Segment Results

3 Months Ended

Mar. 31, 2020

NOTE 4. SEGMENT RESULTS

The Company’s four reportable business segments are Branded Pharmaceuticals, Sterile Injectables, Generic Pharmaceuticals and International Pharmaceuticals. These segments reflect the level at which the chief operating decision maker (CODM) 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 segment adjusted income from continuing operations before income tax, which we define as Income (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, continuity 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; certain legal costs; 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. Effective January 1, 2020, the Company revised its definition of segment adjusted income from continuing operations before income tax to exclude certain legal costs in order to reflect changes in how the CODM reviews segment performance. The Company believes that such costs are not indicative of business performance and that excluding them more accurately reflects each segment’s results and better enables management to compare financial results between periods. Prior period results have been adjusted to reflect this change. Specifically, for the three months ended March 31, 2019, certain legal costs of $16.3 million and $0.4 million have been excluded from our Branded Pharmaceuticals and Generic Pharmaceuticals segments, respectively, resulting in increases to the segment adjusted income from continuing operations before income tax for these segments. This change had no impact on our Total consolidated income (loss) from continuing operations before income tax.

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 total segment adjusted income from continuing operations before income tax is equal to the combined results of each of its segments.

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^®, EDEX^®, LIDODERM^® and TESTOPEL^®, 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 (Merck) 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). The key products of this segment serve various 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 months ended March 31, 2020 and 2019 (in thousands):



	Three Months Ended March 31,
	2020		2019
Net revenues from external customers:
Branded Pharmaceuticals	$	204,073	$	203,525
Sterile Injectables	336,390		270,048
Generic Pharmaceuticals	251,283		218,526
International Pharmaceuticals (1)	28,659		28,312
Total net revenues from external customers	$	820,405	$	720,411
Segment adjusted income from continuing operations before income tax:
Branded Pharmaceuticals	$	98,422	$	95,283
Sterile Injectables	263,896		196,183
Generic Pharmaceuticals	57,327		50,411
International Pharmaceuticals	14,197		12,095
Total segment adjusted income from continuing operations before income tax	$	433,842	$	353,972

__________


(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.

The table below provides reconciliations of our Total consolidated income (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 months ended March 31, 2020 and 2019 (in thousands):



	Three Months Ended March 31,
	2020			2019
Total consolidated income (loss) from continuing operations before income tax	$	21,249		$	(1,709	)
Interest expense, net	132,877			132,675
Corporate unallocated costs (1)	43,322			48,095
Amortization of intangible assets	117,237			145,599
Upfront and milestone payments to partners	1,750			939
Continuity and separation benefits and other cost reduction initiatives (2)	23,220			2,025
Certain litigation-related and other contingencies, net (3)	(17,176		)	6
Certain legal costs (4)	15,536			16,689
Asset impairment charges (5)	97,785			165,448
Acquisition-related and integration items, net (6)	12,462			(37,501		)
Gain on extinguishment of debt	—			(119,828		)
Foreign currency impact related to the remeasurement of intercompany debt instruments	(7,094		)	1,534
Other, net (7)	(7,326		)	—
Total segment adjusted income from continuing operations before income tax	$	433,842		$	353,972

__________


(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 months ended March 31, 2020 include $13.7 million of costs associated with certain continuity and transitional compensation arrangements for certain senior management of the Company. Other amounts in 2020 related primarily to certain cost reduction initiatives. Such amounts included accelerated depreciation of $6.6 million, employee separation costs of $0.1 million and other charges of $2.8 million. Amounts for the three months ended March 31, 2019 primarily relate to employee separation costs of $1.8 million and other charges of $0.2 million.


(3)	Amounts include adjustments to our accruals for litigation-related settlement charges and certain settlement proceeds related to suits filed by our subsidiaries. Our material legal proceedings and other contingent matters are described in more detail in Note 12. Commitments and Contingencies.


(4)	Amounts relate to opioid-related legal expenses.


(5)	Amounts primarily relate to charges to impair goodwill and intangible assets as further described in Note 8. Goodwill and Other Intangibles.


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


(7)	Amounts primarily relate to gains on sales of businesses and other assets, as further described in Note 15. Other (Income) Expense, Net.

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

During the three months ended March 31, 2020 and 2019, the Company disaggregated 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 March 31,
	2020		2019
Branded Pharmaceuticals:
Specialty Products:
XIAFLEX®	$	89,072	$	68,507
SUPPRELIN® LA	19,720		22,056
Other Specialty (1)	25,505		24,403
Total Specialty Products	$	134,297	$	114,966
Established Products:
PERCOCET®	$	27,703	$	30,760
EDEX®	8,568		5,971
Other Established (2)	33,505		51,828
Total Established Products	$	69,776	$	88,559
Total Branded Pharmaceuticals (3)	$	204,073	$	203,525
Sterile Injectables:
VASOSTRICT®	$	202,904	$	139,137
ADRENALIN®	56,512		47,322
Ertapenem for injection	17,874		32,219
APLISOL®	9,867		12,381
Other Sterile Injectables (4)	49,233		38,989
Total Sterile Injectables (3)	$	336,390	$	270,048
Total Generic Pharmaceuticals (5)	$	251,283	$	218,526
Total International Pharmaceuticals (6)	$	28,659	$	28,312
Total revenues, net	$	820,405	$	720,411

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(1)	Products included within Other Specialty are NASCOBAL^®Nasal Spray and AVEED^®.


(2)	Products included within Other Established include, but are not limited to, LIDODERM^®and TESTOPEL^®.


(3)	Individual products presented above represent the top two performing products in each product category for the three months ended March 31, 2020 and/or any product having revenues in excess of $25 million during any quarterly period in 2020 or 2019.


(4)	Products included within Other Sterile Injectables include ephedrine sulfate injection and others.

(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 months ended March 31, 2019, colchicine tablets, the authorized generic of Takeda Pharmaceuticals U.S.A., Inc.’s (Takeda) Colcrys^®, which launched in July 2018, made up 6% of consolidated total revenue. 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 3% and 4% of consolidated total revenues during the three months ended March 31, 2020 and 2019, respectively, includes a variety of specialty pharmaceutical products sold outside the U.S., primarily in Canada through our operating company Paladin.