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Segment Results

6 Months Ended

Jun. 30, 2019

NOTE 5. SEGMENT RESULTS

During the first quarter of 2019, the Company changed the names of its reportable segments. This change, which was intended to simplify the segments’ names, had no impact on the Company’s unaudited Condensed Consolidated Financial Statements or segment results for any of the periods presented. The Company’s four reportable business segments are set forth below. These segments reflect the level at which the chief operating decision maker regularly reviews financial information to assess performance and to make decisions about resources to be allocated. Each segment derives revenue from the sales or licensing of its respective products and is discussed in more detail below.

We evaluate segment performance based on each segment’s adjusted income from continuing operations before income tax, which we define as Loss from continuing operations before income tax and before certain upfront and milestone payments to partners; acquisition-related and integration items, including transaction costs and changes in the fair value of contingent consideration; cost reduction and integration-related initiatives such as separation benefits, retention payments, other exit costs and certain costs associated with integrating an acquired company’s operations; asset impairment charges; amortization of intangible assets; inventory step-up recorded as part of our acquisitions; litigation-related and other contingent matters; gains or losses from early termination of debt; gains or losses from the sales of businesses and other assets; foreign currency gains or losses on intercompany financing arrangements; and certain other items.

Certain of the corporate expenses incurred by the Company are not directly attributable to any specific segment. Accordingly, these costs are not allocated to any of the Company’s segments and are included in the results below as “Corporate unallocated costs.” Interest income and expense are also considered corporate items and not allocated to any of the Company’s segments. The Company’s consolidated adjusted income from continuing operations before income tax is equal to the combined results of each of its segments less these unallocated corporate items.

Branded Pharmaceuticals

Our Branded Pharmaceuticals segment includes a variety of branded prescription products to treat and manage conditions in urology, urologic oncology, endocrinology, pain and orthopedics. The products in this segment include XIAFLEX^®, SUPPRELIN^®LA, NASCOBAL^® Nasal Spray, AVEED^®, PERCOCET^®, TESTOPEL^®, LIDODERM^®, VOLTAREN^®Gel, EDEX^®, FORTESTA^®Gel and TESTIM^®, among others.

Sterile Injectables

Our Sterile Injectables segment consists primarily of branded sterile injectable products such as VASOSTRICT^®, ADRENALIN^® and APLISOL^®, among others, and certain generic sterile injectable products, including ertapenem for injection, the authorized generic of Merck Sharp & Dohme Corp’s Invanz^®, and ephedrine sulfate injection, among others.

Generic Pharmaceuticals

Our Generic Pharmaceuticals segment consists of a differentiated product portfolio including solid oral extended-release, solid oral immediate-release, liquids, semi-solids, patches, powders, ophthalmics and sprays and includes products in the pain management, urology, central nervous system disorders, immunosuppression, oncology, women’s health and cardiovascular disease markets, among others.

International Pharmaceuticals

Our International Pharmaceuticals segment includes a variety of specialty pharmaceutical products sold outside the U.S., primarily in Canada through our operating company Paladin Labs Inc. (Paladin). This segment’s key products serve growing therapeutic areas, including attention deficit hyperactivity disorder, pain, women’s health and oncology.

The following represents selected information for the Company’s reportable segments for the three and six months ended June 30, 2019 and 2018 (in thousands):



	Three Months Ended June 30,				Six Months Ended June 30,
	2019		2018		2019		2018
Net revenues from external customers:
Branded Pharmaceuticals	$	209,013	$	212,637	$	412,538	$	412,872
Sterile Injectables	244,280		217,843		514,328		433,697
Generic Pharmaceuticals	217,784		241,236		436,310		490,476
International Pharmaceuticals (1)	28,650		42,980		56,962		78,178
Total net revenues from external customers	$	699,727	$	714,696	$	1,420,138	$	1,415,223
Adjusted income from continuing operations before income tax:
Branded Pharmaceuticals	$	82,965	$	83,749	$	161,973	$	177,563
Sterile Injectables	172,188		173,308		368,371		342,753
Generic Pharmaceuticals	49,308		90,302		99,305		164,582
International Pharmaceuticals	11,447		18,499		23,542		32,217
Total segment adjusted income from continuing operations before income tax	$	315,908	$	365,858	$	653,191	$	717,115

__________


(1)	Revenues generated by our International Pharmaceuticals segment are primarily attributable to external customers located in Canada.

There were no material revenues from external customers attributed to an individual country outside of the U.S. during any of the periods presented. There were no material tangible long-lived assets in an individual country other than the U.S. as of June 30, 2019 or December 31, 2018.

The table below provides reconciliations of our Total consolidated loss from continuing operations before income tax, which is determined in accordance with U.S. GAAP, to our total segment adjusted income from continuing operations before income tax for the three and six months ended June 30, 2019 and 2018 (in thousands):



	Three Months Ended June 30,						Six Months Ended June 30,
	2019			2018			2019			2018
Total consolidated loss from continuing operations before income tax	$	(94,584	)	$	(46,244	)	$	(96,293	)	$	(528,491	)
Interest expense, net	134,809			130,059			267,484			254,049
Corporate unallocated costs (1)	38,365			43,046			86,460			95,506
Amortization of intangible assets	140,418			153,215			286,017			310,387
Inventory step-up	—			124			—			190
Upfront and milestone payments to partners	1,444			36,964			2,383			38,296
Separation benefits and other cost reduction initiatives (2)	2,124			29,153			4,149			78,140
Certain litigation-related and other contingencies, net (3)	10,315			19,620			10,321			17,120
Asset impairment charges (4)	88,438			22,767			253,886			471,183
Acquisition-related and integration items (5)	(5,507		)	5,161			(43,008		)	11,996
Gain on extinguishment of debt	—			—			(119,828		)	—
Foreign currency impact related to the remeasurement of intercompany debt instruments	2,262			(574		)	3,796			(3,088		)
Other, net (6)	(2,176		)	(27,433		)	(2,176		)	(28,173		)
Total segment adjusted income from continuing operations before income tax	$	315,908		$	365,858		$	653,191		$	717,115

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(1)	Amounts include certain corporate overhead costs, such as headcount, facility and corporate litigation expenses and certain other income and expenses.

(2)

Amounts for the three and six months ended June 30, 2019 primarily relate to employee separation costs of $0.4 million and $2.2 million, respectively, and other charges of $1.7 million and $1.9 million, respectively. Amounts for the three and six months ended June 30, 2018 primarily relate to employee separation costs of $5.4 million and $30.6 million, respectively, accelerated depreciation of $18.1 million and $35.2 million, respectively, charges to increase excess inventory reserves of $0.2 million and $2.6 million, respectively, and other charges of $5.4 million and $9.7 million, respectively. These charges were related primarily to our restructuring initiatives. See Note 4. Restructuring for discussion of our material restructuring initiatives.


(3)	Amounts include adjustments for Litigation-related and other contingencies, net as further described in Note 13. Commitments and Contingencies.


(4)	Amounts primarily relate to charges to impair goodwill and intangible assets as further described in Note 9. Goodwill and Other Intangibles.


(5)	Amounts primarily relate to changes in the fair value of contingent consideration.


(6)	Amounts primarily relate to gains on sales of businesses and other assets.

Asset information is not reviewed or included within our internal management reporting. Therefore, the Company has not disclosed asset information for each reportable segment.

The Company disaggregates its revenue from contracts with customers into the categories included in the table below (in thousands). The Company believes these categories depict how the nature, timing and uncertainty of revenue and cash flows are affected by economic factors.



	Three Months Ended June 30,				Six Months Ended June 30,
	2019		2018		2019		2018
Branded Pharmaceuticals:
Specialty Products:
XIAFLEX®	$	74,855	$	63,500	$	143,362	$	120,641
SUPPRELIN® LA	23,714		19,963		45,770		40,540
Other Specialty (1)	25,524		22,585		49,927		41,612
Total Specialty Products	$	124,093	$	106,048	$	239,059	$	202,793
Established Products:
PERCOCET®	$	28,878	$	30,833	$	59,638	$	62,809
TESTOPEL®	11,780		13,844		27,594		29,014
Other Established (2)	44,262		61,912		86,247		118,256
Total Established Products	$	84,920	$	106,589	$	173,479	$	210,079
Total Branded Pharmaceuticals (3)	$	209,013	$	212,637	$	412,538	$	412,872
Sterile Injectables:
VASOSTRICT®	$	116,026	$	106,329	$	255,163	$	220,054
ADRENALIN®	45,835		36,658		93,157		66,398
Ertapenem for injection	25,547		—		57,766		—
Other Sterile Injectables (4)	56,872		74,856		108,242		147,245
Total Sterile Injectables (3)	$	244,280	$	217,843	$	514,328	$	433,697
Total Generic Pharmaceuticals (5)	$	217,784	$	241,236	$	436,310	$	490,476
Total International Pharmaceuticals (6)	$	28,650	$	42,980	$	56,962	$	78,178
Total revenues, net	$	699,727	$	714,696	$	1,420,138	$	1,415,223

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(1)	Products included within Other Specialty are NASCOBAL^®Nasal Spray and AVEED^®. Beginning with our first-quarter 2019 reporting, TESTOPEL^®, which was previously included in Other Specialty, has been reclassified and is now included in the Established Products portfolio for all periods presented.


(2)	Products included within Other Established include, but are not limited to, LIDODERM^®, VOLTAREN^® Gel, EDEX^®, FORTESTA^® Gel, and TESTIM^®, including the authorized generics of TESTIM^® and FORTESTA^® Gel.


(3)	Individual products presented above represent the top two performing products in each product category for either the three or six months ended June 30, 2019 and/or any product having revenues in excess of $25 million during any quarterly period in 2019 or 2018.


(4)	Products included within Other Sterile Injectables include, but are not limited to, APLISOL^® and ephedrine sulfate injection.

(5)

The Generic Pharmaceuticals segment is comprised of a portfolio of products that are generic versions of branded products, are distributed primarily through the same wholesalers, generally have no intellectual property protection and are sold within the U.S. During the three and six months ended June 30, 2019, colchicine tablets, the authorized generic of Takeda Pharmaceuticals U.S.A., Inc.’s Colcrys^®, which launched in July 2018, made up 7% and 6% of consolidated total revenue, respectively. No other individual product within this segment has exceeded 5% of consolidated total revenues for the periods presented.

(6)

The International Pharmaceuticals segment, which accounted for 4% of consolidated total revenues during both the three and six months ended June 30, 2019 and 6% of consolidated total revenues during both the three and six months ended June 30, 2018, respectively, includes a variety of specialty pharmaceutical products sold outside the U.S., primarily in Canada through our operating company Paladin.