Document


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q
(Mark One)
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2018
or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                        to                       
Commission file number 001-10865
http://api.tenkwizard.com/cgi/image?quest=1&rid=23&ipage=12526665&doc=13
AMAG Pharmaceuticals, Inc.
(Exact Name of Registrant as Specified in Its Charter)
Delaware
(State or Other Jurisdiction of
Incorporation or Organization)
04-2742593
(I.R.S. Employer
Identification No.)
1100 Winter Street
Waltham, Massachusetts
(Address of Principal Executive Offices)
02451
(Zip Code)
(617) 498-3300
(Registrant’s Telephone Number, Including Area Code)
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒  No ☐
 
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒  No ☐
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definition of “accelerated filer,” “large accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer
 
Accelerated filer
Non-accelerated filer
 
Smaller reporting company
 
 
 
Emerging growth company

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐  No ☒

As of October 29, 2018, there were 34,535,659 shares of the registrant’s Common Stock, par value $0.01 per share, outstanding.


Table of Contents

AMAG PHARMACEUTICALS, INC.
FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 2018
TABLE OF CONTENTS
 
 
 
 
 
8 
 
 
 
 
 
 
 


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Table of Contents

PART I. FINANCIAL INFORMATION
Item 1. Financial Statements:

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Table of Contents

AMAG PHARMACEUTICALS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(Unaudited)
 
September 30, 2018
 
December 31, 2017
ASSETS
 
 
 
Current assets:
 

 
 

Cash and cash equivalents
$
287,166

 
$
162,855

Marketable securities
140,368

 
136,593

Accounts receivable, net
85,091

 
91,460

Inventories
27,953

 
34,443

Prepaid and other current assets
13,182

 
11,009

Assets held for sale

 
45,508

Total current assets
553,760

 
481,868

Property and equipment, net
7,047

 
7,904

Goodwill
422,513

 
422,513

Intangible assets, net
230,747

 
375,479

Deferred tax assets
1,185

 
47,120

Restricted cash
495

 
495

Other long-term assets
69

 
266

Assets held for sale, net of current portion

 
564,711

Total assets
$
1,215,816

 
$
1,900,356

LIABILITIES AND STOCKHOLDERS’ EQUITY
 

 
 

Current liabilities:
 

 
 

Accounts payable
$
30,331

 
$
7,717

Accrued expenses
141,753

 
166,732

Current portion of convertible notes, net
20,999

 

Current portion of acquisition-related contingent consideration
208

 
49,399

Liabilities held for sale

 
53,870

Total current liabilities
193,291

 
277,718

Long-term liabilities:
 

 
 

Long-term debt, net

 
466,291

Convertible notes, net
258,376

 
268,392

Acquisition-related contingent consideration
615

 
686

Other long-term liabilities
1,288

 
1,204

Liabilities held for sale, net of current portion

 
95,821

Total liabilities
453,570

 
1,110,112

Commitments and contingencies


 


Stockholders’ equity:
 

 
 

Preferred stock, par value $0.01 per share, 2,000,000 shares authorized; none issued

 

Common stock, par value $0.01 per share, 117,500,000 shares authorized; 34,522,957 and 34,083,112 shares issued and outstanding at September 30, 2018 and December 31, 2017, respectively
345

 
341

Additional paid-in capital
1,286,227

 
1,271,628

Accumulated other comprehensive loss
(4,161
)
 
(3,908
)
Accumulated deficit
(520,165
)
 
(477,817
)
Total stockholders’ equity
762,246

 
790,244

Total liabilities and stockholders’ equity
$
1,215,816

 
$
1,900,356

The accompanying notes are an integral part of these condensed consolidated financial statements.

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Table of Contents

AMAG PHARMACEUTICALS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(Unaudited)
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2018
 
2017
 
2018
 
2017
Revenues:
 
 
 
 
    
 
    
Product sales, net
$
122,238

 
$
124,331

 
$
385,806

 
$
367,190

Other revenues

 

 
75

 
53

Total revenues
122,238

 
124,331

 
385,881

 
367,243

Costs and expenses:
 
 
 
 
 
 
 
Cost of product sales
46,489

 
31,085

 
187,176

 
90,761

Research and development expenses
10,133

 
16,274

 
32,635

 
63,021

Acquired in-process research and development
12,500

 

 
32,500

 
65,845

Selling, general and administrative expenses
72,451

 
11,962

 
161,780

 
119,482

Impairment charges of intangible assets

 
319,246

 

 
319,246

Total costs and expenses
141,573

 
378,567

 
414,091

 
658,355

Operating loss
(19,335
)
 
(254,236
)
 
(28,210
)
 
(291,112
)
Other income (expense):
 
 
 
 
 
 
 
Interest expense
(13,366
)
 
(16,847
)
 
(45,400
)
 
(52,403
)
Loss on debt extinguishment
(35,922
)
 
(314
)
 
(35,922
)
 
(9,830
)
Interest and dividend income
1,612

 
487

 
3,207

 
2,181

Other expense
(19
)
 

 
(63
)
 
(43
)
Total other expense, net
(47,695
)
 
(16,674
)
 
(78,178
)
 
(60,095
)
Loss from continuing operations before income taxes
(67,030
)
 
(270,910
)
 
(106,388
)
 
(351,207
)
Income tax (benefit) expense
(2,352
)
 
(115,197
)
 
42,204

 
(145,317
)
Net loss from continuing operations
$
(64,678
)
 
$
(155,713
)
 
$
(148,592
)
 
$
(205,890
)
 
 
 
 
 
 
 
 
Discontinued operations:
 
 
 
 
 
 
 
Income from discontinued operations
5,838

 
4,506

 
18,873

 
4,998

Gain on sale of CBR business
89,581

 

 
89,581

 

Income tax (benefit) expense
(98
)
 
854

 
3,346

 
1,796

Net income from discontinued operations
$
95,517

 
$
3,652

 
$
105,108

 
$
3,202

 
 
 
 
 
 
 
 
Net income (loss)
$
30,839

 
$
(152,061
)
 
$
(43,484
)
 
$
(202,688
)
 
 
 
 
 
 
 
 
Basic and diluted net income (loss) per share:
 

 
 

 
 

 
 

Loss from continuing operations
$
(1.88
)
 
$
(4.41
)
 
$
(4.33
)
 
$
(5.89
)
Income from discontinued operations
2.77

 
0.10

 
3.06

 
0.09

Basic and diluted net income (loss) per share:
$
0.89

 
$
(4.31
)
 
$
(1.27
)
 
$
(5.80
)
 
 
 
 
 
 
 
 
Weighted average shares outstanding used to compute net income (loss) per share (basic and diluted)
34,492

 
35,311

 
34,339

 
34,948


The accompanying notes are an integral part of these condensed consolidated financial statements.

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Table of Contents

AMAG PHARMACEUTICALS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(IN THOUSANDS)
(Unaudited)

 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2018
 
2017
 
2018
 
2017
Net income (loss)
$
30,839

 
$
(152,061
)
 
$
(43,484
)
 
$
(202,688
)
Other comprehensive (loss) income:
 
 
 
 
 
 
 
Holding gains (losses) arising during period, net of tax
134

 
(4
)
 
(253
)
 
201

Total comprehensive income (loss)
$
30,973

 
$
(152,065
)
 
$
(43,737
)
 
$
(202,487
)

The accompanying notes are an integral part of these condensed consolidated financial statements.

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Table of Contents

AMAG PHARMACEUTICALS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(Unaudited)
 
Nine Months Ended September 30,
 
2018
 
2017
Cash flows from operating activities:
 
 
 
Net loss
$
(43,484
)
 
$
(202,688
)
Adjustments to reconcile net loss to net cash provided by operating activities:
 
 
 
Depreciation and amortization
158,002

 
88,941

Impairment of intangible assets

 
319,246

Provision for bad debt expense
754

 
3,503

Amortization of premium/discount on purchased securities
96

 
218

Gain on disposal of fixed assets
(99
)
 

Non-cash equity-based compensation expense 
14,599

 
18,058

Non-cash IPR&D expense

 
945

Loss on debt extinguishment
35,922

 
9,830

Amortization of debt discount and debt issuance costs
11,824

 
10,600

Gains on marketable securities, net
(1
)
 
(255
)
Change in fair value of contingent consideration
(49,175
)
 
(47,142
)
Deferred income taxes
43,747

 
(146,682
)
Gain on sale of the CBR business
(89,581
)
 

Transaction costs
(14,111
)
 

Changes in operating assets and liabilities:
 
 
 
Accounts receivable, net
7,175

 
(8,889
)
Inventories
3,587

 
(600
)
Prepaid and other current assets
1,101

 
(1,409
)
Accounts payable and accrued expenses
(4,280
)
 
29,977

Deferred revenues
8,658

 
14,134

Other assets and liabilities
159

 
(1,139
)
Net cash provided by operating activities
84,893

 
86,648

Cash flows from investing activities:
 
 
 
Proceeds from sales or maturities of marketable securities
60,146

 
279,526

Purchase of marketable securities
(64,400
)
 
(110,894
)
Acquisition of Intrarosa intangible asset

 
(55,800
)
Proceeds from the sale of the CBR business
519,303

 

Capital expenditures
(1,913
)
 
(6,573
)
Net cash provided by investing activities
513,136

 
106,259

Cash flows from financing activities:
 
 
 
Long-term debt principal payments
(475,000
)
 
(328,125
)
Proceeds from 2022 Convertible Notes

 
320,000

Payment to repurchase 2019 Convertible Notes

 
(191,480
)
Payment of premium on debt extinguishment
(28,054
)
 

Proceeds to settle warrants

 
323

Payment of convertible debt issuance costs

 
(9,553
)
Payments of contingent consideration
(87
)
 
(165
)
Proceeds from the exercise of common stock options
2,635

 
2,350

Payments of employee tax withholding related to equity-based compensation
(2,632
)
 
(2,588
)
Net cash used in financing activities
(503,138
)
 
(209,238
)
Net increase (decrease) in cash, cash equivalents, and restricted cash
94,891

 
(16,331
)
Cash, cash equivalents, and restricted cash related to discontinued operations

 
(50,017
)
Cash, cash equivalents, and restricted cash at beginning of the period
192,770

 
276,898

Cash, cash equivalents, and restricted cash at end of the period
$
287,661

 
$
210,550

Supplemental data for cash flow information:
 
 
 
Cash paid for taxes
$
5,041

 
$
3,565

Cash paid for interest
$
43,546

 
$
50,892

Non-cash investing and financing activities:
 
 
 
Fair value of common stock issued in connection with the acquisition of the Intrarosa intangible asset
$

 
$
12,555

Contingent consideration accrued for the acquisition of the Intrarosa intangible asset
$

 
$
9,300

The accompanying notes are an integral part of these condensed consolidated financial statements.

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Table of Contents

AMAG PHARMACEUTICALS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 
A.     DESCRIPTION OF BUSINESS
AMAG Pharmaceuticals, Inc., a Delaware corporation, was founded in 1981. We are a pharmaceutical company focused on bringing innovative products to patients with unmet medical needs. We do this by leveraging our development and commercial expertise to invest in and grow our pharmaceutical products across a range of therapeutic areas, including women’s health. Our currently marketed products support the health of patients in the areas of maternal and women’s health, anemia management and cancer supportive care, including Makena® (hydroxyprogesterone caproate injection), Intrarosa® (prasterone) vaginal inserts, Feraheme® (ferumoxytol injection) for intravenous (“IV”) use, and MuGard® Mucoadhesive Oral Wound Rinse. In addition to our marketed products, our portfolio includes two product candidates, Vyleesi™ (bremelanotide), which is being developed for the treatment of hypoactive sexual desire disorder (“HSDD”) in pre-menopausal women and digoxin immune Fab (ovine) (now referred to as AMAG-423), which is being studied for the treatment of severe preeclampsia.
Since August 2015, we had provided services related to the preservation of umbilical cord blood stem cell and cord tissue units operated through Cord Blood Registry® (“CBR”). On August 6, 2018, we completed the sale of our wholly-owned subsidiary, CBR Acquisition Holdings Corp, and the CBR business to GI Chill Acquisition LLC, an affiliate of GI Partners, a private equity investment firm (together “GI”) pursuant to the June 14, 2018 Stock Purchase Agreement (the “CBR Purchase Agreement”) between us and GI. We received $519.3 million in cash at closing and recognized a gain of $89.6 million on the sale during the three and nine months ended September 30, 2018. For additional information, see Note C “Discontinued Operations and Held for Sale”.
Throughout this Quarterly Report on Form 10-Q, AMAG Pharmaceuticals, Inc. and our consolidated subsidiaries are collectively referred to as “the Company,” “AMAG,” “we,” “us,” or “our.”
B.     BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
These condensed consolidated financial statements are unaudited and, in the opinion of management, include all adjustments necessary for a fair statement of the financial position and results of operations of the Company for the interim periods presented. Such adjustments consisted only of normal recurring items. The year-end condensed consolidated balance sheet data was derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States of America (“GAAP”).
In accordance with GAAP for interim financial reports and the instructions for Form 10-Q and the rules of the Securities and Exchange Commission, certain information and footnote disclosures normally included in annual financial statements have been condensed or omitted. Our accounting policies are described in the Notes to the Consolidated Financial Statements in our Annual Report on Form 10-K for the year ended December 31, 2017 (our “Annual Report”). Interim results are not necessarily indicative of the results of operations for the full year. These interim financial statements should be read in conjunction with our Annual Report.
As of June 30, 2018, our CBR business met all of the conditions to be classified as held for sale and represented a discontinued operation, as we considered the disposal of the CBR business to be a strategic shift that would have a major effect on our operations and financial results. All assets and liabilities associated with CBR were therefore classified as assets and liabilities held for sale in our condensed consolidated balance sheets for the historical period presented. Further, all historical operating results for CBR are reflected within discontinued operations in the condensed consolidated statements of operations for all periods presented. For additional information, see Note C, “Discontinued Operations and Held for Sale.
Principles of Consolidation
The accompanying condensed consolidated financial statements include our accounts and the accounts of our wholly-owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation.
Use of Estimates and Assumptions
The preparation of condensed consolidated financial statements in conformity with GAAP requires management to make certain estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and the related disclosure of contingent assets and liabilities. The most significant estimates and assumptions are used to determine amounts and values of, but are not limited to: revenue recognition related to product sales revenue; product sales allowances and

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accruals; allowance for doubtful accounts; marketable securities; inventory; acquisition date fair value and subsequent fair value estimates used to assess impairment of long-lived assets, including goodwill, in-process research and development (“IPR&D”) and other intangible assets; contingent consideration; debt obligations; certain accrued liabilities, including clinical trial accruals; income taxes, inclusive of valuation allowances; and equity-based compensation expense. Actual results could differ materially from those estimates.
Restricted Cash
We classified $0.5 million of our cash as restricted cash, a non-current asset on the balance sheet, as of September 30, 2018 and December 31, 2017. This amount represented the security deposit delivered to the landlord of our Waltham, Massachusetts headquarters in the form of an irrevocable letter of credit.
Concentrations and Significant Customer Information
Financial instruments which potentially subject us to concentrations of credit risk consist principally of cash and cash equivalents, marketable securities, and accounts receivable. We currently hold our excess cash primarily in institutional money market funds, corporate debt securities, U.S. treasury and government agency securities, commercial paper and certificates of deposit. As of September 30, 2018, we did not have a material concentration in any single investment.

Our operations are located entirely within the U.S. We focus primarily on developing, manufacturing, and commercializing our products and product candidates. We perform ongoing credit evaluations of our customers and generally do not require collateral. The following table sets forth customers who represented 10% or more of our total revenues for the three and nine months ended September 30, 2018 and 2017:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2018
 
2017
 
2018
 
2017
AmerisourceBergen Drug Corporation
24%
 
28%
 
26%
 
26%
McKesson Corporation
25%
 
26%
 
26%
 
23%
 
Our net accounts receivable primarily represent amounts due for products sold directly to wholesalers, distributors, specialty pharmacies, and our authorized generic partner. Accounts receivable for our products are recorded net of reserves for estimated chargeback obligations, prompt payment discounts and any allowance for doubtful accounts.
At September 30, 2018 and December 31, 2017, four and two customers accounted for 10% or more of our accounts receivable balance, respectively, representing approximately 74% and 57% in the aggregate of our total accounts receivable, respectively.
 
We are currently dependent on a single supplier for Feraheme drug substance (produced in two separate facilities) as well as for drug substance and final packaging services for Intrarosa. In addition, we currently have a single supplier for Makena drug substance, which is used for each of our intramuscular and auto-injector products, and primarily use one of two suppliers of finished drug product for our Makena vial product and a single supplier for our auto-injector product. We have been and may continue to be exposed to a significant loss of revenue from the sale of our products in the event that our suppliers and/or manufacturers are not able to fulfill demand for any reason.
Revenue Recognition
Effective January 1, 2018, we adopted Accounting Standards Codification (“ASC”) Topic 606, Revenue from Contracts with Customers (“ASC 606”), using the modified retrospective transition method. We recognized the cumulative effect of applying the new revenue standard to all contracts with customers that were not completed as of January 1, 2018 as an adjustment to the opening balance of stockholders’ equity at the beginning of 2018. The adjustment recorded was for incremental contract acquisition costs related to the CBR business. The comparative information has not been restated and continues to be reported under the accounting standards in effect for the periods presented. This standard applies to all contracts with customers, except for contracts that are within the scope of other standards, such as leases, insurance, collaboration arrangements and financial instruments. ASC 606 also impacts certain other areas, such as the accounting for costs to obtain or fulfill a contract. The standard also requires disclosure of the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. The adoption of ASC 606 did not have an impact on the amount of reported revenues with respect to our product revenue.

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Reclassifications

Certain amounts in prior periods have been reclassified to reflect the impact of the held for sale and discontinued operations treatment of the CBR business in order to conform to the current period presentation.
C.    DISCONTINUED OPERATIONS AND HELD FOR SALE
On August 6, 2018, we completed the sale of our CBR business to GI Partners pursuant to the CBR Purchase Agreement. We received $519.3 million in cash at closing and recognized a gain of $89.6 million on the sale during the three and nine months ended September 30, 2018. Although we are providing limited transitional services related to GI for certain agreed-upon sales and marketing, technology, human resources and finance functions for several months post-closing, we do not expect to have any (and have not had any) significant involvement in the operations of the CBR business following the close of the sale.
We determined that the sale of CBR represented a strategic shift that would have a major effect on our business and therefore met the criteria for classification as discontinued operations at June 30, 2018. All historical operating results for CBR were reflected within discontinued operations in the condensed consolidated statements of operations for all periods presented. Further, all assets and liabilities associated with CBR were classified as assets and liabilities held for sale in our condensed consolidated balance sheets for the historical period presented.
Assets and liabilities held for sale were reflected separately in our condensed consolidated balance sheets and were comprised of the following as of September 30, 2018 and December 31, 2017 (in thousands):
 
September 30, 2018
 
December 31, 2017
Assets
 
 
 
Current assets:
 
 
 
Cash
$

 
$
29,259

Accounts receivable, net

 
12,042

Inventories (raw materials)

 
2,913

Prepaid and other current assets

 
1,294

Total current assets held for sale
$

 
$
45,508

 
 
 
 
Property, plant and equipment, net
$

 
$
18,092

Intangible assets, net

 
328,991

Goodwill

 
216,971

Other long-term assets

 
496

Restricted cash

 
161

Total long-term assets held for sale
$

 
$
564,711

 
 
 
 
Liabilities
 
 
 
Current liabilities:
 
 
 
Accounts payable
$

 
$
2,618

Accrued expenses

 
8,758

Deferred revenues, short term

 
42,494

Total current liabilities held for sale
$

 
$
53,870

 
 
 
 
Deferred revenues, long-term

 
24,387

Deferred tax liabilities

 
71,046

Other long-term liabilities

 
388

Total long-term liabilities held for sale
$

 
$
95,821

The results of operations of the CBR business were classified as discontinued operations for all periods presented in our condensed consolidated financial statements. The following is a summary of net income from discontinued operations for the

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three and nine months ended September 30, 2018 and 2017:    
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2018
 
2017
 
2018
 
2017
Service revenues, net
$
12,163

 
$
29,410

 
$
71,217

 
$
84,365

Costs and expenses:
 
 
 
 
 
 
 
Cost of services
1,576

 
5,559

 
12,559

 
16,130

Selling, general and administrative expenses
4,749

 
19,345

 
39,899

 
63,237

Total costs and expenses
6,325

 
24,904

 
52,458

 
79,367

Operating income
5,838

 
4,506

 
18,759

 
4,998

Other income

 

 
114

 

Income from discontinued operations
5,838

 
4,506

 
18,873

 
4,998

Gain on sale of CBR business
89,581

 

 
89,581

 

Income tax (benefit) expense
(98
)
 
854

 
3,346

 
1,796

Net income from discontinued operations
$
95,517

 
$
3,652

 
$
105,108

 
$
3,202


The cash flows related to discontinued operations have not been segregated and are included in the Consolidated Statements of Cash Flows. For the nine months ended September 30, 2018 and 2017, capital expenditures related to the CBR business were $1.6 million and $3.0 million, respectively. Depreciation and amortization expense related to the CBR business for the same periods was $8.4 million and $17.1 million, respectively. Excluding the gain of $89.6 million recognized on the sale of the CBR business and the related transaction expenses of $14.1 million presented in the Consolidated Statements of Cash Flows for the nine months ended September 30, 2018, there were no other significant operating or investing non-cash items related to the CBR business for either period presented.

D.     REVENUE RECOGNITION
On January 1, 2018, we adopted ASC 606 applying the modified retrospective transition method to all contracts that were not completed as of January 1, 2018. Results for reporting periods beginning after January 1, 2018 are presented under ASC 606, while prior period amounts are not adjusted and continue to be reported under the accounting standards in effect for prior periods. There was no impact to revenue for the three and nine months ended September 30, 2018 as a result of adoption.

Under ASC 606, we recognize revenue when our customer obtains control of promised goods or services in an amount that reflects the consideration which we expect to receive in exchange for those goods or services. To determine revenue recognition for arrangements that we determine are within the scope of ASC 606, we perform the following five steps:

a.Identify the contract(s) with a customer;
b.Identify the performance obligations in the contract;
c.Determine the transaction price;
d.Allocate the transaction price to the performance obligations in the contract; and
e.Recognize revenue when (or as) the performance obligations are satisfied.

We only apply the five-step model to contracts when it is probable that we will collect the consideration we are entitled to in exchange for the goods or services we transfer to the customer. At contract inception, if the contract is determined to be within the scope of ASC 606, we assess the goods or services promised within each contract, determine those that are performance obligations, and assess whether each promised good or service is distinct. We then recognize as revenue the amount of the transaction price that is allocated to the respective performance obligation when (or as) the performance obligation is satisfied.

Our major sources of revenue during the reporting periods were product revenues from Makena (including both our branded and unbranded products), Feraheme and Intrarosa. The adoption of ASC 606 did not have an impact on our product revenue.


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Revenue and Allowances

The following table provides information about disaggregated revenue by products for the three and nine months ended September 30, 2018 and 2017 (in thousands):
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2018
 
2017
 
2018
 
2017
Product sales, net
 
 
 
 
 
 
 
Makena
$
80,221

 
$
97,635

 
$
275,377

 
$
286,771

Feraheme
36,963

 
26,095

 
99,796

 
79,492

Intrarosa
4,925

 
360

 
10,331

 
360

MuGard
129

 
241

 
302

 
567

Total
$
122,238

 
$
124,331

 
$
385,806

 
$
367,190


Total gross product sales were offset by product sales allowances and accruals for the three and nine months ended September 30, 2018 and 2017 as follows (in thousands):
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2018
 
2017
 
2018
 
2017
Gross product sales
$
238,856

 
$
235,299

 
$
776,458

 
$
676,377

Provision for product sales allowances and accruals:
 

 
 

 
 

 
 

Contractual adjustments
93,213

 
80,110

 
290,896

 
225,622

Governmental rebates
23,405

 
30,858

 
99,756

 
83,565

Total
116,618

 
110,968

 
390,652

 
309,187

Product sales, net
$
122,238

 
$
124,331

 
$
385,806

 
$
367,190


The following table summarizes the product revenue allowance and accrual activity for the three and nine months ended September 30, 2018 (in thousands):
 
Contractual
 
Governmental
 
 
 
Adjustments
 
Rebates
 
Total
Balance at December 31, 2017
$
62,164

 
$
50,598

 
$
112,762

Provisions related to current period sales
199,716

 
71,514

 
271,230

Adjustments related to prior period sales
(2,034
)
 
4,837

 
2,803

Payments/returns relating to current period sales
(132,618
)
 
(2,453
)
 
(135,071
)
Payments/returns relating to prior period sales
(55,973
)
 
(51,142
)
 
(107,115
)
Balance at June 30, 2018
71,255

 
73,354

 
144,609

Provisions related to current period sales
93,824

 
20,719

 
114,543

Adjustments related to prior period sales
(614
)
 
2,710

 
2,096

Payments/returns relating to current period sales
(102,627
)
 
(52,040
)
 
(154,667
)
Payments/returns relating to prior period sales
(2,207
)
 
(7,002
)
 
(9,209
)
Balance at September 30, 2018
$
59,631

 
$
37,741

 
$
97,372


We receive payments from customers based upon contractual billing schedules; accounts receivable are recorded when the right to consideration becomes unconditional.

Performance Obligations and Product Revenue

At contract inception, we assess the goods promised in our contracts with customers and identify a performance obligation for each promise to transfer to the customer a good (or bundle of goods) that is distinct. To identify the performance obligations, we consider all of the goods promised in the contract regardless of whether they are explicitly stated or are implied by customary business practices. We determined that the following distinct goods represent separate performance obligations:


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Supply of Makena (branded and unbranded) product
Supply of Feraheme product
Supply of Intrarosa product

We principally sell our products to wholesalers, specialty distributors, specialty pharmacies and other customers, including our authorized generic partner (collectively, “Customers”), who purchase products directly from us. Our Customers subsequently resell the products to healthcare providers and patients. In addition to distribution agreements with Customers, we enter into arrangements with healthcare providers and payers that provide for government-mandated and/or privately-negotiated rebates, chargebacks and discounts with respect to the purchase of our products.

For the majority of our Customers, we transfer control at the point in time when the goods are delivered. In instances when we perform shipping and handling activities, these are considered fulfillment activities, and accordingly, the costs are accrued when the related revenue is recognized. Taxes collected from Customers and remitted to governmental authorities are excluded from revenues.

Variable Consideration
Under ASC 606, we are required to make estimates of the net sales price, including estimates of variable consideration (such as rebates, chargebacks, discounts, co-pay assistance and other deductions), and recognize the estimated amount as revenue, when we transfer control of the product to our customers. In addition, we estimate variable consideration related to our share of net distributable profits from our authorized generic partner. Variable consideration must be determined using either an “expected value” or a “most likely amount” method.

We record product revenues net of certain allowances and accruals in our condensed consolidated statements of operations. Product sales allowances and accruals are primarily comprised of both direct and indirect fees, discounts and rebates and provisions for estimated product returns. Direct fees, discounts and rebates are contractual fees and price adjustments payable to Customers that purchase products directly from us. Indirect fees, discounts and rebates are contractual price adjustments payable to healthcare providers and organizations, such as certain physicians, clinics, hospitals, group purchasing organizations (“GPOs”), and dialysis organizations that typically do not purchase products directly from us but rather from wholesalers and specialty distributors. Consideration payable to a Customer, or other parties that purchase goods from a Customer, are considered to be a reduction of the transaction price, and therefore, of revenue.

Product sales allowances and accruals are based on definitive contractual agreements or legal requirements (such as Medicaid laws and regulations) related to the purchase and/or utilization of the product by these entities and are recorded in the same period that the related revenue is recognized. We use the expected value method for estimating variable consideration. We estimate product sales allowances and accruals using either historical, actual and/or other data, including estimated patient usage, applicable contractual rebate rates, contract performance by the benefit providers, other current contractual and statutory requirements, historical market data based upon experience of our products and other products similar to them, specific known market events and trends such as competitive pricing and new product introductions, current and forecasted Customer buying patterns and inventory levels, and the shelf life of our products. As part of this evaluation, we also review changes to federal and other legislation, changes to rebate contracts, changes in the level of discounts, and changes in product sales trends. Although allowances and accruals are recorded at the time of product sale, rebates are typically paid out in arrears, one to three months after the sale. 

The estimate of variable consideration, which is included in the transaction price, may be constrained and is included in the net sales price only to the extent that it is probable that a significant reversal in the amount of the cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is subsequently resolved in a future period. Estimating variable consideration and the related constraint requires the use of significant management judgment and actual amounts of consideration ultimately received may differ from our estimates. If actual results in the future vary from our estimates, we will adjust these estimates, which would affect net product revenue and earnings in the period such variances become known. No amounts were constrained as of September 30, 2018.

Discounts

We typically offer a 2% prompt payment discount to certain customers as an incentive to remit payment in accordance with the stated terms of the invoice, generally 30 days. Because we anticipate that those customers who are offered this discount will take advantage of the discount, 100% of the prompt payment discount at the time of sale is accrued, based on the gross amount of each invoice. We adjust the accrual quarterly to reflect actual experience.


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Chargebacks

Chargeback reserves represent the estimated obligations resulting from the difference between the prices at which we sell our products to wholesalers and the sales price ultimately paid to wholesalers under fixed price contracts by third-party payers, including governmental agencies. The chargeback estimates are determined based on actual product sales data and forecasted customer buying patterns. Actual chargeback amounts are determined at the time of resale to the qualified healthcare provider, and we generally issue credits for such amounts within several weeks of receiving notification from the wholesaler. Estimated chargeback amounts are recorded at the time of sale and adjusted quarterly to reflect actual experience.

Distributor/Wholesaler and Group Purchasing Organization Fees

Fees under arrangements with distributors and wholesalers are usually based upon units of product purchased during the prior month or quarter and are usually paid by us within several weeks of the receipt of an invoice from the wholesaler or distributor, as the case may be. Fees under the arrangements with GPOs are usually based upon member purchases during the prior quarter and are generally billed by the GPO within 30 days after period end. In accordance with ASC 606, since the consideration given to the Customer is not for a distinct good or service, the consideration is a reduction of the transaction price of the vendor’s products or services. We have included these fees in contractual adjustments in the table above. We generally pay such amounts within several weeks of the receipt of an invoice from the distributor, wholesaler or GPO. Accordingly, we accrue the estimated fee due at the time of sale, based on the contracted price invoiced to the Customer. We adjust the accrual quarterly to reflect actual experience.

Product Returns

Consistent with industry practice, we generally offer wholesalers, specialty distributors and other customers a limited right to return our products based on the product’s expiration date. Currently the expiration periods for our products have a range of three to five years. Product returns are estimated based on the historical return patterns and known or expected changes in the marketplace. We track actual returns by individual production lots. Returns on lots eligible for credits under our returned goods policy are monitored and compared with historical return trends and rates. We expect that wholesalers and healthcare providers will not stock significant inventory due to the cost of the product, the expense to store our products, and/or that our products are readily available for distribution. We record an estimate of returns at the time of sale. If necessary, our estimated rate of returns may be adjusted for actual return experience as it becomes available and for known or expected changes in the marketplace. We did not significantly adjust our reserve for product returns during the three and nine months ended September 30, 2018. To date, our product returns have been relatively limited; however, returns experience may change over time. We may be required to make future adjustments to our product returns estimate, which would result in a corresponding change to our net product sales in the period of adjustment and could be significant.

Sales Rebates

We contract with various private payer organizations, primarily pharmacy benefit managers, for the payment of rebates with respect to utilization of our products. We determine our estimates for rebates, if applicable, based on actual product sales data and our historical product claims experience. Rebate amounts generally are invoiced quarterly and are paid in arrears, and we expect to pay such amounts within several weeks of notification by the provider. We regularly assess our reserve balance and the rate at which we accrue for claims against product sales. If we determine in future periods that our actual rebate experience is not indicative of expected claims, if actual claims experience changes, or if other factors affect estimated claims rates, we may be required to adjust our current accumulated reserve estimate, which would affect net product sales in the period of the adjustment and could be significant.

Governmental Rebates

Governmental rebate reserves relate to our reimbursement arrangements with state Medicaid programs. We determine our estimates for Medicaid rebates, if applicable, based on actual product sales data and our historical product claims experience. In estimating these reserves, we provide for a Medicaid rebate associated with both those expected instances where Medicaid will act as the primary insurer as well as in those instances where we expect Medicaid will act as the secondary insurer. Rebate amounts generally are invoiced quarterly and are paid in arrears, and we expect to pay such amounts within several weeks of notification by the Medicaid or provider entity. We regularly assess our Medicaid reserve balance and the rate at which we accrue for claims against product sales. If we determine in future periods that our actual rebate experience is not indicative of expected claims, if actual claims experience changes, or if other factors affect estimated claims rates, we may be required to adjust our current Medicaid accumulated reserve estimate, which would affect net product sales in the period of the adjustment and could be significant.

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Table of Contents


Other Discounts
Other discounts which we offer include voluntary patient assistance programs, such as co-pay assistance programs, which are intended to provide financial assistance to qualified commercially insured patients with prescription drug co-payments required by payers. The calculation of the accrual for co-pay assistance is based on an estimate of claims and the cost per claim that we expect to receive associated with product that has been recognized as revenue.

E.    MARKETABLE SECURITIES

As of September 30, 2018 and December 31, 2017, our marketable securities were classified as available-for-sale in accordance with accounting standards which provide guidance related to accounting and classification of certain investments in marketable securities. Available-for-sale marketable securities are those securities which we view as available for use in current operations, if needed. We generally classify our available-for-sale marketable securities as short-term investments on our condensed consolidated balance sheets even though the stated maturity date may be one year or more beyond the current balance sheet date.
The following is a summary of our marketable securities as of September 30, 2018 and December 31, 2017 (in thousands):
 
September 30, 2018
 
 
 
Gross
 
Gross
 
Estimated
 
Amortized
 
Unrealized
 
Unrealized
 
Fair
 
Cost
 
Gains
 
Losses
 
Value
Short-term marketable securities:*
 
 
 
 
 
 
 
Corporate debt securities
$
53,862

 
$
1

 
$
(174
)
 
$
53,689

Certificates of deposit
13,000

 

 

 
13,000

U.S. treasury and government agency securities
6,149

 

 
(29
)
 
6,120

Commercial paper
5,462

 

 

 
5,462

Total short-term marketable securities
$
78,473

 
$
1

 
$
(203
)
 
$
78,271

Long-term marketable securities:**
 
 
 
 
 
 
 
Corporate debt securities
$
55,017

 
$
2

 
$
(580
)
 
$
54,439

U.S. treasury and government agency securities
6,236

 

 
(78
)
 
6,158

Certificates of deposit
1,500

 

 

 
1,500

Total long-term marketable securities
62,753

 
2

 
(658
)
 
62,097

Total marketable securities
$
141,226

 
$
3

 
$
(861
)
 
$
140,368


* Represents marketable securities with a remaining maturity of less than one year.
** Represents marketable securities with a remaining maturity of one to three years.
 

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December 31, 2017
 
 
 
Gross
 
Gross
 
Estimated
 
Amortized
 
Unrealized
 
Unrealized
 
Fair
 
Cost
 
Gains
 
Losses
 
Value
Short-term marketable securities:*
 
 
 
 
 
 
 
Corporate debt securities
$
57,257

 
$

 
$
(68
)
 
$
57,189

Certificates of deposit
9,151

 

 

 
9,151

U.S. treasury and government agency securities
1,999

 

 
(13
)
 
1,986

Commercial paper
1,999

 

 

 
1,999

Total short-term marketable securities
$
70,406

 
$

 
$
(81
)
 
$
70,325

Long-term marketable securities:**
 
 
 
 
 
 
 
Corporate debt securities
$
59,282

 
$
1

 
$
(320
)
 
$
58,963

U.S. treasury and government agency securities
7,381

 

 
(76
)
 
7,305

Total long-term marketable securities
66,663

 
1

 
(396
)
 
66,268

Total marketable securities
$
137,069

 
$
1

 
$
(477
)
 
$
136,593


* Represents marketable securities with a remaining maturity of less than one year.
** Represents marketable securities with a remaining maturity of one to three years.

Impairments and Unrealized Gains and Losses on Marketable Securities
We did not recognize any other-than-temporary impairment losses in our condensed consolidated statements of operations related to our marketable securities during the three and nine months ended September 30, 2018 and 2017. We considered various factors, including the length of time that each security was in an unrealized loss position and our ability and intent to hold these securities until the recovery of their amortized cost basis occurs. As of September 30, 2018, we had no material losses in an unrealized loss position for more than one year. Future events may occur, or additional information may become available, which may cause us to identify credit losses where we do not expect to receive cash flows sufficient to recover the entire amortized cost basis of a security and may necessitate the recording of future realized losses on securities in our portfolio. Significant losses in the estimated fair values of our marketable securities could have a material adverse effect on our earnings in future periods.

F.     FAIR VALUE MEASUREMENTS
The following tables represent the fair value hierarchy as of September 30, 2018 and December 31, 2017, for those assets and liabilities that we measure at fair value on a recurring basis (in thousands):
 
Fair Value Measurements at September 30, 2018 Using:
 
 
 
Quoted Prices in
 
 
 
Significant
 
 
 
Active Markets for
 
Significant Other
 
Unobservable
 
 
 
Identical Assets
 
Observable Inputs
 
Inputs
 
Total
 
(Level 1)
 
(Level 2)
 
(Level 3)
Assets:
 
 
 
 
 
 
 
Cash equivalents
$
120,778

 
$
120,778

 
$

 
$

Corporate debt securities
108,128

 

 
108,128

 

U.S. treasury and government agency securities
12,278

 

 
12,278

 

Certificates of deposit
14,500

 

 
14,500

 

Commercial paper
5,462

 

 
5,462

 

Total assets
$
261,146

 
$
120,778

 
$
140,368

 
$

Liabilities:
 

 
 

 
 

 
 

Contingent consideration - MuGard
$
823

 
$

 
$

 
$
823

Total liabilities
$
823

 
$

 
$

 
$
823

 

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Fair Value Measurements at December 31, 2017 Using:
 
 
 
Quoted Prices in
 
 
 
Significant
 
 
 
Active Markets for
 
Significant Other
 
Unobservable
 
 
 
Identical Assets
 
Observable Inputs
 
Inputs
 
Total
 
(Level 1)
 
(Level 2)
 
(Level 3)
Assets:
 
 
 
 
 
 
 
Cash equivalents
$
4,591

 
$
4,591

 
$

 
$

Corporate debt securities
116,152

 

 
116,152

 

U.S. treasury and government agency securities
9,291

 

 
9,291

 

Certificates of deposit
9,151

 

 
9,151

 

Commercial paper
1,999

 

 
1,999

 

Total assets
$
141,184

 
$
4,591

 
$
136,593

 
$

Liabilities:
 
 
 
 
 
 
 
Contingent consideration - Lumara Health
$
49,187

 
$

 
$

 
$
49,187

Contingent consideration - MuGard
898

 

 

 
898

Total liabilities
$
50,085

 
$

 
$

 
$
50,085

 
Marketable Securities
Our cash equivalents, are classified as Level 1 assets under the fair value hierarchy as these assets have been valued using quoted market prices in active markets and do not have any restrictions on redemption. Our marketable securities are classified as Level 2 assets under the fair value hierarchy as these assets are primarily determined from independent pricing services, which normally derive security prices from recently reported trades for identical or similar securities, making adjustments based upon other significant observable market transactions. At the end of each reporting period, we perform quantitative and qualitative analysis of prices received from third parties to determine whether prices are reasonable estimates of fair value. After completing our analysis, we did not adjust or override any fair value measurements provided by our pricing services as of September 30, 2018. In addition, there were no transfers or reclassifications of any securities between Level 1 and Level 2 during the nine months ended September 30, 2018.
Contingent Consideration
We recorded contingent consideration related to the November 2014 acquisition of Lumara Health, Inc. (“Lumara Health”) for our Makena product and related to our June 2013 license agreement for MuGard (the “MuGard License Agreement”) with Abeona Therapeutics, Inc. (“Abeona”), under which we acquired the U.S. commercial rights for the management of oral mucositis and stomatitis (the “MuGard Rights”).
The fair value measurements of contingent consideration obligations and the related intangible assets arising from business combinations are classified as Level 3 assets under the fair value hierarchy as these assets have been valued using unobservable inputs. These inputs include: (a) the estimated amount and timing of projected cash flows; (b) the probability of the achievement of the factors on which the contingency is based; and (c) the risk-adjusted discount rate used to present value the probability-weighted cash flows. Significant increases or decreases in any of those inputs in isolation could result in a significantly lower or higher fair value measurement.
The following table presents a reconciliation of contingent consideration obligations related to the acquisition of Lumara Health and the MuGard Rights (in thousands):
Balance as of December 31, 2017
$
50,085

Payments made
(87
)
Adjustments to fair value of contingent consideration
(49,175
)
Balance as of September 30, 2018
$
823


During the nine months ended September 30, 2018, we reduced the fair value of our contingent consideration liability by approximately $49.2 million based primarily on actual Makena net sales to date and our expectations for future performance, which indicated that achievement of future milestones is not probable. This adjustment was based on our estimates, which are reliant on a number of external factors as well as the exercise of judgment.

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The fair value of the contingent milestone payments payable by us to the former stockholders of Lumara Health has been determined based on our probability-adjusted discounted cash flows estimated to be realized from the net sales of Makena from December 1, 2014 through December 31, 2019.
The fair value of the contingent royalty payments payable by us to Abeona under the MuGard License Agreement was determined based on various market factors, including an analysis of estimated sales using a discount rate of approximately 13%. As of September 30, 2018, we estimated that the undiscounted royalty amounts we could pay under the MuGard License Agreement, based on current projections, may range from approximately $2.0 million to $6.0 million over the remainder of the ten year period, which commenced on June 6, 2013, the acquisition date, which is our best estimate of the period over which we expect the majority of the asset’s cash flows to be derived.  
We believe the estimated fair values of Lumara Health and the MuGard Rights are based on reasonable assumptions; however; our actual results may vary significantly from the estimated results.
Debt
We estimate the fair value of our debt obligations by using quoted market prices obtained from third-party pricing services, which is classified as a Level 2 input. As of September 30, 2018, the estimated fair value of our 2022 Convertible Notes and 2019 Convertible Notes (each as defined below) was $335.2 million and $21.4 million, respectively, which differed from their carrying values. See Note R, “Debt” for additional information on our debt obligations.

G.     INVENTORIES
Our major classes of inventories were as follows as of September 30, 2018 and December 31, 2017 (in thousands):
 
September 30, 2018
 
December 31, 2017
Raw materials
$
11,318

 
$
9,505

Work in process
1,866

 
4,146

Finished goods
14,769

 
20,792

Total inventories
$
27,953

 
$
34,443


H.     PROPERTY AND EQUIPMENT, NET
Property and equipment, net consisted of the following as of September 30, 2018 and December 31, 2017 (in thousands):
 
September 30, 2018
 
December 31, 2017
Computer equipment and software
$
1,438

 
$
1,401

Furniture and fixtures
1,442

 
1,442

Leasehold improvements
2,938

 
2,938

Laboratory and production equipment
6,000

 
654

Construction in progress
59

 
5,068

 
11,877

 
11,503

Less: accumulated depreciation
(4,830
)
 
(3,599
)
Property and equipment, net
$
7,047

 
$
7,904

 

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Table of Contents

I.     GOODWILL AND INTANGIBLE ASSETS, NET
Goodwill
Our $422.5 million goodwill balance represents goodwill of the continuing business following the goodwill allocation required by the CBR transaction discussed in Note C “Discontinued Operations and Held for Sale.” We determined that CBR met the definition of a business and as a result, in accordance with ASC 350 - Intangibles - Goodwill and Other, allocated goodwill on a relative fair value basis between CBR and the continuing business for the purposes of determining the carrying value of CBR. Further, we performed a qualitative goodwill impairment test for our continuing business at June 30, 2018 to assess whether there were indicators that its fair value was less than its carrying value. As a result of this evaluation, we determined that there was no impairment of the goodwill of our continuing business at June 30, 2018.
We test goodwill at the reporting unit level for impairment on an annual basis and between annual tests if events and circumstances indicate it is more likely than not that the fair value of a reporting unit is less than its carrying value. Events that could indicate impairment and trigger an interim impairment assessment include, but are not limited to, an adverse change in current economic and market conditions, including a significant prolonged decline in market capitalization, a significant adverse change in legal factors, unexpected adverse business conditions, and an adverse action or assessment by a regulator. Our annual impairment test date is October 31. We have determined that we operate in a single operating segment and have a single reporting unit.
Intangible Assets
As of September 30, 2018 and December 31, 2017, our identifiable intangible assets consisted of the following (in thousands):
 
September 30, 2018
 
December 31, 2017
 
 
 
Accumulated
 
Cumulative
 
 
 
 
 
Accumulated
 
Cumulative
 
 
 
Cost
 
Amortization
 
Impairments
 
Net
 
Cost
 
Amortization
 
Impairments
 
Net
Finite-lived intangible assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Makena base technology
$
797,100

 
$
390,724

 
$
319,246

 
$
87,130

 
$
797,100

 
$
255,754

 
$
319,246

 
$
222,100

Makena auto-injector developed technology
79,100

 
4,697

 

 
74,403

 

 

 

 

Intrarosa developed technology
77,655

 
8,441

 

 
69,214

 
77,655

 
3,376

 

 
74,279

 
953,855

 
403,862

 
319,246

 
230,747

 
874,755

 
259,130

 
319,246

 
296,379

Indefinite-lived intangible assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Makena IPR&D

 

 

 

 
79,100

 

 

 
79,100

Total intangible assets
$
953,855

 
$
403,862

 
$
319,246

 
$
230,747

 
$
953,855

 
$
259,130

 
$
319,246

 
$
375,479


During the first quarter of 2018, following the U.S. Food and Drug Administration (the “FDA”) approval of Makena for administration via a pre-filled subcutaneous auto-injector (the “Makena auto-injector”), we reclassified the Makena IPR&D as the Makena auto-injector developed technology and placed it into service. Amortization of the Makena auto-injector developed technology is being recognized on a straight-line basis over 8.8 years.


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Table of Contents

 As of September 30, 2018, the weighted average remaining amortization period for our finite-lived intangible assets was approximately 7.7 years. Total amortization expense for the nine months ended September 30, 2018 and 2017 was $144.7 million and $69.6 million, respectively. Amortization expense is recorded in cost of product sales in our condensed consolidated statements of operations. We expect amortization expense related to our finite-lived intangible assets to be as follows (in thousands):
 
 
Estimated
 
 
Amortization
Period
 
Expense
Remainder of Year Ending December 31, 2018
 
$
28,860

Year Ending December 31, 2019
 
35,010

Year Ending December 31, 2020
 
26,636

Year Ending December 31, 2021
 
26,488

Year Ending December 31, 2022
 
26,469

Thereafter
 
87,284

Total
 
$
230,747

J.     CURRENT AND LONG-TERM LIABILITIES
Accrued expenses consisted of the following as of September 30, 2018 and December 31, 2017 (in thousands):
 
September 30, 2018
 
December 31, 2017
Commercial rebates, fees and returns
$
89,157

 
$
101,852

Professional, license, and other fees and expenses
21,442

 
23,657

Salaries, bonuses, and other compensation
23,623

 
15,882

Interest expense
3,533

 
13,525

Intrarosa-related license fees

 
10,000

Research and development expense
3,998

 
1,816

Total accrued expenses
$
141,753

 
$
166,732

  
K.     INCOME TAXES
The following table summarizes our effective tax rate and income tax (benefit) expense from continuing operations for the three and nine months ended September 30, 2018 and 2017 (in thousands except for percentages):
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2018
 
2017
 
2018
 
2017
Effective tax rate
4
%
 
43
%
 
(40
)%
 
41
%
Income tax (benefit) expense
$
(2,352
)
 
$
(115,197
)
 
$
42,204

 
$
(145,317
)
 For the three and nine months ended September 30, 2018, we recognized an income tax benefit of $2.4 million and income tax expense of $42.2 million, respectively, representing an effective tax rate of 4% and (40)%, respectively. The difference between the 2018 statutory federal tax rate of 21% and the effective tax rates for the three and nine months ended September 30, 2018, was primarily attributable to the establishment of a valuation allowance on net deferred tax assets other than refundable alternative minimum tax (“AMT”) credits, the impact of non-deductible stock compensation and other non-deductible expenses, partially offset by a benefit from contingent consideration, state income taxes and orphan drug credits. We have established a valuation allowance on our deferred tax assets other than refundable credits to the extent that our existing taxable temporary differences would not be available as a source of income to realize the benefits of those deferred tax assets. Our valuation allowance on our deferred tax assets, other than refundable AMT credits, increased during the three and nine months ended September 30, 2018 primarily because the deferred tax liabilities associated with the CBR business, which was reclassified to discontinued operations for the three and nine months ended September 30, 2018, are no longer available as a source of income to realize the benefits of the net deferred tax assets.

In December 2017, the Tax Cuts and Jobs Act (the “2017 Tax Act”) was enacted. The 2017 Tax Act included significant changes to the U.S. corporate income tax system, including a reduction of the federal corporate income tax rate from 35% to 21%, effective January 1, 2018. Deferred tax assets and liabilities are measured using enacted rates in effect for

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the year in which those temporary differences are expected to be recovered or settled. As a result of the reduction in the federal tax rate from 35% to 21%, we revalued our ending net deferred tax liabilities at December 31, 2017 and recognized a provisional $17.6 million tax benefit. We are still assessing the implications of the 2017 Tax Act on both a federal and state level. Any additional impacts will be recorded as they are identified during the measurement period as provided for in accordance with Staff Accounting Bulletin No. 118, which addresses the application of GAAP in situations when a registrant does not have the necessary information available, prepared, or analyzed (including computations) in reasonable detail to complete the accounting for certain income tax effects of the 2017 Tax Act.

For the three and nine months ended September 30, 2017, we recognized an income tax benefit of $115.2 million and $145.3 million, respectively, representing an effective tax rate of 43% and 41%, respectively. The difference between the expected 2017 statutory federal tax rate of 35% and the effective tax rates for the three and nine months ended September 30, 2017 was primarily attributable to the impact of state income taxes and the federal research and development tax credit, partially offset by non-deductible stock compensation.

The primary drivers of the increase in tax expense for the three and nine months ended September 30, 2018 as compared to the three and nine months ended September 30, 2017 is primarily attributable to an increase in valuation allowance on net deferred tax assets other than refundable AMT credits and a decrease in the federal tax benefit attributable to the decrease in the statutory federal rate from 35% to 21%, as well as an increase in nondeductible expenses, partially offset by contingent consideration.

L.     ACCUMULATED OTHER COMPREHENSIVE LOSS

The following table summarizes the changes in the accumulated balances of other comprehensive loss during the three and nine months ended September 30, 2018 and 2017 (in thousands):
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2018
 
2017
 
2018
 
2017
Beginning balance
$
(4,295
)
 
$
(3,633
)
 
$
(3,908
)
 
$
(3,838
)
Holding gains (losses) arising during period, net of tax
134

 
(4
)
 
(253
)
 
201

Ending balance
$
(4,161
)
 
$
(3,637
)
 
$
(4,161
)
 
$
(3,637
)
M.     BASIC AND DILUTED NET INCOME (LOSS) PER SHARE
We compute basic net income (loss) per share by dividing net income (loss) by the weighted average number of common shares outstanding during the relevant period. Diluted net income (loss) per common share has been computed by dividing net income (loss) by the diluted number of common shares outstanding during the period. Except where the result would be antidilutive to net income, diluted net income per common share is computed assuming the impact of the conversion of the 2.5% convertible senior notes due 2019 (the “2019 Convertible Notes”) and the 3.25% convertible senior notes due 2022 (the “2022 Convertible Notes”), the exercise of outstanding stock options, the vesting of restricted stock units (“RSUs”), and the exercise of warrants.
We have a choice to settle the conversion obligation of our 2022 Convertible Notes and the 2019 Convertible Notes (together, the “Convertible Notes”) in cash, shares, or any combination of the two. Our current policy is to settle the principal balance of the Convertible Notes in cash. As such, we apply the treasury stock method to these securities and the dilution related to the conversion premium, if any, of the Convertible Notes is included in the calculation of diluted weighted-average shares outstanding to the extent each issuance is dilutive based on the average stock price during each reporting period being greater than the conversion price of the respective Convertible Notes. The dilutive effect of the warrants, stock options and RSUs has been calculated using the treasury stock method.

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The components of basic and diluted net income (loss) per share for the three and nine months ended September 30, 2018 and 2017 were as follows (in thousands, except per share data):
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2018
 
2017
 
2018
 
2017
Net loss from continuing operations
$
(64,678
)
 
$
(155,713
)
 
$
(148,592
)
 
$
(205,890
)
Net income from discontinued operations
95,517

 
3,652

 
105,108

 
3,202

Net income (loss)
$
30,839

 
$
(152,061
)
 
$
(43,484
)
 
$
(202,688
)
 
 
 
 
 
 
 
 
Weighted average common shares outstanding
34,492

 
35,311

 
34,339

 
34,948

 
 
 
 
 
 
 
 
Basic and diluted net income (loss) per share:
 

 
 

 
 

 
 

Loss from continuing operations
$
(1.88
)
 
$
(4.41
)
 
$
(4.33
)
 
$
(5.89
)
Income from discontinued operations
2.77

 
0.10

 
3.06

 
0.09

Basic and diluted net income (loss) per share:
$
0.89

 
$
(4.31
)
 
$
(1.27
)
 
$
(5.80
)
The following table sets forth the potential common shares issuable upon the exercise of outstanding options, the vesting of RSUs, the exercise of warrants (prior to consideration of the treasury stock method), and the conversion of the Convertible Notes, which were excluded from our computation of diluted net (loss) income per share because their inclusion would have been anti-dilutive (in thousands):
 
Nine Months Ended September 30,
 
2018
 
2017
Options to purchase shares of common stock
3,700

 
3,389

Shares of common stock issuable upon the vesting of RSUs
1,135

 
1,140

Warrants
1,008

 
1,008

2022 Convertible Notes
11,695

 
11,695

2019 Convertible Notes
790

 
790

Total
18,328

 
18,022

 In connection with the issuance of the 2019 Convertible Notes, in February 2014, we entered into convertible bond hedges. The convertible bond hedges are not included for purposes of calculating the number of diluted shares outstanding, as their effect would be anti-dilutive. The convertible bond hedges are generally expected, but not guaranteed, to reduce the potential dilution and/or offset the cash payments we are required to make upon conversion of the remaining 2019 Convertible Notes. During the three and nine months ended September 30, 2018 and 2017, our average common stock price was below the exercise price of the warrants. 

N.     EQUITY‑BASED COMPENSATION
We currently maintain three equity compensation plans; our Fourth Amended and Restated 2007 Equity Incentive Plan, as amended (the “2007 Plan”), the Lumara Health Inc. Amended and Restated 2013 Incentive Compensation Plan (the “Lumara Health 2013 Plan”) and our 2015 Employee Stock Purchase Plan (“2015 ESPP”). In June 2018 at our annual meeting of stockholders, our stockholders approved (a) an amendment to our 2007 Plan to, among other things, increase the number of shares of our common stock available for issuance thereunder by 1,043,000 shares and (b) an amendment to our 2015 ESPP to increase the maximum number of shares of our common stock that will be made available for sale thereunder by 500,000 shares. All outstanding stock options granted under each of our equity compensation plans other than our 2015 ESPP have an exercise price equal to the closing price of a share of our common stock on the grant date.

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Stock Options
The following table summarizes stock option activity for the nine months ended September 30, 2018:
 
2007 Equity
 
2013 Lumara
 
Inducement
 
 
 
Plan
 
Equity Plan
 
Grants
 
Total
Outstanding at December 31, 2017
2,590,373

 
125,536

 
815,450

 
3,531,359

Granted
836,846

 
35,400

 
102,393

 
974,639

Exercised
(133,547
)
 
(2,812
)
 

 
(136,359
)
Expired or terminated
(549,156
)
 
(30,675
)
 
(90,000
)
 
(669,831
)
Outstanding at September 30, 2018
2,744,516

 
127,449

 
827,843

 
3,699,808

Restricted Stock Units
The following table summarizes RSU activity for the nine months ended September 30, 2018:
 
2007 Equity
 
2013 Lumara
 
Inducement
 
 
 
Plan
 
Equity Plan
 
Grants
 
Total
Outstanding at December 31, 2017
966,623

 
11,611

 
91,541

 
1,069,775

Granted
752,797

 
1,600

 
48,418

 
802,815

Vested
(370,388
)
 
(10,650
)
 
(47,764
)
 
(428,802
)
Expired or terminated
(306,234
)
 
(460
)
 
(2,502
)
 
(309,196
)
Outstanding at September 30, 2018
1,042,798

 
2,101

 
89,693

 
1,134,592

In March 2018, we granted RSUs under our 2007 Plan to certain members of our senior management covering a maximum of 206,250 shares of common stock. These performance-based RSUs will vest, if at all, on March 1, 2021, based on our total shareholder return performance measured against the median total shareholder return of a defined group of companies over a three-year period. As of September 30, 2018, the maximum shares of common stock that may be issued under these awards is 188,250. The maximum aggregate total fair value of these RSUs is $3.5 million, which is being recognized as expense over a period of three years from the date of grant, net of any actual forfeitures.
Equity-Based Compensation Expense
Equity-based compensation expense for the three and nine months ended September 30, 2018 and 2017 consisted of the following (in thousands):
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2018
 
2017
 
2018
 
2017
Cost of product sales
$
281

 
$
432

 
$
588

 
$
690

Research and development
568

 
799

 
1,896

 
2,651

Selling, general and administrative
4,202

 
4,410

 
12,149

 
12,037

Total equity-based compensation expense
5,051

 
5,641

 
14,633

 
15,378

Income tax effect

 
(1,674
)
 

 
(4,569
)
After-tax effect of equity-based compensation expense
$
5,051

 
$
3,967

 
$
14,633

 
$
10,809

 
We reduce the compensation expense being recognized to account for estimated forfeitures, which we estimate based primarily on historical experience, adjusted for unusual events such as corporate restructurings, which may result in higher than expected turnover and forfeitures. Under current accounting guidance, forfeitures are estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. We adopted ASU No. 2016-09, Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting during the first quarter of 2017. We will continue to use the current method of estimated forfeitures each period rather than accounting for forfeitures as they occur.

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O.     STOCKHOLDERS’ EQUITY

Change in Stockholders’ Equity

Total stockholders’ equity decreased by $28.0 million during the nine months ended September 30, 2018. This decrease was primarily driven by the following:

$43.5 million due to our net loss for the nine months ended September 30, 2018;

$14.6 million increase related to equity-based compensation expense;

$1.1 million increase related to the cumulative effect adjustment to our accumulated deficit from the adoption of ASC 606, net of tax;

$2.6 million decrease due to the payment of employee tax withholdings related to equity-based compensation; and

$2.6 million increase from net shares issued related to the exercise of stock options.

Share Repurchase Program

In January 2016, we announced that our Board authorized a program to repurchase up to $60.0 million in shares of our common stock. The repurchase program does not have an expiration date and may be suspended for periods or discontinued at any time. Under the program, we may purchase our stock from time to time at the discretion of management in the open market or in privately negotiated transactions. The number of shares repurchased and the timing of the purchases will depend on a number of factors, including share price, trading volume and general market conditions, along with working capital requirements, general business conditions and other factors. We may also from time to time establish a trading plan under Rule 10b5-1 of the Securities and Exchange Act of 1934 to facilitate purchases of our shares under this program. As of September 30, 2018, we repurchased and retired a cumulative total of 2,198,010 shares of common stock under this repurchase program for $39.5 million at an average purchase price of $17.97 per share. As of September 30, 2018$20.5 million remains available for the repurchase of shares under the program. We did not repurchase any of our common stock during the first nine months of 2018.

P.     COMMITMENTS AND CONTINGENCIES
Commitments
Our long-term contractual obligations include commitments and estimated purchase obligations entered into in the normal course of business. These include commitments related to our facility leases, purchases of inventory, debt obligations, and other purchase obligations.
Purchase Obligations

Purchase obligations primarily represent minimum purchase commitments for inventory. As of September 30, 2018, our minimum purchase commitments totaled $66.4 million.
Contingent Consideration Related to Business Combinations
In connection with our acquisition of Lumara Health in November 2014, we agreed to pay up to $350.0 million based on the achievement of certain sales milestones, of which $150.0 million has been paid. During the nine months ended September 30, 2018, we reversed the accrual for a $50.0 million milestone payment based on actual Makena net sales to date and our expectations for future performance, which indicated that achievement of the future milestone was not probable. As we update our analysis in future periods, actual results may vary significantly from the estimated results, which are reliant on a number of external factors as well as the exercise of judgment.
Contingent Regulatory and Commercial Milestone Payments
In September 2018, we exercised our option to acquire the global rights to AMAG-423 pursuant to an option agreement entered into in July 2015 with Velo Bio, LLC, a privately-held life-sciences company (“Velo”), the terms of which were amended at the time of exercise. AMAG-423 is a polyclonal antibody currently in clinical development for the treatment of severe preeclampsia in pregnant women and has been granted both orphan drug and fast-track review designations by the FDA. In connection with the exercise of the option and consummation of the acquisition, we have assumed responsibility to complete

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the Phase 2b/3a clinical study that Velo initiated in the second quarter of 2017 and will incur the necessary clinical, regulatory and other costs required to pursue FDA approval. As part of the acquisition, in September 2018 we paid Velo an upfront option exercise fee of $12.5 million, which was recorded as IPR&D expense as the product candidate is in development and has no alternative future use. We will also be obligated to pay Velo a $30.0 million milestone payment upon FDA approval of the product. In addition, if we are successful with the commercial launch of the product, we will be obligated to pay sales milestone payments to Velo of up to $240.0 million in the aggregate, triggered at various annual net sales thresholds between $300.0 million and $900.0 million and low-single digit royalties based on net sales. Further, we have assumed additional obligations under a previous agreement entered into by Velo with a third-party, including a $5.0 million milestone payment upon regulatory approval and $10.0 million upon first commercial sale, payable in quarterly installments as a percentage of quarterly gross sales. We will also be obligated to pay the third-party low-single digit royalties based on net sales.
In connection with a license agreement we entered into with Endoceutics, Inc. (“Endoceutics”) in February 2017 (the “Endoceutics License Agreement”), we are required to pay Endoceutics certain sales milestone payments, including a first sales milestone payment of $15.0 million, which would be triggered when Intrarosa annual net U.S. sales exceed $150.0 million, and a second milestone payment of $30.0 million, which would be triggered when annual net U.S. sales of Intrarosa exceed $300.0 million. If annual net U.S. sales of Intrarosa exceed $500.0 million, there are additional sales milestone payments totaling up to $850.0 million, which would be triggered at various sales thresholds. We are also obligated to pay tiered royalties to Endoceutics equal to a percentage of net sales of Intrarosa in the U.S. ranging from mid-teens for calendar year net sales up to $150.0 million to mid twenty percent for any calendar year net sales that exceed $1.0 billion for the commercial life of Intrarosa, with deductions (a) after the later of (i) the expiration date of the last to expire of a licensed patent containing a valid patent claim or (ii) ten years after the first commercial sale of Intrarosa for the treatment of vulvar and vaginal atrophy (“VVA”) or female sexual dysfunction (“FSD”) in the U.S. (as applicable), (b) for generic competition and (c) for third party payments, subject to an aggregate cap on such deductions of royalties otherwise payable to Endoceutics.
In connection with a license agreement we entered into with Palatin Technologies, Inc. (“Palatin”) in January 2017 (the “Palatin License Agreement”), we are required to pay Palatin up to $380.0 million in regulatory and commercial milestone payments, of which $20.0 million was paid in the second quarter of 2018 following the acceptance by the FDA of our New Drug Application (“NDA”) for Vyleesi. As of September 30, 2018, the remaining potential milestone payments include $60.0 million upon FDA approval of Vyleesi and up to $300.0 million of aggregate sales milestone payments upon the achievement of certain annual net sales milestones over the course of the license. We are also obligated to pay Palatin tiered royalties on annual net sales of Vyleesi and any other products containing Vyleesi (collectively, the “Vyleesi Products”), on a product-by-product basis, in the Palatin Territory ranging from the high-single digits to the low double-digits.
In connection with a development and license agreement (the “Antares License Agreement”) with Antares Pharma, Inc. (“Antares”), we are required to pay royalties to Antares on net sales of the Makena auto-injector commencing on the launch of the Makena auto-injector in a particular country until the Makena auto-injector is no longer sold or offered for sale in such country or the Antares License Agreement is terminated (the “Antares Royalty Term”). The royalty rates range from high single digit to low double digits and are tiered based on levels of net sales of the Makena auto-injector and decrease after the expiration of licensed patents or where there are generic equivalents to the Makena auto-injector being sold in a particular country. Antares is also entitled to sales-based milestone payments upon the achievement of certain annual net sales.
Contingencies
Legal Proceedings
We accrue a liability for legal contingencies when we believe that it is both probable that a liability has been incurred and that we can reasonably estimate the amount of the loss. We review these accruals and adjust them to reflect ongoing negotiations, settlements, rulings, advice of legal counsel and other relevant information. To the extent new information is obtained and our views on the probable outcomes of claims, suits, assessments, investigations or legal proceedings change, changes in our accrued liabilities would be recorded in the period in which such determination is made. For certain matters referenced below, the liability is not probable or the amount cannot be reasonably estimated and, therefore, accruals have not been made. In addition, in accordance with the relevant authoritative guidance, for any matters in which the likelihood of material loss is at least reasonably possible, we will provide disclosure of the possible loss or range of loss. If a reasonable estimate cannot be made, however, we will provide disclosure to that effect. We expense legal costs as they are incurred.

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Sandoz Patent Infringement Lawsuit
In March 2016, we initiated a patent infringement suit regarding an Abbreviated New Drug Application submitted to the FDA by Sandoz Inc. (“Sandoz”) requesting approval to engage in commercial manufacture, use and sale of a generic version of ferumoxytol. On March 23, 2018, we and Sandoz entered a stipulation of dismissal in the United States District Court for the District of New Jersey pursuant to a settlement agreement that dismissed and resolved this action. According to the terms of the settlement, if Sandoz receives FDA approval by a certain date, Sandoz may launch its generic version of Feraheme on July 15, 2021, or earlier under certain circumstances customary for settlement agreements of this nature. Sandoz will pay a royalty on the sales of its generic version of Feraheme to us until the expiration of the last Feraheme patent listed in the Orange Book. If Sandoz is unable to secure approval by such date, Sandoz will launch an authorized generic version of Feraheme on July 15, 2022 for up to twelve months. Sandoz’s right to distribute, and our obligation to supply, the authorized generic product shall be in accordance with standard commercial terms and profit splits.

Other

On July 20, 2015, the Federal Trade Commission (the “FTC”) notified us that it was conducting an investigation into whether Lumara Health or its predecessor engaged in unfair methods of competition with respect to Makena or any hydroxyprogesterone caproate product. The FTC noted in its letter that the existence of the investigation does not indicate that the FTC has concluded that Lumara Health or its predecessor has violated the law and we believe that our contracts and practices comply with relevant law and policy, including the federal Drug Quality and Security Act (the “DQSA”), which was enacted in November 2013, and public statements from and enforcement actions by the FDA regarding its implementation of the DQSA. We have provided the FTC with a response providing a brief overview of the DQSA for context, which we believe was helpful, including: (a) how the statute outlined that large-scale compounding of products that are copies or near-copies of FDA-approved drugs (like Makena) is not in the interests of public safety; (b) our belief that the DQSA has had a significant impact on the compounding of hydroxyprogesterone caproate; and (c) how our contracts with former compounders allow those compounders to continue to serve physicians and patients with respect to supplying medically necessary alternative/altered forms of hydroxyprogesterone caproate. We believe we have fully cooperated with the FTC and we have had no further interactions with the FTC on this matter since we provided our response to the FTC in August 2015.

On or about April 6, 2016, we received Notice of a Lawsuit and Request to Waive Service of a Summons in a case entitled Plumbers’ Local Union No. 690 Health Plan v. Actavis Group et. al. (“Plumbers’ Union”), which was filed in the Court of Common Pleas of Philadelphia County, First Judicial District of Pennsylvania and, after removal to federal court, is now pending in the United States District Court for the Eastern District of Pennsylvania (Civ. Action No. 16-65-AB). Thereafter, we were also made aware of a related complaint entitled Delaware Valley Health Care Coalition v. Actavis Group et. al. (“Delaware Valley”), which was filed with the Court of Common Pleas of Philadelphia County, First Judicial District of Pennsylvania District Court of Pennsylvania (Case ID: 160200806). The complaints name K-V Pharmaceutical Company (“KV”) (Lumara Health’s predecessor company), certain of its successor entities, subsidiaries and affiliate entities (the “Subsidiaries”), along with a number of other pharmaceutical companies. We acquired Lumara Health in November 2014, a year after KV emerged from bankruptcy protection, at which time it, along with its then existing subsidiaries, became our wholly-owned subsidiary. We have not been served with process or waived service of summons in either case. The actions are being brought alleging unfair and deceptive trade practices with regard to certain pricing practices that allegedly resulted in certain payers overpaying for certain of KV’s generic products. On July 21, 2016, the Plaintiff in the Plumbers’ Union case dismissed KV with prejudice to refiling and on October 6, 2016, all claims against the Subsidiaries were dismissed without prejudice. We are in discussions with Plaintiff’s counsel to similarly dismiss all claims in the Delaware Valley case. Because the Delaware Valley case is in the earliest stages and we have not been served with process in this case, we are currently unable to predict the outcome or reasonably estimate the range of potential loss associated with this matter, if any.

We may periodically become subject to other legal proceedings and claims arising in connection with ongoing business activities, including claims or disputes related to patents that have been issued or that are pending in the field of research on which we are focused. Other than the above actions, we are not aware of any material claims against us as of September 30, 2018.
 
Q.     COLLABORATION, LICENSE AND OTHER STRATEGIC AGREEMENTS
Our commercial strategy includes expanding our portfolio through the in-license or acquisition of additional pharmaceutical products or companies, including revenue-generating commercial products and late-state development assets as well as forming alliances with other companies to facilitate the sale and distribution of our products. As of September 30, 2018, we were a party to the following collaborations and license agreements:

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Velo
As described above in Note P, “Commitments and Contingencies,” in September 2018, we exercised our option to acquire the global rights to the AMAG-423 program, which we account for as an asset acquisition under ASU No. 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business (“ASU 2017-01”).

Prasco
In anticipation of the entry of generic competition to our branded Makena intramuscular product following the February 2018 expiration of Makena’s orphan drug exclusivity, we entered into a Distribution and Supply Agreement (the “Prasco Agreement”) with Prasco, LLC (“Prasco”). The Prasco Agreement grants Prasco an exclusive, non-sublicensable, nontranferable license to purchase, distribute and sell a generic version of Makena in the U.S. In July 2018, following the approval by the FDA of a generic version of the Makena single-dose intramuscular injection in late June 2018, in order to participate in the generic market, we authorized Prasco to launch the authorized generic of both the single-dose and multi-dose intramuscular injection of Makena. Under the Prasco Agreement, we are responsible for the manufacture and supply of the generic Makena product to be sold to Prasco at a predetermined supply price and Prasco is also required to pay us a certain percentage of the net distributable profits from the sale of the generic Makena product. We account for revenue recognized under the Prasco Agreement in accordance with ASC 606. Pursuant to the terms of the Prasco Agreement, in certain circumstances we may be required to pay penalties if we fail to supply a certain percentage of product ordered by Prasco. The Prasco Agreement will continue for a set period of time, including mutually agreed to additional renewals, but is subject to early termination by us for convenience after a certain period of time or if Prasco is subject to a change of control or by either party for, among other things, uncured breach by or bankruptcy of the other party or for lack of commercial viability, FDA notice, or by mutual agreement.
Antares
Through our acquisition of Lumara Health, we are party to the Antares License Agreement, which grants us an exclusive, worldwide, royalty-bearing license, with the right to sublicense, to certain intellectual property rights, including know-how, patents and trademarks, to develop, use, sell, offer for sale and import and export the Makena auto-injector. Under the Antares License Agreement, we are responsible for the clinical development and preparation, submission and maintenance of all regulatory applications in each country where we desire to market and sell the Makena auto-injector, including the U.S. We are required to pay royalties to Antares on net sales of the Makena auto-injector for the Antares Royalty Term. The royalty rates range from high single digit to low double digits and are tiered based on levels of net sales of the Makena auto-injector and decrease after the expiration of licensed patents or where there are generic equivalents to the Makena auto-injector being sold in a particular country. In addition, we are required to pay Antares sales milestone payments upon the achievement of certain annual net sales. The Antares License Agreement terminates at the end of the Antares Royalty Term, but is subject to early termination by us for convenience and by either party upon an uncured breach by or bankruptcy of the other party. In March 2018, the Antares License Agreement was amended to, among other things, transfer the agreement to AMAG from our subsidiary, amend certain confidentiality provisions, and to provide for co-termination with the Antares Manufacturing Agreement (described below).
We are also party to a Manufacturing Agreement with Antares (the “Antares Manufacturing Agreement”) that sets forth the terms and conditions pursuant to which Antares agreed to sell to us on an exclusive basis, and we agreed to purchase, the fully packaged Makena auto-injector for commercial distribution. Antares remains responsible for the manufacture and supply of the device components and assembly of the Makena auto-injector. We are responsible for the supply of the drug to be used in the assembly of the finished auto-injector product. The Antares Manufacturing Agreement terminates at the expiration or earlier termination of the Antares License Agreement, but is subject to early termination by us for certain supply failure situations, and by either party upon an uncured breach by or bankruptcy of the other party or our permanent cessation of commercialization of the Makena auto-injector for efficacy or safety reasons.
Endoceutics
In February 2017, we entered into the Endoceutics License Agreement with Endoceutics. Pursuant to the Endoceutics License Agreement, Endoceutics granted us the right to develop and commercialize pharmaceutical products containing dehydroepiandrosterone (“DHEA”), including Intrarosa, at dosage strengths of 13 mg or less per dose and formulated for intravaginal delivery, excluding any combinations with other active pharmaceutical ingredients, in the U.S. for the treatment of VVA and FSD. The transactions contemplated by the Endoceutics License Agreement closed on April 3, 2017. We accounted for the Endoceutics License Agreement as an asset acquisition under ASU 2017-01.
Upon the closing of the Endoceutics License Agreement, we made an upfront payment of $50.0 million and issued 600,000 shares of unregistered common stock to Endoceutics, which had a value of $13.5 million, as measured on April 3, 2017, the

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date of closing. In addition, we paid Endoceutics $10.0 million in the third quarter of 2017 upon the delivery by Endoceutics of Intrarosa launch quantities and $10.0 million in the second quarter of 2018 following the first anniversary of the closing. In the second quarter of 2017, we recorded a total of $83.5 million of consideration, of which $77.7 million was allocated to the Intrarosa developed technology intangible asset and $5.8 million was recorded as IPR&D expense based on their relative fair values.
In addition, we also pay tiered royalties to Endoceutics equal to a percentage of net sales of Intrarosa in the U.S. ranging from mid-teens for calendar year net sales up to $150.0 million to mid twenty percent for any calendar year net sales that exceed $1.0 billion for the commercial life of Intrarosa, with deductions (a) after the later of (i) the expiration date of the last to expire of a licensed patent containing a valid patent claim or (ii) ten years after the first commercial sale of Intrarosa for the treatment of VVA or FSD in the U.S. (as applicable), (b) for generic competition and (c) for third party payments, subject to an aggregate cap on such deductions of royalties otherwise payable to Endoceutics. Endoceutics is also eligible to receive certain sales milestone payments, including a first sales milestone payment of $15.0 million, which would be triggered when Intrarosa annual net U.S. sales exceed $150.0 million, and a second milestone payment of $30.0 million, which would be triggered when annual net U.S. sales of Intrarosa exceed $300.0 million. If annual net U.S. sales of Intrarosa exceed $500.0 million, there are additional sales milestone payments totaling up to $850.0 million, which would be triggered at various sales thresholds.
In the third quarter of 2017, Endoceutics initiated a clinical study to support an application for U.S. regulatory approval for Intrarosa for the treatment of HSDD in post-menopausal women. We and Endoceutics have agreed to share the direct costs related to such studies based upon a negotiated allocation with us funding up to $20.0 million. We may, with Endoceutics’ consent (not to be unreasonably withheld, conditioned or delayed), conduct any other studies of Intrarosa for the treatment of VVA and FSD anywhere in the world for the purpose of obtaining or maintaining regulatory approval of or commercializing Intrarosa for the treatment of VVA or FSD in the U.S. All data generated in connection with the above described studies would be owned by Endoceutics and licensed to us pursuant to the Endoceutics License Agreement.
We have the exclusive right to commercialize Intrarosa for the treatment of VVA and FSD in the U.S., subject to the terms of the Endoceutics License Agreement, including having final decision making authority with respect to commercial strategy, pricing and reimbursement and other commercialization matters. We have agreed to use commercially reasonable efforts to market, promote and otherwise commercialize Intrarosa for the treatment of VVA and, if approved, FSD in the U.S. Endoceutics has the right to directly conduct additional commercialization activities for Intrarosa for the treatment of VVA and FSD in the U.S. and has the right to conduct activities related generally to the field of intracrinology, in each case, subject to our review and approval and our right to withhold approval in certain instances. Each party’s commercialization activities and budget are described in a commercialization plan, which is updated annually.
In April 2017, we entered into an exclusive commercial supply agreement with Endoceutics pursuant to which Endoceutics, itself or through affiliates or contract manufacturers, agreed to manufacture and supply Intrarosa to us (the “Endoceutics Supply Agreement”) and will be our exclusive supplier of Intrarosa in the U.S., subject to certain rights for us to manufacture and supply Intrarosa in the event of a cessation notice or supply failure (as such terms are defined in the Endoceutics Supply Agreement). Under the Endoceutics Supply Agreement, Endoceutics has agreed to maintain at all times a second source supplier for the manufacture of DHEA and the drug product and to identify, validate and transfer manufacturing intellectual property to the second source supplier by April 2019. The Endoceutics Supply Agreement will remain in effect until the termination of the Endoceutics License Agreement, unless terminated earlier by either party for an uncured material breach or insolvency of the other party, or by us if we exercise our rights to manufacture and supply Intrarosa following a cessation notice or supply failure.
The Endoceutics License Agreement expires on the date of expiration of all royalty obligations due thereunder unless earlier terminated in accordance with the Endoceutics License Agreement.
Palatin
In January 2017, we entered into the Palatin License Agreement with Palatin under which we acquired (a) an exclusive license in all countries of North America (the “Palatin Territory”), with the right to grant sub-licenses, to research, develop and commercialize the Vyleesi Products, an investigational product designed to be a treatment for HSDD in pre-menopausal women, (b) a worldwide non-exclusive license, with the right to grant sub-licenses, to manufacture the Vyleesi Products, and (c) a non-exclusive license in all countries outside the Palatin Territory, with the right to grant sub-licenses, to research and develop (but not commercialize) the Vyleesi Products. The transaction closed in February 2017 and was accounted for as an asset acquisition under ASU 2017-01.
Under the terms of the Palatin License Agreement, in February 2017 we paid Palatin $60.0 million as a one-time upfront payment and subject to agreed-upon deductions reimbursed Palatin approximately $25.0 million for reasonable, documented, out-of-pocket expenses incurred by Palatin in connection with the development and regulatory activities necessary to submit an

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NDA in the U.S. for Vyleesi for the treatment of HSDD in pre-menopausal women. During 2017, we fulfilled these payment obligations to Palatin. The $60.0 million upfront payment made in February 2017 to Palatin was recorded as IPR&D expense as the product candidate had not received regulatory approval. In June 2018, our NDA submission to the FDA for Vyleesi was accepted, which triggered the payment of a $20.0 million milestone obligation, which we paid in the second quarter of 2018 and recorded as an IPR&D expense in the first quarter of 2018 when acceptance was deemed probable.
In addition, the Palatin License Agreement requires us to make contingent payments of (a) $60.0 million upon FDA approval of Vyleesi, and (b) up to $300.0 million of aggregate sales milestone payments upon the achievement of certain annual net sales milestones over the course of the license. The first sales milestone payment of $25.0 million will be triggered when Vyleesi annual net sales exceed $250.0 million. We are also obligated to pay Palatin tiered royalties on annual net sales in North America of the Vyleesi Products, on a product-by-product basis, in the Palatin Territory ranging from the high-single digits to the low double-digits. The royalties will expire on a product-by-product and country-by-country basis upon the latest to occur of (a) the earliest date on which there are no valid claims of Palatin patent rights covering such Vyleesi Product in such country, (b) the expiration of the regulatory exclusivity period for such Vyleesi Product in such country and (c) 10 years following the first commercial sale of such Vyleesi Product in such country. These royalties are subject to reduction in the event that: (a) we must license additional third-party intellectual property in order to develop, manufacture or commercialize a Vyleesi Product or (b) generic competition occurs with respect to a Vyleesi Product in a given country, subject to an aggregate cap on such deductions of royalties otherwise payable to Palatin. After the expiration of the applicable royalties for any Vyleesi Product in a given country, the license for such Vyleesi Product in such country would become a fully paid-up, royalty-free, perpetual and irrevocable license. The Palatin License Agreement expires on the date of expiration of all royalty obligations due thereunder, unless earlier terminated in accordance with the Palatin License Agreement.
R.     DEBT
Our outstanding debt obligations as of September 30, 2018 and December 31, 2017 consisted of the following (in thousands):
 
September 30, 2018
 
December 31, 2017
2023 Senior Notes
$

 
$
466,291

2022 Convertible Notes
258,376

 
248,194

2019 Convertible Notes
20,999

 
20,198

Total long-term debt
279,375

 
734,683

Less: current maturities
(20,999
)
 

Long-term debt, net of current maturities
$
258,376

 
$
734,683

 

2023 Senior Notes

In August 2015, in connection with the CBR acquisition, we completed a private placement of $500.0 million aggregate principal amount of 7.875% Senior Notes due 2023 (the “2023 Senior Notes”). The 2023 Senior Notes were issued pursuant to an Indenture, dated as of August 17, 2015 (the “Indenture”), by and among us, certain of our subsidiaries acting as guarantors of the 2023 Senior Notes and Wilmington Trust, National Association, as trustee. In October 2017, we repurchased $25.0 million of the 2023 Senior Notes in a privately negotiated transaction, resulting in a loss on extinguishment of debt of $1.1 million. In September 2018, we repurchased the remaining $475.0 million of the 2023 Senior Notes at a premium of $28.1 million using the proceeds from the CBR sale, which resulted in a loss on extinguishment of debt of $35.9 million, inclusive of the premium paid.

Convertible Notes
The outstanding balances of our Convertible Notes as of September 30, 2018 consisted of the following (in thousands):
 
2022 Convertible Notes
 
2019 Convertible Notes
 
Total
Liability component:
 

 
 
 
 

Principal
$
320,000

 
$
21,417

 
$
341,417

Less: debt discount and issuance costs, net
61,624

 
418

 
62,042

Net carrying amount
$
258,376

 
$
20,999

 
$
279,375

Equity Component
$
72,576

 
$
9,905

 
$
82,481


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In accordance with accounting guidance for debt with conversion and other options, we separately account for the liability and equity components of our Convertible Notes by allocating the proceeds between the liability component and the embedded conversion option (the “Equity Component”) due to our ability to settle the Convertible Notes in cash, common stock or a combination of cash and common stock, at our option. The carrying amount of the liability components was calculated by measuring the fair value of a similar liability that does not have an associated convertible feature. The allocation was performed in a manner that reflected our non-convertible debt borrowing rate for similar debt. The Equity Component of the Convertible Notes was recognized as a debt discount and represents the difference between the proceeds from the issuance of the Convertible Notes and the fair value of the liability of the Convertible Notes on their respective dates of issuance. The excess of the principal amount of the liability component over its carrying amount is amortized to interest expense using the effective interest method over five years. The Equity Component is not remeasured as long as it continues to meet the conditions for equity classification.
2022 Convertible Notes
In the second quarter of 2017, we issued $320.0 million aggregate principal amount of convertible senior notes due in 2022 (the “2022 Convertible Notes”) and received net proceeds of $310.4 million from the sale of the 2022 Convertible Notes, after deducting fees and expenses of $9.6 million. The approximate $9.6 million of debt issuance costs primarily consisted of underwriting, legal and other professional fees, and we allocated these costs to the liability and equity components based on the allocation of the proceeds. Of the total $9.6 million of debt issuance costs, $2.2 million was allocated to the Equity Component and recorded as a reduction to additional paid-in capital and $7.4 million was allocated to the liability component and is now recorded as a reduction of the 2022 Convertible Notes in our condensed consolidated balance sheets. The portion allocated to the liability component is amortized to interest expense using the effective interest method over five years.
The 2022 Convertible Notes are governed by the terms of an indenture between us, as issuer, and Wilmington Trust, National Association, as the trustee. The 2022 Convertible Notes are senior unsecured obligations and bear interest at a rate of 3.25% per year, payable semi-annually in arrears on June 1 and December 1 of each year, beginning on December 1, 2017. The 2022 Convertible Notes will mature on June 1, 2022, unless earlier repurchased or converted. Upon conversion of the 2022 Convertible Notes, such 2022 Convertible Notes will be convertible into, at our election, cash, shares of our common stock, or a combination thereof, at a conversion rate of 36.5464 shares of common stock per $1,000 principal amount of the 2022 Convertible Notes, which corresponds to an initial conversion price of approximately $27.36 per share of our common stock.
The conversion rate is subject to adjustment from time to time upon the occurrence of certain events, including, but not limited to, the issuance of stock dividends and payment of cash dividends. At any time prior to the close of business on the business day immediately preceding March 1, 2022, holders may convert their 2022 Convertible Notes at their option only under the following circumstances:
1)
during any calendar quarter (and only during such calendar quarter), if the last reported sale price of our common stock for at least 20 trading days (whether or not consecutive) during a period of 30 consecutive trading days ending on the last trading day of the immediately preceding calendar quarter is greater than or equal to 130% of the conversion price on each applicable trading day;
2)
during the five business day period after any five consecutive trading day period (the “measurement period”) in which the trading price per $1,000 principal amount of the 2022 Convertible Notes for each trading day of the measurement period was less than 98% of the product of the last reported sale price of our common stock and the conversion rate on each such trading day; or
3)
upon the occurrence of specified corporate events.
On or after March 1, 2022, until the close of business on the business day immediately preceding the maturity date, holders may convert all or any portion of their 2022 Convertible Notes, in multiples of $1,000 principal amount, at the option of the holder regardless of the foregoing circumstances. The 2022 Convertible Notes were not convertible as of September 30, 2018.
We determined the expected life of the debt was equal to the five-year term on the 2022 Convertible Notes. The effective interest rate on the liability component was 9.49% for the period from the date of issuance through September 30, 2018. As of September 30, 2018, the “if-converted value” did not exceed the remaining principal amount of the 2022 Convertible Notes.

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2019 Convertible Notes
In February 2014, we issued $200.0 million aggregate principal amount of the 2019 Convertible Notes. We received net proceeds of $193.3 million from the sale of the 2019 Convertible Notes, after deducting fees and expenses of $6.7 million. We used $14.1 million of the net proceeds from the sale of the 2019 Convertible Notes to pay the cost of the convertible bond hedges, as described below (after such cost was partially offset by the proceeds to us from the sale of warrants in the warrant transactions described below). In May 2017 and September 2017, we entered into privately negotiated transactions with certain investors to repurchase approximately $158.9 million and $19.6 million, respectively, aggregate principal amount of the 2019 Convertible Notes for an aggregate repurchase price of approximately $171.3 million and $21.4 million, respectively, including accrued interest. Pursuant to ASC Topic 470, Debt, the accounting for the May 2017 repurchase of the 2019 Convertible Notes was evaluated on a creditor-by-creditor basis with regard to the 2022 Convertible Notes to determine modification versus extinguishment accounting. We concluded that the May 2017 repurchase of the 2019 Convertible Notes should be accounted for as an extinguishment and we recorded a debt extinguishment gain of $0.2 million related to the difference between the consideration paid, the fair value of the liability component and carrying values at the repurchase date. As a result of the September 2017 repurchase of the 2019 Convertible Notes, we recorded a debt extinguishment loss of $0.3 million related to the difference between the consideration paid, the fair value of the liability component and carrying value at the repurchase date.
The 2019 Convertible Notes are governed by the terms of an indenture between us, as issuer, and Wilmington Trust, National Association, as the trustee. The 2019 Convertible Notes are senior unsecured obligations and bear interest at a rate of 2.5% per year, payable semi-annually in arrears on February 15 and August 15 of each year. The 2019 Convertible Notes will mature on February 15, 2019 unless earlier repurchased or converted. Upon conversion of the remaining 2019 Convertible Notes, such 2019 Convertible Notes will be convertible into, at our election, cash, shares of our common stock, or a combination thereof, at a conversion rate of 36.9079 shares of common stock per $1,000 principal amount of the 2019 Convertible Notes, which corresponds to an initial conversion price of approximately $27.09 per share of our common stock.
The conversion rate is subject to adjustment from time to time upon the occurrence of certain events, including, but not limited to, the issuance of stock dividends and payment of cash dividends. Beginning on or after May 15, 2018 until the close of business on the second scheduled trading day immediately preceding the maturity date, holders may convert all or any portion of their 2019 Convertible Notes, in multiples of $1,000 principal amount, at the option of the holder. The 2019 Convertible Notes were convertible as of September 30, 2018.
We determined the expected life of the debt was equal to the five-year term of the 2019 Convertible Notes. The effective interest rate on the liability component was 7.79% for the period from the date of issuance through September 30, 2018. As of September 30, 2018, the “if-converted value” did not exceed the remaining principal amount of the 2019 Convertible Notes.
Convertible Notes Interest Expense
The following table sets forth total interest expense recognized related to the Convertible Notes during the three and nine months ended September 30, 2018 and 2017 (in thousands):
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2018
 
2017
 
2018
 
2017
Contractual interest expense