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HORIZON THERAPEUTICS PUBLIC LTD CO – 10-K – Management's Discussion and Analysis of Financial Condition and Results of Operations
You should read the following discussion and analysis of our financial condition and results of operations together with our consolidated financial statements and the related notes appearing at the end of this Annual Report on Form 10-K. Some of the information contained in this discussion and analysis or set forth elsewhere in this Annual Report on Form 10-K, including information with respect to our plans and strategy for our business and related financing, includes forward-looking statements that involve risks and uncertainties. You should read the "Risk Factors" section of this Annual Report on Form 10-K for a discussion of important factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis. This section of this Annual Report on Form 10-K generally discusses 2021 and 2020 items and year-to-year comparisons between 2021 and 2020. Discussions of 2019 items and year-to-year comparisons between 2020 and 2019 that are not included in this Annual Report on Form 10-K can be found in "Management's Discussion and Analysis of Financial Condition and Results of Operations" in Part II, Item 7 of our Annual Report on Form 10-K for the fiscal year endedDecember 31, 2020 , filed with theSecurities and Exchange Commission onFebruary 24, 2021 .
Unless otherwise indicated or the context otherwise requires, references to
"Horizon", "we", "us" and "our" refer to
consolidated subsidiaries.
OUR BUSINESS
We are focused on the discovery, development and commercialization of medicines that address critical needs for people impacted by rare, autoimmune and severe inflammatory diseases. Our pipeline is purposeful: we apply scientific expertise and courage to bring clinically meaningful therapies to patients. We believe science and compassion must work together to transform lives. We have two reportable segments, the orphan segment and the inflammation segment, and our commercial portfolio is currently composed of 12 medicines in the areas of rare diseases, gout, ophthalmology and inflammation. InJuly 2021 , we completed the purchase of a biologic drug product manufacturing facility fromEirGen Pharma Limited , or EirGen, a subsidiary of OPKO Health, Inc., inWaterford, Ireland for$67.9 million . Refer to Note 4, Acquisitions, Divestitures and other Arrangements, of the Notes to Consolidated Financial Statements, included in Item 15 of this Annual Report on Form 10-K, for further details. OnMarch 15, 2021 , we completed the acquisition ofViela Bio, Inc. , or Viela. The acquisition expanded our commercial medicine portfolio by adding an additional rare disease medicine, UPLIZNA®, to our orphan segment. The Viela acquisition also provides multiple opportunities to drive long-term growth and solidify our future as an innovation-driven biotech company. Viela's mid-stage biologics pipeline, research and development, or R&D, team and on-market medicine UPLIZNA, made it a complementary strategic fit with our pipeline, commercial portfolio and therapeutic areas of focus. Refer to Note 4, Acquisitions, Divestitures and other Arrangements, of the Notes to Consolidated Financial Statements, included in Item 15 of this Annual Report on Form 10-K, for further details.
As of
medicines:
Orphan
TEPEZZA® (teprotumumab-trbw), for intravenous infusion
KRYSTEXXA® (pegloticase injection), for intravenous infusion
RAVICTI® (glycerol phenylbutyrate) oral liquid
PROCYSBI® (cysteamine bitartrate) delayed-release capsules and granules, for
oral use
ACTIMMUNE® (interferon gamma-1b) injection, for subcutaneous use
UPLIZNA (inebilizumab-cdon) injection, for intravenous use
BUPHENYL® (sodium phenylbutyrate) tablets and powder, for oral use
QUINSAIR™ (levofloxacin) solution for inhalation
Inflammation
PENNSAID® (diclofenac sodium topical solution) 2% w/w, or PENNSAID 2%, for
topical use
DUEXIS® (ibuprofen/famotidine) tablets, for oral use
RAYOS® (prednisone) delayed-release tablets, for oral use
VIMOVO® (naproxen/esomeprazole magnesium) delayed-release tablets, for oral use
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Impact of COVID-19
See Item 1 of Part I, Business, of this Annual Report on Form 10-K regarding
information about the impact of COVID-19 on our company.
Acquisitions and Divestitures
Since
• In
manufacturing facility from EirGen inWaterford, Ireland for$67.9 million .
• In
all of the issued and outstanding shares of Viela's common stock for
approximately $3.0 billion , including cash acquired of $342.3 million .
• In October 2020 , we sold our rights to develop and commercialize RAVICTI
and BUPHENYL in
Group. We have retained the rights to RAVICTI and BUPHENYL inNorth America .
• In
privately held development-stage biopharma company, and its
development-stage oral selective lysophosphatidic acid 1 receptor (LPAR1)
antagonist, CZN001 (renamed HZN-825), for an upfront cash payment of
million with additional payments contingent on the achievement of
development and regulatory milestones.
• In
Inc., for an upfront payment and potential additional contingent
consideration payments, or the MIGERGOT transaction.
• Effective
Jagotec AG andSkyepharma AG , which are affiliates of Vectura Group plc, or Vectura. Under these amendments, our rights to LODOTRA inEurope were transferred to Vectura. The consolidated financial statements presented herein include the results of operations of the acquired businesses from the applicable dates of acquisition. Refer to Note 4, Acquisitions, Divestitures and other Arrangements, of the Notes to Consolidated Financial Statements, included in Item 15 of this Annual Report on Form 10-K, for further details of our acquisitions and divestitures.
Strategy
Horizon is a leading high-growth, innovation-driven, profitable biotech company.
We are focused on the discovery, development and commercialization of medicines
that address critical needs for people impacted by rare, autoimmune and severe
inflammatory diseases. Our three strategic goals are to: (i) maximize the
benefit and value of our on-market medicines through commercial execution and
clinical investment; (ii) expand our pipeline through significant investment in
R&D and business development; and (iii) build a global presence in targeted
international markets. Our vision is to build healthier communities, urgently
and responsibly, supported by our philosophy to make a meaningful difference for
patients and communities in need. We believe this generates value for our
multiple stakeholders, including our shareholders.
Our commercialization strategy for our on-market rare disease medicines,
including our key growth drivers TEPEZZA and KRYSTEXXA, includes efforts to
increase awareness of the conditions each medicine is designed to treat,
enhancing efforts to identify target patients and promote earlier treatment;
drive awareness of the benefits of the medicines; optimize timely access for
patients to the medicines; and maximize the value of the medicines through
investment in clinical trials. For our key growth driver UPLIZNA, which we added
to our portfolio with the Viela acquisition, in addition to our overall
commercial strategy, our commercialization strategy also includes investing in
the commercial and clinical support infrastructure as well as increasing
awareness of what differentiates UPLIZNA from other medicines by generating
additional trial data analyses and clinical evidence. We are leveraging the
successful strategies we have used with TEPEZZA and KRYSTEXXA to support our
commercial efforts for UPLIZNA.
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Our R&D strategy is to expand our pipeline of preclinical and clinical
development programs to drive sustainable growth, as well as maximizing the
benefit and value of our existing medicines through development programs.
Towards expanding our pipeline, we are using a balanced approach of internal
research and external collaborations while remaining aligned with our core focus
areas. We are (i) acquiring, licensing and developing medicines for indications
that address unmet needs in rare, autoimmune and severe inflammatory diseases,
particularly those in our therapeutic areas of focus; (ii) leveraging our
internal research as well as research-based partnerships and collaborations to
drive earlier-stage innovation; (iii) maximizing the range of potential diseases
our pipeline medicine candidates can impact; and (iv) continuing to build out
our research capabilities to generate earlier-stage candidates internally. The
March 2021 acquisition of Viela and the addition of its mid-stage biologics
pipeline significantly expanded our pipeline and expanded our therapeutic areas
of focus to include neuroimmunology, dermatology and respiratory, in addition to
rheumatology, ophthalmology, nephrology and endocrinology. In the third quarter
of 2021, we announced the addition of five additional Phase 2 development
programs in new disease states for two of our pipeline candidates. In addition,
we expanded our earlier-stage discovery pipeline of novel therapeutic programs
in 2021 through global in-licensing agreements with Arrowhead Pharmaceuticals,
Inc., or Arrowhead, and Alpine Immune Sciences, Inc., or Alpine. At the end of
2021, our R&D pipeline included more than 20 programs, with 16 of them added
during the year. Also in 2021, we successfully completed two Phase 4 clinical
trials designed to maximize the benefit and value of KRYSTEXXA.
The aim of our global expansion strategy is to build a global presence in
targeted international markets and we made significant progress in 2021 in
support of this strategy. In November 2021 , we announced that the Committee for
Medicinal Products for Human Use of the European Medicines Agency has adopted a
positive opinion recommending grant of a Centralised Marketing Authorisation, or
CMA, for UPLIZNA as a monotherapy for the treatment of adult patients with
neuromyelitis optica spectrum disorder, or NMOSD, who are anti-aquaporin-4
immunoglobulin G seropositive (AQP4-IgG+). While the Committee for Orphan
Medicinal Products did not recommend maintenance of the orphan designation for
UPLIZNA following its review, we are continuing to invest in our European
infrastructure to support a potential European launch of UPLIZNA for NMOSD,
which we anticipate would begin with Germany in the second quarter of 2022,
assuming the grant of a CMA by the EC. We advanced our efforts to bring TEPEZZA
to patients with TED in targeted markets outside of the United States , including
Japan , where we initiated a Phase 3 randomized, placebo-controlled clinical
trial for the treatment of moderate-to-severe active TED patients. We acquired a
biologic drug product manufacturing facility in Waterford, Ireland , in the
second quarter of 2021, which will support growth of our on-market and
development-stage biologics as well as our global expansion. Subject to
completing the build-out, validation and regulatory approval processes, we
expect the first medicine manufactured at the facility to be approved for
release in 2023.
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RESULTS OF OPERATIONS
Year Ended
Consolidated Results
For the Years
Ended December 31, Change Change
2021 2020 $ %
(in thousands, except percentages)
Net sales $ 3,226,410 $ 2,200,429 $ 1,025,981 47 %
Cost of goods sold 794,512 532,695 261,817 49 %
Gross profit 2,431,898 1,667,734 764,164 46 %
Operating expenses:
Research and development 431,990 209,364 222,626 106 %
Selling, general and administrative 1,446,410 973,227 473,183 49 %
Impairment of long-lived asset 12,371 - 12,371 100 %
Gain on sale of assets (2,000 ) (4,883 ) 2,883 (59 )%
Total operating expenses 1,888,771 1,177,708 711,063 60 %
Operating income 543,127 490,026 53,101 11 %
Other expense, net:
Interest expense, net (81,063 ) (59,616 ) (21,447 ) 36 %
Foreign exchange loss (1,028 ) (297 ) (731 ) 246 %
Other income, net 1,791 3,388 (1,597 ) (47 )%
Loss on debt extinguishment - (31,856 ) 31,856 (100 )%
Total other expense, net (80,300 ) (88,381 ) 8,081 (9 )%
Income before (benefit) expense for
income taxes 462,827 401,645 61,182 15 %
(Benefit) expense for income taxes (71,664 ) 11,849 (83,513 ) (705 )%
Net income $ 534,491 $ 389,796 $ 144,695 37 %
Net sales. Net sales increased $1,026.0 million , or 47%, to $3,226.4
million during the year ended December 31, 2021 , from $2,200.4 million during
the year ended December 31, 2020 . The increase in net sales during the year
ended December 31, 2021 was primarily due to an increase in net sales in our
orphan segment of $1,107.9 million . Growth was primarily due to an increase in
TEPEZZA net sales of $841.3 million , an increase in KRYSTEXXA net sales of
$159.6 million and net sales generated by UPLIZNA of $60.8 million , partially
offset by a decrease in net sales in our inflammation segment of $81.9 million
when compared to the year ended December 31, 2020 .
The following table presents a summary of total net sales attributed to
geographic sources for the years ended
except percentages):
Year Ended December 31, 2021 Year Ended December 31, 2020
% of Total % of Total
Amount Net Sales Amount Net Sales
United States $ 3,210,020 100% $ 2,191,111 100%
Rest of world 16,390 * 9,318 *
Total net sales $ 3,226,410 $ 2,200,429
*Less than 1%
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The following table reflects the components of net sales for the years
ended
Year Ended December 31, Change Change
2021 2020 $ %
TEPEZZA $ 1,661,299 $ 820,008 $ 841,291 103 %
KRYSTEXXA 565,452 405,849 159,603 39 %
RAVICTI 291,945 261,615 30,330 12 %
PROCYSBI 189,965 170,102 19,863 12 %
ACTIMMUNE 117,164 118,834 (1,670 ) (1 )%
UPLIZNA 60,805 - 60,805 100 %
BUPHENYL 7,860 10,549 (2,689 ) (25 )%
QUINSAIR 1,028 698 330 47 %
Orphan segment net sales $ 2,895,518 $ 1,787,655 $ 1,107,863 62 %
PENNSAID 2% 191,621 178,011 13,610 8 %
DUEXIS 74,023 125,331 (51,308 ) (41 )%
RAYOS 56,851 71,811 (14,960 ) (21 )%
VIMOVO 8,397 37,621 (29,224 ) (78 )%
Inflammation segment net sales $ 330,892 $ 412,774 $ (81,882 ) (20 )%
Total net sales $ 3,226,410 $ 2,200,429 $ 1,025,981 47 %
Orphan Segment
TEPEZZA. Net sales increased $841.3 million , or 103%, to $1,661.3 million during
the year ended December 31, 2021 , from $820.0 million during the year ended
December 31, 2020 . Net sales primarily increased due to volume growth of
approximately $830.3 million . In December 2020 , pursuant to the Defense
Production Act of 1950, Catalent Indiana, LLC , or Catalent, was ordered to
prioritize certain COVID-19 vaccine manufacturing, resulting in the cancellation
of previously guaranteed and contracted TEPEZZA drug product manufacturing slots
in December 2020 , which were required to maintain TEPEZZA supply. In March 2021 ,
the U.S. Food and Drug Administration , or FDA, approved a prior approval
supplement to the TEPEZZA biologics license application (which was previously
approved in January 2020 ), giving us authorization to manufacture more TEPEZZA
drug product in a batch resulting in an increased number of vials with each
manufacturing slot. We commenced resupply of TEPEZZA to the market in April
2021 . Refer to the Impact of COVID-19 section in Item 1 of Part I, Business, of
this Annual Report on Form 10-K above, for further information.
KRYSTEXXA. Net sales increased $159.6 million , or 39%, to $565.4 million during
the year ended December 31, 2021 , from $405.8 million during the year ended
December 31, 2020 . Net sales increased by approximately $106.2 million due to
volume growth and $53.4 million due to higher net pricing.
RAVICTI. Net sales increased $30.3 million , or 12%, to $291.9 million during the
year ended December 31, 2021 , from $261.6 million during the year ended December
31, 2020 . Net sales increased by approximately $32.3 million due to volume
growth, partially offset by a decrease of approximately $2.0 million due to
lower net pricing.
PROCYSBI. Net sales increased $19.9 million , or 12%, to $190.0 million during
the year ended December 31, 2021 , from $170.1 million during the year ended
December 31, 2020 . Net sales increased by approximately $12.0 million due to
higher net pricing and $7.9 million due to volume growth.
ACTIMMUNE. Net sales decreased $1.7 million , or 1%, to $117.1 million during the
year ended December 31, 2021 , from $118.8 million during the year ended December
31, 2020 . Net sales decreased by approximately $4.4 million due to lower sales
volume, partially offset by an increase of approximately $2.7 million resulting
from higher net pricing.
UPLIZNA. Net sales generated by UPLIZNA during the year ended December 31, 2021
were $60.8 million . We began recognizing UPLIZNA sales following our acquisition
of Viela on March 15, 2021 .
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Inflammation Segment
AtSeptember 30, 2021 , we determined that there was an indicator to trigger an interim impairment analysis of the inflammation reporting unit's$56.2 million goodwill balance. The fair value of the inflammation reporting unit exceeded its carrying value by more than 30% as ofSeptember 30, 2021 , the interim testing date, resulting in no impairment. In order to evaluate the sensitivity of the fair value calculations on the goodwill impairment test, we applied a hypothetical 10 percent decrease to the fair values of the reporting unit. A 10% decrease in fair value would reduce the headroom between the reporting unit's fair value and its carrying value to approximately 19%. In addition, our annual, qualitative goodwill impairment test performed for both the orphan and inflammation reporting unit in the fourth quarter of 2021 did not indicate an impairment. While no impairment was recognized during the year endedDecember 31, 2021 , we anticipate that an impairment of the inflammation reporting unit's goodwill could occur in the next 12 to 18 months if the reporting unit does not achieve currently forecasted net sales and profitability estimates. These forecasts and estimates could be impacted by factors outside of our control, such as increased competition from RAYOS generic entrants, which may result in an impairment. PENNSAID 2%. Net sales increased$13.6 million , or 8%, to$191.6 million during the year endedDecember 31, 2021 , from$178.0 million during the year endedDecember 31, 2020 . Net sales increased by approximately$21.8 million resulting from higher net pricing primarily due to lower utilization of our patient assistance programs, partially offset by a decrease of approximately$8.2 million resulting from lower sales volume. DUEXIS. Net sales decreased$51.3 million , or 41%, to$74.0 million during the year endedDecember 31, 2021 , from$125.3 million during the year endedDecember 31, 2020 . Net sales decreased by approximately$44.0 million resulting from lower sales volume, primarily due to the impact of generic competition on DUEXIS, and a decrease of approximately$7.3 million due to lower net pricing. OnAugust 4, 2021 , following a judgment in theDistrict Court of Delaware , which was subsequently affirmed by theFederal Circuit Court of Appeals onNovember 16, 2021 ,Alkem Laboratories, Inc. , or Alkem, launched a generic version of DUEXIS inthe United States . As a result, we have repositioned our promotional efforts previously directed to DUEXIS to the other inflammation segment medicines and expect that our DUEXIS net sales will continue to decrease in future periods. RAYOS. Net sales decreased$14.9 million , or 21%, to$56.9 million during the year endedDecember 31, 2021 , from$71.8 million during the year endedDecember 31, 2020 . Net sales decreased by approximately$11.4 million due to lower sales volume and$3.5 million resulting from lower net pricing. We have an exclusive license toU.S. patents and patent applications from Vectura covering RAYOS. Under our settlement agreement withTeva Pharmaceuticals Industries Limited (formerly known asActavis Laboratories FL, Inc. , which itself was formerly known asWatson Laboratories, Inc. -Florida ), or Teva, Teva may enter the market onDecember 23, 2022 , or earlier under certain circumstances. As a result, we expect our net sales for RAYOS to decline in future periods. VIMOVO. Net sales decreased$29.2 million , or 78%, to$8.4 million during the year endedDecember 31, 2021 , from$37.6 million during the year endedDecember 31, 2020 . Net sales decreased by approximately$24.8 million due to lower sales volume as a result of generic competition which began in 2020 and$4.4 million due to lower net pricing. 106 --------------------------------------------------------------------------------
The table below reconciles our gross to net sales for the years ended
31, 2021
Year Ended Year Ended
December 31, 2021 December 31, 2020
% of Gross % of Gross
Amount Sales Amount Sales
Gross sales $ 4,903.6 100 % $ 4,039.4 100 %
Adjustments to gross sales:
Prompt pay discounts (46.0 ) (0.9 )% (52.3 ) (1.3 )%
Medicine returns (17.6 ) (0.4 )% (16.4 ) (0.4 )%
Co-pay and other patient assistance (599.9 ) (12.2 )% (877.3 ) (21.7 )%
Commercial rebates and wholesaler fees (278.8 ) (5.7 )% (304.2 ) (7.5 )%
Government rebates and chargebacks (734.9 ) (15.0 )% (588.8 ) (14.6 )%
Total adjustments (1,677.2 ) (34.2 )% (1,839.0 ) (45.5 )%
Net sales $ 3,226.4 65.8 % $ 2,200.4 54.5 %
During the year ended December 31, 2021 , co-pay and other patient assistance
costs, as a percentage of gross sales, decreased to 12.2% from 21.7% during the
year ended December 31, 2020 , primarily due to a decreased proportion of
inflammation segment medicines sold, including the impact of generic competition
on DUEXIS and VIMOVO sales.
On a quarter-to-quarter basis, our net sales have traditionally been lower in
first half of the year, particularly in the first quarter, with the second half
of the year representing a greater share of overall net sales each year. This is
due to annual managed care plan changes and the re-setting of patients' medical
insurance deductibles at the beginning of each year, resulting in higher co-pay
and other patient assistance costs as patients meet their annual medical
insurance deductibles during the first and second quarters, and higher net sales
in the second half of the year after patients meet their deductibles and
healthcare plans reimburse a greater portion of the total cost of our medicines.
Cost of Goods Sold. Cost of goods sold increased $261.8 million to $794.5
million during the year ended December 31, 2021 , from $532.7 million during the
year ended December 31, 2020 . The increase in cost of goods sold during the year
ended December 31, 2021 , compared to during the year ended December 31, 2020 ,
was primarily due to an increase in sales volumes, an increase in royalty
expense, an increase in amortization expense and the recording of inventory
step-up expense during the year ended December 31, 2021 . Royalty expense
increased by $112.9 million primarily due to royalties payable on net sales of
TEPEZZA, which increased significantly during the year ended December 31, 2021
compared to the year ended December 31, 2020 . Amortization expense increased
$80.5 million primarily due to the acquisition of the UPLIZNA developed
technology intangible asset in the first quarter of 2021 and we recorded
inventory step-up expense of $27.6 million related to UPLIZNA based on the
acquired units of inventory sold during the year ended December 31, 2021 . In
addition, we recorded a $8.7 million DUEXIS inventory reserve due to the impact
of generic competition on DUEXIS sales. As a percentage of net sales, cost of
goods sold was 25% during the year ended December 31, 2021 , compared to 24%
during the year ended December 31, 2020 . The increase in cost of goods sold as a
percentage of net sales was primarily due to a change in the mix of medicines
sold.
Research and Development Expenses. R&D expenses increased $222.6 million to
$432.0 million during the year ended December 31, 2021 , from $209.4 million
during the year ended December 31, 2020 . The increase during the year ended
December 31, 2021 compared to the year ended December 31, 2020 , was primarily
attributable to a $136.1 million increase in clinical trial and manufacturing
development costs reflecting increased activity in our R&D pipeline as well as
the addition of our medicine candidates and development programs following the
acquisition of Viela in March 2021 and an increase of $59.1 million in
employee-related costs. In addition, during the year ended December 31, 2021 , we
recognized $40.0 million of an upfront cash payment in relation to our agreement
with Arrowhead and $28.1 million of an upfront payment and premium paid for
shares of Alpine's common stock in relation to our agreement with Alpine. This
was partially offset by the $45.0 million upfront payment for the acquisition of
Curzion, which was expensed as in-process research and development, or IPR&D,
during the year ended December 31, 2020 .
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We expect our R&D expenses to increase significantly in future periods as a
result of our on-going and planned clinical trials for our pipeline including
new medicine candidates and development programs acquired in 2021.
Selling, General and Administrative Expenses. Selling, general and administrative expenses increased$473.2 million to$1,446.4 million during the year endedDecember 31, 2021 , from$973.2 million during the year endedDecember 31, 2020 . The increase was primarily attributable to costs associated with the Viela acquisition inMarch 2021 and an increase in TEPEZZA commercial activities. These include an increase of$150.9 million in employee-related costs, an increase of$194.8 million in marketing program costs and an increase of$57.4 million in consulting costs, primarily related to the integration of Viela. In addition,$28.6 million of transaction costs were incurred during the year endedDecember 31, 2021 relating to the Viela acquisition.
We expect our selling, general and administrative expenses to increase
significantly in future periods primarily due to continued support for our
commercial and field-based organization and global expansion activities.
Impairment of long-lived asset. During the year endedDecember 31, 2021 , we recorded an impairment charge of$12.4 million as a result of vacating theLake Forest office. Refer to Note 14, Lease Obligations, of the Notes to Consolidated Financial Statements, included in Item 15 of this Annual Report on Form 10-K, for further details. Gain on sale of assets. During the year endedDecember 31, 2021 , gain on sale of assets represents a$2.0 million contingent consideration payment related to the sale of MIGERGOT in 2019.
During the year ended
RAVICTI and BUPHENYL in
a gain of
Interest Expense, Net. Interest expense, net, increased$21.5 million to$81.1 million during the year endedDecember 31, 2021 , from$59.6 million during the year endedDecember 31, 2020 . The increase was primarily due to an increase in interest expense of$17.8 million , primarily related to an additional$1.6 billion aggregate principal amount of term loans borrowed pursuant to an amendment to our Credit Agreement and a decrease in interest income of$3.7 million . Refer to Note 13, Debt Agreements, of the Notes to Consolidated Financial Statements, included in Item 15 of this Annual Report on Form 10-K, for further details. Loss on Debt Extinguishment. During the year endedDecember 31, 2020 , we recorded a loss on debt extinguishment of$31.9 million in the consolidated statements of comprehensive income, which reflects the exchange of our 2.5% Exchangeable Senior Notes due 2022, or the Exchangeable Senior Notes. During the year endedDecember 31, 2020 ,$400.0 million in aggregate principal amount of Exchangeable Senior Notes were exchanged for ordinary shares and cash payments. 108 -------------------------------------------------------------------------------- (Benefit) Expense for Income Taxes. During the year endedDecember 31, 2021 , we recorded a benefit for income taxes of$71.7 million and an expense for income taxes of$11.8 million during the year endedDecember 31, 2020 . The benefit for income taxes recorded during the year endedDecember 31, 2021 resulted primarily from tax expense on pre-tax income and losses at the Irish statutory tax rate of$57.9 million as offset by tax benefits recognized on share-based compensation of$71.2 million and a tax benefit of$49.4 million recognized due to a reduction in the state tax rate expected to apply to the reversal of temporary differences between the book values and tax bases of certain assets acquired through the Viela acquisition. A tax benefit of$44.7 million was recognized on the pre-tax income and losses generated in jurisdictions with statutory tax rates different than the Irish statutory tax rate, a$13.9 million tax benefit was recognized on intercompany inventory transfers and$11.6 million ofU.S. Federal and state tax credits were generated during the year. These tax benefits were partially offset by a tax expense of$47.1 million attributable to disallowed officers' compensation under Section 162(m) of the Internal Revenue Code of 1986, as amended, or the Code and a tax expense of$18.7 million generated from an intercompany transfer and license of intellectual property from aU.S. subsidiary to an Irish subsidiary. The expense for income taxes recorded during the year endedDecember 31, 2020 was primarily attributable to a$15.2 million provision recorded following the publication, onApril 8, 2020 , by theU.S. Department of the Treasury , of Final Regulations for Section 267A, or commonly referred to as the Anti-Hybrid Rules. The Final Regulations for Section 267A permanently disallow forU.S. tax purposes certain interest expense accrued to a foreign related party during the year endedDecember 31, 2019 . As a result, we recorded a write off of a deferred tax asset related to this interest expense during the year endedDecember 31, 2020 and recognized a corresponding tax provision of$15.2 million . The remainder of the expense for income taxes recorded during the year endedDecember 31, 2020 was primarily attributable to disallowed officers' compensation under Section 162(m) of the Code of$14.6 million , disallowed in-process research and development expense incurred in connection with the Curzion acquisition of$9.5 million and tax expense recognized onU.S. taxable income generated from an intercompany transfer of intellectual property from aU.S. subsidiary to an Irish subsidiary during the year endedDecember 31, 2020 of$11.2 million and changes in valuation allowances of$4.2 million . These expenses were partially offset by tax benefits recognized on share-based compensation of$23.8 million , additionalU.S. Federal and state tax credits of$13.8 million and the recognition of a deferred tax asset in the Irish subsidiary resulting from the intercompany transfer of intellectual property of$6.0 million . 109 --------------------------------------------------------------------------------
Information by Segment
Refer to Note 11, Segment and Other Information, of the Notes to Consolidated Financial Statements, included in Item 15 of this Annual Report on Form 10-K for a reconciliation of our segment operating income to our total income before (benefit) expense for income taxes for the years endedDecember 31, 2021 and 2020. Orphan Segment The following table reflects our orphan segment net sales and segment operating income for the years endedDecember 31, 2021 and 2020 (in thousands, except percentages). For the Year Ended December 31, 2021 2020 Change % Change Net sales$ 2,895,518 $ 1,787,655 $ 1,107,863 62 % Segment operating income 1,219,317 783,560 435,757 56 %
Net sales. The increase in orphan segment net sales during the year ended
Segment operating income. Orphan segment operating income increased$435.7 million to$1,219.3 million during the year endedDecember 31, 2021 , from$783.6 million during the year endedDecember 31, 2020 . The increase was primarily attributable to an increase in net sales of$1,107.9 million as described above, partially offset by an increase in selling, general and administrative expenses of$353.0 million , an increase in R&D expenses of$168.5 million and an increase of$126.0 million in royalty expense primarily related to an increase in royalties payable on net sales of TEPEZZA during the year endedDecember 31, 2021 compared to the year endedDecember 31, 2020 . The increase in selling, general and administrative expenses was mainly due to an increase in the commercial and field-based organization for TEPEZZA, and the increase in R&D expenses was primarily due to incremental net operating expense of Viela after we acquired it onMarch 15, 2021 .
Inflammation Segment
The following table reflects our inflammation segment net sales and segment operating income for the years endedDecember 31, 2021 and 2020 (in thousands, except percentages). For the Year Ended December 31, 2021 2020 Change % Change Net sales$ 330,892 $ 412,774 $ (81,882 ) (20 )% Segment operating income 156,197 212,061 (55,864 ) (26 )%
Net sales. The decrease in inflammation segment net sales during the year ended
Segment operating income. Inflammation segment operating income decreased$55.9 million to$156.2 million during the year endedDecember 31, 2021 , from$212.1 million during the year endedDecember 31, 2020 . The decrease was primarily attributable to a decrease in net sales of$81.9 million as described above and a$8.7 million inventory reserve for DUEXIS due to the impact of generic competition on DUEXIS sales, partially offset by a decrease in selling, general and administrative expenses of$26.9 million . 110
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Non-GAAP Financial Measures
EBITDA, or earnings before interest, taxes, depreciation and amortization, adjusted EBITDA, non-GAAP net income and non-GAAP earnings per share are used and provided by us as non-GAAP financial measures. These non-GAAP financial measures are intended to provide additional information on our performance, operations and profitability. Adjustments to our GAAP figures as well as EBITDA exclude acquisition/divestiture-related costs, manufacturing plant start-up costs, drug substance harmonization costs, fees related to refinancing activities, restructuring and realignment costs and litigation settlements, as well as non-cash items such as share-based compensation, inventory step-up expense, depreciation and amortization, non-cash interest expense, long-lived assets impairment charges, loss on debt extinguishments, gain on sale of assets, gain on equity security investments and other non-cash adjustments. Certain other special items or substantive events may also be included in the non-GAAP adjustments periodically when their magnitude is significant within the periods incurred. We maintain an established non-GAAP cost policy that guides the determination of what costs will be excluded in non-GAAP measures. We believe that these non-GAAP financial measures, when considered together with the GAAP figures, can enhance an overall understanding of our financial and operating performance. The non-GAAP financial measures are included with the intent of providing investors with a more complete understanding of our historical financial results and trends and to facilitate comparisons between periods. In addition, these non-GAAP financial measures are among the indicators our management uses for planning and forecasting purposes and measuring our performance. These non-GAAP financial measures should be considered in addition to, and not as a substitute for, or superior to, financial measures calculated in accordance with GAAP. The non-GAAP financial measures used by us may be calculated differently from, and therefore may not be comparable to, non-GAAP financial measures used by other companies. Beginning in the fourth quarter of 2021, following consultation with the staff of theDivision of Corporation Finance of theU.S. Securities and Exchange Commission , we no longer exclude upfront and milestone payments related to license and collaboration agreements from our non-GAAP financial measures and its line-item components. For purposes of comparability, non-GAAP financial measures for the year endedDecember 31, 2020 and 2019 have been updated to reflect this change. The upfront and milestone payments related to license and collaboration agreements continue to be excluded from our segment operating income and from certain measures contained in our credit agreement that are relevant to, among other things, the calculation of the interest rate.
Reconciliations of reported GAAP net income to EBITDA, adjusted EBITDA and
non-GAAP net income, and the related per share amounts, were as follows (in
thousands, except share and per share amounts):
For the Years Ended December 31,
2021 2020
GAAP net income $ 534,491 $ 389,796
Depreciation (1) 17,475 24,303
Amortization and step-up:
Intangible amortization expense (2) 336,277
255,148
Inventory step-up expense (3) 27,572 - Interest expense, net (including amortization of debt discount and deferred financing costs) 81,063 59,616 (Benefit) expense for income taxes (71,664 ) 11,849 EBITDA 925,214 740,712 Other non-GAAP adjustments: Share-based compensation (4) 219,086 146,627 Acquisition/divestiture-related costs (5) 95,929 49,196 Restructuring and realignment costs (6) 26,309 (141 ) Impairment of long-lived assets (7) 12,371 1,713 Litigation settlements (8) 5,000 - Manufacturing plant start-up costs (9) 3,622 - Fees related to refinancing activities (10) - 54 Loss on debt extinguishment (11) - 31,856 Drug substance harmonization costs (12) - 542 Gain on equity security investments (13) (1,257 ) - Gain on sale of assets (14) (2,000 ) (4,883 ) Total of other non-GAAP adjustments (19) 359,060 224,964 Adjusted EBITDA (19)$ 1,284,274 $ 965,676 111
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For the Years Ended December 31,
2021 2020
GAAP net income $ 534,491 $ 389,796
Non-GAAP adjustments:
Depreciation (1) 17,475 24,303
Amortization and step-up:
Intangible amortization expense (2) 336,277
255,148
Inventory step-up expense (3) 27,572 -
Amortization of debt discount and deferred financing
costs (15)
5,189
12,640
Share-based compensation (4) 219,086
146,627
Acquisition/divestiture-related costs (5) 95,929
49,196
Restructuring and realignment costs (6) 26,309 (141 ) Impairment of long-lived assets (7) 12,371
1,713
Litigation settlements (8) 5,000 - Manufacturing plant start-up costs (9) 3,622 - Fees related to refinancing activities (10) - 54 Loss on debt extinguishment (11) -
31,856
Drug substance harmonization costs (12) - 542 Gain on equity security investments (13) (1,257 ) - Gain on sale of assets (14) (2,000 ) (4,883 ) Total pre-tax non-GAAP adjustments (19) 745,573
517,055
Income tax effect of pre-tax non-GAAP adjustments (16) (169,554 ) (98,628 ) Other non-GAAP income tax adjustments (17) (20,800 )
20,541
Total non-GAAP adjustments (19) 555,219 438,968 Non-GAAP Net Income (19)$ 1,089,710 $ 828,764 Non-GAAP Earnings Per Share: Weighted average ordinary shares - Basic 225,551,410
203,967,246
Non-GAAP Earnings Per Share - Basic GAAP earnings per share - Basic $ 2.37$ 1.91 Non-GAAP adjustments (19) 2.46 2.15 Non-GAAP earnings per share - Basic (19) $ 4.83
Non-GAAP net income (19)$ 1,089,710
Effect of assumed conversion of Exchangeable Senior
Notes, net of tax (18)
-
3,789
Numerator - non-GAAP net income (19)$ 1,089,710
Weighted average ordinary shares - Diluted Weighted average ordinary shares - Basic 225,551,410
203,967,246
Ordinary share equivalents 10,129,073
18,203,897
Denominator - weighted average ordinary shares - Diluted 235,680,483
222,171,143
Non-GAAP Earnings Per Share - Diluted GAAP earnings per share - Diluted $ 2.27$ 1.81 Non-GAAP adjustments (19) 2.35 1.94 Non-GAAP earnings per share - Diluted (19) $ 4.62
(1) Represents depreciation expense related to our property, plant, equipment,
software and leasehold improvements.
(2) Intangible amortization expenses are primarily associated with our
intellectual property rights, developed technology and customer relationships
related to TEPEZZA, KRYSTEXXA, RAVICTI, PROCYSBI, ACTIMMUNE, UPLIZNA,
BUPHENYL, PENNSAID 2% and RAYOS.
112
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(3) During the year ended
revalued in connection with the Viela acquisition. Refer to Note 5,
Inventories, of the Notes to Consolidated Financial Statements, included in
Item 15 of this Annual Report on Form 10-K for further detail.
(4) Represents share-based compensation expense associated with our stock option,
restricted stock unit and performance stock unit grants to our employees and
non-employee directors and our employee share purchase plan.
(5) Primarily represents transaction and integration costs, including, advisory,
legal, consulting and certain employee-related costs, incurred in connection
with our acquisitions and divestitures. Costs recovered from subleases of
acquired facilities and reimbursed expenses incurred under transition
arrangements for divestitures are also reflected in this line item. In
addition, the year ended December 31, 2020 amounts include the Curzion
acquisition payment of
(6) Since 2020, we have been working to expand our TEPEZZA drug substance
manufacturing capacity in the external
2021, we ended further TEPEZZA drug substance manufacturing development
activities in the
R&D expense related to manufacturing development activities in this facility.
We expect existing and planned future production capacity at the
and Boulder facilities to produce sufficient TEPEZZA drug substance to meet
our future needs. In addition, rent and maintenance charges of
were recorded for the leased
quarter of 2021.
(7) During the year ended
impairment charge of
Forest office.
During the year ended December 31, 2020 , we recorded an impairment charge of
$1.7 million related to the Novato, California office lease, which was assumed
through an acquisition.
(8) We recorded
for litigation settlements.
(9) During the year ended
manufacturing plant start-up costs related to the purchase of a biologic drug
product manufacturing facility from EirGen in
(10) Represents arrangement and other fees relating to our refinancing
activities.
(11) During the year ended
extinguishment of
comprehensive income, which reflects the extinguishment of our Exchangeable
Senior Notes.
(12) During the year ended
agreement to acquire certain rights to interferon gamma-1b, marketed as
IMUKIN in an estimated thirty countries primarily in
East, or the IMUKIN purchase agreement. We already owned the rights to
interferon gamma-1b marketed as ACTIMMUNE in
to pay our contract manufacturer certain amounts related to the
harmonization of the manufacturing processes for ACTIMMUNE and IMUKIN drug
substance, or the harmonization program. At the time we entered into the
IMUKIN purchase agreement and the harmonization program commitment was made,
we had anticipated achieving certain benefits should the Phase 3 clinical
trial evaluating ACTIMMUNE for the treatment of Friedreich's ataxia be
successful. If the study had been successful and if
had subsequently been obtained, we had forecasted significant increases in
demand for the medicine and the harmonization program would have resulted in
significant benefits to us. Following our discontinuation of the
Friedreich's ataxia program, we determined that certain assets, including an
upfront payment related to the IMUKIN purchase agreement, were impaired, and
the costs under the harmonization program would no longer have benefit to us
and should be expensed as incurred.
(13) We held investments in equity securities with readily determinable fair
values of
assets in the consolidated balance sheet. For the year ended
2021, we recognized net unrealized gains of
in fair value of these securities.
113
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(14) Gain on sale of assets during the year ended
$2.0 million contingent consideration payment related to the sale of MIGERGOT in 2019.
During the year ended
RAVICTI and BUPHENYL in
a gain of
(15) Represents amortization of debt discount and deferred financing costs
associated with our debt.
(16) Income tax adjustments on pre-tax non-GAAP adjustments represent the
estimated income tax impact of each pre-tax
non-GAAP adjustment based on the statutory income tax rate of the applicable
jurisdictions for each non-GAAP adjustment.
(17) During the year ended
state tax liability on
transfer and license of intellectual property from a
Irish subsidiary which was partially offset by the recognition of a deferred
tax asset in the Irish subsidiary, resulting in a non-GAAP tax adjustment of
to apply to the reversal of temporary differences between the book values
and tax bases of certain assets acquired through the Viela acquisition. The
reduction in state tax rate resulted in a reduction in the deferred tax
liability relating to these assets and a non-GAAP tax adjustment of
million.
During the year ended December 31, 2020 , following the publication by the United
States Department of Treasury and the Internal Revenue Service of the Final
Regulations on the Anti-Hybrid Rules on April 8, 2020 , we recorded a write-off
of a deferred tax asset related to certain interest expense accrued to a foreign
related party during the year ended December 31, 2019 and recognized a
corresponding one-time tax provision, resulting in a non-GAAP tax adjustment of
$15.2 million . We also recognized a U.S. federal tax liability on U.S. taxable
income generated from an intercompany transfer of intellectual property from a
U.S. subsidiary to an Irish subsidiary, which was partially offset by the
recognition of a deferred tax asset in the Irish subsidiary, resulting in a
non-GAAP tax adjustment of $5.3 million .
(18) During the year ended
principal amount of Exchangeable Senior Notes were fully extinguished and
exchanged for ordinary shares or cash.
(19) As discussed above, following consultation with the staff of the Division of
Corporation Finance of theU.S. Securities and Exchange Commission , we no longer exclude upfront and milestone payments related to license and collaboration agreements from our non-GAAP financial measures and its
line-item components. Adjusted EBITDA and non-GAAP net income for the years
ended
of upfront and milestone payments related to license and collaboration
agreements, respectively. These amounts continue to be excluded from our
segment operating income and from certain measures contained in our credit
agreement that are relevant to, among other things, the calculation of the
interest rate.
114
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Liquidity, Financial Position and Capital Resources
As ofDecember 31, 2021 , we had retained earnings of$318.6 million . We expect that our sales and marketing expenses will continue to increase as a result of the commercialization of our medicines and global expansion initiatives, but we believe these cost increases will be more than offset by higher net sales and gross profits in future periods. Additionally, we expect that our R&D costs will increase as we acquire or develop more development-stage medicine candidates and advance our candidates through the clinical development and regulatory approval processes. In particular, we expect to incur substantial costs in connection with advancing our pipeline of medicine candidates and development programs in on-going and planned clinical trials. Following the highly successful launch of TEPEZZA, which significantly exceeded our expectations, we are in the process of expanding our production capacity to meet anticipated future demand for TEPEZZA. As ofDecember 31, 2021 , we had total purchase commitments, including the minimum annual order quantities and binding firm orders, withAGC Biologics A/S (formerly known as CMC Biologics A/S) for TEPEZZA drug substance of €122.8 million ($139.2 million converted at a Euro-to-Dollar exchange rate as ofDecember 31, 2021 of 1.1338), to be delivered throughDecember 2024 . We also expect to incur additional costs and to enter into additional purchase commitments in connection with our efforts to expand TEPEZZA production capacity in order to meet anticipated increases in demand. InJuly 2021 , we completed the purchase of a biologic drug product manufacturing facility from EirGen for$67.9 million . Refer to Note 4, Acquisitions, Divestitures and other Arrangements, of the Notes to Consolidated Financial Statements, included in Item 15 of this Annual Report on Form 10-K, for further details. We expect to incur approximately$35.0 million in capital expenditures through 2022 in order to complete the drug product facility. InFebruary 2020 , we purchased a three-building campus inDeerfield, Illinois , for total consideration and directly attributable transaction costs of$118.5 million . TheDeerfield campus totals 70 acres and consists of approximately 650,000 square feet of office space. We made significant capital expenditures during the first quarter of 2021 in order to prepare theDeerfield campus for occupancy. Our office employees previously located inLake Forest, Illinois moved to theDeerfield campus inFebruary 2021 . Vacating theLake Forest leased office building inFebruary 2021 represented a triggering event for impairment consideration of the right-of-use asset relating to this building. During the first quarter of 2021, we recorded an impairment charge of$12.4 million as a result of vacating theLake Forest office. This charge was reported within impairment of long-lived asset in the consolidated statement of comprehensive income. In addition, we recorded a liability of$5.6 million during the year endedDecember 31, 2021 for maintenance charges as a result of vacating the leasedLake Forest office. InJanuary 2022 , we entered a sublease agreement for the entireLake Forest office building for the remaining term of the original lease throughMarch 31, 2031 . During the first quarter of 2021, under our license agreement withF. Hoffmann-La Roche Ltd andHoffmann-La Roche Inc. , or together referred to as Roche, we made a milestone payment ofCHF50.0 million ($56.1 million when converted using a CHF-to-Dollar exchange rate at the date of payment of 1.1228) in relation to the attainment of TEPEZZA net sales milestones. The liability for this milestone payment was recorded during the year endedDecember 31, 2020 . InApril 2021 , under the acquisition agreement forRiver Vision Development Corp. , or River Vision, we made a TEPEZZA net sales milestone payment of$67.0 million . The liability for this milestone payment was recorded during the year endedDecember 31, 2020 . There are no further TEPEZZA net sales milestone obligations remaining to Roche and the former River Vision stockholders. Our remaining obligation to Roche relating to the attainment of various TEPEZZA development and regulatory milestones isCHF43.0 million ($47.0 million when converted using a CHF-to-Dollar exchange rate atDecember 31, 2021 of 1.0937). During the year endedDecember 31, 2020 , we committed to invest as a strategic limited partner in four venture capital funds:Forbion Growth Opportunities Fund I C.V., Forbion Capital Fund V C.V.,Aisling Capital V, L.P. andRiverVest Venture Fund V, L.P. As ofDecember 31, 2021 , the total carrying amount of our investments in these funds was$22.6 million , which is included in other assets in the consolidated balance sheet, and our total future commitments to these funds are$42.3 million . 115 -------------------------------------------------------------------------------- We have financed our operations to date through equity financings, debt financings and the issuance of convertible notes, along with cash flows from operations during the last several years. As ofDecember 31, 2021 , we had$1.6 billion in cash and cash equivalents and total debt with a book value of$2.6 billion and face value of$2.6 billion . We believe our existing cash and cash equivalents and our expected cash flows from our operations will be sufficient to fund our business needs for at least the next 12 months from the issuance of the financial statements in this Annual Report on Form 10-K. We do not have any financial or non-financial covenants that we expect to be affected by the economic disruptions and negative effects of the COVID-19 pandemic. We have a significant amount of debt outstanding on a consolidated basis. For a description of our debt agreements, refer to Note 13, Debt Agreements, of the Notes to Consolidated Financial Statements, included in Item 15 of this Annual Report on Form 10-K. This substantial level of debt could have important consequences to our business, including, but not limited to: making it more difficult for us to satisfy our obligations; requiring a substantial portion of our cash flows from operations to be dedicated to the payment of principal and interest on our indebtedness, therefore reducing our ability to use our cash flows to fund acquisitions, capital expenditures, R&D and future business opportunities; limiting our ability to obtain additional financing, including borrowing additional funds; increasing our vulnerability to, and reducing our flexibility to respond to, general adverse economic and industry conditions; limiting our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate; and placing us at a disadvantage as compared to our competitors, to the extent that they are not as highly leveraged. We may not be able to generate sufficient cash to service all of our indebtedness and may be forced to take other actions to satisfy our obligations under our indebtedness.
In addition, the indenture governing our 5.5% Senior Notes due 2027 and our
Credit Agreement impose various covenants that limit our ability and/or our
restricted subsidiaries' ability to, among other things, pay dividends or
distributions, repurchase equity, prepay junior debt and make certain
investments, incur additional debt and issue certain preferred stock, incur
liens on assets, engage in certain asset sales or merger transactions, enter
into transactions with affiliates, designate subsidiaries as unrestricted
subsidiaries; and allow to exist certain restrictions on the ability of
restricted subsidiaries to pay dividends or make other payments to us.
During the year endedDecember 31, 2021 , we issued an aggregate of 6.0 million ordinary shares in connection with stock option exercises and the vesting of restricted stock units and performance stock units and employee share purchase plan purchases. We received a total of$73.1 million in net proceeds in connection with such issuances. During the year endedDecember 31, 2021 , we made payments of$166.0 million for employee withholding taxes relating to vesting of share-based awards. Since our inception, we have not engaged in any off-balance sheet arrangements, including the use of structured finance, special purpose entities or variable interest entities, other than the indemnification agreements discussed in Note 15, Commitments and Contingencies, of the Notes to Consolidated Financial Statements, included in Item 15 of this Annual Report on Form 10-K.
Sources and Uses of Cash
The following table provides a summary of our cash position and cash flows for
the years ended
For the Years Ended
2021
2020
Cash, cash equivalents and restricted cash$ 1,584,156 $ 2,083,479 Cash provided by (used in): Operating activities 1,035,271 555,688 Investing activities (2,994,111 ) (464,071 ) Financing activities 1,470,123 904,579 116
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Operating Cash Flows
Net cash provided by operating activities during the year endedDecember 31, 2021 of$1,035.3 million was primarily attributable to cash collections from gross sales, partially offset by payments made related to patient assistance costs for our medicines and government rebates for our orphan segment medicines, payments related to selling, general and administrative expenses, including transaction costs related to the Viela acquisition, and payments related to R&D expenses. Net cash provided by operating activities during the year endedDecember 31, 2020 of$555.7 million was primarily attributable to cash collections from gross sales, partially offset by payments made related to patient assistance costs for our inflammation segment medicines and government rebates for our orphan segment medicines, payments related to selling, general and administrative expenses and R&D expenses and advanced payments for TEPEZZA inventory.
Investing Cash Flows
Net cash used in investing activities of$2,994.1 million during the year endedDecember 31, 2021 was primarily attributable to payments for acquisitions, net of$2,845.3 million which was primarily attributable to$2.6 billion paid in relation to the Viela acquisition, net of acquired cash. In addition, we made a milestone payment ofCHF50.0 million ($56.1 million when converted using a CHF-to-Dollar exchange rate at the date of payment of 1.1228) under our license agreement with Roche and we made a milestone payment of$67.0 million to the former River Vision stockholders during the year endedDecember 31, 2021 . In the third quarter of 2021, we completed the purchase of a biologic drug product manufacturing facility from EirGen for$67.9 million , which included an upfront cash payment of$64.8 million and$3.1 million of additional transaction costs, legal fees and liabilities assumed and we paid an upfront cash payment of$40.0 million in relation to the global agreement with Arrowhead inJuly 2021 . Net cash used in investing activities during the year endedDecember 31, 2020 of$464.1 million was primarily attributable to payments for acquisitions of$262.3 million which consisted of$215.2 million of milestone payments associated with the acquisition of River Vision and our agreements with Roche, withS.R. One, Limited and withLundbeckfond Invest A/S , and$45.0 million due to the acquisition of Curzion in the second quarter of 2020. Additionally,$112.5 million was paid in the first quarter of 2020 in relation to the purchase of a three-building campus inDeerfield, Illinois . We also paid an upfront cash payment of$30.0 million in the fourth quarter of 2020 related to a global agreement entered into withHalozyme , that gives us exclusive access toHalozyme's ENHANZE drug delivery technology for subcutaneous formulation of medicines targeting IGF-1R. We intend to use ENHANZE to develop a subcutaneous formulation of TEPEZZA. Financing Cash Flows Net cash provided by financing activities during the year endedDecember 31, 2021 of$1,470.1 million was primarily attributable to an additional$1.6 billion aggregate principal amount of term loans borrowed pursuant to an amendment to our Credit Agreement, the proceeds of which, in addition to a portion of our existing cash on hand, was used to pay the consideration for the Viela acquisition, partially offset by$166.0 million payment of employee withholding taxes relating to share-based awards.
Net cash provided by financing activities during the year ended
2020
million ordinary shares in connection with our underwritten public equity
offering in
million
payable by us in connection with such offering.
117 --------------------------------------------------------------------------------
Financial Condition as of
Inventories, net. Inventories, net, increased$150.4 million , from$75.3 million as ofDecember 31, 2020 to$225.7 million as ofDecember 31, 2021 . The increase was primarily due to stepped-up UPLIZNA inventory of$151.6 million , which consisted of$120.9 million of stepped-up work in process,$20.6 million of stepped-up finished goods and$10.1 million stepped-up raw materials. We recorded$27.6 million of UPLIZNA inventory step-up expense in cost of goods sold during the year endedDecember 31, 2021 . Prepaid expenses and other current assets. Prepaid expenses and other current assets increased$105.2 million , from$251.9 million as ofDecember 31, 2020 to$357.1 million as ofDecember 31, 2021 . The increase was primarily due to an increase of$36.3 million in prepaid income taxes and income taxes receivable, an increase of$22.4 million in upfront payments for inventory and an increase of$13.9 million in deferred charge for taxes on intercompany profits. Property, plant and equipment, net. Property, plant and equipment, net, increased$103.3 million , from$189.0 million as ofDecember 31, 2020 to$292.3 million as ofDecember 31, 2021 . The increase was primarily due to additions of$46.2 million related to the purchase of a biologic drug product manufacturing facility from EirGen inJuly 2021 and$45.9 million of additions related to theDeerfield campus. Refer to Note 4, Acquisitions, Divestitures and other Arrangements, of the Notes to Consolidated Financial Statements, included in Item 15 of this Annual Report on Form 10-K for further details of the purchase of the biologic drug product manufacturing facility. We expect to incur approximately$35.0 million in capital expenditures through 2022 in order to complete the drug product facility. Developed technology and other intangible assets, net. Developed technology and other intangible assets, net, increased$1,177.2 million , from$1,782.9 million as ofDecember 31, 2020 to$2,960.1 million as ofDecember 31, 2021 . During the year endedDecember 31, 2021 , in connection with the acquisition of Viela, we capitalized$1,493.0 million of developed technology related to UPLIZNA. This was partially offset by amortization of developed technology of$336.3 million during the year endedDecember 31, 2021 . In-process research and development. OnMarch 15, 2021 , we completed the acquisition of Viela and acquired$910.0 million of IPR&D. OnMarch 23, 2021 , our strategic partner,Mitsubishi Tanabe Pharma Corporation , received manufacturing and marketing approval of UPLIZNA inJapan . As a result, we transferred$30.0 million of IPR&D to developed technology. As ofDecember 31, 2021 , the remaining IPR&D relating to the Viela acquisition was$880.0 million .Goodwill .Goodwill increased$653.0 million , from$413.7 million as ofDecember 31, 2020 to$1,066.7 million as ofDecember 31, 2021 due to the Viela acquisition. Refer to Note 4, Acquisitions, Divestitures and other Arrangements, of the Notes to Consolidated Financial Statements, included in Item 15 of this Annual Report on Form 10-K for further details of this acquisition. Other assets. Other assets increased$85.0 million , from$55.7 million as ofDecember 31, 2020 to$140.7 million as ofDecember 31, 2021 . InOctober 2019 , we entered into an agreement for lease relating to approximately 63,000 square feet of office space under construction inDublin, Ireland . InMay 2021 , the construction of the office was completed by the lessor and the lease became effective. As a result, we recognized$60.9 million as a right-of-use asset and a corresponding lease liability on the consolidated balance sheet. Long-term debt, net. Long-term debt, net increased$1,551.8 million from$1,003.4 million as ofDecember 31, 2020 to$2,555.2 million as ofDecember 31, 2021 . The increase was primarily related to an additional$1.6 billion aggregate principal amount of term loans we borrowed pursuant to an amendment to our Credit Agreement, the proceeds of which, in addition to a portion of our existing cash on hand, was used to pay the consideration for the Viela acquisition. Refer to Note 13, Debt Agreements, of the Notes to Consolidated Financial Statements, included in Item 15 of this Annual Report on Form 10-K. 118 -------------------------------------------------------------------------------- Deferred tax liabilities, net. Deferred tax liabilities, net, increased$324.0 million from$66.5 million as ofDecember 31, 2020 to$390.5 million as ofDecember 31, 2021 primarily due to the Viela acquisition. Refer to Note 4, Acquisitions, Divestitures and other Arrangements, of the Notes to Consolidated Financial Statements, included in Item 15 of this Annual Report on Form 10-K for further details of this acquisition. Other long-term liabilities. Other long-term liabilities increased$71.4 million , from$101.7 million as ofDecember 31, 2020 to$173.1 million as ofDecember 31, 2021 . InOctober 2019 , we entered into an agreement for lease relating to approximately 63,000 square feet of office space under construction inDublin, Ireland . InMay 2021 , the construction of the office was completed by the lessor and the lease became effective. As a result, we recognized$60.9 million as a right-of-use asset and a corresponding lease liability on the consolidated balance sheet.
Contractual Obligations
As of
obligations, including, among others, our debt agreements, purchase agreements
with third-party manufacturers and non-cancelable lease agreements, were as
follows (in thousands):
2027 &
2022 2023 2024
2025 2026 Thereafter Total
Debt agreements - principal (1)
Debt agreements - interest (1) 83,853 98,198 111,594
110,750 99,392 90,144 593,931 Purchase commitments (2) 130,520 55,652 14,302 5,000 5,000 - 210,474 Lease obligations (3) 6,269 9,986 10,677
10,414 10,273 85,081 132,700
Total contractual cash obligations
(1) Represents the minimum contractual obligation due under the following debt
agreements:
•
interest payments based on the applicable interest rate at
2021 of 2.25%, quarterly payments of 0.25% of the principal and repayment
of the remaining principal inMarch 2028 .
•
interest payments based on the applicable interest rate atDecember 31, 2021 of 2.13% and repayment of the remaining principal inMay 2026 .
•
interest payments and repayment of the principal in
(2) These amounts reflect the following purchase commitments with our third-party
manufacturers. Refer to Note 15, Commitments and Contingencies, of the Notes
to Consolidated Financial Statements, included in Item 15 of this Annual
Report on Form 10-K for further details.
(3) These amounts reflect payments due under our leases, which are principally
for our facilities. For further details regarding these properties, see Item
2 of Part I, Properties, of this Annual Report on Form 10-K. Our office
employees previously located in
campus in
the entire
lease throughMarch 31, 2031 . 119
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The above table does not include the following items:
• On
Alpine for the development and commercialization of up to four preclinical
candidates generated from Alpine's unique discovery platform. In
connection with the execution of the license agreement, we entered into a
stock purchase agreement with Alpine to purchase a minority stake of
951,980 shares of Alpine's common stock in a private placement. Under the
terms of the agreements, we paid Alpine
quarter of 2021 and paid
addition, Alpine is eligible to receive up to
or approximately
related to development, regulatory and commercial milestones, as well as
tiered royalties from a mid-single digit percentage to a low double-digit
percentage on global net sales. Refer to Note 4, Acquisitions,
Divestitures and other Arrangements, of the Notes to Consolidated
Financial Statements, included in Item 15 of this Annual Report on Form
10-K for further details.
• An agreement to lease entered into in November 2021 relating to
approximately 192,000 square feet of office and laboratory space under
construction in
construction of the building is completed by the lessor and we have access
to begin the construction of leasehold improvements. We expect to receive
access to the office and laboratory space and commence the related lease
in the first half of 2023 and incur leasehold improvement costs through
2024 in order to prepare the building for occupancy.
• Effective
lease was amended to include an additional suite with approximately 20,000
square feet and the lease term on the existing lease was extended to
December 31, 2031 .
• On
ARO-XDH, a discovery-stage investigational RNA interference therapeutic,
being developed by Arrowhead as a potential treatment for uncontrolled
gout. Under the terms of the agreement, we paid Arrowhead an upfront cash
payment of
potential future milestone payments of up to
the achievement of certain development, regulatory and commercial
milestones, and low to mid-teens royalties on worldwide calendar year net
sales of licensed products. Refer to Note 4, Acquisitions, Divestitures
and other Arrangements, of the Notes to Consolidated Financial Statements,
included in Item 15 of this Annual Report on Form 10-K for further
details.
• Non-cancellable advertising commitments due within one year of
million, primarily related to agreements for advertising for TEPEZZA and
KRYSTEXXA.
• As of
positions amounted to
Due to the nature and timing of the ultimate outcome of these uncertain
tax positions, we cannot make a reasonably reliable estimate of the amount
and period of related future payments, if any. Therefore, our contingent
liability has been excluded from the above contractual obligations table.
We do not expect a significant tax payment related to these obligations
within the next year.
• Assumed material obligations to make royalty and milestone payments to
certain third parties on net sales of certain of our medicines. Refer to
Note 15, Commitments and Contingencies, of the Notes to Consolidated
Financial Statements, included in Item 15 of this Annual Report on Form
10-K for details of these material obligations.
• During the year ended
strategic limited partner in four venture capital funds: Forbion Growth
Opportunities Fund I C.V., Forbion Capital Fund V C.V., Aisling Capital V,
L.P. and
carrying amount of our investments in these funds was
is included in other assets in the consolidated balance sheet, and
includes $12.7 million in net cash payments for investments made during
the year ended December 31, 2021 . As of December 31, 2021 , our total
future commitments to these funds were $42.3 million .
120
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CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The methods, estimates and judgments that we use in applying our critical accounting policies have a significant impact on the results that we report in our financial statements. Some of our accounting policies require us to make difficult and subjective judgments, often as a result of the need to make estimates regarding matters that are inherently uncertain. We have identified the accounting policies and estimates listed below as those that we believe require management's most subjective and complex judgments in estimating the effect of inherent uncertainties. This section should also be read in conjunction with Note 2, Summary of Significant Accounting Policies, of the Notes to our Consolidated Financial Statements included in Item 15 of this Annual Report on Form 10-K, which includes a discussion of these and other significant accounting policies.
Revenue Recognition
Inthe United States , we sell our medicines primarily to wholesale distributors, specialty distributors and specialty pharmacy providers. In other countries, we sell our medicines primarily to wholesale distributors and other third-party distribution partners. These customers subsequently resell our medicines to health care providers and patients. In addition, we enter into arrangements with health care providers and payers that provide for government-mandated or privately negotiated discounts and allowances related to our medicines. Revenue is recognized when performance obligations under the terms of a contract with a customer are satisfied. The majority of our contracts have a single performance obligation to transfer medicines. Accordingly, revenues from medicine sales are recognized when the customer obtains control of our medicines, which occurs at a point in time, typically upon delivery to the customer. Revenue is measured as the amount of consideration we expect to receive in exchange for transferring medicines and is generally based upon a list or fixed price less allowances for medicine returns, rebates and discounts. We sell our medicines to wholesale pharmaceutical distributors and pharmacies under agreements with payment terms typically less than 90 days. Our process for estimating reserves established for these variable consideration components does not differ materially from our historical practices.
Medicine Sales Discounts and Allowances
The nature of our contracts gives rise to variable consideration because of allowances for medicine returns, rebates and discounts. Allowances for medicine returns, rebates and discounts are recorded at the time of sale to wholesale pharmaceutical distributors and pharmacies. We apply significant judgments and estimates in determining some of these allowances. If actual results differ from our estimates, we will be required to make adjustments to these allowances in the future. Our adjustments to gross sales are discussed further below.
Commercial Rebates
We participate in certain commercial rebate programs. Under these rebate programs, we pay a rebate to the commercial entity or third-party administrator of the program. We calculate accrued commercial rebate estimates using the expected value method. We accrue estimated rebates based on contract prices, estimated percentages of medicine that will be prescribed to qualified patients and estimated levels of inventory in the distribution channel and record the rebate as a reduction of revenue. Accrued commercial rebates are included in "accrued trade discounts and rebates" on the consolidated balance sheet.
Co-pay and Other Patient Assistance Programs
We offer discount card and other programs such as our HorizonCares program to
patients under which the patient receives a discount on his or her prescription.
In certain circumstances when a patient's prescription is rejected by a managed
care vendor, we will pay for the full cost of the prescription. We reimburse
pharmacies for this discount through third-party vendors. We reduce gross sales
by the amount of actual co-pay and other patient assistance in the period based
on invoices received. We also record an accrual to reduce gross sales for
estimated co-pay and other patient assistance on units sold to distributors that
have not yet been prescribed/dispensed to a patient. We calculate accrued co-pay
and other patient assistance costs using the expected value method. The estimate
is based on contract prices, estimated percentages of medicine that will be
prescribed to qualified patients, average assistance paid based on reporting
from the third-party vendors and estimated levels of inventory in the
distribution channel. Accrued co-pay and other patient assistance costs are
included in "accrued trade discounts and rebates" on the consolidated balance
sheet.
121
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Sales Returns
Consistent with industry practice, we maintain a return policy that allows customers to return certain medicines within a specified period prior to and subsequent to the medicine expiration date. Generally, medicines may be returned for a period beginning six months prior to its expiration date and up to one year after its expiration date. The right of return expires on the earlier of one year after the medicine expiration date or the time that the medicine is dispensed to the patient. The majority of medicine returns result from medicine dating, which falls within the range set by our policy, and are settled through the issuance of a credit to the customer. We calculate sales returns using the expected value method. The estimate of the provision for returns is based upon our historical experience with actual returns. The return period is known to us based on the shelf life of medicines at the time of shipment. We record sales returns in "accrued expenses and other current liabilities" and as a reduction of revenue. Government Rebates We participate in certain government rebate programs such as Medicare Coverage Gap and Medicaid. We calculate accrued government rebate estimates using the expected value method. A significant portion of these accruals relates to our Medicaid rebates. We accrue estimated rebates based on estimated percentages of medicine prescribed to qualified patients, estimated rebate percentages and estimated levels of inventory in the distribution channel that will be prescribed to qualified patients and record the rebates as a reduction of revenue. Accrued government rebates are included in "accrued trade discounts and rebates" on the consolidated balance sheet.
Chargebacks
We provide discounts to government qualified entities with whom we have contracted. These entities purchase medicines from the wholesale pharmaceutical distributors at a discounted price and the wholesale pharmaceutical distributors then charge back to us the difference between the current retail price and the contracted price that the entities paid for the medicines. We calculate accrued chargeback estimates using the expected value method. We accrue estimated chargebacks based on contract prices, sell-through sales data obtained from third-party information and estimated levels of inventory in the distribution channel and record the chargeback as a reduction of revenue. Accrued chargebacks are included in "accrued trade discounts and rebates" on the consolidated balance sheet. Refer to Note 10, Accrued Trade Discounts and Rebates, of the Notes to our Consolidated Financial Statements included in Item 15 of this Annual Report on Form 10-K, which includes a table that summarizes changes in our customer-related accruals and allowances fromDecember 31, 2019 toDecember 31, 2021 . Intangible Assets Definite-lived intangible assets are amortized over their estimated useful lives. We review our intangible assets when events or circumstances may indicate that the carrying value of these assets is not recoverable and exceeds their fair value. We measure fair value based on the estimated future discounted cash flows associated with our assets in addition to other assumptions and projections that we deem to be reasonable and supportable. The estimated useful lives, from the date of acquisition, for all identified intangible assets that are subject to amortization are between five and thirteen years. Indefinite-lived intangible assets consist of capitalized IPR&D. IPR&D assets represent capitalized incomplete research projects that we acquired through business combinations. Such assets are initially measured at their acquisition date fair values and are tested for impairment, until completion or abandonment of R&D efforts associated with the projects. An IPR&D asset is considered abandoned when R&D efforts associated with the asset have ceased, and there are no plans to sell or license the asset or derive value from the asset. At that point, the asset is considered to be impaired and is written off. Upon successful completion of each project, we will make a determination about the then remaining useful life of the intangible asset and begin amortization. We test indefinite-lived intangibles, including IPR&D assets, for impairment annually during the fourth quarter and more frequently if events or changes in circumstances indicate that it is more likely than not that the asset is impaired. 122 --------------------------------------------------------------------------------
Business Combinations
We account for business combinations in accordance with the guidance in Accounting Standards Codification Topic 805, Business Combinations, under which acquired assets and liabilities are measured at their respective estimated fair values as of the acquisition date. We may be required, as in the case of intangible assets to determine the fair value associated with these amounts by estimating the fair value using an income approach under the discounted cash flow method, which may include revenue projections and other assumptions made by us to determine the fair value.
Goodwill represents the excess of the purchase price of acquired businesses over the estimated fair value of the identifiable net assets acquired.Goodwill is not amortized but is tested for impairment at least annually at the reporting unit level or more frequently if events or changes in circumstances indicate that the asset might be impaired. Impairment loss, if any, is recognized based on a comparison of the fair value of the asset to its carrying value, without consideration of any recoverability. We test goodwill for impairment annually during the fourth quarter and whenever indicators of impairment exist by first assessing qualitative factors to determine whether it is more likely than not that the fair value is less than its carrying amount. If we conclude it is more likely than not that the fair value of a reporting unit is less than its carrying amount, a quantitative impairment test is performed. If we conclude that goodwill is impaired, we will record an impairment charge in our consolidated statement of comprehensive income.
Provision for Income Taxes
We account for income taxes based upon an asset and liability approach. Deferred tax assets and liabilities represent the future tax consequences of the differences between the financial statement carrying amounts of assets and liabilities versus the tax basis of assets and liabilities. Under this method, deferred tax assets are recognized for deductible temporary differences, and operating loss and tax credit carryforwards. Deferred tax liabilities are recognized for taxable temporary differences. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. Significant judgment is required in determining whether it is probable that sufficient future taxable income will be available against which a deferred tax asset can be utilized. In determining future taxable income, we are required to make assumptions including the amount of taxable income in the various jurisdictions in which we operate. These assumptions require significant judgment about forecasts of future taxable income. Actual operating results in future years could render our current assumption of recoverability of deferred tax assets inaccurate. The impact of tax rate changes on deferred tax assets and liabilities is recognized in the period that the change is enacted. From time to time, we execute intercompany transactions in response to changes in operations, regulations, tax laws, funding needs and other circumstances. These transactions require the interpretation and application of tax laws in the applicable jurisdiction to support the tax treatment taken. The valuations which support the tax treatment of the transactions require significant estimates and assumptions within discounted cash flow models. We also account for the uncertainty in income taxes by utilizing a comprehensive model for the recognition, measurement, presentation and disclosure in financial statements of any uncertain tax positions that have been taken or are expected to be taken on an income tax return. Deferred tax assets and deferred tax liabilities are netted by each tax-paying entity within each jurisdiction in our consolidated balance sheets.
New Accounting Pronouncements Impacting Critical Accounting Policies
Refer to Note 2, Summary of Significant Accounting Policies, of the Notes to our
Consolidated Financial Statements included in Item 15 of this Annual Report on
Form 10-K, which includes a discussion of the new accounting pronouncements
impacting critical accounting policies.
123
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