Note 13 — Commitments and Contingencies

On December 22, 2011, the Company acquired the rights to three NDA products from H. Lundbeck A/S ("Lundbeck"). The Company paid $45.0 million in initial consideration at closing and has a commitment to pay additional consideration of $15.0 million to Lundbeck on December 22, 2014, the third anniversary of the acquisition date. Both the initial $45.0 million paid at closing and the additional $15.0 million are subject to claw-back provisions if sales of the three underlying products fail to achieve certain minimum amounts specified in the Lundbeck Agreement. The discounted value of the additional consideration has been recorded by the Company as a current liability on its December 31, 2013 balance sheet. The liability was discounted at 9.0%, the Company’s approximate cost of long-term capital, to an initial value of $11.6 million. The accrual of non-cash interest expense during 2013 increased the carrying amount of this current liability to $14.7 million as of December 31, 2013.

As part of the Lundbeck Agreement, the Company assumed Lundbeck’s obligations under a supply agreement with the third party manufacturer of two of the three products acquired. The supply agreement committed the Company to purchase $13.3 million of product in total over the years 2012 through 2015. The Company determined that its committed purchase quantities exceeded the amount that it anticipated being able to sell. Accordingly, as part of the initial accounting for the Lundbeck Agreement, the Company recorded a long-term liability of $2.5 million, which equaled the estimated present value of the unfavorable contract terms. A portion of this liability was amortized during 2012 and 2013. In the fourth quarter of 2013, the Company determined that no future liability existed related to excess inventory purchase commitments, and accordingly, the Company wrote off the remaining liability balance of $1.3 million.

Also included within the Lundbeck Agreement is a commitment to pay royalties to Lundbeck based on the Company’s sales of a generic form of one of the acquired products. This commitment is more fully described in Note 16 – Business Combinations and Other Strategic Investments. The dollar amount of this commitment is not estimable since it is subject to future sales volumes, prices and margins for the applicable product.

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 timelines, 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. These costs, when realized, will be reported as part of research and development expense or as a component of cost of sales in the Company’s Consolidated Statement of Income.

The table below summarizes contingent potential milestone payments due to strategic partners in the years 2014 and beyond, assuming all such contingencies occur (in thousands):

Year ending December 31,	Milestone Payments
2014	$	4,524
2015		598
2016		200
Total	$	5,322

On October 17, 2012, the Company entered into an exclusive distribution agreement with MBL for the Company’s marketing of MBL-manufactured tetanus-diphtheria vaccine (“Td vaccine”) over an initial contract term of two years. The exclusive distribution agreement commits the Company to acquire $9.2 million in Td vaccine during calendar year 2014. The agreement contains a provision for automatic annual renewals if neither party delivers notice of non-renewal at least six months prior to the end of the initial two-year term or any subsequent annual term.

The Company had an outstanding product warranty reserve which related to a ten year expiration guarantee on DTPA sold to HHS in 2006. The Company was performing yearly stability studies for this product and, if the annual stability did not support the ten-year product life, it would replace the product at no charge. The Company’s supplier, Hameln Pharmaceuticals, was to share one-half of this cost if the product did not meet the stability requirement.

During the quarter ended June 30, 2013, Hameln and the Company terminated and settled their contractual relationship related to the Company’s marketing of DTPA products supplied by Hameln. As part of the settlement arrangement, the Company was released from its remaining product warranty obligations. Accordingly, during the quarter ended June 30, 2013, the Company reversed its $1.3 million product warranty reserve and recognized a corresponding reduction to cost of sales.

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.