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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
xANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 20112012
OR
oTRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File No. 000-30334
Angiotech Pharmaceuticals, Inc.
(Exact Name of Registrant as Specified in its Charter)
British Columbia, Canada | | 98-0226269 |
(State or Other Jurisdiction of Incorporation or Organization) | | (I.R.S. Employer Identification No.) |
1618 Station355 Burrard Street, Vancouver,Suite 1100 Vancover, BC Canada
| | V6A 1B6V6C 2G8
|
(Address of principal executive offices) | | (Zip Code) |
Registrant’s telephone number, including area code: (604) 221-7676
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | | Name of each exchange on which registered |
Common shares, without par value | | OTC Bulletin Board |
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o No x
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 ox No xo
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months and (2) has been subject to such filing requirements for the past 90 days. Yes x No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x 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 the 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. x
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer o | | Accelerated filer o |
| | |
Non-accelerated filer x | | Smaller reporting company o |
(Do not check if a smaller reporting company) | | |
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x
As of March 29, 2012,28, 2013, the registrant had 12,556,67312,547,702 outstanding common shares.
DOCUMENTS INCORPORATED BY REFERENCE
None.
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Angiotech Pharmaceuticals, Inc.
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Annual Report on Form 10-K for the year ended December 31, 20112012
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In this Annual Report on Form 10-K, references to “the Company,” “Angiotech,” “us” or “we” are to Angiotech Pharmaceuticals, Inc. and all of its subsidiaries as a whole, except where it is clear that these terms only refer to Angiotech Pharmaceuticals, Inc.
Accounting Standards
In this Annual Report on Form 10-K, all dollar amounts are in U.S. dollars, except where otherwise stated and financial reporting is made in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”).
Currency and Exchange Rates
The Company’s consolidated functional and reporting currency is the U.S. dollar. The Canadian dollar is the functional currency for the parent company Angiotech Pharmaceuticals, Inc. (on a non-consolidated basis) and its Canadian subsidiaries, the U.K pound is the functional currency of our U.K subsidiary, Pearsalls Limited, the Danish Kroner is the functional currency of our Danish subsidiary, PBN Medicals Denmark A/S, and the U.S. dollar is the functional currency for all other subsidiaries.
NOTICE REGARDING WEBSITE ACCESS TO COMPANY REPORTS
We file electronically with the Securities and Exchange Commission (“SEC”) our annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (“the Exchange Act”). You may obtain a free copy of our annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K, and any amendments to those reports, on or after the day of filing with the SEC and on our website at: www.angiotech.com. Our website and the information on our website is not part of this Annual Report on Form 10-K.
You may also read and copy any materials we file with the SEC at the SEC’s Public Reference Room at 100 F Street, NE, Washington, DC 20549. You may also obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC maintains an Internet site at www.sec.gov that contains reports, proxy and information statements, and other information regarding issuers such as us that file electronically.
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PART I
Item 1. BUSINESS
Summary
Angiotech develops, manufactures and markets medical device products and technologies, primarily within the areas of interventional oncology, wound closure and ophthalmology. Our strategy is to utilize our precision manufacturing capabilities and our highly targeted sales and marketing capabilities to offer novel or differentiated medical device products to patients, physicians and other medical device manufacturers or distributors within certain segments of our target markets.
We currently operate in two business segments: Medical Device Technologies and Licensed Technologies. Our Medical Device Technologies segment, which generates the majority of our revenue, develops, manufactures and markets a wide range of single use medical device products, as well as precision manufactured medical device components. These products and components are sold directly to hospitals, clinics, physicians and other end users, as well as to medical products distributors or other third-party medical device manufacturers. Our Licensed Technologies segment includes certain of our legacy technologies for which research and development activities have been concluded. This segment generates additional revenue in the form of royalties received from partners who have licensed and utilize these technologies in their medical device product lines. Our principal revenues in this segment to date have historically been royalties derived from sales by our partner Boston Scientific Corporation (“BSC”) of TAXUS® paclitaxel-eluting coronary stents (“TAXUS”) for the treatment of coronary artery disease. We expect that continued declines in our TAXUS related royalties may be offset by future growth of royalties we may receive from our partner Cook Medical, Inc. (“Cook”) related to their sales of Zilver® PTX® paclitaxel-eluting peripheral vascular stents (“Zilver-PTX”).
For the year ended December 31, 2011,2012, we recorded $208.5$221.3 million in direct sales of our various medical products and $24.7$22.5 million in royalties and license fees received from our partners. For additional financial information about our business segments and the geographic areas in which we operate, refer to note 23 of the audited consolidated financial statements included in this Annual Report on Form 10-K.
Sale of the Interventional Products Business to Argon Medical, Inc.
On March 25, 2013, we announced that we entered into a definitive agreement to sell certain of our subsidiaries, comprising our Interventional Products Business to Argon Medical Devices, Inc., a Delaware corporation (“Argon”), which is a portfolio company of RoundTable Healthcare Partners (“RoundTable”), for $362.5 million in cash consideration. Subject to various conditions, the transaction is expected to close prior to the end of April 2013. The cash consideration from this transaction will be used to repay $44.0 million of outstanding debt obligations owing under our Senior Floating Rate Notes (“New Notes”) and $229.4 million of outstanding debt obligations owing under our 9% Senior Notes (“Senior Notes”). For more detailed information on the significant terms and conditions contemplated by this transaction, refer note 26 — Subsequent Events of our audited consolidated financial statements included in this Annual Report and our Form 8-K filed with the U.S. Securities and Exchange Commission (“SEC”) on March 26, 2013.
Recapitalization and Emergence from Proceedings
Over the past several years, royalty revenue we receive from sales of TAXUS coronary stent systems by our partner BSC has declined significantly. These declines led to significant constraints on our liquidity, working capital and capital resources, which adversely impacted our ability to continue to support certain of our business initiatives and service our debt obligations.
As a result, after extensively exploring a range of financial and strategic alternatives, on January 28, 2011 we and certain of our subsidiaries (collectively, the “Angiotech Entities”) voluntarily filed for creditor protection (the “CCAA Proceedings”) with the Supreme Court of British Columbia (the “Canadian Court”) under the Companies’ Creditors Arrangement Act (Canada) (the “CCAA”) to implement a recapitalization or restructuring of certain of our debt obligations (the “Recapitalization Transaction”) through a plan of compromise or arrangement (as amended, supplemented or restated from time to time, the “CCAA Plan”). In order to have the CCAA Proceedings recognized in the United States, on January 30, 2011, the Angiotech Entities commenced proceedings under Chapter 15 of Title 11 of the United States Code (the “U.S. Bankruptcy Code”) in the United States Bankruptcy Court (the U.S. Court) for the District of Delaware (together with the CCAA Proceedings, the “Creditor Protection Proceedings”). On January 13, 2011 and March 3, 2011, respectively, our common shares were delisted from the NASDAQ Stock Market (“NASDAQ”) and the Toronto Stock Exchange (“TSX”).
On April 4, 2011, a meeting was held for creditors whose obligations were compromised under the CCAA Plan (“Affected Creditors”) to vote for or against the resolution approving the CCAA Plan. The CCAA Plan was approved by 100% of the Affected Creditors, whose votes were registered and sanctioned by the order of the Canadian Court on April 6, 2011. This order was subsequently recognized by the U.S. Court on April 7, 2011. Affected Creditors who did not file a proof of claim in accordance with the procedure for the adjudication, resolution and determination of claims established by order of the Canadian Court on February 17, 2011 (the “Claims Procedure Order”) had their claims forever barred and extinguished and were not permitted to receive distributions under the CCAA Plan. On May 12, 2011 (the “Plan Implementation Date” or the “Effective Date”), all of our existing common shares and options were cancelled without payment or consideration and the Subordinated Noteholders’ claims of $266 million were settled for 12,500,000 new common shares issued in accordance with the terms of the CCAA Plan. All other Affected Creditors elected, or were deemed to have elected, for cash settlement of their claims. As a result, the $4.5 million of distribution claims of Affected Creditors (excluding Subordinated Noteholders) were settled for $0.4 million in cash. For more detail on additional transactions that were consummated as part of the CCAA Plan on the Plan Implementation Date, refer to note 3 in our audited consolidated financial statements for the year ended December 31, 2011.2012.
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On February 7, 2011, we entered into a definitive agreement with Wells Fargo Capital Finance, LLC (“Wells Fargo”) to secure a $28.0 million debtor-in-possession credit facility (the “DIP Facility”). The DIP Facility provided us with liquidity for working capital, general corporate purposes and expenses during the implementation of the CCAA Plan. On the Plan Implementation Date, the DIP Facility was repaid and terminated, and we entered into a new credit facility (as amended, the “Exit Facility”) with Wells Fargo, which
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provides for potential borrowings up to $28 million (see notes 16(c) and 16(f)note 14(f) of the audited consolidated financial statements included in this Annual Report on Form 10-K).
On May 12, 2011, upon the close of business, we concluded substantially all the activities relating to the Recapitalization Transaction and the Angiotech Entities emerged from Creditor Protection Proceedings. During the course of the Creditor Protection Proceedings, the majority of our businesses continued to operate as usual and there were no material disruptions to our operations, marketing or product distribution activities.
Business Strategy
Our strategy is to target selected segments of markets where we can establish or maintain a leadership position in medical device products or components, and thereby achieve profitable revenue growth and improved cash flows. Key elements of this strategy include:
· Maintaining and Investing in Our Precision Manufacturing Capabilities and Technology. We maintain multiple facilities with precision manufacturing capabilities specifically tailored to medical products. These operations enable us to control the most material aspects of manufacturing of our products or product components and assure we are able to readily and flexibly provide products and serve our customers in a safe, consistent and high quality manner that complies with all regulations. We believe maintaining and investing in these capabilities and ensuring the on-time delivery of quality products provides a key barrier to entry in our current markets, and may facilitate more rapid capture of new market or product opportunities as compared to competitors that manufacture using mainly outside vendors or third party manufacturers.
· Developing and Investing in Highly Specialized Sales and Marketing Personnel and Activities. We have developed several focused, specialized groups of sales and marketing personnel that, in combination with third party distribution networks, target highly selective market sub-segments or customers, with an emphasis on product areas where our precision manufacturing capabilities may provide us a competitive advantage or on markets that may be underserved by the largest medical product providers and manufacturers. We believe this hybrid selling approach, as opposed to working solely through third party sales organizations or personnel, facilitates our ability to build our most important product brands and help customers better understand the key advantages of our products and capabilities.
· Selectively Investing in New Product Development, Intellectual Property and Proprietary Know-How. We maintain dedicated medical device product engineering, regulatory and quality affairs personnel centered primarily in two of our facility locations. We believe maintaining dedicated product development resources in-house, in combination with our in-house manufacturing capabilities, may facilitate a more rapid and disciplined response to new market opportunities and customer needs, and may provide opportunities to improve our gross profit margins or competitive position us through the development of new, proprietary manufacturing technology or know-how.
· Pursuing Selective and Disciplined Business Development, Product or Business Acquisition Activities. We expect to continue to supplement our in-house product development and commercialization activities by selectively pursuing product licenses, distribution arrangements, acquisitions or other similar transactions. We believe such activities, when pursued within the discipline of our profitable operating model and within defined financial risk parameters, may provide additional opportunity for us to capitalize on, and generate additional operating profit and cash flow, from our significant investments in our dedicated manufacturing and sales and marketing resources.
Business Overview
Medical Device Technologies
Our Medical Device Technologies segment manufactures and markets a wide range of single-use specialty medical device products and medical device components. These products are sold directly to end users or other third-party medical device manufacturers. This segment contains significant manufacturing capabilities as well as specialized direct and indirect sales and distribution capabilities. Many of our medical products are made using our proprietary manufacturing processes and aremay be protected by our patent portfolio or proprietary know-how. Our most significant product groups within this business segment include Interventional Oncology, Wound Closure, Ophthalmology and Medical Device Components.
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Interventional Oncology
We develop, manufacture and market a range of proprietary single use medical device products for the diagnosis of cancer, primarily biopsy devices and related products. These product lines include a wide range of soft tissue biopsy products, both disposable and re-usable, primarily for use in different types of breast, lung, spinalsoft tissue and bone marrow biopsies. Some key features of our soft tissue biopsy products include specially manufactured high visibility needle tips to facilitate placement under ultrasound guidance, numerically
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ordered centimeter markings to facilitate precise depth placement, and adjustable needle stops to restrict forward movement and localize the needle to the biopsy site. Other selected product lines in our biopsy group include fixation pins, breast localization markers and tunneling stylets, surgical tunnelers and isotope seed spacers and needles for prostate cancer treatment.stylets. We also offer additional product lines for certain selected interventional radiology procedures performed primarily by physicians that also utilize our biopsy product lines.
We sell the majority of these product lines through our Interventional Oncology direct sales organization directly to hospitals and other end users. We also employ selected independent sales representatives and third party distributors to market and sell these product lines in territories where we lack direct sales coverage or where such direct investment would not be financially justified. Our most significant product lines include:
· BioPince™ full core biopsy devices. Our BioPince biopsy instrument product line is used to obtain tissue samples from patients for analysis and diagnosis of disease. We believe that BioPince is the only commercially available “full core” biopsy device, which may provide a more substantive and improved tissue sample and thereby enable clinicians to more rapidly and accurately provide diagnosis of potential disease. BioPince features a proprietary tri-axial “Core, Cut and Capture” cannula system, which allows the device to deliver cylindrical, full-length biopsy specimens that are complete and largely undamaged, which we believe significantly improves the diagnostic value of the sample.
· Tru-CoreTM II (fully automatic) and SuperCore™ (semi-automatic) disposable biopsy instruments. Our True-Core and SuperCore soft tissue biopsy product lines are designed to address a variety of diagnostic procedures where a “full core” sample may not be necessary, offer a greater variety of needle lengths and sizes and are cost effective by combining disposable needles with reusable instrumentation. These product lines are designed to be light weight, easily maneuverable and operated with one hand. Our SuperCore is a semi-automatic device which allows for placement of the device specimen notch in a lesion before the spring-loaded cutting cannula is fired, which is considered ideal in CT-guided biopsies. We believe that SuperCore is one of the only semi-automatic devices with an adjustable specimen notch, which may provide clinical flexibility.
· T-Lok™ bone marrow biopsy devices. Our T-Lok™ bone marrow biopsy device is used for collecting bone marrow. Bone marrow collection is a procedure that is typically done after abnormal red or white blood cells are found in a patient. T-LOK has an ergonomically designed twist-lock handle, which we believe improves a clinician’s ability to penetrate hard bone to obtain the biopsy sample. An adjustable needle stop to control the depth of penetration allows the clinician to safely collect bone marrow at the sternum of the patient.
· SKATER™ line of drainage catheters. Our SKATER drainage system, which includes catheters and related accessories, is used to facilitate drainage of fluid from wounds, infectious tissues or surgical sites. SKATER features larger lumens and drainage holes, kink resistance, resistance to encrustation and high radiopacity. SKATER is offered in multiple sizes and configurations to address the most typical drainage applications including specific designs for centesis, or small volume drainage procedures, drainage from the biliary duct and nephrostomy procedures.
Wound Closure
We develop, manufacture and market a full line of wound closure products, primarily various types of sutures and surgical needle products. These products are used by surgeons in a wide variety of applications in hospitals, surgery centers and physician offices. We also sell a significant amount of our general suture products for use in dental and oral surgery procedures. Our suture configurations vary in diameter, length, and material. Our product lines also include a full line of bio-absorbable and non-absorbable suture materials, including PolySynTM and PolySyn FATM, Monoderm™, PolyvioleneTM, polypropylene, poly-ethylene-terephthatate, glycolide and e-caprolactone, polyglycolic acid (PGA), plain and chromic gut, nylon and silk. This wide range of materials allows us to offer a range of handling characteristics and bio-absorption times for our product line. Our product lines also include a wide variety of needle types, including drilled-end and channel surgical needles. Drilled-end suture needles have a precisely drilled butt end for maximum suture holding strength and are adequately tempered for securing strong attachment of the suture. Our proprietary needle designs, including our SharpointTM, UltraGlideTM, and M.E.T.TM Microsurgical product lines are used in very precise tissue closures such as corneal transplants, microvascular, microtubal, and nerve repair procedures.
We sell many of these product lines directly to hospitals, surgery centers, clinics and other end users through our Wound Closure direct sales organization. We also employ selected independent sales representatives and third party distributors to market and sell these product lines in territories or areas where we lack direct sales coverage or where such direct investment is not financially
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justified. We also manufacture certain of these products in finished form for other third party medical device manufacturers and distributors. Our most significant product lines include:
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· Quill™ Knotless Tissue-Closure products (“Quill”). Our Quill product line is a surface modified suture material that contains proprietary patterns of tiny barbs or other patterns, which can eliminate the need for surgeons to tie knots when closing certain wound types. We believe that use of Quill may lead to faster surgical times, improved wound cosmesis and lower wound infection and complication rates. Quill may also provide for stronger wound closure due to its ability to distribute tension across the entire length of a wound over large numbers of barbs or anchors, as opposed to a far fewer number of knots or anchor points with traditional sutures or surgical staples. Due to this ability to distribute tension, we believe Quill may enable certain tissue types to be repaired that are not addressable by other wound closure technologies.
· LOOK™ brand sutures for dental and general surgery. LOOK sutures are a specialized line of suture products for tissue approximation and ligation, which are offered in a variety of absorbable and non-absorbable suture materials that are well suited for the needs of the oral, periodontal, dermatological and general surgeon. The needles used on LOOK sutures possess precision manufactured sharpness, penetration and strength characteristics. Unique to the LOOK suture offering are SmallStitch™ sutures, which are offered in lengths of 8 inches and 10 inches. This shorter length is ideal for the dental and physician office because there is less waste than with traditional sutures.
· SharpointTM UltraGlide and SharpointTM M.E.T Microsurgical sutures. Our Sharpoint microsurgical needles and sutures are manufactured using a proprietary process that ensures incisions are consistently sharp and dimensionally true in order to meet the needs for a very precise tissue closure in ophthalmic, micro vessel and nerve repair procedures.
Ophthalmology
We develop, manufacture and market a selection of single-use disposable products for ophthalmic surgery, including various types of surgical blades used primarily in cataract surgery or other ophthalmic surgery where very small incisions are required. Our products include clear corneal knives, standard implant knives, pilot tip implant knives, precision depth knives, crescent knives, spoon knives, stab knives, vitrectomy knives to create small, precise incisions, sub-2mm series knives, and a variety of slit and specialty knives. Other selected products in our ophthalmic group include a variety of cannula needles for the administration of anesthetic or for irrigation or aspiration in ophthalmic surgery, a full line of absorbable and non-absorbable microsurgical ophthalmic sutures, punctum plugs for treatment of dry eye symptoms and trephine blades for penetrating keratoplasty surgery.
We sell these product lines directly, primarily to surgery centers and clinics, primarily through a network of third party independent sales representatives and medical product distributors. We also manufacture ophthalmic surgical blades in finished form for other third party medical device manufacturers and distributors. Our most significant product lines include:
· Sharpoint™ brand disposable ophthalmic surgical blades. Our Sharpoint product line, which is used primarily to make incisions for cataract and other ophthalmic surgery procedures, is manufactured using a proprietary manufacturing process - our Infinite Edge™ Technology - that eliminates blade grinding and produces cutting edges with consistent sharpness and tolerance. The Sharpoint knife portfolio includes a full range of sizes and styles to fit the needs of the ophthalmic surgeon.
· Ultrafit™ trephine blades. The UltraFit trephine product line, which are comprised of instruments used in corneal transplant procedures, consists of disposable vacuum trephines, donor punch sets, and short or long handled trephines in a wide range of sizes. Advanced trephine blade technology provides a sharp cutting edge to achieve the critical fit needed for successful cornea transplants.
· Tan EndoGlide™ human corneal endothelial cell transplantation device. Tan EndoGlide is an endothelial insertion device for specialized corneal transplant surgery procedures and is designed to reduce damage of donor endothelium used in the procedure. The device consistently delivers donor tissue through a small incision, while making the insertion procedure relatively reliable and consistent, with the surgeon in full control of the donor tissue at all stages of procedure. The Tan EndoGlide device consists of a preparation base, glide cartridge and a glide introducer. The glide cartridge automatically coils the donor tissue into a double coil configuration, with no endothelial surfaces touching, and is designed to fit through a very small scleral or corneal incision.
Medical Device Components
We develop, manufacture and market a wide range of components, primarily on a made-to-order basis, for other third party medical device manufacturers, who then use the provided components as part of assembling their own finished medical device products. These
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products may range from unsterilized product components, which are shipped to the customer for final assembly and sterilization, to fully finished, packaged and sterilized medical device products. These components are typically manufactured using the same manufacturing capabilities and technologies we utilize to produce our various other product lines. Our most significant manufacturing capabilities that we offer for use in making components for third parties include metal grinding and polishing, plasma welding, chemical etching, electropolishing and electro-chemical marking, plastics injection molding, plastics and polymer extrusion and silk suture formation, weaving of medical grade textiles and packaging and assembly.
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We sell these product lines directly to corporate customers solely through a direct sales organization. Our customers include many leading medical device manufacturers in the cardiology and vascular access, interventional radiology, ophthalmology, orthopedics, women’s health, and wound closure product areas.
Licensed Technologies
Our Licensed Technologies segment includes certain of our legacy technologies for which research and development activities have been concluded. This segment generates additional revenue in the form of royalties received from partners who have licensed and utilize these technologies in their medical device product lines. Our principal revenues in this segment to date have been royalties derived from sales by our partner BSC of TAXUS paclitaxel-eluting coronary stents for the treatment of coronary artery disease.
We have also licensed the same technology utilized by BSC in its TAXUS product line to our partner Cook Medical Inc. (“Cook”) for use in its Zilver® PTX® paclitaxel-eluting peripheral vascular stent (“Zilver PTX”)PTX for the treatment of vascular disease in the leg. Zilver PTX is currently approved for sale in the E.U. and in certain other countries outside of the U.S., and is awaiting approvalwas recently approved for sale in the U.S. in November 2012 by the U.S. Food and Drug Administration (“FDA”) for sale in the U.S. Should Cook receive U.S. approval for Zilver PTX, we expect we would receive additional royalty revenue in our Licensed Technologies segment..
We receive royalty revenue derived from sales of TAXUS and Zilver PTX based on our license agreements with BSC and Cook of several families of intellectual property relating to our proprietary paclitaxel technology. The royalty rate applied to BSC’s sales increases in certain countries depending upon unit sales volume achieved by BSC. The royalty rates applied to Cook’s sales of Zilver PTX are flat rates designated by the geographic location of sales, regardless of the unit volume of sales achieved. There is minimal expense associated with our receipt of royalty revenue derived from TAXUS. We expect we will incur royalty expense associated with Cook’s sales of Zilver PTX under our license agreement with the National Institutes of Health.Health (“NIH”) for certain intellectual property owned by NIH relating to this product line. We may continue to receive royalty revenue from BSC and Cook for the life of the licensed patent families depending upon BSC’s and Cook’s level of product sales and commercial and clinical success.
TAXUS Paclitaxel-Eluting Coronary Stents
The TAXUS paclitaxel-eluting coronary vascular stent, which incorporates our proprietary paclitaxel technology, is a small, balloon-expanded metal scaffold designed for placement in diseased arteries in the heart to restore blood flow by expanding and holding open the arteries upon deployment.
BSC first received approval to sell TAXUS in the E.U. in 2003 and in the U.S. in 2004. Subsequent to the U.S. approval of the TAXUS Express™ stent system in 2004, BSC has introduced multiple next generation coronary stent platforms that utilize our proprietary paclitaxel technology, including the TAXUS Liberte™ and the recently introduced TAXUS Ion™ coronary stent systems.technology.
TAXUS has been studied in multiple human clinical trials, as well as in independent registry studies, which have repeatedly demonstrated the safety and efficacy of TAXUS coronary stent systems, particularly in diabetic patient populations. In patients receiving TAXUS coronary stents, the number of repeat surgery procedures has been shown to be significantly lower in patients receiving TAXUS than those receiving non drug-eluting, or bare metal, coronary stents. The most recent study
Study results announced in November 2011 by our partner BSC include positive long-term data from BSC’s PERSEUS clinical program, which demonstrated favorable two-year safety and efficacy outcomes for the TAXUS ION stent system versus prior-generation paclitaxel-eluting stents.
In addition, in February 2012, BSC announced that the TAXUS Liberte™ and the TAXUS ION™ coronary stent systems received U.S. FDA approval for use in patients experiencing an acute myocardial infarction (“AMI”) or heart attack. This indication accounts for approximately 10% of all coronary interventions and arose from the FDA’s review of data from the Paclitaxel clinical program and the HORIZONS-AMI global trial. The HORIZONS-AMI trial included 3,600 randomized patients that that either received drug-eluting stents or bare-metal stents for the treatment of AMI. The HORIZONS-AMI trial clinical data, reviewed by BSC, demonstrated that paclitaxel-eluting stents were superior in efficacy to bare-metal stents in AMI patients by significantly reducing clinical and angiographic restenosis and exhibiting a comparable safety profile at 3 years.
Certain clinicians suggested in 2006 that the use of drug-eluting stents may cause an increased rate of late thrombosis (the formation of blood clots in the stent long after the initial stent implantation) and in turn, potentially lead to an increased rate of myocardial infarctions (heart attacks) or deaths as compared to patients receiving bare metal stents. These suggestions led to a significant decrease in the use of drug-eluting stents beginning in the second half of 2006 and continuing through 2008. While subsequent analysis of clinical data suggest that these concerns may not have been justified and use of drug-eluting stents began to recover in 2009, usage has yet to reach to the levels observed in 2005 prior to the initial reporting of physician concerns.
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In addition, starting in mid 2008 and early 2009, several new competitive drug-eluting stents were made commercially available in the United States, Europe and Japan. The reduction in drug-eluting stent usage, combined with the entry of new competitors, has had significant negative impacts on the levels of royalty revenue we receive from BSC. Our royalty revenues derived from sales of TAXUS stent systems by BSC declined by 32% from 2008 to 2009, 47% from 2009 to 2010 and 34% from 2010 to 2011.
Zilver PTX Paclitaxel-Eluting Peripheral Vascular Stents
The Zilver PTX paclitaxel-eluting peripheral vascular stent, which incorporates our proprietary paclitaxel technology, is a small, self-expanding metal scaffold designed for placement in diseased arteries in the limbs to restore blood flow by expanding and holding open the arteries upon deployment.
Cook first received approval to sell Zilver PTX in the E.U. in 2009, and is currently awaiting2009. On November 15, 2012, Cook received FDA approval to market and sell Zilver PTXZilver-PTX in the U.S. To date,Historically, stent procedures for peripheral artery disease (“PAD”) in the limbs have beenwere limited due to high observed complication rates for such proceduresincidence of complications that often lead to a subsequent surgical procedure,procedures, as well as risk of stent fracture with existing products, as thesegiven that peripheral vascular stents aremay be exposed and not protected by the patient’s anatomy as they are with coronary stents.stents, which are implanted in vessels in the heart behind a patient’s rib cage. Cook has conducted multiple human clinical trials for Zilver PTX in the E.U., U.S., Japan, and selected other countries to assess product safety and efficacy. To date, clinicalClinical results for Zilver PTX have suggested significant reductions in complications as compared to traditional PAD treatments. Selected highlights of Cook’s reported regulatory milestones and clinical results include:
·November 2012 — Cook announced that it had received approval by the FDA of its Pre-Market Approval (“PMA”) application for Zilver PTX. This FDA approval allows Cook to market and sell Zilver PTX in the U.S.
· October 2011 — Cook announced that Zilver PTX had received a unanimous recommendation from the FDA’s Circulatory System Devices Panel of the Medical Devices Advisory Committee, with all 11 of its members voting to recommend approval of Zilver PTX for sale in the U.S. on the basis of its safety, efficacy and acceptable risk profile. Cook in June 2010 had submitted its Pre-Market Approval (“PMA”) application to the FDA for Zilver PTX.
· September, 2010 — Cook announced that a summary of the final clinical trial results for the randomized study of Zilver PTX was presented at the annual TCT symposium in Washington D.C. The study met its 12-month primary endpoint showing non-inferior event-free survival (“EFS”) and superior patency for the Zilver PTX as compared to balloon angioplasty.
· May 2010 — Cook presented one-year data at Euro PCR that confirmed sustained clinical outcomes with Zilver PTX. According to data presented, 86.2% of all patient subgroups treated with Zilver PTX demonstrated vessel patency at 12 months without the requirement for an additional intervention. The trial is based on a group of 787 patients, including symptomatic patients, diabetics, and those with the most complex lesions, including long lesions, total occlusions and in-stent restenosis.
· April 2010 — Cook announced it had enrolled its first patient in its landmark Formula™ PTX® clinical trial. The trial is the first of its kind to evaluate the safety and effectiveness of a paclitaxel-eluting stent to treat renal artery disease, the narrowing of the arteries that supply blood to the kidneys.
· April 2009 — Cook reported data that showed that 82 percent of patients who were treated with Cook’s Zilver PTX stent were free from re-intervention at two-year follow up. The Zilver PTX Registry study, involving 792 patients globally, is assessing the safety and efficacy of the Zilver PTX in treating peripheral artery disease. Data was compiled at 12 and 24 months for 593 patients and 177 patients, respectively. The corresponding EFS rates were 87 percent and 78 percent, respectively, and freedom from target lesion revascularization was 89 percent and 82 percent, respectively. Detailed evaluation of stent x-rays demonstrated excellent stent integrity through 12 months, confirming previously published results showing 99 percent completely intact stents (less than 1 percent stent fracture rates observed) with a mean follow up of 2.4 years in the challenging superior femoral artery and popliteal arteries, including behind the knee locations.
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Manufacturing and Product Distribution
We have significant precision medical device manufacturing capabilities, with seven facilities that are primarily dedicated to medical device manufacturing located in the United States, Europe and Puerto Rico. Each of our manufacturing facilities has specific, and in some cases proprietary, expertise in certain types of medical device manufacturing as well as experience in complying with the significant regulations, quality and operating requirements that are critical aspects of medical products manufacturing. Our medical device manufacturing capabilities include polymer handling and extrusion, metals, plastics and textile fabrication and packaging and assembly. Our suture manufacturing capabilities include the ability to make and handle various approved polymer materials in multiple lengths, diameters and configurations. Our metal manufacturing capabilities include bending, grinding, flattening, drilling, polishing, chemical etching, plasma welding, thermal curing and wire winding. Our plastics manufacturing capabilities include injection molding, plastic extrusion, insert molding and wire coating. Our textile manufacturing capabilities include braiding and embroidery of selected suture materials, including silk. Our assembly and packaging capabilities include small lot assembly, suture
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attachment and kit assembly. We also maintain manufacturing capabilities for certain medical device coating technologies, primarily relating to coatings designed to facilitate medical device lubricity upon implant or insertion.
We use a diverse and broad range of raw materials in the design, development and manufacture of our products. Our non-implantable products are manufactured from man-made raw materials including resins, chemicals, plastics and metal. We purchase certain materials and components used in manufacturing our products from external suppliers. In addition, we may purchase certain supplies from single sources for reasons of quality assurance, sole source availability, cost effectiveness or constraints resulting from regulatory requirements. Angiotech works closely with its suppliers to mitigate risk and assure continuity of supply while maintaining high quality and reliability. Alternative supplier options are generally considered and identified, although we do not typically pursue regulatory qualification of alternative sources due to the strength of our existing supplier relationships and the time and expense associated with the regulatory validation process.
We maintain raw material, work in process and finished goods in each of our facilities. We distribute products directly from our various manufacturing facilities, many of which include space for safely storing and maintaining medical products and related components. We also maintain an independent product distribution partner in the E.U. for certain of our product lines.
We maintain resources to develop procedures and process controls for our products and product candidates to ensure successful technology transfer for commercial scale manufacturing. We expect that process development performed during the pre-clinical post-approval stages of manufacturing will result in products with the desired performance consistency, product tolerances and stability. These activities include scaling up production methods, developing quality control systems, optimizing batch-to-batch reproducibility, testing sterilization methods and establishing reliable sources of raw materials for synthesizing proprietary products.
Quality Assurance
We are committed to providing quality products to our customers. To meet this commitment, we have implemented modern quality systems and concepts throughout the organization. Our quality system starts with the initial product specification and continues through the design of the product, component specification processes, and the manufacturing, sales and servicing of the product. The quality system is intended to incorporate quality into products and utilizes continuous improvement concepts throughout the product lifecycle. Our operations are certified under applicable international quality systems standards, such as International Organization for Standardization (“ISO”) 9000 and ISO 13485. These standards require, among other items, quality system controls that are applied to product design component material, suppliers and manufacturing operations. These ISO certifications can be obtained only after a complete audit of a company’s quality system has been conducted by an independent outside auditor. Periodic reexamination by an independent outside auditor is required to maintain these certifications.
Sales and Marketing
We market and sell our various medical device products through a group of specialized sales organizations that consist of direct sales and marketing personnel, which in some cases are supplemented by independent sales representatives and independent medical products distributors, depending on the product category, customer base or geographic location. We currently employ approximately 5549 direct sales and marketing personnel in our Interventional Oncology group, approximately 5363 direct sales and marketing personnel in our Wound Closure group, and approximately 3036 additional direct sales personnel serving customers in our other product areas and selected geographies outside of the U.S. The majority of our direct sales teams are based in the U.S.
Our Interventional Oncology and Wound Closure direct sales teams primarily target hospital-based physician customers, alternate site health care providers such as ambulatory surgery centers and urgent care centers. The primary goal of our direct sales teams is to sustain sales volumes or, in certain cases where we have products with a significant technical or other competitive advantage or a new product offering, increase market share of our products.
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Our independent sales representatives and independent distributors target hospital customers, alternate site health care providers, such as ambulatory surgery centers and urgent care centers and physician and dental offices. These sales representatives and distributors, under the guidance of our senior sales and marketing management, may also target other third party medical products manufacturers or distributors as potential customers for finished private label medical device products in our Wound Closure and Ophthalmology product areas.
Our Medical Device Component product area is supported by a small direct sales team, and targets high level managers and supply chain experts within other third party medical device manufacturers.
We are not dependent on any single customer and no single customer accounted for more than 10% of our net sales in 2011.2012. Sales personnel work closely with the main decision makers who purchase our products, which primarily include physicians, but may also include: material managers; nurses; hospital administrators; purchasing managers; and ministries of health. Also, for certain of our products and where appropriate, our sales personnel actively pursues approval of Angiotech as a qualified supplier for hospital group purchasing organizations (“GPOs”) that negotiate contracts with suppliers of medical products.
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In 2011, 61%2012, 62% of our reported product sales were derived from sales to customers in the U.S., and 39%38% of our reported product sales were derived internationally.
Product Development
We maintain new product development capabilities and personnel, with a primary focus on medical device, mechanical and manufacturing engineering. The focus of our product development efforts are primarily on developing improvements to our existing products or manufacturing processes,processes; or on new product opportunities that focus on markets similar to our current target markets, and that may compliment certain of our existing product offerings.
The majority of our product development personnel are located at two of our manufacturing facilities, with additional engineering support personnel located in each of our material manufacturing operations. We also employ personnel with expertise in regulatory affairs and quality control that are responsible for regulatory and quality control activities with respect to certain of our existing and new product candidates.
We, or our partners, are evaluating selected new product candidates and product line extensions, including certain product candidates that may be undergoing human clinical testing or other testing conducted either by us or our partners. We also may maintain certain pre-clinical or research stage programs and conduct various product and process improvement initiatives related to our currently marketed products and our manufacturing facilities.
Government Regulation and other Matters
The research and development, manufacturing, labeling, advertising, sale, marketing and third-party reimbursement of our medical device products and those of our suppliers, customers and partners are subject to extensive regulation by the FDA, the U.S. Department of Health and Human Services Centers for Medicare and Medicaid Services (“CMS”), and comparable regulatory agencies in state and local jurisdictions and in foreign countries.
Medical product regulations often require registration of manufacturing facilities, carefully controlled research and testing of products, government review and approval or clearance of results prior to marketing of products, adherence to current Good Manufacturing Practices (“cGMPs”) during the production and processing of products, and compliance with comprehensive post-marketing requirements, including restrictions on advertising and promotion and requirements for reporting adverse events to the FDA in the U.S. and other regulatory authorities abroad. In the U.S., these activities are subject to rigorous regulation by the FDA. Similar regulations apply in the E.U. and other markets.
Our success is ultimately dependent upon our and our suppliers’, customers or partners obtaining marketing approval or clearance for our or their products or potential product candidates currently under development, and will depend on our and our suppliers’, customers’ and partners’ ability to comply with FDA and other market regulations governing the manufacturing, quality control, pre-clinical evaluation, and clinical testing of their products or product candidates. If we or our present or future suppliers, customers or partners are not able to comply with the continuing FDA regulations that accompany FDA approval, the FDA may require us or our suppliers, customers or partners to recall a device or drug from distribution, withdraw the 510(k) or Premarket Approval for the relevant marketed medical device product, halt our clinical trials or withdraw approval for our clinical trials.
We have significant medical device component engineering and manufacturing, as well as finished goods and packaging manufacturing operations. The manufacturing processes used in the production of finished medical devices are subject to FDA regulatory inspection, and must comply with FDA regulations, including its Quality Systems Regulation, which sets forth the cGMP
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requirements for medical devices. The Quality Systems Regulation requires manufacturers of finished medical devices to follow elaborate design, testing, control, documentation and other quality assurance procedures during the finished device manufacturing process. Our FDA registered facilities are subject to FDA inspection at any time for compliance with the Quality Systems Regulation and other FDA regulatory requirements. Failure to comply with these regulatory requirements and similar foreign requirements may result in civil and criminal enforcement actions, including financial penalties, seizures, injunctions or other measures. In some cases, failure to comply with the Quality System Regulation could prevent us or our customers from marketing products or gaining clearance to market additional products. Our products must also comply with state and foreign regulatory requirements.
Our business arrangements and other interactions with healthcare providers and other entities are also governed by numerous federal, state and foreign laws and regulations, including law and regulations:
· prohibiting kickbacks, which may prohibit making payments to healthcare providers and other individuals in order to induce the purchase of our products or services;
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· restricting physician self-referrals, such as the federal “Stark Law,” which generally prohibits physicians from referring Medicare or Medicaid patients to entities with which the physician (or an immediate family member) is affiliated for the provision of certain designated health services;
· proscribing the use, disclosure and maintenance of certain patient health information, such as the federal Health Information Portability and Accountability Act of 1996 (“HIPAA”), as amended by the Health Information Technology for Economic and Clinical Health Act (“HITECH”);
· prohibiting submission of false or misleading claims to Medicare or Medicaid and retention of overpayments related to the submission of such claims;
· requiring disclosure of payments made to teaching hospitals and physicians and financial interests held by physicians (and their immediate family members), such as the federal “Physician Payment Sunshine Act” and similar state laws; and
· providing for prosecution of U.S. companies related to arrangements with foreign government officials and other individuals and entities outside of the U.S.
Failure to comply with these laws and regulatory requirements may result in civil and criminal enforcement actions, including financial penalties, seizures, injunctions or other measures.
Internationally, the regulation of medical devices is complex. In Europe, our products are subject to extensive regulatory requirements. The regulatory regime in the E.U. for medical devices became mandatory in June 1998. It requires that medical devices may only be placed on the market if they do not compromise safety and health when properly installed, maintained and used in accordance with their intended purpose. National laws conforming to the E.U.’s legislation regulate our products under the medical devices regulatory system. Although the more variable national requirements under which medical devices were formerly regulated have been substantially replaced by the European Union Medical Devices Directive, individual nations can still impose unique requirements that may require supplemental submissions. The E.U. medical device laws require manufacturers to declare that their products conform to the essential regulatory requirements after which the products may be placed on the market bearing the CE Mark. Manufacturers’ quality systems for products in all but the lowest risk classification are also subject to certification and audit by an independent notified body. In the E.U., particular emphasis is being placed on more sophisticated and faster procedures for the reporting of adverse events to the competent authorities. In many of the other foreign countries in which we market our products, we may be subject to regulations affecting, among other things:
· product standards and specifications;
· packaging requirements;
· labeling requirements;
· quality system requirements;
· import restrictions;
· tariffs;
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· duties; and
·tax requirements.
Many of the regulations applicable to our devices and products in these countries are similar to those of the FDA. In some regions, the level of government regulation of medical devices is increasing, which can lengthen time to market and increase registration and approval costs. In many countries, the national health or social security organizations require our products to be qualified before they can be marketed and considered eligible for reimbursement.
In the U.S., health care providers generally rely on third-party payers, including both private health insurance plans and governmental payers, such as Medicare and Medicaid, to cover and reimburse all or part of the cost of a medical device and the procedures in medical devices that are used. Foreign governments also impose significant regulations in connection with their health care reimbursement programs and the delivery of health care items and services.
Our ability to commercialize human therapeutic products and product candidates successfully will depend in part on the extent to which coverage and reimbursement for such products and related treatments will be available from government health administration authorities, private health insurers and other third-party payers or supported by the market for these products. Third-party payers are
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increasingly challenging the price of medical products and services and instituting cost containment measures to control or significantly influence the purchase of medical products and services.
In the U.S., there have been and we expect there will continue to be a number of legislative and regulatory proposals to change the health care system in ways that could significantly affect our business. For example, the 2010 health reform law was intended to increase the number of individuals covered by health insurance, impose reimbursement provisions intended to restrict the growth in Medicare and Medicaid spending and encourage development of health care delivery programs and models intended to tie payments to quality and care delivery innovations. Although some provisions of the health reform legislation have been implemented, manyMany of the legislative changes contained within the health reform legislation will not beare effective or implemented untilin 2013 or later. In addition, the Supreme Court will likely rule on the constitutionality of portions of the health reform law later this year, which could result in repeal of all or portions of the law. Therefore, theand beyond. The impact of health reformthese healthcare reforms on our business is currently uncertain. Apart from the 2010 health reform law, efforts by governmentaluncertain and third-party payers to reduce healthcare costs or the announcement of legislative proposals or reforms to implement government controls could cause a reduction inmay negatively impact our sales or in the selling price of our products, which could seriously harm our business. Weproducts. In addition, we cannot predict the impact on our business of any legislation or regulations related to the healthcare system that may be enacted or adopted in the future.
Patents, Proprietary Rights and Licenses
Patents and other proprietary rights are essential to our business. We may file patent applications to protect technology, inventions and improvements to inventions that are considered important to our business. We may also rely upon trade secrets, continuing technological innovations and licensing opportunities to develop and maintain our competitive position. Furthermore, we may also endeavor to extend, or capture value from, our intellectual property portfolio by licensing patents and patent applications from others or to others, and initiating research collaborations with outside sources.
As part of our patent strategy, we have filed a variety of patent applications internationally. Oppositions have been filed against various granted patents that we either own or license and which are related to certain of our technologies. See “— Legal Proceedings” elsewhere in this Annual Report on Form 10-K for a discussion of the proceedings related to certain of such oppositions. An adverse decision by an Opposition Division in any country, or subsequently, by a Board of Appeal, could result in revocation of our patent or a narrowing of the scope of protection afforded by the patent. The ultimate outcomes of the pending oppositions, including appeals, are uncertain at this time. We do not know whether the patents that we have received or licensed, or those we may be able to obtain or license in the future, would be held valid or enforceable by a court or whether our patents would be found to infringe a competitor’s patents related to its technology or product. Further, we have no assurance that third parties will not (whether pursuant to or in breach of the terms) modify or terminate any license they have granted to us.
Competition
We expect to face competition from companies marketing, selling and developing medical device or other medical technologies that target the same diseases, clinical indications, customers or markets that our technologies target, as well as competition from other manufacturers of medical device components who sell to similar third party medical device manufacturers, including to some of our current customers. Some of these companies have substantially greater product development, sales and marketing, manufacturing capabilities and experience, proprietary technology or more substantive financial resources than we do. Specifically, we compete with a number of large companies across variousa number of our medical device product lines. These competitors have substantially greater business and financial resources than we do. These competitors include, but are not limited to, the Ethicon division of Johnson & Johnson and Covidien, Inc. in surgical sutures and wound closure devices; C.R. Bard Inc., the Allegiance division of Cardinal Health, Inc. and the Sherwood, Davis & Geck division of Covidien, Inc. in biopsy needle devices; Alcon, Inc., Allergan, Inc. and the
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Allegiance division of Cardinal Health, Inc. in ophthalmology products; and Accelent Inc., Teleflex Incorporated and Symmetry Medical Inc. in the manufacture of medical devices and device components for other third party medical device manufacturers.
The medical device, biotechnology and pharmaceutical industries are subject to rapid and substantial business, operational and technological change. There can be no assurance that developments by others will not render obsolete our products or technologies, that we will be able to keep pace with technological developments or that we will be able to manufacture and market our products at a cost that will be attractive to our customers.
Some competitive products have an entirely different approach or means to accomplish the desired therapeutic or diagnostic effect as compared to our product candidates. These competitive products, including any enhancements or modifications made to such products in the future, could be more effective and/or less costly than our products, technologies or our product candidates.
There are a number of companies that are marketing or developing competing drug-eluting coronary stents or other treatments for restenosis that may be considered to be directly competitive with our technology. Certain of our competitors have developed and commercialized coronary drug-eluting stents that compete with BSC’s TAXUS stents and which have been approved for use in the U.S., E.U. and certain other countries. The launch of these competing products has had a significant impact on BSC’s sales of
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TAXUS, and has resulted in a decline in our royalty revenue received from BSC. The continued successful commercialization of any of these or other technologies to treat restenosis following angioplasty or stent placement could have a material adverse impact on our business.
Employees
As of December 31, 2011,2012, on a worldwide basis, we had approximately 1,2901,364 employees, including 9171018 in manufacturing, 2317 in research and development, 10595 in quality assurance, 164148 in sales and marketing and 8186 in administration. In addition, we have contractual arrangements with scientists at various research and academic institutions. All such employees and contractors execute confidentiality agreements with us. While we will continue to seek to hire highly qualified employees, we believe that we have employed a sufficient number of qualified personnel.
Environmental
Our business is subject to a broad range of government regulation and requirements, including federal, state, local and foreign environmental laws and regulations governing, among other matters, air emissions, wastewater discharges, workplace health and safety as well as the use, handling, storage and disposal of hazardous materials and remediation of contamination associated with the release of these materials at or from our facilities or off-site disposal locations. Some of these laws can impose liability for remediation costs on a party regardless of fault or the lawfulness of its conduct. Many of our manufacturing processes involve the use and subsequent regulated disposal of hazardous materials. To date, such matters have not had a material adverse impact on our business or financial condition. We cannot assure you, however, that such matters will not have such an effect in the future.
International Operations
Our medical devices are manufactured and sold worldwide. Approximately 39%38% of our medical device revenues are generated outside of the U.S. and geographic expansion remains a core component of our strategy. We currently sell our products in the following international territories: Europe, Asia-Pacific, Latin America and Canada. We are subject to certain risks inherent in conducting business outside the U.S. For more information regarding these risks, see the risk factors under the captions “We are subject to risks associated with doing business globally” and “We may incur losses associated with foreign currency fluctuations” in Item 1A of this Annual Report on Form 10-K, all of which information is incorporated herein by reference.
For financial information about foreign and domestic operations and geographic information, see note 2322 of the audited consolidated financial statements included in this Annual Report on Form 10-K. In addition, for more information regarding foreign currency exchange risk, refer to the discussion under “Foreign Currency Risk” under Item 7A of this Annual Report on Form 10-K.
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Item 1A. RISK FACTORS
You should consider carefully the following information about these risks, together with all of the other information contained within this document. Additional risks and uncertainties not currently known to us or that we currently deem immaterial may impair our business operations. If any of the following risks actually occur, our business, results of operations and financial condition could be harmed.
Risks Related to Our Business
Our business activities involve various elements of risk. The risks described below and incorporated herein by reference are not the only ones facing us. Additional risks that are presently unknown to us or that we currently deem immaterial may also impact our business. We consider the following issues to be the most critical risks to the success of our business:
Our success depends on the successful commercialization of our existing products and new product candidates.
The continued and successful commercialization of our medical device products and technology is crucial for our success. Successful product commercialization and product development in the medical device industry is highly uncertain, and very few product commercialization initiatives or research and development projects produce a significant or successful commercial product. Our products and product candidates are in various stages of commercial and clinical development and face a variety of risks and uncertainties. Principally, these risks and uncertainties include the following:
· Commercialization risk. Even if our, or our customers’ or partners’, products or product candidates are successfully developed, receive all necessary regulatory approvals and are commercially produced, there is no guarantee that there will be market acceptance of them or that they will generate or sustain any significant revenues. Our ability to achieve sustainable market acceptance for any of our medical device products or product components will depend on a number of factors, including but not limited to: (i) whether competitors develop technologies which are superior to, or less costly than, our products or product candidates; (ii) whether our products or product candidates lead to or directly cause unwanted side effects; (iii) whether government and private third-party payers provide adequate coverage and reimbursement for our products or product candidates; (iv) whether our sales and marketing efforts are effective and of reasonable cost, or are able to reach our target markets and customer base.
· Manufacturing and scale-up risk. We, our suppliers or our partners may face significant or unforeseen difficulties in manufacturing our products or product components, including but not limited to (i) technical issues relating to producing products on a commercial scale at reasonable cost, and in a reasonable time frame, (ii) difficulty meeting demand or timing requirements for component orders due to excessive costs or lack of capacity for part or all of an operation or process; (iii) lack of skilled labor or unexpected increases in labor costs needed to produce a certain product or perform a certain operation; (iv) changes in government regulations, quality or other requirements that lead to additional manufacturing costs or an inability to supply product in a timely manner, if at all; (v) increases in raw material or component supply cost or an inability to obtain supplies of certain critical supplies needed to complete our manufacturing processes. These difficulties may only become apparent when scaling up the manufacturing of a product or product candidate to more substantive commercial scale.
· Clinical risk. Future clinical trial or study results, whether conducted by or in collaboration with us or by independent third parties, may show or suggest that some or all of our technology, or the technology of our partners that incorporates our technology, is not safe or effective or is not as safe or effective as similar technologies produced by our competitors.
· Liquidity and working capital risk. We may not have the working capital and financial resources necessary to effectively market or distribute our products to customers or potential customers, or to finance the launch of any potential new products. Our available working capital to market and distribute our products and product candidates is in part dependent on our ability to sustain our cash flow from operations, if any, to obtain outside financing, to effectively manage our working capital and to repay or refinance our existing debt obligations.
If we are unsuccessful in dealing with any of these risks, or if we are unable to successfully commercialize our technology for some other reason, it would likely seriously harm our ability to sustain or to generate additional revenue.
We may be unsuccessful in marketing, selling and distributing certain of our products.
We distribute a number of our products worldwide. In order to achieve commercial success for our approved products, we have established sales and marketing resources in the United States, Europe and other parts of the world. If our distribution personnel or
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methods are not sufficient to achieve market acceptance of our products, to maintain our current customer relationships or to ensure we have supply to meet demand for our products, it could harm our prospects, business, financial condition and results of operations.
To the extent that we enter into co-promotion or other marketing and sales arrangements with other companies, any revenues received will be dependent on the efforts of others, and we do not know whether these efforts will be successful. Failure to develop an adequate sales and marketing operation or to enter into appropriate arrangements with other companies to market and sell our products will reduce our ability to sustain or generate revenues.
The manufacture of many of our products is highly complex and subject to strict regulatory and quality controls. If we or one of our suppliers encounters manufacturing or quality problems, our business could suffer.
The manufacture of many of our products is highly complex and subject to strict regulatory and quality controls. In addition, quality is extremely important due to the serious and costly consequences of a product failure. Problems can arise during the manufacturing process for a number of reasons, including equipment malfunction, failure to follow protocols and procedures, raw material problems or human error. If these problems arise or if we otherwise fail to meet our internal quality standards or those of the FDA or other applicable regulatory body, which include detailed record-keeping requirements, our reputation could be damaged, we could become subject to a safety alert or a recall, we could incur product liability and other costs, product approvals could be delayed and our business could otherwise be adversely affected.
Any adverse events associated with our products must be reported to regulatory authorities. If deficiencies in our or our collaborators’ manufacturing and laboratory facilities are discovered, or we or our collaborators fail to comply with applicable post-market regulatory requirements, a regulatory agency may close the facility or suspend manufacturing.
The significant majority of our products are manufactured, assembled and packaged in facilities that are owned by us. In the event one or more of our facilities is affected by a natural disaster or is unable to operate for any reason, our ability to supply products to our customers may be materially impacted. While we maintain manufacturing disaster and business interruption plans designed to mitigate or eliminate manufacturing interruptions or the financial impact of such, there can be no assurance that such plans or actions taken will be adequate, or that any sales lost during any manufacturing interruption will be recovered.
With respect to products manufactured by third-party contractors, we are, and we expect to continue to be, dependent on our collaborators for continuing regulatory compliance, and we may have little or no control over these matters. Our ability to control third-party compliance with the FDA and other regulatory requirements will be limited to contractual remedies and rights of inspection. Our failure or the failure of third-party manufacturers to comply with regulatory requirements applicable to our products may result in legal or regulatory action by those regulatory authorities. There can be no assurance that our or our collaborators’ manufacturing processes will satisfy regulatory, cGMPs or International Standards Organization requirements.
In addition, there may be uncertainty as to whether or not we or others who are involved in the manufacturing process will be able to make the transition to commercial production of some of our newly developed products. A failure to achieve regulatory approval for manufacturing facilities or a failure to make the transition to commercial production for our products will adversely affect our prospects, business, financial condition and results of operations.
The Company has historically been unprofitable and may not be able to maintain or achieve and maintain profitability.
We have incurred a loss from operations in a majority of the years in which we have been operating. Our ability to become profitable and maintain or achieve sustained profitability will depend on, among other things, our ability to maintain and improve sales of our existing product lines; our ability to successfully market and sell certain new products and technologies; the amount of royalty revenue we receive from our corporate partners; our ability to develop and successfully launch new products and technologies; our ability to improve our profit margins through lower manufacturing costs and efficiencies or improved product sales mix; and our ability to effectively control our various operating costs.
Our working capital and funding needs may vary significantly depending upon a number of factors including, but not limited to, our levels of sales and gross profit; costs associated with our manufacturing operations, including capital expenditures, labor and raw materials costs, and our ability to realize manufacturing efficiencies from our various operations; fluctuations in certain working capital items, including inventory and accounts receivable, that may be necessary to support the growth of our business or new product introductions; the level of royalty revenue we receive from corporate partners; progress of our product development programs and costs associated with completing clinical studies and the regulatory process; collaborative and license arrangements with third parties; the cost of filing, prosecuting and enforcing our patent claims and other intellectual property rights; expenses associated with litigation; opportunities to in-license complementary technologies or potential acquisitions; potential milestone or other payments we may make to licensors or corporate partners; and technological and market developments that impact our royalty revenue, sales levels or competitive position in the marketplace.
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The significant decline in royalty payments we receive from BSC, the large amount of our outstanding indebtedness and the related cash interest payments due on such indebtedness, as well as the working capital, capital and other operating expenditures
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required to operate our Medical Device Products segment, among other factors, have adversely affected our operating cash flows, liquidity and profitability. In order to continue to finance our operations, it may be necessary for us to explore new or alternative sources of financing, which may further impact our operating cash flows, liquidity and profitability. Such financing may not be available when needed, or available on attractive or acceptable terms, due to credit market conditions and other factors.
We continue to explore options to improve our capital structure and address our current and future capital needs. If we are not able to adequately address our capital needs or refinance our $229.4 million of 9% Senior Floating Rate Notes before they mature on December 1, 2016, there can be no assurances that we will have adequate liquidity and capital resources to satisfy our financial obligations, meet the funding requirements necessary to execute our operating plan or achieve profitability.
If our products are alleged to be harmful, we may not be able to sell them, we may be subject to product liability claims not covered by insurance and our reputation could be damaged.
The nature of our business exposes us to potential liability risks inherent in the testing, manufacturing and marketing of medical devices. Using our medical device product candidates in clinical trials may expose us to product liability claims. These risks will expand with respect to medical devices that receive regulatory approval for commercial sale. In addition, some of the products we manufacture and sell are designed to be implanted in the human body for varying periods of time. Even if a medical device were approved for commercial use by an appropriate governmental agency, there can be no assurance that users will not claim that effects other than those intended may have resulted from our products. Component failures, manufacturing flaws, quality system failures, design defects, inadequate disclosure of product-related risks or product-related information or other safety issues with respect to these or other products we manufacture or sell could result in an unsafe condition or injury to, or death of, a patient. In addition, although many of our products are subject to review and approval by the FDA or other regulatory agencies, under the current state of the law, any approval of our products by such agencies will not prohibit product liability lawsuits from being brought against us in the event that our products are alleged to be defective, even if such products have been used for their approved indications and appropriate labels have been included.
In the event that anyone alleges that any of our products are harmful, we may experience reduced demand for our products or our products may be recalled from the market. In addition, we may be forced to defend individual or class action lawsuits and, if unsuccessful, to pay a substantial amount in damages. A recall of some of our products could result in exposure to additional product liability claims, lost sales and significant expense to perform the recall. The outcome of litigation, particularly class action lawsuits, is difficult to assess or quantify. Plaintiffs in these types of lawsuits often seek recovery of very large or indeterminate amounts, including not only actual damages, but also punitive damages. The magnitude of the potential loss relating to these types of lawsuits may remain unknown for substantial periods of time. In addition, the cost to defend against any future litigation may be significant.
We do not have insurance covering our costs and losses as a result of any recall of products or devices incorporating our technologies, whether such recall is instituted by a device manufacturer or us as required by a regulatory agency. Insurance to cover costs and losses associated with product recalls is expensive. If we seek insurance covering product recalls in the future, it may not be available on acceptable terms. Even if obtained, insurance may not fully protect us against potential liability or cover our losses. Some manufacturers that suffered such claims in the past have been forced to cease operations or declare bankruptcy.
We do have insurance covering product liability. However, our insurance may not fully protect us from potential product liability claims. If a product liability claim or a series of claims is brought against us in excess of our insurance coverage, our business could suffer. Some manufacturers that suffered such claims in the past have been forced to cease operations or declare bankruptcy.
OurThe level of our TAXUS and Zilver-PTX royalty revenues we receive fromare highly dependent on the production, distribution, development and sales and marketing efforts undertaken by our strategic partners, BSC have declined significantly, and may continue to decline, thereby negatively impacting our cash flows and liquidity.Cook, respectively.
We do not have control over the sales and marketing efforts, pricing, production volumes, distribution or regulatory environment related to BSC’s TAXUS paclitaxel-eluting coronary stent program and Cook’s Zilver-PTX paclitaxel-eluting peripheral vascular stent program. Our involvement is limited to the terms of our 1997 License Agreement (as amended) with BSC and Cook (the “1977“1997 License Agreement”), which provides for the receipt of royalty revenue based on the net sales of TAXUS.TAXUS and Zilver-PTX.
Royalty revenue from BSC has declined significantly, as described in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in this Annual Report on Form 10-K.
BSC has attributed this significant decline in royalties primarily to competition in the drug-eluting stent market, price pressurepricing pressures in the drug-eluting stent market and a decline in the overall number of drug-eluting stent procedures. Our TAXUS related royalties may decline further due to these and other factors in the future.
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In addition, if BSC isor Cook are impaired in itstheir ability to market and distribute TAXUS and Zilver-PTX, respectively, whether for these reasons or due to a failure to comply with applicable regulatory requirements, discovery of a defect in the device, increased incidence of adverse events or
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identification of other safety issues, or previously unknown problems with the manufacturing operations for TAXUS or Zilver-PTX (any of which could, under certain circumstances, result in a manufacturing injunction), our revenues couldmay be further reduced. BSC’snegatively impacted. BSC or Cook’s failure to resolve these issues in a timely manner and to the satisfaction of the FDA and other regulatory authorities, or the occurrence of similar problems in the future, could delay the launch of additional TAXUS or Zilver-PTX product lines and could have a significantan adverse impact on our royalty revenue from sales of TAXUS.both products.
Additionally, BSC or Cook may terminate our 1997 License Agreement under certain circumstances, including if BSC is unablewhich include an inability to acquire a supply of paclitaxel at a commercially reasonable price; if BSC reasonably determinesprice, determination that the paclitaxel-eluting coronary stent isstents are no longer commercially viable; or if our exclusive license agreement with the Public Health Service of the U.S. through the National Institutes of Health (the “NIH”), whereby terminates. Under the terms of this exclusive licence agreement, NIH granted the Company an exclusive, worldwide license to certain technologies of the NIH for the use of paclitaxel (the “the NIH License Agreement”), certain rights under which are sublicensed to BSC terminates.and Cook.
The amounts payable by BSC and Cook to us vary depending on various factors, including the volume of sales in each quarterly period and patent protection laws in the country of sale. There is no guarantee that royalty payments under our 1997 License Agreement will continue, and demand for BSC’sBSC and Cook’s paclitaxel-eluting coronary stent products could continue to decline as a result of the factors stated above, as well as technological change, changes in reimbursement rates or other factors. Also,In addition, the royalty raterates payable by BSC and Cook could decline if and when patent protection expires, or no longer exists (as defined by our 1997 License Agreement) in certain jurisdictions.
Our royalty revenue derived from the sale of paclitaxel-eluting coronary stents depends on BSC’sBSC and Cook’s ability to continue to sell its varioustheir respective TAXUS paclitaxel-eluting stentand Zilver-PTX products and to launch next generation paclitaxel-eluting stentsstent products in the United States and in other countries. Historically, stent manufacture and sale have been subject to a substantial amount of patent litigation,litigation. Should BSC, Cook and BSC and others may become involved in material legal proceedings related to paclitaxel-eluting stents that could adversely impact BSC’stheir ability to sell TAXUS therebyand Zilver-PTX, this may negatively impactingimpact our royalty revenue derived from the sale of these paclitaxel-eluting coronary stents.
We face and will continue to face significant competition.
Competition from medical device companies, pharmaceutical companies, biotechnology companies and academic and research institutions is significant. Many of our competitors and potential competitors have substantially greater product development capabilities, experience conducting clinical trials and financial, scientific, manufacturing, sales and marketing resources and experience than our company. We also face competition from non-medical device companies, such as pharmaceutical companies, which may offer non-surgical alternative therapies for disease states that are currently treated or are intended to be treated using our products. Other companies may:
· develop and obtain patent protection for products earlier than we do;
· design around patented technology developed by us;
· obtain regulatory approvals for such products more rapidly;
· have greater manufacturing capabilities and other resources;
· have larger or more experienced sales forces;
· develop more effective or less expensive products; or
· have greater success in obtaining adequate third-party payer coverage and reimbursement for their competing products.
While we intend to maintain or expand our technological capabilities in order to remain competitive, there is a risk that:
· research and development by others will render our technology or product candidates obsolete or non-competitive;
· treatments or cures developed by others will be superior to any therapy developed by us; and
· any therapy developed by us will not be preferred to any existing or newly developed technologies.
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If physicians do not recommend and endorse our products or products that use our technology, or if our working relationships with physicians deteriorate, our products or products that use our technology may not be accepted in the marketplace, which could adversely affect our sales and royalty revenues.
In order for us to sell our products or continue to receive royalty revenues from the sale of products that use our technologies, physicians must recommend and endorse them. We believe that recommendations and endorsements by physicians are and will be essential for market acceptance of our products, and we do not know whether we will obtain the necessary recommendations or endorsements from physicians. Acceptance of our products or of products that use our technology depends on educating the medical community as to the distinctive characteristics, perceived benefits, safety, clinical efficacy and cost-effectiveness of these products compared to products of competitors, and on training physicians in the proper application of these products. If we are not successful in
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obtaining the recommendations or endorsements of physicians for our products, or our collaborators are not successful in doing the same for their products that use our technology, our sales and royalty revenues may not increase or may decline.
In addition, if we fail to maintain our working relationships with physicians, many of our products may not be developed and marketed in line with the needs and expectations of professionals who use and support our products. The research, development, marketing and sales of many of our new and improved products are dependent upon our maintaining working relationships with physicians. We rely on these professionals to provide us with considerable knowledge and experience regarding our products and the marketing of our products. Physicians assist us as researchers, marketing consultants, product consultants, inventors and public speakers. If we are unable to maintain our strong relationships with these professionals while continuing to receive their advice and input, the development and marketing of our products could suffer, which could adversely affect the acceptance of our products in the marketplace and our sales.
Technological advances and evolving industry standards could reduce our future product sales, which could cause our revenues to grow more slowly or decline.
The markets for our products are characterized by rapidly changing technology, changing customer needs, evolving industry standards and frequent new product introductions and enhancements. The emergence of new industry standards in related fields may adversely affect the demand for our products. This could happen, for example, if new standards and technologies emerged that were incompatible with customer deployments of our applications. In addition, any compounds, products or processes that we develop may become obsolete or uneconomical before we recover any of the expenses incurred in connection with their development. We cannot assure you that we will succeed in developing and marketing product enhancements or new products that respond to technological change, new industry standards, changed customer requirements or competitive products on a timely and cost-effective basis. Additionally, even if we are able to develop new products and product enhancements, we cannot assure you that they will achieve market acceptance.
The commercial potential of our products and product candidates will be significantly limited if we are not able to obtain adequate levels of reimbursement for them.
Our ability to commercialize our medical products and product candidates successfully will depend in part on the extent to which coverage and reimbursement for such products and related treatments will be available from government health administration authorities, private health insurers and other third-party payers or otherwise supported by the market for these products. There can be no assurance that third-party payers’ coverage and reimbursement will be available or sufficient for the products we might develop.
Third-party payers are increasingly challenging the price of medical products and services and instituting cost-containment measures to control or significantly influence the purchase of medical products and services. These cost containment measures, if instituted in a manner affecting the coverage of or payment for our products, could have a material adverse effect on our ability to operate profitably. In some countries in the E.U. and in the U.S., significant uncertainty exists as to the reimbursement status of newly approved health care products, and we do not know whether adequate third-party coverage and reimbursement will be available for us to realize an appropriate return on our investment in product development, which could seriously harm our business. In the U.S., while reimbursement amounts previously approved appear to have provided a reasonable rate of return, there can be no assurance that our products will continue to be reimbursed at current rates or that third-party payers will continue to consider our products cost-effective and provide coverage and reimbursement for our products, in whole or in part.
We cannot be certain that our products will gain commercial acceptance among physicians, patients and third-party payers, even if necessary international and U.S. marketing approvals are maintained. We believe that recommendations and endorsements by physicians will be essential for market acceptance of our products, and we do not know whether these recommendations or endorsements will be obtained. We also believe that surgeons will not use these products unless they determine, based on clinical data and other factors, that the clinical benefits to patients and cost savings achieved through use of these products outweigh their cost.
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Acceptance among physicians may also depend upon the ability to train surgeons and other potential users of our products and the willingness of such users to learn these relatively new techniques.
If certain single-source suppliers fail to deliver key product components in a timely manner, our manufacturing would be impaired and our product sales could suffer.
We depend on certain single-source suppliers that supply components used in the manufacture of certain of our products. If we need alternative sources for key component parts or materials for any reason, these component parts or materials may not be immediately available to us. If alternative suppliers are not immediately available, we will have to identify and qualify alternative suppliers, and production of certain components or products may be delayed. We may not be able to find an adequate alternative supplier in a reasonable time period or on commercially acceptable terms, if at all. Our inability to obtain our key source supplies for the manufacture of our products may require us to delay shipments of products, harm customer relationships or force us to curtail or cease operations.
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Our business is subject to economic, political and other risks associated with international sales and operations, including risks arising from currency exchange rate fluctuations.
Because we sell our products in a number of countries, our business is subject to the risks of doing business internationally, including risks associated with U.S. government oversight and enforcement of the Foreign Corrupt Practices Act as well as with the United Kingdom’s Bribery Act and anti-corruption laws in other jurisdictions. We anticipate that sales from international operations will continue to represent a significant portion of our total sales. Accordingly, our future results could be harmed by a variety of factors, including:
· changes in local medical reimbursement policies and programs;
· changes in foreign regulatory requirements;
· changes in a specific country’s or region’s political or economic conditions, such as the current financial uncertainties in Europe and changing circumstances in emerging regions;
· trade protection measures, quotas, embargoes, import or export licensing requirements and duties, tariffs or surcharges;
· potentially negative impact of tax laws, including tax costs associated with the repatriation of cash;
· difficulty in staffing and managing global operations;
· cultural, exchange rate or other local factors affecting financial terms with customers;
· local economic and financial conditions affecting the collectability of receivables, including receivables from sovereign entities;
· economic and political instability and local economic and political conditions;
· differing labor regulations; and
· differing protection of intellectual property.
Substantially all of our sales outside of the U.S. are denominated in local currencies. Measured in local currency, a substantial portion of our international sales was generated in the E.U. The U.S. dollar value of our international sales varies with currency exchange rate fluctuations. Decreases in the value of the U.S. dollar to the Euro have the effect of increasing our reported revenues even when the volume of international sales has remained constant. Increases in the value of the U.S. dollar relative to the Euro, as well as other currencies, have the opposite effect and, if significant, could have a material adverse effect on our reported revenues and results of operations.
The United States Foreign Corrupt Practices Act, the United Kingdom Bribery Act, and similar laws in other jurisdictions contain prohibitions against bribery and other illegal payments or for the failure to have procedures in place that prevent such payments. Recent years have seen an increasing number of investigations and other enforcement activities under these laws. Although we have
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compliance programs in place with respect to these laws, no assurance can be given that a violation will not be found, and if found, the resulting penalties could adversely affect us and our business.
Future legislation or regulatory changes to, or consolidation in, the health care system may affect our ability to sell our products profitably
There have been, and we expect there will continue to be, a number of legislative and regulatory proposals to change the health care system, and some could involve changes that could significantly affect our business. For example, the 2010 health reform law was intended to increase the number of individuals covered by health insurance, impose reimbursement provisions intended to restrict the growth in Medicare and Medicaid spending and encourage development of health care delivery programs and models intended to tie payments to quality and care delivery innovations. Included inAs currently enacted, the health reform law wasimposed a 2.3% excise tax on United Statesmedical device manufacturers on U.S. sales of a wide range ofClass I, II and III medical devices. The excise tax is effective in 2013. Given that 62% or our worldwide product sales are to customers based in the U.S., we expect that this tax burden will become effectivehave a negative impact on our earnings and cash flows in 2013 and the Internal Revenue Service (“IRS”) issued proposed rules regarding implementation of the excise tax in February 2012. We expect the excise tax to increase our operating expenses.beyond.
Although some provisions of the health reform legislation have been implemented, many of the legislative changes contained within the health reform legislation will not be effective or implemented until future years. In addition, the Supreme Court will hear arguments related to the constitutionality of portions of the health reform law later this year and the outcome of the case could result in repeal of all or portions of the law. Therefore, the impact of health reform on our business is currently uncertain. Apart from the 2010 health reform law, efforts by governmental and third-party payers to reduce healthcare costs or the announcement of legislative
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proposals or reforms to implement government controls could cause a reduction in sales or in the selling price of our products, which could seriously harm our business.
Additionally, initiatives to reduce the cost of health care have resulted in a consolidation trend in the health care industry, including hospitals. This in turn has resulted in greater pricing pressures and the exclusion of certain suppliers from certain market segments as consolidated groups such as group purchasing organizations, independent delivery networks and large single accounts continue to consolidate purchasing decisions for some of our hospital customers. We expect that market demand, government regulation, and third-party reimbursement policies will continue to change the worldwide health care industry, resulting in further business consolidations and alliances among our customers and competitors, which may reduce competition, exert further downward pressure on the prices of our products and may adversely impact our business, financial condition or results of operations.
If we are unable to license new technologies, or our existing license agreements are terminated, our ability to maintain our competitive advantage in our existing products and to develop future products may be adversely affected.
We have entered into, and we expect that we will continue to enter into, licensing agreements with third parties to give us access to technologies that we may use to develop products, or that we may use to gain access to new products for us to further develop, market and sell through our commercial sales organizations. The technologies governed by these license agreements may be critical to our ability to maintain our competitive advantage in our existing products and to develop future products.
Pursuant to terms of our existing license agreements, licensors have the right under certain specified circumstances to terminate their respective licenses. Events that may allow licensors to exercise these termination provisions include:
· sub-licensing without the licensor’s consent;
· a transaction which results in a change of control of us;
· our failure to use the required level of diligence to develop, market and sell products based on the licensed technology;
· our failure to maintain adequate levels of insurance with respect to the licensed technologies;
· our bankruptcy; or
· other acts or omissions that may constitute a breach by us of our license agreement.
In addition, any failure to continue to have access to these technologies may materially adversely affect the benefits that we currently derive from our collaboration and partnership arrangements and may adversely affect our results and operations.
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We may depend on certain strategic partners for the development, regulatory approval, testing, manufacturing and potential commercialization of our products.
We have entered into various arrangements with corporate and academic partners, licensors, licensees and others for the research, development, clinical testing, regulatory approval, manufacturing, marketing and commercialization of our product candidates. For instance, we have partnered with BSC and Cook to develop and market paclitaxel-eluting coronary and peripheral stents. Strategic partners both existing (particularly BSC) and those that we may collaborate with currently and in the future, are or may be essential to the development of our technology and potential revenue and we have little control over or access to information regarding our partners’ activities with respect to our products.
Our strategic partners may fail to successfully develop or commercialize our technology to which they have rights for a number of reasons, including:
· failure of a strategic collaborator to continue, or delays in, its funding, research, development and commercialization activities;
· the pursuit or development by a strategic collaborator of alternative technologies, either on its own or with others, including our competitors, as a means for developing treatments for the diseases targeted by our programs;
· the preclusion of a strategic collaborator from developing or commercializing any product, through, for example, litigation or other legal action; and
· the failure of a strategic collaborator to make required milestone payments, meet contractual milestone obligations or exercise options which may result in our terminating applicable licensing arrangements.
We may not be able to protect our intellectual property or obtain necessary intellectual property rights from third parties, which could adversely affect our business.
Our success depends, in part, on ensuring that our intellectual property rights are covered by valid and enforceable patents or effectively maintained as trade secrets and on our ability to detect violations of our intellectual property rights and enforce such rights against others.
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The validity of our patent claims depends, in part, on whether pre-existing public information described or rendered obvious our inventions as of the filing date of our patent applications. We may not have identified all prior art, such as U.S. and foreign patents, published applications or published scientific literature that could adversely affect the validity of our issued patents or the patentability of our pending patent applications. For example, patent applications in the U.S. are maintained in confidence for up to 18 months after their filing. In some cases, however, patent applications remain confidential in the U.S. Patent and Trademark Office (the “USPTO”) for the entire time prior to their issuance as a U.S. patent. Patent applications filed in countries outside the U.S. are not typically published until at least 18 months from their first filing date. Similarly, publication of discoveries in scientific or patent literature often lags behind actual discoveries. Therefore, we cannot be certain that we were the first to invent, or the first to file patent applications related to, our technology. In the event that a third party has also filed a U.S. patent application covering a similar invention, we may have to participate in an adversarial proceeding, known as an interference, declared by the USPTO to determine priority of invention in the U.S. It is possible that we may be unsuccessful in the interference, resulting in a loss of some portion or all of our U.S. patent positions. The laws in some foreign jurisdictions do not protect intellectual property rights to the same extent as in the U.S., and many companies have encountered significant difficulties in protecting and defending such rights in foreign jurisdictions. If we encounter such difficulties or we are otherwise precluded from effectively protecting our intellectual property rights in foreign jurisdictions, our business prospects could be substantially harmed.
We frequently seek patents to protect our intellectual property. It should be recognized that we may not be able to obtain patent protection for key elements of our technology, as the patent positions of medical device, pharmaceutical and biotechnology companies are uncertain and involve complex legal and factual questions for which important legal issues are largely unresolved. For example, no consistent policy has emerged regarding the scope of health-related patent claims that are granted by the USPTO or enforced by the U.S. federal courts. Rights under any of our issued patents may not provide commercially meaningful protection for our products or afford us a commercial advantage against our competitors or their competitive products or processes. In addition, even if a patent is issued, the coverage claimed in a patent application may be significantly reduced in the patent as granted.
There can be no assurance that:
· patent applications will result in the issuance of patents;
· additional proprietary products developed will be patentable;
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· licenses we have obtained from third parties that we use in connection with our technology will not be terminated;
· patents issued will provide adequate protection or any competitive advantages;
· patents will not be successfully challenged by any third parties; or
· the patents of others will not impede our or our collaborators’ ability to commercialize our technology.
For example, the drug paclitaxel is itself not covered by composition of matter patents. Therefore, although we have developed and are developing an intellectual property portfolio around the use of paclitaxel for intended commercial applications, others may be able to engage in off-label use of paclitaxel for the same indications, causing us to lose potential revenue. Furthermore, others may independently develop similar products or technologies or, if patents are issued to us, design around any patented technology developed by us, which could affect our potential to generate revenues and harm our results of operations.
Patent protection for our technology may not be available based on prior art. The publication of discoveries in scientific or patent literature often lags behind actual discoveries. As a consequence, there may be uncertainty as to whether we or a third party were the first creator of inventions covered by issued patents or pending patent applications or that we or a third party were the first to file patent applications for such inventions. Moreover, we might have to participate in interference proceedings declared by the USPTO, or other proceedings outside the U.S., including oppositions, to determine priority of invention or patentability, which could result in substantial cost to us even if the outcome were favorable. An unfavorable outcome in an interference or opposition proceeding could preclude us, our collaborators and our licensees from making, using or selling products using the technology or require us to obtain license rights from prevailing third parties. We do not know whether any prevailing party would offer us a license on commercially acceptable terms, if at all. We may also be forced to pay damages or royalties for our past use of such intellectual property rights, as well as royalties for any continued usage.
As part of our patent strategy, we have filed a variety of patent applications internationally. Oppositions have been filed against various granted patents that we either own or license and which are related to certain of our technologies. For a summary of certain of our material current legal proceedings, including those relating to our patents and intellectual property, see the section entitled “Legal Proceedings” under Part I, Item 3 of this Annual Report on Form 10-K.
Our future success and competitive position depend in part on our ability to obtain and maintain certain proprietary intellectual property rights used in our approved products and principal product candidates. Any such success depends in part on effectively instituting claims against others who we believe are infringing our rights and by effectively defending claims of intellectual property infringement brought by our competitors and others. The stent-related markets have experienced rapid technological change and obsolescence in the recent past, and our competitors have strong incentives to attempt to stop or delay us from introducing new
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products and technologies. See “—We may incur substantial costs as a result of litigation or other proceedings relating to patent and other intellectual property rights.”
We do not know whether the patents that we have obtained or licensed, or may be able to obtain or license in the future, would be held valid or enforceable by a court or whether a competitor’s technology or product would be found to infringe such patents. Further, we have no assurance that third parties will not properly or improperly modify or terminate any license they have granted to us.
We have obtained licenses from third parties with respect to their intellectual property that we use in connection with certain aspects of our technology or products. However, we may need to obtain additional licenses for the development of our current or future products. Licenses may not be available on satisfactory terms or at all. If available, these licenses may obligate us to exercise diligence in bringing our technology to market and may obligate us to make minimum guarantee or milestone payments. This diligence and these milestone payments may be costly and could adversely affect our business. We may also be obligated to make royalty payments on the sales, if any, of products resulting from licensed technology and may be responsible for the costs of filing and prosecuting patent applications. These costs could affect our results of operations and decrease our earnings.
Certain of our key technologies include trade secrets and know-how that may not be protected by patents. There can be no assurance that we will be able to protect our trade secrets. To help protect our rights, we require employees, consultants, advisors and collaborators to enter into confidentiality agreements. We cannot assure you that all employees, consultants, advisors and collaborators have signed such agreements, or that these agreements will adequately protect our trade secrets, know-how or other proprietary information in the event of any unauthorized use or disclosure. Furthermore, we may not have adequate remedies for any such breach. Any disclosure of confidential data into the public domain or to third parties could allow our competitors to learn our trade secrets and use the information in competition against us.
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Our ability to operate could be hindered by the proprietary rights of others.
A number of medical device, pharmaceutical and biotechnology companies as well as research and academic institutions have developed technologies, filed patent applications or received patents on various technologies that may be related to our business. Some of these technologies, applications or patents may conflict with or adversely affect our technologies or intellectual property rights, including those that we license from others. We are aware of other parties holding intellectual property rights that may represent prior art or other potentially conflicting intellectual property. Any conflicts with the intellectual property of others could limit the scope of the patents, if any, that we may be able to obtain or result in the denial of our current or future patent applications altogether.
If patents that cover our activities are issued to other persons or companies, we could be charged with infringement. In the event that other parties’ patents cover any portion of our activities, we may be forced to develop alternatives or negotiate a license for such technology. We do not know whether we would be successful in either developing alternative technologies or acquiring licenses upon reasonable terms, if at all. Obtaining any such licenses could require the expenditure of substantial time and other resources and could harm our business and decrease our earnings. If we do not obtain such licenses, we could encounter delays in the introduction of our products or could find that the development, manufacture or sale of products requiring such licenses is prohibited.
We may incur substantial costs as a result of litigation or other proceedings relating to patent and other intellectual property rights.
In connection with maintaining the value of our various intellectual property and exclusivity rights, we regularly evaluate the activities of others worldwide. Our success will depend, in part, on our ability to obtain patents, or licenses to patents, maintain trade secret protection and enforce our rights against others. Should it become necessary to protect those rights, we intend to pursue all cost-efficient strategies, including, when appropriate, negotiation or litigation in any relevant jurisdiction. For a summary of certain of our current legal proceedings, including proceedings in respect of patent infringement and intellectual property matters, see the section entitled “Legal Proceedings” under Part I, Item 3 of this Annual Report on Form 10-K.
We intend to pursue and to defend vigorously any and all actions of third parties related to our material patents and technology. Any failure to obtain and protect intellectual property could adversely affect our business and our ability to operate could be hindered by the proprietary rights of others.
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Our involvement in intellectual property litigation could result in significant expense, adversely affecting the development of product candidates or sales of the challenged product or intellectual property and diverting the efforts of our technical and management personnel, whether or not such litigation is resolved in our favor. Some of our competitors may be able to sustain the costs of complex patent litigation more effectively than we can because they have substantially greater resources, and intellectual property litigation may be used against us as a means of gaining a competitive advantage. Competing parties frequently file multiple suits to leverage patent portfolios across product lines, technologies and geographies and to balance risk and exposure between the parties. Uncertainties resulting from the initiation and continuation of any litigation could affect our ability to continue our operations. In the event of an adverse outcome as a defendant in any such litigation, we may, among other things, be required to:
· pay substantial damages or back royalties;
· cease the development, manufacture, use or sale of product candidates or products that infringe upon the intellectual property of others;
· expend significant resources to design around a patent or to develop or acquire non-infringing intellectual property;
· discontinue processes incorporating infringing technology; or
· obtain licenses to the infringed intellectual property.
We cannot assure you that we will be successful in developing or acquiring non-infringing intellectual property or that necessary licenses will be available upon reasonable terms, if at all. Any such development, acquisition or license could require the expenditure of substantial time and other resources and could adversely affect our business and financial results. If we cannot develop or acquire such intellectual property or obtain such licenses, we could encounter delays in any introduction of products or could find that the development, manufacture or sale of products requiring such licenses could be prohibited.
If third parties file patent applications, or are issued patents claiming technology also claimed by us in pending applications, we may be required to participate in interference proceedings with the USPTO, or other proceedings outside the United States, including
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oppositions, to determine priority of invention or patentability, which could result in substantial cost to us even if the eventual outcome were favorable.
We must receive regulatory approval for each of our product candidates before they can be sold commercially in Canada, the U. S. or internationally, which can take significant time and be very costly.
The development, manufacture and sale of medical devices and human therapeutic products in Canada, the U.S. and internationally is governed by a variety of statutes and regulations. These laws require, among other things:
· regulatory approval of manufacturing facilities and practices;
· adequate and well-controlled research and testing of products in pre-clinical and clinical trials;
· review and approval of submissions containing manufacturing, pre-clinical and clinical data in order to obtain marketing approval based on establishing the safety and efficacy of the product for each use sought, including adherence to current cGMPs during production and storage; and
· control of marketing activities, including advertising and labeling.
The product candidates currently under development by us or our collaborators will require significant research, development, pre-clinical and clinical testing, pre-market review and approval, and investment of significant funds prior to their commercialization. In many instances, we are dependent on our collaborators for regulatory approval and compliance, and have little or no control over these matters. The process of completing clinical testing and obtaining such approvals is likely to take many years and require the expenditure of substantial resources, and we do not know whether any clinical studies by us or our collaborators will be successful, whether regulatory approvals will be received, or whether regulatory approvals will be obtained in a timely manner. Despite the time and resources expended by us, regulatory approval is never guaranteed. Even if regulatory approval is obtained, regulatory agencies may limit the approval to certain diseases, conditions or categories of patients who can use them.
If any of our development programs are not successfully completed in a timely fashion, required regulatory approvals are not obtained in a timely fashion, or products for which approvals are obtained are not commercially successful, it could seriously harm our business.
If our process related to product development does not result in an approved and commercially successful product, our business could be adversely affected.
We focus our product development activities on areas in which we have particular strengths. The outcome of any development program is highly uncertain, notwithstanding how promising a particular program may seem. Success in pre-clinical and early-stage clinical trials may not necessarily translate into success in large-scale clinical trials. Further, clinical trials are expensive and may require increased investment for which we do not have adequate funding or for which we are not able to access adequate funding.
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In addition, we will need to obtain and maintain regulatory approval in order to market new products. Notwithstanding the outcome of clinical trials for new products, regulatory approval may not be achieved. The results of clinical trials are susceptible to varying interpretations that may delay, limit or prevent approval or result in the need for post-marketing studies. In addition, changes in regulatory policy for product approval during the period of product development and review by regulators of a new application may cause delays or rejection. Even if we receive regulatory approval, this approval may include limitations on the indications for which we can market the product. There is no guarantee that we will be able to satisfy the applicable regulatory requirements, and we may suffer a significant variation from planned revenue as a result.
Compulsory licensing and/or generic competition may affect our business in certain countries.
In a number of countries, governmental authorities have the right to grant licenses to others to use a pharmaceutical or medical device company’s patents or other intellectual property without the consent of the owner of the patent or other intellectual property. Governmental authorities could use this right to grant licenses under our patents or other intellectual property to others or could require us to grant licenses under our patents or other intellectual property to others, thereby allowing our competitors to manufacture and sell their own versions of our products. In other circumstances, governmental authorities could use this right to require us or our licensees to reduce the prices of our products. In all of these situations, our sales or the sales of our licensee(s), and the results of our operations, in these countries could be adversely affected.
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We are subject to litigation that could strain our resources and distract management.
From time to time, we are involved in a variety of claims, lawsuits and other disputes. These suits may concern issues including product liability, contract disputes, employee-related matters, intellectual property and personal injury matters. It is not feasible to predict the outcome of all pending suits and claims, and the ultimate resolution of these matters as well as future lawsuits could have a material adverse effect on our business, financial condition, results of operations or cash flows or reputation.
For a summary of certain of our material current legal proceedings, see the section entitled “Legal Proceedings” under Part I, Item 3 of this Annual Report on Form 10-K.
We may be subject to damages resulting from claims that we or our employees have wrongfully used or disclosed alleged trade secrets of their former employers.
Many of our employees were previously employed at universities or other biotechnology or pharmaceutical companies, including our competitors or potential competitors. Although no such claims against us are currently pending, we may be subject to claims that these employees or we have used or disclosed trade secrets or other proprietary information of their former employers. Litigation may be necessary to defend against these claims. Even if we are successful in defending against these claims, litigation could result in substantial costs and be a distraction to management. If we fail in defending such claims, in addition to paying monetary damages, we may lose valuable intellectual property rights or personnel. A loss of key research personnel or their work product could hamper or prevent our ability to commercialize certain product candidates, which could severely harm our business.
We may incur significant costs complying with environmental laws and regulations.
Our research and development processes and manufacturing operations involve the use of hazardous materials. In the countries in which we operate or sell our products, we are subject to federal, state, provincial, local and other laws and regulations that govern the use, manufacture, storage, handling and disposal of such materials and certain waste products. The risk of accidental contamination or injury from these materials cannot be completely eliminated. In the event of an accident or the discovery of pre-existing contamination at one or more of our facilities, we could be held liable for any damages that result, and any such liability could exceed our resources. In addition, our manufacturing facilities may become subject to new or increased legislation or regulation as a result of climate control initiatives. We may not be specifically insured with respect to these liabilities, and we do not know whether we will be required to incur significant costs to comply with environmental laws and regulations in the future, or whether our operations, business or assets will be harmed by current or future environmental laws or regulations.
If we are unable to fully comply with federal and state “fraud and abuse laws,” we could face substantial penalties, which may adversely affect our business, financial condition and results of operations.
We are subject to various laws pertaining to health care fraud and abuse, including the U.S. Anti-Kickback Statute, physician self-referral laws (the “Stark Law”), the U.S. False Claims Act, HIPAA (as amended by HITECH), the U.S. False Statements Statute, the Physician Payment Sunshine Act, and state law equivalents to these U.S. federal laws, which may not be limited to government-reimbursed items and may not contain identical exceptions. Violations of these laws are punishable by criminal and civil sanctions, including, in some instances, civil and criminal penalties, damages, fines, exclusion from participation in U.S. federal and state health care programs, including Medicare and Medicaid, and the curtailment or restructuring of operations. Any action against us for violation of these laws could have a significant impact on our business. In addition, we are subject to the U.S. Foreign Corrupt
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Practices Act. Any action against us for violation by us or our agents or distributors of this act could have a significant impact on our business.
Acquisition of companies or technologies may result in disruptions to our business.
As part of our business strategy, we may acquire additional assets, products or businesses principally relating to or complementary to our current operations. Any acquisitions or mergers by us will be accompanied by the risks commonly encountered in acquisitions of companies. These risks include, among other things, higher than anticipated acquisition costs and expenses, the difficulty and expense of integrating the operations and personnel of the companies and the loss of key employees and customers as a result of changes in management.
In addition, geographic distances may make integration of acquired businesses more difficult. We may not be successful in overcoming these risks or any other problems encountered in connection with any acquisitions.
If significant acquisitions are made for cash consideration, we may be required to use a substantial portion of our available cash, cash equivalents and short-term investments. Future acquisitions by us may cause large one-time expenses or create goodwill or other
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intangible assets that could result in significant asset impairment charges in the future. Acquisition financing may not be available on acceptable terms, if at all.
If we fail to hire and retain key management and technical personnel, we may be unable to successfully implement our business plan.
We are highly dependent on our senior management and technical personnel. The competition for qualified personnel in the health care field is intense, and we rely heavily on our ability to attract and retain qualified managerial and technical personnel. Our ability to manage growth effectively will require continued implementation and improvement of our management systems and the ability to recruit and train new employees. We may not be able to successfully attract and retain skilled and experienced personnel, which could harm our ability to develop our product candidates and generate revenues.
Risks Relating to Our Indebtedness, Organization and Financial Position
We may not be ablehave a substantial amount of indebtedness, which could adversely affect our financial position and ability to service our debt or obtain future financing.additional financing
We may incur additional debt from time to time to finance our operations, for capital expenditures or for other purposes. The magnitude of debt that we carry may have important consequences toimpact us includingin the following:following ways:
· make it difficult for us to satisfy our financial obligations, including making scheduled principal and interest payments;
·limit our ability to obtainborrow additional financing, if necessary,funds for working capital, capital expenditures, acquisitions or other purposes may be impaired orgeneral corporate purposes;
·limit our ability to borrow additional financing may not be available on favorablefunds at favourable terms;
· we are be requiredrequire us to use a substantial portion of our operating cash flow from operations to pay the interest or principal on our debt. These payments reduce the fundsmake debt service payments; that would otherwise be available for our operations and future business opportunities;
· a substantial decreaselimit our flexibility to plan for, or react to, changes in our net operating cash flows could make it difficult for us to meet our debt service requirementsbusiness and force us to further modify our operations;industry;
· we may be placedplace us at a competitive disadvantage compared to our less leveragedless-leveraged competitors; and
· we may be more vulnerableincrease our vulnerability to a downturn in our business or the economy generally.
If we cannot service our debt, we will be forced to take actions such as reducing or delaying capital expenditures, selling assets, restructuring or refinancing our debt, or seeking additional equity capital. We can give no assurance that we can do anyimpact of these things on satisfactory terms or at all.adverse economic and industry conditions.
Our obligation to pay cash interest on our notes has had, and may continue to have, an adverse effect on our liquidity.
We are obligated to make periodic cash interest payments on our outstanding indebtedness. As a result of these required cash interest payments, combined with the significant decline in royalty payments we receive from BSC, we have had significant liquidity issues, which led to our need to restructure a significant portionMaturity of our indebtedness through the Recapitalization Transaction as concluded in May 2011. For more information on the Recapitalization Transaction, refer to the “Recapitalization Transaction and Emergence from Creditor Protection Proceedings” section of Management’s, Discussion and Analysis and notes 1, 3 and 4 of the audited consolidated financial statements for the year ended December 31, 2011 included in this Annual Report on Form 10-K. Ifexisting debt may limit our cash flows are worse than expected, we may be unable to access additional sources of liquidity to fund our cash needs, which could further adversely affect our financial condition or results of operations and our ability to make payments on our debt.
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We may not be able to obtain financing or execute other strategic alternatives to meet requirements upon maturity of our existing debt.
We continue toAs at December 31, 2012, we have a material amount$229.4 million of outstanding indebtedness, the significant majority9% Senior Notes due on December 1, 2016 (“Senior Notes”) and $60 million of which will become fullySenior Floating Rate Notes (“New Notes”) due and payable on or before December 1, 2013. As a result,Management expects that these debt obligations will be fully repaid using the cash consideration from Angiotech’s contemplated sale of its Interventional Products Business to Argon (see the Sale of the Interventional Products Business to Argon Medical, Inc. section above).
If we are unable to complete or close the sale of the Interventional Products Business to Argon, we will need to seek new financing or pursue other strategic alternatives such as a dispositionreducing or delaying capital expenditures, selling assets, disposing of part or all of our business, that would allow us to meetrestructuring or refinancing our obligationsexisting debt, or seeking additional equity capital to repay or refinance our outstanding indebtedness.these debt obligations upon maturity. There can beis no assurance that we will be able to achieve any transaction or obtain new financingcomplete such activities, to meet our obligations on favorablesatisfactory terms, if at all.
If we are unable to raise new or additional financing or conclude other strategic activities,execute the any of the initiatives described above, and as a result we are not able to meet our financial obligations, we may be forced to pursue alternatives to restructure our outstanding indebtedness, including but not limited to extending the maturity on our existing indebtedness, restructuring other terms of our existing indebtedness or seeking protection from our creditors through formal bankruptcy proceedings. If such actions become necessary, they may be costly, and would likely adversely impact our business, operations, liquidity and capital resources, and may also severely limit or eliminate any amounts that may be ultimately received by our outstanding creditors in service of our obligations thereto, or that may be received by shareholders.
Our obligation to pay cash interest on our notes has had, and may continue to have, an adverse effect on our liquidity.
We are obligated to make periodic cash interest payments on our outstanding indebtedness. As a result of these required cash interest payments, combined with the significant decline in royalty payments we receive from BSC, we have had significant liquidity issues, which led to our need to restructure a significant portion of our indebtedness through the Recapitalization Transaction as concluded in May 2011. For more information on the Recapitalization Transaction, refer to note 3 of the audited consolidated financial statements for the year ended December 31, 2012 included in this Annual Report on Form 10-K. If our cash flows are worse
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than expected, we may be unable to access additional sources of liquidity to fund our cash needs, which could further adversely affect our financial condition or results of operations and our ability to make payments on our debt.
We must offer to repurchase the Senior Notes upon a change of control.
The Senior Notes Indenture will require that, upon the occurrence of a “change of control”, as defined in the Senior Notes Indenture, we must make an offer to repurchase the Senior Notes at a price equal to 101% of the principal amount thereof, plus accrued and unpaid interest, if any, to the date of repurchase.
Certain events involving a change of control may result in an event of default or require the applicable indebtedness or other obligations to be repurchased or repaid under our other indebtedness or indebtedness that we may incur in the future, including our $60.0 million existing Senior Floating Rate Notes (“New Notes”) and any indebtedness outstanding under our revolving credit facility (“Revolving Credit Facility”). The exercise by the holders of their right to require the Issuer to repurchase the Senior Notes upon a change of control could cause a default under the New Notes Indenture or the Revolving Credit Facility, even if the change of control itself does not. An event of default under other indebtedness could result in an acceleration of such indebtedness. We cannot assure you that we would have sufficient resources to repurchase any of the Senior Notes or to pay our other obligations in the event of such an acceleration of indebtedness upon a change of control. The acceleration of indebtedness and our inability to repurchase all of the tendered Senior Notes would constitute events of default under the Senior Notes Indenture. We cannot assure you that the terms of any future indebtedness will not contain cross default provisions based upon the occurrence of a change of control or other defaults under such debt instruments. Furthermore, this would likely impact our ability to continue operations.
We have effected reductions in our operating costs and, as a result, our ability to cut costs further and sustain our business initiatives may be limited.
Beginning in late 2008 and continuing into 2011,early 2012, we have implemented various initiatives to reduce operating costs across all functions of the Company and focus our business efforts on our most promising near-term product opportunities. As a result of these cost-cutting initiatives, we may have a more limited ability to further reduce costs to increase our liquidity should such measures become necessary. Any further reductions may have a materially negative impact on our business.
Restrictive covenants in our existing and future credit agreements may adversely affect us.
We must comply with operating and financing restrictions in our revolving credit facility;Revolving Credit Facility; which was entered into on May 12, 2011 and provides us with up to $28 million of aggregate principal borrowings (as amended, the “Revolving Credit Facility”);borrowings; and the indentures governing our other outstanding indebtedness. The Revolving Credit Facility is subject to a borrowing base, certain reserves and other conditions (for more information, refer to notes 16(c) and 16(f)14 of the audited consolidated financial statements for the year ended December 31, 20112012 included in this Annual Report on Form 10-K). These restrictions affect, and in many respects limit or prohibit, our ability to:
· incur additional indebtedness;
· make any distributions, declare or pay any dividends on or acquire any of our capital stock;
· incur liens;
· make investments, including joint venture investments;
· sell assets;
· repurchase certain debt; and
· merge or consolidate with or into other companies or sell substantially all of our assets.
We may also have similar restrictions with any future debt.
Our Revolving Credit Facility requires us to make mandatory payments upon the occurrence of certain events, including the sale of assets, in each case subject to certain limitations and conditions. Our Revolving Credit Facility also contains financial covenants, including maintaining certain levels of EBITDA and interest coverage ratios. These restrictions could limit our ability to plan for or react to market conditions or to meet extraordinary capital needs or otherwise could restrict our activities. These restrictions could also
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adversely affect our ability to finance our future operations or capital needs or to engage in other business activities that would be in our interest.
Global credit and financial market conditions may exacerbate certain risks affecting our business.
Significantly challenging global credit and financial market conditions may make obtaining additional financing for our business difficult or impossible, or may make it more difficult to pursue a refinancing, restructuring or other transaction with respect to our existing indebtedness.
In addition, the tightening of global credit may lead to a disruption in the performance of our third-party contractors, suppliers or partners. We rely on third parties for several important aspects of our business, including but not limited to royalty revenue, portions of our product manufacturing and raw materials. If such third parties are unable to satisfy their commitments to us, our business would be adversely affected.
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Certain of our products are used in elective medical procedures which are not covered by insurance. Adverse changes in the economy or other conditions or events have had and may continue to have an adverse effect on consumer spending and may reduce the demand for these procedures. Any such changes, conditions or events could have an adverse effect on our sales and results of operations.
We and our subsidiaries are permitted to incur substantially more debt, which could further exacerbate the risks associated with our leverage.
The respective terms of the indenture governing our outstanding indebtedness under certain conditions expressly permit, or are anticipated to permit, as applicable, the incurrence of additional amounts of debt for specified purposes. Moreover the terms governing our outstanding indebtedness do not impose any limitation on our incurrence of liabilities that are not defined as “Indebtedness” under such indentures or facility (such as trade payables).
We are subject to risks associated with doing business globally.
As a medical device company with significant operations in the U.S., E.U., Canada and other countries, we are subject to political, economic, operational, legal, regulatory and other risks that are inherent in conducting business globally. These risks include foreign exchange fluctuations, exchange controls, capital controls, new laws or regulations or changes in the interpretation or enforcement of existing laws or regulations, political instability, macroeconomic changes, including recessions and inflationary or deflationary pressures, increases in prevailing interest rates by central banks or financial services companies, economic uncertainty, which may reduce the demand for our products or reduce the prices that our customers are willing to pay for our products, import or export restrictions, tariff increases, price controls, nationalization and expropriation, changes in taxation, diminished or insufficient protection of intellectual property, lack of access to impartial court systems, violations of law, including the U.S. Foreign Corrupt Practices Act and the U.K. Bribery Act, disruption or destruction of operations or changes to the Company’s business position, regardless of cause, including war, terrorism, riot, civil insurrection, social unrest, strikes and natural or man-made disasters, including famine, flood, fire, earthquake, storm or disease. The impact of any of these developments, either individually or cumulatively, could have a material adverse effect on our business, financial condition and results of operations.
We may incur losses associated with foreign currency fluctuations.
We report our operating results and financial position in U.S. dollars in order to more accurately represent the currency of the economic environment in which we operate.
Our operations are in some instances conducted in currencies other than the U.S. dollar, and fluctuations in the value of foreign currencies relative to the U.S. dollar could cause us to incur currency exchange losses. In addition to the U.S. dollar, we currently conduct operations in Canadian dollars, Euros, Swiss francs, Danish kroner, Swedish kroner, Norwegian kroner and U.K. pounds sterling. Exchange rate fluctuations may reduce our future operating results and comprehensive income. For a description of the effects of exchange rate fluctuations on our results, see “Quantitative and Qualitative Disclosures about Market Risk” under Item 7.A of this Annual Report on Form 10-K.
We have not entered into any forward currency contracts or other financial derivatives to hedge foreign exchange risk, and therefore we are subject to foreign currency transaction and translation gains and losses. We purchase goods and services in U.S. and Canadian dollars, Euros, Swiss francs, Danish kroner, and U.K. pounds sterling, and earn a significant portion of our license and milestone revenues in U.S. dollars. We primarily manage our foreign exchange risk by satisfying foreign-denominated expenditures with cash flows or assets denominated in the same currency.
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U. S. investors may not be able to obtain enforcement of civil liabilities against us.
We were formed under the laws of British Columbia, Canada. A substantial portion of our assets are located outside the U.S. As a result, it may be impossible for U.S. investors to affect service of process within the U.S. upon us or these persons or to enforce against us or these persons any judgments in civil and commercial matters, including judgments under U.S. federal or state securities laws. In addition, judgments of U.S. courts will not necessarily be recognized by courts in non-U.S. jurisdictions. Accordingly, even if a favorable judgment is obtained in a U.S. court, a party may be required to re-litigate a claim in other jurisdictions. In addition, in certain jurisdictions in which certain of our subsidiaries are organized, it is questionable whether a court would accept jurisdiction and impose civil liability if proceedings were commenced in an original action predicated only upon U.S. federal securities laws.
Item 1B. UNRESOLVED STAFF COMMENTS
None.
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Item 2. PROPERTIES
As at December 31, 2011,2012, we have 1516 facilities located in six different countries, which include Canada, the United States, Puerto Rico, the United Kingdom, Denmark and Switzerland. Of the 1516 facilities, seven are primarily used to manufacture and distribute medical devices or materials for medical device products. Our other eight facilities are primarily used for sales and marketing and administrative activities. One of our facilities, located in Seattle, WA, is currently subleased to a tenant. Collectively, these facilities comprise approximately 428,000458,145 square feet(1) of modern technical manufacturing, research and administrative operations. The following chart summarizes the facilities where our domestic and international operations occur:
Location | | Primary Purpose | | Segment | | Owned or Leased |
St. Gregoire, France | | Administration | | Medical Device Technologies | | Leased |
| | | | | | |
Lausanne, Switzerland | | Administration | | Medical Device Technologies | | Leased |
| | | | | | |
Stockholm, Sweden | | Administration | | Medical Device Technologies | | Leased |
| | | | | | |
Taunton, United Kingdom | | Manufacturing | | Medical Device Technologies | | Owned |
| | | | | | |
Stenlose, Denmark (3 facilities) | | Manufacturing | | Medical Device Technologies | | 2 Leased, 1 Owned(2) |
| | | | | | |
Wheeling, IL | | Manufacturing | | Medical Device Technologies | | Owned |
| | | | | | |
Gainesville, FL | | Manufacturing | | Medical Device Technologies | | Owned |
| | | | | | |
Henrietta, NY | | Manufacturing | | Medical Device Technologies | | Leased |
| | | | | | |
Seattle, WA | | Administration | | Medical Device Technologies | | Leased (Subleased) |
| | | | | | |
Bellevue, WA | | Administration | | Medical Device Technologies | | Leased |
| | | | | | |
Reading, PA | | Manufacturing | | Medical Device Technologies | | Owned |
| | | | | | |
Aguadilla, Puerto Rico | | Manufacturing | | Medical Device Technologies | | Leased |
| | | | | | |
Sao Paulo, Brazil | | Administration | | Medical Device Technologies | | Leased |
| | | | | | |
Vancouver, B.C. | | Administration | | Licensed Technologies | | Leased |
(1) 458,145 sq. ft. of facilities excludes 19,260 sq. ft. of a subleased facility located in Seattle, WA.
(2) In connection with the closure of our Denmark manufacturing facility, the owned property is currently being marketed for sale and the leased properties will be vacated in 2013.
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Item 3. LEGAL PROCEEDINGS
Recapitalization Transaction and Emergence from Creditor Protection Proceedings
On January 28, 2011, the Angiotech Entities, as part of the Recapitalization Transaction, filed for protection under the CCAA. The CCAA Plan imposed a stay of proceedings against the Angiotech Entities preventing any party from commencing or continuing any action, suit or proceeding against the Angiotech Entities or from exercising other enforcement rights that could arise as a result of the commencement of proceedings under the CCAA. The stay of proceedings generally precluded parties from taking any action against the Angiotech Entities for breach of contractual or other obligations. In order to have the CCAA Proceedings recognized in the U. S., on January 30, 2011, the Angiotech Entities commenced the Chapter 15 Cases. The purpose of the Chapter 15 Cases was to obtain recognition and enforcement in the U. S. of certain relief granted in the CCAA Proceedings, and to obtain the assistance of the U.S. court in effectuating the Recapitalization Transaction. On February 22, 2011, the U.S. court granted an order that among other things, recognized the CCAA Proceedings as a foreign main proceeding.
On May 12, 2011, the Recapitalization Transaction was implemented, which effectively eliminated our $250 million aggregate principal amount of our outstanding Subordinated Notes and related accrued interest obligations in exchange for 96% or 12,500,000 of the new common shares which were issued as part of the reorganization. In addition, through the Creditor Protection Proceedings, we also eliminated $4.1 million of certain of our other liabilities. On May 12, 2011, the Monitor filed the Monitor’s Certificate with the Canadian Court, confirming that all steps, compromises, transactions, arrangements, releases and reorganizations were satisfactorily implemented in accordance with the provisions of the CCAA Plan. As a result, the Angiotech Entities were discharged and emerged from Creditor Protection Proceedings. For more information on the CCAA Proceedings and Recapitalization Transaction, refer to Management’s Discussion and Analysis of Financial Condition and Results of Operations, along with notes 1, 3, and 4 in the audited consolidated financial statements in this Annual Report on Form 10-K.
Quill Medical, Inc. (“QMI”)
On October 4, 2010, the Company was notified that QSR Holdings, Inc. (“QSR”), as a representative for former stockholders of Quill Medical, Inc. (“QMI”), had made a formal demand (the “Arbitration Demand”) to the American Arbitration Association naming the Company, QMI and Angiotech Pharmaceuticals (US), Inc. (“Angiotech US”) as respondents (collectively, the “Respondents”). The Arbitration Demand alleged that the Respondents failed to satisfy certain obligations under the Agreement and Plan of Merger, dated May 25, 2006, by and among Angiotech, Angiotech US, Quaich Acquisition, Inc. and QMI (the “Merger Agreement”), notably including the obligations to make certain earn out payments and the orthopedic milestone payment. On October 1, 2010, QSR also commenced an action in the United States District Court for the Middle District of North Carolina against the Respondents, entitled QSR Holdings, Inc. v. Angiotech Pharmaceuticals, Inc., Angiotech Pharmaceuticals (US), Inc. and Quill Medical, Inc. (the “Federal Litigation”). The Complaint in the Federal Litigation alleged, among other items, that the Respondents: (a) breached certain contractual obligations under the Merger Agreement; (b) made certain misrepresentations or omissions during the initial negotiation of the Merger Agreement; and (c) tortiously interfered with the Merger Agreement.
On January 27, 2011, Angiotech and QSR entered into a settlement agreement (the “Settlement Agreement”), which resolved, among other things, any and all claims that the parties may have arising out of the Merger Agreement (including, without limitation, all claims, counterclaims or defenses that were or could have been asserted in the Arbitration Demand and the Federal Litigation) in exchange for a payment of $6.0 million (the “Settlement Amount”) by Angiotech US. In accordance with the terms of the Settlement Agreement, the first $2.0 million of the Settlement Amount was paid on May 26, 2011. The remaining $4.0 million is being paid in installments of $166,667 over a 24 month period. The Settlement Agreement further provides for complete and mutual releases between the parties, as more fully set forth therein. In accordance with its obligations under the Settlement Agreement, on February 24, 2011, QSR irrevocably dismissed the Federal Litigation and the Arbitration Demand with prejudice.
Rex Medical, LP (“Rex”)
In connection with the Company’s decision to discontinue selling the Option IVC Filter due to liquidity constraints, on November 18, 2010, Rex initiated an arbitration (the “Rex Arbitration”) against Angiotech US alleging that it had breached certain terms of the License, Supply, Marketing and Distribution Agreement, dated as of March 13, 2008, by and between Angiotech US and Rex (as amended, the “Option Agreement”). On February 16, 2011, Angiotech US entered into a Settlement and License Termination Agreement with Rex (the “Rex Settlement Agreement”) which provided for the full and final settlement and/or dismissal of all claims arising under the Option Agreement and Rex Arbitration. The Rex Settlement Agreement became effective on March 10, 2011 upon the Canadian Court granting an order authorizing Angiotech US to enter into the Rex Settlement Agreement and approving the terms thereof.
The following actions were effected under the terms of the Rex Settlement Agreement: (i) the Option Agreement terminated on March 31, 2011; (ii) Angiotech US paid $1.5 millionCompany may be subject to Rex in February 2011 to settle allvarious claims and royalties owedlegal proceedings brought against it in the normal course of business. The Company maintains insurance policies that provide limited coverage for amounts in excess of certain pre-determined deductibles for intellectual property infringement and product liability claims. Such matters are subject to Rex priormany uncertainties and may be difficult for management to January 1, 2011 related to Option IVC Filter sales as well as all currentdetermine the outcome or future milestone payments owing; (iii)estimate the potential range of losses if the Company does not prevail in February 2011, Angiotech
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US alsosuch matters. However, management believes that adequate provisions have been made in the accounts where required. There is no assurance that any legal proceedings disclosed here, or other legal proceedings not disclosed here, will not have a royalty payments to Rex based upon actual cash receipts collected from customers attributable to salesmaterial adverse impact on the Company’s financial condition or results of the Option IVC Filter that were recorded and accrued between January 1, 2011 and the effective date; (iv) from the effective date through the Termination Date, Angiotech US made ongoing royalty payments to Rex on a weekly basis based upon actual cash receipts collected; and (v) Angiotech US delivered certain materials relating to the marketing and sale of the Option IVC Filter.
Patent Oppositionoperations.
At the European Patent Office (“EPO”), various patents either owned or licensed by or to the Company are in opposition proceedings. The outcomes of these proceedings have not yet been determined.
In addition to the foregoing, the Company may be subject to claims and legal proceedings brought against us in the normal course of business. Such matters are subject to many uncertainties. The Company maintains insurance policies that provide limited coverage for amounts in excess of certain pre-determined deductibles for intellectual property infringement and product liability claims. Management believes that adequate provisions have been made in the accounts where required. However, we are not able to determine the outcome or estimate potential losses of pending legal proceedings to which we may become subject in the normal course of business nor are we able to estimate the amount or range of any possible loss we might incur should we not prevail in such matters. We cannot provide assurance that the legal proceedings listed here, or other legal proceedings not listed here, will not have a material adverse impact on our financial condition or results of operations.
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Item 4. MINE SAFETY DISCLOSURE
Not applicable.
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PART II
Item 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Our outstanding common shares are privately held, and there is currently no established public trading market for our common stock. As at March 23, 2012,28, 2013, there were 12,556,67312,547,702 new common shares issued and outstanding which were all held by 4462 shareholders of record. See Item 12, “Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters” included in this report. In addition, as of March 23, 2012,28, 2013, there were outstanding options (“Options”) and Restricted Stock Units (“RSUs”) to purchase 1,046,302759,517 common shares; and outstanding and unvested units of restricted stock (“RS”) that would convert into 130,20886,805 common shares once vesting conditions are met.
Dividend Policy
We have not declared or paid any dividends on our common shares since inception. The declaration of dividend payments is at the sole discretion of our Board of Directors. The Board of Directors may declare dividends in the future depending upon numerous factors that ordinarily affect dividend policy, including the results of our operations, our financial position and general business conditions. Our Revolving Credit Facility and Newthe indentures governing our Senior Floating Rate Note indenturesNotes and 9% Senior Notes also contain certain customary affirmative and negative covenants which limit our ability to make dividend distributions.
Sale of Unregistered Securities Withinwithin the Past Twelve Months
Upon implementationDuring the year ended December 31, 2012, 43,403 common shares were issued to certain executives upon vesting of the Recapitalization Plan on May 12, 2011, the Company issued 221,354their units of restricted stock and 299,479 RSUsRestricted Stock. We concurrently repurchased 16,701 of units of RS from these executives in connection the withholding taxes owed by them on units which had vested.
During the year ended December 31, 2012, 219,500 RSU’s were issued to certain employees and members of senior management. During the eight monthssame period 31,000 RSU’s were forfeited and 208,333 were cancelled in accordance with the terms of Dr. Hunter’s (former President and Chief Executive Officer of Angiotech) Termination Settlement Agreement dated November 14, 2012.
During the year ended December 31, 2011,2012, 37,200 Options were forfeited and 219,452 were cancelled in accordance with the Companyterms of Dr. Hunter’s Termination Settlement Agreement referred to above. The Options were issued an additional 116,000 RSUs to certain employees and directors of the Company. On May 12, 2011, the Company also issued 708,023 options to certain employees to acquire 5.2% of the new common shares, on a fully-diluted basis. The options are at an exercise price of $20 and expire on May 12, 2018. The grants of these Awards
These equity based awards were deemed to be exempt from registration under the Securities Act in reliance on Section 4(2) of the Securities Act, as transactions by an issuer not involving a public offering, and the issuance of common shares upon exercise of the options was exempt from registration in reliance on Rule 701 of the Securities Act.
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Item 6. SELECTED FINANCIAL DATA
The following table sets forth selected consolidated financial information for each of our five most recently completed financial years. This data should be read in conjunction with our Management’s Discussion and Analysis of Financial Condition and Results of Operations, the audited consolidated financial statements, including the notes to the financial statements, and the Risk Factors set out in this Annual Report on Form 10-K.
On May 12, 2011, Angiotech implemented a recapitalization transaction that, among other things, eliminated its $250 million 7.75% Senior Subordinated Notes due in 2014 (“Subordinated Notes”) and $16 million of related interest obligations in exchange for the cancellation of all outstanding common shares and issuance of new common shares of Angiotech (the “Recapitalization Transaction”). In connection with this Recapitalization Transaction and as discussed below, the Company adopted fresh start accounting on April 30, 2011 (the “Convenience Date”).
Upon implementation of fresh-starting accounting, Angiotech comprehensively revalued its assets and liabilities to their estimated fair values and eliminated its deficit, additional paid-in-capital and accumulated other comprehensive income balances. Debt and equity were also re-measured based on the reorganization value, being the fair value of the entity before considering liabilities, which were substantively derived from the Company’s financial projections. As the estimated enterprise value calculated for the purposes of fresh start accounting continues to be dependent on the achievement of future financial results and various assumptions, there is no assurance these financial projections will be realized to support the estimated enterprise value. Material adjustments resulting from the reorganization and the application of fresh-start accounting were reflected in the May 1, 2011 consolidated balance sheet and the consolidated statements of operations for the four months ended April 30, 2011.
Given that the reorganization and adoption of fresh-start accounting resulted in a new entity for financial reporting purposes, the Company is referred to as the “Predecessor Company” for all periods preceding the Convenience Date and the “Successor Company” for all periods subsequent to the Convenience Date. In addition, the consolidated results of the Successor Company may not be comparable in certain respects to those of the Predecessor Company. For more information, refer to note 1, 3 and 4 of the audited consolidated financial statements included in this Annual Report on Form 10-K.
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CONSOLIDATED STATEMENTS OF INCOMETable of Contents
| | Successor Company | | Predecessor Company | | | Successor Company | | | Predecessor Company | |
| | Eight months ended | | Four months ended | | Year ended | | Year ended | | Year ended | | Year ended | | | Year ended | | Eight months ended | | | Four months ended | | Year ended | | Year ended | | Year ended | |
| | December 31, | | April 30, | | December 31, | | December 31, | | December 31, | | December 31, | | | December 31, | | December 31, | | | April 30, | | December 31, | | December 31, | | December 31, | |
(in thousands of U.S. $) | | 2011 | | 2011 | | 2010 | | 2009 | | 2008 | | 2007 | | | 2012 | | 2011 | | | 2011 | | 2010 | | 2009 | | 2008 | |
REVENUE | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Product sales, net (1) | | $ | 139,307 | | $ | 69,198 | | $ | 211,495 | | $ | 191,951 | | $ | 190,816 | | $ | 170,193 | | |
Product sales, net | | | $ | 221,326 | | $ | 139,307 | | | $ | 69,198 | | $ | 211,495 | | $ | 191,951 | | $ | 190,816 | |
Royalty revenue | | 13,670 | | 10,941 | | 34,461 | | 62,171 | | 91,546 | | 116,659 | | | 18,449 | | 13,670 | | | 10,941 | | 34,461 | | 62,171 | | 91,546 | |
License fees (2) | | — | | 127 | | 286 | | 25,556 | | 910 | | 842 | | |
License fees (1) | | | 4,050 | | — | | | 127 | | 286 | | 25,556 | | 910 | |
| | 152,977 | | 80,266 | | 246,242 | | 279,678 | | 283,272 | | 287,694 | | | 243,825 | | 152,977 | | | 80,266 | | 246,242 | | 279,678 | | 283,272 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
EXPENSES | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Cost of products sold (3)(2) | | 90,348 | | 32,219 | | 106,304 | | 104,616 | | 101,052 | | 94,949 | | | 102,706 | | 90,348 | | | 32,219 | | 106,304 | | 104,616 | | 101,052 | |
License and royalty fees | | 264 | | 68 | | 5,889 | | 10,431 | | 14,258 | | 18,652 | | | 618 | | 264 | | | 68 | | 5,889 | | 10,431 | | 14,258 | |
Research and development | | 14,076 | | 5,686 | | 26,790 | | 23,701 | | 53,192 | | 53,963 | | | 7,056 | | 14,076 | | | 5,686 | | 26,790 | | 23,701 | | 53,192 | |
Selling, general and administration | | 60,424 | | 24,846 | | 89,238 | | 81,504 | | 98,483 | | 99,315 | | | 70,985 | | 60,424 | | | 24,846 | | 89,238 | | 81,504 | | 98,483 | |
Depreciation and amortization | | 23,973 | | 14,329 | | 33,745 | | 33,251 | | 33,998 | | 33,429 | | | 34,503 | | 23,973 | | | 14,329 | | 33,745 | | 33,251 | | 33,998 | |
In-process research and development | | — | | — | | — | | — | | 2,500 | | 8,125 | | | — | | — | | | — | | — | | — | | 2,500 | |
Write-down of assets held for sale (4) | | — | | 570 | | 1,450 | | 3,090 | | 1,283 | | — | | |
Write-down of assets held for sale (3) | | | 277 | | — | | | 570 | | 1,450 | | 3,090 | | 1,283 | |
Write-down of property, plant and equipment (5)(4) | | 4,502 | | 215 | | 4,779 | | — | | — | | — | | | 877 | | 4,502 | | | 215 | | 4,779 | | — | | — | |
Write-down of intangible assets (6) | | 10,850 | | — | | 2,814 | | — | | — | | — | | |
Escrow settlement recovery (7) | | — | | — | | (4,710 | ) | — | | — | | — | | |
Write-down of goodwill (8) | | — | | — | | — | | — | | 649,685 | | — | | |
Write-down of intangible assets (5) | | | — | | 10,850 | | | — | | 2,814 | | — | | — | |
Escrow settlement recovery (6) | | | — | | — | | | — | | (4,710 | ) | — | | — | |
Write-down of goodwill (7) | | | — | | — | | | — | | — | | — | | 649,685 | |
| | 204,437 | | 77,933 | | 266,299 | | 256,593 | | 954,451 | | 308,433 | | | 217,022 | | 204,437 | | | 77,933 | | 266,299 | | 256,593 | | 954,451 | |
Operating income (loss) | | (51,460 | ) | 2,333 | | (20,057 | ) | 23,085 | | (671,179 | ) | (20,739 | ) | | 26,803 | | (51,460 | ) | | 2,333 | | (20,057 | ) | 23,085 | | (671,179 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
Other (expenses) income: | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Foreign exchange (loss) gain | | 1,461 | | (646 | ) | 1,011 | | (1,612 | ) | 540 | | (341 | ) | | (751 | ) | 1,461 | | | (646 | ) | 1,011 | | (1,612 | ) | 540 | |
Investment and other income | | 547 | | 34 | | (571 | ) | 378 | | 1,192 | | 10,393 | | |
Debt restructuring costs (9) | | — | | — | | (9,277 | ) | — | | — | | — | | |
Other income (expense) | | | 1,320 | | 547 | | | 34 | | (571 | ) | 378 | | 1,192 | |
Debt restructuring costs (8) | | | — | | — | | | — | | (9,277 | ) | — | | — | |
Interest expense | | (11,945 | ) | (10,327 | ) | (40,258 | ) | (38,039 | ) | (44,490 | ) | (51,748 | ) | | (20,390 | ) | (11,945 | ) | | (10,327 | ) | (40,258 | ) | (38,039 | ) | (44,490 | ) |
Write-down and other deferred financing charges (10) | | — | | — | | (291 | ) | (643 | ) | (16,544 | ) | — | | |
Write-downs of investments (11) | | (2,035 | ) | — | | (1,297 | ) | — | | (23,587 | ) | (8,157 | ) | |
Loan settlement gain (12) | | — | | — | | 1,880 | | — | | — | | — | | |
Gain on disposal of Laguna Hills manufacturing facility (13) | | — | | — | | 2,005 | | — | | — | | — | | |
Write-down and other deferred financing charges (9) | | | — | | — | | | — | | (291 | ) | (643 | ) | (16,544 | ) |
Write-downs of investments (10) | | | (561 | ) | (2,035 | ) | | — | | (1,297 | ) | — | | (23,587 | ) |
Debt extinguishment loss (13) | | | (4,437 | ) | | | | | | | | | | | |
Loan settlement gain (11) | | | — | | — | | | — | | 1,880 | | — | | — | |
Gain on disposal of Laguna Hills manufacturing facility (12) | | | — | | — | | | — | | 2,005 | | — | | — | |
Total other expenses | | (11,972 | ) | (10,939 | ) | (46,798 | ) | (39,916 | ) | (82,889 | ) | (49,853 | ) | | (24,819 | ) | (11,972 | ) | | (10,939 | ) | (46,798 | ) | (39,916 | ) | (82,889 | ) |
Loss before reorganization items, gain on extinguishment of debt and settlement of other other liabilities and income taxes | | (63,432 | ) | (8,606 | ) | (66,855 | ) | (16,831 | ) | (754,068 | ) | (70,592 | ) | |
Income (loss) before reorganization items, gain on extinguishment of debt and settlement of other other liabilities and income taxes | | | 1,984 | | (63,432 | ) | | (8,606 | ) | (66,855 | ) | (16,831 | ) | (754,068 | ) |
Reorganization items | | — | | 321,084 | | — | | — | | — | | — | | | — | | — | | | 321,084 | | — | | — | | — | |
Gain on extinguishment of debt and settlement of other liabilities | | — | | 67,307 | | — | | — | | — | | — | | | — | | — | | | 67,307 | | — | | — | | — | |
Loss from discontinued operations, net of taxes (14) | | — | | — | | — | | — | | — | | (9,893 | ) | |
(Loss) income before taxes | | (63,432 | ) | 379,785 | | (66,855 | ) | (16,831 | ) | (754,068 | ) | (80,485 | ) | | 1,984 | | (63,432 | ) | | 379,785 | | (66,855 | ) | (16,831 | ) | (754,068 | ) |
Income tax (recovery) expense | | (2,986 | ) | 267 | | (44 | ) | 6,037 | | (12,892 | ) | (14,545 | ) | | 8,210 | | (2,986 | ) | | 267 | | (44 | ) | 6,037 | | (12,892 | ) |
Net (loss) income | | (60,446 | ) | 379,518 | | (66,811 | ) | (22,868 | ) | (741,176 | ) | (65,940 | ) | | (6,226 | ) | (60,446 | ) | | 379,518 | | (66,811 | ) | (22,868 | ) | (741,176 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
Basic and diluted net (loss) income per common share: | | | | | | | | | | | | | | |
Continuing operations | | $ | (4.82 | ) | $ | 4.46 | | $ | (0.78 | ) | $ | (0.27 | ) | $ | (8.71 | ) | $ | (0.66 | ) | |
Discontinued operations | | — | | — | | — | | — | | — | | (0.12 | ) | |
Total | | (4.82 | ) | 4.46 | | (0.78 | ) | (0.27 | ) | (8.71 | ) | (0.78 | ) | |
Basic and diluted net (loss) income per common share | | | $ | (0.49 | ) | $ | | (4.82 | ) | | $ | 4.46 | | $ | (0.78 | ) | $ | (0.27 | ) | $ | (8.71 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
Basic and diluted weighted average number of common shares outstanding (in thousands) | | 12,528 | | 85,185 | | 85,168 | | 85,130 | | 85,118 | | 85,015 | | | 12,791 | | 12,528 | | | 85,185 | | 85,168 | | 85,130 | | 85,118 | |
|
Footnotes:
(1) | | During the year ended December 31, 2007,2012, the PredecessorSuccessor Company recorded a $2.6recognized $4.0 million sales creditof license fee revenue in connection with the completion of certain product development milestones defined under the terms of the collaboration arrangement with Ethicon, LLC and Ethicon, Inc. (“Ethicon”) related to its acceptance of returns of the Contour Threads product as part of the consolidation and discontinuation of the Contour Threads brand name, which was executed concurrently with the launch of theproprietary Quill Knotless Tissue-Closure Device product line (formerly known as the Quill SRS brand name). |
(2)
| | Technology. During the first quarter ofyear ended December 31, 2009, the Predecessor Company received a one-time up-front payment of $25.0 million from Baxter International Inc. (“Baxter”) under the terms of ourthe Amended and Restated Distribution and Licence Agreement between Angiotech US, Angiotech International GmbH, Baxter Healthcare Corporation and Baxter Healthcare, S.A. dated January 1, 2009 (the “Baxter Distribution and License Agreement”). The payment was received in lieu and settlement of future royalty and milestone obligations related to existing formulations of CoSeal and future related products. |
33
(3)
| |
(2) | During the eight months ended December 31, 2011, the Successor Company’s net income included $22.6 million of additional cost of products sold was temporarily reported at materially higher levels per dollar of sales from May to August 2011 as compared to prior periods dueexpense related to the impactrevaluation of fresh start accounting. Uponits inventory from $37.5 million to $60.1 million in connection with our implementation of fresh start accounting on April 30, 2011, inventory was revalued from $37.5 million to its fair value of $60.1 million. This resulted in a $22.6 million non-cash increase to cost of products sold during May to August 2011 (i.e. the period during which the revalued inventory was sold).2011. This is also the primary reason for the decline in Medical Device Technologies segment’s consolidatedthe gross margin earned from medical device product sales from 53.4% during the four months ended April 30, 2011 to 35.7% during the eight month ended December 31, 2011. The temporaryThis non-recurring, non-cash fair value impact of fresh start accounting onadjustment to inventory was fully charged to cost of products sold during the eight months ended December 31, 2011 and had no impact on the Successor Company’s cash flows, liquidity, credit profile or capital resources. This fresh start accounting adjustment is not expected to negatively affect the Successor Company’s future reported cost of products sold and consolidated gross margins. The Successor Company’s future reported cost of products sold and consolidated gross margins are expected to be relatively consistent with historically reported figures. |
(4)
| |
(3) | During the year ended December 31, 2012, the Successor Company recorded a $0.3 million impairment charge on a property that has been classified as held-for-sale and is being marketed for sale in connection with the closure of its Denmark manufacturing facility. As at December 31, 2008, the Predecessor Company had three properties that were designated and classified as held-for-sale in Vancouver, Canada; Syracuse, New York and Puerto Rico. Impairment charges of $0.6 million, $1.5 million, $3.0 million and $1.3 million were recorded during the four months ended April 30, 2011, and the years ended December 31, 2010, December 31, 2009 and December 31, 2008, respectively, to adjust the carrying values of these properties to the lower of cost and fair value less estimated selling costs. The Puerto Rico property was sold for net proceeds of $0.7 million in January 2010, the Vancouver property was sold for |
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| net proceeds of $1.8 million in May 2011 and the Syracuse property was sold for net proceeds of $0.9 million in June 2011. |
(5)
| |
(4) | During the eight months ended December 31, 2011, the Successor Company recorded $4.5 million of impairment write-downs of certain manufacturing equipment, furniture and fixtures, and leasehold improvements in connection with: (i) the restructuring of theits research and development department; and (ii) the termination of theits anti-infective research and development program in the later part of 2011. During the year ended December 31, 2010, the Predecessor Company recorded impairment write-downs of $4.8 million of certain laboratory and manufacturing equipment in connection with: (i) the suspension of its research and development activities related to the fibrin and thrombin technologies acquired from Haemacure Corporation (“Haemacure”) in early 2010; and (ii) restructuring changes that were initiated in connection with the Recapitalization Transaction. |
(6)
| |
(5) | During the eight months ended December 31, 2011, the Successor Company recorded $10.9 million of impairment write-downs related to the termination of its anti-infective research and development program. Similarly, during the year ended December 31, 2010, the Predecessor Company recorded a $1.7 million write-down on certain of its intellectual property in connection with the suspension of research and development activities related to the fibrin and thrombin technologies acquired from Haemacure. In addition, the Predecessor Company also recorded a $1.1 million write-down of the intellectual property related to the Option IVC filter in connection with the termination of its 2008 License, Supply, Marketing and Distribution Agreement with Rex Medical LP (“Rex”). |
(7)
| |
(6) | The $4.7 million recovery represents settlement funds that were received in connection with the resolution of the Predecessor Company’s dispute with RoundTable Healthcare Partners, LP (“Roundtable”) over $13.5 million of escrow funds that were being held by LaSalle Bank in connection with its 2006 acquisition of American Medical Instruments Holding, Inc. All legal proceedings have since been dismissed. |
(8)
| |
(7) | During the third quarter of 2008, the Predecessor Company wrote-down the carrying value of its goodwill associated with the Medical Products segment (now known as our Medical Device Products segment)segment by $599.4 million. The remaining balance of $26.8 million was subsequently written off in the fourth quarter of 2008. As at December 31, 2008, the Predecessor Company also determined that the goodwill allocated to its Pharmaceuticals Technology segment (now known as our Licensed Technologies segment)segment was impaired and accordingly, management wrote off the remaining balance of $23.5 million. |
(9)
| |
(8) | During the year ended December 31, 2010, the Predecessor Company incurred debt restructuring costs of $9.3 million for fees and expenses related to the Recapitalization Transaction. These fees and expenses represent professional fees paid to both the Predecessor Company and the 7.75% Senior Subordinated Noteholders’ financial and legal advisors to assist in the analysis of certain financial and strategic alternatives. |
(10)
| |
(9) | During the year ended December 31, 2010, the Predecessor Company wrote-off $0.3 million of deferred financing costs related to its shelf registration statement that was filed with the SEC in 2009. During the year ended December 31, 2009, the Predecessor Company wrote-off $0.6 million of deferred financing costs due to the early termination of the term loan portion of its credit facility with Wells Fargo Foothill LLC. During the third and fourth quarters of 2008, the Predecessor Company also expensed $13.5 million and $3.0 million of deferred financing charges, respectively, related to the suspension of a note purchase agreement. |
(11)
| |
(10) | During the eight monthsyear ended December 31, 2011,2012, the Successor Company recognized a $2.0disposed of $2.6 million other-than-temporary impairment onof its short term investment in equity securities in a publicly traded biotechnology company for net proceeds of $2.3 million and realized a loss of $0.4 million. The Successor Company also recorded $0.2 million of other-than-temporary impairment losses on this investment due to uncertainty about its ability to recover the investment’s costcost. During the eight months ended December 31, 2011, the Successor Company recognized $2.0 million of $5.3 million.similar other-than-temporary impairment losses on this investment. . During the year ended December 31, 2010, the Predecessor Company recorded $1.3 million of write-offs related to its long term investments in three private biotechnology companies that were determined to be irrecoverable. In 2008, the Predecessor Company wrote-down and realized a loss on investments of $10.7 million, $1.9 million and $11.0 million in the second, third and fourth quarters respectively. In 2007, the Predecessor Company wrote-down and realized a loss on investments of $8.2 million. |
(12)
| |
(11) | During the year ended December 31, 2010, the Predecessor Company recorded a $1.9 million loan settlement gain relating to the settlement of its loan to Haemacure Corporation (“Haemacure”) in connection with its acquisition of certain product candidates and technology assets from Haemacure. |
(13)
| |
(12) | During the year ended December 31, 2010, the Predecessor Company recorded a $2.0 million gain from the sale of its Laguna Hills manufacturing facility and related long-lived assets. |
(14)
| |
(13) | During the first quarteryear ended December 31, 2012, the Successor Company incurred a $4.4 million debt extinguishment loss upon the exchange and settlement of 2007, the Predecessor Company recorded impairment charges$225.0 million New Notes for $229.4 million of $8.9 million related to the discontinuance of the following subsidiaries: American Medical Instruments Inc. (Dartmouth), Point Technologies, Inc and Point Technologies SA.Senior Notes, which includes a 2% Early Tender Premium. |
34
BALANCE SHEET INFORMATIONInterventional Oncology
| | Successor Company | | Predecessor Company | |
As at | | Year ended December 31, | | Year ended December 31, | |
(in thousands of U.S.$) | | 2011 | | 2010 | | 2009 | | 2008 | | 2007 | |
Cash, cash equivalents and short-term investments | | $ | 25,432 | | $ | 37,968 | | $ | 57,322 | | $ | 39,800 | | $ | 91,326 | |
Working capital | | 62,052 | | (518,739 | ) | 66,512 | | 51,767 | | 97,745 | |
Total assets | | 608,106 | | 305,998 | | 370,059 | | 385,197 | | 1,150,108 | |
Total long-term obligations | | 427,153 | | 50,211 | | 620,160 | | 623,655 | | 645,096 | |
Deficit | | (60,446 | ) | (933,352 | ) | (866,541 | ) | (843,673 | ) | (102,497 | ) |
Total shareholders’ equity (deficit) | | 146,407 | | (384,076 | ) | (313,287 | ) | (299,873 | ) | 442,072 | |
| | | | | | | | | | | | | | | | |
QUARTERLY RESULTS
The following tables present our unaudited consolidated quarterly resultsWe develop, manufacture and market a range of operationsproprietary single use medical device products for eachthe diagnosis of cancer, primarily biopsy devices and related products. These product lines include a wide range of soft tissue biopsy products, both disposable and re-usable, primarily for use in different types of soft tissue and bone marrow biopsies. Some key features of our last eight quarters:soft tissue biopsy products include specially manufactured high visibility needle tips to facilitate placement under ultrasound guidance, numerically
| | Successor Company | | Predecessor Company | |
| | Quarter ended | | Quarter ended | | Two months ended | | One month ended | | Quarter ended | |
| | December 31, | | September 30, | | June 30, | | April 30, | | March 31, | |
(in thousands of U.S.$, except per share data) | | 2011 | | 2011 | | 2011 | | 2011 | | 2011 | |
Revenue | | | | | | | | | | | |
Product sales | | $ | 51,506 | | $ | 51,899 | | $ | 35,902 | | $ | 16,365 | | $ | 52,834 | |
Royalty and license revenue | | 7,106 | | 5,497 | | 1,068 | | 5,309 | | 5,758 | |
Total revenues | | 58,612 | | 57,396 | | 36,970 | | 21,674 | | 58,592 | |
Gross Margin: | | | | | | | | | | | |
Medical Device Products | | 26,887 | | 13,103 | | 8,968 | | 8,074 | | 28,906 | |
Licensed Technologies | | 6,942 | | 5,447 | | 1,018 | | 5,309 | | 5,690 | |
Total Gross Margin | | 33,829 | | 18,550 | | 9,986 | | 13,383 | | 34,596 | |
Operating (loss) income | | (22,080 | ) | (18,066 | ) | (11,314 | ) | 2,378 | | (47 | ) |
Net loss | | (27,514 | ) | (18,684 | ) | (14,248 | ) | 397,519 | | (18,001 | ) |
Basic and diluted loss per common share | | $ | (2.20 | ) | $ | (1.47 | ) | $ | (1.12 | ) | $ | 4.67 | | $ | (0.21 | ) |
| | Predecessor Company | |
| | Quarter ended | |
| | December 31, | | September 30, | | June 30, | | March 31, | |
(in thousands of U.S.$, except per share data) | | 2010 | | 2010 | | 2010 | | 2010 | |
Revenue | | | | | | | | | |
Product sales | | $ | 55,699 | | $ | 51,868 | | $ | 52,948 | | $ | 50,980 | |
Royalty and license revenue | | 6,332 | | 7,116 | | 8,938 | | 12,361 | |
Total revenues | | 62,031 | | 58,984 | | 61,886 | | 63,341 | |
Gross Margin: | | | | | | | | | |
Medical Device Products | | 29,278 | | 25,060 | | 25,077 | | 25,776 | |
Licensed Technologies | | 5,327 | | 5,946 | | 7,461 | | 10,124 | |
Total Gross Margin | | 34,605 | | 31,006 | | 32,538 | | 35,900 | |
Operating (loss) income | | (11,792 | ) | (6,020 | ) | (5,376 | ) | 3,131 | |
Net loss | | (27,542 | ) | (18,500 | ) | (14,074 | ) | (6,695 | ) |
Basic and diluted loss per common share | | $ | (0.32 | ) | $ | (0.22 | ) | $ | (0.17 | ) | $ | (0.08 | ) |
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ordered centimeter markings to facilitate precise depth placement, and adjustable needle stops to restrict forward movement and localize the needle to the biopsy site. Other selected product lines in our biopsy group include fixation pins, breast localization markers and tunneling stylets. We also offer additional product lines for certain selected interventional radiology procedures performed primarily by physicians that also utilize our biopsy product lines.
We sell the majority of these product lines through our Interventional Oncology direct sales organization directly to hospitals and other end users. We also employ selected independent sales representatives and third party distributors to market and sell these product lines in territories where we lack direct sales coverage or where such direct investment would not be financially justified. Our most significant product lines include:
·BioPince™ full core biopsy devices. Our BioPince biopsy instrument product line is used to obtain tissue samples from patients for analysis and diagnosis of disease. We believe that BioPince is the only commercially available “full core” biopsy device, which may provide a more substantive and improved tissue sample and thereby enable clinicians to more rapidly and accurately provide diagnosis of potential disease. BioPince features a proprietary tri-axial “Core, Cut and Capture” cannula system, which allows the device to deliver cylindrical, full-length biopsy specimens that are complete and largely undamaged, which we believe significantly improves the diagnostic value of the sample.
·Tru-CoreTM II (fully automatic) andSuperCore™(semi-automatic) disposable biopsy instruments. Our True-Core and SuperCore soft tissue biopsy product lines are designed to address a variety of diagnostic procedures where a “full core” sample may not be necessary, offer a greater variety of needle lengths and sizes and are cost effective by combining disposable needles with reusable instrumentation. These product lines are designed to be light weight, easily maneuverable and operated with one hand. Our SuperCore is a semi-automatic device which allows for placement of the device specimen notch in a lesion before the spring-loaded cutting cannula is fired, which is considered ideal in CT-guided biopsies. We believe that SuperCore is one of the only semi-automatic devices with an adjustable specimen notch, which may provide clinical flexibility.
·T-Lok™ bone marrow biopsy devices. Our T-Lok™ bone marrow biopsy device is used for collecting bone marrow. Bone marrow collection is a procedure that is typically done after abnormal red or white blood cells are found in a patient. T-LOK has an ergonomically designed twist-lock handle, which we believe improves a clinician’s ability to penetrate hard bone to obtain the biopsy sample. An adjustable needle stop to control the depth of penetration allows the clinician to safely collect bone marrow at the sternum of the patient.
·SKATER™ line of drainage catheters. Our SKATER drainage system, which includes catheters and related accessories, is used to facilitate drainage of fluid from wounds, infectious tissues or surgical sites. SKATER features larger lumens and drainage holes, kink resistance, resistance to encrustation and high radiopacity. SKATER is offered in multiple sizes and configurations to address the most typical drainage applications including specific designs for centesis, or small volume drainage procedures, drainage from the biliary duct and nephrostomy procedures.
Wound Closure
We develop, manufacture and market a full line of wound closure products, primarily various types of sutures and surgical needle products. These products are used by surgeons in a wide variety of applications in hospitals, surgery centers and physician offices. We also sell a significant amount of our general suture products for use in dental and oral surgery procedures. Our suture configurations vary in diameter, length, and material. Our product lines also include a full line of bio-absorbable and non-absorbable suture materials, including PolySynTM and PolySyn FATM, Monoderm™, PolyvioleneTM, polypropylene, poly-ethylene-terephthatate, glycolide and e-caprolactone, polyglycolic acid (PGA), plain and chromic gut, nylon and silk. This wide range of materials allows us to offer a range of handling characteristics and bio-absorption times for our product line. Our product lines also include a wide variety of needle types, including drilled-end and channel surgical needles. Drilled-end suture needles have a precisely drilled butt end for maximum suture holding strength and are adequately tempered for securing strong attachment of the suture. Our proprietary needle designs, including our SharpointTM, UltraGlideTM, and M.E.T.TM Microsurgical product lines are used in very precise tissue closures such as corneal transplants, microvascular, microtubal, and nerve repair procedures.
We sell many of these product lines directly to hospitals, surgery centers, clinics and other end users through our Wound Closure direct sales organization. We also employ selected independent sales representatives and third party distributors to market and sell these product lines in territories or areas where we lack direct sales coverage or where such direct investment is not financially justified. We also manufacture certain of these products in finished form for other third party medical device manufacturers and distributors. Our most significant product lines include:
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·Quill™ Knotless Tissue-Closure products (“Quill”). Our Quill product line is a surface modified suture material that contains proprietary patterns of tiny barbs or other patterns, which can eliminate the need for surgeons to tie knots when closing certain wound types. We believe that use of Quill may lead to faster surgical times, improved wound cosmesis and lower wound infection and complication rates. Quill may also provide for stronger wound closure due to its ability to distribute tension across the entire length of a wound over large numbers of barbs or anchors, as opposed to a far fewer number of knots or anchor points with traditional sutures or surgical staples. Due to this ability to distribute tension, we believe Quill may enable certain tissue types to be repaired that are not addressable by other wound closure technologies.
·LOOK™ brand sutures for dental and general surgery. LOOK sutures are a specialized line of suture products for tissue approximation and ligation, which are offered in a variety of absorbable and non-absorbable suture materials that are well suited for the needs of the oral, periodontal, dermatological and general surgeon. The needles used on LOOK sutures possess precision manufactured sharpness, penetration and strength characteristics. Unique to the LOOK suture offering are SmallStitch™ sutures, which are offered in lengths of 8 inches and 10 inches. This shorter length is ideal for the dental and physician office because there is less waste than with traditional sutures.
·SharpointTM UltraGlide and SharpointTM M.E.T Microsurgical sutures. Our Sharpoint microsurgical needles and sutures are manufactured using a proprietary process that ensures incisions are consistently sharp and dimensionally true in order to meet the needs for a very precise tissue closure in ophthalmic, micro vessel and nerve repair procedures.
Ophthalmology
We develop, manufacture and market a selection of single-use disposable products for ophthalmic surgery, including various types of surgical blades used primarily in cataract surgery or other ophthalmic surgery where very small incisions are required. Our products include clear corneal knives, standard implant knives, pilot tip implant knives, precision depth knives, crescent knives, spoon knives, stab knives, vitrectomy knives to create small, precise incisions, sub-2mm series knives, and a variety of slit and specialty knives. Other selected products in our ophthalmic group include a variety of cannula needles for the administration of anesthetic or for irrigation or aspiration in ophthalmic surgery, a full line of absorbable and non-absorbable microsurgical ophthalmic sutures, punctum plugs for treatment of dry eye symptoms and trephine blades for penetrating keratoplasty surgery.
We sell these product lines directly, primarily to surgery centers and clinics, primarily through a network of third party independent sales representatives and medical product distributors. We also manufacture ophthalmic surgical blades in finished form for other third party medical device manufacturers and distributors. Our most significant product lines include:
·Sharpoint™ brand disposable ophthalmic surgical blades. Our Sharpoint product line, which is used primarily to make incisions for cataract and other ophthalmic surgery procedures, is manufactured using a proprietary manufacturing process - our Infinite Edge™ Technology - that eliminates blade grinding and produces cutting edges with consistent sharpness and tolerance. The Sharpoint knife portfolio includes a full range of sizes and styles to fit the needs of the ophthalmic surgeon.
·Ultrafit™ trephine blades. The UltraFit trephine product line, which are comprised of instruments used in corneal transplant procedures, consists of disposable vacuum trephines, donor punch sets, and short or long handled trephines in a wide range of sizes. Advanced trephine blade technology provides a sharp cutting edge to achieve the critical fit needed for successful cornea transplants.
·Tan EndoGlide™ human corneal endothelial cell transplantation device. Tan EndoGlide is an endothelial insertion device for specialized corneal transplant surgery procedures and is designed to reduce damage of donor endothelium used in the procedure. The device consistently delivers donor tissue through a small incision, while making the insertion procedure relatively reliable and consistent, with the surgeon in full control of the donor tissue at all stages of procedure. The Tan EndoGlide device consists of a preparation base, glide cartridge and a glide introducer. The glide cartridge automatically coils the donor tissue into a double coil configuration, with no endothelial surfaces touching, and is designed to fit through a very small scleral or corneal incision.
Medical Device Components
We develop, manufacture and market a wide range of components, primarily on a made-to-order basis, for other third party medical device manufacturers, who then use the provided components as part of assembling their own finished medical device products. These products may range from unsterilized product components, which are shipped to the customer for final assembly and sterilization, to fully finished, packaged and sterilized medical device products. These components are typically manufactured using the same manufacturing capabilities and technologies we utilize to produce our various other product lines. Our most significant manufacturing capabilities that we offer for use in making components for third parties include metal grinding and polishing, plasma welding, chemical etching, electropolishing and electro-chemical marking, plastics injection molding, plastics and polymer extrusion and silk suture formation, weaving of medical grade textiles and packaging and assembly.
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We sell these product lines directly to corporate customers solely through a direct sales organization. Our customers include many leading medical device manufacturers in the cardiology and vascular access, interventional radiology, ophthalmology, orthopedics, women’s health, and wound closure product areas.
Licensed Technologies
Our Licensed Technologies segment includes certain of our legacy technologies for which research and development activities have been concluded. This segment generates additional revenue in the form of royalties received from partners who have licensed and utilize these technologies in their medical device product lines. Our principal revenues in this segment to date have been royalties derived from sales by our partner BSC of TAXUS paclitaxel-eluting coronary stents for the treatment of coronary artery disease.
We have also licensed the same technology utilized by BSC in its TAXUS product line to our partner Cook Medical Inc. (“Cook”) for use in its Zilver PTX for the treatment of vascular disease in the leg. Zilver PTX is currently approved for sale in the E.U. and in certain other countries outside of the U.S., and was recently approved for sale in the U.S. in November 2012 by the U.S. Food and Drug Administration (“FDA”).
We receive royalty revenue derived from sales of TAXUS and Zilver PTX based on our license agreements with BSC and Cook of several families of intellectual property relating to our proprietary paclitaxel technology. The royalty rate applied to BSC’s sales increases in certain countries depending upon unit sales volume achieved by BSC. The royalty rates applied to Cook’s sales of Zilver PTX are flat rates designated by the geographic location of sales, regardless of the unit volume of sales achieved. There is minimal expense associated with our receipt of royalty revenue derived from TAXUS. We incur royalty expense associated with Cook’s sales of Zilver PTX under our license agreement with the National Institutes of Health (“NIH”) for certain intellectual property owned by NIH relating to this product line. We may continue to receive royalty revenue from BSC and Cook for the life of the licensed patent families depending upon BSC’s and Cook’s level of product sales and commercial and clinical success.
TAXUS Paclitaxel-Eluting Coronary Stents
The TAXUS paclitaxel-eluting coronary vascular stent, which incorporates our proprietary paclitaxel technology, is a small, balloon-expanded metal scaffold designed for placement in diseased arteries in the heart to restore blood flow by expanding and holding open the arteries upon deployment.
BSC first received approval to sell TAXUS in the E.U. in 2003 and in the U.S. in 2004. Subsequent to the U.S. approval of the TAXUS Express™ stent system in 2004, BSC has introduced multiple next generation coronary stent platforms that utilize our proprietary paclitaxel technology.
TAXUS has been studied in multiple human clinical trials, as well as in independent registry studies, which have repeatedly demonstrated the safety and efficacy of TAXUS coronary stent systems, particularly in diabetic patient populations. In patients receiving TAXUS coronary stents, the number of repeat surgery procedures has been shown to be significantly lower in patients receiving TAXUS than those receiving non drug-eluting, or bare metal, coronary stents.
Study results announced in November 2011 by our partner BSC include positive long-term data from BSC’s PERSEUS clinical program, which demonstrated favorable two-year safety and efficacy outcomes for the TAXUS ION stent system versus prior-generation paclitaxel-eluting stents.
In addition, in February 2012, BSC announced that the TAXUS Liberte™ and the TAXUS ION™ coronary stent systems received U.S. FDA approval for use in patients experiencing an acute myocardial infarction (“AMI”) or heart attack. This indication accounts for approximately 10% of all coronary interventions and arose from the FDA’s review of data from the Paclitaxel clinical program and the HORIZONS-AMI global trial. The HORIZONS-AMI trial included 3,600 randomized patients that that either received drug-eluting stents or bare-metal stents for the treatment of AMI. The HORIZONS-AMI trial clinical data, reviewed by BSC, demonstrated that paclitaxel-eluting stents were superior in efficacy to bare-metal stents in AMI patients by significantly reducing clinical and angiographic restenosis and exhibiting a comparable safety profile at 3 years.
Certain clinicians suggested in 2006 that the use of drug-eluting stents may cause an increased rate of late thrombosis (the formation of blood clots in the stent long after the initial stent implantation) and in turn, potentially lead to an increased rate of myocardial infarctions (heart attacks) or deaths as compared to patients receiving bare metal stents. These suggestions led to a significant decrease in the use of drug-eluting stents beginning in the second half of 2006 and continuing through 2008. While subsequent analysis of clinical data suggest that these concerns may not have been justified and use of drug-eluting stents began to recover in 2009, usage has yet to reach to the levels observed in 2005 prior to the initial reporting of physician concerns.
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In addition, starting in mid 2008 and early 2009, several new competitive drug-eluting stents were made commercially available in the United States, Europe and Japan. The reduction in drug-eluting stent usage, combined with the entry of new competitors, has had significant negative impacts on the levels of royalty revenue we receive from BSC.
Zilver PTX Paclitaxel-Eluting Peripheral Vascular Stents
The Zilver PTX paclitaxel-eluting peripheral vascular stent, which incorporates our proprietary paclitaxel technology, is a small, self-expanding metal scaffold designed for placement in diseased arteries in the limbs to restore blood flow by expanding and holding open the arteries upon deployment.
Cook first received approval to sell Zilver PTX in the E.U. in 2009. On November 15, 2012, Cook received FDA approval to market and sell Zilver-PTX in the U.S. Historically, stent procedures for peripheral artery disease (“PAD”) in the limbs were limited due to high incidence of complications that often lead to subsequent surgical procedures, as well as risk of stent fracture with existing products, given that peripheral vascular stents may be exposed and not protected by the patient’s anatomy as with coronary stents, which are implanted in vessels in the heart behind a patient’s rib cage. Cook has conducted multiple human clinical trials for Zilver PTX in the E.U., U.S., Japan, and selected other countries to assess product safety and efficacy. Clinical results for Zilver PTX have suggested significant reductions in complications as compared to traditional PAD treatments. Selected highlights of Cook’s reported regulatory milestones and clinical results include:
·November 2012 — Cook announced that it had received approval by the FDA of its Pre-Market Approval (“PMA”) application for Zilver PTX. This FDA approval allows Cook to market and sell Zilver PTX in the U.S.
·October 2011 — Cook announced that Zilver PTX had received a unanimous recommendation from the FDA’s Circulatory System Devices Panel of the Medical Devices Advisory Committee, with all 11 of its members voting to recommend approval of Zilver PTX for sale in the U.S. on the basis of its safety, efficacy and acceptable risk profile. Cook in June 2010 had submitted its Pre-Market Approval (“PMA”) application to the FDA for Zilver PTX.
·September, 2010 — Cook announced that a summary of the final clinical trial results for the randomized study of Zilver PTX was presented at the annual TCT symposium in Washington D.C. The study met its 12-month primary endpoint showing non-inferior event-free survival (“EFS”) and superior patency for the Zilver PTX as compared to balloon angioplasty.
·May 2010 — Cook presented one-year data at Euro PCR that confirmed sustained clinical outcomes with Zilver PTX. According to data presented, 86.2% of all patient subgroups treated with Zilver PTX demonstrated vessel patency at 12 months without the requirement for an additional intervention. The trial is based on a group of 787 patients, including symptomatic patients, diabetics, and those with the most complex lesions, including long lesions, total occlusions and in-stent restenosis.
·April 2010 — Cook announced it had enrolled its first patient in its landmark Formula™ PTX® clinical trial. The trial is the first of its kind to evaluate the safety and effectiveness of a paclitaxel-eluting stent to treat renal artery disease, the narrowing of the arteries that supply blood to the kidneys.
·April 2009 — Cook reported data that showed that 82 percent of patients who were treated with Cook’s Zilver PTX stent were free from re-intervention at two-year follow up. The Zilver PTX Registry study, involving 792 patients globally, is assessing the safety and efficacy of the Zilver PTX in treating peripheral artery disease. Data was compiled at 12 and 24 months for 593 patients and 177 patients, respectively. The corresponding EFS rates were 87 percent and 78 percent, respectively, and freedom from target lesion revascularization was 89 percent and 82 percent, respectively. Detailed evaluation of stent x-rays demonstrated excellent stent integrity through 12 months, confirming previously published results showing 99 percent completely intact stents (less than 1 percent stent fracture rates observed) with a mean follow up of 2.4 years in the challenging superior femoral artery and popliteal arteries, including behind the knee locations.
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Manufacturing and Product Distribution
We have significant precision medical device manufacturing capabilities, with seven facilities that are primarily dedicated to medical device manufacturing located in the United States, Europe and Puerto Rico. Each of our manufacturing facilities has specific, and in some cases proprietary, expertise in certain types of medical device manufacturing as well as experience in complying with the significant regulations, quality and operating requirements that are critical aspects of medical products manufacturing. Our medical device manufacturing capabilities include polymer handling and extrusion, metals, plastics and textile fabrication and packaging and assembly. Our suture manufacturing capabilities include the ability to make and handle various approved polymer materials in multiple lengths, diameters and configurations. Our metal manufacturing capabilities include bending, grinding, flattening, drilling, polishing, chemical etching, plasma welding, thermal curing and wire winding. Our plastics manufacturing capabilities include injection molding, plastic extrusion, insert molding and wire coating. Our textile manufacturing capabilities include braiding and embroidery of selected suture materials, including silk. Our assembly and packaging capabilities include small lot assembly, suture attachment and kit assembly. We also maintain manufacturing capabilities for certain medical device coating technologies, primarily relating to coatings designed to facilitate medical device lubricity upon implant or insertion.
We use a diverse and broad range of raw materials in the design, development and manufacture of our products. Our non-implantable products are manufactured from man-made raw materials including resins, chemicals, plastics and metal. We purchase certain materials and components used in manufacturing our products from external suppliers. In addition, we may purchase certain supplies from single sources for reasons of quality assurance, sole source availability, cost effectiveness or constraints resulting from regulatory requirements. Angiotech works closely with its suppliers to mitigate risk and assure continuity of supply while maintaining high quality and reliability. Alternative supplier options are generally considered and identified, although we do not typically pursue regulatory qualification of alternative sources due to the strength of our existing supplier relationships and the time and expense associated with the regulatory validation process.
We maintain raw material, work in process and finished goods in each of our facilities. We distribute products directly from our various manufacturing facilities, many of which include space for safely storing and maintaining medical products and related components. We also maintain an independent product distribution partner in the E.U. for certain of our product lines.
We maintain resources to develop procedures and process controls for our products and product candidates to ensure successful technology transfer for commercial scale manufacturing. We expect that process development performed during the pre-clinical post-approval stages of manufacturing will result in products with the desired performance consistency, product tolerances and stability. These activities include scaling up production methods, developing quality control systems, optimizing batch-to-batch reproducibility, testing sterilization methods and establishing reliable sources of raw materials for synthesizing proprietary products.
Quality Assurance
We are committed to providing quality products to our customers. To meet this commitment, we have implemented modern quality systems and concepts throughout the organization. Our quality system starts with the initial product specification and continues through the design of the product, component specification processes, and the manufacturing, sales and servicing of the product. The quality system is intended to incorporate quality into products and utilizes continuous improvement concepts throughout the product lifecycle. Our operations are certified under applicable international quality systems standards, such as International Organization for Standardization (“ISO”) 9000 and ISO 13485. These standards require, among other items, quality system controls that are applied to product design component material, suppliers and manufacturing operations. These ISO certifications can be obtained only after a complete audit of a company’s quality system has been conducted by an independent outside auditor. Periodic reexamination by an independent outside auditor is required to maintain these certifications.
Sales and Marketing
We market and sell our various medical device products through a group of specialized sales organizations that consist of direct sales and marketing personnel, which in some cases are supplemented by independent sales representatives and independent medical products distributors, depending on the product category, customer base or geographic location. We currently employ approximately 49 direct sales and marketing personnel in our Interventional Oncology group, approximately 63 direct sales and marketing personnel in our Wound Closure group, and approximately 36 additional direct sales personnel serving customers in our other product areas and selected geographies outside of the U.S. The majority of our direct sales teams are based in the U.S.
Our Interventional Oncology and Wound Closure direct sales teams primarily target hospital-based physician customers, alternate site health care providers such as ambulatory surgery centers and urgent care centers. The primary goal of our direct sales teams is to sustain sales volumes or, in certain cases where we have products with a significant technical or other competitive advantage or a new product offering, increase market share of our products.
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Our independent sales representatives and independent distributors target hospital customers, alternate site health care providers, such as ambulatory surgery centers and urgent care centers and physician and dental offices. These sales representatives and distributors, under the guidance of our senior sales and marketing management, may also target other third party medical products manufacturers or distributors as potential customers for finished private label medical device products in our Wound Closure and Ophthalmology product areas.
Our Medical Device Component product area is supported by a small direct sales team, and targets high level managers and supply chain experts within other third party medical device manufacturers.
We are not dependent on any single customer and no single customer accounted for more than 10% of our net sales in 2012. Sales personnel work closely with the main decision makers who purchase our products, which primarily include physicians, but may also include: material managers; nurses; hospital administrators; purchasing managers; and ministries of health. Also, for certain of our products and where appropriate, our sales personnel actively pursues approval of Angiotech as a qualified supplier for hospital group purchasing organizations (“GPOs”) that negotiate contracts with suppliers of medical products.
In 2012, 62% of our reported product sales were derived from sales to customers in the U.S., and 38% of our reported product sales were derived internationally.
Product Development
We maintain new product development capabilities and personnel, with a primary focus on medical device, mechanical and manufacturing engineering. The focus of our product development efforts are primarily on developing improvements to our existing products or manufacturing processes; or on new product opportunities that focus on markets similar to our current target markets, and that may compliment certain of our existing product offerings.
The majority of our product development personnel are located at two of our manufacturing facilities, with additional engineering support personnel located in each of our material manufacturing operations. We also employ personnel with expertise in regulatory affairs and quality control that are responsible for regulatory and quality control activities with respect to certain of our existing and new product candidates.
We, or our partners, are evaluating selected new product candidates and product line extensions, including certain product candidates that may be undergoing human clinical testing or other testing conducted either by us or our partners. We also may maintain certain pre-clinical or research stage programs and conduct various product and process improvement initiatives related to our currently marketed products and our manufacturing facilities.
Government Regulation and other Matters
The research and development, manufacturing, labeling, advertising, sale, marketing and third-party reimbursement of our medical device products and those of our suppliers, customers and partners are subject to extensive regulation by the FDA, the U.S. Department of Health and Human Services Centers for Medicare and Medicaid Services (“CMS”), and comparable regulatory agencies in state and local jurisdictions and in foreign countries.
Medical product regulations often require registration of manufacturing facilities, carefully controlled research and testing of products, government review and approval or clearance of results prior to marketing of products, adherence to current Good Manufacturing Practices (“cGMPs”) during the production and processing of products, and compliance with comprehensive post-marketing requirements, including restrictions on advertising and promotion and requirements for reporting adverse events to the FDA in the U.S. and other regulatory authorities abroad. In the U.S., these activities are subject to rigorous regulation by the FDA. Similar regulations apply in the E.U. and other markets.
Our success is ultimately dependent upon our and our suppliers’, customers or partners obtaining marketing approval or clearance for our or their products or potential product candidates currently under development, and will depend on our and our suppliers’, customers’ and partners’ ability to comply with FDA and other market regulations governing the manufacturing, quality control, pre-clinical evaluation, and clinical testing of their products or product candidates. If we or our present or future suppliers, customers or partners are not able to comply with the continuing FDA regulations that accompany FDA approval, the FDA may require us or our suppliers, customers or partners to recall a device or drug from distribution, withdraw the 510(k) or Premarket Approval for the relevant marketed medical device product, halt our clinical trials or withdraw approval for our clinical trials.
We have significant medical device component engineering and manufacturing, as well as finished goods and packaging manufacturing operations. The manufacturing processes used in the production of finished medical devices are subject to FDA regulatory inspection, and must comply with FDA regulations, including its Quality Systems Regulation, which sets forth the cGMP
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requirements for medical devices. The Quality Systems Regulation requires manufacturers of finished medical devices to follow elaborate design, testing, control, documentation and other quality assurance procedures during the finished device manufacturing process. Our FDA registered facilities are subject to FDA inspection at any time for compliance with the Quality Systems Regulation and other FDA regulatory requirements. Failure to comply with these regulatory requirements and similar foreign requirements may result in civil and criminal enforcement actions, including financial penalties, seizures, injunctions or other measures. In some cases, failure to comply with the Quality System Regulation could prevent us or our customers from marketing products or gaining clearance to market additional products. Our products must also comply with state and foreign regulatory requirements.
Our business arrangements and other interactions with healthcare providers and other entities are also governed by numerous federal, state and foreign laws and regulations, including law and regulations:
·prohibiting kickbacks, which may prohibit making payments to healthcare providers and other individuals in order to induce the purchase of our products or services;
·restricting physician self-referrals, such as the federal “Stark Law,” which generally prohibits physicians from referring Medicare or Medicaid patients to entities with which the physician (or an immediate family member) is affiliated for the provision of certain designated health services;
·proscribing the use, disclosure and maintenance of certain patient health information, such as the federal Health Information Portability and Accountability Act of 1996 (“HIPAA”), as amended by the Health Information Technology for Economic and Clinical Health Act (“HITECH”);
·prohibiting submission of false or misleading claims to Medicare or Medicaid and retention of overpayments related to the submission of such claims;
·requiring disclosure of payments made to teaching hospitals and physicians and financial interests held by physicians (and their immediate family members), such as the federal “Physician Payment Sunshine Act” and similar state laws; and
·providing for prosecution of U.S. companies related to arrangements with foreign government officials and other individuals and entities outside of the U.S.
Failure to comply with these laws and regulatory requirements may result in civil and criminal enforcement actions, including financial penalties, seizures, injunctions or other measures.
Internationally, the regulation of medical devices is complex. In Europe, our products are subject to extensive regulatory requirements. The regulatory regime in the E.U. for medical devices became mandatory in June 1998. It requires that medical devices may only be placed on the market if they do not compromise safety and health when properly installed, maintained and used in accordance with their intended purpose. National laws conforming to the E.U.’s legislation regulate our products under the medical devices regulatory system. Although the more variable national requirements under which medical devices were formerly regulated have been substantially replaced by the European Union Medical Devices Directive, individual nations can still impose unique requirements that may require supplemental submissions. The E.U. medical device laws require manufacturers to declare that their products conform to the essential regulatory requirements after which the products may be placed on the market bearing the CE Mark. Manufacturers’ quality systems for products in all but the lowest risk classification are also subject to certification and audit by an independent notified body. In the E.U., particular emphasis is being placed on more sophisticated and faster procedures for the reporting of adverse events to the competent authorities. In many of the other foreign countries in which we market our products, we may be subject to regulations affecting, among other things:
·product standards and specifications;
·packaging requirements;
·labeling requirements;
·quality system requirements;
·import restrictions;
·tariffs;
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·duties; and
·tax requirements.
Many of the regulations applicable to our devices and products in these countries are similar to those of the FDA. In some regions, the level of government regulation of medical devices is increasing, which can lengthen time to market and increase registration and approval costs. In many countries, the national health or social security organizations require our products to be qualified before they can be marketed and considered eligible for reimbursement.
In the U.S., health care providers generally rely on third-party payers, including both private health insurance plans and governmental payers, such as Medicare and Medicaid, to cover and reimburse all or part of the cost of a medical device and the procedures in medical devices that are used. Foreign governments also impose significant regulations in connection with their health care reimbursement programs and the delivery of health care items and services.
Our ability to commercialize human therapeutic products and product candidates successfully will depend in part on the extent to which coverage and reimbursement for such products and related treatments will be available from government health administration authorities, private health insurers and other third-party payers or supported by the market for these products. Third-party payers are increasingly challenging the price of medical products and services and instituting cost containment measures to control or significantly influence the purchase of medical products and services.
In the U.S., there have been and we expect there will continue to be a number of legislative and regulatory proposals to change the health care system in ways that could significantly affect our business. For example, the 2010 health reform law was intended to increase the number of individuals covered by health insurance, impose reimbursement provisions intended to restrict the growth in Medicare and Medicaid spending and encourage development of health care delivery programs and models intended to tie payments to quality and care delivery innovations. Many of the legislative changes contained within the health reform legislation are effective in 2013 and beyond. The impact of these healthcare reforms on our business is currently uncertain and may negatively impact our sales or the selling price of our products. In addition, we cannot predict the impact on our business of any legislation or regulations related to the healthcare system that may be enacted or adopted in the future.
Patents, Proprietary Rights and Licenses
Patents and other proprietary rights are essential to our business. We may file patent applications to protect technology, inventions and improvements to inventions that are considered important to our business. We may also rely upon trade secrets, continuing technological innovations and licensing opportunities to develop and maintain our competitive position. Furthermore, we may also endeavor to extend, or capture value from, our intellectual property portfolio by licensing patents and patent applications from others or to others, and initiating research collaborations with outside sources.
As part of our patent strategy, we have filed a variety of patent applications internationally. Oppositions have been filed against various granted patents that we either own or license and which are related to certain of our technologies. See “— Legal Proceedings” elsewhere in this Annual Report on Form 10-K for a discussion of the proceedings related to certain of such oppositions. An adverse decision by an Opposition Division in any country, or subsequently, by a Board of Appeal, could result in revocation of our patent or a narrowing of the scope of protection afforded by the patent. The ultimate outcomes of the pending oppositions, including appeals, are uncertain at this time. We do not know whether the patents that we have received or licensed, or those we may be able to obtain or license in the future, would be held valid or enforceable by a court or whether our patents would be found to infringe a competitor’s patents related to its technology or product. Further, we have no assurance that third parties will not (whether pursuant to or in breach of the terms) modify or terminate any license they have granted to us.
Competition
We expect to face competition from companies marketing, selling and developing medical device or other medical technologies that target the same diseases, clinical indications, customers or markets that our technologies target, as well as competition from other manufacturers of medical device components who sell to similar third party medical device manufacturers, including to some of our current customers. Some of these companies have substantially greater product development, sales and marketing, manufacturing capabilities and experience, proprietary technology or more substantive financial resources than we do. Specifically, we compete with a number of large companies across a number of our medical device product lines. These competitors have substantially greater business and financial resources than we do. These competitors include, but are not limited to, the Ethicon division of Johnson & Johnson and Covidien, Inc. in surgical sutures and wound closure devices; C.R. Bard Inc., the Allegiance division of Cardinal Health, Inc. and the Sherwood, Davis & Geck division of Covidien, Inc. in biopsy needle devices; Alcon, Inc., Allergan, Inc. and the
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Allegiance division of Cardinal Health, Inc. in ophthalmology products; and Accelent Inc., Teleflex Incorporated and Symmetry Medical Inc. in the manufacture of medical devices and device components for other third party medical device manufacturers.
The medical device, biotechnology and pharmaceutical industries are subject to rapid and substantial business, operational and technological change. There can be no assurance that developments by others will not render obsolete our products or technologies, that we will be able to keep pace with technological developments or that we will be able to manufacture and market our products at a cost that will be attractive to our customers.
Some competitive products have an entirely different approach or means to accomplish the desired therapeutic or diagnostic effect as compared to our product candidates. These competitive products, including any enhancements or modifications made to such products in the future, could be more effective and/or less costly than our products, technologies or our product candidates.
There are a number of companies that are marketing or developing competing drug-eluting coronary stents or other treatments for restenosis that may be considered to be directly competitive with our technology. Certain of our competitors have developed and commercialized coronary drug-eluting stents that compete with BSC’s TAXUS stents and which have been approved for use in the U.S., E.U. and certain other countries. The launch of these competing products has had a significant impact on BSC’s sales of TAXUS, and has resulted in a decline in our royalty revenue received from BSC. The continued successful commercialization of any of these or other technologies to treat restenosis following angioplasty or stent placement could have a material adverse impact on our business.
Employees
As of December 31, 2012, on a worldwide basis, we had approximately 1,364 employees, including 1018 in manufacturing, 17 in research and development, 95 in quality assurance, 148 in sales and marketing and 86 in administration. In addition, we have contractual arrangements with scientists at various research and academic institutions. All such employees and contractors execute confidentiality agreements with us. While we will continue to seek to hire highly qualified employees, we believe that we have employed a sufficient number of qualified personnel.
Environmental
Our business is subject to a broad range of government regulation and requirements, including federal, state, local and foreign environmental laws and regulations governing, among other matters, air emissions, wastewater discharges, workplace health and safety as well as the use, handling, storage and disposal of hazardous materials and remediation of contamination associated with the release of these materials at or from our facilities or off-site disposal locations. Some of these laws can impose liability for remediation costs on a party regardless of fault or the lawfulness of its conduct. Many of our manufacturing processes involve the use and subsequent regulated disposal of hazardous materials. To date, such matters have not had a material adverse impact on our business or financial condition. We cannot assure you, however, that such matters will not have such an effect in the future.
International Operations
Our medical devices are manufactured and sold worldwide. Approximately 38% of our medical device revenues are generated outside of the U.S. and geographic expansion remains a core component of our strategy. We currently sell our products in the following international territories: Europe, Asia-Pacific, Latin America and Canada. We are subject to certain risks inherent in conducting business outside the U.S. For more information regarding these risks, see the risk factors under the captions “We are subject to risks associated with doing business globally” and “We may incur losses associated with foreign currency fluctuations” in Item 1A of this Annual Report on Form 10-K, all of which information is incorporated herein by reference.
For financial information about foreign and domestic operations and geographic information, see note 22 of the audited consolidated financial statements included in this Annual Report on Form 10-K. In addition, for more information regarding foreign currency exchange risk, refer to the discussion under “Foreign Currency Risk” under Item 7A of this Annual Report on Form 10-K.
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Item 7.1A. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONSRISK FACTORS
You should consider carefully the following information about these risks, together with all of the other information contained within this document. Additional risks and uncertainties not currently known to us or that we currently deem immaterial may impair our business operations. If any of the following risks actually occur, our business, results of operations and financial condition could be harmed.
Risks Related to Our Business
Our business activities involve various elements of risk. The risks described below and incorporated herein by reference are not the only ones facing us. Additional risks that are presently unknown to us or that we currently deem immaterial may also impact our business. We consider the following issues to be the most critical risks to the success of our business:
Our success depends on the successful commercialization of our existing products and new product candidates.
The continued and successful commercialization of our medical device products and technology is crucial for our success. Successful product commercialization and product development in the medical device industry is highly uncertain, and very few product commercialization initiatives or research and development projects produce a significant or successful commercial product. Our products and product candidates are in various stages of commercial and clinical development and face a variety of risks and uncertainties. Principally, these risks and uncertainties include the following:
·Commercialization risk. Even if our, or our customers’ or partners’, products or product candidates are successfully developed, receive all necessary regulatory approvals and are commercially produced, there is no guarantee that there will be market acceptance of them or that they will generate or sustain any significant revenues. Our ability to achieve sustainable market acceptance for any of our medical device products or product components will depend on a number of factors, including but not limited to: (i) whether competitors develop technologies which are superior to, or less costly than, our products or product candidates; (ii) whether our products or product candidates lead to or directly cause unwanted side effects; (iii) whether government and private third-party payers provide adequate coverage and reimbursement for our products or product candidates; (iv) whether our sales and marketing efforts are effective and of reasonable cost, or are able to reach our target markets and customer base.
·Manufacturing and scale-up risk. We, our suppliers or our partners may face significant or unforeseen difficulties in manufacturing our products or product components, including but not limited to (i) technical issues relating to producing products on a commercial scale at reasonable cost, and in a reasonable time frame, (ii) difficulty meeting demand or timing requirements for component orders due to excessive costs or lack of capacity for part or all of an operation or process; (iii) lack of skilled labor or unexpected increases in labor costs needed to produce a certain product or perform a certain operation; (iv) changes in government regulations, quality or other requirements that lead to additional manufacturing costs or an inability to supply product in a timely manner, if at all; (v) increases in raw material or component supply cost or an inability to obtain supplies of certain critical supplies needed to complete our manufacturing processes. These difficulties may only become apparent when scaling up the manufacturing of a product or product candidate to more substantive commercial scale.
·Clinical risk. Future clinical trial or study results, whether conducted by or in collaboration with us or by independent third parties, may show or suggest that some or all of our technology, or the technology of our partners that incorporates our technology, is not safe or effective or is not as safe or effective as similar technologies produced by our competitors.
·Liquidity and working capital risk. We may not have the working capital and financial resources necessary to effectively market or distribute our products to customers or potential customers, or to finance the launch of any potential new products. Our available working capital to market and distribute our products and product candidates is in part dependent on our ability to sustain our cash flow from operations, if any, to obtain outside financing, to effectively manage our working capital and to repay or refinance our existing debt obligations.
If we are unsuccessful in dealing with any of these risks, or if we are unable to successfully commercialize our technology for some other reason, it would likely seriously harm our ability to sustain or to generate additional revenue.
We may be unsuccessful in marketing, selling and distributing certain of our products.
We distribute a number of our products worldwide. In order to achieve commercial success for our approved products, we have established sales and marketing resources in the United States, Europe and other parts of the world. If our distribution personnel or
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methods are not sufficient to achieve market acceptance of our products, to maintain our current customer relationships or to ensure we have supply to meet demand for our products, it could harm our prospects, business, financial condition and results of operations.
To the extent that we enter into co-promotion or other marketing and sales arrangements with other companies, any revenues received will be dependent on the efforts of others, and we do not know whether these efforts will be successful. Failure to develop an adequate sales and marketing operation or to enter into appropriate arrangements with other companies to market and sell our products will reduce our ability to sustain or generate revenues.
The manufacture of many of our products is highly complex and subject to strict regulatory and quality controls. If we or one of our suppliers encounters manufacturing or quality problems, our business could suffer.
The manufacture of many of our products is highly complex and subject to strict regulatory and quality controls. In addition, quality is extremely important due to the serious and costly consequences of a product failure. Problems can arise during the manufacturing process for a number of reasons, including equipment malfunction, failure to follow protocols and procedures, raw material problems or human error. If these problems arise or if we otherwise fail to meet our internal quality standards or those of the FDA or other applicable regulatory body, which include detailed record-keeping requirements, our reputation could be damaged, we could become subject to a safety alert or a recall, we could incur product liability and other costs, product approvals could be delayed and our business could otherwise be adversely affected.
Any adverse events associated with our products must be reported to regulatory authorities. If deficiencies in our or our collaborators’ manufacturing and laboratory facilities are discovered, or we or our collaborators fail to comply with applicable post-market regulatory requirements, a regulatory agency may close the facility or suspend manufacturing.
The significant majority of our products are manufactured, assembled and packaged in facilities that are owned by us. In the event one or more of our facilities is affected by a natural disaster or is unable to operate for any reason, our ability to supply products to our customers may be materially impacted. While we maintain manufacturing disaster and business interruption plans designed to mitigate or eliminate manufacturing interruptions or the financial impact of such, there can be no assurance that such plans or actions taken will be adequate, or that any sales lost during any manufacturing interruption will be recovered.
With respect to products manufactured by third-party contractors, we are, and we expect to continue to be, dependent on our collaborators for continuing regulatory compliance, and we may have little or no control over these matters. Our ability to control third-party compliance with the FDA and other regulatory requirements will be limited to contractual remedies and rights of inspection. Our failure or the failure of third-party manufacturers to comply with regulatory requirements applicable to our products may result in legal or regulatory action by those regulatory authorities. There can be no assurance that our or our collaborators’ manufacturing processes will satisfy regulatory, cGMPs or International Standards Organization requirements.
In addition, there may be uncertainty as to whether or not we or others who are involved in the manufacturing process will be able to make the transition to commercial production of some of our newly developed products. A failure to achieve regulatory approval for manufacturing facilities or a failure to make the transition to commercial production for our products will adversely affect our prospects, business, financial condition and results of operations.
The Company may not be able to maintain or achieve profitability.
We have incurred a loss from operations in a majority of the years in which we have been operating. Our ability to maintain or achieve sustained profitability will depend on, among other things, our ability to maintain and improve sales of our existing product lines; our ability to successfully market and sell certain new products and technologies; the amount of royalty revenue we receive from our corporate partners; our ability to develop and successfully launch new products and technologies; our ability to improve our profit margins through lower manufacturing costs and efficiencies or improved product sales mix; and our ability to effectively control our various operating costs.
Our working capital and funding needs may vary significantly depending upon a number of factors including, but not limited to, our levels of sales and gross profit; costs associated with our manufacturing operations, including capital expenditures, labor and raw materials costs, and our ability to realize manufacturing efficiencies from our various operations; fluctuations in certain working capital items, including inventory and accounts receivable, that may be necessary to support the growth of our business or new product introductions; the level of royalty revenue we receive from corporate partners; progress of our product development programs and costs associated with completing clinical studies and the regulatory process; collaborative and license arrangements with third parties; the cost of filing, prosecuting and enforcing our patent claims and other intellectual property rights; expenses associated with litigation; opportunities to in-license complementary technologies or potential acquisitions; potential milestone or other payments we may make to licensors or corporate partners; and technological and market developments that impact our royalty revenue, sales levels or competitive position in the marketplace.
The significant decline in royalty payments we receive from BSC, the large amount of our outstanding indebtedness and the related cash interest payments due on such indebtedness, as well as the working capital, capital and other operating expenditures
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required to operate our Medical Device Products segment, among other factors, have adversely affected our operating cash flows, liquidity and profitability. In order to continue to finance our operations, it may be necessary for us to explore new or alternative sources of financing, which may further impact our operating cash flows, liquidity and profitability. Such financing may not be available when needed, or available on attractive or acceptable terms, due to credit market conditions and other factors.
We continue to explore options to improve our capital structure and address our current and future capital needs. If we are not able to adequately address our capital needs or refinance our $229.4 million of 9% Senior Notes before they mature on December 1, 2016, there can be no assurances that we will have adequate liquidity and capital resources to satisfy our financial obligations, meet the funding requirements necessary to execute our operating plan or achieve profitability.
If our products are alleged to be harmful, we may not be able to sell them, we may be subject to product liability claims not covered by insurance and our reputation could be damaged.
The nature of our business exposes us to potential liability risks inherent in the testing, manufacturing and marketing of medical devices. Using our medical device product candidates in clinical trials may expose us to product liability claims. These risks will expand with respect to medical devices that receive regulatory approval for commercial sale. In addition, some of the products we manufacture and sell are designed to be implanted in the human body for varying periods of time. Even if a medical device were approved for commercial use by an appropriate governmental agency, there can be no assurance that users will not claim that effects other than those intended may have resulted from our products. Component failures, manufacturing flaws, quality system failures, design defects, inadequate disclosure of product-related risks or product-related information or other safety issues with respect to these or other products we manufacture or sell could result in an unsafe condition or injury to, or death of, a patient. In addition, although many of our products are subject to review and approval by the FDA or other regulatory agencies, under the current state of the law, any approval of our products by such agencies will not prohibit product liability lawsuits from being brought against us in the event that our products are alleged to be defective, even if such products have been used for their approved indications and appropriate labels have been included.
In the event that anyone alleges that any of our products are harmful, we may experience reduced demand for our products or our products may be recalled from the market. In addition, we may be forced to defend individual or class action lawsuits and, if unsuccessful, to pay a substantial amount in damages. A recall of some of our products could result in exposure to additional product liability claims, lost sales and significant expense to perform the recall. The outcome of litigation, particularly class action lawsuits, is difficult to assess or quantify. Plaintiffs in these types of lawsuits often seek recovery of very large or indeterminate amounts, including not only actual damages, but also punitive damages. The magnitude of the potential loss relating to these types of lawsuits may remain unknown for substantial periods of time. In addition, the cost to defend against any future litigation may be significant.
We do not have insurance covering our costs and losses as a result of any recall of products or devices incorporating our technologies, whether such recall is instituted by a device manufacturer or us as required by a regulatory agency. Insurance to cover costs and losses associated with product recalls is expensive. If we seek insurance covering product recalls in the future, it may not be available on acceptable terms. Even if obtained, insurance may not fully protect us against potential liability or cover our losses. Some manufacturers that suffered such claims in the past have been forced to cease operations or declare bankruptcy.
We do have insurance covering product liability. However, our insurance may not fully protect us from potential product liability claims. If a product liability claim or a series of claims is brought against us in excess of our insurance coverage, our business could suffer. Some manufacturers that suffered such claims in the past have been forced to cease operations or declare bankruptcy.
The level of our TAXUS and Zilver-PTX royalty revenues are highly dependent on the production, distribution, development and sales and marketing efforts undertaken by our strategic partners, BSC and Cook, respectively.
We do not have control over the sales and marketing efforts, pricing, production volumes, distribution or regulatory environment related to BSC’s TAXUS paclitaxel-eluting coronary stent program and Cook’s Zilver-PTX paclitaxel-eluting peripheral vascular stent program. Our involvement is limited to the terms of our 1997 License Agreement (as amended) with BSC and Cook (the “1997 License Agreement”), which provides for the receipt of royalty revenue based on the net sales of TAXUS and Zilver-PTX.
Royalty revenue from BSC has declined significantly, as described in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in this Annual Report on Form 10-K. BSC has attributed this significant decline in royalties primarily to competition in the drug-eluting stent market, pricing pressures in the drug-eluting stent market and a decline in the overall number of drug-eluting stent procedures. Our TAXUS related royalties may decline further due to these and other factors in the future.
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In addition, if BSC or Cook are impaired in their ability to market and distribute TAXUS and Zilver-PTX, respectively, whether for these reasons or due to a failure to comply with applicable regulatory requirements, discovery of a defect in the device, increased incidence of adverse events or identification of other safety issues, or previously unknown problems with the manufacturing operations for TAXUS or Zilver-PTX (any of which could, under certain circumstances, result in a manufacturing injunction), our revenues may be negatively impacted. BSC or Cook’s failure to resolve these issues in a timely manner and to the satisfaction of the FDA and other regulatory authorities, or the occurrence of similar problems in the future, could delay the launch of additional TAXUS or Zilver-PTX product lines and have an adverse impact on our royalty revenue from sales of both products.
Additionally, BSC or Cook may terminate our 1997 License Agreement under certain circumstances, which include an inability to acquire a supply of paclitaxel at a commercially reasonable price, determination that paclitaxel-eluting stents are no longer commercially viable; or if our exclusive license agreement with the Public Health Service of the U.S. through the National Institutes of Health (the “NIH”) terminates. Under the terms of this exclusive licence agreement, NIH granted the Company an exclusive, worldwide license to certain technologies of the NIH for the use of paclitaxel (the “the NIH License Agreement”), certain rights under which are sublicensed to BSC and Cook.
The amounts payable by BSC and Cook to us vary depending on various factors, including the volume of sales in each quarterly period and patent protection laws in the country of sale. There is no guarantee that royalty payments under our 1997 License Agreement will continue, and demand for BSC and Cook’s paclitaxel-eluting stent products could continue to decline as a result of the factors stated above, as well as technological change, changes in reimbursement rates or other factors. In addition, the royalty rates payable by BSC and Cook could decline if and when patent protection expires, or no longer exists (as defined by our 1997 License Agreement) in certain jurisdictions.
Our royalty revenue derived from the sale of paclitaxel-eluting stents depends on BSC and Cook’s ability to continue to sell their respective TAXUS and Zilver-PTX products and to launch next generation paclitaxel-eluting stent products in the United States and in other countries. Historically, stent manufacture and sale have been subject to a substantial amount of patent litigation. Should BSC, Cook and others become involved in material legal proceedings related to paclitaxel-eluting stents that could adversely impact their ability to sell TAXUS and Zilver-PTX, this may negatively impact our royalty revenue derived from the sale of these paclitaxel-eluting stents.
We face and will continue to face significant competition.
Competition from medical device companies, pharmaceutical companies, biotechnology companies and academic and research institutions is significant. Many of our competitors and potential competitors have substantially greater product development capabilities, experience conducting clinical trials and financial, scientific, manufacturing, sales and marketing resources and experience than our company. We also face competition from non-medical device companies, such as pharmaceutical companies, which may offer non-surgical alternative therapies for disease states that are currently treated or are intended to be treated using our products. Other companies may:
·develop and obtain patent protection for products earlier than we do;
·design around patented technology developed by us;
·obtain regulatory approvals for such products more rapidly;
·have greater manufacturing capabilities and other resources;
·have larger or more experienced sales forces;
·develop more effective or less expensive products; or
·have greater success in obtaining adequate third-party payer coverage and reimbursement for their competing products.
While we intend to maintain or expand our technological capabilities in order to remain competitive, there is a risk that:
·research and development by others will render our technology or product candidates obsolete or non-competitive;
·treatments or cures developed by others will be superior to any therapy developed by us; and
·any therapy developed by us will not be preferred to any existing or newly developed technologies.
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If physicians do not recommend and endorse our products or products that use our technology, or if our working relationships with physicians deteriorate, our products or products that use our technology may not be accepted in the marketplace, which could adversely affect our sales and royalty revenues.
In order for us to sell our products or continue to receive royalty revenues from the sale of products that use our technologies, physicians must recommend and endorse them. We believe that recommendations and endorsements by physicians are and will be essential for market acceptance of our products, and we do not know whether we will obtain the necessary recommendations or endorsements from physicians. Acceptance of our products or of products that use our technology depends on educating the medical community as to the distinctive characteristics, perceived benefits, safety, clinical efficacy and cost-effectiveness of these products compared to products of competitors, and on training physicians in the proper application of these products. If we are not successful in obtaining the recommendations or endorsements of physicians for our products, or our collaborators are not successful in doing the same for their products that use our technology, our sales and royalty revenues may not increase or may decline.
In addition, if we fail to maintain our working relationships with physicians, many of our products may not be developed and marketed in line with the needs and expectations of professionals who use and support our products. The research, development, marketing and sales of many of our new and improved products are dependent upon our maintaining working relationships with physicians. We rely on these professionals to provide us with considerable knowledge and experience regarding our products and the marketing of our products. Physicians assist us as researchers, marketing consultants, product consultants, inventors and public speakers. If we are unable to maintain our strong relationships with these professionals while continuing to receive their advice and input, the development and marketing of our products could suffer, which could adversely affect the acceptance of our products in the marketplace and our sales.
Technological advances and evolving industry standards could reduce our future product sales, which could cause our revenues to grow more slowly or decline.
The markets for our products are characterized by rapidly changing technology, changing customer needs, evolving industry standards and frequent new product introductions and enhancements. The emergence of new industry standards in related fields may adversely affect the demand for our products. This could happen, for example, if new standards and technologies emerged that were incompatible with customer deployments of our applications. In addition, any compounds, products or processes that we develop may become obsolete or uneconomical before we recover any of the expenses incurred in connection with their development. We cannot assure you that we will succeed in developing and marketing product enhancements or new products that respond to technological change, new industry standards, changed customer requirements or competitive products on a timely and cost-effective basis. Additionally, even if we are able to develop new products and product enhancements, we cannot assure you that they will achieve market acceptance.
The commercial potential of our products and product candidates will be significantly limited if we are not able to obtain adequate levels of reimbursement for them.
Our ability to commercialize our medical products and product candidates successfully will depend in part on the extent to which coverage and reimbursement for such products and related treatments will be available from government health administration authorities, private health insurers and other third-party payers or otherwise supported by the market for these products. There can be no assurance that third-party payers’ coverage and reimbursement will be available or sufficient for the products we might develop.
Third-party payers are increasingly challenging the price of medical products and services and instituting cost-containment measures to control or significantly influence the purchase of medical products and services. These cost containment measures, if instituted in a manner affecting the coverage of or payment for our products, could have a material adverse effect on our ability to operate profitably. In some countries in the E.U. and in the U.S., significant uncertainty exists as to the reimbursement status of newly approved health care products, and we do not know whether adequate third-party coverage and reimbursement will be available for us to realize an appropriate return on our investment in product development, which could seriously harm our business. In the U.S., while reimbursement amounts previously approved appear to have provided a reasonable rate of return, there can be no assurance that our products will continue to be reimbursed at current rates or that third-party payers will continue to consider our products cost-effective and provide coverage and reimbursement for our products, in whole or in part.
We cannot be certain that our products will gain commercial acceptance among physicians, patients and third-party payers, even if necessary international and U.S. marketing approvals are maintained. We believe that recommendations and endorsements by physicians will be essential for market acceptance of our products, and we do not know whether these recommendations or endorsements will be obtained. We also believe that surgeons will not use these products unless they determine, based on clinical data and other factors, that the clinical benefits to patients and cost savings achieved through use of these products outweigh their cost.
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Acceptance among physicians may also depend upon the ability to train surgeons and other potential users of our products and the willingness of such users to learn these relatively new techniques.
If certain single-source suppliers fail to deliver key product components in a timely manner, our manufacturing would be impaired and our product sales could suffer.
We depend on certain single-source suppliers that supply components used in the manufacture of certain of our products. If we need alternative sources for key component parts or materials for any reason, these component parts or materials may not be immediately available to us. If alternative suppliers are not immediately available, we will have to identify and qualify alternative suppliers, and production of certain components or products may be delayed. We may not be able to find an adequate alternative supplier in a reasonable time period or on commercially acceptable terms, if at all. Our inability to obtain our key source supplies for the manufacture of our products may require us to delay shipments of products, harm customer relationships or force us to curtail or cease operations.
Our business is subject to economic, political and other risks associated with international sales and operations, including risks arising from currency exchange rate fluctuations.
Because we sell our products in a number of countries, our business is subject to the risks of doing business internationally, including risks associated with U.S. government oversight and enforcement of the Foreign Corrupt Practices Act as well as with the United Kingdom’s Bribery Act and anti-corruption laws in other jurisdictions. We anticipate that sales from international operations will continue to represent a significant portion of our total sales. Accordingly, our future results could be harmed by a variety of factors, including:
·changes in local medical reimbursement policies and programs;
·changes in foreign regulatory requirements;
·changes in a specific country’s or region’s political or economic conditions, such as the current financial uncertainties in Europe andchanging circumstances in emerging regions;
·trade protection measures, quotas, embargoes, import or export licensing requirements and duties, tariffs or surcharges;
·potentially negative impact of tax laws, including tax costs associated with the repatriation of cash;
·difficulty in staffing and managing global operations;
·cultural, exchange rate or other local factors affecting financial terms with customers;
·local economic and financial conditions affecting the collectability of receivables, including receivables from sovereign entities;
·economic and political instability and local economic and political conditions;
·differing labor regulations; and
·differing protection of intellectual property.
Substantially all of our sales outside of the U.S. are denominated in local currencies. Measured in local currency, a substantial portion of our international sales was generated in the E.U. The U.S. dollar value of our international sales varies with currency exchange rate fluctuations. Decreases in the value of the U.S. dollar to the Euro have the effect of increasing our reported revenues even when the volume of international sales has remained constant. Increases in the value of the U.S. dollar relative to the Euro, as well as other currencies, have the opposite effect and, if significant, could have a material adverse effect on our reported revenues and results of operations.
The United States Foreign Corrupt Practices Act, the United Kingdom Bribery Act, and similar laws in other jurisdictions contain prohibitions against bribery and other illegal payments or for the failure to have procedures in place that prevent such payments. Recent years have seen an increasing number of investigations and other enforcement activities under these laws. Although we have
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compliance programs in place with respect to these laws, no assurance can be given that a violation will not be found, and if found, the resulting penalties could adversely affect us and our business.
Future legislation or regulatory changes to, or consolidation in, the health care system may affect our ability to sell our products profitably
There have been, and we expect there will continue to be, a number of legislative and regulatory proposals to change the health care system, and some could involve changes that could significantly affect our business. For example, the 2010 health reform law was intended to increase the number of individuals covered by health insurance, impose reimbursement provisions intended to restrict the growth in Medicare and Medicaid spending and encourage development of health care delivery programs and models intended to tie payments to quality and care delivery innovations. As currently enacted, the health reform law imposed a 2.3% excise tax on medical device manufacturers on U.S. sales of Class I, II and III medical devices. The excise tax is effective in 2013. Given that 62% or our worldwide product sales are to customers based in the U.S., we expect that this tax burden will have a negative impact on our earnings and cash flows in 2013 and beyond.
Although some provisions of the health reform legislation have been implemented, many of the legislative changes contained within the health reform legislation will not be effective or implemented until future years. In addition, the Supreme Court will hear arguments related to the constitutionality of portions of the health reform law later this year and the outcome of the case could result in repeal of all or portions of the law. Therefore, the impact of health reform on our business is currently uncertain. Apart from the 2010 health reform law, efforts by governmental and third-party payers to reduce healthcare costs or the announcement of legislative proposals or reforms to implement government controls could cause a reduction in sales or in the selling price of our products, which could seriously harm our business.
Additionally, initiatives to reduce the cost of health care have resulted in a consolidation trend in the health care industry, including hospitals. This in turn has resulted in greater pricing pressures and the exclusion of certain suppliers from certain market segments as consolidated groups such as group purchasing organizations, independent delivery networks and large single accounts continue to consolidate purchasing decisions for some of our hospital customers. We expect that market demand, government regulation, and third-party reimbursement policies will continue to change the worldwide health care industry, resulting in further business consolidations and alliances among our customers and competitors, which may reduce competition, exert further downward pressure on the prices of our products and may adversely impact our business, financial condition or results of operations.
If we are unable to license new technologies, or our existing license agreements are terminated, our ability to maintain our competitive advantage in our existing products and to develop future products may be adversely affected.
We have entered into, and we expect that we will continue to enter into, licensing agreements with third parties to give us access to technologies that we may use to develop products, or that we may use to gain access to new products for us to further develop, market and sell through our commercial sales organizations. The technologies governed by these license agreements may be critical to our ability to maintain our competitive advantage in our existing products and to develop future products.
Pursuant to terms of our existing license agreements, licensors have the right under certain specified circumstances to terminate their respective licenses. Events that may allow licensors to exercise these termination provisions include:
·sub-licensing without the licensor’s consent;
·a transaction which results in a change of control of us;
·our failure to use the required level of diligence to develop, market and sell products based on the licensed technology;
·our failure to maintain adequate levels of insurance with respect to the licensed technologies;
·our bankruptcy; or
·other acts or omissions that may constitute a breach by us of our license agreement.
In addition, any failure to continue to have access to these technologies may materially adversely affect the benefits that we currently derive from our collaboration and partnership arrangements and may adversely affect our results and operations.
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We may depend on certain strategic partners for the development, regulatory approval, testing, manufacturing and potential commercialization of our products.
We have entered into various arrangements with corporate and academic partners, licensors, licensees and others for the research, development, clinical testing, regulatory approval, manufacturing, marketing and commercialization of our product candidates. For instance, we have partnered with BSC and Cook to develop and market paclitaxel-eluting coronary and peripheral stents. Strategic partners that we may collaborate with currently and in the future, are or may be essential to the development of our technology and potential revenue and we have little control over or access to information regarding our partners’ activities with respect to our products.
Our strategic partners may fail to successfully develop or commercialize our technology to which they have rights for a number of reasons, including:
·failure of a strategic collaborator to continue, or delays in, its funding, research, development and commercialization activities;
·the pursuit or development by a strategic collaborator of alternative technologies, either on its own or with others, including our competitors, as a means for developing treatments for the diseases targeted by our programs;
·the preclusion of a strategic collaborator from developing or commercializing any product, through, for example, litigation or other legal action; and
·the failure of a strategic collaborator to make required milestone payments, meet contractual milestone obligations or exercise options which may result in our terminating applicable licensing arrangements.
We may not be able to protect our intellectual property or obtain necessary intellectual property rights from third parties, which could adversely affect our business.
Our success depends, in part, on ensuring that our intellectual property rights are covered by valid and enforceable patents or effectively maintained as trade secrets and on our ability to detect violations of our intellectual property rights and enforce such rights against others.
The validity of our patent claims depends, in part, on whether pre-existing public information described or rendered obvious our inventions as of the filing date of our patent applications. We may not have identified all prior art, such as U.S. and foreign patents, published applications or published scientific literature that could adversely affect the validity of our issued patents or the patentability of our pending patent applications. For example, patent applications in the U.S. are maintained in confidence for up to 18 months after their filing. In some cases, however, patent applications remain confidential in the U.S. Patent and Trademark Office (the “USPTO”) for the entire time prior to their issuance as a U.S. patent. Patent applications filed in countries outside the U.S. are not typically published until at least 18 months from their first filing date. Similarly, publication of discoveries in scientific or patent literature often lags behind actual discoveries. Therefore, we cannot be certain that we were the first to invent, or the first to file patent applications related to, our technology. In the event that a third party has also filed a U.S. patent application covering a similar invention, we may have to participate in an adversarial proceeding, known as an interference, declared by the USPTO to determine priority of invention in the U.S. It is possible that we may be unsuccessful in the interference, resulting in a loss of some portion or all of our U.S. patent positions. The laws in some foreign jurisdictions do not protect intellectual property rights to the same extent as in the U.S., and many companies have encountered significant difficulties in protecting and defending such rights in foreign jurisdictions. If we encounter such difficulties or we are otherwise precluded from effectively protecting our intellectual property rights in foreign jurisdictions, our business prospects could be substantially harmed.
We frequently seek patents to protect our intellectual property. It should be recognized that we may not be able to obtain patent protection for key elements of our technology, as the patent positions of medical device, pharmaceutical and biotechnology companies are uncertain and involve complex legal and factual questions for which important legal issues are largely unresolved. For example, no consistent policy has emerged regarding the scope of health-related patent claims that are granted by the USPTO or enforced by the U.S. federal courts. Rights under any of our issued patents may not provide commercially meaningful protection for our products or afford us a commercial advantage against our competitors or their competitive products or processes. In addition, even if a patent is issued, the coverage claimed in a patent application may be significantly reduced in the patent as granted.
There can be no assurance that:
·patent applications will result in the issuance of patents;
·additional proprietary products developed will be patentable;
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·licenses we have obtained from third parties that we use in connection with our technology will not be terminated;
·patents issued will provide adequate protection or any competitive advantages;
·patents will not be successfully challenged by any third parties; or
·the patents of others will not impede our or our collaborators’ ability to commercialize our technology.
For example, the drug paclitaxel is itself not covered by composition of matter patents. Therefore, although we have developed and are developing an intellectual property portfolio around the use of paclitaxel for intended commercial applications, others may be able to engage in off-label use of paclitaxel for the same indications, causing us to lose potential revenue. Furthermore, others may independently develop similar products or technologies or, if patents are issued to us, design around any patented technology developed by us, which could affect our potential to generate revenues and harm our results of operations.
Patent protection for our technology may not be available based on prior art. The publication of discoveries in scientific or patent literature often lags behind actual discoveries. As a consequence, there may be uncertainty as to whether we or a third party were the first creator of inventions covered by issued patents or pending patent applications or that we or a third party were the first to file patent applications for such inventions. Moreover, we might have to participate in interference proceedings declared by the USPTO, or other proceedings outside the U.S., including oppositions, to determine priority of invention or patentability, which could result in substantial cost to us even if the outcome were favorable. An unfavorable outcome in an interference or opposition proceeding could preclude us, our collaborators and our licensees from making, using or selling products using the technology or require us to obtain license rights from prevailing third parties. We do not know whether any prevailing party would offer us a license on commercially acceptable terms, if at all. We may also be forced to pay damages or royalties for our past use of such intellectual property rights, as well as royalties for any continued usage.
As part of our patent strategy, we have filed a variety of patent applications internationally. Oppositions have been filed against various granted patents that we either own or license and which are related to certain of our technologies. For a summary of certain of our material current legal proceedings, including those relating to our patents and intellectual property, see the section entitled “Legal Proceedings” under Part I, Item 3 of this Annual Report on Form 10-K.
Our future success and competitive position depend in part on our ability to obtain and maintain certain proprietary intellectual property rights used in our approved products and principal product candidates. Any such success depends in part on effectively instituting claims against others who we believe are infringing our rights and by effectively defending claims of intellectual property infringement brought by our competitors and others. The stent-related markets have experienced rapid technological change and obsolescence in the recent past, and our competitors have strong incentives to attempt to stop or delay us from introducing new products and technologies. See “—We may incur substantial costs as a result of litigation or other proceedings relating to patent and other intellectual property rights.”
We do not know whether the patents that we have obtained or licensed, or may be able to obtain or license in the future, would be held valid or enforceable by a court or whether a competitor’s technology or product would be found to infringe such patents. Further, we have no assurance that third parties will not properly or improperly modify or terminate any license they have granted to us.
We have obtained licenses from third parties with respect to their intellectual property that we use in connection with certain aspects of our technology or products. However, we may need to obtain additional licenses for the development of our current or future products. Licenses may not be available on satisfactory terms or at all. If available, these licenses may obligate us to exercise diligence in bringing our technology to market and may obligate us to make minimum guarantee or milestone payments. This diligence and these milestone payments may be costly and could adversely affect our business. We may also be obligated to make royalty payments on the sales, if any, of products resulting from licensed technology and may be responsible for the costs of filing and prosecuting patent applications. These costs could affect our results of operations and decrease our earnings.
Certain of our key technologies include trade secrets and know-how that may not be protected by patents. There can be no assurance that we will be able to protect our trade secrets. To help protect our rights, we require employees, consultants, advisors and collaborators to enter into confidentiality agreements. We cannot assure you that all employees, consultants, advisors and collaborators have signed such agreements, or that these agreements will adequately protect our trade secrets, know-how or other proprietary information in the event of any unauthorized use or disclosure. Furthermore, we may not have adequate remedies for any such breach. Any disclosure of confidential data into the public domain or to third parties could allow our competitors to learn our trade secrets and use the information in competition against us.
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Our ability to operate could be hindered by the proprietary rights of others.
A number of medical device, pharmaceutical and biotechnology companies as well as research and academic institutions have developed technologies, filed patent applications or received patents on various technologies that may be related to our business. Some of these technologies, applications or patents may conflict with or adversely affect our technologies or intellectual property rights, including those that we license from others. We are aware of other parties holding intellectual property rights that may represent prior art or other potentially conflicting intellectual property. Any conflicts with the intellectual property of others could limit the scope of the patents, if any, that we may be able to obtain or result in the denial of our current or future patent applications altogether.
If patents that cover our activities are issued to other persons or companies, we could be charged with infringement. In the event that other parties’ patents cover any portion of our activities, we may be forced to develop alternatives or negotiate a license for such technology. We do not know whether we would be successful in either developing alternative technologies or acquiring licenses upon reasonable terms, if at all. Obtaining any such licenses could require the expenditure of substantial time and other resources and could harm our business and decrease our earnings. If we do not obtain such licenses, we could encounter delays in the introduction of our products or could find that the development, manufacture or sale of products requiring such licenses is prohibited.
We may incur substantial costs as a result of litigation or other proceedings relating to patent and other intellectual property rights.
In connection with maintaining the value of our various intellectual property and exclusivity rights, we regularly evaluate the activities of others worldwide. Our success will depend, in part, on our ability to obtain patents, or licenses to patents, maintain trade secret protection and enforce our rights against others. Should it become necessary to protect those rights, we intend to pursue all cost-efficient strategies, including, when appropriate, negotiation or litigation in any relevant jurisdiction. For a summary of certain of our current legal proceedings, including proceedings in respect of patent infringement and intellectual property matters, see the section entitled “Legal Proceedings” under Part I, Item 3 of this Annual Report on Form 10-K.
We intend to pursue and to defend vigorously any and all actions of third parties related to our material patents and technology. Any failure to obtain and protect intellectual property could adversely affect our business and our ability to operate could be hindered by the proprietary rights of others.
Our involvement in intellectual property litigation could result in significant expense, adversely affecting the development of product candidates or sales of the challenged product or intellectual property and diverting the efforts of our technical and management personnel, whether or not such litigation is resolved in our favor. Some of our competitors may be able to sustain the costs of complex patent litigation more effectively than we can because they have substantially greater resources, and intellectual property litigation may be used against us as a means of gaining a competitive advantage. Competing parties frequently file multiple suits to leverage patent portfolios across product lines, technologies and geographies and to balance risk and exposure between the parties. Uncertainties resulting from the initiation and continuation of any litigation could affect our ability to continue our operations. In the event of an adverse outcome as a defendant in any such litigation, we may, among other things, be required to:
·pay substantial damages or back royalties;
·cease the development, manufacture, use or sale of product candidates or products that infringe upon the intellectual property of others;
·expend significant resources to design around a patent or to develop or acquire non-infringing intellectual property;
·discontinue processes incorporating infringing technology; or
·obtain licenses to the infringed intellectual property.
We cannot assure you that we will be successful in developing or acquiring non-infringing intellectual property or that necessary licenses will be available upon reasonable terms, if at all. Any such development, acquisition or license could require the expenditure of substantial time and other resources and could adversely affect our business and financial results. If we cannot develop or acquire such intellectual property or obtain such licenses, we could encounter delays in any introduction of products or could find that the development, manufacture or sale of products requiring such licenses could be prohibited.
If third parties file patent applications, or are issued patents claiming technology also claimed by us in pending applications, we may be required to participate in interference proceedings with the USPTO, or other proceedings outside the United States, including
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oppositions, to determine priority of invention or patentability, which could result in substantial cost to us even if the eventual outcome were favorable.
We must receive regulatory approval for each of our product candidates before they can be sold commercially in Canada, the U. S. or internationally, which can take significant time and be very costly.
The development, manufacture and sale of medical devices and human therapeutic products in Canada, the U.S. and internationally is governed by a variety of statutes and regulations. These laws require, among other things:
·regulatory approval of manufacturing facilities and practices;
·adequate and well-controlled research and testing of products in pre-clinical and clinical trials;
·review and approval of submissions containing manufacturing, pre-clinical and clinical data in order to obtain marketing approval based on establishing the safety and efficacy of the product for each use sought, including adherence to current cGMPs during production and storage; and
·control of marketing activities, including advertising and labeling.
The product candidates currently under development by us or our collaborators will require significant research, development, pre-clinical and clinical testing, pre-market review and approval, and investment of significant funds prior to their commercialization. In many instances, we are dependent on our collaborators for regulatory approval and compliance, and have little or no control over these matters. The process of completing clinical testing and obtaining such approvals is likely to take many years and require the expenditure of substantial resources, and we do not know whether any clinical studies by us or our collaborators will be successful, whether regulatory approvals will be received, or whether regulatory approvals will be obtained in a timely manner. Despite the time and resources expended by us, regulatory approval is never guaranteed. Even if regulatory approval is obtained, regulatory agencies may limit the approval to certain diseases, conditions or categories of patients who can use them.
If any of our development programs are not successfully completed in a timely fashion, required regulatory approvals are not obtained in a timely fashion, or products for which approvals are obtained are not commercially successful, it could seriously harm our business.
If our process related to product development does not result in an approved and commercially successful product, our business could be adversely affected.
We focus our product development activities on areas in which we have particular strengths. The outcome of any development program is highly uncertain, notwithstanding how promising a particular program may seem. Success in pre-clinical and early-stage clinical trials may not necessarily translate into success in large-scale clinical trials. Further, clinical trials are expensive and may require increased investment for which we do not have adequate funding or for which we are not able to access adequate funding.
In addition, we will need to obtain and maintain regulatory approval in order to market new products. Notwithstanding the outcome of clinical trials for new products, regulatory approval may not be achieved. The results of clinical trials are susceptible to varying interpretations that may delay, limit or prevent approval or result in the need for post-marketing studies. In addition, changes in regulatory policy for product approval during the period of product development and review by regulators of a new application may cause delays or rejection. Even if we receive regulatory approval, this approval may include limitations on the indications for which we can market the product. There is no guarantee that we will be able to satisfy the applicable regulatory requirements, and we may suffer a significant variation from planned revenue as a result.
Compulsory licensing and/or generic competition may affect our business in certain countries.
In a number of countries, governmental authorities have the right to grant licenses to others to use a pharmaceutical or medical device company’s patents or other intellectual property without the consent of the owner of the patent or other intellectual property. Governmental authorities could use this right to grant licenses under our patents or other intellectual property to others or could require us to grant licenses under our patents or other intellectual property to others, thereby allowing our competitors to manufacture and sell their own versions of our products. In other circumstances, governmental authorities could use this right to require us or our licensees to reduce the prices of our products. In all of these situations, our sales or the sales of our licensee(s), and the results of our operations, in these countries could be adversely affected.
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We are subject to litigation that could strain our resources and distract management.
From time to time, we are involved in a variety of claims, lawsuits and other disputes. These suits may concern issues including product liability, contract disputes, employee-related matters, intellectual property and personal injury matters. It is not feasible to predict the outcome of all pending suits and claims, and the ultimate resolution of these matters as well as future lawsuits could have a material adverse effect on our business, financial condition, results of operations or cash flows or reputation.
For a summary of certain of our material current legal proceedings, see the section entitled “Legal Proceedings” under Part I, Item 3 of this Annual Report on Form 10-K.
We may be subject to damages resulting from claims that we or our employees have wrongfully used or disclosed alleged trade secrets of their former employers.
Many of our employees were previously employed at universities or other biotechnology or pharmaceutical companies, including our competitors or potential competitors. Although no such claims against us are currently pending, we may be subject to claims that these employees or we have used or disclosed trade secrets or other proprietary information of their former employers. Litigation may be necessary to defend against these claims. Even if we are successful in defending against these claims, litigation could result in substantial costs and be a distraction to management. If we fail in defending such claims, in addition to paying monetary damages, we may lose valuable intellectual property rights or personnel. A loss of key research personnel or their work product could hamper or prevent our ability to commercialize certain product candidates, which could severely harm our business.
We may incur significant costs complying with environmental laws and regulations.
Our research and development processes and manufacturing operations involve the use of hazardous materials. In the countries in which we operate or sell our products, we are subject to federal, state, provincial, local and other laws and regulations that govern the use, manufacture, storage, handling and disposal of such materials and certain waste products. The risk of accidental contamination or injury from these materials cannot be completely eliminated. In the event of an accident or the discovery of pre-existing contamination at one or more of our facilities, we could be held liable for any damages that result, and any such liability could exceed our resources. In addition, our manufacturing facilities may become subject to new or increased legislation or regulation as a result of climate control initiatives. We may not be specifically insured with respect to these liabilities, and we do not know whether we will be required to incur significant costs to comply with environmental laws and regulations in the future, or whether our operations, business or assets will be harmed by current or future environmental laws or regulations.
If we are unable to fully comply with federal and state “fraud and abuse laws,” we could face substantial penalties, which may adversely affect our business, financial condition and results of operations.
We are subject to various laws pertaining to health care fraud and abuse, including the U.S. Anti-Kickback Statute, physician self-referral laws (the “Stark Law”), the U.S. False Claims Act, HIPAA (as amended by HITECH), the U.S. False Statements Statute, the Physician Payment Sunshine Act, and state law equivalents to these U.S. federal laws, which may not be limited to government-reimbursed items and may not contain identical exceptions. Violations of these laws are punishable by criminal and civil sanctions, including, in some instances, civil and criminal penalties, damages, fines, exclusion from participation in U.S. federal and state health care programs, including Medicare and Medicaid, and the curtailment or restructuring of operations. Any action against us for violation of these laws could have a significant impact on our business. In addition, we are subject to the U.S. Foreign Corrupt Practices Act. Any action against us for violation by us or our agents or distributors of this act could have a significant impact on our business.
Acquisition of companies or technologies may result in disruptions to our business.
As part of our business strategy, we may acquire additional assets, products or businesses principally relating to or complementary to our current operations. Any acquisitions or mergers by us will be accompanied by the risks commonly encountered in acquisitions of companies. These risks include, among other things, higher than anticipated acquisition costs and expenses, the difficulty and expense of integrating the operations and personnel of the companies and the loss of key employees and customers as a result of changes in management.
In addition, geographic distances may make integration of acquired businesses more difficult. We may not be successful in overcoming these risks or any other problems encountered in connection with any acquisitions.
If significant acquisitions are made for cash consideration, we may be required to use a substantial portion of our available cash, cash equivalents and short-term investments. Future acquisitions by us may cause large one-time expenses or create goodwill or other
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intangible assets that could result in significant asset impairment charges in the future. Acquisition financing may not be available on acceptable terms, if at all.
If we fail to hire and retain key management and technical personnel, we may be unable to successfully implement our business plan.
We are highly dependent on our senior management and technical personnel. The competition for qualified personnel in the health care field is intense, and we rely heavily on our ability to attract and retain qualified managerial and technical personnel. Our ability to manage growth effectively will require continued implementation and improvement of our management systems and the ability to recruit and train new employees. We may not be able to successfully attract and retain skilled and experienced personnel, which could harm our ability to develop our product candidates and generate revenues.
Risks Relating to Our Indebtedness, Organization and Financial Position
ANGIOTECH PHARMACEUTICALS, INC.We have a substantial amount of indebtedness, which could adversely affect our financial position and ability to obtain future additional financing
We may incur additional debt from time to time to finance our operations, for capital expenditures or for other purposes. The magnitude of debt we carry may impact us in the following ways:
·make it difficult for us to satisfy our financial obligations, including making scheduled principal and interest payments;
·limit our ability to borrow additional funds for working capital, capital expenditures, acquisitions or other general corporate purposes;
·limit our ability to borrow additional funds at favourable terms;
·require us to use a substantial portion of our cash flow from operations to make debt service payments; that would otherwise be available for our operations and future business opportunities;
·limit our flexibility to plan for, or react to, changes in our business and industry;
·place us at a competitive disadvantage compared to our less-leveraged competitors; and
·increase our vulnerability to the impact of adverse economic and industry conditions.
Maturity of our existing debt may limit our ability to obtain financing or execute other strategic alternatives
As at December 31, 2012, we have $229.4 million of 9% Senior Notes due on December 1, 2016 (“Senior Notes”) and $60 million of Senior Floating Rate Notes (“New Notes”) due December 1, 2013. Management expects that these debt obligations will be fully repaid using the cash consideration from Angiotech’s contemplated sale of its Interventional Products Business to Argon (see the Sale of the Interventional Products Business to Argon Medical, Inc. section above).
If we are unable to complete or close the sale of the Interventional Products Business to Argon, we will need to seek new financing or pursue other strategic alternatives such as a reducing or delaying capital expenditures, selling assets, disposing of part or all of our business, restructuring or refinancing our existing debt, or seeking additional equity capital to repay these debt obligations upon maturity. There is no assurance that we will be able to complete such activities, to meet our obligations on satisfactory terms, if at all.
If we are unable to execute the any of the initiatives described above, and as a result we are not able to meet our financial obligations, we may be forced to pursue alternatives to restructure our outstanding indebtedness, including but not limited to extending the maturity on our existing indebtedness, restructuring other terms of our existing indebtedness or seeking protection from our creditors through formal bankruptcy proceedings. If such actions become necessary, they may be costly, and would likely adversely impact our business, operations, liquidity and capital resources, and may also severely limit or eliminate any amounts that may be ultimately received by our outstanding creditors in service of our obligations thereto, or that may be received by shareholders.
Our obligation to pay cash interest on our notes has had, and may continue to have, an adverse effect on our liquidity.
We are obligated to make periodic cash interest payments on our outstanding indebtedness. As a result of these required cash interest payments, combined with the significant decline in royalty payments we receive from BSC, we have had significant liquidity issues, which led to our need to restructure a significant portion of our indebtedness through the Recapitalization Transaction as concluded in May 2011. For more information on the Recapitalization Transaction, refer to note 3 of the audited consolidated financial statements for the year ended December 31, 2012 included in this Annual Report on Form 10-K. If our cash flows are worse
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than expected, we may be unable to access additional sources of liquidity to fund our cash needs, which could further adversely affect our financial condition or results of operations and our ability to make payments on our debt.
We must offer to repurchase the Senior Notes upon a change of control.
The Senior Notes Indenture will require that, upon the occurrence of a “change of control”, as defined in the Senior Notes Indenture, we must make an offer to repurchase the Senior Notes at a price equal to 101% of the principal amount thereof, plus accrued and unpaid interest, if any, to the date of repurchase.
Certain events involving a change of control may result in an event of default or require the applicable indebtedness or other obligations to be repurchased or repaid under our other indebtedness or indebtedness that we may incur in the future, including our $60.0 million existing Senior Floating Rate Notes (“New Notes”) and any indebtedness outstanding under our revolving credit facility (“Revolving Credit Facility”). The exercise by the holders of their right to require the Issuer to repurchase the Senior Notes upon a change of control could cause a default under the New Notes Indenture or the Revolving Credit Facility, even if the change of control itself does not. An event of default under other indebtedness could result in an acceleration of such indebtedness. We cannot assure you that we would have sufficient resources to repurchase any of the Senior Notes or to pay our other obligations in the event of such an acceleration of indebtedness upon a change of control. The acceleration of indebtedness and our inability to repurchase all of the tendered Senior Notes would constitute events of default under the Senior Notes Indenture. We cannot assure you that the terms of any future indebtedness will not contain cross default provisions based upon the occurrence of a change of control or other defaults under such debt instruments. Furthermore, this would likely impact our ability to continue operations.
We have effected reductions in our operating costs and, as a result, our ability to cut costs further and sustain our business initiatives may be limited.
Beginning in late 2008 and continuing into early 2012, we have implemented various initiatives to reduce operating costs across all functions of the Company and focus our business efforts on our most promising near-term product opportunities. As a result of these cost-cutting initiatives, we may have a more limited ability to further reduce costs to increase our liquidity should such measures become necessary. Any further reductions may have a materially negative impact on our business.
Restrictive covenants in our existing and future credit agreements may adversely affect us.
We must comply with operating and financing restrictions in our Revolving Credit Facility; which was entered into on May 12, 2011 and provides us with up to $28 million of aggregate principal borrowings; and the indentures governing our other outstanding indebtedness. The Revolving Credit Facility is subject to a borrowing base, certain reserves and other conditions (for more information, refer to notes 14 of the audited consolidated financial statements for the year ended December 31, 2012 included in this Annual Report on Form 10-K). These restrictions affect, and in many respects limit or prohibit, our ability to:
·incur additional indebtedness;
·make any distributions, declare or pay any dividends on or acquire any of our capital stock;
·incur liens;
·make investments, including joint venture investments;
·sell assets;
·repurchase certain debt; and
·merge or consolidate with or into other companies or sell substantially all of our assets.
We may also have similar restrictions with any future debt.
Our Revolving Credit Facility requires us to make mandatory payments upon the occurrence of certain events, including the sale of assets, in each case subject to certain limitations and conditions. Our Revolving Credit Facility also contains financial covenants, including maintaining certain levels of EBITDA and interest coverage ratios. These restrictions could limit our ability to plan for or react to market conditions or to meet extraordinary capital needs or otherwise could restrict our activities. These restrictions could also
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adversely affect our ability to finance our future operations or capital needs or to engage in other business activities that would be in our interest.
Global credit and financial market conditions may exacerbate certain risks affecting our business.
Significantly challenging global credit and financial market conditions may make obtaining additional financing for our business difficult or impossible, or may make it more difficult to pursue a refinancing, restructuring or other transaction with respect to our existing indebtedness.
In addition, the tightening of global credit may lead to a disruption in the performance of our third-party contractors, suppliers or partners. We rely on third parties for several important aspects of our business, including but not limited to royalty revenue, portions of our product manufacturing and raw materials. If such third parties are unable to satisfy their commitments to us, our business would be adversely affected.
Certain of our products are used in elective medical procedures which are not covered by insurance. Adverse changes in the economy or other conditions or events have had and may continue to have an adverse effect on consumer spending and may reduce the demand for these procedures. Any such changes, conditions or events could have an adverse effect on our sales and results of operations.
We and our subsidiaries are permitted to incur substantially more debt, which could further exacerbate the risks associated with our leverage.
The respective terms of the indenture governing our outstanding indebtedness under certain conditions expressly permit, or are anticipated to permit, as applicable, the incurrence of additional amounts of debt for specified purposes. Moreover the terms governing our outstanding indebtedness do not impose any limitation on our incurrence of liabilities that are not defined as “Indebtedness” under such indentures or facility (such as trade payables).
We are subject to risks associated with doing business globally.
As a medical device company with significant operations in the U.S., E.U., Canada and other countries, we are subject to political, economic, operational, legal, regulatory and other risks that are inherent in conducting business globally. These risks include foreign exchange fluctuations, exchange controls, capital controls, new laws or regulations or changes in the interpretation or enforcement of existing laws or regulations, political instability, macroeconomic changes, including recessions and inflationary or deflationary pressures, increases in prevailing interest rates by central banks or financial services companies, economic uncertainty, which may reduce the demand for our products or reduce the prices that our customers are willing to pay for our products, import or export restrictions, tariff increases, price controls, nationalization and expropriation, changes in taxation, diminished or insufficient protection of intellectual property, lack of access to impartial court systems, violations of law, including the U.S. Foreign Corrupt Practices Act and the U.K. Bribery Act, disruption or destruction of operations or changes to the Company’s business position, regardless of cause, including war, terrorism, riot, civil insurrection, social unrest, strikes and natural or man-made disasters, including famine, flood, fire, earthquake, storm or disease. The impact of any of these developments, either individually or cumulatively, could have a material adverse effect on our business, financial condition and results of operations.
We may incur losses associated with foreign currency fluctuations.
We report our operating results and financial position in U.S. dollars in order to more accurately represent the currency of the economic environment in which we operate.
Our operations are in some instances conducted in currencies other than the U.S. dollar, and fluctuations in the value of foreign currencies relative to the U.S. dollar could cause us to incur currency exchange losses. In addition to the U.S. dollar, we currently conduct operations in Canadian dollars, Euros, Swiss francs, Danish kroner, Swedish kroner, Norwegian kroner and U.K. pounds sterling. Exchange rate fluctuations may reduce our future operating results and comprehensive income. For a description of the effects of exchange rate fluctuations on our results, see “Quantitative and Qualitative Disclosures about Market Risk” under Item 7.A of this Annual Report on Form 10-K.
We have not entered into any forward currency contracts or other financial derivatives to hedge foreign exchange risk, and therefore we are subject to foreign currency transaction and translation gains and losses. We purchase goods and services in U.S. and Canadian dollars, Euros, Swiss francs, Danish kroner, and U.K. pounds sterling, and earn a significant portion of our revenues in U.S. dollars. We primarily manage our foreign exchange risk by satisfying foreign-denominated expenditures with cash flows or assets denominated in the same currency.
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U. S. investors may not be able to obtain enforcement of civil liabilities against us.
We were formed under the laws of British Columbia, Canada. A substantial portion of our assets are located outside the U.S. As a result, it may be impossible for U.S. investors to affect service of process within the U.S. upon us or these persons or to enforce against us or these persons any judgments in civil and commercial matters, including judgments under U.S. federal or state securities laws. In addition, judgments of U.S. courts will not necessarily be recognized by courts in non-U.S. jurisdictions. Accordingly, even if a favorable judgment is obtained in a U.S. court, a party may be required to re-litigate a claim in other jurisdictions. In addition, in certain jurisdictions in which certain of our subsidiaries are organized, it is questionable whether a court would accept jurisdiction and impose civil liability if proceedings were commenced in an original action predicated only upon U.S. federal securities laws.
Item 1B.UNRESOLVED STAFF COMMENTS
None.
Item 2.PROPERTIES
As at December 31, 2012, we have 16 facilities located in six different countries, which include Canada, the United States, Puerto Rico, the United Kingdom, Denmark and Switzerland. Of the 16 facilities, seven are primarily used to manufacture and distribute medical devices or materials for medical device products. Our other eight facilities are primarily used for sales and marketing and administrative activities. One of our facilities, located in Seattle, WA, is currently subleased to a tenant. Collectively, these facilities comprise approximately 458,145 square feet(1) of modern technical manufacturing, research and administrative operations. The following chart summarizes the facilities where our domestic and international operations occur:
Location |
| Primary Purpose |
| Segment |
| Owned or Leased |
St. Gregoire, France | | Administration | | Medical Device Technologies | | Leased |
| | | | | | |
Lausanne, Switzerland | | Administration | | Medical Device Technologies | | Leased |
| | | | | | |
Stockholm, Sweden | | Administration | | Medical Device Technologies | | Leased |
| | | | | | |
Taunton, United Kingdom | | Manufacturing | | Medical Device Technologies | | Owned |
| | | | | | |
Stenlose, Denmark (3 facilities) | | Manufacturing | | Medical Device Technologies | | 2 Leased, 1 Owned(2) |
| | | | | | |
Wheeling, IL | | Manufacturing | | Medical Device Technologies | | Owned |
| | | | | | |
Gainesville, FL | | Manufacturing | | Medical Device Technologies | | Owned |
| | | | | | |
Henrietta, NY | | Manufacturing | | Medical Device Technologies | | Leased |
| | | | | | |
Seattle, WA | | Administration | | Medical Device Technologies | | Leased (Subleased) |
| | | | | | |
Bellevue, WA | | Administration | | Medical Device Technologies | | Leased |
| | | | | | |
Reading, PA | | Manufacturing | | Medical Device Technologies | | Owned |
| | | | | | |
Aguadilla, Puerto Rico | | Manufacturing | | Medical Device Technologies | | Leased |
| | | | | | |
Sao Paulo, Brazil | | Administration | | Medical Device Technologies | | Leased |
| | | | | | |
Vancouver, B.C. | | Administration | | Licensed Technologies | | Leased |
(1) 458,145 sq. ft. of facilities excludes 19,260 sq. ft. of a subleased facility located in Seattle, WA.
(2) In connection with the closure of our Denmark manufacturing facility, the owned property is currently being marketed for sale and the leased properties will be vacated in 2013.
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Item 3.LEGAL PROCEEDINGS
The Company may be subject to various claims and legal proceedings brought against it in the normal course of business. The Company maintains insurance policies that provide limited coverage for amounts in excess of certain pre-determined deductibles for intellectual property infringement and product liability claims. Such matters are subject to many uncertainties and may be difficult for management to determine the outcome or estimate the potential range of losses if the Company does not prevail in such matters. However, management believes that adequate provisions have been made in the accounts where required. There is no assurance that any legal proceedings disclosed here, or other legal proceedings not disclosed here, will not have a material adverse impact on the Company’s financial condition or results of operations.
At the European Patent Office (“EPO”), various patents either owned or licensed by or to the Company are in opposition proceedings. The outcomes of these proceedings have not yet been determined.
Item 4.MINE SAFETY DISCLOSURE
Not applicable.
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PART II
Item 5.MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Our outstanding common shares are privately held, and there is currently no established public trading market for our common stock. As at March 28, 2013, there were 12,547,702 new common shares issued and outstanding which were held by 62 shareholders of record. See Item 12, “Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters” included in this report. In addition, as of March 28, 2013, there were outstanding options (“Options”) and Restricted Stock Units (“RSUs”) to purchase 759,517 common shares; and outstanding and unvested units of restricted stock (“RS”) that would convert into 86,805 common shares once vesting conditions are met.
Dividend Policy
(All amounts following are expressedWe have not declared or paid any dividends on our common shares since inception. The declaration of dividend payments is at the sole discretion of our Board of Directors. The Board of Directors may declare dividends in U.S. dollars unless otherwise indicated.)the future depending upon numerous factors that ordinarily affect dividend policy, including the results of our operations, our financial position and general business conditions. Our Revolving Credit Facility and the indentures governing our Senior Floating Rate Notes and 9% Senior Notes also contain certain customary affirmative and negative covenants which limit our ability to make dividend distributions.
Important InformationSale of Unregistered Securities within the Past Twelve Months
During the year ended December 31, 2012, 43,403 common shares were issued to certain executives upon vesting of their units of Restricted Stock. We concurrently repurchased 16,701 of units of RS from these executives in connection the withholding taxes owed by them on units which had vested.
During the year ended December 31, 2012, 219,500 RSU’s were issued to certain employees and members of senior management. During the same period 31,000 RSU’s were forfeited and 208,333 were cancelled in accordance with the terms of Dr. Hunter’s (former President and Chief Executive Officer of Angiotech) Termination Settlement Agreement dated November 14, 2012.
During the year ended December 31, 2012, 37,200 Options were forfeited and 219,452 were cancelled in accordance with the terms of Dr. Hunter’s Termination Settlement Agreement referred to above. The Options were issued at an exercise price of $20 and expire on May 12, 2018.
These equity based awards were deemed to be exempt from registration under the Securities Act in reliance on Section 4(2) of the Securities Act, as transactions by an issuer not involving a public offering, and the issuance of common shares upon exercise of the options was exempt from registration in reliance on Rule 701 of the Securities Act.
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Item 6.SELECTED FINANCIAL DATA
The following table sets forth selected consolidated financial information presentedfor each of our five most recently completed financial years. This data should be read in thisconjunction with our Management’s Discussion and Analysis includesof Financial Condition and Results of Operations, the resultsaudited consolidated financial statements, including the notes to the financial statements, and the Risk Factors set out in this Annual Report on Form 10-K.
On May 12, 2011, Angiotech implemented a recapitalization transaction that, among other things, eliminated its $250 million 7.75% Senior Subordinated Notes due in 2014 (“Subordinated Notes”) and $16 million of the successor companyrelated interest obligations in exchange for the eight months ended December 31, 2011cancellation of all outstanding common shares and four months endedissuance of new common shares of Angiotech (the “Recapitalization Transaction”). In connection with this Recapitalization Transaction and as discussed below, the Company adopted fresh start accounting on April 30, 2011 (the “Convenience Date”). Upon implementation of fresh-starting accounting, Angiotech comprehensively revalued its assets and our predecessor company for all periods priorliabilities to April 30, 2011. their estimated fair values and eliminated its deficit, additional paid-in-capital and accumulated other comprehensive income balances.
Given that the reorganization and adoption of fresh startfresh-start accounting resultsresulted in a new entity for financial reporting purposes, the Company is referred to as the “Predecessor Company” for all periods preceding the Convenience Date and the “Successor Company” for all periods subsequent to the Convenience Date. In addition, the consolidated financial statementsresults of the Successor Company willmay not be comparable in certain respects to those of the Predecessor Company. For comparative purposes in this management’s discussion and analysis we have combined the results of the Predecessor Company and the Successor Company for the year ended December 31, 2011. While the adoption of fresh-start accounting has resulted in a new reporting entity, we believe that the comparison of the year ended December 31, 2011 versus the year ended December 31, 2010 provides the best analysis of our operating results. Where specific income statement items have been significantly impacted, either temporarily or permanently, by the reorganization and fresh-start accounting, we have provided detailed explanations of such in the discussion below.
The following management’s discussion and analysis (“MD&A”) for the eight months ended December 31, 2011 and four months ended April 30, 2011, should be read in conjunction with our audited consolidated financial statements for the eight months ended December 31, 2011 and four months ended April 30, 2011 prepared in accordance with United States generally accepted accounting principles (“U.S. GAAP”) and the applicable rules and regulations of the U.S. Securities and Exchange Commission (“SEC”) for the presentation of annual financial information. Additional information relating to our company is available by accessing the SEDAR website at www.sedar.com or the SEC’s EDGAR website at www.sec.gov/edgar.shtml.
Forward-Looking Statements and Cautionary Factors That May Affect Future Results
Statements contained in this Annual Report on Form 10-K that are not based on historical fact, including without limitation statements containing the words “believes,” “may,” “plans,” “will,” “estimates,” “continues,” “anticipates,” “intends,” “expects” and similar expressions, constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995 and constitute “forward-looking information” within the meaning of applicable Canadian securities laws. All such statements are made pursuant to the “safe harbor” provisions of applicable securities legislation. Forward-looking statements may involve, but are not limited to, comments with respect to our objectives and priorities for 2012 and beyond, our strategies or future actions, our targets, expectations for our financial condition and the results of, or outlook for, our operations, research and development and product and drug development. Such forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause the actual results, events or developments to be materially different from any future results, events or developments expressed or implied by such forward-looking statements.
Many such known risks, uncertainties and other factors are taken into account as part of our assumptions underlying these forward-looking statements and include, among others, the following: general economic and business conditions in the U.S., E.U. and the other regions in which we operate; market demand; technological changes that could impact our existing products or our ability to develop and commercialize future products; competition; existing governmental legislation and regulations and changes in, or the failure to comply with, governmental legislation and regulations; availability of financial reimbursement coverage from governmental and third-party payers for products and related treatments; adverse results or unexpected delays in pre-clinical and clinical product development processes; adverse findings related to the safety and/or efficacy of our products or products sold by our partners; decisions, and the timing of decisions, made by health regulatory agencies regarding approval of our technology and products; general capital markets conditions and the requirement for funding to sustain or expand manufacturing, commercialization or our various product development activities; and any other factors that may affect our performance.
In addition, our business is subject to certain operating risks that may cause any results expressed or implied by the forward-looking statements in this Annual Report on Form 10-K to differ materially from our actual results. These operating risks include: market acceptance of our technology and products; our ability to successfully manufacture and market our various products; our ability to attract and retain qualified personnel; our ability to complete, in a timely and cost effective manner, pre-clinical and clinical development of certain potential new products; the impact of changes in our business strategy or development plans; our ability to obtain or maintain patent protection for discoveries; potential commercialization limitations imposed by patents owned or controlled
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by third parties; our ability to obtain rights to technology from licensors; liability for patent claims and other claims asserted against us; our ability to successfully manufacture, market and sell our products; the availabilityTable of capital to finance our activities; our ability to service our debt obligations; and any other factors referenced in our other filings with the applicable securities regulatory authorities.Contents
| | Successor Company | | | Predecessor Company | |
| | Year ended | | Eight months ended | | | Four months ended | | Year ended | | Year ended | | Year ended | |
| | December 31, | | December 31, | | | April 30, | | December 31, | | December 31, | | December 31, | |
(in thousands of U.S. $) | | 2012 | | 2011 | | | 2011 | | 2010 | | 2009 | | 2008 | |
REVENUE | | | | | | | | | | | | | | |
Product sales, net | | $ | 221,326 | | $ | 139,307 | | | $ | 69,198 | | $ | 211,495 | | $ | 191,951 | | $ | 190,816 | |
Royalty revenue | | 18,449 | | 13,670 | | | 10,941 | | 34,461 | | 62,171 | | 91,546 | |
License fees (1) | | 4,050 | | — | | | 127 | | 286 | | 25,556 | | 910 | |
| | 243,825 | | 152,977 | | | 80,266 | | 246,242 | | 279,678 | | 283,272 | |
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EXPENSES | | | | | | | | | | | | | | |
Cost of products sold (2) | | 102,706 | | 90,348 | | | 32,219 | | 106,304 | | 104,616 | | 101,052 | |
License and royalty fees | | 618 | | 264 | | | 68 | | 5,889 | | 10,431 | | 14,258 | |
Research and development | | 7,056 | | 14,076 | | | 5,686 | | 26,790 | | 23,701 | | 53,192 | |
Selling, general and administration | | 70,985 | | 60,424 | | | 24,846 | | 89,238 | | 81,504 | | 98,483 | |
Depreciation and amortization | | 34,503 | | 23,973 | | | 14,329 | | 33,745 | | 33,251 | | 33,998 | |
In-process research and development | | — | | — | | | — | | — | | — | | 2,500 | |
Write-down of assets held for sale (3) | | 277 | | — | | | 570 | | 1,450 | | 3,090 | | 1,283 | |
Write-down of property, plant and equipment (4) | | 877 | | 4,502 | | | 215 | | 4,779 | | — | | — | |
Write-down of intangible assets (5) | | — | | 10,850 | | | — | | 2,814 | | — | | — | |
Escrow settlement recovery (6) | | — | | — | | | — | | (4,710 | ) | — | | — | |
Write-down of goodwill (7) | | — | | — | | | — | | — | | — | | 649,685 | |
| | 217,022 | | 204,437 | | | 77,933 | | 266,299 | | 256,593 | | 954,451 | |
Operating income (loss) | | 26,803 | | (51,460 | ) | | 2,333 | | (20,057 | ) | 23,085 | | (671,179 | ) |
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Other (expenses) income: | | | | | | | | | | | | | | |
Foreign exchange (loss) gain | | (751 | ) | 1,461 | | | (646 | ) | 1,011 | | (1,612 | ) | 540 | |
Other income (expense) | | 1,320 | | 547 | | | 34 | | (571 | ) | 378 | | 1,192 | |
Debt restructuring costs (8) | | — | | — | | | — | | (9,277 | ) | — | | — | |
Interest expense | | (20,390 | ) | (11,945 | ) | | (10,327 | ) | (40,258 | ) | (38,039 | ) | (44,490 | ) |
Write-down and other deferred financing charges (9) | | — | | — | | | — | | (291 | ) | (643 | ) | (16,544 | ) |
Write-downs of investments (10) | | (561 | ) | (2,035 | ) | | — | | (1,297 | ) | — | | (23,587 | ) |
Debt extinguishment loss (13) | | (4,437 | ) | | | | | | | | | | | |
Loan settlement gain (11) | | — | | — | | | — | | 1,880 | | — | | — | |
Gain on disposal of Laguna Hills manufacturing facility (12) | | — | | — | | | — | | 2,005 | | — | | — | |
Total other expenses | | (24,819 | ) | (11,972 | ) | | (10,939 | ) | (46,798 | ) | (39,916 | ) | (82,889 | ) |
Income (loss) before reorganization items, gain on extinguishment of debt and settlement of other other liabilities and income taxes | | 1,984 | | (63,432 | ) | | (8,606 | ) | (66,855 | ) | (16,831 | ) | (754,068 | ) |
Reorganization items | | — | | — | | | 321,084 | | — | | — | | — | |
Gain on extinguishment of debt and settlement of other liabilities | | — | | — | | | 67,307 | | — | | — | | — | |
(Loss) income before taxes | | 1,984 | | (63,432 | ) | | 379,785 | | (66,855 | ) | (16,831 | ) | (754,068 | ) |
Income tax (recovery) expense | | 8,210 | | (2,986 | ) | | 267 | | (44 | ) | 6,037 | | (12,892 | ) |
Net (loss) income | | (6,226 | ) | (60,446 | ) | | 379,518 | | (66,811 | ) | (22,868 | ) | (741,176 | ) |
| | | | | | | | | | | | | | |
Basic and diluted net (loss) income per common share | | $ | (0.49 | ) | $ | | (4.82 | ) | | $ | 4.46 | | $ | (0.78 | ) | $ | (0.27 | ) | $ | (8.71 | ) |
| | | | | | | | | | | | | | |
Basic and diluted weighted average number of common shares outstanding (in thousands) | | 12,791 | | 12,528 | | | 85,185 | | 85,168 | | 85,130 | | 85,118 | |
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For a more thorough discussion of the risks associated with our business, see the section entitled “Risk Factors” in this Annual Report on Form 10-K.
Footnotes:
Given these uncertainties, assumptions and risk factors, investors are cautioned not to place undue reliance on such forward-looking statements. Except as required by law, we disclaim any obligation to update any such factors or to publicly announce the result of any revisions to any of the forward-looking statements contained in this Annual Report on Form 10-K to reflect future results, events or developments.
This Annual Report on Form 10-K contains forward-looking information that constitutes “financial outlooks” within the meaning of applicable securities laws. We have provided this information to give shareholders general guidance on management’s current expectations of certain factors affecting our business, including our future financial results. Given the uncertainties, assumptions and risk factors associated with this type of information, including those described above, investors are cautioned that the information may not be appropriate for other purposes.
Business Overview
(1) | During the year ended December 31, 2012, the Successor Company recognized $4.0 million of license fee revenue in connection with the completion of certain product development milestones defined under the terms of the collaboration arrangement with Ethicon, LLC and Ethicon, Inc. (“Ethicon”) related to its proprietary Quill Technology. During the year ended December 31, 2009, the Predecessor Company received a one-time up-front payment of $25.0 million from Baxter International Inc. (“Baxter”) under the terms of the Amended and Restated Distribution and Licence Agreement between Angiotech US, Angiotech International GmbH, Baxter Healthcare Corporation and Baxter Healthcare, S.A. dated January 1, 2009 (the “Baxter Distribution and License Agreement”). The payment was received in lieu and settlement of future royalty and milestone obligations related to existing formulations of CoSeal and future related products. |
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(2) | During the eight months ended December 31, 2011, the Successor Company’s net income included $22.6 million of additional cost of products sold expense related to the revaluation of its inventory from $37.5 million to $60.1 million in connection with our implementation of fresh start accounting on April 30, 2011. This is also the primary reason for the decline in the gross margin earned from medical device product sales from 53.4% during the four months ended April 30, 2011 to 35.7% during the eight month ended December 31, 2011. This non-recurring, non-cash fair value adjustment to inventory was fully charged to cost of products sold during the eight months ended December 31, 2011 and had no impact on the Successor Company’s cash flows, liquidity, credit profile or capital resources. |
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(3) | During the year ended December 31, 2012, the Successor Company recorded a $0.3 million impairment charge on a property that has been classified as held-for-sale and is being marketed for sale in connection with the closure of its Denmark manufacturing facility. As at December 31, 2008, the Predecessor Company had three properties that were designated and classified as held-for-sale in Vancouver, Canada; Syracuse, New York and Puerto Rico. Impairment charges of $0.6 million, $1.5 million, $3.0 million and $1.3 million were recorded during the four months ended April 30, 2011, and the years ended December 31, 2010, December 31, 2009 and December 31, 2008, respectively, to adjust the carrying values of these properties to the lower of cost and fair value less estimated selling costs. The Puerto Rico property was sold for net proceeds of $0.7 million in January 2010, the Vancouver property was sold for |
Angiotech develops, manufactures and markets medical device products and technologies. Our products are designed to serve physicians and patients primarily in the areas34
Table of interventional oncology, wound closure and ophthalmology.We currently operate in two business segments: Medical Device Technologies and Licensed Technologies.Contents
Medical Device Technologies
| net proceeds of $1.8 million in May 2011 and the Syracuse property was sold for net proceeds of $0.9 million in June 2011. |
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(4) | During the eight months ended December 31, 2011, the Successor Company recorded $4.5 million of impairment write-downs of certain manufacturing equipment, furniture and fixtures, and leasehold improvements in connection with: (i) the restructuring of its research and development department; and (ii) the termination of its anti-infective research and development program in the later part of 2011. During the year ended December 31, 2010, the Predecessor Company recorded impairment write-downs of $4.8 million of certain laboratory and manufacturing equipment in connection with: (i) the suspension of its research and development activities related to the fibrin and thrombin technologies acquired from Haemacure Corporation (“Haemacure”) in early 2010; and (ii) restructuring changes that were initiated in connection with the Recapitalization Transaction. |
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(5) | During the eight months ended December 31, 2011, the Successor Company recorded $10.9 million of impairment write-downs related to the termination of its anti-infective research and development program. Similarly, during the year ended December 31, 2010, the Predecessor Company recorded a $1.7 million write-down on certain of its intellectual property in connection with the suspension of research and development activities related to the fibrin and thrombin technologies acquired from Haemacure. In addition, the Predecessor Company also recorded a $1.1 million write-down of the intellectual property related to the Option IVC filter in connection with the termination of its 2008 License, Supply, Marketing and Distribution Agreement with Rex Medical LP (“Rex”). |
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(6) | The $4.7 million recovery represents settlement funds that were received in connection with the resolution of the Predecessor Company’s dispute with RoundTable Healthcare Partners, LP (“Roundtable”) over $13.5 million of escrow funds that were being held by LaSalle Bank in connection with its 2006 acquisition of American Medical Instruments Holding, Inc. All legal proceedings have since been dismissed. |
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(7) | During the third quarter of 2008, the Predecessor Company wrote-down the carrying value of its goodwill associated with the Medical Device Products segment by $599.4 million. The remaining balance of $26.8 million was subsequently written off in the fourth quarter of 2008. As at December 31, 2008, the Predecessor Company also determined that the goodwill allocated to its Licensed Technologies segment was impaired and accordingly, management wrote off the remaining balance of $23.5 million. |
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(8) | During the year ended December 31, 2010, the Predecessor Company incurred debt restructuring costs of $9.3 million for fees and expenses related to the Recapitalization Transaction. These fees and expenses represent professional fees paid to both the Predecessor Company and the 7.75% Senior Subordinated Noteholders’ financial and legal advisors to assist in the analysis of certain financial and strategic alternatives. |
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(9) | During the year ended December 31, 2010, the Predecessor Company wrote-off $0.3 million of deferred financing costs related to its shelf registration statement that was filed with the SEC in 2009. During the year ended December 31, 2009, the Predecessor Company wrote-off $0.6 million of deferred financing costs due to the early termination of the term loan portion of its credit facility with Wells Fargo Foothill LLC. During the third and fourth quarters of 2008, the Predecessor Company also expensed $13.5 million and $3.0 million of deferred financing charges, respectively, related to the suspension of a note purchase agreement. |
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(10) | During the year ended December 31, 2012, the Successor Company disposed of $2.6 million of its short term investment in equity securities in a publicly traded biotechnology company for net proceeds of $2.3 million and realized a loss of $0.4 million. The Successor Company also recorded $0.2 million of other-than-temporary impairment losses on this investment due to uncertainty about its ability to recover the investment’s cost. During the eight months ended December 31, 2011, the Successor Company recognized $2.0 million of similar other-than-temporary impairment losses on this investment. . During the year ended December 31, 2010, the Predecessor Company recorded $1.3 million of write-offs related to its long term investments in three private biotechnology companies that were determined to be irrecoverable. In 2008, the Predecessor Company wrote-down and realized a loss on investments of $10.7 million, $1.9 million and $11.0 million in the second, third and fourth quarters respectively. In 2007, the Predecessor Company wrote-down and realized a loss on investments of $8.2 million. |
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(11) | During the year ended December 31, 2010, the Predecessor Company recorded a $1.9 million loan settlement gain relating to the settlement of its loan to Haemacure Corporation (“Haemacure”) in connection with its acquisition of certain product candidates and technology assets from Haemacure. |
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(12) | During the year ended December 31, 2010, the Predecessor Company recorded a $2.0 million gain from the sale of its Laguna Hills manufacturing facility and related long-lived assets. |
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(13) | During the year ended December 31, 2012, the Successor Company incurred a $4.4 million debt extinguishment loss upon the exchange and settlement of $225.0 million New Notes for $229.4 million of Senior Notes, which includes a 2% Early Tender Premium. |
Our Medical Device Technologies segment, which generates the majority of our revenue, develops, manufactures and markets a wide range of single use medical device products, as well as precision manufactured medical device components. These products and components are sold directly to hospitals, clinics, physicians and other end users, as well as to medical products distributors or other third-party medical device manufacturers.
Our most significant product groups within this business segment include:
·Interventional Oncology.
We develop, manufacture and market a range of proprietary single use medical device products for the diagnosis of cancer, primarily biopsy devices and related products. These product lines include a wide range of soft tissue biopsy products, both disposable and re-usable, primarily for use in different types of soft tissue and bone marrow biopsies. Some key features of our soft tissue biopsy products include specially manufactured high visibility needle tips to facilitate placement under ultrasound guidance, numerically
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ordered centimeter markings to facilitate precise depth placement, and adjustable needle stops to restrict forward movement and localize the needle to the biopsy site. Other selected product lines in our biopsy group include fixation pins, breast localization markers and tunneling stylets. We also offer additional product lines for certain selected interventional radiology procedures performed primarily by physicians that also utilize our biopsy product lines. Our most significant product lines include our BioPince™ full core biopsy devices, our True-Core™ and SuperCore™ single use disposable biopsy devices, our T-Lok™ bone marrow biopsy devices and our SKATER™ line of drainage catheters.
We sell the significant majority of these product lines through our Interventional Oncology direct sales organization directly to hospitals and other end users. We also employ selected independent sales representatives and third party distributors to market and sell these product lines in territories where we lack direct sales coverage or where such direct investment would not be financially justified. Our most significant product lines include:
·BioPince™ full core biopsy devices. Our BioPince biopsy instrument product line is used to obtain tissue samples from patients for analysis and diagnosis of disease. We believe that BioPince is the only commercially available “full core” biopsy device, which may provide a more substantive and improved tissue sample and thereby enable clinicians to more rapidly and accurately provide diagnosis of potential disease. BioPince features a proprietary tri-axial “Core, Cut and Capture” cannula system, which allows the device to deliver cylindrical, full-length biopsy specimens that are complete and largely undamaged, which we believe significantly improves the diagnostic value of the sample.
· Tru-CoreTM II (fully automatic) andSuperCore™(semi-automatic) disposable biopsy instruments. Our True-Core and SuperCore soft tissue biopsy product lines are designed to address a variety of diagnostic procedures where a “full core” sample may not be necessary, offer a greater variety of needle lengths and sizes and are cost effective by combining disposable needles with reusable instrumentation. These product lines are designed to be light weight, easily maneuverable and operated with one hand. Our SuperCore is a semi-automatic device which allows for placement of the device specimen notch in a lesion before the spring-loaded cutting cannula is fired, which is considered ideal in CT-guided biopsies. We believe that SuperCore is one of the only semi-automatic devices with an adjustable specimen notch, which may provide clinical flexibility.
·T-Lok™ bone marrow biopsy devices. Our T-Lok™ bone marrow biopsy device is used for collecting bone marrow. Bone marrow collection is a procedure that is typically done after abnormal red or white blood cells are found in a patient. T-LOK has an ergonomically designed twist-lock handle, which we believe improves a clinician’s ability to penetrate hard bone to obtain the biopsy sample. An adjustable needle stop to control the depth of penetration allows the clinician to safely collect bone marrow at the sternum of the patient.
·SKATER™ line of drainage catheters. Our SKATER drainage system, which includes catheters and related accessories, is used to facilitate drainage of fluid from wounds, infectious tissues or surgical sites. SKATER features larger lumens and drainage holes, kink resistance, resistance to encrustation and high radiopacity. SKATER is offered in multiple sizes and configurations to address the most typical drainage applications including specific designs for centesis, or small volume drainage procedures, drainage from the biliary duct and nephrostomy procedures.
Wound Closure
. We develop, manufacture and market a full line of wound closure products, primarily various types of sutures and surgical needle products. These products are used by surgeons in a wide variety of applications in hospitals, surgery centers and physician offices. We also sell a significant amount of our general suture products for use in dental and oral surgery procedures. Our most significantsuture configurations vary in diameter, length, and material. Our product lines also include a full line of bio-absorbable and non-absorbable suture materials, including PolySynTM and PolySyn FATM, Monoderm™, PolyvioleneTM, polypropylene, poly-ethylene-terephthatate, glycolide and e-caprolactone, polyglycolic acid (PGA), plain and chromic gut, nylon and silk. This wide range of materials allows us to offer a range of handling characteristics and bio-absorption times for our Quill™ Knotless Tissue-Closure productsproduct line. Our product lines also include a wide variety of needle types, including drilled-end and channel surgical needles. Drilled-end suture needles have a precisely drilled butt end for maximum suture holding strength and are adequately tempered for securing strong attachment of the suture. Our proprietary needle designs, including our LOOK™ brand sutures for dentalSharpointTM, UltraGlideTM, and general surgery. M.E.T.TM Microsurgical product lines are used in very precise tissue closures such as corneal transplants, microvascular, microtubal, and nerve repair procedures.
We sell many of these product lines in particular our Quill product line, directly to hospitals, surgery centers, clinics and other end users through our Wound Closure direct sales organization. We also employ selected independent sales representatives and third party distributors to market and sell these product lines in territories or areas where we lack direct sales coverage or where such direct investment is not financially justified. We also manufacture certain of these products in finished form for other third party medical device manufacturers and distributors. Our most significant product lines include:
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· OphthalmologyQuill™ Knotless Tissue-Closure products (“Quill”). Our Quill product line is a surface modified suture material that contains proprietary patterns of tiny barbs or other patterns, which can eliminate the need for surgeons to tie knots when closing certain wound types. We believe that use of Quill may lead to faster surgical times, improved wound cosmesis and lower wound infection and complication rates. Quill may also provide for stronger wound closure due to its ability to distribute tension across the entire length of a wound over large numbers of barbs or anchors, as opposed to a far fewer number of knots or anchor points with traditional sutures or surgical staples. Due to this ability to distribute tension, we believe Quill may enable certain tissue types to be repaired that are not addressable by other wound closure technologies.
·LOOK™ brand sutures for dental and general surgery. LOOK sutures are a specialized line of suture products for tissue approximation and ligation, which are offered in a variety of absorbable and non-absorbable suture materials that are well suited for the needs of the oral, periodontal, dermatological and general surgeon. The needles used on LOOK sutures possess precision manufactured sharpness, penetration and strength characteristics. Unique to the LOOK suture offering are SmallStitch™ sutures, which are offered in lengths of 8 inches and 10 inches. This shorter length is ideal for the dental and physician office because there is less waste than with traditional sutures.
·SharpointTM UltraGlide and SharpointTM M.E.T Microsurgical sutures. Our Sharpoint microsurgical needles and sutures are manufactured using a proprietary process that ensures incisions are consistently sharp and dimensionally true in order to meet the needs for a very precise tissue closure in ophthalmic, micro vessel and nerve repair procedures.
Ophthalmology
We develop, manufacture and market a selection of single-use disposable products for ophthalmic surgery, including various types of surgical blades used primarily in cataract surgery as well as ancillaryor other ophthalmic surgery where very small incisions are required. Our products includinginclude clear corneal knives, standard implant knives, pilot tip implant knives, precision depth knives, crescent knives, spoon knives, stab knives, vitrectomy knives to create small, precise incisions, sub-2mm series knives, and a variety of slit and specialty knives. Other selected products in our ophthalmic group include a variety of cannula needles for the administration of anesthetic or for irrigation or aspiration in ophthalmic surgery, a full line of absorbable and non-absorbable microsurgical ophthalmic sutures, cannulas,punctum plugs for treatment of dry eye shieldssymptoms and punctual plugs. Our most significant product lines include our Sharpoint™ brand disposable ophthalmic surgical blades. trephine blades for penetrating keratoplasty surgery.
We sell these product lines directly, primarily to surgery centers and clinics, primarily through our directa network of third party independent sales organization.representatives and medical product distributors. We also manufacture ophthalmic surgical blades in finished form for other third party medical device manufacturers and distributors. Our most significant product lines include:
·Sharpoint™ brand disposable ophthalmic surgical blades. Our Sharpoint product line, which is used primarily to make incisions for cataract and other ophthalmic surgery procedures, is manufactured using a proprietary manufacturing process - our Infinite Edge™ Technology - that eliminates blade grinding and produces cutting edges with consistent sharpness and tolerance. The Sharpoint knife portfolio includes a full range of sizes and styles to fit the needs of the ophthalmic surgeon.
· Medical device componentsUltrafit™ trephine blades. The UltraFit trephine product line, which are comprised of instruments used in corneal transplant procedures, consists of disposable vacuum trephines, donor punch sets, and short or long handled trephines in a wide range of sizes. Advanced trephine blade technology provides a sharp cutting edge to achieve the critical fit needed for successful cornea transplants.
·Tan EndoGlide™ human corneal endothelial cell transplantation device. Tan EndoGlide is an endothelial insertion device for specialized corneal transplant surgery procedures and is designed to reduce damage of donor endothelium used in the procedure. The device consistently delivers donor tissue through a small incision, while making the insertion procedure relatively reliable and consistent, with the surgeon in full control of the donor tissue at all stages of procedure. The Tan EndoGlide device consists of a preparation base, glide cartridge and a glide introducer. The glide cartridge automatically coils the donor tissue into a double coil configuration, with no endothelial surfaces touching, and is designed to fit through a very small scleral or corneal incision.
Medical Device Components
We develop, manufacture and market a wide range of components, primarily on a made-to-order basis, for other third party medical device manufacturers.manufacturers, who then use the provided components as part of assembling their own finished medical device products. These products may range from unsterilized product components, which are shipped to the customer for final assembly and sterilization, to fully finished, packaged and sterilized medical device products. These components are typically manufactured using the same manufacturing capabilities and technologies we utilize to produce our various other product lines. Our most significant manufacturing capabilities that we offer for use in making components for third parties include metal grinding and polishing, plasma welding, chemical etching, electropolishing and electro-chemical marking, plastics injection molding, plastics and polymer extrusion and silk suture formation, weaving of medical grade textiles and packaging and assembly.
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We sell these product lines directly to corporate customers solely through oura direct sales organization. Our customers include many leading medical device manufacturers in the cardiology and vascular access, interventional radiology, ophthalmology, orthopedics, women’s health, and wound closure product areas.
Our strategy is to target certainspecialized medical markets where we can establish or maintain a leadership position in medical device products or components, and thereby achieve profitable revenue growth and improved cash flows. Key elements of this strategy include maintaining and investing in our precision manufacturing capabilities and technology, developing and investing in highly specialized sales and marketing personnel and activities, selectively investing in new product development, intellectual property and other proprietary know-how, and pursuing selective and disciplined business development, product or business acquisition activities that would enhance our capabilities or presence within our target customer base and markets.
Our Medical Device Technologies segment contains significant precision medical device manufacturing capabilities. We manufacture our products at seven different locations, with each facility having specific, and in some cases, proprietary expertise in certain types of medical device manufacturing as well as experience in complying with the significant regulations, quality and operating requirements that are critical aspects of medical products manufacturing. Certain of our key capabilities include electro-chemical cutting, chemical etching, match point metal grinding, custom insert molding, injection molding, wire and tube forming and plastic extrusion.
Our Medical Device Technologies segment markets, sells and distributes our products through a group of highly specialized sales organizations that consist of direct sales and marketing personnel, which in some cases are supplemented by independent sales representatives and independent medical products distributors, depending on the product category, customer base or geographic location. We currently employ approximately 55 direct sales and marketing personnel in our Interventional Oncology group, approximately 53 direct sales and marketing personnel in our Wound Closure group, and approximately 30 additional direct sales personnel serving customers in our other product areas and selected geographies outside of the U.S.
We conduct highly selective new product development primarily in two of our manufacturing facility locations. Our product development groups include personnel with expertise in medical products and manufacturing engineering, regulatory affairs and quality assurance. These groups, in addition to supporting certain new product and product line extension initiatives, also support our manufacturing operations in order to enhance our manufacturing capabilities and operating efficiencies.
During the year ended December 31, 2011 and in prior years, we had significant research and new product development resources located at our headquarters in Vancouver, BC Canada and in certain of our other facilities that were focused on earlier stage or higher risk programs. Certain of the most substantive of these programs and resources related to our anti-infective medcial device programs, other early stage drug-device combination product or surgical drug-related research programs, certain longer-term research programs relating to our Quill product line and our collaboration with Athersys, Inc. (“Athersys”). In December 2011, we elected to focus our product development resources and efforts on certain of our medical device products franchises where our capabilities and market presence are stronger, and where the potential for near-term returns may be more substantive or certain. As a result, the majority of our earlier stage, higher risk programs have been postponed, discontinued or concluded, including our collaboration with Athersys relating to development of its Multistem® stem cell technology for treatment of patients post-myocardial infarction. These changes are expected to materially reduce or eliminate selected research and development expenses, and have relieved us of any further financial or other obligations relating to Multistem®.
Licensed Technologies
Our Licensed Technologies segment includes certain of our legacy technologies for which research and development activities have been concluded. This segment generates additional revenue in the form of royalties received from partners who have licensed and utilize these technologies in their medical device product lines. Our principal revenues in this segment to date have been royalties derived from sales by our partner BSC of TAXUS paclitaxel-eluting coronary stents for the treatment of coronary artery disease.
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We have also licensed the same technology utilized by BSC in its TAXUS product line to our partner Cook Medical Inc. (“Cook”) for use in its Zilver PTX paclitaxel-eluting peripheral vascular stent for the treatment of vascular disease in the leg. Zilver PTX is currently approved for sale in the E.U. and in certain other countries outside of the U.S., and is awaiting approvalwas recently approved for sale in the U.S. in November 2012 by the U.S. Food and Drug Administration (“FDA”) for sale in the U.S. Should Cook.
We receive U.S. approval forroyalty revenue derived from sales of TAXUS and Zilver PTX we expect we would receive additionalbased on our license agreements with BSC and Cook of several families of intellectual property relating to our proprietary paclitaxel technology. The royalty rate applied to BSC’s sales increases in certain countries depending upon unit sales volume achieved by BSC. The royalty rates applied to Cook’s sales of Zilver PTX are flat rates designated by the geographic location of sales, regardless of the unit volume of sales achieved. There is minimal expense associated with our receipt of royalty revenue inderived from TAXUS. We incur royalty expense associated with Cook’s sales of Zilver PTX under our Licensed Technologies segment.license agreement with the National Institutes of Health (“NIH”) for certain intellectual property owned by NIH relating to this product line. We may continue to receive royalty revenue from BSC and Cook for the life of the licensed patent families depending upon BSC’s and Cook’s level of product sales and commercial and clinical success.
TAXUS Paclitaxel-Eluting Coronary Stents
The TAXUS paclitaxel-eluting coronary vascular stent, which incorporates our proprietary paclitaxel technology, is a small, balloon-expanded metal scaffold designed for placement in diseased arteries in the heart to restore blood flow by expanding and holding open the arteries upon deployment.
BSC first received approval to sell TAXUS in the E.U. in 2003 and in the U.S. in 2004. Subsequent to the U.S. approval of the TAXUS Express™ stent system in 2004, BSC has introduced multiple next generation coronary stent platforms that utilize our proprietary paclitaxel technology, including the TAXUS Express, the TAXUS Liberte™ and the recently introduced TAXUS Ion™ coronary stent system. technology.
TAXUS has been studied in multiple human clinical trials, as well as in independent registry studies, which have repeatedly demonstrated the safety and efficacy of TAXUS coronary stent systems, particularly in diabetic patient populations. In patients receiving TAXUS coronary stents, the number of repeat surgery procedures has been shown to be significantly lower in patients receiving TAXUS than those receiving non drug-eluting, or bare metal, coronary stents. The most recent study
Study results announced in November 2011 by our partner BSC include positive long-term data from BSC’s PERSEUS clinical program, which demonstrated favorable two-year safety and efficacy outcomes for the TAXUS Ion™ION stent system versus prior-generation paclitaxel-eluting stents.
In addition, in February 2012, BSC announced that the TAXUS Liberte™ and the TAXUS ION™ coronary stent systems received U.S. FDA approval for use in patients experiencing an acute myocardial infarction (“AMI”) or heart attack. This indication accounts for approximately 10% of all coronary interventions and arose from the FDA’s review of data from the Paclitaxel clinical program and the HORIZONS-AMI global trial. The HORIZONS-AMI trial included 3,600 randomized patients that that either received drug-eluting stents or bare-metal stents for the treatment of AMI. The HORIZONS-AMI trial clinical data, reviewed by BSC, demonstrated that paclitaxel-eluting stents were superior in efficacy to bare-metal stents in AMI patients by significantly reducing clinical and angiographic restenosis and exhibiting a comparable safety profile at 3 years.
Certain clinicians suggested in 2006 that the use of drug-eluting stents may cause an increased rate of late thrombosis (the formation of blood clots in the stent long after the initial stent implantation) and in turn, potentially lead to an increased rate of myocardial infarctions (heart attacks) or deaths as compared to patients receiving bare metal stents. These suggestions led to a significant decrease in the use of drug-eluting stents beginning in the second half of 2006 and continuing through 2008. While subsequent analysis of clinical data suggest that these concerns may not have been justified and use of drug-eluting stents began to recover in 2009, usage has yet to reach to the levels observed in 2005 prior to the initial reporting of physician concerns.
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In addition, starting in mid 2008 and early 2009, several new competitive drug-eluting stents were made commercially available in the United States, Europe and Japan. The reduction in drug-eluting stent usage, combined with the entry of new competitors, has had significant negative impacts on the levels of royalty revenue we receive from BSC.
Zilver PTX Paclitaxel-Eluting Peripheral Vascular Stents
The Zilver PTX paclitaxel-eluting peripheral vascular stent, which incorporates our proprietary paclitaxel technology, is a small, self-expanding metal scaffold designed for placement in diseased arteries in the limbs to restore blood flow by expanding and holding open the arteries upon deployment.
Cook first received approval to sell Zilver PTX in the E.U. in 2009, and is currently awaiting2009. On November 15, 2012, Cook received FDA approval to market and sell Zilver PTXZilver-PTX in the U.S. To date,Historically, stent procedures for peripheral artery disease (“PAD”) in the limbs have beenwere limited due to high observed complication rates for such proceduresincidence of complications that often lead to a subsequent surgical procedure,procedures, as well as risk of stent fracture with existing products, as thesegiven that peripheral vascular stents aremay be exposed and not protected by the patient’s anatomy as they are with coronary stents.stents, which are implanted in vessels in the heart behind a patient’s rib cage. Cook has conducted multiple human clinical trials for Zilver PTX in the E.U., U.S., Japan, and selected other countries to assess product safety and efficacy. To date, clinicalClinical results for Zilver PTX have suggested significant reductionreductions in complications as compared to traditional PAD treatments. Selected highlights of Cook’s reported regulatory milestones and clinical results include:
·November 2012 — Cook announced that it had received approval by the FDA of its Pre-Market Approval (“PMA”) application for Zilver PTX. This FDA approval allows Cook to market and sell Zilver PTX in the U.S.
· October 2011 — Cook announced that Zilver PTX had received a unanimous recommendation from the FDA’s Circulatory System Devices Panel of the Medical Devices Advisory Committee, with all 11 of its members voting to recommend approval of Zilver PTX for sale in the U.S. on the basis of its safety, efficacy and acceptable risk profile. Cook in June 2010 had submitted its Pre-Market Approval (“PMA”) application to the FDA for Zilver PTX.
· September, 2010 — Cook announced that a summary of the final clinical trial results for the randomized study of Zilver PTX was presented at the annual TCT symposium in Washington D.C. The study met its 12-month primary endpoint showing non-inferior event-free survival (“EFS”) and superior patency for the Zilver PTX as compared to balloon angioplasty.
· May 2010 — Cook presented one-year data at Euro PCR that confirmed sustained clinical outcomes with Zilver PTX. According to data presented, 86.2% of all patient subgroups treated with Zilver PTX demonstrated vessel patency at 12 months without the requirement for an additional intervention. The trial is based on a group of 787 patients, including symptomatic patients, diabetics, and those with the most complex lesions, including long lesions, total occlusions and in-stent restenosis.
·April 2010 — Cook announced it had enrolled its first patient in its landmark Formula™ PTX®PTX® clinical trial. The trial is the first of its kind to evaluate the safety and efficacyeffectiveness of a paclitaxel-eluting stent to treat renal artery disease, the narrowing of the arteries that supply blood to the kidneys.
· April 2009 — Cook reported data that showed that 82 percent of patients who were treated with Cook’s Zilver PTX stent were free from reinterventionre-intervention at two-year follow up. The Zilver PTX Registry study, involving 792 patients globally, is assessing the safety and efficacy of the Zilver PTX in treating peripheral artery disease. Data was compiled at 12 and 24 months for 593 patients and 177 patients, respectively. The corresponding EFS rates were 87 percent and 78 percent, respectively, and freedom from target lesion revascularization was 89 percent and 82 percent, respectively. Detailed evaluation of stent x-rays demonstrated excellent stent integrity through 12 months, confirming previously published results showing 99 percent
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completely intact stents (less than 1 percent stent fracture rates observed) with a mean follow up of 2.4 years in the challenging superior femoral artery and popliteal arteries, including behind the knee locations.
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Manufacturing and Product Distribution
We have significant precision medical device manufacturing capabilities, with seven facilities that are primarily dedicated to medical device manufacturing located in the United States, Europe and Puerto Rico. Each of our manufacturing facilities has specific, and in some cases proprietary, expertise in certain types of medical device manufacturing as well as experience in complying with the significant regulations, quality and operating requirements that are critical aspects of medical products manufacturing. Our medical device manufacturing capabilities include polymer handling and extrusion, metals, plastics and textile fabrication and packaging and assembly. Our suture manufacturing capabilities include the ability to make and handle various approved polymer materials in multiple lengths, diameters and configurations. Our metal manufacturing capabilities include bending, grinding, flattening, drilling, polishing, chemical etching, plasma welding, thermal curing and wire winding. Our plastics manufacturing capabilities include injection molding, plastic extrusion, insert molding and wire coating. Our textile manufacturing capabilities include braiding and embroidery of selected suture materials, including silk. Our assembly and packaging capabilities include small lot assembly, suture attachment and kit assembly. We also maintain manufacturing capabilities for certain medical device coating technologies, primarily relating to coatings designed to facilitate medical device lubricity upon implant or insertion.
We use a diverse and broad range of raw materials in the design, development and manufacture of our products. Our non-implantable products are manufactured from man-made raw materials including resins, chemicals, plastics and metal. We purchase certain materials and components used in manufacturing our products from external suppliers. In addition, we may purchase certain supplies from single sources for reasons of quality assurance, sole source availability, cost effectiveness or constraints resulting from regulatory requirements. Angiotech works closely with its suppliers to mitigate risk and assure continuity of supply while maintaining high quality and reliability. Alternative supplier options are generally considered and identified, although we do not typically pursue regulatory qualification of alternative sources due to the strength of our existing supplier relationships and the time and expense associated with the regulatory validation process.
We maintain raw material, work in process and finished goods in each of our facilities. We distribute products directly from our various manufacturing facilities, many of which include space for safely storing and maintaining medical products and related components. We also maintain an independent product distribution partner in the E.U. for certain of our product lines.
We maintain resources to develop procedures and process controls for our products and product candidates to ensure successful technology transfer for commercial scale manufacturing. We expect that process development performed during the pre-clinical post-approval stages of manufacturing will result in products with the desired performance consistency, product tolerances and stability. These activities include scaling up production methods, developing quality control systems, optimizing batch-to-batch reproducibility, testing sterilization methods and establishing reliable sources of raw materials for synthesizing proprietary products.
Quality Assurance
We are committed to providing quality products to our customers. To meet this commitment, we have implemented modern quality systems and concepts throughout the organization. Our quality system starts with the initial product specification and continues through the design of the product, component specification processes, and the manufacturing, sales and servicing of the product. The quality system is intended to incorporate quality into products and utilizes continuous improvement concepts throughout the product lifecycle. Our operations are certified under applicable international quality systems standards, such as International Organization for Standardization (“ISO”) 9000 and ISO 13485. These standards require, among other items, quality system controls that are applied to product design component material, suppliers and manufacturing operations. These ISO certifications can be obtained only after a complete audit of a company’s quality system has been conducted by an independent outside auditor. Periodic reexamination by an independent outside auditor is required to maintain these certifications.
Sales and Marketing
We market and sell our various medical device products through a group of specialized sales organizations that consist of direct sales and marketing personnel, which in some cases are supplemented by independent sales representatives and independent medical products distributors, depending on the product category, customer base or geographic location. We currently employ approximately 49 direct sales and marketing personnel in our Interventional Oncology group, approximately 63 direct sales and marketing personnel in our Wound Closure group, and approximately 36 additional direct sales personnel serving customers in our other product areas and selected geographies outside of the U.S. The majority of our direct sales teams are based in the U.S.
Our Interventional Oncology and Wound Closure direct sales teams primarily target hospital-based physician customers, alternate site health care providers such as ambulatory surgery centers and urgent care centers. The primary goal of our direct sales teams is to sustain sales volumes or, in certain cases where we have products with a significant technical or other competitive advantage or a new product offering, increase market share of our products.
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Our independent sales representatives and independent distributors target hospital customers, alternate site health care providers, such as ambulatory surgery centers and urgent care centers and physician and dental offices. These sales representatives and distributors, under the guidance of our senior sales and marketing management, may also target other third party medical products manufacturers or distributors as potential customers for finished private label medical device products in our Wound Closure and Ophthalmology product areas.
Our Medical Device Component product area is supported by a small direct sales team, and targets high level managers and supply chain experts within other third party medical device manufacturers.
We are not dependent on any single customer and no single customer accounted for more than 10% of our net sales in 2012. Sales personnel work closely with the main decision makers who purchase our products, which primarily include physicians, but may also include: material managers; nurses; hospital administrators; purchasing managers; and ministries of health. Also, for certain of our products and where appropriate, our sales personnel actively pursues approval of Angiotech as a qualified supplier for hospital group purchasing organizations (“GPOs”) that negotiate contracts with suppliers of medical products.
In 2012, 62% of our reported product sales were derived from sales to customers in the U.S., and 38% of our reported product sales were derived internationally.
Product Development
We maintain new product development capabilities and personnel, with a primary focus on medical device, mechanical and manufacturing engineering. The focus of our product development efforts are primarily on developing improvements to our existing products or manufacturing processes; or on new product opportunities that focus on markets similar to our current target markets, and that may compliment certain of our existing product offerings.
The majority of our product development personnel are located at two of our manufacturing facilities, with additional engineering support personnel located in each of our material manufacturing operations. We also employ personnel with expertise in regulatory affairs and quality control that are responsible for regulatory and quality control activities with respect to certain of our existing and new product candidates.
We, or our partners, are evaluating selected new product candidates and product line extensions, including certain product candidates that may be undergoing human clinical testing or other testing conducted either by us or our partners. We also may maintain certain pre-clinical or research stage programs and conduct various product and process improvement initiatives related to our currently marketed products and our manufacturing facilities.
Government Regulation and other Matters
The research and development, manufacturing, labeling, advertising, sale, marketing and third-party reimbursement of our medical device products and those of our suppliers, customers and partners are subject to extensive regulation by the FDA, the U.S. Department of Health and Human Services Centers for Medicare and Medicaid Services (“CMS”), and comparable regulatory agencies in state and local jurisdictions and in foreign countries.
Medical product regulations often require registration of manufacturing facilities, carefully controlled research and testing of products, government review and approval or clearance of results prior to marketing of products, adherence to current Good Manufacturing Practices (“cGMPs”) during the production and processing of products, and compliance with comprehensive post-marketing requirements, including restrictions on advertising and promotion and requirements for reporting adverse events to the FDA in the U.S. and other regulatory authorities abroad. In the U.S., these activities are subject to rigorous regulation by the FDA. Similar regulations apply in the E.U. and other markets.
Our success is ultimately dependent upon our and our suppliers’, customers or partners obtaining marketing approval or clearance for our or their products or potential product candidates currently under development, and will depend on our and our suppliers’, customers’ and partners’ ability to comply with FDA and other market regulations governing the manufacturing, quality control, pre-clinical evaluation, and clinical testing of their products or product candidates. If we or our present or future suppliers, customers or partners are not able to comply with the continuing FDA regulations that accompany FDA approval, the FDA may require us or our suppliers, customers or partners to recall a device or drug from distribution, withdraw the 510(k) or Premarket Approval for the relevant marketed medical device product, halt our clinical trials or withdraw approval for our clinical trials.
We have significant medical device component engineering and manufacturing, as well as finished goods and packaging manufacturing operations. The manufacturing processes used in the production of finished medical devices are subject to FDA regulatory inspection, and must comply with FDA regulations, including its Quality Systems Regulation, which sets forth the cGMP
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requirements for medical devices. The Quality Systems Regulation requires manufacturers of finished medical devices to follow elaborate design, testing, control, documentation and other quality assurance procedures during the finished device manufacturing process. Our FDA registered facilities are subject to FDA inspection at any time for compliance with the Quality Systems Regulation and other FDA regulatory requirements. Failure to comply with these regulatory requirements and similar foreign requirements may result in civil and criminal enforcement actions, including financial penalties, seizures, injunctions or other measures. In some cases, failure to comply with the Quality System Regulation could prevent us or our customers from marketing products or gaining clearance to market additional products. Our products must also comply with state and foreign regulatory requirements.
Our business arrangements and other interactions with healthcare providers and other entities are also governed by numerous federal, state and foreign laws and regulations, including law and regulations:
·prohibiting kickbacks, which may prohibit making payments to healthcare providers and other individuals in order to induce the purchase of our products or services;
·restricting physician self-referrals, such as the federal “Stark Law,” which generally prohibits physicians from referring Medicare or Medicaid patients to entities with which the physician (or an immediate family member) is affiliated for the provision of certain designated health services;
·proscribing the use, disclosure and maintenance of certain patient health information, such as the federal Health Information Portability and Accountability Act of 1996 (“HIPAA”), as amended by the Health Information Technology for Economic and Clinical Health Act (“HITECH”);
·prohibiting submission of false or misleading claims to Medicare or Medicaid and retention of overpayments related to the submission of such claims;
·requiring disclosure of payments made to teaching hospitals and physicians and financial interests held by physicians (and their immediate family members), such as the federal “Physician Payment Sunshine Act” and similar state laws; and
·providing for prosecution of U.S. companies related to arrangements with foreign government officials and other individuals and entities outside of the U.S.
Failure to comply with these laws and regulatory requirements may result in civil and criminal enforcement actions, including financial penalties, seizures, injunctions or other measures.
Internationally, the regulation of medical devices is complex. In Europe, our products are subject to extensive regulatory requirements. The regulatory regime in the E.U. for medical devices became mandatory in June 1998. It requires that medical devices may only be placed on the market if they do not compromise safety and health when properly installed, maintained and used in accordance with their intended purpose. National laws conforming to the E.U.’s legislation regulate our products under the medical devices regulatory system. Although the more variable national requirements under which medical devices were formerly regulated have been substantially replaced by the European Union Medical Devices Directive, individual nations can still impose unique requirements that may require supplemental submissions. The E.U. medical device laws require manufacturers to declare that their products conform to the essential regulatory requirements after which the products may be placed on the market bearing the CE Mark. Manufacturers’ quality systems for products in all but the lowest risk classification are also subject to certification and audit by an independent notified body. In the E.U., particular emphasis is being placed on more sophisticated and faster procedures for the reporting of adverse events to the competent authorities. In many of the other foreign countries in which we market our products, we may be subject to regulations affecting, among other things:
·product standards and specifications;
·packaging requirements;
·labeling requirements;
·quality system requirements;
·import restrictions;
·tariffs;
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·duties; and
·tax requirements.
Many of the regulations applicable to our devices and products in these countries are similar to those of the FDA. In some regions, the level of government regulation of medical devices is increasing, which can lengthen time to market and increase registration and approval costs. In many countries, the national health or social security organizations require our products to be qualified before they can be marketed and considered eligible for reimbursement.
In the U.S., health care providers generally rely on third-party payers, including both private health insurance plans and governmental payers, such as Medicare and Medicaid, to cover and reimburse all or part of the cost of a medical device and the procedures in medical devices that are used. Foreign governments also impose significant regulations in connection with their health care reimbursement programs and the delivery of health care items and services.
Our ability to commercialize human therapeutic products and product candidates successfully will depend in part on the extent to which coverage and reimbursement for such products and related treatments will be available from government health administration authorities, private health insurers and other third-party payers or supported by the market for these products. Third-party payers are increasingly challenging the price of medical products and services and instituting cost containment measures to control or significantly influence the purchase of medical products and services.
In the U.S., there have been and we expect there will continue to be a number of legislative and regulatory proposals to change the health care system in ways that could significantly affect our business. For example, the 2010 health reform law was intended to increase the number of individuals covered by health insurance, impose reimbursement provisions intended to restrict the growth in Medicare and Medicaid spending and encourage development of health care delivery programs and models intended to tie payments to quality and care delivery innovations. Many of the legislative changes contained within the health reform legislation are effective in 2013 and beyond. The impact of these healthcare reforms on our business is currently uncertain and may negatively impact our sales or the selling price of our products. In addition, we cannot predict the impact on our business of any legislation or regulations related to the healthcare system that may be enacted or adopted in the future.
Patents, Proprietary Rights and Licenses
Patents and other proprietary rights are essential to our business. We may file patent applications to protect technology, inventions and improvements to inventions that are considered important to our business. We may also rely upon trade secrets, continuing technological innovations and licensing opportunities to develop and maintain our competitive position. Furthermore, we may also endeavor to extend, or capture value from, our intellectual property portfolio by licensing patents and patent applications from others or to others, and initiating research collaborations with outside sources.
As part of our patent strategy, we have filed a variety of patent applications internationally. Oppositions have been filed against various granted patents that we either own or license and which are related to certain of our technologies. See “— Legal Proceedings” elsewhere in this Annual Report on Form 10-K for a discussion of the proceedings related to certain of such oppositions. An adverse decision by an Opposition Division in any country, or subsequently, by a Board of Appeal, could result in revocation of our patent or a narrowing of the scope of protection afforded by the patent. The ultimate outcomes of the pending oppositions, including appeals, are uncertain at this time. We do not know whether the patents that we have received or licensed, or those we may be able to obtain or license in the future, would be held valid or enforceable by a court or whether our patents would be found to infringe a competitor’s patents related to its technology or product. Further, we have no assurance that third parties will not (whether pursuant to or in breach of the terms) modify or terminate any license they have granted to us.
Competition
We expect to face competition from companies marketing, selling and developing medical device or other medical technologies that target the same diseases, clinical indications, customers or markets that our technologies target, as well as competition from other manufacturers of medical device components who sell to similar third party medical device manufacturers, including to some of our current customers. Some of these companies have substantially greater product development, sales and marketing, manufacturing capabilities and experience, proprietary technology or more substantive financial resources than we do. Specifically, we compete with a number of large companies across a number of our medical device product lines. These competitors have substantially greater business and financial resources than we do. These competitors include, but are not limited to, the Ethicon division of Johnson & Johnson and Covidien, Inc. in surgical sutures and wound closure devices; C.R. Bard Inc., the Allegiance division of Cardinal Health, Inc. and the Sherwood, Davis & Geck division of Covidien, Inc. in biopsy needle devices; Alcon, Inc., Allergan, Inc. and the
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Allegiance division of Cardinal Health, Inc. in ophthalmology products; and Accelent Inc., Teleflex Incorporated and Symmetry Medical Inc. in the manufacture of medical devices and device components for other third party medical device manufacturers.
The medical device, biotechnology and pharmaceutical industries are subject to rapid and substantial business, operational and technological change. There can be no assurance that developments by others will not render obsolete our products or technologies, that we will be able to keep pace with technological developments or that we will be able to manufacture and market our products at a cost that will be attractive to our customers.
Some competitive products have an entirely different approach or means to accomplish the desired therapeutic or diagnostic effect as compared to our product candidates. These competitive products, including any enhancements or modifications made to such products in the future, could be more effective and/or less costly than our products, technologies or our product candidates.
There are a number of companies that are marketing or developing competing drug-eluting coronary stents or other treatments for restenosis that may be considered to be directly competitive with our technology. Certain of our competitors have developed and commercialized coronary drug-eluting stents that compete with BSC’s TAXUS stents and which have been approved for use in the U.S., E.U. and certain other countries. The launch of these competing products has had a significant impact on BSC’s sales of TAXUS, and has resulted in a decline in our royalty revenue received from BSC. The continued successful commercialization of any of these or other technologies to treat restenosis following angioplasty or stent placement could have a material adverse impact on our business.
Employees
As of December 31, 2012, on a worldwide basis, we had approximately 1,364 employees, including 1018 in manufacturing, 17 in research and development, 95 in quality assurance, 148 in sales and marketing and 86 in administration. In addition, we have contractual arrangements with scientists at various research and academic institutions. All such employees and contractors execute confidentiality agreements with us. While we will continue to seek to hire highly qualified employees, we believe that we have employed a sufficient number of qualified personnel.
Environmental
Our business is subject to a broad range of government regulation and requirements, including federal, state, local and foreign environmental laws and regulations governing, among other matters, air emissions, wastewater discharges, workplace health and safety as well as the use, handling, storage and disposal of hazardous materials and remediation of contamination associated with the release of these materials at or from our facilities or off-site disposal locations. Some of these laws can impose liability for remediation costs on a party regardless of fault or the lawfulness of its conduct. Many of our manufacturing processes involve the use and subsequent regulated disposal of hazardous materials. To date, such matters have not had a material adverse impact on our business or financial condition. We cannot assure you, however, that such matters will not have such an effect in the future.
International Operations
Our medical devices are manufactured and sold worldwide. Approximately 38% of our medical device revenues are generated outside of the U.S. and geographic expansion remains a core component of our strategy. We currently sell our products in the following international territories: Europe, Asia-Pacific, Latin America and Canada. We are subject to certain risks inherent in conducting business outside the U.S. For more information regarding these risks, see the risk factors under the captions “We are subject to risks associated with doing business globally” and “We may incur losses associated with foreign currency fluctuations” in Item 1A of this Annual Report on Form 10-K, all of which information is incorporated herein by reference.
For financial information about foreign and domestic operations and geographic information, see note 22 of the audited consolidated financial statements included in this Annual Report on Form 10-K. In addition, for more information regarding foreign currency exchange risk, refer to the discussion under “Foreign Currency Risk” under Item 7A of this Annual Report on Form 10-K.
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Item 1A.RISK FACTORS
You should consider carefully the following information about these risks, together with all of the other information contained within this document. Additional risks and uncertainties not currently known to us or that we currently deem immaterial may impair our business operations. If any of the following risks actually occur, our business, results of operations and financial condition could be harmed.
Risks Related to Our Business
Our business activities involve various elements of risk. The risks described below and incorporated herein by reference are not the only ones facing us. Additional risks that are presently unknown to us or that we currently deem immaterial may also impact our business. We consider the following issues to be the most critical risks to the success of our business:
Our success depends on the successful commercialization of our existing products and new product candidates.
The continued and successful commercialization of our medical device products and technology is crucial for our success. Successful product commercialization and product development in the medical device industry is highly uncertain, and very few product commercialization initiatives or research and development projects produce a significant or successful commercial product. Our products and product candidates are in various stages of commercial and clinical development and face a variety of risks and uncertainties. Principally, these risks and uncertainties include the following:
·Commercialization risk. Even if our, or our customers’ or partners’, products or product candidates are successfully developed, receive all necessary regulatory approvals and are commercially produced, there is no guarantee that there will be market acceptance of them or that they will generate or sustain any significant revenues. Our ability to achieve sustainable market acceptance for any of our medical device products or product components will depend on a number of factors, including but not limited to: (i) whether competitors develop technologies which are superior to, or less costly than, our products or product candidates; (ii) whether our products or product candidates lead to or directly cause unwanted side effects; (iii) whether government and private third-party payers provide adequate coverage and reimbursement for our products or product candidates; (iv) whether our sales and marketing efforts are effective and of reasonable cost, or are able to reach our target markets and customer base.
·Manufacturing and scale-up risk. We, our suppliers or our partners may face significant or unforeseen difficulties in manufacturing our products or product components, including but not limited to (i) technical issues relating to producing products on a commercial scale at reasonable cost, and in a reasonable time frame, (ii) difficulty meeting demand or timing requirements for component orders due to excessive costs or lack of capacity for part or all of an operation or process; (iii) lack of skilled labor or unexpected increases in labor costs needed to produce a certain product or perform a certain operation; (iv) changes in government regulations, quality or other requirements that lead to additional manufacturing costs or an inability to supply product in a timely manner, if at all; (v) increases in raw material or component supply cost or an inability to obtain supplies of certain critical supplies needed to complete our manufacturing processes. These difficulties may only become apparent when scaling up the manufacturing of a product or product candidate to more substantive commercial scale.
·Clinical risk. Future clinical trial or study results, whether conducted by or in collaboration with us or by independent third parties, may show or suggest that some or all of our technology, or the technology of our partners that incorporates our technology, is not safe or effective or is not as safe or effective as similar technologies produced by our competitors.
·Liquidity and working capital risk. We may not have the working capital and financial resources necessary to effectively market or distribute our products to customers or potential customers, or to finance the launch of any potential new products. Our available working capital to market and distribute our products and product candidates is in part dependent on our ability to sustain our cash flow from operations, if any, to obtain outside financing, to effectively manage our working capital and to repay or refinance our existing debt obligations.
If we are unsuccessful in dealing with any of these risks, or if we are unable to successfully commercialize our technology for some other reason, it would likely seriously harm our ability to sustain or to generate additional revenue.
We may be unsuccessful in marketing, selling and distributing certain of our products.
We distribute a number of our products worldwide. In order to achieve commercial success for our approved products, we have established sales and marketing resources in the United States, Europe and other parts of the world. If our distribution personnel or
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methods are not sufficient to achieve market acceptance of our products, to maintain our current customer relationships or to ensure we have supply to meet demand for our products, it could harm our prospects, business, financial condition and results of operations.
To the extent that we enter into co-promotion or other marketing and sales arrangements with other companies, any revenues received will be dependent on the efforts of others, and we do not know whether these efforts will be successful. Failure to develop an adequate sales and marketing operation or to enter into appropriate arrangements with other companies to market and sell our products will reduce our ability to sustain or generate revenues.
The manufacture of many of our products is highly complex and subject to strict regulatory and quality controls. If we or one of our suppliers encounters manufacturing or quality problems, our business could suffer.
The manufacture of many of our products is highly complex and subject to strict regulatory and quality controls. In addition, quality is extremely important due to the serious and costly consequences of a product failure. Problems can arise during the manufacturing process for a number of reasons, including equipment malfunction, failure to follow protocols and procedures, raw material problems or human error. If these problems arise or if we otherwise fail to meet our internal quality standards or those of the FDA or other applicable regulatory body, which include detailed record-keeping requirements, our reputation could be damaged, we could become subject to a safety alert or a recall, we could incur product liability and other costs, product approvals could be delayed and our business could otherwise be adversely affected.
Any adverse events associated with our products must be reported to regulatory authorities. If deficiencies in our or our collaborators’ manufacturing and laboratory facilities are discovered, or we or our collaborators fail to comply with applicable post-market regulatory requirements, a regulatory agency may close the facility or suspend manufacturing.
The significant majority of our products are manufactured, assembled and packaged in facilities that are owned by us. In the event one or more of our facilities is affected by a natural disaster or is unable to operate for any reason, our ability to supply products to our customers may be materially impacted. While we maintain manufacturing disaster and business interruption plans designed to mitigate or eliminate manufacturing interruptions or the financial impact of such, there can be no assurance that such plans or actions taken will be adequate, or that any sales lost during any manufacturing interruption will be recovered.
With respect to products manufactured by third-party contractors, we are, and we expect to continue to be, dependent on our collaborators for continuing regulatory compliance, and we may have little or no control over these matters. Our ability to control third-party compliance with the FDA and other regulatory requirements will be limited to contractual remedies and rights of inspection. Our failure or the failure of third-party manufacturers to comply with regulatory requirements applicable to our products may result in legal or regulatory action by those regulatory authorities. There can be no assurance that our or our collaborators’ manufacturing processes will satisfy regulatory, cGMPs or International Standards Organization requirements.
In addition, there may be uncertainty as to whether or not we or others who are involved in the manufacturing process will be able to make the transition to commercial production of some of our newly developed products. A failure to achieve regulatory approval for manufacturing facilities or a failure to make the transition to commercial production for our products will adversely affect our prospects, business, financial condition and results of operations.
The Company may not be able to maintain or achieve profitability.
We have incurred a loss from operations in a majority of the years in which we have been operating. Our ability to maintain or achieve sustained profitability will depend on, among other things, our ability to maintain and improve sales of our existing product lines; our ability to successfully market and sell certain new products and technologies; the amount of royalty revenue we receive from our corporate partners; our ability to develop and successfully launch new products and technologies; our ability to improve our profit margins through lower manufacturing costs and efficiencies or improved product sales mix; and our ability to effectively control our various operating costs.
Our working capital and funding needs may vary significantly depending upon a number of factors including, but not limited to, our levels of sales and gross profit; costs associated with our manufacturing operations, including capital expenditures, labor and raw materials costs, and our ability to realize manufacturing efficiencies from our various operations; fluctuations in certain working capital items, including inventory and accounts receivable, that may be necessary to support the growth of our business or new product introductions; the level of royalty revenue we receive from corporate partners; progress of our product development programs and costs associated with completing clinical studies and the regulatory process; collaborative and license arrangements with third parties; the cost of filing, prosecuting and enforcing our patent claims and other intellectual property rights; expenses associated with litigation; opportunities to in-license complementary technologies or potential acquisitions; potential milestone or other payments we may make to licensors or corporate partners; and technological and market developments that impact our royalty revenue, sales levels or competitive position in the marketplace.
The significant decline in royalty payments we receive from BSC, the large amount of our outstanding indebtedness and the related cash interest payments due on such indebtedness, as well as the working capital, capital and other operating expenditures
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required to operate our Medical Device Products segment, among other factors, have adversely affected our operating cash flows, liquidity and profitability. In order to continue to finance our operations, it may be necessary for us to explore new or alternative sources of financing, which may further impact our operating cash flows, liquidity and profitability. Such financing may not be available when needed, or available on attractive or acceptable terms, due to credit market conditions and other factors.
We continue to explore options to improve our capital structure and address our current and future capital needs. If we are not able to adequately address our capital needs or refinance our $229.4 million of 9% Senior Notes before they mature on December 1, 2016, there can be no assurances that we will have adequate liquidity and capital resources to satisfy our financial obligations, meet the funding requirements necessary to execute our operating plan or achieve profitability.
If our products are alleged to be harmful, we may not be able to sell them, we may be subject to product liability claims not covered by insurance and our reputation could be damaged.
The nature of our business exposes us to potential liability risks inherent in the testing, manufacturing and marketing of medical devices. Using our medical device product candidates in clinical trials may expose us to product liability claims. These risks will expand with respect to medical devices that receive regulatory approval for commercial sale. In addition, some of the products we manufacture and sell are designed to be implanted in the human body for varying periods of time. Even if a medical device were approved for commercial use by an appropriate governmental agency, there can be no assurance that users will not claim that effects other than those intended may have resulted from our products. Component failures, manufacturing flaws, quality system failures, design defects, inadequate disclosure of product-related risks or product-related information or other safety issues with respect to these or other products we manufacture or sell could result in an unsafe condition or injury to, or death of, a patient. In addition, although many of our products are subject to review and approval by the FDA or other regulatory agencies, under the current state of the law, any approval of our products by such agencies will not prohibit product liability lawsuits from being brought against us in the event that our products are alleged to be defective, even if such products have been used for their approved indications and appropriate labels have been included.
In the event that anyone alleges that any of our products are harmful, we may experience reduced demand for our products or our products may be recalled from the market. In addition, we may be forced to defend individual or class action lawsuits and, if unsuccessful, to pay a substantial amount in damages. A recall of some of our products could result in exposure to additional product liability claims, lost sales and significant expense to perform the recall. The outcome of litigation, particularly class action lawsuits, is difficult to assess or quantify. Plaintiffs in these types of lawsuits often seek recovery of very large or indeterminate amounts, including not only actual damages, but also punitive damages. The magnitude of the potential loss relating to these types of lawsuits may remain unknown for substantial periods of time. In addition, the cost to defend against any future litigation may be significant.
We do not have insurance covering our costs and losses as a result of any recall of products or devices incorporating our technologies, whether such recall is instituted by a device manufacturer or us as required by a regulatory agency. Insurance to cover costs and losses associated with product recalls is expensive. If we seek insurance covering product recalls in the future, it may not be available on acceptable terms. Even if obtained, insurance may not fully protect us against potential liability or cover our losses. Some manufacturers that suffered such claims in the past have been forced to cease operations or declare bankruptcy.
We do have insurance covering product liability. However, our insurance may not fully protect us from potential product liability claims. If a product liability claim or a series of claims is brought against us in excess of our insurance coverage, our business could suffer. Some manufacturers that suffered such claims in the past have been forced to cease operations or declare bankruptcy.
The level of our TAXUS and Zilver-PTX royalty revenues are highly dependent on the production, distribution, development and sales and marketing efforts undertaken by our strategic partners, BSC and Cook, respectively.
We do not have control over the sales and marketing efforts, pricing, production volumes, distribution or regulatory environment related to BSC’s TAXUS paclitaxel-eluting coronary stent program and Cook’s Zilver-PTX paclitaxel-eluting peripheral vascular stent program. Our involvement is limited to the terms of our 1997 License Agreement (as amended) with BSC and Cook (the “1997 License Agreement”), which provides for the receipt of royalty revenue based on the net sales of TAXUS and Zilver-PTX.
Royalty revenue from BSC has declined significantly, as described in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in this Annual Report on Form 10-K. BSC has attributed this significant decline in royalties primarily to competition in the drug-eluting stent market, pricing pressures in the drug-eluting stent market and a decline in the overall number of drug-eluting stent procedures. Our TAXUS related royalties may decline further due to these and other factors in the future.
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In addition, if BSC or Cook are impaired in their ability to market and distribute TAXUS and Zilver-PTX, respectively, whether for these reasons or due to a failure to comply with applicable regulatory requirements, discovery of a defect in the device, increased incidence of adverse events or identification of other safety issues, or previously unknown problems with the manufacturing operations for TAXUS or Zilver-PTX (any of which could, under certain circumstances, result in a manufacturing injunction), our revenues may be negatively impacted. BSC or Cook’s failure to resolve these issues in a timely manner and to the satisfaction of the FDA and other regulatory authorities, or the occurrence of similar problems in the future, could delay the launch of additional TAXUS or Zilver-PTX product lines and have an adverse impact on our royalty revenue from sales of both products.
Additionally, BSC or Cook may terminate our 1997 License Agreement under certain circumstances, which include an inability to acquire a supply of paclitaxel at a commercially reasonable price, determination that paclitaxel-eluting stents are no longer commercially viable; or if our exclusive license agreement with the Public Health Service of the U.S. through the National Institutes of Health (the “NIH”) terminates. Under the terms of this exclusive licence agreement, NIH granted the Company an exclusive, worldwide license to certain technologies of the NIH for the use of paclitaxel (the “the NIH License Agreement”), certain rights under which are sublicensed to BSC and Cook.
The amounts payable by BSC and Cook to us vary depending on various factors, including the volume of sales in each quarterly period and patent protection laws in the country of sale. There is no guarantee that royalty payments under our 1997 License Agreement will continue, and demand for BSC and Cook’s paclitaxel-eluting stent products could continue to decline as a result of the factors stated above, as well as technological change, changes in reimbursement rates or other factors. In addition, the royalty rates payable by BSC and Cook could decline if and when patent protection expires, or no longer exists (as defined by our 1997 License Agreement) in certain jurisdictions.
Our royalty revenue derived from the sale of paclitaxel-eluting stents depends on BSC and Cook’s ability to continue to sell their respective TAXUS and Zilver-PTX products and to launch next generation paclitaxel-eluting stent products in the United States and in other countries. Historically, stent manufacture and sale have been subject to a substantial amount of patent litigation. Should BSC, Cook and others become involved in material legal proceedings related to paclitaxel-eluting stents that could adversely impact their ability to sell TAXUS and Zilver-PTX, this may negatively impact our royalty revenue derived from the sale of these paclitaxel-eluting stents.
We face and will continue to face significant competition.
Competition from medical device companies, pharmaceutical companies, biotechnology companies and academic and research institutions is significant. Many of our competitors and potential competitors have substantially greater product development capabilities, experience conducting clinical trials and financial, scientific, manufacturing, sales and marketing resources and experience than our company. We also face competition from non-medical device companies, such as pharmaceutical companies, which may offer non-surgical alternative therapies for disease states that are currently treated or are intended to be treated using our products. Other companies may:
·develop and obtain patent protection for products earlier than we do;
·design around patented technology developed by us;
·obtain regulatory approvals for such products more rapidly;
·have greater manufacturing capabilities and other resources;
·have larger or more experienced sales forces;
·develop more effective or less expensive products; or
·have greater success in obtaining adequate third-party payer coverage and reimbursement for their competing products.
While we intend to maintain or expand our technological capabilities in order to remain competitive, there is a risk that:
·research and development by others will render our technology or product candidates obsolete or non-competitive;
·treatments or cures developed by others will be superior to any therapy developed by us; and
·any therapy developed by us will not be preferred to any existing or newly developed technologies.
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If physicians do not recommend and endorse our products or products that use our technology, or if our working relationships with physicians deteriorate, our products or products that use our technology may not be accepted in the marketplace, which could adversely affect our sales and royalty revenues.
In order for us to sell our products or continue to receive royalty revenues from the sale of products that use our technologies, physicians must recommend and endorse them. We believe that recommendations and endorsements by physicians are and will be essential for market acceptance of our products, and we do not know whether we will obtain the necessary recommendations or endorsements from physicians. Acceptance of our products or of products that use our technology depends on educating the medical community as to the distinctive characteristics, perceived benefits, safety, clinical efficacy and cost-effectiveness of these products compared to products of competitors, and on training physicians in the proper application of these products. If we are not successful in obtaining the recommendations or endorsements of physicians for our products, or our collaborators are not successful in doing the same for their products that use our technology, our sales and royalty revenues may not increase or may decline.
In addition, if we fail to maintain our working relationships with physicians, many of our products may not be developed and marketed in line with the needs and expectations of professionals who use and support our products. The research, development, marketing and sales of many of our new and improved products are dependent upon our maintaining working relationships with physicians. We rely on these professionals to provide us with considerable knowledge and experience regarding our products and the marketing of our products. Physicians assist us as researchers, marketing consultants, product consultants, inventors and public speakers. If we are unable to maintain our strong relationships with these professionals while continuing to receive their advice and input, the development and marketing of our products could suffer, which could adversely affect the acceptance of our products in the marketplace and our sales.
Technological advances and evolving industry standards could reduce our future product sales, which could cause our revenues to grow more slowly or decline.
The markets for our products are characterized by rapidly changing technology, changing customer needs, evolving industry standards and frequent new product introductions and enhancements. The emergence of new industry standards in related fields may adversely affect the demand for our products. This could happen, for example, if new standards and technologies emerged that were incompatible with customer deployments of our applications. In addition, any compounds, products or processes that we develop may become obsolete or uneconomical before we recover any of the expenses incurred in connection with their development. We cannot assure you that we will succeed in developing and marketing product enhancements or new products that respond to technological change, new industry standards, changed customer requirements or competitive products on a timely and cost-effective basis. Additionally, even if we are able to develop new products and product enhancements, we cannot assure you that they will achieve market acceptance.
The commercial potential of our products and product candidates will be significantly limited if we are not able to obtain adequate levels of reimbursement for them.
Our ability to commercialize our medical products and product candidates successfully will depend in part on the extent to which coverage and reimbursement for such products and related treatments will be available from government health administration authorities, private health insurers and other third-party payers or otherwise supported by the market for these products. There can be no assurance that third-party payers’ coverage and reimbursement will be available or sufficient for the products we might develop.
Third-party payers are increasingly challenging the price of medical products and services and instituting cost-containment measures to control or significantly influence the purchase of medical products and services. These cost containment measures, if instituted in a manner affecting the coverage of or payment for our products, could have a material adverse effect on our ability to operate profitably. In some countries in the E.U. and in the U.S., significant uncertainty exists as to the reimbursement status of newly approved health care products, and we do not know whether adequate third-party coverage and reimbursement will be available for us to realize an appropriate return on our investment in product development, which could seriously harm our business. In the U.S., while reimbursement amounts previously approved appear to have provided a reasonable rate of return, there can be no assurance that our products will continue to be reimbursed at current rates or that third-party payers will continue to consider our products cost-effective and provide coverage and reimbursement for our products, in whole or in part.
We cannot be certain that our products will gain commercial acceptance among physicians, patients and third-party payers, even if necessary international and U.S. marketing approvals are maintained. We believe that recommendations and endorsements by physicians will be essential for market acceptance of our products, and we do not know whether these recommendations or endorsements will be obtained. We also believe that surgeons will not use these products unless they determine, based on clinical data and other factors, that the clinical benefits to patients and cost savings achieved through use of these products outweigh their cost.
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Acceptance among physicians may also depend upon the ability to train surgeons and other potential users of our products and the willingness of such users to learn these relatively new techniques.
If certain single-source suppliers fail to deliver key product components in a timely manner, our manufacturing would be impaired and our product sales could suffer.
We depend on certain single-source suppliers that supply components used in the manufacture of certain of our products. If we need alternative sources for key component parts or materials for any reason, these component parts or materials may not be immediately available to us. If alternative suppliers are not immediately available, we will have to identify and qualify alternative suppliers, and production of certain components or products may be delayed. We may not be able to find an adequate alternative supplier in a reasonable time period or on commercially acceptable terms, if at all. Our inability to obtain our key source supplies for the manufacture of our products may require us to delay shipments of products, harm customer relationships or force us to curtail or cease operations.
Our business is subject to economic, political and other risks associated with international sales and operations, including risks arising from currency exchange rate fluctuations.
Because we sell our products in a number of countries, our business is subject to the risks of doing business internationally, including risks associated with U.S. government oversight and enforcement of the Foreign Corrupt Practices Act as well as with the United Kingdom’s Bribery Act and anti-corruption laws in other jurisdictions. We anticipate that sales from international operations will continue to represent a significant portion of our total sales. Accordingly, our future results could be harmed by a variety of factors, including:
·changes in local medical reimbursement policies and programs;
·changes in foreign regulatory requirements;
·changes in a specific country’s or region’s political or economic conditions, such as the current financial uncertainties in Europe andchanging circumstances in emerging regions;
·trade protection measures, quotas, embargoes, import or export licensing requirements and duties, tariffs or surcharges;
·potentially negative impact of tax laws, including tax costs associated with the repatriation of cash;
·difficulty in staffing and managing global operations;
·cultural, exchange rate or other local factors affecting financial terms with customers;
·local economic and financial conditions affecting the collectability of receivables, including receivables from sovereign entities;
·economic and political instability and local economic and political conditions;
·differing labor regulations; and
·differing protection of intellectual property.
Substantially all of our sales outside of the U.S. are denominated in local currencies. Measured in local currency, a substantial portion of our international sales was generated in the E.U. The U.S. dollar value of our international sales varies with currency exchange rate fluctuations. Decreases in the value of the U.S. dollar to the Euro have the effect of increasing our reported revenues even when the volume of international sales has remained constant. Increases in the value of the U.S. dollar relative to the Euro, as well as other currencies, have the opposite effect and, if significant, could have a material adverse effect on our reported revenues and results of operations.
The United States Foreign Corrupt Practices Act, the United Kingdom Bribery Act, and similar laws in other jurisdictions contain prohibitions against bribery and other illegal payments or for the failure to have procedures in place that prevent such payments. Recent years have seen an increasing number of investigations and other enforcement activities under these laws. Although we have
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compliance programs in place with respect to these laws, no assurance can be given that a violation will not be found, and if found, the resulting penalties could adversely affect us and our business.
Future legislation or regulatory changes to, or consolidation in, the health care system may affect our ability to sell our products profitably
There have been, and we expect there will continue to be, a number of legislative and regulatory proposals to change the health care system, and some could involve changes that could significantly affect our business. For example, the 2010 health reform law was intended to increase the number of individuals covered by health insurance, impose reimbursement provisions intended to restrict the growth in Medicare and Medicaid spending and encourage development of health care delivery programs and models intended to tie payments to quality and care delivery innovations. As currently enacted, the health reform law imposed a 2.3% excise tax on medical device manufacturers on U.S. sales of Class I, II and III medical devices. The excise tax is effective in 2013. Given that 62% or our worldwide product sales are to customers based in the U.S., we expect that this tax burden will have a negative impact on our earnings and cash flows in 2013 and beyond.
Although some provisions of the health reform legislation have been implemented, many of the legislative changes contained within the health reform legislation will not be effective or implemented until future years. In addition, the Supreme Court will hear arguments related to the constitutionality of portions of the health reform law later this year and the outcome of the case could result in repeal of all or portions of the law. Therefore, the impact of health reform on our business is currently uncertain. Apart from the 2010 health reform law, efforts by governmental and third-party payers to reduce healthcare costs or the announcement of legislative proposals or reforms to implement government controls could cause a reduction in sales or in the selling price of our products, which could seriously harm our business.
Additionally, initiatives to reduce the cost of health care have resulted in a consolidation trend in the health care industry, including hospitals. This in turn has resulted in greater pricing pressures and the exclusion of certain suppliers from certain market segments as consolidated groups such as group purchasing organizations, independent delivery networks and large single accounts continue to consolidate purchasing decisions for some of our hospital customers. We expect that market demand, government regulation, and third-party reimbursement policies will continue to change the worldwide health care industry, resulting in further business consolidations and alliances among our customers and competitors, which may reduce competition, exert further downward pressure on the prices of our products and may adversely impact our business, financial condition or results of operations.
If we are unable to license new technologies, or our existing license agreements are terminated, our ability to maintain our competitive advantage in our existing products and to develop future products may be adversely affected.
We have entered into, and we expect that we will continue to enter into, licensing agreements with third parties to give us access to technologies that we may use to develop products, or that we may use to gain access to new products for us to further develop, market and sell through our commercial sales organizations. The technologies governed by these license agreements may be critical to our ability to maintain our competitive advantage in our existing products and to develop future products.
Pursuant to terms of our existing license agreements, licensors have the right under certain specified circumstances to terminate their respective licenses. Events that may allow licensors to exercise these termination provisions include:
·sub-licensing without the licensor’s consent;
·a transaction which results in a change of control of us;
·our failure to use the required level of diligence to develop, market and sell products based on the licensed technology;
·our failure to maintain adequate levels of insurance with respect to the licensed technologies;
·our bankruptcy; or
·other acts or omissions that may constitute a breach by us of our license agreement.
In addition, any failure to continue to have access to these technologies may materially adversely affect the benefits that we currently derive from our collaboration and partnership arrangements and may adversely affect our results and operations.
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We may depend on certain strategic partners for the development, regulatory approval, testing, manufacturing and potential commercialization of our products.
We have entered into various arrangements with corporate and academic partners, licensors, licensees and others for the research, development, clinical testing, regulatory approval, manufacturing, marketing and commercialization of our product candidates. For instance, we have partnered with BSC and Cook to develop and market paclitaxel-eluting coronary and peripheral stents. Strategic partners that we may collaborate with currently and in the future, are or may be essential to the development of our technology and potential revenue and we have little control over or access to information regarding our partners’ activities with respect to our products.
Our strategic partners may fail to successfully develop or commercialize our technology to which they have rights for a number of reasons, including:
·failure of a strategic collaborator to continue, or delays in, its funding, research, development and commercialization activities;
·the pursuit or development by a strategic collaborator of alternative technologies, either on its own or with others, including our competitors, as a means for developing treatments for the diseases targeted by our programs;
·the preclusion of a strategic collaborator from developing or commercializing any product, through, for example, litigation or other legal action; and
·the failure of a strategic collaborator to make required milestone payments, meet contractual milestone obligations or exercise options which may result in our terminating applicable licensing arrangements.
We may not be able to protect our intellectual property or obtain necessary intellectual property rights from third parties, which could adversely affect our business.
Our success depends, in part, on ensuring that our intellectual property rights are covered by valid and enforceable patents or effectively maintained as trade secrets and on our ability to detect violations of our intellectual property rights and enforce such rights against others.
The validity of our patent claims depends, in part, on whether pre-existing public information described or rendered obvious our inventions as of the filing date of our patent applications. We may not have identified all prior art, such as U.S. and foreign patents, published applications or published scientific literature that could adversely affect the validity of our issued patents or the patentability of our pending patent applications. For example, patent applications in the U.S. are maintained in confidence for up to 18 months after their filing. In some cases, however, patent applications remain confidential in the U.S. Patent and Trademark Office (the “USPTO”) for the entire time prior to their issuance as a U.S. patent. Patent applications filed in countries outside the U.S. are not typically published until at least 18 months from their first filing date. Similarly, publication of discoveries in scientific or patent literature often lags behind actual discoveries. Therefore, we cannot be certain that we were the first to invent, or the first to file patent applications related to, our technology. In the event that a third party has also filed a U.S. patent application covering a similar invention, we may have to participate in an adversarial proceeding, known as an interference, declared by the USPTO to determine priority of invention in the U.S. It is possible that we may be unsuccessful in the interference, resulting in a loss of some portion or all of our U.S. patent positions. The laws in some foreign jurisdictions do not protect intellectual property rights to the same extent as in the U.S., and many companies have encountered significant difficulties in protecting and defending such rights in foreign jurisdictions. If we encounter such difficulties or we are otherwise precluded from effectively protecting our intellectual property rights in foreign jurisdictions, our business prospects could be substantially harmed.
We frequently seek patents to protect our intellectual property. It should be recognized that we may not be able to obtain patent protection for key elements of our technology, as the patent positions of medical device, pharmaceutical and biotechnology companies are uncertain and involve complex legal and factual questions for which important legal issues are largely unresolved. For example, no consistent policy has emerged regarding the scope of health-related patent claims that are granted by the USPTO or enforced by the U.S. federal courts. Rights under any of our issued patents may not provide commercially meaningful protection for our products or afford us a commercial advantage against our competitors or their competitive products or processes. In addition, even if a patent is issued, the coverage claimed in a patent application may be significantly reduced in the patent as granted.
There can be no assurance that:
·patent applications will result in the issuance of patents;
·additional proprietary products developed will be patentable;
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·licenses we have obtained from third parties that we use in connection with our technology will not be terminated;
·patents issued will provide adequate protection or any competitive advantages;
·patents will not be successfully challenged by any third parties; or
·the patents of others will not impede our or our collaborators’ ability to commercialize our technology.
For example, the drug paclitaxel is itself not covered by composition of matter patents. Therefore, although we have developed and are developing an intellectual property portfolio around the use of paclitaxel for intended commercial applications, others may be able to engage in off-label use of paclitaxel for the same indications, causing us to lose potential revenue. Furthermore, others may independently develop similar products or technologies or, if patents are issued to us, design around any patented technology developed by us, which could affect our potential to generate revenues and harm our results of operations.
Patent protection for our technology may not be available based on prior art. The publication of discoveries in scientific or patent literature often lags behind actual discoveries. As a consequence, there may be uncertainty as to whether we or a third party were the first creator of inventions covered by issued patents or pending patent applications or that we or a third party were the first to file patent applications for such inventions. Moreover, we might have to participate in interference proceedings declared by the USPTO, or other proceedings outside the U.S., including oppositions, to determine priority of invention or patentability, which could result in substantial cost to us even if the outcome were favorable. An unfavorable outcome in an interference or opposition proceeding could preclude us, our collaborators and our licensees from making, using or selling products using the technology or require us to obtain license rights from prevailing third parties. We do not know whether any prevailing party would offer us a license on commercially acceptable terms, if at all. We may also be forced to pay damages or royalties for our past use of such intellectual property rights, as well as royalties for any continued usage.
As part of our patent strategy, we have filed a variety of patent applications internationally. Oppositions have been filed against various granted patents that we either own or license and which are related to certain of our technologies. For a summary of certain of our material current legal proceedings, including those relating to our patents and intellectual property, see the section entitled “Legal Proceedings” under Part I, Item 3 of this Annual Report on Form 10-K.
Our future success and competitive position depend in part on our ability to obtain and maintain certain proprietary intellectual property rights used in our approved products and principal product candidates. Any such success depends in part on effectively instituting claims against others who we believe are infringing our rights and by effectively defending claims of intellectual property infringement brought by our competitors and others. The stent-related markets have experienced rapid technological change and obsolescence in the recent past, and our competitors have strong incentives to attempt to stop or delay us from introducing new products and technologies. See “—We may incur substantial costs as a result of litigation or other proceedings relating to patent and other intellectual property rights.”
We do not know whether the patents that we have obtained or licensed, or may be able to obtain or license in the future, would be held valid or enforceable by a court or whether a competitor’s technology or product would be found to infringe such patents. Further, we have no assurance that third parties will not properly or improperly modify or terminate any license they have granted to us.
We have obtained licenses from third parties with respect to their intellectual property that we use in connection with certain aspects of our technology or products. However, we may need to obtain additional licenses for the development of our current or future products. Licenses may not be available on satisfactory terms or at all. If available, these licenses may obligate us to exercise diligence in bringing our technology to market and may obligate us to make minimum guarantee or milestone payments. This diligence and these milestone payments may be costly and could adversely affect our business. We may also be obligated to make royalty payments on the sales, if any, of products resulting from licensed technology and may be responsible for the costs of filing and prosecuting patent applications. These costs could affect our results of operations and decrease our earnings.
Certain of our key technologies include trade secrets and know-how that may not be protected by patents. There can be no assurance that we will be able to protect our trade secrets. To help protect our rights, we require employees, consultants, advisors and collaborators to enter into confidentiality agreements. We cannot assure you that all employees, consultants, advisors and collaborators have signed such agreements, or that these agreements will adequately protect our trade secrets, know-how or other proprietary information in the event of any unauthorized use or disclosure. Furthermore, we may not have adequate remedies for any such breach. Any disclosure of confidential data into the public domain or to third parties could allow our competitors to learn our trade secrets and use the information in competition against us.
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Our ability to operate could be hindered by the proprietary rights of others.
A number of medical device, pharmaceutical and biotechnology companies as well as research and academic institutions have developed technologies, filed patent applications or received patents on various technologies that may be related to our business. Some of these technologies, applications or patents may conflict with or adversely affect our technologies or intellectual property rights, including those that we license from others. We are aware of other parties holding intellectual property rights that may represent prior art or other potentially conflicting intellectual property. Any conflicts with the intellectual property of others could limit the scope of the patents, if any, that we may be able to obtain or result in the denial of our current or future patent applications altogether.
If patents that cover our activities are issued to other persons or companies, we could be charged with infringement. In the event that other parties’ patents cover any portion of our activities, we may be forced to develop alternatives or negotiate a license for such technology. We do not know whether we would be successful in either developing alternative technologies or acquiring licenses upon reasonable terms, if at all. Obtaining any such licenses could require the expenditure of substantial time and other resources and could harm our business and decrease our earnings. If we do not obtain such licenses, we could encounter delays in the introduction of our products or could find that the development, manufacture or sale of products requiring such licenses is prohibited.
We may incur substantial costs as a result of litigation or other proceedings relating to patent and other intellectual property rights.
In connection with maintaining the value of our various intellectual property and exclusivity rights, we regularly evaluate the activities of others worldwide. Our success will depend, in part, on our ability to obtain patents, or licenses to patents, maintain trade secret protection and enforce our rights against others. Should it become necessary to protect those rights, we intend to pursue all cost-efficient strategies, including, when appropriate, negotiation or litigation in any relevant jurisdiction. For a summary of certain of our current legal proceedings, including proceedings in respect of patent infringement and intellectual property matters, see the section entitled “Legal Proceedings” under Part I, Item 3 of this Annual Report on Form 10-K.
We intend to pursue and to defend vigorously any and all actions of third parties related to our material patents and technology. Any failure to obtain and protect intellectual property could adversely affect our business and our ability to operate could be hindered by the proprietary rights of others.
Our involvement in intellectual property litigation could result in significant expense, adversely affecting the development of product candidates or sales of the challenged product or intellectual property and diverting the efforts of our technical and management personnel, whether or not such litigation is resolved in our favor. Some of our competitors may be able to sustain the costs of complex patent litigation more effectively than we can because they have substantially greater resources, and intellectual property litigation may be used against us as a means of gaining a competitive advantage. Competing parties frequently file multiple suits to leverage patent portfolios across product lines, technologies and geographies and to balance risk and exposure between the parties. Uncertainties resulting from the initiation and continuation of any litigation could affect our ability to continue our operations. In the event of an adverse outcome as a defendant in any such litigation, we may, among other things, be required to:
·pay substantial damages or back royalties;
·cease the development, manufacture, use or sale of product candidates or products that infringe upon the intellectual property of others;
·expend significant resources to design around a patent or to develop or acquire non-infringing intellectual property;
·discontinue processes incorporating infringing technology; or
·obtain licenses to the infringed intellectual property.
We cannot assure you that we will be successful in developing or acquiring non-infringing intellectual property or that necessary licenses will be available upon reasonable terms, if at all. Any such development, acquisition or license could require the expenditure of substantial time and other resources and could adversely affect our business and financial results. If we cannot develop or acquire such intellectual property or obtain such licenses, we could encounter delays in any introduction of products or could find that the development, manufacture or sale of products requiring such licenses could be prohibited.
If third parties file patent applications, or are issued patents claiming technology also claimed by us in pending applications, we may be required to participate in interference proceedings with the USPTO, or other proceedings outside the United States, including
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oppositions, to determine priority of invention or patentability, which could result in substantial cost to us even if the eventual outcome were favorable.
We must receive regulatory approval for each of our product candidates before they can be sold commercially in Canada, the U. S. or internationally, which can take significant time and be very costly.
The development, manufacture and sale of medical devices and human therapeutic products in Canada, the U.S. and internationally is governed by a variety of statutes and regulations. These laws require, among other things:
·regulatory approval of manufacturing facilities and practices;
·adequate and well-controlled research and testing of products in pre-clinical and clinical trials;
·review and approval of submissions containing manufacturing, pre-clinical and clinical data in order to obtain marketing approval based on establishing the safety and efficacy of the product for each use sought, including adherence to current cGMPs during production and storage; and
·control of marketing activities, including advertising and labeling.
The product candidates currently under development by us or our collaborators will require significant research, development, pre-clinical and clinical testing, pre-market review and approval, and investment of significant funds prior to their commercialization. In many instances, we are dependent on our collaborators for regulatory approval and compliance, and have little or no control over these matters. The process of completing clinical testing and obtaining such approvals is likely to take many years and require the expenditure of substantial resources, and we do not know whether any clinical studies by us or our collaborators will be successful, whether regulatory approvals will be received, or whether regulatory approvals will be obtained in a timely manner. Despite the time and resources expended by us, regulatory approval is never guaranteed. Even if regulatory approval is obtained, regulatory agencies may limit the approval to certain diseases, conditions or categories of patients who can use them.
If any of our development programs are not successfully completed in a timely fashion, required regulatory approvals are not obtained in a timely fashion, or products for which approvals are obtained are not commercially successful, it could seriously harm our business.
If our process related to product development does not result in an approved and commercially successful product, our business could be adversely affected.
We focus our product development activities on areas in which we have particular strengths. The outcome of any development program is highly uncertain, notwithstanding how promising a particular program may seem. Success in pre-clinical and early-stage clinical trials may not necessarily translate into success in large-scale clinical trials. Further, clinical trials are expensive and may require increased investment for which we do not have adequate funding or for which we are not able to access adequate funding.
In addition, we will need to obtain and maintain regulatory approval in order to market new products. Notwithstanding the outcome of clinical trials for new products, regulatory approval may not be achieved. The results of clinical trials are susceptible to varying interpretations that may delay, limit or prevent approval or result in the need for post-marketing studies. In addition, changes in regulatory policy for product approval during the period of product development and review by regulators of a new application may cause delays or rejection. Even if we receive regulatory approval, this approval may include limitations on the indications for which we can market the product. There is no guarantee that we will be able to satisfy the applicable regulatory requirements, and we may suffer a significant variation from planned revenue as a result.
Compulsory licensing and/or generic competition may affect our business in certain countries.
In a number of countries, governmental authorities have the right to grant licenses to others to use a pharmaceutical or medical device company’s patents or other intellectual property without the consent of the owner of the patent or other intellectual property. Governmental authorities could use this right to grant licenses under our patents or other intellectual property to others or could require us to grant licenses under our patents or other intellectual property to others, thereby allowing our competitors to manufacture and sell their own versions of our products. In other circumstances, governmental authorities could use this right to require us or our licensees to reduce the prices of our products. In all of these situations, our sales or the sales of our licensee(s), and the results of our operations, in these countries could be adversely affected.
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We are subject to litigation that could strain our resources and distract management.
From time to time, we are involved in a variety of claims, lawsuits and other disputes. These suits may concern issues including product liability, contract disputes, employee-related matters, intellectual property and personal injury matters. It is not feasible to predict the outcome of all pending suits and claims, and the ultimate resolution of these matters as well as future lawsuits could have a material adverse effect on our business, financial condition, results of operations or cash flows or reputation.
For a summary of certain of our material current legal proceedings, see the section entitled “Legal Proceedings” under Part I, Item 3 of this Annual Report on Form 10-K.
We may be subject to damages resulting from claims that we or our employees have wrongfully used or disclosed alleged trade secrets of their former employers.
Many of our employees were previously employed at universities or other biotechnology or pharmaceutical companies, including our competitors or potential competitors. Although no such claims against us are currently pending, we may be subject to claims that these employees or we have used or disclosed trade secrets or other proprietary information of their former employers. Litigation may be necessary to defend against these claims. Even if we are successful in defending against these claims, litigation could result in substantial costs and be a distraction to management. If we fail in defending such claims, in addition to paying monetary damages, we may lose valuable intellectual property rights or personnel. A loss of key research personnel or their work product could hamper or prevent our ability to commercialize certain product candidates, which could severely harm our business.
We may incur significant costs complying with environmental laws and regulations.
Our research and development processes and manufacturing operations involve the use of hazardous materials. In the countries in which we operate or sell our products, we are subject to federal, state, provincial, local and other laws and regulations that govern the use, manufacture, storage, handling and disposal of such materials and certain waste products. The risk of accidental contamination or injury from these materials cannot be completely eliminated. In the event of an accident or the discovery of pre-existing contamination at one or more of our facilities, we could be held liable for any damages that result, and any such liability could exceed our resources. In addition, our manufacturing facilities may become subject to new or increased legislation or regulation as a result of climate control initiatives. We may not be specifically insured with respect to these liabilities, and we do not know whether we will be required to incur significant costs to comply with environmental laws and regulations in the future, or whether our operations, business or assets will be harmed by current or future environmental laws or regulations.
If we are unable to fully comply with federal and state “fraud and abuse laws,” we could face substantial penalties, which may adversely affect our business, financial condition and results of operations.
We are subject to various laws pertaining to health care fraud and abuse, including the U.S. Anti-Kickback Statute, physician self-referral laws (the “Stark Law”), the U.S. False Claims Act, HIPAA (as amended by HITECH), the U.S. False Statements Statute, the Physician Payment Sunshine Act, and state law equivalents to these U.S. federal laws, which may not be limited to government-reimbursed items and may not contain identical exceptions. Violations of these laws are punishable by criminal and civil sanctions, including, in some instances, civil and criminal penalties, damages, fines, exclusion from participation in U.S. federal and state health care programs, including Medicare and Medicaid, and the curtailment or restructuring of operations. Any action against us for violation of these laws could have a significant impact on our business. In addition, we are subject to the U.S. Foreign Corrupt Practices Act. Any action against us for violation by us or our agents or distributors of this act could have a significant impact on our business.
Acquisition of companies or technologies may result in disruptions to our business.
As part of our business strategy, we may acquire additional assets, products or businesses principally relating to or complementary to our current operations. Any acquisitions or mergers by us will be accompanied by the risks commonly encountered in acquisitions of companies. These risks include, among other things, higher than anticipated acquisition costs and expenses, the difficulty and expense of integrating the operations and personnel of the companies and the loss of key employees and customers as a result of changes in management.
In addition, geographic distances may make integration of acquired businesses more difficult. We may not be successful in overcoming these risks or any other problems encountered in connection with any acquisitions.
If significant acquisitions are made for cash consideration, we may be required to use a substantial portion of our available cash, cash equivalents and short-term investments. Future acquisitions by us may cause large one-time expenses or create goodwill or other
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intangible assets that could result in significant asset impairment charges in the future. Acquisition financing may not be available on acceptable terms, if at all.
If we fail to hire and retain key management and technical personnel, we may be unable to successfully implement our business plan.
We are highly dependent on our senior management and technical personnel. The competition for qualified personnel in the health care field is intense, and we rely heavily on our ability to attract and retain qualified managerial and technical personnel. Our ability to manage growth effectively will require continued implementation and improvement of our management systems and the ability to recruit and train new employees. We may not be able to successfully attract and retain skilled and experienced personnel, which could harm our ability to develop our product candidates and generate revenues.
Risks Relating to Our Indebtedness, Organization and Financial Position
We have a substantial amount of indebtedness, which could adversely affect our financial position and ability to obtain future additional financing
We may incur additional debt from time to time to finance our operations, for capital expenditures or for other purposes. The magnitude of debt we carry may impact us in the following ways:
·make it difficult for us to satisfy our financial obligations, including making scheduled principal and interest payments;
·limit our ability to borrow additional funds for working capital, capital expenditures, acquisitions or other general corporate purposes;
·limit our ability to borrow additional funds at favourable terms;
·require us to use a substantial portion of our cash flow from operations to make debt service payments; that would otherwise be available for our operations and future business opportunities;
·limit our flexibility to plan for, or react to, changes in our business and industry;
·place us at a competitive disadvantage compared to our less-leveraged competitors; and
·increase our vulnerability to the impact of adverse economic and industry conditions.
Maturity of our existing debt may limit our ability to obtain financing or execute other strategic alternatives
As at December 31, 2012, we have $229.4 million of 9% Senior Notes due on December 1, 2016 (“Senior Notes”) and $60 million of Senior Floating Rate Notes (“New Notes”) due December 1, 2013. Management expects that these debt obligations will be fully repaid using the cash consideration from Angiotech’s contemplated sale of its Interventional Products Business to Argon (see the Sale of the Interventional Products Business to Argon Medical, Inc. section above).
If we are unable to complete or close the sale of the Interventional Products Business to Argon, we will need to seek new financing or pursue other strategic alternatives such as a reducing or delaying capital expenditures, selling assets, disposing of part or all of our business, restructuring or refinancing our existing debt, or seeking additional equity capital to repay these debt obligations upon maturity. There is no assurance that we will be able to complete such activities, to meet our obligations on satisfactory terms, if at all.
If we are unable to execute the any of the initiatives described above, and as a result we are not able to meet our financial obligations, we may be forced to pursue alternatives to restructure our outstanding indebtedness, including but not limited to extending the maturity on our existing indebtedness, restructuring other terms of our existing indebtedness or seeking protection from our creditors through formal bankruptcy proceedings. If such actions become necessary, they may be costly, and would likely adversely impact our business, operations, liquidity and capital resources, and may also severely limit or eliminate any amounts that may be ultimately received by our outstanding creditors in service of our obligations thereto, or that may be received by shareholders.
Our obligation to pay cash interest on our notes has had, and may continue to have, an adverse effect on our liquidity.
We are obligated to make periodic cash interest payments on our outstanding indebtedness. As a result of these required cash interest payments, combined with the significant decline in royalty payments we receive from BSC, we have had significant liquidity issues, which led to our need to restructure a significant portion of our indebtedness through the Recapitalization Transaction as concluded in May 2011. For more information on the Recapitalization Transaction, refer to note 3 of the audited consolidated financial statements for the year ended December 31, 2012 included in this Annual Report on Form 10-K. If our cash flows are worse
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than expected, we may be unable to access additional sources of liquidity to fund our cash needs, which could further adversely affect our financial condition or results of operations and our ability to make payments on our debt.
We must offer to repurchase the Senior Notes upon a change of control.
The Senior Notes Indenture will require that, upon the occurrence of a “change of control”, as defined in the Senior Notes Indenture, we must make an offer to repurchase the Senior Notes at a price equal to 101% of the principal amount thereof, plus accrued and unpaid interest, if any, to the date of repurchase.
Certain events involving a change of control may result in an event of default or require the applicable indebtedness or other obligations to be repurchased or repaid under our other indebtedness or indebtedness that we may incur in the future, including our $60.0 million existing Senior Floating Rate Notes (“New Notes”) and any indebtedness outstanding under our revolving credit facility (“Revolving Credit Facility”). The exercise by the holders of their right to require the Issuer to repurchase the Senior Notes upon a change of control could cause a default under the New Notes Indenture or the Revolving Credit Facility, even if the change of control itself does not. An event of default under other indebtedness could result in an acceleration of such indebtedness. We cannot assure you that we would have sufficient resources to repurchase any of the Senior Notes or to pay our other obligations in the event of such an acceleration of indebtedness upon a change of control. The acceleration of indebtedness and our inability to repurchase all of the tendered Senior Notes would constitute events of default under the Senior Notes Indenture. We cannot assure you that the terms of any future indebtedness will not contain cross default provisions based upon the occurrence of a change of control or other defaults under such debt instruments. Furthermore, this would likely impact our ability to continue operations.
We have effected reductions in our operating costs and, as a result, our ability to cut costs further and sustain our business initiatives may be limited.
Beginning in late 2008 and continuing into early 2012, we have implemented various initiatives to reduce operating costs across all functions of the Company and focus our business efforts on our most promising near-term product opportunities. As a result of these cost-cutting initiatives, we may have a more limited ability to further reduce costs to increase our liquidity should such measures become necessary. Any further reductions may have a materially negative impact on our business.
Restrictive covenants in our existing and future credit agreements may adversely affect us.
We must comply with operating and financing restrictions in our Revolving Credit Facility; which was entered into on May 12, 2011 and provides us with up to $28 million of aggregate principal borrowings; and the indentures governing our other outstanding indebtedness. The Revolving Credit Facility is subject to a borrowing base, certain reserves and other conditions (for more information, refer to notes 14 of the audited consolidated financial statements for the year ended December 31, 2012 included in this Annual Report on Form 10-K). These restrictions affect, and in many respects limit or prohibit, our ability to:
·incur additional indebtedness;
·make any distributions, declare or pay any dividends on or acquire any of our capital stock;
·incur liens;
·make investments, including joint venture investments;
·sell assets;
·repurchase certain debt; and
·merge or consolidate with or into other companies or sell substantially all of our assets.
We may also have similar restrictions with any future debt.
Our Revolving Credit Facility requires us to make mandatory payments upon the occurrence of certain events, including the sale of assets, in each case subject to certain limitations and conditions. Our Revolving Credit Facility also contains financial covenants, including maintaining certain levels of EBITDA and interest coverage ratios. These restrictions could limit our ability to plan for or react to market conditions or to meet extraordinary capital needs or otherwise could restrict our activities. These restrictions could also
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adversely affect our ability to finance our future operations or capital needs or to engage in other business activities that would be in our interest.
Global credit and financial market conditions may exacerbate certain risks affecting our business.
Significantly challenging global credit and financial market conditions may make obtaining additional financing for our business difficult or impossible, or may make it more difficult to pursue a refinancing, restructuring or other transaction with respect to our existing indebtedness.
In addition, the tightening of global credit may lead to a disruption in the performance of our third-party contractors, suppliers or partners. We rely on third parties for several important aspects of our business, including but not limited to royalty revenue, portions of our product manufacturing and raw materials. If such third parties are unable to satisfy their commitments to us, our business would be adversely affected.
Certain of our products are used in elective medical procedures which are not covered by insurance. Adverse changes in the economy or other conditions or events have had and may continue to have an adverse effect on consumer spending and may reduce the demand for these procedures. Any such changes, conditions or events could have an adverse effect on our sales and results of operations.
We and our subsidiaries are permitted to incur substantially more debt, which could further exacerbate the risks associated with our leverage.
The respective terms of the indenture governing our outstanding indebtedness under certain conditions expressly permit, or are anticipated to permit, as applicable, the incurrence of additional amounts of debt for specified purposes. Moreover the terms governing our outstanding indebtedness do not impose any limitation on our incurrence of liabilities that are not defined as “Indebtedness” under such indentures or facility (such as trade payables).
We are subject to risks associated with doing business globally.
As a medical device company with significant operations in the U.S., E.U., Canada and other countries, we are subject to political, economic, operational, legal, regulatory and other risks that are inherent in conducting business globally. These risks include foreign exchange fluctuations, exchange controls, capital controls, new laws or regulations or changes in the interpretation or enforcement of existing laws or regulations, political instability, macroeconomic changes, including recessions and inflationary or deflationary pressures, increases in prevailing interest rates by central banks or financial services companies, economic uncertainty, which may reduce the demand for our products or reduce the prices that our customers are willing to pay for our products, import or export restrictions, tariff increases, price controls, nationalization and expropriation, changes in taxation, diminished or insufficient protection of intellectual property, lack of access to impartial court systems, violations of law, including the U.S. Foreign Corrupt Practices Act and the U.K. Bribery Act, disruption or destruction of operations or changes to the Company’s business position, regardless of cause, including war, terrorism, riot, civil insurrection, social unrest, strikes and natural or man-made disasters, including famine, flood, fire, earthquake, storm or disease. The impact of any of these developments, either individually or cumulatively, could have a material adverse effect on our business, financial condition and results of operations.
We may incur losses associated with foreign currency fluctuations.
We report our operating results and financial position in U.S. dollars in order to more accurately represent the currency of the economic environment in which we operate.
Our operations are in some instances conducted in currencies other than the U.S. dollar, and fluctuations in the value of foreign currencies relative to the U.S. dollar could cause us to incur currency exchange losses. In addition to the U.S. dollar, we currently conduct operations in Canadian dollars, Euros, Swiss francs, Danish kroner, Swedish kroner, Norwegian kroner and U.K. pounds sterling. Exchange rate fluctuations may reduce our future operating results and comprehensive income. For a description of the effects of exchange rate fluctuations on our results, see “Quantitative and Qualitative Disclosures about Market Risk” under Item 7.A of this Annual Report on Form 10-K.
We have not entered into any forward currency contracts or other financial derivatives to hedge foreign exchange risk, and therefore we are subject to foreign currency transaction and translation gains and losses. We purchase goods and services in U.S. and Canadian dollars, Euros, Swiss francs, Danish kroner, and U.K. pounds sterling, and earn a significant portion of our revenues in U.S. dollars. We primarily manage our foreign exchange risk by satisfying foreign-denominated expenditures with cash flows or assets denominated in the same currency.
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U. S. investors may not be able to obtain enforcement of civil liabilities against us.
We were formed under the laws of British Columbia, Canada. A substantial portion of our assets are located outside the U.S. As a result, it may be impossible for U.S. investors to affect service of process within the U.S. upon us or these persons or to enforce against us or these persons any judgments in civil and commercial matters, including judgments under U.S. federal or state securities laws. In addition, judgments of U.S. courts will not necessarily be recognized by courts in non-U.S. jurisdictions. Accordingly, even if a favorable judgment is obtained in a U.S. court, a party may be required to re-litigate a claim in other jurisdictions. In addition, in certain jurisdictions in which certain of our subsidiaries are organized, it is questionable whether a court would accept jurisdiction and impose civil liability if proceedings were commenced in an original action predicated only upon U.S. federal securities laws.
Item 1B.UNRESOLVED STAFF COMMENTS
None.
Item 2.PROPERTIES
As at December 31, 2012, we have 16 facilities located in six different countries, which include Canada, the United States, Puerto Rico, the United Kingdom, Denmark and Switzerland. Of the 16 facilities, seven are primarily used to manufacture and distribute medical devices or materials for medical device products. Our other eight facilities are primarily used for sales and marketing and administrative activities. One of our facilities, located in Seattle, WA, is currently subleased to a tenant. Collectively, these facilities comprise approximately 458,145 square feet(1) of modern technical manufacturing, research and administrative operations. The following chart summarizes the facilities where our domestic and international operations occur:
Location |
| Primary Purpose |
| Segment |
| Owned or Leased |
St. Gregoire, France | | Administration | | Medical Device Technologies | | Leased |
| | | | | | |
Lausanne, Switzerland | | Administration | | Medical Device Technologies | | Leased |
| | | | | | |
Stockholm, Sweden | | Administration | | Medical Device Technologies | | Leased |
| | | | | | |
Taunton, United Kingdom | | Manufacturing | | Medical Device Technologies | | Owned |
| | | | | | |
Stenlose, Denmark (3 facilities) | | Manufacturing | | Medical Device Technologies | | 2 Leased, 1 Owned(2) |
| | | | | | |
Wheeling, IL | | Manufacturing | | Medical Device Technologies | | Owned |
| | | | | | |
Gainesville, FL | | Manufacturing | | Medical Device Technologies | | Owned |
| | | | | | |
Henrietta, NY | | Manufacturing | | Medical Device Technologies | | Leased |
| | | | | | |
Seattle, WA | | Administration | | Medical Device Technologies | | Leased (Subleased) |
| | | | | | |
Bellevue, WA | | Administration | | Medical Device Technologies | | Leased |
| | | | | | |
Reading, PA | | Manufacturing | | Medical Device Technologies | | Owned |
| | | | | | |
Aguadilla, Puerto Rico | | Manufacturing | | Medical Device Technologies | | Leased |
| | | | | | |
Sao Paulo, Brazil | | Administration | | Medical Device Technologies | | Leased |
| | | | | | |
Vancouver, B.C. | | Administration | | Licensed Technologies | | Leased |
(1) 458,145 sq. ft. of facilities excludes 19,260 sq. ft. of a subleased facility located in Seattle, WA.
(2) In connection with the closure of our Denmark manufacturing facility, the owned property is currently being marketed for sale and the leased properties will be vacated in 2013.
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Item 3.LEGAL PROCEEDINGS
The Company may be subject to various claims and legal proceedings brought against it in the normal course of business. The Company maintains insurance policies that provide limited coverage for amounts in excess of certain pre-determined deductibles for intellectual property infringement and product liability claims. Such matters are subject to many uncertainties and may be difficult for management to determine the outcome or estimate the potential range of losses if the Company does not prevail in such matters. However, management believes that adequate provisions have been made in the accounts where required. There is no assurance that any legal proceedings disclosed here, or other legal proceedings not disclosed here, will not have a material adverse impact on the Company’s financial condition or results of operations.
At the European Patent Office (“EPO”), various patents either owned or licensed by or to the Company are in opposition proceedings. The outcomes of these proceedings have not yet been determined.
Item 4.MINE SAFETY DISCLOSURE
Not applicable.
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PART II
Item 5.MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Our outstanding common shares are privately held, and there is currently no established public trading market for our common stock. As at March 28, 2013, there were 12,547,702 new common shares issued and outstanding which were held by 62 shareholders of record. See Item 12, “Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters” included in this report. In addition, as of March 28, 2013, there were outstanding options (“Options”) and Restricted Stock Units (“RSUs”) to purchase 759,517 common shares; and outstanding and unvested units of restricted stock (“RS”) that would convert into 86,805 common shares once vesting conditions are met.
Dividend Policy
We have not declared or paid any dividends on our common shares since inception. The declaration of dividend payments is at the sole discretion of our Board of Directors. The Board of Directors may declare dividends in the future depending upon numerous factors that ordinarily affect dividend policy, including the results of our operations, our financial position and general business conditions. Our Revolving Credit Facility and the indentures governing our Senior Floating Rate Notes and 9% Senior Notes also contain certain customary affirmative and negative covenants which limit our ability to make dividend distributions.
Sale of Unregistered Securities within the Past Twelve Months
During the year ended December 31, 2012, 43,403 common shares were issued to certain executives upon vesting of their units of Restricted Stock. We concurrently repurchased 16,701 of units of RS from these executives in connection the withholding taxes owed by them on units which had vested.
During the year ended December 31, 2012, 219,500 RSU’s were issued to certain employees and members of senior management. During the same period 31,000 RSU’s were forfeited and 208,333 were cancelled in accordance with the terms of Dr. Hunter’s (former President and Chief Executive Officer of Angiotech) Termination Settlement Agreement dated November 14, 2012.
During the year ended December 31, 2012, 37,200 Options were forfeited and 219,452 were cancelled in accordance with the terms of Dr. Hunter’s Termination Settlement Agreement referred to above. The Options were issued at an exercise price of $20 and expire on May 12, 2018.
These equity based awards were deemed to be exempt from registration under the Securities Act in reliance on Section 4(2) of the Securities Act, as transactions by an issuer not involving a public offering, and the issuance of common shares upon exercise of the options was exempt from registration in reliance on Rule 701 of the Securities Act.
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Item 6.SELECTED FINANCIAL DATA
The following table sets forth selected consolidated financial information for each of our five most recently completed financial years. This data should be read in conjunction with our Management’s Discussion and Analysis of Financial Condition and Results of Operations, the audited consolidated financial statements, including the notes to the financial statements, and the Risk Factors set out in this Annual Report on Form 10-K.
On May 12, 2011, Angiotech implemented a recapitalization transaction that, among other things, eliminated its $250 million 7.75% Senior Subordinated Notes due in 2014 (“Subordinated Notes”) and $16 million of related interest obligations in exchange for the cancellation of all outstanding common shares and issuance of new common shares of Angiotech (the “Recapitalization Transaction”). In connection with this Recapitalization Transaction and as discussed below, the Company adopted fresh start accounting on April 30, 2011 (the “Convenience Date”). Upon implementation of fresh-starting accounting, Angiotech comprehensively revalued its assets and liabilities to their estimated fair values and eliminated its deficit, additional paid-in-capital and accumulated other comprehensive income balances.
Given that the reorganization and adoption of fresh-start accounting resulted in a new entity for financial reporting purposes, the Company is referred to as the “Predecessor Company” for all periods preceding the Convenience Date and the “Successor Company” for all periods subsequent to the Convenience Date. In addition, the consolidated results of the Successor Company may not be comparable in certain respects to those of the Predecessor Company.
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| | Successor Company | | | Predecessor Company | |
| | Year ended | | Eight months ended | | | Four months ended | | Year ended | | Year ended | | Year ended | |
| | December 31, | | December 31, | | | April 30, | | December 31, | | December 31, | | December 31, | |
(in thousands of U.S. $) | | 2012 | | 2011 | | | 2011 | | 2010 | | 2009 | | 2008 | |
REVENUE | | | | | | | | | | | | | | |
Product sales, net | | $ | 221,326 | | $ | 139,307 | | | $ | 69,198 | | $ | 211,495 | | $ | 191,951 | | $ | 190,816 | |
Royalty revenue | | 18,449 | | 13,670 | | | 10,941 | | 34,461 | | 62,171 | | 91,546 | |
License fees (1) | | 4,050 | | — | | | 127 | | 286 | | 25,556 | | 910 | |
| | 243,825 | | 152,977 | | | 80,266 | | 246,242 | | 279,678 | | 283,272 | |
| | | | | | | | | | | | | | |
EXPENSES | | | | | | | | | | | | | | |
Cost of products sold (2) | | 102,706 | | 90,348 | | | 32,219 | | 106,304 | | 104,616 | | 101,052 | |
License and royalty fees | | 618 | | 264 | | | 68 | | 5,889 | | 10,431 | | 14,258 | |
Research and development | | 7,056 | | 14,076 | | | 5,686 | | 26,790 | | 23,701 | | 53,192 | |
Selling, general and administration | | 70,985 | | 60,424 | | | 24,846 | | 89,238 | | 81,504 | | 98,483 | |
Depreciation and amortization | | 34,503 | | 23,973 | | | 14,329 | | 33,745 | | 33,251 | | 33,998 | |
In-process research and development | | — | | — | | | — | | — | | — | | 2,500 | |
Write-down of assets held for sale (3) | | 277 | | — | | | 570 | | 1,450 | | 3,090 | | 1,283 | |
Write-down of property, plant and equipment (4) | | 877 | | 4,502 | | | 215 | | 4,779 | | — | | — | |
Write-down of intangible assets (5) | | — | | 10,850 | | | — | | 2,814 | | — | | — | |
Escrow settlement recovery (6) | | — | | — | | | — | | (4,710 | ) | — | | — | |
Write-down of goodwill (7) | | — | | — | | | — | | — | | — | | 649,685 | |
| | 217,022 | | 204,437 | | | 77,933 | | 266,299 | | 256,593 | | 954,451 | |
Operating income (loss) | | 26,803 | | (51,460 | ) | | 2,333 | | (20,057 | ) | 23,085 | | (671,179 | ) |
| | | | | | | | | | | | | | |
Other (expenses) income: | | | | | | | | | | | | | | |
Foreign exchange (loss) gain | | (751 | ) | 1,461 | | | (646 | ) | 1,011 | | (1,612 | ) | 540 | |
Other income (expense) | | 1,320 | | 547 | | | 34 | | (571 | ) | 378 | | 1,192 | |
Debt restructuring costs (8) | | — | | — | | | — | | (9,277 | ) | — | | — | |
Interest expense | | (20,390 | ) | (11,945 | ) | | (10,327 | ) | (40,258 | ) | (38,039 | ) | (44,490 | ) |
Write-down and other deferred financing charges (9) | | — | | — | | | — | | (291 | ) | (643 | ) | (16,544 | ) |
Write-downs of investments (10) | | (561 | ) | (2,035 | ) | | — | | (1,297 | ) | — | | (23,587 | ) |
Debt extinguishment loss (13) | | (4,437 | ) | | | | | | | | | | | |
Loan settlement gain (11) | | — | | — | | | — | | 1,880 | | — | | — | |
Gain on disposal of Laguna Hills manufacturing facility (12) | | — | | — | | | — | | 2,005 | | — | | — | |
Total other expenses | | (24,819 | ) | (11,972 | ) | | (10,939 | ) | (46,798 | ) | (39,916 | ) | (82,889 | ) |
Income (loss) before reorganization items, gain on extinguishment of debt and settlement of other other liabilities and income taxes | | 1,984 | | (63,432 | ) | | (8,606 | ) | (66,855 | ) | (16,831 | ) | (754,068 | ) |
Reorganization items | | — | | — | | | 321,084 | | — | | — | | — | |
Gain on extinguishment of debt and settlement of other liabilities | | — | | — | | | 67,307 | | — | | — | | — | |
(Loss) income before taxes | | 1,984 | | (63,432 | ) | | 379,785 | | (66,855 | ) | (16,831 | ) | (754,068 | ) |
Income tax (recovery) expense | | 8,210 | | (2,986 | ) | | 267 | | (44 | ) | 6,037 | | (12,892 | ) |
Net (loss) income | | (6,226 | ) | (60,446 | ) | | 379,518 | | (66,811 | ) | (22,868 | ) | (741,176 | ) |
| | | | | | | | | | | | | | |
Basic and diluted net (loss) income per common share | | $ | (0.49 | ) | $ | | (4.82 | ) | | $ | 4.46 | | $ | (0.78 | ) | $ | (0.27 | ) | $ | (8.71 | ) |
| | | | | | | | | | | | | | |
Basic and diluted weighted average number of common shares outstanding (in thousands) | | 12,791 | | 12,528 | | | 85,185 | | 85,168 | | 85,130 | | 85,118 | |
| | | | | | | | | | | | | | | | | | | | | |
Footnotes:
(1) | During the year ended December 31, 2012, the Successor Company recognized $4.0 million of license fee revenue in connection with the completion of certain product development milestones defined under the terms of the collaboration arrangement with Ethicon, LLC and Ethicon, Inc. (“Ethicon”) related to its proprietary Quill Technology. During the year ended December 31, 2009, the Predecessor Company received a one-time up-front payment of $25.0 million from Baxter International Inc. (“Baxter”) under the terms of the Amended and Restated Distribution and Licence Agreement between Angiotech US, Angiotech International GmbH, Baxter Healthcare Corporation and Baxter Healthcare, S.A. dated January 1, 2009 (the “Baxter Distribution and License Agreement”). The payment was received in lieu and settlement of future royalty and milestone obligations related to existing formulations of CoSeal and future related products. |
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(2) | During the eight months ended December 31, 2011, the Successor Company’s net income included $22.6 million of additional cost of products sold expense related to the revaluation of its inventory from $37.5 million to $60.1 million in connection with our implementation of fresh start accounting on April 30, 2011. This is also the primary reason for the decline in the gross margin earned from medical device product sales from 53.4% during the four months ended April 30, 2011 to 35.7% during the eight month ended December 31, 2011. This non-recurring, non-cash fair value adjustment to inventory was fully charged to cost of products sold during the eight months ended December 31, 2011 and had no impact on the Successor Company’s cash flows, liquidity, credit profile or capital resources. |
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(3) | During the year ended December 31, 2012, the Successor Company recorded a $0.3 million impairment charge on a property that has been classified as held-for-sale and is being marketed for sale in connection with the closure of its Denmark manufacturing facility. As at December 31, 2008, the Predecessor Company had three properties that were designated and classified as held-for-sale in Vancouver, Canada; Syracuse, New York and Puerto Rico. Impairment charges of $0.6 million, $1.5 million, $3.0 million and $1.3 million were recorded during the four months ended April 30, 2011, and the years ended December 31, 2010, December 31, 2009 and December 31, 2008, respectively, to adjust the carrying values of these properties to the lower of cost and fair value less estimated selling costs. The Puerto Rico property was sold for net proceeds of $0.7 million in January 2010, the Vancouver property was sold for |
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| net proceeds of $1.8 million in May 2011 and the Syracuse property was sold for net proceeds of $0.9 million in June 2011. |
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(4) | During the eight months ended December 31, 2011, the Successor Company recorded $4.5 million of impairment write-downs of certain manufacturing equipment, furniture and fixtures, and leasehold improvements in connection with: (i) the restructuring of its research and development department; and (ii) the termination of its anti-infective research and development program in the later part of 2011. During the year ended December 31, 2010, the Predecessor Company recorded impairment write-downs of $4.8 million of certain laboratory and manufacturing equipment in connection with: (i) the suspension of its research and development activities related to the fibrin and thrombin technologies acquired from Haemacure Corporation (“Haemacure”) in early 2010; and (ii) restructuring changes that were initiated in connection with the Recapitalization Transaction. |
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(5) | During the eight months ended December 31, 2011, the Successor Company recorded $10.9 million of impairment write-downs related to the termination of its anti-infective research and development program. Similarly, during the year ended December 31, 2010, the Predecessor Company recorded a $1.7 million write-down on certain of its intellectual property in connection with the suspension of research and development activities related to the fibrin and thrombin technologies acquired from Haemacure. In addition, the Predecessor Company also recorded a $1.1 million write-down of the intellectual property related to the Option IVC filter in connection with the termination of its 2008 License, Supply, Marketing and Distribution Agreement with Rex Medical LP (“Rex”). |
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(6) | The $4.7 million recovery represents settlement funds that were received in connection with the resolution of the Predecessor Company’s dispute with RoundTable Healthcare Partners, LP (“Roundtable”) over $13.5 million of escrow funds that were being held by LaSalle Bank in connection with its 2006 acquisition of American Medical Instruments Holding, Inc. All legal proceedings have since been dismissed. |
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(7) | During the third quarter of 2008, the Predecessor Company wrote-down the carrying value of its goodwill associated with the Medical Device Products segment by $599.4 million. The remaining balance of $26.8 million was subsequently written off in the fourth quarter of 2008. As at December 31, 2008, the Predecessor Company also determined that the goodwill allocated to its Licensed Technologies segment was impaired and accordingly, management wrote off the remaining balance of $23.5 million. |
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(8) | During the year ended December 31, 2010, the Predecessor Company incurred debt restructuring costs of $9.3 million for fees and expenses related to the Recapitalization Transaction. These fees and expenses represent professional fees paid to both the Predecessor Company and the 7.75% Senior Subordinated Noteholders’ financial and legal advisors to assist in the analysis of certain financial and strategic alternatives. |
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(9) | During the year ended December 31, 2010, the Predecessor Company wrote-off $0.3 million of deferred financing costs related to its shelf registration statement that was filed with the SEC in 2009. During the year ended December 31, 2009, the Predecessor Company wrote-off $0.6 million of deferred financing costs due to the early termination of the term loan portion of its credit facility with Wells Fargo Foothill LLC. During the third and fourth quarters of 2008, the Predecessor Company also expensed $13.5 million and $3.0 million of deferred financing charges, respectively, related to the suspension of a note purchase agreement. |
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(10) | During the year ended December 31, 2012, the Successor Company disposed of $2.6 million of its short term investment in equity securities in a publicly traded biotechnology company for net proceeds of $2.3 million and realized a loss of $0.4 million. The Successor Company also recorded $0.2 million of other-than-temporary impairment losses on this investment due to uncertainty about its ability to recover the investment’s cost. During the eight months ended December 31, 2011, the Successor Company recognized $2.0 million of similar other-than-temporary impairment losses on this investment. . During the year ended December 31, 2010, the Predecessor Company recorded $1.3 million of write-offs related to its long term investments in three private biotechnology companies that were determined to be irrecoverable. In 2008, the Predecessor Company wrote-down and realized a loss on investments of $10.7 million, $1.9 million and $11.0 million in the second, third and fourth quarters respectively. In 2007, the Predecessor Company wrote-down and realized a loss on investments of $8.2 million. |
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(11) | During the year ended December 31, 2010, the Predecessor Company recorded a $1.9 million loan settlement gain relating to the settlement of its loan to Haemacure Corporation (“Haemacure”) in connection with its acquisition of certain product candidates and technology assets from Haemacure. |
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(12) | During the year ended December 31, 2010, the Predecessor Company recorded a $2.0 million gain from the sale of its Laguna Hills manufacturing facility and related long-lived assets. |
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(13) | During the year ended December 31, 2012, the Successor Company incurred a $4.4 million debt extinguishment loss upon the exchange and settlement of $225.0 million New Notes for $229.4 million of Senior Notes, which includes a 2% Early Tender Premium. |
BALANCE SHEET INFORMATION
| | Successor Company | | | Predecessor Company | |
As at | | Year ended December 31, | | | Year ended December 31, | |
(in thousands of U.S.$) | | 2012 | | 2011 | | | 2010 | | 2009 | | 2008 | |
Cash, cash equivalents and short-term investments | | $ | 46,369 | | $ | 25,432 | | | $ | 37,968 | | $ | 57,322 | | $ | 39,800 | |
Working capital | | 22,056 | | 65,509 | | | (518,739 | ) | 66,512 | | 51,767 | |
Total assets | | 608,402 | | 608,106 | | | 305,998 | | 370,059 | | 385,197 | |
Total long-term obligations | | 353,379 | | 427,153 | | | 50,211 | | 620,160 | | 623,655 | |
Deficit | | (66,672 | ) | (60,446 | ) | | (933,352 | ) | (866,541 | ) | (843,673 | ) |
Total shareholders’ equity (deficit) | | 140,668 | | 146,407 | | | (384,076 | ) | (313,287 | ) | (299,873 | ) |
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QUARTERLY RESULTS
The following tables present our unaudited consolidated quarterly results of operations for each of our last eight quarters:
| | Successor Company | |
| | Quarter ended | | Quarter ended | | Quarter ended | | Quarter ended | |
| | December 31, | | September 30, | | June 30, | | March 31, | |
(in thousands of U.S.$, except per share data) | | 2012 | | 2012 | | 2012 | | 2012 | |
Revenue | | | | | | | | | |
Product sales | | $ | 57,518 | | $ | 52,661 | | $ | 56,523 | | $ | 54,623 | |
Royalty and license revenue | | 7,782 | | 3,976 | | 4,815 | | 5,927 | |
Total revenues | | 65,300 | | 56,637 | | 61,338 | | 60,550 | |
Gross Margin: | | | | | | | | | |
Medical Device Products | | 35,724 | | 29,619 | | 29,953 | | 30,721 | |
Licensed Technologies | | 2,602 | | 2,848 | | 3,999 | | 5,035 | |
Total Gross Margin | | 38,326 | | 32,467 | | 33,952 | | 35,756 | |
Operating (loss) income | | 8,636 | | 6,613 | | 4,626 | | 6,929 | |
Net income (loss) | | 5,329 | | (8,608 | ) | (2,948 | ) | 1 | |
Basic net income (loss) per common share | | $ | 0.42 | | $ | (0.67 | ) | $ | (0.23 | ) | $ | — | |
Diluted net income (loss) per common share | | $ | 0.42 | | $ | (0.67 | ) | $ | (0.23 | ) | $ | — | |
| | Successor Company | | | Predecessor Company | |
| | Quarter ended | | Quarter ended | | Two months ended | | | One month ended | | Quarter ended | |
| | December 31, | | September 30, | | June 30, | | | April 30, | | March 31, | |
(in thousands of U.S.$, except per share data) | | 2011 | | 2011 | | 2011 | | | 2011 | | 2011 | |
Revenue | | | | | | | | | | | | |
Product sales | | $ | 51,506 | | $ | 51,899 | | $ | 35,902 | | | $ | 16,365 | | $ | 52,834 | |
Royalty and license revenue | | 7,106 | | 5,497 | | 1,068 | | | 5,309 | | 5,758 | |
Total revenues | | 58,612 | | 57,396 | | 36,970 | | | 21,674 | | 58,592 | |
Gross Margin: | | | | | | | | | | | | |
Medical Device Products | | 27,882 | | 14,123 | | 9,915 | | | 8,148 | | 29,870 | |
Licensed Technologies | | 5,947 | | 4,427 | | 4,048 | | | 1,258 | | 4,726 | |
Total Gross Margin | | 33,829 | | 18,550 | | 9,986 | | | 13,383 | | 34,596 | |
Operating (loss) income | | (22,080 | ) | (18,066 | ) | (11,314 | ) | | 2,378 | | (47 | ) |
Net loss | | (27,514 | ) | (18,684 | ) | (14,248 | ) | | 397,519 | | (18,001 | ) |
Basic and diluted loss per common share | | $ | (2.20 | ) | $ | (1.47 | ) | $ | (1.12 | ) | | $ | 4.67 | | $ | (0.21 | ) |
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Item 7.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
ANGIOTECH PHARMACEUTICALS, INC.
For the year ended December 31, 2012
(All amounts following are expressed in U.S. dollars unless otherwise indicated.)
The following management’s discussion and analysis (“MD&A”) for the year ended December 31, 2012 should be read in conjunction with our audited consolidated financial statements for the year ended December 31, 2012 prepared in accordance with United States generally accepted accounting principles (“U.S. GAAP”) and the applicable rules and regulations of the U.S. Securities and Exchange Commission (“SEC”) for the presentation of annual financial information. Additional information relating to our company is available by accessing the SEDAR website at www.sedar.com or the SEC’s EDGAR website at www.sec.gov/edgar.shtml.
Forward-Looking Statements and Cautionary Factors That May Affect Future Results
Statements contained in this Annual Report on Form 10-K that are not based on historical fact, including without limitation statements containing the words “believes,” “may,” “plans,” “will,” “estimates,” “continues,” “anticipates,” “intends,” “expects” and similar expressions, constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995 and constitute “forward-looking information” within the meaning of applicable Canadian securities laws. All such statements are made pursuant to the “safe harbor” provisions of applicable securities legislation. Forward-looking statements may involve, but are not limited to, comments with respect to our objectives and priorities for 2013 and beyond, our strategies or future actions, our targets, expectations for our financial condition and the results of, or outlook for, our operations, research and development and product and drug development. Such forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause the actual results, events or developments to be materially different from any future results, events or developments expressed or implied by such forward-looking statements.
Many such known risks, uncertainties and other factors are taken into account as part of our assumptions underlying these forward-looking statements and include, among others, the following: general economic and business conditions in the U.S., E.U. and the other regions in which we operate; market demand; technological changes that could impact our existing products or our ability to develop and commercialize future products; competition; existing governmental legislation and regulations and changes in, or the failure to comply with, governmental legislation and regulations; availability of financial reimbursement coverage from governmental and third-party payers for products and related treatments; adverse results or unexpected delays in pre-clinical and clinical product development processes; adverse findings related to the safety and/or efficacy of our products or products sold by our partners; decisions, and the timing of decisions, made by health regulatory agencies regarding approval of our technology and products; general capital markets conditions and the requirement for funding to sustain or expand manufacturing, commercialization or our various product development activities; and any other factors that may affect our performance.
In addition, our business is subject to certain operating risks that may cause any results expressed or implied by the forward-looking statements in this Annual Report on Form 10-K to differ materially from our actual results. These operating risks include: market acceptance of our technology and products; our ability to successfully manufacture and market our various products; our ability to attract and retain qualified personnel; our ability to complete, in a timely and cost effective manner, pre-clinical and clinical development of certain potential new products; the impact of changes in our business strategy or development plans; our ability to obtain or maintain patent protection for discoveries; potential commercialization limitations imposed by patents owned or controlled by third parties; our ability to obtain rights to technology from licensors; liability for patent claims and other claims asserted against us; our ability to successfully manufacture, market and sell our products; the availability of capital to finance our activities; our ability to service our debt obligations; and any other factors referenced in our other filings with the applicable securities regulatory authorities.
For a more thorough discussion of the risks associated with our business, see the section entitled “Risk Factors” in this Annual Report on Form 10-K.
Given these uncertainties, assumptions and risk factors, investors are cautioned not to place undue reliance on such forward-looking statements. Except as required by law, we disclaim any obligation to update any such factors or to publicly announce the result of any revisions to any of the forward-looking statements contained in this Annual Report on Form 10-K to reflect future results, events or developments.
This Annual Report on Form 10-K contains forward-looking information that constitutes “financial outlooks” within the meaning of applicable securities laws. We have provided this information to give shareholders general guidance on management’s current expectations of certain factors affecting our business, including our future financial results. Given the uncertainties, assumptions and
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risk factors associated with this type of information, including those described above, investors are cautioned that the information may not be appropriate for other purposes.
Basis of Presentation
On May 12, 2011 (the “Plan Implementation Date” or the “Effective Date”), we implemented a recapitalization transaction that, among other things, eliminated our $250 million 7.75% Senior Subordinated Notes due in 2014 (“Subordinated Notes”) and $16 million of related interest obligations in exchange for new common shares issued (the “Recapitalization Transaction”). In connection with the execution of this Recapitalization Transaction, on January 28, 2011, we and certain of our subsidiaries (the “Angiotech Entities”) filed for creditor protection under the Companies’ Creditors Arrangement Act (“CCAA”)in Canada and Chapter 15 of Title 11 of the Bankruptcy Code in the U.S (the “Creditor Protection Proceedings”).
Upon commencement of the Creditor Protection Proceedings through to the Convenience Date (as described below), we applied Accounting Standards Codification (“ASC”) No. 852 — Reorganization to prepare our consolidated financial statements. ASC No. 852 required us to distinguish transactions and events directly associated with the Recapitalization Transaction from ongoing operations of the business as follows: (i) certain expenses, recoveries, loss provisions, and other charges incurred during Creditor Protection Proceedings were reported as Reorganization Items on the Consolidated Statement of Operations and (ii) specific cash flow items directly related to the Reorganization Items were segregated on the Consolidated Statement of Cash Flows. In addition, in accordance with the terms of the recapitalization plan, we ceased to accrue interest from January 28, 2011 onwards on our pre-petition Subordinated Notes.
Upon emergence from Creditor Protection Proceedings and completion of the Recapitalization Transaction on the Effective Date, we were required to adopt fresh-start accounting in accordance with ASC No. 852 — Reorganization based on the following conditions being met: (i) total post-petition liabilities and allowed claims exceeded the reorganization value, which resulted from the Recapitalization Transaction; and (ii) pre-petition stockholders received less than 50% of the new common shares issued under the reorganization plan, thereby resulting in a substantive change in control. We applied fresh start accounting on April 30, 2011 (the “Convenience Date”) after concluding that the operating results between the Convenience Date and the Effective Date did not result in a material difference.
Given that the reorganization and adoption of fresh-start accounting resulted in a new entity for financial reporting purposes, the Company is referred to as the “Predecessor Company” for all periods preceding the Convenience Date and the “Successor Company” for all periods subsequent to the Convenience Date. Overall, the implementation of fresh start accounting resulted in: (i) a comprehensive revaluation of our assets and liabilities to their estimated fair values, (ii) the elimination of our pre-reorganization deficit, additional paid-in-capital and accumulated other comprehensive income balances and (iii) reclassification of certain balances. Given these material changes to our consolidated financial statements, the results of the Successor Company may not be comparable in certain respects to those of the Predecessor Company. However, given that these fresh start adjustments were non-cash in nature and did not change our business or operations, for comparative purposes, we have combined the results of the Predecessor Company for the eight months ended December 31, 2011 and the results of the Successor Company for four months ended April 30, 2011. We believe that the comparison of the year ended December 31, 2012 versus the year ended December 31, 2011 provides the best analysis of our operating results. Where specific income statement items have been significantly impacted, either temporarily or permanently, by the reorganization and fresh-start accounting, we have provided detailed explanations of such in the discussion below.
Business Overview
Angiotech develops, manufactures and markets medical device products and technologies. Our products are designed to serve physicians and patients primarily in the areas of interventional oncology, wound closure and ophthalmology.We currently operate in two business segments: Medical Device Products and Licensed Technologies.
Medical Device Products
Our Medical Device Products segment, which generates the majority of our revenue, develops, manufactures and markets a wide range of single use medical device products, as well as precision manufactured medical device components. These products and components are sold directly to hospitals, clinics, physicians, other end users, medical products distributors, and other third-party medical device manufacturers.
Our most significant product groups within this business segment include:
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·Interventional Oncology. We develop, manufacture and market a range of proprietary single use medical device products for the diagnosis of cancer, primarily biopsy devices and related products. We also offer additional product lines for selected other interventional radiology procedures performed primarily by physicians that also utilize our biopsy product lines. Our most significant product lines include our BioPince™ full core biopsy devices, our True-Core™ and SuperCore™ single use disposable biopsy devices, our T-Lok™ bone marrow biopsy devices and our SKATER™ line of drainage catheters. We sell the majority of these product lines through our direct sales organization directly to hospitals and other end users, as well as through third party medical products distributors in certain countries outside of the United States.
·Wound Closure. We develop, manufacture and market a full line of wound closure products, primarily various types of sutures and surgical needle products. Our most significant product lines include our Quill™ Knotless Tissue-Closure products (“Quill”) and our LOOK™ brand sutures for dental and general surgery. We sell these product lines, in particular our Quill product line, directly to hospitals, surgery centers, clinics and other end users through our direct sales organization, as well as through third party medical products distributors. We also manufacture certain of these products in finished form for other third party medical device manufacturers and distributors that sell them under independently owned brand names. During the year ended December 31, 2012, we entered into an arrangement with Ethicon, LLC and Ethicon, Inc. (collectively “Ethicon”) related to our proprietary Quill technology, certain manufacturing equipment and services (refer to the Quill Transaction section below).
·Ophthalmology. We develop, manufacture and market a selection of single-use disposable products for ophthalmic surgery, including various types of surgical blades used primarily in cataract surgery, as well as ancillary products including sutures, cannulas, eye shields and punctual plugs. Our most significant product lines include our Sharpoint™ brand disposable ophthalmic surgical blades. We sell these product lines directly, primarily to surgery centers and clinics, through our direct sales organization, as well as through third party medical products distributors. We also manufacture ophthalmic surgical blades in finished form for other third party medical device manufacturers and distributors that sell them under independently owned brand names.
·Medical Device Components. We develop, manufacture and market a wide range of components, primarily on a made-to-order basis, for other third party medical device manufacturers. These products primarily comprise unsterilized product components, which are shipped to the customer for final assembly and sterilization. These components are typically manufactured using the same manufacturing capabilities and technologies we utilize to produce our various other product lines. We sell these product lines directly to corporate customers through our direct sales organization. Our customers include many leading medical device manufacturers in the cardiology and vascular access, interventional radiology, ophthalmology, orthopedics, women’s health, and wound closure product areas.
Our strategy is to target certainspecialized medical markets where we can establish or maintain a leadership position in medical device products or components, and thereby achieve profitable revenue growth and improved cash flows. Key elements of this strategy include maintaining and investing in our precision manufacturing capabilities and technology, developing and investing in highly specialized sales and marketing personnel and activities, selectively investing in new product development, intellectual property and other proprietary know-how, and pursuing selective and disciplined business development, product or business acquisition activities that would enhance our capabilities or presence within our target customer base and markets.
Our Medical Device Products segment contains significant precision medical device manufacturing capabilities. As at December 31, 2012, we manufactured our products at seven different locations. Each facility has specific, and in some cases, proprietary expertise in certain types of medical device manufacturing as well as experience in complying with the significant regulations, quality and operating requirements that are critical aspects of medical products manufacturing. Certain of our key capabilities include electro-chemical cutting, chemical etching, match point metal grinding, custom insert molding, injection molding, wire and tube forming and plastic extrusion.
In April 2012, we announced plans to close our manufacturing facility in Denmark and to move the vast majority of product being manufactured at that facility to our facilities located in the United States, primarily due to the high cost of manufacturing in Denmark. Production activities associated with this facility are currently in the process of being moved to our facilities in the U.S. The closure of our Denmark manufacturing facility is expected to be completed by April 2013. As at December 31, 2012, we have incurred $0.7 million of retention and severance costs and $0.6 million of costs to execute transfer and transition activities.
Our Medical Device Product segment markets, sells and distributes our products through a group of highly specialized sales organizations that consist of direct sales and marketing personnel, which in some cases are supplemented by independent sales representatives and independent medical products distributors, depending on the product category, customer base or geographic location. We currently employ approximately49 direct sales and marketing personnel in our Interventional Oncology group, approximately 63 direct sales and marketing personnel in our Wound Closure group, and approximately 36 additional direct sales personnel serving customers in our other product areas and selected geographies outside of the U.S.
We conduct highly selective new product development activities, primarily at two of our manufacturing facility locations. Our product development groups include personnel with expertise in medical products and manufacturing engineering, regulatory affairs and
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quality assurance. These groups, in addition to supporting certain new products and product line extension initiatives, also support our manufacturing operations to enhance our existing manufacturing capabilities and operating efficiencies.
Licensed Technologies
Our Licensed Technologies segment includes certain of our legacy technologies for which research and development activities have been concluded. This segment generates additional revenue in the form of royalties received from partners who license and utilize these technologies in their medical device product lines.
We receive royalty revenue derived from sales of TAXUS paclitaxel-eluting coronary stents for the treatment of coronary artery disease (“TAXUS”) and Zilver PTX paclitaxel-eluting peripheral vascular stents for the treatment of vascular disease in the leg (“Zilver-PTX”), based upon our respective license agreements with BSCBoston Scientific Corporation (“BSC”) and Cook Medical, Inc. (“Cook”) for the use of several families of intellectual property relating tounderlying our proprietary paclitaxel technology. Our principal revenues in our Licensed Technologies segment to date have been royalties derived from sales of TAXUS by our partner BSC. We have licensed the same technology utilized by BSC in its TAXUS product line to Cook for use in its Zilver PTX product.
The royalty rate applied to BSC’s sales increases in certain countries depending upon unit sales volume achieved by BSC. The royalty raterates applied to Cook’s sales of Zilver PTX is aare flat rate,rates, regardless of the unit volume of sales achieved. At December 31, 2011 our Successor Company recorded a $4.0 million receivable in connection with a sales milestone fee that was triggered under the license agreement with Cook and is dependent upon Cook achieving a certain targeted level of sales of Zilver PTX. This fee was received on February 3, 2012.
Therea)TAXUS
The TAXUS stent, which incorporates our proprietary paclitaxel technology, is a small, balloon-expanded metal scaffold designed for placement in diseased arteries in the heart to restore blood flow by expanding and holding open the arteries upon deployment.
BSC first received approval to sell TAXUS in the E.U. in 2003 and in the U.S. in 2004. Subsequent to the U.S. approval of the TAXUS stent system in 2004, BSC has introduced multiple next generation coronary stent platforms that utilize our proprietary paclitaxel technology. TAXUS has been studied in multiple human clinical trials, as well as in independent registry studies, which have repeatedly demonstrated the safety and efficacy of TAXUS. In addition, the number of repeat surgery procedures has been shown to be significantly lower in patients receiving TAXUS than those receiving non drug-eluting, or bare metal, coronary stents.
On February 22, 2012, BSC announced that the TAXUS Liberte™ and the TAXUS ION™ coronary stent systems received U.S. Food and Drug Administration (“FDA”) approval for use in patients experiencing an acute myocardial infarction (“AMI”) or heart attack. This indication accounts for approximately 10% of all coronary interventions and arose from the FDA’s review of data from the Paclitaxel clinical program and the HORIZONS-AMI global trial. The HORIZONS-AMI trial included 3,600 randomized patients that that either received drug-eluting stents or bare-metal stents for the treatment of AMI. The HORIZONS-AMI trial clinical data, reviewed by BSC, demonstrated that paclitaxel-eluting stents were superior in efficacy to bare-metal stents in AMI patients by significantly reducing clinical and angiographic restenosis and exhibiting a comparable safety profile at 3 years.
TAXUS royalty revenues may continue to decline in future periods, primarily due to continued competitive pressures experienced by BSC in the market for drug-eluting coronary stents. We expect minimal expense associated withexpenses related to our receipt of future royalty revenue derived from BSC’s sales of TAXUS. We
b)Zilver-PTX
The Zilver PTX paclitaxel-eluting peripheral vascular stent; which incorporates our proprietary paclitaxel technology; is a small, self-expanding metal scaffold designed for placement in diseased arteries in the limbs to restore blood flow by expanding and holding open the arteries upon deployment.
Cook first received approval to sell Zilver PTX in the E.U. in 2009. In addition, as discussed under the Recent Significant Developments section below, on November 15, 2012, Cook received FDA approval to market and sell Zilver-PTX in the U.S. Historically, stent procedures for peripheral artery disease (“PAD”) in the limbs were limited due to high incidence of complications that often lead to subsequent surgical procedures, as well as risk of stent fracture with existing products, given peripheral vascular stents may be exposed and not protected by the patient’s anatomy as with coronary stents, which are implanted in vessels in the heart behind a patient’s rib cage. Cook has conducted multiple human clinical trials for Zilver PTX in the E.U., U.S., Japan, and selected other countries to assess product safety and efficacy. Clinical results for Zilver PTX have suggested significant reduction in complications as compared to traditional PAD treatments.
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Table of Contents
As Zilver-PTX is now approved for sale in the U.S., we expect to receive additional royalty revenue from future sales growth of Zilver-PTX. In addition, we willexpect to incur royalty expense associated with Cook’s sales of Zilver PTX, under our license agreement with the National Institutes of Health. Health (“NIH”) for certain intellectual property owned by NIH relating to this product line.
We maywill continue to receive royalty revenue from BSC and Cook forover the life of the licensed patent families in each respective geography, depending upon BSC’s and Cook’s level of product sales and commercial and clinical success.
Strategy
Our strategy is to target selected market segments where we can establish or maintain a leadership position in medical device products or components, and thereby achieve profitable revenue growth and improved cash flows. Key elements of this strategy include:
·Maintaining and Investing in Our Precision Manufacturing Capabilities and Technology. We maintain multiple facilities with precision manufacturing capabilities specifically tailored to medical products. These operations enable us to control the most critical aspects of manufacturing of our products or product components, and thereby assure we are able to readily and flexibly provide products and serve our customers in a safe, consistent and high quality manner that complies with all regulations. We believe maintaining and investing in these capabilities and ensuring the on-time delivery of quality products provides a key barrier to entry in our current markets, and may facilitate more rapid capture of new market or product opportunities as compared to competitors that manufacture using mainly outside vendors or third party manufacturers.
·Developing and Investing in Highly Specialized Sales and Marketing Personnel and Activities. We have developed several focused, specialized groups of sales and marketing personnel that, in combination with third party distribution networks, target highly selective market sub-segments or customers, with an emphasis on product areas where our precision manufacturing capabilities may provide us with a competitive advantage in markets that may be underserved by the largest medical product providers and manufacturers. We believe this hybrid selling approach, as opposed to working solely through third party sales organizations or personnel, facilitates our ability to build our most important product brands and help customers better understand the key advantages of our products and capabilities.
·Selectively Investing in New Product Development, Intellectual Property and Proprietary Know-How. We maintain dedicated medical device product engineering, regulatory and quality affairs personnel centered primarily in two of our facility locations. We believe maintaining dedicated product development resources in-house, in combination with our in-house manufacturing capabilities, may facilitate a more rapid and disciplined response to new market opportunities and customer needs, and may provide opportunities to improve our gross profit margins or our competitive position through the development of new, proprietary manufacturing technology or know-how.
·Pursuing Selective and Disciplined Business Development, Product or Business Acquisition Activities. We expect to continue to supplement our in-house product development and commercialization activities by selectively pursuing product licenses, distribution arrangements, acquisitions or other similar transactions. We believe such activities, when pursued within the discipline of our profitable operating model and within defined financial risk parameters, may provide additional opportunity for us to capitalize on, and generate additional operating profit and cash flow, from our significant investments in our dedicated manufacturing and sales and marketing resources.
Significant Recent Developments
AmendmentSale of Interventional Products Business to Revolving Credit FacilityArgon Medical Devices, Inc.
On March 12, 2012, we entered into an amendment to our Revolving Credit Facility in order to provide increased financial flexibility and further improve our overall liquidity. This amendment provides for, among other things: i) the repurchase of our outstanding Senior Floating Rate Notes, subject to certain terms and conditions; ii) the repurchase of equity held by current or former employees, officers or directors subject to certain limitations; iii) an increase in the amount of cash that can be held by our foreign subsidiaries; iv) the ability to dispose of certain of our intellectual property assets (at which time the component of the borrowing base supported by such intellectual property assets would be reduced to nil); v) a reduction in the restrictions surrounding eligibility of certain accounts receivable; vi) the removal of the lien over our short term investments; vii) a revision to the definition of EBITDA to allow for certain historical and future restructuring and CCAA costs; and viii) less restrictive reporting requirements when advances under the Revolving Credit Facility are below certain thresholds. We estimate total fees of $0.4 million to be paid to complete this amendment.
Change in Chief Executive Officer
On October 21, 2011,25, 2013, we announced that the employment of William L. Hunter, as the Company’s President and Chief Executive Officer, ended effective October 17, 2011. In addition, effective November 5, 2011 Dr. Hunter resigned from the Company’s Board of Directors. K. Thomas Bailey, the Company’s Chief Financial Officer, was appointed the Interim President and Chief Executive Officer and was subsequently named the President and Chief Executive Officer in February 2012.
Recapitalization and Emergence from Proceedings
Over the past several years, royalty revenue we receive from sales of TAXUS coronary stent systems by our partner BSC declined significantly. These declines led to significant constraints on our liquidity, working capital and capital resources, which adversely impacted our ability to continue to support our business initiatives and service debt obligations.
As a result, after extensively exploring a range of financial and strategic alternatives, on January 28, 2011 we and certain of our subsidiaries (collectively, the “Angiotech Entities”) voluntarily filed for creditor protection (the “CCAA Proceedings”) with the Supreme Court of British Columbia (the “Canadian Court”) under the Companies’ Creditors Arrangement Act (Canada) (the “CCAA”) to implement a recapitalization or restructuring of certain of our debt obligations (the “Recapitalization Transaction”) through a plan of compromise or arrangement (as amended, supplemented or restated from time to time, the “CCAA Plan”). In order to have the CCAA Proceedings recognized in the United States, on January 30, 2011, the Angiotech Entities commenced proceedings under Chapter 15 of Title 11 of the United States Code (the “U.S. Bankruptcy Code”) in the United States Bankruptcy Court (the U.S. Court) for the District of Delaware (together with the CCAA Proceedings, the “Creditor Protection Proceedings”). On January 13, 2011 and March 3, 2011, respectively, our common shares were delisted from the NASDAQ Stock Market (“NASDAQ”) and the Toronto Stock Exchange (“TSX”).
On April 4, 2011, a meeting was held for creditors whose obligations were compromised under the CCAA Plan (“Affected Creditors”) to vote for or against the resolution approving the CCAA Plan. The CCAA Plan was approved by 100% of the Affected Creditors, whose votes were registered and sanctioned by the order of the Canadian Court on April 6, 2011. This order was subsequently recognized by the U.S. Court on April 7, 2011. Affected Creditors who did not file a proof of claim in accordance with the procedure for the adjudication, resolution and determination of claims established by order of the Canadian Court on February 17, 2011 (the “Claims Procedure Order”) had their claims forever barred and extinguished and were not permitted to receive distributions under the CCAA Plan. On May 12, 2011 (the “Plan Implementation Date” or the “Effective Date”), all of our existing common shares and
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options were cancelled without payment or consideration and the Subordinated Noteholders’ claims of $266 million were settled for 12,500,000 new common shares issued in accordance with the terms of the CCAA Plan. All other Affected Creditors elected, or were deemed to have elected, for cash settlement of their claims. As a result, the $4.5 million of distribution claims of Affected Creditors (excluding Subordinated Noteholders) were settled for $0.4 million in cash. For more detail on additional transactions that were consummated as part of the CCAA Plan on the Plan Implementation Date, refer to note 3 in our audited consolidated financial statements for the year ended December 31, 2011.
On February 7, 2011, we entered into a definitive agreement with Wells Fargo Capital Finance, LLCto sell certain of our subsidiaries, comprising our Interventional Products Business to Argon Medical Devices, Inc., a Delaware corporation (“Wells Fargo”Argon”) to secure, which is a $28.0 million debtor-in-possession credit facility (the “DIP Facility”). The DIP Facility provided us with liquidityportfolio company of RoundTable, for working capital, general corporate purposes and expenses during the implementation of the CCAA Plan. On the Plan Implementation Date, the DIP Facility was repaid and terminated, and we entered into a new credit facility (as amended, the “Revolving Credit Facility”) with Wells Fargo, which provides for potential borrowings up to $28 million (see note 16(f)). We incurred approximately $1.5$362.5 million in feescash consideration. Subject to obtain and completevarious conditions, the Revolving Credit Facility.
On May 12, 2011, upon thetransaction is expected to close of business, we concluded substantially all the activities relatingprior to the Recapitalization Transaction and the Angiotech Entities emerged from Creditor Protection Proceedings. During the course of the Creditor Protection Proceedings, the majority of our businesses continued to operate as usual and there were no material disruptions to our operations, marketing or product distribution activities.
Fresh-Start Accounting
Following the completion of the Recapitalization Transaction and our emergence from Creditor Protection Proceedings, we were required to adopt fresh-start accounting in accordance with ASC No. 852 — Reorganization. We elected to apply fresh-start accounting on a convenience dateend of April 30, 2011 (the “Convenience Date”) after concluding that operating results between the Effective Date and the Convenience Date did not result in a material difference. Material adjustments resulting from the reorganization and the application of fresh-start accounting have therefore been reflected in the May 1, 2011 consolidated balance sheet and the four months ended April 2011 consolidated statements of operations. Material cash payments of $8.7 million made in May 2011 related to the Recapitalization Transaction have been reflected in the period subsequent to the Convenience Date. Given that the reorganization and adoption of fresh-start accounting resulted in a new entity for financial reporting purposes, Angiotech is referred to as the “Predecessor Company” for all periods preceding the Convenience Date and the “Successor Company” for all periods subsequent to the Convenience Date.2013.
The going concern enterprise value of the Successor Company’s operations for purposes of fresh start accounting was estimated to be within a range of $450 million to $580 million, excluding the value of cash and cash equivalents and short term investments. We determined that $517 million was the best estimate of the Successor Company’s enterprise value.
Upon implementation of fresh-starting accounting, we allocated the estimated reorganization value as detailed in the table below (including the value of cash, short term investments and non-interest bearing liabilities) to our various assets and liabilities based on their estimated fair values and eliminated our deficit, additional paid-in-capital and accumulated other comprehensive income balances. Deferred income taxes were recorded in accordance with ASC No. 740. The reorganization value was first assigned to tangible and identifiable intangible assets. The excess of the reorganization value over and above the identifiable net asset values resulted in goodwill. We also recorded the Successor Company’s debt and equity at the fair value estimated through this process. As the estimated enterprise value is dependent on the achievement of future financial results and various assumptions, there is no assurance that financial results will be realized to support the estimated enterprise value.
| | in 000’s | |
Successor Company enterprise value | | $ | 516,729 | |
Add: | | | |
Cash and cash equivalents | | 30,222 | |
Short-term investments | | 5,294 | |
Non-interest bearing liabilities | | 140,563 | |
Reorganization value to be allocated to assets | | $ | 692,808 | |
Less amount allocated to tangible and identifiable intangible assets, based on their fair values | | 567,563 | |
Unallocated reorganization value attributed to goodwill | | 125,245 | |
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AllocationTable of Reorganization Value to Assets and LiabilitiesContents
The following table summarizes the April 30, 2011 fresh-start accounting adjustments required to adjust the carrying valuesHighlights and selected terms of the Successor Company’s asset and liabilities to their estimated fair values:
| | in 000’s | |
| | Debit / (Credit) | |
Inventory | | $ | 22,616 | |
Deferred income tax assets, current | | (2,741 | ) |
Deferred income tax assets, non-current | | (122 | ) |
Assets held for sale | | 143 | |
Property, plant and equipment | | 7,423 | |
Intangible assets | | 250,466 | |
Goodwill | | 119,878 | |
Deferred financing costs | | (4,372 | ) |
Deferred leasehold inducements | | 3,485 | |
Deferred income tax liabilities, current | | (3,544 | ) |
Deferred income tax liabilities, non-current | | (61,404 | ) |
Other liabilities | | 9,388 | |
Net gains from fresh start accounting | | $ | 341,217 | |
The assumptions used and approaches applied on April 30, 2011 to derive estimated fair values of our assets and liabilities on our May 1, 2011 balance sheet are summarized as follows:
Inventory
As at May 1, 2011, the $60.1 million estimated fair value of inventory was determined as follows:transaction include:
· Raw materials — no fair value adjustments were recorded to raw materials, given that their existing carrying values were determined to be representativeOn March 22, 2013, Angiotech Pharmaceuticals, Inc., Angiotech International AG, a Swiss corporation (“AIAG”), and Angiotech Pharmaceuticals (US), Inc., a Washington corporation (“AUS” and, collectively with the Company and AIAG, the “Sellers”) entered into a Stock Purchase Agreement (the “SPA”) with Argon Medical Devices Holdings, Inc., a Delaware corporation (“Argon Holdco”), Argon Medical Devices, Inc., a Delaware corporation (“Argon”), and Argon Medical Devices Netherlands B.V., a private company with limited liability incorporated under the laws of current replacement costs.the Netherlands (“Argon Netherlands” and, collectively with Argon, “Buyers”). AIAG and AUS are subsidiaries of Angiotech.
· Work-in-process inventory (“WIP”) —The businesses being acquired by Argon include all manufacturing, commercial and administrative operations relating to Angiotech’s Interventional Products Business. Key product lines in this business include Angiotech’s BioPince™ full core biopsy devices, Tru-Core™ II (fully automatic) and SuperCore™ (semi-automatic) disposable biopsy instruments, T-Lok™ bone marrow biopsy devices, and Skater™ drainage catheters, among other products. Angiotech’s Interventional Products Business also manufactures components for other third party medical device manufacturers, operates manufacturing facilities in Wheeling, IL, Gainesville, FL and Stenlose, Denmark and employs a direct sales and marketing organization in the fair value of WIP was determined based on estimated selling prices less conversion costs to complete manufacturing, sellingU.S. and disposal costs, and a reasonable profit allowance for manufacturing and selling efforts. When selectingEurope. Angiotech’s Interventional Products Businesses recorded $101.6 million in revenue during the estimated selling prices for WIP, we applied the fair value concept of “best and highest use” by assessing the principal and most advantageous market where the highest profit margin could be obtained.year ended December 31, 2012.
· Finished goods inventory —Consideration for the fair valuetransaction will total $362.5 million in cash, subject to a potential working capital adjustment, with $347.5 million to be received upon the close of finished goods was determined based on estimated selling pricesthe transaction, and $15 million to be retained in escrow for a period of inventory on hand, less selling and disposal costs, as well as a reasonable profit allowance for selling efforts.12 months to secure indemnification obligations relating to the transaction.
The following table summarizes·We expect to use the respective estimated fair valuesproceeds received from the transaction to repay all of our remaining outstanding debt obligations, including remaining amounts due under our New Notes due in December 2013 and book valuesthe Senior Notes due in December 2016. We also expect to terminate our Revolving Credit Facility with Wells Fargo Capital Finance upon the close of the Successor Company’s and Predecessor Company’s inventory:
| | May 1,
2011
Successor
Company | | | April 30,
2011
Predecessor
Company | |
Raw materials | | $ | 10,705 | | | $ | 10,705 | |
Work in process | | 25,978 | | | 13,908 | |
Finished goods | | 23,418 | | | 12,872 | |
Total | | $ | 60,101 | | | $ | 37,485 | |
Deferred income taxes and other tax liabilitiestransaction.
Deferred income taxes·The transaction is subject to approval of Angiotech shareholders. Shareholders representing approximately 70% of Angiotech’s outstanding shares have been adjustedsigned voting agreements in connection with the transaction, and have agreed to reflectvote their shares in favor of the tax effectsproposed transaction.
·The transaction is conditioned on, among other things, expiration of differences betweenapplicable waiting periods under the estimated fair valueU.S. Hart Scott Rodino Act.
·We expect to make a cash distribution, in the form of identifiable assetsa return of capital, to shareholders in an amount to be determined shortly after the close of the transaction, and liabilitiessubsequent to the repayment of our debt obligations, final payment of all transaction related fees and their tax basisexpenses, and final determination by management and the benefitsBoard of any unused tax losses, tax credits, other tax attributesDirectors as to the extent thatoperating cash needs of our remaining businesses.
Upon the conclusion of the transaction, we will retain our Surgical Products Business and our Royalty Business. Revenue recorded by Angiotech during the year ended December 31, 2012 from these amounts are more likely than notbusinesses was $123.1 million and $15.1 million, respectively. The Royalty Business consists of a portfolio of intellectual property related to be realized. Measurement period adjustments were made to deferred income tax liabilities as explaineda variety of biomaterial, drug and medical device related technologies, and technology applications, which includes TAXUS and Zilver-PTX. Key product lines in (a) above.our Surgical Products business include wound closure
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Property, Plant and Equipment and Assets Held for SaleTable of Contents
Property, plantproducts such as the Quill, Look™ brand sutures for general and equipment were recorded at their estimated fair value of $47.7 million baseddental surgery and Sharpoint™ UltraGlide and Microsurgical sutures, and ophthalmic products such as the Sharpoint™ brand ophthalmic surgical blades. Our Surgical Products Business also manufactures components for other third party medical device manufacturers, and operates manufacturing facilities in Reading, PA, Aguadilla, PR and Taunton, England. Our Surgical Products Business also employs a specialized direct sales and marketing team, with dedicated groups focused on the highestits wound closure, ophthalmology and best use of these assets. Assets held for sale were recorded at $2.6 million, which represents their fair values less costs to sell. The following approaches were applied to determine fair value:medical components product lines respectively.
·The market approachWe will also retain all intellectual property, rights, assets and inventory related to our BioSentry™ (formerly Bio-Seal) product line, which was recently approved for sale in the U.S. by the FDA (see the FDA Approval of Bio-Sentry™ Long Biopsy Tract Plug System section below for further discussion). Coincident with the transaction, we concluded a three year Manufacturing and Supply Agreement with Argon with respect to BioSentry. Argon will not, as part of this agreement, have commercialization rights to BioSentry. U.S. commercial launch activities for this product line will continue, and customers may inquire or sales comparison approach utilizes recent sales or offerings of similar assets to derive a probable selling price. Under this method, certain adjustments may be made to compensateplace orders for differences in age, condition, operating capacity and the recentness of comparable transactions.BioSentry through our existing customer service line.
·The cost approach considers the current costs required to construct, purchase or replace similar assets. This approach incorporates certain assumptions about the age and estimated useful livesWe will retain real property assets located in Stenlose, Denmark as part of the transaction, and will retain net proceeds generated upon any sale of such real property assets under consideration, which may include adjustments forsubsequent to Angiotech and Argon concluding our previously announced transfer of production activities from Stenlose to facilities located in the following factors:U.S. Such transfer is still currently expected to conclude during the first half of 2013.
Upon the close of the transaction, we will cease to be a voluntary reporting public issuer, and will therefore no longer file financial or other information with the U.S. Securities and Exchange Commission.
Refinancing of $225 million of Senior Floating Rate Notes
·Physical deterioration: refersIn July 2012, we launched an offer to the lossexchange up to a maximum of $225.0 million in value resulting from wearaggregate principal amount of our outstanding $325.0 million existing Floating Rate Notes (the “New Notes”) due December 1, 2012 (the “Maximum Principal Exchange Amount”) for new 9% Senior Notes due December 1, 2016 (the “Senior Notes”) issued by Angiotech Pharmaceuticals (US), Inc. pursuant to an Offering Memorandum and tear, deterioration, deferred maintenance, exposure to the elements, age and design flaws.
·Functional obsolescence: refers to the loss in value resulting from impediments or factors specific to the asset under consideration, which prevents it from operating efficiently or as intended.
·Economic obsolescence: refers to the loss in value resulting from external factors such as market conditions, environmental conditions, or regulatory changes.
·Assets held for sale were adjusted to estimated fair value less selling costs based on recent purchase offers received.
·Third party appraisers were engaged to assess the value of land and buildings. A combinationConsent Solicitation Statement (the “Exchange Offer”). On August 13, 2012, $225.0 million of the sales comparison$255.5 million tendered New Notes were irrevocably extinguished and income based approaches were used to estimateexchanged, on a pro rata basis, for $229.4 million of Senior Notes. All note holders that tendered their New Notes by the valueJuly 23, 2012 early tender date received the Senior Notes with a principal amount that included a 2% premium above the principal amount of landthe New Notes exchanged. In accordance with ASC No. 470-50 — Debt Extinguishment and buildings.
·Cost and market approaches were used to assess Modification, the estimated fair valuerefinancing of leasehold improvements, manufacturing equipment, research equipment, office furniture and equipment and computer equipment.
·The current carrying valuesthe $225 million of construction-in-progress (“CIP”) assets wereNew Notes was determined to be representative of fair value.
The following table summarizes the respective estimated fair values and book values of the Successor Company’s and Predecessor Company’s property, plant and equipment:
| | May 1,
2011
Successor
Company | | | April 30,
2011
Predecessor
Company | |
Land | | $ | 3,645 | | | $ | 4,810 | |
Building | | 14,645 | | | 11,775 | |
Leasehold Improvements | | 6,430 | | | 9,426 | |
Manufacturing equipment | | 19,407 | | | 12,353 | |
Research equipment | | 401 | | | 183 | |
Office furniture and equipment | | 1,188 | | | 327 | |
Computer equipment | | 1,982 | | | 1,401 | |
Total | | $ | 47,698 | | | $ | 40,275 | |
| | | | | | |
Assets held for sale | | $ | 2,624 | | | $ | 2,481 | |
Intangible Assets
The $377.5 million estimated fair value of intangible assets was determined using the following income approach methodologies:
·The excess earnings method estimates the value of an intangible asset by quantifying the amount of residual or excess cash flows generated by an asset and discounting those cash flows to the present. The method substantially resembles a traditional financial projection for a company, which includes revenues, costs of goods sold, operating expenses and taxes projected for the next several years based on reasonable assumptions. Unlike a traditional financial projection, however, the excess earnings methodology requires the application of contributory asset charges. These charges represent the return on
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andTable of all contributory assets, and are applied in order to estimate the “excess” earnings generated by the subject intangible asset. Contributory asset charges typically include payments for the use of working capital, tangible assets and other intangible assets.
·The relief from royalty method is based on the assumption that, in lieu of ownership of an intangible asset, an independent licensor would be willing to pay a royalty in order to enjoy the benefits of the asset. Under this method, value is estimated by discounting the hypothetical royalty payments to their present value over the economic life of the asset.Contents
·We have several trade names with estimated economic livesextinguishment of approximately 20 years,debt given that the change in future cash flows on a pre and post transaction basis exceeded 10% and was therefore considered substantial. As such, the new Senior Notes were recorded at their fair values for which were estimated using the relief from royalty method. Royalty rates utilized to conduct this exercise in our case ranged from 0.7%value of $229.4 million and 3%,a $4.4 million non-cash debt extinguishment loss was triggered upon settlement and the discount rates applied ranged from 16% to 25%, depending on factors such as risk or development stagecancellation of the asset, age, profitability, degree$225.0 million of importanceNew Notes that were tendered. For more detail on the terms, rights and competition.conditions associated with the Senior Notes, refer to the Liquidity and Capital Resources section below.
·Redemption of New Notes
Customer relationshipsOn September 17, 2012, pursuant to a Notice of Optional Partial Redemption, we exercised our call option to redeem approximately $40 million in aggregate principal amount of our $100 million then outstanding New Notes. On October 17, 2012 we redeemed $40 million of New Notes at 100% of the principal amount, together with accrued and developed technologies fair values were estimated usingunpaid interest of $0.2 million. After accounting for the excess earnings method with estimated economic lives of approximately 20 years. The residual/excess cash flows were discounted at rates ranging from 15%$40 million partial redemption, our total long-term debt was reduced to 40%, reflecting what we believe are reasonable required returns relative$289.4 million and our total long-term debt maturing in December 2013 was reduced to the risk associated with the development stage and market acceptance of certain products. Attrition rates ranging from 1% to 13% were assumed in determining the estimated fair value of various existing customer relationships.$60 million.
In addition, on March 18, 2013, we announced a second partial redemption for $16.0 million of New Notes outstanding at 100% of their principal amount together with accrued and unpaid interest. The partial redemption is expected to be completed on or prior to April 12, 2013.
·FDA Approval of Zilver-PTXOur patents’ fair values were estimated using
On November 15, 2012, our partner Cook received approval from the reliefFDA to market and sell Zilver-PTX in the United States. Zilver-PTX is now approved for sale in over 50 markets. Zilver-PTX is the only FDA approved drug-eluting stent indicated for use in PAD. Data from royalty method over estimated economic livesCook’s pivotal clinical trial indicated that 8 out of approximately 510 patients treated with Zilver PTX still had open arteries (primary patency) after one year, as compared to 14 years. Royalty rates utilizedonly 3 out of 10 patients treated with balloon angioplasty alone. In addition, patients who received a bare-metal stent required more than twice as many re-intervention procedures to conduct this exercisereopen the treated vessel as compared to patients who received Zilver PTX.
On December 18, 2012, Cook announced that the Riverside Methodist Hospital in our case from 8% to 15%, and the discount rates applied ranged from 15% to 40%, reflecting what we believe are reasonable required returns relative to the risk associatedColumbus, Ohio treated its first patient with the patents’ and/or associated products’ development stage and market acceptance.Zilver-PTX as part of their commercial launch.
FDA Approval of BioSentry™ Lung Biopsy Tract Plug System (“BioSentry”)
·A tax rateOn December 19, 2012, we received approval from the FDA to market and sell our proprietary BioSentry (formerly Bio-Seal) product in the United States. Our BioSentry product is a novel biopsy device system that contains a proprietary hydrogel plug designed to prevent air leaks that can lead to a collapsed lung, or pneumothorax, in patients having lung biopsies. On contact with moist tissue, the hydrogel plug absorbs fluids and expands to fill the void created by the biopsy needle puncture. The plug is absorbed into the body after healing of 30% was assumedthe puncture site has occurred. Pneumothorax is the most common potential complication in determiningpatients undergoing lung biopsy procedures. In cases where a chest tube is inserted to treat pneumothorax, an extended hospital stay for such patients may be required until the value of each category of intangible assets.condition has stabilized. Industry estimates indicate that over 250,000 lung biopsy procedures are performed annually in the United States.
The following tables summarizeQuill Transaction
On April 4, 2012, we concurrently entered into a series of agreements with Ethicon in connection with the Company’s proprietary Quill technology and certain related manufacturing equipment and services. Significant terms of the respective estimated fair values and book values of the Successor Company’s and Predecessor Company’s intangible assets:agreements are described as follows:
| | May 1, 2011
Fair Values | |
| | Successor
Company | |
Customer relationships | | $ | 171,000 | |
Trade names and other | | 25,200 | |
Patents | | 113,900 | |
Core and developed technology | | 67,400 | |
| | $ | 377,500 | |
| | April 30, 2011
Net book value | |
| | Predecessor
Company | |
Acquired technologies | | $ | 47,046 | |
Customer relationships | | 56,630 | |
In-licensed technologies | | 16,870 | |
Trade names and other | | 6,488 | |
| | $ | 127,034 | |
i.Deferred financing costsAsset Sale and Purchase Agreement
The estimated fair valueWe entered into an Asset Sale and Purchase Agreement dated April 4, 2012 (the “APA”) with Ethicon. Pursuant to the terms of the $4.4 million deferred financing costs was determinedAPA, Angiotech sold certain intellectual property related to be nil and written off upon application of fresh start accounting.
Deferred leasehold inducements
The estimated fair valueits Quill technology, as well as certain related manufacturing equipment, to Ethicon. Under the terms of the $3.5APA, on April 4, 2012 Ethicon made an initial cash payment of $20.4 million deferred leasehold inducements was determined to be nil upon application of fresh start accounting, given that the inducements received are non-refundable, not transferableus, and agreed to a third party and are not expectedpay up to give risean additional $30.0 million in additional cash consideration, with any
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to any cash flows in the future. Furthermore, as current lease rates applicable to the properties under consideration were determined to be reflectiveTable of current market rates, no provisions were required to adjust the Successor Company’s current rental agreements to market rates.Contents
additional amounts that may be paid contingent upon the completion of certain activities, including the transfer of certain Quill-related know-how to Ethicon and the achievement of certain product development milestones.
ii.Other long term liabilitiesCo-Exclusive Patent and Know-How License Agreement
The following items were adjustedConcurrent with the APA, we also entered into a Co-Exclusive Patent and Know-How License Agreement dated April 4, 2012 (the “License Agreement”) with Ethicon. Under the License Agreement, Ethicon has granted us a worldwide, royalty free license to the intellectual property sold to Ethicon under the APA, which effectively grants us an unrestricted right to manufacture and distribute Quill wound closure products (without the Ethicon label) in other long term liabilities:any market at our discretion.
·iii. Prior to the application of fresh start accounting, the Predecessor Company had recorded $1.9 million of deferred revenue related to upfront fees received from licensors for certain licensing arrangements. While the Successor Company still has an ongoing obligation to provide the licensors with access to the relevant licenses, no further costs are expected to service or maintain the licenseManufacturing and related deferred revenue liability. As such, the estimated fair value of the deferred revenue liability was determined to be nil upon application of fresh start accounting.
·Pursuant to a 1997 license agreement (“NIH License Agreement”) with National Institutes of Health (“NIH”), we agreed to pay to the NIH certain milestone payments upon achievement of specified clinical and commercial development milestones and to pay royalties on net TAXUS sales by BSC and sales of the Zilver™-PTX™ paclitaxel-eluting peripheral stent (“Zilver”) by Cook Medical Inc (“Cook”). Prior to the application of fresh start accounting, the Predecessor Company had a $7.2 million accrual for royalty fees and interest owing to the NIH under this licensing arrangement for the use of certain technologies related to paclitaxel. On December 29, 2010, the Predecessor Company and the NIH entered into an amendment to the NIH LicenseSupply Agreement whereby the parties agreed to eliminate: (i) approximately $7.2 million of unpaid royalties and interest due on sales of TAXUS by BSC; and (ii) future royalties payable on licensed products sold by BSC going forward, in exchange for a 0.25% increase of existing royalty rates for licensed products sold by Cook and an extension of the term for payment of such royalties of approximately two years. Upon implementation of fresh start accounting, the estimated fair value of this liability was determined to be nominal.
Debt
As discussed above,We also entered into a Manufacturing and Supply Agreement dated April 4, 2012 (the “MSA”) with Ethicon, pursuant to which we will act as Ethicon’s exclusive manufacturer of knotless wound closure products that utilize the Successor Company’s New Floating Rate Notes were issued on May 12, 2011 and replacedQuill technology for an undisclosed term. Under the Predecessor Company’s Existing Floating Rate Notes. Based on the interest rate and other terms of the New Floating Rate NotesMSA, Ethicon agreed to pay up to $12.0 million in cash consideration to us, with any amounts that may be paid contingent upon the completion of certain activities, specifically the achievement of certain product development milestones. The MSA requires us to fulfill monthly orders placed by Ethicon subject to certain terms and conditions. In addition, under the our current credit profile, the $325 million face valueterms of the New Floating Rate Notes was determinedMSA, Ethicon has a right of first negotiation with respect to be representativethe commercialization of estimated fair value for the purposes of adopting fresh-start accounting.
Additional paid in capital, accumulated deficit and accumulated other comprehensive income
Upon implementation of fresh start accounting, additional paid in capital, accumulated other comprehensive income and the remaining accumulated deficit (after the revaluation of the Predecessor Company’s assets and liabilities) were eliminated.
Goodwill
Upon implementation of fresh start accounting on April 30, 2011, we comprehensively revalued our assets and liabilities at their estimated fair values. After allocating $568 million of the estimated reorganization valueany new products, as detaileddefined, in the table above to tangiblefield of knotless wound closure, which may be developed by us and identifiable intangible assets based on their respective estimated fair values,are not otherwise covered by the remaining unallocated portion of the reorganization value of $125 million was recorded as goodwill in accordance with ASC No. 852. Based on management’s analysis, all of the goodwill was determined to be attributable to the Successor Company’s Medical Device Technologies segment. Furthermore, none of the goodwill was determined to be deductible for tax purposes.
Management believes the estimated fair value of the goodwill can be primarily attributed to the following:
·Our assembled workforce;
·The generally higher multiples / values assigned to companies in the medical device / pharmaceuticals industry sectors as compared to companies in other industry sectors;
·The recession-resistant nature of our products;
·Price inelasticity of the our products; and
·Regulatory barriers to entry in the medical device / pharmaceuticals industryMSA.
As many of the fair value estimates described abovecontingent payments embedded in the respective agreements are inherently subject to the same or interrelated performance conditions; the APA, License Agreement and MSA were determined to be closely related for accounting purposes. As such, these agreements were collectively determined, for accounting purposes, to represent a multiple-element arrangement. This conclusion was based on the following factors: (a) significant uncertainties, therecontinuing involvement is no assurancerequired from us to complete the transfer of certain Quill know-how to Ethicon and achieve the specified product development milestones, and (b) the fact that we have retained the estimatessame unrestricted rights that it had on a pre-transaction basis to continue manufacturing and assumptionsdistributing our Quill wound closure products for our own purposes, in these valuationsany market at our discretion.
In accordance with ASC No. 605, management evaluated this multiple-element arrangement to identify all key deliverables listed below:
·$0.4 million of cash received during April 2012, related to the sale of certain manufacturing equipment;
·$20.0 million of cash received up-front during April 2012 for the transfer of title of certain Quill related intellectual property to Ethicon;
·$5.0 million of cash received during August 2012 for the transfer of certain know-how to Ethicon;
·$22.0 million of cash received during October 2012 related to the achievement of certain product development milestones associated with the development of an initial set of product codes; and
·$15.0 million of future contingent consideration due upon the achievement of certain product development milestones associated with the development of an additional set of product codes.
The $0.4 million of cash received was recognized as revenue in April 2012 upon delivery of the manufacturing equipment to Ethicon in April 2012.
We have determined that each of the remaining deliverables under the collective agreements does not independently have standalone value to Ethicon without our continuing involvement and proprietary knowledge, which is required to complete certain product development tasks and the manufacture and supply of products utilizing the Quill technology. As such, the entire arrangement has been treated as one unit of accounting and the consideration has been measured and recognized as follows:
·As the earnings process associated with the arrangement was incomplete upon receipt of each installment of consideration, we instantly recorded all consideration as deferred revenue upon receipt of the funds. As discussed above, in October 2012 we successfully completed the development of an initial set of product codes, which signified the completion of the first major stage of the joint arrangement. As a result, we ratably recognized approximately $4.0 million of the $47.0 million of total consideration received to date as license fee revenue. In accordance with ASC No. 605, the remaining $43.0 million of associated deferred revenue and future consideration will continue to be realizedratably recognized into revenue, over a period of approximately three years, as we continue to complete and actual results may differ materially.fulfill our performance obligations. As at December 31, 2012, approximately $18.8 million of the $43.0 million of deferred revenue is expected to be recognized as revenue over the next year. This amount has therefore been classified as current.
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·In accordance with ASC No. 605, we are required to evaluate whether the contractual gross margins to be earned under the MSA are representative of fair value. If the contractual gross margins are not determined to be representative of fair value, a portion of the consideration received to date and/or future contingent consideration may need to be reallocated to the manufacturing and supply based on our best estimate of selling price. This ensures that gross margins recorded for accounting purposes on any product sold to Ethicon are reflected at their estimated fair values, which are commensurate with gross margins earned from similar third party sales. Based on our overall assessment as at December 31, 2012, the gross margins earned on the product shipped to Ethicon in 2012 were determined to be reflective of fair value. We will continue to monitor and evaluate the fairness of gross margins earned on future shipments.
·Due to the risk and uncertainty associated with the completion of activities relating to these future milestones, and the fact that various activities were still in process as at December 31, 2012, no amounts have been recorded in the financial statements as at December 31, 2012, in connection with the remaining $15.0 million of contingent consideration described above. We will only begin to recognize future contingent consideration as revenue over the remaining contract term once the relevant performance obligations have been completed and all revenue recognition criteria have been met.
Termination Settlement Agreement
On November 7, 2012, we reached a mediated settlement in principle on the termination payments to be made to Dr. William L. Hunter, the former President and Chief Executive Officer of Angiotech. Dr. Hunter’s employment ceased with Angiotech effective October 17, 2011. Pursuant to the terms of the Settlement Agreement dated November 14, 2012 (the “Termination Settlement Agreement”); Dr. Hunter received a cash settlement of $6.5 million, inclusive of legal costs, for the full and final settlement of all claims. Without further consideration, Dr. Hunter surrendered all equity awards granted to him under Angiotech’s stock incentive plan and all such awards are and will be deemed to be forfeited, terminated and cancelled and of no further force and effect. Dr. Hunter and Angiotech each executed a mutual release in connection with entering into the Settlement Agreement. As at December 31, 2012, this Settlement Amount had been fully paid out.
Acquisitions
As part of our business development efforts we consider strategic acquisitions from time to time. Terms of certain of our prior acquisitions may require us to make future milestone or contingent payments upon achievement of certain product development and commercialization objectives, as discussed under “Contractual Obligations”. During the eight monthsyear ended December 31, 2011 and four months ended April 30, 2011,2012, we did not complete any acquisitions. The fair value of these future milestone and contingent payments was determined to be a nominal value upon adoption of fresh-start accounting.
Collaboration, License and Sales and Distribution Agreements
In connection with our research and development efforts, we have entered into various arrangements with corporate and academic collaborators, licensors, licensees and others for the research, development, clinical testing, regulatory approval, manufacturing, marketing and commercialization of our product candidates. Terms of the various license agreements may require us, or our collaborators, to make milestone payments upon achievement of certain product development and commercialization objectives and pay royalties on future sales of commercial products, if any, resulting from the collaborations.
DuringAs described under the eight monthsQuill Transaction section above, on April 4, 2012 we entered into an Asset Sale and Purchase Agreement, Co-Exclusive Patent and Know-How License Agreement and Manufacturing and Supply Agreement with Ethicon.
In May 2012, we entered into an amendment agreement with Biopsy Sciences, LLC that eliminated all future financial obligations owing under the original January 2007 Asset Purchase and Assignment Agreement and Amended and Restated License Agreement related to our BioSeal Product in exchange for our payment of an amendment fee of $1.0 million (the “Amendment Fee”). The Amendment Fee was paid on May 31, 2012 and has been recorded as research and development expense in the consolidated statement of operations during the year ended December 31, 2011 and four months ended April 30, 2011, we did not enter into any new collaboration, license, sales or distribution agreements.2012.
Agreements relating to our material collaborations, licenses, sales and distribution arrangements are listed in the exhibits index to this Annual Report on Form 10-K and may be found at the locations specified therein.
Critical Accounting Policies and Estimates
Our consolidated financial statements are prepared in accordance with U.S. GAAP. These accounting principles require management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses. We believe that the
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estimates and assumptions upon which we rely are reasonable and are based upon information available to us at the time the estimates and assumptions were made. Actual results could differ materially from our estimates.
We believe the following policies to be critical to understanding our financial condition, results of operations, and expectations for 2012 because these policies require management to make significant estimates, assumptions and judgments about matters that are inherently uncertain.
Predecessor Company - Accounting Policies Applicable during Creditor Protection Proceedings
Upon commencement of the Creditor Protection Proceedings on January 28, 2011, the Predecessor Company was required to adopt Accounting Standards Codification (“ASC”) No. 852 — Reorganization. Among other things, ASC No. 852 required that the Predecessor Company: (i) distinguish transactions and events which are directly associated with the Recapitalization Transaction from ongoing operations of the business (see note 4);business; and (ii) identify pre-petition liabilities which were subject to compromise through the reorganization process from those that were not subject to compromise or are post-petition liabilities (see note 3).liabilities. For all other items, the Predecessor Company applied the same accounting policies as detailed in note 2 to our 2011 Financial Statements.
(a) Liabilities Subject to Compromise
From January 28, 2011 to April 30, 2011, the Predecessor Company presented certain prepetition liabilities that were incurred prior to January 28, 2011 as liabilities subject to compromise. All claims which arose during the CCAA Proceedings were recognized in accordance with the Predecessor Company’s accounting policespolicies based on our best estimate of the expected amounts of allowed claims, whether known or potential claims, permitted by the Canadian Court (“Allowed Claims”). Liabilities Subject to Compromise of the Predecessor Company were adjusted to the Allowed Claims amount as approved by the Canadian Court. Where a carrying value adjustment arose due to disputes or changes in the amount for goods and services consumed by the Predecessor Company, the difference was recorded as an operating item. In contrast, where carrying value adjustments arose from the claims process under the CCAA or repudiation of contracts, the difference was presented as a Reorganization Item as discussed below (also see note 43 to our 20112012 Financial Statements).
(b) Reorganization Items
ASC No. 852 requires separate disclosure of incremental costs which are directly associated with reorganization or restructuring activities that are realized or incurred during Creditor Protection Proceedings. These Reorganization Items include professional fees incurred in connection with the Creditor Protection Proceedings and implementation of the Recapitalization Transaction. However, Reorganization Items also include gains, losses, loss provisions, recoveries, and other charges resulting from asset disposals, restructuring activities, Revolving Credit Facility or disposal activities, and contract repudiations which havenhave been specifically undertaken as a result of the CCAA Proceedings and Recapitalization Transaction. Similar costs incurred in 2010 prior to the Predecessor Company’s Creditor Protection Proceedings were recorded as debt restructuring expenses, write-downs of intangible
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assets and write-downs of property, plant and equipment. ASC No. 852 also requires that specific cash flows directly related to Reorganization Items be separately disclosed on the consolidated statement of cash flows.
(c) Interest Expense
Interest expense on the Predecessor Company’s debt obligations was recognized only to the extent that: (i) the interest expense was not stayed by the Canadian Court and was paid during the Creditor Protection Proceedings or (ii) the interest was an allowed priority, secured claim or unsecured claim. All interest recognized subsequent to the January 28, 2011 CCAA Filing Date has been presented as regular interest expense and not as a Reorganization Item.
(d) Fresh-Start Accounting
As described in notes 1 and note 3 to our 2011 Financial Statements, upon emergence from Creditor Protection Proceedings, we adopted fresh-start accounting. On the April 30, 2011 Convenience Date, we completed a comprehensive revaluation of its assets and liabilities. All assets and liabilities, except for deferred income tax assets and liabilities, on our May 1, 2011 Successor Company’s Consolidated Balance Sheet are therefore reflected at their newly estimated fair values. In addition, we recorded goodwill of $125 million in accordance with ASC No. 852, which stipulates that the portion of the estimated reorganization value which cannot be attributed to specific tangible or identified intangible assets of the emerging entity should be recorded as goodwill (see note 3 to our 2011 Financial Statements). In addition, the effects of the adjustments on the reported amounts of individual assets and liabilities resulting from the adoption of fresh-start reporting and the effects of the Recapitalization Transaction were reflected in our Successor Company’s opening consolidated balance sheet and our Predecessor Company’s final consolidated statement of operations. Adoption of fresh-start accounting results in a new reporting entity with no beginning retained earnings, deficit, additional paid-in-capital and accumulated other comprehensive income. The financial statements of the Successor Company are not comparable to those of the
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Predecessor Company. The Predecessor Company’s comparative financial statements are therefore presented to comply with the SEC’s reporting requirements and should not be viewed as a continuum between the Predecessor and Successor Companies’ financial statements.
Successor and Predecessor Companies’ Accounting Policies
With the exception of the accounting policies applicable to property, plant and equipment and intangible assets, the Successor Company has adopted the same accounting policies as the Predecessor Company as described below:
(a) Property, plant and equipment
As described in note 3, upon implementation of fresh start accounting on April 30, 2011, Angiotech’s property, plant and equipment were re-measured and recorded at their estimated fair value of $47.7 million. Accordingly, effective May 1, 2011, the fair value of $47.7 million represents the new cost base for the Successor Company’s property, plant and equipment. The respective Company’s property, plant and equipment are recorded at cost less accumulated depreciation. Depreciation was recorded using the straight-line method over the following terms:
| | Successor Company | | | Predecessor Company | |
Buildings | | 15-40 years | | | 40 years | |
Leasehold improvements | | Term of the lease | | | Term of the lease | |
Manufacturing equipment | | 3-10 years | | | 3-10 years | |
Research equipment | | 3-5 years | ��
| | 5 years | |
Office furniture and equipment | | 2-10 years | | | 3-10 years | |
Computer equipment | | 1-5 years | | | 3-5 years | |
Where the respective Company had property, plant and equipment under construction, these assets were not depreciated until they were put into use.
(b) Goodwill and intangible assets
As discussed in note 3 below, the Successor Company recorded $125 million of goodwill upon implementation of fresh start accounting on April 30, 2011. The implied fair value of goodwill represents the excess of the Successor Company’s reorganization value over and above the fair value of its tangible assets and identifiable intangible assets. Based on management’s analysis, all of the goodwill was determined to be attributable to the Successor Company’s Medical Device TechnologiesProducts segment.
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In accordance with Accounting Standards Codification (“ASC”) No. 350 — Intangibles — Goodwill and Other, goodwill is not amortized, but rather it is tested annually for impairment and whenever changes in circumstances occur that would indicate impairment. WhenDuring the year ended December 31, 2012, the provisions of Accounting Standards Update (“ASU”) No. 2011-08 were adopted. ASU No. 2011-08 permits the Successor Company to perform a qualitative assessment (termed a “step- zero impairment test”) of potential impairment indicators to assess whether it is more-likely-than-not that the fair value of a reporting unit is less than its carrying amount, before proceeding to a two-step impairment test. If management determines that it is not more-likely-than-not that the fair value of a reporting unit is less than the carrying amount, the two-step goodwill impairment test is not required. However, if this is not the case, management is required to conduct the customary two-step goodwill impairment test in accordance ASC No. 350. Factors that would be considered in developing the Successor Company’s qualitative analysis include:
·Adverse changes or outcomes in legal or regulatory matters
·Significant negative industry or economic trends
·Technological advances
·Decreases in anticipated demand for products and increased competition, relative to historical or projected operating results
·Future growth strategies
·Significant changes in the strategy of the overall business (e.g. decision to sell or divest of a business unit)
·Key personnel and management expertise
·A decline in market-dependent valuation multiples
Under step one of the goodwill impairment test, management would estimate the fair value of the Medical Device Products reporting unit using a discounted projection of future cash flows (“DCF model”), which incorporates various assumptions and estimates about the outlook on future operating performance, discount rates and EBITDA multiples used to derive terminal value. As a result, the DCF model may be subject to a high degree of uncertainty and subjectivity. If the analysis indicates that the carrying value of the Medical Device Products reporting unit exceeds its fair value, management is required to proceed to step two of the goodwill impairment test. If the carrying value of a reporting unit’s goodwill exceeds the implied fair value of the goodwill under step two of the goodwill impairment test, the Successor Company would record an impairment loss is recognized which is equal to the excess. Examples
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Table of circumstances that could trigger impairment include adverse changes or outcomes in legal or regulatory matters, technological advances, decreases in anticipated demand for products, and increased competition. The Company estimates fair value based on a discounted projection of future cash flows which are subject to significant uncertainty and estimates.Contents
Intangible assets with finite lives are amortized based on their estimated useful lives. The amortization method is selected to best reflect the pattern in which the economic benefits are derived from the intangible asset. If the pattern cannot be reliably or reasonably determined, straight line amortization is applied. Amortization was determined using the straight line method over the following terms:
| | Successor Company | |
Customer relationships | | 10-20 years | |
Trade names and other | | 9-20 years | |
Patents | | 5-20 years | |
Core and developed technology | | 10-20 years | |
| | Predecessor Company | |
Acquired technologies | | 2-10 years | |
Trade names and other | | 2-12 years | |
Customer relationships | | 10 years | |
In-licensed technologies | | 5-10 years | |
(c) Impairment of long-lived assets
The respective Company reviews long-lived assets subject to amortization to determine if any adverse conditions exist or a change in circumstances has occurred that would indicate impairment or a change in the remaining useful life. Conditions that may indicate impairment include; but are not limited to; a significant adverse change in legal factors, business climate or strategy decisions that could affect the value of an asset; discontinuation of certain research and development programs or products; product recalls, or adverse actions or assessments by regulators. If an impairment indicator exists, the respective Company tests the asset (asset group) for recoverability. For purposes of the recoverability test, long-lived assets are grouped with other assets and liabilities at the lowest level of identifiable cash flows if the long-lived asset does not generate cash flows independent of other assets and liabilities. If the carrying value of the asset (asset group) exceeds the undiscounted cash flows expected to result from the use and eventual disposition of the asset (asset group), an impairment charge is recorded to write the carrying value down to the fair value in the period identified.
The respective Company estimates the fair value of assets (asset groups) by calculating the present value of estimated future cash flows expected to be generated from the asset using a risk-adjusted discount rate. In determining the present value of estimated future cash flows associated with assets (asset groups), certain assumptions are made about future revenue contributions, cost structures, discount rates and the remaining useful lives of the asset (asset group). Variation in the assumptions used could result in material differences when estimating impairment write-downs.
(d) Revenue recognition
(i) Product sales
Revenue from product sales, including shipments to distributors, is recognized when the product is shipped from the respective Company’s facilities to the customer provided that the respective Company has not retained any significant risks of ownership or future obligations with respect to products shipped. Revenue from product sales is recognized net of provisions for future returns. These provisions are established in the same period as the related product sales are recorded and are based on estimates derived from historical experience and adjusted to actual returns when determinable.
Revenue is considered to be realized or realizable and earned when all of the following criteria are met: persuasive evidence of a sales arrangement exists; delivery has occurred; the price is fixed or determinable; and collectability is reasonably assured. These criteria are generally met at the time of shipment when the risk of loss and title passes to the customer or distributor.
Amounts billed to customers for shipping and handlinghandlings are included in revenue. Where applicable, revenue is recorded net of sales taxes. The corresponding costs for shipping and handling are included in cost of products sold.
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(ii) Royalty revenue
Royalty revenue is recognized when the respective Company has substantially fulfilled its performance obligations under the terms of the contractual agreement, no significant future obligations remain, the amount of the royalty fee is determinable, and collection is reasonably assured. The respective Company records royalty revenue from BSC and from Cook on a cash basis due to the difficulty in accurately estimating the BSC and Cook royalties before the reports and payments are received.
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(iii) License fees
License fees are comprised of fees and milestone payments derived from collaborative and other licensing arrangements. License fees are recognized as revenue when persuasive evidence of an arrangement exists, the contracted fee is fixed or determinable, the intellectual property is delivered to the customer and the license term has commenced, collection is reasonably assured and the performance obligations have been substantially completed.
Where license fees are tied to research and development arrangements, under which the respective Company is required to provide services over a period of time and the consideration is contingent upon uncertain future events or circumstances, the respective Company will assess whether it is appropriate to apply the milestone method of revenue recognition in accordance with ASC No. 605-28, Revenue Recognition: Milestone Method. A milestone payment is recognized as revenue in its entirety when a specified substantive milestone is achieved. A milestone is considered substantive if: (i) the payment is commensurate with the respective Company’s performance required to achieve the milestone; (ii) the payment relates to past service; and (iii) the payment is reasonable relative to all of the deliverables and payment terms under the arrangement. If any portion of the payment is refundable or adjustable based on future performance, the milestone is not considered to be substantive. Fees and non-substantive milestone payments received which require the ongoing involvement of the respective Company are deferred and amortized into income on a straight-line basis over the period of ongoing involvement if there is no other method under which performance can be objectively measured. In addition, milestone payments related to future product sales are accounted for as royalties. On January 1, 2011, the Predecessor Company applied ASU No. 2010-17, Milestone Method of Revenue Recognition prospectively to the receipt of future milestone payments without any material impact to its consolidated financial statements.
(iv) Multiple-element arrangements
When an arrangement includes multiple deliverables, the respective Company applies ASU 605-25 Revenue Recognition: Multiple-Element Arrangements to identify the units of accounting and allocate the consideration to each separate unit of accounting. A separate unit of accounting is identified if the delivered item(s) have standalone value to the customer and the delivery or performance of undelivered items is considered probable and within the control of the respective Company. The arrangement consideration is generally allocated to the separate units of accounting based on their relative selling prices, Company specific objective evidence of selling prices, third-party evidence of selling prices, or the Company’s best estimate of the selling prices. The consideration allocated is limited to the amount that is not contingent on the delivery of additional items or fulfillment of other performance conditions. Effective January 1, 2011, the Predecessor Company adopted ASU No. 2009-13, Multiple-Deliverable Revenue Arrangements, prospectively without any material impact to its consolidated financial statements. Prior to January 1, 2011 and the issuance of the new guidance under ASU No. 2009-13, the Predecessor Company applied ASC No. 605-25 which had more stringent requirements to identify units of accounting and allocate the arrangement consideration.
(e) Income taxes
Income taxes are accounted for using the liability method. Deferred income tax assets and liabilities result from the temporary differences between the amount of assets and liabilities recognized for financial statement and income tax purposes, and for operating losses, capital losses and tax credit carry forwards, using enacted tax rates expected to be in effect for the years in which the differences are expected to reverse. A valuation allowance is provided to reduce the deferred income tax assets if, based upon the available evidence, it is more likely than not that some or all of the deferred income tax assets will not be realized.
(f) Accounting for Uncertainty in Income Taxes
The respective Company accounts for uncertainty related to income tax positions in accordance with ASC No. 740-10 — Income taxes. ASC No. 740-10 requires the use of a two-step approach for recognizing and measuring the income tax benefits of uncertain tax positions taken or expected to be taken in a tax return, as well as enhanced disclosures regarding uncertain tax positions. A tax benefit from an uncertain tax position may only be recognized if it is more-likely-than-not that the position will be sustained upon examination by the tax authority based on the technical merits of the position. The tax benefit of an uncertain tax position that meets the more-likely-than-not recognition threshold is measured as the largest amount that is greater than 50% likely to be realized upon settlement with the tax authority. To the extent a full benefit is not expected to be realized, an income tax liability is established. Any
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change in judgment related to the expected resolution of uncertain tax positions are recognized in the year of such a change. Accrued interest and penalties related to unrecognized tax benefits are recorded in income tax expense in the current year.
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(g) Stock-based compensation
The respective Company accounts for stock based compensation expense in accordance with ASC No. 718 — Compensation: Stock Compensation and ASC No. 505-50 — Equity: Equity Based Payments to Non-Employees. These standards require the respective Company to recognize the grant date fair value of stock-based compensation awards granted to employees over the requisite service period. The compensation expense recognized reflects estimates of award forfeitures at the time of grant and revised in subsequent periods, if necessary when forfeitures rates are expected to change.
The grant date fair value of stock options is determined using the Black-Scholes model and the following assumptions: the risk-free rate is estimated using yield rates on U.S. Treasury or Canadian Government securities for a period which approximates the expected term of the award; and volatility is estimated by using a weighted average of the Predecessor’s historical volatility and comparable volatilities of companies in the same industry of similar sizes and scale. The Predecessor and Successor Company have not paid any dividends on common stock since their inception and the Successor Company does not anticipate paying dividends on its common stock in the foreseeable future. Generally, the stock options granted have a maximum term of seven years and vest over a three-year period from the date of the grant. When an employee ceases employment at the Successor Company, any unexercised vested options granted will expire either immediately, within 365 days from the last date of service or on the original expiration date at the time the option was granted, as defined in the Successor Company’s Stock Incentive Plan. The expected life of employee stock options is based on a number of factors, including historic exercise patterns, cancellations and forfeiture rates, vesting periods and contractual terms of the options. The costs of the stock options are recognized on a straight line basis over the vesting period.
The grant date fair value of Restricted Stock awards and Restricted Stock Units is determined based on the fair value of the Successor Company’s common shares on the grant date as if the award was vested and the shares issued. Restricted Stock awards vest over a three-year period from the date of the grant and when an employee ceases employment, the unvested Restricted Stock either vests or expires immediately as defined in the Successor Company’s Stock Incentive Plan. Restricted Stock Units either vest over a three-year period or immediately if a change in control occurs. In addition, Restricted Stock Units are scheduled to expire at the earlier of December 31, 2012, if a change in control occurs, or seven years from the grant date. The costs of these awards are recognized on a straight-line basis over the expected service period taking into account the expected date of employment cessation. Restricted stock units that vest when a change of control occurs are recognized on a straight-line basis from the grant date to December 31, 2012 taking into account the cessation of employment because the probability of fulfilling the performance condition cannot be determined until the change in control occurs.
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Results of Operations
Overview
| | Successor Company | | | Predecessor Company | | Combined | | Predecessor Company | | Predecessor Company | | | Successor Company | | | Predecessor Company | | Combined | | Predecessor Company | |
| | Eight months ended
December 31, | | | Four months ended
April 30, | | Year ended
December 31, | | Year ended
December 31, | | Year ended
December 31, | | | Year ended
December 31, | | Eight months ended
December 31, | | | Four months ended
April 30, | | Year ended
December 31, | | Year ended
December 31, | |
(in thousands of U.S.$, except per share data) | | 2011 | | | 2011 | | 2011 | | 2010 | | 2009 | | | 2012 | | 2011 | | | 2011 | | 2011 | | 2010 | |
Revenues | | | | | | | | | | | | | | | | | | | | | | | | |
Medical Device Technologies | | $ | 139,307 | | | $ | 69,198 | | $ | 208,505 | | $ | 211,495 | | $ | 191,951 | | |
Medical Device Products | | | $ | 228,723 | | $ | 142,245 | | | $ | 70,260 | | $ | 212,505 | | $ | 215,278 | |
Licensed Technologies | | 13,670 | | | 11,068 | | 24,738 | | 34,747 | | 87,727 | | | 15,102 | | 10,732 | | | 10,006 | | 20,738 | | 30,964 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Total revenues | | 152,977 | | | 80,266 | | 233,243 | | 246,242 | | 279,678 | | | 243,825 | | 152,977 | | | 80,266 | | 233,243 | | 246,242 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Operating (loss) income | | (51,460 | ) | | 2,333 | | (49,127 | ) | (20,057 | ) | 23,085 | | | 26,803 | | (51,460 | ) | | 2,333 | | (49,127 | ) | (20,057 | ) |
Other expense | | (11,972 | ) | | (10,939 | ) | (22,911 | ) | (46,798 | ) | (39,916 | ) | | (24,819 | ) | (11,972 | ) | | (10,939 | ) | (22,911 | ) | (46,798 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | |
Loss before reorganization items, gain on extinguishment of debt and settlement of other other liabilities and income taxes | | (63,432 | ) | | (8,606 | ) | (72,038 | ) | (66,855 | ) | (16,831 | ) | | 1,984 | | (63,432 | ) | | (8,606 | ) | (72,038 | ) | (66,855 | ) |
Reorganization items | | — | | | 321,084 | | 321,084 | | — | | — | | |
Reorganization items, net of taxes | | | — | | — | | | 321,084 | | 321,084 | | — | |
Gain on extinguishment of debt and settlement of other liabilities | | — | | | 67,307 | | 67,307 | | — | | — | | | — | | — | | | 67,307 | | 67,307 | | — | |
(Loss) income before taxes | | (63,432 | ) | | 379,785 | | 316,353 | | (66,855 | ) | (16,831 | ) | | 1,984 | | (63,432 | ) | | 379,785 | | 316,353 | | (66,855 | ) |
Income tax (recovery) expense | | (2,986 | ) | | 267 | | (2,719 | ) | (44 | ) | 6,037 | | | 8,210 | | (2,986 | ) | | 267 | | (2,719 | ) | (44 | ) |
Net (loss) income | | (60,446 | ) | | 379,518 | | 319,072 | | (66,811 | ) | (22,868 | ) | | (6,226 | ) | (60,446 | ) | | 379,518 | | 319,072 | | (66,811 | ) |
| | | | | | | | | | | | | | | | | | | | | | | |
Basic and diluted net (loss) income per common share | | $ | (4.82 | ) | | $ | 4.46 | | | | $ | (0.78 | ) | $ | 0.27 | | | $ | (0.49 | ) | $ | (4.82 | ) | | $ | 4.46 | | | | $ | (0.78 | ) |
Basic and diluted weighted average number of common shares outstanding (in thousands) | | 12,528 | | | 85,185 | | | | 85,168 | | 85,130 | | | 12,791 | | 12,528 | | 85,185 | | | | 85,168 | |
|
For comparative purposes we have combined the results of the Predecessor Company and the Successor Company for the year ended December 31, 2011. Where specific income statement items have been impacted significantly as compared to our historical results,
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either temporarily (as in the case of Cost of Products Sold) or permanently, by the Recapitalization Transaction and the fresh-start accounting, process, we have provided explanations of such in the discussion. The respective fresh start accounting adjustments are requirements resultingresulted from our emergence from the CCAA and Chapter 15 proceedings. As such, these adjustments are non-cash in nature and do not reflect materialoperating changes in our business or operations, our cash flows, liquidity and capital resources or credit profile.business.
For the year ended December 31, 2012, we recorded a net loss of $6.2 million compared to net income of $319.1 million for the year ended December 31, 2011. The $325.3 million decline in net income is primarily due to the following factors: (i) $321.1 million of non-recurring reorganization items recorded in 2011 (see Reorganization Items section below for more detailed information); (ii) a $67.3 million non-recurring gain recognized in 2011 upon settlement and extinguishment of our former $250 million Subordinated Notes and $16 million of related interest obligations; (iii) recognition of a $4.4 million debt extinguishment loss upon the exchange and settlement of $225.0 million of New Notes for $229.4 million of Senior Notes in August 2012; (iv) a $10.9 million increase in income tax expense due to increase in uncertain tax positions, expiry of losses carried forward and withholding taxes on intercompany dividends; and (v) a $7.6 million decline in TAXUS royalty revenue derived from BSC’s sales of paclitaxel-eluting coronary stent systems. These decreases in income were offset by the following positive factors: (i) a $32.1 improvement in gross margins resulting from increased sales of our medical products and the $22.6 million non-recurring, non-cash adjustment applied to costs of products sold in 2011 related to the revaluation of inventory during the implementation of fresh start accounting (see “Costs of Products Sold” for more information); (ii) a $12.7 million decrease in research and development expenses; (iii) a $14.3 million decrease in selling, general and administrative expenses; (iv) a $15.0 million decrease in impairment charges of certain long lived assets primarily related to certain research and development restructuring initiatives which were executed in 2011; (iv) $4.0 million of license revenue that was recognized in connection with the fulfillment of certain performance obligations under the terms of the Quill Transaction with Ethicon; (v) a $2.1 million increase in royalty revenue derived from Cook’s sales of Zilver PTX in Europe and certain other territories outside of the U.S.; and (v) a $3.8 million decline in amortization and depreciation expense predominately related to revisions in the estimated useful lives of certain long lived assets in connection with certain restructuring initiatives that were executed in 2011.
For the year ended December 31, 2011, we recorded net income of $319.1 million, compared to a net loss of $66.8 million for the year ended December 31, 2010. The $385.9 million increase in net income is primarily due to the following factors: (i) $321.1 million of one-timenon-recurring reorganization items (see Reorganization Items section below for more detailed information);incurred in 2011; (ii) a $67.3 million one-timenon-recurring gain recognized upon settlement and extinguishment of our $250 million Subordinated Notes and $16 million of related interest obligations in addition to $4.5 million of certain other liabilities; (iii) a $17.8 million reduction in interest expense during the period related to the settlement and extinguishment of the Subordinated Notes; (iv) a $7.1 million decrease in research and development expenses due to reductions in headcount and in discretionary spending related to certain research and development programs; (v) a decrease in other expenses of $9.3 million relating to non-recurring professional fees that were incurred in the third quarter of 2010 relating to our Recapitalization Transaction; (vi) a $5.7 million decrease in license and royalty expenses associated with our TAXUS-derived royalty revenue as a
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result of an amendment to our license agreement with the NIH, (see “License and Royalty Fees on Royalty Revenue” for more information); and (v) an $2.7 million increase in income tax recoveries. These improvements to net income were partly offset by: (i) a $15.5 million increase in cost of products sold, of which $22.6 million is related to a non-cash adjustment resulting from the revaluation of inventory in connection with the implementation of fresh start accounting on April 30, 2011, (see “Costs of Products Sold” for more information), partly offset by the elimination of costs related to discontinuing sales of the Hemostream and Option IVC Filter products; (ii) a $10.4 million decline in TAXUS royalty revenue derived from BSC’s sales of paclitaxel-eluting coronary stent systems; (iii) an $8.0 million increase in intangible asset impairment write-downs for the year ended December 31, 2011 relating to the suspension of research and development activities for our anti-infective technologies; (iv) a $4.7 million recovery from a litigation settlement recorded during the year ended December 31, 2010; and (v) a $4.3 million increase in depreciation and amortization expense due to changes in estimated useful lives as driven by certain restructuring activities and the revaluation of our tangible and intangible assets upon implementation of fresh start accounting on April 30, 2011.
For the year ended December 31, 2010, we recorded a net loss of $66.8 million ($0.78 basic and diluted net loss per common share), compared to a net loss of $22.9 million ($0.27 basic and diluted net loss per common share) for the year ended December 31, 2009. The increase in net loss of $43.9 is due to several factors, including: (i) the receipt of a $25.0 million one-time payment from Baxter International, Inc. (“Baxter”) in 2009, which did not recur in 2010; (ii) a $27.8 million decline in royalty revenue related to the lower sales of TAXUS by BSC, primarily as a result of increased competition in the stent market; (iii) a $1.6 million increase in research and development salary and benefit costs associated with new hires recruited to conduct research and development activities on certain of our medical products; (iv) a $7.7 million increase in selling, general and administrative costs, primarily due to the addition of sales and marketing staff required to support our Quill Knotless Tissue-Closure Device product line; (v) $0.6 million of transaction expenses related to our 2010 acquisition of certain Haemacure Corporation (“Haemacure”) assets and $1.1 million of research and development costs incurred in connection with research and development activities performed on the related fibrin and thrombin technologies; (vi) $9.3 million of professional fees and other debt restructuring costs incurred in connection with the Recapitalization Transaction; (vii) $2.8 million of intangible asset impairment write-downs; (viii) an additional $4.8 million of property, plant and equipment impairment write-downs compared to 2009; (ix) $1.3 million of write-downs on our long term investments; and (x) a $3.2 million increase in the amortization of our deferred financing costs related to a change in the estimated useful lives of the expected interest period for the Subordinated Notes and a change in the expected life of the Existing Credit Facility which was effectively replaced and superseded by the DIP Facility. The unfavorable impact of the factors described above were partially offset by: (i) a $17.9 million increase in gross margin due to an increase in sales of our higher gross margin products as well as improvements achieved with respect to certain manufacturing costs, including reduced labor costs and more efficient utilization of our fixed overhead costs; (ii) a $4.5 million reduction in license and royalty fees associated with the simultaneous drop in royalty revenue noted above; (iii) a $4.7 million recovery from a litigation settlement and a $3.8 million drop in litigation expenses; (iv) $1.0 million of foreign exchange gains; (v) a $1.9 million gain on the settlement of the Haemacure loan upon completion of our acquisition of certain of their assets; (vi) a $2.0 million gain recognized from the sale of a manufacturing facility; and (vii) a $6.0 million tax recovery.
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Revenues
| | Successor Company | | | Predecessor Company | | Combined | | Predecessor Company | | Predecessor Company | | | Successor Company | | | Predecessor Company | | Combined | | Predecessor Company | |
| | Eight months ended
December 31, | | | Four months ended
April 30, | | Year ended
December 31, | | Year ended
December 31, | | Year ended
December 31, | | | Year ended
December 31, | | Eight months ended
December 31, | | | Four months ended
April 30, | | Year ended
December 31, | | Year ended
December 31, | |
(in thousands of U.S.$) | | 2011 | | | 2011 | | 2011 | | 2010 | | 2009 | | | 2012 | | 2011 | | | 2011 | | 2011 | | 2010 | |
Medical Device Technologies: | | | | | | | | | | | | | |
Medical Device Products: | | | | | | | | | | | | | |
Product sales | | $ | 139,307 | | | $ | 69,198 | | $ | 208,505 | | $ | 211,495 | | $ | 191,951 | | | $ | 221,326 | | $ | 139,307 | | | $ | 69,198 | | $ | 208,505 | | $ | 211,495 | |
| | | | | | | | | | | | | |
Licensed Technologies: | | | | | | | | | | | | | |
Royalty revenue — paclitaxel-eluting stents | | 10,173 | | | 9,929 | | 20,102 | | 30,501 | | 57,420 | | |
Royalty revenue — other | | 3,437 | | | 1,062 | | 4,499 | | 3,960 | | 4,751 | | | 3,397 | | 2,938 | | | 1,062 | | 4,000 | | 3,783 | |
License fees | | 60 | | | 77 | | 137 | | 286 | | 25,556 | | | 4,000 | | — | | | — | | — | | — | |
| | 13,670 | | | 11,068 | | 24,738 | | 34,747 | | 87,727 | | | 228,723 | | 142,245 | | | 70,260 | | 212,505 | | 215,278 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Licensed Technologies: | | | | | | | | | | | | | |
Royalty revenue — paclitaxel-eluting stents | | | 15,051 | | 10,672 | | | 9,929 | | 20,601 | | 30,679 | |
License fees | | | 50 | | 60 | | | 77 | | 137 | | 286 | |
| | | 15,102 | | 10,732 | | | 10,006 | | 20,738 | | 30,964 | |
| | | | | | | | | | | | | |
Total revenues | | $ | 152,977 | | | $ | 80,266 | | $ | 233,243 | | $ | 246,242 | | $ | 279,678 | | | $ | 243,825 | | $ | 152,977 | | | $ | 80,266 | | $ | 233,243 | | $ | 246,242 | |
As described above, we operate in two reportable segments:
Medical Device Technologies
Revenue from our Medical Device Technologies segment for the year ended December 31, 20112012 was $208.5$228.7 million compared to $211.5$212.5 million for the year ended December 31, 2011. The net $12.2 million increase in revenue is primarily due to sales growth of our biopsy, wound closure and medical device component product lines. This increase was partially offset by the elimination of $3.8 million of product revenue associated with our March 2011 discontinuation of the sale of Option IVC Filters related to the termination of our 2008 License, Supply, Marketing and Distribution agreement with Rex Medical, L.P. Despite the elimination of Option IVC Filter revenues, the savings from the elimination of related royalty fees, milestone costs and selling and marketing expenses has positively impact our net cash flows, gross margins and operating profitability (see the Cost of Products Sold discussion below).
Revenue from our Medical Device Technologies segment for the year ended December 31, 2011 was $212.5 million, compared to $215.3 million for the year ended December 31, 2010. The net $3.0$2.8 million decrease is primarily attributable to the elimination of revenue from our sales of Option IVC Filters and Hemostream dialysis catheters, from which we recorded $3.8 million of revenue during the year ended December 31, 2011 as compared to $13.4 million during the year ended December 31, 2010. This decline is a result of therelated to our termination of certainour license and distribution agreements with Rex Medical relating to our sale of Option IVC Filters and Hemostream dialysis catheters at the end of 2010 and in early 2011.as discussed above. While the elimination of revenue from our sale of Option IVC Filters and Hemostream dialysis catheters has had an adverse impact on aggregate revenue growth for 2011 as compared to 2010, the savings from the elimination of related royalty fees, milestone costs, and selling and marketing expenses have positively impact our cash flows, gross margins and operating profitability (see the “Cost of Products Sold” discussion below). The decline in revenue from these products was partially offset by an increaseincreases in sales of our Quill Knotless Tissue-Closure Device product line as well as an increase in sales ofand medical device components sold to other third-party medical device manufacturers.
RevenueDuring the year ended December 31, 2012, $4.0 million of deferred revenue was recognized as revenue in connection with our completion of certain Quill product development milestones under the terms of the Quill Transaction with Ethicon (refer to detailed discussion under the Quill Transaction section above). As at December 31, 2012, we received total consideration of $47.0 million from our Medical DeviceEthicon. The remaining $43.0 million of consideration received from Ethicon, which has been recorded as deferred revenue, will continue to be recognized ratably into revenue over the remaining 2.3 year expected term of the Manufacturing Supply Agreement.
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Licensed Technologies segment
Royalty revenue derived from sale of TAXUS by BSC for the year ended December 31, 2010 was $211.52012 decreased by 38%, or $7.6 million, as compared to $192.0 millionthe year ended December 31, 2011. The decrease in royalty revenues is due to lower sales of TAXUS by BSC, primarily as a result of competitive pressures in the market for drug-eluting coronary stents. Royalty revenue for the year ended December 31, 2009.2012 was based on BSC’s net sales of $230 million for the period October 1, 2011 to September 30, 2012, of which $149 million was in the U.S., compared to net sales of $363 million for the comparable prior period, of which $242 million was in the U.S. The $19.5 million increase is primarily dueaverage gross royalty rate earned on BSC’s net sales in the U.S. was 6.0% for both periods. The average gross royalty rate earned on BSC’s net sales outside the US was 4.3% for the year ended December 31, 2012, compared to an average rate of 4.4% for in the year ended December 31, 2011. These average gross royalty rates are dictated by our tiered royalty rate structure for sales growth ofin certain of our product lines,territories, including our Quill Knotless Tissue-Closure Device product linethe U.S., Japan and our Option IVC Filter as well as modest sales growth of medical device components to third-party medical device manufacturers. The revenue increase was partly offset by the elimination of revenue from our EnSnareTM product line at the beginning of 2010 in connection with the discontinuation of our licensing agreement with Hatch Medical, LLC. In 2009, we elected not to match a competing offer to purchase the distribution rights and as a result, we no longer sell EnSnare.
Licensed TechnologiesE.U.
Royalty revenue derived from sales of TAXUS by BSC for the year ended December 31, 2011 decreased by 34% or $10.4 million compared to the year ended December 31, 2010. The decrease in royalty revenues is due to lower sales of TAXUS by BSC, primarily as a result of competitive pressures in the market for drug-eluting coronary stents. Royalty revenue for the year ended December 31, 2011 was based on BSC’s net sales of $363 million for the period October 1, 2010 to September 30, 2011, of which $242 million was in the U.S., compared to net sales of $539 million for the samecomparable prior period, in 2010, of which $271 million was in the U.S. The average gross royalty rate earned on BSC’s net sales in the U.S. was 6.0% for both periods. The average gross royalty rate earned on BSC’s net sales outside the US was 4.4% for the year ended December 31, 2011, compared to an average rate of 5.3% for in the year ended December 31, 2010. TheseThe decline in average gross royalty rates are dictated by our tiered royalty rate structure for salesobserved in certain territories, including the U.S., Japan and E.U. Our current year average gross royalty rates have therefore declined in connection with2011 was due to: (i) lower sales volumes of TAXUS in the U.S.,; where sales volumes did not exceed the first tier of royalties earned, as well asearned; and (ii) lower sales volumes and shiftinga shift in sales mix in territories outside of the U.S., where the tiered structure, combined with a greater proportion of sales being recorded in certain countries where lower royalty rates are appliedapply due to more limited patent coverage, had a significant impact.
Royalty revenue derived from sales of TAXUSZilver-PTX by BSCCook for the year ended December 31, 2010 decreased2012 increased by 47%$2.1 million as compared to the year ended December 31, 2009. The decrease in royalty revenues2011. This increase is primarily due to lower sales growth achieved by Cook of TAXUS by BSC, primarily as a resultZilver-PTX in territories outside of competitive pressuresthe U.S. Zilver-PTX was first approved for sale in the E.U. and certain other countries in 2009, and on November 15, 2012 Cook received FDA approval to market for drug-eluting coronary stents. Royalty revenue for the year ended December 31, 2010 was based on BSC’s net sales of $539 million for the period October 1, 2009 to September 30, 2010, of which $271 million wasand sell Zilver-PTX in the U.S., compared to net sales of $926 million for the same period in 2009, of which $411 million was in the U.S. The average gross royalty rate earned on BSC’s net sales for the year ended December 31, 2010 was 6.0% for sales in the U.S. and 5.3% for sales in other countries, compared to an average rate of 6.4% for sales in the U.S. and 6.1% for sales in other countries for corresponding period in 2009. Our average gross royalty rates are dictated by our tiered royalty rate structure for sales in certain territories including
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the U.S., E.U. and Japan. Our current year average gross royalty rates have therefore declined in connection with lower sales volumes of TAXUS in these territories.
License fees were relatively consistent for the year ended December 31, 2011 as compared to the prior year. For the year ended December 31, 2010, license fees decreased by $25.3 million compared to the year ended December 31, 2009 primarily due to a $25.0 million one-time payment received in the first quarter of 2009 in connection with the the Baxter Distribution and License Agreement discussed above. The payment was recorded as revenue in 2009 because the Company had fulfilled its performance obligations and had no further ongoing involvement in the collaboration.
Although royaltyRoyalty revenues derived from sales of TAXUS by BSC showed signs of stabilizing during 2011, such revenues may continue to decreasedecline in 2012future years as compared to revenues recorded in 2012, 2011 2010 and 2009,2010. The decline in royalty revenue observed to date is primarily as a result ofdue to competitive pricing and other pressures in the market for drug-eluting coronary stent systems and the related potential decline in royalty revenues we derive from sales by BSC of TAXUS.systems. Any such declines may be offset by growth of royalty revenues we may receive from our partner Cook shouldin connection with the recent FDA approval received by Cook receive approval to market and sell its Zilver PTX stentZilver-PTX in the U.S. (see the Significant Recent Developments section above for more information).
The significant and continued decline in royalty revenues in 2012 was identified as an impairment indicator for the purposes of testing our intangible assets for the year ended December 31, 2012. Given that the Zilver-PTX utilizes the same patented paclitaxel technology as TAXUS, we determined that our TAXUS and Zilver-PTX intangible assets were closely related. As a result, TAXUS and Zilver-PTX were tested as a single asset group for impairment in accordance with ASC No. 360 — Property, Plant and Equipment. The impairment test conducted indicated that the sum of the undiscounted future cash flows for our TAXUS and Zilver_PTX intangible assets exceeded their combined carrying values. As a result, we concluded that our TAXUS and Zilver-PTX intangible asset carrying values were recoverable and not impaired as at December 31, 2012. Our estimated cash flow projections are subject to significant uncertainty and highly depend on the degree to which BSC and Cook are able to market and sell the TAXUS and Zilver-PTX, respectively. These estimates could be subject to change in the near term depending on the success of the U.S. launch of Zilver by Cook following the recent U.S. FDA marketing approval received in November 2012. Other factors that may impact our estimated future cash flows include: technological advances, competing stent product candidates, regulatory or legislative change in the industry, and continued patent protection. A decrease of 10% or greater in the estimated undiscounted cash flows would result in a material impairment to our TAXUS and Zilver-PTX intangible asset group.
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Expenditures
| | Successor Company | | | Predecessor Company | | Combined | | Predecessor Company | | Predecessor Company | | | Successor Company | | | Predecessor Company | | Combined | | Predecessor Company | |
| | Eight months ended
December 31, | | | Four months ended
April 30, | | Year ended
December 31, | | Year ended
December 31, | | Year ended
December 31, | | | Year ended
December 31, | | Eight months ended
December 31, | | | Four months ended
April 30, | | Year ended
December 31, | | Year ended
December 31, | |
(in thousands of U.S.$) | | 2011 | | | 2011 | | 2011 | | 2010 | | 2009 | | | 2012 | | 2011 | | | 2011 | | 2011 | | 2010 | |
| | | | | | | | | | | | | |
Cost of products sold | | $ | 90,348 | | | $ | 32,219 | | $ | 122,567 | | $ | 106,304 | | $ | 104,616 | | | $ | 102,706 | | $ | 90,348 | | | $ | 32,219 | | $ | 122,567 | | $ | 106,304 | |
License and royalty fees | | 264 | | | 68 | | 332 | | 5,889 | | 10,431 | | | 618 | | 264 | | | 68 | | 332 | | 5,889 | |
Research and development | | 14,076 | | | 5,686 | | 19,762 | | 26,790 | | 23,701 | | | 7,056 | | 14,076 | | | 5,686 | | 19,762 | | 26,790 | |
Selling, general and administrative | | 60,424 | | | 24,846 | | 85,270 | | 89,238 | | 81,504 | | | 70,985 | | 60,424 | | | 24,846 | | 85,270 | | 89,238 | |
Depreciation and amortization | | 23,973 | | | 14,329 | | 38,302 | | 33,745 | | 33,251 | | | 34,503 | | 23,973 | | | 14,329 | | 38,302 | | 33,745 | |
Write-down of assets held for sale | | | 277 | | — | | | 570 | | 570 | | 1,450 | |
Write-down of property, plant and equipment | | 4,502 | | | 215 | | 4,717 | | 4,779 | | — | | | 877 | | 4,502 | | | 215 | | 4,717 | | 4,779 | |
Write-down of assets held for sale | | — | | | 570 | | 570 | | 1,450 | | 3,090 | | |
Write-down of intangible assets | | 10,850 | | | — | | 10,850 | | 2,814 | | — | | | — | | 10,850 | | | — | | 10,850 | | 2,814 | |
Escrow settlement recovery | | — | | | — | | — | | (4,710 | ) | — | | | — | | — | | | — | | — | | (4,710 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | |
| | $ | 204,437 | | | $ | 77,933 | | $ | 282,370 | | $ | 266,299 | | $ | 256,593 | | | $ | 217,022 | | $ | 204,437 | | | $ | 77,933 | | $ | 282,370 | | $ | 266,299 | |
Cost of Products Sold
Cost of products sold is comprised of costs and expenses related to the production of our various medical devices, device components and biomaterial products and technologies,device component products; including direct labor, raw materials, depreciation and certain fixed overhead costs related to our various manufacturing facilities and operations.
Cost of products sold decreased by $19.9 million to $102.7 million for the year ended December 31, 2012 as compared to $122.6 million for the year ended December 31, 2011. The 16% decrease is primarily due to the $22.6 million non-recurring non-cash charge in cost of products sold in 2011, resulting from the revaluation of inventory from $37.5 million to $60.1 million in connection with our implementation of fresh start accounting on April 30, 2011. Excluding the impact of this fresh start accounting adjustment, cost of products sold would have been $100.0 million for the year ended December 31, 2011. The net $2.7 million increase from 2011 to 2012 is primarily due to the sales growth observed in our wound closure and medical device component product lines, which was partially offset by: (i) the elimination of approximately $2.3 million of royalty and product costs related to our discontinuance of sales of Option IVC Filters in early 2011; (ii) a shift in our sales mix towards products with lower relative production costs; and (iii) decreases in our production costs associated with manufacturing improvements and efficiencies achieved.
During the year ended December 31, 2012, our gross margin on medical product sales was 53.6% as compared to 41.2% for the same period in 2011. The rise in gross margin is due to the same factors described above. Excluding the impact of the fresh start accounting adjustment, our gross margin would have been 52.4% for the year ended December 31, 2011. The 1.2% improvement observed from 2011 to 2012 is primarily due to the increase in our medical products and medical product component sales leading to a greater absorption of certain fixed overhead costs over greater manufacturing volume, shift in sales mix to certain of our higher margin medical products and components and cost savings from the manufacturing efficiencies as described above.
Cost of products sold increased by $16.3 million to $122.6 million for the year ended December 31, 20112011as compared to $106.3 million for the year ended December 31, 2010. The 15% increase is primarily due to the same $22.6 million non-cash increase in the cost of inventory resulting from the turnover of the inventory that was revalued from $37.5 million to $60.1 million in connection with our implementation of fresh start accounting (as discussed under the “Allocation of Reorganization Value to Assets and Liabilities - Inventory” section above).adjustment described above. Excluding the impact of this $22.6 million fresh start accounting adjustment in 2011, the $6.3 million decrease in our normalized cost of products sold would have been $100.0 million and our gross margin would have been 52.4%, comparedfrom 2010 to cost of products sold of $106.3 million and a gross margin of 49.7% for the year ended December 31, 2010. The $6.3 million decrease in cost of products sold (excluding the fresh-start reporting adjustment to inventory, which were included in the cost of products sold for the year ended December 31, 2011)2011 was primarily due toto: (i) the elimination of royalty and otherproducts costs related toassociated with our discontinuance of sales of Option IVC Filters and Hemostream dialysis catheters,catheters; and improvement resulting from(ii) a reduction in spending on certain fixed overhead costs. These positive changes were offset by an increase in cost of products sold associated with higher sales volumes primarily ofor our Quill product line and higher sales of medical device components sold to other third party medical device manufacturers. The improvement in
During the year ended December 31, 2011, our gross margin to 52.4% (as adjusted to exclude the temporary impact of the fresh start accounting adjustments as previously described)on medical product sales was 41.2% as compared to 49.7% infor the same period in the prior year,2010. The decline in gross margin is primarily due to the $22.6 million fresh start accounting adjustment described above. Excluding the impact of this fresh start accounting adjustment in 2011, our normalized gross margin would have been 52.4% for the year ended December 31, 2011 as compared to 49.7% for the same period in 2010. The 2.7% improvement observed in our normalized gross margin was primarily due: (i) a shift in our sales mix of sales to reflect greater sales oftowards our Quill, Skater, Biopince and certain other higher growth product lines, combined withlines; (ii) the elimination of sales of the lower margin Option IVC Filter product lineline; and the(iii) improved manufacturing efficiencies as described above. These positive factors were partly offset by growth in sales of medical device components to third-party medical device manufacturers, which tend to recordgenerally earn lower gross margins.
Cost of products sold increased by $1.7 million to $106.3 million for the year ended December 31, 2010 compared to $104.6 million for the year ended December 31, 2009. The increase was due primarily to the higher aggregate sales in our Medical Device Technologies segment leading to higher direct manufacturing costs, as well as increases in royalty expenses relating to increased sales
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of certain of our products, most specifically our Option IVC filter. These factors were partially offset by the positive impact of favorable manufacturing variances. In 2009, we incurred significant non-recurring costs due to manufacturing inefficiencies related to the transfer of certain manufacturing operations from our facilities in Syracuse, New York and Reading, Pennsylvania to our Aguadilla, Puerto Rico facility. Consolidated gross margin for our Medical Device Technologies segment sales was 49.7% for the year ended December 31, 2010 compared to 45.5% during 2009. The increase in gross margins is primarily due to sales growth of certain higher margin product lines, labor cost savings resulting from our relocation of certain manufacturing operations to lower cost jurisdictions, and improved absorption of fixed manufacturing overhead costs resulting from higher sales volumes, partially offset by the impact of royalty expenses relating to increased sales of certain of our products, primarily Option IVC filter.
We expect that cost of products sold will continue to be significant and that our reported cost of products sold and gross profit margins will be impacted by several factors in 2012, including2013 including: the closure of our manufacturing facility in Denmark and the final move of all
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production to our facilities in the U.S. by April 2013, which is expected to further improve our gross margins recorded on sales of the affected product lines; the 2.3% excise tax imposed by current U.S. health reform law on sales of Class I, II and III medical devices, which we expect to absorb; changes in our product sales mix,mix; changes in total sales volumevolume; and the implementation of certain cost improvement initiatives at certain of our manufacturing facilities.
License and Royalty Fees on Royalty Revenue
License and royalty fee expenses generally include license and royalty payments due to certain of our licensors primarily relating tofor the use of their technologies in paclitaxel-eluting coronary stent systemsystems, which are sold by certain of our partners. These fees currently consist of license and royalty revenue received from BSCfees paid, or that may be paid, primarily to the NIH for the use of certain of their technologies related to the use of paclitaxel in TAXUS and more recently, relating to European sales of Zilver PTX, respectively.
License and royalty fees increased by Cook. $0.3 million to $0.6 million for the year ended December 31, 2012 compared to $0.3 million for the same period in 2011. The increase in license and royalty fees is primarily due to certain shared patent costs that we reimbursed NIH for in 2012.
License and royalty fees decreased by $5.6 million to $0.3 million for the year ended December 31, 2011 compared to $5.9 million for year ended December 31, 2010. This decline is primarily due to an amendment to our December 29, 2010 NIH license agreement, which eliminated certain license and royalty fees payable to NIH on future sales of TAXUS by BSC. Under the terms of the NIH license agreement, we have an exclusive, worldwide license to certain NIH technologies related to the use of paclitaxel.
While these royaltyroyalties and license fees are expected to bewere minimal in 2012, they may be offset by increased future license and royalty fees that may be dueowing to NIH shouldmay become significant depending on the magnitude of sales growth achieved by Cook, receive approval to market and sell Zilverfrom its sales of Zilver-PTX, in the U.S. and record significant sales thereof.other territories.
Research and Development
Our research and development expense is comprised of costs incurred in performing new product development, regulatory affairs and product quality assurance activities, including salaries and benefits, engineering, clinical trial and related clinical manufacturing costs, contract research or other consulting costs, patent procurement costs, materials and supplies and operating and occupancy costs.
Research and development expenditures decreased bywere $7.1 million for the year ended December 31, 2012, compared to $19.7$19.8 million for the same period in 2011. The net $12.7 million or 64% decrease is primarily due to the following factors: (i) a $5.8 million decrease in salaries and benefit costs related headcount reductions that were completed in 2011; (ii) a $2.0 million decrease in non-recurring severance and termination obligations recorded in 2012 due to the headcount reductions discussed above; (iii) a $0.9 million decrease in stock based compensation expense associated with the accelerated vesting of certain Restricted Stock Units (“RSU’s”) and Stock Options (“Options”) in 2011 related to the termination of a former executive officer; (iii) a $1.1 million reduction in spending on patent related costs; and (iv) a $3.3 million decrease in rent and other discretionary costs related to the significant wind down of certain early stage research and development programs at our Vancouver, Canada and Sarasota, Florida facilities in 2011. These cost decreases were offset by a $1.0 million non-recurring Amendment Fee, discussed under the Collaboration, License and Sales and Distribution Agreements section above, that was paid to Biopsy Sciences, LLC on May 31, 2012.
Research and development expenditures were $19.8 million for the year ended December 31, 2011 compared to $26.8 million for the same period in 2010. The $7.0 million decrease is primarily due to the following factors: (i) a $4.0 million decrease in salaries and benefits costs related to reduced headcount;headcount reductions completed in 2010; (ii) a $1.0 million non-cash recovery on our rent expense resulting from the recognition of certain leasehold inducements received in prior years, associated with our recent reduction of our rentable space at one of our facilities; (iii) a $1.2 million reduction in spending on patent related costs; and (iv) reductions in certain discretionary spending on various research and development initiatives. These reductions were partially offset byby: (i) $2.0 million in severance expense related to the previously discussed headcount reductions.
Researchreductions; and development expenditures increased by $3.1(ii) a $0.9 million to $26.8 million forincrease in stock based compensation expense associated with the year ended December 31, 2010 as compared to $23.7 million for the same periodaccelerated vesting of certain RSU’s and Options in 2009. The increase is primarily due2011 related to the following factors: (i) higher salaries and benefit costs incurred by personnel conducting research and development activities on certaintermination of our products; and (ii) $1.1 million of costs related to new personnel retained, and occupancy costs incurred, in connection with our acquisition of assets from Haemacure.a former executive officer.
We expect that our research and development expenditures in 20122013 will be significantly lower as compared to 2011 and 2010 duecomparable to the refocusingamounts recorded in 2012.
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Table of our research and product development efforts as described, including reduced expenses relating to headcount reductions and the conclusion, postponement or cancellation of certain programs, most substantively certain earlier stage research or product development programs in our Vancouver, Canada headquarters facility which occurred in December 2011.Contents
Selling, General and Administrative Expenses
Our selling, general and administrative expenses are comprised of direct selling and marketing costs related to the sale of our various medical products, including salaries, benefits and sales commissions, and our various management and administrative support functions, including salaries, commissions, benefits and bonuses and other operating and occupancy costs.
Selling, general and administrative expenses decreased by $4.0were $71.0 million for the year ended December 31, 2012 compared to $85.3 million for the same period in 2011. The $14.3 million or 16.8% decrease is primarily due to: (i) a $6.9 million decrease in salaries and benefit costs related to sales, marketing and administrative headcount reductions that were completed in 2011; (ii) a $4.4 million decrease in certain non-recurring severance and termination obligations in 2012 compared to 2011 related to the headcount reductions discussed above; (iii) $6.5 million less in additional stock based compensation expense recorded in 2012 as compared to 2011 related to the accelerated vesting of certain Restricted Stock, RSU’s and Options that were provided for under the provisions of the employment agreements for three executive officers that were released from Angiotech in 2011; (iv) a $1.3 million decline in travel costs primarily related to our 2011 sales force reduction and general cost management initiatives; and (v) a $0.6 million recovery that was recorded in 2011 related to a previous lease obligation that was recorded in 2010. These cost decreases were partially offset by: (i) $1.6 million of non-recurring transaction fees and expenses related to the completion of the Quill Transaction described above; (ii) $0.9 million of additional costs, as compared to amounts recorded in 2011, related to our exploration of certain strategic and financial alternatives; (iii) a $1.1 million obligation recorded for continuing lease payments on a property that was vacated in late 2012; (iv) $1.1 million of ongoing lease costs, related to space that was previously designated for certain research and development activities, that was reallocated to selling, general and administrative expenses in 2012; and (v) $0.5 million of restructuring costs associated with the closure of our Denmark manufacturing facility.
Selling, general and administrative expenses were $85.3 million for the year ended December 31, 2011 compared to $89.2 million for the same period in 2010. The $4.0 million decrease iswas primarily due toto: (i) a $8.2 million decrease in operating and occupancy costs, of which $5.6 million related to the closure or contractionand downsizing of administrative offices and a $1.4 million reduction in bad debt expense as $0.9 million expense was recorded for the year ended December 31, 2010 primarily related to a select number of specific accounts in Europe as compared to a recovery of $0.5 million recorded in the same period of 2011 primarily related to the subsequent collection of a number of accounts previously written off as uncollectible. In addition, for the same period, there was2010; (ii) a $4.2 million decrease in salaries and benefit costs related to a reduction in our sales, marketing and administrative headcount; (iii) a $1.4 million decrease in travel costs, related primarily to headcount decreases in personnel and general cost management practices; and(iv) $1.0 million of
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non-recurring transaction fees incurred during the year ended December 31, 2010 related to the acquisition of certain technology assets from Haemacure Corporation (“Haemacure”) and general consulting costs related to our exploration of certain strategic and financial alternatives.alternatives; and (v) a $1.4 million reduction in bad debt expense. The change in bad debt expense resulted from a $0.9 million provision that was recorded during 2010, related to a select number of specific accounts in Europe, and a subsequent recovery of $0.5 million recorded in 2011 related to the collection of a number of accounts previously written off as uncollectible. These cost reductions were partly offset byby: (i) $3.9 million of severance costs and $7.4recorded in 2011; (ii) $6.5 million of additional stock based compensation expense primarily associated withrecorded in 2011 related to the accelerated vesting of certain units of Restricted Stock, Restricted Stock Units,RS, RSU’s and stock options that were providedOptions for under the provisions of employment agreements for fourthree executive officers whothat were released from Angiotech during the year ended December 31, 2011.
Selling, generalin 2011; and administrative expenditures increased by $7.7 million to $89.2 million for the year ended December 31, 2010 compared to $81.5 million for the year ended December 31, 2009. The increase is primarily due to the following factors: (i)(iii) a $6.1 million rise in salaries and benefits related to new sales and marketing personnel hired to expand sales of certain of our medical products, most specifically relating to our Quill product line; (ii) a $1.3$1.0 million increase in travel costs attributedstock based compensation expense in 2011 associated with RS’s, RSU’s and Options that were granted to certain executives, directors and employees under the increased personnel; and (iii) a $3.8 million increase in operating costs relating toterms of the increased personnel. The net $11.2 million increase in these costsnew 2011 Stock Incentive Plan that was offset by an overall $3.8 million decrease in legal expenses, primarily related to lower litigation costs due to a settlementestablished upon implementation of certain litigation.the Recapitalization Transaction.
We expect that selling, general and administrative expenses in 20122013 will be lower than the levels of such expenses incurred in 2011, due primarilycomparable to the headcount and related cost reductions noted above, as well as due to additional headcount reductionsamounts recorded in part of our direct sales organization and executive terminations that were concluded in December 2011.2012. These expenditures could fluctuate depending on product sales levels, the timing of the launch of certain new products, growth of new product sales unforeseen litigation or for other legaladministrative or transaction related expenses that may be incurred.
Depreciation and Amortization
Depreciation and amortization is comprised of depreciation expense of property, plant and equipment and amortization expense of licensed and internally developed technologies, and identifiable assets purchased through business combinations.
Depreciation expense (excluding the portion allocated to cost of products sold) was $2.5 million for the year ended December 31, 2012 as compared to $4.5 million for the same period in 2011. The $2.0 million decrease was primarily related to additional depreciation expense that was specifically recorded in 2011 related to revisions of the estimated useful life of certain leasehold improvements associated with the downsizing of our Vancouver, Canada and Seattle offices that was executed in various stages throughout 2011 and 2012.
Depreciation expense (excluding the portion allocated to cost of products sold) was $4.5 million for the year ended December 31, 2011 as compared to $2.9 million for the same period in 2010. The net $1.6 million increase was primarily due toto: (i) a $2.0 million increase in depreciation expense related to a change in the estimated useful life of certain leasehold improvements associated with rentable space that was vacated during 2011 or expected to be vacated in 20122012; and a(ii) $0.6 million increase toof additional depreciation expense forduring the eight months ended December 31, 2011 related to the reassessment of the estimated useful lives of property, plant and equipment as a result ofin connection with the implementation of fresh start accounting. These increases were partly offset by an approximate $0.7 million decrease in depreciation expense related to the December 31, 2010 write-off of $1.3 million of laboratory equipment at the
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Vancouver head office facility. The laboratory equipment was written off due to the operational changes that were initiated as part of the Recapitalization Plan.
Amortization expense increased by $2.9was $32.0 million for the year ended December 31, 2012 compared to $33.7 million for the same period in 2011. The net $1.7 million decrease in amortization expense was primarily due to: (i) $2.2 million of additional amortization expense recorded in 2011 related to a revision in the estimated useful life of our license from Rex Medical to sell Option IVC Filters, which was terminated effective March 31, 2011; (ii) a $0.8 million reduction in amortization expense related to the write-down of certain intangible assets in connection with the termination of our anti-infectives program at the end of 2011; and (iii) a $1.5 million increase to amortization expense related to the higher basis of amortization expense resulting from the increase to intangible asset values upon implementation of fresh start accounting, which affected twelve months of 2012 versus eight months of 2011. Upon application of fresh start accounting, our intangible assets were revalued from $127.0 million to $377.5 million. The period January — April, 2011 was therefore unaffected by the higher basis of amortization.
Amortization expense was $33.7 million for the year ended December 31, 2011 compared to $30.8 million for the same period in 2010. The $2.9 million increase was primarily due to additional amortization expense of $3.0 million during 2010, of which $2.0 millionthe 8 months ended December 31, 2011 related to the revaluation of our intangible assets from $127.0 million to $377.5 million in connection with our implementation of fresh start accounting on April 30, 2011 and $0.7 million related to the change in the estimated useful life of our license with Rex to sell the Option IVC Filter. Our license with Rex to sell the Option IVC Filter was terminated effective March 31, 2011 based on the terms of the Settlement and License Termination Agreement entered into on February 16, 2011.
Depreciation and amortization expense of $33.7 million for the year ended December 31, 2010 was comparable to $33.3 million in 2009.
As our long-lived assets were comprehensively revalued as part of the fresh start accounting exercise on April 30, 2011, depreciation and amortization expense for 2012 is expected to be slightly higher than the comparable periods in 2011 and 2010. The respective fresh start accounting adjustments are a requirement resulting from our emergence from the CCAA and Chapter 15 proceedings, and do not reflect material changes in our business or operations.
Write-down of Property, Plant and Equipment
During the year ended December 31, 2012, we recorded a $0.7 million write-down of certain leasehold improvements associated with the downsizing of our Vancouver, Canada facility, and a $0.2 million write-down of certain manufacturing equipment related to the termination of one of our product development projects.
During the year ended December 31, 2011, we recorded write-downs of $4.7 million primarily related to certain leasehold improvements and manufacturing equipment at our Vancouver office as well as furniture and fixtures related to the downsizing of our rentable space at our Seattle and Vancouver offices and our Rochester manufacturing facility.
During the same period inyear ended December 31, 2010, we recorded write-downs of $4.8 million related to our suspension of certain research and development activities, including those related to our fibrin and thrombin technologies (December 31, 2009 — nil).technologies.
Write-down of Assets Held For Sale
During the year ended December 31, 2010,2012, we recorded a $1.5$0.3 million impairment charge on propertiesa property that were classified as heldis currently being marketed for sale.sale in connection with the closure of our Denmark manufacturing facility. As at December 31, 2010, two held-for-sale properties with2012, the $1.9 million carrying values totaling $3.0 million were reclassified back into
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Property, Plant and Equipment from assets-held-for-sale because they failed to meetvalue of the property has been classified as held-for-sale classification criteria defined under in accordance with ASC No. 360-10 — Property, Plant and Equipment.
During the year ended December 31, 2011, we recorded a $0.6 million impairment charge on a Vancouver, Canada based property that was classified as held for saleheld-for-sale as at May 1, 2011, and subsequently sold. During the same period another property, that was classified as held for saleheld-for-sale as at May 1, 2011, was sold for approximately its approximate carry value.
During the year ended December 31, 2010, we recorded a $1.5 million impairment charge on properties that were classified as held- for-sale. As at December 31, 2010, two held-for-sale properties with carrying values totaling $3.0 million were reclassified back to Property, Plant and Equipment from assets-held-for-sale because they failed to meet the held-for-sale classification criteria.
Write-down of Intangible Assets
During the year ended December 31, 2011, we recorded intangible asset impairment write-downs of $10.9 million related to the termination of our anti-infective research and development programs. We have no specific plans for further development of these programs.
During the year ended December 31, 2010, we recorded intangible asset impairment write-downs of $2.8 million (December 31, 2009 — nil) related to (i) the termination of our 2008 License, Supply, Marketing and Distribution a licensing agreement with Rex (see Significant Recent Developments for additional information) and (ii) our temporary suspension of research and development activities related to our fibrin and thrombin technologies which were acquired from Haemacure in 2010.
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Escrow Settlement Recovery
In January 2010 we received $4.7 million in full settlement of an outstandinga litigation matter with RoundTable Healthcare Partners, LP. The litigation related to a claim we had made against amounts paid intoplaced in escrow in connection with our March 2006 acquisition of American Medical Instruments Holdings, Inc. that, which remained in escrow pending the resolution of certain representations and warranties in the agreement governing the acquisition. The proceeds received were recorded as a one-time escrow settlement recovery during the three monthsyear ended MarchDecember 31, 2010.
Other Income (Expense)
| | Successor Company | | | Predecessor Company | | Combined | | Predecessor Company | | Predecessor Company | | | Successor Company | | | Predecessor Company | | Combined | | Predecessor Company | |
| | Eight months ended
December 31, | | | Four months ended
April 30, | | Year ended
December 31, | | Year ended
December 31, | | Year ended
December 31, | | | Year ended
December 31, | | Eight months ended
December 31, | | | Four months ended
April 30, | | Year ended
December 31, | | Year ended
December 31, | |
| | 2011 | | | 2011 | | 2011 | | 2010 | | 2009 | | | 2012 | | 2011 | | | 2011 | | 2011 | | 2010 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Other income (expenses) | | | | | | | | | | | | | | | | | | | | | | | | |
Foreign exchange gain (loss) | | $ | 1,461 | | | $ | (646 | ) | $ | 815 | | $ | 1,011 | | $ | (1,612 | ) | | (751 | ) | $ | 1,461 | | | $ | (646 | ) | $ | 815 | | $ | 1,011 | |
Other income (expense) | | 547 | | | 34 | | 581 | | (862 | ) | (265 | ) | | 1,320 | | 547 | | | 34 | | 581 | | (862 | ) |
Debt restructuring costs | | — | | | | | — | | (9,277 | ) | — | | | — | | — | | | | | — | | (9,277 | ) |
Interest expense on long-term debt | | (11,945 | ) | | (10,327 | ) | (22,272 | ) | (40,258 | ) | (38,039 | ) | | (20,390 | ) | (11,945 | ) | | (10,327 | ) | (22,272 | ) | (40,258 | ) |
Write-downs and net losses on redemption of investments | | (2,035 | ) | | | | (2,035 | ) | (1,297 | ) | — | | | (561 | ) | (2,035 | ) | | | | (2,035 | ) | (1,297 | ) |
Debt extinguishment loss | | | (4,437 | ) | — | | | — | �� | — | | — | |
Loan settlement gain | | — | | | — | | — | | 1,880 | | — | | | — | | — | | | — | | — | | 1,880 | |
Gain on disposal of Laguna Hills manufacturing facility | | — | | | | | — | | 2,005 | | — | | | — | | — | | | | | — | | 2,005 | |
Total other expenses | | $ | (11,972 | ) | | $ | (10,939 | ) | $ | (22,911 | ) | $ | (46,798 | ) | $ | (39,916 | ) | | $ | (24,819 | ) | $ | (11,972 | ) | | $ | (10,939 | ) | $ | (22,911 | ) | $ | (46,798 | ) |
|
Net foreign exchange gains and losses were primarily the result of changes in the relationship of the U.S. to Canadian dollar and other foreign currency exchange rates when translating our foreign currency denominated cash, cash equivalents and short-term investments to U.S. dollars for reporting purposes at period end.the end of the period. We continue to hold foreign currency denominated cash and cash equivalents, denominated in foreign currencies, to meet our future anticipated operating and capital expenditure needs in future periods in jurisdictions outside of the U.S.foreign jurisdictions. We do not use derivatives to hedge against exposures to foreign currency exposure arising from our balance sheet financial instruments and thereforeinstruments. As a result, we are exposed to future fluctuations in the U.S. dollar to foreign currency exchange rates.
During the year ended December 31, 2010, we recorded a $0.3 million write-down of deferred financing costs related to our 2009 shelf registration statement filed with the SEC. Write-down and other deferred financing chargesOther income (expense) for the year ended December 31, 2009 related to a charge2012 primarily consists of $0.6 million resultinggains from the write-offsale of manufacturing and lab equipment in connection with our termination of research and development activities at our Vancouver, B.C. headquarters at the portionend of the deferred financing charges related to our term loan facility with Wells Fargo that terminated on May 29, 2009.2011.
During the year ended December 31, 2010, we incurred debt restructuring costs of $9.3 million for fees and expenses related to the Recapitalization Transaction. These fees and expenses representrepresented professional fees paid to both our, and the Consenting Noteholders’ financial and legal advisors to assist in the analysis of financial and strategic alternatives. TheSimilar costs were included in “Reorganization Items”incurred during the year ended December 31, 2011.2011 were included in Reorganization Items line on the Consolidated Statement of Operations. For more information seerefer to notes 3 and 4 underof the Notes to the Consolidated Financial Statements included in Part IV of the 20112012 10-K and “Reorganization Items”Reorganization Items section below.
WeDuring the year ended December 31, 2012, we incurred interest expense of $20.4 million, compared to $22.3 million for the same period in 2011. The $1.9 million decrease in interest expense is due to the following factors: (i) a $1.6 million decline in interest expense relative to 2011 due to the cancellation of the Subordinated Notes during the Recapitalization Transaction; (ii) a $3.6 million decline in non-cash interest expense related to the amortization of the previous deferred financing costs associated with our former credit facilities, Subordinated Notes and New Notes; (iii) interest savings of $0.4 million associated with the October 17, 2012 early redemption of $40.0 million of the Floating Rate Notes due December 1, 2013; and (iv) a $0.9 million decrease in interest expense and administration fees associated with lower usage of our revolving credit facility in 2012 and ongoing maintenance of this facility in 2012. These decreases in interest expense were offset by: (i) a $3.6 million increase in interest expense associated with higher 9% fixed interest rate applicable to the $229.4 million of new Senior Notes that were issued in exchange for the $225.0 million of former New Notes, which had an effective interest rate of 5%; and (ii) a $1.0 million increase in interest expense due to our former New Notes being subject to a LIBOR floor of 1.25%, which raised the effective interest rate from 4.1% during the year ended December 31, 2011 to 5%.
During the year ended December 31, 2011, we incurred interest expense of $22.3 million andcompared to $40.3 million forin the years ended December 31, 2011 and December 31, 2010, respectively.same period in 2010. The $18.0 million decrease is primarily due to the elimination of $17.8 million of interest expense related to the cancellation of $250 million Subordinated Notes (as discussed above) and the elimination of approximately $3.4 million of amortization of deferred financing costs during the year ended December 31, 2011 in connection with the implementation of fresh start accounting on April 30, 2011, which resulted in deferred financing costs being fair valued at nil, as well as a $0.7 million
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decrease of interest expense previously incurred from overdue royalties owing to NIH at December 31, 2010. These cost reductions were partly offset by an increase of $0.7 million of interest during the year ended December 31, 2011 related to advances under the Revolving Credit Facility, DIP Facility and Revolving Credit Facility and a $3.2 million increase in the amortization of the deferred financing costs during the
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four months ended April 30, 2011 due to a change in the estimated useful lives of our debt instruments to coincide with their termination on the Plan Implementation Date.
We incurred interest expense of $40.3 million and $38.0 million for the years ended December 31, 2010 and December 31, 2009, respectively. For the year ended December 31, 2010, interest expense consists of $32.9 million of interest incurred; related to our Existing Floating Rate Notes, Subordinated Notes and Existing Credit Facility; $0.7 million of interest expense incurred from overdue royalties owing to NIH; and $6.7 million of amortization of deferred financing costs. Similarly, interest expense for the year ended December 31, 2009 consists of $35.2 million of interest incurred; related to our Existing Floating Rate Notes and Subordinated Notes; and $2.8 million of amortization of deferred financing costs. The $2.3 million decline in interest expense on our long term debt obligations is primarily due to a decline in LIBOR (London Interbank Offered Rate) rates, which are used to determine the interest rate applicable to our Existing Floating Rate Notes. The average interest rate for the year ended December 31, 2010 was 4.1% compared to 4.7% for the year ended December 31, 2009.
During the year ended December 31, 2011, we recorded $2.0 million of write-downs on short term investments in equity securities in a publicly traded biotechnology company as the decline in value was considered to be other than temporaryother-than-temporary due to the value being depressed for an extended period of time and our intent to liquidate these securities in the near term. During the year ended December 31, 2010, we recorded $1.3 million of write-downs related to our long term investments in three private biotechnology companies that were determined to be irrecoverable.
During the year ended December 31, 2009, there were no write-downs2012, we incurred a $4.4 million debt extinguishment loss upon the exchange and settlement of investments.$225.0 million of New Notes for $229.4 million of Senior Notes, which includes a 2% Early Tender Premium.
During the year ended December 31, 2010, we recorded a $1.9 million loan settlement gain relating to the settlement of the loan with Haemacure in connection with the acquisition of Haemacure’s assets.their assets related to certain fibrin and thrombin technologies.
During the year ended December 31, 2010, we sold our Laguna Hills manufacturing operations, which was part of our Medical Device TechnologiesProducts operating segment. The sale included certain assets and liabilities for total net proceeds of $2.8 million and resulted in a $2.0 million gain.
Reorganization Items
Upon commencement of the Creditor Protection Proceedings, we adopted Accounting Standards Codification (“ASC”) No. 852 — Reorganization in preparing our consolidated financial statements. ASC No. 852 required that we distinguish transactions and events directly associated with the Recapitalization Transaction from the ongoing operations of the business. Accordingly, we reported certain expenses, recoveries, provisions for losses, and other charges that have been realized or incurred during the Creditor Protection Proceedings as Reorganization Items on the Consolidated Statements of Operations as follows:
| | | | Predecessor
Company
Four months
ended
April 30, 2011 | | | | | Predecessor
Company
Four months
ended
April 30, 2011 | |
Professional fees | | (1 | ) | (17,868 | ) | | (1) | | (17,868 | ) |
Directors’ and officers’ insurance | | (2 | ) | (1,601 | ) | | (2) | | (1,601 | ) |
KEIP payment, | | (3 | ) | (793 | ) | | (3) | | (793 | ) |
Gain on settlement of financial liability approved by the Canadian Court | | (4 | ) | 1,500 | | | (4) | | 1,500 | |
Cancellation of options and awards | | (5 | ) | (1,371 | ) | | (5) | | (1,371 | ) |
Net gains due to fresh start accounting adjustments | | (6),(7 | ) | 341,217 | | | (6),(7) | | 341,217 | |
| | | | $ | 321,084 | | | | | $ | 321,084 | |
|
(1) Professional fees represent legal, accounting and other financial consulting fees paid to ouradvisors; which represented the Predecessor Company and Subordinated Noteholders during the Consenting Noteholders’Recapitalization Transaction. These advisors to assistassisted in the analysis of financial and strategic alternatives as well as the execution and completion of the Recapitalization Transaction, andthroughout the Predecessor Company’s Creditor Protection Proceedings.
(2) Directors’ and officers’ insurance represents the purchase of additional insurance coverage required to indemnify the preceding directors and officers of the Predecessor Company for a period of six years after the Plan Implementation Date. Given that a new board of directors was appointed upon implementation of the CCAA Plan, the feetotal fees of $1.6 million waswere expensed to reorganization items during the four months ended April 30, 2011.
(3) Upon completion of the Recapitalization Transaction, a $0.8 million incentive payment (net of a $0.2 million tax recovery) was triggered under the terms of the KEIP. Two-thirdsKey Employment Incentive Plan (“KEIP”), which was established as part of the Recapitalization Transaction. The KEIP payment was fully paid on the Plan Implementation Date. The remaining one-third was paid onout by August 10, 2011.
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(4) In connection with the termination and settlement of an agreement with a previous distributor Rex, Settlement Agreement, wethe Predecessor Company recorded a $1.5 million recovery during the four months ended April 30, 2011 related to the full and final settlement of all milestone and royalty obligations owing under the Option Agreement and accrued as at December 31, 2010.2010 under the terms of the original agreement.
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(5) In connection with the cancellation of all stock options uponUpon implementation of the CCAA Plan,Recapitalization Transaction, the Predecessor Company cancelled all existing stock options and charged the total unrecognized stock based compensation of $1.4 million was charged to earnings on April 30, 2011.
(6) Refer to the Fresh Start Accounting section above for an explanationUpon reorganization and implementation of the gains resulting from fresh start accounting, adjustments.the Company’s reorganization value of $692.8 million was allocated to all tangible and identifiable intangible assets based on their fair values, which totaled $567.6 million. The fresh start revaluation resulted in goodwill of $125.2 million and net revaluation gains of $341.1 million.
(7) The implementation of the Recapitalization Transaction triggered forgiveness of indebtedness of approximately $67.3 million, resulting in the utilization of Canadian tax attributes for which a deferred tax asset was not previously recorded. Accordingly, the Canadian tax attributes available to the Successor Company are significantly reduced from the Predecessor Company’s previously disclosed balances. Management has evaluated other tax implications of the reorganization and has determined that they did not have a significant impact on the tax balances.
Unless specifically prescribed under ASC No. 852, other items that are indirectly related to the ourPredecessor Company’s reorganization activities, have been recorded in accordance with other applicable U.S. GAAP, including accounting for impairments of long-lived assets, modification of leases, accelerated depreciation and amortization, and severance and termination costs associated with exit and disposal activities.
For more detailed information about the Creditor Protection Proceedings and the Recapitalization Transaction, refer to the annual audited consolidated financial statements included in the 2011 Annual Report filed with the SEC on Form 10-K on March 29, 2012.
Income Tax
Income tax expense for the year ended December 31, 2012 was $8.2 million. The income tax expense recorded for the year ended December 31, 2012 is primarily due to increase in uncertain tax positions, expiry of losses carried forward and withholding taxes on intercompany dividends.
Income tax recovery for the eight months ended December 31, 2011 was $3.0 million and income tax expense for the four months ended April 30, 2011 was $0.3 million.million, compared to income tax recovery of $0.04 million for the year ended December 31, 2010. The income tax recovery for the eight months ended December 31, 2011 is primarily due to the tax benefit arising on the dissolution of certain subsidiaries in the U.S. and the amortization of intangible assets recognized for fresh start accounting purposes on the reorganization.
The Company adopted fresh start accounting on April 30, 2011. Upon adoption of fresh-start accounting, a comprehensive revaluation of assets and liabilities was performed, resulting in the recognition of all assets and liabilities at their newly estimated fair values. Intangible assets of $377,500 million were recognized for accounting purposes, for which there is no associated tax basis, resulting in a significant increase in the deferred income tax liability for identifiable intangible assets.
Implementation of the Recapitalization Transaction also triggered a $67.3 million gain on the forgiveness of debt, resulting in the utilization of Canadian tax attributes for which a deferred tax asset was not previously recorded, and a reduction in the valuation allowance of the Predecessor Company.
Income tax recovery for the year ended December 31, 2010 was $0.04 million compared to income tax expense of $6.0 million for the year ended December 31, 2009. The income tax recovery for 2010 primarily consisted of positive net earnings from operations in the U.S. and certain foreign jurisdictions, and a recovery on the amortization of identifiable intangible assets. The income tax expense for 2009 is primarily due to net income from U.S. and foreign operations, and includes the recognition of a $6.1 million deferred tax charge relating to taxes paid in prior years in connection with an inter-company transfer of intellectual property in connection with the transaction with Baxter.
The effective tax rate for the current period differs from the statutory Canadian tax rate of 26.5%25.0% in 2011 (28.5%2012 (26.5% in 2010)2011). The difference is primarily due to valuation allowancesincrease in uncertain tax positions, expiry of losses carried forward and withholding taxes on net operating losses, the net effect of lower tax rates on earnings in foreign jurisdictions, permanent differences not subject to tax, and the reversal of temporary timing differences relating to the reorganization.intercompany dividends.
Liquidity and Capital Resources
AtAs at December 31, 2011,2012, we had working capital of $66.0$22.1million, including cash and cash equivalents of $45.9 million, andcompared to working capital of $65.5 million, which included cash and cash equivalents of $22.2 million. For the year endedmillion, as at December 31, 2011, our2011. The net $43.4 million decrease in working capital increased by $580.8 million as compared to December 31, 2010,is primarily due to the eliminationfollowing factors: (i) the reclassification of the $60.0 million of remaining New Notes, which are due on December 1, 2013, from non-current to current; (ii) a $21.5 million increase in the current portion of deferred revenue associated with the estimated portion of the consideration, received from Ethicon related to the Quill Transaction, that we expect to ratably recognize into revenue in 2013; (iii) a $4.0 million decrease in other current assets related to a receivable that was recorded at the end of 2011and received in early 2012, in connection with a sales milestone fee that was triggered under the license agreement with Cook related to achievement of a certain level of targeted sales of Zilver PTX; and (iv) a $2.8 million decline in our short term investments related to our liquidation of a portion of our $250 million Subordinated Notes and $16 million of related accrued interest obligations through the Recapitalization Transaction and the exchange and replacement of our $325 million Existing Floating Rate Notes with New Floating Rate Notes on the Plan Implementation Date and their subsequent reclassification from current liabilities back to non-current liabilities.securities held in a public biotechnology company. These obligations had been previously classified as current as at December 31, 2010 due to our undertaking of the steps necessary to conclude our Recapitalization Transaction. The remaining changedecreases in our working capital position is partly attributable to decreaseswere partially offset by: (i) a $23.8 million increase in cash and cash equivalents as(see Cash Flow Highlights section below for further discussed under “Cash Flow Highlights” below.
Fordiscussion); (ii) a $12.1 million rise in inventory levels, in part due to: (a) increase in inventory required to fulfill expected future orders from Ethicon for Quill in accordance with the Successor Company’s eight months ended December 31, 2011, working capital decreased by $4.2 as comparedterms of the MSA; (b) temporary increases in inventory required to May 1, 2011. This decrease was primarily duefacilitate the closure and transfer of production activities from our Demark facility to the $22.6 million non-cash charge to cost of products sold during this period as a result of revaluing inventory as partcertain of our implementationU.S. manufacturing facilities; and (c) other general increases to improve customer lead times as well as support our current and future expected sales growth; (iii) a $3.7 million decline in payables primarily associated with our payment of fresh start accounting at May 1, 2011 (as discussed undercertain non-recurring severance and termination costs as well as the “Allocationpayment of Reorganization Value to Assets and Liabilities - Inventory” section above). Excludinganother twelve months of the impact of this fresh start accounting adjustment,outstanding balance owing on our working capital increased by $18.4 million as compared to May 1, 2011. This increase is primarily due to costsettlement
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reduction initiatives
of the QSR Holdings claim; (iv) a net $1.7 million increase in income taxes receivable due primarily to reduce researchoverpayment of U.S. estimated taxes; and development expenditures as well as sales, general and administrative expenditures as previously described; and,(v) a $1.9 million increase in current deferred income tax assets due primarily to deferred revenue.
Senior Notes
In July 2012, we launched an offer to exchange up to a lesser extent, this increase is also a resultmaximum of a reduction$225.0 million in outstanding accounts receivable balances achieved by increasing collections efforts.
Historically, our most significant financial liabilities have been ouraggregate principal amount of the $325 million Existing Floating Rateoutstanding New Notes and our $250(the “Maximum Principal Exchange Amount”) for Senior Notes issued by Angiotech Pharmaceuticals (US), Inc. pursuant to an Exchange Offer. On August 13, 2012, $225.0 million Subordinated Notes. As previously, discussed, these debt obligations were originally supported in substantive part by royalty revenues derived from sales of TAXUS coronary stent systems by BSC. The sustained and significant decline in royalty revenues received from BSC over the past several years had a significant negative impact on our liquidity and capital resources, which constrained our ability to continue servicing the totality of our long term debt and related interest obligations. As a result of our liquidity constraints, among other things, on January 28, 2011, the Angiotech Entities commenced the CCAA Proceedings to implement an in-court recapitalization of the Company through the CCAA Plan. On May 12, 2011 we implemented the Recapitalization Transaction, which effectively eliminated our $250$255.5 million Subordinatedtendered New Notes were irrevocably extinguished and $16exchanged, on a pro rata basis, for $229.4 million of related accrued interest obligations in exchange for new common sharesSenior Notes. All New Notes that were tendered by the prescribed July 23, 2012 early tender date received the Senior Notes with a principal amount that included a 2% premium (“Early Tender Premium”) on the principal amount of the Company. In addition, on the Plan Implementation Date, our $325 million Existing Floating RateNew Notes exchanged. The Senior Notes were replaced withrecorded at their fair value of $229.4 million and a $4.4 million non-cash debt extinguishment loss was triggered upon settlement and cancellation of the $225 million of New Floating Rate Notes.Notes that were tendered.
The $229.4 million of Senior Notes are due on December 1, 2016 and bear interest at 9% per annum, which is payable quarterly in cash and in arrears on March 1, June 1, September 1, and December 1 of each year. The Senior Notes are senior secured obligations, which are fully, joint and severally, and unconditionally guaranteed by our existing and future subsidiaries which may guarantee any of our other indebtedness. Subject to certain exceptions, the Senior Notes and the Guarantors’ guarantees of the Senior Notes are secured, ratably with the remaining $60.0 million of New Floating RateNotes, by second-priority liens and security interests over the same collateral that currently or in the future secures the obligations owing under our revolving credit facility (as amended, the “Revolving Credit Facility”), which is described below.
On August 13, 2012, Angiotech US, Angiotech and certain of Angiotech’s subsidiaries entered into an indenture with Deutsche Bank National Trust Company, as trustee, governing the Senior Notes (as amended, the “Senior Notes Indenture”). Aside from the higher rate of interest and extended maturity date, the Senior Notes were issued pursuant to the Senior Notes Indenture on substantially the same terms and conditions as the Existing Floating Rateindenture governing the New Notes dated May 12, 2011 among Angiotech, the guarantors party thereto and Deutsche Bank National Trust Company as trustee (as amended, the “New Notes Indenture”), except that, among other things:for the following:
(i)· subject toThe New Notes were issued by Angiotech and guaranteed by Angiotech US and certain exceptions, the New Floating Rateother subsidiaries. The Senior Notes were issued by Angiotech US, and are securedguaranteed by second-priority liens over substantially all of the assets, property and undertaking of Angiotech and certain of its subsidiaries;subsidiaries.
(ii)· The Senior Notes are redeemable at Angiotech US’s option at any time, in whole or in part, at a redemption price equal to 100% of the principal amount thereof, plus any accrued and unpaid interest thereon to the applicable redemption date and any outstanding fees, expenses or other amounts owing in respect thereof. However, the redemption is subject to the condition that all New Notes then outstanding, if any, must be concurrently redeemed under the New Floating Rate Notes continueIndenture.
·The covenants restricting incurrence of Indebtedness were modified to accrueprohibit the incurrence of Indebtedness based on the Fixed Charge Coverage Ratio and limit the amount of Permitted Refinancing Indebtedness that can be secured with Permitted Liens.
·Provided that no Default or Event of Default has occurred, under the Senior Notes Indenture, we have the option to prepay the outstanding New Notes in whole or in part prior to making any principal payments on the Senior Notes.
The Senior Notes Indenture contains covenants that, among other things, limit our ability to: incur, assume or guarantee additional indebtedness or issue preferred stock, pay dividends or make other equity distributions to stockholders, purchase or redeem capital stock, make certain investments, create liens, sell or otherwise dispose of assets, engage in transactions with affiliates, and merge or consolidate with another entity, or transfer a substantial portion of our assets. The Senior Notes are subject to certain change in control provisions, under which we would be required to offer to repurchase the Senior Notes at a price equal to 101% of the principal amount thereof, plus any accrued and unpaid interest, if any, to the date of repurchase.
In connection with the Exchange Offer, we also received consents from the holders of the New Notes to amend the New Notes Indenture dated May 12, 2011 to provide for, among other things, the Senior Notes and New Notes to vote together as a single class on certain matters.
As discussed under the Sale of Interventional Products Business to Argon Medical, Inc. section above, we expect that the cash consideration from this transaction will be used to repay the $229.4 million of debt outstanding under the Senior Notes.
Under the terms of the Senior Notes Indenture, the occurrence of a defined event of default would permit the holders of the Senior Notes to exercise their right to demand immediate repayment of debt obligations owing thereunder. In the event that this occurred and we were unable to complete and close the transaction contemplated under the sale transaction of our Interventional Products Business to Argon, our current cash and credit capacity may not be sufficient to service our principal debt and interest obligations. In addition, restrictions on our ability to borrow and the possible accelerated demand of repayment of existing or future obligations by any of our creditors may jeopardize our working capital position and our ability to sustain future operations.
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New Notes
On September 17, 2012, pursuant to a Notice of Optional Partial Redemption, we exercised our call option to partially redeem $40 million in aggregate principal amount of our $100 million then outstanding New Notes. On October 17, 2012 we redeemed 40 million of these New Notes at 100% of the principal amount, together with accrued and unpaid interest of $0.2 million.
As at December 31, 2012, we had $60 million of New Notes outstanding which are scheduled to mature on December 1, 2013. On March 18, 2013, we announced a second partial redemption of $16 million of the New Notes outstanding at 100% of the principal amount together with accrued and unpaid interest. The partial redemption is expected to be completed on April 17, 2013. We anticipate that our remaining $44.0 million debt obligation outstanding under the New Notes will be repaid using the cash consideration that is expected to be received from the Sale of Angiotech’s Interventional Products Business to Argon Medical Devices, Inc. that was announced on March 25, 2013 (refer to discussion of this transaction under the Significant Recent Developments section above).
The New Notes bear interest at an annual rate of LIBOR (London Interbank Offered Rate) plus 3.75%, however, are subject to a LIBOR floor of 1.25%;. The interest rate resets quarterly and
(iii)certain covenants related to the incurrence is payable in arrears on March 1, June 1, September 1, and December 1 of additional indebtedness and asset sales and the definition of permitted liens, asset sales and change of control have been modified in the indenture that governs theeach year. The New Floating Rate Notes (the “New Notes Indenture”).
Following the implementation of the Recapitalization Transaction on May 12, 2011, our most significant financial liabilities are our New Floating Rate Notesunsecured senior obligations, which are due December 1, 2013. Long term debt interest payments on these New Floating Rates Notes are expectedguaranteed by certain of our subsidiaries, and rank equally in right of payment to be significant and may adversely impact our liquidity position. As LIBOR may fluctuate from period to period, such volatility may affect quarterly interest rates on the New Floating Rate Notes, thereby affecting the magnitude of such interest costs within a given period. Additional declines in royalty revenues derived from sales of TAXUS may further strain our liquidity, thus negatively impacting our ability to service our principalall existing and future interest obligations owingsenior indebtedness other than debt incurred under the New Floating Rate Notes.
An eventRevolving Credit Facility. The guarantees of default underour guarantor subsidiaries are unconditional, joint and several. Under the terms of the New Notes Indenture, subject to certain conditions, the holders of our New Notes were granted a security interest in the form of a second lien over our and certain of our subsidiaries’ property, assets and undertakings which secure our Revolving Credit Facility.
The New Notes Indenture contains restrictive covenants, which are substantially the same to as those described above under the Senior Notes section. In addition, the occurrence of a defined event of default would permit the holders of the New Floating Rate Notes to demand immediate repayment of our debt obligations owing thereunder. In such a case, our current cash and credit capacity would not be sufficient to service our principal debt and interest obligations or maintain our working capital position to sustain operations.
In connection with the implementation of the Recapitalization Transaction, we paid out the following fees on or around May 12, 2011: (i) approximately $7.2 million of professional fees for legal, financial advisory, accounting and consulting services; (ii) $0.7 million of incentive payments owing to the named beneficiaries of the KEIP; (iii) approximately $1.4 million in financing fees to complete the Revolving Credit Facility; (iv) $0.4 million to settle the $4.5 million of distribution claims allowed pursuant to the Claims Procedure Order in accordance with the CCAA Plan; and (v) $4.8 million of repayments of the Company’s DIP Facility. While these obligations were fully accrued for as at April 30, 2011, they were paid subsequent to April 30, 2011 and the cash flow impact is reflected in the cash flows from reorganization activities during the eight months ended December 31, 2011. The magnitude of these transaction costs negatively impacted the Company’s cash and liquidity position as compared to April 30, 2011.Facility
Upon consummation of the Recapitalization Transaction, we replaced our Existing Credit Facility and DIP Facility with the Revolving Credit Facility. TheOur current Revolving Credit Facility was used to repay the $22 million of advances outstanding under the DIP Facility. The Existing Credit Facility and DIP Facility were then terminated on the Plan Implementation Date concurrently with our entry into the Revolving Credit Facility.
The Revolving Credit Facility, as amended on July 14, 2011 and March 12, 2012, provides us with up to $28.0 million in aggregate principal amount (subject to a borrowing base and certain other conditions discussed below). and expires on September 2, 2013. As at December 31, 2011, under the Revolving Credit Facility,2012, we had a nominal amount ofnil borrowings outstanding $2.6(December 31, 2011 - $0.04 million), $0.7 million outstanding under issued letters of credit (December 31, 2011 - $2.6 million) and $21.3$22.6 million of available borrowing capacity.capacity (December 31, 2011 - $21.3 million).
Borrowings under the Revolving Credit Facility are subject to a borrowing base formula based on certain balances of: eligible inventory, accounts receivable real property, securities and intellectualreal property, net of applicable reserves. As a result, the amount we are able to borrow at any given time may fluctuate from month to month. Borrowings under the Revolving Credit Facility are secured by certain assets held by certain of our subsidiaries (the “Exit Guarantors”). Under the terms of the Revolving Credit Facility, our Exit Guarantors irrevocably and unconditionally jointly and severally guarantee: (a) the punctual payment; whether at stated maturity, by
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acceleration or otherwise; of all borrowings; including principal, interest, expenses or otherwise; when due and payable; and (b) the fulfillment of and compliance with all terms, conditions and covenants under the Revolving Credit Facility and all other related loan documents. Our Exit Guarantors also agree to pay any and all expenses that Wells Fargo may incur in enforcing its rights under the guarantee.
Borrowings under the Revolving Credit Facility bear interest at a rate equal to, at our option, either (a) the Base Rate (as defined in the Revolving Credit Facility to include a floor of 4.0%) plus either 3.25% or 3.50%, depending on the availability we have under the Revolving Credit Facility on the date of determination or (b) the LIBOR Rate (as defined in the Revolving Credit Facility to include a floor of 2.25%) plus either 3.50% or 3.75%, depending on the availability we have under the Revolving Credit Facility on the date of determination. If we were to default on our obligations under the
Our Revolving Credit Facility Wells Fargo also has the option to implement a default rate of an additional 2% above the already applicable interest rate. In addition to interest, we are required to pay an unused line fee of 0.5% per annum in respect to the unutilized commitments.
In additionis subject to certain customary affirmative and negative covenants, including, but not limitedwhich limit our ability to, those related toamong other things, incur indebtedness, create liens, merge or consolidate, sell or dispose of assets, change the incurrencenature of additional indebtedness, asset sales, the incurrence of liens, and the making of certain investments, dividends andits business, make distributions theor advances, loans or investments. The Revolving Credit Facility also requires us to achievecomply with a specified minimum adjusted earnings before income taxes, depreciation and amortization (“Adjusted EBITDAEBITDA”) and fixed charge coverage ratio as well as maintain $15$15.0 million in Excess Availability plus Qualified Cash (as defined under the Revolving Credit Facility), of which Qualified Cash must be at least $5 million (all as defined under the Revolving Credit Facility).$5.0 million. In addition, in the eventat any time that the aggregate amount of cash and cash equivalents of the parent company and its subsidiaries exceeds $20 million at any time, we are required to immediately prepay anythe outstanding principal amount of the advances until paid in full in an amount equal to such excess. TheOur Revolving Credit Facility containsalso stipulates certain customary events of default including but not limited to those for failure to comply with covenants, commencement of insolvency proceedings and defaults under our other indebtedness.
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On March 12, 2012, we completed an amendment to our Revolving Credit Facility to provide increased financial flexibility and improve our overall liquidity. This amendment provides for, among other things: (i) the repurchase of our outstanding New Notes, subject to certain terms and conditions; (ii) the repurchase of equity held by current or former employees, officers or directors subject to certain limitations; (iii) an increase in the amount of cash that can be held by our foreign subsidiaries; (iv) the ability to dispose of the intellectual property assets contemplated in the transaction with Ethicon (at which time the component of the borrowing base supported by such intellectual property assets was reduced to nil); (v) a reduction in the restrictions surrounding eligibility of certain accounts receivable; (vi) the removal of the lien over our short term investments (at which time the component of the borrowing base supported by such short term investments was reduced to nil); (vii) a revision to the definition of EBITDA to allow for certain historical and future restructuring and CCAA costs; and (viii) less restrictive reporting requirements when advances under the Revolving Credit Facility are below certain thresholds. We incurred total fees of $0.4 million to complete this amendment. In addition, on August 13, 2012, we completed another amendment to our Revolving Credit Facility to amend the covenants to allow for the execution of the Exchange Offer.
While we are currently in compliance with the covenants specified under the Revolving Credit Facility, we cannot guarantee that we will be able to comply with these covenants and related conditions in 2012 and beyond. Aa breach of these covenants or failure to obtain waivers to cure any further breaches of the covenants and the restrictions set forth under the Revolving Credit Facility, may limit our ability to obtain additional advances or result in demands for accelerated repayment thus further strainingof any amounts outstanding at that point in time. As discussed under the Sale of the Interventional Products Business to Argon Medical, Inc. section above, we expect to terminate our working capital positionRevolving Credit Facility upon close of the transaction.
Contractual Obligations and abilityLiquidity Risk
Liquidity risk is the risk at we will encounter difficulty in meeting our contractual obligations and financial liabilities in the normal course of business. At December 31, 2012, our significant contractual obligations for the next five years are summarized in the table below:
| | Payments due by period | |
(in thousands of U.S.$) | | Total | | Less than 1 year | | 1 to 3 years | | 3 to 5 years | | More than
5 years | |
Long-term debt repayments | | 289,413 | | 60,000 | | — | | 229,413 | | — | |
Long-term debt interest obligations | | 80,834 | | 20,647 | | 41,294 | | 18,893 | | — | |
Operating leases | | 7,928 | | 1,695 | | 2,770 | | 2,589 | | 874 | |
| | | | | | | | | | | |
Total obligations | | 378,175 | | 82,342 | | 44,064 | | 250,895 | | 874 | |
Our most significant financial risk relates to continue operations.our long term debt obligations which include $229.4 million of Senior Notes and $60 million of New Notes. Repayments are based on contractual commitments as defined in the indentures governing the Senior Notes and New Notes. Long-term debt interest obligations under the New Notes are subject to variable (floating) rates and are estimated using the current interest rates in effect at December 31, 2012. Long-term debt interest obligations under the Senior Notes are subject to a fixed interest rate of 9%. Long-term debt repayments and interest obligations shown in the table above assume no early repayment of principal. As discussed above, management expects that Angiotech’s total long term obligations outstanding under the Senior Notes and New Notes will be repaid using the cash consideration that is expected to be received from the Sale of the Interventional Products Business to Argon (refer to discussion under the Significant Recent Developments section above).
We have entered into operating leases in the ordinary course of business for office and laboratory space with various third parties. The longest term of these leases will expire in 2019.
The table above does not include any cost sharing or milestone payments in connection with research and development collaborations with third parties as these payments are contingent on the achievement of specific developmental, regulatory or commercial activities and milestones as described in note 21 to the audited consolidated financial statements included in this Annual Report on Form 10-K. In addition, we may have to make certain royalty payments based on a percentage of future sales of TAXUS and Zilver PTX.
Our cash resources and any borrowings available under the Revolving Credit Facility, in addition to cash generated from operations or cash available per commitments of certain of our creditors, are used to support our continuing sales and marketing initiatives, working capital requirements, debt servicing requirements, capital expenditure requirements, research andproduct development initiatives and for general corporate purposes.
Due to numerous factors that may impact our future cash position, working capital and liquidity, and the significant cash that may be necessary to continue to execute our business plan, including selected growth initiatives in our Medical Device Technologies segment and initiatives to maintain sales of our existing products and to service our debt obligations, there can be no assurance that we will have adequate liquidity and capital resources to satisfy our future financial obligations, including obligations under the New Floating Rate Notes.
Our cash flows, cash balances and liquidity position are subject to numerous uncertainties, including but not limited to, sales of our existing medical device products, medical device components and new product launches; the timing and success of our product development activities; the timing of completing certain operational initiatives; our ability to effect reductions in certain aspects of our
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budgets in an efficient and timely manner; changes in drug-eluting stent markets,markets; including the impact of increased competition in such markets, the results of research relating to the efficacy of drug-eluting stents,stents; the sales achieved in such markets by BSC or Cook, the timing and success of product sales and marketing initiatives, sales of existing medical products and new product launches, the timing and success of our research and product development activities, the timing of completing certain operational initiatives, our ability to effect reductions in certain aspects of our budgets in an efficient and timely manner,initiatives; changes in interest rates, fluctuations in foreign exchange rates and regulatory or legislative changes.
Our ability to maintain and sustain future operations will depend upon our ability to: (i) refinance or amend terms of our existing debt obligations including our New Floating Rate Notes prior to maturity in December 2013; (ii) remain in compliance with our debt covenants to maintain access to our Revolving Credit Facility; (iii) obtain additional equity or debt financing when needed; (iv) achieve revenue growth and improved gross margins; and (v) achieve greater operating efficiencies or reduce expenses.
Our future plans and current initiatives to manage operating and liquidity risks include, but are not limited to the following:
·maintenance and continued utilization of the Revolving Credit Facility;
·continued exploration of various other strategic and financial alternatives, including, but not limited to, refinancing opportunities for the New Floating Rate Notes, raising new equity or debt capital or exploring sales of, or partnerships for, various products, assets or businesses;
·continued evaluation of budgets and forecasts for our operations including sales and marketing and research and development programs;
·selected gross margin improvement initiatives; and
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·potential sale of selected property, plant and equipment assets or other core or non-core assets
We continue to closely monitor and manage liquidity by regularly preparing rolling cash flow forecasts, monitoring the condition and value of assets available to be used as security in financing arrangements, seeking flexibility in financing arrangements and maintaining processes to ensure compliance with the terms of financing agreements.
While we believe that we have developed planned courses of action and identified opportunities to mitigate themanage our operating and liquidity risks outlined above,risks; there is no assurance that we will be able to complete any or all of the plans or initiatives that have been identified or obtain sufficientadequate liquidity and capital resources to execute our business plan.plan, support our sales growth initiatives, or satisfy our future financial obligations, including obligations under the Senior Notes. Furthermore, there may be other material risks and uncertainties that may impact our liquidity position that have not yet been identified.
Cash Flow Highlights
| | | Successor Company | | | Predecessor Company | | Combined | | Predecessor Company | |
| | Successor Company | | | Predecessor Company | | Combined | | Predecessor Company | | Predecessor Company | | | Year ended
December 31, | | Eight months ended
December 31, | | | Four months ended
April 30, | | Year ended
December 31, | | Year ended
December 31, | |
(in thousands of U.S.$) | | Eight months ended
December 31,
2011 | | | Four months ended
April 30,
2011 | | Year ended December
31,
2011 | | Year ended
December 31,
2010 | | Year ended
December 31,
2009 | | | 2012 | | 2011 | | | 2011 | | 2011 | | 2010 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Cash and cash equivalents, beginning of period | | $ | 30,222 | | | $ | 33,315 | | $ | 33,315 | | $ | 49,542 | | $ | 38,952 | | | $ | 22,173 | | $ | 30,222 | | | $ | 33,315 | | $ | 33,315 | | $ | 49,542 | |
Cash used in operating activities | | 14,361 | | | (12,857 | ) | 1,504 | | (21,609 | ) | 21,971 | | |
Cash provided by (used in) operating activities | | | 66,432 | | 14,361 | | | (12,857 | ) | 1,504 | | (21,609 | ) |
Cash provided by (used in) investing activities | | 1,621 | | | (945 | ) | 676 | | (3,695 | ) | (8,187 | ) | | 1,134 | | 1,621 | | | (945 | ) | 676 | | (3,695 | ) |
Cash (used in) provided by financing activities | | (23,955 | ) | | 10,741 | | (13,214 | ) | 9,342 | | (3,400 | ) | | (44,111 | ) | (23,955 | ) | | 10,741 | | (13,214 | ) | 9,342 | |
Effect of exchange rate changes on cash | | (76 | ) | | (32 | ) | (108 | ) | (265 | ) | 206 | | | 317 | | (76 | ) | | (32 | ) | (108 | ) | (265 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | |
Net (decrease) increase in cash and cash equivalents | | (8,049 | ) | | (3,093 | ) | (11,142 | ) | (16,227 | ) | 10,590 | | | 23,772 | | (8,049 | ) | | (3,093 | ) | (11,142 | ) | (16,227 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | |
Cash and cash equivalents, end of period | | $ | 22,173 | | | $ | 30,222 | | $ | 22,173 | | $ | 33,315 | | $ | 49,542 | | | $ | 45,945 | | $ | 22,173 | | | $ | 30,222 | | $ | 22,173 | | $ | 33,315 | |
Cash Flows from Operating Activities
Cash provided by operating activities for the year ended December 31, 2012 was $66.4 million compared to cash provided by operating activities of $1.5 million for the year ended December 31, 2011. The $64.9 million increase in cash provided by operating activities is primarily due to the following factors: (i) $47.0 million of consideration received from Ethicon related to the terms of the Quill Transaction described above; (ii) a $4.0 million sales milestone fee received from Cook related to the achievement of a certain targeted level of sales of Zilver PTX; (iii) $20.1 million of non-recurring reorganization costs incurred in 2011 related to our Creditor Protection Proceedings and the implementation of the Recapitalization Transaction; (iv) reduced research and development spending of $11.5 million; (v) reduced selling, general and administrative spending of $9.2 million; and (vi) a $9.5 million improvement in gross margins (excluding the $22.6 million fresh start accounting impact on cost of products sold in 2011). These net cash inflows were partially offset by the following cash outflows: (i) an $11.6 million increase in inventory working capital needs, in part due to inventory levels required to support and fulfill expected future Quill orders from Ethicon in accordance with the terms of the MSA, temporary increases in inventory required to facilitate the closure and transfer of production activities from our Denmark facility to certain of our U.S. manufacturing facilities, and other general increases to improve customer lead times as well as support our current and future expected sales growth; (ii) a $7.6 million decrease in TAXUS royalty revenue; (iii) $6.5 million of additional taxes paid in 2012 associated with the need to pay estimated taxes for our U.S. domiciled operations and withholding taxes paid on intercompany
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dividends; (iv) a $3.4 million increase in interest paid primarily related to the refinancing of $225.0 million of former New Notes for $229.4 million of new Senior Notes at a higher interest rate of 9%; and (v) the payment of $6.4 million of settlement proceeds to Dr. Hunter in accordance with the terms of the Termination Settlement Agreement dated November 14, 2012.
Cash provided by operating activities for the year ended December 31, 2011 was $1.5 million compared to cash used in operating activities of $21.6 million for the year ended December 31, 2010. The $23.1 million increase in cash provided by operating activities is primarily due to the following factors: (i) lower interest payments of $13.2 million due to the elimination of our subordinated notes as discussed above; (ii) $4.1 million due to improvement in gross margins (excluding the $22.6 million non-cash impact on cost of goods sold from fresh-start accounting adjustments relating to inventory, as described above); and (iii) reduced research and development and selling, general and administrative expenses of $7.1 million and $4.0 million, respectively. These improvements were offset by a (i) $12.8 million increase in reorganization costs related to our Creditor Protection Proceedings and the implementation of the Recapitalization Transaction; and (ii) a $4.7 million net decrease in TAXUS royalty revenue net of associated license and royalty expenses paid to the NIH as previously discussed. Working capital changes during the year ended December 31, 2011 included net cash inflows of $4.9 million related to the decrease in accounts receivable associated with increased collections efforts focused on certain customer accounts and a $3.2 million reduction in prepaid expenses associated with reorganization costs related to our Creditor Protection Proceedings. These net cash inflows were offset by $5.5 million of net cash outflows associated with a reduction in accounts payable and accrued liabilities primarily as a result of fresh-start accounting adjustments as described above.
Cash used in operating activities for the year ended December 31, 2010 was $21.6 million compared to cash provided by operating activities of $22.0 million for the year ended December 31, 2009. The $43.5 million decrease in cash provided by operating activities is primarily due to the following factors: (i) a $25.0 million cash payment received from Baxter in the first quarter of 2009; (ii) a $27.8 million decline in royalty revenue related to lower sales of TAXUS by BSC; (iii) $7.2 million paid for transaction and professional fees and expenses related to our Recapitalization Transaction; and (iv) a $10.3 million increase in net working capital requirements, offset by: (i) improved gross margins of $17.9 million; (ii) $4.7 million received in settlement of a litigation matter; (iii) $2.1 million received from a government grant; and (iv) $2.0 million of proceeds received in connection with the sale of our Laguna Hills manufacturing facility. Working capital changes during the year ended December 31, 2010 included net cash outflows of $5.6 million related to the increase in accounts receivable associated with sales growth of certain of our higher margin Proprietary Products and net cash outflows $2.3 million from accounts payable and accrued liabilities due to payments made during the period as well as the reclassification of an accrual for certain license and royalty fees owing to one of our licensors from current to long term due to an amendment of the contractual payments terms . Other working capital changes include net cash inflows of $9.8 million related to our decision to defer our October 1, 2010 interest payment in connection with the Recapitalization Transaction, and net cash outflows of $8.6 million relating to income taxes payable.
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Cash Flows from Investing Activities
Net cash provided by investing activities for the year ended December 31, 20112012 was $0.7 million compared to $3.7$1.1 million. For 2012, the net cash provided by investing activities consists of $2.3 million of netproceeds from the sale of a portion of our short term investments and $1.0 million of proceeds related to the sale of manufacturing and lab equipment in our research and development department at our Vancouver headquarters. These cash usedinflows were offset by $2.1 million of capital expenditures.
Net cash provided by investing activities for the year ended December 31, 2010.2011 was $0.7 million. For 2011, the net cash provided by investing activities primarily consistsconsisted of $2.6 million in proceeds received from the sale of properties, offset by $1.9 million for capital expenditures.
Net cash used in investing activities for the year ended December 31, 2010 was $3.7 million compared to $8.2 million of net cash used for the year ended December 31, 2009.million. For 2010, the net cash used in investing activities primarily consistsconsisted of $5.7 million of capital expenditures, $3.2 million of proceeds related to our disposition of certain assets and our Laguna Hills manufacturing facility and $1.0 million advanced to Haemacure in connection with our subsequent purchase of certain fibrin and thrombin product candidates and the related technology.
Depending on the level of our cash portfolio, we may invest our excess cash in short-term marketable securities, principally investment grade commercial debt and government agency notes. Investments are made with the secondary objective of achieving the highest rate of return while meeting our primary objectives of liquidity and safety of principal. Our investment policy limits investments to certain types of instruments issued by institutions with investment grade credit ratings and places restrictions on maturities and concentration by type and issuer. Due to liquidity constraints in recent years, we did not invest excess cash in short-term marketable securities in any of 2012, 2011 2010 or 2009.2010.
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At December 31, 20112012 and December 31, 2010,2011, we retained the following cash and cash equivalents denominated in foreign currencies in order to meet our anticipated foreign operating and capital expenditures in future periods.
| | Successor Company | | | Predecessor Company | | |
(in thousands of U.S.$) | | December 31,
2011 | | | December 31,
2010 | | | December 31,
2012 | | December 31,
2011 | |
Canadian dollars | | $ | 4,884 | | | $ | 933 | | | $ | 1,086 | | $ | 4,884 | |
Swiss franc | | 307 | | | 575 | | |
British pounds | | | 2,433 | | 1,223 | |
Euro | | 1,515 | | | 1,447 | | | 1,449 | | 1,515 | |
Danish krone | | 940 | | | 1,090 | | |
Danish kroner | | | 1,707 | | 940 | |
Other | | 1,690 | | | 1,491 | | | 981 | | 774 | |
|
Cash Flows from Financing Activities
Net cash used in financing activities for year ended December 31, 2012 was $44.1 million. The $44.1 million of net cash used in financing activities consists of: (i) the $40.0 million early repayment of the New Notes on October 17, 2012; (ii) $3.2 million of deferred financing costs paid in connection with the refinancing of $225 million of our New Notes on August 13, 2012 and two amendments to our Revolving Credit Facility; (iiii) $0.9 million of cash used to repurchase shares from certain terminated executives.
Net cash used in financing activities for the year ended December 31, 2011 was $13.2 million. The $13.2 million whichof net cash used in financing activities consisted of $12.0 million of advances drawn under our previous DIP Facility and $17.4 million of advances drawn under our Revolving Credit Facility, offset by $39.4 million of repayments on our previousformer credit facility, DIP Facility, and Revolving Credit Facility, $1.3 million of costs to secure and complete our DIP Facility, and $1.4 million of costs related to the establishment of the Revolving Credit Facility. As noted above, onOn May 12, 2011, our existingformer credit facility and DIP facility were terminated.
Net cash used in financing activities for the year ended December 31, 2010 was $9.3 million, which consisted of $0.7 million of fees incurred related to the completion of the third and fourthcertain amendments to our Existing Credit Facilityprevious credit facility and $10.0 million of funds drawn under our Existing Credit Facilityprevious credit facility to support working capital and liquidity needs (see “Liquidity and Capital Resources” above and note 1, 3, 17 and 27 to the audited consolidated financial statements included in this Annual Report on Form 10-K).
Net cash used in financing activities for the year ended December 31, 2009 was $3.4 million, primarily for expenditures related to our Existing Credit Facility.
Debt
(a) Subordinated Notes
On March 23, 2006, we issued the Subordinated Notes due on April 1, 2014 in the aggregate principal amount of $250 million. As described under the Significant Recent Developments section above, due to liquidity constraints and in connection with discussions with certain holders of the Subordinated Notes, the Company did not make its $9.7 million interest payment due to holders of the Subordinated Notes on October 1, 2010. On January 28, 2011 the Angiotech Entities commenced the Creditor Protection Proceedings to effectuate an in-court Recapitalization Transaction that would improve our credit ratios, liquidity and financial flexibility. In accordance with the provisions of the Recapitalization Support Agreement (“RSA”), on May 12, 2011 the Recapitalization Transaction was implemented, thereby irrevocably eliminating and cancelling our $250 million Subordinated Notes, the SSN Indenture and $16.0 million of our related accrued interest obligations in exchange for 96 % or 12,500,000 of the Company’s new common shares.
The Subordinated Notes were unsecured obligations and bore interest at an annual rate of 7.75% payable semi-annually in arrears on April 1 and October 1 of each year through to maturity. The Subordinated Notes and related guarantees provided by us and certain of
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our subsidiaries were subordinated in right of payment to the Existing Floating Rate Notes described below and our indebtedness owing under the Existing Credit Facility and DIP Facility.
(b) Existing Floating Rate Notes
The Existing Floating Rate Notes were issued on December 11, 2006 and are due on December 1, 2013. As described in note 1 to the financial statements and in accordance with the provisions of the RSA, on the Plan Implementation Date 99.99% of the Existing Floating Rate Noteholders tendered their Existing Floating Rate Notes for New Floating Rate Notes in accordance with the terms of the FRN Exchange Offer. The holders of the $25,000 face value of Existing Floating Rate Notes that did not participate in the FRN Exchange Offer will continue to hold their Existing Floating Rate Notes under the FRN Indenture as modified by the Supplement. Pursuant to the terms of the Supplement, most of the restrictive covenants and events of default have been eliminated from the FRN Indenture.
(c) New Floating Rate Notes
The New Floating Rate Notes were issued on May 12, 2011 on substantially the same terms and conditions as the Existing Floating Rates Notes described above, except that, among other things, the indenture governing the New Floating Rate Notes differed from the FRN Indenture as follows:
·Changes to certain covenants related to the incurrence of additional indebtedness and asset sales and the definition of permitted liens, asset sales and change of control have been modified in the New Notes Indenture. These changes include a reduction in the allowance from $100 million to $50 million for us to obtain new senior secured indebtedness having seniority to the New Floating Rate Notes;
·The New Floating Rate Notes will continue to accrue interest at LIBOR plus 3.75%, however, are subject to a LIBOR floor of 1.25%; and
·The provision of additional security for holders of the Existing Floating Rate Notes by providing a second lien over the property, assets and undertakings of the Company and certain of its subsidiaries, that secure the Existing Credit Facility and successive DIP Facility, subject to customary carve-outs and certain permitted liens.
The interest rate will continue to reset quarterly and is payable quarterly in arrears on March 1, June 1, September 1, and December 1 of each year through to the maturity date of December 1, 2013. The New Floating Rate Notes are unsecured senior obligations, which are guaranteed by certain of our subsidiaries, and rank equally in right of payment to all of our existing and future senior indebtedness. The guarantees of our guarantor subsidiaries are unconditional, joint and several.
Under the terms of the indenture governing the New Floating Rate Notes, an event of default would permit the holders of the New Floating Rate Notes to exercise their right to demand immediate repayment of the Company’s debt obligations owing thereunder. In this case, the Company’s current cash and credit capacity would not be sufficient to service the principal debt and interest obligations. In addition, restrictions on the Company’s ability to borrow and the possible accelerated demand of repayment of existing or future obligations by any of its creditors may jeopardize its working capital position and ability to sustain operations.
(d) Proforma Interest Expense
The following table shows the estimated interest payable for the New Floating Rate Notes over the next two years through to the maturity date of December 1, 2013. Our estimates assume a LIBOR floor of 1.25% for the term of the notes. We have also calculated the impact on the estimated interest payable of a 0.5% increase in the base LIBOR rate. Given that the interest on the New Floating Rate Notes is subject to a fixed LIBOR floor of 1.25%, we did not calculate the impact of a decrease in the LIBOR rate.
Year | | Base LIBOR | | 0.5% Increase in
base LIBOR | |
2012 | | 16,250 | | 17,875 | |
2013 | | 14,896 | | 16,385 | |
(e) Debt Covenants
The New Notes Indenture still contains various covenants which impose restrictions on the operation of our business including the incurrence of certain liens and other indebtedness. Material covenants under this indenture: specify maximum or permitted amounts for certain types of capital transactions; impose certain restrictions on asset sales, the use of proceeds and the payment of dividends by us; and require that all outstanding principal amounts and interest accrued and unpaid become due and payable upon the occurrence of a defined event of default.
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In addition to the covenants imposed on us under the New Notes Indenture, the Revolving Credit Facility includes a number of customary financial covenants, including a requirement to maintain certain minimum levels of Adjusted EBITDA, liquidity and interest coverage ratios, as well as covenants that limit our ability to, among other things, incur indebtedness, create liens, merge or consolidate, sell or dispose of assets, change the nature of our business, make distributions or make advances, loans or investments.
Contractual Obligations
At December 31, 2011, our significant contractual obligations for the next five years and thereafter include:
| | Payments due by period | |
(in thousands of U.S.$) | | Total | | Less than 1 year | | 1 to 3 years | | 3 to 5 years | | More than 5 years | |
Long-term debt repayments | | 325,000 | | — | | 325,000 | | — | | — | |
Exit credit facility repayments | | 40 | | 40 | | — | | — | | — | |
Long-term debt interest obligations | | 31,146 | | 16,250 | | 14,896 | | — | | — | |
Operating leases | | 10,008 | | 2,443 | | 2,821 | | 2,578 | | 2,166 | |
Other tax liability | | 12,562 | | — | | — | | — | | 12,562 | |
| | | | | | | | | | | |
Total obligations | | 378,756 | | 18,733 | | 342,717 | | 2,578 | | 14,728 | |
Long-term debt includes $325.0 million of New Floating Rate Notes. Repayments are based on contractual commitments as defined in the indentures governing the notes. Long-term debt interest obligations on variable (floating) rate debt are estimated using the current interest rates in effect at December 31, 2011. Long-term debt repayments and interest obligations assume no early repayment of principal.
We have entered into operating leases in the ordinary course of business for office and laboratory space with various third parties. The longest term of these leases will expire in 2019.
The table above does not include any cost sharing or milestone payments in connection with research and development collaborations with third parties as these payments are contingent on the achievement of specific developmental, regulatory or commercial activities and milestones as described in note 22 to the audited consolidated financial statements included in this Annual Report on Form 10-K. In addition, we may have to make royalty payments based on a percentage of future sales of certain products in the event regulatory approval for marketing is obtained.needs.
Contingencies
We are party to various legal proceedings, including patent infringement litigation and other matters. See Part I, Item 3 and Note 22(b) “Contingencies”21(b) Contingencies, in the Notes to the Consolidated Financial Statements of Part II, Item 8 of this Annual Report on Form 10-K for more information.
Inflation
The effects of inflation or changing prices have not had a material impact on our net sales, revenues or income from continuing operations for the last three years.
Off-Balance Sheet Arrangements
As of December 31, 2011,2012, we do not have any off-balance sheet arrangements, as defined by applicable securities regulators in Canada and the U.S., that have, or are reasonably likely to have, a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that would be material to investors.
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Recently adopted accounting policies
In January 2010, the FASB issued ASU No. 2010-06, Fair Value Measurements and Disclosures (Topic 820): Improving Disclosures about Fair Value Measurements. The update requires new disclosures about roll forward activity affecting Level 3 fair value measurements. ASU No. 2010-06 also clarifies disclosures required about inputs, valuation techniques and the level of disaggregation applied to each class of assets and liabilities. New disclosures about Level 3 fair value measurements are effective for interim and annual reporting periods beginning after December 15, 2010. Adoption of ASU No. 2010-06 expanded the Predecessor Company’s disclosures around fresh start accounting, which was implemented effective April 30, 2011 (see note 3 of the audited consolidated financial statements included in this Annual Report on Form 10-K).
In April 2010, the FASB issued ASU No. 2010-13, Compensation — Stock Compensation (Topic 718): Effect of Denominating the Exercise Price of a Share-Based Payment Award in the Currency of the Market in Which the Underlying Equity Security Trades. ASC
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No. 718, Compensation — Stock Compensation, provides guidance on whether share-based payments should be classified as either equity or a liability. Under this section, stock options which have a fixed price denominated in the functional currency of the respective Company’s foreign operations or in the currency in which the employee is paid, does not result in the stock option being classified as a liability. The updated guidance clarifies that an employee share-based payment award, with an exercise price denominated in the currency of a market in which substantial portion of the entity’s equity securities trade and which differs from the functional currency of the employer entity or payroll currency of the employee, are not considered to contain a condition that is not a market, performance or service condition. As such, these awards are classified as equity. ASU No. 2010-13 is effective for fiscal years and interim periods beginning on or after December 15, 2010. The cumulative effect of adopting this guidance should be applied to the opening balance of retained earnings. The adoption of this standard did not have an impact on the Predecessor Company’s financial results or financial condition.
In April 2010, the FASB issued ASU 2010-12 Income Taxes (Topic 740): Accounting for Certain Tax Effects of the 2010 Health Care Reform Acts, providing clarification on the financial reporting impact of changes to the 2010 Health Care Reform Act. ASU 2010-12 codifies the SEC Staff’s views on encouraging registrants to incorporate the accounting effects of the Health Care and Education Reconciliation Act of 2010 and the Patient Protection and Affordable Health Care Act into their financial statements. The adoption of ASU 2010-12 did not have a material effect on the financial position, results of operations or cash flows of the Successor Company in 2011.
In December 2010, the FASB issued ASU No. 2010-29, Business Combinations (Topic 805): Disclosure of Supplementary Pro Forma Information for Business Combinations. The new guidance clarifies that if a public entity presents comparative financial statements, the entity should disclose revenue and earnings of the combined entity as if the business combination occurred as of the beginning of the comparable prior annual reporting period only. ASU No. 2010-29 also requires additional disclosures about the nature and amount of material, non-recurring pro forma adjustments, which are directly attributable to the business combination and are included in the pro forma revenue and earnings estimates. The guidance is effective for all business combinations beginning on first annual reporting period beginning on or after December 15, 2010. The adoption of this standard did not have any impact on the Successor Company’s consolidated financial statement disclosures.
In December 2010, the FASB issued ASU No. 2010-28, Intangibles — Goodwill and Other (Topic 350): When to Perform Step 2 of the Goodwill Impairment Test for Reporting Units with Zero or Negative Carrying Amounts. The amendments in this Update modify Step 1 of the goodwill impairment test for reporting units with zero or negative carrying amounts. For those reporting units, an entity is required to perform Step 2 of the goodwill impairment test if it is more likely than not that a goodwill impairment exists. In determining whether it is more likely than not that goodwill has been impaired, an entity should consider whether there are any adverse qualitative factors indicating that impairment may exist. The qualitative factors are consistent with the existing guidance and examples in paragraph 350-20-35-30, which requires that goodwill of a reporting unit be tested for impairment between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. For public entities, the amendments in this update are effective for fiscal years, and interim periods within those years, beginning after December 15, 2010. ASU No. 2010-28 had no impact on the Successor Company’s 2011 goodwill impairment test given that none of the identified reporting units had zero or negative carrying values.
Future accounting pronouncements
In May 2011, the FASBFinancial Accounting Standards Board (“FASB”) issued ASUAccounting Standards Update (“ASU”) No. 2011-04, Fair Value Measurements (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in US GAAP and International Financial Reporting Standards (“IFRS”). Under ASU No. 2011-04, the FASB and the International Accounting Standards Board (the “IASB”) have jointly developed common measurement and disclosure requirements for items that are recorded in accordance with fair value standards. In addition, the FASB and IASB have developed a common definition of “fair value” which has a consistent meaning under both U.S. GAAP and IFRS. The amendments in this ASU are required to be applied prospectively, and are effective for interim and annual periods beginning on January 1, 2012. The Successor Company is still assessing the potential impact thatadoption of ASU No. 2011-04 maydid not have a material impact on itsthe consolidated financial statements.statements for the year ended December 31, 2012.
In June 2011, the FASB issued ASU No. 2011-05, Comprehensive Income (Topic 220): Presentation of Comprehensive Income. Under ASU No. 2011-05, the FASB has eliminated the option to present components of other comprehensive income as part of the statement of changes in stockholders’ equity. The amendment requires that the total of comprehensive income, the components of net income, and the componentsitems of other comprehensive income and total comprehensive income be presented.presented in one continuous statement or two separate consecutive statements. In addition, an entity isfilers are required to present on the face of the financial statements reclassification adjustments for items reclassified from accumulated other comprehensive income to net income. The amendment iswas effective for fiscal and interim periods beginning on January 1, 2012. The Successor Company adopted ASU No. 2011-05 during the quarter ended March 31, 2012 and selected to prepare separate Consolidated Statements of Comprehensive (Losses) Income. This standard relates to presentation only and did not impact our results of operations or financial position for the year ended December 31, 2012.
In December 2011, as a follow up to ASU No. 2011-05, the FASB issued ASU No. 2011-12, Comprehensive Income (Topic 220): Deferral of the Effective Date for Amendments to the Presentation of Reclassification Items Outout of Accumulated Other Comprehensive Income in Accounting Standards UpdateIncome. ASU No. 2011-05, 2011-12 deferred the effective date for presentation of
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reclassification items to fiscal years and interim period beginning after December 15, 2012. TheAs at December 31, 2012, the Successor Company is still assessing the impactdoes not have any adjustments that ASU No. 2011-05 will have on its presentation ofwould require reclassification from accumulated other comprehensive income to net income.
In September 2011, the FASB issued ASU No. 2011-08, Intangibles —Goodwill and Other (Topic 350): Testing Goodwill for Impairment. ASU No. 2011-08 simplifies how an entity tests goodwill for impairment and permits an entity to first assess qualitative factors to determine whether it is more likely than notmore-likely-than-not that the fair value of a reporting unit is less than its carrying amount to evaluate whether it is necessary to perform the two-step goodwill impairment test currently required. The amendments arewere effective for annual and interim goodwill impairment tests performed for fiscal years commencing on January 1, 2012. TheFor the year ended December 31, 2012, the Successor Company is still assessing the potential impact thatconducted a qualitative assessment of impairment indicators in accordance with ASU No. 2011-08 may have on its consolidated financial statements and the annualdetermined that goodwill impairment test.was not impaired.
Future accounting pronouncements
In July 2012, the FASB issued ASC No. 2012-02, Intangibles - Goodwill and Other (Topic 350): Testing Indefinite-Lived Intangible Assets for Impairment. This update provides companies with the option to first assess qualitative factors to determine whether events and circumstances indicate that it is more likely than not that an indefinite-lived intangible asset is impaired before proceeding to perform a quantitative impairment test. If a company concludes that impairment is unlikely, no further quantitative assessment is required. This update is effective for fiscal years beginning after September 15, 2012. Aside from goodwill (see discussion under the recently adopted accounting policies section above), the Successor Company does not have any other indefinite-lived intangible assets which require assessment under this guidance.
In December 2011, the FASB issued ASU No. 2011-11, Balance Sheet (Topic 210): Disclosures about Offsetting Assets and Liabilities which aims enhance disclosures about financial instruments and derivative instruments that are either offset in accordance with U.S. GAAP or are subject to an enforceable master netting arrangement or similar agreement. The additional disclosures are expected to facilitate comparisons between financial statements prepared under IFRS versus U.S. GAAP. ASU No. 2011-11 is effective for annual and interim reporting periods beginning on or after January 1, 2013. This standard relates to presentation only and is not expected to significantly impact the Successor Company’s consolidated financial statements.
In October 2012, the FASB issued ASU No. 2012-04, Technical Corrections and Improvements. This update features certain technical corrections and conforming amendments to a wide range of fair value topics in the Accounting Standards Codification. The guidance was issued to correct and clarify prevailing fair value measurement and disclosure requirements in order to ensure that they conform to the current definition of fair value. The amendments in this update are effective for fiscal periods beginning after December 15, 2012. The adoption of ASU 2012-04 is not expected to have a material impact on the Successor Company’s financial position or results of operations.
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Outstanding Share Data
Upon implementation of the Recapitalization Transaction and CCAA Plan on May 12, 2011, all stock options, warrants, and other rights or entitlements to purchase common shares under existing plans were cancelled. In conjunction with the cancellation of these awards, we charged unrecognized stock based compensation costs of $1.4 million were charged to earnings in April 2011.
On May 12, 2011, we issued 12,500,000 new common shares to the holders of our Subordinated Notes in consideration and settlement of our $250 million Subordinated Notes and $16 million of related interest obligations. In addition, on May 12, 2011, we issued the following:
(i) | 221,354 units of RS to certain senior management. The terms of the RS’s provide that a holder shall generally have the same rights and privileges of a shareholder as to such Restricted Stock, including the right to vote such Restricted Stock. The units of RS vest one third on each of the first, second and third anniversaries from the date of grant; |
| |
(ii) | 299,479 RSUs to certain senior management. The RSUs allow a holder to acquire one common share for each unit held upon vesting. The RSUs vest one third on each of the first, second and third anniversaries from the date of grant. There is no expiry date associated with vested RSU’s; |
| |
(iii) | 708,023 Options to certain employees to acquire 5.2% of the new common shares, on a fully-diluted basis. The Options were issued at an exercise price of $20 and expire on May 12, 2018. Options to acquire an additional 5% of the new common shares have been reserved for issuance at a later date at the discretion of the new board of directors in place upon implementation of the Recapitalization Transaction. |
(i)221,354
During the year ended December 31, 2011, four of our executive officers were terminated. The provisions of their employment agreements provided for accelerated vesting of any RS, RSU’s, Options under certain conditions.
During the year ended December 31, 2012, 43,403 common shares were issued to certain executives upon vesting of their units of Restricted StockRS. We concurrently repurchased 16,701 units of RS from these executives in connection with the withholding taxes owed on the vested units. As at December 31, 2012, there were 86,805 units of RS which were outstanding and unvested.
During the year ended December 31, 2011, 34,473 common shares were repurchased from the terminated executives described above in connection with the withholding taxes owed on certain units of their RS, which vested in accordance with the accelerated vesting provisions of their employment agreements. As at December 31, 2011, there were 130,208 units of RS which were outstanding and unvested.
During the year ended December 31, 2012, 219,500 RSU’s were issued to certain employees and members of senior management. TheDuring the same period, 31,000 RSU’s were forfeited and 208,333 RSU’s were cancelled in accordance with the terms of Dr. Hunter’s Termination Settlement Agreement. As at December 31, 2012, 342,646 RSU’s were outstanding, of which 281,882 unvested.
During the restricted stock provide that a holder shall generally haveyear ended December 31, 2011, 116,000 additional RSUs were issued to certain employees and directors of the same rights and privilegescompany. During the year ended December 31, 2011, 415,479 RSUs were outstanding, of a shareholder as to such Restricted Stock, including the right to vote such Restricted Stock. The Restricted Stock vests one thirdwhich 161,572 were unvested. Approximately 111,573 RSU’s vest on each of the first, second and third anniversaries from the date of grant;
(ii)299,479 RSUs to certain senior management.grant. The RSUs allow the holder to acquire one common share for each unit held upon vesting. The RSUs vest one third on each of the first, second and third anniversaries from the date of grant;
(iii)708,023 options to certain employees to acquire 5.2% of the new common shares, on a fully-diluted basis. The options are at an exercise price of $20 and expire on May 12, 2018. Options to acquire an additional 5% of the new common shares have been reserved for issuance at a later date at the discretion of the new board of directors in place upon implementation of the Recapitalization Transaction.
During the year ended December 31, 2011, certain of our executive officers were terminated. The provisions of the employment agreements for four of these executive officers included accelerated vesting of any Restricted Stock, Restricted Stock Units and stock options. In relation to the accelerated vesting of the Restricted Stock, we repurchased 34,473 common shares from the terminated executives in consideration of withholding taxes owing on the vested units. As at December 31, 2011, there were 130,208 units of restricted stock outstanding.
During the year ended December 31, 2011, we issued an additional 116,000 RSUs to certain employees and directors of the company. Of the 415,479 RSUs outstanding at December 31, 2011, 253,906 were vested, 111,573 vest one third on each of the first, second and third anniversaries from the date of grant andRSU’s expire on the seventh anniversary of the grant date and 50,000 of the RSUs vest upon the earlier of a consummation of a change of control (as defined) anddate.
During December 31, 2012.
2012, 37,200 Options were forfeited and 219,452 Options were cancelled in accordance with the terms of Dr. Hunter’s Termination Settlement Agreement. As at December 31, 2012, there were 212,107 Options outstanding, of which 204,764 were unvested. As at December 31, 2011, there were 673,523 optionsOptions outstanding, of which 329,177344,346 were vested.unvested.
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Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The primary objective of our investment activities is to preserve our capital to fund operations. We also seek to maximize income from our investments without assuming significant risk. To achieve our objectives, we maintain a portfolio of cash and cash equivalents and investments in a variety of securities of high credit quality. As of December 31, 2011,2012, we had cash and cash equivalents of $22.2$45.9 million.
Interest Rate Risk
As the issuer of the $325at December 31, 2012, we had $60.0 million of NewSenior Floating Rate Notes, we are exposed to interest rate risk. TheNotes. Given that the interest rate on the NewSenior Floating Rate Notes is reset quarterly to 3-month LIBOR plus 3.75%, subject to a LIBOR floor of 1.25% and, consequently, the notes, we are exposed to interest rate risk on this debt. The Senior Floating Rate Notes bore interest at a rate of approximately 5.00%5.0% at December 31, 2012 (December 31, 2011 (4.05% at December 31, 2010)— 5.0%). Based on the $325 million of floating rate debt of the Company during the year, aA 100 basis point increase in the closing 3-month LIBOR rate would have impacted our interest expense by approximately $0.8$0.1 million for the year ended December 31, 20112012 ($3.30.8 million for the year ended December 31, 2010)2011). We do not use derivatives to hedge against interest rate risk.
Foreign Currency Risk
We operate internationally and enter into transactions denominated in foreign currencies. As such, our financial results are subject to the variability that arises from foreign currency exchange rate movements in relation to the U.S. dollar. Our foreign currency exposures are primarily limited to the Canadian dollar, the Danish kroner, the Swiss franc, the Euro and the U.K.British pound sterling. We incurred anet foreign exchange losses of $0.8 million for the year ended December 31, 2012 (eight months ended December 31, 2011- net foreign exchange gain of $1.5 million for the eight months ended December 31, 2011 and a foreign exchange loss of $0.6 million for themillion; four months ended April 30, 2011 (year- net foreign exchange loss of $0.6 million; and year ended December 31, 2010 - $1.0 million net foreign exchange gain; year ended December 31, 2009 - $1.6 million foreign exchange loss)gain) primarily as a result of changes in the relationship of the U.S. to the Canadian dollar and Danish kroner as well as other foreign currency exchange rates when translating our foreign currency-denominated cash, cash equivalents and account receivable to U.S. dollars for reporting purposes at period end. We have not entered into any forward currency contracts or other financial derivatives to hedge foreign exchange risk, and therefore we are subject to foreign currency transaction and translation gains and losses. We purchase goods and services in U.S. and Canadian dollars, Danish kroner, Swiss francs, Euros, and U.K. pound sterling and we earn the majority of our license and milestone revenues in U.S. dollars. Foreign exchange risk is managed primarily by satisfying foreign denominated expenditures with cash flows or monetary assets denominated in the same (or a pegged) currency. For a summary of our cash balances which are denominated in foreign currencies refer to note 75 of the audited consolidated financial statements included in this Annual Report on Form 10-K.
Since we operate internationally and approximately 13%12% of our net revenue for the eightyear ended December 31, 2012 (eight months ended December 31, 2011 and 15% of our net revenue for the— 13%; four months ended April 30, 2011 (year— 15%; year ended December 31, 2010 — 13%; year ended December 31, 2009 — 11.4%) was generated in other than the U.S. dollar, foreign currency exchange rate fluctuations could significantly impact our financial position, results of operations, cash flows and competitive position.
For the purposes of conducting a specific risk analysis, we used a sensitivity analysis to measure the potential impact to our consolidated financial statements of a hypothetical 10% strengthening of the U.S. dollar compared with the other currencies in which we denominate product sales in for the four months ended April 30, 2011 and the eight monthsyear ended December 31, 2011.2012. Assuming a 10% strengthening of the U.S. dollar to these other foreign currencies, our product net revenue would have been negatively impacted by approximately $1.1$3.0 million forduring the year ended December 31, 2012 (eight months ended December 31, 2011 - $1.8 million; four months ended April 30, 2011 and approximately $1.8- $1.1 million, for the eight months ended December 31, 2011 (yearyear ended December 31, 2010 - $2.8 million; year ended December 31, 2009 - $2.9 million). In addition, assuming a 10% strengthening of the U.S. dollar to these other foreign currencies, our net lossincome would have been positively impacted by approximately $0.7$2.0 million for the year ended December 31, 2012 (eight months ended December 31, 2011 - $1.5 million; four months ended April 30, 2011 and approximately $1.5- $0.7 million, for the eight months ended December 31, 2011 (yearyear ended December 31, 2010 - $3.7 million; year ended December 31, 2009 - $2.4 million).
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Table of Contents
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements and financial statement schedules in Part IV, Item 15(a) (1) and (2) of this Annual Report on Form 10-K are incorporated by reference into this Item 8.
Management’s Report on Internal Control over Financial Reporting
Refer to Part II, Item 9A(b) of this Annual Report on Form 10-K.
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Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
Item 9A. CONTROLS AND PROCEDURES
(a) Disclosure Controls and Procedures.
We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed by us in reports we file or submit 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 our management, including our Principal Executive Officer (“PEO”) and Principal Financial Officer (“PFO”), as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating disclosure controls and procedures, management recognizes that any control and procedure, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management necessarily applies its judgment in evaluating the cost-benefit relationship regarding the potential utilization of certain controls and procedures.
As required by Rules 13(a)-15(b) under the Exchange Act, our management, with the participation of our PEO and PFO, evaluated the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) or 15d-15(e) under the Exchange Act). Based on such evaluation, our PEO and PFO have concluded that, as of December 31, 2011,2012, our disclosure controls and procedures were effective and were operating at a reasonable assurance level.
(b) Management Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) to provide reasonable assurance regarding the reliability of our financial reporting and the preparation of financial statements for external purposes in accordance with U.S. generally accepted accounting principles.principles (“US GAAP”).
Due to 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 due to changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Under the supervision and with the participation of our management, including our Interim CEOPresident & Chief Executive Officer and our Senior VPVice President, Finance, we conducted an evaluation of the effectiveness of our internal control over financial reporting using the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control — Integrated Framework.
Based on our assessment, management has concluded that our internal control over financial reporting was effective as of December 31, 20112012 to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external reporting purposes in accordance with U.S. GAAP.
(c) Changes in Internal Control over Financial Reporting
No change was made to our internal control over financial reporting during the fiscal quarter and year ended December 31, 20112012 that has materially affected, or is reasonably likely to materially affect, such internal control over financial reporting.
Item 9B. OTHER INFORMATION
None.
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PART III
PART III
Item 10.DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Directors, Executive Officers, Promoters and Control Persons
Our directors, principal officers, and their positions and ages, are set forth below. In connection with the implementation of the CCAA Plan, the current Board of Directors was designated in the Sanction Order approving the CCAA Plan.
Name
|
| Age
|
| Position
|
Donald M. Casey Jr.
| | 52
| | Director(4)
|
Kurt M. Cellar
| | 42
| | Director(4)
|
Jeffrey D. Goldberg (2)
| | 46
| | Director(4)
|
Bradley S. Karro (1) (2)
| | 50
| | Director(4)
|
Omar Vaishnavi (1) (2)
| | 29
| | Director(4)
|
K. Thomas Bailey
| | 43
| | Interim Chief Executive Officer & President
|
Steven Bryant
| | 61
| | Executive Vice President, Sales & Marketing
|
Victor Diaz
| | 51
| | Executive Vice President, Manufacturing Operation & Supply Chain
|
Tammy Neske
| | 41
| | Chief Business Officer and Corporate Secretary
|
Jay Dent
| | 52
| | Senior Vice President, Finance
|
Jeffrey Gross (3)
| | 48
| | Senior Vice President, Research and Development
|
(1)Member of the Company’s Audit Committee.
(2)Member of the Company’s Governance, Nominating and Compensation Committee.
(3)Dr. Gross ceased employment on December 31, 2011.
(4)Appointed until the earlier of (a) June 30, 2013; and (b) immediately before the election or appointment of the directors elected or appointed at the third annual general meeting following the implementation of the CCAA Plan.
There are no family relationships among the directors and executive officers of the Company.
The present and principal occupations and recent employment history of each of our directors and executive officers listed above is as follows:
Donald M. Casey Jr.became a memberTermination of the Company’s board of directors on May 12, 2011. Mr. Casey is currently the Chief Executive Officer and a member of the Board at the West Wireless Health Institute where he is driving the development of a world-class research organization focused on accelerating wireless health innovations to lower health care costs. Mr. Casey also serves on the board of directors for Blodel Inc., GlucoTech and Readan Udail. He has over 25 years of global healthcare experience and an outstanding track record in identifying and commercializing medical innovations. Previously, Mr. Casey served as Worldwide Chairman for Johnson & Johnson’s comprehensive care group and member of the Company’s Executive committee, where he oversaw its cardiovascular, diagnostic, diabetes and vision care franchises around the world. He was responsible for defining a corporate-wide comprehensive approach to chronic disease management, including leading the development of patient-centric solutions and innovations within the medical device segment for some of the world’s most pervasive conditions, including diabetes and cardiovascular disorders. Mr. Casey began his career with Johnson & Johnson in 1985, advancing into executive positions throughout the company’s consumer, pharmaceutical and medical device franchises. Mr. Casey’s 25 years of global healthcare experience and outstanding track record in identifying and commercializing medical innovations provides significant contributions to our board of directors.
Kurt M. Cellarbecame a member of the Company’s board of directors on May 12, 2011 and is also Co-Chairman of the Board.Since January 2008, Mr. Cellar has been a consultant and board member to companies in a variety of industries as well as a private investor. He also serves on the board of directors for Aventine Renewable Energy, Hawaiian Telcom, Six Flags Entertainment, US Concrete and Vertis Communications. Previously Mr. Cellar worked for the hedge fund Bay Harbour Management, L.C. (“Bay Harbour”). He was partner and portfolio manager from 2003 until his departure. During his tenure at Bay Harbour, the fund won many investor awards including The Absolute Return “Hedge Fund of the Year” award in 2006. Prior to Bay Harbour, Mr. Cellar was with the private equity firm Remy Investors & Consultants, Inc. Prior to that, he was a strategy consultant at LEK/Alcar. Mr. Cellar brings to our board of directors extensive financial, accounting, and investing experience and prior and ongoing board service for other public companies.
Jeffrey D. Goldberg became a member of the Company’s board of directors on May 12, 2011 and is also Co-Chairman of the Board. Mr. Goldberg is the President of IncuMed, the technology incubator for Al Mann’s development-level companies. In that capacity he
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serves as the Chief Executive Officer of RoundTrip Technologies (tagging, tracking, and locating technology), the President of PerQFlo (combined insulin and pump to treat type 2 diabetes), and the Chief Executive Officer of NeuroSystec (combination drug-device to treat tinnitus). He previously served on the board of directors at PerQFlo LLC, Quallion LLC, Medical Research Products B, EZX, Inc. and Elixir Fund. Mr. Goldberg brings to our board of directors experience in all aspects of the healthcare industry business. Mr. Goldberg previously held executive management positions in the health care industry, including Advanced Bionics Corporation, Los Angeles Orthopaedic Hospital (in alliance with UCLA Healthcare), and the Doheny Eye Institute at USC’s Keck School of Medicine. He has also worked as an M&A lawyer for Occidental Petroleum Corporation, O’Melveny & Myers, LLP and McDermott Will & Emery LLP.
Bradley S. Karro became a member of the Company’s board of directors on May 12, 2011. Mr. Karro is the founder of Hillcote Advisors, LLC, an advisory firm he started in 2007 and is also a principal at Crawford-Ross, a private equity firm focused on investing in and restructuring healthcare service companies. Prior to joining Crawford-Ross, Mr. Karro held a number of senior executive positions in the industry, most recently, serving as Executive Vice President of Caremark Rx, a prescription benefit management company. During his time at Caremark RX, he had responsibility for mergersSales and acquisitions, integration planning, information technology, and Medicare product development. He previously served on the board of directors at Emageon, Inc., and Cheekwood Botanical Garden Museum of Art, and currently serves on the board of directors at Nashville Predators Foundation and Vanderbilt Eye Institute. Over the course of his career, Mr. Karro has also led one of the nation’s largest physician practice management organizations as well as a managed care company. Mr. Karro’s 25 years of healthcare industry experience provides significant contributions to our board of directors.Marketing
Omar Vaishnavi became a memberOn March 25, 2013, Angiotech announced that the employment of the Company’s board of directors on May 12, 2011. Mr. Vaishnavi is currently a Senior Investment Analyst with BlueMountain Capital Management (“Blue Mountain”) in New York, where he principally focuses on investing in credit and equities in a variety of industries. Prior to joining BlueMountain, Mr. Vaishnavi spent several years at Silver Point Capital as an investment professional with a primary focus on health care and distressed investing. Before that he was an investment banking analyst with UBS. Mr. Vaishnavi’s experience in the investment industry is an asset to the Company.
K. Thomas Baileyjoinedthe Company in 2004, and was appointed President and Chief Executive Officer in October 2011. Prior to becoming President and Chief Executive Officer, Mr. Bailey served as the Company’s Chief Financial Officer from 2005 to 2011, and as Vice President, Business Development from 2004 to 2005. Mr. Bailey is responsible for overseeing the Company’s business strategy, operations, corporate finance and financial planning initiatives. Mr. Bailey has over 20 years of experience working with, or for, companies in the life sciences industry, in particular in the areas of corporate finance, treasury, corporate strategy, mergers, acquisitions, alliances, and operational and balance sheet restructuring initiatives. Prior to joining the Company, Mr. Bailey worked as an investment banker, most recently as a leader of the biotechnology practice group at Credit Suisse First Boston and Donaldson, Lufkin & Jenrette.
Steven Bryant joined the Company in 2001. Since he joined he has served as Vice President, Sales & Marketing, Senior Vice President, Sales & Marketing and nowits Executive Vice President of Sales & Marketing.and Marketing, Steven Bryant, ended effective March 22, 2013. Mr. Bryant has over 30 years of global health care sales, marketingis expected to receive severance and operations management experiencetermination payments in accordance with the terms and conditions specified in his employment agreement, which was previously filed with the SEC. We expect that Angiotech and Mr. Bryant will execute a termination and release letter in the medical device industry. He is responsible for overseeing commercial activities fornear future to govern the Company’s specialty medical device product lines, including: ophthalmic, microsurgery, dental, core sutures, interventional soft tissue biopsy, private label and OEM products. Previously, Mr. Bryant was Presidentobligations of IBMD International BioMedical Devices in Charleston, SC as well as a consultant and advisor to medical device companies on international acquisition, consolidation, and reorganization. He also held senior sales and marketing roles at Chiron Vision, Inc. in Irvine, CA; IntraOptics, Inc. in Boca Raton, FL; and CILCO, Inc. in Huntington, WV.
Victor Diaz joined the Company in 2007. Since he joined he has served as Senior Vice President, Global Manufacturing & Supply Chain Management and is now Executive Vice President, Manufacturing Operation & Supply Chain. Mr. Diaz has over 20 years experience in the healthcare, medical device, and medical instrument industries. Prior to joining the Company, Mr. Diaz was Vice President, Global Operations at Teleflex Medical. Prior to Teleflex Medical, he served as Vice President of Manufacturing at both Kendall Healthcare, a subsidiary of Tyco Healthcare, and Tyco Healthcare Respiratory.
Tammy Neskejoined the Company in 2005. Since she joined she has served as Director, Corporate Development, Vice President, Human Resources, Senior Vice President, Human Resources and now Chief Business Officer and Corporate Secretary.She has over 15 years experience building and growing technology-based organizations both organically and through acquisition, locally and globally. Prior to joining the Company, Ms. Neske worked at Ballard Power Systems, Inc. where she participated in several major transactions, restructured and integrated European operations and was responsible for providing leadership, program development and management of global compensation and employment related programs for over 1,700 employees. Prior to Ballard Power Systems, she built and led Human Resources at Mainframe Entertainment during its growth as an industry leader in CG animation for TV and film.
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Jay Dent joined the Company in 2005, and was appointed the Company’s principal financial officer in December 2011. Since joining the Company, Mr. Dent has served as Vice President, Finance & Accounting from 2005 to 2006, and as Senior Vice President, Finance from 2007 to now. Prior to joining the Company, Mr. Dent worked at Ballard Power Systems Inc. as Corporate Controller. He has also held previous senior financial positions at TimberWest Forest Corp. and Fletcher Challenge Canada Ltd. Mr. Dent has over 20 years of experience in corporate finance and accounting, during which time has been involved in numerous public equity offerings, mergers, acquisitions, and corporate restructurings.
Jeffrey Gross waseach party with the Company from 2007 to 2011. He served as Vice President, Engineering and then Senior Vice President, Research and Development. He has over 20 years experience working in the medical device field, primarily in successive technical and leadership positions at Medtronic, Inc. and the Company. He has directed multidisciplinary teams of scientists and engineers in the Heart Valve and Spinal Biologics divisions culminating in the commercialization of numerous products. Dr. Gross has published in the Journal of Heart Valve Disease and the Journal of Thoracic and Cardiovascular Surgery, is a noted expert on the development and use of mechanical and bioprosthetic heart valves, and is the holder of numerous patents.
Code of Ethics
The Company has adopted a code of ethics for our Chief Executive Officer, Chief Financial Officer and Senior Vice President, Finance. In addition, the Company has also adopted a guide of business conduct for our employees. The current code of ethics and the guide of business conduct are available on the Company’s website at www.angiotech.com. Management reports violations of the codes and any remedial actions it has takenrespect to the Board of Directors.
Audit Committee
In connection with the implementation of the CCAA Plan, a new Board of Directors was designated in the Sanction Order approving the CCAA Plan. A new Audit Committee was also formed at this time. The charter for the Audit Committee of the Board of Directors requires that it be comprised of at least two unrelated and independent directors. The Audit Committee is currently comprised of two members — Brad Karro (Chair) and Omar Vaishnavi. We believe that the composition of the Audit Committee meets the criteria for independence under, and the functioning of our Audit Committee complies with, the applicable requirements of the Sarbanes-Oxley Act and SEC rules and regulations. The new Audit Committee formed post restructuring held two meetings during the eight months ended December 31, 2011. All Audit Committee members are required to be financially literate and at least one member is required to have accounting or related financial management expertise.
Our Board of Directors has determined that it has at least one audit committee financial expert serving on its Audit Committee. Mr. Brad Karro has been determined by the Board of Directors to meet the “audit committee financial expert” criteria prescribed by the rules and regulations of the SEC and is independent, as that term is defined by the Canadian and U.S. securities laws applicable to the Company.
The Audit Committee Charter is available on the Company’s website at www.angiotech.com.
Governance Nominating and Compensation Committee
A new Governance Nominating and Compensation Committee was formed in connection with the implementation of the CCAA Plan. The Governance, Nominating and Compensation Committee (for purposes of this discussion, the “Committee”) of the Board of Directors is charged, on behalf of the Board of Directors, to develop, review and approve compensation policies and practices applicable to executive officers, including determining the benchmarks, criteria and performance metrics upon which executive compensation such as base salary, annual bonuses, equity compensation and other benefits are based. The new Committee held three meetings during the eight months ended December 31, 2011. The Committee Charter is available on the Company’s website at www.angiotech.com.
Role of Executive Officers in Compensation Decisions
The Committee makes all decisions pertaining to the compensation of the Chief Executive Officer. The Committee reviews and approves recommendations for compensation awards to other executive officers presented by the Chief Executive Officer.
The Chairs of the Board of Directors and the Committee annually review the performance of the Chief Executive Officer. The Chief Executive Officer annually reviews the performance of the other executive officers. The conclusions reached and recommendations based on these reviews, including compensation awards, are presented to the Committee for review and approval. The Committee may exercise its discretion in modifying any recommended adjustments or awards to executive officers.
Setting Executive Compensation
The Committee has structured the Company’s compensation programs to motivate executives to achieve the short and long-term business goals of the Company, and to reward executives for achieving such goals. In the fall of 2011, the Committee made certain changes, adding responsibility to the roles of Named Executive Officers (“NEO’s”), and awarded compensation adjustments accordingly, but otherwise left the compensation programs implemented prior to the Recapitalization Transaction, in place.termination.
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Table of Contents
PART III
Item 10.DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The information required by this Item is set forth under the captions “Election of Directors” and “Corporate Governance” in our definitive Proxy Statement, which will be filed with the SEC pursuant to Regulation 14A under the Exchange Act and is incorporated herein by reference.
Item 11.EXECUTIVE COMPENSATION
Compensation Discussion & Analysis
Overview of Compensation Program
The Company competes in a global market for executives, management, engineers, sales and marketing, manufacturing and other professionals. Many of our professional and management candidates are soughtinformation required by other attractive employers, such as multi-national medical device companies and technology companies. Our overall approach to compensation reflects our need to motivate, recruit and retain executive talent withthis Item is set forth under the diversity of experience necessary to articulate and execute the critical elements of our corporate strategy and manage our operating businesses.
A new Board of Directors was designated in the Sanction Order approving the CCAA Plan. The following description of the executive compensation program provides an overview of material elements for both the Predecessor Company and Successor Company.
As described below, the Committee approves the compensation of each of our NEO’s. In 2011, our NEOs were: Mr. Bailey, Dr. Gross (terminated on December 31, 2011), Mr. Diaz, Mr. Dent, Ms. Neske, Dr. Hunter (terminated on October 17, 2011), Mr. McMasters (terminated on July 12, 2011)captions “Executive Compensation”, and Mr. Cunliffe (terminated on July 12, 2011).
Compensation Philosophy and Objectives
The Company’s objectives for its executive compensation policies, programs, and practices are to:
·Attract and retain experienced and talented executive officers;
·Inspire excellence“Corporate Governance” in the performance of executive officers; and
·Align shareholder and executive officer interests.
To further these objectives, the Committee:
·Designs pay and performance systems that reflect the level of job responsibility, and incumbent specific considerations;
·Aligns the Company’s compensation programs with those of similarly complex medical device companies;
·Motivates executive performance by aligning incentive compensation programs to achieve objectives thatour definitive Proxy Statement, which will drive future success and enhance shareholder value; and
·Links a significant portion of compensation to overall corporate performance and attainment of specific value enhancing goals.
Stock Ownership Guidelines and Stock Retention Requirements
In March 2010, ownership guidelines were implemented. Under the guidelines, the Chief Executive Officer is expected to hold five times his base salary in shares, RSUs and Deferred Stock Units (“DSUs”), and other executive officers are expected to hold one times base salary in shares, RSUs and DSUs. Executive officers have 5 years from implementation of the policy to meet the requirement to comply and are expected to comply with the spirit of the guidelines.
Adjustment or Recovery of Awards upon Restatement of Financial Results
The Company implemented a compensation recovery policy in 2010. The Company will, in all circumstances deemed appropriate by the Board of Directors and to the extent permitted by governing law, require reimbursement of any cash incentive to an executive after January 1, 2010 where:
i.the payment was predicated upon achieving certain financial results that were subsequently the subject of a material restatement of Company financial statementsbe filed with the SEC;
ii.in the Board of Directors’ view the executive engaged in misconduct that caused or substantially caused the need for the material restatement; and
iii.a lower payment would have been madeSEC pursuant to the executive based upon the restated financial results.
In each such instance, the Company will, to the extent practicable, seek to recover from the individual executive the amount by which the individual executive’s incentive payments for the relevant periods exceeded the lower payment that would have been made based on the restated financial results. Further, following a restatement of the Company’s financial statements, the Company will recover
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any bonuses paid to the Chief Executive Officer and the Chief Financial Officer that are required to be recovered by Section 304 of the Sarbanes-Oxley Act of 2002 (“SOX”) for public companies.
2011 Executive Compensation Elements
For 2011, the principal components of compensation for NEOs were:
·Annual base salary
·Annual cash incentive program;
·Long-term incentive program
·Retirement savings plan
Annual Base Salary
NEOs and other employees receive a salary which provides them with a base level of income. The base salary of each NEO is reviewed annually. The level of base salary is based on the executive’s responsibilities, performance, peer group data, experience and the general economic climate. Based on a combination of these factors as well as changes in the roles and responsibilities of the NEOs, the Committee awarded salary increases in the fall of 2011 to Mr. Bailey and Mr. Diaz. The other NEOs included in the following table were awarded salary increases by the committee of the Predecessor Company.
Name | | Title | | 2010
Annuallized
Base
Salary | | 2011
Annuallized
Base
Salary | | Total
Percentage
Increase | |
K. Thomas Bailey (1) | | Interim Chief Executive Officer & President | | $ | 385,840 | | $ | 500,000 | | 30 | % |
Jay Dent | | Senior Vice President, Finance | | $ | 246,376 | | $ | 253,767 | | 3 | % |
Jeffrey Gross (2) | | Senior Vice President, Research and Development | | $ | 320,331 | | $ | 329,941 | | 3 | % |
Tammy Neske | | Chief Business Officer & Corporate Secretary | | $ | 296,937 | | $ | 305,845 | | 3 | % |
Victor Diaz (3) | | Executive Vice President, Manufacturing Operation and Supply Chain | | $ | 325,208 | | $ | 351,712 | | 8 | % |
Notes:
(1)
| | Mr. Bailey was promoted to the position of Interim Chief Executive Officer and President on October 17, 2011. His salary was increased on April 1, 2011 to $397,415 as Chief Financial Officer and again on October 17, 2011 to $500,000 as Interim Chief Executive Officer and President.
|
| | |
(2)
| | Dr. Gross was provided a salary increase on April 1, 2011. His employment was terminated on December 31, 2011.
|
| | |
(3)
| | Mr. Diaz was promoted to Executive Vice President, Manufacturing Operation and Supply Chain. His salary was increased to $334,964 on April 1, 2011 and subsequently to $351,712.
|
Dr. Hunter’s employment was terminated on October 17, 2011; Mr. McMasters’s employment was terminated on July 12, 2011; and Mr. Cunliffe’s employment was terminated on July 12, 2011.
Annual Cash Incentive Program
The annual cash incentive program rewards the contribution of NEOs and other employees to the extent that we achieve important short-term corporate objectives. The NEO bonus targets established by the former Committee were not changed for 2011 with the exception of Mr. Bailey’s bonus target which was increased to 75% of base salary for the portion of 2011 during which he served as Interim Chief Executive Officer and President. Messrs. Bryant and Diaz and Ms. Neske’s bonus target were 40% of base salary. Mr. Dent’s bonus target was 30% of base salary.
At the beginning of 2011, key corporate objectives were set by the former Board of Directors to represent a broad range of activities that span the Company’s global and complex business. The 2011 corporate objectives are categorized into the following performance criteria: commercial, research and product development, operations and people. The commercial objectives included internal sales revenue targets; the research and product development objectives included new product launch and new product development activities; the operational and financial objectives included internal earnings, expense and margin goals; and the people objective was related to the engagement of the workforce. The new Board amended the weightings of certain categories to reflect the priorities of the
73
new shareholders. Commercial objectives were re-weighted at 30%, research and product development objectives at 25%, operational and financial objectives at 35% and people objectives at 10%. The weights are intended to reflect the relative priority, importance and impact of each objective on the Company’s successes. Objectives are set with targets that represent significant “stretch” goals for the organization. Each objective is also assigned a minimum achievement target and a maximum achievement target. After the year-end results are compiled, performance relative to the corporate objectives is measured to determine a “corporate performance result.” If an objective is achieved on target, the performance result is 100% and the annual bonus pool is funded at 100% for that objective. If the minimum achievement target is not met for an objective, the annual bonus pool will not be funded for that objective. If the minimum achievement target is met, the annual bonus pool will be funded at 50% of the target bonus pool for that objective. If the maximum achievement level is met, the annual bonus pool will be funded up to 150% of the target bonus pool for that objective. The Board of Directors gives consideration to how challenging each goal was and considers other business, commercial and organizational factors that may have impacted achievement of the goals in arriving at its final assessment of the corporate performance result. The formula for determining the amount each NEO receivedRegulation 14A under the annual bonus program is as follows:
Base Salary x Bonus Target % x Individual Performance Result x Corporate Performance Result
The individual performance result is based on each NEO’s achievement of his or her functional and individual goals and demonstrated leadership competencies as assessed by the Chief Executive Officer and Committee. The CEO’s individual goals are generally the same as the corporate objectives. The other NEOs functional and individual goals include commercial, financial, technical, scientific and special project goals specific to the NEO’s area of responsibility. The Committee and CEO do not use quantitative targets and formulas to assess individual executive performance. The Committee determines the individual performance result of the Chief Executive Officer and approves (or modifies) the recommendations made by the Chief Executive Officer for the individual performance result of the other NEOs.
For 2011, the objectives and relative achievements of those objectives were:
Area | | Goal | | Weight | | Target | | Result | |
Commercial | | Product Revenue (excluding royalty revenue) | | 30 | % | $214MM | | 21 | % |
Research & Product Dev. | | Combination drug-device product milestones; Commercial launch of a medical device product; Advance pipeline of a novel device product | | 25 | % | Internal milestones | | 22 | % |
Operations | | Achieve key operational and financial metrics | | 30 | % | Internal metrics | | 50 | % |
People | | Improve employee engagement | | 10 | % | Internal metrics | | 13 | % |
The 2011 corporate performance result was determined by the Committee. In determining the corporate performance result for 2011, the Committee reviewed results for each 2011 objective. Results related to the commercial objective, which consisted of internal sales goals, were slightly underachieved. Results for the research and product development objective were mixed. While the Company made progress on targeted research and product development projects and successfully launched several new products and line extensions, it did not meet all internally targeted deliverables. Results related to the operational and financial objective were exceeded. The internal earnings goal was over-achieved, the internal expense target was over-achieved and the internal margin target was achieved. The people goal related to employee engagement was slightly over-achieved. The Committee determined that a 106% score reflected the Company’s corporate performance result against its targeted achievement level. For 2011, the Committee awarded bonuses at target, multiplied by the corporate performance result to Messrs Bailey, Bryant, Diaz and Dent which resulted in bonuses for each at 106% of target. Ms. Neske was awarded a bonus above target resulting in a payment which was 127% of target. Information about the dollar value of bonus awards granted for 2011 is set forth below in the Summary Compensation Table.
Long-Term Incentive Program
The purpose of the Company’s long-term incentive awards is to promote the long-term success of the Company by aligning the interests of the Company’s employees with the interests of its shareholders. The awards provide employees and executive officers an equity-based interest in the Company and thereby encourage those people to perform their duties to the best of their abilities, and to devote their time and effort to further the long-term growth and development of the Company. The awards are also intended to assist the Company in attracting and retaining individuals with superior experience and ability and providing competitive levels of compensation to such individuals. Subject to the approval of the Board of Directors, the plan allows for grants of stock options, stock appreciation rights (“SARs”), restricted stock, RSUs and DSUs. 2011 awards for NEOs were approved by the former Board of Directors and then subsequently by sanction order of the Supreme Court of British Colombia upon implementation of the CCAA plan. Awards vary among participants based on their position, performance and relative contribution. Information about the awards granted in 2011 is set forth below in the Grant of Plan-Based Awards table.
74
Option and restricted stock or RSUs were granted in 2011. The fair market value of Options granted to NEOs in 2011 was estimated to be $9.77 based on the black-scholes pricing model and the fair market value of both restricted stock and RSUs granted to NEOs in 2011 was estimated to be $15.17 based on the equity value resulting from the fresh-start valuation.
Long-term equity incentive awards are typically granted in early spring at the discretion of the Committee.
Angiotech Stock Option Plans
In connection with the implementation of the CCAA Plan, any options, warrants or other rights or entitlements to acquire or purchase common shares of Angiotech that were existing or issued and outstanding immediately prior to the implementation of the CCAA Plan, including any options to acquire common shares of Angiotech issued under the Company’s 2006 Stock Incentive Plan or the Company’s previous stock option plans, were cancelled and terminated without any liability, payment or other compensation in respect thereof and the Company’s 2006 Stock Incentive Plan or the Company’s previous stock option plans were terminated.
Upon completion of the Recapitalization Transaction, the Successor Company established and implemented a new equity compensation plan — the 2011 Stock Incentive Plan (“2011 SIP”). The 2011 SIP provides for the granting of Restricted Stock, RSUs, stock options, stock appreciation rights, and DSUs (collectively referred to as “Awards”)Exchange Act and is available to certain eligible employees, directors, consultants and advisors as determinedincorporated herein by the Governance, Nominating and Compensation Committee of the Board of Directors. The 2011 SIP allows for a maximum of 2,130,150 shares with respect to the number of Awards that may be granted.reference.
Retirement Savings Plans
NEOs participate in the retirement plans made available for all employees. The Company does not have a defined benefit pension plan for any of its employees or executive officers.
Other Programs
Perquisites
NEOs are eligible to participate in an executive perquisite program. The program allows NEOs to be reimbursed up to a maximum of $15,000 per year for expenses associated with a car lease, financial planning, tax advice and preparation, and health-related services. The Company does not provide any other perquisites to NEOs.
Key Employee Incentive Program
On September 30, 2010, the Company adopted a key employee incentive program (as subsequently amended, the “KEIP”), which was designed to incentivize certain of the Company’s key employees, including the NEOs, to successfully and promptly address certain of the Company’s outstanding financial obligations by giving these key employees an incentive payment tied to the accomplishment of these goals. Pursuant to the KEIP, the cash incentive awards payable thereunder were paid in two installments upon the occurrence of each of the following performance milestones, subject to the participant’s continued employment by the Company or one of its subsidiaries through each applicable milestone date:
·Two-thirds (2/3) of the award was paid upon the consummation of the Recapitalization Transaction, which was met on May 12, 2011; and
·One-third (1/3) of the Award was paid on the date that was 90 days following such consummation or August 10, 2011.
Payments made to employees under the KEIP are included in the Bonus compensation figures found in the Summary Compensation Table.
Employment Agreements
The Company has employment agreements with each of the NEOs. The employment agreements are generally effective until terminated by the Company or the executive and provide for minimum base salary and participation by each of the NEOs in the Company’s annual bonus program, the Company’s benefit plans and the applicable retirement plans maintained by the Company. The terms of the executive employment agreements that are applicable upon termination of an NEO’s employment with the Company are summarized below in the section of this Item 11 titled “— Potential Payments Upon Termination or Change of Control.”
75
Summary Compensation Table for the Fiscal Year Ended December 31, 2011
The following tables contain certain information about the 2011 compensation and benefits paid or provided to each of the Chief Executive Officer, the Principal Financial Officer and the other three most highly compensated executive officers of the Company (determined based on total compensation) and two additional individuals for whom disclosure would have been provided but for the fact that the individual was not serving as an executive officer of the company as at December 31, 2011 (collectively the NEOs).
Name and Principal
Position | | Year | | Salary $ (1) | | Bonus
($) (1)(2) | | Stock Awards
($) | | Option Awards
($) (3) | | Non-equity
incentive
plan compensation
($) (1)(4)(5)(14) | | All other
compensation ($)
(6)(7)(8)(9)(10)(11)
(12)(13) | | Total ($) | |
K. Thomas Bailey | | 2011 | | $ | 436,844 | | $ | 289,860 | | $ | 987,628 | | $ | 571,750 | | $ | 249,540 | | $ | 78,997 | | $ | 2,614,619 | |
| | 2010 | | $ | 385,840 | | Nil | | Nil | | $ | 125,004 | | $ | 173,628 | | $ | 90,820 | | $ | 775,292 | |
| | 2009 | | $ | 364,000 | | Nil | | Nil | | $ | 45,000 | | $ | 127,400 | | $ | 194,866 | | $ | 731,266 | |
| | | | | | | | | | | | | | | | | |
Jay Dent | | 2011 | | $ | 256,276 | | $ | 24,638 | | Nil | | $ | 175,860 | | $ | 82,093 | | $ | 23,665 | | $ | 562,532 | |
| | 2010 | | $ | 236,900 | | Nil | | Nil | | $ | 28,949 | | $ | 179,584 | | $ | 20,842 | | $ | 466,275 | |
| | 2009 | | $ | 207,443 | | Nil | | Nil | | $ | 19,500 | | $ | 54,350 | | $ | 17,985 | | $ | 299,278 | |
| | | | | | | | | | | | | | | | | |
Jeffrey Gross(8) | | 2011 | | $ | 333,203 | | $ | 64,066 | | $ | 691,342 | | $ | 357,338 | | $ | 65,000 | | $ | 668,056 | | $ | 2,179,004 | |
| | 2010 | | $ | 306,066 | | Nil | | Nil | | $ | 70,304 | | $ | 111,960 | | $ | 57,977 | | $ | 546,307 | |
| | 2009 | | $ | 257,646 | | Nil | | Nil | | $ | 39,000 | | $ | 73,555 | | $ | 49,624 | | $ | 419,825 | |
| | | | | | | | | | | | | | | | | |
Tammy Neske | | 2011 | | $ | 308,869 | | $ | 118,775 | | $ | 691,342 | | $ | 357,338 | | $ | 198,056 | | $ | 29,558 | | $ | 1,703,939 | |
| | 2010 | | $ | 272,042 | | Nil | | Nil | | $ | 70,304 | | $ | 103,784 | | $ | 27,959 | | $ | 474,088 | |
| | 2009 | | $ | 201,401 | | Nil | | Nil | | $ | 39,000 | | $ | 64,851 | | $ | 23,205 | | $ | 328,457 | |
| | | | | | | | | | | | | | | | | |
Victor Diaz | | 2011 | | $ | 334,914 | | $ | 65,042 | | $ | 493,814 | | $ | 357,338 | | $ | 149,126 | | $ | 14,987 | | $ | 1,415,221 | |
| | 2010 | | $ | 311,852 | | Nil | | Nil | | $ | 66,411 | | $ | 117,075 | | $ | 16,259 | | $ | 511,597 | |
| | 2009 | | $ | 275,600 | | Nil | | Nil | | $ | 27,000 | | $ | 77,168 | | $ | 28,246 | | $ | 408,014 | |
| | | | | | | | | | | | | | | | | |
William L. Hunter(11) | | 2011 | | $ | 652,428 | | Nil | | $ | 3,160,412 | | $ | 2,144,046 | | Nil | | $ | 2,928,974 | | $ | 8,885,859 | |
| | 2010 | | $ | 766,990 | | Nil | | Nil | | $ | 240,902 | | $ | 690,291 | | $ | 96,549 | | $ | 1,794,732 | |
| | 2009 | | $ | 691,769 | | Nil | | Nil | | $ | 102,843 | | $ | 363,200 | | $ | 100,954 | | $ | 1,258,766 | |
| | | | | | | | | | | | | | | | | |
David McMasters, Esq., (12) | | 2011 | | $ | 307,593 | | $ | 129,917 | | $ | 691,342 | | $ | 357,388 | | Nil | | $ | 1,255,714 | | $ | 2,741,955 | |
| | 2010 | | $ | 487,190 | | Nil | | Nil | | $ | 105,472 | | $ | 175,388 | | $ | 38,447 | | $ | 806,497 | |
| | 2009 | | $ | 487,190 | | Nil | | Nil | | $ | 36,000 | | $ | 156,875 | | $ | 35,535 | | $ | 715,600 | |
| | | | | | | | | | | | | | | | | |
Sean Cunliffe(13) | | 2011 | | $ | 180,477 | | $ | 65,100 | | $ | 691,342 | | $ | 357,388 | | Nil | | $ | 474,051 | | $ | 1,768,359 | |
| | 2010 | | $ | 318,635 | | Nil | | Nil | | $ | 66,411 | | $ | 117,180 | | $ | 31,139 | | $ | 533,364 | |
| | 2009 | | $ | 92,308 | | Nil | | Nil | | $ | 18,000 | | $ | 28,000 | | $ | 6,519 | | $ | 144,827 | |
Notes:
(1)Amounts paid to Mr. Dent, Dr. Gross, Ms. Neske and Dr. Hunter were paid in Canadian dollars and, for the purposes of this table, converted to U.S. dollars using the average exchange rate of 0.983, 0.971 and 0.876 for each of the years ended December 31, 2011, December 31, 2010 and December 31, 2009, respectively.
(2)Represents KEIP payments made to the NEOs under the KEIP. See description of the KEIP under “Other Programs” section of this Item 11.
(3)Represents the fair value of option awards granted during the respective year calculated using the Black-Scholes option pricing model.
(4)Non-equity incentive plan compensation for Messrs Bailey, Dent, Gross and Diaz include annual bonus accrued at December 31 but paid subsequent to December 31.
(5)Non-equity incentive plan compensation for Ms. Neske includes annual bonus accrued at December 31 but paid subsequent to December 31 as well as an incremental bonus of $40,000 awarded and paid with respect to her promotion to Chief Business Officer.
(6)Represents with respect to Mr. Bailey $nil of relocation allowance (2010 — nil; 2009 — $118,508); $30,000 of rent paid by the Company on behalf of the NEO (2010 - $28,531; 2009 — $25,597); $37,465 in personal tax make-whole payments (2010 - $50,757; 2009 — $38,819); and $11,532 in auto lease payments paid by the Company on behalf of the NEO (2010 - $11,532; 2009 — $11,942).
(7)Represents with respect to Mr. Dent $12,813 of registered retirement savings plan contributions (2010 - $11,845; 2009 — $10,372); $8,845 in auto lease payments paid by the Company on behalf of the NEO (2010 - $8,441, 2009 — $7,613); and $2,006 of other miscellaneous perquisites (2010 - $556; 2009 — $nil).
76
| (8)
| | Represents with respect to Dr. Gross $6,786 in auto lease payments paid by the Company on behalf of the NEO (2010 - $6,477; 2009 - $5,842); $3,306 of other miscellaneous perquisites (2010 - $2,956; 2009 — nil); $nil of relocation allowance (2010 - $48,544; 2009 - $43,783) and $657,963 of severance and severance related amounts that were accrued upon the termination of Dr. Gross on December 31, 2011.
|
| | | |
| (9)
| | Represents with respect to Ms. Neske $15,543 of RRSP contributions made by the Company on behalf of the NEO (2010 - $13,602; 2009 — $10,070); $13,423 in auto lease payments paid by the Company on behalf of the NEO (2010 - $12,810; 2009 — $11,554); and $692 of other miscellaneous perquisites (2010 - $1,547; 2009 — $1,581).
|
| | | |
| (10)
| | Represents with respect to Mr. Diaz $14,987 in auto lease payments paid by the Company on behalf of the NEO (2010 - $14,987; 2009 — $14,987); and $nil of 401K contributions made by the company on behalf of the NEO (2010 - $1,272; 2009 — $13,259).
|
| | | |
| (11)
| | Represents with respect to Dr. Hunter $46,505 of costs related to reimbursement of family travel costs (2010 - $33,842; 2009 — $52,488); $15,802 in auto lease payments paid by the Company on behalf of the NEO (2010 - $22,915; 2009 — $20,665); $20,694 of RRSP contributions made by the Company on behalf of the NEO (2010 - $20,775; 2009 — $17,294); $18,778 of other miscellaneous perquisites (2010 - $96,549; 2009 — $10,507); and $2,603,092 in amounts related to the estimated contractual severance entitlement pertaining to the termination of Dr. Hunter on October 17, 2011.
|
| | | |
| (12)
| | Represents with respect to Mr. McMasters $24,750 of rent paid by the Company on behalf of the NEO (2010 - $38,447; 2009 — $33,625); $nil of other miscellaneous perquisites (2010 - $nil; 2009 — $1,910); and $1,230,964 of severance and other severance related payments upon the termination of Mr. McMasters on July 12, 2011.
|
| | | |
| (13)
| | Represents with respect to Mr. Cunliffe $7,944 in auto lease payments paid by the Company on behalf of the NEO (2010 - $15,000; 2009 — $3,750); $9,800 of 401K contributions made by the company on behalf of the NEO (2010 - $11,139; 2009 — $2,769); and $456,308 of severance and other severance related payments upon the termination of Mr. Cunliffe on July 12, 2011.
|
Grant of Plan-Based Awards
All amounts are expressed in U.S. Dollars unless otherwise noted.
| | | | Estimated Future Payouts Under Non-
Equity Incentive Plans | | All Other
Stock
Awards;
Number of
Share of
Stock or | | All Other
Option
Awards;
Number of
Securities
Underlying | | Exercise or
Base Price
of Option
Awards | | Grant Date
Fair Value
of
Stock and
Option | |
Name | | Grant Date | | Threshold ($) | | Target ($) | | Maximum($) | | Units (#) | | Options (#) | | ($/Sh) | | Awards (1) | |
K. Thomas Bailey | | 5/12/2011 | | Nil | | Nil | | Nil | | | | 58,521 | | $ | 20.00 | | $ | 9.77 | |
| | 5/12/2011 | | Nil | | Nil | | Nil | | 65,104 | | | | $ | — | | $ | 15.17 | |
Jay Dent | | 5/12/2011 | | Nil | | Nil | | Nil | | | | 18,000 | | $ | 20.00 | | $ | 9.77 | |
| | 9/12/2011 | | Nil | | Nil | | Nil | | 4,000 | | | | $ | — | | $ | — | |
Jeffrey Gross | | 5/12/2011 | | Nil | | Nil | | Nil | | | | 36,575 | | $ | 20.00 | | $ | 9.77 | |
| | 5/12/2011 | | Nil | | Nil | | Nil | | 45,573 | | | | $ | — | | $ | 15.17 | |
Tammy Neske | | 5/12/2011 | | Nil | | Nil | | Nil | | | | 36,575 | | $ | 20.00 | | $ | 9.77 | |
| | 5/12/2011 | | Nil | | Nil | | Nil | | 45,573 | | | | $ | — | | $ | 15.17 | |
Victor Diaz | | 5/12/2011 | | Nil | | Nil | | Nil | | | | 36,575 | | $ | 20.00 | | $ | 9.77 | |
| | 5/12/2011 | | Nil | | Nil | | Nil | | 32,552 | | | | $ | — | | $ | 15.17 | |
William L. Hunter | | 5/12/2011 5/12/2011 | | Nil
Nil | | Nil
Nil | | Nil
Nil | |
208,333
| | 219,452
| | $
$ | 20.00
— | | $
$ | 9.77
15.17 | |
David McMasters, Esq. | | 5/12/2011
5/12/2011 | | Nil
Nil | | Nil
Nil | | Nil
Nil | |
45,573
| | 36,575
| | $
$ | 20.00 — | | $
$ | 9.77
15.17 | |
Sean Cunliffe | | 5/12/2011 | | Nil | | Nil | | Nil | | | | 36,575 | | $ | 20.00 | | $ | 9.77 | |
| | 5/12/2011 | | Nil | | Nil | | Nil | | 45,573 | | | | $ | — | | $ | 15.17 | |
Note:
(1)Represents the grant date fair value of option awards, restricted stock and RSUs granted during the respective year calculated using the Black-Scholes option pricing model.
77
Outstanding Equity Awards at Fiscal Year-End
The table below shows option awards to NEOs outstanding as of December 31, 2011. All exercise prices are denoted in Canadian dollars unless otherwise specified.
| | Option Awards(1) | | Stock Awards(1) | |
Name | | Grant Date | | Number of
securities
underlying
unexercised
options (#)
exercisable | | Number of
securities
underlying
unexercised
options (#)
unexercisable | | Equity incentive
plan
awards: number
of
securities
underlying
unexercised
unearned
options (#) | | Option
exercise
price ($) | | Option
Expiration date | | Grant Date | | Number of
Shares or
Units of
Stock That
Have Not
Vested (#) | | Market
Value of
Shares or
Units of
Stock That
Have Not
Vested ($) | | Equity
incentive
plan
awards:
number
ofunearned
shares,
units or
other
rights that
have not
vested (#) | | Equity
incentive
plan
awards:
Market
value of
unearned
shares,
units or
other
rights that
have not
vested ($) | |
K. Thomas Bailey | | 5/12/2011 | | — | | 58,521 | | — | | $ | 20.00 | | 5/12/2018 | | 5/12/2011 | | 65,104 | | $ | 987,628 | | — | | — | |
Jay Dent | | 5/12/2011 | | — | | 18,000 | | — | | $ | 20.00 | | 5/12/2018 | | 9/12/2011 | | 4,000 | | $ | 0 | | — | | — | |
Jeffrey Gross | | 5/12/2011 | | 36,575 | | — | | — | | $ | 20.00 | | 5/12/2018 | | — | | — | | — | | — | | — | |
Tammy Neske | | 5/12/2011 | | — | | 36,575 | | — | | $ | 20.00 | | 5/12/2018 | | 5/12/2011 | | 45,573 | | $ | 691,342 | | — | | — | |
Victor Diaz | | 5/12/2011 | | — | | 36,575 | | — | | $ | 20.00 | | 5/12/2018 | | 5/12/2011 | | 32,552 | | $ | 493,814 | | — | | — | |
William L. Hunter, | | 5/12/2011 | | 219,452 | | — | | — | | $ | 20.00 | | 5/12/2018 | | — | | — | | — | | — | | — | |
David McMasters, Esq., | | 5/12/2011 | | 36,575 | | — | | — | | $ | 20.00 | | 5/12/2018 | | — | | — | | — | | — | | — | |
Sean Cunliffe | | 5/12/2011 | | 36,575 | | — | | — | | $ | 20.00 | | 5/12/2018 | | — | | — | | — | | — | | — | |
(1) Options vest in thirds on each of the 1st, 2nd and 3rd anniversary date of the grant date. Vesting and exercise rights cease immediately upon termination of employment for cause and voluntary termination. In the case of termination without cause, all options, restricted stock and RSUs granted to NEOs are immediately considered vested and may be exercised until the earlier of the one year anniversary of termination or the last day of the term of the option, provided however that if the underlying stock applicable to any award is not traded on a public exchange then awards shall remain exercisable until the first to occur of the one year anniversary of underlying stock becoming publicly tradable or the last day of the original term. In the event of death, disability or retirement, vesting rights cease upon death, disability or retirement and exercise of previously vested awards cease after 365 days or the expiration of the option, whichever is earlier.
Option Exercises and Stock Vested in 2011
There were no options exercised by NEOs during the last completed fiscal year. Restricted stock with a fair market value of $15.17 per unit, vested upon the employment termination of the following NEOs:
Name | | Number of
Shares
Acquired on
Vesting (#) | | Value Realized on
Vesting ($) | |
David McMasters, Esq. | | 45,573 | | $ | 691,342 | |
Sean Cunliffe | | 45,573 | | $ | 691,342 | |
RSUs in the amount of 208,333 and with a fair market value on grant date of $3,160,412 vested to Dr. Hunter upon his termination on October 17, 2011. RSUs in the amount of 45,573 and with a fair market value on grant date of $691,342 vested to Dr. Gross upon his termination on December 31, 2011. The underlying common shares have not yet been issued to either of Dr. Hunter or Dr. Gross as the vested RSUs have not yet been exercised.
Potential Payments Upon Termination or Change of Control
The tables below reflect the amount of compensation payable to each of the NEOs in the event of termination of such executive’s employment. The amount of compensation payable to each NEO upon voluntary termination, involuntary without-cause termination, termination following a change of control, termination by executive for good reason and in the event of death of the executive is also shown below. The amounts shown assume that such termination was effective as of December 31, 2011, and thus include amounts earned through such time and are estimates of the amounts which would be paid out to the executives upon their termination. The amounts shown below assume a share price of $15.17 based on the equity value resulting from the fresh-start valuation. The actual amounts to be paid out can only be determined at the time of the executive’s separation from the Company.
78
Mr. Bailey, Mr. Diaz, Mr. Dent, Ms. Neske, Dr. Gross, Mr. Cunliffe, and Mr. McMasters
Under the terms of the executive employment agreements of Messrs. Bailey, Diaz, Dent, Gross, Cunliffe, McMasters and Ms. Neske, if the executive is terminated for any reason other than for cause or resigns for good reason, regardless of whether a change of control has occurred he or she will receive:
| ·
| 12 months of base salary plus an additional two months of base salary for each full year of employment completed up to a combined maximum of 24 months of base salary;
|
| | |
| ·
| Lump sum amount as compensation for loss of any benefits made available during employment in the amount of $24,000 plus an additional $2,000 for each full year of employment completed up to a combined maximum of $48,000;
|
| | |
| ·
| The balance of any payment due under the bonus plan, including, if applicable, a prorated payment under the bonus plan earned in respect of the fiscal year of termination;
|
| | |
| ·
| Outstanding equity shall be fully vested and may be exercised until the earlier of the one year anniversary of termination or the last day of the term of the option, provided however that if the underlying stock applicable to any award is not traded on a public exchange then awards shall remain exercisable until the first to occur of the one year anniversary of underlying stock becoming publicly tradable or the last day of the original term;
|
| | |
| ·
| Following a Change of Control, in the event that any payment made by the Company to executive is subject to excise tax under Section 4999 of the Code and the reduction of the amounts payable to the maximum amount that could be paid by the Company without triggering the excise tax would provide executive with a greater after-tax amount than if such amounts were not reduced, then the amounts payable to executive will be reduced to the safe harbor cap; and
|
| | |
| ·
| The Company’s obligation to provide the foregoing payments and benefits is conditional on the executive’s ongoing compliance with all applicable post-employment obligations which, among other things, restricts competitive activity for one year following termination date.
|
Dr. Hunter
Termination Without Cause or Termination by Dr. Hunter for Good Reason:
| ·
| Under the terms of his employment agreement, if Dr. Hunter’s employment is terminated without cause or Dr. Hunter terminates his employment for good reason,, Dr. Hunter will receive a lump sum severance payment equivalent to 12 months’ salary, plus an amount equal to the average annual bonus payments received in the previous three years; and monthly payments equivalent to one-half of monthly salary for 24 months, plus an additional amount equivalent to the average annual bonus payments received in the previous three years paid in 24 equal monthly installments. Health and certain other benefits will also be continued for 24 months, or Dr. Hunter will receive an amount equal to the cost to the Company of providing those benefits. The Company’s obligation to provide the foregoing payments and benefits is conditional on Dr. Hunter signing a release acceptable to the Company, acting reasonably and his compliance with a Confidentiality, Inventions and Non Competition Agreement, which, among other things, restricts competitive activity for one year following the termination date.
|
| | |
| ·
| Outstanding equity shall be fully vested and may be exercised until the earlier of the one year anniversary of termination or the last day of the term of the option, provided however that if the underlying stock applicable to any award is not traded on a public exchange, then awards shall remain exercisable until the first to occur of the one year anniversary of underlying stock becoming publicly tradable or the last day of the original term
|
79
The following table shows the potential payments upon termination for Mr. Bailey, Mr. Diaz, Mr. Dent and Ms. Neske. Payments upon termination will be calculated in accordance with each executive’s employment agreement. For Messrs Bailey and Diaz, actual payments received for termination without cause following a Change of Control will be reduced to the Safe Harbor Cap if such after tax amount is greater than the after tax amounts subject to Section 4999 that the executive would otherwise receive. By way of side letter, Mr. Bailey has agreed that the base salary to be used in calculating payments upon termination would be his former base salary (as CFO) of $397,415.
Since Mr. Cunliffe, Mr. McMasters, Dr. Hunter and Dr. Gross’s employment was terminated in 2011, they are not included in the chart below. Specific information about the benefits each of them received upon termination follows this chart.
| | Voluntary
Termination | | For Cause
Termination | | Termination
without Cause
or Termination
by Executive
with Good
Reason | | Death | |
K. Thomas Bailey | | | | | | | | | |
Lump Sum Severance | | $ | — | | $ | — | | $ | 794,830 | | — | |
Bonus for Fiscal Year of Termination | | — | | — | | 249,540 | | 249,540 | |
Lump Sum Compensation for Loss of Benefits | | — | | — | | 38,000 | | — | |
Exercise of Vested Options | | — | | — | | — | | — | |
Exercise of Unvested or Accelerated Options | | | | | | — | | | |
Exercise of Unvested or Accelerated RSU’s | | — | | — | | 987,628 | | | |
Total | | $ | — | | $ | — | | $ | 2,069,998 | | 249,540 | |
| | | | | | | | | |
Tammy Neske | | | | | | | | | |
Lump Sum Severance | | $ | — | | $ | — | | $ | 611,690 | | — | |
Bonus for Fiscal Year of Termination | | — | | — | | 129,678 | | 129,678 | |
Lump Sum Compensation for Loss of Benefits | | — | | — | | 36,000 | | — | |
Exercise of Vested Options | | — | | — | | — | | | |
Exercise of Unvested or Accelerated Options | | | | | | — | | | |
Exercise of Unvested or Accelerated RSU’s | | — | | — | | 691,342 | | — | |
Total | | $ | — | | $ | — | | $ | 1,468,711 | | 129,678 | |
| | | | | | | | | |
Victor Diaz | | | | | | | | | |
Lump Sum Severance | | $ | — | | $ | — | | $ | 586,187 | | — | |
Bonus for Fiscal Year of Termination | | — | | — | | 149,126 | | 149,126 | |
Lump Sum Compensation for Loss of Benefits | | — | | — | | 32,000 | | — | |
Exercise of Vested Options | | — | | — | | — | | | |
Exercise of Unvested or Accelerated Options | | | | | | — | | | |
Exercise of Unvested or Accelerated RSU’s | | — | | — | | 493,814 | | | |
Total | | $ | — | | $ | — | | $ | 1,261,126 | | 149,126 | |
| | | | | | | | | |
Jay Dent | | | | | | | | | |
Lump Sum Severance | | $ | — | | $ | — | | $ | 507,534 | | — | |
Bonus for Fiscal Year of Termination | | — | | — | | 80,698 | | 80,698 | |
Lump Sum Compensation for Loss of Benefits | | — | | — | | 36,000 | | — | |
Further Lump Sum | | — | | — | | — | | — | |
Exercise of Vested Options | | — | | — | | — | | | |
Exercise of Unvested or Accelerated Options | | | | | | — | | | |
Exercise of Unvested or Accelerated RSU’s | | — | | — | | — | | — | |
Total | | $ | — | | $ | — | | $ | 624,232 | | 80,698 | |
Mr. Cunliffe
Mr. Cunliffe’s employment was terminated without cause by the Company, effective July 12, 2011. Under the terms of his employment agreement, Mr. Cunliffe executed a release and waiver of claims in favor of the Company and received cash severance payments and benefits in the total amount of $417,143, which consisted of the following payments and benefits:
· | 14 months Base Salary | | $ | 391,143 | |
· | Lump sum compensation for benefits | | $ | 26,000 | |
The Committee did not award a cash bonus for 2011to Mr, Cunliffe.
In accordance with the terms of his employment agreement, Mr. Cunliffe’s 45,573 units of restricted stock valued at $691,342 at the time of termination and 36,575 stock options with exercise price of $20 became fully vested as of the date of termination and may be exercised until the earlier of the one year anniversary of termination or the last day of the term of the option, provided however that if
80
the underlying stock applicable to any award is not traded on a public exchange, then awards shall remain exercisable until the first to occur of the one year anniversary of underlying stock becoming publicly tradable or the last day of the original term.
Mr. McMasters
Mr. McMasters’ employment was terminated without cause by the Company, effective July 12, 2011. Under the terms of his employment agreement, Mr. McMasters executed a release and waiver of claims in favor of the Company and received cash severance payments and benefits in the total amount of $1,047,612, which consisted of the following payments and benefits:
· | 24 months Base Salary | | $ | 1,003,612 | |
· | Lump sum compensation for benefits | | $ | 44,000 | |
The Committee did not award a cash bonus for 2011to Mr. McMasters.
In accordance with the terms of his employment agreement, Mr. McMasters’ 45,573 units of restricted stock valued at $691,342 at the time of termination and 36,575 stock options with exercise price of $20 became fully vested as of the date of termination and may be exercised until the earlier of the one year anniversary of termination or the last day of the term of the option, provided however that if the underlying stock applicable to any award is not traded on a public exchange, then awards shall remain exercisable until the first to occur of the one year anniversary of underlying stock becoming publicly tradable or the last day of the original term.
Dr. Gross
Dr. Gross’s employment was terminated without cause by the Company, effective December 31, 2011. Under the terms of his employment agreement, Dr. Gross executed a release and waiver of claims in favor of the Company and received cash severance payments and benefits in the total amount of $581,902, which consisted of the following payments and benefits:
· | 20 months Base Salary | | $ | 549,902 | |
· | Lump sum compensation for benefits | | $ | 32,000 | |
The Committee awarded a cash bonus for 2011to Dr. Gross in the amount of $65,000.
In accordance with the terms of his employment agreement, Dr. Gross’s 45,573 restricted stock units valued at $691,342 at the time of termination and 36,575 stock options with exercise price of $20 became fully vested as of the date of termination and may be exercised until the earlier of the one year anniversary of termination or the last day of the term of the option, provided however that if the underlying stock applicable to any award is not traded on a public exchange, then awards shall remain exercisable until the first to occur of the one year anniversary of underlying stock becoming publicly tradable or the last day of the original term.
Dr. Hunter
Dr. Hunter’s employment was terminated by the Company, effective October 17, 2011. Dr. Hunter is entitled to cash payments as follows:
· | 12 months’ salary plus an amount equal to the average of annual bonus payments received by Dr. Hunter in the previous three years of employment | | $ | 1,188,950 | |
· | Monthly payment equivalent to one half base salary and an amount equivalent to the average of annual bonus payments received by Dr. Hunter in the previous three years of employment for 24 months following termination date, in total | | $ | 1,188,950 | |
· | Payment of an amount equal to the cost to the Company for 24 months for providing benefits set out in the employment agreement, in total | | $ | 225,192 | |
In accordance with the terms of his employment agreement, Dr. Hunter’s 208,333 restricted share units valued at $3,160,411 at the time of termination and 219,452 stock options with exercise price of $20 became fully vested as of the date of termination and may be exercised until the earlier of the one year anniversary of termination or the last day of the term of the option, provided however that if the underlying stock applicable to any award is not traded on a public exchange, then awards shall remain exercisable until the first to occur of the one year anniversary of underlying stock becoming publicly tradable or the last day of the original term.
Dr. Hunter has demanded higher amounts.
81
Compensation of Directors
Amounts the Predecessor Company paid to non-executive directors during the four months ended April 30, 2011 are presented in the table below.
Name | | Fees
earned or
paid in
cash ($)
(1) | | Stock
awards ($) | | Option
awards ($) | | Non equity
incentive plan
compensation
($) | | Change in
pension value
and
nonqualified
deferred
compensation
earnings | | All other
compensation
($) | | Total ($) | |
David T. Howard | | $ | 32,750 | | — | | — | | — | | — | | — | | $ | 32,750 | |
Arthur H. Willms | | $ | 27,750 | | — | | — | | — | | — | | — | | $ | 27,750 | |
Edward M. Brown | | $ | 22,750 | | — | | — | | — | | — | | — | | $ | 22,750 | |
Henry McKinnell | | $ | 27,750 | | — | | — | | — | | — | | — | | $ | 27,750 | |
Laura Brege | | $ | 16,750 | | — | | — | | — | | — | | — | | $ | 16,750 | |
Notes:
(1)Includes fees for Board of Directors and committee membership.
Amounts the Successor Company paid to non-executive directors during the eight months ended December 31, 2011 are presented in the table below.
Name | | Fees
earned or
paid in
cash ($)
(1) | | Stock
awards ($) | | Option
awards ($) | | Non equity
incentive plan
compensation
($) | | Change in
pension value
and
nonqualified
deferred
compensation
earnings | | All other
compensation
($) | | Total ($) | |
Jeffrey D. Goldberg | | $ | 62,500 | | 204,795 | | — | | — | | — | | — | | $ | 267,295 | |
Kurt M. Cellar | | $ | 62,500 | | 204,795 | | — | | — | | — | | — | | $ | 267,295 | |
Bradley S. Karro | | $ | 51,563 | | 163,836 | | — | | — | | — | | — | | $ | 215,399 | |
Donald M. Casey Jr | | $ | 46,875 | | 163,836 | | — | | — | | — | | — | | $ | 210,711 | |
Omar Vaishnavi | | $ | 46,875 | | 163,836 | | — | | — | | — | | — | | $ | 210,711 | |
Notes:
(1)Includes fees for Board of Directors and committee membership.
For the eight months ended December 31, 2011, the Successor Company paid each non-executive director in quarterly installments as follows:
Chair of the Board of Directors retainer
| | $
| 100,000 per annum
| |
Board of Directors member retainer
| | $
| 75,000 per annum
| |
Committee Chair retainer
| | $
| 7,500 per annum
| |
Upon initially being elected or appointed to the Board of Directors, each independent director will be granted 12,000 RSUs and the Board Chairs receive 15,000 RSUs. On an annual basis thereafter, occurring at the time of the annual general meeting of the Company, if he or she continues to be an independent director of the Company, he or she will be granted 6,000 RSUs. The RSUs typically vest in thirds over three years. For the eight months ended December 31, 2011, the independent directors of the Company were paid approximately $270,313 in aggregate cash fees for their service on the Board of Directors. Independent directors of the Company were issued 66,000 RSUs during the eight months ended December 31, 2011 with an aggregate fair market value of $901,098.
Compensation Committee Interlocks And Insider Participation
The Governance, Nominating and Compensation Committee serves as the compensation committee of the Board of Directors. Its members are Jeffrey Goldberg, Omar Vaishnavi and Don Casey. No member of the Governance, Nominating and Compensation Committee is or has been an executive officer or employee of the Company. None of our executive officers served as a director or member of a compensation committee (or other committee serving an equivalent function) of any other entity whose executive officers served as a director or member of our Governance, Nominating and Compensation Committee during the eight months ended December 31, 2011.
82
Report of the Governance, Nominating and Compensation Committee
The Company’s Compensation Discussion and Analysis is included in this Annual Report on Form 10-K. The Company has the primary responsibility for the Compensation Discussion and Analysis.
On behalf of the Board of Directors, the Governance, Nominating and Compensation Committee oversees the development, review and approval of the Company’s compensation program for executive officers. As part of this responsibility, the Governance, Nominating and Compensation Committee has reviewed and discussed with the Company’s management the contents of the Compensation Discussion and Analysis. Based on its review and discussion, and subject to the limitations on the role and responsibility of the Governance, Nominating and Compensation Committee, the Committee recommended to the Board of Directors that the Compensation Discussion and Analysis be included in this Form 10-K and incorporated into the Company’s Proxy Statement for the eight months ended December 31, 2011.
THE GOVERNANCE, NOMINATING AND COMPENSATION COMMITTEE
Jeffrey Goldberg
Omar Vaishnavi
Don Casey
83
Item 12.SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
Equity Compensation Plan Information
The following table sets out information relating torequired by this Item is set forth under the Company’s equity compensation plans in place at December 31, 2011. The only equity compensation plans the Successor Company has are the 2011 Stock Incentive Plan, pursuant to which the Company grants stock options, restricted stock, and RSUs in U.S. dollars. The 2011Stock Incentive Plan is described above under “Executive Compensation — Angiotech Stock Option Plans.”
Plan Category | | Number of
securities to be issued
upon exercise of
outstanding options
and rights (a) | | Weighted-average
exercise price of
outstanding options
and rights (b) | | Number of
securities remaining
available for future
issuance under equity
compensation plans
(excluding securities
reflected in
column (a)) (c) | |
Equity compensation plans approved by securityholders: | | | | | | | |
2011 Stock Incentive Plan — Stock Options | | 673,523 | | $ | 20.00 | | | |
2011 Stock Incentive Plan — Restricted Stock | | 130,208 | | $ | nil | | | |
2011 Stock Incentive Plan — Restricted Share Units | | 415,479 | | $ | nil | | | |
Total | | 1,219,210 | | | | 819,794 | |
Securitycaption “Security Ownership of Certain Beneficial Owners and Management
The authorized capital of and Related Stockholder Matters” in our definitive Proxy Statement, which will be filed with the Company consists of an unlimited number of common shares without par value.
As of March 29, 2012, there were 12,556,673 common shares issued and outstanding.
Beneficial Owners of More than Five Percent
As of March 29, 2012,SEC pursuant to the knowledge of the directors and executive officers of the Company, no person or group beneficially owns, directly or indirectly, or exercises control or direction over, greater than 5% of any class of voting securities of the Company other than the following:
Title of Class | | Name and Address of Beneficial Holder | | Amount and
Nature of
Beneficial
Ownership
(owned or
controlled or
directed, directly
or indirectly) | | % of Class
(1) | |
Common | | JP MORGAN CLEARING CORP | | 3,687,950 | | 29.4 | % |
Common | | JEFFERIES & COMPANY INC | | 1,547,750 | | 12.3 | % |
Common | | COURAGE SPECIAL SITUATIONS MASTER FUND LP | | 1,395,204 | | 11.1 | % |
Common | | JPMORGAN CHASE BANK NATIONAL ASSOCIATION | | 902,250 | | 7.2 | % |
Common | | SILVER POINT LUXEMBOURG PLATFORM SARL | | 864,600 | | 6.9 | % |
Notes:
(1)In accordance with Rule 13d-3(d)(1)Regulation 14A under the Exchange Act the applicable percentage of ownership for each personand is based on 12,556,673 common shares outstanding as of March 29, 2012, plus any securities heldincorporated herein by such person exercisable for or convertible into common shares within 60 days after the date of this Annual Report on Form 10-K.reference.
84
Beneficial Ownership of Directors and Named Executive Officers
As at March 29, 2012, the number of common shares beneficially owned by each director and NEO of the Company, or over which each director and NEO exercises control or direction, directly or indirectly, is set out in the following table:
Title of Class | | Name and Address of Beneficial Holder | | Amount and
Nature of
Beneficial
Ownership
(owned or
controlled or
directed, directly
or indirectly) | | % of Class
(1) | |
Common | | K. THOMAS BAILEY | | 41,208 | | 0.3 | % |
Common | | JAY DENT | | 6,000 | | 0.0 | % |
Common | | JEFFREY GROSS | | 82,148 | | 0.6 | % |
Common | | TAMMY NESKE | | 27,383 | | 0.2 | % |
Common | | VICTOR DIAZ | | 23,042 | | 0.2 | % |
Common | | WILLIAM L. HUNTER | | 427,785 | | 3.3 | % |
Common | | DAVID D MCMASTERS | | 65,633 | | 0.5 | % |
Common | | SEAN CUNLIFFE | | 64,190 | | 0.5 | % |
Notes:
(1)In accordance with Rule 13d-3(d)(1) under the Exchange Act, the applicable percentage of ownership for each person is based on 12,556,673 shares outstanding as of March 29, 2012, plus any securities held by such person exercisable for or convertible into common shares within 60 days after the date of this Annual Report on Form 10-K.
As of March 29, 2012, directors and executive officers of the Company beneficially owned or exercised control or direction over, directly or indirectly, 784,815 common shares representing approximately 6.1% of the outstanding common shares in the aggregate.
85
Item 13.CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
Related-Party Transactions Policy
Pursuant to our Audit Committee Charter, all transactions between us and any of our directors, executive officers or other related parties are subject to reviewThe information required by our Audit Committee. Our Audit Committee, in its sole discretion,this Item is permitted to consider any factors it deems appropriate in approving any such related-party transactions.
Certainset forth under the captions “Certain Relationships and Related Party Transactions
Since January 1, 2009, there has not been, nor is there currently proposed, any transaction or series of similar transactions toTransactions” and “Corporate Governance” in our definitive Proxy Statement, which we were or are a party in which the amount involved exceeds $120,000 and in which any director, executive officer or beneficial holder of more than 5% of any class of our voting securities or members of such person’s immediate family had or will have a direct or indirect material interest.
As of March 29, 2012, the Company is not aware of any proceeding or action involving a director, executive officer or nominee which would be adverse to the Company.
Director Independence
Although our common shares are not registered or listed for trading on a national securities exchange or an automated inter-dealer quotation system of a national securities association that has a requirement that a majority of its Board of Directors be independent, we review and take into consideration the director independence criteria required by the NASDAQ Stock Market in determining the independence of our directors. Under NASDAQ Stock Market rules, the independence of a director is determined based upon certain criteria which evaluate whether the director has a relationshipfiled with the Company that would interfere withSEC pursuant to Regulation 14A under the exercise of the director’s independent business judgment. At present, we believe that all five of the Company’s directors would be considered independent under these rules.
The charters of both the Audit CommitteeExchange Act and the Governance, Nominating, and Compensation Committee of the Board of Directors stipulate that each be comprised of at least two directors, each of whom is independent. The Audit Committee is currently comprised of two members — Bradley Karro (Chair) and Omar Vaishnavi. All of the members of the Audit Committee are independent. The Governance, Nominating and Compensation Committee is currently comprised of three members — Jeffrey Goldberg (Chair), Omar Vaishnavi and Don Casey. Each of the members of the Governance, Nominating and Compensation Committee is independent.incorporated herein by reference.
Item 14.PRINCIPAL ACCOUNTANT FEES AND SERVICES
The firminformation required by this Item is set forth under the caption “Appointment of PricewaterhouseCoopers LLP, Chartered Accountants, of 250 Howe Street, Vancouver, British Columbia (“PWC”) served as independent auditors forAuditors” in our definitive Proxy Statement, which will be filed with the Company forSEC pursuant to Regulation 14A under the fiscal years ended December 31, 2010Exchange Act and 2011. PWC was first appointed as independent auditors of the Company on June 8, 2006. The Audit Committee pre-approves all services providedis incorporated herein by PWC.
The aggregate fees for professional services rendered by the independent auditors, PWC, for the Company for the years ending December 31, 2011 and December 31, 2010 totaled $1,801,475 and $1,835,643, respectively, as detailed in the following table. All amounts are in U.S. dollars and have been converted from Canadian dollars using an average foreign exchange rate for the period indicated:
(in U.S. dollars) | | Year Ended
December 31,
2011 | | Year Ended
December 31,
2010 | |
Audit and Audit-Related Fees | | $ | 1,727,600 | | $ | 1,611,746 | |
Tax Fees | | 60,000 | | $ | 69,519 | |
All Other Fees | | 13,875 | | $ | 154,378 | |
TOTAL | | $ | 1,801,475 | | $ | 1,835,643 | |
The nature of the services provided by PWC under each of the categories indicated in the foregoing table is described below.
Audit Fees
Audit fees were for professional services rendered for the audit of the Company’s annual financial statements, quarterly reviews of interim financial statements and services provided in connection with regulatory filings or engagements.reference.
8672
For the year ended December 31, 2010, audit fees also included an auditTable of internal controls over financial reporting requirements in accordance with Section 404 of SOX.
Additional audit related fees were also incurred in 2011 related to the Company’s implementation of the Recapitalization Transaction and fresh start accounting on April 30, 2011.
Tax Fees
Tax fees were for tax compliance, tax advice and tax planning professional services. These services consisted of tax compliance, including the review of tax returns and tax planning and advisory services relating to common forms of domestic and international taxation (i.e. income tax, capital tax, goods and services tax, value added tax and payroll tax).
All Other Fees
In 2011, “All Other Fees” were minimal and primarily related to auditor consents required for the Company’s Form S-8 filing.
Pre-approval Policies and Procedures
The Audit Committee must pre-approve any audit or any permissible non-audit services to be provided by the independent auditors and has established pre-approval policies and procedures. All audit and permissible non-audit fees are pre-approved by the Audit Committee on a project-by-project basis. Before approving the services described under “Tax Fees” above, the Audit Committee reviewed whether the independent auditors could provide those services and maintain its independence. The Audit Committee approved 100% of the audit-related and tax fees for 2011 and 2010.
87Contents
PART IV
Item 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) The following documents are included as part of this Annual Report on Form 10-K.
(1) Financial Statements:
|
| Page † |
|
Report of Independent Registered Public Accounting Firm | Pertaining to the Successor Company | F-1 |
Report of Independent Registered Public Accounting Firm Pertaining to the Predecessor Company | F-2 |
Consolidated Balance Sheets as of December 31, 20112012 and 20102011 | | F-2
| F-3 |
Consolidated Statements of Operations for the year ended December 31, 2012, the eight months ended December 31, 2011, the four months ended April 30, 2011, and the yearsyear ended December 31, 2010, and 2009. | | F-3
| |
Consolidated Statements of Shareholders’ (Deficit) Equity as of December 31, 2011, 2010 and 2009.
| 2010. | F-4 | |
Consolidated Statements of Cash FlowsComprehensive (Losses) Income for the year ended December 31, 2012, the eight months ended December 31, 2011, the four months ended April 30, 2011, and the yearsyear ended December 31, 2010 and 2009. | 2010. | F-5 |
Consolidated Statements of Shareholders’ (Deficit) Equity as of December 31, 2012, 2011 and 2010. | F-6 |
Consolidated Statements of Cash Flows for the year ended December 31, 2012, the eight months ended December 31, 2011, the four months ended April 30, 2011, and the year ended December 31, 2010. | F-7 |
Notes to Consolidated Financial Statements | | F-6
| F-8 |
† Page numbers refer to Exhibit 13 of this Annual Report on Form 10-K.
(2) Financial Statement Schedule:
|
| Page † |
|
Schedule II — Valuation of Qualifying Accounts for the year ended December 31, 2012, the eight months ended December 31, 2011, the four months ended April 30, 2011, and the yearsyear ended December 31, 2010 and 2009.2010. | | F-53
| F-63 |
† Page numbers refer to Item F of this Annual Report on Form 10-K.
All other schedules are omitted as the information required is inapplicable or the information is presented in the consolidated financial statements or related notes.
(3) Exhibits:
The exhibits listed below are filed as part of this Annual Report on Form 10-K. References under the caption “Location” to exhibits or other filings indicate that the exhibit or other filing has been filed, that the indexed exhibit and the exhibit or other filing referred to are the same and that the exhibit or other filing referred to is incorporated by reference. Management contracts and compensatory plans or arrangements filed as exhibits to this Annual Report on Form 10-K are identified by an asterisk. The Commission file number for our Exchange Act filings referenced below is 000-30334.
Exhibit | | Description | | Location |
| | | | |
2.1* | | Asset Sale and Purchase Agreement by and among Angiotech Pharmaceuticals, Inc., Surgical Specialties Puerto Rico, Inc., Quill Medical, Inc., Ethicon, Inc. and Ethicon, LLC dated as of April 4, 2012 | | Exhibit 2.1, Form 8-K filed on November 13, 2012 |
| | | | |
3.1 | | Articles of Angiotech Pharmaceuticals, Inc. | | Exhibit 3.3, Form 8-K filed on May 16, 2011 |
| | | | |
3.2 | | First amendment to Notice of Articles of Angiotech Pharmaceuticals, Inc., dated May 12, 2011 | | Exhibit 3.1, Form 8-K filed on May 16, 2011 |
| | | | |
3.3 | | Second amendment to Notice of Articles of Angiotech Pharmaceuticals, Inc., dated May 16, 2011 | | Exhibit 3.2, Form 8-K filed on May 16, 2011 |
|
73
Table of Contents
| | | | 4.1 | | Indenture dated March 23, 2006 among Angiotech Pharmaceuticals, Inc., certain of its subsidiaries and Wells Fargo Bank N.A., for 7.75% Senior Subordinated Notes due 2014 | | Exhibit 99.2, Form 6-K filed April 3, 2006 |
| | | | |
4.2 | | Indenture dated December 11, 2006 among Angiotech Pharmaceuticals, Inc., certain of its subsidiaries and Wells Fargo Bank N.A., for Senior Floating Rate Notes due 2013 | | Exhibit 2, Form 6-K filed December 15, 2006 |
| | | | |
4.3 | | Supplemental Indenture dated June 8, 2010 among Angiotech America, Inc., Angiotech Florida Holdings, Inc., Angiotech Pharmaceuticals, Inc., certain of its subsidiaries and Deutsche Bank National Trust Company, for 7.75% Senior Subordinated Notes due 2014. | | Exhibit 10.2, Form 10-Q filed August 9, 2010 |
| | | | |
4.4 | | Supplemental Indenture dated June 8, 2010 among Angiotech America, Inc., Angiotech Florida Holdings, Inc., Angiotech Pharmaceuticals, Inc., certain of its subsidiaries and Deutsche Bank National Trust Company, for Senior Floating Rate Notes due 2013. | | Exhibit 10.3, Form 10-Q filed August 9, 2010 |
88
Exhibit
|
| Description
|
| Location
|
|
|
|
|
|
4.5 | | Indenture, dated May 12, 2011, by and among Angiotech Pharmaceuticals, Inc. certain of its subsidiaries party thereto and Deutsche Bank National Trust Company, as trustee, for senior floating rate notes due 2013 | | Exhibit 4.1, Form 8-K filed May 16, 2011 |
| | | | |
4.6 | | Supplemental indenture, dated May 12, 2011, by and among Angiotech Pharmaceuticals, Inc., certain of its subsidiaries party thereto and Deutsche Bank National Trust Company, as trustee, for senior floating rate notes due 2013 | | Exhibit 4.2, Form 8-K filed May 16, 2011 |
| | | | |
4.7 | | Supplemental Indenture, dated October 29, 2010, between Angiotech Pharmaceuticals, Inc. and U.S. Bank National Association, relating to the Company’s 7.75% Subordinated Notes. | | Exhibit 10.3, Form 8-K filed November 2, 2010 |
| | | | |
4.8 | | Supplemental Indenture, dated November 29, 2010, between Angiotech Pharmaceuticals, Inc. and U.S. Bank National Association, relating to the Company’s 7.75% Subordinated Notes. | | Exhibit 10.3, Form 8-K filed December 2, 2010 |
| | | | |
4.9 | | Supplemental Indenture, dated December 21, 2010, between Angiotech Pharmaceuticals, Inc. and U.S. Bank National Association, relating to the Company’s 7.75% Subordinated Notes. | | Exhibit 10.1, Form 8-K filed December 23, 2010 |
| | | | |
4.10 | | Supplemental Indenture, dated January 27, 2011, between Angiotech Pharmaceuticals, Inc. and U.S. Bank National Association, relating to the Company’s 7.75% Subordinated Notes. | | Exhibit 10.3, Form 8-K filed January 28, 2011 |
| | | | |
10.74.11
| | Indenture, dated August 13, 2012, by and among Angiotech Pharmaceuticals (US), Inc., Angiotech Pharmaceuticals, Inc., certain of its subsidiaries party thereto and Deutsche Bank National Trust Company, as trustee, for 9% Senior Notes due 2014 | | Exhibit 4.1, Form 8-K filed on August 16, 2012 |
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Table of Contents
4.12 | | Supplemental Indenture, dated August 13, 2012, by and among Angiotech Pharmaceuticals, Inc. certain of its subsidiaries party thereto and Deutsche Bank National Trust Company, as trustee, for Senior Floating Rate Notes due 2013 | | Exhibit 4.2, Form 8-K filed on August 16, 2012 |
| | | | |
10.1 | | Credit Agreement, dated May 12, 2011, by and among Angiotech Pharmaceuticals, Inc. as Parent, the subsidiaries of Parent listed as borrowers on the signature pages thereto, as borrowers, the lenders signatory thereto, as lenders and Wells Fargo Capital Finance, LLC as arranger and administrative agent. | | Exhibit 10.1, Form 8-K filed May 16, 2011 |
| | | | |
10.810.2
| | First Amendment to Credit Agreement dated July 14, 2011 | | Exhibit 10.1, Form 8-K filed July 20, 2011
|
| | by and among Angiotech Pharmaceuticals, Inc., as Parent, the subsidiaries of Parent listed as borrowers on the signature pages thereto, as borrowers, the lenders signatory thereto, as lenders and Wells Fargo Capital Financial, LLC as arranger and administrative agent. | | Exhibit 10.1, Form 8-K filed July 20, 2011 |
| | | | |
10.910.3
| | License Agreement by and among Angiotech Pharmaceuticals, Inc., Boston Scientific Corporation and Cook Incorporated, dated as of July 9, 1997 | | Exhibit, Form 20-FR filed October 5, 1999 |
| | | | |
10.1010.4
| | September 24, 2004 Amendment Between Angiotech Pharmaceuticals, Inc. and Cook Incorporated Modifying July 9, 1997 License Agreement Among Angiotech Pharmaceuticals, Inc., Boston Scientific Corporation, and Cook Incorporated** | | Exhibit 10.3, Form 10-K filed March 16, 2009 |
| | | | |
10.1110.5
| | May 20, 2010 Amendment between Angiotech Pharmaceuticals, Inc. and Cook Incorporated to the July 9, 1997 License Agreement among Angiotech Pharmaceuticals, Inc., Boston Scientific Corporation, and Cook Incorporated.** | | Exhibit 10.1, Form 10-Q filed August 9, 2010 |
| | | | |
10.1210.6
| | Distribution and License Agreement by and among Angiodevice International GmbH (as assignee of Angiotech Pharmaceuticals, Inc., Angiotech International, GmbH, and Cohesion Technologies, Inc.), Baxter Healthcare Corporation and Baxter Healthcare, S.A., dated April 1, 2003** | | Exhibit 10.5, Form 10-K filed March 16, 2009 |
| | | | |
10.1310.7
| | Manufacturing and Supply Agreement, by and among Angiodevice International GmbH (as assignee of Angiotech Pharmaceuticals, Inc., Angiotech International, GmbH, and Cohesion Technologies, Inc.), Baxter Healthcare Corporation and Baxter Healthcare, S.A., dated April 1, 2003** | | Exhibit 10.6, Form 10-K filed March 16, 2009 |
| | | | |
10.1410.8
| | Amendment No. 1 dated December 23, 2004 to Distribution and License Agreement, by and among Angiodevice International GmbH (as assignee of Angiotech Pharmaceuticals, Inc., Angiotech International, GmbH, and Cohesion Technologies, Inc.), Baxter Healthcare Corporation and Baxter Healthcare, S.A., dated April 1, 2003 | | Exhibit 10.7, Form 10-K filed March 16, 2009 |
| | | | |
10.1510.10
| | Amendment No. 1 dated January 21, 2005 to Manufacturing and Supply Agreement, by and among Angiodevice International GmbH (as assignee of Angiotech Pharmaceuticals, Inc., Angiotech International, GmbH, and | | Exhibit 10.8, Form 10-K filed March 16, 2009 |
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| | Cohesion Technologies, Inc.), Baxter Healthcare Corporation and Baxter Healthcare, S.A., dated April 1, 2003 | | Exhibit 10.8, Form 10-K filed March 16, 2009
|
89
Exhibit
|
| Description
|
| Location
|
|
|
|
|
|
10.1610.11
| | Amendment No. 2 dated October 8, 2007 to Distribution and License Agreement, by and among Angiodevice International GmbH (as assignee of Angiotech Pharmaceuticals, Inc., Angiotech International, GmbH, and Cohesion Technologies, Inc.), Baxter Healthcare Corporation and Baxter Healthcare, S.A., dated April 1, 2003** | | Exhibit 10.9, Form 10-K filed March 16, 2009 |
| | | | |
10.1710.12
| | Amended and Restated Distribution and License Agreement by and among Angiotech Pharmaceuticals (U.S.) Inc., Angiodevice International GmbH, Baxter Healthcare Corporation and Baxter Healthcare, S.A, dated as of January 1, 2009** | | Exhibit 10.1, Form 10-Q filed May 8, 2009 |
| | | | |
10.1810.13
| | License Agreement between Public Health Service (through the Office of Technology Transfer, National Institutes of Health) and Angiotech Pharmaceuticals, Inc., dated November 19, 1997** | | Exhibit 10.11, Form 10-K filed March 16, 2009 |
| | | | |
10.1910.14
| | First Amendment between Public Health Service (through the Office of Technology Transfer, National Institutes of Health) and Angiotech Pharmaceuticals, Inc., dated March 28, 2002 modifying the License Agreement between Public Health Service (through the Office of Technology Transfer, National Institutes of Health) and Angiotech Pharmaceuticals, Inc., dated November 19, 1997** | | Exhibit 10.12, Form 10-K filed March 16, 2009 |
| | | | |
10.2010.15
| | Second Amendment between Public Health Service (through the Office of Technology Transfer, National Institutes of Health) and Angiotech Pharmaceuticals, Inc., dated May 23, 2007 modifying the License Agreement between Public Health Service (through the Office of Technology Transfer, National Institutes of Health) and Angiotech Pharmaceuticals, Inc., dated November 19, 1997** | | Exhibit 10.13, Form 10-K filed March 16, 2009 |
| | | | |
10.2110.16
| | License Agreement between Angiotech Pharmaceuticals, Inc. and The University of British Columbia, dated August 1, 1997** | | Exhibit 10.14, Form 10-K filed March 16, 2009 |
| | | | |
10.2210.17
| | Amendment to License Agreement between Angiotech Pharmaceuticals, Inc. and The University of British Columbia, dated February 27, 2004, modifying the License Agreement between Angiotech Pharmaceuticals, Inc. and The University of British Columbia, dated August 1, 1997** | | Exhibit 10.15, Form 10-K filed March 16, 2009 |
| | | | |
10.23*10.18*
| | Form of U.S. Director Indemnification Agreement | | Exhibit 10.2, Form 8-K filed October 4, 2010 |
| | | | |
10.24*10.19*
| | Form of Canadian Director Indemnification Agreement | | Exhibit 10.3, Form 8-K filed October 4, 2010 |
| | | | |
10.25*10.20*
| | Form of U.S. Executive Indemnification Agreement | | Exhibit 10.4, Form 8-K filed October 4, 2010 |
| | | | |
10.26*10.21*
| | Form of Canadian Executive Indemnification Agreement | | Exhibit 10.5, Form 8-K filed October 4, 2010 |
| | | | |
10.27*10.22*
| | Form of William L. Hunter Indemnification Agreement | | Exhibit 10.6, Form 8-K filed October 4, 2010 |
| | | | |
10.28*10.23*
| | Executive Employment Agreement between Angiotech Pharmaceuticals, Inc. and William L. Hunter, dated April 23, 2004 | | Exhibit 10.19, Form 10-K filed March 16, 2009 |
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| | | | |
10.2910.24
| | Amendment to Executive Employment Agreement with William L. Hunter, M.D. | | Exhibit 10.1, Form 8-K filed April 5, 2011 |
| | | | |
10.30*10.25*
| | Executive Employment Agreement between Angiotech Pharmaceuticals, Inc. and K. Thomas Bailey, dated August 8, 2007** | | Exhibit 10.20, Form 10-K filed March 16, 2009 |
| | | | |
10.31*10.26*
| | Executive Employment Agreement between Angiotech Pharmaceuticals, Inc. and David D. McMasters, dated October 30, 2007** | | Exhibit 10.21, Form 10-K filed March 16, 2009 |
| | | | |
10.32*10.27*
| | Executive Employment Agreement between Angiotech Pharmaceuticals, Inc. and Rui Avelar, dated October 15, 2007 | | Exhibit 10.22, Form 10-K filed March 16, 2009 |
| | | | |
10.33*10.28*
| | Executive Employment Agreement between Angiotech Pharmaceuticals, Inc. and Steve Bryant, dated June 11, 2009** | | Exhibit 10.3, Form 10-K filed March 16, 2011 |
| | | | |
| | Form of Amendment to Executive Employment Agreement | | Exhibit 10.2, Form 8-K filed on April 5, 2011 |
| | | | |
10.36*10.29*
| | Angiotech Pharmaceuticals, Inc. 2006 Stock Option Plan | | Exhibit 10.28, Form 10-K filed March 16, 2009 |
90
Exhibit
|
| Description
|
| Location
|
|
|
|
|
|
10.37*10.30*
| | American Medical Instruments Holdings, Inc. 2003 Stock Option Plan | | Exhibit 10.29, Form 10-K filed March 16, 2009 |
| | | | |
10.3810.31
| | Angiotech Pharmaceuticals, Inc. 2011 Stock Incentive Plan | | Exhibit 10.3, Form 8-K filed May 16, 2011 |
| | | | |
10.3910.32
| | Form of Restricted Share Unit Award Agreement (for Canadian participants) | | Exhibit 10.4, Form 8-K filed May 16, 2011 |
| | | | |
10.4010.33
| | Form of Restricted Stock Award Agreement (for U.S. participants) | | Exhibit 10.5, Form 8-K filed May 16, 2011 |
| | | | |
10.4110.34
| | Form of Stock Options/SAR Award Agreement (for Canadian participants) | | Exhibit 10.6, Form 8-K filed May 16, 2011 |
| | | | |
10.4210.35
| | Form of Stock Options/SAR Award Agreement (for U.S. participants) | | Exhibit 10.7, Form 8-K filed May 16, 2011 |
| | | | |
10.4310.36
| | Agreement and Plan of Merger, dated as of May 25, 2006, by and among Angiotech Pharmaceuticals, Inc., Angiotech Pharmaceuticals (US), Inc., Quaich Acquisition, Inc. and Quill Medical, Inc. | | Exhibit 10.4, Form 8-K filed November 2, 2010 |
| | | | |
10.4410.37
| | Settlement Agreement, dated January 27, 2011, among Angiotech Pharmaceuticals, Inc., certain of its subsidiaries, QSR Holdings, Inc. and the other signatories thereto. | | Exhibit 10.4, Form 8-K filed January 28, 2011 |
| | | | |
10.4710.38
| | Settlement and License Termination Agreement, dated as of February 16, 2011, by and between Angiotech Pharmaceuticals (US), Inc. and Rex Medical, LP. | | Exhibit 10.1, Form 8-K filed February 18, 2011 |
| | | | |
10.5010.39
| | Recapitalization Support Agreement, dated as of October 29, 2010, among Angiotech Pharmaceuticals, Inc., and the holders of senior subordinated notes signatory thereto. | | Exhibit 10.1, Form 8-K filed November 2, 2010 |
| | | | |
10.5110.40
| | Agreement to Amend the Recapitalization Support Agreement, dated November 29, 2010, among Angiotech Pharmaceuticals, Inc., and the holders of senior subordinated notes signatory thereto. | | Exhibit 10.1, Form 8-K filed December 2, 2010 |
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| | thereto. | | |
| | | | |
10.5210.41
| | Second Agreement to Amend the Recapitalization Support Agreement, dated December 15, 2010, among Angiotech Pharmaceuticals, Inc. and the holders of senior subordinated notes signatory thereto. | | Exhibit 10.1, Form 8-K filed December 17, 2010 |
| | | | |
10.5310.42
| | Third Agreement to Amend the Recapitalization Support Agreement, dated January 11, 2011, among Angiotech Pharmaceuticals, Inc. and the holders of senior subordinated notes signatory thereto. | | Exhibit 10.1, Form 8-K filed January 13, 2011 |
| | | | |
10.5410.43
| | Fourth Agreement to Amend the Recapitalization Support Agreement, dated January 27, 2011, among Angiotech Pharmaceuticals, Inc., and the holders of senior subordinated notes signatory thereto. | | Exhibit 10.1, Form 8-K filed January 28, 2011 |
| | | | |
10.5510.45
| | Fifth Agreement to Amend the Recapitalization Support Agreement, dated February 7, 2011, among Angiotech Pharmaceuticals, Inc. and the holders of senior subordinated notes signatory thereto. | | Exhibit 10.2, Form 8-K filed February 10, 2011 |
| | | | |
10.5610.46
| | Sixth Agreement to Amend the Recapitalization Support Agreement, dated as of April 22, 2011, by and among Angiotech Pharmaceuticals, Inc., certain of its subsidiaries party thereto and the holders of senior subordinated notes signatory thereto. | | Exhibit 10.1, Form 8-K filed April 25, 2011 |
| | | | |
10.5710.47
| | Floating Rate Note Support Agreement, dated as of October 29, 2010, among Angiotech Pharmaceuticals, Inc., and the holders of floating rate notes signatory thereto. | | Exhibit 10.2, Form 8-K filed November 2, 2010 |
| | | | |
10.5810.48
| | Agreement to Amend the Floating Rate Note Support Agreement, dated as of November 29, 2010, among Angiotech Pharmaceuticals, Inc., and the holders of floating rate notes signatory thereto. | | Exhibit 10.2, Form 8-K filed December 2, 2010 |
| | | | |
10.5910.49
| | Second Agreement to Amend the Floating Rate Note Support Agreement, dated as of December 15, 2010, among Angiotech Pharmaceuticals, Inc., and the holders of floating rate notes signatory thereto. | | Exhibit 10.2, Form 8-K filed December 17, 2010 |
| | | | |
10.6010.50
| | Third Agreement to Amend the Floating Rate Note Support Agreement, dated as of January 11, 2011, among Angiotech Pharmaceuticals, Inc., and the holders of floating rate notes signatory thereto. | | Exhibit 10.2, Form 8-K filed January 13, 2011 |
91
Exhibit
|
| Description
|
| Location
|
| | | | |
10.6110.51
| | Fourth Agreement to Amend the Floating Rate Note Support Agreement, dated as of January 27, 2011, among Angiotech Pharmaceuticals, Inc., and the holders of floating rate notes signatory thereto. | | Exhibit 10.2, Form 8-K filed January 28, 2011 |
| | | | |
10.6210.52
| | Fifth Agreement to Amend the Floating Rate Note Support Agreement, dated as of February 7, 2011, among Angiotech Pharmaceuticals, Inc., and the holders of floating rate notes signatory thereto. | | Exhibit 10.1, Form 8-K filed February 10, 2011 |
| | | | |
10.6310.53
| | Sixth Agreement to Amend the Floating Rate Note Support Agreement, dated as of February 22, 2011, among Angiotech | | Exhibit 10.1, Form 8-K filed February 24, 2011 |
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| | Pharmaceuticals, Inc., and the holders of floating rate notes signatory thereto. | | Exhibit 10.1, Form 8-K filed February 24, 2011
|
| | | | |
10.6410.54
| | Seventh Agreement to Amend the Floating Rate Note Support Agreement dated as of April 22, 2011, by and among Angiotech Pharmaceuticals, Inc., certain of its subsidiaries party thereto and the holders of the senior floating rate notes signatory thereto. | | Exhibit 10.2, Form 8-K filed April 25, 2011 |
| | | | |
10.6510.55
| | Registration Rights Agreement, dated May 12, 2011, by and among Angiotech Pharmaceuticals, Inc. and the investors party thereto. | | Exhibit 10.2, Form 8-K filed May 16, 2011 |
| | | | |
10.6610.56
| | Second Amendment to Credit Agreement dated March 12, 2012, by and among Angiotech Pharmaceuticals, Inc., as Parent, the subsidiaries of Parent listed as borrowers on the signature pages thereto, as borrowers, the lenders signatory thereto, as lenders and Wells Fargo Capital Financial, LLC as arranger and administrative agent. | | Exhibit 10.1, Form 8-K filed March 16, 2012 |
| | | | |
10.57 | | Third Amendment, dated August 13, 2012 to the Credit Agreement dated May 12, 2011 by and among Angiotech Pharmaceuticals, Inc., as Parent, the subsidiaries of the Parent listed as Borrowers on the signature pages thereto, as Borrowers, the Lenders signatory thereto, as Lenders, and Wells Fargo Capital Finance, LLC, as Arranger and Administrative Agent for the Lenders. | | Exhibit 10.1, Form 8-K filed on August 16, 2012 |
| | | | |
10.58 | | Co-Exclusive Manufacturing and Supply Agreement by and among Angiotech Pharmaceuticals, Inc., Surgical Specialties Puerto Rico, Inc., Angiotech Puerto Rico, Inc., Angiotech International AG, Quill Medical, Inc. and Ethicon, LLC dated as of April 4, 2012* | | Exhibit 10.1, Form 8-K filed November 13, 2012 |
| | | | |
14.1 | | Code of Ethics for Chief Executive Officer, Chief Financial Officer and SVP Finance | | Exhibit 14.1, Form 10-K filed March 16, 2010 |
| | | | |
14.2 | | Guide of Business Conduct | | Exhibit 14.2, Form 10-K filed March 16, 2010 |
| | | | |
2121.0
| | List of Worldwide Subsidiaries | | Filed herewith
|
| | | | |
23.1
| | Consent of PricewaterhouseCoopers LLP
| | Filed herewith |
| | | | |
31.1 | | Certification of PEO Pursuant to Securities Exchange Act Rules 13a-14 and 15d-14 as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | | Filed herewith |
| | | | |
31.2 | | Certification of PFO Pursuant to Securities Exchange Act Rules 13a-14 and 15d-14 as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | | Filed herewith |
| | | | |
32.1 | | Certification of PEO Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | | Filed herewith |
| | | | |
32.2 | | Certification of PFO Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | | Filed herewith |
|
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| | | | 101 | | XBRL Interactive Data File | | Filed herewith |
** portions of this exhibit have been omitted and filed separately with the Commission pursuant to a request for confidential treatment
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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.
| | Angiotech Pharmaceuticals, Inc. |
| | | |
Date: March 29, 201228, 2013 | | By: | /S/ K. THOMAS BAILEY |
|
|
| K. Thomas Bailey
President & Chief Executive Officer
|
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS that each person whose signature appears below constitute and appoint K. Thomas Bailey, President & Chief Executive Officer, and each of them, the lawful attorney and agent or attorneys and agents with power and authority to do any and all acts and things and to execute all instruments which said attorneys and agents, or either of them, determine may be necessary or advisable or required to enable Angiotech Pharmaceuticals, Inc. to comply with the Securities Exchange Act of 1934, as amended, and any rules or regulations or requirements of the Securities and Exchange Commission in connection with this Annual Report on Form 10-K. Without limiting the generality of the foregoing power and authority, the powers granted include the power and authority to sign the names of the undersigned officers and directors in the capacities indicated below to this Annual Report on Form 10-K or amendments or supplements thereto, and each of the undersigned hereby ratifies and confirms all that said attorneys and agents or either of them, shall do or cause to be done by virtue hereof. This Power of Attorney may be signed in several counterparts.
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.
Signatures | | Title | | Date |
| | | | |
/S/ K. THOMAS BAILEY | | President & Chief Executive Officer and Chief Financial Officer | | March 29, 201228, 2013 |
K. Thomas Bailey | | (Principal Executive Officer) | | |
| | | | |
/S/ JAY DENT | | Senior Vice President, Finance | | March 29, 201228, 2013 |
Jay Dent | | (Principal Financial Officer) | | |
| | | | |
/S/ JEFF D. GOLDBERG | | Co - Chairman of the Board of Directors | | March 29, 201228, 2013 |
Jeff D. Goldberg | | | | |
| | | | |
/S/ KURT M. CELLAR | | Co —- Chairman of the Board of Directors | | March 29, 201228, 2013 |
Kurt M. Cellar | | | | |
| | | | |
/S/ BRADLEY S. KARRO | | Director | | March 29, 201228, 2013 |
Bradley S. Karro | | | | |
| | | | |
/S/ DONALD M. CASEY JR. | | Director | | March 29, 201228, 2013 |
Donald M. Casey Jr. | | | | |
| | | | |
/S/ OMAR VAISHNAVI | | Director | | March 29, 201228, 2013 |
Omar Vaishnavi | | | | |
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Report of Independent Registered Public Accounting Firm
To the Shareholders of Angiotech Pharmaceuticals, Inc.
We have audited the accompanying consolidated balance sheetsheets of Angiotech Pharmaceuticals, Inc. (“the Company”)(the Company) and its subsidiaries, as of December 31, 2012 and December 31, 2011 (Successor(the Successor Company) and the related consolidated statements of operations, comprehensive (loss) income, shareholders’ (deficit) equity and cash flows for the year ended December 31, 2012 and the eight months ended December 31, 2011. In addition, we audited the financial statement scheduleschedules for the year ended December 31, 2012 and the eight months ended December 31, 2011 listed in the index appearing under Item 15 (a)(2) of the Annual Report on Form 10-K. These consolidated financial statements and financial statement schedules are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements and the financial statement schedules based on our audit.audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includesOur audits of the consolidated financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includesstatements, assessing the accounting principles used and significant estimates made by management, as well asand evaluating the overall consolidated financial statement presentation.We were not engaged to perform an audit of the Company’s internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. 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 opinion.opinions.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Angiotech Pharmaceuticals, Inc. and its subsidiaries as atof December 31, 2012 and December 31, 2011 and the results of theirits operations and theirits cash flows for the year ended December 31, 2012 and the eight months ended December 31, 2011 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements.
As discussed in Note 1 to the consolidated financial statements, the Supreme Court of British Columbia and the United States Bankruptcy Court for the District of Delaware confirmed the Company’s plan of reorganization on April 6, 2011 and April 7, 2011, respectively. The confirmation of the plan resulted in the discharge of all claims against the Company and certain of its subsidiaries that arose before January 28, 2011 and substantially terminates all rights and interests of pre-existing equity security holders as provided for in the plan. The plan of reorganization became effective and the Company and the respective subsidiaries emerged from creditor protection on May 12, 2011. In connection with its emergence from creditor protection, the Company adopted fresh start accounting as of May 1, 2011.
(signed) PricewaterhouseCoopers LLP
Chartered Accountants
Vancouver, Canada
March 29, 201228, 2013
F-1
Table of Contents
Report of Independent Registered Public Accounting Firm
To the Shareholders of Angiotech Pharmaceuticals, Inc.
We have audited the accompanying consolidated balance sheetsstatements of operations, comprehensive (loss) income, shareholders’ deficit (equity) and cash flows of Angiotech Pharmaceuticals, Inc. (“the Company”)(the Company) and its subsidiaries as of December 31, 2010 (Predecessor Company) and the related consolidated statements of operations, shareholders’ deficit and cash flows for the four months ended April 30, 2011 and for each of the years in the two-year periodyear ended December 31, 2010.2010 (the Predecessor Company). In addition, we have audited the financial statement scheduleschedules for the four months ended April 30, 2011 and for each of the years in the two-year periodyear ended December 31, 2010 listed in the index appearing under Item 15 (a)(2) of the Annual Report on Form 10-K. These consolidated financial statements and financial statement schedules are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedules based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the auditour audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Angiotech Pharmaceuticals, Inc. and its subsidiaries as at December 31, 2010, and the results of theirthe Company’s operations and theirits cash flows for the four months ended April 30, 2011 and for each of the years in the two-year periodyear ended December 31, 2010 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements.
As discussed in Note 1 to the consolidated financial statements, the Company and certain of its subsidiaries filed a petition for creditor protection with the Supreme Court of British Columbia under the Companies’ Creditors Arrangement Act on January 28, 2011 and with the United States Bankruptcy Court for the District of Delaware under Chapter 15 of Title 11 of the United States Bankruptcy Code on January 30, 2011. The Company’s plan of reorganization became effective and the Company and the respective subsidiaries emerged from creditor protection on May 12, 2011. In connection with its emergence from creditor protection, the Company adopted fresh start accounting as of May 1, 2011.
(signed) PricewaterhouseCoopers LLP
Chartered Accountants
Vancouver, Canada
March 29, 2012
F-2
Table of Contents
ANGIOTECH PHARMACEUTICALS INC.
CONSOLIDATED BALANCE SHEETS
(All amounts expressed in thousands of U.S. dollars, except share data)
| | Successor Company | | | Predecessor Company | |
| | December 31, | | | December 31, | |
| | 2011 | | | 2010 | |
ASSETS | | | | | | |
Current assets | | | | | | |
Cash and cash equivalents [note 7] | | $ | 22,173 | | | $ | 33,315 | |
Short-term investments [note 8] | | 3,259 | | | 4,653 | |
Accounts receivable | | 28,238 | | | 33,494 | |
Income tax receivable | | 1,462 | | | 669 | |
Inventories [note 9] | | 34,304 | | | 34,631 | |
Deferred income taxes, current portion | | 3,995 | | | 4,102 | |
Deferred financing costs [note 16(e)] | | 0 | | | 5,611 | |
Prepaid expenses and other current assets | | 3,167 | | | 4,649 | |
Total current assets | | 96,598 | | | 121,124 | |
| | | | | | |
Property, plant and equipment [note 10] | | 39,189 | | | 46,261 | |
Intangible assets [note 11] | | 343,066 | | | 137,973 | |
Goodwill [note 3 and 11] | | 123,228 | | | 0 | |
Deferred income taxes, non-current portion | | 2,165 | | | 0 | |
Other assets [note 13] | | 3,860 | | | 640 | |
Total assets | | 608,106 | | | 305,998 | |
| | | | | | |
LIABILITIES AND SHAREHOLDERS’ EQUITY (DEFICIT) | | | | | | |
| | | | | | |
Current liabilities | | | | | | |
Accounts payable and accrued liabilities [note 12] | | 30,537 | | | 36,847 | |
Income taxes payable | | 2,023 | | | 2,255 | |
Interest payable | | 1,450 | | | 15,761 | |
Deferred revenue, current portion [note 13] | | 496 | | | 0 | |
Revolving credit facility [note 16 (f)] | | 40 | | | 10,000 | |
Debt [note 16(a) and 16(b)] | | 0 | | | 575,000 | |
Total current liabilities | | 34,546 | | | 639,863 | |
| | | | | | |
Deferred leasehold inducement [note 3] | | 0 | | | 4,785 | |
Deferred revenue, non-current portion [note 13] | | 3,771 | | | 789 | |
Deferred income taxes, non-current portion | | 92,634 | | | 31,702 | |
Other tax liabilities | | 5,729 | | | 4,367 | |
Debt [note 16(b)] | | 325,000 | | | 0 | |
Other liabilities | | 19 | | | 8,568 | |
Total non-current liabilities | | 427,153 | | | 50,211 | |
| | | | | | |
Shareholders’ equity (deficit) | | | | | | |
Predecessor share capital | | | | | 472,753 | |
Authorized: | | | | | | |
200,000,000 Common shares, without par value | | | | | | |
50,000,000 Class I Preference shares, without par value | | | | | | |
Common shares issued and outstanding: | | | | | | |
December 31, 2010 — 85,180,377 | | | | | | |
Sucessor share capital | | 203,719 | | | | |
Authorized: | | | | | | |
Unlimited number of common shares, without par value | | | | | | |
Common shares issued and outstanding: | | | | | | |
December 31, 2011 — 12,556,673 | | | | | | |
Additional paid-in capital | | 8,552 | | | 35,470 | |
Accumulated deficit | | (60,446 | ) | | (933,352 | ) |
Accumulated other comprehensive income | | (5,418 | ) | | 41,053 | |
Total shareholders’ equity (deficit) | | 146,407 | | | (384,076 | ) |
| | | | | | |
Total liabilities and shareholders’ equity (deficit) | | $ | 608,106 | | | $ | 305,998 | |
| | Successor Company | |
| | December 31, | | December 31, | |
| | 2012 | | 2011 | |
ASSETS | | | | | |
Current assets | | | | | |
Cash and cash equivalents [note 5] | | $ | 45,945 | | $ | 22,173 | |
Short-term investments [note 6] | | 424 | | 3,259 | |
Accounts receivable | | 28,786 | | 28,238 | |
Income tax receivable | | 4,769 | | 1,462 | |
Inventories [note 7] | | 46,414 | | 34,304 | |
Deferred income taxes, current portion [note 12] | | 5,885 | | 3,995 | |
Deferred financing costs, current portion [note 14(e)] | | 833 | | — | |
Prepaid expenses and other current assets | | 3,355 | | 3,167 | |
Total current assets | | 136,411 | | 96,598 | |
| | | | | |
Assets held for sale [note 8, 16] | | 1,866 | | — | |
Property, plant and equipment [note 8] | | 31,437 | | 39,189 | |
Intangible assets [note 9(a)] | | 311,443 | | 343,066 | |
Goodwill [note 9(b)] | | 124,051 | | 123,228 | |
Deferred income taxes, non-current portion [note 12] | | 1,005 | | 2,165 | |
Deferred financing costs, non-current portion [note 14(e)] | | 1,915 | | — | |
Other assets | | 274 | | 3,860 | |
Total assets | | 608,402 | | 608,106 | |
| | | | | |
LIABILITIES AND SHAREHOLDERS’ EQUITY | | | | | |
| | | | | |
Current liabilities | | | | | |
Accounts payable and accrued liabilities [note 10] | | 26,789 | | 30,537 | |
Deferred income taxes, current portion [note 12] | | — | | — | |
Income taxes payable | | 3,663 | | 2,023 | |
Interest payable | | 1,872 | | 1,450 | |
Deferred revenue, current portion [note 11] | | 22,007 | | 496 | |
Debt, current portion [note 14] | | 60,024 | | — | |
Revolving credit facility [note 14] | | — | | 40 | |
Total current liabilities | | 114,355 | | 34,546 | |
| | | | | |
Deferred revenue, non-current portion [note 11] | | 24,901 | | 3,771 | |
Deferred income taxes, non-current portion [note 12] | | 88,539 | | 92,634 | |
Other tax liabilities [note 13] | | 9,618 | | 5,729 | |
Debt, non-current portion [note 14] | | 229,413 | | 325,000 | |
Other liabilities | | 908 | | 19 | |
Total non-current liabilities | | 353,379 | | 427,153 | |
| | | | | |
Shareholders’ equity | | | | | |
Sucessor share capital | | 203,613 | | 203,719 | |
Authorized: | | | | | |
Unlimited number of common shares, without par value | | | | | |
Common shares issued and outstanding: | | | | | |
December 31, 2011 — 12,556,673 | | | | | |
December 31, 2012 - 12,547,702 | | | | | |
Additional paid-in capital | | 7,356 | | 8,552 | |
Accumulated deficit | | (66,672 | ) | (60,446 | ) |
Accumulated other comprehensive loss | | (3,629 | ) | (5,418 | ) |
Total shareholders’ equity | | 140,668 | | 146,407 | |
| | | | | |
Total liabilities and shareholders’ equity | | $ | 608,402 | | $ | 608,106 | |
Contingencies and commitments [note 21]
Subsequent events [note 27]26]
See accompanying notes to the consolidated financial statements
F-3
Table of Contents
ANGIOTECH PHARMACEUTICALS INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(All amounts expressed in thousands of U.S. dollars, except share and per share data)
(Audited)
| | Successor Company | | | Predecessor Company | | | Successor Company | | | Predecessor Company | |
| | Eight months ended | | | Four months ended | | Year ended | | Year ended | | | Year ended | | Eight months ended | | | Four months ended | | Year ended | |
| | December 31, | | | April 30, | | December 31, | | December 31, | | | December 31, | | December 31, | | | April 30, | | December 31, | |
| | 2011 | | | 2011 | | 2010 | | 2009 | | | 2012 | | 2011 | | | 2011 | | 2010 | |
REVENUE | | | | | | | | | | | | | | | | | | | | |
Product sales, net | | $ | 139,307 | | | $ | 69,198 | | $ | 211,495 | | $ | 191,951 | | | $ | 221,326 | | $ | 139,307 | | | $ | 69,198 | | $ | 211,495 | |
Royalty revenue | | 13,670 | | | 10,941 | | 34,461 | | 62,171 | | | 18,449 | | 13,670 | | | 10,941 | | 34,461 | |
License fees [note 18] | | — | | | 127 | | 286 | | 25,556 | | |
License fees [note 11(b)] | | | 4,050 | | — | | | 127 | | 286 | |
| | 152,977 | | | 80,266 | | 246,242 | | 279,678 | | | 243,825 | | 152,977 | | | 80,266 | | 246,242 | |
| | | | | | | | | | | | | | | | | | | | |
EXPENSES | | | | | | | | | | | | | | | | | | | | |
Cost of products sold | | 90,348 | | | 32,219 | | 106,304 | | 104,616 | | | 102,706 | | 90,348 | | | 32,219 | | 106,304 | |
License and royalty fees | | 264 | | | 68 | | 5,889 | | 10,431 | | | 618 | | 264 | | | 68 | | 5,889 | |
Research and development | | 14,076 | | | 5,686 | | 26,790 | | 23,701 | | | 7,056 | | 14,076 | | | 5,686 | | 26,790 | |
Selling, general and administration | | 60,424 | | | 24,846 | | 89,238 | | 81,504 | | | 70,985 | | 60,424 | | | 24,846 | | 89,238 | |
Depreciation and amortization | | 23,973 | | | 14,329 | | 33,745 | | 33,251 | | | 34,503 | | 23,973 | | | 14,329 | | 33,745 | |
Write-down of assets held for sale [note 19] | | — | | | 570 | | 1,450 | | 3,090 | | |
Write-down of property, plant and equipment [note 10] | | 4,502 | | | 215 | | 4,779 | | — | | |
Write-down of intangible assets [note 11] | | 10,850 | | | — | | 2,814 | | — | | |
Escrow settlement recovery [note 20] | | — | | | — | | (4,710 | ) | — | | |
Write-down of assets held for sale [note 17] | | | 277 | | — | | | 570 | | 1,450 | |
Write-down of property, plant and equipment [note 8] | | | 877 | | 4,502 | | | 215 | | 4,779 | |
Write-down of intangible assets [note 9] | | | — | | 10,850 | | | — | | 2,814 | |
Escrow settlement recovery [note 18] | | | — | | — | | | — | | (4,710 | ) |
| | 204,437 | | | 77,933 | | 266,299 | | 256,593 | | | 217,022 | | 204,437 | | | 77,933 | | 266,299 | |
Operating (loss) income | | (51,460 | ) | | 2,333 | | (20,057 | ) | 23,085 | | |
Operating income (loss) | | | 26,803 | | (51,460 | ) | | 2,333 | | (20,057 | ) |
| | | | | | | | | | | | | | | | | | | | |
Other income (expenses) | | | | | | | | | | | | | | | | | | | | |
Foreign exchange gain (loss) | | 1,461 | | | (646 | ) | 1,011 | | (1,612 | ) | | (751 | ) | 1,461 | | | (646 | ) | 1,011 | |
Other income (expense) | | 547 | | | 34 | | (862 | ) | (265 | ) | | 1,320 | | 547 | | | 34 | | (862 | ) |
Debt restructuring costs | | — | | | — | | (9,277 | ) | — | | | — | | — | | | — | | (9,277 | ) |
Interest expense | | (11,945 | ) | | (10,327 | ) | (40,258 | ) | (38,039 | ) | | (20,390 | ) | (11,945 | ) | | (10,327 | ) | (40,258 | ) |
Write-downs of investments [note 8] | | (2,035 | ) | | — | | (1,297 | ) | — | | |
Loan settlement gain [note 6] | | — | | | — | | 1,880 | | — | | |
Gain on disposal of Laguna Hills manufacturing facility [note 21] | | — | | | — | | 2,005 | | — | | |
Write-downs and net gains (losses) on investments [note 6] | | | (561 | ) | (2,035 | ) | | — | | (1,297 | ) |
Debt extinguishment loss [note 14] | | | (4,437 | ) | — | | | — | | — | |
Loan settlement gain [note 19] | | | — | | — | | | — | | 1,880 | |
Gain on disposal of Laguna Hills manufacturing facility [note 20] | | | — | | — | | | — | | 2,005 | |
Total other expenses | | (11,972 | ) | | (10,939 | ) | (46,798 | ) | (39,916 | ) | | (24,819 | ) | (11,972 | ) | | (10,939 | ) | (46,798 | ) |
Loss before reorganization items, gain on extinguishment of debt and settlement of other other liabilities and income taxes | | (63,432 | ) | | (8,606 | ) | (66,855 | ) | (16,831 | ) | |
Reorganization items [note 4] | | — | | | 321,084 | | — | | — | | |
Income (loss) before reorganization items, gain on extinguishment of debt and settlement of other other liabilities and income taxes | | | 1,984 | | (63,432 | ) | | (8,606 | ) | (66,855 | ) |
Reorganization items [note 3] | | | — | | — | | | 321,084 | | — | |
Gain on extinguishment of debt and settlement of other liabilities [note 3] | | — | | | 67,307 | | — | | — | | | — | | — | | | 67,307 | | — | |
(Loss) income before taxes | | (63,432 | ) | | 379,785 | | (66,855 | ) | (16,831 | ) | |
Income tax (recovery) expense [note 14] | | (2,986 | ) | | 267 | | (44 | ) | 6,037 | | |
Income (loss) before taxes | | | 1,984 | | (63,432 | ) | | 379,785 | | (66,855 | ) |
Income tax (recovery) expense [note 12] | | | 8,210 | | (2,986 | ) | | 267 | | (44 | ) |
| | | | | | | | | | | | | | | | | | | | |
Net (loss) income | | $ | (60,446 | ) | | $ | 379,518 | | $ | (66,811 | ) | $ | (22,868 | ) | | $ | (6,226 | ) | $ | (60,446 | ) | | $ | 379,518 | | $ | (66,811 | ) |
| | | | | | | | | | | | | | | | | | | | |
Basic and diluted net (loss) income per common share | | $ | (4.82 | ) | | $ | 4.46 | | $ | (0.78 | ) | $ | (0.27 | ) | | $ | (0.49 | ) | $ | (4.82 | ) | | $ | 4.46 | | $ | (0.78 | ) |
| | | | | | | | | | | | | | | | | | | | |
Basic and diluted weighted average number of common shares outstanding (in thousands) | | 12,528 | | | 85,185 | | 85,168 | | 85,130 | | | 12,791 | | 12,528 | | | 85,185 | | 85,168 | |
See accompanying notes to the consolidated financial statements
F-4
Table of Contents
Angiotech Pharmaceuticals, Inc.ANGIOTECH PHARMACEUTICALS INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ (DEFICIT) EQUITYCOMPREHENSIVE (LOSS) INCOME
(All amounts expressed in thousands of U.S. dollars, except share data)dollars)
| | Common Shares | | Additional
paid-in- | | (Accumulated
deficit) /
Retained | | Accumulated
other
comprehensive | | Comprehensive | | Total
Stockholder’s | |
| | Shares | | Amount | | capital | | Earnings | | income (loss) | | (loss) income | | (deficit) equity | |
Balance at December 31, 2008 (Predecessor) | | 85,121,983 | | $ | 472,739 | | $ | 32,107 | | $ | (843,673 | ) | $ | 38,954 | | | | $ | (299,873 | ) |
| | | | | | | | | | | | | | | |
Exercise of stock options | | 16,098 | | 3 | | | | | | | | | | 3 | |
Stock-based compensation | | | | | | 1,580 | | | | | | | | 1,580 | |
Net unrealized loss on available-for-sale securities, net of taxes ($0) | | | | | | | | | | 6,932 | | 6,932 | | 6,932 | |
Cumulative translation adjustment | | | | | | | | | | 939 | | 939 | | 939 | |
Net loss | | | | | | | | (22,868 | ) | | | (22,868 | ) | (22,868 | ) |
Comprehensive loss | | | | | | | | | | | | (14,997 | ) | | |
Balance at December 31, 2009 (Predecessor) | | 85,138,081 | | $ | 472,742 | | $ | 33,687 | | $ | (866,541 | ) | $ | 46,825 | | | | $ | (313,287 | ) |
| | | | | | | | | | | | | | | |
Exercise of stock options | | 42,296 | | 11 | | | | | | | | | | 11 | |
Stock-based compensation | | | | | | 1,783 | | | | | | | | 1,783 | |
Net unrealized loss on available-for-sale securities, net of taxes ($0) | | | | | | | | | | (3,127 | ) | (3,127 | ) | (3,127 | ) |
Cumulative translation adjustment | | | | | | | | | | (2,645 | ) | (2,645 | ) | (2,645 | ) |
Net loss | | | | | | | | (66,811 | ) | | | (66,811 | ) | (66,811 | ) |
Comprehensive loss | | | | | | | | | | | | (72,583 | ) | | |
Balance at December 31, 2010 (Predecessor) | | 85,180,377 | | $ | 472,753 | | $ | 35,470 | | $ | (933,352 | ) | $ | 41,053 | | | | $ | (384,076 | ) |
| | | | | | | | | | | | | | | |
Exercise of stock options | | 5,120 | | 1 | | | | | | | | | | 1 | |
Stock-based compensation | | | | | | 1,735 | | | | | | | | 1,735 | |
Net unrealized gain on available-for-sale securities, net of taxes ($0) | | | | | | | | | | 640 | | 640 | | 640 | |
Cumulative translation adjustment | | | | | | | | | | 2,182 | | 2,182 | | 2,182 | |
Net income | | | | | | | | 379,518 | | | | 379,518 | | 379,518 | |
Comprehensive income | | | | | | | | | | | | 382,340 | | | |
Balance at April 30, 2011 (Predecessor) | | 85,185,497 | | $ | 472,754 | | $ | 37,205 | | $ | (553,834 | ) | $ | 43,875 | | | | $ | 0 | |
| | | | | | | | | | | | | | | |
Reorganization adjustment: Cancellation of Predecessor common shares | | (85,185,497 | ) | (472,754 | ) | | | 472,754 | | | | | | 0 | |
Reorganization adjustment: Issuance of Successor common shares | | 12,500,000 | | 202,948 | | | | | | | | | | 202,948 | |
Fresh start accounting adjustments: Elimination of Predecessor additional-paid-in-capital, accumulated deficit and accumulated other comprehensive income | | | | | | (37,205 | ) | 81,080 | | (43,875 | ) | | | 0 | |
Balance at May 1, 2011 (Successor) | | 12,500,000 | | $ | 202,948 | | $ | 0 | | $ | 0 | | $ | 0 | | | | $ | 202,948 | |
| | | | | | | | | | | | | | | |
Vesting of restricted stock | | 91,146 | | 1,291 | | (1,291 | ) | | | | | | | 0 | |
Share capital repurchases | | (34,473 | ) | (520 | ) | | | | | | | | | (520 | ) |
Stock-based compensation | | | | | | 9,843 | | | | | | | | 9,843 | |
Net unrealized loss on available-for-sale securities, net of taxes ($0) | | | | | | | | | | (2,035 | ) | (2,035 | ) | (2,035 | ) |
Reclassification of other-than-temporary impairment loss on available-for-sale securities, net of taxes ($0) | | | | | | | | | | 2,035 | | 2,035 | | 2,035 | |
Cumulative translation adjustment | | | | | | | | | | (5,418 | ) | (5,418 | ) | (5,418 | ) |
Net loss | | | | | | | | (60,446 | ) | | | (60,446 | ) | (60,446 | ) |
Comprehensive loss | | | | | | | | | | | | (65,864 | ) | | |
Balance at December 31, 2011 (Successor) | | 12,556,673 | | $ | 203,719 | | $ | 8,552 | | $ | (60,446 | ) | $ | (5,418 | ) | | | $ | 146,407 | |
| | Successor Company | | | Predecessor Company | |
| | Year ended | | Eight months ended | | | Four months ended | | Year ended | |
| | December 31, | | December 31, | | | April 30, | | December 31, | |
| | 2012 | | 2011 | | | 2011 | | 2010 | |
Net (loss) income | | $ | (6,226 | ) | $ | (60,446 | ) | | $ | 379,518 | | $ | (66,811 | ) |
Other comprehensive (loss) income: | | | | | | | | | | |
Net unrealized (loss) gain on available-for-sale securities, net of taxes ($0) | | — | | (2,035 | ) | | 640 | | (3,127 | ) |
Reclassification of other-than-temporary impairment loss on available-for-sale securities to earnings, net of taxes ($0) | | — | | 2,035 | | | | | | |
Cumulative translation adjustment | | 1,789 | | (5,418 | ) | | 2,182 | | (2,645 | ) |
Other comprehensive income (loss) | | 1,789 | | (5,418 | ) | | 2,822 | | (5,772 | ) |
Comprehensive (loss) income | | $ | (4,437 | ) | $ | (65,864 | ) | | $ | 382,340 | | $ | (72,583 | ) |
See accompanying notes to the consolidated financial statements
F-5
Table of Contents
ANGIOTECH PHARMACEUTICALS INC.Angiotech Pharmaceuticals, Inc.
CONSOLIDATED STATEMENTSTATEMENTS OF CASH FLOWSSHAREHOLDERS’ (DEFICIT) EQUITY
(All amounts expressed in thousands of U.S. dollars)dollars, except share data)
(Audited)
| | Successor Company | | | Predecessor Company | |
| | Eight months ended | | | Four months ended | | Year ended | | Year ended | |
| | December 31, | | | April 30, | | December 31, | | December 31, | |
| | 2011 | | | 2011 | | 2010 | | 2009 | |
| | | | | | | | | | |
OPERATING ACTIVITIES | | | | | | | | | | |
Net income (loss) | | $ | (60,446 | ) | | $ | 379,518 | | $ | (66,811 | ) | $ | (22,868 | ) |
Adjustments to reconcile net loss to cash provided by operating activities: | | | | | | | | | | |
Depreciation and amortization | | 26,350 | | | 15,518 | | 37,625 | | 37,026 | |
Loss on disposition of property, plant and equipment | | 18 | | | — | | 615 | | 369 | |
Gain on disposal of Laguna Hills manufacturing facility [note 21] | | — | | | — | | (2,005 | ) | — | |
Reorganization items [note 4] | | — | | | (321,084 | ) | — | | — | |
Non-cash cost of product sold adjustment from fresh start accounting | | 22,616 | | | — | | — | | — | |
Gain on extinguishment of debt and settlement of other liabilities [note 3] | | — | | | (67,307 | ) | — | | — | |
Write-down of intangible assets [note 11] | | 10,850 | | | — | | 2,814 | | — | |
Write-down of assets held for sale [note 19] | | — | | | 570 | | 1,450 | | 3,090 | |
Write-down of property, plant and equipment [note 10] | | 4,502 | | | 215 | | 4,779 | | — | |
Write-downs of investments [note 8] | | 2,035 | | | — | | 1,297 | | — | |
Write-downs of deferred financing charges [note 16(e)] | | — | | | — | | 291 | | 643 | |
Loan settlement gain [note 6] | | — | | | — | | (1,880 | ) | — | |
Deferred leasehold amortization | | — | | | (1,300 | ) | — | | — | |
Deferred leasehold inducements | | — | | | — | | 2,700 | | — | |
Deferred income taxes | | (7,080 | ) | | (486 | ) | (3,837 | ) | (4,321 | ) |
Deferred revenue | | 314 | | | 1,090 | | (211 | ) | (211 | ) |
Stock-based compensation expense | | 9,844 | | | 364 | | 1,783 | | 1,579 | |
Non-cash interest expense | | — | | | 1,523 | | 6,175 | | 2,788 | |
Other | | 174 | | | 48 | | (539 | ) | (639 | ) |
Net change in non-cash working capital items relating to operations, excluding non-cash cost of product sold adjustment [note 25] | | 13,840 | | | (10,089 | ) | (5,855 | ) | 4,515 | |
| | | | | | | | | | |
Cash provided by (used in) operating activities before reorganization items | | 23,017 | | | (1,420 | ) | (21,609 | ) | 21,971 | |
| | | | | | | | | | |
OPERATING CASH FLOWS FROM REORGANIZATION ACTIVITIES | | | | | | | | | | |
Professional fees paid for services rendered in connection with the Creditor Protection Proceedings | | (8,105 | ) | | (10,055 | ) | — | | — | |
Key Employment Incentive Plan fee | | (551 | ) | | — | | — | | — | |
Director’s and officer’s insurance | | — | | | (1,382 | ) | — | | — | |
| | | | | | | | | | |
Cash used in reorganization activities | | (8,656 | ) | | (11,437 | ) | — | | — | |
| | | | | | | | | | |
Cash provided by (used in) operating activities | | 14,361 | | | (12,857 | ) | (21,609 | ) | 21,971 | |
| | | | | | | | | | |
INVESTING ACTIVITIES | | | | | | | | | | |
Purchase of property, plant and equipment | | (1,002 | ) | | (945 | ) | (5,726 | ) | (4,366 | ) |
Purchase of intangible assets | | — | | | — | | — | | (2,500 | ) |
Proceeds from disposition of property, plant and equipment | | 2,623 | | | — | | 1,272 | | — | |
Proceeds from disposition of Laguna Hills manufacturing facility [note 20] | | — | | | — | | 2,005 | | — | |
Loans advanced | | — | | | — | | (1,015 | ) | (1,573 | ) |
Other | | — | | | — | | (231 | ) | 252 | |
| | | | | | | | | | |
Cash provieded by (used in) investing activities | | 1,621 | | | (945 | ) | (3,695 | ) | (8,187 | ) |
| | | | | | | | | | |
FINANCING ACTIVITIES | | | | | | | | | | |
Share capital issued and/or repurchased | | (520 | ) | | 1 | | — | | — | |
Deferred financing charges and costs | | (49 | ) | | (1,278 | ) | (669 | ) | (3,403 | ) |
Advances on Revolving Credit Facility | | 17,400 | | | 12,018 | | 10,000 | | — | |
Repayments on Revolving Credit Facility | | (39,378 | ) | | — | | — | | — | |
Proceeds from stock options exercised | | — | | | — | | 11 | | 3 | |
| | | | | | | | | | |
Cash provided by (used in) financing activities before reorganization activities | | (22,547 | ) | | 10,741 | | 9,342 | | (3,400 | ) |
| | | | | | | | | | |
FINANCING CASH FLOWS FROM REORGANIZATION ACTIVITIES | | | | | | | | | | |
Deferred financing costs | | (1,408 | ) | | — | | — | | — | |
| | | | | | | | | | |
Cash provided by (used in) financing activities | | (23,955 | ) | | 10,741 | | 9,342 | | (3,400 | ) |
| | | | | | | | | | |
Effect of exchange rate changes on cash and cash equivalents | | (76 | ) | | (32 | ) | (265 | ) | 206 | |
Net (decrease) increase in cash and cash equivalents | | (8,049 | ) | | (3,093 | ) | (16,227 | ) | 10,590 | |
Cash and cash equivalents, beginning of period | | 30,222 | | | 33,315 | | 49,542 | | 38,952 | |
| | | | | | | | | | |
Cash and cash equivalents, end of period | | $ | 22,173 | | | $ | 30,222 | | $ | 33,315 | | $ | 49,542 | |
Supplemental note disclosure [note 25]
| | Common Shares | | Additional
paid-in- | | (Accumulated
deficit) /
Retained | | Accumulated
other
comprehensive | | Total
Shareholder’s | |
| | Shares | | Amount | | capital | | Earnings | | income (loss) | | (deficit) equity | |
Balance at December 31, 2009 (Predecessor) | | 85,138,081 | | $ | 472,742 | | $ | 33,687 | | $ | (866,541 | ) | $ | 46,825 | | $ | (313,287 | ) |
| | | | | | | | | | | | | |
Exercise of stock options | | 42,296 | | 11 | | | | | | | | 11 | |
Stock-based compensation | | | | | | 1,783 | | | | | | 1,783 | |
Net loss | | | | | | | | (66,811 | ) | | | (66,811 | ) |
Other comprehensive loss | | | | | | | | | | (5,772 | ) | (5,772 | ) |
Balance at December 31, 2010 (Predecessor) | | 85,180,377 | | $ | 472,753 | | $ | 35,470 | | $ | (933,352 | ) | $ | 41,053 | | $ | (384,076 | ) |
| | | | | | | | | | | | | |
Exercise of stock options | | 5,120 | | 1 | | | | | | | | 1 | |
Stock-based compensation | | | | | | 1,735 | | | | | | 1,735 | |
Net income | | | | | | | | 379,518 | | | | 379,518 | |
Other comprehensive income | | | | | | | | | | 2,822 | | 2,822 | |
Balance at April 30, 2011 (Predecessor) | | 85,185,497 | | $ | 472,754 | | $ | 37,205 | | $ | (553,834 | ) | $ | 43,875 | | $ | 0 | |
| | | | | | | | | | | | | |
Reorganization adjustment: Cancellation of Predecessor common shares | | (85,185,497 | ) | (472,754 | ) | | | 472,754 | | | | — | |
Reorganization adjustment: Issuance of Successor common shares | | 12,500,000 | | 202,948 | | | | | | | | 202,948 | |
Fresh start accounting adjustments: Elimination of Predecessor additional-paid-in-capital, accumulated deficit and accumulated other comprehensive income | | | | | | (37,205 | ) | 81,080 | | (43,875 | ) | — | |
Balance at May 1, 2011 (Successor) | | 12,500,000 | | $ | 202,948 | | $ | 0 | | $ | 0 | | $ | 0 | | $ | 202,948 | |
| | | | | | | | | | | | | |
Vesting of restricted stock | | 91,146 | | 1,291 | | (1,291 | ) | | | | | — | |
Share capital repurchases | | (34,473 | ) | (520 | ) | | | | | | | (520 | ) |
Stock-based compensation | | | | | | 9,843 | | | | | | 9,843 | |
Net loss | | | | | | | | (60,446 | ) | | | (60,446 | ) |
Other comprehensive loss | | | | | | | | | | (5,418 | ) | (5,418 | ) |
Balance at December 31, 2011 (Successor) | | 12,556,673 | | $ | 203,719 | | $ | 8,552 | | $ | (60,446 | ) | $ | (5,418 | ) | $ | 146,407 | |
| | | | | | | | | | | | | |
Vesting of restricted stock | | 65,403 | | 787 | | (787 | ) | | | | | — | |
Share capital repurchases | | (74,374 | ) | (893 | ) | 12 | | | | | | (881 | ) |
Cash settlement of awards related to Termination Settlement Agreement [note 21 (b)] | | | | | | (3,241 | ) | | | | | (3,241 | ) |
Stock-based compensation | | | | | | 2,820 | | | | | | 2,820 | |
Net loss | | | | | | | | (6,226 | ) | | | (6,226 | ) |
Other comprehensive income | | | | | | | | | | 1,789 | | 1,789 | |
Balance at December 31, 2012 (Successor) | | 12,547,702 | | $ | 203,613 | | $ | 7,356 | | $ | (66,672 | ) | $ | (3,629 | ) | $ | 140,668 | |
See accompanying notes to the consolidated financial statements
F-6
Table of Contents
Angiotech Pharmaceuticals, Inc.ANGIOTECH PHARMACEUTICALS INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(All amounts expressed in thousands of U.S. dollars)
(Audited)
| | Successor Company | | | Predecessor Company | |
| | Year ended | | Eight months ended | | | Four months ended | | Year ended | |
| | December 31, | | December 31, | | | April 30, | | December 31, | |
| | 2012 | | 2011 | | | 2011 | | 2010 | |
| | | | | | | | | | |
OPERATING ACTIVITIES | | | | | | | | | | |
Net income (loss) | | $ | (6,226 | ) | $ | (60,446 | ) | | $ | 379,518 | | $ | (66,811 | ) |
Adjustments to reconcile net loss to cash provided by operating activities: | | | | | | | | | | |
Depreciation and amortization | | 38,647 | | 26,350 | | | 15,518 | | 37,625 | |
(Gain)/Loss on disposition of property, plant and equipment | | (480 | ) | 18 | | | — | | 615 | |
Gain on disposal of Laguna Hills manufacturing facility [note 20] | | — | | — | | | — | | (2,005 | ) |
Reorganization items [note 4] | | — | | — | | | (321,084 | ) | — | |
Non-cash cost of product sold adjustment from fresh start accounting | | — | | 22,616 | | | — | | — | |
Debt extinguishment loss [note 14] | | 4,437 | | — | | | — | | — | |
Gain on extinguishment of debt and settlement of other liabilities [note 3] | | — | | — | | | (67,307 | ) | — | |
Write-down of intangible assets [note 11] | | — | | 10,850 | | | — | | 2,814 | |
Write-down of assets held for sale [note 17] | | 277 | | — | | | 570 | | 1,450 | |
Write-down of property, plant and equipment [note 10] | | 877 | | 4,502 | | | 215 | | 4,779 | |
Impairment and unrealized losses on investments [note 8] | | 561 | | 2,035 | | | — | | 1,297 | |
Loan settlement gain [note 6] | | — | | — | | | — | | (1,880 | ) |
Deferred leasehold amortization | | — | | — | | | (1,300 | ) | — | |
Deferred leasehold inducements | | — | | — | | | — | | 2,700 | |
Deferred income taxes | | (1,053 | ) | (7,080 | ) | | (486 | ) | (3,837 | ) |
Deferred revenue | | (5,210 | ) | 314 | | | 1,090 | | (211 | ) |
Cash consideration classified as deferred revenue | | 4,452 | | — | | | — | | — | |
Quill consideration [note 11(b)] | | 47,000 | | — | | | — | | — | |
Settlement of termination payments | | (3,241 | ) | — | | | — | | — | |
Stock-based compensation expense | | 2,820 | | 9,844 | | | 364 | | 1,783 | |
Non-cash rent expense | | 1,106 | | — | | | — | | 923 | |
Non-cash interest expense | | 442 | | — | | | 1,523 | | 6,175 | |
Other | | (187 | ) | 174 | | | 48 | | (248 | ) |
Net change in non-cash working capital items relating to operations, excluding non-cash cost of product sold adjustment [note 25] | | (17,790 | ) | 13,840 | | | (10,089 | ) | (6,778 | ) |
| | | | | | | | | | |
Cash provided by (used in) operating activities before reorganization items | | 66,432 | | 23,017 | | | (1,420 | ) | (21,609 | ) |
| | | | | | | | | | |
OPERATING CASH FLOWS FROM REORGANIZATION ACTIVITIES | | | | | | | | | | |
Professional fees paid for services rendered in connection with the Creditor Protection Proceedings | | — | | (8,105 | ) | | (10,055 | ) | — | |
Key Employment Incentive Plan fee | | — | | (551 | ) | | — | | — | |
Director’s and officer’s insurance | | — | | — | | | (1,382 | ) | — | |
| | | | | | | | | | |
Cash used in reorganization activities | | — | | (8,656 | ) | | (11,437 | ) | — | |
| | | | | | | | | | |
Cash provided by (used in) operating activities | | 66,432 | | 14,361 | | | (12,857 | ) | (21,609 | ) |
| | | | | | | | | | |
INVESTING ACTIVITIES | | | | | | | | | | |
Purchase of property, plant and equipment | | (2,115 | ) | (1,002 | ) | | (945 | ) | (5,726 | ) |
Proceeds from disposition of short term investments | | 2,273 | | — | | | — | | — | |
Proceeds from disposition of property, plant and equipment | | 976 | | 2,623 | | | — | | 1,272 | |
Proceeds from disposition of Laguna Hills manufacturing facility [note 20] | | — | | — | | | — | | 2,005 | |
Loans advanced | | — | | — | | | — | | (1,015 | ) |
Other | | — | | — | | | — | | (231 | ) |
| | | | | | | | | | |
Cash provieded by (used in) investing activities | | 1,134 | | 1,621 | | | (945 | ) | (3,695 | ) |
| | | | | | | | | | |
FINANCING ACTIVITIES | | | | | | | | | | |
Share capital issued and/or repurchased | | (881 | ) | (520 | ) | | 1 | | — | |
Deferred financing charges and costs | | (3,191 | ) | (49 | ) | | (1,278 | ) | (669 | ) |
Advances on Revolving Credit Facility | | — | | 17,400 | | | 12,018 | | 10,000 | |
Repayments on Revolving Credit Facility | | (39 | ) | (39,378 | ) | | — | | — | |
Repayments of Floating Rate Notes | | (40,000 | ) | — | | | — | | — | |
Proceeds from stock options exercised | | — | | — | | | — | | 11 | |
| | | | | | | | | | |
Cash provided by (used in) financing activities before reorganization activities | | (44,111 | ) | (22,547 | ) | | 10,741 | | 9,342 | |
| | | | | | | | | | |
FINANCING CASH FLOWS FROM REORGANIZATION ACTIVITIES | | | | | | | | | | |
Deferred financing costs | | — | | (1,408 | ) | | — | | — | |
| | | | | | | | | | |
Cash provided by (used in) financing activities | | (44,111 | ) | (23,955 | ) | | 10,741 | | 9,342 | |
| | | | | | | | | | |
Effect of exchange rate changes on cash and cash equivalents | | 317 | | (76 | ) | | (32 | ) | (265 | ) |
Net (decrease) increase in cash and cash equivalents | | 23,772 | | (8,049 | ) | | (3,093 | ) | (16,227 | ) |
Cash and cash equivalents, beginning of period | | 22,173 | | 30,222 | | | 33,315 | | 49,542 | |
| | | | | | | | | | |
Cash and cash equivalents, end of period | | $ | 45,945 | | $ | 22,173 | | | $ | 30,222 | | $ | 33,315 | |
Supplemental note disclosure [note 24]
See accompanying notes to the consolidated financial statements
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Table of Contents
ANGIOTECH PHARMACEUTICALS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
1. DESCRIPTION OF THE BUSINESS AND BASIS OF PRESENTATION
Nature of operations
Angiotech Pharmaceuticals, Inc. (“Angiotech” or the “Company”) is incorporated under the Business Corporations Act (British Columbia). The Company develops, manufactures and markets medical device products and technologies. Angiotech’s products are designed to serve physicians and patients primarily in the areas of interventional oncology, wound closure and ophthalmology. The Company generates revenue through sales of these products, as well as through royalties derived from sales by its partners of products, which utilize certain of the Company’s proprietary technologies. Accordingly, the Company currently operates in two business segments: Medical Device TechnologiesProducts and Licensed Technologies.
BASIS OF PRESENTATION
These audited consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America (“U.S. GAAP”) and pursuant to the rules and regulations of the U.S. Securities and Exchange Commission (“SEC”). In Management’s opinion, all adjustments (which include reclassification and normal recurring adjustments), necessary to present fairly the consolidated balance sheets, consolidated statements of operations, consolidated statements of shareholders’’ equity (deficit), consolidated statements of comprehensive (loss) income and consolidated statements of cash flows at December 31, 2012 and for all periods presented, have been made. All amounts herein are expressed in U.S. dollars and all tabular amounts are expressed in thousands of U.S. dollars, except share and per share data, unless otherwise noted.
On May 12, 2011 (the “Plan Implementation Date” or the “Effective Date”), Angiotech implemented a recapitalization transaction that, among other things, eliminated its $250 million 7.75% Senior Subordinated Notes due in 2014 (“Subordinated Notes”) and $16 million of related interest obligations in exchange for new common shares of Angiotech (the “Recapitalization Transaction”). In connection with the execution of this Recapitalization Transaction, on January 28, 2011, Angiotech and as discussed below,certain of its subsidiaries voluntarily filed for creditor protection under the Companies’ Creditors Arrangement Act (“CCAA”)in Canada and Chapter 15 of Title 11 of the Bankruptcy Code in the U.S (the “Creditor Protection Proceedings”).
Upon emergence from Creditor Protection Proceedings and completion of the Recapitalization Transaction on the Effective Date, the Company adopted fresh startwas required to adopt fresh-start accounting in accordance with ASC No. 852 — Reorganization based on the following conditions being met: (i) total post-petition liabilities and allowed claims exceeded the reorganization value, which resulted from the Recapitalization Transaction; and (ii) pre-petition shareholders received less than 50% of the new common shares issued under the reorganization plan, thereby resulting in a substantive change in control. The Company applied fresh-start accounting on April 30, 2011 (the “Convenience Date”). after concluding that the operating results between the Convenience Date and the Effective Date did not result in a material difference. Given that the reorganization and adoption of fresh-start accounting resulted in a new entity for financial reporting purposes, the Company is referred to as the “Predecessor Company” for all periods preceding the Convenience Date and the “Successor Company” for all periods subsequent to the Convenience Date.
RECAPITALIZATION TRANSACTION AND EMERGENCE FROM CREDITOR PROTECTION PROCEEDINGS
Over Overall, the past several years,implementation of fresh-start accounting resulted in: (i) a comprehensive revaluation of Predecessor Company’s assets and liabilities to their estimated fair values; (ii) the elimination of the Predecessor Company’s royalty revenues from salesdeficit, additional paid-in-capital and accumulated other comprehensive income balances; and (iii) reclassification of TAXUS® coronary stent systems (“TAXUS”) by our partner Boston Scientific Corporation (“BSC”), declined significantly. These declines ledcertain balances. Given these changes are material to significant constraints onAngiotech’s consolidated financial statements; the Predecessor Company’s liquidity, working capital and capital resources, which adversely impacted its ability to continue to support its business initiatives and service debt obligations.
As a result, after extensively exploring a range of financial and strategic alternatives, on January 28, 2011 Angiotech, 0741693 B.C. Ltd., Angiotech International Holdings, Corp., Angiotech Pharmaceuticals (US), Inc., American Medical Instruments Holdings, Inc., NeuColl, Inc., Angiotech BioCoatings Corp., Afmedica, Inc., Quill Medical, Inc., Angiotech America, Inc., Angiotech Florida Holdings, Inc., B.G. Sulzle, Inc., Surgical Specialties Corporation, Angiotech Delaware, Inc., Medical Device Technologies, Inc., Manan Medical Products, Inc. and Surgical Specialties Puerto Rico, Inc. (collectively, the “Angiotech Entities”) voluntarily filed for creditor protection (the “CCAA Proceedings”) with the Supreme Court of British Columbia (the “Canadian Court”) under the Companies’ Creditors Arrangement Act (Canada) (the “CCAA”) to implement the Recapitalization Transaction through a plan of compromise or arrangement (as amended, supplemented or restated from time to time, the “CCAA Plan”). In order to have the CCAA Proceedings recognized in the United States, on January 30, 2011, the Angiotech Entities commenced proceedings under Chapter 15 of Title 11 of the United States Code (the “U.S. Bankruptcy Code”) in the United States Bankruptcy Court (the U.S. Court) for the District of Delaware (together with the CCAA Proceedings, the “Creditor Protection Proceedings”).
During the Creditor Protection Proceedings, the stay of proceedings granted by the Canadian Court prevented all parties from commencing or continuing any action, suit or proceeding against the Angiotech Entities. In addition, Alvarez and Marsal Canada, Inc. was appointed the monitor (the “Monitor”) over the Angiotech Entities’ business and financial affairs. Throughout the Creditor Protection Proceedings, the Monitor provided restructuring advice and reported information about the Predecessor Company’s financial and operating position to the Canadian Court on a regular basis. On January 13, 2011 and March 3, 2011, respectively, the Predecessor Company’s common shares were delisted from the NASDAQ Stock Market and the Toronto Stock Exchange.
On April 4, 2011, a meeting was held for creditors whose obligations were compromised under the CCAA Plan (“Affected Creditors”) to vote for or against the resolution approving the CCAA Plan. The CCAA Plan was approved by 100% of the Affected Creditors, whose votes were registered, and sanctioned by the order of the Canadian Court on April 6, 2011. This order was subsequently recognized by the U.S. Court on April 7, 2011. Affected Creditors who did not file a proof of claim in accordance with the procedure for the adjudication, resolution and determination of claims established by order of the Canadian Court on February 17, 2011 (the “Claims Procedure Order”) had their claims forever barred and extinguished and were not permitted to receive distributions under the CCAA Plan. On the Plan Implementation Date, all of the existing common shares and options of the Predecessor Company were cancelled without payment or consideration therefore and the Subordinated Noteholders’ claims of $266 million were settled for 12,500,000 new common sharesresults of the Successor Company issuedmay not be comparable in accordance with the termscertain respects to those of the CCAA Plan. All other Affected Creditors elected, or were deemed to have elected, for cash settlement of their claims. As a result, the $4.5 million of distribution
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claims of Affected Creditors (excluding Subordinated Noteholders) were settled for $0.4 million in cash. For more detail on additional transactions that were consummated as part of the CCAA Plan on the Plan Implementation Date, refer to note 3.
On February 7, 2011, the Predecessor Company and certain of its subsidiaries entered into a definitive agreement with Wells Fargo Capital Finance, LLC (“Wells Fargo”) to secure a $28.0 million debtor-in-possession credit facility (the “DIP Facility”). The DIP Facility provided the Predecessor Company with liquidity for working capital, general corporate purposes and expenses during the implementation of the CCAA Plan. On the Plan Implementation Date, the DIP Facility was repaid and terminated; and the Predecessor Company entered into a new credit facility (as amended, the “Revolving Credit Facility”) with Wells Fargo, which provides for potential borrowings up to $28 million (see note 16(f)). The Predecessor Company incurred approximately $1.5 million in fees to obtain and complete the Revolving Credit Facility.
During the four months ended April 30, 2011, the Predecessor Company incurred approximately $17.9 million of professional fees (see note 4). These fees were paid to the Monitor as well as the Predecessor Company’s and the Consenting Noteholders’ financial and legal advisors to assist in the execution and completion of the Recapitalization Transaction.
On the Plan Implementation Date, the Monitor delivered a certificate (the “Monitor’s Certificate”) to the Angiotech Entities and the Subordinated Noteholders’ advisors confirming that all steps, compromises, transactions, arrangements, releases and reorganizations were satisfactorily implemented in accordance with the provisions of the CCAA Plan (refer to note 3 for more detailed information). On May 12, 2011, upon the close of business, following the filing of the Monitor’s Certificate with the Canadian Court and the implementation of the CCAA Plan, the Angiotech Entities emerged from Creditor Protection Proceedings. As a result, the charges on the Angiotech Entities’ assets, property and undertaking were terminated, discharged and released. In addition, certain parties, including the Angiotech Entities, Monitor, Subordinated Noteholders, Wells Fargo, advisors, auditors, indenture trustees, present and former shareholders, directors, and officers; were released and discharged from certain claims, including without limitation, all and any demands, obligations, actions, judgments, orders and claims related to or associated with the Creditor Protection Proceedings, the implementation of the CCAA Plan and the Recapitalization Transaction.Company.
LIQUIDITY RISK
Liquidity risk is the risk that the Successor Company will encounter difficulty in meeting its contractual obligations and financial liabilities. Although Angiotech has completedliabilities in the Recapitalization Transaction and emerged from its Creditor Protection Proceedings as described above, it continues to face a numbernormal course of risks and uncertainties that may adversely impact its ability to generate sufficient future cash flows from operations to meet its contractual obligations and support capital expenditures and other initiatives. These risks and uncertainties may continue to materially impactbusiness. As at December 31, 2012, the Successor Company’s liquidity position, cash flows and future operating results throughout 2012 and the foreseeable future. The more significant risks and uncertainties have been summarized as follows:
·The Successor Company’s most significant liquidity risk relates to its financial liability is its $325liabilities which include $229.4 million of new9% Senior Notes due December 1, 2016 (the “Senior Notes”) and $60.0 million of Senior Floating Rate Notes (the “New Floating Rate Notes”) due December 1, 2013 (see notes 3(the “New Notes”). On March 25, 2013, Angiotech announced that it entered into a definitive agreement to sell certain of its subsidiaries, comprising its Interventional Products Business to Argon Medical Devices, Inc. a Delaware corporation (“Argon”), which is a portfolio company of RoundTable Healthcare Partners (“RoundTable”), for $362.5 million in cash consideration. Subject to various conditions, the transaction is expected to close prior to the end of April 2013. The cash consideration from this transaction will be used to repay all outstanding debt obligations under the New Notes and 16(b)). During the eight months ended December 31, 2011, the Successor Company incurred $11.1 million of interest expenseSenior Notes. For more detailed information on the New Floating Rate Notes. The interest ratesignificant terms and conditions contemplated by this transaction, refer to note 26 — Subsequent Events. For more information on the Company’s Senior Notes and New Floating Rate Notes, resets quarterlyrefer to an interest rate of 3-month London Interbank Offered Rate (“LIBOR”note 14.
As described in note 14, the indenture governing the Senior Notes (the “Senior Notes Indenture”) plus 3.75%, subject to a LIBOR floor of 1.25%. The New Floating Rate Notes bore an interest rate of 5.0% on December 31, 2011 (December 31, 2010 — 4.1%). An increase in LIBOR could impactcontains various restrictive covenants which, among other things, limit the Successor Company’s ability to service its future interest obligations owing under the New Floating Rate Notes. Furthermore, there is no assurance that the Successor Company will be able to refinance the New Floating Rate Notes when they become due on December 1, 2013.
·The Successor Company has a $28 million Revolving Credit Facilityincur certain liens, incur additional debt, assume certain guarantees, engage in capital transactions, sell or transfer assets, pay dividends, and conduct transactions with Wells Fargo (see note 16(f)). As at December 31, 2011, the Successor Company had a nominal amount outstanding under the Revolving Credit Facility, $2.6 million in secured letters of credit issued under the Revolving Credit Facility and $21.3 million of available borrowing capacity. During the eight months ended December 31, 2011, the Successor Company incurred $0.7 million of interest expense on borrowings and repaid $22.0 million under the Revolving Credit Facility. The Successor Company may incur further interest charges on its future borrowings under the Revolving Credit Facility should it choose to draw on the facility in the future. As discussed in note 16(f), utilization of the Revolving Credit Facility is subject to a borrowing base formula based on the value of certain eligible inventory, accounts receivable, real property, securities and intellectual property, net of applicable reserves. The utilization of the Revolving Credit Facility is also subject to certain restrictive covenants pertaining to operations and the maintenance of minimum levels of Adjusted EBITDA, liquidity and fixed charge coverage ratios. While the Successor Company is currently in compliance with the applicable minimum levels of Adjusted EBITDA, liquidity and fixed charge coverage covenants, there is no assurance that it will continue to comply with the covenants specified under the Revolving Credit Facility and future borrowing arrangements in 2012 and beyond. A breach of these covenants and failure to obtain waivers to cure any further breaches of the covenants and restrictions set forthaffiliates or
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under the Revolving Credit Facility may limit the Successor Company’s ability to obtain additional advances or result in demands for accelerated repayment.
·Angiotech has a historyTable of reporting operating losses. For the eight months ended December 31, 2011, the Successor Company incurred net losses of $60.4 million. In addition, for the eight months ended December 31, 2011, Angiotech’s cash resources decreased by $8.0 million; of which $8.7 million was used to fund the reorganization activities of the Predecessor Company; $39.4 million was used to repay amounts owing under the Revolving Credit Facility and $1.5 million was used to secure the Successor Company’s Revolving Credit Facility upon emergence from Creditor Protection Proceedings. These cash outflows were partly offset by the $17.4 million of advances drawn under the Revolving Credit Facility, $22.5 million of funds generated from operating activities before reorganization items and $1.6 million generated from investing activities. Further operating losses or future negative operating cash flows would adversely impact the Successor Company’s liquidity position and its ability to meet its future obligations.Contents
The Successor Company’s ability to maintain and sustain its future operations will depend upon its ability to: (i) refinance, restructure, or amend termsother entities. In the event of its existing debt obligations, most importantly its New Floating Ratedefault, the Senior Notes prior to maturity in December 2013; (ii) remain in compliance with its debt covenants; (iii) achieve revenue growth and improve gross margins; and (v) achieve greater operating efficiencies or reduce expenses.
The Successor Company’s future plans and current initiatives to manage its operating and liquidity risks include, but are not limited toIndenture would permit the following:
·Potential utilizationholders of the Revolving Credit Facility;
·Continued exploration of various other strategic and financial alternatives, including but not limitedSenior Notes to raising new equityexercise their rights to demand or debt capital or exploring sales of various assets or businesses;
·Continued evaluation of potential cost savings in the budgets and forecasts for certain sales and marketing activities and certain research and development activities; and
·Implementation of selected gross margin improvement initiatives.accelerate repayment.
Management continues to closely monitor and manage liquidity by regularly preparing rolling cash flow forecasts, monitoring the condition and value of assets available to be used as security in financing arrangements, seeking flexibility in financing arrangements and maintaining processes to ensure compliance with the terms of its financing arrangements.
While managementManagement believes that it has developed planned courses of action and identified other opportunities to mitigate the operating and liquidity risks outlined above, there is no assurance that the Successor Company will be able to complete any or all of the plans or initiatives that have been identified or obtainmaintain sufficient liquidity to execute its business plan. Furthermore, there may be other material risks and uncertainties that may impact the Successor Company’s liquidity position that have not yet been identified.
BASIS OF PRESENTATION AND FRESH-START ACCOUNTING
These audited consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America (“U.S. GAAP”) and pursuant to the rules and regulations of the U.S. Securities and Exchange Commission (“SEC”). In management’s opinion, all adjustments (which include reclassification and normal recurring adjustments), necessary to present fairly the consolidated balance sheets, consolidated statements of operations, consolidated statements of stockholders’ equity (deficit) and consolidated statements of cash flows at December 31, 2011 and for all periods presented, have been made. All amounts herein are expressed in U.S. dollars and all tabular amounts are expressed in thousands of U.S. dollars, except share and per share data, unless otherwise noted.
In connection with the completion of the Recapitalization Transaction and emergence from Creditor Protection Proceedings, the Predecessor Company was required to adopt fresh-start accounting under ASC No. 852 — Reorganization based on the following conditions being met: (i) our total post-petition liabilities and allowed claims exceeded the Successor Company’s reorganization value, which resulted from the Recapitalization Transaction; and (ii) pre-petition stockholders received less than 50% of the new common shares issued under the CCAA Plan, thereby resulting in a substantive change in control.
Management elected to apply fresh-start accounting on the Convenience Date of April 30, 2011 after concluding that operating results between the Convenience Date and the Effective Date did not result in a material difference. Material adjustments resulting from the reorganization and the application of fresh-start accounting were therefore reflected in the May 1, 2011 consolidated balance sheet and the consolidated statements of operations for the four months ended April 30, 2011. Cash payments of $8.7 million made in May 2011, related to the Recapitalization Transaction, were reflected in the period subsequent to the Convenience Date.
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Upon implementation of fresh-starting accounting, Angiotech comprehensively revalued its assets and liabilities and eliminated its deficit, additional paid-in-capital and accumulated other comprehensive income balances (see note 3). Debt and equity were also re-measured based on the reorganization value, being the fair value of the entity before considering liabilities, which were substantively derived from the Successor Company’s financial projections. As the estimated enterprise value calculated for the purposes of fresh start accounting continues to be dependent on the achievement of future financial results and various assumptions, there is no assurance these financial projections will be realized to support the estimated enterprise value.
Given that the reorganization and adoption of fresh-start accounting resulted in a new entity for financial reporting purposes, the consolidated financial statements of the Successor Company will not be comparable in certain respects to those of the Predecessor Company. Overall, the reorganization and fresh-start accounting adjustments have materially impacted the current carrying values and classifications of certain of Angiotech’s assets, liabilities, debt and shareholders’ equity balances.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Predecessor Company - Accounting Policies Applicable during Creditor Protection Proceedings
Upon commencement of the Creditor Protection Proceedings on January 28, 2011 through to the Convenience Date, the Predecessor Company was required to adopt Accounting Standards Codification (“ASC”) No. 852 — Reorganization. Among other things, ASC No. 852 required that the Predecessor Company:Company distinguish: (i) distinguish transactions and events which are directly associated with the Recapitalization Transaction from ongoing operations of the business (see note 4)3); and (ii) identify pre-petition liabilities which were subject to compromise through the reorganization process from those that were not subject to compromise or arewere post-petition liabilities (see note 3).liabilities. For all other items, the Predecessor Company applied the same accounting policies as detailed in note 2 below for the Successor and Predecessor Companies.
(a) Liabilities Subject to Compromise
From January 28, 2011 to April 30, 2011, the Predecessor Company presented certain prepetitionpre-petition liabilities that were incurred prior to January 28, 2011 as liabilities subject to compromise. All claims which arose during the CCAA Proceedings were recognized in accordance with the Predecessor Company’s accounting policespolicies based on management’sManagement’s best estimate of the expected amounts of allowed claims, whether known or potential claims, permitted by the Canadian Court (“Allowed Claims”). Liabilities Subject to Compromise of the Predecessor Company were adjusted to thetheir Allowed Claims amountamounts as approved by the Canadian Court. Where a carrying value adjustment arose due to disputes or changes in the amount for goods and services consumed by the Predecessor Company, the difference was recorded as an operating item. In contrast, where carrying value adjustments arose from the claims process under the CCAA or repudiation ofrepudiated contracts, the difference was presented as a Reorganization Item as discussed below (also see note 4).below.
(b) Reorganization Items
ASC No. 852 requires separate disclosure of incremental costs, which are directly associated with reorganization or restructuring activities, that are realized orwhich were incurred during Creditor Protection Proceedings. These Reorganization Items include professional fees incurred in connection with the Creditor Protection Proceedings and implementation of the Recapitalization Transaction. However, Reorganization Items also include gains, losses, loss provisions, recoveries, and other charges resulting from asset disposals, restructuring activities, Revolving Credit Facility or disposal activities, administration of credit facilities, and contract repudiations which haven beenwere specifically undertaken as a result of the CCAACreditor Protection Proceedings and Recapitalization Transaction. Similar costs incurred in 2010 prior to the Predecessor Company’s Creditor Protection Proceedings were recorded as debt restructuring expenses, write-downs of intangible assets and write-downs of property, plant and equipment. ASC No. 852 also requires that specificSpecific cash flows directly related to Reorganization Items bewere also separately disclosed on the 2011 consolidated statementstatements of cash flows.
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(c) Interest Expense
Interest expense on the Predecessor Company’s debt obligations was recognized only to the extent that: (i) the interest expense was not stayed by the Canadian Court and was paid during the Creditor Protection Proceedings or (ii) the interest was an allowed priority, secured claim or unsecured claim. All interest recognized subsequent to the January 28, 2011 CCAA Filing Date has been presented as regular interest expense and not as a Reorganization Item.
(d) Fresh-Start Accounting
As described in notes 1 and note 3, upon emergence from Creditor Protection Proceedings, Angiotech adopted fresh-start accounting. On the April 30, 2011 Convenience Date, Angiotech completed a comprehensive revaluation of its assets and liabilities. All assets and liabilities, except for deferred income tax assets and liabilities, on the May 1, 2011 Successor Company’s Consolidated Balance Sheet arewere therefore reflected at their newly estimated fair values. In addition, the Company recorded goodwill of $125 million in accordance with ASC No. 852, which stipulates that the portion of the estimated reorganization value which cannot be attributed to specific tangible or identified intangible assets of the emerging entity should be recorded as goodwill (see note 3).goodwill. In addition, the effects of the adjustments on the reported amounts of individual assets and liabilities resulting from the adoption of fresh-start reporting and the
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effects of the Recapitalization Transaction were reflected in the Successor Company’s opening consolidated balance sheet and the Predecessor Company’s final consolidated statement of operations. Adoption of fresh-start accounting resultsresulted in a new reporting entity with no beginning retained earnings, deficit, additional paid-in-capital and accumulated other comprehensive income. The financial statements of the Successor Company are not comparable to those of the Predecessor Company. The Predecessor Company’s comparative financial statements are therefore presented to comply with the SEC ‘sSEC’s reporting requirements and should not be viewed as a continuum between the Predecessor and Successor Companies’ financial statements.
Successor and Predecessor Companies’ Accounting Policies
With the exception of the accounting policies applicable to property, plant and equipment and intangible assets, the Successor Company has adopted the same accounting policies as the Predecessor Company as described below:
(a) Consolidation
These consolidated financial statements include the accounts of the respective Company and its wholly-owned subsidiaries. All intercompany transactions and balances have been eliminated on consolidation.
(b) Use of estimates
The respective Company’s preparation of financial statements in conformity with U.S. GAAP requires managementManagement to make estimates and assumptions that affect the reported amount of assets and liabilities and disclosures of contingent assets and liabilities at the dates of the financial statements and the reported amounts of revenue and expenses during the reported periods. Actual results could differ materially from these estimates.
(c) Foreign currency translation
The respective Company’s functional and reporting currency is the U.S. dollar. Foreign currency denominated revenues and expenses are translated using average rates of exchange during the year. Foreign currency denominated monetary assets and liabilities are translated at the rate of exchange in effect at the balance sheet date with foreign exchange gains (losses) included in the Statement of Operations, except for the translation gains (losses) arising from available-for-sale instruments which are recorded through Other Comprehensive Income (Loss) until realized through disposal or impairment. Foreign currency denominated non monetarynon-monetary assets and liabilities are re-translated using historical exchange rates.
The assets and liabilities of foreign subsidiaries that have a functional currency differentwhich differs from the reporting currency are translated into the reporting currency with all resulting exchange differences recognized in other comprehensive income.income (loss). Assets and liabilities are translated at each balance sheet date at the closing rate at the date of the balance sheet. Income and expenses are translated at average exchange rates.
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(d) Cash equivalents
The respective Company considers all highly liquid financial instruments purchased with an original maturity of three months or less to be cash equivalents. Cash equivalents are recorded at cost plus accrued interest. The carrying values of these cash equivalents approximate their fair values.
(e) Investments
Short term investments in equity securities with readily determinable fair values are classified as available-for-sale and are carried at fair value with unrealized gains or losses, net of tax, reflected in accumulated other comprehensive income (loss). Realized gains or losses are determined on a specific identification method and are included within other income (expense). Where unrealized losses on equity securities are other-than-temporary, these losses are reclassified out of accumulated other comprehensive income (loss) and are recognized in the Consolidated Statement of Operations.
(f) Allowance for doubtful accounts
Accounts receivable are presented net of an allowance for doubtful accounts. In determining the allowance for doubtful accounts, which include specific reserves, the respective Company reviews accounts receivable aging, customer financial strength, credit standing, and payment history to assess the probability of collection. The respective Company continually monitors the collectability of the receivables. Receivables are considered for write- offwrite-off when managementManagement determines them to be uncollectible. Prior to the write-off, the respective Company utilizes the services of approved third party collection agencies to assist in the collection of accounts deemed uncollectible. If the efforts of the collection agency are deemed to be unsuccessful, the account is written off upon final approval by one or more duly authorized persons.
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(g) Inventories
Raw materials are recorded at the lower of cost, determined on a specific item basis, and market. Work-in-process, which includes inventory stored at a stage preceding final assembly and packaging, and finished goods are recorded at the lower of cost, determined on a standard cost basis which approximates average cost and market. Standard costs include direct labor, materials, external services, and an allocation of manufacturing overhead. In addition, standard costs are reviewed against actual costs incurred and adjusted where appropriate.
(h) Property, plant and equipment
As described in note 3, uponUpon implementation of fresh startfresh-start accounting, on April 30, 2011, Angiotech’s property, plant and equipment were re-measured and recorded at their estimated fair value of $47.7 million. Accordingly, effective May 1, 2011, the fair value of $47.7 million represents the new cost base for the Successor Company’s property, plant and equipment. The respective Company’s property,Property, plant and equipment are recorded at cost less accumulated depreciation. Depreciation wasis recorded using theon a straight-line methodbasis over the following terms:
| | Successor Company | | | Predecessor Company | |
Buildings | | 15-40 years | | | 40 years | |
Leasehold improvements | | Term of the lease | | | Term of the lease | |
Manufacturing equipment | | 3-10 years | | | 3-10 years | |
Research equipment | | 3-5 years | | | 5 years | |
Office furniture and equipment | | 2-10 years | | | 3-10 years | |
Computer equipment | | 1-5 years | | | 3-5 years | |
Where the respective Company had property, plant and equipment are under construction, these assets wereare not depreciated until they wereare put into use.
(i) Goodwill and intangible assets
As discussed in note 3 below,Upon implementation of fresh-start accounting, the Successor Company recorded $125$125.0 million of goodwill upon implementation of fresh start accounting on April 30, 2011.goodwill. The implied fair value of goodwill representsrepresented the excess of the Successor Company’s reorganization value over and above the fair value of its tangible assets and identifiable intangible assets. Based on management’sManagement’s analysis, all of the goodwill was determined to be attributable to the Successor Company’s Medical Device Technologies segment.
Products reporting unit. In accordance with Accounting Standards Codification (“ASC”) No. 350 — Intangibles — Goodwill and Other, goodwill is not amortized, but is rather it is tested annually for impairment and whenever changes in circumstances occur that would indicate impairment. When
During the year ended December 31, 2012, the provisions of Accounting Standards Update (“ASU”) No. 2011-08 were adopted. ASU No. 2011-08 permits the Successor Company to perform a qualitative assessment (termed a “step- zero impairment test”) of potential impairment indicators to assess whether it is more-likely-than-not that the fair value of a reporting unit is less than its carrying amount, before proceeding to a quantitative two-step goodwill impairment test. If Management determines that it is not more-likely-than-not that the fair value of a reporting unit is less than the carrying amount, the two-step goodwill impairment test is not required. However,
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if this is not the case, Management is required to conduct the customary quantitative two-step goodwill impairment test in accordance ASC No. 350. Factors that would be considered in developing the Successor Company’s qualitative analysis include:
·Adverse changes or outcomes in legal or regulatory matters
·Significant negative industry or economic trends
·Technological advances
·Decreases in anticipated demand for products and increased competition, relative to historical or projected operating results
·Future growth strategies
·Significant changes in the strategy of the overall business (e.g. decision to sell or divest of a business unit)
·Key personnel and management expertise
·A decline in market-dependent valuation multiples
Under step one of the goodwill impairment test, management would estimate the fair value of the Medical Device Products reporting unit using a discounted projection of future cash flows (“DCF model”), which incorporates various assumptions and estimates about the outlook on future operating performance, discount rates and EBITDA multiples used to derive terminal value. If the analysis indicates that the carrying value of the Medical Device Products reporting unit exceeds its fair value, management is required to proceed to step two of the goodwill impairment test. If the carrying value of a reporting unit’s goodwill exceeds the implied fair value of the goodwill under step two of the goodwill impairment test, the Successor Company would record an impairment loss is recognized which is equal to the excess. Examples of circumstances that could trigger impairment include adverse changes or outcomes in legal or regulatory matters, technological advances, decreases in anticipated demand for products, and increased competition. The Company estimates fair value based on a discounted projection of future cash flows which are subject to significant uncertainty and estimates.
Intangible assets with finite lives are amortized based on their estimated useful lives. The amortization method is selected to best reflect the pattern in which the economic benefits are derived from the intangible asset. If the pattern cannot be reliably or reasonably determined, straight line amortization is applied. Amortization was determined using thecalculated on a straight line methodbasis over the following terms:
| | Successor Company | |
Customer relationships | | 10-20 years | |
Trade names and other | | 9-20 years | |
Patents | | 5-20 years | |
Core and developed technology | | 10-20 years | |
| | Predecessor Company | |
Acquired technologies | | 2-10 years | |
Trade names and other | | 2-12 years | |
Customer relationships | | 10 years | |
In-licensed technologies | | 5-10 years | |
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(j) Impairment of long-lived assets
The respective Company reviews long-lived assets subject to amortization to determine if any adverse conditions exist or a change in circumstances has occurred that would indicate impairment or a change in the remaining useful life. Conditions that may indicate impairment include; but are not limited to; a significant adverse change in legal factors, business climate or strategy decisions that could affect the value of an asset; discontinuation of certain research and development programs or products; product recalls, or adverse actions or assessments by regulators. If an impairment indicator exists, the respective Company tests the asset (asset group) for recoverability. For purposes of the recoverability test, long-lived assets are grouped with other assets and liabilities at the lowest level of identifiable cash flows if the long-lived asset does not generate cash flows independent of other assets and liabilities. If the carrying value of the asset (asset group) exceeds the undiscounted cash flows expected to result from the use and eventual disposition of the asset (asset group), an impairment charge is recorded to write the carrying value down to the fair value in the period identified.
The respective Company estimates the fair value of assets (asset groups) by calculating the present value of estimated future cash flows expected to be generated from the asset using a risk-adjusted discount rate. In determining the present value of estimated future cash flows associated with assets (asset groups), certain assumptions are made about future revenue contributions, cost structures, discount rates and the remaining useful lives of the asset (asset group). Variation in the assumptions used could result in material differences when estimating impairment write-downs.
(k) Revenue recognition
(i) Product sales
Revenue from product sales, including shipments to distributors, is recognized when the product is shipped from the respective Company’s facilities to the customer provided that the respective Company has not retained any significant risks of ownership or future obligations with respect to products shipped. Revenue from product sales is recognized net of provisions for future returns.
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These provisions are established in the same period as the related product sales are recorded and are based on estimates derived from historical experience and adjusted to actual returns when determinable.
Revenue is considered to be realized or realizable and earned when all of the following criteria are met: persuasive evidence of a sales arrangement exists; delivery has occurred; the price is fixed or determinable; and collectability is reasonably assured. These criteria are generally met at the time of shipment when the risk of loss and title passes to the customer or distributor.
Amounts billed to customers for shipping and handling are included in revenue. Where applicable, revenue is recorded net of sales taxes. The corresponding costs for shipping and handling are included in cost of products sold.
(ii) Royalty revenue
Royalty revenue is recognized when the respective Company has substantially fulfilled its performance obligations under the terms of the contractual agreement, no significant future obligations remain, the amount of the royalty fee is determinable, and collection is reasonably assured. The respective Company records royalty revenue from BSC and from Cook on a cash basis due to the difficulty in accurately and consistently estimating the BSC and Cook royalties before the reports and payments are received.
(iii) License fees
License fees are comprised of fees and milestone payments derived from collaborative and other licensing arrangements. License fees are recognized as revenue when persuasive evidence of an arrangement exists, the contracted fee is fixed or determinable, the intellectual property is delivered to the customer and the license term has commenced, collection is reasonably assured and the performance obligations have been substantially completed.
Where license fees are tied to research and development arrangements, under which the respective Company is required to provide services over a period of time and the consideration is contingent upon uncertain future events or circumstances, the respective Company will assess whether it is appropriate to apply the milestone method of revenue recognition in accordance with ASC No. 605-28, Revenue Recognition: Milestone Method. A milestone payment is recognized as revenue in its entirety when a specified substantive milestone is achieved. A milestone is considered substantive if: (i) the payment is commensurate with the respective Company’s performance required to achieve the milestone; (ii) the payment relates to past service; and (iii) the payment is reasonable relative to all of the deliverables and payment terms under the arrangement. If any portion of the
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payment is refundable or adjustable based on future performance, the milestone is not considered to be substantive. Fees and non-substantive milestone payments received which require the ongoing involvement of the respective Company are deferred and amortized into income on a straight-line basis over the period of ongoing involvement if there is no other method under which performance can be objectively measured. In addition, milestone payments related to future product sales are accounted for as royalties. On January 1, 2011, the Predecessor Company applied ASU No. 2010-17, Milestone Method of Revenue Recognition prospectivelyto the receipt of future milestone payments without any material impact to its consolidated financial statements.
(iv) Multiple-element arrangements
When an arrangement includes multiple deliverables, the respective Company applies ASU 605-25 Revenue Recognition: Multiple-Element Arrangements to identify the units of accountingaccount and allocate the consideration to each separate unit of accounting.account. A separate unit of accountingaccount is identified if the delivered item(s) have standalone value to the customer and the delivery or performance of undelivered items is considered probable and within the control of the respective Company. The arrangement consideration is generally allocated to the separate units of accounting based on their relative selling prices, Company specific objective evidence of selling prices, third-party evidence of selling prices, or the Company’s best estimate of the selling prices. The consideration allocated is limited to the amount that is not contingent on the delivery of additional items or fulfillment of other performance conditions. Effective January 1, 2011,Where a delivered item(s) does not qualify as a separate unit of accounting, it is combined with other applicable undelivered item(s) within the Predecessor Company adopted ASU No. 2009-13, Multiple-Deliverable Revenue Arrangements, prospectively without any material impact to its consolidated financial statements. Prior to January 1, 2011 and the issuancearrangement. The allocation of the new guidance under ASU No. 2009-13, the Predecessor Company applied ASC No. 605-25 which had more stringent requirements to identify unitsarrangement consideration and associated measurement of accounting and allocate the arrangement consideration.revenue recognition is then determined on a combined basis as a single unit of accounting.
(l) Income taxes
Income taxes are accounted for using the liability method. Deferred income tax assets and liabilities result from the temporary differences between the amount of assets and liabilities recognized for financial statement and income tax purposes, and for operating losses, capital losses and tax credit carry forwards, using enacted tax rates expected to be in effect for the years in which the differences are expected to reverse. A valuation allowance is provided to reduce the deferred income tax assets if, based upon the available evidence, it is more likely than not that some or all of the deferred income tax assets will not be realized.
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(m) Accounting for Uncertainty in Income Taxes
The respective Company accounts for uncertainty related to income tax positions accounted for in accordance with ASC No. 740-10 — Income taxes. ASC No. 740-10 requires the use of a two-step approach for recognizing and measuring the income tax benefits of uncertain tax positions taken or expected to be taken in a tax return, as well as enhanced disclosures regarding uncertain tax positions. A tax benefit from an uncertain tax position may only be recognized if it is more-likely-than-not that the position will be sustained upon examination by the tax authority based on the technical merits of the position. The tax benefit of an uncertain tax position that meets the more-likely-than-not recognition threshold is measured as the largest amount that is greater than 50% likely to be realized upon settlement with the tax authority. To the extent a full benefit is not expected to be realized, an income tax liability is established. Any change in judgment related to the expected resolution of uncertain tax positions are recognized in the year of such a change. Accrued interest and penalties related to unrecognized tax benefits are recorded in income tax expense in the current year.
(n) Research and development costs
Research and development expenses are comprised of costs incurred in performing research and development activities including salaries and benefits, clinical trial and related clinical manufacturing costs, contract research costs, patent procurement costs, materials and supplies, and other operating and occupancy costs. Amounts paid for medical technologies used solely in research and development activities and with no alternative future use are expensed in the year incurred.
Advance payments for non-refundable portions of research and development activities are deferred and capitalized until the related goods are delivered or services are performed.
(o) Shipping and Handling Costs
Shipping and handling costs which are billed to customers are included in revenue for the applicable period. The corresponding shipping and handling expense is recorded in cost of products sold.
(p) Net income (loss) per common share
Net income (loss) per common share is calculated using the weighted average number of common shares outstanding during the period. Diluted net income (loss) per common share is calculated using the treasury stock method which uses the weighted average
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number of common shares outstanding during the period and also includes the dilutive effect of potentially issuable common shares from outstanding Restricted Stock awards, Restricted Stock Units (“RSUs”) and stock options.
(q) Stock-based compensation
The respective Company accounts for stock based compensation expense in accordance with ASC No. 718 — Compensation: Stock Compensation and ASC No. 505-50 — Equity: Equity Based Payments to Non-Employees. These standards require the respective Company to recognizeby recognizing the grant date fair value of stock-based compensation awards granted to employees over the requisite service period. The compensation expense recognized reflects estimates of award forfeitures at the time of grant and revised in subsequent periods, if necessary when forfeitures rates are expected to change.
The grant date fair value of stock options is determined using the Black-Scholes model and the following assumptions: the risk-free rate is estimated using yield rates on U.S. Treasury or Canadian Government securities for a period which approximates the expected term of the award; and volatility is estimated by using a weighted average of the Predecessor’s historical volatility and comparable volatilities of companies in the same industry of similar sizes and scale. The Predecessor and Successor Company have not paid any dividends on common stock since their inception and the Successor Company does not anticipate paying dividends on its common stock in the foreseeable future. Generally, the stock options granted have a maximum term of seven years and vest over a three-year period from the date of the grant. When an employee ceases employment at the Successor Company, any unexercised vested options granted will expire either immediately, within 365 days from the last date of service or on the original expiration date at the time the option was granted, as defined in the Successor Company’s Stock Incentive Plan. The expected life of employee stock options is based on a number of factors, including historic exercise patterns, cancellations and forfeiture rates, vesting periods and contractual terms of the options. The costs of the stock options are recognized on a straight line basis over the vesting period.
The grant date fair value of Restricted Stock awards and RSUs is determined based on the fair value of the Successor Company’s common shares on the grant date as if the award was vested and the shares issued. Restricted Stock awards and RSUs generally vest over a three-year period from the date of the grant and when an employee ceases employment, the unvested Restricted Stock and RSUs either vest or expire immediately as defined in the Successor Company’s Stock Incentive Plan. Certain RSUs only vest upon the occurrence
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Table of a change in control prior to December 31, 2012. The costs of these awards are recognized on a straight-line basis over the expected service period taking into account the expected date of employment cessation. RSUs that vest upon the occurrence of a change of control are recognized on a straight-line basis from the grant date to December 31, 2012 taking into account the cessation of employment because the probability of fulfilling the performance condition cannot be determined until the change in control occurs.Contents
(r) Deferred financing costs
Financing costs for long-term debt and revolving credit facilities are capitalized and amortized on a straight-line basis, which approximates the effective-interest rate method to interest expense over the life of the debt instruments. The Successor Company revisits the life of debt instruments as significant events warrant.
(s) Contingencies
The respective Company may be subject to various legal proceedings, regulatory proceedings, intellectual property litigation, and product liability suits. Litigation costs are generally expensed as incurred and included in selling, general and administration expenses. In certain cases, claimants may seek damages or other injunctive relief, which may result in significant expenditures or adversely impact the respective Company’s ability to sell its products. The respective Company maintains insurance policies that provide limited coverage for amounts in excess of pre-determined deductibles for intellectual property infringement and product liability claims. To the extent that contingent losses are probable and estimable, the respective Company will accrue for the anticipated settlement costs, damages, fines and penalties. See note 2221 for a description of material legal proceedings.
(t) Recently adopted accounting policies
In January 2010, the FASB issued ASU No. 2010-06, Fair Value Measurements and Disclosures (Topic 820): Improving Disclosures about Fair Value Measurements. The update requires new disclosures about roll forward activity affecting Level 3 fair value measurements. ASU No. 2010-06 also clarifies disclosures required about inputs, valuation techniques and the level of disaggregation applied to each class of assets and liabilities. New disclosures about Level 3 fair value measurements are effective for interim and annual reporting periods beginning after December 15, 2010. Adoption of ASU No. 2010-06 expanded the Predecessor Company’s disclosures around fresh start accounting, which was implemented effective April 30, 2011 (see note 3).
In April 2010, the FASB issued ASU No. 2010-13, Compensation — Stock Compensation (Topic 718): Effect of Denominating the Exercise Price of a Share-Based Payment Award in the Currency of the Market in Which the Underlying Equity Security Trades. ASC No. 718, Compensation — Stock Compensation, provides guidance on whether share-based payments should be classified as either equity or a liability. Under this section, stock options which have a fixed price denominated in the functional currency of the respective Company’s foreign operations or in the currency in which the employee is paid, does not result in the stock option being classified as a liability. The updated guidance clarifies that an employee share-based payment award, with an exercise price denominated in the currency of a market in which substantial portion of the entity’s equity securities trade and which differs from the
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functional currency of the employer entity or payroll currency of the employee, are not considered to contain a condition that is not a market, performance or service condition. As such, these awards are classified as equity. ASU No. 2010-13 is effective for fiscal years and interim periods beginning on or after December 15, 2010. The cumulative effect of adopting this guidance should be applied to the opening balance of retained earnings. The adoption of this standard did not have an impact on the Predecessor Company’s financial results or financial condition.
In April 2010, the FASB issued ASU 2010-12 Income Taxes (Topic 740): Accounting for Certain Tax Effects of the 2010 Health Care Reform Acts, providing clarification on the financial reporting impact of changes to the 2010 Health Care Reform Act. ASU 2010-12 codifies the SEC Staff’s views on encouraging registrants to incorporate the accounting effects of the Health Care and Education Reconciliation Act of 2010 and the Patient Protection and Affordable Health Care Act into their financial statements. The adoption of ASU 2010-12 did not have a material effect on the financial position, results of operations or cash flows of the Successor Company in 2011.
In December 2010, the FASB issued ASU No. 2010-29, Business Combinations (Topic 805): Disclosure of Supplementary Pro Forma Information for Business Combinations. The new guidance clarifies that if a public entity presents comparative financial statements, the entity should disclose revenue and earnings of the combined entity as if the business combination occurred as of the beginning of the comparable prior annual reporting period only. ASU No. 2010-29 also requires additional disclosures about the nature and amount of material, non-recurring pro forma adjustments, which are directly attributable to the business combination and are included in the pro forma revenue and earnings estimates. The guidance is effective for all business combinations beginning on first annual reporting period beginning on or after December 15, 2010. The adoption of this standard did not have any impact on the Successor Company’s consolidated financial statement disclosures.
In December 2010, the FASB issued ASU No. 2010-28, Intangibles — Goodwill and Other (Topic 350): When to Perform Step 2 of the Goodwill Impairment Test for Reporting Units with Zero or Negative Carrying Amounts. The amendments in this Update modify Step 1 of the goodwill impairment test for reporting units with zero or negative carrying amounts. For those reporting units, an entity is required to perform Step 2 of the goodwill impairment test if it is more likely than not that a goodwill impairment exists. In determining whether it is more likely than not that goodwill has been impaired, an entity should consider whether there are any adverse qualitative factors indicating that impairment may exist. The qualitative factors are consistent with the existing guidance and examples in paragraph 350-20-35-30, which requires that goodwill of a reporting unit be tested for impairment between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. For public entities, the amendments in this update are effective for fiscal years, and interim periods within those years, beginning after December 15, 2010. ASU No. 2010-28 had no impact on the Successor Company’s 2011 goodwill impairment test given that none of the identified reporting units had zero or negative carrying values.
(u) Future accounting pronouncements
In May 2011, the FASBFinancial Accounting Standards Board (“FASB”) issued ASUAccounting Standards Update (“ASU”) No. 2011-04, Fair Value Measurements (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in US GAAP and International Financial Reporting Standards (“IFRS”). Under ASU No. 2011-04, the FASB and the International Accounting Standards Board (the “IASB”) have jointly developed common measurement and disclosure requirements for items that are recorded in accordance with fair value standards. In addition, the FASB and IASB have developed a common definition of “fair value” which has a consistent meaning under both U.S. GAAP and IFRS. The amendments in this ASU are required to be applied prospectively, and are effective for interim and annual periods beginning on January 1, 2012. The Successor Company is still assessing the potential impact thatadoption of ASU No. 2011-04 maydid not have a material impact on itsthe consolidated financial statements.statements for the year ended December 31, 2012.
In June 2011, the FASB issued ASU No. 2011-05, Comprehensive Income (Topic 220): Presentation of Comprehensive Income. Under ASU No. 2011-05, the FASB has eliminated the option to present components of other comprehensive income as part of the statement of changes in stockholders’ equity. The amendment requires that the total of comprehensive income, the components of net income, and the componentsitems of other comprehensive income and total comprehensive income be presented.presented in one continuous statement or two separate consecutive statements. In addition, an entity isfilers are required to present on the face of the financial statements reclassification adjustments for items reclassified from accumulated other comprehensive income to net income. The amendment iswas effective for fiscal and interim periods beginning on January 1, 2012. The Successor Company adopted ASU No. 2011-05 during the quarter ended March 31, 2012 and selected to prepare separate Consolidated Statements of Comprehensive (Losses) Income. This standard relates to presentation only and did not impact our results of operations or financial position for the year ended December 31, 2012.
In December 2011, as a follow up to ASU No. 2011-05, the FASB issued ASU No. 2011-12, Comprehensive Income (Topic 220): Deferral of the Effective Date for Amendments to the Presentation of Reclassification Items Outout of Accumulated Other Comprehensive Income in Accounting Standards UpdateIncome. ASU No. 2011-05, 2011-12 deferred the effective date for presentation of reclassification items to fiscal years and interim period beginning after December 15, 2012. TheAs at December 31, 2012, the Successor Company is still assessing the impactdoes not have any adjustments that ASU No. 2011-05 will have on its presentation ofwould require reclassification from accumulated other comprehensive income to net income.
In September 2011, the FASB issued ASU No. 2011-08, Intangibles —Goodwill and Other (Topic 350): Testing Goodwill for Impairment. ASU No. 2011-08 simplifies how an entity tests goodwill for impairment and permits an entity to first assess qualitative factors to determine whether it is more likely than notmore-likely-than-not that the fair value of a reporting unit is less than its carrying amount to evaluate whether it is necessary to perform the two-step goodwill impairment test currently required. The amendments arewere effective for annual and interim goodwill impairment tests performed for fiscal years commencing on January 1, 2012. TheFor the year ended December 31, 2012, the Successor Company is still assessing the potential impact thatconducted a qualitative assessment of impairment indicators in accordance with ASU No. 2011-08 mayand determined that goodwill was not impaired.
(u) Future accounting pronouncements
In July 2012, the FASB issued ASC No. 2012-02, Intangibles - Goodwill and Other (Topic 350): Testing Indefinite-Lived Intangible Assets for Impairment. This update provides companies with the option to first assess qualitative factors to determine whether events and circumstances indicate that it is more likely than not that an indefinite-lived intangible asset is impaired before proceeding to perform a quantitative impairment test. If a company concludes that impairment is unlikely, no further quantitative assessment is required. This update is effective for fiscal years beginning after September 15, 2012. Aside from goodwill (see discussion under the recently adopted accounting policies section above), the Successor Company does not have on its consolidated financial statements and the annual goodwill impairment test.any other indefinite-lived intangible assets which require assessment under this guidance.
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In December 2011, the FASB issued ASU No. 2011-11, Balance Sheet (Topic 210): Disclosures about Offsetting Assets and Liabilities which aims enhance disclosures about financial instruments and derivative instruments that are either offset in accordance with U.S. GAAP or are subject to an enforceable master netting arrangement or similar agreement. The additional disclosures are expected to facilitate comparisons between financial statements prepared under IFRS versus U.S. GAAP. ASU No. 2011-11 is effective for annual and interim reporting periods beginning on or after January 1, 2013. This standard relates to presentation only and is not expected to significantly impact the Successor Company’s consolidated financial statements.
In October 2012, the FASB issued ASU No. 2012-04, Technical Corrections and Improvements. This update features certain technical corrections and conforming amendments to a wide range of fair value topics in the Accounting Standards Codification. The guidance was issued to correct and clarify prevailing fair value measurement and disclosure requirements in order to ensure that they conform to the current definition of fair value. The amendments in this update are effective for fiscal periods beginning after December 15, 2012. The adoption of ASU 2012-04 is not expected to have a material impact on the Successor Company’s financial position or results of operations.
3. REORGANIZATION AND FRESH-START REPORTING
Recapitalization Transaction and Emergence from Creditor Protection Proceedings
As discusseddescribed above in note 1, on May 12,January 28, 2011 Angiotech, 0741693 B.C. Ltd., Angiotech International Holdings, Corp., Angiotech Pharmaceuticals (US), Inc., American Medical Instruments Holdings, Inc., NeuColl, Inc., Angiotech BioCoatings Corp., Afmedica, Inc., Quill Medical, Inc., Angiotech America, Inc., Angiotech Florida Holdings, Inc., B.G. Sulzle, Inc., Surgical Specialties Corporation, Angiotech Delaware, Inc., Medical Device Technologies, Inc., Manan Medical Products, Inc. and Surgical Specialties Puerto Rico, Inc. (collectively, the “Angiotech Entities”) voluntarily initiated Creditor Protection Proceedings to implement the Recapitalization Transaction through a plan of compromise or arrangement (as amended, supplemented or restated from time to time, the “CCAA Plan”).
During the Creditor Protection Proceedings, the Angiotech Entities remained in possession of their assets and continued to operate as “debtors-in-possession” under the supervision of its court appointed monitor, Alvarez and Marsal Canada, Inc. (the “Monitor”); the jurisdiction of the courts; and the applicable provisions of CCAA and Chapter 15. The stay of proceedings granted by the Canadian Court prevented all parties from commencing or continuing any action, suit or proceeding against the Angiotech Entities during the Creditor Protection Proceedings. In addition, on January 13, 2011 and March 3, 2011, the Predecessor Company’s common shares were delisted from the NASDAQ Stock Market and the Toronto Stock Exchange, respectively.
On April 4, 2011, a meeting was held for creditors whose obligations were compromised under the CCAA Plan became effective(“Affected Creditors”) to vote for or against the resolution approving the CCAA Plan. The CCAA Plan was approved by 100% of the Affected Creditors, whose votes were registered, and Angiotech emerged from Creditor Protection Proceedings. sanctioned by the order of the Canadian Court on April 6, 2011. This order was subsequently recognized by the U.S. Court on April 7, 2011. Affected Creditors who did not file a proof of claim in accordance with the procedure for the adjudication, resolution and determination of claims established by order of the Canadian Court on February 17, 2011 (the “Claims Procedure Order”) had their claims forever barred and extinguished and were not permitted to receive distributions under the CCAA Plan.
In accordance with the provisions of the CCAA Plan, the following transactions were consummated or deemed to be consummated on or prior to the Plan Implementation Date:
(i)Common shares, options, warrants or other rights to purchase or acquire common shares existing prior to the Plan Implementation Date were cancelled without further liability, payment or compensation in respect thereof. | Common shares, options, warrants or other rights to purchase or acquire common shares existing prior to the Plan Implementation Date were cancelled without further liability, payment or compensation in respect thereof. |
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(ii) | Angiotech’s Articles and Notice of Articles were amended to: (a) eliminate the class of existing common shares from the authorized capital of the Predecessor Company; and (b) create an unlimited number of new common shares under the Successor Company with similar rights, privileges, restrictions and conditions attached to the previous class of common shares. |
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(iii) | The Predecessor Company’s Shareholder Rights Plan Agreement, dated October 30, 2008 between Angiotech and Computershare Trust Company of Canada (the “Shareholder Rights Plan”), was rescinded and terminated without any liability, payment or other compensation in respect thereof. |
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(iv) | 12,500,000 new common shares, representing approximately 96% of the common shares issuable in connection with the implementation of the CCAA Plan (including restricted shares and restricted share units issued under the CCAA Plan), |
(ii)Angiotech’s Articles and Notice of Articles were amended to: (a) eliminate the class of existing common shares from the authorized capital of the Predecessor Company; and (b) create an unlimited number of new common shares under the Successor Company with similar rights, privileges, restrictions and conditions attached to the previous class of common shares.
(iii)The Predecessor Company’s Shareholder Rights Plan Agreement, dated October 30, 2008 between Angiotech and Computershare Trust Company of Canada (the “Shareholder Rights Plan”), was rescinded and terminated without any liability, payment or other compensation in respect thereof.
(iv)12,500,000 new common shares, representing approximately 96% of the common shares issuable in connection with the implementation of the CCAA Plan (including restricted shares and restricted share units issued under the CCAA Plan), were issued to holders of the Predecessor Company’s Subordinated Notes in consideration and settlement for the irrevocable and final cancellation and elimination of such noteholders’ Subordinated Notes; provided, however, that the indenture related to the Subordinated Notes (the “SSN Indenture”) remained in effect solely to the extent necessary to effect distributions to the Subordinated Noteholders and provide certain related protection to the indenture trustee there under.
(v)Holders of 99.99% of the aggregate principal amount outstanding of the Predecessor Company’s $325 million senior floating rate notes (the “Existing Floating Rate Notes”) tendered their Existing Floating Rate Notes and consents in the FRN Exchange Offer. The New Floating Rate Notes were issued on the Plan Implementation Date with substantially the same terms and conditions as the Existing Floating Rate Notes, except that, among other things, (i) subject to certain exceptions, the New Floating Rate Notes are secured by second-priority liens over substantially all of the assets, property and undertaking of Angiotech and certain of its subsidiaries; (ii) the New Floating Rate Notes continue to accrue interest at LIBOR plus 3.75%, however, they are subject to a LIBOR floor of 1.25%; and (iii) certain covenants related to the incurrence of additional indebtedness and assets sales and the definition of permitted liens, asset sales and change of control have been modified in the indenture that governs the New Floating Rate Notes (the “New Notes Indenture”).
(vi)Angiotech entered into the Revolving Credit Facility with Wells Fargo (see note 16(f)). As at the Plan Implementation Date, the DIP Facility was terminated in connection with the terms of the CCAA Plan.
(vii)The Predecessor Company established and implemented a Key Employee Incentive Plan (“KEIP”) that was satisfactory to the Predecessor Company and holders of the Subordinated Notes, who consented to the Recapitalization Transaction. The KEIP, which provides payments to the named beneficiaries totaling no more than $1.0 million, was triggered upon the implementation and completion of the Recapitalization Transaction. Two-thirds of the KEIP payment was paid on the Plan Implementation Date. The remaining one-third was paid in August 2011.
(viii)The Predecessor Company established and implemented a Management Incentive Plan (“MIP”) that was satisfactory to the Predecessor Company and the Consenting Noteholders. Under the terms of the MIP, the beneficiaries were granted restricted shares and restricted share units representing 4% or 520,833 of the new common shares issued on the Plan Implementation Date and 708,025 options to acquire 5.2% of the new common shares, on a fully-diluted basis. These options are scheduled to expire on May 12, 2019 and will vest in thirds on each anniversary of the Plan Implementation Date. The restricted shares and restricted share units do not have a contractual expiration date but are expected to vest in thirds on each anniversary of the Plan Implementation Date. Options to acquire an additional 5% of the new common shares have been reserved for issuance at a later date at the discretion of the board of directors of the Successor Company.
(ix)The Successor Company appointed a new board of directors.
(x)The Successor Company paid transaction fees of $5.3 million on May 12, 2011 to certain of its financial advisors.
(xi)The Predecessor Company placed $0.4 million in escrow with the Monitor for distribution to Affected Creditors, other than the Subordinated Noteholders, to settle distribution claims totaling $4.5 million in accordance with the CCAA Plan (see note 3). Distributions were paid to Affected Creditors, other than Subordinated Noteholders, in May, 2011.
(xii)The Settlement Agreement with QSR described in note 22 was determined to be in full force and effect. In accordance with the terms of the Settlement Agreement, $2 million was paid to QSR on May 26, 2011 and $1.2 million was paid to QSR during the eight months ended December 31, 2011.
F-17F-16
(xiii)The Amended and Restated Forbearance Agreement with Wells Fargo dated November 4, 2010 was terminated. Under this Amended and Restated Forbearance Agreement, Wells Fargo agreed to preserve the Predecessor Company’s Existing Credit Facility (as defined in note 16) and not exercise anyTable of its rights and remedies during the restructuring period with respect to amounts owed to the Subordinated Noteholders and certain litigation with QSR Holdings, Inc. (see note 22).Contents
Enterprise Valuation
The going concern enterprise value of the Successor Company’s operations for the purposes of fresh start accounting was estimated to be within a range of $450 million to $580 million, excluding the value of cash and cash equivalents and short term investments. Management determined that $517 million was the best estimate of the Successor Company’s enterprise value. The reorganization value approximates the fair value of the Successor Company before considering liabilities and is intended to estimate the amount that a willing arms-length buyer might pay for the assets of the entity immediately after the reorganization.
| | May 1, 2011
in 000’s | |
Successor Company enterprise value | | $ | 516,729 | |
Add: | | | |
Cash and cash equivalents | | 30,222 | |
| | | |
Short-term investments | | 5,294 | |
Non-interest bearing liabilities | | 140,563 | |
Reorganization value to be allocated to assets | | $ | 692,808 | |
Less amount allocated to tangible and identifiable intangible assets, based on their fair values | | 567,563 | |
Unallocated reorganization value attributed to goodwill | | 125,245 | |
The enterprise value was estimated based on fair values derived from discounted cash flow (“DCF”) analyses and comparable company analyses, evaluated for each of the following product or revenue categories which were selected due to their differing maturity and development stages, market and growth characteristics:
·Proprietary Medical Device Technologies: relates to certain product lines which contain certain technological advantages and exhibit higher growth potential.
·Base Medical Device Technologies: relates to more mature finished product lines as well as medical device components that are manufactured by Angiotech and sold to other third-party medical device manufacturers who assemble these components | were issued to holders of the Predecessor Company’s Subordinated Notes in consideration and settlement for the irrevocable and final cancellation and elimination of such noteholders’ Subordinated Notes; provided, however, that the indenture related to the Subordinated Notes (the “SSN Indenture”) remained in effect solely to the extent necessary to effect distributions to the Subordinated Noteholders and provide certain related protection to the indenture trustee there under. |
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(v) | Holders of 99.99% of the aggregate principal amount outstanding of the Predecessor Company’s prior $325 million senior floating rate notes (the “Old Notes”) tendered their Old Notes and consents in the FRN Exchange Offer. New floating rates notes (the “New Notes”) were issued on the Plan Implementation Date with substantially the same terms and conditions as the Old Notes, except that, among other things, (i) subject to certain exceptions, the New Notes are secured by second-priority liens over substantially all of the assets, property and undertaking of Angiotech and certain of its subsidiaries; (ii) the New Notes continue to accrue interest at LIBOR plus 3.75%, however, they are subject to a LIBOR floor of 1.25%; and (iii) certain covenants related to the incurrence of additional indebtedness and assets sales and the definition of permitted liens, asset sales and change of control have been modified in the indenture that governs the New Notes dated May 12, 2012 among Angiotech, the guarantors party thereto and Deutshe Bank National Trust Company as trustee (the “New Notes Indenture”). |
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(vi) | Angiotech entered into finished medical devices. ·Royalty: relates to royalty revenues generated from licensing Angiotech’s proprietary paclitaxel and other technologies to various partners.
Under a DCF analysis, which is an income approach valuation methodology, the expected future cash flows of an asset or business are discounted to their present value using a rate of return that is assumed commensurate with current investor yield requirements and risk considerations for similar asset investments.
The estimated DCF fair value for Angiotech’s Proprietary Medical Device Technologies was derived from the present value of the Successor Company’s unlevered after-tax free cash flows as derived from sales of these products based on an eight year financial projection, including certain adjustments and an estimate of terminal value. The following inputs and assumptions were applied to calculate the DCF fair value of the Successor Company’s Proprietary Medical Device Technologies: discount rates of 16-19% and perpetuity growth rates of 2-4%.
The estimated DCF fair value for Angiotech’s Base Medical Device Technologies was derived from the present value of the Successor Company’s unlevered after-tax free cash flows as derived from sales of these products, based on a five year financial projection, including certain adjustments and an estimate of value beyond the five year horizon (i.e. terminal value). The following inputs and assumptions were applied to calculate the DCF fair value of the Company’s Base Medical Device Technologies: discount rates of 9-12% and perpetuity growth rates of 1-2%.
The estimated DCF fair value of Angiotech’s royalty revenues was calculated by estimating the present value of the various categories of expected royalty revenue, using rates ranging from 12-33 %.
Comparable company analysis estimates the fair value of a company based on a relative comparison with other publicly traded companies that have similar financial and operating characteristics. The enterprise value for each selected company examined is calculated by using current market capitalization as the value of its equity securities plus the aggregate value of the debt outstanding and non-controlling interests. These enterprise values are commonly expressed as multiples of certain key performance metrics such as Earnings before Interest, Taxes, Depreciation and Amortization (“EBITDA”). The fair value of Angiotech’s Base Medical Device Technologies under this method was estimated by applying multiples ranging from 7-9 times EBITDA of a particular year. The fair value of Angiotech’s Proprietary Medical Device Technologies under this method was estimated by applying multiples ranging from 1.25 — 2.00 times revenue of a particular year.
The product and revenue categories used to derive enterprise value, which are based on subjective estimates and assumptions, differ from the actual reporting segments used by management to monitor and manage the business. Operating results are tracked and maintained in the Company’s accounting records consistent with the reporting segments identified in note 23
F-18
Summary of Reorganization and Fresh Start Accounting Adjustments
The following table and accompanying footnotes summarizes the impact of the Recapitalization Transaction and fresh-start accounting:
ANGIOTECH PHARMACEUTICALS INC.
CONSOLIDATED BALANCE SHEETS
(All amounts expressed in thousands of U.S. dollars, except share data)
(Unaudited)
| | | | | | | | Fresh-start | | | | | | | | April 30, 2011 | | Reorganization | | | | accounting | | | | May 1, 2011 | | | | Predecessor Company | | adjustments | | Footnote | | adjustments | | Footnote | | Successor Company | | ASSETS | | | | | | | | | | | | | | Current assets | | | | | | | | | | | | | | Cash and cash equivalents [note 6] | | $ | 30,222 | | $ | — | | | | $ | — | | | | $ | 30,222 | | Short-term investments [note 7] | | 5,294 | | — | | | | — | | | | 5,294 | | Accounts receivable | | 36,390 | | — | | | | — | | | | 36,390 | | Income tax receivable | | 1,315 | | — | | | | — | | | | 1,315 | | Inventories [note 3,8] | | 37,485 | | — | | | | 22,616 | | (a) | | 60,101 | | Deferred income taxes, current portion | | 2,534 | | 207 | | (7) | | (2,741 | ) | (b) | | — | | Prepaid expenses and other current assets | | 3,699 | | — | | | | — | | | | 3,699 | | Total current assets | | 116,939 | | 207 | | | | 19,875 | | | | 137,021 | | | | | | | | | | | | | | | | Assets held for sale [note 10] | | 2,481 | | — | | | | 143 | | (c) | | 2,624 | | Property, plant and equipment [note 3,9] | | 40,275 | | — | | | | 7,423 | | (c) | | 47,698 | | Intangible assets [note 3,11] | | 127,034 | | — | | | | 250,466 | | (d) | | 377,500 | | Goodwill [note 3] | | 5,367 | | — | | | | 119,878 | | (j) | | 125,245 | | Deferred financing costs [note 3,13(e)] | | 3,146 | | 1,226 | | (1) | | (4,372 | ) | (e) | | — | | Deferred income taxes, non-current portion | | 2,413 | | — | | (7) | | (121 | ) | (b) | | 2,292 | | Other assets | | 428 | | — | | | | — | | | | 428 | | Total assets | | 298,084 | | 1,433 | | | | 393,292 | | | | 692,808 | | | | | | | | | | | | | | | | LIABILITIES AND SHAREHOLDERS’ DEFICIT | | | | | | | | | | | | | | | | | | | | | | | | | | | | Current liabilities | | | | | | | | | | | | | | Accounts payable and accrued liabilities [note 12] | | 25,623 | | 11,822 | | (1),(2),(3),(6) | | — | | | | 37,445 | | Deferred income taxes, current portion | | — | | — | | | | 3,544 | | (b) | | 3,544 | | Income taxes payable | | 1,485 | | — | | | | — | | | | 1,485 | | Interest payable on long-term debt | | 2,279 | | — | | | | — | | | | 2,279 | | Exit credit facility [note 13(f)] | | 22,018 | | — | | | | — | | | | 22,018 | | Total current liabilities | | 51,405 | | 11,822 | | | | 3,544 | | | | 66,771 | | | | | | | | | | | | | | | | Liabiliities subject to compromise [note 3] | | 270,624 | | (270,624 | ) | (6) | | — | | | | — | | | | | | | | | | | | | | | | Deferred leasehold inducement [note 3] | | 3,485 | | — | | | | (3,485 | ) | (f) | | — | | Deferred income taxes, non-current portion | | 31,851 | | — | | | | 61,404 | | (b) | | 93,254 | | Other tax liabilities | | 4,835 | | — | | | | — | | | | 4,835 | | Debt [note 13 (a) & (b)] | | 325,000 | | — | | | | — | | (h) | | 325,000 | | Other liabilities | | 9,388 | | — | | | | (9,388 | ) | (g) | | — | | Total non-current liabilities | | 374,559 | | — | | | | 48,531 | | | | 423,089 | | | | | | | | | | | | | | | | Contingencies and commitments [note 16] | | | | | | | | | | | | | | | | | | | | | | | | | | | | Shareholders’ (deficit) equity | | | | | | | | | | | | | | Predecessor share capital | | 472,754 | | (472,754 | ) | (5) | | — | | | | — | | Authorized: | | | | | | | | | | | | | | 2000,000,000 Common shares, without par value | | | | | | | | | | | | | | 50,000,000 Class I Preference shares, without par value | | | | | | | | | | | | | | Common shares issued and outstanding: | | | | | | | | | | | | | | June 30, 2011 — nil | | | | | | | | | | | | | | December 31, 2010 — 85,180,377 | | | | | | | | | | | | | | Sucessor share capital | | (0 | ) | 202,948 | | (6) | | — | | | | 202,948 | | Authorized: | | | | | | | | | | | | | | Unlimited number of common shares, without par value | | | | | | | | | | | | | | Common shares issued and outstanding: | | | | | | | | | | | | | | May 1, 2011 - 12,721,354 | | | | | | | | | | | | | | June 30, 2011 — 12,721,354 | | | | | | | | | | | | | | Additional paid-in capital | | 35,834 | | 1,371 | | (4) | | (37,205 | ) | (i) | | — | | Accumulated deficit | | (950,967 | ) | 528,670 | | (1),(2),(3),(4),(5),(6) | | 422,297 | | (i) | | — | | Accumulated other comprehensive income | | 43,875 | | — | | | | (43,875 | ) | (i) | | — | | Total shareholders’ (deficit) equity | | (398,504 | ) | 260,235 | | | | 341,217 | | | | 202,948 | | | | | | | | | | | | | | | | Total liabilities and shareholders’ (deficit) equity | | $ | 298,084 | | $ | 1,433 | | | | $ | 393,292 | | | | $ | 692,808 | |
F-19
Reorganization Adjustments
(1)Represents the deferral and capitalization of $1.2 million of financing costs incurred during May 2011 to secure and complete the Revolving Credit Facility with Wells Fargo (see note 14(f)). As at the Plan Implementation Date, the previous debtor-in-possession credit facility (“DIP Facility”) was repaid and terminated in connection with the terms of the CCAA Plan.
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(vii) | The Predecessor Company established and implemented a Key Employee Incentive Plan (“KEIP”) that was satisfactory to the Predecessor Company and holders of the Subordinated Notes, who consented to the Recapitalization Transaction. The KEIP provided payments to the named beneficiaries totaling no more than $1.0 million and was triggered upon the implementation and completion of the Recapitalization Transaction. |
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(viii) | The Predecessor Company established and implemented a Management Incentive Plan (“MIP”) that was satisfactory to the Predecessor Company and the Consenting Noteholders. Under the terms of the MIP, the beneficiaries were granted restricted shares and restricted share units representing 4% or 520,833 of the new common shares issued on the Plan Implementation Date and 708,025 options to acquire 5.2% of the new common shares, on a fully-diluted basis. These options are scheduled to expire on May 12, 2019 and will vest in thirds on each anniversary of the Plan Implementation Date. The restricted shares and restricted share units do not have a contractual expiration date but are expected to vest in thirds on each anniversary of the Plan Implementation Date. Options to acquire an additional 5% of the new common shares have been reserved for issuance at a later date at the discretion of the board of directors of the Successor Company. |
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(ix) | The Successor Company appointed a new board of directors. |
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(x) | The Successor Company paid transaction fees of $5.3 million on May 12, 2011 to certain of its financial advisors. |
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(xi) | The Predecessor Company placed $0.4 million in escrow with the Monitor for distribution to Affected Creditors, other than the Subordinated Noteholders, to settle distribution claims totaling $4.5 million in accordance with the CCAA Plan. Distributions were paid to Affected Creditors, other than Subordinated Noteholders, in May, 2011. |
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(xii) | The settlement agreement with QSR Holdings, Inc. (the “Settlement Agreement”), related to certain litigation pertaining to the May 25, 2006 Agreement and Plan of Merger by and among Angiotech, the Company’s wholly owned subsidiary Angiotech Pharmaceuticals, (U.S.) Inc. (“Angiotech US”), Quaich Acquisition, Inc. and Quill Medical, Inc., was determined to be in full force and effect. As at December 31, 2012, approximately $5.2 million of the $6.0 million settlement amount has been paid out and $0.8 million is accrued in other liabilities. |
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(xiii) | The Amended and Restated Forbearance Agreement with Wells Fargo dated November 4, 2010 was terminated. Under this Amended and Restated Forbearance Agreement, Wells Fargo agreed to preserve the Predecessor Company’s previous existing credit facility and not exercise any of its rights and remedies during the restructuring period with respect to amounts owed to the Subordinated Noteholders and the litigation with QSR Holdings, Inc. |
On May 12, 2011, upon the close of business, the Angiotech Entities emerged from Creditor Protection Proceedings following the delivery of Monitor’s Certificate to the Angiotech Entities, the Subordinated Noteholders’ advisors and the Canadian Court. The Monitor’s Certificate confirmed that all steps, compromises, transactions, arrangements, releases and reorganizations were satisfactorily implemented in accordance with the provisions of the CCAA Plan. DuringAs a result, the three months ended March 31, 2011,charges on the Predecessor Company deferredAngiotech Entities’ assets, property and capitalized $0.3 millionundertaking were terminated, discharged and released. In addition, certain parties, including the Angiotech
F-17
Table of financing costs related to the initial setup of the Revolving Credit Facility.Contents
(2)On May 12, 2011, the successful completion of the Recapitalization Transaction triggeredEntities, Monitor, Subordinated Noteholders, Wells Fargo, advisors, auditors, indenture trustees, present and former shareholders, directors, and officers; were released and discharged from certain contractual participation fees of $5.4 million payableclaims, including without limitation, all and any demands, obligations, actions, judgments, orders and claims related to certain of the Predecessor Company’s financial advisors. In addition, the Predecessor Company accrued a further $3.6 million of professional fees owing to the Monitor and the Predecessor Company’s and participating Subordinated Noteholder’s financial and legal advisors for services incurred to execute and complete the Recapitalization Transaction.
(3)Upon successful completion of the Recapitalization Transaction on the Plan Implementation Date, the Company incurred $1.0 million of incentive payments owing to the named beneficiaries of the KEIP.
(4)In connectionor associated with the cancellation of all stock options upon implementation of the CCAA Plan, the total unrecognized stock based compensation of $1.4 million was charged to earnings on April 30, 2011.
(5)The $473 million reorganization adjustment reflects the cancellation of the Predecessor Company’s existing common stock in accordance with the provisions of the CCAA Plan.
(6)Prior toCreditor Protection Proceedings, the implementation of the CCAA Plan the Predecessor Company identified $270.6 million of Liabilities Subject to Compromise, which consisted of the following: $250 million of Subordinated Notes, $16 million of interest obligations related to the Subordinated Notes and $4.5 million of general accounts payable and accruals. Liabilities subject to compromise primarily represented unsecured pre-petition obligations of the Angiotech Entities that were subject to impairment and settlement at lesser amounts through the Creditor Protection Proceedings. Under the terms of the Creditor Protection Proceedings, any actions to enforce or otherwise effect payment of these liabilities were stayed. As a result, as at April 30, 2011, these liabilities were classified separately as liabilities subject to compromise on the consolidated balance sheet of the Predecessor Company and recorded at claim amounts allowed or expected to be allowed by the Canadian Court under the CCAA Plan. Management was able to develop reasonable estimates of the all Affected Creditors’ claims. In addition, allowed claims did not include any intercompany amounts. Liabilities subject to compromise excluded: (i) the unsecured Existing Floating Rate Notes and accompanying interest, which remained uncompromised in accordance with the terms of the CCAA Plan; (ii) post-petition liabilities incurred after the commencement of the CCAA Proceedings; (iii) pre-petition liabilities that were expected to be paid in full in accordance with the CCAA Plan, or applicable laws or provisions of CCAA and the U.S. Bankruptcy Code; (iv) negotiated settlements which were approved by the Canadian Court and (v) claims from creditors that were specifically named as Unaffected Creditors under the CCAA Plan. Liabilities that were subject to compromise were subject to adjustment based on: (i) approvals and orders granted by the Canadian Court, (ii) negotiated settlements and resolution of disputed claims, and (iii) repudiation or rejection of existing contracts.Recapitalization Transaction.
In accordance with the terms of the CCAA Plan, the maximum amount of distributions that were permitted to be made to Affected Creditors; excluding holders of the Subordinated Notes; was $30.0 million. Under the terms of the CCAA Plan, Affected Creditors, other than the Subordinated Noteholders, with claims less than or equal to $5,000 were deemed to have elected to receive cash in an amount equal to their claims in full satisfaction of their claims. Affected Creditors, other than Subordinated Noteholders, with claims greater than $5,000 but less than or equal to $31,250 could elect to receive $5,000 in satisfaction of their claims. In addition, Affected Creditors, other than the Subordinated Noteholders, with claims greater than $31,250 could elect to receive 16 cents on the dollar up to a maximum of $24,000 in satisfaction of their claims in lieu of receiving new common shares to be issued and outstanding upon completion of Recapitalization Transaction. As a result, this $4.5 million of distribution claims of Affected Creditors (excluding Subordinated Noteholders) were effectively settled for $0.4 million in cash on the Plan Implementation Date.
In accordance with the application of fresh start accounting on the Convenience Date, the $4.1 million recovery was recorded as part of the reorganization adjustments on April 30, 2011 and the $0.4 million of Affected Creditors Claims that were settled on the Plan Implementation Date were reclassified from Liabilities subject to Compromise to regular accounts payable and accrued liabilities. In addition, on May 12, 2011, the Predecessor Company’s $250 million Subordinated Notes and $16 million of related interest obligations (identified as Liabilities Subject to Compromise prior to the implementation of the CCAA Plan), were eliminated in exchange for 12,500,000 new common shares as follows:
F-20
| | Amount (000’s) | |
Predecessor Company liabilities subject to compromise: | | | |
Subordinated Notes | | $ | 250,000 | |
Pre-petition interest payable on Subordinated Notes | | 16,145 | |
Trade accounts payable and accruals | | 4,480 | |
Less: new common shares issued to satisfy Subordinated Noteholders’ claims | | (202,948 | ) |
Less: cash settlement of lender claims related to trade accounts payable and accruals | | (370 | ) |
Gain on extinguishment of debt and settlement of other liabilities | | $ | 67,307 | |
As at December 31, 2011, the Company had no further liabilities that were subject to compromise.
(7)The implementation of the Recapitalization Transaction triggered a $67.3 million gain onrelated to the forgiveness of indebtedness, resulting in the utilization of Canadian tax attributes for which a deferred tax asset was not previously recorded. Accordingly, the Canadian tax attributes available to the Successor Company are significantly reduced from the Predecessor Company’s previously disclosed balances. Management has evaluated other tax implications of the reorganization and has determined that they did not have a significant impact on the tax balances.
Fresh-Start Accounting Adjustments—Allocation of Reorganization Value to Assets and Liabilities
In accordance with ASC No. 805 — Business Combinations, the Company’s reorganization value of $693 million,debt, which was derived from its estimated enterprise value, was allocated to its assets and liabilities based on their estimated fair values. Deferred income taxes were recorded in accordance with ASC No. 740. The reorganization value was first assigned to tangible and identifiable intangible assets. The excess of the reorganization value over and above the identifiable net asset values resulted in goodwill of $125 million.
The assumptions used and approaches applied on April 30, 2011 to derive the estimated fair values of Angiotech’s assets and liabilities are summarizedcalculated as follows:
a) Inventory
The $60.1 million estimated fair value of inventory was estimated as follows:
·Raw materials — no fair value adjustments were recorded on account of raw materials given that their existing carrying values were determined to be representative of current replacement costs.
·Work-in-process inventory (“WIP”) — the fair value of WIP was determined based on estimated selling prices less conversion costs to complete manufacturing, selling and disposal costs, and a reasonable profit allowance for manufacturing and selling efforts. When selecting the estimated selling prices for WIP, management applied the fair value concept of “best and highest use” by assessing the principal and most advantageous market where the highest profit margin could be obtained.
·Finished goods inventory — the fair value of finished goods was determined based on estimated selling prices of inventory on hand less selling and disposal costs, including a reasonable profit allowance for selling efforts.
The following table summarizes the respective estimated fair values and book values of the Successor Company’s and Predecessor Company’s inventory:
| | May 1, 2011
Successor Company | | | April 30, 2011
Predecessor Company | |
Raw materials | | $ | 10,705 | | | $ | 10,705 | |
Work in process | | 25,978 | | | 13,908 | |
Finished goods | | 23,418 | | | 12,872 | |
Total | | $ | 60,101 | | | $ | 37,485 | |
| | May 1, 2011
in 000’s | |
Predecessor Company liabilities subject to compromise: | | | |
Subordinated Notes | | $ | 250,000 | |
Pre-petition interest payable on Subordinated Notes | | 16,145 | |
Trade accounts payable and accruals | | 4,480 | |
Less: new common shares issued to satisfy Subordinated Noteholders’ claims | | (202,948 | ) |
Less: cash settlement of lender claims related to trade accounts payable and accruals | | (370 | ) |
Gain on extinguishment of debt and settlement of other liabilities | | $ | 67,307 | |
b) Deferred income taxes and other tax liabilities
Deferred income taxes have been adjusted to reflect the tax effects of differences between the estimated fair value of identifiable assets and liabilities and their tax basis and the benefits of any unused tax losses, tax credits, other tax attributes to the extent that theses amounts are more likely than not to be realized. Measurement period adjustments were made to deferred income tax liabilities as explained in (a) above.
F-21
c) Property, Plant and Equipment and Assets Held for Sale
Property, plant and equipment were recorded at their estimated fair values totaling $47.7 million based on the highest and best use of these assets. Assets held for sale were recorded at $2.6 million, which represented their estimated fair value less cost to sell. The following approaches were applied to determine fair value:
·The market approach or sales comparison approach utilizes recent sales or offerings of similar assets to derive a probable selling price. Under this method, certain adjustments may be made to compensate for differences in age, condition, operating capacity and the recentness of comparable transactions.
·The cost approach considers the current costs required to construct, purchase or replace similar assets. This approach incorporates certain assumptions about the age and estimated useful lives of the assets under consideration, which may include adjustments for the following factors:
·Physical deterioration: refer to the loss in value resulting from wear and tear, deterioration, deferred maintenance, exposure to the elements, age and design flaws.
·Functional obsolescence: refers to the loss in value resulting from impediments or factors specific to the asset under consideration, which prevents it from operating efficiently or as intended.
·Economic obsolescence: refers to the loss in value resulting from external factors such as market conditions, environmental conditions, or regulatory changes.
·Assets held for sale were adjusted to their estimated fair value less selling costs based on recent purchase offers received.
·Third party appraisers were engaged to assess the estimated value of land and buildings. A combination of the sales comparison and income based approaches were used to estimate the value of land and buildings.
·Cost and market approaches were used to fair value leasehold improvements, manufacturing equipment, research equipment, office furniture & equipment and computer equipment.
·The current carrying values of construction-in-progress (“CIP”) assets were determined to be representative of fair value.
The following table summarizes the respective estimated fair values and book values of the Successor Company’s and Predecessor Company’s property, plant and equipment:
| | May 1, 2011
Successor Company | | | April 30, 2011
Predecessor Company | |
Land | | $ | 3,645 | | | $ | 4,810 | |
Building | | 14,645 | | | 11,775 | |
Leasehold Improvements | | 6,430 | | | 9,426 | |
Manufacturing equipment | | 19,407 | | | 12,353 | |
Research equipment | | 401 | | | 183 | |
Office furniture and equipment | | 1,188 | | | 327 | |
Computer equipment | | 1,982 | | | 1,401 | |
Total | | $ | 47,698 | | | $ | 40,275 | |
Assets held for sale | | $ | 2,624 | | | $ | 2,481 | |
d) Intangible Assets
The $377.5 million fair value of intangible assets was estimated using the following income approach methodologies:
·The excess earnings method estimates the value of an intangible asset by quantifying the amount of residual or excess cash flows generated by an asset and discounting those cash flows to the present. The method substantially resembles a “traditional” financial projection for a company, which includes revenues, costs of goods sold, operating expenses and taxes projected for the next several years based on reasonable assumptions. Unlike a traditional financial projection, however, the excess earnings methodology requires the application of contributory asset charges. These charges represent the return on and of all contributory assets, and are applied in order to estimate the “excess” earnings generated by the subject intangible asset. Contributory asset charges typically include payments for the use of working capital, tangible assets and other intangible assets.
·The relief from royalty method is based on the assumption that, in lieu of ownership of an intangible asset, an independent licensor would be willing to pay a royalty in order to enjoy the benefits of the asset. Under this
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method, value is estimated by discounting the hypothetical royalty payments to their present value over the economic life of the asset.
·Angiotech has several trade names, with estimated economic lives of approximately 20 years, for which fair values were estimated using the relief from royalty method. Royalty rates ranged from 0.7% and 3% and discount rates ranged from 16% to 25% depending on factors such as age, profitability, degree of importance and competition.
·Customer relationships and developed technologies fair values were estimated using the excess earnings method with estimated economic lives of approximately 20 years. The residual/excess cash flows were discounted at rates ranging from 15% to 40% to reflect required returns and risk associated with the development stage and market acceptance of certain products. Attrition rates ranging from 1% to 13% were assumed in determining the estimated fair value of various existing customer relationships.
·Angiotech’s patent fair values were estimated using the relief from royalty method over estimated economic lives of approximately 5 to 14 years. Royalty rates ranged from 8% to 15% and discount rates ranged from 15% to 40% to reflect risk associated with the patents’ stage of development and market acceptance.
·A tax rate of 30% was assumed in determining the value of each category of intangible assets.
The following tables summarize the estimated respective fair values and book values of the Successor Company’s and Predecessor Company’s intangible assets:
| | May 1, 2011
Fair Values | |
| | Successor Company | |
Customer relationships | | $ | 171,000 | |
Trade names and other | | 25,200 | |
Patents | | 113,900 | |
Core and developed technology | | 67,400 | |
| | $ | 377,500 | |
| | April 30, 2011
Net book value | |
| | Predecessor Company | |
Acquired technologies | | $ | 47,046 | |
Customer relationships | | 56,630 | |
In-licensed technologies | | 16,870 | |
Trade names and other | | 6,488 | |
| | $ | 127,034 | |
e) Deferred financing costs
The estimated fair value of the $4.4 million deferred financing costs was determined to be nil and written off upon application of fresh start accounting.
f) Deferred leasehold inducementsReorganization Items
As at December 31, 2010, the Company had $4.8 million of deferred leasehold inducements related to its Canadian and Puerto Rican subsidiaries. The estimated fair value of the $3.5 million book value of deferred leasehold inducements as at April 30, 2011 was determined to be nil upon application of fresh start accounting given that the inducements received are non-refundable, not transferable to a third party and are not expected to give rise to any cash flows in the future. Furthermore, as current lease rates applicable to the propertiesdescribed under consideration were determined to be reflective of current market rates, no provisions were required to adjust the Company’s current rental agreements to market rates.
g) Other long term liabilities
The following items were adjusted in other long term liabilities:
·Prior to the application of fresh start accounting, the Predecessor Company had $1.9 million of deferred revenue related to upfront fees received from licensors for certain licensing arrangements. While the Successor Company still has an ongoing obligation to provide the licensors with access to the relevant licenses, no further costs are expected to service or maintain the license and related deferred revenue liability. As such, the fair value of the deferred revenue liability was determined to be nil upon application of fresh start accounting.
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·Pursuant to a 1997 license agreement (“NIH License Agreement”) with National Institutes of Health (“NIH”), the Company agreed to pay to the NIH certain milestone payments upon achievement of specified clinical and commercial development milestones and to pay royalties on net TAXUS® sales by BSC and sales of the ZilverTM-PTX TM paclitaxel-eluting peripheral stent (“Zilver”) by Cook Medical Inc (“Cook”). Prior to the application of fresh start accounting, the Company had a $7.2 million accrual for royalty fees and interest owing to the NIH under this licensing arrangement for the use of certain technologies related to paclitaxel. On December 29, 2010, the Company and the NIH entered into an amendment to the NIH License Agreement whereby the parties agreed to eliminate: (i) the $7.2 million accrual for unpaid royalties and interest owing to the NIH and (ii) future royalties payable on licensed products sold by BSC going forward, in exchange for a 0.25% increase of existing royalty rates for licensed products sold by Cook and an extension of the term for payment of such royalties of approximately two years. Upon implementation of fresh start accounting, the estimated fair value of this liability was not determined to be significant.
h) Debt
As discussed above, the Successor Company’s New Floating Rate Notes were issued on May 12, 2011 and replaced the Predecessor Company’s Existing Floating Rate Notes. Based on the interest rate and other terms of the New Floating Rate Notes and the Company’s current credit profile, the $325 million face value of the New Floating Rate Notes was determined to be representative of estimated fair value for the purposes of adopting fresh-start accounting.
i) Additional paid in capital, accumulated deficit and accumulated other comprehensive income
These fresh start accounting adjustments reflect the elimination of additional paid in capital, accumulated other comprehensive income and the remaining accumulated deficit (after the revaluation of the Predecessor Company’s assets and liabilities).
j) Goodwill
Upon implementation of fresh start accounting on April 30, 2011, Angiotech comprehensively revalued its assets and liabilities at their estimated fair values. After allocating $568 million of the estimatednote 2, reorganization value to tangible assets and identifiable intangible assets based on their respective estimated fair values, the remaining unallocated portion of the reorganization value of $125 million was recorded as goodwill in accordance with ASC No. 852. Based on management’s analysis, all of the goodwill was determined to be attributable to the Successor Company’s Medical Device Technologies segment. Furthermore, none of the goodwill was determined to be deductible for tax purposes.
Reorganization value to be allocated to assets | | $ | 692,808 | |
Less amount allocated to tangible and identifiable intangible assets, based on their fair values | | 567,563 | |
Unallocated reorganization value attributed to goodwill | | 125,245 | |
Management believes the fair value of the goodwill can be primarily attributed to the following:
·The Company’s assembled workforce;
·The generally higher multiples / values assigned to companies in the medical device / pharmaceuticals industry sectors as compared to companies in other industry sectors;
·The recession-resistant nature of the Company’s products;
·Price inelasticity of the Company’s products; and
·Regulatory barriers to entry in the medical device / pharmaceuticals industry
As many of the fair value estimates described above are inherently subject to significant uncertainties, there is no assurance that the estimates and assumptions in these valuations will be realized and actual results may differ materially.
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4.REORGANIZATION ITEMS
Reorganization items represent certain recoveries, expenses, gains and losses and loss provisions that are directly related to the Predecessor Company’s Creditor Protection Proceedings and Recapitalization Transaction. In accordance with ASC No. 852, these reorganization items have been separately disclosed as follows:
| | | | Predecessor Company
Four months
ended
April 30, 2011 | | | | | Predecessor Company
Four months
ended
April 30, 2011 | |
Professional fees | | (1 | ) | (17,868 | ) | | (1 | ) | (17,868 | ) |
Director’s and officer’s insurance | | (2 | ) | (1,601 | ) | | (2 | ) | (1,601 | ) |
KEIP payment | | (3 | ) | (793 | ) | | (3 | ) | (793 | ) |
Gain on settlement of financial liability approved by the Canadian Court | | (4 | ) | 1,500 | | | (4 | ) | 1,500 | |
Cancellation of options and awards | | (5 | ) | (1,371 | ) | | (5 | ) | (1,371 | ) |
Net gains due to fresh start accounting adjustments | | (6 | ) | 341,217 | | |
Net gains due to fresh-start accounting adjustments | | | (6 | ) | 341,217 | |
| | | | $ | 321,084 | | | | | $ | 321,084 | |
|
(1) Professional fees represent legal, accounting and other financial consulting fees paid to advisors toadvisors; which represented the Predecessor Company and Subordinated Noteholders during the Consenting Noteholders to assistRecapitalization Transaction. These advisors assisted in the analysis of financial and strategic alternatives as well as the execution and completion of the Recapitalization Transaction, throughthroughout the Predecessor Company’s Creditor Protection Proceedings.
(2) Directors’ and officers’ insurance represents the purchase of additional insurance coverage required to indemnify existingthe preceding directors and officers of the Predecessor Company for a period of six years after the Plan Implementation Date. Given that a new board of directors was appointed upon implementation of the CCAA Plan, total fees of $1.6 million waswere expensed to reorganization items during the four months ended April 30, 2011.
(3) Upon completion of the Recapitalization Transaction, ana $0.8 million incentive payment (net of a $0.2 million tax recovery) was triggered under the terms of the KEIP. Two-thirdsKey Employment Incentive Plan (“KEIP”), which was established as part of the Recapitalization Transaction. The KEIP payment was paid on the Plan Implementation Date. The remaining one-third wasfully paid out onby August 10, 2011.
(4) On February 16, 2011,In connection with the termination and settlement of an agreement with a previous distributor, the Predecessor Company entered into a Settlement and License Termination Agreement with Rex Medical L.P. (the “Rex Settlement Agreement”), which provides for the full and final settlement and/or dismissal of all claims arising under the 2008 License, Supply, Marketing and Distribution Agreement (the “Option Agreement”) for the manufacturing and distribution rights to the Option Inferior Vena Cava Filter. Based on the terms of the Rex Settlement Agreement, the Option Agreement terminated on March 31, 2011 and the Predecessor Company paid $1.5 million on March 10, 2011 to settle $3.0 million of royalty and milestone obligations owed as at December 31, 2010. The Predecessor Company therefore recorded a $1.5 million recovery during the four months ended April 30, 2011 related to the full and final settlement of theseall milestone and royalty obligations.obligations owing and accrued as at December 31, 2010 under the terms of the original agreement.
(5) In connection with the cancellation of all stock options uponUpon implementation of the CCAA Plan,Recapitalization Transaction, the Predecessor Company cancelled all existing stock options and charged the total unrecognized stock based compensation of $1.4 million was charged to earnings on April 30, 2011.
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Table of Contents
(6) ReferUpon reorganization and implementation of fresh-start accounting, the Company’s reorganization value of $692.8 million was allocated to note 3 for an explanationall tangible and identifiable intangible assets based on their fair values, which totaled $567.6 million. The fresh-start revaluation resulted in goodwill of the$125.2 million and net revaluation gains resulting from fresh start accounting adjustments.of $341.2 million.
Unless specifically prescribed under ASC No. 852, other items that are indirectly related to the Predecessor Company’s reorganization activities, have been recorded in accordance with other applicable U.S. GAAP, including accounting for impairments of long-lived assets, modification of leases, accelerated depreciation and amortization, and severance and termination costs associated with Revolving Creditexit and disposal activities.
For more detailed information about the Creditor Protection Proceedings and the Recapitalization Transaction, refer to the annual audited consolidated financial statements included in the 2011 Annual Report filed with the SEC on Form 10-K on March 29, 2012.
5.4. FINANCIAL INSTRUMENTS AND FINANCIAL INSTRUMENT RISK
For certain of Angiotech’s financial assets and liabilities, including cash and cash equivalents, accounts receivable, accounts payable and accrued liabilities and interest payable, the carrying amounts approximate fair value due to their short-term nature. The fair value of short term investments was determined based on quoted market prices for identical assets.assets, which qualify as level 1 inputs within the fair value hierarchy defined by ASC 820 — Fair Value Measurements and Disclosures. As at December 31, 2011,2012, the fair value of Angiotech’s short-term investment was approximately $3.3$0.4 million (December 31, 20102011 — $4.7$3.3 million).
As discussed below in note 14, on August 13, 2012, $225.0 million of the $255.5 million New Notes that were tendered were irrevocably extinguished and exchanged, on a pro rata basis, for $229.4 million of Senior Notes. As at December 31, 2011,2012, the total fair value and carrying value of the Senior Notes was $229.4 million. As at December 31, 2012, the total fair value of the Successor Company’s New Floating Rate Notes was approximately $60.7 million (December 31, 2011 - $316 millionmillion) and the carrying value was $325 million.$60.0 million (December 31, 2011 - $325.0 million). The estimated fair value of the New Floating RateSenior Notes was based on a consideration of cash flows associated with future interest and principal payments and discount rates from similar companies in the healthcare industry as well as quoted market prices for these particular liabilities. As discussed above, the Successor Company’s New Floating Rate Notes were issued on May 12, 2011 and replaced the Predecessor Company’s Existing Floating Rate Notes. As at December 31, 2010, the fair value of the Predecessor Company’s Existing Floating Rate Notes, Subordinated Notes and accrued interest was estimated to be
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approximately $590.8 million. The fair values of the Existing Floating Rate Notes and Subordinated Notes were based on quoted market prices for these particular liabilities.health care industry.
Financial risk includes interest rate risk, exchange rate risk and credit risk.
· Interest rate risk arises due to the respectiveSuccessor Company’s long-term debt bearing variable interest rates. The interest rate on the New Floating Rate Notes attributable to the Successor Company is resetresets quarterly to 3-month LIBOR plus 3.75%, subject to a LIBOR floor of 1.25%. The New Floating Rate Notes currently bear interest at a rate of 5%. On December 31, 2010 the Existing Floating Rate Notes attributable to the Predecessor Company, which were subject to an interest rate based on 3-month LIBOR plus 3.75%, bore interest at a rate of 4.1%. The Successor Company does not use derivatives to hedge against interest rate risks.
· Foreign exchange rate risk arises as a portion of the respectiveSuccessor Company’s investments, assets, liabilities, revenues and expenses are denominated in other than U.S. dollars. The respectiveSuccessor Company’s financial results are subject to the variability that arises from exchange rate movements in relation to the U.S. dollar, and is primarily limited to the Canadian dollar, the Danish kroner, the Swiss franc, the Euro, and the UK pound sterling.British pounds. Foreign exchange risk is mitigated, to some extent by satisfying foreign denominated expenditures with cash inflows or assets denominated in either the same currency or a pegged currency.
· Credit risk arises as the respectiveSuccessor Company provides credit to its customers in the normal course of business. The respectiveSuccessor Company performs credit evaluations of its customers on a continuing basis and the majority of its trade receivables are unsecured. The maximum credit risk loss that the respectiveSuccessor Company could face is limited to the carrying amount of accounts receivable. Concentrations of credit risk with respect to trade accounts receivable are limited due to the large number of customers and their dispersion across many geographic areas. However, the Successor Company has a significant amount of trade accounts receivable is with customers who form part of the national healthcarehealth care systems of several countries. Efforts by governmental and third-party payers to reduce health care costs or the announcement of legislative proposals or reforms to implement government controls could impact the Successor Company’s credit risk. Although the Successor Company does not currently foresee any significant credit risk associated with these receivables, collection is dependent upon the financial stability of those countries’ national economies. At December 31, 20112012, the accounts receivable allowance for uncollectible accounts was $0.2 million (December 31, 20102011 — $2.4$0.2 million).
6. ACQUISITION OF CERTAIN ASSETS OF HAEMACURE CORPORATION
On April 6, 2010, the Predecessor Company acquired certain Haemacure Corporation (“Haemacure”) assets for consideration of $3.9 million. Under ASC No. 805, the transaction qualified as a business combination and the acquisition method was used to account for the transaction.
Prior to the acquisition, the Predecessor Company entered into various license, distribution, development and supply agreements for fibrin and thrombin technologies. The collaboration was intended to provide the Predecessor Company with access to technology for certain of its surgical product candidates in preclinical development. As these agreements did not contain any settlement provisions and were neither favorable nor unfavorable when compared to current market pricing for similar transactions, no settlement gains or losses were recognized.
On January 11, 2010 Haemacure announced it filed a notice of intention to make a proposal to its creditors under the Bankruptcy and Insolvency Act (Canada) and its wholly-owned U.S. subsidiary sought court protection under Chapter 11 of the U.S. Bankruptcy Code. These actions were taken in light of Haemacure’s financial condition and inability to raise additional financing. As part of the collaboration arrangement, the Predecessor Company provided Haemacure with a senior secured bridge financing facility as well as additional financing to fund its insolvency proceedings and day-to-day operations. These loans were secured by substantially all of Haemacure’s assets. As at April 5, 2010, the carrying value of the loan owed by Haemacure was $2.5 million compared to the contractual amount of $3.7 million. In accordance with ASC No. 805-10-55-21, the loans and accrued interest were effectively settled in exchange for the acquisition of certain assets from Haemacure and an additional $0.2 million cash payment. The Predecessor Company recognized a $1.2 million gain on the effective settlement of the pre-existing debt arrangement, which reflects the difference between the contractual settlement amount of the loan and its carrying value.
The estimated fair values of the net assets acquired at the date of acquisition are summarized as follows:
| | April 6, 2010 | |
Property, plant and equipment | | $ | 2,906 | |
Intangible assets | | 1,700 | |
Deferred income tax liability | | (720 | ) |
| | | |
Estimated fair value of net assets acquired | | 3,886 | |
| | | | |
F-26F-19
| | April 6, 2010 | |
Consideration: | | | |
Face value of the loan receivable, including accrued interest | | 3,686 | |
Cash paid | | 200 | |
| | | |
Total consideration | | $ | 3,886 | |
| | | | |
The Predecessor Company used the income approach to determine the fair valueTable of the intangible assets acquired. The fair values of the property, plant and equipment were estimated using a cost-based approach which considers replacement values as well as the values ascribed to the assets for their highest and best use as defined by GAAP.Contents
As the acquisition qualified as a business combination, transaction-related expenses of $0.6 million were charged to selling, general and administration costs during the year ended December 31, 2010. The assets acquired from Haemacure have been included in the consolidated financial statements since the date of acquisition. Given the liquidity constraints and recapitalization plans executed through the Creditor Protection Proceedings, the research and development activities related to the Haemacure fibrin and thrombin technologies were indefinitely suspended. As a result, as at December 31, 2010, the Predecessor Company wrote-off the $3.9 million of net assets acquired from Haemacure during the year. This impairment charge triggered a corresponding reduction of the $0.7 million deferred income tax liability and expense, thereby increasing the loan settlement gain to $1.9 million as at December 31, 2010.
Pro forma information (unaudited)
The following unaudited pro forma information is provided for the business combination assuming that it occurred at the beginning of the earliest period presented, January 1, 2009. The pro forma information combines the financial results of the Predecessor Company with the financial results of Haemacure for the year ended December 31, 2010 and December 31, 2009.
| | Year ended
December 31, 2010 | | Year ended
December 31, 2009 | |
Net loss | | $ | (68,997 | ) | $ | (27,505 | ) |
Net loss per share | | $ | (0.81 | ) | $ | (0.32 | ) |
The information presented above is for illustrative purposes only and is not indicative of the results that would have been achieved had the business combination taken place at the beginning of the earliest period presented. For comparative purposes, the pro forma information above excludes the impact of the $1.9 million non-recurring loan settlement gain and $0.6 million of transaction costs which were incurred in connection with the business combination during the year ended December 31, 2010. The pro forma impact on revenue was not material for any of the periods presented.
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7.5. CASH AND CASH EQUIVALENTS
All cash and cash equivalents are held in interest and non-interest bearing bank accounts and are denominated in the following currencies:
| | Successor Company | | | Predecessor Company | | |
| | December 31, | | | December 31, | | | December 31, | | December 31, | |
| | 2011 | | | 2010 | | | 2012 | | 2011 | |
| | | | | | | | | | | | | |
U.S. dollars | | $ | 12,837 | | | $ | 27,779 | | | $ | 38,289 | | $ | 12,837 | |
Canadian dollars | | 4,884 | | | 933 | | | 1,086 | | 4,884 | |
Swiss francs | | 307 | | | 575 | | |
British pounds | | | 2,433 | | 1,223 | |
Euros | | 1,515 | | | 1,447 | | | 1,449 | | 1,515 | |
Danish kroner | | 940 | | | 1,090 | | | 1,707 | | 940 | |
Other | | 1,690 | | | 1,491 | | | 981 | | 774 | |
| | | | | | | | $ | 45,945 | | $ | 22,173 | |
| | $ | 22,173 | | | $ | 33,315 | | |
8. SHORT TERM6. SHORT-TERM INVESTMENT
December 31, 2011 — Successor Company | | Cost | | Net Unrealized
(Losses) | | Carrying value | |
Short-term investment: | | | | | | | |
Available-for-sale equity securities | | $ | 5,294 | | $ | (2,035 | ) | $ | 3,259 | |
| | | | | | | | | | |
December 31, 2010 — Predecessor Company | | Cost | | Net Unrealized
Gains | | Carrying value | |
Short-term investment: | | | | | | | |
Available-for-sale equity securities | | $ | 848 | | $ | 3,805 | | $ | 4,653 | |
| | | | | | | | | | |
Short term investment - Available-for-sale securities | | December 31, 2012 | | December 31, 2011 | |
Cost | | $ | 3,259 | | $ | 5,294 | |
Securities sold | | (2,623 | ) | — | |
Net unrealized gains (losses) recognized in earnings | | (212 | ) | (2,035 | ) |
Carrying value | | 424 | | 3,259 | |
| | | | | | | |
ShortThe Successor Company’s short term investment as at December 31, 20112012 and December 31, 20102011 consist of equity securities in a publicly traded biotechnology company, which is recorded at its fair value at the end of each reporting period. In accordance with ASC 820 — Fair Value Measurements and Disclosures, this fair value measure is included in Level 1 of the fair value hierarchy given that its measurement is based on quoted bid prices which are available in an active stock market.
During the year ended December 31, 2012, the Successor Company disposed of $2.6 million of its investment for net proceeds of $2.3 million and realized a loss of $0.4 million on the Consolidated Statement of Operations. The Successor Company also recorded unrealized other-than-temporary impairment losses of $0.2 million in its Consolidated Statement of Operations for the year ended December 31, 2012. As at December 31, 2011, the Successor Company determined that this investment was impaired on an other-than-temporary basis due to the value being depressedsubstantially below the Successor Company’s carrying value for an extended period of time and management’sManagement’s intent to liquidate these securities in the near term. As a result, the $2.0 million of net unrealized losses recorded in accumulated other comprehensive income at that time were reclassified to the Consolidated Statement of Operations as an impairment write-down for the eight months ended December 31, 2011.
During the four months ended April 30, 2011, the Predecessor Company recorded unrealized gains of $0.6 million on this short term investment (year ended December 31, 2010 — unrealized losses of $3.1 million). These unrealized gains and losses were recorded in accumulated and other comprehensive income.
During the year ended December 31, 2010, the Predecessor Company recorded $1.3 million of write-offs in its Consolidated Statement of Operations related to three of its long term investments in private biotechnology companies that were determined to be not recoverable.irrecoverable.
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9.7. INVENTORIES
| | Successor Company | | | Predecessor Company | | |
| | December 31, | | | December 31, | | | December 31, | | December 31, | |
| | 2011 | | | 2010 | | | 2012 | | 2011 | |
| | | | | | | | | | | |
Raw materials | | $ | 9,641 | | | $ | 9,760 | | | $ | 14,779 | | $ | 9,641 | |
Work in process | | 11,882 | | | 11,770 | | | 15,265 | | 11,882 | |
Finished goods | | 12,781 | | | 13,101 | | | 16,370 | | 12,781 | |
| | | | | | | | | | | |
Total | | $ | 34,304 | | | $ | 34,631 | | | $ | 46,414 | | $ | 34,304 | |
As at December 31, 2011,2012, the inventory allowance was $0.9$1.1 million (December 31, 20102011 - $3.4$1.0 million). For
During the year ended December 31, 2012, the Successor Company recorded net inventory and obsolescence charges of $0.1 million. During the eight months ended December 31, 2011, the Successor Company recorded $1.0 million of inventory write-downs and obsolescence charges. During the four months ended April 30, 2011, the Predecessor Company did not record any inventory write-downs and obsolescence charges ($3.0 million write-down for the year ended December 31, 2010). During the eight months ended December 31, 2011, the Successor Company recorded $1.0 million of inventory write-downs and obsolescence charges.
10.8. PROPERTY, PLANT AND EQUIPMENT
| | | | Accumulated | | Net Book | | |
December 31, 2011 - Successor Company | | Cost | | Depreciation | | Value | | |
December 31, 2012 | | | Cost | | Accumulated
Depreciation | | Net Book Value | |
Land | | $ | 3,589 | | $ | — | | $ | 3,589 | | | $ | 3,224 | | $ | — | | $ | 3,224 | |
Buildings | | 14,355 | | 452 | | 13,903 | | | 12,276 | | 689 | | 11,587 | |
Leasehold improvements | | 4,946 | | 1,930 | | 3,016 | | | 7,489 | | 4,340 | | 3,149 | |
Manufacturing equipment | | 17,504 | | 1,573 | | 15,931 | | | 15,502 | | 4,407 | | 11,095 | |
Research equipment | | 312 | | 63 | | 249 | | | 275 | | 189 | | 86 | |
Office furniture and equipment | | 798 | | 156 | | 642 | | | 709 | | 333 | | 376 | |
Computer equipment | | 2,120 | | 261 | | 1,859 | | | 2,689 | | 769 | | 1,920 | |
| | | | | | | | | $ | 42,164 | | $ | 10,727 | | $ | 31,437 | |
| | $ | 43,624 | | $ | 4,435 | | $ | 39,189 | | |
December 31, 2010 — Predecessor Company | | Cost | | Accumulated
Depreciation | | Net Book
Value | | |
| | | | | Accumulated | | Net Book | |
December 31, 2011 | | | Cost | | Depreciation | | Value | |
Land | | $ | 7,345 | | $ | — | | $ | 7,345 | | | $ | 3,589 | | $ | — | | $ | 3,589 | |
Buildings | | 14,614 | | 2,394 | | 12,220 | | | 14,355 | | 452 | | 13,903 | |
Leasehold improvements | | 17,296 | | 7,259 | | 10,037 | | | 8,175 | | 1,930 | | 6,245 | |
Manufacturing equipment | | 25,949 | | 11,367 | | 14,582 | | | 14,275 | | 1,573 | | 12,702 | |
Research equipment | | 631 | | 429 | | 202 | | | 312 | | 63 | | 249 | |
Office furniture and equipment | | 4,252 | | 3,812 | | 440 | | | 798 | | 156 | | 642 | |
Computer equipment | | 8,445 | | 7,010 | | 1,435 | | | 2,120 | | 261 | | 1,859 | |
| | $ | 78,532 | | $ | 32,271 | | $ | 46,261 | | | $ | 43,624 | | $ | 4,435 | | $ | 39,189 | |
Depreciation expense for the year ended December 31, 2012 was $6.7 million and approximately $4.1 million of this amount was allocated to cost of products sold.
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Table of Contents
Depreciation expense for the eight months ended December 31, 2011 was $4.4 million and approximately $1.7 million of this amount was allocated to cost of products sold. Depreciation expense for the four months ended April 30, 2011 was $3.9 million and
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approximately $1.4 million of this amount was allocated to cost of products sold. Depreciation expense for the yearsyear ended December 31, 2010 and 2009 was $6.8 million and $7.1 million, respectively, with approximately $4.0 million and $3.8 million of these amounts beingthis amount was allocated to cost of products sold.
During the year ended December 31, 2012, the Successor Company’s Medical Device Products segment recorded $0.9 million of impairment write-downs of certain leasehold improvements, associated with the downsizing of the Vancouver, Canada facility, and certain manufacturing equipment related to the termination of one of our product development projects. Furthermore, in connection with the Successor Company’s closure of its Denmark manufacturing facility described in note 16, the $1.9 million carrying value of a property that is currently being marketed for sale was reclassified from property, plant and equipment to assets-held- for-sale. .
During December 2011, the Successor Company’s Medical Device TechnologiesProducts segment of the Successor Company recorded $4.5 million of impairment write-downs of certain manufacturing equipment, furniture and fixtures and leasehold improvements in connection with the restructuring of the research and development department and termination of the anti-infective product, research and development program that occurred during the latter part of 2011.program. These assets were assigned a carrying value of nil based on management’sManagement’s conclusion that their estimated fair values net of selling costs was determined to be nominal.
During December 2010, the Predecessor Company’s Medical Device TechnologiesProducts segment of the Predecessor Company recorded impairment write-downs of $4.8 million relating to: (i) certain lab and manufacturing equipment held at its Haemacure operations due to the indefinite suspension of research and development activities for that operation; and (ii) certain lab equipment related to its head office lab facilities due to the restructuring changes that the Predecessor Company implemented in accordance with its Recapitalization Plan. These assets were assigned a carrying value of nil based on management’sManagement’s conclusion that their estimated fair values net of selling costs was determined to be nominal.
There were no impairments recorded to property, plant and equipment recorded during the year ended December 31, 2009.
11.9. INTANGIBLE ASSETS AND GOODWILL
(a) Intangible Assets
| | | | Accumulated | | Net Book | | |
December 31, 2011 - Succcessor Company | | Cost | | Amortization | | Value | | |
December 31, 2012 | | | Cost | | Accumulated
Amortization | | Net Book Value | |
Customer relationships | | $ | 170,269 | | $ | 6,723 | | $ | 163,546 | | | $ | 170,452 | | $ | 16,816 | | $ | 153,636 | |
Trade names and other | | 24,859 | | 1,102 | | 23,757 | | | 24,887 | | 2,751 | | 22,136 | |
Patents | | 105,700 | | 10,663 | | 95,037 | | | 105,690 | | 26,670 | | 79,020 | |
Core and developed technology | | 63,576 | | 2,850 | | 60,726 | | | 63,778 | | 7,127 | | 56,651 | |
| | $ | 364,404 | | $ | 21,338 | | $ | 343,066 | | | $ | 364,807 | | $ | 53,364 | | $ | 311,443 | |
December 31, 2010 — Predecessor Company | | Cost | | Accumulated
Amortization | | Net Book
Value | |
Acquired technologies | | $ | 131,947 | | $ | 78,731 | | $ | 53,216 | |
Customer relationships | | 110,176 | | 50,886 | | 59,290 | |
In-licensed technologies | | 53,100 | | 34,426 | | 18,674 | |
Trade names and other | | 14,288 | | 7,495 | | 6,793 | |
| | $ | 309,511 | | $ | 171,538 | | $ | 137,973 | |
| | | | Accumulated | | Net Book | |
December 31, 2011 | | Cost | | Amortization | | Value | |
Customer relationships | | $ | 170,269 | | $ | 6,723 | | $ | 163,546 | |
Trade names and other | | 24,859 | | 1,102 | | 23,757 | |
Patents | | 105,700 | | 10,663 | | 95,037 | |
Core and developed technology | | 63,576 | | 2,850 | | 60,726 | |
| | $ | 364,404 | | $ | 21,338 | | $ | 343,066 | |
Amortization expense for the year ended December 31, 2012 was $32.0 million. Amortization expense for the four months ended April 30, 2011 and eight months ended December 31, 2011 was $11.8 million and $21.9 million, respectively (December 31, 2010 - $30.8 million,million).
During the year ended December 31, 2009 - $30.0 million).2012, the Successor Company’s royalty revenues derived from sales of TAXUS paclitaxel-eluting coronary stents (“TAXUS”) by Boston Scientific Corporation (“BSC”), declined by $7.6 million compared to the same period in the 2011. This continued decline in royalty revenues was identified as an impairment indicator for the purposes of testing the Successor Company’s intangible assets for the year ended December 31, 2012.
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Given that the Zilver PTX paclitaxel-eluting peripheral vascular stents (“Zilver-PTX”) utilizes the same patented paclitaxel technology as TAXUS, management determined that the Successor Company’s TAXUS and Zilver-PTX intangible assets were closely related. As a result, TAXUS and Zilver-PTX were tested as a single asset group for impairment in accordance with ASC No. 360 — Property, Plant and Equipment.
The impairment test conducted indicated that the sum of the undiscounted future cash flows of the TAXUS and Zilver-PTX intangible assets exceeded their combined carrying values. As a result, management concluded that the TAXUS and Zilver-PTX intangible asset carrying values were recoverable and not impaired as at December 31, 2012.
The estimated cash flow projections prepared by management are subject to significant uncertainty and highly depend on the degree to which BSC and Cook are able to market and sell the TAXUS and Zilver-PTX products, respectively. These estimates could be subject to change in the near term depending on the success of the U.S. launch of Zilver-PTX by Cook following the recent U.S. Food and Drug Administration (“FDA”) marketing approval received in November 2012. Other factors that may impact the estimated future cash flows include: technological advances, competing stent product candidates, regulatory or legislative change in the industry, and continued patent protection. A decrease of 10% or greater in the estimated undiscounted cash flows would result in a material impairment to the TAXUS and Zilver-PTX intangible asset group.
During December 2011, the Successor Company’s Medical Device TechnologiesProducts segment of the Successor Company recorded impairment write-downs of $10.9 million related to the termination of the Successor Company’s anti-infective product research and development program, which based on a review of product and business prioritizations,, management Management concluded would no longer be actively pursued. Management considered the likelihood of various outcomes and actively explored a number of financial and strategic alternatives for this program. Based on this assessment and a risk-adjusted DCF analysis, managementManagement determined the estimated fair value, including the related intangible assets, of the program to be nominal.
During December 2010, the Predecessor Company’s Medical Device TechnologiesProducts segment of the Predecessor Company recorded impairment write-downs of $2.8 million (December 31, 2009 — nil) relating to: (i) a write-down of the intellectual property acquired from Haemacure in connection with the Company’s decision to indefinitely suspend further research and development activities for that operation; and
F-30
(ii) a write-down of the intellectual property associated with the Option IVC Filter in connection with the termination of the Company’s 2008 License, Supply, Marketing and Distribution Agreement with Rex.Rex Medical, LP.
The following table summarizes the estimated amortization expense for each of the five succeeding fiscal years for intangible assets held as of December 31, 2011:2012:
2012 | | $ | 31,936 | | |
2013 | | 31,936 | | | $ | 32,131 | |
2014 | | 31,936 | | | 32,131 | |
2015 | | 31,936 | | | 32,131 | |
2016 | | 29,763 | | | 29,501 | |
2017 | | | 18,981 | |
Thereafter | | | 166,568 | |
(b) Goodwill
As described in note 3, on May 1, 2011 the Successor Company recorded $125 million of goodwill in connection with its implementation of fresh startfresh-start accounting. All of the goodwill was assigned to ourthe Successor Company’s Medical Device TechnologiesProducts reporting unit. The following table details the changes in the carrying value of goodwill during the eight monthsyear ended December 31, 2011:2012:
| | Medical Device
Technologies | | | Medical Device
Technologies | |
Balance, May 1, 2011 | | $ | 125,245 | | |
Balance, December 31, 2011 | | | $ | 123,228 | |
Foreign currency revaluation adjustment for goodwill denominated in foreign currencies | | (2,017 | ) | | 823 | |
Balance, December 31, 2011 | | $ | 123,228 | | |
Balance, December 31, 2012 | | | $ | 124,051 | |
Management conducted the Successor Company’s goodwill impairment test as at December 31, 2011. The Successor Company was determined to have two reporting units: Medical Device Technologies and Licensed Technologies.2012. As described above, all of the goodwill was attributed to the Medical Device TechnologiesProducts reporting unit. The estimatedIn accordance with ASU No. 2011-08, management conducted
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a qualitative assessment of potential impairment indicators and determined that it was not more-likely-than-not that the fair value of the Medical Device TechnologiesProducts reporting unit was determined usingless than its carrying value. As a DCF model based on a 9 year projection, a 12.5% discount rate and a 9 times EBITDA multiple used to calculate the terminal value. Management’s estimated fair value of the Medical Device Technologies reporting unit is highly reliant on various assumptions and estimates of future cash flows, which are subject to uncertainty. However, givenresult, management determined that the estimated fair value of the Medical Device Technologies reporting unit exceeded its carrying value by at least 15%, goodwill was not determined to be impaired as at December 31, 2011.2012.
12.10. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
| | Successor Company | | | Predecessor Company | | |
| | December 31, 2011 | | | December 31, 2010 | | | December 31, 2012 | | December 31, 2011 | |
Trade accounts payable | | $ | 3,923 | | | $ | 6,016 | | | $ | 6,066 | | $ | 3,923 | |
Accrued license and royalty fees | | 542 | | | 3,350 | | | 449 | | 542 | |
Employee-related accruals | | 17,909 | | | 14,470 | | | 12,566 | | 17,909 | |
Accrued professional fees | | 1,509 | | | 5,898 | | | 2,769 | | 1,509 | |
Accrued contract research | | 133 | | | 559 | | |
Other liabilities (1) | | 6,521 | | | 6,554 | | | 4,939 | | 6,654 | |
| | | | | | | | $ | 26,789 | | $ | 30,537 | |
| | $ | 30,537 | | | $ | 36,847 | | |
(1) Other liabilities as at December 31, 2012 includes $0.8 million (December 31, 2011 includes- $2.8 millionmillion) for the remaining obligation related to the prior 2011 settlement of certain litigation with QSR Settlement Amount (see note 22)Holdings, Inc., $1.0which will be fully paid by May 2013; $1.2 million (December 31, 2011 - $1.2 million) for VAT payable by certain of our European entities, and $2.9 million (December 31, 2011 - $2.5 million) of other general operating liabilities.
F-31
13.11. DEFERRED REVENUE
a) Cook Milestone Payment
In July 1997, the Predecessor Company entered into a license agreement with Cook Medical, Inc. (“Cook”) to allow Cook to utilize certain of Angiotech’s technologies in its Zilver® PTX® paclitaxel-eluting peripheral vascular stent (“Zilver PTX”) for the treatment of vascular disease in the leg (“License(the “License Agreement”). Zilver PTX is currently approved for sale inOn November 15, 2012, Cook received approval from the European Union (“E.U.”), certain other countries outside of the U.S., and is awaiting approval by the U.S.U.S Food and Drug Administration (“FDA”) to market and sell Zilver PTX in the U.S. Zilver PTX is now approved for sale in the U.S.United States (U.S.), European Union (“E.U.”), and certain other countries.
As at December 31, 2011,On February 3, 2012, the Successor Company recordedreceived a $4.0 million receivable in connection with a sales milestone fee that was triggered under the License Agreement and dependent upon Cook achievingCook’s achievement of a certain targeted level of sales of Zilver PTX. ThePTX under the terms of the License Agreement. Upon receipt, the $4.0 million sales milestone fee was received byrecognized as deferred revenue given that: (i) the Successor Company on February 3, 2012. Given that the sales milestone fee may be adjustable and is creditable against 50% of future royalties from Cook on future sales of the product, the sales milestone fee was not determined to be substantive for the purposes of assessing revenue recognition under ASC No. 605 — Revenue Recognition: Milestone Method. As such, the Successor Company has recorded the entire up-front payment as deferred revenue as at December 31, 2011. In accordance with,and (ii) under the terms of the arrangement, the deferred revenue balance will be amortized into revenuefee is creditable at a rate of 50% ofagainst future royalties receivedquarterly royalty amounts owing from Cook. Approximately $3.5 During the year ended December 31, 2012, $1.2 million of thethis deferred revenue balance and corresponding receivable, which has been recorded in other assets,was recognized as revenue based on the 50% draw down formula stipulated by the License Agreement. As at December 31, 2012 the remaining deferred revenue balance of $2.8 million has been classified as non-current.current.
b) Quill Consideration
On April 4, 2012, Angiotech concurrently entered into a series of agreements with Ethicon, LLC and Ethicon, Inc. (collectively “Ethicon”) in connection with the Company’s proprietary Quill technology and certain related manufacturing equipment and services. Significant terms of the respective agreements are described as follows:
i. Asset Sale and Purchase Agreement
Angiotech entered into an Asset Sale and Purchase Agreement dated April 4, 2012 (the “APA”) with Ethicon. Pursuant to the terms of the APA, Angiotech sold certain intellectual property related to its Quill technology, as well as certain related manufacturing equipment, to Ethicon. Under the terms of the APA, on April 4, 2012 Ethicon made an initial cash payment of $20.4 million to Angiotech, and agreed to pay up to an additional $30.0 million in additional cash consideration, with any additional amounts that may be paid contingent upon the completion of certain activities, including the transfer of certain Quill-related know-how to Ethicon and the achievement of certain product development milestones.
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ii. Co-Exclusive Patent and Know-How License Agreement
Concurrent with the APA, Angiotech also entered into a Co-Exclusive Patent and Know-How License Agreement dated April 4, 2012 (the “License Agreement”) with Ethicon. Under the License Agreement, Ethicon has granted Angiotech a worldwide, royalty free license to the intellectual property sold to Ethicon under the APA, which effectively grants the Company an unrestricted right to manufacture and distribute Quill wound closure products (without the Ethicon label) in any market and at the Company’s discretion.
iii. Manufacturing and Supply Agreement
The Company also entered into a Manufacturing and Supply Agreement dated April 4, 2012 (the “MSA”) with Ethicon, pursuant to which the Company will act as Ethicon’s exclusive manufacturer of knotless wound closure products that utilize the Quill technology for an undisclosed gross margin and for an undisclosed term. Under the terms of the MSA, Ethicon agreed to pay up to an additional $12.0 million in cash consideration to Angiotech, contingent upon the completion of certain activities, specifically the achievement of certain product development milestones. The MSA requires Angiotech to fulfill monthly orders placed by Ethicon subject to certain terms and conditions. In addition, under the terms of the MSA, Ethicon has a right of first negotiation with respect to the commercialization of any new products, as defined, in the field of knotless wound closure, which may be developed by the Company and are not otherwise covered by the MSA.
As many of the contingent payments embedded in the respective agreements are subject to the same or interrelated performance conditions; the APA, License Agreement and MSA were determined to be closely related for accounting purposes. As such, these agreements were collectively determined, for accounting purposes, to represent a multiple-element arrangement. This conclusion was based on the following factors: (a) significant continuing involvement is required from Angiotech to complete the transfer of certain Quill know-how to Ethicon and achieve the specified product development milestones, and (b) the fact that Angiotech has retained the same unrestricted rights that it had on a pre-transaction basis to continue manufacturing and distributing its Quill wound closure products for its own purposes, in any market at its discretion.
In accordance with ASC No. 605, Management evaluated this multiple-element arrangement to identify all key deliverables listed below:
·$0.4 million of cash received during April 2012, related to the sale of certain manufacturing equipment;
·$20.0 million of cash received up-front during April 2012 for the transfer of title of certain Quill related intellectual property to Ethicon;
·$5.0 million of cash received during August 2012 for the transfer of certain know-how to Ethicon;
·$22.0 million of cash received during October 2012 related to the achievement of certain product development milestones associated with the development of an initial set of product codes; and
·$15.0 million of future contingent consideration due upon the achievement of certain product development milestones associated with the development of an additional set of product codes.
The $0.4 million of cash received was recognized as revenue in April 2012 upon delivery of the manufacturing equipment to Ethicon in April 2012.
The Company has determined that each of the remaining deliverables under the collective agreements does not independently have standalone value to Ethicon without Angiotech’s continuing involvement and proprietary knowledge, which is required to complete certain product development tasks and the manufacture and supply of products utilizing the Quill technology. As such, the entire arrangement has been treated as one unit of account and the consideration has been measured and recognized as follows:
·As the earnings process associated with the arrangement was incomplete upon receipt of each installment of consideration, the Successor Company recorded all consideration as deferred revenue upon receipt of the funds. As discussed above, in October 2012 the Successor Company successfully completed the development of an initial set of product codes, which signified the completion of the first major stage of the joint arrangement and commencement of commercial production for Ethicon. As a result, the Successor Company ratably recognized approximately $4.0 million of the $47.0 million of total consideration received to date as license fee revenue. In accordance with ASC No. 605, the remaining $43.0 million of associated deferred revenue and future consideration will continue to be ratably recognized into revenue, over a period of approximately three years, as the Successor Company continues to complete and fulfill its performance obligations. As at December 31, 2012, approximately $18.8 million of the $43.0 million of deferred revenue is expected to be recognized as revenue over the next year. This amount has therefore been classified as current.
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·In accordance with ASC No. 605, Angiotech is required to evaluate whether the contractual gross margins to be earned under the MSA are representative of fair value. If the contractual gross margins are not determined to be representative of fair value, a portion of the consideration received to date and/or future contingent consideration may need to be reallocated to the MSA based on Management’s best estimate of fair value gross margins. This ensures that gross margins recorded for accounting purposes on any product sold to Ethicon are reflected at their estimated fair values, which are commensurate with gross margins earned from similar third party sales. Based on Management’s overall assessment as at December 31, 2012, the gross margins earned on the product shipped to Ethicon in 2012 were determined to be reflective of fair value. Management will continue to monitor and evaluate the fairness of gross margins earned on future shipments.
·Due to the risk and uncertainty associated with the completion of activities relating to these future milestones, and the fact that various activities were still in process as at December 31, 2012, no amounts have been recorded in the financial statements as at December 31, 2012, in connection with the remaining $15.0 million of contingent consideration described above. The Company will only begin to recognize future contingent consideration as revenue over the remaining contract term once the relevant performance obligations have been completed and all revenue recognition criteria have been met.
14.12. INCOME TAXES
(a) The components of the provision for (recovery of) income taxes from continuing operations are as follows:
| | Successor
Company | | | Predecessor Company | | | Successor
Company | | | Predecessor Company | |
| | 8 Months ended
December 31,
2011 | | | 4 Months ended
April 30, 2011 | | Year ended
December 31,
2010 | | Year ended
December 31,
2009 | | | Year ended
December 31,
2012 | | 8 Months ended
December 31,
2011 | | | 4 Months ended
April 30, 2011 | | Year ended
December 31,
2010 | |
Current income tax expense (recovery): | | | | | | | | | | | | | | | | | | | | |
Canada | | $ | 71 | | | $ | 38 | | $ | 376 | | $ | 523 | | | 2,235 | | $ | 71 | | | $ | 38 | | $ | 376 | |
Foreign | | 3,522 | | | 1,901 | | 4,714 | | 4,505 | | | 9,203 | | 3,522 | | | 1,901 | | 4,714 | |
| | 3,593 | | | 1,939 | | 5,090 | | 5,028 | | | 11,438 | | 3,593 | | | 1,939 | | 5,090 | |
Deferred income tax expense (recovery): | | | | | | | | | | | | | | | | | | | | |
Canada | | 341 | | | (235 | ) | (533 | ) | 63 | | | (601 | ) | 341 | | | (235 | ) | (533 | ) |
Foreign | | (6,920 | ) | | (1,437 | ) | (4,601 | ) | 946 | | | (2,627 | ) | (6,920 | ) | | (1,437 | ) | (4,601 | ) |
| | (6,579 | ) | | (1,672 | ) | (5,134 | ) | 1,009 | | | (3,228 | ) | (6,579 | ) | | (1,672 | ) | (5,134 | ) |
| | | | | | | | | | | | | | | | | | | | | | |
Income tax expense (recovery) | | $ | (2,986 | ) | | $ | 267 | | $ | (44 | ) | $ | 6,037 | | |
(b) The provision for income taxes is based on net income (loss) from continuing operations before income taxes as follows:
| | Successor
Company | | | Predecessor Company | | | Successor
Company | | | Predecessor Company | |
| | 8 Months ended
December 31,
2011 | | | 4 Months ended
April 30, 2011 | | Year ended
December 31,
2010 | | Year ended
December 31,
2009 | | | Year ended
December 31,
2012 | | 8 Months ended
December 31,
2011 | | | 4 Months ended
April 30, 2011 | | Year ended
December 31,
2010 | |
| | | | | | | | | | | | | | | | | | | | |
Canada | | $ | (44,088 | ) | | $ | 141,699 | | $ | (24,740 | ) | $ | (27,984 | ) | | (12,885 | ) | $ | (44,088 | ) | | $ | 141,699 | | $ | (24,740 | ) |
Foreign | | (19,344 | ) | | 238,086 | | (42,115 | ) | 11,153 | | | 14,869 | | (19,344 | ) | | 238,086 | | (42,115 | ) |
| | $ | (63,432 | ) | | $ | 379,785 | | $ | (66,855 | ) | $ | (16,831 | ) | | 1,984 | | $ | (63,432 | ) | | $ | 379,785 | | $ | (66,855 | ) |
(c) The reconciliation between the combined Canadian federal and provincial income taxes at the statutory rate and the provision for income taxes from continuing operations is as follows:
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| | Successor | | | | |
| | Company | | | Predecessor Company | |
| | 8 Months
ended
December 31,
2011 | | | 4 Months
ended
April 30, 2011 | | Year ended
December 31,
2010 | | Year ended
December
31,
2009 | |
| | | | | | | | | | |
Net income (loss) before income taxes | | $ | (63,432 | ) | | $ | 379,785 | | $ | (66,855 | ) | $ | (16,831 | ) |
Statutory tax rate | | 26.5 | % | | 26.5 | % | 28.5 | % | 30.0 | % |
| | | | | | | | | | |
Expected income tax expense (recovery) | | (16,809 | ) | | 100,643 | | (19,053 | ) | (5,049 | ) |
Tax rate differences | | (3,833 | ) | | (820 | ) | 3,661 | | (5,890 | ) |
Foreign exchange (gain) loss | | 114 | | | 29 | | 24 | | (640 | ) |
Change in valuation allowance | | 23,472 | | | 9,859 | | 11,191 | | 3,091 | |
Capital losses(1) | | (9,282 | ) | | (4,183 | ) | (2,311 | ) | — | |
Non-deductible stock based compensation | | 2,268 | | | 527 | | 378 | | 323 | |
Uncertain tax positions | | 640 | | | 591 | | 721 | | 740 | |
Accruals for tax on unremitted earnings | | 2,416 | | | 1,417 | | 5,070 | | 1,719 | |
Non-deductible transaction costs | | (70 | ) | | 35 | | (1,193 | ) | 1,124 | |
Release of prepaid taxes | | — | | | 28 | | 84 | | 6,211 | |
Permanent differences and other | | 3,168 | | | 364 | | 1,384 | | 3,351 | |
Change in valuation allowance on forgiveness of debt | | — | | | (17,745 | ) | — | | — | |
Worthless stock deduction(1) | | (5,070 | ) | | — | | — | | — | |
Non-taxable gains due to fresh start accounting adjustments | | — | | | (90,478 | ) | — | | — | |
Reassessment of prior years’ taxes | | — | | | — | | — | | 1,057 | |
Income tax expense (recovery) | | $ | (2,986 | ) | | $ | 267 | | $ | (44 | ) | $ | 6,037 | |
| | Successor
Company | | | Predecessor Company | |
| | Year ended
December 31,
2012 | | 8 Months
ended
December 31,
2011 | | | 4 Months
ended
April 30, 2011 | | Year ended
December 31,
2010 | |
| | | | | | | | | | |
Net income (loss) before income taxes | | 1,984 | | $ | (63,432 | ) | | $ | 379,785 | | $ | (66,855 | ) |
Statutory tax rate | | 25.0 | % | 26.5 | % | | 26.5 | % | 28.5 | % |
| | | | | | | | | | |
Expected income tax expense (recovery) | | 496 | | (16,809 | ) | | 100,643 | | (19,053 | ) |
Tax rate differences | | (3,543 | ) | (3,833 | ) | | (820 | ) | 3,661 | |
Change in valuation allowance | | (491 | ) | 23,472 | | | 9,859 | | 11,191 | |
Capital losses(1) | | — | | (9,282 | ) | | (4,183 | ) | (2,311 | ) |
Non-deductible stock based compensation | | 537 | | 2,268 | | | 527 | | 378 | |
Uncertain tax positions | | 2,719 | | 640 | | | 591 | | 721 | |
Accruals for tax on unremitted earnings | | 1,083 | | 2,416 | | | 1,417 | | 5,070 | |
Non-deductible transaction costs | | — | | (70 | ) | | 35 | | (1,193 | ) |
Early tender premium | | 1,678 | | — | | | — | | — | |
Permanent differences and other | | 1,139 | | 3,282 | | | 421 | | 1,492 | |
Change in valuation allowance on forgiveness of debt | | — | | — | | | (17,745 | ) | — | |
Worthless stock deduction(1) | | — | | (5,070 | ) | | — | | — | |
Non-taxable gains due to fresh-start accounting adjustments | | — | | — | | | (90,478 | ) | — | |
Withholding taxes on intercompany dividends | | 1,987 | | | | | | | | |
Expiry of losses carried forward | | 2,605 | | | | | | | | |
Income tax expense (recovery) | | 8,210 | | $ | (2,986 | ) | | $ | 267 | | $ | (44 | ) |
(1)During the eight months ended December 31, 2011, the Successor Company utilized losses of $5.0 million arising upon windup of certain of its U.S.subsidiaries through use of a worthless stock deduction. The Successor Company also claimed $8.2 million of capital losses upon wind up of these subsidiaries, for which a full valuation allowance has been applied.
(d)Deferred income tax assets and liabilities result from the temporary differences between the amount of assets and liabilities recognized for financial statement and income tax purposes. The significant components of the net deferred income tax assets and liabilities are as follows:
| | Successor
Company | | | Predecessor
Company | |
| | December 31,
2011 | | | December 31,
2010 | |
| | | | | | |
Deferred income tax assets | | | | | | |
Property, plant and equipment | | $ | 2,446 | | | $ | 1,822 | |
Intangible assets | | — | | | 7,240 | |
Other assets | | 5,736 | | | 5,828 | |
Accrued liabilities | | 3,996 | | | 5,559 | |
Unrealized foreign exchange losses | | (50 | ) | | 4,126 | |
Operating loss carry forwards | | 22,276 | | | 28,314 | |
Capital loss carry forwards | | 70,828 | | | 56,491 | |
Tax credits | | 19,997 | | | 22,989 | |
Total gross deferred income tax assets | | 125,229 | | | 132,369 | |
Less: valuation allowance | | (98,277 | ) | | (106,594 | ) |
Total deferred income tax assets | | $ | 26,952 | | | $ | 25,775 | |
| | | | | | |
Deferred income tax liabilities | | | | | | |
Property, plant and equipment | | $ | 2,660 | | | $ | 444 | |
Identifiable intangible assets | | 108,513 | | | 50,921 | |
Other liabilities | | 322 | | | 95 | |
Accrual for tax on unremitted earnings | | 1,931 | | | 1,950 | |
Total deferred tax liabilities | | 113,426 | | | 53,410 | |
| | | | | | |
Net deferred income tax assets (liabilities) | | $ | (86,474 | ) | | $ | (27,635 | ) |
F-33
| | Successor
Company | |
| | December 31,
2012 | | December 31,
2011 | |
| | | | | |
Deferred income tax assets | | | | | |
Property, plant and equipment | | 2,187 | | $ | 2,446 | |
Other assets | | 4,097 | | 5,736 | |
Accrued liabilities | | 3,941 | | 3,996 | |
Unrealized foreign exchange losses | | — | | (50 | ) |
Deferred revenues | | 8,537 | | | |
Deferred professional fees | | 715 | | | |
Operating loss carry forwards | | 12,944 | | 22,276 | |
Capital loss carry forwards | | 68,720 | | 70,828 | |
Tax credits | | 19,025 | | 19,997 | |
Total gross deferred income tax assets | | 120,166 | | 125,229 | |
Less: valuation allowance | | (97,897 | ) | (98,277 | ) |
Total deferred income tax assets | | 22,269 | | $ | 26,952 | |
| | | | | |
Deferred income tax liabilities | | | | | |
Property, plant and equipment | | 3,276 | | $ | 2,660 | |
Identifiable intangible assets | | 98,778 | | 108,513 | |
Other liabilities | | 321 | | 322 | |
Accrual for tax on unremitted earnings | | 1,543 | | 1,931 | |
Total deferred tax liabilities | | 103,918 | | 113,426 | |
| | | | | |
Net deferred income tax assets (liabilities) | | (81,649 | ) | $ | (86,474 | ) |
The realization of deferred income tax assets is dependent upon the generation of sufficient taxable income during future periods in which the temporary differences are expected to reverse. The valuation allowance is reviewed on a quarterly basis and if the assessment of the “more likely than not” criteria changes, the valuation allowance is adjusted accordingly. The valuation allowance continues to be applied against certain deferred income tax assets where the Company has assessed that the realization of such assets does not meet the “more likely than not” criteria.
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As described in notes 1 and 3, the Company adopted fresh startfresh-start accounting on April 30, 2011. Upon adoption of fresh-start accounting, a comprehensive revaluation of assets and liabilities was performed, resulting in the recognition of substantially all assets and liabilities at their estimated fair values and net deferred tax liabilities of $94,506.$0.1 million. Intangible assets of $377,500$377.5 million were recognized for accounting purposes, for which there is no associated tax basis, resulting in a significant increase in the deferred income tax liability for identifiable intangible assets. A tax recovery of $90,478$0.1 million was recognized with respect to the nonnon- taxable gains due to fresh startfresh-start adjustments included within reorganization items by the Predecessor during the period ended April 30, 2011.
The gain on extinguishment of debt and settlement of other liabilities of $67.3 million is treated for tax purposes as a forgiveness of debt, resulting in the utilization of Canadian tax attributes for which a valuation allowance was previously recorded. The forgiveness of debt resulted in a reversal of the valuation allowance of the Predecessor Company in the amount of $17,745$0.02 million for the period ended April 30, 2011.
(e) The Company has unclaimed U.S. federal and state research and development investment tax credits of approximately $3.9$2.7 million (December 31, 20102011 - $4.4$3.9 million) available to reduce future U.S. income taxes otherwise payable. The Company also has Canadian federal and provincial investment tax credits of approximately $12.7$16.5 million (December 31, 20102011 - $15.5$12.7 million) available.
The Company has a net operating loss carry forward balance of approximately $180.9$114.4 million (December 31, 20102011 - $214.8$180.9 million) available to offset future taxable income in Canada ($37.1(December 31, 2012 - $19.4 million, December 31, 20102011 - $73.4$37.1 million), the U.S. ($28.8(December 31, 2012 - $2.9 million, December 31, 20102011 - $30.0$28.8 million) and Switzerland ($115(December 31, 2012 - $92.1 million, December 31, 20102011 - $111.4$115 million) The losses in the U.S. are subjected to limitation but the Company does not expect the limitation will impair the use of any of the losses.
The Company has foreign tax credits in the U.S. of approximately $2.1$2.2 million (December 31, 20102011 - $2.1 million) available to use against foreign-source income.
The Company has a capital loss carry forward balance of approximately $515.7$511.4 million (December 31, 20102011 - $445.5$515.8 million) available to offset future capital gains in the U.S. ($24.7(December 31, 2012 - $18.8 million, December 31, 20102011 - $3.1$24.7 million) and Canada ($491.0(December 31, 2012 - $492.6 million, December 31, 20102011 - $442.4$491.0 million). The capital losses can be carried forward indefinitely for Canada and five years for the U.S.
The investment tax credits and loss carry forwards expire as follows:
| | Federal
tax
credits | | Provincial/state
tax
credits | | Operating Loss
Carry forwards | | | Federal
tax
credits | | Provincial/state
tax
credits | | Operating Loss
Carry forwards | |
2012 | | 742 | | — | | 18,209 | | |
2013 | | 2,093 | | — | | 7,393 | | | — | | — | | 7,572 | |
2014 | | 1,412 | | — | | 3,202 | | | — | | — | | 3,280 | |
2015 | | 1,518 | | — | | 17,773 | | | — | | — | | 15,713 | |
2016 | | — | | — | | 53,082 | | | — | | — | | 52,112 | |
2017 | | 414 | | — | | 4,429 | | | — | | — | | 4,536 | |
2018 | | 426 | | — | | 10,914 | | | — | | — | | 7,402 | |
2019 | | 323 | | — | | — | | | — | | — | | 1,500 | |
2020 | | 315 | | — | | — | | | 13 | | 103 | | — | |
2021 | | 170 | | — | | 36 | | | 978 | | — | | 36 | |
2022 | | 34 | | — | | 632 | | | 2,274 | | — | | 632 | |
2023 | | 166 | | — | | 537 | | | 1,578 | | — | | 537 | |
2024 | | 415 | | — | | 1,721 | | | 1,933 | | — | | 1,721 | |
2025 | | 239 | | — | | — | | | 2,213 | | — | | — | |
2026 | | 2,405 | | — | | — | | | 431 | | — | | — | |
2027 | | 1,550 | | | | 13,540 | | | 1,550 | | | | — | |
2028 | | 1,538 | | 832 | | 5,426 | | | 1,538 | | 832 | | — | |
2029 | | 1,433 | | | | — | | | 1,433 | | | | — | |
2030 (or later) | | — | | 1,330 | | 44,032 | | | 2,976 | | 1,330 | | 19,396 | |
| | $ | 15,193 | | $ | 2,162 | | $ | 180,926 | | | $ | 16,917 | | $ | 2,265 | | $ | 114,437 | |
|
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15.13. OTHER TAX LIABILITY
The Company accounts for income taxes in accordance with ASC No. 740, Income Taxes. As of December 31, 20112012 and December 31, 2010,2011, the total amount of the Company’s unrecognized tax benefits were $13.6$16.4 million and $12.6$13.6 million, respectively. If recognized in future periods, the unrecognized tax benefits would affect our effective tax rate.
The reserve for uncertain tax positions includes accrued interest and penalties of $1.1$1.4 million (December 31, 20102011 - $0.9$1.1 million). In accordance with the Company’s accounting policies, accrued interest and penalties, if incurred, relating to unrecognized tax benefits are recognized as a component of income tax expense.
The taxation years 2006 - 20102012 remain open to examination by the Canada Revenue Agency, taxation years 2003 — 20102012 remain open to examination by the Internal Revenue Service or State authorities, and various years remain open in the foreign jurisdictions. The Company files income tax returns in Canada, the U.S. and various foreign jurisdictions.
A reconciliation of the change in the reserves for an uncertain tax positions from January 1, 2010 — December 31, 20112012 is as follows:
| | Successor | | | | |
| | Company | | | Predecessor Company | |
| | 8 Months
ended
December 31,
2011 | | | 4 Months
ended
April 30, 2011 | | Year ended
December 31,
2010 | |
Beginning Balance | | $ | 13,115 | | | $ | 12,638 | | $ | 11,367 | |
Tax positions related to current year: | | | | | | | | |
Additions | | 813 | | | 407 | | 1,600 | |
Reductions | | | | | — | | — | |
Tax positions related to prior years: | | | | | | | | |
Additions | | 142 | | | 70 | | 371 | |
Reductions | | (424 | ) | | — | | (700 | ) |
Ending Balance | | $ | 13,646 | | | $ | 13,115 | | $ | 12,638 | |
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| | Successor
Company | | | Predecessor Company | |
| | Year ended
December 31,
2012 | | 8 Months
ended
December 31,
2011 | | | 4 Months
ended
April 30, 2011 | | Year ended
December 31,
2010 | |
Beginning Balance | | $ | 13,646 | | $ | 13,115 | | | $ | 12,638 | | $ | 11,367 | |
Tax positions related to current year: | | | | | | | | | | |
Additions | | 2,461 | | 813 | | | 407 | | 1,600 | |
Reductions | | | | | | | — | | — | |
Tax positions related to prior years: | | | | | | | | | | |
Additions | | 387 | | 142 | | | 70 | | 371 | |
Reductions | | (75 | ) | (424 | ) | | — | | (700 | ) |
Ending Balance | | $ | 16,419 | | $ | 13,646 | | | $ | 13,115 | | $ | 12,638 | |
16.14. DEBT
The Company has the following debt issued and outstanding:
| | Successor Company | | | Predecessor Company | |
| | December 31, 2011 | | | December 31, 2010 | |
Subordinated Notes | | $ | — | | | $ | 250,000 | |
Existing Floating Rate Notes | | — | | | 325,000 | |
New Floating Rate Notes | | 325,000 | | | — | |
Revolving Credit Facility | | 40 | | | 10,000 | |
| | | | | | |
| | $ | 325,040 | | | $ | 585,000 | |
| | December 31, 2012 | | December 31, 2011 | |
New Notes - current portion | | $ | 60,024 | | $ | — | |
New Notes - non-current portion | | — | | 325,000 | |
Senior Notes | | 229,413 | | — | |
Revolving Credit Facility | | — | | 40 | |
| | $ | 289,437 | | $ | 325,040 | |
(a) SubordinatedNew Notes
On May 12, 2011,As discussed in note 3, the Successor Company issued $325.0 million of New Notes as part of the Recapitalization Transaction on May 12, 2011.
In July 2012, Angiotech launched an offer to exchange up to a maximum of $225.0 million in aggregate principal amount of the outstanding New Notes (the “Maximum Principal Exchange Amount”) for Senior Notes issued by Angiotech Pharmaceuticals (U.S.), Inc. pursuant to an Offering Memorandum and Consent Solicitation Statement (the “Exchange Offer”). On August 13, 2012, $225.0 million of the $255.5 million tendered New Notes were irrevocably extinguished and exchanged, on a pro rata basis, for
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$229.4 million of Senior Notes. All New Notes which were tendered by the prescribed July 23, 2012 early tender date received new Senior Notes (see note 14 (b) below) with a principal amount that included a 2% premium (“Early Tender Premium”) of the New Notes exchanged. In accordance with ASC No. 470-50 — Debt Extinguishment and Modification, the refinancing of the $225.0 million of New Notes was implemented, thereby irrevocably eliminatingdetermined to be an extinguishment of debt given that the change in the future cash flows on a pre and cancellingpost transaction basis was considered substantial. As such, the Predecessor Company’s $250Senior Notes were initially recorded at their fair value of $229.4 million Subordinatedand a $4.4 million non-cash debt extinguishment loss was triggered upon settlement and cancellation of the $225.0 million of New Notes tendered.
The Successor Company has the indenture relatingoption to redeem all or part of the New Notes at 100% of the principal amount plus accrued and unpaid interest, if any, on the New Notes redeemed, to the Subordinated Notes and $16 millionapplicable redemption date. Upon the occurrence of related accrued interest obligations in exchange for 12,500,000 new common sharesa Change of Control, the Successor Company representing approximately 96%is required to make an offer to each holder of the new common shares issued.New Notes to repurchase all or any part (equal to $2,000 or any integral multiple of $1,000 in excess thereof) of their New Notes at a purchase price in cash equal to 101% of the aggregate principal amount of New Notes repurchased plus accrued and unpaid interest.
On September 17, 2012, pursuant to a (b)Notice of Optional Partial Redemption, the Successor Company exercised its option to call for the redemption of $40.0 million in aggregate principal amount of the $100.0 million then outstanding New Floating RateNotes. These New Notes were redeemed on October 17, 2012 at 100% of the principal amount, together with accrued and unpaid interest of $0.2 million.
On March 18, 2013, the Plan Implementation Date 99.99%Successor Company announced a second partial redemption of $16.0 million of New Notes outstanding at 100% of their principal amount together with accrued and unpaid interest. The partial redemption is expected to be completed on April 17, 2013. As described in note 26 — Subsequent Events, Angiotech expects that the remaining $44.0 million of New Notes will be repaid with the cash consideration to be received from the Sale of the Existing Floating Rate Noteholders tendered their Existing Floating Rate Note for New Floating Rate Notes in accordance with the terms of the FRN Exchange Offer.Interventional Products Business to Argon.
The New Floating Rate Notes were issued on May 12, 2011 on substantially the same terms and conditions as the Existing Floating Rates Notes described above, except that, among other things, the indenture governing the New Floating Rate Notes differed from the FRN Indenture as follows:
·Changes to covenants pertaining to the incurrence of additional indebtedness, asset sales and the definition of asset sales, change of control and permitted liens, including a reduction in the allowance from $100 million to $50 million for the Successor to obtain new senior secured indebtedness having seniority to the New Floating Rate Notes;
·The New Floating Rate Notes will accruebear interest at an annual rate of LIBOR (London Interbank Offered Rate) plus 3.75%, subject to a LIBOR floor of 1.25%; and
·The provision of additional security for holders of the New Floating Rate Notes by providing a second lien over the property, assets and undertakings of the Successor Company and certain of its subsidiaries, that secure the Revolving Credit Facility, which superseded the existing credit facility (the “Existing Credit Facility”) and successive DIP Facility with Wells Fargo (see note 16 (f)), subject to customary carve-outs and certain permitted liens.
. The interest rate will continue to resetresets quarterly and is payable quarterly in arrears on March 1, June 1, September 1, and December 1 of each year through to the maturity date of December 1, 2013.
The New Floating Rate Notes are unsecured senior obligations, which are guaranteed by certain of the Successor Company’s subsidiaries, and rank equally in right of payment to all of the Successor Company’s existing and future senior indebtedness.indebtedness other than debt incurred under the Revolving Credit Facility (see note 14(f) below). The guarantees of itsthe guarantor subsidiaries are unconditional, joint and several.
Under the terms of the indenture governingNew Notes Indenture and subject to certain customary carve-outs and permitted liens, the holders of the New Floating Rate Notes have been granted a security interest in the form of a second lien over the Successor Company and certain of its subsidiaries’ property, assets and undertakings that secure the Revolving Credit Facility. As described below in note 14(c), the New Notes are also subject to certain restrictive covenants. Under the terms of the New Notes Indenture, an event of default would permit the holders of the New Floating Rate Notes to exercise their right to demand immediate repayment of the Successor Company’s debt obligations owing there under. thereunder.
(b)Senior Notes
The $229.4 million of Senior Notes are due on December 1, 2016 and bear interest at 9% per annum, which is payable quarterly in cash and in arrears on March 1, June 1, September 1, and December 1 of each year. The Senior Notes are senior secured obligations, which are fully, joint and severally, and unconditionally guaranteed by certain of Angiotech’s existing and future subsidiaries which may guarantee any of its other indebtedness. Subject to certain exceptions, the Senior Notes and the Guarantors’ guarantees of the Senior Notes are secured, ratably with the remaining $60.0 million of New Notes, by second-priority liens and security interests over the same collateral that currently or in the future secures the obligations owing under the Successor Company’s Revolving Credit Facility.
Aside from the higher rate of interest and extended maturity date, the Senior Notes were issued pursuant to an indenture (the “Senior Notes Indenture”) on substantially the same terms and conditions as the New Notes Indenture, except for the following:
·The New Notes were issued by Angiotech and guaranteed by Angiotech US and certain other subsidiaries. The Senior Notes were issued by Angiotech US, and are guaranteed by Angiotech and certain of its subsidiaries.
·The Senior Notes are redeemable at Angiotech US’s option at any time, in whole or in part, at a redemption price equal to 100% of the principal amount thereof, plus any accrued and unpaid interest thereon to the applicable redemption date and any outstanding fees, expenses or other amounts owing in respect thereof. However, the redemption is subject to the condition that all New Notes then outstanding, if any, must be concurrently redeemed under the New Notes Indenture.
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·The covenants restricting incurrence of Indebtedness were modified to prohibit the incurrence of Indebtedness based on the Fixed Charge Coverage Ratio and limit the amount of Permitted Refinancing Indebtedness that can be secured with Permitted Liens.
·Provided that no Default or Event of Default has occurred, under the Senior Notes Indenture, Angiotech has the option to prepay the outstanding New Notes in whole or in part prior to making any principal payments on the Senior Notes.
The Senior Notes are subject to certain change in control provisions, under which, Angiotech will be required to offer to repurchase the Senior Notes at a price equal to 101% of the principal amount thereof, plus any accrued and unpaid interest, if any, to the date of repurchase.
In connection with the Exchange Offer, the Successor Company also received consents from the holders of the New Notes to amend the New Notes Indenture dated May 12, 2011 to provide for, among other things, the Senior Notes and New Notes to vote together as a single class on certain matters.
As described in note 26 — Subsequent Events, Angiotech expects that the remaining $229.4 million of Senior Notes will be repaid with the cash consideration to be received from the Sale of the Interventional Products Business to Argon.
Under the terms of the Senior Notes Indenture, an event of default would permit the holders of the Senior Notes to exercise their right to demand immediate repayment of the Successor Company’s debt obligations owing thereunder. In the event that this case,occurred and the Successor Company was unable to complete and close the sale transaction contemplated in note 26 — Subsequent Events, the Successor Company’s current cash and credit capacity wouldmay not be sufficient to service its principal debt and interest obligations. In addition, restrictions on the Successor Company’s ability to borrow and the possible accelerated demand of repayment of existing or future obligations by any of its creditors may jeopardize its working capital position and ability to sustain future operations.
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(c) Covenants
Upon the closing of the FRN Exchange Offer on May 12, 2011, the FRNNew Notes Indenture pertaining towas issued on substantially the Existing Floating Ratesame terms and conditions as the Old Notes Indenture; however, it was amended to eliminate most of the restrictive covenants and events of default therein. The indenture, entered into on May 12, 2011, governing the New Floating Rate Notes Indenture still contains various restrictive covenants which impose restrictions on the operation of the Successor Company’s business and the business of its subsidiaries, includingwith respect to the incurrence of certain liens and otheradditional indebtedness. The Successor Company’s ability to obtain new senior secured indebtedness having seniority to the New Notes is limited to a $50 million allowance. Material covenants under this indenture: specify maximum or permitted amounts for certain types of capital transactions; impose certain restrictions on asset sales, the use of proceeds and the payment of dividends by the Successor Company; and requires that all outstanding principal amounts and interest accrued and unpaid become due and payable upon the occurrence of a defined event of default.
The Senior Notes Indenture contains similar covenants to the New Notes Indenture that, among other things, limit the Successor Company’s ability to: incur, assume or guarantee additional indebtedness or issue preferred stock, pay dividends or make other equity distributions to stockholders, purchase or redeem capital stock, make certain investments, create liens, sell or otherwise dispose of assets, engage in transactions with affiliates, and merge or consolidate with another entity, or transfer substantially of the Successor Company’s assets.
In addition, the Revolving Credit Facility described below includes certain customary affirmative and negative covenants, which limit the Successor Company’s ability to, among other things, incur indebtedness, create liens, merge or consolidate, sell or dispose of assets, change the nature of its business, make distributions or advances, loans or investments. The Revolving Credit Facility also requires the Successor Company to comply with a specified minimum adjusted earnings before income taxes, depreciation and amortization (“Adjusted EBITDAEBITDA”) and fixed charge coverage ratio as well as maintain $15.0 million in Excess Availability plus Qualified Cash (as defined under the Revolving Credit Facility), of which Qualified Cash must be at least $5.0 million. In addition, in the event that the aggregate amount of cash and cash equivalents of the parent company and its subsidiaries exceeds $20 million at any time, the Successor Company is required to immediately prepay the outstanding principal amount of the advances until paid in full in an amount equal to such excess. The Revolving Credit Facility contains certain customary events of default including but not limited to those for failure to comply with covenants, commencement of insolvency proceedings and defaults under the Successor Company’s other indebtedness. On March 12, 2012,As described in note 14(f) below, the Successor Company entered into an amendment to its Revolving Credit Facility on March 12, 2012 to modify certain of these covenants and other conditions to provide increased financial flexibility and improve liquidity (see note 27 for a description of the amended terms).liquidity.
(d) Interest
Pursuant toDuring the FRN Exchange Offer,year ended December 31, 2012, the Successor Company incurred $7.9 million of interest expense on the Senior Notes. The effective interest rate on these notes for the five months ended December 31, 2012 was 9%. During the year ended December 31, 2012, the Successor Company incurred interest expense of $11.6 million on the New Floating RateNotes. The effective interest rate on the New Notes accruefor the year ended December 31, 2012 was 5% and the rate in effect on December 31, 2012 was 5%.
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For the eight months ended December 31, 2011, the Successor Company incurred interest at LIBOR plus 3.75%, subject to a LIBOR floorexpense of 1.25%.$11.1 million on the New Notes. The effective interest rate on these notes for the eight months ended December 31, 2011 was 5.0% and the rate in effect on December 31, 2011 was 5.0%. The effective interest rate on the Existing Floating Rate Notes for four months ended April 30, 2011 was 4.1% (year ended December 31, 2010 — 4.2%, year ended December 31, 2009 — 4.0%) and the rate in effect on April 30, 2011 was 4.1% (December 31, 2010 — 4.1%, December 31, 2009 — 4.0%). For the eight months ended December 31, 2011, the Successor Company incurred interest expense of $11.1 million on the New Floating Rate Notes. For the four months ended April 30, 2011, the Predecessor Company incurred interest expense of $4.4 million on the Existing Floating RateOld Notes that were in place prior to the issuance of the New Notes on the Plan Implementation Date (year ended December 31, 2010 - $13.5 million, yearmillion). The effective interest rate on these notes for the four months ended April 30, 2011 was 4.1% (year ended December 31, 2009 - $15.5 million)2010 — 4.2%) and the rate in effect on April 30, 2011 was 4.1% (December 31, 2010 — 4.1%).
The Subordinated Notes were terminated on the Plan Implementation Date. As discussed in note 2, interest was accrued in accordance with the terms of the CCAA Plan, which stipulated that the amount of the claims in respect of the Subordinated Notes only included the principal and accrued interest amounts owing, directly by Angiotech under the SSN Indenture and by the other Angiotech Entities under the guarantees executed by such other Angiotech Entities in respect of the Subordinated Notes, up to the date of the Initial Order, being January 28, 2011. If not for the terms of the CCAA Plan regardingAs a result, no interest amounts owing, under the contractual terms ofexpense was recorded on the Subordinated Notes from January 29, 2011 to the Predecessor Company would have incurred $6.5 million of interest expense for the four months ended April 30, 2011.Plan Implementation Date.
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e) Deferred Financing Costs
As at December 31, 2012, the Successor Company had the following deferred financing costs:
December 31, 2012 | | Cost | | Accumulated
Amortizaton | | Net Book Value | |
Deferred financing costs related to: | | | | | | | |
Senior Notes | | $ | 2,815 | | $ | 244 | | $ | 2,571 | |
Revolving Credit Facility | | 376 | | 199 | | 177 | |
Total | | 3,191 | | 443 | | 2,748 | |
| | | | | | | | | | |
Deferred financing costs are capitalized and amortized to interest expense over the life of the debt instruments on a straight-line basis, which approximates the effective interest rate method. UponDuring the year ended December 31, 2012, the Successor Company incurred $2.8 million of deferred financing costs recorded related to the fees that were incurred to complete the Exchange Offer described in note 14(a) above and $0.4 million of deferred financing costs related to certain amendments to the Revolving Credit Facility described in note 14(f) below. As at December 31, 2012, approximately $0.8 million and $1.9 million of the deferred financing costs have been classified as current and non-current, respectively. During the year ended December 31, 2012, the Successor Company recorded $0.4 million of non-cash interest expense related to the amortization of its deferred financing costs.
During the four months ended April 30, 2011, the Predecessor Company recorded $3.9 million of non-cash interest expense, related to the amortization of deferred financing costs (year ended December 31, 2010 - $6.2 million).Upon implementation of fresh startfresh-start accounting on April 30, 2011, the Predecessor Company’s $4.4 million of deferred financing costs, related to the Old Notes and prior credit facilities, were fair valued to nil. As a result, the Successor Company did not record any non-cash interest expense related to the amortization of deferred financing costs during the eight months ended December 31, 2011 and as at December 31, 2011, the Successor Companyit had no deferred financing costs capitalized.
December 31, 2010 — Predecessor Company | | Cost | | Accumulated
Amortization | | Net Book
Value | |
Debt issuance costs relating to: | | | | | | | |
Existing Floating Rate Notes — current | | $ | 8,000 | | $ | 4,654 | | $ | 3,346 | |
7.75% Senior Subordinated Notes — current | | 8,718 | | 7,765 | | 953 | |
Revolving Credit Facility — current | | 3,213 | | 1,901 | | 1,312 | |
| | $ | 19,931 | | $ | 14,320 | | $ | 5,611 | |
During the four months ended April 30, 2011, the Predecessor Company recorded $3.9 million of non-cash interest expense, related to the amortization of deferred financing costs (year endedas at December 31, 2010 - $6.2 million, year ended December 31, 2009 - $2.7 million).2011.
During the year ended December 31, 2010, the Predecessor Company recorded a $0.3 million impairment write-down of deferred financing costs related to its shelf registration statement which was filed in July 2009. In addition, during the year ended December 31, 2009, the Predecessor Company recorded a $0.6 million impairment write-down of deferred financing costs related to its term loan facility with Wells Fargo Foothill LLC, which terminated on May 29, 2009.
f) Revolving Credit Facility
The Predecessor Company’s Existing Credit Facility with Wells Fargo was fully repaid by March 31, 2011 and terminated on May 12, 2011, the Plan Implementation Date. The Existing Credit Facility had an original maturity date of February 27, 2013 and provided for borrowing of up to $35.0 million with an additional $10.0 million of temporary supplemental borrowing,
In connection with the Predecessor Company’s emergence from its Creditor Protection Proceedings described in note 1, the DIP Facility (including all principal loans and interest owing there under) was fully repaid and terminated on May 12, 2011, the Plan Implementation Date. During the four months ended April 30, 2011, the Predecessor Company incurred $0.4 million of interest expense on borrowings under the Existing Credit Facility and DIP Facility.
In accordance with the provisions of the CCAA Plan, upon consummation of the Recapitalization Transaction on May 12, 2011, Angiotech replaced its Existingpreexisting credit facility (“Preexisting Credit FacilityFacility”) and DIP Facility with a new revolving credit facility (as amended the “Revolving Credit Facility”) on May 12, 2011.. The Predecessor Company incurred approximately $1.5 million in fees to obtain and complete the Revolving Credit Facility. The Revolving Credit Facility was used to effectively repay the $22 million of borrowings outstanding under the DIP Facility as at May 12, 2011, which was net of $3 million of cash remitted to Wells Fargo as collateral for secured letters of credit.
The Revolving Credit Facility expires on September 2, 2013 and provides the Successor Company with up to $28.0 million in aggregate principal amount (subject to a borrowing base, certain reserves, and other conditions described below) of revolving loans.
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Borrowings under the Revolving Credit Facility are subject to a borrowing base formula based on certain balances of: eligible inventory, accounts receivable, real property, securities and intellectual property, net of applicable reserves.
Borrowings under the Revolving Credit Facility are secured by certain assets held by certain of the Successor Company’s subsidiaries (the “Revolving Credit Guarantors”). Under the terms of the Revolving Credit Facility, the Successor Company’s Revolving Credit Guarantors irrevocably and unconditionally jointly and severally guarantee: (a) the punctual payment; whether at stated maturity, by acceleration or otherwise; of all borrowings; including principal, interest, expenses or otherwise; when due and payable; and (b) the fulfillment of and compliance with all terms, conditions and covenants under the Revolving Credit Facility and all other related loan documents. The Successor Company’s Revolving Credit Guarantors also agree to pay any and all expenses that Wells Fargo may incur in enforcing its rights under the guarantee.
Borrowings under the Revolving Credit Facility bear interest at a rate equal to, at the Successor Company’s option, either (a) the Base Rate (as defined in the Revolving Credit Facility to include a floor of 4.0%) plus either 3.25% or 3.50%, depending on the availability the Successor Company has under the Revolving Credit Facility on the date of determination or (b) the LIBOR Rate (as defined in the Revolving Credit Facility to include a floor of 2.25%) plus either 3.50% or 3.75%, depending on the availability the Successor Company has under the Revolving Credit Facility on the date of determination. If the Successor Company defaults on its obligations under the Revolving Credit Facility, Wells Fargo also has the option to implement a default rate of an additional 2% above the already applicable interest rate. In addition, the Successor Company is required to pay an unused line fee of 0.5% per annum in respect to any unutilized commitments.
F-38On March 12, 2012, the Successor Company completed an amendment to its Revolving Credit Facility to provide increased financial flexibility and improve its overall liquidity. This amendment provides for, among other things: (i) the repurchase of the Successor Company’s outstanding New Notes, subject to certain terms and conditions; (ii) the repurchase of equity held by current or former employees, officers or directors subject to certain limitations; (iii) an increase in the amount of cash that can be held by the Successor Company’s foreign subsidiaries; (iv) the ability to dispose of certain of the Successor Company’s intellectual property assets (at which time the component of the borrowing base supported by such intellectual property assets would be reduced to nil); (v) a reduction in the restrictions surrounding eligibility of certain accounts receivable; (vi) the removal of the lien over the Successor Company’s short term investments; (vii) a revision to the definition of EBITDA to allow for certain historical and future restructuring and CCAA costs; and (viii) less restrictive reporting requirements when advances under the Revolving Credit Facility are below certain thresholds. Total fees of $0.4 million were incurred to complete this amendment.
On August 13, 2012, the Successor Company completed a third amendment to its Revolving Credit Facility to amend the covenants to allow for the completion of the Exchange Offer.
As at December 31, 2011,2012, the Successor Company had $0.04 millionnil borrowings outstanding under the Revolving Credit Facility (Existing Credit Facility — December(December 31, 20102011 - $10.0$0.04 million), $2.6$0.7 million of letters of credit issued under the facility (Existing Credit Facility — December(December 31, 20102011 - $2.8$2.6 million) and $21.3$22.6 million of remaining availability under the Revolving Credit Facility (Existing Credit Facility — December(December 31, 20102011 - $14.8$21.3 million). During the eight months ended December 31, 2011 and the four months ended April 30, 2011, the Successor Company incurred $0.7 million of interest expense on borrowings under the Revolving Credit Facility (Existingand the Predecessor Company incurred $0.4 million of interest expense on borrowings under the DIP Facility and Preexisting Credit Facility, respectively (Preexisting Credit Facility — December 31, 2010 - $0.5 million). As described in note 26 — Subsequent Events, Angiotech expects to terminate its Revolving Credit Facility upon close of the sale of it’s Interventional Products Business to Argon.
17.15. SHARE CAPITAL
a) Common Shares
During the year ended December 31, 2012, the Successor Company issued 47,702 common shares upon the vesting of Restricted Stock and Restricted Stock Unit awards. In the same period the Successor Company repurchased 56,673 common shares held by former executives of the Company. The Company issues new shares to satisfy stock option and other award exercises.
As described under Notenote 3 “Reorganization and Fresh-Start Reporting”- Reorganization, upon consummation of the CCAA Plan in 2011, Angiotech’s Articles and Notice of Articles were amended to: (a) eliminate the existing class of common shares from the authorized capital of the Predecessor Company; and (b) create an unlimited number of authorized no-par value new common shares for the Successor Company with similar rights, privileges, restrictions and conditions as were attached to the previous class of common shares. Accordingly and in connection with the implementation of the CCAA Plan during the year ended December 31, 2011, 12,500,000 new common shares were issued to holders of the Successor Company’s Subordinated Notes in consideration and settlement for the irrevocable and final cancellation and elimination of such noteholders’ Subordinated Notes.
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Table of Contents
b) Stock Incentive Plans
(i) Sucessor companySuccessor Company
Upon completion of the Recapitalization Transaction, the Successor Company established and implemented a new equity compensation plan — the 2011 Stock Incentive Plan (“2011 SIP”). The 2011 SIP provides for the granting of Restricted Stock, RSUs, stock options, stock appreciation rights, and deferred share units (collectively referred to as “Awards”) and is available to certain eligible employees, directors, consultants and advisors as determined by the Governance, Nominating and Compensation Committee of the Board of Directors. The 2011 SIP allows for a maximum of 2,130,150 shares with respect to the number of Awards that may be granted.
(1) Restricted Stock
As described under Note 3 “Reorganization and Fresh-Start Reporting”“Reorganization”, upon consummation of the CCAA Plan during the year ended December 31, 2011 and in accordance with the MIP, the Successor Company issued 221,354 units of Restricted Stock to certain senior management.Management. The terms of the restricted stock provide that a holder shall generally have the same rights and privileges as a common shareholder as to such Restricted Stock, including the right to vote such Restricted Stock. The Restricted Stock vests 1/3rd on each of the first, second and third anniversaries from the date of grant.
During the year ended December 31, 2012, 43,403 commons shares were issued to executives upon the vesting of units of Restricted Stock, at which time Angiotech repurchased 16,701 units from the executives in consideration of withholding taxes owing on the vested units. During the eight months ended December 31, 2011, two executive officers of the Company holding Restricted Stock were terminated. The provisions of the employment agreements for these executive officers provided for accelerated vesting of Restricted Stock awards and stock options upon termination. The total value of the Restricted Stock awards accelerated was estimated to be approximately $1.3 million. Of the 91,146 of Restricted Stock awards that were vested on an accelerated basis, Angiotech repurchased 34,473 common shares from these terminated executives in consideration of withholding taxes owing on the vested awards.
As at December 31, 2011,2012, there were 130,20886,805 awards of Restricted Stock outstanding, all of which remain unvested. Stock-based compensation expense related to Restricted Stock for the year ended December 31, 2012 was $0.7 million ($1.8 million for the eight months ended December 31, 2011 was $1.8 million, including the2011which includes $1.3 million of stock-based compensation related to the accelerated Restricted Stock awards.awards).
A summary of Restricted Stock activity for the Successor Company is as follows:
| | Number
outstanding | | Weighted average
grant date fair
value | |
Outstanding at May 1, 2011 | | — | | — | |
Granted | | 221,354 | | $ | 15.17 | |
Vested and exchanged for common shares | | (91,146 | ) | $ | 15.17 | |
Forfeited | | — | | | |
Outstanding at December 31, 2011 | | 130,208 | | $ | 15.17 | |
Outstanding and Exercisable at December 31, 2011 | | — | | — | |
F-39
| | Number
outstanding | | Weighted average
grant date fair
value | |
Outstanding at May 1, 2011 | | — | | — | |
Granted | | 221,354 | | $ | 15.17 | |
Vested and exchanged for common shares | | (91,146 | ) | $ | 15.17 | |
Forfeited | | — | | | |
Outstanding at December 31, 2011 | | 130,208 | | $ | 15.17 | |
Granted | | — | | | |
Vested and exchanged for common shares | | (43,403 | ) | $ | 15.17 | |
Forfeited | | — | | | |
Outstanding at December 31, 2012 | | 86,805 | | $ | 15.17 | |
Outstanding and Exercisable at December 31, 2012 | | — | | — | |
A summary of the status of nonvested restricted stock awards as of December 31, 20112012 and changes during the eight monthsyear ended December 31, 2011,2012, is presented below:
| | No. of awards | | Weighted
average grant-
date fair
value | | | No. of awards | | Weighted
average grant-
date fair
value | |
Nonvested at May 1, 2011 | | — | | $ | — | | | — | | $ | — | |
Granted | | 221,354 | | 15.17 | | | 221,354 | | 15.17 | |
Vested and exchanged for common shares | | (91,146 | ) | 15.17 | | | (91,146 | ) | 15.17 | |
| | | | | | |
Nonvested at December 31, 2011 | | 130,208 | | $ | 15.17 | | | 130,208 | | $ | 15.17 | |
Granted | | | — | | | |
Vested and exchanged for common shares | | | (43,403 | ) | 15.17 | |
Nonvested at December 31, 2012 | | | 86,805 | | $ | 15.17 | |
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Table of Contents
The aggregate intrinsic value of Restricted Stock vested during the year ended December 31, 2012 is $1.4 million.$0.7 million ($1.4 million for the eight months ended December 31, 2011).
(2) Restricted Stock Units
Restricted Stock Units (“RSUs”) allow the holder to acquire one common share for each unit held upon vesting. As described under Note 3 “Reorganization and Fresh-Start Reporting”“Reorganization”, upon consummation of the CCAA Plan and in accordance with the MIP, the Successor Company issued 299,479 RSUs to certain senior management.Management. During the eight months ended December 31, 2011, Angiotech issued an additional 116,000 RSUs to certain employees and directors of the company. The RSUs allow the holder to acquire one common share for each unit held upon vesting. Of the 415,479 RSUs issued during the eight months ended December 31, 2011, 365,479 vest 1/3rd on each of the first, second and third anniversaries from the date of grant and expire on the seventh anniversary of the date of grant and 50,000 of the RSUs vest upon the consummation of a change of control (as defined) that occurs on or before December 31, 2012.
Company. During the eight months ended December 31, 2011, two executive officers of the Company holding RSUs were terminated. The provisions of these executive officer’s employment agreements provided for accelerated vesting of all RSUs and stock options upon termination. The total value of the RSUs accelerated was estimated to be approximately $3.3 million.
During the year ended December 31, 2012 the Successor Company issued 219,500 RSUs to certain employees and senior Management. During the same period, 31,000 RSUs were forfeited and 208,333 RSUs were cancelled by a former executive officer of the Company as part of the settlement of the former executive officer’s termination agreement (see note 21(b) for more information) . The RSUs outstanding on December 31, 2012 vest 1/3rd on each of the first, second and third anniversaries from the date of grant. There is no expiry date on vested RSUs.
At December 31, 2012 there were 60,764 RSUs vested and 281,882 RSUs unvested (December 31, 2011 there were 253,906 RSUs vested and 161,573 RSUs unvested.unvested). Stock-based compensation expense related to RSUs for the eight monthsyear ended December 31, 20112012 was $4.2$1.2 million ($4.2 million including the $3.3 million of stock-based compensation related to the accelerated RSUs.RSUs for the eight months ended December 31, 2011).
A summary of RSU activity for the Successor Company is as follows:
| | No. of RSUs | | Weighted average
remaining
contractual term
(years) | | Weighted
average grant
date fair value | | | No. of RSUs | | Weighted
average grant
date fair value | |
Outstanding at May 1, 2011 | | — | | — | | — | | | — | | — | |
Granted | | 415,479 | | 6.00 | | $ | 15.17 | | | 415,479 | | $ | 15.17 | |
Exercised | | — | | | | | | | — | | | |
Forfeited | | — | | | | | | | — | | | |
Outstanding at December 31, 2011 | | 415,479 | | 5.75 | | $ | 15.17 | | | 415,479 | | $ | 15.17 | |
Outstanding and Exercisable at December 31, 2011 | | 253,906 | | 5.75 | | $ | 15.17 | | |
Granted | | | 219,500 | | 12.02 | |
Exercised | | | (22,000 | ) | 15.17 | |
Forfeited | | | (31,000 | ) | 13.95 | |
Cancelled | | | (208,333 | ) | 15.17 | |
Expired | | | (31,000 | ) | nil | |
Outstanding at December 31, 2012 | | | 342,646 | | $ | 13.38 | |
Outstanding and Exercisable at December 31, 2012 | | | 60,764 | | $ | 15.17 | |
A summary of the status of nonvested RSU awards as of December 31, 20112012 and changes during the eight monthsyear ended December 31, 2011,2012, is presented below:
| | No. of awards | | Weighted
average grant-
date fair
value | | | No. of awards | | Weighted
average grant-
date fair
value | |
Nonvested at May 1, 2011 | | — | | $ | — | | | — | | $ | — | |
Granted | | 415,479 | | 14.48 | | | 415,479 | | 14.48 | |
Vested | | (253,906 | ) | 15.17 | | | (253,906 | ) | 15.17 | |
Forfeited | | — | | — | | | — | | — | |
| | | | | | |
Nonvested at December 31, 2011 | | 161,573 | | $ | 13.38 | | | 161,573 | | $ | 13.38 | |
Granted | | | 219,500 | | 12.02 | |
Vested | | | (37,191 | ) | 15.17 | |
Forfeited | | | (31,000 | ) | 13.95 | |
Expired | | | (31,000 | ) | nil | |
Nonvested at December 31, 2012 | | | 281,882 | | $ | 12.85 | |
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The aggregate intrinsic value of RSUs vested and exercisable is $3.9$0.9 million.
F-40
(3) Stock Options
As described under Note 3 “Reorganization and Fresh-Start Reporting”, upon consummation of the CCAA Plan and in accordance with the MIP, the Company issued 708,023 options to certain employees to acquire 5.2% of the new common shares, on a fully-diluted basis. The options are at an exercise price of $20 and expire on May 12, 2018. Options to acquire an additional 5% of the new common shares have been reserved for issuance at a later date at the discretion of the new board of directors put in place upon implementation of the Recapitalization Transaction. Stock-based compensation expense related to stock options for the year ended December 31, 2012 was $1.0 million ($3.9 million for the eight months ended December 31, 2011 was $3.9 million. This expensewhich includes $2.8 million for the accelerated vesting of stock option awards for the four executive officers that were terminated during the eight months ended December 31, 2011, as discussed above.previously discussed).
A summary of stock option and award activity for the Successor Company is as follows:
| | No. of Stock
Options | | Weighted average
exercise price | | Weighted
average
remaining
contractual
term (years) | | Weighted
average
grant date
fair value | | | No. of Stock
Options | | Weighted average
exercise price | | Weighted
average
remaining
contractual
term (years) | | Weighted
average
grant date
fair value | |
Outstanding at May 1, 2011 | | — | | — | | — | | — | | | — | | — | | — | | — | |
Granted | | 708,023 | | $ | 20.00 | | 7.00 | | $ | 9.40 | | | 708,023 | | $ | 20.00 | | 7.00 | | $ | 9.40 | |
Exercised | | — | | | | | | | | | — | | | | | | | |
Forfeited | | (34,500 | ) | $ | 20.00 | | | | | | | (34,500 | ) | $ | 20.00 | | | | | |
Outstanding at December 31, 2011 | | 673,523 | | $ | 20.00 | | 6.37 | | $ | 9.45 | | | 673,523 | | $ | 20.00 | | 6.37 | | $ | 9.45 | |
Outstanding and Exercisable at December 31, 2011 | | 329,177 | | $ | 20.00 | | 6.37 | | $ | 9.77 | | |
Granted | | | — | | | | | | | |
Exercised | | | — | | | | | | | |
Cancelled | | | (219,452 | ) | $ | 20.00 | | | | | |
Forfeited | | | (37,200 | ) | $ | 20.00 | | | | | |
Outstanding at December 31, 2012 | | | 416,871 | | $ | 20.00 | | 5.37 | | $ | 9.38 | |
Outstanding and Exercisable at December 31, 2012 | | | 212,107 | | $ | 20.00 | | 5.37 | | $ | 9.51 | |
During the year ended December 31, 2012, 37,200 stock options were forfeited and 219,452 stock options were cancelled as part of the settlement of a former executive officer’s termination agreement.
A summary of the status of nonvested stock option awards as of December 31, 20112012 and changes during the eight monthsyear ended December 31, 2011,2012, is presented below:
| | | | Weighted | | Weighted | | | | | Weighted | | Weighted | |
| | | | average | | average | | | | | average | | average | |
| | | | grant-date | | exercise | | | | | grant-date | | exercise | |
| | No.of awards | | fair value | | price | | | No.of awards | | fair value | | price | |
Nonvested at May 1, 2011 | | — | | $ | — | | $ | — | | | — | | — | | — | |
Granted | | 708,023 | | $ | 9.40 | | $ | 20.00 | | | 708,023 | | $ | 9.40 | | $ | 20.00 | |
Vested | | (329,177 | ) | $ | 9.77 | | 20.00 | | | (329,177 | ) | $ | 9.77 | | 20.00 | |
Forfeited | | (34,500 | ) | 8.42 | | 20.00 | | | (34,500 | ) | 8.42 | | 20.00 | |
| | | | | | | | |
Nonvested at December 31, 2011 | | 344,346 | | $ | 9.15 | | $ | 20.00 | | | 344,346 | | $ | 9.15 | | $ | 20.00 | |
Granted | | | — | | — | | — | |
Vested | | | (105,382 | ) | $ | 8.42 | | 20.00 | |
Forfeited | | | (34,200 | ) | 8.42 | | 20.00 | |
Nonvested at December 31, 2012 | | | 204,764 | | $ | 9.24 | | $ | 20.00 | |
(ii) Predecessor Company
In June 2006, the shareholders approved the adoption of the 2006 Stock Incentive Plan (the “2006 Plan”) which superseded theThe Predecessor Company’s previous stock option plans. The 2006 Plan incorporated all of the options granted under the previous stock option plans and, in total, providesplan provided for the issuance of non-transferable stock options and stock-based awards (as defined below) to purchase up to 13,937,756 common shares to employees, officers, directors of the Predecessor Company, and persons providing ongoing managementManagement or consulting services to the Company. The 2006 Plan providesplan also provided for but does not require, the granting of tandem stock appreciation rights that at the option of the holder may behave been exercised instead of the underlying option. A stock option with a tandem stock appreciation right is referred to as an award. When the tandem stock appreciation right portion of an award is exercised, the underlying option is cancelled. The tandem stock appreciation rights are settled in equity and the option holder receives common shares with a fair market value equal to the excess of the fair value of the shares subject to the option at the time of exercise (or the portion thereof so exercised) over the aggregate option price of the shares set forth in the option agreement. The exercise price of the options and awards iswas fixed by the Board of Directors, but willwas generally be at least equal to the market price of the
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Table of Contents
common shares at the date of grant,grant. The term of the options and for options issued under the 2006 Planawards was between five and the Predecessor Company’s 2004 Stock Option Plan (the “2004 Plan”), the term may not exceed five years. For options grandfathered from the stock option plans prior to the 2004 Plan, the term did not exceed 10ten years. Options and awards granted are also subject to certain vesting provisions. Options and awards generally vestvested monthly after being granted over varying terms
F-41
from two to four years. Any one person is permitted, subject to the approval of the Company’s Board of Directors, to receive options and awards to acquire up to 5% of its issued and outstanding common shares.
During the four months ended April 30, 2011, the Predecessor Company issued 5,120 common shares respectively upon exercise of awards (December 31, 2010 — 42,296, December 31, 2009 — 16,098)42,296). Angiotech issuesThe Predecessor Company issued new shares to satisfy stock option and award exercises.
A summary of Canadian dollar stock option and award activity for the Predecessor Company is as follows:
| | No. of Stock
Options
and
Awards | | Weighted average
exercise price
(in CDN$) | | Weighted average
remaining
contractual
term (years) | | Aggregate
intrinsic
value
(in CDN$) | | | No. of Stock
Options
and
Awards | | Weighted average
exercise price
(in CDN$) | | Weighted average
remaining
contractual
term (years) | | Aggregate
intrinsic
value
(in CDN$) | |
Outstanding at December 31, 2009 | | 5,171,709 | | $ | 5.99 | | 3.18 | | $ | 2,800 | | |
Granted | | 919,500 | | 1.09 | | | | | | |
Exercised | | (10,000 | ) | 0.31 | | | | | | |
Forfeited | | (806,025 | ) | 14.63 | | | | | | |
Outstanding at December 31, 2010 | | 5,275,184 | | $ | 3.83 | | 2.75 | | $ | 132 | | | 5,275,184 | | $ | 3.83 | | 2.75 | | $ | 132 | |
Exercised | | — | | — | | | | | | | — | | — | | | | | |
Forfeited | | (5,275,184 | ) | 3.83 | | | | | | | (5,275,184 | ) | 3.83 | | | | | |
Outstanding at April 30, 2011 | | — | | $ | — | | — | | $ | — | | | — | | $ | — | | — | | $ | — | |
Exercisable at April 30, 2011 | | — | | $ | — | | — | | $ | — | | | — | | $ | — | | — | | $ | — | |
A summary of the status of Canadian dollar nonvested awards and options for the Predecessor Company as of April 30, 2011 and changes during the four months ended April 30, 2011, is presented below:
Nonvested CDN$ awards | | No. of
awards | | Weighted average
grant-date
fair value
(in CDN$) | |
Nonvested at December 31, 2010 | | 2,225,194 | | $ | 0.46 | |
Vested | | (294,577 | ) | 1.46 | |
Forfeited | | (560,223 | ) | 0.57 | |
Nonvested at April 30, 2011 | | 1,370,394 | | $ | 0.59 | |
A summary of U.S. dollar award activity for the Predecessor Company is as follows:
| | No. of
Awards | | Weighted average
exercise price
(in U.S.$) | | Weighted average
remaining
contractual
term (years) | | Aggregate
intrinsic
value
(in U.S.$) | | | No. of
Awards | | Weighted average
exercise price
(in U.S.$) | | Weighted average
remaining
contractual
term (years) | | Aggregate
intrinsic
value
(in U.S.$) | |
Outstanding at December 31, 2009 | | 2,984,748 | | $ | 1.64 | | 3.74 | | $ | 2,278 | | |
Granted | | 1,194,000 | | 1.05 | | | | | | |
Exercised | | (52,480 | ) | 0.26 | | | | | | |
Forfeited | | (235,269 | ) | 1.07 | | | | | | |
Outstanding at December 31, 2010 | | 3,890,999 | | $ | 1.51 | | 3.14 | | $ | 179 | | | 3,890,999 | | $ | 1.51 | | 3.14 | | $ | 179 | |
Granted | | — | | — | | | | | | | — | | — | | | | | |
Exercised | | (20,833 | ) | (0.26 | ) | | | | | | (20,833 | ) | (0.26 | ) | | | | |
Forfeited | | (3,870,166 | ) | 1.52 | | | | | | | (3,870,166 | ) | 1.52 | | | | | |
Outstanding at April 30, 2011 | | — | | $ | — | | — | | $ | — | | | — | | $ | — | | — | | $ | — | |
Exercisable at April 30, 2011 | | — | | $ | — | | — | | $ | — | | | — | | $ | — | | — | | $ | — | |
A summary of the status of US dollar nonvested awards and options for the Predecessor Company as of April 30, 2011 and changes during the four months ended April 30, 2011, is presented below:
Nonvested U.S. $ awards | | No. of
awards | | Weighted average
grant-date
fair value
(in U.S.$) | |
Nonvested at December 31, 2010 | | 2,044,339 | | $ | 0.48 | |
Vested | | (371,746 | ) | 1.09 | |
Forfeited | | (74,890 | ) | 0.64 | |
Nonvested at April 30, 2011 | | 1,597,703 | | $ | 0.64 | |
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American Medical Instruments Holdings, Inc. (“AMI”)
On March 9, 2006, AMI granted 304 stock options under AMI’s 2003 Stock Option Plan (the “AMI Stock Option Plan”), each of which was exercisable for approximately 3,852 of the Predecessor Company’s common shares. All outstanding options and warrants granted prior to the March 9, 2006 grant were settled and cancelled upon the acquisition of AMI. No further options to acquire common shares can be issued pursuant to the AMI Stock Option Plan. Approximately 1,171,092 of the Predecessor Company’s common shares were reserved in March 2006 to accommodate future exercises of the AMI options.
F-42
| | No. of
Shares Underlying
Options | | Weighted average
exercise price
(in U.S.$) | | Weighted average
remaining
contractual
term (years) | | Aggregate
intrinsic
value
(in U.S.$) | | | No. of
Shares Underlying
Options | | Weighted average
exercise price
(in U.S.$) | | Weighted average
remaining
contractual
term (years) | | Aggregate
intrinsic
value
(in U.S.$) | |
Outstanding at December 31, 2009 | | 300,480 | | 15.44 | | 6.19 | | — | | |
Outstanding at December 31, 2010 | | 300,480 | | 15.44 | | 5.19 | | — | | | 300,480 | | $ | 15.44 | | 5.19 | | — | |
Forfeited | | (300,480 | ) | 15.44 | | — | | | | | (300,480 | ) | 15.44 | | — | | | |
Outstanding at April 30, 2011 | | — | | — | | — | | — | | | — | | — | | — | | — | |
Exercisable at April 30, 2011 | | — | | — | | — | | — | | | — | | — | | — | | — | |
|
As described under note 1, upon implementation of the CCAA Plan on May 12, 2011, all stock options, warrants and other rights or entitlements to acquire or purchase common shares of the Predecessor Company under existing stock option plans were cancelled and terminated without any liability, payment or other compensation in respect thereof. In conjunction with the cancellation of all stock options, warrants, and other rights or entitlements to purchase common shares, all unrecognized stock based compensation costs of approximately $1.4 million were charged to restructuring items in April 2011.
(c) Stock-based compensation expense
The Successor Company recorded stock-based compensation expense of $9.8 million for the eight months ended December 31, 2011, and the Predecessor Company recorded $0.4 million for the four months ended April 30, 2011, (December 31, 2010 - $1.8 million, December 31, 2009 - $1.6 million) relating to awards granted under its stock option plan that were modified or settled subsequent to October 1, 2002.
The Company expenses the compensation cost of stock-based payments over the service period using the straight-line method over the vesting period. The total unrecognized compensation cost of non-vested awards was $5.6 million as at December 31, 2011.
The following weighted average assumptions were used for stock options grants in the respective periods:
| | Successor
Company | | Predecessor Company | |
| | Eight Months Ended
December 31,
2011 | | Four Months
Ended
April 30, 2011(1) | | Year Ended
December 31,
2010 | | Year Ended
December 31,
2009 | |
Dividend Yield | | Nil | | Nil | | Nil | | Nil | |
Expected Volatility | | 39.9% - 103.4 | % | — | % | 99.6% - 101.7 | % | 108.0% -126.8 | % |
Weighted Average Volatility | | 71.6 | % | — | % | 100.7 | % | 113.9 | % |
Risk-free Interest Rate | | 2.95 | % | — | % | 1.8 | % | 0.37% -1.31 | % |
Expected Term (Years) | | 3 | | — | | 5 | | 3 | |
(1)There were no stock options granted for the Predecessor Company during the four months Ended April 30, 2011.
The weighted average fair value of awards granted in the eight months ended December 31, 2011, four months ended April 30, 2011, and the years ended December 31, 2010 and 2009 are presented below:
| | Predecessor Company | |
Stock Options | | Four Months
Ended April 30,
2011(1) | | Year Ended
December 31,
2010 | | Year Ended
December 31,
2009 | |
CDN$ awards | | CDN$ | — | | CDN$ | 0.83 | | CDN$ | 0.28 | |
U.S.$ awards | | $ | — | | $ | 0.78 | | $ | 0.27 | |
| | | | | | | | | | | | | |
(1)There were no stock options granted for the Predecessor Company during the four months Ended April 30, 2011.
A summary of the status of AMI nonvested awards and options for the Predecessor Company as of April 30, 2011 and changes during the four months ended April 30, 2011, is presented below:
Nonvested AMI options | | No. of
shares
underlying
options | | Weighted average
grant-date
fair value
(in U.S.$) | |
Nonvested at December 31, 2010 | | 112,683 | | $ | 6.51 | |
Vested | | (75,124 | ) | 6.51 | |
Nonvested at April 30, 2011 | | 37,599 | | $ | 6.51 | |
F-43
The total fair value of the AMI options vested during the four months ended April 30, 2011 was $0.5 million ($0.5 million for the year ended December 31, 2010).
The weighted average fair value of awards granted in the four months ended April 30, 2011, and the year ended December 31, 2010 are presented below:
| | Predecessor Company | |
Stock Options | | Four Months
Ended April 30,
2011(1) | | Year Ended
December 31,
2010 | |
CDN$ awards | | CDN$ | — | | CDN$ | 0.83 | |
U.S.$ awards | | $ | — | | $ | 0.78 | |
| | | | | | | | | |
(1)There were no stock options granted for the Predecessor Company during the four months ended April 30, 2011.
Nonvested CDN$ awards | | No. of
awards | | Weighted average
grant-date
fair value
(in CDN$) | |
Nonvested at December 31, 2010 | | 2,225,194 | | $ | 0.46 | |
Vested | | (294,577 | ) | 1.46 | |
Forfeited | | (560,223 | ) | 0.57 | |
Nonvested at April 30, 2011 | | 1,370,394 | | $ | 0.59 | |
Nonvested U.S. $ awards | | No. of
awards | | Weighted average
grant-date
fair value
(in U.S.$) | |
Nonvested at December 31, 2010 | | 2,044,339 | | $ | 0.48 | |
Vested | | (371,746 | ) | 1.09 | |
Forfeited | | (74,890 | ) | 0.64 | |
Nonvested at April 30, 2011 | | 1,597,703 | | $ | 0.64 | |
Nonvested AMI options | | No. of
shares
underlying
options | | Weighted average
grant-date
fair value
(in U.S.$) | |
Nonvested at December 31, 2010 | | 112,683 | | $ | 6.51 | |
Vested | | (75,124 | ) | 6.51 | |
Nonvested at April 30, 2011 | | 37,599 | | $ | 6.51 | |
As discussed above, in conjunction with the cancellation of all awards and other rights or entitlements to purchase common shares in accordance with the implementation of the CCAA Plan; $1.1 million and $0.3 million of these costs related to the nonvested awards granted under the 2006 Plan and AMI stock options, respectively, was charged to restructuring items in April 2011.
(c) Stock-based compensation expense
The Successor Company recorded stock-based compensation expense of $2.8 million for the year ended December 31, 2012 ($9.8 million for the eight months ended December 31, 2011 and the Predecessor Company recorded $0.4 million for the four months ended April 30, 2011, December 31, 2010 - $1.8 million) relating to awards granted under its stock option plan that were modified or settled subsequent to October 1, 2002.
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The Company expenses the compensation cost of stock-based payments over the service period using the straight-line method over the vesting period. The total fair valueunrecognized compensation cost of non-vested awards was $4.6 million as at December 31, 2012.
The following weighted average assumptions were used for stock options grants in the AMIrespective periods:
|
| Successor Company |
|
|
| Year Ended
December 31,
2012(1) |
| Eight Months
Ended
December 31,
2011 |
|
Dividend Yield | | N/A | | Nil | |
Expected Volatility | | N/A | | 39.9% - 103.4 | % |
Weighted Average Volatility | | N/A | | 71.6 | % |
Risk-free Interest Rate | | N/A | | 2.95 | % |
Expected Term (Years) | | N/A | | 3 | |
(1)There were no stock options vestedgranted for the Successor Company during the year ended December 31, 2012.
|
| Predecessor Company |
|
|
| Four Months
Ended
April 30, 2011(1) |
| Year Ended
December 31,
2010 |
|
Dividend Yield | | N/A | | Nil | |
Expected Volatility | | N/A | | 99.6% - 101.7 | % |
Weighted Average Volatility | | N/A | | 100.7 | % |
Risk-free Interest Rate | | N/A | | 1.8 | % |
Expected Term (Years) | | N/A | | 5 | |
(1)There were no stock options granted for the Predecessor Company during the four months ended April 30, 2011 was $0.5 million ($0.5 million for2011.
During the year ended December 31, 2010).
During the2012, eight months ended December 31, 2011, four months ended April 30, 2011 and yearsyear ended December 31, 2010 and 2009 the following activity occurred:
| | | Successor Company | |
(in thousands) | | Four months ended April
30, 2011 | | Year Ended
December 31, 2010 | | Year Ended
December 31, 2009 | | | Year ended
December 31, 2012 | | Eight months ended
December 31, 2011 | |
Total intrinsic value of awards exercised | | | | | | | | | | | | |
CDN dollar awards | | $ | n/a | | $ | 7 | | $ | 17 | | |
U.S. dollar awards | | $ | 1 | | $ | 33 | | $ | 10 | | |
Restricted Stock | | | $ | 521,700 | | $ | 1,382,685 | |
Restricted Stock Units | | | $ | n/a | | $ | n/a | |
Stock Options | | | $ | n/a | | $ | n/a | |
Total fair value of awards vested | | $ | 444 | | $ | 1,565 | | $ | 1,559 | | | $ | 2,109,922 | | $ | 8,450,498 | |
| | Predecessor Company | |
(in thousands) | | Four months Ended
Apr30, 2011 | | Year Ended
December 31, 2010 | |
Total intrinsic value of awards exercised | | | | | |
CDN dollar awards | | $ | n/a | | $ | 7 | |
U.S. dollar awards | | $ | 1 | | $ | 33 | |
Total fair value of awards vested | | $ | 444 | | $ | 1,565 | |
Cash received from award exercises was $nil for the year ended December 31, 2012 ($nil for the eight months ended December 31, 2011 and four months ended April 30, 2011, ($11,000and $11,000 for the year ended December 31, 2010 and $3,000 for the year ended December 31, 2009)2010).
| | Successor Company | |
(in thousands) | | Eight months ended
December 31, 2011 | |
Total intrinsic value of awards exercised | | | |
Restricted Stock | | $ | 1,382,685 | |
Restricted Stock Units | | $ | n/a | |
Stock Options | | $ | n/a | |
Total fair value of awards vested | | $ | 8,450,498 | |
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(f) Shareholder rights plan
The Predecessor Company adopted a shareholder’s rights plan (“the Plan”) on February 10, 1999, amended and restated March 5, 2002, June 9, 2005 and October 30, 2008. According to the Plan, each shareholder is issued one right. Each right will entitle the holder to acquire common shares of the Predecessor Company at a 50% discount to the market upon certain specified events, including upon a person or group of persons acquiring 20% or more of the total common shares of the Predecessor Company. The rights are not exercisable in the event of a Permitted Bid as defined in the Plan. The Plan was required to be reconfirmed by the Predecessor Company’s shareholders every three years. In connection with the implementation of the CCAA Plan, the Plan and all rights issued thereunder were cancelled.
18. LICENCE FEE REVENUE16. RESTRUCTURING CHARGES
Under an AmendedIn April 2012, the Successor Company announced the closure of its Denmark manufacturing plant, primarily due to the high cost of manufacturing in that territory. Production activities associated with the Demark manufacturing plant will be transferred to other locations. Closure of the Denmark manufacturing plant is expected to be completed by April 30, 2013.
During the year ended December 31, 2012, the Medical Device Products segment of the Successor Company incurred and Restated Distributionrecorded $0.7 million of retention and Licence Agreement with our partner Baxter, in 2009 the Predecessor Company received a one-time paymentseverance costs and $0.6 million of $25.0 million, which was received in lieu and settlement of future royalty and milestone obligationscosts related to existing formulationscertain transfer and transition activities for the Denmark plant closure. Approximately $0.6 million of CoSeal surgical sealantthese retention and severance costs related to manufacturing employees and was recorded in cost of products sold during the period. The remaining $0.1 million of retention and severance costs related to administrative employees and was recorded in selling, general and administrative expenses along with the $0.6 million of transition cost discussed above. The Successor Company expects to incur a further $0.3 million in retention and severance costs and $0.4 million of other transfer and transition activities over the next four months. In accordance with ASC No. 420 — Exit or any future products. All deliverablesDisposal Cost Obligations, the retention and severance costs were providedmeasured at the communication date, based upon the fair value of the liability as of the termination date, and are being ratably recognized over the relevant service period. Other transfer and transition costs are being recognized in the period in which the liability is incurred.
In connection with these restructuring activities, the Successor Company is currently marketing the property associated with the Denmark manufacturing facility for sale. During the year ended December 31, 2012, the Successor Company recorded a $0.3 million write-down on this property to Baxteradjust the carrying value to its estimated fair value less selling costs. As at December 31, 2012, the remaining $1.9 million carrying value of this property has been reclassified from property, plant and the Predecessor Company’s performance obligations were substantially complete when the payment was recognized as license fee revenue.equipment to assets-held-for-sale.
19.17. WRITE-DOWN OF ASSETS HELD FOR SALE
During the year ended December 31, 2012, the Successor Company recorded a $0.3 million impairment loss on its Denmark property, which is currently being marketed for sale (see note 16), to adjust its carrying value to its estimated fair value less selling costs.
In June 2011, the Successor Company completed the sale of the Syracuse property for net proceeds of $0.9 million. Given that the carrying value of the property was adjusted to its fair value of $0.9 million upon implementation of fresh startfresh-start accounting on April 30, 2011, the Successor Company did not realize any gains or losses upon completion of the sale.
On March 25, 2011, the Predecessor Company entered into a sale agreement to sell the vacant Vancouver property for net proceeds of $1.8 million. The agreement became effective on April 27, 2011, upon the Canadian Court grant of an Approval and Vesting Order on April 6, 2011 and the elapse of a 21 day appeal period following the grant of such an order. InDuring the four months ended April 2011, the Predecessor Company recorded a $0.6 million write-down to adjust the carrying value of this property to the amount of the expected proceeds. On the Plan Implementation Date, the Successor Company completed the sale of the property and no gains or losses were recorded.
As at December 31, 2009, the Predecessor Company had three properties that were classified as held-for-sale based in Vancouver, Canada; Syracuse, New York; and Puerto Rico. Impairment charges of $1.5 million and $3.1 million were recorded during the yearsyear ended December 31, 2010 and December 31, 2009 to adjust the carrying values of these properties to the lower of cost and fair value less estimated selling costs. In early 2010, the Puerto Rico property was sold for net proceeds of $0.7 million with no resulting gain or loss.
As at December 31, 2010, the $3.1 million carrying value of the two remaining properties were reclassified back to Property, Plant and Equipment because they failed to meet the held-for-sale classification criteria defined under ASC No. 360-10 — Property, Plant and Equipment. The carrying values of the remaining properties were measured at the lower of (a) the carrying values of the properties prior to their classification as held-for-sale, adjusted for depreciation that would have been recognized if the properties had remained classified as held and used; and (b) the fair values of the properties at the date of the subsequent decision to not sell the properties.
20.18. ESCROW SETTLEMENT RECOVERY
In connection with the 2006 acquisition of AMI, RoundTable Healthcare Partners, LP (“RoundTable”) and Angiotech entered into an Escrow Agreement on March 23, 2006. Under this agreement, Angiotech deposited $20.0 million with LaSalle Bank (“LaSalle”), which was designated as the Escrow Agent. On April 4, 2007, Angiotech issued an Escrow Claim Notice to LaSalle to return the $20.0 million, which was subsequently disputed by RoundTable. After various legal proceedings, hearings and discussions, a Joint
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Letter of Direction was executed and $6.5 million was released to RoundTable, thereby leaving the amount in dispute at approximately $13.5 million. On January 14, 2010, a settlement agreement was signed whereby Angiotech received $4.7 million from the escrow account. On January 15, 2010, the Predecessor Company received the settlement funds, which were recorded as a recovery. All legal proceedings have been dismissed.
21.19. ACQUISITION OF CERTAIN ASSETS OF HAEMACURE CORPORATION
On April 6, 2010, the Predecessor Company acquired certain assets from Haemacure Corporation (“Haemacure”) for consideration of $3.9 million. These assets related to certain fibrin and thrombin technologies, which the Predecessor Company intended to use in some of its surgical product candidates which were in preclinical development at the time.
On January 11, 2010 Haemacure announced it filed a notice of intention to make a proposal to its creditors under the Bankruptcy and Insolvency Act (Canada) and its wholly-owned U.S. subsidiary sought court protection under Chapter 11 of the U.S. Bankruptcy Code. These actions were taken in light of Haemacure’s financial condition and inability to raise additional financing. Under the terms of the collaborative arrangement, the Predecessor Company loaned Haemacure $3.7 million to help fund its insolvency proceedings and day-to-day operations. These loans were secured by substantially all of Haemacure’s assets.
Under ASC No. 805, the transaction qualified as a business combination and the acquisition method was used to account for the transaction. As part of the settlement of preexisting debt arrangement with Haemacure, the Predecessor Company recognized a $1.9 million settlement gain which reflected the difference between the contractual settlement amount of the loan and its carrying value.
20. DISPOSAL OF LAGUNA HILLS MANUFACTURING FACILITY
During the year ended December 31, 2010, the Company sold its Laguna Hills manufacturing operations under its Medical Device Technologies operating segment. The sale included certain assets and liabilities for total net proceeds of $2.8 million resulting in a gain of $2.0 million.
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22.21. COMMITMENTS AND CONTINGENCIES
(a) Commitments
i) Lease commitments
Angiotech has various operating lease agreements for office laboratory and manufacturing space which are scheduled to expire through to July 2019.January 2022. Future minimum annual lease payments under these leases are as follows:
2012 | | $ | 2,443 | | |
2013 | | 1,532 | | | $ | 1,715 | |
2014 | | 1,289 | | | 1,499 | |
2015 | | 1,281 | | | 1,292 | |
2016 | | 1,297 | | | 1,309 | |
2017 | | | 1,326 | |
Thereafter | | 2,166 | | | 1,046 | |
| | $ | | 10,008 | | | $ | 8,187 | |
|
Rent expense for the fouryear ended December 31, 2012 was $2.1 million (four months ended April 30, 2011 and- $0.9 million; eight months ended December 31, 2011 and was $0.9 million and- $1.7 million, respectively (Decemberyear ended December 31, 2010 - $3.1 million). The 2012 amount includes a $1.1 million non-recurring rent charge related to the ongoing lease commitments for a property that the Successor Company elected to vacate during the fourth quarter of 2012.
In accordance with ASC No. 420-10 Exit or Disposal Cost Obligations, during the year ended December 31, 2009 - $3.2 million).2012the Company has recorded a $1.1 million accrual for the estimated exit costs associated with a leased property which is no longer in use. Approximately $0.2 million and $0.9 million of this accrual have been classified as current and non-current, respectively. During the year ended December 31, 2010, the Predecessor Company recorded a similar accrual of $0.9 million for another leased property which was no longer in use.
ii) Commitments
We haveIn prior years, we entered into certain research and development collaboration agreements that involvewhich require joint research efforts. Certain collaboration costs and any eventual profits willare to be shared as per the terms provided forstipulated in thethese agreements. We may also be required to
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make milestone, royalty, and/or other research and development funding payments under research and development collaboration and other agreements with third parties. These payments are contingent upon the achievement of specific development, regulatory and/or commercial milestones. We accrue for these payments when it is probable that a liability has been incurred and the amount can be reasonably estimated. We do not accrue for these payments if the outcome of achieving these milestones is not determinable. Our significant contingent milestone, royalty and other research and development commitments are as follows:
Quill Medical, Inc. (“Quill”)
In connection with the acquisition of Quill in June 2006, the Predecessor Company was required to make additional contingent payments of up to $150 million upon the achievement of certain revenue growth and a development milestone. These payments were primarily contingent upon the achievement of significant incremental revenue growth over a five-year period beginning on July 1, 2006, subject to certain conditions.
On October 4, 2010, the Predecessor Company was notified that QSR Holdings, Inc. (“QSR”), as a representative for former stockholders of Quill Medical, Inc. (“QMI”), had made a formal demand (the “Arbitration Demand”) to the American Arbitration Association naming the Company, QMI and Angiotech Pharmaceuticals (US), Inc. as respondents (collectively, the “Respondents”). The Arbitration Demand alleged that the Respondents failed to satisfy certain obligations under the Agreement and Plan of Merger, dated May 25, 2006, by and among Angiotech, Angiotech US, Quaich Acquisition, Inc. and QMI (the “Merger Agreement”), notably including the obligations to make certain earn out payments and the orthopedic milestone payment. The Arbitration Demand sought either direct monetary damages or, in the alternative, extension of the earn-out period for a sixth year as more fully set forth in the Merger Agreement. In addition, QSR commenced an action in the United States District Court for the Middle District of North Carolina on October 1, 2010 against the Respondents, entitled QSR Holdings, Inc. v. Angiotech
On January 27, 2011 the Predecessor Company entered into a settlement agreement (the “Settlement Agreement”) for the full and final settlement of all claims, including all potential contingent payments, under the Merger Agreement. Under the terms of the Settlement Agreement, Angiotech is required to pay QSR $6.0 million (the “Settlement Amount”). In accordance with the terms of the Settlement Agreement, the first $2.0 million was paid on May 26, 2011, with the remainder being payable in equal monthly installments over a 24 month period.
Athersys, Inc. (“Athersys”)
In May 2006, Angiotech entered into a collaboration and licensing arrangement with Athersys to co-develop and commercialize Multi-Stem Stem Cell Therapy (“Multi-Stem”) for use in the indications of acute myocardial infarction (“AMI”) and peripheral vascular disease. On November 11, 2011, Angiotech entered into a mutual Termination Agreement (“Termination Agreement”) with Athersys Inc. and ABT Holding Company (formerly known as Athersys, Inc.) to terminate all existing collaboration and licensing agreements between the parties. Under the terms of the Termination Agreement, Athersys regained all rights to the
F-46
development of their stem cell technologies and products for cardiovascular disease indications; including AMI, congestive heart failure, chronic ischemia and peripheral vascular disease. Going forward, Angiotech will no longer have any licensing rights or funding obligations related to Athersys’ stem cell technologies and products. However, in the event that Athersys enters a new AMI collaboration, Angiotech will be entitled to a certain percentage of the license fees that Athersys receives from a third party partner, subject to various conditions.
Biopsy Sciences LLC (“Biopsy Sciences”)
In connection with the acquisition of certain assets from Biopsy Sciences in January 2007, Angiotech may bewas contractually required to make certain contingent payments of up to $2.0 million upon the achievement of certain clinical and regulatory milestones and up to $10.7 million for achievingupon achievement of certain commercialization milestones. No clinical or regulatory milestones were achieved in 2011. As a result, no payments were madeIn May 2012, Angiotech entered into an amendment to the original 2007 Asset Purchase Agreement and Amended and Restated License Agreement with Biopsy Sciences, duringLLC, to eliminate all future financial obligations related to the eight monthsdevelopment, commercialization and sale of the BioSeal Product in exchange for an amendment fee of $1.0 million (the “Amendment Fee”). The Amendment Fee was paid on May 31, 2012 and has been recorded as a research and development expense in the Consolidated Statement of Operations for the year ended December 31, 2011 or the four months ended April 30, 2011 (year ended December 31, 2010 — nil).2012.
(b) Contingencies
On November 7, 2012, the Successor Company reached a mediated settlement in principle on the termination payments to be made to Dr. William L. Hunter, the former President and Chief Executive Officer of Angiotech. Dr. Hunter’s employment ceased with Angiotech effective October 17, 2011. Pursuant to the terms of the Settlement Agreement dated November 14, 2012 (the “Termination Settlement Agreement”); Dr. Hunter received a cash settlement of $6.5 million, inclusive of legal costs, (the “Termination Settlement Amount”) for the full and final settlement of all claims. Without further consideration, Dr. Hunter surrendered all equity awards granted to him under Angiotech’s stock incentive plan and all such awards area and will be deemed to be forfeited, terminated and cancelled and of no further force and effect. Dr. Hunter and Angiotech each executed a mutual release in connection with entering into the Settlement Agreement. As at December 31, 2012, this Settlement Amount had been fully paid out.
From time to time, the Successor Company may be subject to claims and legal proceedings brought against usAngiotech in the normal course of business. Such matters are subject to many uncertainties.uncertainties and may be difficult for Management to determine the outcome or estimate the potential range of losses if the Successor Company does not prevail in such matters. The Successor Company maintains insurance policies that provide limited coverage for amounts in excess of certain pre-determined deductibles for intellectual property infringement and product liability claims. Management believes that adequate provisions have been made in the accounts where required. However, we are not able to determine the outcome or estimate potential losses of the pending legal proceedings listed below to which we may become subject in the normal course of business nor are we able to estimate the amount or range of any possible loss we might incur should we not prevail in such matters. WeManagement cannot provide assurance that the legal proceedings listeddisclosed here, or other legal proceedings not listeddisclosed here, will not have a material adverse impact on our financial condition or results of operations.
At the European Patent Office (“EPO”), various patents either owned or licensed by or to Angiotech are in opposition proceedings. The outcomes of these proceedings have not yet been determined.
23.22. SEGMENTED INFORMATION
As at December 31, 2011,2012, the Company had two reportable segments based on the type of revenue generated: (i) Medical Device TechnologiesProducts and (2) Licensed Technologies. The Medical Device TechnologiesProducts segment includes revenues and gross margins of single use, specialty medical devices including suture needles, biopsy needles / devices, micro surgical ophthalmic knives, drainage catheters, self-anchoring sutures, other specialty devices, biomaterials and other technologies. The Licensed Technologies segment includes royalty revenue generated from out-licensing technology related to the drug-eluting stent and other technologies.
The Successor Company and Predecessor Company reports segmented information on each of these segments to the gross margin level. All other income and expenses are not allocated to segments as they are not considered in evaluating the segment’s operating performance. The following tables represent reportable segment information for the year ended December 31, 2012, the eight months ended December 31, 2011, the four months ended April 30, 2011 and the yearsyear ended December 31, 2010 and 2009:2010:
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| | Successor Company | | | Predecessor Company | |
| | Eight months ended
December 31, | | | Four months ended
April 30, | | Year ended
December 31, | | Year ended
December 31, | |
| | 2011 | | | 2011 | | 2010 | | 2009 | |
Revenue | | | | | | | | | | |
Medical Device Technologies | | $ | 139,307 | | | $ | 69,198 | | $ | 211,495 | | $ | 191,951 | |
Licensed Technologies | | 13,670 | | | 11,068 | | 34,747 | | 87,727 | |
| | | | | | | | | | |
Total revenue | | 152,977 | | | 80,266 | | 246,242 | | 279,678 | |
| | | | | | | | | | |
Cost of products sold — Medical Device Technologies | | 90,348 | | | 32,219 | | 106,304 | | 104,616 | |
Licence and royalty fees — Licensed Technologies | | 264 | | | 68 | | 5,889 | | 10,431 | |
| | | | | | | | | | |
Gross margin | | | | | | | | | | |
Medical Device Products | | 48,959 | | | 36,979 | | 105,191 | | 87,335 | |
Licensed Technologies | | 13,406 | | | 11,000 | | 28,858 | | 77,296 | |
| | | | | | | | | | |
Total gross margin | | 62,365 | | | 47,979 | | 134,049 | | 164,631 | |
| | | | | | | | | | |
Research and development | | 14,076 | | | 5,686 | | 26,790 | | 23,701 | |
Selling, general and administration | | 60,424 | | | 24,846 | | 89,238 | | 81,504 | |
Depreciation and amortization | | 23,973 | | | 14,329 | | 33,745 | | 33,251 | |
Write-down of assets held for sale | | — | | | 570 | | 1,450 | | 3,090 | |
Write-down of property, plant and equipment | | 4,502 | | | 215 | | 4,779 | | — | |
Write-down of intangible assets | | 10,850 | | | — | | 2,814 | | — | |
Escrow settlement recovery | | — | | | — | | (4,710 | ) | — | |
| | | | | | | | | | |
Operating (loss) income | | (51,460 | ) | | 2,333 | | (20,057 | ) | 23,085 | |
Other expenses | | (11,972 | ) | | (10,939 | ) | (46,798 | ) | (39,916 | ) |
| | | | | | | | | | |
Loss before reorganization items, gain on extinguishment of debt and settlement of other other liabilities and income taxes | | $ | (63,432 | ) | | $ | (8,606 | ) | $ | (66,855 | ) | $ | (16,831 | ) |
| | Successor Company | | | Predecessor Company | |
| | Year ended
December 31, | | Eight months ended
December 31, | | | Four months ended
April 30, | | Year ended
December 31, | |
| | 2012 | | 2011 | | | 2011 | | 2010 | |
Revenue | | | | | | | | | | |
Medical Device Products | | $ | 228,723 | | $ | 142,245 | | | $ | 70,260 | | $ | 215,278 | |
Licensed Technologies | | 15,102 | | 10,732 | | | 10,006 | | 30,964 | |
| | | | | | | | | | |
Total revenue | | 243,825 | | 152,977 | | | 80,266 | | 246,242 | |
| | | | | | | | | | |
Cost of products sold — Medical Device Products | | 102,706 | | 90,348 | | | 32,219 | | 106,304 | |
Licence and royalty fees — Licensed Technologies | | 618 | | 264 | | | 68 | | 5,889 | |
| | | | | | | | | | |
Gross margin | | | | | | | | | | |
Medical Device Products | | 126,017 | | 51,897 | | | 38,041 | | 108,974 | |
Licensed Technologies | | 14,484 | | 10,468 | | | 9,938 | | 25,075 | |
| | | | | | | | | | |
Total gross margin | | 140,501 | | 62,365 | | | 47,979 | | 134,049 | |
| | | | | | | | | | |
Research and development | | 7,056 | | 14,076 | | | 5,686 | | 26,790 | |
Selling, general and administration | | 70,985 | | 60,424 | | | 24,846 | | 89,238 | |
Depreciation and amortization | | 34,503 | | 23,973 | | | 14,329 | | 33,745 | |
Write-down of assets held for sale | | 277 | | — | | | 570 | | 1,450 | |
Write-down of property, plant and equipment | | 877 | | 4,502 | | | 215 | | 4,779 | |
Write-down of intangible assets | | — | | 10,850 | | | — | | 2,814 | |
Escrow settlement recovery | | — | | — | | | — | | (4,710 | ) |
| | | | | | | | | | |
Operating (loss) income | | 26,803 | | (51,460 | ) | | 2,333 | | (20,057 | ) |
Other expenses | | (24,819 | ) | (11,972 | ) | | (10,939 | ) | (46,798 | ) |
| | | | | | | | | | |
Loss before reorganization items, gain on extinguishment of debt and settlement of other other liabilities and income taxes | | 1,984 | | (63,432 | ) | | (8,606 | ) | (66,855 | ) |
| | | | | | | | | | |
Reorganization items | | — | | — | | | 321,084 | | — | |
Gain on extinguishment of debt and settlement of other liabilities | | — | | — | | | 67,307 | | — | |
Loss before income taxes | | 1,984 | | (63,432 | ) | | 379,785 | | (66,855 | ) |
| | | | | | | | | | |
Income tax (recovery) expense | | 8,210 | | (2,986 | ) | | 267 | | (44 | ) |
Net (loss) income | | $ | (6,226 | ) | $ | (60,446 | ) | | $ | 379,518 | | $ | (66,811 | ) |
The Company allocates its assets to the two reportable segments; however, as noted above, depreciation, income taxes and other expense and income are not allocated to segment operating units.
During the four monthsyear ended April 30, 2011 andDecember 31, 2012, the eight months ended December 31, 2011 and the four months ended April 30, 2011, the royalty revenue from BSC represented approximately 12%5%, 7% and 7%12% of total revenue, respectively (year ended December 31, 2010 — 12%). During the year ended December 31, 2009, revenue from two licensees, BSC and Baxter International Inc. represented 29% of total revenue.
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The following tables represent total assets andtable represents capital expenditures for each reportable segment at December 31, 2012, 2011 and 2010:
| | Successor Company | | | Predecessor Company | | | Successor Company | | | Predecessor Company | |
| | Eight months ended
December 31, | | | Four months ended
April 30, | | Year ended
December 31, | | Year ended
December 31, | | | Year ended
December 31, | | Eight months ended
December 31, | | | Four months ended
April 30, | | Year ended
December 31, | |
| | 2011 | | | 2011 | | 2010 | | 2009 | | | 2012 | | 2011 | | | 2011 | | 2010 | |
Capital expenditures | | | | | | | | | | | | | | | | | | | | |
Medical Device Technologies | | $ | 1,002 | | | $ | 945 | | $ | 5,726 | | $ | 3,178 | | |
Medical Device Products | | | $ | 2,115 | | $ | 1,002 | | | $ | 945 | | $ | 5,726 | |
Licensed Technologies | | — | | | | | — | | 1,188 | | | — | | — | | | | | — | |
| | | | | | | | | | | |
Total capital expenditures | | $ | 1,002 | | | $ | 945 | | $ | 5,726 | | $ | 4,366 | | | $ | 2,115 | | $ | 1,002 | | | $ | 945 | | $ | 5,726 | |
| | Successor Company | | | Predecessor Company | |
| | December 31, | | | December 31, | |
| | 2011 | | | 2010 | |
| | | | | | |
Total assets | | | | | | |
Medical Device Technologies | | $ | 535,377 | | | $ | 270,138 | |
Licensed Technologies | | 72,729 | | | 35,860 | |
| | | | | | |
Total assets | | $ | 608,106 | | | $ | 305,998 | |
The following table represents total assets each reportable segment at December 31, 2012 and 2011:
| | December 31, | | December 31, | |
| | 2012 | | 2011 | |
| | | | | |
Total assets | | | | | |
Medical Device Products | | $ | 558,429 | | $ | 545,097 | |
Licensed Technologies | | 49,973 | | 63,009 | |
Total assets | | $ | 608,402 | | $ | 608,106 | |
Geographic information
Revenues are attributable to countries based on the location of the Company’s customers or, for revenue from collaborators, the location of the collaborator’s customers.
| | Successor Company | | | Predecessor Company | |
| | Eight months ended
December 31, | | | Four months ended
April 30, | | Year ended
December 31, | | Year ended
December 31, | |
| | 2011 | | | 2011 | | 2010 | | 2009 | |
| | | | | | | | | | |
United States | | $ | 94,417 | | | $ | 53,403 | | $ | 150,428 | | $ | 172,318 | |
Europe | | 35,430 | | | 17,285 | | 49,420 | | 60,001 | |
Other | | 23,130 | | | 9,578 | | 46,394 | | 47,359 | |
Total | | $ | 152,977 | | | $ | 80,266 | | $ | 246,242 | | $ | 279,678 | |
F-49
| | Successor Company | | | Predecessor Company | |
| | Year ended
December 31, | | Eight months ended
December 31, | | | Four months
ended April 30, | | Year ended
December 31, | |
| | 2012 | | 2011 | | | 2011 | | 2010 | |
| | | | | | | | | | |
United States | | $ | 150,141 | | $ | 94,417 | | | $ | 53,403 | | $ | 150,428 | |
Europe | | 48,986 | | 35,430 | | | 17,285 | | 49,420 | |
Other | | 44,698 | | 23,130 | | | 9,578 | | 46,394 | |
Total | | $ | 243,825 | | $ | 152,977 | | | $ | 80,266 | | $ | 246,242 | |
Intangible assets and property, plant and equipment by country are summarized as follows:
| | Successor Company | | | Predecessor Company | | | Successor Company | |
| | December 31, | | | December 31, | | | December 31, | | December 31, | |
| | 2011 | | | 2010 | | | 2012 | | 2011 | |
| | | | | | | | | | | |
United States | | $ | 281,229 | | | $ | 146,806 | | | $ | 261,754 | | $ | 281,229 | |
Canada | | 78,989 | | | 21,476 | | | 63,007 | | 78,989 | |
Other | | 22,037 | | | 15,952 | | | 19,985 | | 22,037 | |
Total assets | | $ | 382,255 | | | $ | 184,234 | | | $ | 344,746 | | $ | 382,255 | |
F-44
Table of Contents
24.23. LOSS PER SHARE
Loss per share was calculated as follows:
| | Successor Company | | | Predecessor Company | | | Successor Company | | | Predecessor Company | |
| | Eight months ended
December 31, | | | Four months ended
April 30, | | Year ended
December 31, | | Year ended
December 31, | | | Year ended
December 31, | | Eight months ended
December 31, | | | Four months ended
April 30, | | Year ended
December 31, | |
| | 2011 | | | 2011 | | 2010 | | 2009 | | | 2012 | | 2011 | | | 2011 | | 2010 | |
| | | | | | | | | | | | | | | | | | | | |
Numerator: | | | | | | | | | | | | | | | | | | | | |
Net (loss) income | | $ | (60,446 | ) | | $ | 379,518 | | $ | (66,811 | ) | $ | (22,868 | ) | | $ | (6,226 | ) | $ | (60,446 | ) | | $ | 379,518 | | $ | (66,811 | ) |
| | | | | | | | | | | | | | | | | | | | |
Denominator: | | | | | | | | | | | | | | | | | | | | |
Basic and diluted weighted average common shares outstanding | | 12,528 | | | 85,185 | | 85,168 | | 85,130 | | | 12,791 | | 12,528 | | | 85,185 | | 85,168 | |
Basic and diluted net (loss) income per common share: | | $ | (4.82 | ) | | $ | 4.46 | | $ | (0.78 | ) | $ | (0.27 | ) | | $ | (0.49 | ) | $ | (4.82 | ) | | $ | 4.46 | | $ | (0.78 | ) |
For the eight monthsyear ended December 31, 2011, 545,6872012, 429,451 Restricted Stock awards and RSUs and 673,523416,871 stock options were excluded from the calculation of diluted net loss per common share given that the effect of including them would have been anti-dilutive due to the loss position for the periodperiod. Similarly, for the eight months ended December 31, 2011, 545,687 Restricted Stock awards and RSUs and 673,523 stock options were excluded from the calculation of diluted net loss per common share (December 31, 2010 — 6,045,830 stock options, December 31, 2009 — 3,411,357 stock options). For the four months ended April 30, 2011, there was no dilutive impact of stock options as all stock options were out-of-the money and no stock options were outstanding as at April 30, 2011.
F-50
25.24. CHANGE IN NON-CASH WORKING CAPITAL ITEMS RELATING TO OPERATING ACTIVITIES AND SUPPLEMENTAL CASH FLOW INFORMATION
The change in non-cash working capital items relating to operations was as follows:
| | Successor Company | | | Predecessor Company | | | Successor Company | | | Predecessor Company | |
| | Eight months ended
December 31, | | | Four months ended
April 30, | | Year ended
December 31, | | Year ended
December 31, | | | Year ended
December 31, | | Eight months ended
December 31, | | | Four months ended
April 30, | | Year ended
December 31, | |
| | 2011 | | | 2011 | | 2010 | | 2009 | | | 2012 | | 2011 | | | 2011 | | 2010 | |
| | | | | | | | | | | | | | | | | | | | |
Accounts receivable | | $ | 5,778 | | | $ | (855 | ) | $ | (5,638 | ) | $ | (2,122 | ) | | $ | (127 | ) | $ | 5,778 | | | $ | (855 | ) | $ | (5,638 | ) |
Income tax receivable | | (148 | ) | | (645 | ) | 420 | | — | | | (3,308 | ) | (148 | ) | | (645 | ) | 420 | |
Inventories | | 2,840 | | | (2,603 | ) | 768 | | 3,244 | | | (12,011 | ) | 2,840 | | | (2,603 | ) | 768 | |
Prepaid expenses and other assets | | 1,102 | | | 2,141 | | (223 | ) | 7,623 | | | 3,374 | | 1,102 | | | 2,141 | | (223 | ) |
Accounts payable and accrued liabilities | | 4,559 | | | (10,020 | ) | (2,337 | ) | (5,417 | ) | | (4,176 | ) | 606 | | | (10,020 | ) | (3,260 | ) |
Deferred Revenue | | | (3,603 | ) | 3,953 | | | — | | — | |
Income taxes payable | | 538 | | | (770 | ) | (8,603 | ) | 1,698 | | | 1,640 | | 538 | | | (770 | ) | (8,603 | ) |
Interest payable on long term debt | | (829 | ) | | 2,663 | | 9,758 | | (511 | ) | | 421 | | (829 | ) | | 2,663 | | 9,758 | |
| | $ | 13,840 | | | $ | (10,089 | ) | $ | (5,855 | ) | $ | 4,515 | | | $ | (17,790 | ) | $ | 13,840 | | | $ | (10,089 | ) | $ | (6,778 | ) |
F-45
Table of Contents
Supplemental disclosure
| | Successor Company | | | Predecessor Company | | | Successor Company | | | Predecessor Company | |
| | Eight months ended
December 31, | | | Four months ended
April 30, | | Year ended
December 31, | | Year ended
December 31, | | | Year ended
December 31, | | Eight months ended
December 31, | | | Four months ended
April 30, | | Year ended
December 31, | |
| | 2011 | | | 2011 | | 2010 | | 2009 | | | 2012 | | 2011 | | | 2011 | | 2010 | |
| | | | | | | | | | | | | | | | | | | | |
Income taxes paid | | $ | 2,847 | | | $ | 2,334 | | $ | 13,904 | | $ | 8,748 | | | 11,324 | | $ | 2,847 | | | $ | 2,334 | | $ | 13,904 | |
Income tax refund | | 408 | | | — | | 634 | | 5,179 | | | 81 | | 408 | | | — | | 634 | |
Interest paid | | 11,888 | | | 3,763 | | 23,523 | | 35,671 | | | 19,045 | | 11,888 | | | 3,763 | | 23,523 | |
Deferred financing charges and costs accrued but not paid | | — | | | 1,160 | | 2,090 | | — | | | | | — | | | 1,160 | | 2,090 | |
Non-cash transaction - settlement of loan receivable in exchange for Haemacure net assets acquired | | — | | | — | | 3,686 | | — | | | — | | — | | | — | | 3,686 | |
Non-cash transaction - settlement of Subordinated Notes and related interest obligations for common shares | | — | | | 202,948 | | — | | — | | | — | | — | | | 202,948 | | — | |
Non-cash transaction - exchange of $225.0 million New Notes for $229.4 million of Senior Notes | | | 229,413 | | — | | | — | | — | |
|
26.25. CONDENSED CONSOLIDATING GUARANTOR FINANCIAL INFORMATION
The following presents the condensed consolidating guarantor financial information as of December 31, 2011,2012, December 31, 2010,2011, and for the year ended December 31, 2012, the eight months ended December 31, 2011, the four months ended April 30, 2011, and the yearsyear ended December 31, 2010 and 2009 for the direct and indirect subsidiaries of the Angiotech that serve as guarantors of the Senior Floating Rate Notes, and for the subsidiaries that do not serve as guarantors. The Senior Notes are guaranteed by Angiotech Pharmaceuticals (US), Inc. and each subsidiary that has been named as a guarantor under the terms of the Senior Notes Indenture. The New Notes are guaranteed by the parent company, Angiotech Pharmaceuticals, Inc., and each subsidiary that has been named as a guarantor under the terms of the New Notes Indenture. Non-guarantor subsidiaries include the Swiss subsidiaries and a Canadian Trust that cannot guarantee the debt of the Angiotech. All of Angiotech’s subsidiaries are 100% owned, and all guarantees are full and unconditional, joint and several.
F-51F-46
Table of Contents
Condensed Consolidating Balance Sheet
As at December 31, 2012
USD (in ‘000s)
| | Successor Company | |
| | Parent Company
Angiotech
Pharmaceuticals,
Inc. | | Angiotech Pharmaceuticals,
(US) Inc. | | Guarantor
Subsidiaries | | Non Guarantor
Subsidiaries | | Consolidating
Adjustments | | Consolidated
Total | |
| | | | | | | | | | | | | |
ASSETS | | | | | | | | | | | | | |
| | | | | | | | | | | | | |
Current assets | | | | | | | | | | | | | |
Cash and cash equivalents | | $ | 22,316 | | $ | 9,660 | | $ | (49 | ) | $ | 14,018 | | $ | — | | $ | 45,945 | |
Short term investments | | 424 | | — | | — | | — | | — | | 424 | |
Accounts receivable | | 55 | | 533 | | 18,580 | | 9,618 | | — | | 28,786 | |
Income taxes receivable | | — | | — | | 4,322 | | 447 | | — | | 4,769 | |
Inventories | | — | | — | | 38,099 | | 8,316 | | — | | 46,414 | |
Deferred income taxes, current portion | | — | | — | | 5,640 | | 244 | | — | | 5,885 | |
Deferred financing costs, current portion | | — | | 833 | | — | | — | | — | | 833 | |
Prepaid expenses and other current assets | | 1,766 | | 56 | | 631 | | 902 | | — | | 3,355 | |
Total Current Assets | | 24,561 | | 11,082 | | 67,222 | | 33,547 | | — | | 136,411 | |
| | | | | | | | | | | | | |
Investment in subsidiaries | | $ | 147,132 | | $ | 335,572 | | $ | 27,225 | | $ | — | | (509,929 | ) | $ | — | |
Assets held for sale | | — | | — | | — | | 1,866 | | | | 1,866 | |
Property, plant and equipment | | 1,119 | | 514 | | 25,363 | | 4,441 | | | | 31,437 | |
Intangible assets | | 61,889 | | — | | 234,959 | | 14,595 | | | | 311,443 | |
Goodwill | | — | | — | | 101,244 | | 22,807 | | | | 124,051 | |
Deferred income taxes | | — | | — | | 1,005 | | — | | | | 1,005 | |
Deferred financing costs | | — | | 1,915 | | — | | — | | | | 1,915 | |
Other assets | | 80 | | — | | 7 | | 187 | | | | 274 | |
Total Assets | | $ | 234,781 | | $ | 349,083 | | $ | 457,026 | | $ | 77,441 | | $ | (509,929 | ) | $ | 608,402 | |
| | | | | | | | | | | | | |
LIABILITIES AND SHAREHOLDERS’ (DEFICIT) EQUITY | | | | | | | | | | | | | |
| | | | | | | | | | | | | |
Current liabilities | | | | | | | | | | | | | |
| | | | | | | | | | | | | |
Accounts payable and accrued liabilities | | $ | 2,449 | | $ | 3,703 | | $ | 14,252 | | $ | 6,385 | | | | $ | 26,789 | |
Income taxes payable | | 573 | | — | | 282 | | 2,808 | | | | 3,663 | |
Deferred income taxes, current portion | | — | | — | | — | | — | | — | | — | |
Interest payable on long-term debt | | 194 | | 1,678 | | — | | — | | | | 1,872 | |
Deferred revenue, current portion | | 14,237 | | — | | 7,343 | | 427 | | | | 22,007 | |
Revolving credit facility | | — | | — | | — | | — | | | | — | |
Debt | | 60,024 | | — | | — | | — | | | | 60,024 | |
Total Current Liabilities | | 77,477 | | 5,381 | | 21,877 | | 9,620 | | — | | 114,355 | |
| | | | | | | | | | | | | |
Deferred revenue | | 15,990 | | — | | 8,208 | | 703 | | | | 24,901 | |
Deferred income taxes | | — | | — | | 84,043 | | 4,496 | | | | 88,539 | |
Other tax liabilities | | 646 | | 1,805 | | 4,379 | | 2,788 | | | | 9,618 | |
Debt | | — | | 229,413 | | — | | — | | | | 229,413 | |
Other liabilities | | — | | 908 | | — | | — | | | | 908 | |
Total Non-current Liabilities | | 16,636 | | 232,126 | | 96,630 | | 7,987 | | — | | 353,379 | |
| | | | | | | | | | | | | |
Total Shareholders’ (Deficit) Equity | | $ | 140,668 | | $ | 111,576 | | $ | 338,519 | | $ | 59,834 | | $ | (509,929 | ) | $ | 140,668 | |
| | | | | | | | | | | | | |
Total Liabilities and Shareholders’ (Deficit) Equity | | $ | 234,781 | | $ | 349,083 | | $ | 457,026 | | $ | 77,441 | | $ | (509,929 | ) | $ | 608,402 | |
F-47
Table of Contents
Condensed Consolidating Balance Sheet
As at December 31, 2011
USD (in ‘000s)
| | Successor Company | | |
| | Parent Company | | | | | | | | | | |
| | Angiotech | | | | | | | | | | |
| | Pharmaceuticals, | | Guarantor | | Non Guarantor | | Consolidating | | Consolidated | | | Successor Company | |
| | Inc. | | Subsidiaries | | Subsidiaries | | Adjustments | | Total | | | Parent Company
Angiotech
Pharmaceuticals,
Inc. | | Angiotech Pharmaceuticals,
(US) Inc. | | Guarantor
Subsidiaries | | Non Guarantor
Subsidiaries | | Consolidating
Adjustments | | Consolidated
Total | |
| | | | | | | | | | | | | | | | | | | | | | | | |
ASSETS | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Current assets | | | | | | | | | | | | | | | | | | | | | | | | |
Cash and cash equivalents | | $ | 8,649 | | $ | 7,449 | | $ | 6,075 | | $ | — | | $ | 22,173 | | | $ | 8,649 | | $ | 6,781 | | $ | 668 | | $ | 6,075 | | $ | — | | $ | 22,173 | |
Short term investments | | 3,259 | | — | | — | | — | | 3,259 | | | 3,259 | | — | | — | | — | | — | | 3,259 | |
Accounts receivable | | 167 | | 20,076 | | 7,995 | | — | | 28,238 | | | 167 | | 107 | | 19,969 | | 7,995 | | — | | 28,238 | |
Income taxes receivable | | — | | 1,239 | | 223 | | — | | 1,462 | | | — | | — | | 1,239 | | 223 | | — | | 1,462 | |
Inventories | | — | | 26,744 | | 7,560 | | — | | 34,304 | | | — | | (31 | ) | 26,775 | | 7,560 | | — | | 34,304 | |
Deferred income taxes | | — | | 3,995 | | — | | — | | 3,995 | | | — | | — | | 3,995 | | — | | — | | 3,995 | |
Prepaid expenses and other current assets | | 1,120 | | 1,541 | | 506 | | — | | 3,167 | | | 1,120 | | 54 | | 1,487 | | 506 | | — | | 3,167 | |
| | | | | | | | | | | | |
Total Current Assets | | 13,195 | | 61,044 | | 22,359 | | — | | 96,598 | | | 13,195 | | 6,911 | | 54,133 | | 22,359 | | — | | 96,598 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Investment in subsidiaries | | 388,653 | | 20,538 | | — | | (409,191 | ) | — | | | 388,653 | | 417,563 | | 12,430 | | — | | (818,646 | ) | — | |
Assets held for sale | | | — | | | — | | | — | | | — | | — | | | $ | — | | $ | — | | $ | — | | $ | — | | $ | — | | — | |
Property, plant and equipment | | 3,213 | | 22,552 | | 13,424 | | — | | 39,189 | | | 3,213 | | 469 | | 22,083 | | 13,424 | | — | | 39,189 | |
Intangible assets | | 75,754 | | 251,905 | | 15,407 | | — | | 343,066 | | | 75,754 | | — | | 251,905 | | 15,407 | | — | | 343,066 | |
Goodwill | | — | | 101,244 | | 21,984 | | — | | 123,228 | | | — | | — | | 101,244 | | 21,984 | | — | | 123,228 | |
Deferred income taxes | | 1,729 | | — | | 436 | | — | | 2,165 | | | 1,729 | | | | — | | 436 | | — | | 2,165 | |
Other assets | | 3,537 | | 54 | | 269 | | — | | 3,860 | | | 3,537 | | 48 | | 6 | | 269 | | — | | 3,860 | |
| | | | | | | | | | | | |
Total Assets | | | 486,081 | | | 457,337 | | | 73,879 | | | (409,191 | ) | | 608,106 | | | $ | 486,081 | | $ | 424,991 | | $ | 441,801 | | $ | 73,879 | | $ | (818,646 | ) | $ | 608,106 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
LIABILITIES AND SHAREHOLDERS’ (DEFICIT) EQUITY | LIABILITIES AND SHAREHOLDERS’ (DEFICIT) EQUITY | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Current liabilities | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
Accounts payable and accrued liabilities | | $ | 6,999 | | $ | 17,896 | | $ | 5,642 | | $ | — | | $ | 30,537 | | | $ | 6,999 | | $ | 5,423 | | $ | 12,473 | | $ | 5,642 | | $ | — | | $ | 30,537 | |
Income taxes payable | | — | | — | | 2,023 | | — | | 2,023 | | | — | | — | | — | | 2,023 | | — | | 2,023 | |
Interest payable on long-term debt | | 1,450 | | — | | — | | — | | 1,450 | | | 1,450 | | (43 | ) | 43 | | — | | — | | 1,450 | |
Deferred revenue, current portion | | 496 | | — | | — | | — | | 496 | | | 496 | | — | | — | | — | | — | | 496 | |
Revolving credit facility | | — | | 40 | | — | | — | | 40 | | | — | | 39 | | 1 | | — | | — | | 40 | |
Debt | | — | | — | | — | | — | | — | | | — | | — | | — | | — | | — | | — | |
| | | | | | | | | | | | |
Total Current Liabilities | | 8,945 | | 17,936 | | 7,665 | | — | | 34,546 | | | 8,945 | | 5,419 | | 12,517 | | 7,665 | | — | | 34,546 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Deferred leasehold inducement | | | — | | | — | | | — | | | — | | | — | | | $ | — | | $ | — | | $ | — | | $ | — | | $ | — | | $ | — | |
Deferred revenue | | 3,456 | | — | | 315 | | — | | 3,771 | | | 3,456 | | — | | — | | 315 | | — | | 3,771 | |
Deferred income taxes | | — | | 87,415 | | 5,219 | | — | | 92,634 | | | — | | — | | 87,415 | | 5,219 | | — | | 92,634 | |
Other tax liabilities | | 2,273 | | 896 | | 2,560 | | — | | 5,729 | | | 2,273 | | — | | 896 | | 2,560 | | — | | 5,729 | |
Debt | | 325,000 | | — | | — | | — | | 325,000 | | | 325,000 | | — | | — | | — | | — | | 325,000 | |
Other liabilities | | — | | 19 | | — | | — | | 19 | | | — | | 19 | | — | | — | | — | | 19 | |
| | | | | | | | | | | | |
Total Non-current Liabilities | | 330,729 | | 88,330 | | 8,094 | | — | | 427,153 | | |
Total Non-current Liabilities | | | 330,729 | | 19 | | 88,311 | | 8,094 | | — | | 427,153 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Total Shareholders’ (Deficit) Equity | | | 146,407 | | | 351,071 | | | 58,120 | | | (409,191 | ) | | 146,407 | | | $ | 146,407 | | $ | 419,553 | | $ | 340,973 | | $ | 58,120 | | $ | (818,646 | ) | $ | 146,407 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Total Liabilities and Shareholders’ (Deficit) Equity | | $ | 486,081 | | $ | 457,337 | | $ | 73,879 | | $ | (409,191 | ) | $ | 608,106 | | | $ | 486,081 | | $ | 424,991 | | $ | 441,801 | | $ | 73,879 | | $ | (818,646 | ) | $ | 608,106 | |
F-52F-48
Condensed Consolidating Balance Sheet
As at December 31, 2010
USD (in ‘000s)
| | Predecessor Company | |
| | Parent Company
Angiotech
Pharmaceuticals,
Inc. | | Guarantor
Subsidiaries | | Non Guarantor
Subsidiaries | | Consolidating
Adjustments | | Consolidated
Total | |
ASSETS | | | | | | | | | | | |
Current assets | | | | | | | | | | | |
Cash and cash equivalents | | $ | 11,180 | | $ | 15,340 | | $ | 6,795 | | $ | — | | $ | 33,315 | |
Short term investments | | 4,653 | | — | | — | | — | | 4,653 | |
Accounts receivable | | 356 | | 21,279 | | 11,859 | | — | | 33,494 | |
Income taxes receivable | | 669 | | — | | 0 | | — | | 669 | |
Inventories | | — | | 29,177 | | 7,176 | | (1,722 | ) | 34,631 | |
Deferred income taxes | | — | | 4,102 | | — | | — | | 4,102 | |
Deferred financing costs | | 4,300 | | 1,311 | | — | | — | | 5,611 | |
Prepaid expenses and other current assets | | 2,311 | | 1,933 | | 405 | | — | | 4,649 | |
Total Current Assets | | 23,469 | | 73,142 | | 26,235 | | (1,722 | ) | 121,124 | |
Investment in subsidiaries | | 182,887 | | 151,710 | | — | | (334,597 | ) | — | |
Assets held for sale | | — | | — | | — | | — | | — | |
Property, plant and equipment | | 11,544 | | 29,893 | | 4,824 | | — | | 46,261 | |
Intangible assets | | 9,931 | | 125,548 | | 2,494 | | — | | 137,973 | |
Deferred financing costs | | — | | — | | — | | — | | — | |
Deferred income taxes | | — | | — | | — | | — | | — | |
Other assets | | 80 | | 375 | | 185 | | — | | 640 | |
Total Assets | | 227,911 | | 380,668 | | 33,738 | | (336,319 | ) | 305,998 | |
| | | | | | | | | | | |
LIABILITIES AND SHAREHOLDERS’ (DEFICIT) EQUITY | | | | | | | | | | | |
Current liabilities | | | | | | | | | | | |
Accounts payable and accrued liabilities | | 10,719 | | 20,596 | | 5,527 | | 5 | | 36,847 | |
Income taxes payable | | 669 | | (480 | ) | 2,066 | | — | | 2,255 | |
Interest payable on long-term debt | | 15,665 | | 96 | | — | | — | | 15,761 | |
Revolving credit facility | | — | | 10,000 | | — | | — | | 10,000 | |
Long-term debt | | 575,000 | | — | | — | | — | | 575,000 | |
Total Current Liabilities | | 602,053 | | 30,212 | | 7,593 | | 5 | | 639,863 | |
Deferred leasehold inducement | | 2,247 | | 2,538 | | — | | — | | 4,785 | |
Deferred income taxes | | (1,783 | ) | 32,991 | | 494 | | — | | 31,702 | |
Other tax liabilities | | 2,205 | | 961 | | 1,201 | | — | | 4,367 | |
Other liabilities | | 7,265 | | 1,111 | | 981 | | — | | 9,357 | |
Long-term debt | | — | | — | | — | | — | | — | |
Total Non-current Liabilities | | 9,934 | | 37,601 | | 2,676 | | — | | 50,211 | |
Total Shareholders’ (Deficit) Equity | | (384,076 | ) | 312,855 | | 23,469 | | (336,324 | ) | (384,076 | ) |
Total Liabilities and Shareholders’ (Deficit) Equity | | $ | 227,911 | | $ | 380,668 | | $ | 33,738 | | $ | (336,324 | ) | $ | 305,998 | |
F-53Table of Contents
Condensed Consolidated Statement of Operations
EightFor the year ended December 31, 2012
USD (in ‘000s)
| | Successor Company | |
| | Parent Company
Angiotech
Pharmaceuticals,
Inc. | | Angiotech
Pharmaceuticals (US) Inc. | | Guarantor
Subsidiaries | | Non Guarantor
Subsidiaries | | Consolidating
Adjustments | | Consolidated
Total | |
| | | | | | | | | | | | | |
REVENUE | | | | | | | | | | | | | |
Product sales, net | | $ | — | | $ | — | | $ | 171,052 | | $ | 66,271 | | $ | (15,997 | ) | $ | 221,326 | |
Royalty revenue | | 15,051 | | — | | 3,398 | | — | | — | | 18,449 | |
License fees | | 2,552 | | — | | 1,448 | | 50 | | — | | 4,050 | |
| | 17,603 | | — | | 175,898 | | 66,321 | | (15,997 | ) | 243,825 | |
| | | | | | | | | | | | | |
EXPENSES | | | | | | | | | | | | | |
Cost of products sold | | $ | — | | $ | (195 | ) | $ | 69,336 | | $ | 42,794 | | $ | (9229 | ) | 102,706 | |
License and royalty fees | | 618 | | — | | — | | — | | — | | 618 | |
Research & development | | 940 | | 521 | | 5,271 | | 324 | | — | | 7,056 | |
Selling, general and administration | | 6,259 | | 12,467 | | 41,835 | | 10,424 | | — | | 70,985 | |
Depreciation and amortization | | 15,278 | | 286 | | 17,377 | | 1,562 | | — | | 34,503 | |
Write-down of assets held for sale | | — | | — | | — | | 277 | | — | | 277 | |
Write-down of property, plant and equipment | | 692 | | 12 | | 173 | | — | | — | | 877 | |
| | 23,787 | | 13,091 | | 133,992 | | 55,381 | | (9,229 | ) | 217,022 | |
| | | | | | | | | | | | | |
Operating income (loss) | | (6,184 | ) | (13,091 | ) | 41,906 | | 10,940 | | (6,768 | ) | 26,803 | |
| | | | | | | | | | | | | |
Other income (expense) | | | | | | | | | | | | | |
Foreign exchange gain (loss) | | $ | (158 | ) | $ | — | | $ | (40 | ) | $ | (553 | ) | $ | — | | (751 | ) |
Other (expense) income | | 872 | | 2 | | 150 | | 345 | | (49 | ) | 1,320 | |
Interest expense | | (11,644 | ) | (8,795 | ) | — | | — | | 49 | | (20,390 | ) |
Write-down of investments | | (561 | ) | — | | — | | — | | — | | (561 | ) |
Debt extinguishment loss | | — | | (4,437 | ) | — | | — | | — | | (4,437 | ) |
Total other expenses | | (11,491 | ) | (13,230 | ) | 110 | | (208 | ) | — | | (24,819 | ) |
| | | | | | | | | | | | | |
Income (loss) before income tax expense (recovery) | | (17,675 | ) | (26,321 | ) | 42,016 | | 10,732 | | (6,768 | ) | 1,984 | |
Income tax expense (recovery) | | 1,634 | | — | | 1,573 | | 5,003 | | | | 8,210 | |
| | | | | | | | | | | | | |
Income (loss) from operations | | (19,309 | ) | (26,321 | ) | 40,443 | | 5,729 | | (6,768 | ) | (6,226 | ) |
Equity in subsidiaries | | 13,083 | | 53,018 | | 12,575 | | — | | (78,676 | ) | — | |
| | | | | | | | | | | | | |
Net income (loss) | | $ | (6,226 | ) | $ | 26,697 | | $ | 53,018 | | $ | 5,729 | | $ | (85,444 | ) | $ | (6,226 | ) |
F-49
Table of Contents
Condensed Consolidated Statement of Operations
For the eight months ended December 31, 2011
USD (in ‘000s)
| | Successor Company | | |
| | Parent Company | | | | | | | | | | |
| | Angiotech | | | | | | | | | | |
| | Pharmaceuticals, | | Guarantors | | Non Guarantors | | Consolidating | | Consolidated | | | Successor Company | |
| | Inc. | | Subsidiaries | | Subsidiaries | | Adjustments | | Total | | | Parent Company
Angiotech
Pharmaceuticals,
Inc. | | Angiotech
Pharmaceuticals (US) Inc. | | Guarantor
Subsidiaries | | Non Guarantor
Subsidiaries | | Consolidating
Adjustments | | Consolidated
Total | |
| | | | | | | | | | | | | | | | | | | | | | | | |
REVENUE | | | | | | | | | | | | | | | | | | | | | | | | |
Product sales, net | | $ | 7 | | $ | 101,288 | | $ | 47,579 | | $ | (9,567 | ) | $ | 139,307 | | | $ | 7 | | $ | — | | $ | 101,288 | | $ | 47,579 | | $ | (9,567 | ) | $ | 139,307 | |
Royalty revenue | | 10,671 | | 2,989 | | 10 | | — | | 13,670 | | | 10,671 | | — | | 2,989 | | 10 | | — | | 13,670 | |
| | 10,678 | | 104,277 | | 47,589 | | (9,567 | ) | 152,977 | | | 10,678 | | — | | 104,277 | | 47,589 | | (9,567 | ) | 152,977 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
EXPENSES | | | | | | | | | | | | | | | | | | | | | | | | |
Cost of products sold | | | — | | | 59,480 | | | 36,298 | | | (5,430 | ) | 90,348 | | | $ | — | | $ | 35 | | $ | 59,445 | | $ | 36,298 | | $ | (5,430 | ) | 90,348 | |
License and royalty fees | | 264 | | — | | — | | — | | 264 | | | 264 | | — | | — | | — | | — | | 264 | |
Research & development | | 7,829 | | 5,921 | | 326 | | — | | 14,076 | | | 7,829 | | 2,541 | | 3,380 | | 326 | | — | | 14,076 | |
Selling, general and administration | | 13,941 | | 38,946 | | 7,537 | | — | | 60,424 | | | 13,941 | | 8,666 | | 30,280 | | 7,537 | | — | | 60,424 | |
Depreciation and amortization | | 10,085 | | 12,021 | | 1,867 | | — | | 23,973 | | | 10,085 | | 534 | | 11,487 | | 1,867 | | — | | 23,973 | |
Write-down of assets held for sale | | — | | — | | — | | — | | — | | | — | | — | | — | | — | | — | | — | |
Write-down of property, plant and equipment | | 4,359 | | 143 | | — | | — | | 4,502 | | | 4,359 | | 143 | | — | | — | | — | | 4,502 | |
Write-down of intangible assets | | 6,474 | | — | | 4,376 | | — | | 10,850 | | | 6,474 | | — | | — | | 4,376 | | — | | 10,850 | |
| | 42,952 | | 116,511 | | 50,404 | | (5,430 | ) | 204,437 | | | 42,952 | | 11,919 | | 104,592 | | 50,404 | | (5,430 | ) | 204,437 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Operating income (loss) | | (32,274 | ) | (12,234 | ) | (2,815 | ) | (4,137 | ) | (51,460 | ) | | (32,274 | ) | (11,919 | ) | (315 | ) | (2,815 | ) | (4,137 | ) | (51,460 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | |
Other income (expense) | | | | | | | | | | | | | | | | | | | | | | | | |
Foreign exchange gain (loss) | | | 587 | | | 111 | | | 763 | | | — | | 1,461 | | | $ | 537 | | $ | — | | $ | 111 | | $ | 763 | | $ | — | | 1,461 | |
Other (expense) income | | 823 | | (2,426 | ) | 2,150 | | — | | 547 | | | 823 | | (10 | ) | (2,416 | ) | 2,150 | | — | | 547 | |
Interest expense | | (11,189 | ) | (738 | ) | (18 | ) | — | |  (11,945
| ) | | (11,189 | ) | (886 | ) | 148 | | (18 | ) | — | | (11,945 | ) |
Write-down of investments | | (2,035 | ) | — | | — | | — | | (2,035 | ) | | (2,035 | ) | — | | — | | — | | — | | (2,035 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | |
Total other expenses | | (11,814 | ) | (3,053 | ) | 2,895 | | — | | (11,972 | ) | | (11,814 | ) | (896 | ) | (2,157 | ) | 2,895 | | — | | (11,972 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | |
Income (loss) before income tax expense (recovery) | | (44,088 | ) | (15,287 | ) | 80 | | (4,137 | ) | (63,432 | ) | | (44,088 | ) | (12,815 | ) | (2,472 | ) | 80 | | (4,137 | ) | (63,432 | ) |
Income tax expense (recovery) | | 16,159 | | (22,435 | ) | 3,290 | | — | | (2,986 | ) | | 16,159 | | — | | (22,435 | ) | 3,290 | | — | | (2,986 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | |
Income (loss) from operations | | (60,247 | ) | 7,148 | | (3,210 | ) | (4,137 | ) | (60,446 | ) | | (60,247 | ) | (12,815 | ) | 19,963 | | (3,210 | ) | (4,137 | ) | (60,446) | |
Equity in subsidiaries | | (199 | ) | 7,270 | | — | | (7,071 | ) | — | | | (199 | ) | 27,234 | | 7,271 | | — | | (34,306 | ) | — | |
| | | | | | | | | | | | | | |
Net income (loss) | | $ | (60,446 | ) | $ | 14,418 | | $ | (3,210 | ) | $ | (11,208 | ) | $ | (60,446 | ) | | $ | (60,446 | ) | $ | 14,419 | | $ | 27,234 | | $ | (3,210 | ) | $ | (38,443 | ) | $ | (60,446 | ) |
F-54F-50
Table of Contents
Condensed Consolidated Statement of Operations
For the four months ended April 30, 2011
USD (in ‘000s)
| | Predecessor Company | |
| | Parent Company | | | | | | | | | |
| | Angiotech | | | | | | | | | |
| | Pharmaceuticals, | | Guarantors | | Non Guarantors | | Consolidating | | Consolidated | |
| | Inc. | | Subsidiaries | | Subsidiaries | | Adjustments | | Total | |
| | | | | | | | | | | |
REVENUE | | | | | | | | | | | |
Product sales, net | | $ | 8 | | $ | 54,494 | | $ | 22,832 | | $ | (8,136 | ) | $ | 69,198 | |
Royalty revenue | | 9,930 | | 1,011 | | — | | — | | 10,941 | |
License fees | | — | | — | | 127 | | — | | 127 | |
| | 9,938 | | 55,505 | | 22,959 | | (8,136 | ) | 80,266 | |
| | | | | | | | | | | |
EXPENSES | | | | | | | | | | | |
Cost of products sold | | — | | 22,041 | | 14,783 | | (4,605 | ) | 32,219 | |
License and royalty fees | | 68 | | — | | — | | — | | 68 | |
Research & development | | 2,448 | | 3,022 | | 216 | | — | | 5,686 | |
Selling, general and administration | | 3,187 | | 18,198 | | 3,461 | | — | | 24,846 | |
Depreciation and amortization | | 3,007 | | 11,021 | | 301 | | — | | 14,329 | |
Write-down of assets held for sale | | 570 | | — | | — | | — | | 570 | |
Write-down of property, plant and equipmen | | — | | 215 | | — | | — | | 215 | |
| | 9,280 | | 54,497 | | 18,761 | | (4,605 | ) | 77,933 | |
| | | | | | | | | | | |
Operating income (loss) | | 658 | | 1,008 | | 4,198 | | (3,531 | ) | 2,333 | |
| | | | | | | | | | | |
Other income (expense) | | | | | | | | | | | |
Foreign exchange gain (loss) | | (492 | ) | (46 | ) | (108 | ) | — | | (646 | ) |
Other (expense) income | | 1,116 | | (1,134 | ) | 52 | | — | | 34 | |
Interest expense on long-term debt | | (7,372 | ) | (2,914 | ) | (41 | ) | — | | (10,327 | ) |
| | | | | | | | | | | |
Total other expenses | | (6,748 | ) | (4,094 | ) | (97 | ) | — | | (10,939 | ) |
| | | | | | | | | | | |
Loss before reorganization items and income tax expense | | (6,090 | ) | (3,086 | ) | 4,101 | | (3,531 | ) | (8,606 | ) |
Reorganization items | | 80,482 | | 217,254 | | 23,348 | | — | | 321,084 | |
Gain on extinguishment of debt and settlement of other liabilities | | 67,307 | | — | | — | | — | | 67,307 | |
Income (loss) before income taxes | | 141,699 | | 214,168 | | 27,449 | | (3,531 | ) | 379,785 | |
Income tax (recovery) expense | | (197 | ) | (910 | ) | 1,374 | | — | | 267 | |
| | | | | | | | | | | |
Income (loss) from operations | | 141,896 | | 215,078 | | 26,075 | | (3,531 | ) | 379,518 | |
Equity in subsidiaries | | 237,622 | | 2,502 | | — | | (240,124 | ) | — | |
Net income (loss) | | $ | 379,518 | | $ | 217,580 | | $ | 26,075 | | $ | (243,655 | ) | $ | 379,518 | |
F-55F-51
Table of Contents
Condensed Consolidated Statement of Operations
YearFor the year ended December 31, 2010
USD (in ‘000s)
| | Predecessor Company | |
| | Parent Company
Angiotech
Pharmaceuticals,
Inc. | | Guarantors
Subsidiaries | | Non
Guarantors
Subsidiaries | | Consolidating
Adjustments | | Consolidated
Total | |
REVENUE | | | | | | | | | | | |
Product sales, net | | $ | 22 | | $ | 160,479 | | $ | 69,822 | | $ | (18,828 | ) | $ | 211,495 | |
Royalty revenue | | 30,691 | | 3,770 | | — | | — | | 34,461 | |
License fees | | — | | (24 | ) | 310 | | — | | 286 | |
| | 30,713 | | 164,225 | | 70,132 | | (18,828 | ) | 246,242 | |
EXPENSES | | | | | | | | | | | |
Cost of products sold | | (26 | ) | 74,568 | | 49,530 | | (17,768 | ) | 106,304 | |
License and royalty fees | | 5,889 | | — | | — | | — | | 5,889 | |
Research & development | | 15,952 | | 10,477 | | 361 | | — | | 26,790 | |
Selling, general and administration | | 15,645 | | 61,101 | | 12,492 | | — | | 89,238 | |
Depreciation and amortization | | 4,186 | | 28,530 | | 1,029 | | — | | 33,745 | |
Write-down of assets held for sale | | 700 | | 750 | | — | | — | | 1,450 | |
Write-down of property, plant and equipment | | 1,734 | | 3,045 | | — | | — | | 4,779 | |
Write-down of intangible assets | | — | | 2,814 | | — | | — | | 2,814 | |
Escrow settlement recovery | | — | | (4,710 | ) | — | | — | | (4,710 | ) |
| | 44,080 | | 176,575 | | 63,412 | | (17,768 | ) | 266,299 | |
Operating income (loss) | | (13,367 | ) | (12,350 | ) | 6,720 | | (1,060 | ) | (20,057 | ) |
Other income (expense) | | | | | | | | | | | |
Debt restructuring charges | | (9,277 | ) | — | | — | | — | | (9,277 | ) |
Foreign exchange gain (loss) | | 56,840 | | (57,633 | ) | 1,804 | | — | | 1,011 | |
Other (expense) income | | (246,320 | ) | (21,578 | ) | 6,249 | | 261,078 | | (571 | ) |
Interest expense on long-term debt | | (38,439 | ) | (1,635 | ) | (184 | ) | — | | (40,258 | ) |
Write-down of deferred financing | | (291 | ) | — | | — | | — | | (291 | ) |
Write-down of investment | | (561 | ) | — | | (736 | ) | — | | (1,297 | ) |
Gain on loan settlement | | (34,401 | ) | (5,619 | ) | 41,900 | | — | | 1,880 | |
Gain on disposal of Laguna Hills manufacturing facility | | — | | 2,005 | | — | | — | | 2,005 | |
Total other expenses | | (272,449 | ) | (84,460 | ) | 49,033 | | 261,078 | | (46,798 | ) |
Income (loss) before income taxes | | (285,816 | ) | (96,810 | ) | 55,753 | | 260,018 | | (66,855 | ) |
Income tax (recovery) expense | | (171 | ) | (3,388 | ) | 3,515 | | — | | (44 | ) |
Income (loss) from operations | | (285,645 | ) | (93,422 | ) | 52,238 | | 260,018 | | (66,811 | ) |
Equity in subsidiaries | | 218,834 | | 12,479 | | — | | (231,313 | ) | — | |
Net income (loss) | | $ | (66,811 | ) | $ | (80,943 | ) | $ | 52,238 | | $ | 28,705 | | $ | (66,811 | ) |
F-56F-52
Table of Contents
Condensed Consolidated Statement of OperationsComprehensive Income (Loss)
YearFor the year ended December 31, 20092012
USD (in ‘000s)
| | Predecessor Company | |
| | Parent Company
Angiotech
Pharmaceuticals,
Inc. | | Guarantors
Subsidiaries | | Non Guarantors
Subsidiaries | | Consolidating
Adjustments | | Consolidated
Total | |
REVENUE | | | | | | | | | | | |
Product sales, net | | $ | — | | $ | 153,364 | | $ | 58,887 | | $ | (20,300 | ) | $ | 191,951 | |
Royalty revenue | | 57,420 | | 3,414 | | 1,337 | | — | | 62,171 | |
License fees | | — | | 356 | | 25,200 | | — | | $ | 25,556 | |
| | 57,420 | | 157,134 | | 85,424 | | (20,300 | ) | 279,678 | |
EXPENSES | | | | | | | | | | | |
Cost of products sold | | 85 | | 82,905 | | 42,488 | | (20,862 | ) | 104,616 | |
License and royalty fees | | 10,421 | | — | | 10 | | — | | 10,431 | |
Research & development | | 14,491 | | 8,827 | | 383 | | — | | 23,701 | |
Intercompany R&D charges | | 2,078 | | (2,078 | ) | — | | — | | — | |
Selling, general and administration | | 16,375 | | 53,334 | | 11,795 | | — | | 81,504 | |
Depreciation and amortization | | 4,535 | | 24,527 | | 4,189 | | — | | 33,251 | |
Write-down of assets held for sale | | 2,290 | | 800 | | — | | — | | 3,090 | |
| | 50,275 | | 168,315 | | 58,865 | | (20,862 | ) | 256,593 | |
Operating income (loss) | | 7,145 | | (11,181 | ) | 26,560 | | 562 | | 23,085 | |
| | | | | | | | | | | |
Other income (expense) | | | | | | | | | | | |
Foreign exchange gain (loss) | | 7,393 | | (2,100 | ) | (6,905 | ) | — | | (1,612 | ) |
Investment and other income | | (78,446 | ) | (245 | ) | 111 | | 78,958 | | 378 | |
Interest expense on long-term debt | | 58,755 | | (96,039 | ) | (755 | ) | — | | (38,039 | ) |
Write-down of deferred financing charges | | — | | (643 | ) | — | | — | | (643 | ) |
Management fees | | (47 | ) | 47 | | — | | — | | — | |
Total other expenses | | (12,345 | ) | (98,980 | ) | (7,549 | ) | 78,958 | | (39,916 | ) |
Income (loss) before income taxes | | (5,200 | ) | (110,161 | ) | 19,011 | | 79,520 | | (16,831 | ) |
Income tax (recovery) expense | | 129 | | (4,099 | ) | 3,975 | | 6,032 | | 6,037 | |
Income (loss) from operations | | (5,329 | ) | (106,062 | ) | 15,036 | | 73,488 | | (22,868 | ) |
Equity in subsidiaries | | (17,539 | ) | 257 | | — | | 17,282 | | — | |
Net income (loss) | | $ | (22,868 | ) | $ | (105,805 | ) | $ | 15,036 | | $ | 90,769 | | $ | (22,868 | ) |
| | Successor Company | |
| | Parent Company | | | | | | | | | | | |
| | Angiotech | | Angiotech | | | | | | | | | |
| | Pharmaceuticals, | | Pharmaceuticals (US), | | Guarantors | | Non Guarantors | | Consolidating | | Consolidated | |
| | Inc. | | Inc. | | Subsidiaries | | Subsidiaries | | Adjustments | | Total | |
| | | | | | | | | | | | | |
Net income (loss) | | $ | (6,226 | ) | $ | 26,697 | | $ | 53,018 | | $ | 5,729 | | $ | (85,444 | ) | $ | (6,226 | ) |
Other comprehensive income (loss): | | | | | | | | | | | | | |
Net unrealized gain on available-for-sale securities, net of taxes ($0) | | — | | — | | — | | — | | — | | — | |
Reclassification of other-than-temporary impairment loss on available-for-sale securities to earnings, net of taxes ($0) | | — | | — | | — | | — | | — | | — | |
Cumulative translation adjustment | | — | | — | | — | | 1,789 | | — | | 1,789 | |
Other comprehensive income (loss) | | — | | — | | — | | 1,789 | | — | | 1,789 | |
Comprehensive income (loss) | | $ | (6,226 | ) | $ | 26,697 | | $ | 53,018 | | $ | 7,518 | | $ | (85,444 | ) | $ | (4,437 | ) |
F-53
Table of Contents
Condensed Consolidated Statement of Comprehensive Income (Loss)
For the eight months ended December 31, 2011
USD (in ‘000s)
| | Successor Company | |
| | Parent Company | | | | | | | | | | | |
| | Angiotech | | Angiotech | | | | | | | | | |
| | Pharmaceuticals, | | Pharmaceuticals (US), | | Guarantors | | Non Guarantors | | Consolidating | | Consolidated | |
| | Inc. | | Inc. | | Subsidiaries | | Subsidiaries | | Adjustments | | Total | |
| | | | | | | | | | | | | |
Net income(loss) | | $ | (60,446 | ) | $ | 14,419 | | $ | 27,234 | | $ | (3,210 | ) | $ | (38,443 | ) | $ | (60,446 | ) |
Other comprehensive income (loss): | | | | | | | | | | | | | |
Net unrealized gain on available-for-sale securities, net of taxes ($0) | | (2,035 | ) | — | | — | | — | | — | | (2,035 | ) |
Reclassification of other-than-temporary impairment loss on available-for-sale securities to earnings, net of taxes ($0) | | 2,035 | | — | | — | | — | | — | | 2,035 | |
Cumulative translation adjustment | | — | | — | | — | | (5,418 | ) | — | | (5,418 | ) |
Other comprehensive income (loss) | | — | | — | | — | | (5,418 | ) | — | | (5,418 | ) |
Comprehensive income (loss) | | $ | (60,446 | ) | $ | 14,419 | | $ | 27,234 | | $ | (8,628 | ) | $ | (38,443 | ) | $ | (65,864 | ) |
F-54
Table of Contents
Condensed Consolidated Statement of Comprehensive Income (Loss)
For the four months ended April 30, 2011
USD (in ‘000s)
| | Predecessor Company | |
| | Parent Company | | | | | | | | | |
| | Angiotech | | | | | | | | | |
| | Pharmaceuticals, | | Guarantors | | Non Guarantors | | Consolidating | | Consolidated | |
| | Inc. | | Subsidiaries | | Subsidiaries | | Adjustments | | Total | |
| | | | | | | | | | | |
Net income (loss) | | $ | 379,518 | | $ | 217,580 | | $ | 26,075 | | $ | (243,655 | ) | $ | 379,518 | |
Other comprehensive income (loss): | | | | | | | | | | | |
Net unrealized gain on available-for-sale securities, net of taxes ($0) | | 640 | | — | | — | | — | | 640 | |
Reclassification of other-than-temporary impairment loss on available-for-sale securities to earnings, net of taxes ($0) | | — | | — | | — | | — | | — | |
Cumulative translation adjustment | | — | | — | | 2,182 | | — | | 2,182 | |
Other comprehensive income (loss) | | 640 | | — | | 2,182 | | — | | 2,822 | |
Comprehensive income (loss) | | $ | 380,158 | | $ | 217,580 | | $ | 28,257 | | $ | (243,655 | ) | $ | 382,340 | |
F-55
Table of Contents
Condensed Consolidated Statement of Comprehensive Income (Loss)
For the year ended December 31, 2010
USD (in ‘000s)
| | Predecessor Company | |
| | Parent Company | | | | | | | | | |
| | Angiotech | | | | | | | | | |
| | Pharmaceuticals, | | Guarantors | | Non Guarantors | | Consolidating | | Consolidated | |
| | Inc. | | Subsidiaries | | Subsidiaries | | Adjustments | | Total | |
| | | | | | | | | | | |
Net income (loss) | | $ | (66,811 | ) | $ | (80,943 | ) | $ | 52,238 | | $ | 28,705 | | $ | (66,811 | ) |
Other comprehensive income (loss): | | | | | | | | | | | |
Net unrealized gain on available-for-sale securities, net of taxes ($0) | | (3,127 | ) | — | | — | | — | | (3,127 | ) |
Reclassification of other-than-temporary impairment loss on available-for-sale securities to earnings, net of taxes ($0) | | — | | — | | — | | — | | — | |
Cumulative translation adjustment | | — | | — | | — | | (2,645 | ) | (2,645 | ) |
Other comprehensive income (loss) | | (3,127 | ) | — | | — | | (2,645 | ) | (5,772 | ) |
Comprehensive income (loss) | | $ | (69,938 | ) | $ | (80,943 | ) | $ | 52,238 | | $ | 26,060 | | $ | (72,583 | ) |
F-56
Table of Contents
Condensed Consolidated Statement of Cash Flows
For the year ended December 31, 2012
USD (in ‘000s)
| | Successor Company | |
| | Parent Company | | | | | | | | | | | |
| | Angiotech | | Angiotech | | | | | | | | | |
| | Pharmaceuticals, | | Pharmaceuticals (US), | | Guarantors | | Non Guarantors | | Consolidating | | Consolidated | |
| | Inc. | | Inc. | | Subsidiaries | | Subsidiaries | | Adjustments | | Total | |
| | | | | | | | | | | | | |
OPERATING ACTIVITIES: | | | | | | | | | | | | | |
Cash used in operating activities before reorg items | | $ | 18,023 | | $ | (11,114 | ) | $ | 48,775 | | $ | 10,748 | | $ | — | | $ | 66,432 | |
| | | | | | | | | | | | | |
OPERATING CASH FLOWS FROM REORGANIZATION ACTIVITIES | | | | | | | | | | | | | |
Professional fess paid for services rendered in connection with the Creditor | | | | | | | | | | | | | |
Protection Proceedings | | | | | | | | | | | | — | |
Key Employment Incentive Plan fee | | | | | | | | | | | | — | |
Cash used in reorganization activities | | — | | — | | — | | — | | — | | — | |
Cash used in operating activities | | 18,023 | | (11,114 | ) | 48,775 | | 10,748 | | — | | 66,432 | |
| | | | | | | | | | | | | |
INVESTING ACTIVITIES: | | | | | | | | | | | | | |
Purchase of property, plant and equipment | | (120 | ) | (217 | ) | (1,656 | ) | (122 | ) | — | | (2,115 | ) |
Proceeds from disposition of short term investments | | 2,273 | | — | | — | | — | | — | | 2,273 | |
Proceeds from disposition of property, plant and equipment | | 976 | | — | | — | | — | | — | | 976 | |
Cash used in investing activities | | 3,129 | | (217 | ) | (1,656 | ) | (122 | ) | | | 1,134 | |
| | | | | | | | | | | | | |
FINANCING ACTIVITIES: | | | | | | | | | | | | | |
Share capital issued and/or repurchased | | — | | (881 | ) | — | | — | | — | | (881) | |
Deferred financing charges and costs | | — | | (3,191 | ) | — | | — | | — | | (3,191 | ) |
Dividends received / (paid) | | — | | — | | 3,000 | | (3,000 | ) | — | | — | |
Repayments on revolving Credit Facility | | — | | (39 | ) | — | | — | | — | | (39 | ) |
Repayments of Floating Rate Notes | | (40,000 | ) | — | | — | | — | | — | | (40,000 | ) |
Intercompany advances from affiliates | | — | | 50,836 | | (50,836 | ) | — | | — | | — | |
Intercompany notes payable/receivable | | 32,515 | | (32,515 | ) | — | | — | | — | | — | |
Cash provided by (used in) financing activities before reorganization activities | | (7,485 | ) | 14,210 | | (47,836 | ) | (3,000 | ) | — | | (44,111 | ) |
| | | | | | | | | | | | | |
FINANCING CASH FLOWS FROM REORGANIZATION ACTIVITIES | | | | | | | | | | | | | |
Deferred financing costs | | — | | — | | — | | — | | — | | — | |
| | | | | | | | | | | | | |
Cash provided by (used in) financing activities | | (7,485 | ) | 14,210 | | (47,836 | ) | (3,000 | ) | — | | (44,111 | ) |
| | | | | | | | | | | | | |
Effect of exchange rate changes on cash and cash equivalents | | — | | — | | — | | 317 | | — | | 317 | |
Net (decrease) increase in cash and cash equivalents | | 13,667 | | 2,879 | | (717 | ) | 7,943 | | — | | 23,772 | |
Cash and cash equivalents, beginning of period | | 8,649 | | 6,781 | | 668 | | 6,075 | | — | | 22,173 | |
Cash and cash equivalents, end of period | | $ | 22,316 | | $ | 9,660 | | $ | (49 | ) | $ | 14,018 | | $ | — | | $ | 45,945 | |
F-57
Table of Contents
Condensed Consolidated Statement of Cash Flows
For the eight monthmonths ended December 31, 2011
USD (in ‘000s)
| | Successor Company | | | Successor Company | |
| | Parent Company | | | | | | | | | | | Parent Company | | | | | | | | | | | |
| | Angiotech | | | | | | | | | | | Angiotech | | Angiotech | | | | | | | | | |
| | Pharmaceuticals, | | Guarantors | | Non Guarantors | | Consolidating | | Consolidated | | | Pharmaceuticals, | | Pharmaceuticals (US), | | Guarantors | | Non Guarantors | | Consolidating | | Consolidated | |
| | Inc. | | Subsidiaries | | Subsidiaries | | Adjustments | | Total | | | Inc. | | Inc. | | Subsidiaries | | Subsidiaries | | Adjustments | | Total | |
| | | | | | | | | | | | | | | | | | | | | | | | |
OPERATING ACTIVITIES: | | | | | | | | | | | | | | | | | | | | | | | | |
Cash used in operating activities before reorg items | | $ | (5,553 | ) | $ | 22,440 | | $ | 6,132 | | $ | — | | $ | 23,019 | | | $ | (5,554 | ) | $ | (6,605 | ) | $ | 29,044 | | $ | 6,132 | | $ | — | | $ | 23,017 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
OPERATING CASH FLOWS FROM REORGANIZATION ACTIVITIES | | | | | | | | | | | | | | | | | | | | | | | | |
Professional fess paid for services rendered in connection with the Creditor Protection Proceedings | | (8,105 | ) | — | | — | | — | | (8,105 | ) | | (8,105 | ) | — | | — | | — | | — | | (8,105 | ) |
Key Employment Incentive Plan fee | | (156 | ) | (395 | ) | — | | — | | (551 | ) | | (156 | ) | (395 | ) | — | | — | | — | | (551 | ) |
Cash used in reorganization activities | | (8,261 | ) | (395 | ) | — | | — | | (8,656 | ) | | (8,261 | ) | (395 | ) | — | | — | | — | | (8,656 | ) |
Cash used in operating activities | | (13,814 | ) | 22,045 | | 6,132 | | — | | 14,363 | | |
Cash used in operating activites | | | (13,815 | ) | (7,000 | ) | 29,044 | | 6,132 | | — | | 14,361 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
INVESTING ACTIVITIES: | | | | | | | | | | | | | | | | | | | | | | | | |
Purchase of property, plant and equipment | | (272 | ) | (635 | ) | (95 | ) | — | | (1,002 | ) | | (272 | ) | — | | (635 | ) | (95 | ) | — | | (1,002 | ) |
Proceeds from disposition of property, plant and equipment | | 1,732 | | 891 | | ��� | | — | | 2,623 | | | 1,732 | | — | | 891 | | — | | — | | 2,623 | |
Cash used in investing activities | | 1,460 | | 256 | | (95 | ) | — | | 1,621 | | | 1,460 | | — | | 256 | | (95 | ) | — | | 1,621 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
FINANCING ACTIVITIES: | | | | | | | | | | | | | | | | | | | | | | | | |
Share capital issued | | (521 | ) | — | | — | | — | | (521 | ) | | (520 | ) | — | | — | | — | | — | | (520 | ) |
Deferred financing charges and costs | | — | | (49 | ) | — | | — | | (49 | ) | | — | | (49 | ) | — | | — | | — | | (49 | ) |
Dividends received (paid) | | — | | 6,886 | | (6,886 | ) | — | | — | | |
Dividends received / (paid) | | | — | | — | | 6,886 | | (6,886 | ) | — | | — | |
Advances on Revolving Credit Facility | | — | | 17,400 | | — | | — | | 17,400 | | | — | | 17,400 | | — | | — | | — | | 17,400 | |
Repayments on revolving Credit Facility | | — | | (39,379 | ) | — | | — | | (39,379 | ) | | — | | (39,378 | ) | — | | — | | — | | (39,378 | ) |
Proceeds from stock options exercised | | — | | — | | — | | — | | — | | | — | | — | | — | | — | | — | | — | |
Intercompany advances from affiliates | | | — | | 44,363 | | (44,363 | ) | — | | — | | — | |
Intercompany notes payable/receivable | | 17,842 | | (17,842 | ) | — | | — | | — | | | 17,842 | | (17,842 | ) | — | | — | | — | | — | |
Cash provided by (used in) financing activities before reorganization activities | | 17,321 | | (32,984 | ) | (6,886 | ) | — | | (22,549 | ) | | 17,322 | | 4,494 | | (37,477 | ) | (6,886 | ) | — | | (22,547 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | |
FINANCING CASH FLOWS FROM REORGANIZATION ACTIVITIES | | | | | | | | | | | | | | | | | | | | | | | | |
Deferred financing costs | | (1,408 | ) | — | | — | | — | | (1,408 | ) | | (1,408 | ) | — | | — | | — | | — | | (1,408 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | |
Cash provided by (used in) financing activities | | 15,913 | | (32,984 | ) | (6,886 | ) | — | | (23,957 | ) | | 15,914 | | 4,494 | | (37,477 | ) | (6,886 | ) | — | | (23,955 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | |
Effect of exchange rate changes on cash and cash equivalents | | — | | — | | (76 | ) | — | | (76 | ) | | — | | — | | — | | (76 | ) | — | | (76 | ) |
Net (decrease) increase in cash and cash equivalents | | 3,559 | | (10,683 | ) | (925 | ) | — | | (8,049 | ) | | 3,559 | | (2,506 | ) | (8,177 | ) | (925 | ) | — | | (8,049 | ) |
Cash and cash equivalents, beginning of period | | 5,090 | | 18,132 | | 7,000 | | — | | 30,222 | | |
Cash and cash equivalents, beginning of period | | | 5,090 | | 9,287 | | 8,845 | | 7,000 | | — | | 30,222 | |
Cash and cash equivalents, end of period | | $ | 8,649 | | $ | 7,449 | | $ | 6,075 | | $ | — | | $ | 22,173 | | | $ | 8,649 | | $ | 6,781 | | $ | 668 | | $ | 6,075 | | $ | — | | $ | 22,173 | |
F-58
Table of Contents
Condensed Consolidated Statement of Cash Flows
For the four months ended April 30, 2011
USD (in ‘000s)
| | Predecessor Company | | | Predecessor Company | |
| | Parent Company | | | | | | | | | | | Parent Company | | | | | | | | | |
| | Angiotech | | | | | | | | | | | Angiotech | | | | | | | | | |
| | Pharmaceuticals, | | Guarantors | | Non Guarantors | | Consolidating | | Consolidated | | | Pharmaceuticals, | | Guarantors | | Non Guarantors | | Consolidating | | Consolidated | |
| | Inc. | | Subsidiaries | | Subsidiaries | | Adjustments | | Total | | | Inc. | | Subsidiaries | | Subsidiaries | | Adjustments | | Total | |
| | | | | | | | | | | | | | | | | | | | | | |
OPERATING ACTIVITIES: | | | | | | | | | | | | | | | | | | | | | | |
Cash used in operating activities before reorg items | | $ | (7,900 | ) | $ | 2,887 | | $ | 3,593 | | $ | — | | $ | (1,420 | ) | | $ | (7,900 | ) | $ | 2,887 | | $ | 3,593 | | $ | — | | $ | (1,420 | ) |
| | | | | | | | | | | | | | | | | | | | | | |
OPERATING CASH FLOWS FROM REORGANIZATION ACTIVITIES | | | | | | | | | | | | | | | | | | | | | | |
Professional fess paid for services rendered in connection with the Creditor | | | | | | | | | | | | | | | | | | | | | | |
Protection Proceedings | | (7,447 | ) | (2,608 | ) | — | | — | | (10,055 | ) | | (7,447 | ) | (2,608 | ) | — | | — | | (10,055 | ) |
Key Employment Incentive Plan fee | | — | | — | | — | | — | | — | | | — | | — | | — | | — | | — | |
Director’s and officer’s insurance | | (1,382 | ) | — | | — | | — | | (1,382 | ) | | (1,382 | ) | — | | — | | — | | (1,382 | ) |
Cash used in reorganization activities | | (8,829 | ) | (2,608 | ) | — | | — | | (11,437 | ) | | (8,829 | ) | (2,608 | ) | — | | — | | (11,437 | ) |
Cash used in operating activities | | (16,729 | ) | 279 | | 3,593 | | — | | (12,857 | ) | | (16,729 | ) | 279 | | 3,593 | | — | | (12,857 | ) |
| | | | | | | | | | | | | | | | | | | | | | |
INVESTING ACTIVITIES: | | | | | | | | | | | | | | | | | | | | | | |
Purchase of property, plant and equipment | | (329 | ) | (591 | ) | (25 | ) | — | | (945 | ) | | (329 | ) | (591 | ) | (25 | ) | — | | (945 | ) |
Cash used in investing activities | | (329 | ) | (591 | ) | (25 | ) | — | | (945 | ) | | (329 | ) | (591 | ) | (25 | ) | — | | (945 | ) |
| | | | | | | | | | | | | | | | | | | | | | |
FINANCING ACTIVITIES: | | | | | | | | | | | | | | | | | | | | | | |
Share capital issued | | 1 | | — | | — | | — | | 1 | | | 1 | | — | | — | | — | | 1 | |
Deferred financing charges and costs | | — | | (1,278 | ) | — | | — | | (1,278 | ) | | — | | (1,278 | ) | — | | — | | (1,278 | ) |
Dividends received (paid) | | — | | 3,137 | | (3,137 | ) | — | | — | | | — | | 3,137 | | (3,137 | ) | — | | — | |
Net (repayments) advances on Revolving Credit Facility | | — | | 12,018 | | — | | — | | 12,018 | | | — | | 12,018 | | — | | — | | 12,018 | |
Intercompany notes payable/receivable | | 10,967 | | (10,967 | ) | | | — | | — | | | 10,967 | | (10,967 | ) | | | — | | — | |
Cash provided by (used in) financing activities | | 10,968 | | 2,910 | | (3,137 | ) | — | | 10,741 | | | 10,968 | | 2,910 | | (3,137 | ) | — | | 10,741 | |
| | | | | | | | | | | | | | | | | | | | | | |
Effect of exchange rate changes on cash and cash equivalents | | — | | — | | (32 | ) | — | | (32 | ) | | — | | — | | (32 | ) | — | | (32 | ) |
Net (decrease) increase in cash and cash equivalents | | (6,090 | ) | 2,598 | | 399 | | — | | (3,093 | ) | | (6,090 | ) | 2,598 | | 399 | | — | | (3,093 | ) |
Cash and cash equivalents, beginning of period | | 11,180 | | 15,340 | | 6,795 | | — | | 33,315 | | | 11,180 | | 15,340 | | 6,795 | | — | | 33,315 | |
Cash and cash equivalents, end of period | | $ | 5,090 | | 17,938 | | 7,194 | | $ | — | | 30,222 | | | $ | 5,090 | | 17,938 | | 7,194 | | $ | — | | 30,222 | |
|
F-59
Table of Contents
Condensed Consolidating Statement of Cash Flows
For the year end December 31, 2010
USD (in ‘000s)
| | Predecessor Company | |
| | Parent Company
Angiotech
Pharmaceuticals,
Inc. | | Guarantors
Subsidiaries | | Non Guarantors
Subsidiaries | | Consolidating
Adjustments | | Consolidated
Total | |
OPERATING ACTIVITIES: | | | | | | | | | | | |
Cash used in operating activities | | $ | (15,931 | ) | $ | (13,920 | ) | $ | 8,242 | | $ | — | | (21,609 | ) |
| | | | | | | | | | | |
INVESTING ACTIVITIES: | | | | | | | | | | | |
Purchase of property, plant and equipment | | (3,588 | ) | (2,099 | ) | (39 | ) | — | | (5,726 | ) |
Proceeds from disposition of property, plant and equipment | | — | | 1,272 | | — | | — | | 1,272 | |
Proceeds from disposition of intangible assets | | — | | 2,005 | | — | | — | | 2,005 | |
Loans advanced | | (1,015 | ) | — | | — | | — | | (1,015 | ) |
Asset acquisition costs | | (231 | ) | — | | — | | — | | (231 | ) |
Cash used in investing activities | | (4,834 | ) | 1,178 | | (39 | ) | — | | (3,695 | ) |
| | | | | | | | | | | |
FINANCING ACTIVITIES: | | | | | | | | | | | |
Deferred financing charges and costs | | (669 | ) | — | | — | | — | | (669 | ) |
Dividends received / (paid) | | | | 13,170 | | (13,170 | ) | — | | — | |
Proceeds from stock options exercised | | 11 | | — | | — | | — | | 11 | |
Advances under credit facility | | — | | 10,000 | | — | | — | | 10,000 | |
Intercompany notes payable/receivable | | 12,001 | | (12,001 | ) | | | — | | — | |
Cash provided by (used in) financing activities | | 11,343 | | 11,169 | | (13,170 | ) | — | | 9,342 | |
Effect of exchange rate changes on cash and cash equivalents | | — | | 1 | | (266 | ) | — | | (265 | ) |
Net (decrease) increase in cash and cash equivalents | | (9,422 | ) | (1,572 | ) | (5,233 | ) | — | | (16,227 | ) |
Cash and cash equivalents, beginning of period | | 20,602 | | 16,912 | | 12,028 | | — | | 49,542 | |
| | | | | | | | | | | |
Cash and cash equivalents, end of period | | $ | 11,180 | | $ | 15,340 | | $ | 6,795 | | $ | — | | $ | 33,315 | |
| | | | | | | | | | | | | | | | |
F-60
Table of Contents
Condensed Consolidating Statement of Cash Flows
For the year end December 31, 2009
USD (in ‘000s)26. SUBSEQUENT EVENTS
| | Predecessor Company | |
| | Parent Company
Angiotech
Pharmaceuticals,
Inc. | | Guarantors
Subsidiaries | | Non Guarantors
Subsidiaries | | Consolidating
Adjustments | | Consolidated
Total | |
OPERATING ACTIVITIES: | | | | | | | | | | | |
Cash used in operating activities | | $ | (1,379 | ) | $ | 43,966 | | $ | (20,891 | ) | | | $ | 21,696 | |
| | | | | | | | | | | |
INVESTING ACTIVITIES: | | | | | | | | | | | |
Purchase of property, plant and equipment | | (1,581 | ) | (2,258 | ) | (625 | ) | — | | (4,464 | ) |
Purchase of intangible assets | | — | | (2,500 | ) | — | | — | | (2,500 | ) |
Loans advanced | | (1,200 | ) | | | | | | | (1,200 | ) |
Other | | 12 | | 334 | | (94 | ) | — | | 252 | |
| | | | | | | | | | | |
Cash used in investing activities | | (2,769 | ) | (4,424 | ) | (719 | ) | — | | (7,912 | ) |
| | | | | | | | | | | |
FINANCING ACTIVITIES: | | | | | | | | | | | |
Deferred financing charges and costs | | (3,403 | ) | — | | — | | — | | (3,403 | ) |
Dividends received / (paid) | | 24,800 | | (21,800 | ) | (3,000 | ) | — | | — | |
Intercompany notes payable/receivable | | (6,830 | ) | (7,418 | ) | 14,248 | | — | | — | |
Proceeds from stock options exercised | | 3 | | — | | — | | — | | 3 | |
| | | | | | | | | | | |
Cash provided by (used in) financing activities | | 14,570 | | (29,218 | ) | 11,248 | | — | | (3,400 | ) |
| | | | | | | | | | | |
Effect of exchange rate changes on cash and cash equivalents | | — | | 16 | | 190 | | — | | 206 | |
Net (decrease) increase in cash and cash equivalents | | 10,422 | | 10,340 | | (10,172 | ) | — | | 10,590 | |
Cash and cash equivalents, beginning of period | | 10,180 | | 6,572 | | 22,200 | | — | | 38,952 | |
| | | | | | | | | | | |
Cash and cash equivalents, end of period | | $ | 20,602 | | $ | 16,912 | | $ | 12,028 | | $ | — | | $ | 49,542 | |
| | | | | | | | | | | | | | | | |
Redemption of $16.0 million of New Notes
On March 18, 2013, the Successor Company announced a second partial redemption of $16.0 million of New Notes outstanding at 100% of their principal amount together with accrued and unpaid interest. The partial redemption is expected to be completed on April 17, 2013.
Sale of Interventional Products Business to Argon Medical Devices, Inc.
On March 25, 2013, Angiotech announced that it entered into a definitive agreement to sell certain of its subsidiaries, comprising Angiotech’s Interventional Products Business to Argon Medical Devices, Inc., a Delaware corporation (“Argon”), which is a portfolio company of RoundTable, for $362.5 million in cash consideration. The transaction is expected to close prior to the end of April 2013, subject to various conditions.
Highlights and selected terms of the transaction include:
·On March 22, 2013, Angiotech Pharmaceuticals, Inc., Angiotech International AG, a Swiss corporation (“AIAG”), and Angiotech Pharmaceuticals (US), Inc., a Washington corporation (“AUS” and, collectively with the Company and AIAG, the “Sellers”) entered into a Stock Purchase Agreement (the “SPA”) with Argon Medical Devices Holdings, Inc., a Delaware corporation (“Argon Holdco”), Argon Medical Devices, Inc., a Delaware corporation (“Argon”), and Argon Medical Devices Netherlands B.V., a private company with limited liability incorporated under the laws of the Netherlands (“Argon Netherlands” and, collectively with Argon, “Buyers”). AIAG and AUS are subsidiaries of Angiotech.
·The businesses being acquired by Argon include all manufacturing, commercial and administrative operations relating to Angiotech’s Interventional Products Business. Key product lines in this business include Angiotech’s BioPince™ full core biopsy devices, Tru-Core™ II (fully automatic) and SuperCore™ (semi-automatic) disposable biopsy instruments, T-Lok™ bone marrow biopsy devices, and Skater™ drainage catheters, among other products. Angiotech’s Interventional Products Business also manufactures components for other third party medical device manufacturers, operates manufacturing facilities in Wheeling, IL, Gainesville, FL and Stenlose, Denmark and employs a direct sales and marketing organization in the U.S. and Europe.
·Consideration for the transaction will total $362.5 million in cash, subject to a potential working capital adjustment, with $347.5 million to be received upon the close of the transaction, and $15 million to be retained in escrow for a period of 12 months to secure indemnification obligations relating to the transaction.
·Angiotech expects to use the proceeds received from the transaction to repay all of its remaining outstanding debt obligations, including remaining amounts due under its New Notes due in December 2013 and the Senior Notes due in December 2016. Angiotech also expects to terminate its Revolving Credit Facility with Wells Fargo Capital Finance upon the close of the transaction.
·The transaction is subject to approval of 75% of Angiotech’s shareholders. As at March 25, 2013, shareholders representing approximately 70% of Angiotech’s outstanding shares have signed voting agreements in connection with the transaction and have agreed to vote their shares in favor of the proposed transaction.
·The transaction is conditioned on, among other things, expiration of applicable waiting periods under the U.S. Hart Scott Rodino Act.
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27. SUBSEQUENT EVENTS·Angiotech expects to make a cash distribution, in the form of a return of capital, to shareholders in an amount to be determined shortly after the close of the transaction, and subsequent to the repayment of Angiotech’s debt obligations, final payment of all transaction related fees and expenses, and final determination by management and the Board of Directors as to the operating cash needs of Angiotech’s remaining businesses.
Angiotech estimates that the carrying values as at December 31, 2012 of the major classes of assets and liabilities to be disposed of through this sale transaction are as follows:
Intangible assets | | $117.5 million |
Goodwill | | $75.0 million |
All other assets | | $45.0 million |
Liabilities | | $17.5 million |
Upon the conclusion of the transaction, Angiotech will retain its Surgical Products Business and its Royalty Business. The Royalty Business consists of a portfolio of intellectual property related to a variety of biomaterial, drug and medical device related technologies, and technology applications, which includes TAXUS and Zilver-PTX. Key product lines in Angiotech’s Surgical Products business include wound closure products such as the Quill, Look™ brand sutures for general and dental surgery and Sharpoint™ UltraGlide and Microsurgical sutures, and ophthalmic products such as the Sharpoint™ brand ophthalmic surgical blades. Angiotech’s Surgical Products Business also manufactures components for other third party medical device manufacturers, and operates manufacturing facilities in Reading, PA, Aguadilla, PR and Taunton, England. Angiotech’s Surgical Products Business also employs a specialized direct sales and marketing team, with dedicated groups focused on its wound closure, ophthalmology and medical components product lines respectively.
Angiotech will also retain all intellectual property, rights, assets and inventory related to its BioSentry™ (formerly Bio-Seal) product line, which was recently approved for sale in the U.S. by the FDA. Coincident with the transaction, Angiotech concluded a three year Manufacturing and Supply Agreement with Argon with respect to BioSentry. Argon will not, as part of this agreement, have commercialization rights to BioSentry. U.S. commercial launch activities for this product line will continue, and customers may inquire or place orders for BioSentry through Angiotech’s existing customer service line.
Angiotech will retain real property assets located in Stenlose, Denmark as part of the transaction, and will retain net proceeds generated upon any sale of such real property assets subsequent to Angiotech and Argon concluding Angiotech’s previously announced transfer of production activities from Stenlose to facilities located in the U.S. Such transfer is still currently expected to conclude during the first half of 2013.
Upon the close of the transaction, Angiotech will cease to be a voluntary reporting public issuer, and will therefore no longer file financial or other information with the U.S. Securities and Exchange Commission.
Amendment to Revolving Credit FacilityTermination Payments
On March 12, 2012,25, 2013, Angiotech announced that the Successor Company completed an amendmentemployment of its Executive Vice President of Sales and Marketing, Steven Bryant, ended effective March 22, 2013. Mr. Bryant is expected to its Revolving Credit Facilityreceive severance and termination payments in order to provide increased financial flexibility and improve its overall liquidity. This amendment provides for, among other things: (i)accordance with the repurchase of the Successor Company’s outstanding Senior Floating Rate Notes, subject to certain terms and conditions; (ii)conditions specified in his employment agreement, which was previously filed with the repurchase of equity held by current or former employees, officers or directors subject to certain limitations; (iii) an increaseSEC. We expect that Angiotech and Mr. Bryant will execute a termination and release letter in the amountnear future to govern the obligations of cash that can be held by the Successor Company’s foreign subsidiaries; (iv) the ability to dispose of certain of the Successor Company’s intellectual property assets (at which time the component of the borrowing base supported by such intellectual property assets would be reduced to nil); (v) a reduction in the restrictions surrounding eligibility of certain accounts receivable; (vi) the removal of the lien over the Company’s short term investments; (vii) a revisioneach party with respect to the definition of EBITDA to allow for certain historical and future restructuring and CCAA costs; and (viii) less restrictive reporting requirements when advances under the Revolving Credit Facility are below certain thresholds. Management estimates total fees of $0.4 million to be paid to complete this amendment.termination.
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SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
For the year ended December 31, 2012,
the eight months ended December 31, 2011, the four months ended April 30, 2011
and the years ended December 31, 2010 and 2009
(in thousands of U.S. dollars)
| | | | Additions | | | | | | |
| | Balance at
Beginning
of Period | | Charged to
Costs and
Expenses | | Charged
to Other
accounts | | Deductions | | Balance at
End of Period | | | Balance at
Beginning
of Period | | Additions | | Deductions | | Balance at
End of Period | |
Deferred Income Tax Valuation Allowance: | | | | | | | | | | | | | | | | | | | | |
Year ended December 31, 2012 | | | $ | 98,277 | | — | | 380 | | 97,897 | |
Eight months ended December 31, 2011 | | $ | 80,722 | | 17,555 | | — | | — | | $ | 98,277 | | | 80,722 | | 17,555 | | — | | $ | 98,277 | |
Four months ended April 30, 2011, including the impact of fresh start accounting | | 106,594 | | — | | — | | 25,872 | | 80,617 | | | 106,594 | | — | | 25,872 | | 80,617 | |
Year ended December 31, 2010 | | 95,159 | | 11,435 | | — | | — | | 106,594 | | | 95,159 | | 11,435 | | — | | 106,594 | |
Year ended December 31, 2009 | | 91,986 | | $ | 3,173 | | — | | | | 95,159 | | |
|
| | | | Additions | | | | | | |
| | Balance at
Beginning
of Period | | Charged to
Costs and
Expenses | | Charged
to Other
accounts | | Deductions | | Balance at
End of Period | | | Balance at
Beginning
of Period | | Additions | | Deductions | | Balance at
End of Period | |
Accounts Receivable Allowance: | | | | | | | | | | | | | | | | | | | | |
For the year ended December 31, 2012 | | | $ | 233 | | — | | 40 | | $ | 193 | |
Eight months ended December 31, 2011 | | $ | Nil | | $ | 233 | | — | | — | | $ | 233 | | | Nil | | $ | 233 | | — | | $ | 233 | |
Impact of fresh start accounting on April 30, 2011 | | 1,944 | | — | | — | | 1,944 | | Nil | | | 1,944 | | — | | 1,944 | | Nil | |
Four months ended April 30, 2011 | | 2,435 | | 479 | | — | | 970 | | 1,944 | | | 2,435 | | 479 | | 970 | | 1,944 | |
Year ended December 31, 2010 | | 471 | | 2,499 | | — | | 535 | | $ | 2,435 | | | 471 | | 2,499 | | 535 | | $ | 2,435 | |
Year ended December 31, 2009 | | 270 | | 730 | | — | | 529 | | $ | 471 | | |
|
| | | | Additions | | | | | | |
| | Balance at
Beginning
of Period | | Charged to
Costs and
Expenses | | Charged
to Other
accounts | | Deductions | | Balance at
End of Period | | | Balance at
Beginning
of Period | | Additions | | Deductions | | Balance at
End of Period | |
Inventory Valuation Allowance: | | | | | | | | | | | | | | | | | | | | |
For the year ended December 31, 2012 | | | $ | 1,022 | | 71 | | — | | $ | 1,093 | |
Eight months ended December 31, 2011 | | $ | Nil | | $ | 1,022 | | — | | — | | $ | 1,022 | | | Nil | | 1,022 | | — | | $ | 1,022 | |
Impact of fresh start accounting on April 30, 2011 | | 2,920 | | — | | — | | 2,920 | | Nil | | | 2,920 | | — | | 2,920 | | Nil | |
Four months ended April 30, 2011 | | 3,417 | | 88 | | — | | 585 | | 2,920 | | | 3,417 | | 88 | | 585 | | 2,920 | |
Year ended December 31, 2010 | | 2,969 | | 1,428 | | — | | 981 | | 3,417 | | | 2,969 | | 1,428 | | 981 | | 3,417 | |
Year ended December 31, 2009 | | 2,138 | | 3,346 | | — | | 2,515 | | 2,969 | | |
|
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