differed from the Canadian statutory tax rate of 26.9% primarily due to: (i) a benefit related to internal integrations and restructurings, (ii) a benefit related to U.S. tax law changes enacted in December 2017, (iii) a benefit generated from our annualized mix of earnings by jurisdiction, (iv) a benefit from the sale of divested businesses and (v) the recording of valuation allowance on entities for which no tax benefit of losses is expected.
In 2016, our effective tax rate differed from the Canadian statutory tax rate of 26.9% primarily due to: (i) a benefit related to internal integrations and restructurings, (ii) a charge for the impact of non-deductible goodwill impairment, (iii) a benefit for the effect of valuation allowance on our tax attribute carryforwards in Canada, (iv) benefit of intra-entity transfers including the amortization of intangibles for tax purposes (these include a charge for internal restructuring) and (v) a benefit from income earned in jurisdictions with a lower statutory rate than in Canada.$30 million, as discussed above.
See Note 18,17, "INCOME TAXES" to our audited Consolidated Financial Statements for further details regarding income taxes.details.
Reportable Segment Revenues and Profits
We have threeOur portfolio of products falls into five operating and reportable segments: (i) Bausch + Lomb/Lomb, (ii) Salix, (iii) International (ii) Branded Rx, (iv) Ortho Dermatologics and (iii) U.S.(v) Diversified Products. Effective for the first quarter of 2017, revenues and profits from the Company's operations in Canada, included in the Branded Rx segment in prior periods, are included in the Bausch + Lomb/International segment. Prior period presentations of segment revenues and segment profits have been recast to conform to the current segment reporting structure.
The following is a brief description of our segments:
•The Bausch + Lomb/Lomb segment consists of global sales of Bausch + Lomb Vision Care, Consumer, Surgical and Ophthalmic Pharmaceuticals products.
•The Salix segmentconsists of sales in the U.S. of GI products.
•The International Rx segmentconsists of sales, with the exception of sales of Bausch +Lomb products and Solta aesthetic medical devices, outside the U.S and Puerto Rico of branded pharmaceutical products, branded generic pharmaceutical and OTC products.
•The Ortho Dermatologicssegment consists of: (i) sales in the U.S. of pharmaceutical products, OTC products and medical device products, primarily comprised of Bausch + Lomb products, with a focus on the Vision Care, Surgical, Consumer and Ophthalmology RxOrtho Dermatologics (dermatological) products and (ii) global sales in Canada, Europe, Asia, Australia and New Zealand, Latin America, Africa and the Middle East of branded pharmaceutical products, branded generic pharmaceutical products, OTC products,Solta aesthetic medical device products and Bausch + Lomb products.
devices.•The Branded Rx segment consists of sales in the U.S. of: (i) Salix products (GI products), (ii) Ortho Dermatologics (dermatological products) and (iii) oncology (or Dendreon), dentistry and women’s health products (or Sprout). As a result of the divestiture of the Company's equity interest in Dendreon on June 28, 2017 and Sprout on December 20, 2017, the Company has exited the oncology and women's health business, respectively.
The U.S. Diversified Products segment consists of sales in the U.S. of: (i) pharmaceutical products, OTC products and medical device products in the areas of neurology and certain other therapeutic classes, including aesthetics which includes the Solta business(ii) generic products and the Obagi business (the Obagi Sale was completed on November 9, 2017) and (ii) AG(iii) dentistry products.
Segment profit is based on operating income after the elimination of intercompany transactions (including transactions with any consolidated variable interest entities).transactions. Certain costs, such as amortization and impairmentsAmortization of intangible assets, goodwill impairment, certain R&D expenses not specific to our active portfolio, acquired in-process researchAsset impairments, including loss on assets held for sale, Restructuring, integration, separation and development costs, restructuring, integration and acquisition-relatedIPO costs, and other (income)Other expense, net, are not included in the measure of segment profit, as management excludes these items in assessing segment financial performance. In addition, a portion of share-based compensation, representing the difference between actual and budgeted expense, is not allocated to segments. See Note 23,22, "SEGMENT INFORMATION" to our audited Consolidated Financial Statements for a reconciliation of segment profit to Loss before (benefit from) provision forbenefit from income taxes.
The following table presents segment revenues, segment revenues as a percentage of total revenues and the year over year changes in segment revenues for 20172021 and 2016.2020. The following table also presents segment profits, segment profits as a percentage of segment revenues and the year over yearyear-over-year changes in segment profits for 20172021 and 2016.2020.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Years Ended December 31, | | Change |
| | | 2021 | | 2020 | | 2020 to 2021 |
| (in millions) | | Amount | | Pct. | | Amount | | Pct. | | Amount | | Pct. |
| Segment Revenue | | | | | | | | | | | | |
| Bausch + Lomb | | $ | 3,765 | | | 45 | % | | $ | 3,415 | | | 42 | % | | $ | 350 | | | 10 | % |
| Salix | | 2,074 | | | 24 | % | | 1,904 | | | 24 | % | | 170 | | | 9 | % |
| International Rx | | 1,166 | | | 14 | % | | 1,181 | | | 15 | % | | (15) | | | (1) | % |
| Ortho Dermatologics | | 564 | | | 7 | % | | 548 | | | 7 | % | | 16 | | | 3 | % |
| Diversified Products | | 865 | | | 10 | % | | 979 | | | 12 | % | | (114) | | | (12) | % |
| Total revenues | | $ | 8,434 | | | 100 | % | | $ | 8,027 | | | 100 | % | | $ | 407 | | | 5 | % |
| | | | | | | | | | | | |
| Segment Profits / Segment Profit Margins | | | | | | | | | | | | |
| Bausch + Lomb | | $ | 958 | | | 25 | % | | $ | 909 | | | 27 | % | | $ | 49 | | | 5 | % |
| Salix | | 1,493 | | | 72 | % | | 1,338 | | | 70 | % | | 155 | | | 12 | % |
| International Rx | | 403 | | | 35 | % | | 386 | | | 33 | % | | 17 | | | 4 | % |
| Ortho Dermatologics | | 265 | | | 47 | % | | 228 | | | 42 | % | | 37 | | | 16 | % |
| Diversified Products | | 624 | | | 72 | % | | 717 | | | 73 | % | | (93) | | | (13) | % |
| Total | | $ | 3,743 | | | 44 | % | | $ | 3,578 | | | 45 | % | | $ | 165 | | | 5 | % |
Organic Revenues and Organic Growth Rates (non-GAAP)
Organic growth, a non-GAAP metric, is defined as a change on a period-over-period basis in revenues on a constant currency basis (if applicable) excluding the impact of recent acquisitions, divestitures and discontinuations. Organic revenue growth (non-GAAP) is growth in GAAP Revenue (its most directly comparable GAAP financial measure), adjusted for certain items, of businesses that have been owned for one or more years. Organic revenue (non-GAAP) is impacted by changes in product volumes and price. The price component is made up of two key drivers: (i) changes in product gross selling price and (ii) changes in sales deductions. The Company uses organic revenue (non-GAAP) and organic revenue growth (non-GAAP) to assess performance of its reportable segments, and the Company in total, without the impact of foreign currency exchange fluctuations and recent acquisitions, divestitures and product discontinuations. The Company believes that such measures are useful to investors as they provide a supplemental period-to-period comparison.
Non-GAAP measures are not standardized measures under the financial reporting framework used to prepare the Company’s financial statements and might not be comparable to similar financial measures disclosed by other issuers.
Organic revenue growth (non-GAAP) reflects adjustments for: (i) the impact of period-over-period changes in foreign currency exchange rates on revenues and (ii) the revenues associated with acquisitions, divestitures and discontinuations of businesses divested and/or discontinued. These adjustments are determined as follows:
Foreign currency exchange rates: Although changes in foreign currency exchange rates are part of our business, they are not within management’s control. Changes in foreign currency exchange rates, however, can mask positive or negative trends in the underlying business performance. The impact for changes in foreign currency exchange rates is determined as the difference in the current period reported revenues at their current period currency exchange rates and the current period reported revenues revalued using the monthly average currency exchange rates during the comparable prior period.
Acquisitions, divestitures and discontinuations: In order to present period-over-period organic revenues (non-GAAP) on a comparable basis, revenues associated with acquisitions, divestitures and discontinuations are adjusted to include only revenues from those businesses and assets owned during both periods. Accordingly, organic revenue growth (non-GAAP) excludes from the current period, all revenues attributable to each acquisition for twelve months subsequent to the day of acquisition, as there are no revenues from those businesses and assets included in the comparable prior period. Organic revenue growth (non-GAAP) excludes from the prior period (but not the current period), all revenues attributable to each divestiture and discontinuance during the twelve months prior to the day of divestiture or discontinuance, as there are no revenues from those businesses and assets included in the comparable current period. There were no acquisitions during 2021.
|
| | | | | | | | | | | | | | | | | | | | | |
| | | Years Ended December 31, | | Change |
| | | 2017 | | 2016 | | 2016 to 2017 |
| (in millions) | | Amount | | Pct. | | Amount | | Pct. | | Amount | | Pct. |
| Segment Revenue | | | | | | | | | | | | |
| Bausch + Lomb/International | | $ | 4,871 |
| | 56 | % | | $ | 4,927 |
| | 51 | % | | $ | (56 | ) | | (1 | )% |
| Branded Rx | | 2,475 |
| | 28 | % | | 2,828 |
| | 29 | % | | (353 | ) | | (12 | )% |
| U.S. Diversified Products | | 1,378 |
| | 16 | % | | 1,919 |
| | 20 | % | | (541 | ) | | (28 | )% |
| Total revenues | | $ | 8,724 |
| | 100 | % | | $ | 9,674 |
| | 100 | % | | $ | (950 | ) | | (10 | )% |
| | | | | | | | | | | | | |
| Segment Profits / Segment Profit Margins | | | | | | | | | | | | |
| Bausch + Lomb/International | | $ | 1,440 |
| | 30 | % | | $ | 1,483 |
| | 30 | % | | $ | (43 | ) | | (3 | )% |
| Branded Rx | | 1,361 |
| | 55 | % | | 1,517 |
| | 54 | % | | (156 | ) | | (10 | )% |
| U.S. Diversified Products | | 994 |
| | 72 | % | | 1,522 |
| | 79 | % | | (528 | ) | | (35 | )% |
| Total segment profit | | $ | 3,795 |
| | 44 | % | | $ | 4,522 |
| | 47 | % | | $ | (727 | ) | | (16 | )% |
The following table presents a reconciliation of GAAP revenues to organic revenues (non-GAAP) and presents organic revenue (Non-GAAP) and the year over year changes in organic revenue (Non-GAAP) for 20172021 and 20162020 by segment. Organic revenues and organic growth rates are defined in the previous section titled “Selected Financial Information”.
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Year Ended December 31, 2017 | | Year ended December 31, 2016 | | Change in Organic Revenue |
| | | Revenue as Reported | | Changes in Exchange Rates | | Organic Revenue (Non-GAAP) | | Revenue as Reported | |
Divested Revenues | | Organic Revenue (Non-GAAP) | |
| (in millions) | | Amount | | Pct. |
| Bausch + Lomb/International | | $ | 4,871 |
| | $ | 78 |
| | $ | 4,949 |
| | $ | 4,927 |
| | $ | (240 | ) | | $ | 4,687 |
| | $ | 262 |
| | 6 | % |
| Branded Rx | | 2,475 |
| | — |
| | 2,475 |
| | 2,828 |
| | (194 | ) | | 2,634 |
| | (159 | ) | | (6 | )% |
| U.S. Diversified Products | | 1,378 |
| | — |
| | 1,378 |
| | 1,919 |
| | (25 | ) | | 1,894 |
| | (516 | ) | | (27 | )% |
| Total | | $ | 8,724 |
| | $ | 78 |
| | $ | 8,802 |
| | $ | 9,674 |
| | $ | (459 | ) | | $ | 9,215 |
| | $ | (413 | ) | | (4 | )% |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, 2021 | | Year ended December 31, 2020 | | Change in
Organic Revenue (Non-GAAP) |
| Revenue
as
Reported | | Changes in Exchange Rates | | Organic Revenue (Non-GAAP) | | Revenue
as
Reported | | Divestitures and Discontinuations | | Organic Revenue (Non-GAAP) | |
| (in millions) | Amount | | Pct. |
| Bausch + Lomb | $ | 3,765 | | | $ | (58) | | | $ | 3,707 | | | $ | 3,415 | | | $ | (10) | | | $ | 3,405 | | | $ | 302 | | | 9 | % |
| Salix | 2,074 | | | — | | | 2,074 | | | 1,904 | | | — | | | 1,904 | | | 170 | | | 9 | % |
| International Rx | 1,166 | | | (28) | | | 1,138 | | | 1,181 | | | (113) | | | 1,068 | | | 70 | | | 7 | % |
| Ortho Dermatologics | 564 | | | (9) | | | 555 | | | 548 | | | — | | | 548 | | | 7 | | | 1 | % |
| Diversified Products | 865 | | | — | | | 865 | | | 979 | | | (9) | | | 970 | | | (105) | | | (11) | % |
| Total | $ | 8,434 | | | $ | (95) | | | $ | 8,339 | | | $ | 8,027 | | | $ | (132) | | | $ | 7,895 | | | $ | 444 | | | 6 | % |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
Bausch + Lomb/InternationalLomb Segment:
Bausch + Lomb/InternationalLomb Segment Revenue
The Bausch + Lomb/InternationalLomb segment has a diversified product line with no single product group representing 10% or more of its segment product sales.revenues. The Bausch + Lomb/InternationalLomb segment revenue was $4,871$3,765 million and $4,927$3,415 million for 20172021 and 2016,2020, respectively, a decreasean increase of $56$350 million, or 1%10%. The decreaseincrease was primarily drivenattributable to: (i) an increase in volumes across all of our Bausch + Lomb businesses of $337 million primarily due to the positive impacts from the recovery from the COVID-19 pandemic and the easing of certain social restrictions, as previously discussed, partially offset by: (i)(a) the impact of generic competition as certain products, primarily Lotemax® Gel, lost exclusivity and (b) the Skincare Sale,impacts of a third-party supplier quality issue on the iNova Sale and other divestitures and discontinuationsrevenues of $240 millioncertain Consumer products, as previously discussed, and (ii) the unfavorablefavorable impact of foreign currencies of $78$58 million, which includes the unfavorable impact from the Egyptian pound of $138 million.
primarily in Europe and Asia. These factorsincreases were partially offset by: (i) ana decrease in net realized pricing of $35 million primarily due to higher sales deductions in our Ophthalmic Pharmaceuticals business and (ii) the impact of divestitures and discontinuations of $10 million, related to several products. The increase in volume of $145 million primarily driven by the U.S.volumes was across all Bausch + Lomb Consumerbusinesses, most notably seen in our Surgical and internationalVision Care businesses, and to a lesser extent,across all geographies, most notably in the U.S., Asia and Europe.
During 2020, the volumes of our Bausch + Lomb Vision Caresegment were most negatively impacted by the social restrictions and Surgicalother precautionary measures taken in response to the COVID-19 pandemic during the second quarter of 2020. However, as governments began lifting social restrictions, the negative trend in the revenues began to level off and stabilize prior to our third quarter and continued into our fourth quarter of 2020 and first quarter of 2021. Our revenues returned to pre-pandemic levels for many of our Bausch + Lomb businesses and (ii) an increasegeographies in average realized pricing2021 and, at the current pace of $121 million, primarilyrecovery, we anticipate the COVID-19 pandemic to have a minimal impact on the remaining businesses and geographies in Egypt in order to offset the unfavorable impact of foreign exchange due to the Egyptian pound devaluation.2022.
Bausch + Lomb/InternationalLomb Segment Profit
The Bausch + Lomb/InternationalLomb segment profit was $1,440$958 million and $1,483$909 million for 20172021 and 2016,2020, respectively, a decreasean increase of $43$49 million, or 3%5%. The decreaseincrease was primarily driven by: (i) the decreaseby an increase in contribution from the impact of the Skincare Sale, the iNova Sale and other divestitures and discontinuations of $151 million and (ii) the unfavorable impact of foreign currencies on our business of $41 million, primarily dueattributable to the Egyptian pound.
These factors werenet increase in revenues, as previously discussed. This increase was partially offset by: (i) an increasethe impacts of the non-recurrence of certain profit protection measures taken in contribution2020 to manage and reduce operating expenses during the COVID-19 pandemic, as a resultpreviously discussed, which resulted in year-over-year increases primarily in selling expenses and advertising and promotion expenses, (ii) the non-recurrence of increasesthe temporary suspension in volumecertain R&D activities and average realized pricingclinical trials in 2020 due to social restrictions and other precautionary measures taken in response to the COVID-19 pandemic, as previously discussed and (ii)(iii) inflationary pressures related to certain manufacturing costs.
On January 13, 2022, in connection with the B+L Separation, Bausch + Lomb Corporation filed a decreaseRegistration Statement on Form S-1 with the SEC (the "Registration Statement"), which as of the date of this filing has not been declared effective. As the Bausch + Lomb business has historically operated as part of the Company, Bausch + Lomb Corporation relied on the Company’s corporate and other support functions. Therefore, certain corporate and shared costs have been allocated to Bausch + Lomb Corporation in operating expenses (excluding amortizationthe financial results and impairments of intangible assets) of $26 million primarilyother financial information as presented by Bausch + Lomb in advertising and promotion,its filings with the SEC, including expenses eliminated asrelated to the support functions that are provided on a resultcentralized basis by the Company and not included in the measurement of segment profit for any segment in the Skincare Sale, the iNova Saletable above. This includes expenses for executive oversight, treasury, accounting, legal, human resources, shared services, compliance, procurement, information technology and other divestitures and discontinuances.corporate functions. Therefore, any measurement of Bausch + Lomb Corporation's net operating results, as presented in Bausch + Lomb Corporation's filings with the SEC, will not agree to Bausch + Lomb's segment profit as presented in the table above.
Branded RxSalix Segment:
Branded RxSalix Segment Revenue
The Branded RxSalix segment has a diversified includes the Xifaxan® product line, and includes Xifaxan®, which accounted for approximately 40%79% and 33%78% of the Branded RxSalix segment product salesrevenues and approximately 11%19% and 10%18% of the Company's product salesrevenues for 20172021 and 2016,2020, respectively. No other single product group represents 10% or more of the BrandedSalix segment revenues. The Salix segment revenue was $2,074 million and $1,904 million for 2021 and 2020, respectively, an increase of $170 million, or 9%. The increase was primarily attributable to increases in: (i) volume of $101 million, primarily attributable to increased volumes for our Xifaxan® and Trulance® product lines driven in part by the positive impacts of the recovery from the COVID-19 pandemic and the easing of certain social restrictions, as previously discussed, and (ii) net realized pricing of $69 million, primarily attributable to our Xifaxan® product line, partially offset by higher sales adjustments for Glumetza® SLX.
Salix Segment Profit
The Salix segment profit was $1,493 million and $1,338 million for 2021 and 2020, respectively, an increase of $155 million, or 12%. The increase was primarily driven by the increase in contribution as a result of: (i) the increase in revenue, as previously discussed, and (ii) a reduction in third party royalties. This increase was partially offset by the impacts of the non-recurrence of certain profit protection measures taken in 2020 to manage and reduce operating expenses during the COVID-19 pandemic, as previously discussed, which resulted in year-over-year increases primarily in selling expenses and advertising and promotion expenses.
International Rx Segment:
International Rx Segment Revenue
The International Rx segment has a diversified product line with no single product group representing 10% or more of its product sales. The BrandedInternational Rx segment revenue was $2,475$1,166 million and $2,828$1,181 million for 20172021 and 2016,2020, respectively, a decrease of $353$15 million, or 1%. The decrease was primarily attributable to the impact of divestitures and discontinuations of $113 million, primarily attributable to our divestiture of Amoun on July 26, 2021. Amoun revenues were $157 million for the period of January 1, 2021 through July 26,2021 and were $247 million for the full year 2020. The decreases were partially offset by: (i) an increase in volumes of $51 million, (ii) the favorable impact of foreign currencies of $28 million, primarily in Canada and Latin America, and (iii) an increase in net realized pricing of $19 million. The increase in volumes is primarily due to the positive impacts from the recovery from the COVID-19 pandemic and the easing of certain social restrictions, as previously discussed.
Although we experienced COVID-19 pandemic related declines in year-over-year revenues in certain products and geographies during 2021, at the current pace of recovery, we anticipate the COVID-19 pandemic to have a minimal impact on the remaining businesses and geographies in 2022. .
International Rx Segment Profit
The International Rx segment profit for 2021 and 2020 was $403 million and $386 million, respectively, an increase of $17 million, or 4%. The increase was primarily driven by a decrease in SG&A expenses, partially offset by the decrease in contribution primarily attributable to our divestiture of Amoun on July 26, 2021.
Ortho Dermatologics Segment:
Ortho Dermatologics Segment Revenue
The Ortho Dermatologics segment includes the Thermage® and Jublia® product lines, which accounted for approximately 42% and 10% of the Ortho Dermatologics segment revenues for 2021, respectively. No other single product group represents 10% or more of the Ortho Dermatologics segment revenues. The Ortho Dermatologics segment revenue was $564 million and $548 million for 2021 and 2020, respectively, an increase of $16 million, or 3%. The increase was primarily attributable to: (i) an increase in volume of $54 million and (ii) the favorable impact of foreign currencies of $9 million. These increases were partially offset by a decrease in net realized pricing of $47 million, as a result of higher sales deductions for our medical dermatology products. The increase in volume was primarily due to: (i) increased demand of Thermage FLX® in our Solta aesthetic medical device business and (ii) the positive impacts from the recovery from the COVID-19 pandemic and the easing of certain social restrictions, as previously discussed, and were partially offset by the impact of generic competition as certain medical dermatology products, such as Elidel®, lost exclusivity.
Ortho Dermatologics Segment Profit
The Ortho Dermatologics segment profit was $265 million and $228 million for 2021 and 2020, respectively, an increase of $37 million, or 16%. The increase was primarily due to: (i) an increase in contribution primarily attributable to the net increase in revenues, as previously discussed, (ii) a decrease in selling expenses and (iii) a decrease in R&D expenses due to the impact of rebalancing our portfolio within the Ortho Dermatologics business.
Diversified Products Segment:
Diversified Products Segment Revenue
The following table displays the Diversified Products segment revenues by product and product revenues as a percentage of segment revenue for 2021 and 2020.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Years Ended December 31, | | Change |
| | | 2021 | | 2020 | | 2020 to 2021 |
| (in millions) | | Amount | | Pct. | | Amount | | Pct. | | Amount | | Pct. |
Wellbutrin® Franchise | | $ | 254 | | | 29% | | $ | 271 | | | 28% | | $ | (17) | | | (6)% |
Aplenzin® | | 109 | | | 13% | | 98 | | | 9% | | 11 | | | 11% |
Arestin® | | 89 | | | 10% | | 63 | | | 6% | | 26 | | | 41% |
Ativan® Franchise | | 53 | | | 6% | | 50 | | | 5% | | 3 | | | 6% |
Cardizem® Franchise | | 27 | | | 3% | | 35 | | | 4% | | (8) | | | (23)% |
Mysoline® Franchise | | 26 | | | 3% | | 27 | | | 3% | | (1) | | | (4)% |
Diastat® Franchise | | 24 | | | 3% | | 30 | | | 3% | | (6) | | | (20)% |
Xenazine® Franchise | | 22 | | | 3% | | 29 | | | 3% | | (7) | | | (24)% |
Elidel® Franchise | | 19 | | | 2% | | 17 | | | 2% | | 2 | | | 12% |
Librium® | | 17 | | | 3% | | — | | | —% | | 17 | | | 100% |
| Other product revenues | | 218 | | | 24% | | 351 | | | 35% | | (133) | | | (38)% |
| Other revenues | | 7 | | | 1% | | 8 | | | 2% | | (1) | | | (13)% |
| Total Diversified Products revenues | | $ | 865 | | | 100% | | $ | 979 | | | 100% | | $ | (114) | | | (12)% |
The Diversified Products segment revenue was $865 million and $979 million for 2021 and 2020, respectively, a decrease of $114 million, or 12%. The decrease was primarily driven by: (i) a decrease in volume of $288$72 million, primarily driven by: (a) the dermatology business, most notably with our Jublia® product, and to a lesser extent our Solodyn® product, which have experienced lower volumes since the change in our fulfillment model, (b) lower demand within the GI business most notably with our Glumetza® and Uceris® products attributable to competition and the increase in high deductible medical plans, (c) generic competition as certain products lost exclusivity, such as our Zegerid® product in our GI business and our Carac®, Targretin® and Ziana® products in our dermatology business and (d) reduced patient access by third party payors to certain legacy dermatology products and (ii) the decrease from the impact of the Dendreon Sale and other divestitures and discontinuations of $194 million.
These factors were partially offset by an increase in pricing of $129 million primarily driven by: (i) increased wholesale selling prices and (ii) lower discounts within the GI business in 2017 when compared to 2016. As previously discussed in “Cash Discounts and Allowances, Chargebacks and Distribution Fees,”as a result of corrective actions taken by the Company, and its continued pricing discipline during 2016, chargeback rates within the GI business were lower in 2017 when compared to 2016. This resulted in an increase in average realized pricing and was partially offset by higher managed care rebates, particularly in the dermatology business and to a lesser extent the GI business.
Branded Rx Segment Profit
The Branded Rx segment profit was $1,361 million and $1,517 million for 2017 and 2016, respectively, a decrease of $156 million, or 10%. The decrease was primarily driven by a decrease in contribution from: (i) the impact of the Dendreon Sale and other divestitures and discontinuations of $153 million, (ii) lower volume partially offset by higher average realized pricing and (iii) higher third-party royalty costs on certain drugs.
These factors were partially offset by: (i) a decrease in operating expenses of $112 million primarily related to lower advertising and promotional expenses and (ii) acquisition accounting adjustments related to inventories expensed in 2016 of $33 million.
U.S. Diversified Products Segment:
U.S. Diversified Products Segment Revenue
The following table displays the U.S. Diversified Products segment revenues by product and product revenues as a percentage of segment revenue for 2017 and 2016.
|
| | | | | | | | | | | | | | | | | | |
| | | Years Ended December 31, | | Change |
| | | 2017 | | 2016 | | 2016 to 2017 |
| (in millions) | | Amount | | Pct. | | Amount | | Pct. | | Amount | | Pct. |
Wellbutrin® | | $ | 234 |
| | 17% | | $ | 279 |
| | 15% | | (45 | ) | | (16)% |
Xenazine® US | | 113 |
| | 8% | | 157 |
| | 8% | | (44 | ) | | (28)% |
Isuprel® | | 105 |
| | 8% | | 178 |
| | 9% | | (73 | ) | | (41)% |
Syprine® | | 91 |
| | 7% | | 88 |
| | 5% | | 3 |
| | 3% |
Cuprimine® | | 78 |
| | 6% | | 104 |
| | 5% | | (26 | ) | | (25)% |
Ativan® | | 60 |
| | 4% | | 41 |
| | 2% | | 19 |
| | 46% |
Migranal® AG | | 53 |
| | 4% | | 54 |
| | 3% | | (1 | ) | | (2)% |
Mephyton® | | 51 |
| | 4% | | 56 |
| | 3% | | (5 | ) | | (9)% |
Glumetza® AG | | 39 |
| | 3% | | — |
| | —% | | 39 |
| | NM |
Aplenzin® | | 31 |
| | 2% | | 42 |
| | 2% | | (11 | ) | | (26)% |
| Other product revenues | | 509 |
| | 37% | | 900 |
| | 47% | | (391 | ) | | (43)% |
| Other revenues | | 14 |
| | 1% | | 20 |
| | 1% | | (6 | ) | | (30)% |
| Total U.S. Diversified revenues | | $ | 1,378 |
| | 100% | | $ | 1,919 |
| | 100% | | $ | (541 | ) | | (28)% |
NM — Not meaningful
The U.S. Diversified segment revenue was $1,378 million and $1,919 million for 2017 and 2016, respectively, a decrease of $541 million, or 28%. The decrease was primarily driven by: (i) a decrease in volume of $353 million and (ii) a decrease in averagenet realized pricing of $157 million. The decrease in volumes and average realized pricing is primarily driven by generic competition to certain products, such as Nitropress®, Isuprel®, Xenazine® and Wellbutrin® in our neurology business unit and the Zegerid® AG in our generics business unit.
U.S. Diversified Products Segment Profit
The U.S. Diversified segment profit was $994$33 million and $1,522 million for 2017 and 2016, respectively, a decrease of $528 million, or 35%. The decrease was primarily driven by the decrease in contribution as a result of decreases in volumes and average realized pricing.
2016 Compared with 2015
Revenues
Our revenue was $9,674 million and $10,447 million for 2016 and 2015, respectively, a decrease of $773 million, or 7%. The decrease was primarily driven by: (i) a decline in organic revenues of $1,277 million, (ii) the unfavorable impact of foreign currencies (most notably the Mexican peso, Egyptian pound and Chinese yuan) of $137 million, (iii) the impact of divestitures and discontinuations of $79 million and (iv) a decline$9 million. The decrease in other revenues (excludingvolume was primarily attributable to the impact of foreign currencies) of $15 million. These decreases were offset by incremental product sales of $735 million from the Salix Acquisition, the Amoun Acquisitiongeneric competition as certain products in our Neurology and other acquisitions.Other business, such as Migranal®, Xenazine®, Mephyton®, Isuprel®, Syprine®, Cuprimine® and Demser®, lost exclusivity.
OurDiversified Products Segment Profit
The Diversified Products segment revenues and segment profits are discussed in detail in the subsequent section titled "Reportable Segment Revenues and Profits".
Cash Discounts and Allowances, Chargebacks and Distribution Fees
|
| | | | | | | | | | | | | |
| | | Years Ended December 31, |
| | | 2016 | | 2015 |
| (in millions) | | Amount | | Pct. | | Amount | | Pct. |
| Gross product sales | | $ | 16,047 |
| | 100% | | $ | 15,508 |
| | 100 | % |
| Provisions to reduce gross product sales to net product sales | | | | | | | | |
| Discounts and allowances | | 789 |
| | 5% | | 614 |
| | 4 | % |
| Returns | | 460 |
| | 3% | | 482 |
| | 3 | % |
| Rebates | | 2,521 |
| | 16% | | 2,157 |
| | 15 | % |
| Chargebacks | | 2,318 |
| | 14% | | 1,736 |
| | 11 | % |
| Distribution service fees | | 423 |
| | 3% | | 227 |
| | 1 | % |
| | | 6,511 |
| | 41% | | 5,216 |
| | 34 | % |
| Net product sales | | $ | 9,536 |
| | 59% | | $ | 10,292 |
| | 66 | % |
Cash discounts and allowances, returns, rebates, chargebacks and distribution fees as a percentage of gross product sales were 41% and 34% in 2016 and 2015, respectively, an increase of 7% primarily driven by:
an increase in the provisions for discounts and allowances, primarily due to an increase in generic product sales as a percentage of gross product sales, which typically have higher discounts and allowances;
| |
• | an increase in the provisions for rebates primarily driven by increased sales of products that carry higher contractual rebates and co-pay assistance programs, including the impact of gross price increases where customers receive incremental rebates based on contractual price increase limitations. Specifically, the comparisons were impacted primarily by higher provisions for rebates, including managed care rebates for Jublia® and the co-pay assistance programs for launch products and other promoted products including Onexton®, Retin-A Micro® Microsphere 0.08% ("RAM 0.08%") and Solodyn®, as well as the Salix products. These increases were partially offset by a decrease in rebates for Glumetza® resulting from a decline in sales volume due to generic competition;
|
| |
• | an increase in the provisions for chargebacks primarily driven by increased utilization and higher chargebacks given to group purchasing organizations for product sales of Isuprel®, Nitropress® and Ammonul® and to the U.S. government in connection with product sales for Minocin®, Ativan®, Glumetza® and Targretin®, offset by decreases in utilization for the Wellbutrin® product line; and
|
higher distribution service fees primarily as a result of lower price appreciation credits. Price appreciation credits when realized (as previously explained) are offset against the distribution service fees we pay wholesalers. Price appreciation credits were $13profit was $624 million and $171$717 million for 20162021 and 2015,2020, respectively, a decrease of $158 million. The decrease in price appreciation credits was primarily the result of lower and fewer price increase actions in 2016 and lower inventory levels at the wholesalers.
Operating Expenses
Cost of Goods Sold (exclusive of amortization and impairments of intangible assets)
Cost of goods sold was $2,572 million and $2,532 million in 2016 and 2015, respectively, an increase of $40$93 million, or 2%. The increase13% and was primarily driven by the costs associated with incremental product sales from the Salix Acquisition, the Amoun Acquisition and other acquisitions. These increases were partially offset by: (i) costs attributable to the decrease in volumes from organic revenues, (ii) the favorable impact of foreign currencies, (iii) lower amortization of acquisition accounting adjustments related to inventories of $96 million and (iv) the decrease attributable to the impact of divestitures and discontinuations.
Cost of goods sold as a percentage of revenue was 27% and 24% for 2016 and 2015, respectively, an increase of 3 percentage points. The increase was primarily driven by a decrease in average realized pricing within the Branded Rx, U.S. Diversified and Bausch + Lomb/International segments of $431 million, $123 million and $98 million, respectively. The increase is also attributable to an unfavorable change in product mix, as, in 2016, a greater percentage of our revenue was attributable to the Bausch + Lomb/International segment, which generally has lower gross margins than the balance of the Company's product portfolio. Our segment revenues and segment profits are discussed in detail in the subsequent section titled "Reportable Segment Revenues and Profits". These increases in costs of goods sold as a percentage of revenue were partially offset by the decrease in acquisition accounting adjustments related to inventories expensed in 2016 and 2015 of $38 million and $96 million (or 1% of 2015 product revenues), respectively, primarily related to the fair value step-up in inventories acquired in the Salix Acquisition and other acquisitions.
Selling, General and Administrative Expenses
SG&A was $2,810 million and $2,700 million for 2016 and 2015, respectively, an increase of $110 million, or 4%. The increase was primarily driven by: (i) incremental SG&A related to the Salix Acquisition, the Amoun Acquisition and other acquisitions of $193 million, (ii) termination benefits associated with our former Chief Executive Officer ("CEO") of $38 million recognized in the first quarter consisting of: (a) the pro-rata vesting of performance-based restricted stock units ("RSUs") (no shares were issued on vesting of these performance-based RSUs because the associated market-based performance condition was not attained), (b) a cash severance payment and (c) a pro-rata annual cash bonus, (iii) professional fees in connection with recent legal and governmental proceedings, investigations and information requests relating to, among other matters, our distribution, marketing, pricing, disclosure and accounting practices of $65 million, (iv) severance and other benefits paid to our exiting executives (excluding benefits paid to the former CEO) and costs associated with recruiting and on-boarding new executive team members and (v) an increase in legal and professional fees in connection with ongoing corporate and business matters. These factors were partially offset by: (i) a net decrease in advertising and selling expenses of $96 million, primarily driven by decreases in promotion and advertising in our dermatology and Salix businesses, (ii) an increase in bad debt expense and (iii) the favorable impact of foreign currencies.
Research and Development Expenses
R&D expenses were $421 million and $334 million for 2016 and 2015, respectively, an increase of $87 million, or 26%. The increase was driven by our focus to maximize the value of our core segments. To bring out additional value in our core Branded Rx segment, we dedicated additional resources to enhance our dermatology and GI product portfolios. A significant portion of this increase is associated with the testing and attaining regulatory approval for Siliq™ (brodalumab) which was launched in the U.S. on July 27, 2017.
Amortization of Intangible Assets
Amortization of intangible assets was $2,673 million and $2,257 million for 2016 and 2015, respectively, an increase of $416 million, or 18%. The increase was driven by a full year of amortization of intangible assets acquired in the Salix Acquisition, the Sprout Acquisition, the Amoun Acquisition and other business and asset acquisitions and includes a $275 million increase related to the Xifaxan® product brands, which includes Xifaxan® 550 mg for the treatment of irritable bowel syndrome with diarrhea in adults ("Xifaxan® IBS-D") approved by the FDA in May 2015.
Goodwill impairments
Goodwill impairments was $1,077 million for 2016.
Commencing in the three months ended September 30, 2016, the Company operates in three operating segments: (i) Bausch + Lomb/International, (ii) Branded Rx and (iii) U.S. Diversified Products. The realignment of the segment structure resulted in changes in the Company’s reporting units. In the third and fourth quarter of 2016, goodwill impairment testing was performed under the former reporting unit structure immediately prior to the change and under the current reporting unit structure immediately subsequent to the change.
Under the former reporting unit structure, the fair value of each reporting unit exceeded its carrying value by more than15%, except for the former U.S. reporting unit whose carrying value exceeded its fair value by 2%. As a result, the Company proceeded to perform step two of the goodwill impairment test for the former U.S. reporting unit and determined that the carrying value of the unit's goodwill exceeded its implied fair value, which resulted in an initial goodwill impairment charge of $838 million in the three months ended September 30, 2016. In the three months ended December 31, 2016, step two testing was completed and we concluded that the excess of the carrying value of the former U.S. reporting unit's unadjusted goodwill over its implied value as of September 30, 2016 was $905 million and recognized an incremental goodwill impairment charge of $67 million for the fourth quarter of 2016. The goodwill impairment was primarily driven by changes to the Company's forecasted performance which resulted in a lower fair value of the U.S. businesses, mainly the Salix business.
Under the current reporting unit structure, the carrying value of the Salix reporting unit exceeded its fair value, as updates to the unit's forecast resulted in a lower estimated fair value for the business. As a result, the Company proceeded to perform step two of the goodwill impairment test for the Salix reporting unit and determined that the carrying value of the unit's goodwill exceeded its implied fair value, which resulted in an initial goodwill impairment charge of $211 million in the three months ended September 30, 2016. In the three months ended December 31, 2016, step two testing was completed and we concluded that the excess of the carrying value of the Salix reporting unit's unadjusted goodwill over its implied value as of September 30, 2016 was $172 million and recognized a credit of $39 million to the initial goodwill impairment charge for the fourth quarter of 2016.
See Note 9, "INTANGIBLE ASSETS AND GOODWILL" to our audited Consolidated Financial Statements for further details related to our goodwill impairment analysis.
Asset Impairments
Asset impairments were $422 million for 2016 and included: (i) $199 million related to Ruconest® which was divested on December 7, 2016, (ii) $25 million related to intangible assets associated with IBSChek™ and was attributable to declining sales trends and (iii) $14 million related to the termination of the development program for Cirle 3-dimensional surgical navigation technology.
Asset impairments were $304 million for 2015 and included: (i) $90 million in the third quarter related to the Rifaximin SSD development program based on analysis of Phase 2 study data, (ii) $79 million in connection with the termination of the arrangements with and relating to Philidor, (iii) $28 million in the fourth quarter related to the original Emerade® program in the U.S. based on analysis of feedback received from the FDA, (iv) $27 million related to the remaining intangible asset for ezogabine/retigabine (immediate-release formulation) resulting from declining sales trends, (v) $26 million related to Zelapar® resulting from declining sales trends and (vi) $12 million in the second quarter related to the Arestin® Peri-Implantitis development program based on analysis of Phase 3 study data.
See Note 4, "DIVESTITURES" and Note 9, "INTANGIBLE ASSETS AND GOODWILL" to our audited Consolidated Financial Statements regarding further details related to our intangible assets.
Restructuring and Integration Costs
Restructuring and integration costs were $132 million and $362 million for 2016 and 2015, respectively. As of December 31, 2017, we have substantially completed the integration of the businesses acquired prior to 2016. The Company continues to evaluate opportunities to streamline its operations and identify additional cost savings globally. Although a specific plan does not exist at this time, the Company may identify and take additional exit and cost-rationalization restructuring actions in the future, the costs of which could be material. See Note 5, "RESTRUCTURING AND INTEGRATION COSTS" to our audited Consolidated Financial Statements for further details regarding these actions.
Acquired In-Process Research and Development Costs
Acquired in-process research and development costs were $34 million for 2016 and was primarily related to a $25 million license payment. Acquired in-process research and development costs were $106 million for 2015 and was primarily related to a $100 million upfront payment to acquire certain multi-year licensing rights to Siliq™ (brodalumab), which was launched in the U.S. on July 27, 2017.
Acquisition-Related Contingent Consideration
Acquisition-related contingent consideration was a net gain of $13 million for 2016. This net gain included net fair value adjustments of $105 million which were partially offset by accretion for the time value of money of $92 million.
Acquisition-related contingent consideration was a net gain of $23 million for 2015. This net gain included net fair value adjustments of $78 million which were partially offset by accretion for the time value of money of $55 million.
See Note 6, "FAIR VALUE MEASUREMENTS" to our audited Consolidated Financial Statements for further details.
Other (income) expense, net
Other (income) expense, net for 2016 and 2015 consists of the following:
|
| | | | | | | | |
| (in millions) | | 2016 | | 2015 |
| Net loss (gain) on other sales of assets | | (6 | ) | | 8 |
|
| Other post business combination expenses | | — |
| | 183 |
|
| Litigation and other matters | | 59 |
| | 37 |
|
| Other, net | | 20 |
| | 67 |
|
| Other (income) expense, net | | $ | 73 |
| | $ | 295 |
|
Litigation and other matters includes amounts provided for certain matters discussed in Note 21, "LEGAL PROCEEDINGS" to our audited Consolidated Financial Statements.
In 2016, Litigation and other matters includes: (i) an unfavorable adjustment of $90 million from the proposed settlement of the Salix securities litigation and (ii) a favorable adjustment of $39 million from the settlement of the investigation into Salix's pre-acquisition sales and promotional practices for the Xifaxan®, Relistor® and Apriso® products. Net gain on other sales of assets includes: (i) a gain of $20 million from an amendment to a license agreement terminating the Company's right to develop and commercialize brodalumab in Europe and (ii) a loss of $22 million from the divestiture of Ruconest®.
In 2015, Other post business combination expenses includes: (i) $168 million related to the acceleration of unvested restricted stock for Salix employees (including $3 million of related payroll taxes) in connection with the Salix Acquisition and (ii) $12 million related to bonuses paid to Amoun employees. Litigation and other matters includes $25 million related to the AntiGrippin® litigation.
Non-Operating Income and Expense
Interest Expense
Interest expense was $1,836 million and $1,563 million and included non-cash amortization and write-offs of debt discounts and deferred financing costs of $118 million and $145 million for 2016 and 2015, respectively. The increase in interest expense of $273 million, or 17%, was primarily due to: (i) higher principal amounts of outstanding debt during 2016, mainly as a result of the Salix Acquisition financing during 2015 and (ii) higher interest rates resulting from amendments to our Credit Agreement in 2016. The weighted average stated rate of interest as of December 31, 2016 and 2015 was 5.75% and 5.10%, respectively.
See Note 11, "FINANCING ARRANGEMENTS" to our audited Consolidated Financial Statements for further details.
Loss on Extinguishment of Debt
Loss on extinguishment of debt was $20 million for 2015 and was related to the redemption of the December 2018 Notes in February 2015.
Foreign Exchange and Other
Foreign exchange and other was a net loss of $41 million for 2016 and includes: (i) a foreign exchange loss related to a euro-denominated intercompany loan and (ii) net foreign exchange losses related to intercompany transactions within our European operations.
Foreign exchange and other was a net loss of $103 million for 2015 and includes: (i) a foreign exchange loss related to a euro-denominated intercompany loan of $50 million, (ii) a $26 million loss recognized in connection with the foreign currency forward-exchange contracts entered into in March 2015 and (iii) net foreign exchange losses related to other intercompany transactions within our European operations.
Income Taxes
Benefit from income taxes was $27 million for 2016 versus a provision for income taxes of $133 million for 2015.
In 2016, our effective tax rate differed from the Canadian statutory tax rate of 26.9% due to: (i) tax provisions related to internal integrations and restructurings, (ii) the impact of non-deductible goodwill impairment, (iii) the effect of valuation allowance on our tax attribute carryforwards in Canada, (iv) the net benefit of intra-entity transfers including the amortization of intangibles for tax purposes and (v) income earned in jurisdictions with a lower statutory rate than in Canada. Our consolidated foreign rate differential reflects the net total tax cost or benefit on income earned or losses incurred in jurisdictions outside of Canada as compared to the net total tax cost or benefit of such income (on a jurisdictional basis) at the Canadian statutory rate. Tax costs below the Canadian statutory rate generate a beneficial foreign rate differential as do tax benefits generated in jurisdictions where the statutory tax rate exceeds the Canadian statutory tax rate. The net total foreign rate differentials generated in each jurisdiction in which we operate is not expected to bear a direct relationship to the net total amount of foreign income (or loss) earned outside of Canada.
In 2015, our effective tax rate differed from the Canadian statutory tax rate of 26.9% due to: (i) income earned in jurisdictions with a lower statutory rate than in Canada, (ii) the effect of valuation allowance on our tax attribute carryforwards, (iii) tax benefits related to internal integrations and restructurings, and (iv) benefit of intra-entity transfers including the amortization of intangibles for tax purposes. Our consolidated foreign rate differential reflects the net total tax cost or benefit on income earned or losses incurred in jurisdictions outside of Canada as compared to the net total tax cost or benefit of such income (on a jurisdictional basis) at the Canadian statutory rate. Tax costs below the Canadian statutory rate generate a beneficial foreign rate differential as do tax benefits generated in jurisdictions where the statutory tax rate exceeds the Canadian statutory tax rate. The net total foreign rate differentials generated in each jurisdiction in which we operate is not expected to bear a direct relationship to the net total amount of foreign income (or loss) earned outside of Canada.
See Note 18, "INCOME TAXES" to our audited Consolidated Financial Statements for further details regarding income taxes.
Reportable Segment Revenues and Profits
The following table presents segment revenues, segment revenues, as a percentage of total revenues, and the year over year changes in segment revenues for 2016 and 2015. The following table also presents segment profits, segment profits as a percentage of segment revenues and the year over year changes in segment profits for 2016 and 2015.previously discussed.
|
| | | | | | | | | | | | | | | | | | | | | |
| | | Years Ended December 31, | | Change |
| | | 2016 | | 2015 | | 2015 to 2016 |
| (in millions) | | Amount | | Pct. | | Amount | | Pct. | | Amount | | Pct. |
| Segment Revenue | | | | | | | | | | | | |
| Bausch + Lomb /International | | $ | 4,927 |
| | 51 | % | | $ | 4,937 |
| | 47 | % | | $ | (10 | ) | | — | % |
| Branded Rx | | 2,828 |
| | 29 | % | | 3,248 |
| | 31 | % | | (420 | ) | | (13 | )% |
| U.S. Diversified Products | | 1,919 |
| | 20 | % | | 2,262 |
| | 22 | % | | (343 | ) | | (15 | )% |
| Total revenues | | $ | 9,674 |
| | 100 | % | | $ | 10,447 |
| | 100 | % | | $ | (773 | ) | | (7 | )% |
| | | | | | | | | | | | | |
| Segment Profits / Segment Profit Margins | | | | | | | | | | | | |
| Bausch + Lomb/International | | $ | 1,483 |
| | 30 | % | | $ | 1,686 |
| | 34 | % | | $ | (203 | ) | | (12 | )% |
| Branded Rx | | 1,517 |
| | 54 | % | | 1,875 |
| | 58 | % | | (358 | ) | | (19 | )% |
| U.S. Diversified Products | | 1,522 |
| | 79 | % | | 1,785 |
| | 79 | % | | (263 | ) | | (15 | )% |
| Total segment profit | | $ | 4,522 |
| | 47 | % | | $ | 5,346 |
| | 51 | % | | $ | 1,307 |
| | 24 | % |
The following table presents organic revenue (Non-GAAP) and the year over year changes in organic revenue for 2016 and 2015 by segment. Organic revenue and organic growth rates are defined in section titled “Selected Financial Information”.
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Year Ended December 31, 2016 | | Year Ended December 31, 2015 | | Change in Organic Revenue |
| | | Revenue as Reported | | Revenues of Businesses Acquired | | Changes in Exchange Rates | | Organic Revenue (Non-GAAP) | | Revenue as Reported | | Revenues of Businesses Divested | | Organic Revenue (Non-GAAP) | |
| (in millions) | | | Amount | | Pct. |
| Bausch + Lomb /International | | $ | 4,927 |
| | $ | (239 | ) | | $ | 137 |
| | $ | 4,825 |
| | $ | 4,937 |
| | $ | (45 | ) | | $ | 4,892 |
| | $ | (67 | ) | | (1 | )% |
| Branded Rx | | 2,828 |
| | (383 | ) | | — |
| | 2,445 |
| | 3,248 |
| | (12 | ) | | 3,236 |
| | (791 | ) | | (24 | )% |
| U.S. Diversified Products | | 1,919 |
| | (113 | ) | | — |
| | 1,806 |
| | 2,262 |
| | (22 | ) | | 2,240 |
| | (434 | ) | | (19 | )% |
| Total | | $ | 9,674 |
| | $ | (735 | ) | | $ | 137 |
| | $ | 9,076 |
| | $ | 10,447 |
| | $ | (79 | ) | | $ | 10,368 |
| | $ | (1,292 | ) | | (12 | )% |
Bausch + Lomb/International Segment:
Bausch + Lomb/International Segment Revenue
The Bausch + Lomb/International segment revenue was $4,927 million and $4,937 million for 2016 and 2015, respectively, a decrease of $10 million, or less than 1%. The decrease was primarily driven by: (i) incremental product sales from the 2015 the acquisition of Synergetics USA Inc., the Amoun Acquisition and other acquisitions of $239 million and (ii) net increase in our organic revenues driven by volume of $37 million. During 2016, revenue from increased volumes in Latin America and the U.S. consumer businesses were partially offset by decreases in volumes in Europe as the inventory levels in Europe were worked-down to our target inventory levels, particularly in Poland and Russia.
These factors were partially offset by: (i) the unfavorable impact of foreign currencies of $137 million, (ii) net decrease in organic revenues driven by a decrease in average realized pricing of $99 million primarily attributable to lower realized prices related to our ophthalmology products as a result of the implementation of rebates and other price adjustments during the year and (iii) the impact from divestitures and discontinuations of $45 million.
The unfavorable impact of foreign exchange of $137 million, were primarily due to the strengthening of the U.S. dollar against certain currencies, most notably the Mexican peso, Egyptian pound and Chinese yuan, partially offset by the strengthening of the Japanese yen against the U.S. dollar. In November 2016, as a result of the Egyptian government’s decision to float the Egyptian pound and un-peg it to the U.S. Dollar, the Egyptian pound was significantly devalued. Our exposure to the Egyptian pound is primarily with respect to Amoun Pharmaceutical Company S.A.E., which we acquired in October 2015, and which represented approximately 2% of our total 2017 and 2016 revenues or approximately 3% and 4% of 2017 and 2016 revenues, respectively, from our Bausch + Lomb/International segment.
Bausch + Lomb/International Segment Profit
The Bausch + Lomb/International segment profit was $1,483 million and $1,686 million for 2016 and 2015, respectively, a decrease of $203 million, or 12%. The decrease was primarily driven by: (i) a decrease in contribution from lower average realized pricing of organic revenues, (ii) the unfavorable impact of foreign exchange due to the strengthening of the U.S. dollar against certain currencies, most notably the Mexican peso, Egyptian pound and Chinese yuan, (iii) an increase in operating expenses (excluding amortization and impairments of intangible assets) associated with the Amoun Acquisition and other acquisitions and (iv) the decrease in contribution from the impact of divestitures and discontinuations of $28 million.
These factors were partially offset by the increase in contribution associated the incremental revenues from the Salix Acquisition, the Amoun Acquisition and other acquisitions of $116 million.
Branded Rx Segment:
Branded Rx Segment Revenue
The Branded Rx segment revenue was $2,828 million and $3,248 million for 2016 and 2015, respectively, a decrease of $420 million, or 13%. The decrease was primarily driven by: (i) a decrease in average realized prices of $430 million primarily attributable to: (a) higher managed care rebates particularly in the dermatology and Salix businesses, (b) lower price appreciation credits particularly in the dermatology and Salix businesses and (c) the new fulfillment arrangement with Walgreens, (ii) a decrease in volume of $363 million primarily attributable to: (a) the dermatology business, most notably with our Jublia®, Solodyn® and Ziana® products, which have experienced lower volumes since the change in our fulfillment model and (b) generic competition
as certain products lost exclusivity, such as our Glumetza® and Zegerid® products in our Salix business unit and our Ziana® product in our dermatology business unit and (iii) the decrease from the impact of divestitures and discontinuations of $12 million.
These factors were partially offset by the incremental product revenue of $383 million from acquisitions, primarily the Salix Acquisition (mainly driven by Xifaxan®, as well as Uceris®, Apriso®, Relistor® and Zegerid® product sales for the three months ended March 31, 2016) and the acquisition of certain assets of Dendreon Corporation (Provenge® product sales). Approximately 10% of the increase is attributable to price increases implemented subsequent to these 2015 acquisitions (primarily related to Apriso®, Zegerid® and Relistor®). Price appreciation credits in 2016 related to product sales from 2015 acquisitions were nominal due to lower and fewer price increases.
Branded Rx Segment Profit
The Branded Rx segment profit was $1,517 million and $1,875 million for 2016 and 2015, respectively, a decrease of $358 million, or 19%. The decrease was primarily driven by: (i) a decrease in contribution from organic revenues that includes decreases in contribution from lower average realized pricing and volumes and (ii) a decrease in contribution from the impact of divestitures and discontinuations of $11 million.
These factors were partially offset by: (i) an increase in contribution associated with the Salix Acquisition (primarily driven by Xifaxan®, as well as Uceris®, Apriso®, Relistor® and Zegerid® product sales) and other acquisitions of $285 million, (ii) lower amortization of acquisition accounting adjustments related to inventories of $53 million and (iii) a decrease in operating expenses (excluding amortization and impairments of finite-lived intangible assets) primarily related to lower advertising and promotional expenses to support the dermatology business.
U.S. Diversified Products Segment:
U.S. Diversified Products Segment Revenue
The following table displays the U.S. Diversified Products segment revenues in U.S. dollars by product and product revenues as a percentage of segment revenue for 2016 and 2015.
|
| | | | | | | | | | | | | | | | | | |
| | | Years Ended December 31, | | Change |
| | | 2016 | | 2015 | | 2015 to 2016 |
| (in millions) | | Amount | | Pct. | | Amount | | Pct. | | Amount | | Pct. |
Wellbutrin® | | $ | 279 |
| | 15% | | $ | 306 |
| | 14% | | $ | (27 | ) | | (9)% |
Isuprel® | | 178 |
| | 9% | | 224 |
| | 10% | | (46 | ) | | (21)% |
Xenazine® US | | 157 |
| | 8% | | 223 |
| | 10% | | (66 | ) | | (30)% |
Nitropress® | | 130 |
| | 7% | | 219 |
| | 10% | | (89 | ) | | (41)% |
Cuprimine® | | 104 |
| | 5% | | 70 |
| | 3% | | 34 |
| | 49% |
Zegerid® AG | | 98 |
| | 5% | | — |
| | —% | | 98 |
| | NM |
Syprine® | | 88 |
| | 5% | | 89 |
| | 4% | | (1 | ) | | (1)% |
Mephyton® | | 56 |
| | 3% | | 58 |
| | 3% | | (2 | ) | | (3)% |
Migranal® AG | | 54 |
| | 3% | | 34 |
| | 2% | | 20 |
| | 59% |
Aplenzin® | | 42 |
| | 2% | | 40 |
| | 2% | | 2 |
| | 5% |
| Other products | | 713 |
| | 38% | | 967 |
| | 42% | | (254 | ) | | (26)% |
| Other Revenues | | 20 |
| | 1% | | 32 |
| | 1% | | (12 | ) | | (38)% |
| The U.S. Diversified revenues | | $ | 1,919 |
| | 100% | | $ | 2,262 |
| | 100% | | $ | (343 | ) | | (15)% |
NM — Not meaningful
The U.S. Diversified segment revenue was $1,919 million and $2,262 million for 2016 and 2015, respectively, a decrease of $343 million, or 15%. The decrease was primarily driven by: (i) a decrease in volume of $299 million primarily driven by generic competition to our Neurology products (Xenazine®, Mestinon®, Ammonul® and Sodium Edecrin®), (ii) a decrease in average realized prices of $123 million primarily attributable to our Neurology products and as a result of: (a) higher managed care rebates, (b) lower price appreciation credits and (c) higher group purchasing organization chargebacks on Nitropress® and Isuprel® and (iii) the decrease in contribution from the impact of divestitures and discontinuations of $22 million.
These factors were partially offset by incremental product sales revenue related to the acquisition of certain assets of Marathon Pharmaceuticals, LLC ("Marathon") (mainly driven by Isuprel® and Nitropress® product sales) and other acquisitions of $113 million.
U.S. Diversified Products Segment Profit
The U.S. Diversified segment profit was $1,522 million and $1,785 million for 2016 and 2015, respectively, a decrease of $263 million, or 15%. The decrease was primarily driven by: (i) the decrease in contribution from our organic revenues as a result of lower volumes and average realized pricing and (ii) the decrease in contribution from the impact of divestitures and discontinuations of $17 million. These factors were partially offset by an increase in contribution associated with the Salix Acquisition (Zegerid® authorized generic product sales) and the acquisition of certain assets of Marathon (Nitropress® and Isuprel®) and other acquisitions of $106 million.
LIQUIDITY AND CAPITAL RESOURCES
Cash Flows
Our primary sources of cash include: cash collected from customers, funds as available from our revolving credit facility, issuances of long-term debt and issuances of equity. Our primary uses of cash include: funding ongoing operations (including R&D), payments for improvements to our production infrastructure, interest and principal repayments of long-term debt and restructuring activities. Summarized cash flow information for 2017, 2016the years 2021, 2020 and 20152019 is as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Years Ended December 31, | | Change |
| (in millions) | | 2021 | | 2020 | | 2019 | | 2020 to 2021 | | 2019 to 2020 |
| Net loss | | $ | (937) | | | $ | (559) | | | $ | (1,783) | | | $ | (378) | | | | | $ | 1,224 | | | |
| Adjustments to reconcile Net loss to net cash provided by operating activities | | 2,491 | | | 2,036 | | | 3,602 | | | 455 | | | | | (1,566) | | | |
| Cash provided by operating activities before changes in operating assets and liabilities | | 1,554 | | | 1,477 | | | 1,819 | | | 77 | | | | | (342) | | | |
| Changes in operating assets and liabilities | | (128) | | | (366) | | | (318) | | | 238 | | | | | (48) | | | |
| Net cash provided by operating activities | | 1,426 | | | 1,111 | | | 1,501 | | | 315 | | | | | (390) | | | |
| Net cash provided by (used in) investing activities | | 409 | | | (261) | | | (419) | | | 670 | | | | | 158 | | | |
| Net cash (used in) provided by financing activities | | (1,513) | | | (2,294) | | | 1,443 | | | 781 | | | | | (3,737) | | | |
| Effect of exchange rate changes on cash and cash equivalents | | (19) | | | 16 | | | (4) | | | (35) | | | | | 20 | | | |
| Net increase (decrease) in Cash and cash equivalents and Restricted cash and other settlement deposits | | 303 | | | (1,428) | | | 2,521 | | | 1,731 | | | | | (3,949) | | | |
| Cash and cash equivalents and Restricted cash and other settlement deposits, beginning of year | | 1,816 | | | 3,244 | | | 723 | | | (1,428) | | | | | 2,521 | | | |
| Cash and cash equivalents and Restricted cash and other settlement deposits, end of year | | $ | 2,119 | | | $ | 1,816 | | | $ | 3,244 | | | $ | 303 | | | | | $ | (1,428) | | | |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
|
| | | | | | | | | | | | | | | | | | | | |
| | | Years Ended December 31, | | Change |
| ($ in millions) | | 2017 | | 2016 | | 2015 | | 2016 to 2017 | | 2015 to 2016 |
| Net income (loss) | | $ | 2,404 |
| | $ | (2,408 | ) | | $ | (288 | ) | | $ | 4,812 |
| | $ | (2,120 | ) |
| Adjustments to reconcile net income (loss) to net cash provided by operating activities | | (958 | ) | | 4,605 |
| | 3,213 |
| | (5,563 | ) | | 1,392 |
|
| Changes in operating assets and liabilities | | 844 |
| | (110 | ) | | (668 | ) | | 954 |
| | 558 |
|
| Net cash provided by operating activities | | 2,290 |
| | 2,087 |
| | 2,257 |
| | 203 |
| | (170 | ) |
| Net cash provided by (used in) investing activities | | 2,887 |
| | (125 | ) | | (15,577 | ) | | 3,012 |
| | 15,452 |
|
| Net cash (used in) provided by financing activities | | (4,963 | ) | | (1,963 | ) | | 13,624 |
| | (3,000 | ) | | (15,587 | ) |
| Effect of exchange rate changes on cash and cash equivalents | | 41 |
| | (54 | ) | | (30 | ) | | 95 |
| | (24 | ) |
| Net increase (decrease) in cash and cash equivalents and restricted cash | | 255 |
| | (55 | ) | | 274 |
| | 310 |
| | (329 | ) |
| Cash and cash equivalents and restricted cash, beginning of year | | 542 |
| | 597 |
| | 323 |
| | (55 | ) | | 274 |
|
| Cash and cash equivalents and restricted cash, end of year | | $ | 797 |
| | $ | 542 |
| | $ | 597 |
| | $ | 255 |
| | $ | (55 | ) |
Operating Activities
Net cash provided by operating activities was $2,290$1,426 million and $2,087$1,111 million in 20172021 and 2016,2020, respectively, an increase of $203$315 million. The increase was attributable to the year-over-year increases in: (i) Changes in operating assets and liabilities of $238 million or 10%.and (ii) Cash provided by operating activities before changes in operating assets and liabilities of $77 million.
Cash provided by operating activities before changes in operating assets and liabilities for the years 2021 and 2020 was $1,554 million and $1,477 million, respectively, an increase of $77 million. The increase was primarily attributable to: (i) the positive impacts on our operating results of the recovery from the COVID-19 pandemic and the easing of certain social restrictions, as previously discussed, and (ii) higher insurance recoveries during 2021 as compared to changes2020 associated with certain litigation matters. These increases were partially offset by: (i) higher payments of accrued legal settlements during 2021 as compared to 2020, (ii) higher payments for Separation and IPO costs and Separation-related and IPO-related costs during 2021 as compared to 2020 and (iii) the impacts of the non-recurrence of certain profit protection measures taken in our2020 to manage and reduce operating expenses during the COVID-19 pandemic, as previously discussed, which resulted in year-over-year increases in payments primarily for selling expenses and advertising and promotion expenses.
Changes in operating assets and liabilities asresulted in a result of better working capital management and the collection of trade receivables attributable to our fulfillment agreement with Walgreens in resolution of certain 2016 billing issues. These increasesnet decrease in cash from changesof $128 million and $366 million in our2021 and 2020, respectively, a favorable change of $238 million. During 2021, Changes in operating assets and liabilities werewas negatively impacted by: (i) the increase in trade receivables of $229 million, (ii) an increase in inventories of $16 million and (iii) lower interest payable due to the timing of payments of $13 million, partially offset by lower contributions from businesses divested and contributions from existing businesses as previously discussed and payments for the settlement of the legacy Salix securities class action litigation of $150 million (net of insurance proceeds).
As a result of our focus on our core businesses and divestitures of non-core businesses, we have reduced our inventory days and working capital days during 2017. Further, we have simplified our supply chain by reducing the number of manufacturing sites and have discontinued more than 1,900 stock keeping units or SKUs. These operational improvements generated over $800 million of additional cash from changes in working capital during 2017. Although we continually drive for operational excellence across our organization, we do not foresee significant cash generation during 2018 from additional reductions in working capital. However, at this time, we believe we have right-sized the Company's working capital to a level that fits our business size and needs.
Net cash provided by operating activities was $2,087 million and $2,257 million for 2016 and 2015, respectively, a decrease of $170 million, or 8%. The decrease is primarily attributable to changes in our operating results as previously discussed and was partially offset by decreases in our operating assets and liabilities during 2016.
The change in our operating assets and liabilities during 2016 was primarily driven by increases in inventories and decreases in accounts payable, accrued liabilities and other liabilities due to thepositive impact of the timing of other payments in the ordinary course of business partially offset by the reductionof $130 million. During 2020, Changes in prepaid expenses and other current assets. The changes in our operating assets and liabilities include a true-up payment of $110 million, related to price appreciation credits, received in the first quarter of 2016 under a distribution service agreement with one of our wholesalers. The change in our operating assets and liabilities during 2015 was primarily driven by increases in trade receivables, inventory, prepaid expenses and other current assets partially offset by increases in accounts payable, accrued liabilities and other liabilities due to the impact ofnegatively impacted by: (i) the timing of other payments and in the ordinary course of business. The changesbusiness of $495 million and (ii) an increase in our operating assetsinventories of $77 million and liabilities includewas partially offset by: (i) the post-acquisition build-up incollection of trade receivables of $170 million and (ii) an increase in 2015 relatedaccrued interest due to the Salix Acquisition and the acquisitiontiming of certain assetspayments of Marathon where minimal trade receivable balances were acquired.$36 million.
Investing Activities
Net cash provided by investing activities during 2017 was $2,887$409 million in 2021 and was primarily driven by the execution of leadership’s commitment to strengthen the Company’s balance sheet through theby: (i) Proceeds from sale of non-core assets. Net proceeds from salesassets and businesses, net of non-core assetscosts to sell of $3,253$669 million, as previously discussed, includeswhich is primarily attributable to the Skincare Sale, the Dendreon Sale, the iNova Sale, the ObagiAmoun Sale and other smaller divestitures(ii) Settlements from cross-currency swaps of $27 million, partially offset by Purchases of property, plant and were substantially used to reduce the Company's debt obligations. equipment of $269 million.
Net cash used in investing activities during 2016 was $125$261 million and included a reduction in cash due to the deconsolidation of a former subsidiary of $30 million and payments for businesses previously acquired of $19 million. Net cash used in investing activities during 2015 was $15,577 million2020 and was primarily driven by payments of $15,458 million related to purchases of businesses (net of cash acquired) and intangible assets, primarily the Salix Acquisition, the Sprout Acquisition, the Amoun Acquisition and the acquisitions of certain assets of Marathon and Dendreon Corporation. Other uses of cash by investing activities for 2017, 2016 and 2015 include payments for purchasesPurchases of property, plant and equipment of $171$302 million $235partially offset by: (i) Interest settlements from cross-currency swaps of $23 million and $235 million and acquisitions(ii) Proceeds from sale of intangible assets and other assets previously acquiredbusinesses, net of $165costs to sell of $21 million, $56 million and $68 million, respectively.primarily related to the receipt of a milestone payment associated with a prior year divestiture.
Financing Activities
Net cash used in financing activities during 20172021 was $4,963$1,513 million and was primarily driven by the execution of leadership’s commitment to improve the Company’s capital structure. In 2017, net cash used in financing activities included repayments of long-term debt of $14,203$3,440 million which consisted of: (i) term loans under our$1,600 million of 7.000% Senior Secured Credit FacilitiesNotes due 2024 as part of $9,478the 2021 Refinancing Transactions (as defined below), (ii) the aggregate prepayments of $1,600 million (ii) Senior Unsecured Notes of $4,100 millionusing cash on hand, cash generated from operations and (iii) amounts due under our revolving credit facility of $625 million. These repayments were funded with: (i) the net proceeds from the sales of non-core assets, including the Skincare Sale, the Dendreon Sale, the iNovaAmoun Sale and (iii) the Obagi Sale, (ii) netrepayment of $240 million previously drawn under our 2023 Revolving Credit Facility. Issuance of long-term debt (net of discounts) of $2,100 million primarily includes: (i) the proceeds of $9,424$1,575 million from the 2017 Refinancing Transactionsissuance of $1,600 million in principal amount of 4.875% Senior Secured Notes due June 2028 and (iii) cash on hand.(ii) draw downs of $525 million under our 2023 Revolving Credit Facility which we used primarily to make deposits of approximately $300 million, in the aggregate, into escrow funds under the terms of settlement agreements regarding the Glumetza Antitrust Litigation and to pay interest and other business expenses.
Net cash used in financing activities during 20162020 was $1,963$2,294 million and was primarily driven by the execution of leadership’s commitment to improve the Company’s capital structure. In 2016, net cash used in financing activities included: (i) repayments of term loans under our Senior Secured Credit Facilitieslong-term debt, net of $2,436 million which consisted of: (a) $1,841 million under our term loan facilitiesissuances and (b) $595 million under our revolving credit facility, (ii) paymentrelated discounts, of deferred consideration of $500 million in connection with the Sprout Acquisition, (iii) payments of contingent consideration of $123 million, including $50 million in connection with the FDA approval of Relistor® tablets and (iv) payments of $97 million, in the aggregate, in connection with the April 2016 amendment and the August 2016 amendment.$2,187 million. These factors were partially offset by $625repayments primarily include: (i) $1,240 million of net borrowings under our revolving credit facility, which included $1,220 million of borrowing and $595 million of repayments. Repayments of $1,841 million of term loan facilities consisted of repayments of: (i) mandatory scheduled 2016 term loan amortization payments of $556 million in aggregate, (ii) all outstanding principal amounts of the Series A-1 and Series A-2 Tranche A Term Loan Facilities of $260 million, (iii) mandatory scheduled 2017 term loan amortization payments of $610 million in aggregate, (iv) term loans with the proceeds from the sale of non-core assets of $140 million and (v) $275 million applied pro rata across the Company's term loans (of which $125 million represented an estimate of the mandatory excess cash flow payment for 2015 based on preliminary 2015 results at the time).
Net cash provided by financing activities during 2015 was $13,624 million and included: (i) aggregate net proceeds of approximately $16,490 million related to debt and equity issuances utilized to fund the Salix Acquisition, (ii) net proceeds of $992 million from the issuance of the 5.50%5.875% Senior Unsecured Notes due 2023 and (iii) net proceeds of $250 million from the issuance of incremental term loans under the Series A-3 Tranche A Term Loan Facility. These amounts were partially offset by: (i) the redemption of the convertible notes assumed in the Salix Acquisition of $3,123 million, (ii) the redemption(the "May 2023 Unsecured Notes"), which was previously financed as part of the December 2018 Notes2019 Financing and Refinancing Transactions and (ii) debt repayments of $500$902 million (iii) payments of contingent considerationusing cash on hand and deferred consideration of $206 million and (iv) payments of financing costs of $103 million primarily related to debt obtained in connection with the Salix Acquisition. The aggregate net proceeds of approximately $16,490 million related to debt and equity issuances utilized to fund the Salix Acquisition consisted of net proceedscash generated from the issuance of: (i) senior notes in March 2015 of approximately $10,000 million, (ii) incremental term loans under the Series
A-4 Tranche A Term Loan Facility and the Series F Tranche B Term Loan Facility of $5,060 million, in aggregate and (iii) common stock in March 2015 of $1,430 million.operations.
See Note 11,10, "FINANCING ARRANGEMENTS" to our audited Consolidated Financial Statements for further details regarding the financing activities previously described.
Liquidity and Debt
Future Sources of Liquidity
Our primary sources of liquidity are our cash and cash equivalents, cash collected from customers, funds as available from our revolving credit facility, issuances of long-term debt and issuances of equity and equity-linked securities. We believe these sources will be sufficient to meet our current liquidity needs for the next twelve months.
As previously discussed, at the end of 2021, we had substantially completed the internal objectives to facilitate the IPOs and related separation of the B+L and Solta Medical businesses. We continue to monitor market conditions and aim to launch the B+L IPO and the Solta IPO when financial market conditions are favorable (subject to receipt of regulatory, stock exchange and other approvals). However, there can be no assurance as to when we will complete either IPO, if at all. Until such time, we continue to manage these businesses along with our diverse portfolio of gastrointestinal, dermatology, neurology and other therapeutics, with our continued commitment to bring out additional value for our shareholders. Following the B+L IPO, we expect to complete the separation of Bausch + Lomb after the expiry of customary lockups related to the B+L IPO and achievement of targeted debt leverage ratios, subject to the receipt of applicable shareholder and other necessary approvals and market conditions. Nothing in the Form 10-K shall constitute an offer to sell or the solicitation of an offer to buy any securities of the Bausch + Lomb or Solta entities.
The Company regularly evaluates market conditions, its liquidity profile, and various financing alternatives for opportunities to enhance its capital structure. If opportunities are favorable, the Company may refinance or repurchase existing debt. We believe our existing cash and cash generated from operations will be sufficient to service our debt obligations through 2019.
Restricted Cash
Restricted cash was $77 million, $0 and $0 as of December 31, 2017, 2016 and 2015, respectively. During 2017, $77 million was deposited with a bank as collateral to secure a bank guarantee for the benefit of the Australian Government in connection with the notice of assessment received on August 8, 2017 from the Australian Taxation Office. The Company disagrees with the notice of assessment and continues to believe that its tax positions are appropriate and supported by the facts, circumstances and applicable laws and intends to defend its tax position in this matter vigorously. On January 9, 2018, the collateral of $77 million in Restricted cash was returned in exchange for a $77 million letter of credit.or issue equity or equity-linked securities.
Long-term Debt
Long-term debt, net of unamortized premiums, discounts and financeissuance costs was $25,444$22,654 million and $29,846$23,925 million as of December 31, 20172021 and December 31, 2016,2020, respectively. Aggregate contractual principal amounts due under our debt obligations were $25,752$22,870 million and $30,169$24,185 million as of December 31, 20172021 and 2016,2020, respectively, a decrease of $4,417$1,315 million.
In 2017, we completed a series of transactions that reduced our long-term debt principal and extended The decrease during 2021 was attributable to the maturities of a significant portion of our debt. Through the sale of certain non-core assets and using cash on hand, we repaid $4,641 million of debt principal during 2017. In addition, by accessing the credit markets, we: (i) refinanced $9,562 million that was due to mature in 2018 through 2022, which we extended out to 2022 through 2025, (ii) extended $1,190 million of commitments under our revolving credit facility, originally set to expire in April 2018, out to April 2020 and (iii) obtained less stringent loan financial maintenance covenants under our Senior Secured Credit Facilities, including the removal of the financial maintenance covenants from our term loans. As a result, the financial maintenance covenants apply only with respect to our revolving loans and can be waived or amended without the consent of the term loan lenders under the Credit Agreement. These refinancing transactions and debt repayments have had the effect of lowering our cash requirements for principal debt repayments through 2020 by more than $10,600 million as of December 31, 2017 as compared with those as of December 31, 2016.
Debt repaymentspreviously discussed under " - We used the proceeds from the sale of non-core assets, including the Skincare Sale, iNova Sale, Dendreon Sale and Obagi Sale, and made unscheduled prepayments using cash on hand to prepay $3,680 million of term loans under our Senior Secured Credit Facilities during 2017. Using cash on hand, we repurchased $500 million of our August 2018 Unsecured Notes, made mandatory scheduled principal repayments of $86 million under our Series F Tranche B Term Loan Facility and paid down $375 million of amounts outstanding under our revolving credit facility during 2017.
RefinancingCash Flows - On March 21, 2017, we completed a series of transactions that provided us with additional borrowings, which we used to: (i) repay $4,962 million of debt, representing all outstanding amounts of our senior secured: (a) Series A-3 Tranche A Term Loan Facility originally due October 2018, (b) Series A-4 Tranche A Term Loan Facility originally due April 2020, (c) Series D-2 Tranche B Term Loan Facility originally due February 2019, (d) Series C-2 Tranche B Term Loan Facility originally due December 2019 and (e) Series E-1 Tranche B Term Loan Facility originally due August 2020, (ii) repay $250 million of amounts outstanding under our revolving credit facility and (iii) repurchase, at a purchase price of 103%, $1,100 million of August 2018 Unsecured Notes. The sources of funds for the repayments and repurchases of the aforementioned debt obligations and related fees and expenses were obtained through: (i) a comprehensive amendment and refinancing of our Credit Agreement, which, among other matters, provided for incremental term loans under our Series F-3 Tranche B Term Loan of $3,060 million maturing April 2022, (ii) issuance of $1,250 million aggregate principal amount of March 2022 Secured Notes, (iii) issuance of $2,000 million aggregate principal amount of March 2024 Secured Notes and (iv) the use of cash on hand.Financing Activities".
On October 17, 2017, the Company issued $1,000 million aggregate principal amount of November 2025 Secured Notes in a private placement, the proceeds of which were used to: (i) repurchase $569 million in principal amount of 6.375% October 2020 Unsecured Notes and (ii) repurchase $431 million in principal amount of 7.00% October 2020 Unsecured Notes. The related fees and expenses were paid using cash on hand.
On November 21, 2017, the Company issued $750 million aggregate principal amount of November 2025 Secured Notes in a private placement, the proceeds of which were used to repay $750 million of our Series F Tranche B Term Loan Facility. These are additional notes that form part of the same series as the Company’s existing November 2025 Secured Notes. The related fees and expenses were paid using cash on hand.
On November 21, 2017, the Company entered into Amendment No. 16 to the Credit Agreement (“Amendment No. 16”) to, among other things, reprice the Series F Tranche B Term Loan Facility. The applicable margins for borrowings under the Series F Tranche B Term Loan Facility, as modified by the repricing, are 2.50% with respect to base rate borrowings and 3.50% with respect to LIBO rate borrowings. Any prepayment of the Series F Tranche B Term Loan Facility in connection with certain refinancings prior to May 21, 2018 will require a prepayment premium of 1.0% of such loans prepaid.
On December 18, 2017, the Company issued $1,500 million aggregate principal amount of the December 2025 Unsecured Notes in a private placement, the proceeds of which were used to: (i) repurchase $1,021 million in principal amount of 6.375% October 2020 Unsecured Notes, (ii) repurchase $291 million in principal amount of March 2020 Unsecured Notes and (iii) repurchase $188 million in principal amount of 7.00% October 2020 Unsecured Notes. The related fees and expenses were paid using cash on hand.
The aforementioned repayments, refinancings and other changes in our debt portfolio completed during 2017 have lowered our cash requirements for principal debt repayment over the next five years. The mandatory scheduled principal repayments of our debt obligations as of December 31, 2017 and 2016 were as follows:
|
| | | | | | | | |
| (in millions) | | December 31, 2017 | | December 31, 2016 |
| 2018 | | $ | 209 |
| | $ | 3,738 |
|
| 2019 | | — |
| | 2,122 |
|
| 2020 | | 2,690 |
| | 7,723 |
|
| 2021 | | 3,175 |
| | 3,215 |
|
| 2022 | | 5,115 |
| | 4,281 |
|
| Thereafter | | 14,563 |
| | 9,090 |
|
| Gross maturities | | $ | 25,752 |
| | $ | 30,169 |
|
On January 30, 2018, using cash on hand, we repaid $200 million of our Series F Tranche B Term Loan Facility satisfying, which we directed to be applied to satisfy (in part) payment of the expected $206 million Consolidated Excess Cash Flow payment for the year 2017. Also due in 2018, is $3 million which consists of (i) short-term loan obligations and (ii) lines of credit assumed from certain acquisitions prior to 2016 and are not related to the Senior Secured Credit Facility, Senior Secured Notes or Senior Unsecured Notes. As the table above demonstrates, as a result of these debt repayments and refinancing transactions, we have eliminated all mandatory scheduled principal long-term debt repayments through March 2020, providing us with additional liquidity and greater flexibility to execute our business plans.
See Note 11, "FINANCING ARRANGEMENTS" to our audited Consolidated Financial Statements and “Management's Discussion and Analysis - Liquidity and Capital Resources: Long-term Debt” for further details.
The weighted average stated rate of interest as of December 31, 2017 and 2016 was 6.07% and 5.75%, respectively.
Senior Secured Credit Facilities
On February 13, 2012,June 1, 2018, the Company and certain of its subsidiaries as guarantors entered into the “Senior Secured Credit Facilities” under the Company’s ThirdFourth Amended and Restated Credit and Guaranty Agreement, as amended by the First Incremental Amendment to the Restated Credit Agreement, dated as of November 27, 2018 (the “Credit“Restated Credit Agreement”) with a syndicate of financial institutions and investors.investors as lenders.
On March 3, 2017, the Company used proceeds from the Skincare Sale to repay $1,086 million of outstanding debt under its Senior Secured Credit Facilities.
On March 21, 2017, the Company entered into Amendment No. 14 to theThe Restated Credit Agreement (“Amendment No. 14”) which: (i) provided additional financing from an incremental term loan under the Company's Series F-3 Tranche B Term Loan of $3,060 million, (ii) amended the financial covenants contained in the Credit Agreement, (iii) increased the amortization rateprovides for the Series F Tranche B Term Loan Facility from 0.25% per quarter (1% per annum) to 1.25% per quarter (5% per annum), with quarterly repayments starting March 31, 2017, (iv) amended certain financial definitions, including the definition of Consolidated Adjusted EBITDA and (v) provided additional ability for the Company to, among other things, incur indebtedness and liens, consummate acquisitions and make other investments, including relaxing certain limitations imposed by prior amendments. The proceeds from the additional financing, combined with the proceeds from the issuance of the Senior Secured Notes described below and cash on hand, were used to: (i) repay all outstanding balances under the Company’s Series A-3 Tranche A Term Loan Facility, Series A-4 Tranche A Term Loan Facility, Series D-2 Tranche B Term Loan Facility, Series C-2 Tranche B Term Loan Facility and Series E-1 Tranche B Term Loan Facility (collectively the “Refinanced Debt”), (ii) repurchase $1,100 million in principal amount of the August 2018 Senior Unsecured Notes, (iii) repay $350 million of amounts outstanding under the Company's Revolving Credit Facility and (iv) pay related fees and expenses.
Amendments to the covenants made as part of Amendment No. 14 include: (i) removed the financial maintenance covenants with respect to the Series F Tranche B Term Loan Facility, (ii) reduced the interest coverage ratio maintenance covenant to 1.50:1.00 with respect to the Revolving Credit Facility beginning in the quarter ending March 31, 2017 through the quarter ending March 31, 2019 (stepping up to 1.75:1.00 thereafter) and (iii) increased the secured leverage ratio maintenance covenant to 3.00:1.00 with respect to the Revolving Credit Facility beginning in the quarter ending March 31, 2017 through the quarter ending March 31, 2019 (stepping down to 2.75:1.00 thereafter). These financial maintenance covenants apply only with respect to the Revolving Credit Facility and can be waived or amended without the consent of the term loan lenders under the Credit Agreement.
Modifications to Consolidated Adjusted EBITDA from Amendment No. 14 included, among other things: (i) modifications to permit the Company to add back extraordinary, unusual or non-recurring expenses or charges (including certain costs of, and payments of, litigation expenses, actual or prospective legal settlements, fines, judgments or orders, subject to a cap of $500 million in any twelve month period, of which no more than $250 million may pertain to any costs, payments, expenses, settlements, fines, judgments or orders, in each case, arising out of any actual or potential claim, investigation, litigation or other proceeding that the Company did not publicly disclose (via press release or any filing with the SEC) on or prior to the effectiveness of Amendment No. 14, and subject to other customary limitations) and (ii) modifications to allow the Company to add back certain expenses, charges or losses actually reimbursed or for which the Company reasonably expects to be reimbursed by third parties pursuant to indemnification, reimbursement, insurance or similar agreements within 365 days, subject to customary limitations.
Amendment No. 14 was accounted for as a modification of debt to the extent the Refinanced Debt was replaced with the incremental Series F-3 Tranche B Term Loan issued to the same creditor and an extinguishment of debt to the extent the Refinanced Debt was replaced with Series F-3 Tranche B Term Loan issued to a different creditor. The Refinanced Debt that was replaced with the proceeds of the newly issued Senior Secured Notes was accounted for as an extinguishment of debt. For amounts accounted for as an extinguishment of debt, the Company incurred a Loss on extinguishment of debt of $27 million representing the difference between the amount paid to settle the extinguished debt and the extinguished debt’s carrying value (the stated principal amount net of unamortized discount and debt issuance costs). Payments made to the lenders of $38 million associated with the issuance of the new Series F-3 Tranche B Term Loan were capitalized and are being amortized as interest expense over the remaining term of the Series F Tranche B Term Loan Facility. Third party expenses of $3 million associated with the modification of debt were expensed as incurred and included in Interest expense.
On March 28, 2017, the Company entered into Amendment No. 15 to the Credit Agreement (“Amendment No. 15”) which provided for the extension of the maturity date of $1,190 million of revolving credit commitments under the Revolving Credit Facility from April 20, 2018 tofacility of $1,225 million, which matures on the earlier of: (i) April 20, 2020of June 1, 2023 and (ii) the date that is 91 calendar days prior to the scheduled maturity of any series or tranche of term loans under the Credit Agreement, certain Senior Secured Notes or Senior Unsecured Notes and any other indebtedness for borrowed money of the Company and Bausch Health Americas, Inc. ("BHA") in an aggregate principal amount in excess of $750 million. Unless otherwise terminated prior thereto,$1,000 million (the "2023 Revolving Credit Facility") and term loan facilities of original principal amounts of $4,565 million and $1,500 million, maturing in June 2025 (the “June 2025 Term Loan B Facility”) and November 2025 (the "November 2025 Term Loan B Facility"), respectively. Both the remaining $310 million of revolving credit commitmentsCompany and BHA are borrowers under the 2023 Revolving Credit Facility, borrowings under which may be made in U.S. dollars or Canadian dollars (or if an amendment to the Restated Credit Agreement is made to replace LIBOR with an alternative benchmark rate with respect to borrowings under the Revolving Credit Facility will continue to mature on April 20, 2018. Amendment No. 15 was accounted fordenominated in part as a debt modification, whereby the fees paid to lenders agreeing to extend their commitment through April 20, 2020 and the fees paid to lenders providing additional commitments were recognized as additional debt issuance costs and are being amortized over the remaining term of the Revolving Credit Facility. Amendment No. 15 was accounted for in part as an extinguishment of debt and the Company incurred a Loss on extinguishment of debt of $1 million representing the unamortized debt issuance costs associated with the commitments canceled by lenders in the amendment.
In April 2017, using the net proceeds from the Skincare Sale and the proceeds from the divestiture of a manufacturing facility in Brazil, the Company repaid $220 million of its Series F Tranche B Term Loan Facility. On July 3, 2017, using the net proceeds from the Dendreon Sale, the Company repaid $811 million of its Series F Tranche B Term Loan Facility.
On October 5, 2017, using the net proceeds from the iNova Sale, the Company repaid $923 million of its Series F Tranche B Term Loan Facility. On November 10, 2017, using the net proceeds from the Obagi Sale, the Company repaid $181 million of its Series F Tranche B Term Loan Facility. On November 21, 2017, using the proceeds from the November 2017 Refinancing Transactions, the Company repaid $750 million of its Series F Tranche B Term Loan Facility.
On November 21, 2017, the Company entered into Amendment No. 16 to the Credit Agreement (“Amendment No. 16”) to reprice the Series F Tranche B Term Loan Facility. The applicable margins for borrowings under the Series F Tranche B Term Loan Facility, as modified by the repricing, are 2.50% with respect to base rate borrowings and 3.50% with respect to LIBO rate borrowings. Any prepayment of the Series F Tranche B Term Loan Facility in connection with certain refinancings prior to May 21, 2018 will require a prepayment premium of 1.0% of such loans prepaid. Amendment No. 16 also increases the letter of credit facility sublimit under the Credit Agreement to $300 million and makes certain other amendments to provide the Company with additional flexibility to enter into certain cash management transactions. The Company paid a prepayment penalty of approximately $38 million in connection with Amendment No. 16 recognized in the Loss on extinguishment of debt in the consolidated statement of operations.
As of December 31, 2017, the Company had $250 million of outstanding borrowings, $94 million of issued and outstanding letters of credit, and remaining availability of $1,156 million under its Revolving Credit Facility. Of the $94 million issued and outstanding letters of credit, a $50 million letter of credit was issued as part of the $127 million of collateral to secure a bank guarantee for the benefit of the Australian Government in connection with the notice of assessment received on August 8, 2017 from the Australian Taxation Office, as discussed in Note 18, "INCOME TAXES"euros, euros). The Company disagrees with the notice of assessment and continues to believe that its tax positions are appropriate and supported by the facts, circumstances and applicable laws. The Company intends to defend its tax position in this matter vigorously. On January 9, 2018, the cash collateral of $77 million of Restricted cash was returned to the Company in exchange for a $77 million letter of credit.
Current Description of Senior Secured Credit Facilities
Borrowings under the Senior Secured Credit Facilities in U.S. dollars bear interest at a rate per annum equal to, at the Company's option, from time to time, either: (i) a base rate determined by reference to the higherhighest of: (a) the prime rate (as defined in the Restated Credit Agreement) and, (b) the federal funds effective rate plus 1/2 of 1%1.00% or (c) the eurocurrency rate (as defined in the Restated Credit Agreement) for a period of one month plus 1.00% (or if such eurocurrency rate shall not be ascertainable, 1.00%) or (ii) a LIBOeurocurrency rate determined by reference to the costs of funds for U.S. dollar deposits for the interest period relevant to such borrowing adjusted for certain additional costs (provided however, that the eurocurrency rate shall at no time be less than 0.00% per annum), in each case plus an applicable margin. With respect to
Borrowings under the 2023 Revolving Credit Facility these applicable margins have been subjectin euros, when available, are expected to increase or decrease quarterly based on the secured leverage ratio beginning with the quarter ended June 30, 2017. Based on its calculation of the Company’s secured leverage ratio, management does not anticipate any such increase or decreasebear interest at a term benchmark rate determined by reference to the current applicable marginscosts of funds for euro deposits for the nextinterest period relevant to such borrowing (provided however, that the eurocurrency rate is at no time expected to be less than 0.00% per annum), plus an applicable period.margin.
The loansBorrowings under the Senior Secured Credit Facilities may be made to, and the letters of credit under the2023 Revolving Credit Facility may be issued on behalf of,in Canadian dollars bear interest at a rate per annum equal to, at the Company. All borrowings under the Senior Secured Credit Facilities are subjectCompany's option, either: (i) a prime rate determined by reference to the satisfactionhigher of: (a) the rate of customary conditions, includinginterest last quoted by The Wall Street Journal as the absence“Canadian Prime Rate” or, if The Wall Street Journal ceases to quote such rate, the highest per annum interest rate published by the Bank of a defaultCanada as its prime rate and (b) the 1 month BA rate (as defined below) calculated daily plus 1.00% (provided however, that the prime rate shall at no time be less than 0.00%) or (ii) the bankers’ acceptance rate for Canadian dollar deposits in the Toronto interbank market (the “BA rate”) for the interest period relevant to such borrowing (provided however, that the BA rate shall at no time be less than 0.00% per annum), in each case plus an event of default and the accuracy in all material respects of representations and warranties.applicable margin.
Subject to certain exceptions and customary baskets set forth in the Restated Credit Agreement, the Company is required to make mandatory prepayments of the loans under the Senior Secured Credit Facilities under certain circumstances, including from: (a)(i) 100% of the net cash proceeds of insurance and condemnation proceeds for property or asset losses (subject to reinvestment rights, and net proceeds threshold), (b) 50% of the net cash proceeds from the issuance of equity securities subject to decrease based on leverage ratios (c)and net proceeds threshold), (ii) 100% of the net cash proceeds from the incurrence of debt (other than permitted debt as defineddescribed in the Restated Credit Agreement), (d)(iii) 50% of Consolidated Excess Cash Flow (as defined in the Restated Credit Agreement) subject to decrease based on leverage ratios and (e)subject to a threshold amount and (iv) 100% of net cash proceeds from asset sales outside the ordinary course of business (subject to reinvestment rights, which were restricted by the terms of the April 2016 amendment)decrease based on leverage ratios and net proceeds threshold). These mandatory prepayments may be used to satisfy future amortization.
The Company is permitted to voluntarily reduceapplicable interest rate margins for the unutilized portion ofJune 2025 Term Loan B Facility and the revolving commitment amountNovember 2025 Term Loan B Facility are 2.00% and repay outstanding loans under the Revolving Credit Facility at any time without premium or penalty, other than customary “breakage” costs1.75%, respectively, with respect to LIBObase rate loans.and prime rate borrowings and 3.00% and 2.75%, respectively, with respect to eurocurrency rate and BA rate borrowings. As of December 31, 2017, any prepayment2021, the stated rates of interest on the Series F Tranche BCompany’s borrowings under the June 2025 Term Loan B Facility in connection with certain refinancings prior to May 21, 2018 will require a prepayment premium of 1.0% of such loans prepaid.and the November 2025 Term Loan B Facility were 3.09% and 2.84% per annum, respectively.
The Company’s obligationsamortization rate for both the June 2025 Term Loan B Facility and the obligationsNovember 2025 Term Loan B Facility is 5.00% per annum. The Company may direct that prepayments be applied to such amortization payments in order of the guarantors under the Senior Secured Credit Facilities and cash management arrangements entered into with lenders under the Senior Secured Credit Facilities (or affiliates thereof) are secured by first-priority security interests in substantially all tangible and intangible assetsmaturity. As of the Company and the guarantors, including 100% of the capital stock of Valeant and each material subsidiary of the Company that is directly owned by the Company or another guarantor (other than Valeant’s foreign subsidiaries) and 65% of the capital stock of each foreign subsidiary of Valeant that is
directly owned by Valeant or owned by a guarantor that is a domestic subsidiary of Valeant, in each case subject to certain exclusions and limitations set forth in the credit documentation governingDecember 31, 2021, there were no remaining mandatory quarterly amortization payments for the Senior Secured Credit Facilities.
The applicable interest rate margins for borrowings under the 2023 Revolving Credit Facility are 2.25%-2.75%1.50% - 2.00% with respect to base rate or prime rate borrowings and 3.25%-3.75%2.50% - 3.00% with respect to LIBOeurocurrency rate or BA rate borrowings. As of December 31, 2017,2021, the stated rate of interest on the 2023 Revolving Credit Facility was 5.32%2.84% per annum. As of the date of this filing, the Company had $285 million outstanding borrowings, $54 million of issued and outstanding letters of credit, and remaining availability of $886 million under its 2023 Revolving Credit Facility. In addition, the Company is required to pay commitment fees of 0.25% - 0.50% per annum with respect to the unutilized commitments under the 2023 Revolving Credit Facility, payable quarterly in arrears. The Company also is required to pay: (i) letter of credit fees on the maximum amount available to be drawn under all outstanding letters of credit in an amount equal to the applicable margin on LIBOeurocurrency rate
borrowings under the 2023 Revolving Credit Facility on a per annum basis, payable quarterly in arrears, (ii) customary fronting fees for the issuance of letters of credit and (iii) agency fees.
The applicable interest rate margins forRestated Credit Agreement permits the Series F Tranche B Term Loan Facility are 2.50% with respectincurrence of incremental credit facility borrowings, up to base rate borrowingsthe greater of $1,000 million and 3.50% with respect28.5% of Consolidated Adjusted EBITDA (non-GAAP) (as defined in the Restated Credit Agreement), subject to LIBO ratecustomary terms and conditions, as well as the incurrence of additional incremental credit facility borrowings subject to, in the case of secured debt, a 0.75% LIBO rate floor. Assecured leverage ratio of December 31, 2017,not greater than 3.50:1.00, and, in the stated ratecase of unsecured debt, either a total leverage ratio of not greater than 6.50:1.00 or an interest on the Company’s borrowings under the Series F Tranche B Term Loan Facility was 4.94% per annum.
Ascoverage ratio of December 31, 2017, there were no remaining quarterly amortization repayments for the Senior Secured Credit Facilities.not less than 2.00:1.00.
Senior Secured Notes
The Senior Secured Notes are guaranteed by each of the Company’s subsidiaries that is a guarantor under the Restated Credit Agreement and existing Senior Unsecured Notes (together, the “Note Guarantors”). The Senior Secured Notes and the guarantees related thereto are senior obligations and are secured, subject to permitted liens and certain other exceptions, by the same first priority liens that secure the Company’s obligations under the Restated Credit Agreement under the terms of the indentureindentures governing the Senior Secured Notes.
The Senior Secured Notes and the guarantees rank equally in right of repayment with all of the Company’s and Note Guarantors’ respective existing and future unsubordinated indebtedness and senior to the Company’s and Note Guarantors’ respective future subordinated indebtedness. The Senior Secured Notes and the guarantees related thereto are effectively pari passu with the Company’s and the Note Guarantors’ respective existing and future indebtedness secured by a first priority lien on the collateral securing the Senior Secured Notes and effectively senior to the Company’s and the Note Guarantors’ respective existing and future indebtedness that is unsecured, including the existing Senior Unsecured Notes, or that is secured by junior liens, in each case to the extent of the value of the collateral. In addition, the Senior Secured Notes are structurally subordinated to: (i) all liabilities of any of the Company’s subsidiaries that do not guarantee the Senior Secured Notes and (ii) any of the Company’s debt that is secured by assets that are not collateral.
Upon the occurrence of a change in control (as defined in the indentures governing the Senior Secured Notes), unless the Company has exercised its right to redeem all of the notes of a series, as previously described, holders of the Senior Secured Notes may require the Company to repurchase such holder’s notes, in whole or in part, at a purchase price equal to 101% of the principal amount thereof plus accrued and unpaid interest.
6.50%The aggregate principal amount of our Senior Secured Notes due 2022as of December 31, 2021 and 2020 was $3,850 million and $4,250 million, respectively, a decrease of $400 million representing the prepayment of $400 million 7.00% Senior Secured Notes due 2024 - March 2017 Refinancing Transactions
As part of the March 2017 Refinancing Transactions, the Company issued $1,250 million aggregate principal amount of the March 2022 Secured Notes and $2,000 million aggregate principal amount of the March 2024 Secured Notes, in a private placement, the proceeds of which, when combined with the proceeds from the Series F-3 Tranche B Term Loan andusing cash on hand were used to:and cash generated from operations during 2021. Additionally, in June 2021, we accessed the credit markets and completed a series of transactions, whereby we: (i) repay the Refinanced Debt, (ii) repurchase $1,100extended $1,600 million in principal amount of August 2018 Unsecured Notes, (iii) repay $350 million of amounts outstanding under the Company's Revolving Credit Facility and (iv) pay related fees and expenses. Interest on these notes is payable semi-annually in arrears on each March 15 and September 15.
The March 2022 Secured Notes are redeemable at the option of the Company, in whole or in part, at any time on or after March 15, 2019, at the redemption prices set forth in the indenture. The Company may redeem some or all of the March 2022 Secured Notes prior to March 15, 2019 at a price equal to 100% of the principal amount thereof plus a “make-whole” premium. Prior to March 15, 2019, the Company may redeem up to 40% of the aggregate principal amount of the March 2022 Secured Notes using the proceedsmaturities of certain equity offerings at the redemption price set forthdebt obligations due to mature in the indenture.
The March 2024 Secured Notes are redeemable at the optionout to 2028 and (ii) refinanced $1,600 million in aggregate of the Company, in whole or in part, at any time on or after March 15, 2020, at the redemption prices set forth in the indenture. The Company may redeem some or all of the March 2024 Secured Notes prior to March 15, 2020 at a price equal to 100% of the principal amount thereof plus a “make-whole” premium. Prior to March 15, 2020, the Company may redeem up to 40% of the aggregate principal amount of the March 2024 Secured Notes using the proceeds of certain equity offerings at the redemption price set forth in the indenture.
5.50%existing 7.00% Senior Secured Notes due 2025 - October 2017 Refinancing Transactions and November 2017 Refinancing Transactions
On October 17, 2017, the Company issued $1,0002024 with $1,600 million in aggregate principal amount of the November 20254.875% Senior Secured Notes in a private placement, the proceeds of which were used to: (i) repurchase $569 million in principal amount of the 6.375% October 2020 Unsecured Notes and (ii) repurchase $431 million in principal amount of the 7.00% October 2020 Unsecured Notes. The related fees and expenses were paid using cash on hand. Interest on these notes is payable semi-annually in arrears on each May 1 and November 1.
The November 2025 Secured Notes are redeemable at the option of the Company, in whole or in part, at any time on or after November 1, 2020, at the redemption prices set forth in the indenture. The Company may redeem some or all of the November 2025 Secured Notes prior to November 1, 2020 at a price equal to 100% of the principal amount thereof plus a “make-whole” premium. Prior to November 1, 2020, the Company may redeem up to 40% of the aggregate principal amount of the November 2025 Secured Notes using the proceeds of certain equity offerings at the redemption price set forth in the indenture.
On November 21, 2017, the Company issued $750 million aggregate principal amount of the November 2025 Secured Notes, in a private placement. These are additional notes and form part of the same series as the Company’s existing November 2025 Secured Notes. The proceeds were used to prepay its Series F Tranche B Term Loan Facility. The related fees and expenses were paid using cash on hand.due 2028 (the "2021 Refinancing Transactions").
Senior Unsecured Notes
The Senior Unsecured Notes issued by the Company are the Company’s senior unsecured obligations and are jointly and severally guaranteed on a senior unsecured basis by each of its subsidiaries that is a guarantor under the Senior Secured Credit Facilities. The Senior Unsecured Notes issued by the Company’s subsidiary ValeantBHA are senior unsecured obligations of ValeantBHA and are jointly and severally guaranteed on a senior unsecured basis by the Company and each of its subsidiaries (other than Valeant)BHA) that is a guarantor under the Senior Secured Credit Facilities. Future subsidiaries of the Company and Valeant,BHA, if any, may be required to guarantee the Senior Unsecured Notes.
If the Company experiences a change in control, the Company may be required to make an offer to repurchase each series of Senior Unsecured Notes, in whole or in part, at a purchase price equal to 101% of the aggregate principal amount of the Senior Unsecured Notes repurchased, plus accrued and unpaid interest.
7.00% Senior Unsecured Notes due 2020 - On September 28, 2010, Valeant issued $700 millionThe aggregate principal amount of the 7.00% October 2020 Unsecured Notes in a private placement. The October 2020 Unsecured Notes accrue interest at the rate of 7.00% per year, payable semi-annually in arrears.
On October 17, 2017, as part of the October 2017 Refinancing Transactions, the Company repaid $431 million in principal amount of the 7.00% October 2020 Unsecured Notes.
On December 18, 2017, as part of the December 2017 Refinancing Transactions, the Company repaid $188 million principal amount of the 7.00% October 2020 Unsecured Notes.
Valeant may redeem all or a portion of the 7.00% October 2020 Unsecured Notes at the applicable redemption prices set forth in the 7.00% October 2020 Unsecured Notes indenture, plus accrued and unpaid interest to the date of redemption.
6.375%our Senior Unsecured Notes dueas of December 31, 2021 and 2020
On October 4, 2012, VPI Escrow Corp. (the “VPI Escrow Issuer”), was $14,900 million and $15,500 million, respectively, a newly formed wholly owned subsidiarydecrease of Valeant, issued $1,750 million aggregate principal amount of the 6.375% October 2020 Unsecured Notes in a private placement. The 6.375% October 2020 Unsecured Notes accrue interest at the rate of 6.375% per year, payable semi-annually in arrears. At the time of the closing of the Medicis acquisition, (i) the VPI Escrow Issuer merged with and into Valeant, with Valeant continuing as the surviving corporation, (ii) Valeant assumed all of the VPI Escrow Issuer’s obligations under the 6.375% October 2020 Unsecured Notes and the related indenture and (iii) the funds previously held in escrow were released to the Company and were used to finance the Medicis acquisition.
Concurrently with the offering of the 6.375% October 2020 Unsecured Notes, Valeant issued $500 million aggregate principal amount of 6.375% Senior Unsecured Notes due 2020 (the “Exchangeable Notes”) in a private placement, the form and terms of such notes being substantially identical to the form and terms of the 6.375% October 2020 Unsecured Notes, as previously described.
On March 29, 2013, the Company announced that Valeant commenced an offer to exchange (the “Exchange Offer”) any and all of its Exchangeable Notes into 6.375% October 2020 Unsecured Notes. Valeant conducted the Exchange Offer in order to satisfy its obligations under the indenture governing the Exchangeable Notes with the anticipated result being that some or all of such notes would be part of a single series of 6.375% October 2020 Unsecured Notes under one indenture. The Exchange Offer, which did not result in any changes to existing terms or to the total amount of the Company’s outstanding debt, expired on April 26, 2013. All of the Exchangeable Notes were tendered in the Exchange Offer and exchanged for 6.375% October 2020 Unsecured Notes to form a single series.
On October 17, 2017, as part of the October 2017 Refinancing Transactions, the Company repaid $569 million in principal amount of the 6.375% October 2020 Unsecured Notes.
On December 18, 2017, as part of the December 2017 Refinancing Transactions, the Company repaid $1,021 million in principal amount of the 6.375% October 2020 Unsecured Notes.
Valeant may redeem all or a portion of the 6.375% October 2020 Unsecured Notes at the applicable redemption prices set forth in the 6.375% October 2020 Unsecured Notes indenture, plus accrued and unpaid interest to the date of redemption.
6.75% Senior Unsecured Notes due 2018 and 7.50% Senior Unsecured Notes due 2021
On July 12, 2013, VPII Escrow Corp. (the “VPII Escrow Issuer”), a newly formed wholly-owned subsidiary of the Company, issued $1,600 million aggregate principal amount of the August 2018 Unsecured Notes and $1,625 million aggregate principal amount of 7.50% Senior Unsecured Notes due 2021 (the "July 2021 Unsecured Notes") in a private placement. The August 2018 Unsecured Notes accrued interest at the rate of 6.75% per year, payable semi-annually in arrears. The July 2021 Unsecured Notes accrue interest at the rate of 7.50% per year, payable semi-annually in arrears. At the time of the closing of the B&L Acquisition, (i) the VPII Escrow Issuer was voluntarily liquidated and all of its obligations were assumed by, and all of its assets were distributed to, the Company, (ii) the Company assumed all of the VPII Escrow Issuer’s obligations under the August 2018 Unsecured Notes and July 2021 Unsecured Notes and the related indenture and (iii) the funds previously held in escrow were released to the Company and were used to finance the B&L Acquisition.
As part of the March 2017 Refinancing Transactions, the Company completed a tender offer to repurchase $1,100 million in aggregate principal amount of the August 2018 Unsecured Notes for total consideration of approximately $1,132 million plus accrued and unpaid interest through March 20, 2017. Loss on extinguishment of debt during the three months ended March 31, 2017 associated with the repurchase of the August 2018 Unsecured Notes was $36$600 million, representing the difference between the amount paid to settle the debt and the debt’s carrying value.
On August 15, 2017, the Company repurchased the remaining $500prepayment of $600 million of outstanding August 2018 Unsecured Notes using cash on hand, plus accrued and unpaid interest. Loss on extinguishment of debt during the three months ended September 30, 2017 associated with the repurchase of the August 2018 Unsecured Notes was $1 million representing the difference between the amount paid to settle the debt and the debt’s carrying value.
The Company may redeem all or a portion of the July 2021 Unsecured Notes at the applicable redemption prices set forth in the July 2021 Unsecured Notes indenture, plus accrued and unpaid interest to the date of redemption.
5.375% Senior Unsecured Notes due 2020, 5.875% Senior Unsecured Notes due 2023, 4.50% Senior Unsecured Notes due 2023 and 6.125% Senior Unsecured Notes due 2025
On March 27, 2015, VRX Escrow Corp. (the "VRX Issuer"), a newly formed wholly owned subsidiary of the Company, issued $2,000 million aggregate principal amount of the March 2020 Unsecured Notes, $3,250 million aggregate principal amount of 5.875% Senior Unsecured Notes due 2023 (the "May 2023 Unsecured Notes"), €1,500 million aggregate principal amount of 4.50% Senior Unsecured Notes due 2023 (the "Euro Notes”) and $3,250 million aggregate principal amount of 6.125% Senior Unsecured Notes due 2025 (the "May 2025 Unsecured Notes" and, together with the March 2020 Unsecured Notes, the May 2023 Unsecured Notes and the Euro Notes, the "VRX Notes") in a private placement.
In addition, the VRX Issuer entered into an escrow and security agreement (the “Escrow Agreement”) dated as of March 27, 2015, with an escrow agent. Pursuant to the Escrow Agreement, the proceeds from the issuance of the VRX Notes, together with cash sufficient to fund certain accrued and unpaid interest on the VRX Notes, totaling $10,340 million in the aggregate, were deposited into escrow accounts and held as security for the VRX Issuer’s obligations until the consummation of the Salix Acquisition, which occurred on April 1, 2015. At the time of the closing of the Salix Acquisition, (1) the VRX Issuer was voluntarily liquidated and all of its obligations were assumed by, and all of its assets were distributed to, the Company, (2) the Company assumed all of the VRX Issuer's obligations under the VRX Notes and the related indenture and (3) the funds previously held in escrow were released to the Company and were used to finance the Salix Acquisition (as such, the $10,340 million referenced in this paragraph was released from restricted cash and cash equivalents in April 2015.)
The March 2020 Unsecured Notes accrue interest at the rate of 5.375% per year, payable semi-annually in arrears. The May 2023 Unsecured Notes and the Euro Notes accrue interest at the rate of 5.875% and 4.50% per year, respectively, payable semi-annually in arrears. The May 2025 Unsecured Notes accrue interest at the rate of 6.125% per year, payable semi-annually in arrears.
On December 18, 2017, as part of the December 2017 Refinancing Transactions, the Company repaid $291 million in principal amount of the March 2020 Unsecured Notes.
The Company may redeem all or a portion of the March 2020 Unsecured Notes at the applicable redemption prices set forth in the March 2020 Unsecured Notes indenture, plus accrued and unpaid interest to the date of redemption.
The Company may redeem all or a portion of the May 2023 Unsecured Notes, the Euro Notes and the May 2025 Unsecured Notes at any time prior to March 15, 2017, May 15, 2018, May 15, 2018 and April 15, 2020, respectively, at a price equal to 100% of the principal amount thereof, plus accrued and unpaid interest, if any, to the date of redemption, plus a “make-whole” premium. In addition, at any time prior to May 15, 2018 in the case of the May 2023 Unsecured Notes, May 15, 2018 in the case of the Euro Notes and April 15, 2018 in the case of the May 2025 Unsecured Notes, the Company may redeem up to 40% of the aggregate principal amount of the applicable series of notes with the net proceeds of certain equity offerings at the redemption prices set forth in the applicable indenture. On or after May 15, 2018, May 15, 2018 and April 15, 2020, the Company may redeem all or a portion of the May 2023 Unsecured Notes, the Euro Notes and the May 2025 Unsecured Notes, respectively, at the redemption prices applicable to each series of such notes, as set forth in the applicable indenture, plus accrued and unpaid interest to the date of redemption.
9.00% Senior Unsecured"6.125% Notes due 2025 - December 2017 Refinancing Transactions
On December 18, 2017, the Company issued $1,500 million aggregate principal amount of December 2025 Unsecured Notes in a private placement, the proceeds of which were used to: (i) repurchase $1,021 million in principal amount of the 6.375% October 2020 Unsecured Notes, (ii) repurchase $291 million in principal amount of the March 2020 Unsecured Notes and (iii) repurchase $188 million in principal amount of 7.00% October 2020 Unsecured Notes. The related fees and expenses were paid2025") using cash on hand. The December 2025 Unsecured Notes accrue interest at the rate of 9.00% per year, payable semi-annually in arrears on each of June 15hand and December 15.
The Company may redeem all or a portion of the December 2025 Unsecured Notes at any time prior to December 15, 2021, at a price equal to 100% of the principal amount thereof, plus accrued and unpaid interest, if any, to the date of redemption, plus a “make-whole” premium. In addition, at any time prior to December 15, 2020, the Company may redeem up to 40% of the aggregate principal amount of the outstanding December 2025 Unsecured Notes with the net proceeds of certain equity offerings at the redemption price set forth in the December 2025 Unsecured Notes indenture. On or after December 15, 2021, the Company may redeem all or a portion of the December 2025 Unsecured Notes at the applicable redemption prices set forth in the December 2025 Unsecured Notes indenture, plus accrued and unpaid interest to the date of redemption.
Remaining Senior Unsecured Notes - Aggregate balances by principal and net of discounts and issuance costs of other Senior Unsecured Notes were $3,100 million and $3,082 million, respectively, as of December 31, 2017 and had limited activitycash generated from operations during 2017.2021.
Covenant Compliance
Any inability to comply with the financial maintenance and other covenants under the terms of our Restated Credit Agreement, Senior Secured Notes indentures or Senior Unsecured Notes indentures could lead to a default or an event of default for which we may need to seek relief from our lenders and noteholders in order to waive the associated default or event of default and avoid a potential
acceleration of the related indebtedness or cross-default or cross-acceleration to other debt. There can be no assurance that we would be able to obtain such relief on commercially reasonable terms or otherwise and we may be required to incur significant additional costs. In addition, the lenders under our Restated Credit Agreement, holders of our Senior Secured Notes and holders of our
Senior Unsecured Notes may impose additional operating and financial restrictions on us as a condition to granting any such waiver.
DuringSince 2017 through the date of this filing, the Company completed several actions which included using therepaying debt with proceeds from divestitures and cash flows from operations, to repay debt, amending financial maintenance covenants, extending a significant portion of the Revolving Credit Facility andas well as refinancing debt with near term maturities. These actions have reduced the Company’s debt balance and positively affected itsthe Company’s ability to comply with its financial maintenance covenants.covenant. As of December 31, 2017,2021, the Company was in compliance with allthe financial maintenance covenantscovenant related to its outstanding debt. The Company, based on its current forecast for the next twelve months from the date of issuance of this Form 10-K, expects to remain in compliance with thesethe financial maintenance covenantscovenant and meet its debt service obligations over that same period.
The Company continues to take steps to improve its operating results to ensure continual compliance with its financial maintenance covenantscovenant and take other actions to reduce its debt levels to align with the Company’s long termlong-term strategy. WeThe Company may consider taking other actions, including divesting other businesses, and refinancing debt and issuing equity or equity-linked securities including secondary offerings of the common stock of Bausch + Lomb and Solta Medical, as deemed appropriate, to provide additional coverage in complying with the financial maintenance covenantscovenant and meeting its debt service obligations.
The Senior Notes and Secured Notes are guaranteed by a substantial portion of the Company’s subsidiaries. On a non-consolidated basis, the non-guarantor subsidiaries had total assets of $3,247$2,161 million and $3,337$2,442 million and total liabilities of $1,367$942 million and $1,408$1,804 million as of December 31, 20172021 and 2016, respectively, and2020, respectively. On a non-consolidated basis, the non-guarantor subsidiaries had revenues of $1,657$1,755 million and $1,632$1,320 million for 2021 and 2020, respectively. On a non-consolidated basis, the non-guarantor subsidiaries had operating income of $149 million and $125$116 million for years ended2021 and an operating loss of $38 million for 2020.
Focus on Capitalization of the Post-separation Entities
In connection with the B+L Separation and Solta IPO, we have emphasized that it is important that the post-separation entities be well-capitalized, with appropriate leverage and with access to additional capital, if and when needed, to provide each entity with the ability to independently allocate capital to areas that will strengthen their own competitive positions in their respective lines of business and position each entity for sustainable growth. Therefore, we see the appropriate capitalization and leverage of these businesses post-separation as a key to bringing out the maximum value across our portfolio of assets and, it is a primary objective of our plan of separation.
On January 18, 2022, in connection with the anticipated B+L IPO and Solta IPO, the Company issued conditional notices of redemption to redeem in full all of its outstanding 6.125% Notes due 2025 and to redeem $370 million aggregate principal amount of its outstanding 9.000% Notes due 2025. The redemption and discharge of the indenture governing the 6.125% Notes due 2025 will be conditioned upon the completion of the Credit Agreement Refinancing, as defined below. The redemption of the 9.000% Notes due 2025 will be conditioned upon the receipt of aggregate gross proceeds from the B+L IPO, the B+L Debt Financing as defined below, the Credit Agreement Refinancing and the offering of the February 2027 Secured Notes, as defined below, of at least $7,000 million. The foregoing redemptions are subject to the conditions described above, and there can be no assurance that such conditions will be satisfied and that such redemptions will occur.
On January 18, 2022, the Company announced its intention to refinance its existing Restated Credit Agreement with an amended Restated Credit Agreement (the "New Restated Credit Agreement" and such refinancing, the "Credit Agreement Refinancing"). The New Restated Credit Agreement is expected to consist of approximately $2,500 million of term B loans and a $975 million revolving credit facility. The Credit Agreement Refinancing is expected to occur only upon completion of the B+L IPO and a related debt financing by Bausch + Lomb (the "B+L Debt Financing"). At the time of the B+L IPO, the Credit Agreement Refinancing will provide that Bausch + Lomb initially be a "restricted" subsidiary subject to the terms of the Credit Agreement covenants, however the Credit Agreement Refinancing is expected to permit the Company to designate Bausch + Lomb as an "unrestricted" subsidiary under the New Restated Credit Agreement covenants upon achievement of a 7.6x pro forma "Remainco Total Leverage Ratio." Such designation could take place at any time after the B+L IPO (including as soon as the closing of the B+L IPO). The Credit Agreement Refinancing is designed to facilitate the separation and distribution of Bausch + Lomb. The Credit Agreement Refinancing will not be consummated until completion of the B+L IPO and related B+L Debt Financing. There can be no assurance that the Credit Agreement Refinancing will occur on the terms described above, or at all.
On February 10, 2022, the Company issued $1,000 million aggregate principal amount of 6.125% Senior Secured Notes due February 2027 (the “February 2027 Secured Notes”). The February 2027 Secured Notes accrue interest at a rate of 6.125% per year, payable semi-annually in arrears on each February and August. The February 2027 Secured Notes are redeemable at the option of the Company, in whole or in part, at any time on or after February 2024, at the redemption prices set forth in the indenture. The Company may redeem some or all of the February 2027 Secured Notes prior to February 2024 at a price equal to 100% of the principal amount thereof plus a “make-whole” premium. Prior to February 2024, the Company may redeem up to 40% of the aggregate principal amount of the February 2027 Secured Notes using the proceeds of certain equity offerings at the redemption price set forth in the indenture. If the B+L IPO does not occur on or prior to August 15, 2022, the Company will be required to redeem the February 2027 Secured Notes at such time at a redemption price equal to the issue price of the February 2027 Secured Notes plus accrued and unpaid interest.
Weighted Average Interest Rate
The weighted average stated rate of interest of the Company's debt as of December 31, 20172021 and 2016,2020 was 5.88% and 6.02%, respectively.
See Note 10, "FINANCING ARRANGEMENTS" and Note 23, "SUBSEQUENT EVENTS" to our audited Consolidated Financial Statements for further details.
Credit Ratings
On November 8, 2017, Moody’s upgradedDuring 2021, Moody's, Standard & Poor's and Fitch maintained our credit ratings but changed our outlook tofrom Stable fromto Negative. As of February 28, 2018,23, 2022, the credit ratings and outlook ratings from Moody's, and Standard & Poor's and Fitch for certain of our outstanding obligations areof the Company were as follows:
|
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Rating Agency | | Corporate Rating | | Senior Secured Rating | | Senior Unsecured Rating | | Outlook |
| Moody’s | | B3B2 | | Ba2/Ba3 | | Caa1B3 | | StableNegative |
| Standard & Poor’s | | BB+ | | BB-BB | | B-B | | StableNegative |
| Fitch | | B | | BB | | B | | Negative |
As a part of the financing transactions launched in January 2022 discussed above, Moody’s assigned a Ba3 rating to the $2,500 million of term B loans and the $975 million revolving credit facility as anticipated by the Credit Agreement Refinancing and to the newly issued February 2027 Secured Notes. The Ba3 rating is one notch lower than Moody’s rating of Ba2 for our existing senior secured debt. As the Credit Agreement Refinancing will not be consummated until completion of the B+L IPO and related B+L Debt Financing, there can be no assurance that the Credit Agreement Refinancing will occur on the terms described above, or at all. Should the Credit Agreement Refinancing be completed as described above, Moody's anticipates downgrading its ratings on our existing senior secured notes to Ba3 from Ba2, consistent with the Ba3 rating assigned to the $2,500 million of term B loans and the $975 million revolving credit facility as anticipated by the Credit Agreement Refinancing and to the newly issued February 2027 Secured Notes.
Any downgrade in our corporate credit ratings or other credit ratings may increase our cost of borrowing and may negatively impact our ability to raise additional debt capital.
OFF-BALANCE SHEET ARRANGEMENTS AND CONTRACTUAL OBLIGATIONS
We have no off-balance sheet arrangements that have a material current effect or that are reasonably likely to have a material future effect on our results of operations, financial condition, capital expenditures, liquidity, or capital resources.
The following table summarizes our contractual obligations as of December 31, 2017 for the periods presented:
|
| | | | | | | | | | | | | | | | | | | | |
(in millions) | | Total | | 2018 | | 2019 and 2020 | | 2021 and 2022 | | Thereafter |
| Long-term debt obligations, including interest | | $ | 34,452 |
| | $ | 1,780 |
| | $ | 5,794 |
| | $ | 10,746 |
| | $ | 16,132 |
|
| Operating lease obligations | | 386 |
| | 73 |
| | 110 |
| | 71 |
| | 132 |
|
| Capital lease obligations | | 6 |
| | 2 |
| | 2 |
| | 2 |
| | — |
|
| Purchase obligations | | 677 |
| | 378 |
| | 186 |
| | 111 |
| | 2 |
|
| Total contractual obligations | | $ | 35,521 |
| | $ | 2,233 |
| | $ | 6,092 |
| | $ | 10,930 |
| | $ | 16,266 |
|
Purchase obligations consist of agreements to purchase goods and services that are enforceable and legally binding and include obligations for minimum inventory and capital expenditures, and outsourced information technology, product promotion and clinical research services.
The table of contractual obligations excludes payments for: (i) contingent milestone payments to third parties as part of certain development, collaboration and license agreements and (ii) acquisition-related contingent consideration. See Note 22, "COMMITMENTS AND CONTINGENCIES" and Note 6, "FAIR VALUE MEASUREMENTS" to our audited Consolidated Financial Statements for further details related to these contingent payments.
The table of contractual obligations excludes payments for uncertain tax positions totaling $273 million as of December 31, 2017 because a reliable estimate of the period in which uncertain tax positions will be payable, if ever, cannot be made. Further, the Company has recognized a provisional Transition Toll Tax (payable over eight years) in the amount of $88 million which has been excluded from the table of contractual obligations as we have provisionally utilized net operating losses to offset this liability.
Other Future Cash Requirements
Our other future cash requirements relate to working capital, capital expenditures, business development transactions (contingent consideration), restructuring, integration, separation and integration,IPO costs, benefit obligations and litigation settlements and benefit obligations.settlements. In addition, we may use cash to enter into licensing arrangements and/or to make strategic acquisitions, although we have made minimal acquisitions since 2015 and expect the volume and sizeacquisitions. We are considering further acquisition opportunities within our core therapeutic areas, some of acquisitions towhich could be low for the foreseeable future.sizable.
In addition to our working capital requirements, and other amounts presented in the contractual obligations table presented above,as of December 31, 2021, we expect our primary cash requirements for 20182022 to include:
•Debt repayments-We and interest payments—On February 11, 2022, we repaid $285 million representing all amounts outstanding under our 2023 Revolving Credit Facility as of December 31, 2021, and, therefore as a result of prepayments and a series of refinancing transactions we have reduced and extended the maturities of a substantial portion of our long-term debt and have no debt maturities until 2025 (other than our obligation to redeem the February 2027 Secured Notes if the B+L IPO does not occur on or prior to August 15, 2022 as discussed above) and have no mandatory amortization payments. Based on our debt portfolio as of December 31, 2021, which does not reflect changes in our capitalization in
connection with the B+L Separation and the Solta IPO if and when they occur, we anticipate making interest payments of approximately $1,350 million during 2022. Further, in connection with the conditional notices of redemption discussed above, we anticipate: (i) redeeming in full all of our outstanding 6.125% Notes due 2025 conditioned upon the completion of the Credit Agreement Refinancing, as discussed above, and (ii) redeeming $370 million aggregate principal amount of our 9.000% Notes due 2025 conditioned upon the receipt of aggregate gross proceeds from the B+L IPO, the B+L Debt Financing, the Credit Agreement Refinancing and the February 2027 Secured Notes of at least $7,000 million, as discussed above. The foregoing redemptions are subject to the conditions described above, and there can be no assurance that such conditions will be satisfied and that such redemptions will occur. We may under certain circumstances,also elect to make additional principal repayments during 2018.payments under certain circumstances. Further, in the ordinary course of business, we may borrow and repay additional amounts under our Revolving Credit Facility to meet business needs;
credit facilities using cash on hand, cash generated from operations and cash provided from the sale of common stock and additional debt financings in connection with the B+L Separation and the Solta IPO;Capital expenditures-We•IT Infrastructure Investment—We expect to make payments of approximately $250$65 million for licensing, maintenance and capitalizable costs associated with our IT infrastructure improvement projects during 2022;
•Capital expenditures—We expect to make payments of approximately $275 million for property, plant and equipment during 2018, of which there were $35 million in committed amounts as of December 31, 2017;
2022;•Contingent consideration payments-We—We expect to make contingent consideration and other development/approval/sales-based milestone payments of $112approximately $64 million during 2018;
2022;•Restructuring and integration payments-We—We expect to make payments of $27$8 million during 20182022 for employee separation costs and lease termination obligations associated with restructuring and integration actions we have taken through December 31, 2017;
2021;•Benefit obligations-We—We expect to make aggregate payments under our pension and postretirement obligations of $5$13 million $7 million and $6 million to the U.S. pension benefit plan, the non-U.S. pension benefit plans and the U.S. postretirement benefit plan, respectively during 2018.2022. See Note 12,11, "PENSION AND POSTRETIREMENT EMPLOYEE BENEFIT PLANS" to our audited Consolidated Financial Statements for further details of our benefit obligations; and
•Litigation Payments—In the ordinary course of business, the Company is involved in litigation, claims, government inquiries, investigations, charges and proceedings. As of December 31, 2021, the Company's Consolidated Balance Sheet includes accrued current loss contingencies of $1,890 million related to matters which are both probable and reasonably estimable, of which $1,567 million, has been paid or is expected to be payable during 2022; however, no assurance can be provided as to when such amount will be payable, if at all. The amounts which can be expected to be payable during 2022 include among other agreements to resolve:
U.S. Securities Litigation for $1,210 million - The Company reached an agreement to resolve the U.S. Securities Litigation for $1,210 million. Final court approval of this settlement was granted in January 2021 but is subject to an objector's appeal of the Court's final approval order. The settlement resolves and discharges all claims against the Company in the class action. As part of the settlement, the Company and the other settling defendants admitted no liability as to the claims against them and deny all allegations of wrongdoing. This settlement resolves the most significant of the Company's remaining legacy legal matters and eliminates a material uncertainty regarding our Company. As of December 31, 2021, Restricted cash and other settlement deposits includes $1,210 million of payments into an escrow fund under the terms of a settlement agreement regarding the U.S. Securities Litigation.
Glumetza Antitrust Litigation for $300 million - On September 14, 2021, the Company executed a final settlement agreement to resolve the class plaintiffs’ claims in the Glumetza Antitrust Litigation for $300 million, subject to court approval. On February 3, 2022, the court granted final approval of the class settlement and ordered dismissal of the class plaintiffs’ claims. Subject to appeal of the final approval of the class settlement, the settlement will resolve and discharge all asserted class claims against the Company. As part of the settlement, the Company admitted no liability as to the claims against it and denied all allegations of wrongdoing. As of December 31, 2021, Restricted cash and other settlement deposits includes approximately $300 million of payments into an escrow fund under the terms of a settlement agreement regarding the class plaintiffs' claims in the Glumetza Antitrust Litigation.
See Note 20, "LEGAL PROCEEDINGS" to our audited interim Consolidated Financial Statements for further details of our benefit obligations;these and other matters. Our ability to successfully defend the Company against pending and future litigation may impact future cash flows.
Allergan Settlement-As more fully disclosed in Note 21, "LEGAL PROCEEDINGS"101
Future Costs of B+L Separation and Solta IPO
The Company has incurred, and will incur, costs associated with activities to our audited Consolidated Financial Statements, on December 28, 2017, all parties agreed to settlecomplete the ongoing related Allergan shareholder class actions for a total of $290 million. The settlement is subject to Court approval. UnderB+L Separation and the termsSolta IPO. These activities include the costs of: (i) separating the Bausch + Lomb and the Solta Medical businesses from the remainder of the proposed settlement,Company and (ii) registering the Company will pay $96 million, or 33%, of the settlement amount. We are pursuing recovery of the settlement amountBausch + Lomb and the Solta Medical businesses as independent publicly traded entities. Separation and IPO costs are incremental costs directly related to the B+L Separation and Solta IPO and include, but are not limited to: (i) legal, audit and advisory fees, (ii) talent acquisition costs and (iii) costs associated with establishing new boards of defense under our insurance policies, although recovery isdirectors and related board committees for the Bausch + Lomb and Solta Medical entities. The Company has also incurred, and will incur, Separation-related and IPO-related costs which are incremental costs indirectly related to the B+L Separation and Solta IPO. These costs include, but are not assured.limited to: (i) IT infrastructure and software licensing costs, (ii) rebranding costs and (iii) costs associated with facility relocation and/or modification. The extent and timing of future charges for these costs cannot be reasonably estimated at this time and could be material.
Future Cost Savings Programs
| |
• | Solodyn® Antitrust Class Actions Settlement-As more fully disclosed in Note 21, "LEGAL PROCEEDINGS" to our audited Consolidated Financial Statements, in February 2018, Medicis agreed to resolve the Solodyn® civil antitrust class action litigation with the End Payor and Direct Payor classes for an amount of $58 million, subject to Court approval, and resolved related litigation with opt-out retailers for additional consideration.
|
We continue to evaluate opportunities to improve our operating results and may initiate additional cost savings programs to streamline our operations and eliminate redundant processes and expenses. These cost savings programs may include, but are not limited to: (i) reducing headcount, (ii) eliminating real estate costs associated with unused or under-utilized facilities and (iii) implementing contribution margin improvement and other cost reduction initiatives. The expenses associated with the implementation of these cost savings programs could be material and may impact our cash flows.
Future Licensing Payments
In the ordinary course of business, the Company is involvedmay enter into select licensing and collaborative agreements for the commercialization and/or development of unique products primarily in litigation, claims, government inquiries, investigations, chargesthe U.S. and proceedings.Canada. In connection with these agreements, the Company may pay an upfront fee to secure the agreement. See Note 21, "LEGAL PROCEEDINGS"3, "ACQUISITIONS, LICENSING AGREEMENTS AND DIVESTITURE"to our audited Consolidated Financial StatementsStatements. Payments associated with the upfront fee for further detailsthese agreements cannot be reasonably estimated at this time and could be material.
Unrecognized Tax Benefits
As of these matters. Our ability to successfully defendDecember 31, 2021, the Company against pending and future litigation may impact cash flows.had unrecognized tax benefits totaling $104 million which are expected to be realized within the next twelve months.
OUTSTANDING SHARE DATA
Our common shares are listed on the TSX and the NYSE under the ticker symbol “VRX”“BHC”.
At February 22, 2018,17, 2022, we had 348,837,730359,646,496 issued and outstanding common shares. In addition, as of February 22, 2018,17, 2022, we had 4,452,1808,734,135 stock options and 4,458,1115,150,139 time-based RSUsrestricted share units ("RSUs") that each represent the right of a holder to receive one of the
Company’s common shares, and 2,152,4542,625,722 performance-based RSUs that represent the right of a holder to receive a number of the Company's common shares up to a specified maximum. A maximum of 4,193,5023,937,844 common shares could be issued upon vesting of the performance-based RSUs outstanding.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our business and financial results are affected by fluctuations in world financial markets, including the impacts of foreign currency exchange rate and interest rate movements. We evaluate our exposure to such risks on an ongoing basis, and seek ways to manage these risks to an acceptable level, based on management’s judgment of the appropriate trade-off between risk, opportunity and cost. We may use derivative financial instruments from time to time as a risk management tool and not for trading or speculative purposes. Currently, we do not hold any market risk sensitive instruments whose value is subject to market price risk.
Inflation; Seasonality
We are subject to price control restrictions on our pharmaceutical products in a number of countries in which we now operate. As a result, our ability to raise prices in a timely fashion in anticipation of inflation may be limited in some markets.
Historically, revenues from our business tend to be weighted toward the second half of the year. Sales in the first quarter tend to be lower as patient co-pays and deductibles reset at the beginning of each year. Sales in the fourth quarter tend to be higher based on consumer and customer purchasing patterns associated with health care reimbursement programs. However, there are no assurances that these historical trends will continue in the future.
Foreign Currency Risk
In the year ended December 31, 2017,2021, a majority of our revenue and expense activities and capital expenditures were denominated in U.S. dollars. We have exposure to multiple foreign currencies, including, among others, the Euro, Chinese yuan, Polish zloty, Canadian dollar Polish zloty and Russian ruble.Mexican peso. Our operations are subject to risks inherent in conducting business abroad, including price and currency exchange controls and fluctuations in the relative values of currencies. In November 2016, as a result of the Egyptian government’s decision to float the Egyptian pound and un-peg it to the U.S. Dollar, the Egyptian pound was significantly devalued. Our exposure to the Egyptian pound is primarily with respect to Amoun Pharmaceutical Company S.A.E., which we acquired in October 2015, and which represented approximately 2% of our total 2017 and 2016 revenues. In addition, to the extent that we require, as a source of debt repayment, earnings and cash flows from some of our operations located in foreign countries, we are subject to risk of changes in the value of the U.S. dollar, relative to all other currencies in which we operate, which may materially affect our results of operations. Where possible, we manage foreign currency risk by managing same currency revenues in relation to same currency expenses. Further strengthening of the U.S. dollar and/or further devaluation of foreign currencies will have a negative impact on our reported revenue and reported results. As of December 31, 2017,2021, a 1% change in foreign currency exchange rates would have impacted our shareholders’ equitydeficit by approximately $36$39 million.
As of December 31, 2017,2021, the unrealized foreign exchange gain on the translation of the remaining principal amount of the Senior Secured Credit Facilities was approximately $112 millionU.S. denominated senior secured and the unrealized foreign exchange loss on the translation of the remaining principal amount of the seniorunsecured notes was approximately $270$285 million, for Canadian income tax purposes. Additionally, as of December 31, 2017,2021, the unrealized foreign exchange gainloss on certain intercompany balances was equal to $407$197 million. One-half of any realized foreign exchange gain or loss will be included in our Canadian taxable income. Any resulting gain will result in a corresponding reduction in our available Canadian Non-Capital Losses, Scientific Research and Experimental Development Pool, and/or Investment Tax Credit carryforward balances. However, the repayment of the senior secured credit facilitiesnotes and the intercompany loans denominated in U.S. dollars does not result in a foreign exchange gain or loss being recognized in our consolidated financial statements,Consolidated Financial Statements, as these statements are prepared in U.S. dollars.
Interest Rate Risk
We currently do not hold financial instruments for speculative purposes. Our financial assets are not subject to significant interest rate risk due to their short duration. The primary objective of our policy for the investment of temporary cash surpluses is the protection of principal, and accordingly, we generally invest in high quality, money market investments and time deposits with varying maturities, but typically less than three months. As it is our intent and policy to hold these investments until maturity, we do not have a material exposure to interest rate risk.
As of December 31, 2017,2021, we had $20,177$18,762 million and $3,771$4,108 million principal amount of issued fixed rate debt and variable rate debt, respectively, that requires U.S. dollar repayment, as well as €1,500 million principal amount of issued fixed rate debt that requires repayment in euros and $3 million of other foreign currency-denominated debt obligations.respectively. The estimated fair value of our issued fixed rate debt as of December 31, 2017, including the debt denominated in euros,2021 was $21,561$18,599 million. If interest
rates were to increase by 100 basis-points, the fair value of our long-termissued fixed rate debt would decrease by approximately $786$561 million. If interest rates were to decrease by 100 basis-points, the fair value of our long-termissued fixed rate debt would increase by approximately $709$478 million. We are subject to interest rate risk on our variable rate debt as changes in interest rates could adversely affect earnings and cash flows. A 100 basis-points increase in interest rates, based on 3-month LIBOR, would have an annualized pre-tax effect of approximately $38$41 million in our consolidated statementsConsolidated Statements of operationsOperations and cash flows,Consolidated Statements of Cash Flows, based on current outstanding borrowings and effective interest rates on our variable rate debt. For the tranches in our credit facility that have a LIBOR floor, an increase in interest rates would only impact interest expense on those term loans to the extent LIBOR exceeds the floor. While our variable-rate debt may impact earnings and cash flows as interest rates change, it is not subject to changes in fair value.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Critical accounting policies and estimates are those policies and estimates that are most important and material to the preparation of our consolidated financial statements,Consolidated Financial Statements, and which require management’s most subjective and complex judgments due to the need to select policies from among alternatives available, and to make estimates about matters that are inherently uncertain. We base our estimates on historical experience and other factors that we believe to be reasonable under the circumstances. On an ongoing basis, we review our estimates to ensure that these estimates appropriately reflect changes in our business and new information as it becomes available. If historical experience and other factors we use to make these estimates do not reasonably reflect future activity, our results of operations and financial condition could be materially impacted.
Revenue Recognition
We recognize product sales revenue when persuasive evidence of an arrangement exists, delivery has occurred, collectability is reasonably assured and the price to the buyer is fixed or determinable, the timing of which is based on the specific contractual terms with each customer. Delivery occurs when title has transferred to the customer, and the customer has assumed the risks and rewards of ownership. As such, we generally recognize revenue on a sell-in basis (i.e., record revenue upon delivery); however, based upon specific terms and circumstances, we have determined that, for arrangements with certain retailers and third parties, revenue should be recognized on a sell-through basis (i.e. record revenue when productsThe Company’s revenues are dispensed to patients). In evaluating the proper revenue recognition for sales transactions, we consider all relevant factors, including additional discounts or extended payment terms which we grant to certain customers, often near the end of fiscal quarterly periods.
Revenueprimarily generated from product sales, is recognized net of provisions for estimated cash discounts, allowances, returns, rebates, chargebacks and distribution fees paid to certain of our wholesale customers. We establish these provisions concurrently with the recognition of product sales revenue.
Under certain product manufacturing and supply agreements, we rely on estimates for future returns, rebates and chargebacks made by our commercialization counterparties. We make adjustments as needed to state these estimates on a basis consistent with our revenue recognition policy and our methodology for estimating returns, rebates and chargebacks related to our own direct product sales.
We continually monitor our product sales provisions and evaluate the estimates used as additional information becomes available. We make adjustments to these provisions periodically to reflect new facts and circumstances that may indicate that historical experience may not be indicative of current and/or future results. We are required to make subjective judgments based primarily on our evaluation of current market conditions and trade inventory levels related to our products. This evaluation may result in an increase or decrease in the experience ratetherapeutic areas of eye-health, GI and dermatology that is applied to currentconsist of: (i) branded pharmaceuticals, (ii) generic and future sales, or an adjustment related to past sales, or both.
In May 2014, the FASB issued guidance on recognizingbranded generic pharmaceuticals, (iii) OTC products and (iv) medical devices (contact lenses, intraocular lenses, ophthalmic surgical equipment and aesthetics devices). Other revenues include alliance and service revenue from contracts with customers. the licensing and co-promotion of products and contract service revenue primarily in the areas of dermatology and topical medication.
The core principle of the revenue model is that an entityCompany recognizes revenue to depictwhen the transfercustomer obtains control of promised goods or services to customersand in an amount that reflects the consideration to which the entityCompany expects to be entitled to receive in exchange for those goods or services. In applyingTo achieve this core principle, the Company applies the five-step revenue model to contracts within its scope, an entity will:scope: (i) identify the contract(s) with a customer, (ii) identify the performance obligations in the contract, (iii) determine the transaction price, (iv) allocate the transaction price to the performance obligations in the contract and (v) recognize revenue when (or as) the entity satisfies a performance obligation. In addition
As is customary in the pharmaceutical industry, gross product sales are subject to a variety of deductions in arriving at reported net product sales. The transaction price for product sales is typically adjusted for variable consideration, which may be in the form of cash discounts, allowances, returns, rebates, chargebacks and distribution fees paid to customers. Provisions for variable consideration are established to reflect the Company’s best estimates of the amount of consideration to which it is entitled based on the terms of the contract. The amount of variable consideration included in the transaction price may be constrained, and is included in the net sales price only to the extent that it is probable that a significant reversal in the amount of the cumulative revenue recognized will not occur in the future period.
Provisions for these provisions,deductions are recorded concurrently with the new standard provides implementation guidance on several other topics, including the accounting for certain revenue-related costs,recognition of gross product sales revenue and include cash discounts and allowances, chargebacks, and distribution fees, which are paid to direct customers, as well as enhancedrebates and returns, which can be paid to direct and indirect customers.
The development and application of the critical accounting policies associated with the revenue recognition guidance, including the policies associated with each of our product sales provisions and the table showing the activity and ending balances for our product sales provisions, are discussed in more detail in Note 2, "SIGNIFICANT ACCOUNTING POLICIES" to our audited Consolidated Financial Statements.
Acquisition-Related Contingent Consideration
Some of the business combinations that we have consummated include contingent consideration to be potentially paid based upon the occurrence of future events, such as sales performance and the achievement of certain future development, regulatory and sales milestones. Acquisition-related contingent consideration associated with a business combination is initially recognized at fair value and remeasured each reporting period, with changes in fair value recorded in the Consolidated Statements of Operations. The estimates of fair value involve the use of acceptable valuation methods, such as probability-weighted discounted cash flow analysis and Monte Carlo Simulation (when appropriate), and contain uncertainties as they require assumptions about the likelihood of achieving specified milestone criteria, projections of future financial performance and assumed discount rates. Changes in the fair value of the acquisition-related contingent consideration result from several factors including changes in the timing and amount of revenue estimates, changes in probability assumptions with respect to the likelihood of achieving specified milestone criteria and changes in discount rates. A change in any of these assumptions could produce a different fair value, which could have a material impact on our results of operations. At December 31, 2021, the fair value measurements of acquisition-related contingent consideration were determined using risk-adjusted discount rates ranging from 6% to 18%.
Intangible Assets
We evaluate potential impairments of amortizable intangible assets acquired through asset acquisitions or business combinations if events or changes in circumstances indicate that the carrying amounts of these assets may not be recoverable. Our evaluation is based on an assessment of potential indicators of impairment, such as:
•an adverse change in legal factors or in the business climate that could affect the value of an asset. For example, a successful challenge of our patent rights resulting in earlier than expected generic competition;
•an adverse change in the extent or manner in which an asset is used or is expected to be used. For example, a decision not to pursue a product line-extension strategy to enhance an existing product due to changes in market conditions and/or technological advances; or
•current or forecasted reductions in revenue, operating income, or cash flows associated with the use of an asset. For example, the introduction of a competing product that results in a significant loss of market share.
Impairment exists when the carrying value of the asset exceeds the related estimated undiscounted future cash flows expected to be derived from the asset, which include the amount and timing of the projected future cash flows. If impairment exists, the carrying value of the asset is adjusted to its fair value. A discounted cash flow analysis is typically used to determine an asset's fair value, using estimates and assumptions that market participants would apply. Some of the estimates and assumptions inherent in a discounted cash flow model include the amount and timing of the projected future cash flows, and the discount rate used to reflect the risks inherent in the future cash flows. A change in any of these estimates and assumptions
could produce a different fair value, which could have a material impact on our results of operations. In addition, an intangible asset’s expected useful life can increase estimation risk, as longer-lived assets necessarily require longer-term cash flow forecasts, which for some of our intangible assets can be up to 20 years. In connection with an impairment evaluation, we also reassess the remaining useful life of the intangible asset and modify it, as appropriate.
Management continually assesses the useful lives of the Company's long-lived assets.
Indefinite-lived intangible assets, including Acquired in-process research and development and the B&L corporate trademark, are tested for impairment annually, or more frequently if events or changes in circumstances between annual tests indicate that the asset may be impaired. Impairment losses on indefinite-lived intangible assets are recognized based solely on a comparison of their fair value to carrying value, without consideration of any recoverability test. In particular, we will continue to monitor closely the progression of our R&D programs as their likelihood of success is contingent upon the achievement of future milestones. See Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Overview — Focus on Core Business” for additional information regarding our R&D programs.
Goodwill
Goodwill is not amortized but is tested for impairment at least annually on October 1st at the reporting unit level. A reporting unit is the same as, or one level below, an operating segment. The Company performs its annual impairment test by first assessing qualitative factors. Where the qualitative assessment suggests that it is more likely than not that the fair value of a reporting unit is less than its carrying amount, a quantitative fair value test is performed for that reporting unit (Step 1).
The fair value of a reporting unit refers to the price that would be received to sell the unit as a whole in an orderly transaction between market participants. The Company estimates the fair values of a reporting unit using a discounted cash flow model which utilizes Level 3 unobservable inputs. The discounted cash flow model relies on assumptions regarding revenue growth rates, gross profit, projected working capital needs, selling, general and administrative expenses, research and development expenses, capital expenditures, income tax rates, discount rates and terminal growth rates. To estimate fair value, the Company discounts the forecasted cash flows of each reporting unit. The discount rate the Company uses represents the estimated weighted average cost of capital, which reflects the overall level of inherent risk involved in its reporting unit operations and the rate of return a market participant would expect to earn. The quantitative fair value test is performed utilizing long-term growth rates and discount rates applied to the estimated cash flows in estimation of fair value. To estimate cash flows beyond the final year of its model, the Company estimates a terminal value by applying an in-perpetuity growth assumption and discount factor to determine the reporting unit's terminal value.
To forecast a reporting unit's cash flows the Company takes into consideration economic conditions and trends, estimated future operating results, management's and a market participant's view of growth rates and product lives, and anticipates future economic conditions. Revenue growth rates inherent in these forecasts are based on input from internal and external market research that compare factors such as growth in global economies, recent industry trends and product life-cycles. Macroeconomic factors such as changes in economies, changes in the competitive landscape including the unexpected LOE to the Company's product portfolio, changes in government legislation, product life-cycles, industry consolidations and other changes beyond the Company’s control could have a positive or negative impact on achieving its targets. Accordingly, if market conditions deteriorate, or if the Company is unable to execute its strategies, it may be necessary to record impairment charges in the future.
2019 Annual Goodwill Impairment Test
The Company conducted its annual goodwill impairment test as of October 1, 2019 by first assessing qualitative factors. Where the qualitative assessment suggested that it was more likely than not that the fair value of a reporting unit was less than its carrying amount, a quantitative fair value test was performed for that reporting unit. In each quantitative fair value test performed, the fair value was greater than the carrying value of the reporting unit. As a result, there was no impairment to the goodwill of any reporting unit.
2020 Interim Goodwill Impairment Assessment
During the interim periods of 2020, after giving consideration to the nature and timing of the negative impacts of the COVID-19 pandemic on the Company's forecasted cash flows, with the exception of the Ortho Dermatologics reporting unit, no events occurred, or circumstances changed that would indicate that the fair value of any other reporting unit might be below its carrying value and therefore, no impairments were recorded.
During the three months ended March 31, 2020 and June 30, 2020, the operating results for the Ortho Dermatologics reporting unit were less than forecasted primarily due to certain products experiencing longer launch cycles than originally anticipated as a result of the COVID-19 pandemic. The Company revised its long-term forecasts as of March 31, 2020 and as of
June 30, 2020 for these matters. Management believed that these events were indicators that there was less headroom as of March 31, 2020 and June 30, 2020 as compared to the headroom calculated on the date Ortho Dermatologics goodwill was previously tested for impairment. Therefore, a quantitative fair value test for impairment to the goodwill of the Ortho Dermatologics reporting unit was performed at March 31, 2020 and at June 30, 2020. Based on the quantitative fair value tests, the fair value of the Ortho Dermatologics reporting unit continued to be greater than its carrying value and as a result there was no impairment to the goodwill of the reporting unit at March 31, 2020 or at June 30, 2020.
2020 Annual Goodwill Impairment Test
The Company conducted its annual goodwill impairment test as of October 1, 2020 by first assessing qualitative factors. Based on its qualitative assessment as of October 1, 2020, management believed that, with the exception of the Ortho Dermatologics reporting unit, it was more likely than not that the carrying amounts of its reporting units were less than their respective fair values and therefore concluded that a quantitative fair value test for those reporting units was not required.
As part of its qualitative assessment of the Ortho Dermatologics reporting unit as of October 1, 2020, the Company considered, among other matters, a range of potential impacts of COVID-19 pandemic related matters and the limited headroom calculated on the date Ortho Dermatologics goodwill was last tested for impairment (June 30, 2020). The Company believed that these factors may suggest that it was more likely than not that the fair value of the Ortho Dermatologics reporting unit was less than its carrying amount, and therefore a quantitative fair value test was performed for the reporting unit.
The Company performed a quantitative fair value test for the Ortho Dermatologics reporting unit as of October 1, 2020, utilizing a long-term growth rate of 2.0% and a range of discount rates between 9.50% and 9.75%, in estimation of the fair value of this reporting unit. Based on the quantitative fair value test, the fair value of the Ortho Dermatologics reporting unit was approximately 10% greater than its carrying value and as a result there was no impairment to the goodwill of the reporting unit.
2021 Interim Goodwill Impairment Test
During the three months ended March 31, 2021, management identified launches of certain Ortho Dermatologics products which were not going to achieve their trajectories as forecasted once the social restrictions associated with the COVID-19 pandemic began to ease in the U.S. and offices of health care professionals could reopen. In addition, insurance coverage pressures within the U.S. continued to persist limiting patient access to topical acne and psoriasis products. In light of these developments, during the first quarter of 2021, the Company began taking steps to: (i) redirect its R&D spend to eliminate projects it has identified as high cost and high risk, (ii) redirect a portion of its marketing and product development outside the U.S. to geographies where there is better patient access and (iii) reduce its cost structure to be more competitive. As a result, during the three months ended March 31, 2021, the Company revised its long-term forecasts for the Ortho Dermatologics reporting unit. Management believed that these events were indicators that there is less headroom as of March 31, 2021 as compared to the headroom calculated on the date goodwill was last tested for impairment (October 1, 2020). Therefore, a quantitative fair value test for the Ortho Dermatologics reporting unit was performed. The quantitative fair value test utilized the Company's most recent cash flow projections as revised in the first quarter of 2021 to reflect the business changes previously discussed, including a range of potential outcomes, along with a long-term growth rate of 1.0% and a range of discount rates between 9.0% and 10.0%. Based on the quantitative fair value test, the carrying value of the Ortho Dermatologics reporting unit exceeded its fair value at March 31, 2021, and the Company recognized a goodwill impairment of $469 million.
2021 Annual Goodwill Impairment Test
The Company conducted its annual goodwill impairment test as of October 1, 2021 by first assessing qualitative factors. Based on its qualitative assessment as of October 1, 2021, management believed that, with the exception of the Ortho Dermatologics reporting unit, it was more likely than not that the carrying amounts of its reporting units were less than their respective fair values and therefore concluded that a quantitative fair value test for those reporting units was not required.
As part of its qualitative assessment of the Ortho Dermatologics reporting unit as of October 1, 2021, the Company considered, among other matters, the limited headroom as a result of the impairment to the goodwill of the Ortho Dermatologics reporting unit when last tested (March 31, 2021) and macroeconomic factors such as higher than expected inflation for many commodities, volatility in many of the equity markets and pressures on market interest rates. The Company believed that these facts and circumstances may suggest that it was more likely than not that the fair value of the Ortho Dermatologics reporting unit was less than its carrying amount, and therefore a quantitative fair value test was performed for the reporting unit.
The Company performed a quantitative fair value test for the Ortho Dermatologics reporting unit as of October 1, 2021, utilizing a long-term growth rate of 1.0% and a discount rate of 9.0%, in estimation of the fair value of this reporting unit. Based on the quantitative fair value test, the fair value of the Ortho Dermatologics reporting unit was approximately 10% greater than its carrying value and as a result there was no impairment to the goodwill of the reporting unit.
See Note 8, "INTANGIBLE ASSETS AND GOODWILL" to our audited Consolidated Financial Statements for further details on the goodwill impairments recognized in 2021.
Contingencies
In the normal course of business, we are subject to loss contingencies, such as claims and assessments arising from litigation and other legal proceedings, contractual indemnities, product and environmental liabilities and tax matters. Other than loss contingencies that are assumed in business combinations for which we can reliably estimate the fair value, we are required to accrue for such loss contingencies if it is probable that the outcome will be unfavorable and if the amount of the loss can be reasonably estimated. We evaluate our exposure to loss based on the progress of each contingency, experience in similar contingencies and consultation with our legal counsel. We re-evaluate all contingencies as additional information becomes available. Given the uncertainties inherent in complex litigation and other contingencies, these evaluations can involve significant judgment about future events. The ultimate outcome of any litigation or other contingency may be material to our results of operations, financial condition and cash flows. See Note 20, "LEGAL PROCEEDINGS" to our audited Consolidated Financial Statements for further details regarding our current legal proceedings. If no accrual is made for a loss contingency because the amount of loss cannot be reasonably estimated, the Company will disclose contingent liabilities when there is at least a reasonable possibility that a loss or an additional loss may have been incurred.
Income Taxes
We have operations in various countries that have differing tax laws and rates. Our tax structure is supported by current domestic tax laws in the countries in which we operate and the application of tax treaties between the various countries in which we operate. Our income tax reporting is subject to audit by domestic and foreign tax authorities. Our effective tax rate may change from year to year based on changes in the mix of activities and income earned under our intercompany arrangements among the different jurisdictions in which we operate, changes in tax laws in these jurisdictions, changes in tax treaties between various countries in which we operate, changes in our eligibility for benefits under those tax treaties and changes in the estimated values of deferred tax assets and liabilities. Such changes could result in an increase in the effective tax rate on all or a portion of our income and/or any of our subsidiaries.
Our provision for income taxes is based on a number of estimates and assumptions made by management. Our consolidated income tax rate is affected by the amount of income earned in our various operating jurisdictions, the availability of benefits under tax treaties and the rates of taxes payable in respect of that income. We enter into many transactions and arrangements in the ordinary course of business in which the tax treatment is not entirely certain. We must therefore make estimates and judgments based on our knowledge and understanding of applicable tax laws and tax treaties, and the application of those tax laws and tax treaties to our business, in determining our consolidated tax provision. For example, certain countries could seek to tax a greater share of income than has been provided for by us. The final outcome of any audits by taxation authorities may differ from the estimates and assumptions we have used in determining our consolidated income tax provisions and accruals. This could result in a material effect on our consolidated income tax provision, results of operations, and financial condition for the period in which such determinations are made.
Our income tax returns are subject to audit in various jurisdictions. Existing and future audits by, or other disputes with, tax authorities may not be resolved favorably for us and could have a material adverse effect on our reported effective tax rate and after-tax cash flows. We record liabilities for uncertain tax positions, which involve significant management judgment. New laws and new interpretations of laws and rulings by tax authorities may affect the liability for uncertain tax positions. Due to the subjectivity and complex nature of the underlying issues, actual payments or assessments may differ from our estimates. To the extent that our estimates differ from amounts eventually assessed and paid our income and cash flows may be materially and adversely affected.
We assess whether it is more likely than not that we will realize the tax benefits associated with our deferred tax assets and establish a valuation allowance for assets that are not expected to result in a realized tax benefit. A significant amount of judgment is used in this process, including preparation of forecasts of future taxable income and evaluation of tax planning initiatives. If we revise these forecasts or determine that certain planning events will not occur, an adjustment to the valuation allowance will be made to tax expense in the period such determination is made.
NEW ACCOUNTING STANDARDS
Information regarding the recently issued new accounting guidance (adopted and not adopted as of December 31, 2021) is contained in Note 2, "SIGNIFICANT ACCOUNTING POLICIES" to our audited Consolidated Financial Statements.
FORWARD-LOOKING STATEMENTS
Caution regarding forward-looking information and statements and “Safe-Harbor” statements under the U.S. Private Securities Litigation Reform Act of 1995 and applicable Canadian securities laws:
To the extent any statements made in this Form 10-K contain information that is not historical, these statements are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, and may be forward-looking information within the meaning defined under applicable Canadian securities laws (collectively, “forward-looking statements”).
These forward-looking statements relate to, among other things: our business strategy, business plans and prospects and forecasts and changes thereto; product pipeline, prospective products and product approvals, expected launches of new products, product development and future performance and results of current and anticipated products; anticipated revenues for our products; expected R&D and marketing spend; our expected primary cash and working capital requirements for 2022 and beyond; the Company's plans for continued improvement in operational efficiency and the anticipated impact of such plans; our liquidity and our ability to satisfy our debt maturities as they become due; our ability to reduce debt levels; our ability to comply with the financial and other covenants contained in the Restated Credit Agreement, and senior notes indentures; the impact of our distribution, fulfillment and other third-party arrangements; proposed pricing actions; exposure to foreign currency exchange rate changes and interest rate changes; the outcome of contingencies, such as litigation, subpoenas, investigations, reviews, audits and regulatory proceedings; the anticipated impact of the adoption of new accounting standards; general market conditions; our expectations regarding our financial performance, including revenues, expenses, gross margins and income taxes; our impairment assessments, including the assumptions used therein and the results thereof; the anticipated impact of the evolving COVID-19 pandemic and related responses from governments and private sector participants on the Company, its supply chain, third-party suppliers, project development timelines, costs, revenues, margins, liquidity and financial condition, the anticipated timing, speed and magnitude of recovery from these COVID-19 pandemic related impacts and the Company’s planned actions and responses to this pandemic; the Company’s plan to separate its eye- health business, including the structure and timing of completing such separation transaction; and the proposed initial public offering (“IPO”) of the Company’s Solta aesthetic medical device business, including the timing of such IPO.
Forward-looking statements can generally be identified by the use of words such as “believe”, “anticipate”, “expect”, “intend”, “estimate”, “plan”, “continue”, “will”, “may”, “could”, “would”, “should”, “target”, “potential”, “opportunity”, “designed”, “create”, “predict”, “project”, “forecast”, “seek”, “strive”, “ongoing”, “decrease” or “increase” and variations or other similar expressions. In addition, any statements that refer to expectations, intentions, projections or other characterizations of future events or circumstances are forward-looking statements. These forward-looking statements may not be appropriate for other purposes. Although we have previously indicated certain of these statements set out herein, all of the, statements in this Form 10-K that contain forward-looking statements are qualified by these cautionary statements. These statements are based upon the current expectations and beliefs of management. Although we believe that the expectations reflected in such forward-looking statements are reasonable, such statements involve risks and uncertainties, and undue reliance should not be placed on such statements. Certain material factors or assumptions are applied in making such forward-looking statements, including, but not limited to, factors and assumptions regarding the items previously outlined, those factors, risks and uncertainties outlined below and the assumption that none of these factors, risks and uncertainties will cause actual results or events to differ materially from those described in such forward-looking statements. Actual results may differ materially from those expressed or implied in such statements. Important factors, risks and uncertainties that could cause actual results to differ materially from these expectations include, among other things, the following:
•the risks and uncertainties caused by or relating to the evolving COVID-19 pandemic, the fear of that pandemic, the availability and effectiveness of vaccines for COVID-19 (including with respect to current or future variants), COVID-19 vaccine immunization rates, the emergence of variant strains of COVID-19, the evolving reaction of governments, private sector participants and the public to that pandemic, and the potential effects and economic impact of the pandemic and the reaction to it, the severity, duration and future impact of which are highly uncertain and cannot be predicted, and which may have a significant adverse impact on the Company, including but not limited to its supply chain, third-party suppliers, project development timelines, employee base, liquidity, stock price, financial condition and costs (which may increase) and revenue and margins (both of which may decrease);
•with respect to the proposed separation of the Company’s eye-health business, the risks and uncertainties include, but are not limited to, the expected benefits and costs of the separation transaction, the expected timing of completion of the separation transaction and its terms, (including the Company’s expectation that it will launch the IPO of the Bausch
+ Lomb entity when financial market conditions are favorable, subject to receipt of regulatory, stock exchange and other approvals, and the Company’s expectation that the separation transaction will be completed following the expiry of customary lockups related to the B+L IPO and achievement of targeted debt leverage ratios, subject to receipt of applicable shareholder and other necessary approvals), the Company’s ability to complete the separation transaction considering the various conditions to the completion of the separation transaction (some of which are outside the Company’s control, including conditions related to regulatory matters and a possible shareholder vote, if applicable), that market or other conditions are no longer favorable to completing the transaction, that any shareholder, stock exchange, regulatory or other approval (if required) is not obtained on the terms or timelines anticipated or at all, business disruption during the pendency of or following the separation transaction, diversion of management time on separation transaction-related issues, retention of existing management team members, the reaction of customers and other parties to the separation transaction, the qualification of the separation transaction as a tax-free transaction for Canadian and/or U.S. federal income tax purposes (including whether or not an advance ruling from the Canada Revenue Agency will be sought or obtained), the ability of the Company and the separated entity to satisfy the conditions required to maintain the tax-free status of the separation transaction (some of which are beyond their control), the ability of the Company and the separated entity to satisfy the conditions required to maintain the tax-free status of the separation transaction (some of which are beyond their control), the potential dissynergy costs resulting from the separation transaction, the impact of the separation transaction on relationships with customers, suppliers, employees and other business counterparties, general economic conditions, conditions in the markets the Company is engaged in, behavior of customers, suppliers and competitors, technological developments, as well as legal and regulatory rules affecting the Company’s business. In particular, the Company can offer no assurance that any IPO or separation will occur at all, or that any such transaction will occur on the timelines anticipated by the Company;
•with respect to the proposed IPO of the Company’s Solta aesthetic medical device business, the risks and uncertainties include, but are not limited to, risks relating to the expected timing of completion of such transaction (including the Company’s expectation that it will launch such IPO when financial market conditions are favorable, subject to receipt of regulatory, stock exchange and other approvals) and the Company’s ability to complete such transaction, that market or other conditions are no longer favorable to completing the transaction on a timely basis or at all, the receipt of (or failure to receive) any stock exchange, regulatory and other approvals required in connection with the transaction and the timing of receipt of such approvals, business disruption during the pendency of or following such transaction, diversion of management time on transaction-related issues, retention of Solta aesthetic medical device management team members, the reaction of customers and other parties to such transaction, the impact of such transaction on relationships with customers, suppliers, employees and other business counterparties, and other events that could adversely impact the completion of such transaction, including industry or economic conditions outside of Bausch Health’s control. In particular, the Company can offer no assurance that any IPO will occur at all, or that any such transaction will occur on the timelines anticipated by the Company;
•the expense, timing and outcome of legal and governmental proceedings, investigations and information requests relating to, among other matters, our past distribution, marketing, pricing, disclosure requirements. Theand accounting practices (including with respect to our former relationship with Philidor Rx Services, LLC ("Philidor")), including a number of pending non-class securities litigations (including certain pending opt-out actions in the U.S. related to the previously settled securities class action (which remains subject to an objector's appeal of the Court's final approval order) and certain opt-out actions in Canada relating to the recently settled class action in Canada), certain pending lawsuits and other claims, investigations or proceedings that may be initiated or that may be asserted;
•potential additional litigation and regulatory investigations (and any costs, expenses, use of resources, diversion of management time and efforts, liability and damages that may result therefrom), negative publicity and reputational harm on our Company, products and business that may result from the past and ongoing public scrutiny of our past distribution, marketing, pricing, disclosure and accounting practices and from our former relationship with Philidor;
•the past and ongoing scrutiny of our legacy business practices, including with respect to pricing, and any pricing controls or price adjustments that may be sought or imposed on our products as a result thereof;
•pricing decisions that we have implemented, or may in the future elect to implement, such as the Patient Access and Pricing Committee’s historic practice of limiting the average annual price increase for our branded prescription pharmaceutical products to single digits, or any future pricing actions we may take in 2022 or beyond following review by our Patient Access and Pricing Committee (which is responsible for the pricing of our drugs);
•legislative or policy efforts, including those that may be introduced and passed by the U.S. Congress, designed to reduce patient out-of-pocket costs for medicines, which could result in new mandatory rebates and discounts or other pricing restrictions, controls or regulations (including mandatory price reductions);
•ongoing oversight and review of our products and facilities by regulatory and governmental agencies, including periodic audits by the U.S. Food and Drug Administration (the "FDA") and equivalent agencies outside of the U.S. and the results thereof;
•actions by the FDA or other regulatory authorities with respect to our products or facilities;
•compliance with the legal and regulatory requirements of our marketed products;
•our substantial debt (and potential additional future indebtedness) and current and future debt service obligations, our ability to reduce our outstanding debt levels and the resulting impact on our financial condition, cash flows and results of operations;
•our ability to comply with the financial and other covenants contained in our Restated Credit Agreement, senior notes indentures, 2023 Revolving Credit Facility (as defined below) and other current or future credit and/or debt agreements and the limitations, restrictions and prohibitions such covenants impose or may impose on the way we conduct our business, including prohibitions on incurring additional debt if certain financial covenants are not met, limitations on the amount of additional obligations we are able to incur pursuant to other covenants, our ability to draw under our 2023 Revolving Credit Facility and restrictions on our ability to make certain investments and other restricted payments;
•any default under the terms of our senior notes indentures or Restated Credit Agreement (and other current or future credit and/or debt agreements) and our ability, if any, to cure or obtain waivers of such default;
•any downgrade by rating agencies in our credit ratings, which may impact, among other things, our ability to raise debt and the cost of capital for additional debt issuances;
•any reductions in, or changes in the assumptions used in, our forecasts for fiscal year 2022 or beyond, including as a result of the impacts of the COVID-19 pandemic on our business and operations, which could lead to, among other things: (i) a failure to meet the financial and/or other covenants contained in our Restated Credit Agreement and/or senior notes indentures (and other current or future credit and/or debt agreements) and/or (ii) impairment in the goodwill associated with certain of our reporting units or impairment charges related to certain of our products or other intangible assets, which impairments could be material;
•changes in the assumptions used in connection with our impairment analyses or assessments, which would lead to a change in such impairment analyses and assessments and which could result in an impairment in the goodwill associated with any of our reporting units or impairment charges related to certain of our products or other intangible assets;
•the uncertainties associated with the acquisition and launch of new products, assets and businesses, including, but not limited to, our ability to provide the time, resources, expertise and funds required for the commercial launch of new products, the acceptance and demand for new products, and the impact of competitive products and pricing, which could lead to material impairment charges;
•our ability or inability to extend the profitable life of our products, including through line extensions and other life-cycle programs;
•our ability to retain, motivate and recruit executives and other key employees;
•our ability to implement effective succession planning for our executives and key employees;
•factors impacting our ability to stabilize and reposition our Ortho Dermatologics business to generate additional value, including the success of recently launched products and the approval of pipeline products (and the timing of such approvals);
•factors impacting our ability to achieve anticipated revenues for our products, including changes in anticipated marketing spend on such products and launch of competing products;
•factors impacting our ability to achieve anticipated market acceptance for our products, including acceptance of the pricing, effectiveness of promotional efforts, reputation of our products and launch of competing products;
•the challenges and difficulties associated with managing a large complex business, which has, in the past, grown rapidly;
•our ability to compete against companies that are larger and have greater financial, technical and human resources than we do, as well as other competitive factors, such as technological advances achieved, patents obtained and new products introduced by our competitors;
•our ability to effectively operate and grow our businesses in light of the challenges that the Company has faced and market conditions, including with respect to its substantial debt, pending investigations and legal proceedings, scrutiny of our past pricing and other practices, limitations on the way we conduct business imposed by the covenants contained in our Restated Credit Agreement, senior notes indentures and the agreements governing our other indebtedness, and the impacts of the COVID-19 pandemic;
•the extent to which our products are reimbursed by government authorities, pharmacy benefit managers ("PBMs") and other third-party payors; the impact our distribution, pricing and other practices may have on the decisions of such government authorities, PBMs and other third-party payors to reimburse our products; and the impact of obtaining or maintaining such reimbursement on the price and sales of our products;
•the inclusion of our products on formularies or our ability to achieve favorable formulary status, as well as the impact on the price and sales of our products in connection therewith;
•the consolidation of wholesalers, retail drug chains and other customer groups and the impact of such industry consolidation on our business;
•our ability to maintain strong relationships with physicians and other healthcare professionals;
•our eligibility for benefits under tax treaties and the continued availability of low effective tax rates for the business profits of certain of our subsidiaries;
•the implementation of the Organisation for Economic Co-operation and Development inclusive framework on Base Erosion and Profit Shifting, including the global minimum corporate tax rate, by the countries in which we operate;
•the outcome of any audits by taxation authorities, which outcomes may differ from the estimates and assumptions that we may use in determining our consolidated tax provisions and accruals;
•the actions of our third-party partners or service providers of research, development, manufacturing, marketing, distribution or other services, including their compliance with applicable laws and contracts, which actions may be beyond our control or influence, and the impact of such actions on our Company;
•the risks associated with the international scope of our operations, including our presence in emerging markets and the challenges we face when entering and operating in new and different geographic markets (including the challenges created by new and different regulatory regimes in such countries and the need to comply with applicable anti-bribery and economic sanctions laws and regulations);
•adverse global economic conditions and credit markets and foreign currency exchange uncertainty and volatility in certain of the countries in which we do business;
•the trade conflict between the United States and China;
•the potential conflict between Russia and Ukraine and any restrictive actions that may be taken by the U.S. and/or other countries in response thereto, such as sanctions or export controls;
•our ability to obtain, maintain and license sufficient intellectual property rights over our products and enforce and defend against challenges to such intellectual property (such as in connection with the filing by Norwich Pharmaceuticals Inc. (“Norwich”) of its Abbreviated New Drug Application (“ANDA”) for Xifaxan® (rifaximin) 550 mg tablets and the Company’s related lawsuit filed against Norwich in connection therewith);
•the introduction of generic, biosimilar or other competitors of our branded products and other products, including the introduction of products that compete against our products that do not have patent or data exclusivity rights;
•our ability to identify, finance, acquire, close and integrate acquisition targets successfully and on a timely basis and the difficulties, challenges, time and resources associated with the integration of acquired companies, businesses and products;
•any divestitures of our assets or businesses and our ability to successfully complete any such divestitures on commercially reasonable terms and on a timely basis, or at all, and the impact of any such divestitures on our Company, including the reduction in the size or scope of our business or market share, loss of revenue, any loss on
sale, including any resultant impairments of goodwill or other assets, or any adverse tax consequences suffered as a result of any such divestitures;
•the expense, timing and outcome of pending or future legal and governmental proceedings, arbitrations, investigations, subpoenas, tax and other regulatory audits, examinations, reviews and regulatory proceedings against us or relating to us and settlements thereof;
•our ability to negotiate the terms of or obtain court approval for the settlement of certain legal and regulatory proceedings;
•our ability to obtain components, raw materials or finished products supplied by third parties (some of which may be single-sourced) and other manufacturing and related supply difficulties, interruptions and delays;
•the disruption of delivery of our products and the routine flow of manufactured goods;
•economic factors over which the Company has no control, including changes in inflation, interest rates, foreign currency rates, and the potential effect of such factors on revenues, expenses and resulting margins;
•interest rate risks associated with our floating rate debt borrowings;
•our ability to effectively distribute our products and the effectiveness and success of our distribution arrangements;
•our ability to effectively promote our own products and those of our co-promotion partners;
•the success of our fulfillment arrangements with Walgreen Co. including market acceptance of, or market reaction to, such arrangements (including by customers, doctors, patients, PBMs, third-party payors and governmental agencies), and the continued compliance of such arrangements with applicable laws;
•our ability to secure and maintain third-party research, development, manufacturing, licensing, marketing or distribution arrangements;
•the risk that our products could cause, or be alleged to cause, personal injury and adverse effects, leading to potential lawsuits, product liability claims and damages and/or recalls or withdrawals of products from the market;
•the mandatory or voluntary recall or withdrawal of our products from the market and the costs associated therewith;
•the availability of, and our ability to obtain and maintain, adequate insurance coverage and/or our ability to cover or insure against the total amount of the claims and liabilities we face, whether through third-party insurance or self-insurance;
•our indemnity agreements, which may result in an obligation to indemnify or reimburse the relevant counterparty, which amounts may be material;
•the difficulty in predicting the expense, timing and outcome within our legal and regulatory environment, including with respect to approvals by the FDA, Health Canada, European Medicines Agency ("EMA") and similar agencies in other countries, legal and regulatory proceedings and settlements thereof, the protection afforded by our patents and other intellectual and proprietary property, successful generic challenges to our products and infringement or alleged infringement of the intellectual property of others;
•the results of continuing safety and efficacy studies by industry and government agencies;
•the success of preclinical and clinical trials for our drug development pipeline or delays in clinical trials that adversely impact the timely commercialization of our pipeline products, as well as other factors impacting the commercial success of our products, which could lead to material impairment charges;
•uncertainties around the successful improvement and modification of our existing products and development of new products, which may require significant expenditures and efforts;
•the results of management reviews of our research and development portfolio (including following the receipt of clinical results or feedback from the FDA or other regulatory authorities), which could result in terminations of specific projects which, in turn, could lead to material impairment charges;
•the seasonality of sales of certain of our products;
•declines in the pricing and sales volume of certain of our products that are distributed or marketed by third parties, over which we have no or limited control;
•compliance by the Company or our third-party partners and service providers (over whom we may have limited influence), or the failure of our Company or these third parties to comply, with health care “fraud and abuse” laws and other extensive regulation of our marketing, promotional and business practices (including with respect to pricing), worldwide anti-bribery laws (including the U.S. Foreign Corrupt Practices Act and the Canadian Corruption of Foreign Public Officials Act), worldwide economic sanctions and/or export laws, worldwide environmental laws and regulation and privacy and security regulations;
•the impacts of the Patient Protection and Affordable Care Act, as amended by the Health Care and Education Reconciliation Act of 2010 and potential amendment thereof and other legislative and regulatory health care reforms in the countries in which we operate, including with respect to recent government inquiries on pricing;
•the impact of any changes in or reforms to the legislation, laws, rules, regulation and guidance requires entitiesthat apply to disclose boththe Company and its businesses and products or the enactment of any new or proposed legislation, laws, rules, regulations or guidance that will impact or apply to the Company or its businesses or products;
•the impact of changes in federal laws and policy that may be undertaken under the Biden administration;
•illegal distribution or sale of counterfeit versions of our products;
•interruptions, breakdowns or breaches in our information technology systems; and
•risks in Item 1A. “Risk Factors” in this Form 10-K.
Additional information about these factors and about the material factors or assumptions underlying such forward-looking statements may be found elsewhere in this Form 10-K, under Item 1A. "Risk Factors" and in the Company's other filings with the SEC and the CSA. When relying on our forward-looking statements to make decisions with respect to the Company, investors and others should carefully consider the foregoing factors and other uncertainties and potential events. These forward-looking statements speak only as of the date made. We undertake no obligation to update or revise any of these forward-looking statements to reflect events or circumstances after the date of this Form 10-K or to reflect actual outcomes, except as required by law. We caution that, as it is not possible to predict or identify all relevant factors that may impact forward-looking statements, the foregoing list of important factors that may affect future results is not exhaustive and should not be considered a complete statement of all potential risks and uncertainties.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Information relating to quantitative and qualitative disclosures about market risk is detailed in Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Quantitative and Qualitative Disclosures About Market Risk” and is incorporated herein by reference.
Item 8. Financial Statements and Supplementary Data
The information required by this Item is contained in the financial statements set forth in Item 15. “Exhibits and Financial Statement Schedules” as part of this Form 10-K and is incorporated herein by reference.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Not applicable.
Item 9A. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
The Company’s management, with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of December 31, 2021. Based on that enables usersevaluation, the Company’s Chief Executive Officer and the Company’s Chief Financial Officer have concluded that as of December 31, 2021, the Company’s disclosure controls and procedures were effective to provide reasonable assurance that the information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to management as appropriate to allow timely decisions regarding required disclosure.
Management’s Annual Report on Internal Control Over Financial Reporting
The Company’s management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. The Company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to understandfuture periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Under the supervision and with the participation of management, including the Company’s Chief Executive Officer and the Company’s Chief Financial Officer, the Company conducted an evaluation of the effectiveness of its internal control over financial reporting as of December 31, 2021 based on the framework described in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on that evaluation, management has concluded that the Company maintained effective internal control over financial reporting as of December 31, 2021.
The effectiveness of the Company’s internal control over financial reporting as of December 31, 2021 has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report which appears herein.
Changes in Internal Control over Financial Reporting
There have not been any changes in the Company’s internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the last fiscal quarter of 2021 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
Item 9B. Other Information
None.
Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections
Not applicable.
PART III
Item 10. Directors, Executive Officers and Corporate Governance
Information required under this Item is incorporated herein by reference from information included in the 2022 Proxy Statement.
The Board of Directors has adopted a code of ethics (the "Code of Conduct") that applies to our Chief Executive Officer, Chief Financial Officer, the principal accounting officer, controller, and all vice presidents and above in the finance department of the Company worldwide. A copy of the Code of Conduct can be found on our website at: www.bauschhealth.com. We intend to satisfy the SEC disclosure requirements regarding amendments to, or waivers from, any provisions of our Code of Conduct on our website.
Item 11. Executive Compensation
Information required under this Item relating to executive compensation is incorporated herein by reference from information included in the 2022 Proxy Statement.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Information required under this Item relating to securities authorized for issuance under equity compensation plans and to security ownership of certain beneficial owners and management is incorporated herein by reference from information included in the 2022 Proxy Statement.
Item 13. Certain Relationships and Related Transactions, and Director Independence
Information required under this Item relating to certain relationships and transactions with related parties and about director independence is incorporated herein by reference from information included in the 2022 Proxy Statement.
Item 14. Principal Accounting Fees and Services
Information required under this Item relating to the fees for professional services rendered by our independent auditors in 2021 and 2020 is incorporated herein by reference from information included in the 2022 Proxy Statement.
PART IV
Item 15. Exhibits and Financial Statement Schedules
(a)Documents filed as a part of the report:
(1)The consolidated financial statements required to be filed in the Annual Report on Form 10-K are listed on page F-1 hereof.
(2)Exhibits
All schedules are omitted because they are not applicable or the required information is included in the financial statements or notes.
Item 16. Form 10-K Summary
None.
INDEX TO EXHIBITS
| | | | | | | | |
Exhibit
Number | | Exhibit Description |
| 3.1 | | |
| 3.2 | | |
| 3.3 | | |
| 3.4 | | |
| 3.5 | | |
| 4.1 | | Indenture, dated as of March 27, 2015 (the “VRX Escrow Corp Indenture”), between VRX Escrow Corp., the Bank of New York Mellon Trust Company, N.A., as trustee, registrar and US paying agent, and The Bank of New York Mellon, acting through its London branch, as the Euro paying agent, governing the 5.375% Senior Notes due 2020 (the “2020 Notes”), the 5.875% Senior Notes due 2023 (the “May 2023 Notes”), the 4.500% Senior Notes due 2023 (the “Euro Notes”) and the 6.125% Senior Notes due 2025 (the “2025 Notes” and together with the 2020 Notes, the May 2023 Notes and the Euro Notes, the “Notes”), originally filed as Exhibit 4.1 to the Company’s Current Report on Form 8-K filed on March 27, 2015, which is incorporated by reference herein. |
| 4.2 | | First Supplemental Indenture to the VRX Escrow Corp Indenture, dated as of March 27, 2015, between Valeant Pharmaceuticals International, Inc., the guarantors named therein and the Bank of New York Mellon Trust Company, N.A., as trustee, governing the Notes, originally filed as Exhibit 4.2 to the Company's Current Report on Form 8-K filed on March 27, 2015, which is incorporated by reference herein. |
| 4.3 | | Indenture, dated as of March 21, 2017, by and among Valeant Pharmaceuticals International, Inc., the guarantors party thereto, The Bank of New York Mellon, as trustee and the notes collateral agents party thereto, governing the 6.500% Senior Secured Notes due 2022 and the 7.000% Senior Secured Notes due 2024, originally filed as Exhibit 4.1 to the Company’s Current Report on Form 8-K filed on March 21, 2017, which is incorporated by reference herein. |
| 4.4 | | Indenture, dated as of October 17, 2017, by and among Valeant Pharmaceuticals International, Inc., the guarantors party thereto, The Bank of New York Mellon, as trustee and the notes collateral agents party thereto, governing the 5.500% Senior Secured Notes due 2025, originally filed as Exhibit 4.1 to the Company’s Current Report on Form 8-K filed on October 17, 2017, which is incorporated by reference herein. |
| 4.5 | | Indenture, dated as of December 18, 2017, by and among Valeant Pharmaceuticals International, Inc., the guarantors party thereto and The Bank of New York Mellon, as trustee, governing the 9.000% Senior Notes due 2025, originally filed as Exhibit 4.1 to the Company’s Current Report on Form 8-K filed on December 18, 2017, which is incorporated by reference herein. |
| 4.6 | | Indenture, dated as of March 26, 2018, by and among Valeant Pharmaceuticals International, Valeant Pharmaceuticals International, Inc., the other guarantors party thereto and The Bank of New York Mellon, as trustee, governing the 9.250% Senior Secured Notes due 2026, originally filed as Exhibit 4.1 to the Company’s Current Report on Form 8-K filed on March 27, 2018, which is incorporated by reference herein. |
| 4.7 | | Indenture, dated as of June 1, 2018, by and among Valeant Pharmaceuticals International, Valeant Pharmaceuticals international, Inc., the other guarantors party thereto and The Bank of New York Mellon, as trustee, governing the 8.500% Senior Secured Notes due 2027, originally filed as Exhibit 4.1 to the Company’s Current Report on Form 8-K filed on June 1, 2018, which is incorporated by reference herein. |
| 4.8 | | Indenture, dated as of March 8, 2019, by and among Bausch Health Companies Inc., the guarantors named therein, The Bank of New York Mellon Trust Company, N.A., as trustee, and the notes collateral agents party thereto, governing the 5.750% Senior Secured Notes due 2027, originally filed as Exhibit 4.1 to the Company’s Current Report on Form 8-K filed on March 8, 2019, which is incorporated by reference herein. |
| 4.9 | | Indenture, dated as of May 23, 2019, by and among Bausch Health Companies Inc., the guarantors named therein and The Bank of New York Mellon Trust Company, N.A., as trustee, governing the 7.000% Senior Notes due 2028 and the 7.250% Senior Notes due 2029, originally filed as Exhibit 4.1 to the Company’s Current Report on Form 8-K filed on May 24, 2019, which is incorporated by reference herein. |
| 4.10 | | Indenture, dated as of December 30, 2019, by and among Bausch Health Companies Inc., the guarantors named therein and The Bank of New York Mellon Trust Company, N.A., as trustee, governing the 5.000% Senior Notes due 2028 and the 5.250% Senior Notes due 2030, originally filed as Exhibit 4.1 to the Company’s Current Report on Form 8-K filed on December 30, 2019, which is incorporated by reference herein. |
| | | | | | | | |
| 4.11 | | Indenture, dated as of May 26, 2020, by and among Bausch Health Companies Inc., the guarantors named therein and The Bank of New York Mellon Trust Company, N.A., as trustee, governing the 6.250% Senior Notes due 2029, originally filed as Exhibit 4.1 to the Company’s Current Report on Form 8-K filed on May 26, 2020, which is incorporated by reference herein. |
| 4.12 | | Indenture, dated as of December 3, 2020, by and among Bausch Health Companies Inc., the guarantors named therein and The Bank of New York Mellon, N.A., as trustee, governing the 5.000% Senior Notes due 2029 and the 5.250% Senior Notes due 2031, originally filed as Exhibit 4.1 to the Company’s Current Report on Form 8-K filed on December 3, 2020, which is incorporated by reference herein. |
| 4.13 | | Indenture, dated as of June 8, 2021, by and among Bausch Health Companies Inc., the guarantors named therein and The Bank of New York Mellon, N.A., as trustee, governing the 4.875% Senior Notes due 2028, originally filed as Exhibit 4.1 to the Company’s Current Report on Form 8-K filed on June 8, 2021, which is incorporated by reference herein. |
| 4.14 | | Indenture, dated as of February 10, 2022, by and among Bausch Health Companies Inc., the guarantors named therein, The Bank of New York Mellon, N.A., as trustee and the notes collateral agents party thereto, governing the 6.125% Senior Secured Notes due 2027, originally filed as Exhibit 4.1 to the Company’s Current Report on Form 8-K filed on February 10, 2022, which is incorporated by reference herein. |
| 4.15 | | |
| 4.16 | | |
| 10.1 | | |
| 10.2 | | |
| 10.3 | | |
| 10.4 | | |
| 10.5 | | |
| 10.6 | | |
| 10.7 | | |
| 10.8 | | |
| 10.9 | | |
| 10.10 | | |
| | | | | | | | |
| 10.11 | | |
| 10.12 | | Valeant Pharmaceuticals International, Inc. 2011 Omnibus Incentive Plan (the “2011 Omnibus Incentive Plan”), effective as of April 6, 2011, as amended on and approved by the shareholders on May 16, 2011, originally filed as Annex A to the Company's Management Proxy Circular and Proxy Statement on Schedule 14A filed on April 14, 2011, as amended by the Supplement dated May 10, 2011 to the Company's Management Proxy Circular and Proxy Statement filed on May 10, 2011, which is incorporated by reference herein.† |
| 10.13 | | |
| 10.14 | | |
| 10.15 | | |
| 10.16 | | |
| 10.17 | | |
| 10.18 | | |
| 10.19 | | |
| 10.20* | | |
| 10.21 | | |
| 10.22 | | |
| 10.23 | | |
| 10.24 | | First Incremental Amendment, dated as of November 27, 2018, to the Fourth Amended and Restated Credit and Guaranty Agreement, by and among Bausch Health Companies Inc., Valeant Pharmaceuticals International, certain subsidiaries of Bausch Health Companies Inc. as guarantors, each of the financial institutions named therein as lenders and issuing banks and Barclays Bank PLC, as Administrative Agent, originally filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on November 27, 2018, which is incorporated by reference herein and which First Incremental Amendment appends, as an exhibit thereto, a copy of such Fourth Amended and Restated Credit and Guaranty Agreement, as amended to date. |
| 10.25 | | |
| 10.26 | | |
| 10.27 | | |
| | | | | | | | |
| 10.28 | | |
| 10.29 | | |
| 10.30 | | Restatement Agreement, dated as of June 1, 2018, among Valeant Pharmaceuticals International, Inc., Valeant Pharmaceuticals International, certain subsidiaries of Valeant Pharmaceuticals International, Inc. as guarantors, each of the financial institutions named therein as lenders and issuing banks and Barclays Bank PLC, as Administrative Agent, originally filed as Exhibit 10.1 to the Company's Current Report on Form 8-K filed on June 1, 2018, which is incorporated by reference herein. |
| 10.31 | | |
| 10.32 | | |
| 10.33 | | |
| 21.1* | | |
| 23.1* | | |
| 31.1* | | |
| 31.2* | | |
| 32.1* | | |
| 32.2* | | |
| 101.INS* | | Inline XBRL Instance Document |
| 101.SCH* | | Inline XBRL Taxonomy Extension Schema Document |
| 101.CAL* | | Inline XBRL Taxonomy Extension Calculation Linkbase Document |
| 101.LAB* | | Inline XBRL Taxonomy Extension Label Linkbase Document |
| 101.PRE* | | Inline XBRL Taxonomy Extension Presentation Linkbase Document |
| 101.DEF* | | Inline XBRL Taxonomy Extension Definition Linkbase Document |
| 104* | | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) |
* Filed herewith.
† Management contract or compensatory plan or arrangement.
†† One or more exhibits or schedules to this exhibit have been omitted pursuant to Item 601(a)(5) or Item 601(b)(2) of Regulation S-K. We undertake to furnish supplementally a copy of any omitted exhibit or schedule to the SEC upon request.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| | | | | | | | | | | | | | | | | |
| | | BAUSCH HEALTH COMPANIES INC.
(Registrant) |
| | | | | |
| Date: | February 23, 2022 | | By: | /s/ JOSEPH C. PAPA | |
| | | | | |
| | | | Joseph C. Papa Chief Executive Officer (Principal Executive Officer and Chairman of the Board) |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
| | | | | | | | | | | | | | | | | |
| Signature | | Title | | Date |
| | | | | |
| /s/ JOSEPH C. PAPA Joseph C. Papa
| | Chief Executive Officer and Chairman of the Board | | February 23, 2022 |
| /s/ SAM ELDESSOUKY Sam Eldessouky | | Executive Vice President and Chief Financial Officer (Principal Financial Officer) | | February 23, 2022 |
| /s/ FREDERICK J. MUNSCH Frederick J. Munsch | | Senior Vice President, Controller and Chief Accounting Officer (Principal Accounting Officer) | | February 23, 2022 |
| /s/ RICHARD U. DESCHUTTER Richard U. DeSchutter | | Director | | February 23, 2022 |
| /s/ BRETT ICAHN Brett Icahn | | Director | | February 23, 2022 |
| /s/ ARGERIS N. KARABELAS Argeris N. Karabelas | | Director | | February 23, 2022 |
| /s/ SARAH B. KAVANAGH Sarah B. Kavanagh | | Director | | February 23, 2022 |
| /s/ STEVEN D. MILLER Steven D. Miller | | Director | | February 23, 2022 |
| /s/ JOHN A. PAULSON John A. Paulson | | Director | | February 23, 2022 |
| /s/ ROBERT N. POWER Robert N. Power | | Director | | February 23, 2022 |
| /s/ RUSSEL C. ROBERTSON Russel C. Robertson | | Director | | February 23, 2022 |
| /s/ THOMAS W. ROSS, SR. Thomas W. Ross, Sr. | | Director | | February 23, 2022 |
| /s/ ANDREW C. VON ESCHENBACH Andrew C. von Eschenbach | | Director | | February 23, 2022 |
| /s/ AMY B. WECHSLER Amy B. Wechsler | | Director | | February 23, 2022 |
BAUSCH HEALTH COMPANIES INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
| | | | | | | | |
| | Page |
| Report of Management on Financial Statements | | |
| Report of Independent Registered Public Accounting Firm (PCAOB ID 238) | | |
| Consolidated Balance Sheets as of December 31, 2021 and 2020 | | |
| Consolidated Statements of Operations for the years ended December 31, 2021, 2020 and 2019 | | |
| Consolidated Statements of Comprehensive Loss for the years ended December 31, 2021, 2020 and 2019 | | |
| Consolidated Statements of Shareholders’ Equity (Deficit) for the years ended December 31, 2021, 2020 and 2019 | | |
| Consolidated Statements of Cash Flows for the years ended December 31, 2021, 2020 and 2019 | | |
| Notes to Consolidated Financial Statements | | |
REPORT OF MANAGEMENT ON FINANCIAL STATEMENTS
The Company’s management is responsible for preparing the accompanying consolidated financial statements in conformity with United States generally accepted accounting principles (“U.S. GAAP”). In preparing these consolidated financial statements, management selects appropriate accounting policies and uses its judgment and best estimates to report events and transactions as they occur. Management has determined such amounts on a reasonable basis in order to ensure that the consolidated financial statements are presented fairly, in all material respects. Financial information included throughout this Annual Report is prepared on a basis consistent with that of the accompanying consolidated financial statements.
PricewaterhouseCoopers LLP has been engaged by the Company to audit the consolidated financial statements.
The Board of Directors is responsible for ensuring that management fulfills its responsibility for financial reporting and is ultimately responsible for reviewing and approving the consolidated financial statements. The Board of Directors carries out this responsibility principally through its Audit and Risk Committee. The members of the Audit and Risk Committee are outside Directors. The Audit and Risk Committee considers, for review by the Board of Directors and approval by the shareholders, the engagement or reappointment of the external auditors. PricewaterhouseCoopers LLP has full and free access to the Audit and Risk Committee.
| | | | | | | | |
| /s/ JOSEPH C. PAPA | | /s/ SAM ELDESSOUKY |
Joseph C. Papa
Chief Executive Officer | | Sam Eldessouky
Executive Vice President and
Chief Financial Officer |
February 23, 2022
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of Bausch Health Companies Inc.
Opinions on the Financial Statements and Internal Control over Financial Reporting
We have audited the accompanying consolidated balance sheets of Bausch Health Companies Inc. and its subsidiaries (the “Company”) as of December 31, 2021 and 2020, and the related consolidated statements of operations, of comprehensive loss, of shareholders' equity (deficit) and of cash flows for each of the three years in the period ended December 31, 2021, including the related notes (collectively referred to as the “consolidated financial statements”). We also have audited the Company's internal control over financial reporting as of December 31, 2021, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2021 and 2020, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2021 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2021, based on criteria established in Internal Control - Integrated Framework (2013) issued by the COSO.
Basis for Opinions
The Company's management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in Management’s Annual Report on Internal Control Over Financial Reporting appearing under Item 9A. Our responsibility is to express opinions on the Company’s consolidated financial statements and on the Company's internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.
Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the audit committee and that (i) relate to accounts or disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
Medicaid Rebates and Sales Returns Allowances
As described in Note 2 to the consolidated financial statements, gross product sales are subject to a variety of deductions in arriving at reported net product sales. The transaction price for product sales is typically adjusted for variable consideration, which may be in the form of cash discounts, allowances, returns, rebates, chargebacks and distribution fees paid to customers. The provisions for these deductions are recorded concurrently with the recognition of gross product sales revenue as a reduction in revenue. The variable consideration provisions, either recognized within accrued and other current liabilities or as a reduction of trade receivables, included $482 million related to returns allowances and $944 million related to rebates, including Medicaid rebates as of December 31, 2021. For certain rebate programs, such as Medicaid, provisions recognized by management are based on the terms of state government-managed programs, estimates of outstanding and future claims for end-customer sales and the sales mix. As disclosed by management, for sales returns, management estimates provisions utilizing existing return policies with customers, historical return and exchange levels, external data with respect to inventory levels in the wholesale distribution channel, external data with respect to prescription demand for products, remaining shelf lives of products at the date of sale, and estimated returns liability to be processed by year of sale based on an analysis of lot information related to actual historical returns.
The principal considerations for our determination that performing procedures relating to Medicaid rebates and sales returns allowances is a critical audit matter are the significant judgment by management when developing the estimate of Medicaid rebates and allowances for sales returns as the estimates are based on assumptions developed using terms of state government-managed Medicaid programs, existing return policies with customers, and projected estimated outstanding and future claims for end-customer sales. This in turn led to a high degree of auditor judgment, subjectivity, and effort in performing procedures and evaluating audit evidence relating to these assumptions.
Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included testing the effectiveness of controls relating to provisions for Medicaid rebates and allowances for sales returns, including controls over the assumptions used to estimate these rebates and allowances. These procedures also included, among others (i) developing an independent estimate of Medicaid rebates by utilizing third-party information on inventory levels in the distribution channel, the terms of the specific Medicaid rebate programs, and the historical trends of actual Medicaid rebate claims paid, adjusted for price and projected market conditions, (ii) comparing the independent estimate for these Medicaid rebates to management’s estimates, (iii) evaluating management's process for developing the estimate of the allowance for sales returns and the reasonableness of management’s assumptions related to existing return policies, (iv) evaluating management's assumptions related to existing return policies involved comparing to historical trends and considering whether these assumptions were consistent with evidence obtained in other areas of the audit, (v) evaluating the appropriateness of the method for estimating the allowance for sales returns and testing the completeness and accuracy of underlying data used in the model, and (vi) testing Medicaid rebate and sales returns claims processed by the Company, including evaluating those claims for consistency with the contractual terms of the Company’s arrangements and policies.
Finite-Lived Intangible Assets Impairment Assessment
As described in Notes 2 and 8 to the consolidated financial statements, the Company’s consolidated finite-lived net intangible assets balance was $5,250 million as of December 31, 2021, which consists of product and corporate brands, product rights/patents, partner relationships and technology and other assets. Finite-lived intangible assets are tested for impairment whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. If indicators of impairment are present, the asset is tested for recoverability by comparing the carrying value of the asset to the related estimated undiscounted future cash flows expected to be derived from the asset, which include the amount and timing of the projected future cash flows.
The principal considerations for our determination that performing procedures relating to the finite-lived intangible assets impairment assessment is a critical audit matter are the significant judgment by management in the identification of events that suggest an asset group might not be recoverable and in developing the assumptions used in the impairment testing assessment.
This in turn led to a high degree of auditor judgment, subjectivity, and effort in performing procedures and evaluating audit evidence related to management’s undiscounted future cash flow projections.
Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included testing the effectiveness of controls relating to management’s finite-lived intangible assets impairment assessment, including controls over the development of assumptions used to estimate recoverability and controls over the identification of events that suggest an asset group might not be recoverable. These procedures also included, among others (i) testing management’s process for identifying potential impairment events and determining the recoverability of the intangible assets, (ii) evaluating the appropriateness of the undiscounted cash flow model used in the impairment testing assessment, (iii) testing the completeness and accuracy of underlying data used in the model, and (iv) evaluating the reasonableness of the significant assumptions used by management related to the undiscounted future cash flow projections. Evaluating the reasonableness of management's assumptions for undiscounted future cash flow projections involved evaluating whether the assumptions used by management were reasonable considering the current and past performance of the asset group and whether these assumptions were consistent with evidence obtained in other areas of the audit.
Goodwill Impairment Assessments – Ortho Dermatologics Reporting Unit
As described in Note 2 and 8 to the consolidated financial statements, the Company’s consolidated goodwill balance was $12,457 million as of December 31, 2021, and the goodwill associated with the Ortho Dermatologics segment was $798 million, inclusive of a goodwill impairment of $469 million. The Ortho Dermatologics segment consists of the Ortho Dermatologics and Global Solta reporting units. Goodwill is not amortized but is tested for impairment at least annually as of October 1st at the reporting unit level. An interim goodwill impairment test in advance of the annual impairment assessment may be required if events occur that indicate an impairment might be present. Where the qualitative assessment suggested that it was more likely than not that the fair value of a reporting unit was less than its carrying amount, a quantitative fair value test was performed for that reporting unit. Goodwill impairment is measured by the amount the carrying value exceeds the fair value. Fair value of each reporting unit is estimated by management using a discounted cash flow model. During the quarter ended March 31, 2021, the Company revised its long-term forecasts for the Ortho Dermatologics reporting unit and thus Management conducted an interim quantitative fair value test for this reporting unit and recognized a goodwill impairment of $469 million. Management also conducted its annual goodwill impairment test on October 1, 2021 and determined that there was no additional impairment of goodwill. Management’s discounted cash flow model relies on assumptions regarding revenue growth rates, gross profit, projected working capital needs, selling, general and administrative expenses, research and development expenses, capital expenditures, income tax rates, discount rates and terminal growth rates.
The principal considerations for our determination that performing procedures relating to the goodwill impairment assessments of the Ortho Dermatologics reporting unit is a critical audit matter are the significant judgment by management when developing the fair value estimates of the reporting unit. This in turn led to a high degree of auditor judgment, subjectivity, and effort in performing procedures and evaluating management’s significant assumptions related to revenue growth rates, gross profit, discount rates, and terminal growth rates. Also, the audit effort involved the use of professionals with specialized skill and knowledge.
Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included testing the effectiveness of controls relating to management’s goodwill impairment assessments, including controls over the valuation of the Company’s Ortho Dermatologics reporting unit. These procedures also included, among others (i) testing management’s process for developing the fair value estimates of the Ortho Dermatologics reporting unit, (ii) evaluating the appropriateness of the discounted cash flow models, (iii) testing the completeness and accuracy of underlying data used in the models, and (iv) evaluating the reasonableness of the significant assumptions used by management related to the revenue growth rates, gross profit, discount rates, and terminal growth rates. Evaluating management’s assumptions related to revenue growth rates and gross profit involved evaluating whether the assumptions used by management were reasonable considering (i) the current and past performance of the reporting unit, (ii) the consistency with external market and industry data, and (iii) whether these assumptions were consistent with evidence obtained in other areas of the audit. Professionals with specialized skill and knowledge were used to assist in the evaluation of the Company’s discounted cash flow models and discount rate and terminal growth rate assumptions.
/s/ PricewaterhouseCoopers LLP
Florham Park, New Jersey
February 23, 2022
We have served as the Company’s auditor since 2012.
BAUSCH HEALTH COMPANIES INC.
CONSOLIDATED BALANCE SHEETS
(in millions, except share amounts)
| | | | | | | | | | | | | | |
| | | December 31, |
| | | 2021 | | 2020 |
| Assets | | | | |
| Current assets: | | | | |
| Cash and cash equivalents | | $ | 582 | | | $ | 605 | |
| Restricted cash and other settlement deposits | | 1,537 | | | 1,211 | |
| Trade receivables, net | | 1,775 | | | 1,577 | |
| Inventories, net | | 993 | | | 1,094 | |
| Prepaid expenses and other current assets | | 720 | | | 855 | |
| Total current assets | | 5,607 | | | 5,342 | |
| Property, plant and equipment, net | | 1,598 | | | 1,567 | |
| Intangible assets, net | | 6,948 | | | 8,445 | |
| Goodwill | | 12,457 | | | 13,044 | |
| Deferred tax assets, net | | 2,252 | | | 2,137 | |
| Other non-current assets | | 340 | | | 664 | |
| Total assets | | $ | 29,202 | | | $ | 31,199 | |
| Liabilities | | | | |
| Current liabilities: | | | | |
| Accounts payable | | $ | 407 | | | $ | 337 | |
| Accrued and other current liabilities | | 4,791 | | | 4,576 | |
| Total current liabilities | | 5,198 | | | 4,913 | |
| Acquisition-related contingent consideration | | 202 | | | 216 | |
| Non-current portion of long-term debt | | 22,654 | | | 23,925 | |
| Deferred tax liabilities, net | | 529 | | | 528 | |
| Other non-current liabilities | | 653 | | | 1,012 | |
| Total liabilities | | 29,236 | | | 30,594 | |
| Commitments and contingencies (Notes 20 and 21) | | 0 | | 0 |
| Equity | | | | |
| Common shares, no par value, unlimited shares authorized, 359,405,748 and 355,422,347 issued and outstanding at December 31, 2021 and 2020, respectively | | 10,317 | | | 10,227 | |
| Additional paid-in capital | | 462 | | | 454 | |
| Accumulated deficit | | (8,961) | | | (8,013) | |
| Accumulated other comprehensive loss | | (1,924) | | | (2,133) | |
| Total Bausch Health Companies Inc. shareholders’ (deficit) equity | | (106) | | | 535 | |
| Noncontrolling interest | | 72 | | | 70 | |
| Total (deficit) equity | | (34) | | | 605 | |
| Total liabilities and (deficit) equity | | $ | 29,202 | | | $ | 31,199 | |
On behalf of the Board:
| | | | | | | | |
| /s/ JOSEPH C. PAPA | | /s/ RUSSEL C. ROBERTSON |
| Joseph C. Papa | | Russel C. Robertson |
| Chief Executive Officer | | Chairperson, Audit and Risk Committee |
The accompanying notes are an integral part of these consolidated financial statements.
BAUSCH HEALTH COMPANIES INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in millions, except per share amounts)
| | | | | | | | | | | | | | | | | |
| | Years Ended December 31, |
| | 2021 | | 2020 | | 2019 |
| Revenues | | | | | |
| Product sales | $ | 8,342 | | | $ | 7,924 | | | $ | 8,489 | |
| Other revenues | 92 | | | 103 | | | 112 | |
| 8,434 | | | 8,027 | | | 8,601 | |
| Expenses | | | | | |
| Cost of goods sold (excluding amortization and impairments of intangible assets) | 2,361 | | | 2,202 | | | 2,297 | |
| Cost of other revenues | 33 | | | 47 | | | 53 | |
| Selling, general and administrative | 2,624 | | | 2,367 | | | 2,554 | |
| Research and development | 465 | | | 452 | | | 471 | |
| Amortization of intangible assets | 1,375 | | | 1,645 | | | 1,897 | |
| Goodwill impairments | 469 | | | — | | | — | |
| Asset impairments, including loss on assets held for sale | 234 | | | 114 | | | 75 | |
| Restructuring, integration, separation and IPO costs | 50 | | | 22 | | | 31 | |
| Other expense, net | 373 | | | 502 | | | 1,426 | |
| 7,984 | | | 7,351 | | | 8,804 | |
| Operating income (loss) | 450 | | | 676 | | | (203) | |
| Interest income | 7 | | | 13 | | | 12 | |
| Interest expense | (1,426) | | | (1,534) | | | (1,612) | |
| Loss on extinguishment of debt | (62) | | | (59) | | | (42) | |
| Foreign exchange and other | 7 | | | (30) | | | 8 | |
| Loss before benefit from income taxes | (1,024) | | | (934) | | | (1,837) | |
| Benefit from income taxes | 87 | | | 375 | | | 54 | |
| Net loss | (937) | | | (559) | | | (1,783) | |
| Net income attributable to noncontrolling interest | (11) | | | (1) | | | (5) | |
| Net loss attributable to Bausch Health Companies Inc. | $ | (948) | | | $ | (560) | | | $ | (1,788) | |
| | | | | |
| Basic and diluted loss per share attributable to Bausch Health Companies Inc. | $ | (2.64) | | | $ | (1.58) | | | $ | (5.08) | |
| | | | | |
| Basic and diluted weighted-average common shares | 358.9 | | | 355.0 | | | 352.1 | |
The accompanying notes are an integral part of these consolidated financial statements.
BAUSCH HEALTH COMPANIES INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(in millions)
| | | | | | | | | | | | | | | | | |
| Years Ended December 31, |
| 2021 | | 2020 | | 2019 |
| Net loss | $ | (937) | | | $ | (559) | | | $ | (1,783) | |
| Other comprehensive (loss) income | | | | | |
| Pension and postretirement benefit plan adjustments: | | | | | |
| Net actuarial gain (loss) arising during the year | 24 | | | (15) | | | (8) | |
| Amortization of prior service credit | (4) | | | (4) | | | (4) | |
| Amortization or settlement recognition of net loss | 10 | | | 1 | | | 2 | |
| Income tax benefit (expense) | 1 | | | 2 | | | (2) | |
| Foreign currency impact | (3) | | | — | | | (2) | |
| Net pension and postretirement benefit plan adjustments | 28 | | | (16) | | | (14) | |
| Foreign currency translation adjustment | (158) | | | (29) | | | 64 | |
| Other comprehensive (loss) income | (130) | | | (45) | | | 50 | |
| Comprehensive loss | (1,067) | | | (604) | | | (1,733) | |
| Comprehensive income attributable to noncontrolling interest | (12) | | | (3) | | | (4) | |
| Comprehensive loss attributable to Bausch Health Companies Inc. | $ | (1,079) | | | $ | (607) | | | $ | (1,737) | |
The accompanying notes are an integral part of these consolidated financial statements.
BAUSCH HEALTH COMPANIES INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (DEFICIT)
(in millions)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Bausch Health Companies Inc. Shareholders' Equity | | | | |
| | | Common Shares | | | | | | Accumulated
Other
Comprehensive
Loss | | Bausch Health
Companies Inc.
Shareholders'
Equity (Deficit) | | | | |
| | | Shares | | Amount | | Additional
Paid-In
Capital | | Accumulated
Deficit | | Noncontrolling
Interest | | Total
Equity (Deficit) |
| Balance, January 1, 2019 | | 349.9 | | | $ | 10,121 | | | $ | 413 | | | $ | (5,664) | | | $ | (2,137) | | | $ | 2,733 | | | $ | 82 | | | $ | 2,815 | |
| Common shares issued under share-based compensation plans | | 2.7 | | | 51 | | | (46) | | | — | | | — | | | 5 | | | — | | | 5 | |
| Share-based compensation | | — | | | — | | | 102 | | | — | | | — | | | 102 | | | — | | | 102 | |
| Share-based awards tax withholding | | — | | | — | | | (40) | | | — | | | — | | | (40) | | | — | | | (40) | |
| Noncontrolling interest distributions | | — | | | — | | | — | | | — | | | — | | | — | | | (13) | | | (13) | |
| Net (loss) income | | — | | | — | | | — | | | (1,788) | | | — | | | (1,788) | | | 5 | | | (1,783) | |
| Other comprehensive income (loss) | | — | | | — | | | — | | | — | | | 51 | | | 51 | | | (1) | | | 50 | |
| Balance, December 31, 2019 | | 352.6 | | | 10,172 | | | 429 | | | (7,452) | | | (2,086) | | | 1,063 | | | 73 | | | 1,136 | |
Effect of application of new accounting standard: financial instruments - credit losses | | — | | | — | | | — | | | (1) | | | — | | | (1) | | | — | | | (1) | |
| Common shares issued under share-based compensation plans | | 2.8 | | | 55 | | | (50) | | | — | | | — | | | 5 | | | — | | | 5 | |
| Share-based compensation | | — | | | — | | | 105 | | | — | | | — | | | 105 | | | — | | | 105 | |
| Share-based awards tax withholding | | — | | | — | | | (30) | | | — | | | — | | | (30) | | | — | | | (30) | |
| Noncontrolling interest distributions | | — | | | — | | | — | | | — | | | — | | | — | | | (6) | | | (6) | |
| Net (loss) income | | — | | | — | | | — | | | (560) | | | — | | | (560) | | | 1 | | | (559) | |
| Other comprehensive (loss) income | | — | | | — | | | — | | | — | | | (47) | | | (47) | | | 2 | | | (45) | |
| Balance, December 31, 2020 | | 355.4 | | | 10,227 | | | 454 | | | (8,013) | | | (2,133) | | | 535 | | | 70 | | | 605 | |
| Common shares issued under share-based compensation plans | | 4.0 | | | 90 | | | (68) | | | — | | | — | | | 22 | | | — | | | 22 | |
| Share-based compensation | | — | | | — | | | 128 | | | — | | | — | | | 128 | | | — | | | 128 | |
| Share-based awards tax withholding | | — | | | — | | | (52) | | | — | | | — | | | (52) | | | — | | | (52) | |
| Release of foreign currency translation losses upon disposal of assets held for sale | | — | | | — | | | — | | | — | | | 340 | | | 340 | | | — | | | 340 | |
| Noncontrolling interest distributions | | — | | | — | | | — | | | — | | | — | | | — | | | (10) | | | (10) | |
| Net (loss) income | | — | | | — | | | — | | | (948) | | | — | | | (948) | | | 11 | | | (937) | |
| Other comprehensive (loss) income | | — | | | — | | | — | | | — | | | (131) | | | (131) | | | 1 | | | (130) | |
| Balance, December 31, 2021 | | 359.4 | | | $ | 10,317 | | | $ | 462 | | | $ | (8,961) | | | $ | (1,924) | | | $ | (106) | | | $ | 72 | | | $ | (34) | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
The accompanying notes are an integral part of these consolidated financial statements.
BAUSCH HEALTH COMPANIES INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in millions)
| | | | | | | | | | | | | | | | | | | | |
| | | Years Ended December 31, |
| | | 2021 | | 2020 | | 2019 |
| Cash Flows From Operating Activities | | | | | | |
| Net loss | | $ | (937) | | | $ | (559) | | | $ | (1,783) | |
| Adjustments to reconcile net loss to net cash provided by operating activities: | | | | | | |
| Depreciation and amortization of intangible assets | | 1,552 | | | 1,825 | | | 2,075 | |
| Amortization and write-off of debt discounts and debt issuance costs | | 55 | | | 61 | | | 63 | |
| Asset impairments, including loss on assets held for sale | | 234 | | | 114 | | | 75 | |
| Goodwill impairment | | 469 | | | — | | | — | |
| Acquisition-related contingent consideration | | 11 | | | 48 | | | 12 | |
| Allowances for losses on trade receivables and inventories | | 60 | | | 60 | | | 75 | |
| Deferred income taxes | | (225) | | | (475) | | | (230) | |
| Gain on disposal of assets | | (2) | | | (1) | | | (31) | |
| Additions to accrued legal settlements | | 569 | | | 442 | | | 1,401 | |
| Payments of accrued legal settlements | | (351) | | | (168) | | | (15) | |
| Share-based compensation | | 128 | | | 105 | | | 102 | |
| Foreign exchange loss | | 6 | | | 8 | | | 7 | |
| Gain excluded from hedge effectiveness | | (20) | | | (23) | | | (9) | |
| Loss on extinguishment of debt | | 62 | | | 59 | | | 42 | |
| Payments of contingent consideration adjustments, including accretion | | (16) | | | (1) | | | (1) | |
| Other | | (41) | | | (18) | | | 36 | |
| Changes in operating assets and liabilities: | | | | | | |
| Trade receivables | | (229) | | | 170 | | | 39 | |
| Inventories | | (16) | | | (77) | | | (209) | |
| Prepaid expenses and other current assets | | (4) | | | 12 | | | 1 | |
| Accounts payable, accrued and other liabilities | | 121 | | | (471) | | | (149) | |
| Net cash provided by operating activities | | 1,426 | | | 1,111 | | | 1,501 | |
| Cash Flows From Investing Activities | | | | | | |
| Acquisition of businesses, net of cash acquired | | — | | | — | | | (180) | |
| Acquisition of intangible assets and other assets | | (14) | | | (7) | | | (8) | |
| Purchases of property, plant and equipment | | (269) | | | (302) | | | (270) | |
| Purchases of marketable securities | | (19) | | | (4) | | | (16) | |
| Proceeds from sale of marketable securities | | 15 | | | 8 | | | 10 | |
| Proceeds from sale of assets and businesses, net of costs to sell | | 669 | | | 21 | | | 45 | |
| Settlements from cross-currency swaps | | 27 | | | 23 | | | — | |
| Net cash provided by (used in) investing activities | | 409 | | | (261) | | | (419) | |
| Cash Flows From Financing Activities | | | | | | |
| Issuance of long-term debt, net of discounts | | 2,100 | | | 3,455 | | | 5,960 | |
| Repayments of long-term debt | | (3,440) | | | (5,642) | | | (4,406) | |
| Borrowings of short-term debt | | — | | | 1 | | | 12 | |
| Repayments of short-term debt | | — | | | (1) | | | (12) | |
| Payment of employee withholding taxes related to share-based awards | | (52) | | | (30) | | | (40) | |
| Payments of acquisition-related contingent consideration | | (83) | | | (35) | | | (35) | |
| Payments of financing costs | | (48) | | | (39) | | | (28) | |
| Other | | 10 | | | (3) | | | (8) | |
| Net cash (used in) provided by financing activities | | (1,513) | | | (2,294) | | | 1,443 | |
| Effect of exchange rate changes on cash and cash equivalents | | (19) | | | 16 | | | (4) | |
| Net increase (decrease) in Cash and cash equivalents and Restricted cash and other settlement deposits | | 303 | | | (1,428) | | | 2,521 | |
| Cash and cash equivalents and Restricted cash and other settlement deposits, beginning of year | | 1,816 | | | 3,244 | | | 723 | |
| Cash and cash equivalents and Restricted cash and other settlement deposits, end of year | | $ | 2,119 | | | $ | 1,816 | | | $ | 3,244 | |
| | | | | | |
| Cash and cash equivalents, end of year | | $ | 582 | | | $ | 605 | | | $ | 3,243 | |
| Restricted cash and other settlement deposits, end of year | | 1,537 | | | 1,211 | | | 1 | |
| Cash and cash equivalents and Restricted cash and other settlement deposits, end of year | | $ | 2,119 | | | $ | 1,816 | | | $ | 3,244 | |
The accompanying notes are an integral part of these consolidated financial statements.
BAUSCH HEALTH COMPANIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1.DESCRIPTION OF BUSINESS
Bausch Health Companies Inc. (the “Company”), formerly known as Valeant Pharmaceuticals International, Inc., is a multinational, specialty pharmaceutical and medical device company that develops, manufactures and markets a broad range of branded, generic and branded generic pharmaceuticals, over-the-counter (“OTC”) products and medical devices (contact lenses, intraocular lenses, ophthalmic surgical equipment and aesthetics devices) which are marketed directly or indirectly in approximately 100 countries. Effective August 9, 2013, the Company continued from the federal jurisdiction of Canada to the Province of British Columbia, meaning that the Company became a company registered under the laws of the Province of British Columbia as if it had been incorporated under the laws of the Province of British Columbia. As a result of this continuance, the legal domicile of the Company became the Province of British Columbia, the Canada Business Corporations Act ceased to apply to the Company and the Company became subject to the British Columbia Business Corporations Act.
2.SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation and Use of Estimates
The Consolidated Financial Statements have been prepared by the Company in United States (“U.S.”) dollars and in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”), applied on a consistent basis. The Consolidated Financial Statements include the accounts of the Company and those of its subsidiaries and any variable interest entities for which the Company is the primary beneficiary. All intercompany transactions and balances have been eliminated.
Separation of the Bausch + Lomb Eye-Health Business and Initial Public Offering of Solta Medical Business
On August 6, 2020, the Company announced its intentions to separate its eye-health business into an independent publicly traded entity from the remainder of Bausch Health Companies Inc. (the “B+L Separation”). On August 3, 2021, the Company announced its intentions to conduct an initial public offering ("IPO") of its aesthetic medical device business, Global Solta (the “Solta IPO"). In January 2022, the Company completed the internal organizational design and structure of the new eye-health entity, Bausch + Lomb Corporation ("Bausch + Lomb"), and the new Global Solta entity, Solta Medical Corporation ("Solta"), as previously announced and aims to launch the B+L IPO and the Solta IPO when financial market conditions are favorable (and subject to receipt of regulatory, stock exchange and other approvals). Following the B+L IPO the Company expects to complete the separation of Bausch + Lomb after the expiry of customary lockups related to the B+L IPO and achievement of targeted debt leverage ratios, subject to the receipt of applicable shareholder and other necessary approvals. The B+L Separation and the proposed Solta IPO will establish 3 separate companies that include: (i) a fully integrated eye-health company which will consist of the Company’s Bausch + Lomb Global Vision Care, Global Surgical, Global Consumer and Global Ophthalmic Pharmaceuticals businesses, (ii) a global provider of aesthetic medical devices which will consist of the Company’s Solta business and (iii) a diversified pharmaceutical company which will include the Company’s Salix, International Rx, dentistry, neurology, medical dermatology and generics pharmaceutical businesses. These audited Consolidated Financial Statements do not include any adjustments to give effect to either the B+L Separation or the proposed Solta IPO.
Impacts of COVID-19 Pandemic
The unprecedented nature of the COVID-19 pandemic has, and continues to, adversely impact the global economy. The COVID-19 pandemic and the reactions of governments, private sector participants and the public in an effort to contain the spread of the COVID-19 virus and/or address its impacts have had significant direct and indirect effects on businesses and commerce. This includes, but is not limited to, disruption to supply chains, employee base and transactional activity, facility closures and production suspensions.
The extent to which these events may continue to impact the Company's business, financial condition, cash flows and results of operations, in particular, will depend on future developments which are highly uncertain and many of which are outside the Company's control. Such developments include the availability and effectiveness of vaccines for the COVID-19 virus, COVID-19 vaccine immunization rates, the ultimate geographic spread and duration of the pandemic, the extent and duration of a resurgence of the COVID-19 virus and variant strains thereof, such as the delta and omicron variants, new information concerning the severity of the COVID-19 virus, the effectiveness and intensity of measures to contain the COVID-19 virus and the economic impact of the pandemic and the reactions to it. Such developments, among others, depending on their nature, duration and intensity, could have a significant adverse effect on the Company's business, financial condition, cash flows and results of operations.
To date, the Company has been able to continue its operations with limited disruptions in supply and manufacturing. Although it is difficult to predict the broad macroeconomic effects that the COVID-19 pandemic will have on industries or individual companies, the Company has assessed the possible effects and outcomes of the pandemic on, among other things, its supply chain, customers and distributors, discounts and rebates, employee base, product sustainability, research and development efforts, product pipeline and consumer demand and currently believes that its estimates are reasonable.
Use of Estimates
In preparing the Company's Consolidated Financial Statements, management is required to make estimates and assumptions. This includes estimates and assumptions regarding the nature, timing and extent of the impacts that the COVID-19 pandemic will have on its operations and cash flows. The estimates and assumptions used by the Company affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Significant estimates made by management include: provisions for product returns, rebates, chargebacks, discounts and allowances and distribution fees paid to certain wholesalers; useful lives of amortizable intangible assets and property, plant and equipment; expected future cash flows used in evaluating intangible assets for impairment, assessing compliance with debt covenants and making going concern assessments; reporting unit fair values for testing goodwill for impairment and allocating goodwill to new reporting unit structure on a relative fair value basis; provisions for loss contingencies; provisions for income taxes, uncertain tax positions and realizability of deferred tax assets; fair value of cross-currency swaps; fair value of foreign currency exchange contracts; and the recognition of the fair value of assets and liabilities acquired in a business combination, including the fair value of contingent consideration. Under certain product manufacturing and supply agreements, management uses information from the Company’s commercialization counterparties to arrive at estimates for future returns, rebates and chargebacks.
On an ongoing basis, management reviews its estimates to ensure that these estimates appropriately reflect changes in the Company’s business and new information as it becomes available. If historical experience and other factors used by management to make these estimates do not reasonably reflect future activity, the Company’s Consolidated Financial Statements could be materially impacted.
Reclassifications
Certain reclassifications have been made to prior year amounts to conform to the current year presentation.
Acquisitions
Acquired businesses are accounted for using the acquisition method of accounting, which requires that assets acquired and liabilities assumed be recorded at fair value, with limited exceptions. Transaction costs and costs to restructure the acquired company are expensed as incurred. The operating results of the acquired business are reflected in the Consolidated Financial Statements after the date of acquisition. Acquired in-process research and development (“IPR&D”) is recognized at fair value and initially characterized as an indefinite-lived intangible asset, irrespective of whether the acquired IPR&D has an alternative future use. If the acquired net assets do not constitute a business, the transaction is accounted for as an asset acquisition and no goodwill is recognized. In an asset acquisition, the amount allocated to acquired IPR&D with no alternative future use is charged to expense at the acquisition date and any future contingent consideration is not recorded until it becomes probable.
Fair Value of Financial Instruments
The estimated fair values of cash and cash equivalents, trade receivables, accounts payable and accrued liabilities approximate their carrying values due to their short maturity periods. The fair value of acquisition-related contingent consideration is based on estimated discounted future cash flows or Monte Carlo Simulation (when appropriate) analyses and assessment of the probability of occurrence of potential future events.
Fair Value of Derivative Instruments
The accounting for changes in the fair value of a derivative instrument depends on whether the instrument has been designated and qualifies as part of a hedging relationship and on the type of hedging relationship. For derivative instruments designated and qualifying as hedging instruments, the hedging instrument must be designated, based upon the exposure being hedged, as a fair value hedge, cash flow hedge, or a hedge of the foreign currency exposure of a net investment in a foreign operation. For derivative instruments not designated as hedging instruments, the gain or loss is recognized in the Consolidated Statements of Operations during the current period.
The Company’s cross-currency swaps qualified for and had been designated as an accounting hedge of the foreign currency exposure of a net investment in a foreign operation and were remeasured at each reporting date to reflect changes in their
fair values. The fair value was determined via a mark-to-market analysis, using observable (Level 2) inputs. These inputs included: (i) the foreign currency exchange spot rate between the euro and U.S. dollar, (ii) the interest rate yield curves in the euro and U.S. dollar and (iii) the credit risk rating for each applicable counterparty. The net change in fair value of cross-currency swaps is reported as a gain or loss in the Consolidated Statements of Comprehensive Loss as part of Foreign currency translation adjustment to the extent they are effective, and remain in Accumulated other comprehensive loss until either the sale or complete, or substantially complete, liquidation of the subsidiary. No portion of the cross-currency swaps was ineffective. The Company uses the spot method of assessing hedge effectiveness. The Company had elected to amortize amounts excluded from the assessment of effectiveness over the term of its cross-currency swaps as a reduction of Interest expense in the Consolidated Statements of Operations.
The Company uses foreign currency exchange contracts to economically hedge the foreign exchange exposure on certain of the Company’s intercompany and third party balances. The Company's foreign currency exchange contracts are remeasured at each reporting date to reflect changes in their fair values determined using forward rates, which are observable market inputs, multiplied by the notional amount. These contracts have not been designated as an accounting hedge, and therefore the net change in their fair value is reported as a gain or loss in the Consolidated Statements of Operations as part of Foreign exchange and other.
Cash and Cash Equivalents
Cash and cash equivalents consist of cash in bank accounts and highly liquid investments with maturities of three months or less when purchased.
Concentrations of Credit Risk
Financial instruments that potentially subject the Company to significant concentrations of credit risk consist primarily of cash and cash equivalents, marketable securities, trade receivables, cross-currency swaps and foreign currency exchange contracts.
The Company invests its excess cash in high-quality, money market instruments and term deposits with varying maturities, but typically less than three months.Cash deposited at banks may exceed the amount of insurance provided on such deposits. Generally, these cash deposits may be redeemed upon demand and are maintained with financial institutions with reputable credit and therefore bear minimal credit risk. The Company seeks to mitigate such risks by spreading its risk across multiple counterparties and monitoring the risk profiles of these counterparties.
The Company’s trade receivables primarily represent amounts due from wholesale distributors, retail pharmacies, government entities and group purchasing organizations. Outside of the U.S., concentrations of credit risk with respect to trade receivables, which are typically unsecured, are limited due to the number of customers using the Company’s products, as well as their dispersion across many different geographic regions. The Company performs periodic credit evaluations of customers and does not require collateral. The Company monitors economic conditions, including volatility associated with international economies, and related impacts on the relevant financial markets and its business, especially in light of sovereign credit issues. The credit and economic conditions within Argentina, Brazil, Egypt, Greece, among other members of the European Union, Turkey, Ukraine and Venezuela have been weak in recent years. These conditions have increased, and may continue to increase, the average length of time that it takes to collect on the Company’s trade receivables outstanding in these countries.
As of December 31, 2021, the Company’s 3 largest U.S. wholesaler customers accounted for approximately 44% of net trade receivables. In addition, as of December 31, 2021 and 2020, the Company’s net trade receivable balance from Argentina, Brazil, Egypt, Greece, Serbia, South Africa, Turkey, Ukraine, Venezuela and Vietnam amounted to $78 million and $166 million, respectively, the majority of which is current or less than 90 days past due. The portion of the net trade receivable from these countries that is past due more than 90 days amounted to $2 million, as of December 31, 2021, a portion of which is comprised of public hospitals. Based on an analysis of credit risk, including an analysis of bad debt experience and assessment of historical payment patterns for such customers, the Company has established a reserve covering more than half of the balance past due more than 90 days for such countries. Over the three-year period ended December 31, 2021, the Company has not experienced any material losses from uncollectible accounts in excess of the established reserves.
The Company does not enter into financial instruments for trading or speculative purposes. Further, the Company has a policy of only entering into contracts with parties that have at least an investment grade credit rating. The Company enters into cross-currency swaps and foreign currency exchange contracts with high credit quality financial institutions. The counter-parties to the Company's cross-currency swaps and foreign currency exchange contracts are major financial institutions, and there is no significant concentration of exposure with any one counter-party. To date, no counterparty has failed to meet its obligations to the Company and management believes the risk of loss associated with these contracts is
remote. See Note 5, "FAIR VALUE MEASUREMENTS" for additional details regarding the Company's cross-currency swaps and foreign currency exchange contracts.
Allowance for Credit Losses
An allowance is maintained for potential credit losses. The Company estimates the current expected credit loss on its receivables based on various factors, including historical credit loss experience, customer credit worthiness, value of collaterals (if any), and any relevant current and reasonably supportable future economic factors. Additionally, the Company generally estimates the expected credit loss on a pool basis when customers are deemed to have similar risk characteristics. Trade receivable balances are written off against the allowance when it is deemed probable that the trade receivable will not be collected. Trade receivables, net are stated net of certain sales provisions and the allowance for credit losses. Allowance for credit losses were $35 million, $39 million and $48 million as of December 31, 2021, 2020 and 2019, respectively. The activity in the allowance for credit losses for trade receivables for the years 2021, 2020 and 2019 is as follows.
| | | | | | | | | | | | | | | | | |
| (in millions) | 2021 | | 2020 | | 2019 |
| Balance, beginning of period | $ | 39 | | | $ | 48 | | | $ | 47 | |
| Retrospective effect of application of new accounting standard | — | | | 1 | | | — | |
| Provision | (2) | | | 2 | | | 10 | |
| Write-offs | (3) | | | (12) | | | (10) | |
| Recoveries | 2 | | | 3 | | | 1 | |
| Foreign exchange and other | (1) | | | (3) | | | — | |
| Balance, end of period | $ | 35 | | | $ | 39 | | | $ | 48 | |
Inventories
Inventories comprise raw materials, work in process and finished goods, which are valued at the lower of cost or net realizable value, on a first-in, first-out basis. The cost value for work in process and finished goods inventories includes materials, direct labor and an allocation of overheads.
The Company evaluates the carrying value of inventories on a regular basis, taking into account such factors as historical and anticipated future sales compared with quantities on hand, the price the Company expects to obtain for products in their respective markets compared with historical cost and the remaining shelf life of goods on hand.
Property, Plant and Equipment
Property, plant and equipment are reported at cost, less accumulated depreciation. Costs incurred on assets under construction are capitalized as construction in progress. Depreciation is calculated using the straight-line method, commencing when the assets become available for productive use, based on the following estimated useful lives:
| | | | | | | | |
| Land improvements | | 15 - 30 years |
| Buildings and improvements | | Up to 40 years |
| Machinery and equipment | | 3 - 20 years |
| Other equipment | | 3 - 10 years |
| Equipment on operating lease | | Up to 5 years |
| Leasehold improvements | | Lesser of term of lease or 10 years |
Intangible Assets
Intangible assets are reported at cost, less accumulated amortization and impairments. Intangible assets with finite lives are amortized over their estimated useful lives. Amortization is calculated primarily using the straight-line method based on the following estimated useful lives:
| | | | | | | | |
| Product brands | | 2 - 20 years |
| Corporate brands | | 9 - 20 years |
| Product rights/patents | | 4 - 15 years |
| Partner relationships | | 7 - 9 years |
| Out-licensed technology and other | | 8 - 9 years |
Divestitures of Products
The net proceeds on the divestiture of products and the carrying amount of the related assets is recorded as a gain/loss on sale within Other expense, net. Any contingent payments that are potentially due to the Company as a result of these divestitures are recorded when realizable.
IPR&D
The fair value of IPR&D acquired through a business combination is capitalized as an indefinite-lived intangible asset until the completion or abandonment of the related research and development activities. When the related research and development is completed, the asset will be assigned a useful life and amortized. Acquired IPR&D assets are tested for impairment at least annually or when triggering events are identified.
The fair value of an acquired IPR&D intangible asset is typically determined using an income approach. This approach starts with a forecast of the net cash flows expected to be generated by the asset over its estimated useful life. The net cash flows reflect the asset’s stage of completion, the probability of technical success, the projected costs to complete, expected market competition and an assessment of the asset’s life-cycle. The net cash flows are then adjusted to present value by applying an appropriate discount rate that reflects the risk factors associated with the expected cash flow streams.
Impairment of Long-Lived Assets
Long-lived assets with finite lives are tested for impairment whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. If indicators of impairment are present, the asset is tested for recoverability by comparing the carrying value of the asset to the related estimated undiscounted future cash flows expected to be derived from the asset, which include the amount and timing of the projected future cash flows. If the expected undiscounted cash flows are less than the carrying value of the asset, then the asset is considered to be impaired and its carrying value is written down to fair value, based on the related estimated discounted future cash flows.
Indefinite-lived intangible assets, which includes acquired IPR&D and the corporate trademark acquired in the acquisition of Bausch & Lomb Holdings Incorporated (the ‘‘B&L Trademark’’), are tested for impairment annually or more frequently if events or changes in circumstances between annual tests indicate that the asset may be impaired. Impairment losses on indefinite-lived intangible assets are recognized based on a comparison of the fair value of the asset to its carrying value.
Goodwill
Goodwill is recorded with the acquisition of a business and is calculated as the difference between the acquisition date fair value of the consideration transferred and the values assigned to the assets acquired and liabilities assumed. Goodwill is not amortized but is tested for impairment at least annually as of October 1st at the reporting unit level. Goodwill impairment is measured as the amount by which a reporting unit's carrying value exceeds its fair value. A reporting unit is the same as, or one level below, an operating segment. An entity is permitted to first assess qualitatively whether it is necessary to perform a quantitative impairment test for any of its reporting units. The quantitative impairment test is required only when the Company concludes that it is more likely than not that a reporting unit’s fair value is less than its carrying amount. In evaluating whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount, the Company considers the totality of all relevant events or circumstances that affect the fair value or carrying amount of a reporting unit.
An interim goodwill impairment test in advance of the annual impairment assessment may be required if events occur that indicate an impairment might be present. For example, a substantial decline in the Company’s market capitalization, changes in reportable segments, unexpected adverse business conditions, economic factors and unanticipated competitive activities may signal that an interim impairment test is needed. Accordingly, among other factors, the Company monitors
changes in its share price between annual impairment tests. The Company considers a decline in its share price that corresponds to an overall deterioration in stock market conditions to be less of an indicator of goodwill impairment than a unilateral decline in its share price reflecting adverse changes in its underlying operating performance, cash flows, financial condition and/or liquidity. In the event that the Company’s market capitalization does decline below its book value, the Company would consider the length and severity of the decline and the reason for the decline when assessing whether potential goodwill impairment exists. The Company believes that short-term fluctuations in share prices may not necessarily reflect underlying values.
Debt Discounts and Premiums, Issuance Costs and Deferred Financing Costs
Debt discounts, premiums and issuance costs are presented in the Consolidated Balance Sheets as a direct deduction from or addition to the carrying amount of the related debt and are amortized or accreted, using the effective interest method, as interest expense over the contractual lives of the related credit facilities or notes. Deferred financing costs associated with revolving credit facility arrangements are included in the balances of Prepaid expenses and other current assets and Other non-current assets in the Consolidated Balance Sheets and are amortized as interest expense over the contractual life of the related revolving credit facility.
Foreign Currency Translation
The assets and liabilities of the Company’s foreign operations having a functional currency other than the U.S. dollar are translated into U.S. dollars at the exchange rate prevailing at the balance sheet date, and at the average exchange rate for the reporting period for revenue and expense accounts. The cumulative foreign currency translation adjustment is recorded as a component of Accumulated other comprehensive loss in the Consolidated Balance Sheets.
Foreign currency exchange gains and losses on transactions occurring in a currency other than an operation’s functional currency are recognized as a component of Foreign exchange and other in the Consolidated Statements of Operations.
Revenue Recognition
The Company’s revenues are primarily generated from product sales, primarily in the therapeutic areas of eye-health, gastroenterology ("GI") and dermatology that consist of: (i) branded pharmaceuticals, (ii) generic and branded generic pharmaceuticals, (iii) OTC products and (iv) medical devices (contact lenses, intraocular lenses, ophthalmic surgical equipment and aesthetics devices). Other revenues include alliance and service revenue from the licensing and co-promotion of products and contract service revenue primarily in the areas of dermatology and topical medication. Contract service revenue is derived primarily from contract manufacturing for third parties and is not material. See Note 22, "SEGMENT INFORMATION" for the disaggregation of revenues which depicts how the nature, amount, timing and uncertainty of revenue and cash flows arising fromare affected by the economic factors of each category of customer contracts.
The Company recognizes revenue when the customer obtains control of promised goods or services and in an amount that reflects the consideration to which the Company expects to be entitled to receive in exchange for those goods or services. To achieve this core principle, the Company applies the five-step revenue model to contracts within its scope: (i) identify the contract(s) with customers. In March 2016,a customer, (ii) identify the FASB issued an amendment to clarify the implementation guidance around considerations whether an entity is a principal or an agent, impacting whether an entity reports revenue on a gross or net basis. In April 2016, the FASB issued an amendment to clarify guidance on identifying performance obligations in the contract, (iii) determine the transaction price, (iv) allocate the transaction price to the performance obligations in the contract and (v) recognize revenue when (or as) the implementation guidanceentity satisfies a performance obligation.
Product Sales
A contract with the Company’s customers exists for each product sale. Where a contract with a customer contains more than one performance obligation, the Company allocates the transaction price to each distinct performance obligation based on licensing.its relative standalone selling price. The guidancetransaction price is effectiveadjusted for annual reporting periods beginning after December 15, 2017.
Early application was permitted but not before the annual reporting period, including adoption in an interim period, beginning January 1, 2017. Entities have the option of using either a full retrospective or a modified approach to adopt the guidance.variable consideration which is discussed below. The Company has completed its detailed assessment program and a training program for its personnel. Pursuant to the detailed assessment program, the Company reviewed selectedgenerally recognizes revenue arrangements and assessed the differences in accounting for such contracts under the new guidance as compared with current revenue accounting standards. Based on this review of current customer contracts, the Company does not expect the implementation of the new guidance to have a material quantitative impact on its consolidated financial statements as the timing of revenue recognition for product sales is not expected to significantly change. The Company also completed its assessmentat a point in time, when the customer obtains control of the impact to the design of its internal controls over financial reporting and is in the process of completing its assessment of the impact to its disclosures, which will be completed in the first reporting period post adoption. The Company will adopt the new guidance using the modified retrospective approach, under which the new guidance will be adopted retrospectively with the cumulative effect of initial application of the guidance recognized on the date of initial application (which is January 1, 2018).products.
Product Sales Provisions
As is customary in the pharmaceutical industry, gross product sales are subject to a variety of deductions in arriving at reported net product sales. The transaction price for product sales is typically adjusted for variable consideration, which may be in the form of cash discounts, allowances, returns, rebates, chargebacks and distribution fees paid to customers. Provisions for variable consideration are established to reflect the Company’s best estimates of the amount of consideration to which it is entitled based on the terms of the contract. The amount of variable consideration included in the transaction price may be constrained, and is included in the net sales price only to the extent that it is probable that a significant reversal in the amount of the cumulative revenue recognized will not occur in the future period.
Provisions for these deductions are recorded concurrently with the recognition of gross product sales revenue and include cash discounts and allowances, chargebacks, and distribution fees, which are paid to direct customers, as well as rebates and returns, which can be paid to direct and indirect customers. Returns provision balances and volume discounts to direct customers are included in Accrued and other current liabilities. All other provisions related to direct customers are included in Trade receivables, net, while provision balances related to indirect customers are included in Accrued and other current liabilities.
The following table presents the activity and ending balances for our product sales provisions for each of the last three years.Company’s variable consideration provisions the years 2021 and 2020.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (in millions) | | Discounts
and
Allowances | | Returns | | Rebates | | Chargebacks | | Distribution
Fees | | Total |
| Reserve balance, January 1, 2020 | | $ | 182 | | | $ | 691 | | | $ | 927 | | | $ | 168 | | | $ | 82 | | | $ | 2,050 | |
| Current period provision | | 621 | | | 120 | | | 2,174 | | | 1,925 | | | 196 | | | 5,036 | |
| Payments and credits | | (613) | | | (236) | | | (2,322) | | | (1,909) | | | (193) | | | (5,273) | |
| Reserve balance, December 31, 2020 | | 190 | | | 575 | | | 779 | | | 184 | | | 85 | | | 1,813 | |
| Current period provision | | 625 | | | 131 | | | 2,462 | | | 1,999 | | | 211 | | | 5,428 | |
| Payments and credits | | (593) | | | (224) | | | (2,297) | | | (2,013) | | | (251) | | | (5,378) | |
| Reserve balance, December 31, 2021 | | $ | 222 | | | $ | 482 | | | $ | 944 | | | $ | 170 | | | $ | 45 | | | $ | 1,863 | |
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| (in millions) | | Discounts and Allowances | | Returns | | Rebates | | Chargebacks | | Distribution Fees | | Total |
| Reserve balance, January 1, 2015 | | $ | 126 |
| | $ | 380 |
| | $ | 693 |
| | $ | 188 |
| | $ | 85 |
| | $ | 1,472 |
|
| Acquisition of Salix | | — |
| | 120 |
| | 212 |
| | 65 |
| | — |
| | 397 |
|
| Current year provision | | 614 |
| | 482 |
| | 2,157 |
| | 1,736 |
| | 227 |
| | 5,216 |
|
| Payments or credits | | (637 | ) | | (355 | ) | | (2,160 | ) | | (1,718 | ) | | (200 | ) | | (5,070 | ) |
| Reserve balance, December 31, 2015 | | 103 |
| | 627 |
| | 902 |
| | 271 |
| | 112 |
| | 2,015 |
|
| Current year provision | | 789 |
| | 460 |
| | 2,521 |
| | 2,318 |
| | 423 |
| | 6,511 |
|
| Payments or credits | | (768 | ) | | (379 | ) | | (2,526 | ) | | (2,316 | ) | | (338 | ) | | (6,327 | ) |
| Reserve balance, December 31, 2016 | | 124 |
| | 708 |
| | 897 |
| | 273 |
| | 197 |
| | 2,199 |
|
| Current year provision | | 829 |
| | 423 |
| | 2,545 |
| | 2,145 |
| | 288 |
| | 6,230 |
|
| Payments or credits | | (786 | ) | | (268 | ) | | (2,348 | ) | | (2,144 | ) | | (337 | ) | | (5,883 | ) |
| Reserve balance, December 31, 2017 | | $ | 167 |
| | $ | 863 |
| | $ | 1,094 |
| | $ | 274 |
| | $ | 148 |
| | $ | 2,546 |
|
UseThe Company continually monitors its variable consideration provisions and evaluates the estimates used as additional information becomes available. Adjustments will be made to these provisions periodically to reflect new facts and circumstances that may indicate that historical experience may not be indicative of Informationcurrent and/or future results. The Company is required to make subjective judgments based primarily on its evaluation of current market conditions and trade inventory levels related to the Company's products. These judgments include the potential impact of the COVID-19 pandemic on, among other things, unemployment and related changes in customer health insurance levels, customer behaviors during the COVID-19 pandemic and government stimulus bills that focus on ensuring availability and access to lifesaving drugs during a public health crisis. This evaluation may result in an increase or decrease in the experience rate that is applied to current and future sales, or require an adjustment related to past sales, or both. If the trend in actual amounts of variable consideration varies from External Sources
To the extent possible, we use information from externalCompany’s prior estimates, the Company adjusts these estimates when such trend is believed to be sustainable. At that time, the Company would record the necessary adjustments which would affect net product revenue and earnings reported in the current period. The Company applies this method consistently for contracts with similar characteristics. The following describes the major sources of variable consideration in the Company’s customer arrangements and the methodology, estimates and judgments applied to estimate our product sales provisions. We have data sharing agreements with the three largest wholesalers in the U.S. Where we do not have data sharing agreements, we use third party data to estimate the leveleach type of product inventories and product demand at wholesalers and retail pharmacies. Third party data with respect to prescription demand and wholesaler inventory levels are subject to the inherent limitations of estimates that rely on information from external sources, as this information may itself rely on certain estimates and reflect other limitations.variable consideration.
Our distribution agreements with the three largest wholesalers in the U.S. contain target inventory levels between ½ and 2 months' supply of our products, calculated using historical demand. Wholesaler inventory levels can fluctuate based on changes in demand, such as the launch of a new product.
Cash Discounts and Allowances
We offer cashCash discounts are offered for prompt payment and allowances for volume purchases to customers.purchases. Provisions for cash discounts and allowances are estimated at the time of sale and recorded as direct reductions to trade receivables and revenue. We estimateManagement estimates the provisions for cash discounts and allowances based on contractual sales terms with customers, an analysis of unpaid invoices and historical payment experience. Estimated cash discounts and allowances have historically been predictable and less subjective, due to the limited number of assumptions involved, the consistency of historical experience and the fact that wethese amounts are generally settle these amountssettled within one month of incurring the liability.
Returns
Consistent with industry practice, wecustomers are generally allow customersallowed to return a product within a specified period of time before and after its expiration date, excluding our European businesses which generally do not carryprovide a right of return. Our productThe returns provision is estimated based onutilizing historical sales and return rates over the period during which customers have a right of return, taking into account additional available information on competitive products and contract changes. We utilize the followingThe information utilized to estimate ourthe returns provision for returns:
includes: (i) historical return and exchange levels;
levels, (ii) external data with respect to inventory levels in the wholesale distribution channel;
channel, (iii) external data with respect to prescription demand for our products;
products, (iv) remaining shelf lives of our products at the date of sale;sale and
(v) estimated returns liability to be processed by year of sale based on an analysis of lot information related to actual historical returns.
In determining our estimatesthe estimate for returns, we aremanagement is required to make certain assumptions regarding the timing of the introduction of new products and the potential of these products to capture market share. In addition, we make certain assumptions with respect to the extent and pattern of decline associated with generic competition. To make these assessments, we utilizecompetition are necessary. These assumptions are formulated using market data for similar products, as analogs for our estimates. We use our best judgment to formulate these assumptions based on past experience and informationother available to us at the time. Weinformation. These assumptions are continually reassessreassessed, and make the appropriate changes to ourthe estimates and assumptions are made as new information becomes available to us.available. A change of 1% in the estimated return rates would have impacted ourthe Company’s pre-tax earnings by approximately $92$81 million for the year ended December 31, 2017.2021.
OurThe estimate for returns may be impacted by a number of factors, but the principal factor relates to the level of inventory levels in the distribution channel. When we aremanagement becomes aware of an increase in the level ofsuch inventory of our products in the distribution channel, we consider the reasons for the increase to determine iflevels, it considers whether the increase may be temporary or other-than-temporary. IncreasesTemporary increases in wholesaler inventory levels assessed as temporary will not differ from our original estimates of ourwarrant revision to the provision for returns. Other-than-temporary increases in wholesaler inventory levels, however, may be an indication that future product returns could be higher than originally anticipated, and, as a result, weestimates for returns may need to adjust our estimate for returns. Some of the factorsbe adjusted. Factors that may suggest that an increaseincreases in wholesaler inventory levels will beare temporary include:
(i) recently implemented or announced price increases for our products;
certain products, (ii) new product launches or expanded indications for our existing products;products and
(iii) timing of purchases by our wholesale customers.
Conversely, factors that may suggest that an increaseincreases in wholesaler inventory levels will beare other-than-temporary include:
(i) declining sales trends based on prescription demand;
demand, (ii) introduction of new products or generic competition;
competition, (iii) increasing price competition from generic competitors;competitors and
recent (iv) changes to the U.S. National Drug Codes (“NDC”) of ourproducts. Changes in the NDC of products which could result in a period of higher returns related to products with the old NDC, as our U.S. customers generally permit only one NDC per product for identification and tracking within their inventory systems.
Over the last several years, the Company increased its focus on maximizing operational efficiencies and continues to take actions to reduce product returns, including but not limited to: (i) monitoring and reducing customer inventory levels, (ii) instituting disciplined pricing policies and (iii) improving contracting. These actions have had the effect of improving sales return experience, primarily related to branded and generic products. Sales return provisions for 2021 and 2020 were $131 million and $120 million, respectively, and includes reductions in variable consideration for sales return provisions related to past sales of approximately $28 million and $38 million, respectively.
Rebates and Chargebacks
We are subject to rebates onProduct sales made under governmental and managed-care pricing programs in the U.S. We participateare subject to rebates. The Company participates in state government-managed Medicaid programs, as well as certain other qualifying federal and state government programs whereby discounts and rebates are provided to participating government entities. Medicaid rebates are generally billed 45 days after the quarter, but can be billed up to 270 days after the quarter in which the product is dispensed to the Medicaid participant. As a result, ourthe Medicaid rebate reserve includes an estimate of outstanding claims for end-customer sales that occurred, but for which the related claim has not been billed and/or paid, and an estimate for future claims that will be made when inventory in the distribution channel is sold through to plan participants. OurThe calculation of the Medicaid rebate reserve also requires other estimates, such as estimates of sales mix, to determine which sales are subject to rebates and the amount of such rebates. A change of 1% in the volume of product sold
through toestimated rates used in the Medicaid plan participantsrebate reserve would have impacted ourthe Company’s pre-tax earnings by approximately $93$76 million for the year ended December 31, 2017.2021. Quarterly, we adjust the Medicaid rebate reserve is adjusted based on actual claims paid. Due to the delay in billing, adjustments provided during the quarter forto actual claims paid may incorporate changes torevisions of that reserve for several periods.
Managed Care rebates relate to our contractual agreements to sell products to managed care organizations and pharmacy benefit managers at contractual rebate percentages in exchange for volume and/or market share.
Chargebacks relate to our contractual agreements to sell products to government agencies, group purchasing organizations and other indirect customers at contractual prices that are lower than the list prices we chargethe Company charges wholesalers. When these group purchasing organizations or other indirect customers purchase our products through wholesalers at these reduced prices, the wholesaler charges usthe Company for the difference between the prices they paid usthe Company and the prices at which they sold the products to the indirect customers.
In estimating our provisions for rebates and chargebacks, we considermanagement considers relevant statutes with respect to governmental pricing programs and contractual sales terms with managed-care providers and group purchasing organizations. We estimateManagement estimates the amount of our product sales subject to these programs based on historical utilization levels. Changes in the level of utilization of our products through private or public benefit plans and group purchasing organizations will affect the amount of rebates and chargebacks that we arethe Company is obligated to pay. WeManagement continually updateupdates these factors based on new contractual or statutory requirements, and any significant changes in sales trends that may impact the percentage of our products subject to rebates or chargebacks.
The amount of Managed Care, Medicaid and other rebates and chargebacks has become more significant as a result of a combination of deeper discounts due to the price increases we implemented in each of the last three years, changes in ourthe Company’s product portfolio due to recent acquisitions and increased Medicaid utilization due to expansion of government funding for these programs. OurManagement’s estimate for rebates and chargebacks may be impacted by a number of factors, but the principal factor relates to the level of inventory in the distribution channel.
Rebate provisions are based on factors such as timing and terms of plans under contract, time to process rebates, product pricing, sales volumes, amount of inventory in the distribution channel and prescription trends. Accordingly, we generally assume that adjustments made to rebate provisions relate to sales made in the prior years due to the delay in billing. However, we assume that adjustments made to chargebacks are generally related to sales made in the current year, as we settle these amounts within a few months of original sale. Our adjustmentsAdjustments to actual in 2017, 2016for the years 2021 and 20152020 were not material to ourthe Company’s revenues or earnings.
Patient Co-Pay Assistance programs, Consumer Rebates and Loyalty Programs are rebates we offeroffered on many of ourthe Company’s products. Patient Co-Pay Assistance Programs are patient discount programs we offeroffered in the form of coupon cards or point of sale discounts, wherewith which patients receive certain discounts off their prescription at participating pharmacies, as defined by the specific product program. We generally accountAn accrual for these programs by establishing an accrual based on ouris established, equal to management’s estimate of the discount, rebate and loyalty incentives attributable to a sale. We accrue our estimatesThat estimate is based on historical experience and other relevant factors. We adjust our accruals periodicallyThe accrual is adjusted throughout each quarter based on actual experience and changes in other factors, if any, to ensure the balance is fairly stated. The reserve balance for Patient Co-Pay Assistance, Consumer Rebates and Loyalty Programs was $201 million, $163 million and $111 million as of December 31, 2017, 2016 and 2015, respectively.any.
Distribution Fees
We sell productThe Company sells products primarily to wholesalers, and in some instances to large pharmacy chains such as CVS and Wal-Mart. We have entered intoWalmart. The Company has Distribution Services Agreements ("DSAs") with several large wholesale customers such as McKesson Corporation, AmerisourceBergen Corporation, Cardinal Health, Inc. and McKesson Specialty. Under the DSA agreements,DSAs, the wholesalers agree to provide services, and we paythe Company pays the contracted DSA distribution service fees for these services based on product volumes. Additionally, price appreciation credits are generated when we increasethe Company increases a product’s WACwholesaler acquisition cost (“WAC”) under our contracts with certain wholesalers. Under such contracts, we arethe Company is entitled to credits from such wholesalers for the impact of that WAC increase on inventory currently on hand at the wholesalers. Such credits are used to offset against the total distribution service fees we pay on all of our productspaid to each such wholesaler. Net revenue on these credits is recognized on the date that the wholesaler is notified of the price increase. The net revenue impact from suchvariable consideration associated with price appreciation credits for the years ended December 31, 2017, 2016 and 2015 was $21 million, $13 million and $171 million, respectively (such amounts areis reflected in the previous table as a deduction to the distribution fees).
Acquisitions
We have completed several acquisitionstransaction price of companies, as well as acquisitions of certain assets of companies. To determine whether such acquisitions qualify as business combinations or asset acquisitions, we make certain judgments, which include assessment of the inputs, processes and outputs associated with the acquired set of activities. If we determine that the acquisition consists of inputs, as well as processes thatproducts sold when applied to those inputs have the ability to create outputs, the acquisition is
determined to be a business combination. In instances where the acquired set of activities does not include all of the inputs and processes used by the seller in operating the business, we make judgments as to whether market participants would be capable of acquiring the business and continuing to produce outputs, for example, by integrating the business with their own inputs and processes. If we conclude that market participants would have this capability, the acquisitionit is determined to be probable that a business combination.significant reversal will not occur. Included as a reduction of current period provisions for Distribution Fees in the table above are price appreciation credits of $17 million and $15 million for the years 2021 and 2020, respectively.
In a business combination, we account for acquired businesses using the acquisition method of accounting, which requires that assets acquiredContract Assets and liabilities assumed be recorded at fair value, with limited exceptions. The judgments made in determining the estimated fair value assigned to each class of asset acquired and liability assumed can materially impact our results of operations. As part of our valuation procedures, we typically consult an independent advisor. Contract Liabilities
There are several methods that can be usedno contract assets for any period presented. Contract liabilities consist of deferred revenue, the balance of which is not material to determine fair value. For intangible assets, we typically use an excess earnings or relief from royalty method. The excess earnings method starts with a forecast of the net cash flows expectedany period presented.
Sales Commissions
Sales commissions are generally attributed to be generated by the asset over its estimated useful life. These cash flows are then adjusted to present value by applying an appropriate discount rate that reflects the risk factors associated with the cash flow streams. Some of the more significant estimates and assumptions inherent in the excess earnings method include:
the amount and timing of projected future cash flows, adjusted for the probability of technical success of products in the IPR&D stage;
the amount and timing of projected costs to develop IPR&D into commercially viable products;
the discount rate selected to measure the risks inherent in the future cash flows; and
an assessment of the asset’s life-cycle and the competitive trends impacting the asset, including consideration of any technical, legal, regulatory, or economic barriers to entry.
The relief from royalty method involves estimating the amount of notional royalty income that could be generated if the intangible asset was licensed to a third party. The fair value of the intangible asset is the net present value of the prospective stream of the notional royalty income that would be generated over the expected useful life of the intangible asset. Values derived using the relief from royalty method are based on royalty rates observed for comparable intangible assets.
We believe the fair values assigned to the assets acquired and liabilities assumed are based on reasonable assumptions. However, these assumptions may be incomplete or inaccurate, and unanticipated events and circumstances may occur. Any changes resulting from facts and circumstances that existed as of the acquisition dates may result in adjustments to the provisional amounts recognized at the acquisition dates. These changes could be significant. We finalize these amounts no laterperiods shorter than one year from the respective acquisition dates.and therefore are expensed when incurred. Sales commissions are included in selling, general and administrative expenses.
Determining the useful life of an intangible asset also requires judgment, as different types of intangible assets will have different useful lives and certain assets may even be consideredFinancing Component
The Company has elected not to have indefinite useful lives. Useful life is the period over which the intangible asset is expected to contribute directly or indirectly to our future cash flows. We determine the useful lives of intangible assets based on a number of factors, such as legal, regulatory, or contractual provisions that may limit the useful life, andadjust consideration for the effects of obsolescence, anticipated demand, existencea significant financing component when the period between the transfer of a promised good or absenceservice to the customer and when the customer pays for that good or service will be one year or less. The Company's global payment terms are generally between thirty to ninety days.
Leases
The Company leases certain facilities, vehicles and equipment principally under multi-year agreements generally having a lease term of competitionone to twenty years, some of which include termination options and other economic factors. We determinedoptions to extend the lease term from one to five years or on a month-to-month basis. The Company includes options that the B&L corporate trademark has an indefinite useful lifeare reasonably certain to be exercised as there are no legal, regulatory, contractual, competitive, economic, or other factors that limit the useful life of this intangible asset.
Acquisition-Related Contingent Consideration
Somepart of the business combinations that we have consummated include contingent consideration to be potentially paid based upon the occurrencelease term. The Company may negotiate termination clauses in anticipation of future events, such as sales performance and the achievement of certain future development, regulatory and sales milestones. Acquisition-related contingent consideration associated with a business combination is initially recognized at fair value and remeasured each reporting period, with changes in fair value recorded in the consolidated statements of operations. The estimates of fair value involve the use of acceptable valuation methods, such as probability-weighted discounted cash flow analysis and Monte Carlo Simulation, and contain uncertainties as they require assumptions about the likelihood of achieving specified milestone criteria, projections of future financial performance and assumed discount rates. Changes in the fair value of the acquisition-related contingent consideration obligations result from several factors including changes in the timing and amount of revenue estimates, changes in probability assumptions with respect to the likelihood of achieving specified milestone criteria and changes in discount rates. A change in any of these assumptions could produce a different fair value, which could have a material impact on our results of operations.
Intangible Assets
We evaluate potential impairments of amortizable intangible assets acquired through asset acquisitions or business combinations if events or changes in circumstances indicate that the carrying amounts of these assets may not be recoverable. Our evaluation is based on an assessment of potential indicators of impairment, such as:
an adverse change in legal factors or in the business climate that could affect the value of an asset. For example, a successful challenge of our patent rights resulting in earlier than expected generic competition;
an adverse change in the extent or manner in which an asset is used or is expected to be used. For example, a decision not to pursue a product line-extension strategy to enhance an existing product due to changes in market conditions and/but generally, these termination options are not exercised. Certain lease agreements also include variable payments that are dependent on usage or technological advances; or
current or forecasted reductions in revenue, operating income, or cash flows associated with the use of an asset. For example, the introduction of a competing product that results in a significant loss of market share.
Impairment exists when the carrying value of the asset exceeds the related estimated undiscounted future cash flows expected to be derived from the asset. If impairment exists, the carrying value of the asset is adjusted to its fair value. A discounted cash flow analysis is typically used to determine an asset's fair value, using estimatesmay vary month-to-month such as insurance, taxes and assumptions that market participants would apply. Some of the estimates and assumptions inherent in a discounted cash flow model include the amount and timing of the projected future cash flows, and the discount rate used to reflect the risks inherent in the future cash flows. A change in any of these estimates and assumptions could produce a different fair value, which could have a material impact on our results of operations. In addition, an intangible asset’s expected useful life can increase estimation risk, as longer-lived assets necessarily require longer-term cash flow forecasts, which for some of our intangible assets can be up to 20 years. In connection with an impairment evaluation, we also reassess the remaining useful life of the intangible asset and modify it, as appropriate.
Management continually assesses the useful livesmaintenance costs. None of the Company's long-lived assets. In 2017, management revised the estimated useful lives of certain intangible assets in connection with market events and changes in assumptions. As a result, the useful lives of certain product brands, with an aggregate carryinglease agreements contain material residual value of $7,618 million as of December 31, 2017, were revised to take into consideration, among other factors, various scenarios related to the date each product is anticipated to lose its exclusivity and the resulting potential changes in the forecasted sales. In addition, the useful life of the Salix Brand, with a carrying value of $569 million as of December 31, 2017, was revised from seventeen years to ten years to reflect a number of possible scenarios related to forecasted sales of its product portfolio.
Indefinite-lived intangible assets, including IPR&D and the B&L corporate trademark, are tested for impairment annually,guarantees or more frequently if events or changes in circumstances between annual tests indicate that the asset may be impaired. Impairment losses on indefinite-lived intangible assets are recognized based solely on a comparison of their fair value to carrying value, without consideration of any recoverability test. In particular, we will continue to monitor closely the progression of our R&D programs as their likelihood of success is contingent upon the achievement of future milestones. See Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Overview — Key Initiatives — Internal Capital Allocation and Operating Efficiencies” for additional information regarding our R&D programs.
Goodwill
Goodwill is not amortized but is tested for impairment at least annually as of October 1st at the reporting unit level. A reporting unit is the same as, or one level below, an operating segment. The fair value of a reporting unit refers to the price that would be received to sell the unit as a whole in an orderly transaction between market participants. The Company estimates the fair values of all reporting units using a discounted cash flow model which utilizes Level 3 unobservable inputs.
The discounted cash flow method relies on assumptions regarding revenue growth rates, gross profit, projected working capital requirements, selling, general and administrative expenses, research and development expenses, capital expenditures, income tax rates, discount rates and terminal growth rates. To estimate fair value, the Company discounts the forecasted cash flows of each reporting unit. The discount rate the Company uses represents the estimated weighted average cost of capital, which reflects the overall level of inherent risk involved in its reporting unit operations and the rate of return a market participant would expect to earn. To estimate cash flows beyond the final year of its model, the Company estimates a terminal value by applying an in perpetuity growth assumption and discount factor to determine the reporting unit's terminal value.material restrictive covenants.
The Company forecasted cash flows for each of its reporting units and took into consideration economic conditions and trends, estimated future operating results, management's and a market participant's view of growth rates and product lives, and anticipated future economic conditions. Revenue growth rates inherent in these forecasts were based on input from internal and external market research that compare factors such as growth in global economies, recent industry trends and product life-cycles. Macroeconomic factors such as changes in economies, changes in the competitive landscape including the unexpected loss of
exclusivity to the Company's product portfolio, changes in government legislation, product life-cycles, industry consolidations and other changes beyond the Company’s control could have a positive or negative impact on achieving its targets. Accordingly, if market conditions deteriorate, or if the Company is unable to execute its strategies, it may be necessaryrequired to record impairment charges in the future.
2016
Commencing in the third quarter of 2016, the Company operates in three operating segments: (i) Bausch + Lomb/International, (ii) Branded Rxa right-of-use asset and (iii) U.S. Diversified Products. This 2016 segment structure realignment resulted in the Bausch + Lomb/International segment consisting of the following reporting units: (i) U.S. Bausch + Lomb and (ii) International; the Branded Rx segment consisting of the following reporting units: (i) Salix, (ii) Dermatology, (iii) Canada and (iv) Branded Rx Other; and the U.S. Diversified Products segment consisting of the following reporting units: (i) Neurology and other and (ii) Generics. As a result of these changes, goodwill was reassignedcorresponding lease liability, equal to each of the aforementioned reporting units using a relative fair value approach. Goodwill previously reported in the former U.S. reporting unit, after adjustment of impairment as described below, was reassigned, using a relative fair value approach, to the U.S. Bausch + Lomb, Salix, Dermatology, Branded Rx Other, Neurology and other, and Generics reporting units. Similarly, goodwill previously reported in the former Canada and Australia reporting unit was reassigned to the Canada and the International reporting units using a relative fair value approach. Goodwill previously reported in the remaining former reporting units was reassigned to the International reporting unit.
In the third quarter of 2016, goodwill impairment testing was performed under the former reporting unit structure immediately prior to the change and under the current reporting unit structure immediately subsequent to the change. Using the forecasts and assumptions at the time, the Company estimated the fair value of each reporting unit using a discounted cash flow analysis. As a result of its test, the Company determined that goodwill associated with the former U.S. reporting unit and the goodwill associated with the Salix reporting unit under the current reporting unit structure were impaired. Consequently, in the aggregate, goodwill impairment charges of $1,077 million were recognized as follows:
Under the former reporting unit structure, the fair value of each reporting unit exceeded its carrying value by more than 15%, except for the former U.S. reporting unit whose carrying value exceeded its fair value by 2%. As a result, the Company proceeded to perform step two of the goodwill impairment test for the former U.S. reporting unit and determined that the carrying value of the unit's goodwill exceeded its implied fair value. However, as the estimate of fair value is complex and requires significant amounts of time and judgment, the Company could not complete step two of the testing prior to the release of its financial statements for the period ended September 30, 2016. Under these circumstances, accounting guidance requires that a company recognize an estimated impairment charge if management determines that it is probable that an impairment loss has occurred and such impairment can be reasonably estimated. Using its best estimate, the Company recorded an initial goodwill impairment charge of $838 million as of September 30, 2016. In the three months ended December 31, 2016, step two testing was completed and the Company concluded that the excess of the carrying value of the former U.S. reporting unit's unadjusted goodwill over its implied value as of September 30, 2016 was $905 million and recognized an incremental goodwill impairment charge of $67 million for the three months ended December 31, 2016. The goodwill impairment was primarily driven by changes to the Company's forecasted performance which resulted in a lower fair value of the U.S. businesses, mainly the Salix business.
Under the current reporting unit structure, the carrying value of the Salix reporting unit exceeded its fair value, as updates to the unit's forecast resulted in a lower estimated fair value for the business. As a result, the Company proceeded to perform step two of the goodwill impairment test for the Salix reporting unit and determined that the carrying value of the unit's goodwill exceeded its implied fair value. However, the Company could not complete step two of the testing prior to the release of its financial statements for the period ended September 30, 2016. Using its best estimate, the Company recorded an initial goodwill impairment charge of $211 million as of September 30, 2016. In the three months ended December 31, 2016, step two testing was completed and the Company concluded that the excess of the carrying value of the Salix reporting unit's unadjusted goodwill over its implied value as of September 30, 2016 was $172 million and recognized a credit to the initial goodwill impairment charge of $39 million for the three months ended December 31, 2016. As of the date of testing, after all adjustments, the Salix reporting unit had a carrying value of $14,066 million, an estimated fair value of $10,409 million and goodwill with a carrying value of $5,128 million.
In order to evaluate the sensitivity of its fair value calculations on the goodwill impairment test, the Company compared the carrying value of each reporting unit to its fair value as of August 31, 2016, the date of testing. The fair value of each reporting unit exceeded its carrying value by more than 15%, except for the Salix reporting unit as previously discussed and the U.S. Branded Rx reporting unit. As of the date of testing, goodwill of the U.S. Branded Rx reporting unit was $897 million and the estimated fair value of the unit exceeded its carrying value by approximately 5%.
2016 Annual Goodwill Impairment Test - The Company conducted its annual goodwill impairment test as of October 1, 2016 and determined that the carrying value of the Salix reporting unit exceeded its fair value and, as a result, the Company proceeded to perform step two of the goodwill impairment test for the Salix reporting unit. After completing step two of the impairment testing, the Company determined that the carrying value of the unit's goodwill did not exceed its implied fair value and, therefore, no impairment was identified to the goodwill of the Salix reporting unit. At the date of testing the Salix reporting unit had a carrying value of $14,087 million, an estimated fair value of $10,319 million and goodwill with a carrying value of $5,128 million. The Company's remaining reporting units passed step one of the goodwill impairment test as the estimated fair value of each reporting unit exceeded its carrying value at the date of testing and, therefore, impairment to goodwill was $0. The Company determined that no events occurred or circumstances changed during the period of October 1, 2016 through December 31, 2016 that would indicate that the fair value of a reporting unit may be below its carrying amount, except for the Salix reporting unit. During the period of October 1, 2016 through December 31, 2016, there were no changes in the facts and circumstances which would suggest that goodwill of the Salix reporting unit was further impaired.
In order to evaluate the sensitivity of its fair value calculations on the goodwill impairment test, the Company compared the carrying value of each reporting unit to its fair value as of October 1, 2016, the date of testing. The fair value of each reporting unit exceeded its carrying value by more than 15%, except for the Salix reporting unit, as previously discussed and the U.S. Branded Rx reporting unit.
2017
2017 Realignment of Segment Structure
As detailed in Note 2, "SIGNIFICANT ACCOUNTING POLICIES", the revenues and profits from the Company's operations in Canada were reclassified. In connection with this change, the prior-period presentation of segment goodwill has been recast to conform to the current reporting structure, of which $264 million of goodwill as of December 31, 2016 was reclassified from the Branded Rx segment to the Bausch + Lomb/International segment. No facts or circumstances were identified in connection with this change in alignment that would suggest an impairment exists.
As detailed in Note 4, "DIVESTITURES", the Sprout business was classified as held for sale. As the Sprout business represented only a portion of a Branded Rx reporting unit, we assessed the remaining reporting unit for impairment and determined the carrying value of the remaining reporting unit exceeded its fair value. After completing step two of the impairment testing, the Company determined and recorded a goodwill impairment charge of $312 million during the three months ended September 30, 2017.
2017 Interim Goodwill Impairment Assessments
As the facts and circumstances had not materially changed since the October 1, 2016 impairment test, management concluded that the carrying value of the Salix reporting unit continued to be in excess of its fair value. Therefore, during the three months ended March 31, 2017, June 30, 2017 and September 30, 2017, the Company performed qualitative assessments of the Salix reporting unit goodwill to determine if testing was warranted.
As part of its qualitative assessments, management compared the reporting unit’s operating results to its original forecasts. Although Salix reporting unit revenue during the three months ended March 31, 2017, June 30, 2017 and September 30, 2017 declined as compared to the three months ended December 31, 2016, each decrease was within management's expectations. Further, the latest forecast for the Salix reporting unit is not materially different than the forecast used in management's October 1, 2016 testing and the difference in the forecasts would not change the conclusion of the Company’s goodwill impairment testing as of October 1, 2016. As part of these qualitative assessments, the Company also considered the sensitivity of its conclusions as they relate to changes in the estimates and assumptions used in the latest forecast available for each period. Based on its qualitative assessments, management believes that the carrying value of the Salix reporting unit goodwill does not exceed its implied fair value and that testing the Salix reporting unit goodwill for impairment was not required based on the current facts and circumstances.
2017 Annual Goodwill Impairment Test
The Company conducted its annual goodwill impairment test as of October 1, 2017 and determined that the carrying value of the Salix reporting unit exceeded its fair value and, as a result, the Company proceeded to perform step two of the goodwill impairment test for the Salix reporting unit. After completing step two of the impairment testing, the Company determined that the carrying value of the unit's goodwill did not exceed its implied fair value and, therefore, no impairment was identified to the goodwill of the Salix reporting unit. The Company's remaining reporting units passed step one of the goodwill impairment test as the estimated fair value of each reporting unit exceeded its carrying value at the date of testing and, therefore, there was no impairment to goodwill. In order to evaluate the sensitivity of its fair value calculations on the goodwill impairment test, the Company compared the carrying value of each reporting unit to its fair value as of October 1, 2017, the date of testing. The fair value of each reporting unit exceeded its carrying value by more than 15%, except for the Salix reporting unit.
Subsequent to the annual impairment test, the Company considered events occurring after October 1st to determine if further testing was required. The Company considered the impact of the changes in the Tax Act on its reporting units, including the impact on the carrying value, for changes in deferred tax assets and liabilities and changes in assumptions related to the tax rate when assessing the fair value. The Company concluded that the fair value continues to exceed the carrying value for all reporting units, except Salix, after considering the impact of the changes in the Tax Act. Further, the step 2 impairment test for Salix continued to support the implied fair value of goodwill. As a result, no additional impairment charges were recorded.
In January 2017, the FASB issued guidance which simplifies the subsequent measurement of goodwill by eliminating “Step 2” from the goodwill impairment test. Instead, goodwill impairment will be measured as the amount by which a reporting unit's carrying value exceeds its fair value. The FASB also eliminated the requirements for any reporting unit with a zero or negative carrying amount to perform a qualitative assessment. The guidance is effective for annual periods beginning after December 15, 2019, and interim periods within those annual periods, with early adoption permitted. The Company may elect to adopt this standard effective the first quarter of 2018. Once adopted, this guidance is expected to have a significant impact on the Company’s financial position, results of operations, and disclosures with respect to the Salix reporting unit. While the fair value of a reporting unit is subject to update for events occurring subsequent to the date of impairment testing, at October 1, 2017, the Salix reporting unit had an estimated fair value of $10,660 million and a carrying value of $13,404 million, including goodwill of $5,127 million. See Note 9, "INTANGIBLE ASSETS AND GOODWILL".
Total accumulated goodwill impairment charges to date are $1,389 million.
As previously discussed the Company estimated the fair value of each reporting unit using an income approach which values the unit based on the future cash flows expected from that reporting unit. Future cash flows are based on forward-looking information regarding market share and costs for each reporting unit and are discounted using an appropriate discount rate. Future discounted cash flows can be affected by changes in industry or market conditions or the rate and extent to which anticipated synergies or cost savings are realized with newly acquired entities.
The discounted cash flow model used in the Company’s income approach relies on assumptions regarding revenue growth rates, gross profit, projected working capital requirements, selling, general and administrative expenses, research and development expenses, business restructuring costs, capital expenditures, income tax rates, discount rates and terminal growth rates. To estimate fair value, the Company discounts the expected cash flows of each reporting unit. The discount rate the Company uses represents the estimated weighted average cost of capital, which reflects the overall level of inherent risk involved in its reporting unit operations and the rate of return an outside investor would expect to earn. To estimate cash flows beyond the final year of its model, the Company uses a terminal value approach. Under this approach, the Company applies an in perpetuity growth assumption and discount factor to determine the terminal value. The Company incorporates the present value of the resulting terminallease payments at the commencement date of each lease. For all asset classes, in determining future lease payments, the Company has elected to aggregate lease components, such as payments for rent, taxes and insurance costs with non-lease components such as maintenance costs, and account for these payments as a single lease component. In limited
circumstances, when the information necessary to determine the rate implicit in a lease is available, the present value intoof the lease payments is determined using the rate implicit in that lease. If the information necessary to determine the rate implicit in a lease is not available, the Company uses its estimateincremental borrowing rate at the commencement of fair value.the lease, which represents the rate of interest that the Company would incur to borrow on a collateralized basis over a similar term.
All leases must be classified as either an operating lease or finance lease. The Company forecasted cash flows for each of its reporting units and took into consideration economic conditions and trends, estimated future operating results, management’s view of growth rates and product lives, and anticipated future economic conditions. Revenue growth rates inherent in these forecasts wereclassification is determined based on input from internal and external market research that compare factors such as growth in global economies, recent industry trends and product evolution. Macroeconomic factors such as changes in economies, changes in the competitive landscape including the unexpected loss of exclusivitywhether substantive control has been transferred to the Company'slessee. The classification governs the pattern of lease expense recognition. For leases classified as operating leases, total lease expense over the term of the lease is equal to the undiscounted payments due in accordance with the lease arrangement. Fixed lease expense is recognized periodically on a straight-line basis over the term of each lease and includes: (i) imputed interest during the period on the lease liability determined using the effective interest rate method plus (ii) amortization of the right-of-use asset for that period. Amortization of the right-of-use asset during the period is calculated as the difference between the straight-line expense and the imputed interest on the lease liability for that period. Variable lease expense is recognized when the achievement of the specific target is considered probable.
Research and Development Expenses
Costs related to internal research and development programs, including costs associated with the development of acquired IPR&D, are expensed as goods are delivered or services are performed. Under certain research and development arrangements with third parties, the Company may be required to make payments that are contingent on the achievement of specific developmental, regulatory and/or commercial milestones. Milestone payments made to third parties before a product portfolio, changesreceives regulatory approval, but after the milestone is determined to be probable, are expensed and included in government legislation, product evolutions, industry consolidationsResearch and development expenses. Milestone payments made to third parties after regulatory approval is received are capitalized and amortized over the estimated useful life of the approved product.
Amounts due from third parties as reimbursement of development activities conducted under certain research and development arrangements are recognized as a reduction of Research and development expenses.
Legal Costs
Legal fees and other changes beyond the Company’s control could have a positive or negative impact on achieving its targets. Accordingly, if market conditions deteriorate, or if the Company is unablecosts related to execute its strategies, it may be necessary to record impairment charges in the future.
See Note 9, "INTANGIBLE ASSETS AND GOODWILL" and Note 23, "SEGMENT INFORMATION" to our audited Consolidated Financial Statements for further details on the goodwill impairment recognized in 2017 and 2016 and for the change in segments.
Contingencies
In the normal course of business, we are subject to loss contingencies, such as claims and assessments arising from litigation and other legal proceedings contractual indemnities,or services are expensed as incurred and are included in Selling, general and administrative expenses. Certain legal costs associated with acquisitions are included in Acquisition-related costs and certain legal costs associated with divestitures, legal settlements and other business development activities are included in Litigation and other matters or Net gain on sales of assets within Other expense (income), net, as appropriate. Legal costs expensed are reported net of expected insurance recoveries. A claim for insurance recovery is recognized when realization becomes probable.
Advertising Costs
Advertising costs comprise product samples, print media, promotional materials and environmental liabilitiestelevision advertising and tax matters. Other than loss contingencies that are assumed in business combinations for which we can reliably estimateexpensed on the fair value, we are required to accrue for such loss contingencies if it is probable that the outcome will be unfavorable and if the amountfirst use of the loss can be reasonably estimated. We evaluate our exposure to loss based on the progressadvertisement. Included in Selling, general and administrative expenses are advertising costs of each contingency, experience in similar contingencies and consultation with our legal counsel. We re-evaluate all contingencies as additional information becomes available. Given the uncertainties inherent in complex litigation and other contingencies, these evaluations can involve significant judgment about future events. The ultimate outcome of any litigation or other contingency may be material to our results of operations, financial condition and cash flows. See Note 21, "LEGAL PROCEEDINGS" to our audited Consolidated Financial Statements for further details regarding our current legal proceedings.
Income Taxes
We have operations in various countries that have differing tax laws and rates. Our tax structure is supported by current domestic tax laws in the countries in which we operate and the application of tax treaties between the various countries in which we operate. Our income tax reporting is subject to audit by domestic and foreign tax authorities. Our effective tax rate may change from year to year based on changes in the mix of activities and income earned under our intercompany arrangements among the different jurisdictions in which we operate, changes in tax laws in these jurisdictions, changes in tax treaties between various countries in which we operate, changes in our eligibility for benefits under those tax treaties and changes in the estimated values of deferred tax assets and liabilities. Such changes could result in an increase in the effective tax rate on all or a portion of our income and/or any of our subsidiaries.
Our provision for income taxes is based on a number of estimates and assumptions made by management. Our consolidated income tax rate is affected by the amount of income earned in our various operating jurisdictions, the availability of benefits under tax treaties and the rates of taxes payable in respect of that income. We enter into many transactions and arrangements in the ordinary course of business in which the tax treatment is not entirely certain. We must therefore make estimates and judgments based on our knowledge and understanding of applicable tax laws and tax treaties, and the application of those tax laws and tax treaties to our business, in determining our consolidated tax provision. For example, certain countries could seek to tax a greater share of income than has been provided for by us. The final outcome of any audits by taxation authorities may differ from the estimates and assumptions we have used in determining our consolidated income tax provisions and accruals. This could result in a material effect on our consolidated income tax provision, results of operations, and financial condition for the period in which such determinations are made.
Our income tax returns are subject to audit in various jurisdictions. Existing and future audits by, or other disputes with, tax authorities may not be resolved favorably for us and could have a material adverse effect on our reported effective tax rate and after-tax cash flows. We record liabilities for uncertain tax positions, which involve significant management judgment. New laws and new interpretations of laws and rulings by tax authorities may affect the liability for uncertain tax positions. Due to the subjectivity and complex nature of the underlying issues, actual payments or assessments may differ from our estimates. To the extent that our estimates differ from amounts eventually assessed and paid our income and cash flows may be materially and adversely affected.
We assess whether it is more likely than not that we will realize the tax benefits associated with our deferred tax assets and establish a valuation allowance for assets that are not expected to result in a realized tax benefit. A significant amount of judgment is used in this process, including preparation of forecasts of future taxable income and evaluation of tax planning initiatives. If we revise these forecasts or determine that certain planning events will not occur, an adjustment to the valuation allowance will be made to tax expense in the period such determination is made.
We have provided for income taxes, including the impacts of the Tax Act, in accordance with the accounting guidance issued through the date of this filing. The tax benefit for 2017 is $4,145$515 million, which includes provisional net tax benefits of $975 million attributable to the Tax Act. The accounting for the Tax Act includes each of the following provisional amounts: (i) the re-measurement of certain deferred tax assets and liabilities based on the rates at which they are expected to reverse in the future of $774 million, (ii) the one-time Transition Toll Tax of $88$451 million and (iii) the decrease in deferred tax assets attributable to certain legal accruals, the deductibility of which is uncertain$544 million, for U.S. federal income tax purposes of $10 million. We have provisionally
utilized NOLs to offset the provisionally determined $88 million Transition Toll Tax2021, 2020 and therefore no amount is recorded as payable. We have previously provided for residual U.S. federal income tax on its outside basis differences in certain foreign subsidiaries; however, as our residual U.S. tax liability was $299 million prior to the law change, we recognized a deferred tax benefit of $299 million in the fourth quarter of 2017.2019, respectively.
In December 2017, the SEC issued guidance in situations where the accounting for certain elements of the Tax Act cannot be completed prior to the release of an entity's financial statements. For the elements of the Tax Act where a reasonable estimate of the tax effects could not be completed prior to the release of our financial statements, we will recognize the resulting tax effects in the period our assessment is complete. The Company did not identify items for which the income tax effects of the Tax Act have been completed and the Company did not identify items for which the accounting and a reasonable estimate could not be determined as of December 31, 2017. As the Tax Act was only recently passed, full guidance associated with its impacts have not yet been provided from the relevant state and federal jurisdictions. As such we have used all available information to form appropriate accounting estimates for the changes within the law but have not completed any aspects of the implementation of the law in expectation of further guidance.
The provisional amounts included in our 2017 Benefit from income taxes, including the Transition Toll Tax, will be finalized when a full assessment can be completed, and the resulting tax effects will be recognized in the period finalized, as additional income tax provision or benefit. The effects of the Tax Act were recorded as provisional estimated in part because of expected future guidance from the SEC, the US Internal Revenue Service, and various state and local governments. Our assessment must be finalized within one year of the enactment of the Tax Act, December 22, 2018. Differences between the provisional benefit from income taxes as provided and the benefit or provision for income taxes when finalized are expected, and those differences could be material.
Share-Based CompensationEvaluation of Disclosure Controls and Procedures
We recognize employee share-based compensation, including grants of stock options and RSUs, at estimated fair value. As there is no market for trading our employee stock options, we useThe Company’s management, with the Black-Scholes option-pricing model to calculate stock option fair values, which requires certain assumptions related to the expected lifeparticipation of the stock option, future stock price volatility, risk-free interest rateCompany’s Chief Executive Officer and dividend yield. The expected lifeChief Financial Officer, has evaluated the effectiveness of the stock option is based on historical exerciseCompany’s disclosure controls and forfeiture patterns. The expected volatility of our common stock is estimated by using implied volatilityprocedures (as defined in market traded options. The risk-free interest rate is based on the rate at the time of grant for U.S. Treasury bonds with a remaining term equal to the expected life of the stock option. Dividend yield is based on the stock option’s exercise priceRules 13a-15(e) and expected annual dividend rate at the time of grant. Changes to any of these assumptions, or the use of a different option-pricing model, such as the lattice model, could produce a different fair value for share-based compensation expense, which could have a material impact on our results of operations.
We determine the fair value of each RSU granted based on the trading price of our common shares on the date of grant, unless the vesting of the RSU is conditional on the attainment of any applicable performance goals, in which case we use a Monte Carlo simulation model. The Monte Carlo simulation model utilizes multiple input variables to estimate the probability that the performance condition will be achieved. Changes to any of these inputs could materially affect the measurement of the fair value of the performance-based RSUs.
NEW ACCOUNTING STANDARDS
Information regarding the recently issued new accounting guidance (adopted and not adopted as of December 31, 2017) is contained in Note 2, "SIGNIFICANT ACCOUNTING POLICIES" to our audited Consolidated Financial Statements.
FORWARD-LOOKING STATEMENTS
Caution regarding forward-looking information and statements and “Safe-Harbor” statements15d-15(e) under the U.S. Private Securities Litigation Reform Act of 1995:
To the extent any statements made in this Form 10-K contain information that is not historical, these statements are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of December 31, 2021. Based on that evaluation, the Company’s Chief Executive Officer and maythe Company’s Chief Financial Officer have concluded that as of December 31, 2021, the Company’s disclosure controls and procedures were effective to provide reasonable assurance that the information required to be forward-looking informationdisclosed by the Company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the meaningtime periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to management as appropriate to allow timely decisions regarding required disclosure.
Management’s Annual Report on Internal Control Over Financial Reporting
The Company’s management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under applicable Canadianthe Exchange Act. The Company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Under the supervision and with the participation of management, including the Company’s Chief Executive Officer and the Company’s Chief Financial Officer, the Company conducted an evaluation of the effectiveness of its internal control over financial reporting as of December 31, 2021 based on the framework described in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on that evaluation, management has concluded that the Company maintained effective internal control over financial reporting as of December 31, 2021.
The effectiveness of the Company’s internal control over financial reporting as of December 31, 2021 has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report which appears herein.
Changes in Internal Control over Financial Reporting
There have not been any changes in the Company’s internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the last fiscal quarter of 2021 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
Item 9B. Other Information
None.
Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections
Not applicable.
PART III
Item 10. Directors, Executive Officers and Corporate Governance
Information required under this Item is incorporated herein by reference from information included in the 2022 Proxy Statement.
The Board of Directors has adopted a code of ethics (the "Code of Conduct") that applies to our Chief Executive Officer, Chief Financial Officer, the principal accounting officer, controller, and all vice presidents and above in the finance department of the Company worldwide. A copy of the Code of Conduct can be found on our website at: www.bauschhealth.com. We intend to satisfy the SEC disclosure requirements regarding amendments to, or waivers from, any provisions of our Code of Conduct on our website.
Item 11. Executive Compensation
Information required under this Item relating to executive compensation is incorporated herein by reference from information included in the 2022 Proxy Statement.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Information required under this Item relating to securities legislation (collectively, “forward-looking statements”).
These forward-looking statements relate to, among other things: our business strategy, businessauthorized for issuance under equity compensation plans and prospects, forecaststo security ownership of certain beneficial owners and changes thereto, product pipeline, prospective productsmanagement is incorporated herein by reference from information included in the 2022 Proxy Statement.
Item 13. Certain Relationships and Related Transactions, and Director Independence
Information required under this Item relating to certain relationships and transactions with related parties and about director independence is incorporated herein by reference from information included in the 2022 Proxy Statement.
Item 14. Principal Accounting Fees and Services
Information required under this Item relating to the fees for professional services rendered by our independent auditors in 2021 and 2020 is incorporated herein by reference from information included in the 2022 Proxy Statement.
PART IV
Item 15. Exhibits and Financial Statement Schedules
(a)Documents filed as a part of the report:
(1)The consolidated financial statements required to be filed in the Annual Report on Form 10-K are listed on page F-1 hereof.
(2)Exhibits
All schedules are omitted because they are not applicable or product approvals, product developmentthe required information is included in the financial statements or notes.
Item 16. Form 10-K Summary
None.
INDEX TO EXHIBITS
| | | | | | | | |
Exhibit
Number | | Exhibit Description |
| 3.1 | | |
| 3.2 | | |
| 3.3 | | |
| 3.4 | | |
| 3.5 | | |
| 4.1 | | Indenture, dated as of March 27, 2015 (the “VRX Escrow Corp Indenture”), between VRX Escrow Corp., the Bank of New York Mellon Trust Company, N.A., as trustee, registrar and US paying agent, and The Bank of New York Mellon, acting through its London branch, as the Euro paying agent, governing the 5.375% Senior Notes due 2020 (the “2020 Notes”), the 5.875% Senior Notes due 2023 (the “May 2023 Notes”), the 4.500% Senior Notes due 2023 (the “Euro Notes”) and the 6.125% Senior Notes due 2025 (the “2025 Notes” and together with the 2020 Notes, the May 2023 Notes and the Euro Notes, the “Notes”), originally filed as Exhibit 4.1 to the Company’s Current Report on Form 8-K filed on March 27, 2015, which is incorporated by reference herein. |
| 4.2 | | First Supplemental Indenture to the VRX Escrow Corp Indenture, dated as of March 27, 2015, between Valeant Pharmaceuticals International, Inc., the guarantors named therein and the Bank of New York Mellon Trust Company, N.A., as trustee, governing the Notes, originally filed as Exhibit 4.2 to the Company's Current Report on Form 8-K filed on March 27, 2015, which is incorporated by reference herein. |
| 4.3 | | Indenture, dated as of March 21, 2017, by and among Valeant Pharmaceuticals International, Inc., the guarantors party thereto, The Bank of New York Mellon, as trustee and the notes collateral agents party thereto, governing the 6.500% Senior Secured Notes due 2022 and the 7.000% Senior Secured Notes due 2024, originally filed as Exhibit 4.1 to the Company’s Current Report on Form 8-K filed on March 21, 2017, which is incorporated by reference herein. |
| 4.4 | | Indenture, dated as of October 17, 2017, by and among Valeant Pharmaceuticals International, Inc., the guarantors party thereto, The Bank of New York Mellon, as trustee and the notes collateral agents party thereto, governing the 5.500% Senior Secured Notes due 2025, originally filed as Exhibit 4.1 to the Company’s Current Report on Form 8-K filed on October 17, 2017, which is incorporated by reference herein. |
| 4.5 | | Indenture, dated as of December 18, 2017, by and among Valeant Pharmaceuticals International, Inc., the guarantors party thereto and The Bank of New York Mellon, as trustee, governing the 9.000% Senior Notes due 2025, originally filed as Exhibit 4.1 to the Company’s Current Report on Form 8-K filed on December 18, 2017, which is incorporated by reference herein. |
| 4.6 | | Indenture, dated as of March 26, 2018, by and among Valeant Pharmaceuticals International, Valeant Pharmaceuticals International, Inc., the other guarantors party thereto and The Bank of New York Mellon, as trustee, governing the 9.250% Senior Secured Notes due 2026, originally filed as Exhibit 4.1 to the Company’s Current Report on Form 8-K filed on March 27, 2018, which is incorporated by reference herein. |
| 4.7 | | Indenture, dated as of June 1, 2018, by and among Valeant Pharmaceuticals International, Valeant Pharmaceuticals international, Inc., the other guarantors party thereto and The Bank of New York Mellon, as trustee, governing the 8.500% Senior Secured Notes due 2027, originally filed as Exhibit 4.1 to the Company’s Current Report on Form 8-K filed on June 1, 2018, which is incorporated by reference herein. |
| 4.8 | | Indenture, dated as of March 8, 2019, by and among Bausch Health Companies Inc., the guarantors named therein, The Bank of New York Mellon Trust Company, N.A., as trustee, and the notes collateral agents party thereto, governing the 5.750% Senior Secured Notes due 2027, originally filed as Exhibit 4.1 to the Company’s Current Report on Form 8-K filed on March 8, 2019, which is incorporated by reference herein. |
| 4.9 | | Indenture, dated as of May 23, 2019, by and among Bausch Health Companies Inc., the guarantors named therein and The Bank of New York Mellon Trust Company, N.A., as trustee, governing the 7.000% Senior Notes due 2028 and the 7.250% Senior Notes due 2029, originally filed as Exhibit 4.1 to the Company’s Current Report on Form 8-K filed on May 24, 2019, which is incorporated by reference herein. |
| 4.10 | | Indenture, dated as of December 30, 2019, by and among Bausch Health Companies Inc., the guarantors named therein and The Bank of New York Mellon Trust Company, N.A., as trustee, governing the 5.000% Senior Notes due 2028 and the 5.250% Senior Notes due 2030, originally filed as Exhibit 4.1 to the Company’s Current Report on Form 8-K filed on December 30, 2019, which is incorporated by reference herein. |
| | | | | | | | |
| 4.11 | | Indenture, dated as of May 26, 2020, by and among Bausch Health Companies Inc., the guarantors named therein and The Bank of New York Mellon Trust Company, N.A., as trustee, governing the 6.250% Senior Notes due 2029, originally filed as Exhibit 4.1 to the Company’s Current Report on Form 8-K filed on May 26, 2020, which is incorporated by reference herein. |
| 4.12 | | Indenture, dated as of December 3, 2020, by and among Bausch Health Companies Inc., the guarantors named therein and The Bank of New York Mellon, N.A., as trustee, governing the 5.000% Senior Notes due 2029 and the 5.250% Senior Notes due 2031, originally filed as Exhibit 4.1 to the Company’s Current Report on Form 8-K filed on December 3, 2020, which is incorporated by reference herein. |
| 4.13 | | Indenture, dated as of June 8, 2021, by and among Bausch Health Companies Inc., the guarantors named therein and The Bank of New York Mellon, N.A., as trustee, governing the 4.875% Senior Notes due 2028, originally filed as Exhibit 4.1 to the Company’s Current Report on Form 8-K filed on June 8, 2021, which is incorporated by reference herein. |
| 4.14 | | Indenture, dated as of February 10, 2022, by and among Bausch Health Companies Inc., the guarantors named therein, The Bank of New York Mellon, N.A., as trustee and the notes collateral agents party thereto, governing the 6.125% Senior Secured Notes due 2027, originally filed as Exhibit 4.1 to the Company’s Current Report on Form 8-K filed on February 10, 2022, which is incorporated by reference herein. |
| 4.15 | | |
| 4.16 | | |
| 10.1 | | |
| 10.2 | | |
| 10.3 | | |
| 10.4 | | |
| 10.5 | | |
| 10.6 | | |
| 10.7 | | |
| 10.8 | | |
| 10.9 | | |
| 10.10 | | |
| | | | | | | | |
| 10.11 | | |
| 10.12 | | Valeant Pharmaceuticals International, Inc. 2011 Omnibus Incentive Plan (the “2011 Omnibus Incentive Plan”), effective as of April 6, 2011, as amended on and approved by the shareholders on May 16, 2011, originally filed as Annex A to the Company's Management Proxy Circular and Proxy Statement on Schedule 14A filed on April 14, 2011, as amended by the Supplement dated May 10, 2011 to the Company's Management Proxy Circular and Proxy Statement filed on May 10, 2011, which is incorporated by reference herein.† |
| 10.13 | | |
| 10.14 | | |
| 10.15 | | |
| 10.16 | | |
| 10.17 | | |
| 10.18 | | |
| 10.19 | | |
| 10.20* | | |
| 10.21 | | |
| 10.22 | | |
| 10.23 | | |
| 10.24 | | First Incremental Amendment, dated as of November 27, 2018, to the Fourth Amended and Restated Credit and Guaranty Agreement, by and among Bausch Health Companies Inc., Valeant Pharmaceuticals International, certain subsidiaries of Bausch Health Companies Inc. as guarantors, each of the financial institutions named therein as lenders and issuing banks and Barclays Bank PLC, as Administrative Agent, originally filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on November 27, 2018, which is incorporated by reference herein and which First Incremental Amendment appends, as an exhibit thereto, a copy of such Fourth Amended and Restated Credit and Guaranty Agreement, as amended to date. |
| 10.25 | | |
| 10.26 | | |
| 10.27 | | |
| | | | | | | | |
| 10.28 | | |
| 10.29 | | |
| 10.30 | | Restatement Agreement, dated as of June 1, 2018, among Valeant Pharmaceuticals International, Inc., Valeant Pharmaceuticals International, certain subsidiaries of Valeant Pharmaceuticals International, Inc. as guarantors, each of the financial institutions named therein as lenders and issuing banks and Barclays Bank PLC, as Administrative Agent, originally filed as Exhibit 10.1 to the Company's Current Report on Form 8-K filed on June 1, 2018, which is incorporated by reference herein. |
| 10.31 | | |
| 10.32 | | |
| 10.33 | | |
| 21.1* | | |
| 23.1* | | |
| 31.1* | | |
| 31.2* | | |
| 32.1* | | |
| 32.2* | | |
| 101.INS* | | Inline XBRL Instance Document |
| 101.SCH* | | Inline XBRL Taxonomy Extension Schema Document |
| 101.CAL* | | Inline XBRL Taxonomy Extension Calculation Linkbase Document |
| 101.LAB* | | Inline XBRL Taxonomy Extension Label Linkbase Document |
| 101.PRE* | | Inline XBRL Taxonomy Extension Presentation Linkbase Document |
| 101.DEF* | | Inline XBRL Taxonomy Extension Definition Linkbase Document |
| 104* | | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) |
* Filed herewith.
† Management contract or compensatory plan or arrangement.
†† One or more exhibits or schedules to this exhibit have been omitted pursuant to Item 601(a)(5) or Item 601(b)(2) of Regulation S-K. We undertake to furnish supplementally a copy of any omitted exhibit or schedule to the SEC upon request.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| | | | | | | | | | | | | | | | | |
| | | BAUSCH HEALTH COMPANIES INC.
(Registrant) |
| | | | | |
| Date: | February 23, 2022 | | By: | /s/ JOSEPH C. PAPA | |
| | | | | |
| | | | Joseph C. Papa Chief Executive Officer (Principal Executive Officer and Chairman of the Board) |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and distribution plans, future performancein the capacities and on the dates indicated.
| | | | | | | | | | | | | | | | | |
| Signature | | Title | | Date |
| | | | | |
| /s/ JOSEPH C. PAPA Joseph C. Papa
| | Chief Executive Officer and Chairman of the Board | | February 23, 2022 |
| /s/ SAM ELDESSOUKY Sam Eldessouky | | Executive Vice President and Chief Financial Officer (Principal Financial Officer) | | February 23, 2022 |
| /s/ FREDERICK J. MUNSCH Frederick J. Munsch | | Senior Vice President, Controller and Chief Accounting Officer (Principal Accounting Officer) | | February 23, 2022 |
| /s/ RICHARD U. DESCHUTTER Richard U. DeSchutter | | Director | | February 23, 2022 |
| /s/ BRETT ICAHN Brett Icahn | | Director | | February 23, 2022 |
| /s/ ARGERIS N. KARABELAS Argeris N. Karabelas | | Director | | February 23, 2022 |
| /s/ SARAH B. KAVANAGH Sarah B. Kavanagh | | Director | | February 23, 2022 |
| /s/ STEVEN D. MILLER Steven D. Miller | | Director | | February 23, 2022 |
| /s/ JOHN A. PAULSON John A. Paulson | | Director | | February 23, 2022 |
| /s/ ROBERT N. POWER Robert N. Power | | Director | | February 23, 2022 |
| /s/ RUSSEL C. ROBERTSON Russel C. Robertson | | Director | | February 23, 2022 |
| /s/ THOMAS W. ROSS, SR. Thomas W. Ross, Sr. | | Director | | February 23, 2022 |
| /s/ ANDREW C. VON ESCHENBACH Andrew C. von Eschenbach | | Director | | February 23, 2022 |
| /s/ AMY B. WECHSLER Amy B. Wechsler | | Director | | February 23, 2022 |
BAUSCH HEALTH COMPANIES INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
| | | | | | | | |
| | Page |
| Report of Management on Financial Statements | | |
| Report of Independent Registered Public Accounting Firm (PCAOB ID 238) | | |
| Consolidated Balance Sheets as of December 31, 2021 and 2020 | | |
| Consolidated Statements of Operations for the years ended December 31, 2021, 2020 and 2019 | | |
| Consolidated Statements of Comprehensive Loss for the years ended December 31, 2021, 2020 and 2019 | | |
| Consolidated Statements of Shareholders’ Equity (Deficit) for the years ended December 31, 2021, 2020 and 2019 | | |
| Consolidated Statements of Cash Flows for the years ended December 31, 2021, 2020 and 2019 | | |
| Notes to Consolidated Financial Statements | | |
REPORT OF MANAGEMENT ON FINANCIAL STATEMENTS
The Company’s management is responsible for preparing the accompanying consolidated financial statements in conformity with United States generally accepted accounting principles (“U.S. GAAP”). In preparing these consolidated financial statements, management selects appropriate accounting policies and uses its judgment and best estimates to report events and transactions as they occur. Management has determined such amounts on a reasonable basis in order to ensure that the consolidated financial statements are presented fairly, in all material respects. Financial information included throughout this Annual Report is prepared on a basis consistent with that of the accompanying consolidated financial statements.
PricewaterhouseCoopers LLP has been engaged by the Company to audit the consolidated financial statements.
The Board of Directors is responsible for ensuring that management fulfills its responsibility for financial reporting and is ultimately responsible for reviewing and approving the consolidated financial statements. The Board of Directors carries out this responsibility principally through its Audit and Risk Committee. The members of the Audit and Risk Committee are outside Directors. The Audit and Risk Committee considers, for review by the Board of Directors and approval by the shareholders, the engagement or resultsreappointment of currentthe external auditors. PricewaterhouseCoopers LLP has full and anticipated products; anticipated revenuesfree access to the Audit and Risk Committee.
| | | | | | | | |
| /s/ JOSEPH C. PAPA | | /s/ SAM ELDESSOUKY |
Joseph C. Papa
Chief Executive Officer | | Sam Eldessouky
Executive Vice President and
Chief Financial Officer |
February 23, 2022
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of Bausch Health Companies Inc.
Opinions on the Financial Statements and Internal Control over Financial Reporting
We have audited the accompanying consolidated balance sheets of Bausch Health Companies Inc. and its subsidiaries (the “Company”) as of December 31, 2021 and 2020, and the related consolidated statements of operations, of comprehensive loss, of shareholders' equity (deficit) and of cash flows for our products,each of the three years in the period ended December 31, 2021, including the Significantrelated notes (collectively referred to as the “consolidated financial statements”). We also have audited the Company's internal control over financial reporting as of December 31, 2021, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
Seven; anticipated compounding growthIn our opinion, the consolidated financial statements referred to above present fairly, in our Ortho Dermatologics business; expected R&D and marketing spend; our liquidity and our ability to satisfy our debt maturities as they become due; our ability to reduce debt levels; the impact of our distribution, fulfillment and other third party arrangements; proposed pricing actions; exposure to foreign currency exchange rate changes and interest rate changes; the outcome of contingencies, such as litigation, subpoenas, investigations, reviews, audits and regulatory proceedings; general market conditions; our expectations regarding our financial performance, including revenues, expenses, gross margins and income taxes; our ability to meetall material respects, the financial position of the Company as of December 31, 2021 and other covenants contained in our Third Amended and Restated Credit and Guaranty Agreement, as amended (the "Credit Agreement") and indentures; and our impairment assessments, including the assumptions used therein2020, and the results thereof.
Forward-looking statements canof its operations and its cash flows for each of the three years in the period ended December 31, 2021 in conformity with accounting principles generally be identifiedaccepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2021, based on criteria established in Internal Control - Integrated Framework (2013) issued by the use of words such as “believe”, “anticipate”, “expect”, “intend”, “estimate”, “plan”, “continue”, “will”, “may”, “could”, “would”, “should”, “target”, “potential”, “opportunity”, “tentative”, “positioning”, “designed”, “create”, “predict”, “project”, “forecast”, “seek”, “ongoing”, “increase”, or “upside”COSO.
Basis for Opinions
The Company's management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and variations or other similar expressions. In addition, any statements that refer to expectations, intentions, projections or other characterizations of future events or circumstances are forward-looking statements. These forward-looking statements may not be appropriate for other purposes. Although we have previously indicated, certain of these statements set out herein, allits assessment of the effectiveness of internal control over financial reporting, included in Management’s Annual Report on Internal Control Over Financial Reporting appearing under Item 9A. Our responsibility is to express opinions on the Company’s consolidated financial statements in this Form 10-K that contain forward-looking statementsand on the Company's internal control over financial reporting based on our audits. We are qualified by these cautionary statements. These statementsa public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are based upon the current expectations and beliefs of management. Although we believe that the expectations reflected in such forward-looking statements are reasonable, such statements involve risks and uncertainties, and undue reliance should notrequired to be placed on such statements. Certain material factors or assumptions are applied in making forward-looking statements, including, but not limited to, factors and assumptions regarding the items previously outlined. Actual results may differ materially from those expressed or implied in such statements. Important factors that could cause actual results to differ materially from these expectations include, among other things, the following:
the expense, timing and outcome of legal and governmental proceedings, investigations and information requests relating to, among other matters, our distribution, marketing, pricing, disclosure and accounting practices (includingindependent with respect to our former relationshipthe Company in accordance with Philidor Rx Services, LLC ("Philidor")), including pending investigations by the U.S. Attorney's Office for the District of Massachusetts, the U.S. Attorney's Office for the Southern District of New Yorkfederal securities laws and the Stateapplicable rules and regulations of North Carolina Department of Justice, the pending investigations by the U.S. Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.
Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the audit committee and that (i) relate to accounts or disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
Medicaid Rebates and Sales Returns Allowances
As described in Note 2 to the consolidated financial statements, gross product sales are subject to a variety of deductions in arriving at reported net product sales. The transaction price for product sales is typically adjusted for variable consideration, which may be in the form of cash discounts, allowances, returns, rebates, chargebacks and distribution fees paid to customers. The provisions for these deductions are recorded concurrently with the recognition of gross product sales revenue as a reduction in revenue. The variable consideration provisions, either recognized within accrued and other current liabilities or as a reduction of trade receivables, included $482 million related to returns allowances and $944 million related to rebates, including Medicaid rebates as of December 31, 2021. For certain rebate programs, such as Medicaid, provisions recognized by management are based on the terms of state government-managed programs, estimates of outstanding and future claims for end-customer sales and the sales mix. As disclosed by management, for sales returns, management estimates provisions utilizing existing return policies with customers, historical return and exchange levels, external data with respect to inventory levels in the wholesale distribution channel, external data with respect to prescription demand for products, remaining shelf lives of products at the date of sale, and estimated returns liability to be processed by year of sale based on an analysis of lot information related to actual historical returns.
The principal considerations for our determination that performing procedures relating to Medicaid rebates and sales returns allowances is a critical audit matter are the significant judgment by management when developing the estimate of Medicaid rebates and allowances for sales returns as the estimates are based on assumptions developed using terms of state government-managed Medicaid programs, existing return policies with customers, and projected estimated outstanding and future claims for end-customer sales. This in turn led to a high degree of auditor judgment, subjectivity, and effort in performing procedures and evaluating audit evidence relating to these assumptions.
Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included testing the effectiveness of controls relating to provisions for Medicaid rebates and allowances for sales returns, including controls over the assumptions used to estimate these rebates and allowances. These procedures also included, among others (i) developing an independent estimate of Medicaid rebates by utilizing third-party information on inventory levels in the distribution channel, the terms of the specific Medicaid rebate programs, and the historical trends of actual Medicaid rebate claims paid, adjusted for price and projected market conditions, (ii) comparing the independent estimate for these Medicaid rebates to management’s estimates, (iii) evaluating management's process for developing the estimate of the allowance for sales returns and the reasonableness of management’s assumptions related to existing return policies, (iv) evaluating management's assumptions related to existing return policies involved comparing to historical trends and considering whether these assumptions were consistent with evidence obtained in other areas of the audit, (v) evaluating the appropriateness of the method for estimating the allowance for sales returns and testing the completeness and accuracy of underlying data used in the model, and (vi) testing Medicaid rebate and sales returns claims processed by the Company, including evaluating those claims for consistency with the contractual terms of the Company’s arrangements and policies.
Finite-Lived Intangible Assets Impairment Assessment
As described in Notes 2 and 8 to the consolidated financial statements, the Company’s consolidated finite-lived net intangible assets balance was $5,250 million as of December 31, 2021, which consists of product and corporate brands, product rights/patents, partner relationships and technology and other assets. Finite-lived intangible assets are tested for impairment whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. If indicators of impairment are present, the asset is tested for recoverability by comparing the carrying value of the asset to the related estimated undiscounted future cash flows expected to be derived from the asset, which include the amount and timing of the projected future cash flows.
The principal considerations for our determination that performing procedures relating to the finite-lived intangible assets impairment assessment is a critical audit matter are the significant judgment by management in the identification of events that suggest an asset group might not be recoverable and in developing the assumptions used in the impairment testing assessment.
This in turn led to a high degree of auditor judgment, subjectivity, and effort in performing procedures and evaluating audit evidence related to management’s undiscounted future cash flow projections.
Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included testing the effectiveness of controls relating to management’s finite-lived intangible assets impairment assessment, including controls over the development of assumptions used to estimate recoverability and controls over the identification of events that suggest an asset group might not be recoverable. These procedures also included, among others (i) testing management’s process for identifying potential impairment events and determining the recoverability of the intangible assets, (ii) evaluating the appropriateness of the undiscounted cash flow model used in the impairment testing assessment, (iii) testing the completeness and accuracy of underlying data used in the model, and (iv) evaluating the reasonableness of the significant assumptions used by management related to the undiscounted future cash flow projections. Evaluating the reasonableness of management's assumptions for undiscounted future cash flow projections involved evaluating whether the assumptions used by management were reasonable considering the current and past performance of the asset group and whether these assumptions were consistent with evidence obtained in other areas of the audit.
Goodwill Impairment Assessments – Ortho Dermatologics Reporting Unit
As described in Note 2 and 8 to the consolidated financial statements, the Company’s consolidated goodwill balance was $12,457 million as of December 31, 2021, and the goodwill associated with the Ortho Dermatologics segment was $798 million, inclusive of a goodwill impairment of $469 million. The Ortho Dermatologics segment consists of the Ortho Dermatologics and Global Solta reporting units. Goodwill is not amortized but is tested for impairment at least annually as of October 1st at the reporting unit level. An interim goodwill impairment test in advance of the annual impairment assessment may be required if events occur that indicate an impairment might be present. Where the qualitative assessment suggested that it was more likely than not that the fair value of a reporting unit was less than its carrying amount, a quantitative fair value test was performed for that reporting unit. Goodwill impairment is measured by the amount the carrying value exceeds the fair value. Fair value of each reporting unit is estimated by management using a discounted cash flow model. During the quarter ended March 31, 2021, the Company revised its long-term forecasts for the Ortho Dermatologics reporting unit and thus Management conducted an interim quantitative fair value test for this reporting unit and recognized a goodwill impairment of $469 million. Management also conducted its annual goodwill impairment test on October 1, 2021 and determined that there was no additional impairment of goodwill. Management’s discounted cash flow model relies on assumptions regarding revenue growth rates, gross profit, projected working capital needs, selling, general and administrative expenses, research and development expenses, capital expenditures, income tax rates, discount rates and terminal growth rates.
The principal considerations for our determination that performing procedures relating to the goodwill impairment assessments of the Ortho Dermatologics reporting unit is a critical audit matter are the significant judgment by management when developing the fair value estimates of the reporting unit. This in turn led to a high degree of auditor judgment, subjectivity, and effort in performing procedures and evaluating management’s significant assumptions related to revenue growth rates, gross profit, discount rates, and terminal growth rates. Also, the audit effort involved the use of professionals with specialized skill and knowledge.
Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included testing the effectiveness of controls relating to management’s goodwill impairment assessments, including controls over the valuation of the Company’s Ortho Dermatologics reporting unit. These procedures also included, among others (i) testing management’s process for developing the fair value estimates of the Ortho Dermatologics reporting unit, (ii) evaluating the appropriateness of the discounted cash flow models, (iii) testing the completeness and accuracy of underlying data used in the models, and (iv) evaluating the reasonableness of the significant assumptions used by management related to the revenue growth rates, gross profit, discount rates, and terminal growth rates. Evaluating management’s assumptions related to revenue growth rates and gross profit involved evaluating whether the assumptions used by management were reasonable considering (i) the current and past performance of the reporting unit, (ii) the consistency with external market and industry data, and (iii) whether these assumptions were consistent with evidence obtained in other areas of the audit. Professionals with specialized skill and knowledge were used to assist in the evaluation of the Company’s discounted cash flow models and discount rate and terminal growth rate assumptions.
/s/ PricewaterhouseCoopers LLP
Florham Park, New Jersey
February 23, 2022
We have served as the Company’s auditor since 2012.
BAUSCH HEALTH COMPANIES INC.
CONSOLIDATED BALANCE SHEETS
(in millions, except share amounts)
| | | | | | | | | | | | | | |
| | | December 31, |
| | | 2021 | | 2020 |
| Assets | | | | |
| Current assets: | | | | |
| Cash and cash equivalents | | $ | 582 | | | $ | 605 | |
| Restricted cash and other settlement deposits | | 1,537 | | | 1,211 | |
| Trade receivables, net | | 1,775 | | | 1,577 | |
| Inventories, net | | 993 | | | 1,094 | |
| Prepaid expenses and other current assets | | 720 | | | 855 | |
| Total current assets | | 5,607 | | | 5,342 | |
| Property, plant and equipment, net | | 1,598 | | | 1,567 | |
| Intangible assets, net | | 6,948 | | | 8,445 | |
| Goodwill | | 12,457 | | | 13,044 | |
| Deferred tax assets, net | | 2,252 | | | 2,137 | |
| Other non-current assets | | 340 | | | 664 | |
| Total assets | | $ | 29,202 | | | $ | 31,199 | |
| Liabilities | | | | |
| Current liabilities: | | | | |
| Accounts payable | | $ | 407 | | | $ | 337 | |
| Accrued and other current liabilities | | 4,791 | | | 4,576 | |
| Total current liabilities | | 5,198 | | | 4,913 | |
| Acquisition-related contingent consideration | | 202 | | | 216 | |
| Non-current portion of long-term debt | | 22,654 | | | 23,925 | |
| Deferred tax liabilities, net | | 529 | | | 528 | |
| Other non-current liabilities | | 653 | | | 1,012 | |
| Total liabilities | | 29,236 | | | 30,594 | |
| Commitments and contingencies (Notes 20 and 21) | | 0 | | 0 |
| Equity | | | | |
| Common shares, no par value, unlimited shares authorized, 359,405,748 and 355,422,347 issued and outstanding at December 31, 2021 and 2020, respectively | | 10,317 | | | 10,227 | |
| Additional paid-in capital | | 462 | | | 454 | |
| Accumulated deficit | | (8,961) | | | (8,013) | |
| Accumulated other comprehensive loss | | (1,924) | | | (2,133) | |
| Total Bausch Health Companies Inc. shareholders’ (deficit) equity | | (106) | | | 535 | |
| Noncontrolling interest | | 72 | | | 70 | |
| Total (deficit) equity | | (34) | | | 605 | |
| Total liabilities and (deficit) equity | | $ | 29,202 | | | $ | 31,199 | |
On behalf of the Board:
| | | | | | | | |
| /s/ JOSEPH C. PAPA | | /s/ RUSSEL C. ROBERTSON |
| Joseph C. Papa | | Russel C. Robertson |
| Chief Executive Officer | | Chairperson, Audit and Risk Committee |
The accompanying notes are an integral part of these consolidated financial statements.
BAUSCH HEALTH COMPANIES INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in millions, except per share amounts)
| | | | | | | | | | | | | | | | | |
| | Years Ended December 31, |
| | 2021 | | 2020 | | 2019 |
| Revenues | | | | | |
| Product sales | $ | 8,342 | | | $ | 7,924 | | | $ | 8,489 | |
| Other revenues | 92 | | | 103 | | | 112 | |
| 8,434 | | | 8,027 | | | 8,601 | |
| Expenses | | | | | |
| Cost of goods sold (excluding amortization and impairments of intangible assets) | 2,361 | | | 2,202 | | | 2,297 | |
| Cost of other revenues | 33 | | | 47 | | | 53 | |
| Selling, general and administrative | 2,624 | | | 2,367 | | | 2,554 | |
| Research and development | 465 | | | 452 | | | 471 | |
| Amortization of intangible assets | 1,375 | | | 1,645 | | | 1,897 | |
| Goodwill impairments | 469 | | | — | | | — | |
| Asset impairments, including loss on assets held for sale | 234 | | | 114 | | | 75 | |
| Restructuring, integration, separation and IPO costs | 50 | | | 22 | | | 31 | |
| Other expense, net | 373 | | | 502 | | | 1,426 | |
| 7,984 | | | 7,351 | | | 8,804 | |
| Operating income (loss) | 450 | | | 676 | | | (203) | |
| Interest income | 7 | | | 13 | | | 12 | |
| Interest expense | (1,426) | | | (1,534) | | | (1,612) | |
| Loss on extinguishment of debt | (62) | | | (59) | | | (42) | |
| Foreign exchange and other | 7 | | | (30) | | | 8 | |
| Loss before benefit from income taxes | (1,024) | | | (934) | | | (1,837) | |
| Benefit from income taxes | 87 | | | 375 | | | 54 | |
| Net loss | (937) | | | (559) | | | (1,783) | |
| Net income attributable to noncontrolling interest | (11) | | | (1) | | | (5) | |
| Net loss attributable to Bausch Health Companies Inc. | $ | (948) | | | $ | (560) | | | $ | (1,788) | |
| | | | | |
| Basic and diluted loss per share attributable to Bausch Health Companies Inc. | $ | (2.64) | | | $ | (1.58) | | | $ | (5.08) | |
| | | | | |
| Basic and diluted weighted-average common shares | 358.9 | | | 355.0 | | | 352.1 | |
The accompanying notes are an integral part of these consolidated financial statements.
BAUSCH HEALTH COMPANIES INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(in millions)
| | | | | | | | | | | | | | | | | |
| Years Ended December 31, |
| 2021 | | 2020 | | 2019 |
| Net loss | $ | (937) | | | $ | (559) | | | $ | (1,783) | |
| Other comprehensive (loss) income | | | | | |
| Pension and postretirement benefit plan adjustments: | | | | | |
| Net actuarial gain (loss) arising during the year | 24 | | | (15) | | | (8) | |
| Amortization of prior service credit | (4) | | | (4) | | | (4) | |
| Amortization or settlement recognition of net loss | 10 | | | 1 | | | 2 | |
| Income tax benefit (expense) | 1 | | | 2 | | | (2) | |
| Foreign currency impact | (3) | | | — | | | (2) | |
| Net pension and postretirement benefit plan adjustments | 28 | | | (16) | | | (14) | |
| Foreign currency translation adjustment | (158) | | | (29) | | | 64 | |
| Other comprehensive (loss) income | (130) | | | (45) | | | 50 | |
| Comprehensive loss | (1,067) | | | (604) | | | (1,733) | |
| Comprehensive income attributable to noncontrolling interest | (12) | | | (3) | | | (4) | |
| Comprehensive loss attributable to Bausch Health Companies Inc. | $ | (1,079) | | | $ | (607) | | | $ | (1,737) | |
The accompanying notes are an integral part of these consolidated financial statements.
BAUSCH HEALTH COMPANIES INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (DEFICIT)
(in millions)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Bausch Health Companies Inc. Shareholders' Equity | | | | |
| | | Common Shares | | | | | | Accumulated
Other
Comprehensive
Loss | | Bausch Health
Companies Inc.
Shareholders'
Equity (Deficit) | | | | |
| | | Shares | | Amount | | Additional
Paid-In
Capital | | Accumulated
Deficit | | Noncontrolling
Interest | | Total
Equity (Deficit) |
| Balance, January 1, 2019 | | 349.9 | | | $ | 10,121 | | | $ | 413 | | | $ | (5,664) | | | $ | (2,137) | | | $ | 2,733 | | | $ | 82 | | | $ | 2,815 | |
| Common shares issued under share-based compensation plans | | 2.7 | | | 51 | | | (46) | | | — | | | — | | | 5 | | | — | | | 5 | |
| Share-based compensation | | — | | | — | | | 102 | | | — | | | — | | | 102 | | | — | | | 102 | |
| Share-based awards tax withholding | | — | | | — | | | (40) | | | — | | | — | | | (40) | | | — | | | (40) | |
| Noncontrolling interest distributions | | — | | | — | | | — | | | — | | | — | | | — | | | (13) | | | (13) | |
| Net (loss) income | | — | | | — | | | — | | | (1,788) | | | — | | | (1,788) | | | 5 | | | (1,783) | |
| Other comprehensive income (loss) | | — | | | — | | | — | | | — | | | 51 | | | 51 | | | (1) | | | 50 | |
| Balance, December 31, 2019 | | 352.6 | | | 10,172 | | | 429 | | | (7,452) | | | (2,086) | | | 1,063 | | | 73 | | | 1,136 | |
Effect of application of new accounting standard: financial instruments - credit losses | | — | | | — | | | — | | | (1) | | | — | | | (1) | | | — | | | (1) | |
| Common shares issued under share-based compensation plans | | 2.8 | | | 55 | | | (50) | | | — | | | — | | | 5 | | | — | | | 5 | |
| Share-based compensation | | — | | | — | | | 105 | | | — | | | — | | | 105 | | | — | | | 105 | |
| Share-based awards tax withholding | | — | | | — | | | (30) | | | — | | | — | | | (30) | | | — | | | (30) | |
| Noncontrolling interest distributions | | — | | | — | | | — | | | — | | | — | | | — | | | (6) | | | (6) | |
| Net (loss) income | | — | | | — | | | — | | | (560) | | | — | | | (560) | | | 1 | | | (559) | |
| Other comprehensive (loss) income | | — | | | — | | | — | | | — | | | (47) | | | (47) | | | 2 | | | (45) | |
| Balance, December 31, 2020 | | 355.4 | | | 10,227 | | | 454 | | | (8,013) | | | (2,133) | | | 535 | | | 70 | | | 605 | |
| Common shares issued under share-based compensation plans | | 4.0 | | | 90 | | | (68) | | | — | | | — | | | 22 | | | — | | | 22 | |
| Share-based compensation | | — | | | — | | | 128 | | | — | | | — | | | 128 | | | — | | | 128 | |
| Share-based awards tax withholding | | — | | | — | | | (52) | | | — | | | — | | | (52) | | | — | | | (52) | |
| Release of foreign currency translation losses upon disposal of assets held for sale | | — | | | — | | | — | | | — | | | 340 | | | 340 | | | — | | | 340 | |
| Noncontrolling interest distributions | | — | | | — | | | — | | | — | | | — | | | — | | | (10) | | | (10) | |
| Net (loss) income | | — | | | — | | | — | | | (948) | | | — | | | (948) | | | 11 | | | (937) | |
| Other comprehensive (loss) income | | — | | | — | | | — | | | — | | | (131) | | | (131) | | | 1 | | | (130) | |
| Balance, December 31, 2021 | | 359.4 | | | $ | 10,317 | | | $ | 462 | | | $ | (8,961) | | | $ | (1,924) | | | $ | (106) | | | $ | 72 | | | $ | (34) | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
The accompanying notes are an integral part of these consolidated financial statements.
BAUSCH HEALTH COMPANIES INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in millions)
| | | | | | | | | | | | | | | | | | | | |
| | | Years Ended December 31, |
| | | 2021 | | 2020 | | 2019 |
| Cash Flows From Operating Activities | | | | | | |
| Net loss | | $ | (937) | | | $ | (559) | | | $ | (1,783) | |
| Adjustments to reconcile net loss to net cash provided by operating activities: | | | | | | |
| Depreciation and amortization of intangible assets | | 1,552 | | | 1,825 | | | 2,075 | |
| Amortization and write-off of debt discounts and debt issuance costs | | 55 | | | 61 | | | 63 | |
| Asset impairments, including loss on assets held for sale | | 234 | | | 114 | | | 75 | |
| Goodwill impairment | | 469 | | | — | | | — | |
| Acquisition-related contingent consideration | | 11 | | | 48 | | | 12 | |
| Allowances for losses on trade receivables and inventories | | 60 | | | 60 | | | 75 | |
| Deferred income taxes | | (225) | | | (475) | | | (230) | |
| Gain on disposal of assets | | (2) | | | (1) | | | (31) | |
| Additions to accrued legal settlements | | 569 | | | 442 | | | 1,401 | |
| Payments of accrued legal settlements | | (351) | | | (168) | | | (15) | |
| Share-based compensation | | 128 | | | 105 | | | 102 | |
| Foreign exchange loss | | 6 | | | 8 | | | 7 | |
| Gain excluded from hedge effectiveness | | (20) | | | (23) | | | (9) | |
| Loss on extinguishment of debt | | 62 | | | 59 | | | 42 | |
| Payments of contingent consideration adjustments, including accretion | | (16) | | | (1) | | | (1) | |
| Other | | (41) | | | (18) | | | 36 | |
| Changes in operating assets and liabilities: | | | | | | |
| Trade receivables | | (229) | | | 170 | | | 39 | |
| Inventories | | (16) | | | (77) | | | (209) | |
| Prepaid expenses and other current assets | | (4) | | | 12 | | | 1 | |
| Accounts payable, accrued and other liabilities | | 121 | | | (471) | | | (149) | |
| Net cash provided by operating activities | | 1,426 | | | 1,111 | | | 1,501 | |
| Cash Flows From Investing Activities | | | | | | |
| Acquisition of businesses, net of cash acquired | | — | | | — | | | (180) | |
| Acquisition of intangible assets and other assets | | (14) | | | (7) | | | (8) | |
| Purchases of property, plant and equipment | | (269) | | | (302) | | | (270) | |
| Purchases of marketable securities | | (19) | | | (4) | | | (16) | |
| Proceeds from sale of marketable securities | | 15 | | | 8 | | | 10 | |
| Proceeds from sale of assets and businesses, net of costs to sell | | 669 | | | 21 | | | 45 | |
| Settlements from cross-currency swaps | | 27 | | | 23 | | | — | |
| Net cash provided by (used in) investing activities | | 409 | | | (261) | | | (419) | |
| Cash Flows From Financing Activities | | | | | | |
| Issuance of long-term debt, net of discounts | | 2,100 | | | 3,455 | | | 5,960 | |
| Repayments of long-term debt | | (3,440) | | | (5,642) | | | (4,406) | |
| Borrowings of short-term debt | | — | | | 1 | | | 12 | |
| Repayments of short-term debt | | — | | | (1) | | | (12) | |
| Payment of employee withholding taxes related to share-based awards | | (52) | | | (30) | | | (40) | |
| Payments of acquisition-related contingent consideration | | (83) | | | (35) | | | (35) | |
| Payments of financing costs | | (48) | | | (39) | | | (28) | |
| Other | | 10 | | | (3) | | | (8) | |
| Net cash (used in) provided by financing activities | | (1,513) | | | (2,294) | | | 1,443 | |
| Effect of exchange rate changes on cash and cash equivalents | | (19) | | | 16 | | | (4) | |
| Net increase (decrease) in Cash and cash equivalents and Restricted cash and other settlement deposits | | 303 | | | (1,428) | | | 2,521 | |
| Cash and cash equivalents and Restricted cash and other settlement deposits, beginning of year | | 1,816 | | | 3,244 | | | 723 | |
| Cash and cash equivalents and Restricted cash and other settlement deposits, end of year | | $ | 2,119 | | | $ | 1,816 | | | $ | 3,244 | |
| | | | | | |
| Cash and cash equivalents, end of year | | $ | 582 | | | $ | 605 | | | $ | 3,243 | |
| Restricted cash and other settlement deposits, end of year | | 1,537 | | | 1,211 | | | 1 | |
| Cash and cash equivalents and Restricted cash and other settlement deposits, end of year | | $ | 2,119 | | | $ | 1,816 | | | $ | 3,244 | |
The accompanying notes are an integral part of these consolidated financial statements.
BAUSCH HEALTH COMPANIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1.DESCRIPTION OF BUSINESS
Bausch Health Companies Inc. (the “SEC”“Company”), formerly known as Valeant Pharmaceuticals International, Inc., is a multinational, specialty pharmaceutical and medical device company that develops, manufactures and markets a broad range of branded, generic and branded generic pharmaceuticals, over-the-counter (“OTC”) products and medical devices (contact lenses, intraocular lenses, ophthalmic surgical equipment and aesthetics devices) which are marketed directly or indirectly in approximately 100 countries. Effective August 9, 2013, the Company continued from the federal jurisdiction of Canada to the Province of British Columbia, meaning that the Company became a company registered under the laws of the Province of British Columbia as if it had been incorporated under the laws of the Province of British Columbia. As a result of this continuance, the legal domicile of the Company became the request for documentsProvince of British Columbia, the Canada Business Corporations Act ceased to apply to the Company and information receivedthe Company became subject to the British Columbia Business Corporations Act.
2.SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation and Use of Estimates
The Consolidated Financial Statements have been prepared by the Company in United States (“U.S.”) dollars and in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”), applied on a consistent basis. The Consolidated Financial Statements include the accounts of the Company and those of its subsidiaries and any variable interest entities for which the Company is the primary beneficiary. All intercompany transactions and balances have been eliminated.
Separation of the Bausch + Lomb Eye-Health Business and Initial Public Offering of Solta Medical Business
On August 6, 2020, the Company announced its intentions to separate its eye-health business into an independent publicly traded entity from the Autorité des marchés financiersremainder of Bausch Health Companies Inc. (the “AMF”“B+L Separation”). On August 3, 2021, the Company announced its intentions to conduct an initial public offering ("IPO") of its aesthetic medical device business, Global Solta (the Company’s principal securities regulator in Canada)“Solta IPO"). In January 2022, the Company completed the internal organizational design and structure of the new eye-health entity, Bausch + Lomb Corporation ("Bausch + Lomb"), and the pending investigation bynew Global Solta entity, Solta Medical Corporation ("Solta"), as previously announced and aims to launch the California DepartmentB+L IPO and the Solta IPO when financial market conditions are favorable (and subject to receipt of Insurance, a number of pending putative securities class action litigations in the U.S. (including related opt-out actions) and Canada and purported class actions under the federal RICO statuteregulatory, stock exchange and other claims, investigations or proceedings that may be initiated or that may be asserted;
potential additional litigationapprovals). Following the B+L IPO the Company expects to complete the separation of Bausch + Lomb after the expiry of customary lockups related to the B+L IPO and regulatory investigations (and any costs, expenses, useachievement of resources, diversiontargeted debt leverage ratios, subject to the receipt of management timeapplicable shareholder and efforts, liability and damages that may result therefrom), negative publicity and reputational harm on our Company, products and business that may result from the ongoing public scrutiny of our distribution, marketing, pricing, disclosure and accounting practices and from our former relationship with Philidor, including any claims, proceedings, investigations and liabilities we may face as a result of any alleged wrongdoing by Philidor and/or its management and/or employees;
the current scrutiny of our business practices including with respect to pricing (including the investigations by the U.S. Attorney's Offices for the District of Massachusettsother necessary approvals. The B+L Separation and the Southern Districtproposed Solta IPO will establish 3 separate companies that include: (i) a fully integrated eye-health company which will consist of New York,the Company’s Bausch + Lomb Global Vision Care, Global Surgical, Global Consumer and Global Ophthalmic Pharmaceuticals businesses, (ii) a global provider of aesthetic medical devices which will consist of the Company’s Solta business and (iii) a diversified pharmaceutical company which will include the Company’s Salix, International Rx, dentistry, neurology, medical dermatology and generics pharmaceutical businesses. These audited Consolidated Financial Statements do not include any adjustments to give effect to either the B+L Separation or the proposed Solta IPO.
Impacts of COVID-19 Pandemic
The unprecedented nature of the COVID-19 pandemic has, and continues to, adversely impact the global economy. The COVID-19 pandemic and the Statereactions of North Carolina Department of Justice) and any pricing controls or price adjustments that may be sought or imposed on our products as a result thereof;
| |
• | pricing decisions that we have implemented, or may in the future elect to implement, whether as a result of recent scrutiny or otherwise, such as the decision of the Company to take no further price increases on our Nitropress® and Isuprel® products and to implement an enhanced rebate program for such products, our decision on the price of our Siliq™ product, the Patient Access and Pricing Committee’s commitment that the average annual price increase for our branded prescription pharmaceutical products will be set at no greater than single digits and below the 5-year weighted average of the increases within the branded biopharmaceutical industry or any future pricing actions we may take following review by our Patient Access and Pricing Committee (which is responsible for the pricing of our drugs);
|
legislative or policy efforts, including those that may be introduced and passed by the U.S. Congress, designed to reduce patient out-of-pocket costs for medicines, which could result in new mandatory rebates and discounts or other pricing restrictions, controls or regulations (including mandatory price reductions);
ongoing oversight and review of our products and facilities by regulatory and governmental agencies, including periodic audits by the U.S. Food and Drug Administration (the "FDA")governments, private sector participants and the results thereof;public in an effort to contain the spread of the COVID-19 virus and/or address its impacts have had significant direct and indirect effects on businesses and commerce. This includes, but is not limited to, disruption to supply chains, employee base and transactional activity, facility closures and production suspensions.
actions byThe extent to which these events may continue to impact the FDA or other regulatory authorities with respect to our products or facilities;
our substantial debt (and potential additional future indebtedness) and current and future debt service obligations, our ability to reduce our outstanding debt levels and the resulting impact on ourCompany's business, financial condition, cash flows and results of operations;operations, in particular, will depend on future developments which are highly uncertain and many of which are outside the Company's control. Such developments include the availability and effectiveness of vaccines for the COVID-19 virus, COVID-19 vaccine immunization rates, the ultimate geographic spread and duration of the pandemic, the extent and duration of a resurgence of the COVID-19 virus and variant strains thereof, such as the delta and omicron variants, new information concerning the severity of the COVID-19 virus, the effectiveness and intensity of measures to contain the COVID-19 virus and the economic impact of the pandemic and the reactions to it. Such developments, among others, depending on their nature, duration and intensity, could have a significant adverse effect on the Company's business, financial condition, cash flows and results of operations.
To date, the Company has been able to meetcontinue its operations with limited disruptions in supply and manufacturing. Although it is difficult to predict the broad macroeconomic effects that the COVID-19 pandemic will have on industries or individual companies, the Company has assessed the possible effects and outcomes of the pandemic on, among other things, its supply chain, customers and distributors, discounts and rebates, employee base, product sustainability, research and development efforts, product pipeline and consumer demand and currently believes that its estimates are reasonable.
Use of Estimates
In preparing the Company's Consolidated Financial Statements, management is required to make estimates and assumptions. This includes estimates and assumptions regarding the nature, timing and extent of the impacts that the COVID-19 pandemic will have on its operations and cash flows. The estimates and assumptions used by the Company affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Significant estimates made by management include: provisions for product returns, rebates, chargebacks, discounts and allowances and distribution fees paid to certain wholesalers; useful lives of amortizable intangible assets and property, plant and equipment; expected future cash flows used in evaluating intangible assets for impairment, assessing compliance with debt covenants and making going concern assessments; reporting unit fair values for testing goodwill for impairment and allocating goodwill to new reporting unit structure on a relative fair value basis; provisions for loss contingencies; provisions for income taxes, uncertain tax positions and realizability of deferred tax assets; fair value of cross-currency swaps; fair value of foreign currency exchange contracts; and the recognition of the fair value of assets and liabilities acquired in a business combination, including the fair value of contingent consideration. Under certain product manufacturing and supply agreements, management uses information from the Company’s commercialization counterparties to arrive at estimates for future returns, rebates and chargebacks.
On an ongoing basis, management reviews its estimates to ensure that these estimates appropriately reflect changes in the Company’s business and new information as it becomes available. If historical experience and other covenants containedfactors used by management to make these estimates do not reasonably reflect future activity, the Company’s Consolidated Financial Statements could be materially impacted.
Reclassifications
Certain reclassifications have been made to prior year amounts to conform to the current year presentation.
Acquisitions
Acquired businesses are accounted for using the acquisition method of accounting, which requires that assets acquired and liabilities assumed be recorded at fair value, with limited exceptions. Transaction costs and costs to restructure the acquired company are expensed as incurred. The operating results of the acquired business are reflected in our Credit Agreement, indenturesthe Consolidated Financial Statements after the date of acquisition. Acquired in-process research and other currentdevelopment (“IPR&D”) is recognized at fair value and initially characterized as an indefinite-lived intangible asset, irrespective of whether the acquired IPR&D has an alternative future use. If the acquired net assets do not constitute a business, the transaction is accounted for as an asset acquisition and no goodwill is recognized. In an asset acquisition, the amount allocated to acquired IPR&D with no alternative future use is charged to expense at the acquisition date and any future contingent consideration is not recorded until it becomes probable.
Fair Value of Financial Instruments
The estimated fair values of cash and cash equivalents, trade receivables, accounts payable and accrued liabilities approximate their carrying values due to their short maturity periods. The fair value of acquisition-related contingent consideration is based on estimated discounted future cash flows or Monte Carlo Simulation (when appropriate) analyses and assessment of the probability of occurrence of potential future debt agreementsevents.
Fair Value of Derivative Instruments
The accounting for changes in the fair value of a derivative instrument depends on whether the instrument has been designated and the limitations, restrictionsqualifies as part of a hedging relationship and prohibitions such covenants impose or may impose on the way we conduct our business, prohibitionstype of hedging relationship. For derivative instruments designated and qualifying as hedging instruments, the hedging instrument must be designated, based upon the exposure being hedged, as a fair value hedge, cash flow hedge, or a hedge of the foreign currency exposure of a net investment in a foreign operation. For derivative instruments not designated as hedging instruments, the gain or loss is recognized in the Consolidated Statements of Operations during the current period.
The Company’s cross-currency swaps qualified for and had been designated as an accounting hedge of the foreign currency exposure of a net investment in a foreign operation and were remeasured at each reporting date to reflect changes in their
fair values. The fair value was determined via a mark-to-market analysis, using observable (Level 2) inputs. These inputs included: (i) the foreign currency exchange spot rate between the euro and U.S. dollar, (ii) the interest rate yield curves in the euro and U.S. dollar and (iii) the credit risk rating for each applicable counterparty. The net change in fair value of cross-currency swaps is reported as a gain or loss in the Consolidated Statements of Comprehensive Loss as part of Foreign currency translation adjustment to the extent they are effective, and remain in Accumulated other comprehensive loss until either the sale or complete, or substantially complete, liquidation of the subsidiary. No portion of the cross-currency swaps was ineffective. The Company uses the spot method of assessing hedge effectiveness. The Company had elected to amortize amounts excluded from the assessment of effectiveness over the term of its cross-currency swaps as a reduction of Interest expense in the Consolidated Statements of Operations.
The Company uses foreign currency exchange contracts to economically hedge the foreign exchange exposure on incurring additional debt if certain financial covenantsof the Company’s intercompany and third party balances. The Company's foreign currency exchange contracts are remeasured at each reporting date to reflect changes in their fair values determined using forward rates, which are observable market inputs, multiplied by the notional amount. These contracts have not met, limitations onbeen designated as an accounting hedge, and therefore the net change in their fair value is reported as a gain or loss in the Consolidated Statements of Operations as part of Foreign exchange and other.
Cash and Cash Equivalents
Cash and cash equivalents consist of cash in bank accounts and highly liquid investments with maturities of three months or less when purchased.
Concentrations of Credit Risk
Financial instruments that potentially subject the Company to significant concentrations of credit risk consist primarily of cash and cash equivalents, marketable securities, trade receivables, cross-currency swaps and foreign currency exchange contracts.
The Company invests its excess cash in high-quality, money market instruments and term deposits with varying maturities, but typically less than three months.Cash deposited at banks may exceed the amount of insurance provided on such deposits. Generally, these cash deposits may be redeemed upon demand and are maintained with financial institutions with reputable credit and therefore bear minimal credit risk. The Company seeks to mitigate such risks by spreading its risk across multiple counterparties and monitoring the risk profiles of these counterparties.
The Company’s trade receivables primarily represent amounts due from wholesale distributors, retail pharmacies, government entities and group purchasing organizations. Outside of the U.S., concentrations of credit risk with respect to trade receivables, which are typically unsecured, are limited due to the number of customers using the Company’s products, as well as their dispersion across many different geographic regions. The Company performs periodic credit evaluations of customers and does not require collateral. The Company monitors economic conditions, including volatility associated with international economies, and related impacts on the relevant financial markets and its business, especially in light of sovereign credit issues. The credit and economic conditions within Argentina, Brazil, Egypt, Greece, among other members of the European Union, Turkey, Ukraine and Venezuela have been weak in recent years. These conditions have increased, and may continue to increase, the average length of time that it takes to collect on the Company’s trade receivables outstanding in these countries.
As of December 31, 2021, the Company’s 3 largest U.S. wholesaler customers accounted for approximately 44% of net trade receivables. In addition, as of December 31, 2021 and 2020, the Company’s net trade receivable balance from Argentina, Brazil, Egypt, Greece, Serbia, South Africa, Turkey, Ukraine, Venezuela and Vietnam amounted to $78 million and $166 million, respectively, the majority of which is current or less than 90 days past due. The portion of the net trade receivable from these countries that is past due more than 90 days amounted to $2 million, as of December 31, 2021, a portion of which is comprised of public hospitals. Based on an analysis of credit risk, including an analysis of bad debt experience and assessment of historical payment patterns for such customers, the Company has established a reserve covering more than half of the balance past due more than 90 days for such countries. Over the three-year period ended December 31, 2021, the Company has not experienced any material losses from uncollectible accounts in excess of the established reserves.
The Company does not enter into financial instruments for trading or speculative purposes. Further, the Company has a policy of only entering into contracts with parties that have at least an investment grade credit rating. The Company enters into cross-currency swaps and foreign currency exchange contracts with high credit quality financial institutions. The counter-parties to the Company's cross-currency swaps and foreign currency exchange contracts are major financial institutions, and there is no significant concentration of exposure with any one counter-party. To date, no counterparty has failed to meet its obligations to the Company and management believes the risk of loss associated with these contracts is
remote. See Note 5, "FAIR VALUE MEASUREMENTS" for additional debt wedetails regarding the Company's cross-currency swaps and foreign currency exchange contracts.
Allowance for Credit Losses
An allowance is maintained for potential credit losses. The Company estimates the current expected credit loss on its receivables based on various factors, including historical credit loss experience, customer credit worthiness, value of collaterals (if any), and any relevant current and reasonably supportable future economic factors. Additionally, the Company generally estimates the expected credit loss on a pool basis when customers are abledeemed to incur wherehave similar risk characteristics. Trade receivable balances are written off against the allowance when it is deemed probable that the trade receivable will not prohibited,be collected. Trade receivables, net are stated net of certain sales provisions and restrictions on our ability to make certain investmentsthe allowance for credit losses. Allowance for credit losses were $35 million, $39 million and other restricted payments;
any default under the terms$48 million as of our senior notes indentures or Credit AgreementDecember 31, 2021, 2020 and our ability, if any, to cure or obtain waivers of such default;
any delay2019, respectively. The activity in the filingallowance for credit losses for trade receivables for the years 2021, 2020 and 2019 is as follows.
| | | | | | | | | | | | | | | | | |
| (in millions) | 2021 | | 2020 | | 2019 |
| Balance, beginning of period | $ | 39 | | | $ | 48 | | | $ | 47 | |
| Retrospective effect of application of new accounting standard | — | | | 1 | | | — | |
| Provision | (2) | | | 2 | | | 10 | |
| Write-offs | (3) | | | (12) | | | (10) | |
| Recoveries | 2 | | | 3 | | | 1 | |
| Foreign exchange and other | (1) | | | (3) | | | — | |
| Balance, end of period | $ | 35 | | | $ | 39 | | | $ | 48 | |
Inventories
Inventories comprise raw materials, work in process and finished goods, which are valued at the lower of anycost or net realizable value, on a first-in, first-out basis. The cost value for work in process and finished goods inventories includes materials, direct labor and an allocation of overheads.
The Company evaluates the carrying value of inventories on a regular basis, taking into account such factors as historical and anticipated future financial statements or other filingssales compared with quantities on hand, the price the Company expects to obtain for products in their respective markets compared with historical cost and any defaultthe remaining shelf life of goods on hand.
Property, Plant and Equipment
Property, plant and equipment are reported at cost, less accumulated depreciation. Costs incurred on assets under construction are capitalized as construction in progress. Depreciation is calculated using the termsstraight-line method, commencing when the assets become available for productive use, based on the following estimated useful lives:
| | | | | | | | |
| Land improvements | | 15 - 30 years |
| Buildings and improvements | | Up to 40 years |
| Machinery and equipment | | 3 - 20 years |
| Other equipment | | 3 - 10 years |
| Equipment on operating lease | | Up to 5 years |
| Leasehold improvements | | Lesser of term of lease or 10 years |
Intangible Assets
Intangible assets are reported at cost, less accumulated amortization and impairments. Intangible assets with finite lives are amortized over their estimated useful lives. Amortization is calculated primarily using the straight-line method based on the following estimated useful lives:
| | | | | | | | |
| Product brands | | 2 - 20 years |
| Corporate brands | | 9 - 20 years |
| Product rights/patents | | 4 - 15 years |
| Partner relationships | | 7 - 9 years |
| Out-licensed technology and other | | 8 - 9 years |
Divestitures of our senior notes indentures or Credit AgreementProducts
The net proceeds on the divestiture of products and the carrying amount of the related assets is recorded as a gain/loss on sale within Other expense, net. Any contingent payments that are potentially due to the Company as a result of such delays;these divestitures are recorded when realizable.
IPR&D
The fair value of IPR&D acquired through a business combination is capitalized as an indefinite-lived intangible asset until the completion or abandonment of the related research and development activities. When the related research and development is completed, the asset will be assigned a useful life and amortized. Acquired IPR&D assets are tested for impairment at least annually or when triggering events are identified.
The fair value of an acquired IPR&D intangible asset is typically determined using an income approach. This approach starts with a forecast of the net cash flows expected to be generated by the asset over its estimated useful life. The net cash flows reflect the asset’s stage of completion, the probability of technical success, the projected costs to complete, expected market competition and an assessment of the asset’s life-cycle. The net cash flows are then adjusted to present value by applying an appropriate discount rate that reflects the risk factors associated with the expected cash flow streams.
Impairment of Long-Lived Assets
Long-lived assets with finite lives are tested for impairment whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. If indicators of impairment are present, the asset is tested for recoverability by comparing the carrying value of the asset to the related estimated undiscounted future cash flows expected to be derived from the asset, which include the amount and timing of the projected future cash flows. If the expected undiscounted cash flows are less than the carrying value of the asset, then the asset is considered to be impaired and its carrying value is written down to fair value, based on the related estimated discounted future cash flows.
Indefinite-lived intangible assets, which includes acquired IPR&D and the corporate trademark acquired in the acquisition of Bausch & Lomb Holdings Incorporated (the ‘‘B&L Trademark’’), are tested for impairment annually or more frequently if events or changes in circumstances between annual tests indicate that the asset may be impaired. Impairment losses on indefinite-lived intangible assets are recognized based on a comparison of the fair value of the asset to its carrying value.
Goodwill
Goodwill is recorded with the acquisition of a business and is calculated as the difference between the acquisition date fair value of the consideration transferred and the values assigned to the assets acquired and liabilities assumed. Goodwill is not amortized but is tested for impairment at least annually as of October 1st at the reporting unit level. Goodwill impairment is measured as the amount by which a reporting unit's carrying value exceeds its fair value. A reporting unit is the same as, or one level below, an operating segment. An entity is permitted to first assess qualitatively whether it is necessary to perform a quantitative impairment test for any further downgradeof its reporting units. The quantitative impairment test is required only when the Company concludes that it is more likely than not that a reporting unit’s fair value is less than its carrying amount. In evaluating whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount, the Company considers the totality of all relevant events or circumstances that affect the fair value or carrying amount of a reporting unit.
An interim goodwill impairment test in advance of the annual impairment assessment may be required if events occur that indicate an impairment might be present. For example, a substantial decline in the Company’s market capitalization, changes in reportable segments, unexpected adverse business conditions, economic factors and unanticipated competitive activities may signal that an interim impairment test is needed. Accordingly, among other factors, the Company monitors
changes in its share price between annual impairment tests. The Company considers a decline in its share price that corresponds to an overall deterioration in stock market conditions to be less of an indicator of goodwill impairment than a unilateral decline in its share price reflecting adverse changes in its underlying operating performance, cash flows, financial condition and/or liquidity. In the event that the Company’s market capitalization does decline below its book value, the Company would consider the length and severity of the decline and the reason for the decline when assessing whether potential goodwill impairment exists. The Company believes that short-term fluctuations in share prices may not necessarily reflect underlying values.
Debt Discounts and Premiums, Issuance Costs and Deferred Financing Costs
Debt discounts, premiums and issuance costs are presented in the Consolidated Balance Sheets as a direct deduction from or addition to the carrying amount of the related debt and are amortized or accreted, using the effective interest method, as interest expense over the contractual lives of the related credit facilities or notes. Deferred financing costs associated with revolving credit facility arrangements are included in the balances of Prepaid expenses and other current assets and Other non-current assets in the Consolidated Balance Sheets and are amortized as interest expense over the contractual life of the related revolving credit facility.
Foreign Currency Translation
The assets and liabilities of the Company’s foreign operations having a functional currency other than the U.S. dollar are translated into U.S. dollars at the exchange rate prevailing at the balance sheet date, and at the average exchange rate for the reporting period for revenue and expense accounts. The cumulative foreign currency translation adjustment is recorded as a component of Accumulated other comprehensive loss in the Consolidated Balance Sheets.
Foreign currency exchange gains and losses on transactions occurring in a currency other than an operation’s functional currency are recognized as a component of Foreign exchange and other in the Consolidated Statements of Operations.
Revenue Recognition
The Company’s revenues are primarily generated from product sales, primarily in the therapeutic areas of eye-health, gastroenterology ("GI") and dermatology that consist of: (i) branded pharmaceuticals, (ii) generic and branded generic pharmaceuticals, (iii) OTC products and (iv) medical devices (contact lenses, intraocular lenses, ophthalmic surgical equipment and aesthetics devices). Other revenues include alliance and service revenue from the licensing and co-promotion of products and contract service revenue primarily in the areas of dermatology and topical medication. Contract service revenue is derived primarily from contract manufacturing for third parties and is not material. See Note 22, "SEGMENT INFORMATION" for the disaggregation of revenues which depicts how the nature, amount, timing and uncertainty of revenue and cash flows are affected by rating agenciesthe economic factors of each category of customer contracts.
The Company recognizes revenue when the customer obtains control of promised goods or services and in our credit ratings,an amount that reflects the consideration to which the Company expects to be entitled to receive in exchange for those goods or services. To achieve this core principle, the Company applies the five-step revenue model to contracts within its scope: (i) identify the contract(s) with a customer, (ii) identify the performance obligations in the contract, (iii) determine the transaction price, (iv) allocate the transaction price to the performance obligations in the contract and (v) recognize revenue when (or as) the entity satisfies a performance obligation.
Product Sales
A contract with the Company’s customers exists for each product sale. Where a contract with a customer contains more than one performance obligation, the Company allocates the transaction price to each distinct performance obligation based on its relative standalone selling price. The transaction price is adjusted for variable consideration which is discussed below. The Company generally recognizes revenue for product sales at a point in time, when the customer obtains control of the products.
Product Sales Provisions
As is customary in the pharmaceutical industry, gross product sales are subject to a variety of deductions in arriving at reported net product sales. The transaction price for product sales is typically adjusted for variable consideration, which may be in the form of cash discounts, allowances, returns, rebates, chargebacks and distribution fees paid to customers. Provisions for variable consideration are established to reflect the Company’s best estimates of the amount of consideration to which it is entitled based on the terms of the contract. The amount of variable consideration included in the transaction price may be constrained, and is included in the net sales price only to the extent that it is probable that a significant reversal in the amount of the cumulative revenue recognized will not occur in the future period.
Provisions for these deductions are recorded concurrently with the recognition of gross product sales revenue and include cash discounts and allowances, chargebacks, and distribution fees, which are paid to direct customers, as well as rebates and returns, which can be paid to direct and indirect customers. Returns provision balances and volume discounts to direct customers are included in Accrued and other current liabilities. All other provisions related to direct customers are included in Trade receivables, net, while provision balances related to indirect customers are included in Accrued and other current liabilities.
The following table presents the activity and ending balances of the Company’s variable consideration provisions the years 2021 and 2020.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (in millions) | | Discounts
and
Allowances | | Returns | | Rebates | | Chargebacks | | Distribution
Fees | | Total |
| Reserve balance, January 1, 2020 | | $ | 182 | | | $ | 691 | | | $ | 927 | | | $ | 168 | | | $ | 82 | | | $ | 2,050 | |
| Current period provision | | 621 | | | 120 | | | 2,174 | | | 1,925 | | | 196 | | | 5,036 | |
| Payments and credits | | (613) | | | (236) | | | (2,322) | | | (1,909) | | | (193) | | | (5,273) | |
| Reserve balance, December 31, 2020 | | 190 | | | 575 | | | 779 | | | 184 | | | 85 | | | 1,813 | |
| Current period provision | | 625 | | | 131 | | | 2,462 | | | 1,999 | | | 211 | | | 5,428 | |
| Payments and credits | | (593) | | | (224) | | | (2,297) | | | (2,013) | | | (251) | | | (5,378) | |
| Reserve balance, December 31, 2021 | | $ | 222 | | | $ | 482 | | | $ | 944 | | | $ | 170 | | | $ | 45 | | | $ | 1,863 | |
Included in Rebates in the table above are cooperative advertising credits due to customers of approximately $36 million and $32 million as of December 31, 2021 and 2020, respectively, which are reflected as a reduction of Trade accounts receivable, net in the Consolidated Balance Sheets.
The Company continually monitors its variable consideration provisions and evaluates the estimates used as additional information becomes available. Adjustments will be made to these provisions periodically to reflect new facts and circumstances that may indicate that historical experience may not be indicative of current and/or future results. The Company is required to make subjective judgments based primarily on its evaluation of current market conditions and trade inventory levels related to the Company's products. These judgments include the potential impact of the COVID-19 pandemic on, among other things, our abilityunemployment and related changes in customer health insurance levels, customer behaviors during the COVID-19 pandemic and government stimulus bills that focus on ensuring availability and access to raise debtlifesaving drugs during a public health crisis. This evaluation may result in an increase or decrease in the experience rate that is applied to current and future sales, or require an adjustment related to past sales, or both. If the trend in actual amounts of variable consideration varies from the Company’s prior estimates, the Company adjusts these estimates when such trend is believed to be sustainable. At that time, the Company would record the necessary adjustments which would affect net product revenue and earnings reported in the current period. The Company applies this method consistently for contracts with similar characteristics. The following describes the major sources of variable consideration in the Company’s customer arrangements and the costmethodology, estimates and judgments applied to estimate each type of capitalvariable consideration.
Cash Discounts and Allowances
Cash discounts are offered for additional debt issuances;prompt payment and allowances for volume purchases. Provisions for cash discounts and allowances are estimated at the time of sale and recorded as direct reductions to trade receivables and revenue. Management estimates the provisions for cash discounts and allowances based on contractual sales terms with customers, an analysis of unpaid invoices and historical payment experience. Estimated cash discounts and allowances have historically been predictable and less subjective, due to the limited number of assumptions involved, the consistency of historical experience and the fact that these amounts are generally settled within one month of incurring the liability.
any reductions in, or changesReturns
Consistent with industry practice, customers are generally allowed to return a product within a specified period of time before and after its expiration date, excluding European businesses which generally do not provide a right of return. The returns provision is estimated utilizing historical sales and return rates over the period during which customers have a right of return, taking into account available information on competitive products and contract changes. The information utilized to estimate the returns provision includes: (i) historical return and exchange levels, (ii) external data with respect to inventory levels in the wholesale distribution channel, (iii) external data with respect to prescription demand for products, (iv) remaining shelf lives of products at the date of sale and (v) estimated returns liability to be processed by year of sale based on an analysis of lot information related to actual historical returns.
In determining the estimate for returns, management is required to make certain assumptions used in, our forecastsregarding the timing of the introduction of new products and the potential of these products to capture market share. In addition, certain assumptions with respect to the extent and pattern of decline associated with generic competition are necessary. These assumptions are formulated using market data for fiscal year 2018 or beyond, which could leadsimilar products, past experience and other available information. These assumptions are continually reassessed, and changes to among other things: (i) a failure to meet the financial and/or other covenants contained in our Credit Agreement and/or indentures and/or (ii) impairmentestimates and assumptions are made as new information becomes available. A change of 1% in the goodwill associated withestimated return rates would have impacted the Company’s pre-tax earnings by approximately $81 million for the year 2021.
The estimate for returns may be impacted by a number of factors, but the principal factor relates to the inventory levels in the distribution channel. When management becomes aware of an increase in such inventory levels, it considers whether the increase may be temporary or other-than-temporary. Temporary increases in wholesaler inventory levels will not warrant revision to the provision for returns. Other-than-temporary increases in wholesaler inventory levels, however, may be an indication that future product returns could be higher than originally anticipated, and, as a result, estimates for returns may need to be adjusted. Factors that suggest increases in wholesaler inventory levels are temporary include: (i) recently implemented or announced price increases for certain products, (ii) new product launches or expanded indications for existing products and (iii) timing of our reporting units or impairment charges related to certainpurchases by wholesale customers. Conversely, factors that suggest increases in wholesaler inventory levels are other-than-temporary include: (i) declining sales trends based on prescription demand, (ii) introduction of ournew products or other intangible assets, which impairments could be material;
generic competition, (iii) increasing price competition from generic competitors and (iv) changes to the U.S. National Drug Codes (“NDC”) of products. Changes in the assumptions used in connection with our impairment analyses or assessments, which would lead to a change in such impairment analyses and assessments and whichNDC of products could result in an impairmenta period of higher returns related to products with the old NDC, as U.S. customers generally permit only one NDC per product for identification and tracking within their inventory systems.
Over the last several years, the Company increased its focus on maximizing operational efficiencies and continues to take actions to reduce product returns, including but not limited to: (i) monitoring and reducing customer inventory levels, (ii) instituting disciplined pricing policies and (iii) improving contracting. These actions have had the effect of improving sales return experience, primarily related to branded and generic products. Sales return provisions for 2021 and 2020 were $131 million and $120 million, respectively, and includes reductions in variable consideration for sales return provisions related to past sales of approximately $28 million and $38 million, respectively.
Rebates and Chargebacks
Product sales made under governmental and managed-care pricing programs in the goodwill associated with anyU.S. are subject to rebates. The Company participates in state government-managed Medicaid programs, as well as certain other qualifying federal and state government programs whereby rebates are provided to participating government entities. Medicaid rebates are generally billed 45 days to 270 days after the quarter in which the product is dispensed to the Medicaid participant. As a result, the Medicaid rebate reserve includes an estimate of our reporting units outstanding claims for end-customer sales that occurred, but for which the related claim has not been billed and/or impairmentpaid, and an estimate for future claims that will be made when inventory in the distribution channel is sold through to plan participants. The calculation of the Medicaid rebate reserve also requires other estimates, such as estimates of sales mix, to determine which sales are subject to rebates and the amount of such rebates. A change of 1% in the estimated rates used in the Medicaid rebate reserve would have impacted the Company’s pre-tax earnings by approximately $76 million for 2021. Quarterly, the Medicaid rebate reserve is adjusted based on actual claims paid. Due to the delay in billing, adjustments to actual claims paid may incorporate revisions of that reserve for several periods.
Managed Care rebates relate to contractual agreements to sell products to managed care organizations and pharmacy benefit managers at contractual rebate percentages in exchange for volume and/or market share.
Chargebacks relate to contractual agreements to sell products to government agencies, group purchasing organizations and other indirect customers at contractual prices that are lower than the list prices the Company charges related to certain of our productswholesalers. When these group purchasing organizations or other intangible assets;
any additional divestitures of our assets or businesses and our ability to successfully complete any such divestitures on commercially reasonable terms and on a timely basis, orindirect customers purchase products through wholesalers at all,these reduced prices, the wholesaler charges the Company for the difference between the prices they paid the Company and the impactprices at which they sold the products to the indirect customers.
In estimating provisions for rebates and chargebacks, management considers relevant statutes with respect to governmental pricing programs and contractual sales terms with managed-care providers and group purchasing organizations. Management estimates the amount of any such divestituresproduct sales subject to these programs based on our Company, including the reductionhistorical utilization levels. Changes in the sizelevel of utilization of products through private or scopepublic benefit plans and group purchasing organizations will affect the amount of our businessrebates and chargebacks that the Company is obligated to pay. Management continually updates these factors based on new contractual or market share, lossstatutory requirements, and any significant changes in sales trends that may impact the percentage of revenue, any loss on sale, including any resultant write-downsproducts subject to rebates or chargebacks.
The amount of goodwill, or any adverse tax consequences sufferedManaged Care, Medicaid and other rebates and chargebacks has become more significant as a result of anya combination of deeper discounts implemented in each of the last three years, changes in the Company’s product portfolio due to recent acquisitions and increased Medicaid utilization due to expansion of government funding for these programs. Management’s estimate for rebates and chargebacks may be impacted by a number of factors, but the principal factor relates to the level of inventory in the distribution channel.
Rebate provisions are based on factors such divestitures;
our shiftas timing and terms of plans under contract, time to process rebates, product pricing, sales volumes, amount of inventory in focusthe distribution channel and prescription trends. Adjustments to much lower business development activity through acquisitionsactual for the foreseeable futureyears 2021 and 2020 were not material to the Company’s revenues or earnings.
Patient Co-Pay Assistance programs, Consumer Rebates and Loyalty Programs are rebates offered on many of the Company’s products. Patient Co-Pay Assistance Programs are patient discount programs offered in the form of coupon cards or point of sale discounts, with which patients receive certain discounts off their prescription at participating pharmacies, as we focusdefined by the specific product program. An accrual for these programs is established, equal to management’s estimate of the discount, rebate and loyalty incentives attributable to a sale. That estimate is based on reducing our outstanding debt levelshistorical experience and other relevant factors. The accrual is adjusted throughout each quarter based on actual experience and changes in other factors, if any.
Distribution Fees
The Company sells products primarily to wholesalers, and in some instances to large pharmacy chains such as CVS and Walmart. The Company has Distribution Services Agreements ("DSAs") with several large wholesale customers such as McKesson Corporation, AmerisourceBergen Corporation, Cardinal Health, Inc. and McKesson Specialty. Under the DSAs, the wholesalers agree to provide services, and the Company pays the contracted DSA distribution service fees for these services based on product volumes. Additionally, price appreciation credits are generated when the Company increases a product’s wholesaler acquisition cost (“WAC”) under contracts with certain wholesalers. Under such contracts, the Company is entitled to credits from such wholesalers for the impact of that WAC increase on inventory currently on hand at the wholesalers. Such credits are offset against the total distribution service fees paid to each such wholesaler. The variable consideration associated with price appreciation credits is reflected in the transaction price of products sold when it is determined to be probable that a significant reversal will not occur. Included as a resultreduction of current period provisions for Distribution Fees in the table above are price appreciation credits of $17 million and $15 million for the years 2021 and 2020, respectively.
Contract Assets and Contract Liabilities
There are no contract assets for any period presented. Contract liabilities consist of deferred revenue, the balance of which is not material to any period presented.
Sales Commissions
Sales commissions are generally attributed to periods shorter than one year and therefore are expensed when incurred. Sales commissions are included in selling, general and administrative expenses.
Financing Component
The Company has elected not to adjust consideration for the effects of a significant financing component when the period between the transfer of a promised good or service to the customer and when the customer pays for that good or service will be one year or less. The Company's global payment terms are generally between thirty to ninety days.
Leases
The Company leases certain facilities, vehicles and equipment principally under multi-year agreements generally having a lease term of one to twenty years, some of which include termination options and options to extend the lease term from one to five years or on a month-to-month basis. The Company includes options that are reasonably certain to be exercised as part of the restrictions imposed by our Credit Agreementlease term. The Company may negotiate termination clauses in anticipation of changes in market conditions but generally, these termination options are not exercised. Certain lease agreements also include variable payments that restrict us from, among other things, making acquisitionsare dependent on usage or may vary month-to-month such as insurance, taxes and maintenance costs. None of the Company's lease agreements contain material residual value guarantees or material restrictive covenants.
The Company is required to record a right-of-use asset and corresponding lease liability, equal to the present value of the lease payments at the commencement date of each lease. For all asset classes, in determining future lease payments, the Company has elected to aggregate lease components, such as payments for rent, taxes and insurance costs with non-lease components such as maintenance costs, and account for these payments as a single lease component. In limited
circumstances, when the information necessary to determine the rate implicit in a lease is available, the present value of the lease payments is determined using the rate implicit in that lease. If the information necessary to determine the rate implicit in a lease is not available, the Company uses its incremental borrowing rate at the commencement of the lease, which represents the rate of interest that the Company would incur to borrow on a collateralized basis over a similar term.
All leases must be classified as either an aggregate threshold (subjectoperating lease or finance lease. The classification is determined based on whether substantive control has been transferred to certain exceptions)the lessee. The classification governs the pattern of lease expense recognition. For leases classified as operating leases, total lease expense over the term of the lease is equal to the undiscounted payments due in accordance with the lease arrangement. Fixed lease expense is recognized periodically on a straight-line basis over the term of each lease and from incurring debtincludes: (i) imputed interest during the period on the lease liability determined using the effective interest rate method plus (ii) amortization of the right-of-use asset for that period. Amortization of the right-of-use asset during the period is calculated as the difference between the straight-line expense and the imputed interest on the lease liability for that period. Variable lease expense is recognized when the achievement of the specific target is considered probable.
Research and Development Expenses
Costs related to finance such acquisitions, until we achieve a specified leverage ratio;
the uncertaintiesinternal research and development programs, including costs associated with the acquisitiondevelopment of acquired IPR&D, are expensed as goods are delivered or services are performed. Under certain research and launchdevelopment arrangements with third parties, the Company may be required to make payments that are contingent on the achievement of new products, including,specific developmental, regulatory and/or commercial milestones. Milestone payments made to third parties before a product receives regulatory approval, but not limitedafter the milestone is determined to our abilitybe probable, are expensed and included in Research and development expenses. Milestone payments made to providethird parties after regulatory approval is received are capitalized and amortized over the time, resources, expertiseestimated useful life of the approved product.
Amounts due from third parties as reimbursement of development activities conducted under certain research and costs required for the commercial launchdevelopment arrangements are recognized as a reduction of new products, the acceptanceResearch and demand for new pharmaceutical products, and the impact of competitive products and pricing, which could lead to material impairment charges;development expenses.
our ability to retain, motivate and recruit executivesLegal Costs
Legal fees and other key employees, including subsequentcosts related to retention payments being paid outlitigation and other legal proceedings or services are expensed as a result of the reputational challenges we faceincurred and may continue to face;
our ability to implement effective succession planning for our executivesare included in Selling, general and key employees;
factors impacting our ability to achieve anticipated compounding growth in our Ortho Dermatologics business, including approval of pending and pipeline products (and the timing of such approvals), expected geographic expansion, changes in estimates on market potential for dermatology products and continued investment in and success of our sales force;
factors impacting our ability to achieve anticipated revenues for our Significant Seven products, including the approval of pending products in the Significant Seven (and the timing of such approvals), changes in anticipated marketing spend on such products and launch of competing products;
the challenges and difficultiesadministrative expenses. Certain legal costs associated with managing a large complex business, which has,acquisitions are included in the past, grown rapidly;
our ability to compete against companies that are largerAcquisition-related costs and have greater financial, technical and human resources than we do, as well as other competitive factors, such as technological advances achieved, patents obtained and new products introduced by our competitors;
our ability to effectively operate, stabilize and grow our businesses in light of the challenges that the Company currently faces, including with respect to its substantial debt, pending investigations andcertain legal proceedings, scrutiny of our pricing, distribution and other practices, reputational harm and limitations on the way we conduct business imposed by the covenants in our Credit Agreement, indentures and the agreements governing our other indebtedness;
the extent to which our products are reimbursed by government authorities, pharmacy benefit managers ("PBMs") and other third party payors; the impact our distribution, pricing and other practices (including as it relates to our current relationship with Walgreens) may have on the decisions of such government authorities, PBMs and other third party payors to reimburse our products; and the impact of obtaining or maintaining such reimbursement on the price and sales of our products;
the inclusion of our products on formularies or our ability to achieve favorable formulary status, as well as the impact on the price and sales of our products in connection therewith;
our eligibility for benefits under tax treaties and the continued availability of low effective tax rates for the business profits of certain of our subsidiaries;
the actions of our third party partners or service providers of research, development, manufacturing, marketing, distribution or other services, including their compliance with applicable laws and contracts, which actions may be beyond our control or influence, and the impact of such actions on our Company, including the impact to the Company of our former relationship with Philidor and any alleged legal or contractual non-compliance by Philidor;
the riskscosts associated with the international scope of our operations, including our presence in emerging marketsdivestitures, legal settlements and the challenges we face when entering and operating in new and different geographic markets (including the challenges created by new and different regulatory regimes in such countries and the need to comply with applicable anti-bribery and economic sanctions laws and regulations);
adverse global economic conditions and credit markets and foreign currency exchange uncertainty and volatility in the countries in which we do business (such as the current or recent instability in Brazil, Russia, Ukraine, Argentina, Egypt, certain other countries in Africa and the Middle East, the devaluation of the Egyptian pound, and the adverse economic impact and related uncertainty caused by the United Kingdom's decision to leave the European Union (Brexit));
our ability to obtain, maintain and license sufficient intellectual property rights over our products and enforce and defend against challenges to such intellectual property;
the introduction of generic, biosimilar or other competitors of our branded products and other products, including the introduction of products that compete against our products that do not have patent or data exclusivity rights;
if permitted under our Credit Agreement, and to the extent we elect to resume business development activities through acquisitions, our ability to identify, finance, acquire, closeare included in Litigation and integrate acquisition targets successfullyother matters or Net gain on sales of assets within Other expense (income), net, as appropriate. Legal costs expensed are reported net of expected insurance recoveries. A claim for insurance recovery is recognized when realization becomes probable.
Advertising Costs
Advertising costs comprise product samples, print media, promotional materials and television advertising and are expensed on a timely basis;
factors relating to the acquisition and integrationfirst use of the companies, businessesadvertisement. Included in Selling, general and products that have been acquired by the Companyadministrative expenses are advertising costs of $515 million, $451 million and that may in the future be acquired by the Company (if permitted under our Credit Agreement$544 million, for 2021, 2020 and to the extent we elect to resume business development activities through acquisitions), such as the time and resources required to integrate such companies, businesses and products, the difficulties associated with such integrations (including potential disruptions in sales activities and potential challenges with information technology systems integrations), the difficulties and challenges associated with entering into new business areas and new geographic markets, the difficulties, challenges and costs associated with managing and integrating new facilities, equipment and other assets, the risks associated with the acquired companies, businesses and products and our ability to achieve the anticipated benefits and synergies from such acquisitions and integrations, including as a result of cost-rationalization and integration initiatives. Factors impacting the achievement of anticipated benefits and synergies may include greater than expected operating costs, the difficulty in eliminating certain duplicative costs, facilities and functions, and the outcome of many operational and strategic decisions;2019, respectively.
the expense, timing and outcome of pending or future legal and governmental proceedings, arbitrations, investigations, subpoenas, tax and other regulatory audits, reviews and regulatory proceedings against us or relating to us and settlements thereof;
our ability to obtain components, raw materials or finished products supplied by third parties (some of which may be single-sourced) and other manufacturing and related supply difficulties, interruptions and delays;
the disruption of delivery of our products and the routine flow of manufactured goods;
economic factors over which the Company has no control, including changes in inflation, interest rates, foreign currency rates, and the potential effect of such factors on revenues, expenses and resulting margins;
interest rate risks associated with our floating rate debt borrowings;
our ability to effectively distribute our products and the effectiveness and success of our distribution arrangements, including the impact of our arrangements with Walgreens;
the success of our fulfillment arrangements with Walgreens, including market acceptance of, or market reaction to, such arrangements (including by customers, doctors, patients, PBMs, third party payors and governmental agencies), the continued compliance of such arrangements with applicable laws, and our ability to successfully negotiate any improvements to our arrangements with Walgreens;
our ability to secure and maintain third party research, development, manufacturing, marketing or distribution arrangements;
the risk that our products could cause, or be alleged to cause, personal injury and adverse effects, leading to potential lawsuits, product liability claims and damages and/or recalls or withdrawals of products from the market;
the mandatory or voluntary recall or withdrawal of our products from the market and the costs associated therewith;
the availability of, and our ability to obtain and maintain, adequate insurance coverage and/or our ability to cover or insure against the total amount of the claims and liabilities we face, whether through third party insurance or self-insurance;
the difficulty in predicting the expense, timing and outcome within our legal and regulatory environment, including with respect to approvals by the FDA, Health Canada and similar agencies in other countries, legal and regulatory proceedings and settlements thereof, the protection afforded by our patents and other intellectual and proprietary property, successful generic challenges to our products and infringement or alleged infringement of the intellectual property of others;
the results of continuing safety and efficacy studies by industry and government agencies;
the success of preclinical and clinical trials for our drug development pipeline or delays in clinical trials that adversely impact the timely commercialization of our pipeline products, as well as other factors impacting the commercial success of our products, which could lead to material impairment charges;
the results of management reviews of our research and development portfolio (including following the receipt of clinical results or feedback from the FDA or other regulatory authorities), which could result in terminations of specific projects which, in turn, could lead to material impairment charges;
the seasonality of sales of certain of our products;
declines in the pricing and sales volume of certain of our products that are distributed or marketed by third parties, over which we have no or limited control;
compliance by the Company or our third party partners and service providers (over whom we may have limited influence), or the failure of our Company or these third parties to comply, with health care “fraud and abuse” laws and other extensive regulation of our marketing, promotional and business practices (including with respect to pricing), worldwide anti-bribery laws (including the U.S. Foreign Corrupt Practices Act and the Canadian Corruption of Foreign Public Officials Act), worldwide economic sanctions and/or export laws, worldwide environmental laws and regulation and privacy and security regulations;
the impacts of the Patient Protection and Affordable Care Act, as amended by the Health Care and Education Reconciliation Act of 2010 (the “Health Care Reform Act”) and potential amendment thereof and other legislative and regulatory health care reforms in the countries in which we operate, including with respect to recent government inquiries on pricing;
the impact of any changes in or reforms to the legislation, laws, rules, regulation and guidance that apply to the Company and its business and products or the enactment of any new or proposed legislation, laws, rules, regulations or guidance that will impact or apply to the Company or its businesses or products;
the impact of changes in federal laws and policy under consideration by the Trump administration and Congress, including the effect that such changes will have on fiscal and tax policies, the potential revision of all or portions of the Health Care Reform Act, international trade agreements and policies and policy efforts designed to reduce patient out-of-pocket costs for medicines (which could result in new mandatory rebates and discounts or other pricing restrictions);
illegal distribution or sale of counterfeit versions of our products; and
interruptions, breakdowns or breaches in our information technology systems.
Additional information about these factors and about the material factors or assumptions underlying such forward-looking statements may be found elsewhere in this Form 10-K, under Item 1A. "Risk Factors" and in the Company's other filings with the SEC and CSA. When relying on our forward-looking statements to make decisions with respect to the Company, investors and others should carefully consider the foregoing factors and other uncertainties and potential events. These forward-looking statements speak only as of the date made. We undertake no obligation to update or revise any of these forward-looking statements to reflect events or circumstances after the date of this Form 10-K or to reflect actual outcomes, except as required by law. We caution that, as it is not possible to predict or identify all relevant factors that may impact forward-looking statements, the foregoing list of important factors that may affect future results is not exhaustive and should not be considered a complete statement of all potential risks and uncertainties.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Information relating to quantitative and qualitative disclosures about market risk is detailed in Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Quantitative and Qualitative Disclosures About Market Risk” and is incorporated herein by reference.
Item 8. Financial Statements and Supplementary Data
The information required by this Item is contained in the financial statements set forth in Item 15 “Exhibits and Financial Statement Schedules” as part of this Form 10-K and is incorporated herein by reference.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Not applicable.
Item 9A. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
The Company’s management, with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of December 31, 2017.2021. Based on that evaluation, the Company’s Chief Executive Officer and the Company’s Chief Financial Officer have concluded that as of December 31, 2017,2021, the Company’s disclosure controls and procedures were effective to provide reasonable assurance that the information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC'sSEC’s rules and forms, and that such information is accumulated and communicated to management as appropriate to allow timely decisions regarding required disclosure.
Management’s Annual Report on Internal Control Over Financial Reporting
The Company’s management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. The Company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Under the supervision and with the participation of management, including the Company’s Chief Executive Officer and the Company’s Chief Financial Officer, the Company conducted an evaluation of the effectiveness of its internal control over financial reporting as of December 31, 20172021 based on the framework described in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on that evaluation, management has concluded that the Company maintained effective internal control over financial reporting as of December 31, 2017.2021.
The effectiveness of the Company’s internal control over financial reporting as of December 31, 20172021 has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report which appears herein.
Changes in Internal Control over Financial Reporting
There have not been any changes in the Company’s internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the last fiscal quarter of 20172021 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
Item 9B. Other Information
None.
Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections
Not applicable.
PART III
Item 10. Directors, Executive Officers and Corporate Governance
Information required under this Item is incorporated herein by reference from information included in the 20182022 Proxy Statement.
The Board of Directors has adopted a Codecode of Ethicsethics (the "Code of Conduct") that applies to our Chief Executive Officer, Chief Financial Officer, the principal accounting officer, controller, and all vice presidents and above in the finance department of the Company worldwide. A copy of the Code of EthicsConduct can be found as an annex to our Standards of Business Conduct, which is located on our website at: www.valeant.com.www.bauschhealth.com. We intend to satisfy the SEC disclosure requirements regarding amendments to, or waivers from, any provisions of our Code of EthicsConduct on our website.
Item 11. Executive Compensation
Information required under this Item relating to executive compensation is incorporated herein by reference from information included in the 20182022 Proxy Statement.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Information required under this Item relating to securities authorized for issuance under equity compensation plans and to security ownership of certain beneficial owners and management is incorporated herein by reference from information included in the 20182022 Proxy Statement.
Item 13. Certain Relationships and Related Transactions, and Director Independence
Information required under this Item relating to certain relationships and transactions with related parties and about director independence is incorporated herein by reference from information included in the 20182022 Proxy Statement.
Item 14. Principal Accounting Fees and Services
Information required under this Item relating to the fees for professional services rendered by our independent auditors in 20172021 and 20162020 is incorporated herein by reference from information included in the 20182022 Proxy Statement.
PART IV
Item 15. Exhibits and Financial Statement Schedules
| |
(a) | Documents filed as a part of the report: |
| |
(1) | The consolidated financial statements required to be filed in the Annual Report on Form 10-K are listed on page F-1 hereof. |
| |
(2) | Schedule II — Valuation and Qualifying Accounts. |
SCHEDULE II — VALUATION AND QUALIFYING ACCOUNTS(a)Documents filed as a part of the report:
(1)The consolidated financial statements required to be filed in the Annual Report on Form 10-K are listed on page F-1 hereof. |
| | | | | | | | | | | | | | | | | | | | |
| (in millions) | | Balance at Beginning of Year | | Charged to Costs and Expenses | | Charged to Other Accounts | | Deductions | | Balance at End of Year |
| Year ended December 31, 2017 | | | | | | | | | | |
| Allowance for doubtful accounts | | $ | 80 |
| | $ | 33 |
| | $ | 4 |
| | $ | (20 | ) | | $ | 97 |
|
| Deferred tax asset valuation allowance | | $ | 1,857 |
| | $ | 221 |
| | $ | (77 | ) | | $ | — |
| | $ | 2,001 |
|
| Year ended December 31, 2016 | | | | | | | | | | |
| Allowance for doubtful accounts | | $ | 67 |
| | $ | 57 |
| | $ | (22 | ) | | $ | (22 | ) | | $ | 80 |
|
| Deferred tax asset valuation allowance | | $ | 1,367 |
| | $ | 627 |
| | $ | (137 | ) | | $ | — |
| | $ | 1,857 |
|
| Year ended December 31, 2015 | | | | | | | | | | |
| Allowance for doubtful accounts | | $ | 36 |
| | $ | 39 |
| | $ | 6 |
| | $ | (14 | ) | | $ | 67 |
|
| Deferred tax asset valuation allowance | | $ | 859 |
| | $ | 344 |
| | $ | 164 |
| | $ | — |
| | $ | 1,367 |
|
With respect toAll schedules are omitted because they are not applicable or the deferred tax valuation allowance,required information is included in the amounts in 2015, 2016 and 2017 charged to other accounts primarily relates to foreign currency fluctuations on debt.financial statements or notes.
Item 16. Form 10-K Summary
None.
INDEX TO EXHIBITS
|
| | | | | | | |
Exhibit
Number
| | Exhibit Description |
2.13.1 | | Agreement and Plan of Merger, dated as of February 20, 2015, among Valeant Pharmaceuticals International, Inc., Valeant Pharmaceuticals International, Sun Merger Sub, Inc. and Salix Pharmaceuticals, Ltd., originally filed as Exhibit 2.1 to the Company’s Form 8-K filed on February 23, 2015, which is incorporated by reference herein. †† |
2.2 | | Amendment No. 1 to the Agreement and Plan of Merger, dated as of March 16, 2015, among Valeant Pharmaceuticals International, Inc., Valeant Pharmaceuticals International, Sun Merger Sub, Inc. and Salix Pharmaceuticals, Ltd., originally filed as Exhibit 2.1 to the Company’s Current Report on Form 8-K filed on March 16, 2015, which is incorporated by reference herein. |
3.1 | | |
| 3.2 | | |
| 3.3 | | |
4.13.4 | | Indenture, datedNotice of Articles of Bausch Health Companies Inc., as of September 28, 2010, among Valeant Pharmaceuticals International, Valeant Pharmaceuticals International, Inc., The Bank of New York Mellon Trust Company, N.A., as trustee, and the guarantors named therein, governing the 7.00% Senior Notes due 2020,July 16, 2018, originally filed as Exhibit 4.13.1 to the Company's Current Report on Form 8-K filed on October 1, 2010,July 16, 2018, which is incorporated by reference herein. |
4.23.5 | | Indenture, datedArticles of Bausch Health Companies Inc., as of February 8, 2011, by and among Valeant Pharmaceuticals International, Valeant Pharmaceuticals International, Inc., the guarantors named therein and The Bank of New York Mellon Trust Company, N.A., as trustee, governing the 6.75% Senior Notes due 2021,July 13, 2018, originally filed as Exhibit 4.13.2 to the Company's Current Report on Form 8-K filed on February 9, 2011,July 16, 2018, which is incorporated by reference herein. |
4.3 | | Indenture, dated as of March 8, 2011, by and among Valeant Pharmaceuticals International, Valeant Pharmaceuticals International, Inc., the guarantors named therein and The Bank of New York Mellon Trust Company, N.A., as trustee, governing the 7.25% Senior Notes due 2022, originally filed as Exhibit 4.1 to the Company's Current Report on Form 8-K filed on March 10, 2011, which is incorporated by reference herein. |
4.4 | | |
4.5 | | Supplemental Indenture to the VPI Escrow Corp Indenture, dated as of October 4, 2012, by and among Valeant Pharmaceuticals International, Valeant Pharmaceuticals International, Inc., the guarantors named therein and The Bank of New York Mellon Trust Company, N.A., as trustee governing the 2020 Senior Notes, originally filed as Exhibit 4.2 to the Company's Current Report on Form 8-K filed on October 9, 2012, which is incorporated by reference herein. |
4.6 | | |
4.7 | | Supplemental Indenture to the VPII Escrow Corp Indenture, dated as of July 12, 2013, among Valeant Pharmaceuticals International, Inc., the guarantors named therein and the Bank of New York Mellon Trust Company, N.A., as trustee, governing the 2021 Senior Notes, originally filed as Exhibit 4.2 to the Company’s Current Report on Form 8-K filed on July 12, 2013, which is incorporated by reference herein. |
4.8 | | Indenture, dated as of December 2, 2013, between Valeant Pharmaceuticals International, Inc., the guarantors named therein and the Bank of New York Mellon Trust Company, N.A., as trustee, governing the 5.625% Senior Notes due 2021, originally filed as Exhibit 4.1 to the Company's Current Report on Form 8-K filed on December 2, 2013, which is incorporated by reference herein. |
4.9 | | Indenture, dated as of January 30, 2015, between Valeant Pharmaceuticals International, Inc., the guarantors named therein and the Bank of New York Mellon Trust Company, N.A., as trustee, governing the 5.50% Senior Notes due 2023, originally filed as Exhibit 4.1 to the Company's Current Report on Form 8-K filed on January 30, 2015, which is incorporated by reference herein. |
|
| | |
4.10 | | Indenture, dated as of March 27, 2015 (the “VRX Escrow Corp Indenture”), between VRX Escrow Corp., the Bank of New York Mellon Trust Company, N.A., as trustee, registrar and US paying agent, and The Bank of New York Mellon, acting through its London branch, as the Euro paying agent, governing the 5.375% Senior Notes due 2020 (the “2020 Notes”), the 5.875% Senior Notes due 2023 (the “May 2023 Notes”), the 4.50%4.500% Senior Notes due 2023 (the “Euro Notes”) and the 6.125% Senior Notes due 2025 (the “2025 Notes” and together with the 2020 Notes, the May 2023 Notes and the Euro Notes, the “Notes”), originally filed as Exhibit 4.1 to the Company’s Current Report on Form 8-K filed on March 27, 2015, which is incorporated by reference herein. |
4.114.2 | | First Supplemental Indenture to the VRX Escrow Corp Indenture, dated as of March 27, 2015, between Valeant Pharmaceuticals International, Inc., the guarantors named therein and the Bank of New York Mellon Trust Company, N.A., as trustee, governing the Notes, originally filed as Exhibit 4.2 to the Company's Current Report on Form 8-K filed on March 27, 2015, which is incorporated by reference herein. |
4.124.3 | | Indenture, dated as of March 21, 2017, by and among Valeant Pharmaceuticals International, Inc., the guarantors party thereto, The Bank of New York Mellon, as trustee and the notes collateral agents party thereto, governing the 6.50%6.500% Senior Secured Notes due 2022 and the 7.00%7.000% Senior Secured Notes due 2024, originally filed as Exhibit 4.1 to the Company’s Current Report on Form 8-K filed on March 21, 2017, which is incorporated by reference herein. |
4.134.4 | | Indenture, dated as of October 17, 2017, by and among Valeant Pharmaceuticals International, Inc., the guarantors party thereto, The Bank of New York Mellon, as trustee and the notes collateral agents party thereto, governing the 5.50%5.500% Senior Secured Notes due 2025, originally filed as Exhibit 4.1 to the Company’s Current Report on Form 8-K filed on October 17, 2017, which is incorporated by reference herein. |
4.144.5 | | Indenture, dated as of December 18, 2017, by and among Valeant Pharmaceuticals International, Inc., the guarantors party thereto and The Bank of New York Mellon, as trustee, governing the 9.00%9.000% Senior Notes due 2025, originally filed as Exhibit 4.1 to the Company’s Current Report on Form 8-K filed on December 18, 2017, which is incorporated by reference herein. |
10.14.6 | | Indenture, dated as of March 26, 2018, by and among Valeant Pharmaceuticals International, Valeant Pharmaceuticals International, Inc. 2014 Omnibus Incentive Plan (the “2014 Omnibus Incentive Plan”), the other guarantors party thereto and The Bank of New York Mellon, as approved bytrustee, governing the shareholders on May 20, 2014,9.250% Senior Secured Notes due 2026, originally filed as Exhibit B4.1 to the Company’s Current Report on Form 8-K filed on March 27, 2018, which is incorporated by reference herein. |
| 4.7 | | Indenture, dated as of June 1, 2018, by and among Valeant Pharmaceuticals International, Valeant Pharmaceuticals international, Inc., the other guarantors party thereto and The Bank of New York Mellon, as trustee, governing the 8.500% Senior Secured Notes due 2027, originally filed as Exhibit 4.1 to the Company’s Current Report on Form 8-K filed on June 1, 2018, which is incorporated by reference herein. |
| 4.8 | | Indenture, dated as of March 8, 2019, by and among Bausch Health Companies Inc., the guarantors named therein, The Bank of New York Mellon Trust Company, N.A., as trustee, and the notes collateral agents party thereto, governing the 5.750% Senior Secured Notes due 2027, originally filed as Exhibit 4.1 to the Company’s Current Report on Form 8-K filed on March 8, 2019, which is incorporated by reference herein. |
| 4.9 | | Indenture, dated as of May 23, 2019, by and among Bausch Health Companies Inc., the guarantors named therein and The Bank of New York Mellon Trust Company, N.A., as trustee, governing the 7.000% Senior Notes due 2028 and the 7.250% Senior Notes due 2029, originally filed as Exhibit 4.1 to the Company’s Current Report on Form 8-K filed on May 24, 2019, which is incorporated by reference herein. |
| 4.10 | | Indenture, dated as of December 30, 2019, by and among Bausch Health Companies Inc., the guarantors named therein and The Bank of New York Mellon Trust Company, N.A., as trustee, governing the 5.000% Senior Notes due 2028 and the 5.250% Senior Notes due 2030, originally filed as Exhibit 4.1 to the Company’s Current Report on Form 8-K filed on December 30, 2019, which is incorporated by reference herein. |
| | | | | | | | |
| 4.11 | | Indenture, dated as of May 26, 2020, by and among Bausch Health Companies Inc., the guarantors named therein and The Bank of New York Mellon Trust Company, N.A., as trustee, governing the 6.250% Senior Notes due 2029, originally filed as Exhibit 4.1 to the Company’s Current Report on Form 8-K filed on May 26, 2020, which is incorporated by reference herein. |
| 4.12 | | Indenture, dated as of December 3, 2020, by and among Bausch Health Companies Inc., the guarantors named therein and The Bank of New York Mellon, N.A., as trustee, governing the 5.000% Senior Notes due 2029 and the 5.250% Senior Notes due 2031, originally filed as Exhibit 4.1 to the Company’s Current Report on Form 8-K filed on December 3, 2020, which is incorporated by reference herein. |
| 4.13 | | Indenture, dated as of June 8, 2021, by and among Bausch Health Companies Inc., the guarantors named therein and The Bank of New York Mellon, N.A., as trustee, governing the 4.875% Senior Notes due 2028, originally filed as Exhibit 4.1 to the Company’s Current Report on Form 8-K filed on June 8, 2021, which is incorporated by reference herein. |
| 4.14 | | Indenture, dated as of February 10, 2022, by and among Bausch Health Companies Inc., the guarantors named therein, The Bank of New York Mellon, N.A., as trustee and the notes collateral agents party thereto, governing the 6.125% Senior Secured Notes due 2027, originally filed as Exhibit 4.1 to the Company’s Current Report on Form 8-K filed on February 10, 2022, which is incorporated by reference herein. |
| 4.15 | | |
| 4.16 | | |
| 10.1 | | |
| 10.2 | | |
10.2*10.3 | | |
10.3*10.4 | | |
10.4* | |
10.5* | |
10.6* | |
10.7 | |
10.810.5 | | |
| 10.6 | | |
10.910.7 | | |
10.10 | |
10.11* | |
10.12*10.8 | | |
10.13*10.9 | | |
10.1410.10 | | |
| | | | | | | | |
| 10.11 | | |
| 10.12 | | Valeant Pharmaceuticals International, Inc. 2011 Omnibus Incentive Plan (the “2011 Omnibus Incentive Plan”), effective as of April 6, 2011, as amended on and approved by the shareholders on May 16, 2011, originally filed as Annex A to the Company's Management Proxy Circular and Proxy Statement on Schedule 14A filed with the Securities and Exchange Commission on April 14, 2011, as amended by the Supplement dated May 10, 2011 to the Company's Management Proxy Circular and Proxy Statement filed with the Securities and Exchange Commission on May 10, 2011, which is incorporated by reference herein.† |
|
| 10.13 | | |
10.15 | |
10.1610.14 | | |
| 10.15 | | |
10.1710.16 | | |
10.1810.17 | | |
10.1910.18 | | |
| 10.19 | | Employment Agreement, dated July 8, 2016, between Valeant Pharmaceuticals International, Inc. and Christina Ackermann, dated July 8, 2016, originally filed as Exhibit 10.23 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2016 filed on March 1, 2017, which is incorporated by reference herein.† |
| 10.20* | | |
| 10.21 | | |
| 10.22 | | |
| 10.23 | | |
10.21*10.24 | | |
10.22 | | First Incremental Amendment, No. 16, dated as of November 21, 2017,27, 2018, to the ThirdFourth Amended and Restated Credit and Guaranty Agreement, by and among Bausch Health Companies Inc., Valeant Pharmaceuticals International, certain subsidiaries of Bausch Health Companies Inc., as guarantors, each of the guarantors party thereto,financial institutions named therein as lenders and issuing banks and Barclays Bank PLC, as administrative agent and the other persons party thereto,Administrative Agent, originally filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on November 21, 2017,27, 2018, which is incorporated by reference herein and which First Incremental Amendment No. 16 appends, as an exhibit thereto, a copy of such ThirdFourth Amended and Restated Credit and Guaranty Agreement, as amended to date. |
10.2310.25 | | Amended and Restated Supply Agreement dated June 24, 1996 ("Supply Agreement") between Alfa Wassermann S.p.A. andOctober 25, 2018 among Salix Pharmaceuticals, Ltd.Inc., Valeant Pharmaceuticals Ireland Limited, Valeant Pharmaceuticals Luxembourg s.à r.l. and Alfasigma S.p.A., originally filed as Exhibit 10.1310.25 to the Company’s Annual Report on Form S-1 of Salix Pharmaceuticals, Ltd. (“Salix”)10-K for the fiscal year ended December 31, 2018 filed on August 15, 1997,February 20, 2019, which is incorporated by reference herein. |
10.2410.26 | | |
10.25 | | |
10.26 | | |
10.27 | | |
10.2810.27 | | |
| | | | | | | | |
| 10.28 | | |
| 10.29 | | |
| 10.30 | | LicenseRestatement Agreement, dated as of June 22, 2006 between Cedars-Sinai Medical Center1, 2018, among Valeant Pharmaceuticals International, Inc., Valeant Pharmaceuticals International, certain subsidiaries of Valeant Pharmaceuticals International, Inc. as guarantors, each of the financial institutions named therein as lenders and Salixissuing banks and Barclays Bank PLC, as Administrative Agent, originally filed as Exhibit 10.1 to the Company's Current Report on Form 8-K filed on June 1, 2018, which is incorporated by reference herein. |
| 10.31 | | |
| 10.32 | | |
| 10.33 | | |
| 21.1* | | |
| 23.1* | | |
| 31.1* | | |
| 31.2* | | |
| 32.1* | | |
| 32.2* | | |
*101.INS101.INS* | | Inline XBRL Instance Document |
*101.SCH101.SCH* | | Inline XBRL Taxonomy Extension Schema Document |
|
| 101.CAL* | | |
*101.CAL | Inline XBRL Taxonomy Extension Calculation Linkbase Document |
*101.LAB101.LAB* | | Inline XBRL Taxonomy Extension Label Linkbase Document |
*101.PRE101.PRE* | | Inline XBRL Taxonomy Extension Presentation Linkbase Document |
*101.DEF101.DEF* | | Inline XBRL Taxonomy Extension Definition Linkbase Document |
| 104* | | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) |
* Filed herewith.
| |
† | Management contract or compensatory plan or arrangement. |
| |
†† | One or more exhibits or schedules to this exhibit have been omitted pursuant to Item 601(b)(2) of Regulation S-K. We undertake to furnish supplementally a copy of any omitted exhibit or schedule to the SEC upon request. |
† Management contract or compensatory plan or arrangement.
†† One or more exhibits or schedules to this exhibit have been omitted pursuant to Item 601(a)(5) or Item 601(b)(2) of Regulation S-K. We undertake to furnish supplementally a copy of any omitted exhibit or schedule to the SEC upon request.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| | | | | | | | | | | | | | | | | |
| | | BAUSCH HEALTH COMPANIES INC.
(Registrant) |
| | | | | |
| Date: | February 23, 2022 | | VALEANT PHARMACEUTICALS INTERNATIONAL, INC.
(Registrant)
|
| By: | | | | | |
Date: | February 28, 2018 | | By: | /s/ JOSEPH C. PAPA | |
| | | | | |
| | | | Joseph C. Papa Chief Executive Officer (Principal Executive Officer and Chairman of the Board) |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
|
| | | | | | | | | | | | | | | | |
| Signature | | Title | | Date |
| | | | | |
| /s/ JOSEPH C. PAPA Joseph C. Papa
| | Chief Executive Officer and Chairman of the Board | | February 28, 201823, 2022 |
| /s/ PAUL S. HERENDEENSAM ELDESSOUKY Paul S. HerendeenSam Eldessouky
| | Executive Vice President and Chief Financial Officer (Principal Financial Officer) | | February 28, 201823, 2022 |
| /s/ SAM ELDESSOUKYFREDERICK J. MUNSCH Sam EldessoukyFrederick J. Munsch
| | Senior Vice President, Controller and Chief Accounting Officer (Principal Accounting Officer) | | February 28, 201823, 2022 |
| /s/ RICHARD U. DESCHUTTER Richard U. DeSchutter | | Director | | February 28, 201823, 2022 |
| /s/ FREDRIC N. ESHELMANBRETT ICAHN Fredric N. EshelmanBrett Icahn
| | Director | | February 28, 201823, 2022 |
| /s/ D. ROBERT HALE
D. Robert Hale
| | Director | | February 28, 2018 |
| /s/ ARGERIS N. KARABELAS Argeris N. Karabelas | | Director | | February 28, 201823, 2022 |
| /s/ SARAH B. KAVANAGH Sarah B. Kavanagh | | Director | | February 28, 201823, 2022 |
| /s/ STEVEN D. MILLER Steven D. Miller | | Director | | February 23, 2022 |
| /s/ JOHN A. PAULSON John A. Paulson | | Director | | February 28, 201823, 2022 |
| /s/ ROBERT N. POWER Robert N. Power | | Director | | February 28, 201823, 2022 |
| /s/ RUSSEL C. ROBERTSON Russel C. Robertson | | Director | | February 28, 201823, 2022 |
| /s/ THOMAS W. ROSS, SR. Thomas W. Ross, Sr. | | Director | | February 28, 201823, 2022 |
| /s/ ANDREW C. VON ESCHENBACH Andrew C. von Eschenbach | | Director | | February 23, 2022 |
| /s/ AMY B. WECHSLER Amy B. Wechsler | | Director | | February 28, 201823, 2022 |
VALEANT PHARMACEUTICALS INTERNATIONAL,
BAUSCH HEALTH COMPANIES INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
| | | | | | | | |
| | Page |
| | Page |
| Report of Management on Financial Statements | | |
| Report of Independent Registered Public Accounting Firm (PCAOB ID 238) | | |
Consolidated Balance Sheets as of December 31, 20172021 and 20162020 | | |
Consolidated Statements of Operations for the years ended December 31, 2017, 20162021, 2020 and 20152019 | | |
Consolidated Statements of Comprehensive Income (Loss)Loss for the years ended December 31, 2017, 20162021, 2020 and 20152019 | | |
Consolidated Statements of Shareholders’ Equity (Deficit) for the years ended December 31, 2017, 20162021, 2020 and 20152019 | | |
Consolidated Statements of Cash Flows for the years ended December 31, 2017, 20162021, 2020 and 20152019 | | |
| Notes to Consolidated Financial Statements | | |
REPORT OF MANAGEMENT ON FINANCIAL STATEMENTS
The Company’s management is responsible for preparing the accompanying consolidated financial statements in conformity with United States generally accepted accounting principles (“U.S. GAAP”). In preparing these consolidated financial statements, management selects appropriate accounting policies and uses its judgment and best estimates to report events and transactions as they occur. Management has determined such amounts on a reasonable basis in order to ensure that the consolidated financial statements are presented fairly, in all material respects. Financial information included throughout this Annual Report is prepared on a basis consistent with that of the accompanying consolidated financial statements.
PricewaterhouseCoopers LLP has been engaged by the Company to audit the consolidated financial statements.
The Board of Directors is responsible for ensuring that management fulfills its responsibility for financial reporting and is ultimately responsible for reviewing and approving the consolidated financial statements. The Board of Directors carries out this responsibility principally through its Audit and Risk Committee. The members of the Audit and Risk Committee are outside Directors. The Audit and Risk Committee considers, for review by the Board of Directors and approval by the shareholders, the engagement or reappointment of the external auditors. PricewaterhouseCoopers LLP has full and free access to the Audit and Risk Committee.
|
| | | | | | | |
| /s/ JOSEPH C. PAPA | | /s/ PAUL S. HERENDEENSAM ELDESSOUKY |
Joseph C. Papa
Chief Executive Officer
| | Paul S. Herendeen
Sam Eldessouky
Executive Vice President and
Chief Financial Officer
|
February 28, 201823, 2022
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of Valeant Pharmaceuticals International,Bausch Health Companies Inc.
Opinions on the Financial Statements and Internal Control over Financial Reporting
We have audited the accompanying consolidated balance sheets of Valeant Pharmaceuticals International,Bausch Health Companies Inc. and its subsidiaries (the "Company"“Company”) as of December 31, 20172021 and 2016,2020, and the related consolidated statements of operations, of comprehensive income (loss), shareholders’loss, of shareholders' equity (deficit) and of cash flows for each of the three years in the period ended December 31, 2017,2021, including the related notes and schedule of valuation and qualifying accounts for each of the three years in the period ended December 31, 2017 appearing under Item 15(a)(2) (collectively referred to as the “consolidated financial statements”). We also have audited the Company's internal control over financial reporting as of December 31, 2017,2021, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 20172021 and 2016,2020, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 20172021 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2017 ,2021, based on criteria established in Internal Control - Integrated Framework (2013) issued by the COSO.
Basis for Opinions
The Company's management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in Management’s Annual Report on Internal Control overOver Financial Reporting appearing under Item 9A. Our responsibility is to express opinions on the Company’s consolidated financial statements and on the Company's internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ("PCAOB")(PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.
Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the audit committee and that (i) relate to accounts or disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
Medicaid Rebates and Sales Returns Allowances
As described in Note 2 to the consolidated financial statements, gross product sales are subject to a variety of deductions in arriving at reported net product sales. The transaction price for product sales is typically adjusted for variable consideration, which may be in the form of cash discounts, allowances, returns, rebates, chargebacks and distribution fees paid to customers. The provisions for these deductions are recorded concurrently with the recognition of gross product sales revenue as a reduction in revenue. The variable consideration provisions, either recognized within accrued and other current liabilities or as a reduction of trade receivables, included $482 million related to returns allowances and $944 million related to rebates, including Medicaid rebates as of December 31, 2021. For certain rebate programs, such as Medicaid, provisions recognized by management are based on the terms of state government-managed programs, estimates of outstanding and future claims for end-customer sales and the sales mix. As disclosed by management, for sales returns, management estimates provisions utilizing existing return policies with customers, historical return and exchange levels, external data with respect to inventory levels in the wholesale distribution channel, external data with respect to prescription demand for products, remaining shelf lives of products at the date of sale, and estimated returns liability to be processed by year of sale based on an analysis of lot information related to actual historical returns.
The principal considerations for our determination that performing procedures relating to Medicaid rebates and sales returns allowances is a critical audit matter are the significant judgment by management when developing the estimate of Medicaid rebates and allowances for sales returns as the estimates are based on assumptions developed using terms of state government-managed Medicaid programs, existing return policies with customers, and projected estimated outstanding and future claims for end-customer sales. This in turn led to a high degree of auditor judgment, subjectivity, and effort in performing procedures and evaluating audit evidence relating to these assumptions.
Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included testing the effectiveness of controls relating to provisions for Medicaid rebates and allowances for sales returns, including controls over the assumptions used to estimate these rebates and allowances. These procedures also included, among others (i) developing an independent estimate of Medicaid rebates by utilizing third-party information on inventory levels in the distribution channel, the terms of the specific Medicaid rebate programs, and the historical trends of actual Medicaid rebate claims paid, adjusted for price and projected market conditions, (ii) comparing the independent estimate for these Medicaid rebates to management’s estimates, (iii) evaluating management's process for developing the estimate of the allowance for sales returns and the reasonableness of management’s assumptions related to existing return policies, (iv) evaluating management's assumptions related to existing return policies involved comparing to historical trends and considering whether these assumptions were consistent with evidence obtained in other areas of the audit, (v) evaluating the appropriateness of the method for estimating the allowance for sales returns and testing the completeness and accuracy of underlying data used in the model, and (vi) testing Medicaid rebate and sales returns claims processed by the Company, including evaluating those claims for consistency with the contractual terms of the Company’s arrangements and policies.
Finite-Lived Intangible Assets Impairment Assessment
As described in Notes 2 and 8 to the consolidated financial statements, the Company’s consolidated finite-lived net intangible assets balance was $5,250 million as of December 31, 2021, which consists of product and corporate brands, product rights/patents, partner relationships and technology and other assets. Finite-lived intangible assets are tested for impairment whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. If indicators of impairment are present, the asset is tested for recoverability by comparing the carrying value of the asset to the related estimated undiscounted future cash flows expected to be derived from the asset, which include the amount and timing of the projected future cash flows.
The principal considerations for our determination that performing procedures relating to the finite-lived intangible assets impairment assessment is a critical audit matter are the significant judgment by management in the identification of events that suggest an asset group might not be recoverable and in developing the assumptions used in the impairment testing assessment.
This in turn led to a high degree of auditor judgment, subjectivity, and effort in performing procedures and evaluating audit evidence related to management’s undiscounted future cash flow projections.
Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included testing the effectiveness of controls relating to management’s finite-lived intangible assets impairment assessment, including controls over the development of assumptions used to estimate recoverability and controls over the identification of events that suggest an asset group might not be recoverable. These procedures also included, among others (i) testing management’s process for identifying potential impairment events and determining the recoverability of the intangible assets, (ii) evaluating the appropriateness of the undiscounted cash flow model used in the impairment testing assessment, (iii) testing the completeness and accuracy of underlying data used in the model, and (iv) evaluating the reasonableness of the significant assumptions used by management related to the undiscounted future cash flow projections. Evaluating the reasonableness of management's assumptions for undiscounted future cash flow projections involved evaluating whether the assumptions used by management were reasonable considering the current and past performance of the asset group and whether these assumptions were consistent with evidence obtained in other areas of the audit.
Goodwill Impairment Assessments – Ortho Dermatologics Reporting Unit
As described in Note 2 and 8 to the consolidated financial statements, the Company’s consolidated goodwill balance was $12,457 million as of December 31, 2021, and the goodwill associated with the Ortho Dermatologics segment was $798 million, inclusive of a goodwill impairment of $469 million. The Ortho Dermatologics segment consists of the Ortho Dermatologics and Global Solta reporting units. Goodwill is not amortized but is tested for impairment at least annually as of October 1st at the reporting unit level. An interim goodwill impairment test in advance of the annual impairment assessment may be required if events occur that indicate an impairment might be present. Where the qualitative assessment suggested that it was more likely than not that the fair value of a reporting unit was less than its carrying amount, a quantitative fair value test was performed for that reporting unit. Goodwill impairment is measured by the amount the carrying value exceeds the fair value. Fair value of each reporting unit is estimated by management using a discounted cash flow model. During the quarter ended March 31, 2021, the Company revised its long-term forecasts for the Ortho Dermatologics reporting unit and thus Management conducted an interim quantitative fair value test for this reporting unit and recognized a goodwill impairment of $469 million. Management also conducted its annual goodwill impairment test on October 1, 2021 and determined that there was no additional impairment of goodwill. Management’s discounted cash flow model relies on assumptions regarding revenue growth rates, gross profit, projected working capital needs, selling, general and administrative expenses, research and development expenses, capital expenditures, income tax rates, discount rates and terminal growth rates.
The principal considerations for our determination that performing procedures relating to the goodwill impairment assessments of the Ortho Dermatologics reporting unit is a critical audit matter are the significant judgment by management when developing the fair value estimates of the reporting unit. This in turn led to a high degree of auditor judgment, subjectivity, and effort in performing procedures and evaluating management’s significant assumptions related to revenue growth rates, gross profit, discount rates, and terminal growth rates. Also, the audit effort involved the use of professionals with specialized skill and knowledge.
Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included testing the effectiveness of controls relating to management’s goodwill impairment assessments, including controls over the valuation of the Company’s Ortho Dermatologics reporting unit. These procedures also included, among others (i) testing management’s process for developing the fair value estimates of the Ortho Dermatologics reporting unit, (ii) evaluating the appropriateness of the discounted cash flow models, (iii) testing the completeness and accuracy of underlying data used in the models, and (iv) evaluating the reasonableness of the significant assumptions used by management related to the revenue growth rates, gross profit, discount rates, and terminal growth rates. Evaluating management’s assumptions related to revenue growth rates and gross profit involved evaluating whether the assumptions used by management were reasonable considering (i) the current and past performance of the reporting unit, (ii) the consistency with external market and industry data, and (iii) whether these assumptions were consistent with evidence obtained in other areas of the audit. Professionals with specialized skill and knowledge were used to assist in the evaluation of the Company’s discounted cash flow models and discount rate and terminal growth rate assumptions.
/s/ PricewaterhouseCoopers LLP
Florham Park, New Jersey
February 28, 2018
23, 2022
We have served as the Company’s auditor since 2012.
VALEANT PHARMACEUTICALS INTERNATIONAL,
BAUSCH HEALTH COMPANIES INC.
CONSOLIDATED BALANCE SHEETS
(in millions, except share amounts)
| | | | | December 31, | | | December 31, |
| | | 2017 | | 2016 | | | 2021 | | 2020 |
| Assets | | | | | Assets | | | | |
| Current assets: | | | | | Current assets: | | | | |
| Cash and cash equivalents | | $ | 720 |
| | $ | 542 |
| Cash and cash equivalents | | $ | 582 | | | $ | 605 | |
| Restricted cash | | 77 |
| | — |
| |
| Restricted cash and other settlement deposits | | Restricted cash and other settlement deposits | | 1,537 | | | 1,211 | |
| Trade receivables, net | | 2,130 |
| | 2,517 |
| Trade receivables, net | | 1,775 | | | 1,577 | |
| Inventories, net | | 1,048 |
| | 1,061 |
| Inventories, net | | 993 | | | 1,094 | |
| Current assets held for sale | | — |
| | 261 |
| |
| Prepaid expenses and other current assets | | 771 |
| | 696 |
| Prepaid expenses and other current assets | | 720 | | | 855 | |
| Total current assets | | 4,746 |
| | 5,077 |
| Total current assets | | 5,607 | | | 5,342 | |
| Property, plant and equipment, net | | 1,403 |
| | 1,312 |
| Property, plant and equipment, net | | 1,598 | | | 1,567 | |
| Intangible assets, net | | 15,211 |
| | 18,884 |
| Intangible assets, net | | 6,948 | | | 8,445 | |
| Goodwill | | 15,593 |
| | 15,794 |
| Goodwill | | 12,457 | | | 13,044 | |
| Deferred tax assets, net | | 433 |
| | 146 |
| Deferred tax assets, net | | 2,252 | | | 2,137 | |
| Non-current assets held for sale | | 12 |
| | 2,132 |
| |
| Other non-current assets | | 99 |
| | 184 |
| Other non-current assets | | 340 | | | 664 | |
| Total assets | | $ | 37,497 |
| | $ | 43,529 |
| Total assets | | $ | 29,202 | | | $ | 31,199 | |
| Liabilities | | | | | Liabilities | | | | |
| Current liabilities: | | | | | Current liabilities: | | |
| Accounts payable | | $ | 365 |
| | $ | 324 |
| Accounts payable | | $ | 407 | | | $ | 337 | |
| Accrued and other current liabilities | | 3,694 |
| | 3,227 |
| Accrued and other current liabilities | | 4,791 | | | 4,576 | |
| Current liabilities held for sale | | — |
| | 57 |
| |
| Current portion of long-term debt and other | | 209 |
| | 1 |
| |
| Total current liabilities | | 4,268 |
| | 3,609 |
| Total current liabilities | | 5,198 | | | 4,913 | |
| Acquisition-related contingent consideration | | 344 |
| | 840 |
| Acquisition-related contingent consideration | | 202 | | | 216 | |
| Non-current portion of long-term debt | | 25,235 |
| | 29,845 |
| Non-current portion of long-term debt | | 22,654 | | | 23,925 | |
| Deferred tax liabilities, net | | 1,180 |
| | 5,434 |
| Deferred tax liabilities, net | | 529 | | | 528 | |
| Non-current liabilities held for sale | | — |
| | 57 |
| |
| Other non-current liabilities | | 526 |
| | 486 |
| Other non-current liabilities | | 653 | | | 1,012 | |
| Total liabilities | | 31,553 |
| | 40,271 |
| Total liabilities | | 29,236 | | | 30,594 | |
| Commitments and contingencies (Notes 21 and 22) | |
| |
| |
| Commitments and contingencies (Notes 20 and 21) | | Commitments and contingencies (Notes 20 and 21) | | 0 | | 0 |
| Equity | | | | | Equity | | | | |
| Common shares, no par value, unlimited shares authorized, 348,708,567 and 347,821,606 issued and outstanding at December 31, 2017 and 2016, respectively | | 10,090 |
| | 10,038 |
| |
| Common shares, no par value, unlimited shares authorized, 359,405,748 and 355,422,347 issued and outstanding at December 31, 2021 and 2020, respectively | | Common shares, no par value, unlimited shares authorized, 359,405,748 and 355,422,347 issued and outstanding at December 31, 2021 and 2020, respectively | | 10,317 | | | 10,227 | |
| Additional paid-in capital | | 380 |
| | 351 |
| Additional paid-in capital | | 462 | | | 454 | |
| Accumulated deficit | | (2,725 | ) | | (5,129 | ) | Accumulated deficit | | (8,961) | | | (8,013) | |
| Accumulated other comprehensive loss | | (1,896 | ) | | (2,108 | ) | Accumulated other comprehensive loss | | (1,924) | | | (2,133) | |
| Total Valeant Pharmaceuticals International, Inc. shareholders’ equity | | 5,849 |
| | 3,152 |
| |
| Total Bausch Health Companies Inc. shareholders’ (deficit) equity | | Total Bausch Health Companies Inc. shareholders’ (deficit) equity | | (106) | | | 535 | |
| Noncontrolling interest | | 95 |
| | 106 |
| Noncontrolling interest | | 72 | | | 70 | |
| Total equity | | 5,944 |
| | 3,258 |
| |
| Total liabilities and equity | | $ | 37,497 |
| | $ | 43,529 |
| |
| Total (deficit) equity | | Total (deficit) equity | | (34) | | | 605 | |
| Total liabilities and (deficit) equity | | Total liabilities and (deficit) equity | | $ | 29,202 | | | $ | 31,199 | |
On behalf of the Board:
|
| | | | | | | |
| /s/ JOSEPH C. PAPA | | /s/ RUSSEL C. ROBERTSON |
| Joseph C. Papa | | Russel C. Robertson |
| Chief Executive Officer | | Chairperson, Audit and Risk Committee |
The accompanying notes are an integral part of these consolidated financial statements.
VALEANT PHARMACEUTICALS INTERNATIONAL,
BAUSCH HEALTH COMPANIES INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in millions, except per share amounts)
|
| | | | | | | | | | | | |
| | | Years Ended December 31, |
| | | 2017 | | 2016 | | 2015 |
| Revenues | | | | | | |
| Product sales | | $ | 8,595 |
| | $ | 9,536 |
| | $ | 10,292 |
|
| Other revenues | | 129 |
| | 138 |
| | 155 |
|
| | | 8,724 |
| | 9,674 |
| | 10,447 |
|
| Expenses | | | | | | |
Cost of goods sold (exclusive of amortization and impairments
of intangible assets) | | 2,506 |
| | 2,572 |
| | 2,532 |
|
| Cost of other revenues | | 42 |
| | 39 |
| | 53 |
|
| Selling, general and administrative | | 2,582 |
| | 2,810 |
| | 2,700 |
|
| Research and development | | 361 |
| | 421 |
| | 334 |
|
| Amortization of intangible assets | | 2,690 |
| | 2,673 |
| | 2,257 |
|
| Goodwill impairments | | 312 |
| | 1,077 |
| | — |
|
| Asset impairments | | 714 |
| | 422 |
| | 304 |
|
| Restructuring and integration costs | | 52 |
| | 132 |
| | 362 |
|
| Acquired in-process research and development costs | | 5 |
| | 34 |
| | 106 |
|
| Acquisition-related contingent consideration | | (289 | ) | | (13 | ) | | (23 | ) |
| Other (income) expense, net | | (353 | ) | | 73 |
| | 295 |
|
| | | 8,622 |
| | 10,240 |
| | 8,920 |
|
| Operating income (loss) | | 102 |
| | (566 | ) | | 1,527 |
|
| Interest income | | 12 |
| | 8 |
| | 4 |
|
| Interest expense | | (1,840 | ) | | (1,836 | ) | | (1,563 | ) |
| Loss on extinguishment of debt | | (122 | ) | | — |
| | (20 | ) |
| Foreign exchange and other | | 107 |
| | (41 | ) | | (103 | ) |
| Loss before (benefit from) provision for income taxes |
| (1,741 | ) |
| (2,435 | ) |
| (155 | ) |
| (Benefit from) provision for income taxes | | (4,145 | ) | | (27 | ) | | 133 |
|
| Net income (loss) | | 2,404 |
|
| (2,408 | ) |
| (288 | ) |
| Less: Net income attributable to noncontrolling interest | | — |
| | 1 |
| | 4 |
|
| Net income (loss) attributable to Valeant Pharmaceuticals International, Inc. |
| $ | 2,404 |
|
| $ | (2,409 | ) |
| $ | (292 | ) |
| Earnings (loss) per share attributable to Valeant Pharmaceuticals International, Inc. | | | | | | |
| Basic | | $ | 6.86 |
| | $ | (6.94 | ) | | $ | (0.85 | ) |
| Diluted | | $ | 6.83 |
| | $ | (6.94 | ) | | $ | (0.85 | ) |
| | | | | | | |
| Weighted-average common shares | | | | | | |
| Basic | | 350.2 |
| | 347.3 |
| | 342.7 |
|
| Diluted | | 351.8 |
| | 347.3 |
| | 342.7 |
|
| | | | | | | | | | | | | | | | | |
| | Years Ended December 31, |
| | 2021 | | 2020 | | 2019 |
| Revenues | | | | | |
| Product sales | $ | 8,342 | | | $ | 7,924 | | | $ | 8,489 | |
| Other revenues | 92 | | | 103 | | | 112 | |
| 8,434 | | | 8,027 | | | 8,601 | |
| Expenses | | | | | |
| Cost of goods sold (excluding amortization and impairments of intangible assets) | 2,361 | | | 2,202 | | | 2,297 | |
| Cost of other revenues | 33 | | | 47 | | | 53 | |
| Selling, general and administrative | 2,624 | | | 2,367 | | | 2,554 | |
| Research and development | 465 | | | 452 | | | 471 | |
| Amortization of intangible assets | 1,375 | | | 1,645 | | | 1,897 | |
| Goodwill impairments | 469 | | | — | | | — | |
| Asset impairments, including loss on assets held for sale | 234 | | | 114 | | | 75 | |
| Restructuring, integration, separation and IPO costs | 50 | | | 22 | | | 31 | |
| Other expense, net | 373 | | | 502 | | | 1,426 | |
| 7,984 | | | 7,351 | | | 8,804 | |
| Operating income (loss) | 450 | | | 676 | | | (203) | |
| Interest income | 7 | | | 13 | | | 12 | |
| Interest expense | (1,426) | | | (1,534) | | | (1,612) | |
| Loss on extinguishment of debt | (62) | | | (59) | | | (42) | |
| Foreign exchange and other | 7 | | | (30) | | | 8 | |
| Loss before benefit from income taxes | (1,024) | | | (934) | | | (1,837) | |
| Benefit from income taxes | 87 | | | 375 | | | 54 | |
| Net loss | (937) | | | (559) | | | (1,783) | |
| Net income attributable to noncontrolling interest | (11) | | | (1) | | | (5) | |
| Net loss attributable to Bausch Health Companies Inc. | $ | (948) | | | $ | (560) | | | $ | (1,788) | |
| | | | | |
| Basic and diluted loss per share attributable to Bausch Health Companies Inc. | $ | (2.64) | | | $ | (1.58) | | | $ | (5.08) | |
| | | | | |
| Basic and diluted weighted-average common shares | 358.9 | | | 355.0 | | | 352.1 | |
The accompanying notes are an integral part of these consolidated financial statements.
VALEANT PHARMACEUTICALS INTERNATIONAL,
BAUSCH HEALTH COMPANIES INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)LOSS
(in millions)
|
| | | | | | | | | | | |
| | Years Ended December 31, |
| | 2017 | | 2016 | | 2015 |
| Net income (loss) | $ | 2,404 |
| | $ | (2,408 | ) | | $ | (288 | ) |
| Other comprehensive income (loss) | | | | | |
| Foreign currency translation adjustment | 202 |
| | (548 | ) | | (647 | ) |
| Net unrealized holding loss on sale of assets and businesses: | | | | | |
| Arising in period | (26 | ) | | — |
| | — |
|
| Reclassification to net income (loss) | 26 |
| | — |
| | — |
|
| | 202 |
| | (548 | ) | | (647 | ) |
| Pension and postretirement benefit plan adjustments: | | | | | |
| Newly established prior service credit | — |
| | 6 |
| | — |
|
| Net actuarial gain (loss) arising during the year | 20 |
| | (32 | ) | | 21 |
|
| Amortization of prior service credit | (4 | ) | | (3 | ) | | (3 | ) |
| Amortization or settlement recognition of net gain | 2 |
| | 1 |
| | 3 |
|
| Income tax (expense) benefit | (4 | ) | | 4 |
| | (3 | ) |
| Currency impact | 1 |
| | 1 |
| | (1 | ) |
| Net pension and postretirement benefit plan adjustments | 15 |
| | (23 | ) | | 17 |
|
| Other comprehensive income (loss) | 217 |
| | (571 | ) | | (630 | ) |
| Comprehensive income (loss) | 2,621 |
| | (2,979 | ) | | (918 | ) |
| Less: Comprehensive income (loss) attributable to noncontrolling interest | 4 |
| | (4 | ) | | — |
|
| Comprehensive income (loss) attributable to Valeant Pharmaceuticals International, Inc. | $ | 2,617 |
| | $ | (2,975 | ) | | $ | (918 | ) |
| | | | | | | | | | | | | | | | | |
| Years Ended December 31, |
| 2021 | | 2020 | | 2019 |
| Net loss | $ | (937) | | | $ | (559) | | | $ | (1,783) | |
| Other comprehensive (loss) income | | | | | |
| Pension and postretirement benefit plan adjustments: | | | | | |
| Net actuarial gain (loss) arising during the year | 24 | | | (15) | | | (8) | |
| Amortization of prior service credit | (4) | | | (4) | | | (4) | |
| Amortization or settlement recognition of net loss | 10 | | | 1 | | | 2 | |
| Income tax benefit (expense) | 1 | | | 2 | | | (2) | |
| Foreign currency impact | (3) | | | — | | | (2) | |
| Net pension and postretirement benefit plan adjustments | 28 | | | (16) | | | (14) | |
| Foreign currency translation adjustment | (158) | | | (29) | | | 64 | |
| Other comprehensive (loss) income | (130) | | | (45) | | | 50 | |
| Comprehensive loss | (1,067) | | | (604) | | | (1,733) | |
| Comprehensive income attributable to noncontrolling interest | (12) | | | (3) | | | (4) | |
| Comprehensive loss attributable to Bausch Health Companies Inc. | $ | (1,079) | | | $ | (607) | | | $ | (1,737) | |
The accompanying notes are an integral part of these consolidated financial statements.
VALEANT PHARMACEUTICALS INTERNATIONAL,
BAUSCH HEALTH COMPANIES INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (DEFICIT)
(in millions)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Bausch Health Companies Inc. Shareholders' Equity | | | | |
| | | Common Shares | | | | | | Accumulated
Other
Comprehensive
Loss | | Bausch Health
Companies Inc.
Shareholders'
Equity (Deficit) | | | | |
| | | Shares | | Amount | | Additional
Paid-In
Capital | | Accumulated
Deficit | | Noncontrolling
Interest | | Total
Equity (Deficit) |
| Balance, January 1, 2019 | | 349.9 | | | $ | 10,121 | | | $ | 413 | | | $ | (5,664) | | | $ | (2,137) | | | $ | 2,733 | | | $ | 82 | | | $ | 2,815 | |
| Common shares issued under share-based compensation plans | | 2.7 | | | 51 | | | (46) | | | — | | | — | | | 5 | | | — | | | 5 | |
| Share-based compensation | | — | | | — | | | 102 | | | — | | | — | | | 102 | | | — | | | 102 | |
| Share-based awards tax withholding | | — | | | — | | | (40) | | | — | | | — | | | (40) | | | — | | | (40) | |
| Noncontrolling interest distributions | | — | | | — | | | — | | | — | | | — | | | — | | | (13) | | | (13) | |
| Net (loss) income | | — | | | — | | | — | | | (1,788) | | | — | | | (1,788) | | | 5 | | | (1,783) | |
| Other comprehensive income (loss) | | — | | | — | | | — | | | — | | | 51 | | | 51 | | | (1) | | | 50 | |
| Balance, December 31, 2019 | | 352.6 | | | 10,172 | | | 429 | | | (7,452) | | | (2,086) | | | 1,063 | | | 73 | | | 1,136 | |
Effect of application of new accounting standard: financial instruments - credit losses | | — | | | — | | | — | | | (1) | | | — | | | (1) | | | — | | | (1) | |
| Common shares issued under share-based compensation plans | | 2.8 | | | 55 | | | (50) | | | — | | | — | | | 5 | | | — | | | 5 | |
| Share-based compensation | | — | | | — | | | 105 | | | — | | | — | | | 105 | | | — | | | 105 | |
| Share-based awards tax withholding | | — | | | — | | | (30) | | | — | | | — | | | (30) | | | — | | | (30) | |
| Noncontrolling interest distributions | | — | | | — | | | — | | | — | | | — | | | — | | | (6) | | | (6) | |
| Net (loss) income | | — | | | — | | | — | | | (560) | | | — | | | (560) | | | 1 | | | (559) | |
| Other comprehensive (loss) income | | — | | | — | | | — | | | — | | | (47) | | | (47) | | | 2 | | | (45) | |
| Balance, December 31, 2020 | | 355.4 | | | 10,227 | | | 454 | | | (8,013) | | | (2,133) | | | 535 | | | 70 | | | 605 | |
| Common shares issued under share-based compensation plans | | 4.0 | | | 90 | | | (68) | | | — | | | — | | | 22 | | | — | | | 22 | |
| Share-based compensation | | — | | | — | | | 128 | | | — | | | — | | | 128 | | | — | | | 128 | |
| Share-based awards tax withholding | | — | | | — | | | (52) | | | — | | | — | | | (52) | | | — | | | (52) | |
| Release of foreign currency translation losses upon disposal of assets held for sale | | — | | | — | | | — | | | — | | | 340 | | | 340 | | | — | | | 340 | |
| Noncontrolling interest distributions | | — | | | — | | | — | | | — | | | — | | | — | | | (10) | | | (10) | |
| Net (loss) income | | — | | | — | | | — | | | (948) | | | — | | | (948) | | | 11 | | | (937) | |
| Other comprehensive (loss) income | | — | | | — | | | — | | | — | | | (131) | | | (131) | | | 1 | | | (130) | |
| Balance, December 31, 2021 | | 359.4 | | | $ | 10,317 | | | $ | 462 | | | $ | (8,961) | | | $ | (1,924) | | | $ | (106) | | | $ | 72 | | | $ | (34) | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Valeant Pharmaceuticals International, Inc. Shareholders | | | | |
| | | Common Shares | | | | | | Accumulated Other Comprehensive Loss | | Valeant Pharmaceuticals International, Inc. Shareholders' Equity | | | | |
| | | Shares | | Amount | | Additional Paid-In Capital | | Accumulated Deficit | | Noncontrolling Interest | | Total Equity |
| Balance, January 1, 2015 | | 334.4 |
| | $ | 8,349 |
| | $ | 244 |
| | $ | (2,398 | ) | | $ | (916 | ) | | $ | 5,279 |
| | $ | 122 |
| | $ | 5,401 |
|
| Issuance of common shares | | 7.5 |
| | 1,482 |
| | — |
| | — |
| | — |
| | 1,482 |
| | — |
| | 1,482 |
|
| Common shares issued under share-based compensation plans | | 1.4 |
| | 78 |
| | (48 | ) | | — |
| | — |
| | 30 |
| | — |
| | 30 |
|
Repurchases of common shares (Note 13) | | (0.4 | ) | | (12 | ) | | — |
| | (60 | ) | | — |
| | (72 | ) | | — |
| | (72 | ) |
| Share-based compensation | | — |
| | — |
| | 140 |
| | — |
| | — |
| | 140 |
| | — |
| | 140 |
|
| Employee withholding taxes related to share-based awards | | — |
| | — |
| | (88 | ) | | — |
| | — |
| | (88 | ) | | — |
| | (88 | ) |
| Excess tax benefits from share-based compensation | | — |
| | — |
| | 57 |
| | — |
| | — |
| | 57 |
| | — |
| | 57 |
|
| Noncontrolling interest from business combinations | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 5 |
| | 5 |
|
| Noncontrolling interest distributions | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (8 | ) | | (8 | ) |
| Net loss | | — |
| | — |
| | — |
| | (292 | ) | | — |
| | (292 | ) | | 4 |
| | (288 | ) |
| Other comprehensive loss | | — |
| | — |
| | — |
| | — |
| | (626 | ) | | (626 | ) | | (4 | ) | | (630 | ) |
| Balance, December 31, 2015 | | 342.9 |
| | 9,897 |
| | 305 |
| | (2,750 | ) | | (1,542 | ) | | 5,910 |
| | 119 |
| | 6,029 |
|
| Effect of retrospective application of a new accounting standard (see Note 2) | | — |
| | — |
| | — |
| | 30 |
| | — |
| | 30 |
| | — |
| | 30 |
|
| Common shares issued under share-based compensation plans | | 4.9 |
| | 141 |
| | (108 | ) | | — |
| | — |
| | 33 |
| | — |
| | 33 |
|
| Share-based compensation | | — |
| | — |
| | 165 |
| | — |
| | — |
| | 165 |
| | — |
| | 165 |
|
| Employee withholding taxes related to share-based awards | | — |
| | — |
| | (11 | ) | | — |
| | — |
| | (11 | ) | | — |
| | (11 | ) |
| Noncontrolling interest distributions | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (9 | ) | | (9 | ) |
| Net loss | | — |
| | — |
| | — |
| | (2,409 | ) | | — |
| | (2,409 | ) | | 1 |
| | (2,408 | ) |
| Other comprehensive loss | | — |
| | — |
| | — |
| | — |
| | (566 | ) | | (566 | ) | | (5 | ) | | (571 | ) |
| Balance, December 31, 2016 | | 347.8 |
| | 10,038 |
| | 351 |
| | (5,129 | ) | | (2,108 | ) | | 3,152 |
| | 106 |
| | 3,258 |
|
| Common shares issued under share-based compensation plans | | 0.9 |
| | 52 |
| | (52 | ) | | — |
| | — |
| | — |
| | — |
| | — |
|
| Share-based compensation | | — |
| | — |
| | 87 |
| | — |
| | — |
| | 87 |
| | — |
| | 87 |
|
| Employee withholding taxes related to share-based awards | | — |
| | — |
| | (4 | ) | | — |
| | — |
| | (4 | ) | | — |
| | (4 | ) |
| Acquisition of noncontrolling interest | | — |
| | — |
| | (2 | ) | | — |
| | (1 | ) | | (3 | ) | | (6 | ) | | (9 | ) |
| Noncontrolling interest distributions | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (9 | ) | | (9 | ) |
| Net income | | — |
| | — |
| | — |
| | 2,404 |
| | — |
| | 2,404 |
| | — |
| | 2,404 |
|
| Other comprehensive income | | — |
| | — |
| | — |
| | — |
| | 213 |
| | 213 |
| | 4 |
| | 217 |
|
| Balance, December 31, 2017 | | 348.7 |
| | $ | 10,090 |
| | $ | 380 |
| | $ | (2,725 | ) | | $ | (1,896 | ) | | $ | 5,849 |
| | $ | 95 |
| | $ | 5,944 |
|
The accompanying notes are an integral part of these consolidated financial statements.
VALEANT PHARMACEUTICALS INTERNATIONAL,
BAUSCH HEALTH COMPANIES INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
| | | | | Years Ended December 31, | | | Years Ended December 31, |
| | | 2017 | | 2016 | | 2015 | | | 2021 | | 2020 | | 2019 |
| Cash Flows From Operating Activities | | | | | | | Cash Flows From Operating Activities | | | | | | |
| Net income (loss) | | $ | 2,404 |
| | $ | (2,408 | ) | | $ | (288 | ) | |
| Adjustments to reconcile net income (loss) to net cash provided by operating activities: | | | | | | | |
| Net loss | | Net loss | | $ | (937) | | | $ | (559) | | | $ | (1,783) | |
| Adjustments to reconcile net loss to net cash provided by operating activities: | | Adjustments to reconcile net loss to net cash provided by operating activities: | | | | | | |
| Depreciation and amortization of intangible assets | | 2,858 |
| | 2,866 |
| | 2,467 |
| Depreciation and amortization of intangible assets | | 1,552 | | | 1,825 | | | 2,075 | |
| Amortization and write-off of debt discounts and debt issuance costs | | 151 |
| | 118 |
| | 145 |
| Amortization and write-off of debt discounts and debt issuance costs | | 55 | | | 61 | | | 63 | |
| Asset impairments | | 714 |
| | 422 |
| | 304 |
| |
| Acquisition accounting adjustment on inventory sold | | — |
| | 38 |
| | 134 |
| |
| Asset impairments, including loss on assets held for sale | | Asset impairments, including loss on assets held for sale | | 234 | | | 114 | | | 75 | |
| Goodwill impairment | | Goodwill impairment | | 469 | | | — | | | — | |
| Acquisition-related contingent consideration | | (289 | ) | | (13 | ) | | (23 | ) | Acquisition-related contingent consideration | | 11 | | | 48 | | | 12 | |
| Allowances for losses on trade receivables and inventories | | 119 |
| | 174 |
| | 115 |
| Allowances for losses on trade receivables and inventories | | 60 | | | 60 | | | 75 | |
| Deferred income taxes | | (4,386 | ) | | (236 | ) | | (160 | ) | Deferred income taxes | | (225) | | | (475) | | | (230) | |
| (Gain) loss on disposal of assets and businesses | | (579 | ) | | (8 | ) | | 5 |
| |
| Gain on disposal of assets | | Gain on disposal of assets | | (2) | | | (1) | | | (31) | |
| Additions to accrued legal settlements | | 226 |
| | 59 |
| | 37 |
| Additions to accrued legal settlements | | 569 | | | 442 | | | 1,401 | |
| Insurance proceeds for legal settlement | | 60 |
| | — |
| | — |
| |
| Payments of accrued legal settlements | | (221 | ) | | (69 | ) | | (33 | ) | Payments of accrued legal settlements | | (351) | | | (168) | | | (15) | |
| Goodwill impairment | | 312 |
| | 1,077 |
| | — |
| |
| Share-based compensation | | 87 |
| | 165 |
| | 140 |
| Share-based compensation | | 128 | | | 105 | | | 102 | |
| Foreign exchange (gain) loss | | (106 | ) | | 14 |
| | 95 |
| |
| Foreign exchange loss | | Foreign exchange loss | | 6 | | | 8 | | | 7 | |
| Gain excluded from hedge effectiveness | | Gain excluded from hedge effectiveness | | (20) | | | (23) | | | (9) | |
| Loss on extinguishment of debt | | 122 |
| | — |
| | 20 |
| Loss on extinguishment of debt | | 62 | | | 59 | | | 42 | |
| Payments of contingent consideration adjustments, including accretion | | Payments of contingent consideration adjustments, including accretion | | (16) | | | (1) | | | (1) | |
| Other | | (26 | ) | | (2 | ) | | (33 | ) | Other | | (41) | | | (18) | | | 36 | |
| Changes in operating assets and liabilities: | | | | | | | Changes in operating assets and liabilities: | | | | | | |
| Trade receivables | | 417 |
| | (34 | ) | | (626 | ) | Trade receivables | | (229) | | | 170 | | | 39 | |
| Inventories | | 7 |
| | (164 | ) | | (276 | ) | Inventories | | (16) | | | (77) | | | (209) | |
| Prepaid expenses and other current assets | | 33 |
| | 232 |
| | (91 | ) | Prepaid expenses and other current assets | | (4) | | | 12 | | | 1 | |
| Accounts payable, accrued and other liabilities | | 387 |
| | (144 | ) | | 325 |
| Accounts payable, accrued and other liabilities | | 121 | | | (471) | | | (149) | |
| Net cash provided by operating activities | | 2,290 |
| | 2,087 |
| | 2,257 |
| Net cash provided by operating activities | | 1,426 | | | 1,111 | | | 1,501 | |
| Cash Flows From Investing Activities | | | | | | | Cash Flows From Investing Activities | | | | | | |
| Acquisition of businesses, net of cash acquired | | — |
| | (19 | ) | | (15,458 | ) | Acquisition of businesses, net of cash acquired | | — | | | — | | | (180) | |
| Acquisition of intangible assets and other assets | | (165 | ) | | (56 | ) | | (68 | ) | Acquisition of intangible assets and other assets | | (14) | | | (7) | | | (8) | |
| Purchases of property, plant and equipment | | (171 | ) | | (235 | ) | | (235 | ) | Purchases of property, plant and equipment | | (269) | | | (302) | | | (270) | |
| Purchases of marketable securities | | (7 | ) | | (1 | ) | | (49 | ) | Purchases of marketable securities | | (19) | | | (4) | | | (16) | |
| Proceeds from sale of marketable securities | | 2 |
| | 17 |
| | 67 |
| Proceeds from sale of marketable securities | | 15 | | | 8 | | | 10 | |
| Proceeds from sale of assets and businesses, net of costs to sell | | 3,253 |
| | 199 |
| | 13 |
| Proceeds from sale of assets and businesses, net of costs to sell | | 669 | | | 21 | | | 45 | |
| Reduction of cash due to deconsolidation | | — |
| | (30 | ) | | — |
| |
| Net settlement of assumed derivative contracts | | — |
| | — |
| | 184 |
| |
| Other | | (25 | ) | | — |
| | (31 | ) | |
| Settlements from cross-currency swaps | | Settlements from cross-currency swaps | | 27 | | | 23 | | | — | |
| Net cash provided by (used in) investing activities | | 2,887 |
| | (125 | ) | | (15,577 | ) | Net cash provided by (used in) investing activities | | 409 | | | (261) | | | (419) | |
| Cash Flows From Financing Activities | | | | | | | Cash Flows From Financing Activities | | | | | | |
| Issuance of long-term debt, net of discount | | 9,424 |
| | 1,220 |
| | 17,817 |
| |
| Issuance of long-term debt, net of discounts | | Issuance of long-term debt, net of discounts | | 2,100 | | | 3,455 | | | 5,960 | |
| Repayments of long-term debt | | (14,203 | ) | | (2,436 | ) | | (2,055 | ) | Repayments of long-term debt | | (3,440) | | | (5,642) | | | (4,406) | |
| Borrowings of short-term debt | | 1 |
| | 3 |
| | 8 |
| Borrowings of short-term debt | | — | | | 1 | | | 12 | |
| Repayments of short-term debt | | (8 | ) | | (3 | ) | | (8 | ) | Repayments of short-term debt | | — | | | (1) | | | (12) | |
| Repayments of convertible notes assumed | | — |
| | — |
| | (3,123 | ) | |
| Issuance of common stock, net | | — |
| | — |
| | 1,433 |
| |
| Repurchases of common shares | | — |
| | — |
| | (72 | ) | |
| Proceeds from exercise of stock options | | — |
| | 33 |
| | 30 |
| |
| Payment of employee withholding tax upon vesting of share-based awards | | (4 | ) | | (11 | ) | | (88 | ) | |
| Payments of contingent consideration | | (45 | ) | | (123 | ) | | (151 | ) | |
| Payments of deferred consideration | | — |
| | (540 | ) | | (55 | ) | |
| Payment of employee withholding taxes related to share-based awards | | Payment of employee withholding taxes related to share-based awards | | (52) | | | (30) | | | (40) | |
| Payments of acquisition-related contingent consideration | | Payments of acquisition-related contingent consideration | | (83) | | | (35) | | | (35) | |
| Payments of financing costs | | (110 | ) | | (97 | ) | | (103 | ) | Payments of financing costs | | (48) | | | (39) | | | (28) | |
| Other | | (18 | ) | | (9 | ) | | (9 | ) | Other | | 10 | | | (3) | | | (8) | |
| Net cash (used in) provided by financing activities | | (4,963 | ) | | (1,963 | ) | | 13,624 |
| Net cash (used in) provided by financing activities | | (1,513) | | | (2,294) | | | 1,443 | |
| Effect of exchange rate changes on cash and cash equivalents | | 41 |
| | (54 | ) | | (30 | ) | Effect of exchange rate changes on cash and cash equivalents | | (19) | | | 16 | | | (4) | |
| Net increase (decrease) in cash and cash equivalents and restricted cash | | 255 |
| | (55 | ) | | 274 |
| |
| Cash and cash equivalents and restricted cash, beginning of period | | 542 |
| | 597 |
| | 323 |
| |
| Cash and cash equivalents and restricted cash, end of period | | $ | 797 |
| | $ | 542 |
| | $ | 597 |
| |
| Net increase (decrease) in Cash and cash equivalents and Restricted cash and other settlement deposits | | Net increase (decrease) in Cash and cash equivalents and Restricted cash and other settlement deposits | | 303 | | | (1,428) | | | 2,521 | |
| Cash and cash equivalents and Restricted cash and other settlement deposits, beginning of year | | Cash and cash equivalents and Restricted cash and other settlement deposits, beginning of year | | 1,816 | | | 3,244 | | | 723 | |
| Cash and cash equivalents and Restricted cash and other settlement deposits, end of year | | Cash and cash equivalents and Restricted cash and other settlement deposits, end of year | | $ | 2,119 | | | $ | 1,816 | | | $ | 3,244 | |
| | | | | | | | | | | | | |
| Cash and cash equivalents, end of period | | $ | 720 |
| | $ | 542 |
| | $ | 597 |
| |
| Restricted cash, end of period | | 77 |
| | — |
| | — |
| |
| Cash and cash equivalents and restricted cash, end of period | | $ | 797 |
| | $ | 542 |
| | $ | 597 |
| |
| Cash and cash equivalents, end of year | | Cash and cash equivalents, end of year | | $ | 582 | | | $ | 605 | | | $ | 3,243 | |
| Restricted cash and other settlement deposits, end of year | | Restricted cash and other settlement deposits, end of year | | 1,537 | | | 1,211 | | | 1 | |
| Cash and cash equivalents and Restricted cash and other settlement deposits, end of year | | Cash and cash equivalents and Restricted cash and other settlement deposits, end of year | | $ | 2,119 | | | $ | 1,816 | | | $ | 3,244 | |
The accompanying notes are an integral part of these consolidated financial statements.
VALEANT PHARMACEUTICALS INTERNATIONAL,
BAUSCH HEALTH COMPANIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
| |
1. | DESCRIPTION OF BUSINESS |
1.DESCRIPTION OF BUSINESS
Bausch Health Companies Inc. (the “Company”), formerly known as Valeant Pharmaceuticals International, Inc. (the “Company”), is a multinational, specialty pharmaceutical and medical device company that develops, manufactures and markets a broad range of branded, generic and branded generic pharmaceuticals, over-the-counter (“OTC”) products and medical devices (contact lenses, intraocular lenses, ophthalmic surgical equipment and aesthetics devices) which are marketed directly or indirectly in over 90approximately 100 countries. Effective August 9, 2013, the Company continued from the federal jurisdiction of Canada to the Province of British Columbia, meaning that the Company became a company registered under the laws of the Province of British Columbia as if it had been incorporated under the laws of the Province of British Columbia. As a result of this continuance, the legal domicile of the Company became the Province of British Columbia, the Canada Business Corporations Act ceased to apply to the Company and the Company became subject to the British Columbia Business Corporations Act.
| |
2. | SIGNIFICANT ACCOUNTING POLICIES |
2.SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation and Use of Estimates
The consolidated financial statementsConsolidated Financial Statements have been prepared by the Company in United States (“U.S.”) dollars and in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”), applied on a consistent basis. The Consolidated Financial Statements include the accounts of the Company and those of its subsidiaries and any variable interest entities for which the Company is the primary beneficiary. All intercompany transactions and balances have been eliminated.
Separation of the Bausch + Lomb Eye-Health Business and Initial Public Offering of Solta Medical Business
On August 6, 2020, the Company announced its intentions to separate its eye-health business into an independent publicly traded entity from the remainder of Bausch Health Companies Inc. (the “B+L Separation”). On August 3, 2021, the Company announced its intentions to conduct an initial public offering ("IPO") of its aesthetic medical device business, Global Solta (the “Solta IPO"). In January 2022, the Company completed the internal organizational design and structure of the new eye-health entity, Bausch + Lomb Corporation ("Bausch + Lomb"), and the new Global Solta entity, Solta Medical Corporation ("Solta"), as previously announced and aims to launch the B+L IPO and the Solta IPO when financial market conditions are favorable (and subject to receipt of regulatory, stock exchange and other approvals). Following the B+L IPO the Company expects to complete the separation of Bausch + Lomb after the expiry of customary lockups related to the B+L IPO and achievement of targeted debt leverage ratios, subject to the receipt of applicable shareholder and other necessary approvals. The B+L Separation and the proposed Solta IPO will establish 3 separate companies that include: (i) a fully integrated eye-health company which will consist of the Company’s Bausch + Lomb Global Vision Care, Global Surgical, Global Consumer and Global Ophthalmic Pharmaceuticals businesses, (ii) a global provider of aesthetic medical devices which will consist of the Company’s Solta business and (iii) a diversified pharmaceutical company which will include the Company’s Salix, International Rx, dentistry, neurology, medical dermatology and generics pharmaceutical businesses. These audited Consolidated Financial Statements do not include any adjustments to give effect to either the B+L Separation or the proposed Solta IPO.
Impacts of COVID-19 Pandemic
The unprecedented nature of the COVID-19 pandemic has, and continues to, adversely impact the global economy. The COVID-19 pandemic and the reactions of governments, private sector participants and the public in an effort to contain the spread of the COVID-19 virus and/or address its impacts have had significant direct and indirect effects on businesses and commerce. This includes, but is not limited to, disruption to supply chains, employee base and transactional activity, facility closures and production suspensions.
The extent to which these events may continue to impact the Company's business, financial condition, cash flows and results of operations, in particular, will depend on future developments which are highly uncertain and many of which are outside the Company's control. Such developments include the availability and effectiveness of vaccines for the COVID-19 virus, COVID-19 vaccine immunization rates, the ultimate geographic spread and duration of the pandemic, the extent and duration of a resurgence of the COVID-19 virus and variant strains thereof, such as the delta and omicron variants, new information concerning the severity of the COVID-19 virus, the effectiveness and intensity of measures to contain the COVID-19 virus and the economic impact of the pandemic and the reactions to it. Such developments, among others, depending on their nature, duration and intensity, could have a significant adverse effect on the Company's business, financial condition, cash flows and results of operations.
To date, the Company has been able to continue its operations with limited disruptions in supply and manufacturing. Although it is difficult to predict the broad macroeconomic effects that the COVID-19 pandemic will have on industries or individual companies, the Company has assessed the possible effects and outcomes of the pandemic on, among other things, its supply chain, customers and distributors, discounts and rebates, employee base, product sustainability, research and development efforts, product pipeline and consumer demand and currently believes that its estimates are reasonable.
Use of Estimates
In preparing the Company’s consolidated financial statements,Company's Consolidated Financial Statements, management is required to make estimates and assumptions. This includes estimates and assumptions regarding the nature, timing and extent of the impacts that the COVID-19 pandemic will have on its operations and cash flows. The estimates and assumptions used by the Company affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Significant estimates made by management include: provisions for product returns, rebates, chargebacks, discounts and allowances and distribution fees paid to certain wholesalers; useful lives of amortizable intangible assets and property, plant and equipment; expected future cash flows used in evaluating intangible assets for impairment, assessing compliance with debt covenants and making going concern assessments; reporting unit fair values for testing goodwill for impairment and allocating goodwill to new reporting unit structure on a relative fair value basis; provisions for loss contingencies; provisions for income taxes, uncertain tax positions and realizability of deferred tax assets (including provisional amounts associated with the U.S. tax law change);assets; fair value of cross-currency swaps; fair value of foreign currency exchange contracts; and the allocationrecognition of the purchase price for acquiredfair value of assets and businesses,liabilities acquired in a business combination, including the fair value of contingent consideration. Under certain product manufacturing and supply agreements, management uses information from the Company’s commercialization counterparties to arrive at estimates for future returns, rebates and chargebacks.
On an ongoing basis, management reviews its estimates to ensure that these estimates appropriately reflect changes in the Company’s business and new information as it becomes available. If historical experience and other factors used by management to make these estimates do not reasonably reflect future activity, the Company’s consolidated financial statementsConsolidated Financial Statements could be materially impacted.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and those of its subsidiaries and any variable interest entities (“VIEs”) for which the Company is the primary beneficiary. All intercompany transactions and balances have been eliminated.
Reclassifications
Certain reclassifications have been made to prior year amounts to conform to the current year presentation.
Effective for the first quarter of 2017, revenues and profits from the Company's operations in Canada, previously included in the Branded Rx segment in prior periods, are now included in the Bausch + Lomb/International segment. Prior period presentations of segment revenues, segment profits and segment assets have been recast to conform to the current segment reporting structure. See Note 23, "SEGMENT INFORMATION" for additional information.
Acquisitions
Acquired businesses are accounted for using the acquisition method of accounting, which requires that assets acquired and liabilities assumed be recorded at fair value, with limited exceptions. Any excess of the purchase price over the fair value of the net assets acquired is recorded as goodwill. Transaction costs and costs to restructure the acquired company are expensed as incurred. The operating results of the acquired business are reflected in the consolidated financial statementsConsolidated Financial Statements after the date of acquisition. Acquired in-process research and development (“IPR&D”) is recognized at fair value and initially characterized as an indefinite-lived intangible asset, irrespective of whether the acquired IPR&D has an alternative future use. If the acquired
net assets do not constitute a business, under the acquisition method of accounting, the transaction is accounted for as an asset acquisition and no goodwill is recognized. In an asset acquisition, the amount allocated to acquired IPR&D with no alternative future use is charged to expense at the acquisition date.date and any future contingent consideration is not recorded until it becomes probable.
Fair Value of Financial Instruments
The estimated fair values of cash and cash equivalents, trade receivables, accounts payable and accrued liabilities approximate their carrying values due to their short maturity periods. The fair value of acquisition-related contingent consideration is based on estimated discounted future cash flows or Monte Carlo Simulation (when appropriate) analyses and assessment of the probability of occurrence of potential future events.
Fair Value of Derivative Instruments
The accounting for changes in the fair value of a derivative instrument depends on whether the instrument has been designated and qualifies as part of a hedging relationship and on the type of hedging relationship. For derivative instruments designated and qualifying as hedging instruments, the hedging instrument must be designated, based upon the exposure being hedged, as a fair value hedge, cash flow hedge, or a hedge of the foreign currency exposure of a net investment in a foreign operation. For derivative instruments not designated as hedging instruments, the gain or loss is recognized in the Consolidated Statements of Operations during the current period.
The Company’s cross-currency swaps qualified for and had been designated as an accounting hedge of the foreign currency exposure of a net investment in a foreign operation and were remeasured at each reporting date to reflect changes in their
fair values. The fair value was determined via a mark-to-market analysis, using observable (Level 2) inputs. These inputs included: (i) the foreign currency exchange spot rate between the euro and U.S. dollar, (ii) the interest rate yield curves in the euro and U.S. dollar and (iii) the credit risk rating for each applicable counterparty. The net change in fair value of cross-currency swaps is reported as a gain or loss in the Consolidated Statements of Comprehensive Loss as part of Foreign currency translation adjustment to the extent they are effective, and remain in Accumulated other comprehensive loss until either the sale or complete, or substantially complete, liquidation of the subsidiary. No portion of the cross-currency swaps was ineffective. The Company uses the spot method of assessing hedge effectiveness. The Company had elected to amortize amounts excluded from the assessment of effectiveness over the term of its cross-currency swaps as a reduction of Interest expense in the Consolidated Statements of Operations.
The Company uses foreign currency exchange contracts to economically hedge the foreign exchange exposure on certain of the Company’s intercompany and third party balances. The Company's foreign currency exchange contracts are remeasured at each reporting date to reflect changes in their fair values determined using forward rates, which are observable market inputs, multiplied by the notional amount. These contracts have not been designated as an accounting hedge, and therefore the net change in their fair value is reported as a gain or loss in the Consolidated Statements of marketable securitiesOperations as part of Foreign exchange and long-term debt are based on quoted market prices, if available, or estimated discounted future cash flows.other.
Cash and Cash Equivalents
Cash and cash equivalents consist of cash in bank accounts and highly liquid investments with maturities of three months or less when purchased.
Concentrations of Credit Risk
Financial instruments that potentially subject the Company to significant concentrations of credit risk consist primarily of cash and cash equivalents, marketable securities, trade receivables, cross-currency swaps and trade receivables.foreign currency exchange contracts.
The Company invests its excess cash in high-quality, money market instruments and term deposits with varying maturities, but typically less than three months.The Company’s cash and cash equivalents are invested in various investment grade institutional money market accounts and bank term deposits. Deposits heldCash deposited at banks may exceed the amount of insurance provided on such deposits. Generally, these cash deposits may be redeemed upon demand and are maintained with financial institutions with reputable credit and therefore bear minimal credit risk. The Company seeks to mitigate such risks by spreading its risk across multiple counterparties and monitoring the risk profiles of these counterparties.
The Company’s trade receivables primarily represent amounts due from wholesale distributors, retail pharmacies, government entities and group purchasing organizations. Outside of the U.S., concentrations of credit risk with respect to trade receivables, which are typically unsecured, are limited due to the number of customers using the Company’s products, as well as their dispersion across many different geographic regions. The Company performs periodic credit evaluations of customers and does not require collateral. The Company monitors economic conditions, including volatility associated with international economies, and related impacts on the relevant financial markets and its business, especially in light of sovereign credit issues. The credit and economic conditions within Italy, Portugal, Spain,Argentina, Brazil, Egypt, Greece, among other members of the European Union, Russia, Brazil,Turkey, Ukraine and EgyptVenezuela have been weak in recent years. In November 2016, as a result of the Egyptian government’s decision to float the Egyptian pound and un-peg it to the U.S. Dollar, the Egyptian pound was significantly devalued. The Company's exposure to the Egyptian pound is with respect to the Amoun Pharmaceutical Company S.A.E. business acquired in October 2015, which represented approximately 2% of the Company's 2017 and 2016 total revenues. These conditions have increased, and may continue to increase, the average length of time that it takes to collect on the Company’s trade receivables outstanding in these countries.
An allowance for doubtful accounts is maintained for potential credit losses based on the aging of trade receivables, historical bad debts experience, and changes in customer payment patterns. Trade receivable balances are written off against the allowance when it is deemed probable that the receivable will not be collected. Trade receivables, net are stated net of reserves for sales returns and allowances and provisions for doubtful accounts of $97 million and $80 million as of December 31, 2017 and 2016, respectively.
As of December 31, 2017,2021, the Company’s three3 largest U.S. wholesaler customers accounted for approximately 43%44% of net trade receivables. In addition, as of December 31, 20172021 and 2016,2020, the Company’s net trade receivable balance from Russia,Argentina, Brazil, Egypt, Italy, Brazil, Spain, Greece, Serbia, South Africa, Turkey, Ukraine, Venezuela and PortugalVietnam amounted to $230$78 million and $214$166 million, respectively, the majority of which is current or less than 90 days past due. The portion of the net trade receivable from these countries that is past due more than 90 days amounted to $14$2 million, as of December 31, 2017,2021, a portion of which is comprised of public hospitals. Based on an analysis of credit risk, including an analysis of bad debt experience and assessment of historical payment patterns for such customers, the Company has established a reserve covering approximatelymore than half of the balance past due more than 90 days for such countries. The Company has not experienced any significant losses from uncollectible accounts inOver the three-year period ended December 31, 2017.2021, the Company has not experienced any material losses from uncollectible accounts in excess of the established reserves.
The Company does not enter into financial instruments for trading or speculative purposes. Further, the Company has a policy of only entering into contracts with parties that have at least an investment grade credit rating. The Company enters into cross-currency swaps and foreign currency exchange contracts with high credit quality financial institutions. The counter-parties to the Company's cross-currency swaps and foreign currency exchange contracts are major financial institutions, and there is no significant concentration of exposure with any one counter-party. To date, no counterparty has failed to meet its obligations to the Company and management believes the risk of loss associated with these contracts is
remote. See Note 5, "FAIR VALUE MEASUREMENTS" for additional details regarding the Company's cross-currency swaps and foreign currency exchange contracts.
Allowance for Credit Losses
An allowance is maintained for potential credit losses. The Company estimates the current expected credit loss on its receivables based on various factors, including historical credit loss experience, customer credit worthiness, value of collaterals (if any), and any relevant current and reasonably supportable future economic factors. Additionally, the Company generally estimates the expected credit loss on a pool basis when customers are deemed to have similar risk characteristics. Trade receivable balances are written off against the allowance when it is deemed probable that the trade receivable will not be collected. Trade receivables, net are stated net of certain sales provisions and the allowance for credit losses. Allowance for credit losses were $35 million, $39 million and $48 million as of December 31, 2021, 2020 and 2019, respectively. The activity in the allowance for credit losses for trade receivables for the years 2021, 2020 and 2019 is as follows.
| | | | | | | | | | | | | | | | | |
| (in millions) | 2021 | | 2020 | | 2019 |
| Balance, beginning of period | $ | 39 | | | $ | 48 | | | $ | 47 | |
| Retrospective effect of application of new accounting standard | — | | | 1 | | | — | |
| Provision | (2) | | | 2 | | | 10 | |
| Write-offs | (3) | | | (12) | | | (10) | |
| Recoveries | 2 | | | 3 | | | 1 | |
| Foreign exchange and other | (1) | | | (3) | | | — | |
| Balance, end of period | $ | 35 | | | $ | 39 | | | $ | 48 | |
Inventories
Inventories comprise raw materials, work in process and finished goods, which are valued at the lower of cost or net realizable value, on a first-in, first-out basis. The cost value for work in process and finished goods inventories includes materials, direct labor and an allocation of overheads.
The Company evaluates the carrying value of inventories on a regular basis, taking into account such factors as historical and anticipated future sales compared with quantities on hand, the price the Company expects to obtain for products in their respective markets compared with historical cost and the remaining shelf life of goods on hand.
Property, Plant and Equipment
Property, plant and equipment are reported at cost, less accumulated depreciation. Costs incurred on assets under construction are capitalized as construction in progress. Depreciation is calculated using the straight-line method, commencing when the assets become available for productive use, based on the following estimated useful lives:
|
| | | | | | | |
| Land improvements | | 15 - 30 years |
| Buildings and improvements | | Up to 40 years |
| Machinery and equipment | | 3 - 20 years |
| Other equipment | | 3 - 710 years |
| Equipment on operating lease | | Up to 5 years |
Leasehold improvements and capital leases | | Lesser of term of lease or 10 years |
Intangible Assets
Intangible assets are reported at cost, less accumulated amortization.amortization and impairments. Intangible assets with finite lives are amortized over their estimated useful lives. Amortization is calculated primarily using the straight-line method based on the following estimated useful lives:
|
| | | | | | | |
| Product brands | | 2 - 20 years |
| Corporate brands | | 69 - 20 years |
Product rightsrights/patents | | 34 - 15 years |
| Partner relationships | | 57 - 9 years |
| Out-licensed technology and other | | 58 - 109 years |
Divestitures of Products
The Company nets thenet proceeds on the divestituresdivestiture of products withand the carrying amount of the related assets and recordsis recorded as a gain/loss on sale within Other (income) expense, net. Any contingent payments that are potentially due to the Company as a result of these divestitures are recorded when realizable.
IPR&D
The fair value of IPR&D acquired through a business combination is capitalized as an indefinite-lived intangible asset until the completion or abandonment of the related research and development activities. When the related research and development is completed, the asset will be assigned a useful life and amortized. Acquired IPR&D assets are tested for impairment at least annually or when triggering events are identified.
The fair value of an acquired IPR&D intangible asset is typically determined using an income approach. This approach starts with a forecast of the net cash flows expected to be generated by the asset over its estimated useful life. The net cash flows reflect the asset’s stage of completion, the probability of technical success, the projected costs to complete, expected market competition and an assessment of the asset’s life-cycle. The net cash flows are then adjusted to present value by applying an appropriate discount rate that reflects the risk factors associated with the expected cash flow streams.
Impairment of Long-Lived Assets
Long-lived assets with finite lives are tested for impairment whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. If indicators of impairment are present, the asset is tested for recoverability by comparing the carrying value of the asset to the related estimated undiscounted future cash flows expected to be derived from the asset.asset, which include the amount and timing of the projected future cash flows. If the expected undiscounted cash flows are less than the carrying value of the asset, then the asset is considered to be impaired and its carrying value is written down to fair value, based on the related estimated discounted future cash flows.
Indefinite-lived intangible assets, includingwhich includes acquired IPR&D and the corporate trademark acquired in the acquisition of Bausch & Lomb Holdings Incorporated (the ‘‘B&L Trademark’’), are tested for impairment annually or more frequently if events or changes in circumstances between annual tests indicate that the asset may be impaired. Impairment losses on indefinite-lived intangible assets are recognized based solely on a comparison of the fair value of the asset to its carrying value.
Goodwill
Goodwill is recorded with the acquisition of a business and is calculated as the difference between the acquisition date fair value of the consideration transferred and the values assigned to the assets acquired and liabilities assumed. Goodwill is not amortized but is tested for impairment at least annually as of October 1st at the reporting unit level. Goodwill impairment is measured as the amount by which a reporting unit's carrying value exceeds its fair value. A reporting unit is the same as, or one level below, an operating segment. An entity is permitted to first assess qualitatively whether it is necessary to perform a quantitative impairment test for any of its reporting units. The quantitative impairment test is required only when the Company concludes that it is more likely than not that a reporting unit’s fair value is less than its carrying amount. In evaluating whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount, the Company considers the totality of all relevant events or circumstances that affect the fair value or carrying amount of a reporting unit.
An interim goodwill impairment test in advance of the annual impairment assessment may be required if events occur that indicate an impairment might be present. For example, a substantial decline in the Company’s market capitalization, changes in reportable segments, unexpected adverse business conditions, economic factors and unanticipated competitive activities may signal that an interim impairment test is needed. Accordingly, among other factors, the Company monitors
changes in its share price between annual impairment tests. The Company considers a decline in its share price that corresponds to an overall deterioration in stock market conditions to be less of an indicator of goodwill impairment than a unilateral decline in its share price reflecting adverse changes in its underlying operating performance, cash flows, financial condition and/or liquidity. In the event that the Company’s market capitalization does decline below its book value, the Company would consider the length and severity of the decline and the reason for the decline when assessing whether potential goodwill impairment exists. The Company believes that short-term fluctuations in share prices may not necessarily reflect underlying values.
The goodwill impairment test consists of two steps. In step one, the Company compares the carrying value of each reporting unit to its fair value. In step two, if the carrying value of a reporting unit exceeds its fair value, the Company will determine the amount of goodwill impairment as the excess of the carrying value of the reporting unit’s goodwill over its fair value, if any. The fair value of goodwill is derived as the excess of the fair value of the reporting unit over the fair value of the reporting unit’s identifiable assetsDebt Discounts and liabilities.
Premiums, Issuance Costs and Deferred Financing Costs
Deferred financingDebt discounts, premiums and issuance costs are presented in the balance sheetConsolidated Balance Sheets as a direct deduction from or addition to the carrying amount of the related debt except for the deferred financing costs associated with revolving-debt arrangements whichand are presented as assets. Deferred finance costs are amortized or accreted, using the effective interest method, as interest expense over the contractual lives of the related credit facilities.facilities or notes. Deferred financing costs associated with revolving credit facility arrangements are included in the balances of Prepaid expenses and other current assets and Other non-current assets in the Consolidated Balance Sheets and are amortized as interest expense over the contractual life of the related revolving credit facility.
Foreign Currency Translation
The assets and liabilities of the Company’s foreign operations having a functional currency other than the U.S. dollar are translated into U.S. dollars at the exchange rate prevailing at the balance sheet date, and at the average exchange rate for the reporting period for revenue and expense accounts. The cumulative foreign currency translation adjustment is recorded as a component of accumulatedAccumulated other comprehensive loss in shareholders’ equity.the Consolidated Balance Sheets.
Foreign currency exchange gains and losses on transactions occurring in a currency other than an operation’s functional currency are recognized as a component of Foreign exchange and other in net income (loss).the Consolidated Statements of Operations.
Revenue Recognition
RevenueThe Company’s revenues are primarily generated from product sales, primarily in the therapeutic areas of eye-health, gastroenterology ("GI") and dermatology that consist of: (i) branded pharmaceuticals, (ii) generic and branded generic pharmaceuticals, (iii) OTC products and (iv) medical devices (contact lenses, intraocular lenses, ophthalmic surgical equipment and aesthetics devices). Other revenues include alliance and service revenue from the licensing and co-promotion of products and contract service revenue primarily in the areas of dermatology and topical medication. Contract service revenue is realized or realizablederived primarily from contract manufacturing for third parties and earned when persuasive evidenceis not material. See Note 22, "SEGMENT INFORMATION" for the disaggregation of an arrangement exists, delivery has occurred or services have been rendered,revenues which depicts how the price tonature, amount, timing and uncertainty of revenue and cash flows are affected by the economic factors of each category of customer is fixed or determinable, and collectability is reasonably assured.contracts.
The Company recognizes product sales revenue when persuasive evidencethe customer obtains control of promised goods or services and in an arrangement exists, delivery has occurred, collectability is reasonably assured, andamount that reflects the consideration to which the Company expects to be entitled to receive in exchange for those goods or services. To achieve this core principle, the Company applies the five-step revenue model to contracts within its scope: (i) identify the contract(s) with a customer, (ii) identify the performance obligations in the contract, (iii) determine the transaction price, (iv) allocate the transaction price to the buyerperformance obligations in the contract and (v) recognize revenue when (or as) the entity satisfies a performance obligation.
Product Sales
A contract with the Company’s customers exists for each product sale. Where a contract with a customer contains more than one performance obligation, the Company allocates the transaction price to each distinct performance obligation based on its relative standalone selling price. The transaction price is fixed or determinable, the timing ofadjusted for variable consideration which is based on the specific contractual terms with each customer. Delivery occurs when title has transferred to the customer, and the customer has assumed the risks and rewards of ownership. As such, thediscussed below. The Company generally recognizes revenue onfor product sales at a sell-in basis (i.e., record revenue upon delivery); however, based upon specific terms and circumstances,point in time, when the Company has determined that,customer obtains control of the products.
Product Sales Provisions
As is customary in the pharmaceutical industry, gross product sales are subject to a variety of deductions in arriving at reported net product sales. The transaction price for certain arrangements with certain retailers and other third parties, revenue should be recognized on a sell-through basis (i.e., record revenue when products are dispensed to patients). In evaluating the proper revenue recognition for sales transactions, the Company considers all relevant factors, including additional discounts or extended payment terms which the Company grants to certain customers, often near the end of quarterly periods.
Revenue from product sales is recognized nettypically adjusted for variable consideration, which may be in the form of provisions for estimated cash discounts, allowances, returns, rebates, chargebacks and distribution fees paid to certaincustomers. Provisions for variable consideration are established to reflect the Company’s best estimates of the Company’s wholesale customers.amount of consideration to which it is entitled based on the terms of the contract. The Company establishesamount of variable consideration included in the transaction price may be constrained, and is included in the net sales price only to the extent that it is probable that a significant reversal in the amount of the cumulative revenue recognized will not occur in the future period.
Provisions for these provisionsdeductions are recorded concurrently with the recognition of gross product sales revenue and include cash discounts and allowances, chargebacks, and distribution fees, which are paid to direct customers, as well as rebates and returns, which can be paid to direct and indirect customers. Returns provision balances and volume discounts to direct customers are included in Accrued and other current liabilities. All other provisions related to direct customers are included in Trade receivables, net, while provision balances related to indirect customers are included in Accrued and other current liabilities.
The following table presents the activity and ending balances of the Company’s variable consideration provisions the years 2021 and 2020.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (in millions) | | Discounts
and
Allowances | | Returns | | Rebates | | Chargebacks | | Distribution
Fees | | Total |
| Reserve balance, January 1, 2020 | | $ | 182 | | | $ | 691 | | | $ | 927 | | | $ | 168 | | | $ | 82 | | | $ | 2,050 | |
| Current period provision | | 621 | | | 120 | | | 2,174 | | | 1,925 | | | 196 | | | 5,036 | |
| Payments and credits | | (613) | | | (236) | | | (2,322) | | | (1,909) | | | (193) | | | (5,273) | |
| Reserve balance, December 31, 2020 | | 190 | | | 575 | | | 779 | | | 184 | | | 85 | | | 1,813 | |
| Current period provision | | 625 | | | 131 | | | 2,462 | | | 1,999 | | | 211 | | | 5,428 | |
| Payments and credits | | (593) | | | (224) | | | (2,297) | | | (2,013) | | | (251) | | | (5,378) | |
| Reserve balance, December 31, 2021 | | $ | 222 | | | $ | 482 | | | $ | 944 | | | $ | 170 | | | $ | 45 | | | $ | 1,863 | |
Included in Rebates in the table above are cooperative advertising credits due to customers of approximately $36 million and $32 million as of December 31, 2021 and 2020, respectively, which are reflected as a reduction of Trade accounts receivable, net in the Consolidated Balance Sheets.
The Company continually monitors its variable consideration provisions and evaluates the estimates used as additional information becomes available. Adjustments will be made to these provisions periodically to reflect new facts and circumstances that may indicate that historical experience may not be indicative of current and/or future results. The Company is required to make subjective judgments based primarily on its evaluation of current market conditions and trade inventory levels related to the Company's products. These judgments include the potential impact of the COVID-19 pandemic on, among other things, unemployment and related changes in customer health insurance levels, customer behaviors during the COVID-19 pandemic and government stimulus bills that focus on ensuring availability and access to lifesaving drugs during a public health crisis. This evaluation may result in an increase or decrease in the experience rate that is applied to current and future sales, or require an adjustment related to past sales, or both. If the trend in actual amounts of variable consideration varies from the Company’s prior estimates, the Company adjusts these estimates when such trend is believed to be sustainable. At that time, the Company would record the necessary adjustments which would affect net product revenue and earnings reported in the current period. The Company applies this method consistently for contracts with similar characteristics. The following describes the major sources of variable consideration in the Company’s customer arrangements and the methodology, estimates and judgments applied to estimate each type of variable consideration.
Cash Discounts and Allowances
Cash discounts are offered for prompt payment and allowances for volume purchases. Provisions for cash discounts and allowances are estimated at the time of sale and recorded as direct reductions to trade receivables and revenue. PriceManagement estimates the provisions for cash discounts and allowances based on contractual sales terms with customers, an analysis of unpaid invoices and historical payment experience. Estimated cash discounts and allowances have historically been predictable and less subjective, due to the limited number of assumptions involved, the consistency of historical experience and the fact that these amounts are generally settled within one month of incurring the liability.
Returns
Consistent with industry practice, customers are generally allowed to return a product within a specified period of time before and after its expiration date, excluding European businesses which generally do not provide a right of return. The returns provision is estimated utilizing historical sales and return rates over the period during which customers have a right of return, taking into account available information on competitive products and contract changes. The information utilized to estimate the returns provision includes: (i) historical return and exchange levels, (ii) external data with respect to inventory levels in the wholesale distribution channel, (iii) external data with respect to prescription demand for products, (iv) remaining shelf lives of products at the date of sale and (v) estimated returns liability to be processed by year of sale based on an analysis of lot information related to actual historical returns.
In determining the estimate for returns, management is required to make certain assumptions regarding the timing of the introduction of new products and the potential of these products to capture market share. In addition, certain assumptions with respect to the extent and pattern of decline associated with generic competition are necessary. These assumptions are formulated using market data for similar products, past experience and other available information. These assumptions are continually reassessed, and changes to the estimates and assumptions are made as new information becomes available. A change of 1% in the estimated return rates would have impacted the Company’s pre-tax earnings by approximately $81 million for the year 2021.
The estimate for returns may be impacted by a number of factors, but the principal factor relates to the inventory levels in the distribution channel. When management becomes aware of an increase in such inventory levels, it considers whether the increase may be temporary or other-than-temporary. Temporary increases in wholesaler inventory levels will not warrant revision to the provision for returns. Other-than-temporary increases in wholesaler inventory levels, however, may be an indication that future product returns could be higher than originally anticipated, and, as a result, estimates for returns may need to be adjusted. Factors that suggest increases in wholesaler inventory levels are temporary include: (i) recently implemented or announced price increases for certain products, (ii) new product launches or expanded indications for existing products and (iii) timing of purchases by wholesale customers. Conversely, factors that suggest increases in wholesaler inventory levels are other-than-temporary include: (i) declining sales trends based on prescription demand, (ii) introduction of new products or generic competition, (iii) increasing price competition from generic competitors and (iv) changes to the U.S. National Drug Codes (“NDC”) of products. Changes in the NDC of products could result in a period of higher returns related to products with the old NDC, as U.S. customers generally permit only one NDC per product for identification and tracking within their inventory systems.
Over the last several years, the Company increased its focus on maximizing operational efficiencies and continues to take actions to reduce product returns, including but not limited to: (i) monitoring and reducing customer inventory levels, (ii) instituting disciplined pricing policies and (iii) improving contracting. These actions have had the effect of improving sales return experience, primarily related to branded and generic products. Sales return provisions for 2021 and 2020 were $131 million and $120 million, respectively, and includes reductions in variable consideration for sales return provisions related to past sales of approximately $28 million and $38 million, respectively.
Rebates and Chargebacks
Product sales made under governmental and managed-care pricing programs in the U.S. are subject to rebates. The Company participates in state government-managed Medicaid programs, as well as certain other qualifying federal and state government programs whereby rebates are provided to participating government entities. Medicaid rebates are generally billed 45 days to 270 days after the quarter in which the product is dispensed to the Medicaid participant. As a result, the Medicaid rebate reserve includes an estimate of outstanding claims for end-customer sales that occurred, but for which the related claim has not been billed and/or paid, and an estimate for future claims that will be made when inventory in the distribution channel is sold through to plan participants. The calculation of the Medicaid rebate reserve also requires other estimates, such as estimates of sales mix, to determine which sales are subject to rebates and the amount of such rebates. A change of 1% in the estimated rates used in the Medicaid rebate reserve would have impacted the Company’s pre-tax earnings by approximately $76 million for 2021. Quarterly, the Medicaid rebate reserve is adjusted based on actual claims paid. Due to the delay in billing, adjustments to actual claims paid may incorporate revisions of that reserve for several periods.
Managed Care rebates relate to contractual agreements to sell products to managed care organizations and pharmacy benefit managers at contractual rebate percentages in exchange for volume and/or market share.
Chargebacks relate to contractual agreements to sell products to government agencies, group purchasing organizations and other indirect customers at contractual prices that are lower than the list prices the Company charges wholesalers. When these group purchasing organizations or other indirect customers purchase products through wholesalers at these reduced prices, the wholesaler charges the Company for the difference between the prices they paid the Company and the prices at which they sold the products to the indirect customers.
In estimating provisions for rebates and chargebacks, management considers relevant statutes with respect to governmental pricing programs and contractual sales terms with managed-care providers and group purchasing organizations. Management estimates the amount of product sales subject to these programs based on historical utilization levels. Changes in the level of utilization of products through private or public benefit plans and group purchasing organizations will affect the amount of rebates and chargebacks that the Company is obligated to pay. Management continually updates these factors based on new contractual or statutory requirements, and any significant changes in sales trends that may impact the percentage of products subject to rebates or chargebacks.
The amount of Managed Care, Medicaid and other rebates and chargebacks has become more significant as a result of a combination of deeper discounts implemented in each of the last three years, changes in the Company’s product portfolio due to recent acquisitions and increased Medicaid utilization due to expansion of government funding for these programs. Management’s estimate for rebates and chargebacks may be impacted by a number of factors, but the principal factor relates to the level of inventory in the distribution channel.
Rebate provisions are based on factors such as timing and terms of plans under contract, time to process rebates, product pricing, sales volumes, amount of inventory in the distribution channel and prescription trends. Adjustments to actual for the years 2021 and 2020 were not material to the Company’s revenues or earnings.
Patient Co-Pay Assistance programs, Consumer Rebates and Loyalty Programs are rebates offered on many of the Company’s products. Patient Co-Pay Assistance Programs are patient discount programs offered in the form of coupon cards or point of sale discounts, with which patients receive certain discounts off their prescription at participating pharmacies, as defined by the specific product program. An accrual for these programs is established, equal to management’s estimate of the discount, rebate and loyalty incentives attributable to a sale. That estimate is based on historical experience and other relevant factors. The accrual is adjusted throughout each quarter based on actual experience and changes in other factors, if any.
Distribution Fees
The Company sells products primarily to wholesalers, and in some instances to large pharmacy chains such as CVS and Walmart. The Company has Distribution Services Agreements ("DSAs") with several large wholesale customers such as McKesson Corporation, AmerisourceBergen Corporation, Cardinal Health, Inc. and McKesson Specialty. Under the DSAs, the wholesalers agree to provide services, and the Company pays the contracted DSA distribution service fees for these services based on product volumes. Additionally, price appreciation credits are generated when the Company increases a product’s wholesaler acquisition cost (“WAC”) under its contracts with certain wholesalers. Under such contracts, the Company is entitled to credits from such wholesalers for the impact of that WAC increase on inventory currently on hand at the wholesalers. Such credits which can be significant, are used to offset against the total distribution service fees the Company pays on all of its productspaid to each such wholesaler. Net revenue on theseThe variable consideration associated with price appreciation credits is recognizedreflected in the transaction price of products sold when it is determined to be probable that a significant reversal will not occur. Included as a reduction of current period provisions for Distribution Fees in the table above are price appreciation credits of $17 million and $15 million for the years 2021 and 2020, respectively.
Contract Assets and Contract Liabilities
There are no contract assets for any period presented. Contract liabilities consist of deferred revenue, the balance of which is not material to any period presented.
Sales Commissions
Sales commissions are generally attributed to periods shorter than one year and therefore are expensed when incurred. Sales commissions are included in selling, general and administrative expenses.
Financing Component
The Company has elected not to adjust consideration for the effects of a significant financing component when the period between the transfer of a promised good or service to the customer and when the customer pays for that good or service will be one year or less. The Company's global payment terms are generally between thirty to ninety days.
Leases
The Company leases certain facilities, vehicles and equipment principally under multi-year agreements generally having a lease term of one to twenty years, some of which include termination options and options to extend the lease term from one to five years or on the datea month-to-month basis. The Company includes options that the wholesaler is notifiedare reasonably certain to be exercised as part of the price increase.lease term. The Company offers cash discounts for prompt payment and allowances for volume purchases to customers. Provisions for cash discounts and allowancesmay negotiate termination clauses in anticipation of changes in market conditions but generally, these termination options are estimated basednot exercised. Certain lease agreements also include variable payments that are dependent on contractual sales terms with customers, an analysis of unpaid invoices, and historical payment experience. The Company generally allows customers to return product within a specified period of time before and after its expiration date, excluding the Company’s European businesses which generally do not carry a right of return. Provisions for returns are estimated based on historical sales and return levels, taking into account additional available informationusage or may vary month-to-month such as historical returninsurance, taxes and exchange levels, external data with respect to inventory levels in the wholesale distribution channel, external data with respect to prescription demand for the Company’s products, remaining shelf livesmaintenance costs. None of the Company’s products at the date of sale and estimated returns liability to be processed by year of sale based on analysis of lot information related to actual historical returns. The Company reviews its methodology and adequacy of the provision for returns on a quarterly basis, adjusting for changes in assumptions, historical results and business practices, as necessary. The Company is subject to rebates on sales made under governmental and managed-care programs in the U.S., and chargebacks on sales made to government agencies, group purchasing organizations and other indirect customers. Provisions for rebates and chargebacks are estimated based on historical utilization levels, relevant statutes with respect to governmental pricing programs and contractual sales terms with managed-care providers and group purchasing organizations. Changes in the level of utilization of the Company’s products through privateCompany's lease agreements contain material residual value guarantees or public benefit plans and group purchasing organizations will impact the amount of rebates and chargebacks that the Company is obligated to pay.material restrictive covenants.
The Company is partyrequired to product manufacturingrecord a right-of-use asset and supply agreementscorresponding lease liability, equal to the present value of the lease payments at the commencement date of each lease. For all asset classes, in determining future lease payments, the Company has elected to aggregate lease components, such as payments for rent, taxes and insurance costs with non-lease components such as maintenance costs, and account for these payments as a numbersingle lease component. In limited
circumstances, when the information necessary to determine the rate implicit in a lease is available, the present value of commercialization counterpartiesthe lease payments is determined using the rate implicit in that lease. If the U.S. Underinformation necessary to determine the termsrate implicit in a lease is not available, the Company uses its incremental borrowing rate at the commencement of these agreements, the Company’s supply prices for its products are determined after taking into consideration estimates for future returns, rebates, and chargebacks provided by each counterparty. Thelease, which represents the rate of interest that the Company makes adjustments, as needed,would incur to state these estimatesborrow on a collateralized basis consistentover a similar term.
All leases must be classified as either an operating lease or finance lease. The classification is determined based on whether substantive control has been transferred to the lessee. The classification governs the pattern of lease expense recognition. For leases classified as operating leases, total lease expense over the term of the lease is equal to the undiscounted payments due in accordance with this policythe lease arrangement. Fixed lease expense is recognized periodically on a straight-line basis over the term of each lease and its methodologyincludes: (i) imputed interest during the period on the lease liability determined using the effective interest rate method plus (ii) amortization of the right-of-use asset for estimating returns, rebatesthat period. Amortization of the right-of-use asset during the period is calculated as the difference between the straight-line expense and chargebacks related to its own direct product sales.the imputed interest on the lease liability for that period. Variable lease expense is recognized when the achievement of the specific target is considered probable.
Research and Development Expenses
Costs related to internal research and development programs, including costs associated with the development of acquired IPR&D, are expensed as goods are delivered or services are performed. Under certain research and development arrangements with third parties, the Company may be required to make payments that are contingent on the achievement of specific developmental, regulatory and/or commercial milestones. BeforeMilestone payments made to third parties before a product receives regulatory approval, but after the milestone payments madeis determined to third partiesbe probable, are expensed and included in Research and development expenses when the milestone is achieved. Milestone payments made to third parties after regulatory approval is received are capitalized and amortized over the estimated useful life of the approved product.
Amounts due from third parties as reimbursement of development activities conducted under certain research and development arrangements are recognized as a reduction of Research and development expenses.
Legal Costs
Legal fees and other costs related to litigation and other legal proceedings or services are expensed as incurred and are included in Selling, general and administrative expenses. Certain legal costs associated with acquisitions are included in Acquisition-related costs and certain legal costs associated with divestitures, legal settlements and other business development activities are included in Litigation and other matters or Net gain on sales of assets within Other (income) expense net or Gain on investments,(income), net, as appropriate. Legal costs expensed are reported net of expected insurance recoveries. A claim for insurance recovery is recognized when realization becomes probable.
Advertising Costs
Advertising costs comprise product samples, print media, promotional materials and television advertising. Advertising costs related to new product launchesadvertising and are expensed on the first use of the advertisement. Included in Prepaid expenses and other current assets are prepaid advertising costs of $7 million and $8 million, as of December 31, 2017 and 2016, respectively. Included in Selling, general and administrative expenses are advertising costs of $462$515 million, $564$451 million and $652$544 million, for 2017, 20162021, 2020 and 2015,2019, respectively.
Share-Based Compensation
The Company recognizes all share-based payments to employees, including grants of employee stock options and restricted share units (“RSUs”), at estimated fair value. The Company amortizes the fair value of stock option or RSU grants on a straight-line basis over the requisite service period of the individual stock option or RSU grant, which generally equals the vesting period. Stock option and RSU forfeitures are estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. Share-based compensation is recorded in Research and development expenses and Selling, general and administrative expenses, and Other (income) expense, net, as appropriate.
See “Adoption of New Accounting Standards” in this Note 2 for details on the Company's adoption of a new standard related to share-based compensation.
Acquisition-Related Contingent Consideration
Acquisition-related contingent consideration, which primarily consists of potential milestone payments and royalty obligations, is recorded in the consolidated balance sheetsConsolidated Balance Sheets at its acquisition date estimated fair value, in accordance with the acquisition method of accounting. The fair value of the acquisition-related contingent consideration is remeasured each reporting period, with changes in fair value recorded in the consolidated statementsConsolidated Statements of operations.Operations. The fair value measurement is based on significant inputs not observable in the market and thus represents a Level 3 measurement as defined in fair value measurement accounting.
Interest Expense
Interest expense includes standby fees, and the amortization of debt discounts and deferred financing costs.costs, accretion of debt premiums and the amortization of amounts excluded from the assessment of effectiveness related to the Company's cross-currency swaps. Interest costs are expensed as incurred, except to the extent such interest is related to construction in progress, in which case interest is capitalized. Capitalized interest related to construction in progress for 2017, 2016as of December 31, 2021 and 20152020 was $32 million, $24$60 million and $14$45 million, respectively.respectively, and is included in Property, plant and equipment, net.
Income Taxes
Income taxes are accounted for under the liability method. Deferred tax assets and liabilities are recognized for the temporary differences between the financial statement and income tax bases of assets and liabilities, and for operating losses and tax credit carryforwards. A valuation allowance is provided for the portion of deferred tax assets that is more likely than not to remain unrealized. Deferred tax assets and liabilities are measured using enacted tax rates and laws. Deferred tax assets for outside basis differences in investments in subsidiaries are only recognized if the difference will be realized in the foreseeable future.
The tax benefit from an uncertain tax position is recognized only if it is more likely than not that the tax position will be sustained upon examination by the appropriate taxing authority, based on the technical merits of the position. The tax benefits recognized from such position are measured based on the amount thatfor which there is a greater than 50% likelylikelihood of being realized upon settlement. Liabilities associated with uncertain tax positions are classified as long-term unless expected to be paid within one year. Interest and penalties related to uncertain tax positions, if any, are recorded in the provision for income taxes and classified with the related liability on the consolidated balance sheets.
In accordance with recently issued accounting guidance, the Company has provisionally provided for the income tax effects of the Tax Cuts and Jobs Act (the “Tax Act”) which was enacted on December 22, 2017. The Company will finalize the provisional amounts within one year of enactment, December 22, 2018.
EarningsLoss Per Share Attributable to Bausch Health Companies Inc.
Basic earningsloss per share attributable to Valeant Pharmaceuticals International,Bausch Health Companies Inc. is calculated by dividing net incomeNet loss attributable to Valeant Pharmaceuticals International,Bausch Health Companies Inc. by the weighted-average number of common shares outstanding during the reporting period. Diluted earningsloss per share attributable to Bausch Health Companies Inc. is calculated by dividing net incomeNet loss attributable to Valeant Pharmaceuticals International,Bausch Health Companies Inc. by the weighted-average number of common shares outstanding during the reporting period after giving effect to dilutive potential common shares for stock options and RSUs, determined using the treasury stock method.
Comprehensive IncomeLoss
Comprehensive incomeloss comprises net incomeNet loss and otherOther comprehensive (loss) income. Other comprehensive (loss) income includes items such as foreign currency translation adjustments, unrealized holding gains and losses on available-for-sale and other
investments and certain pension and other postretirement benefit plan adjustments. Accumulated other comprehensive incomeloss is recorded as a component of shareholders’ equity.
Contingencies
In the normal course of business, the Company is subject to loss contingencies, such as claims and assessments arising from litigation and other legal proceedings, contractual indemnities, product and environmental liabilities and tax matters. Accruals for loss contingencies are recorded when the Company determines that it is both probable that a liability has been incurred and the amount of loss can be reasonably estimated. If the estimate of the amount of the loss is a range and some amount within the range appears to be a better estimate than any other amount within the range, that amount is accrued as a liability. If no amount within the range is a better estimate than any other amount, the minimum amount of the range is accrued as a liability. These accruals are adjusted periodically as assessments change or additional information becomes available.
If no accrual is made for a loss contingency because the amount of loss cannot be reasonably estimated, the Company will disclose contingent liabilities when there is at least a reasonable possibility that a loss or an additional loss may have been incurred.
Certain legal-related contingencies assumed in the acquisition of Salix Pharmaceuticals, Ltd. (“Salix”) were recorded at estimated fair value. See Note 3, "ACQUISITIONS" for additional information.
Employee Benefit Plans
The Company sponsors various retirement and pension plans, including defined benefit pension plans, defined contribution plans and a participatory defined benefit postretirement plan. The determination of defined benefit pension and postretirement plan obligations and their associated expenses requires the use of actuarial valuations to estimate the benefits employees earn while working, as well as the present value of those benefits. Net actuarial gains and losses that exceed 10 percent of the greater of the plan’s projected benefit obligations or the market-related value of assets are amortized to earnings over the shorter of the estimated average future service period of the plan participants (or the
estimated average future lifetime of the plan participants if the majority of plan participants are inactive) or the period until any anticipated final plan settlements.
Adoption of New Accounting Standards
In AugustJune 2016, the Financial Accounting Standards Board (the “FASB”("FASB") issued guidance which adds or clarifies the classification of certain cash receipts and payments in the statement of cash flows (including debt repayment or debt extinguishment costs, contingent consideration payment after a business combination, and distributions received from equity method investees). The guidance was effective for annual periods beginning after December 15, 2017, and interim periods within those annual periods. Early adoption was permitted. The Company adopted this amended guidance in 2017 which did not have a material impact on the presentation of the Company's cash flows for the periods presented.
In October 2016, the FASB amended the guidance as to how a reporting entity that is the single decision maker of a VIE should treat indirect interests in the entity held through related parties that are under common control with the reporting entity when determining whether it is the primary beneficiary of that VIE. The amended guidance was effective for annual reporting periods beginning after December 15, 2016, and interim periods within those annual periods. The Company adopted this amended guidance as of January 1, 2017 which did not have a material impact on the presentation of the Company's results of operations, cash flows or financial position for the periods presented.
In November 2016, the FASB issued guidance which requires entities to include restricted cash in cash and cash equivalent balances on the statement of cash flows and disclose a reconciliation between the balances on the statement of cash flows and the balance sheet. The guidance was effective for annual periods beginning after December 15, 2017, and interim periods within those annual periods. Early adoption was permitted. The Company adopted this amended guidance in 2017 on a retrospective basis, which did not have a material impact on the presentation of the Company's cash flows for the periods presented.
In May 2017, the FASB issued guidance identifying the terms or conditions of share-based payment awards to which an entity would be required to apply modification accounting. The guidance was effective for annual periods beginning after December 15, 2017. The Company has not modified any outstanding awards, and therefore, does not have modification accounting. The Company has adopted this guidance in the fourth quarter of 2017 and concluded it did not have a material impact its financial position, results of operations, cash flows and disclosures for the periods presented.
In December 2017, the U.S. Securities and Exchange Commission (the "SEC") issued guidance for situations where the accounting for certain elements of the Tax Act cannot be completed prior to the release of an entity's financial statements. For the specific elements of the Tax Act where a reasonable estimate of the tax effects cannot be completed, no effect will be recorded in the current period. The guidance provides a measurement period to allow an entity to account for these specific elements, which begins in the reporting period that includes the enactment of the Tax Act and ends when the entity has obtained, prepared and analyzed the information needed in order to complete its accounting assessments. The resulting tax effects must be recognized in the period the assessment is complete, and included in income tax provision or benefit, accompanied by appropriate disclosures. The measurement period shall not exceed one year from enactment, December 22, 2018.
In January 2018, the FASB issued guidance to account for the global intangible low-taxed income ("GILTI") provisions of the Tax Act, which imposes a tax on foreign income in excess of a deemed return on tangible assets of foreign corporations. The guidance provides that an entity may elect to: (i) currently recognize deferred taxes for basis differences that are expected to reverse as GILTI inclusions in future years or (ii) recognize GILTI inclusions as period costs if and when incurred. The Company has provisionally elected to account for GILTI tax in the period in which it is incurred, and therefore has not provided any deferred tax impacts of GILTI in its consolidated financial statements for the year ended December 31, 2017.
Recently Issued Accounting Standards, Not Adopted as of December 31, 2017
In May 2014, the FASB issued guidance on recognizing revenue from contracts with customers. The core principle of the revenue model is that an entity recognizes revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In applying the revenue model to contracts within its scope, an entity will: (i) identify the contract(s) with a customer, (ii) identify the performance obligations in the contract, (iii) determine the transaction price, (iv) allocate the transaction price to the performance obligations in the contract and (v) recognize revenue when (or as) the entity satisfies a performance obligation. In addition to these provisions, the new standard provides implementation guidance on several other topics, including the accounting for certain revenue-related costs, as well as enhanced disclosure requirements. The new guidance requires entities to disclose both quantitative and qualitative information that enables users of financial statements to understand the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. In March 2016, the FASB issued an amendment to clarify the implementation guidance around considerations whether an entity is a principal or an agent, impacting whether an entity reports revenue on a gross or net basis. In April 2016, the FASB issued an amendment to clarify guidance on identifying performance obligations and the implementation guidance on licensing. The guidance is effective for annual reporting periods beginning after December 15, 2017. Early application was permitted but not before the annual reporting period, including adoption in an interim period, beginning January 1, 2017. Entities have the option of using either a full retrospective or a modified approach to adopt the guidance. The Company has completed its detailed assessment program and a training program for its personnel. Pursuant to the detailed assessment program, the Company reviewed selected revenue arrangements and assessed the differences in accounting for such contracts under the new guidance as compared with current revenue accounting standards. Based on this review of current customer contracts, the Company does not expect the implementation of the new guidance to have a material quantitative impact on its consolidated financial statements as the timing of revenue recognition for product sales is not expected to significantly change. The Company also completed its assessment of the impact to the design of its internal controls over financial reporting and is in the process of completing its assessment of the impact to its disclosures, which will be completed in the first reporting period post adoption. The Company will adopt the new guidance using the modified retrospective approach, under which the new guidance will be adopted retrospectively with the cumulative effect of initial application of the guidance recognized on the date of initial application (which is January 1, 2018).
In February 2016, the FASB issued guidance on leases. This guidance will increase transparency and comparability among organizations that lease buildings, equipment, and other assets by recognizing the assets and liabilities that arise from lease transactions. Current off-balance sheet leasing activities will be required to be reflected on balance sheets so that investors and other users of financial statements can more readily and accurately understand the rights and obligations associated with these transactions. Consistent with the current lease standard, the new guidance addresses two types of leases: finance leases and operating leases. Finance leases will be accounted for in substantially the same manner as capital leases are accounted for under current U.S. GAAP. Operating leases will be accounted for (both in the statement of operations and statement of cash flows) in a manner consistent with operating leases under existing U.S. GAAP. However, as it relates to the balance sheet, lessees will recognize lease liabilities based upon the present value of remaining lease payments and corresponding lease assets for operating leases with limited exception. The new guidance will also require lessees and lessors to provide additional qualitative and quantitative disclosures to help financial statement users assess the amount, timing, and uncertainty of cash flows arising from leases. These disclosures are intended to supplement the amounts recorded in the financial statements so
that users can understand more about the nature of an organization’s leasing activities. In 2018, the Company has initiated its project plan for adopting this guidance, which includes a detailed assessment program and a training program for its personnel. The new guidance is effective for annual reporting periods beginning after December 15, 2018. Early application is permitted. The Company is evaluating the impact of adoption of this guidance on its financial position, results of operations and disclosures.
In June 2016, the FASB issued guidance on the impairment of financial instruments requiring an impairment model based on expected losses rather than incurred losses. Under this guidance, an entity recognizes as an allowance its estimate of expected credit losses. The guidance iswas effective for the Company beginning January 1, 2020 and was applied using a modified retrospective approach through a cumulative-effect adjustment to accumulated deficit, which resulted in an increase to Accumulated deficit of less than $1 million. The application of this guidance did not have a material effect on the Company's results of operations and cash flows.
In August 2018, the FASB issued guidance modifying the disclosure requirements for fair value measurement. The guidance was effective for the Company beginning January 1, 2020. The application of this guidance did not have a material effect on the Company's disclosures.
In August 2018, the FASB issued guidance modifying the disclosure requirements for employers that sponsor defined benefit pension or other postretirement plans. The guidance was effective for annual periods beginningending after December 15, 2020. The application of this guidance did not have a material effect on the Company's disclosures.
In December 2019, the FASB issued guidance that simplifies the accounting for income taxes by eliminating certain exceptions to the guidance related to the approach for intraperiod tax allocation, the methodology for calculating income taxes in an interim period and interim periods within those annual periods. Early adoptionthe recognition of deferred tax liabilities for outside basis differences. The new guidance also simplifies aspects of the accounting for franchise taxes and enacted changes in tax laws or rates and clarifies the accounting for transactions that result in a step-up in the tax basis of goodwill. The guidance is permittedeffective for the Company beginning with annual periods beginning afterJanuary 1, 2021. The application of this guidance did not have a material effect on the Company's financial position, results of operations and cash flows.
In March 2020, the FASB issued guidance providing optional expedients and exceptions for applying U.S. GAAP to contracts, hedging relationships, and other transactions that reference LIBOR or a reference rate that is expected to be discontinued as a result of reference rate reform. Optional expedients are provided for contract modification accounting within the areas of receivables, debt, leases, derivatives and hedging. The optional amendments are effective for all entities as of March 12, 2020, through December 15, 2018,31, 2022. During 2020 and interim periods within those annual periods. The2021, the Company is evaluatinghas not entered into any contract modifications in which the optional expedients were applied. However, if prior to December 31, 2022, the Company enters into a contract modification in which the optional expedients are applied, the Company will evaluate the impact of adoption of this guidance on its financial position, results of operations and cash flows.
In October 2016,
3.ACQUISITIONS, LICENSING AGREEMENTS AND DIVESTITURE
Acquisition Agreement for Synergy Pharmaceuticals Inc.
On March 6, 2019, the FASB issued guidance which removesCompany acquired certain assets of Synergy Pharmaceuticals Inc. ("Synergy") for a cash purchase price of approximately $180 million and the prohibition againstassumption of certain liabilities, pursuant to the immediate recognitionterms approved by the U.S. Bankruptcy Court for the Southern District of New York on March 1, 2019. Among the currentassets acquired are the worldwide rights to the Trulance® (plecanatide) product, a once-daily tablet for adults with chronic idiopathic constipation and deferred income tax effectsirritable bowel syndrome with constipation. This acquired business is included in the Company's Salix segment and is expected to result in additional revenues and costs savings associated with business synergies.
Assets Acquired and Liabilities Assumed
The acquisition of intra-entity transferscertain assets of assets other than inventory. The guidance is effective for annual periods beginning after December 15, 2017, and interim periods within those annual periods. The Company estimates the impact of adoption will increase deferred tax assets and equity approximately $1,000 million.
In January 2017, the FASB issued guidance which clarifies the definition of a business with the objective of assisting with evaluating whether transactions should beSynergy has been accounted for as acquisitions (or disposals)a business combination under the acquisition method of assets or businesses. The guidance is effective for annual periods beginning after December 15, 2017, and interim periods within those annual periods. Early adoption is permitted. The Company will apply the new definition to future transactions.
In January 2017, the FASB issued guidance which simplifies the subsequent measurementaccounting since: (i) substantially all of goodwill by eliminating “Step 2” from the goodwill impairment test. Instead, goodwill impairment will be measured as the amount by which a reporting unit's carrying value exceeds its fair value. The FASB also eliminated the requirements for any reporting unit with a zero or negative carrying amount to perform a qualitative assessment. The guidance is effective for annual periods beginning after December 15, 2019, and interim periods within those annual periods, with early adoption permitted. The Company may elect to adopt this standard effective the first quarter of 2018. Once adopted, this guidance is expected to have a significant impact on the Company’s financial position, results of operations, and disclosures with respect to the Salix reporting unit. While the fair value of the assets acquired is not concentrated in a reporting unit is subjectsingle identifiable asset or group of similar identifiable assets and (ii) substantive inputs and processes were acquired to update for events occurring subsequentcontribute to the datecreation of impairment testing, at October 1, 2017,outputs. The following table summarizes the Salix reporting unit had an estimated fair valuevalues of $10,660 millionthe assets acquired and a carrying valueliabilities assumed related to the acquisition of $13,404 million, including goodwillcertain assets of $5,127 million. See Note 9, "INTANGIBLE ASSETS AND GOODWILL".Synergy as of the acquisition date:
| | | | | |
3.(in millions) | ACQUISITIONS |
| Accounts receivable | $ | 7 | |
| Inventories | 24 | |
| Prepaid expenses and other current assets | 5 | |
| Product brand intangible assets (estimated useful life 7 years) | 159 | |
| Accounts payable | (1) | |
| Accrued expenses | (17) | |
| Total identifiable net assets | 177 | |
| Goodwill | 3 | |
| Total fair value of consideration transferred | $ | 180 | |
Goodwill associated with the acquisition of certain assets of Synergy is not deductible for income tax purposes.
Revenue and Operating Results
Revenues associated with the acquired assets of Synergy during the period March 6, 2019 through December 31, 2019 were $55 million. Operating results associated with the acquired assets of Synergy during the period March 6, 2019 through December 31, 2019 and pro-forma revenues and operating results for the year 2019 were not material. Included in Other expense, net for 2019 are acquisition-related costs of $8 million directly related to the acquisition of certain assets of Synergy, which include expenditures for advisory, legal, valuation, accounting and other similar services.
There were no other material business combinations in 2017 and one business combination in 2016 that was not material.2021, 2020 or 2019. The measurement period for all acquisitions has closed.
2015 Business CombinationsOption to Purchase All Ophthalmology Assets of Allegro Ophthalmics, LLC ("Allegro")
Amoun
On October 19, 2015,September 21, 2020, the Company announced that it had entered into an agreement to acquire an option to purchase all of the ophthalmology assets of Allegro (the "Option"), a privately held biopharmaceutical company focused on the development of therapies that regulate integrin functions for the treatment of ocular diseases. Among the assets to be acquired Mercury (Cayman) Holdings,if the holding companyOption was exercised, were the worldwide rights to risuteganib (Luminate®), Allegro's lead investigational compound in retina, which is believed to simultaneously act on the angiogenic, inflammatory and mitochondrial metabolic pathways implicated in diseases such as intermediate dry Age-related Macular Degeneration. During the three months ended September 30, 2020, the Company made and expensed as acquired IPR&D included in Other expense, net, an initial upfront payment of $10 million to acquire the Option. However, on June 23, 2021, Allegro notified the Company that it did not raise the additional funding required under the option agreement. Pursuant to the terms of the option agreement, the Option thereby terminated, and the Company exercised its right to convert the $10 million upfront payment into a minor equity interest in Allegro. The Company expects that it will make no additional payments pursuant to this option agreement.
Licensing Agreements
In the normal course of business, the Company may enter into select licensing and collaborative agreements for the commercialization and/or development of unique products. These products are sometimes investigational treatments in early stage development that target unique conditions. The ultimate outcome, including whether the product will be: (i) fully developed, (ii) approved by regulatory agencies, (iii) covered by third-party payors or (iv) profitable for distribution, is highly uncertain. The commitment periods under these agreements vary and include customary termination provisions. Expenses arising from commitments, if any, to fund the development and testing of these products and their promotion are recognized as incurred. Royalties due are recognized when earned and milestone payments are accrued when each milestone has been achieved and payment is probable and can be reasonably estimated.
Divestiture of Amoun Pharmaceutical Company S.A.E. (“Amoun”("Amoun"), for an aggregate purchase price of approximately $906 million, which included cash plus contingent consideration (the “Amoun Acquisition”). Amoun develops and markets a wide range of pharmaceutical brands in therapeutic areas such as anti-hypertensives, broad spectrum antibiotics, and anti-diarrheals primarily in North Africa and the Middle East.
Fair Value of Consideration Transferred
The fair value of consideration transferred to affect the Amoun Acquisition consisted of $847 million in cash, plus contingent consideration based upon the achievement of specified sales-based milestones. The range of potential milestone payments as of the acquisition date was from nil, if none of the milestones were achieved, to a maximum of up to approximately $75 million over time, if all milestones are achieved. The fair value of the contingent consideration was estimated at the acquisition date to be $59 million and was determined using probability-weighted discounted cash flows. Included in Other expense (income) for 2015 is a charge for post-combination expense of $12 million related to cash bonuses paid to Amoun employees.
Assets Acquired and Liabilities Assumed
The estimated fair values of the acquired identifiable intangible assets, excluding acquired IPR&D, as adjusted, and subject to the finalization of certain working capital provisions were $520 million and consisted of:
|
| | | | | | |
| (in millions) | | Weighted-Average Useful Lives (Years) | | Final Fair Value |
| Product brands | | 9 | | $ | 480 |
|
| Corporate brand | | 17 | | 40 |
|
| Total identifiable intangible assets acquired | |
| | $ | 520 |
|
Goodwill of $284 million was allocated to the Company’s Bausch + Lomb/International segment (initially the former Emerging Markets segment) and represents: (i) the Company’s expectation to develop and market new products and expand its business to new geographic markets, (ii) the value of the continuing operations of Amoun's existing business (that is, the higher rate of return on the assembled net assets versus if the Company had acquired all of the net assets separately) and (iii) intangible assets that do not qualify for separate recognition (for instance, Amoun's assembled workforce). None of the goodwill is expected to be deductible for tax purposes.
Revenues and net losses attributable to Amoun from the date of acquisition through December 31, 2015 were $48 million and $9 million, respectively, and include the effects of acquisition adjustments and acquisition-related costs.
Sprout Pharmaceuticals, Inc.
On October 1, 2015, the Company acquired Sprout Pharmaceuticals, Inc. (“Sprout”), pursuant to the merger agreement, among Sprout, the Company, Valeant Pharmaceuticals International (“Valeant”), Miranda Acquisition Sub, Inc., a wholly owned subsidiary of Valeant, and Shareholder Representative Services LLC, as stockholder representative, on a debt-free basis (the “Sprout Acquisition”), for an aggregate purchase price of approximately $1,447 million, which included cash plus contingent consideration. Sprout has focused solely on the delivery of a treatment option for the unmet need of pre-menopausal women with acquired, generalized hypoactive sexual desire disorder as characterized by low sexual desire that causes marked distress or interpersonal difficulty and is not due to a co-existing medical or psychiatric condition, problems within the relationship, or the effects of a medication or other drug substance. In August 2015, Sprout received approval from the U.S. Food and Drug Administration ("FDA") on its New Drug Application ("NDA") for flibanserin, which is being marketed as Addyi® in the U.S. (launched in the U.S. in October 2015). Sprout also has global rights to flibanserin.
On December 20, 2017, the Company completed the sale of Sprout. Refer to Note 4, "DIVESTITURES" for additional information regarding the Sprout Sale.
Fair Value of Consideration Transferred
The Company paid approximately $530 million, inclusive of customary purchase price adjustments, upon closing of the transaction in October 2015, and an additional payment in the amount of $500 million (acquisition date fair value of $495 million), included in accrued and other current liabilities as of DecemberMarch 31, 2015, which was paid in the first quarter of 2016. In addition, the transaction included contingent consideration representing payments to the former shareholders and former holders of vested stock appreciation rights of Sprout for a share of future profits. That share of future profits was uncapped and commenced on the date that the earlier of: (a) net cumulative worldwide sales of flibanserin products (plus any amounts received from sublicenses on the sale of flibanserin products) exceeded $1,000 million or (b) July 1, 2017; and continued until December 31, 2030. The total fair value of the contingent consideration of $422 million as of the acquisition date was determined using a Monte Carlo Simulation.
Assets Acquired and Liabilities Assumed
The estimated fair values of the acquired Identifiable intangible assets was $994 million and consisted of product rights with a weighted-average useful life of 11 years. Goodwill of $770 million was allocated to the Branded Rx segment (initially the former Developed Markets segment) and represented: (i) the Company’s potential ability to develop and market the product to additional types of patients/indications and launch the product in a variety of new geographies, (ii) the value of the continuing operations of Sprout's existing business and (iii) intangible assets that do not qualify for separate recognition. None of the goodwill is expected to be deductible for tax purposes.
Revenues attributable to Sprout from the date of acquisition through December 31, 2015 were nominal. Net losses attributable to Sprout from the date of acquisition through December 31, 2015 were $37 million and include the effects of acquisition adjustments and acquisition-related costs.
Salix
On April 1, 2015, the Company acquired Salix, pursuant to an Agreement and Plan of Merger dated February 20, 2015, as amended on March 16, 2015 (the “Salix Merger Agreement”), with Salix surviving as a wholly owned subsidiary of Valeant, a subsidiary of the Company (the “Salix Acquisition”). Salix is a specialty pharmaceutical company dedicated to developing and commercializing prescription drugs and medical devices used in treatment of variety of gastrointestinal ("GI") disorders with a portfolio of over 20 marketed products, including Xifaxan®, Uceris®, Apriso®, Glumetza®, and Relistor®.
The Salix Acquisition, as well as related transactions and expenses, were funded through a combination of: (i) the proceeds from an issuance of senior unsecured notes that closed on March 27, 2015; (ii) the proceeds from incremental term loan commitments; (iii) the proceeds from a registered offering of the Company’s common shares in the United States that closed on March 27, 2015; and (iv) cash on hand. For further information regarding these debt and equity issuances, see Note 11, "FINANCING ARRANGEMENTS" and Note 13, "SHAREHOLDERS' EQUITY", respectively.
Fair Value of Consideration Transferred
The purchase price of the Salix Acquisition was $13,132 million, and consisted of cash payments of: (i) $11,329 million to cancel the outstanding common shares, stock options, and restricted stock units of Salix (net of the non-vested portion of Salix restricted stock units), (ii) $1,125 million to redeem Salix’s Term Loan B Credit Facility repaid concurrently with the consummation of the Salix Acquisition and not assumed by the Company and (iii) $842 million to redeem Salix’s 6.00% Senior Notes due 2021, satisfied and discharged concurrently with the consummation of the Salix Acquisition and not assumed by the Company. The purchase price excludes $165 million paid by the Company at closing to settle the non-vested portion of Salix restricted stock units, the vesting of which was accelerated in connection with the Salix Acquisition and accounted for by the Company as a post-combination expense included in Other expense (income).
Assets Acquired and Liabilities Assumed
Acquisition accounting was finalized in the fourth quarter of 2015. The following table provides the fair value of the assets acquired and liabilities assumed in the Salix Acquisition as of the acquisition date.
|
| | | | |
| (in millions) | | Final Fair Value |
| Cash and cash equivalents | | $ | 114 |
|
| Inventories | | 232 |
|
| Other assets | | 1,410 |
|
| Property, plant and equipment | | 24 |
|
| Identifiable intangible assets, excluding acquired IPR&D | | 6,756 |
|
Acquired IPR&D - Xifaxan® IBS-D | | 4,790 |
|
| Acquired IPR&D - Other | | 393 |
|
| Current liabilities | | (1,939 | ) |
| Contingent consideration | | (334 | ) |
| Long-term debt | | (3,123 | ) |
| Deferred income taxes, net of deferred tax assets | | (3,428 | ) |
| Other non-current liabilities | | (43 | ) |
| Total identifiable net assets | | 4,852 |
|
| Goodwill | | 8,280 |
|
| Total fair value of consideration transferred | | $ | 13,132 |
|
Other assets includes the fair value of $1,270 million of the capped call transactions and convertible bond hedge transactions that were entered into by Salix prior to the Salix Acquisition in connection with its 1.5% Convertible Senior Notes due 2019 and 2.75% Convertible Senior Notes due 2015. The capped call transactions and convertible bond hedge transactions were settled on the date of the Salix Acquisition and, as such, the fair value was equal to the settlement amounts.
The following table summarizes the amounts and useful lives assigned to identifiable intangible assets:
|
| | | | | | |
| (in millions) | | Weighted- Average Useful Lives (Years) | | Final Fair Value |
| Product brands | | 10 | | $ | 6,089 |
|
| Corporate brand | | 20 | | 667 |
|
| Total identifiable intangible assets acquired | |
| | $ | 6,756 |
|
Acquired IPR&D assets were valued from a market participant perspective using a multi-period excess earnings methodology (income approach). The projected cash flows from these assets were adjusted for the probabilities of successful development and commercialization of each project, and the Company used risk-adjusted discount rates of 9.5%-11% to present value the projected cash flows.
Current liabilities include: (i) $1,080 million for warrant transactions that Salix entered into in connection with its 1.5% Convertible Senior Notes due 2019 (these instruments were settled at closing of the transaction and the fair value are the settlement amounts), (ii) $336 million for potential losses and related costs associated with ongoing Salix legal matters (see Note 21, "LEGAL PROCEEDINGS" for additional information) and (iii) $375 million of product returns and rebates.
Contingent consideration consists of potential payments to third parties including developmental milestone payments due upon specified regulatory achievements, commercialization milestones contingent upon achieving specified targets for net sales, and royalty-based payments. As of the acquisition date, potential milestone payments (excluding royalty-based payments) ranged from nil if none of the milestones are achieved, to approximately $650 million (the majority of which relates to sales-based milestones) over time. This amount includes up to $250 million in developmental and sales-based milestones related to Relistor® (including Oral Relistor®), of which $50 million was paid in the third quarter of 2016 in connection with the FDA's approval of Oral Relistor®. The fair value of the contingent consideration assumed was $334 million and was determined
using probability-weighted discounted cash flows. See Note 6, "FAIR VALUE MEASUREMENTS" for additional information regarding the contingent consideration.
Long term debt is Salix debt assumed at the acquisition date and consisted of: (i) $1,837 million in 1.5% Convertible Senior Notes due 2019 and (ii) $1,286 million in 2.75% Convertible Senior Notes due 2015. The Company redeemed these amounts in the second quarter of 2015, except for a nominal amount of the 1.5% Convertible Senior Notes due 2019 which remains outstanding.
Goodwill has been allocated to the Branded Rx segment (initially the former Developed Markets segment) and represents: (i) the Company’s expectation to develop and market new product brands, product lines and technology; (ii) cost savings and operating synergies expected to result from combining the operations of Salix with those of the Company; (iii) the value of the continuing operations of Salix’s existing business; and (iv) intangible assets that do not qualify for separate recognition. None of the goodwill is expected to be deductible for tax purposes.
Revenues and net losses attributable to Salix from the date of acquisition through December 31, 2015 were $1,276 million and $302 million, respectively, and include the effects of acquisition adjustments and acquisition-related costs.
Other 2015 Business Combinations
In 2015, the Company completed other business combinations (excluding the Amoun Acquisition, the Sprout Acquisition, and the Salix Acquisition) for an aggregate purchase price of $1,407 million. These other business combinations included contingent consideration arrangements with an original aggregate estimated fair value of $186 million, primarily related to the acquisition of certain assets of Marathon Pharmaceuticals, LLC ("Marathon"), as well as milestone payments and royalties related to other smaller acquisitions. See Note 6, "FAIR VALUE MEASUREMENTS" for additional information regarding contingent consideration.
| |
• | On February 23, 2015, the Company, completed via a "stalking horse bid" in a sales process conducted under the U.S. Bankruptcy Code, for the acquisition of certain assets of Dendreon Corporation for a purchase price of $415 million, net of cash received of $80 million. The purchase price included approximately $50 million in stock consideration, and the Company issued such common shares in June 2015. The assets acquired included the worldwide rights to the Provenge® product (an immunotherapy treatment designed to treat men with advanced prostate cancer). On June 28, 2017, the Company completed the sale of all outstanding equity interests in Dendreon Pharmaceuticals LLC. See Note 4, "DIVESTITURES" for additional information.
|
| |
• | On February 10, 2015, the Company acquired certain assets of Marathon, which included a portfolio of hospital products, including Nitropress®, Isuprel®, Opium Tincture, Pepcid®, Seconal® Sodium, Amytal® Sodium, and Iprivask® for an aggregate purchase price of $286 million which is net of a $64 million assumed liability owed to a third party. The Company also assumed a contingent consideration liability related to potential payments, in the aggregate, of up to $200 million for Isuprel® and Nitropress®, the amounts of which are dependent on the timing of generic entrants for these products. The fair value of the liability as of the acquisition date was $87 million and was determined using probability-weighted projected cash flows. Through December 31, 2017, 2016 and 2015, the Company made contingent consideration payments of $16 million, $50 million and $35 million, respectively, related to the acquisition of certain assets of Marathon.
|
In 2015, the Company completed other acquisitions which are not material individually or in the aggregate. These acquisitions are included in the aggregated amounts presented below.
Assets Acquired and Liabilities Assumed
These transactions have been accounted for as business combinations under the acquisition method of accounting. The estimated fair values of acquired Identifiable intangible assets, excluding acquired IPR&D is summarized as follows:
|
| | | | | | |
| (in millions) | | Weighted- Average Useful Lives (Years) | | Final Fair Value |
| Product brands | | 7 | | $ | 735 |
|
| Product rights | | 3 | | 42 |
|
| Corporate brands | | 16 | | 7 |
|
| Partner relationships | | 8 | | 8 |
|
| Technology/know-how | | 10 | | 284 |
|
| Other | | 6 | | 2 |
|
| Total identifiable intangible assets acquired | |
| | $ | 1,078 |
|
Goodwill of $139 million associated with these acquisitions was allocated primarily to the Company’s Bausch + Lomb/International segment (initially primarily to the former Developed segment) and primarily relates to certain smaller acquisitions and the acquisition of certain assets of Marathon. The goodwill represents primarily the cost savings, operating synergies and other benefits expected to result from combining the operations with those of the Company. The majority of the goodwill is not expected to be deductible for tax purposes.
Revenues and net income attributable to these business combinations from the respective dates of acquisition through December 31, 2015 were $771 million and $208 million, respectively, and include the effects of acquisition adjustments and acquisition-related costs.
Pro Forma Impact of Business Combinations
The following table presents unaudited pro forma consolidated results of operations for 2015, as if the 2015 acquisitions had occurred as of January 1, 2014.
|
| | | | |
| (in millions, except per share amounts) | | 2015 |
| Revenues | | $ | 10,710 |
|
| Net loss attributable to Valeant Pharmaceuticals International, Inc. | | $ | (619 | ) |
| Loss per share attributable to Valeant Pharmaceuticals International, Inc.: | | |
| Basic | | $ | (1.80 | ) |
| Diluted | | $ | (1.80 | ) |
The unaudited pro forma consolidated results of operations were prepared using the acquisition method of accounting and are based on the historical financial information of the Company and the acquired businesses. Except to the extent realized in 2015, the unaudited pro forma information does not reflect any cost savings, operating synergies or other benefits that the Company achieved as a result of these acquisitions, or the costs necessary to achieve these cost savings, operating synergies or other benefits. In addition, except to the extent recognized, the unaudited pro forma information does not reflect the costs to integrate the operations of the Company with those of the acquired businesses.
The unaudited pro forma information is not necessarily indicative of what the Company’s consolidated results of operations actually would have been had the 2015 acquisitions been completed on January 1, 2014. In addition, the unaudited pro forma information does not purport to project the future results of operations of the Company. The unaudited pro forma information reflects primarily the following adjustments:
elimination of historical intangible asset amortization expense of these acquisitions;
additional amortization expense related to the fair value of identifiable intangible assets acquired;
additional depreciation expense related to fair value adjustment to property, plant and equipment acquired;
additional interest expense associated with the financing obtained in connection with the Salix Acquisition; and
the exclusion from pro forma earnings for 2015 of the aggregate acquisition related accounting adjustments to the inventories acquired and subsequently sold of $130 million, the acquisition-related costs incurred for these acquisitions of $35 million and the inclusion of those amounts in pro forma earnings of the preceding years.
All of the above adjustments were adjusted for the applicable tax impact.
2015 Licensing Agreement
On October 1, 2015, pursuant to a license agreement entered into with AstraZeneca Collaboration Ventures, LLC (“AstraZeneca”), the Company was granted an exclusive license to develop and commercialize brodalumab. Brodalumab is an IL-17 receptor monoclonal antibody in development for patients with moderate-to-severe plaque psoriasis and psoriatic arthritis. Under the license agreement, the Company initially held the exclusive rights to develop and commercialize brodalumab globally, except in Japan and certain other Asian countries where rights are held by Kyowa Hakko Kirin Co., Ltd under a prior arrangement with Amgen Inc., the originator of brodalumab. The Company has assumed all remaining development obligations associated with the regulatory approval for brodalumab in its territory subsequent to the acquisition. Regulatory submission in the U.S. and European Union for brodalumab in moderate-to-severe psoriasis occurred in November 2015. On February 16, 2017, the Company announced that the FDAit and certain of its affiliates had approved the Biologics License Application ("BLA") for brodalumab injection, marketed as Siliq™, for subcutaneous use for the treatment of moderate-to-severe plaque psoriasis in adult patients who are candidates for systemic therapy or phototherapy and have failed to respond or have lost response to other systemic therapies. On July 27, 2017, Siliq™ was launched in the U.S. This product hasentered into a Black Box Warning for the risks in patients with a history of suicidal thoughts or behavior and was approved with a Risk Evaluation and Mitigation Strategy involving a one-time enrollment for physicians and one-time informed consent for patients.
Under the terms of the agreement, the Company made an up-front payment to AstraZeneca of $100 million in October 2015, which was recognized in Acquired in-process research and development costs in the fourth quarter of 2015 in the consolidated statement of operations as the product has not yet received regulatory approval at the time of the acquisition. In addition, under the terms of the license agreement, the Company may pay additional regulatory milestones of up to $170 million (subsequently decreased to $150 million as described below and of which $130 million was paid as a result of the FDA's approval on February 15, 2017 of the BLA for Siliq™) and sales-related milestone payments of up to $175 million following launch. Upon launch, AstraZeneca and the Company will share profits. On June 30, 2016, the Company and AstraZeneca amended the original licensedefinitive agreement to terminatesell all of its equity interests in Amoun for total gross consideration of approximately $740 million (including the Company's right to develop and commercialize brodalumab in Europe, in exchange for payments by AstraZenecaassignment to the Company, which consistpurchasing entity of an up-front payment and certain sales-based milestones, and a reduction of one of the pre-launch milestones payableintercompany loan granted by the Company under the license agreement. Concurrently, the Company and AstraZeneca entered into other agreements, amongst which include a settlement agreement to resolveAmoun), subject to certain disputed invoices related to transition services.
2017 Licensing Agreement
On February 21, 2017, EyeGate Pharmaceuticals, Inc. (“EyeGate”) granted a subsidiary of the Company the exclusive worldwide licensing rights to manufacture and sell the EyeGate® II Delivery System and EGP-437 combination product candidate for the treatment of post-operative pain and inflammation in ocular surgery patients. EyeGate will be responsible for the continued development of this product candidate in the U.S. for the treatment of post-operative pain and inflammation in ocular surgery patients, and all associated costs. The Company has the right to further develop the product in the field outside of the U.S. at its cost. In connection with the licensing agreement, the Company paid an initial license fee of $4 million during the three months ended March 31, 2017 and is obligated to make future payments of: (i) up to $34 million upon the achievement of certain development and regulatory milestones, of which $3 million has been paid, (ii) up to $65 million upon the achievement of certain sales-based milestones and (iii) royalties. Based on early stage of development of the asset, and lack of acquired significant inputs, the Company concluded this was an asset acquisition.
The Company has divested certain businesses and assets, which, in each case, was not aligned with its core business objectives.
2017
CeraVe®, AcneFree™ and AMBI® skincare brands
On March 3, 2017, the Company completed the sale of its interests in the CeraVe®, AcneFree™ and AMBI® skincare brands for $1,300 million in cashadjustments (the “Skincare“Amoun Sale”). The CeraVe®, AcneFree™Amoun Sale closed on July 26, 2021. As part of the Amoun Sale, cash generated by Amoun during the period from the locked-box date of January 1, 2021 through closing was for the benefit of the purchasing entity, subject to working capital during such period. Amoun manufactures, markets and AMBI® skincaredistributes branded generics of human and animal health products. The Amoun business was part of the International Rx segment (previously
included within the former Bausch + Lomb/International segmentsegment) and was reclassified as held for sale as of December 31, 2016. Included in Other (income) expense, net is2020. As a result of meeting the Gain on the Skincare Sale of $309 million, as adjusted, in the consolidated statement of operations.
Dendreon Pharmaceuticals LLC
On June 28, 2017, the Company completed the sale of all outstanding equity interests in Dendreon Pharmaceuticals LLC (formerly Dendreon Pharmaceuticals, Inc.) (“Dendreon”)criteria for $845 million in cash (the “Dendreon Sale”), as adjusted. Dendreon was part of the Branded Rx segment and was reclassified as held for sale as of December 31, 2016. Included in Other (income) expense, net isclassification, the Gain on the Dendreon Sale of $97 million, as adjusted, in the consolidated statement of operations.
iNova Pharmaceuticals
On September 29, 2017, the Company completed the sale of its Australian-based iNova Pharmaceuticals (“iNova”) business for $938 million in cash (the “iNova Sale”), as adjusted, and subject to the finalization of certain working capital provisions. iNova markets a diversified portfolio of weight management, pain management, cardiology and cough and cold prescription and OTC products in more than 15 countries, with leading market positions in Australia and South Africa, as well as an established platform in Asia. The Company will continue to operate in these geographies through the Bausch + Lomb franchise. The iNova business was part of the Bausch + Lomb/International segment and was reclassified as held for sale as of December 31, 2016. Included in Other (income) expense, net is the Gain on the iNova Sale of $309 million, as adjusted, in the consolidated statement of operations.
Obagi Medical Products, Inc.
On November 9, 2017, certain of the Company's affiliates completed the sale its Obagi Medical Products, Inc. (“Obagi”) business for $190 million in cash (the “Obagi Sale”). Obagi is a global specialty skin care pharmaceutical business with products focused on premature skin aging, skin damage, hyperpigmentation, acne and sun damage which are primarily available through dermatologists, plastic surgeons and other skin care professionals. The Obagi business was part of the U.S. Diversified Products segment and was reclassified as held for sale as of March 31, 2017. The carrying value of the ObagiAmoun business, including associated goodwill, was adjusted to its estimated fair value, less costs to sell, and the Company recognized an impairment loss of $103$96 million was recognized induring the three months ended December 31, 2020 and an additional impairment loss of $88 million during 2021, included within Asset impairments, including loss on assets held for sale in the consolidated statementConsolidated Statements of operations. Included in Other (income) expense, net is a $13 million loss related to this transaction in the consolidated statement of operations.
Sprout Pharmaceuticals, Inc.
On December 20, 2017, the Company completed the sale of Sprout to a buyer affiliated with certain former shareholders of Sprout (the “Sprout Sale”), in exchange for a 6% royalty on global sales of Addyi® (flibanserin 100 mg) beginning June 2019.Operations. In connection with completing the completion of the Sprout Sale, the terms of the October 2015 merger agreement relating to the Company's acquisition of Sprout were amended to terminate the Company's ongoing obligation to make future royalty payments associated with the Addyi® product, as well as certain related provisions (including the obligation to make certain marketing and other expenditures). In connection with the completion of the Sprout Sale, the litigation against the Company, initiated on behalf of the former shareholders of Sprout, which disputed the Company's compliance with certain contractual terms of that same merger agreement with respect to the use of certain diligent efforts to develop and commercialize the Addyi® product (including a disputed contractual term with respect to the spend of no less than $200 million in certain expenditures), was dismissed with prejudice. In connection with the completion of the SproutAmoun Sale, the Company issued the buyer a five-year $25 million loan for initial operating expenses. Addyi®, a once-daily, non-hormonal tablet approved for the treatment of acquired, generalized hypoactive sexual desire disorder in premenopausal women, is Sprout's only approved and commercialized product. Sprout was part of the Branded Rx segment and was reclassified as held for sale as of September 30, 2017. The carrying value of the Sprout business, including associated goodwill, was adjusted to its estimated fair value less costs to sell and a $352 million impairment was recognized in Asset impairments in the consolidated statement of operations. Upon consummation of the
transaction, aan additional loss of $98$26 million was recognized induring 2021, included within Other (income) expense, net in the consolidated statementCombined Statements of operations.Operations. The Company will recognizetotal loss of $210 million includes the agreed upon 6% royaltyrelease of global salesnon-cash cumulative foreign currency translation losses of Addyi® beginning in June 2019 as these royalties become due, as the Company does not recognize contingent payments until such amounts are realizable.
2016
Portfolio of Neurology Medical Device Products
On April 1, 2016, the Company completed the sale of a portfolio of neurology medical device products, including product rights and related fixed assets, for an upfront payment and certain future milestone payments. These assets$340 million, which were included inas part of the Bausch + Lomb /International segment and a nominal loss on sale in the second quarter of 2016 was recorded.
Ruconest®
On December 7, 2016, the Company completed the sale of all North American commercialization rights to Ruconest® (recombinant human C1 esterase inhibitor) for up to $125 million in consideration, consisting of $60 million paid at closing and future sales-based milestone payments of up to $65 million. These assets were included in the Branded Rx segment and was reclassified as held for sale in the second quarter of 2016. At that time, the assets were written down to the faircarrying value of the expected consideration and a loss of $199 million was recorded in Asset impairmentsAmoun business when measuring for impairment.
Included in the consolidated statement of operations. Upon consummation of the transaction on December 7, 2016, a loss of $22 million was recognized in Other expense (income) in the consolidated statement of operations, representing the estimated fair value of the contingent consideration associated with the sale as the Company does not recognize contingent payments until such amounts are realizable. Through December 31, 2017, no sales-based milestones have been achieved.
Paragon Holdings I, Inc.
On November 9, 2016, the Company completed the sale of Paragon Holdings I, Inc. In connection with the divestiture, the Company recognized a loss of $19 million in the third quarter of 2016, when the assets of the divested business were classified as held for sale.
ASSETS AND LIABILITIES HELD FOR SALE
In addition, the Company has classified a number of small businesses and assets as held for sale Consolidated Balance Sheets as of December 31, 2017 and 2016 as it expects to consummate2020 are the divestiture of these businesses within the next twelve months. The assets related to these businesses were included in the Company’s Bausch + Lomb/International segment. As a result, thefollowing carrying valuesamounts of the Amoun business' assets related to these businesses, including the associated goodwill, were written down to fair value less costs to sell and a loss of $75 million were recognized in Asset impairments in 2016. The components of assets held for sale, as of December 31, 2017 and 2016 were as follows:
|
| | | | | | | | |
| (in millions) | | 2017 | | 2016 |
| Current assets held for sale: | | | | |
| Cash | | $ | — |
| | $ | 1 |
|
| Trade receivables | | — |
| | 86 |
|
| Inventories | | — |
| | 147 |
|
| Other | | — |
| | 27 |
|
| Current assets held for sale | | $ | — |
| | $ | 261 |
|
| | | | | |
| Non-current assets held for sale: | | | | |
| Identifiable intangible assets | | $ | 12 |
| | $ | 680 |
|
| Goodwill | | — |
| | 1,355 |
|
| Other | | — |
| | 97 |
|
| Non-current assets held for sale | | $ | 12 |
| | $ | 2,132 |
|
Liabilities held for sale as of December 31, 2017 were $0. Current and Non-current liabilities held for sale as of December 31, 2016 of $57 million and $57 million, respectively, consists of deferred tax liabilities and other liabilities.sale.
| | | | | | | | | | | | | | | | | | | | |
| (in millions) | | | | | | |
| Prepaid expenses and other current assets: | | | | Accrued and other current liabilities: | | |
| Trade receivables, net | | $ | 91 | | | Accounts payable | | $ | 7 | |
| Inventories, net | | 63 | | | Accrued and other current liabilities | | 28 | |
| Prepaid expenses and other current assets | | 8 | | | | | $ | 35 | |
| | $ | 162 | | | | | |
| Other non-current assets: | | | | Other non-current liabilities: | | |
| Property, plant and equipment, net | | $ | 68 | | | Deferred tax liabilities, net | | $ | 36 | |
| Goodwill and Intangible assets, net | | 245 | | | Other non-current liabilities | | 21 | |
| Deferred tax assets, net | | 2 | | | | | $ | 57 | |
| | $ | 315 | | | | | |
| |
5. | RESTRUCTURING AND INTEGRATION COSTS |
In connection with the Salix Acquisition and other acquisitions, the Company implemented cost-rationalization
4.RESTRUCTURING, INTEGRATION, SEPARATION AND IPO COSTS
Restructuring and integration initiatives to capture operating synergies and generate cost savings. These measures included: (i) workforce reductions company-wide and other organizational changes, (ii) closing of duplicative facilities and other site rationalization actions company-wide, including research and development facilities, sales offices and corporate facilities, (iii) leveraging research and development spend and (iv) procurement savings.
Salix Acquisition-Related Cost-Rationalization and Integration Initiatives
Cost-rationalization and integration initiatives relating to the Salix Acquisition were substantially completed by mid-2016. Total costs incurred primarily include: employee termination costs payable to approximately 475 employees of the Company and Salix who have been terminated as a result of the Salix Acquisition; costs to consolidate or close facilities and relocate employees; and contract termination and lease cancellation costs. Since the acquisition date, total costs of $274 million have been incurred through December 31, 2017, including: (i) $153 million of integration expenses, (ii) $106 million of restructuring expenses and (iii) $15 million of acquisition-related costs.
Salix Restructuring Costs
Salix restructuring costs incurred were $7 million, $7 million and $92 million, and payments were $13 million, $34 million and $58 million in 2017, 2016 and 2015, respectively. The remaining liability associated with these activities as of December 31, 2017 was $3 million.
Salix Integration Costs
Salix integration costs were $0, $43 million and $110 million, and payments were $1 million, $25 million and $100 million in 2017, 2016 and 2015, respectively. The remaining liability associated with these activities as of December 31, 2017 was $6 million.
Other Restructuring and Integration-Related Costs (Excluding Salix)
During 2017, in addition to the Salix restructuring and integration costs, the Company incurred $45 million of other restructuring and integration-related costs. These costs included: (i) $16 million of integration consulting, transition service, and other costs, (ii) $16 million of severance costs and (iii) $13 million of facility closure costs. The Company made payments of $71 million during 2017 (in addition to the payments related to Salix). The remaining liability associated with these activities as of December 31, 2017 was $29 million.
During 2016, in addition to the Salix restructuring and integration costs, the Company incurred $82 million of other restructuring and integration costs. These costs included: (i) $48 million of integration consulting, duplicate labor, transition service, and other costs, (ii) $24 million of severance costs, (iii) $9 million of facility closure costs and (iv) $1 million of other costs. These costs primarily related to integration and restructuring costs for other smaller acquisitions. The Company made payments of $62 million during 2016 (in addition to the payments related to Salix).
During 2015, in addition to the Salix restructuring and integration costs, the Company incurred $160 million of other restructuring and integration costs. These costs included: (i) $103 million of integration consulting, duplicate labor, transition service, and other costs, (ii) $47 million of severance costs, (iii) $9 million of facility closure costs and (iv) $1 million of other costs. These costs primarily related to integration and restructuring costs for the acquisition of certain assets of Dendreon Corporation and other smaller acquisitions. The Company made payments of $179 million during 2015 (in addition to the payments related to Salix).
The Company continues to evaluateevaluates opportunities to improve its operating results and may initiate additionalimplements cost savings programs to streamline its operations and eliminate redundant processes and expenses. TheRestructuring and integration costs are expenses associated with the implementation of these cost savings programs could be material and may include but are not limited to, expenses associated with: (i) reducing headcount, (ii) eliminating real estate costs associated with unused or under-utilized facilities and (iii) implementing contribution margin improvement and other cost reduction initiatives. The liability associated with restructuring and integration costs as of December 31, 2021 was $19 million.
The Company incurred $18 million, $11 million and $31 million of restructuring and integration-related costs and made payments of $19 million, $18 million and $31 million during 2021, 2020 and 2019, respectively.
| |
6. | FAIR VALUE MEASUREMENTS |
Separation costs, Separation-related costs, IPO Costs and IPO-related Costs
The Company has incurred, and will incur, costs associated with activities to effectuate the B+L Separation and the Solta IPO. These activities include: (i) separating the Bausch + Lomb and Solta Medical businesses from the remainder of the Company and (ii) registering the Bausch + Lomb and Solta Medical businesses as independent publicly traded entities. Separation and IPO costs are incremental costs directly related to the B+L Separation and Solta IPO and include, but are not limited to: (i) legal, audit and advisory fees, (ii) talent acquisition costs and (iii) costs associated with establishing a new board of directors and related board committees for the Bausch + Lomb and Solta Medical entities. Included in Restructuring, integration, separation and IPO costs for the years ended December 31, 2021 and 2020 are Separation and IPO costs of $32 million and $11 million, respectively.
The Company has also incurred, and will incur, Separation-related and IPO-related costs which are incremental costs indirectly related to the B+L Separation and Solta IPO. Separation-related and IPO-related costs include, but are not limited to: (i) IT infrastructure and software licensing costs, (ii) rebranding costs and (iii) costs associated with facility relocation and/or modification. Included in Selling, general and administrative for years ended December 31, 2021 and 2020 are Separation-related and IPO-related costs of $132 million and $21 million, respectively.
The extent and timing of future charges for these costs cannot be reasonably estimated at this time and could be material.
5.FAIR VALUE MEASUREMENTS
Fair value measurements are estimated based on valuation techniques and inputs categorized as follows:
•Level 1 — Quoted prices in active markets for identical assets or liabilities;
•Level 2 — Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities; and
•Level 3 — Unobservable inputs that are supported by little or no market activity and that are financial instruments whose values are determined using discounted cash flow methodologies, pricing models, or similar techniques, as well as instruments for which the determination of fair value requires significant judgment or estimation.
If the inputs used to measure the financial assets and liabilities fall within more than one level described above, the categorization is based on the lowest level input that is significant to the fair value measurement of the instrument.
Assets and Liabilities Measured at Fair Value on a Recurring Basis
The following fair value hierarchy table presents the components and classification of the Company’s financial assets and liabilities measured at fair value on a recurring basis as of:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | December 31, 2021 | | December 31, 2020 |
| (in millions) | | Total | | Level 1 | | Level 2 | | Level 3 | | Total | | Level 1 | | Level 2 | | Level 3 |
| Assets: | | | | | | | | | | | | | | | | |
| Cash equivalents | | $ | 76 | | | $ | 58 | | | $ | 18 | | | $ | — | | | $ | 41 | | | $ | 8 | | | $ | 33 | | | $ | — | |
| Restricted cash and other settlement deposits | | $ | 1,537 | | | $ | 1,537 | | | $ | — | | | $ | — | | | $ | 1,211 | | | $ | 1,211 | | | $ | — | | | $ | — | |
| Foreign currency exchange contracts | | $ | 1 | | | $ | — | | | $ | 1 | | | $ | — | | | $ | 3 | | | $ | — | | | $ | 3 | | | $ | — | |
| Liabilities: | | | | | | | | | | | | | | | | |
| Acquisition-related contingent consideration | | $ | 241 | | | $ | — | | | $ | — | | | $ | 241 | | | $ | 328 | | | $ | — | | | $ | — | | | $ | 328 | |
| Cross-currency swaps | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | 70 | | | $ | — | | | $ | 70 | | | $ | — | |
| Foreign currency exchange contracts | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | 11 | | | $ | — | | | $ | 11 | | | $ | — | |
Cash equivalents consist of highly liquid investments, primarily money market funds, with maturities of three months or less when purchased, and are reflected in the Consolidated Balance Sheets at carrying value, which approximates fair value due to their short-term nature.
As of December 31, 2017 and 2016:
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | 2017 | | 2016 |
| (in millions) | | Carrying Value | | Quoted Prices in Active Markets for Identical Assets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) | | Carrying Value | | Quoted Prices in Active Markets for Identical Assets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) |
| Assets: | | | | | | | | | | | | | | | | |
| Cash equivalents | | $ | 265 |
| | $ | 230 |
| | $ | 35 |
| | $ | — |
| | $ | 242 |
| | $ | 179 |
| | $ | 63 |
| | $ | — |
|
| Restricted cash | | $ | 77 |
| | $ | 77 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
|
| Liabilities: | | | | | | |
| | | | | | | | | | |
| Acquisition-related contingent consideration | | $ | (387 | ) | | $ | — |
| | $ | — |
| | $ | (387 | ) | | $ | (892 | ) | | $ | — |
| | $ | — |
| | $ | (892 | ) |
2021, Restricted cash and other settlement deposits includes $1,510 million of $77 million was deposited with a bank as collateralpayments into escrow funds under the terms of settlement agreements regarding that certain U.S. securities litigation (subject to secure a bank guarantee for the benefitan objector's appeal of the Australian Governmentfinal court approval) and the Glumetza Antitrust Litigation. These payments are reflected in connection with the noticeConsolidated Balance Sheets at carrying value, which approximates fair value due to their short-term nature. These payments will remain in escrow until final approval of assessment received on August 8, 2017 from the Australian Taxation Office,settlements as discussed in Note 18, "INCOME TAXES"20, "LEGAL PROCEEDINGS". The Company disagrees with the notice of assessment and continues to believe that its tax positions are appropriate and supported by the facts, circumstances and applicable laws. The Company intends to defend its tax position in this matter vigorously. On January 9, 2018, the cash collateral of $77 million of Restricted cash was returned to the Company in exchange for a $77 million letter of credit.
There were no transfers betweeninto or out of Level 13 during 2021 and Level 2 during 20172020.
Cross-currency Swaps
During 2019, the Company entered into cross-currency swaps, with aggregate notional amounts of $1,250 million, to mitigate fluctuation in the value of a portion of its euro-denominated net investment in its consolidated financial statements from adverse movements in exchange rates. The euro-denominated net investment being hedged was the Company’s investment in certain euro-denominated subsidiaries.
During November 2021, the Company entered into a transaction to unwind its cross-currency swaps and 2016.received net proceeds of $4 million, which included interest income of $6 million, offset by the amount owed by the Company upon the unwinding of $2 million. The gain arising from the transaction of the swaps has been included as a component of Other comprehensive loss.
The assets and Liabilities Measured at Fair Valueliabilities associated with the Company's cross-currency swaps as included in the Consolidated Balance Sheets as of December 31, 2021 and 2020 are as follows:
| | | | | | | | | | | |
| (in millions) | 2021 | | 2020 |
| Other non-current liabilities | $ | — | | | $ | 79 | |
| Prepaid expenses and other current assets | $ | — | | | $ | 9 | |
| Net fair value | $ | — | | | $ | 70 | |
The following table presents the effect of hedging instruments on a Recurring Basis Using Significant Unobservable Inputs (Level 3)the Consolidated Statements of Operations and Consolidated Statements of Comprehensive Loss for 2021 and 2020:
| | | | | | | | | | | |
| (in millions) | 2021 | | 2020 |
| Gain (loss) recognized in Other comprehensive loss | $ | 77 | | | $ | (57) | |
| Gain excluded from assessment of hedge effectiveness | $ | 20 | | | $ | 23 | |
| Location of gain of excluded component | Interest Expense |
For the years ended December 31, 2021 and 2020, the Company received $27 million and $23 million, respectively, in settlements of its cross-currency swaps which are reported as Investing activities in the Consolidated Statements of Cash Flows.
Foreign Currency Exchange Contracts
During 2021 and 2020, the Company entered into foreign currency exchange contracts. As of December 31, 2021, these contracts had an aggregate outstanding notional amount of $166 million.
The assets and liabilities associated with the Company's foreign exchange contracts as included in the Consolidated Balance Sheets as of December 31, 2021 and 2020 are as follows:
| | | | | | | | | | | |
| (in millions) | 2021 | | 2020 |
| Accrued and other current liabilities | $ | — | | | $ | 11 | |
| Prepaid expenses and other current assets | $ | 1 | | | $ | 3 | |
| Net fair value | $ | 1 | | | $ | 8 | |
The following table presents the effect of the Company's foreign exchange contracts on the Consolidated Statements of Operations and the Consolidated Statements of Cash Flows for 2021 and 2020:
| | | | | | | | | | | |
| (in millions) | 2021 | | 2020 |
| Gain (loss) related to changes in fair value | $ | 9 | | | $ | (8) | |
| Loss related to settlements | $ | (17) | | | $ | (2) | |
Acquisition-related Contingent Consideration Obligations
The fair value measurement of contingent consideration obligations arising from business combinations is determined via a probability-weighted discounted cash flow analysis, or Monte Carlo Simulation, using unobservable (Level 3) inputs. These inputs may include: (i) the estimated amount and timing of projected cash flows;flows, (ii) the probability of the achievement of the factor(s) on which the contingency is based;based and (iii) the risk-adjusted discount rate used to present value the probability-weighted cash flows; and (iv) volatility of projected performance (Monte Carlo Simulation).flows. Significant increases (decreases)or decreases in any of those inputs in isolation could result in a significantly higher or lower (higher) fair value measurement. At December 31, 2021, the fair value measurements of acquisition-related contingent consideration were determined using risk-adjusted discount rates ranging from 6% to 18%, and a weighted average risk-adjusted discount rate of 7%. The weighted average risk-adjusted discount rate was calculated by weighting each contract's relative fair value at December 31, 2021.
The following table presents a reconciliation of contingent consideration obligations measured on a recurring basis using significant unobservable inputs (Level 3) for 2017 and 2016:
|
| | | | | | | | | | | | | | | | |
| (in millions) | | 2017 | | 2016 |
| Beginning balance, January 1, | | | | $ | 892 |
| | | | $ | 1,156 |
|
| Adjustments to Acquisition-related contingent consideration: | | | | | | | | |
| Accretion for the time value of money | | $ | 54 |
| | | | $ | 92 |
| | |
Fair value adjustments to the expected future royalty payments for Addyi® | | (312 | ) | | | | (18 | ) | | |
| Fair value adjustments due to changes in estimates of other future payments | | (31 | ) | | | | (87 | ) | | |
| Acquisition-related contingent consideration | | | | (289 | ) | | | | (13 | ) |
| Reclassified to liabilities held for sale and subsequently disposed | | | | (168 | ) | | | | (26 | ) |
| Payments / Settlements | | | | (49 | ) | | | | (175 | ) |
| Foreign currency translation adjustment included in other comprehensive loss | | | | 1 |
| | | | (40 | ) |
| Measurement period adjustments to 2015 acquisitions and other | | | | — |
| | | | (10 | ) |
| Ending balance, December 31, | | | | 387 |
| | | | 892 |
|
| Current portion | | | | 43 |
| | | | 52 |
|
| Non-current portion | | | | $ | 344 |
| | | | $ | 840 |
|
During 2017 and prior to identifying the Sprout business as held for sale, the Company recorded fair value adjustments to contingent consideration to reflect management's revised estimates of the future sales of Addyi®. The Sprout Sale was completed on December 20, 2017 and the remaining contingent consideration related to Addyi® was eliminated.
There were no transfers into or out of Level 3 during the years 20172021 and 2016.2020:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| (in millions) | | 2021 | | 2020 |
| Beginning balance, January 1, | | | | $ | 328 | | | | | $ | 316 | |
| Adjustments to Acquisition-related contingent consideration: | | | | | | | | |
| Accretion for the time value of money | | $ | 17 | | | | | $ | 23 | | | |
| Fair value adjustments | | (6) | | | | | 25 | | | |
| Acquisition-related contingent consideration adjustments | | | | 11 | | | | | 48 | |
| Payments / Settlements | | | | (99) | | | | | (36) | |
| Foreign currency translation adjustment included in other comprehensive loss | | | | 1 | | | | | — | |
| Ending balance, December 31, | | | | 241 | | | | | 328 | |
| Current portion | | | | 39 | | | | | 112 | |
| Non-current portion | | | | $ | 202 | | | | | $ | 216 | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
Assets and Liabilities Measured at Fair Value on a Non-Recurring Basis
The following fair value hierarchy table presents the components and classification of the Company’s financial assets and liabilities measured at fair value on a non-recurring basis as of December 31, 2017 and 2016:basis:
| | | | | As of December 31, 2017 | | As of December 31, 2016 | | | December 31, 2021 | | December 31, 2020 |
| (in millions) | | Carrying Value | | Quoted Prices in Active Markets for Identical Assets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) | | Carrying Value | | Quoted Prices in Active Markets for Identical Assets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) | (in millions) | | Carrying
Value | | Level 1 | | Level 2 | | Level 3 | | Carrying
Value | | Level 1 | | Level 2 | | Level 3 |
| Assets: | | | | | | | | | | | | | | | | | |
| Other non-current assets: | | Other non-current assets: | | | | | | | | | | | | | | | | |
| Non-current assets held for sale | | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 38 |
| | $ | — |
| | $ | — |
| | $ | 38 |
| Non-current assets held for sale | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | 245 | | | $ | — | | | $ | — | | | $ | 245 | |
Non-current assets held for sale of $2,132$245 million included in the consolidated balance sheet as of December 31, 2016 includes held for sale assets of $38 million, which2020 were remeasured to estimated fair valuesvalue, less costs to sell. The Company recognized impairment charges of $75 million, in the aggregate, in Asset impairments for the year ended December 31, 2016 in the consolidated statement of operations. The estimated fair values of these assets less costs to sell, were determined using a discounted cash flow analysis which utilized Level 3 unobservable inputs. The remaining balance of Non-currentSee Note 3, "ACQUISITIONS, LICENSING AGREEMENTS AND DIVESTITURE" for additional details regarding these assets held for sale assale.
Fair Value of December 31, 2016 reflects the historical carrying value of those assets which do not exceed fair value less costs to sell.
Long-term Debt
The fair value of long-term debt as of December 31, 20172021 and 20162020 was $25,385$22,689 million and $26,297$25,378 million, respectively, and was estimated using the quoted market prices for the same or similar debt issuances (Level 2).
The components of inventories,6.INVENTORIES
Inventories, net, of allowance for obsolescence as of December 31, 20172021 and 2016 were as follows:2020 consist of:
| | | | | | | | | | | | | | |
| (in millions) | | 2021 | | 2020 |
| Raw materials | | $ | 279 | | | $ | 286 | |
| Work in process | | 112 | | | 143 | |
| Finished goods | | 602 | | | 665 | |
| | $ | 993 | | | $ | 1,094 | |
|
| | | | | | | | |
| (in millions) | | 2017 | | 2016 |
| Raw materials | | $ | 276 |
| | $ | 256 |
|
| Work in process | | 146 |
| | 125 |
|
| Finished goods | | 626 |
| | 680 |
|
| | | $ | 1,048 |
| | $ | 1,061 |
|
7.PROPERTY, PLANT AND EQUIPMENT
| |
8. | PROPERTY, PLANT AND EQUIPMENT |
The major components of property, plant and equipment as of December 31, 20172021 and 2016 were as follows:2020 consist of:
| | | (in millions) | | 2017 | | 2016 | (in millions) | | 2021 | | 2020 |
| Land | | $ | 84 |
| | $ | 78 |
| Land | | $ | 74 | | | $ | 79 | |
| Buildings | | 687 |
| | 600 |
| |
| Buildings and improvements | | Buildings and improvements | | 675 | | | 686 | |
| Machinery and equipment | | 1,436 |
| | 1,214 |
| Machinery and equipment | | 1,678 | | | 1,722 | |
| Other equipment and leasehold improvements | | 358 |
| | 278 |
| Other equipment and leasehold improvements | | 342 | | | 360 | |
| Equipment on operating lease | | 42 |
| | 42 |
| Equipment on operating lease | | 73 | | | 65 | |
| Construction in progress | | 226 |
| | 296 |
| Construction in progress | | 576 | | | 436 | |
| | | 2,833 |
| | 2,508 |
| | 3,418 | | | 3,348 | |
| Less accumulated depreciation | | (1,430 | ) | | (1,196 | ) | |
| Accumulated depreciation | | Accumulated depreciation | | (1,820) | | | (1,781) | |
| | | $ | 1,403 |
| | $ | 1,312 |
| | $ | 1,598 | | | $ | 1,567 | |
Depreciation expense was $168$177 million, $193$180 million and $210$178 million for 2017, 20162021, 2020 and 2015,2019, respectively.
| |
9. | INTANGIBLE ASSETS AND GOODWILL |
8.INTANGIBLE ASSETS AND GOODWILL
Intangible Assets
The major components of intangible assets as of December 31, 20172021 and 2016 were as follows:2020 consist of:
| | | | Weighted- Average Useful Lives (Years) | | 2017 | | 2016 | | Weighted-
Average
Remaining
Useful
Lives
(Years) | | 2021 | | 2020 |
| (in millions) | Gross Carrying Amount | | Accumulated Amortization | | Net Carrying Amount | | Gross Carrying Amount | | Accumulated Amortization | | Net Carrying Amount | (in millions) | Gross
Carrying
Amount | | Accumulated
Amortization and Impairments | | Net
Carrying
Amount | | Gross
Carrying
Amount | | Accumulated
Amortization and Impairments | | Net
Carrying
Amount |
| Finite-lived intangible assets: | | | | | | | | | | | | | | Finite-lived intangible assets: | | | | | | | | | | | | | |
| Product brands | 6 | | $ | 20,913 |
| | $ | (9,281 | ) | | $ | 11,632 |
| | $ | 20,725 |
| | $ | (6,883 | ) | | $ | 13,842 |
| Product brands | 5 | | $ | 20,842 | | | $ | (16,169) | | | $ | 4,673 | | | $ | 20,890 | | | $ | (14,914) | | | $ | 5,976 | |
| Corporate brands | 10 | | 933 |
| | (179 | ) | | 754 |
| | 999 |
| | (146 | ) | | 853 |
| Corporate brands | 6 | | 902 | | | (473) | | | 429 | | | 907 | | | (404) | | | 503 | |
| Product rights/patents | 5 | | 3,310 |
| | (2,346 | ) | | 964 |
| | 4,240 |
| | (2,118 | ) | | 2,122 |
| Product rights/patents | 4 | | 3,321 | | | (3,174) | | | 147 | | | 3,305 | | | (3,055) | | | 250 | |
| Partner relationships | 2 | | 179 |
| | (169 | ) | | 10 |
| | 152 |
| | (128 | ) | | 24 |
| Partner relationships | 0 | | 158 | | | (158) | | | — | | | 169 | | | (168) | | | 1 | |
| Technology and other | 4 | | 214 |
| | (147 | ) | | 67 |
| | 252 |
| | (160 | ) | | 92 |
| Technology and other | 1 | | 207 | | | (206) | | | 1 | | | 210 | | | (200) | | | 10 | |
| Total finite-lived intangible assets |
| | 25,549 |
| | (12,122 | ) | | 13,427 |
| | 26,368 |
| | (9,435 | ) | | 16,933 |
| Total finite-lived intangible assets | | 25,430 | | | (20,180) | | | 5,250 | | | 25,481 | | | (18,741) | | | 6,740 | |
| Acquired IPR&D not in service | NA | | 86 |
| | — |
| | 86 |
| | 253 |
| | — |
| | 253 |
| Acquired IPR&D not in service | NA | | — | | | — | | | — | | | 7 | | | — | | | 7 | |
| B&L Trademark | NA | | 1,698 |
| | — |
| | 1,698 |
| | 1,698 |
| | — |
| | 1,698 |
| B&L Trademark | NA | | 1,698 | | | — | | | 1,698 | | | 1,698 | | | — | | | 1,698 | |
| | | | $ | 27,333 |
| | $ | (12,122 | ) | | $ | 15,211 |
| | $ | 28,319 |
| | $ | (9,435 | ) | | $ | 18,884 |
| | | | $ | 27,128 | | | $ | (20,180) | | | $ | 6,948 | | | $ | 27,186 | | | $ | (18,741) | | | $ | 8,445 | |
|
Long-lived assets with finite lives are tested for impairment whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. Impairment charges associated with these assets are included in Asset impairments, including loss on assets held for sale in the consolidated statementConsolidated Statement of operations.Operations. The Company continues to monitor the recoverability of its finite-lived intangible assets and tests the intangible assets for impairment if indicators of impairment are present.
Asset impairments, including loss on assets held for sale in 2021 included: (i) impairments of $105 million, in aggregate, due to decreases in forecasted sales of certain product lines, (ii) an $88 million loss on assets held for sale in connection with the Amoun Sale, (iii) impairments of $23 million, in aggregate, related to the discontinuance of certain product lines and (iv) $18 million related to a portion of an IT infrastructure improvement project no longer being utilized.
Asset impairments, including loss on assets held for sale in 2020 included impairments of: (i) $96 million to reduce the year ended December 31, 2017 include: (i) an impairmentcarrying value of $351the Amoun business to its estimated fair value less costs to sell due to classifying the business as held for sale as discussed in Note 3, "ACQUISITIONS, LICENSING AGREEMENTS AND DIVESTITURE", (ii) $16 million in aggregate, due to decreases in forecasted sales of certain product lines, (iii) $1 million in aggregate, related to the discontinuance of certain product lines not aligned with the focus of the Company's core businesses and (iv) $1 million related to the Sprout businessAcquired IPR&D not in service.
Asset impairments, including loss on assets held for sale in 2019 included impairments of: (i) $58 million reflecting decreases in forecasted sales of certain product lines due to generic competition and other factors, (ii) $8 million related to assets being classified as held for sale, (ii) impairments of $151(iii) $5 million reflecting decreases in forecasted sales for other product lines, (iii) impairments of $114 million to other assets classified as held for sale, primarily related to the Obagi business, (iv) impairments of $95 million, in aggregate, to certain product/patent assets associated with the discontinuance of specific product lines not aligned with the focus of the Company's core businessbusinesses and (v) impairments of $3(iv) $4 million related to acquiredAcquired IPR&D. &D not in service.
The impairments to assets reclassified as held for sale were measured as the difference of the carrying value of these assets as compared to the estimated fair values of these assets less costs to sell determined using a discounted cash flow analysis which utilized Level 3 unobservable inputs. The other impairments and adjustments to finite-lived intangible assets were measured as the difference of the historical carrying value of these finite-lived assets as compared to the estimated fair value as determined using a discounted cash flow analysis using Level 3 unobservable inputs.
In connection with an ongoing litigation matter betweenPeriodically, the Company’s products face the expiration of their patent or regulatory exclusivity. The Company anticipates that product sales for such product would decrease shortly following a loss of exclusivity ("LOE"), due to the possible entry of a generic competitor. Where the Company and potentialhas the rights, it may elect to launch an authorized generic competitors to the branded drug Uceris® Tablet, the Company performed an impairment test of its Uceris® Tablet related intangible assets. As the undiscounted expected cash flows from the Uceris® Tablet exceed the carrying value of the Uceris® Tablet related intangible assets, no impairment existssuch product (either as of December 31, 2017. However, if market conditions or legal outcomes differ from the Company’s assumptions,own branded generic or ifthrough a third-party). This may occur prior to, upon or following generic entry, which may mitigate the Company is unable to execute its strategies, it mayanticipated decrease in product sales; however, even with launch of an authorized generic, the decline in product sales of such product could still be necessary to record an impairment charge equal tosignificant, and the difference between the fair value and carrying value of the Uceris® Tablet related intangible assets. As of December 31, 2017, the carrying value of Uceris® Tablet related intangible assets was $563 million.effect on future revenues could be material.
In review of the Company’s finite-lived intangible assets, management revised the estimated useful lives of certain intangible assets in the third and fourth quarters of 2017. As a result,Management continually assesses the useful lives of certain product brands, with an aggregate carrying value of $7,618 million as of December 31, 2017, were revised from an average of seven years to four years primarily due to revisions in the forecasted sales as a result of revisionsrelated to the date each product is expectedCompany's long-lived assets to lose its exclusivity. In addition,reflect the useful life of the Salix Brand, with a carrying value of $569 million as of December 31, 2017, was revised from seventeen years to ten years, due to a change in the forecasted sales of its product portfolio.most current assumptions.
Estimated amortization expense of finite-lived intangible assets for the five years ending December 31 and thereafter are as follows:
|
| | | | |
| (in millions) | | |
| 2018 | | $ | 2,921 |
|
| 2019 | | 2,684 |
|
| 2020 | | 2,399 |
|
| 2021 | | 2,045 |
|
| 2022 | | 1,851 |
|
| Thereafter | | 1,527 |
|
| Total | | $ | 13,427 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (in millions) | | 2022 | | 2023 | | 2024 | | 2025 | | 2026 | | Thereafter | | Total | |
| Amortization | | $ | 1,181 | | | $ | 1,026 | | | $ | 902 | | | $ | 795 | | | $ | 664 | | | $ | 682 | | | $ | 5,250 | | |
Goodwill
The changes in the carrying amountamounts of goodwill forduring the years ended December 31, 20172021, 2020 and 20162019 were as follows:
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| (in millions) | | Developed Markets | | Emerging Markets | | Bausch + Lomb/ International | | Branded Rx | | U.S. Diversified Products | | Total |
| Balance, January 1, 2016 | | $ | 16,141 |
| | $ | 2,412 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 18,553 |
|
| Acquisitions | | 1 |
| | — |
| | — |
| | — |
| | — |
| | 1 |
|
| Divestiture of a portfolio of neurology medical device products | | (36 | ) | | — |
| | — |
| | — |
| | — |
| | (36 | ) |
Goodwill related to Ruconest® reclassified to assets held for sale | | (37 | ) | | — |
| | — |
| | — |
| | — |
| | (37 | ) |
| Foreign exchange and other | | 47 |
| | (12 | ) | | — |
| | — |
| | — |
| | 35 |
|
| Impairment to goodwill of the former U.S. reporting unit | | (905 | ) | | — |
| | — |
| | — |
| | — |
| | (905 | ) |
| Realignment of segment goodwill | | (15,211 | ) | | (2,400 | ) | | 6,708 |
| | 7,873 |
| | 3,030 |
| | — |
|
| Impairment to goodwill of the Salix reporting unit | | — |
| | — |
| | — |
| | (172 | ) | | — |
| | (172 | ) |
| Divestitures | | — |
| | — |
| | (5 | ) | | — |
| | — |
| | (5 | ) |
| Goodwill of certain businesses reclassified to assets held for sale | | — |
| | — |
| | (947 | ) | | (431 | ) | | — |
| | (1,378 | ) |
| Foreign exchange and other | | — |
| | — |
| | (257 | ) | | (5 | ) | | — |
| | (262 | ) |
| Balance, December 31, 2016 | | — |
| | — |
| | 5,499 |
| | 7,265 |
| | 3,030 |
| | 15,794 |
|
| Realignment of segment goodwill | | — |
| | — |
| | 264 |
| | (264 | ) | | — |
| | — |
|
| Balance, January 1, 2017 | | — |
| | — |
| | 5,763 |
| | 7,001 |
| | 3,030 |
| | 15,794 |
|
| Goodwill reclassified to assets held for sale and subsequently disposed | | — |
| | — |
| | (30 | ) | | (61 | ) | | (84 | ) | | (175 | ) |
| Impairment | | — |
| | — |
| | — |
| | (312 | ) | | — |
| | (312 | ) |
| Foreign exchange and other | | — |
| | — |
| | 283 |
| | 3 |
| | — |
| | 286 |
|
| Balance, December 31, 2017 | | $ | — |
| | $ | — |
| | $ | 6,016 |
| | $ | 6,631 |
| | $ | 2,946 |
| | $ | 15,593 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (in millions) | | Bausch +
Lomb/
International | | Bausch +
Lomb | | Salix | | International Rx | | Ortho Dermatologics | | Diversified Products | | Total |
| Balance, January 1, 2019 | | $ | 5,805 | | | $ | — | | | $ | 3,156 | | | $ | — | | | $ | 1,267 | | | $ | 2,914 | | | $ | 13,142 | |
| Acquisition of certain assets of Synergy | | — | | | — | | | 3 | | | — | | | — | | | — | | | 3 | |
| Goodwill reclassified to assets held for sale | | (18) | | | — | | | — | | | — | | | — | | | — | | | (18) | |
| Foreign exchange and other | | (1) | | | — | | | — | | | — | | | — | | | — | | | (1) | |
| Balance, December 31, 2019 | | 5,786 | | | — | | | 3,159 | | | — | | | 1,267 | | | 2,914 | | | 13,126 | |
| Assets held for sale reclassified to goodwill | | 18 | | | — | | | — | | | — | | | — | | | — | | | 18 | |
| Goodwill reclassified to assets held for sale (Note 3) | | (217) | | | — | | | — | | | — | | | — | | | — | | | (217) | |
| Foreign exchange and other | | 117 | | | — | | | — | | | — | | | — | | | — | | | 117 | |
| Balance, December 31, 2020 | | 5,704 | | | — | | | 3,159 | | | — | | | 1,267 | | | 2,914 | | | 13,044 | |
| Realignment of segment goodwill | | (5,704) | | | 5,395 | | | — | | | 887 | | | — | | | (578) | | | — | |
| Impairment | | — | | | — | | | — | | | — | | | (469) | | | — | | | (469) | |
| Foreign exchange and other | | — | | | (77) | | | — | | | (62) | | | — | | | 21 | | | (118) | |
| Balance, December 31, 2021 | | $ | — | | | $ | 5,318 | | | $ | 3,159 | | | $ | 825 | | | $ | 798 | | | $ | 2,357 | | | $ | 12,457 | |
Goodwill is not amortized but is tested for impairment at least annually on October 1st at the reporting unit level. A reporting unit is the same as, or one level below, an operating segment. The Company performs its annual impairment test by first assessing qualitative factors. Where the qualitative assessment suggests that it is more likely than not that the fair value of a reporting unit is less than its carrying amount, a quantitative fair value test is performed for that reporting unit (Step 1).
The fair value of a reporting unit refers to the price that would be received to sell the unit as a whole in an orderly transaction between market participants. The Company estimates the fair values of alla reporting unitsunit using a discounted cash flow model which utilizes Level 3 unobservable inputs.
The discounted cash flow model relies on assumptions regarding revenue growth rates, gross profit, projected working capital needs, selling, general and administrative expenses, research and development expenses, capital expenditures, income tax rates, discount rates and terminal growth rates. To estimate fair value, the Company discounts the forecasted cash flows of each reporting unit. The discount rate the Company uses represents the estimated weighted average cost of capital, which reflects the overall level of inherent risk involved in its reporting unit operations and the rate of return a market participant would expect to earn. The quantitative fair value test is performed utilizing long-term growth rates and discount rates applied to the estimated cash flows in estimation of fair value. To estimate cash flows beyond the final year of its model, the Company estimates a terminal value by applying an in perpetuityin-perpetuity growth assumption and discount factor to determine the reporting unit's terminal value.
The Company forecastsTo forecast a reporting unit's cash flows for each of its reporting units andthe Company takes into consideration economic conditions and trends, estimated future operating results, management's and a market participant's view of growth rates and product lives, and anticipates future economic conditions. Revenue growth rates inherent in these forecasts wereare based on input from internal and external market research that compare factors such as growth in global economies, recent industry trends and product life-cycles. Macroeconomic factors such as changes in economies, changes in the competitive landscape including the unexpected loss of exclusivityLOE to the Company's product portfolio, changes in government legislation, product life-cycles, industry consolidations and other changes beyond the Company’s control could have a positive or negative impact on achieving its targets. Accordingly, if market conditions deteriorate, or if the Company is unable to execute its strategies, it may be necessary to record impairment charges in the future.
2019
20162019 Annual Goodwill Impairment Test
Prior to the change in operating segments in the third quarter of 2016, the Company operated in two operating and reportable segments: Developed Markets and Emerging Markets. The Developed Markets segment consisted of four geographic reporting units: (i) U.S., (ii) Canada and Australia, (iii) Western Europe and (iv) Japan. The Emerging Markets segment consisted of three geographic reporting units: (i) Central and Eastern Europe, Middle East and Africa, (ii) Latin America and (iii) Asia. The Company conducted its annual goodwill impairment test as of October 1, 2015 which resulted in no goodwill impairment under2019 by first assessing qualitative factors. Where the then-current organizational structure.
March 31, 2016
Given challenges facing the Company, particularly in its dermatology and gastrointestinal businesses, management performed a review of its then-current forecast under the direction of the new Chief Executive Officer (“CEO”). As a result ofqualitative assessment suggested that review, management lowered its forecast which resulted in a triggering event requiring the Company to test goodwill for impairment as of March 31, 2016. Although management lowered its forecast, which lowered the estimated fair values of certain business units, including the former U.S. reporting unit, the step one testing determined thereit was no impairment of goodwill as the estimated fair value of each reporting unit exceeded its carrying value. In order to evaluate the sensitivity of its fair value calculations on the goodwill impairment test, the Company applied a hypothetical 15% decrease inmore likely than not that the fair value of eacha reporting unit as of March 31, 2016. For each reporting unit, this hypothetical 15% decrease inwas less than its carrying amount, a quantitative fair value would not have triggered additional impairment testing as the hypotheticaltest was performed for that reporting unit. In each quantitative fair value exceededtest performed, the fair value was greater than the carrying value of the respectivereporting unit. As a result, there was no impairment to the goodwill of any reporting unit.
20162020
The negative impacts of the COVID-19 pandemic on the global economy have led to significant volatility in the global equity markets. The Company has been able to continue its operations with limited disruptions and has assessed the potential impact that the COVID-19 pandemic is likely to have on its forecasted cash flows. In performing its assessment, the Company considered the possible effects and outcomes of the COVID-19 pandemic on, among other things, its supply chain, customers and distributors, employee base, product sustainability, research and development activities, product pipeline and consumer demand and related rebates and discounts and has made adjustments, although not considered to be material, to its long-term forecasts used in its previous goodwill impairment assessments, for these and other matters. After completing this assessment, although not completely insulated from the negative effects of the COVID-19 pandemic, the Company believes that its long-term forecasted cash flows, as adjusted for the possible outcome of the COVID-19 pandemic and other matters, do not indicate that the fair value of any reporting unit may be below its carrying value.
The Company's 2020 revenues were most negatively impacted during its second quarter by certain social restrictions and other precautionary measures taken in response to the COVID-19 pandemic. However, as governments began lifting social restrictions, allowing offices of certain health care providers to reopen and certain surgeries and elective medical procedures to proceed, the negative trend in the revenues of certain businesses began to level off and stabilize prior to the third quarter of 2020. Revenues for 2021 and 2020 were $8,434 million and $8,027 million, respectively. The increase of $407 million in revenue represents an improving trend over the decreases in year-over-year revenues for the three month periods ended June 30, 2020, September 30, 2020 and December 31, 2020 of 23%, 3% and less than 1%, respectively. The Company's revenues returned to pre-pandemic levels for many of its businesses and geographies in 2021 and, presuming there continues to be increased availability of effective vaccines and any further resurgence of the COVID-19 virus, the delta and omicron variants and other variant strains thereof do not have a material adverse impact on efforts to contain the COVID-19 virus, the Company anticipates the COVID-19 pandemic to have a minimal impact on its remaining businesses and geographies in 2022. However, the rates of recovery for each business will vary by geography and will be dependent upon, among other things, the availability and effectiveness of vaccines for the COVID-19 virus, government responses, rates of economic recovery, precautionary measures taken by patients and customers, the rate at which remaining social restrictions are lifted and once lifted, the presumption that social restrictions will not be materially reenacted in the event of a resurgence of the virus and other actions taken in response to the COVID-19 pandemic.
2020 Interim Goodwill Impairment Assessment
During the interim periods of 2020, after giving consideration to the nature and timing of the negative impacts of the COVID-19 pandemic on the Company's forecasted cash flows, with the exception of the Ortho Dermatologics reporting unit, no events occurred, or circumstances changed that would indicate that the fair value of any other reporting unit might be below its carrying value and therefore, no impairments were recorded.
During the three months ended March 31, 2020 and June 30, 2020, the operating results for the Ortho Dermatologics reporting unit were less than forecasted primarily due to certain products experiencing longer launch cycles than originally anticipated as a result of the COVID-19 pandemic. The Company revised its long-term forecasts as of March 31, 2020 and as of June 30, 2020 for these matters. Management believed that these events were indicators that there was less headroom as of March 31, 2020 and June 30, 2020 as compared to the headroom calculated on the date Ortho Dermatologics goodwill was previously tested for impairment. Therefore, a quantitative fair value test for impairment to the goodwill of the Ortho Dermatologics reporting unit was performed at March 31, 2020 and at June 30, 2020. Based on the quantitative fair value tests, the fair value of the Ortho Dermatologics reporting unit continued to be greater than its carrying value and as a result there was no impairment to the goodwill of the reporting unit at March 31, 2020 and at June 30, 2020.
2020 Annual Goodwill Impairment Test
The Company conducted its annual goodwill impairment test as of October 1, 2020 by first assessing qualitative factors. Based on its qualitative assessment as of October 1, 2020, management believed that, with the exception of the Ortho Dermatologics reporting unit, it was more likely than not that the carrying amounts of its reporting units were less than their respective fair values and therefore concluded that a quantitative fair value test for those reporting units was not required.
As part of its qualitative assessment of the Ortho Dermatologics reporting unit as of October 1, 2020, the Company considered, among other matters, a range of potential impacts of COVID-19 pandemic related matters and the limited headroom calculated on the date Ortho Dermatologics goodwill was last tested for impairment (June 30, 2020). The Company believed that these factors may suggest that it was more likely than not that the fair value of the Ortho Dermatologics reporting unit was less than its carrying amount, and therefore a quantitative fair value test was performed for the reporting unit.
The Company performed a quantitative fair value test for the Ortho Dermatologics reporting unit as of October 1, 2020, utilizing a long-term growth rate of 2.0% and a range of discount rates between 9.50% and 9.75%, in estimation of the fair value of this reporting unit. Based on the quantitative fair value test, the fair value of the Ortho Dermatologics reporting unit was approximately 10% greater than its carrying value and as a result there was no impairment to the goodwill of the reporting unit.
2021
First Quarter 2021 - Realignment of Segment StructureSegments
Commencing in the thirdfirst quarter of 2016,2021, the Company operatesbegan operating in three operatingthe following reportable segments: (i) Bausch + Lomb/Lomb, (ii) Salix, (iii) International (ii) Branded Rx, (iv) Ortho Dermatologics and (iii) U.S.(v) Diversified Products. This 2016 segment structure realignment resulted in theThe Bausch + Lomb/InternationalLomb segment consistingconsists of the following reporting units:the: (i) U.S. Bausch + Lomb and (ii) International;International Bausch + Lomb reporting units. The Salix segment consists of the BrandedSalix reporting unit. The International Rx segment consistingconsists of the followingInternational Rx reporting units:unit. The Ortho Dermatologics segment consists of the: (i) Salix,Ortho Dermatologics and (ii) Dermatology, (iii) Canada and (iv) Branded Rx Other; and the U.S.Global Solta reporting units. The Diversified Products segment consistingconsists of the following reporting units:the: (i) Neurology and otherOther, (ii) Generics and (ii) Generics. (iii) Dentistry reporting units. This realignment in segment structure resulted in a change in the Company's former International reporting unit, which is now divided between the International Bausch + Lomb reporting unit and International Rx reporting unit. In addition, as part of this realignment of segment structure, certain products historically included in the Generics reporting unit are now included in the U.S. Bausch + Lomb reporting unit.
As a result of these changes,this realignment, goodwill was reassigned to each of the aforementioned reporting units using a relative fair value approach. Goodwill previously reported in the former U.S.International reporting unit after adjustment of impairment as described below, was reassigned usingto the International Bausch + Lomb and International Rx reporting units, and a relative fair value approach,portion of goodwill previously reported in the former Generics reporting unit was reassigned to the U.S. Bausch + Lomb Salix, Dermatology, Branded Rx Other, Neurologyreporting unit.
Immediately prior to the change in reporting units, the Company performed a qualitative fair value assessment for its former: (i) International and other, and(ii) Generics reporting units. Similarly, goodwill previously reportedBased on the qualitative fair value assessment performed, management believed that it was more likely than not that the carrying values of its former: (i) International and (ii)
Generics reporting units were less than their respective fair values and therefore, concluded a quantitative assessment was not required.
Immediately following the change in reporting units, as a result of the change in composition of the net assets for its current: (i) International Bausch + Lomb, (ii) International Rx and (iii) Generics reporting units, the Company performed a quantitative fair value test. The quantitative fair value test utilized a range of long-term growth rates of 1.0% to 3.0% and a range of discount rates between 11.0% and 12.25%, in estimation of the fair value of the reporting units. After completing the testing, the fair value of each of these reporting units exceeded its carrying value by more than 40%, and, therefore, there was no impairment to goodwill. In addition, as the U.S. Bausch + Lomb reporting unit had a change in composition of its net assets related to certain products historically included in the former Canada and AustraliaGenerics reporting unit now being included in the U.S. Bausch + Lomb reporting unit, the Company performed a qualitative assessment of this reporting unit. Based on the qualitative fair value assessment performed, management believed that it was more likely than not that the carrying value of its current U.S. Bausch + Lomb reporting unit was less than its fair value and therefore, concluded a quantitative assessment was not required.
March 31, 2021 Impairment to Goodwill
During the three months ended March 31, 2021, management identified launches of certain Ortho Dermatologics products which were not going to achieve their trajectories as forecasted once the social restrictions associated with the COVID-19 pandemic began to ease in the U.S. and offices of health care professionals could reopen. In addition, insurance coverage pressures within the U.S. continued to persist limiting patient access to topical acne and psoriasis products. In light of these developments, during the first quarter of 2021, the Company began taking steps to: (i) redirect its R&D spend to eliminate projects it has identified as high cost and high risk, (ii) redirect a portion of its marketing and product development outside the U.S. to geographies where there is better patient access and (iii) reduce its cost structure to be more competitive. As a result, during the three months ended March 31, 2021, the Company revised its long-term forecasts for the Ortho Dermatologics reporting unit. Management believed that these events were indicators that there is less headroom as of March 31, 2021 as compared to the headroom calculated on the date goodwill was last tested for impairment (October 1, 2020). Therefore, a quantitative fair value test for the Ortho Dermatologics reporting unit was performed. The quantitative fair value test utilized the Company's most recent cash flow projections as revised in the first quarter of 2021 to reflect the business changes previously discussed, including a range of potential outcomes, along with a long-term growth rate of 1.0% and a range of discount rates between 9.0% and 10.0%. Based on the quantitative fair value test, the carrying value of the Ortho Dermatologics reporting unit exceeded its fair value at March 31, 2021, and the Company recognized a goodwill impairment of $469 million.
Second Quarter 2021 - Realignment of Bausch + Lomb Reporting Units
Commencing in the second quarter of 2021, the Company changed the way it reviews the financial information of its Bausch + Lomb segment. Beginning in the second quarter of 2021, management no longer reviews the financial information of its Bausch + Lomb segment on a geographic basis, but instead reviews this financial information on a business line basis. This change created a change in the reporting units of the Bausch + Lomb segment. After the change, under its business line view, the Bausch + Lomb segment consists of the global: (i) Vision Care / Consumer Products, (ii) Ophthalmic Pharmaceuticals and (iii) Surgical reporting units. Prior to the second quarter of 2021, under the geographic view, the Bausch + Lomb segment consisted of the former: (i) U.S. Bausch + Lomb and (ii) International Bausch + Lomb reporting units. As a result of this realignment, goodwill was reassigned to each of the Canada and the Internationalaforementioned reporting units using a relative fair value approach. Goodwill previously reportedThe change in the remaining formerBausch + Lomb reporting units was reassigned todoes not impact the International reporting unit.reported revenues and segment profits of the Bausch + Lomb segment for any prior periods.
In the third quarter of 2016, goodwill impairment testing was performed under the former reporting unit structure immediatelyImmediately prior to the change and under the currentin its Bausch + Lomb reporting unit structure immediately subsequent to the change. Using the forecasts and assumptions at the time,units, the Company estimatedperformed a qualitative fair value assessment for its former reporting units. Based on the qualitative fair value assessment, management believed that it was more likely than not that the carrying values of its former: (i) U.S. Bausch + Lomb and (ii) International Bausch + Lomb reporting units were less than their respective fair values and, therefore, concluded a quantitative assessment was not required.
As a result of the change in composition of net assets, the Company performed a quantitative fair value test of its new: (i) Vision Care / Consumer Products, (ii) Ophthalmic Pharmaceuticals and (iii) Surgical reporting units immediately following the change in the Bausch + Lomb segment. The quantitative fair value test utilized long-term growth rates of 2.0% and 3.0% and a range of discount rates between 7.0% and 10.0%, in estimation of the fair value of the reporting units. After completing the testing, the fair value of each of these reporting unit using a discounted cash flow analysis. As a result of its test, the Company determined that goodwill associated with the former U.S. reporting unit and the goodwill associated with the Salix reporting unit under the current reporting unit structure were impaired. Consequently, in the aggregate, goodwill impairment charges of $1,077 million were recognized as follows:
Under the former reporting unit structure, the fair value of each reporting unitunits exceeded its carrying value by more than 15%45%, exceptand, therefore, there was no impairment to goodwill.
June 30, 2021 and September 30, 2021 Interim Assessments of Goodwill
The Company continues to monitor the market conditions impacting the Ortho Dermatologics reporting unit. The Company's latest forecasts for the former U.S.Ortho Dermatologics reporting unit whose carrying value exceeded its fair value by 2%. Asinclude a result,range of potential outcomes for, among other matters: (i) the Company proceeded to perform step twoimpacts of the COVID-19 pandemic on operations, (ii) the impact of the loss of exclusivity of certain products, (iii) the impact of longer launch cycles for certain new products, (iv) progress of its product pipeline and (v) ongoing pricing pressures, which could negatively impact the reporting unit's results over the long term. The changes in the amounts and timing of revenues and expenses in the latest forecast as compared to the forecast used at March 31, 2021 (the last time goodwill impairment test forof the former U.S.Ortho Dermatologics reporting unit was tested), were not substantial enough to materially adversely affect the recoverability of the Ortho Dermatologics reporting unit's assets and determinedare not material enough to indicate that the carrying value of the unit's goodwill exceeded its implied fair value. However, as the estimate of fair value is complex and requires significant amounts of time and judgment, the Company could not complete step two of the testing prior to the release of its financial statements for the period ended September 30, 2016. Under these circumstances, accounting guidance requires that a company recognize an estimated impairment charge if management determines that it is probable that an impairment loss has occurred and such impairment can be reasonably estimated. Using its best estimate, the Company recorded an initial goodwill impairment charge of $838 million as of September 30, 2016. In the fourth quarter of 2016, step two testing was completed and the Company concluded that the excess of the carrying value of the former U.S. reporting unit's unadjusted goodwill over its implied value as of September 30, 2016 was $905 million and recognized an incremental goodwill impairment charge of $67 million for the fourth quarter of 2016. The goodwill impairment was primarily driven by changes to the Company's forecasted performance which resulted in a lower fair value of the U.S. businesses, mainly the Salix business.
Under the currentOrtho Dermatologics reporting unit structure, themight be below its carrying value of the Salix reporting unit exceeded its fair value, as updates to the unit's forecast resulted in a lower estimated fair value for the business. As a result, the Company proceeded to perform step two of the goodwill impairment test for the Salix reporting unit and determined that the carrying value of the unit's goodwill exceeded its implied fair value. However, the Company could not complete step two of the testing prior to the release of its financial statements forlast tested at March 31, 2021.
No other events occurred or circumstances changed during the period ended September 30, 2016. Using its best estimate, the Company recorded an initialOctober 1, 2020 (the earliest date goodwill impairment charge of $211 million as of September 30, 2016. In the fourth quarter of 2016, step two testing was completed and the Company concludedtested for all other reporting units) through December 31, 2021 that indicated that the excess of the carrying value of the Salix reporting unit's unadjusted goodwill over its implied value as of September 30, 2016 was $172 million and recognized a credit to the initial goodwill impairment charge of $39 million for the fourth quarter of 2016. As of the date of testing, the Salix reporting unit had a carrying value of $14,066 million, an estimated fair value of $10,409 million and goodwill with a carrying value of $5,128 million.
In order to evaluate the sensitivity of its fair value calculations on the goodwill impairment test, the Company compared the carrying value of eachany reporting unit, to its fair value as of August 31, 2016,other than the date of testing. The fair value of eachOrtho Dermatologics reporting unit, exceededmight be below its carrying value by more than 15%, except for the Salix reporting unit as previously discussed and the U.S. Branded Rx reporting unit. As of the date of testing, goodwill of the U.S. Branded Rx reporting unit was $897 million and the estimated fair value of the unit exceeded its carrying value by approximately 5%.value.
20162021 Annual Goodwill Impairment Test
The Company conducted its annual goodwill impairment test as of October 1, 2016 and determined that the carrying value of the Salix reporting unit exceeded2021 by first assessing qualitative factors. Based on its fair value and, as a result, the Company proceeded to perform step two of the goodwill impairment test for the Salix reporting unit. After completing step two of the impairment testing, the Company determined that the carrying value of the unit's goodwill did not exceed its implied fair value and, therefore, no impairment was identified to the goodwill of the Salix reporting unit. At the date of testing, the Salix reporting unit had a carrying value of $14,087 million, an estimated fair value of $10,319 million and goodwill with a carrying value of $5,128 million. The Company's remaining reporting units passed step one of the goodwill impairment test as the estimated fair value of each reporting unit exceeded its carrying value at the date of testing and, therefore, impairment to goodwill was $0. The Company determined that no events occurred or circumstances changed during the period of October 1, 2016 through December 31, 2016 that would indicate that the fair value of a reporting unit may be below its carrying amount, except for the Salix reporting unit. During the period of October 1, 2016 through December 31, 2016, there were no changes in the facts and circumstances which would suggest that goodwill of the Salix reporting unit was further impaired.
In order to evaluate the sensitivity of its fair value calculations on the goodwill impairment test, the Company compared the carrying value of each reporting unit to its fair valuequalitative assessment as of October 1, 2016,2021, management believed that, with the dateexception of testing. The fair value of eachthe Ortho Dermatologics reporting unit, exceeded its carrying value byit was more likely than 15%, except for the Salix reporting unit, as previously discussed and the U.S. Branded Rx reporting unit.
2017
2017 Realignment of Segment Structure
As detailed in Note 2, "SIGNIFICANT ACCOUNTING POLICIES", the revenues and profits from the Company's operations in Canada were reclassified. In connection with this change, the prior-period presentation of segment goodwill has been recast to conform to the current reporting structure, of which $264 million of goodwill as of December 31, 2016 was reclassified from the Branded Rx segment to the Bausch + Lomb/International segment. No facts or circumstances were identified in connection with this change in alignment that would suggest an impairment exists.
As detailed in Note 4, "DIVESTITURES", the Sprout business was classified as held for sale as of September 30, 2017. As the Sprout business represented only a portion of a Branded Rx reporting unit, the Company assessed the remaining reporting unit for impairment and determined the carrying value of the remaining reporting unit exceeded its fair value. After completing step two of the impairment testing, the Company determined and recorded a goodwill impairment charge of $312 million during the three months ended September 30, 2017.
2017 Interim Goodwill Impairment Assessments
As the facts and circumstances had not materially changed since the October 1, 2016 impairment test, management concluded that the carrying value of the Salix reporting unit continued to be in excessamounts of its reporting units were less than their respective fair value. Therefore, during the three months
ended March 31, 2017, June 30, 2017values and September 30, 2017, the Company performed qualitative assessments of the Salixtherefore concluded that a quantitative fair value test for those reporting unit goodwill to determine if testingunits was warranted.not required.
As part of its qualitative assessments, management compared the reporting unit’s operating results to its original forecasts. Although Salix reporting unit revenue during the three months ended March 31, 2017, June 30, 2017 and September 30, 2017 declined as compared to the three months ended December 31, 2016, each decrease was within management's expectations. Further, the latest forecast for the Salix reporting unit is not materially different than the forecast used in management's October 1, 2016 testing and the difference in the forecasts would not change the conclusionassessment of the Company’s goodwill impairment testingOrtho Dermatologics reporting unit as of October 1, 2016. As part of these qualitative assessments,2021, the Company also considered, among other matters, the sensitivitylimited headroom as a result of its conclusionsthe impairment to the goodwill of the Ortho Dermatologics reporting unit when last tested (March 31, 2021) and macroeconomic factors such as they relate to changeshigher than expected inflation for many commodities, volatility in many of the estimatesequity markets and assumptions used in the latest forecast available for each period. Basedpressures on its qualitative assessments, management believesmarket interest rates. The Company believed that these facts and circumstances may suggest that it was more likely than not that the carryingfair value of the SalixOrtho Dermatologics reporting unit goodwill does not exceedwas less than its impliedcarrying amount, and therefore a quantitative fair value and that testingtest was performed for the Salix reporting unit goodwill for impairment was not required based on the current facts and circumstances.
2017 Annual Goodwill Impairment Testunit.
The Company conducted its annual goodwill impairmentperformed a quantitative fair value test for the Ortho Dermatologics reporting unit as of October 1, 20172021, utilizing a long-term growth rate of 1.0% and determined thata discount rate of 9.0%, in estimation of the carryingfair value of this reporting unit. Based on the quantitative fair value test, the fair value of the SalixOrtho Dermatologics reporting unit exceededwas approximately 10% greater than its faircarrying value and as a result the Company proceeded to perform step two of the goodwill impairment test for the Salix reporting unit. After completing step two of the impairment testing, the Company determined that the carrying value of the unit's goodwill did not exceed its implied fair value and, therefore,there was no impairment was identified to the goodwill of the Salix reporting unit. As of
If market conditions deteriorate, if the date of testing,factors and circumstances regarding the Salix reporting unit had an estimated fair value of $10,660 million and a carrying value of $13,404 million, including goodwill of $5,127 million. The Company's remaining reporting units passed step one of the goodwill impairment test as the estimated fair value of each reporting unit exceeded its carrying value at the date of testing and, therefore, there was no impairment to goodwill. In order to evaluate the sensitivity of its fair value calculations on the goodwill impairment test,COVID-19 pandemic escalate beyond management’s current expectations, or if the Company compared the carrying value of each reporting unitis unable to execute its fair value as of October 1, 2017, the date of testing. The fair value of each reporting unit exceeded its carrying value by more than 15%, except for the Salix reporting unit.
Subsequentstrategies, it may be necessary to the annualrecord impairment test, the Company considered events occurring after October 1st to determine if further testing was required. The Company considered the impact of the changescharges in the Tax Act on its reporting units, including the impact on the carrying value, for changes in deferred tax assetsfuture and liabilities, and changes in assumptions related to the tax rate when assessing the fair value. The Company concluded that the fair value continues to exceed the carrying value for all reporting units, except Salix, after considering the impact of the changes in the Tax Act. Further, the step 2 impairment test for Salix continued to support the implied fair value of goodwill. As a result, no additional impairmentthose charges were recorded.could be material.
In January 2017, the FASB issued guidance which simplifies the subsequent measurement of goodwill by eliminating “Step 2” from the goodwill impairment test. Instead, goodwill impairment will be measured as the amount by which a reporting unit's carrying value exceeds its fair value. The FASB also eliminated the requirements for any reporting unit with a zero or negative carrying amount to perform a qualitative assessment. The guidance is effective for annual periods beginning after December 15, 2019, and interim periods within those annual periods, with early adoption permitted. The Company may elect to adopt this standard effective the first quarter of 2018. Once adopted, this guidance is expected to have a significant impact on the Company’s financial position, results of operations, and disclosures with respect to the Salix reporting unit.
Total accumulatedAccumulated goodwill impairment charges to date are $1,389through December 31, 2021 were $4,180 million.
| |
10. | ACCRUED AND OTHER CURRENT LIABILITIES |
9.ACCRUED AND OTHER CURRENT LIABILITIES
Accrued and other current liabilities as of December 31, 20172021 and 2016 were as follows:2020 consist of:
| | | | | | | | | | | | | | |
| (in millions) | | 2021 | | 2020 |
| Legal matters and related fees | | $ | 1,890 | | | $ | 1,672 | |
| Product rebates | | 908 | | | 747 | |
| Product returns | | 482 | | | 575 | |
| Employee compensation and benefit costs | | 336 | | | 316 | |
| Interest | | 328 | | | 341 | |
| Income taxes payable | | 98 | | | 158 | |
| Other | | 749 | | | 767 | |
| | $ | 4,791 | | | $ | 4,576 | |
|
| | | | | | | | |
| (in millions) | | 2017 | | 2016 |
| Product rebates | | $ | 1,094 |
| | $ | 897 |
|
| Product returns | | 863 |
| | 708 |
|
| Interest | | 324 |
| | 337 |
|
| Employee compensation and benefit costs | | 259 |
| | 198 |
|
| Income taxes payable | | 202 |
| | 213 |
|
| Legal liabilities assumed in the Salix Acquisition | | 47 |
| | 281 |
|
| Other | | 905 |
| | 593 |
|
| | | $ | 3,694 |
| | $ | 3,227 |
|
| |
11. | FINANCING ARRANGEMENTS |
10.FINANCING ARRANGEMENTS
Principal amounts of debt obligations and principal amounts of debt obligations net of premiums, discounts and issuance costs as of December 31, 20172021 and 20162020 consists of the following:
|
| | | | | | | | | | | | | | | | | | |
| | | | | 2017 |
| 2016 |
| (in millions) | | Maturity | | Principal Amount | | Net of Discounts and Issuance Costs | | Principal Amount | | Net of Discounts and Issuance Costs |
| Senior Secured Credit Facilities: | | | | | | | | | | |
| Revolving Credit Facility | | April 2018 | | $ | — |
| | $ | — |
| | $ | 875 |
| | $ | 875 |
|
| Revolving Credit Facility | | April 2020 | | 250 |
| | 250 |
| | — |
| | — |
|
| Series A-3 Tranche A Term Loan Facility | | October 2018 | | — |
| | — |
| | 1,032 |
| | 1,016 |
|
| Series A-4 Tranche A Term Loan Facility | | April 2020 | | — |
| | — |
| | 668 |
| | 658 |
|
| Series D-2 Tranche B Term Loan Facility | | February 2019 | | — |
| | — |
| | 1,068 |
| | 1,048 |
|
| Series C-2 Tranche B Term Loan Facility | | December 2019 | | — |
| | — |
| | 823 |
| | 805 |
|
| Series E-1 Tranche B Term Loan Facility | | August 2020 | | — |
| | — |
| | 2,456 |
| | 2,429 |
|
| Series F Tranche B Term Loan Facility | | April 2022 | | 3,521 |
| | 3,420 |
| | 3,892 |
| | 3,815 |
|
| Senior Secured Notes: | | | | | | | | | | |
| 6.50% Secured Notes | | March 2022 | | 1,250 |
| | 1,235 |
| | — |
| | — |
|
| 7.00% Secured Notes | | March 2024 | | 2,000 |
| | 1,975 |
| | — |
| | — |
|
| 5.50% Secured Notes | | November 2025 | | 1,750 |
| | 1,729 |
| | — |
| | — |
|
| Senior Unsecured Notes: | | | | | | | | | | |
| 6.75% | | August 2018 | | — |
| | — |
| | 1,600 |
| | 1,593 |
|
| 5.375% | | March 2020 | | 1,708 |
| | 1,699 |
| | 2,000 |
| | 1,985 |
|
| 7.00% | | October 2020 | | 71 |
| | 71 |
| | 690 |
| | 689 |
|
| 6.375% | | October 2020 | | 661 |
| | 656 |
| | 2,250 |
| | 2,231 |
|
| 7.50% | | July 2021 | | 1,625 |
| | 1,615 |
| | 1,625 |
| | 1,613 |
|
| 6.75% | | August 2021 | | 650 |
| | 648 |
| | 650 |
| | 647 |
|
| 5.625% | | December 2021 | | 900 |
| | 896 |
| | 900 |
| | 894 |
|
| 7.25% | | July 2022 | | 550 |
| | 545 |
| | 550 |
| | 543 |
|
| 5.50% | | March 2023 | | 1,000 |
| | 993 |
| | 1,000 |
| | 992 |
|
| 5.875% | | May 2023 | | 3,250 |
| | 3,224 |
| | 3,250 |
| | 3,220 |
|
| 4.50% euro-denominated debt | | May 2023 | | 1,801 |
| | 1,787 |
| | 1,578 |
| | 1,563 |
|
| 6.125% | | April 2025 | | 3,250 |
| | 3,222 |
| | 3,250 |
| | 3,218 |
|
| 9.00% | | December 2025 | | 1,500 |
| | 1,464 |
| | — |
| | — |
|
| Other | | Various | | 15 |
| | 15 |
| | 12 |
| | 12 |
|
| Total long-term debt and other |
| |
| $ | 25,752 |
| | 25,444 |
|
| $ | 30,169 |
| | 29,846 |
|
| Less: Current portion of long-term debt and other | | | | 209 |
| | | | 1 |
|
| Non-current portion of long-term debt |
| | | | | $ | 25,235 |
|
| | | $ | 29,845 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | 2021 | | 2020 |
| (in millions) | | Maturity | | Principal Amount | | Net of Premiums, Discounts and Issuance Costs | | Principal Amount | | Net of Premiums, Discounts and Issuance Costs |
| Senior Secured Credit Facilities: | | | | | | | | | | |
| 2023 Revolving Credit Facility | | June 2023 | | $ | 285 | | | $ | 285 | | | $ | — | | | $ | — | |
| June 2025 Term Loan B Facility | | June 2025 | | 2,829 | | | 2,772 | | | 3,298 | | | 3,220 | |
| November 2025 Term Loan B Facility | | November 2025 | | 994 | | | 984 | | | 1,125 | | | 1,112 | |
| Senior Secured Notes: | | | | | | | | | | |
| 7.000% Secured Notes | | March 2024 | | — | | | — | | | 2,000 | | | 1,987 | |
| 5.500% Secured Notes | | November 2025 | | 1,750 | | | 1,739 | | | 1,750 | | | 1,736 | |
| 5.750% Secured Notes | | August 2027 | | 500 | | | 495 | | | 500 | | | 494 | |
| 4.875% Secured Notes | | June 2028 | | 1,600 | | | 1,580 | | | — | | | — | |
| Senior Unsecured Notes: | | | | | | | | | | |
| 6.125% | | April 2025 | | 2,650 | | | 2,640 | | | 3,250 | | | 3,234 | |
| 9.000% | | December 2025 | | 1,500 | | | 1,482 | | | 1,500 | | | 1,478 | |
| 9.250% | | April 2026 | | 1,500 | | | 1,489 | | | 1,500 | | | 1,487 | |
| 8.500% | | January 2027 | | 1,750 | | | 1,754 | | | 1,750 | | | 1,755 | |
| 7.000% | | January 2028 | | 750 | | | 743 | | | 750 | | | 742 | |
| 5.000% | | January 2028 | | 1,250 | | | 1,238 | | | 1,250 | | | 1,236 | |
| 6.250% | | February 2029 | | 1,500 | | | 1,483 | | | 1,500 | | | 1,480 | |
| 5.000% | | February 2029 | | 1,000 | | | 990 | | | 1,000 | | | 988 | |
| 7.250% | | May 2029 | | 750 | | | 742 | | | 750 | | | 741 | |
| 5.250% | | January 2030 | | 1,250 | | | 1,237 | | | 1,250 | | | 1,235 | |
| 5.250% | | February 2031 | | 1,000 | | | 989 | | | 1,000 | | | 988 | |
| Other | | Various | | 12 | | | 12 | | | 12 | | | 12 | |
| Total long-term debt and other | | | | $ | 22,870 | | | 22,654 | | | $ | 24,185 | | | 23,925 | |
| Less: Current portion of long-term debt and other | | | | — | | | | | — | |
| Non-current portion of long-term debt | | | | | | $ | 22,654 | | | | | $ | 23,925 | |
Covenant Compliance
The Senior Secured Credit Facilities (as defined below) and the indentures governing the Company’s Senior Secured Notes and Senior Unsecured Notes contain customary affirmative and negative covenants and specified events of default. These affirmative and negative covenants include, among other things, and subject to certain qualifications and exceptions, covenants that restrict the Company’s ability and the ability of its subsidiaries to: incur or guarantee additional indebtedness; create or permit liens on assets; pay dividends on capital stock or redeem, repurchase or retire capital stock or subordinated indebtedness; make certain investments and other restricted payments; engage in mergers, acquisitions, consolidations and amalgamations; transfer and sell certain assets; and engage in transactions with affiliates. The Revolving Credit Facility also contains specified financial maintenance covenants (consisting of a secured leverage ratio and an interest coverage ratio).
In 2017, the Company completed several actions which included using the proceeds from divestitures and cash flows from operations to repay debt, amending financial maintenance covenants, extending a significant portion of the Revolving Credit Facility, and refinancing debt with near term maturities. These actions, described below, have reduced the Company’s debt balance and positively affected the Company’s ability to comply with its financial maintenance covenants. As of December 31, 2017,2021, the amount available for restricted payments under the "builder basket" in the Company’s most restrictive indentures (as defined by those indentures) was approximately $13,800 million (although such availability is subject to the Company's compliance with a 2.00:1.00 fixed charge coverage ratio). The 2023 Revolving Credit Facility (as defined below) also contains a financial maintenance covenant that requires the Company to maintain a first lien net leverage ratio of not greater than 4.00:1.00. The financial maintenance covenant may be waived or amended without the consent of the term loan facility lenders and contains a customary term loan facility standstill.
As of December 31, 2021, the Company was in compliance with allits financial maintenance covenantscovenant related to its outstanding debt.debt obligations. The Company, based on its current forecast for the next twelve months from the date of issuance of these financial statements, and the amendments executed, expects to remain in compliance with theseits financial maintenance covenantscovenant and meet its debt service obligations over that same period.
The Company continues to take steps to improve its operating results to ensure continual compliance with its financial maintenance covenantscovenant and may take other actions to reduce its debt levels to align with the Company’s long termlong-term strategy, including divesting other businesses, and refinancing debt and issuing equity or equity-linked securities as deemed appropriate.
Senior Secured Credit Facilities
On February 13, 2012,June 1, 2018, the Company and certain of its subsidiaries as guarantors entered into the “Senior"Senior Secured Credit Facilities”Facilities" under the Company’s ThirdCompany's Fourth Amended and Restated Credit and Guaranty Agreement as amended (the “Credit“Restated Credit Agreement”), with a syndicate of financial institutions and investors.
2015 Activity
On January 22, 2015, the Company and certaininvestors as lenders. The Restated Credit Agreement provides for a revolving credit facility of its subsidiaries, as guarantors, entered into joinder agreements to allow for an increase in commitments under the$1,225 million (the "2023 Revolving Credit Facility to $1,500 million and the issuance of $250 million in incremental term loans under the Series A-3 Tranche A Term Loan Facility.
On March 5, 2015, the Company entered into an amendment to the Credit Agreement to implement certain revisions in connection with the Salix Acquisition. The amendment, among other things, permitted the Salix Acquisition and the refinancing, repayment, termination and discharge of Salix's outstanding indebtedness, as well as the issuance of Senior Unsecured Notes to be used to fund the Salix Acquisition (as described below). The amendment also modified the interest coverage ratio financial maintenance covenant applicable to the Company through March 31, 2016.
Concurrently with the Salix Acquisition on April 1, 2015, the Company obtained incremental term loan commitments in the aggregate principal amount of $5,150 million (the "Incremental Term Loan Facilities") under its existing Credit Agreement. The Incremental Term Loan Facilities, which were fully drawn in the second quarter of 2015, consisted of: (1) $1,000 million of tranche A term loans (the "Series A-4 Tranche A Term Loan Facility"), bearing interest at a rate per annum equal to, at the election of the Company, (i) the base rate plus a range between 0.75% and 1.25% or (ii) LIBO rate plus a range between 1.75% and 2.25%, in each case, depending on the Company's leverage ratio and having terms that are consistent with the Company's existing tranche A term loans and (2) $4,150 million of tranche B term loans (the "Series F Tranche B Term Loan Facility"), bearing interest at a rate per annum equal to, at election of the Company, (i) the base rate plus a range between 2.00% and 2.25% or (ii) LIBO rate plus a range between 3.00% and 3.25%, depending on the Company's secured leverage ratio and subject to a 1.75% base rate floor and 0.75% LIBO rate floor, and having terms that are consistent with the Company's existing tranche B term loans. In connection with the issuance of the Incremental Term Loan Facilities, the Company incurred a total of approximately $85 million of costs and fees (treated as a deduction to Long-term debt), including an original issue discount of approximately $21 million.
The Series A-4 Tranche A Term Loan Facility was payable in quarterly installments at the rate of 5% per annum through March 31, 2016, then at the rate of 10% per annum through March 31, 2017, then at the rate of 20% per annum through maturity on April 1, 2020. The Series F Tranche B Term Loan Facility was payable in quarterly installments at the rate of 1% per annum through maturity on April 1, 2022.
On May 29, 2015, the Company and certain of its subsidiaries, as guarantors, entered into Amendment No. 11 to the Credit Agreement to reprice the Series D-2 Tranche B Term Loan Facility. The applicable margins for borrowings under the Series D-2 Tranche B Term Loan Facility, as modified by the repricing, were initially 1.75% with respect to base rate borrowings and 2.75% with respect to LIBO rate borrowings. Then, commencing with the delivery of the financial statements of the Company for the fiscal quarter ending September 30, 2015, such margins were changed to between 1.50% and 1.75% for base rate borrowings and between 2.50% and 2.75% for LIBO rate borrowings, in each case, based on the secured leverage ratio of the Company for each fiscal quarter for which financial statements were delivered as required under the Credit Agreement,
subject to a 1.75% base rate floor and a 0.75% LIBO rate floor. Costs and fees incurred in connection with the repricing of the Series D-2 Tranche B Term Loan Facility were nominal.
2016 Activity
On April 11, 2016, the Company obtained an amendment and waiver to its Credit Agreement (the “April 2016 amendment”). Pursuant to the April 2016 amendment, the Company obtained an extension to the deadline for filing: (i) the Company's Annual Report on Form 10-K for theseven year ended December 31, 2015 (the “2015 Form 10-K”) to May 31, 2016 and (ii) the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2016 (the “March 31, 2016 Form 10-Q”) to July 31, 2016. The April 2016 amendment also waived, among other things, the cross-default under the Credit Agreement to the Company's and Valeant's indentures that arose when the 2015 Form 10-K was not filed by March 15, 2016, any cross default under the Credit Agreement that may have arisen under the Company's other indebtedness from the failure to timely deliver the 2015 Form 10-K, and the cross default under the Credit Agreement to the Company's and Valeant's indentures that arose when the March 31, 2016 Form 10-Q was not filed by May 16, 2016 or any cross default under the Credit Agreement to the Company’s other indebtedness as a result of the delay in filing the March 31, 2016 Form 10-Q. The April 2016 amendment modified, among other things, the interest coverage financial maintenance covenant from 3.00 to 1.00 to 2.75 to 1.00 from the fiscal quarter ending June 30, 2016 through the fiscal quarter ending March 31, 2017. Certain financial definitions were also amended, including the definition of “Consolidated Adjusted EBITDA” which was modified to add back fees and expenses in connection with any amendment or modification of the Credit Agreement or any other indebtedness, and to permit up to $175 million to be added back in connection with costs, fees and expenses relating to, among other things, Philidor-related matters and/or product pricing-related matters and any review by the Board and the Company’s ad hoc committee of independent directors related to such matters. The April 2016 amendment also modified certain existing add-backs to Consolidated Adjusted EBITDA under the Credit Agreement, including increasing the add-back for: (i) restructuring charges in any twelve-month period to $200 million from $125 million and (ii) fees and expenses in connection with any proposed or actual issuance of debt, equity, acquisitions, investments, assets sales or divestitures to $150 million from $75 million for any twelve month period ending on or prior to March 31, 2017.
The terms of the April 2016 amendment imposed a number of restrictions on the Company and its subsidiaries until the time that: (i) the Company delivered the 2015 Form 10-K (which was filed on April 29, 2016) and the March 31, 2016 Form 10-Q (which was filed on June 7, 2016) (such requirements, the "Financial Reporting Requirements") and (ii) the leverage ratio of the Company and its subsidiaries (being the ratio, as of the last day of any fiscal quarter, of Consolidated Total Debt (as defined in the Credit Agreement) as of such day to Consolidated Adjusted EBITDA (as defined in the Credit Agreement) for the four fiscal quarter period ending on such date) is less than 4.50 to 1.00, including imposing: (i) a $250 million aggregate cap (the "Transaction Cap") on acquisitions (although the Transaction Cap does not apply to any portion of acquisition consideration paid for by either the issuance of the Company’s equity or the proceeds of any such equity issuance), (ii) a restriction on the incurrence of debt to finance such acquisitions and (iii) a requirement that the net proceeds from certain asset sales be used to repay the term loans under the Credit Agreement, instead of investing such net proceeds in real estate, equipment, other tangible assets or intellectual property useful in the business. In addition, the Company's ability to make investments, dividends, distributions, share repurchases and other restricted payments is also restricted and subject to the Transaction Cap until such time as the Financial Reporting Requirements are satisfied and the leverage ratio of the Company and its subsidiaries is less than 4.00 to 1.00 (unless such investments or restricted payments can fit within other existing exceptions set out in the Credit Agreement). The April 2016 amendment also increased the interest rate margins applicable to the Company's loans under the Credit Agreement by 1.00% until delivery of the Company's financial statements for the fiscal quarter ending June 30, 2017. Thereafter, the interest rate margins applicable to the loans have been determined on the basis of a pricing grid tied to the Company's secured leverage ratio. With the filing of the March 31, 2016 Form 10-Q on June 7, 2016, the Financial Reporting Requirements were satisfied in all respects.
The April 2016 amendment was accounted for as a debt modification. As a result, repayments to the lenders were recognized as additional debt discounts and are being amortized over the remaining term of each term loan.
On August 23, 2016, the Company entered into an amendment to its Credit Agreement (the “August 2016 amendment”). The August 2016 amendment reduced the minimum interest coverage maintenance covenant under the Credit Agreement to 2.00 to 1.00 for all fiscal quarters ending on or after September 30, 2016. Prior to the effectiveness of the August 2016 amendment, the minimum interest coverage maintenance covenant was 2.75 to 1.00 for any fiscal quarter ending June 30, 2016 through March 31, 2017 and 3.00 to 1.00 for any fiscal quarter ending thereafter. In addition, the August 2016 amendment permitted the issuance of secured notes with shorter maturities and the incurrence of other indebtedness, in each case to repay term loans under the Credit Agreement. The August 2016 amendment also provided additional flexibility to sell assets, provided the proceeds of such asset sales are used to prepay loans under the Credit Agreement in accordance with its terms.
The August 2016 amendment increased each of the applicable interest rate margins under the Credit Agreement by 0.50%, until delivery of the Company’s financial statements for the quarter ending June 30, 2017. Thereafter, each of the applicable interest rate margins have been determined on the basis of a pricing grid tied to the Company’s secured leverage ratio, which was also increased by 0.50% across the grid.
The August 2016 amendment was accounted for as a debt modification. As a result, repayments to the lenders were recognized as additional debt discounts and are being amortized over the remaining term of each term loan.
2017 Activity
On March 3, 2017, the Company used proceeds from the Skincare Sale to repay $1,086 million of outstanding debt under its Senior Secured Credit Facilities.
On March 21, 2017, the Company entered into Amendment No. 14 to the Credit Agreement (“Amendment No. 14”), which: (i) provided additional financing from an incremental term loan under the Company's Series F Tranche B Term Loan Facility of $3,060$4,565 million (the “Series F-3 Tranche B Term Loan”), (ii) amended the financial covenants contained in the Credit Agreement, (iii) increased the amortization rate for the Series F Tranche B“June 2025 Term Loan Facility from 0.25% per quarter (1% per annum) to 1.25% per quarter (5% per annum), with quarterly repayments starting March 31, 2017, (iv) amended certain financial definitions, including the definition of Consolidated Adjusted EBITDA and (v) provided additional ability for the Company to, among other things, incur indebtedness and liens, consummate acquisitions and make other investments, including relaxing certain limitations imposedB Facility”) borrowed by prior amendments. The proceeds from the additional financing, combined with the proceeds from the issuance of the Senior Secured Notes described below and cash on hand, were used to: (i) repay all outstanding balances under the Company’s Series A-3 Tranche A Term Loan Facility, Series A-4 Tranche A Term Loan Facility, Series D-2 Tranche B Term Loan Facility, Series C-2 Tranche B Term Loan Facility, and Series E-1 Tranche B Term Loan Facility (collectively the “Refinanced Debt”subsidiary, Bausch Health Americas, Inc. ("BHA"), (ii) repurchase $1,100 million in principal amount of 6.75% Senior Unsecured Notes due August 2018 (the “August 2018 Unsecured Notes”), (iii) repay $350 million of amounts outstanding under the Company's.
The 2023 Revolving Credit Facility and (iv) pay related fees and expenses (collectively, the “March 2017 Refinancing Transactions”).
Amendments to the covenants made as part of Amendment No. 14 include: (i) removed the financial maintenance covenants with respect to the Series F Tranche B Term Loan Facility, (ii) reduced the interest coverage ratio maintenance covenant to 1.50:1.00 with respect to the Revolving Credit Facility beginning in the quarter ending March 31, 2017 through the quarter ending March 31, 2019 (stepping up to 1.75:1.00 thereafter) and (iii) increased the secured leverage ratio maintenance covenant to 3.00:1.00 with respect to the Revolving Credit Facility beginning in the quarter ending March 31, 2017 through the quarter ending March 31, 2019 (stepping down to 2.75:1.00 thereafter). These financial maintenance covenants apply only with respect to the Revolving Credit Facility and can be waived or amended without the consent of the term loan lenders under the Credit Agreement.
Modifications to Consolidated Adjusted EBITDA from Amendment No. 14 included, among other things: (i) modifications to permit the Company to add back extraordinary, unusual or non-recurring expenses or charges (including certain costs of, and payments of, litigation expenses, actual or prospective legal settlements, fines, judgments or orders, subject to a cap of $500 million in any twelve month period, of which no more than $250 million may pertain to any costs, payments, expenses, settlements, fines, judgments or orders, in each case, arising out of any actual or potential claim, investigation, litigation or other proceeding that the Company did not publicly disclose (via press release or any filing with the SEC)matures on or prior to the effectiveness of Amendment No. 14, and subject to other customary limitations) and (ii) modifications to allow the Company to add back certain expenses, charges or losses actually reimbursed or for which the Company reasonably expects to be reimbursed by third parties pursuant to indemnification, reimbursement, insurance or similar agreements within 365 days, subject to customary limitations.
Amendment No. 14 was accounted for as a modification of debt to the extent the Refinanced Debt was replaced with the incremental Series F-3 Tranche B Term Loan issued to the same creditor and an extinguishment of debt to the extent the Refinanced Debt was replaced with Series F-3 Tranche B Term Loan issued to a different creditor. The Refinanced Debt that was replaced with the proceeds of the newly issued Senior Secured Notes was accounted for as an extinguishment of debt. For amounts accounted for as an extinguishment of debt, the Company incurred a Loss on extinguishment of debt of $27 million representing the difference between the amount paid to settle the extinguished debt and the extinguished debt’s carrying value (the stated principal amount net of unamortized discount and debt issuance costs). Payments made to the lenders of $38 million associated with the issuance of the new Series F-3 Tranche B Term Loan were capitalized and are being amortized as interest expense over the remaining term of the Series F Tranche B Term Loan Facility. Third party expenses of $3 million associated with the modification of debt were expensed as incurred and included in Interest expense.
On March 28, 2017, the Company entered into Amendment No. 15 to the Credit Agreement (“Amendment No. 15”) which provided for the extension of the maturity date of $1,190 million of revolving credit commitments under the Revolving Credit Facility from April 20, 2018 to the earlier of: (i) April 20, 2020of June 1, 2023 and (ii) the date that is 91 calendar days prior to the scheduled maturity of any series or tranche of term loans under the Credit Agreement, certain Senior Secured Notes or Senior Unsecured Notes and any other indebtedness for borrowed money of the Company or BHA in an aggregate principal amount in excess of $750$1,000 million. Unless otherwise terminated prior thereto,Both the remaining $310 million of revolving credit commitmentsCompany and BHA are borrowers with respect to the 2023 Revolving Credit Facility. Borrowings under the 2023 Revolving Credit Facility may be made in U.S. dollars or Canadian dollars (or if an amendment to the Restated Credit Agreement is made to replace LIBOR with an alternative benchmark rate with respect to borrowings under the Revolving Credit Facility will continue to mature on April 20, 2018. Amendment No. 15 was accounted fordenominated in part as a debt modification, whereby the fees paid to lenders agreeing to extend their commitment through April 20, 2020 and the fees paid to lenders providing additional commitments were recognized as additional debt issuance costs and are being amortized over the remaining term of the Revolving Credit Facility. Amendment No. 15 was accounted for in part as an extinguishment of debt and the Company incurred a Loss on extinguishment of debt of $1 million representing the unamortized debt issuance costs associated with the commitments canceled by lenders in the amendment.
In April 2017, using the net proceeds from the Skincare Sale and the proceeds from the divestiture of a manufacturing facility in Brazil, the Company repaid $220 million of its Series F Tranche B Term Loan Facility. On July 3, 2017, using the net proceeds from the Dendreon Sale, the Company repaid $811 million of its Series F Tranche B Term Loan Facility. On October 5, 2017, using the net proceeds from the iNova Sale, the Company repaid $923 million of its Series F Tranche B Term Loan Facility. On November 10, 2017, using the net proceeds from the Obagi Sale, the Company repaid $181 million of its Series F Tranche B Term Loan Facility. On November 21, 2017, using the proceeds from the November 2017 Refinancing Transactions (as defined below), the Company repaid $750 million of its Series F Tranche B Term Loan Facility.
On November 21, 2017, the Company entered into Amendment No. 16 to the Credit Agreement (“Amendment No. 16”) to reprice the Series F Tranche B Term Loan Facility. The applicable margins for borrowings under the Series F Tranche B Term Loan Facility, as modified by the repricing, are 2.50% with respect to base rate borrowings and 3.50% with respect to LIBO rate borrowings. Any prepayment of the Series F Tranche B Term Loan Facility in connection with certain refinancings prior to May 21, 2018 will require a prepayment premium of 1.0% of such loans prepaid. Amendment No. 16 also increases the letter of credit facility sublimit under the Credit Agreement to $300 million and makes certain other amendments to provide the Company with additional flexibility to enter into certain cash management transactions. The Company paid a prepayment penalty of approximately $38 million in connection with Amendment No. 16, recognized in the Loss on extinguishment of debt in the consolidated statement of operations.euros, euros).
As of December 31, 2017,2021, the Company had $250$285 million of outstanding borrowings, $94$54 million of issued and outstanding letters of credit, and remaining availability of $1,156$886 million under its 2023 Revolving Credit Facility. Of the $94 million issued and outstanding letters of credit, a $50 million letter of credit was issued as part of the $127 million of collateral to secure a bank guarantee for the benefit of the Australian Government in connection with the notice of assessment received on August 8, 2017 from the Australian Taxation Office, as discussed in Note 18, "INCOME TAXES". The Company disagrees with the notice of assessment and continues to believe that its tax positions are appropriate and supported by the facts, circumstances and applicable laws. The Company intends to defend its tax position in this matter vigorously.
On January 9,November 27, 2018, the cash collateral of $77 million of Restricted cash was returnedCompany entered into the First Incremental Amendment to the Company in exchange for a $77Restated Credit Agreement, which provided an additional seven year Tranche B Term Loan Facility of $1,500 million letter of credit.
(the "November 2025 Term Loan B Facility").
Current Description of Senior Secured Credit Facilities
Borrowings under the Senior Secured Credit Facilities in U.S. dollars bear interest at a rate per annum equal to, at the Company's option, from time to time, either: (i) a base rate determined by reference to the higherhighest of: (a) the prime rate (as defined in the Restated Credit Agreement) and, (b) the federal funds effective rate plus 1/2 of 1%1.00% or (c) the eurocurrency rate (as defined in the Restated Credit Agreement) for a period of one month plus 1.00% (or if such eurocurrency rate shall not be ascertainable, 1.00%) or (ii) a LIBOeurocurrency rate determined by reference to the costs of funds for U.S. dollar deposits for the interest period relevant to such borrowing adjusted for certain additional costs (provided however, that the eurocurrency rate shall at no time be less than 0.00% per annum), in each case plus an applicable margin. With respect to
Borrowings under the 2023 Revolving Credit Facility these applicable margins have been subjectin euros, when available, are expected to increase or decrease quarterly based on the secured leverage ratio beginning with the quarter ended June 30, 2017. Based on its calculation of the Company’s secured leverage ratio, management does not anticipate any such increase or decreasebear interest at a term benchmark rate determined by reference to the current applicable marginscosts of funds for euro deposits for the nextinterest period relevant to such borrowing (provided however, that the eurocurrency rate is at no time expected to be less than 0.00% per annum), plus an applicable period.margin.
The loansBorrowings under the Senior Secured Credit Facilities may be made to, and the letters of credit under the2023 Revolving Credit Facility may be issued on behalf of,in Canadian dollars bear interest at a rate per annum equal to, at the Company. All borrowings under the Senior Secured Credit Facilities are subjectCompany's option, either: (i) a prime rate determined by reference to the satisfactionhigher of: (a) the rate of customary conditions, includinginterest last quoted by The Wall Street Journal as the absence“Canadian Prime Rate” or, if The Wall Street Journal ceases to quote such rate, the highest per annum interest rate published by the Bank of a defaultCanada as its prime rate and (b) the 1 month BA rate (as defined below) calculated daily plus 1.00% (provided however, that the prime rate shall at no time be less than 0.00%) or (ii) the bankers’ acceptance rate for Canadian dollar deposits in the Toronto interbank market (the “BA rate”) for the interest period relevant to such borrowing (provided however, that the BA rate shall at no time be less than 0.00% per annum), in each case plus an event of default and the accuracy in all material respects of representations and warranties.applicable margin.
Subject to certain exceptions and customary baskets set forth in the Restated Credit Agreement, the Company is required to make mandatory prepayments of the loans under the Senior Secured Credit Facilities under certain circumstances, including from: (a)(i) 100% of the net cash proceeds of insurance and condemnation proceeds for property or asset losses (subject to reinvestment rights, and net proceeds threshold), (b) 50% of the net cash proceeds from the issuance of equity securities subject to decrease based on leverage ratios (c)and net proceeds threshold), (ii) 100% of the net cash proceeds from the incurrence of debt (other than permitted debt as defineddescribed in the Restated Credit Agreement), (d)(iii) 50% of Consolidated Excess Cash Flow (as defined in the Restated Credit Agreement) subject to decrease based on leverage ratios and (e)subject to a threshold amount and (iv) 100% of net cash proceeds from asset sales outside the ordinary course of business (subject to reinvestment rights, which were restricted by the terms of the April 2016 amendment)decrease based on leverage ratios and net proceeds threshold). These mandatory prepayments may be used to satisfy future amortization.
The Company is permitted to voluntarily reduceapplicable interest rate margins for the unutilized portion ofJune 2025 Term Loan B Facility and the revolving commitment amountNovember 2025 Term Loan B Facility are 2.00% and repay outstanding loans under the Revolving Credit Facility at any time without premium or penalty, other than customary “breakage” costs1.75%, respectively, with respect to LIBObase rate loans.and prime rate borrowings and 3.00% and 2.75%,
respectively, with respect to eurocurrency rate and BA rate borrowings. As of December 31, 2017, any prepayment2021, the stated rates of interest on the Series F Tranche BCompany’s borrowings under the June 2025 Term Loan B Facility in connection with certain refinancings prior to May 21, 2018 will require a prepayment premium of 1.0% of such loans prepaid.and the November 2025 Term Loan B Facility were 3.09% and 2.84% per annum, respectively.
The Company’s obligationsamortization rate for both the June 2025 Term Loan B Facility and the obligationsNovember 2025 Term Loan B Facility is 5.00% per annum. The Company may direct that prepayments be applied to such amortization payments in order of the guarantors under the Senior Secured Credit Facilities and cash management arrangements entered into with lenders under the Senior Secured Credit Facilities (or affiliates thereof) are secured by first-priority security interests in substantially all tangible and intangible assetsmaturity. As of the Company and the guarantors, including 100% of the capital stock of Valeant and each material subsidiary of the Company that is directly owned by the Company or another guarantor other than Valeant’s foreign subsidiaries) and 65% of the capital stock of each foreign subsidiary of Valeant that is directly owned by Valeant or owned by a guarantor that is a domestic subsidiary of Valeant, in each case subject to certain exclusions and limitations set forth in the credit documentation governingDecember 31, 2021, there were no remaining mandatory quarterly amortization payments for the Senior Secured Credit Facilities.
The applicable interest rate margins for borrowings under the 2023 Revolving Credit Facility are 2.25%-2.75%1.50%-2.00% with respect to base rate or prime rate borrowings and 3.25%-3.75%2.50%-3.00% with respect to LIBOeurocurrency rate or BA rate borrowings. As of December 31, 2017,2021, the stated rate of interest on the 2023 Revolving Credit Facility was 5.32%2.84% per annum. In addition, the Company is required to pay commitment fees of 0.25% - 0.50% per annum with respect to the unutilized commitments under the 2023 Revolving Credit Facility, payable quarterly in arrears. The Company also is required to pay: (i) letter of credit fees on the maximum amount available to be drawn under all outstanding letters of credit in an amount equal to the applicable margin on LIBOeurocurrency rate borrowings under the 2023 Revolving Credit Facility on a per annum basis, payable quarterly in arrears, (ii) customary fronting fees for the issuance of letters of credit and (iii) agency fees.
The applicable interest rate margins forRestated Credit Agreement permits the Series F Tranche B Term Loan Facility are 2.50% with respectincurrence of incremental credit facility borrowings, up to base rate borrowingsthe greater of $1,000 million and 3.50% with respect28.5% of Consolidated Adjusted EBITDA (non-GAAP) (as defined in the Restated Credit Agreement), subject to LIBO ratecustomary terms and conditions, as well as the incurrence of additional incremental credit facility borrowings subject to, in the case of secured debt, a 0.75% LIBO rate floor. Assecured leverage ratio of December 31, 2017,not greater than 3.50:1.00, and, in the stated ratecase of unsecured debt, either a total leverage ratio of not greater than 6.50:1.00 or an interest on the Company’s borrowings under the Series F Tranche B Term Loan Facility was 4.94% per annum.
Ascoverage ratio of December 31, 2017, there were no remaining quarterly amortization repayments for the Senior Secured Credit Facilities.not less than 2.00:1.00.
Senior Secured Notes
The Senior Secured Notes are guaranteed by each of the Company’s subsidiaries that is a guarantor under the Restated Credit Agreement and existing Senior Unsecured Notes (together, the “Note Guarantors”). The Senior Secured Notes and the guarantees related
thereto are senior obligations and are secured, subject to permitted liens and certain other exceptions, by the same first priority liens that secure the Company’s obligations under the Restated Credit Agreement under the terms of the indentureindentures governing the Senior Secured Notes.
The Senior Secured Notes and the guarantees rank equally in right of repayment with all of the Company’s and Note Guarantors’ respective existing and future unsubordinated indebtedness and senior to the Company’s and Note Guarantors’ respective future subordinated indebtedness. The Senior Secured Notes and the guarantees related thereto are effectively pari passu with the Company’s and the Note Guarantors’ respective existing and future indebtedness secured by a first priority lien on the collateral securing the Senior Secured Notes and effectively senior to the Company’s and the Note Guarantors’ respective existing and future indebtedness that is unsecured, including the existing Senior Unsecured Notes, or that is secured by junior liens, in each case to the extent of the value of the collateral. In addition, the Senior Secured Notes are structurally subordinated to: (i) all liabilities of any of the Company’s subsidiaries that do not guarantee the Senior Secured Notes and (ii) any of the Company’s debt that is secured by assets that are not collateral.
Upon the occurrence of a change in control (as defined in the indentures governing the Senior Secured Notes), unless the Company has exercised its right to redeem all of the notes of a series, as previously described, holders of the Senior Secured Notes may require the Company to repurchase such holder’s notes, in whole or in part, at a purchase price equal to 101% of the principal amount thereof plus accrued and unpaid interest.
6.50%6.500% Senior Secured Notes due 2022 and 7.00% Senior Secured Notes due 2024 -
In March 2017, Refinancing Transactions
As part of the March 2017 Refinancing Transactions, the Company issued $1,250 million aggregate principal amount of 6.50% Senior Secured Notes6.500% senior secured notes due March 15, 2022 (the “March 2022 Secured Notes”) and $2,000 million aggregate principal amount of 7.00% Senior Secured Notes7.000% senior secured notes due March 15, 2024 (the “March 2024 Secured Notes”), in a private placement, the proceeds of which, when combined with the proceeds from the Series F-3 Tranche B Term Loan and cash on hand, were used to: (i) repay the Refinanced Debt, (ii) repurchase $1,100 million in principal amount of August 2018 Unsecured Notes, (iii) repay $350 million of amounts outstanding under the Company's Revolving Credit Facility and (iv) pay related fees and expenses.placement. Interest on these notes is payable semi-annually in arrears on each March 15 and September 15.
The March 2022 Secured Notes are redeemable at the optionwere repaid in full as part of the Company, in whole or in part, at any time on or after March 15, 2019, at the redemption prices set forth in the indenture. The Company may redeem some or all of the March 2022 Secured Notes prior to March 15, 2019 at a price equal to 100% of the principal amount thereof plus a “make-whole” premium. Prior to March 15, 2019, the Company may redeem up to 40% of the aggregate principal amount of the March 2022 Secured Notes using the proceeds of certain equity offerings at the redemption price set forth in the indenture.May 2020 Refinancing Transactions (as defined below).
The March 2024 Secured Notes are redeemable at the optionwere repaid in full during 2021 with cash on hand and as part of the Company, in whole or in part, at any time on or after March 15, 2020, at the redemption prices set forth in the indenture. The Company may redeem some or all of the March 2024 Secured Notes prior to March 15, 2020 at a price equal to 100% of the principal amount thereof plus a “make-whole” premium. Prior to March 15, 2020, the Company may redeem up to 40% of the aggregate principal amount of the March 2024 Secured Notes using the proceeds of certain equity offerings at the redemption price set forth in the indenture.June 2021 Refinancing Transactions (as defined below).
5.50%5.500% Senior Secured Notes due 2025 - October 2017 Refinancing Transactions and November 2017 Refinancing Transactions
On October 17, 2017, the Company issued $1,000 million, and, on November 21, 2017, the Company issued $750 million, aggregate principal amount of 5.50%5.500% Senior Secured Notes due November 2025 (the “November 2025 Secured Notes”),
in a private placement, the proceeds of which were used to: (i) repurchase $569 million in principal amount of the 6.375% October 2020 Unsecured Notes (as defined below) and (ii) repurchase $431 million in principal amount of the 7.00% October 2020 Unsecured Notes (as defined below) (collectively, the “October 2017 Refinancing Transactions”). The related fees and expenses were paid using cash on hand.placement. Interest on these notesthe November 2025 Secured Notes is payable semi-annually in arrears on each May 1 and November 1.
The November 2025 Secured Notes are redeemable at the option of the Company, in whole or in part, at any time, at the redemption prices set forth in the indenture.
5.750% Senior Secured Notes due 2027 - March 2019 Refinancing Transactions
On March 8, 2019, BHA and the Company issued: (i) $1,000 million aggregate principal amount of 8.500% Senior Unsecured Notes due 2027 (the "January 2027 Unsecured Notes") and (ii) $500 million aggregate principal amount of 5.750% Senior Secured Notes due August 2027 (the "August 2027 Secured Notes"), respectively, in a private placement. A portion of the proceeds and cash on hand were used to: (i) repurchase $584 million of 5.875% Senior Unsecured Notes due 2023 (the "May 2023 Unsecured Notes"), (ii) repurchase $518 million of 5.625% Senior Unsecured Notes due 2021 (the “December 2021 Unsecured Notes”), (iii) repurchase $216 million of 5.500% Senior Unsecured Notes due 2023 (the "March 2023 Unsecured Notes”) and (iv) pay all fees and expenses associated with these transactions (collectively, the “March 2019 Refinancing Transactions”). During April 2019, the Company redeemed $182 million of the December 2021 Unsecured Notes, representing the remaining outstanding principal balance of the December 2021 Unsecured Notes and completing the refinancing of $1,500 million of debt in connection with the March 2019 Refinancing Transactions. The March 2019 Refinancing Transactions were accounted for as an extinguishment of debt and the Company incurred a loss on extinguishment of debt of $8 million representing the difference between the amount paid to settle the extinguished debt and the extinguished debt’s carrying value. Interest on the August 2027 Secured Notes is payable semi-annually in arrears on each February 15 and August 15.
The August 2027 Secured Notes are redeemable at the option of the Company, in whole or in part, at any time on or after November 1, 2020,August 15, 2022, at the redemption prices set forth in the indenture. The Company may redeem some or all of the November 2025August 2027 Secured Notes prior to November 1, 2020August 15, 2022 at a price equal to 100% of the principal amount thereof plus a “make-whole” premium. Prior to November 1, 2020,August 15, 2022, the Company may redeem up to 40% of the aggregate principal amount of the November 2025August 2027 Secured Notes using the proceeds of certain equity offerings at the redemption price set forth in the indenture.
4.875% Senior Secured Notes due 2028 - June 2021 Refinancing Transactions
On November 21, 2017,June 8, 2021, the Company issued $750$1,600 million aggregate principal amount of the November 20254.875% Senior Secured Notes due June 2028 (the “June 2028 Secured Notes”) in a private placement. These are additional notesThe proceeds and form partcash on hand were used to: (i) repurchase a portion and redeem the remainder of $1,600 million of the same series asMarch 2024 Secured Notes, representing the Company’s existing November 2025remaining outstanding principal balance of the March 2024 Secured Notes. The proceeds were used to prepay its Series F Tranche B Term Loan Facility. The relatedNotes and (ii) pay all fees and expenses were paid using cash on handassociated with these transactions (collectively, the “November 2017“June 2021 Refinancing Transactions”). The June 2021 Refinancing Transactions were accounted for as an extinguishment of debt and the Company incurred a loss on extinguishment of debt of $38 million representing the difference between the amount paid to settle the extinguished debt and the extinguished debt’s carrying value. Interest on the June 2028 Secured Notes is payable semi-annually in arrears on each June 1 and December 1.
The June 2028 Secured Notes are redeemable at the option of the Company, in whole or in part, at any time on or after June 1, 2024, at the redemption prices set forth in the June 2028 Secured Notes indenture. The Company may redeem some or all of the June 2028 Secured Notes prior to June 1, 2024 at a price equal to 100% of the principal amount thereof, plus accrued and unpaid interest to, but not including, the date of the redemption plus a “make-whole” premium. In addition, at any time prior to June 1, 2024, the Company may redeem up to 40% of the aggregate principal amount of the June 2028 Secured Notes using the net proceeds of certain equity offerings at the redemption price set forth in the June 2028 Secured Notes indenture.
Senior Unsecured Notes
The Senior Unsecured Notes issued by the Company are the Company’s senior unsecured obligations and are jointly and severally guaranteed on a senior unsecured basis by each of its subsidiaries that is a guarantor under the Senior Secured Credit Facilities. The Senior Unsecured Notes issued by the Company’s subsidiary ValeantBHA are senior unsecured obligations of ValeantBHA and are jointly and severally guaranteed on a senior unsecured basis by the Company and each of its subsidiaries (other than Valeant)BHA) that is a guarantor under the Senior Secured Credit Facilities. Future subsidiaries of the Company and Valeant,BHA, if any, may be required to guarantee the Senior Unsecured Notes.
If the Company experiences a change in control, the Company may be required to make an offer to repurchase each series of Senior Unsecured Notes, in whole or in part, at a purchase price equal to 101% of the aggregate principal amount of the Senior Unsecured Notes repurchased, plus accrued and unpaid interest.
7.00% Senior Unsecured Notes due 2020
On September 28, 2010, Valeant issued $700 million aggregate principal amount of 7.00% Senior Unsecured Notes due 2020 (the “7.00% October 2020 Unsecured Notes”) in a private placement. The 7.00% October 2020 Unsecured Notes accrue interest at the rate of 7.00% per year, payable semi-annually in arrears.
On October 17, 2017, as part of the October 2017 Refinancing Transactions, the Company repaid $431 million in principal amount of the 7.00% October 2020 Unsecured Notes.
On December 18, 2017, as part of the December 2017 Refinancing Transactions (as defined below), the Company repaid $188 million principal amount of the 7.00% October 2020 Unsecured Notes.
Valeant may redeem all or a portion of the 7.00% October 2020 Unsecured Notes at the applicable redemption prices set forth in the 7.00% October 2020 Unsecured Notes indenture, plus accrued and unpaid interest to the date of redemption.
6.75% Senior Unsecured Notes due 2021
On February 8, 2011, Valeant issued $650 million aggregate principal amount of 6.75% Senior Unsecured Notes due 2021 (the “August 2021 Unsecured Notes”) in a private placement. The August 2021 Unsecured Notes accrue interest at the rate of 6.75% per year, payable semi-annually in arrears.
Valeant may redeem all or a portion of the August 2021 Unsecured Notes at the applicable redemption prices set forth in the August 2021 Unsecured Notes indenture, plus accrued and unpaid interest to the date of redemption.
7.25% Senior Unsecured Notes due 2022
On March 8, 2011, Valeant issued $550 million aggregate principal amount of 7.25% Senior Unsecured Notes due 2022 (the “July 2022 Unsecured Notes”) in a private placement. The July 2022 Unsecured Notes accrue interest at the rate of 7.25% per year, payable semi-annually in arrears.
Valeant may redeem all or a portion of the July 2022 Unsecured Notes at the applicable redemption prices set forth in the July 2022 Unsecured Notes indenture, plus accrued and unpaid interest to the date of redemption.
6.375% Senior Unsecured Notes due 2020
On October 4, 2012, VPI Escrow Corp. (the “VPI Escrow Issuer”), a newly formed wholly owned subsidiary of Valeant, issued $1,750 million aggregate principal amount of 6.375% Senior Unsecured Notes due 2020 (the “6.375% October 2020 Unsecured Notes”) in a private placement. The 6.375% October 2020 Unsecured Notes accrue interest at the rate of 6.375% per year, payable semi-annually in arrears. At the time of the closing of the Medicis acquisition: (i) the VPI Escrow Issuer merged with and into Valeant, with Valeant continuing as the surviving corporation, (ii) Valeant assumed all of the VPI Escrow Issuer’s obligations under the 6.375% October 2020 Unsecured Notes and the related indenture and (iii) the funds previously held in escrow were released to the Company and were used to finance the Medicis acquisition.
Concurrently with the offering of the 6.375% October 2020 Unsecured Notes, Valeant issued $500 million aggregate principal amount of 6.375% Senior Unsecured Notes due 2020 (the “Exchangeable Notes”) in a private placement, the form and terms of such notes being substantially identical to the form and terms of the 6.375% October 2020 Unsecured Notes, as previously described.
On March 29, 2013, the Company announced that Valeant commenced an offer to exchange (the “Exchange Offer”) any and all of its Exchangeable Notes into 6.375% October 2020 Unsecured Notes. Valeant conducted the Exchange Offer in order to satisfy its obligations under the indenture governing the Exchangeable Notes with the anticipated result being that some or all of such notes would be part of a single series of 6.375% October 2020 Unsecured Notes under one indenture. The Exchange Offer, which did not result in any changes to existing terms or to the total amount of the Company’s outstanding debt, expired on April 26, 2013. All of the Exchangeable Notes were tendered in the Exchange Offer and exchanged for 6.375% October 2020 Unsecured Notes to form a single series.
On October 17, 2017, as part of the October 2017 Refinancing Transactions, the Company repaid $569 million in principal amount of the 6.375% October 2020 Unsecured Notes.
On December 18, 2017, as part of the December 2017 Refinancing Transactions, the Company repaid $1,021 million in principal amount of the 6.375% October 2020 Unsecured Notes.
Valeant may redeem all or a portion of the 6.375% October 2020 Unsecured Notes at the applicable redemption prices set forth in the 6.375% October 2020 Unsecured Notes indenture, plus accrued and unpaid interest to the date of redemption.
6.75% Senior Unsecured Notes due 2018 and 7.50% Senior Unsecured Notes due 2021
On July 12, 2013, VPII Escrow Corp. (the “VPII Escrow Issuer”), a newly formed wholly-owned subsidiary of the Company, issued $1,600 million aggregate principal amount of the August 2018 Unsecured Notes and $1,625 million aggregate principal amount of 7.50% Senior Unsecured Notes due 2021 (the “July 2021 Unsecured Notes”) in a private placement. The August 2018 Unsecured Notes accrued interest at the rate of 6.75% per year, payable semi-annually in arrears. The July 2021 Unsecured Notes accrue interest at the rate of 7.50% per year, payable semi-annually in arrears. At the time of the closing of the B&L Acquisition: (i) the VPII Escrow Issuer was voluntarily liquidated and all of its obligations were assumed by, and all of its assets were distributed to, the Company, (ii) the Company assumed all of the VPII Escrow Issuer’s obligations under the August 2018 Unsecured Notes and July 2021 Unsecured Notes and the related indenture and (iii) the funds previously held in escrow were released to the Company and were used to finance the B&L Acquisition.
As part of the March 2017 Refinancing Transactions, the Company completed a tender offer to repurchase $1,100 million in aggregate principal amount of the August 2018 Unsecured Notes for total consideration of approximately $1,132 million plus accrued and unpaid interest through March 20, 2017. Loss on extinguishment of debt during the three months ended March 31, 2017 associated with the repurchase of the August 2018 Unsecured Notes was $36 million representing the difference between the amount paid to settle the debt and the debt’s carrying value.
On August 15, 2017, the Company repurchased the remaining $500 million of outstanding August 2018 Unsecured Notes using cash on hand, plus accrued and unpaid interest. Loss on extinguishment of debt during the three months ended September 30, 2017 associated with the repurchase of the August 2018 Unsecured Notes was $1 million representing the difference between the amount paid to settle the debt and the debt’s carrying value.
The Company may redeem all or a portion of the July 2021 Unsecured Notes at the applicable redemption prices set forth in the July 2021 Unsecured Notes indenture, plus accrued and unpaid interest to the date of redemption.
5.625% Senior Unsecured Notes due 2021
On December 2, 2013, the Company issued $900 million aggregate principal amount of 5.625% Senior Unsecured Notes due 2021 (the “December 2021 Unsecured Notes”) in a private placement. The December 2021 Unsecured Notes accrue interest at the rate of 5.625% per year, payable semi-annually in arrears.
The Company may redeem all or a portion of the December 2021 Unsecured Notes at the applicable redemption prices set forth in the December 2021 Unsecured Notes indenture, plus accrued and unpaid interest to the date of redemption.
5.50%5.500% Senior Unsecured Notes due 2023
On January 30, 2015, the Company issued $1,000 million aggregate principal amount of 5.50% SeniorMarch 2023 Unsecured Notes due 2023 (the "March 2023 Unsecured Notes") in a private placement. The March 2023 Unsecured Notes accrueaccrued interest at the rate of 5.50%5.500% per year, payable semi-annually in arrears.
The On March 8, 2019 and May 23, 2019, the Company may redeem all or a portionrepurchased $216 million and $382 million of the March 2023 Unsecured Notes at any time prior to March 1, 2018 at a price equal to 100%as part of the principal amount thereof, plus accruedMarch 2019 Refinancing Transactions and unpaid interest, if any, to the date of redemption, plus a “make-whole” premium. In addition, at any time prior to March 1, 2018,May 2019 Refinancing Transactions (as defined below), respectively. Throughout 2020, the Company may redeem up to 40%repurchased, in aggregate, $169 million of the aggregate principal amount of the outstanding March 2023 Unsecured Notes withusing cash on hand. The Company repurchased the net proceedsremaining outstanding balance of certain equity offerings at the redemption price set forth$233 million in the March 2023 Unsecured Notes indenture. On or after March 1, 2018, the Company may redeem all or a portionDecember 2020 as part of the March 2023 Unsecured Notes at the applicable redemption prices set forth in the March 2023 Unsecured Notes indenture, plus accrued and unpaid interest to the date of redemption.December 2020 Refinancing Transactions (as defined below).
5.375% Senior Unsecured Notes due 2020, 5.875% Senior Unsecured Notes due 2023, 4.50%4.500% Senior Unsecured Notes due 2023 and 6.125% Senior Unsecured Notes due 2025
On March 27, 2015, VRX Escrow Corp. (the "VRX Issuer"), a newly formed wholly owned subsidiary of the Company, issued $2,000 million aggregate principal amount of 5.375% Senior Unsecured Notes due 2020 (the "March 2020 Unsecured Notes"), $3,250 million aggregate principal amount of 5.875% SeniorMay 2023 Unsecured Notes, due 2023 (the "May 2023 Unsecured Notes"), €1,500 million aggregate principal amount of 4.50%4.500% Senior Unsecured Notes due 2023 (the "Euro Notes”) and $3,250 million aggregate principal amount of 6.125% Senior Unsecured Notes due 2025 (the "May"April 2025 Unsecured Notes" and, together with the March 2020 Unsecured Notes, the May 2023 Unsecured Notes and the Euro Notes, the "VRX Notes") in a private placement.
In addition, the VRX Issuer entered into an escrow and security agreement (the “Escrow Agreement”) dated as of March 27, 2015, with an escrow agent. Pursuant to the Escrow Agreement, the proceeds from the issuance of the VRX Notes, together with cash sufficient to fund certain accrued and unpaid interest on the VRX Notes, totaling $10,340 million in the aggregate, were deposited into escrow accounts and held as security for the VRX Issuer’s obligations until the consummation of the Salix Acquisition, which occurred on April 1, 2015. At the time of the closing of the Salix Acquisition, (1) the VRX Issuer was voluntarily liquidated and all of its obligations were assumed by, and all of its assets were distributed to, the Company, (2) the Company assumed all of the VRX Issuer's obligations under the VRX Notes and the related indenture and (3) the funds previously held in escrow were released to the Company and were used to finance the Salix Acquisition (as such, the $10,340 million referenced in this paragraph was released from restricted cash and cash equivalents in April 2015.)
The March 2020 Unsecured Notes accrueaccrued interest at the rate of 5.375% per year payable semi-annuallyand were repaid in arrears.full as part of certain refinancing transactions completed in 2017 and 2018. The May 2023 Unsecured Notes and the Euro Notes accrueaccrued interest at the rate of 5.875% and 4.50%4.500% per year, respectively payable semi-annuallyand were each repaid in arrears.full as of December 31, 2020, as discussed below. The MayApril 2025 Unsecured Notes accrue interest at the rate of 6.125% per year, payable semi-annually in arrears.
On December 18, 2017, asAs part of the December 2017 Refinancing Transactions (as defined below),a refinancing transaction completed in June 2018, the Company repaid $291 million inthe remaining outstanding principal amountamounts of the March 2020 Unsecured Notes.
During 2019, the Company repurchased $584 million and $1,118 million of May 2023 Unsecured Notes as part of the March 2019 Refinancing Transactions and the May 2019 Refinancing Transactions (as defined below), respectively, and on October 3, 2019, the Company repaid an additional $100 million of May 2023 Unsecured Notes using cash on hand. On January 16, 2020, the Company redeemed $1,240 million aggregate principal amount of the May 2023 Unsecured Notes as part of the December 2019 Financing and Refinancing Transactions (as defined below). Throughout 2020, the Company repaid, in aggregate, $208 million of the May 2023 Unsecured Notes, with the May 2023 Unsecured Notes having been fully repaid during November 2020.
On December 3, 2020, the Company redeemed the remaining outstanding balance of the Euro Notes as part of the December 2020 Refinancing Transactions, as defined below.
Throughout 2021, the Company repaid, in aggregate, $600 million of the April 2025 Unsecured Notes. The Company may redeem all or a portion of the March 2020April 2025 Unsecured Notes at the applicable redemption prices set forth in the March 2020 Unsecured Notes indenture, plus accrued and unpaid interest to the date of redemption.
The Company may redeem all or a portion of the May 2023 Unsecured Notes, the Euro Notes and the May 2025 Unsecured Notes at any time prior to March 15, 2017, May 15, 2018, May 15, 2018 and April 15, 2020, respectively, at a price equal to 100% of the principal amount thereof, plus accrued and unpaid interest, if any, to the date of redemption, plus a “make-whole” premium. In addition, at any time prior to May 15, 2018 in the case of the May 2023 Unsecured Notes, May 15, 2018 in the case of the Euro Notes and April 15, 2018 in the case of the May 2025 Unsecured Notes, the Company may redeem up to 40% of the aggregate principal amount of the applicable series of notes with the net proceeds of certain equity offerings at the redemption prices set forth in the applicable indenture. On or after May 15, 2018, May 15, 2018 and April 15, 2020, the Company may redeem all or a portion of the May 2023 Unsecured Notes, the Euro Notes and the May 2025 Unsecured Notes, respectively, at the redemption prices applicable to each series of such notes, as set forth in the applicable indenture, plus accrued and unpaid interest to the date of redemption.
9.00%9.000% Senior Unsecured Notes due 2025 - December 2017 Refinancing Transactions
On December 18, 2017, the Company issued $1,500 million aggregate principal amount of 9.00%9.000% Senior Unsecured Notes due 2025 (the “December 2025 Unsecured Notes”) in a private placement, the net proceeds of which were used to: (i)to repurchase $1,021$1,500 million in aggregate principal amount of the 6.375% October 2020 Unsecured Notes, (ii) repurchase $291 million in principal amount of the March 2020 Unsecured Notes and (iii) repurchase $188 million in principal amount of the 7.00% October 2020 Unsecured Notes (collectively, the “Decemberpreviously outstanding senior unsecured notes (the "December 2017 Refinancing Transactions”Transactions"). The related fees and expenses were paid using cash on hand. The December 2025 Unsecured Notes accrue interest at the rate of 9.00%9.000% per year, payable semi-annually in arrears on each of June 15 and December 15.
The Company may redeem all or a portion of the December 2025 Unsecured Notes at any time prior to December 15, 2021, at a price equal to 100% of the principal amount thereof, plus accrued and unpaid interest, if any, to the date of redemption, plus a “make-whole” premium. In addition, at any time prior to December 15, 2020, the Company may redeem up to 40% of the aggregate principal amount of the outstanding December 2025 Unsecured Notes with the net proceeds of certain equity offerings at the redemption price set forth in the December 2025 Unsecured Notes indenture. On or after December 15, 2021, the Company may redeem all or a portion of the December 2025 Unsecured Notes at the applicable redemption prices set forth in the December 2025 Unsecured Notes indenture, plus accrued and unpaid interest to the date of redemption.
Convertible Notes
The convertible notes assumed as of the acquisition date by the Company in connection with the Salix Acquisition consisted of two tranches: (i) 2.75%9.250% Senior Unsecured Notes due May 15, 2015 (the “2.75% Convertible Notes”), with an outstanding2026
On March 26, 2018, BHA issued $1,500 million in aggregate principal amount of $345 million and (ii) 1.5% Convertible9.250% Senior Unsecured Notes due March 15, 20192026 (the “1.5% Convertible“April 2026 Unsecured Notes”), with an outstanding in a private placement, the net proceeds of which, and cash on hand, were used to repurchase $1,500 million in aggregate principal amount of $690 million.unsecured notes. All fees and expenses associated with these transactions were paid with cash on hand (collectively, the “March 2018 Refinancing Transactions”). The April 2026 Unsecured Notes accrue interest at the rate of 9.250% per year, payable semi-annually in arrears on each of April 1 and October 1.
In connection with the completionBHA may redeem all or a portion of the Salix Acquisition, the Company and the trustee of eachApril 2026 Unsecured Notes at any time prior to April 1, 2022, at a price equal to 100% of the convertible notes indentures entered intoprincipal amount thereof, plus accrued and unpaid interest, if any, to the date of redemption, plus a supplemental indenture on“make-whole” premium. In addition, at any time prior to April 1, 2015, providing that, at and after the effective time2021, BHA may redeem up to 40% of the Salix Acquisition, the right to convert each $1,000 principal amount of any notes into cash, shares of common stock of Salix or a combination of cash and shares of common stock of Salix at the Company's election, has been changed to a right to convert each $1,000 principal amount of such notes into cash.
During the second quarter of 2015, all of the outstandingaggregate principal amount of the 2.75% Convertibleoutstanding April 2026 Unsecured Notes were settledwith the net proceeds of certain equity offerings at the redemption price set forth in cashthe April 2026 Unsecured Notes indenture. On or after April 1, 2022, BHA may redeem all or a portion of the April 2026 Unsecured Notes at an averagethe applicable redemption prices set forth in the April 2026 Unsecured Notes indenture, plus accrued and unpaid interest to the date of redemption.
8.500% Senior Unsecured Notes due 2027
As part of a 2018 refinancing transaction, BHA issued $750 million in aggregate principal amount of January 2027 Unsecured Notes in a private placement. The January 2027 Unsecured Notes accrue interest at the rate of 8.500% per year, payable semi-annually in arrears on each of January 31 and July 31.
As part of the March 2019 Refinancing Transactions described above, BHA issued $1,000 million aggregate principal amount of 8.500% Senior Unsecured Notes due January 2027. These are additional notes and form part of the same series as BHA’s existing January 2027 Unsecured Notes.
BHA may redeem all or a portion of the January 2027 Unsecured Notes at any time prior to July 31, 2022, at a price equal to 100% of $3,729.46 per $1,000the principal amount thereof, plus accrued and unpaid interest, if any, to the date of redemption, plus a “make-whole” premium. In addition, at any time prior to July 31, 2021, BHA may redeem up to 40% of the aggregate principal amount of the notes,outstanding January 2027 Unsecured Notes with the net proceeds of certain equity offerings at the redemption price set forth in the January 2027 Unsecured Notes indenture. On or after July 31, 2022, BHA may redeem all or a portion of the January 2027 Unsecured Notes at the applicable redemption prices set forth in the January 2027 Unsecured Notes indenture, plus accrued and unpaid interest to the date of redemption.
7.000% Senior Unsecured Notes due 2028 and 7.250% Senior Unsecured Notes due 2029 - May 2019 Refinancing Transactions
On May 23, 2019, the Company issued: (i) $750 million aggregate principal amount of 7.000% Senior Unsecured Notes due January 2028 (the "7.000% January 2028 Unsecured Notes") and (ii) $750 million aggregate principal amount of 7.250% Senior Unsecured Notes due May 2029 (the "May 2029 Unsecured Notes"), respectively, in a private placement. The proceeds and cash on hand were used to: (i) repurchase $1,118 million of May 2023 Unsecured Notes, (ii) repurchase $382 million of March 2023 Unsecured Notes and (iii) pay all fees and expenses associated with these transactions (collectively, the “May 2019 Refinancing Transactions”). The May 2019 Refinancing Transactions were accounted for as an extinguishment of debt and the Company incurred a loss on extinguishment of debt of $32 million representing the difference between the amount paid to settle the extinguished debt and the extinguished debt’s carrying value. Interest on the 7.000% January 2028 Unsecured Notes is payable semi-annually in arrears on each January 15 and July 15. Interest on the May 2029 Unsecured Notes is payable semi-annually in arrears on each May 30 and November 30.
The 7.000% January 2028 Unsecured Notes and the May 2029 Unsecured Notes are redeemable at the option of the Company, in whole or in part, at any time on or after January 15, 2023 and May 30, 2024, respectively, at the redemption prices set forth in the respective indenture. The Company may redeem some or all of the outstanding7.000% January 2028 Unsecured Notes or the May 2029 Unsecured Notes prior to January 15, 2023 and May 30, 2024, respectively, at a price equal to 100% of the principal amount thereof plus a “make-whole” premium. Prior to July 15, 2022, and May 30, 2022, the Company may redeem up to 40% of the aggregate principal amount of the 1.5% Convertible7.000% January 2028 Unsecured Notes exceptor the May 2029 Unsecured Notes, respectively, using the proceeds of certain equity offerings at the redemption price set forth in the respective indenture.
5.000% Senior Unsecured Notes due 2028 and 5.250% Senior Unsecured Notes due 2030 - December 2019 Financing and Refinancing Transactions
On December 30, 2019, the Company issued: (i) $1,250 million aggregate principal amount of 5.000% Senior Unsecured Notes due January 2028 (the "5.000% January 2028 Unsecured Notes") and (ii) $1,250 million aggregate principal amount of 5.250% Senior Unsecured Notes due January 2030 (the "January 2030 Unsecured Notes") in a private placement. The
proceeds and cash on hand were used to: (i) redeem $1,240 million of May 2023 Unsecured Notes on January 16, 2020, (ii) finance the $1,210 million settlement of certain U.S. Securities litigation as discussed in Note 20, "LEGAL PROCEEDINGS" and (iii) pay all fees and expenses associated with these transactions (collectively, the "December 2019 Financing and Refinancing Transactions"). The redemption of $1,240 million of May 2023 Unsecured notes was accounted for as an extinguishment of debt and the Company incurred a nominalloss on extinguishment of debt of $24 million representing the difference between the amount were settledpaid to settle the extinguished debt and the extinguished debt's carrying value.
Interest on the 5.000% January 2028 Unsecured Notes is payable semi-annually in casharrears on each January 30 and July 30. Interest on the January 2030 Unsecured Notes is payable semi-annually in arrears on each January 30 and July 30. The 5.000% January 2028 Unsecured Notes and the January 2030 Unsecured Notes are redeemable at an averagethe option of the Company, in whole or in part, at any time on or after January 30, 2023 and January 30, 2025, respectively, at the redemption prices set forth in the respective indenture. The Company may redeem some or all of the 5.000% January 2028 Unsecured Notes or the January 2030 Unsecured Notes prior to January 30, 2023 and January 30, 2025, respectively, at a price equal to 100% of $2,663.26 per $1,000the principal amount thereof plus a “make-whole” premium. Prior to January 30, 2023, the Company may redeem up to 40% of the aggregate principal amount of the notes.5.000% January 2028 Unsecured Notes or the January 2030 Unsecured Notes using the proceeds of certain equity offerings at the redemption price set forth in the respective indenture.
Commitment Letters6.250% Senior Unsecured Notes due 2029 - May 2020 Refinancing Transactions
In connection with the Salix Acquisition (see Note 3, "ACQUISITIONS"),On May 26, 2020, the Company entered into a commitment letter dated as of February 20, 2015 (as amended and restated as of March 8, 2015, the “Salix Commitment Letter”), with a syndicate of banks, led by Deutsche Bank and HSBC. Pursuant to the Salix Commitment Letter, commitment parties committed to provide: (i) incremental term loans pursuant to the Credit Agreement of up to $5,550issued $1,500 million and (ii) senior unsecured increasing rate bridge loans under a new senior unsecured bridge facility of up to $9,600 million. Subsequently, the Company obtained $15,250 million in debt financing comprised of a combination of the incremental term loan facilities under the Company's existing Credit Agreement in an aggregate principal amount of $5,1506.250% Senior Unsecured Notes due February 2029 (the "6.250% February 2029 Unsecured Notes") in a private placement. The proceeds and cash on hand were used to: (i) repurchase $1,250 million and the issuance of the Notes in the U.S. dollar equivalent aggregate principal amount of approximately $10,100the outstanding March 2022 Secured Notes, (ii) prepay $303 million of mandatory amortization scheduled for payment in 2022 under the Company's June 2025 and November 2025 Term Loan B Facilities and (iii) pay all fees and expenses associated with these transactions (collectively, the "May 2020 Refinancing Transactions"). The May 2020 Refinancing Transactions were accounted for as previously described. In the first quarteran extinguishment of 2015,debt and the Company expensed $72incurred a loss on extinguishment of debt of $27 million representing the difference between the amount paid to settle the extinguished debt and the extinguished debt's carrying value. The 6.250% February 2029 Unsecured Notes accrue interest at the rate of financing costs associated6.250% per year, payable semi-annually in arrears on each of February 15 and August 15.
The Company may redeem all or a portion of the 6.250% February 2029 Unsecured Notes at any time prior to February 15, 2024, at a price equal to 100% of the principal amount thereof, plus accrued and unpaid interest, if any, to the date of redemption, plus a “make-whole” premium. In addition, at any time prior to August 15, 2023, the Company may redeem up to 40% of the aggregate principal amount of the outstanding 6.250% February 2029 Unsecured Notes with the Salix Commitment Letter to Interest expensenet proceeds of certain equity offerings at the redemption price set forth in the consolidated statement6.250% February 2029 Unsecured Notes indenture. On or after February 15, 2024, the Company may redeem all or a portion of operations.the 6.250% February 2029 Unsecured Notes at the applicable redemption prices set forth in the 6.250% February 2029 Unsecured Notes indenture, plus accrued and unpaid interest to, but not including, the date of redemption.
In addition, on March 27, 2015,5.000% Senior Unsecured Notes due 2029 and 5.250% Senior Unsecured Notes due 2031 – December 2020 Refinancing Transactions
On December 3, 2020, the Company issued $1,000 million aggregate principal amount of 5.000% Senior Unsecured Notes due February 2029 (the "5.000% February 2029 Unsecured Notes") and $1,000 million aggregate principal amount of 5.250% Senior Unsecured Notes due February 2031 (the "February 2031 Unsecured Notes") in a private placement. The aggregate proceeds and cash on hand were used to repurchase the remaining outstanding principal amounts of: (i) €1,500 million of the Euro Notes, (ii) $233 million of the March 2023 Unsecured Notes and (iii) pay all fees and expenses associated with these transactions (collectively, the "December 2020 Refinancing Transactions"). The December 2020 Refinancing Transactions were accounted for as an extinguishment of debt and the Company incurred a loss on extinguishment of debt of $7 million representing the difference between the amount paid to settle the extinguished debt and the extinguished debt's carrying value. The 5.000% February 2029 Unsecured Notes accrue interest at the rate of 5.000% per year, payable semi-annually in arrears on each of February 15 and August 15. The February 2031 Unsecured Notes accrue interest at the rate of 5.250% per year, payable semi-annually in arrears on each of February 15 and August 15.
The Company may redeem all or a portion of the 5.000% February 2029 Unsecured Notes at any time prior to February 15, 2024, at a price equal to 100% of the principal amount thereof, plus accrued and unpaid interest, if any, to the date of redemption, plus a “make-whole” premium. In addition, at any time prior to February 15, 2024, the Company may redeem up to 40% of the aggregate principal amount of the outstanding 5.000% February 2029 Unsecured Notes with the net proceeds of certain equity offerings at the redemption price set forth in the 5.000% February 2029 Unsecured Notes
indenture. On or after February 15, 2024, the Company may redeem all or a portion of approximately $1,450 millionthe 5.000% February 2029 Unsecured Notes at the applicable redemption prices set forth in the 5.000% February 2029 Unsecured Notes indenture, plus accrued and unpaid interest to, fundbut not including, the Salix Acquisition. See Note 13, "SHAREHOLDERS' EQUITY" for further information regardingdate of redemption.
The Company may redeem all or a portion of the February 2031 Unsecured Notes at any time prior to February 15, 2026, at a price equal to 100% of the principal amount thereof, plus accrued and unpaid interest, if any, to the date of redemption, plus a “make-whole” premium. In addition, at any time prior to February 15, 2024, the Company may redeem up to 40% of the aggregate principal amount of the outstanding February 2031 Unsecured Notes with the net proceeds of certain equity issuance.offerings at the redemption price set forth in the February 2031 Unsecured Notes indenture. On or after February 15, 2026, the Company may redeem all or a portion of the February 2031 Unsecured Notes at the applicable redemption prices set forth in the February 2031 Unsecured Notes indenture, plus accrued and unpaid interest to, but not including, the date of redemption.
Weighted Average Stated Rate of Interest
The weighted average stated rate of interest for the Company's outstanding debt obligations as of December 31, 20172021 and 20162020 was 6.07%5.88% and 5.75%6.02%, respectively.
Maturities and Mandatory Payments
Maturities
Maturities and mandatory payments of debt obligations for the five succeeding years ending December 31 and thereafter are as follows:
| | | | | |
| (in millions) | |
| 2022 | $ | — | |
| 2023 | 285 | |
| 2024 | — | |
| 2025 | 9,723 | |
| 2026 | 1,500 | |
| Thereafter | 11,362 | |
| Total gross maturities | 22,870 | |
| Unamortized discounts | (216) | |
| Total long-term debt and other | $ | 22,654 | |
|
| | | |
| (in millions) | |
| 2018 | $ | 209 |
|
| 2019 | — |
|
| 2020 | 2,690 |
|
| 2021 | 3,175 |
|
| 2022 | 5,115 |
|
| Thereafter | 14,563 |
|
| Total gross maturities | 25,752 |
|
| Unamortized discounts | (308 | ) |
| Total long-term debt and other | $ | 25,444 |
|
On January 30, 2018, using cash on hand,Under the Company repaid $200 million of its Series F Tranche B Term Loan Facility, which the Company directed to be applied to satisfy (in part) payment of the expected $206 million ConsolidatedRestated Credit Agreement, there is no Excess Cash Flow payment due for 2021.
On February 11, 2022, the year 2017. Also dueCompany repaid its outstanding balance of $285 million under its 2023 Revolving Credit Facility.
As more fully discussed in 2018, is $3Note 23, "SUBSEQUENT EVENTS", during January 2022, the Company: (i) issued conditional notices of redemption to redeem in full all of its outstanding April 2025 Unsecured Notes and to redeem $370 million which consistsaggregate principal amount of (i) short-term loan obligationsits outstanding December 2025 Unsecured Notes and (ii) linesissued $1,000 million aggregate principal amount of credit assumed from certain acquisitions prior to 2016 and are not related to the Senior Secured Credit Facility,6.125% Senior Secured Notes or Senior Unsecured Notes.due February 2027.
During 2017, the
11.PENSION AND POSTRETIREMENT EMPLOYEE BENEFIT PLANS
The Company made aggregate repayments of long-term debt of $14,203 million, which consisted of: (i) $9,478 million of repayments of term loans under its Senior Secured Credit Facilities, (ii) $4,100 million of repurchased Senior Unsecured Notes and (iii) $625 million of Revolving Credit Facility amounts outstanding. During the year ended December 31, 2017, the Company incurred $9,560 million of long-term debt, which consisted of: (i) $5,000 million of Senior Secured Notes, (ii) $3,060 million of Series F-3 Tranche B Term Loan and (iii) $1,500 million of Senior Unsecured Notes.
| |
12. | PENSION AND POSTRETIREMENT EMPLOYEE BENEFIT PLANS |
In connection with the acquisition of Bausch & Lomb Holdings Incorporated ("B&L") completed on August 5, 2013, the Company assumed all of B&L’s benefit obligations and related plan assets. This includeshas defined benefit plans and a participatory defined benefit postretirement medical and life insurance plan, which covers a closed grandfathered group of legacy Bausch & Lomb Holdings Incorporated (‘‘B&L&L’’) U.S. employees and employees in certain other countries. The U.S. defined benefit accruals were frozen as of December 31, 2004 and benefits that were earned up to December 31, 2004 were preserved. Participants continue to earn interest credits on their cash balance.balance at an interest crediting rate that is equal to the greater of: (i) the average annual yield on 10-year treasury bonds in effect for the November preceding the plan year or (ii) 4.50%. The most significant non-U.S. plans are two2 defined benefit plans in Ireland. In 2011, both Ireland defined benefit plans were closed to future service benefit accruals; however, additional accruals related to annual salary increases continued. In December 2014, one1 of the Ireland defined benefit plans was amended effective August 2014 to eliminate future benefit accruals related to salary increases. All of the pension benefits accrued through the plan amendment date were preserved. As a result of the plan amendment, there are no active plan participants accruing benefits under the amended Ireland defined benefit plan. The U.S. postretirement benefit plan was amended effective January 1, 2005 to eliminate employer contributions after age 65 for participants who did not meet the minimum requirements of age and service on that date. The employer contributions for medical and prescription
drug benefits for participants retiring after March 1, 1989 were frozen effective January 1, 2010. Effective January 1, 2014, the Company no longer offers medical and life insurance coverage to new retirees.
In addition to the B&L benefit plans, outside of the U.S., a limited group of Valeantthe Company's employees are covered by defined benefit pension plans.
The Company uses December 31 as the year-end measurement date for all of its defined benefit pension plans and the postretirement benefit plan.
Accounting for Pension Benefit Plans and Postretirement Benefit Plan
The Company recognizes in its consolidated balance sheetsConsolidated Balance Sheets an asset or liability equal to the over- or under-funded benefit obligation of each defined benefit pension plan and postretirement benefit plan. Actuarial gains or losses and prior service
costs or credits that arise during the period but are not recognized as components of net periodic benefit cost are recognized, net of tax, as a component of otherOther comprehensive income (loss).
The amounts included in accumulatedAccumulated other comprehensive loss as of December 31, 2017, 20162021 and 20152020 were as follows: |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Pension Benefit Plans | | Postretirement Benefit Plan |
| | U.S. Plan | | Non-U.S. Plans | |
| (in millions) | | 2017 | | 2016 | | 2015 | | 2017 | | 2016 | | 2015 | | 2017 | | 2016 | | 2015 |
| Unrecognized actuarial (losses) gains | | $ | (18 | ) | | $ | (26 | ) | | $ | (24 | ) | | $ | (56 | ) | | $ | (61 | ) | | $ | (40 | ) | | $ | (4 | ) | | $ | (6 | ) | | $ | (6 | ) |
| Unrecognized prior service credits | | $ | — |
| | $ | — |
| | $ | — |
| | $ | 29 |
| | $ | 26 |
| | $ | 24 |
| | $ | 20 |
| | $ | 23 |
| | $ | 23 |
|
Of the December 31, 2017 amounts, the Company expects to recognize $3 million and $1 million of unrecognized prior service credits related to the U.S. postretirement benefit plan and the non-U.S. defined benefit plans, respectively, in net periodic (benefit) cost during 2018. In addition, the Company expects to recognize $1 million of unrecognized actuarial losses related to the non-U.S. pension benefit plans in net periodic (benefit) cost during 2018. | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Pension Benefit Plans | | U.S. Postretirement
Benefit Plan |
| U.S. Plan | | Non-U.S. Plans | |
| (in millions) | | 2021 | | 2020 | | 2021 | | 2020 | | 2021 | | 2020 |
| Unrecognized actuarial losses | | $ | (18) | | | $ | (21) | | | $ | (42) | | | $ | (76) | | | $ | (2) | | | $ | (3) | |
| Unrecognized prior service credits | | $ | — | | | $ | — | | | $ | 25 | | | $ | 27 | | | $ | 8 | | | $ | 11 | |
Net Periodic (Benefit) Cost
The following table provides the components of net periodic (benefit) cost for the Company’s defined benefit pension plans and postretirement benefit plan in 2017, 20162021, 2020 and 2015:2019:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Pension Benefit Plans | | U.S. Postretirement
Benefit Plan |
| U.S. Plan | | Non-U.S. Plans | |
| (in millions) | | 2021 | | 2020 | | 2019 | | 2021 | | 2020 | | 2019 | | 2021 | | 2020 | | 2019 |
| Service cost | | $ | 1 | | | $ | 1 | | | $ | 2 | | | $ | 3 | | | $ | 3 | | | $ | 3 | | | $ | — | | | $ | — | | | $ | — | |
| Interest cost | | 4 | | | 6 | | | 8 | | | 4 | | | 4 | | | 5 | | | 1 | | | 1 | | | 1 | |
| Expected return on plan assets | | (11) | | | (13) | | | (13) | | | (5) | | | (5) | | | (5) | | | — | | | — | | | — | |
| Amortization of net loss | | — | | | — | | | — | | | 2 | | | 2 | | | 1 | | | — | | | — | | | — | |
| Amortization of prior service credit | | — | | | — | | | — | | | (1) | | | (1) | | | (1) | | | (3) | | | (3) | | | (2) | |
| Settlement loss recognized | | — | | | — | | | — | | | 8 | | | — | | | — | | | — | | | — | | | — | |
| Other | | — | | | — | | | — | | | — | | | — | | | 1 | | | — | | | — | | | — | |
| Net periodic (benefit) cost | | $ | (6) | | | $ | (6) | | | $ | (3) | | | $ | 11 | | | $ | 3 | | | $ | 4 | | | $ | (2) | | | $ | (2) | | | $ | (1) | |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Pension Benefit Plans | | Postretirement Benefit Plan |
| | U.S. Plan | | Non-U.S. Plans | |
| (in millions) | | 2017 | | 2016 | | 2015 | | 2017 | | 2016 | | 2015 | | 2017 | | 2016 | | 2015 |
| Service cost | | $ | 2 |
| | $ | 2 |
| | $ | 2 |
| | $ | 3 |
| | $ | 3 |
| | $ | 3 |
| | $ | — |
| | $ | — |
| | $ | 2 |
|
| Interest cost | | 8 |
| | 8 |
| | 10 |
| | 5 |
| | 6 |
| | 6 |
| | 2 |
| | 2 |
| | 2 |
|
| Expected return on plan assets | | (13 | ) | | (13 | ) | | (15 | ) | | (5 | ) | | (7 | ) | | (7 | ) | | — |
| | — |
| | — |
|
| Amortization of net loss | | — |
| | — |
| | — |
| | 2 |
| | — |
| | 1 |
| | — |
| | — |
| | — |
|
| Amortization of prior service credit | | — |
| | — |
| | — |
| | (1 | ) | | (1 | ) | | (1 | ) | | (3 | ) | | (3 | ) | | (3 | ) |
| Settlement loss recognized | | — |
| | — |
| | — |
| | — |
| | — |
| | 2 |
| | — |
| | — |
| | — |
|
| Other | | — |
| | — |
| | — |
| | — |
| | 2 |
| | — |
| | — |
| | — |
| | — |
|
| Net periodic (benefit) cost | | $ | (3 | ) | | $ | (3 | ) | | $ | (3 | ) | | $ | 4 |
| | $ | 3 |
| | $ | 4 |
| | $ | (1 | ) | | $ | (1 | ) | | $ | 1 |
|
Benefit Obligation, Change in Plan Assets and Funded Status
The table below presents components of the change in projected benefit obligation, change in plan assets and funded status for 20172021 and 2016:2020:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Pension Benefit Plans | | U.S. Postretirement
Benefit Plan |
| U.S. Plan | | Non-U.S. Plans | |
| (in millions) | | 2021 | | 2020 | | 2021 | | 2020 | | 2021 | | 2020 |
| Change in Projected Benefit Obligation | | | | | | | | | | | | |
| Projected benefit obligation, beginning of year | | $ | 236 | | | $ | 227 | | | $ | 294 | | | $ | 259 | | | $ | 39 | | | $ | 41 | |
| Service cost | | 1 | | | 1 | | | 3 | | | 3 | | | — | | | — | |
| Interest cost | | 4 | | | 6 | | | 4 | | | 4 | | | 1 | | | 1 | |
| | | | | | | | | | | | |
| Settlements | | (4) | | | — | | | (43) | | | (3) | | | — | | | — | |
| Benefits paid | | (11) | | | (15) | | | (4) | | | (4) | | | (3) | | | (4) | |
| Actuarial (gain) losses | | (6) | | | 17 | | | (8) | | | 13 | | | (2) | | | 1 | |
| Currency translation adjustments | | — | | | — | | | (18) | | | 22 | | | — | | | — | |
| Projected benefit obligation, end of year | | 220 | | | 236 | | | 228 | | | 294 | | | 35 | | | 39 | |
| | | | | | | | | | | | |
| Change in Plan Assets | | | | | | | | | | | | |
| Fair value of plan assets, beginning of year | | 231 | | | 216 | | | 189 | | | 161 | | | — | | | — | |
| Actual return on plan assets | | 8 | | | 29 | | | 18 | | | 11 | | | — | | | — | |
| | | | | | | | | | | | |
| Company contributions | | — | | | 1 | | | 28 | | | 8 | | | 3 | | | 4 | |
| Settlements | | (4) | | | — | | | (43) | | | (2) | | | — | | | — | |
| Benefits paid | | (11) | | | (15) | | | (4) | | | (4) | | | (3) | | | (4) | |
| Currency translation adjustments | | — | | | — | | | (13) | | | 15 | | | — | | | — | |
| Fair value of plan assets, end of year | | 224 | | | 231 | | | 175 | | | 189 | | | — | | | — | |
| Funded status, end of year | | $ | 4 | | | $ | (5) | | | $ | (53) | | | $ | (105) | | | $ | (35) | | | $ | (39) | |
| | | | | | | | | | | | |
| Recognized as: | | | | | | | | | | | | |
| Other non-current assets | | $ | 4 | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | |
| Accrued and other current liabilities | | $ | — | | | $ | — | | | $ | 2 | | | $ | 2 | | | $ | 4 | | | $ | 4 | |
| Other non-current liabilities | | $ | — | | | $ | 5 | | | $ | 51 | | | $ | 103 | | | $ | 31 | | | $ | 35 | |
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | Pension Benefit Plans | | Postretirement Benefit Plan |
| | U.S. Plan | | Non-U.S. Plans | |
| (in millions) | | 2017 | | 2016 | | 2017 | | 2016 | | 2017 | | 2016 |
| Change in Projected benefit Obligation | | | | | | | | | | | | |
| Projected benefit obligation, beginning of year | | $ | 230 |
| | $ | 232 |
| | $ | 230 |
| | $ | 217 |
| | $ | 52 |
| | $ | 58 |
|
| Service cost | | 2 |
| | 2 |
| | 3 |
| | 3 |
| | — |
| | — |
|
| Interest cost | | 8 |
| | 8 |
| | 5 |
| | 6 |
| | 2 |
| | 2 |
|
| Employee contributions | | — |
| | — |
| | — |
| | — |
| | 1 |
| | 1 |
|
| Plan amendments | | — |
| | — |
| | — |
| | (4 | ) | | — |
| | (2 | ) |
| Settlements | | — |
| | — |
| | (1 | ) | | (5 | ) | | — |
| | — |
|
| Benefits paid | | (15 | ) | | (15 | ) | | (4 | ) | | (5 | ) | | (6 | ) | | (6 | ) |
| Actuarial (gains) losses | | 9 |
| | 3 |
| | (9 | ) | | 25 |
| | (1 | ) | | (1 | ) |
| Currency translation adjustments | | — |
| | — |
| | 30 |
| | (8 | ) | | — |
| | — |
|
| Other | | — |
| | — |
| | — |
| | 1 |
| | — |
| | — |
|
| Projected benefit obligation, end of year | | 234 |
| | 230 |
| | 254 |
| | 230 |
| | 48 |
| | 52 |
|
| | | | | | | | | | | | | |
| Change in Plan Assets | | | | | | | | | | | | |
| Fair value of plan assets, beginning of year | | 181 |
| | 182 |
| | 128 |
| | 126 |
| | — |
| | 4 |
|
| Actual return on plan assets | | 30 |
| | 14 |
| | 7 |
| | 7 |
| | — |
| | (1 | ) |
| Employee contributions | | — |
| | — |
| | — |
| | — |
| | 1 |
| | 1 |
|
| Company contributions | | 10 |
| | — |
| | 7 |
| | 9 |
| | 5 |
| | 2 |
|
| Settlements | | — |
| | — |
| | (1 | ) | | (4 | ) | | — |
| | — |
|
| Benefits paid | | (15 | ) | | (15 | ) | | (4 | ) | | (5 | ) | | (6 | ) | | (6 | ) |
| Currency translation adjustments | | — |
| | — |
| | 18 |
| | (5 | ) | | — |
| | — |
|
| Fair value of plan assets, end of year | | 206 |
| | 181 |
| | 155 |
| | 128 |
| | — |
| | — |
|
| Funded Status at end of year | | $ | (28 | ) | | $ | (49 | ) | | $ | (99 | ) | | $ | (102 | ) | | $ | (48 | ) | | $ | (52 | ) |
| | | | | | | | | | | | | |
| Recognized as: | | | | | | | | | | | | |
| Accrued and other current liabilities | | — |
| | — |
| | (2 | ) | | (2 | ) | | (6 | ) | | (6 | ) |
Other non-current liabilities
| | (28 | ) | | (49 | ) | | (97 | ) | | (100 | ) | | (42 | ) | | (46 | ) |
A number of the Company’s pension benefit plans were underfunded as of December 31, 20172021 and 2016,2020, having accumulated benefit obligations exceeding the fair value of plan assets. There were no U.S. pension benefit plans that were underfunded as of December 31, 2021, having accumulated benefit obligations exceeding the fair value of plan assets. Information for the underfunded pension benefit plans is as follows:
| | | | | U.S. Plan | | Non-U.S. Plans | | U.S. Plan | | Non-U.S. Plans |
| (in millions) | | 2017 | | 2016 | | 2017 | | 2016 | (in millions) | | 2021 | | 2020 | | 2021 | | 2020 |
| Projected benefit obligation | | $ | 234 |
| | $ | 230 |
| | $ | 254 |
| | $ | 230 |
| Projected benefit obligation | | $ | — | | | $ | 236 | | | $ | 228 | | | $ | 294 | |
| Accumulated benefit obligation | | 234 |
| | 230 |
| | 244 |
| | 221 |
| Accumulated benefit obligation | | — | | | 236 | | | 219 | | | 286 | |
| Fair value of plan assets | | 206 |
| | 181 |
| | 155 |
| | 128 |
| Fair value of plan assets | | — | | | 231 | | | 175 | | | 189 | |
The Company’s policy for funding its pension benefit plans is to make contributions that meet or exceed the minimum statutory funding requirements. These contributions are determined based upon recommendations made by the actuary under accepted actuarial principles. In 2018,2022, the Company expects to contribute $5 million, $7$0, $9 million and $6$4 million to the U.S. pension benefit plan, the non-U.S. pension benefit plans and the U.S. postretirement benefit plan, respectively. The Company plans to use postretirement benefit plan assets and cash on hand, as necessary, to fund the U.S. postretirement benefit plan benefit payments in 2018.2022.
Estimated Future Benefit Payments
Future benefit payments over the next 10 years for the pension benefit plans and the postretirement benefit plan, which reflect expected future service, as appropriate, are expected to be paid as follows:
|
| | | | | | | | | | | | |
| (in millions) | | Pension Benefit Plans | | Postretirement Benefit Plan |
| | U.S. Plan | | Non-U.S. Plans | |
| 2018 | | $ | 14 |
| | $ | 4 |
| | $ | 6 |
|
| 2019 | | 19 |
| | 5 |
| | 5 |
|
| 2020 | | 19 |
| | 5 |
| | 5 |
|
| 2021 | | 18 |
| | 6 |
| | 4 |
|
| 2022 | | 18 |
| | 6 |
| | 4 |
|
| 2023-2027 | | 79 |
| | 35 |
| | 15 |
|
| | | | | | | | | | | | | | | | | | | | |
| (in millions) | | Pension Benefit Plans | | U.S. Postretirement
Benefit
Plan |
| U.S. Plan | | Non-U.S. Plans | |
| 2022 | | $ | 15 | | | $ | 5 | | | $ | 4 | |
| 2023 | | 19 | | | 6 | | | 4 | |
| 2024 | | 17 | | | 7 | | | 3 | |
| 2025 | | 17 | | | 7 | | | 3 | |
| 2026 | | 16 | | | 7 | | | 3 | |
| 2027-2031 | | 73 | | | 42 | | | 11 | |
Assumptions
The weighted-average assumptions used to determine net periodic benefit costs and benefit obligations for 2017, 20162021, 2020 and 20152019 were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Pension Benefit Plans | | U.S. Postretirement Benefit Plan |
| | 2021 | | 2020 | | 2019 | | 2021 | | 2020 | | 2019 |
| For Determining Net Periodic (Benefit) Cost | | | | | | | | | | | | |
| U.S. Plans: | | | | | | | | | | | | |
| Discount rate | | 2.25 | % | | 3.16 | % | | 4.25 | % | | 2.09 | % | | 3.04 | % | | 4.16 | % |
| Expected rate of return on plan assets | | 5.00 | % | | 6.25 | % | | 7.25 | % | | — | | | — | | | — | |
| Rate of compensation increase | | — | | | — | | | — | | | — | | | — | | | — | |
| Interest crediting rate | | 4.75 | % | | 4.75 | % | | 5.00 | % | | | | | | |
| Non-U.S. Plans: | | | | | | | | | | | | |
| Discount rate | | 1.37 | % | | 1.68 | % | | 2.39 | % | | | | | | |
| Expected rate of return on plan assets | | 2.74 | % | | 2.98 | % | | 3.46 | % | | | | | | |
| Rate of compensation increase | | 2.60 | % | | 3.05 | % | | 2.89 | % | | | | | | |
| Interest crediting rate | | — | | | — | | | — | | | | | | | |
| | | | | | | | | | | | | | | | | Pension Benefit Plans | | U.S. Postretirement Benefit Plan |
| | | Pension Benefit Plans | | Postretirement Benefit Plan(1) | |
| | | 2017 | | 2016 | | 2015 | | 2017 | | 2016 | | 2015 | | 2021 | | 2020 | | 2021 | | 2020 |
| For Determining Net Periodic (Benefit) Cost | | | | | | | | | | | | | |
| For Determining Benefit Obligation | | For Determining Benefit Obligation | | | | | | | | |
| U.S. Plans: | | | | | | | | | | | | | U.S. Plans: | |
| Discount rate | | 4.04 | % | | 4.34 | % | | 3.90 | % | | 3.85 | % | | 4.13 | % | | 3.70 | % | Discount rate | | 2.69 | % | | 2.25 | % | | 2.57 | % | | 2.09 | % |
| Expected rate of return on plan assets | | 7.50 | % | | 7.50 | % | | 7.50 | % | | — |
| | 5.50 | % | | 5.50 | % | |
| Rate of compensation increase | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| Rate of compensation increase | | — | | | — | | | — | | | — | |
| Interest crediting rate | | Interest crediting rate | | 4.75 | % | | 4.75 | % | |
| Non-U.S. Plans: | | | | | | | | | | | | | Non-U.S. Plans: | |
| Discount rate | | 2.08 | % | | 2.74 | % | | 2.41 | % | | | | | | | Discount rate | | 1.72 | % | | 1.37 | % | |
| Expected rate of return on plan assets | | 3.84 | % | | 5.46 | % | | 5.60 | % | | | | | | | |
| Rate of compensation increase | | 2.64 | % | | 2.87 | % | | 2.86 | % | | | | | | | Rate of compensation increase | | 2.63 | % | | 2.60 | % | |
| Interest crediting rate | | Interest crediting rate | | — | | | — | | |
|
| | | | | | | | | | | | |
| | | Pension Benefit Plans | | Postretirement Benefit Plan(1) |
| |
| | | 2017 | | 2016 | | 2017 | | 2016 |
| For Determining Benefit Obligation | | | | | | | | |
| U.S. Plans: | | | | | | | | |
| Discount rate | | 3.56 | % | | 4.04 | % | | 3.47 | % | | 3.85 | % |
| Rate of compensation increase | | — |
| | — |
| | — |
| | — |
|
| Non-U.S. Plans: | | | | | | | | |
| Discount rate | | 2.29 | % | | 2.08 | % | | | | |
| Rate of compensation increase | | 2.87 | % | | 2.64 | % | | | | |
| |
(1)
| The Company does not have non-U.S. postretirement benefit plans. |
The expected long-term rate of return on plan assets was developed based on a capital markets model that uses expected asset class returns, variance and correlation assumptions. The expected asset class returns were developed starting with current Treasury (for the U.S. pension plan) or Eurozone (for the Ireland pension plans) government yields and then adding corporate bond spreads and equity risk premiums to develop the return expectations for each asset class. The expected asset class returns are forward-looking. The variance and correlation assumptions are also forward-looking. They take into account historical relationships, but are adjusted to reflect expected capital market trends. The expected return on plan assets for the Company’s U.S. pension plan for 20172021 was 7.50%5.00%. The expected return on plan assets for the Company’s Ireland pension plans was 4.00%2.75% for 2017.2021.
The discount rate used to determine benefit obligations represents the current rate at which the benefit plan liabilities could be effectively settled considering the timing of expected payments for plan participants.
The 20182022 expected rate of return for the U.S. pension benefit plan will remain at 7.50%be 4.50%. The 20182022 expected rate of return for the Ireland pension benefit plans will be 3.75%2.75%.
Pension Benefit Plans Assets
Pension benefit plan assets are invested in several asset categories. The following presents the actual asset allocation as of December 31, 20172021 and 2016:2020:
| | | | | 2017 | | 2016 | | 2021 | | 2020 |
| U.S. Plan | | | | | U.S. Plan | | | | |
| Cash and cash equivalents | | Cash and cash equivalents | | 1 | % | | 1 | % |
| Equity securities | | Equity securities | | 30 | % | | 39 | % |
| Fixed income securities | | Fixed income securities | | 69 | % | | 60 | % |
| Non-U.S. Plans | | Non-U.S. Plans | |
| Cash and cash equivalents | | Cash and cash equivalents | | 9 | % | | 3 | % |
| Equity securities | | 60 | % | | 61 | % | Equity securities | | 31 | % | | 28 | % |
| Fixed income securities | | 30 | % | | 39 | % | Fixed income securities | | 39 | % | | 58 | % |
| Other | | 10 | % | | — | % | Other | | 21 | % | | 11 | % |
| Cash | | — | % | | — | % | |
| Non-U.S. Plans | | | | | |
| Equity securities | | 23 | % | | 47 | % | |
| Fixed income securities | | 66 | % | | 42 | % | |
| Other | | 11 | % | | 11 | % | |
The investment strategy underlying pension plan asset allocation is to manage the assets of the plan to provide for the non-current liabilities while maintaining sufficient liquidity to pay current benefits. Pension plan assets are diversified to protect against large investment losses and to reduce the probability of excessive performance volatility. Diversification of assets is achieved by allocating funds to various asset classes and investment styles within asset classes, and retaining investment management firm(s) with complementary investment philosophies, styles and approaches.
The Company’s pension plan assets are managed by outside investment managers using a total return investment approach, whereby a mix of equity and debt securities investments are used to maximize the long-term rate of return on plan assets. A significant portion of the assets of the U.S. and Ireland pension plans have been invested in equity securities, as equity portfolios have historically provided higher returns than debt and other asset classes over extended time horizons. Correspondingly, equity investments also entail greater risks than other investments. Equity risks are balanced by investing a significant portion of plan assets in broadly diversified fixed income securities.
Fair Value of Plan Assets
The Company measured the fair value of plan assets based on the prices that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. See Note 6,5, "FAIR VALUE MEASUREMENTS" for details on the Company's fair value measurements based on a three-tier hierarchy.
The table below presents total plan assets by investment category as of December 31, 20172021 and 20162020 and the classification of each investment category within the fair value hierarchy with respect to the inputs used to measure fair value. There were no transfers between Level 1 and Level 2 for the years ended December 31, 2017during 2021 and 2016.2020.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Pension Benefit Plans - U.S. Plans |
| | December 31, 2021 | | December 31, 2020 |
| (in millions) | | Level 1 | | Level 2 | | Level 3 | | Total | | Level 1 | | Level 2 | | Level 3 | | Total |
| Cash and cash equivalents | | $ | 1 | | | $ | — | | | $ | — | | | $ | 1 | | | $ | 2 | | | $ | — | | | $ | — | | | $ | 2 | |
| Commingled funds: | | | | | | | | | | | | | | | | |
| Equity securities: | | | | | | | | | | | | | | | | |
| U.S. broad market | | — | | | 36 | | | — | | | 36 | | | — | | | 48 | | | — | | | 48 | |
| Emerging markets | | — | | | 6 | | | — | | | 6 | | | — | | | 9 | | | — | | | 9 | |
| Worldwide developed markets | | — | | | 16 | | | — | | | 16 | | | — | | | 20 | | | — | | | 20 | |
| Other assets | | — | | | 10 | | | — | | | 10 | | | — | | | 14 | | | — | | | 14 | |
| Fixed income securities: | | | | | | | | | | | | | | | | |
| Investment grade | | — | | | 155 | | | — | | | 155 | | | — | | | 138 | | | — | | | 138 | |
| | $ | 1 | | | $ | 223 | | | $ | — | | | $ | 224 | | | $ | 2 | | | $ | 229 | | | $ | — | | | $ | 231 | |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Pension Benefit Plans - U.S. Plans |
| | | As of December 31, 2017 | | As of December 31, 2016 |
| (in millions) | | Quoted Prices in Active Markets for Identical Assets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) | | Total | | Quoted Prices in Active Markets for Identical Assets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) | | Total |
| Cash and cash equivalents | | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
|
| Commingled funds: | | | | |
| | |
| | | | | | |
| | |
| | |
| Equity securities: | | | | | | | | | | | | | | | | |
| U.S. broad market | | — |
| | 76 |
| | — |
| | 76 |
| | — |
| | 70 |
| | — |
| | 70 |
|
| Emerging markets | | — |
| | 19 |
| | — |
| | 19 |
| | — |
| | 16 |
| | — |
| | 16 |
|
| Worldwide developed markets | | — |
| | 29 |
| | — |
| | 29 |
| | — |
| | 25 |
| | — |
| | 25 |
|
| Fixed income securities: | | | | | | | | | | | | | | | | |
| Investment grade | | — |
| | 62 |
| | — |
| | 62 |
| | — |
| | 52 |
| | — |
| | 52 |
|
| Global high yield | | — |
| | — |
| | — |
| | — |
| | — |
| | 18 |
| | — |
| | 18 |
|
| Other assets | | — |
| | 20 |
| | — |
| | 20 |
| | — |
| | — |
| | — |
| | — |
|
| | | $ | — |
| | $ | 206 |
| | $ | — |
| | $ | 206 |
| | $ | — |
| | $ | 181 |
| | $ | — |
| | $ | 181 |
|
| | | | | Pension Benefit Plans - Non-U.S. Plans | | Pension Benefit Plans - Non-U.S. Plans |
| | | As of December 31, 2017 | | As of December 31, 2016 | | December 31, 2021 | | December 31, 2020 |
| (in millions) | | Quoted Prices in Active Markets for Identical Assets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) | | Total | | Quoted Prices in Active Markets for Identical Assets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) | | Total | (in millions) | | Level 1 | | Level 2 | | Level 3 | | Total | | Level 1 | | Level 2 | | Level 3 | | Total |
| Cash and cash equivalents | | $ | 14 |
| | $ | — |
| | $ | — |
| | $ | 14 |
| | $ | 10 |
| | $ | — |
| | $ | — |
| | $ | 10 |
| |
| Cash equivalents | | Cash equivalents | | $ | — | | | $ | 15 | | | $ | — | | | $ | 15 | | | $ | — | | | $ | 5 | | | $ | — | | | $ | 5 | |
| Commingled funds: | | | | |
| | |
| | | | | | |
| | |
| | | Commingled funds: | | | | | | | | |
| Equity securities: | | | | | | | | | | | | | | | | | Equity securities: | |
| Emerging markets | | — |
| | 1 |
| | — |
| | 1 |
| | — |
| | — |
| | — |
| | — |
| Emerging markets | | — | | | 3 | | | — | | | 3 | | | — | | | 1 | | | — | | | 1 | |
| Worldwide developed markets | | — |
| | 35 |
| | — |
| | 35 |
| | — |
| | 59 |
| | — |
| | 59 |
| Worldwide developed markets | | — | | | 51 | | | — | | | 51 | | | — | | | 51 | | | — | | | 51 | |
| Fixed income securities: | | | | | | | | | | | | | | | | | Fixed income securities: | |
| Investment grade | | — |
| | 10 |
| | — |
| | 10 |
| | — |
| | 10 |
| | — |
| | 10 |
| Investment grade | | — | | | 3 | | | — | | | 3 | | | — | | | 6 | | | — | | | 6 | |
| Global high yield | | — |
| | 4 |
| | — |
| | 4 |
| | — |
| | 1 |
| | — |
| | 1 |
| Global high yield | | — | | | — | | | — | | | — | | | — | | | 1 | | | — | | | 1 | |
| Government bond funds | | — |
| | 88 |
| | — |
| | 88 |
| | — |
| | 43 |
| | — |
| | 43 |
| Government bond funds | | 1 | | | 65 | | | — | | | 66 | | | 1 | | | 102 | | | — | | | 103 | |
| Other assets | | — |
| | 3 |
| | — |
| | 3 |
| | — |
| | 5 |
| | — |
| | 5 |
| Other assets | | — | | | 35 | | | 2 | | | 37 | | | — | | | 20 | | | 2 | | | 22 | |
| | | $ | 14 |
| | $ | 141 |
| | $ | — |
| | $ | 155 |
| | $ | 10 |
| | $ | 118 |
| | $ | — |
| | $ | 128 |
| | $ | 1 | | | $ | 172 | | | $ | 2 | | | $ | 175 | | | $ | 1 | | | $ | 186 | | | $ | 2 | | | $ | 189 | |
Cash equivalents consisted primarily of term deposits and money market instruments. The fair value of the term deposits approximates their carrying amounts due to their short term maturities. The money market instruments also have short maturities and are valued using a market approach based on the quoted market prices of identical instruments.
Commingled funds are not publicly traded. The underlying assets in these funds are publicly traded on the exchanges and have readily available price quotes. The Ireland pension plans held approximately 92%95% and 91%96% of the non-U.S. commingled
funds in 20172021 and 2016,2020, respectively. The commingled funds held by the U.S. and Ireland pension plans are primarily invested in index funds.
The underlying assets in the fixed income funds are generally valued using the net asset value per fund share, which is derived using a market approach with inputs that include broker quotes, benchmark yields, base spreads and reported trades.
The insurance policies held by the postretirement benefit plan consist of variable life insurance contracts whose fair value is their cash surrender value. Cash surrender value is the amount currently payable by the insurance company upon surrender of the policy and is based principally on the net asset values of the underlying trust funds. The trust funds are commingled funds that are not publicly traded. The underlying assets in these funds are primarily publicly traded on exchanges and have readily available price quotes.
Defined Contribution Plans
The Company sponsors defined contribution plans in the U.S., Ireland and certain other countries. Under these plans, employees are allowed to contribute a portion of their salaries to the plans, and the Company matches a portion of the employee contributions. The Company contributed $22$44 million, $28$43 million and $28$41 million to these plans induring the years ended December 31, 2017, 20162021, 2020 and 2015,2019, respectively.
Securities Repurchase Programs
12.LEASES
Right-of-use assets and lease liabilities associated with the Company’s Board of Directors approved a securities repurchase program (the “2015 Securities Repurchase Program”). Under the 2015 Securities Repurchase Program, which commenced on November 21, 2015, the Company could make purchases of up to $3,000 million of its convertible notes, senior notes, common shares and/or other future debt or shares, subject to any restrictionsCompany's operating leases are included in the Company’s financing agreementsConsolidated Balance Sheet as of December 31, 2021 and applicable law. The 2015 Securities Repurchase Program terminated on November 20, 20162020 as follows:
| | | | | | | | | | | |
| (in millions) | 2021 | | 2020 |
| Right-of-use assets included in: | | | |
| Other non-current assets | $ | 247 | | | $ | 259 | |
| Lease liabilities included in: | | | |
| Accrued and other current liabilities | $ | 50 | | | $ | 52 | |
| Other non-current liabilities | 214 | | | 227 | |
| Total lease liabilities | $ | 264 | | | $ | 279 | |
As of December 31, 2021, 2020 and has2019 the Company's finance leases were not been renewed.material and for the years 2021, 2020 and 2019 sub-lease income and short-term lease expense were not material. Lease expense for the years 2021, 2020 and 2019 include:
On November 20, 2014, the Company’s Board | | | | | | | | | | | | | | | | | |
| (in millions) | 2021 | | 2020 | | 2019 |
| Operating lease costs | $ | 67 | | | $ | 65 | | | $ | 62 | |
| Variable operating lease costs | $ | 12 | | | $ | 12 | | | $ | 16 | |
Other information related to operating leases for 2021, 2020 and 2019 is as follows:
| | | | | | | | | | | | | | | | | |
| (dollars in millions) | 2021 | | 2020 | | 2019 |
| Cash paid from operating cash flows for amounts included in the measurement of lease liabilities | $ | 76 | | | $ | 74 | | | $ | 73 | |
| Right-of-use assets obtained in exchange for new operating lease liabilities | $ | 46 | | | $ | 39 | | | $ | 47 | |
| Weighted-average remaining lease term | 7.2 years | | 7.6 years | | 8.2 years |
| Weighted-average discount rate | 6.1 | % | | 6.2 | % | | 6.2 | % |
As of Directors approved a securities repurchase program (the “2014 Securities Repurchase Program”). Under the 2014 Securities Repurchase Program, which commenced on November 21, 2014, the Company could make purchases of up to $2,000 million of its convertible notes, senior notes, common shares and/or otherDecember 31, 2021, future debt or shares, subject to any restrictions in the Company’s financing agreements and applicable law. The 2014 Securities Repurchase Program terminated on November 20, 2015.
Repurchases of Shares and Senior Notes
No common shares were repurchasedpayments under the 2015 Securities Repurchase Program.
During 2015, under the 2014 Securities Repurchase Program, the Company repurchased 424,215 of its common sharesnoncancelable operating leases for an aggregate purchase price of $72 million. The excesseach of the purchase price over the carrying value of the common shares repurchased of $60 million was charged to the accumulated deficit. These common shares were subsequently cancelled.five succeeding years ending December 31 and thereafter are as follows:
During 2017, 2016 and 2015, the Company did not make any purchases of its senior notes under the securities repurchase programs. | | | | | | |
| (in millions) | | |
| 2022 | | $ | 64 | |
| 2023 | | 53 | |
| 2024 | | 41 | |
| 2025 | | 38 | |
| 2026 | | 34 | |
| Thereafter | | 100 | |
| Total | | 330 | |
| Less: Imputed interest | | 66 | |
| Present value of remaining lease payments | | 264 | |
| Less: Current portion | | 50 | |
| Non-current portion | | $ | 214 | |
Issuances of Common Shares
On June 10, 2015, the Company issued 213,610 common shares, representing a portion of the consideration transferred in connection with the acquisition of certain assets of Dendreon Corporation. The shares had an aggregate value of approximately $50 million as of the date of issuance. See Note 3, "ACQUISITIONS" for additional information regarding the acquisition of certain assets of Dendreon Corporation.13.SHARE-BASED COMPENSATION
On March 27, 2015, the Company completed, pursuant to an Underwriting Agreement dated March 17, 2015 with Deutsche Bank Securities Inc. on behalf of several underwriters, a registered offering in the United States of 7,286,432 of its common shares, no par value, at a price of $199.00 per common share, for aggregate gross proceeds of approximately $1,450 million. In connection with the issuance of these new common shares, the Company incurred approximately $18 million of issuance costs,which has been reflected as reduction to the gross proceeds from the equity issuance. The proceeds of this offering were used to fund the Salix Acquisition. The Company granted the underwriters an option to purchase additional common
shares equal to up to 15% of the common shares initially issued in the offering. This option was not exercised by the underwriters.
| |
14. | SHARE-BASED COMPENSATION |
In May 2014, shareholders approved the Company’s 2014 Omnibus Incentive Plan (the “2014 Plan”), which replaced the Company’s 2011 Omnibus Incentive Plan (the “2011 Plan”) for future equity awards granted by the Company. The Company transferred the common shares available under the 2011 Plan to the 2014 Plan. The maximum number of common shares that may be issued to participants under the 2014 Plan iswas equal to 18,000,000 common shares, plus the number of common shares under the 2011 Plan reserved but unissued and not underlying outstanding awards and the number of common shares becoming available for reuse after awards are terminated, forfeited, cancelled, exchanged or
surrendered under the 2011 Plan and the Company’s 2007 Equity Compensation Plan. The Company registered 20,000,000 common shares of common stock for issuance under the 2014 Plan.
Effective April 30, 2018, the Company amended and restated the 2014 Plan (the “Amended and Restated 2014 Plan”). The Amended and Restated 2014 Plan includes the following amendments: (i) the number of common shares authorized for issuance under the Amended and Restated 2014 Plan has been increased by an additional 11,900,000 common shares, as approved by the requisite number of shareholders at the Company’s annual general meeting held on April 30, 2018, (ii) introduction of a $750,000 aggregate fair market value limit on awards (in either equity, cash or other compensation) that can be granted in any calendar year to a participant who is a non-employee director, (iii) housekeeping changes to address recent changes to Section 162(m) of the Internal Revenue Code, (iv) awards are expressly subject to the Company’s clawback policy and (v) awards not assumed or substituted in connection with a Change of Control (as defined in the Amended and Restated 2014 Plan) will only vest on a pro rata basis.
Effective April 28, 2020, the Company further amended and restated the Amended and Restated 2014 Plan (the “Further Amended and Restated 2014 Plan”). The Further Amended and Restated 2014 Plan includes the following amendments: (i) the number of common shares authorized for issuance under the Further Amended and Restated 2014 Plan has been increased by an additional 13,500,000 common shares, as approved by the requisite number of shareholders at the Company’s annual general meeting held on April 28, 2020, (ii) the exercise price of stock options and share appreciation rights (“SARs”) will be based on the closing price of the underlying common shares on the date such stock options or SARs are granted (rather than on the last preceding trading date), (iii) additional provisions clarifying that: (a) stock options and SARs will not be eligible for the payment of dividend or dividend equivalents and (b) the Talent and Compensation Committee of the Board of Directors of the Company cannot, without shareholder approval, seek to effect any repricing of any previously granted “underwater” stock option or SAR and (iv) other housekeeping and/or clerical changes.
Approximately 7,461,00011,593,000 common shares were available for future grants as of December 31, 2017.2021. The Company uses reserved and unissued common shares to satisfy its obligation under its share-based compensation plans.
The components and classification of share-based compensation expense related to stock options and RSUs for the years ended December 31, 2017, 2016 and 2015 were as follows:
|
| | | | | | | | | | | | |
| (in millions) | | 2017 | | 2016 | | 2015 |
| Stock options | | $ | 18 |
| | $ | 16 |
| | $ | 17 |
|
| RSUs | | 69 |
| | 149 |
| | 123 |
|
| Share-based compensation expense | | $ | 87 |
| | $ | 165 |
| | $ | 140 |
|
| | | | | | | |
| Research and development expenses | | $ | 8 |
| | $ | 7 |
| | $ | 6 |
|
| Selling, general and administrative expenses | | 79 |
| | 158 |
| | 134 |
|
| Share-based compensation expense | | $ | 87 |
| | $ | 165 |
| | $ | 140 |
|
During 2017, the Company introducedhas a new long-term incentive program with the objective of realigningaligning the share-based awards granted to senior management with the Company’s focus on improving its tangible capital usage and allocation, while maintaining focus on improving total shareholder return over the long-term. The share-based awards granted under this long-term incentive program consist of time-based stock options, time-based RSUs and performance-based RSUs. Performance-based RSUs are comprised ofof: (i) awards that vest upon achievement of certain share price appreciation conditions that are based on total shareholder return (“TSR”) and, (ii) awards that vest upon attainment of certain performance targets that are based on the Company’s return on tangible capital (“ROTC”). and (iii) vest fully or partially upon attainment of certain goals that are linked to the B+L Separation.
The fair valuecomponents and classification of the ROTC performance-based RSUs is estimated based on the trading price of the Company’s common shares on the date of grant. Expense recognized for the ROTC performance-based RSUs in each reporting period reflects the Company’s latest estimate of the number of ROTC performance-based RSUs that are expected to vest. If the ROTC performance-based RSUs do not ultimately vest due to the ROTC targets not being met, no compensation expense is recognized and any previously recognized compensation expense is reversed.
In March 2016, the Company announced that its Board of Directors had initiated a search to identify a candidate for a new CEO to succeed the Company's then current CEO, who would continue to serve in that role until his replacement was appointed. On May 2, 2016, the Company's new CEO assumed the role, succeeding the Company's former CEO. Pursuant to the terms of his employment agreement dated January 2015, the former CEO was entitled to certain share-based awards and payments upon termination. Under his January 2015 employment agreement, the former CEO received performance-based RSUs that vest when certain market conditions (namely total shareholder return) are met at the defined dates, provided continuing employment through those dates. Under the termination provisions of his employment agreement, upon termination of the former CEO, the defined dates for meeting the market conditions of the performance-based RSUs were eliminated and, as a result, vesting was based solely on the attainment of the applicable level of total shareholder return through the date of termination and the resulting number of common shares, if any, to be awarded to the former CEO was determined on a pro-rata basis for service provided under the original performance period, with credit given for an additional year of service. Because the total shareholder return at the time of the former CEO’s termination did not meet the performance threshold, no common shares were issued and no value was ultimately received by the former CEO pursuant to this performance-based RSU award. However, an incremental share-based compensation expense of $28 million was recognized in the six-month
period ended June 30, 2016, which represents the additional year of service credit consistent with the grant date fair value calculated using a Monte Carlo Simulation Model in the first quarter of 2015, notwithstanding the fact that no value was ultimately received by the former CEO. In addition to the acceleration of his performance-based RSUs, the former CEO was also entitled to a cash severance payment of $9 million and a pro-rata annual cash bonus of approximately $2 million pursuant to his employment agreement. The cash severance payments, the pro-rata cash bonus and the associated payroll taxes were also recognized as expense in the first quarter of 2016.
On June 30, 2015, a former Chief Financial Officer of the Company terminated his employment and subsequently entered into a consulting service agreement with the Company through January 2016. As a result, the outstanding awards held by him were modified to allow the recipient to continue vesting in those awards as service is rendered during the consulting services period. Share-based compensation expense previously recognized of $6 million related to the original awards was reversed in the second quarter of 2015 when such awards were deemed improbable of vesting. The modified awards are re-measured at fair value, at each reporting period, until a performance commitment is reached or the performance is complete. The value of the modified awards is recognized as expense over the requisite service periodstock options and resulted in expense of $12 millionRSUs for the year ended December 31, 2015. Subsequently, on January 6, 2016, the consulting services period was terminated in connection with such executive’s appointmentyears 2021, 2020 and 2019 were as the Company’s interim chief executive officer. The termination of the consulting services period resulted in acceleration of vesting for all unvested equity awards that were scheduled to vest during the remainder of such consulting services period (January 2016) and consequently, the associated unrecognized expense was fully recognized on such date.follows:
The Company recognized $57 million of tax benefits from share-based compensation in additional paid-in capital in the year ended December 31, 2015. In the third quarter of 2016, the Company early adopted FASB guidance (issued in March 2016) which simplified several aspects of the accounting for employee share-based payment transactions, including the recognition of tax benefits in the (Benefit from) provision for income taxes in the periods such tax benefits are realized. | | | | | | | | | | | | | | | | | | | | |
| (in millions) | | 2021 | | 2020 | | 2019 |
| Stock options | | $ | 15 | | | $ | 15 | | | $ | 21 | |
| RSUs | | 113 | | | 90 | | | 81 | |
| Share-based compensation expense | | $ | 128 | | | $ | 105 | | | $ | 102 | |
| | | | | | |
| Research and development expenses | | $ | 10 | | | $ | 11 | | | $ | 9 | |
| Selling, general and administrative expenses | | 118 | | | 94 | | | 93 | |
| Share-based compensation expense | | $ | 128 | | | $ | 105 | | | $ | 102 | |
| | | | | | |
| | | | | | |
| | | | | | |
Stock Options
Stock options granted under the 2011 Plan and the Amended and Restated 2014 Plan generally expire on the fifth or tenth anniversary of the grant date. The exercise price of any stock option granted under the 2011 Plan and the Amended and Restated 2014 Plan will not be less than the closing price per common share precedingon the date of grant. Stock options generally vest 33% and 25% each year over a three-year and four-year period, respectively, on the anniversary of the date of grant.
The fair values of all stock options granted for the years ended December 31, 2017, 20162021, 2020 and 20152019 were estimated as of the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions:
| | | | | 2017 | | 2016 | | 2015 | | 2021 | | 2020 | | 2019 |
| Expected stock option life (years) | | 3.0 |
| | 3.3 |
| | 3.4 |
| Expected stock option life (years) | | 3.0 | | 3.0 | | 3.0 |
| Expected volatility | | 67.3 | % | | 75.0 | % | | 44.5 | % | Expected volatility | | 50.2 | % | | 38.7 | % | | 46.5 | % |
| Risk-free interest rate | | 1.8 | % | | 1.1 | % | | 1.3 | % | Risk-free interest rate | | 0.4 | % | | 1.2 | % | | 2.5 | % |
| Expected dividend yield | | — | % | | — | % | | — | % | Expected dividend yield | | — | % | | — | % | | — | % |
The expected stock option life was determined based on historical exercise and forfeiture patterns. The expected volatility was determined based on implied volatility in the market traded options of the Company’s common stock. The risk-free interest rate was determined based on the rate at the time of grant for zero-coupon U.S. or Canadian government bonds with maturity dates equal to the expected life of the stock option. The expected dividend yield was determined based on the stock option’s exercise price and expected annual dividend rate at the time of grant.
The Black-Scholes option-pricing model used by the Company to calculate stock option values was developed to estimate the fair value of freely tradeable, fully transferable stock options without vesting restrictions, which significantly differ from the Company’s stock option awards. This model also requires highly subjective assumptions, including future stock price volatility and expected time until exercise, which greatly affect the calculated values.
The following table summarizes stock option activity during 2017:2021:
| | | (in millions, except per share amounts) | | Options | | Weighted- Average Exercise Price Per Share | | Weighted- Average Remaining Contractual Term (Years) | | Aggregate Intrinsic Value | (in millions, except per share amounts) | | Options | | Weighted-
Average
Exercise
Price Per Share | | Weighted-
Average
Remaining
Contractual
Term
(Years) | | Aggregate
Intrinsic
Value |
| Outstanding, January 1, 2017 | | 4.1 |
| | $ | 49.57 |
| | | | |
| |
| Outstanding, January 1, 2021 | | Outstanding, January 1, 2021 | | 8.7 | | | $ | 25.59 | | | | | |
| Granted | | 1.6 |
| | $ | 14.28 |
| | | | |
| Granted | | 1.6 | | | $ | 32.01 | | | | | |
| Exercised | | (0.1 | ) | | $ | 5.16 |
| | | | |
| Exercised | | (1.2) | | | $ | 18.20 | | | | | |
| Expired or forfeited | | (1.1 | ) | | $ | 63.72 |
| | | | |
| Expired or forfeited | | (0.2) | | | $ | 29.33 | | | | | |
| Outstanding, December 31, 2017 | | 4.5 |
| | $ | 34.65 |
| | 8.1 | | $ | 10 |
| |
| Vested and expected to vest, December 31, 2017 | | 4.2 |
| | $ | 35.22 |
| | 8.0 | | $ | 9 |
| |
| Vested and exercisable, December 31, 2017 | | 1.4 |
| | $ | 58.80 |
| | 6.6 | | $ | — |
| |
| Outstanding, December 31, 2021 | | Outstanding, December 31, 2021 | | 8.9 | | | $ | 27.65 | | | 6.6 | | $ | 36 | |
| Vested and expected to vest, December 31, 2021 | | Vested and expected to vest, December 31, 2021 | | 8.5 | | | $ | 27.65 | | | 6.5 | | $ | 35 | |
| Vested and exercisable, December 31, 2021 | | Vested and exercisable, December 31, 2021 | | 5.5 | | | $ | 27.60 | | | 5.5 | | $ | 30 | |
The weighted-average fair values of all stock options granted in 2017, 20162021, 2020 and 20152019 were $5.97, $14.50$10.92, $6.60 and $73.10,$8.45, respectively. The total intrinsic values of stock options exercised in 2017, 20162021, 2020 and 20152019 were $1$15 million, $65$2 million and $119$3 million, respectively. Proceeds received on the exercise of stock options in 2017, 20162021, 2020 and 20152019 were less than $1$22 million, $33$5 million and $30$5 million, respectively.
As of December 31, 2017,2021, the total remaining unrecognized compensation expense related to non-vested stock options amounted to $27$10 million, which will be amortized over the weighted-average remaining requisite service period of approximately 1.91.6years. The total fair value of stock options vested in 2017, 20162021, 2020 and 20152019 were $20$15 million, $26$15 million and $26$18 million, respectively.
RSUs
RSUs generally vest either on the first or third anniversary date from the date of grant or 33% a year over a three-year period. Annual RSUs granted to non-management directors vest immediately prior to the next Annual Meeting of Shareholders. Pursuant to the applicable unit agreement, certain RSUs may be subject to the attainment of any applicable performance goals specified by the Board of Directors. If the vesting of the RSUs is conditional upon the attainment of performance goals, any RSUs that do not vest as a result of a determination that the prescribed performance goals failed to be attained will be forfeited immediately upon such determination. RSUs are credited with dividend equivalents, in the form of additional RSUs, when dividends are paid on the Company’s common shares. Such additional RSUs will have the same vesting dates and will vest under the same terms as the RSUs in respect of which such additional RSUs are credited.
To the extent provided for in a RSU agreement, the Company may, in lieu of all or a portion of the common shares which would otherwise be provided to a holder, elect to pay a cash amount equivalent to the market price of the Company’s
common shares on the vesting date for each vested RSU. The amount of cash payment will be determined based on the average market price of the Company’s common shares on the vesting date. The Company’s current intent is to settle vested RSUs through the issuance of common shares.
Time-Based RSUs
Each vested time-based RSU represents the right of a holder to receive one of the Company’s common shares. The fair value of each RSU granted is estimated based on the trading price of the Company’s common shares on the date of grant.
The following table summarizes non-vested time-based RSU activity during 2017:2021:
| | | (in millions, except per share amounts) | | Time-Based RSUs | | Weighted- Average Grant-Date Fair Value Per Share | (in millions, except per share amounts) | | Time-Based
RSUs | | Weighted-
Average
Grant-Date
Fair Value Per Share |
| Non-vested, January 1, 2017 | | 2.7 |
| | $ | 43.96 |
| |
| Non-vested, January 1, 2021 | | Non-vested, January 1, 2021 | | 5.7 | | | $ | 21.98 | |
| Granted | | 3.6 |
| | $ | 11.92 |
| Granted | | 3.4 | | | $ | 31.51 | |
| Vested | | (1.0 | ) | | $ | 57.34 |
| Vested | | (3.3) | | | $ | 21.00 | |
| Forfeited | | (0.6 | ) | | $ | 19.24 |
| Forfeited | | (0.4) | | | $ | 26.77 | |
| Non-vested, December 31, 2017 | | 4.7 |
| | $ | 19.09 |
| |
| Non-vested, December 31, 2021 | | Non-vested, December 31, 2021 | | 5.4 | | | $ | 28.16 | |
As of December 31, 2017,2021, the total remaining unrecognized compensation expense related to non-vested time-based RSUs amounted to $47$68 million, which will be amortized over the weighted-average remaining requisite service period of approximately 1.91.6 years. The total fair value of time-based RSUs vested in 2017, 20162021, 2020 and 20152019 were $58$69 million, $43$66 million and $7$34 million, respectively.
Performance-Based RSUs
Each vested performance-based RSU represents the right of a holder to receive a number of the Company’s common shares up to a specified maximum. Performance-based RSUs vest upon achievement of certain share price appreciation conditions.conditions or attainment of certain performance targets. If the Company’s performance is below a specified performance level, no common shares will be paid.
The fair value of each TSR performance-based RSU granted during 2017, 20162021, 2020 and 20152019 was estimated using a Monte Carlo Simulation model, which utilizes multiple input variables to estimate the probability that the performance condition will be achieved. The fair value of the ROTC performance-based RSUs is estimated based on the trading price of the Company’s common shares on the date of grant. Expense recognized for the ROTC performance-based RSUs in each reporting period reflects the Company’s latest estimate of the number of ROTC performance-based RSUs that are expected to vest. If the ROTC performance-based RSUs do not ultimately vest due to the ROTC targets not being met, no compensation expense is recognized and any previously recognized compensation expense is reversed.
The fair values of TSR performance-based RSUs granted during 2017, 20162021, 2020 and 20152019 were estimated with the following assumptions:
| | | | | 2017 | | 2016 | | 2015 | | 2021 | | 2020 | | 2019 |
| Contractual term (years) | | 3.0 | | 3.0 - 4.0 | | 2.8 - 6.3 | Contractual term (years) | | 3.0 | | 3.0 | | 3.0 |
| Expected Company share volatility | | 67.2% - 77.2% | | 78.2% - 81.4% | | 40.9% - 60.3% | Expected Company share volatility | | 52% | | 38.6% | | 46.5% |
| Risk-free interest rate | | 1.7% - 1.8% | | 1.0% - 1.2% | | 1.1% - 2.1% | Risk-free interest rate | | 0.4% | | 1.2% | | 2.5% |
The expected company share volatility was determined based on historicalimplied volatility overin the contractual termmarket traded options of the performance-based RSU.Company’s common stock. The risk-free interest rate was determined based on the rate at the time of grant for zero-coupon U.S. government bonds with maturity dates equal to the contractual term of the performance-based RSUs.
The following table summarizes non-vested performance-based RSU activity during 2017:2021:
| | | | | | | | | | | | | | |
| (in millions, except per share amounts) | | Performance-based
RSUs | | Weighted-
Average
Grant-Date
Fair Value Per Share |
| Non-vested, January 1, 2021 | | 2.3 | | | $ | 28.10 | |
| Granted | | 1.0 | | | $ | 40.42 | |
| Vested | | (1.0) | | | $ | 27.23 | |
| Non-vested, December 31, 2021 | | 2.3 | | | $ | 33.92 | |
|
| | | | | | | |
| (in millions, except per share amounts) | | Performance-based RSUs | | Weighted- Average Grant-Date Fair Value Per Share |
| Non-vested, January 1, 2017 | | 1.8 |
| | $ | 81.68 |
|
| Granted | | 0.4 |
| | $ | 16.06 |
|
| Vested | | (0.1 | ) | | $ | 211.34 |
|
| Forfeited | | (0.3 | ) | | $ | 135.18 |
|
| Non-vested, December 31, 2017 | | 1.8 |
| | $ | 48.55 |
|
During 2017,2021, the Company granted approximately416,0001,035,000performance-based RSUs, consisting of approximately 208,000400,000 units of TSR performance-based RSUs with an average grant date fair value of $16.35$56.04 per RSU, and approximately 208,000413,000 units of ROTC performance-based RSUs with a weighted-average grant date fair value of $15.76$31.72per RSU.RSU and approximately 222,000 of other performance-based RSU's with a weighted-average grant date fair value of $28.49.
As of December 31, 2017,2021, the total remaining unrecognized compensation expense related to non-vested performance-based RSUs amounted to $35$32 million, which will be amortized over the weighted-average remaining requisite service period of
approximately 1.91.7 years. A maximum of 3,427,493approximately 3,476,000 common shares could be issued upon vesting of the performance-based RSUs outstanding as of December 31, 2017.2021.
| |
15. | ACCUMULATED OTHER COMPREHENSIVE LOSS |
The components of accumulated14.ACCUMULATED OTHER COMPREHENSIVE LOSS
Accumulated other comprehensive loss as of December 31, 20172021 and 2016 were as follows:2020 consists of:
| | | (in millions) | | 2017 | | 2016 | (in millions) | | 2021 | | 2020 |
| Foreign currency translation adjustment | | $ | (1,877 | ) | | $ | (2,074 | ) | Foreign currency translation adjustment | | $ | (1,905) | | | $ | (2,077) | |
| Pension adjustment, net of tax | | (19 | ) | | (34 | ) | Pension adjustment, net of tax | | (19) | | | (56) | |
| | | $ | (1,896 | ) | | $ | (2,108 | ) | |
| Accumulated other comprehensive loss | | Accumulated other comprehensive loss | | $ | (1,924) | | | $ | (2,133) | |
Income taxes are not provided for foreign currency translation adjustments arising on the translation of the Company’s operations having a functional currency other than the U.S. dollar, except to the extent of translation adjustments related to the Company’s retained earnings for foreign jurisdictions in which the Company is not considered to be permanently reinvested.
| |
16. | RESEARCH AND DEVELOPMENT |
15.RESEARCH AND DEVELOPMENT
Included in Research and development are costs related to product development and quality assurance programs. Quality assurance are the costs incurred to meet evolving customer and regulatory standards. Research and development costs are as follows:for the years 2021, 2020 and 2019 consists of:
| | | | | | | | | | | | | | | | | | | | |
| (in millions) | | 2021 | | 2020 | | 2019 |
| Product related research and development | | $ | 440 | | | $ | 420 | | | $ | 434 | |
| Quality assurance | | 25 | | | 32 | | | 37 | |
| Research and development | | $ | 465 | | | $ | 452 | | | $ | 471 | |
16.OTHER EXPENSE, NET
|
| | | | | | | | | | | | |
| (in millions) | | 2017 | | 2016 | | 2015 |
| Product related research and development | | $ | 328 |
| | $ | 385 |
| | $ | 306 |
|
| Quality assurance | | 33 |
| | 36 |
| | 28 |
|
| Research and development | | $ | 361 |
| | $ | 421 |
| | $ | 334 |
|
| |
17. | OTHER (INCOME) EXPENSE, NET
|
Other (income) expense, net for the years ended December 31, 2017, 20162021, 2020 and 2015 were as follows:2019 consists of:
| | | | | | | | | | | | | | | | | | | | |
| (in millions) | | 2021 | | 2020 | | 2019 |
| | | | | | |
| Litigation and other matters | | $ | 356 | | | $ | 422 | | | $ | 1,401 | |
| Acquired in-process research and development costs | | 8 | | | 32 | | | 41 | |
| Net gain on sales of assets | | (2) | | | (1) | | | (31) | |
| Acquisition-related contingent consideration | | 11 | | | 48 | | | 20 | |
| Other, net | | — | | | 1 | | | (5) | |
| Other expense, net | | $ | 373 | | | $ | 502 | | | $ | 1,426 | |
|
| | | | | | | | | | | | |
| (in millions) |
| 2017 |
| 2016 |
| 2015 |
| Gain on the Skincare Sale | | $ | (309 | ) | | $ | — |
| | $ | — |
|
| Gain on the iNova Sale | | (309 | ) | | — |
| | — |
|
| Gain on the Dendreon Sale | | (97 | ) | | — |
| | — |
|
| Loss on the Sprout Sale | | 98 |
| | — |
| | — |
|
| Net loss (gain) on other sales of assets | | 37 |
| | (6 | ) | | 8 |
|
| Other post business combination expenses | | — |
| | — |
| | 183 |
|
| Litigation and other matters | | 226 |
| | 59 |
| | 37 |
|
| Other, net | | 1 |
| | 20 |
| | 67 |
|
| Other (income) expense, net |
| $ | (353 | ) | | $ | 73 |
| | $ | 295 |
|
2017
In 2021, Litigation and other matters includes: (i) $96of $356 million for the estimated settlement of the Allergan shareholder class actions, (ii) the estimated settlement of the Solodyn® antitrust class actions litigation and (iii) the potential partial summary judgmentincludes adjustments related to the Mimetogen Pharmaceuticals litigation. See Note 21, "LEGAL PROCEEDINGS" for additional information.
2016
Glumetza Antitrust Litigation, partially offset by insurance recoveries related to certain litigation matters. In 2020, Litigation and other matters includes: (i)of $422 million includes net charges related to the U.S. Securities Litigation, the SEC Investigation and the Canadian Securities Litigation and related opt-outs. In 2020, Litigation and other matters also includes an unfavorable adjustmentinsurance recovery related to a certain litigation matter. In 2019, Litigation and other matters of $90$1,401 million fromincludes the settlement of the Salixa legacy U.S. securities litigationclass action matter. Certain of these matters and (ii) a favorable adjustment of $39 million from the settlement of the investigation into Salix's pre-acquisition sales and promotional practices for the Xifaxan®, Relistor® and Apriso® products. Seeother significant matters are discussed in further detail in Note 21,20, "LEGAL PROCEEDINGS" for additional information..
In 2020 and 2019, Acquired in-process research and development costs of $32 million and $41 million, primarily consist of costs associated with the upfront payments to enter into certain exclusive licensing agreements.
In 2019, Net gain on other sales of assets includes: (i) a gain ofincludes $20 million from an amendment to a license agreement terminating the Company's right to develop and commercialize brodalumab in Europe and (ii) a loss of $22 million from the divestiture of Ruconest®.
2015
Other post-business combination expenses includes: (i) $168 million related to the accelerationachievement of unvested restricted stock for Salix employees (including $3 million of related payroll taxes) in connection with the Salix Acquisition and (ii) $12 milliona milestone related to bonuses paid to Amoun employees. Litigation and other matters includes $25 million related to the AntiGrippin® litigation. See Note 21, "LEGAL PROCEEDINGS" for additional information.a certain product.
17.INCOME TAXES
The components of Loss before (benefit from) provision forbenefit from income taxes for the years ended December 31, 2017, 20162021, 2020 and 2015 were as follows:2019 consist of:
| | | (in millions) | | 2017 | | 2016 | | 2015 | (in millions) | | 2021 | | 2020 | | 2019 |
| Domestic | | $ | (2,032 | ) | | $ | (1,804 | ) | | $ | (1,516 | ) | Domestic | | $ | (323) | | | $ | (410) | | | $ | (2,396) | |
| Foreign | | 291 |
| | (631 | ) | | 1,361 |
| Foreign | | (701) | | | (524) | | | 559 | |
| | | $ | (1,741 | ) | | $ | (2,435 | ) | | $ | (155 | ) | | $ | (1,024) | | | $ | (934) | | | $ | (1,837) | |
The components of (Benefit from) provision forBenefit from income taxes for the years ended December 31, 2017, 20162021, 2020 and 2015 were as follows:2019 consist of:
| | | | | | | | | | | | | | | | | | | | |
| (in millions) | | 2021 | | 2020 | | 2019 |
| Current: | | | | | | |
| Domestic | | $ | (23) | | | $ | (8) | | | $ | (12) | |
| Foreign | | 74 | | | (216) | | | (116) | |
| | 51 | | | (224) | | | (128) | |
| Deferred: | | | | | | |
| Domestic | | 20 | | | 9 | | | (5) | |
| Foreign | | 16 | | | 590 | | | 187 | |
| | 36 | | | 599 | | | 182 | |
| | $ | 87 | | | $ | 375 | | | $ | 54 | |
|
| | | | | | | | | | | | |
| (in millions) | | 2017 | | 2016 | | 2015 |
| Current: | | | | | | |
| Domestic | | $ | 20 |
| | $ | — |
| | $ | — |
|
| Foreign | | 146 |
| | 241 |
| | 77 |
|
| | | 166 |
|
| 241 |
|
| 77 |
|
| Deferred: | | | | | | |
| Domestic | | 2 |
| | — |
| | (3 | ) |
| Foreign | | (4,313 | ) | | (268 | ) | | 59 |
|
| | | (4,311 | ) |
| (268 | ) |
| 56 |
|
| | | $ | (4,145 | ) | | $ | (27 | ) | | $ | 133 |
|
The (Benefit from) provision forBenefit from income taxes differs from the expected amount calculated by applying the Company’s Canadian statutory rate of 26.9% to Loss before (benefit from) provision forbenefit from income taxes for the years ended December 31, 2017, 20162021, 2020 and 20152019 as follows:
|
| | | | | | | | | | | | |
| (in millions) | | 2017 | | 2016 | | 2015 |
| Loss before (benefit from) provision for income taxes | | $ | (1,741 | ) | | $ | (2,435 | ) | | $ | (155 | ) |
| (Benefit from) provision for income taxes | | | | | | |
| Expected benefit from income taxes at Canadian statutory rate | | $ | (468 | ) | | $ | (655 | ) | | $ | (42 | ) |
| Non-deductible amount of share-based compensation | | 37 |
| | 30 |
| | 4 |
|
| Adjustments to tax attributes | | 242 |
| | (147 | ) | | (87 | ) |
| Impact of changes in enacted income tax rates | | (747 | ) | | — |
| | — |
|
Canadian tax impact of foreign exchange gain or loss on U.S. dollar denominated debt held by VPII and its Canadian Affiliates
| | (157 | ) | | 11 |
| | 174 |
|
| Change in valuation allowance related to foreign tax credits and net operating losses | | (139 | ) | | 155 |
| | 114 |
|
| Change in valuation allowance on Canadian deferred tax assets and tax rate changes | | 517 |
| | 472 |
| | 230 |
|
| Change in uncertain tax positions | | 65 |
| | 10 |
| | — |
|
| Foreign tax rate differences | | (933 | ) | | 101 |
| | 107 |
|
| Goodwill impairment | | 139 |
| | 377 |
| | — |
|
| Tax differences on divestitures of businesses | | (203 | ) | | — |
| | (16 | ) |
| Tax benefit on intra-entity transfers | | (2,480 | ) | | (399 | ) | | (375 | ) |
| Other | | (18 | ) | | 18 |
| | 24 |
|
| | | $ | (4,145 | ) | | $ | (27 | ) | | $ | 133 |
|
In the previous table, the comparable line items within the 2016 and 2015 (Benefit from) provision for income taxes have been reclassified using the current presentation.
| | | | | | | | | | | | | | | | | | | | |
| (in millions) | | 2021 | | 2020 | | 2019 |
| Loss before benefit from income taxes | | $ | (1,024) | | | $ | (934) | | | $ | (1,837) | |
| Benefit from income taxes | | | | | | |
| Expected benefit from income taxes at Canadian statutory rate | | $ | 275 | | | $ | 251 | | | $ | 494 | |
| Non-deductible amount of share-based compensation | | (9) | | | (9) | | | (7) | |
| Adjustments to tax attributes | | (59) | | | 26 | | | (99) | |
| Change in valuation allowance related to foreign tax credits and NOLs | | 28 | | | 62 | | | 21 | |
| Change in valuation allowance on Canadian deferred tax assets and tax rate changes | | 40 | | | 687 | | | (142) | |
| Change in uncertain tax positions | | 112 | | | (163) | | | (350) | |
| Foreign tax rate differences | | (198) | | | (128) | | | 186 | |
| Non-deductible portion of Goodwill impairments | | (99) | | | — | | | — | |
| Tax benefit on intra-entity transfers | | — | | | (338) | | | — | |
| Other | | (3) | | | (13) | | | (49) | |
| | $ | 87 | | | $ | 375 | | | $ | 54 | |
Deferred tax assets and liabilities as of December 31, 20172021 and 20162020 consist of:
| | | | | | | | | | | | | | |
| (in millions) | | 2021 | | 2020 |
| Deferred tax assets: | | | | |
| Tax loss carryforwards | | $ | 2,973 | | | $ | 2,924 | |
| Provisions | | 991 | | | 1,004 | |
| Research and development tax credits | | 173 | | | 172 | |
| Scientific Research and Experimental Development pool | | 52 | | | 55 | |
| Tax credit carryforwards | | 14 | | | 20 | |
| Deferred revenue | | 3 | | | 9 | |
| Prepaid expenses | | 26 | | | 27 | |
| Share-based compensation | | 17 | | | 16 | |
| Other | | 38 | | | 24 | |
| Total deferred tax assets | | 4,287 | | | 4,251 | |
| Less valuation allowance | | (2,222) | | | (2,252) | |
| Deferred tax assets net of valuation allowance | | 2,065 | | | 1,999 | |
| Deferred tax liabilities: | | | | |
| Intangible assets | | 188 | | | 228 | |
| Plant, equipment and technology | | 44 | | | 89 | |
| Outside basis differences | | 110 | | | 71 | |
| Unrealized FX on U.S. dollar debt and other financing cost | | — | | | 2 | |
| Total deferred tax liabilities | | 342 | | | 390 | |
| Net deferred tax asset | | $ | 1,723 | | | $ | 1,609 | |
|
| | | | | | | | |
| (in millions) | | 2017 | | 2016 |
| Deferred tax assets: | | | | |
| Tax loss carryforwards | | $ | 2,485 |
| | $ | 1,328 |
|
| Tax credit carryforwards | | 59 |
| | 422 |
|
| Scientific Research and Experimental Development pool | | 57 |
| | 53 |
|
| Research and development tax credits | | 140 |
| | 129 |
|
| Provisions | | 589 |
| | 563 |
|
| Deferred revenue | | 11 |
| | 15 |
|
| Deferred financing and share issue costs | | 61 |
| | 391 |
|
| Share-based compensation | | 22 |
| | 37 |
|
| Total deferred tax assets | | 3,424 |
| | 2,938 |
|
| Less valuation allowance | | (2,001 | ) | | (1,857 | ) |
| Net deferred tax assets | | 1,423 |
| | 1,081 |
|
| Deferred tax liabilities: | | | | |
| Intangible assets | | 2,014 |
| | 4,044 |
|
| Outside basis differences | | 28 |
| | 2,165 |
|
| Plant, equipment and technology | | 18 |
| | 24 |
|
| Prepaid expenses | | 35 |
| | 80 |
|
| Other | | 75 |
| | 56 |
|
| Total deferred tax liabilities | | 2,170 |
| | 6,369 |
|
| Net deferred tax liability | | $ | (747 | ) | | $ | (5,288 | ) |
The following table presents a reconciliation of the deferred tax asset valuation allowance for 2021, 2020 and 2019:
| | | | | | | | | | | | | | | | | | | | |
| (in millions) | | 2021 | | 2020 | | 2019 |
| Balance, beginning of year | | $ | 2,252 | | | $ | 2,831 | | | $ | 2,913 | |
| Charged to Benefit from income taxes | | (63) | | | (773) | | | 13 | |
| Charged to other accounts | | 33 | | | 194 | | | (95) | |
| Balance, end of year | | $ | 2,222 | | | $ | 2,252 | | | $ | 2,831 | |
The Company’s U.S. interest expense is subject to limitation rules which limit U.S. interest expense to 30% of adjusted taxable income, defined similar to EBITDA through 2021 and EBIT thereafter. Disallowed interest can be carried forward indefinitely and any unused interest deduction assessed for recoverability. On December 22, 2017,March 27, 2020, the TaxCoronavirus Aid, Relief, and Economic Security Act (“CARES Act”) was signed into law and includes a numberlaw. The CARES Act also amended the annual limitation on the deduction of changesinterest in the U.S. tax law, most notablyfollowing respects: (i) increasing the limitation to 50% of adjusted taxable income (“ATI”), (ii) providing a reductionrule for a partnership’s 2019 section 163(j)-disallowed interest expense and (iii) allowing an election to apply 2019 ATI to the 2020 section 163(j) computation. For corporations, the increase to 50% of the U.S. corporate income tax rate from 35%ATI applies to 21% for taxall taxable years beginning after December 31, 2017.in 2019 or 2020 and permits taxpayers whose 2020 income will decrease from its 2019 level, an election to apply their 2019 ATI, rather than their 2020 ATI, to their 2020 computation. The Tax Act also implements a modified territorial tax system that includes a one-time transition tax on the accumulated previously untaxed earnings of foreign subsidiaries (the “Transition Toll Tax”) equalCompany considered such provisions and expects to 15.5% (reinvestedfully utilize any interest carry forwards in liquid assets) or 8% (reinvested in non-liquid assets). At the taxpayer's election, the Transition Toll Tax can be paid over an eight-year period without interest, starting in 2018.future periods.
The Company has provided for income taxes including the impacts of the Tax Act, in accordance with the accounting guidance issued by accounting regulatory bodies, the U.S. Internal Revenue Service and state and local governments through the date of this filing. The tax benefit for 2017 is $4,145 million, which includes provisional net tax benefitsthe issuance of $975 million attributablethese Consolidated Financial Statements. Additional guidance and interpretations can be expected and such guidance, if any, could impact future results. While management continues to monitor these matters, the Tax Act. The accounting for the Tax Act includes eachultimate impact, if any, as a result of the following provisional amounts: (i) the re-measurementapplication of certain deferred tax assets and liabilities based on the rates at which they are expected to reverseany guidance issued in the future of $774 million, (ii) the one-time Transition Toll Tax of $88 million and (iii) the decrease in deferred tax assets attributable to certain legal accruals, the deductibility of which is uncertain for U.S. federal income tax purposes, of $10 million. The Company has provisionally utilized net operating losses (“NOLs”) to offset the provisionallycannot be determined $88 million Transition Toll Tax and therefore no amount is recorded as payable. The Company has previously provided for residual U.S. federal income tax on its outside basis differences in certain foreign subsidiaries; however, as the Company's residual U.S. federal tax liability was $299 million prior to the law change, the Company recognized a deferred tax benefit of $299 million in the fourth quarter of 2017.
The provisional amounts included in the Company's 2017 Benefit from income taxes, including the Transition Toll Tax, will be finalized when a full assessment can be completed, and the resulting tax effects will be recognized in the period finalized, as additional income tax provision or benefit. The effects of the Tax Act were recorded as provisional estimated, in part, because of expected future guidance from the SEC, the US Internal Revenue Service, and various state and local governments. The Company's assessment must be finalized within one year of the enactment of the Tax Act, December 22, 2018. Differences between the provisional benefit from income taxes as provided and the benefit or provision for income taxes when finalized are expected, and those differences could be material.
In 2017, the Company liquidated the Company’s top U.S. subsidiary (Biovail Americas Corp.) (“BAC”) in a taxable transaction, resulting in a taxable loss which was of a character that offset certain gains from internal restructurings and third party
divestitures, the excess of which was, under U.S. tax law, able to be carried back to offset previously recognized gains in 2016, 2015 and 2014. This carry back resulted in an increase in the Company’s deferred tax asset for net operating losses previously utilized against such gains. The largest result ofat this transaction for which the Company has recorded a benefit is the reversal of a previously established deferred tax liability of $1,900 million and a net benefit of approximately $400 million primarily related to the carryback of losses.time.
The realization of deferred tax assets is dependent on the Company generating sufficient domestic and foreign taxable income in the years that the temporary differences become deductible. A valuation allowance has been provided for the portion of the deferred tax assets that the Company determined is more likely than not to remain unrealized based on estimated future taxable income and tax planning strategies. AsIn 2021, the valuation allowance decreased by $30 million primarily due to book taxable income in Canada, the change in deferred tax assets in Canada and the use of deferred tax assets in the U.S. in connection with internal restructurings. In 2020, the valuation allowance decreased by $579 million as a result of taxable losses in Canada and losses generated in conjunction with theas offset by a reduction of deferred tax assets due to internal restructurings which occurred in 2017, the valuation allowance increased by $144 million and $491 million, respectively.restructurings. Given the Company’s history of pre-tax losses and expected future losses in Canada, the Company determinedmaintained that there was insufficient objective evidence to release the remaining valuation allowance against Canadian tax loss carryforwards, International Tax Credits (“ITC”) and pooled Scientific Research and Experimental Development Tax Incentive (“SR&ED”) expenditures. The Canadian valuation allowance represents a material portion of the Company's total valuation allowance.
As of December 31, 20172021 and 2016,2020, the Company had accumulated taxtaxable losses available to offset future years’ federal and provincial taxable income in Canada of approximately $5,047$6,669 million and $3,456$6,530 million, respectively. As of December 31, 20172021 and 2016,2020, unclaimed ITCs available to offset future years’ federal taxes in Canada were approximately $37$31 million and $34$37 million, respectively, which expire between 2018 and 2036.in the years 2022 through 2041. In addition, as of December 31, 20172021 and 2016,2020, pooled SR&ED expenditures available to offset against future years’ taxable income in Canada were approximately $210$196 million and $195$206 million, respectively, which may be carried forward indefinitely. As of December 31, 20172021 and 2016,2020, a full valuation allowance against the net Canadian deferred tax assets on the parent company has been provided of $1,576$1,965 million and $1,328$1,966 million, respectively.
As of December 31, 20172021 and 2016,2020, the Company had accumulated taxtaxable losses available to offset future years' federal taxable income in the U.S. of approximately $1,703$266 million and $651$814 million, respectively, including acquired losses which expire between 2021 and 2036. In conjunction within the Sprout Sale, the Company recognized a capital loss and established a valuation allowance on the portion of the loss for which a benefit is not expected to be realized.years 2022 through 2037. While the remaining taxable losses are subject to multiple annual loss limitations as a result of previous ownership changes, the Company believes that the recoverability of the deferred tax assets associated with these taxtaxable losses are more likely than not to be realized. As of December 31, 20172021 and 2016,2020 U.S. research and development credits available to offset future years' federal income taxes in the U.S. were approximately $95$119 million and $91$110 million, respectively, which includes acquired research and development credits and which expire between 2021 and 2036. in the years 2022 through 2042. In the U.S. the Company has a capital loss of which is offset by a full valuation allowance since the benefit is not expected to be realized.
As of December 31, 2017,2021 and 2020, the Company has intentionshad accumulated taxable losses available to amend prior tax filingsoffset future years’ taxable income in order to deduct foreign taxes rather than take a foreign tax credit. Therefore,Ireland of approximately $10,040 million and $8,387 million, respectively. As of December 31, 2021, the Company has reversed the deferred tax asset and associatedcontinues to have a capital loss which is offset by a valuation allowance of approximately $342 million in U.S. foreign tax credits, including acquired U.S. foreign tax credits. The Company has also provisionally recorded a deferred tax benefit of $84 million for such deduction and has adjusted its expected NOL carryforward accordingly.
The Company has provisionally determined to not recordon the potential tax impacts of GILTI associated with the unremitted earningsportion of the foreign subsidiaries owned by the Company’s U.S. subsidiaries. In addition, theloss for which a benefit is not expected to be realized.
The Company provides for Canadian taxincome taxes on the unremitted earnings of its direct foreign affiliates except for its direct U.S. subsidiaries. The Company continues to assert that the unremitted earnings of its U.S. subsidiaries will be permanently reinvested and not repatriated to Canada.repatriated. As of December 31, 2017,2021, the Company estimates that there will be no Canadian tax liability attributable to the permanently reinvestedunremitted earnings of its U.S. earnings.subsidiaries. However, distribution of future earnings could be subject to U.S. withholding tax.
As of December 31, 20172021 and 2016,2020, unrecognized tax benefits (including interest and penalties) were $598$927 million and $423$1,025 million, of which $273$271 million and $185$414 million would affect the effective income tax rate, respectively. TheIn 2021 and 2020, the remaining unrecognized tax benefits of approximately $325 million would not impact the effective tax rate as the tax positions are offset against existing tax attributes or are timing in nature. In 20172021 and 2016,2020, the Company recognized net increases to unrecognized tax benefits for current year tax positions of $147$79 million and $16$66 million, respectively. In 2017 and 2016, theThe Company recognized a net increases toreduction of $177 million during 2021 and a net reduction of $42 million during 2020 in the unrecognized tax benefits related to tax positions taken in the prior years of $28 million and $63 million, respectively.years.
The Company provides for interest and penalties related to unrecognized tax benefits in the provision for income taxes. As of December 31, 20172021 and 2016,2020, accrued interest and penalties related to unrecognized tax benefits were approximately $41 million and $39 million.$49 million, respectively. In 2017,2021, the Company recognized a net decrease of approximately $8 million and, in 2020, recognized an increase of approximately $2 million and in 2016 recognized a decrease of approximately $7$4 million of interest and penalties.
penalties, respectively.
The Company and one1 or more of its subsidiaries file federal income tax returns in Canada, the U.S., and other foreign jurisdictions, as well as various provinces and states in Canada and the U.S. The Company and its subsidiaries have open tax years, primarily from 20052012 to 2016,2020, with significant taxing jurisdictions, respectively, including Canada and the U.S. These open years contain certain matters that could be subject to differing interpretations of applicable tax laws and regulations and tax treaties, as they relate to the amount, timing, or inclusion of revenues and expenses, or the sustainability of income tax positions of the Company and its subsidiaries. Certain of these tax years are expected to remain open indefinitely.
|
| | | | | | | |
| Jurisdiction: | | Open Years |
| United States - Federal | | 2015 - 20172020 |
| Canada | | 20052012 - 20162020 |
| Germany | | 2014 - 2020 |
| France | | 2013 - 20162020 |
FranceChina | | 20132016 - 20162020 |
ChinaIreland | | 20152016 - 20162020 |
IrelandNetherlands | | 20132017 - 20162020 |
NetherlandsAustralia | | 2015 - 2016 |
Australia | | 2011 - 2020 |
| Luxembourg | | 2017 - 2020 |
The Internal Revenue Service (the "IRS") completed its examinations of the Company’s U.S. consolidated federal income tax returns for the years 2013 and 2014. There were no material adjustments to the Company's taxable income as a result of these examinations. However, the 2014 tax year remains open to the extent of a 2017 capital loss carried back to that year. Additionally, the IRS has selected for examination the Company's annual tax filings for 2015 and 2016 and the Company's short period tax return for the period ended September 8, 2017, which was filed as a result of the Company's internal restructuring efforts during 2017. In February 2018,2017, the Company settledundertook an internal restructuring in the 2013 - 2014 U.S. Federalform of what is commonly known as a Granite Trust transaction, which resulted in a recorded capital loss (the “2017 Capital Loss”). Recently, the Company has received a notice of proposed adjustment from the IRS that would disallow the 2017 Capital Loss and expects to receive a notice of proposed tax deficiency from the IRS, after which the Company intends to contest proposed tax deficiency through the IRS administrative appeals process. If the Company were ultimately unsuccessful in defending its position, and all or a substantial portion of the 2017 Capital Loss deduction were disallowed, the Company could be liable for additional taxes (excluding penalties and interest) of up to $2,100 million, which could have an adverse effect on the Company’s financial condition and results of operations. The Company intends to vigorously defend its position, including through appropriate litigation, if necessary, and ultimately believes it will sustain its deduction of the 2017 Capital Loss, and, accordingly, no income tax examination, the adjustments for which were not material. The Company remains under examination for various state tax audits in the U.S. for years 2002 through 2013. provision has been recorded.
The Company is currently under examination by the Canada Revenue Agency (“CRA”) for three separate cycles: (a) years 20052012 through 2006,2013 (b) years 20072014 through 20092015, and (c) years 20122016 through 2013. In February 2013,2017. The Company believes that the Company received from the Canada Revenue Agency a proposedCRA will open an audit adjustmentcycle for the years 2018 – 2019 in 2022. The Company settled the tax years from 2005 through 2007.2009
with the CRA. The Company disagrees with the adjustments and hashad previously filed a Notice of Objection. The total proposed adjustment will result in a lossObjection related to the assessment of tax attributes which are subject tothese years and reduced net operating losses with a full valuation allowance and willby CAD 44 million to close these years.The adjustment did not result in a material change to the provision for income taxes. The Canada Revenue AgencyCRA audits of the 2010 and 2011 tax years were closed in 2016 and resulted in no material adjustments. The Company received an assessment for certain transfer pricing matters in 2012 and 2013 for CAD 85 million and CAD 90 million, respectively. The Company disagrees with the adjustments and has filed a Notice of Objection for 2012 and 2013. The Company settled certain transfer pricing matters relating the 2015 and 2016 tax years resulting in a reduction to its NOLs of approximately CAD 21 million for 2015 and will receive a further adjustment for 2016. The expected adjustment for 2016 will reduce NOLs currently offset by a full valuation allowance.
In 2014, theThe Company’s subsidiaries in Australia were notifiedGermany are under audit for tax years 2014 through 2016. At this time, the Company does not expect that proposed adjustments, if any, would be material to the Australian Taxation Office would conduct an audit of the 2010 and 2011 tax years. Company's Consolidated Financial Statements.
The Company’s subsidiaries in Australia are under audit by the Australian TaxationTax Office for various years beginning in 2010. On August 8, 2017, the Australian Taxation Office issued a notice of assessment for the tax years 2011 through 2017 in the aggregate amount of $117 million, which includes penalties and interest. The Company disagrees with the assessment and continues to believe that its tax positions are appropriate and supported by the facts, circumstances and applicable laws. The Company intends to defend its tax position in this matter vigorously. To this end, the Companyvigorously and has filed a holding objection against the assessment by the Australian Taxation Office and intends to file an objection in March of 2018. Additionally, the Companyhas secured a bank guarantee to cover any potential cash outlays regarding this assessment. The bank guarantee has been reduced over time to now be an immaterial value. Negotiations with the Australian Tax Office are ongoing and the Company expects to enter into a Settlement Deed in early 2022 with no material adverse results.
The Company's U.S. affiliates remain under examination for various state tax audits in the U.S. for years 2015 through 2020.
Certain affiliates of the Company in regions outside of Canada, the U.S., Germany, Luxembourg and Australia are currently under examination by relevant taxing authorities, and all necessary accruals have been recorded, including uncertain tax benefits. At this time, the Company does not expect that proposed adjustments, if any, would be material to the Company's Consolidated Financial Statements.
The following table presents a reconciliation of the unrecognized tax benefits for 2017, 20162021, 2020 and 2015:2019:
| | | (in millions) | | 2017 | | 2016 | | 2015 | (in millions) | | 2021 | | 2020 | | 2019 |
| Balance, beginning of year | | $ | 423 |
| | $ | 344 |
| | $ | 345 |
| Balance, beginning of year | | $ | 1,025 | | | $ | 1,002 | | | $ | 654 | |
| Acquisition of Salix | | — |
| | — |
| | 15 |
| |
| Additions based on tax positions related to the current year | | 145 |
| | 16 |
| | 5 |
| Additions based on tax positions related to the current year | | 79 | | | 66 | | | 361 | |
| Additions for tax positions of prior years | | 57 |
| | 96 |
| | 23 |
| Additions for tax positions of prior years | | 121 | | | 171 | | | 63 | |
| Reductions for tax positions of prior years | | (18 | ) | | (20 | ) | | (39 | ) | Reductions for tax positions of prior years | | (129) | | | (209) | | | (58) | |
| Lapse of statute of limitations | | (9 | ) | | (13 | ) | | (5 | ) | Lapse of statute of limitations | | (169) | | | (5) | | | (18) | |
| Balance, end of year | | $ | 598 |
| | $ | 423 |
| | $ | 344 |
| Balance, end of year | | $ | 927 | | | $ | 1,025 | | | $ | 1,002 | |
The Company estimatesbelieves it is reasonably possible that the total amount of unrecognized tax benefits realized duringat December 31, 2021 could decrease by approximately $104 million in the next 12twelve months will not be material.as a result of the resolution of certain tax and transfer pricing audits and other events.
| |
19. | EARNINGS (LOSS) PER SHARE |
Earnings (loss)18.LOSS PER SHARE
Loss per share attributable to Valeant Pharmaceuticals International,Bausch Health Companies Inc. for 2017, 20162021, 2020 and 20152019 were calculated as follows:
| | | | | | | | | | | | | | | | | | | | |
| (in millions, except per share amounts) | | 2021 | | 2020 | | 2019 |
| Net loss attributable to Bausch Health Companies Inc. | | $ | (948) | | | $ | (560) | | | $ | (1,788) | |
| Basic and diluted weighted-average common shares | | 358.9 | | | 355.0 | | | 352.1 | |
| Basic and diluted loss per share attributable to Bausch Health Companies Inc. | | $ | (2.64) | | | $ | (1.58) | | | $ | (5.08) | |
|
| | | | | | | | | | | | |
| (in millions, except per share amounts) | | 2017 | | 2016 | | 2015 |
| Net income (loss) attributable to Valeant Pharmaceuticals International, Inc. | | $ | 2,404 |
| | $ | (2,409 | ) | | $ | (292 | ) |
| | | | | | | |
| Basic weighted-average number of common shares outstanding | | 350.2 |
| | 347.3 |
| | 342.7 |
|
| Diluted effect of stock options, RSUs and other | | 1.6 |
| | — |
| | — |
|
| Diluted weighted-average number of common shares outstanding | | 351.8 |
| | 347.3 |
| | 342.7 |
|
| | | | | | | |
| Earnings (loss) per share attributable to Valeant Pharmaceuticals International, Inc. | | | | | | |
| Basic | | $ | 6.86 |
| | $ | (6.94 | ) | | $ | (0.85 | ) |
| Diluted | | $ | 6.83 |
| | $ | (6.94 | ) | | $ | (0.85 | ) |
In 20162021, 2020 and 2015,2019, all potential common shares issuable for stock options and RSUs were excluded from the calculation of diluted loss per share, as the effect of including them would have been anti-dilutive. The dilutive effect of potential common shares issuable for stock options and RSUs on the weighted-average number of common shares outstanding would have been as follows:approximately 4,932,000, 3,154,000 and 5,106,000 common shares for 2021, 2020 and 2019, respectively.
|
| | | | | |
| (in millions) | 2016 | | 2015 |
| Basic weighted-average number of common shares outstanding | 347.3 |
| | 342.7 |
|
| Dilutive effect of stock options and RSUs | 2.8 |
| | 6.1 |
|
| Diluted weighted-average number of common shares outstanding | 350.1 |
| | 348.8 |
|
In 2017, 2016Additionally, in 2021, 2020 and 2015,2019, stock options, time-based RSUs and performance-based RSUs to purchase approximately 7,050,000, 7,825,0003,428,000, 9,551,000 and 1,587,0002,598,000 common shares of the Company, respectively, were not included in the computation of diluted earnings per share because the effect would have been anti-dilutive under the treasury stock method. During 2021, an additional 156,000 performance-based RSUs were not included in the computation of diluted earnings per share as the required performance conditions had not been met.
| |
20. | SUPPLEMENTAL CASH FLOW DISCLOSURES |
The 19.SUPPLEMENTAL CASH FLOW DISCLOSURES
Supplemental cash flow disclosures for 2017, 20162021, 2020 and 2015 were2019 are as follows:
| | | | | | | | | | | | | | | | | | | | |
| (in millions) | | 2021 | | 2020 | | 2019 |
| Other payments | | | | | | |
| Interest paid | | $ | 1,419 | | | $ | 1,474 | | | $ | 1,537 | |
| Income taxes paid | | $ | 240 | | | $ | 162 | | | $ | 172 | |
20.LEGAL PROCEEDINGS
|
| | | | | | | | | | | | |
| (in millions) | | 2017 | | 2016 | | 2015 |
| Non-Cash Investing and Financing Activities | | | | | | |
| Contingent and deferred consideration for businesses acquired, at fair value | | $ | — |
| | $ | — |
| | $ | 1,696 |
|
| Debt assumed in acquisition of businesses, at fair value | | $ | — |
| | $ | — |
| | $ | 3,129 |
|
| Other Payments | | | | | | |
| Interest paid | | $ | 1,708 |
| | $ | 1,718 |
| | $ | 1,269 |
|
| Income taxes paid | | $ | 179 |
| | $ | 149 |
| | $ | 95 |
|
From time to time, the Company becomes involved in various legal and administrative proceedings, which include product liability, intellectual property, commercial, tax, antitrust, governmental and regulatory investigations, related private litigation and ordinary course employment-related issues. From time to time, the Company also initiates actions or files counterclaims. The Company could be subject to counterclaims or other suits in response to actions it may initiate. The Company believes that the prosecution of these actions and counterclaims is important to preserve and protect the Company, its reputation and its assets. Certain of these proceedings and actions are described below. Going forward, in the Company's subsequent Quarterly Reports on Form 10-Q, the Company will only include a description of these matters to the extent there has been a material update with respect thereto during the applicable quarter or to the extent otherwise required by law.
On a quarterly basis, the Company evaluates developments in legal proceedings, potential settlements and other matters that could increase or decrease the amount of the liability accrued. As of December 31, 2017,2021, the Company's consolidated balance
sheetConsolidated Balance Sheets includes accrued current loss contingencies of $243 million and non-current loss contingencies of $20$1,890 million related to matters which arethe Company believes a potential resolution or settlement is both probable and reasonably estimable. For all other matters, unless otherwise indicated, the Company cannot reasonably predict the outcome of these legal proceedings, nor can it estimate the amount of loss, or range of loss, if any, that may result from these proceedings. An adverse outcome in certain of these proceedings could have a material adverse effect on the Company’s business, financial condition and results of operations, and could cause the market value of its common shares and/or debt securities to decline.
Governmental and Regulatory Inquiries
Letter from the U.S. Department of Justice Civil Division and the U.S. Attorney’s Office for the Eastern District of Pennsylvania
The Company has received a letter dated September 10, 2015 from the U.S. Department of Justice Civil Division and the U.S. Attorney’s Office for the Eastern District of Pennsylvania stating that they are investigating potential violations of the False Claims Act arising out of Biovail Pharmaceuticals, Inc.'s treatment of certain service fees under agreements with wholesalers when calculating and reporting Average Manufacturer Prices in connection with the Medicaid Drug Rebate Program. The letter requests that the Company voluntarily produce documents and information relating to the investigation. The Company produced certain documents and clarifying information in response to the government’s request and is cooperating with the government’s investigation. The Company cannot predict the outcome or the duration of this investigation or any other legal proceedings or any enforcement actions or other remedies that may be imposed on the Company arising out of these investigations.
Investigation by the U.S. Attorney's Office for the District of Massachusetts - re OraPharma
In October 2015,August 2019, the Company received a subpoena from the U.S. Attorney's Office for the District of Massachusetts, requesting materials including documents concerning the sales, marketing, coverage and in June 2016, the Company received a follow up subpoena. The materials requested, pursuant to the subpoenasreimbursement of Arestin®, including related support services, and follow-up requests, include documents and witness interviews with respect to the Company’s patient assistance programs and contributions to patient assistance organizations that provide financial assistance to Medicare patients taking products sold by the Company, and the Company’s pricing of its products. other matters.
The Company is cooperating with this investigation.The Company cannot predict the outcome or the duration of this investigation or any other legal proceedings or any enforcement actions or other remedies that may be imposed on the Company arising out of this investigation.
Investigation by the U.S. Attorney's Office for the Southern District of New York
In October 2015, the Company received a subpoena from the U.S. Attorney's Office for the Southern District of New York. The materials requested, pursuant to the subpoena and follow-up requests, include documents and witness interviews with respect to the Company’s patient assistance programs; its former relationship with Philidor and other pharmacies; the Company’s accounting treatment for sales by specialty pharmacies; information provided to the Centers for Medicare and Medicaid Services; the Company’s pricing (including discounts and rebates), marketing and distribution of its products; the Company’s compliance program; and employee compensation. The Company is cooperating with this investigation. The Company cannot predict the outcome or the duration of this investigation or any other legal proceedings or any enforcement actions or other remedies that may be imposed on the Company arising out of this investigation.
SEC Investigation
Beginning in November 2015, the Company has received from the staff of the Los Angeles Regional Office of the SEC subpoenas for documents, as well as various document, testimony and interview requests, related to its investigation of the Company, including requests concerning the Company's former relationship with Philidor, its accounting practices and policies, its public disclosures and other matters. The Company is cooperating with the SEC in this matter. The Company cannot predict the outcome or the duration of the SEC investigation or any other legal proceedings or any enforcement actions or other remedies that may be imposed on the Company arising out of the SEC investigation.
Investigation by the State of North Carolina Department of Justice
In the beginning of March 2016, the Company received an investigative demand from the State of North Carolina Department of Justice. The materials requested relate to the Company's Nitropress®, Isuprel® and Cuprimine® products, including documents relating to the production, marketing, distribution, sale and pricing of, and patient assistance programs covering, such products, as well as issues relating to the Company's pricing decisions for certain of its other products. The Company is cooperating with this investigation. The Company cannot predict the outcome or the duration of this investigation or any other
legal proceedings or any enforcement actions or other remedies that may be imposed on the Company arising out of this investigation.
Request for Information from the AMF
On April 12, 2016, the Company received a request letter from the Autorité des marchés financiers (the “AMF”) requesting documents concerning the work of the Company’s ad hoc committee of independent directors (the “Ad Hoc Committee”) (established to review certain allegations regarding the Company’s former relationship with Philidor and related matters), the Company’s former relationship with Philidor, the Company's accounting practices and policies and other matters. The Company is cooperating with the AMF in this matter. The Company has not received any notice of investigation from the AMF, and the Company cannot predict whether any investigation will be commenced by the AMF or, if commenced, whether any enforcement action against the Company would result from any such investigation.
Investigation by the California Department of Insurance
On or about September 16, 2016, the Company received an investigative subpoena from the California Department of Insurance. The materials requested include documents concerning the Company’s former relationship with Philidor and certain California-based pharmacies, the marketing and distribution of its products in California, the billing of insurers for its products being used by California residents, and other matters. The Company is cooperating with this investigation. The Company cannot predict the outcome or the duration of this investigation or any other legal proceedings or any enforcement actions or other remedies that may be imposed on the Company arising out of this investigation.
Investigation by the State of Texas
On May 27, 2014, the State of Texas served Bausch & Lomb Incorporated (“B&L Inc.”) with a Civil Investigative Demand concerning various price reporting matters relating to the State's Medicaid program and the amounts the State paid in reimbursement for B&L products for the period from 1995 to the date of the Civil Investigative Demand. The Company and B&L Inc. have cooperated fully with the State's investigation and have produced all of the documents requested by the State. In April 2016, the State sent B&L Inc. a demand letter claiming damages in the amount of $20 million. The Company and B&L Inc. have evaluated the letter and disagree with the allegations and methodologies set forth in the letter. The Company and B&L Inc. have responded to the State and are awaiting further response from the State.
California Department of Insurance Investigation
On May 4, 2016, B&L International, Inc. (“B&L International”) received from the Office of the California Insurance Commissioner an administrative subpoena to produce books, records and documents. On September 1, 2016, a revised and corrected subpoena, issued to B&L Inc., was received naming that entity in place of B&L International and seeking additional books records and documents. The requested books, records and documents are being requested in connection with an investigation by the California Department of Insurance and relate to, among other things, consulting agreements and financial arrangements between Bausch & Lomb Holdings Incorporated and its subsidiaries (“B&L”) and health care professionals in California, the provision of ocular equipment, including the Victus® femtosecond laser platform, by B&L to health care professionals in California and prescribing data for prescriptions written by health care professionals in California for certain of B&L’s products, including the Crystalens®, Lotemax®, Besivance® and Prolensa®. B&L Inc. and the Company are cooperating with the investigation. The Company cannot predict the outcome or the duration of this investigation or any other legal proceedings or any enforcement actions or other remedies that may be imposed on the Company arising out of this investigation.
Securities and RICO Class Actions and Related Matters
Valeant U.S. Securities Litigation
FromOn December 16, 2019, the Company announced that it had agreed to settle, subject to final court approval, the consolidated securities class action filed in the U.S. District Court for the District of New Jersey (In re Valeant Pharmaceuticals International, Inc. Securities Litigation, Case No. 15-cv-07658). On January 31, 2021, the District Court
issued an order granting final approval of this settlement. On February 4, 2021, Timber Hill LLC filed a notice of appeal of the Court’s final approval order, which overruled its objections to the allocation of settlement proceeds as between common stock and options. On March 1, 2021, Cathy Lochridge filed a notice of appeal of the Court’s final approval order, which overruled her objections as to the attorneys’ fees awarded to class counsel. On October 22,14, 2021, Timber Hill dismissed its appeal of the final approval order. On December 20, 2021, the Third Circuit denied Lochridge’s appeal. On January 3, 2022, Lochridge filed a petition for rehearing of the appeal en banc which remains pending.
In October 2015, to October 30, 2015, four4 putative securities class actions were filed in the U.S. District Court for the District of New Jersey against the Company and certain current or former officers and directors. Those four actions, captioned Potter v. Valeant Pharmaceuticals International, Inc. et al. (Case No. 15-cv-7658), Chen v. Valeant Pharmaceuticals International, Inc. et al. (Case No. 15-cv-7679), Yang v. Valeant Pharmaceuticals International, Inc. et al. (Case No. 15-cv-7746), and Fein v. Valeant Pharmaceuticals International, Inc. et al. (Case No. 15-cv-7809), all asserted securities fraud claims under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 (the “Exchange Act”) on behalf of putative classes of persons who purchased or otherwise acquired the Company’s stock during various time periods between February 28, 2014 and October 21, 2015. The allegations relaterelated to, among other things, allegedly false and misleading statements and/
or failures to disclose information about the Company’s business and prospects, including relating to drug pricing, the Company’s use of specialty pharmacies, and the Company’s relationship with Philidor.
On May 31, 2016, the Courtcourt entered an order consolidating the four4 actions under the caption In re Valeant Pharmaceuticals International, Inc. Securities Litigation, Case No. 3:15-cv-07658,15-cv-07658. On December 16, 2019, the Company, the current or former officers and appointingdirectors, ValueAct, and the underwriters announced that they agreed to resolve the securities action for $1,210 million, subject to final court approval. This settlement received final approval from the court on January 31, 2021 and will resolve and discharge all claims against the Company in the class action. As part of the settlement, the Company and the other settling defendants admitted no liability as to the claims against it and deny all allegations of wrongdoing. The settlement remains subject to an appeal of the final court approval (as such appeal is further described above). In order to qualify for a lead plaintiffsettlement payment all persons and lead plaintiff’s counsel. entities that purchased or otherwise acquired the Company securities during the class period must have submitted a proof of claim and release form by May 6, 2020. The settlement payments have been paid into an escrow account in accordance with the payment schedule outlined in the settlement agreement. These payments, less certain settlement expenses and attorneys' fees, will remain in escrow until resolution of the appeal of the final court approval of the settlement agreement. The opt-out litigations discussed below remain ongoing. As of December 31, 2021, Restricted cash and other settlement deposits includes an aggregate $1,210 million of: (i) payments in the escrow fund and (ii) certain disbursements for settlement expenses and attorney's fees. Disbursements for attorney's fees remain refundable until resolution of the appeal of the final court approval of the settlement agreement.
On June 24, 2016, the lead plaintiff6, 2018, a putative class action was filed a consolidated complaint naming additional defendants and asserting additional claims based on allegations of false and misleading statements and/or omissions similar to those in the initial complaints. Specifically,U.S. District Court for the consolidated complaintDistrict of New Jersey against the Company and certain current or former officers and directors. This action, captioned Timber Hill LLC, v. Valeant Pharmaceuticals International, Inc., et al., (Case No. 18-cv-10246) (“Timber Hill”), asserts securities fraud claims under Sections 10(b) and 20(a) of the Exchange Act against the Company, and certain current or former officers and directors, as well as claims under Sections 11, 12(a)(2) and 15 of the Securities Act of 1933 (the “Securities Act”) against the Company, certain current or former officers and directors, and certain other parties. The lead plaintiff seeks to bring these claims on behalf of a putative class of persons who purchased call options or sold put options on the Company’s equity securities and senior notes incommon stock during the United States betweenperiod January 4, 2013 and March 15, 2016, including all those who purchasedthrough August 11, 2016. On June 11, 2018, this action was consolidated with In re Valeant Pharmaceuticals International, Inc. Securities Litigation, (Case No. 15-cv-07658). On January 14, 2019, the Company’s securities in the United States in the Company’s debt and stock offerings between July 2013 to March 2015. On September 13, 2016, the Company and the other defendants movedfiled a motion to dismiss the consolidatedTimber Hill complaint. Briefing on the Company'sthat motion was completed on JanuaryFebruary 13, 2017.2019. On April 28, 2017,August 15, 2019, the Court dismissed certain claims arising outdenied the motion to dismiss the Timber Hill action, holding that this complaint was a legal nullity as a result of the Company's private placement offerings and otherwise denied the motions to dismiss. Defendants' answers to the consolidated complaint were filed on August 18, 2017.June 11, 2018 consolidation order.
In addition to the consolidated putative class action, twenty-sixNaN groups of individual investors in the Company’s stock and debt securities at this point have chosen to opt out of the consolidated putative class action and filed securities actions in the U.S. District Court for the District of New Jersey against the Company and certain current or former officers and directors and other such proceedings may be initiated or asserted.directors. These actions are captioned: T. Rowe Price Growth Stock Fund, Inc. v. Valeant Pharmaceuticals International, Inc. (Case No. 16-cv-5034); Equity Trustees Limited as Responsible Entity for T. Rowe Price Global Equity Fund v. Valeant Pharmaceuticals International Inc. (Case No. 16-cv-6127); Principal Funds, Inc. v. Valeant Pharmaceuticals International, Inc. (Case No. 16-cv-6128); BloombergSen Partners Fund LP v. Valeant Pharmaceuticals International, Inc. (Case No. 16-cv-7212); Discovery Global Citizens Master Fund, Ltd. v. Valeant Pharmaceuticals International, Inc. (Case No. 16-cv-7321); MSD Torchlight Partners, L.P. v. Valeant Pharmaceuticals International, Inc. (Case No. 16-cv-7324); BlueMountain Foinaven Master Fund, L.P. v. Valeant Pharmaceuticals International, Inc. (Case No. 16-cv-7328) (“BlueMountain”); Incline Global Master LP v. Valeant Pharmaceuticals International, Inc. (Case No. 16-cv-7494); VALIC Company I v. Valeant Pharmaceuticals International, Inc. (Case No. 16-cv-7496); Janus Aspen Series v. Valeant Pharmaceuticals International, Inc. (Case No. 16-cv-7497) (“Janus Aspen”); Okumus Opportunistic Value Fund, LTD v. Valeant Pharmaceuticals International, Inc. (Case No. 17-cv-6513) (“Okumus”); Lord Abbett Investment Trust- Lord Abbett Short Duration Income Fund, v. Valeant Pharmaceuticals International, Inc. (Case No. 17-cv-6365) (“Lord Abbett”); Pentwater Equity Opportunities Master Fund LTD v. Valeant Pharmaceuticals International, Inc., et al. (Case No. 17-cv-7552), (“Pentwater”); Public Employees’ Retirement System of Mississippi v. Valeant Pharmaceuticals International Inc. (Case No. 17-cv-7625) (“Mississippi”);The Boeing Company Employee Retirement Plans Master Trust v. Valeant Pharmaceuticals International Inc., et al., (Case No. 17-cv-7636) (“Boeing”); State Board of Administration of Florida v. Valeant Pharmaceuticals International Inc. (Case No. 17-cv-12808); The Regents of the University of California v. Valeant Pharmaceuticals International, Inc. (Case No. 17-cv-13488); GMO Trust v. Valeant Pharmaceuticals International, Inc. (Case No. 18-cv-0089); Första AP Fonden v. Valeant Pharmaceuticals International, Inc. (Case No. 17-cv-12088); New York City Employees’ Retirement System v. Valeant Pharmaceuticals International, Inc. (Case No. 18-cv-0032)
(“NYCERS”); Hound Partners Offshore Fund, LP v. Valeant Pharmaceuticals International, Inc. (Case No. 18-cv-08705) (“Hound Partners”); Blackrock Global Allocation Fund, Inc. v. Valeant Pharmaceuticals International, Inc. (Case No. 18-cv-0343) (“Blackrock”); Colonial First State Investments Limited As Responsible Entity for Commonwealth Global Shares Fund 1 v. Valeant Pharmaceuticals International, Inc. (Case No. 18-cv-0383); Bharat Ahuja v. Valeant Pharmaceuticals International, Inc. (Case No. 18-cv-0846); Brahman Capital Corp. v. Valeant Pharmaceuticals International, Inc (Case No. 18-cv-0893); The Prudential Insurance Company of America v. Valeant Pharmaceuticals International, Inc. (Case No. 3:18-cv-01223) (“Prudential”); and Senzar Healthcare Master Fund LP v. Valeant Pharmaceuticals International, Inc. (Case No. 18-cv-02286) (“Senzar”). In addition, one group of individual investors in the Company’s stock securities has chosen to opt out of the consolidated putative class action and filed a securities action in the U.S. District Court for the Southern District of New York against the Company and certain current or former officers and directors. This action is captioned: Hound Partners Offshore Fund, LP; 2012 Dynasty UC LLC v. Valeant Pharmaceuticals International, Inc. (Case No. 18-cv-0076)18-cv-08595) ("2012 Dynasty"); Catalyst Dynamic Alpha Fund v. Valeant Pharmaceuticals International, Inc. (Case No. 18-cv-12673) (“Hound Partners”Catalyst”); Northwestern Mutual Life Insurance Co., v. Valeant Pharmaceuticals International, Inc. (Case No. 18-cv-15286) (“Northwestern Mutual”); Bahaa Aly, et al. v. Valeant Pharmaceuticals International, Inc., (Case No. 18-cv-17393) (“Aly”); Office of the Treasurer as Trustee for the Connecticut Retirement Plans and Trust Funds v. Valeant Pharmaceuticals International, Inc. (Case No. 19-cv-18473) (“Connecticut”); Delaware Public Employees’ Retirement System v. Valeant Pharmaceuticals International, Inc. (Case No. 19-cv-18475) (“Delaware”); Maverick Neutral Levered Fund v. Valeant Pharmaceuticals International, Inc. (Case No. 20-cv-02190) (“Maverick”), Templeton v. Valeant Pharmaceuticals International, Inc. (Case No. 20-cv-05478) (“Templeton”), USAA Mutual Funds Trust, et al. v. Valeant Pharmaceuticals International, Inc., et al., (Case No. 20-cv-07462) (“USAA”), and GIC Private Ltd. v. Valeant Pharmaceuticals International, Inc., (Case No. 20-cv-07460) (“GIC”). NaN of the NaN opt-out actions have been dismissed; and the total number of remaining opt-out actions pending in the District of New Jersey is NaN actions.
These individual shareholder actions assert claims under Sections 10(b), 18, and 20(a) of the Exchange Act. Certain of these individual actions assert additional claims, including claims under Section 18 of the Exchange Act, Sections 11, 12(a)(2), and 15 of the Securities Act, common law fraud, and negligent misrepresentation, and claims under state law,the New Jersey Racketeer Influenced and Corrupt Organizations Act. These claims are based on alleged purchases of ValeantCompany stock, options, and/or debt at various times between January 3, 2013 and August 10, 2016. Plaintiffs in the Lord Abbett, Boeing, Mississippi, NYCERS, and Hound Partners cases additionally assert claims under the New Jersey Racketeer Influenced and Corrupt Organizations Act. The allegations in the complaints are similar to those made by plaintiffs in the putative class action.
Plaintiffs Motions to dismiss have been filed and in most cases decided in many of these individual actions. To date, the Janus Aspen action amended the complaint on April 28, 2017. Defendants filed motions for partial dismissal in ten individual actions in the U.S. District Court for the District ofhas dismissed state law claims including New Jersey on June 16, 2017. Briefing of those motions was completed on August 25, 2017. On January 12, 2018, the Court dismissed theRacketeer Influenced and Corrupt Organizations Act, common law fraud, and negligent misrepresentation claims and otherwise denied the motions for partial dismissal.
in certain cases. On October 19, 2017, the U.S. District Court for the District of New Jersey entered an order requesting briefs from the parties regarding whether the Court should stay the putative securities class action and the individual securities law actions filed in the District of New Jersey until after the resolution of criminal proceedings against Andrew Davenport and Gary Tanner. The Court's order immediately stayed all deadlines, briefing schedules, and discovery in securities actions pending completion of the briefing and the Court’s decision. The Court directed the parties to file briefs either supporting or opposing the stay, with such briefs to be concluded by November 8, 2017. On November 29, 2017,January 7, 2019, the Court entered an order staying all proceedings and discovery, except for a document production in the putative securities class action and the briefing and resolutionstipulation of any motions to dismiss, in the putative securities class action and all current and subsequent related individual securities law actions filed in the District of New Jersey.
Defendants filed motions for partialvoluntary dismissal in the Lord Abbett, Mississippi, and Boeing cases on December 6, 2017. Briefing on those motions will be completed by March 15, 2018. DefendantsSenzar Healthcare Master Fund LP v. Valeant Pharmaceuticals International, Inc. (Case No. 18-cv-02286) opt-out action, closing the case.On September 10, 2019, the Court granted defendants’ motion to dismiss all claims in the Bahaa Aly v. Valeant Pharmaceuticals International, Inc. (“Aly”) (Case No. 18-cv-17393) opt-out action. On October 9, 2019, the Aly Plaintiffs filed actionsa notice of appeal to the United States Court of Appeals for partialthe Third Circuit. On June 16, 2021, the Court of Appeals granted plaintiffs’ appeal in the Aly action. This action has been remanded to the District Court. On June 19, 2020, the Court entered stipulations of voluntary dismissal in the Okumus case in December 18, 2017. Catalyst, Mississippi, Connecticut, and Delaware actions.On February 1, 2018,July 13, 2020, the parties filedCourt entered a stipulation and proposed order in the Okumus case that would withdraw Defendants’ motions for partial dismissal, and dismiss Okumus’ state-law claims. The Court entered that stipulation on February 2, 2018. Defendants filed a motion for partial dismissal in the Pentwater case on February 13, 2018. Briefing on that motion will be completed by March 27, 2018. Defendants filed motions for partialof voluntary dismissal in the NYCERS action. On December 30, 2020, the Court entered a stipulation of voluntary dismissal in the BlueMountain action. On February 18, 2021, and Blackrock cases on February 23, 2018. Briefing on those motions will be completed byMarch 10, 2021, the Court entered stipulations of voluntary dismissal in the T. Rowe, BloombergSen, Principal Funds, Pentwater, Lord Abbett, Equity Trustees, and UC Regents actions. On April 30, 2018.2021, the Court entered a stipulation of voluntary dismissal in the Florida SBA action.On July 20, 2021, the Court entered a stipulation of voluntary dismissal in the Janus action.
The Company believesdisputes the claims against it in the remaining individual opt-out complaints and the consolidated putative class action are without merit and intends to defend itself vigorously.
Canadian Securities Class ActionsLitigation
In 2015, six6 putative class actions were filed and served against the Company and certain current or former officers and directors in Canada in the provinces of British Columbia, Ontario and Quebec. These actions are captioned: (a) Alladina v. Valeant, et al. (Case No. S-1594B6) (Supreme Court of British Columbia) (filed November 17, 2015); (b) Kowalyshyn v. Valeant, et al. (CV-15-540593-00CP) (Ontario Superior Court) (filed November 16, 2015); (c) Kowalyshyn et al. v. Valeant, et al. (CV-15-541082-00CP(CV-15-541082-00CP) (Ontario Superior Court) (filed November 23, 2015); (d) O’Brien v. Valeant et al. (CV-15-543678-00CP) (Ontario Superior Court) (filed December 30, 2015); (e) Catucci v. Valeant, et al. (Court File No. 540-17-011743159)540-17-011743159, then Court File No. 500-06-000783-163) (Quebec Superior Court) (filed October 26, 2015); and (f) Rousseau-Godbout v. Valeant, et al. (Court File No. 500-06-000770-152) (Quebec Superior Court) (filed October 27, 2015).
The Alladina, Kowalyshyn, O’Brien, Catucci and Rousseau-GodboutCompany is also aware of 2 additional putative class actions also name, among others, certain current or former directors and officers ofthat were filed with the applicable court but which have not been served on the Company. These actions are captioned: (i) Okeley v. Valeant, et al. (Case No. S-159991) (Supreme Court of British Columbia) (filed December 2, 2015); and (ii) Sukenaga v Valeant et al. (CV-15-540567-00CP) (Ontario
Superior Court) (filed November 16, 2015), and the factual allegations made in these actions are substantially similar to those outlined herein.
The Rosseau-Godbout action was subsequently stayed by the Quebec Superior Court by consent order.
Each of the five remaining actions allegesgenerally allege violations of Canadian provincial securities legislation on behalf of putative classes of persons who purchased or otherwise acquired securities of the Company for periods commencing as early as January 1, 2013 and ending as late as November 16, 2015. The alleged violations relate to among other things, alleged misrepresentations and/or failures to disclose material information about the Company’s business and prospects, relating to drug pricing,same matters described in the Company’s policies and accounting practices, the Company’s useU.S. Securities Litigation description above.
Each of specialty pharmacies and, in particular, the Company’s relationship with Philidor. The Alladina, Kowalyshyn and O’Brien actions also assert common law claims for negligent misrepresentation, and the Alladina claim additionally asserts common law negligence, conspiracy, and claims under the British Columbia Business Corporations Act, including the statutory oppression remedies in that legislation. The Catucci action asserts claims under the Quebec Civil Code, alleging the Company breached its duty of care under the civil standard of liability contemplated by the Code.
The Company is aware of two additionalthese putative class actions, that have been filed with the applicable court but which have not yet been served on the Company. These actions are captioned: (i) Okeley v. Valeant, et al. (Case No. S-159991) (Supreme Court of British Columbia) (filed December 2, 2015); and (ii) Sukenaga v Valeant et al. (CV-15-540567-00CP) (Ontario Superior Court) (filed November 16, 2015), and the factual allegations made in these actions are substantially similar to those outlined above. The Company has been advised that the plaintiffs in these actions do not intend to pursue the actions.
On June 10, 2016, the Ontario Superior Court of Justice rendered its decision on carriage motions (motions held to determine who will have carriage of the class action) heard on April 8, 2016, provisionally staying the O'Brien action, in favor of the
Kowalyshyn action. On September 15, 2016, in response to an arrangement between the plaintiffs in the Kowalyshyn action and the O’Brien action, the court ordered both that the Kowalyshyn action be consolidated with the O’Brien action and that the consolidated action be stayed in favor ofother than the Catucci action pending either the further order of the Ontario court or the determination of the motion for leave in the Catucci action.
Quebec Superior Court, was discontinued. In the Catucci action, motions for leave under the Quebec Securities Act and for authorization as a class proceeding were heard the week of April 24, 2017, with the motion judge reserving her decision. Prior to that hearing, the parties resolved applications by the defendants concerning jurisdiction and class composition, with the plaintiffs agreeing to revise the definition of the proposed class to exclude claims in respect of Valeant securities purchased in the United States. Onon August 29, 2017, the judge released her reasons for judgment grantinggranted the plaintiffs leave to proceed with their claims under the Quebec Securities Act and authorizingauthorized the class proceeding. On October 12, 2017, Valeant and the other defendants filed applications for leave to appeal from certain aspects of the decision authorizing the class proceeding. The applications for leave to appeal were heard on November 22, 2017 and were dismissed on November 30, 2017. On October 26, 2017, the plaintiffs issued their Judicial Application Originating Class Proceedings.
After a hearing on November 11, 2019, the court approved a settlement in the Catucci action between the class members and the Company’s auditors and the action was dismissed as against them.
On August 4, 2020, the Company entered into a settlement agreement with the plaintiffs in Catucci, on behalf of the class, pursuant to which it agreed to resolve the Catucci action for the amount of CAD 94 million plus payment of an additional amount to cover notice and settlement administration costs and disbursements. As part of the settlement, the Company and the other defendants admitted no liability as to the claims against it and deny all allegations of wrongdoing. Court approval of the settlement was granted after a hearing on November 16, 2020. The Catucci action has now been dismissed against the Company, its current and former directors and officers, its underwriters and its insurers.
In addition to the class proceedings described above, on April 12, 2018, the Company was served with an application for leave filed in the Quebec Superior Court of Justice to pursue an action under the Quebec Securities Act against the Company and certain current or former officers and directors. This proceeding is captioned BlackRock Asset Management Canada Limited et al. v. Valeant, et al. (Court File No. 500-11-054155-185). The allegations in the proceeding are similar to those made by plaintiffs in the Catucci class action. On June 18, 2018, the same BlackRock entities filed an originating application (Court File No. 500-17-103749-183) against the same defendants asserting claims under the Quebec Civil Code in respect of the same alleged misrepresentations.
The Company is aware that certain other members of the Catucci class exercised their opt-out rights prior to the June 19, 2018 deadline. On February 15, 2019, 1 of the entities which exercised its opt-out rights, the California State Teachers' Retirement System (“CalSTRS”), served the Company with an application in the Quebec Superior Court of Justice for leave to pursue an action under the Quebec Securities Act against the Company, certain current or former officers and directors of the Company and its auditor. That proceeding is captioned California State Teachers’ Retirement System v. Bausch Health Companies Inc. et al. (Court File No. 500-11-055722-181). The allegations in the proceeding are similar to those made by the plaintiffs in the Catucci class action and in the BlackRock opt-out proceedings. On that same date, CalSTRS also served the Company with proceedings (Court File No. 500-17-106044-186) against the same defendants asserting claims under the Quebec Civil Code in respect of the same alleged misrepresentations.
On February 3, 2020, the Quebec Superior Court granted the applications of CalSTRS and BlackRock for leave to pursue their respective actions asserting claims under the Quebec Securities Act. On June 16, 2020, the Quebec Court of Appeal granted the defendants leave to appeal that decision. The appeal was heard on September 29, 2021 and, by judgment dated October 29, 2021, the appeals were dismissed.
On October 8 and 9, 2020, respectively, CalSTRS amended its proceedings to, among other things, include a new alleged misrepresentation concerning the accounting treatment of “price appreciation credits” in respect of Glumetza® during the period covered by the claims. A hearing was held on February 17, 2021 with respect to whether CalSTRS would be permitted to file the proposed amended proceedings. On June 9, 2021, the Quebec Superior Court granted the Company’s application to strike the new allegations from its Quebec Securities Act claim, but permitted the amendments to its claim under the Quebec Civil Code. On December 8, 2021, CalSTRS delivered its amended pleadings.
On March 17, 2021, 4 additional opt-outs from the Catucci class issued a Statement of Claim in the Ontario Superior Court of Justice. That proceeding is captioned The Bank of Korea et al. v. Valeant Pharmaceuticals International Inc. et al. (Court File No. 21-00658966-0000). In addition, these plaintiffs also served and filed a motion for leave to pursue claims under the Ontario Securities Act. The allegations in this proceeding are similar to those made by the plaintiffs in the Catucci class action and the plaintiffs in the opt-out actions described above.
The Company believes that it has viable defenses in each of these actions. In each case, the Company intends to defend itself vigorously.
RICO Class Actions
Between May 27, 2016 and September 16, 2016, 3 actions were filed in the U.S. District Court for the District of New Jersey against the Company and various third-parties (these actions were subsequently consolidated), alleging claims under the federal Racketeer Influenced Corrupt Organizations Act (“RICO”) on behalf of a putative class of certain third-party payors that paid claims submitted by Philidor for certain Company-branded drugs between January 2, 2013 and November 9, 2015. The consolidated complaint alleges, among other things, that the defendants committed predicate acts of mail and wire fraud by submitting or causing to be submitted prescription reimbursement requests that misstated or omitted facts regarding: (1) the identity and licensing status of the dispensing pharmacy; (2) the resubmission of previously denied claims; (3) patient co-pay waivers; (4) the availability of generic alternatives; and (5) the insured’s consent to renew the prescription. The complaint further alleges that these acts constitute a pattern of racketeering or a racketeering conspiracy in violation of the RICO statute and caused plaintiffs and the putative class unspecified damages, which may be trebled under the RICO statute. On August 4, 2021, the Company executed a stipulation of settlement for this action and, on August 17, 2021, the Court preliminarily approved the settlement. On December 6, 2021 the Special Master overseeing this litigation issued a report and recommendation recommending final approval of the settlement, and on February 22, 2022 the settlement was approved by the district court.
Insurance Coverage Lawsuit
On December 7, 2017, Valeantthe Company filed a lawsuit against its insurance companies that issued insurance policies covering claims made against Valeant,the Company, its subsidiaries, and its directors and officers during the2 distinct policy periods, (i) 2013-14 and 2015-16 policy periods. (ii) 2015-16.The lawsuit is currently pending in the United States District Court for the District of New Jersey (Valeant Pharmaceuticals International, Inc., et al. v. AIG Insurance Company of Canada, et al.; 3:18-CV-00493).In the lawsuit, Valeantthe Company seeks coverage for (1)for: (i) the costs of defending and resolving claims brought by former shareholders and debtholders of Allergan, Inc. in In re Allergan, Inc. Proxy Violation Securities Litigation and Timber Hill LLC, individually and on behalf of all others similarly situated v. Pershing Square Capital Management, L.P., et al. (such matter described below)(the “Allergan Securities Litigation”) (under the 2013-2014 coverage period), and (2)(ii) costs incurred and to be incurred in connection with the securities and RICO class actions and opt-out cases described in this section and the SEC Investigation and certain of the other investigations described above.
RICO Class Actions
Between May 27, 2016 and September 16, 2016, three virtually identical actions were filedunder “Complete or Inactive Matters” in Note 20, “LEGAL PROCEEDINGS,” to the Company's Consolidated Financial Statements included in the Company's Annual Report on Form 10-K for the year ended December 31, 2020, filed with the SEC and the CSA on February 24, 2021 and under “Governmental and Regulatory Inquiries” and “Complete or Inactive Matters” in Note 21, “LEGAL PROCEEDINGS,” to the Company's Consolidated Financial Statements included in the Company's Annual Report on Form 10-K for the year ended December 31, 2019, filed with the SEC and the CSA on February 19, 2020 (under the 2015-2016 coverage period).
On July 20, 2021, the Company entered into settlement agreements with the insurers in the 2015-2016 coverage period in which the Company agreed to resolve its claims for insurance coverage in connection with the U.S. Securities Litigation and the Canadian Securities Litigation and related opt-out litigation and related investigations matters described above.On that same day, the Company entered into settlement agreements with 2 of its insurers in the 2013-2014 coverage period in which the Company agreed to resolve its claims against those 2 insurers only for insurance coverage in connection with the Allergan Securities Litigation. As a result of all of the settlement agreements entered into with the insurers on July 20, 2021, the Company has received an aggregate sum of $213 million. The Company’s insurance claims with respect to the Allergan Securities Litigation against the remaining insurers in the 2013-2014 coverage period remain pending.
Hound Partners Lawsuit
In October 2018, Hound Partners Offshore Fund, LP, Hound Partners Long Master, LP, and Hound Partners Concentrated Master, LP, filed a lawsuit against the Company in the Superior Court of New Jersey Law Division/Mercer County. This action is captioned Hound Partners Offshore Fund, LP et al., v. Valeant Pharmaceuticals International, Inc., et al. (No. MER-L-002185-18). This suit asserts claims for common law fraud, negligent misrepresentation, and violations of the New Jersey Racketeer Influenced and Corrupt Organizations Act. The Company disputes the claims and intends to vigorously defend this matter.
Antitrust
Generic Pricing Antitrust Litigation
The Company's subsidiaries, Oceanside Pharmaceuticals, Inc. (“Oceanside”), Bausch Health US, LLC (formerly Valeant Pharmaceuticals North America LLC) (“Bausch Health US”), and Bausch Health Americas, Inc. (formerly Valeant Pharmaceuticals International) (“Bausch Health Americas”) (for the purposes of this paragraph, collectively, the “Company”), are defendants in multidistrict antitrust litigation (“MDL”) entitled In re: Generic Pharmaceuticals Pricing
Antitrust Litigation, pending in the United States District Court for the Eastern District of New JerseyPennsylvania (MDL No. 2724, 16-MD-2724). The lawsuits seek damages under federal and state antitrust laws, state consumer protection and unjust enrichment laws and allege that the Company’s subsidiaries entered into a conspiracy to fix, stabilize, and raise prices, rig bids and engage in market and customer allocation for generic pharmaceuticals. The lawsuits, which have been brought as putative class actions by direct purchasers, end payers, and indirect resellers, and as direct actions by direct purchasers, end payers, insurers, States, and various Counties, Cities, and Towns, have been consolidated into the MDL. There are also additional, separate complaints which have been consolidated in the same MDL that do not name the Company or any of its subsidiaries as a defendant. There are cases pending in the Court of Common Pleas of Philadelphia County against the Company and various third parties, allegingother defendants related to the multidistrict litigation, but no complaint has been filed in the cases. The cases have been put in deferred status. The Company disputes the claims underagainst it and continues to defend itself vigorously.
Additionally, Bausch Health Companies Inc. and certain U.S. and Canadian subsidiaries (for the federal Racketeer Influenced Corrupt Organizations Act (“RICO”purposes of this paragraph, collectively “the Company”) have been named as defendants in a proposed class proceeding entitled Kathryn Eaton v. Teva Canada Limited, et al. in the Federal Court in Toronto, Ontario, Canada (Court File No. T-607-20). The plaintiff seeks to certify a proposed class action on behalf of a putative classpersons in Canada who purchased generic drugs in the private sector, alleging that the Company and other defendants violated the Competition Act by conspiring to allocate the market, fix prices, and maintain the supply of certain third party payors that paid claims submitted by Philidor for certain Valeant brandedgeneric drugs, between January 2, 2013 and November 9, 2015 (Airconditioning and Refrigeration Industry Health and Welfare Trust Fund et al. v. Valeant Pharmaceuticals International. Inc. et al., No. 3:16-cv-03087, Plumbers Local Union No. 1 Welfare Fund v. Valeant Pharmaceuticals International Inc. et al., No. 3:16-cv-3885 and N.Y. Hotel Trades Council et al v. Valeant Pharmaceuticals International. Inc. et al., No. 3:16-cv-05663). On November 30, 2016, the Court entered an order consolidating the three actionsseeking damages under the caption In re Valeant Pharmaceuticals International, Inc. Third-Party Payor Litigation, No. 3:16-cv-03087. A consolidatedfederal law. The proposed class action complaint was filed on December 14, 2016. The consolidated complaint alleges, among other things, thatcontains similar allegations to the Defendants committed predicate actsIn re: Generic Pharmaceuticals Pricing Antitrust Litigation pending in the United States Court for the Eastern District of mail and wire fraud by submitting or causing to be submitted prescription reimbursement requests that misstated or omitted facts regarding (1) the identity and licensing status of the dispensing pharmacy; (2) the resubmission of previously denied claims; (3) patient co-pay waivers; (4) the availability of generic alternatives; and (5) the insured’s consent to renew the prescription. The complaint further alleges that these acts constitute a pattern of racketeering or a racketeering conspiracy in violation of the RICO statute and caused plaintiffs and the putative class unspecified damages, which may be trebled under the RICO statute.Pennsylvania. The Company moved to dismissdisputes the consolidated complaint on February 13, 2017. Briefing of the motion was completed on May 17, 2017. On March 14, 2017, other defendants filed a motion to stay the RICO class action pending the resolution of criminal proceedingsclaims against Andrew Davenportit and Gary Tanner. The Company did not oppose the motion to stay. On August 9, 2017, the Court granted the motion to stay and entered an order staying all proceedings in the case and accordingly terminating other pending motions.
The Company believes these claims are without merit and intends towill defend itself vigorously.
Glumetza State-Law Insurer Litigation
Antitrust
Contact LensOn February 8, 2021, the insurer plaintiff from the federal In re Glumetza Antitrust Class Actions
BeginningLitigation, Case No. 3:19-cv-05822-WHA (N.D. Cal.) (the “In re Glumetza Antitrust Litigation”) (discussed in March 2015,further detail below) filed an action asserting its indirect (state law) claims in the Superior Court of Alameda County, California against the Company and others (the “State Court Action”). The State Court Action alleges that a number2012 settlement of civil antitrust class action suits were filed by purchasersa patent litigation regarding Glumetza® delayed generic entry in exchange for an agreement not to launch an authorized generic of contact lenses against B&L Inc., threeGlumetza® or grant any other contact lens manufacturers, andcompany a contact lens distributor, alleginglicense to do so. The State Court Action alleges that the defendants engagedsettlement agreement resulted in an anticompetitive schemehigher prices for Glumetza® and its generic equivalent both prior to eliminate price competition on certain contact lens lines throughand after generic entry. On September 20, 2021, the use of unilateral pricing policies. The plaintiffs in such suits alleged violations of Section 1 of the Sherman Act, 15 U.S.C. § 1, and of various state antitrust and consumer protection laws, and further allegedparties stipulated that the defendants have been unjustly enriched through their alleged conduct. The plaintiffs sought declaratory and injunctive relief and, where applicable, treble, punitive and/or other damages, including attorneys’ fees. By order dated June 8, 2015, the JPML centralized the suitsinsurer plaintiff’s direct opt-out claims from In re Glumetza Antitrust Litigation, discussed below, were deemed asserted in the Middle District of Florida, underState Court Action.
Defendants’ demurrer in the caption In re Disposable Contact Lens Antitrust Litigation, Case No. 3:15-md-02626-HES-JRK, before U.S. District Judge Harvey E. Schlesinger. AfterState Court Action was heard on September 22, 2021. On November 11, 2021, the Class Plaintiffs filed a corrected consolidated class action complaint on December 16, 2015, the defendants jointly moved to dismiss those complaints. On June 16, 2016, the Court granted the Defendants' motion to dismiss with respect to claims brought under the Maryland Consumer Protection Act, butcourt denied the motion in part and granted it in part as to dismisscertain state law claims, with respectleave to claims brought under Sherman Act, Section 1 and other state laws.amend. The actions are currently in discovery. On Marchinsurer plaintiff did not amend the complaint. Defendants’ answers were filed on February 3, 2017, the Class Plaintiffs filed their motion for class certification. On June 15, 2017, defendants filed a motion to oppose the plaintiffs' class certification motion, as well as motions to exclude plaintiffs' expert reports. Defendants likewise have requested an evidentiary hearing on the motions.2022. The Company disputes the claims and intends to vigorously defend all of these actions.this matter.
Intellectual Property
Patent Litigation/Paragraph IV Matters
TheFrom time to time, the Company (and/or certain of its affiliates) is also party to certain patent infringement proceedings in the United States and Canada, including as arising from claims filed by the Company (or that the Company anticipates filing within the required time periods) in connection with Notices of Paragraph IV Certification (in the United States) and Notices of Allegation (in Canada) received from third partythird-party generic manufacturers respecting their pending applications for generic versions of certain products sold by or on behalf of the Company, including OnextonXifaxan® 550mg, Bryhali®, RelistorDuobrii®, AprisoTrulance®, UcerisLumify®, Carac®, Cardizem® and ProlensaRelistor® Injectionin the United States, and WellbutrinJublia® XL and Glumetza®in Canada or other similar suits. These matters are proceeding
On February 17, 2020, the Company and Alfasigma S.p.A. ("Alfasigma") received a Notice of Paragraph IV Certification from Norwich Pharmaceuticals Inc. (“Norwich”), in which Norwich asserted that the U.S. patents listed in the ordinary course. FDA's Orange Book for the Company’s Xifaxan® tablets, 550 mg, are either invalid, unenforceable and/or will not be infringed by the commercial manufacture, use or sale of Norwich’s generic rifaximin tablets, 550 mg, for which an Abbreviated New Drug Application (“ANDA”) has been filed by Norwich. The Company, through its subsidiaries Salix Pharmaceuticals, Inc. and Bausch Health Ireland Limited, holds the New Drug Application for Xifaxan® and owns or exclusively licenses (from Alfasigma) these patents. On March 26, 2020, certain of the Company’s subsidiaries and Alfasigma filed suit against Norwich in the U.S. District Court for the District of Delaware (Case No. 20-cv-00430) pursuant to the Hatch-Waxman Act, alleging infringement by Norwich of one or more claims of the Xifaxan® Patents, thereby triggering a 30-month stay of the approval of Norwich’s ANDA for rifaximin tablets, 550 mg. Xifaxan® is protected by 26 patents covering the composition of matter and the use of Xifaxan® listed in the FDA’s Approved Drug Products with Therapeutic Equivalence Evaluations, or the Orange Book. A 3-day bench trial is scheduled to begin March 21, 2022. The Company
remains confident in the strength of the Xifaxan® patents and will continue to vigorously pursue this matter and defend its intellectual property.
On July 23, 2020, the Company received a Notice of Paragraph IV Certification from Perrigo Israel Pharmaceuticals, Ltd. (now Padagis LLC) (“Padagis”), in which Padagis asserted that certain U.S. patents, each of which is listed in the FDA's Orange Book for Duobrii® (halobetasol propionate and tazarotine) lotion, are either invalid, unenforceable and/or will not be infringed by the commercial manufacture, use or sale of Padagis’ generic lotion, for which an ANDA has been filed by Padagis. On August 28, 2020, the Company filed suit against Padagis pursuant to the Hatch-Waxman Act, alleging infringement by Padagis of one or more claims of the Duobrii® Patents, thereby triggering a 30-month stay of the approval of the Padagis ANDA. On September 3, 2020, this action was consolidated with the action between the Company and Padagis described below, regarding Padagis’ ANDA for generic Bryhali® (halobetasol propionate) lotion. The Company remains confident in the strength of the Duobrii® related patents and will vigorously defend its intellectual property.
On March 20, 2020, the Company received a Notice of Paragraph IV Certification from Padagis, in which Padagis asserted that certain U.S. patents, each of which is listed in the FDA’s Orange Book for Bryhali® (halobetasol propionate) lotion, 0.01% are either invalid, unenforceable and/or will not be infringed by the commercial manufacture, use or sale of Padagis’ generic halobetasol propionate lotion, for which an ANDA has been filed by Padagis. On May 1, 2020, the Company filed suit against Padagis pursuant to the Hatch-Waxman Act, alleging infringement by Padagis of one or more claims of the Bryhali® Patents, thereby triggering a 30-month stay of the approval of the Padagis ANDA for halobetasol propionate lotion. On September 3, 2020, this action was consolidated with the action between the Company and Padagis described above, regarding Padagis’ ANDA for generic Duobrii® (halobetasol propionate and tazarotine) lotion. The Company remains confident in the strength of the Bryhali® Patents and intends to vigorously pursue this matter and defend its intellectual property.
In April 2021, the Company commenced litigation against MSN Laboratories Private Ltd. (“MSN”) and Mylan Pharmaceuticals Inc., (“Mylan”) alleging patent infringement by MSN’s and Mylan’s filing of their ANDA for generic Trulance® (plecanatide) 3mg tablets. This suit had been filed following receipt of a Notice of Paragraph IV Certification from each of MSN and Mylan, in which they had each asserted that the U.S. patents listed in the FDA's Orange Book for the Company’s Trulance® tablets, 3 mg, were either invalid, unenforceable and/or would not be infringed by the commercial manufacture, use or sale of their respective generic plecanatide tablets, 3 mg. The filing of these suits triggered a 30-month stay of the approval of the MSN and Mylan ANDAs for plecanatide tablets. The Company remains confident in the strength of the Trulance® patents and intends to vigorously pursue this matter and defend its intellectual property.
In September 2021, the Company commenced litigation against Slayback Pharma LLC and Slayback Pharma India LLP (together, “Slayback”) alleging patent infringement by Slayback Pharma LLC’s filing of its ANDA No. 216361, referencing Lumify® (0.025% brimonidine tartrate ophthalmic solution). This suit had been filed following receipt of a Notice of Paragraph IV Certification from Slayback Pharma LLC, in which it had asserted that the U.S. patents listed in the FDA's Orange Book for the Company’s Lumify® brimonidine tartrate ophthalmic solution, were either invalid, unenforceable and/or would not be infringed by the commercial manufacture, use or sale of its generic brimonidine tartrate solution. The filing of this suit triggered a 30-month stay of the approval of the Slayback ANDA for its brimonidine tartrate solution. The Company remains confident in the strength of the Lumify® patents and intends to vigorously defend its intellectual property.
On February 2, 2022 the Company commenced litigation against Lupin Pharmaceuticals, Inc. (“Lupin”) alleging patent infringement by Lupin’s filing of its ANDA No. 216716, referencing Lumify® (0.025% brimonidine tartrate ophthalmic solution). This suit had been filed following receipt of a Notice of Paragraph IV Certification from Lupin, in which it had asserted that the U.S. patents listed in the FDA's Orange Book for the Company’s Lumify® brimonidine tartrate ophthalmic solution, were either invalid, unenforceable and/or would not be infringed by the commercial manufacture, use or sale of its generic brimonidine tartrate solution. The filing of this suit triggered a 30-month stay of the approval of the Lupin ANDA for its brimonidine tartrate solution. The Company remains confident in the strength of the Lumify® patents and will continue to vigorously pursue this matter and defend its intellectual property.
Jublia Patent Litigation
In addition, patents covering ourthe Company's branded pharmaceutical products may be challenged in proceedings other than court proceedings, including inter partes review (IPR)("IPR") at the USU.S. Patent & Trademark Office. The proceedings operate under different standards from district court proceedings, and are often completed within 18 months of institution. IPR challenges have been brought against patents covering ourthe Company's branded pharmaceutical products for which we have not yet received a Notice of Paragraph IV Certification.products. For example, following Acrux DDS’s IPR petition, the USU.S. Patent and Trial Appeal Board ("PTAB"), in May 2017, instituted inter partes review for an Orange Book-listed patent covering Jublia®. ThisJublia® (U.S. Patent No. 7,214,506 (the "‘506 Patent")) and, on
June 6, 2018, issued a written determination invalidating such patent. An appeal of this decision was filed on August 7, 2018. On March 13, 2020, the Court of Appeals for the Federal Circuit reversed this decision and remanded the matter back to the PTAB for further proceedings. As a result of a settlement, a joint motion to terminate the proceedings was filed on November 12, 2020 and, on January 8, 2021, the PTAB granted this motion. The ‘506 Patent, therefore, remains valid and enforceable and expires in 2026. Jublia® is proceedingcovered by fourteen Orange Book-listed patents owned by the Company or its licensor, which expire in the ordinary course.
years 2028 through 2035. In addition, on or about February 16, 2016,August and September 2018, the Company received a Notice of Paragraph IV Certification dated February 11, 2016, from Actavis Laboratories FL, Inc. (“Actavis”), in which Actavis asserted that the following U.S. patents, each of which is listed in the FDA’s Orange Book for Salix Pharmaceuticals, Inc.’s (“Salix Inc.”) Xifaxan® tablets, 550 mg, are either invalid, unenforceable and/or will not be infringed by the commercial manufacture, use or sale of Actavis’ generic rifaximin tablets, 550 mg, for which an Abbreviated New Drug Application (“ANDA”) has been filed by Actavis: U.S. Patent No. 8,309,569 (the “‘569 patent”), U.S. Patent No. 8,642,573 (the “‘573 patent”), U.S. Patent No. 8,829,017 (the “‘017 patent”), U.S. Patent No. 8,946,252 (the “‘252 patent”), U.S. Patent No. 8,969,398 (the “‘398 patent”), U.S. Patent No. 7,045,620 (the “‘620 patent”), U.S. Patent No. 7,612,199 (the “‘199 patent”), U.S. Patent No. 7,902,206 (the “‘206 patent”), U.S. Patent No. 7,906,542 (the “‘542 patent”), U.S. Patent No. 7,915,275 (the “‘275 patent”), U.S. Patent No. 8,158,644 (the “‘644 patent”), U.S. Patent No. 8,158,781 (the “‘781 patent”), U.S. Patent No. 8,193,196 (the “‘196 patent”), U.S. Patent No. 8,518,949 (the “‘949 patent”), U.S. Patent No. 8,741,904 (the “‘904 patent”), U.S. Patent No. 8,835,452 (the “‘452 patent”), U.S. Patent No. 8,853,231 (the “‘231 patent”), U.S. Patent No. 6,861,053 (the “‘053 patent”), U.S. Patent No. 7,452,857 (the “‘857 patent”), U.S. Patent No. 7,605,240 (the “‘240 patent”), U.S. Patent No. 7,718,608 (the “‘608 patent”) and U.S. Patent No. 7,935,799 (the “‘799 patent”) (collectively, the “Xifaxan® Patents”). Salix Inc. holds the NDA for Xifaxan® and its affiliate, Salix Pharmaceuticals, Ltd. (“Salix Ltd.”), is the ownernotices of the ‘569filing of a number of ANDAs with paragraph IV certification, and has timely filed patent infringement suits against these ANDA filers, and, in addition, the ‘573Company has also commenced certain patent the ‘017 patent, the ‘252 patent and the ‘398 patent. Alfa Wassermann S.p.A. (“Alfa Wassermann”) is the owner of the ‘620 patent, the ‘199 patent, the ‘206 patent, the ‘542 patent, the ‘275 patent, the ‘644 patent, the ‘781 patent, the ‘196 patent, the ‘949 patent, the ‘904 patent, the ‘452 patent and the ‘231 patent, each of which has been exclusively licensed to Salix Inc. and its affiliate, Valeant Pharmaceuticals Luxembourg S.à r.l. (“Valeant Luxembourg”) to market Xifaxan® tablets, 550 mg. Cedars-Sinai Medical Center (“Cedars-Sinai”) is the owner
of the ‘053 patent, the ‘857 patent, the ‘240 patent, the ‘608 patent and the ‘799 patent, each of which has been exclusively licensed to Salix Inc. and its affiliate, Valeant Luxembourg, to market Xifaxan® tablets, 550 mg. On March 23, 2016, Salix Inc. and its affiliates, Salix Ltd. and Valeant Luxembourg, Alfa Wassermann and Cedars-Sinai (the “Plaintiffs”) filed suitinfringement proceedings in Canada against Actavisfour separate defendants. All cases in the U.S. District Court for the District of Delaware (Case No. 1:16-cv-00188), pursuant to the Hatch-Waxman Act, alleging infringement by Actavis of one or more claims of each of the Xifaxan® Patents, thereby triggering a 30-month stay of the approval of Actavis’ ANDA for rifaximin tablets, 550 mg. On May 24, 2016, Actavis filed its answer in this matter. On June 14, 2016, the Plaintiffs filed an amended complaint adding US patent 9,271,968 (the “‘968 patent”) to this suit. Alfa Wassermann is the owner of the ‘968 patent, which has been exclusively licensed to Salix Inc. and its affiliate, Valeant Luxembourg to market Xifaxan® tablets, 550 mg. On December 6, 2016, the Plaintiffs filed an amended complaint adding US patent 9,421,195 (the “‘195 patent”) to this suit. Salix is the owner of the ‘195 patent. A seven-day trial was scheduled to commence on January 29, 2018, but has been indefinitely removed from the Court's schedule.
On May 17, 2017, the Company and Actavis announced that, at Actavis' request, the parties had agreed to stay this litigation and extend the 30-month stay regarding Actavis’ ANDA for its generic version of XifaxanJublia® (rifaximin) 550 mg tablets. This action is stayed through April 30, 2018 and Actavis has not yet taken any steps to lift the stay. All scheduled litigation activities, including the January 2018 trial date, have been indefinitely removed from the Court docket. Further, the parties agreed and the Court ordered that Actavis' 30-month regulatory stay shall be extended from August 12, 2018 until no earlier than February 12, 2019 and potentially longer if the litigation stay lasts for more than six months. The Company remains confident in the strength of the Xifaxan® Patents and believes it will prevail in this matter should it move forward. The Company also continues to believe the allegations raised in Actavis’ notice are without merit and will defend its intellectual property vigorously.settled. In Canada, 2 lawsuits remain pending against Apotex Inc.
Product Liability
Shower to Shower®Products Liability Litigation
TheSince 2016, the Company has been named in over one hundred and fortya number of product liability lawsuits involving the Shower to ShowerShower® body powder product acquired in September 2012 from Johnson & Johnson. The Company has been successful in obtaining a numberJohnson; due to dismissals, twenty-nine (29) of dismissals assuch product liability suits currently remain pending. Potential liability (including its attorneys’ fees and costs) arising out of these remaining suits is subject to full indemnification obligations of Johnson & Johnson owed to the Company and/orand its subsidiary, Valeant Pharmaceuticals North America LLC (“VPNA”), in someaffiliates, and legal fees and costs will be paid by Johnson & Johnson. Twenty-eight (28) of these cases. The Company continues to seek dismissals in these cases and to pursue agreements fromlawsuits filed by individual plaintiffs to not oppose the Company’s motions for summary judgment.
These lawsuits include one case originally filed on December 30, 2016 in the In re Johnson & Johnson Talcum Powder Litigation, Multidistrict Litigation 2738, pending in the United States District Court for the District of New Jersey. The Company and VPNA were first named in a lawsuit filed directly into the MDL alleging that the use of the Shower to Shower product caused the plaintiff to develop ovarian cancer. On March 24, 2017, the plaintiff agreed to a dismissal of all claims against the Company and VPNA without prejudice. The Company has been named in one additional lawsuit, originally filed in the District of Puerto Rico and recently transferred into the MDL, but has not been served in that case. The Company was also named in one additional lawsuit filed directly into the MDL that has also not yet been served.
These lawsuits also include a number of matters filed in the Superior Court of Delaware allegingallege that the use of Shower to Shower® caused the plaintiffs to develop ovarian cancer, mesothelioma or breast cancer. The Company has been voluntarily dismissed from nearly all of these cases, and only claims against VPNA remain. These lawsuits also include allegations against Johnson & Johnson, directed primarily to its marketing of and warnings for the Shower to Shower product prior to the Company’s acquisition of the product in September 2012. The allegations in these cases specifically directed to VPNA include failure to warn, design defect, manufacturing defect, negligence, gross negligence, breach of express and implied warranties, civil conspiracy concert in action, negligent misrepresentation, wrongful death, andloss of consortium and/or punitive damages. Plaintiffs seekThe damages sought include compensatory damages, including medical expenses, lost wages or earning capacity, loss of consortium and/or compensation for pain and suffering, mental anguish anxiety and discomfort, physical impairment and loss of enjoyment of life. Plaintiffs also seek pre- and post-judgment interest, exemplary and punitive damages, treble damages, and attorneys’ fees.
These lawsuits also include a number of cases filed in certain state courts in the United States (including the California Superior Courts, the Superior Courts of Delaware, the New Jersey Superior Courts, the District Court of Louisiana, the Supreme Court of New York (Niagara County), the District Court of Oklahoma City, the Tennessee Chancery Court (Hamilton County), the South Carolina Court of Common Pleas (Richland County) and the District Court of Nueces County, Texas with a transfer to the asbestos MDL docket in the District Court of Harris County, Texas for pre-trial purposes) alleging use of Shower to Shower and other products resulted in the plaintiffs developing mesothelioma. The Company has been successful in obtaining voluntarily dismissals in some of these cases or the plaintiffs have not opposed summary judgment. The allegations in these cases generally include design defect, manufacturing defect, failure to warn, negligence, and punitive damages, and in some cases breach of express and implied warranties, misrepresentation, and loss of consortium. The plaintiffs seek compensatory damages for loss of services, economic loss, pain and suffering, and, in some cases, lost wages or earning capacity and loss of consortium, in addition to punitive damages, interest, litigation costs, and attorneys’ fees.
Finally, two Additionally, 2 proposed class actions have been filed in Canada against the Company and various Johnson & Johnson entities (one(1 in the Supreme Court of British Columbia and one1 in the Superior Court of Quebec). The Company also acquired the rights to the Shower to Shower product in Canada from Johnson & Johnson in September 2012. In the British Columbia matter, the plaintiff seeks to certify a proposed class action, on behalf of persons in British Columbia and Canada who have purchased or used Johnson & Johnson’s Baby Powder or Shower to Shower including their estates, executors and personal representatives, and is alleging that®. The class actions allege the use of thisthe product increases certain health risks. A certification hearing in the British Columbia matter is scheduled to be heard on November 4, 2018. In the Quebec matter, the plaintiff seeks to certify a proposed class action on behalf of persons in Québec who have used Johnson’s Baby Powderrisks (British Columbia) or Shower to Shower, as well as their family members, assigns and heirs, and is alleging negligence in failing to properly test, failing to warn of health risks, and failing to remove the products from the market in a timely manner. A certification hearing in the Quebec matter was held on January 11, 2018 and a decision is pending.manner (Quebec). The plaintiffs in these actions are seeking awards of general, special, compensatory and punitive damages. The likelihood of the authorization or certification of these claims as class actions cannot be assessed at this time.
The Company intends to defend itself vigorously in each of the remaining actions that are not voluntarily dismissed or subject to a grant of summary judgment. The Company believes that its potential liability (including its attorneys’ fees and costs) arising out the Shower to Shower lawsuits filed against the Company is subject to certain indemnification obligations of Johnson & Johnson owed to the Company, and legal fees and costs have been and are currently being reimbursed by Johnson & Johnson. The Company has provided Johnson & Johnson with notice that the lawsuits filed against the Company relating to Shower to Shower are subject to indemnification by Johnson & Johnson.
General Civil Actions
Afexa Class Action
On March 9, 2012, a Notice of Civil Claim was filed in the Supreme Court of British Columbia which seeks an order certifying a proposed class proceeding against the Company and a predecessor, Afexa Life Sciences Inc. ("Afexa") (Case No. NEW-S-S-140954). The proposed claim asserts that Afexa and the Company made false representations respecting Cold-FX® to residents of British Columbia who purchased the product during the applicable period and that the proposed class has suffered damages as a result. On November 8, 2013, the Plaintiff served an amended notice of civil claim which sought to re-characterize the representation claims and broaden them from what was originally claimed. On December 8, 2014, the Company filed a motion to strike certain elements of the Plaintiff’s claim for failure to state a cause of action. In response, the Plaintiff proposed further amendments to its claim. The hearing on the motion to strike and the Plaintiff’s amended claim was held on February 4, 2015. The Court allowed certain additional subsequent amendments, while it struck others. The hearing to certify the class was held on April 4-8, 2016 and, on November 16, 2016, the Court issued a decision dismissing the plaintiff’s application for certification of this action as a class proceeding. On December 15, 2016, the plaintiff filed a notice of appeal in17, 2020, the British Columbia Court of Appeal appealing the decisioncourt issued a judgment declining to dismiss the application for certification. The plaintiff filed its appeal factum on March 15, 2017 and the Company filed its appeal factum on April 19, 2017. The appeal hearing was held on September 19, 2017 andcertify a decision is pending. The Company denies the allegations being made and is continuing to vigorously defend this matter.
Mississippi Attorney General Consumer Protection Action
The Company and VPNA are named in an action brought by James Hood, Attorney General of Mississippi, in the Chancery Court of the First Judicial District of Hinds County, Mississippi (Hood ex rel. State of Mississippi, Civil Action No. G2014-1207013, filed on August 22, 2014), alleging consumer protection claims against both Johnson & Johnson, the Company and VPNA related to the Shower to Shower body powder product and its alleged causal link to ovarian cancer. As indicated
above, the Company acquired the Shower to Shower body powder product in September 2012 from Johnson & Johnson. The State seeks compensatory damages, punitive damages, injunctive relief requiring warnings for talc-containing products, removal from the market of products that fail to warn, and to prevent the continued violation of the Mississippi Consumer Protection Act (“MCPA”). The State also seeks disgorgement of profits from the sale of the product and civil penalties. In October 2017, Plaintiffs dismissed certain claims under the MCPA related to advertising/marketing that did not appear on the label and/or packaging of Shower to Shower. The State has not made specific allegationsclass as to the Company or VPNA. The Company intendsShower to defend itself vigorouslyShower®, and at this time no appeal of that judgment has been filed. On December 16, 2021, the plaintiff in thisthe British Columbia class action whichfiled a Second Amended Notice of Civil Claim and Application for Certification, removing the Company believes will also fall, in whole or in part, withinas a defendant; as a result, the indemnification obligations of British Columbia class action is concluded as to the Company.
Johnson & Johnson, owedthrough one or more subsidiaries has purported to the Company, as indicated above.
Uceris® Arbitration
On or about December 5, 2016, Cosmo Technologies Ltd. and Cosmo Technologies III Ltd. (collectively, “Cosmo”), the licensor of certain intellectual property rights in, and supplier of, the Company’s Uceris® extended release tablets, commenced arbitration against certain affiliates of the Company, Santarus Inc. (“Santarus”) and Valeant Pharmaceuticals Ireland (“Valeant Ireland”), under the Rules of Arbitration of the International Chamber of Commerce (No. 22453/GR, Cosmo Technologies Ltd. et al. v. Santarus, Inc. et al.). In the arbitration, Cosmo is alleging breach of contracthave completed a Texas divisional merger with respect to certain termsany talc liabilities at Johnson & Johnson Consumer, Inc. (“JJCI”). LTL Management, LLC (“LTL”), the resulting entity of the license agreement, including the obligations on Santarus to use certain commercially reasonable efforts to promote the Uceris® extended release tablets. Cosmo is seeking a declaration that both the license agreementdivisional merger, assumed JJCI’s talc liabilities and a supply agreement with Valeant Ireland have been terminated, plus audit and attorney fees. Santarus and Valeant Ireland submitted their Answerthereafter filed for Chapter 11 bankruptcy protection in the arbitration on January 10, 2017 denying each of Cosmo’s allegations and making certain counterclaims. A hearing on liability issues was conducted from October 5 to 8, 2017. No ruling has yet issued. The Company is vigorously defending this matter.
Arbitration with Alfa Wasserman
On or about July 21, 2016, Alfa Wasserman S.p.A. (“Alfa Wasserman”) commenced arbitration against the Company and its subsidiary, Salix Pharmaceuticals, Inc. (“Salix Inc.”) under the Rules of Arbitration of the International Chamber of Commerce (No. 22132/GR, Alfa Wasserman S.p.A. v. Salix Pharmaceuticals, Inc. et al.), pursuant to the terms of the Amended and Restated License Agreement between Alfa Wasserman and Salix Inc. (the “ARLA”). In the arbitration, Alfa Wasserman has made certain allegations respecting a development project for a formulation of the rifaximin compound (a different formulation to the current formulation, not the Xifaxan® product) that is being conducted under the terms of the ARLA, including allegations that Salix Inc. has failed to use the required efforts with respect to this development and that the Company’s acquisition of Salix resulted in a change of control under the ARLA, which entitled Alfa Wasserman to assume control of this development. Alfa Wasserman is seeking, among other things, a declaration that the provisions of the ARLA relating to the development product and the rights relating to the rifaximin formulation being developed have been terminated and such development and rights shall be returned to Alfa Wasserman, an order requiring the Company and Salix Inc. to payUnited States Bankruptcy Court for the costsWestern District of such development (in an amount of at least $80 million), and alleged damages inNorth Carolina. Pursuant to a court order, the amount of approximately $285 million plus arbitration costs and attorney fees. The Company and Salix Inc. have submitted their initial responsecase was transferred to the request for arbitration and a three-member arbitration tribunal was selected. A hearing on liability issues is scheduled for October 2018. The Company is vigorously defending this matter.
The Company’s Xifaxan® products (and Salix Inc.'s rights thereto under the ARLA) are not the subject of any of the allegations or relief sought in this arbitration.
Mimetogen Litigation
In November 2014, B&L Inc. filed a lawsuit against Mimetogen Pharmaceuticals Inc. (“MPI”) in the United States District Court for the Western District of New York (BauschJersey. Notwithstanding the divisional merger and LTL’s bankruptcy case, the Company and its affiliates continue to have indemnification claims and rights against Johnson & Lomb Incorporated v. Mimetogen Pharmaceuticals Inc., Case No. 6:14-06640 (FPG-JWF) (W.D.N.Y.)) relating to the Development CollaborationJohnson and Exclusive Option Agreement between B&L Inc. and MPI dated July 17, 2013 (the “MIM-D3 Agreement”) for MIM-D3, a compound created by MPI to treat dry eye syndrome. In particular, B&L Inc. sought a declaratory judgment that the Initial Phase III Trial regarding the safety and efficacy of MIM-D3 conductedLTL pursuant to the MIM-D3 Agreement was “Not Successful” as defined in the MIM-D3 Agreement and, as a result, B&L Inc. had no further obligation to MPI when B&L Inc. elected not to exercise or extend its option to obtain an exclusive license to the MIM-D3 Technology to develop and commercialize certain products pursuant to the MIM-D3 Agreement before the end of the applicable option period. MPI filed a counterclaim against B&L Inc., in which it contended that the result of the clinical trial did not meet the definition of “Not Successful” under the MIM-D3 Agreement and that, as a result, a $20 million termination fee was due by B&L Inc. to MPI under the terms of the MIM-D3 Agreementindemnification agreement entered into between JJCI and that B&L Inc. had breached the MIM-D3 Agreement by failing to pay this termination fee. MPI also contended that B&L Inc. acted intentionallyits affiliates and consequently was entitled to additional damages. MPI also brought certain third-party claims
against the Company allegingand its affiliates, which indemnification agreement remains in effect. As a result, it is the Company's current expectation that the Company intentionally interferedit will not incur any material impairments with the MIM-D3 Agreement with the intentrespect to harm MPI. MPI also assertedits indemnification claims as a claim against the Company for unfair and deceptive acts under Massachusetts law, and sought recoveryresult of the $20 million fee,divisional merger or the bankruptcy. Substantially all cases subject to the indemnification agreement related to Johnson & Johnson’s talc liability are stayed through February 28, 2022, pursuant to a preliminary injunction issued by the bankruptcy court. Motions to dismiss the LTL bankruptcy, as well as additional damages related to this claimed delay and injuryextend the stay beyond February 28, 2022, were argued in the bankruptcy court in February 2022. A decision of the court is pending. To the extent that any cases subject to the value of its developmental product. On March 12, 2015,indemnification agreement proceed during the Company moved to dismiss allpendency of the claims againstbankruptcy case, it is the Company and the claims for extra-contractual damages. In May 2016, the Court dismissed all claims against the Company, other than the claim for tortious interference, and declined to dismiss the claims against B&L Inc. and the Company for extra-contractual damages. On August 19, 2016, MPI filed a motion for summary judgment on its contract claim against B&L Inc. On September 22, 2016, B&L Inc. responded to MPI’s motion for summary judgment, and, alongCompany's expectation that Johnson & Johnson, in accordance with the Company, filed a cross-motion for judgment in their favor, dismissing the contract claims against B&L Inc., as well as the remaining third-party claim against the Company for tortious interference. On June 30, 2017, the Court issued a Decision and Order granting MPI’s motion for partial summary judgment, awarding MPI the amount of $20 million (based on a finding that the termination fee was due based on the outcome of the clinical trial) and denying the cross-motion for summary judgment filed by B&L Inc. and the Company. The Decision and Order is not yet appealable and the Company believes that that the Decision and Order cannot be enforced, as it is a partial summary judgment and not yet a final judgment of the Court. B&L Inc. and the Company intend to appeal this decision at the soonest possible time andindemnification agreement, will continue to vigorously defend the remainderCompany in each of the suit. Discovery has proceeded asremaining actions.
General Civil Actions
California Proposition 65 Related Matter
On June 19, 2019, plaintiffs filed a proposed class action in California state court against Bausch Health US and Johnson & Johnson (Gutierrez, et al. v. Johnson & Johnson, et al., Case No. 37-2019-00025810-CU-NP-CTL), asserting claims for
purported violations of the California Consumer Legal Remedies Act, False Advertising Law and Unfair Competition Law in connection with their sale of talcum powder products that the plaintiffs allege violated Proposition 65 and/or the California Safe Cosmetics Act. This lawsuit was served on Bausch Health US in June 2019 and was subsequently removed to the remaining claims. On February 5, 2018, MPIUnited States District Court for the Southern District of California, where it is currently pending. Plaintiffs seek damages, disgorgement of profits, injunctive relief, and reimbursement/restitution. The Company filed a motion to dismiss Plaintiffs’ claims, which was granted in April 2020 without prejudice. In May 2020, Plaintiffs filed an amended complaint and in June 2020, filed a motion for final judgment, seeking entryleave to amend the complaint further, which was granted. In August 2020, Plaintiffs filed the Fifth Amended Complaint. On January 22, 2021, the Court granted the motion to dismiss with prejudice. On February 19, 2021, Plaintiffs filed a Notice of a final judgment on the Court’s June 30, 2017 Decision and Order, and saying that upon entry of final judgment in accordanceAppeal with the DecisionNinth Circuit Court of Appeals. On July 1, 2021, Appellants (Plaintiffs) filed their opening brief; Appellees' response briefs were filed on October 8, 2021. This matter was stayed by the Ninth Circuit on December 7, 2021, due to the preliminary injunction entered by the bankruptcy court in the LTL bankruptcy proceeding. This stay included Appellants’ reply brief deadline, which was previously due to be filed on or before December 2, 2021.
The Company and Order, MPI seeks to dismiss its remainingBausch Health US dispute the claims against B&Lthem and intend to defend this lawsuit vigorously.
New Mexico Attorney General Consumer Protection Action
The Company and Bausch Health US were named in an action brought by State of New Mexico ex rel. Hector H. Balderas, Attorney General of New Mexico, in the County of Santa Fe New Mexico First Judicial District Court (New Mexico ex rel. Balderas v. Johnson & Johnson, et al., Civil Action No. D-101-CV-2020-00013, filed on January 2, 2020), alleging consumer protection claims against Johnson & Johnson and Johnson & Johnson Consumer Companies, Inc. and the Company. On February 21, 2018, the parties filed a stipulation dismissing with prejudice MPI’s claims for extra-contractual damages against B&L Inc. and MPI’s third-party claim against, the Company and providingBausch Health US related to Shower to Shower® and its alleged causal link to mesothelioma and other cancers. In April 2020, Bausch Health US filed a motion to dismiss, which in September 2020, the Court granted in part as to the New Mexico Medicaid Fraud Act and New Mexico Fraud Against Taxpayers Act claims and denied as to all other claims. The State of New Mexico brings claims against all defendants under the New Mexico Unfair Practices Act and other common law and equitable causes of action, alleging defendants engaged in wrongful marketing, sale and promotion of talcum powder products. The lawsuit seeks to recover the cost of the talcum powder products as well as the cost of treating asbestos-related cancers allegedly caused by those products. Bausch Health US filed its answer on November 16, 2020. On December 30, 2020 Johnson & Johnson filed a Motion for final judgment to be entered against B&L Inc. for $20 million plus pre-judgment interest. Once such final judgment is entered, B&L Inc. will be able to appeal the Court’s June 30, 2017 Decision and Order finding that the $20 million termination fee was due basedPartial Judgment on the outcome ofPleadings and on January 4, 2021, Bausch Health US filed a joinder to that motion, which was denied on March 8, 2021. Trial is scheduled to begin on January 18, 2023.
The Company and Bausch Health US dispute the clinical trial,claims against them and intendsintend to do so. B&L Inc. expects to obtain a stay of enforcement of the final judgment pending appeal.defend this lawsuit vigorously.
GAF RealtyDoctors Allergy Formula Lawsuit
In JanuaryApril 2018, GAF Realty Advisors, Inc.Doctors Allergy Formula, LLC (“Doctors Allergy”), filed a lawsuit against the Company (GAF Realty Advisors, Inc. v. Valeant Pharmaceuticals International, Inc., Case No. 30-2018-00967586-CU-BC-CJC)Bausch Health Americas in the SuperiorSupreme Court of the State of California (Orange County), allegingNew York, County of New York, asserting breach of contract and related claims under a 2015 Asset Purchase Agreement, which purports to include milestone payments that Doctors Allergy alleges should have been paid by Bausch Health Americas. Doctors Allergy claims its damages are not less than $23 million. Bausch Health Americas has asserted counterclaims against Doctors Allergy. Bausch Health Americas filed a motion seeking an order granting Bausch Health Americas summary judgment on its counterclaims against Plaintiff and dismissing Plaintiff’s claims against it. The motion was fully briefed as of May 2021. The Court held a hearing on the motion on January 25, 2022. The motion remains pending. Bausch Health Americas disputes the claims against it and will continue to defend itself vigorously.
Litigation with respectFormer Salix CEO
On January 28, 2019, former Salix Ltd. CEO and director Carolyn Logan filed a lawsuit in the Delaware Court of Chancery, Case No. 2019-0059, asserting claims for breach of contract and declaratory relief. On November 19, 2021, Logan amended her complaint to add a dispute over real estate commissions.claim for breach of the implied covenant of good faith and fair dealing. The lawsuit arises out of the contractual termination of approximately $30 million in unvested equity awards following the determination by the Salix Ltd. Board of Directors that Logan intentionally engaged in wrongdoing that resulted, or would reasonably be expected to result, in material harm to Salix Ltd., or to the business or reputation of Salix Ltd. Logan seeks the restoration of the unvested equity awards and a declaration regarding certain rights related to indemnification. On June 19, 2019, the Court entered an order staying the claim for declaratory relief pending the final resolution of the breach of contract claim. Trial is scheduled to commence on September 6, 2022. The Company disputes the claims and intends to vigorously defend thisthe matter.
The Salix legal proceeding matter set out below, as well as each of those Salix matters described under the sub-heading “Completed Matters” below, (other than the matter described under the sub-heading “Salix Shareholder Class Actions”), were commenced prior to the Company’s acquisition of Salix. The estimated fair values of the potential losses regarding these matters, along with other matters, are included as part of contingent liabilities assumed in the Salix Acquisition and updated regularly as needed.
Salix SEC Investigation
In the fourth quarter of 2014, the SEC commenced a formal investigation into possible securities law violations by Salix relating to disclosures by Salix of inventory amounts in the distribution channel and related issues in press releases, on analyst calls and in Salix’s various SEC filings, as well as related accounting issues. In April 2017, the SEC staff indicated that it had substantially completed its investigation and will be making recommendations to the Commission in the near future. Salix continues to cooperate with the SEC staff. The Company cannot predict the outcome of the SEC investigationCompleted or any other legal proceedings or any enforcement actions or other remedies that may be imposed on Salix or the Company arising out of the SEC investigation.
Philidor Matters
As mentioned above in this section, the Company is involved in certain investigations, disputes and other proceedings related to the Company’s now terminated relationship with Philidor. These include the putative class action litigation in the U.S. and Canada, the purported class actions under the federal RICO statute and the investigations by certain offices of the Department of Justice, the SEC and the California Department of Insurance and the request for documents and other information received from the AMF. There can be no assurances that governmental agencies or other third parties will not commence additional investigations or assert claims relating to the Company’s former relationship with Philidor or Philidor’s business practices, including claims that Philidor or its affiliated pharmacies improperly billed third parties or that the Company is liable, directly
or indirectly, for such practices. The Company is cooperating with all existing governmental investigations related to Philidor and is vigorously defending the putative class action litigations. No assurance can be given regarding the ultimate outcome of any present or future proceedings relating to Philidor.
CompletedInactive Matters
The following matters have concluded, have settled, are the subject of an agreement to settle or have otherwise been closed since January 1, 20172021, have been inactive from the Company’s perspective for several quarters or the Company anticipates that no further material activity will take place with respect thereto. Due to the closure, settlement, inactivity or change in status of the matters referenced below, these matters will no longer appear in ourthe Company's next public reports and disclosures.
Congressional Inquiries
Beginningdisclosures, unless required. With respect to inactive matters, to the extent material activity takes place in November 2015,subsequent quarters with respect thereto, the Company received fromwill provide updates as required or as deemed appropriate.
Glumetza Antitrust Litigation
Between August 2019 and July 2020, eight (8) putative antitrust class actions and four (4) non-class complaints naming Bausch Health Companies Inc., Salix Pharmaceuticals, Ltd., Salix Pharmaceuticals, Inc., and Santarus, Inc. (for purposes of this subsection, collectively, the United States Senate Special Committee on Aging various document requests, as well as subpoenas for documents, depositions and a hearing which was held on April 27, 2016. Certain directors, officers and“Company”), among other employees of the Company also received from the United States Senate Special Committee on Aging subpoenas for depositions and/defendants, were filed or hearings. In January 2016, the Company received from the United States House Committee on Oversight and Government Reform a document request and an invitation for the Company’s then interim CEO to testify at a hearing, at which he testified on February 4, 2016. Most of the materials requested relatedtransferred to the Company’s pricing decisions on particular drugs, as well as revenue, expense and profit information, and also include requests relating to financial support provided by the Company for patients and financial data related to the Company’s research and development program, Medicare and Medicaid. On December 21, 2016, the United States Senate Special Committee on Aging issued a report on its drug pricing investigation entitled “Sudden Price Spikes in Off-Patent Prescription Drugs: The Monopoly Business Model that Harms Patients, Taxpayers, and the U.S. health care System”. The Company has cooperated with these inquiries and cannot predict with certainty their outcome or duration; however, the Company currently believes that there will be no further material developments with respect to these inquiries.
Salix Shareholder Class Actions
Following the announcementNorthern District of California. Three (3) of the execution of the Salix Merger Agreement with Salix, between February 25, 2015 and March 12, 2015, six purported stockholder class actions were filed challenging the Salix Acquisition. Allby plaintiffs seeking to represent a class of direct purchasers. The purported classes of direct purchasers filed a consolidated first amended complaint and a motion for class certification in April 2020. The court certified a direct purchaser class in August 2020. The putative class action complaints filed by end payer purchasers have all been voluntarily dismissed. Three (3) of the non-class complaints were filed by direct purchasers. The fourth non-class complaint, asserting claims based on both direct and indirect purchases, was filed by an insurer plaintiff in July 2020 and subsequently amended in September 2020. In December 2020, the court denied the Company’s motion to dismiss as to the insurer plaintiff’s direct claims but dismissed the insurer plaintiff’s indirect claims. On February 2, 2021, the insurer plaintiff’s motion for leave to amend its complaint was denied.
These actions were filedconsolidated and coordinated in the Delaware CourtIn re Glumetza Antitrust Litigation, Case No. 3:19-cv-05822-WHA (N.D. Cal.) (the “In re Glumetza Antitrust Litigation”). The lawsuits alleged that a 2012 settlement of Chancery, and alleged claims against somea patent litigation regarding Glumetza® delayed generic entry in exchange for an agreement not to launch an authorized generic of Glumetza® or all of the board of directors of Salix (the “Salix Board”), the Company, Salix, Valeant and Sun Merger Sub. On March 17, 2015, the Court consolidated the actions under the caption Salix Pharmaceuticals, Ltd. Shareholder Litigation, Consolidated C.A. No.10721-CB. On September 25, 2015, Plaintiffs filed an amended complaint.grant any other company a license to do so. The operative complaint alleged generally that the members of the Salix Board breached their fiduciary duties to stockholders, and that the other defendants aided and abetted such breaches, by seeking to sell Salix through an allegedly inadequate sales process and for allegedly inadequate consideration and by agreeing to allegedly preclusive deal protections. The complaint alsocomplaints alleged that the Schedule 14D-9 filed by Salixsettlement agreement resulted in connection withhigher prices for Glumetza® and its generic equivalent both prior to and after generic entry. Both the Salix Acquisition contained inaccurate or materially misleading information about, among other things, the Salix Acquisitionclass and the sales process leading up to the Salix Merger Agreement. The complaintnon-class plaintiffs sought among other things, money damages and unspecified attorneys’ and other fees and costs. In an oral ruling givenunder federal antitrust laws for claims based on May 19, 2016, the Court dismissed the consolidated action against all defendants. On June 17, 2016, the Plaintiffs filed a notice of appeal in the Delaware Supreme Court appealing the decision to dismiss the consolidated action against all defendants. On January 26, 2017, the Delaware Supreme Court affirmed the dismissal of all claims.
Voluntary Request Letter from the U.S. Federal Trade Commissiondirect purchases.
On October 16, 2015,July 26, 2021, the Company receivedreached an agreement in principle and, thereafter, on September 14, 2021, executed a voluntary request letter fromfinal settlement agreement to resolve the Federal Trade Commission ("FTC") with respectclass plaintiffs’ claims for $300 million, subject to its non-public investigation into the Company's acquisition of Paragon Holdings I, Inc. (“Paragon”). In the letter, the FTC requested thatcourt approval. On August 1, 2021, the Company provide, on a voluntary basis, certain information and documentation relating to its acquisition of Paragon. The Company produced certain documents and information in response to the request and cooperated with the FTC in connection with this investigation. On November 7, 2016, the FTC announced that it had accepted for public comment a consent agreement in connection with this investigation. Pursuant to the consent agreement, the Company agreed to divest Paragon, which divestiture was completed on November 9, 2016. The consent agreement, together with an accompanying Decision and Order, was approved in final form by the FTC on February 8, 2017. The final approval of the Decision and Order by the FTC brings this matter to a close.
AntiGrippin® Litigation
A suit was brought against the Company’s subsidiary, Natur Produkt International, JSC ("Natur Produkt") seeking lost profits in connection with the registration by Natur Produkt of its AntiGrippin® trademark (Case No. A-56-23056/2013, Arbitration Court of St. Petersburg). The plaintiff in this matter alleged that Natur Produkt violated Russian competition law by preventing plaintiff from producing and marketing its products under certain brand names. In a decision dated December 4, 2013, the Court found in favor of the plaintiff (AnviLab) and awarded the plaintiff lost profits in the amount of approximately RUB 1,660 million (being approximately $50 million at the December 4, 2013 decision date). Natur Produkt appealed this decision and the Appeal Court found in favor of Natur Produkt and dismissed the plaintiff’s claim in full. AnviLab appealed the Appeal Court's decision and the IP Court found in favor of the plaintiff and ruled to send the case for the second review to the court of the first instance, indicating that the court of the first instance should decide on the amount of damages suffered by AnviLab. Natur Produkt appealed the decision of the IP Court to the Supreme Court, which appeal was denied, and the matter was sent back to the court of first instance for the second review. The court of first instance ruled in favor of the plaintiff and awarded the plaintiff lost profits in the amount of approximately RUB 1,660 million. Natur Produkt filed an appeal against this decision, both as to the merits and the quantum of damages and the court ruled in favor of the plaintiff. Subsequently, on Natur Produkt’s appeal, the IP Court ruled in favor of the plaintiff and upheld the decision of the Appeal Court. Natur Produkt appealed to the Supreme Court was rejected. Following the decision of the IP Court, AnviLab filed two more claims against Natur Produkt relating to the matter described above (the “Original AnviLab Matter”). The first claim by AnviLab was filed on December 3, 2015 with the Saint Petersburg Arbitration Tribunal (Case No. A-56-89244/2015) and sought an amount in respect of the interest payable on the amount awarded by the Appeal Court in the Original AnviLab Matter for the period between the date the amount was awarded by the Appeal Court (August 4, 2015) and the date AnviLab received the payment (September 29, 2015). The second claim by AnviLab was filed on December 15, 2015 with the Saint Petersburg Arbitration Tribunal (Case No.A-56-23056/2013) and sought an amount in respect of litigation costs related to Original AnviLab Matter. The Court awarded amounts to AnviLab with respect to each of these claims, both of which were insignificant. On appeal, the Appeal Court decreased both of the amounts awarded to Anvilab. The period for either party to appeal the decision of the court in the claim for interest expired on November 7, 2016. In the claim for litigation costs, on appeal, the intellectual property court upheld the decision of the Appeal Court and the Anvilab claim was rejected. The period for Anvilab to appeal that decision to the Supreme Court expired on April 6, 2017.
Investigation by the State of New Jersey Department of Law and Public Safety, Division of Consumer Affairs, Bureau of Securities
On April 20, 2016, the Company received a document subpoena from the New Jersey State Bureau of Securities. The materials requested include documents concerning the Company’s former relationship with Philidor, its accounting treatment for sales to Philidor, its financial reporting and public disclosures and other matters. The Company has cooperated with this investigation. On May 12, 2017, the Company was notified that the New Jersey Bureau of Securities was closing this investigation.
U.S. Department of Justice Investigation
On September 15, 2015, Bausch & Lomb International, Inc. received a subpoena from the Criminal Division of the U.S. Department of Justice regarding agreements and payments between B&L and medical professionals related to its surgical products Crystalens® IOL and Victus® femtosecond laser platform. The government indicated that the subpoena was issued in connection with a criminal investigation into possible violations of Federal health care laws. B&L International produced certain documents in response to the subpoena and cooperated with the investigation. The underlying qui tam action relating to this investigation was dismissed without prejudice on June 19, 2017 and the Department of Justice has both declined to intervene, as well as, declined to further prosecute this matter.
Salix Securities Litigation
Beginning on November 7, 2014, three putative class action lawsuits were filed by shareholders of Salix, each of which generally alleged that Salix and certain of its former officers and directors violated federal securities laws in connection with Salix’s disclosures regarding certain products, including with respect to disclosures concerning historic wholesaler inventory levels, business prospects and demand, reserves and internal controls. Two of these actions were filed in the U.S. District Court for the Southern District of New York, and were captioned: Woburn Retirement System v. Salix Pharmaceuticals, Ltd., et al. (Case No: 1:14-CV-08925 (KMW)), and Bruyn v. Salix Pharmaceuticals, Ltd., et al. (Case No. 1:14-CV-09226 (KMW)). These two actions were consolidated under the caption In re Salix Pharmaceuticals, Ltd. (Case No. 14-CV-8925 (KMW)). A third action was filed in the U.S. District Court for the Eastern District of North Carolina under the caption Grignon v. Salix Pharmaceuticals, Ltd. et al. (Case No. 5:14-cv-00804-D), but was subsequently voluntarily dismissed. On February 8, 2017, the partiesalso reached an agreement in principle to settleresolve the non-class direct purchaser plaintiffs’ claims, described above, for additional consideration. A final settlement agreement with the non-class direct purchaser plaintiffs was executed on August 6, 2021. As part of the settlements, the Company admitted no liability as to the claims against it and denied all allegations of wrongdoing. On September 20, 2021, the insurer plaintiff voluntarily dismissed its claims in the consolidated federal action. Salix made a payment of $210 millionBy stipulation, the insurer plaintiff has asserted its direct opt-out claims in the second quarterState Court Action, resulting in the consolidation of 2017all of its opt-out claims in connection with this settlement. the State Court Action.
On April 5, 2017,September 22, 2021, the court granted preliminary approval of the settlement. A hearing to grantclass settlement agreement and vacated the October 2021 trial date and all other pre-trial deadlines in the consolidated actions. On February 3, 2022, the court granted final approval of the class settlement and ordered dismissal of the class plaintiffs' claims. Subject to appeal of the final approval of the class settlement, the settlements will resolve and discharge all asserted class and direct purchaser non-class claims against the Company in the In re Glumetza Antitrust Litigation.
California Proposition 65 Related Matter
On January 29, 2020, Plaintiff Jan Graham filed a lawsuit (Graham v. Bausch Health Companies, Inc., et al., Case No. 20STCV03578) in Los Angeles County Superior Court against the Company, Bausch Health US and several other manufacturers, distributors and retailers of talcum powder products, alleging violations of California Proposition 65 by manufacturing and distributing talcum powder products containing chemicals listed under the statue, without a compliant warning on the label. On January 29, 2021, certain defendants including the Company and Bausch Health US filed a Motion for Summary Judgment or in the Alternative Motion for Summary Adjudication, which was heardgranted with prejudice on July 28, 2017 andMay 26, 2021; Plaintiff waived the settlement was approved by the Court.right to appeal.
Depomed/PDL LitigationDerivative Lawsuits
On September 10, 2019 and September 13, 2019, 2 alleged stockholders filed derivative lawsuits purportedly on behalf of the Company against former Company board members and executives. On March 7, 2017, Depomed,2020, a consolidated amended derivative complaint was filed, captioned In re Bausch Health Companies Inc. (“Depomed”) and PDL BioPharma, Inc. (“PDL”) commenced litigation by the filing of a complaint in the United States District Court for the District of New Jersey, againstF/K/A/ Valeant Pharmaceuticals International, Inc. Stockholder Derivative Litigation (Case No. 19-cv-17833).
Plaintiffs asserted claims for breach of fiduciary duty, waste of corporate assets, and Valeant Pharmaceuticals Luxembourg S.à r.l. (together, “Valeant”)unjust enrichment related to, among other things, allegedly false and misleading statements and/or failures to disclose information about the Company’s business and prospects, including relating to alleged underpaymentdrug pricing, the Company’s use of royalties in breach ofspecialty pharmacies, and the Company’s relationship with Philidor. The consolidated complaint also asserted a certain commercialization agreementclaim for contribution and indemnification by and between Depomed and Santarus, Inc. (a predecessor company of the Company) dated as of August 22, 2011, as amended, based on, inter alia,Defendants for any liability the findings in an audit report prepared by KPMG LLP. Valeant disputed the claims alleged in Depomed’s complaint. On October 27, 2017, PDL, Depomed and Valeant entered into a settlement agreement that resolved all matters addressed in the lawsuit filed. Under the terms of the settlement agreement, the parties agree that the settlement is not an admission by any party thereto of any fact alleged in the litigation, and reflects a reasonable compromise in the best interest of the parties. As a consequence of the settlement, the litigation was dismissed, with prejudice, on November 6, 2017, and Valeant made a one-time, lump-sum payment of $13 million to Depomed. In addition, under the terms of the settlement agreement, Depomed and PDL has released Valeant from any and all claims against it arising out of the royalty audit that was performed, Valeant’s obligation to pay royalties during the relevant audit period, and/or the litigation, and Valeant has released Depomed and PDL from any and all claims against themCompany ultimately faces as a result of the audit and/or the litigation.
Sprout Litigation
On or about November 2, 2016, the Company and Valeant were named as defendants in a lawsuit filed by the shareholder representative of the former shareholders of Sproutconduct alleged in the Court of Chancery of the State of Delaware (C.A. No. 12868).complaint. The plaintiffclaims alleged in this action alleged, among other things, breach of contract with respect to certain terms of the merger agreement relating to the Company's acquisition of Sprout, including a disputed contractual term respecting the use of certain diligent efforts to develop and commercialize the Addyi® product (including a disputed contractual term respecting the spend of no less than $200 million in certain expenditures). The plaintiff in this action sought unspecified compensatory and other damages and attorneys’ fees, as well as an order requiring Valeant to perform its obligations under the merger agreement. On December 20, 2017, the Company closed the Sprout Sale. In connection with the closing andthese cases were based on the same day, this action was dismissed with prejudice by stipulation of the parties.
Allergan Shareholder Class Actions
On December 16, 2014, Anthony Basile, an alleged shareholder of Allergan filed a lawsuit on behalf of a putative class of Allergan shareholders against the Company, Valeant, AGMS, Pershing Square, PS Management, GP, LLC, PS Fund 1 and William A. Ackmanpurported conduct that is at issue in the U.S. District Court for the Central District of California (Basile v. Valeant Pharmaceuticals International, Inc., et al., Case No. 14-cv-02004-DOC). On June 26, 2015, lead plaintiffs the State Teachers Retirement System of Ohio, the Iowa Public Employees Retirement System and Patrick T. Johnson filed an amended complaint against the Company, Valeant, J. Michael Pearson, Pershing Square, PS Management, GP, LLC, PS Fund 1 and William A. Ackman. The amended complaint alleged claims on behalf of a putative class of sellers of Allergan securities between February 25, 2014 and April 21, 2014, against all defendants contending that various purchases of Allergan securities by PS Fund were made while in possession of material, non-public information concerning a potential tender offer by the Company for Allergan stock, and asserting violations of Section 14(e) of the Exchange Act and rules promulgated by the SEC thereunder and Section 20A of the Exchange Act. The amended complaint also alleged violations of Section 20(a) of the Exchange Act against Pershing
Square, various Pershing Square affiliates, William A. Ackman and J. Michael Pearson. The amended complaint sought, among other relief, money damages, equitable relief, and attorneys’ fees and costs. On March 15, 2017, the Court entered an order certifying a plaintiff class comprised of persons who sold Allergan common stock contemporaneously with purchases of Allergan common stock made or caused by defendants during the period February 25, 2014 through April 21, 2014.
On June 28, 2017, Timber Hill LLC, a Connecticut limited liability company that allegedly traded in Allergan derivative instruments, filed a lawsuit on behalf of a putative class of derivative traders against the Company, Valeant, AGMS, Michael Pearson, Pershing Square, PS Management, GP, LLC, PS Fund 1 and William A. Ackman in the U.S. District Court for the Central District of California (Timber Hill LLC v. Pershing Square Capital Management, L.P., et al., Case No. 17-cv-04776-DOC). The complaint alleged claims on behalf of a putative class of investors who sold Allergan call options, purchased Allergan put options and/or sold Allergan equity forward contracts between February 25, 2014 and April 21, 2014, against all defendants contending that various purchases of Allergan securities by PS Fund were made while in possession of material, non-public information concerning a potential tender offer by the Company for Allergan stock, and asserting violations of Section 14(e) of the Exchange Act and rules promulgated by the SEC thereunder and Section 20A of the Exchange Act. The complaint also alleged violations of Section 20(a) of the Exchange Act against Pershing Square, various Pershing Square affiliates, William A. Ackman and Michael Pearson. The complaint sought, among other relief, money damages, equitable relief, and attorneys’ fees and costs. On July 25, 2017, the Court decided not to consolidate this lawsuit with the Basile action described above.
On December 28, 2017, all parties agreed to settle the ongoing, related Allergan shareholder class actions for a total of $290 million. As part of that proposed settlement, the Valeant parties are to pay $96 million, being 33% of the settlement amount, while the Pershing Square parties are to pay $195 million, being 67% of the settlement amount. The settlement remains subject to approval by the Court; however, on January 16, 2018, following a hearing on the settlement, the Court vacated the trial dates and indicated its preliminary approval of the settlement subject to submission of final papers and associated hearings. The preliminary approval hearing for this settlement is scheduled for March 5, 2018.
Qui Tam Complaint - Eastern District of Pennsylvania
On October 12, 2017, in relation to the investigation described above under subheading “- Letter from the U.S. Department of Justice Civil Division and the U.S. Attorney’s Office for the Eastern District of Pennsylvania”, an underlying qui tam complaint asserting claims under the federal and certain state False Claims Acts was unsealed in the Eastern District of Pennsylvania, after the United States and the states on whose behalf claims were asserted declined to intervene in the case. The complaint named Biovail Pharmaceuticals and three other pharmaceutical manufacturers as defendants. The complaint alleged that Biovail Pharmaceuticals and other manufacturers failed to accurately account for service fees in its calculation of Average Manufacturer Prices reported to the federal government, and as a result underpaid Medicaid rebates. On January 10, 2018, the Relator in this matter filed a voluntary dismissal in this matter, dismissing Biovail Pharmaceuticals, Inc. and two of the other defendants, on a without prejudice basis. The United States and the states on whose behalf claims were asserted have consented to the voluntary dismissal. The dismissal remains subject to approval of the Court.
Solodyn® Antitrust Class Actions
Beginning in July 2013, a number of civil antitrust class action suits were filed against Medicis Pharmaceutical Corporation (“Medicis”),In re Valeant Pharmaceuticals International, Inc. (“VPII”) and various manufacturersSecurities Litigation, all of generic forms of Solodyn®, alleging thatwhich occurred prior to 2017. On April 21, 2020, the defendants engaged in an anticompetitive scheme to exclude competition from the market for minocycline hydrochloride extended release tablets, a prescription drug for the treatment of acne marketed by Medicis under the brand name, Solodyn®. The plaintiffs in such suits alleged violations of Sections 1 and 2 of the Sherman Act, 15 U.S.C. §§ 1, 2, and of various state antitrust and consumer protection laws, and further alleged that the defendants have been unjustly enriched through their alleged conduct. The plaintiffs sought declaratory and injunctive relief and, where applicable, treble, multiple, punitive and/or other damages, including attorneys’ fees. By order dated February 25, 2014, the Judicial Panel for Multidistrict Litigation (‘‘JPML’’) centralized the suits in the District of Massachusetts, under the caption In re Solodyn (Minocycline Hydrochloride) Antitrust Litigation, Case No. 1:14-md-02503-DJC, before U.S. District Judge Denise Casper. After the Direct Purchaser Class Plaintiffs and the End-Payor Class Plaintiffs eachDefendants filed a consolidated amended class action complaint on September 12, 2014, the defendants jointly moved to dismiss those complaints. On August 14, 2015, the Court granted the Defendants' motion to dismiss with respect to claims brought under Sherman Act, Section 2 and various state laws but deniedthe consolidated amended complaint.Briefing on this motion concluded on August 3, 2020. On November 24, 2020, the Special Master appointed by the Court issued a report recommending that the motion to dismiss with respect to claims brought under Sherman Act, Section 1 and other state laws. VPII was dismissed from the case, but the litigation continues against Medicis and the generic manufacturers as to the remaining claims.
be granted in full.On March 26, 2015, and on April 6, 2015, while the motion to dismiss the class action complaints was pending, two additional non-class action complaints were filed against Medicis by certain retail pharmacy and grocery chains ("Individual Plaintiffs") making similar allegations and seeking similar relief to that sought by Direct Purchaser Class Plaintiffs. Those suits have been centralized with the class action suits inSeptember 20, 2021, the District of Massachusetts. FollowingCourt adopted the Court's August 14, 2015 decision on the motion to dismiss, the Individual Plaintiffs each filed amended complaints on October 1, 2015,report and Medicis answered on December 7, 2015. A third non-class action was filed by another retail pharmacy against Medicis on January 26, 2016, and Medicis answered on March 28, 2016.
Plaintiffs have reached a settlement with two of three generic manufacturer defendants, and, on April 14, 2017, the Court granted the Direct Purchaser Plaintiffs' and End-Payor Plaintiffs' motions for preliminary approval of those settlements. The Court granted final approval on November 27, 2017. For the remaining parties, fact discovery and expert discovery have closed. The Court granted Direct Purchaser Plaintiffs' and End-Payor Plaintiffs' motions for class certification for the purposes of damages, but denied End-Payor Plaintiffs' motion for class certification for the purposes of injunctive and declaratory relief. Defendants have petitioned to appeal the certificationrecommendation of the End-Payor ClassSpecial Master and this petition has been denied. Plaintiffs and defendants each filed motions for summary judgment. The Court heard oral argument ondismissed the parties’ summary judgment motions on January 12, 2018. On January 25, 2018, the Court issued a Memorandum and Order denying the parties’ motions, except for partially allowing defendants’ motion on market power. In February 2018, Medicis agreed to resolve the class action litigation with the End Payor and Direct Payor classes for an amount of $58 million, subject to Court approval, and has resolved related litigation with opt-out retailers for additional consideration.action.
| |
22. | COMMITMENTS AND CONTINGENCIES |
Lease Commitments
The Company leases certain facilities, vehicles and equipment principally under operating leases. Rental expense related to operating lease agreements was $77 million, $84 million and $85 million and for 2017, 2016 and 2015, respectively. Minimum future rental payments under non-cancelable operating and capital leases for each of the five succeeding years ending December 31 and thereafter are as follows:
|
| | | | | | | | |
| (in millions) | | Operating Lease Obligations | | Capital Lease Obligations |
| 2018 | | $ | 73 |
| | $ | 2 |
|
| 2019 | | 60 |
| | 1 |
|
| 2020 | | 50 |
| | 1 |
|
| 2021 | | 37 |
| | 1 |
|
| 2022 | | 34 |
| | 1 |
|
| Thereafter | | 132 |
| | — |
|
| Total | | $ | 386 |
| | $ | 6 |
|
Other Commitments21.COMMITMENTS AND CONTINGENCIES
The Company has commitments related to capital expenditures of approximately $35$76 million as of December 31, 2017.2021.
Under certain agreements, the Company may be required to make payments contingent upon the achievement of specific developmental, regulatory, or commercial milestones. In connection with certain business combinations, including the Salix Acquisition, among others, the Company may make contingent consideration payments, as further described in Note 3, "ACQUISITIONS" and Note 6, "FAIR VALUE MEASUREMENTS". In addition to these contingent consideration payments, asAs of December 31, 2017,2021, the Company estimatesbelieves it is reasonably possible that it may pay other potentialpotentially make milestone and license fee payments, including sales-based milestone payments, and license fees, including sales-based milestones, of up to approximately $935$340 million over time, in the aggregate, to third parties for products currently under development or being marketed, primarily consisting of the following:
In connection with certain agreements assumed in the Salix Acquisition which was consummated in April 2015, the Company estimates that it may pay to third parties potential milestones of up to approximately $200 million over time (the majority of which relates to sales-based milestones), in the aggregate.
The Company has made specific regulatory milestone payments related to and shares the profits for brodalumab with AstraZeneca under•Under the terms of the October 2015 licensea June 2013 distribution and supply agreement described in Note 3, "ACQUISITIONS". Aswith Mylan Pharmaceuticals Inc. (as assignee of
December 31, 2017, Spear Pharmaceuticals, Inc and Spear Dermatology Products Inc.), the Company may be required to pay up to an additional $20make sales-based milestone payments. The Company believes it is reasonably possible that these payments over time may approximate $70 million, in regulatory milestone payments and up to $175 million in sales-related milestone payments in accordance with the October 2015 license agreement.aggregate.
•Under the terms of a March 2010 development and licensingan April 2019 agreement between B&L and Nicox Inc.,with Mitsubishi Tanabe Pharma Corporation, the Company has acquired an exclusive worldwide rightslicense to develop and commercialize for certain indications, products containing latanoprostene bunod,MT-1303 (amiselimod), a nitric oxide donatinglate-stage oral compound forthat targets the treatment of glaucomasphingosine 1-phosphate receptor that plays a role in autoimmune diseases, such as Inflammatory Bowel Disease and ocular hypertension.ulcerative colitis. The Company may be required to make potential regulatory, commercializationdevelopment and sales-based milestone payments over time of up to $145$60 million, in the aggregate, as well as royalties on future sales.
•Under the termterms of a December 2019 agreement with Novaliq GmbH, the 2012 acquisitionCompany has acquired an exclusive license for the commercialization and development in the U.S. and Canada of Medicis Pharmaceutical Corporation,NOV03 (perfluorohexyloctane), an investigational drug to treat Dry Eye Disease associated with Meibomian gland dysfunction and may be required to make sales-based milestone payments. The Company believes it is reasonably possible that these payments over time may approximate $48 million, in the aggregate, as well as royalties on future sales.
•Under the terms of a November 2019 agreement with Cedars-Sinai Medical Center, to evaluate a new formulation of rifaximin for the treatment of irritable bowel syndrome, the Company may be required to make potential regulatory, commercializationdevelopment and sales-based milestone payments. The Company believes it is reasonably possible that these payments over time up to $145may approximate $36 million, in the aggregate.
•Under the terms of an October 2020 agreement with Eyenovia, Inc., the Company has acquired an exclusive license in the U.S. and Canada for the development and commercialization of an investigational microdose formulation of atropine ophthalmic solution, which is being investigated for the reduction of pediatric myopia progression, also known as nearsightedness, in children ages 3-12. Under the terms of the agreement, the Company may be required to make development and sales-based milestone payments. The Company believes it is reasonably possible that these payments over time may approximate $35 million, in the aggregate.
•Under the terms of a May 2020 agreement with STADA Arzneimittel AG and its development partner, Xbrane Biopharma AB, to commercialize in the U.S. and Canada a biosimilar candidate to Lucentis (ranibizumab), the Company may be required to make development and sales-based milestone payments.
Due to the nature of these arrangements, the future potential payments related to the attainment of the specified milestones over a period of several years are inherently uncertain. As of December 31, 2021, no accruals related to the aforementioned agreements exist because the milestone targets are not yet probable of being achieved.
Indemnification Provisions
In the normal course of business, the Company enters into agreements that include indemnification provisions for product liability and other matters. These provisions are generally subject to maximum amounts, specified claim periods and other conditions and limits. As of December 31, 2017 or 2016, no material amounts were accrued for the Company’s obligations under these indemnification provisions. In addition, the Company is obligated to indemnify its officers and directors in respect of any legal claims or actions initiated against them in their capacity as officers and directors of the Company in accordance with applicable law. Pursuant to such indemnities, the Company is indemnifying certain former officers and directors in respect of certain litigation and regulatory matters.As of December 31, 2021 and 2020, no material amounts were accrued for the Company’s obligations under these indemnification provisions.
22.SEGMENT INFORMATION
Reportable Segments
During the third quarter of 2016, theThe Company’s CEO,Chief Executive Officer ("CEO"), who is the Company’s Chief Operating Decision Maker, commenced managingmanages the business differently through changes in and reorganizations to the Company’s business structure, including changes to its operating and reportable segments which necessitated a realignment ofconsistent with how the Company's historical segment structure. Pursuant to this change, which was effective in the third quarterCEO: (i) assesses operating performance on a regular basis, (ii) makes resource allocation decisions and (iii) designates responsibilities of 2016, thehis direct reports. The Company operates in three operating andthe following reportable segments: (i) Bausch + Lomb/Lomb, (ii) Salix, (iii) International (ii) Branded Rx, (iv) Ortho Dermatologics and (iii) U.S.(v) Diversified Products. Effective for the first quarter of 2017, revenues and profits from the Company's operations in Canada, included in the Branded Rx segment in prior periods, are included in the Bausch + Lomb/International segment. Prior period presentations of segment revenues, segment profits and segment assets have been recast to conform to the current segment reporting structure.
The following is a brief description of the Company’s segments:
•The Bausch + Lomb/Lomb segment consists of global sales of Bausch + Lomb Vision Care, Consumer, Surgical and Ophthalmic Pharmaceuticals products.
•The Salix segmentconsists of sales in the U.S. of GI products.
•The International Rx segmentconsists of sales, with the exception of sales of Bausch +Lomb products and Solta aesthetic medical devices, outside the U.S and Puerto Rico of branded pharmaceutical products, branded generic pharmaceutical and OTC products.
•The Ortho Dermatologicssegment consists of: (i) sales in the U.S. of pharmaceutical products, OTC products and medical device products, primarily comprised of Bausch + Lomb products, with a focus on the Vision Care, Surgical, Consumer and Ophthalmology RxOrtho Dermatologics (dermatological) products and (ii) global sales in Canada, Europe, Asia, Australia and New Zealand, Latin America, Africa and the Middle East of branded pharmaceutical products, branded generic pharmaceutical products, OTC products,Solta aesthetic medical device products, and Bausch + Lomb products.
devices.•The Branded Rx segment consists of sales in the U.S. of: (i) Salix products (gastrointestinal products), (ii) Ortho Dermatologics (dermatological products) and (iii) oncology (or Dendreon), dentistry and women’s health products (or Sprout). As a result of the divestiture of the Company's equity interest in Dendreon on June 28, 2017 and Sprout on December 20, 2017, the Company has exited the oncology and women's health business, respectively.
The U.S. Diversified Products segment consists of sales in the U.S. of: (i) pharmaceutical products, OTC products and medical device products in the areas of neurology and certain other therapeutic classes, including aesthetics which includes the Solta business(ii) generic products and the Obagi business (the Obagi Sale was completed on November 9, 2017) and (ii) authorized generic(iii) dentistry products.
Segment profit is based on operating income after the elimination of intercompany transactions. Certain costs, such as amortizationAmortization of intangible assets, assetAsset impairments, in-process researchincluding loss on assets held for sale, Restructuring, integration, separation and development costs, restructuring and integration
costs, acquisition-related contingent considerationIPO costs, and other (income)Other expense, net, are not included in the measure of segment profit, as management excludes these items in assessing segment financial performance.
Corporate includes the finance, treasury, certain research and development programs, tax and legal operations of the Company’s businesses and maintains and/or incurs certain assets, liabilities, expenses, gains and losses related to the overall management of the Company, which are not allocated to the other business segments. In addition,assessing segment performance and managing operations, management does not review segment assets. Furthermore, a portion of share-based compensation is considered a corporate cost, since the amount of such expense depends on Company-widecompany-wide performance rather than the operating performance of any single segment.
Prior periodIn connection with the planned separation of its Solta business into an independent publicly traded entity from the remainder of Bausch Health Companies Inc., on February 23, 2022, the Company announced its plan to change its segment financial information has been recaststructure in a manner which is consistent with the organizational structure of the two separate entities as proposed by the Solta IPO during the first quarter of 2022. The new segment structure will not impact the Company’s reporting units but will realign the 2 reporting units of the Ortho Dermatologics segment whereby its medical dermatology reporting unit (Ortho Dermatologics) will now be managed by the CODM as part of the Diversified Products segment and the Solta reporting unit will be managed by the CODM as its own operating and reportable segment. Accordingly, the Company expects to conform to current segment presentation.begin reporting under the following reporting segments on a retrospective basis beginning with its first quarter of 2022 as follows: Bausch + Lomb, Salix, International Rx, Solta and Diversified Products.
Segment Revenues and Profit
Segment revenues and profits for the years ended December 31, 2017, 20162021, 2020 and 20152019 were as follows:
| | | | | | | | | | | | | | | | | |
| (in millions) | 2021 | | 2020 | | 2019 |
| Revenues: | | | | | |
| Bausch + Lomb | $ | 3,765 | | | $ | 3,415 | | | $ | 3,778 | |
| Salix | 2,074 | | | 1,904 | | | 2,022 | |
| International Rx | 1,166 | | | 1,181 | | | 1,154 | |
| Ortho Dermatologics | 564 | | | 548 | | | 560 | |
| Diversified Products | 865 | | | 979 | | | 1,087 | |
| Total revenues | $ | 8,434 | | | $ | 8,027 | | | $ | 8,601 | |
| Segment profit: | | | | | |
| Bausch + Lomb | $ | 958 | | | $ | 909 | | | $ | 1,117 | |
| Salix | 1,493 | | | 1,338 | | | 1,349 | |
| International Rx | 403 | | | 386 | | | 352 | |
| Ortho Dermatologics | 265 | | | 228 | | | 216 | |
| Diversified Products | 624 | | | 717 | | | 801 | |
| Total | 3,743 | | | 3,578 | | | 3,835 | |
| Corporate | (792) | | | (619) | | | (609) | |
| Amortization of intangible assets | (1,375) | | | (1,645) | | | (1,897) | |
| Goodwill impairments | (469) | | | — | | | — | |
| Asset impairments, including loss on assets held for sale | (234) | | | (114) | | | (75) | |
| Restructuring, integration, separation and IPO costs | (50) | | | (22) | | | (31) | |
| Other expense, net | (373) | | | (502) | | | (1,426) | |
| Operating income (loss) | 450 | | | 676 | | | (203) | |
| Interest income | 7 | | | 13 | | | 12 | |
| Interest expense | (1,426) | | | (1,534) | | | (1,612) | |
| Loss on extinguishment of debt | (62) | | | (59) | | | (42) | |
| Foreign exchange and other | 7 | | | (30) | | | 8 | |
| Loss before benefit from income taxes | $ | (1,024) | | | $ | (934) | | | $ | (1,837) | |
|
| | | | | | | | | | | |
| (in millions) | 2017 | | 2016 | | 2015 |
| Revenues: | | | | | |
| Bausch + Lomb/International | $ | 4,871 |
| | $ | 4,927 |
| | $ | 4,937 |
|
| Branded Rx | 2,475 |
| | 2,828 |
| | 3,248 |
|
| U.S. Diversified Products | 1,378 |
| | 1,919 |
| | 2,262 |
|
| Total revenues | $ | 8,724 |
| | $ | 9,674 |
| | $ | 10,447 |
|
| Segment profit: | | | | | |
| Bausch + Lomb/International | $ | 1,440 |
| | $ | 1,483 |
| | $ | 1,686 |
|
| Branded Rx | 1,361 |
| | 1,517 |
| | 1,875 |
|
| U.S. Diversified Products | 994 |
| | 1,522 |
| | 1,785 |
|
| Total segment profit | 3,795 |
| | 4,522 |
| | 5,346 |
|
| Corporate | (562 | ) | | (690 | ) | | (518 | ) |
| Amortization of intangible assets | (2,690 | ) | | (2,673 | ) | | (2,257 | ) |
| Goodwill impairments | (312 | ) | | (1,077 | ) | | — |
|
| Asset impairments | (714 | ) | | (422 | ) | | (304 | ) |
| Restructuring and integration costs | (52 | ) | | (132 | ) | | (362 | ) |
| Acquired in-process research and development costs | (5 | ) | | (34 | ) | | (106 | ) |
| Acquisition-related contingent consideration | 289 |
| | 13 |
| | 23 |
|
| Other income (expense) | 353 |
| | (73 | ) | | (295 | ) |
| Operating income (loss) | 102 |
| | (566 | ) | | 1,527 |
|
| Interest income | 12 |
| | 8 |
| | 4 |
|
| Interest expense | (1,840 | ) | | (1,836 | ) | | (1,563 | ) |
| Loss on extinguishment of debt | (122 | ) | | — |
| | (20 | ) |
| Foreign exchange and other | 107 |
| | (41 | ) | | (103 | ) |
| Loss before (benefit from) provision for income taxes | $ | (1,741 | ) | | $ | (2,435 | ) | | $ | (155 | ) |
Segment Assets
Total assets byCertain reclassifications have been made to segment as of December 31, 2017revenue and 2016 were as follows:
|
| | | | | | | |
| (in millions) | 2017 | | 2016 |
| Bausch + Lomb/International | $ | 13,042 |
| | $ | 16,201 |
|
| Branded Rx | 18,316 |
| | 21,143 |
|
| U.S. Diversified Products | 5,467 |
| | 5,820 |
|
| | 36,825 |
| | 43,164 |
|
| Corporate | 672 |
| | 365 |
|
| Total assets | $ | 37,497 |
| | $ | 43,529 |
|
Capital Expenditures Depreciation and Amortization of intangible assets, and Asset Impairments
Capital expenditures depreciation and amortization of intangible assets, and asset impairments by segment for the years ended December 31, 2017, 20162021, 2020 and 20152019 were as follows:
| | | | | | | | | | | | | | | | | |
| (in millions) | 2021 | | 2020 | | 2019 |
| Capital expenditures: | | | | | |
| Bausch + Lomb | $ | 201 | | | $ | 253 | | | $ | 186 | |
| Salix | 2 | | | 3 | | | 2 | |
| International Rx | 22 | | | 29 | | | 39 | |
| Ortho Dermatologics | 1 | | | 2 | | | 1 | |
| Diversified Products | 1 | | | 2 | | | 2 | |
| 227 | | | 289 | | | 230 | |
| Corporate | 42 | | | 13 | | | 40 | |
| Total capital expenditures | $ | 269 | | | $ | 302 | | | $ | 270 | |
|
| | | | | | | | | | | |
| (in millions) | 2017 | | 2016 | | 2015 |
| Capital expenditures: | | | | | |
| Bausch + Lomb/International | $ | 159 |
| | $ | 221 |
| | $ | 197 |
|
| Branded Rx | 5 |
| | 5 |
| | 15 |
|
| U.S. Diversified Products | 4 |
| | 3 |
| | 5 |
|
| | 168 |
| | 229 |
| | 217 |
|
| Corporate | 3 |
| | 6 |
| | 18 |
|
| Total capital expenditures | $ | 171 |
| | $ | 235 |
| | $ | 235 |
|
| | | | | | |
| Depreciation and amortization of intangible assets: | | | | | |
| Bausch + Lomb/International | $ | 666 |
| | $ | 817 |
| | $ | 818 |
|
| Branded Rx | 1,798 |
| | 1,606 |
| | 1,227 |
|
| U.S. Diversified Products | 369 |
| | 408 |
| | 386 |
|
| | 2,833 |
| | 2,831 |
| | 2,431 |
|
| Corporate | 25 |
| | 35 |
| | 36 |
|
| Total depreciation and amortization of intangible assets | $ | 2,858 |
| | $ | 2,866 |
| | $ | 2,467 |
|
| | | | | | |
| Asset impairments: | | | | | |
| Bausch + Lomb/International | $ | 165 |
| | $ | 150 |
| | $ | 60 |
|
| Branded Rx | 344 |
| | 218 |
| | 190 |
|
| U.S. Diversified Products | 205 |
| | 48 |
| | 54 |
|
| | 714 |
| | 416 |
| | 304 |
|
| Corporate | — |
| | 6 |
| | — |
|
| Total asset impairments | $ | 714 |
| | $ | 422 |
| | $ | 304 |
|
Revenues by Product and by Product Category
Revenues by product categoryfor the Company's top 10 products for the years ended December 31, 2017, 20162021, 2020 and 20152019 represented 43%, 41% and 39% of total product sales, respectively. Revenues by segment and product category were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Bausch + Lomb | | Salix | | International Rx | | Ortho Dermatologics | | Diversified Products | | Total |
| (in millions) | For the year ended December 31, 2021 |
| Pharmaceuticals | $ | 514 | | | $ | 2,066 | | | $ | 259 | | | $ | 241 | | | $ | 683 | | | $ | 3,763 | |
| Devices | 1,596 | | | — | | | — | | | 307 | | | — | | | 1,903 | |
| OTC | 1,388 | | | — | | | 136 | | | — | | | 8 | | | 1,532 | |
| Branded and Other Generics | 240 | | | — | | | 737 | | | — | | | 167 | | | 1,144 | |
| Other revenues | 27 | | | 8 | | | 34 | | | 16 | | | 7 | | | 92 | |
| $ | 3,765 | | | $ | 2,074 | | | $ | 1,166 | | | $ | 564 | | | $ | 865 | | | $ | 8,434 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Bausch + Lomb | | Salix | | International Rx | | Ortho Dermatologics | | Diversified Products | | Total |
| For the year ended December 31, 2020 |
| Pharmaceuticals | $ | 506 | | | $ | 1,899 | | | $ | 255 | | | $ | 275 | | | $ | 745 | | | $ | 3,680 | |
| Devices | 1,313 | | | — | | | — | | | 253 | | | — | | | 1,566 | |
| OTC | 1,311 | | | — | | | 112 | | | — | | | 7 | | | 1,430 | |
| Branded and Other Generics | 254 | | | — | | | 775 | | | — | | | 219 | | | 1,248 | |
| Other revenues | 31 | | | 5 | | | 39 | | | 20 | | | 8 | | | 103 | |
| $ | 3,415 | | | $ | 1,904 | | | $ | 1,181 | | | $ | 548 | | | $ | 979 | | | $ | 8,027 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Bausch + Lomb | | Salix | | International Rx | | Ortho Dermatologics | | Diversified Products | | Total |
| For the year ended December 31, 2019 |
| Pharmaceuticals | $ | 623 | | | $ | 2,022 | | | $ | 268 | | | $ | 353 | | | $ | 813 | | | $ | 4,079 | |
| Devices | 1,524 | | | — | | | — | | | 193 | | | — | | | 1,717 | |
| OTC | 1,322 | | | — | | | 119 | | | — | | | 6 | | | 1,447 | |
| Branded and Other Generics | 260 | | | — | | | 730 | | | — | | | 256 | | | 1,246 | |
| Other revenues | 49 | | | — | | | 37 | | | 14 | | | 12 | | | 112 | |
| $ | 3,778 | | | $ | 2,022 | | | $ | 1,154 | | | $ | 560 | | | $ | 1,087 | | | $ | 8,601 | |
|
| | | | | | | | | | | |
| (in millions) | 2017 | | 2016 | | 2015 |
| Pharmaceuticals | $ | 4,377 |
| | $ | 5,167 |
| | $ | 6,058 |
|
| Devices | 1,532 |
| | 1,504 |
| | 1,480 |
|
| OTC | 1,529 |
| | 1,581 |
| | 1,583 |
|
| Branded and Other Generics | 1,157 |
| | 1,284 |
| | 1,171 |
|
| Other revenues | 129 |
| | 138 |
| | 155 |
|
| | $ | 8,724 |
| | $ | 9,674 |
| | $ | 10,447 |
|
Geographic Information
Revenues are attributed to a geographic region based on the location of the customer for the years ended December 31, 2017, 20162021, 2020 and 20152019 were as follows:
| | | | | | | | | | | | | | | | | |
| (in millions) | 2021 | | 2020 | | 2019 |
| U.S. and Puerto Rico | $ | 4,887 | | | $ | 4,791 | | | $ | 5,164 | |
| China | 490 | | | 341 | | | 368 | |
| Canada | 343 | | | 331 | | | 339 | |
| Poland | 280 | | | 238 | | | 231 | |
| Mexico | 256 | | | 225 | | | 228 | |
| Japan | 230 | | | 226 | | | 241 | |
| France | 208 | | | 179 | | | 201 | |
| Russia | 160 | | | 137 | | | 180 | |
| Egypt | 156 | | | 243 | | | 218 | |
| Germany | 154 | | | 144 | | | 150 | |
| United Kingdom | 116 | | | 86 | | | 115 | |
| Spain | 88 | | | 78 | | | 86 | |
| Italy | 80 | | | 71 | | | 85 | |
| Other | 986 | | | 937 | | | 995 | |
| $ | 8,434 | | | $ | 8,027 | | | $ | 8,601 | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
|
| | | | | | | | | | | |
| (in millions) | 2017 | | 2016 | | 2015 |
| U.S. and Puerto Rico | $ | 5,225 |
| | $ | 6,247 |
| | $ | 7,063 |
|
| China | 331 |
| | 300 |
| | 272 |
|
| Canada | 326 |
| | 320 |
| | 334 |
|
| Japan | 223 |
| | 232 |
| | 206 |
|
| Mexico | 201 |
| | 189 |
| | 204 |
|
| Poland | 201 |
| | 140 |
| | 214 |
|
| Russia | 200 |
| | 165 |
| | 169 |
|
| France | 188 |
| | 186 |
| | 178 |
|
| Germany | 157 |
| | 157 |
| | 159 |
|
| Egypt | 152 |
| | 196 |
| | 51 |
|
| Australia | 149 |
| | 176 |
| | 182 |
|
| United Kingdom | 108 |
| | 104 |
| | 105 |
|
| Brazil | 96 |
| | 105 |
| | 110 |
|
| Other | 1,167 |
| | 1,157 |
| | 1,200 |
|
| | $ | 8,724 |
| | $ | 9,674 |
| | $ | 10,447 |
|
Certain reclassifications have been made and are reflected in the table above.
Long-lived assets consisting of property, plant and equipment, net of accumulated depreciation, are attributed to geographic regions based on their physical location as of December 31, 20172021 and 20162020 were as follows:
| | | (in millions) | 2017 | | 2016 | (in millions) | 2021 | | 2020 |
| U.S. and Puerto Rico | $ | 599 |
| | $ | 614 |
| U.S. and Puerto Rico | $ | 743 | | | $ | 725 | |
| Ireland | 235 |
| | 198 |
| Ireland | 336 | | | 328 | |
| Canada | | Canada | 123 | | | 110 | |
| Poland | 100 |
| | 81 |
| Poland | 75 | | | 83 | |
| Canada | 98 |
| | 83 |
| |
| Germany | 70 |
| | 60 |
| Germany | 87 | | | 80 | |
| Mexico | 50 |
| | 50 |
| Mexico | 45 | | | 49 | |
| Egypt | 47 |
| | 41 |
| |
| France | 34 |
| | 29 |
| France | 39 | | | 34 | |
| China | | China | 30 | | | 31 | |
| Serbia | 30 |
| | 25 |
| Serbia | 25 | | | 30 | |
| China | 28 |
| | 26 |
| |
| Italy | 23 |
| | 19 |
| Italy | 21 | | | 23 | |
| South Korea | 15 |
| | 14 |
| |
| Other | 74 |
| | 72 |
| Other | 74 | | | 74 | |
| | $ | 1,403 |
| | $ | 1,312 |
| | $ | 1,598 | | | $ | 1,567 | |
Major Customers
Customers that accounted for 10% or more of total revenues for the years ended December 31, 2017, 2016 and 2015 were as follows:
| | | | | | | | | | | | | | | | | |
| 2021 | | 2020 | | 2019 |
| AmerisourceBergen Corporation | 18% | | 17% | | 16% |
| McKesson Corporation | 16% | | 17% | | 17% |
| Cardinal Health, Inc. | 12% | | 13% | | 14% |
|
| | | | | |
| (in millions) | 2017 | | 2016 | | 2015 |
| McKesson Corporation | 19% |
| 21% |
| 20% |
| AmerisourceBergen Corporation | 15% |
| 13% |
| 14% |
| Cardinal Health, Inc. | 13% |
| 15% |
| 12% |
SUPPLEMENTARY DATA (UNAUDITED)
Selected unaudited quarterly consolidated financial data are shown below:
23.SUBSEQUENT EVENTS
On January 18, 2022, the Company issued conditional notices of redemption to redeem in full all of its outstanding April 2025 Unsecured Notes and to redeem $370 million aggregate principal amount of its outstanding December 2025 Unsecured Notes. On February 10, 2022, the Company extended these conditional notices of redemption through March 15, 2022. The redemption and discharge of the indenture governing the April 2025 Unsecured Notes will be conditioned upon the completion of the Credit Agreement Refinancing, as defined below. The redemption of the December 2025 Unsecured Notes will be conditioned upon the receipt of aggregate gross proceeds from the B+L IPO, the B+L Debt Financing as defined below, the Credit Agreement Refinancing and the offering of the February 2027 Secured Notes, as defined below, of at least $7,000 million.
On January 18, 2022, the Company announced its intention to refinance its existing Restated Credit Agreement with a Fifth Amended Restated Credit Agreement (the "New Restated Credit Agreement" and such refinancing, the "Credit Agreement Refinancing"). The New Restated Credit Agreement is expected to consist of approximately $2,500 million of term B loans and a $975 million revolving credit facility. The Credit Agreement Refinancing is expected to occur only upon completion of the B+L IPO and a related debt financing by Bausch + Lomb (the "B+L Debt Financing"). At the time of the B+L IPO, the Credit Agreement Refinancing will provide that Bausch + Lomb initially be a "restricted" subsidiary subject to the terms of the Credit Agreement covenants, however the Credit Agreement Refinancing is expected to permit the Company to designate Bausch + Lomb as an "unrestricted" subsidiary under the New Restated Credit Agreement covenants upon achievement of a 7.6x pro forma "Remainco Total Leverage Ratio." Such designation could take place at any time after the B+L IPO (including as soon as the closing of the B+L IPO). The Credit Agreement Refinancing is designed to facilitate the separation and distribution of Bausch + Lomb. The Credit Agreement Refinancing will not be consummated until completion of the B+L IPO and related B+L Debt Financing. There can be no assurance that the Credit Agreement Refinancing will occur on the terms described above, or at all.
On February 10, 2022, the Company issued $1,000 million aggregate principal amount of 6.125% senior secured notes due February 2027 (the “February 2027 Secured Notes”). The February 2027 Secured Notes accrue interest at a rate of 6.125% per year, payable semi-annually in arrears on each February and August. The February 2027 Secured Notes are redeemable at the option of the Company, in whole or in part, at any time on or after February 2024, at the redemption prices set forth in the indenture. The Company may redeem some or all of the February 2027 Secured Notes prior to February 2024 at a price equal to 100% of the principal amount thereof plus a “make-whole” premium. Prior to February 2024, the Company may redeem up to 40% of the aggregate principal amount of the February 2027 Secured Notes using the proceeds of certain equity offerings at the redemption price set forth in the indenture.If the B+L IPO does not occur on or prior to August 15, 2022, the Company will be required to redeem the February 2027 Secured Notes at such time at a redemption price equal to the issue price of the February 2027 Secured Notes plus accrued and unpaid interest.
|
| | | | | | | | | | | | | | | | |
| | | 2017 |
| (in millions, except per share amounts) | | First Quarter | | Second Quarter | | Third Quarter | | Fourth Quarter |
| Revenue | | $ | 2,109 |
| | $ | 2,233 |
| | $ | 2,219 |
| | $ | 2,163 |
|
| Expenses | | 1,898 |
| | 2,058 |
| | 2,181 |
| | 2,485 |
|
| Operating income (loss) | | $ | 211 |
| | $ | 175 |
| | $ | 38 |
| | $ | (322 | ) |
| Net income (loss) attributable to Valeant Pharmaceuticals International, Inc. | | $ | 628 |
| | $ | (38 | ) | | $ | 1,301 |
| | $ | 513 |
|
| | | | | | | | | |
| Earnings (loss) per share attributable to Valeant Pharmaceuticals International, Inc.: | | | | | | | | |
| Basic | | $ | 1.80 |
| | $ | (0.11 | ) | | $ | 3.71 |
| | $ | 1.46 |
|
| Diluted | | $ | 1.79 |
| | $ | (0.11 | ) | | $ | 3.69 |
| | $ | 1.45 |
|
| Net cash provided by operating activities | | $ | 954 |
| | $ | 268 |
| | $ | 490 |
| | $ | 578 |
|
|
| | | | | | | | | | | | | | | | |
| | | 2016 |
| (in millions, except per share amounts) | | First Quarter | | Second Quarter | | Third Quarter | | Fourth Quarter |
| Revenue | | $ | 2,372 |
| | $ | 2,420 |
| | $ | 2,479 |
| | $ | 2,403 |
|
| Expenses | | 2,306 |
| | 2,339 |
| | 3,342 |
| | 2,253 |
|
| Operating income (loss) | | $ | 66 |
| | $ | 81 |
| | $ | (863 | ) | | $ | 150 |
|
| Net loss attributable to Valeant Pharmaceuticals International, Inc. | | $ | (374 | ) | | $ | (302 | ) | | $ | (1,218 | ) | | $ | (515 | ) |
| | | | | | | | | |
| (Loss) earnings per share attributable to Valeant Pharmaceuticals International, Inc.: | | | | | | | | |
| Basic | | $ | (1.08 | ) | | $ | (0.88 | ) | | $ | (3.49 | ) | | $ | (1.47 | ) |
| Diluted | | $ | (1.08 | ) | | $ | (0.88 | ) | | $ | (3.49 | ) | | $ | (1.47 | ) |
| Net cash provided by operating activities | | $ | 556 |
| | $ | 449 |
| | $ | 569 |
| | $ | 512 |
|
