REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of Mallinckrodt plc:plc
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Mallinckrodt plc and subsidiaries (the "Company"“Company”) as of September 30, 2016December 27, 2019 and September 25, 2015, andDecember 28, 2018, the related consolidated statements of income,operations, comprehensive income,operations, changes in shareholders'shareholders’ equity, and cash flows for each of the three fiscal years inended December 27, 2019, December 28, 2018 and December 29, 2017 and the period ended September 30, 2016. Our audits also includedrelated notes and the financial statement schedule listed in the Index at Item 15. These financial statements and financial statement schedule are15 (collectively referred to as the responsibility of the Company's management. Our responsibility is to express an“financial statements”). In our opinion, on the financial statements present fairly, in all material respects, the financial position of the Company as of December 27, 2019 and financial statement schedule based on our audits.December 28, 2018, and the results of its operations and its cash flows for the fiscal years ended December 27, 2019, December 28, 2018 and December 29, 2017, in conformity with accounting principles generally accepted in the United States of America.
We conducted our auditshave also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States). (PCAOB), the Company’s internal control over financial reporting as of December 27, 2019, based on criteria established in Internal Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 25, 2020, expressed an unqualified opinion on the Company’s internal control over financial reporting.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includesmisstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence supportingregarding the amounts and disclosures in the financial statements. An auditOur audits also includes assessingincluded evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statement presentation.statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matters
InThe critical audit matters communicated below are matters arising from the current-period audit of the financial statements that were communicated or required to be communicated to the audit committee and that (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion such consolidatedon the financial statements, present fairly, in all material respects,taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
Income Taxes - Legal Entity Reorganization - Refer to Note 8 to the financial positionstatements
Critical Audit Matter Description
The Company completed a reorganization of its intercompany financing and associated legal entity ownership in response to the changing global tax environment, resulting in a $26.2 million current tax expense and a $239.0 million deferred income tax benefit. The reorganization involved the interpretation of multi-jurisdictional tax laws and regulations, supported by third-party tax opinions. Interpretation of tax laws can be inherently uncertain and can be subject to potential challenges by the relevant tax authorities, both of which were considered in assessing its reserves for uncertain tax positions.
We identified the income taxes associated with the legal entity reorganization as a critical audit matter because of the significant judgments made by management and the complex nature of the reorganization, particularly related to the interpretation of multi-jurisdictional tax laws and regulations. This required a high degree of auditor judgment and an increased extent of effort, including the
need to involve our tax specialistswhen performing audit procedures to evaluate the Company’s interpretation of tax laws and regulations for multiple jurisdictions.
How the Critical Audit Matter Was Addressed in the Audit
Our audit procedures related to the income taxes associated with the legal entity reorganization included the following, among others:
We tested the effectiveness of management’s controls over income taxes, including those over the legal entity reorganization and the interpretation of tax laws and regulations.
With the assistance of our tax specialists, we evaluated the income taxes associated with the legal entity reorganization by performing the following:
| |
– | Obtaining management and third-party tax opinions or memoranda regarding the analysis of relevant tax laws and regulations and evaluating whether the analysis was consistent with our interpretation. |
| |
– | Evaluating the appropriateness of management’s conclusions with respect to reserves for uncertain tax positions associated with the legal entity reorganization. |
| |
– | Testing the underlying calculations and allocations supporting the tax expense and benefit recorded. |
Commitments and Contingencies - Opioid Litigation Settlement - Refer to Notes 19 and 24 to the financial statements
Critical Audit Matter Description
On February 25, 2020, the Company announced that it has reached an agreement in principle on the terms of a global settlement that would resolve all opioid-related claims against the Company and its subsidiaries (“Litigation Settlement”) for $1,600.0 million in cash payments over eight years and the issuance of warrants to purchase ordinary shares of the Company that would represent approximately 19.99% of the Company’s fully diluted outstanding shares. The Litigation Settlement contemplates the filing of voluntary petitions under Chapter 11 of the U.S. Bankruptcy Code (“Chapter 11”) by certain subsidiaries of Mallinckrodt plc operating the Specialty Generics business (the “Specialty Generics Subsidiaries”). The Litigation Settlement payments and subsidiariesthe issuance of warrants are effective upon the emergence from the contemplated Chapter 11 process and are conditioned upon, among other things, bankruptcy court approval of the bankruptcy plan effectuating the Litigation Settlement, the emergence of the Specialty Generics Subsidiaries from bankruptcy and other material terms.
The Company records accruals for contingencies when it is probable that a liability has been incurred and the amount can be reasonably estimated. As a result of the Litigation Settlement, the Company recorded an accrual of $1,600.0 million related to the cash payments and $43.4 million related to the warrants in the consolidated balance sheet as of September 30, 2016December 27, 2019, with a corresponding non-cash charge to the consolidated statement of operations as a component of operating expenses.
We identified the opioid-related litigation settlement liability and September 25, 2015,disclosures as a critical audit matter because of the significant judgments made by management to assess the complex terms of the Litigation Settlement in order to determine the measurement and recognition of the estimated loss. This required a high degree of auditor judgment and an increased extent of effort when performing audit procedures to evaluate the reasonableness of management’s conclusions.
How the Critical Audit Matter Was Addressed in the Audit
Our audit procedures related to the opioid-related litigation settlement liability and disclosures included the following, among others:
We tested the effectiveness of controls over the Litigation Settlement, which included review and approval of the accounting and related disclosures.
We requested and received written responses from the Company’s external legal counsel regarding opioid litigation and the results of their operationsLitigation Settlement.
We evaluated the Company’s conclusions regarding the recognition and their cash flows for eachmeasurement of the three years inopioid-related litigation settlement by obtaining management’s documented accounting treatment and evaluating the period ended September 30, 2016, in conformity withaccounting based on the terms of the Litigation Settlement and the applicable accounting principles generally accepted in the United States of America. Also, in
We evaluated the Company’s disclosures for consistency with our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.
We have also audited, in accordance with the standardsknowledge of the Public Company Accounting Oversight Board (United States), the Company's internal control over financial reporting as of September 30, 2016, based on the criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated November 29, 2016 expressed an unqualified opinion on the Company's internal control over financial reporting.Litigation Settlement.
/s/ DELOITTE & TOUCHE LLP
St. Louis, Missouri
November 29, 2016February 25, 2020
We have served as the Company’s auditor since 2011.
MALLINCKRODT PLC
CONSOLIDATED STATEMENTS OF INCOMEOPERATIONS
(in millions, except per share data)
|
| | | | | | | | | | | |
| Fiscal Year |
| 2016 | | 2015 | | 2014 |
Net sales | $ | 3,380.8 |
| | $ | 2,923.1 |
| | $ | 1,650.3 |
|
Cost of sales | 1,525.8 |
| | 1,300.2 |
| | 765.7 |
|
Gross profit | 1,855.0 |
| | 1,622.9 |
| | 884.6 |
|
| | | | | |
Selling, general and administrative expenses | 925.3 |
| | 1,023.8 |
| | 611.0 |
|
Research and development expenses | 262.2 |
| | 203.3 |
| | 140.5 |
|
Restructuring charges, net | 33.3 |
| | 45.0 |
| | 68.0 |
|
Separation costs | — |
| | — |
| | 9.6 |
|
Non-restructuring impairment charges | 16.9 |
| | — |
| | 27.1 |
|
Gain on divestiture and license | — |
| | (3.0 | ) | | (15.0 | ) |
Operating income | 617.3 |
| | 353.8 |
| | 43.4 |
|
| | | | | |
Interest expense | (384.6 | ) | | (255.6 | ) | | (82.6 | ) |
Interest income | 1.3 |
| | 1.0 |
| | 1.5 |
|
Other (expense) income, net | (0.6 | ) | | 8.1 |
| | 3.1 |
|
Income (loss) from continuing operations before income taxes | 233.4 |
| | 107.3 |
| | (34.6 | ) |
| | | | | |
Benefit from income taxes | (255.6 | ) | | (129.3 | ) | | (12.6 | ) |
Income (loss) from continuing operations | 489.0 |
| | 236.6 |
| | (22.0 | ) |
| | | | | |
Income (loss) from discontinued operations, net of tax expense (benefit) of $43.5, $47.9 and $(32.2) | 154.7 |
| | 88.1 |
| | (297.3 | ) |
| | | | | |
Net income (loss) | $ | 643.7 |
| | $ | 324.7 |
| | $ | (319.3 | ) |
| | | | | |
Basic earnings per share (Note 8): | | | | | |
Income (loss) from continuing operations | $ | 4.42 |
| | $ | 2.03 |
| | $ | (0.34 | ) |
Income (loss) from discontinued operations, net of income taxes | 1.40 |
| | 0.75 |
| | (4.58 | ) |
Net income (loss) | $ | 5.82 |
| | $ | 2.78 |
| | $ | (4.92 | ) |
| | | | | |
Basic weighted-average shares outstanding | 110.6 |
| | 115.8 |
| | 64.9 |
|
| | | | | |
Diluted earnings per share (Note 8): | | | | | |
Income (loss) from continuing operations | $ | 4.39 |
| | $ | 2.00 |
| | $ | (0.34 | ) |
Income (loss) from discontinued operations, net of income taxes | 1.39 |
| | 0.75 |
| | (4.58 | ) |
Net income (loss) | $ | 5.77 |
| | $ | 2.75 |
| | $ | (4.92 | ) |
| | | | | |
Diluted weighted-average shares outstanding | 111.5 |
| | 117.2 |
| | 64.9 |
|
|
| | | | | | | | | | | |
| Fiscal Year |
| 2019 | | 2018 | | 2017 |
Net sales | $ | 3,162.5 |
| | $ | 3,215.6 |
| | $ | 3,221.6 |
|
Cost of sales | 1,741.1 |
| | 1,744.4 |
| | 1,564.1 |
|
Gross profit | 1,421.4 |
| | 1,471.2 |
| | 1,657.5 |
|
| | | | | |
Selling, general and administrative expenses | 831.0 |
| | 834.1 |
| | 849.7 |
|
Research and development expenses | 349.4 |
| | 361.1 |
| | 276.9 |
|
Restructuring charges, net | (1.7 | ) | | 103.0 |
| | 31.2 |
|
Non-restructuring impairment charges | 388.0 |
| | 3,893.1 |
| | 63.7 |
|
Losses (gains) on divestiture | 33.5 |
| | 0.8 |
| | (56.9 | ) |
Opioid-related litigation settlement charge (Note 24) | 1,643.4 |
| | — |
| | — |
|
Operating (loss) income | (1,822.2 | ) | | (3,720.9 | ) | | 492.9 |
|
| | | | | |
Interest expense | (309.0 | ) | | (370.2 | ) | | (369.1 | ) |
Interest income | 9.5 |
| | 8.2 |
| | 4.6 |
|
Gains on debt extinguishment, net | 466.6 |
| | 8.5 |
| | 8.3 |
|
Other income (expense), net | 63.6 |
| | 22.4 |
| | (75.1 | ) |
(Loss) income from continuing operations before income taxes | (1,591.5 | ) | | (4,052.0 | ) | | 61.6 |
|
| | | | | |
Benefit from income taxes | (584.3 | ) | | (430.1 | ) | | (1,709.6 | ) |
(Loss) income from continuing operations | (1,007.2 | ) | | (3,621.9 | ) | | 1,771.2 |
|
| | | | | |
Income from discontinued operations, net of tax expense of $1.7, $1.4, and $5.4 | 10.7 |
| | 14.9 |
| | 363.2 |
|
| | | | | |
Net (loss) income | $ | (996.5 | ) | | $ | (3,607.0 | ) | | $ | 2,134.4 |
|
| | | | | |
Basic (loss) earnings per share (Note 9): | | | | | |
(Loss) income from continuing operations | $ | (12.00 | ) | | $ | (43.12 | ) | | $ | 18.13 |
|
Income from discontinued operations | 0.13 |
| | 0.18 |
| | 3.72 |
|
Net (loss) income | $ | (11.88 | ) | | $ | (42.94 | ) | | $ | 21.85 |
|
| | | | | |
Basic weighted-average shares outstanding | 83.9 |
| | 84.0 |
| | 97.7 |
|
| | | | | |
Diluted (loss) earnings per share (Note 9): | | | | | |
(Loss) income from continuing operations | $ | (12.00 | ) | | $ | (43.12 | ) | | $ | 18.09 |
|
Income from discontinued operations | 0.13 |
| | 0.18 |
| | 3.71 |
|
Net (loss) income | $ | (11.88 | ) | | $ | (42.94 | ) | | $ | 21.80 |
|
| | | | | |
Diluted weighted-average shares outstanding | 83.9 |
| | 84.0 |
| | 97.9 |
|
See Notes to Consolidated Financial Statements.
MALLINCKRODT PLC
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOMEOPERATIONS
(in millions)
|
| | | | | | | | | | | |
| Fiscal Year |
| 2016 | | 2015 | | 2014 |
Net income (loss) | $ | 643.7 |
| | $ | 324.7 |
| | $ | (319.3 | ) |
Other comprehensive (loss), net of tax | | | | | |
Currency translation adjustments | (58.6 | ) | | (70.8 | ) | | (27.6 | ) |
Unrecognized gain on derivatives, net of tax expense of $0.2, $0.2 and $0.2 | 0.5 |
| | 0.4 |
| | 0.5 |
|
Unrecognized gain (loss) on benefit plans, net of tax (benefit) expense of $(15.0), $(2.1) and $(7.3) | (28.4 | ) | | 5.6 |
| | (15.7 | ) |
Total other comprehensive (loss), net of tax | (86.5 | ) | | (64.8 | ) | | (42.8 | ) |
Comprehensive income (loss) | $ | 557.2 |
| | $ | 259.9 |
| | $ | (362.1 | ) |
|
| | | | | | | | | | | |
| Fiscal Year |
| 2019 | | 2018 | | 2017 |
Net (loss) income | $ | (996.5 | ) | | $ | (3,607.0 | ) | | $ | 2,134.4 |
|
Other comprehensive income (loss), net of tax | | | | | |
Currency translation adjustments | 18.3 |
| | (12.2 | ) | | 11.3 |
|
Unrecognized gain on derivatives, net of tax expense of $0.6, $0.2, and $0.3 | 1.8 |
| | 0.7 |
| | 1.0 |
|
Unrecognized (loss) gain on benefit plans, net of tax (benefit) expense of $(1.1), $0.5, and $30.8 | (4.2 | ) | | 1.6 |
| | 45.8 |
|
Unrecognized gain on investments | — |
| | — |
| | 1.5 |
|
Total other comprehensive income (loss), net of tax | 15.9 |
| | (9.9 | ) | | 59.6 |
|
Comprehensive (loss) income | $ | (980.6 | ) | | $ | (3,616.9 | ) | | $ | 2,194.0 |
|
See Notes to Consolidated Financial Statements.
MALLINCKRODT PLC
CONSOLIDATED BALANCE SHEETS
(in millions, except share data)
| | | September 30, 2016 | | September 25, 2015 | December 27, 2019 | | December 28, 2018 |
Assets | | | | | | |
Current Assets: | | | | | | |
Cash and cash equivalents | $ | 280.5 |
| | $ | 365.9 |
| $ | 790.9 |
| | $ | 348.9 |
|
Accounts receivable, less allowance for doubtful accounts of $4.0 and $3.6 | 465.8 |
| | 489.6 |
| |
Accounts receivable, less allowance for doubtful accounts of $4.0 and $5.0 | | 577.5 |
| | 623.3 |
|
Inventories | 335.6 |
| | 262.1 |
| 312.1 |
| | 322.3 |
|
Deferred income taxes | — |
| | 139.2 |
| |
Prepaid expenses and other current assets | 115.9 |
| | 194.4 |
| 150.2 |
| | 132.7 |
|
Current assets held for sale | 308.8 |
| | 394.9 |
| |
Total current assets | 1,506.6 |
| | 1,846.1 |
| 1,830.7 |
| | 1,427.2 |
|
Property, plant and equipment, net | 844.0 |
| | 793.0 |
| 896.5 |
| | 982.0 |
|
Goodwill | 3,705.3 |
| | 3,649.4 |
| |
Intangible assets, net | 9,182.3 |
| | 9,666.3 |
| 7,018.0 |
| | 8,282.8 |
|
Other assets | 260.5 |
| | 225.7 |
| 593.7 |
| | 185.3 |
|
Long-term assets held for sale | — |
| | 223.6 |
| |
Total Assets | $ | 15,498.7 |
| | $ | 16,404.1 |
| $ | 10,338.9 |
| | $ | 10,877.3 |
|
Liabilities and Shareholders' Equity | | | | | | |
Current Liabilities: | | | | | | |
Current maturities of long-term debt | $ | 256.3 |
| | $ | 22.0 |
| $ | 633.6 |
| | $ | 22.4 |
|
Accounts payable | 110.1 |
| | 116.8 |
| 139.8 |
| | 147.5 |
|
Accrued payroll and payroll-related costs | 116.0 |
| | 95.0 |
| 105.2 |
| | 124.0 |
|
Accrued interest | 80.6 |
| | 80.2 |
| 62.9 |
| | 77.6 |
|
Accrued and other current liabilities | 550.9 |
| | 486.1 |
| 485.4 |
| | 572.2 |
|
Current liabilities held for sale | 120.8 |
| | 129.3 |
| |
Total current liabilities | 1,234.7 |
| | 929.4 |
| 1,426.9 |
| | 943.7 |
|
Long-term debt | 5,788.7 |
| | 6,474.3 |
| 4,741.2 |
| | 6,069.2 |
|
Opioid-related litigation settlement liability (Note 24) | | 1,643.4 |
| | — |
|
Pension and postretirement benefits | 144.9 |
| | 114.2 |
| 62.4 |
| | 60.5 |
|
Environmental liabilities | 73.4 |
| | 73.3 |
| 60.0 |
| | 59.7 |
|
Deferred income taxes | 2,581.4 |
| | 3,117.5 |
| 11.0 |
| | 324.3 |
|
Other income tax liabilities | 67.7 |
| | 121.3 |
| 227.1 |
| | 228.0 |
|
Other liabilities | 337.2 |
| | 209.0 |
| 226.2 |
| | 304.6 |
|
Long-term liabilities held for sale | — |
| | 53.9 |
| |
Total Liabilities | 10,228.0 |
| | 11,092.9 |
| 8,398.2 |
| | 7,990.0 |
|
Commitments and contingencies (Note 18) |
|
| |
| |
Shareholders' Equity: | | | | | | |
Preferred shares, $0.20 par value, 500,000,000 authorized; none issued or outstanding | — |
| | — |
| — |
| | — |
|
Ordinary A shares, €1.00 par value, 40,000 authorized; none issued or outstanding | — |
| | — |
| — |
| | — |
|
Ordinary shares, $0.20 par value, 500,000,000 authorized; 118,137,297 and 117,513,370 issued; 107,167,693 and 116,283,149 outstanding | 23.6 |
| | 23.5 |
| |
Ordinary shares held in treasury at cost, 10,969,604 and 1,230,221 | (762.6 | ) | | (109.7 | ) | |
Ordinary shares, $0.20 par value, 500,000,000 authorized; 93,459,206 and 92,705,747 issued; 84,105,786 and 83,323,877 outstanding | | 18.7 |
| | 18.5 |
|
Ordinary shares held in treasury at cost, 9,353,420 and 9,381,870 | | (1,615.7 | ) | | (1,617.4 | ) |
Additional paid-in capital | 5,412.7 |
| | 5,357.6 |
| 5,562.5 |
| | 5,528.2 |
|
Retained earnings | 682.6 |
| | 38.9 |
| |
Accumulated other comprehensive income | (85.6 | ) | | 0.9 |
| |
Retained deficit | | (2,016.9 | ) | | (1,017.7 | ) |
Accumulated other comprehensive loss | | (7.9 | ) | | (24.3 | ) |
Total Shareholders' Equity | 5,270.7 |
| | 5,311.2 |
| 1,940.7 |
| | 2,887.3 |
|
Total Liabilities and Shareholders' Equity | $ | 15,498.7 |
| | $ | 16,404.1 |
| $ | 10,338.9 |
| | $ | 10,877.3 |
|
See Notes to Consolidated Financial Statements.
MALLINCKRODT PLC
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in millions)
| | | Fiscal Year | Fiscal Year |
| 2016 | | 2015 | | 2014 | 2019 | | 2018 | | 2017 |
Cash Flows From Operating Activities: | | | | | | | | | | |
Net income (loss) | $ | 643.7 |
| | $ | 324.7 |
| | $ | (319.3 | ) | |
Net (loss) income | | $ | (996.5 | ) | | $ | (3,607.0 | ) | | $ | 2,134.4 |
|
Adjustments to reconcile net cash provided by operating activities: | | | | | | | | | | |
Depreciation and amortization | 834.5 |
| | 672.5 |
| | 275.9 |
| 951.1 |
| | 852.1 |
| | 808.3 |
|
Share-based compensation | 42.9 |
| | 117.0 |
| | 67.7 |
| 33.8 |
| | 34.6 |
| | 59.2 |
|
Deferred income taxes | (432.9 | ) | | (191.6 | ) | | (107.5 | ) | (604.3 | ) | | (541.5 | ) | | (1,744.1 | ) |
Non-cash impairment charges | 16.9 |
| | — |
| | 381.2 |
| 388.0 |
| | 3,893.1 |
| | 63.7 |
|
Inventory provisions | 29.2 |
| | — |
| | 32.1 |
| 18.0 |
| | 37.9 |
| | 34.1 |
|
Gain on disposal of discontinued operations | (95.3 | ) | | — |
| | — |
| |
Losses (gains) on divestiture | | 33.5 |
| | 0.8 |
| | (418.1 | ) |
Gain on debt extinguishment, net | | (466.6 | ) | | (8.5 | ) | | (8.3 | ) |
Other non-cash items | 29.6 |
| | (59.6 | ) | | (23.6 | ) | (65.7 | ) | | (42.4 | ) | | (13.1 | ) |
Changes in assets and liabilities, net of the effects of acquisitions: | | | | | | | | | | |
Accounts receivable, net | 31.2 |
| | 0.7 |
| | (51.3 | ) | 31.6 |
| | (145.8 | ) | | (16.2 | ) |
Inventories | (17.3 | ) | | 61.3 |
| | 56.0 |
| (23.1 | ) | | 63.1 |
| | (23.6 | ) |
Accounts payable | (9.7 | ) | | 20.4 |
| | (32.9 | ) | 6.7 |
| | 24.6 |
| | (25.8 | ) |
Income taxes | 93.9 |
| | 30.2 |
| | (54.8 | ) | (2.1 | ) | | 99.0 |
| | (34.2 | ) |
Opioid-related litigation settlement liability | | 1,600.0 |
| | — |
| | — |
|
Other | 17.9 |
| | (79.2 | ) | | 149.9 |
| (161.5 | ) | | 5.5 |
| | (89.0 | ) |
Net cash provided by operating activities | 1,184.6 |
| | 896.4 |
| | 373.4 |
| |
Net cash from operating activities | | 742.9 |
| | 665.5 |
| | 727.3 |
|
Cash Flows From Investing Activities: | | | | | | | | | | |
Capital expenditures | (182.9 | ) | | (148.0 | ) | | (127.8 | ) | (133.0 | ) | | (127.0 | ) | | (186.1 | ) |
Acquisitions and intangibles, net of cash acquired | (245.4 | ) | | (2,154.7 | ) | | (2,793.8 | ) | |
Proceeds from disposal of discontinued operations, net of cash | 267.0 |
| | — |
| | — |
| |
Restricted cash | 47.3 |
| | 3.1 |
| | 4.1 |
| |
Acquisitions, net of cash acquired | | — |
| | (699.9 | ) | | (76.3 | ) |
Proceeds from divestiture, net of cash | | 95.1 |
| | 313.0 |
| | 576.9 |
|
Other | 6.0 |
| | 3.0 |
| | 26.7 |
| 29.6 |
| | 33.6 |
| | 3.9 |
|
Net cash used in investing activities | (108.0 | ) | | (2,296.6 | ) | | (2,890.8 | ) | |
Net cash from investing activities | | (8.3 | ) | | (480.3 | ) | | 318.4 |
|
Cash Flows From Financing Activities: | | | | | | | | | | |
Issuance of external debt | 98.3 |
| | 3,010.0 |
| | 3,043.2 |
| 695.0 |
| | 690.3 |
| | 1,465.0 |
|
Repayment of external debt and capital leases | (568.6 | ) | | (1,848.4 | ) | | (34.8 | ) | |
Excess tax benefit from share-based compensation | — |
| | 34.1 |
| | 8.9 |
| |
Repayment of external debt | | (945.1 | ) | | (1,693.6 | ) | | (917.2 | ) |
Debt financing costs | (0.1 | ) | | (39.9 | ) | | (71.7 | ) | (10.1 | ) | | (12.1 | ) | | (12.7 | ) |
Proceeds from exercise of share options | 14.0 |
| | 34.4 |
| | 25.8 |
| 0.6 |
| | 1.0 |
| | 4.1 |
|
Repurchase of shares | (652.9 | ) | | (92.2 | ) | | (17.5 | ) | (2.6 | ) | | (57.5 | ) | | (651.7 | ) |
Other | (53.0 | ) | | (28.1 | ) | | — |
| (17.9 | ) | | (23.1 | ) | | (17.7 | ) |
Net cash (used in) provided by financing activities | (1,162.3 | ) | | 1,069.9 |
| | 2,953.9 |
| |
Net cash from financing activities | | (280.1 | ) | | (1,095.0 | ) | | (130.2 | ) |
Effect of currency rate changes on cash | 0.3 |
| | (11.6 | ) | | (4.2 | ) | 0.6 |
| | (1.8 | ) | | 2.5 |
|
Net (decrease) increase in cash and cash equivalents | (85.4 | ) | | (341.9 | ) | | 432.3 |
| |
Cash and cash equivalents at beginning of period | 365.9 |
| | 707.8 |
| | 275.5 |
| |
Net change in cash, cash equivalents and restricted cash | | 455.1 |
| | (911.6 | ) | | 918.0 |
|
Cash, cash equivalents and restricted cash at beginning of period | | 367.5 |
| | 1,279.1 |
| | 361.1 |
|
Cash, cash equivalents and restricted cash at end of period | | $ | 822.6 |
| | $ | 367.5 |
| | $ | 1,279.1 |
|
| | | | | | |
Cash and cash equivalents at end of period | $ | 280.5 |
| | $ | 365.9 |
| | $ | 707.8 |
| $ | 790.9 |
| | $ | 348.9 |
| | $ | 1,260.9 |
|
Restricted cash included in other long-term assets at end of period | | 31.7 |
| | 18.6 |
| | 18.2 |
|
Cash, cash equivalents and restricted cash at end of period | | $ | 822.6 |
| | $ | 367.5 |
| | $ | 1,279.1 |
|
| | | | | | | | | | |
Supplemental Disclosures of Cash Flow Information: | | | | | | | | | | |
Cash paid for interest | $ | 332.4 |
| | $ | 200.5 |
| | $ | 57.2 |
| $ | 314.2 |
| | $ | 309.7 |
| | $ | 339.1 |
|
Cash paid for income taxes, net | 165.4 |
| | 123.8 |
| | 128.0 |
| 30.7 |
| | 12.4 |
| | 73.4 |
|
See Notes to Consolidated Financial Statements.
MALLINCKRODT PLC
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
(in millions)
| | | Ordinary Shares | | Treasury Shares | | Additional Paid-In Capital | | Retained Earnings | | Accumulated Other Comprehensive Income | | Total Shareholders' Equity | Ordinary Shares | | Treasury Shares | | Additional Paid-In Capital | | Retained Earnings (Deficit) | | Accumulated Other Comprehensive Loss | | Total Shareholders' Equity |
| Number | | Par Value | | Number | | Amount | | Number | | Par Value | | Number | | Amount | |
Balance at September 27, 2013 | 57.7 |
| | $ | 11.5 |
| | — |
| | $ | — |
| | $ | 1,102.1 |
| | $ | 33.5 |
| | $ | 108.5 |
| | $ | 1,255.6 |
| |
Net loss | — |
| | — |
| | — |
| | — |
| | — |
| | (319.3 | ) | | — |
| | (319.3 | ) | |
Currency translation adjustments | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (27.6 | ) | | (27.6 | ) | |
Change in derivatives, net of tax | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 0.5 |
| | 0.5 |
| |
Minimum pension liability, net of tax | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (15.7 | ) | | (15.7 | ) | |
Ordinary shares issued in connection with the Questcor Acquisition | 57.3 |
| | 11.4 |
| | — |
| | — |
| | 3,968.2 |
| | — |
| | — |
| | 3,979.6 |
| |
Share options exercised | 0.8 |
| | 0.2 |
| | — |
| | — |
| | 25.6 |
| | — |
| | — |
| | 25.8 |
| |
Vesting of restricted shares | 0.4 |
| | 0.1 |
| | — |
| | — |
| | (0.1 | ) | | — |
| | — |
| | — |
| |
Excess tax benefit from share-based compensation | — |
| | — |
| | — |
| | — |
| | 8.9 |
| | — |
| | — |
| | 8.9 |
| |
Share-based compensation | — |
| | — |
| | — |
| | — |
| | 67.7 |
| | — |
| | — |
| | 67.7 |
| |
Repurchase of ordinary shares | — |
| | — |
| | 0.2 |
| | (17.5 | ) | | — |
| | — |
| | — |
| | (17.5 | ) | |
Balance at September 26, 2014 | 116.2 |
| | $ | 23.2 |
| | 0.2 |
| | $ | (17.5 | ) | | $ | 5,172.4 |
| | $ | (285.8 | ) | | $ | 65.7 |
| | $ | 4,958.0 |
| |
Balance as of December 30, 2016 | | 118.2 |
| | $ | 23.6 |
| | 13.5 |
| | $ | (919.8 | ) | | $ | 5,424.0 |
| | $ | 529.0 |
| | $ | (72.5 | ) | | $ | 4,984.3 |
|
Impact of accounting standard adoptions | | — |
| | — |
| | — |
| | — |
| | — |
| | (72.1 | ) | | — |
| | (72.1 | ) |
Net income | — |
| | — |
| | — |
| | — |
| | — |
| | 324.7 |
| | — |
| | 324.7 |
| — |
| | — |
| | — |
| | — |
| | — |
| | 2,134.4 |
| | — |
| | 2,134.4 |
|
Currency translation | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (70.8 | ) | | (70.8 | ) | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 11.3 |
| | 11.3 |
|
Change in derivatives, net of tax | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 0.4 |
| | 0.4 |
| — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 1.0 |
| | 1.0 |
|
Minimum pension liability, net of taxes | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 5.6 |
| | 5.6 |
| |
Minimum pension liability, net of tax | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 45.8 |
| | 45.8 |
|
Unrecognized gain on investments | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 1.5 |
| | 1.5 |
|
Share options exercised | 1.2 |
| | 0.2 |
| | — |
| | — |
| | 34.2 |
| | — |
| | — |
| | 34.4 |
| 0.1 |
| | — |
| | — |
| | — |
| | 4.1 |
| | — |
| | — |
| | 4.1 |
|
Vesting of restricted shares | 1.3 |
| | 0.3 |
| | — |
| | — |
| | (0.3 | ) | | — |
| | — |
| | — |
| 0.4 |
| | 0.1 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 0.1 |
|
Shares canceled | (1.2 | ) | | (0.2 | ) | | — |
| | — |
| | 0.2 |
| | — |
| | — |
| | — |
| (26.5 | ) | | (5.3 | ) | | (26.5 | ) | | — |
| | 5.3 |
| | — |
| | — |
| | — |
|
Excess tax benefit from share-based compensation | — |
| | — |
| | — |
| | — |
| | 34.1 |
| | — |
| | — |
| | 34.1 |
| |
Share-based compensation | — |
| | — |
| | — |
| | — |
| | 117.0 |
| | — |
| | — |
| | 117.0 |
| — |
| | — |
| | — |
| | — |
| | 59.2 |
| | — |
| | — |
| | 59.2 |
|
Reissuance of Treasury shares | | — |
| | — |
| | — |
| | 6.8 |
| | — |
| | (2.7 | ) | | — |
| | 4.1 |
|
Repurchase of shares | — |
| | — |
| | 1.0 |
| | (92.2 | ) | | — |
| | — |
| | — |
| | (92.2 | ) | — |
| | — |
| | 18.9 |
| | (651.7 | ) | | — |
| | — |
| | — |
| | (651.7 | ) |
Balance at September 25, 2015 | 117.5 |
| | $ | 23.5 |
| | 1.2 |
| | $ | (109.7 | ) | | $ | 5,357.6 |
| | $ | 38.9 |
| | $ | 0.9 |
| | $ | 5,311.2 |
| |
Net income | — |
| | — |
| | — |
| | — |
| | — |
| | 643.7 |
| | — |
| | 643.7 |
| |
Currency translation adjustments | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (58.6 | ) | | (58.6 | ) | |
Balance as of December 29, 2017 | | 92.2 |
| | $ | 18.4 |
| | 5.9 |
| | $ | (1,564.7 | ) | | $ | 5,492.6 |
| | $ | 2,588.6 |
| | $ | (12.9 | ) | | $ | 6,522.0 |
|
Impact of accounting standard adoptions | | — |
| | — |
| | — |
| | — |
| | — |
| | 2.6 |
| | (1.5 | ) | | 1.1 |
|
Net loss | | — |
| | — |
| | — |
| | — |
| | — |
| | (3,607.0 | ) | | — |
| | (3,607.0 | ) |
Currency translation | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (12.2 | ) | | (12.2 | ) |
Change in derivatives, net of tax | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 0.5 |
| | 0.5 |
| — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 0.7 |
| | 0.7 |
|
Minimum pension liability, net of tax | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (28.4 | ) | | (28.4 | ) | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 1.6 |
| | 1.6 |
|
Share options exercised | 0.4 |
| | 0.1 |
| | — |
| | — |
| | 13.9 |
| | — |
| | — |
| | 14.0 |
| — |
| | — |
| | — |
| | — |
| | 1.0 |
| | — |
| | — |
| | 1.0 |
|
Vesting of restricted shares | 0.2 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| 0.5 |
| | 0.1 |
| | 0.1 |
| | (2.3 | ) | | — |
| | — |
| | — |
| | (2.2 | ) |
Excess tax benefit from share-based compensation | — |
| | — |
| | — |
| | — |
| | (1.7 | ) | | — |
| | — |
| | (1.7 | ) | |
Share-based compensation | — |
| | — |
| | — |
| | — |
| | 42.9 |
| | — |
| | — |
| | 42.9 |
| — |
| | — |
| | — |
| | — |
| | 34.6 |
| | — |
| | — |
| | 34.6 |
|
Repurchase of ordinary shares | — |
| | — |
| | 9.8 |
| | (652.9 | ) | | — |
| | — |
| | — |
| | (652.9 | ) | |
Balance at September 30, 2016 | 118.1 |
| | $ | 23.6 |
| | 11.0 |
| | $ | (762.6 | ) | | $ | 5,412.7 |
| | $ | 682.6 |
| | $ | (85.6 | ) | | $ | 5,270.7 |
| |
Reissuance of Treasury shares | | — |
| | — |
| | (0.2 | ) | | 4.8 |
| | — |
| | (1.9 | ) | | — |
| | 2.9 |
|
Repurchase of shares | | — |
| | — |
| | 3.6 |
| | (55.2 | ) | | — |
| | — |
| | — |
| | (55.2 | ) |
Balance as of December 28, 2018 | | 92.7 |
| | $ | 18.5 |
| | 9.4 |
| | $ | (1,617.4 | ) | | $ | 5,528.2 |
| | $ | (1,017.7 | ) | | $ | (24.3 | ) | | $ | 2,887.3 |
|
Impact of accounting standard adoptions | | — |
| | — |
| | — |
| | — |
| | — |
| | (0.5 | ) | | 0.5 |
| | — |
|
Net loss | | — |
| | — |
| | — |
| | — |
| | — |
| | (996.5 | ) | | — |
| | (996.5 | ) |
Currency translation | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 18.3 |
| | 18.3 |
|
Change in derivatives, net of tax | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 1.8 |
| | 1.8 |
|
Minimum pension liability, net of tax | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (4.2 | ) | | (4.2 | ) |
Share options exercised | | — |
| | — |
| | — |
| | — |
| | 0.6 |
| | — |
| | — |
| | 0.6 |
|
Vesting of restricted shares | | 0.8 |
| | 0.2 |
| | 0.2 |
| | (2.6 | ) | | (0.1 | ) | | — |
| | — |
| | (2.5 | ) |
Share-based compensation | | — |
| | — |
| | — |
| | — |
| | 33.8 |
| | — |
| | — |
| | 33.8 |
|
Reissuance of Treasury shares | | — |
| | — |
| | (0.2 | ) | | 4.3 |
| | — |
| | (2.2 | ) | | — |
| | 2.1 |
|
Balance at December 27, 2019 | | 93.5 |
| | $ | 18.7 |
| | 9.4 |
| | $ | (1,615.7 | ) | | $ | 5,562.5 |
| | $ | (2,016.9 | ) | | $ | (7.9 | ) | | $ | 1,940.7 |
|
See Notes to Consolidated Financial Statements.
MALLINCKRODT PLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in millions, expect share data and where indicated)
|
| |
1. | Background and Basis of Presentation |
Background
Mallinckrodt plc and itsis a global business of multiple wholly owned subsidiaries (collectively, "Mallinckrodt" or "the Company"), is a global business that develops, manufactures, marketsdevelop, manufacture, market and distributesdistribute specialty pharmaceutical products and therapies. Therapeutic areasAreas of focus include autoimmune and rare diseasediseases in specialty areas (includinglike neurology, rheumatology, nephrology, ophthalmologypulmonology and pulmonology);ophthalmology; immunotherapy and neonatal respiratory critical care therapies; analgesics and hemostasis products and central nervous system drugs.
On August 24, 2016, the Company announced that it had entered into a definitive agreement to sell its Nuclear Imaging business to IBA Molecular ("IBAM"), which is expected to be completed during the first half of calendar 2017. The Nuclear Imaging business was deemed to be held for sale. As a result, prior year balances have been recast to present the financial results of the Nuclear Imaging business as a discontinued operation.gastrointestinal products.
The Company completed the sale of the contrast media and delivery systems ("CMDS") business on November 27, 2015. The financial results of this business are presented as a discontinued operation.
Theoperates in two reportable segments, which are further described below:
| |
• | Specialty Brands includes innovative specialty pharmaceutical brands; and |
| |
• | Specialty Generics includes niche specialty generic drugs and active pharmaceutical ingredients "("API(s)"). |
Specialty Brands produces and markets branded pharmaceutical products and therapies; and
Specialty Generics produces and markets specialty generic pharmaceuticals and active pharmaceutical ingredients ("API") consisting of biologics, medicinal opioids, synthetic controlled substances, acetaminophen and other active ingredients.
In May 2015, the Board of Directors of Mallinckrodt plc approved the migration of the Company’sThe Company is incorporated in Ireland, with its principal executive offices from Ireland tolocated in the United Kingdom.Kingdom ("U.K."). The Company remains incorporated in Ireland and continues to be subject to United States ("U.S.") Securities and Exchange Commission ("SEC") reporting requirements and the applicable corporate governance rules of the New York Stock Exchange.
Mallinckrodt plc was incorporated in Ireland on January 9, 2013 for the purpose of holding the Pharmaceuticals business of Covidien plc ("Covidien"), which was subsequently acquired by Medtronic plc. On June 28, 2013, Covidien shareholders of record received one ordinary share of Mallinckrodt for every eight ordinary shares of Covidien held as of the record date, June 19, 2013, and the Pharmaceuticals business of Covidien was transferred to Mallinckrodt plc, thereby completing its legal separation from Covidien ("the Separation").
Basis of Presentation
The consolidated financial statements have been prepared in U.S. dollars and in accordance with accounting principles generally accepted in the U.S. ("GAAP"). The preparation of the consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amount of assets and liabilities, disclosure of contingent assets and liabilities and the reported amounts of revenues and expenses. Actual results may differ from those estimates. The consolidated financial statements include the accounts of the Company, its wholly-ownedwholly owned subsidiaries and entities in which they own or control more than fifty percent50.0% of the voting shares, or have the ability to control through similar rights. All intercompany balances and transactions have been eliminated in consolidation and all normal recurring adjustments necessary for a fair presentation have been included in the results reported.
The results of entities disposed of are included in the consolidated financial statements up to the date of disposal and, where appropriate, these operations have been reflected as discontinued operations. Divestitures of product lines not meeting the criteria for discontinued operations have been reflected in operating (loss) income. All intercompany balances and transactions have been eliminated
During fiscal 2019, the Company experienced a change in consolidation and, in the opinion of management, all normal recurring adjustments necessary for a fair presentation have been included inits reportable segments, which primarily served to move the results reported.
Under Irish law, the Company can only pay dividends and repurchase shares out of distributable reserves, as discussed further in the Company's information statement filed with the SEC as Exhibit 99.2related to Amitiza® (lubiprostone) ("Amitiza") to the Company's Current Report on Form 8-K filed on July 1, 2013. Upon completion ofSpecialty Brands segment from the Separation,Specialty Generics segment. All prior period segment information has been recast to reflect the Company did not have any distributable reserves. On July 22, 2013, the Company filed a petition with the High Court of Ireland seeking the court's confirmation of a reductionrealignment of the Company's share premium so that it can be treated as distributable reserves for the purposes of Irish law. On September 9, 2013, the High Court of Ireland approved this petition and the High Court's order and minutes were filed with the Registrar of Companies. Upon this filing, the Company's share premium was treated as distributable reserves and the share premium balance was reclassified into additional paid-in capital withinreportable segments on a comparable basis.
Certain prior-period amounts on the consolidated balance sheet. Net income subsequent to the Separation has been included in retained earnings and is included in distributable reserves.
Beginning in the first quarter of fiscal year 2016, we revised the presentation of certain medical affairs costs to better align with industry practice, which were previously included in selling, general and administrative ("SG&A") expenses and are now included in research and development ("R&D") expenses. As a result, $56.4 million and $22.5 million of expenses previously included in SG&A for the fiscal years ended September 25, 2015 and September 26, 2014, respectively,financial statements have been classified as R&D expensesreclassified to conform to this change. No other financial statement line items were impacted by this change in classification.current-period presentation.
Fiscal Year
The Company reports its results based on a "52-53 week" year ending on the last Friday of September.December. Fiscal 2016 consisted of 53 weeks2019, 2018 and 2015 and 20142017 each consisted of 52 weeks. Unless otherwise indicated, fiscal 2016, 20152019, 2018 and 20142017 refer to the Company's fiscal years ended September 30, 2016, September 25, 2015December 27, 2019, December 28, 2018 andSeptember 26, 2014, respectively.
On May 17, 2016, the Board of Directors of the Company approved a change in the Company’s fiscal year end to the last Friday in December from the last Friday in September. The change in fiscal year will become effective for the Company’s 2017 fiscal year, which will commence on December 31, 2016 and end on December 29, 2017. As a result, the Company will have a transition period which commenced on October 1, 2016 and will end on December 30, 2016.2017, respectively.
|
| |
2. | Summary of Significant Accounting Policies |
Revenue Recognition
The Company recognizes revenue for product sales when title and risk of loss have transferred from the Company to the buyer, which may be upon shipment, delivery to the customer site, consumption of the product by the customer, or over the period in which the customer has access to the product and any related services, based on contract terms or legal requirements in non-U.S. jurisdictions. Product Sales Revenue
The Company sells its products through independent channels, including directlydirect to retail pharmacies, end user customers and through distributors who resell the products to retail pharmacies, institutions and end user customers. Certaincustomers, while certain products are sold and distributed directly to hospitals. ChargebacksThe Company also enters into arrangements with indirect customers, such as health care providers and payers, wholesalers, government agencies, institutions, managed care organizations and group purchasing organizations to establish contract pricing for certain products that provide for government-mandated and/or privately-negotiated rebates, represent credits that are providedsales
incentives, chargebacks, distribution service agreements fees, fees for services and administration fees and discounts with respect to certain distributors and customers for either the difference betweenpurchase of the Company's contracted price with a customer andproducts.
Reserve for Variable Considerations
Product sales are recorded at the distributor's invoice price paid to the Company or for contractually agreed volume price discounts. When the Company recognizes net sales it simultaneously records an adjustment to revenueprice (transaction price), which includes estimates of variable consideration for which reserves are established. These reserves result from estimated chargebacks, rebates, product returns and other sales deductions.deductions that are offered within contracts between the Company and its customers, health care providers and payers relating to the sale of the Company's products. These provisionsreserves are estimated based uponon the amounts earned or to be claimed on the related sales and are classified as reductions of accounts receivable (if the amount is payable to the customer) or a current liability (if the amount is payable to a party other than a customer). Where appropriate, these estimates take into consideration a range of possible outcomes that are probability-weighted for relevant factors such as the Company's historical experience, estimated future trends, estimated customer inventory levels, current contracted sales terms with customers, level of utilization of the Company's products and other competitive factors. Overall, these reserves reflect the Company's best estimate of the amount of consideration to which it is entitled based on the terms of the contract. The amount of variable consideration that is included in the transaction price may be constrained (reduced) and is included in the net sales price only to the extent that it is probable that a significant reversal in the amount of the cumulative revenue recognized will not occur in a future period. The Company adjusts these reserves for chargebacks, rebates, product returns and other sales deductions to reflect differences between estimated activity and actual experience. Such adjustments impact the amount of net sales recognized by the Company in the period of adjustment.
Product sales are recognized when the customer obtains control of the Company's product. Control is transferred either at a point in time, generally upon delivery to the customer site, or in the case of certain of the Company's products, over the period in which the customer has access to the product and related services. Revenue recognized over time is based upon either consumption of the product or passage of time based upon the Company's determination of the measure that best aligns with how the obligation is satisfied. The Company's considerations of why such measures provide a faithful depiction of the transfer of its products are as follows:
For those contracts whereby revenue is recognized over time based upon consumption of the product, the Company either has:
| |
1. | the right to invoice the customer in an amount that directly corresponds with the value to the customer of the Company's performance to date, for which the practical expedient to recognize in proportion to the amount it has the right to invoice has been applied, or |
| |
2. | the remaining goods and services to which the customer is entitled is diminished upon consumption. |
For those contracts whereby revenue is recognized over time based upon the passage of time, the benefit that the customer receives from unlimited access to the Company's product does not vary, regardless of consumption. As a result, the Company's obligation diminishes with the passage of time; therefore, ratable recognition of the transaction price over the contract period is the measure that best aligns with how the obligation is satisfied.
Transaction price allocated to the remaining performance obligations
The majority of the Company's contracts have a term of less than one year; therefore, the related disclosure of the amount of transaction price allocated to the performance obligations that are unsatisfied at period end has been omitted.
Cost to obtain a contract
As the majority of the Company's contracts are short-term in nature, sales commissions are generally expensed when incurred as the amortization period would have been less than one year. These costs are recorded within selling, general and administrative expense ("SG&A") in the consolidated statements of operations. For contracts that extend beyond one year, the incremental expense recognition matches the recognition of related revenue.
Costs to fulfill a contract
The Company capitalizes the costs associated with the devices used in the Company's portfolio of drug-device combination products, which are used in satisfaction of future performance obligations. Capital expenditures for these devices represent cash outflows for the Company's cost to produce the asset, which is classified in property, plant and equipment, net on the consolidated balance sheets and expensed to cost of sales over the useful life of the equipment.
Product Royalty Revenues
The Company licenses certain rights to Amitiza to a third party in exchange for royalties on net sales of the product. The Company recognizes such royalty revenue as the related sales occur.
Contract Balances
Accounts receivable are recorded when the right to consideration becomes unconditional. Payments received from customers are typically based upon payment terms of 30 days. The Company does not maintain contract asset balances aside from the accounts receivable balance as presented on the consolidated balance sheets as costs to obtain a contract are expensed when incurred as the amortization period would have been less than one year. These costs are recorded within SG&A on the consolidated statements of operations. Contract liabilities are recorded when cash payments are received in advance of the Company's performance, including amounts which are refundable.
Taxes collected from customers relating to product sales and remitted to governmental authorities are accounted for on a net basis. Accordingly, such taxes are excluded from both net sales and expenses.
Shipping and Handling Costs
Shipping costs, which are costs incurred to physically move product from the Company's premises to the customer's premises, are classified as selling, general and administrative expenses.SG&A. Handling costs, which are costs incurred to store, move and prepare product for shipment, are classified as cost of sales. Shipping costs included in selling, general and administrativeSG&A expenses in continuing operations were $12.4 million, $11.6 million and $11.8 million in fiscal 2016, 2015 and 2014, respectively.as follows:
|
| | | | | | | | | | | |
| Fiscal Year |
| 2019 | | 2018 | | 2017 |
Shipping costs | $ | 17.6 |
| | $ | 12.8 |
| | $ | 13.9 |
|
Research and Development
Internal research and development costs are expensed as incurred. Research and development ("R&D") expenses include salary and benefits, allocated overhead and occupancy costs, clinical trial and related clinical manufacturing costs, contract services, medical affairs and other costs.
UpfrontFrom time to time, the Company has entered into licensing or collaborative agreements with third parties from time to time to develop a new drug candidate or intellectual property asset. These agreements may include R&D, marketing, promotion and selling activities to be performed by one or all parties involved. These collaborations generally include upfront, milestone and royalty or profit sharing payments contingent upon future events tied to the developmental and commercial success of the asset. In general, upfront and milestone payments made to third parties under license arrangementsthese agreements are expensed as incurred up to the point of regulatory approval of the product. Milestone payments made to third parties upon or subsequent to regulatory approval are capitalized as an intangible asset and amortized to cost of sales over the estimated useful life of the related product.
Currency Translation
For the Company's non-U.S. subsidiaries that transact in a functional currency other than U.S. dollars, assets and liabilities are translated into U.S. dollars using fiscal year-end exchange rates. Revenues and expenses are translated at the average exchange rates in effect during the related month. The net effect of these translation adjustments is shown in the consolidated financial statements as a component of accumulated other comprehensive income. For subsidiaries operating in highly inflationary environments or where the functional currency is different from the local currency, non-monetary assets and liabilities are translated at the rate of exchange in effect on the date the assets and liabilities were acquired or assumed, while monetary assets and liabilities are translated at fiscal year-end exchange rates. Translation adjustments of these subsidiaries are included in net income. Gains and losses resulting from foreign currency transactions are included in net income. During fiscal 2016,(loss) income ("AOCI"). From time to time, the Company had $3.6 million of foreign currency losses, and during fiscal 2015 and 2014, the Company had $31.6 million and $6.0 million of foreign currency gains, respectively, included within net income from continuing operations. The Companyhas entered into derivative instruments to mitigate the exposure of movements in certain of these foreign currency transactions. Gains and losses resulting from foreign currency transactions and recognized a $0.2 million gainare included in fiscal 2016, a $24.8 million loss in fiscal 2015, and a $5.8 million loss in fiscal 2014 within net income from continuing operations.(loss) income.
Cash and Cash Equivalents
The Company classifies cash on hand and deposits in banks, including commercial paper, money market accounts and other investments it may hold from time to time, with an original maturity to the Company of three months or less, as cash and cash equivalents.
Accounts Receivable and Allowance for Doubtful Accounts
Trade accounts receivable are presented net of an allowance for doubtful accounts. The allowance for doubtful accounts reflects an estimate of losses inherent in the Company's accounts receivable portfolio determined on the basis of historical experience, specific allowances for known troubled accounts and other available evidence. Accounts receivable are written off when management determines they are uncollectible. Trade accounts receivable are also presented net of reserves related to chargebacks and non-branded rebates payable to customers forwith whom we havethe Company has trade accounts receivable and the right of offset exists.
Inventories
Inventories are recorded at the lower of cost or marketnet realizable value, primarily using the first-in, first-out convention. The Company reduces the carrying value of inventories for those items that are potentially excess, obsolete or slow-moving based on changes in customer demand, technology developments or other economic factors.
Property, Plant and Equipment
Property, plant and equipment areis stated at cost. Major renewals and improvements are capitalized, while routine maintenance and repairs are expensed as incurred. Depreciation for property, plant and equipment, assets, other than land and construction in process, is generally based upon the following estimated useful lives, using the straight-line method:
|
| | | |
Buildings | 10 | to | 45 years |
Leasehold improvements | 1 | to | 20 years |
Capitalized software | 1 | to | 10 years |
Machinery and equipment | 1 | to | 20 years |
The Company capitalizes certain computer software and development costs incurred in connection with developing or obtaining software for internal use.
Upon retirement or other disposal of property, plant and equipment, the cost and related amount of accumulated depreciation are eliminated from the asset and accumulated depreciation accounts, respectively. The difference, if any, between the net asset value and the proceeds is included in net income.
The Company assesses the recoverability of assets or asset groups using undiscounted cash flows whenever events or circumstances indicate that the carrying value of an asset or asset group may not be recoverable. If an asset or asset group is found to be impaired, the amount recognized for impairment is equal to the difference between the carrying value of the asset or asset group and its fair value.
Leases
The Company assesses all contracts at inception to determine whether a lease exists. The Company leases office space, manufacturing and warehousing facilities, equipment and vehicles, which are generally operating leases. Leases with an initial term of 12 months or less are not recorded on the consolidated balance sheet; the Company recognizes lease expense for these leases on a straight-line basis over the lease term. The Company has lease agreements with lease and non-lease components, which are accounted for separately. The Company's lease agreements generally do not contain variable lease payments or any material residual value guarantees.
Lease assets and liabilities are recognized based on the present value of the future minimum lease payments over the lease term as of the commencement date. As the Company's leases do not generally provide an implicit rate, the Company utilized its incremental borrowing rate based on the information available at commencement date in determining the present value of future lease payments. The Company used the incremental borrowing rate as of December 29, 2018 for leases that commenced prior to that date. Most leases include one or more options to terminate or renew, with renewal terms that can extend the lease term from one to five years. The exercise of lease renewal options is at the Company's sole discretion. Termination and renewal options are included within the lease assets and liabilities only to the extent they are reasonably certain. Refer to Note 3 for further information regarding the adoption of the lease accounting standard in fiscal 2019.
Acquisitions
Amounts paid for acquisitions that meet the criteria for business combination accounting are allocated to the tangible assets acquired and liabilities assumed based on their estimated fair values at the date of acquisition. The Company then allocates the purchase price in excess of net tangible assets acquired to identifiable intangible assets, including purchased research and development.R&D. The fair value of identifiable intangible assets is based on detailed valuations. The Company allocates any excess purchase price over the fair value of the net tangible and intangible assets acquired to goodwill.
The Company's purchased research and developmentR&D represents the estimated fair value as of the acquisition date of in-process projects that have not reached technological feasibility. The primary basis for determining technological feasibility of these projects is obtaining regulatory approval.
The fair value of in-process research and development ("IPR&D") is determined using the discounted cash flow method. In determining the fair value of IPR&D, the Company considers, among other factors, appraisals, the stage of completion of the projects, the technological feasibility of the projects, whether the projects have an alternative future use and the estimated residual cash flows that could be generated from the various projects and technologies over their respective projected economic lives. The discount rate used includes a rate of return whichthat accounts for the time value of money, as well as risk factors that reflect the economic risk that the cash flows projected may not be realized.
The fair value attributable to IPR&D projects at the time of acquisition is capitalized as an indefinite-lived intangible asset and tested annually for impairment until the project is completed or abandoned. Upon completion of the project, the indefinite-lived intangible asset is then accounted for as a finite-lived intangible asset and amortized on a straight-line basis over its estimated useful life. If the project is abandoned, the indefinite-lived intangible asset is charged to expense.
Certain asset acquisitions or license agreements may not meet the criteria for a business combination. The Company accounts for these transactions as asset acquisitions and recognizes the identifiable assets acquired, the liabilities assumed, and any noncontrolling interest in the acquired entity. Any initial up-front payments incurred in connection with the acquisition or licensing of IPR&D product candidates that do not meet the definition of a business are treated as R&D expense.
Goodwill and Other Intangible Assets
During fiscal 2018, the Company's annual goodwill impairment analysis resulted in the recognition of a full goodwill impairment of $3,672.8 million related to the Specialty Brands reporting unit. As a result, the Company did not have a goodwill balance during fiscal 2019. Prior to this full impairment, the Company tested goodwill on the first day of the fourth quarter of each year for impairment or whenever events or changes in circumstances indicated that the carrying value may not be recoverable. Goodwill represents the excess of the purchase price of an acquired entity over the amounts assigned to assets and liabilities assumed in a business combination. The Company tests goodwill for impairment duringon the first day of the fourth quarter of each fiscal year, or more frequently if impairment indicators arise.whenever events or changes in circumstances indicate that the carrying value may not be recoverable. The impairment test is comprised of a two-step approach. The first step requires a comparison ofcomparing the carrying value of thea reporting unitsunit to theits estimated fair value of these units.value. The Company estimates the fair value of itsa reporting unitsunit through internal analyses and valuation, utilizing an income approach (a level three measurement technique) based on the present value of future cash flows. The fair value of the Company's reporting units is reconciled to its share price and market capitalization as a corroborative step. If the carrying value of a reporting unit exceeds its fair value, the Company will performrecognize the second stepexcess of the goodwill impairment test to measure the amount of impairment loss, if any. The second step of the goodwill impairment test compares the implied faircarrying value of a reporting unit's goodwill with its carrying value. The implied fair value of goodwill is determined in the same manner that the amount of goodwill recognized in a business combination is determined, with the Company allocatingover the fair value ofas a reporting unit to all of the assets and liabilities of that unit, including intangible assets, as if the reporting unit had been acquired in a business combination. Any excess of the value of a reporting unit over the amounts assigned to its assets and liabilities is the implied fair value of goodwill.goodwill impairment loss.
Intangible assets acquired in a business combination are recorded at fair value, while intangible assets acquired in other transactions are recorded at cost. Intangible assets with finite useful lives are subsequently amortized, generally using the straight-line method, over the following estimated useful lives of the assets. The estimated useful lives of the Company's intangible assets except for customer relationships which are amortized overas of December 27, 2019 were the estimated pattern of benefit from these relationships:following:
|
| | | |
Completed technology | 58 | to | 25 years |
License agreements | 8 | to | 30 years |
Trademarks | 1322 | to | 30 years |
Customer relationships | | | 12 years |
Amortization expense related to completed technology and certain other intangible assets is included in cost of sales, while amortization expense related to intangible assets that contribute to the Company's ability to sell, market and distribute products is included in selling, general and administrative expenses.SG&A.
When a triggering event occurs, we evaluatethe Company evaluates potential impairment of finite-lived intangible assets by first comparing undiscounted cash flows associated with the asset, or the asset group they are part of, to its carrying value. If the carrying value is greater than the undiscounted cash flows, the amount of potential impairment is measured by comparing the fair value of the assets, or the asset group, they are part of, with their carrying value. The fair value of the intangible asset, or the asset group, they are part of, is estimated using an income approach. If the fair value is less than the carrying value of the intangible asset, or the asset group, they are part of, the amount recognized for impairment is equal to the difference between the carrying value of the asset and the fair value of the asset. The Company assesses the remaining useful life and the recoverability of finite-lived intangible assets whenever events or circumstances indicate that the carrying value of an asset may not be recoverable. The Company annually tests the indefinite-lived
intangible assets for impairment, or whenever events or changes in circumstances indicate that the carrying value may not be recoverable by comparingeither a qualitative or income approach. The Company will compare the fair value of the assets estimated using an income approach, with their carrying value and recordsrecord an impairment when the carrying value exceeds the fair value.
Contingencies
The Company is subject to various patent infringement claims, product liability matters, government investigations, environmental liabilitymatters, employee disputes, contractual disputes and other commercial disputes, and other legal proceedings in the ordinary course of business.business as further discussed in Note 19. The Company records accruals for contingencies when it is probable that a liability has been incurred and the amount can be reasonably estimated. The Company discounts environmental liabilities using a risk-free rate of return when the obligation is fixed or reasonably determinable. The impact of the discount in the consolidated balance sheets was not material in any period presented. Legal fees, other than those pertaining to environmental and asbestos matters, are expensed as incurred. Insurance recoveries related to potential claims are recognized up to the amount of the recorded liability when coverage is confirmed and the estimated recoveries are probable of payment. Assets and liabilities are not netted for financial statement presentation.
Share-Based Compensation
The Company recognizes the cost of employee services received in exchange for awards of equity instruments based on the grant-date fair value of those awards. That cost is recognized over the period during which an employee is required to provide service in exchange for the award, the requisite service period (generally the vesting period). For more information about our share-based awards, refer
Restructuring
The Company recognizes charges associated with the Company's Board of Directors approved restructuring programs designed to Note 15.transform its business and improve its cost structure. Restructuring charges can include severance costs, infrastructure charges, distributor contract cancellations and other items. The Company accrues for costs when they are probable and reasonably estimable.
Income Taxes
Deferred tax assets and liabilities are recognized for the expected future tax consequences of events that have been reflected in the consolidated financial statements. Deferred tax assets and liabilities are determined based on the differences between the book and tax bases of assets and liabilities and operating loss carryforwards, using 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 net deferred tax assets if, based upon the available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized. Deferred tax liabilities are also recorded for deferred tax obligations related to installment sale arrangements. The deferral of tax payments to the IRSU.S. Internal Revenue Service ("IRS") are subject to interest, which is accrued and included within interest expense.
The Company determines whether it is more likely than not that a tax position will be sustained upon examination. The tax benefit of any tax position that meets the more-likely-than-not recognition threshold is calculated as the largest amount that is more than 50%50.0% likely of being realized upon resolution of the uncertainty. To the extent a full benefit is not expected to be realized on the uncertain tax position, an income tax liability is established. Interest and penalties on income tax obligations, associated with uncertain tax positions, are included in the provision for income taxes.
The calculation of the Company's tax liabilities involves dealing with uncertainties in the application of complex tax regulations in a multitude of jurisdictions across the Company's global operations. Due to the complexity of some of these uncertainties, the ultimate resolution may result in a payment that is materially different from current estimates of the tax liabilities. If the Company's estimate of tax liabilities proves to be less than the ultimate assessment, an additional charge to expense would result. If payment of these amounts ultimately proves to be less than the recorded amounts, the reversal of the liabilities may result in income tax benefits being recognized in the period when it is determined that the liabilities are no longer necessary. A significant portionRefer to Note 8 for further information regarding the classification of these potential tax liabilities are recordedsuch amounts in other income tax liabilities on the consolidated balance sheets as payment is not expected within one year.sheets.
|
| |
3. | Recently Issued Accounting Standards |
FASB issued ASU 2014-09, "Revenue from Contracts with Customers," in May 2014. Adopted
The issuance of ASU 2014-09 and International Financial Reporting Standards ("IFRS") 15, "Revenue from Contracts with Customers," completes the joint effort by FASB and the International Accounting Standards Board ("FASB") issued Accounting Standard Update ("ASU") 2018-02, "Income Statement - Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income," in February 2018. This ASU allows for a reclassification from AOCI to clarify the principles for recognizing revenue and develop a common revenue standard for GAAP and IFRS. Under the new guidance, an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services, applying the following steps: (1) identify the contract(s) with a customer; (2) identify the performance obligations in the contract; (3) determine the transaction price; (4) allocate the transaction price to the performance obligations in the contract; and (5) recognize revenue when (or as) the entity satisfies a performance obligation. The guidance is effectiveretained earnings for the Company in the first quarter of fiscal year 2018 (followingstranded tax effects arising from the change in fiscal year). The FASB subsequently issued additional ASUs to clarify the guidance of ASU 2014-09. The ASUs issued include ASU 2016-08, "Revenue from Contracts with Customers;" ASU
2016-10 "Revenue from Contracts with Customers, Identifying Performance Obligations and Licensing;" and ASU 2016-12, "Narrow-Scope Improvements and Practical Expedients." The Company is assessing the transition approach it will utilize and potential impact of adoption.
FASB issued ASU 2015-11, "Simplifying the Measurement of Inventory," in July 2015. The issuance of ASU 2015-11 is partreduction of the FASB's initiativeU.S. federal statutory income tax rate from 35.0% to more closely align the measurement of inventory between GAAP and IFRS. Under the new guidance, inventory must be measured at the lower of cost and net realizable value. Net realizable value is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. The guidance is effective for the Company in the first quarter of fiscal 2017 (following the change in fiscal year)21.0%. The Company does not anticipate the adoptionadopted this
standard as of this update to haveday 1 of fiscal 2019, which resulted in a material impact.
FASB issued ASU 2015-16, "Simplifying the Accounting for Measurement-Period Adjustments," in September 2015. This update requires an acquirer to recognize adjustments to the provisional amounts that are identified during the measurement period in the reporting period in which the adjusting amounts are determined. The amendments in this update require an entity to present separatelyreclassification between AOCI and retained deficit of $0.5 million and had no impact on the faceCompany's results of the income statementoperations or disclose in the notes the portion of the amount recorded in current period earnings by line item that would have been recorded in previous reporting periods if the adjustment to the provisional amounts had been recognized as of the acquisition date. This guidance is effective for the Company in the first quarter of fiscal 2017 (following the change in fiscal year). The update is not expected to have a material impact for historical acquisitions.financial position.
The FASB issued ASU 2015-17, "Balance Sheet Reclassification2017-07, "Compensation - Retirement Benefits: Improving the Presentation of Deferred Taxes,Net Periodic Pension Cost and Net Periodic Post Retirement Benefit Cost," in November 2015.March 2017. This update requires all deferred tax assetsthat the service cost component be disaggregated from the other components of net benefit cost. Service cost should be reported in the same line item or items as other compensation costs arising from services rendered by pertinent employees during the period. The other components of net benefit cost should be presented in the statement of operations separately from the service cost component and liabilities, along withoutside a subtotal of income from operations, if one is presented. The Company adopted this standard as of day 1 of fiscal 2018 which required retroactive application resulting in the reclassification of the following:
|
| | | |
| Fiscal Year |
| 2017 |
Cost of sales | $ | 1.2 |
|
Selling, general and administrative expenses | 71.2 |
|
Research and development expenses | 0.4 |
|
Other income (expense), net | $ | 72.8 |
|
The adoption of this standard did not result in any related valuation allowance,material changes to be classified as noncurrent on the consolidated balance sheets. Each jurisdiction will now only have one net noncurrent deferred tax asset or liability. The Company elected to early adopt this guidance as of September 30, 2016 on a prospective basis. As such, the Company reclassified $122.6 million of current deferred income taxes to noncurrent as of September 30, 2016.financial statements.
The FASB issued ASU 2016-02, "Leases," in February 2016. This updateASU was issued to increase transparency and comparability among organizations by recognizing all lease transactions (with terms in excess of 12 months) on the balance sheet as a lease liability and a right-of-use asset (as defined). Thisasset. The FASB subsequently issued additional ASUs to clarify the guidance is effective for theof ASU 2016-02 ("Topic 842"), as amended. The Company in the first quarteradopted this standard as of day 1 of fiscal 2019 (followingutilizing the changemodified transition approach expedient which allows an entity to elect not to recast its comparative periods in fiscal year). Upon adoption, the lessee will applyperiod of adoption. In addition, the Company elected to use the package of practical expedients permitted under the transition guidance within the new standard, using a modified retrospective approachwhich among other things, allowed the Company to carry forward the historical lease classification. The Company also elected the hindsight practical expedient to determine the lease term for leases existing at, or entered into after, the beginningleases. Adoption of the earliest comparative period presentednew standard resulted in the financial statements. The modified retrospective approach would not require any transition accountingrecording of additional lease assets and corresponding liabilities of $83.1 million and $99.7 million, respectively, as of December 29, 2018. Refer to Note 12 for leases that expired beforefurther details on the earliest comparative period presented. The Company is assessing the potential impact of this guidance.Company's leases.
The FASB issued ASU 2016-09, "Stock Compensation,2016-01, "Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities," in MarchJanuary 2016. This update simplifies severaladdresses certain aspects of recognition, measurement, presentation and disclosure of financial instruments. Under the accounting for share-based payment award transactions, including the income tax consequences, classification of awards as eithernew guidance, equity or liabilities, and classification of certain tax effects within the statement of cash flows. This guidance is effective for theinvestments, other than equity method investments, are to be measured at fair value with changes in fair value recognized through net income. The Company in the first quarter of fiscal 2017 (following the changeadopted this standard in fiscal year)2018, resulting in a $1.5 million increase to beginning retained earnings with an offsetting decrease to AOCI relating to the unrealized gain on its investment in Mesoblast Limited ("Mesoblast"). UponThe adoption the Company will recognize the incremental income tax expense or benefit related to share option exercises and restricted share unit vesting in the statement of income, whereas these tax effects are presently recognized directly in shareholders' equity. In addition, the incremental tax benefit associated with these events will be classified as a cash inflow from operating activity as compared with a financing activity, as required under current guidance.
The FASB issued ASU 2016-15, “Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments,” in August 2016 and ASU 2016-18 "Statement of Cash Flows (Topic 230): Restricted Cash," in November 2016. This update provides guidance for nine targeted clarifications with respect to how cash receipts and cash payments are classified in the statements of cash flows, with the objective of reducing diversity in practice. The guidance is effective for the Company in the first quarter of fiscal 2018 (following the change in fiscal year), with early adoption permitted. The Company is assessing the potential impact of this guidance.standard did not result in any material changes to the consolidated financial statements.
The FASB issued ASU 2016-16, "Income Taxes: Intra-Entity Transfers of Assets Other Than Inventory," in October 2016. This update simplifies the practice in how income tax consequences of an intra-entity transfer of an asset other than inventory should be recognized. Upon adoption, the entity must recognize such income tax consequences when the intra-entity transfer occurs rather than waiting until such time as the asset has been sold to an outside party. The guidance is effective for the Company in the first quarter of fiscal 2018 (following the change in fiscal year). The Company is assessing the potential impact of this guidance.
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| |
4. | Revenue from Contracts with Customers |
Product Sales Revenue
See Note 21 for presentation of the Company's net sales by product family.
Reserves for variable consideration
The following table reflects activity in the Company's sales reserve accounts:
|
| | | | | | | | | | | | | | | |
| Rebates and Chargebacks | | Product Returns | | Other Sales Deductions | | Total |
Balance as of December 29, 2017 | $ | 327.4 |
| | $ | 34.5 |
| | $ | 14.7 |
| | $ | 376.6 |
|
Provisions | 2,281.3 |
| | 39.3 |
| | 66.9 |
| | 2,387.5 |
|
Payments or credits | (2,254.4 | ) | | (39.8 | ) | | (64.5 | ) | | (2,358.7 | ) |
Balance as of December 28, 2018 | 354.3 |
| | 34.0 |
| | 17.1 |
| | 405.4 |
|
Provisions | 2,347.3 |
| | 22.2 |
| | 68.2 |
| | 2,437.7 |
|
Payments or credits | (2,405.8 | ) | | (27.8 | ) | | (72.1 | ) | | (2,505.7 | ) |
Balance as of December 27, 2019 | $ | 295.8 |
| | $ | 28.4 |
| | $ | 13.2 |
| | $ | 337.4 |
|
Product sales transferred to customers at a point in time and over time were as follows:
|
| | | | | |
| Fiscal Year |
| 2019 | | 2018 |
Product sales transferred at a point in time | 81.8 | % | | 82.9 | % |
Product sales transferred over time | 18.2 |
| | 17.1 |
|
Transaction price allocated to the remaining performance obligations
The following table includes estimated revenue from contracts extending greater than one year for certain of the Company's hospital products that are expected to be recognized in the future related to performance obligations that were unsatisfied or partially unsatisfied as of December 27, 2019:
|
| | | |
Fiscal 2020 | $ | 191.5 |
|
Fiscal 2021 | 95.5 |
|
Fiscal 2022 | 35.7 |
|
Thereafter | 6.2 |
|
Costs to fulfill a contract
As of December 27, 2019 and December 28, 2018, the total net book value of the devices used in the Company's portfolio of drug-device combination products, which are used in satisfying future performance obligations, was $26.5 million and $28.4 million, respectively, and was classified in property, plant and equipment, net, on the consolidated balance sheets. The associated depreciation expense recognized during fiscal 2019 and 2018 was $6.7 million and $7.4 million, respectively.
Product Royalty Revenues
As part of the Company's acquisition of Sucampo Pharmaceuticals, Inc. ("Sucampo") in fiscal 2018, as discussed in further detail in Note 6, it acquired an arrangement under which the Company licenses certain rights to Amitiza to a third party in exchange for royalties on net sales of the product. The Company recognizes such royalty revenue as the related sales occur. The royalty rates consist of several tiers ranging from 18.0% to 26.0% with the royalty rate resetting every year. The associated royalty revenue recognized during both fiscal 2019 and 2018 was $81.3 million.
Contract Liabilities
The following table reflects the balance of the Company's contract liabilities at the end of the respective periods:
|
| | | | | | | |
| December 27, 2019 | | December 28, 2018 |
Accrued and other current liabilities | $ | 5.6 |
| | $ | 20.4 |
|
Other liabilities | 0.6 |
| | 15.1 |
|
Contract liabilities | $ | 6.2 |
| | $ | 35.5 |
|
Revenue recognized during fiscal 2019 and 2018 from amounts included in contract liabilities at the beginning of the period was approximately $13.7 million and $12.5 million inclusive of the Company's wholly owned subsidiary BioVectra Inc. ("BioVectra), prior to the completion of the sale of this business in November 2019.
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| |
5. | Discontinued Operations and Divestitures |
Discontinued Operations
Nuclear Imaging: During the fourth quarter of fiscal 2016, the Company announced that it had entered into a definitive agreement to sell its Nuclear Imaging business to IBAM, which is expected to be completed during the first half of calendar 2017. The Nuclear Imaging business was deemed to be held for sale and the financial results of this business are presented as a discontinued operation.
The following table summarizes the financial results of the Nuclear Imaging business for fiscal years 2016, 2015 and 2014 as presented in the consolidated statements of income:
|
| | | | | | | | | | | |
| Fiscal Year |
Major line items constituting income (loss) from discontinued operations | 2016 | | 2015 | | 2014 |
Net sales | $ | 418.6 |
| | $ | 423.8 |
| | $ | 431.7 |
|
Cost of sales | 216.6 |
| | 193.1 |
| | 256.1 |
|
Selling, general and administrative | 83.7 |
| | 89.6 |
| | 111.5 |
|
Restructuring charges, net | 2.3 |
| | (4.6 | ) | | 13.4 |
|
Non-restructuring impairment charges | — |
| | — |
| | 124.5 |
|
Other | 5.7 |
| | 37.7 |
| | 45.5 |
|
Income (loss) from discontinued operations
| 110.3 |
| | 108.0 |
| | (119.3 | ) |
Income tax expense | 49.0 |
| | 36.4 |
| | 2.5 |
|
Income (loss) from discontinued operations, net of income taxes | $ | 61.3 |
| | $ | 71.6 |
| | $ | (121.8 | ) |
The fiscal 2014 non-restructuring impairment charge of $124.5 million includes charges of $119.5 million associated with goodwill. Further discussion of this impairment charge is included within Note 11.
The fiscal 2016 income tax expense of $49.0 million was impacted by tax expense of $11.7 million associated with the rate difference between Domestic and International jurisdictions, $14.4 million of tax expense associated with accrued income tax liabilities and uncertain tax positions, and $0.9 million of tax expense associated with permanently nondeductible, nontaxable, and other items. The fiscal 2015 income tax expense of $36.4 million was impacted by $14.3 million of tax expense associated with the rate difference between Domestic and International jurisdictions and $0.4 million of tax expense associated with permanently nondeductible, nontaxable, and other items. The fiscal 2014 income tax expense of $2.5 million was impacted by receiving no tax benefit on an impairment of $119.5 million, by $3.1 million of tax expense associated with the rate difference between Domestic and International jurisdictions, by a $1.3 million of tax benefit associated with accrued income tax liabilities and uncertain tax positions, and $0.7 million of tax expense associated with permanently nondeductible, nontaxable, and other items. Fiscal 2016 reflects $0.1 million of Domestic current income tax expense, $52.5 million of International current income tax expense, and $3.6 million of International deferred income tax benefit. Fiscal 2015 reflects $0.1 million of Domestic current income tax expense, $27.8 million of International current income tax expense, and $8.6 million of International deferred income tax expense. Fiscal 2014 reflects $18.6 million of Domestic current income tax expense, $1.0 million of International current income tax benefit, $7.8 million of Domestic deferred income tax benefit, and $7.4 million of International deferred income tax benefit. Domestic reflects U.K. in fiscal 2016 and 2015, and U.S. federal and state in fiscal 2014.
The following table summarizes the assets and liabilities of the Nuclear Imaging business that are classified as held for sale on the consolidated balance sheets as of September 30, 2016 and September 25, 2015:
|
| | | | | | | |
| September 30, 2016 | | September 25, 2015 |
Carrying amounts of major classes of assets included as part of discontinued operations | | | |
Accounts receivable | $ | 53.7 |
| | $ | 58.9 |
|
Inventories | 19.0 |
| | 19.7 |
|
Property, plant and equipment, net | 189.0 |
| | 198.3 |
|
Other current and non-current assets | 47.1 |
| | 41.7 |
|
Total assets classified as held for sale in the balance sheet | $ | 308.8 |
| | $ | 318.6 |
|
| | | |
Carrying amounts of major classes of liabilities included as part of discontinued operations | | | |
Accounts payable | $ | 17.7 |
| | $ | 16.2 |
|
Other current and non-current liabilities | 103.1 |
| | 94.2 |
|
Total liabilities classified as held for sale in the balance sheet | $ | 120.8 |
| | $ | 110.4 |
|
The following table summarizes significant cash and non-cash transactions of the Nuclear Imaging business that are included within the consolidated statements of cash flows for the fiscal years 2016, 2015 and 2014:
|
| | | | | | | | | | | |
| Fiscal Year |
| 2016 | | 2015 | | 2014 |
Depreciation | $ | 20.9 |
| | $ | 13.1 |
| | $ | 17.9 |
|
Capital expenditures | 9.7 |
| | 7.6 |
| | 8.1 |
|
Non-cash impairment charges | — |
| | — |
| | 124.5 |
|
All other notes to the consolidated financial statements that were impacted by this discontinued operation have been reclassified accordingly.
CMDS: On November 27, 2015,In January 2017, the Company completed the sale of the CMDSits Nuclear Imaging business to Guerbet S.A.IBA Molecular ("Guerbet"IBAM") for cash considerationapproximately $690.0 million before tax impacts, including up-front considerations of approximately $270.0$574.0 million, subjectup to net working capital adjustments.
Subsequent to$77.0 million of contingent considerations and the assumption of certain liabilities. The Company recorded a pre-tax gain on the sale of the CMDS business of $362.8 million during fiscal 2017, which excluded any potential proceeds from the Company continues to supply certain products under a supply agreement with Guerbet.
The following table summarizes the financial results of the CMDS business for fiscal 2016, 2015 and 2014 as presented in the consolidated statements of income:
|
| | | | | | | | | | | |
| Fiscal Year |
Major line items constituting income (loss) from discontinued operations | 2016 | | 2015 | | 2014 |
Net sales | $ | 61.0 |
| | $ | 413.8 |
| | $ | 495.8 |
|
Cost of sales | 46.9 |
| | 306.4 |
| | 352.9 |
|
Selling, general and administrative | 20.3 |
| | 97.5 |
| | 97.1 |
|
Restructuring charges, net | — |
| | 0.3 |
| | 47.2 |
|
Non-restructuring impairment charges | — |
| | — |
| | 204.0 |
|
Other | 1.2 |
| | 4.7 |
| | 4.1 |
|
(Loss) income from discontinued operations | (7.4 | ) | | 4.9 |
| | (209.5 | ) |
Gain on disposal of discontinued operations | 95.3 |
| | — |
| | — |
|
Income from discontinued operations, before income taxes | 87.9 |
| | 4.9 |
| | (209.5 | ) |
Income tax expense (benefit) | (2.5 | ) | | 10.8 |
| | (34.7 | ) |
Income (loss) from discontinued operations net of tax | $ | 90.4 |
| | $ | (5.9 | ) | | $ | (174.8 | ) |
The fiscal 2014 non-restructuring impairment charge of $204.0 million includes charges of $51.4 million associated with property, plant and equipment, $52.4 million associated with intangible assets and $100.2 million associated with goodwill. Further discussion of these impairment charges are included within Notes 10 and 11.
The fiscal 2016 income tax benefit of $2.5 million impacted by a $0.4 million benefit related to adjust the fiscal 2015 accrual for taxes paid in connection with the $95.3 million gain on the disposition and a $2.1 million benefit related to the $7.4 million loss from discontinued operations. The fiscal 2015 income tax expense of $10.8 million was impacted by approximately $10.0 million of tax expense related to taxes paid, or anticipated to be paid, in connection with the disposition. The fiscal 2014 income tax benefit of $34.7 million was impacted by receiving a tax benefit of $36.2 million on impairment of $204.0 million, by $3.0 million of tax expense associated with the rate difference between U.S. and non-U.S. jurisdictions, $2.5 million of tax benefit associated with nonrecurring valuation allowances, $0.9 million of tax expense associated with accrued income tax liabilities and uncertain tax positions, and $2.0 million of tax expense associated with permanently nondeductible, nontaxable, and other items. Fiscal 2016 reflects $0.9 million of International current income tax expense, $3.4 million of International deferred income tax benefit, and none being allocable to the Domestic income tax provision. Fiscal 2015 reflects $14.9 million of International current income tax expense, $4.4 million of International deferred income tax benefit, and none being allocable to the Domestic income tax provision. Fiscal 2014 reflects $10.4 million of Domestic current income tax expense, $6.6 million of International current income tax benefit, $35.6 million of Domestic deferred income tax benefit, and $3.0 million of International deferred income tax benefit. Domestic reflects U.K. in fiscal 2016 and 2015, and U.S. federal and state in fiscal 2014.
The following table summarizes the assets and liabilities of the CMDS business that are classified as held for sale on the consolidated balance sheets as of September 30, 2016 and September 25, 2015:
|
| | | | | | | |
| September 30, 2016 | | September 25, 2015 |
Carrying amounts of major classes of assets included as part of discontinued operations | | | |
Accounts receivable | $ | — |
| | $ | 68.5 |
|
Inventories | — |
| | 86.3 |
|
Property, plant and equipment, net | — |
| | 60.3 |
|
Intangible assets, net | — |
| | 27.7 |
|
Other current and non-current assets | — |
| | 57.1 |
|
Total assets classified as held for sale in the balance sheet | $ | — |
| | $ | 299.9 |
|
| | | |
Carrying amounts of major classes of liabilities included as part of discontinued operations | | | |
Accounts payable | $ | — |
| | $ | 22.0 |
|
Other current and non-current liabilities | — |
| | 50.8 |
|
Total liabilities classified as held for sale in the balance sheet | $ | — |
| | $ | 72.8 |
|
The following table summarizes significant cash and non-cash transactions of the CMDS business that are included within the consolidated statements of cash flows for the fiscal years 2016, 2015 and 2014:
|
| | | | | | | | | | | |
| Fiscal Year |
| 2016 | | 2015 | | 2014 |
Depreciation | $ | — |
| | $ | 15.5 |
| | $ | 18.9 |
|
Amortization | — |
| | 2.3 |
| | 7.5 |
|
Capital expenditures | 1.6 |
| | 9.5 |
| | 12.3 |
|
Non-cash impairment charges | — |
| | — |
| | 204.0 |
|
All other notes to the consolidated financial statements that were impacted by this discontinued operation have been reclassified accordingly.
Mallinckrodt Baker: During fiscal 2010, the Specialty Chemicals business (formerly known as "Mallinckrodt Baker") was sold because its products and customer bases were not aligned with the Company's long-term strategic objectives.contingent consideration. This business met the discontinued operations criteria and, accordingly, was included in discontinued operations for all periods presented. During fiscal 2016, 2015, and 2014, the
The Company recordedreceived a gain, nettotal of tax, of $3.0$9.0 million and losses, net of tax, of $0.1$15.0 million and $0.7 million, respectively. The gains and losses were primarilyin contingent consideration related to the indemnification obligationssale of the Nuclear Imaging business during fiscal 2019 and 2018, respectively, consisting primarily of the issuance of $9.0 million par value non-voting preferred equity certificates in both fiscal 2019 and 2018, with an additional $6.0 million cash payment in fiscal 2018. The preferred equity certificates accrue interest at a rate of 10.0% per annum and are redeemable on the retirement date of July 27, 2025, or earlier if elected by the issuer, for cash at a price equal to the purchaser, whichpar value and any accrued but unpaid interest. The receipt of the preferred equity certificates are discussedpresented as a non-cash investing activity on the consolidated statements of cash flows for fiscal 2019 and 2018.
The following table summarizes the financial results of the Nuclear Imaging business as presented in Note 17.
Other: Priorthe consolidated statement of operations, prior to the Separation,completion of the sale of this business in January 2017:
|
| | | |
| Fiscal Year |
Major line items constituting income from discontinued operations | 2017 |
Net sales | $ | 31.6 |
|
Cost of sales | 15.6 |
|
Selling, general and administrative expenses | 7.8 |
|
Other | (0.2 | ) |
Income from discontinued operations | 8.4 |
|
Gain on disposal of discontinued operations | 362.8 |
|
Income from discontinued operations, before income taxes | 371.2 |
|
Income tax expense | 5.2 |
|
Income from discontinued operations, net of tax | $ | 366.0 |
|
The Company provided and accrued for an indemnification,incurred $0.3 million of capital expenditures related to the purchaser of a certain legal entity, to indemnify it for tax obligations should the tax basis of certain assets not be recognized. The Company believesNuclear Imaging business that under the terms of the agreement between the parties, this indemnification obligation has expired. As such, the Company eliminated this liability and recorded a $22.5 million benefit, during fiscal 2015, in discontinued operationsare included within the consolidated statement of income.cash flows for fiscal 2017.
Divestitures
The below businesses did not meet the criteria for discontinued operations classification and accordingly were included in continuing operations for all periods presented.
BioVectra: In November 2019, the Company completed the sale of its wholly owned subsidiary BioVectra to an affiliate of H.I.G. Capital for total consideration of up to $250.0 million, including an upfront payment of $135.0 million and contingent consideration of $115.0 million based on long-term performance of the business. During fiscal 2019, the Company recorded a loss on the sale of $33.5 million, which excluded any potential proceeds from future milestones, in the event they are achieved.
PreveLeak/Recothrom: In March 2018, the Company completed the sale of a portion of its Hemostasis business, inclusive of its PreveLeak™ Surgical Sealant ("PreveLeak") and RECOTHROM® Thrombin topical (Recombinant) ("Recothrom") products to Baxter International Inc. ("Baxter") for approximately $185.0 million, with a base payment of $153.0 million, inclusive of existing inventory and subject to a closing inventory adjustment, with the remainder in potential future milestones. Baxter assumed other expenses, including contingent liabilities associated with PreveLeak. During fiscal 2018, the Company recorded a loss on the sale of $0.8 million, which excluded any potential proceeds from future milestones, in the event they are achieved and reflected a post-sale closing inventory adjustment of $13.7 million.
As part of the divestiture and calculation of the loss, the Company wrote off intangible assets of $49.9 million and goodwill of $51.5 million during fiscal 2018, from the Specialty Brands segment, ascribed to the PreveLeak and Recothrom operations. The remaining items included in the calculation of the loss are primarily attributable to inventory transferred, contingent consideration transferred and transaction costs incurred by the Company.
Intrathecal Therapy: In March 2017, the Company completed its sale of its Intrathecal Therapy business to Piramal Enterprises Limited's subsidiary in the U.K., Piramal Critical Care ("Piramal"), for approximately $203.0 million, including fixed consideration of $171.0 million and contingent consideration of up to $32.0 million. The $171.0 million of fixed consideration consisted of $17.0 million received at closing and a $154.0 million note receivable due one year from the transaction closing date. The Company recorded a gain on the sale of the business of $56.6 million during fiscal 2017, which excluded any potential proceeds from the contingent consideration and reflects a post-sale working capital adjustment. In fiscal 2018, the Company received $154.0 million from Piramal for the settlement of the aforementioned note receivable.
During fiscal 2017, as part of the divestiture and calculation of the gain, the Company wrote off intangible assets of $48.7 million and goodwill of $49.8 million, from the Specialty Brands segment, ascribed to the Intrathecal Therapy business. The Company is committed to reimburse up to $7.3 million of product development expenses incurred by Piramal, of which $2.1 million and
License
$3.1 million was included in accrued and other current liabilities on the consolidated balance sheets as of Intellectual PropertyDecember 27, 2019 and December 28, 2018, respectively. The remaining items included in the gain calculation were attributable to inventory transferred and transaction costs incurred by the Company.
The Company was involved in patent disputes with a counterparty relating to certain intellectual property related to extended-release oxymorphone. In December 2013, the counterparty agreed to pay the Company an upfront cash payment of $4.0 million and contractually obligated future payments of $8.0 million through July 2018, in exchange for the withdrawal of all claims associated with the intellectual property and a license to utilize the Company's intellectual property. The Company has completed the earnings process associated with the agreement and recorded an $11.7 million gain, included within gains on divestiture and license, during fiscal 2014.
|
| |
5.6. | Acquisitions and License Agreements |
Business Acquisitions
StratatechSucampo Pharmaceuticals, Inc.
On August 31, 2016,In February 2018, the Company acquired a developmental program from Stratatech Corporation - which includes StrataGraft®, a regenerative skin tissue and a technology platform for genetically enhanced skin tissues - for upfront consideration of $76.0 million, and contingent milestone payments, which are primarily regulatory, and royalty obligations that could result in up to $121.0 million of additional consideration ("the Stratatech Acquisition"). Stratatech is a regenerative medicine company focused on the development of unique, proprietary skin substitute products. Developmental products include StrataGraft® regenerative skin tissue ("StrataGraft") and a technology platform for genetically enhanced skin tissues. The Stratatech Acquisition was funded through cash on hand.
Hemostasis Products
On February 1, 2016, the Company acquired three commercial stage topical hemostasis drugs from The Medicines Company ("the Hemostasis Acquisition") - RECOTHROM® Thrombin topical (Recombinant) ("Recothrom"), PreveLeakTM Surgical Sealant ("PreveLeak"), and RAPLIXATM (Fibrin Sealant (Human)) ("Raplixa") - for upfront consideration of $173.5 million, inclusive of existing inventory, and contingent sales-based milestone payments that could result in up to $395.0 million of additional consideration. The fair value of the contingent consideration and acquired contingent liabilities associated with the transaction were $52.0 million and $10.6 million, respectively, at February 1, 2016. The Hemostasis Acquisition was funded through cash on hand.
Therakos, Inc.
On September 25, 2015, the Company acquired Therakos, Inc. ("Therakos")Sucampo through the acquisition of all the outstanding common stock of TGG Medical Solutions, Inc., the parent holding company of Therakos, in a transaction valued at approximately $1.3 billion, net of cash acquired ("the Therakos Acquisition"). Consideration for the transaction consisted of approximately $1.0 billion in cash paid to TGG Medical Solutions, Inc. shareholders and the assumption of approximately $0.3 billion of Therakos third-party debt, which was repaid in conjunction with the Therakos Acquisition. The acquisition and repayment of debt was funded through the issuance of $750.0 million aggregate principal amount of senior unsecured notes, a $500.0 million borrowing under a revolving credit facility and cash on hand. Therakos' primary immunotherapy products relate to the administering of extracorporeal photopheresis therapies through its UVAR XTS®and CellexTM Photopheresis Systems.
Ikaria, Inc.
On April 16, 2015, the Company acquired Ikaria, Inc. ("Ikaria") through the acquisition of all the outstanding common stock of Compound Holdings II, Inc., the parent holding company of Ikaria, in a transaction valued at approximately $2.3 billion, net of cash acquired ("the Ikaria Acquisition").Sucampo. Consideration for the transaction consisted of approximately $1.2 billion, in cash paid to Compound Holdings II, Inc. shareholders andincluding the assumption of approximately $1.1 billion of IkariaSucampo's third-party debt which was repaid in conjunction with the Ikaria Acquisition. The acquisition and repayment of debt was funded through the issuance of $1.4 billion aggregate principal amount of senior unsecured notes, a $240.0 million borrowing under the Revolver, which was repaid subsequent to the transaction, and cash on hand. Ikaria's primary product is INOMAX®(nitric oxide) for inhalation ("Inomax"), a vital treatment option in neonatal critical care.
Questcor Pharmaceuticals
On August 14, 2014, the Company acquired all of the outstanding common stock of Questcor Pharmaceuticals, Inc. ("Questcor"), a pharmaceutical company, for total consideration of approximately $5.9 billion, comprised of cash consideration of $30.00 per share, 0.897 ordinary shares of the Company for each share of Questcor common stock owned and the portion of outstanding equity awards deemed to have been earned as of August 14, 2014 ("the QuestcorSucampo Acquisition"). The acquisition was funded through the issuance of approximately 57 million common shares, proceeds from the issuance of $900.0a $600.0 million aggregate principal amount of senior unsecured notes, proceeds from a $700.0 million senior secured term loan, a $900.0 million borrowing under the Company's revolving credit facility, $150.0 million of cash from a receivable securitization programas discussed further in Note 14, and cash on hand. H.P. Acthar® Gel (repository corticotropin injection) ("Acthar"), Questcor'sSucampo's primary commercialized product is focused onwas Amitiza, a leading global product in the treatment of patients with serious, difficult-to-treat autoimmune and rare diseases. Acthar is an injectable drug that is approved by the U.S. Food and Drug Administration ("FDA") for use in 19 indications, including the areas of neurology, rheumatology, nephrology, ophthalmology and pulmonology. Questcor also supplied specialty contract manufacturing services to the global pharmaceutical and biotechnology industry through its wholly-owned subsidiary, BioVectra Inc.
Cadence Pharmaceuticals
On March 19, 2014,branded constipation market. Through this acquisition, the Company acquired allVTS-270, a Phase 3 development product for Niemann-Pick Type C, a complicated, ultra-rare neurodegenerative disease that typically presents in childhood and is ultimately fatal. Also acquired was an option to exercise a collaborative agreement with Cancer Prevention Pharmaceuticals ("CPP") associated with the development of CPP-1X/sulindac, a Phase 3 development product for Familial Adenomatous Polyposis ("FAP").
Upon completion of the outstanding common stockSucampo Acquisition, Sucampo's 3.25% convertible senior notes due 2021 ("the Sucampo Notes") became eligible to receive increased consideration in conjunction with a make-whole fundamental change, such that each $1,000 principal face amount of Cadence Pharmaceuticals,Sucampo Notes could be converted into $1,221 cash. The issued convertible debt of $300.0 million had been converted and paid in full by the Company during fiscal 2018.
Ocera Therapeutics, Inc.
In December 2017, the Company acquired Ocera Therapeutics, Inc. ("Cadence"Ocera"), a pharmaceutical company focused on commercializing products principally for use in the hospital setting, for totalupfront consideration of approximately $1.3 billion$42.4 million, of which $1.9 million of the consideration was paid subsequent to December 29, 2017, and contingent consideration up to $75.0 million based on the successful completion of certain development and sales milestones ("the CadenceOcera Acquisition"). Through this acquisition, the Company acquired Ocera's primary development product MNK-6105/6106, an ammonia scavenger, which is being studied for treatment of hepatic encephalopathy, a neuropsychiatric syndrome associated with hyperammonemia, a complication of acute or chronic liver disease. The acquisitionOcera Acquisition was primarily funded throughwith cash on hand.
InfaCare Pharmaceutical Corporation
In September 2017, the Company acquired InfaCare Pharmaceutical Corporation ("InfaCare") in a $1.3 billion senior secured term loan credit facility. Cadence's sole product, OFIRMEV® (acetaminophen) injectiontransaction valued at approximately $80.4 million, with additional payments of up to $345.0 million dependent on regulatory and sales milestones ("Ofirmev"the InfaCare Acquisition"), is a proprietary intravenous formulation of acetaminophen. Consideration for the managementtransaction consisted of mildapproximately $37.2 million in cash paid to moderate pain, the managementprior shareholders of moderate to severe pain with adjunctive opioid analgesicsInfaCare and the reductionassumption of fever.approximately $43.2 million of debt and other liabilities, which was repaid in conjunction with the InfaCare Acquisition. Through this acquisition, the Company acquired InfaCare's development product stannsoporfin, a heme oxygenase inhibitor. The InfaCare Acquisition was funded with cash on hand.
Fair Value Allocation
The following amounts represent the preliminary allocation of the fair value of the identifiable assets acquired and liabilities assumed for the Stratatech Acquisition and Hemostasis Acquisition, and final allocation of the fair value of the identifiable assets acquired and liabilities assumed for the Therakos Acquisition, Ikaria Acquisition, Questcor Acquisition and Cadence Acquisition:respective acquisitions:
|
| | | | | | | | | | | |
| Sucampo (1) | | Ocera (2) | | InfaCare (3) |
Acquisition Date | February 2018 | | December 2017 | | September 2017 |
Cash | $ | 149.6 |
| | $ | 1.0 |
| | $ | 1.3 |
|
Accounts receivable | 35.7 |
| | — |
| | — |
|
Inventory | 153.2 |
| | — |
| | — |
|
Intangible assets | 919.5 |
| | 64.5 |
| | 113.5 |
|
Goodwill (non-tax deductible) (4) | 248.6 |
| | 18.0 |
| | 11.4 |
|
Other assets, current and non-current | 25.8 |
| | 0.4 |
| | 0.1 |
|
Total assets acquired | 1,532.4 |
| | 83.9 |
| | 126.3 |
|
Current liabilities | 109.4 |
| | 12.0 |
| | 14.5 |
|
Other liabilities (non-current) | 33.3 |
| | — |
| | — |
|
Deferred tax liabilities, net (non-current) | 175.8 |
| | 16.7 |
| | 8.7 |
|
Contingent consideration (non-current) | — |
| | 12.8 |
| | 35.0 |
|
Debt | 366.3 |
| | — |
| | 30.0 |
|
Total liabilities assumed | 684.8 |
| | 41.5 |
| | 88.2 |
|
Net assets acquired | $ | 847.6 |
| | $ | 42.4 |
| | $ | 38.1 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Stratatech | | Hemostasis | | Therakos | | Ikaria | | Questcor | | Cadence |
Cash | $ | 0.2 |
| | $ | 3.3 |
| | $ | 41.3 |
| | $ | 77.3 |
| | $ | 445.1 |
| | $ | 43.2 |
|
Inventory | — |
| | 94.6 |
| | 23.5 |
| | 26.3 |
| | 67.9 |
| | 21.0 |
|
Intangible assets | 99.8 |
| | 132.7 |
| | 1,170.0 |
| | 1,971.0 |
| | 5,601.1 |
| | 1,300.0 |
|
Goodwill (non-tax deductible) | 57.3 |
| | 3.3 |
| | 429.9 |
| | 795.0 |
| | 1,789.4 |
| | 318.1 |
|
Other assets, current and non-current (1) | 3.2 |
| | 7.9 |
| | 40.2 |
| | 174.3 |
| | 274.3 |
| | 18.0 |
|
Total assets acquired | 160.5 |
| | 241.8 |
| | 1,704.9 |
| | 3,043.9 |
| | 8,177.8 |
| | 1,700.3 |
|
Current liabilities | 4.3 |
| | 3.6 |
| | 24.7 |
| | 33.0 |
| | 168.9 |
| | 48.8 |
|
Unpaid purchase consideration (current) | — |
| | — |
| | — |
| | — |
| | 128.8 |
| | — |
|
Other liabilities (non-current) | — |
| | 10.6 |
| | 0.6 |
| | 15.8 |
| | 186.8 |
| | — |
|
Deferred tax liabilities, net (non-current) | 24.3 |
| | 2.1 |
| | 315.7 |
| | 620.5 |
| | 1,906.8 |
| | 292.3 |
|
Contingent consideration (non-current) | 54.9 |
| | 52.0 |
| | — |
| | — |
| | — |
| | — |
|
Total debt | 1.0 |
| | — |
| | 344.8 |
| | 1,121.0 |
| | — |
| | 30.0 |
|
Total liabilities assumed | 84.5 |
| | 68.3 |
| | 685.8 |
| | 1,790.3 |
| | 2,391.3 |
| | 371.1 |
|
Net assets acquired | $ | 76.0 |
| | $ | 173.5 |
| | $ | 1,019.1 |
| | $ | 1,253.6 |
| | $ | 5,786.5 |
| | $ | 1,329.2 |
|
| |
(1) | This amount includes $1.3During fiscal 2019, the Company recognized a full impairment of the IPR&D asset related to VTS-270 of $274.5 million. Refer to Note 13 for further information.
|
| |
(2) | Of the $42.4 million, zero, $22.0 million, $73.8 million, $87.3 net assets acquired for Ocera, $40.5 million and $14.7$1.9 million was paid in fiscal 2017 and 2018, respectively. |
| |
(3) | During fiscal 2019, the Company recognized a full impairment of accounts receivablethe IPR&D asset related to stannsoporfin of $113.5 million. During fiscal 2018, the Company reduced the contingent consideration liability related to this acquisition to zero through the recognition of a $35.0 million fair value adjustment. Refer to Note 13 and 21 for further information. |
| |
(4) | Refer to Note 13 for further information relating to the Stratatech Acquisition, Hemostasis Acquisition, Therakos Acquisition, Ikaria Acquisition, Questcor Acquisition and Cadence Acquisition, respectively, which is also the gross contractual value.full goodwill impairment recorded in fiscal 2018. |
The following reconciles the total consideration to net assets acquired:
|
| | | | | | | | | | | |
| Sucampo | | Ocera (1) | | InfaCare |
Total consideration, net of cash | $ | 698.0 |
| | $ | 63.4 |
| | $ | 71.8 |
|
Plus: cash assumed in acquisition | 149.6 |
| | 1.0 |
| | 1.3 |
|
Total consideration | 847.6 |
| | 64.4 |
| | 73.1 |
|
Less: non-cash contingent consideration | — |
| | (22.0 | ) | | (35.0 | ) |
Net assets acquired | $ | 847.6 |
| | $ | 42.4 |
| | $ | 38.1 |
|
| |
(1) | $1.9 million of the total consideration, net of cash was paid in fiscal 2018, subsequent to the Company's December 11, 2017 acquisition date. |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Stratatech | | Hemostasis | | Therakos | | Ikaria | | Questcor | | Cadence |
Total consideration, net of cash | $ | 130.7 |
| | $ | 222.2 |
| | $ | 977.8 |
| | $ | 1,176.3 |
| | $ | 5,470.2 |
| | $ | 1,286.0 |
|
Plus: cash assumed in acquisition | 0.2 |
| | 3.3 |
| | 41.3 |
| | 77.3 |
| | 445.1 |
| | 43.2 |
|
Total consideration | 130.9 |
| | 225.5 |
| | 1,019.1 |
| | 1,253.6 |
| | 5,915.3 |
| | 1,329.2 |
|
Less: unpaid purchase consideration | — |
| | — |
| | — |
| | — |
| | (128.8 | ) | | — |
|
Less: non-cash contingent consideration | (54.9 | ) | | (52.0 | ) | | — |
| | — |
| | — |
| | — |
|
Net assets acquired | $ | 76.0 |
| | $ | 173.5 |
| | $ | 1,019.1 |
| | $ | 1,253.6 |
| | $ | 5,786.5 |
| | $ | 1,329.2 |
|
Intangible assets acquired consist of the following:
|
| | | | | | | | | | | | | |
Acquisition | | Intangible Asset Acquired | | Amount | | Amortization Period | | Discount Rate | | Segment |
Sucampo | | Completed technology - Amitiza | | $ | 634.0 |
| | 9 years | | 14.0 | % | | Specialty Brands |
Sucampo | | Completed technology - Other (1) | | 11.0 |
| | 8 years | | 14.0 |
| | Specialty Brands |
Sucampo | | In-process research and development - VTS-270 (2) | | 274.5 |
| | Non-Amortizable | | 15.0 |
| | Specialty Brands |
Ocera | | In-process research and development - MNK-6105/6106 | | 64.5 |
| | Non-Amortizable | | 15.5 |
| | Specialty Brands |
InfaCare | | In-process research and development - stannsoporfin (3) | | 113.5 |
| | Non-Amortizable | | 13.5 |
| | Specialty Brands |
|
| | | | | |
Stratatech | Amount | | Amortization Period |
In-process research and development - StrataGraft | $ | 99.8 |
| | Non-Amortizable |
| |
(1) | During fiscal 2019, the intellectual property related to this intangible asset was sold, and therefore is no longer reflected in the Company's consolidated balance sheet as of December 27, 2019. |
| |
(2) | During fiscal 2019, the Company recognized a full impairment of the IPR&D asset related to VTS-270 of $274.5 million. |
| |
(3) | During fiscal 2019, the Company recognized a full impairment of the IPR&D asset related to stannsoporfin of $113.5 million. |
The IPR&Dfair value of the intangible asset relates to StrataGraft.assets was determined using the income approach. The fair value of the IPR&D, completed technology and trademark was determined using the income approach, which is a valuation technique that provides an estimate of fair
value of the assets based on the market participant expectations of cash flows the asset would generate. The cash flowsdiscount rates were discounted at a rate of 16.5%. The IPR&D discount rate for StrataGraft was developed after assigning a probability of success to achieving the projected cash flows based on the current stage of development, inherent uncertainty in the FDAU.S. Food and Drug Administration ("FDA") approval process and risks associated with commercialization of a new product. Based on the Company's preliminary estimate, the excess of purchase price over net tangible and intangible assets acquired resulted in goodwill, which represents future product development, the assembled workforce, and the tax status of the transaction. The goodwill iswas not deductible for U.S. income tax purposes. All assets acquired are included within the Company's Specialty Brands segment.
|
| | | | | |
Hemostasis Products | Amount | | Amortization Period |
Raplixa - Completed technology | $ | 73.0 |
| | 15 years |
Recothrom - Completed technology | 42.7 |
| | 13 years |
PreveLeak - Completed technology | 17.0 |
| | 13 years |
| $ | 132.7 |
| | |
The completed technology intangible assets relate to each of the acquired drugs. The fair value of the intangible assets were determined using the income approach. The cash flows were discounted commensurate with the level of risk associated with each asset or its projected cash flows. The completed technology intangible assets utilized a discount rate of 17.0%, 16.0% and 17.0% for Raplixa, Recothrom and PreveLeak, respectively. All assets acquired are included within the Company's Specialty Brands segment.
|
| | | | | |
Therakos | Amount | | Amortization Period |
Completed technology | $ | 1,170.0 |
| | 15 years |
The completed technology intangible asset relates to extracorporeal photopheresis treatment therapies. The fair value of the intangible asset was determined using the income approach. The completed technology intangible asset utilized a discount rate of 17.0%. The excess of purchase price over net tangible and intangible assets acquired resulted in goodwill, which represents the assembled workforce, future product and device development, anticipated synergies and the tax status of the transaction. The goodwill is not deductible for U.S. income tax purposes. All assets acquired are included within the Company's Specialty Brands segment.
|
| | | | | |
Ikaria | Amount | | Amortization Period |
Completed technology | $ | 1,820.0 |
| | 15 years |
Trademark | 70.0 |
| | 22 years |
In-process research and development - terlipressin | 81.0 |
| | Non-Amortizable |
| $ | 1,971.0 |
| | |
The completed technology and trademark intangible assets relate to Inomax. The fair value of the intangible assets were determined using the income approach. Completed technology, trademark and IPR&D terlipressin intangibles utilized discount rates of 14.5%, 14.5%, and 17.0%, respectively. The IPR&D discount rate for terlipressin was developed after assigning a probability of success to achieving the projected cash flows based on the current stage of development, inherent uncertainty in the FDA approval
process and risks associated with commercialization of a new product. The excess of purchase price over net tangible and intangible assets acquired resulted in goodwill, which represents the assembled workforce, future product and device development, anticipated synergies and the tax status of the transaction. The goodwill is not deductible for U.S. income tax purposes. All assets acquired are included within the Company's Specialty Brands segment.
|
| | | | | |
Questcor | Amount | | Weighted-Average Amortization Period |
Completed technology | $ | 5,343.3 |
| | 18 years |
Trademark | 5.2 |
| | 13 years |
Customer relationships | 34.3 |
| | 12 years |
In-process research and development - Synacthen | 218.3 |
| | Non-Amortizable |
| $ | 5,601.1 |
| | |
The completed technology intangible asset relates to Acthar. The trademark and customer relationship intangible assets relate to BioVectra, Inc. The IPR&D relates to the U.S. development of Synacthen, a synthetic pharmaceutical product. The fair value of the intangible assets were determined using the income approach. Completed technology, customer relationships, trademark and in-process research and development intangibles utilized discount rates of 14.5%, 10.0%, 10.0% and 16.0%, respectively. The in-process research and development discount rate was developed after assigning a probability of success to achieving the projected cash flows based on the current stage of development, inherent uncertainty in the FDA approval process and risks associated with commercialization of a new product. The excess of purchase price over net tangible and intangible assets acquired resulted in goodwill, which represents the assembled workforce, anticipated synergies and the tax status of the transaction. The goodwill is not deductible for U.S. income tax purposes. The majority of assets acquired are included within the Company's Specialty Brands segment. Assets related to BioVectra, Inc. are included within the Company's Specialty Generics segment.
|
| | | | | |
Cadence | Amount | | Amortization Period |
Completed technology | $ | 1,300.0 |
| | 8 years |
The completed technology intangible asset relates to Ofirmev, the rights to which have been in-licensed from Bristol-Myers Squibb Company ("BMS"). The fair value of the intangible asset was determined using the income approach. The cash flows were discounted at a 13.0% rate.For more information on the BMS license agreement, refer to "License Agreement" below. The excess of purchase price over net tangible and intangible assets acquired resulted in goodwill, which represents the assembled workforce, anticipated synergies and the tax status of the transaction. The goodwill is not deductible for U.S. income tax purposes. All assets acquired are included within the Company's Specialty Brands segment.
Financial Results-
The amount of net sales and earningsoperating losses included in the Company's fiscal 2019 consolidated statement of operations related to the Sucampo Acquisition were $217.2 million and $210.6 million, respectively, as compared to $190.5 million and $369.1 million included in the Company's 2018 consolidated statement of operations, respectively. Included within the Sucampo operating results was the full impairment of the VTS-270 intangible asset in fiscal 2019 and a charge for the periods presented weregoodwill allocated to Sucampo at the time of acquisition as follows:
|
| | | | | | | | | | | |
Net sales | 2016 | | 2015 | | 2014 |
Therakos | $ | 207.6 |
| | $ | — |
| | $ | — |
|
Ikaria | 491.5 |
| | 191.9 |
| | — |
|
Questcor | 1,218.4 |
| | 1,125.9 |
| | 129.2 |
|
Cadence | 284.3 |
| | 263.0 |
| | 124.4 |
|
| $ | 2,201.8 |
| | $ | 1,580.8 |
| | $ | 253.6 |
|
Operating income (loss) | | | | | |
Therakos | $ | 12.5 |
| | $ | — |
| | $ | — |
|
Ikaria | 201.1 |
| | 47.1 |
| | — |
|
Questcor | 371.5 |
| | 223.3 |
| | 17.4 |
|
Cadence | (84.5 | ) | | (97.3 | ) | | (66.9 | ) |
| $ | 500.6 |
| | $ | 173.1 |
| | $ | (49.5 | ) |
The amounta result of the full goodwill impairment in fiscal 2018. Also included within the fiscal 2019 and 2018 results was $70.9 million and $62.9 million of amortization onassociated with intangibles recognized from this acquisition, respectively, and $10.0 million and $118.8 million of expense associated with fair value adjustments of acquired intangible assets included within operating income (loss) for the periods presented was as follows:
|
| | | | | | | | | | | |
Intangible asset amortization | 2016 | | 2015 | | 2014 |
Therakos | $ | 78.0 |
| | $ | — |
| | $ | — |
|
Ikaria | 124.5 |
| | 57.1 |
| | — |
|
Questcor | 300.7 |
| | 301.4 |
| | 34.9 |
|
Cadence | 162.5 |
| | 162.5 |
| | 85.9 |
|
| $ | 665.7 |
| | $ | 521.0 |
| | $ | 120.8 |
|
inventory, respectively. During fiscal 2016, 20152019, 2018, and 2014,2017, the Company in total recognized $24.3$10.0 million, $44.1$120.8 million, and $25.7$10.1 million, respectively, of expense associated with fair value adjustments of acquired inventory. This expense was included within cost of sales.
Acquisition-Related Costs - Acquisition-related costs incurred in fiscal 2016, 2015 and 2014 for each of the acquisitions discussed above were as follows:
|
| | | | | | | |
| Fiscal Year |
Acquisition-related costs | 2018 | | 2017 |
Sucampo | $ | 5.2 |
| | $ | 4.2 |
|
Ocera | 0.5 |
| | 0.9 |
|
InfaCare | — |
| | 1.2 |
|
Other | 0.1 |
| | 0.1 |
|
Total acquisition-related costs | $ | 5.8 |
| | $ | 6.4 |
|
|
| | | | | | | | | | | |
Acquisition-related costs | 2016 | | 2015 | | 2014 |
Stratatech | $ | 3.7 |
| | $ | — |
| | $ | — |
|
Hemostasis Products | 2.7 |
| | — |
| | — |
|
Therakos | 0.3 |
| | 22.5 |
| | — |
|
Ikaria | 0.2 |
| | 30.9 |
| | — |
|
Questcor | — |
| | — |
| | 47.5 |
|
Cadence | — |
| | — |
| | 17.6 |
|
| $ | 6.9 |
| | $ | 53.4 |
| | $ | 65.1 |
|
Unaudited Pro Forma Financial Information - The following unaudited pro forma information presentsLicense Agreements
Silence Therapeutics
In July 2019, the Company entered into a summarylicense and collaboration agreement with Silence Therapeutics plc ("Silence") that will allow the companies to develop and commercialize ribonucleic acid interference ("RNAi") drug targets designed to inhibit the complement cascade, a group of proteins that are involved in the immune system and that play a role in the development of inflammation. These proteins are known to contribute to the pathogenesis of many diseases, including autoimmune disease. Under the terms of the results of operations for the periods indicated as if the Questcor Acquisition and Cadence Acquisition had been completed as of September 29, 2012 and the Ikaria Acquisition and Therakos Acquisition as of September 28, 2013. The pro forma financial information is based on the historical financial information foragreement, the Company Therakoswill obtain an exclusive worldwide license to Silence's C3 complement asset, SLN500, with options to license up to two additional complement-targeted assets in Silence's preclinical complement-directed RNAi development program. Silence will be responsible for preclinical activities, and Ikaria, alongfor executing the development program of each asset until the end of Phase 1, after which the Company will assume clinical development and responsibility for global commercialization.
During fiscal 2019, the Company provided Silence an upfront payment of $20.0 million with certain pro forma adjustments. These pro forma adjustments consist primarily of:cash on hand, which was recorded within R&D expense, and gained an exclusive worldwide license to Silence's C3 complement asset, SLN500, with options to license up to two additional complement-targeted assets in Silence's preclinical complement-directed RNAi development program. Silence is also eligible to receive up to $10.0 million in research milestones for SLN500, in addition to funding for Phase 1 clinical development including good manufacturing practices (GMP) manufacturing. Silence will be responsible for preclinical activities, and for executing the development program of SLN500 until the end of Phase 1, after which the Company will assume clinical development and responsibility for global commercialization. If approved, Silence could receive up to $563.0 million in commercial milestone payments and tiered low double-digit to high-teen royalties on net sales for SLN500.
non-recurring costs
Mesoblast
In January 2017, $21.5 million of consideration was remitted to Mesoblast in exchange for equity shares and rights to a nine month exclusivity period related to any potential commercial and development agreements the step-upCompany may have entered into for Mesoblast's therapy products used to treat acute graft versus host disease and/or chronic lower back pain. As a result of this transaction the Company recorded an available for sale investment. During fiscal 2018, all of the Company's shares were sold for gross proceeds
of $25.5 million resulting in fair valuea $3.4 million gain being recognized within other income (expense), net within the consolidated statement of acquired inventory and transaction costs related to the acquisitions;operations.
increased amortization expense related to the intangible assets acquired in the acquisitions;
elimination of direct acquisition transaction costs from the period of acquisition;Ofirmev
increased interest expense to reflect the fixed rate unsecured notes and revolving credit facility (utilizing the interest rate in effect at the dateAs part of the acquisition of 2.58%Cadence Pharmaceuticals, Inc. ("Cadence" or "Cadence Acquisition") entered into in connection with the Therakos Acquisition and the fixed rate unsecured notes entered into in connection with the Ikaria Acquisition (assuming no interest related to the revolving credit facility which was paid down subsequent to the Ikaria Acquisition), including interest and amortization of deferred financing costs and original issue discount; and
the related income tax effects.
The following unaudited pro forma information has been prepared for comparative purposes only and is not necessarily indicative of the results of operations as they would have been had the acquisitions occurred on the assumed dates, nor is it necessarily an indication of future operating results. In addition, the unaudited pro forma information does not reflect the cost of any integration activities, benefits from any synergies that may be derived from the acquisitions or revenue growth that may be anticipated.
|
| | | | | | | |
| 2016 | | 2015 |
Net sales | $ | 3,380.8 |
| | $ | 3,332.0 |
|
Income from continuing operations | 499.4 |
| | 288.9 |
|
Basic earnings per share from continuing operations | $ | 4.52 |
| | $ | 2.49 |
|
Diluted earnings from per share continuing operations | 4.48 |
| | 2.47 |
|
License Agreements
Ofirmev
As part of the Cadence Acquisition,March 2014, the Company acquired the exclusive development and commercialization rights to Ofirmev® in the U.S. and Canada, as well as the rights to the patents and technology, which were originally in-licensed by Cadence from BMSBristol-Myers Squibb Company ("BMS") in March 2006. BMS sublicensed these rights to Cadence under a license agreement with SCR Pharmatop S.A. ("Pharmatop"), and the Company has the right to grant sublicenses to third parties. Under this license agreement, the Company may be obligated to make futuremade the final milestone paymentspayment of up to $25.0$15.0 million upon the achievement of certain levels of net sales, of which $10.0 million was paid duringin fiscal 2015.2018. In addition, the Company is obligated to pay royalties on sales of the product. During fiscal 2016, 20152019, 2018 and 2014,2017, the Company paid royalties of $46.3$69.8 million, $43.9$76.9 million and $13.2$53.9 million, respectively.respectively, which were recorded within cost of sales on the consolidated statements of operations.
ExalgoAdvanced Accelerator Applications
In 2009,2007, the Company's Specialty Brands segmentNuclear Imaging business entered into a license agreement with BioSynthema, Inc. ("BioSynthema"), which was subsequently amended in 2010 when Advanced Accelerator Applications ("AAA") acquired BioSynthema. Pursuant to the rightsamended agreement, upon the first commercial sale of Lutathera® ("Lutathera"), AAA is to marketprovide the Company with a royalty based on net sales of the product through January 1, 2020. In early 2018, the FDA approved Lutathera for treatment of gastroenteropancreatic neuroendocrine tumors and distribute the pain management drug EXALGO® (hydromorphone HCl) extended-release tablets (CII) ("Exalgo")commercial sales commenced. During fiscal 2019 and 2018, in the U.S. Under the licenserelation to this agreement, the Company is obligated to make additional paymentsrecognized royalty income of up to $73.0 million based on the successful completion of specified development and regulatory milestones. Through fiscal 2016, $65.0 million of additional payments had been made, with $55.0 million being capitalized as an intangible asset. The Company is also required to pay royalties on sales of the product. During fiscal 2016, 2015 and 2014, the Company paid royalties of $0.9 million, $3.2$39.0 million and $22.0$15.5 million, respectively.
In January 2014, the Company purchased certain royalty rights associated with Exalgo for $7.2 million, which have been capitalized as an intangible asset.
Depomed
In 2009, the Company's Specialty Brands segment licensed worldwide rights to utilize Depomed, Inc.'s ("Depomed") Acuform gastric retentive drug delivery technology for the exclusive development of four products. Under this license agreement, the Company may be obligated to pay up to $64.0 million in development milestone payments. Through fiscal 2016, approximately $22.0 million of these payments have been made by the Company. During fiscal 2014, upon approval by the FDA for XARTEMIS™ XR (oxycodone HCl and acetaminophen) extended release tablets CII ("Xartemis XR"), the Company made a milestone payment of $10.0 million, which has been capitalized as an intangible asset.
Pennsaid
In 2009, the Company's Specialty Brands segment entered into a licensing agreement which granted it rights to market and distribute Pennsaid and Pennsaid 2%, a formulation of diclofenac sodium topical solutionrespectively, which was approved in February 2014 by the FDA and indicated for the treatment of pain associated with osteoarthritis of the knee. The Company was responsible for future development activities and expenses and were required to make milestone payments of up to $120.0 million based upon the successful completion of specified regulatory and sales milestones, of which $15.0 million of these payments were made, which were capitalized as an intangible asset. During the fourth quarter of fiscal 2014, the Company reached an agreement in principle with Nuvo to settle various claims associated with our license of Pennsaid obtained from Nuvo. As part of the legal settlement, the Company agreed to return the license to Nuvo, which resultedrecognized within other income (expense), net in the Company recording an impairmentconsolidated statements of $11.1 million during the fourth quarter of fiscal 2014.operations.
|
| |
6.7. | Restructuring and Related Charges |
During fiscal 2018, 2016 and 2013, the Company launched a restructuring programprograms designed to improve its cost structure ("the 2013 Mallinckrodt Program"). The 2013 Mallinckrodt Program included actions across the Specialty Brands, Specialty Generics and former Global Imaging segments, as well as within corporate functions. The Company expected to incur chargesstructure. Charges of$100.0 million to $125.0 million under this program as the specific actions required to execute on these initiatives were identified and approved. As of September 30, 2016, the Company has substantially completed the 2013 Mallinckrodt Program.
In July 2016, the Company's Board of Directors approved a $100.0 million to $125.0 million restructuringwere provided for under each program. Each program ("generally commences upon substantial completion of the 2016 Mallinckrodt Program") designed to further improve its cost structure, as the Company continues to transform its business. The 2016 Mallinckrodt Program is expected to include actions across the Specialty Brands and Specialty Generics segments, as well as within corporate functions. There is no specified time period associated with the 2016 Mallinckrodt Program.
previous program. In addition to the 2016 Mallinckrodt Program and the 2013 Mallinckrodt Program,aforementioned restructuring programs, the Company has taken restructuring actions to generate synergies from its acquisitions.
Net restructuring and related charges by segment from continuing operations arewere as follows:
|
| | | | | | | | | | | |
| Fiscal Year |
| 2019 | | 2018 | | 2017 |
Specialty Brands | $ | (13.7 | ) | | $ | 54.6 |
| | $ | 25.4 |
|
Specialty Generics | 10.0 |
| | 5.3 |
| | 7.7 |
|
Corporate | 2.0 |
| | 48.3 |
| | 3.3 |
|
Restructuring and related charges, net | (1.7 | ) | | 108.2 |
| | 36.4 |
|
Less: accelerated depreciation | — |
| | (5.2 | ) | | (5.2 | ) |
Restructuring charges, net | $ | (1.7 | ) | | $ | 103.0 |
| | $ | 31.2 |
|
|
| | | | | | | | | | | |
| Fiscal Year |
| 2016 | | 2015 | | 2014 |
Specialty Brands | $ | 23.3 |
| | $ | 36.5 |
| | $ | 57.0 |
|
Specialty Generics | 3.4 |
| | 4.5 |
| | 9.8 |
|
Corporate | 11.5 |
| | 4.3 |
| | 1.4 |
|
Restructuring and related charges, net | 38.2 |
| | 45.3 |
| | 68.2 |
|
Less: accelerated depreciation | (4.9 | ) | | (0.3 | ) | | (0.2 | ) |
Restructuring charges, net | $ | 33.3 |
| | $ | 45.0 |
| | $ | 68.0 |
|
Net restructuring and related charges by program from continuing operations are comprised of the following:
|
| | | | | | | | | | | |
| Fiscal Year |
| 2019 | | 2018 | | 2017 |
2018 Program | $ | 9.8 |
| | $ | 5.2 |
| | $ | — |
|
2016 Program | (10.6 | ) | | 71.6 |
| | 36.2 |
|
2013 Program | — |
| | — |
| | (0.7 | ) |
Acquisition programs | (0.9 | ) | | 31.4 |
| | 0.9 |
|
Total programs | (1.7 | ) | | 108.2 |
| | 36.4 |
|
Less: non-cash charges, including accelerated depreciation | — |
| | (5.2 | ) | | (5.2 | ) |
Total charges expected to be settled in cash | $ | (1.7 | ) | | $ | 103.0 |
| | $ | 31.2 |
|
|
| | | | | | | | | | | |
| Fiscal Year |
| 2016 | | 2015 | | 2014 |
2016 Mallinckrodt Program | $ | 8.3 |
| | $ | — |
| | $ | — |
|
2013 Mallinckrodt Program | 26.2 |
| | 12.0 |
| | 13.6 |
|
Acquisition programs | 3.7 |
| | 33.6 |
| | 56.4 |
|
Other programs | — |
| | (0.3 | ) | | (1.8 | ) |
Total programs | 38.2 |
| | 45.3 |
| | 68.2 |
|
Less: non-cash charges, including impairments and accelerated share based compensation expense | (4.9 | ) | | (10.1 | ) | | (37.7 | ) |
Total charges expected to be settled in cash | $ | 33.3 |
| | $ | 35.2 |
| | $ | 30.5 |
|
Non-cash charges in fiscal 2015 and 2014 include $9.8 million and $35.1 million, respectively, of accelerated share based compensation expense related to employee terminations, primarily related to the Questcor acquisition, and fiscal 2014 includes $2.3 million of property, plant and equipment asset impairments.
The following table summarizes cash activity for restructuring reserves, substantially all of which related to contract termination costs, employee severance and benefits with the exceptionand exiting of $8.5 million in fiscal 2014 related to consulting costs associated with restructuring initiatives related to the CMDS business:certain facilities: |
| | | | | | | | | | | | | | | | | | | |
| 2018 Program | | 2016 Program | | 2013 Program | | Acquisition Programs | | Total |
Balance as of December 30, 2016 | $ | — |
| | $ | 9.5 |
| | $ | 5.1 |
| | $ | 0.2 |
| | $ | 14.8 |
|
Charges from continuing operations | — |
| | 35.8 |
| | — |
| | 0.9 |
| | 36.7 |
|
Changes in estimate from continuing operations | — |
| | (4.8 | ) | | (0.7 | ) | | — |
| | (5.5 | ) |
Cash payments | — |
| | (26.1 | ) | | (4.4 | ) | | (0.3 | ) | | (30.8 | ) |
Reclassifications | — |
| | 0.3 |
| | — |
| | — |
| | 0.3 |
|
Balance as of December 29, 2017 | — |
| | 14.7 |
| | — |
| | 0.8 |
| | 15.5 |
|
Charges from continuing operations | 2.2 |
| | 76.9 |
| | — |
| | 29.9 |
| | 109.0 |
|
Changes in estimate from continuing operations | — |
| | (5.3 | ) | | — |
| | (0.7 | ) | | (6.0 | ) |
Cash payments | — |
| | (23.4 | ) | | — |
| | (22.2 | ) | | (45.6 | ) |
Reclassifications | — |
| | (1.9 | ) | | — |
| | — |
| | (1.9 | ) |
Balance as of December 28, 2018 | 2.2 |
| | 61.0 |
| | — |
| | 7.8 |
| | 71.0 |
|
Charges from continuing operations | 11.2 |
| | 4.0 |
| | — |
| | 0.1 |
| | 15.3 |
|
Changes in estimate from continuing operations | (1.4 | ) | | (14.6 | ) | | — |
| | (1.0 | ) | | (17.0 | ) |
Cash payments | (9.3 | ) | | (13.1 | ) | | — |
| | (2.4 | ) | | (24.8 | ) |
Reclassifications (1) | — |
| | (5.0 | ) | | — |
| | (4.3 | ) | | (9.3 | ) |
Currency translation | — |
| | (1.0 | ) | | — |
| | — |
| | (1.0 | ) |
Balance as of December 27, 2019 | $ | 2.7 |
| | $ | 31.3 |
| | $ | — |
| | $ | 0.2 |
| | $ | 34.2 |
|
|
| | | | | | | | | | | | | | | | | | | |
| 2016 Mallinckrodt Program | | 2013 Mallinckrodt Program | | Acquisition Programs | | Other Programs | | Total |
Balance at September 27, 2013 | $ | — |
| | $ | 14.9 |
| | $ | — |
| | $ | 10.6 |
| | $ | 25.5 |
|
Charges from continuing operations | — |
| | 19.2 |
| | 22.9 |
| | 1.4 |
| | 43.5 |
|
Charges from discontinued operations | — |
| | 39.0 |
| | — |
| | 1.1 |
| | 40.1 |
|
Changes in estimate from continuing operations | — |
| | (7.3 | ) | | (1.6 | ) | | (4.1 | ) | | (13.0 | ) |
Changes in estimate from discontinued operations | — |
| | (2.1 | ) | | — |
| | (0.7 | ) | | (2.8 | ) |
Cash payments | — |
| | (34.8 | ) | | (13.4 | ) | | (6.8 | ) | | (55.0 | ) |
Reclassifications (1) | — |
| | (1.3 | ) | | — |
| | (1.0 | ) | | (2.3 | ) |
Currency translation | — |
| | (1.0 | ) | | — |
| | (0.1 | ) | | (1.1 | ) |
Balance at September 26, 2014 | — |
| | 26.6 |
| | 7.9 |
| | 0.4 |
| | 34.9 |
|
Charges from continuing operations | — |
| | 11.7 |
| | 25.3 |
| | — |
| | 37.0 |
|
Charges from discontinued operations | — |
| | 4.7 |
| | — |
| | — |
| | 4.7 |
|
Changes in estimate from continuing operations | — |
| | — |
| | (1.5 | ) | | (0.3 | ) | | (1.8 | ) |
Changes in estimate from discontinued operations | — |
| | (8.9 | ) | | — |
| | — |
| | (8.9 | ) |
Cash payments | — |
| | (22.5 | ) | | (21.7 | ) | | (0.1 | ) | | (44.3 | ) |
Reclassifications (1) | — |
| | (3.0 | ) | | — |
| | — |
| | (3.0 | ) |
Currency translation | — |
| | (0.6 | ) | | — |
| | — |
| | (0.6 | ) |
Balance at September 25, 2015 | — |
| | 8.0 |
| | 10.0 |
| | — |
| | 18.0 |
|
Charges from continuing operations | 6.4 |
| | 24.6 |
| | 5.0 |
| | — |
| | 36.0 |
|
Charges from discontinued operations | — |
| | 2.5 |
| | — |
| | — |
| | 2.5 |
|
Changes in estimate from continuing operations | — |
| | (1.4 | ) | | (1.3 | ) | | — |
| | (2.7 | ) |
Changes in estimate from discontinued operations | — |
| | (0.3 | ) | | — |
| | — |
| | (0.3 | ) |
Cash payments | (0.2 | ) | | (20.3 | ) | | (13.2 | ) | | — |
| | (33.7 | ) |
Reclassifications (1) | — |
| | (1.3 | ) | | — |
| | — |
| | (1.3 | ) |
Balance at September 30, 2016 | $ | 6.2 |
| | $ | 11.8 |
| | $ | 0.5 |
| | $ | — |
| | $ | 18.5 |
|
| |
(1) | Represents the reclassification of pensionlease liabilities, net to lease liabilities and lease assets, which are reflected within other liabilities and other postretirement benefits from restructuring reservesassets on the consolidated balance sheet, due to pension and postretirement obligations.the adoption of ASU 2016-02. |
NetAs of December 27, 2019, net restructuring and related charges including associated asset impairments, incurred cumulative to date were as follows:
|
| | | | | | | | | | | |
| 2018 Program (1) | | 2016 Program | | 2013 Program |
Specialty Brands | $ | 3.0 |
| | $ | 68.1 |
| | $ | 18.8 |
|
Specialty Generics | 10.0 |
| | 14.6 |
| | 18.3 |
|
Discontinued Operations | — |
| | — |
| | 69.9 |
|
Corporate | 2.0 |
| | 28.9 |
| | 17.7 |
|
| $ | 15.0 |
| | $ | 111.6 |
| | $ | 124.7 |
|
| |
(1) | There is no specified time period associated with this restructuring program. |
In fiscal 2018, the Company discontinued the marketing of Raplixa after an evaluation of strategic options and incurred restructuring expenses of $51.1 million under the 2016 Program, consisting primarily of estimated contract termination costs related to the 2016 and 2013 Mallinckrodt Programs are as follows:production of Raplixa. During fiscal 2019, the Company finalized the settlement of these contract termination costs.
|
| | | | | | | |
| 2016 Mallinckrodt Program | | 2013 Mallinckrodt Program |
Specialty Brands | $ | 4.7 |
| | $ | 18.8 |
|
Specialty Generics | 0.5 |
| | 18.3 |
|
Discontinued Operations (including Nuclear and CMDS) | — |
| | 69.9 |
|
Corporate | 3.1 |
| | 18.4 |
|
| $ | 8.3 |
| | $ | 125.4 |
|
Substantially allAll of the restructuring reserves arewere included in accrued and other current liabilities on the Company's consolidated balance sheets. Amounts paid in the future may differ from the amount currently recorded.
In May 2015, the activitiesThe U.K. and non-U.K. components of the Company's principal executive offices were relocated from Ireland to the U.K. which resulted in a change in the Company's tax residence to the U.K. Mallinckrodt plc remains incorporated in Ireland. The tax regime applicable to holding companies resident in the U.K. allows Mallinckrodt plc to continue to have flexibility in structuring its subsidiary operations and enhanced global cash management. The Company continues to be subject to taxation in various tax jurisdictions worldwide. As a result of the integration of acquired intellectual property, the Company's income and assets are no longer concentrated in a single tax jurisdiction. Accordingly, beginning in 2015, the Company reports the U.K. tax jurisdiction as its Domestic jurisdiction and the International jurisdiction represents areas outside the U.K. tax jurisdiction.
The Domestic and International components of(loss) income from continuing operations before income taxes were as follows(1):follows:
|
| | | | | | | | | | | |
| Fiscal Year |
| 2019 | | 2018 | | 2017 |
U.K. | $ | (75.3 | ) | | $ | (233.7 | ) | | $ | (165.9 | ) |
Non-U.K. | (1,516.2 | ) | | (3,818.3 | ) | | 227.5 |
|
Total | $ | (1,591.5 | ) | | $ | (4,052.0 | ) | | $ | 61.6 |
|
|
| | | | | | | | | | | |
| 2016 | | 2015 | | 2014 |
Domestic | $ | (275.3 | ) | | $ | (107.5 | ) | | $ | (76.0 | ) |
International | 508.7 |
| | 214.8 |
| | 41.4 |
|
Total | $ | 233.4 |
| | $ | 107.3 |
| | $ | (34.6 | ) |
(1) Domestic reflects U.K. in fiscal 2016 and 2015, and U.S. federal and state in fiscal 2014.
Significant components of income taxes related to continuing operations are as follows(1):follows:
|
| | | | | | | | | | | |
| Fiscal Year |
| 2019 | | 2018 | | 2017 |
Current: | | | | | |
U.K. | $ | 0.1 |
| | $ | (0.2 | ) | | $ | 0.4 |
|
Non-U.K. | 21.7 |
| | 113.0 |
| | 37.7 |
|
Current income tax provision | 21.8 |
| | 112.8 |
| | 38.1 |
|
Deferred: | | | | | |
U.K. | (1.1 | ) | | 1.4 |
| | 0.6 |
|
Non-U.K. | (605.0 | ) | | (544.3 | ) | | (1,748.3 | ) |
Deferred income tax benefit | (606.1 | ) | | (542.9 | ) | | (1,747.7 | ) |
Total | $ | (584.3 | ) | | $ | (430.1 | ) | | $ | (1,709.6 | ) |
|
| | | | | | | | | | | |
| 2016 | | 2015 | | 2014 |
Current: | | | | | |
Domestic | $ | 0.3 |
| | $ | 0.2 |
| | $ | 22.3 |
|
International | 120.5 |
| | 67.3 |
| | 18.9 |
|
Current income tax provision | 120.8 |
| | 67.5 |
| | 41.2 |
|
Deferred: | | | | | |
Domestic | $ | 0.7 |
| | $ | (0.8 | ) | | $ | (41.9 | ) |
International | (377.1 | ) | | (196.0 | ) | | (11.9 | ) |
Deferred income tax (benefit) | (376.4 | ) | | (196.8 | ) | | (53.8 | ) |
| $ | (255.6 | ) | | $ | (129.3 | ) | | $ | (12.6 | ) |
(1) Domestic reflects U.K. in fiscal 2016 and 2015, and U.S. federal and state in fiscal 2014.
The fiscal 2016 Domestic2019 U.K. current income tax provision reflects a utilizationtax benefit of $1.0$1.2 million from utilization of net operating losses. The Domestic net operating loss utilization is comprised of net operating losses carried forward from fiscal 2015.carryforwards. The fiscal 2016 International2019 non-U.K. current income tax provision reflects a utilizationtax benefit of $29.2$0.9 million from utilization of net operating lossesloss carryforwards.
The fiscal 2018 U.K. current income tax provision reflects a tax benefit of $8.5 million from utilization of net operating loss carryforwards. The fiscal 2018 non-U.K. current income tax provision reflects a tax benefit of $13.7 million from utilization of net operating loss carryforwards.
The fiscal 2017 U.K. current income tax provision reflects a tax benefit of $14.3 million from utilization of net operating loss carryforwards. The fiscal 2017 non-U.K. current income tax provision reflects a tax benefit of $57.2 million from utilization of net operating loss carryforwards and $9.5$5.6 million of U.S. credits. The International net operating loss utilization is comprisedIn addition, the non-U.K. current income tax provision includes a tax benefit of $17.9$27.2 million of net operating losses acquiredrelated to carryback claims filed in conjunction with the Hemostasis Acquisition and the remainder of the utilization relates to net operating losses carried forward from fiscal 2015.2017. The U.S. credit utilization is comprised of credit carryforwards and credits carried forward from fiscal 2015 and generated during fiscal 2016.2017.
TheDuring fiscal 2015 International currentyears 2019, 2018, and 2017, net cash payments for income tax provision reflects a utilization of $7.0taxes was $30.7 million, of net operating losses (primarily in the U.S.) and $14.3 million of U.S. credits. The net operating loss utilization is comprised of $4.8 million of net operating losses acquired in conjunction with the Ikaria Acquisition and the remainder of the utilization relates to net operating losses carried forward from fiscal 2014. The U.S. credit utilization is comprised of $7.2 million of credits acquired in conjunction with the Ikaria Acquisition and the remainder utilization relating to credits carried forward or generated during fiscal 2015.
The fiscal 2014 Domestic current income tax provision reflects a utilization of $221.3 million of net operating losses (primarily in the U.S.) and $8.6 million of U.S. credits. The net operating loss utilization is comprised of $187.8 million of net operating losses acquired in conjunction with the Cadence Acquisition and the remainder utilization relating to net operating losses carried forward.
The Company has a provincial tax holiday in Canada that expires on April 1, 2017. The tax holiday reduced International tax expense by $1.0 million, $5.1$12.4 million, and $0.3 million for the fiscal years 2016, 2015 and 2014, respectively.
$73.4 million.
The reconciliation between DomesticU.K. income taxes at the statutory rate and the Company's provision for income taxes on continuing operations is as follows:
|
| | | | | | | | | | | |
| 2016 | | 2015 | | 2014 |
Provision for income taxes at Domestic statutory income tax rate (1) | $ | 46.6 |
| | $ | 21.4 |
| | $ | (12.1 | ) |
Adjustments to reconcile to income tax provision: | | | | | |
U.S. state income tax provision, net (5) | — |
| | — |
| | (7.0 | ) |
Rate difference between Domestic and International jurisdictions (2) | (249.3 | ) | | (152.9 | ) | | (14.2 | ) |
U.S. manufacturing deduction (5) | — |
| | — |
| | (2.7 | ) |
Valuation allowances, nonrecurring | 2.1 |
| | (2.1 | ) | | 0.1 |
|
Adjustments to accrued income tax liabilities and uncertain tax positions | (14.9 | ) | | (7.0 | ) | | (0.4 | ) |
Interest and penalties on accrued income tax liabilities and uncertain tax positions | (16.4 | ) | | 0.3 |
| | (7.7 | ) |
Investment in partnership | — |
| | — |
| | 20.0 |
|
Credits, principally research and orphan drug (3) (4) | (33.7 | ) | | (8.1 | ) | | (0.7 | ) |
Permanently nondeductible and nontaxable items | 7.9 |
| | 14.7 |
| | 13.4 |
|
Other | 2.1 |
| | 4.4 |
| | (1.3 | ) |
Provision for income taxes | $ | (255.6 | ) | | $ | (129.3 | ) | | $ | (12.6 | ) |
|
| | | | | | | | | | | |
| Fiscal Year |
| 2019 | | 2018 | | 2017 |
Provision (benefit) for income taxes at U.K. statutory income tax rate (1) | $ | (302.4 | ) | | $ | (770.1 | ) | | $ | 11.7 |
|
Adjustments to reconcile to income tax provision: | | | | | |
Rate difference between U.K. and non-U.K. jurisdictions (2) | (206.3 | ) | | (235.7 | ) | | (219.9 | ) |
Valuation allowances, nonrecurring (3) | 61.7 |
| | — |
| | (3.7 | ) |
Adjustments to accrued income tax liabilities and uncertain tax positions | (12.4 | ) | | 60.1 |
| | 5.1 |
|
Interest and penalties on accrued income tax liabilities and uncertain tax positions | (6.3 | ) | | 13.1 |
| | 0.2 |
|
Credits, principally research and orphan drug (4) | (13.5 | ) | | (25.9 | ) | | (13.8 | ) |
Impairments non deductible | — |
| | 788.7 |
| | — |
|
Permanently nondeductible and nontaxable items (3) | 98.1 |
| | 7.2 |
| | 6.4 |
|
Pension plan settlement, release of tax effects lodged in other comprehensive income | — |
| | — |
| | (2.4 | ) |
Divestitures (5) | 9.6 |
| | (2.7 | ) | | 18.2 |
|
U.S. Tax Reform (6) | — |
| | (8.5 | ) | | (456.9 | ) |
Legal Entity Reorganization (7) | (212.8 | ) | | (256.0 | ) | | (1,054.8 | ) |
Other | — |
| | (0.3 | ) | | 0.3 |
|
Benefit for income taxes | $ | (584.3 | ) | | $ | (430.1 | ) | | $ | (1,709.6 | ) |
| |
(1) | The statutory tax rate reflects the U.K. statutory tax rate of 20%19.0% for fiscal 2016 and 2015, and the U.S. federal statutory tax rate of 35% for fiscal 2014.all periods presented. |
| |
(2) | Includes the impact of certain recurring valuation allowances for DomesticU.K. and Internationalnon-U.K. jurisdictions. |
| |
(3) | DueFor fiscal 2019, the nonrecurring valuation allowances and permanently nondeductible and nontaxable item were primarily driven by the impact from the opioid-related litigation settlement charge. Refer to the December 31, 2013 Research Credit tax law expiration, fiscal 2014 includes $0.7 millionNote 24 for the period September 28, 2013 through December 31, 2013. During fiscal 2015, the legislation was extended, with a retroactive effective date of January 1, 2014. As such, fiscal 2015 includes approximately $3.6 million of credit related to the period January 1, 2014 through September 26, 2014.further discussion. |
| |
(4) | During fiscal 2019 and 2018, the research and orphan drug credits decreased primarily as a result of the impact of the Tax Cut and Jobs Act of 2017 ("TCJA") and increased in conjunction with the Company's increased investment in qualified research, respectively. |
| |
(5) | The Company realizedcompleted the sale of its wholly owned subsidiary BioVectra in November 2019, a tax benefitportion of $27.4 million resulting from a U.K. tax credit on a dividend between affiliates.its Hemostasis business during fiscal 2018 and the Intrathecal Therapy Business during fiscal 2017. |
| |
(5)(6) | For fiscal 2016,2018, the Company completed its analysis of the TCJA and recognized an additional tax benefit. Other line items, to the extent U.S. staterelated, are reflected at the current U.S. statutory income tax benefitrate of $15.1 million was combined with the rate differences between Domestic and International jurisdictions.21.0%. For fiscal 2015,2017, the benefit reflects the redetermination of the Company's end of year net deferred tax liabilities as a result of the new U.S. statestatutory income tax benefitrate of $34.9 million, and21.0%. Other line items, to the extent U.S. manufacturing deductionrelated, are reflected at the former U.S. statutory income tax rate of 35.0%. |
| |
(7) | Associated unrecognized tax benefit of $4.3 million were combined with the rate differences between Domestic and International jurisdictions. Fiscal 2014 includes U.S. state income tax benefit of $4.4 million associated with fiscal 2014 acquisitions and integration thereof.netted within this line. |
The rate difference between DomesticU.K. and Internationalnon-U.K. jurisdictions changed from $152.9$235.7 million of tax benefit to $249.3$206.3 million of tax benefit for fiscal 20152018 to fiscal 2016,2019, respectively. This change was predominately related to recent acquisitions, which resulted in more income in lower tax rate jurisdictions and less incomeThe $29.4 million decrease in the higher tax rate U.S. jurisdiction relative to income in all jurisdictions. The change in the lower tax rate jurisdictions was predominately due to recent acquisitions, which resulted in more income in lower tax rate jurisdictions and less income in the higher tax rate U.S. jurisdiction relative to income in all jurisdictions. The change in the lower tax rate jurisdictions was primarilybenefit included a $101.0 million decrease attributable to increasedthe non-restructuring impairment charges, a $45.8 million decrease attributable to changes in operating income, a $20.2 million decrease attributable to divestitures; partially offset by amortization. The change in the U.S. jurisdiction was primarilyan increase of $76.7 million attributable to increased amortizationthe gain on debt extinguishment and $60.9 million attributable to the costopioid-related settlement charge.
The rate difference between U.K. and non-U.K. jurisdictions changed from $219.9 million of financing recent acquisitions.tax benefit to $235.7 million of tax benefit for fiscal 2017 to fiscal 2018, respectively. The $96.4$15.8 million increase in the tax benefit included increasesa $90.3 million increase attributable to the non-restructuring impairment charges in fiscal 2018, a $22.2 million increase attributable to divestitures; partially offset by decreases of $146.3$80.2 million ofto the tax benefit attributedattributable to the impact of U.S. Tax Reform, an $11.8 million decrease related to recent acquisitions, and a $4.7 million decrease attributable to changes in operating income and $32.0fiscal 2017 one-time items that did not recur in fiscal 2018.
During fiscal 2019, the Company completed a reorganization of its intercompany financing and associated legal entity ownership in response to the changing global tax environment. As a result, the Company recognized current income tax expense of $26.2 million ofand a deferred income tax benefit relatedof $239.0 million with a corresponding reduction to acquisition and other non-acquisition related items; partially offset by $56.8 millionnet deferred tax liabilities. The reduction in net deferred tax liabilities was comprised of increaseda decrease in interest-bearing deferred tax expense to the change in amortization and a $25.1 million decrease to the U.S. state tax benefit associated with the impact of recent acquisitions, integration thereof, and legislative changes.
The rate difference between Domestic and International jurisdictions changed from $14.2 million of tax benefit to $152.9 million of tax benefit for fiscal 2014 to fiscal 2015, respectively. The rate difference between Domestic and International jurisdictions would have been $19.0 million of tax benefit in fiscal 2014 if the referenced rate would have been the U.K. statutory rate of 21%. This change was predominately related to recent acquisitions,obligations which resulted in more incomethe elimination of the December 28, 2018 balance of $227.5 million, a $29.7 million increase in lowervarious other net deferred tax rate jurisdictionsliabilities, a $28.7 million increase to a deferred tax asset related to excess interest carryforwards and less income ina $12.5 million increase to a deferred tax asset related to tax loss and credit carryforwards net of valuation allowances. The elimination of the higherinterest-bearing deferred tax rate U.S. jurisdiction relativeobligation also eliminated the annual Internal Revenue Code section 453A interest expense. The reorganization involved the interpretation of multi-jurisdictional tax laws and regulations, supported by third party opinions. Interpretation of tax laws can be inherently uncertain and can be subject to income in all jurisdictions. The change inpotential challenges by the lowerrelevant tax rate jurisdictions was predominately due to recent acquisitions,authorities, both of which resultedwere considered in more income in lowerassessing its reserves for uncertain tax rate jurisdictions and less income in the higher tax rate U.S. jurisdiction relative to income in all jurisdictions. The change in the lower tax rate jurisdictions was primarily attributable to increased operating income partially offset by amortization. The change in the U.S. jurisdiction was primarily attributable to increased amortization and the cost of financing recent acquisitions. The $138.7 million increase in the tax benefit included increases of $62.4 million of tax benefit attributed to changes in operating income, $62.2 million of tax benefit related to acquisition and other non-acquisition related items and $31.8 million of tax benefit to the U.S. state tax benefit associated with the impact of recent acquisitions, integration thereof, and legislative changes, and $4.8 million of tax benefit can be attributed to the change in the referenced rate from U.S. to U.K.; partially offset by $22.5 million of increased tax expense to the change in amortization.
positions.
The following table summarizes the activity related to the Company's unrecognized tax benefits, excluding interest:
|
| | | | | | | | | | | |
| Fiscal Year |
| 2019 | | 2018 | | 2017 |
Balance at beginning of period | $ | 287.7 |
| | $ | 182.5 |
| | $ | 118.7 |
|
Additions related to current year tax positions | 123.5 |
| | 19.6 |
| | 79.9 |
|
Additions related to prior period tax positions | 19.2 |
| | 125.1 |
| | 0.3 |
|
Reductions related to prior period tax positions | (5.7 | ) | | (32.7 | ) | | (13.6 | ) |
Settlements | (1.0 | ) | | (2.0 | ) | | — |
|
Lapse of statute of limitations | (25.1 | ) | | (4.8 | ) | | (2.8 | ) |
Balance at end of period | $ | 398.6 |
| | $ | 287.7 |
| | $ | 182.5 |
|
|
| | | | | | | | | | | |
| 2016 | | 2015 | | 2014 |
Balance at beginning of fiscal year | $ | 89.2 |
| | $ | 82.0 |
| | $ | 100.1 |
|
Additions related to current year tax positions | 63.8 |
| | 4.5 |
| | 3.2 |
|
Additions related to prior period tax positions | 10.8 |
| | 19.9 |
| | 30.6 |
|
Reductions related to prior period tax positions | (37.8 | ) | | (7.7 | ) | | (33.0 | ) |
Reductions related to disposition transactions | (6.6 | ) | | — |
| | — |
|
Settlements | (2.6 | ) | | (7.8 | ) | | (6.9 | ) |
Lapse of statute of limitations | (2.0 | ) | | (1.7 | ) | | (12.0 | ) |
Balance at end of fiscal year | $ | 114.8 |
| | $ | 89.2 |
| | $ | 82.0 |
|
During fiscal 2015, the Company made a payment of $8.9 million ($7.4 million of tax and $1.5 million of interest) to the U.S. Internal Revenue Service ("IRS") in connection with the settlement of certain tax matters for 2008 and 2009. During fiscal 2014, the Company made a payment of $35.9 million ($27.3 million of tax and $8.6 million of interest) to the IRS in connection with the settlement of certain tax matters for 2005 through 2007.
On January 19, 2016, Tyco International plc (“Tyco International”) announced it had entered into Stipulations of Settled Issues with the IRS to resolve certain disputes before the U.S. Tax Court. The disputes involved IRS audits of Tyco International for years in which companies that are now subsidiaries of Mallinckrodt were subsidiaries of Tyco International. On May 31, 2016, the U.S. Tax Court entered decisions consistent with the Stipulations of Settled Issues. As a result, all aspects of the disputes that were before the U.S. Tax court and Appeals Division of the IRS have been resolved for audit cycles from 1997-2007. Mallinckrodt is not a participant in the tax sharing agreement between Medtronic plc (as successor to Covidien plc), Tyco International and TE Connectivity and will not share in or be responsible for any payments to be made under the terms of the settlement.
Unrecognized tax benefits, excluding interest, are reported in the following consolidated balance sheet captions in the amountamounts shown:
|
| | | | | | | |
| December 27, 2019 | | December 28, 2018 |
Other assets | $ | 204.7 |
| | $ | — |
|
Accrued and other current liabilities | — |
| | 1.0 |
|
Other income tax liabilities | 193.9 |
| | 189.9 |
|
Deferred income taxes (non-current liability) | — |
| | 96.8 |
|
| $ | 398.6 |
| | $ | 287.7 |
|
|
| | | | | | | |
| September 30, 2016 | | September 25, 2015 |
Accrued and other current liabilities | $ | — |
| | $ | 1.3 |
|
Other income tax liabilities | 55.4 |
| | 80.0 |
|
Deferred income taxes (non-current liability) | 59.4 |
| | 7.9 |
|
| $ | 114.8 |
| | $ | 89.2 |
|
Included within total unrecognized tax benefits at September 30, 2016as of December 27, 2019, September 25, 2015December 28, 2018, and September 26, 2014,December 29, 2017, were $113.1$395.9 million, $87.4$275.8 million, and $82.0$180.8 million, respectively, of unrecognized tax benefits, which if favorably settled would benefit the effective tax rate.rate, of which up to $20.0 million in each year may be reported in discontinued operations. The remaining unrecognized tax benefits for each period would be offset by the write-off of related deferred and other tax assets, if recognized. During fiscal 2016,
2019, the Company recorded $4.1$14.4 million of additional interest through tax provision and acquisition accounting and decreased accrued interest and penalties by $32.1$18.6 million related to cash payments related toprior period reductions, settlements as well as reductions related to prior periods and $6.5 million related to disposition transactions.lapse of statute of limitations. During fiscal 20152018 and 2014,2017, the Company accrued additionalhad a net increase of interest and penalties activity of $5.7$30.0 million and $7.0 million,a net interest and penalties activity of 0, respectively. The total amount of accrued interest and penalties related to uncertain tax positions was $7.2$32.9 million, $41.7$37.1 million, and $45.1$7.1 million, respectively.
It is reasonably possible that within the next twelve months, as a result of the resolution of various DomesticU.K. and Internationalnon-U.K. examinations and appeals and the expiration of various statutes of limitation, that the unrecognized tax benefits could decrease by up to $14.6$99.5 million. Interest and penalties could decrease by up to $6.1$21.7 million.
Certain of the Company's subsidiaries continue to be subject to examination by the IRS for tax years as early as 2014. On August 5, 2019, the IRS proposed an adjustment to the taxable income of Mallinckrodt Hospital Products Inc. (“MHP”) (formerly known as Cadence Pharmaceuticals, Inc.) as a result of its findings in the audit of MHP's tax year ended September 26, 2014. The proposed adjustment to taxable income of $871.0 million, excluding potential associated interest and penalties, is proposed as a multi-year adjustment and may result in a non-cash reduction of the Company's U.S. Federal net operating loss carryforward of $782.0 million. The Company strongly disagrees with the proposed adjustment and intends to contest it through all available administrative and judicial remedies, which may take a number of years to conclude. See Note 19 for further details. In addition, the earliest open years for state tax jurisdictions are 2009 and a number of tax periods from 2013 to present are subject to examination by tax authorities in various jurisdictions, including Ireland, Luxembourg, Switzerland and the U.K.
Income taxes payable, including uncertain tax positions and related interest accruals, is reported in the following consolidated balance sheet captions in the amounts shown:
|
| | | | | | | |
| December 27, 2019 | | December 28, 2018 |
Accrued and other current liabilities | $ | 15.0 |
| | $ | 25.0 |
|
Other income tax liabilities | 227.1 |
| | 228.0 |
|
| $ | 242.1 |
| | $ | 253.0 |
|
|
| | | | | | | |
| September 30, 2016 | | September 25, 2015 |
Accrued and other current liabilities | $ | 111.8 |
| | $ | 15.6 |
|
Other income tax liabilities | 67.7 |
| | 121.3 |
|
| $ | 179.5 |
| | $ | 136.9 |
|
At September 30, 2016, other assets included $69.1 million of taxTax receivables and payments associated with non-current deferred intercompany transactions. Prepaid expenses and other current assets includes $10.0 million of tax payments associated with current deferred intercompany transactions and $43.5 million of receivables associated with tax payments on account withare included in the taxing authorities. At September 25, 2015, other assets includes $51.7 million of tax payments associated with non-current deferred intercompany transactions. Prepaid expenses and other current assets includes a receivable of $81.1 million and tax payments of $8.7 million associated with current deferred intercompany transactions. All offollowing consolidated balance sheet captions in the above items exclude amounts related to assets which are held for sale.shown: |
| | | | | | | |
| December 27, 2019 | | December 28, 2018 |
Other assets | $ | 3.1 |
| | $ | 3.0 |
|
Prepaid expenses and other current assets | 8.0 |
| | 16.2 |
|
| $ | 11.1 |
| | $ | 19.2 |
|
|
| | | | | | | |
| September 30, 2016 | | September 25, 2015 |
Other assets | $ | 69.1 |
| | $ | 51.7 |
|
Prepaid expenses and other current assets | 53.5 |
| | 89.8 |
|
| $ | 122.6 |
| | $ | 141.5 |
|
Covidien continues to be examined by various taxing authorities for periods the Company was included within the consolidated results of Covidien. In connection with the Separation, the Company entered into a tax matters agreement ("the Tax Matters Agreement") with Covidien that generally governs Covidien's and Mallinckrodt's respective rights, responsibilities and obligations after the Separation with respect to certain taxes, including, but not limited to, ordinary course of business taxes. For further information on the Tax Matters Agreement, refer to Note 18.
As of September 30, 2016, the earliest open years for U.S. federal and state tax jurisdictions is 2010 and 2000, respectively. Additionally, a number of tax periods from 2009 to present are subject to examination by tax authorities in various jurisdictions, including Ireland, Luxembourg, Switzerland and the U.K.
Deferred income taxes result from temporary differences between the amount of assets and liabilities recognized for financial reporting and tax purposes. The components of the net deferred tax asset (liability) asset at the end of each fiscal year were as follows:
|
| | | | | | | |
| September 30, 2016 | | September 25, 2015 |
Deferred tax assets: | | | |
Accrued liabilities and reserves | $ | 80.8 |
| | $ | 91.0 |
|
Inventories | 35.4 |
| | 21.4 |
|
Tax loss and credit carryforwards | 332.3 |
| | 159.5 |
|
Environmental liabilities | 28.6 |
| | 23.6 |
|
Rebate reserves | 48.7 |
| | 48.1 |
|
Expired product | 12.2 |
| | 26.3 |
|
Postretirement benefits | 48.7 |
| | 37.3 |
|
Federal and state benefit of uncertain tax positions and interest | 17.4 |
| | 33.6 |
|
Share-based compensation | 22.1 |
| | 17.6 |
|
Intangible assets | 341.8 |
| | 105.7 |
|
Other | 14.9 |
| | 8.7 |
|
| 982.9 |
| | 572.8 |
|
Deferred tax liabilities: | | | |
Property, plant and equipment | (111.3 | ) | | (111.8 | ) |
Intangible assets | (775.1 | ) | | (1,550.7 | ) |
Installment sale | (1,902.9 | ) | | (1,465.3 | ) |
Investment in partnership | (186.0 | ) | | (187.9 | ) |
| (2,975.3 | ) | | (3,315.7 | ) |
Net deferred tax (liability) before valuation allowances | (1,992.4 | ) | | (2,742.9 | ) |
Valuation allowances | (564.9 | ) | | (233.0 | ) |
Net deferred tax (liability) | $ | (2,557.3 | ) | | $ | (2,975.9 | ) |
|
| | | | | | | |
| December 27, 2019 | | December 28, 2018 |
Deferred tax assets: | | | |
Tax loss and credit carryforwards | $ | 2,263.4 |
| | $ | 1,987.8 |
|
Intangible assets | 981.2 |
| | 757.7 |
|
Opioid-related litigation settlement liability | 273.7 |
| | — |
|
Excess interest | 81.5 |
| | 71.4 |
|
Other | 200.4 |
| | 189.5 |
|
| 3,800.2 |
| | 3,006.4 |
|
Deferred tax liabilities: | | | |
Intangible assets | (139.4 | ) | | (264.7 | ) |
Interest-bearing deferred tax obligations | — |
| | (227.5 | ) |
Investment in partnership | (178.9 | ) | | (170.2 | ) |
Other | (46.3 | ) | | (42.9 | ) |
| (364.6 | ) | | (705.3 | ) |
Net deferred tax asset before valuation allowances | 3,435.6 |
| | 2,301.1 |
|
Valuation allowances | (3,131.5 | ) | | (2,604.9 | ) |
Net deferred tax assets (liability) | $ | 304.1 |
| | $ | (303.8 | ) |
Deferred taxes are reported in the following consolidated balance sheet captions in the amounts shown:
|
| | | | | | | |
| September 30, 2016 | | September 25, 2015 |
Deferred income taxes (current asset) | $ | — |
| | $ | 139.2 |
|
Other non-current assets | 24.1 |
| | 6.6 |
|
Accrued and other current liabilities | — |
| | (4.2 | ) |
Deferred income taxes (non-current liability) | (2,581.4 | ) | | (3,117.5 | ) |
Net deferred tax (liability) | $ | (2,557.3 | ) | | $ | (2,975.9 | ) |
The above table reflects the reclassification of current deferred taxes to non-current upon the Company's adoption of ASU 2015-17, "Balance Sheet Reclassification of Deferred Taxes."
The Company's current deferred tax asset decreased from $139.2 million at September 25, 2015 to zero at September 30, 2016 due to tax credit utilization of $12.4 million in the current year, and the remainder primarily due to the adoption of ASU 2015-17, "Balance Sheet Reclassification of Deferred Taxes," whereby deferred taxes are reclassified as non-current. Non-current deferred tax liability decreased from $3,117.5 million at September 25, 2015 to $2,581.4 million at September 30, 2016, primarily due to $322.8 million of decreases associated with the payment of internal installment sale obligations, $122.6 million of decreases due to reclassification on the adoption of ASU 2015-17, $66.4 million of decreases associated with the amortization of intangibles, and $50.0 million of decreases related to other impacts of recent acquisitions and integration and normal operating activity. These factors were partially offset by a $25.7 million increase from current year acquisitions.
The Hemostasis Acquisition resulted in a net deferred tax liability increase of $1.4 million. Significant components of this increase include $20.3 million of deferred tax liabilities associated with intangibles and $4.1 million associated with inventory, partially offset by $23.0 million of deferred tax assets associated with non U.K. net operating losses and tax credits.
The Stratatech Acquisition resulted in a net deferred tax liability increase of $24.3 million. Significant components of this include $35.5 million of deferred tax liabilities associated with intangibles partially offset by $11.2 million of deferred tax assets associated with non U.K. net operating losses and tax credits.
As a part of the Ikaria integration, the Company entered into an internal installment sale transaction during fiscal 2016. The Ikaria internal installment sale transaction resulted in a decrease of $535.1 million to the deferred tax liability associated with the completed technology and IPR&D intangible assets, a $519.5 million increase to the deferred tax liability associated with an installment sale note receivable, a $42.8 million increase to the current income tax liability, a $23.8 million increase to deferred tax charges and a $1.0 million increase to prepaid taxes.
As part of the Therakos integration, the Company entered into an internal installment sale transaction during fiscal 2016. The Therakos internal installment sale transaction resulted in a decrease of $267.3 million to the deferred tax liability associated with the completed technology intangible asset, a $250.4 million increase to the deferred tax liability associated with an installment sale note receivable, a $17.3 million increase to the current income tax liability and a $0.3 million increase to prepaid taxes.
At September 30, 2016, the Company had approximately $246.1 million of net operating loss carryforwards in certain International jurisdictions, of which $175.3 million have no expiration and the remaining $70.8 million will expire in future years through 2036. As a result of the Company's disposition of its CMDS business, as discussed in Note 4, the Company's International net operating losses increased by $29.5 million. The Company had $75.0 million of Domestic net operating loss carryforwards at September 30, 2016, which have no expiration date.
At September 30, 2016 the Company also had $11.2 million of tax credits available to reduce future income taxes payable, primarily in jurisdictions within the U.S., of which $4.0 million have no expiration and the remainder expire during fiscal 2017 through 2036.
The deferred tax asset valuation allowances of $564.9$3,131.5 million and $233.0$2,604.9 million at September 30, 2016as of December 27, 2019 and September 25, 2015,December 28, 2018, respectively, relate principallyprimarily to the uncertainty of the utilization of certain deferred tax assets, primarily Internationaldriven by U.K. and non-U.K. net operating losses, credits, intangible assets and intangible assets.the opioid-related settlement liability. The Company believes that it will generate sufficient future taxable income to realize the tax benefits related to the remaining net deferred tax assets.
Deferred taxes are reported in the following consolidated balance sheet captions in the amounts shown:
|
| | | | | | | |
| December 27, 2019 | | December 28, 2018 |
Other assets | $ | 315.1 |
| | $ | 20.5 |
|
Deferred income taxes (non-current liability) | (11.0 | ) | | (324.3 | ) |
Net deferred tax asset (liability) | $ | 304.1 |
| | $ | (303.8 | ) |
The net deferred tax liability decreased from $303.8 million as of December 28, 2018 to a non-current deferred tax asset of $304.1 million as of December 27, 2019, primarily due to $239.0 million of decreases associated with the deferred tax benefit recognized from a completed reorganization of its intercompany financing and associated legal entity ownership in response to the changing global tax environment, $211.9 million of decreases related to the opioid-related settlement charge, $69.0 million of decreases related to non-restructuring impairment charges, $37.8 million of decreases associated with the amortization of intangibles and $50.2 million of decreases predominately related to the generation of net operating losses and other operational activity.
The sale of BioVectra was completed in November 2019. This divestiture resulted in a net deferred tax liability decrease of $3.1 million. Significant components of this decrease includes a decrease of $2.7 million of deferred tax liability associated with fixed assets and $2.2 million of deferred tax liability associated with intangible assets, partially offset by an increase of $1.3 million associated with other deferred tax assets and $0.5 million of deferred tax assets associated with tax loss and credit carryforwards.
As of September 30, 2016,December 27, 2019, the cumulative amountCompany had approximately $2,084.0 million of undistributed earningsnet operating loss carryforwards in certain non-U.K. jurisdictions measured at the applicable statutory rates, of which $1,378.2 million have no expiration and the remaining $705.8 million will expire in future years through 2040. The Company had $115.1 million of U.K. net operating loss carryforwards measured at the applicable statutory rates at December 27, 2019, which have no expiration date.
As of December 27, 2019, the Company also had $64.3 million of tax credits available to reduce future income taxes payable, primarily in jurisdictions within the U.S., of which $2.6 million have no expiration and the remainder will expire in future years through 2040.
As of December 27, 2019, the Company's financial reporting basis in international subsidiaries that may be subject to tax but arewas in excess of its corresponding tax basis by $17.0 million. Such excess amount is considered to be indefinitely reinvested was $354.8 million. Itand it is not practicable to determine the cumulative amount of tax liability that would arise if thesethis indefinitely reinvested earningsamount were remittedrealized due to a variety of factors including the complexity of the Company's global legal entity structure as well as the timing, extent, and nature of any hypothetical repatriation of unremitted earnings.realization. The net decrease, in such undistributed earnings as compared to the period ended September 25, 2015fiscal 2018, was attributable to the removaldivestiture of the earnings for the entities classifiedBioVectra as held for sale, further adjusted by unrepatriated earnings associated withwell as income and losses attributed to the current year activity.
As of September 25, 2015, the The Company has also accruedrecorded a $6.5 million deferred tax liability associated with approximately $41.3of $7.6 million of unrepatriated earnings that werefor amounts not considered to be indefinitely reinvested related to assets held for sale, which was adjusted to $3.9 million in 2016. As a result of the disposition of the CMDS business, the Company satisfied this deferred tax liability. As of September 30, 2016, the Company has no deferred tax liabilities associated with unrepatriated earnings that are not indefinitely reinvested on assets from continuing operations or related to assets held for sale.reinvested.
|
| |
8.9. | (Loss) Earnings (Loss) per Share |
In fiscal 2016, basicBasic (loss) earnings (loss) per share wasis computed by dividing net (loss) income by the number of weighted-average shares outstanding during the period. Diluted (loss) earnings (loss) per share wasis computed using the weighted-average shares outstanding and, if dilutive, potential ordinary shares outstanding during the period. Potential ordinary shares represent the incremental ordinary shares issuable for restricted share units and share option exercises. The Company calculated the dilutive effect of outstanding restricted share units and share options on (loss) earnings (loss) per share by application of the treasury stock method.
In fiscal 2015 and 2014, basic and diluted earnings (loss) per share were computed using the two-class method. The two-class method is an earnings allocation that determines earnings per share for each class of common stock and participating securities according to dividends declared and participation rights in undistributed earnings. The Company’s restricted stock awards, issued in conjunction with the Questcor Acquisition in August 2014, were considered participating securities as holders were entitled to receive non-forfeitable dividends during the vesting term. Diluted earnings per share included securities that could potentially dilute basic earnings per share during a reporting period, for which the Company includes all share-based compensation awards other than participating securities.
Dilutive securities, including participating securities, are not included in the computation of loss per share when the Company reports a net loss from continuing operations as the impact would be anti-dilutive.
The weighted-average number of shares outstanding used in the computations of basic and diluted (loss) earnings per share were as follows (in millions):
|
| | | | | | | | | | | |
| 2016 | | 2015 | | 2014 |
Earnings (loss) per share numerator: | | | | | |
Income (loss) from continuing operations attributable to common shareholders before allocation of earnings to participating securities | $ | 489.0 |
| | $ | 236.6 |
| | $ | (22.0 | ) |
Less: earnings allocated to participating securities | — |
| | 2.0 |
| | — |
|
Income (loss) from continuing operations attributable to common shareholders, after earnings allocated to participating securities | 489.0 |
| | 234.6 |
| | (22.0 | ) |
| | | | | |
Income (loss) from discontinued operations | 154.7 |
| | 88.1 |
| | (297.3 | ) |
Less: earnings from discontinued operations allocated to participating securities | — |
| | 0.7 |
| | — |
|
Income (loss) from discontinued operations attributable to common shareholders, after allocation of earnings to participating securities | 154.7 |
| | 87.4 |
| | (297.3 | ) |
Net income (loss) attributable to common shareholders, after allocation of earnings to participating securities | $ | 643.7 |
| | $ | 322.0 |
| | $ | (319.3 | ) |
Earnings (loss) per share denominator: | | | | | |
Weighted-average shares outstanding - basic | 110.6 |
| | 115.8 |
| | 64.9 |
|
Impact of dilutive securities | 0.9 |
| | 1.4 |
| | — |
|
Weighted-average shares outstanding - diluted | 111.5 |
| | 117.2 |
| | 64.9 |
|
Basic earnings (loss) per share attributable to common shareholders | | | | | |
Income (loss) from continuing operations | $ | 4.42 |
| | $ | 2.03 |
| | $ | (0.34 | ) |
Income (loss) from discontinued operations | 1.40 |
| | 0.75 |
| | (4.58 | ) |
Net income (loss) attributable to common shareholders | $ | 5.82 |
| | $ | 2.78 |
| | $ | (4.92 | ) |
Diluted earnings (loss) per share attributable to common shareholders | | | | | |
Income (loss) from continuing operations | $ | 4.39 |
| | $ | 2.00 |
| | $ | (0.34 | ) |
Income (loss) from discontinued operations | 1.39 |
| | 0.75 |
| | (4.58 | ) |
Net income (loss) attributable to common shareholders | $ | 5.77 |
| | $ | 2.75 |
| | $ | (4.92 | ) |
|
| | | | | | | | |
| Fiscal Year |
| 2019 | | 2018 | | 2017 |
Basic | 83.9 |
| | 84.0 |
| | 97.7 |
|
Dilutive impact of restricted share units and share options | — |
| | — |
| | 0.2 |
|
Diluted | 83.9 |
| | 84.0 |
| | 97.9 |
|
The computation of diluted earnings per shareweighted-average shares outstanding for fiscal 2016, 20152019, 2018 and 2014 excludes2017 excluded approximately 1.76.3 million, 0.13.3 million and 5.74.2 million, respectively, shares of equity awardsaward because the effect would have been anti-dilutive. As the Company incurred a net loss in fiscal 2014, there was no allocation of the undistributed loss to participating securities because the effect would have been anti-dilutive to basic and diluted earnings per share.
Inventories are comprised of the following at the end of each period:
|
| | | | | | | |
| September 30, 2016 | | September 25, 2015 |
Raw materials and supplies | $ | 62.0 |
| | $ | 52.9 |
|
Work in process | 188.9 |
| | 121.6 |
|
Finished goods | 84.7 |
| | 87.6 |
|
Inventories | $ | 335.6 |
| | $ | 262.1 |
|
Inventories were comprised of the following at the end of each period:
|
| | | | | | | |
| December 27, 2019 | | December 28, 2018 |
Raw materials | $ | 62.7 |
| | $ | 69.2 |
|
Work in process | 166.5 |
| | 167.6 |
|
Finished goods | 82.9 |
| | 85.5 |
|
Inventories | $ | 312.1 |
| | $ | 322.3 |
|
|
| |
11. | Property, Plant and Equipment |
The gross carrying amount and accumulated depreciation of property, plant and equipment were comprised of the following at the end of each periodperiod:
|
| | | | | | | |
| December 27, 2019 | | December 28, 2018 |
Land | $ | 43.4 |
| | $ | 43.9 |
|
Buildings | 363.6 |
| | 379.5 |
|
Capitalized software | 142.2 |
| | 130.8 |
|
Machinery and equipment | 1,157.0 |
| | 1,137.3 |
|
Construction in process | 193.9 |
| | 244.7 |
|
| 1,900.1 |
| | 1,936.2 |
|
Less: accumulated depreciation | (1,003.6 | ) | | (954.2 | ) |
Property, plant and equipment, net | $ | 896.5 |
| | $ | 982.0 |
|
Depreciation expense was as follows: |
| | | | | | | | | | | |
| Fiscal Year |
| 2019 | | 2018 | | 2017 |
Depreciation expense | $ | 97.7 |
| | $ | 111.9 |
| | $ | 113.8 |
|
|
| | | | | | | |
| September 30, 2016 | | September 25, 2015 |
Land | $ | 46.8 |
| | $ | 47.1 |
|
Buildings | 287.2 |
| | 261.7 |
|
Capitalized software | 85.3 |
| | 85.4 |
|
Machinery and equipment | 1,032.3 |
| | 979.9 |
|
Construction in process | 164.1 |
| | 118.3 |
|
| 1,615.7 |
| | 1,492.4 |
|
Less: accumulated depreciation | (771.7 | ) | | (699.4 | ) |
Property, plant and equipment, net | $ | 844.0 |
| | $ | 793.0 |
|
Depreciation expense, including amountsLease assets and liabilities related to capitalizedthe Company's operating leases are reported in the following consolidated balance sheet captions:
|
| | | |
| December 27, 2019 |
Other assets | $ | 83.5 |
|
| |
Accrued and other current liabilities | $ | 19.2 |
|
Other liabilities | 70.2 |
|
Total lease liabilities | $ | 89.4 |
|
Dependent on the nature of the leased assets, for continuing operationsasset, lease expense is included within cost of sales or SG&A. The primary components of lease expense were as follows:
|
| | | |
| Fiscal Year |
| 2019 |
Lease cost: | |
Operating lease cost | $ | 21.3 |
|
Short-term lease cost | 3.5 |
|
Total lease cost | $ | 24.8 |
|
Prior to the adoption of Topic 842, rental expense under facility, vehicle and equipment operating leases was $113.3$24.8 million $90.8 millionand $76.7$30.4 million for fiscal 2016, 20152018 and 2014,2017, respectively.
Lease terms and discount rates were as follows:
|
| | |
| December 27, 2019 |
Weighted-average remaining lease term (in years) - operating lease | 6.6 |
|
Weighted-average discount rate - operating leases | 3.8 | % |
Maturities of operating lease liabilities as of December 27, 2019 were as follows:
|
| | | |
Fiscal 2020 | $ | 22.7 |
|
Fiscal 2021 | 17.9 |
|
Fiscal 2022 | 13.7 |
|
Fiscal 2023 | 12.1 |
|
Fiscal 2024 | 8.9 |
|
Thereafter | 28.1 |
|
Total lease payments | 103.4 |
|
Less: Interest | (14.0 | ) |
Present value of lease liabilities | $ | 89.4 |
|
Long-Lived Asset
Other supplemental cash flow information related to leases were as follows:
|
| | | |
| Fiscal Year |
| 2019 |
Cash paid for amounts included in the measurement of lease liabilities: | |
Operating cash flows from operating leases | $ | 23.2 |
|
Lease assets obtained in exchange for lease obligations: | |
Operating leases | 7.3 |
|
|
| |
13. | Goodwill and Intangible Assets |
2018 Goodwill Impairment Analysis
InDuring fiscal 2014,2018, the Company recorded long-lived assetCompany's annual goodwill impairment chargesanalysis resulted in the recognition of a full goodwill impairment of $3,672.8 million related to the Specialty Brands reporting unit. The Company performed its CMDS asset group. Duringannual goodwill impairment analysis for the Specialty Brands reporting unit as of the first day of the fourth quarterquarter. The Company's 2018 annual assessment first considered its internally developed future cash flows, which reflect the Company's overall strategy, future growth and value proposition. At the time of fiscal 2014,this analysis there continued to be a disparity between the Company received notification that the Company lost preferred supplier status withCompany's anticipated future performance and present uncertainty reflected in its market capitalization, driven by a significant group purchasing organization ("GPO") and that a related-party supply contract was terminated by the Company.sustained decrease in its share price. The Company determined that these events constitutedits share price had been adversely affected primarily by uncertainties regarding patient withdrawal issues impacting net sales of Acthar® Gel ("Acthar Gel"), ongoing INOmax® ("INOmax") patent litigation and the perceived value of its various pipeline products. Given the passage of time since first experiencing a triggering event with respectsubstantial decline in its share price during the three months ended December 29, 2017 and the fact that the aforementioned uncertainties were not expected to our CMDS asset group assessedbe resolved in the recoverability ofnear-term, the CMDS asset group. The Company determined that the undiscounted cash flows of this asset group were less than its net book value. This required the Company to record an impairment charge as the fair value of the CMDS asset groupgoodwill was less than its net book value.fully impaired.
The Company determined the fair value of the CMDS asset group using the income approach, a level three measurement technique. For purposes of determining fair valuethe 2018 goodwill impairment assessment for the Specialty Brands reporting unit, the Company made various assumptions regarding estimated future cash flows, discount ratesrate and other factors in determining the respective fair valuesvalue of eachthe reporting unit using the income approach. The Company's projections of future cash flows were then discounted based on a weighted-averageweighted average cost of capital ("WACC")of 12.5% that was determined from relevant market comparisons, adjusted upward for specific risks (primarily the uncertainty of achieving projected operating cash flows).reporting unit risks. A terminal value growth rate was applied to the terminal year cash flows, both of which representrepresenting the Company's estimate of stable sustainable growth.cash flows. The fair value of the asset group represents the sum of the discounted cash flows from the discrete period and the terminal year cash flows.
The Company's projections in the CMDS asset group included long-term net sales and operating income at lower than historical levels. The decrease in net sales and operating income was reflective of the notification of the loss of a significant customer, termination of a supply contract with a related party and increased competition in the marketplace. The Company utilized a WACC of
8.0%, which reflects the lower inherent risk with the decreasing revenue trends. These assumptions resulted in a fair value of the CMDS asset group that was less than its net book value. Therefore, the Company recorded impairment charges of $65.9 million and $52.4 million to the property, plant and equipment and long-lived amortizing intangible assets, respectively, included in the CMDS asset group. The Company sold its CMDS business and the financial results of this business are presented as a discontinued operation. The Company reclassified $51.4 million of the impairment charge associated with property, plant and equipment to discontinued operations as certain of the assets were retained by the Company based upon the terms of the Company's agreement with Guerbet. The Company reclassified $52.4 million of the impairment charge associated with intangible assets to discontinued operations.
|
| |
11. | Goodwill and Intangible Assets |
The changes in the carrying amount of goodwill by segment were as follows:
|
| | | | | | | |
| September 30, 2016 | | September 25, 2015 |
Specialty Brands | $ | 3,498.3 |
| | $ | 3,442.4 |
|
Specialty Generics | 207.0 |
| | 207.0 |
|
Total | $ | 3,705.3 |
| | $ | 3,649.4 |
|
During the fiscal year ended September 30, 2016, the gross carrying value of goodwill in the Specialty Brands segment increased by $55.9 million, primarily attributable to $57.3 million from the Stratatech Acquisition. The remaining change in goodwill is a result of the Hemostasis Acquisition, offset by purchase accounting adjustments for the Therakos Acquisition and Ikaria Acquisition primarily attributable to changes in deferred tax balances.
Goodwill Impairment Analysis
As of the fiscal 2016 measurement date, the Company had identified the Specialty Brands, Specialty Generics and Nuclear Imaging businesses as representing the reporting units in our annual goodwill impairment analysis. For purposes of assessing impairment and the recoverability of goodwill for each reporting unit the Company makes various assumptions regarding estimated future cash flows, discount rates and other factors in determining the fair values of each reporting unit using the income approach. The Company's projections of future cash flows were then discounted based on a WACC determined from relevant market comparisons, adjusted upward for specific reporting unit risks (primarily the uncertainty of achieving projected operating cash flows). A terminal value growth rate was applied to the terminal year cash flows, both of which represent the Company's estimate of stable, sustainable growth. The fair value of the reporting unit represents the sum of the discounted cash flows from the discrete period and the terminal year cash flows. The fair values of the reporting units were assessed for reasonableness by aggregating the fair values and comparing this to the Company's market capitalization with a control premium.
The Company's projections in its Specialty Brands reporting unit include long-term revenue and operating income at levels higher than historical levels, which is primarily associated with the Therakos Acquisition, Hemostasis Acquisition and revenue growth for Acthar. The projections also reflect the potential impacts from the future loss of exclusivity related to Ofirmev. The Company utilized a WACC of 12.5%. These assumptions resulted in a fair value of the Specialty Brands reporting unit in excess of its net book value. Should the Specialty Brands reporting unit fail to experience growth in the aforementioned products, revise its long-term projections for these products downward or market conditions dictate utilization of higher discount rates, the Specialty Brands reporting unit could be subject to impairment in future periods.
The Company's projections in its Specialty Generics reporting unit include long-term revenue and operating income at lower than historical levels primarily attributable to increased competition. The Specialty Generics segment has and may continue to experience customer consolidation, which could result in further downward pressure to our long-term revenue and operating income projections. The Company utilized a WACC of 11.0%. These assumptions resulted in a fair value of the Specialty Generics reporting unit in excess of its net book value.Intangible Assets
In October 2016, the Company was notified that the FDA was initiating Withdrawal Proceedings on the Company's Methylphenidate ER products, which could result in these products losing their FDA approval. The Specialty Generics segment includes cash flows from the sale of the Company's Methylphenidate ER products. The loss of FDA approval could have a material, negative impact to our Specialty Generics segment. It is possible that if the Specialty Generics segment experiences greater downward pressure than projected or the Company loses FDA approval of its Methylphenidate ER products, or a combination of these factors, it could result in impairment of goodwill and other long-lived assets associated with this segment.
In fiscal 2014, the Company recorded goodwill impairment charges related to its former Global Medical Imaging reporting unit (which included the CMDS and Nuclear Imaging businesses that are now included within discontinued operations). The Company recorded an impairment charge related to goodwill in fiscal 2014 of $219.7 million, which eliminated all goodwill balances related to the Global Medical Imaging reporting unit. In fiscal 2016 and fiscal 2015, the Company announced that it had entered into definitive agreements to sell its Nuclear Imaging and CMDS businesses, respectively, therefore the businesses were each deemed to be held for sale and the financial results of each business are presented as discontinued operations. As a result, the Company reclassified the impairment charge to discontinued operations.
The gross carrying amount and accumulated amortization of intangible assets excluding held for sale intangible assets,were comprised of the following at the end of each period were as follows:period: |
| | | | | | | | | | | | | | | |
| December 27, 2019 | | December 28, 2018 |
| Gross Carrying Amount | | Accumulated Amortization | | Gross Carrying Amount | | Accumulated Amortization |
Amortizable: | | | | | | | |
Completed technology | $ | 10,456.9 |
| | $ | 3,822.8 |
| | $ | 10,467.9 |
| | $ | 2,980.6 |
|
License agreements | 120.1 |
| | 74.1 |
| | 120.1 |
| | 70.1 |
|
Trademarks | 77.7 |
| | 20.1 |
| | 81.9 |
| | 18.1 |
|
Customer relationships | — |
| | — |
| | 27.5 |
| | 14.1 |
|
Total | $ | 10,654.7 |
| | $ | 3,917.0 |
| | $ | 10,697.4 |
| | $ | 3,082.9 |
|
Non-Amortizable: | | | | | | | |
Trademarks | $ | 35.0 |
| | | | $ | 35.0 |
| | |
In-process research and development | 245.3 |
| | | | 633.3 |
| | |
Total | $ | 280.3 |
| | | | $ | 668.3 |
| | |
|
| | | | | | | | | | | | | | | |
| September 30, 2016 | | September 25, 2015 |
| Gross Carrying Amount | | Accumulated Amortization | | Gross Carrying Amount | | Accumulated Amortization |
Amortizable: | | | | | | | |
Completed technology | $ | 10,028.8 |
| | $ | 1,446.2 |
| | $ | 9,896.0 |
| | $ | 765.8 |
|
Licenses | 185.1 |
| | 112.3 |
| | 185.1 |
| | 99.8 |
|
Customer relationships | 28.6 |
| | 8.0 |
| | 28.1 |
| | 4.4 |
|
Trademarks | 82.2 |
| | 10.0 |
| | 82.1 |
| | 6.2 |
|
Other | 6.7 |
| | 6.7 |
| | 6.7 |
| | 6.7 |
|
Total | $ | 10,331.4 |
| | $ | 1,583.2 |
| | $ | 10,198.0 |
| | $ | 882.9 |
|
Non-Amortizable: | | | | | | | |
Trademarks | $ | 35.0 |
| | | | $ | 35.0 |
| | |
In-process research and development | 399.1 |
| | | | 316.2 |
| | |
Total | $ | 434.1 |
| | | | $ | 351.2 |
| | |
During fiscal 2016, theThe Company recorded impairment charges totaling $16.9$388.0 million, related to certain Specialty Brands in-process research$220.3 million and development intangible assets acquired as part of the CNS Therapeutics acquisition in$63.7 million during fiscal 2013.2019, 2018 and 2017, respectively. The valuation method used to approximate fair value in each of these periods was based on the estimated discounted cash flows for the respective asset. During the three months ended December 27, 2019, the Company recognized a full impairment on its IPR&D asset related to VTS-270 of $274.5 million, primarily driven by continued regulatory challenges. The
Company will continue to engage in dialogue with the FDA and assess future opportunities for this development program. Also during the three months ended June 28, 2019, the Company recognized a full impairment on its IPR&D asset related to stannsoporfin of $113.5 million as the Company is no longer pursuing this development program. The fiscal 2018 and 2017 impairment charges resulted from delays in anticipated FDA approval, higher than expected development costsprimarily relate to the MNK-1411 and Raplixa intangible assets, respectively, and were a result of lower than previously anticipated pricing assumptions and commercial opportunities.opportunities, respectively.
Ofirmev®
Since the Company's acquisition of Ofirmev in March 2014, the related completed technology intangible asset had been amortized using the straight-line method over a useful life of eight years. As the product nears loss of exclusivity, the Company is better positioned to reliably determine the pattern in which the remaining economic benefits of the intangible asset are consumed. As a result, during the three months ended March 29, 2019, the Company concluded that the sum of the years digits method, an accelerated method of amortization, would more accurately reflect the consumption of the economic benefits over the remaining useful life of the asset. This change in amortization method resulted in additional amortization expense of $107.3 million during fiscal 2019, which impacted basic earnings per share for the respective periods by $1.28 per share.
Finite-lived intangible asset amortization expense within continuing operations was $700.1 million, $550.3 million and $154.8 million in fiscal 2016, 2015 and 2014, respectively. is as follows:
|
| | | | | | | | | | | |
| Fiscal Year |
| 2019 | | 2018 | | 2017 |
Amortization expense | $ | 853.4 |
| | $ | 740.2 |
| | $ | 694.5 |
|
The estimated aggregate amortization expense on intangible assets owned by the Company excluding held for sale intangible assets, is expected to be as follows:
|
| | | |
Fiscal 2020 | $ | 754.2 |
|
Fiscal 2021 | 657.6 |
|
Fiscal 2022 | 585.1 |
|
Fiscal 2023 | 581.1 |
|
Fiscal 2024 | 581.1 |
|
|
| | | |
| |
Fiscal 2017 | $ | 701.4 |
|
Fiscal 2018 | 692.4 |
|
Fiscal 2019 | 692.1 |
|
Fiscal 2020 | 691.9 |
|
Fiscal 2021 | 691.6 |
|
Debt was comprised of the following at the end of each period:
|
| | | | | | | | | | | | | | | |
| December 27, 2019 | | December 28, 2018 |
| Principal | | Unamortized Discount and Debt Issuance Costs | | Principal | | Unamortized Discount and Debt Issuance Costs |
Current maturities of long-term debt: | | | | | | | |
4.875% senior notes due April 2020 | $ | 614.8 |
| | $ | 0.6 |
| | $ | — |
| | $ | — |
|
Term loan due September 2024 | 15.6 |
| | 0.2 |
| | 16.4 |
| | 0.2 |
|
Term loan due February 2025 | 4.1 |
| | 0.1 |
| | 6.0 |
| | 0.1 |
|
Other | — |
| | — |
| | 0.3 |
| | — |
|
Total current debt | 634.5 |
| | 0.9 |
| | 22.7 |
| | 0.3 |
|
Long-term debt: | | | | | | | |
4.875% senior notes due April 2020 | — |
| | — |
| | 700.0 |
| | 3.2 |
|
Variable-rate receivable securitization due July 2020 | — |
| | — |
| | 250.0 |
| | 0.4 |
|
9.50% debentures due May 2022 | 10.4 |
| | — |
| | 10.4 |
| | — |
|
5.75% senior notes due August 2022 | 610.3 |
| | 3.7 |
| | 835.2 |
| | 7.0 |
|
8.00% debentures due March 2023 | 4.4 |
| | — |
| | 4.4 |
| | — |
|
4.75% senior notes due April 2023 | 133.7 |
| | 0.8 |
| | 500.2 |
| | 3.5 |
|
5.625% senior notes due October 2023 | 514.7 |
| | 4.4 |
| | 731.4 |
| | 8.0 |
|
Term loan due September 2024 | 1,505.2 |
| | 15.5 |
| | 1,597.4 |
| | 19.8 |
|
Term loan due February 2025 | 399.5 |
| | 6.1 |
| | 591.0 |
| | 10.7 |
|
5.50% senior notes due April 2025 | 387.2 |
| | 3.6 |
| | 692.1 |
| | 7.7 |
|
10.00% senior notes due April 2025 | 322.9 |
| | 9.9 |
| | — |
| | — |
|
Other | — |
| | — |
| | 1.9 |
| | — |
|
Revolving credit facility | 900.0 |
| | 3.1 |
| | 220.0 |
| | 4.5 |
|
Total long-term debt | 4,788.3 |
| | 47.1 |
| | 6,134.0 |
| | 64.8 |
|
Total debt | $ | 5,422.8 |
| | $ | 48.0 |
| | $ | 6,156.7 |
| | $ | 65.1 |
|
|
| | | | | | | | | | | | | | | |
| September 30, 2016 | | September 25, 2015 |
| Principal | | Unamortized Discount and Debt Issuance Costs | | Principal | | Unamortized Discount and Debt Issuance Costs |
Current maturities of long-term debt: | | | | | | | |
Variable rate receivable securitization | $ | 235.0 |
| | $ | 0.4 |
| | $ | — |
| | $ | — |
|
Term loans due March 2021 | 20.0 |
| | 0.4 |
| | 20.0 |
| | — |
|
4.00% term loan due February 2022 | 1.1 |
| | — |
| | 1.0 |
| | — |
|
Capital lease obligation and vendor financing agreements | 1.0 |
| | — |
| | 1.0 |
| | — |
|
Total current debt | 257.1 |
| | 0.8 |
| | 22.0 |
| | — |
|
Long-term debt: | | | | | | | |
Variable rate receivable securitization | — |
| | — |
| | 153.0 |
| | 0.8 |
|
3.50% notes due April 2018 | 300.0 |
| | 1.1 |
| | 300.0 |
| | 1.7 |
|
4.875% notes due April 2020 | 700.0 |
| | 8.8 |
| | 700.0 |
| | 11.3 |
|
Term loans due March 2021 | 1,933.5 |
| | 35.4 |
| | 1,958.5 |
| | 44.1 |
|
4.00% term loan due February 2022 | 6.0 |
| | — |
| | 6.9 |
| | — |
|
9.50% debentures due May 2022 | 10.4 |
| | — |
| | 10.4 |
| | — |
|
5.75% notes due August 2022 | 884.0 |
| | 12.1 |
| | 900.0 |
| | 14.4 |
|
8.00% debentures due March 2023 | 4.4 |
| | — |
| | 4.4 |
| | — |
|
4.75% notes due April 2023 | 600.0 |
| | 6.4 |
| | 600.0 |
| | 7.1 |
|
5.625% notes due October 2023 | 740.0 |
| | 11.8 |
| | 750.0 |
| | 13.7 |
|
5.50% notes due April 2025 | 700.0 |
| | 10.6 |
| | 700.0 |
| | 11.9 |
|
Revolving credit facility | — |
| | 3.6 |
| | 500.0 |
| | 4.9 |
|
Capital lease obligation and vendor financing agreements | 0.2 |
| | — |
| | 1.0 |
| | — |
|
Total long-term debt | 5,878.5 |
| | 89.8 |
| | 6,584.2 |
| | 109.9 |
|
Total debt | $ | 6,135.6 |
| | $ | 90.6 |
| | $ | 6,606.2 |
| | $ | 109.9 |
|
In November 2012, Mallinckrodt International Finance S.A. ("MIFSA") was formed asis a 100%wholly owned subsidiary of Covidien in connection with the Separation.Company. MIFSA isfunctions as a holding company, established to own, directly or indirectly, substantially all of the operating subsidiaries of the Company, as well as to issue debt securities and to perform treasury operations. At the time of the Separation, MIFSA became a 100% owned subsidiary of the Company.
In April 2013, MIFSA issued $300.0a $600.0 million aggregate principal amount of 3.50%4.75% senior unsecured notes due April 2018 and $600.0 million aggregate principal amount of 4.75% senior unsecured notes due April 2023 (collectively, "the ("the April 2023 Notes"). Mallinckrodt plc has fully and unconditionally guaranteed the April 2023 Notes on an unsecured and unsubordinated basis. The April 2023 Notes are subject to an indenture which contains covenants limiting the ability of MIFSA, its restricted subsidiaries (as defined in the April 2023 Notes) and Mallinckrodt plc, as guarantor, to incur certain liens or enter into sale and lease-back transactions. It also restricts Mallinckrodt plc and MIFSA's ability to merge or consolidate with any other person or sell or convey all or substantially all of their assets to any one person. MIFSA may redeem all of the April 2023 Notes at any time, and some of the April 2023 Notes from time to time, at a redemption price equal to the principal amount of the April 2023 Notes redeemed plus a make-whole premium. MIFSA will payThe Company pays interest on the April 2023 Notes semiannually in arrears on April 15th and October 15th of each year, which commenced on October 15, 2013.
In MarchAugust 2014, MIFSA and Mallinckrodt CB LLC ("MCB"), each a wholly-owned subsidiary of the Company, entered into senior secured credit facilities consisting of a $1.3 billion term loan facility due 2021 ("the Term Loan"Issuers") and a $250.0 million revolving credit facility due 2019 ("the Revolver") (collectively, "the Facilities"). The Facilities are fully and unconditionally guaranteed by Mallinckrodt plc, certain of its direct or indirect wholly-owned U.S. subsidiaries and each of its direct or indirect wholly-owned subsidiaries that owns directly or indirectly any such wholly-owned U.S. subsidiary (collectively, "the Guarantors"). The Facilities are secured by a security interest in certain assets of MIFSA, MCB and the Guarantors. The Facilities contain customary affirmative and negative covenants, which include, among other things, restrictions on the Company's ability to declare or pay dividends, create liens, incur additional indebtedness, enter into sale and lease-back transactions, make investments, dispose of assets and merge or consolidate with any other person. In addition, the Revolver contains a financial covenant that may limit the Company's total net debt leverage ratio, which is defined as the ratio of (i) the Company's consolidated debt, less any unrestricted cash and cash
equivalents, to (ii) the Company's adjusted consolidated EBITDA, as defined in the credit agreement. The Facilities bear interest at LIBOR plus a margin based on the Company's total net debt leverage ratio, and the Term Loan is subject to a minimum LIBOR level of 0.75%. Interest payment dates are variable based on the LIBOR rate utilized, but the Company generally expects interest to be payable every 90 days. The Term Loan requires quarterly principal amortization payments in an amount equal to 0.25% of the original principal amount of the Term Loan payable on the last day of each calendar quarter, which commenced on June 30, 2014, with the remaining balance payable on the due date, March 19, 2021. The Company incurred an original issue discount of 0.25%, or $3.3 million, associated with the Term Loan. The Revolver contains a $150.0 million letter of credit provision, of which none had been issued as of September 30, 2016. On August 28, 2015, in connection with the Therakos Acquisition, Mallinckrodt Enterprises LLC and Mallinckrodt plc, two wholly owned subsidiaries of Mallinckrodt plc, MIFSA and MCB, entered into a $250.0 million replacement revolving credit facility (the “2015 Replacement Revolving Credit Facility”), which refinanced and replaced in full the existing revolving credit facility, and an additional $250.0 million incremental revolving credit facility (the “2015 Incremental Revolving Credit Facility” and, together with the 2015 Replacement Revolving Credit Facility, the “2015 Revolving Credit Facility”), such that the 2015 Revolving Credit Facility has an aggregate facility size of $500.0 million. Unused commitments on the 2015 Revolving Credit Facility are subject to an annual commitment fee, which was 0.275% as of September 30, 2016, and the fee applied to outstanding letters of credit is based on the interest rate applied to borrowings. As of September 30, 2016, there were no outstanding borrowings under the 2015 Revolving Credit Facility, the applicable interest rate was 3.10% as of September 30, 2016.
In July 2014, Mallinckrodt Securitization S.À.R.L. ("Mallinckrodt Securitization"), a wholly-owned special purpose subsidiary of the Company, entered into a $160.0 million accounts receivable securitization facility that matures in July 2017 ("the Receivable Securitization"). In January 2015, Mallinckrodt Securitization amended the Receivable Securitization with third-party lenders to increase the borrowing limit from $160.0 million to $250.0 million. The terms of the Receivable Securitization, and the determination of interest rates, were largely unchanged. Mallinckrodt Securitization may, from time to time, obtain up to $250.0 million in third-party borrowings secured by certain receivables, which may be increased to $300.0 million upon approval of the third-party lenders, subject to certain conditions. The Receivable Securitization agreements contain customary representations, warranties and affirmative and negative covenants. The borrowings under the Receivable Securitization are to be repaid as the secured receivables are collected. Loans under the Receivable Securitization will bear interest (including facility fees) at a rate equal to the one month LIBOR rate plus a margin of 0.80%. Unused commitments on the Receivables Securitization are subject to an annual commitment fee of 0.35%. As of September 30, 2016, the applicable interest rate on outstanding borrowings under the Receivable Securitization was 1.33% and outstanding borrowings totaled $235.0 million.
In August 2014, MIFSA and MCB issued $900.0 million aggregate principal amount of 5.75% senior unsecured notes due August 1, 2022 ("the 2022 Notes”). The 2022 Notes are guaranteed on an unsecured basis by certainMallinckrodt plc and each of MIFSA's subsidiaries.its subsidiaries that guarantee the obligations under the 2017 Facilities (as defined below). The 2022 Notes are subject to an indenture that contains certain customary covenants and events of default (subject in certain cases to customary grace and cure periods). The occurrence of an event of default under the indenture could result in the acceleration of the 2022 Notes and could cause a cross-default that could result in the acceleration of other indebtedness of Mallinckrodt plc and its subsidiaries. MIFSAThe Issuers may redeem some or all of the 2022 Notes prior to August 1, 2017 by paying a make-whole premium. MIFSA may redeem some or all of the 2022 Notes on or after August 1, 2017 at specified redemption prices. In addition, prior to August 1, 2017, MIFSA may redeem up to 40% of the aggregate principal amount of the 2022 Notes with the net proceeds of certain equity offerings. The Issuers are obligated to offer to repurchase the 2022 Notes at a price of (a) 101% of their principal amount plus accrued and unpaid interest, if any, as a result of certain change of control events and (b) 100% of their principal amount plus accrued and unpaid interest if any, in the event of net proceeds from certain asset sales. These obligations are subject to certain qualifications and exceptions. MIFSAThe Company pays interest on the 2022 Notes semiannually in arrears on February 1st and August 1st of each year, which commenced on February 1, 2015.
In August 2014, MIFSA and MCB entered into a $700.0 million senior secured term loan facility ("the New Term Loan”). The New Term Loan is an incremental tranche under the credit agreement governing our existing Term Loan and Revolver, entered intoApril 2015, in March 2014, (collectively,connection with the New Term Loan, represent "the Senior Secured Credit Facilities"). New Term Loan has substantially similar terms to the Term Loan (other than pricing); including the determinationCompany's acquisition of interest rates and quarterly principal amortization payments equal to 0.25% of the original principal amount of the New Term Loan. The quarterly principal payments commenced on December 31, 2014, with the remaining balance payable on the due date of March 19, 2021. Mallinckrodt plc and its subsidiaries (other than MIFSA, MCB and the subsidiaries of MIFSA that guarantee the Facilities) will not guarantee the New Term Loan, and the New Term Loan will not be secured by the assets of such entities. The August 2014 Term Loan bears interest under substantially similar terms of the March 2014 Term Loan, including the use of LIBOR rates with a minimum floor, except that the margin applied to LIBOR is not dependent upon the Company's total net debt leverage ratio.
On April 15, 2015,Ikaria, Inc. ("Ikaria"), MIFSA and MCB issued $700.0 million aggregate principal amount of 4.875% senior unsecured notes due April 15, 2020 ("the 2020 Notes") and $700.0 million aggregate principal amount of 5.50% senior unsecured notes due April 15, 2025 ("the 2025 Notes", and together with the 2020 Notes, the "Ikaria
Notes"). The Ikaria Notes are guaranteed by Mallinckrodt plc and each of its subsidiaries that guarantee the obligations under the 2017 Facilities (as defined below), which following the acquisition of Ikaria Acquisition includes Compound Holdings II, Inc. (or its successors) and its U.S. subsidiaries. The Ikaria Notes are subject to an indenture that contains certain customary covenants and events of default (subject in certain cases to customary grace and cure periods). The occurrence of an event of default under the indenture could result in the acceleration of the Ikaria Notes and could cause a cross-default that could result in the acceleration of
other indebtedness of the Company. The Issuers may redeem some or all of the (i) 2020 Notes prior to April 15, 2017 and (ii) 2025 Notes prior to April 15, 2020 in each case, by paying a “make-whole” premium. The Issuers may redeem some or all of the (i) 2020 Notes on or after April 15, 2017 and (ii) 2025 Notes on or after April 15, 2020, in each case, at specified redemption prices. In addition, prior to (i) April 15, 2017, in the case of the 2020 Notes, and (ii) April 15, 2018, in the case of the 2025 Notes, the Issuers may redeem up to 40% of the aggregate principal amount of the 2020 Notes or 2025 Notes, as the case may be, with the net proceeds of certain equity offerings. The Issuers are obligated to offer to repurchase the Ikaria Notes (a) each series of Notes at a price of 101% of their respective principal amount plus accrued and unpaid interest, if any, as a result of certain change of control events and (b) the Notes at a price of 100% of their respective principal amount plus accrued and unpaid interest if any, in the event of net proceeds from certain net asset sales. These obligations are subject to certain qualifications and exceptions. The Company pays interest on the Ikaria Notes semiannually on April 15th and October 15th of each year, which commenced on October 15, 2015.
OnIn September 24, 2015, in connection with the Company's acquisition of Therakos, Acquisition,Inc. ("Therakos"), MIFSA and MCB issued $750.0 million aggregate principal amount of 5.625% senior unsecured notes due October 2023 (the “2023“October 2023 Notes”). The October 2023 Notes are guaranteed by Mallinckrodt plc and each of its subsidiaries under the 2017 Facilities (as defined below), which following the acquisition of Therakos, Acquisition includes TGG Medical Solutions, Inc. (or its successors) and its U.S. subsidiaries. The October 2023 Notes are subject to an indenture that contains certain customary covenants and events of default (subject in certain cases to customary grace and cure periods). The occurrence of an event of default under the indenture could result in the acceleration of the October 2023 Notes and could cause a cross-default that could result in the acceleration of other indebtedness of the Company. The Issuersissuers may redeemcall some or all of the October 2023 Notes on or after October 15, 2018 at specified redemption prices. In addition, prior to October 15, 2018, the Issuers may redeem up to 40% of the aggregate principal amount of the 2023 Notes with the net proceeds of certain equity offerings. The Issuersissuers may also redeem all, but not less than all, of the October 2023 Notes at any time at a price of 100% of their principal amount, plus accrued and unpaid interest, if any, in the event the Issuersissuers become obligated to pay additional amounts as a result of changes affecting certain withholding tax laws applicable to payments on the October 2023 Notes. The Issuers are obligated to offer to repurchase the October 2023 Notes (a) at a price of 101% of their principal amount plus accrued and unpaid interest, if any, as a result of certain change of control events and (b) the 2023 Notes at a price of 100% of their principal amount plus accrued and unpaid interest if any, in the event of net proceeds from certain net asset sales. These obligations are subject to certain qualifications and exceptions. The Company pays interest on the October 2023 Notes semiannually on April 15th and October 15th of each year, which commenced on April 15, 2016.
AsIn February 2017, MIFSA and MCB refinanced the March 2014 and August 2014 term loans, both of September 30, 2016, the weighted-average interest ratewhich were due March 2021. The Company accounted for the term loan refinancing as a debt modification, which resulted in a $10.0 million charge included within the other expense line in the consolidated statement of operations. The refinanced term loan had an initial aggregate principal amount of $1,865.0 million, is due March 2021September 2024 and bears interest at London Interbank Offered Rate ("LIBOR") plus 2.75% ("the 2017 Term Loan"). The 2017 Term Loan requires quarterly principal amortization payments in an amount equal to 0.25% of the original principal balance of the 2017 Term Loan, and may be reduced by making optional prepayments. The quarterly principal amortization is payable on the last day of each calendar quarter, which commenced on June 30, 2017, with the remaining balance due September 2024. In January 2019, the Company made a $25.0 million prepayment on the 2017 Term Loan. In making this payment, the Company satisfied certain obligations included within external debt agreements to reinvest proceeds from the sale of assets and businesses within the year of the respective transaction or use the proceeds to pay down debt.
In conjunction with the term loan refinancing, MIFSA and MCB entered into a $900.0 million revolving credit facility that matures on February 28, 2022 (the "Revolving Credit Facility"). The Revolving Credit Facility bears interest at LIBOR plus 2.25% and contains a $50.0 million letter of credit provision, of which none had been issued as of December 27, 2019. Unused commitments on the Revolving Credit Facility are subject to an annual commitment fee, which was 3.43%0.275% as of December 27, 2019, and the fee applied to outstanding letters of credit is based on the interest rate applied to borrowings. The Revolving Credit Facility added certain wholly owned subsidiaries of the Company as borrowers, in addition to MIFSA and MCB.
The 2017 Term Loan and Revolving Credit Facility (collectively "the 2017 Facilities") are fully and unconditionally guaranteed by Mallinckrodt plc, certain of its direct or indirect wholly owned U.S. subsidiaries and each of its direct or indirect wholly owned subsidiaries that owns directly or indirectly any wholly owned U.S. subsidiaries and certain of its other subsidiaries (collectively, "the Guarantors"). The 2017 Facilities are secured by a security interest in certain assets of MIFSA, MCB and the Guarantors. The 2017 Facilities contain customary affirmative and negative covenants, which include, among other things, restrictions on the Company's ability to declare or pay dividends, create liens, incur additional indebtedness, enter into sale and lease-back transactions, make investments, dispose of assets and merge or consolidate with any other person.
In July 2017, Mallinckrodt Securitization S.à r.l. ("Mallinckrodt Securitization"), a wholly owned special purpose subsidiary of the Company, entered into a $250.0 million accounts receivable securitization facility ("the Receivable Securitization") with PNC Bank, National Association, as administrative agent, and Mallinckrodt LLC, a wholly owned subsidiary of the Company, as initial servicer (the "Servicer"). Loans under the Receivable Securitization bore interest (including facility fees) at a rate equal to one month LIBOR rate plus a margin of 0.90%. In July 2019, the Company repaid $200.0 million of outstanding obligations. Upon payment in full of such outstanding obligations under the Receivable Securitization, the $250.0 million receivables securitization program was automatically terminated (including (i) the Receivable Securitization, (ii) the Amended and Restated Purchase and Sale Agreement,
dated as of July 28, 2017 (as amended, the "Purchase and Sale Agreement"), among certain wholly owned subsidiaries of the Company, the Servicer, and Mallinckrodt Securitization, (iii) the Sale Agreements (together, the "Sale Agreements"), between Mallinckrodt LLC and certain subsidiaries of the Company and (iv) all agreements and documents entered into in connection therewith, and all security interests, liens or other rights securing the receivables securitization program were automatically released and terminated. Certain indemnification and other obligations in the Receivable Securitization, the Purchase and Sale Agreement, the Sale Agreements and the documents related thereto, which by their terms expressly survive termination of such documents, will survive the termination of Mallinckrodt Securitization's receivables securitization program.
In February 2018, in connection with the Sucampo Acquisition, MIFSA and MCB issued a $600.0 million senior secured term loan due February 2025 (the "2018 Term Loan"). The variable-rate loan bears an interest rate of LIBOR plus 3.00% basis points and was issued with a discount of 0.25%. The incremental term loan requires quarterly principal amortization payments in an amount equal to 0.25% of the original principal balance of the incremental term loan, and may be reduced by making optional prepayments. The quarterly principal amortization is payable on the last day of each calendar quarter, which commenced on June 30, 2018. In February 2019, the Company made a $175.0 million prepayment on the term loan due February 2025. In making this payment, the Company satisfied certain obligations included within external debt agreements to reinvest proceeds from the sale of assets and businesses within the year of the respective transaction or use the proceeds to pay down debt.
In December 2019, upon the terms and conditions set forth in a confidential offering memorandum dated November 5, 2019, the Issuers, completed private offers to exchange (the "2019 Exchange Offers") (i) $83.2 million of the 2020 Notes issued by the Issuers for $70.2 million of new 10.00% Second Lien Senior Secured Notes due April 2025 to be issued by the Issuers (the "2025 Notes") and (ii) $52.9 million of the 2022 Notes, $216.4 million of the April 2023 Notes, $144.7 million of the October 2023 Notes and $208.9 million of the 2025 Notes issued by the Issuers (collectively, and together with the 2020 Notes, the "Existing Notes") for $252.7 million of 2025 Notes. The 2025 Notes are subject to an indenture that contains customary covenants and events of default (subject in certain cases to customary grace and cure periods). The 2025 Notes are secured by a second lien security interest in all collateral that currently secures Mallinckrodt plc's senior secured notes, subject to certain exceptions. The 2025 Notes are guaranteed by each entity that currently guarantees Mallinckrodt plc's senior secured notes, subject to certain exceptions. The Issuers may redeem any or all of the 2025 Notes at any time at specified redemption prices. The Issuers are obligated to (a) offer to repurchase all of the 2025 Notes at a price of 101% of their principal amount plus accrued and unpaid interest, if any, upon the occurrence of certain change of control events and (b) offer to repurchase 2025 Notes with the net proceeds of certain asset sales at a price equal to 100% of their principal amount plus accrued and unpaid interest, if any. These obligations are subject to certain qualifications and exceptions.
The Company accounted for the 2019 Exchange Offers as a debt extinguishment, which resulted in the extinguishment of $383.2 million of principal of Existing Notes and the transfer of $322.9 million of Existing Notes to 2025 Notes. The exchanges also resulted in the capitalization of $10.1 million of deferred financing fees related to the 2025 Notes. In conjunction with the exchanges, the Company recorded a gain on debt extinguishment of $377.4 million primarily associated with retiring a portion of its Existing Notes at less than face value, net of the write-off of associated deferred financing fees of $4.9 million.
As of December 27, 2019, the applicable interest rate and outstanding principal under these agreements totaled approximately $1,953.5 million.borrowings on the Company's variable-rate debt instruments were as follows:
|
| | | | | | |
| Applicable interest rate | | Outstanding borrowings |
Term loan due September 2024 | 4.85 | % | | $ | 1,520.8 |
|
Term loan due February 2025 | 4.91 |
| | 403.6 |
|
Revolving credit facility | 4.23 |
| | 900.0 |
|
The aggregate amounts of debt including the capital lease obligation, maturing during the next five fiscal years are as follows:
|
| | | |
Fiscal 2020 | $ | 634.5 |
|
Fiscal 2021 | 19.7 |
|
Fiscal 2022 | 1,540.4 |
|
Fiscal 2023 | 672.5 |
|
Fiscal 2024 | 1,462.5 |
|
|
| | | |
Fiscal 2017 | $ | 257.1 |
|
Fiscal 2018 | 321.3 |
|
Fiscal 2019 | 16.2 |
|
Fiscal 2020 | 721.3 |
|
Fiscal 2021 | 1,879.8 |
|
Pension Plan Termination
On March 31, 2016, the Company terminated six of its previously frozen U.S. pension plans. The Company is evaluating alternativesDuring fiscal 2017, approximately $212.9 million of obligations and corresponding pension assets were transferred to settlea third party for settlement of the outstanding obligations of theseterminated pension plans and expects final settlement to occur during fiscal 2017, subject to customary regulatory approvals. The Company's ultimate settlement obligation will depend uponthrough the naturepurchase of participant settlements and the prevailing market conditions.annuity contracts. As a result certain assumptions utilized in determining the obligations under these pension plans reflect those expected in the final settlement of the Company's obligations.settlement, the Company made a $62.3 million cash contribution to the terminated plans and recognized a $70.5 million charge included within other income (expense) during fiscal 2017.
Defined Benefit Plans
The Company sponsors a number of defined benefit retirement plans covering certain of its U.S. employees and non-U.S. employees. As of September 30, 2016,December 27, 2019, U.S. plans represented 100%35.0% of the Company's total pension plan assets and 96% of the Company'sremaining projected benefit obligation. The Company generally does not provide postretirement benefits other than retirement plan benefits for its employees; however, certain of the Company's U.S. employees participate in postretirement benefit plans that provide medical benefits. These plans are unfunded.
The net periodic benefit cost (credit) for the Company's pension and postretirement benefit plans was as follows:
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Pension Benefits | | Postretirement Benefits |
| Fiscal Year | | Fiscal Year |
| 2019 | | 2018 | | 2017 | | 2019 | | 2018 | | 2017 |
Service cost | $ | 0.1 |
| | $ | 0.2 |
| | $ | 1.4 |
| | $ | — |
| | $ | — |
| | $ | — |
|
Interest cost | 0.7 |
| | 0.6 |
| | 2.3 |
| | 1.6 |
| | 1.5 |
| | 1.7 |
|
Expected return on plan assets | — |
| | — |
| | (1.3 | ) | | — |
| | — |
| | — |
|
Amortization of net actuarial loss | 0.5 |
| | 0.5 |
| | 2.7 |
| | — |
| | 0.1 |
| | — |
|
Amortization of prior service cost | 0.2 |
| | 0.1 |
| | 0.2 |
| | (2.1 | ) | | (2.1 | ) | | (2.0 | ) |
Loss (gain) on plan settlements | — |
| | 0.1 |
| | 71.1 |
| | — |
| | (0.7 | ) | | (0.9 | ) |
Curtailment gain | — |
| | — |
| | (1.0 | ) | | — |
| | — |
| | — |
|
Net periodic benefit cost (credit) | $ | 1.5 |
| | $ | 1.5 |
| | $ | 75.4 |
| | $ | (0.5 | ) | | $ | (1.2 | ) | | $ | (1.2 | ) |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Pension Benefits | | Postretirement Benefits |
| Fiscal Year | | Fiscal Year |
| 2016 | | 2015 | | 2014 | | 2016 | | 2015 | | 2014 |
Service cost | $ | 1.8 |
| | $ | 2.4 |
| | $ | 2.7 |
| | $ | 0.1 |
| | $ | 0.1 |
| | $ | 0.1 |
|
Interest cost | 13.2 |
| | 14.5 |
| | 15.4 |
| | 2.0 |
| | 1.9 |
| | 2.1 |
|
Expected return on plan assets | (16.7 | ) | | (18.9 | ) | | (20.5 | ) | | — |
| | — |
| | — |
|
Amortization of net actuarial loss | 11.3 |
| | 9.2 |
| | 8.0 |
| | — |
| | — |
| | — |
|
Amortization of prior service cost | — |
| | — |
| | — |
| | (2.1 | ) | | (4.0 | ) | | (9.3 | ) |
Loss on plan settlements | 8.1 |
| | 5.9 |
| | 3.8 |
| | — |
| | — |
| | — |
|
Net periodic benefit cost (credit) | $ | 17.7 |
| | $ | 13.1 |
| | $ | 9.4 |
| | $ | — |
| | $ | (2.0 | ) | | $ | (7.1 | ) |
The following table represents the changes in benefit obligations plan assets and the net amounts recognized on the consolidated balance sheets for pension and postretirement benefit plans at the end of fiscal 2016 and 2015:each period:
|
| | | | | | | | | | | | | | | |
| Pension Benefits | | Postretirement Benefits |
| December 27, 2019 | | December 28, 2018 | | December 27, 2019 | | December 28, 2018 |
Change in benefit obligations: | | | | | | | |
Projected benefit obligations at beginning of year | $ | 26.1 |
| | $ | 27.8 |
| | $ | 39.8 |
| | $ | 45.6 |
|
Service cost | 0.1 |
| | 0.2 |
| | — |
| | — |
|
Interest cost | 0.7 |
| | 0.6 |
| | 1.6 |
| | 1.5 |
|
Actuarial loss (gain) | 2.3 |
| | 0.7 |
| | 1.7 |
| | (3.9 | ) |
Benefits and administrative expenses paid | (1.7 | ) | | (1.6 | ) | | (2.6 | ) | | (2.7 | ) |
Plan settlements | (0.2 | ) | | (0.8 | ) | | — |
| | (0.7 | ) |
Currency translation | (0.3 | ) | | (0.8 | ) | | — |
| | — |
|
Projected benefit obligations at end of year | $ | 27.0 |
| | $ | 26.1 |
| | $ | 40.5 |
| | $ | 39.8 |
|
|
| | | | | | | | | | | | | | | |
| Pension Benefits | | Postretirement Benefits |
| 2016 | | 2015 | | 2016 | | 2015 |
Change in benefit obligation: | | | | | | | |
Projected benefit obligations at beginning of year | $ | 375.5 |
| | $ | 400.8 |
| | $ | 52.2 |
| | $ | 52.0 |
|
Service cost | 1.8 |
| | 2.4 |
| | 0.1 |
| | 0.1 |
|
Interest cost | 13.2 |
| | 14.5 |
| | 2.0 |
| | 1.9 |
|
Actuarial (gain) loss | 65.5 |
| | (0.8 | ) | | 0.5 |
| | 2.1 |
|
Benefits and administrative expenses paid | (20.1 | ) | | (17.8 | ) | | (4.0 | ) | | (3.9 | ) |
Plan settlements | (26.5 | ) | | (23.6 | ) | | — |
| | — |
|
Plan curtailments and amendments | (0.4 | ) | | — |
| | — |
| | — |
|
Net transfer in/(out) | — |
| | 0.7 |
| | — |
| | — |
|
Currency translation | 0.1 |
| | (0.7 | ) | | — |
| | — |
|
Projected benefit obligations at end of year | $ | 409.1 |
| | $ | 375.5 |
| | $ | 50.8 |
| | $ | 52.2 |
|
| | | | | | | |
Change in plan assets: | | | | | | | |
Fair value of plan assets at beginning of year | $ | 309.9 |
| | $ | 339.0 |
| | $ | — |
| | $ | — |
|
Actual return on plan assets | 29.5 |
| | 1.9 |
| | — |
| | — |
|
Employer contributions | 16.7 |
| | 10.4 |
| | 4.0 |
| | 3.9 |
|
Benefits and administrative expenses paid | (20.1 | ) | | (17.8 | ) | | (4.0 | ) | | (3.9 | ) |
Plan settlements | (26.5 | ) | | (23.6 | ) | | — |
| | — |
|
Currency translation | — |
| | — |
| | — |
| | — |
|
Fair value of plan assets at end of year | $ | 309.5 |
| | $ | 309.9 |
| | $ | — |
| | $ | — |
|
Funded status at end of year | $ | (99.6 | ) | | $ | (65.6 | ) | | $ | (50.8 | ) | | $ | (52.2 | ) |
|
| | | | | | | | | | | | | | | |
| Pension Benefits | | Postretirement Benefits |
| 2016 | | 2015 | | 2016 | | 2015 |
Amounts recognized on the consolidated balance sheet: | | | | | | | |
Non-current assets | $ | 4.0 |
| | $ | 3.9 |
| | $ | — |
| | $ | — |
|
Current liabilities | (5.2 | ) | | (2.9 | ) | | (4.3 | ) | | (4.6 | ) |
Non-current liabilities | (98.4 | ) | | (66.6 | ) | | (46.5 | ) | | (47.6 | ) |
Net amount recognized on the consolidated balance sheet | $ | (99.6 | ) | | $ | (65.6 | ) | | $ | (50.8 | ) | | $ | (52.2 | ) |
| | | | | | | |
Amounts recognized in accumulated other comprehensive income consist of: | | | | | | | |
Net actuarial loss | $ | (141.2 | ) | | $ | (107.9 | ) | | $ | (5.6 | ) | | $ | (5.1 | ) |
Prior service credit | 0.3 |
| | — |
| | 12.8 |
| | 14.9 |
|
Net amount recognized in accumulated other comprehensive income | $ | (140.9 | ) | | $ | (107.9 | ) | | $ | 7.2 |
| | $ | 9.8 |
|
The estimated amounts that will be amortized from accumulated other comprehensive income into net periodic benefit cost (credit) in fiscal 2017 are as follows:
|
| | | | | | | |
| Pension Benefits | | Postretirement Benefits |
Amortization of net actuarial loss | $ | 14.1 |
| | $ | 0.1 |
|
Amortization of prior service cost | 0.3 |
| | (2.1 | ) |
The accumulated benefit obligation for all pension plans at the end of fiscal 2016 and 2015 was $408.7 million and $375.3 million, respectively. Additional information related to pension plans is as follows:
|
| | | | | | | |
| 2016 | | 2015 |
Pension plans with accumulated benefit obligations in excess of plan assets: | | | |
Accumulated benefit obligation | $ | 398.1 |
| | $ | 363.4 |
|
Fair value of plan assets | 295.0 |
| | 294.1 |
|
The accumulated benefit obligation and fair value of plan assets for pension plans with projected benefit obligations in excess of plan assets do not significantly differ from the amounts recognized on the consolidated balance sheet, as noted in the table above, since substantially all of the Company's U.S. pension plans are frozen.
|
| | | | | | | | | | | | | | | |
| Pension Benefits | | Postretirement Benefits |
| December 27, 2019 | | December 28, 2018 | | December 27, 2019 | | December 28, 2018 |
Amounts recognized on the consolidated balance sheet: | | | | | | | |
Current liabilities | $ | (1.8 | ) | | $ | (2.0 | ) | | $ | (3.3 | ) | | $ | (3.4 | ) |
Non-current liabilities | (25.2 | ) | | (24.1 | ) | | (37.2 | ) | | (36.4 | ) |
Net amount recognized on the consolidated balance sheet | $ | (27.0 | ) | | $ | (26.1 | ) | | $ | (40.5 | ) | | $ | (39.8 | ) |
| | | | | | | |
Amounts recognized in accumulated other comprehensive loss consist of: | | | | | | | |
Net actuarial (loss) gain | $ | (10.1 | ) | | $ | (8.4 | ) | | $ | (0.8 | ) | | $ | 0.9 |
|
Prior service (cost) credit | (0.2 | ) | | (0.4 | ) | | 5.9 |
| | 8.1 |
|
Net amount recognized in accumulated other comprehensive loss | $ | (10.3 | ) | | $ | (8.8 | ) | | $ | 5.1 |
| | $ | 9.0 |
|
The estimated amounts that will be amortized from accumulated other comprehensive loss into net periodic benefit cost (credit) in fiscal 2020 are as follows:
|
| | | | | | | |
| Pension Benefits | | Postretirement Benefits |
Amortization of net actuarial loss | $ | 0.7 |
| | $ | — |
|
Amortization of prior service cost (credit) | 0.1 |
| | (2.1 | ) |
Actuarial Assumptions
Weighted-average assumptions used each fiscal yearperiod to determine net periodic benefit cost for the Company's pension plans arewere as follows:
| | | | | | | | | | | | | | U.S. Plans | | Non-U.S. Plans |
| U.S. Plans | | Non-U.S. Plans | Fiscal Year | | Fiscal Year |
| 2016 | | 2015 | | 2014 | | 2016 | | 2015 | | 2014 | 2019 | | 2018 | | 2017 | | 2019 | | 2018 | | 2017 |
Discount rate | 3.9 | % | | 3.8 | % | | 4.2 | % | | 2.0 | % | | 2.4 | % | | 3.1 | % | 4.0 | % | | 3.3 | % | | 3.0 | % | | 2.0 | % | | 1.9 | % | | 1.8 | % |
Expected return on plan assets | 5.8 | % | | 6.0 | % | | 6.5 | % | | 2.0 | % | | 2.0 | % | | 2.0 | % | |
Rate of compensation increase | — | % | | — | % | | — | % | | — | % | | — | % | | — | % | — | % | | — | % | | — | % | | 2.5 | % | | 2.5 | % | | 2.5 | % |
Weighted-average assumptions used each fiscal yearperiod to determine benefitsbenefit obligations for the Company's pension plans arewere as follows:
|
| | | | | | | | | | | | | | | | | |
| U.S. Plans | | Non-U.S. Plans |
| Fiscal Year | | Fiscal Year |
| 2019 | | 2018 | | 2017 | | 2019 | | 2018 | | 2017 |
Discount rate | 2.8 | % | | 4.0 | % | | 3.3 | % | | 1.3 | % | | 2.0 | % | | 1.9 | % |
Rate of compensation increase | — | % | | — | % | | — | % | | 2.5 | % | | 2.5 | % | | 2.5 | % |
|
| | | | | | | | | | | | | | | | | |
| U.S. Plans | | Non-U.S. Plans |
| 2016 | | 2015 | | 2014 | | 2016 | | 2015 | | 2014 |
Discount rate | 2.3 | % | | 3.9 | % | | 3.9 | % | | 1.3 | % | | 2.4 | % | | 2.4 | % |
Rate of compensation increase | — | % | | — | % | | — | % | | — | % | | — | % | | — | % |
For the Company's fundedunfunded U.S. plans, the discount rate is based on the market rate for a broad population of AA-rated (Moody's or S&P) corporate bonds over $250.0 million. For the Company's U.S. plans that were funded in prior periods, the discount rate was based on the estimated final settlement discount rates based on quotes received from a group of well-rated insurance carriers who are active in the single premium group annuity marketplace. The group of insurance carriers are rated A or better by AM best. For the Company's unfunded U.S. plans, the discount rate is based on the market rate for a broad population of AA-rated (Moody's or S&P) corporate bonds over $250.0 million.
In determining the expected return on pension plan assets, the Company considers the relative weighting of plan assets by class and individual asset class performance expectations as provided by external advisors in reaching conclusions on appropriate assumptions. The investment strategy for the pension plans is to obtain a long-term return on plan assets that is consistent with the level of investment risk that is considered appropriate. Investment risks and returns are reviewed regularly against benchmarks to ensure objectives are being met.
The weighted-average discount rate used to determine net periodic benefit costcredit and obligations for the Company's postretirement benefit plans arewere as follows:
|
| | | | | | | | |
| Fiscal Year |
| 2019 | | 2018 | | 2017 |
Net periodic benefit credit | 4.1 | % | | 3.4 | % | | 3.7 | % |
Benefit obligations | 3.0 | % | | 4.1 | % | | 3.4 | % |
|
| | | | | | | | |
| 2016 | | 2015 | | 2014 |
Net periodic benefit cost | 4.0 | % | | 3.6 | % | | 4.0 | % |
Benefit obligations | 3.2 | % | | 3.9 | % | | 3.7 | % |
Healthcare cost trend assumptions for postretirement benefit plans are as follows:
|
| | | | | |
| December 27, 2019 | | December 28, 2018 |
Healthcare cost trend rate assumed for next fiscal year | 5.8 | % | | 6.3 | % |
Rate to which the cost trend rate is assumed to decline | 4.5 | % | | 4.5 | % |
Fiscal year the ultimate trend rate is achieved | 2038 |
| | 2038 |
|
|
| | | | | |
| 2016 | | 2015 |
Healthcare cost trend rate assumed for next fiscal year | 7.1 | % | | 7.1 | % |
Rate to which the cost trend rate is assumed to decline | 4.5 | % | | 4.5 | % |
Fiscal year the ultimate trend rate is achieved | 2029 |
| | 2029 |
|
A one-percentage-point change in assumed healthcare cost trend rates would have the following effects:
|
| | | | | | | |
| One-Percentage-Point Increase | | One-Percentage-Point Decrease |
Effect on total of service and interest cost | $ | — |
| | $ | — |
|
Effect on postretirement benefit obligation | 0.3 |
| | (0.2 | ) |
Plan Assets
In conjunction with the Company’s decision to terminate and annuitize the defined benefit pension plans in fiscal 2016, the Company elected to change the asset allocation to shift substantially to debt securities, in an attempt to mitigate fluctuations in both interest rates and the equity markets.
Pension plans have the following weighted-average asset allocations at the end of each fiscal year:
|
| | | | | |
| U.S. Plans |
| 2016 | | 2015 |
Equity securities | — | % | | 27 | % |
Debt securities | 96 |
| | 70 |
|
Cash and cash equivalents | 4 |
| | 3 |
|
Other | — |
| | — |
|
Total | 100 | % | | 100 | % |
The following tables provide a summary of plan assets held by the Company's pension plans that are measured at fair value on a recurring basis at the end of fiscal 2016 and 2015:
|
| | | | | | | | | | | | | | | |
| | | Basis of Fair Value Measurement |
| Fiscal 2016 | | Quoted Prices in Active Markets for Identical Assets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) |
Equity Securities: | | | | | | | |
U.S. large cap | 1.4 |
| | 1.4 |
| | — |
| | — |
|
Debt securities: | | | | | | | |
Diversified fixed income funds (1) | 296.1 |
| | 296.1 |
| | — |
| | — |
|
Other | 12.0 |
| | 12.0 |
| | — |
| | — |
|
Total | $ | 309.5 |
| | $ | 309.5 |
| | $ | — |
| | $ | — |
|
|
| | | | | | | | | | | | | | | |
| | | Basis of Fair Value Measurement |
| Fiscal 2015 | | Quoted Prices in Active Markets for Identical Assets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) |
Equity Securities: | | | | | | | |
U.S. small mid cap | $ | 15.1 |
| | $ | 15.1 |
| | $ | — |
| | $ | — |
|
U.S. large cap | 46.2 |
| | 46.2 |
| | — |
| | — |
|
International | 22.9 |
| | 22.7 |
| | 0.2 |
| | — |
|
Debt securities: | | | | | | | |
Diversified fixed income funds (1) | 197.2 |
| | 196.9 |
| | 0.3 |
| | — |
|
High yield bonds | 11.3 |
| | 11.3 |
| | — |
| | — |
|
Emerging market funds | 7.4 |
| | 7.4 |
| | — |
| | — |
|
Other | 9.8 |
| | 9.0 |
| | 0.8 |
| | — |
|
Total | $ | 309.9 |
| | $ | 308.6 |
| | $ | 1.3 |
| | $ | — |
|
| |
(1)
| Diversified fixed income funds consist of U.S. Treasury bonds, mortgage-backed securities, corporate bonds, asset-backed securities and U.S. agency bonds. |
Equity securities. Equity securities primarily consist of mutual funds with underlying investments in foreign equity and domestic equity markets. The fair value of these investments is based on net asset value of the units held in the respective fund, which are determined by obtaining quoted prices on nationally recognized securities exchanges (level 1) or through net asset values provided by the fund administrators that can be corroborated by observable market data (level 2).
Debt securities. Debt securities are primarily invested in mutual funds with underlying fixed income investments in U.S. government and corporate debt, U.S. dollar denominated foreign government and corporate debt, asset-backed securities, mortgage-backed securities and U.S. agency bonds. The fair value of these investments is based on the net asset value of the units held in the respective fund which are determined by obtaining quoted prices on nationally recognized securities exchanges.
Other. Other includes cash and cash equivalents invested in a money market mutual fund, the fair value of which is determined by obtaining quoted prices on nationally recognized securities exchanges (level 1). In addition, other includes real estate funds, the fair value of which is determined using other inputs, such as net asset values provided by the fund administrators that can be corroborated by observable market data (level 2).
Mallinckrodt shares are not a direct investment of the Company's pension funds; however, the pension funds may indirectly include Mallinckrodt shares. The aggregate amount of the Mallinckrodt shares are not material relative to the total pension fund assets.
Contributions
The Company's funding policy is to make contributions in accordance with the laws and customs of the various countries in which the Company operates, as well as to make discretionary voluntary contributions from time to time. In fiscal 20162019 and 2015,2018, the Company made $16.7$1.9 million and $10.4$2.4 million in contributions, respectively, to the Company's pension plans.
Expected Future Benefit Payments
Benefit payments expected to be paid, reflecting future expected service as appropriate, arewere as follows:
|
| | | | | | | |
| Pension Benefits | | Postretirement Benefits |
Fiscal 2020 | $ | 1.8 |
| | $ | 3.4 |
|
Fiscal 2021 | 1.7 |
| | 3.2 |
|
Fiscal 2022 | 1.6 |
| | 3.0 |
|
Fiscal 2023 | 1.6 |
| | 2.9 |
|
Fiscal 2024 | 1.6 |
| | 2.8 |
|
Fiscal 2025 - 2029 | 7.2 |
| | 12.6 |
|
|
| | | | | | | |
| Pension Benefits | | Postretirement Benefits |
Fiscal 2017 | $ | 113.2 |
| | $ | 4.3 |
|
Fiscal 2018 | 22.2 |
| | 4.0 |
|
Fiscal 2019 | 21.8 |
| | 3.7 |
|
Fiscal 2020 | 20.5 |
| | 3.5 |
|
Fiscal 2021 | 19.2 |
| | 3.3 |
|
Fiscal 2021 - 2025 | 85.9 |
| | 14.9 |
|
The above table reflects increased lump sum disbursements in fiscal 2017 associated with the termination of the Company's six qualified U.S. pension plans. Disbursements associated with the settlement of the remaining obligations under these plans have not been reflected.
Defined Contribution Retirement Plans
The Company maintains one active tax-qualified 401(k) retirement plan and one active non-qualified deferred compensation plan in the U.S. The 401(k) retirement plan provides for an automatic Company contribution of three percent of an eligible employee's pay, with an additional Company matching contribution generally equal to 50%50.0% of each employee's elective contribution to the plan up to six percent of the employee's eligible pay. The deferred compensation plan permits eligible employees to defer a portion of their compensation. Total defined contribution expense related to continuing operations was $21.9 million, $25.3 million, $22.1 million and $19.0$25.2 million for fiscal 2016, 20152019, 2018 and 2014,2017, respectively.
Rabbi Trusts and Other Investments
The Company maintains several rabbi trusts, the assets of which are used to pay retirement benefits. The rabbi trust assets are subject to the claims of the Company's creditors in the event of the Company's insolvency. Plan participants are general creditors of the Company with respect to these benefits. The trusts primarily hold life insurance policies and debt and equity securities, the value of which is included in other assets on the consolidated balance sheets. Note 1920 provides additional information regarding the debt and equity securities. During fiscal 2019, a portion of these policies were liquidated. The carrying value of the 13462 and 118 life insurance contracts held by these trusts was $59.2$43.8 million and $57.9$58.4 million at September 30, 2016as of December 27, 2019 and September 25, 2015,December 28, 2018, respectively. These contracts had a total death benefit of $150.0$94.0 million and $147.3$142.9 million at September 30, 2016December 27, 2019 and September 25, 2015,December 28, 2018, respectively. However, there are outstanding loans against the policies amounting to $43.4$23.6 million and $40.4$43.8 million at September 30, 2016December 27, 2019 and September 25, 2015,December 28, 2018, respectively.
The Company has insurance contracts whichthat serve as collateral for certain of the Company's non-U.S. pension plan benefits, whichbenefits. These insurance contracts totaled $8.3$7.3 million and $8.9$8.0 million at September 30, 2016December 27, 2019 and September 25, 2015,December 28, 2018, respectively. These amounts were also included in other assets on the consolidated balance sheets.
Preferred Shares
Mallinckrodt is authorized to issue 500,000,000 preferred shares, par value of $0.20 per share, noneNaN of which were issued or outstanding at September 30, 2016.December 27, 2019. Rights as to dividends, return of capital, redemption, conversion, voting and otherwise with respect to these shares may be determined by Mallinckrodt's Board of Directors on or before the time of issuance. In the event of the liquidation of the Company, the holders of any preferred shares then outstanding would, if issued on such terms that they carry a preferential distribution entitlement on liquidation, be entitled to payment to them of the amount for which the preferred shares were subscribed and any unpaid dividends prior to any payment to the ordinary shareholders.
Share Repurchases
On November 19, 2015,From time to time, the Company's Board of Directors have authorized a $500.0 million share repurchase program (the “November 2015 Program”). The November 2015 Program commenced after the $300.0 million share repurchase program authorized by the Board of Directors on January 23, 2015 (the “January 2015 Program”) was completed in the first fiscal quarter of 2016. On March 16, 2016, the Board of Directors authorized an additional $350.0 million share repurchase program (the “March 2016 Program”) which will commence upon the completion of the November 2015 Program. These programs, have no time limit or expiration date, and the Company currently expects to fully utilize each program.as set forth below:
|
| | | | | | | | | | | | | |
| March 2017 Repurchase Program (1) | | March 2016 Repurchase Program |
| Number of Shares | | Amount | | Number of Shares | | Amount |
Authorized repurchase amount | | | $ | 1,000.0 |
| | | | $ | 350.0 |
|
Repurchases: | | | | | | | |
Three months ended December 30, 2016 (2) | — |
| | — |
| | 1,501,676 |
| | 84.0 |
|
Fiscal 2017 | 13,490,448 |
| | 380.6 |
| | 5,366,741 |
| | 266.0 |
|
Fiscal 2018 | 3,610,968 |
| | 55.2 |
| | — |
| | — |
|
Fiscal 2019 | — |
| | — |
| | — |
| | — |
|
Remaining amount available | | | $ | 564.2 |
| | | | $ | — |
|
|
| | | | | | | | | | | | | | | | | | | | |
| March 2016 Repurchase Program | | November 2015 Repurchase Program | | January 2015 Repurchase Program |
| Number of Shares | | Amount | | Number of Shares | | Amount | | Number of Shares | | Amount |
Authorized repurchase amount | | | $ | 350.0 |
| | | | $ | 500.0 |
| |
|
| | $ | 300.0 |
|
Repurchases: | | | | | | | | | | | |
Fiscal 2015 | — |
| | — |
| | — |
| | — |
| | 823,592 |
| | 75.0 |
|
Fiscal 2016 | — |
| | — |
| | 6,510,824 |
| | 425.6 |
| | 3,199,279 |
| | 225.0 |
|
Remaining amount available | | | $ | 350.0 |
| | | | $ | 74.4 |
| | | | $ | — |
|
| |
(1) | The March 2017 Program has no time limit or expiration date, and the Company currently expects to fully utilize the program. |
| |
(2) | On May 17, 2016, the Company's Board of Directors approved a change in the Company's fiscal year end to the last Friday in December from the last Friday in September. The change in fiscal year became effective for the Company's 2017 fiscal year, which began on December 31, 2016 and ended on December 29, 2017. As a result of the change in fiscal year, the Company filed a Transition Report on Form 10-Q on February 7, 2017, covering the period from October 1, 2016 through December 30, 2016 ("the three months ended December 30, 2016"). |
The Company also repurchases shares from certain employees in order to satisfy employee tax withholding requirements in connection with the vesting of restricted shares. In addition, the Company repurchases shares to settle certain option exercises. The Company spent $2.3$2.6 million, 0 and $17.2$5.1 million to acquire shares in connection with equity-based awards in fiscal 20162019, 2018 and 2015,2017, respectively.
Treasury Shares
During fiscal 2017, the Company canceled approximately 26.5 million treasury shares. Irish law requires a company's treasury share value to represent less than 10.0% of Company capital. The cancellation of treasury shares had a net zero impact on shareholders' equity as $5.3 million was reflected in both common stock and additional paid-in capital.
Total share-based compensation cost from continuing operations was $41.4$33.8 million, $115.0$34.6 million and $64.9$58.5 million for fiscal 2016, 20152019, 2018 and 2014,2017, respectively. These amounts are generally included within selling, general and administrativeSG&A expenses in the consolidated statements of income. In conjunction with the Questcor Acquisition, Questcor equity awards were converted to Mallinckrodt equity awards which resulted in post-combination expense of $90.4 million in fiscal 2015, included in the above total share-based compensation, of which $80.6 million is included within selling, general and administrative expenses and $9.8 million is included within restructuring charges, net. The incremental fair value associated with the conversion of Covidien equity awards into Mallinckrodt equity awards is included in separation costs.operations. The Company recognized a related tax benefit associated with this expense of $13.1$1.2 million, $41.3 million0 and $23.4$11.0 million in fiscal 20162019, 20152018 and 20142017, respectively. During fiscal 2017, the $11.0 million tax benefit was comprised of $16.0 million associated with amortization and net stock exercises, partially offset by $5.0 million associated with U.S. Tax Reform re-measurement.
Stock Compensation Plans
Prior toOver the Separation,years, the Company has adopted the 2013and amended its Mallinckrodt Pharmaceuticals Stock and Incentive Plan, ("the 2013 Plan"). The 2013 Planwhich provides for the award of share options, share appreciation rights, annual performance bonuses, long-term performance awards, restricted units, restricted shares, deferred share units, promissory shares and other share-based awards (collectively, "Awards"). The 2013 Plan provided for a maximum number of5.7 million common shares to be issued as Awards, subject to adjustment as provided under the terms of the 2013 Plan. In fiscal 2015, the Company amended the 2013 Plan and adopted the 2015 Mallinckrodt Pharmaceuticals Stock and Incentive Plan ("the 2015 Plan"). The 2015 Plan provides for a maximum of 17.8 million common shares to be issuedrespective plans were as Awards (an incremental 12.1 million Awards from the 2013 Plan subject to issuance), subject to adjustment as provided under the terms of the 2015 Plan. follows:
|
| | | |
| | Maximum Number of Common Shares to be Issued as Awards (in millions) |
2013 Plan | | 5.7 |
|
2015 Plan | | 17.8 |
|
2018 Plan | | 26.8 |
|
As of September 30, 2016,December 27, 2019, all equity awards held by the Company's employees were either converted from Covidien equity awards at the Separation, converted fromissued by Questcor equity awards,Pharmaceuticals, Inc. ("Questcor"), acquired during fiscal 2014, or granted under the 2013 Plan or 2015 Plan.aforementioned plans.
Share options. Share options are granted to purchase the Company's ordinary shares at prices that are equal to the fair market value of the shares on the date the share option is granted. Share options generally vest in equal annual installments over a period of four years and expire ten years after the date of grant. The grant-date fair value of share options, adjusted for estimated forfeitures, is recognized as expense on a straight-line basis over the requisite service period, which is generally the vesting period. Forfeitures are estimated based on historical experience.
Share option activity and information iswas as follows:
|
| | | | | | | | | | | | |
| Share Options | | Weighted-Average Exercise Price | | Weighted-Average Remaining Contractual Term (in years) | | Aggregate Intrinsic Value |
Outstanding as of December 30, 2016 | 3,386,694 |
| | $ | 61.24 |
| | | | |
Granted | 1,719,532 |
| | 51.57 |
| | | | |
Exercised | (113,605 | ) | | 47.74 |
| | | | |
Expired/Forfeited | (348,637 | ) | | 68.08 |
| | | | |
Outstanding as of December 29, 2017 | 4,643,984 |
| | 57.78 |
| | | | |
Granted | 3,159,521 |
| | 13.92 |
| | | | |
Exercised | (39,949 | ) | | 32.00 |
| | | | |
Expired/Forfeited | (756,505 | ) | | 52.63 |
| | | | |
Outstanding as of December 28, 2018 | 7,007,051 |
| | 38.74 |
| | | | |
Granted | 1,378,175 |
| | 22.09 |
| | | | |
Exercised | (45,324 | ) | | 20.67 |
| | | | |
Expired/Forfeited | (1,449,202 | ) | | 34.80 |
| | | | |
Outstanding as of December 27, 2019 | 6,890,700 |
| | 36.39 |
| | 1.6 | | $ | — |
|
| | | | | | | |
Vested and non-vested expected to vest as of December 27, 2019 | 6,376,302 |
| | 37.58 |
| | 7.1 | | $ | — |
|
Exercisable as of December 27, 2019 | 3,349,227 |
| | 49.80 |
| | 1.2 | | — |
|
|
| | | | | | | | | | | | |
| Share Options | | Weighted-Average Exercise Price | | Weighted-Average Remaining Contractual Term (in years) | | Aggregate Intrinsic Value |
Outstanding at September 26, 2014 | 3,526,789 |
| | $ | 36.84 |
| | | | |
Granted | 635,567 |
| | 102.20 |
| | | | |
Exercised | (1,132,778 | ) | | 29.79 |
| | | | |
Expired/Forfeited | (243,135 | ) | | 58.00 |
| | | | |
Outstanding at September 25, 2015 | 2,786,443 |
| | 52.76 |
| | | | |
Granted | 1,248,828 |
| | 72.44 |
| | | | |
Exercised | (413,830 | ) | | 32.76 |
| | | | |
Expired/Forfeited | (199,585 | ) | | 72.65 |
| | | | |
Outstanding at September 30, 2016 | 3,421,856 |
| | 61.17 |
| | 7.3 | | $ | 49.6 |
|
| | | | | | | |
Vested and unvested expected to vest as of September 30, 2016 | 2,997,502 |
| | 61.60 |
| | 7.5 | | $ | 42.6 |
|
Exercisable at September 30, 2016 | 1,388,805 |
| | 45.55 |
| | 5.3 | | 38.2 |
|
As of September 30, 2016December 27, 2019, there was $35.5$20.9 million of total unrecognized compensation cost related to unvestednon-vested share option awards, which is expected to be recognized over a weighted-average period of 2.72.4 years.
The grant dategrant-date fair value of share options has been estimated using the Black-Scholes pricing model. Use of a valuation model requires management to make certain assumptions with respect to selected model inputs. The expected volatility assumption is based on the historical and implied volatility of the Company's peer group with similar business models. The expected life assumption is based on the contractual and vesting term of the share option, employee exercise patterns and employee post-vesting termination behavior. The expected annual dividend per share is based on the Company's current intentions regarding payment of cash dividends. The risk-free interest rate is based on U.S. Treasury zero-coupon issues with a remaining term equal to the expected life assumed at the date of grant. The weighted-average assumptions used in the Black-Scholes pricing model for shares granted in fiscal 2016, 20152019, 2018 and 2014,2017, along with the weighted-average grant-date fair value, were as follows:
|
| | | | | | | | | | | |
| 2016 | | 2015 | | 2014 |
Expected share price volatility | 31 | % | | 29 | % | | 32 | % |
Risk-free interest rate | 1.74 | % | | 1.72 | % | | 1.96 | % |
Expected annual dividend per share | — | % | | — | % | | — | % |
Expected life of options (in years) | 5.3 |
| | 5.3 |
| | 5.5 |
|
Fair value per option | $ | 22.82 |
| | $ | 30.08 |
| | $ | 17.38 |
|
|
| | | | | | | | | | | |
| Fiscal Year |
| 2019 | | 2018 | | 2017 |
Expected share price volatility | 45.8 | % | | 38.2 | % | | 36.0 | % |
Risk-free interest rate | 2.2 | % | | 2.6 | % | | 2.0 | % |
Expected annual dividend per share | — | % | | — | % | | — | % |
Expected life of options (in years) | 5.3 |
| | 5.3 |
| | 5.3 |
|
Fair value per option | $ | 9.66 |
| | $ | 5.32 |
| | $ | 18.36 |
|
In fiscal 2016, 20152019, 2018 and 2014,2017, the total intrinsic value of options exercised was $15.3$0.3 million, $89.5$0.2 million and $34.2$1.4 million, respectively, and the related tax benefit was $5.7$0.1 million, $33.1$0.1 million and $12.0$0.5 million, respectively.
Restricted share units. Recipients of RSUsrestricted share units ("RSUs") have no voting rights and receive dividend equivalent units whichthat vest upon the vesting of the related shares. RSUs generally vest in equal annual installments over a period of four years. Restrictions on RSUs lapse upon normal retirement, death or disability of the employee. The grant-date fair value of RSUs, adjusted for estimated forfeitures, is recognized as expense on a straight-line basis over the service period. The fair market value of RSUs granted after the Conversion is determined based on the market value of the Company's shares on the date of grant for periods after the Separation.
grant.
RSU activity iswas as follows:
|
| | | | | | |
| Shares | | Weighted-Average Grant-Date Fair Value |
Non-vested as of December 30, 2016 | 883,462 |
| | $ | 71.03 |
|
Granted | 655,282 |
| | 50.74 |
|
Exercised | (263,189 | ) | | 69.14 |
|
Expired/Forfeited | (169,789 | ) | | 68.57 |
|
Non-vested as of December 29, 2017 | 1,105,766 |
| | 60.08 |
|
Granted | 1,222,568 |
| | 14.58 |
|
Exercised | (433,354 | ) | | 57.93 |
|
Expired/Forfeited | (209,879 | ) | | 44.38 |
|
Non-vested as of December 28, 2018 | 1,685,101 |
| | 29.54 |
|
Granted | 755,180 |
| | 20.13 |
|
Exercised | (713,274 | ) | | 35.29 |
|
Expired/Forfeited | (307,987 | ) | | 24.81 |
|
Non-vested as of December 27, 2019 | 1,419,020 |
| | 22.68 |
|
|
| | | | | | |
| Shares | | Weighted-Average Grant-Date Fair Value |
Non-vested at September 26, 2014 | 589,222 |
| | $ | 47.88 |
|
Granted | 273,733 |
| | 105.68 |
|
Vested | (219,189 | ) | | 49.84 |
|
Forfeited | (71,272 | ) | | 68.15 |
|
Non-vested at September 25, 2015 | 572,494 |
| | 73.45 |
|
Granted | 615,074 |
| | 70.10 |
|
Vested | (193,849 | ) | | 69.27 |
|
Forfeited | (99,260 | ) | | 79.95 |
|
Non-vested at September 30, 2016 | 894,459 |
| | 70.40 |
|
The total fair value of Mallinckrodt restricted share unit awardsRSUs granted during fiscal 20162019 was $43.1$15.2 million. The total vest date fair value of Mallinckrodt restricted share unitsRSUs vested during fiscal 20162019 was $13.4$25.2 million. As of September 30, 2016,December 27, 2019, there was $47.2$20.6 million of total unrecognized compensation cost related to non-vested restricted share units granted. The costRSUs granted, which is expected to be recognized over a weighted-average period of 2.72.3 years.
Performance share units. Similar to recipients of RSUs, recipients of PSUsperformance share units ("PSUs") have no voting rights and receive dividend equivalent units. The grant dategrant-date fair value of PSUs, adjusted for estimated forfeitures, is generally recognized as expense on a straight-line basis from the grant dategrant-date through the end of the performance period. The vesting of PSUs and related dividend equivalent units is generally based on various performance metrics and relative total shareholder return (total shareholder return for the Company as compared to total shareholder return of the PSU peer group), measured over a three-yearthree year performance period. The PSU peer group is comprised of various healthcare companies which attempts to replicate the Company’sCompany's mix of businesses. Depending on Mallinckrodt's relative performance during the performance period, a recipient of the award is entitled to receive a number of ordinary shares equal to a percentage, ranging from 0%0.0% to 200%200.0%, of the award granted.
PSU activity iswas as follows (1):
| | | Shares | | Weighted-Average Grant-Date Fair Value | Shares | | Weighted-Average Grant-Date Fair Value |
Non-vested at September 26, 2014 | 72,740 |
| | $ | 63.46 |
| |
Non-vested as of December 30, 2016 | | 265,648 |
| | $ | 88.51 |
|
Granted | 77,306 |
| | 125.84 |
| 348,963 |
| | 51.73 |
|
Forfeited | (19,072 | ) | | 92.05 |
| (48,606 | ) | | 107.00 |
|
Non-vested at September 25, 2015 | 130,974 |
| | 96.05 |
| |
Vested | | (61,554 | ) | | 62.65 |
|
Non-vested as of December 29, 2017 | | 504,451 |
| | 64.44 |
|
Granted | 145,192 |
| | 83.00 |
| 770,714 |
| | 13.80 |
|
Forfeited | (9,521 | ) | | 96.30 |
| (89,614 | ) | | 59.18 |
|
Non-vested at September 30, 2016 | 266,645 |
| | 88.59 |
| |
Vested | | (24,022 | ) | | 98.27 |
|
Non-vested as of December 28, 2018 | | 1,161,529 |
| | 28.61 |
|
Granted | | 448,363 |
| | 32.46 |
|
Forfeited | | (414,387 | ) | | 30.54 |
|
Non-vested as of December 27, 2019 | | 1,195,505 |
| | 23.85 |
|
(1) The number of shares disclosed within this table are at the target number of 100%100.0%.
The Company generally uses the Monte Carlo model to estimate the probability of satisfying the performance criteria and the resulting fair value of PSU awards. The assumptions used in the Monte Carlo model for PSUs granted during each year were as follows:
|
| | | | | | | | |
| Fiscal Year |
| 2019 | | 2018 | | 2017 |
Expected stock price volatility | 55.2 | % | | 56.9 | % | | 47.5 | % |
Peer group stock price volatility | 41.3 | % | | 39.1 | % | | 39.9 | % |
Correlation of returns | 47.8 | % | | 2.1 | % | | 17.0 | % |
|
| | | | | | | | |
| 2016 | | 2015 | | 2014 |
Expected stock price volatility | 41 | % | | 27 | % | | 28 | % |
Peer group stock price volatility | 36 | % | | 32 | % | | 33 | % |
Correlation of returns | 24 | % | | 14 | % | | 17 | % |
The weighted-average grant dategrant-date fair value per share of PSUs granted during fiscal 2019 was $83.00 in fiscal 2016.$32.46. As of September 30, 2016,December 27, 2019, there was $13.7$10.5 million of unrecognized compensation cost related to PSUs, which is expected to be recognized over a weighted-average period of 1.71.8 years.
Restricted stock awards. Recipients of restricted stock awards ("RSAs") pertainpertained solely to converted awards from the Questcor, Acquisition, which were converted at identical terms to their original award. The converted RSAs maintain voting rights and a non-forfeitable right to receive dividends. RSAs are subject to accelerated vesting as prescribed by the terms of the original award based on a change in control, and substantially all of which vested over a thirteen month period of time from the date of the Questcor Acquisition. Restrictions on RSAs lapse upon normal retirement, death or disability of the employee. The grant-date fair value of RSAs, adjusted for estimated forfeitures, iswas recognized as expense on a straight-line basis over the service period.
|
| | | | | | |
| Shares | | Weighted-Average Grant-Date Fair Value |
Non-vested at September 26, 2014 | 1,432,031 |
| | $ | 70.88 |
|
Vested | (1,362,823 | ) | | 70.88 |
|
Forfeited | (34,646 | ) | | 70.88 |
|
Non-vested at September 25, 2015 | 34,562 |
| | 70.88 |
|
Vested | (9,760 | ) | | 70.88 |
|
Forfeited | (7,936 | ) | | 70.88 |
|
Non-vested at September 30, 2016 | 16,866 |
| | 70.88 |
|
The total vest dateweighted average grant-date fair value of Mallinckrodt restrictedper share awards vested during fiscal 2016 was $0.6 million.$70.88.
|
| | |
| Shares |
Non-vested as of December 30, 2016 | 14,868 |
|
Vested | (7,970 | ) |
Forfeited | (2,223 | ) |
Non-vested as of December 29, 2017 | 4,675 |
|
Vested | (3,970 | ) |
Forfeited | (705 | ) |
Non-vested as of December 28, 2018 | — |
|
Employee Stock Purchase Plans
Effective March 16, 2016, upon approval by the shareholders of Mallinckrodt, the Company adopted a new qualified Mallinckrodt Employee Stock Purchase Plan ("ESPP"). Substantially all full-time employees of the Company's U.S. subsidiaries and employees of certain qualified non-U.S. subsidiaries are eligible to participate in the ESPP. Eligible employees authorize payroll deductions to be made to purchase shares at 15%15.0% below the market price at the beginning or end of an offering period.
Employees are eligible to authorize withholdings such that purchases of shares may amount to $25,000 of fair market value for each calendar year as prescribed by IRCthe Internal Revenue Code Section 423. Mallinckrodt has elected to deliver shares under the period by utilizing treasury stock accumulated by the Company. The ESPP was suspended effective June 30, 2019 and remains unavailable as of December 27, 2019.
Prior to the first offering period of the ESPP (July 1, 2016), the Company maintained a non-qualified employee stock purchase plan ("the Old ESPP"). Substantially all full-time employees of the Company's U.S. subsidiaries and employees of certain qualified non-U.S. subsidiaries were eligible to participate in the Old ESPP. Eligible employees authorized payroll deductions to be made for the purchase of shares. The Company matched a portion of the employee contribution by contributing an additional 15% (25% in fiscal 2014 and fiscal 2015) of the employee's payroll deduction up to a $25,000 per employee contribution. All shares purchased under the Old ESPP were purchased on the open market by a designated broker.
|
| |
16. | Accumulated Other Comprehensive Income |
The components of accumulated other comprehensive income are as follows:
|
| | | | | | | | | | | | | | | |
| Currency Translation | | Unrecognized Loss on Derivatives | | Unrecognized Gain (Loss) on Benefit Plans | | Accumulated Other Comprehensive Income |
Balance at September 27, 2013 | $ | 158.6 |
| | $ | (7.3 | ) | | $ | (42.8 | ) | | $ | 108.5 |
|
Other comprehensive income (loss), net | (27.6 | ) | | — |
| | (17.1 | ) | | (44.7 | ) |
Reclassification from other comprehensive income (loss) | — |
| | 0.5 |
| | 1.4 |
| | 1.9 |
|
Balance at September 26, 2014 | 131.0 |
| | (6.8 | ) | | (58.5 | ) | | 65.7 |
|
Other comprehensive income (loss), net | (70.8 | ) | | — |
| | (1.1 | ) | | (71.9 | ) |
Reclassification from other comprehensive income (loss) | — |
| | 0.4 |
| | 6.7 |
| | 7.1 |
|
Balance at September 25, 2015 | 60.2 |
| | (6.4 | ) | | (52.9 | ) | | 0.9 |
|
Other comprehensive income (loss), net | 0.8 |
| | — |
| | (39.5 | ) | | (38.7 | ) |
Reclassification from other comprehensive income (loss) | (59.4 | ) | | 0.5 |
| | 11.1 |
| | (47.8 | ) |
Balance at September 30, 2016 | $ | 1.6 |
| | $ | (5.9 | ) | | $ | (81.3 | ) | | $ | (85.6 | ) |
The following summarizes reclassifications out of accumulated other comprehensive income for the 2016 and 2015 fiscal years:
|
| | | | | | | | | |
| Amount Reclassified from Accumulated Other Comprehensive Income | | Amount Reclassified from Accumulated Other Comprehensive Income | | |
| September 30, 2016 | | September 25, 2015 | | Line Item in the Condensed Consolidated Statement of Income |
Amortization of unrealized loss on derivatives | $ | 0.7 |
| | $ | 0.6 |
| | Interest expense |
Income tax provision | (0.2 | ) | | (0.2 | ) | | Provision for income taxes |
Net of income taxes | 0.5 |
| | 0.4 |
| | |
| | | | | |
Amortization of pension and post-retirement benefit plans: | | | | | |
Net actuarial loss | 11.4 |
| | 9.4 |
| | (1) |
Prior service credit | (2.7 | ) | | (4.6 | ) | | (1) |
Disposal of discontinued operations | 0.8 |
| | — |
| | |
Plan settlements | 8.1 |
| | 6.0 |
| | (1) |
Total before tax | 17.6 |
| | 10.8 |
| | |
Income tax provision | (6.5 | ) | | (4.1 | ) | | Provision for income taxes |
Net of income taxes | 11.1 |
| | 6.7 |
| | |
| | | | | |
Currency translation | (59.4 | ) | | — |
| | |
| | | | | |
Total reclassifications for the period | $ | (47.8 | ) | | $ | 7.1 |
| | |
| |
(1) | These accumulated other comprehensive income components are included in the computation of net periodic benefit cost. See Note 13 for additional details.
|
In disposing of assets or businesses, the Company has historicallyfrom time to time provided representations, warranties and indemnities to cover various risks and liabilities, including unknown damage to the assets, environmental risks involved in the sale of real estate, liability to investigate and remediate environmental contamination at waste disposal sites and manufacturing facilities, and unidentified tax liabilities related to periods prior to disposition. The Company assesses the probability of potential liabilities related to such representations, warranties and indemnities and adjusts potential liabilities as a result of changes in facts and circumstances. The Company believes, given the information currently available, that theirthe ultimate resolutionresolutions will not have a material adverse effect on its financial condition, results of operations and cash flows.
In connection with the sale of the Specialty Chemical business (formerly known as Mallinckrodt Baker) in fiscal 2010, the Company agreed to indemnify the purchaser with respect to various matters, including certain environmental, health, safety, tax and other matters. The indemnification obligations relating to certain environmental, health and safety matters have a term of 17 years from the sale, while some of the other indemnification obligations have an indefinite term. The amount of the liability relating to all of these indemnification obligations included in other liabilities on the Company's consolidated balance sheets at September 30, 2016December 27, 2019 and September 25, 2015December 28, 2018 was $15.7$15.0 million and $14.6 million, respectively, of which $12.9$12.3 million and $13.0$11.8 million,, respectively, related to environmental, health and safety matters. The value of the environmental, health and safety indemnity was measured based on the probability-weighted present value of the costs expected to be incurred to address environmental, health and safety claims made under the indemnity. The aggregate fair value of these indemnification obligations did not differ significantly from their aggregate carrying value at September 30, 2016December 27, 2019 and September 25, 2015.December 28, 2018. As of September 30, 2016,December 27, 2019, the maximum future payments the Company could be required to make under these indemnification obligations was $71.0$70.2 million. The Company was required to pay $30.0 million into an escrow account as collateral to the purchaser, of which $19.0$18.9 million and $18.6 million remained in restricted cash, included in other long-term assets on the consolidated balance sheets at September 30, 2016December 27, 2019 and September 25, 2015.December 28, 2018, respectively.
The Company has recorded liabilities for known indemnification obligations included as part of environmental liabilities, which are discussed in Note 18. In addition, the19.
The Company is also liable for product performance; however the Company believes, given the information currently available, that theirthe ultimate resolution of any such claims will not have a material adverse effect on its financial condition, results of operations and cash flows.
The Company is required to provide the U.S. Nuclear Regulatory Commission financial assurance demonstrating its ability to fund the decommissioning of its Maryland Heights, Missouri radiopharmaceuticals production facility upon closure, though the Company does not intend to close this facility. The Company has provided this financial assurance in the form of surety bonds totaling $30.2 million. As of September 30, 2016,December 27, 2019, the Company had various other letters of credit, and guaranteeguarantees and surety bonds totaling $32.7 million. Upon closing the sale of the Nuclear Imaging business, these obligations will be transferred to the buyer.
In April 2015, the Company terminated a letter of credit to guarantee decommissioning costs associated with its Saint Louis, Missouri plant$35.2 million and placed $21.1 million of restricted cash on deposit with a trustee. In February 2016, following completion of the decommissioning efforts, the trustee returned the cash on deposit and it was available$12.8 million held in segregated accounts primarily to collateralize surety bonds for general use.
In addition, the separation and distribution agreement entered into with Covidien at the Separation provides for cross-indemnities principally designed to place financial responsibility of the obligations and liabilities of the Company's business with the Company and financial responsibility for the obligations and liabilities of Covidien's remaining business with Covidien, among other indemnities.environmental liabilities.
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18.19. | Commitments and Contingencies |
The Company has purchase obligations related to commitments to purchase certain goods and services. At September 30, 2016December 27, 2019, such obligations were as follows:
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Fiscal 2020 | $ | 63.4 |
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Fiscal 2021 | 1.7 |
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Fiscal 2022 | 1.7 |
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Fiscal 2023 | 1.7 |
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Fiscal 2024 | 1.6 |
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Fiscal 2017 | $ | 147.5 |
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Fiscal 2018 | 31.6 |
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Fiscal 2019 | 20.3 |
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Fiscal 2020 | 14.1 |
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Fiscal 2021 | 6.7 |
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The Company is subject to various legal proceedings and claims, including patent infringement claims, product liability matters, personal injury, environmental matters, employment disputes, contractual disputes and other commercial disputes, including those described below. The Company believes that these legal proceedings and claims likely will be resolved over an extended period of time. Although it is not feasible to predict the outcome of these matters, the Company believes, unless indicated below, given the
information currently available, that their ultimate resolution will not have a material adverse effect on its financial condition, results of operations and cash flows.
Governmental Proceedings
Opioid-Related Matters
Since 2017, multiple U.S. states, counties, a territory, other governmental persons or entities and private plaintiffs have filed lawsuits against certain entities of the Company, as well as various other manufacturers, distributors, pharmacies, pharmacy benefit managers, individual doctors and/or others, asserting claims relating to defendants' alleged sales, marketing, distribution, reimbursement, prescribing, dispensing and/or other practices with respect to prescription opioid medications, including certain of the Company's products. As of February 25, 2020, the cases the Company is aware of include, but are not limited to, approximately 2,496 cases filed by counties, cities, Native American tribes and/or other government-related persons or entities; approximately 253 cases filed by hospitals, health systems, unions, health and welfare funds or other third-party payers; approximately 110 cases filed by individuals; approximately 6 cases filed by schools and school boards; and 17 cases filed by the Attorneys General for New Mexico, Kentucky, Rhode Island, Georgia, Florida, Alaska, New York, Nevada, South Dakota, New Hampshire, Louisiana, Illinois, Mississippi, West Virginia, Puerto Rico, Ohio, and Idaho, with Idaho being the only state Attorney General to file in federal as opposed to state court. As of February 25, 2020, the Mallinckrodt defendants in these cases consist of Mallinckrodt plc and the following subsidiaries of Mallinckrodt plc: Mallinckrodt Enterprises LLC, Mallinckrodt LLC, SpecGx LLC, Mallinckrodt Brand Pharmaceuticals Inc., Mallinckrodt Inc., MNK 2011 Inc., and Mallinckrodt Enterprises Holdings, Inc. On November 22, 2019, the Delaware Attorney General filed a motion in the Superior Court of the State of Delaware to amend its complaint to add certain entities of the Company, which the Court granted on December 18, 2019. The Delaware Attorney General has not yet filed its amended complaint. The Hawaii Attorney General filed a complaint against the Company on June 3, 2019. On December 27, 2019, the First Circuit Court entered a written order dismissing the Hawaii Attorney General's claims against all defendants without prejudice, finding that the allegations in the State's complaint failed to give notice of the claims against the defendants. Certain of the lawsuits have been filed as putative class actions.
Most pending federal lawsuits have been coordinated in a federal multi-district litigation (“MDL”) pending in the U.S. District Court for the Northern District of Ohio. The MDL court has issued a series of case management orders permitting motion practice addressing threshold legal issues in certain cases, allowing discovery, setting pre-trial deadlines and setting a trial date on October 21, 2019 for two cases originally filed in the Northern District of Ohio by Summit County and Cuyahoga County against opioid manufacturers, distributors, and pharmacies ("Track 1 Cases"). The counties claimed that opioid manufacturers' marketing activities changed the medical standard of care for treating both chronic and acute pain, which led to increases in the sales of their prescription opioid products. They also alleged that opioid manufacturers' and distributors' failure to maintain effective controls against diversion was a substantial cause of the opioid crisis. On September 30, 2019, the Company announced that Mallinckrodt plc, along with its wholly owned subsidiaries Mallinckrodt LLC and SpecGx LLC, had executed a definitive settlement agreement and release with Cuyahoga and Summit Counties in Ohio. The settlement fully resolves the Track 1 cases against all named Mallinckrodt entities that were scheduled to go to trial in October 2019 in the MDL. Under the agreement, the Company paid $24.0 million in cash on October 1, 2019. In addition, the Company will provide $6.0 million in generic products, including addiction treatment products, and will also provide a $0.5 million payment in two years in recognition of the counties' time and expenses. Further in the event of a comprehensive resolution of government-related opioid claims, the Company has agreed that the two plaintiff counties will receive the value they would have received under such a resolution, less the payments described above. All named Mallinckrodt entities were dismissed with prejudice from the lawsuit. The value of the settlement should not be extrapolated to any other opioid-related cases or claims. On October 21, 2019, the MDL court issued a Stipulated Dismissal Order dismissing the claims against the remaining manufacturers and distributors pursuant to a settlement agreement, and severing the claims against the remaining pharmacy defendant to be heard in a subsequent trial. Judge Polster issued Suggestions of Remand for City and County of San Francisco, California and City of Chicago, Illinois. Additionally, all manufacturer defendants, including us, were severed from the “Track Two” MDL cases, City of Huntington and Cabell County Commission, West Virginia. Those cases have subsequently been remanded to the Southern District of West Virginia.
Other lawsuits remain pending in various state courts. In some jurisdictions, such as Arizona, California, Connecticut, Illinois, Massachusetts, New York, Pennsylvania, South Carolina, Texas, Utah and West Virginia, certain of the 234 state lawsuits have been consolidated or coordinated for pre-trial proceedings before a single court within their respective state court systems. State cases are generally at the pleading and/or discovery stage.
The lawsuits assert a variety of claims, including, but not limited to, public nuisance, negligence, civil conspiracy, fraud, violations of the Racketeer Influenced and Corrupt Organizations Act (“RICO”) or similar state laws, violations of state Controlled Substances Acts or state False Claims Acts, product liability, consumer fraud, unfair or deceptive trade practices, false advertising, insurance fraud, unjust enrichment, negligence, negligent misrepresentation, and other common law and statutory claims arising from defendants' manufacturing, distribution, marketing and promotion of opioids and seek restitution, damages, injunctive and other relief
and attorneys' fees and costs. The claims generally are based on alleged misrepresentations and/or omissions in connection with the sale and marketing of prescription opioid medications and/or an alleged failure to take adequate steps to prevent diversion.
Subsequent to December 27, 2019, the Company announced an agreement in principle on the terms of a global settlement of all opioid-related claims against the Company and its subsidiaries. See Note 24 for further information.
In addition to the lawsuits described above, certain entities of the Company have received subpoenas and civil investigative demands ("CID(s)") for information concerning the sale, marketing and/or distribution of prescription opioid medications and the Company's suspicious order monitoring programs, including from the U.S. Department of Justice ("DOJ") and the Attorneys General for Missouri, New Hampshire, Kentucky, Washington, Alaska, South Carolina, Puerto Rico, New York, West Virginia, Indiana, the Divisions of Consumer Protection and Occupational and Professional Licensing of the Utah Department of Commerce, and the New York State Department of Financial Services. The Company has been contacted by the coalition of State Attorneys General investigating the role manufacturers and distributors may have had in contributing to the increased use of opioids in the U.S. On January 27, 2018, the Company received a grand jury subpoena from the U.S. Attorneys' Office (“USAO”) for the Southern District of Florida for documents related to the distribution, marketing and sale of generic oxymorphone products. On April 17, 2019, the Company received a grand jury subpoena from the USAO for the Eastern District of New York ("EDNY") for documents related to the sales and marketing of controlled substances, the policies and procedures regarding controlled substances, and other related documents. On June 4, 2019, the Company received a rider from the USAO for EDNY requesting additional documents regarding the Company's anti-diversion program. The Company is responding or has responded to these subpoenas, CIDs and any informal requests for documents.
In August 2018, the Company received a letter from the leaders of the Energy and Commerce Committee in the U.S. House of Representatives requesting a range of documents relating to its marketing and distribution of opioids. The Company completed its response to this letter in December 2018. The Company received a follow-up letter in January 2020 and provided the committee a response. The Company is cooperating with the investigation.
The Attorneys General for Kentucky, Alaska, New York, New Hampshire, West Virginia and Puerto Rico have subsequently filed lawsuits against the Company. Similar subpoenas and investigations may be brought by others or the foregoing matters may be expanded or result in litigation. Since these investigations and/or lawsuits are in early stages, the Company is unable to predict outcomes or estimate a range of reasonably possible losses.
New York State Opioid Stewardship Act. On October 24, 2018, the Company filed suit in the U.S. District Court for the Southern District of New York against the State of New York, asking the court to declare New York State's Opioid Stewardship Act (“OSA”) unconstitutional and to enjoin its enforcement. On December 19, 2018, the court declared the OSA unconstitutional and granted the Company's motion for preliminary injunctive relief. On January 17, 2019, the State of New York appealed the court's decision. The appeal has been fully briefed and argued before the Second Circuit, and the parties are awaiting a decision. In April 2019, the State of New York passed its 2020 budget, which amended the OSA so that if the OSA decision is reversed on appeal, the OSA would apply only to the sale or distribution of certain opioids in New York for 2017 and 2018 and, effective July 1, 2019, imposed an excise tax on certain opioids.
DEA Investigation. In November 2011 and October 2012, the Company received subpoenas from the U.S. Drug Enforcement Administration ("DEA") requesting production of documents relating to its suspicious order monitoring program for controlled substances. The United States Attorney’s Office (the “USAO”)USAO for the Eastern District of Michigan is investigatinginvestigated the possibility that the Company failed to report suspicious orders of controlled substances during the period 2006-2011 in violation of the Controlled Substances Act and its related
regulations. The USAO for the Northern District of New York and Office of Chief Counsel for the U.S. Drug Enforcement Administration are investigatingDEA investigated the possibility that the Company failed to maintain appropriate records and security measures with respect to manufacturing of certain controlled substances at its Hobart facility during the period 2012-2013. WhileIn July 2017, the Company entered into a final settlement with the DEA and the USAOs for Eastern District of Michigan and the Northern District of New York to settle these investigations. As part of the agreement, the Company paid $35.0 million to resolve all potential claims and agreed, as part of a Memorandum of Agreement (“MOA”), to utilize all available transaction information to identify suspicious orders of any Mallinckrodt controlled substance product and to report to the DEA when it concludes that chargeback data or other information indicates that a downstream registrant poses a risk of diversion, among other things. The MOA remains in effect until July 10, 2020.
Other Matters
SEC Subpoena. In August 2019, the Company received a subpoena from the U.S. Securities and Exchange Commission (“SEC”) for documents related to the Company's disclosure of its dispute with the U.S. Department of Health and Human Services ("HHS") and Centers for Medicare & Medicaid Services ("CMS" and together with HHS, the "Agency") concerning the base date average manufacturer price ("AMP") under the Medicaid Drug Rebate Program for Mallinckrodt's Acthar® Gel (repository corticotropin injection) ("Acthar Gel"), which is not possible at this timenow the subject of litigation between the Company and the Agency (see Medicaid Lawsuit below). The Company is cooperating with the SEC's investigation.
Medicaid Lawsuit. In May 2019, the Company filed a lawsuit under the Administrative Procedure Act ("APA") in federal district court for the District of Columbia against the Agency. The dispute involves the base date AMP under the Medicaid Drug Rebate Program for Acthar Gel. A drug's “base date AMP” is used to determinecalculate the Medicaid rebate amount payable by the drug's manufacturer to state Medicaid agencies when the drug is prescribed to Medicaid beneficiaries. At issue in the lawsuit is whether FDA's 2010 approval of a new drug application for use of Acthar Gel in treating infantile spasms rendered Acthar Gel eligible for a new base date AMP, as indicated by CMS's written communications in 2012. In May 2019, CMS indicated that if the Company failed to revert to use of the original base date AMP in its calculation of Acthar Medicaid rebates, CMS would identify the Company as being out of compliance with certaintyits Medicaid Drug Rebate Program reporting requirements, among other potential actions, triggering certain negative consequences. As such, the ultimate outcomeCompany filed a lawsuit alleging (i) that CMS has violated the Medicaid drug rebate statute, (ii) that CMS has violated its own regulations defining “single source drug,” (iii) that CMS has failed to adequately explain its change in position based on two letters that CMS sent Questcor Pharmaceuticals Inc. ("Questcor") in 2012 regarding the base date AMP for Acthar Gel, (iv) that CMS failed to give the Company fair notice of its latest position, and (v) that CMS should be prohibited from applying its new position retroactively. The court held a hearing regarding this matter on August 2, 2019 and the court took the matter under advisement. While the Company believes giventhat its lawsuit has strong factual and legal bases, as of December 27, 2019, the potential for retroactive non-recurring charges could range from 0 to approximately $630.0 million.
Florida Civil Investigative Demand. In February 2019, the Company received a CID from the U.S. Attorney's Office for the Middle District of Florida for documents related to alleged payments to healthcare providers in Florida and whether those payments violated the Anti-Kickback Statute. The Company is cooperating with the investigation.
U.S. House Committee Investigation. In January 2019, the Company along with 11 other pharmaceutical companies, received a letter from the U.S. House Committee on Oversight and Reform requesting information currently available, thatrelating to the ultimate resolution, after taking into account amounts already accrued, could haveCompany's pricing strategy for Acthar Gel and related matters. The Company is cooperating with the Committee's investigation.
Boston Civil Investigative Demand. In January 2019, the Company received a material adverse effect on its financial condition, resultsCID from the U.S. Attorney's Office for the District of operationsMassachusetts for documents related to the Company's participation in the Medicaid Drug Rebate Program. The Company is cooperating with the investigation.
Generic Pricing Subpoena. In March 2018, the Company received a grand jury subpoena issued by the U.S. District Court for the Eastern District of Pennsylvania pursuant to which the Antitrust Division of the DOJ is seeking documents regarding generic products and cash flows.pricing, communications with generic competitors and other related matters. The Company is in the process of responding to this subpoena and intends to cooperate in the investigation.
Boston Subpoena. In September 2012,QuestcorDecember 2016, the Company received a subpoena from the USAO for the Eastern District of Pennsylvania for information relating to its promotional practices related to Acthar. Questcor has also been informed by the USAO for the Eastern District of Pennsylvania that the USAO for the Southern District of New York and the SEC are participating in the investigation to review Questcor's promotional practices and related matters related to Acthar. On March 9, 2015, the Company received a "No Action" letter from the SEC regarding its review of the Company's promotional practices related to Acthar.
In June 2014, Questcor received a subpoena and Civil Investigative Demand ("CID") from the Federal Trade Commission ("FTC") seeking documentary materials and information regarding the FTC's investigation into whether Questcor's acquisition of certain rights to develop, market, manufacture, distribute, sell and commercialize Synacthen Depot® from Novartis AG and Novartis Pharma AG (collectively, "Novartis") violates antitrust laws. Subsequently, a small number of states commenced similar investigations focused on whether the transaction violates state antitrust laws. The Company is not aware of any existing or pending litigation in connection with these investigations. While it is not possible at this time to determine with certainty the ultimate outcome of this matter, the Company believes, given the information currently available, that the ultimate resolution, after taking into account amounts already accrued, could have a material adverse effect on its financial condition, results of operations and cash flows.
In March 2014, the USAO for the Eastern District of Pennsylvania requested the production of documents related to an investigation of the U.S. promotion of Therakos’ immunotherapy drug/device system UVADEX/UVAR XTS and UVADEX/CELLEX (collectively, the “Therakos System”), for indications not approved by the FDA, including treatment of patients with graft versus host disease (“GvHD”) and solid organ transplant patients, including pediatric patients. The investigation also includes Therakos’ efforts to secure FDA approval for additional uses of, and alleged quality issues relating to, UVADEX/UVAR. In August 2015, the USAO for the Eastern District of Pennsylvania sent Therakos a subsequent requestMassachusetts for documents related to the investigationCompany's payments to charitable foundations, the provision of financial and has since made certainother support by charitable foundations to patients receiving Acthar Gel, and related requests. We arematters. The Company responded to these requests and continues to cooperate in the process of responding to those requests.investigation.
Texas Pricing Investigation. In November 2014, the Company received a CID from the Civil Medicaid Fraud Division of the Texas Attorney General's Office. According to the CID, the Attorney General's office is investigating the possibility of false reporting of information by the Company regarding the prices of certain of its drugs used by Texas Medicaid to establish reimbursement rates for pharmacies that dispensed the Company's drugs to Texas Medicaid recipients.
We have The Company responded to or arethese requests. In December 2018, the Company entered into a final settlement with the Texas Attorney General's Office to resolve all potential claims in the processinvestigation and recorded a corresponding expense, which is included in SG&A in the consolidated statement of responding to each of the subpoenas and the CIDs and we intend to cooperate fully in each such investigation.operations.
MNK 2011 Inc. (formerly known as Mallinckrodt Inc.) v. U.S. Food and Drug Administration and United States of America. The In November 2014, the FDA reclassified the Company's Methylphenidate ER in the Orange Book: Approved Drug Products with Therapeutic Equivalence ("the Orange Book"). In November 2014, the Company filed a Complaint for Declaratory and Injunctive Relief ("the Complaint") in the U.S. District Court for the District of Maryland Greenbelt Division against the FDA and the United States of America in November 2014(the "MD Complaint") for judicial review of what the Company believes is the FDA's inappropriate and unlawful reclassification of the Company's Methylphenidate HCl Extended-Release tablets USP (CII) ("Methylphenidate ER") in the Orange Book: Approved Drug Products with Therapeutic Equivalence ("Orange Book") on November 13, 2014. In its Complaint, the Company asked the court to: issue an injunction to (a) set aside the FDA's reclassification of the Company's Methylphenidate ER products from freely substitutable at the pharmacy level (class AB) to presumed to be therapeutically inequivalent (class BX) in the Orange Book and (b) prohibit the FDA from reclassifying the Company's Methylphenidate ER products in the future without following applicable legal requirements; and issue a declaratory judgment that the FDA's action reclassifying the Company's Methylphenidate ER products in the Orange Book is unlawful. The Company concurrently filed a motion with the same court requesting an expedited hearing to issue a temporary restraining order ("TRO") directing the FDA to reinstate the Orange Book AB rating for the Company's Methylphenidate ER products on a temporary basis. The court denied the Company's motion for a TRO. In December 2014, the FDA filed a motion to dismiss the Complaint with the district court. The Company filed its opposition to the motion to dismiss in January 2015, and concurrently filed a motion for summary judgment.reclassification. In July 2015, the court granted the FDA’sFDA's motion to dismiss with respect to three of the five counts in the MD Complaint and granted summary judgment in favor of the FDA with respect to the two remaining counts. The Company appealed the court’s decision to the U.S. Court of Appeals for the Fourth Circuit.counts (the “MD Order”). On October 18, 2016, the FDA initiated proceedings, proposing to withdraw approval of Mallinckrodt’sthe Company's Abbreviated New Drug Application ("ANDA") for Methylphenidate ER. On October 21, 2016, the United StatesU.S. Court of Appeals for the Fourth Circuit issued an Order removing Company’s pending litigation withorder placing the FDA fromCompany's appeal of the Court’s oral argument calendar and placing that litigationMD Order in abeyance pending the outcome of the withdrawal proceedings. The Company concurrently submitted to the FDA requests for a hearingparties exchanged documents and in the withdrawal proceeding and for a 90-day extension of the deadline for submitting documentation supporting the necessity of a hearing. The FDA has granted the Company’s extension request, with a new deadline of March 19, 2017, andApril 2018, the Company is preparing the supporting documentation for the March submission. The Company plans to vigorously set forthfiled its submission in support of its position in the withdrawal proceedings. A potential outcome of the withdrawal proceedings is that the Company's Methylphenidate ER products may lose their FDA approval and have to be withdrawn from the market.
Therakos® Subpoena. In March 2014, the USAO for the Eastern District of Pennsylvania requested the production of documents related to an investigation of the U.S. promotion of Therakos' drug/device system UVADEX/UVAR XTS and UVADEX/CELLEX (collectively, the "Therakos System"), for indications not approved by the FDA, including treatment of patients with graft versus host disease ("GvHD") and solid organ transplant patients, including pediatric patients. The investigation also includes Therakos' efforts to secure FDA approval for additional uses of, and alleged quality issues relating to, UVADEX/UVAR. In August 2015, the USAO for
the Eastern District of Pennsylvania sent Therakos a subsequent request for documents related to the investigation and has since made certain related requests. The Company responded to these requests and continues to cooperate in the investigation.
Patent/AntitrustQuestcor Subpoena. In September 2012,Questcor received a subpoena from the USAO for the Eastern District of Pennsylvania for information relating to its promotional practices related to Acthar Gel. Questcor subsequently was informed by the USAO for the Eastern District of Pennsylvania that the USAO for the Southern District of New York and the SEC were participating in the investigation to review Questcor's promotional practices and related matters pertaining to Acthar Gel. The current investigation also relates to Questcor's provision of financial and other support to patients, including through charitable foundations and related matters. On March 9, 2015, the Company received a "No Action" letter from the SEC regarding its review of the Company's promotional practices related to Acthar Gel. On or about March 8, 2019, the U.S. District Court for the Eastern District of Pennsylvania unsealed two qui tam actions involving the allegations under investigation by the USAO for the Eastern District of Pennsylvania. The DOJ intervened in both actions, which were later consolidated. In September 2019, the Company executed a settlement agreement with the DOJ for $15.4 million and finalized settlements with the three qui tam plaintiffs. These settlements were paid during the three months ended September 27, 2019 and resolve the portion of the investigation and litigation involving Questcor's promotional practices related to Acthar Gel.
On or about June 4, 2019, the DOJ filed its Complaint in Intervention in the litigation, alleging claims under the federal False Claim Act based on Questcor's relationship with and donations to an independent charitable patient co-pay foundation. The Company disagrees with the DOJ's characterization of the facts and applicable law. On January 22, 2020, the court denied the Company's motion to dismiss the Complaint in Intervention. The Company intends to vigorously defend itself in this matter. At this stage, the Company is not able to reasonably estimate the expected amount or range of cost or any loss associated with this lawsuit.
Patent Litigation
Tyco Healthcare Group LP, et al. v. MutualAmitiza Patent Litigation: Zydus Pharmaceuticals (USA) Inc. In January 2020, Sucampo GmbH, Sucampo Pharmaceuticals, Inc., Sucampo Pharma Americas LLC and Sucampo Pharma LLC, all subsidiaries of the Company, and Takeda Pharmaceutical Company Limited, Takeda Pharmaceuticals USA, Inc. In March 2007,, and Takeda Pharmaceuticals America, Inc. (collectively "Takeda," the Companyexclusive licensee under the patents in litigation) filed a patent infringement suit in the U.S. District Court for the District of New Jersey against Mutual Pharmaceutical Co.,Zydus Pharmaceuticals (USA) Inc., et al. (collectively, "Mutual" (“Zydus”) after Mutual submittedalleging that Zydus infringed U.S. Patent Nos. 7,795,312, 8,026,393, 8,338,639, 8,748,481 and 8,779,187 following receipt of a December 2019 notice from Zydus concerning its submission of an Abbreviated New Drug Application ("ANDA") toANDA containing a Paragraph IV patent certification with the FDA seeking to sellfor a generic version of the Company's 7.5 mg RESTORIL™ sleep aid product. Mutual also filed antitrust and unfair competition counterclaims. The patents at issue have since expired or been found invalid. The trial court issued an opinion and order granting the Company's motion for summary judgment regarding Mutual's antitrust and unfair competition counterclaims. Mutual appealed this decision to the U.S. Court of Appeals for the Federal Circuit and the Federal Circuit issued a split decision, affirming the trial court in part and remanding to the trial court certain counterclaims for further proceedings.Amitiza. The Company filed a motion for summary judgment with the U.S. District Court regarding the remanded issues. In May 2015, the trial court issued an opinion granting-in-part and denying-in-part the Company’s motion for summary judgment.intends to vigorously enforce its intellectual property rights relating to Amitiza.
'222 and '218Amitiza Patent Litigation: InnoPharma LicensingSun Pharmaceutical Industries, Ltd. and Sun Pharmaceutical Industries, Inc. In October 2018, Sucampo AG, Sucampo Pharmaceuticals, Inc. and Sucampo Pharma LLC, and InnoPharma, Inc. In September 2014, Cadence and Mallinckrodt IP,all subsidiaries of the Company, and Pharmatop,Takeda Pharmaceutical Company Limited, Takeda Pharmaceuticals USA, Inc., and Takeda Pharmaceuticals America, Inc. (collectively "Takeda," the ownerexclusive licensee under the patents in litigation) filed suit in the U.S. District Court for the District of New Jersey against Sun Pharmaceutical Industries, Ltd. and Sun Pharmaceutical Industries, Inc. (collectively “Sun”) alleging that Sun infringed U.S. Patent Nos. 7,795,312, 8,026,393, 8,097,653, 8,338,639, 8,389,542, 8,748,481 and 8,779,187 following receipt of a September 2018 notice from Sun concerning its submission of an ANDA containing a Paragraph IV patent certification with the FDA for a generic version of Amitiza. The Company intends to vigorously enforce its intellectual property rights relating to Amitiza.
Amitiza Patent Litigation: Teva Pharmaceuticals USA, Inc. In September 2017, Sucampo AG and Sucampo Pharmaceuticals, Inc., both subsidiaries of the twoCompany, and Takeda filed suit in the U.S. patents licensed exclusively byDistrict Court for the District of New Jersey against Teva Pharmaceuticals USA, Inc. ("Teva")alleging that Teva infringed U.S. Patent Nos. 6,414,016, 6,982,283, 7,795,312, 8,026,393, 8,071,613, 8,097,653, 8,338,639, 8,389,542 and 8,748,481 following receipt of an August 2017 notice from Teva concerning its submission of an ANDA containing a Paragraph IV patent certification with the FDA for a generic version of Amitiza. On June 28, 2018, the parties entered into a settlement agreement under which Teva was granted the non-exclusive right to market a competing lubiprostone product in the U.S. under its ANDA on or after January 1, 2023, or earlier under certain circumstances.
Amitiza Patent Litigation: Amneal Pharmaceuticals, LLC. In April 2017, Sucampo AG and Sucampo Pharmaceuticals, Inc., both subsidiaries of the Company, and Takeda filed suit in the U.S. District Court for the District of New Jersey against Amneal Pharmaceuticals, LLC ("Amneal")alleging that Amneal infringed U.S. Patent Nos. 6,982,283, 8,026,393, 8,097,653, 8,338,639 and 8,389,542 following receipt of a March 2017 notice from Amneal concerning its submission of an ANDA containing a Paragraph IV patent certification with the FDA for a generic version of Amitiza. On June 28, 2018, the parties entered into a settlement agreement under which Amneal was granted the non-exclusive right to market a competing lubiprostone product in the U.S. under its ANDA on or after January 1, 2023, or earlier under certain circumstances.
Amitiza Patent Litigation:Par and DRL. Settlement and License Agreements were entered into with Anchen Pharmaceuticals, Inc., Par Pharmaceutical, Inc. and Par Pharmaceutical Companies, Inc. (collectively "Par") and Dr. Reddy's Laboratories, Inc. and Dr. Reddy's Laboratories, Ltd. (collectively "DRL") to settle Paragraph IV patent litigation with each of Par and DRL. Under the terms of the Par settlement dated September 30, 2014, Par was granted a non-exclusive license and right to market a competing generic of
Amitiza on or after January 1, 2021, or earlier under certain circumstances. Under the terms of the DRL settlement dated September 14, 2016, DRL was granted a non-exclusive license and right to market a competing generic of Amitiza on or after January 1, 2023, or earlier under certain circumstances.
INOmax Patent Litigation: Praxair Distribution, Inc. and Praxair, Inc. (collectively “Praxair”). In February 2015, INO Therapeutics LLC and Ikaria, Inc., both subsidiaries of the Company, filed suit in the U.S. District Court for the District of Delaware against InnoPharma Licensing LLC and InnoPharma, Inc. (collectively "InnoPharma") alleging that InnoPharma infringed U.S. Patent Nos. 6,028,222 ("the '222 patent") and 6,992,218 ("the '218 patent")Praxair following receipt of an August 2014a January 2015 notice from InnoPharmaPraxair concerning its submission of a New Drug Application (“NDA”),an ANDA containing a Paragraph IV patent certification with the FDA for a competing version of Ofirmev.
'222 and '218 Patent Litigation: Agila Specialties Private Limited, Inc. and Agila Specialties Inc. (a Mylan Inc. Company), (collectively “Agila”).nitric oxide drug product delivery system. In December 2014, Cadence and Mallinckrodt IP, subsidiaries of the Company, and Pharmatop, the owner of the two U.S. patents licensed exclusively byJuly 2016, the Company filed a second suit against Praxair in the U.S. District Court for the District of Delaware against Agila alleging that Agila infringed the '222 and the '218 patents following receipt of a November 2014Paragraph IV notice from Agila concerning three additional patents recently added to the FDA Orange Book that was submitted by Praxair regarding its submissionANDA for its nitric oxide drug product delivery system. The infringement claims in the second suit were added to the original suit. In September 2016, the Company filed a third suit against Praxair in the U.S. District Court for the District of a NDA containingDelaware following receipt of a Paragraph IV notice concerning a fourth patent certification withadded to the FDA Orange Book that was submitted by Praxair regarding its ANDA for its nitric oxide drug product delivery system.
Trial for the suit filed in February 2015 was held in March 2017 and a competing version of Ofirmev.
decision was rendered September 5, 2017 that ruled five patents invalid and six patents not infringed. The Company has successfully assertedappealed the ‘222decision to the Court of Appeals for the Federal Circuit. The oral arguments in the appeal occurred on February 6, 2019. Praxair received FDA approval of their ANDA for their Noxivent nitric oxide and ‘218clearance of their 510(k) for their NOxBOXi device on October 2, 2018. The appeal decision, issued on August 27, 2019, substantively affirmed the District Court decision with respect to the invalidity of the heart failure (HF) patents and maintained their validity in both litigation and proceedingsthe non-infringement of the delivery system infrared (DSIR) patents. The Company filed a petition for en banc review at the U.S. Patent and Trademark Office (“USPTO”).Federal Circuit on September 26, 2019, which the Federal Circuit denied on November 19, 2019. There has been limited commercial launch activity by Praxair. The Company willintends to continue its efforts to vigorously enforce its intellectual property rights relating to OfirmevINOmax in the Praxair litigation to prevent the marketing of infringing generic or competing products prior to December 6, 2020,the expiration of the patents covering INOmax. An adverse final outcome in the appeal of the Praxair litigation decision (or a broad at-risk launch by Praxair prior to the final appellate decision) could result in the broader-scale launch of a competitive nitric oxide product before the expiration of the last of the listed patents on May 3, 2036 (November 3, 2036 including pediatric exclusivity), which if unsuccessful, could adversely affect the Company's ability to successfully maximize the value of OfirmevINOmax and have an adverse effect on its financial condition, results of operations and cash flows.
InomaxINOmax Patents: Inter Partes Review ("IPR")IPR Proceedings. In February 2015 and March 2015, the USPTOU.S. Patent and Trademark Office ("USPTO") issued Notices of Filing Dates Accorded to Petitions for IPR petitions filed by Praxair Distribution, Inc. concerning ten patents covering InomaxINOmax (i.e., five patents expiring in 2029 and five patents expiring in 2031).
In July 2015 the USPTO Patent Trial and Appeal Board ("PTAB") issued rulings denying the institution of four of the five IPR petitions challenging the five patents expiring in 2029. The PTAB also issued a ruling in July 2015 that instituted the IPR proceeding in the fifth of this group of patents and the PTAB ruled in July 2016 that one claim of this patent survived review and is valid while the remaining claims were unpatentable. The Company believesbelieved the claim held valid claimby the PTAB describes and encompasses thea manner in which InomaxINOmax is distributed in conjunction with its approved labeling and that Praxair infringes that claim. Praxair filed an appeal and Mallinckrodt filed a cross-appeal of this decision to the Court of Appeals for the Federal Circuit. In March 2016, Praxair Distribution, Inc. submitted additional IPR petitions for the five patents expiringOral argument of that appeal occurred in 2029.January 2018. The PTABFederal Circuit decision was issued non-appealable rulings in AugustMay 16, 2018 and September 2016 denying institution ofheld all five of these additional IPR petitions.claims unpatentable (invalid).
In September 2015 the USPTO PTAB issued rulings that instituted the IPR proceedings in each of the second set of five patents that expire in 2031. In September 2016 the PTAB ruled that all claims in the five patents expiring in 2031 are patentable.
InomaxOfirmev Patent Litigation: Praxair Distribution,Altan Pharma Ltd. In March 2019, Mallinckrodt Hospital Products Inc. and Praxair, Inc. (collectively “Praxair”). In February 2015, INO Therapeutics LLCMallinckrodt Hospital Products IP Limited, both subsidiaries of the Company, and Ikaria, Inc., subsidiariesNew Pharmatop LP, the current owner of the U.S. patents licensed exclusively by the Company, filed suit in the U.S. District Court for the District of Delaware against PraxairAltan Pharma Ltd. (“Altan”) alleging that Altan infringed U.S. Patent No. 6,992,218, U.S. Patent No. 9,399,012, U.S. Patent No. 9,610,265 and U.S. Patent No. 9,987,238 following receipt of a January 2015February 2019 notice from PraxairAltan concerning its submission of a new drug application, containing a Paragraph IV patent certification with the FDA for a competing version of Ofirmev. On August 29, 2019, the parties entered into a settlement agreement under which Altan was granted the non-exclusive right to market a competing intravenous acetaminophen product in the U.S. under its New Drug Application (NDA) on or after December 6, 2020, or earlier under certain circumstances.
Ofirmev Patent Litigation: Aurobindo Pharma U.S.A., Inc. In December 2017, Mallinckrodt Hospital Products Inc. and Mallinckrodt IP Unlimited Company, both subsidiaries of the Company, and New Pharmatop LP, the current owner of the two U.S. patents licensed exclusively by the Company, filed suit in the U.S. District Court for the District of Delaware against Aurobindo Pharma U.S.A., Inc. (“Aurobindo”) alleging that Aurobindo infringed U.S. Patent No. 6,992,218 ("the ‘218 patent"), U.S. Patent No. 9,399,012 ("the ‘012 patent") and U.S. Patent No. 9,610,265 ("the ‘265 patent") following receipt of a November 2017 notice from Aurobindo concerning its submission of an ANDA, containing a Paragraph IV patent certification with the FDA for a genericcompeting version of Inomax.Ofirmev. On May 7, 2018 the parties entered into a settlement agreement under which Aurobindo was granted the non-exclusive right to market a competing intravenous acetaminophen product in the U.S. under its ANDA on or after December 6, 2020, or earlier under certain circumstances.
Ofirmev Patent Litigation: B. Braun Medical Inc. In July 2016,April 2017, Mallinckrodt Hospital Products Inc. and Mallinckrodt IP, both subsidiaries of the Company, and Pharmatop, the then owner of the two U.S. patents licensed exclusively by the Company, filed a second suit against Praxair in the U.S. District Court for the District of Delaware against B. Braun Medical Inc. ("B. Braun") alleging that B. Braun infringed the '218 patent and the '012 patent following receipt of a February 2017 notice from B. Braun concerning its submission of a NDA, containing a Paragraph IV notice concerning three additional patents recently added topatent certification with the FDA Orange Book thatfor a competing version of Ofirmev. On October 3, 2018, the parties entered into a settlement agreement under which B. Braun was submitted by Praxair regardinggranted the non-exclusive right to market a competing intravenous acetaminophen product in the U.S. under its ANDA for a generic version of Inomax. The infringement claims in the second suit have been added to the original suit. on or after December 6, 2020, or earlier under certain circumstances.
Ofirmev Patent Litigation: InnoPharma Licensing LLC and InnoPharma, Inc. In September 2016,2014, Cadence and Mallinckrodt IP, both subsidiaries of the Company, and Pharmatop, the then owner of the two U.S. patents licensed exclusively by the Company, filed a third suit against Praxair in the U.S. District Court for the District of Delaware following receiptagainst InnoPharma Licensing LLC and InnoPharma, Inc. (both are subsidiaries of Pfizer and collectively "InnoPharma") alleging that InnoPharma infringed U.S. Patent Nos. 6,028,222 ("the '222 patent") and 6,992,218 ("the '218 patent"). Separately, on December 1, 2016 Mallinckrodt IP Filed suit in the U.S. District Court for the District of Delaware against InnoPharma alleging that InnoPharma infringed the '012 patent. On May 4, 2017 the parties entered into settlement agreements on both suits under which InnoPharma was granted the non-exclusive right to market a Paragraph IV notice concerningcompeting intravenous acetaminophen product in the U.S. under its NDA on or after December 6, 2020, or earlier under certain circumstances.
Ofirmev Patent Litigation: Agila Specialties Private Limited, Inc. (now Mylan Laboratories Ltd.) and Agila Specialties Inc. (a Mylan Inc. Group), (collectively "Agila"). In December 2014, Cadence and Mallinckrodt IP, both subsidiaries of the Company, and Pharmatop filed suit in the U.S. District Court for the District of Delaware against Agila alleging that Agila infringed the '222 and the '218 patents. Separately, on December 1, 2016 Mallinckrodt IP filed suit in the U.S. District Court for the District of Delaware against Agila alleging that Agila infringed the '012 patent. On December 31, 2016, the parties entered into settlement agreements on both suits under which Agila was granted the non-exclusive right to market a fourth patent recently added tocompeting intravenous acetaminophen product in the FDA Orange Book that was submitted by Praxair regardingU.S. under its ANDA for a generic version of Inomax.
NDA on or after December 6, 2020, or earlier under certain circumstances.
The Company intendshas successfully asserted the '222 and '218 patents and maintained their validity in both litigation and proceedings at the USPTO. The Company will continue to vigorously enforce its intellectual property rights relating to Inomax in both the IPR and Praxair litigation proceedingsOfirmev to prevent the marketing of infringing generic or competing products prior to the expiration of the patents covering Inomax. An adverse outcome in either the IPRs or the Praxair litigation ultimately could result in the launch of a generic version of Inomax before the expiration of the last of the listed patents on February 19, 2034 (August 19, 2034 including pediatric exclusivity),December 6, 2020, which, if unsuccessful, could adversely affect the Company's ability to successfully maximize the value of InomaxOfirmev and have an adverse effect on its financial condition, results of operations and cash flows.
Shire Development LLC, Shire LLC and Shire US, Inc. v. SpecGx LLC. In May 2018, Shire Development LLC, Shire LLC and Shire US, Inc. (collectively “Shire”) filed suit in the U.S. District Court for the District of Delaware against the Company alleging that the Company infringed U.S. Patent Nos. 6,913,768, 8,846,100, and 9,173,857 following receipt of an April 2018 notice from the Company concerning its submission of an ANDA, containing a Paragraph IV patent certification with the FDA for a competing version of Mydayis. On January 28, 2019, the parties entered into a settlement agreement under which the Company was granted the non-exclusive right to market a competing generic version of Mydayis in the U.S. under its ANDA on or after May 10, 2023 (or November 10, 2023 if any pediatric exclusivity is granted by the FDA with respect to the Mydayis product), or earlier under certain circumstances.
Janssen Pharmaceuticals, Inc. and Janssen Pharmaceutica NV v. Pharmascience Inc. and SpecGx LLC. In December 2019, Janssen Pharmaceuticals, Inc. and Janssen Pharmaceutica NV (collectively “Janssen”) filed suit in the U.S. District Courts for the Districts of New Jersey and Delaware against the Company and Pharmascience Inc. (“Pharmascience”) relating to the collaboration between Company and Pharmascience that resulted in Pharmascience's ANDA submission, containing a Paragraph IV patent certification, with the FDA for a competing version of Invega Sustenna. Janssen alleges that the Company and Pharmascience infringe U.S. Patent No. 9,439,906. The Company intends to vigorously defend its position.
Commercial and Securities Litigation
RetrophinCity of Marietta Litigation. On February 6, 2020, the City of Marietta, Georgia filed a putative civil class action complaint against the Company in the U.S. District Court for the Northern District of Georgia relating to the price of Acthar Gel. The complaint, which pleads one claim for unjust enrichment, purports to be brought on behalf of third-party payers and their beneficiaries and people without insurance in the United States and its Territories that paid for Acthar from four years prior to the filing of the Complaint until the date of trial. The case is captioned City of Marietta v. Mallinckrodt ARC LLC. Marietta alleges that it has paid $2.0 million to cover the cost of an Acthar Gel prescription of an employee and that the Company has been unjustly enriched as a result. The Company intends to vigorously defend itself in this matter.
Shareholder Derivative Litigation (Brandhorst). In September 2019, a purported shareholder of the Company's stock filed a shareholder derivative complaint in the United States District Court for the District of Columbia against the Company, as nominal defendant, as well as its Chief Executive Officer ("CEO") Mark Trudeau, its former Chief Financial Officer ("CFO") Matthew K. Harbaugh, its Executive Vice President Hugh O'Neill, and the following members of the Company's Board of Directors: Angus Russell, David Carlucci, J. Martin Carroll, David Norton, JoAnn Reed and Kneeland Youngblood (collectively with Trudeau,
Harbaugh and O'Neill, the “Individual Defendants”). The lawsuit is captioned Lynn Brandhorst, derivatively on behalf of nominal defendant Mallinckrodt PLC v. Mark Trudeau et al. and relies on the allegations from the putative class action securities litigation that was filed against the Company and certain of its officers in January 2014, Retrophin,2017, captioned Patricia A. Shenk v. Mallinckrodt plc, et al. described further below. The complaint asserts claims for contribution, breaches of fiduciary duty, unjust enrichment, abuse of control, and gross mismanagement, and is premised on allegations that the Individual Defendants caused the Company to make the allegedly false or misleading statements at issue in the Shenk lawsuit. The complaint seeks damages in an unspecified amount and corporate governance reforms. On November 20, 2019, this matter was stayed by agreement of the parties pending resolution of the Shenk lawsuit below. The Company and the Individual Defendants intend to vigorously defend themselves in this matter.
Humana Litigation. In August 2019, Humana Inc. ("Retrophin") filed a lawsuit against Questcorthe Company in the U.S. District Court for the Central District of California alleging a varietyviolations of federal and state antitrust laws; racketeering (“RICO”) violations basedunder 18 U.S.C. § 1962(c); conspiracy to violate RICO under 18 U.S.C. § 1962(d); violations of state unfair competition, consumer fraud and deceptive trade practice laws; state insurance fraud; tortious interference with contract; and unjust enrichment related to the pricing of Acthar Gel. Humana alleges that it paid more than $700.0 million for Acthar Gel and seeks undisclosed damages from 2011 through present. The case alleges similar facts as those alleged in the MSP and Rockford matters below, and includes references to allegations at issue in a pending qui tam action against the Company in the U.S. District Court for the Eastern District of Pennsylvania (see Questcor Subpoena above) and is proceeding as Humana Inc. v. Mallinckrodt ARD LLC. The Company intends to vigorously defend itself in this matter, and on Questcor's acquisition from Novartis of certain rights to develop, market, manufacture, distribute, sell and commercialize Synacthen. In June 2015, the parties entered into a binding settlement agreement, under the terms of which Retrophin agreedOctober 28, 2019, moved to dismiss the litigation with prejudice and Questcor agreedcomplaint. The Company's motion to make a one-time cash payment to Retrophin in the amount of $15.5 million.dismiss remains pending.
Glenridge Litigation. In June 2011, Glenridge Pharmaceuticals LLC (“Glenridge”), filed a lawsuit against Questcor in the Superior Court of California, Santa Clara County, alleging that Questcor had underpaid royalties to Glenridge under a royalty agreement related to net sales of Acthar. In August 2012, Questcor filed a separate lawsuit against the three principals of Glenridge, as well as Glenridge, challenging the enforceability of the royalty agreement. In August 2013, the two lawsuits were consolidated into one case in the Superior Court of California, Santa Clara County. In October 2014, the parties entered into a binding term sheet settling the lawsuit. Under the terms of the settlement, the royalty rate payable by Questcor was reduced, royalties were capped instead of being payable for so long as Acthar was sold and Questcor agreed to pay Glenridge a reduced amount in satisfaction of royalties Questcor had previously accrued but not paid during the course of the lawsuit. In February 2015, the settlement agreement was finalized, with terms consistent with the October 2014 term sheet.
Putative Class Action Securities Litigation.Litigation (Strougo). In September 2012,July 2019, a putative class action lawsuit was filed against Questcorthe Company, its CEO Mark Trudeau, its CFO Bryan M. Reasons, its former Interim CFO George A. Kegler and certainits former CFO Matthew K. Harbaugh, in the U.S. District Court for the Southern District of New York, captioned Barbara Strougo v. Mallinckrodt plc, et al. The complaint purports to be brought on behalf of all persons who purchased or otherwise acquired Mallinckrodt's securities between February 28, 2018 and July 16, 2019. The lawsuit generally alleges that the defendants made false and misleading statements in violation of Sections 10(b) and 20(a) of the Exchange Act and Rule 10b-5 promulgated thereunder related to the Company's clinical study designed to assess the efficacy and safety of its officersActhar Gel in patients with amyotrophic lateral sclerosis. The lawsuit seeks monetary damages in an unspecified amount. The Company intends to vigorously defend itself in this matter. At this stage, the Company is not able to reasonably estimate the expected amount or range of cost or any loss associated with this lawsuit.
Putative Class Action Litigation - Steamfitters Local Union No. 420. In July, 2019, Steamfitters Local Union No. 420 filed a putative class action lawsuit against the Company and directorsUnited BioSource Corporation in the U.S. District Court for the Eastern District of Pennsylvania, proceeding as Steamfitters Local Union No. 420 v. Mallinckrodt ARD, LLC et al. The complaint makes similar allegations as those alleged in related state and federal actions that were filed by the same plaintiff's law firm in Illinois, Pennsylvania, Tennessee and Maryland (now dismissed; see WCBE below), and includes references to allegations at issue in a pending qui tam actions against the Company in the U.S. District Court for the Eastern District of Pennsylvania (see Questcor Subpoena above). In particular, the complaint alleges RICO violations under 18 U.S.C. § 1962(c); conspiracy to violate RICO under 18 U.S.C. § 1962(c); violations of the Pennsylvania (and other states) Unfair Trade Practices and Consumer Protection laws; negligent misrepresentation; aiding and abetting/conspiracy; and unjust enrichment. The complaint also seeks declaratory and injunctive relief. On December 19, 2019, the court denied the Company's motion to dismiss the complaint. The Company intends to vigorously defend itself in this matter. At this stage, the Company is not able to reasonably estimate the expected amount or range of cost or any loss associated with this lawsuit.
Acument Global. In May 2019, Acument Global Technologies, Inc., filed a non-class complaint against the Company and other defendants in Tennessee state court alleging violations of Tennessee Consumer Protection Laws, unjust enrichment, fraud and conspiracy to defraud. The case alleges similar facts as those alleged in the MSP and Rockford matters below, and is captioned Acument Global Technologies, Inc., v. Mallinckrodt ARD Inc., et al. The Company intends to vigorously defend itself in this matter, and on July 29, 2019, moved to dismiss the complaint. The Company's motion to dismiss remains pending.
Washington County Board of Education ("WCBE"). In May 2019, WCBE filed a non-class complaint against the Company and other defendants in Maryland state court alleging violations of Maryland Consumer Protection Act, negligent misrepresentation, fraud, unjust enrichment and conspiracy to defraud. The case, which was removed to the U.S. District Court for the District of Maryland on June 24, 2019, alleges similar facts as those alleged in the MSP and Rockford matters discussed below. On January 4, 2020, the court dismissed the complaint.
Local 542. In May 2018, the International Union of Operating Engineers Local 542 filed a non-class complaint against the Company and other defendants in Pennsylvania state court alleging improper pricing and distribution of Acthar Gel, in violation of Pennsylvania's Unfair Trade Practices and Consumer Protection Law, aiding and abetting, unjust enrichment and negligent misrepresentation. The case alleges similar facts as the MSP and Rockford matters below, and is captioned Int'l Union of Operating Engineers Local 542 v. Mallinckrodt ARD Inc., et al. Plaintiff filed an amended complaint on August 27, 2018, the Company's objections to which were denied by the court. The Company intends to continue to vigorously defend itself in this matter. On January 22, 2020, the court stayed further proceedings in this case given the overlap with the Rockford and MSP cases discussed below.
Grifols. In March 2018, Grifols initiated arbitration against the Company, alleging breach of a Manufacturing and Supply Agreement entered into between the Company's predecessor-in-interest, Cadence Pharmaceuticals Inc., and Grifols. During 2019, the Company entered into a settlement for this matter and appropriate reserves were recorded.
Putative Class Action Litigation (MSP). In October 2017, a putative class action lawsuit was filed against the Company and United BioSource Corporation in the U.S. District Court for the Central District of California,California. Pursuant to a motion filed by the defendants, the case was transferred to the U.S. District Court for the Northern District of Illinois in January 2018, and is currently proceeding as MSP Recovery Claims, Series II, LLC, et al. v. Mallinckrodt ARD, Inc., et al. The Company filed a motion to dismiss on February 23, 2018, which was granted on January 25, 2019 with leave to amend. MSP filed the operative First Amended Class Action Complaint on April 10, 2019, in which it asserts claims under federal and state antitrust laws and state consumer protection laws and names additional defendants. The complaint alleges that the Company unlawfully maintained a monopoly in a purported ACTH product market by acquiring the U.S. rights to Synacthen® Depot ("Synacthen") and reaching anti-competitive agreements with the other defendants by selling Acthar Gel through an exclusive distribution network. The complaint purports to be brought on behalf of all third-party payers, or their assignees, in the U.S. and its territories, who have, as indirect purchasers, in whole or in part, paid for, provided reimbursement for, and/or possess the recovery rights to reimbursement for the indirect purchase of Acthar Gel from August 1, 2007 to present. The Company moved to dismiss the First Amended Class Action Complaint on May 24, 2019. The Company's motion to dismiss remains pending.
Employee Stock Purchase Plan (ESPP) Securities Litigation. In July 2017, a purported purchaser of Mallinckrodt stock through Mallinckrodt's ESPPs, filed a derivative lawsuit in the Federal District Court in the Eastern District of Missouri, captioned JohnSolomon v. Mallinckrodt plc, et al., against the Company, its CEO Mark C. Trudeau, its former CFO Matthew K. NortonHarbaugh, its Controller Kathleen A. Schaefer, and current and former directors of the Company. On September 6, 2017, plaintiff voluntarily dismissed its complaint in the Federal District Court for the Eastern District of Missouri and refiled virtually the same complaint in the U.S. District Court for the District of Columbia. The complaint purports to be brought on behalf of all persons who purchased or otherwise acquired Mallinckrodt stock between November 25, 2014, and January 18, 2017, through the ESPPs. In the alternative, the plaintiff alleges a class action for those same purchasers/acquirers of stock in the ESPPs during the same period. The complaint asserts claims under Section 11 of the Securities Act, and for breach of fiduciary duty, misrepresentation, non-disclosure, mismanagement of the ESPPs' assets and breach of contract arising from substantially similar allegations as those contained in the putative class action securities litigation described in the Shenk lawsuit below. Stipulated co-lead plaintiffs were approved by the court on March 1, 2018. Co-lead Plaintiffs filed an amended complaint on June 4, 2018 having a class period of July 14, 2014 to November 6, 2017. On July 6, 2018, this matter was stayed by agreement of the parties pending resolution of the Shenk lawsuit below.
Putative Class Action Litigation (Rockford). In April 2017, a putative class action lawsuit was filed against the Company and United BioSource Corporation in the U.S. District Court for the Northern District of Illinois. The case is captioned City of Rockford v. Questcor Pharmaceuticals,Mallinckrodt ARD, Inc., et al., No. SACvl2-1623 DMG (FMOx) The complaint was subsequently amended to, among other things, include an additional named plaintiff and additional defendants. As amended, the complaint purports to be brought on behalf of all self-funded entities in the U.S. and its Territories, excluding any Medicare Advantage Organizations, related entities and certain others, that paid for Acthar Gel from August 2007 to the present. Plaintiff alleges violations of federal antitrust and RICO laws, as well as various state law claims in connection with the distribution and sale of Acthar Gel. On January 22, 2018, the Company filed a motion to dismiss the Second Amended Complaint, which was granted in part on January 25, 2019, dismissing one of two named plaintiffs and all claims with the exception of Plaintiff's federal and state antitrust claims. The remaining allegation in the case is that the Company engaged in anti-competitive acts to artificially raise and maintain the price of Acthar Gel. To this end, Plaintiff alleges that the Company unlawfully maintained a monopoly in a purported ACTH product market by acquiring the U.S. rights to Synacthen and conspired with the other named defendants by selling Acthar Gel through an exclusive distributor. The Company intends to continue to vigorously defend itself in this matter. At this stage, the Company is not able to reasonably estimate the expected amount or range of cost or any loss associated with this lawsuit.
Putative Class Action Securities Litigation (Shenk). In January 2017, a putative class action lawsuit was filed against the Company and its CEO in the U.S. District Court for the District of Columbia, captioned Patricia A. Shenk v. Mallinckrodt plc, et al. The complaint purportedpurports to be brought on behalf of all persons who purchased Mallinckrodt's publicly traded securities on a domestic exchange between November 25, 2014 and January 18, 2017. The lawsuit generally alleges that the Company made false or misleading statements related to Acthar Gel and Synacthen to artificially inflate the price of the Company's stock. In particular, the complaint alleges a failure by the Company to provide accurate disclosures concerning the long-term sustainability of Acthar Gel revenues, and the exposure of Acthar Gel to Medicare and Medicaid reimbursement rates. On January 26, 2017, a second putative class action lawsuit, captioned Jyotindra Patel v. Mallinckrodt plc, et al. was filed against the same defendants named in the Shenk lawsuit in the U.S. District Court for the District of Columbia. The Patel complaint purports to be brought on behalf of shareholders during the same period of time as that set forth in the Shenk lawsuit and asserts claims similar to those set forth in the Shenk lawsuit. On March 13, 2017, a third putative class action lawsuit, captioned Amy T. Schwartz, et al., v. Mallinckrodt plc, et al., was filed against the same defendants named in the Shenk lawsuit in the U.S. District Court for the District of Columbia. The Schwartz complaint purports to be brought on behalf of shareholders who purchased Questcor common stock between April 26, 2011 and September 21, 2012. The complaint generally alleged that Questcor and certain of its officers and directors engaged in various acts to artificially inflate the price of Questcor stock and enable insiders to profit through stock sales. The complaint asserted that Questcor and certain of its officers and directors violated sections l0(b) and/or 20(a)shares of the Securities Exchange ActCompany between July 14, 2014 and January 18, 2017 and asserts claims similar to those set forth in the Shenk lawsuit. On March 23, 2017, a fourth putative class action lawsuit, captioned Fulton County Employees' Retirement System v. Mallinckrodt plc, et al., was filed against the Company, its CEO and former CFO in
the U.S. District Court for the District of 1934,Columbia. The Fulton County complaint purports to be brought on behalf of shareholders during the same period of time as amended ("that set forth in the Exchange Act"), by making allegedly false and/or misleading statements concerningSchwartz lawsuit and asserts claims similar to those set forth in the clinical evidenceShenk lawsuit. On March 27, 2017, four separate plaintiff groups moved to supportconsolidate the use of Acthar for indications other than infantile spasms,pending cases and to be appointed as lead plaintiffs in the promotionconsolidated case. Since that time, two of the saleplaintiff groups have withdrawn their motions. Lead plaintiff was designated by the court on March 9, 2018. Lead plaintiff filed a consolidated complaint on May 18, 2018, alleging a class period from July 14, 2014 to November 6, 2017, the Company, its CEO, its former CFO, and use of Acthar in the treatment of multiple sclerosisExecutive Vice President, Hugh O'Neill, as defendants, and nephrotic syndrome,containing similar claims, but further alleging misstatements regarding payer reimbursement restrictions for Acthar from third-party insurers, and Questcor's outlook and potential market growth for Acthar.Gel. On August 30, 2018, the lead plaintiff voluntarily dismissed the claims against Mr. O'Neill without prejudice. The Company filed a motion to dismiss the complaint sought damages in an unspecified amount and equitable relief against the defendants. This lawsuitwhich was consolidated with four subsequently-filed actions asserting similar claims under the caption: In re Questcor Securities Litigation, No. CV 12-01623 DMG (FMOx). In October 2013, the District Court granted in part, and denied in part Questcor's motionby the court on July 30, 2019. The Company intends to dismissvigorously defend itself in this matter.
Generic Price Fixing Litigation
Generic Pharmaceutical Antitrust MDL. In August 2016, a multidistrict litigation was established in the consolidated amended complaint. Eastern District of Pennsylvania relating to allegations of antitrust violations with respect to generic pharmaceutical pricing (the "Generic Pricing MDL"). Plaintiffs in the Generic Pricing MDL, captioned In October 2013, Questcorre: Generic Pharmaceuticals Pricing Antitrust Litigation, allege a conspiracy of price-fixing and customer allocation among generic drug manufacturers beginning in or around July 2009. Since its establishment, the Generic Pricing MDL has expanded to encompass dozens of pharmaceutical companies and more than 100 generic pharmaceutical drugs. The Company was recently named in three cases associated with this litigation. A status conference is due to be held on March 12, 2020.
1199SEIU National Benefit Fund Litigation. In December 2019, a putative class action lawsuit was filed an answer to the consolidated amended complaint and fact discovery was concluded in January 2015. In April 2015, the parties executed a long-form settlement agreement, under the terms of which Questcor agreed to pay $38.0 million to resolve the plaintiff claims, inclusive of all fees and costs. Questcor and the individual defendants maintain that the plaintiffs' claims are without merit, and have entered into the settlement to eliminate the uncertainties, burden and expense of further protracted litigation. During fiscal 2015,against the Company established a $38.0 million reserve for this settlement, which was subsequently paid to a settlement fund. The court issued its final approval of the settlement on September 18, 2015.
Federal Shareholder Derivative Litigation. On October 4, 2012, another alleged shareholder filed a derivative lawsuitand more than 30 other pharmaceutical manufacturers in the United StatesU.S. District Court for the CentralEastern District of CaliforniaPennsylvania, captioned Gerald Easton1199SEIU National Benefit Fund et al. v. Don M Bailey,Actavis Holdco U.S., Inc., et al., No. SACV12-01716 DOC (JPRx). The suit asserted claims substantially identicalcomplaint purports to those assertedbe brought on behalf of all persons and entities that indirectly purchased, paid, or provided reimbursement for the purchase of defendants' generic drugs, other than for resale, from July 1, 2009, to the present. The lawsuit generally alleges that defendants conspired to allocate customers and fix prices for generic pharmaceutical drugs beginning in the do Valle derivative action described below against the same defendants. This lawsuit was consolidated with five subsequently-filed actions asserting similar claims under the caption: In re Questcor Shareholder Derivative Litigation, CV 12- 01716 DMG (FMOx). Following the resolutionJuly 2009. The complaint seeks monetary damages and injunctive relief based on violations of Sections 1 and 3 of the motionSherman Act and various state antitrust, consumer protection, and unjust enrichment claims. The Company intends to dismissvigorously defend itself in the consolidated putative securities class action, the court issued an order staying the federal derivative action until the earlier of: (a) 60 days after the resolution of any motion for summary judgment filed in thethis matter.
César Castillo, Inc., Litigation. In February 2020, a putative class action lawsuit (b) 60 days afterwas filed against the deadline to file a motion for summary judgmentCompany and more than 30 other pharmaceutical manufacturers in the putative class action lawsuit, if none is filed, or (c) the execution of any settlement agreement (including any partial settlement agreement) to resolve the putative class action lawsuit. In July 2015, the parties stipulated to a dismissal of the derivative case and Questcor agreed to make a one-time cash payment to plaintiffs in the form of a mootness fee.
State Shareholder Derivative Litigation. In October 2012, an alleged shareholder filed a derivative lawsuit purportedly on behalf of Questcor against certain of its officers and directors in the Superior Court of the State of California, Orange County, captioned Monika do Valle v. Virgil D. Thompson, et al., No. 30-2012-00602258-CU-SL-CXC. The complaint asserted claims for breach of fiduciary duty, abuse of control, mismanagement and waste of corporate assets arising from substantially similar allegations as those
contained in the putative securities class action described above, as well as from allegations relating to sales of Questcor common stock by the defendants and repurchases of Questcor common stock. The complaint sought an unspecified sum of damages and equitable relief. On October 24, 2012, another alleged shareholder filed a derivative lawsuit purportedly on behalf of Questcor against certain of its officers and directors in the Superior Court of the State of California, Orange County, captioned Jones v. Bailey, et al., Case No. 30-2012-00608001-CU-MC-CXC. The suit asserted claims substantially identical to those asserted in the do Valle derivative action. In February 2013, the court issued an order staying the state derivative actions until the putative federal securities class action and federal derivative actions are resolved. In May 2014, the court granted plaintiffs' request for dismissal without prejudice of the Jones action. In November 2014, the do Valle matter was voluntarily dismissed.
Put Options Securities Action. In March 2013, individual traders of put options filed a securities complaint in the United StatesU.S. District Court for the CentralEastern District of CaliforniaPennsylvania, captioned David Taban,César Castillo, Inc., et al. v. Questcor Pharmaceuticals,Actavis Holdco U.S., Inc., No. SACV13-0425.et al. The lawsuit purports to be brought on behalf of all persons or entities that directly purchased certain generic drugs from defendants or from one of defendants' direct customers-where the direct customer is alleged to be a completely involved co-conspirator-between July 1, 2009, and the present. The complaint generally asserted claims against Questcorhas similar allegations as the 1199SEIU National Benefit Fund litigation and certain of its officers and directorsseeks damages for violations of Sections 1 and 3 of the ExchangeSherman Act. The Company intends to vigorously defend itself in this matter.
The Kroger Co. Litigation. In February 2020, a proposed amended complaint filed in the U.S. District Court for the Eastern District of Pennsylvania named the Company and several other pharmaceutical manufacturers as new defendants in an action captioned The Kroger Co., et al. v. Actavis Holdco U.S., Inc. et al. The lawsuit is brought by several entities that purportedly purchased generic drugs directly from defendants. The proposed amended complaint seeks monetary damages and injunctive relief for violations of Section 1 of the Sherman Antitrust Act, and for state law fraud and fraudulent concealment basedis premised on allegationsfacts similar to those assertedalleged in the putative securities class action described above.1199SEIU National Benefit Fund and César Castillo litigations. The complaint sought compensatory and punitive damages of an unspecified amount. Following the resolution of the motion to dismiss in the consolidated putative securities class action, the court issued an order staying this action until the earlier of: (a) sixty (60) days after the resolution of any motion for summary judgment filed in the putative class action lawsuit, (b) sixty (60) days after the deadlineleave to file a motion for summary judgment in the putative class action lawsuit, if none is filed, or (c) the execution of any settlement agreement (including any partial settlement agreement) to resolve the putative class action lawsuit. In May 2015, the parties entered into a binding settlement agreement, under the terms of which plaintiffs agreed to dismiss the litigation with prejudice and Questcor agreed to make a one-time cash payment to plaintiffs.proposed amended complaint remains pending.
Pricing Litigation
State of Utah v. Apotex Corp., et al. The Company, along with several other pharmaceutical companies, was a defendant in this matter which was filed in May 2008, in the Third Judicial Circuit of Salt Lake County, Utah. The State of Utah alleged, generally, that the defendants reported false pricing information in connection with certain drugs that were reimbursable under Utah Medicaid, resulting in overpayment by Utah Medicaid for those drugs, and sought monetary damages and attorneys' fees. The Company believes that it had meritorious defenses to these claims and vigorously defended against them. In December 2015, the parties entered into a binding settlement agreement, under the terms of which the State of Utah agreed to dismiss the litigation with prejudice and the Company agreed to make a one-time cash payment to the State of Utah within the reserve established for this matter.
Environmental Remediation and Litigation Proceedings
The Company is involved in various stages of investigation and cleanup related to environmental remediation matters at a number of sites, including those described below. The ultimate cost of site cleanup and timing of future cash outlays is difficult to predict, given the uncertainties regarding the extent of the required cleanup, the interpretation of applicable laws and regulations and alternative cleanup methods. The Company concluded that, as of September 30, 2016,December 27, 2019, it was probable that it would incur remediation costs in the range of $38.7$38.2 million to $121.3$86.9 million. The Company also concluded that, as of September 30, 2016,December 27, 2019, the best estimate within this range was $75.9$61.9 million, of which $2.6$1.9 million was included in accrued and other current liabilities and the remainder was included in environmental liabilities on the consolidated balance sheet at September 30, 2016.as of December 27, 2019. While it is not possible at this time to determine with certainty the ultimate outcome of these matters, the Company believes, given the information currently available, that the final resolution of all known claims, after taking into account amounts already accrued, will not have a material adverse effect on its financial condition, results of operations and cash flows.
Crab Orchard National Wildlife Refuge Superfund Site, near Marion, Illinois. Lower Passaic River, New Jersey. The Company isand approximately 70 other companies (“Cooperating Parties Group” or “CPG”) are parties to a successor in interest to International Minerals and Chemicals Corporation ("IMC"). Between 1967 and 1982, IMC leased portions of the Additional and Uncharacterized Sites ("AUS") Operable Unit at the Crab Orchard Superfund Site ("the Site") from the government and manufactured various explosives for use in mining and other operations. In March 2002, the Department of Justice, the U.S. Department of the Interior and the U.S. Environmental Protection Agency ("EPA") (together, "the Government Agencies") issued a special notice letter to General Dynamics Ordnance and Tactical Systems, Inc. ("General Dynamics"), one of the other potentially responsible parties ("PRPs") at the Site, to compel General Dynamics to perform the remedial investigation and feasibility study ("RI/FS") for the AUS Operable Unit. General Dynamics negotiated anMay 2007 Administrative Order on Consent ("AOC") with the Government AgenciesEnvironmental Protection Agency ("EPA") to conduct an extensive perform a
remedial investigation and feasibility study ("RI/FS at the Site under the directionFS") of the U.S. Fish17-mile stretch known as the Lower Passaic River ("the River") Study Area. The Company's potential liability stems from former operations at Lodi and Wildlife Service. General Dynamics asserted inBelleville, New Jersey.
In April 2014, the EPA issued a revised Focused Feasibility Study ("FFS"), with remedial alternatives to address cleanup of the lower 8-mile stretch of the River. The EPA estimated the cost for the remediation alternatives ranged from $365.0 million to $3.2 billion and the EPA's preferred approach had an estimated cost of $1.7 billion.
In April 2015, the CPG presented a draft of the RI/FS of the River to the EPA that included alternative remedial actions for the entire 17-mile stretch of the River.
On March 4, 2016, the EPA issued the Record of Decision ("ROD") for the lower 8 miles of the River with a slight modification on its preferred approach and a revised estimated cost of $1.38 billion. On October 5, 2016, the EPA announced that Occidental Chemicals Corporation ("OCC") had entered into an agreement to develop the remedial design.
On August 2004 that7, 2018, the EPA finalized a buyout offer of $280,600 with the Company, is jointly and severally liable, along with approximately eight other lessees and operators atlimited to its former Lodi facility, for the AUS Operable Unit, for alleged contaminationlower 8 miles of soils and groundwater resulting from historic operations, and has threatened to file a contribution claim againstthe River. During the three months ended September 28, 2018, the Company and other parties for recoveryreduced the accrual associated with this matter by $11.8 million to $26.2 million, which represents the Company's estimate of its costs incurred in connectionremaining liability related to the River.
Despite the issuance of the revised FFS and ROD by the EPA, the RI/FS by the CPG, and the cash out settlement by the EPA there are many uncertainties associated with the RI/FS activities being conducted atfinal agreed-upon remediation, potential future liabilities and the AUS Operable Unit. Company's allocable share of the remediation. Given those uncertainties, the amounts accrued may not be indicative of the amounts for which the Company may be ultimately responsible and will be refined as the remediation progresses.
Occidental Chemical Corp. v. 21st Century Fox America, Inc. The Company and approximately 120 other PRPs who received demand letters from General Dynamics have explored settlement alternatives, but have not reached settlementcompanies were named as defendants in a lawsuit filed in June 2018, by OCC, in which OCC seeks cost recovery and contribution for past and future costs in response to date. General Dynamics has completedreleases and threatened releases of hazardous substances into the RI and initiatedlower 8 miles of the FS,River. A former Mallinckrodt facility located in Jersey City, NJ (located in Newark Bay) and the PRPs agreedformer Belleville facility were named in the suit. Due to enter into non-binding mediation.an indemnification agreement with AVON Inc., Mallinckrodt has tendered the liability for the Jersey City site to AVON Inc. and they have accepted. The Company retains a share of the liability for this suit related to the Belleville facility. A motion to dismiss several of the claims was denied by the court. While it is not possible at this time to determine with certainty the ultimate outcome of this case,matter, the Company believes, given the information currently available, that the finalultimate resolution of all known claims, after taking
into account amounts already accrued will not have a material adverse effect on its financial condition, results of operations and cash flows.
Mallinckrodt Veterinary, Inc., Millsboro, Delaware. The Company previously operated a plantfacility in Millsboro, Delaware ("the Millsboro Site") that manufacturedwhere various animal healthcare products.products were manufactured. In 2005, the Delaware Department of Natural Resources and Environmental Control found trichloroethylene ("TCE") in the Millsboro public water supply at levels that exceeded the federal drinking water standards. Further investigation to identify the TCE plume in the ground water indicated that the plume has extended to property owned by a third party near the Millsboro Site. The Company, and another former owner, have assumed responsibility for the Millsboro Site cleanup under the Alternative Superfund Program administered by the EPA. The Company and another PRPcompanies have entered into twothree AOCs with the EPA to perform investigations to abate, mitigate or eliminate the release or threat of release of hazardous substances at the Millsboro Site and to conduct an Engineering Evaluation/Cost Analysis ("EE/CA") to characterize the nature and extent of the contamination. The Company, along withIn January 2017, the other party, continues to conductEPA issued its Action Memorandum regarding the studies and prepare remediation plans in accordance with the AOCs.EE/CA. While it is not possible at this time to determine with certainty the ultimate outcome of this matter, the Company believes, given the information currently available, that the ultimate resolution of all known claims, after taking into account amounts already accrued, will not have a material adverse effect on its financial condition, results of operations and cash flows.
Coldwater Creek, Saint Louis County, Missouri. TheCrab Orchard National Wildlife Refuge Superfund Site, near Marion, Illinois. Between 1967 and 1982, International Minerals and Chemicals Corporation ("IMC"), a predecessor in interest to the Company, leased portions of the Additional and Uncharacterized Sites ("AUS") Operable Unit at the Crab Orchard Superfund Site ("the CO Site") from the government and manufactured various explosives for use in mining and other operations. In March 2002, the Department of Justice, the U.S. Department of the Interior and the EPA (together, "the Government Agencies") issued a special notice letter to General Dynamics Ordnance and Tactical Systems, Inc. ("General Dynamics"), one of the other potentially responsible parties ("PRPs") at the CO Site, to compel General Dynamics to perform the RI/FS for the AUS Operable Unit. General Dynamics negotiated an AOC with the Government Agencies to conduct an extensive RI/FS at the CO Site under the direction of the U.S. Fish and Wildlife Service. General Dynamics asserted in August 2004 that the Company is named asjointly and severally liable, along with approximately eight other lessees and operators at the AUS Operable Unit, for costs associated with alleged contamination of soils and groundwater resulting from historic operations, and the parties have entered into a defendant in numerous tort complaints filed in and subsequent to February 2012 with numerous plaintiffs pending in the U.S. District Court for the Eastern District of Missouri. These cases allege personal injury for alleged exposure to radiological substances, including in Coldwater Creek in Missouri, and in the air. Plaintiffs allegedly lived and/or worked in various locations in Saint Louis County, Missouri near Coldwater Creek. Radiological residues which may have been present in the creek have previously been remediated by the U.S. Army Corps of Engineers ("USACE"). The USACE continues to study and remediate the creek and surrounding areas. The Company believes that it has meritorious defenses to these complaints and is vigorously defending against them. The Company is unable to estimate a range of reasonably possible losses for the following reasons: (i) the proceedings are in intermediate stages; (ii) the Company has not received and reviewed complete information regarding the plaintiffs and their medical conditions; and (iii) there are significant factual and scientific issues to be resolved. An initial group of bellwether plaintiffs have been selected by the court and discovery is ongoing.non-binding mediation process. While it is not possible at this time to determine with certainty the ultimate outcome of this case,matter, the Company believes, given the information currently available, that the final resolution of all known claims, after taking into account amounts already accrued, will not have a material adverse effect on its financial condition, results of operations and cash flows.
Lower Passaic River, New Jersey. The Company and approximately 70 other companies originally comprised the Lower Passaic Cooperating Parties Group ("the CPG") and are parties to a May 2007 AOC with the EPA to perform a RI/FS of the 17-mile stretch known as the Lower Passaic River Study Area ("the River"). The Company's potential liability stems from former operations at Lodi and Belleville, New Jersey. In June 2007, the EPA issued a draft Focused Feasibility Study ("FFS") that considered interim remedial options for the lower 8-miles of the river, in addition to a "no action" option. As an interim step related to the 2007 AOC, the CPG voluntarily entered into an AOC on June 18, 2012 with the EPA for remediation actions focused solely at mile 10.9 of the River. The Company's estimated costs related to the RI/FS and focused remediation at mile 10.9, based on interim allocations, are immaterial and have been accrued.
In April 2014, the EPA issued its revised FFS, with remedial alternatives to address cleanup of the lower 8-mile stretch of the River, which also included a "no action" option. The EPA estimates the cost for the alternatives range from $365.0 million to $3.2 billion. The EPA's preferred approach would involve bank-to-bank dredging of the lower 8-mile stretch of the River and installing an engineered cap at a discounted, estimated cost of $1.7 billion. Based on the issuance of the EPA's revised FFS, the Company recorded a $23.1 million accrual in fiscal 2014 representing the estimate of its allocable share of the joint and several remediation liability resulting from this matter.
In April 2015, the CPG presented a draft of the RI/FS of the River to the EPA. The CPG's RI/FS included alternatives that ranged from "no action," targeted remediation of the entire 17-mile stretch of the River to remedial actions consistent with the EPA's preferred approach for the lower 8-mile stretch of the River and also included remediation alternatives for the upper 9-mile stretch of the River. The discounted cost estimates for the CPG remediation alternatives ranged from $483.4 million to $2.7 billion. The Company recorded an additional charge of $13.3 million in the second quarter of fiscal 2014 based on the Company's estimate of its allocable share of the joint and several remediation liability resulting from this matter.
On March 4, 2016, the EPA issued the Record of Decision ("ROD") for the lower 8 miles of the River. The EPA's selected remedy for this stretch of the River was a slight modification of the preferred approach it identified in the revised FFS issued in April 2014. The new discounted, estimated cost is $1.38 billion. By letter dated March 31, 2016, EPA notified the Company, and approximately 98 other parties, of the Company’s potential liability for the lower 8 miles of the River. The letter also announced the EPA's intent to seek to determine whether one company, Occidental Chemicals Corporation ("OCC"), will voluntarily enter into an agreement to perform the remedial design for the remedy selected in the ROD. The letter states that, after execution of such an agreement, EPA plans to begin negotiation of an agreement under which OCC and the other major PRPs would implement and/or pay for the EPA’s selected remedy for the lower 8 miles of the River. Finally, the letter announced EPA's intent to provide a separate notice to unspecified parties of the opportunity to discuss a cash out settlement for the lower 8 miles of the River at a later date. On October 5, 2016, EPA announced that OCC had entered into an agreement to develop the remedial design.
Despite the issuance of the revised FFS and ROD by the EPA, and the RI/FS by the CPG, there are many uncertainties associated with the final agreed-upon remediation and the Company's allocable share of the remediation. As of November 20, 2015, the Company withdrew from the CPG, but remains liable for its obligations under the two above-referenced AOCs, as well as potential future liabilities. Given those uncertainties, the amounts accrued may not be indicative of the amounts for which the Company may be ultimately responsible and will be refined as the remediation progresses.
Other Matters
SEC Subpoena. In August 2019, the Company received a subpoena from the U.S. Securities and Exchange Commission (“SEC”) for documents related to the Company's disclosure of its dispute with the U.S. Department of Health and Human Services ("HHS") and Centers for Medicare & Medicaid Services ("CMS" and together with HHS, the "Agency") concerning the base date average manufacturer price ("AMP") under the Medicaid Drug Rebate Program for Mallinckrodt's Acthar® Gel (repository corticotropin injection) ("Acthar Gel"), which is now the subject of litigation between the Company and the Agency (see Medicaid Lawsuit below). The Company is cooperating with the SEC's investigation.
Medicaid Lawsuit. In May 2019, the Company filed a lawsuit under the Administrative Procedure Act ("APA") in federal district court for the District of Columbia against the Agency. The dispute involves the base date AMP under the Medicaid Drug Rebate Program for Acthar Gel. A drug's “base date AMP” is used to calculate the Medicaid rebate amount payable by the drug's manufacturer to state Medicaid agencies when the drug is prescribed to Medicaid beneficiaries. At issue in the lawsuit is whether FDA's 2010 approval of a new drug application for use of Acthar Gel in treating infantile spasms rendered Acthar Gel eligible for a new base date AMP, as indicated by CMS's written communications in 2012. In May 2019, CMS indicated that if the Company failed to revert to use of the original base date AMP in its calculation of Acthar Medicaid rebates, CMS would identify the Company as being out of compliance with its Medicaid Drug Rebate Program reporting requirements, among other potential actions, triggering certain negative consequences. As such, the Company filed a lawsuit alleging (i) that CMS has violated the Medicaid drug rebate statute, (ii) that CMS has violated its own regulations defining “single source drug,” (iii) that CMS has failed to adequately explain its change in position based on two letters that CMS sent Questcor Pharmaceuticals Inc. ("Questcor") in 2012 regarding the base date AMP for Acthar Gel, (iv) that CMS failed to give the Company fair notice of its latest position, and (v) that CMS should be prohibited from applying its new position retroactively. The court held a hearing regarding this matter on August 2, 2019 and the court took the matter under advisement. While the Company believes that its lawsuit has strong factual and legal bases, as of December 27, 2019, the potential for retroactive non-recurring charges could range from 0 to approximately $630.0 million.
Florida Civil Investigative Demand. In February 2019, the Company received a CID from the U.S. Attorney's Office for the Middle District of Florida for documents related to alleged payments to healthcare providers in Florida and whether those payments violated the Anti-Kickback Statute. The Company is cooperating with the investigation.
U.S. House Committee Investigation. In January 2019, the Company along with 11 other pharmaceutical companies, received a letter from the U.S. House Committee on Oversight and Reform requesting information relating to the Company's pricing strategy for Acthar Gel and related matters. The Company is cooperating with the Committee's investigation.
Boston Civil Investigative Demand. In January 2019, the Company received a CID from the U.S. Attorney's Office for the District of Massachusetts for documents related to the Company's participation in the Medicaid Drug Rebate Program. The Company is cooperating with the investigation.
Generic Pricing Subpoena. In March 2018, the Company received a grand jury subpoena issued by the U.S. District Court for the Eastern District of Pennsylvania pursuant to which the Antitrust Division of the DOJ is seeking documents regarding generic products and pricing, communications with generic competitors and other related matters. The Company is in the process of responding to this subpoena and intends to cooperate in the investigation.
Boston Subpoena. In December 2016, the Company received a subpoena from the USAO for the District of Massachusetts for documents related to the Company's payments to charitable foundations, the provision of financial and other support by charitable foundations to patients receiving Acthar Gel, and related matters. The Company responded to these requests and continues to cooperate in the investigation.
Texas Pricing Investigation. In November 2014, the Company received a CID from the Civil Medicaid Fraud Division of the Texas Attorney General's Office. According to the CID, the Attorney General's office is investigating the possibility of false reporting of information by the Company regarding the prices of certain of its drugs used by Texas Medicaid to establish reimbursement rates for pharmacies that dispensed the Company's drugs to Texas Medicaid recipients. The Company responded to these requests. In December 2018, the Company entered into a final settlement with the Texas Attorney General's Office to resolve all potential claims in the investigation and recorded a corresponding expense, which is included in SG&A in the consolidated statement of operations.
MNK 2011 Inc. (formerly known as Mallinckrodt Inc.) v. U.S. Food and Drug Administration and United States of America. In November 2014, the FDA reclassified the Company's Methylphenidate ER in the Orange Book: Approved Drug Products Liability Litigationwith Therapeutic Equivalence ("the Orange Book"). In November 2014, the Company filed a Complaint in the U.S. District Court for the District of Maryland Greenbelt Division against the FDA and the United States (the "MD Complaint") for judicial review of the FDA's reclassification. In July 2015, the court granted the FDA's motion to dismiss with respect to three of the five counts in the MD Complaint and granted summary judgment in favor of the FDA with respect to the two remaining counts (the “MD Order”). On October 18, 2016, the FDA initiated proceedings, proposing to withdraw approval of the Company's Abbreviated New Drug Application ("ANDA") for Methylphenidate ER. On October 21, 2016, the U.S. Court of Appeals for the Fourth Circuit issued an order placing the Company's appeal of the MD Order in abeyance pending the outcome of the withdrawal proceedings. The parties exchanged documents and in April 2018, the Company filed its submission in support of its position in the withdrawal proceedings. A potential outcome of the withdrawal proceedings is that the Company's Methylphenidate ER products may lose their FDA approval and have to be withdrawn from the market.
BeginningTherakos® Subpoena. In March 2014, the USAO for the Eastern District of Pennsylvania requested the production of documents related to an investigation of the U.S. promotion of Therakos' drug/device system UVADEX/UVAR XTS and UVADEX/CELLEX (collectively, the "Therakos System"), for indications not approved by the FDA, including treatment of patients with lawsuits broughtgraft versus host disease ("GvHD") and solid organ transplant patients, including pediatric patients. The investigation also includes Therakos' efforts to secure FDA approval for additional uses of, and alleged quality issues relating to, UVADEX/UVAR. In August 2015, the USAO for
the Eastern District of Pennsylvania sent Therakos a subsequent request for documents related to the investigation and has since made certain related requests. The Company responded to these requests and continues to cooperate in July 1976,the investigation.
Questcor Subpoena. In September 2012,Questcor received a subpoena from the USAO for the Eastern District of Pennsylvania for information relating to its promotional practices related to Acthar Gel. Questcor subsequently was informed by the USAO for the Eastern District of Pennsylvania that the USAO for the Southern District of New York and the SEC were participating in the investigation to review Questcor's promotional practices and related matters pertaining to Acthar Gel. The current investigation also relates to Questcor's provision of financial and other support to patients, including through charitable foundations and related matters. On March 9, 2015, the Company received a "No Action" letter from the SEC regarding its review of the Company's promotional practices related to Acthar Gel. On or about March 8, 2019, the U.S. District Court for the Eastern District of Pennsylvania unsealed two qui tam actions involving the allegations under investigation by the USAO for the Eastern District of Pennsylvania. The DOJ intervened in both actions, which were later consolidated. In September 2019, the Company executed a settlement agreement with the DOJ for $15.4 million and finalized settlements with the three qui tam plaintiffs. These settlements were paid during the three months ended September 27, 2019 and resolve the portion of the investigation and litigation involving Questcor's promotional practices related to Acthar Gel.
On or about June 4, 2019, the DOJ filed its Complaint in Intervention in the litigation, alleging claims under the federal False Claim Act based on Questcor's relationship with and donations to an independent charitable patient co-pay foundation. The Company disagrees with the DOJ's characterization of the facts and applicable law. On January 22, 2020, the court denied the Company's motion to dismiss the Complaint in Intervention. The Company intends to vigorously defend itself in this matter. At this stage, the Company is also named as a defendant in personal injury lawsuits based on alleged exposurenot able to asbestos-containing materials. A majorityreasonably estimate the expected amount or range of cost or any loss associated with this lawsuit.
Patent Litigation
Amitiza Patent Litigation: Zydus Pharmaceuticals (USA) Inc. In January 2020, Sucampo GmbH, Sucampo Pharmaceuticals, Inc., Sucampo Pharma Americas LLC and Sucampo Pharma LLC, all subsidiaries of the cases involve product liability claims based principally on allegationsCompany, and Takeda Pharmaceutical Company Limited, Takeda Pharmaceuticals USA, Inc., and Takeda Pharmaceuticals America, Inc. (collectively "Takeda," the exclusive licensee under the patents in litigation) filed suit in the U.S. District Court for the District of past distributionNew Jersey against Zydus Pharmaceuticals (USA) Inc. (“Zydus”) alleging that Zydus infringed U.S. Patent Nos. 7,795,312, 8,026,393, 8,338,639, 8,748,481 and 8,779,187 following receipt of productsa December 2019 notice from Zydus concerning its submission of an ANDA containing asbestos. A limited numbera Paragraph IV patent certification with the FDA for a generic version of Amitiza. The Company intends to vigorously enforce its intellectual property rights relating to Amitiza.
Amitiza Patent Litigation: Sun Pharmaceutical Industries, Ltd. and Sun Pharmaceutical Industries, Inc. In October 2018, Sucampo AG, Sucampo Pharmaceuticals, Inc. and Sucampo Pharma LLC, all subsidiaries of the cases allege premises liability basedCompany, and Takeda Pharmaceutical Company Limited, Takeda Pharmaceuticals USA, Inc., and Takeda Pharmaceuticals America, Inc. (collectively "Takeda," the exclusive licensee under the patents in litigation) filed suit in the U.S. District Court for the District of New Jersey against Sun Pharmaceutical Industries, Ltd. and Sun Pharmaceutical Industries, Inc. (collectively “Sun”) alleging that Sun infringed U.S. Patent Nos. 7,795,312, 8,026,393, 8,097,653, 8,338,639, 8,389,542, 8,748,481 and 8,779,187 following receipt of a September 2018 notice from Sun concerning its submission of an ANDA containing a Paragraph IV patent certification with the FDA for a generic version of Amitiza. The Company intends to vigorously enforce its intellectual property rights relating to Amitiza.
Amitiza Patent Litigation: Teva Pharmaceuticals USA, Inc. In September 2017, Sucampo AG and Sucampo Pharmaceuticals, Inc., both subsidiaries of the Company, and Takeda filed suit in the U.S. District Court for the District of New Jersey against Teva Pharmaceuticals USA, Inc. ("Teva")alleging that Teva infringed U.S. Patent Nos. 6,414,016, 6,982,283, 7,795,312, 8,026,393, 8,071,613, 8,097,653, 8,338,639, 8,389,542 and 8,748,481 following receipt of an August 2017 notice from Teva concerning its submission of an ANDA containing a Paragraph IV patent certification with the FDA for a generic version of Amitiza. On June 28, 2018, the parties entered into a settlement agreement under which Teva was granted the non-exclusive right to market a competing lubiprostone product in the U.S. under its ANDA on claimsor after January 1, 2023, or earlier under certain circumstances.
Amitiza Patent Litigation: Amneal Pharmaceuticals, LLC. In April 2017, Sucampo AG and Sucampo Pharmaceuticals, Inc., both subsidiaries of the Company, and Takeda filed suit in the U.S. District Court for the District of New Jersey against Amneal Pharmaceuticals, LLC ("Amneal")alleging that individualsAmneal infringed U.S. Patent Nos. 6,982,283, 8,026,393, 8,097,653, 8,338,639 and 8,389,542 following receipt of a March 2017 notice from Amneal concerning its submission of an ANDA containing a Paragraph IV patent certification with the FDA for a generic version of Amitiza. On June 28, 2018, the parties entered into a settlement agreement under which Amneal was granted the non-exclusive right to market a competing lubiprostone product in the U.S. under its ANDA on or after January 1, 2023, or earlier under certain circumstances.
Amitiza Patent Litigation:Par and DRL. Settlement and License Agreements were exposedentered into with Anchen Pharmaceuticals, Inc., Par Pharmaceutical, Inc. and Par Pharmaceutical Companies, Inc. (collectively "Par") and Dr. Reddy's Laboratories, Inc. and Dr. Reddy's Laboratories, Ltd. (collectively "DRL") to asbestos whilesettle Paragraph IV patent litigation with each of Par and DRL. Under the terms of the Par settlement dated September 30, 2014, Par was granted a non-exclusive license and right to market a competing generic of
Amitiza on or after January 1, 2021, or earlier under certain circumstances. Under the Company's property. Each case typically names dozensterms of corporate defendantsthe DRL settlement dated September 14, 2016, DRL was granted a non-exclusive license and right to market a competing generic of Amitiza on or after January 1, 2023, or earlier under certain circumstances.
INOmax Patent Litigation: Praxair Distribution, Inc. and Praxair, Inc. (collectively “Praxair”). In February 2015, INO Therapeutics LLC and Ikaria, Inc., both subsidiaries of the Company, filed suit in additionthe U.S. District Court for the District of Delaware against Praxair following receipt of a January 2015 notice from Praxair concerning its submission of an ANDA containing a Paragraph IV patent certification with the FDA for a nitric oxide drug product delivery system. In July 2016, the Company filed a second suit against Praxair in the U.S. District Court for the District of Delaware following receipt of a Paragraph IV notice concerning three additional patents recently added to the Company.FDA Orange Book that was submitted by Praxair regarding its ANDA for its nitric oxide drug product delivery system. The complaints generally seek monetary damagesinfringement claims in the second suit were added to the original suit. In September 2016, the Company filed a third suit against Praxair in the U.S. District Court for personal injury or bodily injury resulting from alleged exposurethe District of Delaware following receipt of a Paragraph IV notice concerning a fourth patent added to products containing asbestos.the FDA Orange Book that was submitted by Praxair regarding its ANDA for its nitric oxide drug product delivery system.
Trial for the suit filed in February 2015 was held in March 2017 and a decision was rendered September 5, 2017 that ruled five patents invalid and six patents not infringed. The Company's involvementCompany appealed the decision to the Court of Appeals for the Federal Circuit. The oral arguments in asbestos casesthe appeal occurred on February 6, 2019. Praxair received FDA approval of their ANDA for their Noxivent nitric oxide and clearance of their 510(k) for their NOxBOXi device on October 2, 2018. The appeal decision, issued on August 27, 2019, substantively affirmed the District Court decision with respect to the invalidity of the heart failure (HF) patents and the non-infringement of the delivery system infrared (DSIR) patents. The Company filed a petition for en banc review at the Federal Circuit on September 26, 2019, which the Federal Circuit denied on November 19, 2019. There has been limited because it did not mine or produce asbestos. Furthermore, in the Company's experience, a large percentage of these claims have never been substantiated and have been dismissedcommercial launch activity by the courts.Praxair. The Company has not suffered an adverse verdict in a trial court proceeding related to asbestos claims and intends to continue its efforts to defend these lawsuits. When appropriate, the Company settles claims; however, amounts paidvigorously enforce its intellectual property rights relating to settle and defend all asbestos claims have been immaterial. As of September 30, 2016, there were approximately 11,700 asbestos-related cases pending against the Company.
The Company estimates pending asbestos claims, claims that were incurred but not reported and related insurance recoveries, which are recorded on a gross basisINOmax in the consolidated balance sheets. ThePraxair litigation to prevent the marketing of infringing generic products prior to the expiration of the patents covering INOmax. An adverse final outcome in the appeal of the Praxair litigation decision (or a broad at-risk launch by Praxair prior to the final appellate decision) could result in the broader-scale launch of a competitive nitric oxide product before the expiration of the last of the listed patents on May 3, 2036 (November 3, 2036 including pediatric exclusivity), which could adversely affect the Company's estimateability to successfully maximize the value of its liability for pendingINOmax and future claims is based on claims experience over the past five years and covers claims either currently filed or expected to be filed over the next seven years. The Company believes that it has adequate amounts recorded related to these matters. While it is not possible at this time to determine with certainty the ultimate outcome of these asbestos-related proceedings, the Company believes, given the information currently available, that the ultimate resolution of all known and anticipated future claims, after taking into account amounts already accrued, along with recoveries from insurance, will not have a materialan adverse effect on its financial condition, results of operations and cash flows.
INOmax Patents: IPR Proceedings. In February 2015 and March 2015, the U.S. Patent and Trademark Office ("USPTO") issued Notices of Filing Dates Accorded to Petitions for IPR petitions filed by Praxair Distribution, Inc. concerning ten patents covering INOmax (i.e., five patents expiring in 2029 and five patents expiring in 2031).
Industrial Revenue BondsIn July 2015 the USPTO Patent Trial and Appeal Board ("PTAB") issued rulings denying the institution of four of the five IPR petitions challenging the five patents expiring in 2029. The PTAB also issued a ruling in July 2015 that instituted the IPR proceeding in the fifth of this group of patents and the PTAB ruled in July 2016 that one claim of this patent survived review and is valid while the remaining claims were unpatentable. The Company believed the claim held valid by the PTAB describes and encompasses a manner in which INOmax is distributed in conjunction with its approved labeling and that Praxair infringes that claim. Praxair filed an appeal and Mallinckrodt filed a cross-appeal of this decision to the Court of Appeals for the Federal Circuit. Oral argument of that appeal occurred in January 2018. The Federal Circuit decision was issued May 16, 2018 and held all claims unpatentable (invalid).
ThroughIn September 30,2015 the USPTO PTAB issued rulings that instituted the IPR proceedings in each of the second set of five patents that expire in 2031. In September 2016 the PTAB ruled that all claims in the five patents expiring in 2031 are patentable.
Ofirmev Patent Litigation: Altan Pharma Ltd. In March 2019, Mallinckrodt Hospital Products Inc. and Mallinckrodt Hospital Products IP Limited, both subsidiaries of the Company, exchanged titleand New Pharmatop LP, the current owner of the U.S. patents licensed exclusively by the Company, filed suit in the U.S. District Court for the District of Delaware against Altan Pharma Ltd. (“Altan”) alleging that Altan infringed U.S. Patent No. 6,992,218, U.S. Patent No. 9,399,012, U.S. Patent No. 9,610,265 and U.S. Patent No. 9,987,238 following receipt of a February 2019 notice from Altan concerning its submission of a new drug application, containing a Paragraph IV patent certification with the FDA for a competing version of Ofirmev. On August 29, 2019, the parties entered into a settlement agreement under which Altan was granted the non-exclusive right to $88.0market a competing intravenous acetaminophen product in the U.S. under its New Drug Application (NDA) on or after December 6, 2020, or earlier under certain circumstances.
Ofirmev Patent Litigation: Aurobindo Pharma U.S.A., Inc. In December 2017, Mallinckrodt Hospital Products Inc. and Mallinckrodt IP Unlimited Company, both subsidiaries of the Company, and New Pharmatop LP, the current owner of the two U.S. patents licensed exclusively by the Company, filed suit in the U.S. District Court for the District of Delaware against Aurobindo Pharma U.S.A., Inc. (“Aurobindo”) alleging that Aurobindo infringed U.S. Patent No. 6,992,218 ("the ‘218 patent"), U.S. Patent No. 9,399,012 ("the ‘012 patent") and U.S. Patent No. 9,610,265 ("the ‘265 patent") following receipt of a November 2017 notice from Aurobindo concerning its submission of an ANDA, containing a Paragraph IV patent certification with the FDA for a competing version of Ofirmev. On May 7, 2018 the parties entered into a settlement agreement under which Aurobindo was granted the non-exclusive right to market a competing intravenous acetaminophen product in the U.S. under its ANDA on or after December 6, 2020, or earlier under certain circumstances.
Ofirmev Patent Litigation: B. Braun Medical Inc. In April 2017, Mallinckrodt Hospital Products Inc. and Mallinckrodt IP, both subsidiaries of the Company, and Pharmatop, the then owner of the two U.S. patents licensed exclusively by the Company, filed suit in the U.S. District Court for the District of Delaware against B. Braun Medical Inc. ("B. Braun") alleging that B. Braun infringed the '218 patent and the '012 patent following receipt of a February 2017 notice from B. Braun concerning its submission of a NDA, containing a Paragraph IV patent certification with the FDA for a competing version of Ofirmev. On October 3, 2018, the parties entered into a settlement agreement under which B. Braun was granted the non-exclusive right to market a competing intravenous acetaminophen product in the U.S. under its ANDA on or after December 6, 2020, or earlier under certain circumstances.
Ofirmev Patent Litigation: InnoPharma Licensing LLC and InnoPharma, Inc. In September 2014, Cadence and Mallinckrodt IP, both subsidiaries of the Company, and Pharmatop, the then owner of the two U.S. patents licensed exclusively by the Company, filed suit in the U.S. District Court for the District of Delaware against InnoPharma Licensing LLC and InnoPharma, Inc. (both are subsidiaries of Pfizer and collectively "InnoPharma") alleging that InnoPharma infringed U.S. Patent Nos. 6,028,222 ("the '222 patent") and 6,992,218 ("the '218 patent"). Separately, on December 1, 2016 Mallinckrodt IP Filed suit in the U.S. District Court for the District of Delaware against InnoPharma alleging that InnoPharma infringed the '012 patent. On May 4, 2017 the parties entered into settlement agreements on both suits under which InnoPharma was granted the non-exclusive right to market a competing intravenous acetaminophen product in the U.S. under its NDA on or after December 6, 2020, or earlier under certain circumstances.
Ofirmev Patent Litigation: Agila Specialties Private Limited, Inc. (now Mylan Laboratories Ltd.) and Agila Specialties Inc. (a Mylan Inc. Group), (collectively "Agila"). In December 2014, Cadence and Mallinckrodt IP, both subsidiaries of the Company, and Pharmatop filed suit in the U.S. District Court for the District of Delaware against Agila alleging that Agila infringed the '222 and the '218 patents. Separately, on December 1, 2016 Mallinckrodt IP filed suit in the U.S. District Court for the District of Delaware against Agila alleging that Agila infringed the '012 patent. On December 31, 2016, the parties entered into settlement agreements on both suits under which Agila was granted the non-exclusive right to market a competing intravenous acetaminophen product in the U.S. under its NDA on or after December 6, 2020, or earlier under certain circumstances.
The Company has successfully asserted the '222 and '218 patents and maintained their validity in both litigation and proceedings at the USPTO. The Company will continue to vigorously enforce its intellectual property rights relating to Ofirmev to prevent the marketing of infringing generic or competing products prior to December 6, 2020, which, if unsuccessful, could adversely affect the Company's ability to successfully maximize the value of Ofirmev and have an adverse effect on its financial condition, results of operations and cash flows.
Shire Development LLC, Shire LLC and Shire US, Inc. v. SpecGx LLC. In May 2018, Shire Development LLC, Shire LLC and Shire US, Inc. (collectively “Shire”) filed suit in the U.S. District Court for the District of Delaware against the Company alleging that the Company infringed U.S. Patent Nos. 6,913,768, 8,846,100, and 9,173,857 following receipt of an April 2018 notice from the Company concerning its submission of an ANDA, containing a Paragraph IV patent certification with the FDA for a competing version of Mydayis. On January 28, 2019, the parties entered into a settlement agreement under which the Company was granted the non-exclusive right to market a competing generic version of Mydayis in the U.S. under its ANDA on or after May 10, 2023 (or November 10, 2023 if any pediatric exclusivity is granted by the FDA with respect to the Mydayis product), or earlier under certain circumstances.
Janssen Pharmaceuticals, Inc. and Janssen Pharmaceutica NV v. Pharmascience Inc. and SpecGx LLC. In December 2019, Janssen Pharmaceuticals, Inc. and Janssen Pharmaceutica NV (collectively “Janssen”) filed suit in the U.S. District Courts for the Districts of New Jersey and Delaware against the Company and Pharmascience Inc. (“Pharmascience”) relating to the collaboration between Company and Pharmascience that resulted in Pharmascience's ANDA submission, containing a Paragraph IV patent certification, with the FDA for a competing version of Invega Sustenna. Janssen alleges that the Company and Pharmascience infringe U.S. Patent No. 9,439,906. The Company intends to vigorously defend its position.
Commercial and Securities Litigation
City of Marietta Litigation. On February 6, 2020, the City of Marietta, Georgia filed a putative civil class action complaint against the Company in the U.S. District Court for the Northern District of Georgia relating to the price of Acthar Gel. The complaint, which pleads one claim for unjust enrichment, purports to be brought on behalf of third-party payers and their beneficiaries and people without insurance in the United States and its Territories that paid for Acthar from four years prior to the filing of the Complaint until the date of trial. The case is captioned City of Marietta v. Mallinckrodt ARC LLC. Marietta alleges that it has paid $2.0 million to cover the cost of an Acthar Gel prescription of an employee and that the Company has been unjustly enriched as a result. The Company intends to vigorously defend itself in this matter.
Shareholder Derivative Litigation (Brandhorst). In September 2019, a purported shareholder of the Company's stock filed a shareholder derivative complaint in the United States District Court for the District of Columbia against the Company, as nominal defendant, as well as its Chief Executive Officer ("CEO") Mark Trudeau, its former Chief Financial Officer ("CFO") Matthew K. Harbaugh, its Executive Vice President Hugh O'Neill, and the following members of the Company's Board of Directors: Angus Russell, David Carlucci, J. Martin Carroll, David Norton, JoAnn Reed and Kneeland Youngblood (collectively with Trudeau,
Harbaugh and O'Neill, the “Individual Defendants”). The lawsuit is captioned Lynn Brandhorst, derivatively on behalf of nominal defendant Mallinckrodt PLC v. Mark Trudeau et al. and relies on the allegations from the putative class action securities litigation that was filed against the Company and certain of its plant assetsofficers in returnJanuary 2017, captioned Patricia A. Shenk v. Mallinckrodt plc, et al. described further below. The complaint asserts claims for an equal amountcontribution, breaches of Industrial Revenue Bonds ("IRB") issued by Saint Louis County. The Company also simultaneously leased such assets back from Saint Louis County under capital leases expiring through December 2025,fiduciary duty, unjust enrichment, abuse of control, and gross mismanagement, and is premised on allegations that the terms of which provide it with the right of offset against the IRBs. The lease also provides an option forIndividual Defendants caused the Company to repurchasemake the assetsallegedly false or misleading statements at issue in the endShenk lawsuit. The complaint seeks damages in an unspecified amount and corporate governance reforms. On November 20, 2019, this matter was stayed by agreement of the leaseparties pending resolution of the Shenk lawsuit below. The Company and the Individual Defendants intend to vigorously defend themselves in this matter.
Humana Litigation. In August 2019, Humana Inc. filed a lawsuit against the Company in the U.S. District Court for nominal consideration. These transactions collectively resultthe Central District of California alleging violations of federal and state antitrust laws; racketeering (“RICO”) violations under 18 U.S.C. § 1962(c); conspiracy to violate RICO under 18 U.S.C. § 1962(d); violations of state unfair competition, consumer fraud and deceptive trade practice laws; state insurance fraud; tortious interference with contract; and unjust enrichment related to the pricing of Acthar Gel. Humana alleges that it paid more than $700.0 million for Acthar Gel and seeks undisclosed damages from 2011 through present. The case alleges similar facts as those alleged in the MSP and Rockford matters below, and includes references to allegations at issue in a ten-year property tax abatement frompending qui tam action against the dateCompany in the propertyU.S. District Court for the Eastern District of Pennsylvania (see Questcor Subpoena above) and is placedproceeding as Humana Inc. v. Mallinckrodt ARD LLC. The Company intends to vigorously defend itself in service. Duethis matter, and on October 28, 2019, moved to dismiss the complaint. The Company's motion to dismiss remains pending.
Putative Class Action Securities Litigation (Strougo). In July 2019, a putative class action lawsuit was filed against the Company, its CEO Mark Trudeau, its CFO Bryan M. Reasons, its former Interim CFO George A. Kegler and its former CFO Matthew K. Harbaugh, in the U.S. District Court for the Southern District of New York, captioned Barbara Strougo v. Mallinckrodt plc, et al. The complaint purports to be brought on behalf of all persons who purchased or otherwise acquired Mallinckrodt's securities between February 28, 2018 and July 16, 2019. The lawsuit generally alleges that the defendants made false and misleading statements in violation of Sections 10(b) and 20(a) of the Exchange Act and Rule 10b-5 promulgated thereunder related to the rightCompany's clinical study designed to assess the efficacy and safety of offset, the capital lease obligation and IRB asset are recorded netits Acthar Gel in the consolidated balance sheets.patients with amyotrophic lateral sclerosis. The lawsuit seeks monetary damages in an unspecified amount. The Company expects thatintends to vigorously defend itself in this matter. At this stage, the rightCompany is not able to reasonably estimate the expected amount or range of offset will be applied to payments required under these arrangements. During the third quarter of fiscal 2016,cost or any loss associated with this lawsuit.
Putative Class Action Litigation - Steamfitters Local Union No. 420. In July, 2019, Steamfitters Local Union No. 420 filed a putative class action lawsuit against the Company and St. Louis County agreed onUnited BioSource Corporation in the U.S. District Court for the Eastern District of Pennsylvania, proceeding as Steamfitters Local Union No. 420 v. Mallinckrodt ARD, LLC et al. The complaint makes similar allegations as those alleged in related state and federal actions that were filed by the same plaintiff's law firm in Illinois, Pennsylvania, Tennessee and Maryland (now dismissed; see WCBE below), and includes references to allegations at issue in a changepending qui tam actions against the Company in valuationthe U.S. District Court for the Eastern District of Pennsylvania (see Questcor Subpoena above). In particular, the complaint alleges RICO violations under 18 U.S.C. § 1962(c); conspiracy to violate RICO under 18 U.S.C. § 1962(c); violations of the plant assetsPennsylvania (and other states) Unfair Trade Practices and IRBsConsumer Protection laws; negligent misrepresentation; aiding and abetting/conspiracy; and unjust enrichment. The complaint also seeks declaratory and injunctive relief. On December 19, 2019, the court denied the Company's motion to dismiss the complaint. The Company intends to vigorously defend itself in this matter. At this stage, the Company is not able to reasonably estimate the expected amount or range of cost or any loss associated with this lawsuit.
Acument Global. In May 2019, Acument Global Technologies, Inc., filed a sale of additional assets to St. Louis County. The net effect of the agreements betweennon-class complaint against the Company and St. Louisother defendants in Tennessee state court alleging violations of Tennessee Consumer Protection Laws, unjust enrichment, fraud and conspiracy to defraud. The case alleges similar facts as those alleged in the MSP and Rockford matters below, and is captioned Acument Global Technologies, Inc., v. Mallinckrodt ARD Inc., et al. The Company intends to vigorously defend itself in this matter, and on July 29, 2019, moved to dismiss the complaint. The Company's motion to dismiss remains pending.
Washington County duringBoard of Education ("WCBE"). In May 2019, WCBE filed a non-class complaint against the quarter resultedCompany and other defendants in Maryland state court alleging violations of Maryland Consumer Protection Act, negligent misrepresentation, fraud, unjust enrichment and conspiracy to defraud. The case, which was removed to the U.S. District Court for the District of Maryland on June 24, 2019, alleges similar facts as those alleged in the MSP and Rockford matters discussed below. On January 4, 2020, the court dismissed the complaint.
Local 542. In May 2018, the International Union of Operating Engineers Local 542 filed a new valuationnon-class complaint against the Company and other defendants in Pennsylvania state court alleging improper pricing and distribution of plant assetsActhar Gel, in violation of $73.7 million, a decreasePennsylvania's Unfair Trade Practices and Consumer Protection Law, aiding and abetting, unjust enrichment and negligent misrepresentation. The case alleges similar facts as the MSP and Rockford matters below, and is captioned Int'l Union of $14.3 million.Operating Engineers Local 542 v. Mallinckrodt ARD Inc., et al. Plaintiff filed an amended complaint on August 27, 2018, the Company's objections to which were denied by the court. The Company intends to continue to vigorously defend itself in this matter. On January 22, 2020, the court stayed further proceedings in this case given the overlap with the Rockford and MSP cases discussed below.
Interest Bearing Deferred Tax Obligation
As partGrifols. In March 2018, Grifols initiated arbitration against the Company, alleging breach of a Manufacturing and Supply Agreement entered into between the integration of Questcor,Company's predecessor-in-interest, Cadence Pharmaceuticals Inc., and Grifols. During 2019, the Company entered into a settlement for this matter and appropriate reserves were recorded.
Putative Class Action Litigation (MSP). In October 2017, a putative class action lawsuit was filed against the Company and United BioSource Corporation in the U.S. District Court for the Central District of California. Pursuant to a motion filed by the defendants, the case was transferred to the U.S. District Court for the Northern District of Illinois in January 2018, and is currently proceeding as MSP Recovery Claims, Series II, LLC, et al. v. Mallinckrodt ARD, Inc., et al. The Company filed a motion to dismiss on February 23, 2018, which was granted on January 25, 2019 with leave to amend. MSP filed the operative First Amended Class Action Complaint on April 10, 2019, in which it asserts claims under federal and state antitrust laws and state consumer protection laws and names additional defendants. The complaint alleges that the Company unlawfully maintained a monopoly in a purported ACTH product market by acquiring the U.S. rights to Synacthen® Depot ("Synacthen") and reaching anti-competitive agreements with the other defendants by selling Acthar Gel through an internal installmentexclusive distribution network. The complaint purports to be brought on behalf of all third-party payers, or their assignees, in the U.S. and its territories, who have, as indirect purchasers, in whole or in part, paid for, provided reimbursement for, and/or possess the recovery rights to reimbursement for the indirect purchase of Acthar Gel from August 1, 2007 to present. The Company moved to dismiss the First Amended Class Action Complaint on May 24, 2019. The Company's motion to dismiss remains pending.
Employee Stock Purchase Plan (ESPP) Securities Litigation. In July 2017, a purported purchaser of Mallinckrodt stock through Mallinckrodt's ESPPs, filed a derivative lawsuit in the Federal District Court in the Eastern District of Missouri, captioned Solomon v. Mallinckrodt plc, et al., against the Company, its CEO Mark C. Trudeau, its former CFO Matthew K. Harbaugh, its Controller Kathleen A. Schaefer, and current and former directors of the Company. On September 6, 2017, plaintiff voluntarily dismissed its complaint in the Federal District Court for the Eastern District of Missouri and refiled virtually the same complaint in the U.S. District Court for the District of Columbia. The complaint purports to be brought on behalf of all persons who purchased or otherwise acquired Mallinckrodt stock between November 25, 2014, and January 18, 2017, through the ESPPs. In the alternative, the plaintiff alleges a class action for those same purchasers/acquirers of stock in the ESPPs during the same period. The complaint asserts claims under Section 11 of the Securities Act, and for breach of fiduciary duty, misrepresentation, non-disclosure, mismanagement of the ESPPs' assets and breach of contract arising from substantially similar allegations as those contained in the putative class action securities litigation described in the Shenk lawsuit below. Stipulated co-lead plaintiffs were approved by the court on March 1, 2018. Co-lead Plaintiffs filed an amended complaint on June 4, 2018 having a class period of July 14, 2014 to November 6, 2017. On July 6, 2018, this matter was stayed by agreement of the parties pending resolution of the Shenk lawsuit below.
Putative Class Action Litigation (Rockford). In April 2017, a putative class action lawsuit was filed against the Company and United BioSource Corporation in the U.S. District Court for the Northern District of Illinois. The case is captioned City of Rockford v. Mallinckrodt ARD, Inc., et al. The complaint was subsequently amended to, among other things, include an additional named plaintiff and additional defendants. As amended, the complaint purports to be brought on behalf of all self-funded entities in the U.S. and its Territories, excluding any Medicare Advantage Organizations, related entities and certain others, that paid for Acthar Gel from August 2007 to the present. Plaintiff alleges violations of federal antitrust and RICO laws, as well as various state law claims in connection with the distribution and sale transactionof Acthar Gel. On January 22, 2018, the Company filed a motion to dismiss the Second Amended Complaint, which was granted in part on January 25, 2019, dismissing one of two named plaintiffs and all claims with the exception of Plaintiff's federal and state antitrust claims. The remaining allegation in the case is that the Company engaged in anti-competitive acts to artificially raise and maintain the price of Acthar Gel. To this end, Plaintiff alleges that the Company unlawfully maintained a monopoly in a purported ACTH product market by acquiring the U.S. rights to Synacthen and conspired with the other named defendants by selling Acthar Gel through an exclusive distributor. The Company intends to continue to vigorously defend itself in this matter. At this stage, the Company is not able to reasonably estimate the expected amount or range of cost or any loss associated with this lawsuit.
Putative Class Action Securities Litigation (Shenk). In January 2017, a putative class action lawsuit was filed against the Company and its CEO in the U.S. District Court for the District of Columbia, captioned Patricia A. Shenk v. Mallinckrodt plc, et al. The complaint purports to be brought on behalf of all persons who purchased Mallinckrodt's publicly traded securities on a domestic exchange between November 25, 2014 and January 18, 2017. The lawsuit generally alleges that the Company made false or misleading statements related to certain Acthar intangible assetsGel and Synacthen to artificially inflate the price of the Company's stock. In particular, the complaint alleges a failure by the Company to provide accurate disclosures concerning the long-term sustainability of Acthar Gel revenues, and the exposure of Acthar Gel to Medicare and Medicaid reimbursement rates. On January 26, 2017, a second putative class action lawsuit, captioned Jyotindra Patel v. Mallinckrodt plc, et al. was filed against the same defendants named in the Shenk lawsuit in the U.S. District Court for the District of Columbia. The Patel complaint purports to be brought on behalf of shareholders during the three months ended December 26, 2014. Duringsame period of time as that set forth in the three months ended December 25, 2015,Shenk lawsuit and asserts claims similar to those set forth in the Shenk lawsuit. On March 13, 2017, a third putative class action lawsuit, captioned Amy T. Schwartz, et al., v. Mallinckrodt plc, et al., was filed against the same defendants named in the Shenk lawsuit in the U.S. District Court for the District of Columbia. The Schwartz complaint purports to be brought on behalf of shareholders who purchased shares of the Company entered intobetween July 14, 2014 and January 18, 2017 and asserts claims similar transactions with certain intangible assets acquiredto those set forth in the Ikaria AcquisitionShenk lawsuit. On March 23, 2017, a fourth putative class action lawsuit, captioned Fulton County Employees' Retirement System v. Mallinckrodt plc, et al., was filed against the Company, its CEO and Therakos Acquisition.former CFO in
the U.S. District Court for the District of Columbia. The installment sale transactions resulted in a taxable gain. In accordance with Internal Revenue Code Section 453A ("Section 453A")Fulton County complaint purports to be brought on behalf of shareholders during the gain is considered taxablesame period of time as that set forth in the Schwartz lawsuit and asserts claims similar to those set forth in the Shenk lawsuit. On March 27, 2017, four separate plaintiff groups moved to consolidate the pending cases and to be appointed as lead plaintiffs in the consolidated case. Since that time, two of the plaintiff groups have withdrawn their motions. Lead plaintiff was designated by the court on March 9, 2018. Lead plaintiff filed a consolidated complaint on May 18, 2018, alleging a class period in which installment payments are received. As of September 30, 2016,from July 14, 2014 to November 6, 2017, the Company, hadits CEO, its former CFO, and Executive Vice President, Hugh O'Neill, as defendants, and containing similar claims, but further alleging misstatements regarding payer reimbursement restrictions for Acthar Gel. On August 30, 2018, the lead plaintiff voluntarily dismissed the claims against Mr. O'Neill without prejudice. The Company filed a motion to dismiss the complaint which was granted in part, and denied in part by the court on July 30, 2019. The Company intends to vigorously defend itself in this matter.
Generic Price Fixing Litigation
Generic Pharmaceutical Antitrust MDL. In August 2016, a multidistrict litigation was established in the Eastern District of Pennsylvania relating to allegations of antitrust violations with respect to generic pharmaceutical pricing (the "Generic Pricing MDL"). Plaintiffs in the Generic Pricing MDL, captioned In re: Generic Pharmaceuticals Pricing Antitrust Litigation, allege a conspiracy of price-fixing and customer allocation among generic drug manufacturers beginning in or around July 2009. Since its establishment, the Generic Pricing MDL has expanded to encompass dozens of pharmaceutical companies and more than 100 generic pharmaceutical drugs. The Company was recently named in three cases associated with this litigation. A status conference is due to be held on March 12, 2020.
1199SEIU National Benefit Fund Litigation. In December 2019, a putative class action lawsuit was filed against the Company and more than 30 other pharmaceutical manufacturers in the U.S. District Court for the Eastern District of Pennsylvania, captioned 1199SEIU National Benefit Fund et al. v. Actavis Holdco U.S., Inc., et al. The complaint purports to be brought on behalf of all persons and entities that indirectly purchased, paid, or provided reimbursement for the purchase of defendants' generic drugs, other than for resale, from July 1, 2009, to the present. The lawsuit generally alleges that defendants conspired to allocate customers and fix prices for generic pharmaceutical drugs beginning in July 2009. The complaint seeks monetary damages and injunctive relief based on violations of Sections 1 and 3 of the Sherman Act and various state antitrust, consumer protection, and unjust enrichment claims. The Company intends to vigorously defend itself in this matter.
César Castillo, Inc., Litigation. In February 2020, a putative class action lawsuit was filed against the Company and more than 30 other pharmaceutical manufacturers in the U.S. District Court for the Eastern District of Pennsylvania, captioned César Castillo, Inc., et al. v. Actavis Holdco U.S., Inc., et al. The lawsuit purports to be brought on behalf of all persons or entities that directly purchased certain generic drugs from defendants or from one of defendants' direct customers-where the direct customer is alleged to be a completely involved co-conspirator-between July 1, 2009, and the present. The complaint has similar allegations as the 1199SEIU National Benefit Fund litigation and seeks damages for violations of Sections 1 and 3 of the Sherman Act. The Company intends to vigorously defend itself in this matter.
The Kroger Co. Litigation. In February 2020, a proposed amended complaint filed in the U.S. District Court for the Eastern District of Pennsylvania named the Company and several other pharmaceutical manufacturers as new defendants in an aggregate $1,883.7action captioned The Kroger Co., et al. v. Actavis Holdco U.S., Inc. et al. The lawsuit is brought by several entities that purportedly purchased generic drugs directly from defendants. The proposed amended complaint seeks monetary damages and injunctive relief for violations of Section 1 of the Sherman Antitrust Act, and is premised on facts similar to those alleged in the 1199SEIU National Benefit Fund and César Castillo litigations. The motion for leave to file the proposed amended complaint remains pending.
Environmental Remediation and Litigation Proceedings
The Company is involved in various stages of investigation and cleanup related to environmental remediation matters at a number of sites, including those described below. The ultimate cost of site cleanup and timing of future cash outlays is difficult to predict, given the uncertainties regarding the extent of the required cleanup, the interpretation of applicable laws and regulations and alternative cleanup methods. The Company concluded that, as of December 27, 2019, it was probable that it would incur remediation costs in the range of $38.2 million to $86.9 million. The Company also concluded that, as of December 27, 2019, the best estimate within this range was $61.9 million, of interest bearing U.S. deferred tax liabilities associated with outstanding installment notes. The GAAP calculation of interest associated with these deferred tax liabilities is subject to variable interest rates. The Company recognized interest expense associated with the Section 453A deferred tax liabilities of $73.8which $1.9 million and $36.5 million for fiscal 2016 and 2015, respectively.
The Company has reported Section 453A interest on its tax returns on the basis of its interpretation of the U.S. Internal Revenue Code and Regulations. Alternative interpretations of these provisions could resultwas included in additional interest payable on the deferred tax liability. Due to the inherent uncertainty in these interpretations, the Company has deferred the recognition of the benefit associated with the Company’s interpretation and maintains a corresponding liability. During the year ended September 30, 2016, the Company reclassified $25.7 million of previously established payables from accrued and other current liabilities to otherand the remainder was included in environmental liabilities inon the
condensed consolidated balance sheet. This balance is expected to increase over future periods until such uncertainty is resolved. Favorable resolution of this uncertainty would likely result in a material reversal of this liability and a benefit being recorded to interest expense within the consolidated statements of income.
Leases
The Company has facility, vehicle and equipment leases that expire at various dates. Rental expense under facility, vehicle and equipment operating leases related to continuing operations was $23.9 million, $22.2 million and $12.2 million for fiscal 2016, 2015 and 2014, respectively. The Company also has facility and equipment commitments under capital leases.
The following is a schedule of minimum lease payments for non-cancelable leasessheet as of September 30, 2016:
|
| | | | | | | |
| Operating Leases | | Capital Leases |
Fiscal 2017 | $ | 26.5 |
| | $ | 1.0 |
|
Fiscal 2018 | 20.1 |
| | 0.2 |
|
Fiscal 2019 | 19.0 |
| | — |
|
Fiscal 2020 | 13.7 |
| | — |
|
Fiscal 2021 | 11.5 |
| | — |
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Thereafter | 44.9 |
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Total minimum lease payments | $ | 135.7 |
| | 1.2 |
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Less: interest portion of payments | | | — |
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Present value of minimum lease payments | | | $ | 1.2 |
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Tax Matters
The income tax returns of the Company and its subsidiaries are periodically examined by various tax authorities. The resolution of these matters is subject to the conditions set forth in the tax matters agreement entered into between the Company and Covidien ("the Tax Matters Agreement")December 27, 2019. Covidien has the right to administer, control and settle all U.S. income tax audits for periods prior to the Separation. While it is not possible at this time to determine with certainty the ultimate outcome of these matters, the Company believes, given the information currently available, that established liabilities are reasonable and that the ultimatefinal resolution of these mattersall known claims, after taking into account amounts already accrued, will not have a material adverse effect on its financial condition, results of operations and cash flows.
Lower Passaic River, New Jersey. The Company and approximately 70 other companies (“Cooperating Parties Group” or “CPG”) are parties to a May 2007 Administrative Order on Consent ("AOC") with the Environmental Protection Agency ("EPA") to perform a
remedial investigation and feasibility study ("RI/FS") of the 17-mile stretch known as the Lower Passaic River ("the River") Study Area. The Company's potential liability stems from former operations at Lodi and Belleville, New Jersey.
In April 2014, the EPA issued a revised Focused Feasibility Study ("FFS"), with remedial alternatives to address cleanup of the lower 8-mile stretch of the River. The EPA estimated the cost for the remediation alternatives ranged from $365.0 million to $3.2 billion and the EPA's preferred approach had an estimated cost of $1.7 billion.
In April 2015, the CPG presented a draft of the RI/FS of the River to the EPA that included alternative remedial actions for the entire 17-mile stretch of the River.
On January 19,March 4, 2016, Tyco International plc (“Tyco International”the EPA issued the Record of Decision ("ROD") for the lower 8 miles of the River with a slight modification on its preferred approach and a revised estimated cost of $1.38 billion. On October 5, 2016, the EPA announced itthat Occidental Chemicals Corporation ("OCC") had entered into Stipulationsan agreement to develop the remedial design.
On August 7, 2018, the EPA finalized a buyout offer of Settled Issues$280,600 with the IRSCompany, limited to resolve certain disputes beforeits former Lodi facility, for the U.S. Tax Court. The disputes involved IRS auditslower 8 miles of Tyco International for years inthe River. During the three months ended September 28, 2018, the Company reduced the accrual associated with this matter by $11.8 million to $26.2 million, which companies thatrepresents the Company's estimate of its remaining liability related to the River.
Despite the issuance of the revised FFS and ROD by the EPA, the RI/FS by the CPG, and the cash out settlement by the EPA there are now subsidiaries of Mallinckrodt were subsidiaries of Tyco International. On May 31, 2016 the U.S. Tax Court entered decisions consistentmany uncertainties associated with the Stipulations of Settled Issues. As a result, all aspectsfinal agreed-upon remediation, potential future liabilities and the Company's allocable share of the controversy that were beforeremediation. Given those uncertainties, the U.S. Tax Court and Appeals Divisionamounts accrued may not be indicative of the IRS have been resolvedamounts for audit cycles from 1997-2007. Mallinckrodt is not a participant inwhich the tax sharing agreement between Medtronic plc (as successor to Covidien plc), Tyco International and TE ConnectivityCompany may be ultimately responsible and will not share in or be responsible for any payments to be made underrefined as the terms of the settlement.remediation progresses.
The IRS is examining tax years 2010-2012 with respect to certain tax returns filed by Covidien. Taxes for periods prior to September 29, 2012 are subject to the Company's $200.0 million liability limitation, as prescribed in the Tax Matters Agreement. Occidental Chemical Corp. v. 21st Century Fox America, Inc. The Company believes that it is adequately reserved for taxes related to these years.
Prior to the Separation, the Company provided and accrued for an indemnification, to the purchaser of a certain legal entity, to indemnify it for tax obligations should the tax basis of certain assets not be recognized. The Company believes that, under the terms of the agreement between the parties, this indemnification obligation has expired. As such, the Company eliminated this liability and recorded a $22.5 million benefit, during fiscal 2015, in discontinued operations.
Acquisition-Related Litigation
Several putative class actionsapproximately 120 other companies were filed by purported holders of Questcor common stock in connection with the Questcor Acquisition (Hansen v. Thompson, et al., Heng v. Questcor Pharmaceuticals, Inc., et al., Buck v. Questcor Pharmaceuticals, Inc., et al., Ellerbeck v. Questcor Pharmaceuticals, Inc., et al., Yokem v. Questcor Pharmaceuticals, Inc., et al., Richter v. Questcor Pharmaceuticals, Inc., et al., Tramantano v. Questcor Pharmaceuticals, Inc., et al., Crippen v. Questcor Pharmaceuticals, Inc., et al., Patel v. Questcor Pharmaceuticals, Inc., et al., and Postow v. Questcor Pharmaceuticals, Inc., et al.). The actions were consolidated on June 3, 2014. The consolidated complaint named as defendants in a lawsuit filed in June 2018, by OCC, in which OCC seeks cost recovery and generally allegedcontribution for past and future costs in response to releases and threatened releases of hazardous substances into the lower 8 miles of the River. A former Mallinckrodt facility located in Jersey City, NJ (located in Newark Bay) and the former Belleville facility were named in the suit. Due to an indemnification agreement with AVON Inc., Mallinckrodt has tendered the liability for the Jersey City site to AVON Inc. and they have accepted. The Company retains a share of the liability for this suit related to the Belleville facility. A motion to dismiss several of the claims was denied by the court. While it is not possible at this time to determine with certainty the ultimate outcome of this matter, the Company believes, given the information currently available, that the directorsultimate resolution of Questcor breached their fiduciary dutiesall known claims, after taking into account amounts already accrued will not have a material adverse effect on its financial condition, results of operations and cash flows.
Mallinckrodt Veterinary, Inc., Millsboro, Delaware. The Company previously operated a facility in connectionMillsboro, Delaware ("the Millsboro Site") where various animal healthcare products were manufactured. In 2005, the Delaware Department of Natural Resources and Environmental Control found trichloroethylene ("TCE") in the Millsboro public water supply at levels that exceeded the federal drinking water standards. Further investigation to identify the TCE plume in the ground water indicated that the plume has extended to property owned by a third party near the Millsboro Site. The Company, and another former owner, have assumed responsibility for the Millsboro Site cleanup under the Alternative Superfund Program administered by the EPA. The companies have entered into three AOCs with the acquisition by, among other things, agreeingEPA to sell Questcor for inadequate considerationperform investigations to abate, mitigate or eliminate the release or threat of release of hazardous substances at the Millsboro Site and
pursuant to conduct an inadequate process. The consolidated complaint also allegedEngineering Evaluation/Cost Analysis ("EE/CA") to characterize the nature and extent of the contamination. In January 2017, the EPA issued its Action Memorandum regarding the EE/CA. While it is not possible at this time to determine with certainty the ultimate outcome of this matter, the Company believes, given the information currently available, that the Questcor directors breached their fiduciary duties by failingultimate resolution of all known claims, after taking into account amounts already accrued, will not have a material adverse effect on its financial condition, results of operations and cash flows.
Crab Orchard National Wildlife Refuge Superfund Site, near Marion, Illinois. Between 1967 and 1982, International Minerals and Chemicals Corporation ("IMC"), a predecessor in interest to disclose purportedly material informationthe Company, leased portions of the Additional and Uncharacterized Sites ("AUS") Operable Unit at the Crab Orchard Superfund Site ("the CO Site") from the government and manufactured various explosives for use in mining and other operations. In March 2002, the Department of Justice, the U.S. Department of the Interior and the EPA (together, "the Government Agencies") issued a special notice letter to shareholders in connectionGeneral Dynamics Ordnance and Tactical Systems, Inc. ("General Dynamics"), one of the other potentially responsible parties ("PRPs") at the CO Site, to compel General Dynamics to perform the RI/FS for the AUS Operable Unit. General Dynamics negotiated an AOC with the merger. The consolidated complaint also alleged, among other things,Government Agencies to conduct an extensive RI/FS at the CO Site under the direction of the U.S. Fish and Wildlife Service. General Dynamics asserted in August 2004 that the Company aidedis jointly and abettedseverally liable, along with approximately eight other lessees and operators at the purported breachesAUS Operable Unit, for costs associated with alleged contamination of fiduciary duty. The lawsuits sought various forms of relief, including but not limited to, rescission ofsoils and groundwater resulting from historic operations, and the transaction, damages and attorneys' fees and costs.
On July 29, 2014, the defendants reached an agreement in principle with the plaintiffs in the consolidated actions, and that agreement was reflected in a Memorandum of Understanding ("MOU"). In connection with the settlement contemplated by the MOU, Questcor agreed to make certain additional disclosures related to the proposed transaction with the Company, which are contained in the Company's Current Report on Form 8-K filed with the SEC on July 30, 2014. Additionally, as part of the settlement and pursuant to the MOU, the Company agreed to forbear from exercising certain rights under the merger agreement with Questcor, as follows: the four business day period referenced in Section 5.3(e) of the merger agreement with Questcor was reduced to three business days. Consistent with the terms of the MOU, the parties have entered into a formal stipulationnon-binding mediation process. While it is not possible at this time to determine with certainty the ultimate outcome of settlement in February 2015this matter, the Company believes, given the information currently available, that the final resolution of all known claims, after taking into account amounts already accrued, will not have a material adverse effect on its financial condition, results of operations and re-executed the stipulation of settlement on May 7, 2015 (collectively the "Stipulation of Settlement").cash flows.
The Stipulation of Settlement was subject to customary conditions, including court approval. On May 8, 2015, the California Court denied plaintiffs' Motion for Preliminary Approval of Settlement. On October 23, 2015, the parties submitted a proposed Stipulation and Order re Dismissal With Prejudice dismissing the action with prejudice as to each of the named plaintiffs and without prejudice as to the remainder of the class and, on October 30, 2015, the California Court entered that Order.
Other Matters
SEC Subpoena. In August 2019, the Company received a subpoena from the U.S. Securities and Exchange Commission (“SEC”) for documents related to the Company's disclosure of its dispute with the U.S. Department of Health and Human Services ("HHS") and Centers for Medicare & Medicaid Services ("CMS" and together with HHS, the "Agency") concerning the base date average manufacturer price ("AMP") under the Medicaid Drug Rebate Program for Mallinckrodt's Acthar® Gel (repository corticotropin injection) ("Acthar Gel"), which is now the subject of litigation between the Company and the Agency (see Medicaid Lawsuit below). The Company is cooperating with the SEC's investigation.
Medicaid Lawsuit. In May 2019, the Company filed a lawsuit under the Administrative Procedure Act ("APA") in federal district court for the District of Columbia against the Agency. The dispute involves the base date AMP under the Medicaid Drug Rebate Program for Acthar Gel. A drug's “base date AMP” is used to calculate the Medicaid rebate amount payable by the drug's manufacturer to state Medicaid agencies when the drug is prescribed to Medicaid beneficiaries. At issue in the lawsuit is whether FDA's 2010 approval of a new drug application for use of Acthar Gel in treating infantile spasms rendered Acthar Gel eligible for a new base date AMP, as indicated by CMS's written communications in 2012. In May 2019, CMS indicated that if the Company failed to revert to use of the original base date AMP in its calculation of Acthar Medicaid rebates, CMS would identify the Company as being out of compliance with its Medicaid Drug Rebate Program reporting requirements, among other potential actions, triggering certain negative consequences. As such, the Company filed a lawsuit alleging (i) that CMS has violated the Medicaid drug rebate statute, (ii) that CMS has violated its own regulations defining “single source drug,” (iii) that CMS has failed to adequately explain its change in position based on two letters that CMS sent Questcor Pharmaceuticals Inc. ("Questcor") in 2012 regarding the base date AMP for Acthar Gel, (iv) that CMS failed to give the Company fair notice of its latest position, and (v) that CMS should be prohibited from applying its new position retroactively. The court held a hearing regarding this matter on August 2, 2019 and the court took the matter under advisement. While the Company believes that its lawsuit has strong factual and legal bases, as of December 27, 2019, the potential for retroactive non-recurring charges could range from 0 to approximately $630.0 million.
Florida Civil Investigative Demand. In February 2019, the Company received a CID from the U.S. Attorney's Office for the Middle District of Florida for documents related to alleged payments to healthcare providers in Florida and whether those payments violated the Anti-Kickback Statute. The Company is cooperating with the investigation.
U.S. House Committee Investigation. In January 2019, the Company along with 11 other pharmaceutical companies, received a letter from the U.S. House Committee on Oversight and Reform requesting information relating to the Company's pricing strategy for Acthar Gel and related matters. The Company is cooperating with the Committee's investigation.
Boston Civil Investigative Demand. In January 2019, the Company received a CID from the U.S. Attorney's Office for the District of Massachusetts for documents related to the Company's participation in the Medicaid Drug Rebate Program. The Company is cooperating with the investigation.
Generic Pricing Subpoena. In March 2018, the Company received a grand jury subpoena issued by the U.S. District Court for the Eastern District of Pennsylvania pursuant to which the Antitrust Division of the DOJ is seeking documents regarding generic products and pricing, communications with generic competitors and other related matters. The Company is in the process of responding to this subpoena and intends to cooperate in the investigation.
Boston Subpoena. In December 2016, the Company received a subpoena from the USAO for the District of Massachusetts for documents related to the Company's payments to charitable foundations, the provision of financial and other support by charitable foundations to patients receiving Acthar Gel, and related matters. The Company responded to these requests and continues to cooperate in the investigation.
Texas Pricing Investigation. In November 2014, the Company received a CID from the Civil Medicaid Fraud Division of the Texas Attorney General's Office. According to the CID, the Attorney General's office is investigating the possibility of false reporting of information by the Company regarding the prices of certain of its drugs used by Texas Medicaid to establish reimbursement rates for pharmacies that dispensed the Company's drugs to Texas Medicaid recipients. The Company responded to these requests. In December 2018, the Company entered into a final settlement with the Texas Attorney General's Office to resolve all potential claims in the investigation and recorded a corresponding expense, which is included in SG&A in the consolidated statement of operations.
MNK 2011 Inc. (formerly known as Mallinckrodt Inc.) v. U.S. Food and Drug Administration and United States of America. In November 2014, the FDA reclassified the Company's Methylphenidate ER in the Orange Book: Approved Drug Products with Therapeutic Equivalence ("the Orange Book"). In November 2014, the Company filed a Complaint in the U.S. District Court for the District of Maryland Greenbelt Division against the FDA and the United States (the "MD Complaint") for judicial review of the FDA's reclassification. In July 2015, the court granted the FDA's motion to dismiss with respect to three of the five counts in the MD Complaint and granted summary judgment in favor of the FDA with respect to the two remaining counts (the “MD Order”). On October 18, 2016, the FDA initiated proceedings, proposing to withdraw approval of the Company's Abbreviated New Drug Application ("ANDA") for Methylphenidate ER. On October 21, 2016, the U.S. Court of Appeals for the Fourth Circuit issued an order placing the Company's appeal of the MD Order in abeyance pending the outcome of the withdrawal proceedings. The parties exchanged documents and in April 2018, the Company filed its submission in support of its position in the withdrawal proceedings. A potential outcome of the withdrawal proceedings is that the Company's Methylphenidate ER products may lose their FDA approval and have to be withdrawn from the market.
Therakos® Subpoena. In March 2014, the USAO for the Eastern District of Pennsylvania requested the production of documents related to an investigation of the U.S. promotion of Therakos' drug/device system UVADEX/UVAR XTS and UVADEX/CELLEX (collectively, the "Therakos System"), for indications not approved by the FDA, including treatment of patients with graft versus host disease ("GvHD") and solid organ transplant patients, including pediatric patients. The investigation also includes Therakos' efforts to secure FDA approval for additional uses of, and alleged quality issues relating to, UVADEX/UVAR. In August 2015, the USAO for
the Eastern District of Pennsylvania sent Therakos a subsequent request for documents related to the investigation and has since made certain related requests. The Company responded to these requests and continues to cooperate in the investigation.
Questcor Subpoena. In September 2012,Questcor received a subpoena from the USAO for the Eastern District of Pennsylvania for information relating to its promotional practices related to Acthar Gel. Questcor subsequently was informed by the USAO for the Eastern District of Pennsylvania that the USAO for the Southern District of New York and the SEC were participating in the investigation to review Questcor's promotional practices and related matters pertaining to Acthar Gel. The current investigation also relates to Questcor's provision of financial and other support to patients, including through charitable foundations and related matters. On March 9, 2015, the Company received a "No Action" letter from the SEC regarding its review of the Company's promotional practices related to Acthar Gel. On or about March 8, 2019, the U.S. District Court for the Eastern District of Pennsylvania unsealed two qui tam actions involving the allegations under investigation by the USAO for the Eastern District of Pennsylvania. The DOJ intervened in both actions, which were later consolidated. In September 2019, the Company executed a settlement agreement with the DOJ for $15.4 million and finalized settlements with the three qui tam plaintiffs. These settlements were paid during the three months ended September 27, 2019 and resolve the portion of the investigation and litigation involving Questcor's promotional practices related to Acthar Gel.
On or about June 4, 2019, the DOJ filed its Complaint in Intervention in the litigation, alleging claims under the federal False Claim Act based on Questcor's relationship with and donations to an independent charitable patient co-pay foundation. The Company disagrees with the DOJ's characterization of the facts and applicable law. On January 22, 2020, the court denied the Company's motion to dismiss the Complaint in Intervention. The Company intends to vigorously defend itself in this matter. At this stage, the Company is not able to reasonably estimate the expected amount or range of cost or any loss associated with this lawsuit.
Patent Litigation
Amitiza Patent Litigation: Zydus Pharmaceuticals (USA) Inc. In January 2020, Sucampo GmbH, Sucampo Pharmaceuticals, Inc., Sucampo Pharma Americas LLC and Sucampo Pharma LLC, all subsidiaries of the Company, and Takeda Pharmaceutical Company Limited, Takeda Pharmaceuticals USA, Inc., and Takeda Pharmaceuticals America, Inc. (collectively "Takeda," the exclusive licensee under the patents in litigation) filed suit in the U.S. District Court for the District of New Jersey against Zydus Pharmaceuticals (USA) Inc. (“Zydus”) alleging that Zydus infringed U.S. Patent Nos. 7,795,312, 8,026,393, 8,338,639, 8,748,481 and 8,779,187 following receipt of a December 2019 notice from Zydus concerning its submission of an ANDA containing a Paragraph IV patent certification with the FDA for a generic version of Amitiza. The Company intends to vigorously enforce its intellectual property rights relating to Amitiza.
Amitiza Patent Litigation: Sun Pharmaceutical Industries, Ltd. and Sun Pharmaceutical Industries, Inc. In October 2018, Sucampo AG, Sucampo Pharmaceuticals, Inc. and Sucampo Pharma LLC, all subsidiaries of the Company, and Takeda Pharmaceutical Company Limited, Takeda Pharmaceuticals USA, Inc., and Takeda Pharmaceuticals America, Inc. (collectively "Takeda," the exclusive licensee under the patents in litigation) filed suit in the U.S. District Court for the District of New Jersey against Sun Pharmaceutical Industries, Ltd. and Sun Pharmaceutical Industries, Inc. (collectively “Sun”) alleging that Sun infringed U.S. Patent Nos. 7,795,312, 8,026,393, 8,097,653, 8,338,639, 8,389,542, 8,748,481 and 8,779,187 following receipt of a September 2018 notice from Sun concerning its submission of an ANDA containing a Paragraph IV patent certification with the FDA for a generic version of Amitiza. The Company intends to vigorously enforce its intellectual property rights relating to Amitiza.
Amitiza Patent Litigation: Teva Pharmaceuticals USA, Inc. In September 2017, Sucampo AG and Sucampo Pharmaceuticals, Inc., both subsidiaries of the Company, and Takeda filed suit in the U.S. District Court for the District of New Jersey against Teva Pharmaceuticals USA, Inc. ("Teva")alleging that Teva infringed U.S. Patent Nos. 6,414,016, 6,982,283, 7,795,312, 8,026,393, 8,071,613, 8,097,653, 8,338,639, 8,389,542 and 8,748,481 following receipt of an August 2017 notice from Teva concerning its submission of an ANDA containing a Paragraph IV patent certification with the FDA for a generic version of Amitiza. On June 28, 2018, the parties entered into a settlement agreement under which Teva was granted the non-exclusive right to market a competing lubiprostone product in the U.S. under its ANDA on or after January 1, 2023, or earlier under certain circumstances.
Amitiza Patent Litigation: Amneal Pharmaceuticals, LLC. In April 2017, Sucampo AG and Sucampo Pharmaceuticals, Inc., both subsidiaries of the Company, and Takeda filed suit in the U.S. District Court for the District of New Jersey against Amneal Pharmaceuticals, LLC ("Amneal")alleging that Amneal infringed U.S. Patent Nos. 6,982,283, 8,026,393, 8,097,653, 8,338,639 and 8,389,542 following receipt of a March 2017 notice from Amneal concerning its submission of an ANDA containing a Paragraph IV patent certification with the FDA for a generic version of Amitiza. On June 28, 2018, the parties entered into a settlement agreement under which Amneal was granted the non-exclusive right to market a competing lubiprostone product in the U.S. under its ANDA on or after January 1, 2023, or earlier under certain circumstances.
Amitiza Patent Litigation:Par and DRL. Settlement and License Agreements were entered into with Anchen Pharmaceuticals, Inc., Par Pharmaceutical, Inc. and Par Pharmaceutical Companies, Inc. (collectively "Par") and Dr. Reddy's Laboratories, Inc. and Dr. Reddy's Laboratories, Ltd. (collectively "DRL") to settle Paragraph IV patent litigation with each of Par and DRL. Under the terms of the Par settlement dated September 30, 2014, Par was granted a non-exclusive license and right to market a competing generic of
Amitiza on or after January 1, 2021, or earlier under certain circumstances. Under the terms of the DRL settlement dated September 14, 2016, DRL was granted a non-exclusive license and right to market a competing generic of Amitiza on or after January 1, 2023, or earlier under certain circumstances.
INOmax Patent Litigation: Praxair Distribution, Inc. and Praxair, Inc. (collectively “Praxair”). In February 2015, INO Therapeutics LLC and Ikaria, Inc., both subsidiaries of the Company, filed suit in the U.S. District Court for the District of Delaware against Praxair following receipt of a January 2015 notice from Praxair concerning its submission of an ANDA containing a Paragraph IV patent certification with the FDA for a nitric oxide drug product delivery system. In July 2016, the Company filed a second suit against Praxair in the U.S. District Court for the District of Delaware following receipt of a Paragraph IV notice concerning three additional patents recently added to the FDA Orange Book that was submitted by Praxair regarding its ANDA for its nitric oxide drug product delivery system. The infringement claims in the second suit were added to the original suit. In September 2016, the Company filed a third suit against Praxair in the U.S. District Court for the District of Delaware following receipt of a Paragraph IV notice concerning a fourth patent added to the FDA Orange Book that was submitted by Praxair regarding its ANDA for its nitric oxide drug product delivery system.
Trial for the suit filed in February 2015 was held in March 2017 and a decision was rendered September 5, 2017 that ruled five patents invalid and six patents not infringed. The Company appealed the decision to the Court of Appeals for the Federal Circuit. The oral arguments in the appeal occurred on February 6, 2019. Praxair received FDA approval of their ANDA for their Noxivent nitric oxide and clearance of their 510(k) for their NOxBOXi device on October 2, 2018. The appeal decision, issued on August 27, 2019, substantively affirmed the District Court decision with respect to the invalidity of the heart failure (HF) patents and the non-infringement of the delivery system infrared (DSIR) patents. The Company filed a petition for en banc review at the Federal Circuit on September 26, 2019, which the Federal Circuit denied on November 19, 2019. There has been limited commercial launch activity by Praxair. The Company intends to continue its efforts to vigorously enforce its intellectual property rights relating to INOmax in the Praxair litigation to prevent the marketing of infringing generic products prior to the expiration of the patents covering INOmax. An adverse final outcome in the appeal of the Praxair litigation decision (or a broad at-risk launch by Praxair prior to the final appellate decision) could result in the broader-scale launch of a competitive nitric oxide product before the expiration of the last of the listed patents on May 3, 2036 (November 3, 2036 including pediatric exclusivity), which could adversely affect the Company's ability to successfully maximize the value of INOmax and have an adverse effect on its financial condition, results of operations and cash flows.
INOmax Patents: IPR Proceedings. In February 2015 and March 2015, the U.S. Patent and Trademark Office ("USPTO") issued Notices of Filing Dates Accorded to Petitions for IPR petitions filed by Praxair Distribution, Inc. concerning ten patents covering INOmax (i.e., five patents expiring in 2029 and five patents expiring in 2031).
In July 2015 the USPTO Patent Trial and Appeal Board ("PTAB") issued rulings denying the institution of four of the five IPR petitions challenging the five patents expiring in 2029. The PTAB also issued a ruling in July 2015 that instituted the IPR proceeding in the fifth of this group of patents and the PTAB ruled in July 2016 that one claim of this patent survived review and is valid while the remaining claims were unpatentable. The Company believed the claim held valid by the PTAB describes and encompasses a manner in which INOmax is distributed in conjunction with its approved labeling and that Praxair infringes that claim. Praxair filed an appeal and Mallinckrodt filed a cross-appeal of this decision to the Court of Appeals for the Federal Circuit. Oral argument of that appeal occurred in January 2018. The Federal Circuit decision was issued May 16, 2018 and held all claims unpatentable (invalid).
In September 2015 the USPTO PTAB issued rulings that instituted the IPR proceedings in each of the second set of five patents that expire in 2031. In September 2016 the PTAB ruled that all claims in the five patents expiring in 2031 are patentable.
Ofirmev Patent Litigation: Altan Pharma Ltd. In March 2019, Mallinckrodt Hospital Products Inc. and Mallinckrodt Hospital Products IP Limited, both subsidiaries of the Company, and New Pharmatop LP, the current owner of the U.S. patents licensed exclusively by the Company, filed suit in the U.S. District Court for the District of Delaware against Altan Pharma Ltd. (“Altan”) alleging that Altan infringed U.S. Patent No. 6,992,218, U.S. Patent No. 9,399,012, U.S. Patent No. 9,610,265 and U.S. Patent No. 9,987,238 following receipt of a February 2019 notice from Altan concerning its submission of a new drug application, containing a Paragraph IV patent certification with the FDA for a competing version of Ofirmev. On August 29, 2019, the parties entered into a settlement agreement under which Altan was granted the non-exclusive right to market a competing intravenous acetaminophen product in the U.S. under its New Drug Application (NDA) on or after December 6, 2020, or earlier under certain circumstances.
Ofirmev Patent Litigation: Aurobindo Pharma U.S.A., Inc. In December 2017, Mallinckrodt Hospital Products Inc. and Mallinckrodt IP Unlimited Company, both subsidiaries of the Company, and New Pharmatop LP, the current owner of the two U.S. patents licensed exclusively by the Company, filed suit in the U.S. District Court for the District of Delaware against Aurobindo Pharma U.S.A., Inc. (“Aurobindo”) alleging that Aurobindo infringed U.S. Patent No. 6,992,218 ("the ‘218 patent"), U.S. Patent No. 9,399,012 ("the ‘012 patent") and U.S. Patent No. 9,610,265 ("the ‘265 patent") following receipt of a November 2017 notice from Aurobindo concerning its submission of an ANDA, containing a Paragraph IV patent certification with the FDA for a competing version of Ofirmev. On May 7, 2018 the parties entered into a settlement agreement under which Aurobindo was granted the non-exclusive right to market a competing intravenous acetaminophen product in the U.S. under its ANDA on or after December 6, 2020, or earlier under certain circumstances.
Ofirmev Patent Litigation: B. Braun Medical Inc. In April 2017, Mallinckrodt Hospital Products Inc. and Mallinckrodt IP, both subsidiaries of the Company, and Pharmatop, the then owner of the two U.S. patents licensed exclusively by the Company, filed suit in the U.S. District Court for the District of Delaware against B. Braun Medical Inc. ("B. Braun") alleging that B. Braun infringed the '218 patent and the '012 patent following receipt of a February 2017 notice from B. Braun concerning its submission of a NDA, containing a Paragraph IV patent certification with the FDA for a competing version of Ofirmev. On October 3, 2018, the parties entered into a settlement agreement under which B. Braun was granted the non-exclusive right to market a competing intravenous acetaminophen product in the U.S. under its ANDA on or after December 6, 2020, or earlier under certain circumstances.
Ofirmev Patent Litigation: InnoPharma Licensing LLC and InnoPharma, Inc. In September 2014, Cadence and Mallinckrodt IP, both subsidiaries of the Company, and Pharmatop, the then owner of the two U.S. patents licensed exclusively by the Company, filed suit in the U.S. District Court for the District of Delaware against InnoPharma Licensing LLC and InnoPharma, Inc. (both are subsidiaries of Pfizer and collectively "InnoPharma") alleging that InnoPharma infringed U.S. Patent Nos. 6,028,222 ("the '222 patent") and 6,992,218 ("the '218 patent"). Separately, on December 1, 2016 Mallinckrodt IP Filed suit in the U.S. District Court for the District of Delaware against InnoPharma alleging that InnoPharma infringed the '012 patent. On May 4, 2017 the parties entered into settlement agreements on both suits under which InnoPharma was granted the non-exclusive right to market a competing intravenous acetaminophen product in the U.S. under its NDA on or after December 6, 2020, or earlier under certain circumstances.
Ofirmev Patent Litigation: Agila Specialties Private Limited, Inc. (now Mylan Laboratories Ltd.) and Agila Specialties Inc. (a Mylan Inc. Group), (collectively "Agila"). In December 2014, Cadence and Mallinckrodt IP, both subsidiaries of the Company, and Pharmatop filed suit in the U.S. District Court for the District of Delaware against Agila alleging that Agila infringed the '222 and the '218 patents. Separately, on December 1, 2016 Mallinckrodt IP filed suit in the U.S. District Court for the District of Delaware against Agila alleging that Agila infringed the '012 patent. On December 31, 2016, the parties entered into settlement agreements on both suits under which Agila was granted the non-exclusive right to market a competing intravenous acetaminophen product in the U.S. under its NDA on or after December 6, 2020, or earlier under certain circumstances.
The Company has successfully asserted the '222 and '218 patents and maintained their validity in both litigation and proceedings at the USPTO. The Company will continue to vigorously enforce its intellectual property rights relating to Ofirmev to prevent the marketing of infringing generic or competing products prior to December 6, 2020, which, if unsuccessful, could adversely affect the Company's ability to successfully maximize the value of Ofirmev and have an adverse effect on its financial condition, results of operations and cash flows.
Shire Development LLC, Shire LLC and Shire US, Inc. v. SpecGx LLC. In May 2018, Shire Development LLC, Shire LLC and Shire US, Inc. (collectively “Shire”) filed suit in the U.S. District Court for the District of Delaware against the Company alleging that the Company infringed U.S. Patent Nos. 6,913,768, 8,846,100, and 9,173,857 following receipt of an April 2018 notice from the Company concerning its submission of an ANDA, containing a Paragraph IV patent certification with the FDA for a competing version of Mydayis. On January 28, 2019, the parties entered into a settlement agreement under which the Company was granted the non-exclusive right to market a competing generic version of Mydayis in the U.S. under its ANDA on or after May 10, 2023 (or November 10, 2023 if any pediatric exclusivity is granted by the FDA with respect to the Mydayis product), or earlier under certain circumstances.
Janssen Pharmaceuticals, Inc. and Janssen Pharmaceutica NV v. Pharmascience Inc. and SpecGx LLC. In December 2019, Janssen Pharmaceuticals, Inc. and Janssen Pharmaceutica NV (collectively “Janssen”) filed suit in the U.S. District Courts for the Districts of New Jersey and Delaware against the Company and Pharmascience Inc. (“Pharmascience”) relating to the collaboration between Company and Pharmascience that resulted in Pharmascience's ANDA submission, containing a Paragraph IV patent certification, with the FDA for a competing version of Invega Sustenna. Janssen alleges that the Company and Pharmascience infringe U.S. Patent No. 9,439,906. The Company intends to vigorously defend its position.
Commercial and Securities Litigation
City of Marietta Litigation. On February 6, 2020, the City of Marietta, Georgia filed a putative civil class action complaint against the Company in the U.S. District Court for the Northern District of Georgia relating to the price of Acthar Gel. The complaint, which pleads one claim for unjust enrichment, purports to be brought on behalf of third-party payers and their beneficiaries and people without insurance in the United States and its Territories that paid for Acthar from four years prior to the filing of the Complaint until the date of trial. The case is captioned City of Marietta v. Mallinckrodt ARC LLC. Marietta alleges that it has paid $2.0 million to cover the cost of an Acthar Gel prescription of an employee and that the Company has been unjustly enriched as a result. The Company intends to vigorously defend itself in this matter.
Shareholder Derivative Litigation (Brandhorst). In September 2019, a purported shareholder of the Company's stock filed a shareholder derivative complaint in the United States District Court for the District of Columbia against the Company, as nominal defendant, as well as its Chief Executive Officer ("CEO") Mark Trudeau, its former Chief Financial Officer ("CFO") Matthew K. Harbaugh, its Executive Vice President Hugh O'Neill, and the following members of the Company's Board of Directors: Angus Russell, David Carlucci, J. Martin Carroll, David Norton, JoAnn Reed and Kneeland Youngblood (collectively with Trudeau,
Harbaugh and O'Neill, the “Individual Defendants”). The lawsuit is captioned Lynn Brandhorst, derivatively on behalf of nominal defendant Mallinckrodt PLC v. Mark Trudeau et al. and relies on the allegations from the putative class action securities litigation that was filed against the Company and certain of its officers in January 2017, captioned Patricia A. Shenk v. Mallinckrodt plc, et al. described further below. The complaint asserts claims for contribution, breaches of fiduciary duty, unjust enrichment, abuse of control, and gross mismanagement, and is premised on allegations that the Individual Defendants caused the Company to make the allegedly false or misleading statements at issue in the Shenk lawsuit. The complaint seeks damages in an unspecified amount and corporate governance reforms. On November 20, 2019, this matter was stayed by agreement of the parties pending resolution of the Shenk lawsuit below. The Company and the Individual Defendants intend to vigorously defend themselves in this matter.
Humana Litigation. In August 2019, Humana Inc. filed a lawsuit against the Company in the U.S. District Court for the Central District of California alleging violations of federal and state antitrust laws; racketeering (“RICO”) violations under 18 U.S.C. § 1962(c); conspiracy to violate RICO under 18 U.S.C. § 1962(d); violations of state unfair competition, consumer fraud and deceptive trade practice laws; state insurance fraud; tortious interference with contract; and unjust enrichment related to the pricing of Acthar Gel. Humana alleges that it paid more than $700.0 million for Acthar Gel and seeks undisclosed damages from 2011 through present. The case alleges similar facts as those alleged in the MSP and Rockford matters below, and includes references to allegations at issue in a pending qui tam action against the Company in the U.S. District Court for the Eastern District of Pennsylvania (see Questcor Subpoena above) and is proceeding as Humana Inc. v. Mallinckrodt ARD LLC. The Company intends to vigorously defend itself in this matter, and on October 28, 2019, moved to dismiss the complaint. The Company's motion to dismiss remains pending.
Putative Class Action Securities Litigation (Strougo). In July 2019, a putative class action lawsuit was filed against the Company, its CEO Mark Trudeau, its CFO Bryan M. Reasons, its former Interim CFO George A. Kegler and its former CFO Matthew K. Harbaugh, in the U.S. District Court for the Southern District of New York, captioned Barbara Strougo v. Mallinckrodt plc, et al. The complaint purports to be brought on behalf of all persons who purchased or otherwise acquired Mallinckrodt's securities between February 28, 2018 and July 16, 2019. The lawsuit generally alleges that the defendants made false and misleading statements in violation of Sections 10(b) and 20(a) of the Exchange Act and Rule 10b-5 promulgated thereunder related to the Company's clinical study designed to assess the efficacy and safety of its Acthar Gel in patients with amyotrophic lateral sclerosis. The lawsuit seeks monetary damages in an unspecified amount. The Company intends to vigorously defend itself in this matter. At this stage, the Company is not able to reasonably estimate the expected amount or range of cost or any loss associated with this lawsuit.
Putative Class Action Litigation - Steamfitters Local Union No. 420. In July, 2019, Steamfitters Local Union No. 420 filed a putative class action lawsuit against the Company and United BioSource Corporation in the U.S. District Court for the Eastern District of Pennsylvania, proceeding as Steamfitters Local Union No. 420 v. Mallinckrodt ARD, LLC et al. The complaint makes similar allegations as those alleged in related state and federal actions that were filed by the same plaintiff's law firm in Illinois, Pennsylvania, Tennessee and Maryland (now dismissed; see WCBE below), and includes references to allegations at issue in a pending qui tam actions against the Company in the U.S. District Court for the Eastern District of Pennsylvania (see Questcor Subpoena above). In particular, the complaint alleges RICO violations under 18 U.S.C. § 1962(c); conspiracy to violate RICO under 18 U.S.C. § 1962(c); violations of the Pennsylvania (and other states) Unfair Trade Practices and Consumer Protection laws; negligent misrepresentation; aiding and abetting/conspiracy; and unjust enrichment. The complaint also seeks declaratory and injunctive relief. On December 19, 2019, the court denied the Company's motion to dismiss the complaint. The Company intends to vigorously defend itself in this matter. At this stage, the Company is not able to reasonably estimate the expected amount or range of cost or any loss associated with this lawsuit.
Acument Global. In May 2019, Acument Global Technologies, Inc., filed a non-class complaint against the Company and other defendants in Tennessee state court alleging violations of Tennessee Consumer Protection Laws, unjust enrichment, fraud and conspiracy to defraud. The case alleges similar facts as those alleged in the MSP and Rockford matters below, and is captioned Acument Global Technologies, Inc., v. Mallinckrodt ARD Inc., et al. The Company intends to vigorously defend itself in this matter, and on July 29, 2019, moved to dismiss the complaint. The Company's motion to dismiss remains pending.
Washington County Board of Education ("WCBE"). In May 2019, WCBE filed a non-class complaint against the Company and other defendants in Maryland state court alleging violations of Maryland Consumer Protection Act, negligent misrepresentation, fraud, unjust enrichment and conspiracy to defraud. The case, which was removed to the U.S. District Court for the District of Maryland on June 24, 2019, alleges similar facts as those alleged in the MSP and Rockford matters discussed below. On January 4, 2020, the court dismissed the complaint.
Local 542. In May 2018, the International Union of Operating Engineers Local 542 filed a non-class complaint against the Company and other defendants in Pennsylvania state court alleging improper pricing and distribution of Acthar Gel, in violation of Pennsylvania's Unfair Trade Practices and Consumer Protection Law, aiding and abetting, unjust enrichment and negligent misrepresentation. The case alleges similar facts as the MSP and Rockford matters below, and is captioned Int'l Union of Operating Engineers Local 542 v. Mallinckrodt ARD Inc., et al. Plaintiff filed an amended complaint on August 27, 2018, the Company's objections to which were denied by the court. The Company intends to continue to vigorously defend itself in this matter. On January 22, 2020, the court stayed further proceedings in this case given the overlap with the Rockford and MSP cases discussed below.
Grifols. In March 2018, Grifols initiated arbitration against the Company, alleging breach of a Manufacturing and Supply Agreement entered into between the Company's predecessor-in-interest, Cadence Pharmaceuticals Inc., and Grifols. During 2019, the Company entered into a settlement for this matter and appropriate reserves were recorded.
Putative Class Action Litigation (MSP). In October 2017, a putative class action lawsuit was filed against the Company and United BioSource Corporation in the U.S. District Court for the Central District of California. Pursuant to a motion filed by the defendants, the case was transferred to the U.S. District Court for the Northern District of Illinois in January 2018, and is currently proceeding as MSP Recovery Claims, Series II, LLC, et al. v. Mallinckrodt ARD, Inc., et al. The Company filed a motion to dismiss on February 23, 2018, which was granted on January 25, 2019 with leave to amend. MSP filed the operative First Amended Class Action Complaint on April 10, 2019, in which it asserts claims under federal and state antitrust laws and state consumer protection laws and names additional defendants. The complaint alleges that the Company unlawfully maintained a monopoly in a purported ACTH product market by acquiring the U.S. rights to Synacthen® Depot ("Synacthen") and reaching anti-competitive agreements with the other defendants by selling Acthar Gel through an exclusive distribution network. The complaint purports to be brought on behalf of all third-party payers, or their assignees, in the U.S. and its territories, who have, as indirect purchasers, in whole or in part, paid for, provided reimbursement for, and/or possess the recovery rights to reimbursement for the indirect purchase of Acthar Gel from August 1, 2007 to present. The Company moved to dismiss the First Amended Class Action Complaint on May 24, 2019. The Company's motion to dismiss remains pending.
Employee Stock Purchase Plan (ESPP) Securities Litigation. In July 2017, a purported purchaser of Mallinckrodt stock through Mallinckrodt's ESPPs, filed a derivative lawsuit in the Federal District Court in the Eastern District of Missouri, captioned Solomon v. Mallinckrodt plc, et al., against the Company, its CEO Mark C. Trudeau, its former CFO Matthew K. Harbaugh, its Controller Kathleen A. Schaefer, and current and former directors of the Company. On September 6, 2017, plaintiff voluntarily dismissed its complaint in the Federal District Court for the Eastern District of Missouri and refiled virtually the same complaint in the U.S. District Court for the District of Columbia. The complaint purports to be brought on behalf of all persons who purchased or otherwise acquired Mallinckrodt stock between November 25, 2014, and January 18, 2017, through the ESPPs. In the alternative, the plaintiff alleges a class action for those same purchasers/acquirers of stock in the ESPPs during the same period. The complaint asserts claims under Section 11 of the Securities Act, and for breach of fiduciary duty, misrepresentation, non-disclosure, mismanagement of the ESPPs' assets and breach of contract arising from substantially similar allegations as those contained in the putative class action securities litigation described in the Shenk lawsuit below. Stipulated co-lead plaintiffs were approved by the court on March 1, 2018. Co-lead Plaintiffs filed an amended complaint on June 4, 2018 having a class period of July 14, 2014 to November 6, 2017. On July 6, 2018, this matter was stayed by agreement of the parties pending resolution of the Shenk lawsuit below.
Putative Class Action Litigation (Rockford). In April 2017, a putative class action lawsuit was filed against the Company and United BioSource Corporation in the U.S. District Court for the Northern District of Illinois. The case is captioned City of Rockford v. Mallinckrodt ARD, Inc., et al. The complaint was subsequently amended to, among other things, include an additional named plaintiff and additional defendants. As amended, the complaint purports to be brought on behalf of all self-funded entities in the U.S. and its Territories, excluding any Medicare Advantage Organizations, related entities and certain others, that paid for Acthar Gel from August 2007 to the present. Plaintiff alleges violations of federal antitrust and RICO laws, as well as various state law claims in connection with the distribution and sale of Acthar Gel. On January 22, 2018, the Company filed a motion to dismiss the Second Amended Complaint, which was granted in part on January 25, 2019, dismissing one of two named plaintiffs and all claims with the exception of Plaintiff's federal and state antitrust claims. The remaining allegation in the case is that the Company engaged in anti-competitive acts to artificially raise and maintain the price of Acthar Gel. To this end, Plaintiff alleges that the Company unlawfully maintained a monopoly in a purported ACTH product market by acquiring the U.S. rights to Synacthen and conspired with the other named defendants by selling Acthar Gel through an exclusive distributor. The Company intends to continue to vigorously defend itself in this matter. At this stage, the Company is not able to reasonably estimate the expected amount or range of cost or any loss associated with this lawsuit.
Putative Class Action Securities Litigation (Shenk). In January 2017, a putative class action lawsuit was filed against the Company and its CEO in the U.S. District Court for the District of Columbia, captioned Patricia A. Shenk v. Mallinckrodt plc, et al. The complaint purports to be brought on behalf of all persons who purchased Mallinckrodt's publicly traded securities on a domestic exchange between November 25, 2014 and January 18, 2017. The lawsuit generally alleges that the Company made false or misleading statements related to Acthar Gel and Synacthen to artificially inflate the price of the Company's stock. In particular, the complaint alleges a failure by the Company to provide accurate disclosures concerning the long-term sustainability of Acthar Gel revenues, and the exposure of Acthar Gel to Medicare and Medicaid reimbursement rates. On January 26, 2017, a second putative class action lawsuit, captioned Jyotindra Patel v. Mallinckrodt plc, et al. was filed against the same defendants named in the Shenk lawsuit in the U.S. District Court for the District of Columbia. The Patel complaint purports to be brought on behalf of shareholders during the same period of time as that set forth in the Shenk lawsuit and asserts claims similar to those set forth in the Shenk lawsuit. On March 13, 2017, a third putative class action lawsuit, captioned Amy T. Schwartz, et al., v. Mallinckrodt plc, et al., was filed against the same defendants named in the Shenk lawsuit in the U.S. District Court for the District of Columbia. The Schwartz complaint purports to be brought on behalf of shareholders who purchased shares of the Company between July 14, 2014 and January 18, 2017 and asserts claims similar to those set forth in the Shenk lawsuit. On March 23, 2017, a fourth putative class action lawsuit, captioned Fulton County Employees' Retirement System v. Mallinckrodt plc, et al., was filed against the Company, its CEO and former CFO in
the U.S. District Court for the District of Columbia. The Fulton County complaint purports to be brought on behalf of shareholders during the same period of time as that set forth in the Schwartz lawsuit and asserts claims similar to those set forth in the Shenk lawsuit. On March 27, 2017, four separate plaintiff groups moved to consolidate the pending cases and to be appointed as lead plaintiffs in the consolidated case. Since that time, two of the plaintiff groups have withdrawn their motions. Lead plaintiff was designated by the court on March 9, 2018. Lead plaintiff filed a consolidated complaint on May 18, 2018, alleging a class period from July 14, 2014 to November 6, 2017, the Company, its CEO, its former CFO, and Executive Vice President, Hugh O'Neill, as defendants, and containing similar claims, but further alleging misstatements regarding payer reimbursement restrictions for Acthar Gel. On August 30, 2018, the lead plaintiff voluntarily dismissed the claims against Mr. O'Neill without prejudice. The Company filed a motion to dismiss the complaint which was granted in part, and denied in part by the court on July 30, 2019. The Company intends to vigorously defend itself in this matter.
Generic Price Fixing Litigation
Generic Pharmaceutical Antitrust MDL. In August 2016, a multidistrict litigation was established in the Eastern District of Pennsylvania relating to allegations of antitrust violations with respect to generic pharmaceutical pricing (the "Generic Pricing MDL"). Plaintiffs in the Generic Pricing MDL, captioned In re: Generic Pharmaceuticals Pricing Antitrust Litigation, allege a conspiracy of price-fixing and customer allocation among generic drug manufacturers beginning in or around July 2009. Since its establishment, the Generic Pricing MDL has expanded to encompass dozens of pharmaceutical companies and more than 100 generic pharmaceutical drugs. The Company was recently named in three cases associated with this litigation. A status conference is due to be held on March 12, 2020.
1199SEIU National Benefit Fund Litigation. In December 2019, a putative class action lawsuit was filed against the Company and more than 30 other pharmaceutical manufacturers in the U.S. District Court for the Eastern District of Pennsylvania, captioned 1199SEIU National Benefit Fund et al. v. Actavis Holdco U.S., Inc., et al. The complaint purports to be brought on behalf of all persons and entities that indirectly purchased, paid, or provided reimbursement for the purchase of defendants' generic drugs, other than for resale, from July 1, 2009, to the present. The lawsuit generally alleges that defendants conspired to allocate customers and fix prices for generic pharmaceutical drugs beginning in July 2009. The complaint seeks monetary damages and injunctive relief based on violations of Sections 1 and 3 of the Sherman Act and various state antitrust, consumer protection, and unjust enrichment claims. The Company intends to vigorously defend itself in this matter.
César Castillo, Inc., Litigation. In February 2020, a putative class action lawsuit was filed against the Company and more than 30 other pharmaceutical manufacturers in the U.S. District Court for the Eastern District of Pennsylvania, captioned César Castillo, Inc., et al. v. Actavis Holdco U.S., Inc., et al. The lawsuit purports to be brought on behalf of all persons or entities that directly purchased certain generic drugs from defendants or from one of defendants' direct customers-where the direct customer is alleged to be a completely involved co-conspirator-between July 1, 2009, and the present. The complaint has similar allegations as the 1199SEIU National Benefit Fund litigation and seeks damages for violations of Sections 1 and 3 of the Sherman Act. The Company intends to vigorously defend itself in this matter.
The Kroger Co. Litigation. In February 2020, a proposed amended complaint filed in the U.S. District Court for the Eastern District of Pennsylvania named the Company and several other pharmaceutical manufacturers as new defendants in an action captioned The Kroger Co., et al. v. Actavis Holdco U.S., Inc. et al. The lawsuit is brought by several entities that purportedly purchased generic drugs directly from defendants. The proposed amended complaint seeks monetary damages and injunctive relief for violations of Section 1 of the Sherman Antitrust Act, and is premised on facts similar to those alleged in the 1199SEIU National Benefit Fund and César Castillo litigations. The motion for leave to file the proposed amended complaint remains pending.
Environmental Remediation and Litigation Proceedings
The Company is involved in various stages of investigation and cleanup related to environmental remediation matters at a number of sites, including those described below. The ultimate cost of site cleanup and timing of future cash outlays is difficult to predict, given the uncertainties regarding the extent of the required cleanup, the interpretation of applicable laws and regulations and alternative cleanup methods. The Company concluded that, as of December 27, 2019, it was probable that it would incur remediation costs in the range of $38.2 million to $86.9 million. The Company also concluded that, as of December 27, 2019, the best estimate within this range was $61.9 million, of which $1.9 million was included in accrued and other current liabilities and the remainder was included in environmental liabilities on the consolidated balance sheet as of December 27, 2019. While it is not possible at this time to determine with certainty the ultimate outcome of these matters, the Company believes, given the information currently available, that the final resolution of all known claims, after taking into account amounts already accrued, will not have a material adverse effect on its financial condition, results of operations and cash flows.
Lower Passaic River, New Jersey. The Company and approximately 70 other companies (“Cooperating Parties Group” or “CPG”) are parties to a May 2007 Administrative Order on Consent ("AOC") with the Environmental Protection Agency ("EPA") to perform a
remedial investigation and feasibility study ("RI/FS") of the 17-mile stretch known as the Lower Passaic River ("the River") Study Area. The Company's potential liability stems from former operations at Lodi and Belleville, New Jersey.
In April 2014, the EPA issued a revised Focused Feasibility Study ("FFS"), with remedial alternatives to address cleanup of the lower 8-mile stretch of the River. The EPA estimated the cost for the remediation alternatives ranged from $365.0 million to $3.2 billion and the EPA's preferred approach had an estimated cost of $1.7 billion.
In April 2015, the CPG presented a draft of the RI/FS of the River to the EPA that included alternative remedial actions for the entire 17-mile stretch of the River.
On March 4, 2016, the EPA issued the Record of Decision ("ROD") for the lower 8 miles of the River with a slight modification on its preferred approach and a revised estimated cost of $1.38 billion. On October 5, 2016, the EPA announced that Occidental Chemicals Corporation ("OCC") had entered into an agreement to develop the remedial design.
On August 7, 2018, the EPA finalized a buyout offer of $280,600 with the Company, limited to its former Lodi facility, for the lower 8 miles of the River. During the three months ended September 28, 2018, the Company reduced the accrual associated with this matter by $11.8 million to $26.2 million, which represents the Company's estimate of its remaining liability related to the River.
Despite the issuance of the revised FFS and ROD by the EPA, the RI/FS by the CPG, and the cash out settlement by the EPA there are many uncertainties associated with the final agreed-upon remediation, potential future liabilities and the Company's allocable share of the remediation. Given those uncertainties, the amounts accrued may not be indicative of the amounts for which the Company may be ultimately responsible and will be refined as the remediation progresses.
Occidental Chemical Corp. v. 21st Century Fox America, Inc. The Company and approximately 120 other companies were named as defendants in a lawsuit filed in June 2018, by OCC, in which OCC seeks cost recovery and contribution for past and future costs in response to releases and threatened releases of hazardous substances into the lower 8 miles of the River. A former Mallinckrodt facility located in Jersey City, NJ (located in Newark Bay) and the former Belleville facility were named in the suit. Due to an indemnification agreement with AVON Inc., Mallinckrodt has tendered the liability for the Jersey City site to AVON Inc. and they have accepted. The Company retains a share of the liability for this suit related to the Belleville facility. A motion to dismiss several of the claims was denied by the court. While it is not possible at this time to determine with certainty the ultimate outcome of this matter, the Company believes, given the information currently available, that the ultimate resolution of all known claims, after taking into account amounts already accrued will not have a material adverse effect on its financial condition, results of operations and cash flows.
Mallinckrodt Veterinary, Inc., Millsboro, Delaware. The Company previously operated a facility in Millsboro, Delaware ("the Millsboro Site") where various animal healthcare products were manufactured. In 2005, the Delaware Department of Natural Resources and Environmental Control found trichloroethylene ("TCE") in the Millsboro public water supply at levels that exceeded the federal drinking water standards. Further investigation to identify the TCE plume in the ground water indicated that the plume has extended to property owned by a third party near the Millsboro Site. The Company, and another former owner, have assumed responsibility for the Millsboro Site cleanup under the Alternative Superfund Program administered by the EPA. The companies have entered into three AOCs with the EPA to perform investigations to abate, mitigate or eliminate the release or threat of release of hazardous substances at the Millsboro Site and to conduct an Engineering Evaluation/Cost Analysis ("EE/CA") to characterize the nature and extent of the contamination. In January 2017, the EPA issued its Action Memorandum regarding the EE/CA. While it is not possible at this time to determine with certainty the ultimate outcome of this matter, the Company believes, given the information currently available, that the ultimate resolution of all known claims, after taking into account amounts already accrued, will not have a material adverse effect on its financial condition, results of operations and cash flows.
Crab Orchard National Wildlife Refuge Superfund Site, near Marion, Illinois. Between 1967 and 1982, International Minerals and Chemicals Corporation ("IMC"), a predecessor in interest to the Company, leased portions of the Additional and Uncharacterized Sites ("AUS") Operable Unit at the Crab Orchard Superfund Site ("the CO Site") from the government and manufactured various explosives for use in mining and other operations. In March 2002, the Department of Justice, the U.S. Department of the Interior and the EPA (together, "the Government Agencies") issued a special notice letter to General Dynamics Ordnance and Tactical Systems, Inc. ("General Dynamics"), one of the other potentially responsible parties ("PRPs") at the CO Site, to compel General Dynamics to perform the RI/FS for the AUS Operable Unit. General Dynamics negotiated an AOC with the Government Agencies to conduct an extensive RI/FS at the CO Site under the direction of the U.S. Fish and Wildlife Service. General Dynamics asserted in August 2004 that the Company is jointly and severally liable, along with approximately eight other lessees and operators at the AUS Operable Unit, for costs associated with alleged contamination of soils and groundwater resulting from historic operations, and the parties have entered into a non-binding mediation process. While it is not possible at this time to determine with certainty the ultimate outcome of this matter, the Company believes, given the information currently available, that the final resolution of all known claims, after taking into account amounts already accrued, will not have a material adverse effect on its financial condition, results of operations and cash flows.
Products Liability Litigation
Beginning with lawsuits brought in July 1976, the Company is named as a defendant in personal injury lawsuits based on alleged exposure to asbestos-containing materials. A majority of the cases involve product liability claims based principally on allegations of past distribution of products containing asbestos. A limited number of the cases allege premises liability based on claims that individuals were exposed to asbestos while on the Company's property. Each case typically names dozens of corporate defendants in addition to the Company. The complaints generally seek monetary damages for personal injury or bodily injury resulting from alleged exposure to products containing asbestos. The Company's involvement in asbestos cases has been limited because it did not mine or produce asbestos. Furthermore, in the Company's experience, a large percentage of these claims have never been substantiated and have been dismissed by the courts. The Company has not suffered an adverse verdict in a trial court proceeding related to asbestos claims and intends to continue to defend these lawsuits. When appropriate, the Company settles claims; however, amounts paid to settle and defend all asbestos claims have been immaterial. As of December 27, 2019, there were approximately 11,800 asbestos-related cases pending against the Company.
The Company estimates pending asbestos claims, claims that were incurred but not reported and related insurance recoveries, which are recorded on a gross basis in the consolidated balance sheets. The Company's estimate of its liability for pending and future claims is based on claims experience over the past five years and covers claims either currently filed or expected to be filed over the next seven years. The Company believes that it has adequate amounts recorded related to these matters. While it is not possible at this time to determine with certainty the ultimate outcome of these asbestos-related proceedings, the Company believes, given the information currently available, that the ultimate resolution of all known and anticipated future claims, after taking into account amounts already accrued, along with recoveries from insurance, will not have a material adverse effect on its financial condition, results of operations and cash flows.
Interest-Bearing Deferred Tax Obligation
As part of the integration of Questcor, the Company entered into an internal installment sale transaction related to certain Acthar Gel intangible assets during the three months ended December 26, 2014. The installment sale transaction resulted in a taxable gain. In accordance with Internal Revenue Code Section 453A ("Section 453A") the gain is considered taxable in the period in which installment payments are received. During the three months ended December 25, 2015, the Company entered into similar transactions with certain intangible assets acquired in the acquisitions of Ikaria and Therakos.
During fiscal 2019, the Company completed its reorganization of its intercompany financing and associated legal entity ownership. As a result, the Company had 0 remaining interest-bearing U.S. deferred tax liabilities as of December 27, 2019, compared to $227.5 million as of December 28, 2018. See Note 8 for further details regarding this reorganization. The GAAP calculation of interest associated with these deferred tax liabilities was subject to variable interest rates. The Company recognized interest expense associated with these deferred tax liabilities of $23.7 million, and $69.3 million for fiscal 2018 and 2017, respectively. Fiscal 2017 included a one-time charge of $8.4 million resulting primarily from the reorganization of its legal entity ownership.
The Company has reported Section 453A interest on its tax returns on the basis of its interpretation of the U.S. Internal Revenue Code and Regulations. Alternative interpretations of these provisions could result in additional interest payable on the deferred tax liability. Due to the inherent uncertainty in these interpretations, the Company has deferred the recognition of the benefit associated with the Company's interpretation and maintains a corresponding liability of $47.4 million and $56.0 million as of December 27, 2019 and December 28, 2018, respectively. The decrease of $8.6 million was recognized as a benefit to interest expense during fiscal 2019 due to a lapse of certain statute of limitations. Further favorable resolution of this uncertainty would likely result in a material reversal of this liability and a benefit being recorded to interest expense within the consolidated statements of operations.
Tax Matters
The Company continues to be subject to examination by the IRS for tax years 2014 to 2018. On August 5, 2019, the IRS proposed an adjustment to the taxable income of MHP as a result of its findings in the audit of MHP's tax year ended September 26, 2014. MHP, formerly known as Cadence Pharmaceuticals, Inc. (“Cadence”), was acquired by the Company as a U.S. subsidiary on March 19, 2014. Following the acquisition of Cadence, the Company transferred certain rights and risks in Ofirmev intellectual property (“Transferred IP”) to a wholly owned non-U.S. subsidiary of the Company. The transfer occurred at a price (“Transfer Price”) determined in conjunction with the Company's external advisors, in accordance with applicable Treasury Regulations and with reference to the $1,329.0 million taxable consideration paid by the Company to the shareholders of Cadence. The IRS asserts the value of the Transferred IP exceeds the value of the acquired Cadence shares and, further, partially disallows the Company's control premium subtraction. The proposed adjustment to taxable income of $871.0 million, excluding potential associated interest and penalties, is proposed as a multi-year adjustment and may result in a non-cash reduction of the Company's U.S. Federal net operating loss carryforward of $782.0 million. The Company strongly disagrees with the proposed increase to the Transfer Price and intends to contest it through all available administrative and judicial remedies, which may take a number of years to conclude. The final outcome
cannot be reasonably quantified at this time, however, the proposed adjustment may be material. The Company believes its reserve for income tax contingencies is adequate. See Note 8 for further information.
Other Matters
The Company is a defendant in a number of other pending legal proceedings relating to present and former operations, acquisitions and dispositions. The Company does not expect the outcome of these proceedings, either individually or in the aggregate, to have a material adverse effect on its financial condition, results of operations and cash flows.
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19.20. | Financial Instruments and Fair Value Measurements |
Fair value is defined as the exit price that would be received from the sale of an asset or paid to transfer a liability, using assumptions that market participants would use in pricing an asset or liability. The fair value guidance establishes a three-level fair value hierarchy, which maximizes the use of observable inputs and minimizes the use of unobservable inputs used in measuring fair value. The levels within the hierarchy are as follows:
Level 1— observable inputs such as quoted prices in active markets for identical assets or liabilities;
Level 2— significant other observable inputs that are observable either directly or indirectly; and
Level 3— significant unobservable inputs in which there is little or no market data, which requires the Company to develop its own assumptions.
The following tables provide a summary of the significant assets and liabilities that are measured at fair value on a recurring basis at the end of each period:
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| | | | | | | | | | | | | | | |
| September 30, 2016 | | Quoted Prices in Active Markets for Identical Assets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) |
Assets: | | | | | | | |
Debt and equity securities held in rabbi trusts | $ | 34.6 |
| | $ | 23.1 |
| | $ | 11.5 |
| | $ | — |
|
Foreign exchange forward and option contracts | $ | 0.2 |
| | $ | 0.2 |
| | $ | — |
| | $ | — |
|
| $ | 34.8 |
| | $ | 23.3 |
| | $ | 11.5 |
| | $ | — |
|
Liabilities: | | | | | | | |
Deferred compensation liabilities | $ | 26.8 |
| | $ | — |
| | $ | 26.8 |
| | $ | — |
|
Contingent consideration and acquired contingent liabilities | 247.8 |
| | — |
| | — |
| | 247.8 |
|
Foreign exchange forward and option contracts | 1.6 |
| | 1.6 |
| | — |
| | — |
|
| $ | 276.2 |
| | $ | 1.6 |
| | $ | 26.8 |
| | $ | 247.8 |
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| December 27, 2019 | | Quoted Prices in Active Markets for Identical Assets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) |
Assets: | | | | | | | |
Debt and equity securities held in rabbi trusts | $ | 30.6 |
| | $ | 21.0 |
| | $ | 9.6 |
| | $ | — |
|
Equity securities | 26.2 |
| | 26.2 |
| | — |
| | — |
|
| $ | 56.8 |
| | $ | 47.2 |
| | $ | 9.6 |
| | $ | — |
|
Liabilities: | | | | | | | |
Deferred compensation liabilities | $ | 39.2 |
| | $ | — |
| | $ | 39.2 |
| | $ | — |
|
Contingent consideration and acquired contingent liabilities | 69.3 |
| | — |
| | — |
| | 69.3 |
|
| $ | 108.5 |
| | $ | — |
| | $ | 39.2 |
| | $ | 69.3 |
|
| | | September 25, 2015 |
| Quoted Prices in Active Markets for Identical Assets (Level 1) |
| Significant Other Observable Inputs (Level 2) |
| Significant Unobservable Inputs (Level 3) | December 28, 2018 | | Quoted Prices in Active Markets for Identical Assets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) |
Assets: | | | | | | | | | | | | | | |
Debt and equity securities held in rabbi trusts | $ | 34.6 |
| | $ | 24.2 |
| | $ | 10.4 |
| | $ | — |
| $ | 33.1 |
| | $ | 22.4 |
| | $ | 10.7 |
| | $ | — |
|
| $ | 34.6 |
| | $ | 24.2 |
| | $ | 10.4 |
| | $ | — |
| $ | 33.1 |
| | $ | 22.4 |
| | $ | 10.7 |
| | $ | — |
|
Liabilities: | | | | | | | | | | | | | | |
Deferred compensation liabilities | $ | 20.0 |
| | $ | — |
| | $ | 20.0 |
| | $ | — |
| $ | 38.5 |
| | $ | — |
| | $ | 38.5 |
| | $ | — |
|
Contingent consideration and acquired contingent liabilities | 174.6 |
| | — |
| | — |
| | 174.6 |
| 151.4 |
| | — |
| | — |
| | 151.4 |
|
Foreign exchange forward and option contracts | 3.3 |
| | 3.3 |
| | — |
| | — |
| |
| $ | 197.9 |
| | $ | 3.3 |
| | $ | 20.0 |
| | $ | 174.6 |
| $ | 189.9 |
| | $ | — |
| | $ | 38.5 |
| | $ | 151.4 |
|
1. When quoted market prices for a security are not available in an active market, they are classified as level 2. Equity securities held in the rabbi trusttrusts primarily consist of U.S. common stocks, which are valued using quoted market prices reported on nationally recognized securities exchanges.
In August 2014, the Company recorded acquired contingent liabilities of $195.4 million from the Questcor Acquisition.acquisition of Questcor. The contingent liabilities relate to Questcor's contingent obligations associated with their acquisition of an exclusive, perpetual and irrevocable license to develop, market, manufacture, distribute, sell and commercialize Synacthen and Synacthen Depot (collectively "Synacthen"MNK-1411 ("Synacthen") from Novartis AG and Novartis Pharma AG (collectively "Novartis") and their acquisition of BioVectra. The fair value of these contingent consideration obligations at September 30, 2016 were $123.4 million.
Under the terms of the license agreement with Novartis, the Company made a $25.0 million payment in fiscal 2016,2019 and is obligated to make annual payments of $25.0 million subsequent to fiscal 20162019 until such time that the Company obtains FDA approval of Synacthen and makes a $25.0 million payment upon obtaining FDA approval of Synacthen. If FDA approval is obtained, the Company will pay an annual royalty to Novartis based on a percentage of net sales in the U.S. market. As of September 30, 2016, the total remaining payments under the license agreement shall not exceed $165.0 million. The terms of the license agreement do allow the Company to terminate the license agreement at its discretion following the fiscal 2018 payment or upon the occurrence of certain events following the fiscal 20162020 payment. The Company measured the fair value of the contingent payments based on a probability-weighted present value of the consideration expected to be transferred using a discount rate of 4.7%.
The carrying amounts of cash and cash equivalents, accounts receivable, accounts payable and the majority of other current assets and liabilities approximate fair value because of their short-term nature. The Company classifies cash on hand and deposits in banks, including commercial paper, money market accounts and other investments it may hold from time to time, with an original maturity to the Company of three months or less, as cash and cash equivalents (level 1). The fair value of restricted cash iswas equivalent to its carrying value of $19.1$31.7 million and $66.3$18.6 million as of September 30, 2016December 27, 2019 and September 25, 2015, respectivelyDecember 28, 2018, (level 1), substantially all ofrespectively, which iswas included in other assets on the consolidated balance sheets.
The Company's life insurance contracts are carried at cash surrender value, which is based on the present value of future cash flows under the terms of the contracts (level 3). Significant assumptions used in determining the cash surrender value include the amount and timing of future cash flows, interest rates and mortality charges. The fair value of these contracts approximates the carrying value of $67.6$51.1 million and $66.8$66.4 million at September 30, 2016December 27, 2019 and September 25, 2015,December 28, 2018, respectively. These contracts are included in other assets on the consolidated balancesbalance sheets.
Financial instruments that potentially subject the Company to concentrations of credit risk primarily consist of accounts receivable. The Company generally does not require collateral from customers. A portion of the Company's accounts receivable outside the U.S. includes sales to government-owned or supported healthcare systems in several countries, which are subject to payment delays. Payment is dependent upon the financial stability and creditworthiness of those countries' national economies.