Edwards Lifesciences

EW
Delayed Nyse - 02/21 10:03:05 pm
231.25USD
-1.14%

EDWARDS LIFESCIENCES : Management's Discussion and Analysis of Financial Condition and Results of Operations (form 10-K)

Envoyer par e-mail
02/14/2020 | 10:31 pm


The following discussion and analysis presents the factors that had a material
effect on our results of operations during the two years ended December 31,
2019
. Also discussed is our financial position as of December 31, 2019. You
should read this discussion in conjunction with the historical consolidated
financial statements and related notes included elsewhere in this Form 10-K. For
a discussion related to the results of operations for 2018 compared to 2017,
refer to Part II, Item 7, "Management's Discussion and Analysis of Financial
Condition and Results of Operations" in our 2018 Annual Report on Form 10-K
filed with the Securities and Exchange Commission on February 15, 2019.


Overview




We are the global leader in patient-focused medical innovations for structural
heart disease, as well as critical care and surgical monitoring. Driven by a
passion to help patients, we partner with the world's leading clinicians and
researchers and invest in research and development to transform care for those
impacted by structural heart disease or who require hemodynamic monitoring
during surgery or in intensive care. We conduct operations worldwide and are
managed in the following geographical regions: United States, Europe, Japan, and
Rest of World. Our products are categorized into the following main areas:
Transcatheter Aortic Valve Replacement ("TAVR"), Transcatheter Mitral and
Tricuspid Therapies ("TMTT"), Surgical Structural Heart ("Surgical"), and
Critical Care. Prior to 2019, TMTT and TAVR had been reported together.
Therefore, prior periods have been presented to conform with the updated product
categories.


23



--------------------------------------------------------------------------------



Table of Contents





Financial Highlights
[[Image Removed: ew10-kq420_chartx21698a14.jpg]][[Image Removed: ew10-kq420_chartx23239a14.jpg]]
Our sales growth was driven by our TAVR products, primarily the Edwards SAPIEN 3
transcatheter heart valve and the Edwards SAPIEN 3 Ultra System. Our 2018
Surgical sales in the United States were reduced by a $82.5 million sales return
reserve related to our conversion to a consignment inventory model.

Our gross profit increase was driven by our sales performance noted above and
was positively impacted by an improved product mix, led by TAVR products.
Partially offsetting this increase was a charge of $73.1 million recorded in
2019, primarily comprised of the write off of inventory related to strategic
decisions regarding our TAVR portfolio, including the decision to discontinue
our CENTERA program.

The increase in our net income and diluted earnings per share in 2019 was
primarily driven by the aforementioned sales growth, partially offset by a 2018
tax benefit and the charge in 2019 related to strategic decisions regarding our
TAVR portfolio.


Healthcare Environment, Opportunities, and Challenges




The medical technology industry is highly competitive and continues to evolve.
Our success is measured both by the development of innovative products and the
value we bring to our stakeholders. We are committed to developing new
technologies and providing innovative patient care, and we are committed to
defending our intellectual property in support of those developments. In 2019,
we invested 17.3% of our net sales in research and development. The following is
a summary of important developments during 2019:


• we reached an agreement with Boston Scientific Corporation ("Boston



Scientific") in January 2019 to settle all outstanding patent disputes



for a one-time payment to Boston Scientific of $180.0 million;



• we completed the acquisition of CAS Medical Systems, Inc. ("CASMED").



CASMED is a medical technology company dedicated to noninvasive



monitoring of tissue oxygenation in the brain;





• we received CE Mark for the Edwards PASCAL transcatheter valve repair system;


• we received FDA approval to expand use of the Edwards SAPIEN and SAPIEN
3 Ultra transcatheter heart valve systems to the treatment of severe,
symptomatic aortic stenosis patients who are determined to be at low
risk of open-heart surgery;



• we received CE Mark to expand use of the Edwards SAPIEN 3 transcatheter



heart valve for the treatment of patients diagnosed with aortic stenosis



who are at low risk for open-heart surgery; and



24



--------------------------------------------------------------------------------



Table of Contents



• we received FDA approval for an Early Feasibility Study to evaluate the



safety and function of the Edwards EVOQUE tricuspid valve replacement



system.





We are dedicated to generating robust clinical, economic, and quality of life
evidence increasingly expected by patients, clinicians, and payors in the
current healthcare environment, with the goal of encouraging the adoption of
innovative new medical therapies that demonstrate superior outcomes.


Results of Operations




Net Sales by Major Regions
(dollars in millions)
Year Ended December 31, Change
2019 2018 $ %
United States $ 2,532.7 $ 2,055.3 $ 477.4 23.2 %
Europe 941.2 885.1 56.1 6.4 %
Japan 444.7 396.8 47.9 12.1 %
Rest of World 429.4 385.6 43.8 11.3 %
International 1,815.3 1,667.5 147.8 8.9 %
Total net sales $ 4,348.0 $ 3,722.8 $ 625.2 16.8 %



International net sales include the impact of foreign currency exchange rate
fluctuations. The impact of foreign currency exchange rate fluctuations on net
sales is not necessarily indicative of the impact on net income due to the
corresponding effect of foreign currency exchange rate fluctuations on
international manufacturing and operating costs, and our hedging activities. For
more information, see "Quantitative and Qualitative Disclosures About Market
Risk."

Net Sales by Product Group
(dollars in millions)
Year Ended December 31, Change
2019 2018 $ %



Transcatheter Aortic Valve Replacement $ 2,737.9 $ 2,283.8 $ 454.1 19.9 %
Transcatheter Mitral and Tricuspid Therapies 28.2


2.9 25.3 NM
Surgical Heart Valve Therapy 841.7 761.6 80.1 10.5 %
Critical Care 740.2 674.5 65.7 9.7 %
Total net sales $ 4,348.0 $ 3,722.8 $ 625.2 16.8 %





NM - Not meaningful


25



--------------------------------------------------------------------------------



Table of Contents





Transcatheter Aortic Valve Replacement
[[Image Removed: ew10-k2015_chartx09288a18.jpg]]
The increase in net sales of TAVR products was due primarily to:

• higher sales of the Edwards SAPIEN 3 valve, particularly in the United
States
, driven by strong therapy adoption; and



• higher sales of the Edwards SAPIEN 3 Ultra System following its
regulatory approval in Europe (November 2018) and the United States
(December 2018);



partially offset by:


• foreign currency exchange rate fluctuations, which decreased net sales



by $32.7 million, due primarily to the weakening of the Euro against
the United States dollar.



The March 2019 results of the PARTNER 3 Trial demonstrated superiority of SAPIEN
3 TAVR over surgery in the low risk patient population. In August 2019, we
received FDA approval to expand use of the Edwards SAPIEN 3 and SAPIEN 3 Ultra
transcatheter heart valve systems to the treatment of severe, symptomatic aortic
stenosis patients who are determined to be at low risk of open-heart surgery.
Given the approval for patients at low surgical risk and the continued
excellence and versatility of our balloon expandable platform, we decided to
discontinue the CENTERA program. While the CENTERA valve has demonstrated
excellent clinical outcomes and is performing well for patients, the time and
resources required to optimize deliverability and expand the indications to
match the SAPIEN 3 valve are significant. In November 2019, we received CE Mark
to expand use of the Edwards SAPIEN 3 transcatheter heart valve for the
treatment of patients diagnosed with aortic stenosis who are at low risk for
open-heart surgery.


26



--------------------------------------------------------------------------------



Table of Contents





Transcatheter Mitral and Tricuspid Therapies
[[Image Removed: chart-d3246dbf592a6f10715.jpg]]
The increase in net sales of TMTT products was due primarily to sales of the
Edwards PASCAL transcatheter valve repair system in Europe, which received CE
Mark in February 2019.

In mitral repair, we continue to enroll our CLASP IID U.S. pivotal trial to
study PASCAL in primary, or degenerative, mitral valve disease. We also have
initiated enrollment in our CLASP IIF pivotal trial for patients with secondary,
or functional, mitral valve disease. In September 2019, we received FDA approval
for our CLASP IITR pivotal trial to study PASCAL in patients with symptomatic
severe tricuspid regurgitation. In the fourth quarter of 2019, we received FDA
approval for an Early Feasibility Study to evaluate the safety and function of
the Edwards EVOQUE tricuspid valve replacement system.

Surgical Structural Heart
[[Image Removed: ew10-k2015_chartx10581a18.jpg]]
The increase in net sales of Surgical products was due primarily to:

• sales return reserves in 2018 of $82.5 million in the United States
related to our conversion to a consignment inventory model; and




27



--------------------------------------------------------------------------------



Table of Contents



• increased sales of aortic tissue valves in Japan, Europe and the United



States, primarily the INSPIRIS RESILIA aortic valve;



partially offset by:



• foreign currency exchange rate fluctuations, which decreased net sales



by $14.5 million, due primarily to the weakening of the Euro against
the United States dollar.




At the end of 2019, we received European regulatory approval for HARPOON Beating
Heart Mitral Valve Repair System, and are in the process of beginning our
commercial launch. HARPOON offers the potential for earlier treatment of
degenerative mitral valve disease, with faster recovery and more consistent
outcomes for surgical patients.




Critical Care
[[Image Removed: ew10-k2015_chartx11938a18.jpg]]
2019 Compared with 2018

The increase in net sales of Critical Care products was driven by our HemoSphere
advanced monitoring platform, primarily in the United States, partially offset
by foreign currency exchange rate fluctuations, which decreased net sales by
$9.1 million, due primarily to the weakening of the Euro and various other
currencies against the United States dollar.

On April 18, 2019, we completed the acquisition of CASMED, a medical technology
company dedicated to noninvasive monitoring of tissue oxygenation in the brain.
Our Critical Care sales for 2019 included $16.8 million related to CASMED.

We received FDA clearance in the third quarter of 2019 to use FORE-SIGHT, our
cerebral oximetry technology, on our Hemosphere platform, and have initiated the
commercial launch.



28



--------------------------------------------------------------------------------



Table of Contents


Gross Profit

[[Image Removed: ew10-kq420_chartx27460a14.jpg]]
The decrease in gross profit as a percentage of net sales in 2019 compared to
2018 was driven by (1) a charge of $73.1 million related to strategic decisions
regarding our transcatheter aortic valve portfolio, including the decision to
discontinue our CENTERA program (for further information see the "Financial
Highlights" section above), (2) the impact of multiple investments in our
operations, including an increase in costs to improve our manufacturing
processes and (3) spending in support of the new European device regulations.
This decrease was partially offset by a 1.5 percentage point increase due to the
impact of foreign currency exchange rate fluctuations, including the settlement
of foreign currency hedging contracts.


Selling, General, and Administrative ("SG&A") Expenses




[[Image Removed: ew10-kq420_chartx28676a14.jpg]]
The increase in SG&A expenses in 2019 compared to 2018 was due primarily to
higher transcatheter structural heart field personnel-related costs, primarily
in the United States and Europe. These increases were partially offset by the
impact of foreign currency, which decreased expenses by $16.7 million primarily
due to the weakening of the Euro against the United States dollar. The decrease
in SG&A expenses as a percentage of net sales was primarily due to leverage from
our higher sales performance.




29



--------------------------------------------------------------------------------



Table of Contents





Research and Development ("R&D") Expenses
[[Image Removed: ew10-kq420_chartx29983a14.jpg]]
The increase in R&D expenses in 2019 compared to 2018 was due primarily to
investments in our transcatheter structural heart programs, including generating
clinical evidence.


Intellectual Property Litigation Expenses (Income), net




We incurred intellectual property litigation expenses, including settlements and
external legal costs, of $33.4 million and $214.0 million during 2019 and 2018,
respectively. In January 2019, we reached an agreement with Boston Scientific to
settle all outstanding patent disputes for a one-time payment to Boston
Scientific of $180.0 million, which was included as an expense in 2018. The
settlement covers alleged past damages and no further royalties will be owed by
either party.


Change in Fair Value of Contingent Consideration Liabilities, net




The change in fair value of contingent consideration liabilities resulted in
income of $6.1 million and $5.7 million for the years ended December 31, 2019
and 2018, respectively. The income was due primarily to longer product
development timelines, which reduced the probability of milestone achievements.
The income was net of expenses associated with changes in the fair value of the
liabilities associated with adjustments to discount rates, accretion of interest
due to the passage of time, and the 2018 achievement by Valtech Cardio Ltd. of a
regulatory milestone. For further information, see Note 11 to the "Consolidated
Financial Statements."

Special Charges, net



For information on special charges, see Note 4 to the "Consolidated Financial
Statements."




Interest Expense


Interest expense was $20.7 million and $29.9 million in 2019 and 2018,
respectively. The decrease in interest expense resulted primarily from a lower
average debt balance.




Interest Income


Interest income was $32.2 million and $32.0 million in 2019 and 2018,
respectively. The increase in interest income resulted primarily from higher
average interest rates, partially offset by a lower average investment balance.



30



--------------------------------------------------------------------------------



Table of Contents


Other (Income) Expense, net
(in millions)
Years Ended December 31,
2019 2018
Foreign exchange gains, net $ (5.9 ) $ (6.7 )
(Gain) loss on investments (0.5 ) 1.7



Non-service cost components of net periodic pension benefit
cost (credit)


0.2 (0.1 )
Other (2.0 ) 1.1
Total other (income) expense, net $ (8.2


) $ (4.0 )






The net foreign exchange gains relate to the foreign currency fluctuations in
our global trade and intercompany receivable and payable balances, offset by the
gains and losses on derivative instruments intended as an economic hedge of
those exposures.

The (gain) loss on investments represents our net share of gains and losses in
investments accounted for under the equity method, and realized gains and losses
on investments in equity securities.

The non-service cost components of net periodic pension benefit cost (credit)
includes the costs of our defined benefit plans that are not attributed to
services rendered by eligible employees during the year, such as interest costs,
expected return on plan assets, and amortization of actuarial gains or losses.
Certain costs associated with realignments, including settlements and
curtailments, have been included as a component of "Special (Gains) Charges,
net." For further information, see Notes 4 and 13 to the "Consolidated Financial
Statements."

Provision for Income Taxes
Year Ended December 31, Change
2019 2018 $ %
Provision for income taxes 119.6 39.2 80.4 205.1 %
Effective tax rate 10.3 % 5.1 %





Our effective income tax rate in 2019 and 2018 was 10.3% and 5.1%, respectively.
Our effective tax rate for 2019 increased in comparison to 2018 primarily
because of the increase in the U.S. tax on global intangible low-taxed income
that became effective with the Tax Cuts and Jobs Act of 2017 (the "2017 Act"),
and the tax benefit in 2018 from audit settlements.

In 2019, the difference between our 10.3% effective tax rate and the Federal
statutory rate of 21% was primarily due to the foreign tax rate differential on
foreign operations, the recognition of excess tax benefits on stock-based
compensation, and Federal and California research and development credits.



As of December 31, 2019, gross uncertain tax positions were $203.1 million. We
estimate that these liabilities would be reduced by $50.1 million from
offsetting tax benefits associated with the correlative effects of potential
transfer pricing adjustments, state income taxes, and timing adjustments. The
net amount of $153.0 million, if not required, would favorably affect our
effective tax rate.

We strive to resolve open matters with each tax authority at the examination
level and could reach agreement with a tax authority at any time. While we have
accrued for matters we believe are more likely than not to require settlement,
the final outcome with a tax authority may result in a tax liability that is
more or less than that reflected in the consolidated financial statements.
Furthermore, we may later decide to challenge any assessments, if made, and may
exercise our right to appeal. The uncertain tax positions are reviewed quarterly
and adjusted as events occur that affect potential liabilities for additional
taxes, such as lapsing of applicable statutes of limitations, proposed
assessments by tax authorities, negotiations between tax authorities,
identification of new issues, and issuance of new legislation, regulations, or
case law. We believe that adequate amounts of tax and related penalty and
interest have been provided in income tax expense for any adjustments that may
result from our uncertain tax positions.

At December 31, 2019, all material state, local, and foreign income tax matters
have been concluded for years through 2008. During 2018, we signed agreements
with the Internal Revenue Service ("IRS") to settle tax years 2009 through 2014,

31



--------------------------------------------------------------------------------



Table of Contents



including transfer pricing matters and the tax treatment of a portion of a
litigation settlement payment received in 2014. The IRS began its examination of
the 2015 and 2016 tax years during the fourth quarter of 2018 and its
examination of the 2017 tax year during the first quarter of 2019.




During 2018, we executed an Advance Pricing Agreement ("APA") between the United
States
and Switzerland governments for tax years 2009 through 2020 covering
various transfer pricing matters and we have updated our transfer pricing
policies accordingly. Certain intercompany transactions covering tax years 2015
through 2019 were not resolved and those related tax positions remain uncertain.
These transfer pricing matters may be significant to our consolidated financial
statements. Based upon the information currently available and numerous possible
outcomes, we cannot reasonably estimate what, if any, changes in our existing
uncertain tax positions may occur in the next 12 months and, therefore, have
recorded the gross uncertain tax positions as a long-term liability.

In addition, we executed other APAs as follows: during 2017, an APA between the
United States
and Japan covering tax years 2015 through 2019; and during 2018,
APAs between Japan and Singapore and between Switzerland and Japan covering tax
years 2015 through 2019. We are evaluating filing to renew some or all of these
APAs for the years 2020 and forward. The execution of some or all of these APAs
depends on a number of variables outside of our control.

We have received tax incentives in certain non-U.S. tax jurisdictions, the
primary benefit for which will expire in 2029. The tax reductions as compared to
the local statutory rates were $157.6 million ($0.75 per diluted share) and
$144.9 million ($0.70 per diluted share) for the years ended December 31, 2019
and 2018, respectively.


Liquidity and Capital Resources




Our sources of cash liquidity include cash and cash equivalents, short-term
investments, amounts available under credit facilities, and cash from
operations. We believe that these sources are sufficient to fund the current
requirements of working capital, capital expenditures, and other financial
commitments for the next twelve months from the financial statement issuance
date. However, we periodically consider various financing alternatives and may,
from time to time, seek to take advantage of favorable interest rate
environments or other market conditions.

The 2017 Act, which was signed into law on December 22, 2017, included extensive
changes to the international tax regime. The 2017 Act required a deemed
repatriation of post-1986 undistributed foreign earnings and profits. The deemed
repatriation resulted in a $263.9 million tax obligation as of December 31,
2019
. The one-time transition tax liability, as adjusted, is payable in six
remaining annual installments, as outlined in the contractual obligations table
below. See Note 17 to the "Consolidated Financial Statements" for additional
information about the one-time transition tax.

As of December 31, 2019, cash and cash equivalents and short-term investments
held in the United States and outside the United States were $909.8 million and
$607.1 million, respectively. During 2019, we repatriated cash and notes
receivable of $1.2 billion. We assert that $1.1 billion of our foreign earnings
continue to be permanently reinvested and our intent is to repatriate $140.7
million
of our foreign earnings as of December 31, 2019.

On April 18, 2019, we acquired CASMED for an aggregate cash purchase price of
$2.45 per share of common stock, or
$100.8 million. For more information, see Note 8 to the "Consolidated Financial
Statements."

Certain of our business acquisitions involve contingent consideration
arrangements. Payment of additional consideration in the future may be required,
contingent upon the acquired company reaching certain performance milestones,
such as attaining specified revenue levels, or obtaining regulatory approvals.
For further information, see Note 8 to the "Consolidated Financial Statements."

We have a Five-Year Credit Agreement ("the Credit Agreement") which matures on
April 28, 2023. The Credit Agreement provides up to an aggregate of $750.0
million
in borrowings in multiple currencies. Subject to certain terms and
conditions, we may increase the amount available under the Credit Agreement by
up to an additional $250.0 million in the aggregate. As of December 31, 2019,
there were no borrowings outstanding under the Credit Agreement. The Credit
Agreement is unsecured and contains various financial and other covenants,
including a maximum leverage ratio, as defined in the Credit Agreement. The
Company was in compliance with all covenants at December 31, 2019.

In June 2018, we issued $600.0 million of 4.3% fixed-rate unsecured senior notes
(the "2018 Notes") due June 15, 2028. As of December 31, 2019, the total
carrying value of our 2018 Notes was $594.4 million. For further information on
our debt, see Note 10 to the "Consolidated Financial Statements."


32



--------------------------------------------------------------------------------



Table of Contents





We reached an agreement with Boston Scientific to settle all outstanding patent
disputes for a one-time payment to Boston Scientific of $180.0 million, which
was paid in January 2019.

From time to time, we repurchase shares of our common stock under share
repurchase programs authorized by the Board of Directors. We consider several
factors in determining when to execute share repurchases, including, among other
things, expected dilution from stock plans, cash capacity, and the market price
of our common stock. During 2019, under the Board authorized repurchase
programs, we repurchased a total of 1.4 million shares at an aggregate cost of
$255.0 million, and as of December 31, 2019, we had remaining authority to
purchase $1.2 billion of our common stock. For further information, see Note 14
to the "Consolidated Financial Statements."
Consolidated Cash Flows - For the twelve months ended December 31, 2019 and 2018
[[Image Removed: ew10-kq420_chartx22176a14.jpg]]
[[Image Removed: ew10-kq420_chartx23236a14.jpg]]
[[Image Removed: ew10-kq420_chartx24215a14.jpg]]
Net cash flows provided by operating activities of $1.2 billion for 2019
increased $252.6 million from 2018 due primarily to (1) improved operating
performance in 2019, (2) higher tax payments in 2018 related to an audit
settlement, and (3) a higher bonus payout in 2018 associated with 2017
performance, partially offset by (1) a payment of $180.0 million in 2019 for a
litigation settlement and (2) higher working capital needs in 2019.

Net cash used in investing activities of $595.8 million in 2019 consisted
primarily of (1) capital expenditures of $254.4 million, (2) net purchases of
investments of $158.2 million, (3) a $100.2 million net cash payment associated
with the acquisition of CASMED, (4) a $35.0 million payment for an option to
acquire a company, and (5) a $24.0 million payment to acquire certain
early-stage transcatheter intellectual property and associated clinical and
regulatory experience.

Net cash provided by investing activities of $76.7 million in 2018 consisted
primarily of net proceeds from investments of $342.0 million, partially offset
by capital expenditures of $238.7 million.


We currently anticipate making capital expenditures of approximately $400
million
in 2020 as we continue to invest in our operations.
Net cash used in financing activities of $115.6 million in 2019 consisted
primarily of purchases of treasury stock of $263.3 million, partially offset by
proceeds from stock plans of $160.5 million.



Net cash used in financing activities of $1.1 billion in 2018 consisted
primarily of purchases of treasury stock of $795.5 million and net debt
repayments of $437.3 million, partially offset by proceeds from stock plans of
$147.0 million.



Consolidated Cash Flows - For the twelve months ended December 31, 2018 and 2017




For a discussion related to our consolidated cash flows for 2018 compared to
2017, refer to Part II, Item 7, "Management's Discussion and Analysis of
Financial Condition and Results of Operations" in our 2018 Annual Report on Form
10-K filed with the Securities and Exchange Commission on February 15, 2019.


33



--------------------------------------------------------------------------------



Table of Contents


Contractual Obligations



A summary of all of our contractual obligations and commercial commitments as of
December 31, 2019 is as follows (in millions):



Payments Due by Period
Less Than 1-3 4-5 After 5
Contractual Obligations Total 1 Year Years Years Years
Debt $ 600.0 $ - $ - $ - $ 600.0
Operating leases 91.8 27.4 34.2 15.7 14.5
Interest on debt 164.3 19.9 39.8 38.5 66.1
Transition tax on unremitted foreign
earnings and profits (a) 263.9 25.1 50.3 110.0 78.5
Pension obligations (b) 1.9 1.9 - - -
Purchase and other commitments (c) 43.6 28.0 12.1 1.3 2.2
Total contractual cash obligations
(d), (e) $ 1,165.5 $ 102.3 $ 136.4


$ 165.5 $ 761.3



_______________________________________________________________________________



(a) As of December 31, 2019, we had recorded $263.9 million of income tax



liabilities related to the one-time transition tax that resulted from the



enactment of the 2017 Act. The transition tax is due in eight annual



installments, with the first annual installment paid in 2018 and the second



annual installment paid in 2019. The remaining installment amounts will be



equal to 8% of the total liability, payable in fiscal years 2020 through



2022, 15% in fiscal year 2023, 20% in fiscal year 2024, and 25% in fiscal



year 2025. See Note 17 to the "Consolidated Financial Statements" for
additional information about the one-time transition tax.




(b) The amount included in "Less Than 1 Year" reflects anticipated contributions



to our various pension plans. Anticipated contributions beyond one year are



not determinable. The total accrued benefit liability for our pension plans



recognized as of December 31, 2019 was $42.0 million. This amount is impacted



by, among other items, pension expense funding levels, changes in plan



demographics and assumptions, and investment returns on plan assets.



Therefore, we are unable to make a reasonably reliable estimate of the amount



and period in which the liability might be paid, and did not include this



amount in the contractual obligations table. See Note 13 to the "Consolidated



Financial Statements" for further information.



(c) For certain purchase and other commitments, such as commitments to fund



equity method or other investments, the timing of the payment may not be



certain. In these cases, the maturity dates in the table reflect our best



estimates.




(d) As of December 31, 2019, the gross liability for uncertain tax positions,



including interest, was $215.9 million and relates primarily to transfer



pricing matters. During 2018, we executed an APA between the United States



and Switzerland governments for tax years 2009 through 2020 covering various



transfer pricing matters and we have updated our transfer pricing policies



accordingly. Certain intercompany transactions covering tax years 2015



through 2019 were not resolved and those related tax positions remain



uncertain. These transfer pricing matters may be significant to our



consolidated financial statements, and the final outcome of the negotiations



is uncertain. Management believes that adequate amounts of tax and related



penalty and interest have been provided in income tax expense for any



adjustments that may result for our uncertain tax positions. We are unable to



make a reasonably reliable estimate of the amount and period in which the



liability might be paid, and did not include this amount in the contractual



obligations table.




(e) We acquire assets still in development, enter into research and development



arrangements, acquire businesses, and sponsor certain clinical trials that



often require milestone, royalty, or other future payments to third-parties,



contingent upon the occurrence of certain future events. In situations where



we have no ability to influence the achievement of the milestone or otherwise



avoid the payment, we have included those payments in the table above.



However, we have excluded from the table contingent milestone payments and



other contingent liabilities for which we cannot reasonably predict future



payments or for which we can avoid making payment by unilaterally deciding to



stop development of a product or cease progress of a clinical trial. We



estimate that these contingent payments could be up to $565.0 million if all



milestones or other contingent obligations are met. This amount includes



certain milestone-based contingent obligations that may be paid through a
combination of cash and issuance of common stock.




Critical Accounting Policies and Estimates



Our results of operations and financial position are determined based upon the
application of our accounting policies, as discussed in the notes to the
"Consolidated Financial Statements." Certain of our accounting policies
represent a selection



34



--------------------------------------------------------------------------------



Table of Contents



among acceptable alternatives under GAAP. In evaluating our transactions,
management assesses all relevant GAAP and chooses the accounting policy that
most accurately reflects the nature of the transactions.




The application of accounting policies requires the use of judgment and
estimates. These matters that are subject to judgments and estimation are
inherently uncertain, and different amounts could be reported using different
assumptions and estimates. Management uses its best estimates and judgments in
determining the appropriate amount to reflect in the consolidated financial
statements, using historical experience and all available information. We also
use outside experts where appropriate. We apply estimation methodologies
consistently from year to year.

We believe the following are the critical accounting policies which could have
the most significant effect on our reported results and require subjective or
complex judgments by management.


Revenue Recognition




When we recognize revenue from the sale of our products, the amount of
consideration we ultimately receive varies depending upon the return terms,
sales rebates, discounts, and other incentives that we may offer, which are
accounted for as variable consideration when estimating the amount of revenue to
recognize. The estimate of variable consideration requires significant judgment.
We include estimated amounts in the transaction price to the extent it is
probable that a significant reversal of cumulative revenue recognized will not
occur when the uncertainty associated with the variable consideration is
resolved. The estimates of variable consideration and determination of whether
to include estimated amounts in the transaction price are based largely upon an
assessment of historical payment experience, historical relationship to
revenues, estimated customer inventory levels, and current contract sales terms
with direct and indirect customers. Product returns are typically not
significant because returns are generally not allowed unless the product is
damaged at time of receipt. If the historical data and inventory estimates used
to calculate the variable consideration do not approximate future activity, our
financial position, results of operations, and cash flows could be impacted.

In addition, in limited circumstances, we may allow customers to return
previously purchased products, such as for next-generation product offerings.
For these transactions, we defer recognition of revenue on the sale of the
earlier generation product based upon an estimate of the amount of product to be
returned when the next-generation products are shipped to the customer.
Uncertain timing of next-generation product approvals, variability in product
launch strategies, product recalls, and variation in product utilization all
affect the estimates related to sales returns and could cause actual returns to
differ from these estimates.

Our sales adjustment related to distributor rebates given to our United States
distributors represents the difference between our sales price to the
distributor and the negotiated price to be paid by the end-customer. We validate
the distributor rebate accrual quarterly through either a review of the
inventory reports obtained from our distributors or an estimate of the
distributor's inventory. This distributor inventory information is used to
verify the estimated liability for future distributor rebate claims based on
historical rebates and contract rates. We periodically monitor current pricing
trends and distributor inventory levels to ensure the credit for future
distributor rebates is fairly stated.


Excess and Obsolete Inventory




The valuation of our inventory requires us to estimate excess, obsolete, and
expired inventory. We base our provisions for excess, obsolete, and expired
inventory on our estimates of forecasted net sales. A significant change in the
timing or level of demand for our products as compared to forecasted amounts may
result in recording additional allowances for excess, obsolete, and expired
inventory in the future. In addition, our industry is characterized by rapid
product development and frequent new product introductions. Uncertain timing of
next-generation product approvals, variability in product launch strategies,
product recalls, increasing levels of consigned inventory, and variation in
product utilization all affect our estimates related to excess, obsolete, and
expired inventory.


Intangible Assets and Long-lived Assets




We acquire intangible assets in connection with business combinations and asset
purchases. The acquired intangible assets are recorded at fair value, which is
determined based on a discounted cash flow analysis. The determination of fair
value requires significant estimates, including, but not limited to, the amount
and timing of projected future cash flows, the discount rate used to discount
those cash flows, the assessment of the asset's life cycle, including the timing
and expected costs to complete in-process projects, and the consideration of
legal, technical, regulatory, economic, and competitive risks.


35



--------------------------------------------------------------------------------



Table of Contents





In-process research and development assets acquired in business combinations is
reviewed for impairment annually, or whenever an event occurs or circumstances
change that would indicate the carrying amount may be impaired. Additionally,
management reviews the carrying amounts of other intangible and long-lived
assets whenever events or circumstances indicate that the carrying amounts of an
asset may not be recoverable. The impairment reviews require significant
estimates about fair value, including estimation of future cash flows, selection
of an appropriate discount rate, and estimates of long-term growth rates.


Contingent Consideration



We record contingent consideration resulting from a business combination at its
fair value on the acquisition date. We determine the fair value of the
contingent consideration based primarily on the following factors:



• discount rates used to present value the projected cash flows;



• the probability of success of clinical events and regulatory approvals,



and/or meeting commercial milestones;



• projected payment dates; and



• volatility of future revenue.






On a quarterly basis, we revalue these obligations and record changes in their
fair value as an adjustment to earnings. Changes to contingent consideration
obligations can result from adjustments to discount rates, accretion of the
discount rates due to the passage of time, changes in our estimates of the
likelihood or timing of achieving development or commercial milestones, changes
in the probability of certain clinical events, or changes in the assumed
probability associated with regulatory approval.

The assumptions related to determining the value of contingent consideration
include a significant amount of judgment, and any changes in the underlying
estimates could have a material impact on the amount of contingent consideration
expense recorded in any given period.


Income Taxes




The determination of our provision for income taxes requires significant
judgment, the use of estimates, and the interpretation and application of
complex tax laws. Realization of certain deferred tax assets, primarily tax
credits, net operating loss and other carryforwards, is dependent upon
generating sufficient taxable income in the appropriate jurisdiction prior to
the expiration of the carryforward periods. Failure to achieve forecasted
taxable income in the applicable taxing jurisdictions could affect the ultimate
realization of deferred tax assets and could result in an increase in our
effective tax rate on future earnings.

We have made an accounting policy election to recognize the U.S. tax effects of
global intangible low-taxed income as a component of income tax expense in the
period the tax arises.

We are subject to income taxes in the United States and numerous foreign
jurisdictions. Our income tax returns are periodically audited by domestic and
foreign tax authorities. These audits include questions regarding our tax filing
positions, including the timing and amount of deductions and the allocation of
income amongst various tax jurisdictions. We evaluate our tax positions and
establish liabilities in accordance with the applicable accounting guidance on
uncertainty in income taxes. Significant judgment is required in evaluating our
uncertain tax positions, including estimating the ultimate resolution to
intercompany pricing controversies between countries when there are numerous
possible outcomes. We review these tax uncertainties quarterly and adjust the
liability as events occur that affect potential liabilities for additional
taxes, such as the progress of tax audits, lapsing of applicable statutes of
limitations, negotiations between tax authorities, identification of new issues,
and issuance of new legislation, regulations, or case law.


For additional details on our income taxes, see Note 2 and Note 17 to the
"Consolidated Financial Statements."



Stock-based Compensation



We measure and recognize compensation expense for all stock-based awards based
on estimated fair values. Stock-based awards consist of stock options,
service-based restricted stock units, market-based restricted stock units,
performance-based restricted stock units, and employee stock purchase
subscriptions. The fair value of each option award and employee stock



36



--------------------------------------------------------------------------------



Table of Contents





purchase subscription is estimated on the date of grant using the Black-Scholes
option valuation model. The fair value of market-based restricted stock units is
determined using a Monte Carlo simulation model, which uses multiple input
variables to determine the probability of satisfying the market condition
requirements. The Black-Scholes and Monte Carlo models require various highly
judgmental assumptions, including stock price volatility, risk-free interest
rate, and expected option term. For performance-based restricted stock units,
expense is recognized if and when we conclude that it is probable that the
performance condition will be achieved, which requires judgment. Stock-based
compensation expense is recorded net of estimated forfeitures. Judgment is
required in estimating the stock awards that will ultimately be forfeited. If
actual results differ significantly from these estimates, stock-based
compensation expense and our results of operations would be impacted.


New Accounting Standards



Information regarding new accounting standards is included in Note 2 to the
"Consolidated Financial Statements."

© Edgar Online, source Glimpses

Acquiremedia 2020
Envoyer par e-mail