Newswires
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, 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 2022 and 2021 items and year-to-year comparisons between 2022 and 2021. Discussions of 2020 items and year-to-year comparisons between 2021 and 2020 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, 2021 , filed with theSecurities and Exchange Commission , orSEC , onMarch 1, 2022 .
Unless otherwise indicated or the context otherwise requires, references to
"Horizon", "we", "us" and "our" refer to
consolidated subsidiaries.
OUR BUSINESS
We are a global biotechnology company 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. Effective in the fourth quarter of 2022, management realigned our reportable segments to reflect changes in the manner in which the chief operating decision maker, or CODM, assesses financial information for decision-making purposes. We transitioned our two reportable segments, the inflammation segment and the orphan segment, to one reportable segment for the year endedDecember 31, 2022 . All prior year amounts have been reclassified to conform to our current reporting structure. Our commercial portfolio is currently composed of 12 medicines in the areas of rare diseases, gout, ophthalmology and inflammation. OnDecember 12, 2022 , we announced we had entered into a transaction agreement with Amgen Inc., or Amgen, andPillartree Limited , or Pillartree, a wholly owned subsidiary of Amgen. Subject to the terms of the transaction agreement, Pillartree will acquire our company, or the Transaction, pursuant to a scheme of arrangement under Chapter 1 of Part 9 of the Companies Act 2014 ofIreland , or the Scheme. As a result of the Scheme, we would become a wholly owned subsidiary of Amgen.
At the effective time of the Scheme, or the Effective Time, holders of our
ordinary shares will be entitled to receive
or the Consideration. Our equity awards will be treated as set forth in the
transaction agreement, such that:
•
each option to purchase our ordinary shares that is outstanding as of
immediately prior to the Effective Time (whether or not vested) will, contingent
upon and effective as of the Effective Time, be canceled and converted into the
right to receive cash, without interest, in an amount equal to (a) the total
number of our ordinary shares subject to such option immediately prior to the
Effective Time, multiplied by (b) the excess of (i) the Consideration over (ii)
the exercise price payable per share under such option;
104
--------------------------------------------------------------------------------
•
each of our restricted stock unit, or RSU, awards, excluding PSUs (as defined below), that is outstanding as of immediately prior to the Effective Time (whether or not vested) will, contingent upon and effective as of the Effective Time, (a) if granted to a non-employee member of our board of directors, or held by a person who, as of the date of the completion of the Transaction, is a former service-provider of our company, be canceled and converted into the right to receive a cash amount equal to (i) the total number of our ordinary shares subject to such RSU immediately prior to the Effective Time multiplied by (ii) the Consideration, and (b) if not granted to an individual described in clause (a) above, be canceled and converted into a restricted stock unit, or an Amgen RSU, denominated in shares of Amgen's common stock. The number of shares of Amgen common stock subject to each such Amgen RSU will be equal to the product (rounded down to the nearest whole number) of (a) the total number of our ordinary shares subject to such RSU immediately prior to the Effective Time multiplied by (b) the quotient of (i) the Consideration divided by (ii) the volume weighted average of the per share closing price of Amgen's common stock on the Nasdaq Global Select Market for five trading days ending on the second business day prior to the completion of the Transaction. Following the Effective Time, each Amgen RSU will continue to be governed by the same terms and conditions (including vesting terms) as were applicable to the applicable RSU immediately prior to the Effective Time; and
•
each of our RSU awards with performance-based vesting or delivery requirements, or a PSU, that is outstanding as of immediately prior to the Effective Time (whether or not vested) will, contingent upon and effective as of the Effective Time, be canceled and converted into the right to receive cash, without interest, in an amount equal to (i) the total number of our ordinary shares issuable in settlement of such PSU as determined, in accordance with the terms of such PSU, by the compensation committee of our board of directors prior to the Effective Time multiplied by (ii) the Consideration. OnFebruary 24, 2023 , our shareholders approved the Scheme and certain scheme approval resolutions and amendments to the memorandum and articles of association of Horizon to enable the Scheme to be effected. The closing of the Transaction remains subject to customary closing conditions, including, among other things, (a) the sanction by theIrish High Court of the Scheme and delivery of the court order to the Irish Registrar of Companies, (b) the receipt of required antitrust clearance inthe United States , and the absence of an order or law that prevents consummation of the Transaction or imposes a burdensome condition (as defined in the transaction agreement), (c) absence of any Material Adverse Effect (as defined in the transaction agreement) fromDecember 12, 2022 to the Sanction Date (as defined in the transaction agreement) that is continuing as of the Sanction Date, (d) the accuracy of the other party's representations and warranties subject to certain materiality and material adverse effect exceptions and (e) the performance by each party of all of its covenants and agreements under the transaction agreement in all material respects. OnJanuary 30, 2023 , we and Amgen received a request for additional information and documentary materials, or a second request, from theFederal Trade Commission , orFTC , in connection with theFTC's review of the Transaction. The effect of the second request is to extend the waiting period imposed by the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, until 30 days after we and Amgen have substantially complied with the second request, unless the period is extended voluntarily by the parties or terminated sooner by theFTC . In connection with the Transaction, we and Amgen have received clearances or confirmation of non-applicability related to foreign direct investment inDenmark ,Italy ,Germany andFrance and clearances related to antitrust inGermany andAustria . We expect the Transaction to close during the first half of 2023, subject to the regulatory clearances and other customary closing conditions described above and in the transaction agreement. Additional information about the transaction agreement and the Transaction is set forth in our filings with theSEC . 105 --------------------------------------------------------------------------------
As of
medicines:
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 UPLIZNA® (inebilizumab-cdon) injection, for intravenous use ACTIMMUNE® (interferon gamma-1b) injection, for subcutaneous use PENNSAID® (diclofenac sodium topical solution) 2% w/w, or PENNSAID 2%, for topical use RAYOS® (prednisone) delayed-release tablets, for oral use BUPHENYL® (sodium phenylbutyrate) tablets and powder, for oral use DUEXIS® (ibuprofen/famotidine) tablets, for oral use VIMOVO® (naproxen/esomeprazole magnesium) delayed-release tablets, for oral use QUINSAIR™ (levofloxacin) solution for inhalation
Acquisitions and Divestitures
Since
•
In
manufacturing facility from
OPKO Health, Inc., in
•
InMarch 2021 , we completed the acquisition ofViela Bio, Inc. , or Viela, in which we acquired all of the issued and outstanding shares of Viela's common stock for$53.00 per share in cash. The total consideration for the acquisition was approximately$3.0 billion , including cash acquired of$342.3 million .
•
InOctober 2020 , we sold our rights to develop and commercialize RAVICTI and BUPHENYL inJapan toMedical Need Europe AB , part of theImmedica Group . We have retained the rights to RAVICTI and BUPHENYL inNorth America .
•
InApril 2020 , we acquiredCurzion Pharmaceuticals, Inc. , or Curzion, a 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$45.0 million with additional payments contingent on the achievement of development and regulatory milestones. 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. 106 --------------------------------------------------------------------------------
Strategy
Horizon is a leading high-growth, innovation-driven, profitable global biotechnology 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 value of our on-market rare disease medicines through commercial execution and clinical investment; (ii) expand our research and development, or R&D, pipeline through significant internal investment and external 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, KRYSTEXXA and UPLIZNA, includes initiatives to increase awareness of the conditions each medicine is designed to treat, enhancing efforts to identify target patients and in certain cases pursue opportunities for international commercialization and more effective uses through clinical trials. For TEPEZZA and KRYSTEXXA, initiatives include promoting earlier treatment by driving awareness of the benefits of the medicines, and for UPLIZNA, initiatives include increasing awareness of what differentiates our medicines from other available therapies. Additional strategies for our on-market rare disease medicines include optimizing timely access for patients to the medicines and maximizing the value of the medicines through investment in clinical trials. Specifically, with respect to TEPEZZA, we expanded our commercial team, continued to invest in our direct-to-consumer marketing activities, refined our marketing and physician education strategies, and conducted extensive market analysis to identify further opportunities to accelerate growth, which we are implementing. These growth opportunities involve increasing adoption by ocular specialists and driving an urgency among ophthalmologists and endocrinologists to diagnose and refer thyroid eye disease, or TED, patients. With respect to KRYSTEXXA, after receivingU.S. Food and Drug Administration approval of our supplemental biologics license application, or sBLA, inJuly 2022 to expand the label to include co-treatment of KRYSTEXXA with the immunomodulator methotrexate, we launched a successful commercial campaign, expanded our commercial team and are focused on promoting the expanded label with physicians and patients. 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. 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) maximizing our pipeline candidates through internal R&D; (iii) expanding our early-stage pipeline through partnerships and collaborations; and (iv) continuing to build out our research capabilities to generate discovery-stage candidates internally. Our R&D pipeline includes more than 20 programs, and we announced the initiation of five clinical trials in 2022 and expect to initiate several more in 2023, including a planned Phase 3 program for dazodalibep in Sjögren's syndrome. InJanuary 2023 , we announced the initiation of our daxdilimab discoid lupus erythematosus Phase 2 trial. The aim of our global expansion strategy is to build a global presence in targeted international markets to support the (i) continued launch of UPLIZNA in certain European markets andBrazil this year; (ii) potential approvals and commercial launches of UPLIZNA in additional markets in the coming years; and (iii) potential approvals and full-scale commercial launches of TEPEZZA inJapan ,Brazil ,Europe and other international markets over the next several years. We plan to use a combination of direct marketing and partnerships for our global expansion efforts and are establishing the infrastructure needed to support these activities. 107
--------------------------------------------------------------------------------
RESULTS OF OPERATIONS
Year Ended
Consolidated Results
For the Years
Ended December 31, Change Change
2022 2021 $ %
(in thousands, except percentages)
Net sales $ 3,629,044 $ 3,226,410 $ 402,634 12 %
Cost of goods sold 920,197 794,512 125,685 16 %
Gross profit 2,708,847 2,431,898 276,949 11 %
Operating expenses:
Research and development 437,962 345,318 92,644 27 %
Acquired in-process research and
development and milestones 56,250 86,672 (30,422 ) (35 )%
Selling, general and administrative 1,541,052 1,446,410 94,642 7 %
Impairment of goodwill 56,171 - 56,171 100 %
Impairment of long-lived asset - 12,371 (12,371 ) (100 )%
Gain on sale of asset - (2,000 ) 2,000 100 %
Total operating expenses 2,091,435 1,888,771 202,664 11 %
Operating income 617,412 543,127 74,285 14 %
Other expense, net:
Interest expense, net (83,707 ) (81,063 ) (2,644 ) (3 )%
Foreign exchange loss (1,202 ) (1,028 ) (174 ) (17 )%
Other (expense) income, net (5,567 ) 1,791 (7,358 ) (411 )%
Total other expense, net (90,476 ) (80,300 ) (10,176 ) (13 )%
Income before expense (benefit) for
income taxes 526,936 462,827 64,109 14 %
Expense (benefit) for income taxes 5,454 (71,664 ) 77,118 108 %
Net income $ 521,482 $ 534,491 $ (13,009 ) (2 )%
Beginning with the third quarter of 2022, we separately present upfront,
milestone, and similar payments pursuant to collaborations, licenses of
third-party technologies, and asset acquisitions as "Acquired in-process
research and development and milestones" expenses in the consolidated statement
of comprehensive income. Amounts recorded in this line item for the year ended
December 31, 2022 , would have historically been recorded to R&D expenses. We
believe the new classification assists users of the financial statements in
better understanding the payments incurred to acquire in-process research and
development, or IPR&D. Prior period consolidated statements of comprehensive
income have been reclassified to conform with the new classification.
Net sales. Net sales increased $402.6 million , or 12%, to $3,629.0 million
during the year ended December 31, 2022 , from $3,226.4 million during the year
ended December 31, 2021 . The increase during the year ended December 31, 2022
was primarily due to an increase in TEPEZZA net sales of $304.4 million , an
increase in KRYSTEXXA net sales of $150.7 million and an increase in UPLIZNA net
sales of $93.8 million , partially offset by a decrease in PENNSAID 2% net sales
of $117.8 million and a decrease in DUEXIS net sales of $69.1 million when
compared to the year ended December 31, 2021 , each due to the impact of generic
competition.
The following table presents a summary of total net sales attributed to
geographic sources for the years ended
except percentages):
Year Ended December 31, 2022 Year Ended December 31, 2021
% of Total % of Total
Amount Net Sales Amount Net Sales
United States $ 3,589,510 99% $ 3,210,020 100%
Rest of world 39,534 1% 16,390 *
Total net sales $ 3,629,044 $ 3,226,410
*Less than 1%
108
--------------------------------------------------------------------------------
The following table reflects the components of net sales for the years ended
Year ended December 31, Change Change
2022 2021 $ %
TEPEZZA $ 1,965,711 $ 1,661,299 $ 304,412 18 %
KRYSTEXXA 716,167 565,452 150,715 27 %
RAVICTI 325,652 291,945 33,707 12 %
PROCYSBI 209,990 189,965 20,025 11 %
UPLIZNA 154,622 60,805 93,817 154 %
ACTIMMUNE 126,080 117,164 8,916 8 %
PENNSAID 2% 73,774 191,621 (117,847 ) (62 )%
RAYOS 41,882 56,851 (14,969 ) (26 )%
BUPHENYL 7,332 7,860 (528 ) (7 )%
DUEXIS 4,901 74,023 (69,122 ) (93 )%
VIMOVO 1,851 8,397 (6,546 ) (78 )%
QUINSAIR 1,082 1,028 54 5 %
Total net sales $ 3,629,044 $ 3,226,410 $ 402,634 12 %
TEPEZZA. Net sales increased $304.4 million , or 18%, to $1,965.7 million during
the year ended December 31, 2022 , from $1,661.3 million during the year ended
December 31, 2021 . Net sales increased by approximately $244.9 million due to
volume growth and $59.5 million due to higher net pricing. Net sales growth for
TEPEZZA was negatively impacted by the omicron variant of COVID-19 in the first
half of 2022. In addition, we identified certain challenges, including the
often-burdensome reimbursement process, that we believe contributed to
slower-than-expected growth of TEPEZZA in the first half of 2022. These
challenges, as well as challenges related to a lower rate of adherence to the
full course of TEPEZZA therapy, have continued to moderate TEPEZZA net sales
growth. In the second half of 2022, we began executing on several opportunities
to address these challenges and accelerate growth, including significantly
expanding the size of our TEPEZZA sales force to allow our representatives more
time with core TEPEZZA prescribers while educating other key physicians,
including ophthalmologists and endocrinologists, about TED and TEPEZZA. We are
also spending more time and focus on the reimbursement process to more
effectively support the patient access journey. We also continue to invest
significantly in direct-to-consumer advertising based on the returns we have
seen to date. However, it will continue to take some time for these strategies
to contribute meaningfully to TEPEZZA net sales growth.
KRYSTEXXA. Net sales increased $150.7 million , or 27%, to $716.2 million during
the year ended December 31, 2022 , from $565.5 million during the year ended
December 31, 2021 . Net sales increased by approximately $113.4 million due to
volume growth and $37.3 million due to higher net pricing. We expect net sales
for KRYSTEXXA to continue to increase in future periods primarily due to the use
of KRYSTEXXA with methotrexate following the approval of our sBLA in July 2022 ,
which expanded KRYSTEXXA's labeling to include co-administration with
methotrexate.
RAVICTI. Net sales increased $33.7 million , or 12%, to $325.6 million during the
year ended December 31, 2022 , from $291.9 million during the year ended December
31, 2021 . Net sales increased by approximately $23.8 million due to volume
growth and $9.9 million due to higher net pricing.
PROCYSBI. Net sales increased $20.0 million , or 11%, to $210.0 million during
the year ended December 31, 2022 , from $190.0 million during the year ended
December 31, 2021 . Net sales increased by approximately $11.2 million due to
volume growth and $8.8 million due to higher net pricing. The $8.8 million
impact from higher net pricing was primarily driven by a benefit from a $7.5
million partial release of the pricing review liability recorded in the third
quarter of 2022 as a result of a decision made by the Patented Medicine Prices
Review Board , or PMPRB, in September 2022 relating to PROCYSBI pricing in
Canada .
UPLIZNA. Net sales increased $93.8 million , or 154%, to $154.6 million during
the year ended December 31, 2022 , from $60.8 million during the year ended
December 31, 2021 . Net sales in the United States increased by $79.7 million ,
which was composed of an increase of $74.7 million due to higher sales volume
and $5.0 million due to higher net pricing. The remaining $14.1 million increase
in net sales related primarily to revenue and milestone payments from our
international partners recognized during the year ended December 31, 2022 .
109
--------------------------------------------------------------------------------
PENNSAID 2%. Net sales decreased $117.8 million , or 62%, to $73.8 million during
the year ended December 31, 2022 , from $191.6 million during the year ended
December 31, 2021 . Net sales decreased by approximately $81.8 million resulting
from lower net pricing and by approximately $36.0 million due to lower sales
volume.
In May 2022 , Apotex Corp. and its affiliate, Apotex Inc. , or collectively
Apotex, initiated an at-risk launch of a generic version of PENNSAID 2% in the
United States . The generic competition reduced our PENNSAID 2% sales, resulting
in increased utilization of co-pay and other patient assistance programs for
PENNSAID 2%, which negatively impacted net pricing. We expect our net sales for
PENNSAID 2% to continue declining in future periods primarily due to generic
competition and the wind down of our former inflammation business, which we
substantially completed in the fourth quarter of 2022.
RAYOS. Net sales decreased $15.0 million , or 26%, to $41.9 million during the
year ended December 31, 2022 , from $56.9 million during the year ended December
31, 2021 . Net sales decreased by approximately $11.4 million resulting from
lower net pricing and $3.6 million due to lower sales volume.
Under our settlement agreement with Teva Pharmaceuticals Industries Limited
(formerly known as Actavis Laboratories FL, Inc. , which itself was formerly
known as Watson Laboratories, Inc. - Florida ), or Teva, we expect Teva to enter
the market with a generic version of RAYOS in 2023. As a result, we expect our
net sales for RAYOS to decline in future periods.
DUEXIS. Net sales decreased $69.1 million , or 93%, to $4.9 million during the
year ended December 31, 2022 , from $74.0 million during the year ended December
31, 2021 . Net sales decreased by approximately $61.8 million resulting from
lower sales volume, primarily due to the impact of generic competition, and by
approximately $7.3 million due to lower net pricing.
Due to the impact of the at-risk launch of generic PENNSAID 2%, we redeployed a
portion of our inflammation commercial team to support our TEPEZZA and KRYSTEXXA
expansions. In the fourth quarter of 2022, we substantially completed a wind
down of our former inflammation business, including active promotion efforts and
associated HorizonCares support, for our inflammation medicines. As a result,
sales volumes for PENNSAID 2%, RAYOS and DUEXIS declined significantly since the
second quarter of 2022 and we expect net sales of our inflammation medicines to
be immaterial going forward.
The table below reconciles our gross to net sales for the years ended
31, 2022
Year Ended December 31, 2022 Year Ended December 31, 2021
% of Gross % of Gross
Amount Sales Amount Sales
Gross sales $ 5,022.3 100 % $ 4,903.6 100 %
Adjustments to gross sales:
Prompt pay and other discounts (28.8 ) (0.6 )% (46.0 ) (0.9 )%
Medicine returns (31.6 ) (0.6 )% (17.6 ) (0.4 )%
Co-pay and other patient assistance (341.9 ) (6.8 )% (599.9 ) (12.2 )%
Commercial rebates and wholesaler fees (198.0 ) (3.9 )% (278.8 ) (5.7 )%
Government rebates and chargebacks (793.0 ) (15.8 )% (734.9 ) (15.0 )%
Total adjustments (1,393.3 ) (27.7 )% (1,677.2 ) (34.2 )%
Net sales $ 3,629.0 72.3 % $ 3,226.4 65.8 %
During the year ended December 31, 2022 , co-pay and other patient assistance
costs, as a percentage of gross sales, decreased to 6.8% from 12.2% during the
year ended December 31, 2021 , primarily due to a decreased proportion of
PENNSAID 2% and DUEXIS sold. We expect co-pay and other patient assistance costs
to continue to decrease as a percentage of total gross sales.
110
--------------------------------------------------------------------------------
On a quarter-to-quarter basis, our net sales can be impacted due to end customer
buying patterns, fluctuations in wholesaler inventory levels, the impact of
benefit plan changes, insurance reverification and increased co-pay expenses as
patients work through deductibles. For example, our net sales in the first
quarter of a year historically represents the lowest net sales quarter as a
result of some of these impacts, and we expect this trend to continue in 2023.
This is primarily 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 $125.7 million , or 16%, to
$920.2 million during the year ended December 31, 2022 , from $794.5 million
during the year ended December 31, 2021 . The increase in cost of goods sold was
primarily due to an increase in inventory step-up expense, an increase in
royalty and earnout expense and an increase in amortization expense. Inventory
step-up expense increased by $64.1 million related to acquired units of UPLIZNA
inventory sold, which increased during the year ended December 31, 2022 compared
to the year ended December 31, 2021 . Royalty and earnout expense increased by
$48.8 million primarily due to royalties and earnouts payable on net sales of
TEPEZZA, which increased during the year ended December 31, 2022 compared to the
year ended December 31, 2021 due to higher net sales. Amortization expense
increased $28.1 million primarily due to the acquisition of the UPLIZNA
developed technology intangible asset in March 2021 . In addition, we recorded a
$6.5 million PENNSAID 2% inventory reserve due to the impact of generic
competition on PENNSAID 2% sales. As a percentage of net sales, cost of goods
sold (excluding amortization expense of $362.9 million during 2022 and $334.8
million during 2021) was 15% during the year ended December 31, 2022 , compared
to 14% during the year ended December 31, 2021 . The increase in cost of goods
sold as a percentage of net sales was primarily due to an increase in inventory
step-up expense related to UPLIZNA as noted above.
Research and Development Expenses. R&D expenses increased $92.7 million , or 27%,
to $438.0 million during the year ended December 31, 2022 , from $345.3 million
during the year ended December 31, 2021 . The increase was primarily due to a
$56.2 million increase in clinical trial costs reflecting increased activity in
our R&D pipeline as well as the addition of certain medicine candidates and
development programs following the acquisition of Viela in March 2021 , and an
increase of $21.4 million in consultant costs.
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
the medicine candidates and development programs we acquired in 2021.
Acquired In-Process Research and Development and Milestones Expenses. Acquired IPR&D and milestones expenses decreased$30.4 million , or 35%, to$56.3 million during the year endedDecember 31, 2022 , from$86.7 million during the year endedDecember 31, 2021 . The$56.3 million of acquired IPR&D and milestones expenses during the year endedDecember 31, 2022 , was primarily related to an upfront payment of$15.0 million recognized in relation to the collaboration and option agreement entered into withQ32 Bio Inc. , or Q32, in the third quarter of 2022 and$17.5 million recognized in the fourth quarter of 2022 relating to milestone-based development funding paid to Q32. In addition, we recognized a$15.0 million development milestone in relation to the global agreement with Arrowhead Pharmaceuticals, Inc., or Arrowhead, in the fourth quarter of 2022. During the year endedDecember 31, 2021 , we recognized a$40.0 million upfront payment in relation to the global agreement with Arrowhead and$28.1 million relating to a stock purchase agreement with Alpine Immune Sciences, Inc., or Alpine. 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. Selling, General and Administrative Expenses. Selling, general and administrative expenses increased$94.7 million , or 7%, to$1,541.1 million during the year endedDecember 31, 2022 , from$1,446.4 million during the year endedDecember 31, 2021 . The increase was primarily due to costs associated with the commercialization of our medicines and global expansion initiatives. These include an increase of$55.9 million in marketing program costs and an increase of$24.1 million in employee-related costs, partially offset by a decrease of$28.6 million in transaction costs, which were incurred during the year endedDecember 31, 2021 relating to the Viela acquisition. In addition, we incurred severance and consulting costs of$15.8 million during the year endedDecember 31, 2022 , related to the wind down of our former inflammation business.
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.
111 -------------------------------------------------------------------------------- Impairment of goodwill. During the year endedDecember 31, 2022 , we recorded an impairment charge of$56.2 million in relation to our former inflammation reporting unit. Refer to Note 8,Goodwill and Intangible Assets, of the Notes to the Consolidated Financial Statements, included in Item 15 of this Annual Report on Form 10-K, for further details. 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 15, Lease Obligations, of the Notes to Consolidated Financial Statements, included in Item 15 of this Annual Report on Form 10-K, for further details. Interest Expense, Net. Interest expense, net, increased$2.6 million to$83.7 million during the year endedDecember 31, 2022 , from$81.1 million during the year endedDecember 31, 2021 . The increase was primarily due to an increase in interest expense of$33.9 million , primarily related to increases in interest rates on the portion of our variable interest debt, partially offset by an increase in interest income of$31.2 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. Expense (benefit) for income taxes. During the year endedDecember 31, 2022 , we recorded an expense for income taxes of$5.5 million and we recorded a benefit for income taxes of$71.7 million during the year endedDecember 31, 2021 . The expense for income taxes recorded during the year endedDecember 31, 2022 resulted primarily from tax expense on pre-tax income and losses at the Irish statutory tax rate of$65.9 million , tax expense of$31.4 million attributable to disallowed officers' compensation under Section 162(m) of the Internal Revenue Code of 1986, as amended, or the Code, tax expense of$27.5 million recognized in respect of changes in the state tax rate expected to apply to the reversal of temporary differences between the book values and tax bases of certain assets and tax expense of$11.8 million attributable to a goodwill impairment which is non-deductible for tax purposes. These tax expenses were partially offset by tax benefit of$54.7 million recognized on the pre-tax income and losses generated in jurisdictions with statutory tax rates different than the Irish statutory tax rate, tax benefits recognized on share-based compensation of$53.1 million , tax benefit of$18.9 million recognized due to the release of valuation allowances on certain state net operating losses and$12.5 million ofU.S. federal and state tax credits generated during the year. 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$58.5 million was recognized on the pre-tax income and losses generated in jurisdictions with statutory tax rates different than the Irish statutory tax rate 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 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. 112
--------------------------------------------------------------------------------
Non-GAAP Financial Measures
We provide certain non-GAAP financial measures, including EBITDA, or earnings before interest, taxes, depreciation and amortization, adjusted EBITDA, non-GAAP net income and non-GAAP earnings per share. 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, transaction-related costs, manufacturing facility start-up costs, litigation settlements and restructuring and realignment costs, 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 (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.
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,
2022 2021
GAAP net income $ 521,482 $ 534,491
Depreciation (1) 23,931 17,475
Amortization and step-up:
Intangible amortization expense (2) 366,462
336,277
Inventory step-up expense (3) 91,709
27,572
Interest expense, net (including amortization of debt discount and deferred financing costs) 83,707
81,063
Expense (benefit) for income taxes 5,454 (71,664 ) EBITDA 1,092,745
925,214
Other non-GAAP adjustments: Share-based compensation (4) 182,100
219,086
Impairment of goodwill (5) 56,171 - Restructuring and realignment costs (6) 16,977
26,309
Transaction-related costs (7) 11,086 - Loss (gain) on equity security investments (8) 6,188 (1,257 ) Manufacturing facility start-up costs (9) 5,552 3,622 Impairment of long-lived assets (10) - 12,371 Litigation settlements (11) - 5,000 Gain on sale of asset (12) - (2,000 ) Acquisition/divestiture-related costs (13) (239 )
95,929
Total of other non-GAAP adjustments 277,835 359,060 Adjusted EBITDA$ 1,370,580 $ 1,284,274 113
--------------------------------------------------------------------------------
For the Years Ended December 31,
2022 2021
GAAP net income $ 521,482 $ 534,491
Non-GAAP adjustments:
Depreciation (1) 23,931 17,475
Amortization and step-up:
Intangible amortization expense (2) 366,462
336,277
Inventory step-up expense (3) 91,709
27,572
Amortization of debt discount and deferred financing
costs (14)
7,912
5,189
Share-based compensation (4) 182,100
219,086
Impairment of goodwill (5) 56,171 - Restructuring and realignment costs (6) 16,977
26,309
Transaction-related costs (7) 11,086 - Loss (gain) on equity security investments (8) 6,188 (1,257 ) Manufacturing facility start-up costs (9) 5,552
3,622
Impairment of long-lived assets (10) - 12,371 Litigation settlements (11) - 5,000 Gain on sale of asset (12) - (2,000 ) Acquisition/divestiture-related costs (13) (239 )
95,929
Total pre-tax non-GAAP adjustments 767,849
745,573
Income tax effect of pre-tax non-GAAP adjustments (15) (148,373 ) (169,554 ) Other non-GAAP income tax adjustments (16) 3,387 (20,800 ) Total non-GAAP adjustments 622,863 555,219 Non-GAAP net income$ 1,144,345 $ 1,089,710 Non-GAAP Earnings Per Share: Weighted average ordinary shares - Basic 229,108,881
225,551,410
Non-GAAP Earnings Per Share - Basic GAAP earnings per share - Basic $ 2.28$ 2.37 Non-GAAP adjustments 2.71 2.46 Non-GAAP earnings per share - Basic $ 4.99
Weighted average ordinary shares - Diluted Weighted average ordinary shares - Basic 229,108,881
225,551,410
Ordinary share equivalents 6,130,771
10,129,073
Weighted average ordinary shares - Diluted 235,239,652
235,680,483
Non-GAAP Earnings Per Share - Diluted GAAP earnings per share - Diluted $ 2.22$ 2.27 Non-GAAP adjustments 2.64 2.35 Non-GAAP earnings per share - Diluted $ 4.86$ 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 developed technology related to TEPEZZA, KRYSTEXXA, RAVICTI, PROCYSBI, UPLIZNA, ACTIMMUNE, BUPHENYL and RAYOS.
(3)
During the years endedDecember 31, 2022 and 2021, we recognized in cost of goods sold$91.7 million and$27.6 million , respectively, for inventory step-up expense related to UPLIZNA inventory 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 restricted stock
unit and performance stock unit grants to our employees and non-employee
directors and our employee share purchase plan.
114 --------------------------------------------------------------------------------
(5)
Our interim goodwill impairment test in the second quarter of 2022 indicated an impairment which represented the difference between the estimated fair value of our former inflammation reporting unit and its carrying value. As a result, we recognized an impairment charge of$56.2 million inJune 2022 representing the full amount of goodwill for the former inflammation reporting unit. Refer to Note 8,Goodwill and Intangible Assets, of the Notes to Consolidated Financial Statements, included in Item 15 of this Annual Report on Form 10-K for further detail.
(6)
Primarily represents severance and consulting costs related to the wind down of our former inflammation business during 2022 and rent and maintenance charges as a result of vacating the leasedLake Forest office in the first quarter of 2021. In addition, during the fourth quarter of 2021, we ended TEPEZZA drug substance manufacturing development activities in theSeattle facility of a contract manufacturer and recorded a charge of$16.6 million to R&D expense related to manufacturing development activities in this facility.
(7)
Primarily represents transaction-related costs, including, advisory, legal and consulting costs, incurred in connection with the Transaction with Amgen, as well as the process leading to the transaction.
(8)
We held investments in equity securities with readily determinable fair values of$7.0 million and$13.2 million as ofDecember 31, 2022 and 2021, respectively, which are included in other long-term assets in the consolidated balance sheet. For the year endedDecember 31, 2022 , we recognized net unrealized losses of$6.2 million due to the change in fair value of these securities. For the year endedDecember 31, 2021 , we recognized net unrealized gains of$1.3 million due to the change in fair value of these securities.
(9)
During the year endedDecember 31, 2022 , we recorded$5.6 million of manufacturing facility start-up costs related to our drug product biologics manufacturing facility inWaterford, Ireland . During the year endedDecember 31, 2021 , we recorded$3.6 million of manufacturing facility start-up costs related to the purchase of our drug product biologics manufacturing facility inWaterford, Ireland from EirGen inJuly 2021 .
(10)
During the year ended
impairment charge of
Forest
(11)
We recorded
litigation settlements.
(12)
Gain on sale of asset during the year ended
million
2019.
(13)
Primarily represents transaction and integration costs, including, advisory, legal, consulting and certain employee-related costs, incurred in connection with our acquisitions and divestitures.
(14)
Represents amortization of debt discount and deferred financing costs associated
with our debt.
(15)
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.
(16)
During the year endedDecember 31, 2022 , we recognized tax expense attributable to state tax legislation enacted during the period, resulting in a non-GAAP tax adjustment of$3.4 million . During the year endedDecember 31, 2021 , we recognized aU.S. federal and state tax liability onU.S. taxable income generated from an intercompany transfer and license of intellectual property from aU.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$28.3 million . We also recognized 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. 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$49.1 million . 115 --------------------------------------------------------------------------------
Liquidity, Financial Position and Capital Resources
OnDecember 12, 2022 , we announced that we had entered into a transaction agreement with Amgen and Pillartree. We have agreed to various covenants and agreements, including, among others, agreements to conduct our business in the ordinary course during the period between the execution of the transaction agreement and the Effective Time. Outside of certain limited exceptions, we may not take, authorize, commit, resolve, or agree to do certain actions without Amgen's consent, including: (i) acquiring businesses and disposing of significant assets; (ii) incurring capital expenditures above specified thresholds; (iii) issuing equity; (iv) incurring indebtedness; and (v) repurchasing outstanding ordinary shares. We do not believe these restrictions will prevent us from being able to fund our operations, working capital needs or capital expenditure requirements. The following discussion assumes that the Transaction is not consummated and we continue to operate as an independent entity. As ofDecember 31, 2022 , we had retained earnings of$590.0 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 offset by higher net sales and gross profits in future periods. Additionally, we expect that our R&D and acquired IPR&D and milestones expenses will continue to 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. We are in the process of expanding our production capacity to meet anticipated future demand for TEPEZZA, primarily for 2023 and beyond. As ofDecember 31, 2022 , 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 €72.8 million ($77.6 million converted at a Euro-to-Dollar exchange rate as ofDecember 31, 2022 of 1.0660), 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.
Under our license agreement with
Inc.
relating to the attainment of various TEPEZZA development and regulatory
milestones is
CHF-to-Dollar exchange rate at
InJuly 2021 , we completed the purchase of a drug product biologics 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$30.0 million in capital expenditures during 2023 in order to prepare the drug product facility to manufacture the first medicine for commercial use in the second half of 2023. InAugust 2022 , we submitted a planning application to build a drug substance biologics manufacturing facility adjacent to our existing drug product biologics manufacturing facility inWaterford, Ireland . Based on our current operating plan, we do not anticipate making significant investments in building a drug substance biologics manufacturing facility during 2023. OnAugust 12, 2022 , we entered into a collaboration and option agreement with Q32 related to its pipeline candidate ADX-914, a monoclonal antibody antagonist of the interleukin-7 receptor for the treatment of autoimmune and inflammatory diseases. An upfront payment of$15.0 million and milestone-based development funding of$17.5 million were paid during the year endedDecember 31, 2022 and recorded as acquired IPR&D and milestones expenses in the consolidated statement of comprehensive income. We may also be obligated to pay up to$22.5 million in the form of additional milestone-based development funding. If we exercise the option, we may be obligated to make up to an additional$645.0 million in closing and milestone payments, as well as tiered royalties on net sales from a high single-digit to a low double-digit percentage, inclusive of certain amounts payable to a third party under a pre-existing license agreement. 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. 116 -------------------------------------------------------------------------------- OnJune 18, 2021 , we entered into a global agreement with Arrowhead for HZN-457, 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$40.0 million inJuly 2021 and agreed to pay additional potential future milestone payments of up to$660.0 million contingent on the achievement of certain development, regulatory and commercial milestones, and low to mid-teens royalties on worldwide calendar year net sales of licensed medicines. In addition, we recognized a$15.0 million development milestone in the fourth quarter of 2022. We are 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, 2022 , the total carrying amount of our investments in these funds was$27.0 million , which is included in other long-term assets in the consolidated balance sheet, and our total future commitments to these funds are$36.2 million . 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, 2022 , we had$2.4 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 covenants or non-financial covenants that we expect to be affected by the economic disruptions and negative effects of the COVID-19 pandemic, global macro-economic issues or inflationary pressures. 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, including rising interest rates; 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.
OnApril 25, 2022 , we entered into two interest rate swap agreements with notional amounts totaling$800.0 million , effectiveJune 24, 2022 , to hedge or otherwise protect against interest rate fluctuations on a portion of our variable rate debt. The agreements effectively fix LIBOR at approximately 2.8% throughDecember 24, 2026 . These agreements were designated as cash flow hedges of the variability of future cash flows subject to the variable monthly interest rates on$800.0 million of our senior secured term loans borrowed under our Credit Agreement inDecember 2019 andMarch 2021 . Refer to Note 14, Derivative Instruments and Hedging Activities, of the Notes to Consolidated Financial Statements, included in Item 15 of this Annual Report on Form 10-K for further details. During the year endedDecember 31, 2022 , we issued an aggregate of 3.8 million of our ordinary shares in connection with stock option exercises, the vesting of restricted stock units and performance stock units, and employee share purchase plan purchases. We received a total of$55.4 million in net proceeds in connection with such issuances. During the year endedDecember 31, 2022 , we made payments of$137.2 million for employee withholding taxes relating to vesting of share-based awards. 117 -------------------------------------------------------------------------------- InSeptember 2022 , our board of directors authorized a share repurchase program pursuant to which we may repurchase up to$500.0 million of our ordinary shares. Under the program, we may repurchase ordinary shares from time to time on the open market or through privately negotiated transactions or structured repurchase transactions. During the year endedDecember 31, 2022 , we executed open market share repurchases of 3.9 million ordinary shares under this repurchase program for total consideration of$250.0 million . All ordinary shares repurchased were subsequently retired. The timing and amount of future repurchases, if any, will depend on a variety of factors, including the price of our ordinary shares, alternative investment opportunities, our cash resources, restrictions under our debt agreements and the transaction agreement with Amgen, corporate and regulatory requirements and market conditions. We expect that any future repurchases of our ordinary shares under the program would be funded with existing cash and cash equivalents. Refer to Note 18, Shareholders' Equity, of the Notes to Consolidated Financial Statements, included in Item 15 of this Annual Report on Form 10-K for further details. Since our inception, we have not engaged in any off-balance sheet arrangements, including the use of structured finance, special purpose entities or variable interest entities, other than the indemnification agreements discussed in Note 16, Commitments and Contingencies, of the Notes to Consolidated Financial Statements, included in Item 15 of this Annual Report on Form 10-K.
Sources and Uses of Cash
The following table provides a summary of our cash position and cash flows for
the years ended
For the Years Ended
2022
2021
Cash, cash equivalents and restricted cash$ 2,357,588 $ 1,584,156 Cash provided by (used in): Operating activities 1,257,842 1,035,271 Investing activities (134,001 ) (2,994,111 ) Financing activities (347,958 ) 1,470,123 Operating Cash Flows Net cash provided by operating activities during the year endedDecember 31, 2022 of$1,257.8 million was primarily attributable to cash collections from gross sales, partially offset by payments made related to government rebates and patient assistance costs for our medicines, payments for inventory, payments related to selling, general and administrative expenses and payments related to R&D expenses. 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 and government rebates for our medicines, payments related to selling, general and administrative expenses, including transaction costs related to the Viela acquisition, and payments related to R&D expenses.
Investing Cash Flows
Net cash used in investing activities during the year endedDecember 31, 2022 of$134.0 million was primarily attributable to an upfront payment of$25.0 million paid to Alpine in the first quarter of 2022 relating to an exclusive license agreement entered into inDecember 2021 , an upfront payment of$15.0 million relating to a collaboration and option agreement entered into with Q32 in the third quarter of 2022, milestone-based development funding of$17.5 million paid to Q32 in the fourth quarter of 2022 and payments related to purchases of property, plant and equipment of$64.0 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 on the Alpine license agreement and collaboration and option agreement with Q32. 118
-------------------------------------------------------------------------------- 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 drug product biologics 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 .
Financing Cash Flows
Net cash used in financing activities during the year endedDecember 31, 2022 of$348.0 million was primarily attributable to$137.2 million in payments of employee withholding taxes relating to share-based awards, partially offset by$55.4 million in proceeds from the issuance of ordinary shares in connection with stock option exercises and employee share purchase plan purchases. In addition, we executed open market share repurchases of 3.9 million of our ordinary shares for total consideration of$250.0 million . Refer to Note 18, Shareholders' Equity, of the Notes to Consolidated Financial Statements, included in Item 15 of this Annual Report on Form 10-K, for further details on our share repurchase program. 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 the payment of$166.0 million of employee withholding taxes relating to share-based awards.
Financial Condition as of
Inventories, net. Inventories, net decreased$56.2 million , from$225.7 million during the year endedDecember 31, 2021 to$169.5 million during the year endedDecember 31, 2022 . The decrease was primarily due inventory step-up expense recorded relating to UPLIZNA of$91.7 million based on the acquired units sold during the period, partially offset by an increase in finished goods of$40.1 million primarily related to finished goods on hand of TEPEZZA during the year endedDecember 31, 2022 . 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 details. Prepaid expenses and other current assets. Prepaid expenses and other current assets increased$92.2 million , from$357.1 million during the year endedDecember 31, 2021 to$449.3 million during the year endedDecember 31, 2022 . The increase was primarily due to a tax benefit of$98.6 million related to deferred charges for taxes on higher intercompany inventory transfers. Developed technology and other intangible assets, net. Developed technology and other intangible assets, net decreased$295.3 million , from$2,960.1 million during the year endedDecember 31, 2021 to$2,664.8 million during the year endedDecember 31, 2022 . The decrease was primarily due to a decrease of$366.5 million related to amortization of developed technology during the year endedDecember 31, 2022 . This was partially offset by$70.0 million of IPR&D reclassified to developed technology in the second quarter of 2022 due to theEuropean Commission issuing a legally binding decision to grant a Marketing Authorization for UPLIZNA for the treatment of adult patients with neuromyelitis optica spectrum disorder in theEuropean Union inApril 2022 . Refer to Note 8,Goodwill and Intangible Assets, of the Notes to Consolidated Financial Statements, included in Item 15 of this Annual Report on Form 10-K for further details. In-process research and development. IPR&D decreased$70.0 million , from$880.0 million as ofDecember 31, 2021 to$810.0 million as ofDecember 31, 2022 , primarily related to the reclassification of$70.0 million of IPR&D relating to UPLIZNA to developed technology in the second quarter of 2022. Refer to Note 8,Goodwill and Intangible Assets, of the Notes to Consolidated Financial Statements, included in Item 15 of this Annual Report on Form 10-K for further details.Goodwill .Goodwill decreased$56.2 million , from$1,066.7 million as ofDecember 31, 2021 to$1,010.5 million as ofDecember 31, 2022 . Our interim goodwill impairment test in the second quarter of 2022 indicated an impairment which represented the difference between the estimated fair value of our former inflammation reporting unit and its carrying value. As a result, we recognized an impairment charge of$56.2 million inJune 2022 representing the full amount of goodwill for the former inflammation reporting unit. Refer to Note 8,Goodwill and Intangible Assets, of the Notes to Consolidated Financial Statements, included in Item 15 of this Annual Report on Form 10-K for further details. 119 -------------------------------------------------------------------------------- Other long-term assets. Other long-term assets increased$63.4 million , from$140.7 million during the year endedDecember 31, 2021 to$204.1 million during the year endedDecember 31, 2022 . The increase was primarily due to a$23.8 million increase in right-of-use assets following new leases entered into inSan Francisco andDublin , an increase of$22.5 million relating to advance payments for long-term clinical studies and$14.8 million relating to the interest rate swap asset that was recorded in connection with the interest rate swap contracts entered into during the year endedDecember 31, 2022 . Refer to Note 14, Derivative Instruments and Hedging Activities, of the Notes to Consolidated Financial Statements, included in Item 15 of this Annual Report on Form 10-K for further details. Accounts Payable. Accounts payable increased$125.7 million , from$30.1 million during the year endedDecember 31, 2021 to$155.8 million during the year endedDecember 31, 2022 . The increase was primarily due to the timing of invoices received, including an increase of$77.4 million in accounts payable related to government rebates, co-pay and patient assistance costs and commercial rebates and wholesaler fees. Accrued Expenses and other current liabilities. Accrued expenses and other current liabilities decreased$65.4 million , from$523.0 million during the year endedDecember 31, 2021 to$457.6 million during the year endedDecember 31, 2022 . The decrease was primarily due to a decrease of$26.4 million in accrued payroll-related expenses, a decrease of$21.1 million in pricing review liability and a decrease of$20.1 million in accrued upfront and milestone payments.
Contractual Obligations
Our primary contractual obligations relate to our debt agreements, non-cancellable obligations under lease agreements and commitments with third parties. For information relating to our scheduled maturities with respect to our long-term debt and our lease liabilities, refer to Note 13, Debt Agreements, and Note 15, Lease Obligations, respectively, included in the Notes to Consolidated Financial Statements, included in Item 15 of this Annual Report on Form 10-K. For information relating to our purchase commitments with our third-party manufacturers, non-cancellable advertising commitments due within one year and venture capital fund future commitments, refer to Note 16, Commitments and Contingencies, included in the Notes to Consolidated Financial Statements, included in Item 15 of this Annual Report on Form 10-K. In addition, for information relating to our contingent liability for uncertain tax positions, refer to Note 20, Income Taxes, included in the Notes to Consolidated Financial Statements, included in Item 15 of this Annual Report on Form 10-K. We do not expect a significant tax payment related to these obligations within the next year. We are committed to an aggregate$2.7 billion of potential contingent future milestone payments to third parties relating to asset acquisitions and license and collaboration agreements, including those acquired through business combinations. Milestone payments generally are due and payable only upon achievement of certain developmental, regulatory and commercial milestones for which the specific timing cannot be predicted.
In
manufacturing facility from EirGen for
approximately
prepare the drug product facility to manufacture the first medicine for
commercial use in the second half of 2023. 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.
120
--------------------------------------------------------------------------------
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. Discounts, rebates, returns and certain other adjustments are accounted for as variable consideration.
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 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
--------------------------------------------------------------------------------
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, 2020 toDecember 31, 2022 . 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 and development 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
--------------------------------------------------------------------------------
N.J. schools rank second in nation for solar power
Jeh Johnson Named to MetLife’s Board of Directors
Advisor News
- CFP Board announces CEO leadership transition
- State Street study looks at why AUM in model portfolios is increasing
- Supreme Court to look at ERISA rules in upcoming Cornell case
- FPA announces passing of CEO, succession plan
- Study: Do most affluent investors prefer a single financial services provider?
More Advisor NewsAnnuity News
Health/Employee Benefits News
- Nebraska senators Brian Hardin, Mike Jacobson pitch Unicam bills on federal help for rural health care
- Jacobson, Hardin pitch Unicam bills on help for rural health care
- State Comptroller's audit reveals $16.2 million in improper Medicaid claim payments
- Recent Research from University of the North Highlight Findings in Opioids (Long-term Opioid Therapy and Risk of Opioid Overdose By Derived Clinical Indication In North Carolina, 2006-2018): Opioids
- Health centers brace for chance of limited funds
More Health/Employee Benefits NewsLife Insurance News
- 59% of insurance sector breaches caused by third-party attacks.
- Pacific Life Announces Promotions of Karen Neeley and Patricia Thompson to Senior Vice President
- Lincoln Financial Reports 2024 Fourth Quarter and Full Year Results
- 2024 Annual Information Form
- 4th Quarter 2024 Results 2024 Management's Discussion and Analysis
More Life Insurance News