BAUSCH HEALTH COMPANIES INC.
The accompanying notes are an integral part of these consolidated financial statements.
BAUSCH HEALTH COMPANIES INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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1. | DESCRIPTION OF BUSINESS |
Bausch Health Companies Inc. (the “Company”) is a pharmaceutical and medical device company that develops, manufactures, and markets, primarily in the therapeutic areas of eye-health, gastroenterology ("GI") and dermatology, a broad range of: (i) branded pharmaceuticals, (ii) generic and branded generic pharmaceuticals, (iii) over-the-counter (“OTC”) products and (iv) medical devices (contact lenses, intraocular lenses, ophthalmic surgical equipment and aesthetics devices), which are marketed directly or indirectly in over 90 countries.
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2. | SIGNIFICANT ACCOUNTING POLICIES |
Basis of Presentation and Use of Estimates
The accompanying unaudited Consolidated Financial Statements have been prepared by the Company in United States (“U.S.”) dollars and in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”) for interim financial reporting, which do not conform in all respects to the requirements of U.S. GAAP for annual financial statements. Accordingly, these notes to the unaudited Consolidated Financial Statements should be read in conjunction with the audited Consolidated Financial Statements prepared in accordance with U.S. GAAP that are contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018, filed with the SEC and the Canadian Securities AdministratorsCSA on February 20, 2019. The unaudited Consolidated Financial Statements have been prepared using accounting policies that are consistent with the policies used in preparing the Company’s audited Consolidated Financial Statements for the year ended December 31, 2018, except for the new accounting guidance adopted during the period. The unaudited Consolidated Financial Statements reflect all normal and recurring adjustments necessary for a fair presentation of the Company’s financial position and results of operations for the interim periods. The operating results for the interim periods presented are not necessarily indicative of the results expected for the full year.
In preparing the unaudited Consolidated Financial Statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the unaudited Consolidated Financial Statements, and the reported amounts of revenue and expenses during the reporting periods. Actual results could differ from these estimates.
On an ongoing basis, management reviews its estimates to ensure that these estimates appropriately reflect changes in the Company’s business and new information as it becomes available. If historical experience and other factors used by management to make these estimates do not reasonably reflect future activity, the Company’s results of operations and financial position could be materially impacted.
Principles of Consolidation
The unaudited Consolidated Financial Statements include the accounts of the Company and those of its subsidiaries and any variable interest entities for which the Company is the primary beneficiary. All intercompany transactions and balances have been eliminated.
Revisions to the Three Months Ended March 31, 2018
As originally disclosed in the financial statements for the quarterly period ended June 30, 2018, the Company identified an understatement of the Benefit from income taxes for the three months ended March 31, 2018 of $112 million due to an error in the forecasted effective tax rate. The revision decreased the Net loss and Net loss attributable to Bausch Health Companies Inc. by $112 million, or $0.32 per basic and diluted share, and affects Net loss and Deferred income taxes presented on the Consolidated Statement of Cash Flows by $112 million, with no net impact to total Net cash provided by operating activities. The Company also identified an understatement of the foreign currency translation adjustment as presented in the Consolidated Statement of Comprehensive Loss for the three months ended March 31, 2018 which did not impact the Net loss and Net loss attributable to Bausch Health Companies Inc. reported for the same period. Based on its evaluation, the Company concluded that these misstatements were not material to its Consolidated Balance Sheet and Consolidated Statements of Operations, Comprehensive Loss, Equity and Cash Flows as of and for the three months ended March 31, 2018 or related disclosures. The March 31, 2018 financial information has been revised to correct these misstatements. There was no impact to the March 31, 2019 reported amounts.
The following table presents the effect of the revisions on the Company’s Consolidated Balance Sheet as of March 31, 2018:
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| | | | | | | | | | | |
(in millions) | As Previously Reported | | Adjustment | | As Revised |
Deferred tax liabilities, net | $ | 1,139 |
| | $ | (112 | ) | | $ | 1,027 |
|
Total liabilities | 31,275 |
| | (112 | ) | | 31,163 |
|
Accumulated deficit | (4,209 | ) | | 112 |
| | (4,097 | ) |
Total Bausch Health Companies Inc. shareholders' equity | 4,424 |
| | 112 |
| | 4,536 |
|
Total equity | 4,523 |
| | 112 |
| | 4,635 |
|
The following table presents the effect of the revisions on the Company’s Consolidated Statements of Operations and Comprehensive Loss for the three months ended March 31, 2018:
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| | | | | | | | | | | |
(in millions, except per share amounts) | As Previously Reported | | Adjustment | | As Revised |
Consolidated Statement of Operations | | | | | |
Benefit from income taxes | $ | (3 | ) | | $ | (112 | ) | | $ | (115 | ) |
Net loss | (2,691 | ) | | 112 |
| | (2,579 | ) |
Net loss attributable to Bausch Health Companies Inc. | (2,693 | ) | | 112 |
| | (2,581 | ) |
Basic and diluted loss per share attributable to Bausch Health Companies Inc. | (7.68 | ) | | 0.32 |
| | (7.36 | ) |
Consolidated Statement of Comprehensive Loss | | | | | |
Foreign currency translation adjustment | (46 | ) | | 92 |
| | 46 |
|
Other comprehensive (loss) income | (46 | ) | | 92 |
| | 46 |
|
Comprehensive loss | (2,737 | ) | | 204 |
| | (2,533 | ) |
Comprehensive loss (income) attributable to noncontrolling interest | 2 |
| | (6 | ) | | (4 | ) |
Comprehensive loss attributable to Bausch Health Companies Inc. | (2,735 | ) | | 198 |
| | (2,537 | ) |
Reclassifications
Changes in Reportable Segments
In the second quarter of 2018, the Company began operating in the following operating segments: (i) Bausch + Lomb/International, (ii) Salix, (iii) Ortho Dermatologics and (iv) Diversified Products. Prior to the second quarter of 2018, the Company operated in the following operating segments: (i) Bausch + Lomb/International, (ii) Branded Rx and (iii) U.S. Diversified Products. The Bausch + Lomb/International segment consists of the: (i) U.S. Bausch + Lomb and (ii) International reporting units. The Salix segment consists of the Salix reporting unit (originally part of the former Branded Rx segment). The Ortho Dermatologics segment consists of the: (i) Ortho Dermatologics (originally part of the former Branded Rx segment) and (ii) Global Solta (originally part of the former Branded Rx segment) reporting units. The Diversified Products segment consists of the: (i) Neurology and Other (originally part of the former U.S. Diversified Product segment), (ii) Generics (originally part of the former U.S. Diversified Product segment) and (iii) Dentistry (originally part of the former Branded Rx segment) reporting units. Prior period presentations of segment revenues and segment profits have been recast to conform to the current segment reporting structure. See Note 20, "SEGMENT INFORMATION" for additional information.
Certain other reclassifications have been made to prior year amounts to conform to the current year presentation.
Adoption of New Accounting Guidance
In February 2016, the Financial Accounting Standards Board ("FASB") issued a new standard revising the accounting for leases to increase transparency and comparability among organizations that lease buildings, equipment and other assets by requiring the recognition of lease assets and lease liabilities on the balance sheet. Under the new standard, all leases are classified as either a finance lease or an operating lease. The classification is determined based on whether substantive control has been transferred to the lessee and its determination will govern the pattern of lease cost recognition. Finance leases are accounted for in substantially the same manner as capital leases under the former U.S. GAAP standard. Operating leases are
accounted for in the statements of operations and statements of cash flows in a manner substantially consistent with operating leases under the former U.S. GAAP standard. However, as it relates to the balance sheet, lessees are, with limited exception, required to record a right-of-use asset and a corresponding lease liability, equal to the present value of the lease payments for each operating lease. Lessees are not required to recognize a right-of-use asset or lease liability for short-term leases, but instead recognizes lease payments as an expense on a straight-line basis over the lease term. The standard also requires lessees
and lessors to provide additional qualitative and quantitative disclosures to help financial statement users assess the amounts, timing and uncertainty of cash flows arising from leases.
The Company adopted the new standard effective January 1, 2019, using the modified retrospective approach. Upon adoption, the Company elected the available practical expedients, including: (i) the package of practical expedients as defined in the accounting guidance, which among other things, allowed the carry forward of historical lease classifications, (ii) the election to use hindsight in determining the lease terms for all leases, (iii) the transition method, which does not require the restatement of prior periods, (iv) the election to aggregate lease components with non-lease components and account for these payments as a single lease component and (v) the short-term lease exemption, which does not require recognition on the balance sheet for leases with an initial term of 12 months or less. The Company has updated its systems, processes and controls to track, record and account for its lease portfolio, including implementation of a third-party software tool to assist in complying with the new standard. Upon adoption of the new standard, the Company recognized a right-of-use asset and a corresponding lease liability of $302 million. In addition, approximately $20 million of restructuring liabilities associated with facility closures and deferred rents, included in Other non-current liabilities as of December 31, 2018, were reclassified to reduce right-of-use assets. The adoption of the standard did not have a material impact on the Consolidated Statements of Operations, Comprehensive Loss, Equity and Cash Flows for any of the periods presented. See Note 12, "LEASES" for additional details and application of this standard.
In August 2018, the FASB issued guidance aligning the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. The guidance is effective for annual periods beginning after December 15, 2019, and interim periods within those fiscal years with early adoption permitted. The Company has early-adopted this guidance prospectively for all implementation costs incurred after January 1, 2019.
Recently Issued Accounting Standards, Not Adopted as of March 31,June 30, 2019
In June 2016, the FASB issued guidance on the impairment of financial instruments requiring an impairment model based on expected losses rather than incurred losses. Under this guidance, an entity recognizes as an allowance its estimate of expected credit losses. The guidance is effective for annual periods beginning after December 15, 2019, and interim periods within those annual periods. Early adoption is permitted for annual periods beginning after December 15, 2018, and interim periods within those annual periods. In May 2019, the FASB issued an update allowing a targeted transition relief for the option to irrevocably elect the fair value option for certain financial assets previously measured at amortized cost basis. The Company is evaluating the impact of adoption of this guidance on its financial position, results of operations and cash flows.
In August 2018, the FASB issued guidance modifying the disclosure requirements for fair value measurement. The guidance is effective for annual periods beginning after December 15, 2019. The Company is permitted to early-adopt any removed or modified disclosures upon issuance of this update and delay adoption of the additional disclosures until the effective date. The Company is evaluating the impact of adoption of this guidance on its disclosures.
In August 2018, the FASB issued guidance modifying the disclosure requirements for employers that sponsor defined benefit pension or other postretirement plans. The guidance is effective for annual periods ending after December 15, 2020, with early adoption permitted. The Company is evaluating the impact of adoption of this guidance on its disclosures.
The Company’s revenues are primarily generated from product sales, primarily in the therapeutic areas of eye-health, GI and dermatology, that consist of: (i) branded pharmaceuticals, (ii) generic and branded generic pharmaceuticals, (iii) OTC products and (iv) medical devices (contact lenses, intraocular lenses, ophthalmic surgical equipment and aesthetics devices). Other revenues include alliance and service revenue from the licensing and co-promotion of products and contract service revenue primarily in the areas of dermatology and topical medication. Contract service revenue is derived primarily from contract manufacturing for third parties and is not material. See Note 20, "SEGMENT INFORMATION" for the disaggregation of revenue which depicts how the nature, amount, timing and uncertainty of revenue and cash flows are affected by the economic factors of each category of customer contracts.
Product Sales Provisions
As is customary in the pharmaceutical industry, gross product sales are subject to a variety of deductions in arriving at reported net product sales. The transaction price for product sales is typically adjusted for variable consideration, which may be in the
form of cash discounts, allowances, returns, rebates, chargebacks and distribution fees paid to customers. Provisions for variable consideration are established to reflect the Company’s best estimates of the amount of consideration to which it is entitled based on the terms of the contract. The amount of variable consideration included in the transaction price may be constrained, and is included in the net sales price only to the extent that it is probable that a significant reversal in the amount of the cumulative revenue recognized will not occur in thea future period.
Provisions for these deductions are recorded concurrently with the recognition of gross product sales revenue and include cash discounts and allowances, chargebacks, and distribution fees, which are paid to direct customers, as well as rebates and returns, which can be paid to direct and indirect customers. Returns provision balances and volume discounts to direct customers are included in Accrued and other current liabilities. All other provisions related to direct customers are included in Trade receivables, net, while provision balances related to indirect customers are included in Accrued and other current liabilities.
The following tables present the activity and ending balances of the Company’s variable consideration provisions for the threesix months ended March 31,June 30, 2019 and 2018.
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| | | | | | | | | | | | | | | | | | | | | | | | |
| | Six Months Ended June 30, 2019 |
(in millions) | | Discounts and Allowances | | Returns | | Rebates | | Chargebacks | | Distribution Fees | | Total |
Reserve balances, January 1, 2019 | | $ | 175 |
| | $ | 813 |
| | $ | 1,024 |
| | $ | 209 |
| | $ | 163 |
| | $ | 2,384 |
|
Acquisition of Synergy | | — |
| | 3 |
| | 12 |
| | — |
| | 1 |
| | 16 |
|
Current period provisions | | 406 |
| | 78 |
| | 1,100 |
| | 930 |
| | 98 |
| | 2,612 |
|
Payments and credits | | (408 | ) | | (120 | ) | | (1,125 | ) | | (979 | ) | | (119 | ) | | (2,751 | ) |
Reserve balances, June 30, 2019 | | $ | 173 |
| | $ | 774 |
| | $ | 1,011 |
| | $ | 160 |
| | $ | 143 |
| | $ | 2,261 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended March 31, 2019 |
(in millions) | | Discounts and Allowances | | Returns | | Rebates | | Chargebacks | | Distribution Fees | | Total |
Reserve balances, January 1, 2019 | | $ | 175 |
| | $ | 813 |
| | $ | 1,024 |
| | $ | 209 |
| | $ | 163 |
| | $ | 2,384 |
|
Acquisition of Synergy | | — |
| | 3 |
| | 12 |
| | — |
| | 1 |
| | 16 |
|
Current period provisions | | 204 |
| | 33 |
| | 533 |
| | 443 |
| | 48 |
| | 1,261 |
|
Payments and credits | | (210 | ) | | (55 | ) | | (568 | ) | | (497 | ) | | (85 | ) | | (1,415 | ) |
Reserve balances, March 31, 2019 | | $ | 169 |
| | $ | 794 |
| | $ | 1,001 |
| | $ | 155 |
| | $ | 127 |
| | $ | 2,246 |
|
Included in Rebates in the table above are cooperative advertising credits due to customers of approximately $27$30 million and $26 million as of March 31,June 30, 2019 and January 1, 2019, respectively, which are reflected as a reduction of Trade receivables, net in the Consolidated Balance Sheets. There were no price appreciation credits for the threesix months ended March 31,June 30, 2019.
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| | | | | | | | | | | | | | | | | | | | | | | | |
| | Six Months Ended June 30, 2018 |
(in millions) | | Discounts and Allowances | | Returns | | Rebates | | Chargebacks | | Distribution Fees | | Total |
Reserve balances, January 1, 2018 | | $ | 167 |
| | $ | 863 |
| | $ | 1,094 |
| | $ | 274 |
| | $ | 148 |
| | $ | 2,546 |
|
Current period provisions | | 406 |
| | 163 |
| | 1,330 |
| | 947 |
| | 116 |
| | 2,962 |
|
Payments and credits | | (409 | ) | | (185 | ) | | (1,287 | ) | | (971 | ) | | (120 | ) | | (2,972 | ) |
Reserve balances, June 30, 2018 | | $ | 164 |
| | $ | 841 |
| | $ | 1,137 |
| | $ | 250 |
| | $ | 144 |
| | $ | 2,536 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended March 31, 2018 |
(in millions) | | Discounts and Allowances | | Returns | | Rebates | | Chargebacks | | Distribution Fees | | Total |
Reserve balances, January 1, 2018 | | $ | 167 |
| | $ | 863 |
| | $ | 1,094 |
| | $ | 274 |
| | $ | 148 |
| | $ | 2,546 |
|
Current period provisions | | 184 |
| | 88 |
| | 635 |
| | 477 |
| | 48 |
| | 1,432 |
|
Payments and credits | | (199 | ) | | (75 | ) | | (620 | ) | | (474 | ) | | (81 | ) | | (1,449 | ) |
Reserve balances, March 31, 2018 | | $ | 152 |
| | $ | 876 |
| | $ | 1,109 |
| | $ | 277 |
| | $ | 115 |
| | $ | 2,529 |
|
Included as a reduction of current period provisions for Distribution Fees in the table above are price appreciation credits of $15 million for the threesix months ended March 31,June 30, 2018.
Contract Assets and Contract Liabilities
There are no contract assets for any period presented. Contract liabilities consist of deferred revenue, the balance of which is not material to any period presented.
Synergy Pharmaceuticals Inc.
On March 6, 2019, the Company acquired certain assets of Synergy Pharmaceuticals Inc. ("Synergy") for a cash purchase price of approximately $180 million and the assumption of certain assumed liabilities, pursuant to the terms approved by the U.S. Bankruptcy Court for the Southern District of New York on March 1, 2019. Among the assets acquired are the worldwide rights to the Trulance® (plecanatide) product, a once-daily tablet for adults with chronic idiopathic constipation and irritable
bowel syndrome with constipation. This acquisition is expected to result in additional revenues and costs savings associated with business synergies.
Assets Acquired and Liabilities Assumed
The acquisition of certain assets of Synergy has been accounted for as a business combination under the acquisition method of accounting since: (i) substantially all of the fair value of the assets acquired is not concentrated in a single identifiable asset or group of similar identifiable assets and (ii) sufficient inputs and processes were acquired to contribute to the creation of outputs. The following table summarizes the estimated fair values of the assets acquired and liabilities assumed related to the acquisition of certain assets of Synergy as of the acquisition date:
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| | | |
(in millions) | |
Accounts receivable | $ | 7 |
|
Inventories | 24 |
|
Prepaid expenses and other current assets | 5 |
|
Product brand intangible assets (estimated useful life - 7 years) | 159 |
|
Accounts payable | (1 | ) |
Accrued expenses | (17 | ) |
Total identifiable net assets | 177 |
|
Goodwill | 3 |
|
Total fair value of consideration transferred | $ | 180 |
|
|
| | | |
(in millions) | |
Accounts receivable | $ | 7 |
|
Inventories | 24 |
|
Prepaid expenses and other current assets | 5 |
|
Product brand intangible assets (7 years) | 159 |
|
Accounts payable | (1 | ) |
Accrued expenses | (17 | ) |
Total identifiable net assets | 177 |
|
Goodwill | 3 |
|
Total fair value of consideration transferred | $ | 180 |
|
Due to the timing of the acquisition, the following are provisional and are subject to change:
amounts for intangible assets, property and equipment, inventories, receivables and other working capital adjustments pending finalization of the valuation;
amounts for income tax assets and liabilities, pending finalization of estimates and assumptions in respect of certain tax aspects of the transaction; and
amount of goodwill pending the completion of the valuation of the assets acquired and liabilities assumed.
The Company will finalize these amounts no later than one year from the acquisition date, once it obtains the information necessary to complete the measurement process. Any changes resulting from facts and circumstances that existed as of the acquisition date may result in adjustments to the provisional amounts recognized at the acquisition date which will impact the reported results in the period those adjustments are identified. These adjustments, if any, could be material.
Goodwill associated with the acquisition of certain assets of Synergy is not deductible for income tax purposes.
Revenue and Operating Results
Revenues associated with the acquired assets of Synergy during the period March 6, 2019 through March 31,June 30, 2019 were $6$23 million. Operating results associated with the acquired assets of Synergy during the period March 6, 2019 through March 31,June 30, 2019 and pro-forma revenues and operating results for the threesix months ended March 31,June 30, 2019 and 2018 were not material. Included in Other (income) expense, net during the threesix months ended March 31,June 30, 2019 are acquisition-related costs of $8 million directly related to the acquisition of certain assets of Synergy, which includes expenditures for advisory, legal, valuation, accounting and other similar services.
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5. | RESTRUCTURING AND INTEGRATION COSTS |
The Company evaluates opportunities to improve its operating results and implements cost savings programs to streamline its operations and eliminate redundant processes and expenses. The expenses associated with the implementation of these cost savings programs include expenses associated with: (i) reducing headcount, (ii) eliminating real estate costs associated with unused or under-utilized facilities and (iii) implementing contribution margin improvement and other cost reduction initiatives. The remaining liability associated with restructuring and integration costs as of March 31,June 30, 2019 was $31$27 million.
During the threesix months ended March 31,June 30, 2019, the Company incurred $20$24 million of restructuring and integration costs. These costs included: (i) $10$11 million of severance and other costs associated with the acquisition of certain assets of Synergy, which were not essential to complete, close and report the acquisition, (ii) $6 million of other severance costs, (iii) $6 million of facility closure costs and (iii) $4(iv) $1 million of other costs. The Company made payments of $24 million for the six months ended June 30, 2019.
During the six months ended June 30, 2018, the Company incurred $13 million of restructuring and integration costs. These costs included: (i) $8 million of severance costs and (ii) $5 million of facility closure costs. The Company made payments of $16$13 million for the threesix months ended March 31, 2019.
During the three months ended March 31, 2018, the Company incurred $6 million of restructuring and integration costs. These costs included: (i) $4 million of severance costs and (ii) $2 million of facility closure costs. The Company made payments of $6 million for the three months ended March 31,June 30, 2018.
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6. | FAIR VALUE MEASUREMENTS |
Fair value measurements are estimated based on valuation techniques and inputs categorized as follows:
Level 1 — Quoted prices in active markets for identical assets or liabilities;
Level 2 — Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities; and
Level 3 — Unobservable inputs that are supported by little or no market activity and that are financial instruments whose values are determined using discounted cash flow methodologies, pricing models, or similar techniques, as well as instruments for which the determination of fair value requires significant judgment or estimation.
If the inputs used to measure the financial assets and liabilities fall within more than one level described above, the categorization is based on the lowest level input that is significant to the fair value measurement of the instrument.
Assets and Liabilities Measured at Fair Value on a Recurring Basis
The following fair value hierarchy table presents the components and classification of the Company’s financial assets and liabilities measured at fair value on a recurring basis.basis:
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| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | June 30, 2019 | | December 31, 2018 |
(in millions) | | Carrying Value | | Quoted Prices in Active Markets for Identical Assets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) | | Carrying Value | | Quoted Prices in Active Markets for Identical Assets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) |
Assets: | | | | | | | | | | | | | | | | |
Cash equivalents | | $ | 258 |
| | $ | 206 |
| | $ | 52 |
| | $ | — |
| | $ | 197 |
| | $ | 166 |
| | $ | 31 |
| | $ | — |
|
Restricted cash | | $ | 2 |
| | $ | 2 |
| | $ | — |
| | $ | — |
| | $ | 2 |
| | $ | 2 |
| | $ | — |
| | $ | — |
|
Liabilities: | | | | | | |
| | | | | | | | | | |
Acquisition-related contingent consideration | | $ | 318 |
| | $ | — |
| | $ | — |
| | $ | 318 |
| | $ | 339 |
| | $ | — |
| | $ | — |
| | $ | 339 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | March 31, 2019 | | December 31, 2018 |
(in millions) | | Carrying Value | | Quoted Prices in Active Markets for Identical Assets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) | | Carrying Value | | Quoted Prices in Active Markets for Identical Assets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) |
Assets: | | | | | | | | | | | | | | | | |
Cash equivalents | | $ | 263 |
| | $ | 235 |
| | $ | 28 |
| | $ | — |
| | $ | 197 |
| | $ | 166 |
| | $ | 31 |
| | $ | — |
|
Restricted cash | | $ | 2 |
| | $ | 2 |
| | $ | — |
| | $ | — |
| | $ | 2 |
| | $ | 2 |
| | $ | — |
| | $ | — |
|
Liabilities: | | | | | | |
| | | | | | | | | | |
Acquisition-related contingent consideration | | $ | 309 |
| | $ | — |
| | $ | — |
| | $ | 309 |
| | $ | 339 |
| | $ | — |
| | $ | — |
| | $ | 339 |
|
Cash equivalents consist of highly liquid investments, primarily money market funds, with maturities of three months or less when purchased, and are reflected in the Consolidated Balance Sheets at carrying value, which approximates fair value due to their short-term nature.
There were no transfers between Level 1, Level 2 or Level 3 during the threesix months ended March 31,June 30, 2019.
Assets and Liabilities Measured at Fair Value on a Recurring Basis Using Significant Unobservable Inputs (Level 3)
The fair value measurement of contingent consideration obligations arising from business combinations is determined via a probability-weighted discounted cash flow analysis, or Monte Carlo Simulation, using unobservable (Level 3) inputs. These inputs may include: (i) the estimated amount and timing of projected cash flows, (ii) the probability of the achievement of the factor(s) on which the contingency is based and (iii) the risk-adjusted discount rate used to present value the probability-weighted cash flows and (iv) volatility of projected performance (Monte Carlo Simulation).flows. Significant increases (decreases) in any of those inputs in isolation could result in a significantly lower (higher) fair value measurement. At March 31,June 30, 2019, the fair value measurements of acquisition-related contingent consideration were determined using risk-adjusted discount rates ranging from 5% to 25%.
The following table presents a reconciliation of contingent consideration obligations measured on a recurring basis using significant unobservable inputs (Level 3) for the threesix months ended March 31,June 30, 2019 and 2018:
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| | | | | | | | | | | | | | | | |
(in millions) | | 2019 | | 2018 |
Balance, beginning of period | | | | $ | 339 |
| | | | $ | 387 |
|
Adjustments to Acquisition-related contingent consideration: | | | | | | | | |
Accretion for the time value of money | | $ | 11 |
| | | | $ | 12 |
| | |
Fair value adjustments due to changes in estimates of other future payments | | (12 | ) | | | | (16 | ) | | |
Acquisition-related contingent consideration | | | | (1 | ) | | | | (4 | ) |
Foreign currency translation adjustment included in other comprehensive loss | | | | — |
| | | | 1 |
|
Payments | | | | (20 | ) | | | | (20 | ) |
Balance, end of period | | | | 318 |
| | | | 364 |
|
Current portion included in Accrued and other current liabilities | | | | 47 |
| | | | 54 |
|
Non-current portion | | | | $ | 271 |
| | | | $ | 310 |
|
|
| | | | | | | | | | | | | | | | |
(in millions) | | 2019 | | 2018 |
Balance, beginning of period | | | | $ | 339 |
| | | | $ | 387 |
|
Adjustments to Acquisition-related contingent consideration: | | | | | | | | |
Accretion for the time value of money | | $ | 6 |
| | | | $ | 6 |
| | |
Fair value adjustments due to changes in estimates of other future payments | | (27 | ) | | | | (4 | ) | | |
Acquisition-related contingent consideration | | | | (21 | ) | | | | 2 |
|
Foreign currency translation adjustment included in other comprehensive loss | | | | — |
| | | | 1 |
|
Payments | | | | (9 | ) | | | | (12 | ) |
Balance, end of period | | | | 309 |
| | | | 378 |
|
Current portion included in Accrued and other current liabilities | | | | 45 |
| | | | 58 |
|
Non-current portion | | | | $ | 264 |
| | | | $ | 320 |
|
Included in Fair value adjustments due to changes in estimates of other future payments in the table above for the three and six months ended June 30, 2019, is an $8 million fair value adjustment related to an acquisition which occurred in 2011.Fair Value of Long-term Debt
The fair value of long-term debt as of March 31,June 30, 2019 and December 31, 2018 was $25,003$25,275 million and $23,357 million, respectively, and was estimated using the quoted market prices for the same or similar debt issuances (Level 2).
Inventories, net of allowances for obsolescence consist of:
|
| | | | | | | | |
(in millions) | | June 30, 2019 |
| December 31, 2018 |
Raw materials | | $ | 307 |
| | $ | 275 |
|
Work in process | | 145 |
| | 95 |
|
Finished goods | | 608 |
| | 564 |
|
| | $ | 1,060 |
| | $ | 934 |
|
|
| | | | | | | | |
(in millions) | | March 31, 2019 |
| December 31, 2018 |
Raw materials | | $ | 291 |
| | $ | 275 |
|
Work in process | | 136 |
| | 95 |
|
Finished goods | | 585 |
| | 564 |
|
| | $ | 1,012 |
| | $ | 934 |
|
| |
8. | INTANGIBLE ASSETS AND GOODWILL |
Intangible Assets
The major components of intangible assets consist of:
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | June 30, 2019 | | December 31, 2018 |
(in millions) | | Gross Carrying Amount | | Accumulated Amortization and Impairments | | Net Carrying Amount | | Gross Carrying Amount | | Accumulated Amortization and Impairments | | Net Carrying Amount |
Finite-lived intangible assets: | | | | | | | | | | | | |
Product brands | | $ | 21,109 |
| | $ | (12,815 | ) | | $ | 8,294 |
| | $ | 20,891 |
| | $ | (11,958 | ) | | $ | 8,933 |
|
Corporate brands | | 930 |
| | (301 | ) | | 629 |
| | 926 |
| | (263 | ) | | 663 |
|
Product rights/patents | | 3,297 |
| | (2,769 | ) | | 528 |
| | 3,292 |
| | (2,658 | ) | | 634 |
|
Partner relationships | | 169 |
| | (167 | ) | | 2 |
| | 168 |
| | (166 | ) | | 2 |
|
Technology and other | | 209 |
| | (182 | ) | | 27 |
| | 208 |
| | (173 | ) | | 35 |
|
Total finite-lived intangible assets | | 25,714 |
| | (16,234 | ) | | 9,480 |
| | 25,485 |
| | (15,218 | ) | | 10,267 |
|
Acquired IPR&D not in service | | 18 |
| | — |
| | 18 |
| | 36 |
| | — |
| | 36 |
|
Bausch + Lomb Trademark | | 1,698 |
| | — |
| | 1,698 |
| | 1,698 |
| | — |
| | 1,698 |
|
| | $ | 27,430 |
| | $ | (16,234 | ) | | $ | 11,196 |
| | $ | 27,219 |
| | $ | (15,218 | ) | | $ | 12,001 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | March 31, 2019 | | December 31, 2018 |
(in millions) | | Gross Carrying Amount | | Accumulated Amortization and Impairments | | Net Carrying Amount | | Gross Carrying Amount | | Accumulated Amortization and Impairments | | Net Carrying Amount |
Finite-lived intangible assets: | | | | | | | | | | | | |
Product brands | | $ | 21,066 |
| | $ | (12,376 | ) | | $ | 8,690 |
| | $ | 20,891 |
| | $ | (11,958 | ) | | $ | 8,933 |
|
Corporate brands | | 927 |
| | (281 | ) | | 646 |
| | 926 |
| | (263 | ) | | 663 |
|
Product rights/patents | | 3,293 |
| | (2,713 | ) | | 580 |
| | 3,292 |
| | (2,658 | ) | | 634 |
|
Partner relationships | | 165 |
| | (163 | ) | | 2 |
| | 168 |
| | (166 | ) | | 2 |
|
Technology and other | | 208 |
| | (177 | ) | | 31 |
| | 208 |
| | (173 | ) | | 35 |
|
Total finite-lived intangible assets | | 25,659 |
| | (15,710 | ) | | 9,949 |
| | 25,485 |
| | (15,218 | ) | | 10,267 |
|
Acquired IPR&D not in service | | 36 |
| | — |
| | 36 |
| | 36 |
| | — |
| | 36 |
|
Bausch + Lomb Trademark | | 1,698 |
| | — |
| | 1,698 |
| | 1,698 |
| | — |
| | 1,698 |
|
| | $ | 27,393 |
| | $ | (15,710 | ) | | $ | 11,683 |
| | $ | 27,219 |
| | $ | (15,218 | ) | | $ | 12,001 |
|
Long-lived assets with finite lives are tested for impairment whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. The Company continues to monitor the recoverability of its finite-lived intangible assets and tests the intangible assets for impairment if indicators of impairment are present.
Asset impairments for the threesix months ended March 31,June 30, 2019 wereinclude impairments of: (i) $13 million reflecting decreases in forecasted sales of a certain product line due to generic competition and (ii) $3 million, duein aggregate, related to certain product/patent assets associated with the discontinuance of a specific product linelines not aligned with the focus of the Company's core businesses.
Asset impairments for the threesix months ended March 31,June 30, 2018 includeinclude: (i) impairments of: (i) $34of $323 million reflecting decreases in forecasted sales for a certainthe Uceris® Tablet product lineand other product lines due to generic competition, (ii) $6impairments of $17 million, in aggregate, related to certain product/patent assets associated with the discontinuance of specific product lines not aligned with the focus of the Company's core businesses and revisions to forecasted sales and (iii) $4impairments of $5 million related to assets being classified as held for sale.
Periodically, the Company’s products face the expiration of their patent or regulatory exclusivity. The Company anticipates that product sales for such productproducts would decrease shortly following a loss of exclusivity, due to the possible entry of a generic competitor. Where the Company has the rights, it may elect to launch an authorized generic of such product (either as the Company’s own branded generic or through a third-party). This may occur prior to, upon or following generic entry, which may mitigate the anticipated decrease in product sales; however, even with launch of an authorized generic, the decline in product sales of such product could still be significant, and the effect on future revenues could be material.
As a result of the launch of a generic competitor in July 2018, the Company revised its near and long-term financial projections of the Uceris® Tablet related intangible assets. As of June 30, 2018, the carrying value of the Uceris® Tablet related intangible assets exceeded the undiscounted expected cash flows from the Uceris® Tablet. As a result, the Company recognized an impairment of $263 million to reduce the carrying value of the Uceris® Tablet related intangible assets to their estimated fair value. As of June 30, 2019, the remaining carrying value of the Uceris® Tablet related intangible assets was $93 million. Prior to its launch, the Company initiated infringement proceedings against this generic competitor. The Company continues to believe that its Uceris® Tablet-related patents are enforceable and is proceeding in the ongoing litigation between the Company and the generic competitor, however the ultimate outcome of the matter is not predictable.
Management continually assesses the useful lives related to the Company's long-lived assets to reflect the most current assumptions. In review of the Company’s finite-lived intangible assets, management revised the estimated useful lives of certain intangible assets in 2018.
Effective September 12, 2018, the Company changed the estimated useful life of its Xifaxan®-related intangible assets due to the positive impact of the agreement between the Company and Actavis Laboratories FL, Inc. ("Actavis") resolving the intellectual property litigation regarding Xifaxan® tablets, 550 mg. As discussed in further detail in Note 20, "LEGAL PROCEEDINGS" to the Company's Annual Consolidated Financial Statements contained in its Annual Report on Form 10-K for the year ended December 31, 2018, the parties have agreed to dismiss all litigation related to Xifaxan® tablets, 550 mg and all intellectual property protecting Xifaxan® will remain intact and enforceable. As a result, the useful life of the Xifaxan®-related intangible assets was extended from 2024 to January 1, 2028. As this change in the estimated useful life is a change in an accounting estimate, amortization expense is impacted prospectively. The change in the estimated useful life of the Xifaxan®-related intangible assets resulted in a decrease to the Net loss attributable to Bausch Health Companies Inc. of $118$235 million, and a decrease to the Basic and Diluted Loss per share attributable to Bausch Health Companies Inc. of $0.34$0.67 for the threesix months ended March 31,June 30, 2019. As of March 31,June 30, 2019, the net carrying value of the Xifaxan®-related intangible assets was $4,713$4,579 million.
Estimated amortization expense of finite-lived intangible assets for the remainder of 2019 and each of the five succeeding years ending December 31 and thereafter is as follows:
|
| | | | |
(in millions) | | |
April through December 2019 | | $ | 1,410 |
|
2020 | | 1,639 |
|
2021 | | 1,389 |
|
2022 | | 1,237 |
|
2023 | | 1,088 |
|
2024 | | 954 |
|
Thereafter | | 2,232 |
|
Total | | $ | 9,949 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(in millions) | | Remainder of 2019 | | 2020 | | 2021 | | 2022 | | 2023 | | 2024 | | Thereafter | | Total |
Amortization | | $ | 924 |
| | $ | 1,641 |
| | $ | 1,392 |
| | $ | 1,239 |
| | $ | 1,089 |
| | $ | 955 |
| | $ | 2,240 |
| | $ | 9,480 |
|
Goodwill
The changes in the carrying amounts of goodwill during the threesix months ended March 31,June 30, 2019 and the year ended December 31, 2018 were as follows:
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(in millions) | | Bausch + Lomb/ International | | Branded Rx | | U.S. Diversified Products | | Salix | | Ortho Dermatologics | | Diversified Products | | Total |
Balance, January 1, 2018 | | $ | 6,016 |
| | $ | 6,631 |
| | $ | 2,946 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 15,593 |
|
Impairment of the Salix and Ortho Dermatologics reporting units | | — |
| | (2,213 | ) | | — |
| | — |
| | — |
| | — |
| | (2,213 | ) |
Realignment of Global Solta reporting unit goodwill | | (82 | ) | | 115 |
| | (33 | ) | | — |
| | — |
| | — |
| | — |
|
Goodwill reclassified to assets held for sale and subsequently disposed | | (2 | ) | | — |
| | — |
| | — |
| | — |
| | — |
| | (2 | ) |
Realignment of segment goodwill | | — |
| | (4,533 | ) | | (2,913 | ) | | 3,156 |
| | 1,267 |
| | 3,023 |
| | — |
|
Impairment of the Dentistry reporting unit | | — |
| | — |
| | — |
| | — |
| | — |
| | (109 | ) | | (109 | ) |
Foreign exchange and other | | (127 | ) | | — |
| | — |
| | — |
| | — |
| | — |
| | (127 | ) |
Balance, December 31, 2018 | | 5,805 |
| | — |
| | — |
| | 3,156 |
| | 1,267 |
| | 2,914 |
| | 13,142 |
|
Acquisition of certain assets of Synergy | | — |
| | — |
| | — |
| | 3 |
| | — |
| | — |
| | 3 |
|
Foreign exchange and other | | 15 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 15 |
|
Balance, June 30, 2019 | | $ | 5,820 |
| | $ | — |
| | $ | — |
| | $ | 3,159 |
| | $ | 1,267 |
| | $ | 2,914 |
| | $ | 13,160 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(in millions) | | Bausch + Lomb/ International | | Branded Rx | | U.S. Diversified Products | | Salix | | Ortho Dermatologics | | Diversified Products | | Total |
Balance, January 1, 2018 | | $ | 6,016 |
| | $ | 6,631 |
| | $ | 2,946 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 15,593 |
|
Impairment of the Salix and Ortho Dermatologics reporting units | | — |
| | (2,213 | ) | | — |
| | — |
| | — |
| | — |
| | (2,213 | ) |
Realignment of Global Solta reporting unit goodwill | | (82 | ) | | 115 |
| | (33 | ) | | — |
| | — |
| | — |
| | — |
|
Goodwill reclassified to assets held for sale and subsequently disposed | | (2 | ) | | — |
| | — |
| | — |
| | — |
| | — |
| | (2 | ) |
Realignment of segment goodwill | | — |
| | (4,533 | ) | | (2,913 | ) | | 3,156 |
| | 1,267 |
| | 3,023 |
| | — |
|
Impairment of the Dentistry reporting unit | | — |
| | — |
| | — |
| | — |
| | — |
| | (109 | ) | | (109 | ) |
Foreign exchange and other | | (127 | ) | | — |
| | — |
| | — |
| | — |
| | — |
| | (127 | ) |
Balance, December 31, 2018 | | 5,805 |
| | — |
| | — |
| | 3,156 |
| | 1,267 |
| | 2,914 |
| | 13,142 |
|
Acquisition of certain assets of Synergy | | — |
| | — |
| | — |
| | 3 |
| | — |
| | — |
| | 3 |
|
Foreign exchange and other | | (24 | ) | | — |
| | — |
| | — |
| | — |
| | — |
| | (24 | ) |
Balance, March 31, 2019 | | $ | 5,781 |
| | $ | — |
| | $ | — |
| | $ | 3,159 |
| | $ | 1,267 |
| | $ | 2,914 |
| | $ | 13,121 |
|
Goodwill is not amortized but is tested for impairment at least annually at the reporting unit level. A reporting unit is the same as, or one level below, an operating segment. The fair value of a reporting unit refers to the price that would be received to sell the unit as a whole in an orderly transaction between market participants. The Company estimates the fair values of all reporting units using a discounted cash flow model which utilizes Level 3 unobservable inputs.
The discounted cash flow model relies on assumptions regarding revenue growth rates, gross profit, projected working capital needs, selling, general and administrative expenses, research and development expenses, capital expenditures, income tax rates, discount rates and terminal growth rates. To estimate fair value, the Company discounts the forecasted cash flows of each reporting unit. The discount rate the Company uses represents the estimated weighted average cost of capital, which reflects the overall level of inherent risk involved in its reporting unit operations and the rate of return a market participant would expect to earn. The Company performed its annual impairment test as of October 1, 2018, utilizing long-term growth rates for its reporting units ranging from 1.0% to 3.0% and discount rates applied to the estimated cash flows ranging from 7.5% to 14.0% in estimation of fair value. To estimate cash flows beyond the final year of its model, the Company estimates
a terminal value by applying an in perpetuity growth assumption and discount factor to determine the reporting unit's terminal value.
The Company forecasts cash flows for each reporting unit and takes into consideration economic conditions and trends, estimated future operating results, management's and a market participant's view of growth rates and product lives, and
anticipates future economic conditions. Revenue growth rates inherent in these forecasts were based on input from internal and external market research that compare factors such as growth in global economies, recent industry trends and product life-cycles. Macroeconomic factors such as changes in economies, changes in the competitive landscape including the unexpected loss of exclusivity to the Company's product portfolio, changes in government legislation, product life-cycles, industry consolidations and other changes beyond the Company’s control could have a positive or negative impact on achieving its targets. Accordingly, if market conditions deteriorate, or if the Company is unable to execute its strategies, it may be necessary to record impairment charges in the future.
2018
Adoption of New Accounting Guidance for Goodwill Impairment Testing
In January 2017, the FASB issued guidance which simplifies the subsequent measurement of goodwill by eliminating “Step 2” from the goodwill impairment test. Instead, goodwill impairment is measured as the amount by which a reporting unit's carrying value exceeds its fair value. The Company elected to adopt this guidance effective January 1, 2018.
Upon adopting the new guidance, the Company tested goodwill for impairment and determined that the carrying value of the Salix reporting unit exceeded its fair value. As a result of the adoption of new accounting guidance, the Company recognized a goodwill impairment of $1,970 million associated with the Salix reporting unit.
As of October 1, 2017, the date of the 2017 annual goodwill impairment test, the fair value of the Ortho Dermatologics reporting unit exceeded its carrying value. However, at January 1, 2018, unforeseen changes in the business dynamics of the Ortho Dermatologics reporting unit, such as: (i) changes in the dermatology sector, (ii) increased pricing pressures from third-party payors, (iii) additional risks to the exclusivity of certain products and (iv) an expected longer launch cycle for a new product, were factors that negatively impacted the reporting unit's operating results beyond management's expectations as of October 1, 2017, when the Company performed its 2017 annual goodwill impairment test. In response to these adverse business indicators, as of January 1, 2018, the Company reduced its near and long term financial projections for the Ortho Dermatologics reporting unit. As a result of the reductions in the near and long term financial projections, the carrying value of the Ortho Dermatologics reporting unit exceeded its fair value at January 1, 2018 and the Company recognized a goodwill impairment of $243 million.
As of January 1, 2018, with the exception of the Salix reporting unit and Ortho Dermatologics reporting unit, the fair value of all reporting units exceeded their respective carrying value by more than 15%.
2018 Realignment of Solta Business
Effective March 1, 2018, revenues and profits from the U.S. Solta business included in the former U.S. Diversified Products segment in prior periods and revenues and profits from the international Solta business included in the Bausch + Lomb/International segment in prior periods, are reported in the new Global Solta reporting unit, which, at that time, was a part of the former Branded Rx segment. As a result of this change, $115 million of goodwill was reallocated to the new Global Solta reporting unit and the Company assessed the impact on the fair values of each of the reporting units affected. After considering, among other matters: (i) the limited period of time between last impairment test (January 1, 2018) and the realignment (March 1, 2018), (ii) the results of the last impairment test and (iii) the amount of goodwill reallocated to the new Global Solta reporting unit, the Company did not identify any indicators of impairment at the time of the realignment.
2018 Realignment of Segment Structure
In the second quarter of 2018, the Company began operating in the following reportable segments: (i) Bausch + Lomb/International segment, (ii) Salix segment, (iii) Ortho Dermatologics segment and (iv) Diversified Products segment. The Bausch + Lomb/International segment consists of the: (i) U.S. Bausch + Lomb and (ii) International reporting units. The Salix segment consists of the Salix reporting unit. The Ortho Dermatologics segment consists of the: (i) Ortho Dermatologics and (ii) Global Solta reporting units. The Diversified Products segment consists of the: (i) Neurology and Other, (ii) Generics and (iii) Dentistry reporting units. There was no triggering event which would require the Company to test goodwill for
impairment as a result of the second quarter realignment of the segment structure as it did not result in a change in the reporting units.
2018 Annual Goodwill Impairment Test
The Company conducted its annual goodwill impairment test as of October 1, 2018 and determined that the carrying value of the Dentistry reporting unit exceeded its fair value and, as a result, the Company recognized a goodwill impairment of $109 million for the Dentistry reporting unit, representing the full amount of goodwill for the reporting unit. Changing market conditions such as: (i) an increasing competitive environment and (ii) increasing pricing pressures negatively impacted the reporting unit's operating results. The Company is taking steps to address these changing market and business conditions.
The Company's remaining reporting units passed the goodwill impairment test as the estimated fair value of each reporting unit exceeded its carrying value at the date of testing and, therefore, there was no impairment to goodwill for any reporting unit other than the Dentistry reporting unit. In order to evaluate the sensitivity of its fair value calculations on the goodwill impairment test, the Company compared the carrying value of each reporting unit to its fair value as of October 1, 2018, the date of testing. As of October 1, 2018, the fair value of each reporting unit with associated goodwill exceeded its carrying value by more than 15%.
2019 Interim Goodwill Impairment Assessment
No events occurred or circumstances changed during the period October 1, 2018 (the date goodwill was last tested for impairment) through March 31,June 30, 2019 that would indicate that the fair value of any reporting unit might be below its carrying value. Based on the results of the October 1, 2018 annual goodwill impairment test, the Company continues to perform qualitative interim assessments of the carrying value and fair value of the Ortho Dermatologics reporting unit on a quarterly basis to determine if impairment testing of goodwill will be warranted. As part of the qualitative assessment as of March 31,June 30, 2019, management compared the reporting unit’s operating results to the forecast used to test the goodwill of the Ortho Dermatologics reporting unit as of October 1, 2018. Based on the qualitative assessment, management believed that the carrying value of Ortho Dermatologics reporting unit did not exceed its fair value and, therefore, concluded a quantitative assessment was not required at March 31,June 30, 2019.
If market conditions deteriorate, or if the Company is unable to execute its strategies, it may be necessary to record impairment charges in the future and those charges can be material.
Accumulated goodwill impairment charges through March 31,June 30, 2019 were $3,711 million.
| |
9. | ACCRUED AND OTHER CURRENT LIABILITIES |
Accrued and other current liabilities consist of:
|
| | | | | | | | |
(in millions) | | June 30, 2019 | | December 31, 2018 |
Product rebates | | $ | 981 |
| | $ | 998 |
|
Product returns | | 774 |
| | 813 |
|
Interest | | 284 |
| | 273 |
|
Employee compensation and benefit costs | | 241 |
| | 301 |
|
Income taxes payable | | 150 |
| | 167 |
|
Other | | 692 |
| | 645 |
|
| | $ | 3,122 |
| | $ | 3,197 |
|
|
| | | | | | | | |
(in millions) | | March 31, 2019 | | December 31, 2018 |
Product rebates | | $ | 974 |
| | $ | 998 |
|
Product returns | | 794 |
| | 813 |
|
Interest | | 387 |
| | 273 |
|
Employee compensation and benefit costs | | 238 |
| | 301 |
|
Income taxes payable | | 167 |
| | 167 |
|
Other | | 695 |
| | 645 |
|
| | $ | 3,255 |
| | $ | 3,197 |
|
| |
10. | FINANCING ARRANGEMENTS |
Principal amounts of debt obligations and principal amounts of debt obligations net of premiums, discounts and issuance costs consist of the following:
|
| | | | | | | | | | | | | | | | | | |
|
|
|
| June 30, 2019 |
| December 31, 2018 |
(in millions) |
| Maturity |
| Principal Amount |
| Net of Premiums, Discounts and Issuance Costs |
| Principal Amount |
| Net of Premiums, Discounts and Issuance Costs |
Senior Secured Credit Facilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
2023 Revolving Credit Facility |
| June 2023 |
| $ | 150 |
|
| $ | 150 |
|
| $ | 75 |
|
| $ | 75 |
|
June 2025 Term Loan B Facility | | June 2025 | | 4,141 |
| | 4,029 |
| | 4,394 |
| | 4,269 |
|
November 2025 Term Loan B Facility | | November 2025 | | 1,406 |
| | 1,384 |
| | 1,481 |
| | 1,456 |
|
Senior Secured Notes: |
|
|
|
|
|
|
|
|
|
|
6.50% Secured Notes |
| March 2022 |
| 1,250 |
|
| 1,240 |
|
| 1,250 |
|
| 1,239 |
|
7.00% Secured Notes |
| March 2024 |
| 2,000 |
|
| 1,981 |
|
| 2,000 |
|
| 1,979 |
|
5.50% Secured Notes | | November 2025 | | 1,750 |
| | 1,732 |
| | 1,750 |
| | 1,730 |
|
5.75% Secured Notes | | August 2027 | | 500 |
| | 493 |
| | — |
| | — |
|
Senior Unsecured Notes: |
| |
|
|
|
|
|
|
|
|
5.625% |
| December 2021 |
| — |
|
| — |
|
| 700 |
|
| 697 |
|
5.50% |
| March 2023 |
| 402 |
|
| 400 |
|
| 1,000 |
|
| 995 |
|
5.875% |
| May 2023 |
| 1,548 |
|
| 1,539 |
|
| 3,250 |
|
| 3,229 |
|
4.50% euro-denominated debt |
| May 2023 |
| 1,706 |
|
| 1,696 |
|
| 1,720 |
|
| 1,709 |
|
6.125% |
| April 2025 |
| 3,250 |
|
| 3,228 |
|
| 3,250 |
|
| 3,226 |
|
9.00% | | December 2025 | | 1,500 |
| | 1,471 |
| | 1,500 |
| | 1,469 |
|
9.25% | | April 2026 | | 1,500 |
| | 1,483 |
| | 1,500 |
| | 1,482 |
|
8.50% | | January 2027 | | 1,750 |
| | 1,757 |
| | 750 |
| | 738 |
|
7.00% | | January 2028 | | 750 |
| | 740 |
| | — |
| | — |
|
7.25% | | May 2029 | | 750 |
| | 740 |
| | — |
| | — |
|
Other |
| Various |
| 16 |
|
| 16 |
|
| 12 |
|
| 12 |
|
Total long-term debt and other |
| |
| $ | 24,369 |
|
| 24,079 |
|
| $ | 24,632 |
|
| 24,305 |
|
Less: Current portion of long-term debt and other |
| |
| 56 |
|
|
|
|
| 228 |
|
Non-current portion of long-term debt |
| |
|
|
| $ | 24,023 |
|
|
|
|
| $ | 24,077 |
|
|
| | | | | | | | | | | | | | | | | | |
|
|
|
| March 31, 2019 |
| December 31, 2018 |
(in millions) |
| Maturity |
| Principal Amount |
| Net of Premiums, Discounts and Issuance Costs |
| Principal Amount |
| Net of Premiums, Discounts and Issuance Costs |
Senior Secured Credit Facilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
2023 Revolving Credit Facility |
| June 2023 |
| $ | — |
|
| $ | — |
|
| $ | 75 |
|
| $ | 75 |
|
June 2025 Term Loan B Facility | | June 2025 | | 4,222 |
| | 4,104 |
| | 4,394 |
| | 4,269 |
|
November 2025 Term Loan B Facility | | November 2025 | | 1,425 |
| | 1,402 |
| | 1,481 |
| | 1,456 |
|
Senior Secured Notes: |
|
|
|
|
|
|
|
|
|
|
6.50% Secured Notes |
| March 2022 |
| 1,250 |
|
| 1,239 |
|
| 1,250 |
|
| 1,239 |
|
7.00% Secured Notes |
| March 2024 |
| 2,000 |
|
| 1,980 |
|
| 2,000 |
|
| 1,979 |
|
5.50% Secured Notes | | November 2025 | | 1,750 |
| | 1,731 |
| | 1,750 |
| | 1,730 |
|
5.75% Secured Notes | | August 2027 | | 500 |
| | 493 |
| | — |
| | — |
|
Senior Unsecured Notes: |
| |
|
|
|
|
|
|
|
|
5.625% |
| December 2021 |
| 182 |
|
| 181 |
|
| 700 |
|
| 697 |
|
5.50% |
| March 2023 |
| 784 |
|
| 780 |
|
| 1,000 |
|
| 995 |
|
5.875% |
| May 2023 |
| 2,666 |
|
| 2,650 |
|
| 3,250 |
|
| 3,229 |
|
4.50% euro-denominated debt |
| May 2023 |
| 1,683 |
|
| 1,673 |
|
| 1,720 |
|
| 1,709 |
|
6.125% |
| April 2025 |
| 3,250 |
|
| 3,227 |
|
| 3,250 |
|
| 3,226 |
|
9.00% | | December 2025 | | 1,500 |
| | 1,470 |
| | 1,500 |
| | 1,469 |
|
9.25% | | April 2026 | | 1,500 |
| | 1,482 |
| | 1,500 |
| | 1,482 |
|
8.50% | | January 2027 | | 1,750 |
| | 1,757 |
| | 750 |
| | 738 |
|
Other |
| Various |
| 12 |
|
| 12 |
|
| 12 |
|
| 12 |
|
Total long-term debt and other |
| |
| $ | 24,474 |
|
| 24,181 |
|
| $ | 24,632 |
|
| 24,305 |
|
Less: Current portion of long-term debt and other |
| |
| 257 |
|
|
|
|
| 228 |
|
Non-current portion of long-term debt |
| |
|
|
| $ | 23,924 |
|
|
|
|
| $ | 24,077 |
|
Covenant Compliance
The Senior Secured Credit Facilities (as defined below) and the indentures governing the Senior Secured Notes and Senior Unsecured Notes contain customary affirmative and negative covenants and specified events of default. These affirmative and negative covenants include, among other things, and subject to certain qualifications and exceptions, covenants that restrict the Company’s ability and the ability of its subsidiaries to: incur or guarantee additional indebtedness; create or permit liens on assets; pay dividends on capital stock or redeem, repurchase or retire capital stock or subordinated indebtedness; make certain investments and other restricted payments; engage in mergers, acquisitions, consolidations and amalgamations; transfer and sell certain assets; and engage in transactions with affiliates. The 2023 Revolving Credit Facility (as defined below) also contains a financial maintenance covenant that requires the Company to maintain a first lien net leverage ratio of not greater than 4.00:1.00. The financial maintenance covenant may be waived or amended without the consent of the term loan facility lenders and contains a customary term loan facility standstill.
As of March 31,June 30, 2019, the Company was in compliance with its financial maintenance covenant related to its debt obligations. The Company, based on its current forecast for the next twelve months from the date of issuance of these financial statements, expects to remain in compliance with its financial maintenance covenant and meet its debt service obligations over that same period.
The Company continues to take steps to improve its operating results to ensure continual compliance with its financial maintenance covenant and may take other actions to reduce its debt levels to align with the Company’s long term strategy, including divesting other businesses, refinancing debt and issuing equity or equity-linked securities as deemed appropriate.
Senior Secured Credit Facilities
On February 13, 2012, the Company and certain of its subsidiaries as guarantors entered into the “Senior Secured Credit Facilities” under the Company’s Third Amended and Restated Credit and Guaranty Agreement, as amended (the “Third Amended Credit Agreement”) with a syndicate of financial institutions and investors, as lenders. As of January 1, 2018, the Third Amended Credit Agreement, as amended, provided for: (i) a $1,500 million Revolving Credit Facility maturing on April 20, 2018 (the "2018 Revolving Credit Facility"),of revolving credit facilities, which included a sublimit for the issuance of standby and commercial letters of credit and a sublimit for swing line loans and (ii) $4,150 milliona series of tranche B term loans maturing on April 1, 2022 (the "Series F Tranche B Term Loan Facility").
On June 1, 2018, the Company entered into a Restatement Agreement in respect of a Fourth Amended andthe Restated Credit and Guaranty Agreement (the “Restated Credit Agreement”).Agreement. The Restated Credit Agreement amended and restated in full the Third Amended Credit Agreement. The Restated Credit Agreement replaced the 2020 Revolving Credit Facility with a revolving credit facility of $1,225 million (the "2023 Revolving Credit Facility") and replaced the Series F Tranche B Term Loan Facility principal amount outstanding of $3,315 million with a seven year Tranche B Term Loan Facility of $4,565 million (the “June 2025 Term Loan B Facility”) borrowed by the Company’s subsidiary, Bausch Health Americas, Inc. ("BHA") (formerly Valeant Pharmaceuticals International).
The 2023 Revolving Credit Facility matures on the earlier of June 1, 2023 and the date that is 91 calendar days prior to the scheduled maturity of indebtedness for borrowed money of the Company or BHA in an aggregate principal amount in excess of $1,000 million. Both the Company and BHA are borrowers with respect to the 2023 Revolving Credit Facility. Borrowings under the 2023 Revolving Credit Facility may be made in U.S. dollars, Canadian dollars or euros.
On June 1, 2018, the Company issued an irrevocable notice of redemption for the remaining outstanding principal amounts of: (i) $691 million of 5.375% Senior Unsecured Notes due 2020 (the "March 2020 Unsecured Notes"), (ii) $578 million of 6.75% Senior Unsecured Notes due 2021(the "August 2021 Unsecured Notes"), (iii) $550 million of 7.25% Senior Unsecured Notes due 2022 (the “July 2022 Unsecured Notes”) and (iv) $146 million of 6.375% Senior Unsecured Notes due 2020 (the “6.375% October 2020 Unsecured Notes” and together with the March 2020 Unsecured Notes, August 2021 Unsecured Notes and July 2022 Unsecured Notes the “June 2018 Unsecured Refinanced Debt”). On June 1, 2018, using the remaining net proceeds from the June 2025 Term Loan B Facility, the net proceeds from the issuance of $750 million in aggregate principal amount of 8.50% Senior Unsecured Notes due 2027 (the "January 2027 Unsecured Notes") by BHA and cash on hand, the Company prepaid the remaining Series F Tranche B Term Loan Facility and redeemed the June 2018 Unsecured Refinanced Debt at its aggregate redemption price and the indentures governing the June 2018 Unsecured Refinanced Debt were discharged (collectively, the “June 2018 Refinancing Transactions”).
TheIn connection with the Restated Credit Agreement, was accounted for as a modification of debt, to the extent the June 2018 Unsecured Refinanced Debt was replaced with newly issued debt to the same creditor, and as an extinguishment of debt if: (i) the June 2018 Unsecured Refinanced Debt was replaced with newly issued debt to a different creditor, (ii) a portion of the unamortized deferred financing fees was allocated to debt that was paid down or (iii) the borrowing capacity declined when issuing a new revolving credit facility. The following was accounted for as an extinguishment of debt: (i) the difference between the amounts paid to redeem the June 2018 Unsecured Refinanced Debt and the June 2018 Unsecured Refinanced Debt’s carrying value, (ii) the replacement of the Series F Tranche B Term Loan with the June 2025 Term Loan B Facility to the extent any unamortized deferred financing fees were associated with the portion of the Series F Tranche B Term Loan that was paid down and (iii) the replacement of the 2020 Revolving Credit Facility with the 2023 Revolving Credit Facility to the extent any unamortized deferred financing fees were associated with the decline in borrowing capacity. For amounts accounted for as an extinguishment of debt, the Company incurred a loss on extinguishment of debt of $48 million. PaymentsCertain payments made to the lenders and a portion of payments made to third parties of $74 million associated with the June 2018 Refinancing TransactionsRestated Credit Agreement were capitalized and are being amortized as interest expense over the remaining terms of the debt, ranging from 2023 through 2027.debt. Third-party expenses of $4 million associated with the modification of debt were expensed as incurred and included in Interest expense.
On November 27, 2018, the Company entered into the First Incremental Amendment to the Restated Credit Agreement, which provided an additional seven year Tranche B Term Loan Facility of $1,500 million (the "November 2025 Term Loan B Facility") and used the net proceeds, and cash on hand, to repay $1,483 million of 7.50% Senior Unsecured Notes due July 2021 (the “July 2021 Unsecured Notes”) in a tender offer (the "November 2018 Refinancing Transactions"). On December 27, 2018, the Company redeemed, using cash on hand, the remaining outstanding principal amount of $17 million of the July 2021 Unsecured Notes.
TheIn connection with the repayment of the July 2021 Unsecured Notes, was accounted for as an extinguishment of debt and the Company incurred a loss on extinguishment of debt of $43 million representing the difference between the amount paid to settle the extinguished debt and the extinguished debt’s carrying value. Paymentsmillion. Certain payments made to the lenders and other third parties of $25 million associated with the issuance of the November 2025 Term Loan B Facility were capitalized and are being amortized as interest expense over the remaining term of the November 2025 Term Loan B Facility.
As of March 31,June 30, 2019, the Company had no$150 million of outstanding borrowings, $170$169 million of issued and outstanding letters of credit and remaining availability of $1,055$906 million under its 2023 Revolving Credit Facility. During April and May 2019, the Company had drawn net borrowings of $175 million under its 2023 Revolving Credit Facility.
Current Description of Senior Secured Credit Facilities
Borrowings under the Senior Secured Credit Facilities in U.S. dollars bear interest at a rate per annum equal to, at the Company's option, either: (i) a base rate determined by reference to the higherhighest of: (a) the prime rate (as defined in the Restated Credit Agreement), (b) the federal funds effective rate plus 1/2 of 1.00% orand (c) the eurocurrency rate (as defined in the Restated Credit Agreement) for a period of one month plus 1.00% (or if such eurocurrency rate shall not be ascertainable, 1.00%) or (ii) a eurocurrency rate determined by reference to the costs of funds for U.S. dollar deposits for the interest period relevant to such borrowing adjusted for certain additional costs (provided however, that the eurocurrency rate shall at no time be less than zero)0.00% per annum), in each case plus an applicable margin.
Borrowings under the 2023 Revolving Credit Facility in euros bear interest at a eurocurrency rate determined by reference to the costs of funds for euro deposits for the interest period relevant to such borrowing (provided however, that the eurocurrency rate shall at no time be less than 0.00% per annum), plus an applicable margin.
Borrowings under the 2023 Revolving Credit Facility in Canadian dollars bear interest at a rate per annum equal to, at the Company's option, either: (i) a prime rate determined by reference to the higher of: (a) the rate of interest last quoted by The Wall Street Journal as the “Canadian Prime Rate” or, if The Wall Street Journal ceases to quote such rate, the highest per annum interest rate published by the Bank of Canada as its prime rate and (b) the 1 month BA rate (as defined below) calculated daily plus 1.00% (provided however, that the prime rate shall at no time be less than 0.00%) or (ii) the bankers’ acceptance rate for Canadian dollar deposits in the Toronto interbank market (the “BA rate”) for the interest period relevant to such borrowing (provided however, that the BA rate shall at no time be less than 0.00% per annum), in each case plus an applicable margin.
Subject to certain exceptions and customary baskets set forth in the Restated Credit Agreement, the Company is required to make mandatory prepayments of the loans under the Senior Secured Credit Facilities under certain circumstances, including from: (i) 100% of the net cash proceeds of insurance and condemnation proceeds for property or asset losses (subject to reinvestment rights and net proceeds threshold), (ii) 100% of the net cash proceeds from the incurrence of debt (other than permitted debt as described in the Restated Credit Agreement), (iii) 50% of Excess Cash Flow (as defined in the Restated Credit Agreement) subject to decrease based on leverage ratios and subject to a threshold amount and (iv) 100% of net cash proceeds from asset sales (subject to reinvestment rights). These mandatory prepayments may be used to satisfy future amortization.
The applicable interest rate margins for the June 2025 Term Loan B Facility and the November 2025 Term Loan B Facility are 2.00% and 1.75%, respectively, with respect to base rate and prime rate borrowings and 3.00% and 2.75%, respectively, with respect to eurocurrency rate and BA rate borrowings. As of March 31,June 30, 2019, the stated rates of interest on the Company’s borrowings under the June 2025 Term Loan B Facility and the November 2025 Term Loan B Facility were 5.48%5.41% and 5.23%5.16% per annum, respectively.
The amortization rate for both the June 2025 Term Loan B Facility and the November 2025 Term Loan B Facility is 5.00% per annum. The Company may direct that prepayments be applied to such amortization payments in order of maturity. As of March 31,June 30, 2019, the remaining mandatory quarterly amortization payments for the Senior Secured Credit Facilities were $1,630$1,530 million through November 1, 2025.
The applicable interest rate margins for borrowings under the 2023 Revolving Credit Facility are 1.50%-2.00% with respect to base rate or prime rate borrowings and 2.50%-3.00% with respect to eurocurrency rate or BA rate borrowings. As of March 31,June 30, 2019, the stated rate of interest on the 2023 Revolving Credit Facility was 5.48%5.42% per annum. In addition, the Company is required to pay commitment fees of 0.25%-0.50% per annum with respect to the unutilized commitments under the 2023 Revolving Credit Facility, payable quarterly in arrears. The Company also is required to pay: (i) letter of credit fees on the
maximum amount available to be drawn under all outstanding letters of credit in an amount equal to the applicable margin on eurocurrency rate borrowings under the 2023 Revolving Credit Facility on a per annum basis, payable quarterly in arrears, (ii) customary fronting fees for the issuance of letters of credit and (iii) agency fees.
The Restated Credit Agreement permits the incurrence of incremental credit facility borrowings up to the greater of $1,000 million and 28.5% of Consolidated Adjusted EBITDA (as defined in the Restated Credit Agreement), subject to customary terms and conditions, as well as the incurrence of additional incremental credit facility borrowings subject to a secured leverage ratio of not greater than 3.50:1.00.
Senior Secured Notes
The Senior Secured Notes are guaranteed by each of the Company’s subsidiaries that is a guarantor under the Restated Credit Agreement and existing Senior Unsecured Notes (together, the “Note Guarantors”). The Senior Secured Notes and the guarantees related thereto are senior obligations and are secured, subject to permitted liens and certain other exceptions, by the same first priority liens that secure the Company’s obligations under the Restated Credit Agreement under the terms of the indentures governing the Senior Secured Notes.
The Senior Secured Notes and the guarantees rank equally in right of repayment with all of the Company’s and Note Guarantors’ respective existing and future unsubordinated indebtedness and senior to the Company’s and Note Guarantors’ respective future subordinated indebtedness. The Senior Secured Notes and the guarantees related thereto are effectively pari passu with the Company’s and the Note Guarantors’ respective existing and future indebtedness secured by a first priority lien on the collateral securing the Senior Secured Notes and effectively senior to the Company’s and the Note Guarantors’ respective existing and future indebtedness that is unsecured, including the existing Senior Unsecured Notes, or that is secured by junior liens, in each case to the extent of the value of the collateral. In addition, the Senior Secured Notes are structurally subordinated to: (i) all liabilities of any of the Company’s subsidiaries that do not guarantee the Senior Secured Notes and (ii) any of the Company’s debt that is secured by assets that are not collateral.
Upon the occurrence of a change in control (as defined in the indentures governing the Senior Secured Notes), unless the Company has exercised its right to redeem all of the notes of a series, holders of the Senior Secured Notes may require the Company to repurchase such holder’s notes, in whole or in part, at a purchase price equal to 101% of the principal amount thereof plus accrued and unpaid interest.
5.75% Senior Secured Notes due 2027 - March 2019 Refinancing Transactions
On March 8, 2019, BHA and the Company issued: (i) $1,000 million aggregate principal amount of January 2027 Unsecured Notes and (ii) $500 million aggregate principal amount of 5.75% Senior Secured Notes due August 2027 (the "August 2027 Secured Notes"), respectively, in a private placement, a portion of the net proceeds of which, and cash on hand, were used to: (i) repurchase $584 million of 5.875% Senior Unsecured Notes due 2023 (the "May 2023 Unsecured Notes"), (ii) repurchase $518 million of 5.625% Senior Unsecured Notes due 2021 (the “December 2021 Unsecured Notes”), (iii) repurchase $216 million of 5.50% Senior Unsecured Notes due 2023 (the "March 2023 Unsecured Notes”) and (iv) pay all fees and expenses associated with these transactions (collectively, the “March 2019 Refinancing Transactions”). During April 2019, the Company redeemed $182 million of the December 2021 Unsecured Notes, representing the remaining outstanding principal balance of the December 2021 Unsecured Notes and completing the refinancing of $1,500 million of debt in connection with the March 2019 Refinancing Transactions. The March 2019 Refinancing Transactions were accounted for as an extinguishment of debt and the Company incurred a loss on extinguishment of debt of $7$8 million representing the difference between the amount paid to settle the extinguished debt and the extinguished debt’s carrying value. Interest on the August 2027 Secured Notes is payable semi-annually in arrears on each February 15 and August 15.
The August 2027 Secured Notes are redeemable at the option of the Company, in whole or in part, at any time on or after August 15, 2022, at the redemption prices set forth in the indenture. The Company may redeem some or all of the August 2027 Secured Notes prior to August 15, 2022 at a price equal to 100% of the principal amount thereof plus a “make-whole” premium. Prior to August 15, 2022, the Company may redeem up to 40% of the aggregate principal amount of the August 2027 Secured Notes using the proceeds of certain equity offerings at the redemption price set forth in the indenture.
Senior Unsecured Notes
The Senior Unsecured Notes issued by the Company are the Company’s senior unsecured obligations and are jointly and severally guaranteed on a senior unsecured basis by each of its subsidiaries that is a guarantor under the Senior Secured Credit
Facilities. The Senior Unsecured Notes issued by BHA are senior unsecured obligations of BHA and are jointly and severally guaranteed on a senior unsecured basis by the Company and each of its subsidiaries (other than BHA) that is a guarantor under the Senior Secured Credit Facilities. Future subsidiaries of the Company and BHA, if any, may be required to guarantee the Senior Unsecured Notes.
If the Company experiences a change in control, the Company may be required to make an offer to repurchase each series of Senior Unsecured Notes, in whole or in part, at a purchase price equal to 101% of the aggregate principal amount of the Senior Unsecured Notes repurchased, plus accrued and unpaid interest.
9.25% Senior Unsecured Notes due 2026 - March 2018 Refinancing Transactions
On March 26, 2018, BHA issued $1,500 million in aggregate principal amount of 9.25% Senior Unsecured Notes due 2026 (the “April 2026 Unsecured Notes”) in a private placement, the net proceeds of which, and cash on hand, were used to repurchase $1,500 million in aggregate principal amount of unsecured notes, which consisted of: (i) $1,017 million in principal amount of the March 2020 Unsecured Notes, (ii) $411 million in principal amount of the 6.375% October 2020 Unsecured Notes and (iii) $72 million in principal amount of the August 2021 Unsecured Notes. All fees and expenses associated with these transactions were paid with cash on hand (collectively, the “March 2018 Refinancing Transactions”). The March 2018 Refinancing Transactions were accounted for as an extinguishment of debt and the Company incurred a loss on extinguishment of debt of $26 million representing the difference between the amount paid to settle the extinguished debt and the extinguished debt’s carrying value. The April 2026 Unsecured Notes accrue interest at the rate of 9.25% per year, payable semi-annually in arrears on each of April 1 and October 1.
8.50% Senior Unsecured Notes due 2027 - June 2018 Refinancing Transactions and March 2019 Refinancing Transactions
As part of the June 2018 Refinancing Transactions, BHA issued $750 million in aggregate principal amount of January 2027 Unsecured Notes in a private placement, the proceeds of which, when combined with the remaining net proceeds from the June 2025 Term Loan B Facility and cash on hand, were deposited with The Bank of New York Mellon Trust Company, N.A., as trustee under the indentures governing the June 2018 Unsecured Refinanced Debt, to redeem the June 2018 Unsecured Refinanced Debt at its aggregate redemption price and the indentures governing the June 2018 Unsecured Refinanced Debt were discharged. The January 2027 Unsecured Notes accrue interest at the rate of 8.50% per year, payable semi-annually in arrears on each of January 31 and July 31.
As part of the March 2019 Refinancing Transactions described above, BHA issued $1,000 million aggregate principal amount of 8.50% Senior Unsecured Notes due January 2027. These are additional notes and form part of the same series as BHA’s existing January 2027 Unsecured Notes.
7.00% Senior Unsecured Notes due 2028 and 7.25% Senior Unsecured Notes due 2029 - May 2019 Refinancing Transactions
On May 23, 2019, the Company issued: (i) $750 million aggregate principal amount of 7.00% Senior Unsecured Notes due January 2028 (the "January 2028 Unsecured Notes") and (ii) $750 million aggregate principal amount of 7.25% Senior Unsecured Notes due May 2029 (the "May 2029 Unsecured Notes"), respectively, in a private placement, the net proceeds of which, and cash on hand, were used to: (i) repurchase $1,118 million of May 2023 Unsecured Notes, (ii) repurchase $382 million of March 2023 Unsecured Notes and (iii) pay all fees and expenses associated with these transactions (collectively, the “May 2019 Refinancing Transactions”). The May 2019 Refinancing Transactions were accounted for as an extinguishment of debt and the Company incurred a loss on extinguishment of debt of $32 million representing the difference between the amount paid to settle the extinguished debt and the extinguished debt’s carrying value. Interest on the January 2028 Unsecured Notes is payable semi-annually in arrears on each January 15 and July 15. Interest on the May 2029 Unsecured Notes is payable semi-annually in arrears on each May 30 and November 30.
The January 2028 Unsecured Notes and the May 2029 Unsecured Notes are redeemable at the option of the Company, in whole or in part, at any time on or after January 15, 2023 and May 30, 2024, respectively, at the redemption prices set forth in the respective indenture. The Company may redeem some or all of the January 2028 Unsecured Notes or the May 2029 Unsecured Notes prior to January 15, 2023 and May 30, 2024, respectively, at a price equal to 100% of the principal amount thereof plus a “make-whole” premium. Prior to July 15, 2022, and May 30, 2022, the Company may redeem up to 40% of the aggregate principal amount of the January 2028 Unsecured Notes or the May 2029 Unsecured Notes, respectively, using the proceeds of certain equity offerings at the redemption price set forth in the respective indenture.
Weighted Average Stated Rate of Interest
The weighted average stated rate of interest for the Company's outstanding debt obligations as of March 31,June 30, 2019 and December 31, 2018 was 6.38%6.44% and 6.23%, respectively.
Maturities and Mandatory Payments
Maturities and mandatory payments of debt obligations for the period April through Decemberremainder of 2019, the five succeeding years ending December 31 and thereafter are as follows:
|
| | | |
(in millions) | |
Remainder of 2019 | $ | 4 |
|
2020 | 203 |
|
2021 | 303 |
|
2022 | 1,553 |
|
2023 | 4,109 |
|
2024 | 2,303 |
|
Thereafter | 15,894 |
|
Total debt obligations | 24,369 |
|
Unamortized premiums, discounts and issuance costs | (290 | ) |
Total long-term debt and other | $ | 24,079 |
|
|
| | | |
(in millions) | |
April through December 2019 | $ | 182 |
|
2020 | 303 |
|
2021 | 303 |
|
2022 | 1,553 |
|
2023 | 5,436 |
|
2024 | 2,303 |
|
Thereafter | 14,394 |
|
Total debt obligations | 24,474 |
|
Unamortized premiums, discounts and issuance costs | (293 | ) |
Total long-term debt and other | $ | 24,181 |
|
During April and MayOn August 1, 2019, the Company:Company repaid $100 million of long-term debt, which included: (i) redeemed $182$81 million of the December 2021 Unsecured Notes, representing the remaining outstanding principal balanceJune 2025 Term Loan B Facility and (ii) $19 million of the December 2021 Unsecured Notes and completing the refinancing of $1,500 million of debt in connection with the March 2019 Refinancing Transactions and (ii) had drawn net borrowings of $175 million under its 2023 Revolving CreditNovember 2025 Term Loan B Facility. These transactions are not reflected in the table above.above and are therefore included as due during 2020.
| |
11. | PENSION AND POSTRETIREMENT EMPLOYEE BENEFIT PLANS |
The Company sponsors defined benefit plans and a participatory defined benefit postretirement medical and life insurance plan, which covers certain U.S. employees and employees in certain other countries. Net periodic (benefit) cost for the Company’s defined benefit pension plans and postretirement benefit plan for the threesix months ended March 31,June 30, 2019 and 2018 consists of:
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Pension Benefit Plans | | Postretirement Benefit Plan |
| U.S. Plan | | Non-U.S. Plans | |
(in millions) | | 2019 | | 2018 | | 2019 | | 2018 | | 2019 | | 2018 |
Service cost | | $ | 1 |
| | $ | 1 |
| | $ | 1 |
| | $ | 1 |
| | $ | — |
| | $ | — |
|
Interest cost | | 4 |
| | 3 |
| | 3 |
| | 3 |
| | — |
| | — |
|
Expected return on plan assets | | (6 | ) | | (7 | ) | | (3 | ) | | (3 | ) | | — |
| | — |
|
Amortization of prior service credit | | — |
| | — |
| | — |
| | — |
| | (1 | ) | | (1 | ) |
Net periodic (benefit) cost | | $ | (1 | ) | | $ | (3 | ) | | $ | 1 |
| | $ | 1 |
| | $ | (1 | ) | | $ | (1 | ) |
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Pension Benefit Plans | | Postretirement Benefit Plan |
| U.S. Plan | | Non-U.S. Plans | |
| | Three Months Ended March 31, |
(in millions) | | 2019 | | 2018 | | 2019 | | 2018 | | 2019 | | 2018 |
Service cost | | $ | — |
| | $ | — |
| | $ | 1 |
| | $ | 1 |
| | $ | — |
| | $ | — |
|
Interest cost | | 2 |
| | 2 |
| | 1 |
| | 1 |
| | — |
| | — |
|
Expected return on plan assets | | (3 | ) | | (4 | ) | | (1 | ) | | (1 | ) | | — |
| | — |
|
Net periodic (benefit) cost | | $ | (1 | ) | | $ | (2 | ) | | $ | 1 |
| | $ | 1 |
| | $ | — |
| | $ | — |
|
The Company leases certain facilities, vehicles and equipment principally under multi-year agreements generally having a lease term of one to twenty years, some of which include termination options and options to extend the lease term from one to five years or on a month-to-month basis. The Company includes options that are reasonably certain to be exercised as part of the lease term. The Company may negotiate termination clauses in anticipation of changes in market conditions but generally, these termination options are not exercised. Certain lease agreements also include variable payments that are dependent on usage or may vary month-to-month such as insurance, taxes and maintenance costs. None of the Company's lease agreements contain material residual value guarantees or material restrictive covenants.
As discussed in Note 2, "SIGNIFICANT ACCOUNTING POLICIES" under the new standard for accounting for leases, which the Company adopted effective January 1, 2019, the Company is required to record a right-of-use asset and corresponding lease liability, equal to the present value of the lease payments at the commencement date of each lease. For all asset classes, in determining future lease payments, the Company has elected to aggregate lease components, such as payments for rent,
taxes and insurance costs with non-lease components such as maintenance costs, and account for these payments as a single
lease component. In limited circumstances, when the information necessary to determine the rate implicit in a lease is available, the present value of the lease payments is determined using the rate implicit in that lease. If the information necessary to determine the rate implicit in a lease is not available, the Company uses its incremental borrowing rate at the commencement of the lease, which represents the rate of interest that the Company would incur to borrow on a collateralized basis over a similar term.
All leases must be classified as either an operating lease or finance lease. The classification is determined based on whether substantive control has been transferred to the lessee. The classification governs the pattern of lease expense recognition. For leases classified as operating leases, total lease expense over the term of the lease is equal to the undiscounted payments due in accordance with the lease arrangement. Fixed lease expense is recognized periodically on a straight-line basis over the term of each lease and includes: (i) imputed interest during the period on the lease liability determined using the effective interest rate method plus (ii) amortization of the right-of-use asset for that period. Amortization of the right-of-use asset during the period is calculated as the difference between the straight-line expense and the imputed interest on the lease liability for that period. Variable lease expense is recognized when the achievement of the specific target is considered probable. As of March 31,June 30, 2019, the Company's finance leases were not material.
Right-of-use assets and lease liabilities associated with the Company's operating leases are included in the Consolidated Balance Sheet as of March 31,June 30, 2019 as follows:
|
| | | |
(in millions) | |
Right-of-use assets included in: | |
Other non-current assets | $ | 263 |
|
Lease liabilities included in: | |
Accrued and other current liabilities | $ | 47 |
|
Other non-current liabilities | 235 |
|
Total lease liabilities | $ | 282 |
|
|
| | | |
(in millions) | |
Right-of-use assets included in: | |
Other non-current assets | $ | 274 |
|
Lease liabilities included in: | |
Accrued and other current liabilities | $ | 55 |
|
Other non-current liabilities | 238 |
|
Total lease liabilities | $ | 293 |
|
Short-term lease costs and sub-leaseSub-lease income for the three months ended March 31, 2019 wereis not material. Lease expense for the three months ended March 31, 2019 includes:
|
| | | | | | | |
(in millions) | Three Months Ended June 30, 2019 | | Six Months Ended June 30, 2019 |
Operating lease costs | $ | 16 |
| | $ | 32 |
|
Variable operating lease costs | $ | 5 |
| | $ | 9 |
|
Short-term lease expense | $ | 1 |
| | $ | 1 |
|
|
| | | |
(in millions) | |
Operating lease costs | $ | 16 |
|
Variable operating lease costs | $ | 4 |
|
Other information related to operating leases for the threesix months ended March 31,June 30, 2019 areis as follows:
|
| | | |
(dollars in millions) | |
Cash paid from operating cash flows for amounts included in the measurement of lease liabilities | $ | 39 |
|
Right-of-use assets obtained in exchange for new operating lease liabilities | $ | 11 |
|
Weighted-average remaining lease term | 8.5 years |
|
Weighted-average discount rate | 6.2 | % |
|
| | | |
(dollars in millions) | |
Cash paid from operating cash flows for amounts included in the measurement of lease liabilities | $ | 20 |
|
Right-of-use assets obtained in exchange for new operating lease liabilities | $ | 7 |
|
Weighted-average remaining lease term | 8.6 years |
|
Weighted-average discount rate | 6.2 | % |
Right-of-use assets obtained in exchange for new operating lease liabilities during the threesix months ended March 31,June 30, 2019 of $7$11 million in the table above does not include $282 million of right-of-use assets recognized upon adoption of the new standard for accounting for leases on January 1, 2019. See Note 2, "SIGNIFICANT ACCOUNTING POLICIES" for further detail regarding the impact of adoption.
As of March 31,June 30, 2019, future payments under noncancelable operating leases for the remainder of 2019, each of the five succeeding years ending December 31 and thereafter are as follows:
|
| | | |
(in millions) | |
Remainder of 2019 | $ | 33 |
|
2020 | 59 |
|
2021 | 45 |
|
2022 | 38 |
|
2023 | 33 |
|
2024 | 28 |
|
Thereafter | 137 |
|
Total | 373 |
|
Less: Imputed interest | 91 |
|
Present value of remaining lease payments | 282 |
|
Less: Current portion | 47 |
|
Non-current portion | $ | 235 |
|
|
| | | |
(in millions) | |
Remainder of 2019 | $ | 54 |
|
2020 | 57 |
|
2021 | 42 |
|
2022 | 36 |
|
2023 | 32 |
|
2024 | 27 |
|
Thereafter | 138 |
|
Total | 386 |
|
Less: Imputed interest | 93 |
|
Present value of remaining lease payments | 293 |
|
Less: Current portion | 55 |
|
Non-current portion | $ | 238 |
|
Upon adopting the new lease guidance, the Company elected the modified retrospective approach without revising prior periods. Accordingly, the Company is providing the following table of future payments under noncancelable operating leases as of December 31, 2018, for each of the five succeeding years ending December 31 and thereafter as previously disclosed under prior accounting guidance:
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(in millions) | | 2019 | | 2020 | | 2021 | | 2022 | | 2023 | | Thereafter | | Total |
Future payments | | $ | 78 |
| | $ | 60 |
| | $ | 44 |
| | $ | 39 |
| | $ | 32 |
| | $ | 166 |
| | $ | 419 |
|
|
| | | |
(in millions) | |
2019 | $ | 78 |
|
2020 | 60 |
|
2021 | 44 |
|
2022 | 39 |
|
2023 | 32 |
|
Thereafter | 166 |
|
Total | $ | 419 |
|
| |
13. | SHARE-BASED COMPENSATION |
In May 2014, shareholders approved the Company’s 2014 Omnibus Incentive Plan (the “2014 Plan”) which replaced the Company’s 2011 Omnibus Incentive Plan (the “2011 Plan”) for future equity awards granted by the Company. The Company transferred the common shares available under the 2011 Plan to the 2014 Plan. The maximum number of common shares that may be issued to participants under the 2014 Plan is equal to 18,000,000 common shares, plus the number of common shares under the 2011 Plan reserved but unissued and not underlying outstanding awards and the number of common shares becoming available for reuse after awards are terminated, forfeited, cancelled, exchanged or surrendered under the 2011 Plan and the Company’s 2007 Equity Compensation Plan. The Company registered 20,000,000 common shares of common stock for issuance under the 2014 Plan.
Effective April 30, 2018, the Company amended and restated the 2014 Plan (the “Amended and Restated 2014 Plan”). The Amended and Restated 2014 Plan includesincluded the following amendments: (i) the number of common shares authorized for issuance under the Amended and Restated 2014 Plan has beenwas increased by an additional 11,900,000 common shares, as approved by the requisite number of shareholders at the Company’s annual general meeting held on April 30, 2018, (ii) introduction of a $750,000 aggregate fair market value limit on awards (in either equity, cash or other compensation) that can be granted in any calendar year to a participant who is a non-employee director, (iii) housekeeping changes to address recent changes to Section 162(m) of the Internal Revenue Code, (iv) awards arewere made expressly subject to the Company’s clawback policy and (v) awards not assumed or substituted in connection with a Change of Control (as defined in the Amended and Restated 2014 Plan) will only vest on a pro rata basis.
Approximately 9,691,0009,754,000 common shares were available for future grants as of March 31,June 30, 2019. The Company uses reserved and unissued common shares to satisfy its obligations under its share-based compensation plans.
During the three months ended March 31, 2017, the Company introduced a long-term incentive program with the objective to re-align the share-based awards granted to senior management with the Company’s focus on improving its tangible capital usage and allocation while maintaining focus on improving total shareholder return over the long-term. The share-based awards granted under this long-term incentive program consist of time-based stock options, time-based restricted share units (“RSUs”) and performance-based RSUs. Performance-based RSUs are comprised of awards that vest upon achievement of certain share price appreciation conditions that are based on total shareholder return (“TSR”) and awards that vest upon attainment of certain performance targets that are based on the Company’s return on tangible capital (“ROTC”).
The following table summarizes the components and classification of share-based compensation expense related to stock options and RSUs for the three and six months ended March 31,June 30, 2019 and 2018:
|
| | | | | | | | | | | | | | | |
| Three Months Ended June 30, |
| Six Months Ended June 30, |
(in millions) | 2019 |
| 2018 |
| 2019 |
| 2018 |
Stock options | $ | 6 |
| | $ | 6 |
| | $ | 12 |
| | $ | 11 |
|
RSUs | 21 |
| | 16 |
| | 39 |
| | 32 |
|
| $ | 27 |
| | $ | 22 |
| | $ | 51 |
| | $ | 43 |
|
| | | | | | | |
Research and development expenses | $ | 3 |
| | $ | 2 |
| | $ | 5 |
| | $ | 4 |
|
Selling, general and administrative expenses | 24 |
| | 20 |
| | 46 |
| | 39 |
|
| $ | 27 |
| | $ | 22 |
| | $ | 51 |
| | $ | 43 |
|
|
| | | | | | | |
| Three Months Ended March 31, |
(in millions) | 2019 |
| 2018 |
Stock options | $ | 6 |
| | $ | 5 |
|
RSUs | 18 |
| | 16 |
|
| $ | 24 |
| | $ | 21 |
|
| | | |
Research and development expenses | $ | 2 |
| | $ | 2 |
|
Selling, general and administrative expenses | 22 |
| | 19 |
|
| $ | 24 |
| | $ | 21 |
|
Share-based awards granted consist of:During the three months ended March 31, 2019 and 2018, the Company granted approximately 1,684,000 stock options with a weighted-average exercise price of $23.16 per option and approximately 2,065,000 stock options with a weighted-average exercise price of $15.32 per option, respectively. The weighted-average fair values of all stock options granted to employees during the three months ended March 31, 2019 and 2018 were $8.47 and $7.82, respectively. |
| | | | | | | |
| Six Months Ended June 30, |
| 2019 | | 2018 |
Stock options | | | |
Granted | 1,725,000 |
| | 2,076,000 |
|
Weighted-average exercise price | $ | 23.16 |
| | $ | 15.35 |
|
Weighted-average grant date fair value | $ | 8.46 |
| | $ | 7.82 |
|
| | | |
Time-based RSUs | | | |
Granted | 2,667,000 |
| | 2,726,000 |
|
Weighted-average grant date fair value | $ | 24.06 |
| | $ | 17.07 |
|
|
|
| |
|
|
TSR performance-based RSUs | | | |
Granted | 454,000 |
| | 469,000 |
|
Weighted-average grant date fair value | $ | 34.53 |
| | $ | 29.35 |
|
| | | |
ROTC performance-based RSUs | | | |
Granted | 505,000 |
| | 409,000 |
|
Weighted-average grant date fair value | $ | 25.03 |
| | $ | 18.80 |
|
During the three months ended March 31, 2019 and 2018, the Company granted approximately2,401,000time-based RSUs with a weighted-average grant date fair value of $24.05per RSU and approximately 2,449,000 time-based RSUs with a weighted-average grant date fair value of $16.75 per RSU, respectively.
During the three months ended March 31, 2019 and 2018, the Company granted approximately959,000and 877,000performance-based RSUs, consisting of approximately 454,000 and 469,000 units of TSR performance-based RSUs with an average grant date fair value of $34.53 and $29.35 per RSU and approximately 505,000 and 408,000 units of ROTC performance-based RSUs with a weighted-average grant date fair value of $25.03 and $18.80 per RSU, respectively.
The granted stock options, time-based RSUs and performance-based RSUs includes long-term incentive awards granted to the Company’s Chief Executive Officer ("CEO") during the three months ended March 31, 2018, which had an aggregate value of $10 million. In connection with his award, approximately 933,000 performance-based RSUs received by the CEO upon his hire in 2016 were cancelled, and the shares underlying those performance-based RSUs were permanently retired and are not available for future grants under the Amended and Restated 2014 Plan. The CEO's long-term incentive award was accounted for as an award modification whereby the Company continues to recognize the unamortized compensation associated with the original award plus the incremental fair value of the new award measured at the date of grant, over the vesting period of the new award.
As of March 31,June 30, 2019, the remaining unrecognized compensation expense related to all outstanding non-vested stock options, time-based RSUs and performance-based RSUs amounted to $162$142 million, which will be amortized over a weighted-average period of 2.282.07 years.
| |
14. | ACCUMULATED OTHER COMPREHENSIVE LOSS |
Accumulated other comprehensive loss consists of:
|
| | | | | | | | |
(in millions) | | June 30, 2019 | | December 31, 2018 |
Foreign currency translation adjustments | | $ | (2,034 | ) | | $ | (2,111 | ) |
Pension and postretirement benefit plan adjustments, net of tax | | (27 | ) | | (26 | ) |
| | $ | (2,061 | ) | | $ | (2,137 | ) |
|
| | | | | | | | |
(in millions) | | March 31, 2019 | | December 31, 2018 |
Foreign currency translation adjustments | | $ | (2,090 | ) | | $ | (2,111 | ) |
Pension and postretirement benefit plan adjustments, net of tax | | (26 | ) | | (26 | ) |
| | $ | (2,116 | ) | | $ | (2,137 | ) |
Income taxes are not provided for foreign currency translation adjustments arising on the translation of the Company’s operations having a functional currency other than the U.S. dollar, except to the extent of translation adjustments related to the Company’s retained earnings for foreign jurisdictions in which the Company is not considered to be permanently reinvested.
| |
15. | RESEARCH AND DEVELOPMENT |
Included in Research and development are costs related to product development and quality assurance programs. Quality assurance are the costs incurred to meet evolving customer and regulatory standards. Research and development costs consist of:
|
| | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, | | Six Months Ended June 30, |
(in millions) | | 2019 | | 2018 | | 2019 | | 2018 |
Product related research and development | | $ | 108 |
| | $ | 84 |
| | $ | 215 |
| | $ | 167 |
|
Quality assurance | | 9 |
| | 10 |
| | 19 |
| | 19 |
|
| | $ | 117 |
| | $ | 94 |
| | $ | 234 |
| | $ | 186 |
|
|
| | | | | | | | |
| | Three Months Ended March 31, |
(in millions) | | 2019 | | 2018 |
Product related research and development | | $ | 107 |
| | $ | 83 |
|
Quality assurance | | 10 |
| | 9 |
|
| | $ | 117 |
| | $ | 92 |
|
| |
16. | OTHER (INCOME) EXPENSE, NET |
Other (income) expense, net consists of:
|
| | | | | | | | | | | | | | | | |
|
| Three Months Ended June 30, |
| Six Months Ended June 30, |
(in millions) |
| 2019 |
| 2018 |
| 2019 |
| 2018 |
Net loss (gain) on sale of assets | | $ | 1 |
| | $ | — |
| | $ | (9 | ) | | $ | — |
|
Acquisition-related costs | | — |
| | 1 |
| | 8 |
| | 1 |
|
Litigation and other matters |
| 1 |
|
| (1 | ) |
| 3 |
|
| 10 |
|
Other, net |
| 6 |
|
| — |
|
| 3 |
|
| 1 |
|
|
| $ | 8 |
|
| $ | — |
|
| $ | 5 |
|
| $ | 12 |
|
|
| | | | | | | | |
|
| Three Months Ended March 31, |
(in millions) |
| 2019 |
| 2018 |
Net gain on sale of assets | | $ | (10 | ) | | $ | — |
|
Acquisition-related costs | | 8 |
| | — |
|
Litigation and other matters |
| 2 |
|
| 11 |
|
Other, net |
| (4 | ) |
| — |
|
|
| $ | (4 | ) |
| $ | 11 |
|
Included in Other, net in the table above for the three and six months ended June 30, 2019, is $8 million of in-process research and development costs associated with the upfront payment to enter into an exclusive licensing agreement.For interim financial statement purposes, U.S. GAAP income tax expense/benefit related to ordinary income is determined by applying an estimated annual effective income tax rate against a company's ordinary income, subject to certain limitations on the benefit of losses. Income tax expense/benefit related to items not characterized as ordinary income is recognized as a discrete item when incurred. The estimation of the Company's income tax provision requires the use of management forecasts and other estimates, application of statutory income tax rates, and an evaluation of valuation allowances. The Company's estimated annual effective income tax rate may be revised, if necessary, in each interim period.
Benefit from income taxes for the threesix months ended March 31,June 30, 2019 was $74$83 million and included: (i) $51$52 million of net income tax benefit for discrete items, which includes: (a) a $32 million of tax benefit recognized upon a ruling from the Polish tax
authorities confirming the deductibility of royalty payments by an affiliate, (b) a $15$23 million in tax benefits associated with the filing of certain tax returns and (c) $4 million of net tax benefitscharges related to other changes in uncertain tax positions and (ii) $23$31 million of income tax benefit for the Company's ordinary loss during the threesix months ended March 31,June 30, 2019.
Benefit fromProvision for income taxes for the threesix months ended March 31,June 30, 2018 was $115$23 million and included: (i) $119$170 million of income tax benefit for the Company's ordinary loss forduring the threesix months ended March 31,June 30, 2018 and (ii) $4$193 million of net income tax expense for discrete items. The net income tax expense for discrete items which includes: (a) $3(i) $255 million of tax charges related to internal restructurings, and (b)(ii) a $2$57 million tax benefit related to changes in uncertainthe impairment of intangible assets and (iii) $10 million of tax positions.benefits associated with the filing of tax returns for various tax jurisdictions.
The Company records a valuation allowance against its deferred tax assets to reduce the net carrying value to an amount that it believes is more likely than not to be realized. When the Company establishes or reduces the valuation allowance against its deferred tax assets, the provision for income taxes will increase or decrease, respectively, in the period such determination is made except that, as a result of the 2018 adoption of guidance regarding intra-entity transfers, any change in valuation allowance surrounding the adoption of the intra-entity transfer resulting from this adoption was recorded within equity. The valuation allowance against deferred tax assets was $2,997$3,058 million and $2,913 million as of March 31,June 30, 2019 and December 31, 2018, respectively. The increase was primarily due to continued losses in Canada. The Company will continue to assess the need for a valuation allowance on a go-forward basis.
As of March 31,June 30, 2019 and December 31, 2018, the Company had $613$642 million and $654 million of unrecognized tax benefits, which included $43$45 million and $42 million of interest and penalties, respectively. Of the total unrecognized tax benefits as of March 31,June 30, 2019, $306$334 million would reduce the Company’s effective tax rate, if recognized. The Company anticipates that unrecognized tax benefits resolved within the next 12 months will not be material.
The Company continues to be under examination by the Canada Revenue Agency. The Company’s position as of March 31,June 30, 2019 with regard to proposed audit adjustments has not changed and the proposed adjustments continue to result primarily in a loss of tax attributes that are subject to a full valuation allowance.
The Internal Revenue Service completed its examinations of the Company’s U.S. consolidated federal income tax returns for the years 2013 and 2014. There were no material adjustments to the Company's taxable income as a result of these examinations. The Company has filed tax returns which used a capital loss generated in 2017 to offset capital gains generated in 2014. As these tax returns were filed subsequent to the commencement of the examination by the Internal Revenue Service, the Company’s 2014 tax year cannot be closed commensurate with the examination’s conclusion. Additionally, the Internal Revenue Service has selected for examination the Company's annual tax filings for 2015 and 2016 and the Company's short period tax return for the period ended September 8, 2017, which was filed as a result of the Company's internal restructuring efforts during 2017. At this time, the Company does not expect that proposed adjustments, if any, for these periods would be material to the Company's consolidated financial statements.
The Company's U.S. affiliates remain under examination for various state tax audits in the U.S. for years 2012 through 2017.
The Company’s subsidiaries in Germany are under audit for tax years 2013 through 2017. At this time, the Company does not expect that proposed adjustments, if any, would be material to the Company's consolidated financial statements.
The Company’s subsidiaries in Australia are under audit by the Australian Tax Office for various years beginning in 2010. At this time, the Company does not expect that proposed adjustments, if any, would be material to the Company's consolidated financial statements.
Certain affiliates of the Company in regions outside of Canada, the U.S., Germany and Australia are currently under examination by relevant taxing authorities, and all necessary accruals have been recorded, including uncertain tax benefits. At this time, the Company does not expect that proposed adjustments, if any, would be material to the Company's consolidated financial statements.
Loss per share attributable to Bausch Health Companies Inc. were calculated as follows:
|
| | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
(in millions, except per share amounts) | 2019 | | 2018 | | 2019 | | 2018 |
Net loss attributable to Bausch Health Companies Inc. | $ | (171 | ) | | $ | (873 | ) | | $ | (223 | ) | | $ | (3,454 | ) |
| | | | | | | |
Basic and diluted weighted-average common shares outstanding | 352.1 |
| | 351.3 |
| | 351.7 |
| | 351.0 |
|
| | | | | | | |
Basic and diluted loss per share attributable to Bausch Health Companies Inc.: | $ | (0.49 | ) | | $ | (2.49 | ) | | $ | (0.63 | ) | | $ | (9.84 | ) |
|
| | | | | | | |
| Three Months Ended March 31, |
(in millions, except per share amounts) | 2019 | | 2018 |
Net loss attributable to Bausch Health Companies Inc. | $ | (52 | ) | | $ | (2,581 | ) |
| | | |
Basic weighted-average common shares outstanding | 351.3 |
| | 350.7 |
|
Diluted effect of stock options and RSUs | — |
| | — |
|
Diluted weighted-average common shares outstanding | 351.3 |
| | 350.7 |
|
| | | |
Loss per share attributable to Bausch Health Companies Inc.: | | | |
Basic | $ | (0.15 | ) | | $ | (7.36 | ) |
Diluted | $ | (0.15 | ) | | $ | (7.36 | ) |
During the three and six months ended March 31,June 30, 2019 and 2018, all potential common shares issuable for stock options and RSUs were excluded from the calculation of diluted loss per share, as the effect of including them would have been anti-dilutive. The dilutive effect of potential common shares issuable for stock options and RSUs on the weighted-average number of common shares outstanding would have been approximately 4,920,0004,395,000 and 2,486,0003,245,000 common shares for the three months ended March 31,June 30, 2019 and 2018, respectively, and approximately 4,657,000 and 2,865,000 common shares for the six months ended June 30, 2019 and 2018, respectively.
During the three and six months ended March 31,June 30, 2019, time-based RSUs, performance-based RSUs and stock options to purchase approximately 4,855,000 common shares were not included in the computation of diluted earnings per share because the effect would have been anti-dilutive under the treasury stock method. During the three and six months ended June 30, 2018, time-based RSUs, performance-based RSUs and stock options to purchase approximately 5,370,0005,369,000 and 4,830,0006,286,000 common shares, respectively, were not included in the computation of diluted earnings per share because the effect would have been anti-dilutive under the treasury stock method.
From time to time, the Company becomes involved in various legal and administrative proceedings, which include product liability, intellectual property, commercial, tax, antitrust, governmental and regulatory investigations, related private litigation and ordinary course employment-related issues. From time to time, the Company also initiates actions or files counterclaims. The Company could be subject to counterclaims or other suits in response to actions it may initiate. The Company believes that the prosecution of these actions and counterclaims is important to preserve and protect the Company, its reputation and its assets. Certain of these proceedings and actions are described below.
On a quarterly basis, the Company evaluates developments in legal proceedings, potential settlements and other matters that could increase or decrease the amount of the liability accrued. As of March 31,June 30, 2019, the Company's Consolidated Balance Sheet includes accrued current loss contingencies of $12 million related to matters which are both probable and reasonably estimable. For all other matters, unless otherwise indicated, the Company cannot reasonably predict the outcome of these legal proceedings, nor can it estimate the amount of loss, or range of loss, if any, that may result from these proceedings. An adverse outcome in certain of these proceedings could have a material adverse effect on the Company’s business, financial condition and results of operations, and could cause the market value of its common shares and/or debt securities to decline.
Governmental and Regulatory Inquiries
Investigation by the U.S. Attorney's Office for the District of Massachusetts
In October 2015, the Company received a subpoena from the U.S. Attorney's Office for the District of Massachusetts, and, in June 2016, the Company received a follow-up subpoena. The materials requested, pursuant to the subpoenas and follow-up requests, include documents and witness interviews with respect to the Company’s patient assistance programs and contributions to patient assistance organizations that provide financial assistance to Medicare patients taking products sold by the Company, and the Company’s pricing of its products. The Company is cooperating with this investigation. The Company cannot predict the outcome or the duration of this investigation or any other legal proceedings or any enforcement actions or other remedies that may be imposed on the Company arising out of this investigation.
Investigation by the U.S. Attorney's Office for the Southern District of New York
In October 2015, the Company received a subpoena from the U.S. Attorney's Office for the Southern District of New York. The materials requested, pursuant to the subpoena and follow-up requests, include documents and witness interviews with respect to the Company’s patient assistance programs; its former relationship with Philidor Rx Services, LLC ("Philidor") and other pharmacies; the Company’s accounting treatment for sales by specialty pharmacies; information provided to the Centers for Medicare and Medicaid Services; the Company’s pricing (including discounts and rebates), marketing and distribution of its products; the Company’s compliance program; and employee compensation. The Company is cooperating with this investigation. The Company cannot predict the outcome or the duration of this investigation or any other legal proceedings or any enforcement actions or other remedies that may be imposed on the Company arising out of this investigation.
SEC Investigation
Beginning in November 2015, the Company received from the staff of the Los Angeles Regional Office of the SEC subpoenas for documents, as well as various document, testimony and interview requests, related to its investigation of the Company, including requests concerning the Company's former relationship with Philidor, its accounting practices and policies, its public disclosures and other matters. The Company is cooperating with the SEC in this matter. The Company cannot predict the outcome or the duration of the SEC investigation or any other legal proceedings or any enforcement actions or other remedies that may be imposed on the Company arising out of the SEC investigation.
AMF Investigation
On April 12, 2016, the Company received a request letter from the Autorité des marchés financiers (the “AMF”) requesting documents concerning the work of the Company’s ad hoc committee of independent directors (established to review certain allegations regarding the Company’s former relationship with Philidor and related matters), the Company’s former relationship with Philidor, the Company's accounting practices and policies and other matters. The Company is cooperating with the AMF in this matter. In July 2018, the Company was advised by the AMF that it had issued a formal investigation order in respect of the Company on February 2, 2018.against it. The Company cannot predict whether any enforcement action against the Company will result from such investigation.
Investigation by the State of Texas
On May 27, 2014, the State of Texas served Bausch & Lomb Incorporated ("B&L Inc.") with a Civil Investigative Demand concerning various price reporting matters relating to the State's Medicaid program and the amounts the State paid in reimbursement for B&L products for the period from 1995 to the date of the Civil Investigative Demand. The Company and B&L Inc. have cooperated fully with the State's investigation and have produced all of the documents requested by the State. In April 2016, the State sent B&L Inc. a demand letter claiming damages in the amount of $20 million. The Company and B&L Inc. have evaluated the letter and disagree with the allegations and methodologies set forth in the letter. In June 2016, the Company and B&L Inc. responded to the State. In July 2018, the State responded to the Company's June 2016 letter and indicated that it disagreed with certain of the Company’s positions and would send a response to the Company's June 2016 letter, which the Company has not yet received.
Securities and RICO Class Actions and Related Matters
U.S. Securities Litigation
In October 2015, four putative securities class actions were filed in the U.S. District Court for the District of New Jersey against the Company and certain current or former officers and directors. The allegations related to, among other things, allegedly false and misleading statements and/or failures to disclose information about the Company’s business and prospects, including relating to drug pricing, the Company’s use of specialty pharmacies, and the Company’s relationship with Philidor.
On May 31, 2016, the Court entered an order consolidating the four actions under the caption In re Valeant Pharmaceuticals International, Inc. Securities Litigation, Case No. 3:15-cv-07658. On June 24, 2016, the lead plaintiff filed a consolidated complaint asserting claims under Sections 10(b) and 20(a) of the Exchange Act against the Company, and certain current or former officers and directors, as well as claims under Sections 11, 12(a)(2) and 15 of the Securities Act of 1933 (the “Securities Act”) against the Company, certain current or former officers and directors, and certain other parties. The lead plaintiff seeks to bring these claims on behalf of a putative class of persons who purchased the Company’s equity securities and senior notes in the United States between January 4, 2013 and March 15, 2016, including all those who purchased the Company’s securities in the United States in the Company’s debt and stock offerings between July 2013 to March 2015. On September 13, 2016,
the Company and the other defendants moved to dismiss the consolidated complaint. On April 28, 2017, the Court dismissed
certain claims arising out of the Company's private placement offerings and otherwise denied the motions to dismiss. On September 20, 2018, lead plaintiff filed an amended complaint, adding claims against ValueAct Capital Management L.P. and affiliated entities. On October 31, 2018, ValueAct filed a motion to dismiss anddismiss. On June 30, 2019, the parties then agreed thatCourt denied the action was stayed pursuantmotion to the Private Securities Litigation Reform Act.dismiss.
On June 6, 2018, a putative class action was filed in the U.S. District Court for the District of New Jersey against the Company and certain current or former officers and directors. This action, captioned Timber Hill LLC, v. Valeant Pharmaceuticals International, Inc., et al., (Case No. 2:18-cv-10246) (“Timber Hill”), asserts securities fraud claims under Sections 10(b) and 20(a) of the Exchange Act on behalf of a putative class of persons who purchased call options or sold put options on the Company’s common stock during the period January 4, 2013 through August 11, 2016. On June 11, 2018, this action was consolidated with In re Valeant Pharmaceuticals International, Inc. Securities Litigation, (Case No. 3:15-cv-07658). On January 14, 2019, the defendants filed a motion to dismiss the Timber Hill complaint. Briefing on that motion was completed on February 13, 2019.
In addition to the consolidated putative class action, as previously reported in the Company’s Form 10-K, thirty-one groups of individual investors in the Company’s stock and debt securities have chosen to opt out of the consolidated putative class action and filed securities actions pending in the U.S. District Court for the District of New Jersey against the Company and certain current or former officers and directors. These individual shareholder actions assert claims under Sections 10(b), 18, and 20(a) of the Exchange Act, Sections 11, 12(a)(2), and 15 of the Securities Act, common law fraud, and negligent misrepresentation under state law, based on alleged purchases of Company stock, options, and/or debt at various times between January 3, 2013 and August 10, 2016. Some plaintiffs additionally assert claims under the New Jersey Racketeer Influenced and Corrupt Organizations Act. The allegations in the complaints are similar to those made by plaintiffs in the putative class action. Motions to dismiss have been filed in many of these individual actions. To date, the Court has dismissed state law claims including New Jersey Racketeer Influenced and Corrupt Organizations Act, common law fraud, and negligent misrepresentation claims in certain cases. On January 7, 2019, the Court entered a stipulation of voluntary dismissal in the Senzar Healthcare Master Fund LP v. Valeant Pharmaceuticals International, Inc. (Case No. 18-cv-02286) opt-out action, closing the case. On May 31, 2019, the Court dismissed the Catalyst Dynamic Alpha Fund v. Valeant Pharmaceuticals International, Inc. (Case No. 18-cv-12673) opt-out action on statute of limitations and other grounds, with leave to re-plead. The Catalyst Plaintiffs filed an amended complaint on July 1, 2019.
The Company believes the individual complaints and the consolidated putative class action are without merit and intends to defend itself vigorously.
Canadian Securities Litigation
In 2015, six putative class actions were filed and served against the Company and certain current or former officers and directors in Canada in the provinces of British Columbia, Ontario and Quebec, as previously reported in the Company's Annual Report on Form 10-K for the year ended December 31, 2018, filed on February 20, 2019.
The actions generally allege violations of Canadian provincial securities legislation on behalf of putative classes of persons who purchased or otherwise acquired securities of the Company for periods commencing as early as January 1, 2013 and ending as late as November 16, 2015. The alleged violations relate to the same matters described in the U.S. Securities Litigation description above.
The Rosseau-Godbout action was stayed by the Quebec Superior Court by consent order. The Kowalyshyn action has been consolidated with the O’Brien action and that consolidated action is stayed in favor of the Catucci action. In the Catucci action, on August 29, 2017, the judge granted the plaintiffs leave to proceed with their claims under the Quebec Securities Act and authorized the class proceeding. On October 26, 2017, the plaintiffs issued their Judicial Application Originating Class Proceedings. A timetable for certain pre-trial procedural matters in the action has been set and the notice of certification has been disseminated to class members. Among other things, the timetable established a deadline of June 19, 2018 for class members to exercise their right to opt-out of the class.
The Company is aware of two additional putative class actions that have been filed with the applicable court but which have not yet been served on the Company, as previously reported in the Company's Annual Report on Form 10-K for the year ended December 31, 2018, filed on February 20, 2019, and the factual allegations made in these actions are substantially similar to those outlined above. The Company has been advised that the plaintiffs in these actions do not intend to pursue the actions.
In addition to the class proceedings described above, on April 12, 2018, the Company was served with an application for leave filed in the Quebec Superior Court of Justice to pursue an action under the Quebec Securities Act against the Company and
certain current or former officers and directors. This proceeding is captioned BlackRock Asset Management Canada Limited et al. v. Valeant, et al. (Court File No. 500-11-054155-185). The allegations in the proceeding are similar to those made by plaintiffs in the Catucci class action. That application has been scheduled to be heard on May 14, 2019. On June 18, 2018, the same BlackRock entities filed an originating application (Court File No. 500-17-103749-183) against the same defendants asserting claims under the Quebec Civil Code in respect of the same alleged misrepresentations.
The Company is aware that certain other members of the Catucci class exercised their opt-out rights prior to the June 19, 2018 deadline. On February 15, 2019, one of the entities which exercised its opt-out rights served the Company with an application in the Quebec Superior Court of Justice for leave to pursue an action under the Quebec Securities Act against the Company, certain current or former officers and directors of the Company and its auditor. That proceeding is captioned California State Teachers’ Retirement System v. Bausch Health Companies Inc. et al. (Court File No. 500-11-055722-181). The allegations in the proceeding are similar to those made by the plaintiffs in the Catucci class action and in the BlackRock opt-out proceedings. On that same date, California State Teachers’ Retirement System also served the Company with proceedings (Court File No. 500-17-106044-186) against the same defendants asserting claims under the Quebec Civil Code in respect of the same alleged misrepresentations.
The Company believes that it has viable defenses in each of these actions. In each case, the Company intends to defend itself vigorously.
Insurance Coverage Lawsuit
On December 7, 2017, the Company filed a lawsuit against its insurance companies that issued insurance policies covering claims made against the Company, its subsidiaries, and its directors and officers during two distinct policy periods, (i) 2013-14 and (ii) 2015-16. The lawsuit is currently pending in the United States District Court for the District of New Jersey (Valeant Pharmaceuticals International, Inc., et al. v. AIG Insurance Company of Canada, et al.; 3:18-CV-00493). In the lawsuit, the Company seeks coverage for (1) the costs of defending and resolving claims brought by former shareholders and debtholders of Allergan, Inc. in In re Allergan, Inc. Proxy Violation Securities Litigation and Timber Hill LLC, individually and on behalf of all others similarly situated v. Pershing Square Capital Management, L.P., et al. (under the 2013-2014 coverage period), and (2) costs incurred and to be incurred in connection with the securities class actions and opt-out cases described in this section and certain of the investigations described above (under the 2015-2016 coverage period).
RICO Class Actions
Between May 27, 2016 and September 16, 2016, three virtually identical actions were filed in the U.S. District Court for the District of New Jersey against the Company and various third-parties, alleging claims under the federal Racketeer Influenced Corrupt Organizations Act (“RICO”) on behalf of a putative class of certain third-party payors that paid claims submitted by Philidor for certain Company branded drugs between January 2, 2013 and November 9, 2015. On November 30, 2016, the Court entered an order consolidating the three actions under the caption In re Valeant Pharmaceuticals International, Inc. Third-Party Payor Litigation, No. 3:16-cv-03087. A consolidated class action complaint was filed on December 14, 2016. The consolidated complaint alleges, among other things, that the defendants committed predicate acts of mail and wire fraud by submitting or causing to be submitted prescription reimbursement requests that misstated or omitted facts regarding (1) the identity and licensing status of the dispensing pharmacy; (2) the resubmission of previously denied claims; (3) patient co-pay waivers; (4) the availability of generic alternatives; and (5) the insured’s consent to renew the prescription. The complaint further alleges that these acts constitute a pattern of racketeering or a racketeering conspiracy in violation of the RICO statute and caused plaintiffs and the putative class unspecified damages, which may be trebled under the RICO statute. The Company moved to dismiss the consolidated complaint on February 13, 2017. On March 14, 2017, other defendants filed a motion to stay the RICO class action pending the resolution of criminal proceedings against Andrew Davenport and Gary Tanner. On August 9, 2017, the Court granted the motion to stay and entered an order staying all proceedings in the case and accordingly terminating other pending motions. On April 12, 2019, the court lifted the stay. TheOn July 30, 2019, the plaintiffs have indicated that they will filefiled an amended complaint.
The Company believes these claims are without merit and intends to defend itself vigorously.
Hound Partners Lawsuit
On October 19, 2018, Hound Partners Offshore Fund, LP, Hound Partners Long Master, LP, and Hound Partners Concentrated Master, LP, filed a lawsuit against the Company in the Superior Court of New Jersey Law Division/Mercer County. This action is captioned Hound Partners Offshore Fund, LP et al., v. Valeant Pharmaceuticals International, Inc., et al. (No. MER-
L-002185-18)MER-L-002185-18). This suit asserts claims for common law fraud, negligent misrepresentation, and violations of the New Jersey Racketeer Influenced and Corrupt Organizations Act. The factual allegations made in this complaint are similar to those made in the District of New Jersey Hound Partners action. On March 29, 2019, the Company, certain individual defendants, and Plaintiffs submitted a consent order to stay further proceedings pending the completion of discovery in the federal opt-out case Hound Partners Offshore Funds, LP et al. v. Valeant Pharmaceuticals International, Inc. The Company disputes the claims and intends to vigorously defend this matter.
Antitrust
Contact Lens Antitrust Class Actions
Beginning in March 2015, a number of civil antitrust class action suits were filed by purchasers of contact lenses against B&L Inc., three other contact lens manufacturers, and a contact lens distributor, alleging that the defendants engaged in an anticompetitive scheme to eliminate price competition on certain contact lens lines through the use of unilateral pricing policies, and alleging violations of Section 1 of the Sherman Act, 15 U.S.C. § 1, and of various state antitrust and consumer protection laws. These cases have been consolidated in the Middle District of Florida by the Judicial Panel for Multidistrict Litigation, under the caption In re Disposable Contact Lens Antitrust Litigation, Case No. 3:15-md-02626-HES-JRK. On August 20, 2018, defendants filed motions for summary judgment. The Court has set oral argument on the motions for summary judgement for August 21 and 22, 2019. On December 4, 2018, the Court certified six classes, four of which relate to B&L Inc. On December 18, 2018, the defendants filedDefendants' petitions seeking leave from the Eleventh Circuit Court of Appeals to file an immediate appeal of the class certification order one of which hashave been denied. On February 20, 2019, the Court removed the case from the trial calendar. The Company continues to vigorously defend this matter.
Generic Pricing Antitrust Class Action
As of June 2018, the Company's subsidiaries, Oceanside Pharmaceuticals, Inc. (“Oceanside”), Bausch Health US, LLC (formerly Valeant Pharmaceuticals North America LLC) (“Bausch Health US”), and Bausch Health Americas, Inc. (formerly Valeant Pharmaceuticals International) (“Bausch Health Americas”) (for the purposes of this subsection, collectively, the “Company”), were added as defendants in putative class action multidistrict antitrust litigation entitled In re: Generic Pharmaceuticals Pricing Antitrust Litigation, pending in the United States District Court for the Eastern District of Pennsylvania (MDL 2724, 16-MD-2724). The lawsuit to which the Company was added was filed by direct purchaser plaintiffs and seeks damages under federal antitrust laws, alleging that the Company’s subsidiaries entered into a conspiracy to fix, stabilize, and raise prices, rig bids and engage in market and customer allocation for generic pharmaceuticals. Specific claims against the Company’s subsidiaries relate to generic pricing of the Company’s metronidazole vaginal product as part of an alleged overarching conspiracy among generic drug manufacturers. As of December 2018, three direct purchaser plaintiffs that had opted out of the putative class filed an amended complaint in the MDL that added Oceanside, Bausch Health US and Bausch Health Americas, alleging similar claims as the direct purchaser plaintiffs’ putative class action complaint. Separate complaints by other plaintiffs which had been consolidated in the same multidistrict litigation do not name the Company or any of its subsidiaries as a defendant. The Company has filed motions to dismiss. Discovery against the Company’s subsidiaries has commenced. The Company continues to vigorously defend this matter.
Intellectual Property
Patent Litigation/Paragraph IV Matters
From time to time, the Company (and/or certain of its affiliates) is also party to certain patent infringement proceedings in the United States and Canada, including as arising from claims filed by the Company (or that the Company anticipates filing within the required time periods) in connection with Notices of Paragraph IV Certification (in the United States) and Notices of Allegation (in Canada) received from third-party generic manufacturers respecting their pending applications for generic versions of certain products sold by or on behalf of the Company, including Relistor®, Apriso®, Uceris®, Xifaxan® 200mg, Plenvu®, Glumetza®, Bryhali™, Prolensa® and Jublia® in the United States, or other similar suits. These matters are proceeding in the ordinary course. In July 2019, the Company announced that the U.S. District Court of New Jersey had upheld the validity of and determined Actavis' infringement of a patent protecting the Company's Relistor® tablets, expiring in March 2031. In
July, the Company also announced that it had agreed to resolve the outstanding intellectual property litigation with Teva Pharmaceuticals USA, Inc. ("Teva") regarding Apriso® extended-release capsules 0.375g. As part of the settlement, the parties agreed to dismiss all litigation related to Apriso®, and intellectual property protecting Apriso® will remain intact and enforceable. In addition, the Company will grant Teva a non-exclusive license effective October 1, 2021to the intellectual property relating to Apriso® in the United States (provided that Teva will be able to begin marketing prior to such date if another generic version of the product is granted approval and starts selling or distributing such generic prior to October 1, 2021).
In addition, patents covering the Company's branded pharmaceutical products may be challenged in proceedings other than court proceedings, including inter partes review ("IPR") at the U.S. Patent & Trademark Office. The proceedings operate under different standards from district court proceedings, and are often completed within 18 months of institution. IPR challenges have been brought against patents covering the Company's branded pharmaceutical products. For example, following Acrux DDS’s IPR petition, the U.S. Patent and Trial Appeal Board, in May 2017, instituted inter partes review for an Orange Book-listed patent covering Jublia® and, on June 6, 2018, issued a written determination invalidating such patent. An appeal of this decision was filed on August 7, 2018. Jublia® continues to be covered by seven other Orange Book-listed patents owned by the Company, which expire in the years 2028 through 2034.
Product Liability
Shower to Shower® Products Liability Litigation
TheSince 2016, the Company has been named in one hundred and sixty-fivesixty-six (166) product liability lawsuits involving the Shower to Shower® body powder product acquired in September 2012 from Johnson & Johnson.Johnson; due to dismissals, only twelve (12) of such product liability suits currently remain pending, and these twelve (12) matters are subject to the Johnson & Johnson indemnification referenced below.
These lawsuits include three cases originally filed in the In re Johnson & Johnson Talcum Powder Litigation, Multidistrict Litigation 2738, pending in the United States District Court for the District of New Jersey, and one case that was filed in the District of Puerto Rico and subsequently transferred to the MDL. The Company and Bausch Health US were first named in a lawsuit filed directly into the MDL alleging that the use of the Shower to Shower® product caused the plaintiff to develop ovarian cancer. The plaintiff agreed to a dismissal of all claims against the Company and Bausch Health US without prejudice. The Company has subsequently been named in one additional lawsuit, originally filed in the District of Puerto Rico and subsequently transferred into the MDL, but has not been served in that case. The Company was also named in two additional lawsuits filed directly into the MDL that have also not yet been served.
These lawsuits also include a number of matters filed in the Superior Court of Delaware and five cases filed in the Superior Court of New Jersey alleging that the use of Shower to Shower® caused the plaintiffs to develop ovarian cancer. The Company has been voluntarily dismissed from nearly all of these cases, with claims against Bausch Health US only remaining in one case pending in New Jersey and one case pending in Delaware. Four of the five cases in the Superior Court of New Jersey were voluntarily dismissed as to Bausch Health US as well. The allegations in the remaining two cases specifically directed to Bausch Health US include failure to warn, design defect, negligence, gross negligence, breach of express and implied warranties, civil conspiracy concert in action, negligent misrepresentation, wrongful death, and punitive damages. One hundred twenty-two (122) of the Delaware actions were voluntarily dismissed without prejudice pursuant to stipulation in January 2019, but, pursuant to aand although the stipulation amongpermitted the parties, werecases to be refiled in either the MDL or in coordinated proceedings in Atlantic County, New Jersey Superior Court, depending on the state of residence of each plaintiff. Asfiled again within 60 days, none of the date of this Form 10-Q, these re-filingscases have not yet occurred.been refiled.
In addition, these lawsuits also include a number of cases filed in certain state courts in the United States (including the Superior Courts of California, Delaware and New Jersey); the District Court of Louisiana; the Supreme Court of New York (Niagara County); the District Court of Oklahoma City, Oklahoma; the South Carolina Court of Common Pleas (Richland County); and the District Court of Nueces County, Texas (transferred to the asbestos MDL docket in the District Court of Harris County, Texas for pre-trial purposes) alleging use of Shower to Shower® and other products resulted in the plaintiffs developing mesothelioma. The Company has been successful in obtaining voluntarily dismissals in most of these cases or the plaintiffs have not opposed summary judgment. Presently, four cases remain pending in the Superior Court of New Jersey.Jersey and one case in the Superior Court of California. The allegations in these cases generally include design defect, manufacturing defect, failure to warn, negligence, and punitive damages, and in some cases breach of express and implied warranties, misrepresentation, and loss of consortium. The damages sought by the various Plaintiffs include compensatory damages, including medical expenses, lost wages or earning capacity, and loss of consortium. In addition, Plaintiffs seek compensation for pain and suffering, mental anguish anxiety and discomfort, physical impairment and loss of enjoyment of life. Plaintiffs also seek pre- and post-judgment interest, exemplary and punitive damages, and attorneys’ fees.
On February 11, 2019, seven plaintiffs filed a pre-suit notice letter with the California Attorney General notifying the Attorney General’s office of their intent to file suit after 60 days against the Company and certain of its subsidiaries, alleging they committed violations of the California Safe Drinking Water and Toxic Enforcement Act of 1986 (Proposition 65) by manufacturing and distributing Shower to Shower that they allege contained chemical compounds known to cause cancer. That notice letter was served on the Company on February 22, 2019. By statute, a private lawsuit may not be filed until at least 60 days have passed following service of this pre-suit notice letter.
On April 15, 2019, one plaintiff filed a pre-suit notice letter with the California Attorney General notifying the Attorney General’s office of their intent to file suit after 60 days against the Company and certain of its subsidiaries, alleging they committed violations of the California Safe Drinking Water and Toxic Enforcement Act of 1986 (Proposition 65) by manufacturing and distributing Shower to Shower that they allege contained silica, arsenic, lead and chromium (hexavalent compounds), which they allege are known to cause cancer and/or reproductive toxicity. That notice letter was served on the Company on April 18, 2019. By statute, a private lawsuit may not be filed until at least 60 days have passed following service of this pre-suit notice letter.
Additionally, two proposed class actions have been filed in Canada against the Company and various Johnson & Johnson entities (one in the Supreme Court of British Columbia and one in the Superior Court of Quebec). The Company also acquired the rights to the Shower to Shower® product in Canada from Johnson & Johnson in September 2012. In the British Columbia matter, the plaintiff seeks to certify a proposed class action on behalf of persons in British Columbia and Canada who have purchased or used Johnson & Johnson’s Baby Powder or Shower to Shower®, including their estates, executors and personal representatives, and is alleging that the use of this product increases certain health risks. In the Quebec matter, the plaintiff sought to certify a proposed class action on behalf of persons in Quebec who have used Johnson & Johnson’s Baby Powder or Shower to Shower®, as well as their family members, assigns and heirs, and is alleging negligence in failing to properly test, failing to warn of health risks, and failing to remove the products from the market in a timely manner. A certification (also known as authorization) hearing was held in the Quebec matter and the Court certified (or as stated under Quebec law, authorized) the bringing of a class action by a representative plaintiff on behalf of people in Quebec who have used Johnson & Johnson's Baby Powder and/or Shower to Shower® in their perineal area and have been diagnosed with ovarian cancer and/or family members, assigns and heirs. The plaintiffs in these actions are seeking awards of general, special, compensatory and punitive damages.
The Company intends to defend itself vigorously in each of the remaining actions that are not voluntarily dismissed or subject to a grant of summary judgment. Potential liability (including its attorneys’ fees and costs) arising out of the covered Shower to Shower® lawsuits filed against the Company is subject to certain indemnification obligations of Johnson & Johnson owed to the Company, and legal fees and costs have been and will continue to be reimbursed by Johnson & Johnson. The Company and Johnson & Johnson reached an agreement on April 17, 2019, regarding the scope of the indemnification relating to the majority of the Shower to Shower® matters (the “Covered Matters”) and the Company has dismissed the demand for arbitration that the Company filed against Johnson & Johnson to assert its rights to indemnification. Johnson & Johnson will fully indemnify the Company in the Covered Matters, which include (i) personal injury and products liability actions arising from alleged exposure to Shower to Shower® prior to March 2020, and (ii) consumer fraud, consumer protection, false advertising or other regulatory actions arising out of the manufacture, use, or sale of Shower to Shower® up to and including September 9, 2012. The Company does not believe that the Covered Matters will have a material impact on the Company’s financial results going forward.
General Civil Actions
Mississippi Attorney General Consumer Protection Action
The Company and Bausch Health US are named in an action brought by James Hood, Attorney General of Mississippi, in the Chancery Court of the First Judicial District of Hinds County, Mississippi (Hood ex rel. State of Mississippi, Civil Action No. G2014-1207013, filed on August 22, 2014), alleging consumer protection claims against Johnson & Johnson and Johnson Consumer Companies, Inc., the Company and Bausch Health US related to the Shower to Shower® body powder product and its alleged causal link to ovarian cancer. As indicated above, the Company acquired the Shower to Shower® body powder product in September 2012 from Johnson & Johnson. The State seeks compensatory damages, punitive damages, injunctive relief requiring warnings for talc-containing products, removal from the market of products that fail to warn, and to prevent the continued violation of the Mississippi Consumer Protection Act (“MCPA”). The State also seeks disgorgement of profits from the sale of the product and civil penalties. In October 2017, plaintiffs dismissed certain claims under the MCPA related to advertising/marketing that did not appear on the label and/or packaging of Shower to Shower.Shower®. The State has not made specific allegations as to the Company or Bausch Health US. The Company intends to defend itself vigorously in this action. Johnson & Johnson will fully indemnify the Company in this case with respect to liabilities arising out of the manufacture, use, or sale of Shower to Shower® prior to the Company's acquisition of the product.
California Proposition 65 Related Matters
On February 11, 2019, plaintiffs filed a pre-suit notice letter with the California Attorney General notifying the Attorney General’s office of their intent to file suit after 60 days against the Company and certain of its subsidiaries, alleging they committed violations of the California Safe Drinking Water and Toxic Enforcement Act of 1986 (Proposition 65) by manufacturing and distributing Shower to Shower® that they allege contained talc contaminated with asbestos, a listed carcinogen. That notice letter was served on the Company on February 22, 2019. By statute, a private lawsuit may not be filed until at least 60 days have passed following service of this pre-suit notice letter. In April 2019, rather than filing a lawsuit against Bausch Health US, the plaintiffs moved for leave to amend their complaint in a pending Proposition 65 lawsuit (Luna, et al. v. Johnson & Johnson, et al., case 2:18-cv-04830-GW-KS) against Johnson & Johnson in federal court in California to
add Bausch Health US as a defendant. Plaintiffs subsequently filed a motion to dismiss the lawsuit without prejudice. The court has ordered that the case be dismissed without prejudice.
On April 15, 2019, a plaintiff filed a pre-suit notice letter with the California Attorney General notifying the Attorney General’s office of their intent to file suit after 60 days against the Company and certain of its subsidiaries, alleging they committed violations of Proposition 65 by manufacturing and distributing Shower to Shower® that they allege contained silica, arsenic, lead and chromium (hexavalent compounds), which they allege are known to cause cancer and/or reproductive toxicity. That notice letter was served on the Company on April 18, 2019. While the statutory 60 days have passed before a private lawsuit may be filed, no lawsuit has been filed to date.
On June 19, 2019, plaintiffs filed a proposed class action in California state court against Bausch Health US and Johnson & Johnson (Gutierrez, et al. v. Johnson & Johnson, et al., Case No. 37-2019-00025810-CU-NP-CTL), asserting claims for purported violations of the California Consumer Legal Remedies Act, False Advertising Law and Unfair Competition Law in connection with their sale of talcum powder products that the plaintiffs allege violated Proposition 65. This lawsuit was served on Bausch Health US on June 28, 2019. Plaintiffs seek damages, disgorgement of profits, injunctive relief, and reimbursement/restitution. The Company and Bausch Health US intend to defend this lawsuit vigorously.
Doctors Allergy Formula Lawsuit
In April 2018, Doctors Allergy Formula, LLC (“Doctors Allergy”), filed a lawsuit against Bausch Health Americas in the Supreme Court of the State of New York, County of New York, Index No. 651597/2018. Doctors Allergy asserts breach of contract and related claims under a 2015 Asset Purchase Agreement, which purports to include milestone payments that Doctors Allergy alleges should have been paid by Bausch Health Americas. Doctors Allergy claims its damages are not less than $23 million. On June 14, 2018, Bausch Health Americas filed a motion to dismiss the complaint in part and a motion to strike. Oral argument on thisOn July 16, 2019 the court granted the Company's motion was held on November 13, 2018.in part and dismissed Doctor's Allergy's fraud and punitive damages claims. Discovery is proceeding. Bausch Health Americas disputes the claims and intends to vigorously defend this matter.the remaining claims.
Litigation with Former Salix CEO
On January 28, 2019, former Salix Ltd. CEO and director Carolyn Logan filed a lawsuit in the Delaware Court of Chancery, Case No. 2019-0059, asserting claims for breach of contract and declaratory relief. The lawsuit arises out of the contractual termination of approximately $30 million in unvested equity awards following the determination by the Salix Ltd. Board of Directors that Logan intentionally engaged in wrongdoing that resulted, or would reasonably be expected to result, in material harm to Salix Ltd., or to the business or reputation of Salix Ltd. Logan seeks the restoration of the unvested equity awards and a declaration regarding certain rights related to indemnification. On June 19, 2019, the Court entered an order staying the claim for declaratory relief pending the final resolution of the breach of contract claim. The Company disputes the claims and intends to vigorously defend the matter.
Completed or Inactive Matters
The following matters have concluded, have settled, are the subject of an agreement to settle or have otherwise been closed since January 1, 2019, have been inactive from the Company’s perspective for several quarters or the Company anticipates that no further material activity will take place with respect thereto. Due to the closure, settlement, inactivity or change in status of the matters referenced below, these matters will no longer appear in the Company's next public reports and disclosures, unless required. With respect to inactive matters, to the extent material activity takes place in subsequent quarters with respect thereto, the Company will provide updates as required or as deemed appropriate.
Settlement of Horizon Blue Cross Blue Shield of New Jersey Lawsuit
On July 26, 2018, Horizon Blue Cross Blue Shield of New Jersey ("Horizon") filed a lawsuit against the Company in the Superior Court of New Jersey Law Division/Essex County. This action was captioned Horizon Blue Cross Blue Shield of New Jersey v. Valeant Pharmaceuticals International Inc., et. al., (No. ESX-L-005234-18). This suit asserted a claim under the New Jersey Insurance Fraud Prevention Act, N.J.S.A. 17:33A-1 to -30, as well as claims for common law fraud and negligent misrepresentation. In its complaint, Horizon alleged that the Company and other defendants submitted and caused Horizon to pay fraudulent insurance claims. On October 5, 2018, the Company filed a motion to dismiss the claims against it. While that motion was pending, plaintiff and the Company entered into a confidential settlement agreement, pursuant to which the Company was dismissed from the action on January 8, 2019.
Afexa Class Action
On March 9, 2012, a Notice of Civil Claim was filed in the Supreme Court of British Columbia which sought an order certifying a proposed class proceeding against the Company and a predecessor, Afexa Life Sciences Inc. ("Afexa") (Case No. NEW-S-S-140954). The proposed claim asserted that Afexa and the Company made false representations respecting Cold-FX® to residents of British Columbia who purchased the product during the applicable period and that the proposed class has suffered damages as a result. On November 8, 2013, the plaintiff served an amended notice of civil claim which sought to re-characterize the representation claims and broaden them from what was originally claimed. On December 8, 2014, the Company filed a motion to strike certain elements of the plaintiff’s claim for failure to state a cause of action. In response, the plaintiff proposed further amendments to its claim. The hearing on the motion to strike and the plaintiff’s amended claim was held on February 4, 2015. The Court allowed certain additional subsequent amendments, while it struck others. The hearing to certify the class was held on April 4-8, 2016 and, on November 16, 2016, the Court issued a decision dismissing the plaintiff’s application for certification of this action as a class proceeding. On December 15, 2016, the plaintiff filed a notice of appeal in the British Columbia Court of Appeal appealing the decision to dismiss the application for certification. The plaintiff filed its appeal factum on March 15, 2017 and the Company filed its appeal factum on April 19, 2017. The appeal hearing was held on September 19, 2017 and, on April 30, 2018, the British Columbia Court of Appeal dismissed the appeal. On June 29, 2018, the plaintiff filed leave to appeal to the Supreme Court of Canada in this matter and, on February 7, 2019, the Supreme Court of Canada dismissed the application for leave to appeal with costs.
Settlement of Salix Ltd. SEC Investigation
In the fourth quarter of 2014, the SEC commenced a formal investigation into alleged securities law violations by Salix Ltd. The investigation related to certain disclosures made prior to the Salix Acquisition by Salix Ltd. and its then-chief financial officer relating to the amounts of Salix Ltd. drugs held in inventory by certain wholesaler customers. The Company cooperated with the SEC's investigation. On September 28, 2018, the Company reached a settlement of the relevant charges with the SEC. Under the terms of the settlement, Salix Ltd. neither admitted nor denied the SEC’s allegations. No monetary penalty against the Company or Salix Ltd. was assessed by the terms of the settlement. On April 4, 2019, the U.S. District Court for the Southern District of New York rendered its final judgment approving the settlement.
Reportable Segments
In 2018, the Company began reallocating capital and resources among its businesses. As a result, duringSince the second quarter of 2018 the Company’s CEO, who is the Company’s Chief Operating Decision Maker, commenced managing the business differently through changes in its operating and reportable segments, which necessitated a realignment of the Company's historical segment structure. This realignment is consistent with how the Company’s CEO currently: (i) assesses operating performance on a regular basis, (ii) makes resource allocation decisions and (iii) designates responsibilities of his direct reports. Pursuant to these changes, in the second quarter of 2018,reports; the Company began operatingoperates in the following reportable segments: (i) Bausch + Lomb/International segment, (ii) Salix segment, (iii) Ortho Dermatologics segment and (iv) Diversified Products segment. Prior period presentations of segment revenues and segment profits have been recast to conform to the current segment reporting structure. See Note 2, "SIGNIFICANT ACCOUNTING POLICIES" for additional information regarding changes to the Company's reportable segments.
The following is a brief description of the Company’s segments:
| |
• | The Bausch + Lomb/International segment consists of: (i) sales in the U.S. of pharmaceutical products, OTC products and medical device products, primarily comprised of Bausch + Lomb products, with a focus on the Vision Care, Surgical, Consumer and Ophthalmology Rx products and (ii) with the exception of sales of Solta products, sales in Canada, Europe, Asia, Australia, Latin America, Africa and the Middle East of branded pharmaceutical products, branded generic pharmaceutical products, OTC products, medical device products and Bausch + Lomb products. |
| |
• | The Salix segment consists of sales in the U.S. of GI products. |
| |
• | The Ortho Dermatologics segment consists of: (i) sales in the U.S. of Ortho Dermatologics (dermatological) products and (ii) global sales of Solta medical aesthetic devices. |
| |
• | The Diversified Products segment consists of sales in the U.S. of: (i) pharmaceutical products in the areas of neurology and certain other therapeutic classes, (ii) generic products and (iii) dentistry products. |
The Bausch + Lomb/International segment consists of: (i) sales in the U.S. of pharmaceutical products, OTC products and medical device products, primarily comprised of Bausch + Lomb products, with a focus on the Vision Care, Surgical, Consumer and Ophthalmology Rx products and (ii) with the exception of sales of Solta products, sales in Canada, Europe, Asia, Australia, Latin America, Africa and the Middle East of branded pharmaceutical products, branded generic pharmaceutical products, OTC products, medical device products and Bausch + Lomb products.
The Salix segment consists of sales in the U.S. of GI products.
The Ortho Dermatologics segment consists of: (i) sales in the U.S. of Ortho Dermatologics (dermatological) products and (ii) global sales of Solta medical aesthetic devices.
The Diversified Products segment consists of sales in the U.S. of: (i) pharmaceutical products in the areas of neurology and certain other therapeutic classes, (ii) generic products and (iii) dentistry products.
Effective in the first quarter of 2019, one product historically included in the reported results of the Ortho Dermatologics business unit in the Ortho Dermatologics segment is now included in the reported results of the Generics business unit in the Diversified Products segment and another product historically included in the reported results of the Ortho Dermatologics business unit in the Ortho Dermatologics segment is now included in the reported results of the Dentistry business unit in the Diversified Products segment as management believes the products better align with the new respective business units. These changes in product alignment are not material. Prior period presentations of business unit and segment revenues and profits have been conformed to current segment and business unit reporting structures.
Segment profit is based on operating income after the elimination of intercompany transactions. Certain costs, such as Amortization of intangible assets, Asset impairments, In-process research and development costs, Restructuring and integration costs, Acquisition-related contingent consideration costs and Other income, net, are not included in the measure of segment profit, as management excludes these items in assessing segment financial performance.
Corporate includes the finance, treasury, certain research and development programs, tax and legal operations of the Company’s businesses and incurs certain expenses, gains and losses related to the overall management of the Company, which are not allocated to the other business segments. In assessing segment performance and managing operations, management does not review segment assets. Furthermore, a portion of share-based compensation is considered a corporate cost, since the amount of such expense depends on company-wide performance rather than the operating performance of any single segment.
Segment Revenues and Profits
Segment revenues and profits were as follows:
|
| | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
(in millions) | 2019 | | 2018 | | 2019 | | 2018 |
Revenues: | | | | | | | |
Bausch + Lomb/International | $ | 1,208 |
| | $ | 1,209 |
| | $ | 2,326 |
| | $ | 2,312 |
|
Salix | 509 |
| | 441 |
| | 954 |
| | 863 |
|
Ortho Dermatologics | 122 |
| | 141 |
| | 260 |
| | 281 |
|
Diversified Products | 313 |
| | 337 |
| | 628 |
| | 667 |
|
| $ | 2,152 |
| | $ | 2,128 |
| | $ | 4,168 |
| | $ | 4,123 |
|
| | | | | | | |
Segment profits: | | | | | | | |
Bausch + Lomb/International | $ | 337 |
| | $ | 350 |
| | $ | 656 |
| | $ | 647 |
|
Salix | 332 |
| | 292 |
| | 620 |
| | 564 |
|
Ortho Dermatologics | 41 |
| | 58 |
| | 98 |
| | 102 |
|
Diversified Products | 232 |
| | 259 |
| | 468 |
| | 499 |
|
| 942 |
| | 959 |
| | 1,842 |
| | 1,812 |
|
Corporate | (152 | ) | | (161 | ) | | (277 | ) | | (275 | ) |
Amortization of intangible assets | (488 | ) | | (741 | ) | | (977 | ) | | (1,484 | ) |
Goodwill impairments | — |
| | — |
| | — |
| | (2,213 | ) |
Asset impairments | (13 | ) | | (301 | ) | | (16 | ) | | (345 | ) |
Restructuring and integration costs | (4 | ) | | (7 | ) | | (24 | ) | | (13 | ) |
Acquisition-related contingent consideration | (20 | ) | | 6 |
| | 1 |
| | 4 |
|
Other income (expense), net | (8 | ) | | — |
| | (5 | ) | | (12 | ) |
Operating income (loss) | 257 |
| | (245 | ) | | 544 |
| | (2,526 | ) |
Interest income | 3 |
| | 3 |
| | 7 |
| | 6 |
|
Interest expense | (409 | ) | | (435 | ) | | (815 | ) | | (851 | ) |
Loss on extinguishment of debt | (33 | ) | | (48 | ) | | (40 | ) | | (75 | ) |
Foreign exchange and other | 3 |
| | (9 | ) | | 3 |
| | 18 |
|
Loss before benefit from (provision for) income taxes | $ | (179 | ) | | $ | (734 | ) | | $ | (301 | ) | | $ | (3,428 | ) |
|
| | | | | | | |
| Three Months Ended March 31, |
(in millions) | 2019 | | 2018 |
Revenues: | | | |
Bausch + Lomb/International | $ | 1,118 |
| | $ | 1,103 |
|
Salix | 445 |
| | 422 |
|
Ortho Dermatologics | 138 |
| | 140 |
|
Diversified Products | 315 |
| | 330 |
|
| $ | 2,016 |
| | $ | 1,995 |
|
| | | |
Segment profits: | | | |
Bausch + Lomb/International | $ | 319 |
| | $ | 297 |
|
Salix | 288 |
| | 272 |
|
Ortho Dermatologics | 57 |
| | 44 |
|
Diversified Products | 236 |
| | 240 |
|
| 900 |
| | 853 |
|
Corporate | (125 | ) | | (114 | ) |
Amortization of intangible assets | (489 | ) | | (743 | ) |
Goodwill impairments | — |
| | (2,213 | ) |
Asset impairments | (3 | ) | | (44 | ) |
Restructuring and integration costs | (20 | ) | | (6 | ) |
Acquired in-process research and development costs | (1 | ) | | (1 | ) |
Acquisition-related contingent consideration | 21 |
| | (2 | ) |
Other income (expense), net | 4 |
| | (11 | ) |
Operating income (loss) | 287 |
| | (2,281 | ) |
Interest income | 4 |
| | 3 |
|
Interest expense | (406 | ) | | (416 | ) |
Loss on extinguishment of debt | (7 | ) | | (27 | ) |
Foreign exchange and other | — |
| | 27 |
|
Loss before benefit from income taxes | $ | (122 | ) | | $ | (2,694 | ) |
Revenues by Segment and Product Category
Revenues by segment and product category were as follows:
| | | Three Months Ended March 31, 2019 | | Three Months Ended March 31, 2018 | Three Months Ended June 30, 2019 | | Three Months Ended June 30, 2018 |
(in millions) | Bausch + Lomb/ International | | Salix | | Ortho Dermatologics | | Diversified Products | | Total | | Bausch + Lomb/ International | | Salix | | Ortho Dermatologics | | Diversified Products |
| Total | Bausch + Lomb/ International | | Salix | | Ortho Dermatologics | | Diversified Products | | Total | | Bausch + Lomb/ International | | Salix | | Ortho Dermatologics | | Diversified Products | | Total |
Pharmaceuticals | $ | 217 |
| | $ | 445 |
| | $ | 95 |
| | $ | 211 |
| | $ | 968 |
| | $ | 203 |
| | $ | 422 |
| | $ | 105 |
| | $ | 236 |
| | $ | 966 |
| $ | 235 |
| | $ | 509 |
| | $ | 75 |
| | $ | 199 |
| | $ | 1,018 |
| | $ | 242 |
| | $ | 441 |
| | $ | 101 |
| | $ | 245 |
| | $ | 1,029 |
|
Devices | 366 |
| | — |
| | 38 |
| | — |
| | 404 |
| | 363 |
| | — |
| | 29 |
| | — |
| | 392 |
| 387 |
| | — |
| | 45 |
| | — |
| | 432 |
| | 389 |
| | — |
| | 32 |
| | — |
| | 421 |
|
OTC | 324 |
| | — |
| | — |
| | — |
| | 324 |
| | 326 |
| | — |
| | — |
| | — |
| | 326 |
| 367 |
| | — |
| | — |
| | — |
| | 367 |
| | 368 |
| | — |
| | — |
| | — |
| | 368 |
|
Branded and Other Generics | 191 |
| | — |
| | — |
| | 102 |
| | 293 |
| | 191 |
| | — |
| | — |
| | 90 |
| | 281 |
| 194 |
| | — |
| | — |
| | 111 |
| | 305 |
| | 193 |
| | — |
| | — |
| | 89 |
| | 282 |
|
Other revenues | 20 |
| | — |
| | 5 |
| | 2 |
| | 27 |
| | 20 |
| | — |
| | 6 |
| | 4 |
| | 30 |
| 25 |
| | — |
| | 2 |
| | 3 |
| | 30 |
| | 17 |
| | — |
| | 8 |
| | 3 |
| | 28 |
|
| $ | 1,118 |
| | $ | 445 |
| | $ | 138 |
| | $ | 315 |
| | $ | 2,016 |
| | $ | 1,103 |
| | $ | 422 |
| | $ | 140 |
| | $ | 330 |
| | $ | 1,995 |
| $ | 1,208 |
| | $ | 509 |
| | $ | 122 |
| | $ | 313 |
| | $ | 2,152 |
| | $ | 1,209 |
| | $ | 441 |
| | $ | 141 |
| | $ | 337 |
| | $ | 2,128 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Six Months Ended June 30, 2019 | | Six Months Ended June 30, 2018 |
(in millions) | Bausch + Lomb/ International | | Salix | | Ortho Dermatologics | | Diversified Products | | Total | | Bausch + Lomb/ International | | Salix | | Ortho Dermatologics | | Diversified Products |
| Total |
Pharmaceuticals | $ | 452 |
| | $ | 954 |
| | $ | 170 |
| | $ | 410 |
| | $ | 1,986 |
| | $ | 445 |
| | $ | 863 |
| | $ | 206 |
| | $ | 481 |
| | $ | 1,995 |
|
Devices | 753 |
| | — |
| | 83 |
| | — |
| | 836 |
| | 752 |
| | — |
| | 61 |
| | — |
| | 813 |
|
OTC | 691 |
| | — |
| | — |
| | — |
| | 691 |
| | 694 |
| | — |
| | — |
| | — |
| | 694 |
|
Branded and Other Generics | 385 |
| | — |
| | — |
| | 213 |
| | 598 |
| | 384 |
| | — |
| | — |
| | 179 |
| | 563 |
|
Other revenues | 45 |
| | — |
| | 7 |
| | 5 |
| | 57 |
| | 37 |
| | — |
| | 14 |
| | 7 |
| | 58 |
|
| $ | 2,326 |
| | $ | 954 |
| | $ | 260 |
| | $ | 628 |
| | $ | 4,168 |
| | $ | 2,312 |
| | $ | 863 |
| | $ | 281 |
| | $ | 667 |
| | $ | 4,123 |
|
The top ten products for the threesix months ended March 31,June 30, 2019 and 2018 represented 36%38% and 35% of total revenues for the threesix months ended March 31,June 30, 2019 and 2018, respectively.
Geographic Information
Revenues are attributed to a geographic region based on the location of the customer and were as follows:
|
| | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
(in millions) | 2019 | | 2018 | | 2019 | | 2018 |
U.S. and Puerto Rico | $ | 1,282 |
| | $ | 1,261 |
| | $ | 2,482 |
| | $ | 2,437 |
|
China | 101 |
| | 98 |
| | 190 |
| | 182 |
|
Canada | 88 |
| | 76 |
| | 167 |
| | 153 |
|
Japan | 59 |
| | 55 |
| | 114 |
| | 106 |
|
France | 58 |
| | 58 |
| | 111 |
| | 113 |
|
Poland | 49 |
| | 52 |
| | 107 |
| | 115 |
|
Mexico | 58 |
| | 54 |
| | 102 |
| | 97 |
|
Egypt | 49 |
| | 44 |
| | 102 |
| | 89 |
|
Germany | 41 |
| | 42 |
| | 86 |
| | 92 |
|
Russia | 41 |
| | 40 |
| | 77 |
| | 68 |
|
United Kingdom | 30 |
| | 31 |
| | 58 |
| | 58 |
|
Italy | 22 |
| | 23 |
| | 44 |
| | 45 |
|
Spain | 23 |
| | 23 |
| | 44 |
| | 44 |
|
Other | 251 |
| | 271 |
| | 484 |
| | 524 |
|
| $ | 2,152 |
| | $ | 2,128 |
| | $ | 4,168 |
| | $ | 4,123 |
|
|
| | | | | | | |
| Three Months Ended March 31, |
(in millions) | 2019 | | 2018 |
U.S. and Puerto Rico | $ | 1,200 |
| | $ | 1,176 |
|
China | 89 |
| | 84 |
|
Canada | 79 |
| | 77 |
|
Poland | 58 |
| | 63 |
|
Japan | 55 |
| | 51 |
|
France | 53 |
| | 55 |
|
Egypt | 53 |
| | 45 |
|
Germany | 45 |
| | 50 |
|
Mexico | 44 |
| | 43 |
|
Russia | 36 |
| | 28 |
|
United Kingdom | 28 |
| | 27 |
|
Italy | 22 |
| | 22 |
|
Spain | 21 |
| | 21 |
|
Other | 233 |
| | 253 |
|
| $ | 2,016 |
| | $ | 1,995 |
|
Major Customers
Customers that accounted for 10% or more of total revenues were as follows:
|
| | | |
| Six Months Ended June 30, |
| 2019 | | 2018 |
McKesson Corporation (including McKesson Specialty) | 17% | | 17% |
AmerisourceBergen Corporation | 16% | | 18% |
Cardinal Health, Inc. | 14% | | 13% |
|
| | | |
| Three Months Ended March 31, |
| 2019 | | 2018 |
McKesson Corporation (including McKesson Specialty) | 17% | | 18% |
AmerisourceBergen Corporation | 16% | | 18% |
Cardinal Health, Inc. | 14% | | 11% |
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
INTRODUCTION
Unless the context otherwise indicates, as used in this “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” the terms “we,” “us,” “our,” “the Company,” and similar terms refer to Bausch Health Companies Inc. and its subsidiaries. This “Management’s Discussion and Analysis of Financial Condition and Results of Operations” has been updated through MayAugust 6, 2019 and should be read in conjunction with the unaudited interim Consolidated Financial Statements and the related notes included elsewhere in this Quarterly Report on Form 10-Q for the quarterly period ended March 31,June 30, 2019 (this “Form 10-Q”). The matters discussed in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” contain certain forward-looking statements within the meaning of Section 27A of The Securities Act of 1993, as amended, and Section 21E of The Securities Exchange Act of 1934, as amended, and that may be forward-looking information within the meaning defined under applicable Canadian securities laws (collectively, “Forward-Looking Statements”). See “Forward-Looking Statements” at the end of this discussion.
Our accompanying unaudited interim Consolidated Financial Statements as of March 31,June 30, 2019 and for the three and six months ended March 31,June 30, 2019 and 2018 have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) and the rules and regulations of the United States Securities and Exchange Commission (the “SEC”) for interim financial statements, and should be read in conjunction with our Consolidated Financial Statements for the year ended December 31, 2018, which were included in our Annual Report on Form 10-K filed on February 20, 2019. In our opinion, the unaudited interim Consolidated Financial Statements reflect all adjustments, consisting of normal and recurring adjustments, necessary for a fair statement of the financial condition, results of operations and cash flows for the periods indicated. Additional company information is available on SEDAR at www.sedar.com and on the SEC website at www.sec.gov. All currency amounts are expressed in U.S. dollars, unless otherwise noted.
OVERVIEW
We are a global pharmaceutical and medical device company whose mission is to improve people’s lives with our health care products. We develop, manufacture and market, primarily in the therapeutic areas of eye-health, gastroenterology ("GI") and dermatology, a broad range of: (i) branded pharmaceuticals, (ii) generic and branded generic pharmaceuticals, (iii) over-the-counter (“OTC”) products and (iv) medical devices (contact lenses, intraocular lenses, ophthalmic surgical equipment and aesthetics devices)., which are marketed directly or indirectly in over 90 countries.
Business Strategy
Core Businesses
Our strategy is to focus our business on core therapeutic classes that offer attractive growth opportunities. Within our chosen therapeutic classes, we prioritize durable products which we believe have the potential for strong operating margins and evidence of growth opportunities. We believe this strategy has reduced complexity in our operations and maximized the value of our: (i) eye-health, (ii) GI and (iii) dermatology businesses which collectively now represent approximately 70%a substantial portion of our revenues. We have found and continue to believe there is significant opportunity in these businesses and we believe that our existing portfolio, commercial footprint and pipeline of product development projects position us to successfully compete in these markets and provide us with the greatest opportunity to build value for our shareholders. We identify these businesses as “core”, meaning that we believe we are best positioned to grow and develop them.
Reportable Segments and Strategies
Our portfolio of products falls into four operating and reportable segments: (i) Bausch + Lomb/International, (ii) Salix, (iii) Ortho Dermatologics and (iv) Diversified Products.
The Bausch + Lomb/International segment - consists of our Global Bausch + Lomb eye-health business and our International Rx business. Our Global Bausch + Lomb eye-health business includes our Vision Care, Surgical, Consumer and Ophthalmology Rx products, which in aggregate accounted for approximately 43%, 41%43% and 37%41% of our Company's revenues for the six months ended June 30, 2019 and the years 2018 2017 and 2016,2017, respectively. Our International Rx business, with the exception of our Solta products, includes sales in Canada, Europe, Asia, Australia, Latin America, Africa and the Middle East of branded pharmaceutical products, branded generic pharmaceutical products, OTC products and medical device products.
Our Bausch + Lomb business is a fully-integrated eye-health business, which we believe is critical to maintaining our position in the global eye-health market. As a fully-integrated eye-health business with a 165-year legacy, Bausch + Lomb has
an established line of contact lenses, intraocular lenses and other medical devices, surgical systems and devices, vitamin and mineral supplements, lens care products, prescription eye-medications and other consumer products that positions us to compete in all areas of the eye-health market.
As part of our Global Bausch + Lomb business strategy, we continually look for key trends in the eye-health market to meet changing consumer/patient needs and identify areas for investment and growth. For instance, one of these trends, myopia, is increasing substantially, and importantly, myopia is a risk factor for glaucoma, macular degeneration and retinal detachment. We continue to see increased demand for new eye-health products that address conditions brought on by factors such as increased screen time, lack of outdoor activities and academic pressures, as well as conditions brought on by an aging population for example, as more and more baby-boomers in the U.S. are reaching the age of 65. To supplement our well-established Bausch + Lomb product lines, we continue to identify for development new products tailored to address these key trends, which we develop internally with our own research and development (“R&D”) team to generate organic growth. Recent product launches include Biotrue® ONEday daily disposable contact lenses, the next generation of Bausch + Lomb ULTRA® contact lenses, SiHy Daily contact lenses, Lumify® (an eye redness treatment) and, Vyzulta® (a pressure lowering eye drop for patients with angle glaucoma or ocular hypertension) and Ocuvite® Eye Performance (vitamins to protect the eye from stressors such as sun light and blue light emitted from digital devices).
The Salix segment - consists of sales in the U.S. of gastrointestinal or GI products and includes Xifaxan® which accounted for approximately 14%16%, 11%14% and 10%11% of our total revenues for the six months ended June 30, 2019 and the years 2018 and 2017, and 2016, respectively.
As part of our acquisition of Salix Pharmaceutical, Ltd. in April 2015 (the "Salix Acquisition"), we acquired the intellectual property to a number of products that have provided us with year-over-year revenue growth, particularly the intellectual properties behind Xifaxan® for, amongst other indications, irritable bowel syndrome with diarrhea (“IBS-D”), and Relistor® for opioid induced constipation (“OIC”). Revenues from our Xifaxan® and Relistor® products increased approximately 22% and 37%, respectively, in 2018 when compared to 2017 and increased 11%16% and 30%14%, respectively, for the threesix months ended March 31,June 30, 2019 when compared to the threesix months ended March 31,June 30, 2018. We attribute these increases, in part, to our January 2017 sales force expansion program described later in the discussion of our transformation.Salix infrastructure.
Our Salix business strategy includes building upon our Xifaxan® and Relistor® business models. Specifically, we have identified and continue to look for opportunities to capitalize on the sales force and infrastructure we have built around our Xifaxan® and Relistor® products. Part of that strategy is to gain access to new products through innovation, co-promotion and acquisition. We have been executing on these strategies in the second half of 2018 and during 2019, as we: (i) have entered into strategic co-promotion relationships with pharmaceutical companies with new GI products, (ii) are in the process of developing next generation formulations of our Salix intellectual properties to address new indications, (iii) have completed athe strategic acquisition of certain assets of Synergy Pharmaceuticals Inc. (“Synergy”) as we discuss later and (iv) have entered into a licensing agreementagreements for investigational products, which, once developed and if approved by the U.S. Food and Drug Administration (the "FDA"), will be new treatments for certain GI and liver diseases. Each of these opportunities potentially provides us with the ability to expand our GI portfolio and allows us to leverage our existing GI sales force, supply channel and distribution channel.
The Ortho Dermatologics segment - consists of: (i) sales in the U.S. of Ortho Dermatologics (dermatological products) and (ii) global sales of Solta medical dermatological devices.
As part of our business strategy for the Ortho Dermatologics segment, we have made significant investments to build out our aesthetics, psoriasis and acne product portfolios, which are the markets within dermatology where we see the greatest opportunities, with a focus on topical gel and lotion products over injectable biologics. We continue to support and develop injectable biologics; however, we believe some patients prefer topical products as an alternative to injectable biologics. Further, as topical products can, in many cases, defer the use of injectable biologics that often come with associated risk/benefit profiles, a topical product is usually more readily adopted by payors, is less expensive and can be more cost-effective than injectable biologics. Therefore, we believe topical products represent alternative treatments for physicians, payors and patients, and as the preferred choice of treatment, have the potential to drive greater volumes, generate better margins and will ultimately be a key contributing factor of our Ortho Dermatologics business.
As we later discuss, in addition to our established and in-development product lines, we also look to gain access to other dermatology products through strategic licensing agreements. We believe this allows us to leverage our experienced dermatology sales leadership team and our recently expanded Ortho Dermatologics sales force to drive growth in our Ortho Dermatologics business.
The Diversified Products segment - consists of sales in the U.S. of: (i) pharmaceutical products in the areas of neurology and certain other therapeutic classes, such as Wellbutrin XL®, Cuprimine® and Migranal®, (ii) generic products, such as Diastat®, Uceris® and Zegerid® and (iii) dentistry products, such as Arestin® and NeutraSal®.
Significant Seven
We have focused our R&D to advance development programs that we believe will drive growth in our core businesses, while creating efficiencies in our R&D efforts and expenses. These programs include products we have recently launched, or expect to launch in the near future,following products which we have dubbed our "Significant Seven". These Significant Seven products are: (i) , all of which have been launched as of June 2019.
Duobrii™ (Ortho Dermatologics) - Launched in June 2019 and is the first and only topical lotion that contains a unique combination of halobetasol propionate and tazarotene for the treatment of moderate-to-severe plaque psoriasis in adults.
Bryhali™ (Ortho Dermatologics), (ii) Duobrii™ (Ortho Dermatologics), (iii) Lumify® (Bausch + Lomb), (iv) Relistor® (Salix), (v) SiHy Daily (Bausch + Lomb), (vi) Siliq™ (Ortho Dermatologics) - Launched in November 2018 and (vii) Vyzulta® (Bausch + Lomb). is a novel product that contains a unique, lower concentration of halobetasol propionate for the treatment of moderate-to-severe psoriasis.
| |
• | Lumify® (Bausch + Lomb) - Launched in May 2018 and is an OTC eye drop developed as an ocular redness reliever. |
| |
• | SiHy Daily AQUALOXTM (Bausch + Lomb) - Launched in Japan in September 2018 and is a silicone hydrogel daily disposable contact lens designed to provide clear vision throughout the day. |
| |
• | Siliq® (Ortho Dermatologics) - Launched in the U.S. in 2017 and is an IL-17 receptor blocker monoclonal antibody for patients with moderate-to-severe plaque psoriasis. |
| |
• | Vyzulta® (Bausch + Lomb) - Launched in December 2017 and is an intraocular pressure lowering single-agent eye drop dosed once daily for patients with open angle glaucoma or ocular hypertension. |
| |
• | Relistor® (Salix) - Launched in 2016 and is given to adults who use narcotic medicine to treat severe chronic pain that is not caused by cancer to prevent constipation without reducing the pain-relieving effects of the narcotic. |
As outlined later in this discussion, although revenues associated with our Significant Seven products are currently not material, we believe the prospects for this group are substantial.
For a comprehensive discussion of our business, business strategy, products and other business matters, see Item 1. “Business” included in our Annual Report on Form 10-K for the year ended December 31, 2018, filed with the SEC and the Canadian Securities Administrators on SEDAR on February 20, 2019.
Our Transformation
In response to changing business dynamics within our Company, we recognized the need to change our focus in order to build a world-class health care organization. In 2016, we retained a new executive team which immediately implemented a multi-year plan to stabilize, turnaround and transform the Company. As we continue to work through our plan to build a world-class health care organization, the Company has made changes to its leadership, product focus, infrastructure, geographic footprint and capital structure.
In 2016, the new executive team: (i) identified and retained a new leadership team, (ii) enhanced the Company's focus on core assets, which enabled the Company to recruit and retain stronger talent for its sales initiatives and (iii) realigned the Company’s operations to improve transparency and operational efficiency and better support the Company's sales force. Once in place, the new leadership team began executing on a multi-year plan and delivering on commitments to narrow the Company's activities to our core businesses where we believe we have an existing and sustainable competitive edge and to identify opportunities to improve operational efficiencies and our capital structure.
Throughout 2017 and 2018, the Company executed and continues to execute on its commitments. We believe that during this time we have: (i) better defined our core businesses, (ii) made measurable progress in improving our capital structure and (iii) been aggressively addressing and resolving certain legacy legal matters to eliminate disruptions to our operations.
Focus on Core Businesses
Once we committedAs part of our commitment to our core businesses, we began analyzing the strategic alternatives for business units and assets that fall outside our definition of “core”. In order to focus on our objectives, in 2016 and 2017, we began divestingdivested businesses and assets, which were not aligned with our core business objectives. This not only allowed us to better focus our internal resources on our eye-health, GI and dermatology businesses, but also provided us with significant sources of capital, which we used to reduce our debt and improve our capital structure.
As a result of theIn order to continue to focus on our core businesses and the divestitures of businesses not aligned withwe have: (i) directed capital allocation to drive growth within our core business objectives,businesses, (ii) made measurable progress in improving our capital structure and reduced sales of products in(iii) aggressively addressed and resolved certain legacy legal matters to eliminate disruptions to our Diversified Products segment due to the loss of exclusivity, a greater portion of our revenues are now driven by our core businesses. During the years 2018, 2017 and 2016, our Bausch + Lomb (eye-health), Salix (GI) and Ortho Dermatologics (dermatology) businesses collectively represented approximately 71%, 67% and 63% of our total revenues, respectively. The year-over-year increase in this percentage demonstrates our convictions in these businesses.operations.
Allocation of Capital to Drive Growth
The ranking of our business units during 2016 changed our view as to how to allocate capital across our activities. In support of our core activities, our leadership teamwe have been aggressively reallocatedallocating resources to: (i) promote our core businesses globally, (ii) make strategic investments in our infrastructure and (iii) direct R&D to our eye-health,Bausch + Lomb, GI and dermatology businesses to drive growth organically. The outcome of this process allows us to better drive value in our product portfolio and generate operational efficiencies.
Continued Investment in Emerging Markets - In October 2018, we acquired the 40% minority interests of Medpharma Pharmaceutical and Chemical Industries LLC ("Medpharma") for $18 million, thereby completing the planned acquisition of this joint venture. Medpharma formulates, manufactures and distributes certain branded generic pharmaceuticals and non-patented generic pharmaceuticals for the Company and third parties. In 2014, we entered into the Medpharma joint venture to provide the Company with a presence in the United Arab Emirates ("UAE"). The completion of this acquisition provides us
with full control over the business activities of Medpharma and allows us to wholly benefit from the allocation of additional Company resources and the growth, if any, in the UAE and the surrounding region.
Strategic Investments in our Infrastructure - In support of our core businesses, we have and continue to make strategic investments in our infrastructure, the most significant of which are at our Waterford facility in Ireland and our Rochester facility in New York, and our Greenville facility in South Carolina.York.
To meet the forecasted demand for our Biotrue® ONEday lenses, in July 2017, we placed into service a $175 million multi-year strategic expansion project of the Waterford facility. The emphasis of the expansion project was to: (i) develop new technology to manufacture, automatically inspect and package contact lenses, (ii) bring that technology to full validation and (iii) increase the size of the Waterford facility. As a result of the increased production capacity and in support of our core eye-health business, we added approximately 300 production employees since the project’s inception, bringing total headcount to approximately 1,350 employees, and succeeded in increasing production, which in 2017 was over 30% higher than it was in 2015 at the facility. We continue to invest in this facility, spending approximately $5 million during 2018 and budgeting an additional $16 million through June 2020.
In order toTo address the expected global demand for our Bausch + Lomb ULTRA® contact lens, in December 2017, we completed a multi-year, $200 million strategic upgrade to our Rochester facility. The upgrade increased production capacity in support of our Bausch + Lomb Ultra® and SiHy Daily AQUALOXTM product lines and better supports the production of other well-established contact lenses, such as our PureVision®, PureVision®2 (SVS, Toric, and Multifocal), SofLens® 38 and SilSoft®. In connection with
To address the increased production capacity, we added approximately 120 production employees since the project’s inception, bringing total headcount to approximately 1,000 employees and continue to make investments to enhanceexpected global demand for our production technologies and capacity at the facility. These enhancements to our production technologies and capacity led, in part, to the validation of SiHy Daily production at the Rochester facility and the successful launch of SiHy Daily AQUALOXTMdisposable contact lenses, in Japan in September 2018.
Additionally, in November 2018, we announced strategicinitiated $300 million of additional expansion projects that willto add multiple production lines to our Rochester and Waterford and Rochester facilities in order to support our strategic investments in eye-health and meet the anticipated global demand for ourfacilities. SiHy Daily disposable contact lenses, one of our Significant Seven products. These expansion projectsproducts, are expected to be completedcommercially available in 2022 and increase our combined headcount at these sites by more than 200 employees.
To support the growthsecond half of our Biotrue® lens care product lines, in May 2018, we placed into service a new production line in our Bausch + Lomb Greenville, South Carolina manufacturing facility, where we produce a substantial portion of our lens care product lines. The new production line has been validated to produce contact-lens solutions for our Biotrue®, Renu® and Sensitive Eyes® brands and replaces one of the facility’s original 1983 production lines that had limitations in product configurations. Planned and in development for more than two years, the new production line cost $25 million, has a capacity ranging between 40 million and 50 million bottles annually and is expected to generate additional sustainable operational efficiencies through 2019.2020.
We believe the investments in our Waterford Rochester and GreenvilleRochester facilities and related expansion of labor forces further demonstrates the growth potential we see in our Bausch + Lomb products and our eye-health business.
Direct R&D Investment to our Bausch + Lomb, GI and Dermatology Businesses to Drive Growth Organically - Our R&D organization focuses on the development of products through clinical trials. As of December 31, 2018, approximately 1,200 dedicated R&D and quality assurance employees in 23 R&D facilities were involved in our R&D efforts.
As part of our turnaround, we removed projects related to divested businesses and rebalanced our portfolio to better align with our long-term plans and focus on core businesses. Our investment in R&D reflects our commitment to drive organic growth through internal development of new products, a pillar of our new strategy. We have approximately 250over 225 projects in our global pipeline and anticipate submitting overapproximately 125 of those projects for regulatory approval in 2019 and 2020.
Core assets that have received a significant portion of our R&D investment in current and prior periods are listed below.
Dermatology - In AprilJune 2019, the FDA approvedwe launched Duobrii™, the first and only topical lotion that contains a unique combination of halobetasol propionate and tazarotene for the treatment of moderate-to-severe plaque psoriasis in adults. Halobetasol propionate and tazarotene are each approved to treat plaque psoriasis when used separately, but are limited inthe duration of use. Halobetasolhalobetasol propionate may be used for up to two weeksis limited by FDA labeling constraints and the use of tazarotene maycan be limited due to irritation.tolerability concerns. However, the combination of these ingredients in Duobrii™, with a dual mechanism of action, allows for expanded duration of use, with reduced adverse events. We expect to launch Duobrii™ in June 2019.
Dermatology - In November 2018, we launched Bryhali™ is, a novel product that contains a unique, lower concentration of halobetasol propionate for the treatment of moderate-to-severe psoriasis which is FDA approved for 8 weeks of use. The FDA has previously approved halobetasol propionate to treat plaque psoriasis, but limited in duration of use. We launched Bryhali™ in November 2018.use to two weeks.
Dermatology - Internal Development Project ("IDP") 133 is a project to expand the indication for Bryhali™ (halobetasol propionate lotion 0.01%) from plaque psoriasis to corticosteroid responsive dermatoses.include the topical treatment of atopic dermatitis. A Phase 3 study is planned to start in the second half of 2019.
Dermatology - IDP-131 is a new chemical entity, KP-470, for the topical treatment of psoriasis. On February 27, 2018, we announced that we entered into an exclusive license agreement with Kaken Pharmaceutical Co., Ltd. to develop and commercialize the compound. EarlyAn early proof of concept studies are planned forstudy was initiated in the first half of 2019. If approved by the FDA, KP-470 could represent a novel drug with an alternative mechanism of action in the topical treatment of psoriasis.
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• | Bausch + Lomb - Bausch + Lomb ULTRA® for Astigmatism is a monthly planned replacement contact lens for astigmatic patients. The Bausch + Lomb ULTRA® for Astigmatism lens was developed using the proprietary MoistureSeal® technology. In addition, the Bausch + Lomb ULTRA® for Astigmatism lens integrates an OpticAlign® design engineered |
for lens stability and to promote a successful wearing experience for the astigmatic patient. In 2017, we launched this product and the extended power range for this product. In 2018, we launched the Bausch + Lomb ULTRA® for Astigmatism -2.75 cylinder expanded SKU range.
Dermatology - On July 27, 2017, we launched Siliq™ inthis product and the U.S. Siliq™ is an IL-17 receptor blocker monoclonal antibody biologicextended power range for treatment of moderate-to-severe plaque psoriasis, whichthis product. In 2018, we estimate to be an over $5,000 million market inlaunched the U.S. The FDA approved the Biologics License ApplicationBausch + Lomb ULTRA® for Siliq™ injection for subcutaneous use for the treatment of moderate-to-severe plaque psoriasis in adult patients who are candidates for systemic therapy or phototherapy and have failed to respond or have lost response to other systemic therapies. Siliq™ has a Black Box Warning for the risks in patients with a history of suicidal thoughts or behavior and was approved with a Risk Evaluation and Mitigation Strategy involving a one-time enrollment for physicians and one-time informed consent for patients.Astigmatism -2.75 cylinder expanded SKU range.
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• | Bausch + Lomb - SiHy Daily AQUALOXTM is a silicone hydrogel daily disposable contact lens designed to provide clear vision throughout the day. Product validation was completed in June 2018 and SiHy Daily AQUALOXTM was launched in Japan in September 2018. |
Dermatology - IDP-126 is an acne product with a fixed combination of benzoyl peroxide, clindamycin phosphate and adapalene, currently in Phase 2 testing.
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• | Bausch + Lomb - Lumify® (brimonidine tartrate ophthalmic solution, 0.025%) is an OTC eye drop developed as an ocular redness reliever. Lumify® was approved by the FDA in December 2017 andreliever which we launched in May 2018. |
Gastrointestinal - We have initiated a Phase 2 study for the treatment of overt hepatic encephalopathy with a new formulation of rifaximin, which we acquired as part of the Salix Acquisition. We expect to complete an interim analysis by the end of 2019.
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• | Gastrointestinal - We plan to initiate a Phase 2 study evaluating Xifaxan® 550mg tablets for the treatment of small intestinal bacterial overgrowth or SIBO. The study is targeted to start in the second half of 2019.
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Gastrointestinal - We planare initiating a Phase 2 study to initiateevaluate rifaximin for the treatment of small intestinal bacterial overgrowth or SIBO. Patient enrollment is expected to begin in the first quarter of 2020.
Gastrointestinal - Our partner Alfasigma S.p.A. is initiating a Phase 2/3 study for the treatment of postoperative Crohns disease using a novel rifaximin extended release formulation. The study is scheduledexpected to start in the secondfirst half of 2019.2020.
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• | Gastrointestinal - We plan to initiateare initiating a Phase 2 study evaluating Xifaxan® 550mg tablets for the prevention of complications of decompensation cirrhosis. The study is scheduledexpected to start in the first halffourth quarter of 2019. |
Dermatology - On August 23, 2018, the FDA approved Altreno™ (tretinoin 0.05%) lotion, indicated for the topical treatment of acne vulgaris in patients 9 years of age and older. Altreno™ is the first tretinoin formulation in a lotion, approved for patients 9 years of age and older. We launched Altreno™ in the U.S. in October 2018. | |
• | Dermatology - In October 2018, we launched Altreno® (tretinoin 0.05%) lotion, indicated for the topical treatment of acne vulgaris in patients 9 years of age and older. Altreno® is the first tretinoin formulation in a lotion, approved for patients 9 years of age and older. |
Dermatology - IDP-120 is an acne product with a fixed combination of mutually incompatible ingredients; benzoyl peroxide and tretinoin. Phase 3 clinical studies are ongoing.
Dermatology - IDP-123 is an acne product containing lower concentration of tazarotene in a lotion form to help reduce irritation while maintaining efficacy. We submitted a New Drug Application (“NDA”) with the FDA on February 22, 2019.
Dermatology - IDP-124 is a topical lotion product designed to treat moderate to severe atopic dermatitis, with pimecrolimus, currently in Phase 3 testing.
Dermatology - IDP-135 is a topical retinoid product in development. We are seeking guidance from the FDA to develop this product for OTC use for the treatment of acne. The guidance meeting is targeted for 2019.
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• | Gastrointestinal - On September 11, 2018, we announced the launch of Plenvu® in the U.S. We license Plenvu® from Norgine B.V. Plenvu® is a novel, lower-volume polyethylene glycol-based bowel preparation developed to help provide complete bowel cleansing, with an additional focus on the ascending colon. |
Bausch + Lomb - In April 2017, we launched our Stellaris Elite™ Vision Enhancement System. The Stellaris Elite™ Vision Enhancement System is our next generation phacoemulsification cataract platform, which offers new innovations, as well as the opportunity to add upgrades and enhancements every one to two years. Stellaris Elite™ is the first phacoemulsification platform on the market to offer Adaptive Fluidics™, which combines aspiration control with predictive infusion management to create a responsive and controlled surgical environment for efficient cataract lens removal.
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• | Bausch + Lomb - Vitesse® is a hypersonic vitrectomy system for the removal of the vitreous humor gel that fills the eye cavity to provide better access to the retina and allows for a variety of repairs, including the removal of scar tissue, laser repair of retinal detachments and treatment of macular holes. Available exclusively on the Stellaris Elite™ system, Vitesse® liquefies tissue in a highly-localized zone at the edge of the port to increase the level of surgical control and precision to vitrectomies. We launched this product on a limited basis in October 2017.
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• | Dermatology - Next Generation Thermage FLX® is a fourth-generation non-invasive treatment option using a radiofrequency platform designed to optimize key functional characteristics and improve patient outcomes. On September 22, 2017, we received 510(k) clearance from the FDA and launched this product in the United States. During 2018 and 2019, Next Generation Thermage FLX® was launched in Hong Kong, Japan, Korea, Taiwan, Philippines, Singapore, Indonesia, Malaysia, China, Thailand, Vietnam, and Australia as part of our Solta medical aesthetic devices portfolio. During 2019, we expect additional worldwide launches of the Next Generation Thermage FLX® in Asia, Canada and Europe, paced by country-specific regulatory registrations.
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• | Bausch + Lomb - On May 1, 2018, we received Premarket Approval ("PMA") from the FDA for, and subsequently launched, 7-day extended wear for our Bausch + Lomb ULTRA® monthly planned replacement contact lenses. |
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• | Bausch + Lomb - Biotrue® ONEday for Astigmatism is a daily disposable contact lens for astigmatic patients. The Biotrue® ONEday lenses incorporate Surface Active TechnologyTM to provide a dehydration barrier. The Biotrue® ONEday for Astigmatism also includes evolved peri-ballast geometry to deliver stability and comfort for the astigmatic patient. We launched this product in December 2016 and launched an extended power range in 2017. During 2018, we launched aand further extended power range in 2017 and 2018, respectively. We expect to launch a further power expansion for this product.product in 2019. |
Bausch + Lomb - We are developing a new Ophthalmic Viscosurgical Device product, with a formulation to protect corneal endothelium during phacoemulsification process during a cataract surgery and to help chamber maintenance and lubrication during interocular lens delivery. In April 2018, we initiated an investigative device exemption (“IDE”) study for this product and completed enrollment in December 2018. We expect to complete the clinical trial in the fourth quarter of 2019 and anticipate filing a PMA application with the FDA in the first quarter of 2020.
Dermatology - Traser™ is an energy-based platform device with significant versatility and power capabilities to address various dermatological conditions, including vascular and pigmented lesions. We are planning to launch this product in the second half of 2022 as part of our Solta business.
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• | Bausch + Lomb - In April 2019, we launched Lotemax® SM (loteprednol etabonate ophthalmic gel) 0.38% is, a new formulation for the treatment of post-operative inflammation and pain following ocular surgery. Lotemax® SM is the lowest concentrated loteprednol ophthalmic corticosteroid indicated for the treatment of post-operative inflammation and pain following ocular surgery in the U.S. Lotemax® SM was approved by the FDA in February 2019 and launched in April 2019. |
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• | Bausch + Lomb - enVista® Trifocal intraocular lens is an innovative lens design. We have initiated an IDE study for this product in May 2018 and completed patient enrollment forexpect to initiate a Phase 12 study in December 2018.the fourth quarter of 2019. |
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• | Bausch + Lomb - enVista® Toric intraocular lens received FDA approval in June 2018 and was launched in July 2018. |
Bausch + Lomb - We are developing a preloaded intraocular lens injector platform for enVista interocular lens. The Premarket ApprovalPMA application was submitted to the FDA in July 2018 and the CE Mark notification was submitted in Europe in February 2019.
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• | Bausch + Lomb - An ULTRA® Multifocal for Astigmatism contact lens combiningis the benefitsfirst and only multifocal toric lens available as a standard offering in the eye care professional's fit set. The new monthly silicone hydrogel lens, which was specifically designed to address the lifestyle and vision needs of our ULTRApatients with both astigmatism and presbyopia, combines the Company's unique 3-Zone Progressive®™ for Presbyopia multifocal design with our ULTRAthe stability of its OpticAlign® toric with MoistureSeal® technology to provide eye care professionals and their patients an advanced contact lens technology that offers the convenience of same-day fitting during the initial lens exam. Bausch + Lomb ULTRA® Multifocal for Astigmatism OpticAlign™ design engineered for lens stability for presbyopic/astigmatic patients. We received FDA approval for this productwas launched in November 2018.June 2019. |
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• | Bausch + Lomb - Renu® Advanced Multi-Purpose Solution (“MPS”) contains a triple disinfectant system that kills 99.9% of germs, and has a dual surfactant system that provides up to 20 hours of moisture. Renu Advanced MPS is FDA cleared with indications for use to condition, clean, remove protein, disinfectant, rinse and store soft contact lenses including those composed of silicone hydrogels. Renu Advanced MPS has gained regulatory approvals in Korea, India, Mexico, Indonesia, Malaysia and Singapore. |
Bausch + Lomb - Custom soft contact lens (Ultra buttons) is a latheable silicone hydrogel button for custom soft specialty lenses including; Sphere, Toric, Multifocal, Toric Multifocal and irregular corneas. If approved by the FDA, we may launch as early asin the firstsecond half of 2020.
Bausch + Lomb - In January 2019, we launched Zen™ Multifocal Scleral Lens for presbyopia exclusively available with Zenlens™ and Zen™ RC scleral lenses and will allow eye care professionals to fit presbyopic patients with irregular and regular corneas and those with ocular surface disease, such as dry eye. The Zen™ multifocal Scleral Lens incorporates decentered optics, enabling the near power to be positioned over the visual axis. We launched this product in January 2019.
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• | Bausch + Lomb - In March 2019, we launched Tangible® Hydra-PEG® is a high-water polymer coating that is bonded to the surface of a contact lens and designed to address contact lens discomfort and dry eye. Tangible® Hydra-PEG® coating technology in combination with our Boston® materials and Zenlens™ family of scleral lenses will help eye care professionals provide a better lens wearing experience for their patients with challenging vision needs. We launched this product in March 2019. |
Improve Capital Structure
We have made measurable progress in improving our capital structure by: (i) reducing our debt through repayments and (ii) extending the maturities of debt through refinancing. Using the net cash proceeds from divestitures of non-core assets, cash generated from operations and cash generated from tighter working capital management, through the date of this filing, we repaid (net of additional borrowings) over $7,000$7,200 million of long-term debt since the beginning of 2016, in the aggregate. Further, as a result of the refinancing and debt repayments outlined below, as of the date of this filing, we have eliminated all mandatory scheduled principal repayments of our debt obligations forthrough the remaindersecond quarter of 20192020 and our mandatory scheduled principal repayments through 2021 are less than $610approximately $410 million.
Divestitures - During 2017, we divested businesses and assets not aligned with our core business objectives, which simplified our operating model and generated over $3,200 million of net cash proceeds that we used to improve our capital structure, the most significant of which were the divestitures of the Company's interests in the CeraVe®, AcneFree™ and AMBI® skincare brands (March 3, 2017), the iNova Pharmaceuticals business (September 29, 2017), the Company's equity interest in Dendreon Pharmaceuticals LLC (June 28, 2017) and the Obagi Medical Products, Inc. business (November 9, 2017).
Debt Repayments - During the years 2016 through 2018, we repaid (net of additional borrowings) over $6,800 million of long-term debt using the net cash proceeds from divestitures of non-core assets, cash generated from operations and cash generated from tighter working capital management. During the threesix months ended March 31,June 30, 2019, using cash on hand we repaid $303approximately $250 million of long-term debt, whichnet of borrowings under our 2023 Revolving Credit Facility (as defined below). Repayments of long-term debt during the six months ended June 30, 2019 included: (i) $172$253 million of our seven year Tranche B Term Loan Facility maturing in June 2025 (the “June 2025 Term Loan B Facility”), and (ii) $75 million of our 2023 Revolving Credit Facility (as defined below) and (iii) $56 million of our seven year Tranche B Term Loan Facility maturing in November 2025 (the "November 2025 Term Loan B Facility"). In addition to these repayments, on August 1, 2019, we repaid $100 million of long-term debt, which included: (i) $81 million of the June 2025 Term Loan B Facility and (ii) $19 million of the November 2025 Term Loan B Facility. Net borrowings during the six months ended June 30, 2019 under our 2023 Revolving Credit Facility of $75 million were primarily used for the payment of interest due in April 2019 and other short-term capital needs.
2017 Refinancing Transactions - In March, October, November and December of 2017, we accessed the credit markets and completed a series of transactions, whereby we extended approximately $9,500 million in aggregate maturities of certain debt obligations due to mature in April 2018 through April 2022, out to March 2022 through December 2025. As part of these transactions we also extended commitments under our revolving credit facility, originally set to expire in April 2018, out to April 2020.
2018 Refinancing Transactions - In March, June and November 2018, we accessed the credit markets and completed a series of transactions, whereby we extended approximately $8,300 million in aggregate maturities of certain debt obligations due to mature in March 2020 through July 2022, out to June 2025 through January 2027. As part of these transactions we obtained less stringent loan financial maintenance covenants under our Senior Secured Credit Facilities and extended commitments under our revolving credit facility by more than three years by replacing our then-existing revolving credit facility, set to expire in April 2020 with a revolving credit facility of $1,225 million due in June 2023 (the “2023 Revolving Credit Facility”).
2019 Refinancing Transactions - In March and May 2019, we accessed the credit markets and completed a series of transactions, whereby we extended approximately $1,500$3,000 million in aggregate maturities of certain debt obligations due to mature in December 2021 through May 2023, out to January 2027 through August 2027. May 2029.
On March 8, 2019, we issued: (i) $1,000 million aggregate principal
amount of 8.50% Senior Unsecured Notes due January 2027 and (ii) $500 million aggregate principal amount of 5.75% Senior Secured Notes due August 2027 (the "August 2027 Secured Notes") in a private placement. The unsecured notes form part of the same series as our existing 8.50% senior notesSenior Unsecured Notes due January 2027 (the "January 2027 Unsecured Notes"). A portion of the net proceeds of the January 2027 Unsecured Notes and the August 2027 Secured Notes and cash on hand were used to: (i) repurchase the remaining $700 million outstanding principal amount of 5.625% Senior Unsecured Notes due 2021 (the “December 2021 Unsecured Notes”), (ii) repurchase $584 million of 5.875% Senior Unsecured Notes due 2023 (the "May 2023 Unsecured Notes"), (ii) repurchase $518 million of 5.625% Senior Unsecured Notes due 2021 (the “December 2021 Unsecured Notes”), (iii) repurchase $216 million of 5.50% Senior Unsecured Notes due 2023 (the "March 2023 Unsecured Notes") and (iv) pay all fees and expenses associated with these transactions (collectively, the “March 2019 Refinancing Transactions”). During April
On May 23, 2019, the Company redeemed $182we issued: (i) $750 million aggregate principal amount of 7.00% Senior Unsecured Notes due January 2028 (the "January 2028 Unsecured Notes") and (ii) $750 million aggregate principal amount of 7.25% Senior Unsecured Notes due May 2029 (the "May 2029 Unsecured Notes") in a private placement. The net proceeds and cash on hand were used to: (i) repurchase $1,118 million of the December 2021May 2023 Unsecured Notes, representing the remaining outstanding principal balance(ii) repurchase $382 million of the December 2021March 2023 Unsecured Notes and completing(iii) pay all fees and expenses associated with these transactions (collectively, the refinancing of $1,500 million of debt in connection with the March“May 2019 Refinancing Transactions.Transactions”).
As a result of prepayments and a series of refinancing transactions through March 31,June 30, 2019, we have extended the maturities of a substantial portion of our long-term debt, providing us with additional liquidity and greater flexibility to execute our business plans. The tables below summarize our outstanding debt portfolio and maturities as of March 31,June 30, 2019 as compared to December 31, 2018.
| | | | March 31, 2019 | | December 31, 2018 | | June 30, 2019 | | December 31, 2018 |
(in millions) | | Maturity | | Principal Amount | | Net of Premiums, Discounts and Issuance Costs | | Principal Amount | | Net of Premiums, Discounts and Issuance Costs | | Maturity | | Principal Amount | | Net of Premiums, Discounts and Issuance Costs | | Principal Amount | | Net of Premiums, Discounts and Issuance Costs |
Senior Secured Credit Facilities: | | | | | | | | | | | | | | | | |
2023 Revolving Credit Facility | | June 2023 | | $ | — |
| | $ | — |
| | $ | 75 |
| | $ | 75 |
| | June 2023 | | $ | 150 |
| | $ | 150 |
| | $ | 75 |
| | $ | 75 |
|
June 2025 Term Loan B Facility | | June 2025 | | 4,222 |
| | 4,104 |
| | 4,394 |
| | 4,269 |
| | June 2025 | | 4,141 |
| | 4,029 |
| | 4,394 |
| | 4,269 |
|
November 2025 Term Loan B Facility | | November 2025 | | 1,425 |
| | 1,402 |
| | 1,481 |
| | 1,456 |
| | November 2025 | | 1,406 |
| | 1,384 |
| | 1,481 |
| | 1,456 |
|
Senior Secured Notes: | | | | | | | | | | | | | | | | |
5.75% Secured Notes | | August 2027 | | 500 |
| | 493 |
| | — |
| | — |
| | August 2027 | | 500 |
| | 493 |
| | — |
| | — |
|
All other Senior Secured Notes | | March 2022 through November 2025 | | 5,000 |
| | 4,950 |
| | 5,000 |
| | 4,948 |
| | March 2022 through November 2025 | | 5,000 |
| | 4,953 |
| | 5,000 |
| | 4,948 |
|
Senior Unsecured Notes: | | | | | | | | | | | | | | | | | | | | |
5.625% | | December 2021 | | 182 |
| | 181 |
| | 700 |
| | 697 |
| | December 2021 | | — |
| | — |
| | 700 |
| | 697 |
|
5.50% | | March 2023 | | 784 |
| | 780 |
| | 1,000 |
| | 995 |
| | March 2023 | | 402 |
| | 400 |
| | 1,000 |
| | 995 |
|
5.875% | | May 2023 | | 2,666 |
| | 2,650 |
| | 3,250 |
| | 3,229 |
| | May 2023 | | 1,548 |
| | 1,539 |
| | 3,250 |
| | 3,229 |
|
8.50% | | January 2027 | | 1,750 |
| | 1,757 |
| | 750 |
| | 738 |
| | January 2027 | | 1,750 |
| | 1,757 |
| | 750 |
| | 738 |
|
7.00% | | | January 2028 | | 750 |
| | 740 |
| | — |
| | — |
|
7.25% | | | May 2029 | | 750 |
| | 740 |
| | — |
| | — |
|
All other Senior Unsecured Notes | | May 2023 through April 2026 | | 7,933 |
| | 7,852 |
| | 7,970 |
| | 7,886 |
| | May 2023 through April 2026 | | 7,956 |
| | 7,878 |
| | 7,970 |
| | 7,886 |
|
Other | | Various | | 12 |
| | 12 |
| | 12 |
| | 12 |
| | Various | | 16 |
| | 16 |
| | 12 |
| | 12 |
|
Total long-term debt and other | | | $ | 24,474 |
| | $ | 24,181 |
| | $ | 24,632 |
| | $ | 24,305 |
| | | $ | 24,369 |
| | $ | 24,079 |
| | $ | 24,632 |
| | $ | 24,305 |
|
The weighted average stated interest rate of the Company's outstanding debt as of March 31,June 30, 2019 and December 31,
2018 was 6.38%6.44% and 6.23%, respectively.
The scheduled principal repayments of our debt obligations as of March 31,June 30, 2019 compared with December 31, 2018 were as follows:
| | (in millions) | | March 31, 2019 | | December 31, 2018 | | June 30, 2019 | | December 31, 2018 |
2019 | | $ | 182 |
| | $ | 228 |
| | $ | 4 |
| | $ | 228 |
|
2020 | | 303 |
| | 303 |
| | 203 |
| | 303 |
|
2021 | | 303 |
| | 1,003 |
| | 303 |
| | 1,003 |
|
2022 | | 1,553 |
| | 1,553 |
| | 1,553 |
| | 1,553 |
|
2023 | | 5,436 |
| | 6,348 |
| | 4,109 |
| | 6,348 |
|
2024 | | 2,303 |
| | 2,303 |
| | 2,303 |
| | 2,303 |
|
Thereafter | | 14,394 |
| | 12,894 |
| | 15,894 |
| | 12,894 |
|
Gross maturities | | $ | 24,474 |
| | $ | 24,632 |
| | $ | 24,369 |
| | $ | 24,632 |
|
See Note 10, "FINANCING ARRANGEMENTS" to our unaudited interim Consolidated Financial Statements and “Management's Discussion and Analysis - Liquidity and Capital Resources: Long-term Debt” for further details.
These matters and other significant matters are discussed in further detail in Note 19, "LEGAL PROCEEDINGS" to our unaudited interim Consolidated Financial Statements presented elsewhere in this Form 10-Q and Note 20, "LEGAL PROCEEDINGS" to our audited Consolidated Financial Statements for the year ended December 31, 2018, which were included in our Annual Report on Form 10-K filed on February 20, 2019.
In the normal course of business, our products, devices and facilities are the subject of ongoing oversight and review, by regulatory and governmental agencies, including general, for cause and pre-approval inspections by the FDA. In 2016, FDA inspections of our Rochester, New York and Tampa, Florida facilities resulted in observations thatrelevant competent authorities where we needed to address as we disclosed in previous filings. As we disclosed in previous filings, in 2017, we resolved these matters withhave business operations, including the FDA. Following the resolution of these matters and the completion of U.S. FDA inspections of our other facilities going back to February 2017,Currently, all of our global operations and facilities were in good compliance standing withhave the FDA.
Improving patient access to our products, as well as making them more affordable, is an important element of our turnaround. In May 2016, we formed the Patient Access and Pricing Committee responsible for setting, changing and monitoring the pricing of our products to ensure launch prices and price changes are assessed and implemented across channels with a focus on patient accessibility and affordability while maintaining profitability. Since that time, the Patient Access and Pricing Committee has been committed to limiting the average annual price increase for our branded prescription pharmaceutical products to no greater than single digits and reaffirmed this commitment for 2019. We expect that the Patient Access and Pricing Committee will continue to implement or recommend additional price changes and/or new programs in-line with this commitment to enhance patient access to our drugs. These pricing changes and programs could affect the average realized pricing for our products and may have a significant impact on our revenue trends.
We are constantly challenged by the dynamics of our industry to innovate and bring new products to market. Now that weWe have divested certain businesses where we saw limited growth opportunities so that we can be more aggressive in redirecting our R&D spend and other corporate investments to innovate within our core businesses where we believe we can be most profitable and where we aim to be an industry leader.
We believe that we have a well-established product portfolio that is diversified within our core businesses and provides a sustainable revenue stream to fund our operations. However, our future success is also dependent upon our ability to continually refresh our pipeline, to provide a rotation of product launches that meet new and changing demands and replace other products that have lost momentum. We believe we have a robust pipeline that not only provides for the next generation of our existing products, but is also poised to bring new products to market.
In the first quarter of 2017, we hired approximately 250 trained and experienced sales force representatives and managers to create, bolster and sustain deep relationships with primary care physicians (“PCP”). With approximately 70% of IBS-D patients initially presenting symptoms to a PCP, we believe that the dedicated PCP sales force is better positioned to reach more patients in need of IBS-D treatment.
sales force and in the later portion of 2018 and in 2019 we have identified and executed on certain opportunities which we describe below.
In addition to driving growth through internal R&D development, we seek to align ourselves with new external product development opportunities as well.opportunities. As recently as this past April, we entered into two licensing agreements which present us with unique developmental opportunities to address unmet needs of individuals suffering with certain GI and liver diseases. The first of these two licensing agreements is with the University of California for certain intellectual property relating to an investigational compound targeting the pituitary adenylate cyclase receptor 1 in non-alcoholic fatty liver disease (“NAFLD”), nonalcoholic steatohepatitis
(“NASH”) and other GI and liver diseases. We believe this compound, once fully developed, could address certain unmet medical needs in the treatment of NAFLD and NASH. The second, is an exclusive licensing agreement with Mitsubishi Tanabe Pharma Corporation to develop and commercialize MT-1303 (amiselimod), a late-stage oral compound that targets the sphingosine 1-phosphate receptor that plays a role in autoimmune diseases, such as inflammatory bowel disease and ulcerative colitis. We plan to initiate a Phase 2 study for the development of MT-1303 in ulcerative colitis.colitis in the first half of 2020, and additionally the cardiovascular Holter study is expected to readout around year end.
In support of our Ortho Dermatologics business and the opportunities we see for growth in this business, we continue to allocate resources and make additional investments in this business to recruit and retain talent and focus on our core dermatology portfolio of products.
As previously outlined, we completed a series of transactions that reduced our debt levels, extended our debt maturities and improved our capital structure, providing us with additional liquidity and greater flexibility to execute our business plans. As a result of prepayments and a series of refinancing transactions, we have extended the maturities of a substantial portion of our long-term debt and, as a result, as of the date of this filing, scheduled principal repayments of our debt obligations through 2021 are less than $610approximately $410 million. Our reduced debt levels and improved debt portfolio will translate to lower repayments of principal over the next five years, which, in turn, will permit more cash flows to be directed toward developing our core assets and repay additional debt amounts. In addition, as a result of the changes in our debt portfolio, approximately 75% of our debt is fixed rate debt as of March 31,June 30, 2019, as compared to approximately 65% as of January 1, 2017.
We continue to monitor our capital structure and to evaluate other opportunities to simplify our business and improve our capital structure giving us the ability to better focus on our core businesses. While we anticipate focusing any future divestiture activities on non-core assets, consistent with our duties to our shareholders and other stakeholders, we will consider dispositions in core areas that we believe represent attractive opportunities for the Company. Also, the Company regularly evaluates market conditions, its liquidity profile and various financing alternatives for opportunities to enhance its capital structure. If the Company determines that conditions are favorable, the Company may refinance or repurchase existing debt or issue additional debt, equity or equity-linked securities.
Certain of our products face the expiration of their patent or regulatory exclusivity in 2019 or in later years, following which we anticipate generic competition of these products. In addition, in certain cases, as a result of negotiated settlements of some of our patent infringement proceedings against generic competitors, we have granted licenses to such generic companies, which will permit them to enter the market with their generic products prior to the expiration of our applicable patent or regulatory exclusivity. Finally, for certain of our products that lost patent or regulatory exclusivity in prior years, we anticipate that generic competitors
may launch in 2019 or in later years. Following a loss of exclusivity of and/or generic competition for a product, we would anticipate that product sales for such product would decrease significantly shortly following the loss of exclusivity or entry of a generic competitor. Where we have the rights, we may elect to launch an authorized generic of such product (either ourselves or through a third party) prior to, upon or following generic entry, which may mitigate the anticipated decrease in product sales; however, even with launch of an authorized generic, the decline in product sales of such product would still be expected to be significant, and the effect on our future revenues could be material.
The risks of generic competition are a fact of the health care industry and are not specific to our operations or product portfolio. These risks are not avoidable, but we believe they are manageable. To manage these risks, our leadership team continually evaluates the impact that generic competition may have on future profitability and operations. In addition to aggressively defending the Company's patents and other intellectual property, our leadership team makes operational and investment decisions regarding these products and businesses at risk, not the least of which are decisions regarding our pipeline. Our leadership team actively manages the Company's pipeline in order to identify what we believe are the proper projects to pursue. Innovative and realizable projects aligned with our core businesses that are expected to provide incremental and sustainable revenues and growth into the future. We believe that our current pipeline is strong enough to meet these objectives and provide future sources of revenues, in our core businesses, sufficient enough to sustain our growth and corporate health as other products in our established portfolio face generic competition and lose momentum.
We believe that we have a well-established product portfolio that is diversified within our core businesses. We also believe that we have a robust pipeline that not only provides for the next generation of our existing products, but also brings new solutions into the market. Revenues for our Significant Seven were greater than $150 million in 2018 and approximately $75 million in 2017, as several of these products have only recently been launched and others are yet to be launched. However, we believe the potential revenues for our Significant Seven to be substantial.
In addition to the acquisition and divestiture actions previously outlined, the following events have affected and are expected to affect our business trends:
The U.S. federal and state governments continue to propose and pass legislation designed to regulate the health care industry. In March 2010, the Patient Protection and Affordable Care Act (the “ACA”) was enacted in the U.S. The ACA contains several provisions that impact our business, including: (i) an increase in the minimum Medicaid rebate to states participating in the Medicaid program, (ii) the extension of the Medicaid rebates to Managed Care Organizations that dispense drugs to Medicaid beneficiaries, (iii) the expansion of the 340(B) Public Health Services drug pricing program, which provides outpatient drugs at reduced rates, to include additional hospitals, clinics and health care centers and (iv) a fee payable to the federal government based on our prior-calendar-year share relative to other companies of branded prescription drug sales to specified government programs.
In addition, in 2013: (i) federal subsidies began to be phased in for brand-name prescription drugs filled in the Medicare Part D cover gap and (ii) the law requires the medical device industry to subsidize health care reform in the form of a 2.3% excise tax on U.S. sales of most medical devices. However, the Consolidated Appropriations Act, 2016 (Pub. L. 114-113), signed into law on December 18, 2015, included a two-year moratorium on the medical device excise tax. On January 22, 2018, with the passage of continuing appropriations through February 8, 2018 (HR 195), the moratorium on the medical device excise tax was further extended until January 1, 2020. The ACA also included provisions designed to increase the number of Americans covered by health insurance. In 2014, the ACA's private health insurance exchanges began to operate. The ACA also allows states to expand Medicaid coverage with most of the expansion’s cost paid for by the federal government.
For 2018 and 2017, we incurred costs of $36 million and $48 million, respectively, related to the annual fee assessed on prescription drug manufacturers and importers that sell branded prescription drugs to specified U.S. government programs (e.g., Medicare and Medicaid). For 2018 and 2017, we also incurred costs of $90 million and $106 million, respectively, on Medicare Part D utilization incurred by beneficiaries whose prescription drug costs cause them to be subject to the Medicare Part D coverage gap (i.e., the “donut hole”).
On July 28, 2014, the U.S. Internal Revenue Service issued final regulations related to the branded pharmaceutical drug annual fee pursuant to the ACA. Under the final regulations, an entity’s obligation to pay the annual fee is triggered by qualifying sales in the current year, rather than the liability being triggered upon the first qualifying sale of the following year. We adopted this guidance in the third quarter of 2014, and it did not have a material impact on our financial position or results of operations.
The financial impact of the ACA will be affected by certain additional developments over the next few years, including pending implementation guidance and certain health care reform proposals. Additionally, policy efforts designed specifically to
reduce patient out-of-pocket costs for medicines could result in new mandatory rebates and discounts or other pricing restrictions. Also, it is possible, as discussed further below, that under the current administration, legislation will be passed by Congress repealing the ACA in whole or in part. Adoption of legislation at the federal or state level could materially affect demand for, or pricing of, our products.
In 2018, we faced uncertainties due to federal legislative and administrative efforts to repeal, substantially modify or invalidate some or all of the provisions of the ACA. However, we believe there is low likelihood of repeal of the ACA, given the recent failure of the Senate’s multiple attempts to repeal various combinations of ACA provisions. There is no assurance that any replacement or administrative modifications of the ACA will not adversely affect our business and financial results, particularly if the replacing legislation reduces incentives for employer-sponsored insurance coverage, and we cannot predict how future federal or state legislative or administrative changes relating to the reform will affect our business.
Other legislative efforts relating to drug pricing have been proposed and considered at the U.S. federal and state level. We also anticipate that Congress, state legislatures and third-party payors may continue to review and assess alternative health care delivery and payment systems and may in the future propose and adopt legislation or policy changes or implementations affecting additional fundamental changes in the health care delivery system.
Organic growth, a non-GAAP metric, is defined as a change on a period-over-period basis in revenues on a constant currency basis (if applicable) excluding the impact of recent acquisitions, divestitures and discontinuations. Organic revenue growth (non-GAAP) is growth in GAAP Revenue (its most directly comparable GAAP financial measure), adjusted for certain items, of businesses that have been owned for one or more years. The Company uses organic revenue (non-GAAP) and organic revenue growth (non-GAAP) to assess performance of its reportable segments, and the Company in total, without the impact of foreign currency exchange fluctuations and recent acquisitions, divestitures and product discontinuations. The Company believes that such measures are useful to investors as they provide a supplemental period-to-period comparison.
Please refer to the tables of organic revenues (non-GAAP) and organic revenue growth (non-GAAP) rates presented in the subsequent section titled “Reportable Segment Revenues and Profits” for a reconciliation of GAAP revenues to organic revenues (non-GAAP).
The following table provides selected unaudited financial information for the three and six months ended March 31,June 30, 2019 and 2018: