Document
0.250.33P3YP3YP1YP6YAMAG Pharmaceuticals, Inc (the “Company” or “we”) is filing this Amendment No. 1 on Form 10-K/A (this “Amendment”) to amend and restate certain items in its Annual Report on Form 10-K for the year ended December 31, 2019, originally filed with the U.S. Securities and Exchange Commission (the “SEC”) on March 6, 2020 (the “Original 10-K”). The Company identified immaterial errors in its previously reported revenue over the impacted annual periods of 2016 through 2019 and, in connection therewith, the Company’s management identified a material weakness in our internal control over financial reporting (“ICFR”) related to ensuring the timely recognition of our gross-to-net adjustments for certain governmental rebates and the related accruals. Accordingly, this Amendment is being filed to amend Item 6, Selected Financial Data, Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, Item 8, Financial Statements and Supplementary Data, and Item 9A, Controls and Procedures, of Part II of the Original 10-K and restate the financial statements and related notes to reflect the immaterial errors identified, Management’s Annual Report on Internal Control Over Financial Reporting, management’s assessment of the effectiveness of our disclosure controls and procedures and PwC’s Report of Independent Registered Public Accounting Firm on the Company’s internal control over financial 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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
____________________ ______
FORM 10-K/A
Amendment No. 1
(Mark One)
 
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 2019
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
https://cdn.kscope.io/816d660eb28d377aaf3a85091a04775a-amag_rgba03.jpg
AMAG PHARMACEUTICALS, INC.
(Exact Name of Registrant as Specified in Its Charter)
Delaware
04-2742593
(State or Other Jurisdiction of
Incorporation or Organization)
(I.R.S. Employer
Identification No.)
1100 Winter Street,
Waltham,
Massachusetts
02451
(Address of Principal Executive Offices)
(Zip Code)
(617498-3300
(Registrant’s Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the Act:
 
 
 
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Common Stock, par value $0.01 per share
Preferred Share Purchase Rights
AMAG
NASDAQ Global Select Market
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes No  
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes No 
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 the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
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  
The aggregate market value of the registrant’s voting stock held by non-affiliates as of June 28, 2019 was approximately $335.0 million based on the closing price of $9.99 of the Common Stock of the registrant as reported on the NASDAQ Global Select Market on such date. As of March 2, 2020, there were 34,265,738 shares of the registrant’s Common Stock, par value $0.01 per share, outstanding.





EXPLANATORY NOTE

AMAG Pharmaceuticals, Inc (the “Company” or “we”) is filing this Amendment No. 1 on Form 10-K/A (this “Amendment”) to amend and restate certain items in its Annual Report on Form 10-K for the year ended December 31, 2019, originally filed with the U.S. Securities and Exchange Commission (the “SEC”) on March 6, 2020 (the “Original 10-K”).

As previously disclosed, including in the Company’s Current Report on Form 8-K filed with the SEC on August 17, 2020, the Company identified immaterial errors in its previously reported revenue for Makena® (hydroxyprogesterone caproate injection) that overstated revenues by approximately $6.3 million in the aggregate over the impacted annual periods of 2016 through 2019 and understated revenue as previously reported in the three month period ended March 31, 2020 by approximately $1.8 million and, in connection therewith, the Company’s management identified a material weakness in its internal control over financial reporting (“ICFR”) related to ensuring the timely recognition of its gross-to-net adjustments for certain governmental rebates and the related accruals. Specifically, the Company did not design and maintain controls to allow for an effective review of disputed claims related to certain government rebate arrangements, where the decision had been made to initially not record and accrue for such items, to assess whether and when the need to record an accrual is required for such claims. Also, as previously disclosed, management determined that its report regarding the effectiveness of the Company’s ICFR contained in the Original 10-K, and PricewaterhouseCoopers LLP (“PwC”), the Company’s independent registered accounting firm as of December 31, 2019, have determined its opinion relating to the effectiveness of the Company’s ICFR as of December 31, 2019 included in the Original 10-K, should not be relied upon.

Accordingly, this Amendment is being filed to amend Item 6, Selected Financial Data, Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, Item 8, Financial Statements and Supplementary Data, and Item 9A, Controls and Procedures, of Part II of the Original 10-K and to revise the financial statements and related notes to reflect the correction of the immaterial errors identified, and to restate Management’s Annual Report on Internal Control Over Financial Reporting, management’s assessment of the effectiveness of our disclosure controls and procedures and PwC’s Report of Independent Registered Public Accounting Firm on the Company’s internal control over financial reporting. Additionally, in accordance with Rule 12b-15 under the Securities Exchange Act of 1934, as amended, the Company is including with this Amendment currently dated certifications as Exhibits 31.1, 31.2, 32.1 and 32.2 and Item 15 of Part IV of the Original 10-K is accordingly replaced with the Item 15 included herein.

Except as described above, this Amendment does not amend, update or change any other disclosures in the Original Form 10-K. In addition, the information contained in this Amendment does not reflect events occurring after the filing of the Original 10-K and does not modify or update the disclosures therein, except as specifically identified above. Significant developments with respect to those disclosures, as well as other changes in and risks to our business, have occurred and are described in filings we have made with the SEC subsequent to filing the Original 10-K, including our Quarterly Report on Form 10-Q for the three and six months ended June 30, 2020, which further describes the impact of the material weakness. Accordingly, this Amendment should be read in conjunction with the Company’s filings made with the SEC subsequent to the filing of the Original 10-K, including the information contained under the heading “Risk Factors,” or otherwise identified as risks to the Company and its operations, in such filings.




AMAG PHARMACEUTICALS, INC.
FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 2019
TABLE OF CONTENTS




PART II
 
ITEM 6. SELECTED FINANCIAL DATA:
The following table sets forth selected financial data as of and for the years ended December 31, 2019, 2018, 2017, 2016 and 2015. The selected financial data set forth below has been derived from our audited financial statements. This information should be read in conjunction with the financial statements and the related notes thereto included in Part II, Item 8 of this Annual Report on Form 10-K/A and Management’s Discussion and Analysis of Financial Condition and Results of Operations included in Part II, Item 7 of this Annual Report on Form 10-K/A. Our consolidated financial statements as of December 31, 2019 and 2018, and for the years ended December 31, 2019, 2018 and 2017, have been revised to correct prior period errors as discussed in Note X, “Revision of Prior Period Financial Statements” to our consolidated financial statements included in this Annual Report on Form 10-K/A. Accordingly, this selected financial data reflects the impact of those revisions. The tables below are also revised to reflect the correction of the related immaterial prior period errors as of and for the year ended December 31, 2016. There was no impact to 2015 as a result of these prior period errors.
 
Years Ended December 31,
 
2019
 
2018
 
2017
 
2016
 
2015
 
(in thousands, except per share data)
Statements of Operations Data
 
 
 
 
 
 
 
 
 
Continuing Operations:
 
 
 
 
 
 
 
 
 
Revenues:
 
 
 
 
 
 
 
 
 
Product sales, net
$
309,985

 
$
471,898

 
$
493,843

 
$
430,828

 
$
341,816

Collaboration revenue (1)
16,400

 

 

 

 
51,050

Other revenues
161

 
150

 
124

 
317

 
1,278

Total revenues
326,546

 
472,048

 
493,967

 
431,145

 
394,144

Costs and expenses:
 
 
 
 
 
 
 
 
 
Cost of product sales (2)
107,193

 
215,892

 
161,349

 
96,314

 
78,509

Research and development expenses
64,853

 
44,846

 
75,017

 
65,561

 
42,710

Acquired in-process research and development (3)
74,856

 
32,500

 
65,845

 

 

Selling, general and administrative expenses (4)
286,600

 
227,810

 
178,151

 
169,468

 
131,127

Impairment of assets (5)
232,336

 

 
319,246

 
15,724

 

Acquisition-related costs

 

 

 

 
11,232

Restructuring expenses
7,420

 

 

 
341

 
2,274

Total costs and expenses
773,258

 
521,048

 
799,608

 
347,408

 
265,852

Operating (loss) income
(446,712
)
 
(49,000
)
 
(305,641
)
 
83,737

 
128,292

Other income (expense):
 
 
 
 
 
 
 
 
 
Interest expense
(25,709
)
 
(51,971
)
 
(68,382
)
 
(73,153
)
 
(53,251
)
Loss on debt extinguishment (6)

 
(35,922
)
 
(10,926
)
 

 
(10,449
)
Interest and dividend income
4,285

 
5,328

 
2,810

 
3,149

 
1,501

Other income (expense)
428

 
(74
)
 
(70
)
 
189

 
(9,173
)
Total other expense
(20,996
)
 
(82,639
)
 
(76,568
)
 
(69,815
)
 
(71,372
)
(Loss) income from continuing operations before income taxes
(467,708
)
 
(131,639
)
 
(382,209
)
 
13,922

 
56,920

Income tax (benefit) expense (7)
(47
)
 
40,436

 
(175,521
)
 
12,656

 
12,764

Net (loss) income from continuing operations
$
(467,661
)
 
$
(172,075
)
 
$
(206,688
)
 
$
1,266

 
$
44,156

 
 
 
 
 
 
 
 
 
 
Discontinued operations:
 
 
 
 
 
 
 
 
 
Income (loss) from discontinued operations
$

 
$
18,873

 
$
10,313

 
$
(6,209
)
 
$
(17,076
)
Gain on sale of CBR business

 
87,076

 

 

 

Income tax expense (benefit)

 
2,371

 
4,388

 
(1,633
)
 
(5,699
)
Net income (loss) from discontinued operations
$

 
$
103,578

 
$
5,925

 
$
(4,576
)
 
$
(11,377
)

4




 
 
 
 
 
 
 
 
 
 
Net (loss) income
$
(467,661
)
 
$
(68,497
)
 
$
(200,763
)
 
$
(3,310
)
 
$
32,779

 
 
 
 
 
 
 
 
 
 
Basic earnings per share:
 

 
 

 
 

 
 
 
 
(Loss) income from continuing operations
$
(13.74
)
 
$
(5.00
)
 
$
(5.92
)
 
$
0.04

 
$
1.40

Income (loss) from discontinued operations

 
3.01

 
0.17

 
(0.13
)
 
(0.36
)
Total
$
(13.74
)
 
$
(1.99
)
 
$
(5.75
)
 
$
(0.09
)
 
$
1.04

 
 
 
 
 
 
 
 
 
 
Diluted earnings per share:
 
 
 
 
 
 
 
 
 
(Loss) income from continuing operations
$
(13.74
)
 
$
(5.00
)
 
$
(5.92
)
 
$
0.04

 
$
1.25

Income (loss) from discontinued operations

 
3.01

 
0.17

 
(0.13
)
 
(0.32
)
Total
$
(13.74
)
 
$
(1.99
)
 
$
(5.75
)
 
$
(0.09
)
 
$
0.93

 
 
 
 
 
 
 
 
 
 
Weighted average shares outstanding used to compute earnings per share:
 

 
 

 
 

 
 

 
 

Basic
34,030

 
34,394

 
34,907

 
34,346

 
31,471

Diluted
34,030

 
34,394

 
34,907

 
34,833

 
35,308

 
December 31,
 
2019
 
2018
 
2017
 
2016
 
2015
Balance Sheet Data
    
    
    
    
    
    
    
    
    
Cash, cash equivalents and marketable securities
$
171,751

 
$
394,171

 
$
299,448

 
$
527,130

 
$
456,359

Working capital (current assets less current liabilities)
$
102,070

 
$
354,628

 
$
201,006

 
$
404,339

 
$
360,753

Total assets (8)
$
791,227

 
$
1,175,459

 
$
1,901,138

 
$
2,478,426

 
$
2,476,210

Long-term liabilities (9)
$
296,914

 
$
263,360

 
$
832,394

 
$
1,230,645

 
$
1,298,025

Stockholders’ equity
$
279,816

 
$
741,557

 
$
787,882

 
$
933,562

 
$
932,264

________________________

(1) 
In 2019, we recognized $16.4 million in collaboration revenue associated with the termination of a clinical trial collaboration agreement with a pharmaceutical company that we acquired in connection with the Perosphere transaction. In 2015, we recognized $44.4 million in revenues associated with the amortization of the then remaining deferred revenue balance as a result of the termination of a license, development and commercialization agreement (the “Takeda Termination Agreement) with Takeda Pharmaceutical Company Limited (“Takeda) and $6.7 million of additional revenues related to payments made by Takeda upon the final termination date under the terms of the Takeda Termination Agreement.

(2) 
Cost of product sales in 2019, 2018, 2017, 2016, and 2015 included approximately $24.8 million, $158.4 million, $130.4 million, $77.8 million, and $63.3 million, respectively, of non-cash expense related to the amortization of intangible assets and the step-up of Lumara Health’s inventories at the acquisition date.

(3) 
2019 reflects $74.9 million related to our acquisition of Perosphere. 2018 reflects $12.5 million paid in connection with our acquisition of AMAG-423 and $20.0 million paid to Palatin upon FDA acceptance of the Vyleesi NDA. 2017 reflects $65.8 million related to a $60.0 million one-time upfront payment under the terms of the Palatin License Agreement and $5.8 million, which represented a portion of the consideration recorded in 2017 under the terms of the Endoceutics License Agreement.

(4) 
2019, 2018 and 2017 reflect increases driven by organizational growth associated with significant launch activities for multiple products and costs related to the commercialization of Intrarosa and Vyleesi. 2016 reflects an increase in the Makena-related contingent consideration based on the expected timing of milestone payments.

(5) 
In 2019, we recognized $232.3 million of charges related to the impairments of the asset groups containing the Makena base technology, Makena auto-injector developed technology, Intrarosa developed technology and Vyleesi developed technology driven by (i) the discontinuation of the Makena IM products, (ii) the unfavorable FDA Advisory Committee

5




recommendation for Makena and (iii) our intention to divest Intrarosa and Vyleesi based on the strategic review that we conducted. In 2017, we recognized a $319.2 million impairment charge related to the Makena base technology intangible asset. In 2016, we recognized $15.7 million of charges related to the impairment of the remaining net intangible asset related to MuGard.

(6) 
Reflects $35.9 million, $10.9 million and $10.4 million loss on debt extinguishment in 2018, 2017 and 2015, respectively, due to the early redemption of a $500.0 million aggregate principal amount of 7.875% Senior Notes due 2023 (the “2023 Senior Notes”), the early repayment of a 2015 term loan facility and the early repayment of a 2014 term loan facility, respectively.

(7) 
The $175.5 million income tax benefit in 2017 was primarily driven by the deferred tax benefit related to the Makena base technology intangible asset impairment and amortization.

(8) 
Reflects the impact of aggregate asset impairment charges of $232.3 million in 2019, the sale of the Cord Blood Registry business in 2018 and the $319.2 million impairment charge related to the Makena base technology intangible asset in 2017.

(9) 
Long-term liabilities decreased in 2018 and 2017 primarily due to the repayment of our 2023 Senior Notes and 2015 term loan facility, respectively.

ITEM 7.  
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS:

Overview

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 by leveraging our development and commercial expertise to invest in and grow our pharmaceutical products and product candidates across a range of therapeutic areas. Our currently marketed products support the health of patients in the areas of hematology and maternal and women’s health, including Feraheme® (ferumoxytol injection) for intravenous (“IV”) use, Makena® (hydroxyprogesterone caproate injection) auto-injector, Intrarosa® (prasterone) vaginal inserts and Vyleesi®(bremelanotide injection). In addition to our approved products, our portfolio includes two product candidates, AMAG-423 (digoxin immune fab (ovine)), which is being studied for the treatment of severe preeclampsia, and ciraparantag, which is being studied as an anticoagulant reversal agent.

In January 2020, we announced that we had recently completed a review of our product portfolio and strategy with the objective of driving near- and long-term profitability and enhancing shareholder value. Based on this strategic review, we are currently pursuing options to divest Intrarosa and Vyleesi. In addition, we announced that William Heiden will be stepping down as our President and Chief Executive Officer. We expect that Mr. Heiden will remain at the company until the Board of Directors (the “Board”) appoints a new Chief Executive Officer.

We intend to continue to expand the impact of our current and future products for patients by delivering on our growth strategy, which includes collaborating on and acquiring promising therapies at various stages of development, and advancing them through the clinical and regulatory process to deliver new treatment options to patients. Our primary sources of revenue in 2019 were from sales of Feraheme, Makena and Intrarosa. Except as otherwise stated below, the following discussions of our results of operations reflect the results of our continuing operations, excluding the results related to the Cord Blood Registry (the “CBR business”), which we sold in August 2018. The CBR business has been separated from continuing operations and reflected as a discontinued operation. See Note C, “Discontinued Operations,” to our consolidated financial statements included in this Annual Report on Form 10-K.

The consolidated financial statements as of December 31, 2019 and 2018, and for the years ended December 31, 2019, 2018 and 2017 have been revised to correct prior period errors as discussed in Note X, “Revision of Prior Period Financial Statements” to our consolidated financial statements included in this Annual Report on Form 10-K/A. Accordingly, Management’s Discussion and Analysis reflects the impact of those revisions.

AMAG’s Portfolio of Products and Product Candidates

Feraheme

Feraheme received approval from the U.S. Food and Drug Administration (the “FDA”) in June 2009 for use as an IV iron replacement therapy for the treatment of iron deficiency anemia (“IDA”) in adult patients with chronic kidney disease (“CKD”). In February 2018, the FDA approved the supplemental New Drug Application to expand the Feraheme label to

6




include all eligible adult IDA patients who have intolerance to oral iron or have had unsatisfactory response to oral iron in addition to patients who have CKD. IDA is prevalent in many different patient populations, such as patients with CKD, gastrointestinal diseases or disorders, inflammatory diseases, and chemotherapy-induced anemia. For many of these patients, treatment with oral iron is unsatisfactory or is not tolerated. It is estimated that approximately five million people in the U.S. have IDA and we estimate that a small fraction of the patients who are diagnosed with IDA regardless of the underlying cause are currently being treated with IV iron.

The expanded Feraheme label was supported by two positive pivotal Phase 3 trials, which evaluated Feraheme versus iron sucrose or placebo in a broad population of patients with IDA and positive results from a third Phase 3 randomized, double-blind non-inferiority trial that evaluated the incidence of moderate-to-severe hypersensitivity reactions (including anaphylaxis) and moderate-to-severe hypotension with Feraheme compared to Injectafer® (ferric carboxymaltose injection) (the “Feraheme comparator trial”). The Feraheme comparator trial demonstrated comparability to Injectafer® based on the primary composite endpoint of the incidence of moderate-to-severe hypersensitivity reactions (including anaphylaxis) and moderate-to-severe hypotension (Feraheme incidence 0.6%; Injectafer® incidence 0.7%). Adverse event rates were similar across both treatment groups; however, the incidence of severe hypophosphatemia (defined by blood phosphorous of <0.2 mg/dl at week 2) was less in the patients receiving Feraheme (0.4% of patients) compared to those receiving Injectafer® (38.7% of patients).

Makena

We acquired the rights to Makena in connection with our acquisition of Lumara Health Inc. (“Lumara Health”) in November 2014. Makena is indicated to reduce the risk of preterm birth in women pregnant with a single baby who have a history of singleton spontaneous preterm birth.

Makena was approved by the FDA in February 2011 as an intramuscular (“IM”) injection (the “Makena IM product”) packaged in a multi-dose vial and in February 2016 as a single-dose preservative-free vial. In February 2018, the Makena auto-injector was approved by the FDA for administration via a pre-filled subcutaneous auto-injector, a drug-device combination product (the “Makena auto-injector”). In mid-2018, we launched our own authorized generic of both the single- and multi-dose vials (the “Makena authorized generic”) through Prasco, LLC (“Prasco”). As previously disclosed, based on manufacturing challenges and increased generic competition we no longer offer a branded IM product of Makena and in August 2019 we and Prasco determined it was not commercially viable to continue the relationship and mutually terminated our distribution and supply agreement, such that we no longer offer the Makena authorized generic. Further, as a result of the loss of substantial market share for the Makena IM product, in the second quarter of 2019 we revised our long-term Makena IM products forecast resulting in the recording of significant impairment charges related to the Makena IM products, as discussed in Note I, “Goodwill and Intangible Assets, Net” to the consolidated financial statements included in this annual report on Form 10-K.

In March 2019, we announced topline results from the Progestin’s Role in Optimizing Neonatal Gestation clinical trial (“PROLONG” or “Trial 003”), a randomized, double-blinded, placebo-controlled clinical trial evaluating Makena in patients with a history of a prior spontaneous singleton preterm delivery. The PROLONG trial was conducted under the FDA’s “Subpart H” accelerated approval process. The approval of Makena was based primarily on the Meis trial (“Trial 002”), which was conducted by the Maternal-Fetal Medicine Units Network, sponsored by the National Institute of Child Health and Human Development. In contrast to the Meis trial, the PROLONG trial did not demonstrate a statistically significant difference between the treatment and placebo arms for the co-primary endpoints: the incidence of preterm delivery at less than 35 weeks (Makena treated group 11.0% vs. placebo 11.5%) and the percentage of patients who met criteria for the pre-specified neonatal morbidity and mortality composite index (Makena treated group 5.6% vs. placebo 5.0%). The adverse event profile between the two arms was comparable. Adverse events of special interest, including miscarriage and stillbirth, were infrequent and similar between the treatment and placebo groups. The PROLONG trial enrolled 1,708 pregnant women, over 75% of whom were enrolled outside the U.S.

On October 29, 2019, the FDA’s Bone, Reproductive and Urologic Drugs Advisory Committee (the “Advisory Committee”) met to discuss the results of the PROLONG trial to inform the FDA’s regulatory decision for Makena. Following various presentations by experts and discussions at the meeting, the Advisory Committee voted as follows: (a) in response to the question “Do the findings from Trial 003 verify the clinical benefits of Makena on neonatal outcomes?”, 16 members voted “No” and no members voted “Yes”; (b) in response to the question “Based on the findings from Trial 002 and Trial 003, is there substantial evidence of effectiveness of Makena in reducing the risk of recurrent preterm birth?”, 13 members voted “No” and three members voted “Yes”; and (c) in response to the question, “Should the FDA (A) pursue withdrawal of approval for Makena, (B) leave Makena on the market under accelerated approval and require a new confirmatory trial, or (C) leave Makena on the market without requiring a new confirmatory trial?”, nine members voted for (A), seven members voted for (B) and no members voted for (C). The FDA is not required to follow the recommendations of its Advisory Committees but will take them into consideration in deciding what regulatory steps to take with respect to Makena. During the fourth quarter of 2019, we

7




reassessed the fair value of assets related to the Makena auto-injector following the Advisory Committee meeting and recorded significant impairment charges, as discussed in Note I, “Goodwill and Intangible Assets, Net” to the consolidated financial statements included in this annual report on Form 10-K.

This complex and unique situation has no clear precedent and it is therefore difficult to predict outcomes or timing of any FDA actions with respect to Makena. We remain committed to working collaboratively with the FDA to seek a path forward to ensure eligible pregnant women continue to have access to Makena and the currently approved generics that rely on Makena as the innovator drug.

AMAG-423

In September 2018, we acquired the global rights to AMAG-423 for the treatment of preeclampsia and eclampsia in antepartum and postpartum women pursuant to an option agreement entered into in July 2015 (the “Velo Agreement”) with Velo Bio, LLC, a privately-held life sciences company (“Velo”). AMAG-423 is an antibody fragment currently in development for the treatment of severe preeclampsia in pregnant women and has been granted both orphan drug and Fast Track designations by the FDA. AMAG-423 is intended to bind to endogenous digitalis-like factors (“EDLFs”) and remove them from the circulation. EDLFs appear to be elevated in preeclampsia and may play an important role in the pathogenesis of preeclampsia though their inhibitory actions on Na+/K+-ATPase (the sodium pump). By decreasing circulating EDLFs, AMAG-423 is believed to improve vascular endothelial function and lead to better post-delivery outcomes in affected mothers and their babies.

We are currently conducting a multi-center, randomized, double-blind, placebo-controlled, parallel-group Phase 2b/3a study in which we expect to enroll approximately 200 antepartum women with severe preeclampsia between 23 weeks and 0 days and 31 weeks and six days gestation. The study is enrolling at sites both within the U.S. and outside of the U.S. Participants in the study receive either AMAG-423 or placebo intravenously four times a day over a maximum of four days. The study’s primary endpoint is to demonstrate a reduction in the percentage of babies who develop severe intraventricular hemorrhage (bleeding in the brain), necrotizing enterocolitis (severe inflammation of the infant bowels) or death by 36 weeks corrected gestational age between the AMAG-423 and placebo arms. Secondary endpoints include the change from baseline in maternal creatinine clearance, maternal incidence of pulmonary edema during treatment and the period of time between treatment and delivery. In addition to these endpoints, information on both maternal as well as neonatal outcomes and complications related to preeclampsia and/or prematurity will be collected and analyzed. Severe preeclampsia presents challenges to enrollment as it is an extremely complex and dynamic condition; oftentimes, the patient needs be scheduled for immediate delivery. While we continue to work to obtain the necessary country approvals, opening new sites as well as implementing and optimizing strategies to enhance enrollment, the serious nature of the condition under study and the characteristics of the patient population make it difficult for us to predict the timing of enrollment completion.
 
Ciraparantag
 
In January 2019, we acquired ciraparantag with our acquisition of Perosphere Pharmaceuticals Inc. (“Perosphere”), a privately-held biopharmaceutical company pursuant to an Agreement and Plan of Merger (the “Perosphere Agreement”). Ciraparantag is a small molecule anticoagulant reversal agent in development as a single dose solution that is delivered intravenously to reverse the effects of certain novel oral anticoagulants (“NOACs”) (Xarelto®(rivaroxaban), Eliquis®(apixaban), and Savaysa®(edoxaban)) as well as Lovenox® (enoxaparin sodium injection), a low molecular weight heparin (“LMWH”) when reversal of the anticoagulant effect of these products is needed for emergency surgery, urgent procedures or due to life-threatening or uncontrolled bleeding. Ciraparantag has been granted Fast Track designation by the FDA.

Ciraparantag has been evaluated in more than 250 healthy volunteers across seven clinical trials. A first in human Phase 1 study evaluated the safety, tolerability, pharmacokinetic, and pharmacodynamic effects of ciraparantag alone and following a single dose of Savaysa®, and another Phase 1 study evaluated the overall metabolism of the drug. Two Phase 2a studies evaluated the safety, tolerability, pharmacokinetic, and pharmacodynamic effects related to the reversal of unfractionated heparin and Lovenox® and three Phase 2b randomized, single-blind, placebo-controlled dose-ranging studies evaluated the reversal of Savaysa®, Eliquis®, and Xarelto® to assess the safety and efficacy of ciraparantag, each of which included 12 subjects dosed with ciraparantag. In these Phase 2b clinical trials, ciraparantag or placebo was administered to healthy volunteers in a blinded fashion after achieving steady blood concentrations of the respective anticoagulant. Pharmacodynamic assessments of whole blood clotting time (“WBCT”), an important laboratory measure of clotting capacity, were sampled frequently for the first hour post study drug dose, and then periodically thereafter out to 24 hours post administration of study drug. Key endpoints in the Phase 2 trials included mean change from baseline in WBCT and the proportion of subjects that returned to within 10% of their baseline WBCT. Subjects in these studies experienced a rapid and statistically significant (p<0.001) reduction in WBCT compared to placebo as early as 15 minutes after the administration of ciraparantag in each of

8




the four studies and the effect was sustained for 24 hours. Moreover, in both the Eliquis® and Xarelto® studies, 100% of subjects in the highest dose cohorts (180 mg of ciraparantag) were responders, as defined by a return to within 10% of baseline WBCT within 30 minutes and sustained for at least six hours. Ciraparantag has been well tolerated in clinical trials, with the most common related adverse events to date being mild sensations of coolness, warmth or tingling, skin flushing, and alterations in taste. There have been no drug-related serious adverse events to date.

We are planning to conduct a clinical study in healthy volunteers to confirm the proposed dose of ciraparantag to be used in the Phase 3 program, after reaching peak steady state blood concentrations of certain NOAC drugs. This proposed study will utilize an automated coagulometer developed by Perosphere Technologies, Inc. (“Perosphere Technologies”), an independent company, to measure WBCT. An investigational device exemption, which Perosphere Technologies will submit once the design of the healthy volunteer study is finalized, is required for use of the coagulometer in clinical studies. Over the past several months, Perosphere Technologies has completed additional analytic studies and we have continued to work with the FDA on the design of this next clinical study. Following the completion of this study, we plan to schedule an End of Phase 2 meeting with the FDA to discuss the design of the Phase 3 program to evaluate the safety and efficacy of ciraparantag in the target patient population. We currently expect enrollment in the healthy volunteer study to be completed by the end of 2020, assuming our proposed protocol is acceptable to the FDA and that additional dose exploration is not needed.

In December 2019, we entered into a termination and settlement agreement with Daiichi Sankyo, Inc. to terminate a clinical trial collaboration agreement we acquired in connection with the Perosphere transaction. Under the terms of the settlement agreement, we received $10.0 million in December 2019 as a termination payment from Daiichi Sankyo, Inc. In 2019, we also recognized $6.4 million of deferred revenue that we acquired from Perosphere related to the original agreement.

Products to be Divested

In January 2020, following a review of our product portfolio and strategy, we announced that we would be pursuing options to divest Intrarosa and Vyleesi from our product portfolio.

Intrarosa

In February 2017, we entered into a license agreement (the “Endoceutics License Agreement”) with Endoceutics, Inc. (“Endoceutics”) pursuant to which Endoceutics granted us the U.S. rights to Intrarosa, an FDA-approved product for the treatment of moderate to severe dyspareunia (pain during sexual intercourse), a symptom of vulvar and vaginal atrophy (“VVA”), due to menopause. Intrarosa was approved by the FDA in November 2016 and was launched commercially in July 2017. Intrarosa is the only FDA-approved vaginal non-estrogen treatment indicated for the treatment of moderate to severe dyspareunia, a symptom of VVA, due to menopause. Intrarosa contains prasterone, a synthetic form of dehydroepiandrosterone, which is an inactive endogenous (i.e. occurring in the body) sex steroid. The mechanism of action of Intrarosa is not fully established. Intrarosa is contraindicated in women with undiagnosed abnormal genital bleeding and its label contains a precaution that it has not been studied in women with a history of breast cancer.

Vyleesi

We acquired the exclusive rights to commercialize Vyleesi in certain territories in January 2017 pursuant to a license agreement (the “Palatin License Agreement”) entered into with Palatin Technologies, Inc. (“Palatin”). On June 21, 2019, the FDA approved Vyleesi for the treatment of acquired, generalized HSDD in premenopausal women, and Vyleesi became commercially available in the U.S. in September 2019 through specialty pharmacies. Based on the June 2019 approval, we made a $60.0 million milestone payment to Palatin in July 2019, which we recorded as an intangible asset.

Vyleesi, a melanocortin receptor agonist, is an “as needed” therapy used in anticipation of sexual activity and self-administered by premenopausal women with HSDD in the thigh or abdomen via a single-use subcutaneous auto-injector. The most common adverse events are nausea, flushing, injection site reactions, headache and vomiting. Vyleesi is contraindicated in women with uncontrolled hypertension or known cardiovascular disease. In addition, the Vyleesi label includes precautions that it may cause (i) small, transient increases in blood pressure with a corresponding decrease in heart rate; (ii) focal hyperpigmentation (darkening of the skin on certain parts of the body), including the face, gums (gingiva) and breasts; and (iii) nausea.

Critical Accounting Policies

Our management’s discussion and analysis of our financial condition and results of operations is based on our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the U.S. (“GAAP”). The preparation of these financial statements requires management to make certain estimates and assumptions that affect the reported amount of assets, liabilities, revenues and expenses, and the related disclosure of contingent liabilities. Actual results could differ materially from those estimates. Management employs the following critical accounting policies affecting our most significant estimates and assumptions: revenue recognition and related sales allowances and accruals; valuation of marketable securities; valuation of inventory; business combinations and asset acquisitions, including acquisition-related contingent consideration; goodwill; intangible assets; equity-based compensation; and income taxes.

9





Revenue Recognition

Product revenues
On January 1, 2018, we adopted Accounting Standards Codification (“ASC”) Topic 606, Revenue from Contracts with Customers (“ASC 606”), by 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 our product revenue 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, Feraheme and Intrarosa. The adoption of ASC 606 in 2018 did not have an impact on the pattern or timing of recognition of our product revenue, as the majority of our product revenue continues to be recognized when the customer takes control of our product.

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

Performance Obligations

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:

Supply of Makena product
Supply of Feraheme product
Supply of Intrarosa product
Supply of Vyleesi product

We principally sell our products to wholesalers, specialty distributors, specialty pharmacies and other customers (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.


10




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, copay assistance and other deductions), and recognize the estimated amount as revenue, when we transfer control of the product to our customers. 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 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 laws and regulations to provide mandatory discounts for sales to government entities) 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.

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 between 30 to 60 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 for eligible customers, based on the gross amount of each invoice. We adjust the accrual quarterly to reflect actual experience.

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. Fees under 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

11




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. The current shelf-lives or time between manufacture and expiration for products in our portfolio range from 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. There were no material adjustments to our reserve for product returns during the years ended December 31, 2019, 2018 or 2017. 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 rebates 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.

Other Discounts
Other discounts which we offer include voluntary patient assistance programs, such as copay assistance programs, which are intended to provide financial assistance to qualified commercially insured patients with prescription drug copayments required by payers. The calculation of the accrual for copay 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.

Collaboration Revenues

When we enter into collaboration agreements, we assess whether the agreements fall within the scope of ASC Topic 808, Collaborative Arrangements (“ASC 808”) based on whether the arrangements involve joint operating activities and whether both parties have active participation in the arrangement and are exposed to significant risks and rewards. To the extent that the arrangement falls within the scope of ASC 808, we assess whether the payments between us and our collaboration partner fall within the scope of other accounting literature. If we conclude that payments from the collaboration partner to us represent

12




consideration from a customer, such as license fees and contract research and development activities, we account for those payments within the scope of ASC 606. However, if we conclude that our collaboration partner is not a customer for certain activities and associated payments, such as for certain collaborative research, development, manufacturing and commercial activities, we present such payments as a reduction of research and development expense or general and administrative expense, based on where we present the related underlying expense.

Marketable Securities

We account for and classify our marketable securities as either “available-for-sale,” “held-to-maturity,” or “trading debt securities,” in accordance with the accounting guidance related to the accounting and classification of certain investments in marketable securities. The determination of the appropriate classification by us is based primarily on management’s ability and intent to sell the debt security at the time of purchase. As of December 31, 2019 and 2018, all of our marketable securities were classified as available-for-sale.

Available-for-sale securities are those securities which we view as available for use in current operations, if needed. We generally classify our available-for-sale securities as short-term investments, even though the stated maturity date may be one year or more beyond the current balance sheet date. Available-for-sale marketable securities are stated at fair value with their unrealized gains and losses included in accumulated other comprehensive income (loss) within the consolidated statements of stockholders’ equity, until such gains and losses are realized in other income (expense) within the consolidated statements of operations or until an unrealized loss is considered other-than-temporary.

We recognize other-than-temporary impairments of our marketable securities when there is a decline in fair value below the amortized cost basis and if (a) we have the intent to sell the security or (b) it is more likely than not that we will be required to sell the security prior to recovery of its amortized cost basis. If either of these conditions is met, we recognize the difference between the amortized cost basis of the security and its fair value at the impairment measurement date in our consolidated statements of operations. If neither of these conditions is met, we must perform additional analysis to evaluate whether the unrealized loss is associated with the creditworthiness of the issuer of the security rather than other factors, such as interest rates or market factors. If we determine from this analysis that we do not expect to receive cash flows sufficient to recover the entire amortized cost of the security, a credit loss exists, the impairment is considered other-than-temporary and is recognized in our consolidated statements of operations.

Inventory

Inventory is stated at the lower of cost or net realizable value, with approximate cost being determined on a first-in, first-out basis. Prior to initial approval from the FDA or other regulatory agencies, we expense costs relating to the production of inventory in the period incurred, unless we believe regulatory approval and subsequent commercialization of the product candidate is probable and we expect the future economic benefit from sales of the product to be realized, at which point we capitalize the costs as inventory. We assess any costs capitalized prior to regulatory approval each quarter for indicators of impairment, such as a reduced likelihood of approval. We expense costs associated with clinical trial material as research and development expense.

On a quarterly basis, we analyze our inventory levels to determine whether we have any obsolete, expired, or excess inventory. If any inventory is expected to expire prior to being sold, has a cost basis in excess of its net realizable value, is in excess of expected sales requirements as determined by internal sales forecasts, or fails to meet commercial sale specifications, the inventory is written-down through a charge to cost of product sales. The determination of whether inventory costs will be realizable requires estimates by management of future expected inventory requirements, based on sales forecasts. Once packaged, our products have a shelf-life ranging from three to five years. As a result of comparison to internal sales forecasts, we expect to fully realize the carrying value of our finished goods inventory. If actual market conditions are less favorable than those projected by management or in the event of an adverse FDA action, inventory write-downs may be required. Charges for inventory write-downs are not reversed if it is later determined that the product is saleable.

Business Combinations and Asset Acquisitions

The purchase price allocation for business combinations requires extensive use of accounting estimates and judgments to allocate the purchase price to the identifiable tangible and intangible assets acquired and liabilities assumed based on their respective fair values. Under Accounting Standards Update (“ASU”) No. 2017-01, “Business Combinations (Topic 805): Clarifying the Definition of a Business (“2017-01”), we first determine whether substantially all of the fair value of the gross assets acquired is concentrated in a single identifiable asset or a group of similar identifiable assets. If this threshold is met, the single asset or group of assets, as applicable, is not a business.

13





We account for business combinations using the acquisition method of accounting, under which the total purchase price of an acquisition is allocated to the net tangible and identifiable intangible assets acquired and liabilities assumed based on their estimated fair values as of the acquisition date. Acquisition-related costs are expensed as incurred. Any excess of the consideration transferred over the estimated fair values of the identifiable net assets acquired is recorded as goodwill.

The purchase price allocations for business combinations are initially prepared on a preliminary basis and are subject to change as additional information becomes available concerning the fair value and tax basis of the assets acquired and liabilities assumed. Any adjustments to the purchase price allocations are made as soon as practicable but no later than one year from the acquisition date.

Acquired inventory is recorded at its fair value, which may require a step-up adjustment to recognize the inventory at its expected net realizable value. The inventory step-up is recorded to cost of product sales in our consolidated statements of operations when related inventory is sold, and we record step-up costs associated with clinical trial material as research and development expense.

Acquisition-Related Contingent Consideration

Contingent consideration arising from a business combination is included as part of the purchase price and is recognized at its estimated fair value as of the acquisition date. Subsequent to the acquisition date, we measure contingent consideration arrangements at fair value for each period until the contingency is resolved. These changes in fair value are recognized in selling, general and administrative expenses in our consolidated statements of operations. Changes in fair values reflect new information about the likelihood of the payment of the contingent consideration and the passage of time. For asset acquisitions, we record contingent consideration for obligations we consider to be probable and estimable and these liabilities are not adjusted to fair value.

Goodwill
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.
In performing our goodwill impairment tests, we utilize the approach prescribed under ASC 350, as amended by ASU 2017-04, Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment (“ASU 2017-04”), which requires that an entity perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value.
When we perform any goodwill impairment test, the estimated fair value of our reporting unit is determined using either an income approach (utilizing a discounted cash flow (“DCF”) model) or a market approach, when appropriate, which assesses our market capitalization as adjusted for a control premium, or a combination thereof. Under the market approach, when our carrying value exceeds our market capitalization, we consider a control premium for purposes of estimating the fair value of our reporting unit, as we believe that a market participant buyer would be required to pay a control premium for our business. As described in the accounting guidance for evaluating long-lived assets for impairment, an entity’s fair value may include a control premium in addition to the quoted market price to determine the fair value of a single reporting unit entity, as an acquiring entity is often willing to pay more for equity securities that give it a controlling interest than an investor would pay for a number of equity securities representing less than a controlling interest. This accounting guidance also indicates that the quoted market price of an individual security need not be the sole measurement basis of the fair value of a single reporting unit. When our market capitalization exceeds our carrying value, we utilize our market capitalization as the indicator of fair value in our impairment test.
When utilizing an income approach, the DCF model is based upon expected future after-tax operating cash flows of the reporting unit discounted to a present value using a risk-adjusted discount rate. Estimates of future cash flows require management to make significant assumptions concerning (i) future operating performance, including future sales, long-term growth rates, operating margins, variations in the amount and timing of cash flows and the probability of achieving the

14




estimated cash flows (ii) the probability of regulatory approvals, and (iii) future economic conditions, all of which may differ from actual future cash flows. These assumptions are based on significant inputs not observable in the market and thus represent Level 3 measurements within the fair value hierarchy. The discount rate, which is intended to reflect the risks inherent in future cash flow projections, used in the DCF model, is based on estimates of the weighted average cost of capital (“WACC”) of market participants relative to our reporting unit. Financial and credit market volatility can directly impact certain inputs and assumptions used to develop the WACC. Any changes in these assumptions may affect our fair value estimate and the result of an impairment test. The discount rates and other inputs and assumptions are consistent with those that a market participant would use. In addition, in order to assess the reasonableness of the fair value of our reporting unit as calculated under the DCF model, we also compare the reporting unit’s fair value to our market capitalization and calculate an implied control premium. We evaluate the implied control premium by comparing it to control premiums of recent comparable market transactions, as applicable. For additional information, see Note I, “Goodwill and Intangible Assets, Net” to our consolidated financial statements included in this Annual Report on Form 10-K.

Intangible Assets

We amortize our intangible assets that have finite lives based on either the straight-line method, or if reliably determinable, based on the pattern in which the economic benefit of the asset is expected to be utilized.

If we acquire an asset or a group of assets that do not meet the definition of a business, the acquired IPR&D is expensed on its acquisition date. Future costs to develop these assets are recorded to research and development expense as they are incurred.

Impairment of Long-Lived Assets

We review our long-lived assets, which includes property and equipment and identifiable intangible assets for impairment whenever events or changes in circumstances indicate that the carrying value of an asset or asset group may not be recoverable. To evaluate recoverability, management compares the projected undiscounted future cash flows associated with the asset or asset group, including proceeds from its eventual disposition over its estimated useful life against its carrying amount. If the undiscounted cash flows are not sufficient to recover the carrying value of the asset or asset group, the asset or asset group is considered impaired. The impairment loss, if any, is measured as the excess of the carrying amount of the asset or asset group over its estimated fair value, which is typically calculated utilizing a DCF model following the same methodology as described in the preceding section.

Equity-Based Compensation

Equity-based compensation cost is generally measured at the estimated grant date fair value and recorded to expense over the requisite service period, which is generally the vesting period. Because equity-based compensation expense is based on awards ultimately expected to vest, we must make certain judgments about whether employees, officers, directors, consultants and advisers will complete the requisite service period, and reduce the compensation expense being recognized for estimated forfeitures. Forfeitures are estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. Forfeitures are estimated based upon historical experience and adjusted for unusual events such as corporate restructurings, which can result in higher than expected turnover and forfeitures. If factors change and we employ different assumptions in future periods, the compensation expense that we record in the future may differ significantly from what we have recorded in the current period.

We estimate the fair value of equity-based compensation involving stock options based on the Black-Scholes option pricing model. This model requires the input of several factors such as the expected option term, the expected risk-free interest rate over the expected option term, the expected volatility of our stock price over the expected option term and the expected dividend yield over the expected option term and are subject to various assumptions. The fair value of awards calculated using the Black-Scholes option pricing model is generally amortized on a straight-line basis over the requisite service period, and is recognized based on the proportionate amount of the requisite service period that has been rendered during each reporting period.

We estimate the fair value of our restricted stock units (“RSUs”) whose vesting is contingent upon market conditions, such as total shareholder return, using the Monte-Carlo simulation model. The fair value of RSUs where vesting is contingent upon market conditions is amortized based upon the estimated derived service period. The fair value of RSUs granted to our employees and directors whose vesting is dependent on future service is determined based upon the quoted closing market price per share on the date of grant, adjusted for estimated forfeitures.


15




We believe our valuation methodologies are appropriate for estimating the fair value of the equity awards we grant to our employees and directors. Our equity award valuations are estimates and may not be reflective of actual future results or amounts ultimately realized by recipients of these grants. These amounts are subject to future quarterly adjustments based upon a variety of factors, which include, but are not limited to, changes in estimated forfeiture rates and the issuance of new equity-based awards.

Income Taxes

We use the asset and liability method of accounting for deferred income taxes. Under this method, deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. A deferred tax asset is established for the expected future benefit of net operating loss (“NOL”) and credit carryforwards. Deferred tax assets and liabilities are measured using enacted rates in effect for the year in which those temporary differences are expected to be recovered or settled. A valuation allowance against net deferred tax assets is required if, based on available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized. Significant judgments, estimates and assumptions regarding future events, such as the amount, timing and character of income, deductions and tax credits, are required in the determination of our provision for income taxes and whether valuation allowances are required against deferred tax assets. In evaluating our ability to recover our deferred tax assets, we consider all available evidence, both positive and negative, including the existence of taxable temporary differences, our past operating results, the existence of cumulative income in the most recent fiscal years, changes in the business in which we operate and our forecast of future taxable income. In determining future taxable income, we are responsible for assumptions utilized including the amount of state and federal operating income, the reversal of temporary differences and the implementation of feasible and prudent tax planning strategies. These assumptions require significant judgment about the forecasts of future taxable income. As of December 31, 2019, we have established a valuation allowance on our net deferred tax assets other than refundable alternative minimum tax (“AMT”) 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.

We account for uncertain tax positions using a “more-likely-than-not” threshold for recognizing and resolving uncertain tax positions. The evaluation of uncertain tax positions is based on factors that include, but are not limited to, changes in tax law, the measurement of tax positions taken or expected to be taken in tax returns, the effective settlement of matters subject to audit, new audit activity, and changes in facts or circumstances related to a tax position. We evaluate uncertain tax positions on a quarterly basis and adjust the level of the liability to reflect any subsequent changes in the relevant facts surrounding the uncertain positions. Any changes to these estimates, based on the actual results obtained and/or a change in assumptions, could impact our income tax provision in future periods. Interest and penalty charges, if any, related to unrecognized tax benefits would be classified as a provision for income tax in our consolidated statement of operations.

Impact of Recently Issued and Proposed Accounting Pronouncements
From time to time, new accounting pronouncements are issued by the Financial Accounting Standards Board or other standard setting bodies that are adopted by us as of the specified effective date. Unless otherwise discussed, we believe that the impact of recently issued standards that are not yet effective will not have a material impact on our financial position or results of operations upon adoption. For further discussion on recent accounting pronouncements, please see Note V, “Recently Issued and Proposed Accounting Pronouncements,” to our consolidated financial statements included in this Annual Report on Form 10-K for additional information.
Results of Operations - 2019 as compared to 2018
 

16




Revenues
 
Total revenues for 2019 and 2018 consisted of the following (in thousands except for percentages):
 
Years Ended December 31,
 
2019 to 2018
 
2019
 
2018
 
$ Change
 
% Change
Product sales, net
 
 
 
 
 
 
 
Feraheme
$
167,947

 
$
135,001

 
$
32,946

 
24
 %
Makena
120,859

 
320,311

 
(199,452
)
 
(62
)%
Intrarosa
21,417

 
16,218

 
5,199

 
32
 %
Other
(238
)
 
368

 
(606
)
 
<(100 %)

Total
309,985

 
471,898

 
(161,913
)
 
(34
)%
Other revenues
16,561

 
150

 
16,411

 
>100 %

Total revenues
$
326,546

 
$
472,048

 
$
(145,502
)
 
(31
)%
 
Our total revenues for 2019 decreased by $145.5 million as compared to 2018, due primarily to a $260.0 million decrease in Makena IM net sales driven by supply disruptions, generic competition, changes in estimates to prior period liabilities and our withdrawal from the IM market during 2019, partially offset by an increase in Makena auto-injector net sales. Also offsetting the decrease in Makena revenues was a $32.9 million increase in Feraheme net sales in 2019, as compared to 2018.
In addition, during the fourth quarter of 2019, we entered into a termination and settlement agreement (the “Termination Agreement”) with Daiichi Sankyo, Inc. to terminate a clinical trial collaboration agreement we acquired in connection with the Perosphere transaction. Under the terms of the settlement agreement we received $10.0 million in December 2019. As more fully described in Note D “Revenue Recognition” to the consolidated financial statements included in this Annual Report on Form 10-K, the $10.0 million termination payment and $6.4 million of deferred revenue that we acquired from Perosphere were recognized as collaboration revenue in our consolidated statements of operations for the year ended December 31, 2019.

We expect that total net product sales for 2020 will decrease compared to 2019 due to an expected decline in Makena net product sales and our intention to divest Intrarosa and Vyleesi during the first half of 2020. We expect these declines to be partially offset by increases in Feraheme net sales.

The following table sets forth customers who represented 10% or more of our total revenues for 2019 and 2018:
 
Years Ended December 31,
 
2019
 
2018
McKesson Corporation
36
%
 
26
%
AmerisourceBergen Drug Corporation
28
%
 
27
%
Cardinal Health
13
%
 
< 10%


17




Product Sales Allowances and Accruals

Total gross product sales were offset by product sales allowances and accruals for 2019 and 2018 as follows (in thousands except for percentages): 
 
Years Ended December 31,
 
2019 to 2018
 
2019
 
Percent of
gross
product sales
 
2018
 
Percent of
gross
product sales
 
$ Change
 
% Change
Gross product sales
$
955,693

 
 
 
$
974,330

 
 
 
$
(18,637
)
 
(2
)%
Provision for product sales allowances and accruals:
 
 
 
 
 
 
 
 
 
 
 
Contractual adjustments
530,645

 
56
%
 
387,540

 
40
%
 
143,105

 
37
 %
Governmental rebates
115,063

 
12
%
 
114,892

 
12
%
 
171

 
1
 %
Total
645,708

 
68
%
 
502,432

 
52
%
 
143,276

 
29
 %
Product sales, net
$
309,985

 
 
 
$
471,898

 
 
 
$
(161,913
)
 
(34
)%
 
The increase in contractual adjustments as a percentage of gross product sales primarily related to an increase in rebates offered to commercial purchasers and payers.

We record product revenue net of certain allowances and accruals on our consolidated statements of operations. Our contractual adjustments include provisions for returns, pricing and prompt payment discounts, as well as wholesaler distribution fees, rebates to hospitals that qualify for 340B pricing, and volume-based and other commercial rebates and other discounts. Governmental rebates relate to our reimbursement arrangements with state Medicaid programs.

We may refine our estimated revenue reserves as we continue to obtain additional experience or as our customer mix changes. If we determine in future periods that our actual experience is not indicative of our expectations, if our actual experience changes, or if other factors affect our estimates, we may be required to adjust our allowances and accruals estimates, which would affect our net product sales in the period of the adjustment and could be significant.

An analysis of the amount of our product reserves for 2019 and 2018, is as follows (in thousands):
 
Contractual Adjustments
 
Governmental Rebates
 
Total
Balance at January 1, 2018
$
62,164

 
$
53,742

 
$
115,906

Current provisions relating to sales in current year
389,861

 
106,988

 
496,849

Adjustments relating to sales in prior years
(2,330
)
 
7,903

 
5,573

Payments/returns relating to sales in current year
(333,694
)
 
(75,920
)
 
(409,614
)
Payments/returns relating to sales in prior years
(58,802
)
 
(58,501
)
 
(117,303
)
Balance at December 31, 2018
$
57,199

 
$
34,212

 
$
91,411

Current provisions relating to sales in current year
521,916

 
100,926

 
622,842

Adjustments relating to sales in prior years
8,774

 
14,137

 
22,911

Payments/returns relating to sales in current year
(431,014
)
 
(60,218
)
 
(491,232
)
Payments/returns relating to sales in prior years
(61,654
)
 
(41,435
)
 
(103,089
)
Balance at December 31, 2019
$
95,221

 
$
47,622

 
$
142,843



18




Costs and Expenses
Cost of Product Sales
Cost of product sales for 2019 and 2018 were as follows (in thousands except for percentages):
 
Years Ended December 31,
 
2019 to 2018
 
2019
 
2018
 
$ Change
 
% Change
Direct cost of product sales
$
82,393

 
$
57,492

 
$
24,901

 
43
 %
Amortization of intangible assets
$
24,800

 
$
158,400

 
$
(133,600
)
 
(84
)%
 
$
107,193

 
$
215,892

 
$
(108,699
)
 
(50
)%
Direct cost of product sales as a percentage of net product sales
27
%
 
12
%
 
 
 
 
Our cost of product sales are primarily comprised of manufacturing costs, costs of managing our contract manufacturers, costs for quality assurance and quality control associated with our product sales, royalty obligations and the amortization of product-related intangible assets. Direct cost of product sales as a percentage of net product sales increased from 12% during the year ended December 31, 2018 to 27% during the year ended December 31, 2019, driven by a shift in revenue mix from products with a lower cost of product sales, such as the Makena IM product, to products with a higher cost of product sales, such as the Makena auto-injector and inventory write downs recorded in conjunction with the impairments of the Makena base technology and Makena auto-injector asset groups. We expect direct cost of product sales as a percentage of net product sales to decline in 2020 based on our expectation that a higher proportion of our revenue will be from Feraheme.

Amortization of intangible assets decreased by $133.6 million from December 31, 2018 to December 31, 2019, primarily due to a decrease in amortization of the Makena base technology intangible asset, which related to our Makena IM products and was fully impaired during the second quarter of 2019.
  
Research and Development Expenses
 
Research and development expenses include both external and internal expenses. External expenses primarily include costs of clinical trials and fees paid to contract research organizations (“CROs”), clinical supply and manufacturing expenses, regulatory filing fees, consulting and professional fees as well as other general costs related to the execution of research and development activities. Internal expenses primarily include compensation of employees engaged in research and development activities. Research and development expenses are expensed as incurred. Where possible, we track our external costs by major project. To the extent that external costs are not attributable to a specific project or activity, they are included in other external costs. Prior to the initial regulatory approval of our products or development of new manufacturing processes, costs associated with manufacturing process development and the manufacture of drug product are recorded as research and development expenses, unless we believe regulatory approval and subsequent commercialization of the product candidate is probable and we expect the future economic benefit from sales of the product to be realized, at which point we capitalize the costs as inventory.

Research and development expenses for 2019 and 2018 consisted of the following (in thousands except for percentages):
 
Years Ended December 31,
 
2019 to 2018
 
2019
 
2018
 
$ Change
 
% Change
External research and development expenses
$
41,654

 
27,898

 
13,756

 
49
%
Internal research and development expenses
23,199

 
16,948

 
6,251

 
37
%
Total research and development expenses
$
64,853

 
$
44,846

 
$
20,007

 
45
%
 
Total research and development expenses incurred in 2019 increased by $20.0 million, or 45%, as compared to 2018 primarily related to our development program for AMAG-423 and increases in internal costs related headcount to support our development programs.
We have a number of ongoing research and development programs that we are conducting independently or in collaboration with third parties. We expect our research and development expenses to remain consistent in 2020 as compared to 2019 as we continue to invest in AMAG-423 and ciraparantag. We cannot determine with certainty the duration and completion costs of our current or future clinical trials of our products or product candidates as the duration, costs and timing of clinical trials depends on a variety of factors including the uncertainties of future clinical and preclinical studies, uncertainties in clinical trial enrollment rates and significant and changing government regulation.


19




Acquired In-Process Research and Development

During 2019, we recorded $74.9 million for acquired in-process research and development (“IPR&D”) related to the acquisition of ciraparantag from Perosphere.

During 2018, we recorded $32.5 million for acquired IPR&D related to a $20.0 million milestone obligation to Palatin associated with the FDA acceptance of the Vyleesi New Drug Application (“NDA”) and $12.5 million as an upfront option exercise fee in connection with our acquisition of AMAG-423.
 
Selling, General and Administrative Expenses
 
Our selling, general and administrative expenses include costs related to our commercial personnel, including our specialty sales forces, medical education professionals, pharmacovigilance, safety monitoring and commercial support personnel, costs related to our administrative personnel, including our legal, finance, business development and executive personnel, external and facilities costs required to support the marketing and sale of our products, and other costs associated with our corporate activities.

Selling, general and administrative expenses for 2019 and 2018 consisted of the following (in thousands except for percentages):
 
Years Ended December 31,
 
2019 to 2018
 
2019
 
2018
 
$ Change
 
% Change
Compensation, payroll taxes and benefits
$
107,362

 
$
126,754

 
$
(19,392
)
 
(15
)%
Professional, consulting and other outside services
164,690

 
134,049

 
30,641

 
23
 %
Fair value of contingent consideration liability
(270
)
 
(49,607
)
 
49,337

 
(99
)%
Equity-based compensation expense
14,818

 
16,614

 
(1,796
)
 
(11
)%
Total selling, general and administrative expenses
$
286,600

 
$
227,810

 
$
58,790

 
26
 %
 
Total selling, general and administrative expenses in 2018 included a $49.6 million decrease to the fair value of contingent consideration liability expense based on actual Makena net sales and our expectations for future performance. Excluding this decrease, selling, general and administrative expenses increased by $9.2 million as compared to 2018. This increase was driven primarily by higher external costs to support the September 2019 launch of Vyleesi, partially offset by a decrease in costs as a result of our February 2019 restructuring to combine our women’s health and maternal health sales forces.

We expect that total selling, general and administrative expenses will decrease substantially in 2020 as compared to 2019 with the planned divestiture of Intrarosa and Vyleesi.

Impairment of Assets

As more fully described in Note I, “Goodwill and Intangible Assets, Net” to the consolidated financial statements included in this Annual Report on Form 10-K, we recorded $232.3 million of impairment charges during 2019 related to the asset groups containing the Makena base technology, the Makena auto-injector developed technology, the Intrarosa developed technology and Vyleesi developed technology.

There were no asset impairments during the year ended December 31, 2018.

Restructuring Expense

In February 2019, we completed a restructuring to combine our women’s health and maternal health sales forces into one integrated sales team. Approximately 110 employees were displaced through this workforce reduction. We recorded a one-time restructuring charge of $7.4 million primarily related to severance and related benefits in the first quarter of 2019 and expect these charges to be substantially paid in cash by the end of the first quarter of 2020. Estimated total savings from the restructuring in 2019 were approximately $15.2 million of selling, general and administrative expense, specifically related to compensation, payroll taxes and benefits. Estimated savings were partially offset by planned increases in selling, general and administrative expenses related to professional, consulting and other outside services associated with the launch of Vyleesi and continued investment in the growth of our commercial products. For additional information on restructuring expenses, see Note S, “Restructuring Expenses” to our consolidated financial statements included in this Annual Report on Form 10-K.


20




Other Expense, Net
Other expense, net for 2019 and 2018 consisted of the following (in thousands except for percentages):
 
Years Ended December 31,
 
2019 to 2018
 
2019
 
2018
 
$ Change
 
% Change
Interest expense
$
(25,709
)
 
$
(51,971
)
 
$
26,262

 
(51
)%
Loss on debt extinguishment

 
(35,922
)
 
35,922

 
(100
)%
Interest and dividend income
4,285

 
5,328

 
(1,043
)
 
(20
)%
Other expense
428

 
(74
)
 
502

 
>(100 %)

Total other expense, net
$
(20,996
)
 
$
(82,639
)
 
$
61,643

 
(75
)%

Other expense, net for 2019 decreased by $61.6 million compared to 2018, primarily due to (i) a $35.9 million loss on extinguishment of debt (including a $28.1 million redemption premium), incurred during 2018 as a result of the early redemption of the 2023 Senior Notes, and (ii) a $26.3 million reduction in interest expense in 2019 as a result of this redemption and the repayment of the 2019 Convertible Notes in February 2019.

We expect our other expense, net to remain consistent in 2020 as compared to 2019.
Income Tax (Benefit) Expense
The following table summarizes our effective tax rate and income tax (benefit) expense for 2019 and 2018 (in thousands except for percentages):
 
Years Ended December 31,
 
2019
 
2018
Effective tax rate
%
 
(31
)%
Income tax expense (benefit)
$
(47
)
 
$
40,436

For 2019, we recognized an immaterial income tax benefit, representing an effective tax rate of 0%. The difference between the expected statutory federal tax rate of 21% and the 0% effective tax rate for 2019 was primarily attributable to the valuation allowance established against our current period losses generated and the non-deductible IPR&D expense related to the Perosphere acquisition. We have established a valuation allowance on our deferred tax assets other than refundable AMT 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. The income tax benefit for the year ended December 31, 2019 primarily related to the offset of the recognition of the income tax expense recorded in other comprehensive loss associated with the increase in the value of available-for-sale securities that we carried at fair market value during the period, partially offset by state income taxes.

For 2018, we recognized income tax expense of $40.4 million, representing an effective tax rate of (31)%. The difference between the expected statutory federal tax rate of 21% and the (31)% effective tax rate for 2018 was primarily attributable to the establishment of a valuation allowance on net deferred tax assets other than refundable AMT credits, the impact of non-deductible stock compensation and other non-deductible expenses, partially offset by a benefit from contingent consideration associated with Lumara Health, state income taxes and orphan drug tax credits. Our valuation allowance on our deferred tax assets, other than refundable AMT credits, increased during the year ended December 31, 2018 primarily because the deferred tax liabilities associated with the CBR business, which was reclassified to discontinued operations and sold during 2018, are no longer available as a source of income to realize the benefits of the net deferred tax assets.

Net Income from Discontinued Operations

Net income from discontinued operations was $103.6 million in 2018. Of the $103.6 million net income from discontinued operations, $87.1 million represented a gain on the sale of the CBR business, which closed on August 6, 2018. For additional information, see Note C, “Discontinued Operations,” to our consolidated financial statements included in this Annual Report on Form 10-K.


21




Results of Operations - 2018 as compared to 2017
 
Management’s discussion and analysis of our results of operations for the year ended December 31, 2018 compared to the year ended December 31, 2017 may be found in the “Management’s Discussion and Analysis of Financial Condition and Results of Operations - 2018 as compared to 2017 section of our Annual Report on Form 10-K for the year ended December 31, 2018, filed with the SEC on March 1, 2019 (the “2018 Annual Report”), which discussion is incorporated herein by reference. Our results of operations for the years ended December 31, 2018 and 2017 as presented in the “Management’s Discussion and Analysis of Financial Condition and Results of Operations - 2018 as compared to 2017” section of our 2018 Annual Report were not revised to reflect the correction of the immaterial errors disclosed in Note X, “Revision of Prior Period Financial Statements”. Due to the immaterial nature of these errors, they had no impact on management’s discussion contained in our 2018 Annual Report.

Liquidity and Capital Resources
 
General
 
We currently finance our operations primarily from cash generated from our operating activities, including sales of our commercialized products. Cash, cash equivalents, marketable securities and certain financial obligations as of December 31, 2019 and 2018 consisted of the following (in thousands except for percentages):
 
December 31,
 
 
 
 
 
2019
 
2018
 
$ Change
 
% Change
Cash and cash equivalents
$
113,009

 
$
253,256

 
$
(140,247
)
 
(55
)%
Marketable Securities
58,742

 
140,915

 
(82,173
)
 
(58
)%
Total
$
171,751

 
$
394,171

 
$
(222,420
)
 
(56
)%
 
 
 
 
 
 
 
 
Outstanding principal on 2022 Convertible Notes
$
320,000

 
$
320,000

 
$

 
 %
Outstanding principal on 2019 Convertible Notes

 
21,417

 
(21,417
)
 
(100
)%
Total
$
320,000

 
$
341,417

 
$
(21,417
)
 
(6
)%
 
Cash Flows
The following table presents a summary of the primary sources and uses of cash for the years ended December 31, 2019, 2018 and 2017 (in thousands):
 
For the Years Ended December 31
 
2019 compared to 2018
 
2018 compared to 2017
(In thousands, except percentages)
2019
 
2018
 
2017
 
 
Net cash (used in) provided by operating activities
$
(125,696
)
 
$
60,800

 
$
106,596

 
$
(186,496
)
 
$
(45,796
)
Net cash provided by investing activities
20,962

 
502,155

 
102,920

 
(481,193
)
 
399,235

Net cash used in financing activities
(35,513
)
 
(501,974
)
 
(293,644
)
 
466,461

 
(208,330
)
Net (decrease) increase in cash, cash equivalents and restricted cash
$
(140,247
)
 
$
60,981

 
$
(84,128
)
 
$
(201,228
)
 
$
145,109


Operating Activities

Cash flows from operating activities represent the cash receipts and disbursements related to all of our activities other than investing and financing activities. We have historically financed our operating and capital expenditures primarily through cash flows earned through our operations. We expect cash provided by operating activities in addition to our cash, cash equivalents and marketable securities will continue to be a primary source of funds to finance operating needs and capital expenditures.
Operating cash flow is derived by adjusting our net income (loss) for:
Non-cash operating items, such as depreciation and amortization, impairment of long-lived assets and equity-based compensation; and

Changes in operating assets and liabilities, which reflect timing differences between the receipt and payment of cash associated with transactions and when they are recognized in results of operations.

For 2019 compared to 2018, net cash flows provided by operating activities decreased by $186.5 million, driven primarily by a decrease in net income as adjusted for non-cash charges of $205.5 million and a $19.0 million increase due to changes in operating assets and liabilities. Included within net loss for 2019 was $74.9 million of acquired IPR&D expense related to the Perosphere asset acquisition, of which $60.8 million was paid in cash during the first quarter of 2019. The cash flows from

22




operating activities for 2018 include cash flows from the operating activities of the CBR business, which are included in discontinued operations. Subsequent to the closing of the CBR transaction on August 6, 2018, we no longer generated cash flows from that business. See Note C, “Discontinued Operations,” to our consolidated financial statements included in this Annual Report on Form 10-K for further detail regarding our discontinued operations.

For 2018 compared to 2017, net cash flows provided by operations decreased by $45.8 million, driven primarily by a decrease in net income as adjusted for non-cash charges of $29.8 million and a $15.9 million decrease due to changes in operating assets and liabilities.

Investing Activities

Cash flows provided by investing activities was $21.0 million in 2019 due primarily to net proceeds from the sale of marketable securities of $83.5 million, partially offset by a $60.0 million milestone payment triggered by the FDA approval of Vyleesi and capital expenditures of $2.5 million.

Cash flows provided by investing activities in 2018 was $502.2 million due to $519.3 million in proceeds from the sale of CBR, partially offset by net purchases of marketable securities of $4.6 million and capital expenditures of $2.5 million.

Cash flows provided by investing activities in 2017 was $102.9 million due to net proceeds from the sale of marketable securities of $167.7 million, partially offset by $55.8 million of cash used to purchase the Intrarosa asset and capital expenditures of $9.0 million.

Financing Activities

Cash used in financing activities was $35.5 million in 2019 due to the $21.4 million repayment of our 2019 Convertible Notes, $13.7 million for the repurchase of common stock and $1.8 million for payments of employee tax withholdings related to equity-based compensation offset by $1.5 million of proceeds from the issuance of common stock under the Employee Stock Purchase Plan.

Cash used in financing activities was $502.0 million in 2018 due to the repayment of the $475.0 million balance of our 2023 Senior Notes and a related redemption premium of $28.1 million.

Cash used in financing activities in 2017 was $293.6 million driven by $353.1 million of principal payments made during 2017, including the full repayment of the remaining balance of a 2015 term loan facility, $191.7 million used for the repurchase of a portion of our 2019 Convertible Notes, $39.8 million of contingent consideration payments and the repurchase of common stock of $19.5 million, partially offset by $320.0 million net proceeds related to the issuance of our 2022 Convertible Notes.

Future Liquidity Considerations
We believe that our cash, cash equivalents and marketable securities as of December 31, 2019, and the cash we expect to receive from sales of our products, will be sufficient to fund our current operating plans and capital expenditure requirements for at least twelve months from the date of issuance of these financial statements.

We generated negative cash flows from operations during the year ended December 31, 2019 and while we expect to generate positive cash flows from continuing operations during 2020, these cash flows and our cash on hand as of December 31, 2019 in the aggregate will be insufficient to settle our 2022 Convertible Notes. We therefore expect that we will need to issue new securities, in the form of debt, equity or equity-linked, or some combination thereof. We may also utilize proceeds from a potential strategic collaboration or other transaction to manage our existing obligations.

For a detailed discussion regarding the risks and uncertainties related to our liquidity and capital resources, please refer to our Risk Factors in Part I, Item 1A of this Annual Report on Form 10-K.

Borrowings and Other Liabilities
In the second quarter of 2017, we issued $320.0 million aggregate principal amount of convertible senior notes due 2022 (the “2022 Convertible Notes”). We 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 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

23




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. The 2022 Convertible Notes were not convertible by the note holders as of December 31, 2019.

Share Repurchase Program
 
As of January 1, 2019, we had $20.5 million available under our previously approved share repurchase program to repurchase up to $60.0 million in shares of our common stock. In March 2019, our Board authorized additional repurchases of shares in an amount up to $20.0 million under this program. During the first quarter of 2019, we repurchased and retired 1,074,800 shares of common stock for $13.7 million. As of December 31, 2019, $26.8 million remained available for future repurchases under this program.
 
Contractual Obligations

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 operating leases, purchases of inventory and debt obligations (including interest payments). Future contractual obligations, as of December 31, 2019, are as follows (in thousands):
 
Payment due by period
 
Total
 
Less than 1 year
 
1-3 years
 
3-5 years
 
More than 5 years
Lease obligations
$
29,686

 
$
4,077

 
$
6,941

 
$
6,476

 
$
12,192

Purchase commitments
105,903

 
31,373

 
39,009

 
29,829

 
5,692

2022 Convertible Notes
346,000

 
10,400

 
335,600

 

 

Total
$
481,589

 
$
45,850

 
$
381,550

 
$
36,305

 
$
17,884


Lease Obligations
We are a party to operating leases for real estate, including our lease for use as our principal executive offices, vehicles and office equipment. Refer to Note P, “Commitments and Contingencies” to our consolidated financial statements included in this Annual Report on Form 10-K for more information on our lease obligations.
Purchase Obligations
Purchase obligations primarily represent minimum purchase commitments for inventory. As of December 31, 2019, our minimum purchase commitments totaled $105.9 million.

Contingent Regulatory and Commercial Milestone Payments

We are required to make payments contingent on the achievement of certain regulatory and/or commercial milestones under the terms of our collaboration, license and other strategic agreements. Please refer to Note Q, “Collaboration, License and Other Strategic Agreements” to our consolidated financial statements included in this Annual Report on Form 10-K for more information regarding these contingent payments.
Employment Arrangements

We have entered into employment agreements or other arrangements with most of our executive officers and certain other employees, which provide for the continuation of salary and certain benefits and, in certain instances, the acceleration of the vesting of certain equity awards to such individuals in the event that the individual is terminated other than for cause, as defined in the applicable employment agreements or arrangements.

Indemnification Obligations

In the course of operating our business, we have entered into a number of indemnification arrangements under which we may be required to make payments to or on behalf of certain third parties including our directors, officers, and certain employees as well as certain other third parties with whom we enter into agreements. For further discussion of how this may

24




affect our business, see Note P, “Commitments and Contingencies,” to our consolidated financial statements included in this Annual Report on Form 10-K.

Legal Proceedings

For detailed information on our legal proceedings, see Note P, “Commitments and Contingencies,” to our consolidated financial statements included in this Annual Report on Form 10-K. 

Off-Balance Sheet Arrangements
As of December 31, 2019, we did not have any off-balance sheet arrangements as defined in Regulation S-K, Item 303(a)(4)(ii).
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA:

Index To Consolidated Financial Statements





25




MANAGEMENT’S ANNUAL REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING (RESTATED)
Management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Securities and Exchange Act of 1934, as amended. Our internal control over financial reporting is a process designed under the supervision of our principal executive officer and principal financial officer to provide reasonable assurance regarding the reliability of financial reporting and the preparation of our financial statements for external purposes in accordance with U.S. generally accepted accounting principles. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Our management, including our principal executive officer and principal financial officer, assessed the effectiveness of our internal control over financial reporting as of December 31, 2019. In making this assessment, our management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control - Integrated Framework (2013). A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the Company’s annual or interim financial statements will not be prevented or detected on a timely basis. The Company did not design and maintain effective internal controls related to ensuring the timely recognition of our gross-to-net (“GTN”) adjustments for certain governmental rebates and the related accruals. Specifically, we did not design and maintain controls to allow for an effective review of disputed claims related to certain government rebate arrangements, where the decision has been made to initially not record and accrue for such items, to assess whether and when the need to record an accrual is required for such claims. This control deficiency resulted in a misstatement of the Company’s product sales, net, and accrued expenses, and the revision of the Company’s previously issued annual and interim consolidated financial statements as of and for the years ended December 31, 2019, 2018 and 2017 and for each of the interim periods in 2019 and 2018. Additionally, this control deficiency could result in a misstatement of the aforementioned account balances or disclosures that would result in a material misstatement to the annual or interim consolidated financial statements that would not be prevented or detected. Therefore, management has concluded that this control deficiency constitutes a material weakness.
In Management’s Annual Report on Internal Control over Financial Reporting included in the Original 10-K, our management previously concluded that the Company maintained effective internal control over financial reporting as of December 31, 2019. Subsequent to the filing date of the Original 10-K, management has concluded that the material weakness described above existed as of December 31, 2019. As a result, we have concluded that we did not maintain effective internal control over financial reporting as of December 31, 2019 based on the criteria set forth by COSO in Internal Control -Integrated Framework (2013). Accordingly, management has restated its annual report on internal control over financial reporting.
The effectiveness of the Company’s internal control over financial reporting as of December 31, 2019, has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report, which is included in “Item 8. Financial Statements and Supplementary Data” of this Amendment.

26




Report of Independent Registered Public Accounting Firm

To the Board of Directors and Stockholders of AMAG Pharmaceuticals, Inc.

Opinions on the Financial Statements and Internal Control over Financial Reporting

We have audited the accompanying consolidated balance sheets of AMAG Pharmaceuticals, Inc. and its subsidiaries (the “Company”) as of December 31, 2019 and 2018, and the related consolidated statements of operations, comprehensive loss, stockholders’ equity and cash flows for each of the three years in the period ended December 31, 2019, including the related notes (collectively referred to as the “consolidated financial statements”). We also have audited the Company’s internal control over financial reporting as of December 31, 2019, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2019 and 2018, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2019 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company did not maintain, in all material respects, effective internal control over financial reporting as of December 31, 2019, based on criteria established in Internal Control - Integrated Framework (2013) issued by the COSO because a material weakness in internal control over financial reporting existed as of that date related to the timely recognition of the Company’s gross-to-net adjustments for certain governmental rebates and the related accruals. Specifically, the Company did not design and maintain controls to allow for an effective review of disputed claims related to certain government rebate arrangements, where the decision has been made to initially not record and accrue for such items, to assess whether and when the need to record an accrual is required for such claims.

A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the annual or interim financial statements will not be prevented or detected on a timely basis. The material weakness referred to above is described in the accompanying Management’s Annual Report on Internal Control over Financial Reporting. We considered this material weakness in determining the nature, timing, and extent of audit tests applied in our audit of the 2019 consolidated financial statements, and our opinion regarding the effectiveness of the Company’s internal control over financial reporting does not affect our opinion on those consolidated financial statements.

Restatement of Management’s Conclusion Regarding Internal Control over Financial Reporting

Management and we previously concluded that the Company maintained effective internal control over financial reporting as of December 31, 2019. However, management has subsequently determined that a material weakness in internal control over financial reporting existed as of that date related to the timely recognition of the Company’s gross-to-net adjustments for certain governmental rebates and the related accruals as discussed above. Accordingly, management’s report has been restated and our present opinion on internal control over financial reporting, as presented herein, is different from that expressed in our previous report.

Changes in Accounting Principles

As discussed in Note W to the consolidated financial statements, the Company changed the manner in which it accounts for leases in 2019 and the manner in which it accounts for share-based compensation in 2017.

Basis for Opinions

The Company's management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in management’s report referred to above. Our responsibility is to express opinions on the Company’s consolidated financial statements and on the Company's internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement,

27




whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.

Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.

Definition and Limitations of Internal Control over Financial Reporting

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.


/s/ PricewaterhouseCoopers LLP

Boston, Massachusetts
March 6, 2020, except for the effects of the revision discussed in Note X to the consolidated financial statements and the matter discussed in the second paragraph of Management’s Annual Report on Internal Control over Financial Reporting, as to which the date is September 15, 2020


We served as the Company’s auditor from 1982 to 2020.


28





AMAG PHARMACEUTICALS, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
 
As of December 31,
 
2019
 
2018
ASSETS
 
 
 
Current assets:
 

 
 

Cash and cash equivalents
$
113,009

 
$
253,256

Marketable securities
58,742

 
140,915

Accounts receivable, net
94,163

 
75,347

Inventories
31,553

 
26,691

Prepaid and other current assets
19,100

 
18,961

Note receivable

 
10,000

Total current assets
316,567

 
525,170

Property and equipment, net
4,116

 
7,521

Goodwill
422,513

 
422,513

Intangible assets, net
23,620

 
217,033

Operating lease right-of-use asset
23,286

 

Deferred tax assets
630

 
1,260

Restricted cash
495

 
495

Other long-term assets

 
1,467

Total assets
$