Consolidated Financial Statements of
ADVANZ PHARMA Corp. Limited
December 31, 2019 and 2018
Table of Contents
Independent Auditor's Report
Consolidated Balance Sheets
Consolidated Statements of Income (Loss)
Consolidated Statements of Comprehensive Income (Loss)
Consolidated Statements of Changes in Equity (Deficit)
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
3 - 6
7
8
9
10
11
12 - 59
[2]
Independent auditor’s report
To the Shareholders of ADVANZ PHARMA Corp. Limited
Our opinion
In our opinion, the accompanying consolidated financial statements present fairly, in all material respects,
the financial position of ADVANZ PHARMA Corp. Limited and its subsidiaries (together, the Company) as
at December 31, 2019 and 2018, and its financial performance and its cash flows for the years then ended
in accordance with International Financial Reporting Standards as issued by the International Accounting
Standards Board (IFRS).
What we have audited
The Company’s consolidated financial statements comprise:
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the consolidated balance sheets as at December 31, 2019 and 2018;
the consolidated statements of income (loss) for the years then ended;
the consolidated statements of comprehensive income (loss) for the years then ended;
the consolidated statements of changes in equity (deficit) for the years then ended;
the consolidated statements of cash flows for the years then ended; and
the notes to the consolidated financial statements, which include a summary of significant
accounting policies.
Basis for opinion
We conducted our audit in accordance with Canadian generally accepted auditing standards. Our
responsibilities under those standards are further described in the Auditor’s responsibilities for the audit
of the consolidated financial statements section of our report.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our
opinion.
Independence
We are independent of the Company in accordance with the ethical requirements that are relevant to our
audit of the consolidated financial statements in Canada. We have fulfilled our other ethical
responsibilities in accordance with these requirements.
PricewaterhouseCoopers LLP
PwC Tower, 18 York Street, Suite 2600, Toronto, Ontario, Canada M5J 0B2
T: +1 416 863 1133, F: +1 416 365 8215
“PwC” refers to PricewaterhouseCoopers LLP, an Ontario limited liability partnership.
Other information
Management is responsible for the other information. The other information comprises the Management’s
Discussion and Analysis.
Our opinion on the consolidated financial statements does not cover the other information and we do not
express any form of assurance conclusion thereon.
In connection with our audit of the consolidated financial statements, our responsibility is to read the
other information identified above and, in doing so, consider whether the other information is materially
inconsistent with the consolidated financial statements or our knowledge obtained in the audit, or
otherwise appears to be materially misstated.
If, based on the work we have performed, we conclude that there is a material misstatement of this other
information, we are required to report that fact. We have nothing to report in this regard.
Responsibilities of management and those charged with governance for the
consolidated financial statements
Management is responsible for the preparation and fair presentation of the consolidated financial
statements in accordance with IFRS, and for such internal control as management determines is necessary
to enable the preparation of consolidated financial statements that are free from material misstatement,
whether due to fraud or error.
In preparing the consolidated financial statements, management is responsible for assessing the
Company’s ability to continue as a going concern, disclosing, as applicable, matters related to going
concern and using the going concern basis of accounting unless management either intends to liquidate
the Company or to cease operations, or has no realistic alternative but to do so.
Those charged with governance are responsible for overseeing the Company’s financial reporting process.
Auditor’s responsibilities for the audit of the consolidated financial statements
Our objectives are to obtain reasonable assurance about whether the consolidated financial statements as
a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor’s
report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee
that an audit conducted in accordance with Canadian generally accepted auditing standards will always
detect a material misstatement when it exists. Misstatements can arise from fraud or error and are
considered material if, individually or in the aggregate, they could reasonably be expected to influence the
economic decisions of users taken on the basis of these consolidated financial statements.
As part of an audit in accordance with Canadian generally accepted auditing standards, we exercise
professional judgment and maintain professional skepticism throughout the audit. We also:
•
•
•
•
•
•
Identify and assess the risks of material misstatement of the consolidated financial statements,
whether due to fraud or error, design and perform audit procedures responsive to those risks, and
obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk
of not detecting a material misstatement resulting from fraud is higher than for one resulting from
error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the
override of internal control.
Obtain an understanding of internal control relevant to the audit in order to design audit
procedures that are appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company’s internal control.
Evaluate the appropriateness of accounting policies used and the reasonableness of accounting
estimates and related disclosures made by management.
Conclude on the appropriateness of management’s use of the going concern basis of accounting and,
based on the audit evidence obtained, whether a material uncertainty exists related to events or
conditions that may cast significant doubt on the Company’s ability to continue as a going concern.
If we conclude that a material uncertainty exists, we are required to draw attention in our auditor’s
report to the related disclosures in the consolidated financial statements or, if such disclosures are
inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to
the date of our auditor’s report. However, future events or conditions may cause the Company to
cease to continue as a going concern.
Evaluate the overall presentation, structure and content of the consolidated financial statements,
including the disclosures, and whether the consolidated financial statements represent the
underlying transactions and events in a manner that achieves fair presentation.
Obtain sufficient appropriate audit evidence regarding the financial information of the entities or
business activities within the Company to express an opinion on the consolidated financial
statements. We are responsible for the direction, supervision and performance of the group audit.
We remain solely responsible for our audit opinion.
We communicate with those charged with governance regarding, among other matters, the planned scope
and timing of the audit and significant audit findings, including any significant deficiencies in internal
control that we identify during our audit.
We also provide those charged with governance with a statement that we have complied with relevant
ethical requirements regarding independence, and to communicate with them all relationships and other
matters that may reasonably be thought to bear on our independence, and where applicable, related
safeguards.
The engagement partner on the audit resulting in this independent auditor’s report is Ross Sinclair.
(Signed) “PricewaterhouseCoopers LLP”
Chartered Professional Accountants, Licensed Public Accountants
Toronto, Ontario
March 25, 2020
ADVANZ PHARMA Corp. Limited
Consolidated Balance Sheets
(Stated in thousands of U.S. Dollars, except where otherwise stated)
As at
Assets
Current
Cash and cash equivalents
Restricted cash (Note 6)
Accounts receivable (Note 7)
Inventory (Note 8)
Prepaid expenses
Income taxes recoverable (Note 13)
Other current assets
Intangible assets (Note 9)
Goodwill (Note 10)
Fixed assets
Right-of-use assets (Note 3)
Deferred income tax assets (Note 13)
Total Assets
Liabilities
Current
Trade payables, accrued liabilities and interest payable (Note 11)
Provisions (Note 12)
Income taxes payable (Note 13)
Current portion of long-term debt (Note 14)
Current portion of lease liabilities (Note 3)
Long-term debt (Note 14)
Lease liabilities (Note 3)
Deferred income tax liabilities (Note 13)
Other liabilities
Total Liabilities
Shareholders' Equity (Deficit)
Share capital (Note 15)
Contributed surplus
Accumulated other comprehensive loss
Deficit
Total Shareholders' Equity (Deficit)
Total Liabilities and Shareholders' Equity (Deficit)
Commitments and Contingencies (Note 18)
Subsequent Events (Note 26)
Approved and authorized for issue by the Board of Directors on March 24, 2020.
''Elmar Schnee''
Director (Signed)
''Graeme Duncan''
Director (Signed)
The accompanying notes are an integral part of these consolidated financial statements.
[7]
Dec 31, 2019 Dec 31, 2018
261,138
2,922
109,920
71,104
8,025
2,046
14,627
469,782
885,371
224,538
1,616
10,195
1,508
1,593,010
107,957
17,393
53,178
20,987
2,488
202,003
1,302,091
9,701
60,555
3,546
1,577,896
224,438
3,265
115,092
73,930
9,393
2,018
16,001
444,137
1,146,692
232,784
2,550
—
4,781
1,830,944
105,640
25,877
48,375
21,089
—
200,981
1,328,074
—
104,377
848
1,634,280
1,915,000
59,221
(277,436)
(1,681,671)
15,114
1,593,010
1,915,000
55,278
(289,309)
(1,484,305)
196,664
1,830,944
ADVANZ PHARMA Corp. Limited
Consolidated Statements of Income (Loss)
(Stated in thousands of U.S. Dollars, except per share amounts and where otherwise stated)
Revenue (Note 12)
Cost of sales (Notes 8 & 24)
Gross profit
Operating expenses (Note 24)
General and administrative
Selling and marketing
Research and development
Restructuring related, acquisition and other (Note 24)
Share-based compensation (Note 17)
Amortization of intangible assets (Note 9)
Impairments (Notes 9 & 10)
Depreciation expense
Fair value loss
Total operating expenses
For the year ended
Dec 31, 2019 Dec 31, 2018
536,986
175,889
361,097
508,321
171,509
336,812
39,597
34,513
29,121
33,841
3,943
204,349
129,281
2,201
—
476,846
44,220
36,875
29,708
100,972
2,537
250,382
57,560
1,720
425
524,399
Operating income (loss) for the year
(140,034)
(163,302)
105,683
(2,195)
257,655
(2,229)
— (1,931,828)
6,100
38,257
1,468,743
(820)
(24,677)
(218,025)
22,469
(44,476)
(196,018)
16,980
(15,540)
1,467,303
(4.01)
(4.01)
93.69
93.69
Other income and expense
Interest and accretion expense (Note 14)
Interest income
Gain on debt and purchase consideration settlement (Note 14)
Foreign exchange (gain) loss
Unrealized foreign exchange (gain) loss (Note 24)
Income (loss) for the year before tax
Income taxes (Note 13)
Current
Deferred
Net income (loss) for the year
Earnings (loss) per share (Note 16)
Basic earnings (loss) per share
Diluted earnings (loss) per share
The accompanying notes are an integral part of these consolidated financial statements.
[8]
ADVANZ PHARMA Corp. Limited
Consolidated Statements of Comprehensive Income (Loss)
(Stated in thousands of U.S. Dollars, except where otherwise stated)
Net income (loss) for the year
Other comprehensive income (loss), net of tax
Amounts that will be reclassified to net income (loss)
Cumulative translation adjustment
Net investment hedge of GBP denominated loans (net of taxes of $nil (2018 -
$1,945))
Other comprehensive income (loss) for the year, net of tax
Total comprehensive income (loss) for the year
The accompanying notes are an integral part of these consolidated financial statements.
For the year ended
Dec 31, 2019 Dec 31, 2018
(196,018)
1,467,303
11,873
(23,932)
—
11,873
(184,145)
29,368
5,436
1,472,739
[9]
Share Capital
Number of
Shares
Amount
Contributed
Surplus
51,282,901
1,283,083
52,757
Accumulated
Other
Comprehensive
Loss
(294,745)
Total
Shareholders'
Equity/
(Deficit)
Deficit
(2,951,608)
(1,910,513)
—
—
(20)
2,541
—
—
—
55,278
—
55,278
3,943
—
—
59,221
—
—
—
—
—
—
—
—
—
—
631,897
—
2,541
1,467,303
1,467,303
29,368
(23,932)
(289,309)
—
(289,309)
—
—
11,873
(277,436)
—
—
(1,484,305)
(1,348)
(1,485,653)
—
(196,018)
—
(1,681,671)
29,368
(23,932)
196,664
(1,348)
195,316
3,943
(196,018)
11,873
15,114
ADVANZ PHARMA Corp. Limited
Consolidated Statements of Changes in Equity (Deficit)
(Stated in thousands of U.S. Dollars, except where otherwise stated)
Balances, January 1, 2018
Consolidation of common shares (300:1) and re-
designation as limited voting shares (Note 15)
Issuance of shares (Note 15)
Exercise / vesting of share-based compensation
Share-based compensation expense (Note 17)
Net income for the year
Net investment hedge of GBP denominated loans (net
of taxes of $1,945)
(51,112,868)
48,742,558
—
631,897
899
—
—
—
20
—
—
—
Cumulative translation adjustment
Balances, December 31, 2018
—
48,913,490
—
1,915,000
Change in accounting policy for IFRS 16 (Note 3)
Restated balances, January 1, 2019
—
—
48,913,490
1,915,000
Share-based compensation expense (Note 17)
Net loss for the year
Cumulative translation adjustment
Balances, December 31, 2019
—
—
—
—
—
48,913,490
—
1,915,000
The accompanying notes are an integral part of these consolidated financial statements.
[10]
ADVANZ PHARMA Corp. Limited
Consolidated Statements of Cash Flows
(Stated in thousands of U.S. Dollars, except where otherwise stated)
Cash flows from (used in) operating activities
Net income (loss) for the year
Adjustments to reconcile net income (loss) to net cash flows from operating activities:
For the year ended
Dec 31, 2019 Dec 31, 2018
(196,018)
1,467,303
Interest and accretion expense (Note 14)
Interest income
Depreciation and amortization (Note 9)
Share-based compensation expense (Note 17)
Fair value loss
Impairments (Notes 9 & 10)
Income tax expense (recovery) (Note 13)
Gain on debt and purchase consideration settlement (Note 14)
Unrealized foreign exchange (gain) loss (Note 24)
Income taxes paid
Income tax refunds
Decrease (increase) in restricted cash (Note 6)
Other non-cash items
Changes in non-cash working capital (Note 25)
Net cash flows from operating activities
Cash flows from (used in) investing activities
Purchase of development costs and fixed assets (Note 9)
Purchase consideration paid (Notes 5 & 9)
Proceeds from sale of assets
Interest earned
Net cash flows used in investing activities
Cash flows from (used in) financing activities
Repayment of long-term debt prior to Recapitalization Transaction (Note 14)
Repayment of long-term debt and cross currency swap liability as part of
Recapitalization Transaction (Notes 2 & 14)
Repayment of long-term debt subsequent to Recapitalization Transaction (Note
14)
Proceeds from issuance of shares (Note 15)
Equity issuance costs paid (Note 15)
Purchase consideration paid
Repayment of lease liabilities
Interest paid on lease liabilities
Interest paid (Note 14)
Interest paid prior to Recapitalization Transaction (Note 14)
Net cash flows used in financing activities
Net change in cash and cash equivalents
Effects of exchange rate changes on cash and cash equivalents
Cash and cash equivalents, beginning of year
Cash and cash equivalents, end of year
The accompanying notes are an integral part of these consolidated financial statements.
[11]
105,683
(2,195)
206,550
3,943
—
129,281
(22,007)
(24,677)
(25,077)
110
343
818
11,423
188,177
257,655
(2,229)
252,102
2,537
425
57,560
1,440
— (1,931,828)
38,257
(18,796)
87
(3,265)
(929)
21,299
141,618
(5,773)
(30,000)
7
1,519
(34,247)
—
—
(20,973)
—
—
—
(1,597)
(1,113)
(106,250)
—
(129,933)
23,997
12,703
224,438
261,138
(4,137)
—
943
1,220
(1,974)
(22,267)
(604,910)
(5,248)
587,311
(44,197)
(1,500)
—
—
(113,494)
(20,370)
(224,675)
(85,031)
(17,561)
327,030
224,438
ADVANZ PHARMA Corp. Limited
Notes to Consolidated Financial Statements
(Stated in thousands of U.S. Dollars, except per share amounts and where otherwise stated)
1. Description of Business and General Information
ADVANZ PHARMA Corp. Limited (formerly known as ADVANZ PHAMA Corp.) (the "Company",
"ADVANZ PHARMA", and together with its subsidiaries, the "Group") is an international specialty
pharmaceutical company, owning or licensing, through its subsidiaries, a diversified portfolio of branded and
generic prescription products. The Group has two reportable segments, which consist of ADVANZ PHARMA
International and ADVANZ PHARMA North America, as well as a corporate cost centre. Refer to Note 22 for
a further description on the Group's segments.
On December 17, 2019, the Company held a special meeting of the holders of limited voting shares to vote on
a special resolution to authorize the Board of Directors ("the Board") to change the domicile by way of continuance
of the Company from Canada to Jersey, Channel Islands and amend the Company’s articles to effect the change
of name of the Company from "ADVANZ PHARMA Corp." to "ADVANZ PHARMA Corp. Limited". The
shareholders of the Company approved the resolution and accordingly the name of the Company changed from
"ADVANZ PHARMA Corp." to "ADVANZ PHARMA Corp. Limited". The name change and change in domicile
took effect on January 1, 2020.
The Group's business does not experience a significant amount of seasonal variation in demand.
The Company's shares are listed for trading on the Toronto Stock Exchange ("TSX") under the symbol “ADVZ”.
On March 27, 2020, the Company expects to delist its shares from the TSX. Refer to subsequent events for
further information (Note 26).
Effective January 1, 2020, the registered and head office of the Company is located at 11-15 Seaton Place, St
Helier, Jersey, JE4 0QH.
These consolidated financial statements include trademarks that are protected under applicable intellectual
property laws and are the property of ADVANZ PHARMA or its affiliates or its licensors. Solely for convenience,
the trademarks of ADVANZ PHARMA, its affiliates and/or its licensors referred to in these financial statements
may appear with or without the ® or TM symbol, but such references or the absence thereof are not intended to
indicate, in any way, that the Company or its affiliates or licensors will not assert, to the fullest extent under
applicable law, their respective rights to these trademarks. Any other trademarks used in these consolidated
financial statements are the property of their respective owners.
[12]
ADVANZ PHARMA Corp. Limited
Notes to Consolidated Financial Statements
(Stated in thousands of U.S. Dollars, except per share amounts and where otherwise stated)
2. Recapitalization Transaction
In 2017, the Company announced as part of its long-term strategy an objective to realign its capital structure,
which included an intention to significantly reduce the Company’s existing secured and unsecured debt
obligations. On October 20, 2017, as part of the Company’s efforts to realign its capital structure, the Company
and one of its wholly-owned direct subsidiaries commenced a court proceeding (the "CBCA Proceedings")
under the Canada Business Corporations Act (the "CBCA"). The CBCA is a Canadian corporate statute that
includes provisions that allow Canadian corporations to restructure certain debt obligations, and is not a
bankruptcy or insolvency statute. In connection with the CBCA Proceedings, the Group's Currency Swaps
(defined below), which the Group entered into in August and November of 2016, and the revolving commitments
under its credit agreement were terminated.
On May 2, 2018, the Company announced a proposed transaction to realign its capital structure (the
"Recapitalization Transaction") that included, among other things, a new equity capital raise of $586.5 million,
and reduction of the Company's total outstanding debt by approximately $2.4 billion. In addition, as part of the
Recapitalization Transaction, the Company confirmed the amount payable as a result of the termination of the
Group's cross currency swap agreements ("Currency Swaps") of $114,431.
The plan of arrangement under the CBCA pursuant to which the Recapitalization Transaction was implemented
(as amended, the "CBCA Plan") was approved by secured and unsecured debtholders and shareholders of the
Company at the debtholders' and shareholders' meetings held on June 19, 2018. On June 26, 2018, the Company
obtained a final court order (the "Final Order") from the Ontario Superior Court of Justice (Commercial List)
(the "Court") approving the CBCA Plan.
In connection with the Recapitalization Transaction, the Company continued from the Business Corporations
Act (Ontario) to the Canada Business Corporations Act on June 22, 2018.
On September 6, 2018, the Recapitalization Transaction was implemented by the Company.
The Recapitalization Transaction included, among other things, the following key elements:
(a) the Group’s total debt was reduced by approximately $2.4 billion;
(b) $586.5 million in equity, excluding $44 million of fees, was invested pursuant to a private placement (the
"Private Placement") by certain parties that executed the subscription agreement with ADVANZ
PHARMA, dated May 1, 2018, in exchange for new limited voting shares (refer to Note 15 for details of
the limited voting shares) of ADVANZ PHARMA representing in the aggregate approximately 87.69%
of the outstanding limited voting shares of ADVANZ PHARMA upon implementation of the
Recapitalization Transaction, but prior to the issuance of the limited voting shares issued in connection
with the Management Co-Invest (defined in Note 15);
(c) the Company’s secured debt (the "Secured Debt"), including the Cross Currency Swap Liability (together,
the "Exchanged Secured Debt") in the aggregate principal amount of approximately $2.1 billion, plus
accrued and unpaid interest was repaid with (i) cash in the amount of approximately $19 million equal
to outstanding accrued and unpaid non-compound interest (calculated at contractual non-default rates) in
respect of the Exchanged Secured Debt, (ii) cash in the amount of approximately $605 million (taking
into account early consent cash consideration for holders of Exchanged Secured Debt entitled to early
consent cash consideration under the CBCA Plan), and (iii) approximately $1.36 billion of new secured
debt (the "New Secured Debt") comprised of new senior secured term loans (approximately $1.06 billion,
denominated in U.S. dollars and European Euros) and new senior secured notes (approximately $300
million, denominated in U.S. dollars). Refer to Note 14 for a description of the New Secured Debt;
(d) the Company’s unsecured debt (the "Unsecured Debt") in the aggregate principal amount of
approximately $1.6 billion, plus accrued and unpaid interest, was repaid with new limited voting shares
of ADVANZ PHARMA representing in the aggregate approximately 11.96% of the outstanding limited
voting shares of ADVANZ PHARMA upon implementation of the Recapitalization Transaction (taking
into account early consent shares for holders of Unsecured Debt entitled to early consent consideration
under the CBCA Plan), but prior to the issuance of the limited voting shares issued in connection with
the Management Co-Invest (defined in Note 15);
[13]
ADVANZ PHARMA Corp. Limited
Notes to Consolidated Financial Statements
(Stated in thousands of U.S. Dollars, except per share amounts and where otherwise stated)
(e) the Company’s existing common shareholders retained their common shares, subject to a 1-for-300
common share consolidation (the “Share Consolidation”) and a re-designation of such shares as limited
voting shares pursuant to the CBCA Plan, representing approximately 0.35% of the outstanding limited
voting shares of ADVANZ PHARMA upon implementation of the Recapitalization Transaction, but prior
to the issuance of the limited voting shares issued in connection with the Management Co-Invest (defined
in Note 15);
(f) all other equity interests in ADVANZ PHARMA, including all options, warrants, rights or similar
instruments, were cancelled pursuant to the CBCA Plan, and all equity claims, other than the Company's
existing equity class action claims (the "Existing Equity Class Action Claims"), were released pursuant
to the CBCA Plan and the Final Order, provided that any recovery in respect of such Existing Equity
Class Action Claims was limited pursuant to the CBCA Plan and the Final Order to recovery from any
applicable insurance policies maintained by the Company, subject to certain exceptions;
(g) any and all (i) defaults resulting from the CBCA Proceedings, and (ii) third party change-of-control
provisions that may have otherwise been triggered by the Recapitalization Transaction, have been
permanently waived pursuant to the CBCA Plan and the Final Order;
(h) obligations to customers, suppliers and employees (other than the cancellation of certain equity interests,
described above) were not affected by the Recapitalization Transaction; and
(i) pursuant to the CBCA Plan, certain amendments were made to the Company’s articles to, among other
things, amend ADVANZ PHARMA’s authorized capital and provisions attaching to its shares, and the
Company’s existing by-laws were repealed and a new general by-law of ADVANZ PHARMA was adopted
and approved.
The Share Consolidation completed as part of the Recapitalization Transaction reduced the number of issued
and outstanding ADVANZ PHARMA common shares to 170,932 (prior to taking into account the issuance
of the limited voting shares pursuant to the Recapitalization Transaction and the Management Co-Invest
(defined in Note 15)). Together with the new limited voting shares issued pursuant to the Recapitalization
Transaction and the Management Co-Invest (defined in Note 15), the Company now has a total of 48,913,490
limited voting shares issued and outstanding, which commenced trading on the TSX on September 11, 2018.
In connection with the implementation of the CBCA Plan, ADVANZ PHARMA finalized and entered into an
investor rights agreement (the “Investor Rights Agreement”) with the parties that participated in the Private
Placement. The Company has also amended its articles to reflect certain aspects of the governance arrangements
which became effective upon implementation of the CBCA Plan.
As part of the Recapitalization Transaction, a new management incentive plan (the "MIP") was adopted
pursuant to the CBCA Plan, pursuant to which a maximum of up to 7.59% of the limited voting shares
outstanding upon implementation of the CBCA Plan could be issued, as approved in connection with approval
of the CBCA Plan. If such limited voting shares are issued, they will dilute the ownership percentage of
holders of limited voting shares of ADVANZ PHARMA. Refer to Note 17 for a further description of the MIP.
The Company recorded a gain on settlement of debt of $1,924,520. Refer to Note 14 for a further description
of the gain on debt settlement.
3. Significant Accounting Policies
(a) Basis of Presentation
These consolidated financial statements have been prepared in accordance with International Financial
Reporting Standards as issued by the International Accounting Standards Board ("IFRS"). The consolidated
financial statements have been prepared under the historical cost convention, except for certain financial
instruments that are measured at fair value, as described in (p) below, if any. The accounting policies have
been consistently applied throughout the year unless otherwise stated.
[14]
ADVANZ PHARMA Corp. Limited
Notes to Consolidated Financial Statements
(Stated in thousands of U.S. Dollars, except per share amounts and where otherwise stated)
The preparation of financial statements in conformity with IFRS requires the use of certain critical accounting
estimates. It also requires the Company to exercise its judgment in the process of applying the Company’s
accounting policies. The areas involving a higher degree of judgment or complexity, or areas where
assumptions and estimates are significant to the consolidated financial statements are disclosed in Note 4.
The consolidated financial statements are prepared on a going concern basis and have been presented in
U.S. dollars, which is also the Company’s functional currency.
(b) Basis of Consolidation
The wholly owned subsidiaries of the Company are consolidated to produce the financial results for the
consolidated corporation. All intercompany transactions, balances, income and expenses on transactions
between the subsidiaries are fully eliminated. Profits and losses resulting from intercompany transactions
that were recognized are also fully eliminated.
These consolidated financial statements include the following wholly owned material subsidiaries of the
Company: Concordia Laboratories, Inc. S.à R.L., Concordia Pharmaceuticals, Inc. S.à R.L., ADVANZ
PHARMA Investment Holdings (Jersey) Limited, ADVANZ PHARMA Financing (Jersey) Limited,
ADVANZ PHARMA (Jersey) Limited, Amdipharm Holdings S.à R.L., Amdipharm AG, Amdipharm BV,
Amdipharm Limited, Amdipharm Mercury Holdco UK Ltd., Amdipharm Mercury UK Ltd., ADVANZ
PHARMA Holdings (Jersey) Limited, Amdipharm Mercury International Limited, ADVANZ PHARMA
Investment Holdings (UK) Limited, Mercury Pharma Group Limited, Boucher and Muir Pty Limited, Abcur
AB, ADVANZ PHARMA Services (UK) Limited, Focus Pharma Holdings Limited, Focus Pharmaceuticals
Limited, ADVANZ PHARMA Generics (UK) Limited, Mercury Pharmaceuticals (Ireland) Limited,
Mercury Pharma International Limited, and Mercury Pharmaceuticals Limited.
When necessary, adjustments are made to the financial statements of subsidiaries to bring their accounting
policies in line with those followed by other members of the Group.
(c) Comparative Financial Information
Certain prior period balances have been re-classified to conform with the current period financial statement
presentation.
(d) Segment Reporting
Operating segments are reported in a manner consistent with the internal reporting provided to the chief
operating decision maker.
The chief operating decision maker (“CODM”), who is responsible for allocating resources and assessing
performance of the operating segments, has been identified as the Chief Executive Officer of the Company.
(e) Business Combinations
Acquisitions have been accounted for as business combinations using the acquisition method. The
consideration transferred in a business combination is measured at fair value at the date of acquisition.
Acquisition-related transaction costs are recognized in income (loss) and comprehensive income (loss)
as incurred. At the acquisition date, the identifiable assets acquired and the liabilities assumed are initially
recognized at their fair value.
Goodwill is measured as the excess of the sum of the consideration transferred and the fair value of the
acquirer’s previously held equity interest in the acquiree (if any) over the net of the acquisition-date amounts
of the identifiable assets acquired and liabilities assumed.
[15]
ADVANZ PHARMA Corp. Limited
Notes to Consolidated Financial Statements
(Stated in thousands of U.S. Dollars, except per share amounts and where otherwise stated)
When the consideration transferred by the Group in a business combination includes assets or liabilities
resulting from a contingent consideration arrangement, the contingent consideration is measured at its
acquisition-date fair value and included as part of the consideration transferred in a business combination.
Changes in the fair value of the contingent consideration that qualify as measurement period adjustments
are adjusted retrospectively, with corresponding adjustments against goodwill. Changes in fair value that
are not considered measurement adjustments are recognized through the consolidated statements of income
(loss). Measurement period adjustments are adjustments that arise from additional information obtained
during the ‘measurement period’ (which cannot exceed one year from the acquisition date) about facts and
circumstances that existed at the acquisition date.
Contingent consideration that is classified as a financial asset or a financial liability is remeasured at
subsequent reporting dates, with the corresponding gain or loss being recognized in the consolidated
statements of income (loss).
(f) Foreign Currency Translation
The Company’s consolidated financial statements are presented in U.S. dollars, which is the Company’s
functional currency. Each entity in the Group determines its own functional currency, and items included
in the financial statements of each entity are measured using that functional currency. All of the Company’s
significant subsidiaries report in U.S dollars ("USD") with the exception of subsidiaries within the ADVANZ
PHARMA International segment which report primarily in Great British Pounds ("GBP" or "£") and certain
others in Indian Rupees, European Euros ("EUR"), South African Rand, Hong Kong Dollars, Australian
Dollars and Swedish Krona. Transactions in foreign currencies are initially recorded at the functional
currency rate of exchange prevailing at the date of each transaction. Monetary assets and liabilities
denominated in foreign currencies are retranslated at the functional currency spot rate of exchange prevailing
at the balance sheet dates. All differences are taken to the consolidated statements of income (loss). Non-
monetary items measured at historical cost in a foreign currency are translated using the exchange rates at
the dates of the initial transactions. Non-monetary items measured at fair value in a foreign currency are
translated using the exchange rates in effect at the date when the fair value was determined.
The assets and liabilities of foreign operations are translated into USD at the rate of exchange prevailing at
the balance sheet dates, and their consolidated statements of income (loss) are translated at exchange rates
prevailing at the average exchange rate for the period. The exchange differences arising on the translation
are taken directly to a separate component of equity (accumulated other comprehensive income (loss)). On
disposal or dissolution of a foreign operation, the deferred cumulative amount recognized in equity relating
to the particular foreign operation is recognized in the consolidated statements of income (loss).
(g) Cash and cash equivalents
Cash and cash equivalents includes cash on hand, deposits held with financial institutions and other short-
term, highly liquid investments with maturities of three months or less or that are readily convertible to
cash, and which are subject to an insignificant risk of changes in value.
Cash equivalents as at December 31, 2019 includes deposits held with major financial institutions of $16,523
(2018 - $14,771).
(h) Inventory
Inventories consist of raw materials, work-in-progress and finished goods. Inventory, other than inventory
acquired through a business combination, is valued at the lower of cost based on weighted average cost and
net realizable value. Net realizable value is the estimated selling prices less applicable selling expenses and
costs to complete the sale. If the carrying value exceeds the net realizable value, a write-down is recognized.
A reserve is taken on inventory for quantities not expected to be consumed. This reserve offsets the inventory
balance. Inventories acquired through business combinations are initially recognized at fair value.
[16]
ADVANZ PHARMA Corp. Limited
Notes to Consolidated Financial Statements
(Stated in thousands of U.S. Dollars, except per share amounts and where otherwise stated)
(i) Intangible assets
Intangible assets are measured at cost less accumulated amortization and accumulated impairment losses.
The assets are amortized using the straight line method over their estimated useful life, or using a declining
balance approach if such method is more appropriate based on the pattern in which the assets future economic
benefits are expected to be consumed by the Group. The declining balance rate used by the Group for certain
acquired product rights ranges between 10% and 50% annually. Amortization recorded on all other
intangibles applied on a straight line basis is as follows:
Acquired product rights and manufacturing processes
Intellectual property
Customer list
Supplier contracts
Distribution contracts
Software and other intangibles
7-28 years
20 years
4 years
5 years
5 years
3-5 years
The estimated useful life is reviewed at the end of each reporting period with the effect of any changes in
estimate being accounted for on a prospective basis.
In-process research & development ("IPR&D") acquired in a business combination is capitalized as an
indefinite-lived intangible asset and accordingly is not amortized, but is tested for impairment on an annual
basis or more frequently if there are indications that IPR&D may be impaired. When IPR&D is completed,
the asset will be assigned a useful life and amortized, or when abandoned, written off as an impairment.
Indefinite life intangible assets, including IPR&D, are measured at cost less accumulated impairment losses.
Costs incurred on development projects are recognized as intangible assets when technical feasibility has
been met, the Group's resources and intention to develop are committed, expenditures can be measured
reliably and there is an expectation of future economic benefits. Other development expenditures are
recognized as an expense as incurred. Development costs previously recognized as an expense are not
recognized as an asset in a subsequent period.
Intellectual property acquired in a business combination is recognized separately as an intangible asset if it
meets the definition of an intangible asset in accordance with IAS 38, "Intangible Assets", and its fair value
can be measured reliably.
All development costs with a finite useful life that have been capitalized are amortized from the
commencement of the commercial production of the product on a straight-line basis over the period of its
expected benefit.
(j) Goodwill
Goodwill represents the excess fair value of consideration transferred over the fair value of the underlying
net assets in a business combination and is measured at cost less accumulated impairment losses. Goodwill
is not amortized, but is tested for impairment on an annual basis or more frequently if there are indications
that goodwill may be impaired. For the purposes of impairment testing, goodwill is allocated to each of the
Group's cash generating units (“CGU”) or group of CGU's, that are expected to benefit from the synergies
of the acquisitions. If the recoverable amount of the CGU or group of CGU's is less than the carrying amount,
the impairment loss is allocated first to reduce the carrying amount of any goodwill and then to other assets
of the CGU or group of CGU's.
[17]
ADVANZ PHARMA Corp. Limited
Notes to Consolidated Financial Statements
(Stated in thousands of U.S. Dollars, except per share amounts and where otherwise stated)
(k) Impairment of Non-Financial Assets
The Group reviews assets such as property and equipment and intangible assets with finite useful lives for
impairment whenever events or changes in circumstances indicate that the carrying amount may not be
recoverable.
Intangible assets with indefinite lives are tested for impairment annually or more frequently if events or
changes in circumstances indicate that they may be impaired.
For the purpose of measuring recoverable amounts, assets are grouped at the lowest levels for which there
are separately identifiable cash flows. Recoverable amount is the higher of an asset’s fair value less the cost
of disposal and value in use, (being the present value of the expected future cash flows of the relevant asset
or CGU), as determined by the Group.
Any impairment losses are recognized immediately in the consolidated statements of income (loss). Non-
financial assets other than goodwill that suffered impairment are reviewed for possible reversal of the
impairment at each reporting date.
(l) Lease and Right-of-use assets
IFRS 16, "Leases" ("IFRS 16"), sets out the principles for the recognition, measurement and disclosure of
leases. IFRS 16 provides revised guidance on identifying a lease and for separating lease and non-lease
components of a contract. IFRS 16 introduces a single accounting model for all lessees, thereby removing
the distinction between operating and finance leases. IFRS 16 requires a lessee to recognize an asset (right-
to-use the leased item) and a financial liability to pay rentals on the consolidated balance sheets with terms
of more than 12 months, unless the underlying asset is of low value.
From January 1, 2019, with the adoption of IFRS 16, the Group adopted the following accounting policies
for leases and right-of-use assets:
As lessee, the Group assesses whether a contract contains a lease at inception of a contract and upon
modification of a contract. The Group recognizes a right-of-use asset and a corresponding lease liability for
all arrangements in which it is a lessee, except for leases with a term of 12 months or less and low-value
leases. For these leases, payments are recognized on a straight-line basis as general and administrative
expenses in the consolidated statements of income (loss). The lease liability is initially measured at the
present value of the future lease payments as from the commencement date of the lease to end of the lease
term. The lease term includes the period of any lease extension that in management’s assessment is highly
probable to be exercised by the Group. The lease payments are discounted using the interest rate implicit
in the lease. If that rate cannot be determined, the Group’s incremental borrowing rate is used, being the
rate that the lessee would have to pay to borrow funds necessary to obtain an asset of similar value in a
similar economic environment with similar terms and conditions. The Group remeasures the lease liability
(and makes a corresponding adjustment to the related right-of-use asset) whenever there is a change to the
lease terms or expected payments under the lease, or a modification that is not accounted for as a separate
lease. The portion of the lease payments attributable to the repayment of lease liabilities and interest is
recognized in cash flows used in financing activities.
Right-of-use assets are initially recognized on the balance sheet at cost, which comprises the amount of the
initial measurement of the corresponding lease liability, adjusted for any lease payments made at or prior
to the commencement date of the lease and any lease incentive received. Right-of-use assets are depreciated
on a straight-line basis from the commencement date of the lease over the shorter of the useful life of the
right-of-use asset or the end of the lease term. Right-of-use assets are assessed for impairment whenever
there is an indication that the balance sheet carrying amount may not be recoverable using cash flow
projections for the useful life.
[18]
ADVANZ PHARMA Corp. Limited
Notes to Consolidated Financial Statements
(Stated in thousands of U.S. Dollars, except per share amounts and where otherwise stated)
Prior to January 1, 2019, leases of property, plant and equipment were classified as either finance or operating
leases. Payments made under operating leases (net of any incentives received from the lessor) were charged
to profit or loss on a straight-line basis over the period of the lease.
The section "recent accounting pronouncements adopted" included in (t) below provides additional
disclosures on the impact of adoption of IFRS 16 - Leases.
(m) Provisions
Provisions are recognized when present (legal or constructive) obligations as a result of a past event will
lead to a probable outflow of economic resources and amounts can be estimated reliably. Provisions are
measured at the Group's best estimate of the expenditure required to settle the present obligation, based on
the most reliable evidence available at the reporting date, including the risks and uncertainties associated
with the present obligation. The provision level is also subject to factors such as product mix and customer
mix which may result in higher levels of gross to net adjustment. Refer to Note 4, which provides further
detail regarding the estimates involved in determining provisions.
The Group performs evaluations to identify onerous contracts and, where applicable, records provisions for
such contracts. All provisions are reviewed at each reporting date and adjusted to reflect the current best
estimate. In those cases where the possible outflow of economic resources as a result of present obligations
is considered remote, no liability has been recognized.
(n) Net Investment Hedge
The Company had designated its GBP denominated term loan (refer to Note 14) as a net investment hedge
with respect to its investment in the ADVANZ PHARMA International segment as this loan was entered
into at the time of the acquisition of the ADVANZ PHARMA International segment and formed part of the
consideration transferred. This term loan was carried at amortized cost, however foreign currency translation
adjustments of the financial liability were recorded in other comprehensive income (loss) at each reporting
period on a net of tax basis, along with the associated cumulative translation adjustment associated with the
hedged investment. There were no amounts recorded in the consolidated statements of income (loss) with
respect to ineffective portions of the hedge or subsequent changes from the initial designation of the net
investment hedge.
(o) Income Taxes
Income taxes are comprised of current and deferred taxes. These taxes are accounted for using the liability
method.
Current tax is recognized in connection with income for tax purposes, unrealized tax benefits, excluding
interest in respect thereof, and the recovery of tax paid in a prior period. The determination of income for
tax purposes requires interpretation of the relevant rules and judgment, therefore an unrealized tax benefit
may arise in connection with taxation years that have not yet been reviewed by the relevant tax authority.
If appropriate, an unrealized tax benefit will be realized in the reporting period in which the Group determines
that realization is not in doubt. Current tax is measured at the tax rate applicable to the taxation period during
which the income for tax purposes arose.
Deferred tax is recognized on the difference between the carrying amount of an asset or a liability, as reflected
in the financial statements, and the corresponding tax base, used in the computation of income for tax
purposes (“temporary difference”). A deferred tax liability is generally recognized for any temporary
difference in respect of an asset where the carrying amount exceeds the tax base and in respect of a liability
where the tax base exceeds the carrying amount. A deferred tax asset is generally recognized for any
temporary difference in respect of an asset where the tax base exceeds the carrying amount, in respect of a
liability where the carrying amount exceeds the tax base and to the extent that it is probable that income for
[19]
ADVANZ PHARMA Corp. Limited
Notes to Consolidated Financial Statements
(Stated in thousands of U.S. Dollars, except per share amounts and where otherwise stated)
tax purposes will be available from which the temporary difference can be deducted. Deferred tax is not
recognized if a temporary difference arises in connection with goodwill or the initial recognition (other than
in a business combination) of an asset or liability in a transaction that affects neither income for tax purposes
nor income for accounting purposes.
The carrying amount of a deferred tax asset is reviewed at the end of each reporting period and reduced to
the extent that it is no longer probable that sufficient income for tax purposes will be available from which
the temporary difference can be deducted. Deferred taxes are measured at the tax rates that are expected to
apply in the period in which the liability is settled or the asset realized, based on tax rates (and tax laws)
that are enacted or substantively enacted during the reporting period and reflects the tax consequences that
would follow from the manner in which the Group expects, at the end of the reporting period, to realize the
asset or settle the liability that gave rise to the temporary difference.
Income taxes are recognized in the consolidated statements of income (loss), except when they relate to an
item that is recognized in other comprehensive income (loss) or directly in equity, in which case, the taxes
are also recognized in other comprehensive income (loss) or directly in equity, respectively. Where income
taxes arise from the initial accounting for a business combination, these are included in the accounting for
the business combination.
(p) Financial Instruments
Financial assets held with an objective to hold assets in order to collect contractual cash flows which arise
on specified dates that are solely principal and interest are measured at amortised cost using the effective
interest method. Debt investments held with an objective to hold both assets in order to collect contractual
cash flows which arise on specified dates that are solely principal and interest as well as selling the asset
on the basis of fair value are measured at fair value through other comprehensive income ("FVTOCI"). All
other financial assets are classified and measured at fair value through profit or loss ("FVTPL"). Financial
liabilities are classified as either FVTPL or other financial liabilities, and the portion of the change in fair
value that relates to the Company's credit risk is presented in other comprehensive income (loss). Instruments
classified as FVTPL are measured at fair value with unrealized gains and losses recognized in net income
(loss). Other financial liabilities are subsequently measured at amortised cost using the effective interest
method.
Accounts receivables are initially recognized at their invoiced amounts. Provisions for doubtful accounts
receivables, recorded as allowance for doubtful accounts, are established using an expected credit loss
("ECL") model. Impairment is measured using a 12-month expected credit loss method to recognize an
allowance. The Group applies the simplified approach to providing for expected credit losses prescribed by
IFRS 9, which permits the use of the lifetime expected loss provision for all accounts receivables.
Transaction costs that are directly attributable to the acquisition or issuance of financial assets and financial
liabilities, other than financial assets and financial liabilities classified as FVTPL, are added to or deducted
from the fair value on initial recognition. Transaction costs directly attributable to the acquisition of financial
assets or financial liabilities classified as FVTPL are recognized immediately in consolidated net income
(loss).
Financial assets and financial liabilities are recognized on the consolidated balance sheet when the Group
becomes a party to the contractual provisions of the financial instrument. Financial assets are derecognized
when the Group transfers substantially all risks and rewards of ownership or the contractual rights to the
cash flows expire. Financial liabilities are derecognized when the obligation is discharged, cancelled or
expired.
The following table illustrates the classification and measurement of the Group's financial instruments:
[20]
ADVANZ PHARMA Corp. Limited
Notes to Consolidated Financial Statements
(Stated in thousands of U.S. Dollars, except per share amounts and where otherwise stated)
Financial Instruments
Cash and cash equivalents
Restricted cash
Accounts receivable
Trade payables, accrued liabilities and interest
payable
Provisions
Lease liabilities
Long-term debt
Financial Instruments
Cash and cash equivalents
Restricted Cash
Accounts receivable
Trade payables, accrued liabilities and interest
payable
Provisions
Long-term debt
Financial
assets at
amortized cost
Liabilities at
amortized
cost
261,138
2,922
109,920
—
—
—
—
373,980
—
—
—
(107,957)
(17,393)
(12,189)
(1,323,078)
(1,460,617)
As at Dec 31,
2019
261,138
2,922
109,920
(107,957)
(17,393)
(12,189)
(1,323,078)
(1,086,637)
Financial
assets at
amortized cost
Liabilities at
amortized
cost
As at Dec 31,
2018
224,438
3,265
115,092
—
—
—
342,795
—
—
(105,640)
(25,877)
(1,349,163)
(1,480,680)
224,438
3,265
115,092
(105,640)
(25,877)
(1,349,163)
(1,137,885)
Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly
transaction between market participants at the measurement date. The fair value measurement is based on
the presumption that the transaction to sell the asset or transfer the liability takes place either:
•
•
in the principal market for the asset or liability, or
in the absence of a principal market, in the most advantageous market for the asset or liability.
The principal or the most advantageous market must be accessible by the Group.
The fair value of an asset or a liability is measured using the assumptions that market participants would
use when pricing the asset or liability, assuming that market participants act in their economic best interest.
The Group uses valuation techniques that are appropriate in the circumstances and for which sufficient data
are available to measure fair value, maximizing the use of relevant observable inputs and minimizing the
use of unobservable inputs.
All assets and liabilities for which fair value is measured or disclosed in the consolidated financial statements
are categorized within the fair value hierarchy, described, as follows, based on the lowest-level input that
is significant to the fair value measurement as a whole:
Level 1: Valuations based on quoted prices (unadjusted) in active markets for identical assets or liabilities;
Level 2: Valuations based on directly or indirectly observable inputs in active markets for similar assets or
liabilities, other than Level 1 prices, such as quoted interest or currency exchange rates; and
[21]
ADVANZ PHARMA Corp. Limited
Notes to Consolidated Financial Statements
(Stated in thousands of U.S. Dollars, except per share amounts and where otherwise stated)
Level 3: Valuations based on significant inputs that are not derived from observable market data, such as
discounted cash flow methodologies based on internal cash flow forecasts.
(q) Share-based Compensation
In connection with the Recapitalization Transaction, the Group adopted the MIP as described in Notes 2
and 17. The MIP involves participants acquiring shares in a subsidiary of the Company which will be
exchangeable for limited voting shares of the Company in certain circumstances. The MIP is subject to
certain market based exchange conditions and has been valued using a Monte Carlo valuation model. The
fair value of the MIP shares are recognized as a compensation expense over time and the related credit is
recorded as a reserve for share-based compensation within contributed surplus. The share-based
compensation expense is adjusted for subsequent changes in the Group's estimate of timing of when the
exchange may occur. The effect of these are recognized in the period of change.
Prior to the Recapitalization Transaction, the Company had a stock option plan that allowed for the issuance
of stock options to employees, directors, officers, and others as determined by the Company’s board of
directors. Under IFRS, each option installment was treated as a separate option grant with graded-vesting
features, forfeitures were estimated at the time of grant and revised if actual forfeitures were likely to differ
from previous estimates, and options granted to parties other than employees were measured at their fair
value on the date goods or services were received. Over the vesting period of the option grants, the fair
value was recognized as compensation expense and a related credit was recorded as reserve for share-based
compensation. The reserve for share-based compensation was reduced as options were exercised through
a credit to share capital. The consideration paid by option holders was credited to share capital when the
options were exercised.
Prior to the Recapitalization Transaction, the Company had a long term incentive plan. For each Restricted
Share Unit (“RSU”), Deferred Share Unit (“DSU”) or Performance Based RSU (“Performance Based
RSU”) granted under the long-term incentive plan, the Company recognized an expense equal to the market
value of an ADVANZ PHARMA common share at the date of grant based on the number of RSUs, DSUs
and Performance Based RSUs expected to vest, recognized over the term of the vesting period, with a
corresponding credit to reserve for share based compensation anticipated to be equity settled or a
corresponding credit to a liability for those anticipated to be cash settled. Additional RSUs, DSUs or
Performance Based RSUs were issued to reflect dividends declared on the common shares. Certain
Performance Based RSUs were subject to market based vesting conditions and had been valued using a
Monte Carlo valuation model. Compensation expense was adjusted for subsequent changes in management’s
estimate of the number of RSUs, DSUs or Performance Based RSUs that were expected to vest and, for
RSUs, DSUs or Performance Based RSUs anticipated to be cash settled, changes in the market value of
ADVANZ PHARMA common shares. The effect of these changes was recognized in the period of the
change. Vested RSUs, DSUs and Performance Based RSUs were settled either in ADVANZ PHARMA
common shares or in cash or a combination thereof at the discretion of the Company.
(r) Earnings (Loss) Per Share
Basic earnings (loss) per share is calculated by dividing the net income (loss) by the weighted average
number of shares outstanding during the year. Diluted earnings (loss) per share is calculated by dividing
the applicable net earnings by the sum of the weighted average number of shares outstanding during the
year and all additional shares that would have been outstanding if potentially dilutive shares had been issued
during the year.
[22]
ADVANZ PHARMA Corp. Limited
Notes to Consolidated Financial Statements
(Stated in thousands of U.S. Dollars, except per share amounts and where otherwise stated)
(s) Revenue Recognition
Revenue is recorded as net revenue and is recognized in the consolidated statement of income (loss) when
a contractual promise to a customer (performance obligation) has been fulfilled by transferring control over
the promised goods to the customer, generally at the point in time of shipment to or receipt of the products
by the customer. The amount of revenue to be recognized is based on the consideration the Group expects
to receive in exchange for its goods. If a contract contains more than one performance obligation, the
consideration is allocated based on the standalone selling price of each performance obligation.
The Group operates in a number of different geographical segments, with different markets. Further detail
by segment related to revenue recognition is described below:
ADVANZ PHARMA North America segment
Revenue within the ADVANZ PHARMA North America segment is primarily derived from two customer
groups, those being authorized generic partners ("AG Partners") and wholesalers. Revenue from AG
Partners is recognized at the time of sale to the AG Partners as this is the point of transferring control over
the promised goods to the customer, based on the following; 1) the AG Partners are responsible for setting
their sales price to the final customer and collecting on their receivables; 2) the Group can reliably measure
the amount of revenue to be recognized (this includes the impact of gross to net adjustments, including
expected returns, wholesaler and retail inventory levels, prescription data, current market trends, competitor
activity and historical experience); 3) the AG Partners are responsible for managing their customers; and
4) costs associated with the sale have been incurred at the time the product is sold to the AG Partner. Revenue
recognition on sales to wholesalers is similar to AG Partners, however, sales to wholesalers are initially
invoiced to one wholesaler partner and then subsequently sold to the other wholesalers, at which point
revenue is recognized consistent with that of AG Partner revenue recognition. Revenue related to Photofrin®
is concentrated primarily within the United States ("U.S.") and is sold through distributors. The point of
revenue recognition is at the time the distributors receive the product. Revenue is recognized at this time
as the distributor has obtained control over the promised goods since they have no right of return, except
for expired product (at which point they are entitled only to a replacement product), and full risk of ownership
of the product has been transferred.
The Group also earns revenue from licensing and profit-sharing arrangements. Under these arrangements
revenue is recognized as earned in accordance with the substance of the relevant agreement. Arrangements
determined over time are recognized on a straight-line basis over the period of the agreement. Arrangements
that are based on production, sales and other measures are recognized at a point in time once the performance
obligations are satisfied by reference to the underlying arrangement.
Royalty income is recognized over a period of time as the performance obligations are satisfied in accordance
with royalty agreements.
ADVANZ PHARMA International segment
Revenue within the ADVANZ PHARMA International segment is recognized at the time of sale to the
wholesalers, hospitals and pharmacies, as this is the point of transferring control over the promised goods
to the customer. The ADVANZ PHARMA International segment is not subject to significant levels of gross
to net adjustments. Revenue is recognized on either shipment or receipt by the customer depending on the
contractual terms of the sales agreement.
(t) Recent Accounting Pronouncements
(i) Recent accounting pronouncements adopted
[23]
ADVANZ PHARMA Corp. Limited
Notes to Consolidated Financial Statements
(Stated in thousands of U.S. Dollars, except per share amounts and where otherwise stated)
Lease
IFRS 16 sets out the principles for the recognition, measurement and disclosure of leases. IFRS 16 provides
revised guidance on identifying a lease and for separating lease and non-lease components of a contract.
IFRS 16 introduces a single accounting model for all lessees, thereby removing the distinction between
operating and finance leases. IFRS 16 requires a lessee to recognize an asset (right-to-use the leased item)
and a financial liability to pay rentals on the consolidated balance sheets with terms of more than 12-months,
unless the underlying asset is of low value.
The impact of the adoption of IFRS 16 on the Group’s financial statements that has been applied from
January 1, 2019 is outlined below.
The Group has adopted IFRS 16 retrospectively from January 1, 2019, but has not restated comparative
information, as permitted under the specific transitional provisions in the standard in accordance with the
modified retrospective approach for adoption. The reclassifications and the adjustments arising from the
new leasing standard are therefore recognized in the opening consolidated balance sheet on January 1, 2019.
In applying IFRS 16 for the first time, the Group has used the following practical expedients permitted by
the standard:
• The use of a single discount rate to a portfolio of leases with reasonably similar characteristics;
• Reliance on previous assessments on whether leases are onerous;
• The accounting for operating leases with a remaining lease term of less than 12 months as at January
1, 2019 as short-term leases;
• The exclusion of initial direct costs for the measurement of the right-of-use assets at the date of initial
application; and
• The use of hindsight in determining the lease term where the contract contains options to extend or
terminate the lease.
The Group has also elected not to reassess whether a contract is or contains a lease at the date of initial
application. Instead, for contracts entered into before the transition date, the Group has relied on its
assessment made applying IAS 17 and IFRIC 4, “Determining whether an Arrangement contains a Lease”.
i. Adjustments Recognized on Adoption of IFRS 16
On adoption of IFRS 16, the Group recognized lease liabilities in relation to leases which had previously
been classified as ‘operating leases’ under the principles of IAS 17, “Leases”. These liabilities were
measured at the present value of the remaining lease payments, discounted using the lessee’s incremental
borrowing rate as of January 1, 2019. The weighted average lessee’s incremental borrowing rate applied
to the lease liabilities on January 1, 2019 was 8.00%.
[24]
ADVANZ PHARMA Corp. Limited
Notes to Consolidated Financial Statements
(Stated in thousands of U.S. Dollars, except per share amounts and where otherwise stated)
Operating lease commitments disclosed as at December 31, 2018
Operating lease commitments discounted using the lessee's
incremental borrowing rate at the date of initial application (January
1, 2019)
Add: adjustments as a result of a different treatment of extension
options
(Less): short-term leases recognized on a straight-line basis as
expense
Lease liability recognized as at January 1, 2019
2019
9,623
9,270
6,536
(259)
15,547
The balance sheet shows the following amounts related to lease
liabilities:
Dec 31, 2019
Jan 1, 2019
Current lease liabilities
Long-term lease liabilities
2,488
9,701
12,189
2,481
13,066
15,547
The associated right-of-use assets for all leases were measured on a retrospective basis as if the new
rules had always been applied.
There was one existing onerous lease contract which required an adjustment to the right-of-use asset
at the date of initial application. Accordingly, the onerous lease provision in the amount of $1,296 was
reclassified from trade payables, accrued liabilities and interest payable to a reduction in the right-of-
use assets on the date of initial application. The remaining value of the right-of-use asset associated
with this onerous lease contract was $nil on January 1, 2019.
The recognized right-of-use assets relate to the following types of items:
As at
Offices
Total right-of-use assets
Dec 31, 2019
Jan 1, 2019
10,195
10,195
12,903
12,903
The change in accounting policy affected the following items in the consolidated balance sheet on
January 1, 2019:
Right-of-use assets
Lease liabilities
Trade payables, accrued liabilities and interest payable
Retained earnings
Increase
(decrease)
12,903
15,547
(1,296)
(1,348)
The segmental impact of the change in accounting policy is primarily related to ADVANZ PHARMA
International.
[25]
ADVANZ PHARMA Corp. Limited
Notes to Consolidated Financial Statements
(Stated in thousands of U.S. Dollars, except per share amounts and where otherwise stated)
Uncertainty over Income Tax Treatments
On June 7, 2017, the IASB issued IFRIC 23, Uncertainty over Income Tax Treatments ("IFRIC 23"). IFRIC
23 clarifies the application of recognition and measurement requirements in IAS 12, Income Taxes, when
there is uncertainty over income tax treatments. The IFRIC 23 interpretation specifically addresses whether
an entity considers uncertain tax treatments separately; the assumptions an entity makes about the
examination of tax treatments by taxation authorities; how an entity determines taxable profit (tax loss), tax
bases, unused tax losses, unused tax credits and tax rates; and how an entity considers changes in facts and
circumstances. IFRIC 23 was effective for annual periods beginning on or after January 1, 2019, and has
been applied by the Group with no significant impact on these consolidated financial statements.
(ii) Recent accounting pronouncements not yet adopted
On October 22, 2018, the IASB issued a narrow scope amendment to IFRS 3, Business Combinations. This
amendment narrowed and clarified the definition of a business, as well as permitted a simplified assessment
of whether an acquired set of activities and assets is a group of assets rather than a business. This amendment
effective on January 1, 2020 and is to be applied prospectively. The Company intends to adopt the amendment
to IFRS 3 in its consolidated financial statements for the annual period beginning January 1, 2020.
4. Critical Accounting Estimates and Judgments and Key Sources of Estimation Uncertainty
The preparation of the consolidated financial statements requires the Group to make a number of judgments,
estimates and assumptions regarding recognition and measurement of assets, liabilities, income and expenses.
Actual results may differ from these estimates.
Information about the judgments, estimates and assumptions that have the most significant effect on the
recognition and measurement of assets, liabilities, income and expenses are discussed below.
Revenue Recognition
i. Chargebacks
The provision for chargebacks is a significant and complex estimate used in the recognition of revenue and
represents variable consideration under IFRS 15. In the United States, the Group sells its products directly
to wholesale distributors. The wholesale distributors sell directly to independent pharmacies, managed care
organizations, hospitals and group purchasing organizations ("indirect customers"). The difference between
what price the Group sells to the wholesaler and what price the wholesaler sells to the indirect customer is
called a chargeback. The provision for chargebacks is based on the historical sales mix of the wholesalers
for their government and retail customers. As sales are made to large wholesale customers, the Group
continually monitors the provision for chargebacks and makes adjustments when it believes that actual
chargebacks may differ from estimated provisions.
ii. Returns
The provision for returns is a significant and complex estimate used in the recognition of revenue and
represents variable consideration under IFRS 15. The Group has a returns policy that allows wholesalers to
return the product within a specified period prior to and subsequent to the expiration date. Provisions for
returns are recognized in the period in which the underlying revenue is recognized, as a reduction of the
transaction price at the inception of the contract. The Group estimates provisions for returns based upon
historical experience, representing the Group's best estimate. While such experience has allowed for
reasonable estimations in the past, history may not always be an accurate indicator of future returns. The
Group continually monitors provisions for returns and makes adjustments when it believes that actual product
returns may differ from established reserves.
[26]
ADVANZ PHARMA Corp. Limited
Notes to Consolidated Financial Statements
(Stated in thousands of U.S. Dollars, except per share amounts and where otherwise stated)
iii. Rebates
The provision for rebates is a significant and complex estimate used in the recognition of revenue and
represents variable consideration under IFRS 15. Rebates are granted to healthcare authorities and under
contractual arrangements with certain customers. Products sold in the United States are covered by various
programs (such as Medicaid and Medicare) under which products are sold at a discount. The Group estimates
its provisions for rebates based on current contractual terms and conditions as well as the historical
experience, changes to business practices and credit terms. While such experience has allowed for reasonable
estimations in the past, history may not always be an accurate indicator of future rebate liabilities. The Group
continually monitors the provision for rebates and makes adjustments when it believes that actual rebates
may differ from established provisions. All rebates are recognized in the period in which the underlying
sales are recognized as a reduction of sales revenue.
iv. Other transaction price adjustments
The provision for other transaction price adjustments is a significant and complex estimate used in the
application of IFRS 15. Other price adjustments are credits issued by the wholesaler to reflect various
decreases in the selling price. The price that the Group sells to the wholesaler is called the Wholesale
Acquisition Cost (or “WAC”). Decreases to WAC are discretionary decisions made by the wholesalers to
reflect competitive market conditions. Amounts recorded for other transaction price adjustments are initially
estimated at the inception of the contract with the wholesaler, based upon an estimated decline in market
prices. The Group regularly monitors these and other factors and re-evaluates the adjustment to the
transaction price as additional information becomes available.
v. Prompt pay
The provision for prompt pay is an estimate used in the recognition of revenue and represents variable
consideration under IFRS 15. Prompt pay are discounts offered to customers for making early payments on
their invoices within a defined period of time, prior to the payment due date under the Group's normal
payment terms. The Group estimates provisions for prompt pay based upon historical experience,
representing the Group's best estimate. The Group continually monitors provisions for prompt pay and
makes adjustments when it believes that actual prompt pay discounts may differ from established reserves.
Share-based payments and compensation
The compensation expense related to share-based payments under the MIP is determined using the Monte Carlo
option pricing model. The assumptions used in the model are: (i) weighted average probability of expected time
to maturity; (ii) share volatility; (iii) risk free rates; and (iv) the assumption that the Company will not pay
dividends.
Impairment of non-financial assets
The Group reviews amortized non-financial assets for impairment whenever events or changes in circumstances
indicate that the carrying amount of the assets may be impaired. It also reviews annually non-financial assets
with indefinite life for impairment. If the recoverable amount of the respective non-financial asset is less than
its carrying amount, it is considered to be impaired. In the process of measuring the recoverable amount, the
Group makes assumptions about future events and circumstances. The actual results may vary and may cause
significant adjustments.
Amortization of intangible and other assets
The amortization expense related to intangible and other assets is determined using estimates relating to the
useful life of the related assets.
[27]
ADVANZ PHARMA Corp. Limited
Notes to Consolidated Financial Statements
(Stated in thousands of U.S. Dollars, except per share amounts and where otherwise stated)
Income taxes
The Group is subject to income taxes in numerous jurisdictions. The integrated nature of the Group's global
operations gives rise to many transactions in the ordinary course of business in respect of which the determination
of income for tax purposes may be uncertain. The Group uses judgment to determine its income for tax purposes
which may impact the recognized amount of assets or liabilities, the disclosure of contingent liabilities or the
reported amount of revenue or expense during the reporting period. The Group evaluates these judgments based
upon historical experience, current and expected future outcomes, third-party evaluations and various other
assumptions believed to be reasonable in the circumstances.
The evaluation by the Group may result in an unrealized tax benefit in connection with taxation years that have
not yet been reviewed by the relevant tax authority. The Group believes that the amount of unrealized tax benefits
appropriately reflects the uncertainty of items that are or may in the future be under discussion, audit, dispute
or appeal with a tax authority or which may otherwise result in uncertainty in the determination of income for
tax purposes. The unrealized tax benefit is determined based on the Group's estimate of the potential outcomes
and is reviewed during each reporting period. If appropriate, an unrealized tax benefit will be realized in the
reporting period in which the Group determines that realization is not in doubt. Where the finally determined
outcome is different from the Group's estimate, such difference will impact the Group's income taxes in the
reporting period during which such determination is made.
A deferred tax asset is generally recognized for any temporary difference in respect of an asset where the tax
base exceeds the carrying amount and to the extent that it is probable that income for tax purposes will be
available from which the temporary difference can be deducted and in respect of a liability where the carrying
amount exceeds the tax base. The amount of the deferred tax asset recognized could be reduced if income or
temporary differences from which the asset can be deducted do not materialize, which might occur due to various
factors, including adverse business conditions. The carrying amount of a deferred tax asset is reviewed at the
end of each reporting period and reduced to the extent that it is no longer probable that sufficient income for tax
purposes will be available from which the temporary difference can be deducted. The magnitude of any reduction
of the amount of any temporary difference recognized is significantly influenced by the Group's forecast of
income for tax purposes.
5. Acquisitions
On March 31, 2019, the Company, through wholly owned subsidiaries, completed the acquisition of international
rights to Salagen® tablets (pilocarpine hydrochloride) (excluding Japanese rights) and Panretin® (alitretinoin)
gel 0.1% for $30 million in cash plus $3.3 million for inventory and related prepayments (the "Products
Acquisition"). The Company settled this obligation of $33.3 million using cash on hand on April 15, 2019.
The acquisition has been accounted for as an asset acquisition.
6. Restricted Cash
As at
Cash secured letters of credit and bonds
Total
7. Accounts Receivable
As at
Accounts receivable
Loss allowance
Total
Dec 31, 2019 Dec 31, 2018
2,922
2,922
3,265
3,265
Dec 31, 2019 Dec 31, 2018
110,840
(920)
109,920
117,281
(2,189)
115,092
Bad debt write-offs of $1,555 were recorded during the year ended December 31, 2019 (2018 - $1,207).
[28]
ADVANZ PHARMA Corp. Limited
Notes to Consolidated Financial Statements
(Stated in thousands of U.S. Dollars, except per share amounts and where otherwise stated)
An aging of accounts receivable balances past due but not impaired is as follows:
As at
Amounts past due (net of loss allowance)
Past due 1 - 30 days
Past due 31 - 60 days
Past due 61 - 120 days
Past due more than 120 days
Total
Dec 31, 2019 Dec 31, 2018
9,621
1,273
3,049
2,186
8,046
2,997
986
2,642
16,129
14,671
Amounts past due represent accounts receivable past due based on the customer's contractual terms. The net
amounts past due of approximately $16 million, which is equivalent to 15% of the net accounts receivable balance
as at December 31, 2019, has been assessed for recoverability by the Group. The Group applies the simplified
approach to providing for expected credit losses prescribed by IFRS 9, which permits the use of the lifetime
expected loss provision for all accounts receivable.
8. Inventory
As at
Finished goods
Raw materials
Work in process
Obsolescence reserve
Total
Dec 31, 2019 Dec 31, 2018
66,516
21,420
8,401
(25,233)
71,104
63,264
19,334
13,911
(22,579)
73,930
Inventory costs charged to cost of sales during the year ended December 31, 2019 were $140,663 (2018 -
$136,946). The Group increased its reserve for obsolete inventory by $2,654 (2018 - $90) during the year ended
December 31, 2019. Write-down of inventories of $10,409 were recorded during the year ended December 31,
2019.
[29]
ADVANZ PHARMA Corp. Limited
Notes to Consolidated Financial Statements
(Stated in thousands of U.S. Dollars, except per share amounts and where otherwise stated)
9. Intangible Assets
Acquired
Product Rights
and
Manufacturing
Processes
Intellectual
Property
Distribution
Contracts
Supplier
Contracts
IPR&D
All Other
Intangibles
Total
Balances,
January 1, 2018
Additions
Transfer from
IPR&D
Amortization
Impact of foreign
exchange
Impairments
Balances,
December 31,
2018
Additions (Note
5)
Transfer from
IPR&D
Amortization
Impact of foreign
exchange
Impairments
Balances,
December 31,
2019
1,381,631
26,185
16,683
68,805
39
24
—
—
—
—
—
—
(217,818)
(1,640)
(5,926)
(24,253)
9,269
3,024
(24)
—
1,305
1,503,878
67
—
3,130
—
(745)
(250,382)
(48,236)
(52,650)
—
—
(647)
—
(2,650)
—
(772)
(4,910)
(69)
—
(52,374)
(57,560)
1,062,990
24,545
10,110
41,902
6,587
558
1,146,692
30,000
153
—
—
—
—
—
—
(173,446)
(1,640)
(5,659)
(23,162)
22,326
(113,371)
—
—
146
—
594
—
3,178
323
33,501
(153)
—
189
(428)
—
—
(442)
(204,349)
71
23,326
— (113,799)
828,652
22,905
4,597
19,334
9,373
510
885,371
Impairment of intangible assets
In accordance with the Group's accounting policy, IPR&D is tested for impairment annually, and also when there
is an indicator of impairment. The remaining intangible assets are tested for impairment when events or changes
in business circumstances indicate that the carrying amount may not be recoverable.
Summary of impairments
For the year ended December 31, 2019 the Group recorded total impairment losses of $113,371 (2018 - $52,650)
with respect to acquired product rights and manufacturing processes and $428 with respect to IPR&D (2018 -
$4,910). Details of significant impairments are described below.
There have been no reversals of impairment losses or any previous impairments recorded with respect to acquired
product rights and manufacturing processes intangible assets.
Impairments
ADVANZ PHARMA North America
Third quarter of 2019
During the third quarter of 2019, the Group determined that certain triggering events had occurred with respect
to certain products within the ADVANZ PHARMA North America segment.
[30]
ADVANZ PHARMA Corp. Limited
Notes to Consolidated Financial Statements
(Stated in thousands of U.S. Dollars, except per share amounts and where otherwise stated)
With respect to Donnatal®, the triggering event was a sustained decline in market share as a result of competition
which has resulted in lower forecasted revenue. The Group has experienced a sustained higher level of competition
from unapproved products being sold as a substitutable products for the Group's Donnatal® tablets and elixir,
which has resulted in the Group lowering its revenue forecasts. Refer to Note 18 for further details on the Group's
current lawsuits related to Donnatal®. For the remaining products, the triggering event primarily related to the
development of revised forecasts for these products, resulting in lower forecasted revenue.
The total impairment recorded on acquired product rights during the third quarter of 2019 was $103,679. Details
of significant impairments were as follows :
Donnatal®
Lanoxin®
Dibenzyline®
Impairment
Remaining
carrying value as
at Sep 30, 2019
64,108
18,421
15,887
39,650
14,295
2,397
The calculation of the recoverable amount was determined using discounted cash flows projections based on
financial forecasts approved by the Company (level 3 of fair value hierarchy).
Key assumptions of the models are as follows:
• Discount rate: 14.5%; and,
• Estimated future product cash flows, including price and volume assumptions based on historical trends.
The following table presents a sensitivity to show the impact on the impairments for changes in certain
assumptions:
Discount Rate
Terminal revenue growth
assumption
+1%
735
404
52
-1%
(801)
(446)
(58)
+1%
(531)
(308)
(39)
-1%
498
285
35
Donnatal®
Lanoxin®
Dibenzyline®
ADVANZ PHARMA International
Fourth quarter of 2019
During the fourth quarter of 2019, the Group determined that certain triggering events had occurred with respect
to certain products within the ADVANZ PHARMA International segment. The triggering events included market
pricing pressures, sustained issues experienced with respect to product supply, and/or increased product
competition resulting in a decrease to future forecasts.
The total impairment recorded on acquired product rights during the fourth quarter of 2019 was $5,090.
Details of significant impairments recorded during the fourth quarter were as follows:
[31]
ADVANZ PHARMA Corp. Limited
Notes to Consolidated Financial Statements
(Stated in thousands of U.S. Dollars, except per share amounts and where otherwise stated)
Dipipanone + Cyclizine
Trifluoperazine
Key assumptions of the models are as follows:
Impairment
1,478
1,237
Remaining
Carrying Value as
at Dec 31, 2019
6,098
6,136
• Discount rate: 12.5%; and,
• Estimated future product cash flows, including price and volume assumptions based on historical trends.
The following table presents a sensitivity to show the impact on the impairments for changes in certain
assumptions:
Dipipanone + Cyclizine
Trifluoperazine
Third quarter of 2019
Discount Rate
Terminal revenue growth
assumption
+1%
291
320
-1%
(326)
(360)
+1%
(156)
(177)
-1%
139
158
During the third quarter of 2019, the Group determined that certain triggering events had occurred with respect
to certain products within the ADVANZ PHARMA International segment. The triggering events included market
pricing pressures, sustained issues experienced with respect to product supply, and/or increased product
competition resulting in a decrease to future forecasts.
The total impairment recorded on acquired product rights during the third quarter of 2019 was $4,602. Details
of significant impairments were as follows:
Hydrocortisone
Dicycloverine
Key assumptions of the models are as follows:
Impairment
1,897
1,352
Remaining
Carrying Value as
at Sep 30, 2019
733
—
• Discount rate: 12.5%; and,
• Estimated future product cash flows, including price and volume assumptions based on historical trends.
The following table presents a sensitivity to show the impact on the impairments for changes in certain
assumptions:
[32]
ADVANZ PHARMA Corp. Limited
Notes to Consolidated Financial Statements
(Stated in thousands of U.S. Dollars, except per share amounts and where otherwise stated)
Hydrocortisone
Dicycloverine
Fourth quarter of 2018
Discount Rate
Terminal revenue growth
assumption
+1%
38
-
-1%
(43)
-
+1%
(19)
-
-1%
17
-
In the fourth quarter of 2018, the Group determined that certain triggering events had occurred with respect to
certain products within the ADVANZ PHARMA International segment. The triggering events included market
pricing pressures, sustained issues experienced with respect to product supply, and/or increased product
competition resulting in a decrease to future forecasts. The Group recorded impairments using a fair value less
costs of disposal model in the consolidated statement of income (loss). The calculation of the recoverable amount
was determined using discounted cash flow projections based on financial forecasts approved by the Company
(level 3 of fair value hierarchy).
The total impairment recorded on acquired product rights during the fourth quarter of 2018 was $44,715. Details
of significant impairments were as follows:
Carbimazole
Biperiden Hydrochloride
Alimemazine Tartrate
Trazodone
Flumethasone + Clioquinol
Remaining
Carrying
Value as at
Dec 31, 2018
Impairment
14,624
8,151
2,366
2,514
2,490
34,642
12,040
2,162
402
6,951
Key assumptions of the models are as follows:
• Discount rate: 12.5% ; and
• Estimated future product cash flows, including price and volume assumptions based on historical trends.
The following table presents a sensitivity analysis to show the impact on significant impairments for changes
in certain assumptions:
Carbimazole
Biperiden Hydrochloride
Alimemazine Tartrate
Trazodone
Flumethasone + Clioquinol
Discount rate
+0.5%
-0.5%
Terminal revenue
growth assumption
-0.5%
+0.5%
979
326
19
3
212
(923)
(308)
(18)
(3)
(200)
(416)
(137)
—
—
(91)
440
146
—
—
96
[33]
ADVANZ PHARMA Corp. Limited
Notes to Consolidated Financial Statements
(Stated in thousands of U.S. Dollars, except per share amounts and where otherwise stated)
Second quarter of 2018
In the second quarter of 2018, the Group determined that certain triggering events had occurred with respect to
certain products within the ADVANZ PHARMA International segment. These triggering events included product
supply challenges, and/or increased product competition resulting in a decrease to future revenue forecasts. The
Group recorded impairments using a fair value less costs of disposal model in the consolidated statement of
income (loss). The calculation of the recoverable amount was determined using discounted cash flow projections
based on financial forecasts approved by the Company (level 3 of fair value hierarchy).
The total impairment recorded on acquired product rights during the second quarter of 2018 was $7,935, within
the ADVANZ PHARMA International segment, primarily related to an impairment on Dicycloverine of $4,855
due to product supply interruption resulting in a current and future loss of market share. The key assumptions
and estimates used in determining the value were related to estimated future product cash flows, including price
and volume assumptions based on historical trends, and the discount rate of 13.5% applied to the cash flow
projections.
IPR&D
Annual Impairment test
The Group completes its annual impairment testing on IPR&D during the fourth quarter.
The Group recorded an impairment on IPR&D during the fourth quarter of 2019 in the amount of $428. The
impairment relates to projects that have been abandoned, or certain IPR&D projects with lower present day
future forecasts compared with those at the time of the acquisition of the ADVANZ PHARMA International
segment. The calculation of the recoverable amount of IPR&D was determined using the discounted cash flow
projections based on financial forecasts.
Fourth quarter of 2018
The Group recorded an impairment on IPR&D during the fourth quarter of 2018 in the amount of $4,910. The
impairment relates to projects that have been abandoned, or certain IPR&D projects with lower present day
future forecasts compared with those at the time of the acquisition of the ADVANZ PHARMA International
segment. The calculation of the recoverable amount of IPR&D was determined using discounted cash flow
projections based on financial forecasts.
10. Goodwill
As at
Opening balance
Impairment
Impact of foreign exchange
Total
Dec 31, 2019 Dec 31, 2018
232,784
(15,482)
7,236
224,538
244,957
—
(12,173)
232,784
A segment-level summary of the goodwill allocation is presented within Note 22.
In accordance with the Group's accounting policy, the carrying value of goodwill is assessed annually as well
assessed for impairment triggers at each reporting date to determine whether there exists any indicators of
impairment.
[34]
ADVANZ PHARMA Corp. Limited
Notes to Consolidated Financial Statements
(Stated in thousands of U.S. Dollars, except per share amounts and where otherwise stated)
Summary of Impairments
For the year ended December 31, 2019, the Group recorded goodwill impairment losses of $15,482 (2018 - $nil)
associated with the Orphan Drugs group of CGUs (which forms part of the ADVANZ PHARMA North America
segment).
Annual Impairment Test
The Group completed its annual goodwill impairment testing on the goodwill remaining in the ADVANZ
PHARMA International group of CGUs and the Orphan Drugs group of CGUs, which have goodwill carrying
values of $212,054 and $12,484, respectively, post the impairment recorded on the Orphan Drugs group of
CGUs, (2018 - $204,818 and $27,966, respectively). The recoverable amount of the ADVANZ PHARMA
International group of CGUs was calculated using fair value less costs of disposal ("FVLCD"), and the Orphan
Drugs group of CGUs recoverable amount was calculated based on value in use ("VIU").
ADVANZ PHARMA International
2019
The calculation of recoverable amount of the ADVANZ PHARMA International group of CGUs was determined
using discounted cash flow projections based on financial forecasts approved by the Group covering a five-year
period (level 3 of fair value hierarchy) and a terminal growth assumption of 1.5%. The key assumptions and
estimates used in determining the FVLCD are related to revenue and gross margin assumptions, which are based
on the most recently approved financial forecasts and assumed growth rates, working capital assumptions, the
effective tax rate of 13% and the discount rate of 11% applied to the cash flow projections. As a result of the
impairment testing performed, it was determined that the recoverable amount of the ADVANZ PHARMA
International group of CGUs of $957,933 exceeded the carrying value of the ADVANZ PHARMA International
group of CGUs of $792,211.
The recoverable amount would decrease by $42,355 if the discount rate were to increase by 0.5% and would
increase by $46,569 if the discount rate were to decrease by 0.5%. If the terminal growth rate were to increase
or decrease by 0.5%, the recoverable amount would increase by $30,172, or decrease by $27,429, respectively.
2018
The calculation of recoverable amount of the ADVANZ PHARMA International group of CGUs was determined
using discounted cash flow projections based on financial forecasts approved by the Group covering a five-year
period (level 3 of fair value hierarchy) and a terminal growth assumption of 1.5%. The key assumptions and
estimates used in determining the FVLCD are related to revenue and gross margin assumptions, which are based
on the most recently approved financial forecasts and assumed growth rates, working capital assumptions, the
effective tax rate of 13% and the discount rate of 12% applied to the cash flow projections. As a result of the
impairment testing performed, it was determined that the recoverable amount of the ADVANZ PHARMA
International group of CGUs of $1,067,792 exceeded the carrying value of the ADVANZ PHARMA International
group of CGUs of $1,013,969.
The recoverable amount would decrease by $47,545 if the discount rate were to increase by 0.5% and would
increase by $52,518 if the discount rate were to decrease by 0.5%. If the terminal growth rate were to increase
or decrease by 0.5%, the recoverable amount would increase by $35,892, or decrease by $32,474, respectively.
[35]
ADVANZ PHARMA Corp. Limited
Notes to Consolidated Financial Statements
(Stated in thousands of U.S. Dollars, except per share amounts and where otherwise stated)
Orphan Drugs
2019
During the fourth quarter of 2019, the Group completed its annual goodwill impairment testing within the Orphan
Drugs group of CGUs. As a result of the impairment testing performed, the Group recorded an impairment loss
of $15,482 on goodwill. The reason for the impairment is primarily related to the development of revised forecasts
for the product.
The Group recorded an impairment charge using a VIU model, in the consolidated statement of income (loss)
in the fourth quarter of 2019. The calculation of recoverable amount of the Orphan Drugs group of CGUs was
determined using discounted cash flow projections based on financial budgets approved by the Group covering
a five-year period (level 3 of fair value hierarchy). The key assumptions and estimates used in determining the
VIU are related to revenue and gross margin assumptions, which are based on the financial forecasts and assumed
growth rates, and the discount rate of 15% applied to the cash flow projections. As a result of the impairment
testing performed, it was determined that the recoverable amount of the Orphan Drugs group of CGUs is $37,539.
The recoverable amount of the Orphan Drugs group of CGUs would decrease by $1,252 if the discount rate
were to increase by 0.5%, and would increase by $1,339 if the discount rate were to decrease by 0.5%. If the
terminal growth rate were to increase or decrease by 0.5%, the recoverable amount would increase by $727, or
decrease by $680, respectively.
2018
The calculation of recoverable amount of the Orphan Drugs group of CGUs was determined using discounted
cash flow projections based on financial budgets approved by the Group covering a five-year period (level 3 of
fair value hierarchy). The key assumptions and estimates used in determining the VIU are related to revenue
and gross margin assumptions, which are based on the financial forecast and assumed growth rates, and the
discount rate of 15% applied to the cash flow projections. As a result of the impairment testing performed, it
was determined that the recoverable amount of the Orphan Drugs group of CGUs of $82,981 exceeded the
Orphan Drugs group of CGUs carrying value of $53,832.
The recoverable amount of the Orphan Drugs group of CGUs would decrease by $2,998 if the discount rate
were to increase by 0.5%, and would increase by $3,209 if the discount rate were to decrease by 0.5%. If the
terminal growth rate were to increase or decrease by 0.5%, the recoverable amount would increase by $1,643,
or decrease by $1,756, respectively.
11. Trade payables, accrued liabilities and interest payable
As at
Trade payables
Accrued liabilities
Interest payable on long-term debt
Total
Dec 31, 2019 Dec 31, 2018
16,241
83,683
8,033
22,270
70,613
12,757
107,957
105,640
[36]
ADVANZ PHARMA Corp. Limited
Notes to Consolidated Financial Statements
(Stated in thousands of U.S. Dollars, except per share amounts and where otherwise stated)
12. Provisions
The following table describes movements in the Group's provisions balance by nature of provision:
Balance, January 1, 2018
Additions
Utilization
Balance, December 31, 2018
Additions
Utilization
Balance, December 31, 2019
Chargebacks
/Rebates/
Co-pay
16,595
100,447
(101,904)
15,138
28,843
(39,458)
4,523
Returns
11,066
9,239
(13,910)
6,395
14,221
(11,304)
9,312
Inventory
management
Prompt pay
5,883
15,794
(17,817)
3,860
11,569
(12,342)
3,087
552
4,764
(4,832)
484
3,082
(3,095)
471
Total
34,096
130,244
(138,463)
25,877
57,715
(66,199)
17,393
The closing balance relates to provisions made to estimate the liabilities arising from chargebacks, rebates,
returns and other price adjustments recorded as a reduction of revenue, as explained in Note 4. Payments are
expected within 12 months from the balance sheet date. Invoices received for such charges and estimates are
shown in the accounts payable when received. The provision is for the uninvoiced portion of the charges and
estimates.
13. Income Taxes
Significant components of the current and deferred income tax reflected in the consolidated statements of income
(loss) are as follows:
For the year ended
Current income tax expense
Deferred income tax expense (recovery)
Provision for (recovery of) income taxes
Dec 31, 2019 Dec 31, 2018
22,469
(44,476)
(22,007)
16,980
(15,540)
1,440
Current and deferred income tax referred to above is recognized based on the Group's best estimate of the tax
rates expected to apply to the income, loss or temporary difference.
The Group is subject to income tax in numerous jurisdictions with varying tax rates. During the current year
ended, there were no material changes to the statutory tax rates in the taxing jurisdictions where the majority of
the Group's income for tax purposes was earned or where its material temporary differences or losses are expected
to be realized or settled.
On March 11, 2020, the UK announced that there would no longer be a corporate tax rate reduction from 19%
to 17% effective April 1, 2020. This change is expected to be substantively enacted before the end of March
2020 via a Budget Resolution. Had this been substantively enacted on December 31, 2019, the Group estimates
that there would be a net increase in its deferred tax liabilities of $6.4 million.
Although statutory tax rates may not have changed materially, except if noted above, the impact of commercial
decisions and market forces result in changes to the distribution of income for tax purposes amongst taxing
jurisdictions that may result in a change of the effective tax rate applicable to such item of income or temporary
difference.
During the year, the Group undertook certain internal restructuring transactions to centralise the Group’s
intellectual property in the United Kingdom. This included the internal sale of certain assets, including intellectual
[37]
ADVANZ PHARMA Corp. Limited
Notes to Consolidated Financial Statements
(Stated in thousands of U.S. Dollars, except per share amounts and where otherwise stated)
property related to ADVANZ PHARMA North America segment to Mercury Pharma Group Limited, a company
registered in the United Kingdom. The internal restructuring also included the migration of tax residence of
Amdipharm Mercury International Limited, a company registered in Jersey to the United Kingdom. As a
consequence of above, the Group had recognised a deferred tax asset of $17.6 million.
During the year, the Company announced its intention to change its domicile from Canada to Jersey and becoming
a tax resident in the United Kingdom. Refer to Note 1 for further details. There was no prior deferred tax asset
recognized related to these losses in Canada, as such, there was no impact to the income statement of their
elimination as a result of the change in domicile.
The Group continues to believe the amount of unrealized tax benefits appropriately reflects the uncertainty of
items that are or may in the future be under discussion, audit, dispute or appeal with a tax authority or which
otherwise result in uncertainty in the determination of income for tax purposes. If appropriate, an unrealized tax
benefit will be realized in the year in which the Group determines that realization is not in doubt. Where the
final determined outcome is different from the Group's estimate, such difference will impact the Group's income
taxes in the year during which such determination is made.
A reconciliation of the amount of income taxes reflected above compared to the amount of income taxes that
would result by multiplying income (loss) before income taxes by the legislated tax rate applicable to the Company
in Canada is as follows:
For the year ended
Income (loss) for the year before tax
Dec 31, 2019 Dec 31, 2018
(218,025)
1,468,743
Expected expense (recovery) at the Company's Canadian tax rate 26.5%
(57,777)
389,217
Gain on debt and purchase consideration settlement that does not give rise
to current or deferred income tax expense
Recognition of deferred tax assets
Change in deferred income tax assets not recognized (utilized)
Effect of tax rates outside of Canada
Change in tax rates during the year
Other items
Updated estimate of current tax on account of interest deductibility
Non-deductible and non-taxable items
Provision for (recovery of) income taxes
—
(22,590)
24,845
(11,652)
25
227
9,058
35,857
(22,007)
(356,152)
—
(37,330)
(2,223)
(1,555)
591
—
8,892
1,440
Significant components of the deferred income tax assets and liabilities reflected in the consolidated balance
sheets are as follows:
[38]
ADVANZ PHARMA Corp. Limited
Notes to Consolidated Financial Statements
(Stated in thousands of U.S. Dollars, except per share amounts and where otherwise stated)
As at
Deferred income tax assets (liabilities) in respect of:
Losses and credits
Intangible assets
Other items
Deferred income tax assets (liabilities), net
Deferred income tax assets
Deferred income tax liabilities
Deferred income tax assets (liabilities), net
Dec 31, 2019 Dec 31, 2018
—
(56,679)
(2,368)
(59,047)
1,508
(60,555)
(59,047)
356
(98,025)
(1,927)
(99,596)
4,781
(104,377)
(99,596)
The change in the balance of net deferred tax assets (liabilities) includes a $3,789 increase that arises as a result
of the required revaluation of certain balances denominated in currencies other than USD. This reduction has
been reflected as a component of accumulated other comprehensive income (loss) and not as part of the deferred
income tax expense (recovery).
A deferred income tax asset has not been recognized for certain temporary differences that may be available to
reduce income subject to tax in a taxation period subsequent to the period covered by these financial statements.
The amount of such temporary differences, that is the amount before applying the relevant tax rate, which is not
recognized in the consolidated balance sheets or consolidated statements of income (loss), is as follows:
As at
Losses and credits
Total unrecognized temporary differences
Dec 31, 2019 Dec 31, 2018
186,791
186,791
554,119
554,119
Losses in Canada of $506.8 million will no longer be available after the change in the Company's domicile, as
the Company is no longer taxable in Canada.
The deferred income tax assets in connection with the Group's losses and credits that may be available to reduce
income subject to tax in a taxation period subsequent to the period covered by these consolidated financial
statements, is as follows:
As at
Expiring within 15 years
Expiring between 15 and 20 years
No expiration
Total deferred income tax asset in respect of losses and credits
Total in North America
Total in Europe
Total in other jurisdictions
Total deferred income tax asset in respect of losses and credits
Dec 31, 2019 Dec 31, 2018
170
3,185
38,573
41,928
743
40,937
248
41,928
486
87,900
51,077
139,463
90,749
47,470
1,244
139,463
The integrated nature of the Group's global operations gives rise to many transactions in the ordinary course of
business in respect of which the determination of income for tax purposes may be uncertain. Transactions that
arise between multiple taxing jurisdictions are subject to review by these jurisdictions, where a decision of one
taxing authority may not agree with the decision of another. The Group is committed to mitigating uncertainty
that may arise in connection with such transactions and to this end has prepared documentation that complies
[39]
ADVANZ PHARMA Corp. Limited
Notes to Consolidated Financial Statements
(Stated in thousands of U.S. Dollars, except per share amounts and where otherwise stated)
with local legislation and is in accordance with international guidelines, such as those of the Organization of
Economic Co-operation and Development. Refer to the Income taxes section of the Critical Accounting Estimates
and Judgments and Key Sources of Estimation Uncertainty of these notes to the consolidated financial statements
for additional information regarding the Group's judgment and use of estimates relevant to income taxes.
The Group's global operations requires a corporate structure that includes affiliated legal entities that are
collectively subject to the authority of numerous taxing jurisdictions. Certain transactions may arise which create
a temporary difference in connection with an affiliated legal entity. The realization of this temporary difference
may result in income tax. As at December 31, 2019, the Group has recognized $3,483 (2018 - $3,316) deferred
income tax liability in connection with the realization of a temporary difference for certain affiliated legal entities
on the basis that it is probable that such a temporary difference will be realized in the foreseeable future.
14. Long-term Debt
As at
New Term Loans (a)
- New USD Term Loan
- EUR Term Loan
8% senior secured notes (b)
Total long-term debt
Less: current portion of long-term debt
Long-term portion
Dec 31, 2019 Dec 31, 2018
779,421
243,685
299,972
1,323,078
(20,987)
1,302,091
795,409
253,782
299,972
1,349,163
(21,089)
1,328,074
The Company completed the implementation of the Recapitalization Transaction on September 6, 2018. In
connection with the implementation of the Recapitalization Transaction, the Term Loan Facilities and the 9%
senior secured notes (the "Secured Notes") were extinguished and replaced for the following debt facilities
(among other consideration pursuant to the Recapitalization Transaction):
(a) The Company entered into a credit agreement (the "New ADVANZ PHARMA Credit Agreement") on
September 6, 2018 pursuant to which a syndicate of lenders made available secured term loans at par in the
aggregate principal amounts of $799.4 million in one tranche (the "New USD Term Loan") and €222.8
million in a separate tranche (the "EUR Term Loan", and together with the New USD Term Loan, the "New
Term Loans"). The New Term Loans were made available to the Company, as part of the settlement of
Exchanged Secured Debt, including the Term Loan Facilities, pursuant to the implementation of the
Recapitalization Transaction. All obligations of the Company under the New Term Loans are guaranteed
by all current and future material subsidiaries of the Company and include security of first priority interests
in the assets of the Company and its material subsidiaries. The New Term Loans have a maturity date of
September 6, 2024, have variable interest rates and require quarterly principal repayments at a rate of 0.5%.
Interest rates are calculated based on LIBOR and EURIBOR plus applicable margins on the New USD Term
Loan and EUR Term Loan, respectively, with a LIBOR or EURIBOR floor of 1%. Interest expense on the
New Term Loans for the year ended December 31, 2019 was $77,497 (2018 - $25,348).
(b) The Company issued on September 6, 2018 at par approximately $300 million 8.00% senior secured first
lien notes due on September 6, 2024 (the "New Secured Notes"). The New Secured Notes were issued by
the Company, as part of the settlement of Exchanged Secured Debt, including the Secured Notes, pursuant
to the implementation of the Recapitalization Transaction. All obligations of the Company under the New
Secured Notes are guaranteed by all current and future material subsidiaries of the Company and include
security of first priority interests in the assets of the Company and its material subsidiaries. The New Secured
Notes require no payment of principal throughout their term. Interest on the New Secured Notes is payable
semi-annually on April 1st and October 1st of each year. Interest expense on the Secured Notes for the year
ended December 31, 2019 was $23,998 (2018 - $7,800).
The fair value of long-term debt as at December 31, 2019 was $1.3 billion.
[40]
ADVANZ PHARMA Corp. Limited
Notes to Consolidated Financial Statements
(Stated in thousands of U.S. Dollars, except per share amounts and where otherwise stated)
As disclosed in Note 2, the Company completed the implementation of the Recapitalization Transaction on
September 6, 2018. The following table details the movement in the principal amount of the Group's Secured
Debt, Unsecured Debt and Cross Currency Swap Liability (that was treated as secured debt) from January 1,
2018 to September 6, 2018, as well as the movement in principal amounts to December 31, 2018 and to December
31, 2019 in connection with and subsequent to the Recapitalization Transaction on September 6, 2018. Refer to
Note 2 for a further description of the details pertaining to the implementation of the Recapitalization Transaction.
Secured
Debt
Unsecured
Debt
Balance, January 1, 2018
2,062,586
1,625,832
Principal repayments
Impact of foreign exchange
Balance, September 6, 2018
(22,267)
(26,919)
—
—
2,013,400
1,625,832
Total
Long-
Term Debt
3,688,418
(22,267)
(26,919)
3,639,232
Cross
Currency
Swap
Liability
114,431
—
—
114,431
Total Long-
term Debt
including Cross
Currency Swap
Liability
3,802,849
(22,267)
(26,919)
3,753,663
(571,981)
— (571,981)
(32,929)
(604,910)
Principal repayments as part
of Recapitalization
Transaction (Note 2 (c))
Issuance of limited voting
shares (Notes 2 (d) and 15)
Debt forgiveness (principal)
(156,912)
—
(79,975)
(79,975)
(1,545,857) (1,702,769)
Principal portion of debt
repaid or refinanced
New Secured Debt issued (1)
Impact of foreign exchange
Principal repayments on New
Secured Debt (subsequent to
Recapitalization Transaction)
Balance, December 31, 2018
(1,284,507)
1,358,425
(4,014)
— (1,284,507)
— 1,358,425
(4,014)
—
(5,248)
1,349,163
—
(5,248)
— 1,349,163
Repayments
Impact of foreign exchange
(20,973)
(5,112)
—
—
(20,973)
(5,112)
Balance, December 31, 2019
1,323,078
— 1,323,078
—
(7,572)
(73,918)
—
(12)
—
—
—
—
—
(79,975)
(1,710,341)
(1,358,425)
1,358,425
(4,026)
(5,248)
1,349,163
(20,973)
(5,112)
1,323,078
(1) Includes $73,918 associated with the settlement of the Cross Currency Swap Liability.
The total gain on debt and purchase consideration settlement of $1,931,828 was comprised of $1,710,341 of
debt principal forgiven, $214,179 of debt interest forgiven and $7,308 related to gain on settlement of contingent
consideration.
[41]
ADVANZ PHARMA Corp. Limited
Notes to Consolidated Financial Statements
(Stated in thousands of U.S. Dollars, except per share amounts and where otherwise stated)
Interest expense
For the year ended
Interest expense payable in cash - Exchanged Debt
Interest expense payable in cash - New Secured Debt
Interest expense on Cross Currency Swap Liability
Interest expense on lease liabilities (Note 3)
Other non-cash interest
Interest and accretion expense
Dec 31, 2019 Dec 31, 2018
—
216,856
101,495
—
1,113
3,075
33,148
4,864
—
2,787
105,683
257,655
[42]
ADVANZ PHARMA Corp. Limited
Notes to Consolidated Financial Statements
(Stated in thousands of U.S. Dollars, except per share amounts and where otherwise stated)
15. Share Capital
On September 6, 2018, the Company amended its articles to provide for (i) a class of Class A special shares; (ii)
a class of Class B special shares; (iii) a class of Class C special shares; and (iv) a re-designation of the common
shares as limited voting shares.
The authorized share capital of the Company as at December 31, 2019 consists of an unlimited number of limited
voting shares, 1,000 Class A special shares, 1,000 Class B special shares and 2,000 Class C special shares.
Common shares and limited voting shares
The holders of limited voting shares are entitled to one vote for each limited voting share on all matters to be
voted on at all meetings of shareholders of the Company, other than meetings at which only the holders of another
class or series of shares are entitled to vote separately as a class. Subject to the rights of the holders of any other
class of share ranking in priority to the limited voting shares, the holders of the limited voting shares are entitled
to (i) receive, on a ratable basis, any dividend declared by the Company in respect of the limited voting shares;
and (ii) receive the remaining property and assets of the Company available for distribution, after payment of
liabilities, upon the voluntary or involuntary liquidation, dissolution or winding-up of the Company on a ratable
basis.
On September 6, 2018, as part of the Recapitalization Transaction, the Company completed the following:
(i) A Share Consolidation of the issued and outstanding common shares on the basis of one common share
for every 300 common shares outstanding immediately prior to September 6, 2018. No fractional shares
were issued in connection with the Share Consolidation. Any individual holders of 299 or fewer shares
prior to the date of the share consolidation did not receive any common shares as a result of the consolidation.
Refer to Note 2 (e).
(ii) A redesignation of the outstanding common shares as limited voting shares pursuant to the amended articles
as noted above.
(iii) A Private Placement to certain parties that executed the subscription agreement with ADVANZ PHARMA,
dated May 1, 2018, for gross proceeds of $586,500, net of transaction costs of $44,191. The limited voting
shares were issued at a share price of $13.69 per share. Refer to Note 2 (b).
(iv) Issued 5,841,857 limited voting shares, with a market value of $13.69 per share, in settlement of the
Unsecured Debt pursuant to the CBCA Plan. Refer to Note 2 (d).
On September 7, 2018, the Company issued 59,247 limited voting shares to certain employees of the Group for
gross proceeds of $811, net of transaction costs of $6 (the "Management Co-Invest"). The limited voting shares
were issued at a share price of $13.69.
Balance, January 1, 2018
Vesting of RSUs (defined herein) prior to Recapitalization Transaction
Balance, September 6, 2018
Share Consolidation
Private Placement
Unsecured debt settlement
Management Co-Invest
Tax effect of share issuance transaction costs (Note 13)
Balance, December 31, 2018
Changes in 2019
Balance, December 31, 2019
[43]
Number of
Shares
$
51,282,901
1,283,083
899
51,283,800
(51,112,868)
42,841,454
5,841,857
59,247
—
20
1,283,103
—
542,309
79,975
805
8,808
48,913,490
1,915,000
—
—
48,913,490
1,915,000
ADVANZ PHARMA Corp. Limited
Notes to Consolidated Financial Statements
(Stated in thousands of U.S. Dollars, except per share amounts and where otherwise stated)
Class A, Class B and Class C special shares
All Class A special shares were issued to GSO (as defined in Note 23 (b)) at an issue price of $1.00 per share
and are fully paid up.
All Class B special shares were issued to Solus (as defined in Note 23 (b)) at an issue price of $1.00 per share
and are fully paid up.
The Class A and Class B special shares have the following significant rights, privileges, restrictions and
conditions: (i) holders of these shares are entitled to receive notice of, to attend and speak at any meeting of the
holders of limited voting shares; (ii) ability to elect a certain number of directors, depending on their holding of
limited voting shares; (iii) no entitlement to dividends; (iv) redeemable by the holder; and (v) in the event of
liquidation, dissolution or winding-up of the Company, whether voluntary or involuntary, entitled to receive
$1.00 for each Class A or Class B special share held, in pari passu, before any distribution of any part of the
property and assets of the Company among the holders of the limited voting share. The Class A and B special
shares are classified as other liabilities in the consolidated balance sheets.
No Class C special shares have been issued.
16. Earnings (Loss) Per Share
On September 6, 2018, the Company completed a Share Consolidation. Accordingly, all share and per-share
data presented in these consolidated financial statements and accompanying notes have been retrospectively
restated to reflect the Share Consolidation, unless otherwise noted. The weighted average number of shares has
been adjusted retrospectively to be comparable using that basis as if the Share Consolidation had been effective
on the first day of the comparative reporting period of these consolidated financial statements. Refer to Notes 2
and 15.
The calculation of basic and diluted earnings (loss) per share for the years ended December 31, 2019 and 2018
was based on the information in the table below.
Net income (loss) for the year
2019
(196,018)
2018
1,467,303
Weighted average number of shares in issue
48,913,490 15,661,555
Adjustments for:
Dilutive unvested shares
Weighted average number of fully diluted shares
Earnings (loss) per share
Basic earnings (loss) per share
Diluted earnings (loss) per share
—
—
48,913,490 15,661,555
(4.01)
(4.01)
93.69
93.69
As part of the Recapitalization Transaction, the MIP has been adopted, pursuant to which a maximum of 3,664,069
limited voting shares can be issued. If such number of limited voting shares are issued, they will dilute basic
earnings per share in the future, however these dilutive limited voting shares were not included in the calculation
of diluted earnings per share as they are based on a potential dilution event that has not yet occurred. Refer to
Note 17 for further description of the MIP.
[44]
ADVANZ PHARMA Corp. Limited
Notes to Consolidated Financial Statements
(Stated in thousands of U.S. Dollars, except per share amounts and where otherwise stated)
17. Share Based Compensation
Management Incentive Plan
In conjunction with the Recapitalization Transaction, the Group adopted the MIP which allows participants to
share 7.59% of the incremental value growth of the Company in excess of an opening value on September 6,
2018, plus a hurdle of 9% per annum compounding on an annual basis. This 7.59% may increase to 10.12% if
certain additional performance thresholds are met.
Participants acquired shares ("MIP Shares") in a subsidiary of the Company (the "MIP Subsidiary") which
holds an ownership interest in the ADVANZ PHARMA International segment. An exchange rights agreement
provides for mechanisms that can attribute the value of assets held outside of MIP Subsidiary to the MIP Shares,
for purposes of calculating the value of the MIP Shares.
The exchange rights agreement also provides for the exchange of MIP Shares into limited voting shares of
ADVANZ PHARMA in certain circumstances. These circumstances arise primarily in connection with an exit
event ("Exit Event"). An Exit Event includes the following:
(i)
a change of control of the Company,
(ii) a sale of substantially all of the assets of the Company and its subsidiaries on a consolidated basis (including
by way of sale, merger, amalgamation, arrangement, business combination, consolidation, reorganisation
or other similar transaction); or
(iii) an insolvency event, as defined in the exchange rights agreement.
In addition, MIP Shares may be exchanged into limited voting shares of ADVANZ PHARMA pursuant to certain
tag-along rights contained in the exchange rights agreement upon a sale of 25% or more of the issued and
outstanding limited voting shares of ADVANZ PHARMA by certain significant shareholders of ADVANZ
PHARMA.
The performance of the MIP will be measured on or around the date of an Exit Event. The MIP Shares may be
purchased and/or exchanged for new limited voting shares of the Company.
The Group has accounted for the issued MIP Shares on the basis that they will be equity settled, after evaluating
alternatives that may require cash settlement. For accounting purposes, and in accordance with IFRS, the MIP
was valued at $10 million on September 7, 2018 using a Monte-Carlo valuation model. The key assumptions
included within this simulation were, (i) weighted average probability of expected time to maturity, (ii) share
volatility of 35%, (iii) risk free rates between 2.53% and 2.78%, and (iv) the assumption that the Company will
not pay dividends.
On September 7, 2018, 349,903 MIP Exchangeable Shares were acquired by the participants.
For the year ended December 31, 2019 the Group recorded share based compensation expense of $3,943 (2018
- $1,577) related to the MIP Shares. During the year ended December 31, 2019, the Company extended the
expected time to maturity by approximately 9 months.
As at December 31, 2019, 426,939 MIP Exchangeable Shares were issued and outstanding.
Employee Stock Option Plan, Long-Term Incentive Plan
As part of the Recapitalization Transaction, as disclosed in Note 2 to these consolidated financial statements,
all equity interests in the Company represented by options, warrants, rights or similar instruments outstanding
on September 6, 2018, were cancelled pursuant to the CBCA Plan. As a result, all outstanding options under the
employee stock option plan and the outstanding RSUs or DSUs which were granted to officers, directors,
employees or consultants of the Group were cancelled for no consideration.
For the year ended December 31, 2018, the total compensation charged against income with respect to stock
options outstanding was $1,638 and with respect to RSUs and DSUs was a recovery of $678.
[45]
ADVANZ PHARMA Corp. Limited
Notes to Consolidated Financial Statements
(Stated in thousands of U.S. Dollars, except per share amounts and where otherwise stated)
18. Commitments and Contingencies
Commitments
The Group has commitments for purchase obligations with contract manufacturers and royalty payments.
The Group has commitments of $30,833 relating to purchase obligations with contract manufacturers over the
next five years.
The Group has a commitment to pay royalties on certain products acquired from Shionogi Inc. in May 2013 and
certain products acquired from Covis Pharma S.à R.L. on April 21, 2015, at certain prescribed rates. These
royalties are payable on a quarterly basis.
The Group also has a separate commitment to pay royalties to Shionogi Inc. in relation to ADVANZ PHARMA's
distribution of Ulesfia®. The minimum royalty payable on Ulesfia® is $3,000 per year, payable on an annual
basis to the earlier of the period where: (i) there exists an issued and unexpired patent right; or (ii) no unauthorized
third party generic version of Ulesfia® is being sold in the relevant territory. During the second quarter of 2019
the Company determined that there is no longer a future economic benefit associated with Ulesfia and therefore
recorded a $7,500 charge within restructuring related, acquisition and other costs related to this onerous contract,
which represents the present value of the remaining royalties payable. As at December 31, 2019, the outstanding
amount is $6,000.
During the year ended December 31, 2019 the royalty expense was $2,275 (2018 - $1,941).
Guarantees
Subject to the Final Order granted in connection with the court proceedings in relation to the Recapitalization
Transaction, and subject to certain restrictions, all directors and officers of the Group are indemnified by the
Group for various items including, but not limited to, all costs to defend lawsuits or actions due to their association
with the Group. The Group holds directors’ and officers’ liability insurance to mitigate the cost of any potential
future lawsuits or actions.
In the normal course of business, the Group has entered into agreements that include indemnities in favour of
third parties, such as purchase and sale agreements, confidentiality agreements, engagement letters with advisors
and consultants, leasing contracts, license agreements, information technology agreements and various product,
service, data hosting and network access agreements. These indemnification arrangements may require the
applicable Group entity to compensate counterparties for losses incurred by the counterparties as a result of
breaches in representations, covenants and warranties provided by the particular Group entity or as a result of
litigation or other third party claims or statutory sanctions that may be suffered by the counterparties as a
consequence of the relevant transaction.
In connection with the acquisition of Zonegran®, the Group guaranteed the payment, performance and discharge
of the purchaser's payment and indemnification obligations under the asset purchase agreement and each ancillary
agreement entered into by the purchaser in connection therewith that contained payment or indemnification
obligations. Pursuant to the share purchase agreement entered into by the Group in connection with the ADVANZ
PHARMA International Acquisition, the Group guaranteed the obligations of the purchaser under the agreement
and related transaction documents.
In connection with the Products Acquisition, the Company guaranteed the obligations of certain of its subsidiaries
under the asset purchase agreement and each ancillary agreement.
During the third quarter of 2019, the Company guaranteed the obligations of certain of its subsidiaries under an
updated wholesaler distribution agreement for the supply of its products in North America.
Litigation and Arbitration
From time to time, the Group becomes involved in various legal and administrative proceedings, which include
product liability, intellectual property, commercial, antitrust, government and regulatory investigations, related
private litigation and ordinary course employment-related issues. From time to time, the Group also initiates
[46]
ADVANZ PHARMA Corp. Limited
Notes to Consolidated Financial Statements
(Stated in thousands of U.S. Dollars, except per share amounts and where otherwise stated)
actions or files counterclaims. The Group could be subject to counterclaims or other suits in response to actions
it may initiate. The Group believes that the prosecution of these actions and counterclaims is important to preserve
and protect the Group, its reputation and its assets. Certain of these proceedings and actions are described below.
Unless otherwise indicated, the Group cannot reasonably predict the outcome of these legal proceedings, nor
can it currently estimate the amount of loss, or range of loss, if any, that may result from these proceedings. An
adverse outcome in certain of these proceedings could have a material adverse effect on the Group's business,
financial condition and results of operations, and could cause the market value of its limited voting shares and/
or debt securities to decline.
The class action equity claims at the time of the Recapitalization Transaction (the "Existing Equity Class Action
Claims") were released pursuant to the CBCA Plan and the Final Order, provided that any recovery in respect
of such Existing Equity Class Action Claims was limited pursuant to the CBCA Plan and the Final Order to
recovery from any applicable insurance policies maintained by the Group, subject to certain exceptions. These
class actions have now been settled and closed.
The Company and certain of its former executive officers were the subject of various class action complaints in
the US relating to the Company’s August 12, 2016 press release, whereby the Company revised its 2016 guidance.
These class actions have now been settled and closed.
The Company and certain of its former executive officers and a former director were also subject to securities
class actions filed in Ontario and Quebec, Canada. These class actions have now been settled and closed.
Since 2016, the United Kingdom ("U.K.") Competition and Markets Authority ("CMA") has opened a number
of investigations into the International segment of ADVANZ PHARMA. Nine (9) investigations have been
opened. Five (5) of those nine investigations have now been closed by the CMA (although the CMA has powers
to be able to re-open them in certain circumstances). Four (4) investigations are on-going and the Company
continues to cooperate fully with the CMA. More details of these various investigations are set out below.
On October 25, 2016, the Company announced that the Competition and Markets Authority ("CMA")
commenced an investigation into various issues in relation to the U.K. pharmaceutical sector, and that the
ADVANZ PHARMA International segment was part of the inquiry. The CMA’s investigation includes matters
that pre-date the Group’s ownership of the ADVANZ PHARMA International business and relates to the
ADVANZ PHARMA International segment's pricing of three products. On February 15, 2018, and November
25, 2019, the Company announced that the CMA notified the Group that it was closing its investigation related
to Fusidic Acid and Carbimazole, respectively, on administrative grounds. Such a decision does not prevent the
CMA from opening a new investigation into the product in future. The CMA investigation into the pricing of
liothyronine tablets continues: on November 21, 2017, the Company announced that the CMA had issued a
statement of objections to the Group, and the former owners of the ADVANZ PHARMA International segment,
Hg Capital LLP and Cinven, in relation to the pricing of liothyronine tablets, in the U.K. between November
2007 and at least July 2017. A statement of objections is a formal statement by the CMA that, on a provisional
basis, it considers that a competition infringement may have occurred. On April 20, 2018, the Group responded
in detail to the CMA's statement of objections, and on May 21, 2018, the Group attended an oral hearing to
present the key points of its response to the CMA decision panel. On January 30, 2019, the CMA panel issued
a supplemental statement of objections narrowing the scope of the investigation into liothyronine tablets,
including reducing the period of time under consideration by two years. The Group applied for a stay of the
investigation which was heard by the U.K. High Court on June 11, 2019 and was unsuccessful. The Group filed
its response to the supplemental statement of objections on July 11, 2019. An oral hearing took place on September
3, 2019. The CMA has since asked for further information, has conducted further interviews, and arranged a
further oral hearing in January 2020, but has not yet reached a decision.
On March 3, 2017, the Company announced that the CMA issued a statement of objections to a third party and
the Group in relation to the supply of 10mg hydrocortisone tablets in the U.K. between 2013 and 2016. On May
26, 2017, the Company responded in detail to the CMA's statement of objections and on July 20, 2017, the Group
[47]
ADVANZ PHARMA Corp. Limited
Notes to Consolidated Financial Statements
(Stated in thousands of U.S. Dollars, except per share amounts and where otherwise stated)
attended an oral hearing to present the key points of its response to the CMA decision panel. No decision has
been made by the CMA decision panel since this hearing in July 2017. In December 2016, the CMA issued a
statement of objections against Actavis UK in relation to its pricing of hydrocortisone tablets and on March 5,
2019, the CMA issued a statement of objections against Actavis UK and Waymade in relation to their agreements
for 10mg and 20mg hydrocortisone tablets. The Company is not named in either of those two statements of
objections. During 2019, the CMA informed the Company that it was considering merging its investigation into
the Company with its separate investigations into Actavis and Waymade. The Company has objected to this
proposal on various grounds. No decision has yet been taken by the CMA but a decision is expected in early
2020. This investigation includes matters that pre-date the Company’s ownership of the ADVANZ PHARMA
International business.
On October 10, 2017, the Company announced that the CMA commenced additional investigations in relation
to the U.K. pharmaceutical sector, and that the ADVANZ PHARMA International segment and certain of its
products are part of the inquiry. These investigations include matters that predate the Company's ownership of
the ADVANZ PHARMA International segment, and involve the following products: Carbimazole,
Nitrofurantoin, Prochlorperazine, Dicycloverine, Trazodone and Nefopam. On November 12, 2018, the CMA
notified the Group that it had closed its investigations into Trazodone, Nefopam and Dicycloverine on the grounds
of administrative priority. On February 21, 2019, the Group received notice from the CMA that the investigation
into Nitrofurantoin was being amended to include 100mg capsules in addition to 50mg capsules. On May 23,
2019, the CMA issued a statement of objections to the Company and certain of its subsidiaries in relation to
Prochlorperazine, whereby the CMA sets out a provisional view that Focus Pharmaceuticals Limited, a subsidiary
of the Company, infringed competition law. The Company filed its response to this statement of objections on
August 1, 2019. An oral hearing took place on October 8, 2019. The CMA has since asked for further information
and conducted further interviews, but has not reached a decision, which is expected in the third quarter of 2020.
On July 25, 2019, the CMA issued a statement of objections to the Company and certain of its subsidiaries in
relation to Nitrofurantoin 50mg and 100 mg capsules, whereby the CMA sets out its provisional view that certain
of those subsidiaries infringed competition law. The Company filed its response to this statement of objections
in February 2020. An oral hearing is scheduled for April 2020.
During the first quarter of 2016, the Group became aware that a third party had notified wholesalers, through
listing services, of its intent to distribute and sell in certain U.S. regions a non-FDA approved copy of Donnatal®
tablets. On January 6, 2016, the Group commenced a lawsuit against the third party and its principal owner
claiming damages from such conduct. In May 2016, the Group became aware that this non-FDA approved
product was introduced into certain US regions. On March 15, 2017, the court ruled on the third party's motion
to dismiss the Group's claim, denying such motion in part and granting it in part. On March 29, 2017, the third
party filed its answer and counter claim in response to the Group's claim. On August 16, 2017, this third party
filed a motion to amend its counterclaim to add factual allegations detailing the scope of the Group's campaign
to disparage its products and interfere with its contractual and business relationships. On November 8, 2017, the
court granted the Group's motion for leave to file its second amended complaint, permitting the Group to include
its direct false advertising claim. On June 29, 2018, the Group filed an amended complaint to include claims
relating to the listing and distribution of a non-FDA approved copy of Donnatal® elixir. The Group continues
to pursue this lawsuit vigorously and the litigation is expected to go to trial in 2021.
On June 16, 2018, the Group commenced a lawsuit in the United States against Lazarus Pharmaceuticals Inc.
("Lazarus") and Cameron Pharmaceuticals LLC ("Cameron") for listing and distributing a non-FDA approved
copy of Donnatal® elixir in certain U.S. regions. Discovery and depositions are now coming to a close. A
mediation was held in September 2019 but did not resolve the dispute. The litigation is expected to be scheduled
for trial in the first half of 2021. On June 29, 2018, ADVANZ PHARMA filed a statement of claim against
Lazarus and Mark Thompson (the former Chief Executive Officer of the Company) in the Province of Ontario
for, among other things, breach of contract and post-employment covenants. In January 2019, the Group filed
a claim in the Province of Ontario against a former employee, Jean-Paul Laurin for, among other things, breach
of contract and post-employment covenants. In August 2019, the Group filed a similar claim for breach of contract
and post-employment covenants against former employee, Aaron Hullett.
[48]
ADVANZ PHARMA Corp. Limited
Notes to Consolidated Financial Statements
(Stated in thousands of U.S. Dollars, except per share amounts and where otherwise stated)
During the first quarter of 2018, the Group filed a complaint in the United States against Blake Kelley, a former
employee of the Group, for breach of his employment agreement, non-disclosure agreement, non-competition
agreement and separation agreement by, inter alia, retaining, disclosing and / or using the Group’s confidential,
proprietary, and trade secret information relating to Donnatal®, breach of contract accompanied by a fraudulent
act, misappropriation of trade secrets, a claim under the South Carolina Unfair Trade Practice Act, civil conspiracy,
and violation of the Computer Fraud and Abuse Act. The Kelley lawsuit has been consolidated with the Lazarus
lawsuit.
On April 5, 2019, the Group filed a lawsuit in California federal court against Vitae Enim Vitae Scientific Inc.
("VeV"), Boris Gites and Charles Cavallino alleging those defendants conspired with various former employees
of the Group, including Mark Thompson and Jean-Paul Laurin, to develop and market phenobarbital and
belladonna alkaloids elixir products that would directly compete with the Group's Donnatal® elixir products.
On July 23, 2019, the California federal court denied the VeV motion to stay or dismiss the claim and ruled that
the claim should be transferred to the courts in South Carolina where the Lazarus and Cameron claims are being
heard. The Courts of South Carolina have since transferred the claim back to the courts in California. In October
2019, the VeV lawsuit was stayed, pending the trial in the Lazarus lawsuit.
On September 16, 2016, the Company announced that a bill was introduced in the U.K. House of Commons to
amend and extend existing provisions of the National Health Service Act 2006 to enable the Secretary of State
to help manage the cost of health service medicines. On April 27, 2017, the U.K. government accorded Royal
Assent to the UK Health Service Medical Supplies (Costs) Act 2017 (the "Act"). The Act introduces provisions
in connection with controlling the cost of health service medicines and other medical supplies. The Act also
introduces provisions in connection with the provision of pricing and other information by manufacturers,
distributors and suppliers of those medicines and medical supplies. On July 1, 2018, the U.K. Department of
Health and Social Care (the "Department of Health") issued regulations relating to the provision of routine and
non-routine information. These regulations require manufacturers and wholesalers to provide information
relating to sales volumes and average selling prices on a quarterly basis, as well as provide the Department of
Health the power to access information relating to costs and inventory holdings on a non-routine basis. The
Group has historically provided volume and average selling price data on many of its products, and has continued
to do so in accordance with the information regulations issued by the Department of Health on July 1, 2018.
Whilst to date, the Group have seen no material adverse impact, the Group continues to monitor the
implementation of the Act. In June 2019, as part of the wider review of costs, the Department of Health announced
that it intends to issue a consultation on Community Pharmacy Reimbursement Reform. The Department of
Health is consulting with the industry on how it intends to utilize any new powers to control the cost of any
health service medicines and other supplies and is expected to issue a public consultation during 2020. While
the full effects and implementation of the Act and these consultations are unknown at this time, the Act could
impose certain risks and uncertainties on the Group's operations and cash flows. In addition, although the Group
currently believes that the provision of pricing and other information regulations under the Act do not at this
time materially adversely affect the Group, the impact on the Group's business will not be known until such time
that the regulations are fully implemented and enforced.
19. Financial Risk Management
The Group’s activities expose it to certain financial risks, including currency risk, interest rate risk, credit risk
and liquidity risk.
Currency Risk
The Group operates primarily in USD, GBP and EUR. Foreign exchange risk arises from future commercial
transactions, recognized assets and liabilities and net investments in foreign operations.
A portion of the Group's business is with customers in continental Europe and other foreign markets with
transactions completed in foreign currencies. The Group's policy, where considered appropriate, is to minimize
all currency exposures on any balance not expected to mature within 60 days of its arising. The Group is exploring
options to mitigate its currency exposures.
[49]
ADVANZ PHARMA Corp. Limited
Notes to Consolidated Financial Statements
(Stated in thousands of U.S. Dollars, except per share amounts and where otherwise stated)
As part of the Recapitalization Transaction, as described in Note 2, the Company settled external GBP
denominated debt and issued new EUR denominated debt. The settled external GBP debt was treated as a net
investment hedge until the time of settlement.
The table below shows the extent to which the Group has net monetary assets (liabilities), excluding long-term
debt, in currencies other than the functional currency of the Company.
As at
(Amounts in USD)
Great British Pound
Euro
Indian Rupees
Swedish Krona
Australian Dollars
South African Rand
Papua New Guinea Kina
Canadian Dollars
Other
Total
Interest Rate Risk
Dec 31, 2019 Dec 31, 2018
135,132
19,369
16,577
3,008
4,081
4,014
2,035
252
7,764
148,033
9,837
15,614
4,828
6,106
4,063
2,454
774
6,787
192,232
198,496
Interest rate risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because
of changes in market interest rates. The long-term debt which bears interest at floating rates is subject to interest
rate cash flow risk resulting from market fluctuations in interest rates. Certain long-term debt bear interest at a
fixed rate of interest, and as such are subject to interest rate price risk resulting from changes in fair value from
market fluctuations in interest rates. A 1% appreciation (depreciation) in the interest rate would result in the
following:
For the year ended
Impact of a 1% increase in USD LIBOR interest rates for long-term debt on
net income (loss)
Impact of a 1% decrease in USD LIBOR interest rates for long-term debt on
net income (loss)
Impact of a 1% increase in interest rates above EURIBOR floor for long-term
debt on net income (loss)
2019
2018
(8,003)
(14,119)
8,003
8,610
(2,593)
(824)
Credit Risk
Credit risk is the risk of a financial loss to the Group if a customer or counterparty to a financial instrument fails
to meet its contractual obligation. Financial instruments that potentially expose the Group to significant
concentrations of credit risk consist of cash and cash equivalents, accounts receivables, and other receivables.
The Group's investment policies are designed to mitigate the possibility of deterioration of principal, enhance
the Group's ability to meet its liquidity needs and provide high returns within those parameters. The Group
monitors the collectability of accounts receivable and estimates a loss allowance. As at December 31, 2019, the
loss allowance was $920 (2018 – $2,189).
Concentrations of credit risk
Financial instruments that potentially subject the Group to significant concentrations of credit risk primarily
consist of accounts receivable.
[50]
ADVANZ PHARMA Corp. Limited
Notes to Consolidated Financial Statements
(Stated in thousands of U.S. Dollars, except per share amounts and where otherwise stated)
The Group evaluates the recoverability of its accounts receivable on an on-going basis. As of December 31,
2019 the Group’s single largest U.S. wholesale customer account for approximately 14% or $15 million of net
trade receivables and 12% or $59 million of total revenue for the twelve months ended December 31, 2019. The
Group does not consider there to be additional concentration risk within ADVANZ PHARMA International.
Liquidity Risk
Liquidity risk is the risk that the Group will encounter difficulties in meeting its financial liability obligations
as they become due. The Group has a planning and budgeting process in place to determine funds required to
support the Group's normal operating requirements on an ongoing basis. Since inception, the Group has financed
its cash requirements primarily through issuances of securities, short-term borrowings and issuances of long-
term debt. The Group controls liquidity risk through management of working capital, cash flows and the
availability and sourcing of financing.
The Group's primary source of liquidity is cash on hand and cash flows from operations not used for financing
activities. The Group does not have an existing line of credit to access additional borrowed funds. As disclosed
in Note 26 - Subsequent Events, the Company has entered into agreements to acquire certain product rights and
the issued and outstanding share capital of Correvio Pharma Corp., both of which are expected to be funded
with cash on hand ($261 million as at December 31, 2019) and expected to close during the second quarter of
2020. The total purchase consideration for the product acquisition is $84 million plus approximately $14 million
of inventory deposit, and the total purchase consideration for the company acquisition is expected to be $76
million. The impact of the acquisitions noted above will reduce the Group’s cash on hand and cash equivalent
by approximately $180 million. While this will substantially reduce the Group's cash and cash equivalents, the
Group’s management team have assessed the impact of these two acquisitions, including the costs of integration
and other payment obligations, on the Group’s liquidity and believe that the cash on hand and the cash flows
expected to be generated from operations will provide sufficient liquidity to support the Group’s ongoing business
and financing cash flow requirements for at least, but not limited to the next 12 months.
COVID-19
In December 2019, a novel strain of coronavirus, COVID-19, was reported to have surfaced in Wuhan, China
and on January 20, 2020, the World Health Organization declared the outbreak a global health emergency. The
COVID-19 outbreak has continued to evolve rapidly with impacts seen across the world, which has led to
significant a number of disruptions globally. Disruptions that could impact the Company include but are not
limited to, our sales teams ability to travel, the ability of our contract manufacturing organizations to manufacture,
the ability of our distributors to deliver to our patients and the ability of the Company to raise additional capital
to fund future acquisitions. These disruptions, if they occur, could have an impact on the Company’s operating
results.
At present, the Company has not identified any material continuity-risks specifically associated with COVID-19,
but continue to monitor situation carefully, working with Government and all relevant bodies to ensure that our
patients are able to continue to access vital medicines at this time.
The following tables summarize the Group’s significant contractual maturities (on an undiscounted cash flow
basis) as at December 31, 2019 and December 31, 2018:
[51]
ADVANZ PHARMA Corp. Limited
Notes to Consolidated Financial Statements
(Stated in thousands of U.S. Dollars, except per share amounts and where otherwise stated)
As at
Financial Instruments
Trade payables and accrued
liabilities
Provisions
Long-term debt
Interest on long-term debt
Lease liabilities
Royalties payable
As at
Financial Instruments
Trade payables and accrued
liabilities
Provisions
Long-term debt
Interest on long-term debt
< 3
months
3 to 6
months
6 months
to 1 year
1 to 2
years
2 to 5
years Thereafter
96,924
12,067
5,247
15,438
926
750
—
233
5,247
30,425
684
750
—
5,093
10,493
48,968
1,370
1,500
—
—
—
—
20,987
1,281,104
96,187
256,820
2,385
3,000
6,739
—
Dec 31, 2019
Total
96,924
17,393
—
—
— 1,323,078
— 447,838
3,476
—
15,580
6,000
131,352
37,339
67,424
122,559
1,544,663
3,476
1,906,813
Dec 31, 2018
< 3
months
3 to 6
months
6 months
to 1 year
1 to 2
years
2 to 5
years Thereafter
92,883
21,459
5,272
24,629
144,243
—
2,008
5,272
19,767
27,047
—
2,410
10,545
53,383
66,338
—
—
—
—
—
—
21,089
63,268
1,243,717
1,349,163
101,741
294,774
83,330
577,624
122,830
358,042
1,327,047
2,045,547
Total
92,883
25,877
20. Financial Instruments – Fair Value Estimation
Accounting classifications and fair values
The fair value of a financial asset or liability is the amount at which the instrument could be exchanged in a
current transaction between willing parties, other than in a forced or liquidation sale. For the financial assets and
liabilities of the Group, the fair values have been estimated as described below:
Cash and cash equivalents
Long-term debt
- approximates to the carrying amount;
- based on quoted price, or by reference to observable quoted
prices for similar long-term debt;
Receivables and payables
- approximates to the carrying amount
There are no financial assets or liabilities that are measured at fair value as at December 31, 2019 and
December 31, 2018.
Measurement of fair values
There were no transfers between Level 2 and Level 3 during the year.
During the year ended December 31, 2019 interest expense and changes in fair value of $nil (2018 - $425) related
to purchase consideration was recognized in the consolidated statements of income (loss).
21. Capital Management
The Group's capital management objectives are to safeguard its ability to provide returns for shareholders and
benefits for other stakeholders, by ensuring it has sufficient cash resources to fund its activities, to pursue its
commercialization efforts and to maintain its ongoing operations. The Group includes long-term debt and
shareholders’ equity (deficit) in the definition of capital.
[52]
ADVANZ PHARMA Corp. Limited
Notes to Consolidated Financial Statements
(Stated in thousands of U.S. Dollars, except per share amounts and where otherwise stated)
The below table sets forth the Company’s capital structure:
As at
Long-term debt (Note 14)
Shareholders' Equity (Deficit)
22. Segmented Reporting
Operating Segments
Dec 31, 2019 Dec 31, 2018
1,323,078
1,349,163
15,114
196,664
1,338,192
1,545,827
The Group has two reportable operating segments: ADVANZ PHARMA International and ADVANZ PHARMA
North America, as well as a Corporate cost centre. A brief description of each is as follows:
ADVANZ PHARMA International
The ADVANZ PHARMA International segment consists of a diversified portfolio of branded and generic
products that are sold to wholesalers, hospitals and pharmacies in over 90 countries. The ADVANZ PHARMA
International segment specializes in the acquisition, licensing and development of off-patent prescription
medicines, which may be niche, hard to make products. The segment’s over 200 products are manufactured and
sold through an out-sourced manufacturing network and marketed internationally through a combination of
direct sales and local distribution relationships. The ADVANZ PHARMA International segment operates
primarily outside of the North American marketplace.
ADVANZ PHARMA North America
The ADVANZ PHARMA North America segment has a diversified product portfolio that focuses primarily on
the U.S. pharmaceutical market. These products include, but are not limited to, Donnatal® for the treatment of
irritable bowel syndrome; Zonegran® for the treatment of partial seizures in adults with epilepsy; Nilandron®
for the treatment of metastatic prostate cancer; Lanoxin® for the treatment of mild to moderate heart failure and
atrial fibrillation; Plaquenil® for the treatment of lupus and rheumatoid arthritis; and Photofrin® for the treatment
of certain types of cancer. ADVANZ PHARMA North America’s product portfolio consists of branded products
and authorized generic contracts. The segment’s products are manufactured through an out-sourced production
network and sold primarily through a third party distribution network in the U.S.
Corporate
The corporate cost centre represents certain centralized costs including those costs associated with being a public
reporting entity.
The following tables set forth operating income (loss), goodwill, total assets and total liabilities by reportable
operating segment for the years ended December 31, 2019 and 2018.
[53]
ADVANZ PHARMA Corp. Limited
Notes to Consolidated Financial Statements
(Stated in thousands of U.S. Dollars, except per share amounts and where otherwise stated)
ADVANZ
PHARMA
International
ADVANZ
PHARMA
North America
Corporate
Year ended
Dec 31, 2019
Revenue
Cost of sales
Gross profit
Operating expenses
General and administrative
Selling and marketing
Research and development
Restructuring related, acquisition and other
Share-based compensation
Amortization of intangible assets
Impairments
Depreciation expense
Total operating expenses
378,792
144,604
234,188
19,031
25,444
21,508
15,648
—
150,295
10,120
1,979
244,025
129,529
26,905
102,624
7,631
9,069
7,613
9,393
—
54,018
119,161
150
—
—
—
12,935
—
—
8,800
3,943
36
—
72
207,035
25,786
508,321
171,509
336,812
39,597
34,513
29,121
33,841
3,943
204,349
129,281
2,201
476,846
Operating income (loss) for the year
(9,837)
(104,411)
(25,786)
(140,034)
ADVANZ
PHARMA
International
ADVANZ
PHARMA
North America
Corporate
Year ended
Dec 31, 2018
Revenue
Cost of sales
Gross profit
Operating expenses
General and administrative
Selling and marketing
Research and development
Restructuring related, acquisition and other
Share-based compensation
Amortization of intangible assets
Impairments
Depreciation expense
Fair value (gain) loss
Total operating expenses
403,653
148,943
254,710
27,841
24,367
22,707
12,050
—
181,891
57,560
1,437
—
327,853
133,333
26,946
106,387
5,276
12,508
7,001
3,540
—
68,431
—
96
425
—
—
—
11,103
—
—
85,382
2,537
60
—
187
—
536,986
175,889
361,097
44,220
36,875
29,708
100,972
2,537
250,382
57,560
1,720
425
97,277
99,269
524,399
Operating income (loss) for the year
(73,143)
9,110
(99,269)
(163,302)
[54]
ADVANZ PHARMA Corp. Limited
Notes to Consolidated Financial Statements
(Stated in thousands of U.S. Dollars, except per share amounts and where otherwise stated)
Income (loss) from continuing operations before tax includes the total operating income (loss) from above plus
other income and expense which do not form part of any reportable operating segment.
As at
Goodwill
Total assets
ADVANZ
PHARMA
International
ADVANZ
PHARMA
North America
Corporate
Total
Dec 31, 2019
212,054
12,484
—
224,538
1,525,815
48,173
19,022
1,593,010
Total liabilities
234,402
7,152
1,336,342
1,577,896
As at
Goodwill
Total assets
204,818
27,966
—
232,784
Dec 31, 2018
1,326,526
473,713
30,705
1,830,944
Total liabilities
223,135
42,138
1,369,007
1,634,280
Geographic Information
The Group has major operations in Canada, Ireland, Jersey, the U.S. and the U.K.
The following table sets forth revenue by geographic location based on contracted entity (excluding inter-
company transactions):
For the year ended
Revenue
For the year ended
Revenue
Barbados
85,912
Barbados
123,366
United
States
11,749
United
Kingdom &
Jersey
214,032
United
States
9,967
United
Kingdom &
Jersey
246,311
Dec 31, 2019
Ireland
46,544
All other
countries
150,084
Total
508,321
Dec 31, 2018
Ireland
15,592
All other
countries
141,750
Total
536,986
Product Revenue by Category
ADVANZ PHARMA International
For the year ended
Branded
Generics
Total
Dec 31, 2019
Dec 31, 2018
201,294
177,498
378,792
200,210
203,443
403,653
[55]
ADVANZ PHARMA Corp. Limited
Notes to Consolidated Financial Statements
(Stated in thousands of U.S. Dollars, except per share amounts and where otherwise stated)
ADVANZ PHARMA North America
For the year ended
Branded
Authorized Generics and other
Total
Dec 31, 2019
Dec 31, 2018
115,262
14,267
129,529
118,454
14,879
133,333
The following table sets forth assets and liabilities by geographic location (excluding inter-company balances
and investments in subsidiaries):
As at
Dec 31, 2019
Barbados
Canada
United
States
United
Kingdom
& Jersey
Ireland
All other
countries (1)
Total
Current assets
Non-current assets
2,422
22,807
19,022
9,315
217,138
— 13,480 1,054,510
180,620
19,641
41,265
469,782
12,790 1,123,228
Total assets
25,229
19,022
22,795 1,271,648
200,261
54,055 1,593,010
Current liabilities
Non-current liabilities
4,958
34,249
327 1,302,093
1,956
58
88,777
59,871
62,304
5,712
9,759
202,003
7,832 1,375,893
Total liabilities
5,285 1,336,342
2,014
148,648
68,016
17,591 1,577,896
As at
Dec 31, 2018
Barbados
Canada
United
States
United
Kingdom
& Jersey
Ireland
All other
countries (1)
Total
Current assets
Non-current assets
83,129
366,418
30,594
111
9,859
14,307
166,537
898,805
106,613
43,251
47,405
444,137
63,915 1,386,807
Total assets
449,547
30,705
24,166 1,065,342
149,864
111,320 1,830,944
Current liabilities
Non-current liabilities
40,326
40,481
898 1,328,526
Total liabilities
41,224 1,369,007
914
—
914
78,258
86,279
29,271
—
11,731
200,981
17,596 1,433,299
164,537
29,271
29,327 1,634,280
Notes:
(1) All other countries is comprised primarily of Australia, India, Netherlands and Sweden.
23. Related Party Transactions
(a) Compensation of Directors and Key Management
Compensation consisting of salaries, performance and retention bonuses, other benefits, severance and director
fees to key management personnel and directors for the year ended December 31, 2019 amounted to $5,209
(2018 - $17,982).
[56]
ADVANZ PHARMA Corp. Limited
Notes to Consolidated Financial Statements
(Stated in thousands of U.S. Dollars, except per share amounts and where otherwise stated)
Share based compensation (recovery) expense recorded for key management and directors, for the year ended
December 31, 2019 amounted to $2,675 (2018 - $250).
(b) Recapitalization Transaction
As a result of the Recapitalization Transaction investment funds for which GSO Capital Partners LP or its affiliates
acts as investment manager, advisor or sub-advisor ("GSO") and investment funds for which Solus Alternative
Asset Management LP or its affiliates acts as investment manager, advisor or sub-advisor ("Solus"), are now
considered to be related parties in accordance with IFRS and also hold a portion of the Group's long-term debt.
(c) Employee Loan
As at December 31, 2018, there was an employee loan outstanding in the amount of $6, which was subsequently
repaid during the first quarter of 2019.
(d) Fees Paid for Consulting Services to a Firm Affiliated with a Director
During the year ended December 31, 2019, consulting firms affiliated with member of the Board of the Company
provided consulting services to the Company in relation to potential acquisitions. Consulting fees paid or payable
to the firms affiliated with the directors for the year ended December 31, 2019 amounted to $246 (2018 - $nil),
which represented the market value of the transactions. As at December 31, 2019, $92 was outstanding.
24. Nature of expenses
The nature of expenses included in cost of sales and operating expenses are as follows:
For the year ended
Production, manufacturing and distribution costs
Dec 31, 2019 Dec 31, 2018
171,509
175,889
Salaries, bonus and benefits
Sales and marketing expenses
Research and development expenses
Share-based compensation expense
Amortization and depreciation
Impairments
Fair value (gain) loss
Professional fees including those related to restructuring costs
Travel expenses
Other expenses
Total
41,518
20,320
17,697
3,943
206,550
129,281
—
45,282
3,076
9,179
648,355
43,317
23,699
20,291
2,537
252,102
57,560
425
111,054
3,221
10,193
700,288
Restructuring related, acquisition and other costs for the year ended December 31, 2019 was $33,841. The
significant expenses include, $8,615 related to internal restructuring and integration, including costs for closure
of Barbados operations, $8,279 of costs related to ongoing regulatory matters in connection with the CMA
investigations (refer to Note 18 for further details), $7,500 due to the Company recording an onerous contract
cost related to the remaining royalties payable on Ulesfia, and $4,859 of transaction costs in assessing potential
acquisitions.
[57]
ADVANZ PHARMA Corp. Limited
Notes to Consolidated Financial Statements
(Stated in thousands of U.S. Dollars, except per share amounts and where otherwise stated)
Restructuring related, acquisition and other costs for the year ended December 31, 2018 was $100,972. The
expense includes $74,802 of costs associated with the Company's Recapitalization Transaction (which includes
costs of the Company's advisors and advisors of the debtholders involved in the Recapitalization Transaction
(refer to Note 2)), $1,375 of employee retention costs, $15,977 of costs related to severance, and $7,054 of costs
related to ongoing regulatory matters in connection with the CMA investigations (refer to Note 18 for further
details). The remaining costs relate primarily to the class action lawsuits involving the Company.
Unrealized foreign exchange (gain) loss
Unrealized foreign exchange gain for the year ended December 31, 2019 was $24,677 (2018 - loss of $38,257).
The primary component of the unrealized foreign exchange (gain) loss for the period is the recognition of
unrealized foreign exchange (gains) losses on EUR Term Loan and certain inter-company balances, including
certain loans and inter-company interest balances, associated with the Company's investment in the ADVANZ
PHARMA International segment. The European Euros ("EUR") denominated intercompany loans are not
considered permanent investments as a result of repayment terms. The principal and interest, if any, in respect
of these inter-company loans are eliminated on consolidation.
25. Non-cash working capital
Changes in non-cash working capital is comprised of:
For the year ended
Accounts receivable
Inventory
Prepaid expenses and other current assets
Trade payable and accrued liabilities
Provisions
Other liabilities
Changes in non-cash working capital
26. Subsequent Events
(a) Product acquisition
Dec 31, 2019 Dec 31, 2018
33,544
3,168
(8,293)
744
(8,536)
672
21,299
4,917
3,194
2,318
6,991
(8,695)
2,698
11,423
On March 6, 2020, the Company announced it entered into a definitive agreement to acquire the rights to a
portfolio of alprostadil products from UCB S.A. for €75 million ($84 million) which is expected to close on or
about April 1, 2020. On closing, the Company will also pay a deposit for inventory of approximately $14 million.
The alprostadil product portfolio consists of two established, niche, injectable Prostaglandin E1 formulations
for the treatment of erectile dysfunction and peripheral arterial occlusive disease. The products are marketed
under the brand names Prostavasin®, Viridal®, Vasaprostan® and Edex®. Combined sales of all alprostadil
brands generated approximately $33.3 million in revenue in 2019 in the territories where the Company will hold
the rights.
(b) Voluntary de-listing from the Toronto Stock Exchange
On March 10, 2020, the Company announced that it had filed a voluntary de-listing application with the TSX
and expects to de-list its limited voting shares from the TSX on or about March 27, 2020, at which point there
will be no public market to trade the limited voting shares of the Company. The Company will, however, remain
a ‘reporting issuer’ under the applicable Canadian Securities Laws, shares that are currently freely tradeable in
Ontario will continue to be freely tradeable in Ontario, and the Company will continue to disseminate its
continuous disclosure documents as required by such laws until such time as it is no longer required to do so.
[58]
ADVANZ PHARMA Corp. Limited
Notes to Consolidated Financial Statements
(Stated in thousands of U.S. Dollars, except per share amounts and where otherwise stated)
(c) Company acquisition
On March 16, 2020, the Company announced it had entered into an Arrangement Agreement to acquire all of
the issued and outstanding shares of specialty pharmaceutical company Correvio Pharma Corp. for a purchase
price of approximately $76 million, including the repayment of certain Correvio indebtedness. The acquisition
is to be completed pursuant to a plan of arrangement under the CBCA. The acquisition is to be voted on by the
shareholders of Correvio no later than May 20, 2020 to consider, and if deemed advisable, approve the transaction.
[59]