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| AGN > SEC Filings for AGN > Form 10-Q on 6-Aug-2012 | All Recent SEC Filings |
6-Aug-2012
Quarterly Report
Critical Accounting Policies, Estimates and Assumptions
The preparation and presentation of financial statements in conformity with
accounting principles generally accepted in the United States, or GAAP, requires
us to establish policies and to make estimates and assumptions that affect the
amounts reported in our consolidated financial statements. In our judgment, the
accounting policies, estimates and assumptions described below have the greatest
potential impact on our consolidated financial statements. Accounting
assumptions and estimates are inherently uncertain and actual results may differ
materially from our estimates.
Revenue Recognition
We recognize revenue from product sales when goods are shipped and title and
risk of loss transfer to our customers. A substantial portion of our revenue is
generated by the sale of specialty pharmaceutical products (primarily eye care
pharmaceuticals, skin care and urologics products) to wholesalers within the
United States, and we have a policy to attempt to maintain average
U.S. wholesaler inventory levels at an amount less than eight weeks of our net
sales. A portion of our revenue is generated from consigned inventory of breast
implants maintained at physician, hospital and clinic locations. These customers
are contractually obligated to maintain a specific level of inventory and to
notify us upon the use of consigned inventory. Revenue for consigned inventory
is recognized at the time we are notified by the customer that the product has
been used. Notification is usually through the replenishing of the inventory,
and we periodically review consignment inventories to confirm the accuracy of
customer reporting.
We generally offer cash discounts to customers for the early payment of
receivables. Those discounts are recorded as a reduction of revenue and accounts
receivable in the same period that the related sale is recorded. The amounts
reserved for cash discounts were $5.9 million and $4.5 million at June 30, 2012
and December 31, 2011, respectively. Provisions for cash discounts deducted from
consolidated sales in the second quarter of 2012 and 2011 were $17.0 million and
$15.9 million, respectively. Provisions for cash discounts deducted from
consolidated sales in the first six months of 2012 and 2011 were $33.8 million
and $30.2 million, respectively.
We permit returns of product from most product lines by any class of customer if
such product is returned in a timely manner, in good condition and from normal
distribution channels. Return policies in certain international markets and for
certain medical device products, primarily breast implants, provide for more
stringent guidelines in accordance with the terms of contractual agreements with
customers. Our estimates for sales returns are based upon the historical
patterns of product returns matched against sales, and management's evaluation
of specific factors that may increase the risk of product returns. The amount of
allowances for sales returns recognized in our consolidated balance sheets at
June 30, 2012 and December 31, 2011 were $72.9 million and $68.5 million,
respectively, and are recorded in "Other accrued expenses" and "Trade
receivables, net" in our consolidated balance sheets. Provisions for sales
returns deducted from consolidated sales were $111.5 million and $108.8 million
in the second quarter of 2012 and 2011, respectively. Provisions for sales
returns deducted from consolidated sales were $211.2 million and $212.7 million
in the first six months of 2012 and 2011, respectively. The increase in the
amount of allowances for sales returns at June 30, 2012 compared to December 31,
2011 and the provisions for sales returns in the second quarter of 2012 compared
to the second quarter of 2011 are primarily due to increased overall product
sales volume. The small decrease in the provisions for sales returns in the
first six months of 2012 compared to the first six months of 2011 is primarily
due to a decrease in estimated product sales return rates for our skin care
products. Historical allowances for cash discounts and product returns have been
consistent with the amounts reserved or accrued.
We participate in various managed care sales rebate and other incentive
programs, the largest of which relates to Medicaid, Medicare and the U.S.
Department of Veterans Affairs. Sales rebate and other incentive programs also
include contractual volume rebate programs and chargebacks, which are
contractual discounts given primarily to federal government agencies, health
maintenance organizations, pharmacy benefits managers and group purchasing
organizations. We also offer rebate and other incentive programs for our
aesthetic products and certain therapeutic products, including Botox® Cosmetic,
Juvéderm®, Latisse®,
Acuvail®, Aczone®, Sanctura XR® and Restasis®, and for certain other skin care
products. Sales rebates and incentive accruals reduce revenue in the same period
that the related sale is recorded and are included in "Other accrued expenses"
in our consolidated balance sheets. The amounts accrued for sales rebates and
other incentive programs were $278.6 million and $249.1 million at June 30, 2012
and December 31, 2011, respectively. Provisions for sales rebates and other
incentive programs deducted from consolidated sales were $231.2 million and
$182.2 million in the second quarter of 2012 and 2011, respectively. Provisions
for sales rebates and other incentive programs deducted from consolidated sales
were $468.2 million and $356.7 million in the first six months of 2012 and 2011,
respectively. The increases in the amounts accrued at June 30, 2012 compared to
December 31, 2011 and the provisions for sales rebates and other incentive
programs in the second quarter and the first six months of 2012 compared to the
second quarter and the first six months of 2011 are primarily due to an increase
in activity under previously established rebate and incentive programs,
principally related to our eye care pharmaceuticals, Botox® Cosmetic, urology,
skin care and facial aesthetics products, an increase in the number of incentive
programs offered and increased overall product sales volume. In addition, an
increase in our published list prices in the United States for pharmaceutical
products, which occurred for several of our products in each of 2012 and 2011,
generally results in higher provisions for sales rebates and other incentive
programs deducted from consolidated sales.
Our procedures for estimating amounts accrued for sales rebates and other
incentive programs at the end of any period are based on available quantitative
data and are supplemented by management's judgment with respect to many factors,
including but not limited to, current market dynamics, changes in contract
terms, changes in sales trends, an evaluation of current laws and regulations
and product pricing. Quantitatively, we use historical sales, product
utilization and rebate data and apply forecasting techniques in order to
estimate our liability amounts. Qualitatively, management's judgment is applied
to these items to modify, if appropriate, the estimated liability amounts. There
are inherent risks in this process. For example, customers may not achieve
assumed utilization levels; customers may misreport their utilization to us; and
actual movements of the U.S. Consumer Price Index for All Urban Consumers, or
CPI-U, which affect our rebate programs with U.S. federal and state government
agencies, may differ from those estimated. On a quarterly basis, adjustments to
our estimated liabilities for sales rebates and other incentive programs related
to sales made in prior periods have not been material and have generally been
less than 0.5% of consolidated product net sales. An adjustment to our estimated
liabilities of 0.5% of consolidated product net sales on a quarterly basis would
result in an increase or decrease to net sales and earnings before income taxes
of approximately $7.0 million to $8.0 million. The sensitivity of our estimates
can vary by program and type of customer. Additionally, there is a significant
time lag between the date we determine the estimated liability and when we
actually pay the liability. Due to this time lag, we record adjustments to our
estimated liabilities over several periods, which can result in a net increase
to earnings or a net decrease to earnings in those periods. Material differences
may result in the amount of revenue we recognize from product sales if the
actual amount of rebates and incentives differ materially from the amounts
estimated by management.
We recognize license fees, royalties and reimbursement income for services
provided as other revenues based on the facts and circumstances of each
contractual agreement. In general, we recognize income upon the signing of a
contractual agreement that grants rights to products or technology to a third
party if we have no further obligation to provide products or services to the
third party after entering into the contract. We recognize contingent
consideration earned from the achievement of a substantive milestone in its
entirety in the period in which the milestone is achieved. We defer income under
contractual agreements when we have further obligations that indicate that a
separate earnings process has not been completed.
Contingent Consideration
Contingent consideration liabilities represent future amounts we may be required
to pay in conjunction with various business combinations. The ultimate amount of
future payments is based on specified future criteria, such as sales performance
and the achievement of certain future development, regulatory and sales
milestones and other contractual performance conditions. We estimate the fair
value of the contingent consideration liabilities related to sales performance
using the income approach, which involves forecasting estimated future net cash
flows and discounting the net cash flows to their present value using a
risk-adjusted rate of return. We estimate the fair value of the contingent
consideration liabilities related to the achievement of future development and
regulatory milestones by assigning an achievement probability to each potential
milestone and discounting the associated cash payment to its present value using
a risk-adjusted rate of return. We estimate the fair value of the contingent
consideration liabilities associated with sales milestones by employing Monte
Carlo simulations to estimate the volatility and systematic relative risk of
revenues subject to sales milestone payments and discounting the associated cash
payment amounts to their present values using a credit-risk-adjusted interest
rate. The fair value of other contractual performance conditions is measured by
assigning an achievement probability to each payment and discounting the payment
to its present value using our estimated cost of borrowing. We evaluate our
estimates of the fair value of contingent consideration liabilities on a
periodic basis. Any changes in the fair value of contingent consideration
liabilities are recorded through earnings as "Selling, general and
administrative" in the accompanying unaudited condensed consolidated statements
of earnings. The total estimated fair value of contingent consideration
liabilities was $229.2 million and $214.6 million at June 30, 2012 and
December 31, 2011, respectively, and was included in "Other accrued expenses"
and "Other liabilities" in our consolidated balance sheets.
Pensions
We sponsor various pension plans in the United States and abroad in accordance
with local laws and regulations. Our U.S. pension plans account for a large
majority of our aggregate pension plans' net periodic benefit costs and
projected benefit obligations. In connection with these plans, we use certain
actuarial assumptions to determine the plans' net periodic benefit costs and
projected benefit obligations, the most significant of which are the expected
long-term rate of return on assets and the discount rate.
Our assumption for the weighted average expected long-term rate of return on
assets in our U.S. funded pension plan for determining the net periodic benefit
cost is 6.75% and 7.25% for 2012 and 2011, respectively. Our assumptions for the
weighted average expected long-term rate of return on assets in our
non-U.S. funded pension plans are 4.80% and 5.70% for 2012 and 2011,
respectively. For our U.S. funded pension plan, we determine, based upon
recommendations from our pension plan's investment advisors, the expected rate
of return using a building block approach that considers diversification and
rebalancing for a long-term portfolio of invested assets. Our investment
advisors study historical market returns and preserve long-term historical
relationships between equities and fixed income in a manner consistent with the
widely-accepted capital market principle that assets with higher volatility
generate a greater return over the long run. They also evaluate market factors
such as inflation and interest rates before long-term capital market assumptions
are determined. For our non-U.S. funded pension plans, the expected rate of
return was determined based on asset distribution and assumed long-term rates of
return on fixed income instruments and equities. Market conditions and other
factors can vary over time and could significantly affect our estimates of the
weighted average expected long-term rate of return on plan assets. The expected
rate of return is applied to the market-related value of plan assets. As a
sensitivity measure, the effect of a 0.25% decline in our rate of return on
assets assumptions for our U.S. and non-U.S. funded pension plans would increase
our expected 2012 pre-tax pension benefit cost by approximately $1.8 million.
The weighted average discount rates used to calculate our U.S. and
non-U.S. pension benefit obligations at December 31, 2011 were 4.63% and 5.14%,
respectively. The weighted average discount rates used to calculate our U.S. and
non-U.S. net periodic benefit costs for 2012 were 4.63% and 5.14%, respectively,
and for 2011, 5.51% and 5.57%, respectively. We determine the discount rate
based upon a hypothetical portfolio of high quality fixed income investments
with maturities that mirror the pension benefit obligations at the plans'
measurement date. Market conditions and other factors can vary over time and
could significantly affect our estimates for the discount rates used to
calculate our pension benefit obligations and net periodic benefit costs for
future years. As a sensitivity measure, the effect of a 0.25% decline in the
discount rate assumption for our U.S. and non-U.S. pension plans would increase
our expected 2012 pre-tax pension benefit costs by approximately $4.6 million
and increase our pension plans' projected benefit obligations at December 31,
2011 by approximately $42.8 million.
Share-Based Compensation
We recognize compensation expense for all share-based awards made to employees
and directors. The fair value of share-based awards is estimated at the grant
date and the portion that is ultimately expected to vest is recognized as
compensation cost over the requisite service period.
The fair value of stock option awards that vest based on a service condition is
estimated using the Black-Scholes option-pricing model. The fair value of
share-based awards that contain a market condition is generally estimated using
a Monte Carlo simulation model, and the fair value of modifications to
share-based awards is generally estimated using a lattice model.
The determination of fair value using the Black-Scholes, Monte Carlo simulation
and lattice models is affected by our stock price as well as assumptions
regarding a number of complex and subjective variables, including expected stock
price volatility, risk-free interest rate, expected dividends and projected
employee stock option exercise behaviors. We currently estimate stock price
volatility based upon an equal weighting of the historical average over the
expected life of the award and the average implied volatility of at-the-money
options traded in the open market. We estimate employee stock option exercise
behavior based on actual historical exercise activity and assumptions regarding
future exercise activity of unexercised, outstanding options.
Share-based compensation expense is recognized only for those awards that are
ultimately expected to vest, and we have applied an estimated forfeiture rate to
unvested awards for the purpose of calculating compensation cost. These
estimates will be revised in future periods if actual forfeitures differ from
the estimates. Changes in forfeiture estimates impact compensation cost in the
period in which the change in estimate occurs. Compensation expense for
share-based awards based on a service condition is recognized using the
straight-line single option method.
Product Liability Self-Insurance
As of June 1, 2012, we are largely self-insured for future product liability
losses related to all of our products. We have historically been and continue to
be self-insured for any product liability losses related to our breast implant
products. We maintain third party insurance coverage that we believe is adequate
to cover potential product liability losses for injuries alleged to have
occurred prior to June 1, 2011 related to Botox® and Botox® Cosmetic and prior
to June 1, 2012 related to all of our other products. In addition, as a part of
our current self-insurance product liability practice, we maintain a layer of
insurance coverage for potential product liability losses, excluding breast
implant products, above a minimum self-insured amount. Future product liability
losses are, by their nature, uncertain and are based upon complex judgments and
probabilities. The factors to consider in developing product liability reserves
include the merits and jurisdiction of each claim, the nature and the number of
other similar current and past claims, the nature of the product use and the
likelihood of settlement. In addition, we accrue for certain potential product
liability losses estimated to be incurred, but not reported, to the extent they
can be reasonably estimated. We estimate these accruals for potential losses
based primarily on historical claims experience and data regarding product
usage. The total value of self-insured product liability claims settled in the
second quarter and the first six months of 2012 and 2011, respectively, and the
value of known and reasonably estimable incurred but unreported self-insured
product liability claims pending as of June 30, 2012 are not expected to have a
material effect on our results of operations or liquidity.
Income Taxes
The provision for income taxes is determined using an estimated annual effective
tax rate, which is generally less than the U.S. federal statutory rate,
primarily because of lower tax rates in certain non-U.S. jurisdictions, research
and development, or R&D, tax credits available in California and other foreign
jurisdictions and deductions available in the United States for domestic
production activities. We currently expect the U.S. R&D tax credit to be renewed
in the fourth quarter of 2012, with retroactive effect to January 1, 2012;
however, until appropriate legislation is enacted in the United States to renew
the R&D tax credit, our estimated annual effective tax rate for fiscal year 2012
must exclude any potential benefit for this credit. Our effective tax rate may
be subject to fluctuations during the year as new information is obtained, which
may affect the assumptions used to estimate the annual effective tax rate,
including factors such as the mix of pre-tax earnings in the various tax
jurisdictions in which we operate, valuation allowances against deferred tax
assets, the recognition or derecognition of tax benefits related to uncertain
tax positions, expected utilization of R&D tax credits and changes in or the
interpretation of tax laws in jurisdictions where we conduct business. We
recognize deferred tax assets and liabilities for temporary differences between
the financial reporting basis and the tax basis of our assets and liabilities
along with net operating loss and tax credit carryovers.
We record a valuation allowance against our deferred tax assets to reduce the
net carrying value to an amount that we believe is more likely than not to be
realized. When we establish or reduce the valuation allowance against our
deferred tax assets, our provision for income taxes will increase or decrease,
respectively, in the period such determination is made. The valuation allowance
against deferred tax assets was $14.9 million at June 30, 2012 and December 31,
2011.
We have not provided for withholding and U.S. taxes for the unremitted earnings
of certain non-U.S. subsidiaries because we have currently reinvested these
earnings indefinitely in these foreign operations. At December 31, 2011, we had
approximately $2,505.1 million in unremitted earnings outside the United States
for which withholding and U.S. taxes were not provided. Income tax expense would
be incurred if these earnings were remitted to the United States. It is not
practicable to estimate the amount of the deferred tax liability on such
unremitted earnings. Upon remittance, certain foreign countries impose
withholding taxes that are then available, subject to certain limitations, for
use as credits against our U.S. tax liability, if any. We annually update our
estimate of unremitted earnings outside the United States after the completion
of each fiscal year.
Acquisitions
The accounting for acquisitions requires extensive use of estimates and
judgments to measure the fair value of the identifiable tangible and intangible
assets acquired, including in-process research and development, and liabilities
assumed. Additionally, we must determine whether an acquired entity is
considered to be a business or a set of net assets, because the excess of the
purchase price over the fair value of net assets acquired can only be recognized
as goodwill in a business combination.
On June 17, 2011, we acquired Alacer Biomedical, Inc., or Alacer, for an
aggregate purchase price of approximately $7.0 million, net of cash acquired. On
July 1, 2011, we purchased the commercial assets related to the selling and
distribution of our products from our distributor in South Africa for $8.6
million, net of a $2.2 million pre-existing receivable from the distributor. On
July 22, 2011, we acquired Vicept Therapeutics, Inc., or Vicept, for $74.1
million in cash and estimated contingent consideration of $163.0 million as of
the acquisition date. On August 8, 2011, we acquired Precision Light, Inc., or
Precision Light, for $11.7 million in cash and estimated contingent
consideration of $6.2 million as of the acquisition date. On February 1, 2012,
we purchased the commercial assets related to the selling and distribution of
our products from our distributor in Russia for $3.1 million in cash, net of a
$6.6 million pre-existing net receivable from the distributor, and estimated
contingent consideration of $4.7 million as of the acquisition date. We
accounted for these acquisitions as business combinations. The tangible and
intangible assets acquired and liabilities assumed in connection with these
acquisitions were recognized based on their estimated fair values at the
acquisition dates. The determination of estimated fair values requires
significant estimates and assumptions including, but not limited to, determining
the timing and estimated costs to complete the in-process projects, projecting
regulatory approvals, estimating future cash flows and developing appropriate
discount rates. We believe the estimated fair values assigned to the assets
acquired and
liabilities assumed are based on reasonable assumptions.
Impairment Evaluations for Goodwill and Intangible Assets
We evaluate goodwill for impairment on an annual basis, or more frequently if we
believe indicators of impairment exist. We have identified two reporting units,
specialty pharmaceuticals and medical devices, and perform our annual evaluation
as of October 1 each year.
For our specialty pharmaceuticals reporting unit, we performed the qualitative
assessment to determine whether it is more likely than not that its fair value
is less than its carrying amount. For our medical devices reporting unit, we
evaluated goodwill for impairment by comparing its carrying value to its
estimated fair value. We primarily use the income approach and the market
approach to valuation that include the discounted cash flow method, the
guideline company method, as well as other generally accepted valuation
methodologies to determine the fair value.
Upon completion of the October 2011 annual impairment assessment, we determined
that no impairment was indicated. As of June 30, 2012, we do not believe any
significant indicators of impairment exist for our goodwill that would require
additional analysis.
We also review intangible assets for impairment when events or changes in
circumstances indicate that the carrying value of our intangible assets may not
be recoverable. An impairment in the carrying value of an intangible asset is
recognized whenever anticipated future undiscounted cash flows from an
intangible asset are estimated to be less than its carrying value.
In March 2011, we decided to discontinue development of the EasyBand™ Remote
Adjustable Gastric Band System, or EasyBand™, a technology that we acquired in
connection with our 2007 acquisition of EndoArt SA, or EndoArt. As a result, in
the first quarter of 2011 we recorded a pre-tax impairment charge of $16.1
million for the intangible assets associated with the EasyBand™ technology.
Significant management judgment is required in the forecasts of future operating
results that are used in our impairment evaluations. The estimates we have used
are consistent with the plans and estimates that we use to manage our
business. It is possible, however, that the plans may change and estimates used
may prove to be inaccurate. If our actual results, or the plans and estimates
used in future impairment analyses, are lower than the original estimates used
to assess the recoverability of these assets, we could incur future impairment
charges.
Operations
Headquartered in Irvine, California, we are a multi-specialty health care
company focused on developing and commercializing innovative pharmaceuticals,
biologics, medical devices and over-the-counter products that enable people to
live life to its full potential - to see more clearly, move more freely and
express themselves more fully. We discover, develop and commercialize a diverse
range of products for the ophthalmic, neurological, medical aesthetics, medical
dermatology, breast aesthetics, obesity intervention, urological and other
specialty markets in more than 100 countries around the world.
We are also a pioneer in specialty pharmaceutical, biologic and medical device
research and development. Our research and development efforts are focused on
products and technologies related to the many specialty areas in which we
currently operate as well as new specialty areas where unmet medical needs are
. . .
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