T O O U R S H A R E H O L D E R S
Dear Fellow Shareholders,
I am excited to join Akorn at this critical time
for our Company. As an industry veteran,
I have been familiar with Akorn for many
years, including the recent challenging
times that have been a source of frustration
for both the Company and our stakeholders.
However, I see a significant opportunity
to re-invigorate a well-established generic
and specialty pharmaceutical organization, and this was a key driver
in my decision to join Akorn as the CEO. There are many aspects
of the Company that impress me and provide a strong foundation
to build upon.
First and foremost, the Company has a diverse product portfolio, with
a niche generics business focused on unique areas of the market such
as ophthalmology and injectables that have higher barriers to entry
and the ability to generate attractive returns. Furthermore, we have
a strong presence in branded ophthalmics, OTC brands and animal
health, which enhances and diversifies our offering. Additionally, with
no single product generating more than 10% of total revenues, we
don’t currently have the risk that many peers carry related to more
concentrated portfolios.
I am also encouraged by the depth and breadth of our pipeline. The
backlog of ANDAs and other assets, provide us with the potential
for sizeable future growth opportunities. As we move forward, we
will continue to pursue valuable pipeline opportunities in our areas
of expertise to drive margin enhancements and improvements to the
bottom line.
Although my tenure as CEO has been short, I prioritized getting out
to all of our manufacturing, distribution, and development sites to
engage with our leadership and associates, providing initial direction,
and assessing the state of the business. For 2019, the priorities for the
Akorn team are clear – we need to flawlessly execute our operations,
quality systems and compliance enhancement initiatives.
We’re hyper-focused on increasing the level of service we provide
customers, reducing
improving
manufacturing efficiency with sustainable compliance, quality and
operational improvements. Commitment to and focus on these activities
will give us freedom to operate and will help drive long-term growth.
failure-to-supply penalties, and
accountability of our operations. We have strengthened our leadership
team, bringing in highly qualified, talented, and experienced
executives to complement the strong team already in place.
We have also increased the clarity of priorities and expectations at
our manufacturing sites. For example, specific emphasis has been
placed on metrics for safety, batches right first time, timely resolution
of investigations/CAPAs, cycle time, and cost per unit. The emphasis
on these metrics will help drive and sustain business performance and
customer service levels while improving our cost structure. The ultimate
goal of these structural changes is to continue to build a culture where
our teams own safety, quality, performance, and integrity.
Additionally, we are working to find ways to improve our operations
and simplify our global manufacturing network. For example, we have
decided to explore strategic alternatives to exit our operations in India,
which will enable us to concentrate resources on activities with greater
potential to strengthen our business in the near-term.
I recognize that these changes are just the tip of the iceberg and that
this is clearly a multi-step process. However, I believe we have the
right people in place to meet these challenges head on. It has quickly
become apparent to me that our strong and motivated workforce is the
foundation of the company. Strong teams can overcome challenges,
and I know the Akorn team has the desire and the capabilities we
need to deliver improvements near-term while investing intelligently to
realize success in the long-term.
As an engineer by training, I love to solve problems and returning
Akorn back to a high-value specialty pharmaceutical company is both
an exciting challenge and a great opportunity. Our team is focused on
taking the right steps to drive enhanced performance and execution
while we develop a strategic plan to revitalize Akorn. We will be guided
by a culture of compliance, driven by a commitment to providing
patients with affordable and high-quality products, and supported by
the strength and resiliency of our team.
2019 is the year that we get back to running our company and
making decisions in the best interest of Akorn and our stakeholders.
I am impressed by the energy I have seen put into improvement
efforts in these early days; we have and we will continue to see
improvements throughout the year if we stay our course and focus
on compliance, transparency and accountability. I’m excited about
the opportunities ahead for Akorn.
Now let me walk you through some of the near-term actions we are
taking to strengthen our foundation and improve our financial position.
Sincerely,
In an effort to foster a strong emphasis on compliance, transparency,
and accountability, I have made some initial structural and
organizational changes. As part of this commitment to compliance,
I have implemented a company-wide action plan to consolidate,
oversee, manage and improve the timing, effectiveness, and
Douglas Boothe
President and Chief Executive Officer
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Form 10-K
Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the fiscal year ended December 31, 2018
Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Commission File Number: 001-32360
AKORN, INC.
(Exact name of registrant as specified in its charter)
LOUISIANA
(State or other jurisdiction of
incorporation or organization)
72-0717400
(I.R.S. Employer Identification No.)
1925 W. Field Court, Suite 300, Lake Forest, Illinois 60045
(Address of principal executive offices and zip code)
Registrant’s telephone number, including area code: (847) 279-6100
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
Title of each class
Common Stock, No Par Value
Name of each exchange on which registered
The NASDAQ Global Select Market
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
(None)
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes
No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes
No
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90 days. Yes
No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every
Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter)
during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes
No
Indicate by check mark if disclosure of delinquent filers in response to Item 405 of Regulation S-K is not contained herein, and
will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference
in Part III of this Form 10-K or any amendment to this Form 10-K.
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller
reporting company. See definition of “large accelerated filer”, “accelerated filer”, “smaller reporting company”, and “emerging
growth company” in Rule 12b-2 of the Exchange Act. (check one):
Large accelerated filer
Non-accelerated filer
(Do not check if a smaller reporting company)
Accelerated filer
Smaller reporting company
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for
complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes
No
The aggregate market value of the voting stock of the registrant held by non-affiliates (affiliates being, for these purposes only,
directors, executive officers and holders of more than 5% of the registrant’s common stock) of the registrant as of June 30, 2018
was approximately $1,106.7 million based on the closing market price of $16.59 reported on the NASDAQ Global Select Market.
The number of shares of the registrant’s common stock, no par value per share, outstanding as of February 20, 2019 was
125,577,671.
Cautionary Statement Regarding Forward-Looking Statements
Unless otherwise indicated or except where the context otherwise requires, the terms “we,” “us” and “our” or other similar
terms in this Annual Report on Form 10-K refer to Akorn, Inc. and its wholly-owned subsidiaries.
Certain statements in this Form 10-K are forward-looking in nature and are intended to be “forward-looking statements”
within the meaning of the Private Securities Litigation Reform Act of 1995. These statements relate to future events or future
financial performance. In some cases, you can identify forward-looking statements by terminology such as “may,” “should,”
"will," “would,” “could,” “expects,” “plans,” “intends,” “anticipates,” “believes,” “estimates,” “predicts,” “potential,”
“continue” or the negative of such terms or other comparable terminology. Any forward-looking statements, including
statements regarding our intent, beliefs or expectations are not guarantees of future performance. These statements are subject
to risks and uncertainties and actual results, levels of activity, performance or achievements and may differ materially from
those in the forward-looking statements as a result of various factors. See “Item 1A - Risk Factors.” As a result, you should not
place undue reliance on any forward-looking statements. You should read this report completely with the understanding that our
actual results may differ materially from what we expect. Unless required by law, we undertake no obligation to update
publicly any forward-looking statements, whether as a result of new information, future events or otherwise.
FORM 10-K TABLE OF CONTENTS
Item 1.
Business
Item 1A. Risk Factors
Item 1B. Unresolved Staff Comments
Item 2.
Properties
Item 3.
Legal Proceedings
Item 4. Mine Safety Disclosures
PART I
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
Securities
Item 6.
Selected Financial Data
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
Item 8.
Financial Statements and Supplementary Data
Item 9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Item 9A. Controls and Procedures
Item 9B. Other Information
Item 10. Directors, Executive Officers and Corporate Governance
Item 11. Executive Compensation
PART III
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Item 13. Certain Relationships and Related Transactions and Director Independence
Item 14. Principal Accounting Fees and Services
PART IV
Item 15. Exhibits, Financial Statement Schedules
Item 16. Form 10-K Summary
Signatures
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Item 1. Business
PART I
Akorn, Inc., together with its wholly-owned subsidiaries (collectively “Akorn,” the “Company,” “we,” “our” or “us”) is a
specialty generic pharmaceutical company that develops, manufactures and markets generic and branded prescription
pharmaceuticals, branded as well as private-label over-the-counter consumer health products and animal health pharmaceuticals.
We are an industry leader in the development, manufacturing and marketing of specialized generic pharmaceutical products in
alternative dosage forms. We focus on difficult-to-manufacture sterile and non-sterile dosage forms including, but not limited to,
ophthalmics, injectables, oral liquids, otics, topicals, inhalants and nasal sprays. In previous years, the Company completed
numerous mergers, acquisitions, product acquisitions, which resulted in significant growth.
Akorn is a Louisiana corporation founded in 1971 in Abita Springs, Louisiana. In 1997, we relocated our corporate
headquarters to the Chicago, Illinois area and currently maintain our principal corporate offices in Lake Forest, Illinois. We operate
pharmaceutical manufacturing facilities in Decatur, Illinois; Somerset, New Jersey; Amityville, New York; Hettlingen,
Switzerland; and Paonta Sahib, Himachal Pradesh, India. We operate a central distribution warehouse in Gurnee, Illinois and
additional distribution facilities in Amityville, New York and Decatur, Illinois. Our research and development (“R&D”) centers are
located in Vernon Hills, Illinois and Cranbury, New Jersey. We maintain other corporate offices in Ann Arbor, Michigan and
Gurgaon, Haryana, India.
During the years ended December 31, 2018, 2017 and 2016, the Company reported results for two reportable segments:
Prescription Pharmaceuticals and Consumer Health. For further detail concerning our reportable segments please see Part II, Item
8, Note 12 - “Segment Information.”
Our common shares are traded on The NASDAQ Global Select Market under the ticker symbol AKRX. Our principal
corporate office is located at 1925 West Field Court Suite 300, Lake Forest, Illinois 60045 with telephone number (847) 279-6100.
Our Strategy
Our strategy is focused on continuing to strengthen our position in the development and marketing of specialized generic and
branded pharmaceuticals, over-the-counter (“OTC”) drug products and animal health products. We endeavor to maximize
shareholder value by quickly adapting to market conditions, patient demands and customer needs.
We strive to improve cash flow and profitability and generate growth through: new product launches resulting from research
and development successes, improving operational execution, improving and optimizing our cash flow and leveraging our
customer relationships and market leadership. We remain committed to research and development with a focus on our core product
areas of ophthalmics, injectables, oral liquids, otics, topicals, inhalants and nasal sprays.
Additionally, where possible we seek to grow our business inorganically through strategic mergers, acquisitions, business
development and licensing activities that provide the ability to move into new product areas or to expand our reach in existing
product areas.
Our Competitive Strengths
In order to successfully execute our strategy, we must continue to capitalize on our core strengths:
Research and development expertise in alternative dosage forms. Our R&D efforts are primarily focused on the development
of multisource generic products that are in dosage forms other than oral solid dose. We consider dosage forms outside of oral solid
dose to be “alternative dosage forms.” These products typically have fewer competitors in mature markets, are more difficult to
develop and manufacture and can carry higher profitability over time than oral solid dose products. The alternative dosage form
products that we focus on are primarily those that we can manufacture, namely: ophthalmics, injectables, oral liquids, otics,
topicals, inhalants and nasal sprays.
Alternative dosage form manufacturing expertise. Our manufacturing network specializes in alternative dosage form
products. Four of our five manufacturing facilities are U.S. Food and Drug Administration (“FDA”) approved, including:
(1) Our Decatur, Illinois facility, which specializes in sterile products, primarily injectables;
(2) Our Somerset, New Jersey facility, which specializes primarily in sterile ophthalmic products;
4
(3) Our Amityville, New York facility, which specializes in topical creams, gels and ointments, oral liquids, otic liquids, nasal
sprays, sterile ophthalmic products and unit dose oral liquid products; and
(4) Our Hettlingen, Switzerland facility, which specializes primarily in sterile ophthalmic products.
Our Paonta Sahib, Himachal Pradesh, India manufacturing facility is not yet FDA approved. The Paonta Sahib facility is a
sterile injectable facility with separate areas dedicated to general injectable products, carbapenem injectable products,
cephalosporin injectable products and hormonal injectable products. On February 25, 2019, the Company made a decision to
explore strategic alternatives for exiting our Paonta Sahib, Himachal Pradesh, India manufacturing facility.
Established portfolio of generic, branded, OTC and animal health products. We market a diverse portfolio of generic
prescription pharmaceutical products, branded prescription pharmaceutical products, OTC brands, various private-label OTC
pharmaceutical products and a number of prescription animal health products. For our human prescription products, our diverse
portfolio of alternative dosage form products sets us apart from our larger competitors and allows us to provide a single source of
these products for our customers. Our OTC and animal health portfolios are largely complementary to our human prescription
products, allowing us to leverage our manufacturing and marketing expertise.
Targeted sales and marketing infrastructure. We maintain a targeted sales and marketing infrastructure to promote our
branded, generic, OTC and animal health products. We leverage our sales and marketing infrastructure to not only promote our
branded portfolio, but also to sell our multisource generic products directly into physician offices, hospital systems and group
purchasing organizations.
Significant management expertise. Our senior management team has a demonstrated track record of building and operating
pharmaceutical companies through product development, in-licensing and acquisitions.
Our Areas of Focus
Alternative dosage form generics. Our core area of focus is generic prescription pharmaceutical products in alternative dosage
forms. We market a portfolio of multisource prescription pharmaceutical products in injectable, ophthalmic, topical, oral and
inhaled liquid, nasal spray and otic dosage forms. We also market select oral solid dose formulations.
Specialty brands. Alongside our generic prescription pharmaceutical products, we market a portfolio of branded prescription
pharmaceutical products, primarily in the ophthalmology area. While we continue to focus primarily on generic products, our
branded portfolio allows us to leverage our sales and manufacturing infrastructure and deepen our relationships with customers.
OTC products. Our Akorn Consumer Health division (“ACH”) markets a portfolio of OTC brands and various formulations of
private-label OTC pharmaceutical products. Our flagship OTC brand is TheraTears® Therapy for Your Eyes®, which is a family of
therapeutic eye care products including dry eye therapy lubricating eye drops, eyelid and eyelash cleansing foam and eye nutrition
supplements. We also market several specialty OTC products including, Zostrix®, MagOx®, Maginex®, Multi-betic® and
Diabetic Tussin®.
Specialized Animal Health Products. We market a portfolio of branded and generic companion animal prescription
pharmaceutical products under the Akorn Animal Health label. Our major animal health products include Anased® and VetaKet®,
veterinary sedatives; Tolazine® and Yobine®, sedative reversing agents; and Butorphic®, a pain reliever.
New Product Development
We seek to continually grow our business by developing new products. Internal R&D projects are carried out at our R&D
facilities located in Vernon Hills, Illinois and Cranbury, New Jersey. The majority of our product development activity takes place
at our R&D facilities, while our manufacturing facilities provide support for the later phases of product development and exhibit
batch production. We believe that having our own dedicated R&D facilities allows us to increase the size of our product pipeline
and shorten the time between project start and filing with the FDA. As of December 31, 2018, we had 139 full-time employees
directly involved in product R&D activities.
In addition to our internal development work, we strategically partner with drug development and contract manufacturing
companies (“CMOs”) throughout the world for the development of drug products that we believe will complement our existing
product offerings, but for which we may lack the expertise to develop, or the capability, capacity or cost-efficiencies to
manufacture. We may owe payments to these partners from time to time based on their achievement of certain milestones, such as
filing and launch of the subject development product. Our development partners are typically responsible for manufacturing or
sourcing of the finished product and may receive a royalty or a profit split from the sales of the product, or milestone payments.
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R&D costs are expensed as incurred. Such costs amounted to $47.3 million, $45.0 million and $38.8 million for the years
ended December 31, 2018, 2017 and 2016, respectively. This includes internal and external R&D expenses and milestone fees
paid to our strategic partners.
During the year ended December 31, 2018, we submitted two new Abbreviated New Drug Application (“ANDA”) filings to
the FDA. In the prior year ended December 31, 2017, we submitted five ANDA filings while in 2016 we submitted 12 ANDA
filings and three Abbreviated New Animal Drug Application (“ANADA”) filings to the FDA.
Akorn and its partners received eight ANDA product approvals from the FDA in the year ended December 31, 2018; 26
ANDA approvals and one New Drug Application (“NDA”) approval in 2017 and finally, seven ANDA approvals and three
tentative ANDA approvals in 2016.
As of December 31, 2018, we had 62 ANDA filings under FDA review. We plan to continue to regularly submit additional
filings based on perceived market opportunities and our R&D pipeline, as well as review existing filings for commercial viability.
See “Government Regulation” and Item 1A - Risk Factors — “Our growth depends on our ability to timely and efficiently
develop and successfully launch and market new pharmaceutical products.”
Strategic Mergers and Acquisitions
We regularly evaluate and, where appropriate, execute opportunities to expand through the acquisition of products and
companies in areas that we believe offer attractive opportunities for growth. Below is a summary of recent strategic merger and
acquisition activity. See Item 1A - Risk Factors for a description of risks that accompany our business and acquisitions.
Fresenius Kabi AG. On April 24, 2017, the Company entered into an Agreement and Plan of Merger (the “Merger
Agreement”) with Fresenius Kabi AG, a German stock corporation (“Parent”), Quercus Acquisition, Inc., a Louisiana corporation
and wholly-owned subsidiary of Parent (“Merger Sub”) and, solely for purposes of Article VIII thereof, Fresenius SE & Co.
KGaA, a German partnership limited by shares.
On April 22, 2018, Fresenius Kabi AG delivered to Akorn a letter purporting to terminate the Merger Agreement. On April
23, 2018, Akorn filed a verified complaint entitled Akorn, Inc. v. Fresenius Kabi AG, Quercus Acquisition, Inc. and Fresenius SE
& Co. KGaA, in the Court of Chancery of the State of Delaware for breach of contract and declaratory judgment. The complaint
alleged, among other things, that (i) the defendants anticipatorily breached their obligations under the Merger Agreement by
repudiating their obligation to close the Merger, (ii) the defendants knowingly and intentionally breached their obligations under
the Merger Agreement by working to slow the antitrust approval process and by engaging in a series of actions designed to hamper
and ultimately block the Merger and (iii) Akorn had performed its obligations under the Merger Agreement, and was ready, willing
and able to close the Merger. The complaint sought, among other things, a declaration that Fresenius Kabi AG's termination was
invalid, an order enjoining the defendants from terminating the Merger Agreement, and an order compelling the defendants to
specifically perform their obligations under the Merger Agreement to use reasonable best efforts to consummate and make
effective the Merger. On April 30, 2018, the defendants filed a verified counterclaim alleging that, due primarily to purported data
integrity deficiencies, the Company had breached representations, warranties and covenants in the Merger Agreement, and that it
had experienced a material adverse effect. The verified counterclaim sought, among other things, a declaration that defendants’
purported termination of the Merger Agreement was valid and that defendants were not obligated to consummate the transaction,
and damages.
Following expedited discovery, from July 9 to 13, 2018, the Court of Chancery held a trial on the parties’ claims (the
“Delaware Action”). At the conclusion of trial, the Court of Chancery ordered post-trial briefing, which was completed on August
20, 2018, and a post-trial hearing, which was held on August 23, 2018.
On October 1, 2018, the Court of Chancery issued an opinion (the “Opinion”) denying Akorn’s claims for relief and
concluding that Fresenius Kabi AG had validly terminated the Merger Agreement. The Court of Chancery concluded that Akorn
had experienced a material adverse effect due to its financial performance following the signing of the Merger Agreement; that
Akorn had breached representations and warranties in the Merger Agreement and that those breaches would reasonably be
expected to give rise to a material adverse effect; that Akorn had materially breached covenants in the Merger Agreement; and that
Fresenius was materially in compliance with its own contractual obligations. On October 17, 2018, the Court of Chancery entered
partial final judgment against Akorn on its claims and in favor of the Fresenius parties on their claims for declaratory judgment.
The Court of Chancery entered an order holding proceedings on the Fresenius parties’ damages claims in abeyance pending the
resolution of any appeal from the partial final judgment.
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On October 18, 2018, Akorn filed a notice of appeal from the Opinion and the partial final judgment, as well as a motion
seeking expedited treatment of its appeal. On October 23, 2018, the Delaware Supreme Court granted Akorn's motion for
expedited treatment and set a hearing on Akorn's appeal for December 5, 2018.
On December 7, 2018, the Delaware Supreme Court affirmed the Court of Chancery’s ruling denying Akorn’s claims for
declaratory and injunctive relief and granting Defendants’ counterclaim for a declaration that the termination was valid. On
December 27, 2018, the Delaware Supreme Court issued a mandate returning the case to the Court of Chancery for consideration
of all remaining issues, including the Fresenius parties’ damages claims.
On January 15, 2019, the parties filed a joint letter to the Court of Chancery seeking thirty days to discuss the potential
resolution of the Fresenius parties’ damages claims. On February 19, 2019, the parties filed a joint letter advising the Court that
they have been unable to resolve the Fresenius parties’ damages claims. The Fresenius parties stated their intention to seek leave to
amend their counterclaims to assert a new claim for fraud and that they would seek an expedited trial on such claim purportedly
due to Akorn’s financial condition. Akorn stated that it expected to oppose the motions for amendment and expedition, and that it
would move to dismiss the Fresenius parties’ damages claims in their entirety.
On February 20, 2019, the Fresenius parties filed a motion for leave to amend and supplement their counterclaim. The
Fresenius parties’ proposed amended and supplemented counterclaim alleges that Akorn fraudulently induced Fresenius to enter
into the Merger Agreement and thereafter willfully breached contractual representations and warranties and covenants therein. It
seeks damages of approximately $102 million. On February 25, 2019, Akorn filed an opposition to the Fresenius parties’ motion
for leave to amend and supplement their counterclaim, arguing that the motion was untimely and prejudicial. On February 27,
2019, the Fresenius parties filed a reply in further support of their motion to file an amended and supplemented counterclaim. On
February 28, 2019, the Court of Chancery denied the Fresenius parties’ motion for leave to file an amended and supplemented
counterclaim.
Akorn AG (formerly Excelvision AG). To expand our ophthalmic manufacturing capacity, our Luxembourg subsidiary, Akorn
International S.à r.l., closed a share purchase agreement on January 2, 2015 with Fareva SA to acquire all of the issued and
outstanding shares of capital stock of Excelvision AG, a Swiss company (“Excelvision AG”). Excelvision AG was a contract
manufacturer located in Hettlingen, Switzerland specializing in ophthalmic products. On April 1, 2016, the name of Excelvision
AG was changed to Akorn AG.
VersaPharm. On August 12, 2014, we completed the acquisition of VPI Holdings Corp. (“VPI”), the parent company of
VersaPharm Incorporated, a Georgia corporation (“VersaPharm”) (the “VersaPharm Acquisition”). VersaPharm was a developer
and marketer of multi-source prescription pharmaceuticals. VersaPharm’s product portfolio, pipeline and development capabilities
were complementary to the Hi-Tech Pharmacal Co., Inc. (“Hi-Tech”) acquisition, described below, through which we acquired
manufacturing capabilities needed for many of VersaPharm’s marketed and pipeline products.
Hi-Tech Pharmacal Co., Inc. On April 17, 2014, we completed the acquisition of Hi-Tech, which developed, manufactured
and marketed generic and branded prescription and OTC drug products, and specialized in liquid and semi-solid dosage forms (the
“Hi-Tech Acquisition”). The acquisition was approved by the shareholders of Hi-Tech on December 19, 2013, and was approved
by the FTC on April 11, 2014 following review pursuant to provisions of the Hart-Scott Rodino Act (“HSR”). Hi-Tech’s ECR
Pharmaceuticals subsidiary (“ECR”), which marketed branded prescription products, was divested during the year ended
December 31, 2014.
The Hi-Tech Acquisition complemented and expanded our manufacturing capabilities and product portfolio by diversifying
our offerings to our retail customers beyond ophthalmics to other niche dosage forms such as oral liquids, topical creams and
ointments, nasal sprays and otics. The Hi-Tech Acquisition also enhanced our new product pipeline. Further, the Hi-Tech
Acquisition added branded OTC products in the categories of cough and cold, nasal sprays and topicals to our TheraTears® brand
of eye care products.
Business Development and Licensing
Supplemental to our strategic mergers and acquisitions strategy, we also seek to enhance our current generic and branded
product lines through the acquisition or licensing of on-market or in-development products that expand or complement our current
branded and generic product portfolio. Below is a summary of product acquisition and licensing transactions that we made from
2013 to 2018. See Item 1A - Risk Factors for a description of risks that accompany our business development.
7
Lloyd Products Acquisition. To expand our animal health product portfolio, our wholly-owned subsidiary Akorn Animal
Health, Inc. entered into a definitive product acquisition agreement on October 2, 2014 with Lloyd, Inc. to acquire certain rights
and inventory related to a portfolio of animal health injectable products used in pain management and anesthesia.
Xopenex Product Acquisition. To expand our prescription product portfolio of respiratory products, we entered into a
definitive product acquisition agreement with Sunovion Pharmaceuticals Inc., on October 1, 2014 to acquire certain rights and
inventory related to Xopenex® Inhalation Solution (levalbuterol hydrochloride).
Zioptan Product Acquisition. To expand our branded ophthalmology portfolio, we acquired the rights to the U.S. NDA for
Zioptan™, a prescription ophthalmic eye drop indicated for reducing elevated intraocular pressure in patients with open-angle
glaucoma or ocular hypertension, from Merck, Sharp and Dohme Corp. (“Merck”) on April 1, 2014.
Betimol Product Acquisition. To expand our branded ophthalmology portfolio, we acquired the rights to the U.S. NDA for
Betimol®, a prescription ophthalmic eye drop for the reduction of eye pressure in glaucoma patients, from Santen Pharmaceutical
Co., Ltd., (“Santen”) on January 2, 2014.
Merck Products Acquisition. On November 15, 2013, we acquired three ophthalmic U.S. NDAs from Merck:
• AzaSite® — (azithromycin ophthalmic solution), a prescription sterile eye drop solution used to treat bacterial
conjunctivitis;
• Cosopt® — (dorzolamide hydrochloride and timolol maleate ophthalmic solution), a prescription sterile eye drop solution
that is used to reduce intraocular pressure in patients with open-angle glaucoma or ocular hypertension; and
• Cosopt® PF, supplied in sterile, single-use containers.
This acquisition expanded our line of prescription ophthalmic products to include additional branded products. The
acquisition included our acquisition of a Merck subsidiary corporation, Inspire Pharmaceuticals, Inc. (“Inspire”), which was and
continues to be the holder of the product rights to AzaSite®.
Our Segments
The Company has identified two reportable segments with which we operate our business. These segments are the Prescription
Pharmaceuticals Segment and the Consumer Health Segment.
Prescription Pharmaceuticals Segment. Our Prescription Pharmaceuticals segment primarily consists of generic and branded
prescription pharmaceuticals in a variety of dosage forms, including sterile ophthalmics, injectables and inhalants and non-sterile
oral liquids, topicals, nasal sprays and otics. We also market a number of pain management drugs, including drugs subject to the
Controlled Substances Act. The segment represented 89.4% of our net revenue in 2018. Please see Part II, Item 8, Note 12 -
“Segment Information” for further detail of the Prescription Pharmaceuticals segment.
While the majority of sales within the Prescription Pharmaceuticals segment are derived from generic products, Akorn markets
a line of branded ophthalmic and respiratory products including brands such as Akten®, a topical ocular anesthetic gel, AzaSite®,
an antibiotic used to treat bacterial conjunctivitis, Cosopt®, Cosopt® PF, Betimol® and Zioptan™, which are used in the treatment
of glaucoma, and Xopenex® Inhalation Solution, used in the treatment or prevention of bronchospasm.
Consumer Health Segment. Our Consumer Health segment primarily consists of branded and private-label OTC products and
animal health products dispensed by veterinary professionals. Our branded and private-label OTC products are primarily focused
on ophthalmics including a leading dry eye treatment TheraTears® Therapy for Your Eyes®. We also market other OTC consumer
health products including Mag-Ox®, a magnesium supplement, and the Diabetic Tussin® line of cough and cold products. Our
animal health portfolio is focused on products complementary to our human health prescription portfolio, leveraging our R&D and
manufacturing capabilities for alternative dosage form products. Major products within our animal health portfolio include
Anased® and VetaKet® veterinary sedatives; Tolazine® and Yobine®, sedative reversing agents; and Butorphic®, a pain reliever.
Please see Part II, Item 8, Note 12 "Segment Information" for further detail of the Consumer Health segment.
Our Products
Our major products are listed alphabetically below.
8
• AK-FLUOR® (fluorescein injection, USP). We market our branded fluorescein injection as AK-FLUOR® 10% (100 mg/
mL) and 25% (250 mg/mL). AK-FLUOR® is indicated in diagnostic fluorescein angiography or angioscopy of the retina
and iris vasculature.
• Atropine Sulfate Ophthalmic Solution. We received approval of our NDA for Atropine Sulfate Ophthalmic Solution, USP,
1% in July 2014. We had previously been marketing this product as an unapproved product.
• Cosopt® PF. We acquired the rights to the U.S. NDA for Cosopt® PF (2% Dorzolamide Hydrochloride 0.5% and Timolol
Maleate supplied in sterile, single-use containers), a preservative-free prescription ophthalmic eye drop indicated for the
reduction of elevated intraocular pressure (IOP) in patients with open-angle glaucoma or ocular hypertension who are
insufficiently responsive to beta-blockers, through the Merck Products Acquisition on November 15, 2013.
• Dehydrated Alcohol Injection. We began marketing Dehydrated Alcohol Injection, USP in 1997. Our Dehydrated Alcohol
Injection is not an FDA approved product and to date our product has not been found by the FDA to be safe and effective.
• Ephedrine Sulfate Injection. We originally began marketing Ephedrine Sulfate Injection, USP, 50 mg/mL in 1 mL single-
dose ampules in 1997 as an unapproved product. In March 2017, we received FDA approval of our NDA for Ephedrine
Sulfate Injection.
• Myorisan™ (isotretinoin capsules, USP). We acquired Myorisan™ isotretinoin capsules, USP, in 10 mg, 20 mg and 40
mg strengths through the VersaPharm Acquisition. We subsequently received approval for the 30 mg strength in 2015.
• Nembutal® Sodium Solution (pentobarbital sodium injection, USP). We market our pentobarbital sodium injection as
Nembutal® Sodium Solution. Nembutal® is a DEA Schedule II controlled drug.
• Phenylephrine Hydrochloride Ophthalmic Solution. We began marketing Phenylephrine Hydrochloride Ophthalmic
Solution, USP, 2.5% shortly after FDA approval of our NDA in January 2015.
•
•
TheraTears® Dry Eye Therapy Lubricant Eye Drops. TheraTears® is an over-the-counter eye drop that is used as a
lubricant to relieve dryness of the eye. TheraTears® unique hypotonic and electrolyte balanced formula replicates healthy
tears.
Zioptan™. We acquired the rights to the U.S. NDA for Zioptan™ (tafluprost ophthalmic solution) 0.0015%, a
preservative-free prescription ophthalmic eye drop indicated for reducing elevated intraocular pressure in patients with
open-angle glaucoma or ocular hypertension, from Merck, in April 2014.
Most of the products discussed above have several generic equivalent competitors. In the year ended December 31, 2018, none
of the Company’s products represented 10% or more of total net revenue.
Sales and Marketing
We rely on our sales and marketing teams to help us maintain and, where possible, increase market share for our
products. Our sales organization is structured as follows:
(1) field sales teams focused on branded ophthalmology products;
(2) field sales teams focused on institutional markets;
(3) inside sales team focused on customers in smaller markets, and;
(4) national accounts sales team focused on wholesalers, distributors, retail pharmacy chain and group purchasing
organizations (“GPOs”).
Our field sales representatives promote ophthalmic products directly to retinal surgeons and ophthalmologists, and other
pharmaceutical products directly to local hospitals in order to support compliance and pull-through against existing contracts. Our
inside sales team augments our outside sales teams to sell products in markets where field sales would not be cost effective. Our
national accounts sales team seeks to establish and maintain contracts with wholesalers, distributors, retail pharmacy chains and
GPOs. As of the year ended December 31, 2018, we utilized a sales force of 74 field and inside sales representatives to promote
our product portfolio. To support our sales efforts, we also have a customer service team and a marketing department focused on
promoting and raising awareness about our product offerings.
9
Competition
Prescription Pharmaceuticals. The sourcing, marketing and manufacturing of pharmaceutical products is highly competitive,
with many established manufacturers, suppliers and distributors actively engaged in all phases of the business. We compete
principally on the quality of our products and services, reliability of our supply, breadth of our portfolio, depth of our customer
relationships and price. Many of our competitors have substantially greater financial and other resources, including greater sales
volume, larger sales forces and greater manufacturing capacity. See Item 1A - Risk Factors - “Our branded products may become
subject to increased generic competition” for more information.
Generic Pharmaceuticals. Companies that compete with our generic pharmaceuticals portfolio include Teva Pharmaceutical
Ltd., Apotex Inc., Fresenius Kabi AG, Hikma Pharmaceuticals plc, Novartis International AG (through their Sandoz and Alcon
subsidiaries), Perrigo Company plc, Pfizer Inc., Mylan N.V., Amneal Pharmaceuticals, Inc., Taro Pharmaceutical Industries Ltd.
and Bausch Health Companies Inc., among others.
Branded Pharmaceuticals. Companies that compete with our branded pharmaceuticals portfolio include Allergan plc, Novartis
International AG (through their Alcon subsidiary), Pfizer Inc. and Bausch Health Companies Inc., among others. Additionally,
potential generic entrants with equivalent products referencing our branded products present an additional competitive threat.
Consumer Health. Like our Prescription Pharmaceuticals segment, the sourcing, manufacturing and marketing of Consumer
Health products is highly competitive, with many established manufacturers, suppliers and distributors actively engaged in all
phases of the business. With the Company’s relatively small OTC and animal health product portfolio, many of our competitors
have substantially greater financial and other resources, including greater sales volume, larger sales forces and greater
manufacturing capacity. Within this market, we compete primarily on product offering, as well as price and service.
The companies that compete with our Consumer Health segment include both generic and name brand companies such as
Johnson & Johnson, Perrigo Company plc., Pfizer Inc., and Bausch Health Companies Inc., among others.
Seasonality
The majority of our products do not experience significant seasonality. We do market certain prescription pharmaceutical and
consumer health products for the treatment of allergies which typically generate consumer demand in the warmer months as well
as cough and cold products which typically generate higher consumer demand in the colder months, but we do not believe these
products materially impact our overall sales trends. Additionally, we market various antidote products through our Prescription
Pharmaceuticals segment, the sales of which are largely timed to the expiration of existing stock held by our customers.
Major Customers
For the years ended December 31, 2018, 2017 and 2016, a high percentage of our sales were to the three large wholesale drug
distributors noted below. These three wholesale drug distributors account for a significant portion of our gross sales, net revenue
and accounts receivable in both of our segments. The three large wholesale drug distributors are:
• AmerisourceBergen Corporation (“Amerisource”);
• Cardinal Health, Inc. (“Cardinal”); and
• McKesson Corporation (“McKesson”).
On a combined basis, these three wholesale drug distributors accounted for approximately 83.0% of our total gross sales and
61.7% of our net revenue in the year ended December 31, 2018, and 85.5% of our gross accounts receivable as of December 31,
2018. The difference between gross sales and net revenue is that gross sales is calculated before allowances for chargebacks,
rebates, administrative fees and others, promotions and product returns (See Part II, Item 8, Note 2 - “Summary of Significant
Accounting Policies” for more information).
The table below presents the percentages of our total gross sales, net revenue and gross trade accounts receivable attributed to
each of these three wholesale drug distributors as of and for the years ended December 31, 2018, 2017 and 2016, respectively:
10
2018
Net
Revenue
20.9%
15.8%
25.0%
61.7%
38.3%
Gross
Sales
20.5%
20.7%
41.8%
83.0%
17.0%
Gross
Accounts
Receivable
17.9%
19.3%
48.3%
85.5%
14.5%
Gross
Sales
23.6%
17.5%
39.1%
80.2%
19.8%
2017
Net
Revenue
19.1%
17.9%
26.5%
63.5%
36.5%
Gross
Accounts
Receivable
26.3%
21.1%
38.6%
86.0%
14.0%
2016
Net
Revenue
23.3%
16.3%
24.2%
63.8%
36.2%
Gross
Accounts
Receivable
35.6%
15.1%
33.2%
83.9%
16.1%
Gross
Sales
29.5%
15.4%
32.5%
77.4%
22.6%
Amerisource
Cardinal
McKesson
Combined Total
Other
Combined Total
100.0% 100.0%
100.0%
100.0% 100.0%
100.0%
100.0% 100.0%
100.0%
Amerisource, Cardinal and McKesson are key distributors of our products, as well as a broad range of healthcare products for
many other companies. None of these distributors is an end user of our products. Generally speaking, if sales to any one of these
distributors were to diminish or cease, we believe that the end users of our products would likely find little difficulty obtaining our
products from another distributor; however, the loss of one or more of these distributors, together with a delay or inability to secure
an alternative distribution source for end users, could have a material negative impact on our revenue, business, financial condition
and results of operations.
We consider our business relationships with Amerisource, Cardinal and McKesson to be in good standing and we currently
have fee for services contracts with each of them; however, a change in purchasing patterns, a decrease in inventory levels, an
increase in returns of our products, delays in purchasing products and delays in payment for products by one or more of these
distributors could have a material negative impact on our revenue, business, financial condition and results of operations. See Item
1A - Risk Factors — “We depend on a small number of wholesalers to distribute our products, the loss of any of which could have
a material adverse effect on our business” for more information.
Backorders
As of December 31, 2018, we had approximately $28.2 million of products on backorder as compared to approximately $12.2
million of backorders as of December 31, 2017 and $15.5 million as of December 31, 2016.
Foreign Sales
During the years ended December 31, 2018, 2017 and 2016, approximately $16.4 million, $25.5 million, and $26.3 million of
our net revenue, respectively, was related to sales to customers in foreign countries.
Our business is subject to risks of currency fluctuations, governmental actions and other governmental proceedings abroad. We
do not regard these risks as a deterrent to further expansion of our operations abroad; however, we closely review our methods of
operations and seek to adopt strategies responsive to changing economic and political conditions.
Suppliers
We require raw materials and components to manufacture and package pharmaceutical products. The principal components of
our products are active and inactive pharmaceutical ingredients and certain packaging materials. Many of these materials are
available from only a single source and, in the case of many of our products, only one supplier of raw materials has been identified
and qualified. Because FDA approval of drugs requires manufacturers to specify their proposed suppliers of active ingredients and
certain packaging materials in their applications, FDA approval of any new supplier would be required if such active ingredients or
such packaging materials were no longer available from the specified supplier. The qualification of a new supplier could delay our
development and marketing efforts. If for any reason we are unable to obtain sufficient quantities of any of the raw materials or
components required to produce and package our products, we may not be able to manufacture our products as planned. In
addition, certain of the pharmaceutical products that we market are manufactured by third parties that serve as our only supplier of
those products. Any delays or failure of a contract manufacturing partner to supply finished goods timely or in adequate volume
could impede our marketing of those products.
No supplier represented 10% or more of our purchases in the years ended December 31, 2018, 2017 or 2016. See Item 1A -
Risk Factors - “Many of the raw materials and components used in our products come from a single source, the loss of any of
11
which could have a material adverse effect on our business” and "A significant portion of our revenues are generated through the
sale of products manufactured by third parties, the loss or failure of any of which may have a material adverse effect on our
business, financial position and results of operations" for more information.
Manufacturing
We operate manufacturing facilities in Decatur, Illinois; Somerset, New Jersey; Amityville, New York and Hettlingen
Switzerland. In addition, we own a manufacturing facility in Paonta Sahib, Himachal Pradesh, India that is not currently
manufacturing any products for sale. See Item 2 - Properties, for more information. Through these manufacturing facilities we
manufacture a diverse assortment of sterile and non-sterile pharmaceutical products including oral liquids, otics, nasal sprays,
liquid injectables, lyophilized injectables, topical gels, creams and ointments; and ophthalmic solutions and ointments for both of
our reportable segments. By location, these include:
Somerset, New Jersey — sterile ophthalmic solutions, ointments and gels
•
• Decatur, Illinois — sterile liquid and lyophilized injectables and sterile ophthalmic solutions
• Amityville, New York — sterile ophthalmic and otic solutions, sterile gels, and non-sterile nasal sprays, topical ointments
and creams, oral liquids, and liquid unit dose cups
• Hettlingen, Switzerland — sterile ophthalmic solutions, suspensions, gels and ointments
• Paonta Sahib, Himachal Pradesh, India — sterile liquid injectables including cephalosporins, carbapenems, hormones
and general injectables
Patents, Trademarks and Proprietary Property
We consider the protection of our patents, trademarks and proprietary rights important to maintaining and growing our
business. Through our acquisitions, we have increased the number and importance of trademarks related to our products and
product lines. Through acquisitions, we also acquired rights to the trade names for the branded, prescription ophthalmic products
AzaSite®, Betimol®, Cosopt® PF, and Zioptan®, respiratory product Xopenex®, as well as OTC products TheraTears®,
SinusBuster®, Mag-Ox®, Multi-betic® and Zostrix®. We are committed to maintaining and defending these trade names as they
are important in supporting the success and growth of this business. In addition, we maintain and defend trademarks related to a
number of internally-developed products, as well as others licensed from third parties.
We have sought, and intend to continue to seek, patent protection in the United States and selected foreign countries where
deemed appropriate and advantageous to us. The importance of these patents does not vary among our business segments.
We also rely upon trade secrets, unpatented proprietary know-how and continuing technological innovation to maintain and
develop our competitive position. We enter into confidentiality agreements with certain of our employees pursuant to which such
employees agree to assign to us any inventions relating to our business made by them while in our employ; however, there can be
no assurance that others may not acquire or independently develop similar technology or, if patents are not issued with respect to
products arising from research, that we will be able to maintain information pertinent to such research as proprietary technology or
trade secrets. For more information, see Item 1A. Risk Factors - "Third parties may claim that we infringe their proprietary rights
and may prevent or delay us from manufacturing and selling some of our new products" and "Our patents and proprietary rights
may be challenged, circumvented or otherwise compromised by competitors, which may result in our protected products losing
their market exclusivity and becoming subject to generic competition before their patents expire."
Government Regulation
Pharmaceutical manufacturers and distributors are subject to extensive regulation by government agencies, including the FDA,
the Drug Enforcement Administration (“DEA”), the FTC and other federal, state and local agencies. The development, testing,
manufacturing, processing, quality, safety, efficacy, packaging, labeling, recordkeeping, distribution, storage and advertising of our
products, and disposal of waste products arising from such activities, are subject to regulation by the FDA, DEA, FTC, the
Consumer Product Safety Commission, the Occupational Safety and Health Administration and the Environmental Protection
Agency. Similar state and local agencies also have jurisdiction over these activities. Noncompliance with applicable United States
and/or state or local regulatory requirements can result in fines, injunctions, penalties, mandatory recalls or seizures, suspensions of
production, recommendations by the FDA against governmental contracts and criminal prosecution. In addition, we are subject to
oversight from federal and state government benefit programs, healthcare fraud and abuse laws and international regulations in
jurisdictions in which we manufacture or sell our pharmaceutical products.
FDA. The Federal Food, Drug and Cosmetic Act (the “FDC Act”), the Controlled Substance Act and other federal statutes and
regulations govern or influence the development, testing, manufacture, labeling, storage and promotion of products that we
12
manufacture and market. The FDA inspects drug manufacturers and storage facilities to determine compliance with its current
Good Manufacturing Practices (“cGMP”) regulations, non-compliance with which can result in fines, recall and seizure of
products, total or partial suspension of production, refusal to approve NDAs and ANDAs and criminal prosecution. Under the FDC
Act, the federal government has extensive administrative and judicial enforcement authority over the activities of finished drug
product manufacturers to ensure compliance with FDA regulations. This authority includes, but is not limited to, the authority to
initiate judicial action to seize unapproved or non-complying products, to enjoin non-complying activities, to halt manufacturing
operations that are not in compliance with cGMP, to recall products, to seek civil and monetary penalties and to criminally
prosecute violators. Other enforcement activities include refusal to approve product applications, withdrawal of previously
approved applications or prohibition on marketing of certain unapproved products.
FDA approval is required before any prescription drug products can be marketed. New drugs require the filing of an NDA,
including clinical studies demonstrating the safety and efficacy of the drug. Generic drugs, which are therapeutic equivalents of
existing brand name drugs, require the filing of an ANDA. An ANDA does not, for the most part, require clinical studies since
safety and efficacy have already been demonstrated by the product originator; however, the ANDA must provide data to support
the bioequivalence of the generic drug product. The time required by the FDA to review and approve NDAs and ANDAs is
variable and, to a large extent, beyond our control.
In 2018, our Decatur, Illinois and Somerset, New Jersey manufacturing facilities were inspected by the FDA and received
“Other Action Indicated” status as an outcome of the inspections. On January 4, 2019, the company was issued a warning letter
from the FDA related to the 2018 inspection of the Decatur, Illinois manufacturing facility. The Company submitted a
comprehensive response to the warning letter on January 28, 2019.
DEA. We manufacture and distribute several controlled drug substances, the distribution and handling of which are regulated
by the DEA, which imposes, among other things, certain licensing, security and record-keeping requirements, as well as quotas for
the manufacture, purchase, storage and sale of controlled substances. Failure to comply with DEA regulations (and similar state
regulations) can result in fines or seizure of product. There have not been any material fines, seizures or interruptions resulting
from DEA inspections in any of the years ended December 31, 2018, 2017 and 2016.
We are subject to periodic inspections by the DEA in facilities where we manufacture, process or distribute controlled
substances. The DEA inspected our Decatur, Illinois facility in December 2018 and January 2019, and issued two observations to
which the Company responded.
See Item 1A. Risk Factors - Risk factors under the "Risks Related to Regulations" category for more information.
Government Benefit Programs. We sell products that can be subject to the statutory and regulatory requirements for
Medicaid, Medicare, TRICARE and other government healthcare programs. These regulations govern access and reimbursement
levels, including that all pharmaceutical companies pay rebates to individual states based on a percentage of sales arising from
Medicaid-reimbursed products. We are also subject to price ceilings for select products sold through the military TRICARE
program. U.S. Federal and state governments may continue to enact legislation and other measures aimed at containing or reducing
payment levels for prescription pharmaceuticals paid for in whole or in part with government funds. We cannot predict the nature
of such potential future measures or the impact on our profitability.
Healthcare Laws. We are subject to various federal, state and local laws targeting fraud and abuse in the healthcare industry.
In the United States, there are various federal and state anti-kickback laws that prohibit payment or receipt of kickbacks, bribes or
other remuneration intended to induce the purchase or recommendation of healthcare products and services or reward past
purchases or recommendations. Violations of these anti-kickback laws can lead to civil and/or criminal penalties, including fines,
imprisonment and exclusion from participation in government healthcare programs. See Item 1A - Risk Factors - “Any failure to
comply with the complex reporting and payment obligations under Medicare, Medicaid and other government programs may result
in litigation or sanctions,” for more information. We are also subject to other healthcare laws, notably:
• Federal Civil False Claims Act. We are also subject to the provisions of the federal civil False Claims Act and, in
particular, actions brought pursuant to the False Claims Act’s whistleblower or qui tam provisions. The civil False Claims
Act imposes liability on any person or entity that, among other things, knowingly presents, or causes to be presented, a
false or fraudulent claim for payment by a federal healthcare program. The qui tam provisions of the False Claims Act
allow a private individual to bring civil actions on behalf of the federal government alleging that the defendant has
submitted or caused the submission of a false claim to the federal government, and to share in any monetary recovery. In
recent years, the number of suits brought by private individuals has increased dramatically. In addition, various states have
enacted false claim laws analogous to the False Claims Act. Many of these state laws apply where a claim is submitted to
any third-party payer and not merely a federal healthcare program.
13
• HIPAA. Fraud provisions in the Health Insurance Portability and Accountability Act (“HIPAA”) of 1996 prohibits
knowingly and willingly executing a scheme to defraud any healthcare benefit program, including those of private third-
party payers. Also, false statement provisions within HIPAA prohibits knowingly and willingly falsifying, concealing or
covering up a material fact or making any materially false, fictitious or fraudulent statement in connection with the
delivery of or payment for healthcare benefits, items or services.
• Federal Physician Payments Sunshine Act. The Federal Physician Payments Sunshine Act mandates annual reporting of
various types of payments to physicians and teaching hospitals. Under the regulations, applicable drug, biological, device,
and medical supply manufacturers are required to report to CMS payments or other transfers of value made to healthcare
professionals and teaching hospitals, and the regulations also require the manufacturers and GPOs to report ownership and
investment interests held by physicians or their immediate family members. The rule sets forth a reporting process that
permits physicians, teaching hospitals, and physician owners and investors to dispute information reported by applicable
manufacturers and GPOs. Under the regulations, information that is the subject of a dispute not resolved within the initial
allotted 60-day review and dispute resolution period will be posted on CMS’s public website in the manner in which it
was submitted by the manufacturer or GPO, rather than in a manner that includes the version provided by the disputing
physician, teaching hospital, or physician owner or investor. Failure to comply with required reporting requirements could
subject pharmaceutical manufacturers and others to substantial civil monetary penalties.
International Regulations. The Company and its employees are subject to the US Foreign Corrupt Practices Act (“FCPA”), as
well as other international anti-corruption laws. In addition, we have two international manufacturing facilities that are subject to
local anti-corruption laws and regulations that differ from those under which we operate in the United States. The regulatory
agencies outside of the United States that we interact with include Swissmedic in Switzerland and the Central Drugs Standard
Control Organization in India.
Government Contracts
We maintain distribution contracts with the U.S. Federal Government, including the U.S. Department of Veterans Affairs,
among others. A number of these contracts allow the U.S. Federal Government to terminate such contracts upon written notice. We
do not believe that any single termination is likely or would be material to our operations.
Employees
As of December 31, 2018 we had a total of 2,220 employees globally, consisting of 2,191 permanent, full-time employees and
29 part-time or temporary employees. Our full and part time or temporary employees worked in the following locations:
Country
United States of America
India
Switzerland
Full-Time
Part-Time or Temp
1,667
360
164
2,191
3
—
26
29
Total
We believe we have good relations with our employees. Our full-time and part-time employees are not represented by
collective bargaining agreements. All U.S. full-time Akorn employees are eligible to participate in the Company’s 401(k) Plan. The
Company matches the employee contribution to 50% of the first 6% of an employee's eligible compensation. Company matching
contributions vest 50% after two years of credited service and 100% after three years of credited service. During the years ended
December 31, 2018, 2017 and 2016, plan-related expense totaled approximately $2.6 million, $2.6 million and $2.2 million,
respectively. The Company's matching contribution is funded on a current basis.
Environment
Our operations are subject to foreign, federal, state and local environmental laws and regulations concerning, among other
matters, the generation, handling, storage, transport, treatment and disposal of, or exposure to, prescription drugs and toxic and
hazardous substances. Violation of these laws and regulations, which frequently change, can lead to substantial fines and penalties.
Some of our operations require environmental permits and controls to prevent and limit pollution. We believe that our facilities are
in compliance with applicable environmental laws and regulations and we do not anticipate any material adverse effect from
14
compliance with foreign, federal, state and local provisions that have been enacted or adopted regulating the discharge of materials
into the environment, or otherwise relating to the protection of the environment.
Available Information
Our internet address is http://www.akorn.com. The contents of our website are not part of this Annual Report on Form 10-K,
and our internet address is included in this document as an inactive textual reference only. We make our Annual Reports on
Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and all amendments to those reports available free of
charge on our website as soon as reasonably practicable after we file such reports with, or furnish such reports to, the SEC.
Materials filed with the SEC can also be read and copied at the SEC’s Public Reference Room at 100 F Street, NE,
Washington, DC 20549. Information on the operation of the Public Reference Room may be obtained by calling the SEC at 1-800-
SEC-0330. The SEC maintains an Internet website that contains reports, proxy and information statements and other information
regarding issuers that file electronically with the SEC.
15
Item 1A. Risk Factors.
An investment in our common stock involves a high degree of risk. In addition to the other information included in this Annual
Report on Form 10-K, you should carefully consider each of the risks described below before purchasing shares of our common
stock. The risk factors set forth below are not the only risks that may affect our business. Our business could also be affected by
additional risks not currently known to us or that we currently deem to be immaterial. If any of the following risks actually
occur, our business, financial condition and results of operations could materially suffer. As a result, the trading price of our
common stock could decline, and you may lose all or part of your investment.
Risks Related to the Termination of the Merger Agreement and the Delaware Opinion
There are material uncertainties and risks associated with damage claims from the Fresenius parties' and Akorn's
shareholders as a result of the termination of the April 2017 Merger Agreement.
On April 24, 2017, we signed the Merger Agreement with the Fresenius parties. On April 22, 2018, the Fresenius parties
sent Akorn a notice terminating the Merger Agreement. After expedited litigation, the Delaware Court of Chancery ruled on
October 1, 2018, that the termination was valid. That ruling was upheld on appeal by the Delaware Supreme Court on
December 7, 2018. On February 20, 2019, the Fresenius parties filed a motion for leave to amend and supplement its
counterclaim against Akorn in order to recover damages purportedly incurred in connection with the Merger Agreement. On
February 28, 2019, the Court of Chancery denied the Fresenius parties’ motion for leave to file an amended and supplemented
counterclaim. Proceedings on the proposed damages counterclaim are currently ongoing.
In addition, various purported shareholders of Akorn have filed putative class action and derivative claims against Akorn,
its directors and its officers relating to the Merger Agreement, Akorn’s regulatory compliance status and/or Akorn’s public
statements and SEC filings. Proceedings in those cases are ongoing.
Below are material uncertainties and risks associated with the termination of the Merger Agreement, the ongoing litigation
with the Fresenius parties and the pending shareholder litigations. If any of the risks develop into actual events, then our
business, financial condition, results and ongoing operations, stock price or prospects could be materially adversely affected.
• The litigations may involve significant defense costs and indemnification liabilities and may result in significant
monetary judgments against Akorn, which may adversely affect our business, financial condition and results of
operations;
• The litigations, whether or not resolved favorably, may damage our long-term reputation, attract adverse media
coverage, interfere with our relationships with key stakeholders and/or interfere with our ability to attract and retain
employees; and
• The litigations may divert the attention of our employees and management, which may affect our business operations.
Risks Related to Our Business.
Our growth depends on our ability to timely and efficiently develop and successfully launch and market new
pharmaceutical products.
Our strategy for growth is dependent upon our ability to develop products that can be promoted through current marketing
and distribution channels and, when appropriate, the enhancement of such marketing and distribution channels. We may fail to
meet our anticipated time schedule for the filing of new applications or may decide not to pursue applications that we have
already submitted or had anticipated submitting. Our failure to develop new products or to receive regulatory approval of
applications could have a material adverse effect on our business, financial condition and results of operations. Even if
approved, we may have technical challenges or capacity constraints that prevent successful launch and marketing of new
products. Even if successfully launched, no assurance can be given as to the actual size of the market for any product or the
level of profitability and sales of the product.
Business interruptions at our manufacturing facilities can have a material adverse effect on our business, financial
position and results of operations.
We manufacture drug products at three domestic and one international manufacturing facilities, and we have contracted
with a number of third parties to provide other manufacturing, finishing, and packaging services. We face a substantial risk to
our business when any one or more of these facilities is shut down or unable to operate at full capacity as a result of business
interruptions, governmental or regulatory actions, hurricanes, tornadoes, earthquakes, fire, contamination, power shortages,
16
strikes, terrorist acts, or natural or man-made catastrophic events. For example, we suspended manufacturing at our facility in
Somerset, New Jersey during the latter part of 2018 to facilitate the acceleration of the move to our newly constructed
laboratory; personnel and equipment requalification and training; and other various cGMP enhancements. This short-term
disruption impaired our ability to produce and ship drug products to the market on a timely basis, which resulted in failure to
supply penalties, late fees and other adverse impacts on our business.
A significant portion of our revenues are generated through the sale of products manufactured by third parties, the loss
or failure of any of which may have a material adverse effect on our business, financial position and results of
operations.
Certain of the pharmaceutical products that we market, representing a significant portion of our net revenue, are
manufactured by third parties that serve as our only supplier of those products. Any delays or failure of a contract
manufacturing partner to supply finished goods timely or in adequate volume could impede our marketing of those products.
We expect this risk to become more significant as we receive approvals for new products to be manufactured through our
strategic partnerships and as we seek additional growth opportunities beyond the capacity and capabilities of our current
manufacturing facilities. If we are unable to obtain or retain third-party manufacturers for these products on commercially
acceptable terms, we may not be able to distribute such products as planned. Any delays or difficulties with third-party
manufacturers could adversely affect the marketing and distribution of certain of our products, which could have a material
adverse effect on our business, financial condition and results of operations.
We depend on a small number of wholesalers to distribute our products, the loss of any of which could have a material
adverse effect on our business.
A small number of large wholesale drug distributors account for a significant portion of our gross sales, net revenue and
accounts receivable. The following three wholesalers — Amerisource, Cardinal and McKesson — accounted for approximately
83.0% of total gross sales and 61.7% of total net revenue in 2018, and constituted 85.5% of gross trade receivables as of
December 31, 2018. In addition to acting as distributors of our products, these three companies also distribute a broad range of
healthcare products on behalf of many other companies. The loss of our relationship with one or more of these wholesalers,
together with a delay or inability to secure an alternative distribution source for our hospital, retail and other customers, could
have a material adverse impact on our revenue and results of operations. A change in purchasing patterns or inventory levels,
an increase in returns of our products, delays in purchasing products and delays in payment for products by one or more of
these wholesale drug distributors also could have a material adverse impact on our revenue, results of operations and cash
flows.
We may be subject to significant disruptions or failures in our information technology systems and network
infrastructures that could have a material adverse effect on our business.
We rely on the efficient and uninterrupted operation of complex information technology systems and network
infrastructures to operate our business. We also hold data in various data center facilities upon which our business depends.
Although we have experienced occasional, actual or attempted breaches of our cybersecurity, none of these breaches has had a
material effect on our business, operations or reputation. Any significant disruption, infiltration or failure of our information
technology systems or any of our data centers as a result of software or hardware malfunctions, system implementations or
upgrades, computer viruses, third-party security breaches, employee error, theft, misuse or malfeasance could cause breaches of
data security, loss of intellectual property and critical data and the release and misappropriation of sensitive competitive
information. Any of these events could result in the loss of key information, impair our production and supply chain processes,
damage our reputation in the marketplace, deter people from purchasing our products, cause us to incur significant costs to
remedy any damages, subject us to significant civil and criminal liability and require us to incur significant technical, legal and
other expenses, and ultimately materially and adversely affect our business, results of operations, financial condition and price
of our common stock.
We depend on our employees and must continue to attract and retain key personnel in order to be successful, and
failure to do so hinders successful execution of our business and development plans.
Our performance depends, to a large extent, on the continued service of our key R&D personnel, other technical
employees, managers and sales personnel and our ability to continue to attract and retain such personnel. Competition for such
personnel is intense, particularly for highly motivated and experienced R&D and other technical personnel. We are facing
increasing competition from companies with greater financial resources for such personnel. As a result, from time to time, we
have faced challenges in attracting and retaining highly skilled personnel, particularly during 2017 and 2018, which has
adversely affected our business operations.
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We are involved in legal proceedings and governmental investigations from time to time, any of which may result in
substantial losses, government enforcement actions, damage to our business and reputation and place a strain on our
internal resources.
In the ordinary course of our business, we become involved in legal proceedings, as a party or non-party witness, with both
private parties and certain government agencies, including the FDA, DEA and SEC. For example, in 2018, several
shareholders filed lawsuits and shareholder demands asserting that Akorn and its directors and officers violated Louisiana
fiduciary duty law and federal securities laws. Other such matters include receiving and responding to inquiries and subpoenas
from the U.S. Department of Justice - Antitrust Division, and U.S. and Department of Justice - Civil Division relating to
industry drug pricing practices; being named defendants in a multidistrict litigation matter in the Eastern District of
Pennsylvania relating to alleged price fixing by generic pharmaceutical manufactures; and DEA subpoenas. We incur
substantial time and expense participating in these types of lawsuits and investigations, which also divert management’s
attention from ongoing business concerns and normal operations. In addition, these matters and any other substantial litigation
may result in verdicts against us or government enforcement actions, which may include significant monetary awards,
judgments invalidating certain of our intellectual property rights and preventing the manufacture, marketing and sale of our
products. When such disputes are resolved unfavorably, our business, financial condition and results of operations are
adversely affected. Any litigation, whether or not successful, may also damage our reputation. See Part II, Item 8, Note 19 -
"Legal Proceedings.
Charges to earnings resulting from acquisitions could have a material adverse effect on our business, financial position
and results of operations.
Under accounting principles generally accepted in the United States of America (“GAAP”) business acquisition accounting
standards, we recognize the identifiable assets acquired, the liabilities assumed, and any non-controlling interests in acquired
companies generally at their acquisition date fair values and, in each case, separately from goodwill. Goodwill as of the
acquisition date is measured as the excess amount of consideration transferred, which is also generally measured at fair value,
and the net of the acquisition date amounts of the identifiable assets acquired and the liabilities assumed. Our estimates of fair
value are based upon assumptions believed to be reasonable, but which are inherently uncertain. After we complete an
acquisition, the following factors could result in material charges and adversely affect our operating results and may adversely
affect our cash flow:
•
•
•
•
•
•
•
•
costs incurred to combine the operations of companies we acquire, such as transitional employee expenses and
employee retention, redeployment or relocation expenses;
impairment of goodwill or intangible assets;
amortization of intangible assets acquired;
a reduction in the useful lives of intangible assets acquired;
identification of or changes to assumed contingent liabilities, including, but not limited to, contingent purchase price
consideration, income tax contingencies and other non-income tax contingencies, after our final determination of the
amounts for these contingencies or the conclusion of the measurement period (generally up to one year from the
acquisition date), whichever comes first;
charges to our operating results to eliminate certain duplicative pre-acquisition activities, to restructure our operations
or to reduce our cost structure;
charges to our operating results resulting from expenses incurred to effect the acquisition;
changes to contingent consideration liabilities, including accretion and fair value adjustments. A significant portion of
these adjustments could be accounted for as expenses that will decrease our net income and earnings per share for the
periods in which those costs are incurred.
Such charges could cause a material adverse effect on our business, financial position, results of operations and/or cash
flow, and could cause the price of our common stock to decline.
As of December 31, 2018, we had $283.9 million and $285.0 million of Goodwill and Intangible assets, net, respectively
on our consolidated balance sheet. During 2018 and 2017, we recorded impairments of Intangible assets of $231.1 million and
$128.1 million, respectively.
John N. Kapoor, Ph.D., through his stock ownership and his right to nominate up to three directors, could have an
adverse effect on the price of our common stock and have substantial influence over our business strategies and policies.
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John N. Kapoor, Ph.D., is a principal shareholder. As of December 31, 2018, Dr. Kapoor beneficially owns approximately
23% of our common stock. In addition, through the Kapoor Trust and EJ Financial, Dr. Kapoor is entitled to nominate up to
three persons to serve on our Board. Mr. Brian Tambi was nominated for these purposes. The other seats for nomination are
vacant. Nomination of any directors to our Board or any trading of our common stock by Dr. Kapoor and his related parties
could have an adverse effect on the price of our common stock and an adverse effect on our business.
Risks Related to Our Industry.
Many of the raw materials and components used in our products come from a single source, the loss of any of which
could have a material adverse effect on our business.
We require raw materials and components to manufacture and package pharmaceutical products. The principal components
of our products are active and inactive pharmaceutical ingredients and certain packaging materials. Many of these materials are
available from only a single source and, in the case of many of our products, only one supplier of raw materials has been
identified and qualified. Because FDA approval of drugs requires manufacturers to specify their proposed suppliers of active
ingredients and certain packaging materials in their applications, FDA approval of any new supplier would be required if such
active ingredients or such packaging materials were no longer available from the specified supplier. The qualification of a new
supplier could delay our development and marketing efforts. If for any reason we are unable to obtain sufficient quantities of
any of the raw materials or components required to produce and package our products, we may not be able to manufacture our
products as planned.
Sales of our products may be adversely affected by further consolidation of our customer base, which may have a
material adverse effect on our business, financial position and results of operations.
Drug wholesalers, drug retailers, and group purchasing organizations have undergone, and are continuing to undergo,
significant consolidation. Such consolidation has provided and may continue to provide them with additional purchasing
leverage, and consequently may increase the pricing pressures that we face. Our net revenue and quarterly growth comparisons
may be affected by fluctuations in the buying patterns of retail chains, major distributors and other trade buyers, whether
resulting from seasonality, pricing, wholesaler buying decisions or other factors. In addition, since such a significant portion of
our revenues is derived from relatively few customers, any financial difficulties experienced by a single customer, or any delay
in receiving payments from a single customer, could have a material adverse effect on our business, results of operations and
financial condition.
Our branded products may become subject to increased generic competition.
Trends moving toward increased substitution and reimbursement of generics for cost-containment purposes may reduce
and limit the sales of our off-patent branded products. For example, our branded product Cosopt® PF faced generic competition
in late 2018. Increased focus by the FDA on approval of generics may accelerate this trend.
Changes in technology could render our products obsolete.
The pharmaceutical industry is characterized by rapid technological change. The products that we sell today and their drug
delivery methods may be replaced by more effective methods to deliver the same care, rendering our current products obsolete.
Further, the technologies that we invest in for future use may not become the preferred method of delivery.
Risks Related to Regulations.
We are subject to extensive government regulations. When regulations change or we fall out of compliance, we can face
increased costs, additional obligations, fines, or halts to our operations.
New, modified and additional regulations, statutes or legal interpretation, which occur from time to time among other
things, require changes to manufacturing methods, expanded or different labeling, recall, replacement or discontinuation of
certain products, additional record keeping procedures, expanded documentation of the properties of certain products and
additional scientific substantiation. Such changes or new legislation can have a material adverse effect on our business,
financial condition and results of operations. Certain of the regulatory risks that we are subject to are outlined below:
We and our third-party manufacturers are subject to periodic inspection by the FDA to assure regulatory compliance
regarding the manufacturing, distribution, and promotion of pharmaceutical products. The FDA imposes stringent mandatory
requirements on the manufacture and distribution of pharmaceutical products to ensure their safety and efficacy. The FDA also
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regulates drug labeling and the advertising of prescription drugs. A finding by a governmental agency or court that we are not
in compliance with FDA requirements could have a material adverse effect on our business, financial condition and results of
operations.
As previously disclosed in various reports filed with the SEC, the Company, with the assistance of outside consultants, has
been investigating alleged breaches of FDA data integrity requirements relating to product development at the Company. The
Company has informed the FDA regarding the investigation and will continue to update the FDA as it proceeds. During 2018,
we had FDA inspections at our Decatur and Somerset facilities that resulted in Official Action Indicated (“OAI”) facility status
and we received a warning letter in early 2019 related to the 2018 Decatur inspection. In 2018, significant costs were incurred
to address the FDA observations from the inspections of our Decatur and Somerset facilities. If we are unable to adequately
address the FDA’s concerns in a timely manner, the FDA may take further actions and our pipeline product approvals may be
further delayed.
We must obtain approval from the FDA for each prescription pharmaceutical product that we market and the timing of
such approval process is unknown and uncertain. The FDA approval process is typically lengthy, and approval is never certain.
Our new products could take a significantly longer time than we expect to gain regulatory approval and may never gain
approval. Even if the FDA or another regulatory agency approves a product, the approval may limit the indicated uses for a
product, may otherwise limit our ability to promote, sell and distribute a product or may require post-marketing studies or
impose other post-marketing obligations, which could have a material adverse effect on marketability and profitability of the
new products.
We are subject to recalls and other enforcement actions by the FDA. The FDA or other government agencies having
regulatory authority over pharmaceutical products may request us to voluntarily or involuntarily conduct product recalls due to
disputed labeling claims, manufacturing issues, quality defects or for other reasons. Restriction or prohibition on sales, halting
of manufacturing operations, recalls of our pharmaceutical products or other enforcement actions could have a material adverse
effect on our business, financial condition and results of operations. Further, such actions, in certain circumstances, may
constitute an event of default under the terms of our various financing arrangements.
If the FDA changes its regulatory policies, it could force us to delay or suspend our manufacturing, distribution or sales of
certain products. FDA interpretations of existing or pending regulations and standards may change over time with the
advancement of associated technologies, industry trends, or prevailing scientific rationale. If the FDA changes its regulatory
policies due to such factors, it could result in delay or suspension of the manufacturing, distribution or sales of certain of our
products. In addition, modifications or enhancements of approved products are in many circumstances subject to additional
FDA approvals which may or may not be granted and which may be subject to a lengthy application process. Any change in the
FDA’s enforcement policy or any decision by the FDA to require an approved application for one of our products not currently
subject to the approved application requirements or any delay in the FDA approving an application for one of our products
could have a material adverse effect on our business, financial condition and results of operations.
We are subject to extensive DEA regulation, which could result in our being fined or otherwise penalized if we are in non-
compliance. The DEA could limit or reduce the amount of controlled substances that we are permitted to manufacture and
market or issue fines and penalties against us for non-compliance with DEA regulations, which could have a material adverse
effect on our business, financial condition and results of operations.
Our inability to timely and adequately address FDA warning letter and OAI facility status may adversely affect our
business.
During 2018, we had FDA inspections at our Decatur and Somerset facilities that resulted in OAI facility status and we
received a warning letter in early 2019 related to the 2018 Decatur inspection. If we are unable to adequately address the
FDA’s concerns in a timely manner, the FDA may take further actions and our pipeline product approvals may be further
delayed.
Changes in healthcare law and policy may adversely affect our business and results of operations.
The sales of our products depend in part on the availability of reimbursement from third-party payers such as government
health administration authorities, private health insurers, health maintenance organizations including Pharmacy Benefit
Managers (“PBMs”) and other healthcare-related organizations. We expect both federal and state governments in the U.S. and
foreign governments to continue to propose and pass new legislation, rules and regulations designed to contain or reduce the
cost of healthcare. Existing regulations that affect the price of pharmaceutical and other medical products may also change
before any of our products are approved for marketing. Cost control initiatives could decrease the price that we receive for any
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product we develop in the future. In addition, PBMs and other third-party payers are increasingly challenging the price and
cost-effectiveness of medical products and services. Significant uncertainty exists as to the reimbursement status of newly
approved pharmaceutical products. Our products may not be considered cost effective, or adequate third-party reimbursement
may not be available to enable us to maintain price levels sufficient to realize a return on our investments. Any such changes in
healthcare law or policy may harm our ability to market our products and generate profits.
The FDA may require us to stop marketing certain unapproved drugs, which could have a material adverse effect on
our business, financial position and results of operations.
We market several generic prescription products that do not have formal FDA approvals. These products are non-
application drugs that are manufactured and marketed without formal FDA approval on the basis of their having been marketed
by the pharmaceutical industry prior to the 1962 Amendments of the FDC Act. The FDA has increased its efforts to require
companies to file and seek FDA approval for unapproved products, and when a product is approved, the FDA has typically
increased its effort to remove other unapproved products from the market by issuing notices to companies currently
manufacturing these products to cease its distribution of said products. In 2013, we discontinued marketing of a previously
unapproved product after receipt of notice from the FDA. During 2018, we marketed six such unapproved products, generating
net revenue of approximately $48.5 million.
Any failure to comply with the complex reporting and payment obligations under Medicare, Medicaid and other
government programs may result in litigation or sanctions.
We are subject to various federal and state laws pertaining to healthcare fraud and abuse, including anti-kickback, false
claims, marketing and pricing laws. We are also subject to Medicaid and other government reporting and payment obligations
that are highly complex and at times ambiguous. Violations of these laws and reporting obligations are punishable by criminal
or civil sanctions and exclusion from participation in federal and state healthcare programs such as Medicare and Medicaid. In
2013, the Attorney General of the State of Louisiana filed a lawsuit against Hi-Tech Pharmacal and numerous other
pharmaceutical companies alleging that the defendants violated Louisiana state laws in connection with Medicaid
reimbursement for certain vitamins, dietary supplements, and other products that were allegedly ineligible for reimbursement.
In 2017, a similar lawsuit was filed by the State of Mississippi against the Company. If our past, present or future operations
are found to be in violation of any of the laws described above or other similar governmental regulations, we may be subject to
the applicable penalty associated with the violation, which could adversely affect our ability to operate our business and
negatively impact our financial results. Further, if there is a change in laws, regulations or administrative or judicial
interpretations, we may have to change our business practices or our existing business practices could be challenged as
unlawful, which could materially adversely affect our business, financial position and results of operations.
Failure to comply with the U.S. Foreign Corrupt Practices Act could subject us to, among other things, penalties and
legal expenses that could harm our reputation and have a material adverse effect on our business, financial condition
and operating results.
The Company and its employees are subject to the FCPA, which generally prohibits covered entities and their
intermediaries from engaging in bribery or making other prohibited payments to foreign officials for the purpose of obtaining or
retaining business or other benefits. In addition, the FCPA imposes recordkeeping standards and requirements on publicly
traded U.S. corporations and their foreign affiliates, which are intended to prevent the diversion of corporate funds to the
payment of bribes and other improper payments, and to prevent the establishment of “off books” slush funds from which such
improper payments can be made. If our employees, third-party sales representatives or other agents are found to have engaged
in such practices, we could suffer severe penalties, including criminal and civil penalties, disgorgement and other remedial
measures, including further changes or enhancements to our procedures, policies and controls, as well as potential personnel
changes and disciplinary actions.
The FDA may authorize sales of some prescription pharmaceuticals on a non-prescription basis, which may reduce the
profitability of our prescription products.
The FDA may change the designation of some prescription pharmaceuticals we currently sell to non-prescription. If we are
unable to gain approval of our product on a non-prescription designation we may experience an adverse effect on our business.
Risks Related to Financing.
We may not be able to extend or replace the JPM Revolving Facility.
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The JPM revolving facility while undrawn, provides a source of liquidity for the Company. This facility matures on April
17, 2019. If the Company is unable to extend or replace it prior to that time, this source of liquidity will no longer be available
to the Company unless the Company is thereafter able to replace it with similar financing and there is no assurance that it
would be able to do so on favorable terms if at all.
Events of default may occur under our debt instruments. If events of default occur and lenders under these debt
instruments accelerate the obligations thereunder we may not be able to repay the obligations that become immediately
due and the holders of our debt instruments may seek to assert their rights under the debt instruments.
Events of default may occur under our debt instruments. If events of default occur and lenders under these debt instruments
accelerate the obligations thereunder we may not be able to repay the obligations that become immediately due. The terms of
our Loan Agreement and Credit Agreement require us to remain in compliance with certain covenants. In the event that an
event of default has occurred, the loans thereunder may become accelerated and immediately due. If we are not successful in
refinancing our debt or accessing additional liquidity, we may not be able to fund all our commitments and will be in default
under these obligations. If we do not have sufficient funds on hand to pay our debt when due, we may be required to seek a
waiver or amendment from our lenders, refinance our indebtedness, incur additional indebtedness, sell assets or sell additional
securities. No assurance can be given that we will be able to obtain a waiver or amendment from our lenders if needed or that
other financing will be available on terms that are acceptable to us or at all. Any failure to meet our obligations under our debt
instruments could have a material negative impact on our liquidity and on our business.
Our indebtedness reduces our financial and operating flexibility.
We have entered into various credit arrangements to fund certain of our operations and activities, principally acquisitions.
As of December 31, 2018, our debt includes The Existing Term loan and Incremental Term Loan, collectively the “Term
Loans,” with a remaining principal balance of $831.9 million. We also have available borrowing capacity under our credit
facilities (See Part II, Item 8, Note 7 - “Financing Arrangements” for definitions and descriptions of our Term Loans and our
credit facilities). A high level of indebtedness subjects us to a number of risks. In particular, a significant portion of our current
indebtedness has variable interest terms meaning we are subject to the risks associated with higher interest rates, and moreover,
a high level of indebtedness may impair our ability to obtain additional financing in the future and increases the risk that we
may default on our debt obligations. In addition, our current debt arrangements require that we devote a significant portion of
our cash flows to service amounts outstanding under those debt arrangements. We also are subject to various covenants with
respect to our indebtedness, including the obligation to meet certain defined financial ratios and our ability to pay distributions
to our shareholders is restricted. Further, our indebtedness may restrict or otherwise impair our ability to raise additional capital
through other debt financing, which could restrict our ability to grow our business. Our ability to meet our debt obligations, to
comply with all required covenants, and to reduce our level of indebtedness depends on our future performance. General
economic conditions and financial, business and other factors affect our operations and our future performance. Many of these
factors are beyond our control. If we do not have sufficient funds on hand to pay our debt when due, we may be required to
seek a waiver or amendment from our lenders, refinance our indebtedness, incur additional indebtedness, sell assets or sell
additional shares of securities. We may not be able to complete such transactions on terms acceptable to us, or at all. Our failure
to generate sufficient funds to pay our debts or to undertake any of these actions successfully could result in a default on our
debt obligations, which would materially adversely affect our business, results of operations and financial condition.
We may not generate cash flow sufficient to pay interest and make required principal repayments on our Term Loans.
The outstanding balance of the Term Loans, which was $831.9 million as of December 31, 2018, is due and payable on
April 17, 2021. If we do not generate sufficient operating cash flows to fund these payments or obtain additional funding from
external sources at acceptable terms, we may not have sufficient funds to satisfy our principal and interest payment obligations
when those obligations are due, which would place us into default under the terms of the Existing Term Loan and the
Incremental Term Loan. Such default would have a material adverse effect on our business, financial condition and results of
operations. Further, our borrowings are secured by all or substantially all of the Company’s assets. If the Company defaults on
its obligations under the Existing Term Loan or the Incremental Term Loans, the lenders may be able to foreclose upon its
security interest and otherwise be entitled to obtain or control Company assets. The lenders may also be able to negotiate
significant increases in interest rates and fees.
We may need to obtain additional capital to grow our business, which could restrict our ability to operate in a manner
we deem to be in our best interest.
We may require additional funds in order to materially grow our business. We require substantial liquidity to implement
long-term cost savings and productivity improvement plans, continue capital spending to improve our manufacturing facilities
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to increase capacity and support product development programs, meet scheduled term debt and lease maturities, to effect
acquisitions and to run our normal business operations. We may seek additional funds through public and private financing,
including equity and debt offerings. However, adequate funds through the financial markets or from other sources may not be
available to us when needed or on favorable terms. Without sufficient additional capital funding, we may be required to delay,
scale back or abandon some or all of our product development, manufacturing, acquisition, licensing and marketing initiatives,
or operations. Further, such additional financing, if obtained, may require the granting of rights, preferences or privileges senior
to those of the common stock and result in substantial dilution of the existing ownership interests of the common stockholders
and could include covenants and restrictions that limit our ability to operate or expand our business in a manner that we deem
to be in our best interest.
Risks Related to Our Intellectual Property.
Third parties may claim that we infringe their proprietary rights and may prevent or delay us from manufacturing and
selling some of our new products.
The manufacture, use and sale of new products that are the subject of conflicting patent rights have been the subject of
substantial litigation in the pharmaceutical industry. Pharmaceutical companies with patented brand products frequently sue
companies that file applications to produce generic equivalents of their patented brand products for alleged patent infringement
or other violations of intellectual property rights, which may delay or prevent the entry of such generic products into the
market. Generally, a generic drug may not be marketed until the applicable patent(s) on the brand name drug expire or are held
to be not infringed, invalid, or unenforceable. When we or our development partners submit a filing to the FDA for approval of
a generic drug, we or our development partners must certify: (i) that there is no patent listed by the FDA as covering the
relevant brand product, (ii) that any patent listed as covering the brand product has expired, (iii) that the patent listed as
covering the brand product will expire prior to the marketing of the generic product, in which case the filing will not be finally
approved by the FDA until the expiration of such patent, or (iv) that any patent listed as covering the brand drug is invalid or
will not be infringed by the manufacture, sale or use of the generic product for which the filing is submitted.
Under any circumstance in which an act of infringement is alleged to occur, there is a risk that a brand pharmaceutical
company may sue us for alleged patent infringement or other violations of intellectual property rights. Also, competing
pharmaceutical companies may file lawsuits against us or our strategic partners alleging patent infringement or may file
declaratory judgment actions of non-infringement, invalidity, or unenforceability against us relating to our own patents. We
have been sued for patent infringement related to several of our filings and we anticipate that we may be sued once we file for
other products in our pipeline. Such litigation is often costly and time-consuming and could result in a substantial delay in, or
prevent the introduction and/or marketing of our products, allow for damages for any at-risk launches, which could have a
material adverse effect on our business, financial condition and results of operations.
Even if the parties settle their intellectual property disputes through licensing or similar arrangements, the costs associated
with these arrangements may be substantial and could include ongoing royalties, and the necessary licenses might not be
available to us on terms we believe to be acceptable.
Our patents and proprietary rights may be challenged, circumvented or otherwise compromised by competitors, which
may result in our protected products losing their market exclusivity and becoming subject to generic competition before
their patents expire.
The patent and proprietary rights position of competitors in the pharmaceutical industry generally is highly uncertain,
involves complex legal and factual questions, and is the subject of much litigation. There can be no assurance that any patent
applications or other proprietary rights, including licensed rights, relating to our potential products or processes will result in
patents being issued or other proprietary rights secured, or that the resulting patents or proprietary rights, if any, will provide
protection against competitors who: (i) successfully challenge our patents or proprietary rights; (ii) obtain patents or proprietary
rights that may have an adverse effect on our ability to conduct business; or (iii) are able to circumvent our patent or proprietary
rights position. It is possible that other parties have conducted or are conducting research and could make discoveries of
pharmaceutical formulations or processes that would precede any discoveries made by us, which could prevent us from
obtaining patent or other protection for these discoveries or marketing products developed therefrom. Consequently, others
could independently develop pharmaceutical products similar to or rendering obsolete those that we are planning to develop, or
duplicate any of our products. Our inability to obtain patents for, or other proprietary rights in, our products and processes or
the ability of competitors to circumvent or cause to be obsolete our patents or proprietary rights could have a material adverse
effect on our business, financial condition and results of operations. Additionally, our inability to successfully defend the
existing patents on our products against Paragraph IV challenges by competing drug companies could have a material adverse
effect on our business, financial condition and results of operations. For example, the patents that protect Azasite® that will
23
expire in March 2019, were challenged by two generic competitors. We settled with one competitor and the courts found in our
favor with the other. Additionally, the Zioptan™ patents faced challenges from two generic competitors. We ultimately reached
settlements with both competitors.
Further, the majority of the drug products that we market are generics, with essentially no patent or proprietary rights
attached. While this fact allowed us the opportunity to obtain FDA approval to market our generic products, it also allows
competing drug companies to do the same. Should multiple additional drug companies choose to develop and market the same
generic products that we actively market, our profit margins could decline, which would have a material adverse effect on our
business, financial condition and results of operations.
Risks Related to Our Common Stock.
The issuance of shares related to the Company’s various stock plans may have a substantial dilutive effect on our
common stock.
As of December 31, 2018, holders of unvested restricted stock units would receive 1.6 million shares of our common stock
should all their restricted stock units vest. If the price per share of our common stock at the time of exercise of any stock
options is in excess of the various exercise prices of such options, exercise of such options would have a dilutive effect on our
common stock. As of December 31, 2018, holders of our outstanding options would receive 3.4 million shares of our common
stock at a weighted average exercise price of $28.55 per share.
Our announced stock repurchase program could affect the price of our common stock and increase volatility and may
be suspended or terminated at any time, which may result in a decrease in the trading price of our common stock.
In July 2016, the Board authorized a stock repurchase program (the "Stock Repurchase Program") that would allow the
Company to effect repurchases from time to time in the open market, in privately negotiated transactions or otherwise,
including accelerated stock repurchase arrangements. During 2016, the Company repurchased a total of approximately 1.8
million shares at an average price of $24.89 per share of common stock. The timing and actual number of shares repurchased
under the Stock Repurchase Program has depended on a variety of factors, including the timing of open trading windows, price,
corporate and regulatory requirements and other market conditions. Any repurchases pursuant to such program could affect our
stock price and increase its volatility. The existence of a stock repurchase program could also cause our stock price to be higher
than it would be in the absence of such a program and could potentially reduce the market liquidity for our stock. There can be
no assurance that any stock repurchases will occur or that if they do, that they will enhance stockholder value as the market
price of our common stock may decline below the levels at which we repurchased shares of common stock. In addition, short-
term stock price fluctuations could reduce the program’s effectiveness.
We may issue preferred stock and the terms of such preferred stock may reduce the market value of our common stock.
We are authorized to issue up to a total of 5 million shares of preferred stock in one or more series subject to certain
limitations, without further action by holders of our common stock. If we did issue shares of preferred stock, it could affect the
rights or reduce the market value of our common stock. In particular, specific rights granted to future holders of preferred stock
could be used to restrict our ability to merge with or sell our assets to a third party. These terms may include voting rights,
preferences as to dividends and liquidation, conversion and redemption rights and sinking fund provisions.
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Item 1B. Unresolved Staff Comments.
None.
Item 2. Properties.
Our manufacturing facilities in Decatur, Illinois, Amityville, New York, Somerset, New Jersey and Hettlingen, Switzerland
are expected to be adequate to accommodate our current manufacturing needs.
Owned Locations
As of December 31, 2018, the Company owns three facilities in Decatur, Illinois. The Wyckles Road facility, which
consists of 105,000 square feet of building space, is used for packaging, warehousing, distribution, and office space. The
Company also owns approximately 7 acres of additional currently undeveloped land adjacent to the Wyckles facility. The
Grand Avenue facility is a 123,000 square-foot facility for manufacturing, laboratories and office space. A third facility is a 750
square-foot storage unit. The Decatur facilities support the Prescription Pharmaceuticals and Consumer Health segments.
The Company owns five buildings in Hettlingen, Switzerland which support the Prescription Pharmaceuticals and
Consumer Health segments with approximately 50,000 square-feet of manufacturing, office and storage space, and
approximately 0.5 acres of additional currently undeveloped land.
The Company owns seven facilities in Amityville and Copiague, New York, with a total of approximately 219,000 square-
feet. These facilities support the Prescription Pharmaceuticals and Consumer Health segments:
•
•
•
•
•
•
•
42,000 square-foot facility dedicated to liquid and semi-solid production,
29,000 square-foot facility housing a sterile manufacturing facility, DEA manufacturing, chemistry and microbiology
laboratories,
65,000 square-foot facility used for warehousing finished goods,
22,000 square-foot facility with 4,000 square feet of office space and 18,000 square feet of warehouse space,
8,000 square-foot office building utilized for administrative functions,
35,000 square-foot facility with mixed office, laboratory and manufacturing space,
18,000 square-foot building with mixed office and laboratory space. (Operations relocated to Cranbury)
The Company owns approximately 380,000 square feet of pharmaceutical manufacturing, warehousing and distribution
facilities situated on approximately 14 acres of land in Paonta Sahib, Himachal Pradesh, India.
Leased Locations
The Company leases four facilities in Somerset, New Jersey. One is a 50,000 square-foot facility used for drug
manufacturing, research and development and administrative activities related to our Prescription Pharmaceuticals segment.
The second facility is a 15,000 square foot facility used for a quality laboratory and additional office space. The third facility is
a 6,600 square foot on-site warehouse, and the fourth facility is a 52,000 square-foot warehouse. The Company also leases a
facility in Cranbury, New Jersey that is approximately 48,000 square feet used for research and development activities and a
3,000 square-foot laboratory space in Winterthur, Switzerland.
Our corporate headquarters and administrative offices consist of 70,000 square feet of leased space in two office buildings
in Lake Forest, Illinois. In Gurnee, Illinois, we lease approximately 161,000 square feet of space for our product warehousing
and distribution needs. In Vernon Hills, Illinois, the Company leases approximately 28,000 square feet of space for research
and development activities.
Our subsidiary, Akorn Consumer Health, maintains its corporate offices in a 3,200-square foot leased facility in Ann Arbor,
Michigan.
In India, the Company leases approximately 9,000 square feet of warehouse and office space.
Item 3. Legal Proceedings.
Legal proceedings which may have a material effect on the Company have been further disclosed in Part II, Item 8, Note
19 - “Legal Proceedings” and are herein incorporated by reference.
25
Item 4. Mine Safety Disclosures.
Not applicable.
Executive Officers of the Company
The following table identifies our current executive officers, the positions they hold as of February 20, 2019, and the
year in which they became an officer. Our officers are appointed by the Board to hold office until their successors are elected
and qualified.
Name
Position
Year Became
Officer
Age
Douglas S. Boothe
President and Chief Executive Officer (“CEO”)
Duane A. Portwood
Executive Vice President and Chief Financial Officer (“CFO”)
Joseph Bonaccorsi
Executive Vice President, General Counsel, and Secretary (“General
Counsel”)
Randall E. Pollard
Jonathan Kafer
Senior Vice President, Finance, and Chief Accounting Officer ("CAO")
Executive Vice President and Chief Commercial Officer
Christopher C. Young
Executive Vice President, Global Operations
55
52
54
47
55
47
2019
2015
2009
2015
2016
2019
Douglas S. Boothe. Mr. Boothe was named President and Chief Executive Officer of Akorn as of January 1, 2019. Prior to
joining Akorn, Boothe most recently served as president of the generics division of publicly held Impax Laboratories, which
developed, manufactured and marketed bioequivalent pharmaceuticals and was acquired by Amneal Pharmaceuticals LLC.
Prior to Impax Laboratories, Mr. Boothe was the executive vice president and general manager of Perrigo Company Plc, with
responsibility for the U.S. pharmaceuticals business, which included generics and specialty pharmaceutical products. He also
served as the CEO of Actavis Inc., the U.S. manufacturing and marketing division of Actavis Group, and held senior positions
at Alpharma and Pharmacia Corp. Following Mr. Boothe’s time at Impax Laboratories, he served as principal consultant for his
own consulting company, Channel Advantage Consulting LLC. Mr. Boothe received his undergraduate degree from Princeton
University and his MBA from the Wharton School of Business at the University of Pennsylvania.
Duane A. Portwood. Mr. Portwood joined Akorn in 2015 as the Executive Vice President and Chief Financial Officer. He
previously worked for The Home Depot, Inc., where he was their Vice President & Corporate Controller since 2006. In that
role, he was responsible for all of Home Depot’s accounting and financial reporting functions, as well as its financial operations
and internal controls. Prior to Home Depot, Mr. Portwood served with the Wm. Wrigley Jr. Company from 1999 to 2006 in a
number of accounting and finance leadership roles of increasing responsibility, most recently as Corporate Controller. Mr.
Portwood began his career with Price Waterhouse LLP, where he held numerous leadership positions in their audit and
transaction support practices. Mr. Portwood, previously a Certified Public Account, holds an M.B.A. with Honors from the
University of Chicago Booth School of Business and a B.S. in Business Administration from the University of Montana.
Joseph Bonaccorsi. Mr. Bonaccorsi, Executive Vice President, General Counsel and Secretary, joined Akorn in 2009. Mr.
Bonaccorsi came to Akorn from Walgreen Co., where he served as Senior Vice President Mergers & Acquisition and Counsel
for the Walgreens-Option Care Home Care division. Mr. Bonaccorsi joined Option Care, Inc. in 2002, where he served as
Senior Vice President, General Counsel, Secretary and Corporate Compliance Officer through 2007. Prior to joining Option
Care, Inc., he was in private law practice in Chicago, Illinois. He received his B.S. degree from Northwestern University and
his Juris Doctorate from Loyola University School of Law, Chicago.
Randall E. Pollard. Mr. Pollard joined Akorn in 2015 as Vice President, Corporate Controller and is currently serving as
Senior Vice President, Finance, and Chief Accounting Officer. Mr. Pollard joined Akorn from Novartis Pharmaceuticals, where
he most recently served as the head of accounting and reporting for Novartis’ generic division, Sandoz. During his tenure at
Novartis, Mr. Pollard also served as Controller of the Sandoz division. Prior to Novartis/Sandoz, he had served in various
financial leadership roles at Wyeth Pharmaceutics and Mayne Pharma. Mr. Pollard began his career in public accounting at
Arthur Andersen. Mr. Pollard is a Certified Public Accountant and holds a B.S. in Accounting from Pennsylvania State
University and an M.B.A. from Fairleigh Dickinson University.
26
Jonathan Kafer. Mr. Kafer joined Akorn in 2015 as Executive Vice President, Sales and Marketing and was promoted to
Chief Commercial Officer effective as of December 10, 2018. Mr. Kafer joined Akorn from Allergan, Inc., where he was
previously the Vice President, Account Management. At Allergan, Mr. Kafer was responsible for all trade activity within
Allergan’s wholesale, retail specialty pharmacy, e-Solutions and managed market channels for all of Allergan’s business units.
Prior to Allergan, Mr. Kafer was the Vice President of Sales and Marketing for Health Systems at Teva Pharmaceuticals. Mr.
Kafer has also served in various senior management roles at AAIPharma, Xanodyne Pharmaceuticals, HealthNexis and
Novartis. Mr. Kafer holds a B.A. in Organizational Communications from The Ohio State University.
Christopher C. Young. Mr. Young was appointed Executive Vice President, Global Operations, effective January 24, 2019.
Mr. Young brings twenty-five years of pharmaceutical experience to Akorn having most recently been the Executive Vice
President of Global Operations for Alvogen, Inc. from 2013 to 2018. Prior to Alvogen, Mr. Young was Vice President of
Operations in the United States and India for Actavis. Mr. Young received his undergraduate degree from Gettysburg College
and his MBA from Rutgers University.
27
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
From February 7, 2007 to date, our common stock has been listed on the NASDAQ Global Select Market under the
symbol “AKRX”.
As of February 20, 2019, there were 125,577,671 shares of our common stock outstanding, held by 250 stockholders of
record. This number does not include stockholders for which shares are held in a “nominee” or “street” name. The closing
price of our common stock on February 20, 2019 was $4.04 per share.
The Company did not pay cash dividends in 2018, 2017 or 2016 and does not expect to pay dividends on its common stock
in the foreseeable future. Moreover, we may be restricted or limited from making dividend payments pursuant to the terms of
our financing arrangements with certain other financial institutions (see Item 8, Note 7 - "Financing Arrangements”).
The Company did not repurchase any of its common stock during 2018 or 2017. During 2016, the Company repurchased a
total of approximately 1.8 million shares at an average price of $24.89 per share of common stock. See Item 8, Note 20 -
"Share Repurchases" for further information. The following table sets forth the summary of the Company's repurchase activity
during each quarter in 2016.
Period
September 1-30, 2016
November 1-30, 2016
Total
Total Number of
Shares
Repurchased
Average Price Paid
per Share
(including
commission costs)
Cumulative Number of
Shares Purchased as Part
of Publicly Announced
Plans or Programs
Dollar Value of Shares
that may yet be
Purchased under the
Plans or Programs
901,382 $
906,451 $
1,807,833 $
27.74
22.06
24.89
901,382 $
1,807,833 $
1,807,833 $
174,995,663
154,999,354
154,999,354
28
PERFORMANCE GRAPH
The following Stock Performance Graph and related information shall not be deemed “soliciting material” or “filed” with the
Securities and Exchange Commission, nor should such information be incorporated by reference into any future filings under the
Securities Act of 1933 or the Securities Exchange Act of 1934, each as amended, except to the extent that we specifically incorporate
it by reference in such filing.
The graph below compares the cumulative shareholder return on our common stock with the NASDAQ Composite Index
(ticker symbol: ^IXIC) and the NASDAQ Health Care Index (ticker symbol: ^IXHC) over the last five years through December 31,
2018. The graph assumes $100 was invested in our common stock, as well as the two indices presented, at the end of December 2012
and that all dividends were reinvested during the subsequent five-year period.
Total Return Chart
NASDAQ Composite Index (^IXIC)
NASDAQ Health Care Index (^IXHC)
Akorn, Inc. (AKRX)
2013
2014
2015
2016
2017
2018
100
100
100
113
128
147
120
137
152
129
114
89
153
138
131
159
133
14
29
Item 6. Selected Financial Data
The following table sets forth selected summary historical financial data. We have prepared this table using our
consolidated financial statements for the five years ended December 31, 2018. Our consolidated financial statements upon
which the selected summary historical financial data is derived were audited by BDO USA, LLP (“BDO”), independent
registered public accounting firm, during each of the five years ended December 31, 2018, 2017, 2016, 2015 and 2014. Certain
prior-period amounts have been reclassified to conform to current-period presentation including cost of sales, selling, general
and administrative expenses, research and development expenses, impairment of intangible assets, litigation rulings and
settlements and other non-operating (expense) income, net on the consolidated statements of comprehensive (loss) income, as
well as Fin 48 reserve and accrued legal fees and contingencies on the consolidated balance sheet. This summary should be
read in conjunction with our audited Consolidated Financial Statements and Notes thereto, and "Item 7 - Management's
Discussion and Analysis of Financial Condition and Results of Operations" and other financial information included herein.
30
(In thousands, except per share data)
Revenues
Gross profit
Operating (loss) income
Interest expense, net, amortization of
deferred financing costs and other non-
operating income (expense), net
Pretax (loss) income from operations
Income tax (benefit) provision from
operations
(Loss) income from operations
Weighted average shares outstanding:
Basic
Diluted
PER SHARE:
Equity, per diluted share
(Loss) income from operations per share:
Basic
Diluted
Share Price: High
Low
BALANCE SHEET DATA:
Current assets
Net property, plant & equipment
Total assets
Current liabilities
Long-term obligations, less current
installments
Shareholders’ equity
CASH FLOW DATA:
Cash (used in) provided by operating
activities
Cash used in investing activities
Cash (used in) provided by financing
activities
Effect of changes in exchange rates
Decrease/(increase) in cash and cash
equivalents
$
$
$
$
$
$
$
$
$
$
$
$
$
2018 (2)
Years Ended December 31,
2016
2017
2015 (1)
2014 (1)
$
694,018
246,016
(388,426)
$
841,045
432,206
(22,884)
1,116,843
673,512
322,858
$
$
985,076
595,243
288,172
555,048
261,360
60,816
(49,756)
(36,314)
(51,558)
(56,016)
(35,474)
(438,182)
(59,198)
271,300
232,156
25,342
(36,273)
(401,909) $
(34,648)
(24,550) $
87,057
184,243
$
81,358
150,798
$
10,954
14,388
125,383
125,383
124,790
124,790
122,869
125,801
116,980
125,762
103,480
109,588
3.54
$
6.66
$
6.51
$
4.94
$
3.25
(3.21) $
(3.21) $
$
33.63
$
3.16
(0.20) $
(0.20) $
$
34.00
$
17.74
1.50
1.47
39.46
17.57
$
583,819
334,853
$ 1,495,257
170,823
$
880,568
443,866
$
$
$
$
730,151
313,418
1,909,511
171,089
907,177
831,245
$
$
$
$
685,811
238,404
1,973,720
175,555
978,981
819,184
$
$
$
$
$
$
$
$
1.29
1.22
57.10
19.08
708,132
179,614
2,042,545
231,376
1,189,604
621,565
$
$
$
$
$
$
$
$
0.14
0.13
45.25
20.52
437,750
144,196
1,832,150
150,853
1,324,990
356,307
(68,894) $
247,633
$
166,690
$
299,031
$
43,390
(69,131) $
(90,555) $
(72,922) $
(53,718) $
(966,874)
(5,038) $
(1,032) $
7,594
1,183
(144,095) $
165,855
$
$
$
(240,333) $
$
2
31,908
$
(251) $
963,116
(183)
(146,563) $
276,970
$
39,449
(1) Years 2014 and 2015 include the effects of acquisitions such as Akorn AG (January 2, 2015), VersaPharm (August 12, 2014)
and Hi-Tech Pharmacal Co., Inc. (April 17, 2014).
(2) Operating loss for 2018 and 2017, include total intangible asset impairment amounts of $231.1 million and $128.1 million,
respectively.
31
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
OVERVIEW
We, together with our wholly-owned subsidiaries, are a specialty generic pharmaceutical company that develops,
manufactures and markets generic and branded prescription pharmaceuticals, branded and private-label OTC consumer health
products and animal health pharmaceuticals. We are an industry leader in the development, manufacturing and marketing of
specialized generic pharmaceutical products. As such, we specialize in difficult-to-manufacture sterile and non-sterile dosage
forms including, but not limited to, ophthalmics, injectables, oral liquids, otics, topicals, inhalants and nasal sprays.
We have identified two reportable segments:
• Prescription Pharmaceuticals, we manufacture and market generic and branded prescription pharmaceuticals
including ophthalmics, injectables, oral liquids, otics, topical, inhalants, and nasal sprays.
• Consumer Health, we manufacture and market branded and private-label animal health and OTC products.
For a more detailed description of the products and customers that comprise our reportable segments, see Part I, Item 1 -
Business.
New Product Development:
During the year ended December 31, 2018, we submitted two new Abbreviated New Drug Application (“ANDA”) filings
to the FDA. In the prior year ended December 31, 2017, we submitted five ANDA filings while in 2016 we submitted 12
ANDA filings and three Abbreviated New Animal Drug Application (“ANADA”) filings to the FDA.
Akorn and its partners received eight ANDA product approvals from the FDA in the year ended December 31, 2018; 26
ANDA approvals and one New Drug Application (“NDA”) approval in 2017 and finally, seven ANDA approvals and three
tentative ANDA approvals in 2016. As of December 31, 2018, we had 62 ANDA filings under FDA review.
We plan to continue to regularly submit additional filings based on perceived market opportunities and our R&D pipeline,
as well as review existing filings for commercial viability. We continue to develop new products internally; as well as partner
with other drug companies for products that we would not intend to manufacture ourselves. Our R&D expense in the year
ended December 31, 2018 was $47.3 million as compared to $45.0 million in the prior year ended December 31, 2017. This
includes internal and external R&D expenses and milestone fees paid to our strategic partners.
Revenue & Gross Profit:
Net revenue was $694.0 million for the twelve month period ended December 31, 2018, representing a decrease of $147.0
million, or 17.5%, as compared to net revenue of $841.0 million for the twelve month period ended December 31, 2017. The
decrease in net revenue in the period was primarily due to $157.4 million decline in organic revenue. The $157.4 million
decline in organic revenue was due to approximately $117.1 million and $40.4 million declines in volume declines and price
erosion, respectively. Gross profit for the twelve month period ended December 31, 2018 was $246.0 million, or 35.4% of
revenue, compared to $432.2 million, or 51.4% of revenue, for the twelve month period ended December 31, 2017. The
decline in the gross profit percentage was principally due to unfavorable product mix shifts primarily driven by the effect of
competition on Ephedrine Sulfate Injection and Nembutal Injection, unfavorable variances due to decreased production
resulting from extended planned shutdowns at our Decatur and Somerset manufacturing facilities, as well as increased
operating costs associated with FDA compliance related improvement activities.
Sales Practices:
From time to time we offer incentives, such as extended payment terms or discounts, to support the launch of new
products. We believe these practices are consistent with industry practice. For all sales under which these incentives were
provided during the periods presented in this Management’s Discussion & Analysis, revenue received from such sales was
properly accounted for in accordance with ASC 606 — “Revenue Recognition” and was recognized in the proper applicable
accounting period.
RESULTS OF OPERATIONS
32
For the years 2018, 2017 and 2016, we have identified and reported operating results for two distinct business
segments: Prescription Pharmaceuticals and Consumer Health. Our reported results by segment are based upon various internal
financial reports that disaggregate certain operating information. Our Chief Operating Decision Maker ("CODM"), as defined
in Accounting Standards Codification (“ASC”) Topic 280, Segment Reporting, is our Chief Executive Officer (CEO). Our
CEO oversees operational assessments and resource allocations based upon the results of our reportable segments, all of which
have available discrete financial information (See Item 8, Note 12 – “Segment Information” for further discussion).
The following table sets forth amounts and percentages of total revenue for certain items from our Consolidated
Statements of Comprehensive Income and our segment reporting information for the years ended December 31, 2018, 2017 and
2016 (in thousands):
2018
2017
2016
Amount
% of
Revenue
Amount
% of
Revenue
Amount
% of
Revenue
Revenues:
Prescription Pharmaceuticals
$ 620,669
89.4 % $ 772,524
91.9 % $1,053,579
Consumer Health
Total revenues
Gross profit and gross margin percentage:
Prescription Pharmaceuticals
Consumer Health
Total gross profit
Operating expenses:
73,349
694,018
213,560
32,456
246,016
94.3%
5.7%
10.6 %
68,521
8.1 %
63,264
100.0 %
841,045
100.0 % 1,116,843
100.0%
34.4 %
44.2 %
35.4 %
402,082
30,124
432,206
52.0 %
44.0 %
51.4 %
644,319
29,193
673,512
61.2%
46.1%
60.3%
Selling, general & administrative expenses
279,628
40.3 %
216,324
25.7 %
197,631
17.7%
Acquisition-related costs
Research and development expenses
Amortization of intangibles
Impairment of intangible assets
Litigation rulings and settlements
Operating (loss) income
Net (loss) income
121
47,321
53,472
231,086
22,814
$ (388,426)
$ (401,909)
— %
6.8 %
7.7 %
159
44,988
61,443
33.3 %
128,127
3.3 %
4,049
(56.0)% $ (22,884)
(57.9)% $ (24,550)
— %
5.3 %
7.3 %
15.2 %
0.5 %
364
38,753
65,713
44,369
3,824
(2.7)% $ 322,858
(2.9)% $ 184,243
—%
3.5%
5.9%
4.0%
0.3%
28.9%
16.5%
COMPARISON OF YEARS ENDED DECEMBER 31, 2018 AND 2017
Net revenue was $694.0 million for the twelve month period ended December 31, 2018, representing a decrease of $147.0
million, or 17.5%, as compared to net revenue of $841.0 million for the twelve month period ended December 31, 2017. The
decrease in net revenue in the period was primarily due to $157.4 million decline in organic revenue that was partially offset by
$14.8 million of new product revenue. The $157.4 million decline in organic revenue was due to approximately $117.1 million,
or 13.9%, and $40.4 million, or 4.8% in volume and price declines, respectively. The organic revenue decline was principally
due to the effect of competition on Ephedrine Sulfate Injection, Nembutal, Lidocaine Ointment and Clobetasol Cream. In
addition, the Company experienced lower net revenue as a result of supply shortfalls from extended planned shutdowns at our
Decatur and Somerset manufacturing facilities during the year. While the Company received eight new-to-Akorn ANDA
product approvals and launched or relaunched four new products during 2018, it was unable to offset the overall net revenue
decline through new product launches or new business opportunities.
The Prescription Pharmaceuticals segment revenues of $620.7 million for the twelve month period ended December 31,
2018 represented a decrease of $151.8 million, or 19.7%, as compared to revenues of $772.5 million for twelve month period
ended December 31, 2017.
The Consumer Health segment revenues of $73.3 million for the twelve month period ended December 31, 2018
represented an increase of $4.8 million, or 7.0%, as compared to revenues of $68.5 million for twelve month period ended
December 31, 2017.
33
The net revenue for the twelve month period ended December 31, 2018 of $694.0 million was net of adjustments totaling
$1,193.8 million for chargebacks, rebates, administrative fees and others, product returns, discounts and allowances and
advertising, promotions and other. Chargeback expenses for 2018 were $830.0 million, or 44.0% of gross sales, compared to
$953.3 million, or 40.5% of gross sales, in 2017. The $123.3 million decrease in chargeback expense was due to lower gross
sales in the current year as compared to prior year. Rebates, administrative fees and other expenses for the twelve month period
ended December 31, 2018 were $297.8 million, or 15.8% of gross sales, compared to $476.6 million, or 20.3% for twelve
month period ended December 31, 2017. The $178.8 million decrease in rebates, administrative fees and other expenses was
primarily due to volume declines as well as product mix and customer mix. Our product returns provision for the twelve month
period ended December 31, 2018 was $20.2 million, or 1.1% of gross sales, compared to $26.9 million, or 1.1% of gross sales,
for twelve month period ended December 31, 2017. Discounts and allowances were $36.9 million or 2.0% of gross sales for
the twelve month period ended December 31, 2018, compared to $45.3 million, or 1.9% of gross sales for the twelve month
period ended December 31, 2017. Advertisement and promotion expenses were $8.9 million or 0.5% of gross sales for the
twelve month period ended December 31, 2018, compared to $7.9 million, or 0.3% of gross sales for the twelve month period
ended December 31, 2017.
Gross profit for the twelve month period ended December 31, 2018 was $246.0 million, or 35.4% of revenue, compared to
$432.2 million, or 51.4% of revenue, for the twelve month period ended December 31, 2017. The decline in the gross profit
percentage was principally due to unfavorable product mix shifts primarily driven by the effect of competition on Ephedrine
Sulfate Injection and Nembutal Injection, unfavorable variances due to decreased production resulting from extended planned
shutdowns at our Decatur and Somerset manufacturing facilities, as well as increased operating costs associated with FDA
compliance related improvement activities.
Total operating expenses were $634.4 million in the twelve month period ended December 31, 2018, an increase of $179.4
million, or 39.4%, from the comparative prior year period amount of $455.1 million. The $179.4 million increase was
primarily driven by respective increases, $103.0 million, $63.3 million and $18.8 million in Impairment of intangible assets,
Selling, general and administrative (“SG&A”) expenses and Litigation rulings and settlement expenses that were partially offset
by a decrease of $8.0 million in Amortization of intangibles. The following is a discussion of the main drivers of the increase:
Impairments of intangible assets were $231.1 million in 2018, an increase of $103.0 million or 80.4% over the prior
year amount of $128.1 million. The $103.0 million increase was primarily as a result of anticipated market conditions
upon launch resulting in lower expected market share and lower average selling price, which reduced the viability for
future development. As a result, the cost to get these products to market outweighed the benefits resulting in increased
IPR&D impairments of $114.9 million that was partially offset by a decrease in Product licensing rights impairments of
$11.9 million.
SG&A expenses were $279.6 million in 2018, an increase of $63.3 million, or 29.3%, over the prior year expenses of
$216.3 million. The primary drivers of the $63.3 million increase were $36.0 million legal expenses attributed to the
Delaware Action and $27.9 million expenses related to the data integrity assessment projects, $6.2 million severance
packages for the former executives and $6.1 million of fixed assets impairments. These were partially offset by a decrease
of $18.3 million in restatement related expenses.
Litigation rulings and settlements were $22.8 million in 2018, an increase of $18.8 million, from the comparative prior
year period amount of $4.0 million. The primary drivers of the $18.8 million increase were $10.5 million related to an
intermediate appellate decision for damages in a product liability case, $5.0 million related to a legal settlement accrual,
and $3.8 million for an adverse arbitration decision related to a contract dispute in the third quarter of 2018.
Non-operating expenses were $49.8 million in 2018, an increase of $13.5 million, or 37.2%, over the prior year expenses
of $36.3 million. The $13.5 million increase was primarily driven by $11.4 million increase in interest expense related to
higher interest rates in 2018 compared to the prior year in 2017, and $3.0 million income attributed to receipt and subsequent
sale of the Nicox securities that the Company received as a milestone payment in the second quarter of 2017.
Income tax benefit was $36.3 million based on an effective tax provision rate of approximately 8.3% in 2018, compared to
an income tax benefit of $34.6 million in 2017 based on an effective tax provision rate of approximately 58.5%. The change in
the tax rate experienced by the company was driven principally by a full valuation allowance of $60.6 million recorded against
US, India, and Switzerland deferred tax assets and shortfalls and forfeitures related to stock compensation. A $3.0 million
benefit also resulted from the re-measurement of U.S. deferred tax assets and liabilities at the lower enacted corporate tax rate
included in the Tax Cuts and Jobs Act (the “Tax Act”). In the absence of the changes in the Tax Act, our tax benefit for 2018
would have been $33.2 million, with an effective tax provision rate of approximately 7.6%. The Company’s foreign
subsidiaries do not have accumulated earnings that they can distribute; therefore, the provisions of the Tax Act that related to
34
the repatriation of foreign earnings are not applicable to the Company at December 31, 2018. The benefit resulting from the re-
measurement of U.S. deferred tax assets and liabilities was partially offset by an accrual of $15.7 million of penalties and
interest in 2017 and an additional accrual of $7.9 million of penalties and interest in 2018 that could result from adverse results
of income tax examinations. Absent the effects of both the reduction in our deferred tax liability and the accrual of the
penalties and interest, the income tax rate would have been approximately 9.4%.
The Company reported a net loss of $401.9 million for the twelve month period ended December 31, 2018, or 57.9% of net
revenue, compared to net loss of $24.6 million, for the twelve month period ended December 31, 2017 or 2.9% of net revenue.
COMPARISON OF YEARS ENDED DECEMBER 31, 2017 AND 2016
Net revenue was $841.0 million for the twelve month period ended December 31, 2017, representing a decrease of $275.8
million, or 24.7%, as compared to net revenue of $1,116.8 million for the twelve month period ended December 31, 2016. The
decrease in net revenue in the period was primarily due to $279.1 million decline in organic revenue. The $279.1 million
decline in organic revenue was due to approximately $192 million and $87 million declines in volume and price erosion,
respectively. The organic revenue decline was principally due to the effect of competition on Ephedrine Sulfate Injection, as
well as Lidocaine Ointment. Additionally, other key products, such as Progesterone and Clobetasol Ointment, experienced
more significant than expected declines in net revenue as a result of increased competition consistent with observed industry
trends in 2017. In addition, the Company experienced more than normal supply disruptions for certain products during the
year, resulting in lower net revenue. While the Company received 26 new-to-Akorn ANDA product approvals and launched 21
new products during 2017, it was unable to offset the overall net revenue decline through new product launches or new
business opportunities.
The Prescription Pharmaceuticals segment revenues of $772.5 million for the twelve month period ended December 31,
2017 represented a decrease of $281.1 million, or 26.7%, as compared to revenues of $1,053.6 million for twelve month period
ended December 31, 2016.
The Consumer Health segment revenues of $68.5 million for the twelve month period ended December 31, 2017
represented an increase of $5.3 million, or 8.3%, as compared to revenues of $63.3 million for twelve month period ended
December 31, 2016.
The net revenue for the twelve month period ended December 31, 2017 of $841.0 million was net of adjustments totaling
$1,510.0 million for chargebacks, rebates, administrative fees and others, product returns, discounts and allowances and
advertising, promotions and other. Chargeback expenses for 2017 were $953.3 million, or 40.5% of gross sales, compared to
$1,218.6 million, or 42.1% of gross sales, in 2016. The $265.2 million decrease in chargeback expense was due to lower gross
sales in the current year as compared to prior year. Rebates, administrative fees and other expenses for the twelve month period
ended December 31, 2017 were $476.6 million, or 20.3% of gross sales, compared to $463.7 million, or 16.0% for twelve
month period ended December 31, 2016. The $12.9 million increase in rebates, administrative fees and other expenses was due
to the impact of product and customer mix. Our product returns provision for the twelve month period ended December 31,
2017 was $26.9 million, or 1.1% of gross sales, compared to $28.3 million, or 1.0% of gross sales, for twelve month period
ended December 31, 2016. Discounts and allowances were $45.3 million or 1.9% of gross sales for the twelve month period
ended December 31, 2017, compared to $55.5 million, or 1.9% of gross sales for the twelve month period ended December 31,
2016. Advertisement and promotion expenses were $7.9 million or 0.3% of gross sales for the twelve month period ended
December 31, 2017, compared to $8.4 million, or 0.3% of gross sales for the twelve month period ended December 31, 2016.
Gross profit for the twelve month period ended December 31, 2017 was $432.2 million, or 51.4% of revenue, compared to
$673.5 million, or 60.3% of revenue, for the twelve month period ended December 31, 2016. The decline in the gross profit
percentage was principally due to unfavorable product mix shifts primarily driven by the effect of competition on one of our
major products.
Total operating expenses were $455.1 million in the twelve month period ended December 31, 2017, an increase of $104.4
million, or 29.8%, from the comparative prior year period amount of $350.7 million. The $104.4 million increase was
primarily driven by respective increases of $83.7 million and $18.7 million in Impairment of intangible assets and Selling,
general and administrative (“SG&A”) expenses. The following is a discussion of the main drivers of the increase:
Impairments of intangible assets were $128.1 million in 2017, an increase of $83.8 million or 188.8% over the prior
year amount of $44.4 million. The $83.8 million increase was primarily as a result of anticipated market conditions upon
launch resulting in lower expected market share and lower average selling price, which reduced the viability for future
35
development. As a result, the cost to get these products to market outweighed the benefits resulting in increased IPR&D
impairments of $20.7 million and Product licensing rights impairments of $63.0 million.
SG&A expenses were $216.3 million in 2017, an increase of $18.7 million, or 9.5%, over the prior year expenses of
$197.6 million. The primary drivers of the $18.7 million increase were $15.4 million in marketing and advertising
expenses in 2017, of which $13.1 million was related to the TheraTears® direct-to-consumer ("DTC") advertising
campaign, $7.9 million expenses related to the proposed Merger between Fresenius Kabi and Akorn, Inc., $7.5 million of
net increase in Other SG&A expenses and $4.2 million increase in legal and audit expenses, which are being partially
offset by a $16.9 million decrease in restatement related expenses.
During 2017, the Company incurred non-operating expenses totaling $36.3 million compared to $51.6 million during
2016. The $15.3 million decrease was primarily driven by respective decreases of $5.6 million, $4.7 million and $4.5 million
in amortization of deferred financing costs, interest expense, net and other non-operating income (expense), net. The main
drivers of the net decrease were comprised of the following:
Amortization of deferred financing costs totaled approximately $5.2 million in 2017, a decrease of $5.6 million as
compared to the $10.8 million recognized in 2016. The decrease in deferred financing costs in the year was principally
due to 2016 expense including a deferred financing fee write-down associated with $200.0 million principal repayment of
the Term loans in February 2016.
Interest expense, net was $38.1 million in 2017, compared to $42.7 million in 2016. The decrease in 2017 was
primarily due to increased capitalized interest and the effects of the conversion of the Convertible Notes on June 1, 2016.
Income tax benefit was $34.6 million based on an effective tax provision rate of approximately 58.5% in 2017, compared
to an income tax expense of $87.1 million in 2016 based on an effective tax provision rate of approximately 32.1%. The
change in the tax rate experienced by the company was driven principally by $26.9 million tax benefit resulting from the re-
measurement of U.S. deferred tax assets and liabilities at the lower enacted corporate tax rate included in the Tax Cuts and Jobs
Act (the “ Tax Act”). In the absence of the changes in the Tax Act, our tax benefit for 2017 would have been $7.7 million, with
an effective tax provision rate of approximately 13.1%. The Company’s foreign subsidiaries do not have accumulated earnings
that they can distribute; therefore, the provisions of the Act that related to the repatriation of foreign earnings are not applicable
to the Company at December 31, 2017. The benefit resulting from the re-measurement of U.S. deferred tax assets and
liabilities was partially offset by an accrual of $15.7 million of penalties and interest that could result from adverse results of
income tax examinations. Absent the effects of both the reduction in our deferred tax liability and the accrual of the penalties
and interest, the income tax rate would have been approximately 39.5%.
The Company reported a net loss of $24.6 million for the twelve month period ended December 31, 2017, or 2.9% of net
revenue, compared to net income of $184.2 million, for the twelve month period ended December 31, 2016 or 16.5% of net
revenue.
FINANCIAL CONDITION AND LIQUIDITY
Cash and Cash Equivalents
As of December 31, 2018, we had cash and cash equivalents of $224.9 million, which is $143.2 million lower than our
cash and cash equivalents balance of $368.1 million as of December 31, 2017. This decrease in 2018 cash and cash equivalents
was driven by investing cash outflows of $69.1 million, operating cash outflows of $68.9 million and financing cash outflows
of $5.0 million. Our net working capital was $413.0 million at December 31, 2018, compared to $559.1 million at December
31, 2017, a decrease of $146.1 million.
Operating Cash Flows
36
OPERATING ACTIVITIES:
Net (loss) income
Adjustments to reconcile consolidated net (loss) income to net cash
provided by operating activities:
Year ended December 31,
2017
2016
2018
$
(401,909) $
(24,550) $
184,243
Depreciation and amortization
Impairment of intangible assets
Fixed asset impairment
Amortization of deferred financing fees
Non-cash stock compensation expense
Non-cash interest expense
Income from available-for-sale securities
Deferred income taxes, net
Gain on sale of available-for-sale security
Other
Changes in operating assets and liabilities:
Trade accounts receivable, net
Inventories, net
Prepaid expenses and other current assets
Other non-current assets
Trade accounts payable
Accrued legal fees and contingencies
FIN 48 Reserve
Accrued expenses and other liabilities
NET CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES
$
82,805
231,086
6,135
5,216
21,503
—
—
(37,396)
—
421
(11,627)
9,694
3,847
(3,120)
(5,002)
24,120
9,690
(4,357)
(68,894) $
85,173
128,127
—
5,216
21,018
—
(3,032)
(115,249)
199
(307)
141,979
(8,367)
(12,232)
(3,519)
(9,223)
21,492
38,999
(18,091)
247,633
$
87,963
44,369
—
10,760
15,412
777
—
(32,934)
45
(4,888)
(132,617)
10,208
(7,262)
(301)
6,139
711
(984)
(14,951)
166,690
During 2018, we used $68.9 million in cash flow from operations. This negative operating cash flow was primarily driven
by a net loss of $401.9 million and a $37.4 million decrease in deferred income taxes, partially offset by add-backs of
impairment of intangible assets of $231.1 million, add-backs of depreciation and amortization of $82.8 million, accrued legal
fees of $24.1 million, non-cash stock compensation expense of $21.5 million and $9.7 million related to FIN48 reserve, which
mainly represents uncertain tax position regarding the reserve for chargebacks & rebates, penalties and interest for the change
from accrual basis to cash basis.
During 2017, we generated $247.6 million in cash flow from operations. This positive operating cash flow was primarily
driven by a decrease of $142.0 million in trade accounts receivable, net, add-backs of impairment of intangible assets of $128.1
million and add-backs of depreciation and amortization of $85.2 million, partially offset by a net loss of $24.6 million and a
reduction in net deferred tax liabilities of $115.2 million.
During 2016, we generated $166.7 million in cash flow from operations. This positive operating cash flow was primarily
driven by net income of $184.2 million, add-backs of depreciation and amortization of $88.0 million, intangible asset
impairments of $44.4 million and amortization of deferred financing fees of $10.8 million, non-cash stock compensation
expense of $15.4 million and a $10.2 million decrease in inventories, net, partially offset by a $132.6 million increase in trade
accounts receivable, net, a $32.9 million decrease in deferred income taxes, net and $15.0 million related to a decrease in
accrued expenses and other liabilities.
Investing Cash Flows
37
INVESTING ACTIVITIES:
Proceeds from disposal of assets
Payments for other intangible assets
Purchases of property, plant and equipment
NET CASH USED IN INVESTING ACTIVITIES
Year ended December 31,
2017
2016
2018
$
$
$
30
(50)
(69,111)
(69,131) $
$
4,815
(200)
(95,170)
(90,555) $
5,966
(3,950)
(74,938)
(72,922)
During 2018, we used $69.1 million of cash in investing activities. Of this total, $69.1 million was used to acquire
property, plant and equipment. The decrease in net cash used in investing activities during 2018 compared to 2017, was
primarily driven by a decrease of approximately $17.5 million in capital spending related to our ongoing effort to comply with
the Federal Drug Supply Chain Security Act ("DSCSA").
During 2017, we used $90.6 million of cash in investing activities. Of this total, $95.2 million was used to acquire
property, plant and equipment. This use of cash was partially offset by $4.8 million of inflows from the sales of investments in
available-for-sale securities and disposal of fixed assets. The increase in net cash used in investing activities during 2017
compared to 2016, was primarily driven by an increase of approximately $18.0 million in capital spending related to our
ongoing effort to comply with the DSCSA.
During 2016, we used $72.9 million of cash in investing activities. Of this total, $74.9 million was used to acquire
property, plant and equipment, and $4.0 million was used for the payment of other intangible assets. These uses of cash were
partially offset by $6.0 million received in proceeds related to the disposition of assets during the year.
Financing Cash Flows
FINANCING ACTIVITIES:
Proceeds under stock option and stock purchase plans
Stock compensation plan withholdings from employee taxes
$
Payments of contingent acquisition liabilities
Debt financing costs
Common stock repurchases
Lease Payments
Debt repayment
NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES
$
Year ended December 31,
2017
2016
2018
$
546
(777)
(4,793)
—
—
(14)
—
(5,038) $
$
9,320
(1,726)
—
—
—
—
—
7,594
$
11,291
(1,496)
—
(5,128)
(45,000)
—
(200,000)
(240,333)
During 2018, financing activities used $5.0 million of cash. $4.8 million was used for payments of contingent acquisition
liabilities. During 2017, financing activities generated $7.6 million of cash from the employee stock option exercise proceeds.
During 2016, financing activities used $240.3 million of cash of which $200.0 million was specifically used to repay debt,
$45.0 million was used to purchase Akorn shares of common stock under our Stock Repurchase Program and $5.1 million was
spent on debt financing costs. These uses were partially offset by $9.8 million of proceeds under stock option and stock
purchase plans.
Liquidity and Capital Needs
We require certain capital resources in order to operate our business. The company has incurred and expects in 2019 to
continue to incur significant costs related to consultants assisting with cGMP improvements. Our future capital expenditures
may include substantial projects undertaken to upgrade, expand and improve our manufacturing facilities in the U.S. and
Switzerland. Our cash obligations include the principal and interest payments due on our Term Loans and any amount we may
borrow under the JPMorgan Facility (as both described throughout this report). Also, costs related to ongoing legal matters
may be significant (see Item 8, Note 19 - “Legal Proceedings” for further details). We believe that our cash reserves and
operating cash flows will be sufficient to meet our cash needs for the foreseeable future.
38
Refer to Item 8, Note 7 - “Financing Arrangements” for further detail of debt obligations as of and for the year ended
December 31, 2018.
CONTRACTUAL OBLIGATIONS
In order to support the continued increase in the number of relevant and marketable pharmaceutical products that we
market and sell, we will from time to time partner with outside firms for the development of selected products. These
development agreements frequently call for the payment of “milestone payments” as various steps in the process are completed
in relation to product development and submission to the FDA for approval. The dollar amount of these payments is generally
fixed contractually, assuming that the required milestones are achieved; however, the timing of such payments is contingent
based on a variety of factors and is therefore subject to change. The amounts disclosed in the below table under the caption
“Strategic partners - contingent payments” represents our best estimate of the amount and expected timing of the “milestone
payments” and other fees we expect to pay to outside development partners based on our current contractual agreements with
them. These milestone payments are accrued as liabilities on our balance sheets once the milestones have been achieved.
As more fully described under Part I, Item 2 - Properties, we currently lease the facilities that we occupy in
Gurnee, Illinois, Lake Forest, Illinois and Vernon Hills, Illinois, as well as in Ann Arbor, Michigan, Somerset, New Jersey,
Cranbury, New Jersey and India. We also lease various pieces of office equipment at these facilities, as well as at our
manufacturing facilities in Decatur, Illinois and Amityville, New York. Our remaining obligations under these leases are
summarized in the table below.
As of December 31, 2018, our principal outstanding debt obligation was related to our Term Loans. We had no
outstanding loan balance under our JPM Credit Agreement at December 31, 2018, or any time since we entered into this
agreement on April 17, 2014.
The following table details our future contractual obligations as of December 31, 2018 (in thousands):
Description
Total
2019
2020
2021
2022
2023
2024 and
beyond
Term Loans due 2021 (1)
$ 831,938
$
— $
— $ 831,938
$
— $
— $
Interest Payable – 8.06%
existing and incremental
term loan (2)
Estimated future pension
benefit payments (3)
Inventory purchase
commitments
Leases
Strategic partners – contingent
payments (4)
Total:
153,723
67,079
67,079
19,565
—
—
14,167
1,477
1,451
1,316
1,328
1,278
7,317
8,647
26,867
3,452
4,564
2,957
4,647
280
4,283
280
3,724
280
2,673
1,398
6,976
12,998
4,658
3,890
2,650
1,800
—
—
$1,048,340
$
81,230
$
80,024
$ 860,032
$
7,132
$
4,231
$
15,691
—
—
(1) As discussed further in Item 8, Note 7 - “Financing Arrangements,” on February 16, 2016 the Company voluntarily
prepaid $200.0 million of cumulative Term Loans principal which eliminated any further interim principal repayment
obligations.
(2) Interest on borrowings under these facilities are variable as calculated at our election, on an ABR rate or an adjusted
LIBOR rate, plus a margin of 3.25% to 4.50% for ABR loans, and 4.25% to 5.50% for LIBOR loans with a current
comprehensive rate of 8.06% as of December 31, 2018. The calculated interest payable amounts above assume the
current comprehensive rate of 8.06% remains unchanged across the remaining term of the associated loan.
(3) The $7.3 million in the 2024 and beyond column represents estimated future pension benefit payments from 2024
through 2028 only.
(4) Note the strategic partner payments include our best estimates regarding if and when various contingencies and
market opportunities will occur in 2019 and beyond.
39
OFF BALANCE SHEET ARRANGEMENTS
We have no significant off-balance sheet arrangements that have or are reasonably likely to have a current or future effect
on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital
expenditures or capital resources that are material to our shareholders.
CRITICAL ACCOUNTING POLICIES
Our significant accounting policies and critical accounting estimates are described in Item 8, Note 2 - “Summary of
significant accounting policies” to the Consolidated Financial Statements and are herein incorporated by reference.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
Recently issued accounting pronouncements which may have an effect on the Company are described in Item 8, Note 15 -
“Recently issued and adopted accounting pronouncements” to the Consolidated Financial Statements and are herein
incorporated by reference.
RECENTLY ADOPTED ACCOUNTING PRONOUNCEMENTS
Recently adopted accounting pronouncements which have had an effect on the Company are described in Item 8, Note 15 -
“Recently issued and adopted accounting pronouncements” to the Consolidated Financial Statements and are herein
incorporated by reference.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
As of December 31, 2018, our principal debt obligations included the Term Loans with outstanding debt of $831.9 million.
As of the date of the filing of this Form 10-K until the maturity of the Term Loans, our spread will be based upon the Ratings
Level applicable on such date as documented below.
Ratings Level
Index Ratings (Moody's/S&P)
Eurodollar Spread
ABR Spread
Level I
Level II
Level III
B1/B+ or higher
B2/B
B3/B- or lower
4.25%
4.75%
5.50%
3.25%
3.75%
4.50%
As of December 31, 2018, we were party to the $150.0 million JPM Credit Agreement with JPMorgan providing for a
revolving credit facility. Interest on borrowings under the JPM Credit Agreement were to be calculated at a premium above
either the current prime rate or current LIBOR rates plus a margin determined in accordance with the Company’s consolidated
fixed charge coverage ratio (earnings before interest, taxes, depreciation and amortization ("EBITDA") to fixed charges),
exposing us to interest rate risk on such borrowings. As of December 31, 2018, we had no outstanding loans under the JPM
Credit Agreement and no outstanding letter of credit under the JPM Credit Agreement.
Our Swiss subsidiary, Akorn AG, operates a manufacturing facility in Hettlingen, Switzerland. Accordingly, we are subject
to foreign exchange risk based on changes in the exchange rate between U.S. dollars and Swiss Francs.
Our financial instruments include cash and cash equivalents, accounts receivable, available for sale securities and accounts
payable. The fair values of cash and cash equivalents, accounts receivable and accounts payable approximate book value
because of the short maturity of these instruments. Available for sale securities are stated at fair value adjusted for certain lock-
up provisions that prevent us from selling until a set period of time has elapsed.
At December 31, 2018, the majority of our cash and cash equivalents balance of $224.9 million was invested in overnight
instruments, the interest rates of which may change daily.
Item 8. Financial Statements and Supplementary Data
The following financial statements are included in Part II, Item 8 of this Form 10-K.
40
INDEX:
Reports of Independent Registered Public Accounting Firm
Consolidated Balance Sheets as of December 31, 2018 and 2017
Consolidated Statements of Comprehensive Income (Loss) for the years ended December 31, 2018, 2017 and 2016
Consolidated Statements of Shareholders’ Equity for the years ended December 31, 2018, 2017 and 2016
Consolidated Statements of Cash Flows for the years ended December 31, 2018, 2017 and 2016
Notes to Consolidated Financial Statements
41
Report of Independent Registered Public Accounting Firm
Shareholders and Board of Directors
Akorn, Inc.
Lake Forest, Illinois
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of Akorn, Inc. (the “Company”) and subsidiaries as of
December 31, 2018 and 2017, the related consolidated statements of comprehensive (loss) income, shareholders’ equity, and
cash flows for each of the three years in the period ended December 31, 2018, and the related notes (collectively referred to as
the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material
respects, the financial position of the Company and subsidiaries at December 31, 2018 and 2017, and the results of their
operations and their cash flows for each of the three years in the period ended December 31, 2018, in conformity with
accounting principles generally accepted in the United States of America.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United
States) (“PCAOB”), the Company's internal control over financial reporting as of December 31, 2018, based on criteria
established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the
Treadway Commission (“COSO”) and our report dated March 1, 2019 expressed an adverse opinion thereon.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to
express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm
registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal
securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material
misstatement, whether due to error or fraud.
Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial
statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included
examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits
also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating
the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our
opinion.
/s/ BDO USA, LLP
We have served as the Company's auditor since 2016.
Chicago, Illinois
March 1, 2019
42
Report of Independent Registered Public Accounting Firm
Shareholders and Board of Directors
Akorn, Inc.
Lake Forest, Illinois
Opinion on Internal Control over Financial Reporting
We have audited Akorn, Inc.’s (the “Company’s”) internal control over financial reporting as of December 31, 2018, based
on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations
of the Treadway Commission (the “COSO criteria”). In our opinion, the Company did not maintain, in all material respects,
effective internal control over financial reporting as of December 31, 2018, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United
States) (“PCAOB”), the consolidated balance sheets of the Company and subsidiaries as of December 31, 2018 and 2017, the
related consolidated statements of comprehensive (loss) income, shareholders’ equity, and cash flows for each of the three years
in the period ended December 31, 2018, and the related notes and our report dated March 1, 2019, expressed an unqualified
opinion thereon.
Basis for Opinion
A company’s management is responsible for maintaining effective internal control over financial reporting and for its
assessment of the effectiveness of internal control over financial reporting, included in the accompanying Item 9A,
Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the
Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the
PCAOB and are required to be independent with respect to the Company in accordance with U.S. federal securities laws and
the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit of internal control over financial reporting in accordance with the standards of the PCAOB. Those
standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control
over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal
control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and
operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures
as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that
there is a reasonable possibility that a material misstatement of the company’s annual or interim financial statements will not be
prevented or detected on a timely basis. A material weakness regarding management’s failure to design and maintain internal
controls over stock award modification accounting has been identified and described in management’s assessment. This
material weakness was considered in determining the nature, timing, and extent of audit tests applied in our audit of the 2018
financial statements, and this report does not affect our report dated March 1, 2019 on those financial statements.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally
accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures
that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and
dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and
expenditures of the company are being made only in accordance with authorizations of management and directors of the
company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or
disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also,
projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate
because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
43
/s/ BDO USA, LLP
Chicago, Illinois
March 1, 2019
44
AKORN, INC.
CONSOLIDATED BALANCE SHEETS
(In Thousands,
Except Share Data)
ASSETS
CURRENT ASSETS
Cash and cash equivalents
Trade accounts receivable, net
Inventories, net
Prepaid expenses and other current assets
TOTAL CURRENT ASSETS
PROPERTY, PLANT AND EQUIPMENT, NET
OTHER LONG-TERM ASSETS
Goodwill
Intangible assets, net
Deferred tax assets
Other non-current assets
TOTAL OTHER LONG-TERM ASSETS
TOTAL ASSETS
LIABILITIES AND SHAREHOLDERS’ EQUITY
CURRENT LIABILITIES
Trade accounts payable
Purchase consideration payable
Income taxes payable
Accrued royalties
Accrued compensation
Accrued administrative fees
Accrued legal fees and contingencies
Accrued expenses and other liabilities
TOTAL CURRENT LIABILITIES
LONG-TERM LIABILITIES
Long-term debt (net of non-current deferred financing costs)
Deferred tax liability
FIN 48 reserve
Other long-term liabilities
TOTAL LONG-TERM LIABILITIES
TOTAL LIABILITIES
SHAREHOLDERS’ EQUITY
Preferred stock, $1 par value —5,000,000 shares authorized; no shares issued or outstanding at
December 31, 2018 and 2017
Common stock, no par value — 150,000,000 shares authorized; 125,492,373 and 125,090,522 shares
issued and outstanding at December 31, 2018 and 2017
(Accumulated deficit) Retained earnings
Accumulated other comprehensive loss
TOTAL SHAREHOLDERS’ EQUITY
December 31,
2018
2017
$
224,868
$
153,126
173,645
32,180
583,819
334,853
283,879
284,976
—
7,730
576,585
368,119
141,383
183,568
37,081
730,151
313,418
285,310
569,484
6,521
4,627
865,942
$
$
1,495,257
$
1,909,511
39,570
$
—
—
6,786
19,745
36,767
52,413
15,542
51,976
3,901
15,775
5,902
12,286
38,598
28,293
14,358
170,823
171,089
820,411
566
49,990
9,601
880,568
1,051,391
815,195
43,404
40,300
8,278
907,177
1,078,266
—
—
574,553
(107,168)
(23,519)
443,866
550,472
294,741
(13,968)
831,245
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY
$
1,495,257
$
1,909,511
See notes to the consolidated financial statements.
45
AKORN, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME
(In Thousands, Except Per Share Data)
REVENUES
Cost of sales (exclusive of amortization of intangibles, included within operating
expenses below)
GROSS PROFIT
Selling, general and administrative expenses
Acquisition-related costs
Research and development expenses
Amortization of intangibles
Impairment of intangible assets
Litigation rulings and settlements
TOTAL OPERATING EXPENSES
OPERATING (LOSS) INCOME
Amortization of deferred financing costs
Interest expense, net
Other non-operating income (expense), net
(LOSS) INCOME BEFORE INCOME TAXES
Income tax (benefit) provision
NET (LOSS) INCOME
NET (LOSS) INCOME PER COMMON SHARE:
NET (LOSS) INCOME, BASIC
NET (LOSS) INCOME, DILUTED
SHARES USED IN COMPUTING NET (LOSS) INCOME PER COMMON
SHARE:
BASIC
DILUTED
COMPREHENSIVE (LOSS) INCOME:
Net (loss) income
Year ended December 31,
2018
2017
2016
$
694,018
$
841,045
$
1,116,843
448,002
246,016
279,628
121
47,321
53,472
231,086
22,814
634,442
(388,426)
(5,216)
(45,900)
1,360
(438,182)
(36,273)
408,839
432,206
216,324
159
44,988
61,443
128,127
4,049
455,090
(22,884)
(5,216)
(38,070)
6,972
(59,198)
(34,648)
(401,909) $
(24,550) $
443,331
673,512
197,631
364
38,753
65,713
44,369
3,824
350,654
322,858
(10,791)
(42,734)
1,967
271,300
87,057
184,243
(3.21) $
(3.21) $
(0.20) $
(0.20) $
1.50
1.47
$
$
$
125,383
125,383
124,790
124,790
122,869
125,801
$
(401,909) $
(24,550) $
184,243
Unrealized holding (loss) gain on available-for-sale securities, net of tax of $6,
($157) and ($436) for the years ended December 31, 2018, 2017 and 2016,
respectively.
Foreign currency translation (loss) gain for the years ended December 31,
2018, 2017 and 2016, respectively.
Pension liability adjustment, net of tax of $389, ($403) and $694 for the year
ended December 31, 2018, 2017 and 2016, respectively.
(21)
(8,001)
(1,529)
267
6,150
1,582
740
(1,941)
(3,624)
COMPREHENSIVE (LOSS) INCOME
$
(411,460) $
(16,551) $
179,418
See notes to the consolidated financial statements.
46
AKORN, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2016, 2017 AND 2018
(In Thousands)
Common Stock
Retained
Earnings
(Accumulated
Deficit)
Other
Compre-
hensive Loss
Shares
Amount
Amount
Amount
BALANCES AT DECEMBER 31, 2015
119,427
$
458,659
$
180,048
$
(17,142) $
Net income
Common stock repurchases
Exercise of stock options
Restricted stock units
Stock-based compensation expense
Foreign currency translation loss
Excess tax benefit – stock compensation
Unrealized holding loss on available-for-sale securities
Convertible note conversions
Akorn AG pension liability adjustment
Other
—
(1,808)
1,792
184
—
—
(138)
—
4,933
—
—
—
—
13,953
4,091
11,321
—
(4,158)
—
43,215
—
(5,221)
184,243
(45,000)
—
—
—
—
—
—
—
—
—
—
—
—
—
—
(1,941)
—
740
—
(3,624)
—
Total
Amount
621,565
184,243
(45,000)
13,953
4,091
11,321
(1,941)
(4,158)
740
43,215
(3,624)
(5,221)
BALANCES AT DECEMBER 31, 2016
124,390
$
521,860
$
319,291
$
(21,967) $
819,184
Net loss
Exercise of stock options
Restricted stock units
Stock-based compensation expense
Foreign currency translation gain
Stock compensation plan withholdings
for employee taxes
Unrealized holding loss on available-for-sale securities
Akorn AG pension liability adjustment
BALANCES AT DECEMBER 31, 2017
Net loss
Exercise of stock options
Employee stock purchase plan issuances
Compensation and share issuances related to restricted
stock awards
Stock-based compensation expense
Foreign currency translation loss
Stock compensation plan withholdings
for employee taxes
Unrealized holding loss on available-for-sale securities
Akorn AG pension liability adjustment
BALANCES AT DECEMBER 31, 2018
—
625
138
—
—
(62)
—
—
—
9,673
7,736
13,282
—
(2,079)
—
—
(24,550)
—
—
—
—
—
—
—
—
—
—
—
6,150
—
267
1,582
(24,550)
9,673
7,736
13,282
6,150
(2,079)
267
1,582
125,091
$
550,472
$
294,741
$
(13,968) $
831,245
—
22
146
288
—
—
(55)
—
—
—
546
2,809
11,673
9,830
—
(777)
—
—
(401,909)
—
—
—
—
—
—
—
—
—
—
—
—
—
(8,001)
—
(21)
(1,529)
(401,909)
546
2,809
11,673
9,830
(8,001)
(777)
(21)
(1,529)
125,492
$
574,553
$
(107,168) $
(23,519) $
443,866
See notes to the consolidated financial statements.
47
AKORN, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
OPERATING ACTIVITIES:
Net (loss) income
Depreciation and amortization
Impairment of intangible assets
Fixed asset impairment
Amortization of deferred financing fees
Non-cash stock compensation expense
Non-cash interest expense
Income from available-for-sale securities
Deferred income taxes, net
Gain on sale of available-for-sale security
Other
Changes in operating assets and liabilities:
Trade accounts receivable, net
Inventories, net
Prepaid expenses and other current assets
Other non-current assets
Trade accounts payable
Accrued legal fees and contingencies
FIN 48 Reserve
Accrued expenses and other liabilities
NET CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES
INVESTING ACTIVITIES:
Proceeds from disposal of assets
Payments for other intangible assets
Purchases of property, plant and equipment
NET CASH USED IN INVESTING ACTIVITIES
FINANCING ACTIVITIES:
Proceeds under stock option and stock purchase plans
Stock compensation plan withholdings from employee taxes
Payments of contingent acquisition liabilities
Debt financing costs
Common stock repurchases
Lease Payments
Debt repayment
NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES
Effect of changes in exchange rates on cash and cash equivalents
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS
CASH AND CASH EQUIVALENTS, AND RESTRICTED CASH AT
BEGINNING OF YEAR
Year ended December 31,
2017
2016
2018
$
(401,909) $
(24,550) $
184,243
82,805
231,086
6,135
5,216
21,503
—
—
(37,396)
—
421
(11,627)
9,694
3,847
(3,120)
(5,002)
24,120
9,690
(4,357)
(68,894)
30
(50)
(69,111)
(69,131)
546
(777)
(4,793)
—
—
(14)
—
(5,038)
(1,032)
(144,095)
85,173
128,127
—
5,216
21,018
—
(3,032)
(115,249)
199
(307)
141,979
(8,367)
(12,232)
(3,519)
(9,223)
21,492
38,999
(18,091)
247,633
4,815
(200)
(95,170)
(90,555)
9,320
(1,726)
—
—
—
—
—
7,594
1,183
165,855
87,963
44,369
—
10,760
15,412
777
—
(32,934)
45
(4,888)
(132,617)
10,208
(7,262)
(301)
6,139
711
(984)
(14,951)
166,690
5,966
(3,950)
(74,938)
(72,922)
11,291
(1,496)
—
(5,128)
(45,000)
—
(200,000)
(240,333)
2
(146,563)
369,889
204,034
350,597
CASH AND CASH EQUIVALENTS, AND RESTRICTED CASH AT END OF
YEAR
$
225,794
$
369,889
$
204,034
See notes to the consolidated financial statements.
48
AKORN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 — Business and Basis of Presentation
Business: Akorn, Inc., together with its wholly-owned subsidiaries (collectively “Akorn,” the “Company,” “we,” “our” or
“us”) is a specialty generic pharmaceutical company that develops, manufactures and markets generic and branded prescription
pharmaceuticals and branded and private-label over-the-counter (“OTC”) consumer health products and animal health
pharmaceuticals. We are an industry leader in the development, manufacturing and marketing of specialized generic
pharmaceutical products in alternative dosage forms. We specialize in difficult-to-manufacture sterile and non-sterile dosage
forms including, but not limited to, ophthalmics, injectables, oral liquids, otics, topicals, inhalants and nasal sprays. In previous
years, the Company completed numerous mergers, acquisitions, product acquisitions, which resulted in significant growth.
Akorn is a Louisiana corporation founded in 1971 in Abita Springs, Louisiana. In 1997, we relocated our corporate
headquarters to the Chicago, Illinois area and currently maintain our principal corporate offices in Lake Forest, Illinois. We
operate pharmaceutical manufacturing facilities in Decatur, Illinois; Somerset, New Jersey; Amityville, New York; Hettlingen,
Switzerland; and Paonta Sahib, Himachal Pradesh, India. We operate a central distribution warehouse in Gurnee, Illinois and
additional distribution facilities in Amityville, New York and Decatur, Illinois. Our research and development (“R&D”) centers
are located in Vernon Hills, Illinois and Cranbury, New Jersey. We maintain other corporate offices in Ann Arbor, Michigan
and Gurgaon, Haryana, India.
Fresenius Kabi AG: On April 24, 2017, the Company entered into an Agreement and Plan of Merger (the “Merger
Agreement”) with Fresenius Kabi AG, a German stock corporation (“Parent”), Quercus Acquisition, Inc., a Louisiana
corporation and wholly-owned subsidiary of Parent (“Merger Sub”) and, solely for purposes of Article VIII thereof, Fresenius
SE & Co. KGaA, a German partnership limited by shares.
On April 22, 2018, Fresenius Kabi AG delivered to Akorn a letter purporting to terminate the Merger Agreement. On April
23, 2018, Akorn filed a verified complaint entitled Akorn, Inc. v. Fresenius Kabi AG, Quercus Acquisition, Inc. and Fresenius
SE & Co. KGaA, in the Court of Chancery of the State of Delaware for breach of contract and declaratory judgment. The
complaint sought, among other things, a declaration that Fresenius Kabi AG's termination was invalid, an order enjoining the
defendants from terminating the Merger Agreement, and an order compelling the defendants to specifically perform their
obligations under the Merger Agreement to use reasonable best efforts to consummate and make effective the Merger. On April
30, 2018, the defendants filed a verified counterclaim alleging that, due primarily to purported data integrity deficiencies, the
Company had breached representations, warranties and covenants in the Merger Agreement, and that it had experienced a
material adverse effect. The verified counterclaim sought, among other things, a declaration that defendants’ purported
termination of the Merger Agreement was valid and that defendants were not obligated to consummate the transaction, and
damages.
On October 1, 2018, the Court of Chancery issued an opinion (the “Opinion”) denying Akorn’s claims for relief and
concluding that Fresenius Kabi AG had validly terminated the Merger Agreement. The Court of Chancery concluded that
Akorn had experienced a material adverse effect due to its financial performance following the signing of the Merger
Agreement; that Akorn had breached representations and warranties in the Merger Agreement and that those breaches would
reasonably be expected to give rise to a material adverse effect; that Akorn had materially breached covenants in the Merger
Agreement; and that Fresenius was materially in compliance with its own contractual obligations. On October 17, 2018, the
Court of Chancery entered partial final judgment against Akorn on its claims and in favor of the Fresenius parties on their
claims for declaratory judgment. The Court of Chancery entered an order holding proceedings on the Fresenius parties’
damages claims in abeyance pending the resolution of any appeal from the partial final judgment.
On December 7, 2018, the Delaware Supreme Court affirmed the Court of Chancery’s ruling denying Akorn’s claims for
declaratory and injunctive relief and granting Defendants’ counterclaim for a declaration that the termination was valid. On
December 27, 2018, the Delaware Supreme Court issued a mandate returning the case to the Court of Chancery for
consideration of all remaining issues, including the Fresenius parties’ damages claims.
On February 20, 2019, the Fresenius parties filed a motion for leave to amend and supplement their counterclaim. The
Fresenius parties’ proposed amended and supplemented counterclaim alleges that Akorn fraudulently induced Fresenius to enter
into the Merger Agreement and thereafter willfully breached contractual representations and warranties and covenants therein.
It seeks damages of approximately $102 million. On February 25, 2019, Akorn filed an opposition to the Fresenius parties’
motion for leave to file an amended and supplemented counterclaim to the extent the Fresenius parties sought leave to assert a
49
cause of action for fraud. On February 27, 2019, the Fresenius parties filed a reply in further support of their motion to file an
amended and supplemented counterclaim. On February 28, 2019, the Court of Chancery denied the Fresenius parties’ motion
for leave to file an amended and supplemented counterclaim. See Note 19 – Legal Proceedings.
The Company has considered the accounting and disclosure of events occurring after the balance sheet date of December
31, 2018 through the filing date of this Form 10-K.
Certain prior-period amounts have been reclassified to conform to current-period presentation including cost of sales,
selling, general and administrative expenses, research and development expenses, impairment of intangible assets, litigation
rulings and settlements and other non-operating (expense) income, net on the consolidated statements of comprehensive (loss)
income, as well as Fin 48 reserve and accrued legal fees and contingencies on the consolidated balance sheet.
Note 2 — Summary of Significant Accounting Policies
Consolidation: The accompanying consolidated financial statements include the accounts of Akorn, Inc. and its wholly-
owned domestic and foreign subsidiaries. All inter-company transactions and balances have been eliminated in consolidation,
and the financial statements of Akorn India Private Limited (“AIPL”) and Akorn AG have been translated from Indian Rupees
to U.S. dollars and Swiss Francs to U.S. dollars, respectively, based on the currency translation rates in effect during the period
or as of the date of consolidation, as applicable. The Company has no involvement with variable interest entities.
Use of Estimates: The preparation of financial statements in conformity with accounting principles generally accepted in
the United States of America (“GAAP”) requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the
reported amounts of revenues and expenses during the reporting period. Actual results could differ materially from those
estimates.
Significant estimates and assumptions for the Company relate to the allowances for chargebacks, rebates, product returns,
coupons, promotions and doubtful accounts, as well as the reserve for slow-moving and obsolete inventories, the carrying value
and lives of intangible assets, the useful lives of fixed assets, the carrying value of deferred income tax assets and liabilities, the
assumptions underlying share-based compensation, and accrued but unreported employee benefit costs.
Going Concern: In connection with the preparation of the financial statements for the year ended December 31, 2018, the
Company conducted an evaluation as to whether there were conditions and events, considered in the aggregate, which raised
substantial doubt as to the entity's ability to continue as a going concern within one year after the date of the issuance, or the
date of availability, of the financial statements to be issued, noting that there did not appear to be evidence of substantial doubt
of the entity's ability to continue as a going concern.
Revenue Recognition: Revenue is recognized at a point in time upon the transfer of control of the Company’s products,
which occurs upon delivery for substantially all of the Company’s sales. The promises within the contract that are distinct are
primarily the Company’s supply of products, which represents a single performance obligation. The consideration the Company
receives in exchange for its goods or services is only recognized when it is probable that a significant reversal will not occur.
The consideration to which the Company expects to be entitled includes a stated list price, less various forms of variable
consideration. The Company makes significant estimates for related variable consideration at the point of sale, including
chargebacks, rebates, product returns, other discounts and allowances. All sales taxes are excluded from the transaction price.
The Company expenses contract fulfillment costs when incurred since the amortization period would have been less than one
year. Payment terms are primarily less than 90 days. See Note 15 – Recently Issued and Adopted Accounting Pronouncements
for the discussion of the adoption of Accounting Standard Codification ("ASC") Topic 606 Revenue from Contracts with
Customers.
Provision for estimated chargebacks, rebates, discounts, managed care rebates, product returns and doubtful accounts is
made at the time of sale and is analyzed and adjusted, if necessary, at each balance sheet date.
Freight: The Company records shipping and handling expense related to product sales as cost of sales.
Cash and Cash Equivalents: The Company considers all unrestricted, highly liquid investments with maturity of three
months or less when acquired, to be cash and cash equivalents. At December 31, 2018 and 2017, approximately $0.9 million
and $1.8 million, respectively, of cash held by AIPL was restricted, and was reported within prepaid expenses and other current
assets.
50
The following table sets forth the components of the Company’s cash, cash equivalents, and restricted cash as reported in
the consolidated statement of cash flows for the years ended December 31, 2018 and 2017 (in thousands):
Cash, Cash Equivalents, and Restricted Cash
Cash and cash equivalents
Restricted cash
Total cash, cash equivalents, and restricted cash
Year Ended
December 31,
2018
2017
$
$
224,868
926
225,794
$
$
368,119
1,770
369,889
Accounts Receivable: Trade accounts receivable are stated at their net realizable value. The nature of the Company’s
business involves, in the ordinary course, significant judgments and estimates relating to chargebacks, coupon redemption,
product returns, rebates, discounts given to customers and allowances for doubtful accounts. Certain rebates, chargebacks and
other credits are recorded as deductions to the Company’s trade accounts receivable where applicable, based on product and
customer specific terms.
Unless otherwise noted, the provisions and allowances for the following customer deductions are reflected in the
accompanying consolidated financial statements as reductions of revenues and trade accounts receivable, respectively.
Chargebacks: The Company enters into contractual agreements with certain third parties such as retailers, hospitals,
group-purchasing organizations (“GPOs”) and managed care organizations to sell certain products at predetermined prices.
Similarly, we maintain an allowance for rebates and discounts related to billbacks, wholesaler fee for service contracts,
GPO administrative fees, government programs, prompt payment and other adjustments with certain customers. Most of
the parties have elected to have these contracts administered through wholesalers that buy the product from the Company
and subsequently sell it to these third parties. As noted elsewhere, these wholesalers represent a significant percentage of
the Company’s gross sales. When a wholesaler sells products to one of these third parties that are subject to a contractual
price agreement, the difference between the price paid to the Company by the wholesaler and the price under the specific
contract is charged back to the Company by the wholesaler. This process typically takes four to six weeks, but for some
products may extend out to twelve weeks. The Company tracks sales and submitted chargebacks by product number and
contract for each wholesaler. Utilizing this information, the Company estimates a chargeback percentage for each product
and records an allowance as a reduction to gross sales when the Company records its sale of the products. The Company
reduces the chargeback allowance when a chargeback request from a wholesaler is processed. Actual chargebacks processed
by the Company can vary materially from period to period based upon actual sales volume through the wholesalers. However,
the Company’s provision for chargebacks is fully reserved for at the time revenues are recognized.
Management obtains product inventory reports from certain wholesalers to aid in analyzing the reasonableness of the
chargeback allowance and to monitor whether wholesaler inventory levels do not significantly exceed customer demand. The
Company assesses the reasonableness of its chargeback allowance by applying a product chargeback percentage that is based
on a combination of historical activity and future price and mix expectations to the quantities of inventory on hand at the
wholesalers according to wholesaler inventory reports. In addition, the Company estimates the percent of gross sales generated
through direct and indirect sales channels and the percent of contract vs. non-contract revenue in the period, as these each affect
the estimated reserve calculation. In accordance with its accounting policy, the Company also estimates the percent of
wholesaler inventory that will ultimately be sold to third parties that are subject to contractual price agreements based on a
trend of such sales through wholesalers. The Company uses this percentage estimate until historical trends indicate that a
revision should be made. On an ongoing basis, the Company evaluates its actual chargeback rate experience, and new trends
are factored into its estimates each quarter as market conditions change.
For the year ended December 31, 2018, the Company incurred a chargeback provision of $830.0 million, or 44.0%
of gross sales of $1,887.9 million, compared to $953.3 million, or 40.5% of gross sales of $2,351.1 million in the prior
year. The dollar decrease and percent increase in the comparative period was the result of gross sales decreases and a
change in contractual terms with a major customer in the first quarter of 2018. The Company ensures that this rate as a
percent of gross sales is reasonable through inspection of contractual obligations, review of historical trends and
evaluation of recent activity. Furthermore, other events that could materially alter chargeback rates include: changes in
product pricing as a result of competitive market dynamics or negotiations with customers, changes in demand for
specific products due to external factors such as competitor supply position or consumer preferences, customer shifts in
51
buying patterns from direct to indirect through wholesalers, which could either individually or in aggregate increase or
decrease the chargeback rate depending on the direction and velocity of the change(s).
To better understand the impact of changes in chargeback reserve based on circumstances that are not fully outside
of the Company’s control, for instance, the ratio of sales subject to chargeback to indirect sales, the Company performs a
sensitivity analysis. Holding all other assumptions constant, for a 140 basis point (“BP”) change in the ratio of sales
subject to chargeback to indirect sales would increase the chargeback reserve by $0.2 million or decrease the chargeback
reserve by $0.6 million depending on the change in the direction of the ratio. Fundamentally, the BP change calculation
is determined based on the six month trend of the average ratio of sales subject to chargeback to indirect sales. Due to
the competitive generic pharmaceutical industry and our recent experience with wholesalers’ strategy and shifts in
contracted and non-contracted indirect sales, we believe that the six month trend of the proportion of direct to indirect
sales provides a representative basis for sensitivity analysis.
Rebates, Administrative Fees and Others: The Company maintains an allowance for rebates, administrative fees and
others, related to contracts and other rebate programs that it has in place with certain customers. Rebates, administrative
fees and other percentages vary by product and by volume purchased by each eligible customer. The Company tracks
sales by product number for each eligible customer and then applies the applicable rebate, administrative fees and other
percentage, using both historical trends and actual experience to estimate its rebates, administrative fees and others
allowances. The Company reduces gross sales and increases the rebates, administrative fees and others allowance by the
estimated rebates, administrative fees and others amounts when the Company sells its products to eligible customers.
The Company reduces the rebate allowance when it processes a customer request for a rebate. At each balance sheet
date, the Company analyzes the allowance for rebates, administrative fees and others against actual rebates processed
and makes adjustments as appropriate. The amount of actual rebates processed can vary materially from period to period
as discussed below.
The allowances for rebates, administrative fees and others further takes into consideration price adjustments which are
credits issued to reflect increases or decreases in the invoice or contract prices of the Company’s products. In the case of a price
decrease, a shelf-stock adjustment credit may be given for product remaining in customer’s inventories at the time of the price
reduction and is reserved at the point of sale. Contractual price protection results in a similar credit when the invoice or contract
prices of the Company’s products increase, effectively allowing customers to purchase products at previous prices for a
specified period of time. Amounts recorded for estimated shelf-stock adjustments and price protection are based upon specified
terms with customers, estimated changes in market prices, and estimates of inventory held by customers. The Company
regularly monitors these and other factors and evaluates the reserve as additional information becomes available.
Similar to rebates, the reserve for administrative fees and others represents those amounts processed related to contracts
and other fee programs which have been in place with certain entities, but they are settled through cash payment to these
entities and accordingly are accounted for as a current liability. Otherwise, administrative fees and others operate similarly to
rebates.
For the year ended December 31, 2018, the Company incurred rebates, administrative fees and others of $297.8 million, or
15.8% of gross sales of $1,887.9 million, compared to $476.6 million, or 20.3% of gross sales of $2,351.1 million in the prior
year. The dollar and percent decreases from the comparative period were the result of gross sales decreases and product mix
shifts to products with lower rebates, administrative fees and others expense percentages. Additionally, a change in contractual
terms with a major customer in the first quarter of 2018 resulted in a decrease in rebates, which is also a contributing factor in
the variances between the two periods compared. The Company ensures that this rate as a percent of gross sales is reasonable
through inspection of contractual obligations, review of historical trends and evaluation of recent activity. Furthermore, other
events that could materially alter rebates, administrative fees and others rates include: changes in product pricing as a result of
competitive market dynamics or negotiations with customers, changes in demand for specific products due to external factors
such as competitor supply position or consumer preferences, customer shifts in buying patterns from direct to indirect through
wholesalers, which could either individually or in aggregate increase or decrease the rebate rate depending on the direction and
velocity of the change(s).
To better understand the impact of changes in reserves for rebates, administrative fees and others based on
circumstances that are not fully outside the Company’s control, for instance, the proportion of direct to indirect sales
subject to rebates, administrative fees and others, the Company performs a sensitivity analysis. Holding all other
assumptions constant, for a 140 BP change in the ratio of sales subject to rebates, administrative fees and others to
indirect sales would increase the reserve for rebates, administrative fees and others by $0.0 million or decrease the same
reserve by $0.1 million depending on the direction of the change in the ratio. Fundamentally, the BP change calculation
is determined based on the six month trend of the average ratio of sales subject to rebates, administrative fees and others
52
to indirect sales. Due to the competitive generic pharmaceutical industry and our recent experience with wholesalers’
strategy and shifts in contracted and non-contracted indirect sales, we believe the six month trend of the average ratio of
sales subject to rebates, administrative fees and others to indirect sales provides a representative basis for sensitivity
analysis.
Sales Returns: Certain of the Company’s products are sold with the customer having the right to return the product
within specified periods. Provisions are made at the time of sale based upon historical experience. Historical factors such
as one-time recall events as well as pending new developments like comparable product approvals or significant pricing
movement that may impact the expected level of returns are taken into account to determine the appropriate reserve estimate
at each balance sheet date. As part of the evaluation of the reserve required, the Company considers actual returns to date
that are in process, the expected impact of any product recalls and the amount of wholesaler’s inventory to assess the
magnitude of unconsumed product that may result in sales returns to the Company in the future. The sales returns level can
be impacted by factors such as overall market demand and market competition and availability for substitute products which
can increase or decrease the pull through for sales of the Company’s products and ultimately impact the level of sales returns.
For the year ended December 31, 2018 the Company incurred a return provision of $20.2 million, or 1.1% of gross
sales of $1,887.9 million, compared to $26.9 million, or 1.1% of gross sales of $2,351.1 million in the prior year. The dollar
decrease in the comparative period was the result of gross sales decreases. The Company ensures that this rate as a percent
of gross sales is reasonable through inspection of historical trends and evaluation of recent activity. Furthermore, other
events that could materially alter return rates include: acquisitions and integration activities that consolidate dissimilar
contract terms and could increase or decrease the return rate depending on the contracting power of the acquired business;
and consumer demand shifts by products, which could either increase or decrease the return rate depending on the product
or products specifically demanded and ultimately returned.
To better understand the impact of changes in return reserve based on certain circumstances, the Company performs
a sensitivity analysis. Holding all other assumptions constant, for an average 0.7 months change in the lag from the time
of sale to the time the product return is processed, this change would result in an increase of $1.0 million or a decrease of
$0.9 million of the return reserve expense if the lag increases or decreases, respectively. The average 0.7 months change
in the lag from the time of sale to the time the product return is processed was determined based on the difference between
the high and low lag time for the past twelve month historical activities. This sensitivity analysis is a change from prior
reported periods which was determined based on the average variances for the last six months of returns activity. The prior
method did not give a measurable variance to calculate a sensitivity. Due to the change in the volume and type of products
sold by the Company in the recent past, we have determined that the lag calculation provides a reasonable basis for sensitivity
analysis.
Allowance for Coupons, Advertising, Promotions and Co-Pay Discount Cards: The Company issues coupons from time to
time that are redeemable against certain of our Consumer Health products. In addition to couponing, from time to time the
Company authorizes various retailers to run in-store promotional sales and co-pay discount of its products. At the point of sale,
the Company records an estimate of the dollar value of coupons expected to be redeemed, the dollar amount owed back to the
retailer and co-pay discount as variable consideration since the Company intends to continuously issue coupons, advertising
promotion and co-pay discount from time to time. This coupon estimate is based on historical experience and is adjusted as
needed based on actual redemptions. Upon receiving confirmation that an advertising promotion was run, the Company adjusts
the estimate of the dollar amount expected to be owed back to the retailer as needed. This estimate is then adjusted to actual
upon receipt of an invoice from the retailer. Additionally, the Company provides consumer co-pay discount cards, administered
through outside agents to provide discounted products when redeemed. The Company records an estimate of the dollar value of
co-pay discounts expected to be utilized based on historical experience and is adjusted as needed based on actual experience.
Doubtful Accounts: Provisions for doubtful accounts, which reflect trade receivable balances owed to the Company that are
believed to be uncollectible, are recorded as a component of selling, general and administrative ("SG&A") expenses. In
estimating the allowance for doubtful accounts, the Company considers its historical experience with collections and write-offs,
the credit quality of its customers and any recent or anticipated changes thereto, and the outstanding balances and past due
amounts from its customers. Note that in the ordinary course of business, and consistent with our peers, we may from time to
time offer extended payment terms to our customers as an incentive for new product launches or in other circumstances in
accordance with standard industry practices. These extended payment terms do not represent a significant risk to the
collectability of accounts receivable as of the period-end. Accounts are considered past due when they remain uncollected
beyond the due date specified in the applicable contract or on the applicable invoice, whichever is deemed to take precedence.
As of December 31, 2018, the Company had a total of $33.4 million of past due gross accounts receivable and $5.9 million
aged over 60 days. The Company performs monthly a detailed analysis of the receivables due from its customers and provides
53
a specific reserve against known uncollectible items. The Company also includes in the allowance for doubtful accounts an
amount that it estimates to be uncollectible for all other customers, based on a percentage of the past due receivables. The
percentage reserved increases as the age of the receivables increases. Accounts are written off once all reasonable collection
efforts have been exhausted and/or when facts or circumstances regarding the customer (i.e. bankruptcy filing) indicate that the
chance of collection is remote.
Inventories: Inventories are stated at the lower of cost and net realizable value ("NRV") (see Note 4 — “Inventories”). The
Company maintains an allowance for slow-moving and obsolete inventory as well as inventory where the cost is in excess of its
NRV. For finished goods inventory, the Company estimates the amount of inventory that may not be sold prior to its expiration
or is slow-moving based upon recent sales activity by unit and wholesaler inventory information. The Company also analyzes
its raw material and component inventory for slow-moving items and NRV. For the years ended December 31, 2018, 2017 and
2016, the Company recorded a provision for inventory obsolescence and NRV of $27.3 million, $21.4 million, and $32.1
million, respectively. The allowances for inventory obsolescence were $46.5 million and $34.4 million as of December 31,
2018 and 2017, respectively.
The Company capitalizes inventory costs associated with its products prior to regulatory approval when, based on
management judgment, future commercialization is considered probable and future economic benefit is expected to be realized.
The Company assesses the regulatory approval process and where the product stands in relation to that approval process
including any known constraints or impediments to approval. The Company also considers the shelf life of the product in
relation to the product timeline for approval.
At December 31, 2018, the Company established a reserve of $4.0 million related to R&D raw materials that are not
expected to be utilized prior to expiration while at the prior year end, the Company had approximately $1.5 million in reserves
for R&D raw materials.
Property, Plant and Equipment: Property, plant and equipment is stated at cost, less accumulated depreciation.
Depreciation is calculated using the straight-line method in amounts considered sufficient to amortize the cost of the assets to
operations over their estimated useful lives or lease terms. Depreciation expense was $29.3 million, $23.7 million and $22.2
million for the years ended December 31, 2018, 2017 and 2016, respectively. The following table sets forth the average
estimated useful lives at acquisition of the Company’s property, plant and equipment, by asset category:
Asset category
Buildings
Building and leasehold improvements
Furniture and equipment
Automobiles
Computer hardware and software
Depreciable
Life (years)
30 - 50
10 - 20
7 - 20
5 - 7
3 - 5
Intangible Assets: Intangible assets consist primarily of goodwill, which is carried at its initial value, subject to impairment
testing, In-Process Research and Development ("IPR&D"), which is accounted for as an indefinite-lived intangible asset,
subject to impairment testing until completion or abandonment of the project, and product licensing costs, trademarks and other
such costs, which are capitalized and amortized on a straight-line basis over their useful lives, normally ranging from one year
to thirty years. The Company regularly assesses its amortizable intangible assets for impairment based on several factors,
including estimated fair value and anticipated cash flows. If the Company incurs additional costs to renew or extend the life of
an intangible asset, such costs are added to the remaining unamortized cost of the asset, if any, and the sum is amortized over
the extended remaining life of the asset. Goodwill is tested for impairment annually or more frequently if changes in
circumstances or the occurrence of events suggest that impairment may exist. The Company uses widely accepted valuation
techniques to determine the fair value of its reporting units used in its annual goodwill impairment analysis. The Company’s
valuation is primarily based on qualitative and quantitative assessments regarding the fair value of the reporting unit relative to
its carrying value. The Company models the fair value of the reporting unit based on projected earnings and cash flows of the
reporting unit. Impairments are recorded within the impairment of intangible assets line in the Consolidated Statements of
Comprehensive Income.
Net (Loss) Income Per Common Share: Basic net (loss) income per common share is based upon weighted average
common shares outstanding. Diluted net (loss) income per common share is based upon the weighted average number of
54
common shares outstanding, including the dilutive effect, if any, of stock options and convertible securities using the treasury
stock and if converted methods. Anti-dilutive shares excluded from the computation of diluted net (loss) income per share for
2018, 2017 and 2016 include 3.7 million, 3.2 million and 3.6 million shares, respectively, related to options.
Income Taxes: Income taxes are accounted for under the asset and liability method. Deferred income tax assets and
liabilities are determined based on differences between financial reporting and tax bases of assets and liabilities, and net
operating loss and other tax credit carry-forwards. These items are measured using the enacted tax rates and laws that will be in
effect when the differences are expected to reverse. The Company records a valuation allowance to reduce the deferred income
tax assets to the amount that is more likely than not to be realized. On December 22, 2017, the Tax Cuts and Jobs Act (the “Tax
Act”) was enacted into law and the new legislation contains several key tax provisions including a one-time mandatory
transition tax on accumulated foreign earnings and a reduction of the corporate income tax rate to 21%, among others. We are
required to recognize the effect of the tax law changes in the period of enactment, such as re-measuring our U.S. deferred tax
assets and liabilities and reassessing the net realizability of our deferred tax assets and liabilities. The Company’s foreign
subsidiaries do not have accumulated earnings that can be distributed; therefore, the provisions of the Tax Act related to the
repatriation of foreign earnings are not applicable to the Company at December 31, 2018. See Note 11 — Income Taxes for
more information.
Fair Value of Financial Instruments: The Company applies ASC 820 - Fair Value Measurement, which establishes a
framework for measuring fair value and clarifies the definition of fair value within that framework. ASC 820 - Fair Value
Measurement defines fair value as an exit price, which is the price that would be received for an asset or paid to transfer a
liability in the Company’s principal or most advantageous market in an orderly transaction between market participants on the
measurement date. The fair value hierarchy established in ASC 820 - Fair Value Measurement generally requires an entity to
maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. Observable
inputs reflect the assumptions that market participants would use in pricing the asset or liability and are developed based on
market data obtained from sources independent of the reporting entity. Unobservable inputs reflect the entity’s own
assumptions based on market data and the entity’s judgments about the assumptions that market participants would use in
pricing the asset or liability, and are to be developed based on the best information available in the circumstances.
The valuation hierarchy is composed of three levels. The classification within the valuation hierarchy is based on the
lowest level of input that is significant to the fair value measurement. The levels within the valuation hierarchy are described
below:
-
-
-
Level 1—Assets and liabilities with unadjusted, quoted prices listed on active market exchanges. Inputs to the
fair value measurement are observable inputs, such as quoted prices in active markets for identical assets or
liabilities. The carrying value of the Company's cash and cash equivalents are considered Level 1 assets.
Level 2—Inputs to the fair value measurement are determined using prices for recently traded assets and
liabilities with similar underlying terms, as well as directly or indirectly observable inputs, such as interest rates
and yield curves that are observable at commonly quoted intervals. The Company has no Level 2 assets or
liabilities in any of the periods presented.
Level 3—Inputs to the fair value measurement are unobservable inputs, such as estimates, assumptions, and
valuation techniques when little or no market data exists for the assets or liabilities. The portion of the fair
valuation of the available-for-sale investment held in shares of Nicox stock that is subject to a lock-up provision
is considered a Level 3 asset. The additional consideration payable as a result of prior years' acquisitions and
other insignificant contingent amounts are considered Level 3 liabilities.
The following table summarizes the basis used to measure the fair values of the Company’s financial instruments (in
thousands):
55
Description
Cash and cash equivalents
Nicox stock with lockup provisions
Total assets
December 31,
2018
$
$
224,868
18
224,886
Description
Cash and cash equivalents
Nicox stock with lockup provisions
Total assets
Purchase consideration payable
Total liabilities
December 31,
2017
$
$
$
368,119
35
368,154
3,901
3,901
$
$
$
$
$
Fair Value Measurements at Reporting Date, Using:
Quoted Prices
in Active
Markets for
Identical Items
(Level 1)
Significant
Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
224,868
—
224,868
$
$
Quoted Prices
in Active
Markets for
Identical Items
(Level 1)
Significant
Other
Observable
Inputs
(Level 2)
$
368,119
—
368,119
—
— $
$
— $
—
— $
— $
—
— $
—
— $
—
18
18
Significant
Unobservable
Inputs
(Level 3)
—
35
35
3,901
3,901
In accordance with ASC 820 - Fair Value Measurement, the Company records unrealized holding gains and losses on
available-for-sale securities in the “Accumulated other comprehensive income” caption in the Consolidated Balance Sheet. As
of December 31, 2018, the Company maintained rights to receive a small number of shares of Nicox stock held in an expense
escrow. The unrealized holding loss on these shares was a negligible dollar amount as of December 31, 2018. The escrow
shares are not expected to be released within one year, and accordingly, the original cost basis of less than $0.1 million on these
shares is included within other non-current assets on the Company’s Consolidated Balance Sheet as of December 31, 2018.
The fair value of the investment is estimated using observable and unobservable inputs to discount for lack of marketability.
On May 31, 2017, the Company gained the right to receive additional Nicox stock fair valued at $3.0 million as a
milestone payment. The Company received the additional shares of Nicox stock in early June 2017 and subsequently sold them
later that month for net cash proceeds of $2.6 million. Both the $3.0 million milestone payment and the subsequent loss of $0.4
million on the sale of the Nicox shares were reported within other non-operating income (expense), net in the Company's
Condensed Consolidated Statement of Comprehensive (Loss) Income for the year ended December 31, 2017.
Stock-Based Compensation: Stock-based compensation cost is estimated at grant date based on the fair value of the award,
and the cost is recognized as expense ratably over the vesting period. The Company uses the Black-Scholes model for
estimating the grant date fair value of stock options. Determining the assumptions to be used in the model is highly subjective
and requires judgment. The Company uses an expected volatility that is based on the historical volatility of its common stock.
The expected life assumption is based on historical employee exercise patterns and employee post-vesting termination
behavior. The risk-free interest rate for the expected term of the option is based on the average market rate on U.S. Treasury
securities of similar term in effect during the quarter in which the options were granted. The dividend yield reflects the
Company’s historical experience as well as future expectations over the expected term of the option. The Company estimates
forfeitures at the time of grant and revises the estimate in subsequent periods, as necessary, if actual forfeitures differ from
initial estimates.
Note 3 — Accounts Receivable, Sales and Allowances
The nature of the Company’s business inherently involves, in the ordinary course, significant amounts and substantial
volumes of transactions and estimates relating to allowances for product returns, chargebacks, rebates, doubtful accounts and
discounts given to customers. This is typical of the pharmaceutical industry and is not necessarily specific to the Company.
Depending on the product, the end-user customer, the specific terms of national supply contracts and the particular
arrangements with the Company’s wholesaler customers, certain rebates, chargebacks and other credits are deducted from the
Company’s accounts receivable. The process of claiming these deductions depends on wholesalers reporting to the Company
the amount of deductions that were earned under the terms of the respective agreement with the end-user customer (which in
turn depends on the specific end-user customer, each having its own pricing arrangement that entitles it to a particular
56
deduction). This process can lead to partial payments to the Company against outstanding invoices as the wholesalers take the
claimed deductions at the time of payment.
With the exception of the provision for doubtful accounts, which is reflected as part of selling, general and administrative
expense, the provisions for the following customer reserves are reflected as a reduction of revenues in the accompanying
consolidated statements of comprehensive (loss) income. Additionally, with the exception of administrative fees and others,
which is included as a current liability, the ending reserve balances are included in trade accounts receivable, net in the
Company’s consolidated balance sheets.
Trade accounts receivable, net consists of the following (in thousands):
Gross accounts receivable (1)
Less reserves for:
Chargebacks (2)
Rebates (2)
Product returns
Discounts and allowances
Advertising and promotions
Doubtful accounts
Trade accounts receivable, net
December 31,
2018
2017
$
308,305
$
378,759
(55,312)
(55,963)
(35,146)
(6,561)
(1,574)
(623)
153,126
$
(73,984)
(111,945)
(41,687)
(7,779)
(1,301)
(680)
141,383
$
(1) The reduction in the Gross accounts receivable balance as of December 31, 2018 when compared to the December 31,
2017 balance is due to the decline in Gross sales in the fourth quarter of 2018 compared to the fourth quarter of 2017.
(2) The reductions in the reserve for chargebacks and in the reserve for rebates as of December 31, 2018 compared to
December 31, 2017 is primarily due to payment timing, product mix, customer mix and lower wholesaler inventory.
Additionally, a change in contractual terms with a major customer in the first quarter of 2018 resulted in an increase in
chargebacks and a decrease in rebates, which is also a contributing factor in the comparability between the two periods
compared.
For the years ended December 31, 2018, 2017 and 2016, the Company recorded the following adjustments to gross sales
(in thousands):
Gross sales
Less adjustments for:
Chargebacks (1)
Rebates, administrative fees and others (1)
Product returns
Discounts and allowances
Advertising, promotions, and others
Revenues, net
Year ended December 31,
2018
2017
2016
$
1,887,862
$
2,351,071
$
2,891,267
(830,038)
(297,802)
(20,162)
(36,933)
(8,909)
694,018
$
(953,326)
(476,601)
(26,874)
(45,292)
(7,933)
841,045
$
(1,218,560)
(463,724)
(28,285)
(55,494)
(8,361)
1,116,843
$
(1) The decreases in chargebacks and rebates, administrative and other fees for the twelve month period ended December 31,
2018 compared to the same period in 2017, were primarily due to product mix, customer mix, volume declines, and price
erosion due to increased industry pricing pressure and the competitive nature of our business. Additionally, a change in
contractual terms with a major customer in the first quarter of 2018 resulted in an increase in chargebacks and a decrease in
rebates, which is also a contributing factor in the variances between the two periods compared.
57
The annual activity in the Company’s allowance for customer deductions accounts for the three years ended December 31,
2018 is as follows (in thousands):
Returns
Chargebacks Rebates (1)
Discounts
Doubtful
Accounts
Advertising
&
Promotions
Total
Balance at December 31,
2015
$
48,333
$
91,844
$
162,596
$
10,079
$
1,579
$
1,518
$ 315,949
Provision
28,285
1,218,560
Charges processed
(32,929)
(1,230,044)
384,074
(448,735)
55,494
(53,184)
—
(619)
8,361
(9,191)
1,694,774
(1,774,702)
Balance at December 31,
2016
$
43,689
$
80,360
$
97,935
$
12,389
$
960
$
688
$ 236,021
Provision
26,874
953,326
Charges processed
(28,876)
(959,702)
416,125
(402,115)
45,292
(49,902)
—
(280)
7,933
(7,320)
1,449,550
(1,448,195)
Balance at December 31,
2017
Provision
Charges processed
Balance at December 31,
2018
$
41,687
$
73,984
$
111,945
$
7,779
$
680
$
1,301
$ 237,376
20,162
830,038
(26,703)
(848,710)
257,417
(313,399)
36,933
(38,151)
—
(57)
8,909
(8,636)
1,153,459
(1,235,656)
$
35,146
$
55,312
$
55,963
$
6,561
$
623
$
1,574
$ 155,179
(1) As provisions for rebates, administrative fees and others represent both contra-receivables and current liabilities,
depending on the method of settlement, the cumulative provision relating to rebates, administrative fees and others is bifurcated
as applicable based on the associated consolidated balance sheet classification. Accordingly, for the years ended December 31,
2018, 2017 and 2016, an additional $40.4 million, $60.5 million and $79.7 million, respectively, of provision was associated
with administrative fees and others.
Provisions and utilizations of provisions activity in the current period which relate to prior period revenues are not
provided because to do so would be impracticable. Our current systems and processes do not capture the chargeback and
rebate settlements by the period in which the original sales transaction was recorded. Chargeback and rebate claims are
not submitted by customers with sufficient details to link the accrual recorded at the point of sale with the settlement of the
accrual. As a result, the Company is unable to reasonably determine the dollar amount of the change in estimate in its gross
to net reporting reflected in its results of operations for each period presented, and, those changes could be significant;
however, the Company uses a combination of factors and applications to estimate the dollar amount of reserves for
chargebacks and rebates at each balance sheet date. The Company regularly monitors the chargeback reserve based on an
analysis of the Company’s product sales and most recent claims, wholesaler inventory, current pricing, and anticipated
future pricing changes. If claims are different from the estimate due to changes from estimated rates, accrual rate adjustments
are considered prospectively when determining provisions in accordance with authoritative GAAP.
Note 4 — Inventories, Net
The components of inventories, net of allowances, are as follows (in thousands):
Finished goods
Work in process
Raw materials and supplies
December 31,
2018
2017
$
$
76,981
$
13,870
82,794
173,645
$
79,226
15,447
88,895
183,568
The Company maintains an allowance for excess and obsolete inventory, as well as inventory where its cost is in excess of
its net realizable value. The activity in the allowance for excess, obsolete, and net realizable value inventory account for the
two years ended December 31, 2018 and 2017, was as follows (in thousands):
58
Balance at beginning of year
Provision
Charges processed
Balance at end of year
Note 5 - Goodwill and Other Intangible Assets
Years Ended December 31,
2018
2017
$
$
34,402
$
27,341
(15,238)
46,505
$
33,532
21,369
(20,499)
34,402
Intangible assets consist primarily of Goodwill, which is carried at its initial value, subject to evaluation for impairment, In-
Process Research and Development (“IPR&D”), which is accounted for as an indefinite-lived intangible asset, subject to
impairment testing until completion or abandonment of the project, and product licensing costs, trademarks and other such
costs, which are capitalized and amortized on a straight-line basis over their useful lives, normally ranging from one to thirty
years. Accumulated amortization of intangible assets was $217.6 million and $219.0 million at December 31, 2018 and 2017,
respectively. Amortization expense was $53.5 million, $61.4 million and $65.7 million for the years ended December 31, 2018,
2017 and 2016, respectively. The Company regularly assesses its amortizable intangible assets for impairment based on several
factors, including estimated fair value and anticipated cash flows.
IPR&D intangible assets represent the value assigned to acquired R&D projects that principally represent rights to develop and
sell a product that the Company has acquired which have not yet been completed or approved. These assets are subject to
impairment testing until completion or abandonment of each project. Impairment testing requires the development of
significant estimates and assumptions involving the determination of estimated net cash flows for each year for each project or
product (including net revenue, cost of sales, selling and marketing costs and other costs which may be allocated), the
appropriate discount rate to select in order to measure the risk inherent in each future cash flow stream, the assessment of each
asset’s life cycle, the potential regulatory and commercial success risks, and competitive trends impacting the asset and each
cash flow stream as well as other factors. The major risks and uncertainties associated with the timely and successful
completion of the IPR&D projects include legal risk, market risk and regulatory risk. If applicable, upon abandonment of the
IPR&D product, the assets are impaired.
During 2018, 18 IPR&D projects were impaired primarily due to anticipated market conditions and competition upon
launch, reducing the viability for future development and resulting in impairment expenses of $139.5 million. In 2017 and
2016, three and one IPR&D projects were impaired resulting in impairment expenses $24.6 million and $3.9 million,
respectively. Additionally, during 2018, 25 product licensing rights and other intangibles were impaired due to market
conditions and increase in manufacturing costs resulting in impairment expenses of $91.6 million; compared to impairments
expenses of $103.5 million on 10 product licensing rights in 2017, and $40.5 million on eight product licensing rights in 2016.
If the Company incurs additional costs to renew or extend the life of an intangible asset, such costs are added to the
remaining unamortized cost of the asset, if any, and the sum is amortized over the extended remaining life of the asset.
Goodwill is tested for impairment annually or more frequently if changes in circumstances or the occurrence of events
suggest that impairment may exist. The Company uses widely accepted valuation techniques to determine the fair value of its
reporting units used in its annual goodwill impairment analysis. The Company’s valuation is primarily based on qualitative and
quantitative assessments regarding the fair value of the reporting unit relative to its carrying value. The Company also models
the fair value of the reporting unit based on projected earnings and cash flows of the reporting unit. The Company performed its
annual impairment test on October 1, 2018 and determined that the fair value of its reporting units are in excess of its carrying
value and, therefore, no goodwill impairment charge was necessary. As a result of the impacts of the termination of the Merger
Agreement and the Delaware Opinion, as well as the Term loans downgrade, the Company performed additional impairment
testing as of December 31, 2018 and determined that the fair value of its reporting units are in excess of its carrying value and,
therefore, no goodwill impairment charge was necessary.
59
Changes in goodwill during the two years ended December 31, 2018 were as follows (in thousands):
December 31, 2016
Foreign currency translation
December 31, 2017
Foreign currency translation
December 31, 2018
Goodwill
284,293
1,017
285,310
(1,431)
283,879
$
$
$
The following table sets forth the major categories of the Company’s intangible assets and the weighted-average remaining
amortization period as of December 31, 2018 for those assets that are not already fully amortized (in thousands):
Gross
Carrying
Amount (2)
Accumulated
Amortization
Reclassifications
Impairment (1)
Net
Carrying
Amount
Weighted Average
Remaining Amortization
Period (years)
Product licensing
rights
IPR&D
Trademarks
Customer
relationships
Other intangibles
$
597,960
$
(203,323) $
149,161
16,000
4,225
11,235
—
(6,304)
(2,318)
(5,658)
$
778,581
$
(217,603) $
— $
$
5,300
(5,300)
—
(131,306) $
(139,461)
—
—
—
—
(5,235)
(276,002) $
268,631
9.2
4,400 N/A - Indefinite lived
9,696
1,907
342
284,976
17.5
7.3
0.3
(1) Impairment of product licensing rights and other intangibles is stated at gross carrying cost of $131.3 million and $5.2
million less accumulated amortization of $42.8 million and $2.1 million as of the impairment dates. Accordingly, the total net
impairment expense was $91.6 million, of which $88.5 million and $3.1 million, were recognized in product licensing rights
and other intangibles respectively, for the year ended December 31, 2018.
(2) Differences in the Gross Amounts between periods are due to the write down of fully amortized assets.
Changes in intangible assets during the two years ended December 31, 2018 and 2017, were as follows (in thousands):
$
Trademarks
11,756
$
—
(1,132)
—
10,624
—
(928)
—
—
9,696
$
Customer
relationships
2,427
$
—
(260)
—
2,167
—
(260)
—
—
1,907
$
$
Other
intangibles
6,909
—
(1,717)
—
5,192
—
(1,717)
(3,133)
—
342
$
$
$
December 31, 2016
Acquisitions
Amortization
Impairments
December 31, 2017
Acquisitions
Amortization
Impairments
Reclassifications
December 31, 2018
Product
licensing
rights
564,005
200
(58,335)
(103,530)
402,340
50
(50,567)
(88,492)
5,300
268,631
$
$
$
IPR&D
173,757
—
—
(24,596)
149,161
—
—
(139,461)
(5,300)
4,400
$
$
$
60
The amortization expense of acquired intangible assets for each of the following periods are expected to be as follows (in
thousands):
Year ending December 31,
2019
2020
2021
2022
2023 and thereafter
Total
Note 6 – Property, Plant and Equipment
Property, plant and equipment consist of the following (in thousands):
Land
Buildings and leasehold improvements
Furniture and equipment
Accumulated depreciation
Construction in progress
Property, plant and equipment, net
Amortization Expense
$
$
40,404
31,594
31,594
31,594
145,390
280,576
December 31,
2018
2017
$
17,608
$
138,126
240,080
395,814
(158,824)
236,990
97,863
$
334,853
$
17,846
106,316
202,897
327,059
(130,814)
196,245
117,173
313,418
At December 31, 2018 and 2017, property, plant and equipment carrying a net book value of $91.9 million and $82.8 million,
respectively, was located outside the United States.
The 2018 increase in Property, Plant and Equipment is due primarily to spending for compliance with Drug Supply Chain
Security Act ("DSCSA") requirements and expansion and modernization initiatives at our Decatur and Somerset manufacturing
plants.
At December 31, 2018, the Company had $97.9 million of assets under construction which consisted primarily of
investment in building expansions, equipment, and compliance with DSCSA. Depreciation will begin on these assets once they
are placed into service. The Company assesses its long-lived assets, consisting primarily of property and equipment, for
impairment when material events and changes in circumstances indicate that the carrying value may not be recoverable. For
the year ended December 31, 2018, the Company recorded impairment losses of $6.1 million. No impairment losses were
recorded in 2017. During 2018, the Company capitalized interest into PP&E in the amount of $6.3 million.
Depreciation expense was $29.3 million, $23.7 million and $22.2 million for the years ended December 31, 2018, 2017
and 2016, respectively.
Note 7 — Financing Arrangements
Term Loans
During 2014, in order to finance its acquisitions of Hi-Tech Pharmacal Co Inc. and VersaPharm Inc., the Company entered
into two term loan agreements (the “Term Loans”, or collectively, the “Existing Term Loan Facility”) with certain lenders and
with JPMorgan Chase Bank, N.A., as administrative agent. On February 16, 2016, the Company made a voluntary prepayment
of its Existing Term Loan Facility of $200.0 million which settled all future required quarterly principal repayments of the Term
61
Loan Agreements as denoted above until the date of maturity of the Term Loan Agreements or April 16, 2021, although future
voluntary principal repayments are permitted.
The aggregate principal amount financed was $1,045.0 million. As of December 31, 2018, outstanding debt under the
Term Loans was $831.9 million and the Company was in compliance with all applicable covenants which included customary
limitations on indebtedness, distributions, liens, acquisitions, investments, and other activities. As of December 31, 2018, the
Term Loan has a market price of $821 per $1,000 of principal amount. The Existing Term Loan Facility is scheduled to mature
in April 16, 2021.
During the year ended December 31, 2018, the Company amortized $5.0 million of the total Term Loans-related costs,
resulting in $11.5 million remaining balance of deferred financing costs at December 31, 2018. During the years ended
December 31, 2017 and 2016, the Company amortized $5.0 million and $10.4 million, respectively, of Term Loans-related
costs. The decrease in amortization of deferred financing fees in 2018 and 2017 as compared to 2016 was primarily the result of
the deferred financing fee amortization associated with the voluntary principal repayment in 2016. The Company will amortize
this balance using the straight-line method over the life of the Term Loan Agreements.
As of the date of the filing of this Form 10-K until the maturity of the Term Loans, our spread will be based upon the
Ratings Level applicable on such date as documented below. As of the period ended December 31, 2018, the Company was a
Ratings Level III for the Existing Term Loan Facility.
Ratings Level
Level I
Level II
Level III
Index Ratings
(Moody’s/S&P)
Adjusted LIBOR (Eurodollar)
Spread
Adjusted prime/
federal funds rate
(ABR) Spread
B1/B+ or higher
B2/B
B3/B- or lower
4.25%
4.75%
5.50%
3.25%
3.75%
4.50%
For the years ended December 31, 2018, 2017 and 2016, the Company recorded interest expense of $56.9 million, $45.5
million and $43.5 million, respectively in relation to the Term Loans. The increase in interest expense was in part due to a
downgrading of the Company's Term loan credit rating.
JPMorgan Credit Facility
On April 17, 2014, the Akorn Loan Parties entered into a Credit Agreement (the “JPM Credit Agreement”) with JPMorgan
as administrative agent, and Bank of America, N.A., as syndication agent for certain other lenders (at closing, Bank of America,
N.A. and Wells Fargo Bank, N. A.) for a $150.0 million revolving credit facility (the “JPM Revolving Facility”).
The Company may use any proceeds from borrowings under the JPM Revolving Facility for working capital needs and for
the general corporate purposes of the Company and its subsidiaries. At December 31, 2018, there were no outstanding
borrowings under the JPM Revolving Facility, and availability was $135.0 million.
The JPM Credit Agreement places customary limitations on indebtedness, distributions, liens, acquisitions, investments,
and other activities of the Akorn Loan Parties in a manner designed to protect the collateral while providing flexibility for
growth and the historic business activities of the Company and its subsidiaries. The JPM Credit Agreement is set to mature in
April of 2019.
Subject to other conditions in the JPM Credit Agreement, advances under the JPM Revolving Facility will be made in
accordance with a borrowing base consisting of the sum of the following:
(a)
(b)
(c)
85% of eligible accounts receivable;
The lesser of:
a.
65% of the lower of cost or market value of eligible raw materials and work in process inventory,
valued on a first in first out basis, and
85% of the orderly liquidation value of eligible raw materials and work in process inventory, valued on
a first in first out basis;
b.
The lesser of:
a.
75% of the lower of cost or market value of eligible finished goods inventory, valued on a first in first
out basis, and
62
b.
85% of the orderly liquidation value of eligible finished goods inventory, valued on a first in first out
basis up to 85% of the liquidation value of eligible inventory (or 75% of market value finished goods
inventory); and
(d)
Less any reserves deemed necessary by the administrative agent, and allowed in its permitted discretion.
The total amount available under the JPM Revolving Facility includes a $10.0 million letter of credit facility.
Under the terms of the JPM Credit Agreement, if availability under the JPM Revolving Facility falls below 12.5% of
commitments or $15.0 million for more than 30 consecutive days, the Company may be subject to cash dominion, additional
reporting requirements, and additional covenants and restrictions. The Company may seek additional commitments to increase
the maximum amount of the JPM Revolving Facility to $200.0 million.
Unless cash dominion is exercised by the lenders in connection with the JPM Revolving Facility, the Company will be
required to repay the JPM Revolving Facility upon its expiration five years from issuance, subject to permitted extension, and
will pay interest on the outstanding balance monthly based, at the Company’s election, on an adjusted prime/federal funds rate
(“ABR”) or an adjusted LIBOR (“Eurodollar”), plus a margin determined in accordance with the Company’s consolidated fixed
charge coverage ratio (EBITDA to fixed charges) as follows:
Fixed Charge
Coverage Ratio
Category 1
> 1.50 to 1.0
Category 2
> 1.25 to 1.00 but
< 1.50 to 1.00
Category 3
< 1.25 to 1.00
Revolver ABR
Spread
0.50%
0.75%
1.00%
Revolver
Eurodollar
Spread
1.50%
1.75%
2.00%
In addition to interest on borrowings, the Company will pay an unused line fee of 0.25% per annum on the unused portion
of the JPM Revolving Facility.
During an event of default, as defined in the JPM Credit Agreement, any interest rate will be increased by 2.0% per annum.
The JPM Revolving Facility is secured by all of the assets of Akorn Loan Parties, including springing control of the
Company’s primary deposit account pursuant to a deposit account control agreement. The financial covenants require Akorn
Loan Parties to maintain the following on a consolidated basis:
(a) Minimum Liquidity, as defined in the JPM Credit Agreement, of not less than (a) $120.0 million plus (b) 25%
of the JPM Revolving Facility commitments during the three-month period preceding the June 1, 2016
maturity date of the Company’s senior convertible notes.
(b) Ratio of EBITDA to fixed charges of no less than 1.00 to 1.00 (measured quarterly for the trailing 4 quarters).
As of December 31, 2018, the Company was in compliance with all covenants applicable to the JPM Revolving Facility.
The Company may use any proceeds from borrowings under the JPM Revolving Facility for working capital needs and for
the general corporate purposes of the Company and its subsidiaries. At December 31, 2018, there were no outstanding
borrowings and no outstanding letter of credit under the JPM Revolving Facility.
The JPM Credit Agreement places customary limitations on indebtedness, distributions, liens, acquisitions, investments,
and other activities of Akorn Loan Parties in a manner designed to protect the collateral while providing flexibility for growth
and the historic business activities of the Company and its subsidiaries.
Convertible Notes
On June 1, 2011, the Company issued $120.0 million aggregate principal amount of 3.50% Convertible Senior Notes due
June 1, 2016 (the “Notes”) which included $20.0 million in aggregate principal amount of the Notes issued in connection with
63
the full exercise by the initial purchasers of their over-allotment option. The Notes were governed by the Company’s indenture
with Wells Fargo Bank, National Association, as trustee (the “Indenture”). The Notes were offered and sold only to qualified
institutional buyers. The net proceeds from the sale of the Notes were approximately $115.3 million, after deducting
underwriting fees and other related expenses.
The Notes paid interest at an annual rate of 3.50% semiannually in arrears on June 1 and December 1 of each year, with the
first interest payment completed on December 1, 2011. The Notes were convertible into the Company’s common stock, cash or
a combination thereof at an initial conversion price of $8.76 per share, which is equivalent to an initial conversion rate of
approximately 114.1553 shares per $1,000 principal amount of the Notes, subject to adjustment for certain events described in
the Indenture.
The Notes became convertible effective April 1, 2012 as a result of the Company’s common stock closing above the
required price of $11.39 per share for 20 of the last 30 consecutive trading days in the quarter ended March 31, 2012. The
Notes remained convertible for each successive quarter, up to and including the maturity date of June 1, 2016, as a result of
meeting the trading price requirement at the end of each prior quarter. During the year ended December 31, 2015, $44.3 million
in principal amount of Notes were converted at the holders' request which resulted in recognition of losses of $1.2 million, due
to the conversions. On June 1, 2016, the remaining $43.2 million of Notes was converted at the holder's request, resulting in
complete conversion of the Notes.
As a result of the complete conversion on June 1, 2016, during the year ended 2016, the Company recorded the following
expenses in relation to the Notes (in thousands):
Interest expense at 3.50% coupon rate (1)
Debt discount amortization
Deferred financing cost amortization
2016
687
750
136
1,573
$
$
(1) As a result of the restatement of the 2014 financial data and the resultant delays in filings of the 2015 financial
statements, the Company was required to remit an additional 0.5% interest penalty to all holders of the convertible
notes from January 1, 2016 to April 5, 2016 and a lump sum payment equal to 0.25% of the principal balance held by
consenting holders of the convertible notes as of April 6, 2016.
Aggregate cumulative maturities of long-term obligations (including the Term Loans and the JPM Revolving Facility) as
of December 31, 2018 are:
(In thousands)
Maturities
Note 8 — (Loss) Earnings per Common Share
2019
2020
2021
Thereafter
$
— $
— $
831,938
$
—
Basic net (loss) income per common share is based upon the weighted average number of common shares outstanding
during the period. Diluted net (loss) income per common share is based upon the weighted average number of common shares
outstanding, including the dilutive effect, if any, of potentially dilutive securities using the treasury stock method. Additionally,
for the twelve month period ended December 31, 2016, the earnings per share amount was calculated using the if-converted
method to account for the dilutive impact of the Convertible Notes. The Convertible Notes matured in the quarter ended June
30, 2016.
The Company’s potentially dilutive shares consist of: (i) vested and unvested stock options that are in-the-money,
(ii) unvested RSUs, and (iii) shares potentially issuable upon conversion of the Notes.
A reconciliation of the (loss) earnings per share data from a basic to a fully diluted basis is detailed below (amounts in
thousands, except per share data):
64
(Loss) income from operations used for basic earnings per share
Convertible debt income adjustments, net of tax
(Loss) income from operations adjusted for convertible debt as used for
diluted earnings per share
(Loss) income from operations per share:
Basic
Diluted (1)
Shares used in computing (loss) income per share:
Weighted average basic shares outstanding
Dilutive securities:
Stock options and unvested RSUs
Shares issuable on conversion of the Notes
Total dilutive securities
$
$
$
$
2018
(401,909) $
—
2017
2016
(24,550) $
—
184,243
1,049
(401,909) $
(24,550) $
185,292
(3.21) $
(3.21) $
(0.20) $
(0.20) $
1.50
1.47
125,383
124,790
122,869
—
—
—
—
—
—
914
2,018
2,932
Weighted average diluted shares outstanding
125,383
124,790
125,801
(1) As a result of the Company's expectation that it would likely settle all future note conversions in shares of the
Company's common stock, the diluted income from operations per share calculation for the periods prior to the
complete conversion of the convertible debt on June 1, 2016, included the dilutive effect of convertible debt and was
offset by the exclusion of interest expense and deferred financing fees related to the convertible debt of $1.0 million,
after-tax for the year ended December 31, 2016.
Note 9 — Leasing Arrangements
The Company leases real and personal property in the normal course of business under various operating leases and other
insignificant capital leases, including non-cancelable and month-to-month agreements. Rental expense under these leases was
$6.5 million, $5.9 million and $5.2 million for the years ended December 31, 2018, 2017 and 2016, respectively.
Landlord incentives are recorded as deferred rent and amortized on a straight-line basis over the lease term. Rent
escalations are recorded on a straight-line basis over the lease term. The following is a schedule, by year, of future minimum
rental payments required under non-cancelable operating leases in place as of December 31, 2018 (in thousands):
Year ending December 31,
2019
2020
2021
2022
2023
2024 and thereafter
Total
$
$
4,564
4,647
4,283
3,724
2,673
6,976
26,867
Note 10 — Stock Options, Restricted Stock and Employee Stock Purchase Plan
Stock Option Plan
The Company maintains equity compensation plans that allow the Company’s Board of Directors to grant stock options
and other equity awards to eligible employees, officers, directors and consultants. On April 27, 2017, the Company’s
shareholders voted to approve the Akorn, Inc. 2017 Omnibus Incentive Compensation Plan (the “Omnibus Plan”). Under the
Omnibus Plan, 8.0 million shares of the Company’s common stock were made available for issuance pursuant to equity awards.
The Omnibus Plan replaced the Akorn, Inc. 2014 Stock Option Plan (the "2014 Plan"), which was approved by shareholders at
the Company's 2014 Annual Meeting of Shareholders on May 2, 2014 and subsequently amended by proxy vote of the
Company’s shareholders on December 16, 2016. The 2014 Plan had reserved 7.5 million shares for issuance upon the grant of
stock options, restricted stock units (“RSUs”), or various other instruments to directors, officers, employees and
65
consultants. Following shareholder approval of the Omnibus Plan, no new awards could be granted under the 2014 Plan,
although previously granted awards remain outstanding pursuant to their original terms. As of December 31, 2018, there were
approximately 3.4 million stock options and 0.1 million RSU shares outstanding under the 2014 Plan. The 2014 Plan had
replaced the Amended and Restated Akorn, Inc. 2003 Stock Option Plan (the “2003 Plan”), which expired on November 6,
2013. As of December 31, 2018, no awards remain outstanding under the 2003 Plan.
Under the Omnibus Plan, 2.0 million RSUs have been granted to employees and directors, of which 0.3 million have
vested and 0.2 million have been forfeited, leaving 1.5 million RSUs outstanding as of December 31, 2018. No stock options
were granted under the Omnibus Plan from inception through December 31, 2018. As of December 31, 2018, approximately
6.2 million shares remain available for future award grants under the Omnibus Plan.
The Company accounts for stock-based compensation in accordance with ASC Topic 718 - Compensation — Stock
Compensation. Accordingly, stock-based compensation cost is estimated at the grant date based on the fair value of the award,
and the cost is recognized as expense ratably over the vesting period. The Company uses the Black-Scholes model for
estimating the grant date fair value of stock options. Determining the assumptions that enter into the model is highly subjective
and requires judgment. The Company uses an expected volatility that is based on the historical volatility of its stock. The
expected life assumption is based on historical employee exercise patterns and employee post-vesting termination behavior.
The risk-free interest rate for the expected term of the option is based on the average market rate on U.S. Treasury securities in
effect during the quarter in which the options were granted. The dividend yield reflects historical experience as well as future
expectations over the expected term of the option. The Company estimates forfeitures at the time of grant and revises in
subsequent periods, as necessary, if actual forfeitures differ from those estimates.
The Company recorded stock-based compensation expense of approximately $21.5 million, $21.0 million and $15.4
million during the years ended December 31, 2018, 2017 and 2016, respectively. The Company uses the single-award method
for allocating compensation cost to each period.
As of December 31, 2018, the Company agreed to the modification of various stock-based awards of its former Chief
Executive Officer and Chief Operating Officer to accelerate vesting to March 31, 2019 and December 31, 2018, respectively.
The Company recognized stock-based compensation expense of $2.1 million in the year ended December 31, 2018 related to
the accelerated vesting of these awards.
Stock Option Awards
From time to time, the Company has granted stock option awards to certain employees, executives and directors. No stock
options were granted in 2018. The assumptions used in estimating the fair value of the stock options granted during the period,
along with the weighted-average grant date fair values, were as follows:
Expected volatility
Expected life (in years)
Risk-free interest rate
Dividend yield
Weighted-average grant date fair value per stock option
2017
—
50%
50%
46%
2016
—
50%
4.8
1.7% — 1.7%
4.7
0.9% — 1.8%
—
$9.25
—
$11.13
The table below sets forth a summary of stock option activity within the Company’s stock-based compensation plans for
the years ended December 31, 2018, 2017 and 2016:
66
Number of
Shares
(in thousands)
Weighted
Average
Exercise Price
Weighted Average
Remaining Contractual
Term (Years)
Aggregate
Intrinsic Value
(in thousands) (1)
Outstanding at December 31, 2015
4,762
$
Granted
Exercised
Forfeited or expired
2,089
(1,794)
(291)
Outstanding at December 31, 2016
4,766
$
Granted
Exercised
Forfeited or expired
66
(623)
(156)
Outstanding at December 31, 2017
4,053
$
Granted
Exercised
Forfeited or expired
Outstanding at December 31, 2018
Exercisable at December 31, 2018
—
(22)
(613)
3,418
2,350
$
$
20.33
26.61
7.78
28.96
27.27
21.28
15.53
28.20
28.95
—
24.99
31.28
28.55
29.00
3.69
3.41
$
$
—
—
(1) Includes only those options that were in-the-money as of December 31, 2018. Fluctuations in the intrinsic value of
both outstanding and exercisable options may result from changes in underlying stock price and the timing and volume
of option grants, exercises and forfeitures.
The aggregate intrinsic value for stock options outstanding and exercisable is defined as the difference between the market
value of the Company’s common stock at the end of the period and the exercise price of stock options. The total intrinsic value
of stock options exercised during the years ended December 31, 2018, 2017 and 2016 was approximately $0.2 million, $9.8
million and $40.3 million, respectively. As a result of the stock options exercised, the Company received cash and recorded
additional paid-in-capital of approximately $0.5 million, $9.7 million and $14.0 million during the years ended December 31,
2018, 2017 and 2016, respectively.
As of December 31, 2018, the total amount of unrecognized compensation cost related to non-vested stock options was
approximately $7.0 million, which is expected to be recognized as expense over a weighted-average period of 1.3 years.
Restricted Stock Unit Awards
From time to time, the Company has granted RSUs to certain employees, executives and directors. The majority of the
grants to employees, executives and directors are pursuant to the Company's Long-Term Incentive Plans (the "LTIPs"), which
call for annual grants of RSUs to all eligible employees and executives. The RSU awards vest 25% per year on each of the first
four anniversaries of the grant date. All RSUs are valued at the closing market price of the Company’s common stock on the
day of grant and the total value of the units is recognized as expense ratably over the vesting period of the grant. During the
years ended December 31, 2018, 2017 and 2016 the Company granted 1.7 million, 0.7 million and 0.3 million RSUs to certain
employees, executives and directors.
Set forth below is a summary of unvested RSU activity for the three years ended December 31, 2018:
67
Unvested at December 31, 2015
Granted
Vested
Forfeited
Unvested at December 31, 2016
Granted
Vested
Forfeited
Unvested at December 31, 2017
Granted (1)
Vested
Forfeited (1)
Unvested at December 31, 2018
Number of Shares
(in thousands)
Weighted Average Per Share
Grant Date Fair Value
253
303
(118)
(22)
416
666
(137)
(57)
888
1,711
(408)
(548)
1,643
$
$
$
$
35.31
29.50
34.95
28.85
31.52
33.10
32.55
31.34
32.55
16.07
30.22
24.00
19.85
(1) RSUs granted and forfeited include 0.4 million RSUs held by the Company’s former CEO and COO that were
modified to accelerate vesting. This modification was treated as forfeiture of the old awards and granting of new
awards with modified vesting terms.
As of December 31, 2018, the total amount of unrecognized compensation cost related to RSU awards was approximately
$25.4 million which is expected to be recognized as expense over a weighted-average period of 2.9 years.
Employee Stock Purchase Plan
The 2016 Akorn, Inc. Employee Stock Purchase Plan (the “ESPP”) permits eligible employees to acquire shares of the
Company’s common stock through payroll deductions. The ESPP has been structured to qualify under Section 423 of the
Internal Revenue Code (“IRC”). Employees who elect to participate in the ESPP may withhold from 1% to 15% of eligible
wages toward the purchase of stock. Shares will be purchased at a 15% discount off the lesser of the market price at the
beginning or the ending of the applicable offering period. The ESPP is designed with two offering periods each year, one
running from January 1st to December 31st and the other running from July 1st to December 31st. In a given year, employees
may enroll in only one offering period, not both. Per IRC rules, annual purchases per employee are limited to $25,000 worth of
stock, valued as of the beginning of the offering period. Accordingly, with the 15% discount, employees may withhold no more
than $21,250 per year toward the purchase of stock under the ESPP. Employees are further limited to purchasing no more than
15,000 shares of stock per year. A total of 2.0 million shares of the Company’s stock have been set aside for issuance under the
ESPP. The ESPP was approved by vote of the Company’s shareholders on December 16, 2016.
The initial offering period under the ESPP began in January 2017 and ran through the end of the year. The Company did
not have an ESPP offering period starting on July 1, 2017 and did not have any offering periods in 2018 pursuant to terms of
the Merger Agreement. During the year ended December 31, 2017, participants contributed approximately $2.8 million
through payroll deductions toward the purchase of shares under the ESPP. The Company recorded stock-based compensation
expense of $1.1 million during the year ended December 31, 2017 related to the ESPP.
A total of 2.0 million shares of stock were set aside for issuance under the ESPP. Participants in the 2017 offering period
acquired a total of 0.1 million shares, leaving 1.9 million shares remaining available for future issuance as of December 31,
2018.
Note 11 — Income Taxes
On December 22, 2017, the Tax Cuts and Jobs Act (the “Tax Act”) was enacted and implements comprehensive tax
legislation which, among other changes, reduces the federal statutory corporate tax rate from 35% to 21%, requires companies
to pay a one-time transition tax on earnings of certain foreign subsidiaries that were previously deferred, creates new provisions
related to foreign sourced earnings, eliminates the domestic manufacturing deduction and moves to a territorial system.
Additionally, in December 2017, the Securities and Exchange Commission staff issued Staff Accounting Bulletin No. 118
(“SAB 118”), which addresses how a company recognizes provisional amounts when a company does not have the necessary
information available, prepared or analyzed (including computations) in reasonable detail to complete its accounting for the
68
effect of the changes in the Tax Act. The Company has completed the accounting for all of the enactment-date income tax
effects of the Act within the prescribed measurement period, as defined in SAB 118, which ended on December 22, 2018.
Based on the provisions of the Tax Act, the Company re-measured its U.S. deferred tax assets and liabilities and adjusted
its deferred tax balances to reflect the lower U.S. corporate income tax rate at December 31, 2017. The Company recorded the
impact of the rate change on the return to provision differences that resulted in an income tax benefit of $3.0 million which is
included as a discrete item in the 2018 income tax benefit. The Company’s foreign subsidiaries do not have accumulated
earnings that can be distributed; therefore, the provisions of the Act related to the repatriation of foreign earnings are not
applicable to the Company at December 31, 2018.
The income tax (benefit) provision consisted of the following (in thousands):
Year ended December 31, 2018
Federal
State
Foreign
Year ended December 31, 2017
Federal
State
Foreign
Year ended December 31, 2016
Federal
State
Foreign
Current
Deferred
Total
$
$
$
$
$
$
$
$
$
$
$
2,768
(1,677)
32
1,123
78,806
1,706
89
80,601
107,818
11,247
—
119,065
$
(40,345) $
(2,093)
5,042
(37,396) $
(105,006) $
(9,785)
(458)
(115,249) $
(26,377) $
(4,325)
(1,306)
(32,008) $
(37,577)
(3,770)
5,074
(36,273)
(26,200)
(8,079)
(369)
(34,648)
81,441
6,922
(1,306)
87,057
The income tax provision differs from the “expected” tax expense computed by applying the U.S. Federal corporate income
tax rates of 21% to income before income taxes, as follows (in thousands):
69
Computed “expected” tax provision
Change in income taxes resulting from:
State income taxes, net of Federal income tax
Change in state income tax rate, net of Federal income tax
Foreign income tax (benefit) provision
Deduction for domestic production activities
Stock compensation
R&D tax credits
Nondeductible acquisition fees
Interest and penalties from Federal audit
Federal rate change
Discrete adjustments to prior year
162(m) Officers Compensation Limitation
Other expense, net
Valuation allowance change
Income tax (benefit) provision
Years Ended December 31,
2017
2016
2018
$
(92,018) $
(20,719) $
94,955
(11,667)
(16)
(1,658)
—
2,480
(750)
(1,165)
7,935
(3,027)
570
1,483
934
(537)
(4,714)
2,206
(2,527)
(1,316)
(1,200)
1,974
15,650
(26,902)
1,561
—
1,201
60,626
(36,273) $
675
(34,648) $
$
4,501
—
1,580
(7,280)
(11,395)
(825)
39
—
—
—
—
2,564
2,918
87,057
The geographic allocation of the Company’s income before income taxes between U.S. and foreign operations was as follows
(in thousands):
Pre-tax (loss) income from U.S. operations
Pre-tax loss from foreign operations
Total pre-tax (loss) income
2018
(428,299) $
(9,883)
(438,182) $
$
$
2017
2016
(49,572) $
(9,626)
(59,198) $
287,880
(16,580)
271,300
Net deferred income taxes at December 31, 2018 and 2017 include (in thousands):
70
Deferred tax assets:
Net operating loss carry-forward
Stock-based compensation
Chargeback reserves
Reserve for product returns
Inventory valuation reserve
Long-term debt
Interest greater than 30% of EBITDA
Other
Total deferred tax assets
Valuation allowance
Net deferred tax assets
Deferred tax liabilities:
Prepaid expenses
Depreciation & amortization – tax over book
Other
Total deferred tax liabilities
Net deferred income tax (liability)
December 31,
2018
2017
$
48,766
$
9,071
14,173
8,012
9,688
2,226
13,930
16,444
122,310
(71,157)
51,153
$
$
(2,137) $
(49,547)
(35) $
(51,719) $
(566) $
$
$
$
$
$
$
25,100
7,668
17,802
9,479
10,207
3,084
—
10,806
84,146
(10,531)
73,615
(1,709)
(108,788)
—
(110,497)
(36,882)
The Company records a valuation allowance to reduce net deferred income tax assets to the amount that is more likely than
not to be realized. In performing its analysis of whether a valuation allowance to reduce the deferred income tax asset was
necessary, the Company evaluated the data and believes that it is not more likely than not that the deferred tax assets in the US,
India, and Switzerland will be realized. Accordingly, the company has recorded a full valuation allowance against US, India,
and Switzerland deferred tax assets. The Company established a valuation allowance of $71.2 million, $10.5 million and $9.9
million against its deferred tax assets as of December 31, 2018, 2017 and 2016, respectively.
The deferred tax balances have been reflected gross on the balance sheet and are netted only if they are in the same
jurisdiction.
The Company’s net operating loss (“NOL”) carry-forwards as of December 31, 2018 consist of four component pieces:
(i) U.S. Federal NOL carry-forwards valued at $22.2 million, (ii) State NOL carry-forwards valued at $2.7 million (iii) foreign
(Indian) NOLs of $23.7 million and (iv) foreign (Swiss) NOLs of $0.7 million. The U.S. Federal NOL carry-forwards were
obtained through the Merck Acquisition completed in the fourth quarter of 2013 in addition to the current year loss generated.
State NOL carry-forwards are primarily from the loss generated in current year. The Company has established a full valuation
allowance against U.S. Federal and State NOL carry-forwards due to uncertainty related to future earnings projections. The
Indian NOL carry-forwards of $23.7 million relate to operating losses by the Company’s subsidiary in India, which was
acquired in 2012. The Company has established a valuation allowance against this entire amount. A portion of the Swiss NOL
was obtained through the Akorn AG acquisition completed in the first quarter of 2015. It has also generated a loss in the
current year. The NOL carry-forwards begin to expire in 2023 and, accordingly, the Company has established a valuation
allowance against the entire amount.
The Company completed an examination of its Federal income tax return for the year ended December 31, 2015 by the
Internal Revenue Service. The Company’s U.S. Federal income tax returns filed for years 2016 and 2017 are open for
examination by the Internal Revenue Service. The majority of the Company’s state and local income tax returns filed for years
2015 through 2017 remain open for examination as well.
In accordance with ASC 740-10-25 - Income Taxes — Recognition, the Company performs reviews of its tax positions to
determine whether it is “more likely than not” that its tax positions will be sustained upon examination, and if any tax positions
are deemed to fall short of that standard, the Company reserves based on the financial exposure and the likelihood of its tax
positions not being sustained. Based on its review as of December 31, 2018, the Company determined that it would not
recognize tax benefits as follows (in thousands):
71
Balance at December 31, 2015
Additions relating to current year
Payments of amounts relating to prior years
Balance at December 31, 2016
Additions relating to 2017
Additions relating to prior years
Terminations of exposures relating to prior years
Balance at December 31, 2017
Additions relating to 2018
Additions relating to prior years
Terminations of exposures relating to prior years
Balance at December 31, 2018
$
$
$
$
2,285
303
(1,287)
1,301
416
24,297
(619)
25,395
269
4,425
(702)
29,387
If recognized, $2.3 million of the above positions will impact the Company’s effective rate, while the remaining $27.1
million would result in adjustments to the Company’s deferred taxes. On December 31, 2018, the Company filed a non-
automatic accounting method change related to the chargebacks and rebates reserves that accounts for $27.1 million of the
unrecognized tax benefits. It is pending approval from the Internal Revenue Service as of December 31, 2018 and as such the
Company reasonably expects this balance to reverse during the following year. Due to the uncertainty of both timing and
resolution of potential income tax examinations, the Company is unable to determine whether the remaining December 31,
2018 balance of unrecognized tax benefits represent tax positions that could significantly change during the next twelve
months. The Company accounts for interest and penalties as income tax expense. In the year ended December 31, 2018, the
Company recorded a reduction to penalties of $0.4 million and increased the interest by $4.5 million. The Company recorded
the current year interest, net of tax benefit, of $1.7 million related to unrecognized tax benefits. At December 31, 2018, the
Company had accrued a total of $8.6 million and $12.1 million of penalties and interest, respectively.
Note 12 — Segment Information
The Company has two operating segments, which constitute the Company’s two reportable segments and the Company’s
CEO is the CODM, as defined in ASC Topic 280 - Segment Reporting. Our performance is assessed and resources allocated by
the CODM based on the following two reportable segments:
Prescription Pharmaceuticals
•
• Consumer Health
The Company’s Prescription Pharmaceuticals segment principally consists of generic and branded prescription
pharmaceuticals products which span a broad range of indications as well as a variety of dosage forms including: sterile
ophthalmics, injectables and inhalants, and non-sterile oral liquids, topicals and nasal sprays. The Company’s Consumer
Health segment principally consists of animal health and OTC products, both branded and private label. OTC products include,
but are not limited to, a suite of products for the treatment of dry eye sold under the TheraTears® brand name.
Financial information about the Company’s reportable segments is based upon internal financial reports that aggregate
certain operating information. The Company’s CEO oversees operational assessments and resource allocations based upon the
results of the Company’s reportable segments, which have available and discrete financial information.
Selected financial information by reportable segment is presented below (in thousands):
72
REVENUES, NET:
Prescription Pharmaceuticals
Consumer Health
Total revenues, net
GROSS PROFIT:
Prescription Pharmaceuticals
Consumer Health
Total gross profit
Years ended December 31,
2017
2016
2018
$
$
$
$
620,669
73,349
694,018
213,560
32,456
246,016
$
$
$
$
772,524
68,521
841,045
402,082
30,124
432,206
$
$
$
$
1,053,579
63,264
1,116,843
644,319
29,193
673,512
The Company manages its business segments to the gross profit level and manages its operating and other costs on a
company-wide basis. Inter-segment activity at the gross profit level is minimal. The Company does not have discrete assets by
segment, as certain manufacturing and warehouse facilities support more than one segment, and therefore does not report assets
by segment. Financial information including revenues and gross profit from external customers by product or product line is
not provided, as to do so would be impracticable.
During the years ended December 31, 2018, 2017 and 2016, approximately $16.4 million, $25.5 million and $26.3 million
of the Company’s net revenue, respectively, was from customers located in foreign countries. All of the net revenue is related
to our Prescription Pharmaceutical segment.
The carrying amounts of Goodwill by segment were as follows (in thousands):
December 31, 2016
Acquisitions and other adjustments
Impairments
Dispositions
Foreign currency translations
December 31, 2017
Acquisitions and other adjustments
Impairments
Dispositions
Foreign currency translations
December 31, 2018
Prescription
Pharmaceuticals
Consumer
Health
Total
$
$
$
267,576
$
16,717
$
284,293
—
—
—
1,017
—
—
—
—
—
—
—
1,017
268,593
$
16,717
$
285,310
—
—
—
(1,431)
267,162
—
—
—
—
$
16,717
$
—
—
—
(1,431)
283,879
Note 13 — Commitments and Contingencies
The Company has entered into strategic business agreements for the development and marketing of finished dosage form
pharmaceutical products with various pharmaceutical development companies.
Each strategic business agreement includes a future payment schedule for contingent milestone payments and in certain
strategic business agreements, minimum royalty payments. The Company will be responsible for contingent milestone
payments and minimum royalty payments to these strategic business partners based upon the occurrence of future events. Each
strategic business agreement defines the triggering event of its future payment schedule, such as meeting product development
progress timeline, successful product testing and validation, successful clinical studies, various FDA and other regulatory
approvals and other factors as negotiated in each agreement. None of the contingent milestone payments or minimum royalty
payments is individually material to the Company.
73
The Company is engaged in various supply agreements with third parties which obligate the Company to purchase various
active pharmaceutical ingredients or finished products at contractual minimum levels. None of these agreements is individually
or in aggregate material to the Company. Further, the Company does not believe at this time that any of the purchase
obligations represent levels above that of normal business demands.
The table below summarizes contingent, potential milestone payments that would become due to strategic partners in the
years 2019 and beyond, assuming all such contingencies occur (in thousands):
Year ending December 31,
2019
2020
2021
2022 and beyond
Total
Milestone
Payments
$
$
4,658
3,890
2,650
1,800
12,998
The Company is a party in legal proceedings and potential claims arising in the ordinary course of its business. The
amount, if any, of ultimate liability with respect to such matters cannot be determined. Despite the inherent uncertainties of
litigation, management of the Company believes that the ultimate disposition of such proceedings and exposures will not have a
material adverse impact on the financial condition, results of operations, or cash flows of the Company. Legal proceedings
which may have a material effect on the Company have been further disclosed in Note 19 - “Legal Proceedings.”
Note 14 — Supplemental Cash Flow Information (in thousands)
Amount paid for interest
Amount paid for income taxes, net
Non-cash conversion of convertible notes to common shares
Accrued capital expenditures
Note 15 – Recently Issued and Adopted Accounting Pronouncements
Recently Issued Accounting Pronouncements
Year ended December 31,
2018
2017
2016
$
$
57,144
$
45,472
$
9,261
—
42,003
—
6,492
$
13,824
$
44,063
132,695
43,215
12,391
In August 2018, the Financial Accounting Standards Board ("FASB") issued Accounting Standard Update ("ASU") No.
2018-15 — Intangibles — Goodwill and Other—Internal-Use Software (Subtopic 350-40): Customer’s Accounting for
Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract (a consensus of the FASB
Emerging Issues Task Force). The amendments in this Update align the requirements for capitalizing implementation costs
incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred
to develop or obtain internal-use software (and hosting arrangements that include an internal use software license). The
accounting for the service element of a hosting arrangement that is a service contract is not affected by the amendments in this
Update. Accordingly, the amendments in this Update require an entity (customer) in a hosting arrangement that is a service
contract to follow the guidance in Subtopic 350-40 to determine which implementation costs to capitalize as an asset related to
the service contract and which costs to expense. Costs to develop or obtain internal-use software that cannot be capitalized
under Subtopic 350-40, such as training costs and certain data conversion costs, also cannot be capitalized for a hosting
arrangement that is a service contract. Therefore, an entity (customer) in a hosting arrangement that is a service contract
determines which project stage (that is, preliminary project stage, application development stage, or post-implementation stage)
an implementation activity relates to. Costs for implementation activities in the application development stage are capitalized
depending on the nature of the costs, while costs incurred during the preliminary project and post-implementation stages are
expensed as the activities are performed. The amendments in this Update also require the entity (customer) to expense the
capitalized implementation costs of a hosting arrangement that is a service contract over the term of the hosting arrangement.
The term of the hosting arrangement includes the non-cancellable period of the arrangement plus periods covered by (1) an
option to extend the arrangement if the customer is reasonably certain to exercise that option, (2) an option to terminate the
74
arrangement if the customer is reasonably certain not to exercise the termination option, and (3) an option to extend (or not to
terminate) the arrangement in which exercise of the option is in the control of the vendor. The entity also is required to apply
the existing impairment guidance in Subtopic 350-40 to the capitalized implementation costs as if the costs were long-lived
assets. The amendments in this Update clarify that the capitalized implementation costs related to each module or component
of a hosting arrangement that is a service contract are also subject to the guidance in Subtopic 360-10 on abandonment. The
amendments in this Update also require the entity to present the expense related to the capitalized implementation costs in the
same line item in the statement of income as the fees associated with the hosting element (service) of the arrangement and
classify payments for capitalized implementation costs in the statement of cash flows in the same manner as payments made for
fees associated with the hosting element. The entity is also required to present the capitalized implementation costs in the
statement of financial position in the same line item that a prepayment for the fees of the associated hosting arrangement would
be presented. The amendments in this ASU are effective for public business entities for fiscal years beginning after December
15, 2019, and interim periods within those fiscal years. For all other entities, the amendments in this Update are effective for
annual reporting periods beginning after December 15, 2020, and interim periods within annual periods beginning after
December 15, 2021. Early adoption of the amendments in this Update is permitted, including adoption in any interim period,
for all entities. The amendments in this Update should be applied either retrospectively or prospectively to all implementation
costs incurred after the date of adoption. The Company believes that the adoption of this ASU will not have a material impact
on its financial position, results of operations or cash flows.
In August 2018, the FASB issued ASU No. 2018-13—Fair Value Measurement (Topic 820): Disclosure Framework—
Changes to the Disclosure Requirements for Fair Value Measurement. The amendments in this Update modify the disclosure
requirements on fair value measurements in Topic 820, Fair Value Measurement, based on the concepts in the Concepts
Statement, including the consideration of costs and benefits. The FASB issued final guidance that removes, modifies and adds
certain disclosure requirements for fair value measurements as part of its disclosure framework project as follows:
(a) Removals: The following disclosure requirements were removed from Topic 820:
1. The amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy
2. The policy for timing of transfers between levels
3. The valuation processes for Level 3 fair value measurements
(b) Modifications: The following disclosure requirements were modified in Topic 820:
1. For investments in certain entities that calculate net asset value, an entity is required to disclose the timing of
liquidation of an investee’s assets and the date when restrictions from redemption might lapse only if the investee has
communicated the timing to the entity or announced the timing publicly.
2. The amendments clarify that the measurement uncertainty disclosure is to communicate information about the
uncertainty in measurement as of the reporting date.
(c) Additions: The following disclosure requirements were added to Topic 820; however, the disclosures are not required for
nonpublic entities:
1. The changes in unrealized gains and losses for the period included in other comprehensive income for recurring
Level 3 fair value measurements held at the end of the reporting period
2. The range and weighted average of significant unobservable inputs used to develop Level 3 fair value
measurements. For certain unobservable inputs, an entity may disclose other quantitative information (such as the
median or arithmetic average) in lieu of the weighted average if the entity determines that other quantitative
information would be a more reasonable and rational method to reflect the distribution of unobservable inputs used to
develop Level 3 fair value measurements.
In addition, the amendments eliminate "at a minimum" from the phrase "an entity shall disclose at a minimum" to promote the
appropriate exercise of discretion by entities when considering fair value measurement disclosures and to clarify that
materiality is an appropriate consideration. The amendments in this ASU are effective for all entities for fiscal years, and
interim periods within those fiscal years, beginning after December 15, 2019. The amendments on changes in unrealized gains
and losses, the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements,
and the narrative description of measurement uncertainty should be applied prospectively for only the most recent interim or
annual period presented in the initial fiscal year of adoption. All other amendments should be applied retrospectively to all
periods presented upon their effective date. Early adoption is permitted upon issuance of this Update. An entity is permitted to
early adopt any removed or modified disclosures upon issuance of this ASU and delay adoption of the additional disclosures
until their effective date. The Company believes that the adoption of this ASU will not have a material impact on its financial
position, results of operations or cash flows.
In June 2018, the FASB ASU No. 2018-07, Compensation—Stock Compensation (Topic 718): Improvements to
Nonemployee Share-Based Payment Accounting. The amendments in this Update expand the scope of Topic 718 to include
share-based payment transactions for acquiring goods and services from nonemployees. Under this ASU, an entity should
apply the requirements of Topic 718 to nonemployee awards except for specific guidance on inputs to an option pricing model
and the attribution of cost (that is, the period of time over which share-based payment awards vest and the pattern of cost
75
recognition over that period). The amendments specify that Topic 718 applies to all share-based payment transactions in which
a grantor acquires goods or services to be used or consumed in a grantor’s own operations by issuing share-based payment
awards. The amendments also clarify that Topic 718 does not apply to share-based payments used to effectively provide (1)
financing to the issuer or (2) awards granted in conjunction with selling goods or services to customers as part of a contract
accounted for under Topic 606, Revenue from Contracts with Customers. The amendments in this ASU are effective for public
entities for fiscal years beginning after December 15, 2018, including interim periods within that fiscal year. For all other
entities, the amendments are effective for fiscal years beginning after December 15, 2019, and interim periods within fiscal
years beginning after December 15, 2020. Early adoption is permitted, but no earlier than an entity’s adoption date of Topic
606. The Company believes that the adoption of this ASU will not have a material impact on its financial position, results of
operations or cash flows.
In February 2016, FASB issued ASU No. 2016-02 - Leases (Topic 842), as modified by subsequently issued ASUs
2018-10, 2018-11 and 2018-20 (collectively ASU 2016-02). ASU 2018-02 establishes a comprehensive new lease accounting
model. The new standard clarifies the definition of a lease and causes lessees to recognize leases on the balance sheet as a lease
liability with a corresponding right-of-use asset for leases with a lease term of more than one year. ASU 2016-02 is effective
for financial statements issued for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years.
Early adoption is permitted. The new standard initially required a modified retrospective transition for capital or operating
leases existing at or entered into after the beginning of the earliest comparative period presented in the financial statements, but
it does not require transition accounting for leases that expire prior to the date of initial application. In July 2018, the FASB
decided to provide another transition method in addition to the existing transition method by allowing entities to initially apply
the new leases standard at the adoption date and recognize a cumulative-effect adjustment to the opening balance of retained
earnings in the period of adoption. This additional transition method changes only when an entity is required to initially apply
the transition requirements of the new leases standard; it does not change how those requirements apply. We expect to elect the
practical expedient to not separate non-lease components, to not provide comparative reporting periods and the ‘package of
practical expedients’, which permits us to forgo reassessment of our prior conclusions about lease identification, lease
classification and initial direct costs for leases entered into prior to the effective date. We do not expect to elect the use-of-
hindsight practical expedient. Upon adoption, operating leases will be reported on the statement of financial position as right-
of-use assets and lease liabilities. The Company will adopt and implement this ASU on January 1, 2019 using the modified
retrospective method and will not restate comparative periods. We have completed our review of all material leases including
the search for any embedded leases, elected the package of practical expedients and accounting policy, and are currently
finalizing our assessment of the overall financial statement impact. We expect this ASU will have a material impact on the
Company’s financial position and result in the Company recording operating Lease liabilities and Right-of-use asset balances of
approximately $26 million. The impact on the Company’s results of operations is not expected to materially differ from
recorded amounts under ASC 840. The impact of the adoption of this ASU is non-cash in nature and is therefore not expected
to materially affect the Company’s cash flows.
Recently Adopted Accounting Pronouncements
In May 2017, the Financial Accounting Standards Board ("FASB") issued Accounting Standard Update ("ASU") No.
2017-09, Compensation — Stock Compensation (Topic 718): Scope of Modification Accounting, which provides guidance about
which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting in
Topic 718. Per the ASU, an entity should account for the effects of a modification unless all the following are met: (1) The fair
value (or calculated value or intrinsic value, if such an alternative measurement method is used) of the modified award is the
same as the fair value (or calculated value or intrinsic value, if such an alternative measurement method is used) of the original
award immediately before the original award is modified. If the modification does not affect any of the inputs to the valuation
technique that the entity uses to value the award, the entity is not required to estimate the value immediately before and after
the modification, (2) The vesting conditions of the modified award are the same as the vesting conditions of the original award
immediately before the original award is modified, and (3) The classification of the modified award as an equity instrument or a
liability instrument is the same as the classification of the original award immediately before the original award is modified.
The current disclosure requirements in Topic 718 apply regardless of whether an entity is required to apply modification
accounting under the amendments in this ASU. The ASU is effective for public business entities for annual and interim periods
in fiscal years beginning after December 15, 2017. Early adoption is permitted, including adoption in any interim period, for
(1) public business entities for reporting periods for which financial statements have not yet been issued and (2) all other
entities for reporting periods for which financial statements have not yet been made available for issuance. The amendments in
this ASU should be applied prospectively to an award modified on or after the adoption date. The standard was adopted on
January 1, 2018, and did not have a material impact on the Company's consolidated financial statements or financial statement
disclosures.
76
In March 2017, the FASB issued ASU No. 2017-07, — Compensation — Retirement Benefits (Topic 715): Improving the
Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost, which apply to all employers,
including not-for-profit entities, that offer to their employees defined benefit pension plans, other postretirement benefit plans,
or other types of benefits accounted for under Topic 715. The amendments in this ASU require that an employer report the
service cost component in the same line item or items as other compensation costs arising from services rendered by the
pertinent employees during the period. The other components of net benefit cost as defined in paragraphs 715-30-35-4 and
715-60- 35-9 are required to be presented in the income statement separately from the service cost component and outside a
subtotal of income from operations, if one is presented. If a separate line item or items are used to present the other
components of net benefit cost, that line item or items must be appropriately described. If a separate line item or items are not
used, the line item or items used in the income statement to present the other components of net benefit cost must be disclosed.
The amendments in this ASU also allow only the service cost component to be eligible for capitalization when applicable (for
example, as a cost of internally manufactured inventory or a self-constructed asset). The amendments in this ASU are effective
for public business entities for annual periods beginning after December 15, 2017, including interim periods within those
annual periods. Disclosures of the nature of and reason for the change in accounting principle are required in the first interim
and annual periods of adoption. The amendments in this ASU should be applied retrospectively for the presentation of the
service cost component and the other components of net periodic pension cost and net periodic postretirement benefit cost in
the income statement and prospectively, on and after the effective date, for the capitalization of the service cost component of
net periodic pension cost and net periodic postretirement benefit in assets. The amendments allow a practical expedient that
permits an employer to use the amounts disclosed in its pension and other postretirement benefit plan note for the prior
comparative periods as the estimation basis for applying the retrospective presentation requirements. Disclosure that the
practical expedient was used is required. The standard was adopted on January 1, 2018, and did not have a material impact on
the Company's consolidated financial statements or financial statement disclosures.
In November 2016, the FASB issued ASU No. 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash (a
consensus of the FASB Emerging Issues Task Force), which addresses classification and presentation of changes in restricted
cash on the statement of cash flows. The standard requires an entity’s reconciliation of the beginning-of-period and end-of-
period total amounts shown on the statement of cash flows to include in cash and cash equivalents amounts generally described
as restricted cash and restricted cash equivalents. The ASU does not define restricted cash or restricted cash equivalents, but an
entity will need to disclose the nature of the restrictions. The ASU is effective for public business entities for annual and
interim periods in fiscal years beginning after December 15, 2017. For all other entities, the ASU is effective for fiscal years
beginning after December 15, 2018, and interim periods in fiscal years beginning after December 15, 2019. Early adoption is
permitted, including adoption in an interim period. If an entity early adopts the amendments in an interim period, adjustments
should be reflected at the beginning of the fiscal year that includes that interim period. Entities should apply this ASU using a
retrospective transition method to each period presented. The standard was adopted on January 1, 2018, and did not have a
material impact on the Company's consolidated financial statements or financial statement disclosures.
In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230) Classification of Certain Cash
Receipts and Cash Payments. This standard amends and adjusts how cash receipts and cash payments are presented and
classified in the statement of cash flows. ASU 2016-15 is effective for fiscal years beginning after December 15, 2017, and
interim periods within those fiscal years and will require adoption on a retrospective basis unless impracticable. If
impracticable the Company would be required to apply the amendments prospectively as of the earliest date possible. The
standard was adopted on January 1, 2018, and did not have a material impact on the Company's consolidated financial
statements or financial statement disclosures.
In May 2014, FASB issued ASU 2014-09 - Revenue from Contracts with Customers (Topic 606), as modified by
subsequently issued ASUs 2015-14, 2016-08, 2016-10, 2016-12 and 2016-20 (collectively ASU 2014-09). ASU 2014-09
superseded the revenue recognition requirements in ASC (Topic 605) Revenue Recognition, and most industry specific
guidance. This ASU also supersedes some cost guidance included in ASC 605-35 Revenue Recognition Construction Type and
Production Type Contracts. Similar to the previous guidance, the Company makes significant estimates related to variable
consideration at the point of sale, including chargebacks, rebates, product returns, and other discounts and allowances.
Revenue is recognized at a point in time upon the transfer of control of the Company's products, which occurs upon delivery for
substantially all of the Company's sales. The Company has adopted the practical expedient to exclude all sales taxes and
contract fulfillment costs from the transaction price. The Company adopted the standard effective January 1, 2018 using the
modified retrospective approach. The adoption of ASU 2014-09 did not have a material impact on the Company’s consolidated
financial position, results of operations, equity or cash flows as of the adoption date or for the year ended December 31, 2018.
See Note 16 — Customer, Supplier and Product Concentration for the disaggregation of net revenues by major customers.
Note 16 — Customer, Supplier and Product Concentration
77
Customer Concentration
In the years ended December 31, 2018, 2017 and 2016, a significant portion of the Company’s gross and net sales reported
were to three large wholesale drug distributors, and a significant portion of the Company’s accounts receivable as of
December 31, 2018, 2017 and 2016 were due from these wholesale drug distributors as well. AmerisourceBergen Health
Corporation (“Amerisource”), Cardinal Health, Inc. (“Cardinal”) and McKesson Drug Company (“McKesson”) collectively
referred to herein as the “Big 3 Wholesalers”, are all distributors of the Company’s products, as well as suppliers of a broad
range of health care products. Aside from these three wholesale drug distributors, no other individual customer accounted for
more than 10% or more of gross sales, net revenue or gross trade receivables for the indicated dates and periods.
If sales to the Big 3 Wholesalers were to diminish or cease, the Company believes that the end users of its products would
find little difficulty obtaining the Company’s products from another distributor. Further, the Company is subject to credit risk
from its accounts receivable, more heavily weighted to the Big 3 Wholesalers, but as of and for the years ended December 31,
2018, 2017 and 2016, the Company has not experienced significant losses with respect to its collection of these gross accounts
receivable balances.
The following table sets forth the Company’s gross trade accounts receivable, gross sales and net revenue disaggregated by
major customers for the periods indicated:
Gross Accounts Receivable as of December 31,
2018
2017
2016
Disaggregation of
gross A/R by major
customers
Gross
Accounts
Receivable
Gross
Accounts
Receivable %
Gross
Accounts
Receivable
Gross
Accounts
Receivable %
Gross
Accounts
Receivable
Gross
Accounts
Receivable %
Amerisource
Cardinal
McKesson
Combined Total
Other
Grand Total
Disaggregation of
gross sales by major
customers
Amerisource
Cardinal
McKesson
Combined Total
Other
Grand Total
$
$
$
55,160
59,443
149,000
263,603
44,702
308,305
17.9% $
19.3%
48.3%
85.5%
14.5%
100.0% $
99,771
79,731
146,321
325,823
52,936
378,759
26.3% $
21.1%
38.6%
86.0%
14.0%
100.0% $
184,623
78,344
172,468
435,435
83,740
519,175
35.6%
15.1%
33.2%
83.9%
16.1%
100.0%
Gross Sales YTD
2018
2017
2016
Gross Sales
Gross Sales
%
Gross Sales
Gross Sales
%
Gross Sales
Gross Sales
%
386,543
390,438
789,620
1,566,601
321,261
20.5% $
20.7%
41.8%
83.0%
17.0%
554,690
411,458
918,157
1,884,305
466,766
23.6% $
17.5%
39.1%
80.2%
19.8%
852,924
445,255
939,662
2,237,841
653,426
29.5%
15.4%
32.5%
77.4%
22.6%
$
1,887,862
100.0% $
2,351,071
100.0% $
2,891,267
100.0%
78
Net Revenue YTD
2018
2017
2016
Disaggregation of net
revenues by major
customers
Amerisource
Cardinal
McKesson
Combined Total
Other
Grand Total
Net
Revenue
Net Revenue
%
Net
Revenue
Net Revenue
%
Net
Revenue
Net Revenue
%
$
$
144,776
109,747
173,363
427,886
266,132
694,018
20.9% $
15.8%
25.0%
61.7%
38.3%
100.0% $
160,671
150,257
222,715
533,643
307,402
841,045
19.1% $
17.9%
26.5%
63.5%
36.5%
260,225
182,045
270,276
712,546
404,297
23.3%
16.3%
24.2%
63.8%
36.2%
100.0% $
1,116,843
100.0%
Sales to the Big 3 Wholesalers primarily represent purchases of products in the Prescription Pharmaceuticals segment and
generate the majority of the Prescription Pharmaceuticals segment revenue. The Prescription Pharmaceuticals segment revenue
represented 89.4%, 91.9% and 94.3%, of the net revenue for the twelve months ended December 31, 2018, 2017 and 2016,
respectively. Chain pharmacies are the major customers in the Consumer Health segment. For more information, see Note 12 —
Segment Information.
Supplier Concentration
The Company requires a supply of quality raw materials and components to manufacture and package pharmaceutical
products for its own use and for third parties with which it has contracted. The principal components of the Company’s products
are active and inactive pharmaceutical ingredients and certain packaging materials. Certain of these ingredients and components
are available from only a single source and, in the case of certain of the Company’s abbreviated new drug applications and new
drug applications, only one supplier of raw materials has been identified. Because FDA approval of drugs requires
manufacturers to specify their proposed suppliers of active ingredients and certain packaging materials in their applications,
FDA approval of any new supplier would be required if active ingredients or such packaging materials were no longer available
from the specified supplier. The qualification of a new supplier could delay the Company’s development and marketing efforts.
In addition, certain of the pharmaceutical products marketed by the Company are manufactured by a third party manufacturer,
which serves as the Company’s sole source of that finished product. If for any reason the Company is unable to obtain sufficient
quantities of any of the raw materials or components required to produce and package its products, it may not be able to
manufacture its products as planned, which could have a material adverse effect on the Company’s business, financial condition
and results of operations. Likewise, if the Company’s manufacturing partners experience any similar difficulties in obtaining
raw materials or in manufacturing the finished product, the Company’s results of operations would be negatively impacted.
No individual supplier represented 10% or more of the Company’s purchases in any of the years ended December 31, 2018,
2017 and 2016.
Product Concentration
In the year ended December 31, 2018, none of the Company’s products represented 10% or more of total net revenue, while
in the year ended December 31, 2017 and 2016, Ephedrine Sulfate Injection represented approximately 10% and 20% of the
Company’s total net revenue, respectively. The Company attempts to minimize the risk associated with product concentration
by continuing to acquire and develop new products to add to its portfolio.
Note 17 — Related Party Transactions
During the years ended December 31, 2018, 2017 and 2016, the Company obtained legal services totaling $4.1 million,
$0.8 million and $1.3 million, respectively, of which $1.3 million and $0.1 million was payable as of December 31, 2018 and
2017, respectively, from Polsinelli PC, a law firm for which the spouse of the Company’s Executive Vice President, General
Counsel and Secretary is an attorney and shareholder.
The Company also obtained and paid legal services totaling $0.5 million during the year ended December 31, 2018 from
Segal McCambridge Singer & Mahone, a firm for which the brother in law of the Company's Executive Vice President,
General Counsel and Secretary is a partner.
79
The Company obtained support services for compliance with DSCSA requirements totaling $0.1 million during the year
ended December 31, 2018 from Domino Amjet, Inc., a company for which the brother of the Company’s Executive Vice
President, General Counsel and Secretary is a Vice President of Sales.
Note 18 – Selected Quarterly Financial Data (Unaudited)
(In thousands, except per share
amounts)
Revenues
Gross
Profit
Year Ended December 31, 2018:
Net (Loss) Income
Operating
(Loss) Income
(1)(2)
Amount
Per Basic
Share
Per Diluted
Share
4th Quarter
3rd Quarter
2nd Quarter
1st Quarter
Year Ended December 31, 2017:
4th Quarter
3rd Quarter
2nd Quarter
1st Quarter
$
153,386
$
25,247
$
(195,865) $
(215,038) $
(1.71) $
165,625
190,944
184,063
57,262
81,279
82,228
(75,980)
(91,166)
(25,415)
(70,140)
(87,984)
(28,747)
(0.56)
(0.70)
(0.23)
$
186,057
$
82,905
$
(121,601) $
(65,217) $
(0.52) $
202,428
199,140
253,420
97,763
102,769
148,769
8,760
14,244
75,713
(2,897)
2,537
41,027
(0.02)
0.02
0.33
(1.71)
(0.56)
(0.70)
(0.23)
(0.52)
(0.02)
0.02
0.33
(1) The shift from an Operating income position in the first quarter of 2017, to an Operating loss in the fourth quarter 2017,
was primarily due to impairments of Intangibles assets, net. See Note 5 - Goodwill and Other Intangible Assets for further
details.
(2) The significant increase in Operating loss in the fourth quarter of 2018 compared to the prior 2018 quarters, was primarily
due to impairments of Intangibles assets, net. See Note 5 - Goodwill and Other Intangible Assets for further details.
Note 19 – Legal Proceedings
The Company is a party to legal proceedings and potential claims arising in the ordinary course of our business. The
amount, if any, of ultimate liability with respect to such matters cannot be determined, but despite the inherent uncertainties of
litigation, management of the Company believes that the ultimate disposition of such proceedings and exposure will not have a
material adverse impact on the financial condition, results of operations, or cash flows of the Company.
Litigation Related to the Merger
Akorn, Inc. v. Fresenius Kabi AG
On April 22, 2018, Fresenius Kabi AG delivered to Akorn a letter purporting to terminate the Merger Agreement. On April
23, 2018, Akorn filed a verified complaint entitled Akorn, Inc. v. Fresenius Kabi AG, Quercus Acquisition, Inc. and Fresenius
SE & Co. KGaA, in the Court of Chancery of the State of Delaware for breach of contract and declaratory judgment. The
complaint alleged, among other things, that (i) the defendants anticipatorily breached their obligations under the Merger
Agreement by repudiating their obligation to close the Merger, (ii) the defendants knowingly and intentionally breached their
obligations under the Merger Agreement by working to slow the antitrust approval process and by engaging in a series of
actions designed to hamper and ultimately block the Merger and (iii) Akorn had performed its obligations under the Merger
Agreement, and was ready, willing and able to close the Merger. The complaint sought, among other things, a declaration that
Fresenius Kabi AG's termination was invalid, an order enjoining the defendants from terminating the Merger Agreement, and
an order compelling the defendants to specifically perform their obligations under the Merger Agreement to use reasonable best
efforts to consummate and make effective the Merger. On April 30, 2018, the defendants filed a verified counterclaim alleging
that, due primarily to purported data integrity deficiencies, the Company had breached representations, warranties and
covenants in the Merger Agreement, and that it had experienced a material adverse effect. The verified counterclaim sought,
among other things, a declaration that defendants’ purported termination of the Merger Agreement was valid and that
defendants were not obligated to consummate the transaction, and damages.
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Following expedited discovery, from July 9 to 13, 2018, the Court of Chancery held a trial on the parties’ claims (the
“Delaware Action”). At the conclusion of trial, the Court of Chancery ordered post-trial briefing, which was completed on
August 20, 2018, and a post-trial hearing, which was held on August 23, 2018.
On October 1, 2018, the Court of Chancery issued an opinion (the “Opinion”) denying Akorn’s claims for relief and
concluding that Fresenius Kabi AG had validly terminated the Merger Agreement. The Court of Chancery concluded that
Akorn had experienced a material adverse effect due to its financial performance following the signing of the Merger
Agreement; that Akorn had breached representations and warranties in the Merger Agreement and that those breaches would
reasonably be expected to give rise to a material adverse effect; that Akorn had materially breached covenants in the Merger
Agreement; and that Fresenius was materially in compliance with its own contractual obligations. On October 17, 2018, the
Court of Chancery entered partial final judgment against Akorn on its claims and in favor of the Fresenius parties on their
claims for declaratory judgment. The Court of Chancery entered an order holding proceedings on the Fresenius parties’
damages claims in abeyance pending the resolution of any appeal from the partial final judgment.
On October 18, 2018, Akorn filed a notice of appeal from the Opinion and the partial final judgment, as well as a motion
seeking expedited treatment of its appeal. On October 23, 2018, the Delaware Supreme Court granted Akorn's motion for
expedited treatment and set a hearing on Akorn's appeal for December 5, 2018. On December 7, 2018, the Delaware Supreme
Court affirmed the Court of Chancery’s opinion denying Akorn’s claims for declaratory and injunctive relief and granting
Defendants’ counterclaim for a declaration that the termination was valid. On December 27, 2018, the Delaware Supreme
Court issued a mandate returning the case to the Court of Chancery for consideration of all remaining issues, including the
Fresenius parties’ damages claims.
On January 15, 2019, the parties filed a joint letter to the Court of Chancery seeking thirty days to discuss the potential
resolution of the Fresenius parties’ damages claims. On February 19, 2019, the parties filed a joint letter advising the Court that
they have been unable to resolve the Fresenius parties’ damages claims. The Fresenius parties stated their intention to seek
leave to amend their counterclaims to assert a new claim for fraud and that they would seek an expedited trial on such claim
purportedly due to Akorn’s financial condition. Akorn stated that it expected to oppose the motions for amendment and
expedition, and that it would move to dismiss the Fresenius parties’ damages claims in their entirety.
On February 20, 2019, the Fresenius parties filed a motion for leave to amend and supplement their counterclaim. The
Fresenius parties’ proposed amended and supplemented counterclaim alleges that Akorn fraudulently induced Fresenius to enter
into the Merger Agreement and thereafter breached contractual representations and warranties and covenants therein. It seeks
damages of approximately $102 million. On February 25, 2019, Akorn filed an opposition to the Fresenius parties’ motion for
leave to amend and supplement their counterclaim, arguing that the motion was untimely and prejudicial. On February 27,
2019, the Fresenius parties filed a reply in further support of their motion to file an amended and supplemented counterclaim.
On February 28, 2019, the Court of Chancery denied the Fresenius parties’ motion for leave to file an amended and
supplemented counterclaim.
Other Matters
State of Louisiana v. Hi-Tech, et. al
The Louisiana Attorney General filed suit, Number 624,522, State of Louisiana v. Abbott Laboratories, Inc., et al., in the
Nineteenth Judicial District Court, Parish of East Baton Rouge, Louisiana state court, including Hi-Tech Pharmacal and other
defendants. Louisiana’s complaint alleges that the defendants violated Louisiana state laws in connection with Medicaid
reimbursement for certain vitamins, dietary supplements, and DESI products that were allegedly ineligible for reimbursement.
After extensive motion and appellate practice, on October 3, 2017, the trial court issued a judgment holding that for the one
remaining claim, brought under Louisiana’s unfair trade practices claim, Louisiana could not seek civil penalties for conduct
pre-dating June 2, 2006. The defendants filed an application for supervisory writs with the Court of Appeal for the First Circuit
on October 24, 2017, seeking reversal of the trial court’s denial of their no cause of action exception with respect to the unfair
trade practices claim, which the First Circuit denied the writ on July 24, 2018.
In re Akorn, Inc. Data Integrity Securities Litigation
On March 8, 2018, a purported shareholder of the Company filed a putative class action complaint entitled Joshi Living
Trust v. Akorn, Inc. et al., in the United States District Court for the Northern District of Illinois alleging violations of Sections
10(b) and 20(a) of the Securities Exchange Act of 1934. The complaint named as defendants the Company, Chief Executive
Officer Rajat Rai, Chief Financial Officer Duane Portwood and Chief Accounting Officer Randall Pollard. The complaint
alleged that defendants made materially false or misleading statements and/or material omissions by failing to disclose sooner
81
the existence of investigations into data integrity at the Company. The Complaint sought, among other things, an award of
damages, attorneys’ fees and expenses. The Company disputes these claims.
On May 31, 2018, the Court issued an order appointing Gabelli & Co. Investment Advisors, Inc. and Gabelli Funds, LLC
as lead plaintiffs pursuant to the Private Securities Litigation Reform Act (“PSLRA”), approving their selection of lead counsel
and liaison counsel and amending the case caption to In re Akorn, Inc. Data Integrity Securities Litigation. On June 14, 2018,
lead plaintiffs filed a motion to lift the PSLRA stay of discovery. On June 22, 2018, the Company filed a memorandum in
opposition to the motion to lift the PSLRA stay. On June 26, 2018, the Court denied the motion to lift the PSLRA stay, subject
to entry of a preservation order.
On September 5, 2018, lead plaintiffs filed an amended complaint against the Company, Rajat Rai, Duane A. Portwood,
Mark M. Silverberg, Alan Weinstein, Ronald M. Johnson, Brian Tambi, John Kapoor, Kenneth S. Abramowitz, Adrienne L.
Graves, Steven J. Meyer and Terry A. Rappuhn. The amended complaint asserts (i) claims under Sections 10(b) and 20(a) of
the Securities Exchange Act of 1934 (the “Fraud Claims”) against Defendants Akorn, Rai, Portwood, Silverberg, Weinstein,
Johnson and Tambi; and (ii) claims under Sections 14(a) and 20(a) of the Securities Exchange Act of 1934 (the “Proxy
Claims”) against defendants Akorn, Rai, Kapoor, Weinstein, Abramowitz, Graves, Johnson, Meyer, Rappuhn and Tambi. The
amended complaint alleges that defendants knew or recklessly disregarded widespread institutional data integrity problems at
Akorn’s manufacturing and research and development facilities, while making or causing Akorn to make contrary misleading
statements and omissions of material fact concerning the Company’s data integrity at its facilities. The amended complaint
alleges that corrective information was provided to the market on two separate dates, causing non-insider shareholders to lose
over $1.07 billion and $613 million in value respectively. The amended complaint seeks an award of equitable relief and
damages.
On October 29, 2018, the parties filed a stipulation and joint motion providing for the dismissal of certain claims and
defendants. On October 30, 2018, the Court granted the parties’ motion, dismissing the Proxy Claims without prejudice;
dismissing defendants Kapoor, Abramowitz, Graves, Meyer and Rappuhn without prejudice; and dismissing Defendant
Silverberg with prejudice.
On December 19, 2018, the remaining defendants filed an answer to the amended complaint, disputing the plaintiffs’
remaining allegations. The parties are presently engaged in fact discovery.
Wickstrom v. Akorn, Inc. et al.
On February 21, 2019, Plaintiff Johnny Wickstrom, a purported shareholder of the Company, filed a putative class action
complaint in the United States District Court for the Northern District of Illinois alleging violations of Sections 10(b) and 20(a)
of the Securities Exchange Act of 1934. The complaint names as defendants the Company, Rajat Rai and Duane Portwood.
The complaint alleged that defendants made materially false or misleading statements and/or material omissions concerning its
compliance with U.S. Food and Drug Administration (“FDA”) regulations and that those misstatements were corrected when
the Company disclosed its receipt from the FDA of a warning letter at the Company’s facility in Decatur, IL. The complaint
seeks, among other things, an award of damages, attorneys’ fees and expenses.
Kogut v. Akorn, et. al.
On March 8, 2016, a purported shareholder of the Company filed a putative derivative suit entitled Kogut v. Akorn, Inc., et
al., in Louisiana state court in the Parish of East Baton Rouge. On June 10, 2016, the plaintiff filed an amended complaint
asserting shareholder derivative claims alleging breaches of fiduciary duty in connection with the Company’s accounting for its
acquisition and the restatement of its financials. On September 23, 2016, the Company filed a motion to dismiss the case. The
case was subsequently stayed. On September 21, 2018, the plaintiff filed a second amended complaint, which added claims for
shareholder derivative claims alleging breaches by certain present and former officers and directors of Akorn of fiduciary duties
related to, among other matters, Akorn’s compliance with U.S. Food and Drug Administration (“FDA”) regulations and
requirements regarding data integrity. On December 3, 2018, the Company and certain individual defendants moved to dismiss
the complaint. Briefing on the motion to dismiss was completed on January 31, 2019.
In re Akorn, Inc. Shareholder Derivative Litigation
On October 15, 2018, Dale Trsar, a purported shareholder of the Company, filed a putative derivative suit captioned Trsar
v. Kapoor, et al., in the Circuit Court of Cook County, IL. The suit alleged breaches by certain present and former officers and
directors of Akorn of fiduciary duties related to, among other matters, Akorn’s compliance with FDA regulations and
82
requirements regarding data integrity. On October 26, 2018, Trsar moved to dismiss the complaint voluntarily. On November
5, 2018, the Court granted Plaintiff Trsar’s motion and dismissed the complaint without prejudice.
On November 6, 2018, Trsar filed a putative derivative complaint captioned Trsar v. Kapoor, et al. against defendants John
N. Kapoor, Rajat Rai, Duane A. Portwood, Mark M. Silverberg, Alan Weinstein, Kenneth S. Abramowitz, Steven J. Meyer,
Terry Allison Rappuhn, Adrienne L. Graves, Ronald M. Johnson and Brian Tambi in the United States District Court for the
Northern District of Illinois (the “Trsar Action”). The complaint purports to allege derivatively on behalf of the Company that
(i) the defendants breached their fiduciary duties to the Company and its shareholders by failing to address the Company’s
alleged non-compliance with FDA regulations; and (ii) the defendants violated Section 14(a) of the Securities Exchange Act of
1934, and SEC Rule 14a-9 promulgated thereunder, by making false or misleading statements in proxy statements issued to
Akorn shareholders on November 14, 2016 and March 20, 2017. The complaint seeks an award of equitable relief and
damages.
On December 10, 2018, Felix Glaubach, a purported shareholder of the Company, filed a putative derivative complaint
captioned Glaubach v. Kapoor, et al. against John N. Kapoor, Rajat Rai, Mark M. Silverberg, Duane A. Portwood, Alan
Weinstein, Kenneth S. Abramowitz, Steven J. Meyer, Terry Allison Rappuhn, Adrienne L. Graves, Ronald M. Johnson, and
Brian Tambi in the United States District Court for the Northern District of Illinois (the “Glaubach Action”). The complaint
purported to allege derivatively on behalf of the Company that (i) the defendants breached their fiduciary duties to the
Company and its shareholders by failing to address the Company’s alleged non-compliance with FDA regulations; (ii) John N.
Kapoor and Brian Tambi breached their fiduciary duties to the Company and its shareholders by misappropriating inside
information in connection with sales of the Company’s stock; (iii) Rajat Rai and Duane A. Portwood were unjustly enriched;
(iv) the Defendants wasted the Company’s assets; and (v) the Defendants violated Section 14(a) of the Securities Exchange Act
of 1934, and SEC Rule 14a-9 promulgated thereunder, by making false or misleading statements in proxy statements issued to
the Company’s shareholders. The complaint sought an award of equitable relief and damages. On January 11, the Glaubach
Action was consolidated with the Trsar Action, with the complaint filed in the Trsar Action designated as operative, and the
case caption was amended to In re Akorn, Inc. Shareholder Derivative Litigation.
On January 14, 2019, defendants filed a motion to dismiss the operative complaint in the consolidated action. Plaintiffs
filed an opposition to defendants’ motion to dismiss on February 14, 2019.
Pope v. Akorn Sales Inc. and Akorn, Inc.
On April 7, 2017, a jury in the State Court of Houston County in the State of Georgia reached a verdict of $20.5 million in
damages against Akorn, Inc. in a product liability case, Ann Pope and Anthony Pope v. Horatio V. Cabasares, M.D., Horatio V.
Cabasares, M.D., P.C. Houston Healthcare Systems, Inc., Akorn Sales, Inc., and Akorn, Inc., in which plaintiffs claimed the
Company provided inadequate labeling on its product methylene blue. While an intermediate appellate decision affirmed the
verdict on November 2, 2018, the Company filed a petition for certiorari with the Georgia Supreme Court on November 29,
2018, challenging liability as well as the compensatory and punitive damage awards.
The legal matters discussed above and others could result in losses, including damages, fines and civil penalties, and
criminal charges, which could be substantial. We record accruals for these contingencies to the extent that we conclude that a
loss is both probable and reasonably estimable. Regarding the aforementioned labeling verdict and intermediate appellate
decision related to Methylene Blue Injection, the Company has recorded a $20.5 million liability as of December 31, 2018 for
which a corresponding insurance receivable $10 million is also recorded. The Company maintains product liability insurance
coverage in excess of the amount of the verdict and will seek to enforce its coverage rights in excess of the $10 million
receivable noted above. The Company recorded a $5 million contingent liability as of December 31, 2018 related to damage
claims. Regarding the other matters disclosed above, the Company has determined that contingent liabilities associated with
these legal matters are reasonably possible but they cannot be reasonably estimated. Given the nature of the litigation and
investigations and the complexities involved, the Company is unable to reasonably estimate a possible loss for such matters
until the Company knows, among other factors, (i) what claims, if any, will survive dispositive motion practice, (ii) the extent
of the claims, including the size of any potential class, particularly when damages are not specified or are indeterminate,
(iii) how the discovery process will affect the litigation, (iv) the settlement posture of the other parties to the litigation and
(v) any other factors that may have a material effect on the litigation or investigation. However, we could incur judgments,
enter into settlements or revise our expectations regarding the outcome of certain matters, and such developments could have a
material adverse effect on our results of operations in the period in which the amounts are accrued and/or our cash flows in the
period in which the amounts are paid.
Note 20 – Share Repurchases
83
In July 2016, the Company announced that the Board of Directors authorized a stock repurchase program (the "Stock
Repurchase Program") pursuant to which the Company may repurchase up to $200.0 million of the Company’s common stock.
The shares may be repurchased from time to time in open market transactions at prevailing market prices, in privately
negotiated transactions or others, including accelerated stock repurchase arrangements, pursuant to a Rule 10b5-1 repurchase
plan or by other means in accordance with federal securities laws. The timing and the amount of any repurchases will be
determined by the Company’s management based on its evaluation of market conditions, capital allocation alternatives, and
other factors. There is no guarantee as to the number of shares that will be repurchased, and the repurchase program may be
suspended or discontinued at any time without notice and at the Company's discretion, and at this time no estimate to the effect
on the results of the Company due to the Stock Repurchase Program can be made.
The Company did not repurchase any of its common stock during 2018 and 2017. During 2016, the Company repurchased
1.8 million shares at an average price of $24.89. In aggregate, over the life of the Stock Repurchase Program the Company has
repurchased 1.8 million shares at an average purchase price of $24.89. As of December 31, 2018, the Company had $155.0
million remaining under the repurchase authorization.
Companies incorporated under Louisiana law are subject to the Louisiana Business Corporation Act ("LBCA"). Provisions
of the LBCA eliminate the concept of treasury stock. As a result, all stock repurchases are presented as a reduction to issued
shares of common stock, the stated value of common stock and retained earnings.
84
Note 21 — Pension plan and 401(k) Program
Akorn AG Pension Plan
The Company maintains a pension plan for its employees in Switzerland as required by law. The pension plan is funded
by contributions by both employees and employers, with the sum of the contributions made by the employer required to be at
least equal to the sum of the contributions made by employees. The Company contributes the necessary amounts required by
local laws and regulations. Plan assets for the pension plan are held in a retirement trust fund with investments primarily in
publicly traded securities and assets.
The purpose of this pension plan is to provide old age pensions. Some of the pension funds also provide benefits in case
of disability and to the next of kin in case of premature death. Additionally, the pension funds can be used before retirement to
buy a principal residence, to start an independent activity, or when leaving Switzerland permanently. If a participant leaves the
company, accumulated pension funds are transferred either into a savings account or into the pension fund of a new employer.
The following table sets forth a summary of the defined benefit pension plan funded status:
Consolidated Financial Statement Position:
Fair value of plan assets
Less: Benefit obligation
Funded status - Benefit obligation in excess of plan assets
The following table sets forth the change in plan assets:
Change in plan assets:
Fair value of plan assets, beginning of year
Actual return on plan assets
Participant contributions
Employer contributions
Benefits paid
Translation adjustments and other
Fair value of plan assets, end of year
The following table sets forth the change in benefit obligation:
Change in benefit obligation:
Benefit obligation, beginning of year
Service cost
Interest cost
Actuarial losses (gains)
Benefits paid
Translation adjustments and other
Benefit obligation, end of year
85
$
$
$
$
$
$
($ in thousands)
December 31,
2018
23,610 $
30,772
(7,162) $
($ in thousands)
2018
24,281 $
(409)
753
1,503
(2,446)
(72)
23,610 $
($ in thousands)
2018
30,185 $
2,166
197
771
(2,446)
(101)
30,772 $
2017
24,281
30,185
(5,904)
2017
24,906
1,245
646
1,292
(4,767)
959
24,281
2017
32,594
1,982
253
(1,129)
(4,767)
1,252
30,185
The following table sets forth the changes in items not yet recognized as a component of net periodic cost:
Changes in Unrecognized pension cost, pre-tax
($ in thousands)
Unrecognized pension cost, pre-tax, beginning of year
Amortization during year
Actuarial (losses) gains
Asset (losses) gains
Translation adjustments and other
Unrecognized pension cost, pre-tax, end of year
$
$
$
2018
(2,561) $
(19)
(771)
(1,140)
12 $
(4,479) $
2017
(4,546)
120
1,129
472
264
(2,561)
The following table sets forth the estimated amounts that will be amortized from accumulated other comprehensive
(loss) into net periodic benefit cost in 2019:
Estimated amortization from Other Comprehensive Income into net periodic benefit cost
in 2019:
Amortization of actuarial (losses)
Amortization of prior service credit
Estimated net (loss)
$
$
The following table sets forth the aggregated information for the pension plan:
($ in thousands)
Projected benefit obligation
Accumulated benefit obligation
Fair value of plan assets
($ in thousands)
December 31,
2018
30,772 $
30,583
23,610 $
$
$
The following table sets forth the components of net periodic cost for our pension plan:
Components of net periodic benefit cost
($ in thousands)
Service cost
Interest cost
Expected return on plan assets
Amortization of:
Prior service cost (benefit)
Net actuarial loss
Participant contributions
Net periodic benefit cost
$
$
2018
2,166 $
197
(731)
(19)
—
(753)
2017
1,982 $
253
(773)
(19)
139
(625)
860 $
957 $
(197)
19
(178)
2017
30,185
29,985
24,281
2016
2,087
238
(741)
—
212
(598)
1,198
We estimate the discount rate for our pension benefit obligation based on AA-AAA rated Swiss bonds. The expected
rate of return on plan assets takes into consideration expected long-term returns based upon the weighted-average allocation of
equities, fixed income and other asset components comprising the plan's assets at the plan's measurement date. The following
tables set forth the key assumptions used to determine the net periodic cost for each fiscal year and the benefit obligation at
fiscal year-end:
86
Key assumptions used to determine the net periodic cost:
Discount rate
Expected rate of return on plan assets
Rate of increase in compensation levels
2018
0.80%
3.00%
0.75%
Key assumptions used to determine the benefit obligation:
Discount rate
Rate of increase in compensation levels
2017
0.65%
3.00%
0.75%
2018
0.80%
0.75%
2016
0.75%
3.00%
0.75%
2017
0.65%
0.75%
The pension plan's assets are invested with the objective of being able to meet current and future benefit payment needs,
while maximizing total investment returns within the constraints of a prudent level of portfolio risk and diversification. The
assets of the plan are diversified across asset classes to achieve an optimal balance between risk and return, and between
income and growth of assets through capital appreciation. The following table sets forth the asset allocation of our pension
plan assets, by category:
Plan assets by category:
December 31,
Debt securities
Equity securities
Real estate
Other
Cash and cash equivalents
Total Plan Assets
2018
37.9 %
33.2 %
15.4 %
12.9 %
0.6 %
100.0%
2017
34.0 %
32.4 %
4.3 %
27.3 %
2.0 %
100.0%
This pooled pension fund is held in a trust. This fund is comprised of various publicly traded securities and assets
(equity, fixed income, reits, direct real estate and alternative investments). The trust does not have a separate portfolio for
Akorn. Akorn is entitled to a proportion of the total assets of the trust. The fair value amounts were provided by the fund
administrator who values at market the total portfolio in accordance with ASC 820 - Fair Value of Financial Instruments. The
$23.6 million and $24.3 million represents the fair values of the plan assets as of December 31, 2018 and 2017, respectively.
The fair value hierarchy of the plan assets for 2018 and 2017 was level II.
The Company expects to contribute approximately $1.3 million to the pension plan in 2019.
The following table sets forth the Company's estimated future benefit payments:
Year
2019
2020
2021
2022
2023
Years 2024 - 2028
Smart Choice! Akorn's 401(k) Program
87
($ in thousands)
1,477
1,451
1,316
1,328
1,278
7,317
$
$
All U.S. full-time Akorn employees are eligible to participate in the Company’s 401(k) Plan. The Company matches the
employee contribution to 50% of the first 6% of an employee's eligible compensation. Company matching contributions vest
50% after two years of credited service and 100% after three years of credited service. During the years ended December 31,
2018, 2017 and 2016, plan-related expenses totaled approximately $2.6 million, $2.6 million and $2.2 million, respectively.
The Company's matching contribution is funded on a current basis.
Note 22 – Subsequent Events
On February 25, 2019, the Company made a decision to explore strategic alternatives for exiting its Paonta Sahib,
Himachal Pradesh, India manufacturing facility. The Paonta Sahib facility has not yet been FDA approved. It is a sterile
injectable facility with separate areas dedicated to general injectable products, carbapenem injectable products, cephalosporin
injectable products and hormonal injectable products.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
None.
Item 9A. Controls and Procedures.
(i) Evaluation of Disclosure Controls and Procedures
Our disclosure controls and procedures are designed to ensure that information required to be disclosed by us in the reports
that we file or submit under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), is recorded, processed,
summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures
include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in
reports we file or submit under the Exchange Act is accumulated and communicated to our management, including the Chief
Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
As of December 31, 2018, an evaluation was conducted under the supervision and with the participation of our
management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls
and procedures (as defined in Rule 13a-15(e) and Rule 15d-15(e) of the Exchange Act). Based on this evaluation, such officers
have concluded that our disclosure controls and procedures are not effective as of December 31, 2018 solely because of the
material weakness in our internal control over financial reporting described below.
(ii) Management’s Report on Internal Control over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting, as such
term is defined in Exchange Act Rules 13a-15(f) and 15d-15(f). The Company’s internal control over financial reporting is a
process designed by, or under the supervision of, our Chief Executive Officer and Chief Financial Officer, to provide
reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting principles.
Management, including our Chief Executive Officer and Chief Financial Officer, assessed the effectiveness of the
Company’s internal control over financial reporting as of December 31, 2018. In making this assessment, management used the
criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal
Control Integrated Framework (2013). It is Management’s assessment that the Company did not maintain, in all material
respects, effective internal control over financial reporting as of December 31, 2018 due to the Material Weakness described
below.
A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting, such that
there is a reasonable possibility that a material misstatement of the Company’s annual or interim financial statements will not
be prevented or detected on a timely basis.
During the course of our evaluation, we determined that we did not design and maintain effective internal control over the
accounting for Stock Award Modifications and we had a material calculation error on the separation package adjustments for
certain executives departing the organization in 2018. Stock award modifications associated with executive departures are non-
routine in nature. This resulted in a material corrected misstatement to expenses and income on the consolidated financial
88
statements that we did not prevent or detect timely. Accordingly, our management has determined that this control deficiency
constitutes a material weakness.
(iii) Remediation Plan for Material Weakness in Internal Control over Financial Reporting
With oversight from the Audit Committee, the Company’s management has begun to design and implement certain
remediation measures to address the above-described material weakness and enhance the Company’s internal control over
financial reporting. We will take the following actions to improve the design and operating effectiveness of our internal control
in order to remediate this material weakness:
• Review the processes related to the interpretation and calculation of Stock Award Accelerated Vesting to ensure
compliance with GAAP.
• Evaluate, design, document, and implement additional control procedures related to the interpretation of calculation of
awards with respect to accelerated vesting in conjunction with separation packages.
Test and evaluate the design and operating effectiveness of the control procedures.
•
• Assess the effectiveness of the remediation plan.
We expect to complete our remediation plan during 2019. We believe the remediation measures will strengthen the
Company’s internal control over financial reporting and remediate the material weakness identified. We will continue to
monitor the effectiveness of these remediation measures and will make any changes and take such other actions that we deem
appropriate given the circumstances.
(iv) Changes in Internal Control over Financial Reporting
Other than the item described in the above “Management’s Report on Internal Control over Financial Reporting”, there
were no changes in our internal control over financial reporting that have materially affected, or are reasonably likely to
materially affect, the Company’s internal control over financial reporting.
Item 9B. Other Information.
None.
89
Item 10. Directors, Executive Officers and Corporate Governance.
PART III
Incorporated by reference to the material under the caption “Executive Officers of the Company” in Part I of this Report on
Form 10-K and the sections entitled “Corporate Governance and Related Matters” and “Proposal 1 - Election of Directors” in
the definitive proxy statement for the 2019 annual meeting.
Item 11. Executive Compensation.
Incorporated by reference to the sections entitled “Executive Compensation and Other Information” in the definitive proxy
statement for the 2019 annual meeting.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
Incorporated by reference to the section entitled “Security Ownership of Certain Beneficial Owners and Management” in
the definitive proxy statement for the 2019 annual meeting.
Item 13. Certain Relationships and Related Transactions and Director Independence.
Incorporated by reference to the section entitled “Corporate Governance and Related Matters – Certain Relationships and
Related Transactions” in the definitive proxy statement for the 2019 annual meeting.
Item 14. Principal Accounting Fees and Services.
Incorporated by reference to the section entitled “Proposal 2 - Ratification of the Appointment of BDO USA, LLP as the
Company’s Independent Registered Public Accounting Firm for the Fiscal Year Ending December 31, 2019” in the definitive
proxy statement for the 2019 annual meeting.
90
Item 15. Exhibits, Financial Statement Schedules
(a) Documents filed as part of this report.
PART IV
(1) Financial Statements. The consolidated financial statements listed on the index to Item 8 of this Annual Report on
Form 10-K are filed as a part of this Annual Report.
(2) Financial Statement Schedules. All financial statement schedules have been omitted since the information is either
not applicable or required or is included in the financial statements or notes thereof.
(3) Exhibits. Those exhibits marked with a (*) refer to exhibits filed herewith. The other exhibits are incorporated herein
by reference, as indicated in the following list. Those exhibits marked with a (†) refer to management contracts or
compensatory plans or arrangements. Portions of the exhibits marked with a (Ω) are the subject of a Confidential
Treatment Request under 17 C.F.R. §§ 200.80(b)(4), 200.83 and 240.24b-2. Omitted material for which confidential
treatment has been requested has been filed separately with the SEC.
Exhibit No.
Description
2.1
2.2 Ω
2.3
2.4 Ω
2.5
2.6
2.7
2.8
2.9
3.1
3.2
Agreement and Plan of Merger, dated as of August 26, 2013, by and among Akorn, Inc., Akorn Enterprises,
Inc., and Hi-Tech Pharmacal Co., Inc., incorporated by reference to Exhibit 2.1 to Akorn’s report on Form 8-
K filed on August, 28, 2013.
Stock and Asset Purchase and License Agreement dated as of November 15, 2013 by and among Oak
Pharmaceuticals, Inc., a wholly-owned subsidiary of Akorn, Inc., Merck & Co., Inc., Merck Sharp & Dohme
Corp., and Inspire Pharmaceuticals, Inc., incorporated by reference to Exhibit 2.1 to Akorn’s report on Form
8-K filed on November 21, 2013.
Agreement and Plan of Merger dated as of May 9, 2014 by and among Akorn Enterprises II, Inc., a wholly-
owned subsidiary of Akorn, Inc., VPI Holdings Corp., and Tailwind Management LP, incorporated by
reference to Exhibit 2.1 to Akorn’s report on Form 8-K filed on May 12, 2014.
Product Acquisition Agreement dated as of September 30, 2014 by and among Oak Pharmaceuticals, Inc., a
wholly-owned subsidiary of Akron, Inc., and Sunovion Pharmaceuticals, Inc., incorporated by reference to
Exhibit 2.1 to Akorn’s report on Form 8-K filed on October 1, 2014.
Agreement and Plan of Merger By and Among Fresenius Kabi AG, Quercus Acquisition, Inc., Akorn, Inc.
and Fresenius SE & Co. KGAA dated as of April 24, 2017, incorporated by reference to Exhibit 2.1 to the
report on Form 8-K filed by Akorn, Inc. on April 24, 2017.
Voting Agreement dated as of April 24, 2017, among Fresenius Kabi AG, Dr. John N. Kapoor and certain
affiliates of Dr. Kapoor that are shareholders of Akorn, Inc., incorporated by reference to Exhibit 2.2 to the
report on Form 8-K filed by Akorn, Inc. on April 24, 2017.
Voting Agreement dated as of April 24, 2017, among Fresenius Kabi AG, Rajat Rai and an affiliate of Mr. Rai
that is a shareholder of Akorn, Inc., incorporated by reference to Exhibit 2.3 to the report on Form 8-K filed
by Akorn, Inc. on April 24, 2017.
Voting Agreement dated as of April 24, 2017, between Fresenius Kabi AG and Joseph Bonaccorsi,
incorporated by reference to Exhibit 2.4 to the report on Form 8-K filed by Akorn, Inc. on April 24, 2017.
Voting Agreement dated as of April 24, 2017, between Fresenius Kabi AG and Dr. Bruce Kutinsky,
incorporated by reference to Exhibit 2.5 to the report on Form 8-K filed by Akorn, Inc. on April 24, 2017.
Restated Articles of Incorporation of Akorn, Inc. dated September 16, 2004, incorporated by reference to
Exhibit 3.1 to Akorn, Inc.’s Registration Statement on Form S-1 filed on September 21, 2004 (Commission
file No. 001-32360).
By-Laws of Akorn, Inc., as amended on April 24, 2017, incorporated by reference to Exhibit 3.1 to Akorn’s
report on Form 10-Q filed by Akorn, Inc. on May 4, 2017.
91
4.1
4.2
10.1†
10.2†
10.3†
10.4†
10.5†
10.6†
10.7†
10.8†
10.9†
10.10†
10.11†
10.12†
10.13†
10.14†
10.15†
10.16†
10.17†
Modification, Warrant and Investor Rights Agreement, dated April 13, 2009, among Akorn, Inc., Akorn (New
Jersey), Inc., and EJ Funds LP, incorporated by reference to Exhibit 4.2 to Akorn, Inc.’s report on Form 8-K
filed on April 17, 2009.
Indenture dated as of June 1, 2011 by and between Akorn, Inc. and Wells Fargo Bank, National Association,
as trustee, including the form of 3.50% Convertible Senior Note due 2016 (included as Exhibit A to the
Indenture), incorporated by reference to Exhibit 4.1 to Akorn, Inc.’s report on Form 8-K filed on June 2,
2011.
Form of Akorn, Inc. Non-Qualified Stock Option Agreement (May 2016), incorporated by reference to
Exhibit 10.1 to Akorn, Inc.’s report on Form 10-K for the fiscal year ended December 31, 2015, filed on May
10, 2016.
Form of Akorn, Inc. Incentive Stock Option Agreement (May 2016), incorporated by reference to Exhibit
10.2 to Akorn, Inc.’s report on Form 10-K for the fiscal year ended December 31, 2015, filed on May 10,
2016.
Form of Akorn, Inc. Restricted Stock Unit Award Agreement (May 2016), incorporated by reference to
Exhibit 10.3 to Akorn, Inc.’s report on Form 10-K for the fiscal year ended December 31, 2015, filed on May
10, 2016.
Amended and Restated Akorn, Inc. 2003 Stock Option Plan, as amended, incorporated by reference to
Exhibit 10.1 to Akorn, Inc.’s report on Form 8-K filed on March 8, 2012.
Amended and Restated Akorn, Inc. 2014 Stock Option Plan incorporated by reference to Appendix B to
Akorn, Inc.'s Definitive Proxy Statement filed on November 14, 2016.
Akorn, Inc. 2016 Employee Stock Purchase Plan incorporated by reference to Appendix A to Akorn, Inc.'s
Definitive Proxy Statement filed on November 14, 2016.
Akorn, Inc. Omnibus Incentive Compensation Plan, incorporated by reference to Appendix A to the
Definitive Proxy Statement on Schedule 14A filed by Akorn, Inc. on March 20, 2017.
Akorn, Inc. 2017 Omnibus Incentive Compensation Plan - Form of Restricted Stock Unit Award Agreement,
incorporated by reference to Exhibit 10.2 to the report on Form 10-Q filed by Akorn, Inc. on May 4, 2017.
Akorn, Inc. 2017 Omnibus Incentive Compensation Plan - Form of Restricted Stock Unit Award (non-
employee director), incorporated by reference to Exhibit 10.3 to the report on Form 10-Q filed by Akorn, Inc.
on May 4, 2017.
Form of Inducement Award - Non-qualified Options granted to Douglas Boothe on January 8, 2019,
incorporated by reference to Exhibit 4.3 to the Akorn Inc. registration statement on Form S-8 filed on January
8, 2019.
Form of Inducement Award - Performance Stock Units granted to Douglas Boothe on January 8, 2019,
incorporated by reference to Exhibit 4.4 to the Akorn Inc. registration statement on Form S-8 filed on January
8, 2019.
Form of Inducement Award - Restricted Stock Units granted to Douglas Boothe on January 8, 2019,
incorporated by reference to Exhibit 4.5 to the Akorn Inc. registration statement on Form S-8 filed on January
8, 2019.
Form of Employment Agreement, dated December 22, 2010, between Akorn, Inc. and Joe Bonaccorsi, its
Secretary, incorporated by reference to Exhibit 10.3 to Akorn, Inc.’s report on Form 8-K filed on December
28, 2010.
Form of Employment Agreement, dated April 11, 2014, between Akorn, Inc. and Raj Rai, its Chief Executive
Officer, effective January 1, 2014, incorporated by reference to Exhibit 10.1 to Akorn, Inc.’s report on Form
8-K filed on April 16, 2014.
Form of Employment Agreement, dated April 11, 2014, between Akorn, Inc. and Bruce Kutinsky, its Chief
Operating Officer, incorporated by reference to Exhibit 10.2 to Akorn, Inc.’s report on Form 8-K filed on
April 16, 2014.
Letter Offer Agreement, dated October 13, 2014, as amended December 18, 2014, between Akorn, Inc. and
Steve Lichter, incorporated by reference to Exhibit 10.13 to Akorn, Inc.’s report on Form 10-K for the fiscal
year ended December 31, 2015, filed on May 10, 2016
Letter Offer Agreement, dated March 5, 2015, between Akorn, Inc. and Jonathan Kafer, incorporated by
reference to Exhibit 10.14 to Akorn, Inc.’s report on Form 10-K for the fiscal year ended December 31, 2015,
filed on May 10, 2016.
92
10.18†
10.19†
10.20†
10.21†
Letter Offer Agreement, dated March 26, 2015, between Akorn, Inc. and Randall Pollard, incorporated by
reference to Exhibit 10.15 to Akorn, Inc.’s report on Form 10-K for the fiscal year ended December 31, 2015,
filed on May 10, 2016.
Letter Agreement, dated August 25, 2015, between Akorn, Inc. and Randall Pollard, incorporated by
reference to Exhibit 10.16 to Akorn, Inc.’s report on Form 10-K for the fiscal year ended December 31, 2015,
filed on May 10, 2016.
Letter Agreement, dated September 4, 2015, between Akorn, Inc. and Randall Pollard, incorporated by
reference to Exhibit 10.17 to Akorn, Inc.’s report on Form 10-K for the fiscal year ended December 31, 2015,
filed on May 10, 2016.
Form of Employment Agreement, dated October 5, 2015, between Akorn, Inc. and Duane A. Portwood, its
Chief Financial Officer, incorporated by reference to Exhibit 10.1 to Akorn, Inc.'s report on Form 8-K filed
on October 13, 2015.
10.22†
Form of Letter Agreement, dated December 27, 2018, between Akorn, Inc. and Rajat Rai incorporated by
reference to Exhibit 10.1 to Akorn, Inc.’s report on Form 8-K filed on December 28, 2018.
10.23†*
Form of Amendment #1 to Employment Agreement, dated April 11, 2014, between Akorn, Inc. and Raj Rai,
its Chief Executive Officer, effective December 31, 2018.
10.24†
10.25†
Form of Letter Agreement, dated January 7, 2019, between Akorn, Inc. and Bruce Kutinsky incorporated by
reference to Exhibit 10.1 to Akorn, Inc.’s report on Form 8-K filed on January 7, 2019.
Form of Offer Letter Agreement, dated January 28, 2019, between Akorn, Inc. and Christopher Young,
incorporated by reference to Exhibit 10.1 to Akorn, Inc.’s report on Form 8-K filed on January 28, 2019.
10.26†*
Form of Separation and Consulting Agreement, dated February 5, 2019, between Akorn, Inc. and Rajat Rai.
10.27†*
Form of Separation and Consulting Agreement, dated February 5, 2019, between Akorn, Inc. and Bruce
Kutinsky.
10.28†
10.29†
10.30
10.31
10.32
10.33
10.34
Form of Offer Letter Agreement, dated December 20, 2018, between Akorn, Inc. and Douglas S. Boothe,
incorporated by reference to Exhibit 10.1 to Akorn, Inc.’s report on Form 8-K filed on December 20, 2018.
Form of Executive Agreement, dated December 20, 2018, between Akorn, Inc. and Douglas S. Boothe, its
President and Chief Executive Officer, effective January 1, 2019, incorporated by reference to Exhibit 10.2 to
Akorn, Inc.’s report on Form 8-K filed on December 20, 2018.
Series A-2 Preferred Stock Purchase Agreement dated as of August 1, 2011 by and between Akorn, Inc. and
Aciex Therapeutics, Inc., incorporated by reference to Exhibit 10.2 to Akorn Inc.’s report on Form 10-Q filed
on November 9, 2011.
Amendment #1 to Series A-2 Preferred Stock Purchase Agreement dated as of September 30, 2011 by and
between Akorn, Inc. and Aciex Therapeutics, Inc., incorporated by reference to Exhibit 10.1 to Akorn Inc.’s
report on Form 10-Q filed on November 9, 2011.
Lease Agreement dated July 15, 2010, by and between Veronica Development Associates, a New Jersey
general partnership, and Akorn (New Jersey), Inc., an Illinois corporation, for the Company’s 50,000 square
foot manufacturing facility at 72-6 Veronica Avenue, Somerset, New Jersey, incorporate by reference to
Exhibit 10.1 to Akorn, Inc.’s report on Form 8-K filed on July 30, 2010.
Loan Agreement dated as of April 17, 2014 among Akorn, Inc., with certain financial institutions as lenders
(Lenders), and JPMorgan Chase Bank as administrative agent (Agent) for the Lenders, incorporated by
reference to Exhibit 10.1 to Akorn Inc.’s report on Form 8-K filed on April 23, 2014.
Credit Agreement dated as of April 17, 2014 among Akorn, Inc., with certain financial institutions as lenders
(Lenders), and JPMorgan Chase Bank as administrative agent (Agent) for the Lenders, incorporated by
reference to Exhibit 10.2 to Akorn Inc.’s report on Form 8-K filed on April 23, 2014.
93
10.35
10.36
10.37
10.38
10.39
21.1 *
23.1 *
31.1 *
31.2 *
32.1 *
32.2 *
101
Incremental Facility Joinder Agreement dated as of August 12, 2014 among Akorn, Inc., with certain
financial institutions as lenders (Lenders) and JPMorgan Chase Bank as administrative agent (Agent) for the
Lenders, incorporated by reference to Exhibit 10.1 to Akorn Inc.’s report on Form 8-K filed on August 15,
2014.
ABL Consent Memorandum, dated as of May 19, 2015, among Akorn, Inc., the lenders party thereto and
JPMorgan Chase Bank, N.A., as administrative agent, incorporated by reference to Exhibit 10.1 to Akorn,
Inc.'s report on Form 8-K filed on May 20, 2015.
Term Loan Consent Memorandum, dated as of May 19, 2015, among Akorn, Inc., the lenders party thereto
and JPMorgan Chase Bank, N.A., as administrative agent, incorporated by reference to Exhibit 10.2 to
Akorn, Inc.'s report on Form 8-K filed on May 20, 2015.
ABL Consent Memorandum, dated as of November 13, 2015, among Akorn, Inc., the lenders party thereto
and JPMorgan Chase Bank, N.A., as administrative agent, incorporated by reference to Exhibit 10.1 to
Akorn, Inc.'s report on Form 8-K filed on November 13, 2015.
Term Loan Consent Memorandum, dated as of November 13, 2015, among Akorn, Inc., the lenders party
thereto and JPMorgan Chase Bank, N.A., as administrative agent, incorporated by reference to Exhibit 10.2
to Akorn, Inc.'s report on Form 8-K filed on November 13, 2015.
Listing of Subsidiaries of Akorn, Inc.
Consent of BDO USA, LLP, Independent Registered Public Accounting Firm
Certification of the Chief Executive Officer pursuant to Rule 13a-14(a).
Certification of the Chief Financial Officer pursuant to Rule 13a-14(a).
Certification of the Chief Executive Officer pursuant to 18 USC Section 1350.
Certification of the Chief Financial Officer pursuant to 18 USC Section 1350.
The financial statements and footnotes from the Akorn, Inc. Annual Report on Form 10-K for the year ended
December 31, 2018, filed on March 1, 2019 formatted in XBRL: (i) Consolidated Balance Sheets, (ii)
Consolidated Statements of Operations, (iii) Consolidated Statement of Shareholders’ Equity, (iv)
Consolidated Statements of Cash Flows and (v) Notes to Consolidated Financial Statements.
94
Item 16. Form 10-K Summary
None.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned, thereunto duly authorized.
AKORN, INC.
By:
/s/ DOUGLAS S. BOOTHE
Douglas S. Boothe
President and Chief Executive Officer
Date: March 1, 2019
95
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following
persons on behalf of the Registrant, and in the capacities and on the dates indicated.
Signature
Title
Date
/s/ DOUGLAS S. BOOTHE
President and Chief Executive Officer and Director
March 1, 2019
Douglas S. Boothe
/s/ DUANE A. PORTWOOD
Executive Vice President and Chief Financial Officer
March 1, 2019
Duane A. Portwood
(Principal Financial Officer)
/s/ RANDALL E. POLLARD
Randall E. Pollard
Senior Vice President, Finance and Chief Accounting Officer
(Principal Accounting Officer)
March 1, 2019
/s/ ALAN WEINSTEIN
Director, Chairman of the Board
March 1, 2019
Alan Weinstein
/s/ KENNETH S. ABRAMOWITZ
Director
Kenneth S. Abramowitz
/s/ ADRIENNE L. GRAVES
Director
Adrienne L. Graves
/s/ RONALD M. JOHNSON
Director
Ronald M. Johnson
/s/ STEVEN J. MEYER
Director
Steven J. Meyer
/s/ THOMAS G. MOORE
Director
Thomas G. Moore
/s/ TERRY ALLISON RAPPUHN
Director
Terry Allison Rappuhn
/s/ BRIAN TAMBI
Brian Tambi
Director
96
March 1, 2019
March 1, 2019
March 1, 2019
March 1, 2019
March 1, 2019
March 1, 2019
March 1, 2019
Exhibit Index
Exhibit No.
Description
21.1
23.1
31.1
31.2
32.1
32.2
Listing of Subsidiaries of Akorn, Inc.
Consent of BDO USA, LLP, Independent Registered Public Accounting Firm
Certification of the Chief Executive Officer pursuant to Rule 13a-14(a).
Certification of the Chief Financial Officer pursuant to Rule 13a-14(a).
Certification of the Chief Executive Officer pursuant to 18 USC Section 1350.
Certification of the Chief Financial Officer pursuant to 18 USC Section 1350.
97
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S H A R E H O L D E R I N F O R M A T I O N
EX EC U TIVE M ANAG E MENT
SHAR EHOLD ER I NFOR MAT ION
Douglas S. Boothe
President and Chief Executive Officer
Form 10-K
Copies of Akorn’s Form 10-K are available from the
Duane A. Portwood
Executive Vice President and Chief Financial Officer
Joseph Bonaccorsi
Executive Vice President, General Counsel and Secretary
Investor Relations Department
Akorn, Inc.
1925 West Field Court, Suite 300
Lake Forest, IL 60045
Email: investor.relations@akorn.com
Jonathan Kafer
Executive Vice President and Chief Commercial Officer
Stock Trading
Christopher C. Young
Executive Vice President, Global Operations
Akorn’s common stock is listed on the NASDAQ
Global Select Market under the symbol AKRX
Randall Pollard
Senior Vice President, Finance
and Chief Accounting Officer
BOARD O F DIR ECTOR S
Alan Weinstein
Chairman of the Board
Douglas S. Boothe
Director, President and CEO
Kenneth S. Abramowitz
Director
Adrienne L. Graves, Ph.D.
Director
Ronald M. Johnson
Director
Steven J. Meyer
Director
Thomas G. Moore
Director
Terry Allison Rappuhn
Director
Brian Tambi
Director
Corporate Information
1925 West Field Court, Suite 300
Lake Forest, IL 60045
Telephone: (800) 932-5676 x6156
Website: www.akorn.com
Investor Relations
Contact Information
Phone: (847) 279-6162
E-mail: Investor.relations@akorn.com
Independent Registered
Public Accounting Firm
BDO USA, LLP
Transfer Agent & Registrar
Computershare Investor Services, LLC
211 Quality Circle, Suite 210
College Station, TX 77485-4470
Telephone: (800) 962-4284 or (781) 575-3120
1 9 2 5 WEST FI ELD COURT, SUITE 300 • LAKE FOREST, ILLINOIS 6004 5
P HO N E 800-932-5676 • WEB AKORN.COM