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As Of Filer Filing For·On·As Docs:Size Issuer Filing Agent 2/12/13 Elan Corp PLC 20-F 12/31/12 204:29M Donnelley … Solutions/FA |
Document/Exhibit Description Pages Size
1: 20-F Annual Report by a Foreign Non-Canadian Issuer HTML 2.90M
2: EX-4.(B)(3) Instrument Defining the Rights of Security HTML 251K
Holders
3: EX-4.(B)(4) Instrument Defining the Rights of Security HTML 255K
Holders
4: EX-4.(B)(5) Instrument Defining the Rights of Security HTML 381K
Holders
5: EX-4.(C)(31) Instrument Defining the Rights of Security HTML 490K
Holders
6: EX-8.1 Opinion of Counsel re: Tax Matters HTML 60K
9: EX-13.1 Annual or Quarterly Report to Security Holders HTML 56K
10: EX-13.2 Annual or Quarterly Report to Security Holders HTML 56K
7: EX-12.1 Statement re: Computation of Ratios HTML 59K
8: EX-12.2 Statement re: Computation of Ratios HTML 59K
11: EX-15.1 Letter re: Unaudited Interim Financial Information HTML 56K
136: R1 Document and Entity Information HTML 82K
99: R2 Consolidated Statements Of Operations HTML 150K
126: R3 Statements Of Consolidated Comprehensive Income HTML 90K
144: R4 Consolidated Balance Sheets HTML 170K
184: R5 Consolidated Balance Sheets (Parenthetical) HTML 84K
104: R6 Consolidated Statements Of Changes In HTML 92K
Shareholders' Equity
125: R7 Consolidated Statements Of Cash Flows HTML 236K
90: R8 Description Of Business HTML 59K
73: R9 Significant Accounting Policies HTML 132K
186: R10 Revenue HTML 68K
146: R11 Segment Information HTML 97K
145: R12 Net Gain On Divestment Of Business HTML 56K
156: R13 Other Net Charges HTML 69K
157: R14 Settlement Reserve Charge HTML 56K
151: R15 Net Interest Expense HTML 77K
160: R16 Equity Method Investments HTML 108K
127: R17 Net Charge On Debt Retirement HTML 60K
138: R18 Income Taxes HTML 164K
149: R19 Discontinued Operations HTML 244K
203: R20 Net Income/(Loss) Per Share HTML 72K
174: R21 Restricted Cash HTML 58K
116: R22 Assets Held For Sale HTML 61K
148: R23 Accounts Receivable HTML 60K
121: R24 Investment Securities HTML 81K
55: R25 Inventory HTML 59K
176: R26 Prepaid And Other Current Assets HTML 61K
193: R27 Property, Plant And Equipment HTML 91K
84: R28 Goodwill And Other Intangible Assets HTML 105K
83: R29 Other Assets HTML 59K
88: R30 Accrued And Other Current Liabilities, And Other HTML 86K
Long-Term Liabilities
89: R31 Long-Term Debt HTML 79K
92: R32 Share Capital HTML 77K
34: R33 Additional Paid In Capital HTML 57K
170: R34 Accumulated Other Comprehensive Loss HTML 65K
112: R35 Separation And Distribution Of Prothena Business HTML 72K
117: R36 Pension And Other Employee Benefit Plans HTML 164K
64: R37 Share-Based Compensation HTML 165K
202: R38 Fair Value Measurements HTML 104K
18: R39 Leases HTML 67K
96: R40 Commitments And Contingencies HTML 59K
182: R41 Litigation HTML 64K
60: R42 Related Parties HTML 101K
82: R43 Development And Marketing Collaboration Agreements HTML 72K
87: R44 Supplemental Guarantor Information HTML 557K
100: R45 Subsequent Events HTML 58K
33: R46 Valuation And Qualifying Accounts And Reserves HTML 71K
71: R47 Significant Accounting Policies (Policies) HTML 261K
23: R48 Significant Accounting Policies (Tables) HTML 56K
180: R49 Revenue (Tables) HTML 68K
58: R50 Segment Information (Tables) HTML 99K
173: R51 Other Net Charges (Tables) HTML 73K
65: R52 Net Interest Expense (Tables) HTML 76K
97: R53 Equity Method Investments (Tables) HTML 95K
21: R54 Income Taxes (Tables) HTML 162K
28: R55 Discontinued Operations (Tables) HTML 224K
86: R56 Net Income/(Loss) Per Share (Tables) HTML 68K
42: R57 Assets Held For Sale (Tables) HTML 58K
189: R58 Accounts Receivable (Tables) HTML 58K
110: R59 Investment Securities (Tables) HTML 77K
153: R60 Prepaid And Other Current Assets (Tables) HTML 60K
70: R61 Property, Plant And Equipment (Tables) HTML 88K
77: R62 Goodwill And Other Intangible Assets (Tables) HTML 101K
166: R63 Other Assets (Tables) HTML 60K
161: R64 Accrued And Other Current Liabilities, And Other HTML 91K
Long-Term Liabilities (Tables)
115: R65 Long-Term Debt (Tables) HTML 73K
164: R66 Share Capital (Tables) HTML 74K
66: R67 Accumulated Other Comprehensive Loss (Tables) HTML 62K
122: R68 Separation And Distribution Of Prothena Business HTML 62K
(Tables)
192: R69 Pension And Other Employee Benefit Plans (Tables) HTML 163K
26: R70 Share-Based Compensation (Tables) HTML 169K
54: R71 Fair Value Measurements (Tables) HTML 96K
98: R72 Leases (Tables) HTML 62K
40: R73 Related Parties (Tables) HTML 68K
200: R74 Supplemental Guarantor Information (Tables) HTML 554K
62: R75 Description Of Business (Detail) HTML 63K
45: R76 Significant Accounting Policies (Schedule Of HTML 63K
Estimated Useful Lives Of Property, Plant And
Equipment) (Detail)
53: R77 Significant Accounting Policies (Narrative) HTML 158K
(Detail)
30: R78 Revenue (Schedule Of Revenue From Business) HTML 69K
(Detail)
36: R79 Revenue (Narrative) (Detail) HTML 58K
141: R80 Segment Information (Schedule Of Revenue By Region HTML 67K
(By Destination Of Customers)) (Detail)
50: R81 Segment Information (Schedule Of Total Assets By HTML 62K
Region) (Detail)
190: R82 Segment Information (Schedule Of Segment HTML 61K
Information On Property, Plant And Equipment By
Region) (Detail)
94: R83 Segment Information (Schedule Of Goodwill And HTML 60K
Other Intangible Assets By Region) (Detail)
150: R84 Segment Information (Schedule Of Segment HTML 65K
Information By Major Customers) (Detail)
163: R85 Net Gain On Divestment Of Business (Narrative) HTML 61K
(Detail)
47: R86 Other Net Charges (Schedule Of Other Net Charges) HTML 83K
(Detail)
52: R87 Other Net Charges (Narrative) (Detail) HTML 106K
185: R88 Settlement Reserve Charge (Narrative) (Detail) HTML 57K
41: R89 Net Interest Expense (Schedule Of Net Interest HTML 87K
Expenses) (Detail)
143: R90 Equity Method Investments (Schedule Of Losses On HTML 85K
Equity Method Investments) (Detail)
130: R91 Equity Method Investments (Narrative) (Detail) HTML 128K
168: R92 Equity Method Investments (Summarized Balance HTML 76K
Sheet) (Detail)
129: R93 Equity Method Investments (Summarized Income HTML 66K
Statement) (Detail)
105: R94 Net Charge On Debt Retirement (Detail) HTML 82K
179: R95 Income Taxes (Schedule Of Provision For/(Benefit HTML 100K
From) Income Taxes) (Detail)
101: R96 Income Taxes (Narrative) (Detail) HTML 158K
63: R97 Income Taxes (Schedule Of Effective Tax Rate HTML 104K
Differs From Irish Tax Rate) (Detail)
118: R98 Income Taxes (Distribution Of Net Loss For HTML 64K
Continuing Operations Before Provision For Income
Taxes By Geographical Area) (Detail)
111: R99 Income Taxes (Schedule Of Deferred Tax) (Detail) HTML 107K
85: R100 Income Taxes (Schedule Of Unused Tax Loss Carry HTML 73K
Forwards) (Detail)
204: R101 Income Taxes (Schedule Of Unrecognized Tax HTML 75K
Benefits) (Detail)
165: R102 Discontinued Operations (Narrative) (Detail) HTML 148K
128: R103 Discontinued Operations (Schedule Of Discontinued HTML 126K
Income Statement Financial Information Relating To
Subsidiaries) (Detail)
32: R104 Discontinued Operations (Schedule Of Discontinued HTML 76K
Cash Flow Financial Information Relating To
Subsidiaries) (Detail)
181: R105 Discontinued Operations (Schedule Of Revenue From HTML 64K
Tysabri) (Detail)
191: R106 Discontinued Operations (Schedule Of Global HTML 63K
In-Market Net Sales Of Tysabri) (Detail)
183: R107 Discontinued Operations (Schedule Of Revenue From HTML 72K
Tysabri ROW) (Detail)
123: R108 Discontinued Operations (Schedule Of Revenue From HTML 57K
Tysabri ROW) (Parenthetical) (Detail)
43: R109 Discontinued Operations (Schedule Revenue From HTML 74K
Subsidiaries) (Detail)
155: R110 Discontinued Operations (Net Gain On Divestment Of HTML 76K
EDT Business) (Detail)
68: R111 Discontinued Operations (Other Net Gains And HTML 75K
Charges From EDT Business) (Detail)
20: R112 Discontinued Operations (Schedule Of Calculation HTML 70K
Of Net loss On Disposal) (Detail)
103: R113 Net Income/(Loss) Per Share (Detail) HTML 87K
95: R114 Restricted Cash (Detail) HTML 59K
175: R115 Assets Held for Sale (Narrative) (Detail) HTML 65K
75: R116 Assets Held for Sale (Summary Of Major Classes Of HTML 68K
Assets Presented As Held For Sale) (Detail)
195: R117 Accounts Receivable (Narrative) (Detail) HTML 66K
37: R118 Accounts Receivable (Schedule Of Customer Or HTML 59K
Collaborator Accounts Who Contribute For More Than
10% Of Our Accounts Receivable) (Detail)
135: R119 Investment Securities (Schedule Of Current HTML 72K
Investment Securities) (Detail)
162: R120 Investment Securities (Narrative) (Detail) HTML 118K
25: R121 Investment Securities (Schedule Of Net Investment HTML 81K
Losses/(Gains)) (Detail)
131: R122 Inventory (Narrative) (Detail) HTML 57K
119: R123 Prepaid And Other Current Assets (Schedule Of HTML 66K
Prepaid And Other Current Assets) (Detail)
27: R124 Prepaid And Other Current Assets (Narrative) HTML 57K
(Detail)
137: R125 Property, Plant And Equipment (Schedule Of HTML 92K
Property, Plant And Equipment) (Detail)
199: R126 Property, Plant And Equipment (Narrative) (Detail) HTML 66K
38: R127 Goodwill And Other Intangible Assets (Schedule Of HTML 109K
Goodwill And Other Intangible Assets) (Detail)
78: R128 Goodwill And Other Intangible Assets (Schedule Of HTML 60K
Other Intangible Assets) (Detail)
169: R129 Goodwill And Other Intangible Assets (Narrative) HTML 79K
(Detail)
197: R130 Goodwill And Other Intangible Assets (Schedule Of HTML 71K
Expected Future Amortization Expense Of Current
Other Intangible Assets) (Detail)
114: R131 Other Assets (Schedule Of Non-Current Other HTML 62K
Assets) (Detail)
132: R132 Accrued And Other Current Liabilities, And Other HTML 101K
Long-Term Liabilities (Schedule Of Accrued And
Other Current Liabilities) (Detail)
39: R133 Accrued And Other Current Liabilities, And Other HTML 57K
Long-Term Liabilities (Narrative) (Detail)
44: R134 Accrued And Other Current Liabilities, And Other HTML 76K
Long-Term Liabilities (Schedule Of Other Long-Term
Liabilities) (Detail)
102: R135 Accrued And Other Current Liabilities, And Other HTML 80K
Long-Term Liabilities (Schedule Of Rollforward Of
Severance, Restructuring And Other Charges
Accrual) (Detail)
81: R136 Long-Term Debt (Schedule Of Long-Term Debt) HTML 75K
(Detail)
158: R137 Long-Term Debt (Narrative) (Detail) HTML 88K
107: R138 Share Capital (Schedule Of Authorized Share HTML 61K
Capital) (Detail)
74: R139 Share Capital (Schedule Of Authorized Share HTML 61K
Capital) (Parenthetical) (Detail)
109: R140 Share Capital (Schedule Of Issued And Fully Paid HTML 67K
Share Capital) (Detail)
56: R141 Share Capital (Narrative) (Detail) HTML 63K
19: R142 APIC Offset To Accumulated Deficit (Detail) HTML 58K
171: R143 Accumulated Other Comprehensive Loss (Schedule Of HTML 75K
Accumulated OCI Net) (Detail)
147: R144 Separation And Distribution Of Prothena Business HTML 87K
(Narrative) (Detail)
48: R145 Separation And Distribution Of Prothena Business HTML 71K
(Summary Of Assets Transferred To Prothena)
(Detail)
134: R146 Pension And Other Employee Benefit Plans HTML 112K
(Narrative) (Detail)
113: R147 Pension And Other Employee Benefit Plans (Schedule HTML 94K
Of Changes In Projected Benefit Obligation)
(Detail)
46: R148 Pension And Other Employee Benefit Plans (Schedule HTML 97K
Of Changes In Plan Assets) (Detail)
49: R149 Pension And Other Employee Benefit Plans (Schedule HTML 66K
Of Amounts Recognized In Consolidated Balance
Sheet) (Detail)
152: R150 Pension And Other Employee Benefit Plans (Schedule HTML 78K
Of Net Periodic Pension Cost) (Detail)
69: R151 Pension And Other Employee Benefit Plans (Schedule HTML 64K
Of Weighted-Average Assumptions Used To Determine
Net Periodic Pension Cost And Benefit Obligation)
(Detail)
22: R152 Pension And Other Employee Benefit Plans (Schedule HTML 72K
Of Average Life Expectancy In Years Of Current
Pensioner Retiring) (Detail)
124: R153 Pension And Other Employee Benefit Plans (Schedule HTML 79K
Of Impact Of Changes In Principal Assumptions On
Projected Benefit Obligation, Service Cost And Net
Periodic Pension Cost) (Detail)
154: R154 Pension And Other Employee Benefit Plans (Schedule HTML 60K
Of Weighted-Average Asset Allocations) (Detail)
31: R155 Pension And Other Employee Benefit Plans (Schedule HTML 60K
Of Long-Term Asset Allocation Ranges) (Detail)
59: R156 Pension And Other Employee Benefit Plans (Schedule HTML 64K
Of Expected Long-Term Rate Of Return On Assets)
(Detail)
201: R157 Pension And Other Employee Benefit Plans (Schedule HTML 76K
Of Fair Value Of Pension Plan Assets) (Detail)
67: R158 Pension And Other Employee Benefit Plans (Summary HTML 60K
Of Changes In Fair Value Of Level 3 Pension Plan
Assets) (Detail)
93: R159 Share-Based Compensation (Narrative) (Detail) HTML 117K
106: R160 Share-Based Compensation (Schedule Number Of HTML 65K
Options Outstanding) (Detail)
167: R161 Share-Based Compensation (Schedule Of Total HTML 117K
Employee And Non-Employee Stock Options
Outstanding Vested And Expected To Vest And
Exercisable) (Detail)
91: R162 Share-Based Compensation (Schedule Of Range Of HTML 91K
Exercise Prices And Weighted-Average Remaining
Contractual Life Of Outstanding And Exercisable
Options) (Detail)
188: R163 Share-Based Compensation (Schedule Of Fair Value HTML 73K
Of Options Granted Using Weighted-Average
Assumptions) (Detail)
140: R164 Share-Based Compensation (Schedule Of Restricted HTML 85K
Stock Units) (Detail)
196: R165 Share-Based Compensation (Schedule Of Assumptions HTML 80K
Used To Calculate Estimated Fair Values Of Options
Granted) (Detail)
29: R166 Share-Based Compensation (Schedule Of Share-Based HTML 71K
Compensation Expense) (Detail)
178: R167 Share-Based Compensation (Schedule Of Share-Based HTML 59K
Compensation Arose Under Awards) (Detail)
72: R168 Fair Value Measurements (Narrative) (Detail) HTML 65K
133: R169 Fair Value Measurements (Schedule Of Fair Value Of HTML 86K
Financial Assets Measured On Recurring Basis)
(Detail)
120: R170 Fair Value Measurements (Summary Of Changes In HTML 66K
Fair Value Of Level 3 Financial Assets Measured At
Fair Value On Recurring Basis) (Detail)
187: R171 Fair Value Measurements (Schedule Of Principal HTML 63K
Amounts And Fair Values Of Debt Instruments)
(Detail)
79: R172 Leases (Narrative) (Detail) HTML 105K
57: R173 Leases (Schedule Of Future Minimum Rental HTML 84K
Commitments For Operating Leases) (Detail)
159: R174 Commitments And Contingencies (Detail) HTML 57K
61: R175 Litigation (Detail) HTML 62K
24: R176 Related Parties (Narrative) (Detail) HTML 213K
35: R177 Related Parties (Schedule Of Transactions With HTML 80K
Directors) (Detail)
172: R178 Development And Marketing Collaboration Agreements HTML 125K
(Detail)
142: R179 Supplemental Guarantor Information (Narrative) HTML 57K
(Detail)
177: R180 Supplemental Guarantor Information (Condensed HTML 153K
Consolidating Statements Of Operations) (Detail)
108: R181 Supplemental Guarantor Information (Condensed HTML 196K
Consolidating Balance Sheets) (Detail)
51: R182 Supplemental Guarantor Information (Condensed HTML 169K
Consolidating Statements Of Cash Flows) (Detail)
76: R183 Subsequent Events (Detail) HTML 75K
139: R184 Valuation And Qualifying Accounts And Reserves HTML 69K
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| Annual Report |
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 20-F
(Mark One)
| ¨ | REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR(g) OF THE SECURITIES EXCHANGE ACT OF 1934 |
OR
| þ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended: December 31, 2012
OR
| ¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
OR
| ¨ | SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Date of event requiring this shell company report
Commission file number: 001-13896
Elan Corporation, plc
(Exact name of Registrant as specified in its charter)
| Ireland | Treasury Building, Lower Grand Canal Street, Dublin 2, Ireland | |
| (Jurisdiction of incorporation or organization) | (Address of principal executive offices) |
William F. Daniel, Secretary
Elan Corporation, plc
Treasury Building, Lower Grand Canal Street
Dublin 2, Ireland
011-353-1-709-4000
(Name, Telephone, E-mail and/or Facsimile number and Address of Company Contact person)
Securities registered or to be registered pursuant to Section 12(b) of the Act:
| Title of Each Class |
Name of Exchange on Which Registered | |
| American Depositary Shares (ADSs), representing Ordinary Shares, |
New York Stock Exchange | |
| Par value €0.05 each (Ordinary Shares) Ordinary Shares |
New York Stock Exchange |
Securities registered or to be registered pursuant to Section 12(g) of the Act:
None
(Title of Class)
Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act:
None
(Title of Class)
Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the annual report: 594,949,536 Ordinary Shares.
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes þ No ¨
If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. Yes ¨ No þ
Note — Checking the box above will not relieve any registrant required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 from their obligations under those Sections.
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days: Yes þ No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer þ Accelerated filer ¨ Non-accelerated filer ¨
Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:
| U.S. GAAP þ |
International Financial Reporting Standards as issued by the International Accounting Standards Board ¨ |
Other ¨ |
If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow: Item 17 ¨ Item 18 ¨
If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act): Yes ¨ No þ
| Page | ||||||
| 2 | ||||||
| 2 | ||||||
| PART I | ||||||
| Item 1. |
4 | |||||
| Item 2. |
4 | |||||
| Item 3. |
4 | |||||
| Item 4. |
17 | |||||
| Item 4A. |
28 | |||||
| Item 5. |
28 | |||||
| Item 6. |
63 | |||||
| Item 7. |
82 | |||||
| Item 8. |
87 | |||||
| Item 9. |
87 | |||||
| Item 10. |
89 | |||||
| Item 11. |
95 | |||||
| Item 12. |
97 | |||||
| PART II | ||||||
| Item 13. |
98 | |||||
| Item 14. |
Material Modifications to the Rights of Security Holders and Use of Proceeds |
98 | ||||
| Item 15. |
98 | |||||
| Item 16. |
100 | |||||
| Item 16A. |
100 | |||||
| Item 16B. |
100 | |||||
| Item 16C. |
100 | |||||
| Item 16D. |
103 | |||||
| Item 16E. |
Purchases of Equity Securities by the Issuer and Affiliated Purchasers |
103 | ||||
| Item 16F. |
103 | |||||
| Item 16G. |
103 | |||||
| Item 16H. |
105 | |||||
| PART III | ||||||
| Item 17. |
105 | |||||
| Item 18. |
105 | |||||
| Item 19. |
188 | |||||
| 192 | ||||||
| 193 | ||||||
1
As used herein, “we,” “our,” “us,” “Elan” and the “Company” refer to Elan Corporation, plc (public limited company) and its consolidated subsidiaries, unless the context requires otherwise. All product names appearing in italics are trademarks of Elan. Non-italicized product names are trademarks of other companies.
Our Consolidated Financial Statements contained in this Form 20-F have been prepared on the basis of accounting principles generally accepted in the United States (U.S. GAAP). In addition to the Consolidated Financial Statements contained in this Form 20-F, we also prepare separate Consolidated Financial Statements, included in our Annual Report, in accordance with International Financial Reporting Standards as adopted by the European Union (IFRS), which differ in certain significant respects from U.S. GAAP. The Annual Report under IFRS is a separate document from this Form 20-F.
Unless otherwise indicated, our Consolidated Financial Statements and other financial data contained in this Form 20-F are presented in United States dollars ($). We prepare our Consolidated Financial Statements on the basis of a calendar fiscal year beginning on January 1 and ending on December 31. References to a fiscal year in this Form 20-F shall be references to the fiscal year ending on December 31 of that year. In this Form 20-F, financial results and operating statistics are, unless otherwise indicated, stated on the basis of such fiscal years.
Statements included herein that are not historical facts are forward-looking statements. Such forward-looking statements are made pursuant to the safe harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995. The forward-looking statements involve a number of risks and uncertainties and are subject to change at any time. In the event such risks or uncertainties materialize, our results could be materially affected.
This Form 20-F contains forward-looking statements about our financial condition, results of operations and estimates, business prospects and products and potential products that involve substantial risks and uncertainties. These statements can be identified by the fact that they use words such as “anticipate,” “estimate,” “project,” “target,” “intend,” “plan,” “will,” “believe,” “expect” and other words and terms of similar meaning in connection with any discussion of future operating or financial performance or events. Among the factors that could cause actual results to differ materially from those described or projected herein are the following: (1) our agreement to dispose of all of the intellectual property (IP) and other assets related to Tysabri® (natalizumab) (the Tysabri Transaction, refer to Item 4.B “Business Overview” and Note 12 to the Consolidated Financial Statements for a detailed description of the Tysabri Transaction) to Biogen Idec, Inc. (Biogen Idec) may not be consummated; (2) any negative developments relating to Tysabri, such as safety or efficacy issues (including increased incidence of deaths and cases of progressive multifocal leukoencephalopathy (PML)), the introduction or greater acceptance of competing products, including biosimilars, or adverse regulatory or legislative developments may reduce our revenues and adversely affect our results of operations; (3) if the Tysabri Transaction with Biogen Idec is consummated, we will no longer have any commercialized products and our revenue will continue to be dependent on Tysabri, the development, manufacturing and commercialization of which will be controlled exclusively by Biogen Idec with no participation by us; (4) whether we are deemed to be an Investment Company for the purposes of the Investment Company Act of 1940 or Passive Foreign Investment Company (PFIC) for federal income tax purposes; (5) the potential for the successful development and commercialization or acquisition of additional products as we have no material research or pre-clinical programs or capabilities; (6) our ability to maintain financial flexibility and sufficient cash, cash equivalents, and investments and other assets capable of being monetized to meet our liquidity requirements; (7) whether restrictive covenants in our debt obligations will adversely affect us; (8) our dependence on Johnson & Johnson and Pfizer Inc. (Pfizer) for the development and potential commercialization of bapineuzumab and any other potential products in the Alzheimer’s Immunotherapy Program (AIP) in particular given the announced discontinuation of development of bapineuzumab intravenous in mild to moderate Alzheimer’s disease and the possibility that we will never realize any return upon our economic interest in the AIP collaboration (including on our remaining commitment to fund up to an additional $93.2 million to Janssen AI); (9) the expense and success of development activities for ELND0005 (scyllo-inositol) , including, in particular, whether the Phase 2 clinical trials for ELND005 are successful, whether ELND005 is successfully developed in any indication, and, if so, the speed with which regulatory authorizations and product launch may be achieved; (10) competitive developments, including the introduction of new oral therapies competitive with Tysabri (such as Biogen Idec’s BG-12) and potentially biosimilar competition for Tysabri; (11) the ability to protect patents and other IP and defend against IP lawsuits asserted against us or Biogen Idec with respect to Tysabri; (12) difficulties or delays in manufacturing Tysabri (Biogen Idec manufactures Tysabri); (13) pricing pressures and uncertainties regarding healthcare reimbursement and reform and from countries seeking to reduce their public expenditures on healthcare, in particular as the result of the sovereign debt crisis in Europe; (14) the effects of our settlement with the U.S. government relating to marketing practices with respect to our former Zonegran® (zonisamide) product, which required us to pay $203.5 million in fines and to take other actions that could have a material adverse effect on Elan; (15) failure to comply with anti-kickback, bribery and false claims laws in the United States and elsewhere; (16) extensive government regulation; (17) risks from potential environmental liabilities; (18) failure to comply with our reporting and payment obligations under Medicaid or other government programs; (19) exposure to product liability risks, in particular with respect to Tysabri; (20) an adverse effect that could result from the outcome of pending or future litigation; (21) our
2
business is exposed to the volatility of currency exchange rates and the risks of a partial or total collapse of the euro; (22) Our auditor is not inspected by the U.S. Public Company Accounting Oversight Board (PCAOB), and as such, our investors currently do not have the benefits of PCAOB oversight; and (23) some of our agreements that may discourage or prevent others from acquiring us and that Johnson & Johnson is our largest shareholder with an 18.0% interest in our outstanding Ordinary Shares and is largely in control of our remaining interest in the AIP, which may discourage others from seeking to work with or acquire us. We assume no obligation to update any forward-looking statements, whether as a result of new information, future events or otherwise, except as otherwise required by law.
3
| Item 1. | Identity of Directors, Senior Management and Advisers. |
Not applicable.
| Item 2. | Offer Statistics and Expected Timetable. |
Not applicable.
| Item 3. | Key Information. |
| A. | Selected Financial Data |
The selected financial data set forth below, (in millions, except per share data), is derived from our Consolidated Financial Statements and should be read in conjunction with, and is qualified by reference to, Item 5. “Operating and Financial Review and Prospects” and our Consolidated Financial Statements and related notes thereto.
| Years Ended December 31, |
2012 | 2011 | 2010 | 2009 | 2008 | |||||||||||||||
| Continuing Operations: |
||||||||||||||||||||
| Total revenue |
$ | 0.2 | $ | 4.0 | $ | 44.1 | $ | 112.8 | $ | 141.5 | ||||||||||
| Operating loss |
$ | (377.5 | )(2) | $ | (235.1 | )(3) | $ | (478.9 | )(4) | $ | (242.1 | )(5) | $ | (320.5 | )(6) | |||||
| Net loss from continuing operations |
$ | (372.7 | )(7) | $ | (453.5 | )(8) | $ | (561.3 | )(9) | $ | (393.5 | )(10) | $ | (239.9 | )(11) | |||||
| Discontinued Operations:(1) |
||||||||||||||||||||
| Net income from discontinued operations |
$ | 235.3 | (12) | $ | 1,014.0 | (13) | $ | 236.6 | (14) | $ | 217.3 | (15) | $ | 168.9 | (16) | |||||
| Total Operations: |
$ | (137.4 | ) | $ | 560.5 | $ | (324.7 | ) | $ | (176.2 | ) | $ | (71.0 | ) | ||||||
| Basic and diluted Net Income/(Loss) per Ordinary Share |
||||||||||||||||||||
| Continuing operations(17) |
$ | (0.63 | ) | $ | (0.77 | ) | $ | (0.96 | ) | $ | (0.78 | ) | $ | (0.51 | ) | |||||
| Discontinued operations(17) |
$ | 0.40 | $ | 1.73 | $ | 0.40 | $ | 0.43 | $ | 0.36 | ||||||||||
| Total attributable to the ordinary shareholders of the Parent Company |
$ | (0.23 | ) | $ | 0.95 | $ | (0.56 | ) | $ | (0.35 | ) | $ | (0.15 | ) | ||||||
| Basic and diluted weighted-average number of shares outstanding — continuing, discontinued and total operations |
592.4 | 587.6 | 584.9 | 506.8 | 473.5 | |||||||||||||||
| Other Financial Data: |
||||||||||||||||||||
| Adjusted EBITDA — continuing operations(18) |
$ | (168.1 | ) | $ | (174.9 | ) | $ | (185.0 | ) | $ | (238.4 | ) | $ | (234.9 | ) | |||||
| Adjusted EBITDA — discontinued operations(18) |
$ | 361.7 | $ | 387.9 | $ | 351.5 | $ | 334.7 | $ | 239.2 | ||||||||||
| At December 31, |
2012 | 2011 | 2010 | 2009 | 2008 | |||||||||||||||
| Balance Sheet Data: |
||||||||||||||||||||
| Cash and cash equivalents |
$ | 431.3 | $ | 271.7 | $ | 422.5 | $ | 836.5 | $ | 375.3 | ||||||||||
| Restricted cash — current and non-current |
$ | 16.3 | $ | 16.3 | $ | 223.1 | $ | 31.7 | $ | 35.2 | ||||||||||
| Investment securities — current |
$ | 167.9 | $ | 0.3 | $ | 2.0 | $ | 7.1 | $ | 30.5 | ||||||||||
| Total assets |
$ | 1,640.2 | $ | 1,753.8 | $ | 2,017.5 | $ | 2,337.8 | $ | 1,867.6 | ||||||||||
| Debt |
$ | 600.0 | $ | 615.0 | (19) | $ | 1,270.4 | (20) | $ | 1,532.1 | (21) | $ | 1,765.0 | |||||||
| Total shareholders’ equity/(deficit) |
$ | 618.2 | $ | 801.8 | $ | 194.3 | $ | 494.2 | $ | (232.2 | ) | |||||||||
| (1) | The income statement financial information relating to Tysabri for the years ended December 31, 2012, 2011 and 2010; the Prothena Business for the period up to December 20, 2012 and the years ended December 31, 2011 and 2010; and the Elan |
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| Drug Technologies (EDT) business for the years ended December 31, 2012, 2011 and 2010, are presented as discontinued operations in our Consolidated Financial Statements and related notes thereto. |
| (2) | After other net charges of $168.9 million, relating to severance, restructuring and other costs of $42.4 million, facilities and other asset impairment charges of $107.5 million, in-process research and development (IPR&D) costs of $11.0 million, and the Cambridge Collaboration termination charge of $8.0 million. |
| (3) | After other net charges of $24.3 million, relating to severance, restructuring and other costs of $8.8 million, and facilities and other asset impairment charges of $15.5 million. |
| (4) | After a settlement reserve charge of $206.3 million; after other net charges of $52.8 million, primarily relating to severance, restructuring and other costs of $16.1 million, facilities and other asset impairment charges of $16.7 million, net loss on divestment of the Prialt® business of $1.5 million, a legal settlement of $12.5 million, net acquired IPR&D costs of $6.0 million; and after a net gain on divestment of business of $1.0 million. |
| (5) | After a net gain on divestment of business of $108.7 million; and after other net charges of $61.6 million, primarily relating to intangible asset impairment charges of $30.6 million, severance, restructuring and other costs of $23.3 million, facilities and other asset impairment charges of $16.1 million, acquired IPR&D costs of $5.0 million, reduced by net legal awards of $13.4 million. |
| (6) | After other net charges of $25.2 million, primarily relating to severance, restructuring and other costs of $12.2 million, the write-off of deferred transaction costs of $7.5 million, a legal settlement of $4.7 million and facilities and other asset impairment charges of $0.8 million. |
| (7) | After other net charges of $168.9 million; after net loss on equity method investment of $221.8 million; after net charge on debt retirement of $76.1 million; and after a tax credit of $304.2 million primarily related to the recognition of a deferred tax asset expected to be utilized in relation to the expected gain on sale of Tysabri in 2013. |
| (8) | After other net charges of $24.3 million; after net loss on equity method investment of $81.1 million; after net charge on debt retirement of $47.0 million; and after a tax charge of $40.0 million relating to the write-down of U.S. state deferred tax assets. |
| (9) | After a settlement reserve charge of $206.3 million; after other net charges of $52.8 million; after a net gain on divestment of business of $1.0 million; after a net loss on equity method investment of $26.0 million; and after net charge on debt retirement of $3.0 million. |
| (10) | After a net gain on divestment of business of $108.7 million; after other net charges of $61.6 million; and after net charge on debt retirement of $24.4 million. |
| (11) | After other net charges of $25.2 million; and after a tax credit of $236.6 million, which resulted from the release of a deferred tax asset valuation allowance. |
| (12) | After a net loss on divestment of business of $17.9 million; after other net charges of $4.2 million, primarily relating to severance, restructuring and other costs; after a net loss on disposal of equity method investment of $13.3 million; and after a net loss on equity method investment of $7.2 million. |
| (13) | After a net gain on divestment of business of $652.9 million; and after other net gains of $66.5 million, primarily relating to legal settlement gains of $84.5 million, offset by severance, restructuring and other costs of $11.6 million, and facilities and other asset impairment charges of $6.4 million; and after a net loss on equity method investment of $0.7 million. |
| (14) | After other net charges of $3.5 million, relating to severance, restructuring and other costs. |
| (15) | After other net charges of $5.7 million, relating to severance, restructuring and other costs. |
| (16) | After other net charges of $9.0 million, relating to severance, restructuring and other costs. |
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| (17) | Basic and diluted net income/(loss) for continuing and discontinued operations per ordinary share is based on the weighted-average number of outstanding Ordinary Shares and the effect of potential dilutive securities including stock options and restricted stock units (RSUs), unless anti-dilutive. |
| (18) | Refer to pages 45 and 55 for reconciliations of net loss from continuing operations to Adjusted EBITDA from continuing operations and net income from discontinued operations to Adjusted EBITDA from discontinued operations, respectively, and our reasons for presenting these non-GAAP measures. |
| (19) | Net of unamortized original issue discount of $9.5 million. |
| (20) | Net of unamortized original issue discount of $14.6 million. |
| (21) | Net of unamortized original issue discount of $7.9 million. |
| B. | Capitalization and Indebtedness |
Not applicable.
| C. | Reasons for the Offer and Use of Proceeds |
Not applicable.
| D. | Risk Factors |
You should carefully consider all of the information set forth in this Form 20-F, including the following risk factors, when investing in our securities. The risks described below are not the only ones that we face. Additional risks not currently known to us or that we presently deem immaterial may also impair our business operations. We could be materially adversely affected by any of these risks. This Form 20-F also contains forward-looking statements that involve risks and uncertainties. Forward-looking statements are not guarantees of future performance, and actual results may differ materially from those contemplated by such forward-looking statements.
The Tysabri Transaction may not complete
On February 6, 2013, we announced that we have entered into an asset purchase agreement with Biogen Idec International Holding Ltd. (“Biogen International”), an affiliate of Biogen Idec (the “Asset Purchase Agreement”), pursuant to which we agreed to transfer to Biogen International all of our interest in the intellectual property and other assets related to the development, manufacturing and commercialization of Tysabri and other products licensed under our existing Collaboration Agreement with Biogen Idec and its affiliates. On the closing of the Tysabri Transaction, our existing Collaboration Agreement will terminate and Biogen International and its affiliates will have sole authority over, and exclusive worldwide rights to, the development, manufacturing and commercialization of Tysabri. Under the terms of the Asset Purchase Agreement, Biogen International will make a payment of $3.25 billion to us at closing and we will receive royalties on all future global net sales of Tysabri. During the first 12 months following the closing, we will receive a royalty of 12% on all global net sales of Tysabri. Thereafter, we will receive a royalty of 18% on annual global net sales up to and including $2.0 billion and a royalty of 25% on annual global net sales above $2 billion. The Tysabri Transaction is expected to close in the first half of 2013, subject to the satisfaction of certain conditions, as described in further detail below.
The closing of the Tysabri Transaction is subject to the satisfaction or waiver of certain conditions, including the following: (i) the waiting periods and approvals necessary to permit the closing under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the “HSR Act”), the Spanish Competition Act of 2007 and any similar merger control legislation of any other jurisdiction where Biogen International has determined, after consultation with Elan, a filing is required, have expired or terminated or been obtained, (ii) there is no governmental order that prevents the closing of the Tysabri Transaction, would result in rescission of the Tysabri Transaction following the closing, would limit the ability of Biogen International to operate the Tysabri business following the closing, would compel Biogen International to dispose of any assets or would require us or Biogen International to pay a penalty or fine, (iii) there is no pending action by a governmental authority that seeks, or by any other person that seeks and would reasonably be expected (in the reasonable good faith determination of Biogen International) to result in, a governmental order that prevents the closing of the Tysabri Transaction, would result in rescission of the Tysabri Transaction following the closing, would limit the ability of Biogen International to operate the Tysabri business following closing, would compel Biogen International to dispose of any assets or would require us or Biogen International to pay a penalty or fine, (iv) certain material third party consents have been received, (v) there has been no event or occurrence that has resulted in a Tysabri Material Adverse Change (as defined in the Asset Purchase Agreement and described below), (vi) we have terminated certain services provided to us by Prothena Corporation plc, which owns a substantial portion of our former drug discovery business platform, which we separated from our business in December 2012, as described in Item 4.B “Business Overview,” and (vii) we have received and delivered to Biogen International a copy of a written agreement from the Office of Inspector General of the United States Department of Health and Human Services providing that our Corporate Integrity Agreement relating to the Zonegran matter will not apply to Biogen International or any of its products following the closing of the Tysabri Transaction.
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The Asset Purchase Agreement may be terminated by Biogen International prior to the closing date of the Tysabri Transaction if (i) the expiration or termination of the applicable waiting period under the HSR Act has not occurred within 75 days following the signing date, (ii) the waiting periods and approvals necessary to permit the closing under the Spanish Competition Act of 2007 and any similar merger control legislation of any other jurisdiction where Biogen International has determined, after consultation with Elan, a filing is required, have not expired or terminated or been obtained within 100 days following the signing date or (iii) a Tysabri Material Adverse Change has occurred during the period between the signing date and the closing date of the Tysabri Transaction. The Asset Purchase Agreement may be terminated by either Biogen International or us at any time prior to the closing if (i) a final nonappealable governmental order has been issued permanently enjoining or otherwise prohibiting the Tysabri Transaction or (ii) the closing has not occurred on or before December 31, 2013.
For purposes of the Asset Purchase Agreement, a Tysabri Material Adverse Change is defined as any event, change, fact, condition, circumstance or occurrence that has had or would reasonably be expected to have a material adverse effect on Tysabri sales or on the assets to be acquired by Biogen International in the Tysabri Transaction, subject to certain exceptions. In addition, the following events will be deemed to be a Tysabri Material Adverse Change: (i) changes in governmental regulations or third party payors’ reimbursement policies or the imposition of any health care cost containment measures unless, in the aggregate, the worldwide net revenues for Tysabri would not have decreased by more the 7.5% during the 12-month period immediately preceding such changes or measures, had those changes or measures been in effect during that period or (ii) the occurrence of PML in Tysabri-treated patients at rates that equal or exceed certain thresholds specified in the Asset Purchase Agreement (a material increase in PML occurrences in Tysabri-treated patients who meet certain risk profiles would result in a Tysabri Material Adverse Change and, therefore, permit Biogen International to terminate the Asset Purchase Agreement).
If the Tysabri Transaction is not consummated as a result of (i) Biogen International terminating the Asset Purchase Agreement because (a) the expiration or termination of the applicable waiting period under the HSR Act has not occurred within 75 days following the signing date or (b) the waiting periods and approvals necessary to permit the closing under the Spanish Competition Act of 2007 and any similar merger control legislation of any other jurisdiction where Biogen International has determined, after consultation with Elan, a filing is required, have not expired or terminated or been obtained within 100 days following the signing date, (ii) either us or Biogen International terminating the Asset Purchase Agreement because a final nonappealable governmental order has been issued permanently enjoining or otherwise prohibiting the Tysabri Transaction, or (iii) either us or Biogen International terminating the Asset Purchase Agreement because the closing of the Tysabri Transaction has not occurred on or before December 31, 2013 and, at the time of termination, all waiting periods and approvals necessary to permit the closing under the HSR Act, the Spanish Competition Act of 2007 and any similar merger control legislation of any other jurisdiction have not expired or terminated or been obtained (collectively, the “Regulatory Conditions”), our existing Collaboration Agreement will be automatically amended to eliminate provisions of the Collaboration Agreement that would give each party the right to purchase the other party’s interest in Tysabri in the event of either a change of control of the other party or the other party being required to dispose of its interest in Tysabri by a governmental authority.
We cannot guarantee whether the closing conditions for the Tysabri Transaction will be satisfied or whether any of the conditions under which Biogen International is permitted to terminate the Asset Purchase Agreement will occur. As a result, we cannot assure you that the Tysabri Transaction will be completed on a timely basis, or at all. If the closing conditions to the Tysabri Transaction are not satisfied or waived, or if the transaction is not completed for any other reason, our existing Collaboration Agreement with Biogen Idec will continue, subject to the elimination, under certain circumstance, of the change of control and mandatory disposition provisions of the Collaboration Agreement. However, the market price of our ordinary shares could decline and we would nevertheless remain liable for the significant expenses we have incurred related to the Tysabri Transaction.
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We are substantially dependent on revenues from Tysabri.
Sales of our only marketed product Tysabri represented approximately 100% of our total continuing and discontinued revenues during 2012. If the Tysabri Transaction is consummated, we will no longer have any commercialized products and we will continue to be dependent on sales of Tysabri through a future royalty interest based on Tysabri global net sales. Any negative developments relating to Tysabri, such as safety, efficacy or reimbursement issues, the introduction or greater acceptance of competing products, including biosimilars, or adverse regulatory or legislative developments may reduce our revenues and adversely affect our results of operations. New competing products for use in multiple sclerosis (MS) are beginning to (or will soon) enter the market, including BG-12 for which Biogen Idec has filed for marketing approval in the United States and Europe. If any of these competing products have a similar or more attractive profile in terms of efficacy, convenience or safety, future sales of Tysabri could be limited, which would reduce our revenues. If we complete the Tysabri Transaction we will exercise no control over sales of Tysabri and will be totally dependent on the efforts of Biogen Idec to realize on our royalty interest.
Tysabri’s sales growth cannot be assured given the significant restrictions on its use and the significant safety warnings in the label, including the risk of developing PML, a serious brain infection. The risk of developing PML increases with prior immunosuppressant (IS) use, which may cause patients who have previously received IS or their physicians to refrain from using or prescribing Tysabri. The risk of developing PML also increases with longer treatment duration, with limited experience beyond four years. This may cause prescribing physicians or patients to suspend treatment with Tysabri. In addition, the risk of developing PML is heightened when a patient has anti-JC virus (JCV) antibodies. In January 2012, the U.S. Food and Drug Administration (FDA) approved a product label change for Tysabri that identifies anti-JCV antibody status as a risk factor for PML. This risk had already been incorporated into the European label for Tysabri in June 2011. Physicians have discontinued treatment and are likely to continue to discontinue treatment with Tysabri in patients who test positive for JCV antibodies. Increased incidence of PML could limit sales growth, prompt regulatory review, require significant changes to the label or result in market withdrawal. Additional regulatory restrictions on the use of Tysabri or safety-related label changes, including enhanced risk management programs, whether as a result of additional cases of PML or otherwise, may significantly reduce expected revenues and require significant expense and management time to address the associated legal and regulatory issues. In addition, ongoing or future clinical trials involving Tysabri, efforts at stratifying patients into groups with lower or higher risk for developing PML and the commercial availability of the JCV antibody assay may have an adverse impact on prescribing behavior and reduce sales of Tysabri. Further, the utility of the JCV antibody assay may be diminished as a result of the assay’s false negative rate and because a patient who tests negative for JCV antibodies may be infected by the JCV after testing. Any or all of the above factors could lead to volatility in the number of patients who begin or continue to use Tysabri or discontinue the use of Tysabri in any period.
If the Tysabri Transaction is consummated we will no longer have any commercialized products and our revenue will continue to be dependent on sales of Tysabri, the development, manufacturing and commercialization of which will be controlled exclusively by Biogen Idec with no participation by us.
If the Tysabri Transaction is consummated, our revenues will be generated primarily through a royalty interest based on the global net sales of Tysabri. Thus, any future revenues from the commercialization of Tysabri will depend solely upon the commercialization efforts of Biogen Idec. While we will be entitled to royalties based on the global net sales of Tysabri, we will not have any control over, and Biogen Idec will not be subject to, any express contractual standard related to the level of effort or resources that Biogen Idec will devote to the commercialization of Tysabri. In addition, Biogen Idec markets a competing MS therapy, Avonex®, and has another potentially competitive MS therapy (BG-12) awaiting regulatory approval in the United States and Europe. As a result of these competitive drugs, Biogen Idec’s management attention and resources may be diverted from Tysabri and Biogen Idec’s financial interest in the marketing of Tysabri may not be wholly aligned with ours. If Biogen Idec does not allocate sufficient resources or effort to its commercialization of Tysabri, our financial performance and prospects may be adversely affected.
Following the Tysabri Transaction, we may be deemed an Investment Company and subjected to related restrictions under the Investment Company Act of 1940.
The regulatory scope of the Investment Company Act of 1940, as amended (the “Investment Company Act”), which was enacted principally for the purpose of regulating vehicles for pooled investments in securities, extends generally to companies engaged primarily in the business of investing, reinvesting, owning, holding or trading in securities. The Investment Company Act may, however, also be deemed to be applicable to a company that does not intend to be characterized as an investment company but that, nevertheless, engages in activities that may be deemed to be within the definitional scope of certain provisions of the Investment Company Act. We believe that our anticipated principal activities following the Tysabri Transaction will not subject us to regulation
8
under the Investment Company Act. Nevertheless, there can be no assurance that we will not be deemed to be an investment company. If we are deemed to be an investment company, we would intend to rely on Rule 3a-2 under the Investment Company Act, which provides a safe harbor exemption from investment company status, not to exceed one year, for companies that have a bona fide intent to be engaged in an excepted activity but that temporarily do not to meet the requirements for another exemption from registration as an investment company.
If, following expiration of such safe harbor, we are deemed to be an investment company, we may become subject to certain restrictions relating to our activities (unless we determine to seek and are successful in obtaining exemptive relief from the U.S. Securities and Exchange Commission), including restrictions on the nature of our investments and the issuance of securities. In addition, the Investment Company Act imposes certain requirements on companies deemed to be within its regulatory scope, including registration as an investment company, adoption of a specific form of corporate structure and compliance with certain reporting, record keeping, voting, proxy, disclosure and other rules and regulations. In the event of our characterization as an investment company, our inability to satisfy such regulatory requirements, whether on a timely basis or at all, would, under certain circumstances, have a material adverse effect on us.
If we were determined to be a PFIC, U.S. Tax Residents could suffer adverse tax consequences.
We believe that we are not currently a PFIC and, based on our management’s current projections of our future income and assets, and the anticipated use of our cash, that we will not become a PFIC in the foreseeable future, including following consummation of the Tysabri Transaction. However, our status in any taxable year will depend on our assets and activities in each year, and because this is a factual determination made annually after the end of each taxable year, there can be no assurance that we will not be considered a PFIC for the current taxable year or any future taxable year. If we are treated as a PFIC for any taxable year in which a United States taxpayer (U.S. tax resident) holds ordinary shares or ADSs, certain adverse consequences could apply, including that gain on the sale of ADS or ordinary shares could be treated as ordinary income and subject to additional tax in the nature of interest, distributions on the ADS or ordinary shares would fail to qualify as “qualified dividend income” subject to reduced rates and could be subject to additional tax in the nature of interest, and additional reporting requirements would apply. U.S. tax residents should consult with their tax advisors as to the effect of these rules.
Our long-term success depends, in part, on the successful development and commercialization of other product candidates and we may not be successful in advancing ELND005 or in identifying, in-licensing and acquiring clinical stage product candidates on acceptable terms, or at all.
Our long-term viability and growth will depend, in part, on the successful development and commercialization of other products. On August 6, 2012, Johnson & Johnson issued a press release announcing that Janssen Alzheimer Immunotherapy (Janssen AI) and Pfizer had determined to discontinue the development of bapineuzumab intravenous in mild to moderate Alzheimer’s disease. We have an approximate 25% economic interest in the AIP collaboration between Janssen AI and Pfizer, which includes bapineuzumab.
We currently have only one product candidate in clinical trials, ELND005 (Scyllo-inositol). In 2012, we commenced Phase 2 clinical trials of ELND005 in two indications. In a previous Phase 2 clinical trial of ELND005 for mild to moderate Alzheimer’s disease, ELND005 failed to meet the trial’s primary endpoints. Following the separation of a substantial portion of our drug discovery business platform into a new publicly traded company incorporated in Ireland and the discontinuation of our remaining early stage research activities, we have no material pre-clinical programs or capability. As a result, other than ongoing and future clinical development of Tysabri (which will be the sole responsibility of Biogen Idec from and after consummation of the Tysabri Transaction), clinical development of ELND005 and our approximate 25% economic interest in the AIP collaboration, our development and commercialization of future products will be dependent on the in-licensing or acquisition of products or clinical stage product candidates. We may not be successful at identifying, in-licensing or acquiring products or clinical stage product candidates on acceptable terms, or at all.
Product development and commercialization are very expensive and involve a high degree of risk. Success in preclinical work or early stage clinical trials does not ensure that later stage or larger scale clinical trials will be successful. Even if later stage clinical trials are successful, product candidates may not receive marketing approval if regulatory authorities disagree with our view of the data or require additional studies.
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We have substantial cash needs and we may not be successful in generating or otherwise obtaining the funds necessary to meet our cash needs.
As of December 31, 2012, we had $600.0 million of debt falling due in October 2019 (2011: $624.5 million due in October 2016). As of December 31, 2012, we had total cash and cash equivalents, restricted cash and cash equivalents and investments of $624.1 million (2011: $298.1 million). If the Tysabri Transaction is consummated, revenues and cash flows will be substantially reduced, which may negatively impact us. Our indebtedness could have important adverse consequences to us. For example, it does or could:
| • | Increase our vulnerability to general adverse economic and industry conditions; |
| • | Require us to dedicate a substantial portion of our cash flow from operations to payments on indebtedness, thereby reducing the availability of our cash flow to fund research and development (R&D) (including our funding commitments to Janssen AI (for the AIP), working capital, capital expenditures, acquisitions, investments and other general corporate purposes); |
| • | Cause us to elect to redeem our indebtedness at a premium in order to avoid potential debt covenant breaches; |
| • | Limit our flexibility in planning for, or reacting to, changes in our business and the markets in which we operate; |
| • | Place us at a competitive disadvantage compared to our competitors that have less debt; and |
| • | Limit our ability to borrow additional funds. |
We estimate that we have sufficient cash, liquid resources and current assets and investments to meet our liquidity requirements for at least the next 12 months. Our future operating performance will be affected by general economic, financial, competitive, legislative, regulatory and business conditions and other factors, many of which are beyond our control. Even if our future operating performance does meet our expectations, including future Tysabri revenues, we may need to obtain additional funds to meet our longer term liquidity requirements. We may not be able to obtain those funds on commercially reasonable terms, or at all, which would force us to curtail programs, sell assets or otherwise take steps to reduce expenses or cease operations. Any of these steps may have a material adverse effect on our prospects.
Restrictive covenants in our debt instruments restrict or prohibit our ability to engage in or enter into a variety of transactions and could otherwise adversely affect us.
The agreement governing our outstanding indebtedness contains various restrictive covenants that limit our financial, operating and strategic flexibility. The covenants do not require us to maintain or adhere to any specific financial ratio, but do restrict within limits our ability to, among other things:
| • | Incur additional debt; |
| • | Create liens; |
| • | Enter into transactions with affiliates, except on an arm’s-length basis; |
| • | Enter into certain types of investment transactions; |
| • | Engage in certain asset sales or sale and leaseback transactions; |
| • | Pay dividends; and |
| • | Consolidate, merge with, or sell all or substantially all of its assets to another entity. |
The breach of any of these covenants may result in a default, which could result in the indebtedness under the agreement becoming immediately due and payable. If this were to occur, we might not be able to pay our debts or obtain sufficient funds to refinance them on reasonable terms, or at all. Alternatively, we might elect (assuming we then had sufficient cash resources) to redeem our outstanding indebtedness at a premium and discharge the agreement governing our indebtedness as we are permitted to do
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thereunder, which would consume significant cash resources and could materially restrict our financial, operating and strategic flexibility. In addition, complying with these covenants may make it more difficult for us to successfully execute our business strategies and compete against companies not subject to similar constraints.
We depend on Janssen AI, in addition to Pfizer, for the clinical development and potential commercialization of AIP products. As a result of the discontinuation of further development of bapineuzumab intravenous in mild to moderate Alzheimer’s disease, we may never realize any return on our approximate 25% economic interest in the AIP collaboration.
Johnson & Johnson exercises effective control over Janssen AI and, consequently, over our economic interest in the AIP collaboration. The interests of Johnson & Johnson may not be aligned with our interests. On August 6, 2012, Johnson & Johnson issued a press release announcing that Janssen AI and Pfizer had determined to discontinue the development of bapineuzumab intravenous in mild to moderate Alzheimer’s disease based on the co-primary clinical endpoints not being met in the Janssen AI-led Phase 3 clinical studies (Studies 301 and 302). We have a 49.9% shareholding in Janssen AI, which represents an approximate 25% economic interest in the AIP collaboration. As a result of the discontinuation, we may never realize any return on our economic interest in the AIP collaboration, although we are nonetheless required to satisfy our commitment to fund up to $200.0 million to Janssen AI by the end of 2014. Following the provision of $29.9 million of funding to Janssen AI in January 2013, we have a remaining funding commitment of $93.2 million to Janssen AI. We recorded a non-cash impairment charge of $117.3 million on our equity method investment in Janssen AI during 2012, representing the full initial estimated value of our 49.9% share of the Janssen AI AIP assets.
Our industry is highly competitive.
Our principal pharmaceutical competitors consist of major international companies, many of which are larger and have greater financial resources, technical staff, manufacturing, R&D and marketing capabilities than us. We also compete with smaller research companies and generic and biosimilar drug manufacturers. In addition Biogen Idec, markets a competing MS therapy, Avonex and has another potentially competitive MS therapy (BG-12) awaiting regulatory approval in the United States and Europe. As a result of these competitive drugs, Biogen Idec’s management attention and resources may be diverted from Tysabri and Biogen Idec’s financial interest in the marketing of Tysabri may not be wholly aligned with ours. If the Tysabri Transaction with Biogen Idec is consummated, we will exercise no control over sales of Tysabri and will be totally dependent on Biogen Idec to realize our royalty interest.
A drug may be subject to competition from alternative therapies during the period of patent protection or regulatory exclusivity and, thereafter, it may be subject to further competition from generic or biosimilar products. Tysabri is covered by a number of issued patents and pending patent applications in the United States and many other countries. A primary U.S. patent covering the humanized antibody expires in 2020. Additional U.S. patents and pending patent applications of Elan and/or our collaborator, Biogen Idec, covering (i) methods of use, including the use of Tysabri to treat MS, irritable bowel disease and a variety of other indications, and (ii) methods of manufacturing Tysabri, generally expire between 2013 and 2024. Outside the United States, patents and pending patent applications covering Tysabri, methods of using Tysabri and methods of manufacturing Tysabri generally expire between 2013 and 2024. If the Tysabri Transaction closes we will transfer all of our rights in Tysabri IP and other assets related to Tysabri to Biogen Idec. The price of pharmaceutical products typically declines as competition increases. Tysabri sales may be very sensitive to additional new competing products (in particular, from oral therapies approved or filed for U.S. and European approvals or under development such as Biogen Idec’s BG-12). If these products have a similar or more attractive overall profile in terms of efficacy, convenience and/or safety, future sales of Tysabri could be adversely impacted.
Generic and biosimilar competitors do not have to bear the same level of R&D and other expenses associated with bringing a new branded product to market. As a result, they can charge less for a competing version of a product. Managed care organizations (MCOs) typically favor generics over brand name drugs, and governments encourage, or under some circumstances mandate, the use of generic products, thereby reducing the sales of branded products that are no longer patent protected. Governmental and other pressures toward the dispensing of generic or biosimilar products may rapidly and significantly reduce, or slow the growth in, the sales and profitability of any products not protected by patents or regulatory exclusivity and may adversely affect our future results and financial condition. The launch of competitive products, including generic or biosimilar versions of products, has had and may have a material and adverse effect on our revenues and results of operations.
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If the Tysabri Transaction is consummated we have agreed that we will not research, develop or commercialize products that act through or on Alpha 4 Integrin, such as Tysabri. Our inability to compete in this area may materially and adversely affect our prospects.
We have no material pre-clinical programs or capabilities. Our competitive position depends, in part, upon our ability to acquire or develop innovative, cost-effective new products, and to protect all of this with patents and other IP rights. If we fail to maintain our competitive position, then our revenues and results of operations may be materially and adversely affected.
If we are unable to obtain or enforce patent rights, trade secrets or other IP, then our revenues and potential revenues may be materially reduced.
Because of the significant time and expense involved in developing new products in our industry and obtaining regulatory approvals, it is very important to obtain patent and other IP protection for new technologies, products and processes. Our success depends in large part on our continued ability to obtain patents for products and technologies, maintain patent protection for both acquired and developed products, preserve our trade secrets, obtain and preserve other IP such as trademarks and copyrights, and operate without infringing the valid and enforceable proprietary rights of third parties.
The degree of patent protection that will be afforded to technologies, products and processes, including ours, in the United States and in other markets is dependent upon the scope of protection provided by patent offices, courts and legislatures in these countries. There is no certainty that our existing patents or, if obtained, future patents, will provide us with substantial protection or commercial benefit. In addition, there is no assurance that our patent applications or patent applications licensed from third parties will ultimately be granted or that those patents that have been issued or are issued in the future will prevail in any court challenge. Our competitors may also develop products, including generic or biosimilar products, similar to ours using methods and technologies that are beyond the scope of our patent protection, which could adversely affect the sales of Tysabri or our other products, if any.
Although we believe that we make reasonable efforts to protect our IP rights and to ensure that our proprietary technology does not infringe the valid and enforceable rights of other parties, we cannot ascertain the existence of all potentially conflicting claims. Therefore, there is a risk that third parties may make claims of infringement against Tysabri or our other products, if any. In addition, third parties may be able to obtain patents that prevent the sale or use of Tysabri or our other products, if any, or require us to obtain a license and pay significant fees or royalties in order to continue selling Tysabri or our other products, if any.
There has been, and we expect there will continue to be, significant litigation in the industry regarding patents and other IP rights. Litigation and other proceedings concerning patents and other IP rights in which we are involved have been and will continue to be protracted and expensive and could be distracting to our management and business operations. Our competitors have sued and may sue us or our collaborators as a means of delaying the introduction of products, or to extract royalties against a marketed product. In particular, a patent claim is pending against Biogen Idec with trial set for early 2014. In the event of an adverse result in the litigation, or pursuant to a settlement, Biogen Idec may have to agree to pay damages and/or a royalty on sales of Tysabri and under our Collaboration Agreement with Biogen Idec, or under the Tysabri Transaction, we may be required to pay approximately 50% of such damages or royalty, which may result in a material diminution of our Tysabri revenue. Any litigation, interference proceedings, re-examinations or oppositions against us or our licensors, may be costly and time consuming and could adversely affect us. In addition, litigation has been and may be instituted to determine the validity, scope or non-infringement of patent rights claimed by third parties to be pertinent to the manufacturing, use or sale of Tysabri or our other products, if any, or their products. The outcome of any such litigation could adversely affect the validity and scope of our patents or other IP rights, hinder, delay or prevent the marketing and sale of Tysabri or our other products, if any, and cost us substantial sums of money.
If there are significant delays in the manufacture or supply of Tysabri or in the supply of raw materials for Tysabri, then sales of Tysabri could be materially and adversely affected.
Biogen Idec manufactures Tysabri with no participation from us. Our dependence upon Biogen Idec for the manufacture of Tysabri may result in unforeseen delays or other problems beyond our control. For example, if Biogen Idec is not in compliance with current good manufacturing practices (cGMP) or other applicable regulatory requirements, then the supply of Tysabri could be materially and adversely affected. If Biogen Idec experiences delays or difficulties in producing Tysabri, then sales of Tysabri could be materially and adversely affected. Biogen Idec requires supplies of raw materials for the manufacture of Tysabri. Biogen Idec does not have dual sourcing of all required raw materials. In addition, although a second manufacturing facility is in development, Biogen Idec currently relies on its manufacturing facility in Research Triangle Park, North Carolina to manufacture Tysabri. The inability to obtain sufficient quantities of required raw materials could materially and adversely affect the supply of Tysabri.
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We are subject to pricing pressures and uncertainties regarding healthcare reimbursement and reform.
In the United States, many pharmaceutical products and biologics are subject to increasing pricing pressures. Our ability to commercialize products successfully depends, in part, upon the extent to which healthcare providers are reimbursed by third-party payers, such as governmental agencies, including the Centers for Medicare and Medicaid Services, private health insurers and other organizations, such as health maintenance organizations (HMOs), for the cost of such products and related treatments. In addition, if healthcare providers do not view current or future Medicare reimbursements for Tysabri or our other products, if any, favorably, then they may not prescribe Tysabri or our other products, if any. Third party payers are increasingly challenging the pricing of pharmaceutical products by, among other things, limiting the pharmaceutical products that are on their formulary lists. As a result, competition among pharmaceutical companies to place their products on these formulary lists has reduced product prices. If reasonable reimbursement for Tysabri or our other products, if any, is unavailable or if significant downward pricing pressures in the industry occur, then we could be materially and adversely affected.
The Obama Administration and the Congress in the United States have significantly changed U.S. healthcare law and regulation, which may change the manner by which drugs and biologics are developed, marketed and purchased. In addition, MCOs, HMOs, preferred provider organizations, institutions and other government agencies continue to seek price discounts. Further, some states in the United States have proposed and some other states have adopted various programs to control prices for their seniors’ and low-income drug programs, including price or patient reimbursement constraints, restrictions on access to certain products, importation from other countries, such as Canada, and bulk purchasing of drugs.
We encounter similar regulatory and legislative issues in most other countries. In the European Union and some other international markets, the government provides healthcare at low direct cost to consumers and regulates pharmaceutical prices or patient reimbursement levels to control costs for the government-sponsored healthcare system. Many countries are seeking to reduce their public expenditures on healthcare. These efforts may result in patient access restrictions, increased pressure on drug pricing, including denial of price increases, prospective and retrospective price decreases and increased mandatory discounts or rebates. For instance, a revenue reserve of $30.6 million was recorded in 2012 and $37.5 million to date on Tysabri in-market sales in Italy, arising from a disagreement between Biogen Idec and the Italian National Medicines Agency (Medicines Agency) on a contract interpretation of a limit established by the Medicines Agency in 2007. In December 2011, Biogen Idec filed an appeal against the Medicines Agency seeking a ruling that the reimbursement limit does not apply and that the position of the Medicines Agency is unenforceable. Until this dispute is resolved, we will continue to defer Tysabri revenue. The revenue reserve is discussed further on page 48. The sovereign debt crisis in Europe and elsewhere may accelerate efforts by governments to control public expenditures on healthcare, which may limit, reduce or delay reimbursements for Tysabri. These efforts may negatively impact Tysabri revenue. Even if the Tysabri Transaction is consummated, negative impacts on Tysabri revenue will result in lower royalty payments to us.
We settled with the U.S. government with respect to its investigation of the marketing practices concerning our former Zonegran product which required us to pay $203.5 million in criminal and civil fines and penalties and take other actions that could have a material adverse effect on us.
In December 2010, we resolved all aspects of the U.S. Department of Justice’s investigation of sales and marketing practices for Zonegran, an antiepileptic prescription medicine that we divested in 2004. In the first quarter of 2011, we paid $203.5 million pursuant to the terms of a global settlement of all U.S. federal and related state Medicaid claims. In addition, we pleaded guilty to a misdemeanor violation of the U.S. Federal Food Drug & Cosmetic Act (FD&C Act) and entered into a Corporate Integrity Agreement with the Office of Inspector General of the Department of Health and Human Services to promote our compliance with the requirements of U.S. federal healthcare programs and the FDA. If we materially fail to comply with the requirements of U.S. federal healthcare programs or the FDA, or otherwise materially breach the terms of the Corporate Integrity Agreement, such as by a material breach of the compliance program or reporting obligations of the Corporate Integrity Agreement, severe sanctions could be imposed upon us. This resolution of the Zonegran investigation could give rise to other investigations or litigation by state government entities or private parties.
The pharmaceutical industry is subject to anti-kickback, bribery and false claims laws in the United States and elsewhere.
In addition to the FDA restrictions on marketing of pharmaceutical products, several other types of state and federal laws have been applied to restrict some marketing practices in the pharmaceutical industry in recent years. These laws include anti-kickback, bribery and false claims statutes. The federal healthcare program anti-kickback statute prohibits, among other things, knowingly and willfully offering, paying, soliciting, or receiving remuneration to induce or in return for, purchasing, leasing, ordering or arranging for the purchase, lease or order of any healthcare item or service reimbursable under Medicare, Medicaid or other federally financed
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healthcare programs. This statute has been interpreted to apply to arrangements between pharmaceutical manufacturers on one hand, and prescribers, purchasers and formulary managers on the other. Although there are a number of statutory exemptions and regulatory safe harbors protecting some common activities from prosecution, the exemptions and safe harbors are drawn narrowly, and practices that involve remuneration intended to induce prescribing, purchases or recommendations may be subject to scrutiny if they do not qualify for an exemption or safe harbor. Our practices may not in all cases meet all of the criteria for safe harbor protection from anti-kickback liability.
Federal false claims laws prohibit any person from knowingly presenting, or causing to be presented, a false claim for payment to the federal government, or knowingly making, or causing to be made, a false statement to get a false claim paid. In recent years, many pharmaceutical and other healthcare companies have been prosecuted under these laws for allegedly providing free product to customers with the expectation that the customers would bill federal programs for the product. Additionally, we and other pharmaceutical companies have settled charges under the federal False Claims Act, and related state laws, relating to off-label promotion. We are now operating under a Corporate Integrity Agreement with the Office of Inspector General of the U.S. Department of Health and Human Services to promote our compliance with the requirements of U.S. federal healthcare programs and the FDA. If we materially fail to comply with the requirements of U.S. federal healthcare programs or the FDA, or otherwise materially breach the terms of the Corporate Integrity Agreement, such as by a material breach of the compliance program or reporting obligations of the Corporate Integrity Agreement, severe sanctions could be imposed upon us. The majority of states also have statutes or regulations similar to the federal anti-kickback law and false claims laws, which apply to items, and services reimbursed under Medicaid and other state programs, or, in several states, apply regardless of the payer. Sanctions under these federal and state laws may include civil monetary penalties, exclusion of a manufacturer’s products from reimbursement under government programs, criminal fines, and imprisonment. Pursuant to an Order filed on August 6, 2012, we are aware of a lawsuit pending in the United States District Court for the Western District of Virginia against Biogen Idec and Elan pursuant to the federal False Claims Act and similar state statues. We have neither seen, nor been served with, a copy of the related complaint. In addition to any penalties or charges that may result in the ordinary course from this lawsuit, if we are found to have engaged in conduct prohibited under our Corporate Integrity Agreement, severe sanctions could be imposed on us.
The Foreign Corrupt Practices Act (FCPA) and the United Kingdom Bribery Act (U.K. Bribery Act) prohibits companies and their representatives from offering, promising, authorizing or making payments to foreign officials (and some private individuals under the U.K. Bribery Act) for the purpose of obtaining or retaining business abroad. In many countries, the healthcare professionals we interact with may meet the definition of a foreign government official for purposes of the FCPA. Failure to comply with domestic or foreign laws could result in various adverse consequences, including possible delay in approval or refusal to approve a product, recalls, seizures, withdrawal of an approved product from the market, the imposition of civil or criminal sanctions and the prosecution of executives overseeing our international operations.
We are subject to extensive government regulation, which may adversely affect our ability to bring new products to market and may adversely affect Tysabri.
The pharmaceutical industry is subject to significant regulation by state, local, national and international governmental regulatory authorities. In the United States, the FDA, and in the European Union, the European Medicines Agency (EMA) regulate the design, development, preclinical and clinical testing, manufacturing, labeling, storing, distribution, import, export, record keeping, reporting, marketing and promotion of pharmaceutical products, which include drugs, biologics and medical devices. Failure to comply with regulatory requirements at any stage during the regulatory process could result in, among other things, delays in the approval of applications or supplements to approved applications, refusal of a regulatory authority to review pending market approval applications or supplements to approved applications, warning letters, fines, import or export restrictions, product recalls or seizures, injunctions, total or partial suspension of production, civil penalties, withdrawals of previously approved marketing applications or licenses, recommendations by the FDA or other regulatory authorities against governmental contracts, and criminal prosecutions.
We must obtain and maintain approval for products from regulatory authorities before such products may be sold in a particular jurisdiction. The submission of an application to a regulatory authority with respect to a product does not guarantee that approval to market the product will be granted. Each authority generally imposes its own requirements and may delay or refuse to grant approval, even though a product has been approved in another country. In our principal markets, including the United States, the approval process for a new product is complex, lengthy, expensive and subject to unanticipated delays. We cannot be sure when or whether approvals from regulatory authorities will be received or that the terms of any approval will not impose significant limitations that could negatively impact the potential profitability of the approved product. Even after a product is approved, it may be subject to regulatory action based on newly discovered facts about the safety and efficacy of the product, on any activities that regulatory
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authorities consider to be improper or as a result of changes in regulatory policy. Regulatory action may have a material adverse effect on the marketing of a product, require changes in the product’s labeling or even lead to the withdrawal of the regulatory marketing approval of the product.
All facilities and manufacturing techniques used for the manufacture of products and devices for clinical use or for sale in the United States must be operated in conformity with cGMPs, the FDA’s regulations governing the production of pharmaceutical products. There are comparable regulations in other countries, including regulations issued by the EMA for the European Union. Any finding by the FDA, the EMA or other regulatory authority that we are not in substantial compliance with cGMP regulations or that we have engaged in activities in violation of these regulations could interfere with the continued manufacture and distribution of the affected products, up to the entire output of such products, and, in some cases, might also require the recall of previously distributed products. Any such finding by the FDA, the EMA or other regulatory agency could also affect our ability to obtain new approvals until such issues are resolved. The FDA, the EMA and other regulatory authorities conduct scheduled periodic regulatory inspections of facilities to ensure compliance with cGMP regulations. Any determination by the FDA, the EMA or other regulatory authority that we, or one of our suppliers, in particular Biogen Idec, are not in substantial compliance with these regulations or are otherwise engaged in improper or illegal activities could result in substantial fines and other penalties and could cut off our product supply.
Our business exposes us to risks of environmental liabilities.
We use hazardous materials, chemicals and toxic compounds that could expose people or property to accidental contamination and result in events of non-compliance with environmental laws, regulatory enforcement and claims related to personal injury and property damage. If an accident occurred or if we were to discover contamination caused by prior operations, then we could be liable for cleanup, damages or fines, which could have an adverse effect on us.
The environmental laws of many jurisdictions impose actual and potential obligations on us to remediate contaminated sites. These obligations may relate to sites that we currently own or lease, sites that we formerly owned or operated, or sites where waste from our operations was disposed. These environmental remediation obligations could significantly impact our operating results. Stricter environmental, safety and health laws and enforcement policies could result in substantial costs and liabilities to us, and could subject our handling, manufacture, use, reuse or disposal of substances or pollutants to more rigorous scrutiny than is currently the case. Consequently, compliance with these laws could result in significant capital expenditures, as well as other costs and liabilities, which could materially adversely affect us.
If we fail to comply with our reporting and payment obligations under the Medicaid rebate program or other governmental pricing programs, then we could be subject to material reimbursements, penalties, sanctions and fines.
As a condition of reimbursement under Medicaid, we participate in the U.S. federal Medicaid rebate program, as well as several state rebate programs. Under the federal and state Medicaid rebate programs, we pay a rebate to each state for a product that is reimbursed by those programs. The amount of the rebate for each unit of product is set by law, based on reported pricing data. The rebate amount may also include a penalty if our prices increase faster than the rate of inflation.
For manufacturers of single-source, innovator and non-innovator multiple-source products, rebate calculations vary among products and programs. The calculations are complex and, in some respects, subject to interpretation by governmental or regulatory agencies, the courts and us. The Medicaid rebate amount is computed each quarter based on our pricing data submission to the Centers for Medicare and Medicaid Services at the U.S. Department of Health and Human Services. The terms of our participation in the program impose an obligation to correct the prices reported in previous quarters, as may be necessary. Any such corrections could result in an overage or shortfall in our rebate liability for past quarters (up to 12 past quarters), depending on the direction of the correction. Governmental agencies may also make changes in program interpretations, requirements or conditions of participation, some of which may have implications for amounts previously estimated or paid.
U.S. federal law requires that any company that participates in the federal Medicaid rebate program extend comparable discounts to qualified purchasers under the Public Health Service’s (PHS) pharmaceutical pricing program. This pricing program extends discounts comparable to the Medicaid net price to a variety of community health clinics and other entities that receive health services grants from the PHS, as well as outpatient utilization at hospitals that serve a disproportionate share of poor patients.
Additionally, each calendar quarter, we calculate and report an Average Sales Price (ASP) for Tysabri, which is covered by Medicare Part B (primarily injectable or infused products). We submit ASP information for Tysabri within 30 days of the end of each calendar quarter. This information is then used to set reimbursement levels to reimburse Part B providers for the drugs and biologicals dispensed to Medicare Part B participants. Furthermore, pursuant to the Veterans Health Care Act, a Non-Federal Average
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Manufacturer Price is calculated each quarter and a Federal Ceiling Price is calculated each year for Tysabri. These prices are used to set pricing for purchases by the military arm of the government. These price reporting obligations are complicated and often involve decisions regarding issues for which there is no clear-cut guidance from the government. Failure to submit correct pricing data can subject us to material civil, administrative and criminal penalties. If the Tysabri Transaction is consummated, we will transfer these reporting obligations with respect to Tysabri to Biogen Idec. We will retain responsibility for all discounts and allowances liabilities related to Tysabri sales up to the consummation of the Tysabri Transaction. Refer to pages 32 to 36 for additional information on Tysabri sales discounts and allowances.
We are subject to continuing potential product liability risks, in particular with respect to Tysabri, which could cost us material amounts of money.
Risks relating to product liability claims are inherent in the development, manufacturing and marketing of products. Any person who is injured while using Tysabri, or products that we are responsible for, may have a product liability claim against us. Persons who participate in our clinical trials may also bring liability claims. We are a defendant in product liability actions related to products that we marketed. In addition, we are defendants in product liability lawsuits arising out of serious adverse events, including deaths, which occurred in patients taking Tysabri. We expect additional product liability lawsuits related to Tysabri usage to be filed. While we or Biogen Idec intend to vigorously defend these lawsuits, we cannot predict how these cases will be resolved. If the Tysabri Transaction closes, we will continue to be responsible for 50 percent of losses and expenses arising out of Tysabri product liability claims.
Adverse results in one or more of these cases could result in substantial monetary judgments.
Excluding any self-insured arrangements, we do not maintain product liability insurance for the first $10.0 million of aggregate claims, but do maintain coverage with our insurers for the next $140.0 million. Our insurance coverage may not be sufficient to cover fully all potential claims, nor can we guarantee the solvency of any of our insurers.
If our claims experience results in higher rates, or if product liability insurance otherwise becomes costlier because of general economic, market or industry conditions, then we may not be able to maintain product liability coverage on acceptable terms. If sales of our product increase materially, or if we add significant products to our portfolio, then we will require increased coverage and may not be able to secure such coverage at reasonable rates or terms.
Our sales and operations are subject to the risks of fluctuations in currency exchange rates and to the risk of a partial or total collapse of the euro.
Our headquarters are in Ireland and three of the major markets for Tysabri are Germany, France and Italy. As a result, changes in the exchange rate between the U.S. dollar and the euro can have significant effects on our results of operations. In addition, the partial or total collapse of the euro would cause severe and adverse consequences to sales of Tysabri in Europe and to reimbursements for sales of Tysabri in Europe.
Our auditor is not inspected by the PCAOB, and as such, our investors currently do not have the benefits of PCAOB oversight.
As an auditor of companies that are publicly traded in the United States and a firm registered with the PCAOB, our independent registered public accounting firm is required by the laws of the United States to undergo regular inspections by the PCAOB to assess its compliance with the laws of the United States and the professional standards of the PCAOB. However, because our auditor is located in Ireland, a jurisdiction where the PCAOB is currently unable to conduct inspections, our auditor is not currently inspected by the PCAOB.
Inspections of other auditors conducted by the PCAOB outside of Ireland have at times identified deficiencies in those auditor’s audit procedures and quality control procedures, which may be addressed as part of the inspection process to improve future audit quality. The lack of PCAOB inspections in Ireland prevents the PCAOB from regularly evaluating our auditor’s audits and its quality control procedures. In addition, the inability of the PCAOB to conduct auditor inspections in Ireland makes it more difficult to evaluate the effectiveness of our auditor’s audit procedures or quality control procedures as compared to auditors located outside of Ireland that are subject to regular PCAOB inspections. As a result, investors will be deprived of the benefits of PCAOB inspections, and may lose confidence in our reported financial information and procedures and the quality of our financial statements.
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Provisions of agreements to which we are a party may discourage or prevent a third party from acquiring us and could prevent our shareholders from receiving a premium for their shares.
We are a party to agreements that may discourage a takeover attempt that might be viewed as beneficial to our shareholders who wish to receive a premium for their shares from a potential bidder. For example:
| • | Our Collaboration Agreement with Biogen Idec provides Biogen Idec with an option to buy the rights to Tysabri in the event that we undergo a change of control, which may limit our attractiveness to potential acquirers. If the Tysabri Transaction is consummated the Collaboration Agreement (and as a result, the purchase option) will terminate. If the Tysabri Transaction is not consummated due to the Regulatory Conditions having not been satisfied, then the parties have agreed that the purchase option will terminate; |
| • | Johnson & Johnson is our largest shareholder and is largely in control of our share of the AIP; however, Johnson & Johnson and its affiliates are subject to a standstill agreement until September 17, 2014, pursuant to which, subject to limited exceptions, they will not be permitted to acquire additional shares in Elan or take other actions to acquire control of Elan; |
| • | The Corporate Integrity Agreement that we entered into with the U.S. government with respect to the settlement of the Zonegran matter contains provisions that may require any acquirer to assume the obligations imposed by the Corporate Integrity Agreement, which may limit our attractiveness to a potential acquirer; |
| • | Under the terms of the indenture governing our debt, any acquirer would be required to make an offer to repurchase the debt for cash in connection with some change of control events; and |
| • | If the Tysabri Transaction is consummated, we have agreed not to research, develop or commercialize products which act on or through Alpha 4 Integrin, such as Tysabri. |
| Item 4. | Information on the Company. |
| A. | History & Development of the Company |
Elan Corporation, plc is an Irish public limited company listed on the New York and Irish Stock Exchanges, and headquartered in Dublin, Ireland. Elan was incorporated as a private limited company in Ireland in December 1969 and became a public limited company in January 1984. Our registered office and principal executive offices are located at Treasury Building, Lower Grand Canal Street, Dublin 2, Ireland (Telephone: 011-353-1-709-4000).
| B. | Business Overview |
We made significant changes to our business during 2012, including the separation of a substantial portion of our drug discovery business platform into a new publicly traded company incorporated in Ireland, named Prothena Corporation plc (Prothena), and the discontinuation of our remaining early stage research activities. On February 6, 2013, we announced that we have entered into an asset purchase agreement with Biogen Idec to transfer to Biogen Idec all Tysabri IP and other assets related to Tysabri. In accordance with the terms of the transaction, upon close, the existing collaboration arrangements with Biogen Idec will be terminated and Biogen Idec will pay to us an upfront payment of $3.25 billion and continuing royalties on Tysabri in-market sales. We will earn a royalty of 12% of global net sales of Tysabri during the first 12 months following the closing of the transaction. Thereafter, we will earn a royalty of 18% of global net sales up to $2.0 billion each year, and a 25% royalty on annual global net sales above $2.0 billion. The transaction is expected to close in the first half of 2013, subject to the satisfaction of certain conditions, including customary regulatory approvals.
Tysabri
Tysabri an alpha-4 integrin inhibitor invented by our scientists and available since 2006, continues to be a successful therapy for MS, a neurological disorder involving central nervous system dysfunction among adults.
Tysabri is approved in more than 65 countries. Tysabri is approved in the United States as a monotherapy for relapsing forms of MS, generally for patients who have had an inadequate response to, or are unable to tolerate, an alternative MS therapy. In Europe, it is approved for highly active relapsing-remitting MS (RRMS) in adult patients who have failed to respond to beta interferon or have rapidly evolving, severe RRMS. In the United States, Tysabri is also indicated for inducing and maintaining clinical response and
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remission in adult patients with moderately to severely active Crohn’s disease (CD) with evidence of inflammation who have had an inadequate response to, or are unable to, tolerate conventional CD therapies and inhibitors of TNF-a.
Tysabri has advanced the treatment of MS patients with its established efficacy. Data from the Phase 3 AFFIRM trial, which was published in the New England Journal of Medicine, showed that after two years, Tysabri treatment led to a 68% relative reduction (p<0.001) in the annualized relapse rate when compared with placebo and reduced the relative risk of disability progression by 42% to 54% (p<0.001).
Until the Tysabri Transaction closes, we will continue to work with Biogen Idec on Tysabri, as well as the clinical and scientific communities, to generate incremental efficacy and safety understanding of Tysabri for the treatment of relapsing forms of MS as well as for new potential indications so it may be positioned for the clinical benefit of patients.
As of December 31, 2012, there were approximately 72,700 patients on Tysabri therapy worldwide, compared to 64,700 patients as of December 31, 2011, which represents an increase of 12%. In 2012, global in-market net sales of Tysabri exceeded $1.6 billion and constituted approximately 12% of the global MS market by value.
Tysabri increases the risk of PML, an opportunistic viral infection of the brain which usually leads to death or severe disability. Infection by the JCV is required for the development of PML and patients who are anti-JCV antibody positive have a higher risk of developing PML. Recent studies suggest that irrespective of MS treatment, approximately 55% of MS patients are anti-JCV antibody positive. Factors that increase the risk of PML are presence of anti-JCV antibodies, prior IS use, and longer Tysabri treatment duration. Patients who have all three risk factors have the highest risk of developing PML. Other serious adverse events that have occurred in Tysabri-treated patients include hypersensitivity reactions (for example, anaphylaxis) and infections, including opportunistic and other atypical infections. Clinically significant liver injury has also been reported in the post-marketing setting.
In the United States, Europe and in other countries, programs are in place to inform patients of the risks associated with Tysabri therapy, including PML, and to enhance collection of post-marketing data on the safety and utilization of Tysabri for MS.
Tysabri – Secondary Progressive Multiple Sclerosis
In January 2012, Elan and Biogen Idec announced a global Phase 3b study, ASCEND, that is being conducted to evaluate the effectiveness of Tysabri as a treatment for secondary progressive MS (SPMS). According to the National Multiple Sclerosis Society, approximately half of all people initially diagnosed with RRMS — the most common form of MS — will transition to SPMS within 19 years.
The trial is currently ongoing and data is expected to be available in 2015.
Tysabri – Label Updates Provide for more Informed “Benefit/Risk” Analysis
In January 2012, the U.S. FDA approved an update to the Prescribing Information for Tysabri to include anti-JCV antibody status as a factor to help stratify the risk of PML in the Tysabri-treated population. The United States label update followed the European Commission’s approval of anti-JCV antibody status as an additional factor to aid in stratifying patients at risk for developing PML in the Summary of Product Characteristics for Tysabri in Europe in the second quarter 2011. The inclusion of anti-JCV antibody status as a risk factor along with prior IS use and treatment duration enables the identification of differing levels of risk and provides the information patients and physicians need to make a more informed treatment decision.
Anti-JCV antibody status is measured using a two-step enzyme-linked immunosorbent assay (ELISA) called STRATIFY JCV developed by Elan and Biogen Idec. The assay detects anti-JCV antibodies in the blood of patients, and is widely commercially available in both the United States and Europe.
Tysabri – Regulatory Applications for Approval as First-Line Use in Anti-JCV Antibody Negative Patients with MS
In January 2013, Elan and Biogen Idec announced the submission of applications to the FDA and EMA requesting updates to the Tysabri labels. The applications request an expanded indication that would include first-line use for people living with certain relapsing forms of MS who have tested negative for antibodies to the JCV. A formal assessment of both applications is ongoing.
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The submissions of a supplemental Biologic License Application (sBLA) to the FDA and a Type II labeling variation application to the EMA are supported by risk stratification data and a risk algorithm designed by Elan and Biogen Idec that enables physicians and individuals living with MS to make informed decisions when considering treatment with Tysabri. If approved, a first-line label will allow all appropriate anti-JCV antibody negative patients to consider Tysabri early in the course of treatment, regardless of the level of disease activity or prior treatment history.
Tysabri – Data Published and Presentations at Medical Meetings
Elan and Biogen Idec announced and presented findings at the 64th Annual Meeting of the American Academy of Neurology (AAN) from several studies of Tysabri in April 2012. The studies evaluated the long-term safety and efficacy of Tysabri in the treatment of MS across the course of disease and impact on MS-related symptoms such as fatigue.
In May 2012 the New England Journal of Medicine published research from our global risk management program that updates the risk of Tysabri-associated PML. Together with our collaborator Biogen Idec, we developed the quantitative risk stratification algorithm to help physicians and people with MS have more confidence in their treatment decisions when considering Tysabri.
The analysis looked at three risk factors associated with a patient’s PML risk: anti-JCV antibody status; use of IS therapy prior to Tysabri initiation; and longer duration of treatment with Tysabri (especially longer than two years). By identifying these risk factors and incorporating them into our risk stratification algorithm, we help physicians and patients to make more informed treatment decisions.
At the annual European Committee for Treatment and Research in Multiple Sclerosis conference in October 2012, there were eleven Elan and Biogen Idec sponsored Tysabri presentations. Key data presented indicated patients on Tysabri experienced reduced annualized relapse rates, particularly in those treated with Tysabri early in the course of their disease. Data from a separate study showed improvement of MS-related fatigue also significantly improves quality of life in patients treated with Tysabri. Additional data presented supported the utility of JC-virus antibody testing in clinical practice.
Until the Tysabri Transaction closes Tysabri will continue to be marketed and distributed by Elan and Biogen Idec. If the Tysabri Transaction closes, Biogen Idec will have sole authority over and exclusive worldwide rights to the development, manufacturing and commercialization of Tysabri. For full prescribing information and more information about Tysabri, please visit www.elan.com or www.biogenidec.com. Information about Tysabri treatment for MS, including important safety information, is available at www.Tysabri.com.
ELND005
ELND005 is an orally bioavailable small molecule that is being investigated by us for multiple neuropsychiatric indications on the basis of its proposed dual mechanism of action, which includes b-amyloid anti-aggregation and regulation of brain myo-inositol levels. An extensive clinical program of Phase 1 and Phase 2 Alzheimer’s disease studies has been completed with ELND005 to support clinical development, including the published Phase 2 study ELND005-AD201 in Alzheimer’s disease.
Study AD201 was a Phase 2 placebo controlled study in 351 patients with mild to moderate Alzheimer’s disease who received study drug (250mg twice daily; 1,000mg twice daily; 2,000mg twice daily; or placebo) for up to 18 months. The two higher dose groups were discontinued in December 2009. The study did not achieve significance on co-primary outcome measures (neuropsychological test battery (NTB) and Alzheimer’s disease Cooperative Study — Activities of Daily Living (ADCS-ADL)). The 250mg twice daily dose demonstrated a biological effect on amyloid-beta protein in the cerebrospinal fluid (CSF) in a subgroup of patients who provided CSF samples. This dose achieved targeted drug levels in the CSF previously associated with therapeutic effects in animal models, and showed some effects on clinical endpoints in an exploratory analysis.
ELND005 – Bipolar Disorder
In August 2012, we commenced a Phase 2, placebo-controlled, safety and efficacy study of oral ELND005 as an adjunctive maintenance treatment in patients with Bipolar I Disorder (BPD 1) to delay the time to occurrence of mood episodes.
BPD 1 is a severe form of Bipolar Disorder (BPD), also commonly known as manic depressive illness. It is a psychiatric disorder characterized by excessive swings in a person’s mood and energy affecting their ability to function. BPD is a lifetime
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recurrent disorder with cycles of dramatic mood swings of highs and lows, often with periods of normal moods in between. The periods of highs and lows are called episodes of mania and depression. BPD is also associated with increased cardiovascular morbidity and suicide risk. The United States and European population of BPD patients is estimated at approximately 3.5 million.
As a result of the commencement of this Phase 2 trial, we incurred an in-process R&D charge of $11.0 million during the third quarter of 2012, related to a milestone paid to Transition Therapeutics, Inc (Transition) in accordance with the terms of the modification to the Collaboration Agreement agreed with Transition in December 2010.
ELND005 – Agitation/Aggression in Alzheimer’s Disease
In November 2012, we announced that we had enrolled the first patient in a Phase 2 clinical trial of ELND005 (Study AG201) for the treatment of agitation/aggression in patients with moderate to severe Alzheimer’s disease.
ELND005 may have symptomatic benefit in neuropsychiatric indications based on its potential beneficial effects on exploratory end-points in Alzheimer’s disease, coupled with a good understanding of its safety profile from earlier clinical trials in Alzheimer’s disease. In the Phase 2 Alzheimer’s disease Study (AD201), ELND005 appeared to decrease the emergence and severity of specific Neuropsychiatric Symptoms (NPS), an effect which seemed to correlate with drug exposure for some symptoms. ELND005 also led to a sustained reduction of brain Myo-inositol levels that are thought to play a role in phospho-inositol signaling pathways and synaptic activity.
Symptomatic treatments are important in Alzheimer’s disease patient care, especially at the advanced stages of disease. As patients advance in their Alzheimer’s disease, there is an increase in both the prevalence and severity of agitation/aggression. Approximately 90% of Alzheimer’s disease patients develop NPS and up to 60% develop agitation/aggression over the course of their disease. With no approved therapies for agitation/aggression in most countries, including the United States, it is a major treatment challenge in patients with Alzheimer’s disease.
Further information about ELND005 clinical trials can be found at www.clinicaltrials.gov.
ELND005 – Data Published/Presented at Medical Meetings
In April 2012, at the AAN, data from the ELND005 Phase 2 trials in mild/moderate Alzheimer’s disease describing responder analyses and characteristics, along with findings on the effect of ELND005 on the emergence of NPS was presented.
At the Alzheimer’s Association International Conference (AAIC) in Vancouver, Canada in July 2012, data from the ELND005 Phase 2 trials in mild/moderate Alzheimer’s disease describing its effect on both brain scyllo-inositol and myo-inositol levels was presented. In addition, data was also presented on the effects of oral ELND005 on NPS in the Phase 2 trial and the potential role of myo-inositol reduction.
In October 2012, ELND005 was featured during an oral presentation and on two posters at the Clinical Trials in Alzheimer’s Disease Conference (CTAD), where new analyses were presented from the Phase 2 Alzheimer’s disease study which focused on the effects of ELND005 on NPS and agitation/aggression in Alzheimer’s disease dementia. We believe that the data presented at the CTAD supports the evaluation of ELND005 as a potential treatment of clinically significant agitation/aggression at the more advanced stages of Alzheimer’s disease.
Alzheimer’s Disease Programs
Beta Amyloid Immunotherapies (AIP)
Beta amyloid immunotherapy pioneered by our scientists involves the potential treatment of Alzheimer’s disease by inducing or enhancing the body’s immune response in order to clear toxic species of beta amyloid from the brain. In almost a decade of collaboration with Wyeth (which has been acquired by Pfizer), our scientists developed a series of therapeutic monoclonal antibodies and active vaccination approaches that may have the ability to reduce or clear beta amyloid from the brain. The AIP includes bapineuzumab and ACC-001, as well as other compounds.
As part of the Johnson & Johnson Transaction in 2009, Janssen AI, a subsidiary of Johnson & Johnson, acquired substantially all of our assets and rights related to the AIP collaboration. Under the terms of this transaction, Johnson & Johnson provided an initial
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$500.0 million funding to Janssen AI and we have a 49.9% shareholding in Janssen AI. Any additional funding in excess of the initial $500.0 million funding commitment is required to be funded equally by Elan and Johnson & Johnson up to a maximum additional commitment of $400.0 million in total.
During 2012, the remaining $57.6 million of the initial $500.0 million funding commitment provided by Johnson & Johnson to Janssen AI was fully utilized and as a result, we provided funding of $76.9 million to Janssen AI during 2012. In addition, we provided funding of $29.9 million to Janssen AI in January 2013. Following the provision of this funding in January 2013, our remaining funding commitment to Janssen AI is $93.2 million. We recorded a net loss of $101.2 million on the Janssen AI equity method investment in 2012, relating to our share of the losses of Janssen AI.
On August 6, 2012, Johnson & Johnson and Pfizer announced the discontinuation of the Phase 3 development of bapineuzumab IV in mild to moderate Alzheimer’s disease based on the co-primary clinical endpoints not being met in the Janssen AI-led Studies 301 and 302. Studies with other compounds in earlier stages of development in the AIP portfolio are continuing. A subcutaneous formulation of bapineuzumab is in Phase 2 testing and a vaccine for Alzheimer’s disease (ACC-001) is also in Phase 2 testing.
As a result of the discontinuation of the four Phase 3 bapineuzumab IV studies, we recorded a non-cash impairment charge of $117.3 million on our equity method investment in Janssen AI in 2012, representing the full initial estimated value of our 49.9% proportionate share of the Janssen AI AIP assets.
Prothena Corporation plc
On December 20, 2012, we completed the separation of the Prothena Business into a new, publicly traded company incorporated in Ireland. The issued share capital of Prothena was admitted to trading on the NASDAQ Global Market on December 21, 2012. The separation of the Prothena Business from Elan was completed through a demerger under Irish law. The demerger was effected by Elan transferring its wholly-owned subsidiaries comprising the Prothena Business to Prothena, in exchange for Prothena issuing Prothena ordinary shares directly to Elan shareholders, on a pro rata basis. Each Elan shareholder received one Prothena ordinary share for every 41 Elan ordinary shares or Elan ADSs held. In connection with the separation of the Prothena Business, we made a cash contribution to Prothena, which together with the consideration for 18% of Prothena’s outstanding ordinary shares, totaled $125.0 million.
Prothena focuses on the discovery and development of novel antibodies for the potential treatment of a broad range of diseases that involve protein misfolding or cell adhesion. Prothena also focuses on the discovery and development of potential therapeutic monoclonal antibodies directed specifically to disease-causing proteins. These potential therapies have a broad range of indications, including AL and AA forms of amyloidosis, Parkinson’s disease and related synucleinopathies, and novel cell adhesion targets involved in autoimmune disease and metastatic cancers.
Alkermes plc
In September 2011, Alkermes plc and Elan completed the merger between Alkermes, Inc. and Elan Drug Technologies (EDT). Alkermes, Inc. and EDT were combined under a new holding company incorporated in Ireland named Alkermes plc. In connection with the transaction, we received $500.0 million in cash and 31.9 million ordinary shares of Alkermes plc common stock. In March 2012, we sold 76% (24.15 million ordinary shares) of our shareholding in Alkermes plc and received net proceeds of $380.9 million, after deduction of underwriter and other fees. Following this sale we continued to own 7.75 million ordinary shares of Alkermes plc, representing an approximate 6% equity interest in Alkermes plc.
On January 31, 2013, we announced that we had agreed to sell all of our remaining 7.75 million ordinary shares of Alkermes plc. The sale closed on February 6, 2013 and we received proceeds of $169.7 million.
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Scientific collaborations and relationships
Trinity College Dublin
In October 2012, we committed to sponsoring a five year clinician scientist post-doctoral research fellowship in neuroimaging of neurodegenerative diseases. This fellowship was awarded to a specialist in Neurology with a focus on Motor Neuron Disease and advanced Magnetic Resonance Imaging techniques. The fellowship is based in Neurology in Trinity College Dublin’s School of Medicine, the Trinity College Institute of Neuroscience and the Neurology Department at Beaumont Hospital, Dublin.
Dublin Neurological Institute
We continue to support the Dublin Neurological Institute by providing financial support for an initiative which supports improved access and quality of neurological patient care in Ireland. The total financial support amount pledged by us to the DNI is €1.5 million. Our commitment to the DNI began in November 2011 and is for a five year term.
University College Dublin
In December 2011, we announced an initiative with University College Dublin to support leadership in the global biotechnology industry, including the establishment of Europe’s first interdisciplinary Chair in the “Business of Biotechnology”. The initiative is expected to run for at least seven years and will include a contribution in excess of €3 million from us.
Environment
The U.S. market is our most important market. Until the Tysabri Transaction closes, Tysabri continues to be marketed in collaboration with Biogen Idec, and we are responsible for distribution of Tysabri in the United States. For this reason, the factors discussed below, such as “Government Regulation” and “Product Approval,” place emphasis on requirements in the United States.
Government Regulation
The pharmaceutical industry is subject to significant regulation by international, national, state and local governmental regulatory agencies. Pharmaceutical product registration is primarily concerned with the safety, efficacy and quality of new drugs and devices and, in some countries, their pricing. A product must generally undergo extensive clinical trials before it can be approved for marketing. The process of developing a new pharmaceutical product, from idea to commercialization, can take in excess of 10 years.
Governmental authorities, including the FDA and comparable regulatory authorities in other countries, regulate the design, development, testing, manufacturing and marketing of pharmaceutical products. Non-compliance with applicable requirements can result in fines and other judicially imposed sanctions, including product seizures, import restrictions, injunctive actions and criminal prosecutions of both companies and individuals. In addition, administrative remedies can involve requests to recall violative products; the refusal of the government to enter into supply contracts; or the refusal to approve pending product approval applications for drugs, biological products or medical devices until manufacturing or other alleged deficiencies are brought into compliance. The FDA also has the authority to cause the withdrawal of approval of a marketed product or to impose labeling restrictions.
In addition, the U.S. Centers for Disease Control and Prevention regulate select biologics and toxins. This includes registration and inspection of facilities involved in the transfer or receipt of select agents. Select agents are subject to specific regulations for packaging, labeling and transport. Non-compliance with applicable requirements could result in criminal penalties and the disallowance of research and manufacturing of clinical products. Exemptions are provided for select agents used for a legitimate medical purpose or for biomedical research, such as toxins for medical use and vaccines.
In the U.S., federal and state legislatures, health agencies and third-party payors continue to focus on containing the cost of health care. A reduction in funding for Medicare, Medicaid or similar government programs may adversely affect our future results. Economic pressure on state budgets may result in states increasingly seeking to achieve budget savings through mechanisms that limit coverage or payment for drugs. In recent years, some states have considered legislation that would control the prices of drugs. State Medicaid programs are increasingly requesting manufacturers to pay supplemental rebates and requiring prior authorization by the state program for use of any drug for which supplemental rebates are not being paid. Managed care organizations continue to seek price discounts and, in some cases, to impose restrictions on the coverage of particular drugs. Government efforts to reduce Medicaid expenses may lead to increased use of managed care organizations by Medicaid programs. This may result in managed care organizations influencing prescription decisions for a larger segment of the population and a corresponding constraint on prices and reimbursement for drugs.
In the European Union and some other international markets, the government provides health care to consumers and regulates pharmaceutical prices, patient eligibility or reimbursement levels to control costs for the government-sponsored health care system.
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Many countries are reducing their public expenditures and we expect to see strong efforts to reduce healthcare costs in our international markets, including patient access restrictions, suspensions on price increases, prospective or retroactive price reductions, increased mandatory discounts or rebates and greater importation of drugs from lower-cost countries to higher-cost countries. These cost control measures likely will reduce our revenues. In addition, some countries set prices by reference to the prices in other countries where Tysabri is marketed. Thus, our inability to secure adequate prices in a particular country may not only limit the marketing of Tysabri within that country, but may also adversely affect our ability to obtain acceptable prices in other markets.
In December 2010, we resolved all aspects of the U.S. Department of Justice’s investigation of sales and marketing practices for Zonegran, an antiepileptic prescription medicine that we divested in 2004. In March 2011, we paid $203.5 million pursuant to the terms of a global settlement resolving all U.S. federal and related state Medicaid claims. As part of the agreement, our subsidiary Elan Pharmaceuticals, Inc., pleaded guilty to a misdemeanor violation of the FD&C Act, and we entered into a Corporate Integrity Agreement with the Office of Inspector General of the U.S. Department of Health and Human Services to promote our compliance with the requirements of U.S. federal healthcare programs and the FDA. If we materially fail to comply with the requirements of U.S. federal healthcare programs or the FDA, or otherwise materially breach the terms of the Corporate Integrity Agreement, such as by a material breach of the compliance program or reporting obligations of the Corporate Integrity Agreement, severe sanctions could be imposed upon us. The resolution of the Zonegran investigation could give rise to other investigations or litigation by state government entities or private parties.
Product Approval
Preclinical tests assess the potential safety and efficacy of a product candidate in animal models. The results of these studies must be submitted to the FDA as part of an Investigational NDA before human testing may proceed.
The clinical trial process can take three to ten years or more to complete, and there can be no assurance that the data collected will demonstrate that the product is safe or effective or, in the case of a biologic product, pure and potent, or will provide sufficient data to support FDA approval of the product. The FDA may place clinical trials on hold at any point in this process if, among other reasons, it concludes that clinical subjects are being exposed to an unacceptable health risk. Trials may also be terminated by institutional review boards, which must review and approve all research involving human subjects. Side effects or adverse events that are reported during clinical trials can delay, impede or prevent marketing authorization.
The results of the preclinical and clinical testing, along with information regarding the manufacturing of the product and proposed product labeling, are evaluated and, if determined appropriate, submitted to the FDA through a license application such as a NDA or a Biologics License Application (BLA). In certain cases, an Abbreviated NDA can be filed in lieu of filing an NDA.
There can be no marketing in the United States of any drug, biologic or device for which a marketing application is required until the application is approved by the FDA. Until an application is actually approved, there can be no assurance that the information requested and submitted will be considered adequate by the FDA. Additionally, any significant change in the approved product or in how it is manufactured, including changes in formulation or the site of manufacture, generally require prior FDA approval. The packaging and labeling of all products developed by us are also subject to FDA approval and ongoing regulation.
Whether or not FDA approval has been obtained, approval of a pharmaceutical product by comparable regulatory authorities in other countries outside the United States must be obtained prior to the marketing of the product in those countries. The approval procedure varies from country to country. It can involve additional testing and the time required can differ from that required for FDA approval. Although there are procedures for unified filings for E.U. countries, in general, most other countries have their own procedures and requirements.
Once a product has been approved, significant legal and regulatory requirements apply in order to market a product. In the United States, these include, among other things, requirements related to adverse event and other reporting, product advertising and promotion, and ongoing adherence to cGMP requirements, as well as the need to submit appropriate new or supplemental applications and obtain FDA approval for certain changes to the approved product, product labeling or manufacturing process. Further, Elan’s Corporate Integrity Agreement regulates certain aspects of current, and future, development and marketing of Elan products.
The FDA also enforces the requirements of the Prescription Drug Marketing Act, which, among other things, imposes various requirements in connection with the distribution of product samples to physicians. Sales, marketing and scientific/educational grant programs must comply with the Medicare-Medicaid Anti-Fraud and Abuse Act, as amended, the False Claims Act, as amended, and similar state laws. Pricing and rebate programs must comply with the Medicaid rebate requirements of the Omnibus Budget Reconciliation Act of 1990, as amended. We are also subject to Section 6002 of the Affordable Care Act (ACA), commonly known as the Physician Payment Sunshine Act (Sunshine Act) which regulates disclosure of payments to certain healthcare professionals and providers.
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The FCPA and U.K. Bribery Act, among other laws, prohibit companies and their representatives from offering, promising, authorizing or making payments to foreign officials (and certain private individuals under the U.K. Bribery Act) for the purpose of obtaining or retaining business abroad. In many countries, the healthcare professionals we interact with may meet the definition of a foreign government official for purposes of the FCPA. Failure to comply with domestic or foreign laws could result in various adverse consequences, including possible delay in approval or refusal to approve a product, recalls, seizures, withdrawal of an approved product from the market, the imposition of civil or criminal sanctions and the prosecution of executives overseeing our international operations.
Patents and Intellectual Property Rights
Our competitive position depends on our ability to obtain patents on our technologies and our potential products, to defend our patents, to protect our trade secrets and to operate without infringing valid and enforceable patents or trade secrets of others. We own or license a number of patents in the United States and other countries.
Tysabri is covered by issued patents and pending patent applications in the United States and other countries. A primary U.S. patent covering the humanized antibody expires in 2020. Additional U.S. patents and patent applications of Elan and/or Biogen Idec covering (i) methods of use, including the use of Tysabri to treat MS, irritable bowel disease and a variety of other indications and (ii) methods of manufacturing Tysabri, generally expire between 2013 and 2024. Outside the United States, patents and pending patent applications covering Tysabri, methods of using Tysabri and methods of manufacturing Tysabri generally expire between 2013 and 2024. Patents in the United States and outside the United States may be granted additional patent term due to various mechanisms for obtaining patent term extensions. In addition to the noted patents, we and Biogen Idec have additional patents and pending patent applications covering various aspects of Tysabri that may confer additional patent protection.
In addition to our Tysabri collaboration with Biogen Idec, we have entered into licenses covering IP related to Tysabri. We pay royalties under these licenses based upon the level of Tysabri sales. We may be required to enter into additional licenses related to Tysabri IP. If these licenses are not available, or are not available on reasonable terms, we may be materially and adversely affected. If the Tysabri Transaction is consummated, all of our rights in Tysabri IP will transfer to Biogen Idec.
Competition
The pharmaceutical industry is highly competitive. Our principal pharmaceutical competitors consist of major international companies, many of which are larger and have greater financial resources, technical staff, manufacturing, R&D and marketing capabilities than we have. We also compete with smaller research companies and generic drug and biosimilar manufacturers.
Tysabri, a treatment for relapsing forms of MS, competes primarily with Avonex marketed by our collaborator Biogen Idec, Betaseron® marketed by Berlex (an affiliate of Bayer Schering Pharma AG) in the United States and sold under the name Betaferon® by Bayer Schering Pharma in Europe, Rebif® marketed by Merck Serono and Pfizer in the United States and by Merck Serono in Europe, Copaxone® marketed by Teva Neurosciences, Inc. in the United States and co-promoted by Teva and Sanofi-Aventis in Europe and Novartis AG’s Gilenya™, an oral treatment for relapsing MS. Additional oral treatments for MS are awaiting regulatory approval or are under development, including BG-12, which is being developed by Biogen Idec. Many companies are working to develop new therapies or alternative formulations of products for MS that, if successfully developed, would compete with Tysabri.
A drug may be subject to competition from alternative therapies during the period of patent protection or regulatory exclusivity and, thereafter, it may be subject to further competition from generic products or biosimilars. Governmental and other pressures toward the dispensing of generic products or biosimilars may rapidly and significantly reduce, slow or reverse the growth in sales and profitability of any product not protected by patents or regulatory exclusivity, and may adversely affect our future results and financial condition. The launch of competitive products, including generic or biosimilar versions of Tysabri may have a material adverse effect on our revenues and results of operations.
Our competitive position depends, in part, upon our continuing ability to discover, acquire and develop innovative, cost-effective new products, as well as new indications and product improvements protected by patents and other IP rights. We also compete on the basis of price and product differentiation. If we fail to maintain our competitive position, our business, financial condition and results of operations may be materially and adversely affected.
Distribution
We sell Tysabri primarily to drug wholesalers. Our revenue reflects, in part, the demand from these wholesalers to meet the in-market consumption of Tysabri and to reflect the level of inventory that Tysabri wholesalers carry. Changes in the level of inventory can directly impact our revenue and could result in our revenue not reflecting in-market consumption of Tysabri. In the event that the Tysabri Transaction is consummated, the sales and distribution of Tysabri will be controlled exclusively by Biogen Idec.
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Product Supply
Supplies are generally available in quantities adequate to meet the needs of our business. We are dependent on Biogen Idec to manufacture Tysabri. An inability to obtain product supply could have a material adverse impact on our business, financial condition and results of operations.
Employees
As of December 31, 2012, we had 245 employees worldwide, of whom 86 were engaged in R&D activities and the remainder worked in selling, marketing, general and administrative areas. As of December 31, 2011, we had 412 employees worldwide, of whom 226 were engaged in research and development activities and the remainder worked in selling, marketing, general and administrative areas. As of December 31, 2010 we had 1,219 employees worldwide, of whom 475 were in engaged in research and development activities, 478 were engaged in manufacturing and supply activities, 34 were engaged in sales and marketing activities and the remainder worked in general and administrative areas.
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| C. | Organizational Structure |
At December 31, 2012, we had the following principal subsidiary undertakings:
| Company |
Nature of Business |
Group % |
Registered Office & Country of Incorporation | |||
| Athena Neurosciences, Inc. |
Holding company | 100 | 180 Oyster Point Blvd., South San Francisco, CA, USA | |||
| Crimagua Ltd. |
Holding company | 100 | Treasury Building, Lower Grand Canal Street, Dublin 2, Ireland | |||
| Elan Holdings Ltd. |
Holding company | 100 | Treasury Building, Lower Grand Canal Street, Dublin 2, Ireland | |||
| Elan International Services Ltd. |
Financial services company | 100 | Juniper House, 30 Oleander Hill, Smiths, FL-08, Bermuda | |||
| Elan Pharma International Ltd. |
R&D, sale and distribution of pharmaceutical products, management services and financial services | 100 | Treasury Building, Lower Grand Canal Street, Dublin 2, Ireland | |||
| Elan Pharmaceuticals, Inc. |
R&D and sale of pharmaceutical products | 100 | 180 Oyster Point Blvd., South San Francisco, CA, USA | |||
| Elan Science One Ltd. |
Holding company | 100 | Treasury Building, Lower Grand Canal Street, Dublin 2, Ireland | |||
| Elan Science Three Ltd. |
Holding company | 100 | Treasury Building, Lower Grand Canal Street, Dublin 2, Ireland | |||
| Keavy Finance Ltd. |
Dormant | 100 | Treasury Building, Lower Grand Canal Street, Dublin 2, Ireland | |||
| Monksland Holdings BV |
Holding company | 100 | Claude Debussylaan 24, 1082 MD, Amsterdam | |||
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| D. | Property, Plants and Equipment |
We consider that our properties are in good operating condition and that our equipment has been well maintained.
For additional information, refer to Note 20 to the Consolidated Financial Statements, which discloses amounts invested in land and buildings and plant and equipment; Note 32 to the Consolidated Financial Statements, which discloses future minimum rental commitments; Note 33 to the Consolidated Financial Statements, which discloses capital commitments for the purchase of property, plant and equipment; and Item 5B. “Liquidity and Capital Resources,” which discloses our capital expenditures.
The following table lists the location, ownership interest, use and approximate size of our principal properties:
| Location and Ownership Interest |
Use |
Size (Sq. Ft.) |
||||
| Leased: South San Francisco, CA, USA |
R&D, sales and administration |
260,000 | (1) | |||
| Leased: King of Prussia, PA, USA |
Former R&D and manufacturing facility |
113,000 | (2) | |||
| Leased: Dublin, Ireland |
Corporate administration |
41,000 | ||||
| Leased: Boston, MA, USA |
R&D, sales and administration |
11,830 | ||||
| (1) | Approximately 55,000 square feet of laboratory and office space in South San Francisco, which was no longer being utilized by our R&D, sales and administrative functions, is sublet to Janssen AI and is included in the 260,000 square feet noted above. As a result of the planned closure of our facilities in South San Francisco in early 2013, in connection with the separation of the Prothena Business and cessation of the remaining early stage research activities, we will no longer utilize the remaining 205,000 square feet of space in South San Francisco. |
| (2) | The EDT facility in King of Prussia was closed in 2011. Approximately 50,000 square feet of this space was sublet by December 31, 2012. |
| Item 4A. | Unresolved Staff Comments. |
Not applicable.
| Item 5. | Operating and Financial Review and Prospects. |
The following discussion and analysis should be read in conjunction with our Consolidated Financial Statements, the accompanying notes thereto and other financial information, appearing in Item 18. “Consolidated Financial Statements.”
Our Consolidated Financial Statements contained in this Form 20-F have been prepared on the basis of U.S. GAAP. In addition to the Consolidated Financial Statements contained in this Form 20-F, we also prepare separate Consolidated Financial Statements, included in our Annual Report, in accordance with IFRS, which differ in certain significant respects from U.S. GAAP. The Annual Report under IFRS is a separate document from this Form 20-F.
This financial review primarily discusses:
| • | Current operations; |
| • | Critical accounting policies; |
| • | Recently issued accounting pronouncements; |
| • | Subsequent events; |
| • | Results of operations for the year ended December 31, 2012, compared to 2011 and 2010; and |
| • | Liquidity and capital resources. |
Our operating results may be affected by a number of factors, including those described under Item 3D. “Risk Factors.”
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CURRENT OPERATIONS
Elan is an Irish public limited company listed on the Irish and New York Stock Exchanges and headquartered in Dublin, Ireland. For additional information on our current operations, refer to Item 4B. “Business Overview.”
CRITICAL ACCOUNTING POLICIES
The Consolidated Financial Statements include certain estimates based on management’s best judgments. Estimates are used in determining items such as the carrying amounts of long-lived assets, our equity method investments, estimating sales discounts and allowances, the fair value of share-based compensation, and the accounting for contingencies and income taxes, among other items. Because of the uncertainties inherent in such estimates, actual results may differ materially from these estimates.
Goodwill, Other Intangible Assets, Tangible Fixed Assets and Impairment
Total goodwill and other intangible assets, excluding assets held for sale, amounted to $99.0 million at December 31, 2012 (2011: $309.9 million) and our property, plant and equipment had a carrying amount at December 31, 2012 of $12.7 million (2011: $83.2 million). In addition, we also held total goodwill and other intangibles assets of $195.2 million that relate to the Tysabri business and have been classified as held for sale at December 31, 2012 (2011: $Nil).
Goodwill is not amortized, but instead is reviewed for impairment at least annually.
Intangible assets with estimable useful lives are amortized on a straight-line basis over their respective estimated useful lives to their estimated residual values and, as with other long-lived assets such as property, plant and equipment, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If circumstances require a long-lived asset be tested for possible impairment, we compare undiscounted cash flows expected to be generated by an asset to the carrying amount of the asset. If the carrying amount of the long-lived asset is not recoverable on an undiscounted cash flow basis, an impairment is recognized to the extent that the carrying amount exceeds its fair value. We determine fair value using the income approach based on the present value of expected cash flows. Our cash flow assumptions consider historical and forecasted revenue and operating costs and other relevant factors. If we were to use different estimates, particularly with respect to the likelihood of R&D success, the likelihood and date of commencement of generic competition or the impact of any reorganization or change of business focus, then a material impairment charge could arise. We believe that we have used reasonable estimates in assessing the carrying amounts of our intangible assets. The results of certain impairment tests on intangible assets with estimable useful lives are discussed below.
We review our goodwill for impairment at least annually or whenever events or changes in circumstances indicate that the carrying amount of these assets may not be recoverable. The goodwill impairment test is a two-step process and is performed at the reporting-unit level. A reporting unit is the same as, or one level below, an operating segment. Following the divestment of EDT in 2011, Elan is comprised of a single reporting unit.
We first assess qualitative factors to determine whether it is necessary to perform the two-step goodwill impairment test. The qualitative factors assessed include, but are not limited to, macroeconomic conditions, industry and market considerations, cost factors, overall financial performance, other relevant events affecting the reporting unit and the share price performance of the Company. If, after assessing the relevant qualitative factors, we determine that it is not more likely than not that the fair value of the reporting unit is less than its carrying amount, including goodwill, then the first and second steps of the goodwill impairment test are not performed. If, after assessing the relevant qualitative factors, we determine that it is more likely than not that the fair value of the reporting unit is less than its carrying amount, including goodwill, then the first step of the goodwill impairment test is performed.
Under the first step, we compare the fair value of each reporting unit with its carrying amount, including goodwill. If the fair value of the reporting unit exceeds its carrying amount, goodwill of the reporting unit is not considered impaired and step two does not need to be performed. If the carrying amount of a reporting unit exceeds its fair value, the second step of the goodwill impairment test would be performed to measure the amount of impairment charge, if any. The second step compares the implied fair value of the reporting-unit goodwill with the carrying amount of that goodwill, and any excess of the carrying amount over the implied fair value is recognized as an impairment charge. The implied fair value of goodwill is determined, by allocating the fair value of a reporting unit to individual assets and liabilities. The excess of the fair value of a reporting unit over the amounts assigned to its assets and liabilities is the implied fair value of goodwill. In evaluating goodwill for impairment, we determine the fair values of the reporting units using the income approach, based on the present value of expected cash flows.
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On February 6, 2013, we announced that we have entered into an asset purchase agreement with Biogen Idec to transfer to Biogen Idec all Tysabri IP and other assets related to Tysabri. As a result of this transaction, Biogen Idec will have sole authority over and exclusive worldwide rights to the development, manufacturing and commercialization of Tysabri. In accordance with the terms of the transaction, upon consummation of the transaction, the existing collaboration arrangements with Biogen Idec will be terminated and Biogen Idec will pay to us an upfront payment of $3.25 billion and continuing royalties on Tysabri in-market sales. The transaction is expected to close in the first half of 2013, subject to the satisfaction of certain conditions, including customary regulatory approvals. The assets of the Tysabri business, which have been classified as held for sale as of December 31, 2012, include goodwill that has been allocated to the Tysabri business of $110.8 million and other intangible assets of $84.4 million.
In December 2012, we separated the Prothena Business into a new, publicly traded company incorporated in Ireland. In connection with this transaction, we disposed of goodwill of $0.6 million which was allocated to the Prothena Business. We also disposed of property, plant and equipment with a net book value of $3.3 million related to the Prothena Business.
In 2011, Alkermes plc and Elan announced the completion of the merger between Alkermes, Inc. and EDT. As part of this transaction, we disposed of goodwill of $49.7 million which was allocated to the EDT reporting unit. We also disposed of patents, licenses, IP and other intangible assets related to EDT with a net book value of $3.3 million and property, plant and equipment with a net book value of $202.0 million related to EDT.
We complete the annual goodwill impairment review on September 30 of each year, which included the goodwill of $110.8 million allocated to the Tysabri business in 2012. For the 2012 and 2011 fiscal years annual goodwill impairment review, we assessed the relevant qualitative factors and determined that it was not more likely than not that the fair value of the reporting unit was less than its carrying amount, including goodwill, so the first and second steps of the goodwill impairment test were not performed.
There were no material impairment charges relating to intangible assets in 2012 or 2011. For additional information on goodwill and other intangible assets, refer to Note 21 to the Consolidated Financial Statements.
During 2012, we recorded a non-cash asset impairment charge of $64.3 million relating to property, plant and equipment, within other net charges in the Consolidated Statement of Operations, which resulted from the planned closure of our facilities in South San Francisco following the separation of the Prothena Business and cessation of the remaining early stage research activities.
In 2011, we recorded a non-cash asset impairment charge of $10.0 million relating to property, plant and equipment, within other net charges in the Consolidated Statement of Operations which arose from the consolidation of our facilities in South San Francisco and the closure of EDT’s King of Prussia, Pennsylvania, site. In 2010, we recorded a non-cash asset impairment charge of $11.0 million related to a consolidation of facilities in South San Francisco as a direct result of a realignment of the BioNeurology business.
Equity Method Investments
Janssen AI
As part of the transaction whereby Janssen AI, a subsidiary of Johnson & Johnson, acquired substantially all of our assets and rights related to our AIP collaboration with Wyeth (which has been acquired by Pfizer), we received a 49.9% equity investment in Janssen AI. Johnson & Johnson also committed to fund up to an initial $500.0 million towards the further development and commercialization of the AIP to the extent the funding is required by the collaboration. We have recorded our investment in Janssen AI as an equity method investment on the Consolidated Balance Sheet as we have the ability to exercise significant influence, but not control, over the investee. The investment was initially recognized based on the estimated fair value of the investment acquired, representing the fair value of our proportionate 49.9% share of Janssen AI’s total net assets at inception, which were comprised of the AIP assets and the asset created by the Johnson & Johnson contingent funding commitment.
Under the equity method, investors are required to recognize their share of the earnings or losses of an investee in the periods for which they are reported in the financial statements of the investee as this is normally considered an appropriate means of recognizing increases or decreases in the economic resources underlying the investments. However, Johnson & Johnson had committed to wholly fund up to an initial $500.0 million of development and commercialization expenses incurred by Janssen AI so the recognition by Elan of a share of Janssen AI losses that were solely funded by Johnson & Johnson’s $500.0 million commitment would have resulted in an inappropriate decrease in Elan’s share of the economic resources underlying the investment in Janssen AI. Accordingly, until
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the $500.0 million funding commitment was fully utilized, we applied the hypothetical liquidation at book value (HLBV) method to determine how an increase or decrease in net assets of Janssen AI affects Elan’s interest in the net assets of Janssen AI on a period by period basis. Under the HLBV method, an investor determines its share of the earnings or losses of an investee by determining the difference between its claim on the investee’s book value at the end and beginning of the period.
During 2012, the remaining balance of the initial $500.0 million funding commitment which amounted to $57.6 million at December 31, 2011, was spent. Subsequent to the full utilization of the initial $500.0 million funding commitment, we provided funding of $76.9 million to Janssen AI during 2012.
On August 6, 2012, Johnson & Johnson issued a press release announcing the discontinuation of the development of bapineuzumab intravenous in mild to moderate Alzheimer’s disease based on the co-primary clinical endpoints not being met in the Janssen AI-led Phase 3 clinical studies. As a result of the discontinuation, we recorded a non-cash impairment charge of $117.3 million against the carrying value of our equity method investment in Janssen AI, representing the full initial estimated value of Elan’s 49.9% share of the Janssen AI AIP assets. Janssen AI recorded an impairment charge of $678.9 million, representing its full carrying value of the AIP assets.
As of December 31, 2011, the carrying value of our Janssen AI equity method investment of $130.6 million was approximately $185 million below our share of Janssen AI’s reported book value of its net assets. This difference related to the lower estimated value of Janssen AI’s AIP assets when the equity method investment was initially recorded, and the asset created by the Johnson & Johnson $500.0 million contingent funding commitment. The difference in the initial estimated values of the AIP assets was eliminated during 2012 when Elan and Janssen AI recorded impairment charges of $117.3 million and $678.9 million, respectively, representing their respective initial estimated values of the AIP assets. In relation to the asset created by the Johnson & Johnson contingent funding commitment, which was a limited life asset, the basis difference was amortized to the Consolidated Statement of Operations on a pro rata basis; based on the actual amount of Janssen AI losses that were solely funded by Johnson & Johnson in each period as compared to the total $500.0 million, which was the total amount solely funded by Johnson & Johnson. This basis difference was fully amortized during 2012 when the remaining balance of the initial $500.0 million funding commitment provided by Johnson & Johnson to Janssen AI was spent.
As a result of the equity method investment losses incurred to date, relating to our share of the losses in excess of the losses funded solely by Johnson & Johnson’s initial $500.0 million funding commitment, and the impairment charge of $117.3 million recognized during 2012, there is an excess of losses over the investment made in Janssen AI at December 31, 2012 of $11.0 million (2011: $Nil). This amount has been recorded as a current liability at December 31, 2012. In addition, Elan provided further funding to Janssen AI of $29.9 million during January 2013, which will be recorded in the 2013 financial statements.
Proteostasis
We have recorded our investment in Proteostasis as an equity method investment on the Consolidated Balance Sheet as we have the ability to exercise significant influence, but not control, over the investee. The investment was initially recognized based on the estimated fair value of the investment acquired. Under the equity method, we recognize our share of the earnings or losses of Proteostasis, adjusted for the amortization of basis differences, in the Consolidated Statement of Operations with a corresponding increase or decrease in the carrying amount of the investment on the Consolidated Balance Sheet. We recognize our share of the earnings or losses of Proteostasis in the same periods for which they are reported in the financial statements of the investee. We review the carrying value of the investment for impairment when events and changes in circumstances indicate the carrying amount may not be recoverable.
Alkermes plc
Following the completion of the merger between Alkermes, Inc. and EDT in September 2011, we held approximately 25% of the equity of Alkermes plc (31.9 million shares) and accounted for this investment as an equity method investment as we had the ability to exercise significant influence, but not control, over the investee. Our equity interest in Alkermes plc was initially recorded as an equity method investment on the Consolidated Balance Sheet at a carrying amount of $528.6 million, based on the closing share price of $16.57 of Alkermes, Inc. shares on the date of the transaction. The initial carrying amount was approximately $300 million higher than our share of the book value of the net assets of Alkermes plc. Based on our assessment of the fair value of the net assets of Alkermes plc on the date of the transaction, this difference principally related to identifiable intangible assets and goodwill attributable to the Alkermes, Inc. business prior to its acquisition of EDT.
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Under the equity method, we recognized our share of the earnings or losses of Alkermes plc, adjusted for the amortization of basis differences, in the Consolidated Statement of Operations with a corresponding increase or decrease in the carrying amount of the investment on the Consolidated Balance Sheet.
In March 2012, we sold 76% (24.15 million ordinary shares) of our shareholding in Alkermes plc. Following this sale, we continued to own 7.75 million ordinary shares of Alkermes plc, representing an approximate 6% equity interest in Alkermes plc. Following the sale of the 24.15 million ordinary shares, our remaining equity interest in Alkermes plc was classified as an available-for-sale investment in current assets and equity method accounting no longer applied to this investment.
On January 31, 2013, we announced that we had agreed to sell all of our remaining 7.75 million ordinary shares of Alkermes plc. The sale closed on February 6, 2013 and we received proceeds of $169.7 million.
Sales Discounts and Allowances
Revenue from continuing operations is presented in the Consolidated Statement of Operations and revenue from discontinued operations is included in net income from discontinued operations that is also presented in the Consolidated Statement of Operations. We recognize revenue on a gross revenue basis (except for Tysabri revenue outside of the United States) and make various deductions to arrive at net revenue from continuing and discontinued operations. These adjustments are referred to as sales discounts and allowances and are described in detail below. In accordance with the terms of the Tysabri Transaction, we will retain responsibility for all discounts and allowances liabilities related to U.S. Tysabri sales up to the consummation of the Tysabri Transaction.
Sales discounts and allowances include charge-backs, managed health care rebates and other contract discounts, Medicaid rebates, cash and other discounts, sales returns and other adjustments. Estimating these sales discounts and allowances is complex and involves significant estimates and judgments, and we use information from both internal and external sources, including our historical experience, to generate reasonable and reliable estimates. We believe that we have used reasonable judgments in assessing our estimates, and this is borne out by our historical experience. At December 31, 2012, we had total provisions of $50.5 million for sales discounts and allowances, of which approximately 97% related to Tysabri and the remaining 3% related to our divested products. We have almost seven years of experience for Tysabri and we ceased distributing Maxipime® and Azactam® in 2010, after more than 10 years experience with both products.
We do not conduct our sales using the consignment model. All of our product sales transactions are based on normal and customary terms whereby title to the product and substantially all of the risks and rewards transfer to the customer upon either shipment or delivery. Furthermore, we do not have an incentive program that would compensate a wholesaler for the costs of holding inventory above normal inventory levels, thereby encouraging wholesalers to hold excess inventory.
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An analysis of the separate components of our revenue from continuing and discontinued operations is set out in Item 5A. “Operating Results,” and in Note 3 and Note 12 to the Consolidated Financial Statements. The table below summarizes our sales discounts and allowances to adjust gross revenue to net revenue for each significant category (in millions):
| 2012 | 2011 | 2010 | ||||||||||
| Gross revenue subject to discounts and allowances |
$ | 1,151.4 | $ | 936.6 | $ | 762.2 | ||||||
| Net Tysabri ROW revenue |
316.6 | 317.6 | 258.3 | |||||||||
| Manufacturing revenue and royalties |
0.7 | 170.7 | 263.0 | |||||||||
| Contract revenue |
— | 9.9 | 13.7 | |||||||||
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| Gross revenue |
$ | 1,468.7 | $ | 1,434.8 | $ | 1,297.2 | ||||||
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| Sales discounts and allowances: |
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| Charge-backs |
$ | (178.3 | ) | $ | (116.4 | ) | $ | (71.2 | ) | |||
| Medicaid rebates |
(27.1 | ) | (26.6 | ) | (20.4 | ) | ||||||
| Cash discounts |
(30.5 | ) | (25.5 | ) | (18.7 | ) | ||||||
| Managed health care rebates and other contract discounts |
(14.4 | ) | (7.4 | ) | (3.9 | ) | ||||||
| Sales returns |
(1.5 | ) | (0.7 | ) | (2.0 | ) | ||||||
| Other adjustments |
(14.1 | ) | (12.2 | ) | (11.3 | ) | ||||||
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| Total sales discounts and allowances |
$ | (265.9 | ) | $ | (188.8 | ) | $ | (127.5 | ) | |||
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| Net revenue subject to discounts and allowances |
885.5 | 747.8 | 634.7 | |||||||||
| Net Tysabri ROW revenue |
316.6 | 317.6 | 258.3 | |||||||||
| Manufacturing revenue and royalties |
0.7 | 170.7 | 263.0 | |||||||||
| Contract revenue |
— | 9.9 | 13.7 | |||||||||
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| Net revenue from continuing and discontinued operations |
$ | 1,202.8 | $ | 1,246.0 | $ | 1,169.7 | ||||||
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The net revenue from continuing and discontinued operations is presented in the following reporting lines in the Consolidated Statements of Operations (in millions):
| 2012 | 2011 | 2010 | ||||||||||
| Total revenue (continuing operations) |
0.2 | 4.0 | 44.1 | |||||||||
| Net income from discontinued operations |
1,202.6 | 1,242.0 | 1,125.6 | |||||||||
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| Net revenue from continuing and discontinued operations |
$ | 1,202.8 | $ | 1,246.0 | $ | 1,169.7 | ||||||
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Total sales discounts and allowances were 23.1% of gross revenue subject to discounts and allowances in 2012, 20.2% in 2011 and 16.7% in 2010, as detailed in the rollforward below and as further explained in the following paragraphs.
Charge-backs as a percentage of gross revenue subject to discounts and allowances were 15.5% in 2012, 12.4% in 2011 and 9.3% in 2010. The increase in 2012 over 2011 is primarily due to the growth in PHS qualified provider entities and the resulting discounts to these entities. The increase in 2011 over 2010 is due to the expansion of the 340(b) PHS program and the increase in the minimum discount extended to our 340(b) customers, both of which resulted from the U.S. healthcare reform legislation enacted through the Patient Protection Affordable Care Act in 2010. The increases in 2012 and 2011 are also attributable to increases in the discounts due to the changes in Tysabri’s wholesaler acquisition cost price.
The Medicaid rebates as a percentage of gross revenue subject to discounts and allowances were 2.4% in 2012, 2.8% in 2011 and 2.7% in 2010. The decrease in 2012 is primarily due to a change in our estimate of the managed Medicaid patient population utilizing Tysabri in 2012 as compared to 2011. The increase in 2011 compared to 2010 was due to the extension of the Medicaid rebates to drugs supplied to enrollees of Medicaid MCOs and the increase in the rebates due to wholesaler acquisition cost price increases.
Cash and other discounts as a percentage of gross revenue subject to discounts and allowances were 2.6% in 2012, 2.7% 2011 and 2.5% in 2010. Cash and other discounts include cash discounts, generally at 2% of the sales price, as an incentive for prompt payment by customers in the United States.
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The managed health care rebates and other contract discounts as a percentage of gross revenue subject to discounts and allowances were 1.3% in 2012, 0.8% in 2011 and 0.5% 2010. The increase is primarily attributable to the increase in the number of qualified patients that are eligible for the Tysabri patient co-pay assistance program and increases in the discounts due to the changes in Tysabri’s wholesaler acquisition cost price.
Sales returns as a percentage of gross revenue subject to discounts and allowances were 0.1% in 2012, 0.1% in 2011 and 0.3% in 2010.
The following table sets forth the activities and ending balances of each significant category of adjustments for the sales discounts and allowances (in millions):
| Charge- Backs |
Medicaid Rebates |
Cash and other Discounts |
Managed Health Care Rebates and Other Contract Discounts |
Sales Returns |
Other Adjustments |
Total | ||||||||||||||||||||||
| Balance at December 31, 2010 |
$ | 7.2 | $ | 18.5 | $ | 2.8 | $ | 0.6 | $ | 6.3 | $ | 2.5 | $ | 37.9 | ||||||||||||||
| Provision related to sales made in current period |
116.4 | 26.6 | 25.5 | 7.4 | 2.4 | 12.2 | 190.5 | |||||||||||||||||||||
| Provision related to sales made in prior periods |
— | — | — | — | (1.7 | ) | — | (1.7 | ) | |||||||||||||||||||
| Returns and payments |
(117.3 | ) | (17.2 | ) | (25.3 | ) | (6.6 | ) | (1.9 | ) | (12.9 | ) | (181.2 | ) | ||||||||||||||
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| Balance at December 31, 2011 |
$ | 6.3 | $ | 27.9 | $ | 3.0 | $ | 1.4 | $ | 5.1 | $ | 1.8 | $ | 45.5 | ||||||||||||||
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| Provision related to sales made in current period |
178.3 | 27.1 | 30.5 | 14.4 | 2.4 | 14.1 | 266.8 | |||||||||||||||||||||
| Provision related to sales made in prior periods |
— | — | — | — | (0.9 | ) | — | (0.9 | ) | |||||||||||||||||||
| Returns and payments |
(174.9 | ) | (30.9 | ) | (29.0 | ) | (12.7 | ) | (0.5 | ) | (12.9 | ) | (260.9 | ) | ||||||||||||||
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| Balance at December 31, 2012 |
$ | 9.7 | $ | 24.1 | $ | 4.5 | $ | 3.1 | $ | 6.1 | $ | 3.0 | $ | 50.5 | ||||||||||||||
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(a) Charge-backs
In the United States, we participate in charge-back programs with a number of entities, principally the PHS, the U.S. Department of Defense, the U.S. Department of Veterans Affairs, Group Purchasing Organizations and other parties whereby pricing on products is extended below wholesalers’ list prices to participating entities. These entities purchase products through wholesalers at the lower negotiated price, and the wholesalers charge the difference between these entities’ acquisition cost and the lower negotiated price back to us. We account for charge-backs by accruing an amount equal to our estimate of charge-back claims attributable to a sale. We determine our estimate of the charge-backs primarily based on historical experience on a product-by-product and program basis, and current contract prices under the charge-back programs. We consider vendor payments, estimated levels of inventory in the wholesale distribution channel, and our claim processing time lag and adjust accounts receivable and revenue periodically throughout each year to reflect actual and future estimated experience.
As described above, there are a number of factors involved in estimating the accrual for charge-backs, but the principal factor relates to our estimate of the levels of inventory in the wholesale distribution channel. At December 31, 2012, Tysabri, represented approximately 97% of the total charge-backs accrual balance of $9.7 million. If we were to increase our estimated level of inventory in the wholesale distribution channel by one month’s worth of demand for Tysabri, the accrual for charge-backs would increase by approximately $18.9 million. We believe that our estimate of the levels of inventory for Tysabri, in the wholesale distribution channel is reasonable because it is based upon multiple sources of information, including data received from all of the major wholesalers with respect to their inventory levels and sell-through to customers, third-party market research data, and our internal information.
(b) Medicaid rebates
In the United States, we are required by law to participate in state government-managed Medicaid programs, as well as certain other qualifying federal and state government programs whereby discounts and rebates are provided to participating state and local government entities. Discounts and rebates provided through these other qualifying federal and state government programs are included in our Medicaid rebate accrual and are considered Medicaid rebates for the purposes of this discussion. We account for Medicaid rebates by establishing an accrual in an amount equal to our estimate of Medicaid rebate claims attributable to a sale. We determine our estimate of the Medicaid rebates accrual primarily based on our estimates of Medicaid claims, Medicaid payments,
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claims processing lag time, inventory in the distribution channel as well as legal interpretations of the applicable laws related to the Medicaid and qualifying federal and state government programs, and any new information regarding changes in the Medicaid programs’ regulations and guidelines that would impact the amount of the rebates on a product-by-product basis. We consider outstanding Medicaid claims, Medicaid payments, claims processing lag time and estimated levels of inventory in the distribution channel and adjust the accrual and revenue periodically throughout each year to reflect actual and future estimated experience. At December 31, 2012, Tysabri represented 98% of the total Medicaid rebates accrual balance of $24.1 million.
(c) Cash and other discounts
Cash and other discounts include cash discounts, generally at 2% of the sales price, as an incentive for prompt payment by customers in the United States. We account for cash and other discounts by reducing accounts receivable by the full amount of the discounts. We consider factors such as the payment performance of each customer and adjust the accrual and revenue periodically throughout each year to reflect actual experience and future estimates.
(d) Managed healthcare rebates and other contract discounts
We offer rebates and discounts to managed healthcare organizations in the United States. We account for managed healthcare rebates and other contract discounts by establishing an accrual equal to our estimate of the amount attributable to a sale. We determine our estimate of this accrual primarily based on historical experience on a product-by-product and program basis and current contract prices. We consider the sales performance of products subject to managed healthcare rebates and other contract discounts, processing claim lag time and estimated levels of inventory in the distribution channel and adjust the accrual and revenue periodically throughout each year to reflect actual and future estimated experience.
(e) Sales returns
We account for sales returns by establishing an accrual in an amount equal to our estimate of revenue recorded for which the related products are expected to be returned.
Our sales returns accrual is estimated principally based on historical experience, the estimated shelf life of inventory in the distribution channel, price increases and our return goods policy (goods may only be returned six months prior to expiration date and for up to 12 months after expiration date). We also take into account product recalls and introductions of generic products. All of these factors are used to adjust the accrual and revenue periodically throughout each year to reflect actual and future estimated experience.
In the event of a product recall, product discontinuance or introduction of a generic product, we consider a number of factors, including the estimated level of inventory in the distribution channel that could potentially be returned, historical experience, estimates of the severity of generic product impact, estimates of continuing demand and our return goods policy. We consider the reasons for, and impact of, such actions and adjust the sales returns accrual and revenue as appropriate.
As described above, there are a number of factors involved in estimating this accrual, but the principal factor relates to our estimate of the shelf life of inventory in the distribution channel. We believe, based upon both the estimated shelf life and also our historical sales returns experience, that the vast majority of this inventory will be sold prior to the expiration dates, and accordingly believe that our sales returns accrual is appropriate. At December 31, 2012, 90% of the total sales returns accrual balance of $6.1 million related to Tysabri.
During 2012, we recorded adjustments of $0.9 million to decrease (2011: $1.7 million to decrease) the sales returns accrual related to sales made in prior periods.
(f) Other adjustments
In addition to the sales discounts and allowances described above, we make other sales adjustments primarily related to estimated obligations for credits to be granted to wholesalers under wholesaler service agreements we have entered into with many of our pharmaceutical wholesale distributors in the United States. Under these agreements, the wholesale distributors have agreed, in return for certain fees, to comply with various contractually defined inventory management practices and to perform certain activities such as providing weekly information with respect to inventory levels of product on hand and the amount of out-movement of product. As a result, we, along with our wholesale distributors, are able to manage product flow and inventory levels in a way that
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more closely follows trends in prescriptions. We generally account for these other sales discounts and allowances by establishing an accrual in an amount equal to our estimate of the adjustments attributable to the sale. We generally determine our estimates of the accruals for these other adjustments primarily based on contractual agreements and other relevant factors, and adjust the accruals and revenue periodically throughout each year to reflect actual experience.
(g) Use of information from external sources
We use information from external sources to identify prescription trends and patient demand, including inventory pipeline data from three major drug wholesalers in the United States. The inventory information received from these wholesalers is a product of their record-keeping process and excludes inventory held by intermediaries to whom they sell, such as retailers and hospitals. We also receive information from IMS Health, a supplier of market research to the pharmaceutical industry, which we use to project the prescription demand-based sales for our pharmaceutical products. Our estimates are subject to inherent limitations of estimates that rely on third-party information, as certain third-party information is itself in the form of estimates, and reflect other limitations, including lags between the date as of which third-party information is generated and the date on which we receive such information.
Share-Based Compensation
Share-based compensation expense for all equity-settled awards made to employees and directors is measured and recognized based on estimated grant date fair values. These awards include employee stock options, RSUs and stock purchases related to our employee equity purchase plan (EEPP). Share-based compensation cost for RSUs awarded to employees and directors is measured based on the closing fair market value of the Company’s shares on the date of grant. Share-based compensation cost for stock options awarded to employees and directors and shares issued under the EEPP is estimated at the grant date based on each option’s fair value as calculated using an option-pricing model. The value of awards expected to vest is recognized as an expense over the requisite service periods. In 2012, we recognized $45.9 million (2011: $35.3 million, 2010: $31.5 million) relating to equity-settled share-based compensation.
Share-based compensation expense for equity-settled awards to non-employees in exchange for goods or services is based on the fair value of awards on the measurement date, which is the earlier of the date at which the commitment for performance by the non-employees to earn the awards is reached and the date at which the non-employees’ performance is complete. We have determined that the expected vest date is the measurement date for awards granted to non-employees.
Estimating the fair value of share-based awards at grant or vest date using an option-pricing model, such as the binomial model, is affected by our share price as well as assumptions regarding a number of complex variables. These variables include, but are not limited to, the expected share price volatility over the term of the awards, risk-free interest rates, and actual and projected employee exercise behaviors. If factors change and/or we employ different assumptions in estimating the fair value of share-based awards in future periods, the compensation expense that we record for future grants may differ significantly from what we have recorded in the Consolidated Financial Statements. However, we believe we have used reasonable assumptions to estimate the fair value of our share-based awards.
For additional information on our share-based compensation, refer to Note 30 to the Consolidated Financial Statements.
Contingencies Relating to Actual or Potential Administrative and Legal Proceedings
We are currently involved in legal and administrative proceedings relating to securities matters, patent matters, product liability matters and other matters, some of which are described in Note 34 to the Consolidated Financial Statements. We assess the likelihood of any adverse outcomes to contingencies, including legal matters, as well as potential ranges of probable losses. We record accruals for such contingencies when it is probable that a liability has been incurred and the amount of the loss can be reasonably estimated. If an unfavorable outcome is probable, but the amount of the loss cannot be reasonably estimated, we estimate the range of probable loss and accrue the most probable loss within the range. If no amount within the range is deemed more probable, we accrue the minimum amount within the range. If neither a range of loss nor a minimum amount of loss is estimable, then appropriate disclosure is provided, but no amounts are accrued. As of December 31, 2012, we had accrued $1.0 million (2011: $0.7 million), representing our estimates of liability and costs for the resolution of these matters.
In March 2011, we paid $203.5 million relating to the agreement-in-principle announced in July 2010, which was finalized with the U.S. Attorney’s Office for the District of Massachusetts in December 2010 to resolve all aspects of the U.S. Department of Justice’s investigation of sales and marketing practices for Zonegran (zonisamide), an antiepileptic prescription medicine that we
36
divested in 2004. At December 31, 2010, we held $203.7 million in an escrow account to cover the settlement amount and during 2010 we recorded a $206.3 million reserve charge for the settlement, interest and related costs. This resolution of the Zonegran investigation could give rise to other investigations or litigation by state government entities or private parties.
We developed estimates in consultation with outside counsel handling our defense in these matters using the facts and circumstances known to us. The factors that we consider in developing our legal contingency accrual include the merits and jurisdiction of the litigation, the nature and number of other similar current and past litigation cases, the nature of the product and assessment of the science subject to the litigation, and the likelihood of settlement and state of settlement discussions, if any. We believe that the legal contingency accrual that we have established is appropriate based on current factors and circumstances. However, it is possible that other people applying reasonable judgment to the same facts and circumstances could develop a different liability amount. The nature of these matters is highly uncertain and subject to change. As a result, the amount of our liability for certain of these matters could exceed or be less than the amount of our estimates, depending on the outcome of these matters.
Income Taxes
We account for income tax expense based on income before taxes using the asset and liability method. Deferred tax assets (DTAs) and liabilities are determined based on the difference between the financial statement and tax basis of assets and liabilities using tax rates projected to be in effect for the year in which the differences are expected to reverse. DTAs are recognized for the expected future tax consequences, for all deductible temporary differences and operating loss and tax credit carryforwards. A valuation allowance is required for DTAs if, based on available evidence, it is more likely than not that all or some of the asset will not be realized due to the inability to generate sufficient future taxable income.
Significant estimates are required in determining our provision for income taxes. Some of these estimates are based on management’s interpretations of jurisdiction-specific tax laws or regulations and the likelihood of settlement related to tax audit issues. Various internal and external factors may have favorable or unfavorable effects on our future effective income tax rate. These factors include, but are not limited to, changes in tax laws, regulations and/or rates, changing interpretations of existing tax laws or regulations, changes in estimates of prior years’ items, past and future levels of R&D spending, likelihood of settlement, and changes in overall levels of income before taxes. Our assumptions, judgments and estimates relative to the recognition of the DTAs take into account projections of the amount and category of future taxable income, such as income from operations or capital gains income. Actual operating results and the underlying amount and category of income in future years could render our current assumptions of recoverability of net DTAs inaccurate.
We recognize the tax benefit from an uncertain tax position only if it is more likely than not the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such positions are then measured based on the largest benefit that has a greater than 50% likelihood of being realized upon settlement. Changes in recognition or measurement are reflected in the period in which the change in judgment occurs. We account for interest and penalties related to unrecognized tax benefits in income tax expense.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
There have been no Accounting Standards Updates (ASUs) issued by the Financial Accounting Standards Board (FASB) that we have not yet adopted and are expected to have an impact on our consolidated financial position, results of operations or cash flows.
SUBSEQUENT EVENTS
On February 6, 2013, we announced that we have entered into an asset purchase agreement with Biogen Idec to transfer to Biogen Idec all Tysabri IP and other assets related to Tysabri. As a result of this transaction, Biogen Idec will have sole authority over and exclusive worldwide rights to the development, manufacturing and commercialization of Tysabri. In accordance with the terms of the transaction, upon consummation of the transaction, the existing collaboration arrangements with Biogen Idec will be terminated and Biogen Idec will pay to us an upfront payment of $3.25 billion and continuing royalties on Tysabri in-market sales. We will earn a royalty of 12% of global net sales of Tysabri during the first 12 months following the closing of the transaction. Thereafter, we will earn a royalty of 18% of global net sales up to $2.0 billion each year, and a 25% royalty on annual global net sales above $2.0 billion. The transaction is expected to close in the first half of 2013, subject to the satisfaction of certain conditions, including customary regulatory approvals.
37
On January 31, 2013, we announced that we had agreed to sell all of our remaining 7.75 million ordinary shares of Alkermes plc. The sale closed on February 6, 2013 and we received proceeds of $169.7 million. We will recognize a realized gain on the disposal of the Alkermes plc available-for-sale investment of $43.2 million in the 2013 Consolidated Financial Statements.
| A. | RESULTS OF OPERATIONS |
2012 Compared to 2011 and 2010 (in millions, except per share amounts)
| % Increase/(Decrease) | ||||||||||||||||||||
| 2012 | 2011 | 2010 | 2012/2011 | 2011/2010 | ||||||||||||||||
| Continuing Operations |
||||||||||||||||||||
| Product revenue |
$ | 0.2 | $ | 4.0 | $ | 43.1 | (95 | )% | (91 | )% | ||||||||||
| Contract revenue |
— | — | 1.0 | — | (100 | )% | ||||||||||||||
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| Total revenue |
0.2 | 4.0 | 44.1 | (95 | )% | (91 | )% | |||||||||||||
| Cost of sales |
0.2 | 0.8 | 12.2 | (75 | )% | (93 | )% | |||||||||||||
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| Gross margin |
— | 3.2 | 31.9 | (100 | )% | (90 | )% | |||||||||||||
| Operating expenses: |
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| Selling, general and administrative expenses |
113.6 | 107.2 | 124.2 | 6 | % | (14 | )% | |||||||||||||
| Research and development expenses |
95.0 | 106.8 | 128.5 | (11 | )% | (17 | )% | |||||||||||||
| Other net charges |
168.9 | 24.3 | 52.8 | 595 | % | (54 | )% | |||||||||||||
| Settlement reserve charge |
— | — | 206.3 | — | (100 | )% | ||||||||||||||
| Net gain on divestment of business |
— | — | (1.0 | ) | — | (100 | )% | |||||||||||||
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| Total operating expenses |
377.5 | 238.3 | 510.8 | 58 | % | (53 | )% | |||||||||||||
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| Operating loss |
(377.5 | ) | (235.1 | ) | (478.9 | ) | 61 | % | (51 | )% | ||||||||||
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| Net interest and investment gains and losses: |
||||||||||||||||||||
| Net interest expense |
56.6 | 104.9 | 118.4 | (46 | )% | (11 | )% | |||||||||||||
| Net loss on equity method investments |
221.8 | 81.1 | 26.0 | 173 | % | 212 | % | |||||||||||||
| Net charge on debt retirement |
76.1 | 47.0 | 3.0 | 62 | % | 1467 | % | |||||||||||||
| Net investment losses/(gains) |
1.2 | (2.6 | ) | (12.8 | ) | (146 | )% | (80 | )% | |||||||||||
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| Net interest and investment gains and losses |
355.7 | 230.4 | 134.6 | 54 | % | 71 | % | |||||||||||||
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| Net loss before income taxes |
(733.2 | ) | (465.5 | ) | (613.5 | ) | 58 | % | (24 | )% | ||||||||||
| Benefit from income taxes |
(360.5 | ) | (12.0 | ) | (52.2 | ) | 2904 | % | (77 | )% | ||||||||||
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| Net loss from continuing operations |
$ | (372.7 | ) | $ | (453.5 | ) | $ | (561.3 | ) | (18 | )% | (19 | )% | |||||||
| Discontinued Operations |
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| Net income from discontinued operations (net of tax) |
$ | 235.3 | $ | 1,014.0 | $ | 236.6 | (77 | )% | 329 | % | ||||||||||
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| Net (loss)/income for the year |
(137.4 | ) | 560.5 | (324.7 | ) | (125 | )% | (273 | )% | |||||||||||
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| Basic net (loss)/income per Ordinary Share |
$ | (0.23 | ) | $ | 0.95 | $ | (0.56 | ) | (124 | )% | (270 | )% | ||||||||
| Diluted net (loss)/income per Ordinary Share |
$ | (0.23 | ) | $ | 0.94 | $ | (0.56 | ) | (125 | )% | (268 | )% | ||||||||
38
CONTINUING OPERATIONS
Revenue
Revenue can be analyzed as follows (in millions):
| % Increase/(Decrease) | ||||||||||||||||||||
| 2012 | 2011 | 2010 | 2012/2011 | 2011/2010 | ||||||||||||||||
| Product revenue: |
||||||||||||||||||||
| Royalties |
$ | 0.7 | $ | 2.7 | $ | 1.6 | (74 | )% | 69 | % | ||||||||||
| Azactam |
(0.5 | ) | 0.9 | 27.2 | (156 | )% | (97 | )% | ||||||||||||
| Maxipime |
— | 0.4 | 8.2 | (100 | )% | (95 | )% | |||||||||||||
| Prialt |
— | — | 6.1 | — | (100 | )% | ||||||||||||||
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| Total product revenue |
0.2 | 4.0 | 43.1 | (95 | )% | (91 | )% | |||||||||||||
| Contract revenue |
— | — | 1.0 | — | (100 | )% | ||||||||||||||
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| Total revenue |
$ | 0.2 | $ | 4.0 | $ | 44.1 | (95 | )% | (91 | )% | ||||||||||
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We ceased distributing Azactam and Maxipime in 2010. The revenue and adjustments for Azactam and Maxipime in 2012 and 2011 relates to adjustments to discounts and allowances associated with sales prior to the cessation of distribution.
We divested our Prialt assets and rights to Azur (which has since been acquired by Jazz Pharmaceuticals plc (Jazz)) in May 2010. Prialt revenue was $6.1 million for 2010. Refer to Note 6 to the Consolidated Financial Statements for additional information regarding this divestment.
Selling, General and Administrative (SG&A) Expenses
SG&A expenses were $113.6 million in 2012, $107.2 million in 2011 and $124.2 million in 2010. The increase of 6% in SG&A expenses in 2012, compared to 2011, is primarily as a result of higher share-based compensation expense in 2012.
The decrease of 14% in SG&A expenses in 2011, compared to 2010, is primarily as a result of lower support costs due to the realignment and restructuring of the R&D organization in 2010.
Research and Development Expenses
R&D expenses were $95.0 million in 2012, $106.8 million in 2011 and $128.5 million in 2010. The decrease of 11% in 2012, compared to 2011, is primarily as a result of the cessation of our early stage research activities during the fourth quarter of 2012.
The decrease of 17% in 2011, compared to 2010, is primarily as a result of lower costs due to the realignment and restructuring of the R&D organization in 2010.
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Other Net Charges
The principal items classified as other net charges include facilities and other asset impairment charges, severance, restructuring and other costs, in-process research and development (IPR&D) costs, Cambridge Collaboration termination charge, legal settlements and a net loss on divestment of the Prialt business. These items have been treated consistently from period to period. We believe that disclosure of significant other charges is meaningful because it provides additional information in relation to analyzing certain items.
Other net charges for the years ended December 31 consisted of (in millions):
| 2012 | 2011 | 2010 | ||||||||||
| (a) Facilities and other asset impairment charges |
$ | 107.5 | $ | 15.5 | $ | 16.7 | ||||||
| (b) Severance, restructuring and other costs |
42.4 | 8.8 | 16.1 | |||||||||
| (c) In-process research and development costs |
11.0 | — | 6.0 | |||||||||
| (d) Cambridge collaboration |
8.0 | — | — | |||||||||
| (e) Legal settlements |
— | — | 12.5 | |||||||||
| (f) Divestment of Prialt business |
— | — | 1.5 | |||||||||
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| Total other net charges |
$ | 168.9 | $ | 24.3 | $ | 52.8 | ||||||
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(a) Facilities and other asset impairment charges
During 2012, we incurred facilities and other asset impairment charges of $107.5 million, which is primarily comprised of asset impairment charges of $66.1 million and lease termination charges of $34.6 million relating to the planned closure of the South San Francisco facility following the separation of the Prothena Business and cessation of our remaining early stage research activities. We also incurred an additional onerous lease charge of $6.4 million relating to EDT’s King of Prussia, Pennsylvania site which closed in 2011, due to a reassessment of the probable sub-lease income to be achieved over the remaining term of the lease.
During 2011, we incurred facilities and other asset impairment charges of $15.5 million, which included asset impairment charges of $3.6 million and lease charges of $11.9 million relating to the consolidation of our facilities in South San Francisco and the closure of EDT’s King of Prussia, Pennsylvania site.
During 2010, we incurred additional facilities and other asset impairment charges of $16.7 million, which included asset impairment charges of $11.0 million and lease charges of $5.7 million relating to a consolidation of facilities in South San Francisco as a direct result of the realignment of our business.
(b) Severance, restructuring and other costs
During 2012, we incurred severance and restructuring charges of $42.4 million, principally relating to the planned closure of the South San Francisco facility and associated reduction in headcount following the separation of the Prothena Business and cessation of our remaining early stage research activities.
During 2011 and 2010, we incurred severance, restructuring and other costs of $8.8 million and $16.1 million, respectively, principally relating to a realignment and restructuring of our R&D organization and reduction of related support activities as well as the reduction in our general and administrative (G&A) activities following the divestment of the EDT business.
(c) In-process research and development costs
During 2012, we commenced a Phase 2 study of oral ELND005 as an adjunctive maintenance treatment in patients with Bipolar I Disorder. On the commencement of this trial, we incurred an IPR&D charge of $11.0 million related to a milestone payment to Transition in accordance with the terms of the modification to the Collaboration Agreement agreed with Transition in December 2010. For further information on our Collaboration Agreement with Transition, please refer to Note 36 of the Consolidated Financial Statements.
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IPR&D charges in 2010 also include a credit of $3.0 million associated with the termination of the License Agreement with PharmatrophiX Inc. (PharmatrophiX), offset by the $9.0 million charge related to the payment to Transition when the modification of the Collaboration Agreement was agreed.
(d) Cambridge collaboration termination charge
Following the cessation of our early stage research activities, we terminated our Collaboration Agreement with the University of Cambridge and incurred a charge of $8.0 million.
(e) Legal settlements
During 2010, we reached an agreement in principle with the direct purchaser class plaintiffs with respect to nifedipine. As part of the settlement, we agreed to pay $12.5 million in settlement of all claims associated with the litigation. In January 2011, the U.S. District Court for the District of Columbia approved the settlement and dismissed the case.
(f) Divestment of Prialt business
We divested our Prialt assets and rights to Azur Pharma International Limited (Azur, which has since been acquired by Jazz) in May 2010 and recorded a net loss on divestment of $1.5 million, which is comprised of total consideration of $14.6 million less the net book value of Prialt assets and transaction costs. The total consideration used to calculate the loss on divestment was comprised of cash proceeds received in 2010 of $5.0 million and the present value of deferred non-contingent consideration at the close of the transaction of $9.6 million. During 2012, we received the deferred non-contingent consideration of $12.0 million. We are also entitled to receive additional performance-related milestones and royalties.
Settlement Reserve Charge
In December 2010, we finalized the agreement-in-principle with the U.S. Attorney’s Office for the District of Massachusetts to resolve all aspects of the U.S. Department of Justice’s investigation of sales and marketing practices for Zonegran, an antiepileptic prescription medicine that we divested in 2004.
Consistent with the terms of the agreement-in-principle announced in July 2010, we paid $203.5 million pursuant to the terms of a global settlement resolving all U.S. federal and related state Medicaid claims and $203.7 million was held in an escrow account at December 31, 2010 to cover the settlement amount. During 2010, we recorded a $206.3 million reserve charge for the settlement, interest and related costs.
Net Gain on Divestment of Business
In 2010, we recorded a net gain of $1.0 million relating to a transaction costs adjustment on the 2009 divestment of substantially all of Elan’s assets and rights related to our AIP collaboration with Wyeth (which has been acquired by Pfizer) to Janssen AI.
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Net Interest Expense
Net interest expense was $56.6 million in 2012, $104.9 million in 2011 and $118.4 million in 2010.
The decreases of 46% in the net interest expense in 2012 compared to 2011, and 11% in 2011 compared to 2010 is primarily due to debt refinancing transactions in 2012, 2011 and 2010. During 2012, 2011 and 2010, we repaid or refinanced $1.7 billion in debt as follows (in millions):
| 2012 | 2011 | 2010 | Total | |||||||||||||
| 2011 Floating Rate Notes |
$ | — | $ | — | $ | (300.0 | ) | $ | (300.0 | ) | ||||||
| 2013 Floating Rate Notes |
— | (10.5 | ) | (139.5 | ) | (150.0 | ) | |||||||||
| 2013 Fixed Rate Notes |
— | (449.5 | ) | (15.5 | ) | (465.0 | ) | |||||||||
| 2016 Notes issued October 2009 |
(472.1 | ) | (152.9 | ) | — | (625.0 | ) | |||||||||
| 2016 Notes issued August 2010 |
(152.4 | ) | (47.6 | ) | — | (200.0 | ) | |||||||||
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| Total aggregate principal amount of debt redeemed |
(624.5 | ) | (660.5 | ) | (455.0 | ) | (1,740.0 | ) | ||||||||
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| 2016 Notes issued August 2010 |
— | — | 200.0 | 200.0 | ||||||||||||
| 6.25% Notes |
600.0 | — | — | 600.0 | ||||||||||||
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| Total aggregate principal amount of debt issued |
600.0 | — | 200.0 | 800.0 | ||||||||||||
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| Net reduction in total aggregate principal amount of debt |
$ | (24.5 | ) | $ | (660.5 | ) | $ | (255.0 | ) | $ | (940.0 | ) | ||||
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Net Loss on Equity Method Investments
Losses on equity method investments for the years ended December 31 consisted of the following (in millions):
| 2012 | 2011 | 2010 | ||||||||||
| Janssen AI |
$ | 218.5 | $ | 78.4 | $ | 26.0 | ||||||
| Proteostasis |
3.3 | 2.7 | — | |||||||||
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| Total |
$ | 221.8 | $ | 81.1 | $ | 26.0 | ||||||
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Janssen AI
In September 2009, Janssen AI, a newly formed subsidiary of Johnson & Johnson, acquired substantially all of the assets and rights related to our AIP collaboration with Wyeth (which has been acquired by Pfizer). In consideration for the transfer of these assets and rights, we received a 49.9% equity interest in Janssen AI. In general, Elan is entitled to a 49.9% share of all net profits generated by Janssen AI beginning from the date Janssen AI becomes net profitable and certain royalty payments upon the commercialization of products under the AIP collaboration. Johnson & Johnson also committed to fund up to $500.0 million towards the further development and commercialization of the AIP to the extent the funding is required by the collaboration. Any required additional expenditures in respect of Janssen AI’s obligations under the AIP collaboration in excess of the initial $500.0 million funding commitment is required to be funded by Elan and Johnson & Johnson in proportion to their respective shareholdings up to a maximum additional commitment of $400.0 million in total. In the event that further funding is required beyond the $400.0 million, such funding will be on terms determined by the board of Janssen AI, with Johnson & Johnson and Elan having a right of first offer to provide additional funding. If we fail to provide our share of the $400.0 million commitment or any additional funding that is required for the development of the AIP, and if Johnson & Johnson or a third party elects to fund such an amount, our interest in Janssen AI could, at the option of Johnson & Johnson, be commensurately reduced. We have recorded our investment in Janssen AI as an equity method investment on the Consolidated Balance Sheet as we have the ability to exercise significant influence, but not control, over the investee. The investment was initially recognized based on the estimated fair value of the investment acquired, representing the fair value of our proportionate 49.9% share of Janssen AI’s total net assets at inception, which were comprised of the AIP assets and the asset created by the Johnson & Johnson contingent funding commitment.
During 2012, the remaining balance of the initial $500.0 million funding commitment, which amounted to $57.6 million at December 31, 2011, was spent. Subsequent to the full utilization of the initial $500.0 million funding commitment, we provided funding of $76.9 million to Janssen AI during 2012. At December 31, 2012, there was an excess of losses over investment in Janssen
42
AI of $11.0 million (2011: $Nil), which is included in current liabilities. In addition, we provided funding to Janssen AI of $29.9 million in January 2013, which will be recorded in the 2013 Consolidated Financial Statements.
On August 6, 2012, Johnson & Johnson issued a press release announcing the discontinuation of the development of bapineuzumab intravenous in mild to moderate Alzheimer’s disease based on the co-primary clinical endpoints not being met in the Janssen AI-led Phase 3 clinical studies. As a result of the discontinuation, we recorded a non-cash impairment charge of $117.3 million on our equity method investment in Janssen AI, representing the full initial estimated value of Elan’s 49.9% share of the Janssen AI AIP assets. Janssen AI recorded an impairment charge of $678.9 million representing its full carrying value of the AIP assets.
Under the equity method, investors are required to recognize their share of the earnings or losses of an investee in the periods for which they are reported in the financial statements of the investee as this is normally considered an appropriate means of recognizing increases or decreases in the economic resources underlying the investments. However, Johnson & Johnson committed to wholly fund up to an initial $500.0 million of development and commercialization expenses incurred by Janssen AI so the recognition by Elan of a share of Janssen AI losses that were solely funded by Johnson & Johnson’s $500.0 million commitment would have resulted in an inappropriate decrease in Elan’s share of the economic resources underlying the investment in Janssen AI. Accordingly, until the $500.0 million funding commitment was utilized, we applied the HLBV method to determine how an increase or decrease in net assets of Janssen AI affected Elan’s interest in the net assets of Janssen AI on a period by period basis. Under the HLBV method, an investor determines its share of the earnings or losses of an investee by determining the difference between its claim on the investee’s book value at the end and beginning of the period. Elan’s claim on Janssen AI’s book value as of December 31, 2012 was $Nil (2011: $117.3 million, after adjusting for basis differences) due to the non-cash impairment charge of $117.3 million recorded in 2012 representing the full initial estimated value of Elan’s 49.9% share of the Janssen AI AIP assets.
As of December 31, 2011, the carrying value of our Janssen AI equity method investment of $130.6 million was approximately $185 million below our share of Janssen AI’s reported book value of its net assets. This difference related to the lower estimated value of Janssen AI’s AIP assets when the equity method investment was initially recorded, and the asset created by the Johnson & Johnson $500.0 million contingent funding commitment. The difference in the initial estimated values of the AIP assets was eliminated during 2012 when Elan and Janssen AI recorded impairment charges of $117.3 million and $678.9 million, respectively, representing their respective initial estimated values of the AIP assets. In relation to the asset created by the Johnson & Johnson contingent funding commitment, which was a limited life asset, the basis difference was amortized to the Consolidated Statement of Operations on a pro rata basis; based on the actual amount of Janssen AI losses that were solely funded by Johnson & Johnson in each period as compared to the total $500.0 million, which was the total amount solely funded by Johnson & Johnson. This basis difference was fully amortized during 2012 when the remaining balance of the initial $500.0 million funding commitment provided by Johnson & Johnson to Janssen AI was spent. During 2012, we recorded amortization expense of $13.3 million (2011: $50.9 million; 2010: $26.0 million).
The net loss on the Janssen AI equity method investment for the year ended December 31, 2012 of $218.5 million (2011: $78.4 million; 2010: $26.0 million) was comprised of $87.9 million (2011: $Nil; 2010: $Nil) relating to our share of the losses of Janssen AI in excess of the losses funded solely by Johnson & Johnson’s initial $500.0 million funding commitment; the amortization expense of $13.3 million (2011: $50.9 million; 2010: $26.0 million) related to the basis differences described above and the non-cash impairment charge of $117.3 million (2011: $Nil, 2010: $Nil) representing the full initial estimated value of Elan’s 49.9% share of the Janssen AI AIP assets. The net loss on the Janssen AI equity method investment for the year ended December 31, 2011 also includes a charge of $27.5 million to correct an immaterial error from prior periods relating to our accounting for our equity method investment in Janssen AI.
Proteostasis
In May 2011, we invested $20.0 million into equity capital of Proteostasis and became a 24% shareholder. Our $20.0 million equity interest in Proteostasis has been recorded as an equity method investment on the Consolidated Balance Sheet. The net loss recorded on the equity method investment in 2012 was $3.3 million (2011: $2.7 million), representing our share of the net losses of Proteostasis.
Net Charge on Debt Retirement
2012
In 2012, we redeemed the outstanding aggregate principal amount of the 8.75% Senior Notes due 2016 issued October 2009 (the 2016 Notes issued October 2009) of $472.1 million and the outstanding aggregate principal amount of the 8.75% Senior Notes due 2016 issued August 2010 (the 2016 Notes issued August 2010) of $152.4 million. We recorded a net charge on debt retirement of
43
$76.1 million in 2012 in connection with the redemption of these notes, which was comprised of total early redemption premiums of $58.0 million and the write-off of unamortized deferred financing costs and original issue discounts of $18.1 million.
2011
In 2011, following the divestment of EDT, we redeemed the outstanding aggregate principal amount of the 8.875% Senior Fixed Rate Notes due 2013 (the 2013 Fixed Rate Notes) of $449.5 million and the outstanding aggregate principal amount of the Senior Floating Rate Notes Due 2013 (the 2013 Floating Rate Notes) of $10.5 million. We also redeemed $152.9 million of the outstanding aggregate principal amount of the 2016 Notes issued October 2009 and $47.6 million of the outstanding aggregate principal amount of the 2016 Notes issued August 2010. We recorded a net charge on debt retirement of $47.0 million in 2011 in connection with the redemption of these notes, which was comprised of total early redemption premiums of $33.4 million, the write-off of unamortized deferred financing costs and original issue discounts of $10.2 million and transaction costs of $3.4 million.
2010
During 2010, we redeemed the $300.0 million in aggregate principal amount of the Senior Floating Rate Notes due 2011 (2011 Floating Rate Notes). We also redeemed $15.5 million of the outstanding aggregate principal amount of the 2013 Fixed Rate Notes and $139.5 million of the outstanding aggregate principal amount of the 2013 Floating Rate Notes. We recorded a net charge on debt retirement of $3.0 million in 2010 in connection with the redemption of these notes, relating to the write-off of unamortized deferred financing costs associated with these notes.
For additional information related to our debt and debt redemptions, please refer to Note 24 to the consolidated financial statements.
44
Net Investment Losses/(Gains)
Net investment losses were $1.2 million in 2012, compared to net investment gains of $2.6 million in 2011 and $12.8 million in 2010. The net investment losses in 2012 primarily related to an other-than-temporary impairment of our marketable equity securities.
The net investment gains in 2011 are primarily related to the disposal of investment securities. The net investment gains in 2010 include a gain of $7.9 million related to a recovery realized on a previously impaired investment in auction rate securities (ARS) and gains on disposal of investment securities of $4.9 million.
The framework used for measuring the fair value of our investment securities, is described in Note 31 to the Consolidated Financial Statements.
Benefit from Income Taxes
For a discussion of the benefit from income taxes and adjustments for continuing operations for each of the years ended December 31, 2012, 2011 and 2010, refer to page 46.
Adjusted EBITDA – Non-GAAP Financial Information
Adjusted Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA) is a non-GAAP measure of operating results. Elan’s management use this measure to evaluate our operating performance and is among the factors considered as a basis for our planning and forecasting for future periods. We believe that Adjusted EBITDA is a measure of performance used by some investors, equity analysts and others to make informed investment decisions.
Adjusted EBITDA is defined as net income or loss plus or minus net income from discontinued operations, net interest expense, provision for or benefit from income taxes, depreciation and amortization of costs and revenue, share-based compensation, other net gains or charges, net charge on debt retirement, net gain on divestment of business, net loss on equity method investments, net investment gains or losses, and settlement reserve charge. Adjusted EBITDA is not presented as, and should not be considered an alternative measure of, operating results or cash flows from operations, as determined in accordance with U.S. GAAP.
The following table shows a reconciliation from the net income/(loss) to the Adjusted EBITDA for each of the years ended December 31, 2012, 2011, 2010, 2009 and 2008 (in millions):
| 2012 | 2011 | 2010 | 2009 | 2008 | ||||||||||||||||
| Net loss |
$ | (137.4 | ) | $ | 560.5 | $ | (324.7 | ) | $ | (176.2 | ) | $ | (71.0 | ) | ||||||
| Net income from discontinued operations |
(235.3 | ) | (1,014.0 | ) | (236.6 | ) | (217.3 | ) | (168.9 | ) | ||||||||||
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| Net loss from continuing operations |
(372.7 | ) | (453.5 | ) | (561.3 | ) | (393.5 | ) | (239.9 | ) | ||||||||||
| Net interest expense |
56.6 | 104.9 | 118.4 | 136.1 | 132.5 | |||||||||||||||
| (Benefit from)/provision for income taxes |
(360.5 | ) | (12.0 | ) | (52.2 | ) | (8.5 | ) | (234.9 | ) | ||||||||||
| Depreciation and amortization |
11.5 | 14.8 | 17.3 | 28.7 | 27.5 | |||||||||||||||
| Amortized fees, net |
(0.3 | ) | (0.5 | ) | (0.1 | ) | (0.2 | ) | — | |||||||||||
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| EBITDA |
(665.4 | ) | (346.3 | ) | (477.9 | ) | (237.4 | ) | (314.8 | ) | ||||||||||
| Share based compensation |
29.3 | 21.6 | 18.6 | 22.3 | 32.9 | |||||||||||||||
| Other net (gains)/charges |
168.9 | 24.3 | 52.8 | 61.6 | 25.2 | |||||||||||||||
| Net loss on equity method investments |
221.8 | 81.1 | 26.0 | — | ||||||||||||||||
| Net charge on debt retirement |
76.1 | 47.0 | 3.0 | 24.4 | — | |||||||||||||||
| Net gain on divestment of business |
— | — | (1.0 | ) | (108.7 | ) | — | |||||||||||||
| Net investment losses/(gains) |
1.2 | (2.6 | ) | (12.8 | ) | (0.6 | ) | 21.8 | ||||||||||||
| Settlement reserve charge |
— | — | 206.3 | — | — | |||||||||||||||
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| Adjusted EBITDA |
$ | (168.1 | ) | $ | (174.9 | ) | $ | (185.0 | ) | $ | (238.4 | ) | $ | (234.9 | ) | |||||
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45
In 2012, we reported Adjusted EBITDA losses of $168.1 million, compared to Adjusted EBITDA losses of $174.9 million in 2011. The improvement reflects lower operating expenses, following the cessation of early stage research activities that were not part of the Prothena separation.
In 2011, we reported Adjusted EBITDA losses of $174.9 million, compared to Adjusted EBITDA losses of $185.0 million in 2010. The improvement reflected lower R&D and support costs due to the realignment of and restructuring of the R&D organization in 2010.
Provision for Income Taxes
| 2012 | 2011 | 2010 | ||||||||||
| Continuing operations: |
||||||||||||
| Provision for income taxes — continuing operations |
$ | (360.5 | ) | $ | (12.0 | ) | $ | (52.2 | ) | |||
| Discontinued operations: |
||||||||||||
| Tysabri |
65.7 | 56.4 | 43.3 | |||||||||
| Prothena |
(5.0 | ) | (2.5 | ) | 0.2 | |||||||
| EDT |
— | 5.7 | 10.8 | |||||||||
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| Provision for income taxes — discontinued operations |
60.7 | 59.6 | 54.3 | |||||||||
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| Provision for income taxes — total operations |
$ | (299.8 | ) | $ | 47.6 | $ | 2.1 | |||||
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Total operations
The overall tax provision for 2012 for continuing and discontinued operations was a credit of $299.8 million (2011: $47.6 million expense; 2010: $4.5 million expense). In 2012, we did not record any adjustment to shareholders’ equity (2011: $Nil; 2010: $2.4 million reduction) to reflect tax shortfalls or windfalls related to equity awards.
The total tax credit of $299.8 million for continuing and discontinued operations for 2012 reflects income taxes at standard rates in the jurisdictions in which we operate and includes an Irish deferred tax credit of $335.0 million and a U.S. deferred tax expense of $34.6 million. The Irish deferred tax credit of $335.0 million relates primarily to the recognition of DTAs, the benefits of which are expected to be utilized in 2013 in offsetting Irish taxable income arising from the Tysabri divestment. The U.S. deferred tax expense of $34.6 million relates primarily to an increase in the valuation allowance related to U.S. DTAs from which we are now unlikely to benefit given the reduced recurring U.S. income in future years as a result of the expected Tysabri divestment in 2013. In 2011, there was a total deferred tax expense of $51.0 million and a total deferred tax expense $0.1 million in 2010.
In 2011, of the $51.0 million deferred tax expense for continuing and discontinued operations, $40.0 million arose due to the application of new state tax income attribution rules. Following the introduction of these new rules, we no longer expected to benefit from certain state tax loss and credit carry forwards prior to their expiry, due to a lower expected tax burden in future years. We therefore reduced our state DTAs by this amount.
Discontinued operations
To determine the allocation of our total tax provision between continuing and discontinued operations, we separately recalculated the tax provision for continuing operations only and allocated the difference between this tax amount and the total tax provision to discontinued operations for each of the disclosed periods.
46
DISCONTINUED OPERATIONS
Net income from discontinued operations for each of years ended December 31, 2012, 2011 and 2010, include the results of operations for the Tysabri, Prothena and EDT businesses, as set out below.
2012 Compared to 2011 and 2010 (in millions)
| 2012 | 2011 | 2010 | ||||||||||
| Total Revenue |
$ | 1,202.6 | $ | 1,242.0 | $ | 1,125.6 | ||||||
| Cost of sales |
655.5 | 638.9 | 571.1 | |||||||||
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| Gross margin |
547.1 | 603.1 | 554.5 | |||||||||
| Operating expenses/(gains): |
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| Selling, general and administrative expenses |
115.2 | 121.5 | 130.5 | |||||||||
| Research and development expenses |
93.3 | 125.7 | 130.2 | |||||||||
| Net loss/(gain) on divestment of business |
17.9 | (652.9 | ) | — | ||||||||
| Other net charges/(gains) |
4.2 | (66.5 | ) | 3.5 | ||||||||
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| Total operating expenses/(gains) |
230.6 | (472.2 | ) | 264.2 | ||||||||
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| Operating income |
316.5 | 1,075.3 | 290.3 | |||||||||
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| Net interest and investment gains and losses: |
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| Net interest expense/(income) |
— | 1.0 | (0.6 | ) | ||||||||
| Net loss on disposal of equity method investment |
13.3 | — | — | |||||||||
| Net loss on equity method investments |
7.2 | 0.7 | — | |||||||||
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| Net interest and investment gains and losses |
20.5 | 1.7 | (0.6 | ) | ||||||||
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| Net income before income taxes from discontinued operations |
296.0 | 1,073.6 | 290.9 | |||||||||
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| Provision for income taxes |
60.7 | 59.6 | 54.3 | |||||||||
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| Net income from discontinued operations |
$ | 235.3 | $ | 1,014.0 | $ | 236.6 | ||||||
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Separate analyses of the results from the Tysabri, Prothena and EDT businesses are presented below.
Tysabri
On February 6, 2013, we announced that we had entered into an agreement to dispose of our Tysabri IP and other assets related to Tysabri to Biogen Idec. In accordance with the terms of the transaction, upon consummation of the transaction we will terminate our existing collaboration arrangements with Biogen Idec and will receive an upfront payment of $3.25 billion. In addition, we will receive continuing royalties on Tysabri in-market sales. We will earn a royalty of 12% of global net sales of Tysabri during the first 12 months following the closing of the transaction. Thereafter, we will earn a royalty of 18% of global net sales up to $2.0 billion each year and a 25% royalty on annual global net sales above $2.0 billion each year. The transaction is expected to close in the first half of 2013, subject to the satisfaction of certain conditions, including customary regulatory approvals.
As a result of the decision to dispose of the Tysabri IP and other assets related to Tysabri, the results of Tysabri that are included in the Consolidated Statement of Operations for the year ended December 31, 2012, are presented as a discontinued operation and the comparative amounts have been restated to reflect this classification.
47
The income statement financial information relating to Tysabri for the years ended December 31, 2012, 2011 and 2010 are set-out below (in millions):
| % Increase/(Decrease) | ||||||||||||||||||||
| 2012 | 2011 | 2010 | 2012/2011 | 2011/2010 | ||||||||||||||||
| Revenue |
$ | 1,202.6 | $ | 1,064.1 | $ | 851.5 | 13 | % | 25 | % | ||||||||||
| Cost of sales |
655.5 | 571.9 | 452.7 | 15 | % | 26 | % | |||||||||||||
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| Gross margin |
547.1 | 492.2 | 398.8 | 11 | % | 23 | % | |||||||||||||
| Operating expenses: |
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| Selling, general and administrative expenses |
113.2 | 96.1 | 90.8 | 18 | % | 6 | % | |||||||||||||
| Research and development expenses |
62.0 | 67.7 | 67.8 | (8 | )% | (0 | )% | |||||||||||||
| Other net charges |
4.2 | 1.6 | 1.2 | 163 | % | 33 | % | |||||||||||||
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| Total operating expenses |
179.4 | 165.4 | 159.8 | 8 | % | 4 | % | |||||||||||||
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| Operating income |
367.7 | 326.8 | 239.0 | 13 | % | 37 | % | |||||||||||||
| Net interest expense |
— | — | — | — | — | |||||||||||||||
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| Net income from discontinued operations before income taxes |
367.7 | 326.8 | 239.0 | 13 | % | 37 | % | |||||||||||||
| Provision for income taxes |
65.7 | 56.4 | 43.3 | 16 | % | 30 | % | |||||||||||||
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| Net income from discontinued operation |
$ | 302.0 | $ | 270.4 | $ | 195.7 | 12 | % | 38 | % | ||||||||||
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Tysabri Revenue
Revenue from the Tysabri business for the years ended December 31, 2012, 2011 and 2010 consisted of the following (in millions):
| % Increase/(Decrease) | ||||||||||||||||||||
| 2012 | 2011 | 2010 | 2012/2011 | 2011/2010 | ||||||||||||||||
| Product revenue: |
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| Tysabri- U.S. |
$ | 886.0 | $ | 746.5 | $ | 593.2 | 19 | % | 26 | % | ||||||||||
| Tysabri- ROW |
316.6 | 317.6 | 258.3 | (0 | )% | 23 | % | |||||||||||||
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| Total Tysabri |
$ | 1,202.6 | $ | 1,064.1 | $ | 851.5 | 13 | % | 25 | % | ||||||||||
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Global in-market net sales of Tysabri can be analyzed as follows (in millions):
| % Increase/(Decrease) | ||||||||||||||||||||
| 2012 | 2011 | 2010 | 2012/2011 | 2011/2010 | ||||||||||||||||
| United States |
$ | 886.0 | $ | 746.5 | $ | 593.2 | 19 | % | 26 | % | ||||||||||
| ROW |
745.1 | 764.1 | 636.8 | (2 | )% | 20 | % | |||||||||||||
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| Total Tysabri in-market net sales |
$ | 1,631.1 | $ | 1,510.6 | $ | 1,230.0 | 8 | % | 23 | % | ||||||||||
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Tysabri in-market net sales were $1,631.1 million in 2012, $1,510.6 million in 2011 and $1,230.0 million in 2010. The increase in 2012 reflects the 13% increase in units sold and higher pricing in the U.S., which were negatively impacted by the $64.0 million revenue reserve in Italy, and unfavorable foreign currency movements, including the 8% decrease in the average dollar-euro exchange rate from 2011 to 2012. The increase in Tysabri in-market net sales in 2011, compared to 2010, reflected a 16% increase in units sold, higher pricing in the United States, and favorable exchange rate movements in the ROW market, partially reduced by the revenue reserve in Italy.
The revenue reserve for Italy relates to a notification received by Biogen Idec from the Italian National Medicines Agency in 2011, stating that sales of Tysabri had exceeded a limit established by the agency in 2007. Biogen Idec filed an appeal in December 2011 seeking a ruling that Biogen Idec’s interpretation is valid and that the position of the agency is unenforceable. As a result of this dispute, Biogen Idec deferred $64.0 million of revenue recognized on in-market net sales of Tysabri in Italy during 2012, having previously deferred $13.8 million of revenue in Italy during 2011. We expect that Biogen Idec will continue to defer a portion of in-
48
market revenues on future sales of Tysabri for Italy until the matter is resolved. As a consequence of this deferral of in-market net sales by Biogen Idec, we have deferred $30.6 million of revenue in 2012 and $37.5 million to date, reflecting the operating and accounting arrangements between the companies.
As of the end of December 2012, approximately 72,700 patients were on therapy worldwide, including approximately 33,400 commercial patients in the United States and approximately 38,400 commercial patients in the ROW, representing an increase of 12% over the approximately 64,700 (revised) patients who were on therapy at the end of December 2011. As of the end of December 2010, approximately 57,300 (revised) patients were on therapy worldwide.
Tysabri was developed in collaboration with Biogen Idec. Until the Tysabri Transaction closes, Tysabri will continue to be marketed in collaboration with Biogen Idec, and in general, subject to certain limitations, we will continue to share with Biogen Idec most of the development and commercialization costs for Tysabri. Biogen Idec is responsible for manufacturing the product. In the United States, until the Tysabri Transaction closes, we will continue to purchase Tysabri from Biogen Idec and are responsible for distribution. Consequently, we record as revenue the net sales of Tysabri in the U.S. market. We purchase product from Biogen Idec at a price that includes the cost of manufacturing, plus Biogen Idec’s gross margin on Tysabri, and this cost, together with royalties payable by us to other third parties, is included in cost of sales. Upon consummation of the Tysabri Transaction, Biogen Idec will be responsible for all of the development and commercialization (including distribution) costs for Tysabri.
Outside of the United States, Biogen Idec is responsible for distribution and we record as revenue our share of the profit or loss on these sales of Tysabri, plus our directly-incurred expenses on these sales, which are primarily comprised of royalties that we incur and are payable by us to third parties and are reimbursed by the collaboration.
Tysabri-U.S.
In the U.S. market, we recorded net sales of $886.0 million (2011: $746.5 million; 2010: $593.2 million). Almost all of these sales are in relation to the MS indication.
As of the end of December 2012, approximately 33,400 patients were on commercial therapy in the United States, which represents an increase of 11% over the approximately 30,000 patients who were on therapy at the end of December 2011. As of the end of December 2010, approximately 27,600 patients were on commercial therapy.
Tysabri-ROW
As previously mentioned, in the ROW markets, Biogen Idec is responsible for distribution and we record as revenue our share of the profit or loss on ROW sales of Tysabri, plus our directly incurred expenses on these sales, which are primarily comprised of royalties that we incur and are payable by us to third parties and are reimbursed by the collaboration. In 2012, we recorded ROW revenue of $316.6 million (2011: $317.6 million; 2010: $258.3 million), which was calculated as follows (in millions):
| % Increase/(Decrease) | ||||||||||||||||||||
| 2012 | 2011 | 2010 | 2012/2011 | 2011/2010 | ||||||||||||||||
| ROW in-market sales by Biogen Idec |
$ | 745.1 | $ | 764.1 | $ | 636.8 | (2 | )% | 20 | % | ||||||||||
| ROW operating expenses incurred by Elan and Biogen Idec |
(316.3 | ) | (349.3 | ) | (303.8 | ) | (9 | )% | 15 | % | ||||||||||
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| ROW operating profit generated by Elan and Biogen Idec |
428.8 | 414.8 | 333.0 | 3 | % | 25 | % | |||||||||||||
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| Elan’s 50% share of Tysabri ROW collaboration operating profit |
214.4 | 207.4 | 166.5 | 3 | % | 25 | % | |||||||||||||
| Elan’s directly incurred costs |
102.2 | 110.2 | 91.8 | (7 | )% | 20 | % | |||||||||||||
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| Net Tysabri ROW revenue |
$ | 316.6 | $ | 317.6 | $ | 258.3 | (0 | )% | 23 | % | ||||||||||
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As of the end of December 2012, approximately 38,400 patients, principally in the European Union, were on commercial Tysabri therapy, an increase of 13% over the approximately 34,100 (revised) patients at the end of December 2011. As of the end of December 2010, approximately 29,100 (revised) patients were on commercial therapy.
49
Tysabri Cost of Sales
Cost of sales were $655.5 million in 2012, compared to $571.9 million in 2011 and $452.7 million in 2010. The increases in 2012 and 2011 were due to the increased sales of Tysabri. The gross profit margin was 46% in 2012, 46% in 2011 and 47% in 2010. The decrease in gross margin percentage in 2012 compared to 2011 was primarily due to the change in mix between U.S. and ROW reported revenues, and the costs associated with the administration of the JC virus antibody assay to patients.
The Tysabri gross profit margin of 46% in 2012 (2011: 46%; 2010: 47%) is impacted by the profit sharing and operational arrangements in place with Biogen Idec and reflects our gross margin on sales of the product in the United States of 38% in 2012 (2011: 40%; 2010: 39%), and our reported gross margin on ROW sales of 68% (2011: 65%; 2010: 65%). The decrease in the gross margin in the United States primarily reflects the costs associated with the administration of the JC virus antibody assay to patients, partially offset by higher pricing. The ROW gross margin reflects our share of the profit or loss on ROW sales plus our directly incurred expenses on these sales, which are primarily comprised of royalties that we incur and are payable by us to third parties and are reimbursed by the collaboration; offset by the inclusion in cost of sales of these royalties.
Tysabri Selling, General and Administrative Expenses
SG&A expenses were $113.2 million in 2012, $96.1 million in 2011 and $90.8 million in 2010. The increases of 18% in SG&A expenses in 2012, compared to 2011, and 6% in 2011, compared to 2010, are due to increased investment in Tysabri commercial activities in the United States.
Tysabri Research and Development Expenses
R&D expenses were $62.0 million in 2012, $67.7 million in 2011 and $67.8 million in 2010. The decrease of 8% in R&D expenses in 2012, compared to 2011, was primarily due to lower external expenses related to the U.S. clinical trials.
Tysabri Other Net Charges
Other net charges related to the Tysabri business of $4.2 million in 2012 (2011: $1.6 million; 2010: $1.2 million) were incurred as a result of the planned closure of the South San Francisco facility and the associated reduction in headcount.
Tysabri Provision for Income Taxes
For a discussion of the provision for income taxes for discontinued operations for each of the years ended December 31, 2012, 2011 and 2010, refer to page 46.
Prothena
On December 20, 2012, we completed the separation of the Prothena Business into a new, publicly traded company incorporated in Ireland. The issued share capital of Prothena was admitted to trading on the NASDAQ Global Market on December 21, 2012. Prothena focuses on the discovery and development of novel antibodies for the potential treatment of a broad range of diseases that involve protein misfolding or cell adhesion. The separation of the Prothena Business from Elan was completed through a demerger under Irish law. The demerger was effected by Elan transferring our wholly-owned subsidiaries comprising the Prothena Business to Prothena, in exchange for Prothena issuing Prothena ordinary shares directly to Elan shareholders, on a pro rata basis. Prothena’s issuance of its outstanding shares constituted a deemed in specie distribution (a distribution of non-cash assets) by Elan to Elan shareholders. Each Elan shareholder received one Prothena ordinary share for every 41 Elan ordinary shares or Elan ADSs held.
Immediately following the separation of the Prothena Business, a wholly owned subsidiary of Elan subscribed for 3.2 million newly-issued ordinary shares of Prothena, representing 18% of the outstanding ordinary shares of Prothena. This investment was recorded as an available for sale investment on the Consolidated Balance Sheet at an initial fair value of $22.9 million. In connection with the separation of the Prothena Business, we made a cash distribution to Prothena, which together with the consideration for 18% of Prothena’s outstanding ordinary shares, totaled $125.0 million.
The financial results of the Prothena Business included in the Consolidated Statement of Operations for the year ended December 31, 2012 are presented as a discontinued operation and the comparative amounts have been restated to reflect this classification.
50
Transaction and other costs associated with the Prothena separation of $17.9 million were incurred during 2012 and have been included in the net income from discontinued operations reporting line.
The income statement financial information relating to Prothena the period up to December 20, 2012, when the Prothena Business was divested by Elan, and for the years ended December 31, 2011 and 2010 are set-out below (in millions):
| % Increase/(Decrease) | ||||||||||||||||||||
| 2012 | 2011 | 2010 | 2012/2011 | 2011/2010 | ||||||||||||||||
| Revenue |
$ | — | $ | — | $ | — | — | — | ||||||||||||
| Cost of sales |
— | — | — | — | — | |||||||||||||||
|
|
|
|
|
|
|
|||||||||||||||
| Gross margin |
— | — | — | — | — | |||||||||||||||
| Operating expenses: |
||||||||||||||||||||
| Selling, general and administrative expenses |
2.0 | 1.6 | 0.8 | 25 | % | 100 | % | |||||||||||||
| Research and development expenses |
31.3 | 23.7 | 8.7 | 32 | % | 172 | % | |||||||||||||
| Net loss on divestment of business |
17.9 | — | — | 100 | % | — | ||||||||||||||
|
|
|
|
|
|
|
|||||||||||||||
| Total operating expenses |
51.2 | 25.3 | 9.5 | 102 | % | 166 | % | |||||||||||||
|
|
|
|
|
|
|
|||||||||||||||
| Operating loss |
(51.2 | ) | (25.3 | ) | (9.5 | ) | 102 | % | 166 | % | ||||||||||
| Net interest expense |
— | — | — | — | — | |||||||||||||||
|
|
|
|
|
|
|
|||||||||||||||
| Net loss from discontinued operation before income taxes |
(51.2 | ) | (25.3 | ) | (9.5 | ) | 102 | % | 166 | % | ||||||||||
| (Benefit from)/provision for income taxes |
(5.0 | ) | (2.5 | ) | 0.2 | 100 | % | (1350 | )% | |||||||||||
|
|
|
|
|
|
|
|||||||||||||||
| Net loss from discontinued operation |
$ | (46.2 | ) | $ | (22.8 | ) | $ | (9.7 | ) | 103 | % | 135 | % | |||||||
|
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Prothena Selling, General and Administrative Expenses
SG&A expenses were $2.0 million for the period to December 20, 2012, $1.6 million in 2011 and $0.8 million in 2010. The increases in SG&A expenses in 2012, compared to 2011, and in 2011, compared to 2010, reflected the higher G&A support costs resulting from the increase in research activities.
Prothena Research and Development Expenses
R&D expenses were $31.3 million for the period to December 20, 2012, $23.7 million in 2011 and $8.7 million in 2010. The increases in R&D expenses in 2012, compared to 2011, and in 2011, compared to 2010, primarily reflected the increased spend in the NEOD001 amyloidosis program, as well as higher spending on Prothena’s portfolio of targets including alpha-synuclein for the potential treatment of synucleinopathies, such as Lewy body dementia and Parkinson’s disease, and tau for Alzheimer’s disease and other tauopathies.
Net Loss on Divestment of Prothena Business
The net loss recorded on the divestment of the Prothena Business in 2012 was $17.9 million, primarily related to transaction costs.
Prothena Provision for Income Taxes
For a discussion of the provision for income taxes for discontinued operations in the period to December 20, 2012, and in the years ended December 31, 2011 and 2010 refer to page 46.
51
EDT
In September 2011, we announced the completion of the merger between Alkermes, Inc. and EDT following the approval of the merger by Alkermes, Inc. shareholders on September 8, 2011. Alkermes, Inc. and EDT were combined under a new holding company incorporated in Ireland named Alkermes plc. In connection with the transaction, we received $500.0 million in cash and 31.9 million ordinary shares of Alkermes plc common stock. At the close of the transaction, we held approximately 25% of the equity of Alkermes plc, with the existing shareholders of Alkermes, Inc. holding the remaining 75% of the equity. Alkermes plc shares are registered in the United States and trade on the NASDAQ stock market. Our equity interest in Alkermes plc was recorded as an equity method investment on the Consolidated Balance Sheet at an initial carrying amount of $528.6 million, based on the closing share price of $16.57 of Alkermes, Inc. shares on the date of the transaction.
Following the disposal of the EDT business in September 2011, the results of EDT were reported in continuing operations as a result of our 25% equity interest in Alkermes plc.
On March 13, 2012, we announced that we had sold 24.15 million of the ordinary shares that we held in Alkermes plc, which represented 76% of our shareholding in Alkermes plc. Following the sale we continued to own 7.75 million ordinary shares of Alkermes plc, representing an approximate 6% equity interest in Alkermes plc. Following the disposal of 24.15 million ordinary shares of Alkermes plc, our shareholding ceased to qualify as an equity method investment and as a result the results of EDT are presented as a discontinued operation in the Consolidated Statement of Operations for the comparative periods.
On January 31, 2013, we announced that we had agreed to sell all of our remaining 7.75 million ordinary shares of Alkermes plc. The sale closed on February 6, 2013 and we received proceeds of $169.7 million.
The income statement financial information relating to EDT for the years ended December 31, 2012, 2011 and 2010, is set-out below (in millions):
| 2012 | 2011 | 2010 | % Increase/ (Decrease) 2012/2011 |
% Increase/ (Decrease) 2011/2010 |
||||||||||||||||
| Revenue |
$ | — | $ | 177.9 | $ | 274.1 | — | (35 | )% | |||||||||||
| Cost of sales |
— | 67.0 | 118.4 | — | (43 | )% | ||||||||||||||
|
|
|
|
|
|
|
|||||||||||||||
| Gross margin |
— | 110.9 | 155.7 | — | (29 | )% | ||||||||||||||
| Operating expenses: |
||||||||||||||||||||
| Selling, general and administrative expenses |
— | 23.8 | 38.9 | — | (39 | )% | ||||||||||||||
| Research and development expenses |
— | 34.3 | 53.7 | — | (36 | )% | ||||||||||||||
| Net gain on divestment of business |
— | (652.9 | ) | — | — | — | ||||||||||||||
| Other net (gains)/charges |
— | (68.1 | ) | 2.3 | — | (3061 | )% | |||||||||||||
|
|
|
|
|
|
|
|||||||||||||||
| Total operating expenses |
— | (662.9 | ) | 94.9 | — | (799 | )% | |||||||||||||
|
|
|
|
|
|
|
|||||||||||||||
| Operating income |
— | 773.8 | 60.8 | — | 1173 | % | ||||||||||||||
| Net interest and investment gains and losses: |
||||||||||||||||||||
| Net interest expense |
— | 1.0 | (0.6 | ) | — | (267 | )% | |||||||||||||
| Net loss on disposal of equity method investment |
13.3 | — | — | 100 | % | — | ||||||||||||||
| Net loss on equity method investment |
7.2 | 0.7 | — | 929 | % | 100 | % | |||||||||||||
|
|
|
|
|
|
|
|||||||||||||||
| Net interest and investment gains and losses |
20.5 | 1.7 | (0.6 | ) | 1106 | % | (383 | )% | ||||||||||||
|
|
|
|
|
|
|
|||||||||||||||
| Net (loss)/income from discontinued operations before income taxes |
(20.5 | ) | 772.1 | 61.4 | (103 | )% | 1157 | % | ||||||||||||
| Provision for income taxes |
— | 5.7 | 10.8 | — | (47 | )% | ||||||||||||||
|
|
|
|
|
|
|
|||||||||||||||
| Net (loss)/income from discontinued operation |
$ | (20.5 | ) | $ | 766.4 | $ | 50.6 | (103 | )% | 1415 | % | |||||||||
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|
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52
EDT Revenue
Revenue from the EDT business for the period up to September 16, 2011, when the EDT business was divested by Elan, was $177.9 million compared to $274.1 million in 2010. The EDT revenue can be analyzed as follows (in millions):
| % Increase / Decrease |
||||||||||||
| 2011 | 2010 | 2011/2010 | ||||||||||
| Product revenue: |
||||||||||||
| Manufacturing revenue and royalties: |
||||||||||||
| TriCor® 145 |
$ | 35.5 | $ | 54.5 | 35 | % | ||||||
| Focalin® XR/Ritalin® LA |
25.9 | 33.0 | 22 | % | ||||||||
| Ampyra® |
22.6 | 56.8 | 60 | % | ||||||||
| Verelan® |
18.1 | 21.8 | 17 | % | ||||||||
| Naprelan® |
5.9 | 12.6 | 53 | % | ||||||||
| Skelaxin® |
— | 5.9 | 100 | % | ||||||||
| Other |
60.0 | 76.8 | 22 | % | ||||||||
|
|
|
|
|
|||||||||
| Total product revenue from the EDT business |
168.0 | 261.4 | 36 | % | ||||||||
|
|
|
|
|
|||||||||
| Contract revenue: |
||||||||||||
| Research revenue |
6.0 | 8.2 | 27 | % | ||||||||
| Milestone payments |
3.9 | 4.5 | 13 | % | ||||||||
|
|
|
|
|
|||||||||
| Total contract revenue from the EDT business |
9.9 | 12.7 | 22 | % | ||||||||
|
|
|
|
|
|||||||||
| Total revenue from the EDT business |
$ | 177.9 | $ | 274.1 | 35 | % | ||||||
|
|
|
|
|
|||||||||
Manufacturing revenue and royalties comprised revenue earned from products EDT manufactured for clients and royalties earned principally on sales by clients of products that incorporate EDT’s technologies.
Manufacturing revenue and royalties for the period up to September 16, 2011 were $168.0 million compared to $261.4 million in 2010. The decrease in 2011 was principally due to the divestment of EDT on September 16, 2011 and the timing of Ampyra revenues. The manufacturing and royalty revenue recorded for Ampyra in 2010 of $56.8 million included shipments to Acorda Therapeutics Inc. (Acorda) to satisfy Acorda’s initial stocking requirements for the launch of the product in March 2010, as well as build-up of safety stock supply. We recorded revenue upon shipment of Ampyra to Acorda, as this revenue was not contingent upon ultimate sale of the shipped product by Acorda or its customers. Consequently, revenue varied with shipments and was not based directly on in-market sales.
Except as noted above, no other single product accounted for more than 10% of EDT manufacturing revenue and royalties in 2011 or 2010. The royalties on products not manufactured by EDT were 34% of total manufacturing revenue and royalties in 2011 (2010: 32%).
Contract revenue
Contract revenue was $9.9 million for the period up to September 16, 2011 and $12.7 million in 2010. Contract revenue consisted of research revenue, license fees and milestones arising from R&D activities performed on behalf of third parties. The changes between years in contract revenue were primarily due to the level of external R&D projects and the timing of when milestones were earned.
EDT Cost of Sales
Cost of sales were $67.0 million for the period up to September 16, 2011, compared to $118.4 million in 2010. The gross profit margin was 62% in 2011 and 57% in 2010. The decreased gross profit margin in 2011 primarily reflected the timing of divestment of the EDT business and the Ampyra launch in 2010.
53
EDT Selling, General and Administrative Expenses
SG&A expenses were $23.8 million for the period to September 16, 2011 and $38.9 million in 2010. The decrease of 39% in SG&A expenses in 2011, compared to 2010, primarily reflected the timing of divestment of the EDT business.
EDT Research and Development Expenses
R&D expenses were $34.3 million for the period to September 16, 2011 and $53.7 million in 2010. The decrease of 36% in R&D expenses in 2011, compared to 2010, primarily reflected the timing of divestment of the EDT business.
Net Gain on Divestment of Business
The net gain recorded on the divestment of the EDT business for the year ended December 31, 2011 amounted to $652.9 million, and was calculated as follows (in millions):
| Cash consideration |
$ | 500.0 | ||
| Investment in Alkermes plc |
528.6 | |||
|
|
|
|||
| Total consideration |
$ | 1,028.6 | ||
| Property, plant and equipment |
(202.0 | ) | ||
| Goodwill and other intangible assets |
(53.0 | ) | ||
| Working capital and other net assets |
(84.5 | ) | ||
| Transaction and other costs |
(36.2 | ) | ||
|
|
|
|||
| Net gain on divestment of business |
$ | 652.9 | ||
|
|
|
EDT Other Net (Gains)/Charges
During 2011, EDT incurred severance, restructuring and other costs of $10.0 million (2010: $2.3 million), and facilities charges of $6.4 million (2010: $Nil) arising from the closure of the King of Prussia, Pennsylvania site in 2011, offset by legal settlement gains of $84.5 million (2010: $Nil). The severance, restructuring and other costs of $2.3 million in 2010 arose from the realignment of resources to meet our business structure.
In June 2008, a jury ruled in the U.S. District Court for the District of Delaware that Abraxis Biosciences, Inc. (Abraxis, since acquired by Celgene Corporation) had infringed a patent owned by EDT in relation to the application of NanoCrystal® technology to Abraxane®. EDT was awarded $55 million, applying a royalty rate of 6% to sales of Abraxane from January 1, 2005 through June 13, 2008 (the date of the verdict), though the judge had yet to rule on post-trial motions or enter the final order. This award and damages associated with the continuing sales of the Abraxane product were subject to interest. In February 2011, we entered into an agreement with Abraxis to settle this litigation. As part of the settlement agreement with Abraxis, we received $78.0 million in full and final settlement in March 2011 and recorded a gain of this amount.
During 2011, EDT entered into an agreement with Alcon Laboratories, Inc. (Alcon) to settle litigation in relation to the application of NanoCrystal technology. As part of the settlement agreement with Alcon, EDT received $6.5 million in full and final settlement.
Net Loss on Disposal of Equity Method Investment
Following the completion of the merger between Alkermes, Inc. and EDT in September 2011, we held approximately 25% of the equity of Alkermes plc (31.9 million shares) at the close of the transaction. Our equity interest in Alkermes plc was recorded as an equity method investment on the Consolidated Balance Sheet at an initial carrying amount of $528.6 million, based on the closing share price of $16.57 of Alkermes, Inc. shares on the date of the transaction.
54
In March 2012, we sold 76% (24.15 million ordinary shares) of our shareholding in Alkermes plc and received net proceeds of $380.9 million, after deduction of underwriter and other fees. Following this sale we continued to own 7.75 million ordinary shares of Alkermes plc, representing an approximate 6% equity interest in Alkermes plc. Following the sale of the 24.15 million ordinary shares, our remaining equity interest in Alkermes plc ceased to qualify as an equity method investment and was recorded as an available-for-sale investment with an initial carrying value of $126.5 million. The net loss on disposal of $13.3 million was calculated as follows (in millions):
| Share proceeds |
$ | 398.5 | ||
| Initial carrying value of available for sale investment |
126.5 | |||
| Carrying value of equity method investment divested |
(520.7 | ) | ||
| Transaction costs |
(17.6 | ) | ||
|
|
|
|||
| Net loss |
$ | (13.3 | ) | |
|
|
|
On January 31, 2013, we announced that we had agreed to sell all of our remaining 7.75 million ordinary shares of Alkermes plc. The sale closed on February 6, 2013 and we received proceeds of $169.7 million.
Net Loss on Equity Method Investment
For the year ended December 31, 2012, we recorded a net loss on the equity method investment of $7.2 million (2011: $0.7 million) related to our share of the losses of Alkermes plc in the period prior to the disposal of the 24.15 million ordinary shares of Alkermes plc.
For additional information relating to our equity method investments, refer to Note 9 to the Consolidated Financial Statements. For additional information relating to our available for sale investments, refer to Note 17 to the Consolidated Financial Statements.
EDT Provision for Income Taxes
For a discussion of the provision for income taxes for discontinued operations in the period to September 16, 2011, and in the year ended December 31, 2011 refer to page 46.
Reconciliation of net income of discontinued operations to Adjusted EBITDA of discontinued operations (in millions)
| 2012 | 2011 | 2010 | 2009 | 2008 | ||||||||||||||||
| Net income from discontinued operations |
$ | 235.3 | $ | 1,014.0 | $ | 236.6 | $ | 217.3 | $ | 168.9 | ||||||||||
| Net interest expense |
— | 1.0 | (0.6 | ) | 1.8 | (0.5 | ) | |||||||||||||
| Provision for income taxes |
60.7 | 59.6 | 54.3 | 54.9 | 8.6 | |||||||||||||||
| Depreciation and amortization |
13.3 | 21.0 | 46.0 | 46.3 | 42.6 | |||||||||||||||
| Amortized fees, net |
— | — | (0.2 | ) | — | (2.5 | ) | |||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
| EBITDA from discontinued operations |
309.3 | 1,095.6 | 336.1 | 320.3 | 217.1 | |||||||||||||||
| Share based compensation expense |
9.8 | 11.0 | 11.9 | 8.7 | 13.1 | |||||||||||||||
| Net loss/(gain) on divestment of business |
17.9 | (652.9 | ) | — | — | — | ||||||||||||||
| Other net charges/(gains) |
4.2 | (66.5 | ) | 3.5 | 5.7 | 9.0 | ||||||||||||||
| Net loss on disposal of equity method investment |
13.3 | — | — | — | — | |||||||||||||||
| Net loss on equity method investments |
7.2 | 0.7 | — | — | — | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
| Adjusted EBITDA of discontinued operations |
$ | 361.7 | $ | 387.9 | $ | 351.5 | $ | 334.7 | $ | 239.2 | ||||||||||
|
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Refer to page 45 for further information on our reasons for using Adjusted EBITDA as a non-GAAP financial measure.
55
| B. | Liquidity and Capital Resources |
Cash and Cash Equivalents, Liquidity and Capital Resources
Our liquid and capital resources at December 31 were as follows (in millions):
| Increase/ | ||||||||||||
| 2012 | 2011 | (Decrease) | ||||||||||
| Cash and cash equivalents |
$ | 431.3 | $ | 271.7 | 59 | % | ||||||
| Restricted cash and cash equivalents — current |
2.6 | 2.6 | — | |||||||||
| Investment securities — current |
167.9 | 0.3 | 55867 | % | ||||||||
| Shareholders’ equity |
618.2 | 801.8 | (23 | )% | ||||||||
| Total aggregate principal amount of debt |
600.0 | 624.5 | (1) | (4 | )% | |||||||
| (1) | Refer to Note 24 to the Consolidated Financial Statements for a reconciliation of the 2011 aggregate principal amount of the debt to the carrying amount. |
As of December 31, 2012, our total cash and cash equivalents, current restricted cash and cash equivalents, and current investment securities of $601.8 million (2011: $274.6 million) included $357.7 million (2011: $235.8 million) that was held by foreign subsidiaries in the following jurisdictions (in millions):
| 2012 | 2011 | Increase/ (Decrease) |
||||||||||
| United States |
$ | 292.1 | $ | 172.8 | 69 | % | ||||||
| Bermuda |
41.1 | 38.0 | 8 | % | ||||||||
| Other |
24.5 | 25.0 | (2 | )% | ||||||||
|
|
|
|
|
|||||||||
| Total |
$ | 357.7 | $ | 235.8 | 52 | % | ||||||
|
|
|
|
|
|||||||||
There are currently no restrictions that would have a material adverse impact on the parent company or consolidated liquidity of Elan in relation to the intercompany transfer of cash held by our foreign subsidiaries.
We have historically financed our operating and capital resource requirements through cash flows from operations, sales of investment securities and borrowings. We consider all highly liquid deposits with a maturity on acquisition of three months or less to be cash equivalents. Our primary source of funds as of December 31, 2012, consisted of cash and cash equivalents of $431.3 million, which primarily comprise of bank deposits and holdings in U.S. Treasuries funds.
At December 31, 2012, our shareholders’ equity was $618.2 million, compared to $801.8 million at December 31, 2011. The decrease is primarily due to the net loss incurred during the year. The net loss for 2012 from continuing and discontinued operations included other charges of $173.1 million principally associated with the planned closure of the South San Francisco facility and reduction in headcount following the announcement during the third quarter of 2012 of the separation of the Prothena Business and cessation of the remaining early stage research activities. Refer to Note 6 and Note 12 to the Consolidated Financial Statements for additional information on this item.
During 2012, we completed the offering of $600.0 million of the 6.25% Senior Fixed Rate Notes due 2019 (the 6.25% Notes). These Notes have substantially the same terms as those of the 2016 Notes issued October 2009 and the 2016 Notes issued August 2010 (the 2016 Notes issued October 2009, together with the 2016 Notes issued August 2010, the “8.75% Notes”).
During 2012, using the proceeds of the 6.25% Notes offering and existing cash, we redeemed all of the outstanding 8.75% Notes of which $624.5 million in principal amount was outstanding. Following the completion of the offering of $600.0 million of the 6.25% Notes and the redemption of the outstanding 8.75% Notes, the aggregate principal amount of our total debt was reduced from $624.5 million at December 31, 2011 to $600.0 million at December 31, 2012, and the maturity of the debt was extended by approximately three years from October 2016 to October 2019.
56
We believe that we have sufficient current cash, liquid resources, realizable assets and investments to meet our liquidity requirements for at least the next 12 months. Longer term liquidity requirements and debt repayments will need to be met out of available cash resources, future operating cash flows, financial and other asset realizations and future financing. However, events, including the failure to complete the Tysabri Transaction, a material deterioration in our operating performance as a result of an inability to sell significant amounts of Tysabri, material adverse legal judgments, fines, penalties or settlements arising from litigation or governmental investigations, failure to successfully develop and receive marketing approval for products under development or the occurrence of other circumstances or events described under Item 3D. “Risk Factors,” could materially and adversely affect our ability to meet our longer term liquidity requirements.
We expect to commit significant cash resources to the development and commercialization of our ELND005 compound and our remaining Janssen AI funding commitment. Refer to Item 5F. “Tabular Disclosure of Contractual Obligations” for details of our commitments to provide funding to Janssen AI, which commenced during 2012.
We continually evaluate our liquidity requirements, capital needs and availability of resources in view of, among other things, alternative uses of capital, debt service requirements, the cost of debt and equity capital and estimated future operating cash flow. We may raise additional capital; restructure or refinance outstanding debt; repurchase material amounts of outstanding debt (the 6.25% Notes) or equity; consider the sale of interests in subsidiaries, investment securities or other assets; or take a combination of such steps or other steps to increase or manage our liquidity and capital resources. Any such actions or steps, including any repurchase of outstanding debt or equity, could be material. In the normal course of business, we may investigate, evaluate, discuss and engage in future company or product acquisitions, capital expenditures, investments and other business opportunities. In the event of any future acquisitions, capital expenditures, investments or other business opportunities, we may consider using available cash or raising additional capital, including the issuance of additional debt.
Cash Flow Summary
The components of the net decrease/increase in cash and cash equivalents at December 31 were as follows (in millions):
| 2012 | 2011 | 2010 | ||||||||||
| Net cash provided by/(used in) operating activities |
$ | 55.3 | $ | (120.2 | ) | $ | 68.2 | |||||
| Net cash provided by/(used in) investing activities |
303.2 | 660.5 | (216.0 | ) | ||||||||
| Net cash used in financing activities |
(198.8 | ) | (691.0 | ) | (266.1 | ) | ||||||
| Effect of exchange rate changes on cash |
(0.1 | ) | (0.1 | ) | (0.1 | ) | ||||||
|
|
|
|
|
|
|
|||||||
| Net increase/(decrease) in cash and cash equivalents |
159.6 | (150.8 | ) | (414.0 | ) | |||||||
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| Cash and cash equivalents at beginning of year |
271.7 | 422.5 | 836.5 | |||||||||
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| Cash and cash equivalents at end of year |
$ | 431.3 | $ | 271.7 | $ | 422.5 | ||||||
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Operating Activities
The components of net cash provided by/used in operating activities at December 31 were as follows (in millions):
| 2012 | 2011 | 2010 | ||||||||||
| Adjusted EBITDA from continuing operations |
$ | (168.1 | ) | $ | (174.9 | ) | $ | (185.0 | ) | |||
| Adjusted EBITDA from discontinued operations |
361.7 | 387.9 | 351.5 | |||||||||
| Net interest and tax |
(52.6 | ) | (98.1 | ) | (114.5 | ) | ||||||
| Divestment of business — transaction costs |
— | (34.1 | ) | 1.0 | ||||||||
| Other net charges |
(105.8 | ) | (153.0 | ) | (42.8 | ) | ||||||
| Working capital (increase)/decrease |
20.1 | (48.0 | ) | 58.0 | ||||||||
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| Net cash (used in)/provided by operating activities |
$ | 55.3 | $ | (120.2 | ) | $ | 68.2 | |||||
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Net cash provided by operating activities was $55.3 million in 2012 (2011: used $120.2 million; 2010: provided by $68.2 million).
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The improvement in Adjusted EBITDA from continuing operations net cash outflow from a loss of $174.9 million in 2011 to a loss of $168.1 million in 2012 reflects lower operating expenses, following the cessation of early stage research activities that were not part of the Prothena separation. The improvement in the Adjusted EBITDA loss from continuing operations from $185.0 million in 2010 to $174.9 million in 2011 is primarily attributable to the 15% decrease in combined SG&A and R&D expenses.
The decrease in Adjusted EBITDA from discontinued operations net cash inflow from $387.9 million in 2011 to $361.7 million in 2012 was primarily due to lower revenues as a result of the EDT divestment in 2011, offset by the continued growth of Tysabri. The improvement in Adjusted EBITDA from discontinued operations net cash inflow from $351.5 million in 2010 to $387.9 million in 2011 is primarily attributable to improved Tysabri operating performance and a 5% decrease in combined SG&A and R&D expenses.
Net interest and tax are discussed further on page 42 for net interest expense and on page 46 for income taxes. The interest and tax expenses within net cash used in operating activities exclude net non-cash credits of $295.8 million in 2012 (2011: $55.4 million of non-cash charges; 2010: $5.4 million of non-cash charges), comprised of net non-cash interest expenses of $4.6 million in 2012 (2011: $4.4 million; 2010: $5.3 million) and a net non-cash tax credit of $300.4 million (2011: $51.0 million expense; 2010: $0.1 million expense).
The divestment of business charge of $34.1 million in 2011 includes the transaction costs and other cash charges related to the divestment of EDT. The divestment of business gain of $1.0 million in 2010 included the release of accruals for transaction costs associated with the divestment of the AIP business which took place in 2009.
The other net charges of $105.8 million in 2012 (2011: $153.0 million; 2010: $42.8 million) were principally related to the other net charges described on pages 40, 50 and 54; adjusted to exclude non-cash other charges of $72.5 million in 2012 (2011: $11.1 million; 2010: $13.5 million); and Prothena spin-off transaction costs of $5.2 million. The net cash outflow in 2011 is primarily attributable to the settlement reserve charge outflow of $206.3 million related to the Zonegran settlement that was recognized in 2010 and paid in March 2011, and was partially offset by the receipt of legal settlement gains of $84.5 million during 2011.
The working capital decrease in 2012 of $20.1 million is primarily due to the increase in the restructuring accrual and onerous lease provision related to the planned closure of the South San Francisco facility and reduction in headcount following the separation of the Prothena Business and cessation of the remaining early stage research activities, and the Cambridge Collaboration termination fee of $8.0 million.
The working capital increase in 2011 of $48.0 million is primarily due to expansion of the Tysabri business, an increase in EDT working capital prior to the divestment and a lower debt interest accrual related to the debt retirement transactions during 2011.
The working capital decrease in 2010 of $58.0 million was primarily driven by a significant increase in accruals, principally related to the increase in the Medicaid rebate accruals due to changes in U.S healthcare reform and an amount payable to Transition relating to an amendment to the Collaboration Agreement, and a decrease in inventories primarily related to lower levels of EDT finished goods inventory and discontinuation of Maxipime in 2010. In addition, the restructuring accrual increased by $8.8 million as a result of the realignment and restructuring of the R&D organization within our BioNeurology business, and reduction of related support activities.
Investing Activities
Net cash provided by investing activities was $303.2 million in 2012. The primary component of cash provided by investing activities was the net proceeds of $380.9 million from the sale of our 24.15 million shares held in Alkermes plc. This is offset by funding of $76.9 million provided to Janssen AI during 2012.
Net cash provided by investing activities was $660.5 million in 2011. The primary component of cash provided by investing activities was the cash consideration received from the disposal of the EDT business of $500.0 million, in addition to the decrease in restricted cash balances due to payment of the amount held in escrow in respect of the Zonegran settlement of $203.7 million in March 2011, partially offset by capital expenditures of $29.8 million.
Net cash used in investing activities was $216.0 million in 2010. The primary component of cash used in investing activities was the increase in restricted cash in the year, which includes a transfer of $203.7 million into restricted cash in respect of the Zonegran
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settlement. Also included in investing activities are capital expenditures of $44.5 million, partially offset by investment disposal proceeds of $16.4 million and business disposal proceeds of $4.3 million.
Financing Activities
Net cash used in financing activities of $198.8 million in 2012 was primarily comprised of outflows of $682.5 million related to the debt redemption of the 2016 Notes issued October 2009 and the 2016 Notes issued August 2010 offset by proceeds from the issuance of $600.0 million (net of transaction costs of $12.1 million) of the 6.25% Notes. The principal amount of debt repaid was $624.5 million and cash debt retirement costs of $58.0 million were incurred upon early redemption of the Notes. In addition, in connection with the separation of the Prothena Business, we made a cash distribution to Prothena, which together with the consideration for 18% of Prothena’s outstanding ordinary shares, totaled $125.0 million.
Net cash used by financing activities of $691.0 million in 2011 was primarily comprised of outflows of $697.3 million related to the debt redemption of the 2013 Fixed Rate Notes and the 2013 Floating Rate Notes and partial redemption of the 2016 Notes issued October 2009 and the 2016 Notes issued August 2010. The principal amount of debt repaid was $660.5 million and cash debt retirement costs of $36.8 were incurred upon early redemption of the Notes.
Net cash used by financing activities of $266.1 million in 2010 was primarily comprised of outflows of $300.0 million related to the redemption of the 2011 Floating Rate Notes and $155.0 million related to the partial redemption of the 2013 Fixed Rate Notes and the 2013 Floating Rate Notes partially offset by proceeds from the issuance of $200.0 million (net of transaction costs of $12.9 million) of the 2016 Notes issued August 2010.
Debt Facilities
At December 31, 2012, we had total outstanding debt with an aggregate principal amount of $600.0 million, which consisted of the following (in millions):
| 6.25% Notes |
$ | 600.0 | ||
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| Total |
$ | 600.0 | ||
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Our indebtedness could have important consequences to us. For example, it does or could:
| • | Increase our vulnerability to general adverse economic and industry conditions; |
| • | Require us to dedicate a substantial portion of our cash flow from operations to payments on indebtedness, thereby reducing the availability of our cash flow to fund R&D (including our funding commitments to Janssen AI (for AIP)), working capital, capital expenditures, acquisitions, investments and other general corporate purposes; |
| • | Cause us to elect to redeem our indebtedness at a premium in order to avoid potential debt covenant breaches; |
| • | Limit our flexibility in planning for, or reacting to, changes in our businesses and the markets in which we operate; |
| • | Place us at a competitive disadvantage compared to our competitors that have less debt; and |
| • | Limit our ability to borrow additional funds. |
During 2012, as of December 31, 2012, and, as of the date of filing of this Form 20-F, we were not in violation of any of our debt covenants. For additional information regarding our outstanding debt, refer to Note 24 to the Consolidated Financial Statements.
Commitments and Contingencies
For information regarding commitments and contingencies, refer to Notes 33 and 34 to the Consolidated Financial Statements.
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Capital Expenditures
We believe that our current and planned research, product development and corporate facilities will adequately meet our current and projected needs. We will use our resources to make capital expenditures as necessary from time to time and also to make investments in the purchase or licensing of products and in marketing and other alliances with third parties to support our long-term strategic objectives.
| C. | Research and Development, Patents and Licenses, etc. |
Our research activities are aimed at developing new drug products. Our development activities involve the translation of our research into potential new drugs.
On February 6, 2013, we announced that we had agreed to dispose of our Tysabri IP and other rights related to Tysabri to Biogen Idec. In accordance with the terms of the transaction, upon consummation of the transaction, the existing collaboration arrangements with Biogen Idec will be terminated and we will receive from Biogen Idec an upfront payment of $3.25 billion. In addition, we will receive continuing royalties from Biogen Idec on Tysabri in-market sales. The transaction is expected to close in the first half of 2013, subject to the satisfaction of certain conditions, including customary regulatory approvals.
In August 2012, we announced our intention to separate our Prothena Business into a new, publicly traded company and discontinue the portion of the drug discovery business platform not included in the Prothena Business. The separation of the Prothena Business was completed pursuant to a demerger under Irish law on December 20, 2012.
The development activities of the EDT business unit, which was divested on September 16, 2011, involved the translation of research into designs for new processes or technologies, or for a significant improvement to existing drugs.
R&D activities may be performed post-regulatory approval of drug products as required by regulators, to provide additional evidence as to the efficacy and safety of a product, to expand the indications for a product, or with the aim of significantly improving the approved product.
R&D expenses include personnel, materials, equipment and facilities costs that are allocated to related R&D activities. The amortization of intangible assets used in R&D activities and the costs of intangibles that are purchased from others for a particular R&D project and that have no alternative future uses are also included in R&D expenses.
The following table sets forth the total R&D expenses from continuing and discontinued operations incurred for our significant non-EDT programs (those programs that have advanced to at least Phase 2 development with one or more compounds) and other non-EDT R&D expenses for the years ended December 31, 2012, 2011 and 2010, and the cumulative amounts to date. It also sets forth the R&D expenses incurred for EDT for the period up to September 16, 2011, when the EDT business was divested, and for the year ended December 31, 2011, (in millions):
| Cumulative | ||||||||||||||||
| 2012 | 2011 | 2010 | to date(1) | |||||||||||||
| Tysabri |
$ | 70.4 | $ | 72.5 | $ | 71.4 | $ | 842.2 | ||||||||
| Aggregation inhibitor (ELND005, with Transition) |
33.1 | 18.1 | 20.3 | 142.6 | ||||||||||||
| Other R&D(2) |
84.8 | 107.6 | 113.3 | 356.9 | ||||||||||||
| EDT |
— | 34.3 | 53.7 | |||||||||||||
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| Total |
$ | 188.3 | $ | 232.5 | $ | 258.7 | ||||||||||
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| (1) | Cumulative R&D costs to date include the costs incurred from the date when these individual programs have been separately tracked in preclinical development. Expenditures in the early discovery stage are not tracked by program and accordingly have been excluded from these cumulative amounts. |
| (2) | Other R&D is comprised of programs related principally to the potential treatment of central nervous system diseases that have not yet entered Phase 2 development. |
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For further for information on our R&D, Patents and Licenses, etc., see Item 4B. “Business Overview”.
Our R&D expenses incurred are presented in the following reporting lines in the Consolidated Statements of Operations for the years ended December 31, 2012, 2011 and 2010 (in millions):
| 2012 | 2011 | 2010 | ||||||||||
| Research and development (continuing expenses) |
$ | 95.0 | $ | 106.8 | $ | 128.5 | ||||||
| Net income from discontinued operations(1) |
93.3 | 125.7 | 130.2 | |||||||||
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| Total |
$ | 188.3 | $ | 232.5 | $ | 258.7 | ||||||
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| (1) | The R&D expenses reported in net income from discontinued operations excludes an allocation of certain corporate facilities overheads included in the analysis of R&D expenses by program in the table above. These overheads are reported in the continuing operations research and development expense reporting line. |
| D. | Trend Information |
See Item 4B. “Business Overview” and Item 5A. “Operating Results” for trend information.
| E. | Off-Balance Sheet Arrangements |
As of December 31, 2012, we have no unconsolidated special purpose financing or partnership entities or other off-balance sheet arrangements that have, or are reasonably likely to have, a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources, that are material to investors.
| F. | Tabular Disclosure of Contractual Obligations |
The following table sets out (in millions), at December 31, 2012, our main contractual obligations due by period for debt principal and interest repayments and operating leases. These represent the major contractual, future payments that may be made by Elan. The table does not include items such as expected capital expenditures on plant and equipment or future investments in financial assets. As of December 31, 2012, the directors had authorized capital expenditures, which had been contracted for, of $0.1 million (2011: $3.0 million). As of December 31, 2012, the directors had authorized capital expenditures, which had not been contracted for, of $1.7 million (2011: $6.4 million).
| Less than | 1-3 | 3-5 | More than | |||||||||||||||||
| Total | 1 Year | Years | Years | 5 Years | ||||||||||||||||
| 2019 Notes issued October 2012 |
$ | 600.0 | $ | — | $ | — | $ | — | $ | 600.0 | ||||||||||
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| Total debt principal obligations |
600.0 | — | — | — | 600.0 | |||||||||||||||
| Debt interest payments |
254.9 | 37.5 | 75.0 | 75.0 | 67.4 | |||||||||||||||
| Operating lease obligations |
109.2 | 21.3 | 34.5 | 29.0 | 24.4 | |||||||||||||||
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| Total contractual obligations |
$ | 964.1 | $ | 58.8 | $ | 109.5 | $ | 104.0 | $ | 691.8 | ||||||||||
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On September 17, 2009, Janssen AI, a newly formed subsidiary of Johnson & Johnson, completed the acquisition of substantially all of our assets and rights related to the AIP. In addition, Johnson & Johnson, through its affiliate Janssen Pharmaceutical, invested $885.0 million in exchange for newly issued American Depositary Receipts (ADRs) of Elan, representing 18.4% of our outstanding Ordinary Shares at the time. Johnson & Johnson also committed to fund up to $500.0 million towards the further development and commercialization of the AIP. Any required additional expenditures in respect of Janssen AI’s obligations under the AIP collaboration in excess of the initial $500.0 million funding commitment is required to be funded by Elan and Johnson & Johnson in proportion to their respective shareholdings up to a maximum additional commitment of $400.0 million in total. In the event that further funding is required beyond the $400.0 million, such funding will be on terms determined by the board of Janssen AI, with Johnson & Johnson and Elan having a right of first offer to provide additional funding. During 2012, the
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remaining balance of the initial $500.0 million funding commitment, which amounted to $57.6 million at December 31, 2011, was spent. Subsequent to the full utilization of the initial $500.0 million funding commitment, we provided funding of $76.9 million to Janssen AI during 2012. In addition, we provided funding to Janssen AI of $29.9 million in January 2013, which will be recorded in the 2013 financial statements. Following the provision of this funding in January 2013, our remaining funding commitment to Janssen AI is $93.2 million. The table above does not reflect this funding commitment, which is contingent on the future operations and expenditure of Janssen AI.
In December 2010, we modified our Collaboration Agreement with Transition and, in connection with this modification, Transition elected to exercise its opt-out right under the original agreement and we agreed to pay Transition $9.0 million, which we paid to them in January 2011. Under the modified Collaboration Agreement, Transition was eligible to receive a further $11.0 million payment from us upon the commencement of the next ELND005 clinical trial. This was paid to Transition during 2012 when we commenced a Phase 2 study of oral ELND005 as an adjunctive maintenance treatment of patients with BPD 1. We also commenced a Phase 2 clinical trial of ELND005 during 2012 for the treatment of agitation/aggression in patients with moderate to severe Alzheimer’s disease.
As a consequence of Transition’s decision to exercise its opt-out right, it will no longer fund the development or commercialization of ELND005 and has relinquished its 30% ownership of ELND005 to us. Consistent with the terms of the original agreement, following its opt-out decision, Transition will be entitled to receive milestone payments of up to $93.0 million, along with tiered royalty payments on net sales of ELND005 ranging in percentage from a high single digit to the mid teens, depending on level of sales.
At December 31, 2012, we had liabilities related to unrecognized tax benefits of $7.2 million (excluding total potential penalties and interest of $2.3 million). It is not possible to accurately assess the timing of or the amount of any settlement in relation to these liabilities.
At December 31, 2012, we had commitments to invest $2.0 million (2011: $2.6 million) in healthcare managed funds.
In disposing of assets or businesses, we often provide customary representations, warranties and indemnities (if any) to cover various risks. We do not have the ability to estimate the potential liability from such indemnities because they relate to unknown conditions. However, we have no reason to believe that these uncertainties would have a material adverse effect on our financial condition or results of operations.
The two major rating agencies covering our debt, rate our debt as sub-investment grade. None of our debt has a rating trigger that would accelerate the repayment date upon a change in rating.
For information regarding the fair value of our debt, refer to Note 24 to the Consolidated Financial Statements.
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| Item 6. | Directors, Senior Management and Employees. |
| A. | Directors and Senior Management |
Directors
Robert A. Ingram (70)
| Position | Date of Appointment | Tenure as of December 31, 2012 | ||
| Non-Executive Director | December 3, 2010 | 2 years | ||
| Chairman of the Board | January 26, 2011 | 1 year 11 months | ||
| Member of the Nominating & Governance Committee (NGC) | January 26, 2011 | 1 year 11 months |
Mr. Ingram was appointed a director of Elan in December 2010, and assumed the role of chairman effective January 26, 2011. He is currently a general partner of Hatteras Venture Partners, LLC and has served as an advisor to the CEO of GlaxoSmithKline plc since January 2010. Mr. Ingram served as vice chairman pharmaceuticals of GlaxoSmithKline, acting as a special advisor to the corporate executive team from January 2003 until December 2009. He was chief operating officer and president, pharmaceutical operations of GlaxoSmithKline from January 2001 to January 2003. Mr. Ingram was CEO of Glaxo Wellcome plc from 1997 to 2000, and chairman of Glaxo Wellcome Inc. from 1999 to 2000. He is lead director of CREE Inc. and Valeant Pharmaceuticals Inc. and a director of HBM BioVentures AG and Edwards Lifesciences Corporation.
Gary Kennedy (55)
| Position | Date of Appointment | Tenure as of December 31, 2012 | ||
| Non-Executive Director | May 26, 2005 | 7 years 7 months | ||
| Member of the Audit Committee | September 9, 2005 | 7 years 3 months | ||
| Chairman of the Audit Committee | May 24, 2007 | 5 years 7 months | ||
| Member of the Leadership, Development & Compensation Committee (LDCC) | August 26, 2009 | 3 years 4 months |
Mr. Kennedy was appointed a director of Elan in May 2005, and is currently Chairman of Greencore Group plc. Mr. Kennedy is also a director of Friends First Assurance Company, serves as a board member to a number of private companies and was a director of IBRC Limited until February 2013. From May 1997 to December 2005, he was group director, finance and enterprise technology, at Allied Irish Banks, plc (AIB), a member of the main board of AIB, and was also on the board of M&T, AIB’s associate in the United States. Prior to that, Mr. Kennedy was group vice president at Nortel Networks Europe after starting his management career at Deloitte & Touche. He served on the board of the Industrial Development Authority of Ireland for 10 years until he retired in December 2005 and is a Fellow of Chartered Accountants Ireland.
Patrick Kennedy (43)
| Position | Date of Appointment | Tenure as of December 31, 2012 | ||
| Non-Executive Director | May 22, 2008 | 4 years 7 months | ||
| Member of the LDCC | September 10, 2008 | 4 years 3 months | ||
| Chairman of the LDCC | January 29, 2009 | 3 years 11 months |
Mr. Kennedy was appointed a director of Elan in May 2008. He is currently CEO of Paddy Power plc, an international betting and gaming group, listed on both the London and Irish Stock Exchanges; and is also a director of Bank of Ireland. Mr. Kennedy was previously Chief Financial Officer (CFO) of Greencore Group plc and prior to that worked with McKinsey & Company in both their London and Dublin offices. Mr. Kennedy also previously worked with KPMG’s corporate finance arm, splitting his time between Dublin and the Netherlands. Mr. Kennedy is a graduate of University College Dublin, Trinity College Dublin and a Fellow of Chartered Accountants Ireland.
Giles Kerr (53)
| Position | Date of Appointment | Tenure as of December 31, 2012 | ||
| Non-Executive Director | September 13, 2007 | 5 years 3 months | ||
| Member of the Audit Committee | January 31, 2008 | 4 years 11 months | ||
| Member of the NGC | January 27, 2010 | 2 years 11 months |
Mr. Kerr was appointed a director of Elan in September 2007. He is currently the director of finance with the University of Oxford, England, and a fellow of Keble College. At present Mr. Kerr is a member of the board and the chairman of the audit
63
committee of Victrex plc and BTG plc. He is also a director of Isis Innovation Ltd. and a number of other private companies. Previously, Mr. Kerr was the group finance director and CFO of Amersham plc, and prior to that he was a partner with Arthur Andersen in the United Kingdom. Mr. Kerr is a Fellow of the Institute of Chartered Accountants in England and Wales.
G. Kelly Martin (53)
| Position | Date of Appointment | Tenure as of December 31, 2012 | ||
| Executive Director & CEO | February 4, 2003 | 9 years 10 months |
Mr. Martin was appointed a director of Elan in February 2003 following his appointment as president and CEO. Before joining Elan, Mr. Martin spent more than 20 years at Merrill Lynch & Co., Inc., where he held a broad array of operating responsibilities.
Kieran McGowan (69)
| Position | Date of Appointment | Tenure as of December 31, 2012 | ||
| Non-Executive Director | December 1, 1998 | 14 years 1 month | ||
| Lead Independent Director | February 1, 2006 | 6 years 11 months | ||
| Member of the NGC | May 31, 2002 | 10 years 7 months | ||
| Chairman of the NGC | September 9, 2005 | 7 years 3 months |
Mr. McGowan was appointed a director of Elan in December 1998. He is a director Charles Schwab Worldwide Funds plc and was, until May 2012, chairman of CRH plc, as well as sitting on the board of a number of private companies. From 1990 until his retirement in December 1998, Mr. McGowan was chief executive of the Industrial Development Authority of Ireland. He has served as president of the Irish Management Institute and has chaired the Governing Authority at University College Dublin.
Kyran McLaughlin (68)
| Position | Date of Appointment | Tenure as of December 31, 2012 | ||
| Non-Executive Director | January 30, 1998 | 14 years 11 months | ||
| Member of the NGC | May 31, 2002 | 10 years 7 months |
Mr. McLaughlin was appointed a director of Elan in January 1998 and served as chairman from January 2005 to January 2011. He is deputy chairman at Davy, Ireland’s largest stockbroker firm. He is also a director of Ryanair Holdings plc and is a director of a number of private companies.
Donal O’Connor (62)
| Position | Date of Appointment | Tenure as of December 31, 2012 | ||
| Non-Executive Director | May 22, 2008 | 4 years 7 months | ||
| Member of the Audit Committee | September 10, 2008 | 4 years 3 months | ||
| Member of the LDCC | May 26, 2010 | 2 years 7 months |
Mr. O’Connor was appointed a director of Elan in May 2008. He holds directorships in a number of private companies. Prior to joining the Elan Board, Mr. O’Connor was the senior partner of PricewaterhouseCoopers in Ireland from 1995 until 2007. He was also a member of the PricewaterhouseCoopers Global Board and was a former chairman of the Eurofirms Board. Mr. O’Connor is a graduate of University College Dublin and a Fellow of Chartered Accountants Ireland.
Richard Pilnik (55)
| Position | Date of Appointment | Tenure as of December 31, 2012 | ||
| Non-Executive Director | July 16, 2009 | 3 years 5 months |
Mr. Pilnik was elected a director of Elan in July 2009. Mr. Pilnik served in several leadership positions during his 25-year career at Eli Lilly & Company, most recently as group vice president and chief marketing officer, where he was responsible for commercial strategy, market research and medical marketing. Currently, Mr. Pilnik serves as executive vice president and president of Quintiles Commercial Solutions, which is a global pioneer in pharmaceutical services. Mr. Pilnik holds a B.A. from Duke University and an M.B.A. from the Kellogg School of Management at Northwestern University.
64
Dennis J. Selkoe MD (69)
| Position | Date of Appointment | Tenure as of December 31, 2012 | ||
| Non-Executive Director(1) | July 1, 1996 | 16 years 4 months | ||
| Member of the Science and Technology Committee (S&TC) | August 26, 2009 | 3 years 4 months | ||
| Member of the NGC | January 27, 2010 | 2 years 11 months |
| (1) | Retired as a director July 16, 2009 and subsequently reappointed on August 26, 2009. |
Dr. Selkoe was appointed a director of Elan in July 1996, following the acquisition of Athena Neurosciences, where he served as a director since July 1995. Dr. Selkoe was a scientific founder of Athena Neurosciences. Dr. Selkoe, as a neurologist, is the Vincent and Stella Coates Professor of Neurologic Diseases at Harvard Medical School and co-director of the Center for Neurologic Diseases at The Brigham and Women’s Hospital.
Andrew von Eschenbach, MD (71)
| Position | Date of Appointment | Tenure as of December 31, 2012 | ||
| Non-Executive Director | September 15, 2011 | 1 year 3 months | ||
| Member of the S&TC | September 15, 2011 | 1 year 3 months |
Dr. von Eschenbach, MD, was appointed a director of Elan in September 2011. He is currently the President of Samaritan Health Initiatives Inc., a health care policy consultancy. He previously served as Commissioner of the FDA from 2005 to 2009. Prior to that he served as the Director of the National Cancer Institute and held a number of leadership roles at the University of Texas’ M.D. Anderson Cancer Center. He was educated at St. Joseph’s University, Philadelphia and received his M.D. from Georgetown University. His current responsibilities include serving on the boards of Histosonics Inc., the Focused Ultrasound Surgery Foundation, Viamet Pharmaceuticals, the National Comprehensive Cancer Centers Network Foundation, BioTime Inc. and its subsidiary OncoCyte Corporation, and Banyan Biomarkers, Inc. He also serves on the advisory boards of Chugai Pharmaceutical International Advisory Council, GE Healthymagination, the Scientific Advisory Board of Arrowhead Research Corporation and is a Senior Fellow at the Milken Institute and director of the FDA Project at the Manhattan Institute.
Senior Management
Nigel Clerkin (39)
Executive Vice President & Chief Financial Officer
Mr. Clerkin was named chief financial officer in May 2011. Prior to that, he had served as senior vice president, finance and group controller since January 2004. He previously held a number of financial and strategic planning positions since joining Elan in January 1998. Mr. Clerkin is a Fellow of Chartered Accountants Ireland and a graduate of Queen’s University Belfast.
Guriq Basi, Dr. (56)
Chief Science & Technology Officer
Dr. Basi was appointed chief science and technology officer in October 2012. Before this Dr. Basi was head of pre-clinical development at Neotope Biosciences, an Elan business unit which specialized in the discovery and development of biologics for the treatment of diseases associated with protein misfolding. Between June 2008 and May 2010, Dr. Basi was vice-president of extramural research at Elan and prior to that was senior director of discovery research and head of molecular biology. Between 1988 and joining Elan in 1992, Dr. Basi was a staff scientist at Protein Design Labs/PDL Biopharma. Dr. Basi undertook postdoctoral research in neurobiology at Stanford University, received his PhD in Biological Chemistry from the University of Illinois at Chicago, and his BA in Biochemistry from The Ohio State University.
Menghis Bairu, Dr. (52)
Chief Medical Officer & Head of Development
Dr. Bairu was appointed executive vice president, chief medical officer and head of global development in 2008. Dr. Bairu served as chief medical officer until September 2010 and then in October 2012 was reappointed to this position. During his time at Elan Dr. Bairu also served as head of Onclave Therapeutics, an Elan business unit which specialized in developing oncology related assets, and was senior vice president and head of international covering all of Elan’s biopharmaceutical activities outside the United States. Prior to joining Elan, Dr. Bairu worked at Genentech in a number of medical and commercial roles, served on the board of One World Health, a nonprofit drug development company funded by the Bill & Melinda Gates Foundation, and was a director of A-Cube, a privately held pharma start-up. Dr. Bairu also lectures at the University of California San Francisco School of Medicine on global clinical trials’ design, development and conduct.
65
William F. Daniel (60)
Executive Vice President & Company Secretary
Mr. Daniel was appointed a director of Elan in February 2003 and served until July 2007. He has served as the company secretary since December 2001, having joined Elan in March 1994 as group financial controller. In July 1996, he was appointed group vice president, finance, group controller. From 1990 to 1992, Mr. Daniel was financial director of Xtravision plc. Mr. Daniel is a Fellow of Chartered Accountants Ireland and a graduate of University College Dublin. He is a member of the Council of the Institute of Directors in Ireland.
Fabiana Lacerca-Allen (45)
Chief Compliance Officer
Ms. Lacerca-Allen joined Elan as senior vice president, chief compliance officer in June 2010. Ms. Lacerca-Allen has more than 18 years of compliance and legal experience at Fortune 500 companies and law firms in the United States and in Argentina. She joined Elan from Mylan Laboratories, where she was senior vice president and chief compliance officer and led Mylan’s compliance programs, including the establishment of policies and compliance processes. Prior to her role with Mylan, Lacerca-Allen served as legal compliance director for Bristol-Myers Squibb where she was a member of the executive team for Latin America, Canada and Puerto Rico and led all compliance initiatives in those regions. She has also held significant positions with Microsoft, Merck, Sharpe & Dohme and AT&T Capital.
Hans Peter Hasler (57)
Chief Operating Officer (COO)
Mr. Hasler was appointed a non-executive director of Elan in September 2011 and retired in October 2012 to take up the role of COO. He is the Chairman of HBM Healthcare Investments AG and Director of the Board of Acino, Switzerland. Mr. Hasler was principal of HPH Management GmbH. Previously, Mr. Hasler served with Biogen Idec in a number of key executive leadership roles from 2001 to 2009. Prior to his departure from Biogen Idec, Mr. Hasler served as its chief operating officer responsible for all commercial operations, business development, medical affairs and Biogen International. During his tenure, he served as head of global neurology/cardiovascular business and head of International business overseeing the launch of Tysabri in Europe and the management of Avonex. In addition, Mr. Hasler served as chief marketing officer / head of global strategic marketing with Wyeth Pharmaceuticals.
Grainne McAleese (33)
Group Controller & Principal Accounting Officer
Ms. McAleese was appointed group controller and principal accounting officer of Elan in 2011. Since joining Elan in 2004, Ms. McAleese has worked in a number of roles in the group finance area. Prior to joining Elan, she worked with PricewaterhouseCoopers in New York and KPMG in Dublin. Ms. McAleese is a Certified Public Accountant in the United States, a Fellow of Chartered Accountants Ireland and a graduate of Dublin City University.
Mary Sheahan (40)
Head of Human Resources, IT, Facilities and Portfolio Assessment Management
During 2012, Ms. Sheahan was appointed head of human resources, information technology, facilities and portfolio assessment management. As part of this role Ms. Sheahan also serves as a director on the board of Janssen Alzheimer Immunotherapy. Since joining Elan in 1997, Ms. Sheahan has held a number of commercial, R&D and corporate finance roles in Ireland and the United States. Most recently she was vice president — finance, tax and treasury from 2007 to 2011. Prior to joining Elan, Ms. Sheahan worked in KPMG in Dublin. Ms. Sheahan holds a Commerce degree and a Masters in Accounting from University College Dublin and is a Fellow of Chartered Accountants Ireland.
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| B. | Compensation |
Executive Officers and Directors’ Remuneration
For the year ended December 31, 2012, all directors and executive officers as a group that served during the year (17 persons) received total compensation of $6.3 million (2011: $7.8 million).
We reimburse directors and officers for their actual business-related expenses. For the year ended December 31, 2012, an aggregate of $0.4 million (2011: $0.5 million) was accrued to provide pension, retirement and other similar benefits for directors and officers. We also maintain certain health and medical benefit plans for our employees in which our executive director and officers participate.
Directors’ Remuneration
| Year Ended December, 31 | ||||||||||||||||||||||||
| 2012 Salary/ | 2012 | 2012 | 2012 Benefit |
2012 | 2011 | |||||||||||||||||||
| Fees | Bonus | Pension | in kind | Total | Total | |||||||||||||||||||
| Executive Directors: |
||||||||||||||||||||||||
| G. Kelly Martin |
$ | 1,000,000 | $ | 1,125,000 | $ | 7,500 | $ | 45,289 | $ | 2,177,789 | $ | 2,885,110 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
| Total |
1,000,000 | 1,125,000 | 7,500 | 45,289 | 2,177,789 | 2,885,110 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
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| Non-Executive Directors: |
||||||||||||||||||||||||
| Robert A. Ingram |
150,000 | — | — | — | 150,000 | 240,793 | ||||||||||||||||||
| Lars Ekman(1)(4) |
70,109 | — | — | — | 70,109 | 78,503 | ||||||||||||||||||
| Hans Peter Hasler(2) |
50,625 | — | — | — | 50,625 | 19,626 | ||||||||||||||||||
| Gary Kennedy |
92,500 | — | — | — | 92,500 | 92,500 | ||||||||||||||||||
| Patrick Kennedy |
75,000 | — | — | — | 75,000 | 75,000 | ||||||||||||||||||
| Giles Kerr |
82,500 | — | — | — | 82,500 | 82,500 | ||||||||||||||||||
| Kieran McGowan(1) |
95,000 | — | — | — | 95,000 | 95,000 | ||||||||||||||||||
| Kyran McLaughlin(1) |
67,500 | — | — | — | 67,500 | 84,292 | ||||||||||||||||||
| Donal O’Connor |
82,500 | — | — | — | 82,500 | 82,500 | ||||||||||||||||||
| Richard Pilnik |
55,000 | — | — | — | 55,000 | 60,604 | ||||||||||||||||||
| Dennis J. Selkoe(3) |
141,000 | — | — | — | 141,000 | 130,000 | ||||||||||||||||||
| Andrew von Eschenbach(1) |
67,500 | — | — | — | 67,500 | 19,626 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
| Total |
$ | 2,029,234 | $ | 1,125,000 | $ | 7,500 | $ | 45,289 | $ | 3,207,023 | $ | 3,946,054 | ||||||||||||
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|
|
|
|
|
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|
|
|
|
|
|
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| (1) | In 2012, all or some portion of director’s fee was received in the form of RSUs which vest on the earlier of 10 years or 90 days after retirement from the board. For further information refer to the Report of the LDCC on page 73. |
| (2) | Retired as director on October 1, 2012. |
| (3) | Includes fees of $61,000 in 2012 (2011:$50,000) under a consultancy agreement. See Item 7B. “Related Party Transactions” for additional information. |
| (4) | Retired as director on December 7, 2012. |
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| C. | Board Practices |
Policies
We are committed to the adoption and maintenance of the highest standards of corporate governance and compliance and have applied the provisions and principles of the U.K. Corporate Governance Code (the Code) as issued by the Financial Reporting Council (FRC) in June 2010 and adopted by the Irish Stock Exchange (ISE).
Our corporate governance guidelines (the Guidelines), which have been adopted by the board of directors cover the mission of the board, director responsibilities, board structure (including the roles of the chairman, CEO and the lead independent director, board composition, independent directors, definition of independence, board membership criteria, selection of new directors, time limits and mandatory retirement, board composition and evaluation), leadership development (including formal evaluation of the chairman and CEO, succession planning and director development), board committees, board meeting proceedings, board and independent director access to top management, independent advice and board interaction with institutional investors, research analysts and media.
Our policy is to conduct our business in compliance with all applicable laws, rules and regulations and therefore our employees are expected to perform to the highest standards of ethical conduct, consistent with legal and regulatory requirements. The Code of Conduct applies to directors, officers and employees and provides guidance on how to fulfill these requirements, how to seek advice and resolve questions about the appropriateness of conduct, and how to report possible violations of our legal obligations or ethical principles. All employees have a mandatory compliance objective, which accounts for 10% of their performance goals and objectives. This is designed to ensure that employees comply with our Code of Conduct and all policies and procedures that govern our daily business activities. Our Corporate Compliance Office manages our corporate compliance program, which establishes a framework for adherence to applicable laws, rules and regulations and ethical standards, as well as a mechanism for preventing and reporting any breach of same. An executive-level Corporate Compliance Steering Committee also provides oversight of our compliance activities. In addition to the general provisions contained in the code of conduct concerning conflicts of interest, the board adopted, in January 2011, a comprehensive Conflicts of Interests Policy for directors, which sets out wide-ranging procedures covering the identification and management of such conflicts.
In October 2011, we applied to the ISE for the re-classification of the listing of our Ordinary Shares on the Official List of the ISE from a primary listing to a secondary listing and this became effective on November 3, 2011. There was no change to our listing on the New York Stock Exchange (NYSE). Our Ordinary Shares continue to be traded on the main market for listed securities of the ISE but we are not subject to the same ongoing listing requirements as those which would apply to an Irish company with a primary listing on the ISE, including the requirement that certain transactions require the approval of shareholders. In addition, the provisions of the Irish Corporate Governance Annex (the “Irish Annex”) ceased to apply to the Company following the re-classification, however we have voluntarily incorporated the recommendations of the Irish Annex.
The Guidelines, the Committee Charters and Code of Conduct are available on our website, www.elan.com. Any amendments to, or waivers from the Code of Conduct, will also be posted to our website. To date there have been no such waivers.
Board Role and Responsibilities
The board is responsible to the shareholders for ensuring that the Company is appropriately managed and that it achieves its objectives.
The board regularly reviews its responsibilities and those of its committees and management. The board meets regularly throughout the year, and all of the directors have full and timely access to the information necessary to enable them to discharge their duties. At board and committee meetings, directors receive regular reports on the Company’s financial position, risk management, key business issues and other material issues. The board held eight scheduled meetings in 2012. In addition, five meetings were held to deal with specific matters as they arose.
The board has reserved certain matters to its exclusive jurisdiction, thereby maintaining control of the Company and its future direction. All directors are appointed by the board, as nominated by its NGC, and subsequently elected by shareholders. Procedures are in place whereby directors and committees, in furtherance of their duties, may take independent professional advice, if necessary, at our expense.
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Subject to certain limited exceptions, directors may not vote on matters in which they have a material interest. In the absence of an independent quorum, the directors may not vote compensation to themselves or any member of the board of directors. Directors are entitled to remuneration as shall, from time to time, be voted to them by ordinary resolution of the shareholders and to be paid such expenses as may be incurred by them in the course of the performance of their duties as directors. Directors who take on additional committee assignments or otherwise perform additional services for the Company, outside the scope of their ordinary duties as directors, shall be entitled to receive such additional remuneration as the board may determine. The directors may exercise all of the powers of the Company to borrow money. These powers may be amended by special resolution of the shareholders. There is no requirement for a director to hold shares.
The board has delegated authority over certain areas of our activities to a number of standing committees; further information on these committees is described below.
For additional information, see Items 7B. “Related Party Transactions” and Item 10B. “Memorandum and Articles of Association.”
Board Composition
The Company’s Memorandum and Articles of Association provide that the number of directors will be no less than three and no more than fifteen. Currently the board comprises the non-executive chairman, nine other non-executive directors and one executive director. The board considers that the current board size is appropriate and facilitates the work of the board and its committees whilst being small enough to maintain flexibility and to carry out its duties in a timely fashion.
The NGC keep the composition and skills profile of the board and its committees under review and recommends changes where appropriate. The board seeks to ensure that it has an appropriate mix of skills and experience in areas such as science, pharmaceuticals, finance, governance, management and general business amongst others. The board is satisfied that it has an appropriate balance of skills, experience, independence and knowledge of the Company to enable them to discharge their duties and responsibilities effectively. Further information on the work of the NGC is set out in its report on page 75.
Chairman
The roles of the chairman and CEO are separated. The chairman of the board is responsible for the leadership and management of the board. Our CEO is responsible for the operation of the business of the Company.
Lead Independent Director
The chair of the NGC serves as the lead independent director. The lead independent director coordinates, in a lead capacity, the other independent directors and provides ongoing and direct feedback from the directors to the chairman and the CEO. The specific responsibilities of the lead independent director are set out in our Guidelines. Mr. McGowan has served as the lead independent director since February 1, 2006.
Board Tenure
Under the terms of our Articles of Association, directors serve for a term of three years expiring at the Annual General Meeting (AGM) in the third year following their election at an AGM or as the case may be, their re-election at the AGM. Directors are not required to retire at any set age. Following our adoption of the requirements of the Code, all directors now stand for annual re-election at the AGM each year.
The directors may from time to time appoint any person to be a director either to fill a casual vacancy or as an additional director. A director so appointed shall hold office until the conclusion of the AGM immediately following their appointment, where they shall retire and may offer themselves for election.
A director retiring at an AGM shall retain office until the close or adjournment of the meeting. No person shall be eligible for election or re-election to the office of director at any General Meeting unless recommended by the directors or proposed by a duly qualified and authorized member within the prescribed time period.
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Induction and Development
Directors are provided with appropriate induction materials on appointment and meet with key executives, with a particular focus on ensuring non-executive directors are fully informed on issues of relevance to the Company and its operations. All directors are encouraged to update and refresh their skills and knowledge, for example, through attending courses on technical areas or external briefings for non-executive directors.
Independence of Directors
Under our Guidelines, at minimum, two-thirds of the board are required to be independent. In addition to the provisions of the Code, we adopted a definition of independence based on the rules of the NYSE, the exchange on which the majority of our shares are traded. For a director to be considered independent, the board must affirmatively determine that he or she has no material relationship with the Company. The specific criteria that affect independence are set out in the Guidelines and include former employment with the Company, former employment with the Company’s independent auditors, receipt of compensation other than directors’ fees, material business relationships and interlocking directorships.
In December 2012, the board considered the independence of each non-executive director, and determined Mr. Ingram, Mr. Gary Kennedy, Mr. Patrick Kennedy, Mr. Kerr, Mr. McGowan, Mr. McLaughlin, Mr. O’Connor, Mr. Pilnik, Dr. Selkoe and Dr. von Eschenbach, who represent in excess of two-thirds of the board, to be independent in character and judgment and that there are no relationships or circumstances that are likely to affect their independent judgment.
In reaching this conclusion, the board gave due consideration to participation by board members in our equity compensation plans. The board also considered the positions of Mr. McLaughlin, Mr. McGowan and Dr. Selkoe who have served as non-executive directors for in excess of nine years. Additionally, Mr. McLaughlin is deputy chairman of Davy, the Company’s broker and sponsor on the ISE and Dr. Selkoe has an ongoing consultancy agreement with the Company and particulars of both arrangements are set out in detail in Item 7B. “Related Party Transactions”. It is the board’s view that each of these non-executive directors discharges their duties in a thoroughly independent manner and constructively and appropriately challenges the executive director and the board. For these reasons, the board considers that they are independent.
Conflicts of Interest
In addition to the general provisions contained in the code of conduct concerning conflicts of interest which apply to all directors, executives and employees of the Company, the board, in January 2011, adopted a comprehensive Conflicts of Interests Policy for directors. This specific policy sets out comprehensive procedures covering the identification and management of such conflicts. The policy covers directors’ personal interests which may conflict with the interests of the Company, interfere with the director’s ability to perform his or her duties and responsibilities to the Company or give rise to a situation where a director may receive an improper personal benefit because of his position. The policy also extends to director’s immediate family.
Where a director considers that they may have a conflict of interest with respect to any matter they must immediately notify this to the chairman of the Audit Committee or, if the chairman of the Audit Committee is the interested director, to the lead independent director. The Audit Committee (excluding, if applicable, the interested director) considers each notification to determine whether a conflict of interest exists. Until the Audit Committee has completed its determination the director will not participate in any vote, deliberation or discussion on the potential conflict with any other director or employee of the Company and the director will not be furnished with any board materials relating, directly or indirectly, to the potential conflict.
Board Effectiveness
Our Guidelines require that the board will conduct a self-evaluation at least annually to determine whether it and its committees are functioning effectively. An evaluation of the performance of the board and board committees was conducted during the year by the lead independent director through meetings with each member of the board. The results were presented to the NGC and to the board. The board concluded that it and its committees had operated satisfactorily during the year. Under the Code, the board is required to have an externally facilitated evaluation at least every three years and it is planned to do so during 2013.
70
Board Committees
During the majority of 2012, the board had four standing committees to assist it in exercising its authority. In December 2012, the board approved the establishment of a new committee, the Transaction Committee (TC). The TC’s role is to assist the board with oversight of future transactions proposed by management, including both acquisitions and disposals. The TC held no formal meetings in 2012. In addition to the TC, the other committees of the board are the Audit Committee, the Leadership, Development & Compensation Committee (LDCC), the Nominating & Governance Committee (NGC) and the Science and Technology Committee (S&TC).
Each of the committees has a charter under which its authority is delegated to it by the board. The charter for each committee is available in the Corporate Governance section of our website, www.elan.com, or from the company secretary on request.
The reports of the Leadership, Development & Compensation Committee and the Nominating & Governance Committee are set out on pages 73 to 76, and the Report of the Audit Committee is set out on pages 101 to 103.
Board and Board Committee Meetings
The following table shows the number of scheduled board and board committee meetings held and attended by each director and secretary during the year. In addition to regular scheduled board and board committee meetings, a number of other meetings were held to deal with specific matters. If directors are unable to attend a board or board committee meeting they are provided with all the documentation and information relevant to that meeting and are encouraged to discuss the issues arising in that meeting with the chairman, CEO or company secretary.
| Board | Audit | LDCC | NGC | S&TC | ||||||||||||||||
| Directors |
||||||||||||||||||||
| Robert A. Ingram |
8/8 | 3/3 | ||||||||||||||||||
| Lars Ekman(1) |
7/8 | 2/2 | ||||||||||||||||||
| Hans Peter Hasler(2) |
7/7 | 3/3 | ||||||||||||||||||
| Gary Kennedy |
7/8 | 8/8 | 4/4 | |||||||||||||||||
| Patrick Kennedy |
8/8 | 4/4 | ||||||||||||||||||
| Giles Kerr |
8/8 | 8/8 | 3/3 | |||||||||||||||||
| G. Kelly Martin |
8/8 | |||||||||||||||||||
| Kieran McGowan |
8/8 | 3/3 | ||||||||||||||||||
| Kyran McLaughlin |
8/8 | 3/3 | ||||||||||||||||||
| Donal O’Connor |
8/8 | 8/8 | 4/4 | |||||||||||||||||
| Richard Pilnik |
7/8 | |||||||||||||||||||
| Dennis J. Selkoe |
8/8 | 3/3 | 2/2 | |||||||||||||||||
| Andrew von Eschenbach |
8/8 | 2/2 | ||||||||||||||||||
| Secretary |
||||||||||||||||||||
| William F. Daniel |
8/8 | 8/8 | 4/4 | 3/3 | 2/2 | |||||||||||||||
| (1) | Retired as a director on December 7, 2012 |
| (2) | Retired as a director on October 1, 2012 |
Company Secretary
All directors have access to the advice and services of the company secretary. The company secretary supports the chairman in ensuring the board functions effectively and fulfils its role. He is also secretary to the Audit Committee, the LDCC, the NGC, the S&TC and the TC. The company secretary ensures compliance with applicable rules and regulations. The appointment and removal of the company secretary is a matter for the board.
71
Relations with Shareholders
We communicate regularly with our shareholders throughout the year, specifically following the release of quarterly and annual results, and at the time of major developments. Our website, www.elan.com, is the primary method of communication for the majority of our shareholders. We publish our annual report and accounts, quarterly results, Form 20-F, notice of general meetings and other public announcements on our website. In addition, our AGMs, quarterly conference calls and presentations at healthcare investor conferences are webcast and are available on our website.
The directors consider it important to understand the views of shareholders and, in particular, any issues which concern them. The board periodically receives presentations on investor perceptions.
Our investor relations department, with offices in Ireland and the United States, provides a point of contact for shareholders and full contact details are set out on the investor relations section of our website. Shareholders can also submit an information request through the shareholder services section of our website.
The principal forum for discussion with shareholders is our AGM and shareholder participation is encouraged. Formal notification, together with an explanation of each proposed resolution, is sent to shareholders at least 21 calendar days in advance of the AGM. At the meeting, the CEO provides a summary of the period’s events after which the board and senior management are available to answer questions from shareholders. All directors normally attend the AGM and shareholders are invited to ask questions during the meeting and to meet with directors after the formal proceedings have ended.
In accordance with the Code and applicable regulations, the Company counts all proxy votes on each resolution that is voted on with a show of hands, the Company indicates the level of proxies lodged, the number of votes for and against each resolution and the number of votes withheld. This information is made available on our website following the AGM.
Going Concern
The directors, having made inquiries, including consideration of the factors discussed in Item 5B. “Liquidity and Capital Resources,” believe that the Company has adequate resources to continue in operational existence for at least the next 12 months and that it is appropriate to continue to adopt the going concern basis in preparing our Consolidated Financial Statements.
Internal Control
The board of directors has overall responsibility for our system of internal control and for monitoring its effectiveness. The system of internal control is designed to provide reasonable, but not absolute, assurance against material misstatement or loss. The key procedures that have been established to provide effective internal control include:
| • | A clear focus on business objectives is set by the board having considered the risk profile of the Company; |
| • | A formalized risk reporting system, with significant business risks addressed at each board meeting; |
| • | A clearly defined organizational structure under the day-to-day direction of our CEO. Defined lines of responsibility and delegation of authority have been established within which our activities can be planned, executed, controlled and monitored to achieve the strategic objectives that the board has adopted for the Company; |
| • | A comprehensive system for reporting financial results to the board, including a budgeting system with an annual budget approved by the board; |
| • | A system of management and financial reporting, treasury management and project appraisal — the system of reporting covers trading activities, operational issues, financial performance, working capital, cash flow and asset management; and |
| • | To support our system of internal control, we have separate Corporate Compliance and Internal Audit departments. Each of these departments reports periodically to the Audit Committee. The Internal Audit function includes responsibility for the Company’s compliance with Section 404 of the Sarbanes-Oxley Act of 2002. |
72
The directors reviewed our system of internal control and also examined the full range of risks affecting us and the appropriateness of the internal control structures to manage and monitor these risks. This process involved a confirmation that appropriate systems of internal control were in place throughout the financial year and up to the date of signing of the Consolidated Financial Statements. It also involved an assessment of the ongoing process for the identification, management and control of the individual risks and of the role of the various risk management functions and the extent to which areas of significant challenges facing us are understood and are being addressed. No material unaddressed issues emerged from this assessment.
Refer to Item 15. “Controls and Procedures,” for management’s annual report on internal control over financial reporting.
Compliance Statement
The directors confirm that the Company has complied throughout the year ended December 31, 2012 with the provisions of the Code. We follow a U.S. style compensation system for our senior management and our non-executive directors. As a result, we include the non-executive directors in our equity compensation plans. In accordance with the Code, we sought and received shareholder approval to make certain equity grants to our non-executive directors at our 2004 AGM.
Report of the Leadership Development & Compensation Committee
The LDCC held four scheduled meetings in 2012. Details of meeting attendance by LDCC members are included in the table on page 71. In addition, one meeting was held to deal with specific matters.
Committee Membership
| Name |
Status During 2012 | |
| Patrick Kennedy (Chairman) |
Member for the whole period | |
| Hans Peter Hasler |
Retired October 1, 2012 | |
| Gary Kennedy |
Member for the whole period | |
| Donal O’Connor |
Member for the whole period |
The LDCC is composed entirely of independent non-executive directors. Each member of the committee is nominated to serve for a three-year term subject to a maximum of two terms of continuous service.
Role and Focus
The LDCC reviews the Company’s compensation philosophy and policies with respect to executive compensation, fringe benefits and other compensation matters. The LDCC determines, amongst other things, the compensation, terms and conditions of employment of the CEO and any other executive directors. In addition, the LDCC reviews the recommendations of the CEO with respect to the remuneration and terms and conditions of employment of our senior management. The LDCC also exercises all the powers of the board of directors to issue Ordinary Shares on the exercise of share options and vesting of RSUs and to generally administer our equity award plans.
Remuneration Policy
Our policy on executive directors’ remuneration is to set remuneration levels that are appropriate for our senior executives having regard to their substantial responsibilities, their individual performance and the Company’s performance as a whole. The LDCC sets remuneration levels after reviewing remuneration packages of executives in comparable industries. The LDCC takes external advice from independent benefit consultants and considers Section D of the Code. The typical elements of the remuneration package for executive directors include basic salary and benefits, annual cash incentive bonus, pensions and participation in equity award plans. The LDCC grants equity awards to encourage identification with shareholders’ interests.
The LDCC engages Semler Brossy Consulting Group, LLC (SBCG) as independent compensation consultants to ensure that it receives objective advice in making recommendations to the board on compensation matters and to assist the LDCC in fulfilling its mission of actively overseeing the design and operation of our compensation program on behalf of the board of directors. The services provided by SBCG include, among other things: regular attendance at LDCC meetings; review of the LDCC’s charter and terms of reference; updates on trends in compensation, corporate governance, and regulatory/accounting developments; review and update of peer groups; evaluation of the market competitiveness of current compensation; updates on evolving practice in the area of severance; and input to discussions on CEO pay and CEO recommendations for senior executives. SBCG do not provide any other services to Elan.
73
Elements of Non-Executive Director Remuneration
Non-executive directors are compensated with fee payments and equity awards with additional payments where directors are members of board committees. Non-executive directors may elect to receive some or all of their fee payments in the form of RSUs, which will vest on the earlier of 90 days after retirement from the board or 10 years. In 2012, Dr. Ekman, Mr. McGowan and Mr. McLaughlin and Dr. von Eschenbach elected to receive fee payments in the form of RSUs. Non-executive directors are also reimbursed for reasonable travel expenses to and from board meetings.
Elements of Executive Director Remuneration
Basic Salary
The basic salary of the executive director is reviewed annually having regard to personal performance, Company performance and market practice.
Annual Cash Incentive Bonus
We operate a cash bonus plan in which all employees, including the executive director, are eligible to participate if and when we achieve our strategic and operating goals. Bonuses are not pensionable. The cash bonus plan operates on a calendar year basis. We measure our performance against a broad series of financial, operational and scientific objectives and measurements and set annual metrics relating to them. A bonus target, expressed as a percentage of basic salary, is set for all employees. Payment will be made based on a combination of individual, team and company performance.
Share-Based Compensation
It is our policy, in common with other companies operating in similar industries, to award share options and RSUs to management and employees, in line with the best interests of the Company. In 2006, shareholders approved the Elan Corporation, plc 2006 Long Term Incentive Plan (2006 LTIP) which was amended in 2008 when shareholders voted to increase the shares available to be granted under this plan, which was indicated would meet the Company’s equity plan requirements for three years. At the 2012 AGM shareholders approved the Elan Corporation, plc 2012 Long Term Incentive Plan (“the 2012 Plan”) which provides equity for the grant of up to 30 million ordinary shares. As with its predecessor, the purposes of the 2012 Plan is to further advance the interests of the Company and its shareholders by providing a means to attract, retain, and motivate employees, consultants and directors, to provide for competitive compensation opportunities, to encourage long term service, to recognize individual contributions and reward achievement of performance goals, and to promote the creation of long term value for shareholders by aligning the interests of such persons with those of shareholders. It is anticipated that the 2012 Plan would meet the Company’s equity plan requirement for at least three years. Equity awards are usually made annually if and when we achieve our strategic and operating goals. Equity awards may also be granted to some individuals on joining the Company or on the occurrence of other specific events. The equity awards under this plan generally vest between one and four years and do not contain any performance conditions other than service.
In addition, we have an EEPP in which our employees, including executive directors, are eligible to participate. This plan allows eligible employees to purchase shares at a discount of up to 15% of the lower of the fair market value at the beginning or last trading day of the offering period. The EEPP was originally approved by the shareholders at the 2004 AGM and allows all employees, who meet the eligibility criteria, the opportunity to purchase shares in the Company at a discount. At the 2012 AGM shareholder approved an increase of 1.5 million shares in the number of shares available to employees to purchase in accordance with the terms of the plan. It is anticipated that there will be sufficient shares in the EEPP to meet the Company’s needs for at least three years. Purchases are limited and subject to certain U.S. Internal Revenue Code (IRC) restrictions.
Activities Undertaken During the Year
During the year, the LDCC reviewed the non-executive directors’ remuneration policy, the CEO and executive management compensation plans and the appropriateness of the 2012 Elan performance goals and objectives for all staff. In addition, the LDCC continued to monitor general compensation trends and CEO compensation in particular.
74
The LDCC also reviewed and commented on the arrangements for succession planning, severance packages and general talent management at Elan during the period. The committee was further involved in responding to the developments in the talent pool following the Prothena demerger. The committee also engaged in a review of its charter and adopting several amendments during 2012.
On behalf of the LDCC,
Patrick Kennedy
Chairman of the LDCC and
Non-Executive Director
Report of the Nominating & Governance Committee
The NGC held three scheduled meetings in 2012. Details of meeting attendance by NGC members are included in the table on page 71. In addition there was one meeting held to deal with specific matters.
Committee Membership
| Name |
Status During 2012 | |
| Kieran McGowan (Chairman) |
Member for the whole period | |
| Robert Ingram |
Member for the whole period | |
| Kyran McLaughlin |
Member for the whole period | |
| Giles Kerr |
Member for the whole period | |
| Dennis Selkoe |
Member for the whole period |
Role and Focus
The Committee reviews, on an ongoing basis, the membership of the board of directors and of the board committees and the performance of the directors. It recommends new appointments to fill any vacancy that is anticipated or arises on the board of directors. In carrying out this function the Committee looks to the business experience of the candidate, particularly in relation to our established areas and those we are likely to venture into. The committee in evaluating potential candidate’s skills, knowledge and expertise also considers other factors such as, diversity, including nationality and gender, as well the need for an appropriately sized board and appropriately composed committees. The NGC reviews and recommends changes in the functions of the various committees of the board. The guidelines and the charter of the committee set out the manner in which the performance evaluation of the board, its committees and the directors is to be performed and by whom.
Activities Undertaken During the Year
On June 3, 2010, we communicated that, as part of our prudent executive succession management process, Mr. Martin and the board of directors had agreed that by May 1, 2012, Mr. Martin would have successfully completed his commitment and overall duty as CEO to the Company. During 2011 and 2012, the board held several in-depth discussions with a number of exceptionally high caliber candidates regarding the Elan CEO role.
However, as 2012 represented a significant transformational period for the Company, it was decided by the board that the Company and our shareholders would be best served by Mr. Martin continuing his leadership through this critical period and strategic inflection point. To that end, the board requested that Mr. Martin extend his tenure as the Elan’s CEO, on an open ended basis, creating continuity and an opportunity to achieve further clarity for Elan’s strategic and financial path forward. Mr. Martin agreed to this request.
Over the past number of years, the Committee and the board have continued to engage in the process of board refreshment and renewal with just over half of current directors being appointed during the previous six years. This process has continued, overseen by the Committee, in 2012. As outlined above, in considering director appointments, the Committee evaluates, among other things, the balance of skills, experience, independence and knowledge of the Company on the board and compares this to the needs of the
75
Company. This analysis allows the Committee to determine the role and capabilities required for a particular appointment. In assembling candidate lists, the Committee uses external search firms as well as considering candidates recommended by board members and/or shareholders.
During the year, the Committee reviewed the membership of the board’s committees but did not recommend any changes. The Committee also undertook a review of board and CEO performance, making recommendations and reporting its findings to the board and senior management.
On behalf of the NGC,
Kieran McGowan
Chairman of the NGC and
Non-Executive Director
| D. | Employees |
See Item 4B. “Business Overview — Employees” for information on our employees.
| E. | Share Ownership |
Directors’ and Secretary’s Ordinary Shares
The beneficial interests of those persons who were directors and the secretary of Elan Corporation, plc at December 31, 2012, including their spouses and children under 18 years of age, were as follows:
| Ordinary Shares; Par Value €0.05 Each |
||||||||
| 2012(1) | 2011(1) | |||||||
| Directors |
||||||||
| Robert A. Ingram |
— | — | ||||||
| Gary Kennedy |
7,650 | 7,650 | ||||||
| Patrick Kennedy |
10,500 | 10,500 | ||||||
| Giles Kerr |
— | — | ||||||
| G. Kelly Martin |
338,452 | 147,476 | ||||||
| Kieran McGowan |
6,200 | 6,200 | ||||||
| Kyran McLaughlin |
190,000 | 190,000 | ||||||
| Donal O’Connor |
18,900 | 18,900 | ||||||
| Richard Pilnik |
3,700 | — | ||||||
| Dennis J. Selkoe |
180,675 | 180,675 | ||||||
| Andrew von Eschenbach |
2,000 | — | ||||||
| Secretary |
||||||||
| William F. Daniel |
53,037 | 46,274 | ||||||
| (1) | No director or executive officer beneficially owned 1% or more of our outstanding shares of the Company as of December 31, 2012, or as of December 31, 2011. |
76
Directors’ and Secretary’s Options and Restricted Stock Units
| Date of Grant |
At December 31, 2011(2) |
Exercise Price $(1) |
Granted 2012 |
Exercised or Vested/ Cancelled 2012(1) |
Market Price at Exercise/ Vest Date |
At December 31, 2012(1)(2) |
Earliest Vest Date |
Option Expiry/ RSU Latest Vest Date |
||||||||||||||||||||||||||
| Robert A. Ingram |
February 9, 2011 | 29,412 | RSU | — | — | — | 30,365 | February 9, 2021 | (3) | |||||||||||||||||||||||||
| February 9, 2011 | 29,412 | RSU | — | — | — | 30,365 | February 9, 2021 | (3) | ||||||||||||||||||||||||||
| February 9, 2012 | — | RSU | 30,372 | — | — | 31,357 | February 9, 2022 | (3) | ||||||||||||||||||||||||||
| December 20, 2012 | — | RSU | 2,891 | — | — | — | ||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||||||||
| 58,824 | 33,263 | — | 92,087 | |||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||||||||
| Gary Kennedy |
May 26, 2005 | 15,000 | $ | 7.80 | — | — | — | 15,486 | May 26, 2007 | May 25, 2015 | ||||||||||||||||||||||||
| February 1, 2006 | 10,000 | $ | 15.40 | — | — | — | 10,324 | February 1, 2008 | January 31, 2016 | |||||||||||||||||||||||||
| February 21, 2007 | 10,000 | $ | 13.51 | — | — | — | 10,324 | February 21, 2009 | February 20, 2017 | |||||||||||||||||||||||||
| February 14, 2008 | 10,000 | RSU | — | — | — | 10,324 | February 14, 2018 | (3) | ||||||||||||||||||||||||||
| February 11, 2009 | 7,500 | RSU | — | — | — | 7,743 | February 11, 2019 | (3) | ||||||||||||||||||||||||||
| May 26, 2010 | 23,855 | RSU | — | — | — | 24,628 | May 26, 2020 | (3) | ||||||||||||||||||||||||||
| February 9, 2011 | 18,382 | RSU | — | — | — | 18,978 | February 9, 2021 | (3) | ||||||||||||||||||||||||||
| February 9, 2012 | — | RSU | 15,186 | — | — | 15,678 | February 9, 2022 | (3) | ||||||||||||||||||||||||||
| December 20, 2012 | — | Various | 3,562 | — | — | — | ||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||||||||
| 94,737 | 18,748 | — | 113,485 | |||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||||||||
| Patrick Kennedy |
May 22, 2008 | 20,000 | $ | 24.30 | — | — | — | 20,648 | May 22, 2009 | May 21, 2018 | ||||||||||||||||||||||||
| February 11, 2009 | 7,500 | RSU | — | — | — | 7,743 | February 11, 2019 | (3) | ||||||||||||||||||||||||||
| May 26, 2010 | 23,855 | RSU | — | — | — | 24,628 | May 26, 2020 | (3) | ||||||||||||||||||||||||||
| February 9, 2011 | 18,382 | RSU | — | — | — | 18,978 | February 9, 2021 | (3) | ||||||||||||||||||||||||||
| February 9, 2012 | RSU | 15,186 | — | — | 15,678 | February 9, 2022 | (3) | |||||||||||||||||||||||||||
| December 20, 2012 | — | Various | 2,752 | — | — | — | ||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||||||||
| 69,737 | 17,938 | — | 87,675 | |||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||||||||
| Giles Kerr |
September 13, 2007 | 20,000 | $ | 18.90 | — | — | — | 20,648 | September 13, 2008 | September 12, 2017 | ||||||||||||||||||||||||
| February 14, 2008 | 10,000 | RSU | — | — | — | 10,324 | February 14, 2018 | (3) | ||||||||||||||||||||||||||
| February 11, 2009 | 7,500 | RSU | — | — | — | 7,743 | February 11, 2019 | (3) | ||||||||||||||||||||||||||
| May 26, 2010 | 23,855 | RSU | — | — | — | 24,628 | May 26, 2020 | (3) | ||||||||||||||||||||||||||
| February 9, 2011 | 18,382 | RSU | — | — | — | 18,978 | February 9, 2021 | (3) | ||||||||||||||||||||||||||
| February 9, 2012 | RSU | 15,186 | — | — | 15,678 | February 9, 2022 | (3) | |||||||||||||||||||||||||||
| December 20, 2012 | — | Various | 3,076 | — | — | — | ||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||||||||
| 79,737 | 18,262 | — | 97,999 | |||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||||||||
77
78
| Date of Grant |
At December 31, 2011(2) |
Exercise Price $(1) |
Granted 2012 |
Exercised or Vested/ Cancelled 2012(1) |
Market Price at Exercise/ Vest Date |
At December 31, 2012(1)(2) |
Earliest Vest Date |
Option Expiry/ RSU Latest Vest Date |
||||||||||||||||||||||||||
| Kyran McLaughlin |
March 10, 2004 | 40,000 | $ | 15.76 | — | — | — | 41,297 | March10, 2005 | March 9, 2014 | ||||||||||||||||||||||||
| March 10, 2005 | 7,500 | $ | 7.24 | — | — | — | 7,743 | January 1, 2006 | March 9, 2015 | |||||||||||||||||||||||||
| February 1, 2006 | 10,000 | $ | 15.40 | — | — | — | 10,324 | February 1, 2008 | January 31, 2016 | |||||||||||||||||||||||||
| February 21, 2007 | 10,000 | $ | 13.51 | — | — | — | 10,324 | February 21, 2009 | February 20, 2017 | |||||||||||||||||||||||||
| February 14, 2008 | 10,000 | RSU | — | — | — | 10,324 | February 14, 2018 | (3) | ||||||||||||||||||||||||||
| February 11, 2009 | 11,250 | RSU | — | — | — | 11,615 | February 11, 2019 | (3) | ||||||||||||||||||||||||||
| May 26, 2010 | 28,626 | RSU | — | — | — | 29,554 | May 26, 2020 | (3) | ||||||||||||||||||||||||||
| February 9, 2011 | 18,382 | RSU | — | — | — | 18,978 | February 9, 2021 | (3) | ||||||||||||||||||||||||||
| April 21, 2011 | 4,224 | RSU | — | — | — | 4,361 | April 21, 2021 | (4) | ||||||||||||||||||||||||||
| July 28, 2011 | 1,487 | RSU | — | — | — | 1,535 | July 28, 2021 | (4) | ||||||||||||||||||||||||||
| October 28, 2011 | 1,390 | RSU | — | — | — | 1,435 | October 28, 2021 | (4) | ||||||||||||||||||||||||||
| February 9, 2012 | — | RSU | 15,186 | — | — | 15,678 | February 9, 2022 | (3) | ||||||||||||||||||||||||||
| February 9, 2012 | — | RSU | 1,281 | — | — | 1,323 | February 9, 2022 | (4) | ||||||||||||||||||||||||||
| April 27, 2012 | — | RSU | 1,214 | — | — | 1,253 | April 27, 2022 | (4) | ||||||||||||||||||||||||||
| July 26, 2012 | — | RSU | 1,410 | — | — | 1,456 | July 26, 2022 | (4) | ||||||||||||||||||||||||||
| October 25, 2012 | — | RSU | 1,550 | — | — | 1,600 | October 25, 2022 | (4) | ||||||||||||||||||||||||||
| December 20, 2012 | — | Various | 5,300 | — | — | — | ||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||||||||
| 142,859 | 25,941 | — | 168,800 | |||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||||||||
| Donal O’Connor |
May 22, 2008 | 20,000 | 24.30 | — | — | — | 20,648 | May 22, 2009 | May 21, 2018 | |||||||||||||||||||||||||
| February 11, 2009 | 7,500 | RSU | — | — | — | 7,743 | February 11, 2019 | (3) | ||||||||||||||||||||||||||
| May 26, 2010 | 23,855 | RSU | — | — | — | 24,628 | May 26, 2020 | (3) | ||||||||||||||||||||||||||
| February 9, 2011 | 18,382 | RSU | — | — | — | 18,978 | February 9, 2021 | (3) | ||||||||||||||||||||||||||
| February 9, 2012 | — | RSU | 15,186 | — | — | 15,678 | February 9, 2022 | (3) | ||||||||||||||||||||||||||
| December 20, 2012 | — | Various | 2,752 | — | — | — | ||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||||||||
| 69,737 | 17,938 | — | 87,675 | |||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||||||||
| Richard Pilnik |
May 26, 2010 | 23,855 | RSU | — | — | — | 24,628 | May 26, 2020 | (3) | |||||||||||||||||||||||||
| February 9, 2011 | 18,382 | RSU | — | — | — | 18,978 | February 9, 2021 | (3) | ||||||||||||||||||||||||||
| February 9, 2012 | — | RSU | 15,186 | — | — | 15,678 | February 9, 2022 | (3) | ||||||||||||||||||||||||||
| December 20, 2012 | — | Various | 1,861 | — | — | — | ||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||||||||
| 42,237 | 17,047 | — | 59,284 | |||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||||||||
| Dennis J. Selkoe |
May 26, 2010 | 23,855 | RSU | — | — | — | 24,628 | May 26, 2020 | (3) | |||||||||||||||||||||||||
| February 9, 2011 | 18,382 | RSU | — | — | — | 18,978 | February 9, 2021 | (3) | ||||||||||||||||||||||||||
| February 9, 2012 | RSU | 15,186 | — | — | 15,678 | February 9, 2022 | (3) | |||||||||||||||||||||||||||
| December 20, 2012 | — | Various | 1,861 | — | — | — | ||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||||||||
| 42,237 | 17,047 | — | 59,284 | |||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||||||||
| Andrew Von Eschenbach |
February 9, 2012 | — | RSU | 15,186 | — | — | 15,678 | February 9, 2022 | (3) | |||||||||||||||||||||||||
| April 27, 2012 | — | RSU | 607 | — | — | 627 | April 27, 2022 | (4) | ||||||||||||||||||||||||||
| July 26, 2012 | — | RSU | 705 | — | — | 728 | July 26, 2022 | (4) | ||||||||||||||||||||||||||
| October 25, 2012 | — | RSU | 775 | — | — | 800 | October 25, 2022 | (4) | ||||||||||||||||||||||||||
| December 20, 2012 | — | Various | 560 | — | — | — | ||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||||||||
| — | 17,833 | — | 17,833 | |||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||||||||
79
| (1) | Elan stock options and RSUs outstanding amounts at close of business on December 20, 2012 were subject to an adjustment in connection with the separation and distribution of the Prothena Business. In line with the terms of our employee equity plans (2006 LTIP, 1996 LTIP and 1999 Stock Option Plan) the total number of RSUs outstanding on that day was increased by 3.24165%, the number of options outstanding was also increased and the corresponding exercise prices decreased to reflect the changes in the Company’s share price across the transaction date. Refer to Note 30 for additional information on the adjustments made in connection with the demerger of the Prothena Business. |
| (2) | The amounts shown represent the number of Ordinary Shares callable by options or Ordinary Shares issuable upon the vesting of RSUs. |
| (3) | Will vest, after 90 days if after having served for a minimum of three years the non-executive director retires or is removed from the board of directors for any reason other than cause, or on the tenth anniversary of the grant date. |
| (4) | Will vest, after 90 days if the non-executive director concerned retires or is removed from the board of directors for any reason other than cause, or on the tenth anniversary of the grant date. |
During the year ended December 31, 2012, the closing market price ranged from $15.02 to $9.76 per ADS. The closing market price at February 4, 2013 on the NYSE, of our ADSs was $10.47.
80
The following changes in directors’ and secretary’s interests occurred between December 31, 2012, and February 8, 2013:
| Grant Date |
Exercise Price |
No. of Options |
No. of RSUs |
|||||||||||
| Directors |
||||||||||||||
| Robert A. lngram |
February 7, 2013 | $ | — | — | 40,650 | |||||||||
| Gary Kennedy |
February 7, 2013 | $ | — | — | 20,325 | |||||||||
| Patrick Kennedy |
February 7, 2013 | $ | — | — | 20,325 | |||||||||
| Giles Kerr |
February 7, 2013 | $ | — | — | 20,325 | |||||||||
| G. Kelly Martin |
February 7, 2013 | $ | 9.84 | 1,000,000 | 125,000 | |||||||||
| Kieran McGowan |
February 7, 2013 | $ | — | — | 22,738 | (1) | ||||||||
| Kyran McLaughlin |
February 7, 2013 | $ | — | — | 22,039 | (2) | ||||||||
| Donal O’Connor |
February 7, 2013 | $ | — | — | 20,325 | |||||||||
| Richard Pilnik |
February 7, 2013 | $ | — | — | 20,325 | |||||||||
| Dennis J. Selkoe |
February 7, 2013 | $ | — | — | 20,325 | |||||||||
| Andrew von Eschenbach |
February 7, 2013 | $ | — | — | 21,182 | (3) | ||||||||
| Secretary |
||||||||||||||
| William F. Daniel |
February 7, 2013 | $ | 9.84 | 130,222 | 45,656 | |||||||||
| (1) | Includes 2,413 RSUs granted in fulfillment of directors fees for September to December 2012 |
| (2) | Includes 1,714 RSUs granted in fulfillment of directors fees for September to December 2012 |
| (3) | Includes 857 RSUs granted in fulfillment of directors fees for September to December 2012 |
| Date |
RSUs Vested |
Options Exercised |
ADRs Sold |
|||||||||||
| Directors |
||||||||||||||
| G. Kelly Martin |
February 7, 2013 | 16,725 | — | — | ||||||||||
Directors’ Pension Arrangements
Pensions for executive directors are calculated on basic salary only (no incentive or benefit elements are included). Currently there is only one Executive Director, the CEO, Mr. Martin. Mr. Martin participates in a defined contribution plan (401(k) plan) for U.S. based employees.
Non-executive directors do not receive pensions.
For additional information on pension benefits for our employees, refer to Note 28 to the Consolidated Financial Statements.
81
| Item 7. | Major Shareholders and Related Party Transactions. |
| A. | Major Shareholders |
The following table sets forth certain information regarding the ownership of Ordinary Shares or ADSs of which we are aware at February 4, 2013 by major shareholders and all of our directors and officers as a group (either directly or by virtue of ownership of our ADSs):
| Name of Owner or Identity of Group |
No. of Shares | Date of Disclosure(1) | Percent of Issued Share Capital(2) |
|||||||||
| Janssen Pharmaceuticals |
107,396,285 | (3) | September, 2009 | 18.0 | % | |||||||
| Fidelity Management and Research Company LLC |
77,695,797 | November, 2012 | 13.1 | % | ||||||||
| Invesco Limited |
53,068,490 | November, 2012 | 8.9 | % | ||||||||
| Wellington Management Company, LLP |
35,969,219 | November, 2012 | (4) | 6.0 | % | |||||||
| Blackrock, Inc. |
23,735,433 | September, 2011 | 4.0 | % | ||||||||
| T. Rowe Price Associates, Inc. |
18,473,407 | November, 2012 | (4) | 3.1 | % | |||||||
| All directors and officers as a group (17 persons) |
5,845,383 | (5) | February 4, 2013 | 1.0 | % | |||||||
| (1) | Since the date of disclosure, the interest of any person listed above in our Ordinary Shares may have increased or decreased. No requirement to notify us of any change would have arisen unless the holding moved up or down through a whole number percentage level. |
| (2) | Based on 595.3 million Ordinary Shares outstanding on February 4, 2013. |
| (3) | These shares were issued as part of the Johnson & Johnson Transaction. Refer to page 42 for additional information. |
| (4) | Sourced from SEC filings. |
| (5) | Includes 5.0 million Ordinary Shares issuable upon exercise of currently exercisable options held by directors and officers as a group as of February 4, 2013. |
Except for these interests, we have not been notified at February 4, 2013 of any interest of 3% or more of our issued share capital. None of Janssen Pharmaceuticals, Fidelity Management and Research Company LLC, Invesco Limited, Wellington Management Company LLC, Blackrock, Inc. nor T. Rowe Price Associates, Inc. have voting rights different from other shareholders.
We, to our knowledge, are not directly or indirectly owned or controlled by another entity or by any government. We do not know of any arrangements, the operation of which might result in a change of control of the Company.
A total of 595,297,619 Ordinary Shares of Elan were issued and outstanding at February 4, 2013, of which 3,788 Ordinary Shares were held by holders of record in the United States, excluding shares held in the form of ADRs. 484,887,846 Ordinary Shares were represented by our ADSs, evidenced by ADRs, issued by Citibank, N.A., as depositary, pursuant to a deposit agreement. At February 4, 2013, the number of holders of record of Ordinary Shares was 7,082, which includes 11 holders of record in the United States, and the number of registered holders of ADRs was 2,839. Because certain of these Ordinary Shares and ADRs were held by brokers or other nominees, the number of holders of record or registered holders in the United States is not representative of the number of beneficial holders or of the residence of beneficial holders.
82
| B. | Related Party Transactions |
There were no significant transactions with related parties during the year ended December 31, 2012, other than as outlined in Note 35 to the Consolidated Financial Statements.
Transactions with Directors
Except as set out below, there are no service contracts in existence between any of the directors and Elan:
Non-Executive Directors’ Terms of Appointment
| Period |
Three-year term which can be extended by mutual consent, contingent on satisfactory performance and re-election at the Annual General Meeting (AGM). | |||||
| Termination |
By the director or the Company at each party’s discretion without compensation. | |||||
| Fees | ||||||
| Board Membership Fees |
||||||
| Chairman’s Fee |
$ | 150,000 | (1) | |||
| Director’s Fee |
$ | 55,000 | (2) | |||
| Additional Board/Committee Fees |
||||||
| Lead Independent Director’s Fee |
$ | 20,000 | ||||
| Audit Committee Chairman’s Fee |
$ | 25,000 | (3) | |||
| Audit Committee Member’s Fee |
$ | 15,000 | ||||
| Other Committee Chairman’s Fee |
$ | 20,000 | (3) | |||
| Other Committee Member’s Fee |
$ | 12,500 | ||||
| Equity |
Non-executive directors are entitled to be considered for an annual equity award, based on the recommendation of the LDCC and supported by the advice of the LDCC’s compensation consultants. Such equity awards are normally granted in February of each year and are currently made in the form of RSUs. The awards to be made in February 2013 will have the following grant date fair values: | |||||
| Chairman |
$ | 400,000 | (1) | |||
| Other non-executive directors |
$ | 200,000 | (2) | |||
| Expenses |
Reimbursement of travel and other expenses reasonably incurred in the performance of their duties. | |||||
| Time commitment |
Five scheduled in-person board meetings, the AGM and relevant committee meetings depending upon board/committee requirements and general corporate activity. | |||||
| Non-executive board members are also expected to be available for a number of unscheduled board and committee meetings, where applicable, as well as to devote appropriate preparation time ahead of each meeting. | ||||||
| Confidentiality |
Information acquired by each director in carrying out their duties is deemed confidential and cannot be publicly released without prior clearance from the chairman of the board. | |||||
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| (1) | The chairman’s compensation for 2013 consists of a fee of $150,000 (2012: $150,000) and RSUs with a grant date fair value of $400,000 (2012:$400,000), amounting to a total value of $550,000 in 2013 (2012: $550,000). The chairman does not receive additional compensation for sitting on board committees. |
| (2) | Non-executive directors can elect to receive their fee payments in the form of RSUs, which will vest on the earlier of 90 days after their retirement from the Board or 10 years. In 2012, Dr. Ekman (retired December 7, 2012), Mr. McGowan, Mr. McLaughlin and Dr. von Eschenbach elected to receive all or part of their fee payments in the form of RSUs. |
| (3) | Inclusive of committee membership fee. |
Mr. Martin
On January 7, 2003, we and Elan Pharmaceuticals, Inc. (EPI) entered into an agreement with Mr. Martin such that Mr. Martin was appointed president and CEO effective February 3, 2003.
Effective December 7, 2005, we and EPI entered into a new employment agreement with Mr. Martin, under which Mr. Martin continued to serve as our CEO with an initial base annual salary of $798,000. Under the 2003 agreement, Mr. Martin was eligible to participate in our annual bonus plan, performance-based stock awards and merit award plans. Under the new agreement, Mr. Martin was granted an option to purchase 750,000 Ordinary Shares with an exercise price per share of $12.03, vesting in three equal annual instalments (the 2005 Options). Mr. Martin’s employment agreement was amended on December 19, 2008 to comply with the requirements of Section 409A of the IRC.
On June 2, 2010, Elan and Mr. Martin agreed to amend his 2005 employment contract from an open-ended agreement to a fixed term agreement. Under this 2010 agreement, Mr. Martin committed to remain in his current role as CEO and director of the Company through to May 1, 2012. It was agreed that upon the completion of this fixed term Mr. Martin would then serve the board as executive adviser through to January 31, 2013. Under this amendment, Mr. Martin’s base salary was increased from $800,000 to $1,000,000 per year effective June 1, 2010, and when Mr. Martin moved to the role of executive adviser, his base salary was to be reduced to $750,000 per year, he would not be eligible for a bonus and he would resign from the board. However, as 2012 represented a significant transformational period for the Company, it was decided by the board that the Company and our shareholders would be best served by Mr. Martin continuing his leadership through this critical period and strategic inflection point. To that end, the board requested that Mr. Martin extend his tenure as the Elan CEO creating continuity and an opportunity to achieve further clarity for Elan’s strategic and financial path forward. Mr. Martin agreed to this request and the extension.
Effective April 30, 2012, we, EPI and Mr. Martin amended and restated Mr. Martin’s employment agreement. Under the amended and restated agreement, Mr. Martin’s term as CEO was extended indefinitely while his base salary remained at $1,000,000 per year, the vesting of his equity awards that were granted in February 2012 was accelerated to October 2012, the vesting of any equity awards granted in 2013 would receive partial acceleration upon termination of Mr. Martin’s employment, and Mr. Martin was awarded an option to purchase 486,000 shares (subsequently adjusted to 501,754 shares on December 20, 2012, in connection with the separation and distribution of the Prothena Business. Refer to Note 30 for additional information on the December 20, 2012, equity adjustments), with an exercise price per share of $13.79 (subsequently adjusted to $13.36 on December 20, 2012), and an RSU grant covering 81,000 shares (subsequently adjusted to 83,626 shares on December 20, 2012). The equity awards granted in April 2012 vest over a two year period.
In general, the amended and restated agreement, continues until Mr. Martin resigns, is involuntarily terminated, is terminated for cause or dies, or is disabled. Subject to certain conditions, if Mr. Martin’s employment is involuntarily terminated (other than for cause, death or disability), Mr. Martin leaves for good reason or Mr. Martin resigns on or after April 2, 2013, we will pay Mr. Martin a lump sum equal to two (three, in the event of a change in control) times his salary and target bonus. Similarly, most options will be exercisable until the earlier of (i) two years from the date of termination or (ii) tenth anniversary of the date of grant, or in the event of a change in control, the earlier of (i) three years from the date of termination or (ii) the tenth anniversary of the date of grant of the stock option.
In the event of such an involuntary termination (other than as the result of a change in control), Mr. Martin will, for a period of two years (three years in the event of a change in control), or, if earlier, the date Mr. Martin obtains other employment, continue to participate in our health and medical plans and we shall pay Mr. Martin a lump sum of $50,000 to cover other costs and expenses.
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Mr. Martin will also be entitled to career transition assistance and the use of an office and the services of a full-time secretary for a reasonable period of time not to exceed two years (three years in the event of a change in control).
In addition, if it is determined that any payment or distribution to Mr. Martin would be subject to excise tax under Section 4999 of the IRC, or any interest or penalties are incurred by Mr. Martin with respect to such excise tax, then Mr. Martin shall be entitled to an additional payment in an amount such that after payment by Mr. Martin of all taxes on such additional payment, Mr. Martin retains an amount of such additional payment equal to such excise tax amount.
The agreement also obligates us to indemnify Mr. Martin if he is sued or threatened with suit as the result of serving as our officer or director. We will be obligated to pay Mr. Martin’s attorney’s fees if he has to bring an action to enforce any of his rights under the employment agreement.
Mr. Martin is eligible to participate in the retirement, medical, disability and life insurance plans applicable to senior executives in accordance with the terms of those plans. He may also receive financial planning and tax support and advice from the provider of his choice at a reasonable and customary annual cost.
Mr. McLaughlin
In 2012, 2011 and 2010, Davy, an Irish based stock broking, wealth management and financial advisory firm, of which Mr. McLaughlin is deputy chairman, provided advisory services to the company. The total invoiced value of these services in 2012 was $1.3 million (2011: $0.2 million, 2010: $0.3 million), of which $1.1 million related to services rendered in relation to the offering of the 6.25% Notes.
In November 2011, the Company engaged an adult son of Mr. McLaughlin as a consultant in relation to the Company’s investor relations programs for a fixed period. The amount invoiced for these services in 2012 was €70,800 (2011: €11,800). Mr. McLaughlin’s son was not an executive officer of Elan and did not have a key strategic role within Elan. The consultancy arrangement terminated on June 30, 2012.
Dr. Selkoe
In July 2009, EPI entered into a consultancy agreement with Dr. Selkoe under which Dr. Selkoe agreed to provide consultant services with respect to the treatment and/or prevention of neurodegenerative and autoimmune diseases. Under the agreement we paid Dr. Selkoe a fee of $12,500 per quarter. The agreement was effective for three years unless terminated by either party upon 30 days written notice and superseded all prior consulting agreements between Dr. Selkoe and Elan. In July 2012, EPI and Dr. Selkoe agreed an amendment to the 2009 agreement which extended the term of the agreement to July 1, 2015 and increased the fee payable to $18,000 per quarter. Under the consultancy agreements, Dr. Selkoe received $61,000 in 2012 (2011: $50,000; 2010: $50,000).
Dr. Selkoe serves as a Company-nominated director of Janssen AI, a subsidiary of Johnson & Johnson in which Elan holds a 49.9% equity interest. In December 2010, Dr Selkoe entered into a consulting agreement with Johnson & Johnson Pharmaceutical Research & Development LLC. This agreement was amended in November 2011 to extend it until December 31, 2012. During 2011, Dr. Selkoe received a fee of $1,600 in respect of services provided under this agreement. On February 2, 2012, this consulting agreement was terminated.
Arrangements with Former Directors
Dr. Ekman
Effective December 31, 2007, Dr. Lars Ekman resigned from his operational role as president of R&D and continued to serve as a member of the board of directors of Elan in a non-executive capacity. Dr. Ekman retired from the board on December 7, 2012 in contemplation of his appointment as chairman of Prothena Corporation plc.
As part of Dr. Ekman’s retirement from executive duties, we agreed to make payments if we achieve certain milestones in respect of our Alzheimer’s disease program. To date none of the required milestones have been triggered and no payments have been made.
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Mr. Schuler, Mr. Bryson and Crabtree Partners L.L.C.
On September 17, 2010, we entered into agreements with Mr. Schuler and Mr. Bryson whereby we agreed to pay to Mr. Schuler and Mr. Bryson the aggregate amount of $300,000 in settlement of all costs, fees and expenses incurred by them in respect of any and all matters relating to the Irish High Court litigation and the U.S. Securities and Exchange Commission (SEC) investigation of Mr. Schuler. Under the agreements, Mr. Schuler and Mr. Bryson agreed to resign from the board, and they subsequently resigned on October 29, 2010.
On June 8, 2009, we entered into an agreement with Mr. Schuler, Mr. Bryson and Crabtree Partners L.L.C. (an affiliate of Mr. Schuler and a shareholder of the Company) (collectively “the Crabtree Group”). Pursuant to this Agreement, we agreed to nominate Mr. Schuler and Mr. Bryson for election as directors of the Company at the 2009 AGM. Mr. Schuler and Mr. Bryson irrevocably agreed to resign as directors of the Company effective on the first date on which Mr. Schuler, Mr. Bryson and Crabtree Partners L.L.C. cease to beneficially own, in aggregate, at least 0.5% of the Company’s issued share capital. The Agreement also included a standstill provision providing that, until the later of December 31, 2009, amended to January 1, 2012, pursuant to the 2010 agreement, and the date that was three months after the date on which Mr. Schuler and Mr. Bryson cease to be directors of the Company, none of Mr. Schuler, Mr. Bryson, Crabtree Partners L.L.C. or any of their respective affiliates would, among other things, acquire any additional equity interest in the Company if, after giving effect to the acquisition, Mr. Schuler, Mr. Bryson, Crabtree Partners L.L.C. and their affiliates would own more than 3% of the Company’s issued share capital. Finally, we agreed to reimburse the Crabtree Group for $500,000 of documented out-of-pocket legal expenses incurred by their outside counsel in connection with the Agreement and the matters referenced in the Agreement.
Dr. Bloom
On July 17, 2009, EPI entered into a consultancy agreement with Dr. Bloom under which Dr. Bloom agreed to provide consultant services to Elan with respect to the treatment and/or prevention of neurodegenerative diseases and to act as an advisor to the science and technology committee (the “2009 Agreement”). Effective July 17, 2011, the 2009 Agreement was extended for a further year (“the Amended Agreement”) and under which we would pay Dr. Bloom a fee of $12,500 per quarter. Effective July 17, 2012, Dr. Bloom’s Amended Agreement was renewed for a further 12 month period. As with its predecessor, this agreement can be terminated by either party upon 30 days written notice. Under the consultancy agreements, Dr. Bloom received $50,000 in 2012 (2011: $44,674).
Mr. Hasler
Effective October 1, 2012, Elan Pharmaceuticals GmbH entered into an employment agreement with Mr. Hasler under which Mr. Hasler was appointed our chief operating officer with an initial base annual salary of 600,000 CHF. Mr. Hasler is eligible to participate in our annual bonus plan. Mr. Hasler was awarded an option to purchase 375,000 shares vesting in three annual instalments. Mr. Hasler resigned from the board in October 2012 in connection with his appointment as chief operating officer.
External Appointments and Retention of Fees
The Company recognizes that executive directors (and senior management) may be invited to take up non-executive directorships, public sector and/or not-for-profit appointments, and that these can broaden the experience and knowledge of the individual, from which the Company can benefit. Executive directors (and senior management) may, subject to approval, accept external appointments as non-executive directors of other companies and retain any related fees paid to them.
| C. | Interest of Experts and Counsel |
Not applicable.
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| Item 8. | Financial Information. |
| A. | Consolidated Statements and Other Financial Information |
See Item 18 “Consolidated Financial Statements.”
| B. | Significant Changes |
On February 6, 2013, we announced that we have entered into an asset purchase agreement with Biogen Idec to transfer to Biogen Idec all Tysabri IP and other assets related to Tysabri. As a result of this transaction, Biogen Idec will have sole authority over and exclusive worldwide rights to the development, manufacturing and commercialization of Tysabri. In accordance with the terms of the transaction, upon consummation of the transaction, the existing collaboration arrangements with Biogen Idec will be terminated and Biogen Idec will pay to us an upfront payment of $3.25 billion and continuing royalties on Tysabri in-market sales. We will earn a royalty of 12% of global net sales of Tysabri during the first 12 months following the closing of the transaction. Thereafter, we will earn a royalty of 18% of global net sales up to $2.0 billion each year, and a 25% royalty on annual global net sales above $2.0 billion. The transaction is expected to close in the first half of 2013, subject to the satisfaction of certain conditions, including customary regulatory approvals.
| Item 9. | The Offer and Listing. |
| A. | Offer and Listing Details |
See Item 9C “Markets.”
| B. | Plan of Distribution |
Not applicable.
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| C. | Markets |
Our Ordinary Shares are traded on the ISE and our ADSs, each representing one Ordinary Share and evidenced by ADRs, are traded on the NYSE under the symbol “ELN.” The ADR depositary is Citibank, N.A.
The following table sets forth the high and low sales prices of the Ordinary Shares during the periods indicated, based upon mid-market prices at close of business on the ISE and the high and low sales prices of the ADSs, as reported in published financial sources:
| €0.05 Ordinary Shares |
American Depositary Shares(1) |
|||||||||||||||
| High | Low | High | Low | |||||||||||||
| (€) | ($) | |||||||||||||||
| Year ended December 31 |
||||||||||||||||
| 2008 |
23.47 | 4.02 | 36.82 | 5.36 | ||||||||||||
| 2009 |
6.37 | 3.42 | 8.70 | 5.00 | ||||||||||||
| 2010 |
6.04 | 3.48 | 8.18 | 4.33 | ||||||||||||
| 2011 |
10.72 | 4.33 | 13.85 | 5.83 | ||||||||||||
| 2012 |
11.80 | 7.57 | 15.02 | 9.76 | ||||||||||||
| Calendar Year |
||||||||||||||||
| 2011 |
||||||||||||||||
| Quarter 1 |
5.38 | 4.33 | 7.11 | 5.83 | ||||||||||||
| Quarter 2 |
8.00 | 4.87 | 11.37 | 6.80 | ||||||||||||
| Quarter 3 |
8.80 | 6.19 | 12.48 | 9.20 | ||||||||||||
| Quarter 4 |
10.72 | 7.33 | 13.85 | 9.87 | ||||||||||||
| 2012 |
||||||||||||||||
| Quarter 1 |
11.21 | 9.15 | 15.02 | 12.09 | ||||||||||||
| Quarter 2 |
11.78 | 9.84 | 14.96 | 12.77 | ||||||||||||
| Quarter 3 |
11.80 | 8.30 | 14.46 | 10.70 | ||||||||||||
| Quarter 4 |
8.75 | 7.57 | 11.30 | 9.76 | ||||||||||||
| Month Ended |
||||||||||||||||
| August 2012 |
9.67 | 8.43 | 11.94 | 11.07 | ||||||||||||
| September 2012 |
9.03 | 8.30 | 11.53 | 10.70 | ||||||||||||
| October 2012 |
8.75 | 8.21 | 11.30 | 10.75 | ||||||||||||
| November 2012 |
8.71 | 7.72 | 11.04 | 9.98 | ||||||||||||
| December 2012 |
8.05 | 7.57 | 10.54 | 9.76 | ||||||||||||
| January 2013 |
8.45 | 7.33 | 10.93 | 9.94 | ||||||||||||
| (1) | An ADS represents one Ordinary Share, par value €0.05. |
| D. | Selling Shareholders |
Not applicable.
| E. | Dilution |
Not applicable.
| F. | Expenses of the Issue |
Not applicable.
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| Item 10. | Additional Information. |
| A. | Share Capital |
Not applicable.
| B. | Memorandum and Articles of Association |
Our objects, which are detailed in our Memorandum of Association include, but are not limited to, manufacturing, buying, selling and distributing pharmaceutical products.
Directors
Subject to certain limited exceptions, directors may not vote on matters in which they have a material interest. In the absence of an independent quorum, the directors may not vote compensation to themselves or any member of the board of directors. Directors are entitled to remuneration as shall, from time to time, be voted to them by ordinary resolution of the shareholders and to be paid such expenses as may be incurred by them in the course of the performance of their duties as directors. Directors who take on additional committee assignments or otherwise perform additional services for the Company, outside the scope of their ordinary duties as directors, shall be entitled to receive such additional remuneration as the board may determine. The directors may exercise all of the powers of Elan to borrow money. These powers may be amended by special resolution of the shareholders. There is no requirement for a director to hold shares.
The names of the directors are shown in Item 6A. “Directors and Senior Management”. Mr. Hasler and Dr. Ekman resigned from the board on October 1, 2012 and December 7, 2012, respectively.
Under the terms of our Articles of Association, directors serve for a term of three years expiring at the AGM in the third year following their appointment at an AGM or as the case may be, their re-appointment at the AGM. Additionally, in line with the provisions of the UK Corporate Governance Code, all directors now stand subject to annual re-election by shareholders. Directors are not required to retire at any set age and may, if recommended by the board of directors, offer themselves for re-election at any AGM where they are deemed to have retired by rotation.
Meetings
The AGM shall be held in such place and at such time as shall be determined by the board, but no more than 15 months shall pass between the dates of consecutive AGMs. Directors may call Extraordinary General Meetings at any time. The members, in accordance with our Articles of Association and Irish company law, may also requisition Extraordinary General Meetings. Notice of an AGM (or any special resolution) must be given at least 21 clear days prior to the scheduled date and, in the case of any other general meeting, with not less than 14 clear days notice.
Rights, Preferences and Dividends Attaching to Shares
All unclaimed dividends may be invested or otherwise made use of by the directors for the benefit of Elan until claimed. All shareholders entitled to attend and vote at the AGM are likewise entitled to vote on the re-election of directors. We are permitted under our Memorandum and Articles of Association to issue redeemable shares on such terms and in such manner as the shareholders may determine by special resolution. The liability of the shareholders to further capital calls is limited to the amounts remaining unpaid on shares.
Liquidation Rights
In the event of the Company being wound up, the liquidator may, with the authority of a special resolution, divide among the holders of Ordinary Shares the whole or any part of the net assets of the Company (after the return of capital on the non-voting Executive Shares), and may set such value as is deemed fair upon each kind of property to be so divided and determine how such division will be carried out.
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Actions Necessary to Change the Rights of Shareholders
The rights attaching to the different classes of shares may be varied by special resolution passed at a class meeting of that class of shareholders. The additional issuance of further shares ranking pari passu with, or subordinate to, an existing class shall not, unless specified by the Articles or the conditions of issue of that class of shares, be deemed to be a variation of the special rights attaching to that class of shares.
Limitations on the Right to Own Shares
There are no limitations on the right to own shares in the Memorandum and Articles of Association. However, there are some restrictions on financial transfers between Ireland and other specified countries, more particularly described in the section on “Exchange Controls and Other Limitations Affecting Security Holders.”
Other Provisions of the Memorandum and Articles of Association
There are no provisions in the Memorandum and Articles of Association:
| • | Delaying or prohibiting a change in control of Elan that operate only with respect to a merger, acquisition or corporate restructuring; |
| • | Discriminating against any existing or prospective holder of shares as a result of such shareholder owning a substantial number of shares; or |
| • | Governing changes in capital, where such provisions are more stringent than those required by law. |
We incorporate by reference all other information concerning our Memorandum and Articles of Association from the section entitled “Description of Ordinary Shares” in the Registration Statement on Form 8-A/A3 (SEC File No. 001-13896) we filed with the SEC on December 6, 2004 and our Memorandum and Articles of Association filed with the SEC as Exhibit 4.1 to our Registration Statement on Form S-8 (Registration No. 333-181973) filed with the Commission on June 7, 2012.
| C. | Material Contracts |
The indenture governing the 6.25% Senior Fixed Rates Notes due October 15, 2019 contains covenants that restrict or prohibit our ability to engage in or enter into a variety of transactions. These restrictions and prohibitions could have a material and adverse effect on us. During 2012, as of December 31, 2012, and as of the date of filing of this Form 20-F, we were not in violation of any of our debt covenants. For additional information with respect to the restrictive covenants contained in our indenture, refer to Note 24 to the Consolidated Financial Statements.
Development and Marketing Collaboration Agreement with Biogen Idec
In August 2000, we entered into a development and marketing Collaboration Agreement with Biogen Idec, successor to Biogen, Inc., to collaborate in the development and commercialization of Tysabri for MS and Crohn’s disease, with Biogen Idec acting as the lead party for MS and Elan acting as the lead party for Crohn’s disease.
In November 2004, Tysabri received regulatory approval in the United States for the treatment of relapsing forms of MS. In February 2005, Elan and Biogen Idec voluntarily suspended the commercialization and dosing in clinical trials of Tysabri. This decision was based on reports of serious adverse events involving cases of PML, a rare and potentially fatal, demyelinating disease of the central nervous system.
In June 2006, the FDA approved the reintroduction of Tysabri for the treatment of relapsing forms of MS. Approval for the marketing of Tysabri in the European Union was also received in June 2006 and has subsequently been received in a number of other countries. The distribution of Tysabri in both the United States and the European Union commenced in July 2006. Global in-market net sales of Tysabri in 2012 were $1,631.1 million (2011: $1,510.6 million; 2010: $1,230.0 million), consisting of $886.0 million (2011: $746.5 million; 2010: $593.2 million) in the U.S. market and $745.1 million (2011: $764.1 million; 2010: $636.8 million) in the ROW.
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In January 2008, the FDA approved the sBLA for Tysabri for the treatment of patients with Crohn’s disease, and Tysabri was launched in this indication at the end of the first quarter of 2008. In July 2008, we made an optional payment of $75.0 million to Biogen Idec in order to maintain our approximate 50% share of Tysabri for annual global in-market net sales of Tysabri that are in excess of $700.0 million. In addition, in December 2008, we exercised our option to pay a further $50.0 million milestone to Biogen Idec in order to maintain our percentage share of Tysabri at approximately 50% for annual global in-market net sales of Tysabri that are in excess of $1.1 billion. There are no further milestone payments required for us to retain our approximate 50% profit share.
On February 6, 2013, we announced that we have entered into an asset purchase agreement with Biogen Idec to transfer to Biogen Idec all Tysabri IP and other assets related to Tysabri. As a result of this transaction, Biogen Idec will have sole authority over and exclusive worldwide rights to the development, manufacturing and commercialization of Tysabri. In accordance with the terms of the transaction, upon consummation of the transaction, the existing collaboration arrangements with Biogen Idec will be terminated and Biogen Idec will pay to us an upfront payment of $3.25 billion and continuing royalties on Tysabri in-market sales. We will earn a royalty of 12% of global net sales of Tysabri during the first 12 months following the closing of the transaction. Thereafter, we will earn a royalty of 18% of global net sales up to $2.0 billion each year, and a 25% royalty on annual global net sales above $2.0 billion. The transaction is expected to close in the first half of 2013, subject to the satisfaction of certain conditions, including customary regulatory approvals.
Tysabri was developed in collaboration with Biogen Idec. Until the Tysabri Transaction closes, Tysabri continues to be marketed in collaboration with Biogen Idec and, subject to certain limitations imposed by the parties, we share with Biogen Idec most development and commercialization costs. Upon consummation of the Tysabri Transaction, Biogen Idec will be responsible for all development and commercialization costs. Biogen Idec is responsible for manufacturing the product. In the United States, we purchase Tysabri from Biogen Idec and are responsible for distribution. Consequently, we record as revenue the net sales of Tysabri in the U.S. market. We purchase product from Biogen Idec as required at a price, which includes the cost of manufacturing, plus Biogen Idec’s gross profit on Tysabri and this cost, together with royalties payable to other third parties, is included in cost of sales.
In the ROW markets, Biogen Idec is responsible for distribution and we record as revenue our share of the profit or loss on ROW sales of Tysabri, plus our directly incurred expenses on these sales. In 2012, we recorded ROW revenue of $316.6 million (2011: $317.6 million; 2010: $258.3 million).
If the Tysabri Transaction is not consummated, the Collaboration Agreement will expire in November 2019, but may be extended by mutual agreement of the parties. If the agreement is not extended, then each of Biogen Idec and Elan has the option to buy the other party’s rights to Tysabri upon expiration of the term. Each party has a similar option to buy the other party’s rights to Tysabri if the other party undergoes a change of control (as defined in the Collaboration Agreement); however in some circumstances this option will terminate if the Tysabri Transaction fails to complete. In addition, each of Biogen Idec and Elan can terminate the Collaboration Agreement for convenience or material breach by the other party, in which case, among other things, certain licenses, regulatory approvals and other rights related to the manufacture, sale and development of Tysabri are required to be transferred to the party that is not terminating for convenience or is not in material breach of the agreement.
For additional information relating to Tysabri, refer to Note 12.
Johnson & Johnson AIP Agreements
On September 17, 2009, Janssen AI, a newly formed subsidiary of Johnson & Johnson, completed the acquisition of substantially all of our assets and rights related to the AIP. In addition, Johnson & Johnson, through its affiliate Janssen Pharmaceutical, invested $885.0 million in exchange for newly issued American Depositary Receipts (ADRs) of Elan, representing 18.4% of our outstanding Ordinary Shares at the time.
Under the terms of the transaction, Johnson & Johnson provided an initial $500.0 million of funding to Janssen AI for the development and commercialization of the AIP and Elan has a 49.9% shareholding in Janssen AI. The AIP is a collaboration between Janssen AI and Pfizer, which control all operational aspects of the AIP, including bapineuzumab. Through its shareholding in Janssen AI, Elan has an approximate 25.0% economic interest in the AIP, together with certain royalty rights on any future commercialization of the AIP. Any required additional expenditures in respect of Janssen AI’s obligations under the AIP collaboration in excess of the initial $500.0 million funded by Johnson & Johnson will be required to be funded by Johnson & Johnson and Elan in proportion to their respective shareholdings in Janssen AI, up to a maximum additional funding commitment of $400.0 million in total. During
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2012, we provided $76.9 million of our proportionate funding commitment and in January 2013, we provided an additional $29.9 million of our funding commitment. Following the provision of this funding in January 2013, our remaining funding commitment to Janssen AI is $93.2 million. In the event that the AIP collaboration requires expenditures in excess of the additional $400.0 million pro rata commitment, the funding for such expenditures will be on terms determined by the board of directors of Janssen AI, with Johnson & Johnson and Elan each having a right of first refusal to provide such funding. If we fail to provide our share of the $400.0 million commitment or any additional funding that is required for the development of the AIP, and if Johnson & Johnson elects to fund such an amount, our interest in Janssen AI could, at the option of Johnson & Johnson, be commensurately reduced.
On August 6, 2012, Johnson & Johnson issued a press release announcing that Janssen AI and Pfizer had determined to discontinue the development of bapineuzumab intravenous in mild to moderate Alzheimer’s disease based on the co-primary clinical endpoints not being met in the Janssen AI-led Phase 3 clinical studies (Study 301 and 302). We subsequently recorded a non-cash impairment charge of $117.3 million on our equity method investment in Janssen AI, representing the full initial estimated value of our 49.9% share of the Janssen AI AIP assets.
Under the terms of the Johnson & Johnson Transaction, if we undergo a change of control, an affiliate of Johnson & Johnson will be entitled to purchase our 49.9% interest in Janssen AI at the then fair value.
Transition Therapeutics Collaboration Agreement
In September 2006, we entered into an exclusive, worldwide collaboration with Transition for the joint development and commercialization of a novel therapeutic agent for Alzheimer’s disease. The small molecule, ELND005, is a beta amyloid anti-aggregation agent that has been granted fast track designation by the FDA. In December 2007, the first patient was dosed in a Phase 2 clinical study. This 18-month, randomized, double-blind, placebo-controlled, dose-ranging study was designed to evaluate the safety and efficacy of ELND005 in approximately 340 patients with mild to moderate Alzheimer’s disease. In December 2009, we announced that patients would be withdrawn from the two highest dose groups due to safety concerns. In August 2010, Elan and Transition announced the top-line summary results of the Phase 2 clinical study and in September 2011, the Phase 2 clinical study data was published in the journal Neurology. The study’s cognitive and functional co-primary endpoints did not achieve statistical significance. The 250mg twice daily dose demonstrated a biological effect on amyloid-beta protein in the cerebrospinal fluid (CSF), in a subgroup of patients who provided CSF samples. This dose achieved targeted drug levels in the CSF and showed some effects on clinical endpoints in an exploratory analysis.
In December 2010, we modified our Collaboration Agreement with Transition and, in connection with this modification, Transition elected to exercise its opt-out right under the original agreement. Under this amendment, we paid Transition $9.0 million in 2010 and Transition received a further $11.0 million payment upon our commencement of an ELND005 Phase 2 clinical trial in 2012. Transition will no longer be eligible to receive a $25.0 million milestone that would have been due upon the commencement of a Phase 3 trial for ELND005 under the terms of the original agreement.
As a consequence of Transition’s decision to exercise its opt-out right, it no longer funds the development or commercialization of ELND005 and has relinquished its 30% ownership of ELND005 to us. Consistent with the terms of the original agreement, following its opt-out decision, Transition will be entitled to receive milestone payments of up to $93.0 million, along with tiered royalty payments ranging in percentage from a high single digit to the mid teens (subject to offsets) based on net sales of ELND005 should the drug receive the necessary regulatory approvals for commercialization. The term of the Collaboration Agreement runs until we are no longer developing or commercializing ELND005. We may terminate the Collaboration Agreement upon not less than 90 days notice to Transition and either party may terminate the Collaboration Agreement for material breach or because of insolvency of the other party.
In 2012, we initiated two Phase 2 clinical trials of ELND005. The first Phase 2 clinical trial is a safety and efficacy study of ELND005 as an adjunctive treatment of Bipolar Disease (Study BPD201) and the second Phase 2 trial studies ELND005 for the treatment of agitation/aggression in patients with moderate to severe Alzheimer’s disease (Study AG201).
See Item 4B. “Business Overview” for additional information regarding our collaboration activities and related clinical trials.
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| D. | Exchange Controls |
Irish exchange control regulations ceased to apply from and after December 31, 1992. Except as indicated below, there are no restrictions on non-residents of Ireland dealing in domestic securities, which includes shares or depositary receipts of Irish companies such as us. Except as indicated below, dividends and redemption proceeds also continue to be freely transferable to non-resident holders of such securities. The Financial Transfers Act, 1992 gives power to the Minister for Finance of Ireland to make provision for the restriction of financial transfers between Ireland and other countries and persons. Financial transfers are broadly defined and include all transfers that would be movements of capital or payments within the meaning of the treaties governing the member states of the European Union. The acquisition or disposal of ADSs or ADRs representing shares issued by an Irish incorporated company and associated payments falls within this definition. In addition, dividends or payments on redemption or purchase of shares and payments on a liquidation of an Irish incorporated company would fall within this definition. At present the Financial Transfers Act, 1992 prohibits financial transfers involving the late Slobodan Milosevic and associated persons, Burma (Myanmar), Belarus, certain persons indicted by the International Criminal Tribunal for the former Yugoslavia, the late Osama bin Laden, Al-Qaida, the Taliban of Afghanistan, Democratic Republic of Congo, Democratic People’s Republic of Korea (North Korea), Iran, Iraq, Côte d’Ivoire, Lebanon, Liberia, Zimbabwe, Sudan, Somalia, Republic of Guinea, Afghanistan, Egypt, Eritrea, Libya, Syria, Tunisia, certain known terrorists and terrorist groups, and countries that harbor certain terrorist groups, without the prior permission of the Central Bank of Ireland.
Any transfer of, or payment in respect of, an ADS involving the government of any country that is currently the subject of United Nations sanctions, any person or body controlled by any of the foregoing, or by any person acting on behalf of the foregoing, may be subject to restrictions pursuant to such sanctions as implemented into Irish law. We do not anticipate that orders under the Financial Transfers Act, 1992 or United Nations sanctions implemented into Irish law will have a material effect on our business.
| E. | Taxation |
The following is a general description of Irish taxation inclusive of certain Irish tax consequences to U.S. Holders (as defined below) of the purchase, ownership and disposition of ADSs or Ordinary Shares. As used herein, references to the Ordinary Shares include ADSs representing such Ordinary Shares, unless the tax treatment of the ADSs and Ordinary Shares has been specifically differentiated. This description is for general information purposes only and does not purport to be a comprehensive description of all the Irish tax considerations that may be relevant in a U.S. Holder’s decision to purchase, hold or dispose of our Ordinary Shares. It is based on the various Irish Taxation Acts, all as in effect on February 4, 2013, and all of which are subject to change (possibly on a retroactive basis). The Irish tax treatment of a U.S. Holder of Ordinary Shares may vary depending upon such holder’s particular situation, and holders or prospective purchasers of Ordinary Shares are advised to consult their own tax advisors as to the Irish or other tax consequences of the purchase, ownership and disposition of Ordinary Shares.
For the purposes of this tax description, a “U.S. Holder” is a holder of Ordinary Shares that is: (i) a citizen or resident of the United States; (ii) a corporation or partnership created or organized in or under the laws of the United States or of any political subdivision thereof; (iii) an estate, the income of which is subject to U.S. federal income tax regardless of its source; or (iv) a trust, if a U.S. court is able to exercise primary supervision over the administration of such trust and one or more U.S. persons have the authority to control all substantial decisions of such trust.
Taxation of Corporate Income
We are a public limited company incorporated and resident for tax purposes in Ireland. Under current Irish legislation, a company is regarded as resident for tax purposes in Ireland if it is centrally managed and controlled in Ireland, or, in certain circumstances, if it is incorporated in Ireland. Trading income of an Irish company is generally taxable at the Irish corporation tax rate of 12.5%. Non-trading income of an Irish company e.g. interest income, rental income or other passive income, is taxable at a rate of 25%.
Taxation of Capital Gains and Dividends
A person who is neither resident nor ordinarily resident in Ireland and who does not carry on a trade in Ireland through a branch or agency will not be subject to Irish capital gains tax on the disposal of Ordinary Shares.
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Unless exempted, all dividends paid will be subject to Irish withholding tax at the standard rate of income tax in force at the time the dividend is paid, currently 20%, and no additional Irish income tax liability or liability to the universal social charge in Ireland arises as the withholding tax deducted discharges such liability to Irish tax. An individual shareholder resident in a country with which Ireland has a double tax treaty, which includes the United States, or in a member state of the European Union, other than Ireland (together, a Relevant Territory), will be exempt from withholding tax, income tax and the universal social charge provided he or she makes the requisite declaration.
Corporate shareholders who: (i) are ultimately controlled by residents of a Relevant Territory; (ii) are resident in a Relevant Territory and are not controlled by Irish residents; (iii) have the principal class of their shares, or of a 75% parent, traded on a stock exchange in Ireland or in a Relevant Territory; or (iv) are wholly owned by two or more companies, each of whose principal class of shares is substantially and regularly traded on one or more recognized stock exchanges in Ireland or in a Relevant Territory or Territories, will be exempt from withholding tax on the production of the appropriate certificates and declarations.
Holders of our ADSs will be exempt from withholding tax and the universal social charge if they are beneficially entitled to the dividend and their address on the register of depositary shares maintained by the depositary is in the United States, provided that the depositary has been authorized by the Irish Revenue Commissioners as a qualifying intermediary and provided the appropriate declaration is made by the holders of the ADSs. Where such withholding is made, it will satisfy the liability to Irish tax and the universal social charge of the shareholder except in certain circumstances where an individual shareholder may have an additional liability. A charge to Irish social security taxes arise for individuals. However, under the Social Welfare Agreement between Ireland and the United States, an individual who is liable for U.S. social security contributions can normally claim exemption from these taxes and levies.
Irish Capital Acquisitions Tax
A gift or inheritance of Ordinary Shares will be and, in the case of our warrants or American Depositary Warrant Shares (ADWSs) representing such warrants, may be, within the charge to Irish capital acquisitions tax, notwithstanding that the person from whom the gift or inheritance is received is domiciled or resident outside Ireland. Capital acquisitions tax is charged at the rate of 33% (in respect of gifts or inheritances taken on or after December 6, 2012) above a tax-free threshold. This tax-free threshold is determined by the relationship between the donor and the successor or donee. It is also affected by the amount of the current benefit and previous benefits taken since December 5, 1991 from persons within the same capital acquisitions tax relationship category. Gifts and inheritances between spouses are not subject to capital acquisitions tax.
The Estate Tax Convention between Ireland and the United States generally provides for Irish capital acquisitions tax paid on inheritances in Ireland to be credited against tax payable in the United States and for tax paid in the United States to be credited against tax payable in Ireland, based on priority rules set forth in the Estate Tax Convention, in a case where warrants, ADWSs, ADSs or Ordinary Shares are subject to both Irish capital acquisitions tax with respect to inheritance and U.S. federal estate tax. The Estate Tax Convention does not apply to Irish capital acquisitions tax paid on gifts.
Irish Stamp Duty
Under current Irish law, no stamp duty, currently at the rate and on the amount referred to below, will be payable by U.S. Holders on the issue of ADSs, Ordinary Shares or ADWSs of Elan.
Under current Irish law, no stamp duty will be payable on the acquisition of ADWSs or ADSs by persons purchasing such ADWSs or ADSs, or on any subsequent transfer of an ADWS or ADS of Elan.
A transfer of Ordinary Shares, whether on sale, in contemplation of a sale or by way of gift will attract duty at the rate of 1% on the consideration given or, where the purchase price is inadequate or unascertainable, on the market value of the shares. Similarly, any such transfer of a warrant may attract duty at the rate of 1%. The person accountable for payment of stamp duty is the transferee or, in the case of a transfer by way of gift or for a consideration less than the market value, all parties to the transfer. Stamp duty is normally payable within 30 days after the date of execution of the transfer. Late or inadequate payment of stamp duty will result in a liability to pay interest penalties and fines.
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| F. | Dividends and Paying Agents |
Not applicable.
| G. | Statement by Experts |
Not applicable.
| H. | Documents on Display |
The Company is subject to the reporting requirements of the Securities Exchange Act of 1934, as amended (the Exchange Act). In accordance with these requirements, the Company files Annual Reports on Form 20-F with, and furnishes Reports of Foreign Issuer on Form 6-K to, the SEC. These materials, including our Annual Report on Form 20-F for the fiscal year ended December 31, 2012 and the exhibits thereto, may be inspected and copied at the SEC’s Public Reference Room at 100 F Street, NE, Washington D.C. 20549. Copies of the materials may be obtained from the SEC’s Public Reference Room at prescribed rates. The public may obtain information on the operation of the SEC’s Public Reference Room by calling the SEC in the United States at 1-800-SEC-0330. As a foreign private issuer, all documents that we filed or submitted after November 4, 2002 on the SEC’s EDGAR system are available for retrieval on the website maintained by the SEC at http://www.sec.gov. These filings and submissions are also available from commercial document retrieval services.
Copies of our Memorandum and Articles of Association may be obtained at no cost by writing or telephoning the Company at our principal executive offices. Our Memorandum and Articles of Association were filed with the SEC as Exhibit 4.1 to our Registration Statement on Form S-8(Registration No. 333-181973) filed with the SEC on June 7, 2012. You may also inspect or obtain a copy of our Memorandum and Articles of Association using the procedures prescribed above.
| I. | Subsidiary Information |
Not applicable.
| Item 11. | Quantitative and Qualitative Disclosures about Market Risk. |
Market risk is the risk of loss from adverse changes in market prices, interest rates and foreign exchange rates. Our future earnings and cash flows are dependent upon prevailing market rates. Accordingly, we manage our market risk by matching projected cash inflows from operating, investing and financing activities with projected cash outflows for debt service, capital expenditures and other cash requirements.
Inflation Risk
Inflation had no material impact on our operations during the year.
Exchange Rate Risk
We are a multinational business operating in a number of countries and the U.S. dollar is the primary currency in which we conduct business. The U.S. dollar is used for planning and budgetary purposes and is the functional currency for financial reporting. We do, however, have revenues, costs, assets and liabilities denominated in currencies other than U.S. dollars. Transactions in foreign currencies are recorded at the exchange rate prevailing at the date of the transaction. The resulting monetary assets and liabilities are translated into the appropriate functional currency at exchange rates prevailing at the balance sheet date and the resulting gains and losses are recognized in the income statement.
We actively manage our foreign exchange exposures to reduce the exchange rate volatility on our results of operations. The principal foreign currency risk to which we are exposed relates to movements in the exchange rate of the U.S. dollar against the euro. Our main exposure is the revenue received in euro arising from sales of Tysabri in the European Union and expenses denominated in euro from a Corporate office in Dublin. We closely monitor expected euro cash flows to identify exposures and, if considered appropriate, enter into forward foreign exchange contracts or other derivative instruments to reduce our foreign currency risk.
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During 2012, average exchange rates were $1.287 = €1.00. We entered into a number of forward foreign exchange contracts at various rates of exchange during 2012 that required us to sell euro for U.S. dollars. At December 31, 2012, we held a net forward foreign exchange derivative liability of $0.3 million relating to outstanding forward foreign exchange contracts that expire on various dates during the first half of 2013.
Interest Rate Risk on Debt
Our long-term debt at December 31, 2012 was at fixed rates, therefore we are not exposed to cash flow interest rate risk in relation to our debt.
As of December 31, 2012, the fair value of our debt was $628.1 million. For additional information on the fair values of debt instruments, refer to Note 31 to the Consolidated Financial Statements.
Interest Rate Risk on Investments
Our liquid funds are invested primarily in U.S. dollars, except for the working capital balances of subsidiaries operating outside of the United States. Interest rate changes affect the returns on our investment funds. Our exposure to interest rate risk on liquid funds is actively monitored and managed with an average duration of less than three months. By calculating an overall exposure to interest rate risk rather than a series of individual instrument cash flow exposures, we can more readily monitor and hedge these risks. Duration analysis recognizes the time value of money and, in particular, prevailing interest rates by discounting future cash flows.
The interest rate risk profile of our investments at December 31, 2012, was as follows (in millions):
| Fixed | Floating | No Interest | Total | |||||||||||||
| Cash and cash equivalents |
$ | — | $ | 431.3 | $ | — | $ | 431.3 | ||||||||
| Restricted cash and cash equivalents — current |
$ | — | $ | 2.6 | $ | — | $ | 2.6 | ||||||||
| Restricted cash and cash equivalents — non-current |
$ | — | $ | 13.7 | $ | — | $ | 13.7 | ||||||||
| Investment securities — current |
$ | — | $ | — | $ | 167.9 | $ | 167.9 | ||||||||
| Investment securities — non-current |
$ | — | $ | — | $ | 8.6 | $ | 8.6 | ||||||||
Variable interest rates on cash and liquid resources are generally based on the appropriate Euro Interbank Offered Rate, London Interbank Offer Rate (LIBOR) or bank rates dependent on principal amounts on deposit.
Credit Risk
Our treasury function transacts business with counterparties that are considered to be low investment risks. Credit limits are established commensurate with the credit rating of the financial institution that business is being transacted with. The maximum exposure to credit risk is represented by the carrying amount of each financial asset, including derivative financial instruments, in the balance sheet.
For customers, we have a credit policy in place that involves credit evaluation and ongoing account monitoring.
Our principal sovereign risk relates to investments in U.S. Treasuries funds; however, we consider this risk to be remote.
At the balance sheet date, we have a significant concentration of credit risk given that our main customer and collaborator, AmerisourceBergen and Biogen Idec, respectively, account for all of our gross accounts receivable balance at December 31, 2012. However, we do not believe our credit risk in relation with these two customers is significant, as they each have an investment grade credit rating.
Equity Price and Commodity Risks
We do not have any material equity price or commodity risks.
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| Item 12. | Description of Securities Other than Equity Securities. |
| A. | Debt Securities |
Not applicable.
| B. | Warrants and Rights |
Not applicable.
| C. | Other Securities |
Not applicable.
| D. | American Depositary Shares. |
In February 2012, Citibank, N.A. replaced the Bank of New York Mellon as our ADS depository. According to our Depositary Agreement with the ADS depositary, Citibank, N.A., the depositary collects its fees for delivery and surrender of ADSs directly from investors depositing shares or surrendering ADSs for the purpose of withdrawal or from intermediaries acting for them. The depositary collects fees for making distributions to investors by deducting those fees from the amounts distributed or by selling a portion of distributable property to pay the fees. The depositary may collect its annual fee for depositary services by deductions from cash distributions or by directly billing investors or by charging the book-entry system accounts of participants acting for them. The depositary may generally refuse to provide fee-attracting services until its fees for those services are paid.
Depositing or withdrawing shares must pay the following costs:
| Service |
Rate |
By Whom Paid | ||
| (1) Issuance of ADSs upon deposit of Shares (excluding issuances as a result of distributions described in paragraph 4) below). | Up to U.S. $5.00 per 100 ADSs (or fraction thereof) issued. | Person depositing Shares or person receiving ADSs. | ||
| (2) Delivery of Deposited Securities against surrender of ADSs. | Up to U.S. $5.00 per 100 ADSs (or fraction thereof) surrendered. | Person surrendering ADSs for the purpose of withdrawal of Deposited Securities or person to whom Deposited Securities are delivered. | ||
| (3) Distribution of cash dividends or other cash distributions (i.e., sale of rights and other entitlements). | Up to U.S. $5.00 per 100 ADSs (or fraction thereof) held. | Person to whom distribution is made. | ||
| (4) Distribution of ADSs pursuant to (i) stock dividends or other free stock distributions, or (ii) exercise of rights to purchase additional ADSs. | Up to U.S. $5.00 per 100 ADSs (or fraction thereof) held. | Person to whom distribution is made. | ||
| (5) Distribution of securities other than ADSs or rights to purchase additional ADSs (i.e., spin-off shares). | Up to U.S. $5.00 per 100 ADSs (or fraction thereof) held. | Person to whom distribution is made. | ||
| (6) Depositary Services. | Up to U.S. $5.00 per 100 ADSs (or fraction thereof) held on the applicable record date(s) established by the Depositary. | Person holding ADSs on the applicable record date(s) established by the Depositary. | ||
In 2011, Bank of New York Mellon waived certain fees relating to products and services provided by the depositary which were repaid by the Company in February 2012. Citibank, N.A., was appointed as depositary on February 3, 2012. Citibank has agreed to reimburse certain Company expenses and make certain payments related to the Company’s ADS program and incurred by the
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Company in connection with the program. The Depositary reimbursed to the Company, or paid amounts on the Company’s behalf to third parties, or waived its fees and expenses, of $0.4 million for the year ended December 31, 2012.
Subject to certain conditions, should the Company remove the Depositary the Company may be required to repay to the Depositary any amounts reimbursed to the Company during the 12 month period prior to such termination.
| Item 13. | Defaults, Dividend Arrearages and Delinquencies. |
None.
| Item 14. | Material Modifications to the Rights of Security Holders and Use of Proceeds. |
None.
| Item 15. | Controls and Procedures. |
Disclosure Controls and Procedures
We conducted an evaluation as of December 31, 2012 under the supervision and with the participation of management, including our CEO and chief financial officer (CFO), of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act). Based on the evaluation conducted, our management, including our CEO and CFO, concluded that at December 31, 2012 such disclosure controls and procedures are effective to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and is accumulated and communicated to our management, including our CEO and CFO, as appropriate to allow timely decisions regarding required disclosure.
Management’s Annual Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal controls over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act). Our internal control system is designed to provide reasonable assurance regarding the preparation and fair presentation of financial statements for external purposes in accordance with U.S. GAAP. All internal control systems, no matter how well designed, have inherent limitations and can provide only reasonable assurance that the objectives of the internal control system are met. It must be noted that even those systems that management deems to be effective can only provide reasonable assurance with respect to the preparation and presentation of our financial statements. Also, projections of any evaluation of effectiveness to future periods are subject to risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies and procedures may deteriorate.
Under the supervision and with the participation of our management, including our CEO and CFO, we conducted an evaluation of the effectiveness of our internal controls over financial reporting, based on the criteria set forth in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on the evaluation conducted, our management, including our CEO and CFO, concluded that as of December 31, 2012, internal control over financial reporting was effective.
Our independent registered public accounting firm, KPMG, has issued an auditor’s report on the Company’s internal control over financial reporting as of December 31, 2012, which is included under Item 15 “Controls and Procedures” in this Annual Report on Form 20-F.
Changes in Internal Control over Financial Reporting
Changes that have materially affected, or are reasonably likely to material affect, our internal control over financial reporting during the period covered by the annual report, need to be identified and reported as required by paragraph (d) of Rule 13a-15.
During the year ended December 31, 2012, there were no changes in our internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Shareholders
Elan Corporation, plc:
We have audited Elan Corporation, plc’s internal control over financial reporting as of December 31, 2012, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Elan Corporation, plc’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Annual Report on Internal Control Over Financial Reporting, appearing under Item 15 in this Annual Report on Form 20-F. Our responsibility is to express an opinion on Elan Corporation, plc’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, Elan Corporation, plc maintained, in all material respects, effective internal control over financial reporting as of December 31, 2012, based on criteria established in Internal Control — Integrated Framework issued by COSO.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Elan Corporation, plc and subsidiaries, as of December 31, 2012 and 2011, and the related consolidated statements of operations, comprehensive income, changes in shareholders’ equity and cash flows for each of the years in the three-year period ended December 31, 2012, and the related financial statement schedule, and our report dated February 12, 2013 expressed an unqualified opinion on those consolidated financial statements and the related financial statement schedule.
/s/ KPMG
Dublin, Ireland
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| Item 16. | Reserved. |
| Item 16A. | Audit Committee Financial Expert. |
The board of directors of Elan has determined that Mr. Gary Kennedy, Mr. Kerr and Mr. O’Connor qualify as Audit Committee financial experts and as independent directors within the meaning of the NYSE listing standards.
| Item 16B. | Code of Ethics. |
Our board of directors adopted a code of conduct that applies to our directors, officers and employees. The Code of Conduct is regularly reviewed by the board and was revised and updated in October 2012. The Code of Conduct ensures that our directors, officers and employees are familiar with our basic corporate philosophies and policies. The Code of Conduct provides guidance on the ethical and legal standards that constitute appropriate employee behavior and explains the process for reporting potential violations of compliance. We are committed to conducting business with the highest standards of ethical conduct and integrity. Our passion to succeed is guided by our compliance program that ensures we follow the rules established in Elan’s internal policies and are reflected in our Code of Conduct, and that we comply with all applicable laws and regulations in the countries where we do business.
All employees have a mandatory compliance objective, which accounts for 10% of their performance goals and objectives. This is designed to ensure that employees comply with our Code of Conduct and all policies and procedures that govern our daily business activities. In addition to the general provisions contained in the Code of Conduct concerning conflicts of interest, the board adopted, in January 2011, a comprehensive Conflicts of Interests Policy for directors, which sets out wide-ranging procedures covering the identification and management of such conflicts.
There have been no material modifications to, or waivers from, the provisions of the Code of Conduct. The Code of Conduct is available on the corporate governance section of our website at the following address: www.elan.com.
| Item 16C. | Principal Accountant Fees and Services. |
Our principal accountants are KPMG. The table below summarizes the fees for professional services rendered by KPMG for the audit of our Consolidated Financial Statements and fees billed for other services rendered by KPMG (in millions):
| 2012 | 2011 | |||||||
| Auditors’ remuneration: |
||||||||
| Audit fees(1) |
$ | 2.2 | $ | 2.0 | ||||
| Audit-related fees(2) |
— | — | ||||||
|
|
|
|
|
|||||
| Total audit and audit-related fees |
$ | 2.2 | $ | 2.0 | ||||
| Tax fees(3) |
1.7 | 1.2 | ||||||
| All other fees |
— | — | ||||||
|
|
|
|
|
|||||
| Total auditors’ remuneration |
$ | 3.9 | $ | 3.2 | ||||
|
|
|
|
|
|||||
| (1) | Audit services include audit of our Consolidated Financial Statements, as well as work that generally only the independent auditor can reasonably be expected to provide, including comfort letters, statutory audits, and discussions surrounding the proper application of financial accounting or reporting standards. |
| (2) | Audit-related services are for assurance and related services that are traditionally performed by the independent auditor, including due diligence related to mergers, acquisitions and disposals, employee benefit plan audits, and special procedures required to meet certain regulatory requirements. |
| (3) | Tax fees consist of fees for professional services for tax compliance, tax advice and tax planning. This category includes fees related to the preparation and review of tax returns. |
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Report of the Audit Committee
The Audit Committee held eight scheduled meetings in 2012. Details of meeting attendance by Audit Committee members are included in the table on page 71. In addition three further meetings were held to deal with specific matters.
Committee Membership
| Name |
Status During 2012 | |
| Gary Kennedy (Chairman) |
Member for the whole period | |
| Giles Kerr |
Member for the whole period | |
| Donal O’Connor |
Member for the whole period |
The current members of the Audit Committee are all non-executive directors of the Company. The board considers each member to be independent under the Guidelines, the Code and the criteria of the NYSE corporate governance listing standards concerning the composition of Audit Committee.
The board is satisfied that at least one member of the Audit Committee has recent and relevant financial experience. The board has determined that Mr. Kennedy, Mr. Kerr and Mr. O’Connor are Audit Committee financial experts for the purposes of the Sarbanes-Oxley Act of 2002.
Role and Focus
The Audit Committee helps the board in its general oversight of the Company’s accounting and financial reporting practices, internal controls and audit functions, and is directly responsible for the appointment, compensation and oversight of the work of our independent auditors.
The core responsibilities of the Audit Committee include reviewing and reporting to the board on:
| • | Matters relating to the periodic financial reporting prepared by the Company; |
| • | The independent auditors’ qualifications and independence; |
| • | The performance of the internal auditor and the corporate compliance functions; |
| • | Compliance with legal and regulatory requirements including the operation of the Company’s Securities Trading Policy and Code of Conduct; |
| • | The Company’s overall framework for internal control over financial reporting and other internal controls and processes; and |
| • | The Company’s overall framework for risk management. |
The Audit Committee oversees the maintenance and review of the Company’s Code of Conduct. It has established procedures for the receipt and handling of complaints concerning accounting or audit matters.
The Audit Committee appoints and agrees on the compensation for the independent external auditors subject, in each case, to the approval of the Company’s shareholders at general meeting. It maintains policies and procedures for the pre-approval of all audit services and permitted non-audit services undertaken by the independent external auditor. The principal purpose of these policies and procedures is to ensure that the independence of the independent external auditor is not impaired. The policies and procedures cover three categories of work: audit services, audit-related services and non-audit services. The pre-approval procedures permit certain audit, audit-related and non-audit services to be performed by the independent external auditor during the year subject to fee limits agreed with the Audit Committee in advance. Authority to approve, between Audit Committee meetings, work in excess of the pre-agreed fee limits is delegated to members of the Audit Committee if required. Regular reports to the full Audit Committee are also provided for and, in practice, are a standing agenda item at Audit Committee meetings.
Following the entering into of a Corporate Integrity Agreement between the Company and the Office of Inspector General of the U.S. Department of Health and Human Services, the Audit Committee, on behalf of the board of directors, is responsible for the
101
review and oversight of matters related to compliance with federal healthcare program requirements, FDA requirements and the obligations of the Corporate Integrity Agreement.
Activities Undertaken During the Year
The Audit Committee held a number of private meetings without management present with the Company’s general counsel, chief compliance officer and head of internal audit and with the engagement partner from the Company’s independent external auditors. The purpose of these meetings was to facilitate free and open discussions between the Audit Committee members and those individuals separate from the main sessions of the Audit Committee, which were attended by the CFO, the group controller and the Company’s general counsel.
At each regularly scheduled board meeting, the chairman of the Audit Committee reported to the board on the principal matters covered at the preceding Audit Committee meetings. The minutes of all Audit Committee meetings were also circulated to all board members. During 2012, the Audit Committee considered and reviewed various aspects of the Company and its business including, but not limited to the matters referred to below.
| • | The Company’s financial reports and financial guidance were reviewed and various accounting matters and policies were considered. |
| • | Reports were received from the independent external auditors concerning their audit strategy, the planning and the results of their audit of the financial statements of the Company and from management, the internal audit function and chief compliance office on the effectiveness of the Company’s system of internal controls and, in particular, its internal control over financial reporting. |
| • | The Audit Committee reviewed the operations of the Company’s Code of Conduct, the employee helpline and email system. No material issues were reported through this route during the year. No waivers to the Code of Conduct were made in 2012. |
| • | The implementation of the measures required under the terms of the Corporate Integrity Agreement between the Company and the Inspector General of the U.S. Department of Health and Human Services. |
| • | Reviewed and approved, or recommended for approval to the board of directors, various aspects of the Prothena Demerger completed in December, 2012. |
| • | Reviewed proposals for the restructuring of the Company’s debts. |
| • | Reviewed correspondences between the Company and the SEC. |
| • | The Audit Committee reviewed the further implementation of the comprehensive enterprise-wide risk management process in the Company, including the role of the Turnbull Guidance for Directors, other corporate governance measures and the utilization of the insurance function in the control and management of Company wide risk. |
| • | Matters concerning the internal audit function, corporate compliance function and financial functions were reviewed. The Company’s continuing work to comply with the applicable provisions of the Sarbanes-Oxley Act of 2002 was monitored by the Audit Committee. |
| • | The Audit Committee charter, the Company’s Security Trading policy and the operation of the Audit Committee were reviewed during 2012. |
102
| • | The amount of audit and non-audit fees of the independent auditor was monitored throughout 2012. The Audit Committee was satisfied throughout the year that the objectivity and independence of the independent external auditor were not in any way impaired by either the nature of the non-audit work undertaken, the level of non-audit fees charged for such work or any other facts or circumstances. |
On behalf of the Audit Committee,
Gary Kennedy
Chairman of the Audit Committee and Non-Executive Director
| Item 16D. | Exemptions from the Listing Standards for Audit Committees. |
Not applicable.
| Item 16E. | Purchases of Equity Securities by the Issuer and Affiliated Purchasers. |
On September 24, 2012, 21,375 “B” Executive Shares of €0.05 each, and 1,000 non-voting Executive shares of €1.25 each in the capital of the Company were redeemed for cash at par and cancelled.
| Item 16F. | Change in Registrant’s Certifying Accountant. |
Not applicable.
| Item 16G. | Corporate Governance. |
We are required to disclose any significant ways in which our corporate governance practices differ from those required to be followed by domestic companies under NYSE listing standards.
Under Section 303A of the NYSE Listed Company Manual, we may, in general, follow Irish corporate governance practices in lieu of most of the NYSE corporate governance requirements. However, we are required to comply with NYSE Sections 303A.06, 303A.11, 303A.12(b) and 303A.12(c).
The following table contains a summary of our corporate governance practices and those required of domestic companies under NYSE listing standards. There are no significant differences between our corporate governance practices and those required of domestic companies under NYSE listing standards.
| NYSE Standards for U.S. Listed Companies under Listed Company Manual Section 303A |
Elan Corporate Governance Practices | |
| NYSE Section 303A.01 | ||
| A NYSE-listed company must have a majority of independent directors on its board of directors. | At minimum, two-thirds of the members of our board of directors are independent directors. | |
| NYSE Section 303A.02 | ||
| NYSE Section 303A.02 establishes general standards to evaluate directors’ independence. | We have adopted the definition of “independent director” under NYSE Section 303A.02, as described in Elan’s Corporate Governance Guidelines. | |
| NYSE Section 303A.03 | ||
| Non-management directors must meet at regularly scheduled executive meetings not attended by management. | Our Corporate Governance Guidelines provide that “the non-management directors of the board will meet without management at regularly scheduled executive sessions, and at such other times as they deem appropriate, under the chairmanship of the Lead Independent Director.” | |
103
| NYSE Standards for U.S. Listed Companies under Listed Company Manual Section 303A |
Elan Corporate Governance Practices | |
| NYSE Section 303A.04 | ||
| U.S. listed companies must have a nominating/corporate governance committee comprised entirely of independent directors. The committee must have a written charter establishing certain minimum responsibilities as set forth in NYSE Section 303A.04(b)(i) and providing for an annual evaluation of the committee’s performance. | Our board of directors maintains a Nominating & Governance Committee composed entirely of independent directors. The Nominating & Governance Committee has a written charter which, among other things, meets the requirements set forth in NYSE Section 303A.04(b)(i) and provides for an annual evaluation of the Nominating & Governance Committee’s performance. | |
| NYSE Section 303A.05 | ||
| Listed companies must have a compensation committee comprised entirely of independent directors. The committee must have a written charter establishing certain minimum responsibilities as set forth in NYSE Section 303A.05(b)(i) and providing for an annual evaluation of the committee’s performance. | Our board of directors maintains a LDCC composed entirely of independent directors. The LDCC has a written charter which, among other things, meets the requirements set forth in NYSE Section 303A.05(b)(i) (except that the LDCC’s report set forth in Elan’s annual report is based on Irish rules and regulations rather than the SEC proxy rules) and provides for an annual evaluation of the LDCC’s performance. | |
| NYSE Section 303A.06 | ||
| U.S. listed companies must have an audit committee that satisfies the requirements of Rule 10A-3 under the Securities Exchange Act of 1934 (the “Exchange Act”). | Our board of directors maintains an Audit Committee that meets the requirements of Rule 10A-3 of the Exchange Act. | |
| NYSE Section 303A.07 | ||
| The audit committee must consist of at least three members, all of whom must be independent under NYSE Section 303A.02 and be financially literate or must acquire such financial knowledge within a reasonable period. At least one member must have experience in accounting or financial administration. The committee must have a written charter establishing certain minimum responsibilities as set forth in NYSE Section 303A.07(b)(iii) and providing for an annual evaluation of the committee’s performance. | Our Audit Committee is comprised of no fewer than three directors, each of whom is an independent director under NYSE Section 303A.02 and each member of the Audit Committee meets all applicable financial literacy requirements.
The Audit Committee has a written charter that meets the requirements set forth in NYSE Section 303A.07(b)(iii) and provides for an annual evaluation of the Audit Committee’s performance. | |
| NYSE Section 303A.07(c) | ||
| Each U.S. listed company must have an internal audit function in order to provide to management and to the audit committee permanent assessments on the company’s risk management processes and internal control system. | To support our system of internal control, we have separate Corporate Compliance and Internal Audit departments. Each of these departments reports periodically to the Audit Committee. | |
| NYSE Section 303A.08 | ||
| Shareholders must be given the opportunity to vote on all equity-based compensation plans and material revisions thereto with certain exceptions. | Under Section 13.13 of the Listing Rules of the ISE, in general, all employee share plans that contemplate the issuance of new shares must, with certain limited exceptions, be approved by our shareholders prior to their adoption. | |
| NYSE Section 303A.09 | ||
| U.S. listed companies must adopt and disclose corporate governance guidelines, including several issues for which such reporting is mandatory, and include such information on the company’s website, which should also include the charters of the audit committee, the nominating committee, and the compensation committee. In addition, the board of directors must make a self-assessment of its performance at least once a year to determine if it or its committees function effectively and report thereon. | We have adopted Corporate Governance Guidelines that, together with the charters of the Audit Committee, the Nominating & Governance Committee and the LDCC, are published on our website.
Our Corporate Governance Guidelines require that our board of directors conducts a self-assessment at least annually to determine whether the board of directors and its committees function effectively. | |
104
| NYSE Standards for U.S. Listed Companies under Listed Company Manual Section 303A |
Elan Corporate Governance Practices | |
| NYSE Section 303A.10 | ||
| U.S. listed companies must adopt a Code of Business Conduct and Ethics for directors, officers and employees. | We have adopted a Code of Conduct for directors, officers and employees that is published on our website. | |
| NYSE Section 303A.12 | ||
| The CEO of each listed U.S. company must, on a yearly basis, certify to the NYSE that he or she knows of no violation by the company of NYSE rules relating to corporate governance. The CEO must notify the NYSE in writing whenever any executive officer of the company becomes aware of any non-fulfillment of any applicable provision under NYSE Section 303A. Finally, each U.S. listed company must submit an executed Written Affirmation annually to the NYSE and Interim Written Affirmation each time a change occurs in the board or any of the committees subject to NYSE Section 303A. | Our CEO will notify the NYSE in writing whenever any executive officer of Elan becomes aware of any non-fulfillment of any applicable provision under NYSE Section 303A. In addition, we will comply with the NYSE’s rules relating to the submission of annual and interim affirmations. | |
| Item 16H. | Mine Safety Disclosure |
Not applicable.
| Item 17. | Consolidated Financial Statements. |
Not applicable.
| Item 18. | Consolidated Financial Statements. |
Report of Independent Registered Public Accounting Firm
Consolidated Financial Statements of Elan Corporation, plc and subsidiaries
Notes to the Consolidated Financial Statements
105
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Shareholders
Elan Corporation, plc:
We have audited the accompanying consolidated balance sheets of Elan Corporation, plc and subsidiaries (the Company) as of December 31, 2012 and 2011, and the related consolidated statements of operations, comprehensive income, changes in shareholders’ equity and cash flows for each of the years in the three-year period ended December 31, 2012. In connection with our audits of the consolidated financial statements, we have also audited financial statement Schedule II. These consolidated financial statements and financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Elan Corporation, plc and subsidiaries as of December 31, 2012 and 2011, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2012, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Elan Corporation plc’s internal control over financial reporting as of December 31, 2012, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated February 12, 2013 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.
/s/ KPMG
Dublin, Ireland
106
Elan Corporation, plc
Consolidated Statements of Operations
For the Years Ended December 31, 2012, 2011 and 2010
| Notes | 2012 | 2011 | 2010 | |||||||||||||
| (In millions, except per share data) | ||||||||||||||||
| Continuing Operations |
||||||||||||||||
| Product revenue |
$ | 0.2 | $ | 4.0 | $ | 43.1 | ||||||||||
| Contract revenue |
— | — | 1.0 | |||||||||||||
|
|
|
|
|
|
|
|||||||||||
| Total revenue |
3 | 0.2 | 4.0 | 44.1 | ||||||||||||
| Cost of sales |
0.2 | 0.8 | 12.2 | |||||||||||||
|
|
|
|
|
|
|
|||||||||||
| Gross margin |
— | 3.2 | 31.9 | |||||||||||||
| Operating expenses: |
||||||||||||||||
| Selling, general and administrative expenses |
113.6 | 107.2 | 124.2 | |||||||||||||
| Research and development expenses |
95.0 | 106.8 | 128.5 | |||||||||||||
| Other net charges |
6 | 168.9 | 24.3 | 52.8 | ||||||||||||
| Settlement reserve charge |
7 | — | — | 206.3 | ||||||||||||
| Net gain on divestment of business |
5 | — | — | (1.0 | ) | |||||||||||
|
|
|
|
|
|
|
|||||||||||
| Total operating expenses |
377.5 | 238.3 | 510.8 | |||||||||||||
|
|
|
|
|
|
|
|||||||||||
| Operating loss |
(377.5 | ) | (235.1 | ) | (478.9 | ) | ||||||||||
|
|
|
|
|
|
|
|||||||||||
| Net interest and investment gains and losses: |
||||||||||||||||
| Net interest expense |
8 | 56.6 | 104.9 | 118.4 | ||||||||||||
| Net loss on equity method investments |
9 | 221.8 | 81.1 | 26.0 | ||||||||||||
| Net charge on debt retirement |
10 | 76.1 | 47.0 | 3.0 | ||||||||||||
| Net investment losses/(gains) |
17 | 1.2 | (2.6 | ) | (12.8 | ) | ||||||||||
|
|
|
|
|
|
|
|||||||||||
| Net interest and investment gains and losses |
355.7 | 230.4 | 134.6 | |||||||||||||
|
|
|
|
|
|
|
|||||||||||
| Net loss before income taxes |
(733.2 | ) | (465.5 | ) | (613.5 | ) | ||||||||||
| Benefit from income taxes |
11 | (360.5 | ) | (12.0 | ) | (52.2 | ) | |||||||||
|
|
|
|
|
|
|
|||||||||||
| Net loss from continuing operations |
$ | (372.7 | ) | $ | (453.5 | ) | $ | (561.3 | ) | |||||||
| Discontinued Operations |
||||||||||||||||
| Net income from discontinued operations (net of tax) |
12 | 235.3 | 1,014.0 | 236.6 | ||||||||||||
|
|
|
|
|
|
|
|||||||||||
| Net (loss)/income for the year |
$ | (137.4 | ) | $ | 560.5 | $ | (324.7 | ) | ||||||||
|
|
|
|
|
|
|
|||||||||||
| Basic and diluted net income/(loss) per Ordinary Share |
||||||||||||||||
| Continuing operations |
13 | $ | (0.63 | ) | $ | (0.77 | ) | $ | (0.96 | ) | ||||||
| Discontinued operations |
13 | 0.40 | 1.73 | 0.40 | ||||||||||||
|
|
|
|
|
|
|
|||||||||||
| Total attributable to the ordinary shareholders of the Parent Company |
13 | $ | (0.23 | ) | $ | 0.95 | $ | (0.56 | ) | |||||||
|
|
|
|
|
|
|
|||||||||||
| Basic and diluted weighted-average number of Ordinary Shares outstanding — continuing, discontinued and total operations |
592.4 | 587.6 | 584.9 | |||||||||||||
The accompanying notes are an integral part of these Consolidated Financial Statements.
107
Elan Corporation, plc
Statements of Consolidated Comprehensive Income
For the Years Ended December 31, 2012, 2011 and 2010
| Notes | 2012 | 2011 | 2010 | |||||||||||||
| (In millions) | ||||||||||||||||
| Net (loss)/income for the year |
$ | (137.4 | ) | $ | 560.5 | $ | (324.7 | ) | ||||||||
| Other comprehensive income/(loss): |
||||||||||||||||
| Unrealized gains/(losses) on investment securities |
17 | 17.5 | (1.5 | ) | (2.8 | ) | ||||||||||
| Unrealized loss on defined benefit pension plans |
29 | (24.7 | ) | (3.9 | ) | (4.1 | ) | |||||||||
| Currency translation adjustments |
— | 11.1 | (0.1 | ) | ||||||||||||
|
|
|
|
|
|
|
|||||||||||
| Other comprehensive (loss)/income |
(7.2 | ) | 5.7 | (7.0 | ) | |||||||||||
|
|
|
|
|
|
|
|||||||||||
| Total comprehensive (loss)/income |
$ | (144.6 | ) | $ | 566.2 | $ | (331.7 | ) | ||||||||
|
|
|
|
|
|
|
|||||||||||
| Total comprehensive (loss)/income arises from: |
||||||||||||||||
| Continuing operations |
$ | (379.9 | ) | $ | (447.8 | ) | $ | (568.3 | ) | |||||||
| Discontinued operations |
235.3 | 1,014.0 | 236.6 | |||||||||||||
|
|
|
|
|
|
|
|||||||||||
| Total comprehensive (loss)/income |
$ | (144.6 | ) | $ | 566.2 | $ | (331.7 | ) | ||||||||
|
|
|
|
|
|
|
|||||||||||
The accompanying notes are an integral part of these Consolidated Financial Statements.
108
Elan Corporation, plc
Consolidated Balance Sheets
As of December 31, 2012 and 2011
| Notes | 2012 | 2011 | ||||||||||
| (In millions, except shares and par values) |
||||||||||||
| ASSETS |
| |||||||||||
| Current Assets: |
||||||||||||
| Cash and cash equivalents |
$ | 431.3 | $ | 271.7 | ||||||||
| Restricted cash and cash equivalents — current |
14 | 2.6 | 2.6 | |||||||||
| Assets held for sale |
15 | 220.1 | — | |||||||||
| Accounts receivable |
16 | 193.5 | 167.7 | |||||||||
| Investment securities — current |
17 | 167.9 | 0.3 | |||||||||
| Inventory |
18 | — | 23.8 | |||||||||
| Deferred tax assets — current |
11 | 380.9 | 26.2 | |||||||||
| Prepaid and other current assets |
19 | 13.2 | 25.7 | |||||||||
|
|
|
|
|
|||||||||
| Total current assets |
1,409.5 | 518.0 | ||||||||||
| Property, plant and equipment, net |
20 | 12.7 | 83.2 | |||||||||
| Goodwill and other intangible assets, net |
21 | 99.0 | 309.9 | |||||||||
| Equity method investments |
9 | 14.0 | 675.8 | |||||||||
| Investment securities — non-current |
17 | 8.6 | 9.8 | |||||||||
| Restricted cash and cash equivalents — non-current |
14 | 13.7 | 13.7 | |||||||||
| Deferred tax assets — non-current |
11 | 64.6 | 118.9 | |||||||||
| Other assets |
22 | 18.1 | 24.5 | |||||||||
|
|
|
|
|
|||||||||
| Total assets |
$ | 1,640.2 | $ | 1,753.8 | ||||||||
|
|
|
|
|
|||||||||
| LIABILITIES AND SHAREHOLDERS’ EQUITY | ||||||||||||
| Current Liabilities: |
||||||||||||
| Accounts payable |
$ | 45.6 | $ | 46.4 | ||||||||
| Accrued and other current liabilities |
23 | 314.1 | 229.9 | |||||||||
|
|
|
|
|
|||||||||
| Total current liabilities |
359.7 | 276.3 | ||||||||||
| Long-term debt |
24 | 600.0 | 615.0 | |||||||||
| Other liabilities |
23 | 62.3 | 60.7 | |||||||||
|
|
|
|
|
|||||||||
| Total liabilities |
1,022.0 | 952.0 | ||||||||||
|
|
|
|
|
|||||||||
| Shareholders’ Equity: |
||||||||||||
| Ordinary Shares, €0.05 par value, 810,000,000 shares authorized 594,949,536 and 589,346,275 shares issued and outstanding at December 31, 2012 and 2011, respectively |
25 | 36.5 | 36.2 | |||||||||
| Executive Shares, €1.25 par value, 1,000 shares authorized, no shares issued or outstanding at December 31, 2012 and 1,000 shares issued and outstanding at December 31, 2011 |
25 | — | — | |||||||||
| “B” Executive Shares, €0.05 par value, 25,000 shares authorized, no shares issued or outstanding at December 31, 2012 and 21,375 shares issued and outstanding at December 31, 2011 |
25 | — | — | |||||||||
| Additional paid-in capital |
26 | 352.4 | 6,485.9 | |||||||||
| Accumulated surplus /(deficit) |
26 | 273.9 | (5,682.9 | ) | ||||||||
| Accumulated other comprehensive loss |
27 | (44.6 | ) | (37.4 | ) | |||||||
|
|
|
|
|
|||||||||
| Shareholders’ equity |
618.2 | 801.8 | ||||||||||
|
|
|
|
|
|||||||||
| Total liabilities and shareholders’ equity |
$ | 1,640.2 | $ | 1,753.8 | ||||||||
|
|
|
|
|
|||||||||
The accompanying notes are an integral part of these Consolidated Financial Statements.
109
Elan Corporation, plc
Consolidated Statements of Changes In Shareholders’ Equity
For the Years Ended December 31, 2012, 2011 and 2010
| Number of Shares |
Share Capital |
Additional Paid-in Capital (APIC) |
Accumulated Surplus/ (Deficit) |
Accumulated Other Comprehensive Loss |
Total Shareholders’ Equity |
|||||||||||||||||||
| (In millions) | ||||||||||||||||||||||||
| Balance at December 31, 2009 |
583.9 | $ | 35.8 | $ | 6,413.2 | $ | (5,918.7 | ) | $ | (36.1 | ) | $ | 494.2 | |||||||||||
| Total comprehensive loss |
— | — | — | (324.7 | ) | (7.0 | ) | (331.7 | ) | |||||||||||||||
| Net tax shortfalls related to equity awards |
— | — | (1.2 | ) | — | — | (1.2 | ) | ||||||||||||||||
| Stock issued, net of issuance costs |
1.3 | 0.1 | 1.7 | — | — | 1.8 | ||||||||||||||||||
| Share-based compensation |
— | — | 31.2 | — | — | 31.2 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
| Balance at December 31, 2010 |
585.2 | 35.9 | 6,444.9 | (6,243.4 | ) | (43.1 | ) | 194.3 | ||||||||||||||||
| Total comprehensive income |
— | — | — | 560.5 | 5.7 | 566.2 | ||||||||||||||||||
| Stock issued, net of issuance costs |
4.1 | 0.3 | 6.0 | — | — | 6.3 | ||||||||||||||||||
| Share-based compensation |
— | — | 35.0 | — | — | 35.0 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
| Balance at December 31, 2011 |
589.3 | 36.2 | 6,485.9 | (5,682.9 | ) | (37.4 | ) | 801.8 | ||||||||||||||||
| Total comprehensive loss |
— | — | — | (137.4 | ) | (7.2 | ) | (144.6 | ) | |||||||||||||||
| Distribution in specie |
— | — | — | (105.7 | ) | — | (105.7 | ) | ||||||||||||||||
| APIC offset to accumulated deficit |
— | — | (6,199.9 | ) | 6,199.9 | — | — | |||||||||||||||||
| Stock issued, net of issuance costs |
5.6 | 0.3 | 20.5 | — | — | 20.8 | ||||||||||||||||||
| Share-based compensation |
— | — | 45.9 | — | — | 45.9 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
| Balance at December 31, 2012 |
594.9 | $ | 36.5 | $ | 352.4 | $ | 273.9 | $ | (44.6 | ) | $ | 618.2 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
The accompanying notes are an integral part of these Consolidated Financial Statements.
110
Elan Corporation, plc
Consolidated Statements of Cash Flows
For the Years Ended December 31, 2012, 2011 and 2010
| 2012 | 2011 | 2010 | ||||||||||
| (In millions) | ||||||||||||
| Cash flows from operating activities: |
||||||||||||
| Net (loss)/income |
$ | (137.4 | ) | $ | 560.5 | $ | (324.7 | ) | ||||
| Adjustments to reconcile net income/(loss) to net cash provided by/(used in) operating activities: |
||||||||||||
| Amortization of deferred revenue |
(0.3 | ) | (0.5 | ) | (0.3 | ) | ||||||
| Amortization of financing costs |
3.1 | 5.3 | 5.4 | |||||||||
| Depreciation and amortization |
24.8 | 35.8 | 63.3 | |||||||||
| Gain on sale of investment securities |
— | (2.6 | ) | (12.8 | ) | |||||||
| Impairment of property, plant and equipment |
64.3 | 10.0 | 11.0 | |||||||||
| Net loss/(gain) on divestment of business |
17.1 | (654.5 | ) | — | ||||||||
| EDT divestment transaction costs |
— | (34.1 | ) | — | ||||||||
| Net loss on equity method investments |
229.0 | 81.8 | 26.0 | |||||||||
| Loss on disposal of equity method investment |
13.3 | — | — | |||||||||
| Settlement reserve charge |
— | — | 206.3 | |||||||||
| Share-based compensation |
45.9 | 35.3 | 31.5 | |||||||||
| (Recognition)/write-down of deferred tax assets |
(300.4 | ) | 51.0 | 0.1 | ||||||||
| Net charge on debt retirement |
76.1 | 47.0 | 3.0 | |||||||||
| Derivative fair value loss/(gain) |
0.3 | — | (1.2 | ) | ||||||||
| Other |
(0.1 | ) | (0.8 | ) | 2.6 | |||||||
| Net changes in assets and liabilities: |
||||||||||||
| (Increase)/decrease in accounts receivable |
(25.8 | ) | 23.9 | 0.8 | ||||||||
| Decrease/(increase) in prepaid and other assets |
6.5 | (2.2 | ) | 10.7 | ||||||||
| (Increase)/decrease in inventory |
(1.1 | ) | 15.2 | 14.2 | ||||||||
| Decrease in debt interest accrual |
(2.1 | ) | (6.9 | ) | (0.7 | ) | ||||||
| Increase/(decrease) in accounts payable and accruals and other liabilities |
42.1 | (213.5 | ) | 33.0 | ||||||||
| Decrease in working capital from divestment of EDT business |
— | (70.9 | ) | — | ||||||||
|
|
|
|
|
|
|
|||||||
| Net cash provided by/(used in) operating activities |
55.3 | (120.2 | ) | 68.2 | ||||||||
|
|
|
|
|
|
|
|||||||
| Cash flows from investing activities: |
||||||||||||
| Decrease/(increase) in restricted cash |
— | 206.8 | (191.4 | ) | ||||||||
| Proceeds from disposal of property, plant and equipment |
— | 1.3 | 0.1 | |||||||||
| Purchase of property, plant and equipment |
(10.3 | ) | (27.3 | ) | (40.9 | ) | ||||||
| Purchase of intangible assets |
(1.8 | ) | (2.5 | ) | (3.6 | ) | ||||||
| Purchase of equity method investment |
— | (20.0 | ) | — | ||||||||
| Purchase of investment securities |
(0.7 | ) | (0.6 | ) | (0.9 | ) | ||||||
| Funding of equity method investment in Janssen AI |
(76.9 | ) | — | — | ||||||||
| Sale of investment securities |
— | 2.8 | 16.4 | |||||||||
| Receipt of deferred consideration |
12.0 | — | — | |||||||||
| Proceeds from sale of equity method investment |
380.9 | — | — | |||||||||
| Proceeds from business disposals |
— | 500.0 | 4.3 | |||||||||
|
|
|
|
|
|
|
|||||||
| Net cash provided by/(used in) investing activities |
303.2 | 660.5 | (216.0 | ) | ||||||||
|
|
|
|
|
|
|
|||||||
| Cash flows from financing activities: |
||||||||||||
| Cash distribution to Prothena Corporation, plc |
(125.0 | ) | — | — | ||||||||
| Proceeds from share based compensation stock issuances |
20.8 | 6.3 | 1.8 | |||||||||
| Repayment of loans |
(682.5 | ) | (697.3 | ) | (455.0 | ) | ||||||
| Net proceeds from debt issuances |
587.9 | — | 187.1 | |||||||||
|
|
|
|
|
|
|
|||||||
| Net cash used in financing activities |
(198.8 | ) | (691.0 | ) | (266.1 | ) | ||||||
|
|
|
|
|
|
|
|||||||
| Effect of exchange rate changes on cash |
(0.1 | ) | (0.1 | ) | (0.1 | ) | ||||||
|
|
|
|
|
|
|
|||||||
| Net increase/(decrease) in cash and cash equivalents |
159.6 | (150.8 | ) | (414.0 | ) | |||||||
| Cash and cash equivalents at beginning of year |
271.7 | 422.5 | 836.5 | |||||||||
|
|
|
|
|
|
|
|||||||
| Cash and cash equivalents at end of year |
$ | 431.3 | $ | 271.7 | $ | 422.5 | ||||||
|
|
|
|
|
|
|
|||||||
| Supplemental cash flow information: |
||||||||||||
| Cash paid during the year for: |
||||||||||||
| Interest |
$ | (54.0 | ) | (108.1 | ) | $ | (117.2 | ) | ||||
| Income taxes |
$ | (0.8 | ) | (1.5 | ) | $ | (0.4 | ) | ||||
| Non-cash investing activities: |
||||||||||||
| Purchase of equity method investment |
$ | — | (528.6 | ) | $ | — | ||||||
| Transfer of assets, net of liabilities to Prothena Corporation, plc (Note 28). |
$ | 3.2 | — | $ | — | |||||||
The accompanying notes are an integral part of these Consolidated Financial Statements.
111
Elan Corporation, plc
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
1. Description of Business
Elan Corporation, plc, is an Irish public limited company (also referred to hereafter as we, our, us, Elan or the Company), headquartered in Dublin, Ireland. We were incorporated as a private limited company in Ireland in December 1969 and became a public limited company in January 1984. Our principal executive offices are located at Treasury Building, Lower Grand Canal Street, Dublin 2, Ireland and our telephone number is 353-1-709-4000.
On February 6, 2013, we announced that we have entered into an asset purchase agreement with an affiliate of Biogen Idec Inc. (the “Asset Purchase Agreement”) to transfer to Biogen Idec Inc. (Biogen Idec) all Tysabri® intellectual property (IP) and other assets related to the development, manufacturing and commercialization of Tysabri (natalizumab) and other products licensed to Biogen Idec and its affiliates under our collaboration arrangement with Biogen Idec (the “Tysabri Transaction”). As a result of this transaction, Biogen Idec and its affiliates will have sole authority over and exclusive worldwide rights to the development, manufacturing and commercialization of Tysabri. In accordance with the terms of the transaction, upon consummation of the transaction, the existing collaboration arrangements with Biogen Idec will be terminated and Biogen Idec will pay to us an upfront payment of $3.25 billion and continuing royalties on Tysabri in-market sales. We will earn a royalty of 12% of global net sales of Tysabri during the first 12 months following the closing of the transaction. Thereafter, we will earn a royalty of 18% of global net sales up to $2.0 billion each year, and a 25% royalty on annual global net sales above $2.0 billion. The transaction is expected to close in the first half of 2013, subject to the satisfaction of certain conditions, including customary regulatory approvals.
2. Significant Accounting Policies
The following accounting policies have been applied in the preparation of our Consolidated Financial Statements.
(a) Basis of consolidation and presentation of financial information
The accompanying Consolidated Financial Statements have been prepared in conformity with accounting principles generally accepted in the United States of America (U.S. GAAP). In addition to the financial statements included in this Form 20-F, we also prepare separate Consolidated Financial Statements, included in our Annual Report, in accordance with International Financial Reporting Standards as adopted by the European Union (IFRS), which differ in certain significant respects from U.S. GAAP. The Annual Report under IFRS is a separate document from this Form 20-F.
Unless otherwise indicated, our financial statements and other financial data contained in this Form 20-F are presented in U.S. dollars ($). The accompanying Consolidated Financial Statements include our financial position, results of operations and cash flows and those of our wholly-owned subsidiaries. All intercompany amounts have been eliminated. We use the equity method to account for equity investments in instances in which we own common stock and have the ability to exercise significant influence, but not control, over the investee.
Our directors believe that we have adequate resources to continue in operational existence for at least the next 12 months and that it is appropriate to continue to prepare our Consolidated Financial Statements on a going concern basis.
(b) Use of estimates
The preparation of the Consolidated Financial Statements in conformity with U.S. GAAP requires management to make judgments, estimates and assumptions that affect the application of policies and reported amounts of assets, liabilities, income and expenses. The estimates and associated assumptions are based on historical experience and various other factors that are believed to be reasonable under the circumstances, the results of which form the basis of making the judgments about carrying amounts of assets and liabilities that are not readily apparent from other sources. Estimates are used in determining items such as the carrying amounts of intangible assets, property, plant and equipment and equity method investments, revenue recognition, sales rebates and discounts, the fair value of share-based compensation, the accounting for contingencies and income taxes, among other items. Because of the uncertainties inherent in such estimates, actual results may differ materially from these estimates.
112
Elan Corporation, plc
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(c) Fair value measurements
Fair value is defined as the price that would be received upon sale of an asset or paid upon transfer of a liability in an orderly transaction between market participants at the measurement date and in the principal or most advantageous market for that asset or liability. The fair value should be calculated based on assumptions that market participants would use in pricing the asset or liability, not on assumptions specific to the entity. In addition, the fair value of liabilities should include consideration of non-performance risk including our own credit risk.
We disclose our financial instruments that are measured at fair value on a recurring basis using the following fair value hierarchy for valuation inputs. The hierarchy prioritizes the inputs into three levels based on the extent to which inputs used in measuring fair value are observable in the market. Each fair value measurement is reported in one of the three levels, which is determined by the lowest level input that is significant to the fair value measurement in its entirety. These levels are:
| Level 1: | Inputs are based upon unadjusted quoted prices for identical instruments traded in active markets. | |
| Level 2: | Inputs are based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques for which all significant assumptions are observable in the market or can be corroborated by observable market data for substantially the full term of the assets or liabilities. | |
| Level 3: | Inputs are generally unobservable and typically reflect management’s estimates of assumptions that market participants would use in pricing the asset or liability. | |
(d) Cash and cash equivalents
Cash and cash equivalents include cash and highly liquid investments with original maturities on acquisition of three months or less.
(e) Accounts receivable
Accounts receivable are initially recognized at fair value, which represents the invoiced amounts, less adjustments for estimated revenue deductions such as product returns, chargebacks and cash discounts. An allowance for doubtful accounts is established based upon the difference between the recognized value and the estimated net collectible amount with the estimated loss recognized within operating expenses in the Consolidated Statement of Operations. When an account receivable balance becomes uncollectible, it is written off against the allowance for doubtful accounts.
(f) Investment securities and impairment
Marketable equity securities and debt securities are classified into one of three categories including trading, held-to-maturity, or available-for-sale. The classification depends on the purpose for which the financial assets were acquired.
| • | Marketable equity and debt securities are considered trading when purchased principally for the purpose of selling in the near term. These securities are recorded as current investments and are carried at fair value. Unrealized holding gains and losses on trading securities are included in other income. We did not hold any trading securities at December 31, 2012 and 2011. |
| • | Marketable debt securities are considered held-to-maturity when we have the positive intent and ability to hold the securities to maturity. These securities are carried at amortized cost, less any impairment. We did not hold any held-to-maturity securities at December 31, 2012 and 2011. |
| • | Marketable equity and debt securities not classified as trading or held-to-maturity are considered available-for-sale. These securities are recorded as either current or non-current investments and are carried at fair value, with unrealized gains and losses included in accumulated other comprehensive income/(loss) (OCI) in shareholders’ equity. The assessment for impairment of marketable securities classified as available-for-sale is based on established financial methodologies, including quoted market prices for publicly traded equity and debt securities. |
113
Elan Corporation, plc
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Non-marketable equity securities are carried at cost, less write-down-for-impairments, and are adjusted for impairment based on methodologies, including the Black-Scholes option-pricing model, the valuation achieved in the most recent private placement by an investee, an assessment of the impact of general private equity market conditions, and discounted projected future cash flows.
The factors affecting the assessment of impairments include both general financial market conditions and factors specific to a particular company. In the case of equity classified as available-for-sale, a significant and prolonged decline in the fair value of the security below its carrying amount is considered in determining whether the security is impaired. If any such evidence exists, an impairment loss is recognized.
(g) Inventory
Finished goods inventory is valued at the lower of cost or market value.
(h) Property, plant and equipment
Property, plant and equipment are stated at cost less accumulated depreciation and impairment losses. Depreciation is computed using the straight-line method based on estimated useful lives as follows:
| Buildings | 15-40 years | |
| Plant and equipment | 3-10 years | |
| Leasehold improvements | Shorter of expected useful life or lease term |
Land is not depreciated as it is deemed to have an indefinite useful life.
Where events or circumstances indicate that the carrying amount of property, plant and equipment may not be recoverable, we review the carrying value for impairment. The carrying amount of the asset is not deemed recoverable if its carrying amount exceeds the sum of the undiscounted cash flows expected to result from the use and eventual disposition of that asset. In such event, an impairment loss is recognized for the excess of the carrying amount over the asset’s fair value.
(i) Leasing
Property, plant and equipment acquired under a lease that transfers substantially all of the risks and rewards of ownership to us (a capital lease) are capitalized. Amounts payable under such leases, net of finance charges, are shown as current or non-current as appropriate. An asset acquired through capital lease is stated at an amount equal to the lower of its fair value or the present value of the minimum lease payments at the inception of the lease, less accumulated depreciation and impairment losses, and is included in property, plant and equipment. Finance charges on capital leases are expensed over the term of the lease to give a constant periodic rate of interest charge in proportion to the capital balances outstanding.
All other leases that are not capital leases are considered operating leases. Rentals on operating leases are charged to expense on a straight-line basis over the period of the lease. Leased property, plant and equipment sub-let to third parties are classified according to their substance as either direct financing or operating leases. All such arrangements that we have entered into as lessor are operating leases. Income received as lessor is recognized on a straight-line basis over the period of the lease.
(j) Goodwill, other intangible assets and impairment
Goodwill is not amortized, but instead is tested for impairment at least annually.
Intangible assets with estimable useful lives are amortized on a straight-line basis over their respective estimated useful lives to their estimated residual values and, as with other long-lived assets such as property, plant and equipment, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If circumstances require a long-lived asset be tested for possible impairment, we compare undiscounted cash flows expected to be
114
Elan Corporation, plc
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
generated by an asset to the carrying amount of the asset. If the carrying amount of the long-lived asset is not recoverable on an undiscounted cash flow basis, an impairment is recognized to the extent that the carrying amount exceeds its fair value. We determine fair value using the income approach based on the present value of expected cash flows. Our cash flow assumptions consider historical and forecasted revenue and operating costs and other relevant factors.
We review our goodwill for impairment at least annually or whenever events or changes in circumstances indicate that the carrying amount of these assets may not be recoverable. The goodwill impairment test is a two-step process and is performed at the reporting unit level. Following the divestment of our Elan Drug Technologies (EDT) business on September 16, 2011, Elan is comprised of a single reporting unit. Prior to the two-step process, we first assess qualitative factors to determine whether it is necessary to perform the two-step goodwill impairment test. The qualitative factors assessed include, but are not limited to, the macroeconomic conditions, industry and market considerations, cost factors, overall financial performance, other relevant events affecting the reporting unit and the share price performance of the Company. If, after assessing the relevant qualitative factors, we determine that it is not more likely than not that the fair value of the reporting unit is less than its carrying amount, including goodwill, then the first and second steps of the goodwill impairment test are not performed. If, after assessing the relevant qualitative factors, we determine that it is more likely than not that the fair value of the reporting unit is less than its carrying amount, including goodwill, then the first step of the goodwill impairment test is performed.
Under the first step, we compare the fair value of each reporting unit with its carrying amount, including goodwill. If the fair value of the reporting unit exceeds its carrying amount, goodwill of the reporting unit is not considered impaired and step two does not need to be performed. If the carrying amount of a reporting unit exceeds its fair value, the second step of the goodwill impairment test is performed to measure the amount of impairment charge, if any. The second step compares the implied fair value of the reporting-unit goodwill with the carrying amount of that goodwill, and any excess of the carrying amount over the implied fair value is recognized as an impairment charge. The implied fair value of goodwill is determined, by allocating the fair value of a reporting unit to individual assets and liabilities. The excess of the fair value of a reporting unit over the amounts assigned to its assets and liabilities is the implied fair value of goodwill. In evaluating goodwill for impairment, we determine the fair values of the reporting units using the income approach, based on the present value of expected cash flows.
(k) Equity method investments
Janssen AI
As part of the transaction in September 2009 whereby Janssen Alzheimer Immunotherapy (Janssen AI), a subsidiary of Johnson & Johnson, acquired substantially all of our assets and rights related to our Alzheimer’s Immunotherapy Program (AIP) collaboration with Wyeth (which has been acquired by Pfizer Inc. (Pfizer)), we received a 49.9% equity investment in Janssen AI. Johnson & Johnson also committed to fund up to an initial $500.0 million towards the further development and commercialization of the AIP to the extent the funding is required by the collaboration. Any required additional expenditures in respect of Janssen AI’s obligations under the AIP collaboration in excess of the initial $500.0 million funding commitment is required to be funded by Elan and Johnson & Johnson in proportion to their respective shareholdings up to a maximum additional commitment of $400.0 million in total. In the event that further funding is required beyond the $400.0 million, such funding will be on terms determined by the board of Janssen AI, with Johnson & Johnson and Elan having a right of first offer to provide additional funding. If we fail to provide our share of the $400.0 million commitment or any additional funding that is required for the development of the AIP, and if Johnson & Johnson elects to fund such an amount, our interest in Janssen AI could, at the option of Johnson & Johnson, be commensurately reduced. We have recorded our investment in Janssen AI as an equity method investment on the Consolidated Balance Sheet as we have the ability to exercise significant influence, but not control, over the investee. The investment was initially recognized based on the estimated fair value of the investment acquired, representing the fair value of our proportionate 49.9% share of Janssen AI’s total net assets at inception, which were comprised of the AIP assets and the asset created by the Johnson & Johnson contingent funding commitment.
Under the equity method, investors are required to recognize their share of the earnings or losses of an investee in the periods for which they are reported in the financial statements of the investee as this is normally considered an appropriate means of recognizing increases or decreases in the economic resources underlying the investments. However, Johnson & Johnson had committed to wholly fund up to an initial $500.0 million of development and commercialization expenses incurred by Janssen AI so the recognition by Elan of a share of Janssen AI losses that are solely funded by Johnson & Johnson’s $500.0 million commitment would result in an
115
Elan Corporation, plc
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
inappropriate decrease in Elan’s share of the economic resources underlying the investment in Janssen AI. Accordingly, until the $500.0 million funding commitment was fully utilized, we applied the hypothetical liquidation at book value (HLBV) method to determine how an increase or decrease in net assets of Janssen AI affected Elan’s interest in the net assets of Janssen AI on a period by period basis. Under the HLBV method, an investor determines its share of the earnings or losses of an investee by determining the difference between its claim on the investee’s book value at the end and beginning of the period.
During 2012, the remaining balance of the initial $500.0 million funding commitment, provided by Johnson & Johnson to Janssen AI, which amounted to $57.6 million at December 31, 2011, was spent. Subsequent to the full utilization of the initial $500.0 million funding commitment, we provided funding of $76.9 million to Janssen AI during 2012.
On August 6, 2012, Johnson & Johnson issued a press release announcing the discontinuation of the development of bapineuzumab intravenous in mild to moderate Alzheimer’s disease based on the co-primary clinical endpoints not being met in the Janssen AI-led Phase 3 clinical studies. As a result of the discontinuation, we recorded a non-cash impairment charge of $117.3 million against the carrying value of our equity method investment in Janssen AI, representing the full initial estimated value of Elan’s 49.9% share of the Janssen AI AIP assets. Janssen AI recorded an impairment charge of $678.9 million, representing its full carrying value of the AIP assets.
As of December 31, 2011, the carrying value of our Janssen AI equity method investment of $130.6 million was approximately $185 million below our share of Janssen AI’s reported book value of its net assets. This difference related to the lower estimated value of Janssen AI’s AIP assets when the equity method investment was initially recorded, and the asset created by the Johnson & Johnson $500.0 million contingent funding commitment. The difference in the carrying values of the AIP assets was eliminated during 2012 when Elan and Janssen AI recorded impairment charges of $117.3 million and $678.9 million, respectively, representing their respective initial estimated values of the AIP assets. In relation to the asset created by the Johnson & Johnson contingent funding commitment, which was a limited life asset, the basis difference was amortized to the Consolidated Statement of Operations on a pro rata basis; based on the actual amount of Janssen AI losses that were solely funded by Johnson & Johnson in each period as compared to the total $500.0 million, which was the total amount solely funded by Johnson & Johnson. This basis difference was fully amortized during 2012 when the remaining balance of the initial $500.0 million funding commitment provided by Johnson & Johnson to Janssen AI was spent.
As a result of the equity method investment losses incurred to date, relating to our share of the losses in excess of the losses funded solely by Johnson & Johnson’s initial $500.0 million funding commitment, and the impairment charge of $117.3 million recognized during 2012, there is an excess of losses over the investment made in Janssen AI at December 31, 2012 of $11.0 million. This amount has been recorded as a current liability at December 31, 2012. In addition, Elan provided further funding to Janssen AI of $29.9 million during January 2013, which will be recorded in the 2013 financial statements.
Proteostasis Therapeutics, Inc.
We have recorded our investment in Proteostasis Therapeutics Inc. (Proteostasis) as an equity method investment on the Consolidated Balance Sheet as we have the ability to exercise significant influence, but not control, over the investees. The investment was initially recognized based on the estimated fair value of the investment acquired. Under the equity method, we recognize our share of the earnings or losses of the investee, adjusted for the amortization of the basis differences, in the Consolidated Statement of Operations with a corresponding increase or decrease in the carrying amount of the investments on the Consolidated Balance Sheet. We recognize our share of the earnings or losses of Proteostasis in the same periods for which they are reported in the financial statements of the investee.
Alkermes plc
Following the completion of the merger between Alkermes, Inc. and EDT on September 16, 2011, we held approximately 25% of the outstanding ordinary shares of Alkermes plc (31.9 million shares) and accounted for this investment as an equity method investment as we had the ability to exercise significant influence, but not control, over the investee. Under the equity method, we recognize our share of the earnings or losses of the investee, adjusted for the amortization of the basis differences, in the Consolidated Statement of Operations with a corresponding increase or decrease in the carrying amount of the investments on the Consolidated Balance Sheet. The investment was initially recognized based on the estimated fair value of the investment acquired.
116
Elan Corporation, plc
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
In March 2012, we sold 76% (24.15 million ordinary shares) of our shareholding in Alkermes plc. Following this sale, we continued to own 7.75 million ordinary shares of Alkermes plc, representing an approximate 6% equity interest. Following the sale of the 24.15 million ordinary shares, our remaining equity interest in Alkermes plc was classified as an available-for-sale investment in current assets and equity method accounting no longer applied to this investment.
On January 31, 2013, we announced that we had agreed to sell all of our remaining 7.75 million ordinary shares of Alkermes plc. The sale closed on February 6, 2013 and we received proceeds of $169.7 million.
(l) Financing costs
Debt financing costs are comprised of transaction costs and original issue discount on borrowings. Debt financing costs are allocated to financial reporting periods over the term of the related debt using the effective interest rate method.
The carrying amount of debt includes any related unamortized original issue discount. All other unamortized debt financing costs are presented as deferred financing costs in other assets.
(m) Derivative financial instruments
We enter into transactions in the normal course of business using various financial instruments in order to hedge against exposures to fluctuating exchange and interest rates. We use derivative financial instruments to reduce exposure to fluctuations in foreign exchange rates and interest rates. A derivative is a financial instrument or other contract whose value changes in response to some underlying variable, that has an initial net investment smaller than would be required for other instruments that have a similar response to the variable and that will be settled at a future date. We do not enter into derivative financial instruments for trading or speculative purposes. We entered into a number of forward foreign exchange contracts at various rates of exchange during 2012 that required us to sell euro for U.S. dollars. At December 31, 2012, we held a net forward foreign exchange derivative liability of $0.3 million relating to outstanding forward foreign exchange contracts that expire on various dates during the first half of 2013. We did not hold any interest rate swap contracts or forward currency contracts at December 31, 2011.
Our accounting policies for derivative financial instruments are based on whether they meet the criteria for designation as cash flow or fair value hedges. A designated hedge of the exposure to variability in the future cash flows of an asset or a liability, or of a forecasted transaction, is referred to as a cash flow hedge. A designated hedge of the exposure to changes in fair value of an asset or a liability is referred to as a fair value hedge. The criteria for designating a derivative as a hedge include the assessment of the instrument’s effectiveness in risk reduction, matching of the derivative instrument to its underlying transaction, and the probability that the underlying transaction will occur. For derivatives with cash flow hedge accounting designation, we report the gain or loss from the effective portion of the hedge as a component of accumulated OCI and reclassify it into earnings in the same period or periods in which the hedged transaction affects earnings, and within the same income statement line item as the impact of the hedged transaction. For derivatives with fair value hedge accounting designation, we recognize gains or losses from the change in fair value of these derivatives, as well as the offsetting change in the fair value of the underlying hedged item, in earnings. Fair value gains and losses arising on derivative financial instruments not qualifying for hedge accounting are reported in our Consolidated Statement of Operations. The carrying amount of derivative financial instruments is reported within current assets or other current liabilities.
117
Elan Corporation, plc
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(n) Discontinued operations and assets held for sale
A discontinued operation is a component of an entity that either has been disposed of or is classified as held for sale and (i) the operations and cash flows of the component have been (or will be) eliminated from the ongoing operations of the entity as a result of a disposal transaction and (ii) the entity will not have significant continuing involvement in the operations of the component after the disposal transaction.
Any gain or loss from the disposal of a business, together with the results of these operations until the date of disposal, is reported separately in the discontinued operations line of the Consolidated Statement of Operations and comparative information is restated accordingly. Cash flow information related to discontinued operations is disclosed separately in the notes to the financial statements.
Assets are classified as assets held for sale when their carrying amount is to be recovered principally through a sale transaction and a sale is considered highly probable.
Tysabri
On February 6, 2013, we announced that we have entered into an asset purchase agreement with Biogen Idec to transfer to Biogen Idec all Tysabri IP and other assets related to Tysabri. As a result of this transaction, Biogen Idec will have sole authority over and exclusive worldwide rights to the development, manufacturing and commercialization of Tysabri. In accordance with the terms of the transaction, upon consummation of the transaction, the existing collaboration arrangements with Biogen Idec will be terminated and Biogen Idec will pay to us an upfront payment of $3.25 billion and continuing royalties on Tysabri in-market sales. We will earn a royalty of 12% of global net sales of Tysabri during the first 12 months following the closing of the transaction. Thereafter, we will earn a royalty of 18% of global net sales up to $2.0 billion each year, and a 25% royalty on annual global net sales above $2.0 billion. The transaction is expected to close in the first half of 2013, subject to the satisfaction of certain conditions, including customary regulatory approvals. As a result of the agreement to dispose of the Tysabri asset rights, the results of Tysabri for the year ended December 31, 2012 are presented as a discontinued operation in the Consolidated Statement of Operations and the comparative amounts have been restated to reflect this classification. The assets and liabilities of the Tysabri business have been presented as held for sale as of December 31, 2012.
Prothena
On December 20, 2012, we completed the separation of a substantial portion of our drug discovery business platform (the Prothena Business) into a new, publicly traded company incorporated in Ireland named Prothena Corporation, plc (Prothena) pursuant to a demerger under Irish Company law and a pro rata distribution of Prothena ordinary shares was made to our shareholders of one Prothena ordinary share for every 41 Elan ordinary shares or Elan American Depositary Shares (ADSs) held. Since we do not have significant or direct involvement in the future operations of the Prothena Business, the financial results of the Prothena Business for the period up to December 20, 2012, the effective date of the separation, have been presented as a discontinued operation and comparative amounts have been restated to reflect this classification.
EDT
Following the disposal of the EDT business in September 2011, we did not report the results of EDT as a discontinued operation as we continued to have significant continuing involvement in the operations of Alkermes plc through our 25% equity interest.
On March 13, 2012, we announced that we had sold 76% (24.15 million ordinary shares) of our shareholding in Alkermes plc for net proceeds of $380.9 million after deduction of underwriter and other fees. Following this sale, we continued to own 7.75 million ordinary shares of Alkermes plc, representing an approximate 6% equity interest in Alkermes plc. Following the disposal of 76% of our shareholding in Alkermes plc, our shareholding ceased to qualify as an equity method investment and as a result, the results of EDT are presented as a discontinued operation in the Consolidated Statements of Operations for the comparative periods.
118
Elan Corporation, plc
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(o) Revenue
We recognize revenue from the sale of our products and from royalties earned.
We recognize revenue from product sales when there is persuasive evidence that an arrangement exists, title passes, the price is fixed or determinable, and collectability is reasonably assured. Revenue is recorded net of applicable sales tax and sales discounts and allowances, which are described below.
(i) The sale of our products consists of the sale of pharmaceutical drugs, primarily to wholesalers and physicians.
(ii) We earn royalties on licensees’ sales of our products or third-party products that incorporate our technologies. Royalties are recognized as earned in accordance with the contract terms when royalties can be reliably measured and collectability is reasonably assured.
The income statement financial information relating to Tysabri for the years ended December 31, 2012, 2011 and 2010 are presented as discontinued operations in our Consolidated Financial Statements and related notes thereto. Tysabri was developed in collaboration with Biogen Idec. Until the Tysabri Transaction closes, Tysabri continues to be marketed in collaboration with Biogen Idec and, subject to certain limitations imposed by the parties, we share with Biogen Idec most development and commercialization costs. Biogen Idec is responsible for manufacturing the product. In the United States, we purchase Tysabri from Biogen Idec and are responsible for distribution. Consequently, we record as revenue the net sales of Tysabri in the U.S. market. We purchase product from Biogen Idec as required at a price, which includes the cost of manufacturing, plus Biogen Idec’s gross profit on Tysabri and this cost, together with royalties payable to other third parties, is included in cost of sales. Outside of the United States, Biogen Idec is responsible for distribution and we record as revenue our share of the profit or loss on rest of world (ROW) sales of Tysabri, plus the reimbursement from Biogen Idec of Elan’s directly incurred expenses on these sales, which are primarily comprised of royalties we incur and are payable by us to third parties and we record in cost of sales.
(p) Sales discounts and allowances
Revenue from continuing operations is presented in the Consolidated Statement of Operations and revenue from discontinued operations is included in net income from discontinued operations that is also presented in the Consolidated Statement of Operations. We recognize revenue on a gross revenue basis (except for Tysabri revenue outside of the United States) and make various deductions to arrive at net revenue from continuing and discontinued operations. These adjustments are referred to as sales discounts and allowances and are described in detail below. Sales discounts and allowances include charge-backs, managed healthcare rebates and other contract discounts, Medicaid rebates, cash discounts, sales returns, and other adjustments. Estimating these sales discounts and allowances is complex and involves significant estimates and judgments, and we use information from both internal and external sources, including historical experience, to generate reasonable and reliable estimates. In accordance with the terms of the Tysabri Transaction announced on February 6, 2013, whereby we will dispose of our Tysabri IP and other rights related to Tysabri, and the existing collaboration arrangements with Biogen Idec will be terminated, we will retain responsibility for all discounts and allowances liabilities related to Tysabri sales up to the closing of the transaction.
We do not conduct our sales using the consignment model. All of our product sales transactions are based on normal and customary terms whereby title to the product and substantially all of the risks and rewards transfer to the customer upon either shipment or delivery. Furthermore, we do not have an incentive program that would compensate a wholesaler for the costs of holding inventory above normal inventory levels thereby encouraging wholesalers to hold excess inventory.
119
Elan Corporation, plc
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Charge-backs
In the United States, we participate in charge-back programs with a number of entities, principally the U.S. Department of Defense, the U.S. Department of Veterans Affairs, Group Purchasing Organizations and other parties whereby pricing on products is extended below wholesalers’ list prices to participating entities. These entities purchase products through wholesalers at the lower negotiated price, and the wholesalers charge the difference between these entities’ acquisition cost and the lower negotiated price back to us. We account for charge-backs by reducing accounts receivable in an amount equal to our estimate of charge-back claims attributable to a sale. We determine our estimate of the charge-backs primarily based on historical experience on a product-by-product and program basis, and current contract prices under the charge-back programs. We consider vendor payments, estimated levels of inventory in the wholesale distribution channel, and our claim processing time lag and adjust the accrual and revenue periodically throughout each year to reflect actual and future estimated experience.
Medicaid rebates
In the United States, we are required by law to participate in state government-managed Medicaid programs as well as certain other qualifying federal and state government programs whereby discounts and rebates are provided to participating state and local government entities. Discounts and rebates provided through these other qualifying federal and state government programs are included in our Medicaid rebate accrual and are considered Medicaid rebates for the purposes of this discussion. We account for Medicaid rebates by establishing an accrual in an amount equal to our estimate of Medicaid rebate claims attributable to a sale. We determine our estimate of the Medicaid rebates accrual primarily based on our estimates of Medicaid claims, Medicaid payments, claims processing time lag, inventory in the distribution channel, as well as legal interpretations of the applicable laws related to the Medicaid and qualifying federal and state government programs, and any new information regarding changes in the Medicaid programs’ regulations and guidelines that would impact the amount of the rebates on a product-by-product basis. We adjust the accrual and revenue periodically throughout each year to reflect actual and future estimated experience.
Cash and other discounts
Cash and other discounts include cash discounts, generally at 2% of the sales price, as an incentive for prompt payment by customers in the United States. We account for cash discounts by reducing accounts receivable by the full amount of the discounts. We consider payment performance of each customer and adjust the accrual and revenue periodically throughout each year to reflect actual experience and future estimates.
Managed healthcare rebates and other contract discounts
We offer rebates and discounts to managed healthcare organizations in the United States. We account for managed healthcare rebates and other contract discounts by establishing an accrual equal to our estimate of the amount attributable to a sale. We determine our estimate of this accrual primarily based on historical experience on a product-by-product and program basis and current contract prices. We consider the sales performance of products subject to managed healthcare rebates and other contract discounts, processing claim lag time and estimated levels of inventory in the distribution channel and adjust the accrual and revenue periodically throughout each year to reflect actual and future estimated experience.
Sales returns
We account for sales returns by reducing accounts receivable in an amount equal to our estimate of revenue recorded for which the related products are expected to be returned.
Our sales return accrual is estimated principally based on historical experience, the estimated shelf life of inventory in the distribution channel, price increases, and our return goods policy (goods may only be returned six months prior to expiration date and for up to 12 months after expiration date). We also take into account product recalls and introductions of generic products. All of these factors are used to adjust the accrual and revenue periodically throughout each year to reflect actual and future estimated experience.
In the event of a product recall, product discontinuance or introduction of a generic product, we consider a number of factors, including the estimated level of inventory in the distribution channel that could potentially be returned, historical experience, estimates of the severity of generic product impact, estimates of continuing demand and our return goods policy. We consider the reasons for, and impact of, such actions and adjust the sales returns accrual and revenue as appropriate.
120
Elan Corporation, plc
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Other adjustments
In addition to the sales discounts and allowances described above, we make other sales adjustments primarily related to estimated obligations for credits to be granted to wholesalers under wholesaler service agreements we have entered into with many of our pharmaceutical wholesale distributors in the United States. Under these agreements, the wholesale distributors have agreed, in return for certain fees, to comply with various contractually defined inventory management practices and to perform certain activities such as providing weekly information with respect to inventory levels of product on hand and the amount of out-movement of product. As a result, we, along with our wholesale distributors, are able to manage product flow and inventory levels in a way that more closely follows trends in prescriptions. We generally account for these other sales discounts and allowances by establishing an accrual in an amount equal to our estimate of the adjustments attributable to the sale. We generally determine our estimates of the accruals for these other adjustments primarily based on contractual agreements and other relevant factors, and adjust the accruals and revenue periodically throughout each year to reflect actual experience.
Use of information from external sources
We use information from external sources to identify prescription trends and patient demand, including inventory pipeline data from the three major drug wholesalers in the United States. The inventory information received from these wholesalers is a product of their record-keeping process and excludes inventory held by intermediaries to whom they sell, such as retailers and hospitals. We also receive information from IMS Health, a supplier of market research to the pharmaceutical industry, which we use to project the prescription demand-based sales for our pharmaceutical products. Our estimates are subject to inherent limitations of estimates that rely on third-party information, as certain third-party information is itself in the form of estimates, and reflect other limitations including lags between the date as of which third-party information is generated and the date on which we receive such information.
(q) Advertising expenses
We expense the costs of advertising as incurred. Advertising expenses were $Nil in 2012 (2011: $0.6 million; 2010: $0.7 million).
(r) Research and development
R&D costs are expensed as incurred. Acquired in-process research and development (IPR&D) is expensed as incurred. Costs to acquire IP, product rights and other similar intangible assets are capitalized and amortized on a straight-line basis over the estimated useful life of the asset. The method of amortization chosen best reflects the manner in which individual intangible assets are consumed.
(s) Income Taxes
We account for income tax expense based on income before taxes using the asset and liability method. Deferred tax assets (DTAs) and liabilities are determined based on the difference between the financial statement and tax basis of assets and liabilities using the enacted tax rates projected to be in effect for the year in which the differences are expected to reverse. DTAs are recognized for the expected future tax consequences, for all deductible temporary differences and operating loss and tax credit carryforwards. A valuation allowance is required for DTAs if, based on available evidence, it is more likely than not that all or some of the asset will not be realized due to the inability to generate sufficient future taxable income.
Significant estimates are required in determining our provision for income taxes. Some of these estimates are based on management’s interpretations of jurisdiction-specific tax laws or regulations and the likelihood of settlement related to tax audit issues. Various internal and external factors may have favorable or unfavorable effects on our future effective income tax rate. These factors include, but are not limited to, changes in tax laws, regulations and/or rates, changing interpretations of existing tax laws or regulations, changes in estimates of prior years’ items, past and future levels of R&D spending, likelihood of settlement, and changes in overall levels of income before taxes.
121
Elan Corporation, plc
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
We recognize the tax benefit from an uncertain tax position only if it is more likely than not the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such positions are then measured based on the largest benefit that has a greater than 50% likelihood of being realized upon settlement. Changes in recognition or measurement are reflected in the period in which the change in judgment occurs. We account for interest and penalties related to unrecognized tax benefits in income tax expense.
To determine the allocation of our total tax provision between continuing and discontinued operations, we separately recalculated the tax provision for continuing operations only and allocated the difference between this tax amount and the total tax provision to determine the tax for discontinued operations for each of the disclosed periods.
(t) Accumulated other comprehensive income/(loss)
Comprehensive income/(loss) is comprised of our net income or loss and OCI. OCI includes certain changes in shareholders’ equity that are excluded from net income. Specifically, we include in OCI changes in the fair value of unrealized gains and losses on our investment securities, certain foreign currency translation adjustments, and adjustments relating to our defined benefit pension plans.
Comprehensive income/(loss) for the years ended December 31, 2012, 2011 and 2010 has been reflected in the Statements of Consolidated Comprehensive Income and in the Consolidated Statements of Changes in Shareholders’ Equity.
(u) Foreign operations
Transactions in foreign currencies are recorded at the exchange rate prevailing at the date of the transaction. The resulting monetary assets and liabilities are translated into U.S. dollars at exchange rates prevailing at subsequent balance sheet dates, and the resulting gains and losses are recognized in the Consolidated Statements of Operations and, where material, separately disclosed.
The functional currency of Elan and most of our subsidiaries is U.S. dollars. For those subsidiaries with a non-U.S. dollar functional currency, their assets and liabilities are translated using year-end rates and income and expenses are translated at average rates. The cumulative effect of exchange differences arising on consolidation of the net investment in overseas subsidiaries are recognized as OCI in the Statements of Consolidated Comprehensive Income and in the Consolidated Statements of Changes in Shareholders’ Equity.
(v) Share-based compensation
Share-based compensation expense for equity-settled awards made to employees and directors is measured and recognized based on estimated grant date fair values. These awards include employee stock options, restricted stock units (RSUs) and stock purchases related to our employee equity purchase plan (EEPP).
Share-based compensation cost for RSUs awarded to employees and directors is measured based on the closing fair market value of the Company’s shares on the date of grant. Share-based compensation cost for stock options awarded to employees and directors and shares issued under our EEPP is estimated at the grant date based on each option’s fair value as calculated using an option-pricing model. The value of awards expected to vest is recognized as an expense over the requisite service periods.
Share-based compensation expense for equity-settled awards to non-employees in exchange for goods or services is based on the fair value of the awards on the measurement date; which is the earlier of the date at which the commitment for performance by the non-employees to earn the awards is reached and the date at which the non-employees’ performance is complete. We have determined that the expected vest date is the measurement date for awards granted to non-employees.
Estimating the fair value of share-based awards as of the grant or vest date using an option-pricing model, such as the binomial model, is affected by our share price as well as assumptions regarding a number of complex variables. These variables include, but are not limited to, the expected share price volatility over the term of the awards, risk-free interest rates, and actual and projected employee exercise behaviors.
122
Elan Corporation, plc
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(w) Pensions and other employee benefit plans
We have two defined benefit pension plans covering employees based in Ireland. These plans were closed to new entrants from March 31, 2009. These plans are managed externally and the related pension costs and liabilities are assessed at least annually in accordance with the advice of a qualified professional actuary. Two significant assumptions, the discount rate and the expected rate of return on plan assets, are important elements of expense and/or liability measurement. We evaluate these assumptions at least annually, with the assistance of an actuary. Other assumptions involve employee demographic factors such as retirement patterns, mortality, turnover and the rate of compensation increase. We use a December 31 measurement date and all plan assets and liabilities are reported as of that date. The cost or benefit of plan changes, which increase or decrease benefits for prior employee service, is included in expense on a straight-line basis over the period the employee is expected to receive the benefits.
We recognize actuarial gains and losses using the corridor method. Under the corridor method, to the extent that any cumulative unrecognized net actuarial gain or loss exceeds 10% of the greater of the present value of the defined benefit obligation and the fair value of the plan assets, that portion is recognized over the expected average remaining working lives of the plan participants. Otherwise, the net actuarial gain or loss is recorded in OCI.
We recognize the funded status of benefit plans in our Consolidated Balance Sheet. In addition, we recognize as a component of OCI the gains or losses and prior service costs or credits that arise during the period but are not recognized as components of net periodic pension cost of the period.
An event that significantly reduces the expected years of future service of present employees or eliminates for a significant number of employees the accrual of defined benefits for some or all of their future services is a curtailment. A gain arising on a curtailment is recorded in the Consolidated Statement of Operations to the extent that such a gain exceeds any net loss included in OCI. A loss arising on a curtailment is recorded in the Consolidated Statement of Operations to the extent that such a loss exceeds any net gain included in OCI.
We also have a number of defined contribution benefit plans. The cost of providing these plans is expensed as incurred.
(x) Contingencies
We assess the likelihood of any adverse outcomes to contingencies, including legal matters, as well as the potential range of probable losses. We record accruals for such contingencies when it is probable that a liability has been incurred and the amount of the loss can be reasonably estimated. If an unfavorable outcome is probable, but the amount of the loss cannot be reasonably estimated, we estimate the range of probable loss and accrue the most probable loss within the range. If no amount within the range is deemed more probable, we accrue the minimum amount within the range. If neither a range of loss nor a minimum amount of loss is estimable, then appropriate disclosure is provided, but no amounts are accrued.
(y) Non-cash distribution to shareholders
On December 20, 2012, we completed the separation of the Prothena Business into a new, publicly traded company incorporated in Ireland. The issued share capital of Prothena was admitted to trading on the NASDAQ Global Market on December 21, 2012. The separation of the Prothena Business from Elan was completed through a demerger under Irish law. The demerger was effected by Elan transferring its wholly-owned subsidiaries comprising the Prothena Business to Prothena, in exchange for Prothena issuing Prothena ordinary shares directly to Elan shareholders, on a pro rata basis. Prothena’s issuance of its outstanding shares constituted a deemed in specie distribution by Elan to Elan shareholders (a distribution to shareholders of non-cash assets). Each Elan shareholder received one Prothena ordinary share for every 41 Elan ordinary shares or Elan ADSs held. In connection with the separation of the Prothena Business, we made a cash contribution to Prothena, which together with the consideration for 18% of Prothena’s outstanding ordinary shares, totaled $125.0 million.
The demerger is recorded based on the carrying value of the net assets that were transferred to Prothena in connection with the separation and distribution. The total value of the Prothena in specie distribution to the shareholders of Elan in connection with the demerger was $105.7 million.
123
Elan Corporation, plc
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(z) Recent accounting pronouncements
There have been no Accounting Standards Updates (ASUs) issued by the Financial Accounting Standards Board (FASB) which we have not yet adopted that we expect to have an impact on our consolidated financial position, results of operations or cash flows.
3. Revenue
Revenue for the years ended December 31 consisted of the following (in millions):
| 2012 | 2011 | 2010 | ||||||||||
| Product revenue: |
||||||||||||
| Royalties |
$ | 0.7 | $ | 2.7 | $ | 1.6 | ||||||
| Azactam® |
(0.5 | ) | 0.9 | 27.2 | ||||||||
| Maxipime® |
— | 0.4 | 8.2 | |||||||||
| Prialt® |
— | — | 6.1 | |||||||||
|
|
|
|
|
|
|
|||||||
| Total product revenue |
0.2 | 4.0 | 43.1 | |||||||||
| Contract revenue |
— | — | 1.0 | |||||||||
|
|
|
|
|
|
|
|||||||
| Total revenue |
$ | 0.2 | $ | 4.0 | $ | 44.1 | ||||||
|
|
|
|
|
|
|
|||||||
Royalties of $0.7 million (2011: $2.7 million; 2010: $1.6 million) relate to legacy products previously owned by us.
We ceased distributing Azactam and Maxipime in 2010. The revenue and adjustments for these products in 2011 and 2012 relates to adjustments to discounts and allowances associated with sales prior to the cessation of distribution. We divested our Prialt assets and rights in May 2010.
4. Segment Information
Operating segments are reported in a manner consistent with the internal reporting provided to the chief operating decision maker (CODM). Our CODM has been identified as Mr. G. Kelly Martin, chief executive officer (CEO). On September 16, 2011, we announced the completion of the merger between Alkermes, Inc. and EDT. Prior to the divestment of the EDT business, our business was organized into two business units: BioNeurology and EDT, and our CEO reviewed the business from this perspective. Following the divestment of EDT, we are organized in a single operating segment structure. Segment performance is evaluated based on operating income/(loss).
For the years ended December 31, 2012, 2011 and 2010, our continuing and discontinued operations revenue is presented below by geographical area. Similarly, total assets, property, plant and equipment, and goodwill and intangible assets are presented below on a geographical basis at December 31, 2012 and 2011.
124
Elan Corporation, plc
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Revenue by region (by destination of customers) (in millions):
| 2012 | 2011 | 2010 | ||||||||||
| United States |
$ | 0.2 | 1.2 | 37.8 | ||||||||
| Ireland |
— | 1.7 | 1.9 | |||||||||
| Rest of world |
— | 1.1 | 4.4 | |||||||||
|
|
|
|
|
|
|
|||||||
| Total revenue — continuing operations |
$ | 0.2 | $ | 4.0 | $ | 44.1 | ||||||
|
|
|
|
|
|
|
|||||||
| United States |
886.0 | 866.6 | 785.0 | |||||||||
| Ireland |
— | 36.0 | 54.1 | |||||||||
| Rest of world |
316.6 | 339.4 | 286.5 | |||||||||
|
|
|
|
|
|
|
|||||||
| Total revenue — discontinued operations |
$ | 1,202.6 | $ | 1,242.0 | $ | 1,125.6 | ||||||
|
|
|
|
|
|
|
|||||||
| Total revenue — continuing and discontinued operations |
$ | 1,202.8 | $ | 1,246.0 | $ | 1,169.7 | ||||||
|
|
|
|
|
|
|
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Total assets by region (in millions):
| 2012 | 2011 | |||||||
| Ireland |
$ | 755.4 | $ | 920.0 | ||||
| United States |
793.9 | 753.8 | ||||||
| Rest of world |
90.9 | 80.0 | ||||||
|
|
|
|
|
|||||
| Total assets |
$ | 1,640.2 | $ | 1,753.8 | ||||
|
|
|
|
|
|||||
Property, plant and equipment by region (in millions):
| 2012 | 2011 | |||||||
| United States |
$ | 8.9 | $ | 78.4 | ||||
| Ireland |
3.8 | 4.8 | ||||||
|
|
|
|
|
|||||
| Total property, plant and equipment |
$ | 12.7 | $ | 83.2 | ||||
|
|
|
|
|
|||||
Goodwill and other intangible assets by region (in millions):
| 2012 | 2011 | |||||||
| United States |
$ | 79.4 | $ | 192.1 | ||||
| Ireland |
10.9 | 109.1 | ||||||
| Rest of world |
8.7 | 8.7 | ||||||
|
|
|
|
|
|||||
| Total goodwill and other intangible assets |
$ | 99.0 | $ | 309.9 | ||||
|
|
|
|
|
|||||
125
Elan Corporation, plc
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Major customers
The following customer or collaborator contributed to 10% or more of our revenue from continuing and discontinued operations in 2012, 2011 and 2010:
| 2012 | 2011 | 2010 | ||||||||||
| AmerisourceBergen Corporation |
74 | % | 60 | % | 52 | % | ||||||
| Biogen Idec |
26 | % | 25 | % | 22 | % | ||||||
No other customer or collaborator accounted for more than 10% of our revenue from continuing and discontinued operations in 2012, 2011 or 2010.
5. Net Gain on Divestment of Business
In 2010, we recorded a net gain of $1.0 million relating to a transaction cost adjustment on the 2009 divestment of substantially all of Elan’s assets and rights related to our AIP collaboration with Wyeth (which has been acquired by Pfizer) to Janssen AI. For additional information on this transaction, refer to Note 9.
The net loss recorded on divestment of the Prothena Business during 2012 and the net gain recorded on divestment of the EDT business during 2011 are reported as part of the net income from discontinued operations reporting line. For an analysis of the net gain/(loss) on the divestment of the Prothena and EDT businesses, refer to Note 12.
6. Other Net Charges
The principal items classified as other net charges include facilities and other asset impairment charges, severance, restructuring and other costs, IPR&D costs, Cambridge collaboration termination charge, legal settlements and a net loss on divestment of the Prialt business. These items have been treated consistently from period to period. We believe that disclosure of significant other charges is meaningful because it provides additional information in relation to analyzing certain items.
Other net charges for the years ended December 31 consisted of (in millions):
| 2012 | 2011 | 2010 | ||||
| (a) Facilities and other asset impairment charges |
$107.5 | $15.5 | $16.7 | |||
| (b) Severance, restructuring and other costs |
42.4 | 8.8 | 16.1 | |||
| (c) In-process research and development costs |
11.0 | — | 6.0 | |||
| (d) Cambridge collaboration |
8.0 | — | — | |||
| (e) Legal settlements |
— | — | 12.5 | |||
| (f) Divestment of Prialt business |
— | — | 1.5 | |||
|
|
|
| ||||
| Total other net charges |
$168.9 | $24.3 | $52.8 | |||
|
|
|
|
(a) Facilities and other asset impairment charges
During 2012, we incurred facilities and other asset impairment charges of $107.5 million, which is primarily comprised of asset impairment charges of $66.1 million and lease termination charges of $34.6 million relating to the planned closure of the South San Francisco facility following the separation of the Prothena Business and cessation of our remaining early stage research activities. We also incurred an additional onerous lease charge of $6.4 million relating to EDT’s King of Prussia, Pennsylvania site which closed in 2011, due to a reassessment of the probable sub-lease income to be achieved over the remaining term of the lease.
126
Elan Corporation, plc
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
During 2011, we incurred facilities and other asset impairment charges of $15.5 million, which included asset impairment charges of $3.6 million and lease charges of $11.9 million relating to the consolidation of our facilities in South San Francisco and the closure of EDT’s King of Prussia, Pennsylvania site.
During 2010, we incurred additional facilities and other asset impairment charges of $16.7 million, which included asset impairment charges of $11.0 million and lease charges of $5.7 million relating to a consolidation of facilities in South San Francisco as a direct result of the realignment of our business.
(b) Severance, restructuring and other costs
During 2012, we incurred severance and restructuring charges of $42.4 million, principally relating to the planned closure of the South San Francisco facility and associated reduction in headcount following the separation of the Prothena Business and cessation of our remaining early stage research activities.
During 2011 and 2010, we incurred severance, restructuring and other costs of $8.8 million and $16.1 million, respectively, principally relating to a realignment and restructuring of our R&D organization and reduction of related support activities as well as the reduction in our general and administrative (G&A) activities following the divestment of the EDT business.
(c) In-process research and development costs
During 2012, we commenced a Phase 2 study of oral ELND005 as an adjunctive maintenance treatment in patients with Bipolar I Disorder. On the commencement of this trial, we incurred an IPR&D charge of $11.0 million related to a milestone payment to Transition Therapeutics Inc. (Transition) in accordance with the terms of the modification to the Collaboration Agreement agreed with Transition in December 2010. For further information on our Collaboration Agreement with Transition, please refer to Note 36 of the Consolidated Financial Statements.
In-process research and development costs (IPR&D) charges in 2010 also include a credit of $3.0 million associated with the termination of the License Agreement with PharmatrophiX Inc. (PharmatrophiX), offset by the $9.0 million charge related to the payment to Transition when the modification of the Collaboration Agreement was agreed.
(d) Cambridge collaboration termination charge
Following the cessation of our early stage research activities, we terminated our Collaboration Agreement with the University of Cambridge and incurred a charge of $8.0 million.
(e) Legal settlements
During 2010, we reached an agreement in principle with the direct purchaser class plaintiffs with respect to nifedipine. As part of the settlement, we agreed to pay $12.5 million in settlement of all claims associated with the litigation. In January 2011, the U.S. District Court for the District of Columbia approved the settlement and dismissed the case.
(f) Divestment of Prialt business
We divested our Prialt assets and rights to Azur Pharma International Limited (Azur, which has since been acquired by Jazz Pharmaceuticals plc) in May 2010 and recorded a net loss on divestment of $1.5 million, which is comprised of total consideration of $14.6 million less the net book value of Prialt assets and transaction costs. The total consideration used to calculate the loss on divestment was comprised of cash proceeds received in 2010 of $5.0 million and the present value of deferred non-contingent consideration at the close of the transaction of $9.6 million. During 2012, we received the deferred non-contingent consideration of $12.0 million. We are also entitled to receive additional performance-related milestones and royalties.
127
Elan Corporation, plc
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
7. Settlement Reserve Charge
In December 2010, we finalized the agreement-in-principle with the U.S. Attorney’s Office for the District of Massachusetts to resolve all aspects of the U.S. Department of Justice’s investigation of sales and marketing practices for Zonegran® (zonisamide), an antiepileptic prescription medicine that we divested in 2004. During 2010, we recorded a $206.3 million reserve charge for the settlement, interest and related costs and the settlement was paid in March 2011.
This resolution of the Zonegran investigation could give rise to other investigations or litigation by state government entities or private parties.
8. Net Interest Expense
Net interest expense for the years ended December 31 consisted of the following (in millions):
| 2012 | 2011 | 2010 | ||||||||||
| Interest expense: |
||||||||||||
| 2016 Notes issued October 2009 |
$ | 32.2 | $ | 52.3 | $ | 54.5 | ||||||
| 2016 Notes issued August 2010 |
10.4 | 16.7 | 6.5 | |||||||||
| 6.25% Notes |
9.3 | — | — | |||||||||
| 2013 Fixed Rate Notes |
— | 31.8 | 40.9 | |||||||||
| 2013 Floating Rate Notes |
— | 0.4 | 5.2 | |||||||||
| 2011 Floating Rate Notes |
— | — | 9.4 | |||||||||
| Amortization of deferred financing costs |
3.1 | 5.3 | 5.4 | |||||||||
| Foreign exchange (gain)/loss |
1.2 | (2.0 | ) | (2.5 | ) | |||||||
| Other |
1.0 | 1.3 | 0.2 | |||||||||
|
|
|
|
|
|
|
|||||||
| Interest expense |
$ | 57.2 | $ | 105.8 | $ | 119.6 | ||||||
|
|
|
|
|
|
|
|||||||
| Interest income: |
||||||||||||
| Cash and cash equivalents interest |
$ | (0.4 | ) | $ | (0.7 | ) | $ | (1.2 | ) | |||
| Investment interest |
(0.2 | ) | (0.2 | ) | — | |||||||
|
|
|
|
|
|
|
|||||||
| Interest income |
$ | (0.6 | ) | $ | (0.9 | ) | $ | (1.2 | ) | |||
|
|
|
|
|
|
|
|||||||
| Net interest expense |
$ | 56.6 | $ | 104.9 | $ | 118.4 | ||||||
|
|
|
|
|
|
|
|||||||
For additional information on our debt, refer to Note 24 to the Consolidated Financial Statements.
128
Elan Corporation, plc
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
9. Equity Method Investments
The carrying amount of equity method investments at December 31 of each year consisted of the following (in millions):
| Janssen AI | Proteostasis | Alkermes plc | Total | |||||||||||||
| $ | 235.0 | $ | — | $ | — | $ | 235.0 | |||||||||
| Net loss on equity method investments |
(26.0 | ) | — | — | (26.0 | ) | ||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| 209.0 | — | — | 209.0 | |||||||||||||
| Addition |
— | 20.0 | 528.6 | 548.6 | ||||||||||||
| Net loss on equity method investments — continuing operations |
(78.4 | ) | (2.7 | ) | — | (81.1 | ) | |||||||||
| Net loss on equity method investments — discontinued operations |
— | — | (0.7 | ) | (0.7 | ) | ||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| 130.6 | 17.3 | 527.9 | 675.8 | |||||||||||||
| Share of net losses of equity method investment — continuing operations |
(101.2 | ) | (3.3 | ) | — | (104.5 | ) | |||||||||
| Impairment of equity method investment — continuing operations |
(117.3 | ) | — | — | (117.3 | ) | ||||||||||
| Net loss on equity method investment — discontinued operations |
— | — | (7.2 | ) | (7.2 | ) | ||||||||||
| Addition |
76.9 | — | — | 76.9 | ||||||||||||
| Disposal of equity method investment |
— | — | (394.2 | ) | (394.2 | ) | ||||||||||
| Reclassification to available for sale investment |
— | — | (126.5 | ) | (126.5 | ) | ||||||||||
| Reclass of excess of losses over investment to current liabilities |
11.0 | — | — | 11.0 | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| $ | — | $ | 14.0 | $ | — | $ | 14.0 | |||||||||
|
|
|
|
|
|
|
|
|
|||||||||
Janssen AI
In September 2009, Janssen AI, a newly formed subsidiary of Johnson & Johnson, acquired substantially all of the assets and rights related to our AIP collaboration with Wyeth (which has been acquired by Pfizer). In consideration for the transfer of these assets and rights, we received a 49.9% equity interest in Janssen AI. In general, Elan is entitled to a 49.9% share of all net profits generated by Janssen AI beginning from the date Janssen AI becomes net profitable and certain royalty payments upon the commercialization of products under the AIP collaboration. Johnson & Johnson also committed to fund up to $500.0 million towards the further development and commercialization of the AIP to the extent the funding is required by the collaboration. Any required additional expenditures in respect of Janssen AI’s obligations under the AIP collaboration in excess of the initial $500.0 million funding commitment is required to be funded by Elan and Johnson & Johnson in proportion to their respective shareholdings up to a maximum additional commitment of $400.0 million in total. In the event that further funding is required beyond the $400.0 million, such funding will be on terms determined by the board of Janssen AI, with Johnson & Johnson and Elan having a right of first offer to provide additional funding. If we fail to provide our share of the $400.0 million commitment or any additional funding that is required for the development of the AIP, and if Johnson & Johnson or a third party elects to fund such an amount, our interest in Janssen AI could, at the option of Johnson & Johnson, be commensurately reduced. We have recorded our investment in Janssen AI as an equity method investment on the Consolidated Balance Sheet as we have the ability to exercise significant influence, but not control, over the investee. The investment was initially recognized based on the estimated fair value of the investment acquired, representing the fair value of our proportionate 49.9% share of Janssen AI’s total net assets at inception, which were comprised of the AIP assets and the asset created by the Johnson & Johnson contingent funding commitment.
During 2012, the remaining balance of the initial $500.0 million funding commitment, which amounted to $57.6 million at December 31, 2011, was spent. Subsequent to the full utilization of the initial $500.0 million funding commitment, we provided funding of $76.9 million to Janssen AI during 2012. At December 31, 2012, there was an excess of losses over investment in Janssen AI of $11.0 million (2011: $Nil), which is included in current liabilities. In addition, we provided funding to Janssen AI of $29.9 million in January 2013, which will be recorded in the 2013 Consolidated Financial Statements.
129
Elan Corporation, plc
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
On August 6, 2012, Johnson & Johnson issued a press release announcing the discontinuation of the development of bapineuzumab intravenous in mild to moderate Alzheimer’s disease based on the co-primary clinical endpoints not being met in the Janssen AI-led Phase 3 clinical studies. As a result of the discontinuation, we recorded a non-cash impairment charge of $117.3 million on our equity method investment in Janssen AI, representing the full initial estimated value of Elan’s 49.9% share of the Janssen AI AIP assets. Janssen AI recorded an impairment charge of $678.9 million representing its full carrying value of the AIP assets.
Under the equity method, investors are required to recognize their share of the earnings or losses of an investee in the periods for which they are reported in the financial statements of the investee as this is normally considered an appropriate means of recognizing increases or decreases in the economic resources underlying the investments. However, Johnson & Johnson committed to wholly fund up to an initial $500.0 million of development and commercialization expenses incurred by Janssen AI so the recognition by Elan of a share of Janssen AI losses that were solely funded by Johnson & Johnson’s $500.0 million commitment would have resulted in an inappropriate decrease in Elan’s share of the economic resources underlying the investment in Janssen AI. Accordingly, until the $500.0 million funding commitment was utilized, we applied the HLBV method to determine how an increase or decrease in net assets of Janssen AI affected Elan’s interest in the net assets of Janssen AI on a period by period basis. Under the HLBV method, an investor determines its share of the earnings or losses of an investee by determining the difference between its claim on the investee’s book value at the end and beginning of the period. Elan’s claim on Janssen AI’s book value as of December 31, 2012 was $Nil (2011: $117.3 million, after adjusting for basis differences) due to the non-cash impairment charge of $117.3 million recorded in 2012 representing the full initial estimated value of Elan’s 49.9% share of the Janssen AI AIP assets.
As of December 31, 2011, the carrying value of our Janssen AI equity method investment of $130.6 million was approximately $185 million below our share of Janssen AI’s reported book value of its net assets. This difference related to the lower estimated value of Janssen AI’s AIP assets when the equity method investment was initially recorded, and the asset created by the Johnson & Johnson $500.0 million contingent funding commitment. The difference in the initial estimated values of the AIP assets was eliminated during 2012 when Elan and Janssen AI recorded impairment charges of $117.3 million and $678.9 million, respectively, representing their respective initial estimated values of the AIP assets. In relation to the asset created by the Johnson & Johnson contingent funding commitment, which was a limited life asset, the basis difference was amortized to the Consolidated Statement of Operations on a pro rata basis; based on the actual amount of Janssen AI losses that were solely funded by Johnson & Johnson in each period as compared to the total $500.0 million, which was the total amount solely funded by Johnson & Johnson. This basis difference was fully amortized during 2012 when the remaining balance of the initial $500.0 million funding commitment provided by Johnson & Johnson to Janssen AI was spent. During 2012, we recorded amortization expense of $13.3 million (2011: $50.9 million; 2010: $26.0 million).
The net loss on the Janssen AI equity method investment for the year ended December 31, 2012 of $218.5 million (2011: $78.4 million; 2010: $26.0 million) was comprised of $87.9 million (2011: $Nil; 2010: $Nil) relating to our share of the losses of Janssen AI in excess of the losses funded solely by Johnson & Johnson’s initial $500.0 million funding commitment; the amortization expense of $13.3 million (2011: $50.9 million; 2010: $26.0 million) related to the basis differences described above and the non-cash impairment charge of $117.3 million (2011: $Nil, 2010: $Nil) representing the full initial estimated value of Elan’s 49.9% share of the Janssen AI AIP assets. The net loss on the Janssen AI equity method investment for the year ended December 31, 2011 also includes a charge of $27.5 million to correct an immaterial error from prior periods relating to our accounting for our equity method investment in Janssen AI.
Summarized balance sheet amounts of Janssen AI are presented below at December 31 of each year (in millions):
| 2012 | 2011 | |||||||
| Current assets |
$ | 41.9 | $ | 12.9 | ||||
| Non-current assets |
$ | 9.3 | $ | 688.6 | ||||
| Current liabilities |
$ | 60.6 | $ | 60.2 | ||||
| Non-current liabilities |
$ | 0.9 | $ | 8.9 | ||||
130
Elan Corporation, plc
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Summarized income statement amounts of Janssen AI is presented below for the years to December 31, 2012, 2011 and 2010 (in millions):
| 2012 | 2011 | 2010 | ||||||||||
| R&D expenses for the year |
$ | 188.7 | $ | 185.3 | $ | 141.2 | ||||||
| Asset impairment charge |
$ | 678.9 | $ | — | $ | — | ||||||
| Net loss for the year |
$ | 913.7 | $ | 216.3 | $ | 173.6 | ||||||
Proteostasis
In May 2011, we invested $20.0 million into equity capital of Proteostasis and became a 24% shareholder. Our $20.0 million equity interest in Proteostasis has been recorded as an equity method investment on the Consolidated Balance Sheet. The net loss recorded on the equity method investment in 2012 was $3.3 million (2011: $2.7 million), representing our share of the net losses of Proteostasis.
Alkermes plc
Following the completion of the merger between Alkermes, Inc. and EDT on September 16, 2011, we held approximately 25% of the outstanding ordinary shares of Alkermes plc (31.9 million shares). Our equity interest in Alkermes plc was initially recorded as an equity method investment on the Consolidated Balance Sheet at a carrying amount of $528.6 million, based on the closing share price of $16.57 of Alkermes, Inc. shares on the date of the transaction. The initial carrying value was approximately $300 million higher than our share of the book value of the net assets of Alkermes plc. Based on our assessment of the fair value of the net assets of Alkermes plc on the date of the transaction, this difference principally related to identifiable intangible assets and goodwill attributable to the Alkermes, Inc. business prior to its acquisition of EDT.
Under the equity method, we recognized our share of the earnings or losses of Alkermes plc, adjusted for the amortization of basis differences, in the Consolidated Statement of Operations with a corresponding increase or decrease in the carrying amount of the investment on the Consolidated Balance Sheet.
In March 2012, we sold 76% (24.15 million ordinary shares) of our shareholding in Alkermes plc. Following this sale, we continued to own 7.75 million ordinary shares of Alkermes plc, representing an approximate 6% equity interest in Alkermes plc. Following the sale of the 24.15 million ordinary shares, our remaining equity interest in Alkermes plc was classified as an available-for-sale investment in current assets with an initial carrying value of $126.5 million and equity method accounting no longer applied to this investment. For additional information on the disposal of 76% of our shareholding in Alkermes plc, refer to Note 12 to the consolidated financial statements.
On January 31, 2013, we announced that we had agreed to sell all of our remaining 7.75 million ordinary shares of Alkermes plc. The sale closed on February 6, 2013 and we received proceeds of $169.7 million.
For the year ended December 31, 2012, we recorded a net loss on the equity method investment of $7.2 million (2011: $0.7 million) related to our share of the losses of Alkermes plc in the period prior to the disposal of the 24.15 million ordinary shares of Alkermes plc, which has been recognized in the net income from discontinued operations reporting line of the Consolidated Statement of Operations.
For additional information on the EDT transaction with Alkermes, Inc. refer to Note 12.
131
Elan Corporation, plc
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
10. Net Charge on Debt Retirement
2012
In 2012, we redeemed the outstanding aggregate principal amount of the 8.75% Senior Notes due 2016 issued October 2009 (the 2016 Notes issued October 2009) of $472.1 million and the outstanding aggregate principal amount of the 8.75% Senior Notes due 2016 issued August 2010 (the 2016 Notes issued August 2010) of $152.4 million. We recorded a net charge on debt retirement of $76.1 million in 2012 in connection with the redemption of these notes, which was comprised of total early redemption premiums of $58.0 million and the write-off of unamortized deferred financing costs and original issue discounts of $18.1 million.
2011
In 2011, following the divestment of EDT, we redeemed the outstanding aggregate principal amount of the 8.875% Senior Fixed Rate Notes due 2013 (the 2013 Fixed Rate Notes) of $449.5 million and the outstanding aggregate principal amount of the Senior Floating Rate Notes Due 2013 (the 2013 Floating Rate Notes) of $10.5 million. We also redeemed $152.9 million of the outstanding aggregate principal amount of the 2016 Notes issued October 2009 and $47.6 million of the outstanding aggregate principal amount of the 2016 Notes issued August 2010. We recorded a net charge on debt retirement of $47.0 million in 2011 in connection with the redemption of these notes, which was comprised of total early redemption premiums of $33.4 million, the write-off of unamortized deferred financing costs and original issue discounts of $10.2 million and transaction costs of $3.4 million.
2010
During 2010, we redeemed the $300.0 million in aggregate principal amount of the Senior Floating Rate Notes due 2011 (2011 Floating Rate Notes). We also redeemed $15.5 million of the outstanding aggregate principal amount of the 2013 Fixed Rate Notes and $139.5 million of the outstanding aggregate principal amount of the 2013 Floating Rate Notes. We recorded a net charge on debt retirement of $3.0 million in 2010 in connection with the redemption of these notes, relating to the write-off of unamortized deferred financing costs associated with these notes.
For additional information related to our debt and debt redemptions, please refer to Note 24 to the consolidated financial statements.
132
Elan Corporation, plc
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
11. Income Taxes
Provision for/(benefit from) income taxes for the years ended December 31 consisted of the following (in millions):
| 2012 | 2011 | 2010 | ||||||||||
| Continuing Operations: |
||||||||||||
| Irish corporation tax — current |
$ | — | $ | — | $ | 0.5 | ||||||
| Irish corporation tax — deferred |
(369.0 | ) | (37.0 | ) | (29.8 | ) | ||||||
| Foreign taxes — current |
0.6 | (3.4 | ) | 1.5 | ||||||||
| Foreign taxes — deferred |
7.9 | 28.4 | (24.4 | ) | ||||||||
|
|
|
|
|
|
|
|||||||
| Benefit from income taxes — continuing operations |
(360.5 | ) | (12.0 | ) | (52.2 | ) | ||||||
|
|
|
|
|
|
|
|||||||
| Discontinued Operations: |
||||||||||||
| Irish corporation tax — current |
— | — | — | |||||||||
| Irish corporation tax — deferred |
34.0 | 36.9 | 28.5 | |||||||||
| Foreign taxes — current |
— | — | — | |||||||||
| Foreign taxes — deferred |
26.7 | 22.7 | 25.8 | |||||||||
|
|
|
|
|
|
|
|||||||
| Provision for income taxes — discontinued operations |
60.7 | 59.6 | 54.3 | |||||||||
|
|
|
|
|
|
|
|||||||
| Provision for/(benefit from) income taxes — continuing and discontinued operations |
$ | (299.8 | ) | $ | 47.6 | $ | 2.1 | |||||
|
|
|
|
|
|
|
|||||||
| Total current taxes |
0.6 | (3.4 | ) | 2.0 | ||||||||
| Total deferred taxes |
(300.4 | ) | 51.0 | 0.1 | ||||||||
| Tax expense reported in shareholders’ equity related to equity awards |
— | — | 2.4 | |||||||||
The net tax benefit for 2012 for continuing operations was a credit of $360.5 million (2011: $12.0 million benefit; 2010: $52.2 million benefit). The net tax benefits for each of the three years ended December 31, 2012, 2011 and 2010 reflects the availability of Irish and U.S losses and Irish and U.S. income taxes at standard rates in the jurisdictions in which we operate. In 2012, we did not record any adjustment to shareholders’ equity (2011: $Nil; 2010: $2.4 million reduction) to reflect tax shortfalls or windfalls related to equity awards.
Current tax, including Irish corporation tax and foreign taxes, is provided on our taxable profits, using the tax rates and laws that have been enacted by the balance sheet date. In each of the three years ended December 31, 2012, 2011 and 2010, substantially all of our income in Ireland was not subject to tax due to the availability of tax losses or other tax reliefs.
The total deferred tax benefit of $361.1 million for continuing operations for 2012 (2011: $8.6 million benefit; 2010: $54.2 million benefit) includes an Irish deferred tax credit of $369.0 million and a U.S. deferred tax expense of $7.9 million. The Irish deferred tax credit of $369.0 million relates primarily to the recognition of DTAs the benefits of which will more likely than not be recognized by off-setting Irish taxable income arising from the Tysabri divestment announced on February 6, 2013 and the availability of current year Irish losses that are used to off-set profits attributable to discontinued operations. The U.S. deferred tax expense of $7.9 million relates primarily to an increase in the valuation allowance relating to U.S. deferred tax assets we are unlikely to benefit from given the reduced recurring U.S. income going forward as a result of the Tysabri divestment in 2013, offset by the availability of current year U.S. losses that are used to off-set profits attributable to discontinued operations.
In 2011, the $8.6 million deferred tax benefit was primarily due to the availability of Irish and U.S. losses arising on continuing operations offset by a $40.0 million charge arising due to the application of new state tax income attribution rules. Following the introduction of these new rules, we no longer expected to benefit from certain state tax loss and credit carry forwards and therefore reduced our state DTAs by this amount.
In 2010, the $54.2 million deferred tax benefit was primarily due to the availability of Irish and U.S. losses arising on continuing operations which were used to offset profits attributable to discontinued operations.
For a commentary on the net tax charge attributable to discontinued operations for the three years ended December 31, 2012, 2011 and 2010 please refer to Note 12.
133
Elan Corporation, plc
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The effective tax rate differs from the Irish tax rate of 12.5% as follows (in millions):
| 2012 | 2011 | 2010 | ||||||||||
| Net loss before tax from continuing operations |
$ | (733.2 | ) | $ | (465.5 | ) | $ | (613.5 | ) | |||
| Irish standard tax rate |
12.5 | % | 12.5 | % | 12.5 | % | ||||||
| Taxes at the Irish standard rate |
(91.6 | ) | (58.2 | ) | (76.7 | ) | ||||||
| Irish income at rates other than Irish standard rate |
0.1 | 0.6 | (0.6 | ) | ||||||||
| Foreign income at rates other than the Irish standard rate |
(50.5 | ) | (44.8 | ) | (85.9 | ) | ||||||
| Deferred tax impact of new income tax rules |
— | 40.0 | — | |||||||||
| Adjustments to valuation allowance |
(240.8 | ) | 41.9 | 47.7 | ||||||||
| Zonegran settlement(1) |
— | — | 59.2 | |||||||||
| Expenses/losses deriving no tax benefit |
4.0 | 0.5 | 0.5 | |||||||||
| Impairment of carrying value of Janssen AI investment |
14.7 | — | — | |||||||||
| Other |
3.6 | 8.0 | 3.6 | |||||||||
|
|
|
|
|
|
|
|||||||
| Benefit from income taxes |
$ | (360.5 | ) | $ | (12.0 | ) | $ | (52.2 | ) | |||
|
|
|
|
|
|
|
|||||||
| (1) | In 2010, $169.2 million of the $206.3 million settlement reserve charge related to the Zonegran global settlement resolving all U.S. federal and related state Medicaid claims will not be deductible for tax purposes, thus creating a $59.2 million difference in the 2010 tax rate reconciliation. |
The Irish income rate differential reconciling item of $0.1 million for the year ended December 31, 2012 and $0.6 million for the year ended December 31, 2011, primarily relate to profits arising in Elan Finance plc which are taxable at the higher rate of 25%.
The foreign rate differential reconciling item of $50.5 million for the year ended December 31, 2012, was comprised primarily of a $32.3 million tax reduction related to Bermudian income, a $1.1 million tax reduction in ROW income and a $17.1 million benefit related to U.S. losses. The foreign rate differential reconciling item of $44.8 million for the year ended December 31, 2011, was comprised of a $33.2 million tax reduction related to the Bermudian income, a $13.0 million benefit related to U.S. losses partially off-set by an increase of $1.4 million related to ROW income. The foreign rate differential reconciling item of $85.9 million for the year ended December 31, 2010, was comprised of a $46.4 million tax reduction related to the Zonegran settlement charge of $206.3 million, and a $33.5 million tax reduction related to Bermudian income, and a $6.0 million benefit related to U.S. losses.
The valuation allowance differential reconciling item of $240.8 million for the year ended December 31, 2012 relates primarily to the recognition of Irish DTAs expected to be utilized in 2013 as a result of the announced Tysabri divestment. This is partially offset by a U.S. deferred tax charge arising from the increase in the U.S. valuation allowance on DTAs from which we are now unlikely to benefit.
Distribution of net loss for continuing operations before provision for income taxes by geographical area for the years ended December 31 consisted of the following (in millions):
| 2012 | 2011 | 2010 | ||||||||||||
| Ireland |
$ | (926.8 | ) | $ | (688.2 | ) | $ | (632.9 | ) | |||||
| Foreign |
193.6 | 222.7 | 19.4 | |||||||||||
|
|
|
|
|
|
|
|
||||||||
| Net loss before provision for income taxes |
$ | (733.2 | ) | $ | (465.5 | ) | $ | (613.5 | ) | |||||
|
|
|
|
|
|
|
|
||||||||
134
Elan Corporation, plc
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Deferred Tax
The full potential amounts of deferred tax at December 31 of each year consisted of the following deferred tax assets and liabilities (in millions):
| 2012 | 2011 | |||||||
| Deferred tax liabilities: |
||||||||
| Property, plant and equipment |
$ | — | $ | (0.3 | ) | |||
|
|
|
|
|
|||||
| Total deferred tax liabilities |
$ | — | $ | (0.3 | ) | |||
|
|
|
|
|
|||||
| Deferred tax assets: |
||||||||
| Net operating losses |
$ | 354.4 | $ | 327.5 | ||||
| Deferred interest |
263.0 | 236.4 | ||||||
| Intangibles/capitalized items |
6.2 | 8.2 | ||||||
| Tax credits |
85.3 | 84.8 | ||||||
| Reserves/provisions |
31.5 | 41.1 | ||||||
| Property, plant and equipment |
6.0 | 6.8 | ||||||
| Share-based compensation expense |
30.7 | 30.8 | ||||||
| Other |
27.9 | 16.4 | ||||||
|
|
|
|
|
|||||
| Total deferred tax assets |
$ | 805.0 | $ | 752.0 | ||||
|
|
|
|
|
|||||
| Valuation allowance |
$ | (359.5 | ) | $ | (606.6 | ) | ||
|
|
|
|
|
|||||
| Net deferred tax asset |
$ | 445.5 | $ | 145.1 | ||||
|
|
|
|
|
|||||
| Net deferred tax asset is presented as: |
||||||||
| 2012 | 2011 | |||||||
| Current deferred tax asset |
$ | 380.9 | $ | 26.2 | ||||
| Non-current deferred tax asset |
64.6 | 118.9 | ||||||
|
|
|
|
|
|||||
| Net deferred tax asset |
$ | 445.5 | $ | 145.1 | ||||
|
|
|
|
|
|||||
The valuation allowance recorded against the DTAs as of December 31, 2012, was $359.5 million. The net change in the valuation allowance for 2012 was a reduction of $247.1 million (2011: $26.4 million reduction; 2010: $46.7 million increase). The decrease in the valuation allowance of $247.1 million in 2012 arises primarily as a result of a $279.8 million decrease in the Irish valuation allowance and a $32.7 million increase in the U.S. valuation allowance. This net reduction in the valuation allowance primarily arises as a result of the Tysabri divestment and its impact on the recoverability of both our Irish and U.S. deferred tax benefits. In 2011, the reduction in the valuation allowance included the disposal of approximately $60 million of EDT DTAs following the sale of EDT to Alkermes plc. A full valuation allowance was previously recorded against these DTAs.
We have adjusted the above DTAs in relation to net operating losses to exclude stock option deductions for which we have had no book expense. In 2012, we did not record any adjustment to shareholders’ equity (2011: $Nil; 2010: $2.4 million reduction) to reflect tax shortfalls or windfalls related to equity awards.
135
Elan Corporation, plc
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The gross amounts of unused tax loss carryforwards with their expiration dates after adjusting for uncertain tax positions are as follows (in millions):
| At December 31, 2012 | ||||||||||||||||||||
| U.S. | Rest of | |||||||||||||||||||
| Ireland | U.S. State | Federal | World | Total | ||||||||||||||||
| One year |
$ | — | $ | — | $ | — | $ | 5.0 | $ | 5.0 | ||||||||||
| Two years |
— | — | — | — | — | |||||||||||||||
| Three years |
— | 41.0 | — | — | 41.0 | |||||||||||||||
| Four years |
— | 83.3 | — | 1.1 | 84.4 | |||||||||||||||
| Five years |
— | 18.9 | — | 0.9 | 19.8 | |||||||||||||||
| More than five years |
2,615.5 | 79.4 | 523.4 | — | 3,218.3 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
| Total |
$ | 2,615.5 | $ | 222.6 | $ | 523.4 | $ | 7.0 | $ | 3,368.5 | ||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
At December 31, 2012, certain of our Irish subsidiaries had net operating loss carryovers for income tax purposes of $2,615.5 million. These can be carried forward indefinitely but are limited to the same trade/trades.
At December 31, 2012, certain U.S. subsidiaries had net operating loss carryovers for federal income tax purposes of approximately $523.4 million and for state income tax purposes of approximately $222.6 million. These net operating losses include stock option deductions. The federal net operating losses expire from 2018 to 2032. The state net operating losses expire from 2015 to 2032. In addition, at December 31, 2012, certain U.S. subsidiaries had federal research credit carryovers of $40.0 million; orphan drug credit carryovers of $9.7 million and alternative minimum tax (AMT) credits of $6.0 million. The $40.0 million of research credits will expire from 2018 through 2031 and the $9.7 million of orphan drug credits will expire from 2018 through 2020. The AMT credits will not expire. Certain U.S. subsidiaries also had state credit carryovers of $50.3 million which can be carried to subsequent tax years indefinitely. Due to the reduced recurring income as a result of the Tysabri divestment in 2013, we reviewed all federal and state deferred tax assets and recognized an additional valuation allowance against those deferred tax assets from which we do not expect to benefit. We have not had “changes in ownership” as described in the U.S. Internal Revenue Code Section 382 in 2012, 2011 or 2010.
The remaining loss carryovers of $7.0 million have arisen in The Netherlands and are subject to time limits and other local rules.
At December 31, 2012 approximately $559.0 million of net operating losses are derived from stock option exercises and we may record a credit of up to $171.7 million to shareholder’s equity to the extent that these losses are utilized in the future.
No taxes have been provided for the unremitted earnings of our overseas subsidiaries as any tax basis differences relating to investments in these overseas subsidiaries are considered to be permanent in duration. No taxable remittances have occurred during the last 3 years. Cumulative unremitted earnings of overseas subsidiaries totaled approximately $3,235.9 million at December 31, 2012 (2011: $2,973.9 million). Unremitted earnings may be liable to Irish taxation (potentially at a rate of 12.5%) if they were to be distributed as dividends.
Our gross unrecognized tax benefits at December 31, 2012, were $61.7 million (2011: $61.5 million; 2010: $73.4 million), of which $52.8 million (2011: $48.4 million; 2010: $72.2 million), if recognized, would affect the tax charge and as such would impact the effective tax rate. We report accrued interest and penalties related to unrecognized tax benefits in income tax expense. During 2012, we did not accrue any interest relating to unrecognized tax benefits and in total, as of December 31, 2012, we have recorded a liability for potential penalties and interest of $0.5 million and $1.8 million, respectively.
We expect our unrecognized tax benefits to increase by approximately $25 million in 2013 as a result of the Tysabri Transaction.
136
Elan Corporation, plc
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Activity related to our unrecognized tax benefits for the years ended December 31, 2012, consisted of the following (in millions):
| 2012 | 2011 | 2010 | ||||||||||
| Balance at January 1 |
$ | 61.5 | $ | 73.4 | $ | 71.3 | ||||||
| Tax positions related to current year: |
||||||||||||
| Additions |
3.4 | 3.3 | 3.2 | |||||||||
| Tax positions related to prior years: |
||||||||||||
| Additions |
0.5 | — | — | |||||||||
| Reduction |
(0.3 | ) | (13.1 | ) | (1.0 | ) | ||||||
| Settlements |
— | (2.1 | ) | — | ||||||||
| Expiration of statutes of limitations |
(3.4 | ) | — | (0.1 | ) | |||||||
|
|
|
|
|
|
|
|||||||
| Balance at December 31 |
$ | 61.7 | $ | 61.5 | $ | 73.4 | ||||||
|
|
|
|
|
|
|
|||||||
Our major taxing jurisdictions include Ireland and the United States (federal and state). These jurisdictions have varying statutes of limitations. In the United States, the 2008 through 2012 tax years generally remain subject to examination by the respective tax authorities. Additionally, because of our U.S. loss carryforwards, years from 1998 through 2006 may be adjusted. These years generally remain open for three to four years after the loss carryforwards have been utilized. In Ireland, the tax years 2008 to 2012 remain subject to examination by the Irish tax authorities.
12. Discontinued Operations
Tysabri
On February 6, 2013, we announced that we have entered into an asset purchase agreement with Biogen Idec to transfer to Biogen Idec all Tysabri IP and other assets related to Tysabri. As a result of this transaction, Biogen Idec will have sole authority over and exclusive worldwide rights to the development, manufacturing and commercialization of Tysabri. In accordance with the terms of the transaction, upon consummation of the transaction, the existing collaboration arrangements with Biogen Idec will be terminated and Biogen Idec will pay to us an upfront payment of $3.25 billion and continuing royalties on Tysabri in-market sales. We will earn a royalty of 12% of global net sales of Tysabri during the first 12 months following the closing of the transaction. Thereafter, we will earn a royalty of 18% of global net sales up to $2.0 billion each year, and a 25% royalty on annual global net sales above $2.0 billion. The transaction is expected to close in the first half of 2013, subject to the satisfaction of certain conditions, including customary regulatory approvals.
As a result of the decision to dispose of the Tysabri asset rights, the results of Tysabri for the year ended December 31, 2012, are presented as a discontinued operation in the Consolidated Statements of Operations and the comparative amounts have been restated to reflect this classification. The assets of the Tysabri business have been presented as held for sale as of December 31, 2012. Refer to Note 15 for additional information on these assets held for sale.
Prothena
On December 20, 2012, we completed the separation of the Prothena Business into a new, publicly traded company incorporated in Ireland. The issued share capital of Prothena was admitted to trading on the NASDAQ Global Market on December 21, 2012. Prothena focuses on the discovery and development of novel antibodies for the potential treatment of a broad range of diseases that involve protein misfolding or cell adhesion. The separation of the Prothena Business from Elan was completed through a demerger under Irish law. The demerger was effected by Elan transferring our wholly-owned subsidiaries comprising the Prothena Business to Prothena, in exchange for Prothena issuing Prothena ordinary shares directly to Elan shareholders, on a pro rata basis. Prothena’s issuance of its outstanding shares constituted a deemed in specie distribution by Elan to Elan shareholders. Each Elan shareholder received one Prothena ordinary share for every 41 Elan ordinary shares or Elan ADSs held. The total value of the Prothena in specie distribution of $105.7 million was based on the carrying value of the net assets that were transferred to Prothena in connection with the separation and distribution. For additional information on the Prothena distribution in specie, refer to Note 28.
137
Elan Corporation, plc
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Immediately following the separation of the Prothena Business, a wholly owned subsidiary of Elan subscribed for 3.2 million newly-issued ordinary shares of Prothena, representing 18% of the outstanding ordinary shares of Prothena. This investment was recorded as an available for sale investment on the Consolidated Balance Sheet at an initial fair value of $22.9 million.
The financial results of the Prothena Business for the period up to December 20, 2012, the effective date of the separation, have been presented as a discontinued operation in the 2012 Consolidated Statements of Operations and comparative amounts have been restated to reflect this classification.
EDT
On September 16, 2011, we announced the completion of the merger between Alkermes, Inc. and EDT following the approval of the merger by Alkermes, Inc. shareholders on September 8, 2011. Alkermes, Inc. and EDT were combined under a new holding company incorporated in Ireland named Alkermes plc. In connection with the transaction, we received $500.0 million in cash and 31.9 million ordinary shares of Alkermes plc. At the close of the transaction, we held approximately 25% of the equity of Alkermes plc, with the existing shareholders of Alkermes, Inc. holding the remaining 75% of the equity. Alkermes plc shares are registered in the United States and trade on the NASDAQ stock market. Our equity interest in Alkermes plc was recorded as an equity method investment on the Consolidated Balance Sheet at an initial carrying value of $528.6 million, based on the closing share price of $16.57 of Alkermes, Inc. shares on the date of the transaction.
Following the disposal of the EDT business in September 2011, we did not report the results of EDT as a discontinued operation as we continued to have significant continuing involvement in the operations of Alkermes plc through our 25% equity interest.
On March 13, 2012, we announced that we had sold 76% (24.15 million ordinary shares) of our shareholding in Alkermes plc for net proceeds of $380.9 million after deduction of underwriter and other fees. Following this sale, we continued to own 7.75 million ordinary shares of Alkermes plc, representing an approximate 6% equity interest in Alkermes plc. Following the disposal of 76% of our shareholding in Alkermes plc, our shareholding ceased to qualify as an equity method investment and as a result, the results of EDT are presented as a discontinued operation in the Consolidated Statements of Operations for the comparative periods.
On January 31, 2013, we announced that we had agreed to sell all of our remaining 7.75 million ordinary shares of Alkermes plc. The sale closed on February 6, 2013 and we received proceeds of $169.7 million.
138
Elan Corporation, plc
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(a) Income statement
The income statement financial information relating to Tysabri for the years ended December 31, 2012, 2011 and 2010; the Prothena Business for the period up to December 20, 2012 and the years ended December 31, 2011 and 2010; and the EDT business for the years ended December 31, 2012, 2011 and 2010, are set out below (in millions):
| 2012 | Tysabri | Prothena | EDT | Total | ||||||||||||
| Revenue |
$ | 1,202.6 | $ | — | $ | — | $ | 1,202.6 | ||||||||
| Cost of sales |
655.5 | — | — | 655.5 | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Gross margin |
547.1 | — | — | 547.1 | ||||||||||||
| Operating expenses: |
||||||||||||||||
| Selling, general and administrative expenses |
113.2 | 2.0 | — | 115.2 | ||||||||||||
| Research and development expenses |
62.0 | 31.3 | — | 93.3 | ||||||||||||
| Net loss on divestment of business |
— | 17.9 | — | 17.9 | ||||||||||||
| Other net charges |
4.2 | — | — | 4.2 | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Total operating expenses |
179.4 | 51.2 | — | 230.6 | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Operating income/(loss) |
367.7 | (51.2 | ) | — | 316.5 | |||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Net interest and investment gains and losses: |
||||||||||||||||
| Net interest expense |
— | — | — | — | ||||||||||||
| Net loss on disposal of equity method investment |
— | — | 13.3 | 13.3 | ||||||||||||
| Net loss on equity method investments |
— | — | 7.2 | 7.2 | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Net interest expense |
— | — | 20.5 | 20.5 | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Net income/(loss) from discontinued operations before income taxes |
367.7 | (51.2 | ) | (20.5 | ) | 296.0 | ||||||||||
| Provision for/(benefit from) income taxes |
65.7 | (5.0 | ) | — | 60.7 | |||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Net income/(loss) from discontinued operations (net of tax) |
$ | 302.0 | $ | (46.2 | ) | $ | (20.5 | ) | $ | 235.3 | ||||||
|
|
|
|
|
|
|
|
|
|||||||||
| 2011 | Tysabri | Prothena | EDT | Total | ||||||||||||
| Revenue |
$ | 1,064.1 | $ | — | $ | 177.9 | $ | 1,242.0 | ||||||||
| Cost of sales |
571.9 | — | 67.0 | 638.9 | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Gross margin |
492.2 | — | 110.9 | 603.1 | ||||||||||||
| Operating expenses: |
||||||||||||||||
| Selling, general and administrative expenses |
96.1 | 1.6 | 23.8 | 121.5 | ||||||||||||
| Research and development expenses |
67.7 | 23.7 | 34.3 | 125.7 | ||||||||||||
| Net gain on divestment of business |
— | — | (652.9 | ) | (652.9 | ) | ||||||||||
| Other net charges/(gains) |
1.6 | — | (68.1 | ) | (66.5 | ) | ||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Total operating expenses/(gains) |
165.4 | 25.3 | (662.9 | ) | (472.2 | ) | ||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Operating income/(loss) |
326.8 | (25.3 | ) | 773.8 | 1,075.3 | |||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Net interest and investment gains and losses: |
||||||||||||||||
| Net interest expense |
— | — | 1.0 | 1.0 | ||||||||||||
| Net loss on equity method investments |
— | — | 0.7 | 0.7 | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Net interest and investment gains and losses |
— | — | 1.7 | 1.7 | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Net income/(loss) from discontinued operations before income taxes |
326.8 | (25.3 | ) | 772.1 | 1,073.6 | |||||||||||
| Provision for/(benefit from) income taxes |
56.4 | (2.5 | ) | 5.7 | 59.6 | |||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Net income/(loss) from discontinued operations (net of tax) |
$ | 270.4 | $ | (22.8 | ) | $ | 766.4 | $ | 1,014.0 | |||||||
|
|
|
|
|
|
|
|
|
|||||||||
139
Elan Corporation, plc
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
| 2010 | Tysabri | Prothena | EDT | Total | ||||||||||||
| Revenue |
$ | 851.5 | $ | — | $ | 274.1 | $ | 1,125.6 | ||||||||
| Cost of sales |
452.7 | — | 118.4 | 571.1 | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Gross margin |
398.8 | — | 155.7 | 554.5 | ||||||||||||
| Operating expenses: |
||||||||||||||||
| Selling, general and administrative expenses |
90.8 | 0.8 | 38.9 | 130.5 | ||||||||||||
| Research and development expenses |
67.8 | 8.7 | 53.7 | 130.2 | ||||||||||||
| Other net charges |
1.2 | — | 2.3 | 3.5 | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Total operating expenses |
159.8 | 9.5 | 94.9 | 264.2 | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Operating income/(loss) |
239.0 | (9.5 | ) | 60.8 | 290.3 | |||||||||||
| Net interest income |
— | — | (0.6 | ) | (0.6 | ) | ||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Net income/(loss) from discontinued operations before income taxes |
239.0 | (9.5 | ) | 61.4 | 290.9 | |||||||||||
| Provision for income taxes |
43.3 | 0.2 | 10.8 | 54.3 | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Net income/(loss) from discontinued operations (net of tax) |
$ | 195.7 | $ | (9.7 | ) | $ | 50.6 | $ | 236.6 | |||||||
|
|
|
|
|
|
|
|
|
|||||||||
(b) Cash Flows
The cash flows attributable to discontinued operations for the years ended December 31, 2012, 2011 and 2010 are set out below (in millions):
| 2012 | Tysabri | Prothena | EDT | Total | ||||||||||||
| Net cash provided by/(used in)operating activities |
$ | 383.0 | $ | (53.0 | ) | $ | — | $ | 330.0 | |||||||
| Net cash used in financing activities |
— | (125.0 | ) | — | (125.0 | ) | ||||||||||
| Net cash (used in)/provided by investing activities |
— | (1.3 | ) | 380.9 | 379.6 | |||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Net cash provided by/(used in) discontinued operations |
$ | 383.0 | $ | (179.3 | ) | $ | 380.9 | $ | 584.6 | |||||||
|
|
|
|
|
|
|
|
|
|||||||||
| 2011 | Tysabri | Prothena | EDT | Total | ||||||||||||
| Net cash provided by/(used in) operating activities |
$ | 338.8 | $ | (19.7 | ) | $ | 114.4 | $ | 433.5 | |||||||
| Net cash (used in)/provided by investing activities |
— | (0.6 | ) | 492.2 | 491.6 | |||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Net cash provided by/(used in) discontinued operations |
$ | 338.8 | $ | (20.3 | ) | $ | 606.6 | $ | 925.1 | |||||||
|
|
|
|
|
|
|
|
|
|||||||||
| 2010 | Tysabri | Prothena | EDT | Total | ||||||||||||
| Net cash provided by/(used in) operating activities |
$ | 257.1 | $ | (9.1 | ) | $ | 112.3 | $ | 360.3 | |||||||
| Net cash used in investing activities |
— | (2.6 | ) | (15.3 | ) | (17.9 | ) | |||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Net cash provided by/(used in) discontinued operations |
$ | 257.1 | $ | (11.7 | ) | $ | 97.0 | $ | 342.4 | |||||||
|
|
|
|
|
|
|
|
|
|||||||||
140
Elan Corporation, plc
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(c) Revenue
Tysabri Revenue:
Tysabri revenue for the years ended December 31, 2012, 2011 and 2010 consisted of the following (in millions):
| 2012 | 2011 | 2010 | ||||||||||
| Product revenue: |
||||||||||||
| Tysabri — U.S. |
$ | 886.0 | $ | 746.5 | $ | 593.2 | ||||||
| Tysabri — ROW |
316.6 | 317.6 | 258.3 | |||||||||
|
|
|
|
|
|
|
|||||||
| Total Tysabri revenue |
$ | 1,202.6 | $ | 1,064.1 | $ | 851.5 | ||||||
|
|
|
|
|
|
|
|||||||
Until the Tysabri Transaction closes, Tysabri continues to be marketed by Elan in collaboration with Biogen Idec and, subject to certain limitations imposed by the parties, we share with Biogen Idec most of the development and commercialization costs for Tysabri. Biogen Idec is responsible for manufacturing the product. In the United States, we purchase Tysabri from Biogen Idec and are responsible for distribution. Consequently, we record as revenue the net sales of Tysabri in the U.S. market. We purchase product from Biogen Idec at a price that includes the cost of manufacturing, plus Biogen Idec’s gross profit on Tysabri, and this cost, together with royalties payable to other third parties, is included in cost of sales.
Global in-market net sales of Tysabri for the years ended December 31 consisted of the following (in millions):
| 2012 | 2011 | 2010 | ||||||||||
| United States |
$ | 886.0 | $ | 746.5 | $ | 593.2 | ||||||
| ROW |
745.1 | 764.1 | 636.8 | |||||||||
|
|
|
|
|
|
|
|||||||
| Total Tysabri global in-market net sales |
$ | 1,631.1 | $ | 1,510.6 | $ | 1,230.0 | ||||||
|
|
|
|
|
|
|
|||||||
Until the Tysabri Transaction closes, outside of the United States, Biogen Idec is responsible for distribution and we record as revenue our share of the profit or loss on these sales of Tysabri, plus the reimbursement from Biogen Idec of Elan’s directly incurred expenses on these sales, which are primarily comprised of royalties, that we incur and are payable by us to third parties, and which we record in cost of sales.
In 2012, we recorded net Tysabri ROW revenue of $316.6 million (2011: $317.6 million; 2010: $258.3 million), which was calculated as follows (in millions):
| 2012 | 2011 | 2010 | ||||||||||
| ROW in-market sales by Biogen Idec |
$ | 745.1 | $ | 764.1 | $ | 636.8 | ||||||
| ROW operating expenses incurred by Elan and Biogen Idec |
(316.3 | ) | (349.3 | ) | (303.8 | ) | ||||||
|
|
|
|
|
|
|
|||||||
| ROW operating profit generated by Elan and Biogen Idec |
428.8 | 414.8 | 333.0 | |||||||||
|
|
|
|
|
|
|
|||||||
| Elan’s 50% share of Tysabri ROW collaboration operating profit |
214.4 | 207.4 | 166.5 | |||||||||
| Elan’s directly incurred costs |
102.2 | 110.2 | 91.8 | |||||||||
|
|
|
|
|
|
|
|||||||
| Net Tysabri ROW revenue |
$ | 316.6 | $ | 317.6 | $ | 258.3 | ||||||
|
|
|
|
|
|
|
|||||||
141
Elan Corporation, plc
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
EDT Revenue:
Revenue from the EDT business for the period up to September 16, 2011, the date of divestment of the EDT business, and for the year ended December 31, 2010 consisted of the following (in millions):
| 2011 | 2010 | |||||||
| Product revenue: |
||||||||
| Manufacturing revenue and royalties: |
||||||||
|
TriCor® 145 |
$ | 35.5 | $ | 54.5 | ||||
|
Focalin®XR/Ritalin ®LA |
25.9 | 33.0 | ||||||
|
Ampyra® |
22.6 | 56.8 | ||||||
|
Verelan® |
18.1 | 21.8 | ||||||
|
Naprelan® |
5.9 | 12.6 | ||||||
|
Skelaxin® |
— | 5.9 | ||||||
| Other |
60.0 | 76.8 | ||||||
|
|
|
|
|
|||||
| Total product revenue from the EDT business |
168.0 | 261.4 | ||||||
|
|
|
|
|
|||||
| Contract revenue: |
||||||||
| Research revenue |
6.0 | 8.2 | ||||||
| Milestone payments |
3.9 | 4.5 | ||||||
|
|
|
|
|
|||||
| Total contract revenue from the EDT business |
9.9 | 12.7 | ||||||
|
|
|
|
|
|||||
| Total revenue from the EDT business |
$ | 177.9 | $ | 274.1 | ||||
|
|
|
|
|
|||||
(d) Net Gain on Divestment of Business
Disposal of the Prothena Business
The net loss recorded on the divestment of the Prothena Business during 2012 was $17.9 million, primarily comprised of transaction and other costs of $17.1 million and a share-based compensation charge of $0.8 million.
Disposal of the EDT business
The net gain recorded on the divestment of the EDT business for the year ended December 31, 2011 amounted to $652.9 million, and was calculated as follows (in millions):
| Cash consideration |
$ | 500.0 | ||
| Investment in Alkermes plc |
528.6 | |||
|
|
|
|||
| Total consideration |
$ | 1,028.6 | ||
| Property, plant and equipment |
(202.0 | ) | ||
| Goodwill and other intangible assets |
(53.0 | ) | ||
| Working capital and other net assets |
(84.5 | ) | ||
| Transaction and other costs |
(36.2 | ) | ||
|
|
|
|||
| Net gain on divestment of business |
$ | 652.9 | ||
|
|
|
142
Elan Corporation, plc
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(e) Other Net Charges/(Gains)
Prothena did not incur any other net gains and charges in the period to December 20, 2012, or for the years ended December 31, 2011 and December 31, 2010. Other net gains and charges from Tysabri for the years ended December 31, 2012, 2011 and 2010 and the EDT business for the period up to September 16, 2011, the date of divestment of the EDT business, and for the year ended December 31, 2010 consisted of the following (in millions):
| 2012 | 2011 | 2010 | ||||||||||
| (a) Severance, restructuring and other costs |
$ | 4.2 | $ | 11.6 | $ | 3.5 | ||||||
| (b) Facilities and other asset impairment charges |
— | 6.4 | — | |||||||||
| (c) Legal settlement gains and awards |
— | (84.5 | ) | — | ||||||||
|
|
|
|
|
|
|
|||||||
| Total other net (gains)/charges |
$ | 4.2 | $ | (66.5 | ) | $ | 3.5 | |||||
|
|
|
|
|
|
|
|||||||
(a) Severance, restructuring and other costs
During 2012, we incurred severance restructuring and other costs of $4.2 million related to the Tysabri business resulting from the closure of the South San Francisco facility and associated reduction in headcount.
During 2011, severance restructuring and other costs of $11.6 million were incurred by our discontinued operations, including $1.6 million related to the Tysabri business and $10.0 million related to the closure of EDT’s King of Prussia, Pennsylvania site.
During 2010, severance restructuring and other costs of $3.5 million were incurred by our discontinued operations, including $1.2 million related to the Tysabri business and $2.3 million related to the realignment of resources in the EDT business to meet our business structure.
(b) Facilities and other asset impairment charges
During 2011, EDT incurred asset impairment charges of $6.4 million (2010: $Nil), principally relating to the closure of EDT’s King of Prussia, Pennsylvania site.
(c) Legal settlement gains and awards
In June 2008, a jury ruled in the U.S. District Court for the District of Delaware that Abraxis Biosciences, Inc. (Abraxis, since acquired by Celgene Corporation) had infringed a patent owned by EDT in relation to the application of NanoCrystal® technology to Abraxane®. EDT was awarded $55 million, applying a royalty rate of 6% to sales of Abraxane from January 1, 2005 through June 13, 2008 (the date of the verdict), though the judge had yet to rule on post-trial motions or enter the final order. This award and damages associated with the continuing sales of the Abraxane product were subject to interest. In February 2011, EDT entered into an agreement with Abraxis to settle this litigation. As part of the settlement agreement with Abraxis, EDT received $78.0 million in full and final settlement in March 2011 and recorded a gain of this amount.
During 2011, EDT entered into an agreement with Alcon Laboratories, Inc. (Alcon) to settle litigation in relation to the application of EDT’s NanoCrystal technology. As part of the settlement agreement with Alcon, EDT received $6.5 million in full and final settlement.
(f) Net Loss on Disposal of Equity Method Investment
Following the completion of the merger between Alkermes, Inc. and EDT in September 2011, we held approximately 25% of the equity of Alkermes plc (31.9 million shares) at the close of the transaction. Our equity interest in Alkermes plc was recorded as an equity method investment on the Consolidated Balance Sheet at an initial carrying amount of $528.6 million, based on the closing share price of $16.57 of Alkermes, Inc. shares on the date of the transaction.
143
Elan Corporation, plc
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
In March 2012, we sold 76% (24.15 million ordinary shares) of our shareholding in Alkermes plc and received net proceeds of $380.9 million, after deduction of underwriter and other fees. Following this sale we continued to own 7.75 million ordinary shares of Alkermes plc, representing an approximate 6% equity interest in Alkermes plc. Following the sale of the 24.15 million ordinary shares, our remaining equity interest in Alkermes plc ceased to qualify as an equity method investment and was recorded as an available-for-sale investment with an initial carrying value of $126.5 million. The net loss on disposal of $13.3 million was calculated as follows (in millions):
| Share proceeds |
$ | 398.5 | ||
| Initial carrying value of available for sale investment |
126.5 | |||
| Carrying value of equity method investment divested |
(520.7 | ) | ||
| Transaction costs |
(17.6 | ) | ||
|
|
|
|||
| Net loss |
$ | (13.3 | ) | |
|
|
|
On January 31, 2013, we announced that we had agreed to sell all of our remaining 7.75 million ordinary shares of Alkermes plc. The sale closed on February 6, 2013 and we received proceeds of $169.7 million.
(g) Net Loss on Equity Method Investment
For the year ended December 31, 2012, we recorded a net loss on the equity method investment of $7.2 million (2011: $0.7 million) related to our share of the losses of Alkermes plc in the period prior to the disposal of the 24.15 million ordinary shares of Alkermes plc.
For additional information relating to our equity method investments, refer to Note 9 to the Consolidated Financial Statements. For additional information relating to our available for sale investments, refer to Note 17.
(h) Provision for Taxes
The net tax charge attributable to discontinued operations for the year ended December 31, 2012 reflects Irish and U.S. income taxes on Tysabri profits and an Irish and U.S. tax benefit on Prothena losses.
The net tax charge attributable to discontinued operations for the year ended December 31, 2011 reflects Irish and U.S. income taxes on Tysabri profits, an Irish tax benefit on Irish Prothena Business losses, U.S. income taxes on U.S. Prothena profits, Irish taxes on EDT Irish profits and a U.S. tax benefit on EDT U.S. losses.
The net tax charge attributable to discontinued operations for the year ended December 31, 2010 reflects Irish and U.S. income taxes on Tysabri profits, an Irish tax benefit on Irish Prothena Business losses, a U.S. income taxes on U.S. Prothena profits and Irish and U.S. income taxes on EDT profits.
The net tax charges for each of the three years ended December 31, 2012, 2011 and 2010 have been classified as deferred as the net profits attributed to discontinued operations were off-set by losses arising in continuing operations. A corresponding net tax benefit reflecting this off-set has been included in the deferred taxes attributable to continuing operations in the Consolidated Statements of Operations for each of the three years ended December 31, 2012, 2011 and 2010.
144
Elan Corporation, plc
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
13. Net Income/(Loss) Per Share
Basic income/(loss) per share is computed by dividing the net income/(loss) for the period available to ordinary shareholders by the weighted-average number of Ordinary Shares outstanding during the period. Diluted net income/(loss) per share is computed by dividing the net income/(loss) for the period by the weighted-average number of Ordinary Shares outstanding and, when dilutive, adjusted for the effect of all dilutive potential Ordinary Shares, including stock options and RSUs.
| 2012 | 2011 | 2010 | ||||||||||
| (in millions) | ||||||||||||
| Net loss — continuing operations |
$ | (372.7 | ) | $ | (453.5 | ) | $ | (561.3 | ) | |||
| Net income — discontinued operations |
235.3 | 1,014.0 | 236.6 | |||||||||
|
|
|
|
|
|
|
|||||||
| Net (loss)/income — total operations |
$ | (137.4 | ) | $ | 560.5 | $ | (324.7 | ) | ||||
|
|
|
|
|
|
|
|||||||
| Basic and diluted net income/(loss) per share for the years ended December 31 is as follows: |
||||||||||||
| Basic and diluted earnings/(loss) per share: |
||||||||||||
| From continuing operations |
$ | (0.63 | ) | $ | (0.77 | ) | $ | (0.96 | ) | |||
| From discontinued operations |
0.40 | 1.73 | 0.40 | |||||||||
|
|
|
|
|
|
|
|||||||
| Total attributable to the ordinary shareholders of the Parent Company |
$ | (0.23 | ) | $ | 0.95 | $ | (0.56 | ) | ||||
|
|
|
|
|
|
|
|||||||
| Basic and diluted weighted average number of ordinary shares outstanding (in millions) — continuing and discontinued operations and total operations |
592.4 | 587.6 | 584.9 | |||||||||
As of December 31, 2012, there were stock options and RSUs outstanding of 21.6 million shares (2011: 23.4 million shares; 2010: 22.9 million shares). All of these stock options and RSUs were anti-dilutive in 2012, 2011 and 2010 but could potentially have a dilutive impact in the future.
14. Restricted Cash
We had total restricted cash (current and non-current) of $16.3 million at December 31, 2012 (2011: $16.3 million), which relates to amounts pledged to secure certain letters of credit.
15. Assets Held for Sale
On February 6, 2013, we announced that we have entered into an asset purchase agreement with Biogen Idec to transfer to Biogen Idec all Tysabri IP and other assets related to Tysabri. As a result of this transaction, Biogen Idec will have sole authority over and exclusive worldwide rights to the development, manufacturing and commercialization of Tysabri. In accordance with the terms of the transaction, upon consummation of the transaction, the existing collaboration arrangements with Biogen Idec will be terminated and Biogen Idec will pay to us an upfront payment of $3.25 billion and continuing royalties on Tysabri in-market sales. We will earn a royalty of 12% of global net sales of Tysabri during the first 12 months following the closing of the transaction. Thereafter, we will earn a royalty of 18% of global net sales up to $2.0 billion each year, and a 25% royalty on annual global net sales above $2.0 billion. The transaction is expected to close in the first half of 2013, subject to the satisfaction of certain conditions, including customary regulatory approvals.
145
Elan Corporation, plc
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The assets of the Tysabri business have been presented as held for sale as of December 31, 2012. The major classes of assets of the Tysabri business presented as held for sale are as follows:
| 2012 | ||||
| Goodwill |
$ | 110.8 | ||
| Other intangible assets |
84.4 | |||
| Inventory |
24.9 | |||
|
|
|
|||
| Total |
$ | 220.1 | ||
|
|
|
|||
Refer to Note 12 for information on the results of Tysabri for the years ended December 31, 2012, 2011 and 2010, which are presented as a discontinued operation in the Consolidated Statements of Operations.
16. Accounts Receivable
The accounts receivable balance as of December 31, 2012, was $193.5 million (2011: $167.7 million). No allowances for doubtful accounts were required as of December 31, 2012 and 2011.
The following customer or collaborator accounts for more than 10% of our accounts receivable at December 31, 2012 and 2011:
| 2012 | 2011 | |||||||
| AmerisourceBergen Corp. |
68 | % | 65 | % | ||||
| Biogen Idec |
32 | % | 35 | % | ||||
As of December 31, 2012 and 2011 there were no trade receivables past due but not impaired.
17. Investment Securities
Current investment securities
Current investment securities at December 31 of each year consisted of the following (in millions):
| 2012 | 2011 | |||||||
| Equity securities — current, at cost less impairments |
$ | 150.4 | $ | 0.3 | ||||
| Unrealized gains on equity securities |
17.5 | 0.1 | ||||||
| Unrealized losses on equity securities |
— | (0.1 | ) | |||||
|
|
|
|
|
|||||
| Total investment securities — current |
$ | 167.9 | $ | 0.3 | ||||
|
|
|
|
|
|||||
Equity securities — current
Marketable equity securities consisted primarily of an equity investment in Alkermes plc. Following the completion of the merger between Alkermes, Inc. and EDT on September 16, 2011, we held approximately 25% of the equity of Alkermes plc (31.9 million shares). Our equity interest in Alkermes plc was recorded as an equity method investment on the Consolidated Balance Sheet at an initial carrying value of $528.6 million, based on the closing share price of $16.57 of Alkermes, Inc. shares on the date of the transaction. In March 2012, we sold 76% (24.15 million ordinary shares) of our shareholding in Alkermes plc for net proceeds of $380.9 million after deduction of underwriter and other fees. Following this sale, we continued to own 7.75 million ordinary shares of Alkermes plc, representing an approximate 6% equity interest in Alkermes plc. Following the sale of the 24.15 million ordinary shares, our remaining equity interest in Alkermes plc ceased to qualify as an equity method investment and was recorded as an available for sale investment with an initial carrying value of $126.5 million. The fair market value of this investment at December 31, 2012 was $143.5 million. For additional information relating to our net loss on disposal of the Alkermes plc equity method investment during 2012, refer to Note 9 to the Consolidated Financial Statements.
146
Elan Corporation, plc
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
On January 31, 2013, we announced that we had agreed to sell all of our remaining 7.75 million ordinary shares of Alkermes plc. The sale closed on February 6, 2013 and we received proceeds of approximately $169.7 million.
Marketable equity securities also include an equity investment in Prothena. On December 20, 2012, we completed the separation of the Prothena Business into a new, publicly traded company incorporated in Ireland. The issued share capital of Prothena was admitted to trading on the NASDAQ Global Market on December 21, 2012. In connection with the separation of the Prothena Business, a wholly owned subsidiary of Elan subscribed for 3.2 million newly-issued ordinary shares of Prothena, representing 18% of the outstanding ordinary shares of Prothena. This investment was recorded as an available for sale investment on the Consolidated Balance Sheet at an initial carrying value of $22.9 million. The fair market value of this investment at December 31, 2012 was $23.3 million.
Marketable equity securities also include investments in emerging pharmaceutical and biotechnology companies. The fair market value of these securities was $1.1 million at December 31, 2012 (2011: $0.3 million).
Non-current investment securities
Non-current investment securities of $8.6 million as of December 31 2012 (2011: $9.8 million) were comprised of equity investments held in privately held biotech companies recorded at cost, less impairments.
Net investment losses/(gains) (in millions)
| 2012 | 2011 | 2010 | ||||||||||
| Net gains on sale of current investment securities |
$ | — | $ | (0.1 | ) | $ | (4.9 | ) | ||||
| Derivative fair value gains |
— | — | (1.2 | ) | ||||||||
| Net gains on sale of non-current investment securities |
— | (2.3 | ) | (7.9 | ) | |||||||
|
|
|
|
|
|
|
|||||||
| Net investment gains on investment securities |
— | (2.4 | ) | (14.0 | ) | |||||||
| Impairment charges |
1.2 | — | — | |||||||||
| Other |
— | (0.2 | ) | 1.2 | ||||||||
|
|
|
|
|
|
|
|||||||
| Net investment (gains)/losses |
$ | 1.2 | $ | (2.6 | ) | $ | (12.8 | ) | ||||
|
|
|
|
|
|
|
|||||||
In 2012, we recorded an impairment charge of $1.2 million (2011: $Nil; 2010: $Nil) related to an other-than-temporary impairment of our marketable equity securities.
The framework used for measuring the fair value of our investment securities is described in Note 31.
18. Inventory
The inventory balance at December 31, 2012 of $24.9 million consisted of Tysabri finished goods and has been presented as part of the assets held for sale. For information on the assets of the Tysabri business that have been presented as held for sale as of December 31, 2012, refer to Note 15.
Product inventories at December 31, 2011 of $23.8 million also consisted of Tysabri finished goods inventory.
147
Elan Corporation, plc
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
19. Prepaid and Other Current Assets
Prepaid and other current assets at December 31 of each year consisted of the following (in millions):
| 2012 | 2011 | |||||||
| Prepayments |
$ | 10.5 | $ | 10.8 | ||||
| Deferred consideration |
— | 11.4 | ||||||
| Other current assets |
2.7 | 3.5 | ||||||
|
|
|
|
|
|||||
| Total prepaid and other current assets |
$ | 13.2 | $ | 25.7 | ||||
|
|
|
|
|
|||||
The deferred consideration balance at December 31, 2011 related to the present value of deferred non-contingent consideration receivable from Azur (which has since been acquired by Jazz) in respect of the divestment of the Prialt assets and rights in May 2010. During 2012, we received the deferred consideration of $12.0 million. For additional information on this transaction, refer to Note 6.
20. Property, Plant and Equipment
| Land & | Plant & | |||||||||||
| Buildings | Equipment | Total | ||||||||||
| (In millions) | ||||||||||||
| Cost: |
||||||||||||
| $ | 375.9 | $ | 319.9 | $ | 695.8 | |||||||
| Additions |
19.4 | 9.4 | 28.8 | |||||||||
| Impairment |
(29.8 | ) | (14.6 | ) | (44.4 | ) | ||||||
| Disposals |
(283.3 | ) | (250.8 | ) | (534.1 | ) | ||||||
|
|
|
|
|
|
|
|||||||
| $ | 82.2 | $ | 63.9 | $ | 146.1 | |||||||
|
|
|
|
|
|
|
|||||||
| Additions |
2.7 | 6.0 | 8.7 | |||||||||
| Disposals |
(3.4 | ) | (13.4 | ) | (16.8 | ) | ||||||
|
|
|
|
|
|
|
|||||||
| $ | 81.5 | $ | 56.5 | $ | 138.0 | |||||||
|
|
|
|
|
|
|
|||||||
| Accumulated depreciation and impairment: |
||||||||||||
| $ | (167.2 | ) | $ | (241.1 | ) | $ | (408.3 | ) | ||||
| Charged in year |
(8.6 | ) | (11.3 | ) | (19.9 | ) | ||||||
| Impairment |
21.5 | 12.9 | 34.4 | |||||||||
| Disposals |
132.6 | 198.3 | 330.9 | |||||||||
|
|
|
|
|
|
|
|||||||
| $ | (21.7 | ) | $ | (41.2 | ) | $ | (62.9 | ) | ||||
|
|
|
|
|
|
|
|||||||
| Charged in year |
(5.9 | ) | (4.3 | ) | (10.2 | ) | ||||||
| Impairment |
(50.1 | ) | (14.2 | ) | (64.3 | ) | ||||||
| Disposals |
0.7 | 11.4 | 12.1 | |||||||||
|
|
|
|
|
|
|
|||||||
| (77.0 | ) | (48.3 | ) | (125.3 | ) | |||||||
|
|
|
|
|
|
|
|||||||
| Net book value: December 31, 2012 |
$ | 4.5 | $ | 8.2 | $ | 12.7 | ||||||
|
|
|
|
|
|
|
|||||||
| Net book value: December 31, 2011 |
$ | 60.5 | $ | 22.7 | $ | 83.2 | ||||||
|
|
|
|
|
|
|
|||||||
During 2012, we recorded an asset impairment charge of $64.3 million within other net charges in the Consolidated Statement of Operations relating to the planned closure of our facilities in South San Francisco following the separation of the Prothena Business and cessation of the remaining early stage research activities. For additional information on this transaction, refer to Note 12.
148
Elan Corporation, plc
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
On September 16, 2011, we announced the completion of the merger between Alkermes, Inc. and EDT. In connection with this transaction, we disposed of land and buildings with a net book value of $150.7 million and plant and equipment with a net book value of $51.3 million related to EDT. For additional information on this transaction, refer to Note 12.
During 2011, we recorded an asset impairment charge of $10.0 million within other net charges in the Consolidated Statement of Operations relating to a consolidation of facilities in South San Francisco and the closure of EDT’s King of Prussia, Pennsylvania site.
We had no assets acquired under capital leases as of December 31, 2012 or 2011.
21. Goodwill and Other Intangible Assets
| Goodwill | Other Intangible Assets |
Total | ||||||||||
| (In millions) | ||||||||||||
| Cost: |
||||||||||||
| $ | 257.1 | $ | 426.0 | $ | 683.1 | |||||||
| Additions |
— | 2.6 | 2.6 | |||||||||
| Disposals |
(49.7 | ) | (173.0 | ) | (222.7 | ) | ||||||
| Impairment |
— | (0.3 | ) | (0.3 | ) | |||||||
|
|
|
|
|
|
|
|||||||
| $ | 207.4 | $ | 255.3 | $ | 462.7 | |||||||
|
|
|
|
|
|
|
|||||||
| Additions |
— | 1.9 | 1.9 | |||||||||
| Disposals |
(0.6 | ) | (4.4 | ) | (5.0 | ) | ||||||
| Transferred to assets held for sale |
(110.8 | ) | (159.2 | ) | (270.0 | ) | ||||||
| Impairment |
— | — | — | |||||||||
|
|
|
|
|
|
|
|||||||
| $ | 96.0 | $ | 93.6 | $ | 189.6 | |||||||
|
|
|
|
|
|
|
|||||||
| Accumulated amortization: |
||||||||||||
| $ | — | $ | (306.6 | ) | $ | (306.6 | ) | |||||
| Charged in year |
— | (15.9 | ) | (15.9 | ) | |||||||
| Disposals |
— | 169.7 | 169.7 | |||||||||
|
|
|
|
|
|
|
|||||||
| $ | — | $ | (152.8 | ) | $ | (152.8 | ) | |||||
|
|
|
|
|
|
|
|||||||
| Charged in year |
— | (14.6 | ) | (14.6 | ) | |||||||
| Disposals |
— | 3.8 | 3.8 | |||||||||
| Transferred to assets held for sale |
— | 74.8 | 74.8 | |||||||||
| Impairment |
— | (1.8 | ) | (1.8 | ) | |||||||
|
|
|
|
|
|
|
|||||||
| — | (90.6 | ) | (90.6 | ) | ||||||||
|
|
|
|
|
|
|
|||||||
| Net book value: December 31, 2012 |
$ | 96.0 | $ | 3.0 | $ | 99.0 | ||||||
|
|
|
|
|
|
|
|||||||
| Net book value: December 31, 2011 |
$ | 207.4 | $ | 102.5 | $ | 309.9 | ||||||
|
|
|
|
|
|
|
|||||||
Other intangible assets consist primarily of computer software as follows (in millions):
| 2012 | 2011 | |||||||
| Tysabri |
$ | — | $ | 96.9 | ||||
| Other intangible assets |
3.0 | 5.6 | ||||||
|
|
|
|
|
|||||
| Total other intangible assets |
$ | 3.0 | $ | 102.5 | ||||
|
|
|
|
|
|||||
149
Elan Corporation, plc
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The assets of the Tysabri business, which have been classified as held for sale as of December 31, 2012, include goodwill that has been allocated to the Tysabri business of $110.8 million and other intangible assets of $84.4 million. For information on the assets of the Tysabri business, which have been classified as held for sale as of December 31, 2012, refer to Note 15.
On December 20, 2012, we completed the separation of the Prothena Business into a new, publicly traded company incorporated in Ireland. In connection with this transaction, we disposed of goodwill of $0.6 million which was allocated to the Prothena Business. In 2012, we also recorded an impairment charge of $1.8 million within other net charges in respect of computer software and other intangible assets which will no longer be utilized as a result of separation of the Prothena Business and cessation of the remaining early stage research activities. For additional information on this transaction, refer to Note 28.
On September 16, 2011, we announced the completion of the merger between Alkermes, Inc. and EDT. As part of this transaction, we disposed of patents, licenses, IP and other intangible assets related to EDT with a net book value of $3.3 million. We also disposed of goodwill of $49.7 million which was allocated to the EDT business. For additional information on this transaction, refer to Note 5. In 2011, we also recorded an impairment charge of $0.3 million (2010: $0.9 million) within other net charges in respect of computer software which will no longer be utilized.
The weighted-average remaining useful life for other intangible assets at December 31, 2012 was 3.0 years (2011: 7.6 years).
Amortization expense for the year ended December 31, 2012 amounted to $14.6 million (2011: $15.9 million; 2010: $28.4 million) and is recorded as cost of sales, selling, general and administrative (SG&A) expenses and R&D expenses in the Consolidated Statements of Operations, as it relates to the respective functions.
As of December 31, 2012, our expected future amortization expense of currently held other intangible assets is as follows (in millions):
| Year ending December 31, 2013 |
$ | 1.3 | ||
| 2014 |
0.8 | |||
| 2015 |
0.6 | |||
| 2016 |
0.2 | |||
| 2017 |
0.1 | |||
| 2018 and thereafter |
— | |||
|
|
|
|||
| Total |
$ | 3.0 | ||
|
|
|
22. Other Assets
Non-current other assets at December 31 of each year consisted of the following (in millions):
| 2012 | 2011 | |||||||
| Deferred financing costs |
$ | 11.8 | $ | 11.1 | ||||
| Other |
6.3 | 13.4 | ||||||
|
|
|
|
|
|||||
| Total other assets |
$ | 18.1 | $ | 24.5 | ||||
|
|
|
|
|
|||||
150
Elan Corporation, plc
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
23. Accrued and Other Current Liabilities, and Other Long-Term Liabilities
Accrued and other current liabilities at December 31 of each year consisted of the following (in millions):
| 2012 | 2011 | |||||||
| Accrued royalties payable |
$ | 79.1 | $ | 73.3 | ||||
| Lease liabilities |
56.4 | 15.5 | ||||||
| Restructuring accruals |
27.6 | 9.7 | ||||||
| Accrued rebates |
31.8 | 31.7 | ||||||
| Sales and marketing accruals |
28.1 | 23.4 | ||||||
| Payroll and related taxes |
20.8 | 32.5 | ||||||
| Clinical trial accruals |
13.0 | 15.2 | ||||||
| Accrued transaction costs |
12.5 | — | ||||||
| Janssen AI losses in excess of investment |
11.0 | — | ||||||
| Accrued interest |
9.3 | 11.4 | ||||||
| Cambridge Collaboration termination |
8.0 | — | ||||||
| Litigation accruals |
1.0 | 0.7 | ||||||
| Other accruals |
15.5 | 16.5 | ||||||
|
|
|
|
|
|||||
| Total accrued and other current liabilities |
$ | 314.1 | $ | 229.9 | ||||
|
|
|
|
|
|||||
For further information on the $11.0 million as of December 31, 2012 (2011: $Nil) related to Janssen AI losses in excess of investment made, refer to Note 9.
Other long-term liabilities at December 31 of each year consisted of the following (in millions):
| 2012 | 2011 | |||||||
| Unfunded pension liability |
$ | 39.1 | $ | 12.2 | ||||
| Accrued income tax payable |
6.1 | 6.2 | ||||||
| Deferred rent |
0.6 | 17.0 | ||||||
| Deferred revenue |
0.1 | 0.4 | ||||||
| Other |
16.4 | 24.9 | ||||||
|
|
|
|
|
|||||
| Total other long-term liabilities |
$ | 62.3 | $ | 60.7 | ||||
|
|
|
|
|
|||||
The unfunded pension liability at December 31, 2012 and 2011 relates to two defined benefit pension plans. For additional information, refer to Note 29.
151
Elan Corporation, plc
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Severance, restructuring and other costs accrual
The following table provides a rollforward of the severance, restructuring and other charges accrual (in millions):
| Balance at December 31, 2009 |
$ | 4.1 | ||
| Restructuring and other charges |
19.4 | |||
| Reversal of prior year accrual |
(0.5 | ) | ||
| Cash payments |
(9.1 | ) | ||
| Non-cash charges |
(1.0 | ) | ||
|
|
|
|||
| Balance at December 31, 2010 |
$ | 12.9 | ||
| Restructuring and other charges |
20.4 | |||
| Reversal of prior year accrual |
(1.0 | ) | ||
| Cash payments |
(21.5 | ) | ||
| Non-cash charges |
(1.1 | ) | ||
|
|
|
|||
| Balance at December 31, 2011 |
$ | 9.7 | ||
| Restructuring and other charges |
48.7 | |||
| Reversal of prior year accrual |
(2.1 | ) | ||
| Reclassification from long term accrual |
0.2 | |||
| Cash payments |
(22.9 | ) | ||
| Non-cash charges |
(6.0 | ) | ||
|
|
|
|||
| Balance at December 31, 2012 |
$ | 27.6 | ||
|
|
|
24. Long-Term Debt
Long-term debt at December 31, 2012 consisted of the following (in millions):
| Original Maturity | Principal Amount |
Original Issue Discount |
Carrying Value |
|||||||||||||
| 6.25% Notes |
October 2019 | 600.0 | — | 600.0 | ||||||||||||
|
|
|
|
|
|
|
|||||||||||
| Total debt |
$ | 600.0 | $ | — | $ | 600.0 | ||||||||||
|
|
|
|
|
|
|
|||||||||||
Long-term debt at December 31, 2011 consisted of the following (in millions):
| Original Maturity | Principal Amount |
Original Issue Discount |
Carrying Value |
|||||||||||||
| 2016 Notes issued October 2009 |
October 2016 | 472.1 | (4.5 | ) | 467.6 | |||||||||||
| 2016 Notes issued August 2010 |
October 2016 | 152.4 | (5.0 | ) | 147.4 | |||||||||||
|
|
|
|
|
|
|
|||||||||||
| Total debt |
$ | 624.5 | $ | (9.5 | ) | $ | 615.0 | |||||||||
|
|
|
|
|
|
|
|||||||||||
6.25% Notes
In October 2012, we completed the offering and sale of $600.0 million in aggregate principal amount of the 6.25% Senior Fixed Rate Notes due 2019 (the 6.25% Notes), issued by Elan Finance plc and guaranteed by Elan Corporation, plc and certain of our subsidiaries. Interest is paid in cash semi-annually.
152
Elan Corporation, plc
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
At any time, or from time to time, prior to October 15, 2015, we may redeem the 6.25% Notes, in whole but not in part, at a price equal to 100% of their principal amount plus a make whole premium plus accrued and unpaid interest. We may redeem the 6.25% Notes, in whole or in part, beginning on October 15, 2015 at an initial redemption price of 104.688% of their principal amount plus accrued and unpaid interest. In addition, at any time, or from time to time, on or prior to October 15, 2015, we may redeem up to 35% of the 6.25% Notes using the proceeds of certain equity offerings at a redemption price of 106.25% of the principal, plus accrued and unpaid interest. For additional information, refer to Note 37.
2016 Notes issued October 2009 and August 2010
In October 2009, we completed the offering and sale of $625.0 million in aggregate principal amount of the 2016 Notes issued October 2009, issued by Elan Finance plc and guaranteed by Elan Corporation, plc and certain of our subsidiaries. The 2016 Notes issued October 2009 bear interest at a rate of 8.75%. In August 2010, we completed the offering and sale of $200.0 million in aggregate principal amount of the 2016 Notes issued August 2010, issued by Elan Finance plc and guaranteed by Elan Corporation, plc and certain of our subsidiaries. The 2016 Notes issued August 2010 bear interest at a rate of 8.75%.
On September 16, 2011, we issued an offer (the Asset Sale Offer) to purchase up to $721.2 million in aggregate principal amount of the Senior Notes consisting of the 2013 Fixed Rate Notes, the 2013 Floating Rate Notes, the 2016 Notes issued October 2009 and the 2016 Notes issued August 2010, in accordance with the terms of the indenture governing these notes, at a purchase price of 100% of the aggregate principal amount thereof, plus accrued and unpaid interest to the date of payment. The Asset Sale Offer expired on October 14, 2011 and holders of $0.5 million of the 2016 Notes issued October 2009 tendered their notes. On October 20, 2011, we repurchased $152.4 million and $47.6 million in aggregate principal amounts of the 2016 Notes issued October 2009 and the 2016 Notes issued August 2010, respectively in a separate private transaction.
In September 2012, we announced a cash tender offer (the Tender Offer) for the outstanding 2016 Notes issued October 2009 and the outstanding 2016 Notes issued August 2010. The total consideration for the Tender Offer was $1,053.34 per $1,000 of principal amount, plus accrued and unpaid interest to the date of payment. An additional consent payment of $40 per $1,000 principal amount was paid to holders of the 2016 Notes issued October 2009 and the 2016 Notes issued August 2010 who tendered their notes on or before October 5, 2012. The Tender Offer expired on October 22, 2012 and holders of $439.5 million and the $141.3 million in aggregate principal amounts of the 2016 Notes issued October 2009 and the 2016 Notes issued August 2010, respectively, tendered their notes. In October 2012, we also announced the election to redeem all of the 2016 Notes issued October 2009 and the 2016 Notes issued August 2010 not purchased in the Tender Offer. Pursuant to this redemption, $32.6 million and $11.1 million of the outstanding aggregate principal amounts of the 2016 Notes issued October 2009 and the 2016 Notes issued August 2010, respectively, were redeemed at a redemption price of 108.75% of the aggregate principal amount thereof, plus accrued but unpaid interest thereon to the date of payment.
Covenants
The agreement governing our outstanding long-term indebtedness contains various restrictive covenants that limit our financial and operating flexibility. The covenants do not require us to maintain or adhere to any specific financial ratios, however, they do restrict within certain limits our ability to, among other things:
| • | Incur additional debt; |
| • | Create liens; |
| • | Enter into certain transactions with affiliates, except on an arm’s-length basis; |
| • | Enter into certain types of investment transactions; |
| • | Engage in certain asset sales or sale and leaseback transactions; |
| • | Pay dividends; and |
153
Elan Corporation, plc
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
| • | Consolidate, merge with, or sell all or substantially all of its assets to another entity. |
The breach of any of these covenants may result in a default under the agreement, which could result in the indebtedness under the agreement becoming immediately due and payable and may result in a default under our other indebtedness subject to cross acceleration provisions.
25. Share Capital
Share capital at December 31 of each year consisted of the following:
| No. of Ordinary Shares | ||||||||
| Authorized Share Capital | 2012 | 2011 | ||||||
| Ordinary Shares (par value €0.05) |
810,000,000 | 810,000,000 | ||||||
| Executive Shares (par value €1.25) (the Executive Shares) |
1,000 | 1,000 | ||||||
| “B” Executive Shares (par value €0.05) (the “B” Executive Shares) |
25,000 | 25,000 | ||||||
| At December 31, 2012 | At December 31, 2011 | |||||||||||||||
| Issued and Fully Paid Share Capital | Number | $000s | Number | $000s | ||||||||||||
| Ordinary Shares |
594,949,536 | 36,496 | 589,346,275 | 36,158 | ||||||||||||
| Executive Shares |
— | — | 1,000 | 2 | ||||||||||||
| “B” Executive Shares |
— | — | 21,375 | 2 | ||||||||||||
In September 2012, the 1,000 outstanding Executive Shares of €1.25 each and the 21,375 outstanding “B” Executive Shares of €0.05 each were fully redeemed at par and cancelled.
26. Additional Paid In Capital
In accordance with the provisions of Irish Company Law, we took steps to create income available for distribution during the year. At our Annual General Meeting on May 24, 2012, the shareholders resolved, subject to the approval of the High Court of Ireland, to reduce the share premium account (APIC) of the Company by cancelling some or all of the Company’s share premium account (the final amount to be determined by the Directors). The Directors subsequently resolved to reduce the share premium account of the Company by $6,199.9 million and use these reserves to set-off the accumulated deficit of the Company, with the balance to be treated as income which shall be available for distribution. On July 19, 2012, the Irish High Court approved the Directors’ resolution and this order was registered with the Irish Companies Registration Office on July 23, 2012.
27. Accumulated Other Comprehensive Loss
Accumulated OCI net of $Nil taxes at December 31 of each year consisted of the following (in millions):
| 2012 | 2011 | |||||||
| Net unrealized gains on investment securities |
$ | 17.5 | $ | — | ||||
| Currency translation adjustments |
(0.1 | ) | (0.1 | ) | ||||
| Unamortized net actuarial loss on pension plans |
(61.8 | ) | (37.0 | ) | ||||
| Unamortized prior service cost on pension plans |
(0.2 | ) | (0.3 | ) | ||||
|
|
|
|
|
|||||
| Accumulated other comprehensive loss |
$ | (44.6 | ) | $ | (37.4 | ) | ||
|
|
|
|
|
|||||
154
Elan Corporation, plc
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
28. Separation and Distribution of Prothena Business
On December 20, 2012, we transferred a substantial portion of our drug discovery business platform into a new, publicly traded company incorporated in Ireland. The issued share capital of Prothena was admitted to trading on the NASDAQ Global Market on December 21, 2012. Prothena focuses on the discovery and development of novel antibodies for the potential treatment of a broad range of diseases that involve protein misfolding or cell adhesion. The separation of the Prothena Business from Elan was completed through a demerger under Irish law. The demerger was effected by Elan transferring our wholly-owned subsidiaries comprising the Prothena Business to Prothena, in exchange for Prothena issuing Prothena ordinary shares directly to Elan shareholders, on a pro rata basis. Prothena’s issuance of its outstanding shares constituted a deemed in specie distribution by Elan to Elan shareholders. Each Elan shareholder received one Prothena ordinary share for every 41 Elan ordinary shares or Elan ADSs held.
Immediately following the separation of the Prothena Business, a wholly owned subsidiary of Elan subscribed for 3.2 million newly-issued ordinary shares of Prothena, representing 18% of the outstanding ordinary shares of Prothena. We do not have the ability to exercise significant influence over Prothena so this investment has been recorded as an available-for-sale investment on the Consolidated Balance Sheet at an initial fair value of $22.9 million. See Note 17 for further details of this investment.
The total value of the Prothena in specie distribution amounted to $105.7 million, and was calculated as follows (in millions):
| Cash and cash equivalents |
$ | 125.0 | ||
| Net assets |
3.2 | |||
|
|
|
|||
| Total assets transferred |
128.2 | |||
| Fair value of operating lease guarantee |
0.4 | |||
| Less: Initial carrying value of available for sale interest in Prothena |
(22.9 | ) | ||
|
|
|
|||
| Total value of the Prothena distribution |
$ | 105.7 | ||
|
|
|
Prothena’s historical results of operations have been presented as a discontinued operation in the Consolidated Statements of Operations. See Note 12 for further details of the results of discontinued operations.
Lease Guarantee
In connection with the separation of the Prothena Business, we assigned the leases for the facilities at 650 Gateway Boulevard in South San Francisco to Prothena, which were previously used by the Prothena Business. In accordance with the terms of the lease assignment agreement, Prothena agreed to assume all of the rights, obligations and duties as the lessor of the facilities. However, should Prothena default under its lease obligations, Elan would be held liable by the landlord, and thus, Elan have in substance guaranteed the obligations under the lease agreements for the 650 Gateway facilities. As of December 31, 2012, the total lease payments for the duration of the guarantee, which runs through November 2020, are approximately $10.8 million. Elan recorded a liability of $0.4 million on the Consolidated Balance Sheet as of December 31, 2012 related to the estimated fair value of this guarantee. The fair value of this lease guarantee was included as part of the distribution in specie by Elan.
29. Pension and Other Employee Benefit Plans
Pension
We fund the pensions of certain employees based in Ireland through two defined benefit plans. These plans were closed to new entrants from March 31, 2009, and a defined contribution plan was established for employees in Ireland hired after this date.
In general, on retirement, eligible employees in the staff scheme are entitled to a pension calculated at 1/60th (1/52nd for the executive scheme) of their final salary for each year of service, subject to a maximum of 40 years. These plans are managed externally and the related pension costs and liabilities are assessed in accordance with the advice of a qualified professional actuary. The investments of the plans at December 31, 2012 consisted of units held in independently administered funds.
155
Elan Corporation, plc
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The change in projected benefit obligation at December 31 of each year consisted of the following (in millions):
| 2012 | 2011 | |||||||
| Projected benefit obligation at January 1 |
$ | 99.7 | $ | 97.3 | ||||
| Service cost |
1.1 | 3.4 | ||||||
| Interest cost |
4.3 | 4.6 | ||||||
| Plan participants’ contributions |
0.3 | 1.5 | ||||||
| Actuarial loss |
33.5 | 6.7 | ||||||
| Benefits paid and other disbursements |
(1.3 | ) | (1.6 | ) | ||||
| Curtailment gain |
— | (8.8 | ) | |||||
| Foreign currency exchange rate changes |
2.8 | (3.4 | ) | |||||
|
|
|
|
|
|||||
| Projected benefit obligation at December 31 |
$ | 140.4 | $ | 99.7 | ||||
|
|
|
|
|
|||||
The changes in plan assets at December 31 of each year consisted of the following (in millions):
| 2012 | 2011 | |||||||
| Fair value of plan assets at beginning of year |
$ | 87.5 | $ | 77.4 | ||||
| Actual (loss)/gain on plan assets |
11.4 | (2.7 | ) | |||||
| Employer contribution |
1.4 | 16.2 | ||||||
| Plan participants’ contributions |
0.3 | 1.5 | ||||||
| Benefits paid and other disbursements |
(1.3 | ) | (1.6 | ) | ||||
| Foreign currency exchange rate changes |
2.0 | (3.3 | ) | |||||
|
|
|
|
|
|||||
| Fair value of plan assets at end of year |
$ | 101.3 | $ | 87.5 | ||||
|
|
|
|
|
|||||
| Unfunded status at end of year |
$ | (39.1 | ) | $ | (12.2 | ) | ||
| Unamortized net actuarial loss in accumulated OCI |
61.8 | 37.0 | ||||||
| Unamortized prior service cost in accumulated OCI |
0.2 | 0.3 | ||||||
|
|
|
|
|
|||||
| Net amount recognized |
$ | 22.9 | $ | 25.1 | ||||
|
|
|
|
|
|||||
Amounts recognized in the Consolidated Balance Sheet at December 31 of each year consisted of the following (in millions):
| 2012 | 2011 | |||||||
| Unfunded status — non-current liability |
$ | (39.1 | ) | $ | (12.2 | ) | ||
| Accumulated OCI |
62.0 | 37.3 | ||||||
|
|
|
|
|
|||||
| Net amount recognized |
$ | 22.9 | $ | 25.1 | ||||
|
|
|
|
|
|||||
Net periodic pension cost for the years ended December 31 of each year consisted of the following (in millions):
| 2012 | 2011 | 2010 | ||||||||||
| Service cost |
$ | 1.1 | $ | 3.4 | $ | 3.2 | ||||||
| Interest cost |
4.3 | 4.6 | 4.2 | |||||||||
| Expected return on plan assets |
(4.3 | ) | (5.0 | ) | (4.9 | ) | ||||||
| Amortization of net actuarial loss |
1.6 | 1.4 | 1.2 | |||||||||
| Amortization of prior service cost |
— | 0.2 | — | |||||||||
|
|
|
|
|
|
|
|||||||
| Net periodic pension cost |
$ | 2.7 | $ | 4.6 | $ | 3.7 | ||||||
|
|
|
|
|
|
|
|||||||
156
Elan Corporation, plc
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The divestment of the EDT business on September 16, 2011 resulted in the cessation of the pension accrual for the EDT active members of the plans. This resulted in a reduction in the actuarial present value of the projected benefit obligation and a resultant curtailment gain as the link to future pensionable salary increases was broken for these active members. The curtailment gain of $8.8 million was recorded against the unamortized net actuarial loss in OCI.
The weighted-average assumptions used to determine net periodic pension cost and benefit obligation at December 31 of each year were:
| 2012 | 2011 | |||||||
| Discount rate |
3.3 | % | 4.3 | % | ||||
| Expected return on plan assets |
4.3 | % | 5.5 | % | ||||
| Rate of compensation increase |
3.4 | % | 3.4 | % | ||||
The discount rate of 3.3% at December 31, 2012, was determined by reference to yields on high-quality fixed-income investments, having regard to the duration of the plans’ liabilities. The average duration of both defined benefit plans is greater than 20 years. Since no significant market exists for high-quality fixed income investments in Ireland and, following the crisis in the credit markets, the number of AA-rated corporate bonds with long durations is limited, the assumed discount rate of 3.3% per annum at December 31, 2012, was determined based on a yield curve derived by reference to government bonds with an added corporate bond spread derived from the Merrill Lynch 10+ AA corporate bond index.
In Ireland, post-retirement mortality rates are calculated using 62% of the mortality rates of the PNML00 mortality tables for males and 70% of the mortality rates of the PNFL00 mortality tables for females. To make an allowance for expected future increases in average life expectancy, plan benefit obligations for each plan member are increased by 0.39% per annum to retirement age. This approach to post-retirement mortality is used in the standard transfer value basis set out in Actuarial Standard of Practice ASP Pen-2, issued by the Society of Actuaries in Ireland.
The average life expectancy in years of a current pensioner retiring at the age of 65:
| 2012 | 2011 | |||||||
| Females |
23.5 | 23.4 | ||||||
| Males |
21.8 | 21.7 | ||||||
The average life expectancy in years of a pensioner retiring at the age of 65 in 10 years:
| 2012 | 2011 | |||||||
| Females |
24.5 | 24.4 | ||||||
| Males |
22.7 | 22.6 | ||||||
The average life expectancy in years of a pensioner retiring at the age of 65 in 20 years:
| 2012 | 2011 | |||||||
| Females |
25.4 | 25.3 | ||||||
| Males |
23.6 | 23.5 | ||||||
157
Elan Corporation, plc
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
At December 31, 2012, the impact of certain changes in the principal assumptions on the projected benefit obligation, service cost and net periodic pension cost is as follows (in millions):
| Increase/(decrease) in Projected Benefit Obligation |
Increase/(decrease) in Service Cost |
Increase/(decrease) in Net Periodic Pension Cost |
||||||||||
| Increase of 0.25% in discount rate |
$ | (9.8 | ) | $ | (0.2 | ) | $ | (0.8 | ) | |||
| Decrease of 0.25% in discount rate |
10.6 | 0.2 | 0.8 | |||||||||
| Increase of 0.25% in salary and inflation rates |
10.2 | 0.2 | 1.1 | |||||||||
| Decrease of 0.25% in salary and inflation rates |
(9.4 | ) | (0.2 | ) | (1.1 | ) | ||||||
| Increase of one year in life expectancy |
4.5 | 0.1 | 0.5 | |||||||||
| Decrease of one year in life expectancy |
(4.5 | ) | (0.1 | ) | (0.5 | ) | ||||||
| Increase of 0.25% in pension increase assumption |
4.6 | 0.1 | 0.5 | |||||||||
| Decrease of 0.25% in pension increase assumption |
(3.8 | ) | (0.1 | ) | (0.5 | ) | ||||||
The weighted-average asset allocations at December 31 of each year by asset category consisted of the following:
| 2012 | 2011 | |||||||
| Equities |
48.1 | % | 47.1 | % | ||||
| Bonds |
19.4 | % | 18.5 | % | ||||
| Property |
0.6 | % | 0.7 | % | ||||
| Cash |
11.4 | % | 13.3 | % | ||||
| Absolute return fund |
20.5 | % | 20.4 | % | ||||
|
|
|
|
|
|||||
| Total |
100.0 | % | 100.0 | % | ||||
|
|
|
|
|
|||||
The investment mix of the pension plans’ assets is biased towards equities, with a diversified domestic and international portfolio of shares listed and traded on recognized exchanges.
The long-term asset allocation ranges of the trusts are as follows:
| Equities |
60%-80% | |||
| Bonds |
10%-40% | |||
| Property |
0%-10% | |||
| Other |
0%-10% |
A portion of the assets are allocated to low-risk investments, which are expected to move in a manner consistent with that of the liabilities. The balances of the assets are allocated to performance-seeking investments designed to provide returns in excess of the growth in liabilities over the long term. The key risks relating to the plan assets are as follows:
| • | Interest rate risk — the risk that changes in interest rates result in a change in value of the liabilities not reflected in the changes in the asset values. This risk is managed by allocating a portion of the trusts’ assets to assets that are expected to behave in a manner similar to the liabilities. |
| • | Inflation risk — the risk that the inflation-linked liabilities of salary growth and pension increases increase at a faster rate than the assets held. This risk is managed by allocating a portion of the plans’ to investments with returns that are expected to exceed inflation. |
| • | Market risk — the risk that the return from assets is not sufficient to meet liabilities. This risk is managed by monitoring the performance of the assets and requesting regular valuations of the liabilities. A professionally qualified actuary performs regular valuations of the plans and the progress of the assets is examined against the plans’ funding target. Further, the assets of the plans are invested in a range of asset classes in order to limit exposure to any particular asset class or security. |
158
Elan Corporation, plc
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
| • | Manager risk — the risk that the chosen manager does not meet its investment objectives, or deviates from its intended risk profile. This risk is managed by regularly monitoring the managers responsible for the investment of the assets relative to the agreed objectives and risk profile. |
| • | Cash flow risk — the risk that the cash flow needs of the plan requires a disinvestment of assets at an inopportune time. As part of the asset allocation strategy, the proportion of assets held by the plans in liability matching assets will explicitly consider the cash flows expected to arise in the near term. |
As of December 31, 2012, the expected long-term rate of return on assets of 4.3% (2011: 5.5%) was calculated based on the assumptions of the following returns for each asset class:
| 2012 | 2011 | |||||||
| Equities |
6.5 | % | 7.0 | % | ||||
| Property |
5.5 | % | 6.0 | % | ||||
| Bonds |
3.0 | % | 3.5 | % | ||||
| Cash |
2.0 | % | 2.0 | % | ||||
| Absolute return fund |
4.5 | % | 6.0 | % | ||||
As of December 31, 2012, the assumed return on equities has been derived as the assumed return on bonds plus an assumed equity risk premium of 3.5% (2011: 3.5%).
As of December 31, 2012, the expected return on property has been chosen by allowing for a property risk premium of 2.5% (2011: 2.5%) above the expected return on bonds.
The expected government bond returns are set equal to the yield on the government bonds of appropriate duration as at the date of measurement.
The investment in an absolute return fund aims to provide an absolute return with a lower volatility than the target returns.
The following table sets forth the fair value of our pension plan assets, as of December 31, 2012 (in millions):
| Quoted Prices in Active Markets (Level 1) |
Other Observable Inputs (Level 2) |
Unobservable Inputs (Level 3) |
Total | |||||||||||||
| Equities |
$ | 48.7 | $ | — | $ | — | $ | 48.7 | ||||||||
| Bonds |
19.7 | — | — | 19.7 | ||||||||||||
| Property |
— | — | 0.6 | 0.6 | ||||||||||||
| Cash |
11.5 | — | — | 11.5 | ||||||||||||
| Absolute return fund |
20.8 | — | — | 20.8 | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Total |
$ | 100.7 | $ | — | $ | 0.6 | $ | 101.3 | ||||||||
|
|
|
|
|
|
|
|
|
|||||||||
159
Elan Corporation, plc
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The following table sets forth a summary of the changes in the fair value of our Level 3 pension plan assets, which were measured at fair value on a recurring basis for the year ended December 31, 2012 (in millions).
| Total | ||||
| Beginning balance at January 1, 2012 |
$ | 0.6 | ||
| Unrealized loss on property assets |
— | |||
|
|
|
|||
| Ending balance at December 31, 2012 |
$ | 0.6 | ||
|
|
|
|||
All properties in the fund are valued by independent valuers in accordance with the Royal Institute of Chartered Surveyors Valuation Standards by forecasting the returns of the market at regular intervals. These forecasts have regard to the output from a proprietary quantitative model, the inputs to which include gross national product growth, interest rates and inflation.
The total accumulated benefit obligation for the defined benefit pension plans was $136.3 million at December 31, 2012 (2011: $95.0 million).
At December 31, 2012, the total estimated future benefit payments to be paid in respect of the plans for the period of 2013-2017 is approximately $2.0 million per annum. The total estimated future benefit payments to be paid in the period of 2018-2022 is approximately $5.1 million per annum.
The expected benefits to be paid are based on the same assumptions used to measure our benefit obligation at December 31, 2012, including the expected future employee service.
As of December 31, 2012, we expect to recognize $3.0 million of the unamortized net actuarial loss that is included in accumulated OCI at December 31, 2012, during 2013.
In January 2013, the Company ceased the future accrual of benefits to the active members of the defined benefit pension plans. Active members became deferred members of the defined benefit plans on January 31, 2013 and became members of the Irish defined contribution plan on February 1, 2013. In connection with the cessation of the future accrual of benefits, we made a lump sum contribution to the defined benefit plans of $19.8 million. We expect to contribute approximately $22.0 million to our defined benefit plans in 2013, including the lump sum contribution of $19.8 million.
Defined Contribution Retirement Plans
We operate a number of defined contribution retirement plans. The costs of these plans are charged to the Consolidated Statement of Operations in the period they are incurred. For 2012, total expense related to the defined contribution plans was $2.2 million (2011: $3.6 million; 2010: $4.5 million).
Employee Savings and Retirement Plan 401(k)
We maintain a 401(k) retirement savings plan for our employees based in the United States. Participants in the 401(k) plan may contribute up to 80% of their annual compensation, limited by the maximum amount allowed by the IRC. We match 3% of each participating employee’s annual compensation on a quarterly basis and may contribute additional discretionary matching up to another 3% of the employee’s annual qualified compensation. Our matching contributions vest immediately. For 2012, we recorded $1.9 million (2011: $3.2 million; 2010: $4.0 million) of expense in connection with the matching contributions under the 401(k) plan.
Irish Defined Contribution Plan
We operate a defined contribution plan for employees based in Ireland. Under the plan, we contribute up to 18% of each participating employee’s annual eligible income on a monthly basis. For 2012, we recorded $0.3 million (2011: $0.4 million; 2010: $0.5 million) of expense in connection with the matching contributions under the Irish defined contribution plans.
160
Elan Corporation, plc
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
30. Share-based Compensation
We currently grant equity awards from the Long Term Incentive Plan (2006 LTIP), which provides for the issuance of stock options, RSUs and other equity awards. Our equity award program is a long-term retention program that is intended to attract, retain and motivate employees, directors and consultants of Elan and our affiliates, and to align the interests of these parties with those of shareholders. We consider our equity award program critical to our operation and productivity. Equity awards are settled through the issuance of new shares. As of December 31, 2012, there were 1,292,215 shares available for issuance under the 2006 LTIP (2011: 6,082,810 shares).
In May 2012, our shareholders approved the Elan Corporation, plc 2012 Long Term Incentive Plan (2012 LTIP), which provides for the grant of equity up to 30,000,000 Ordinary Shares. As of December 31, 2012, 30,000,000 shares were available for future issuance under the 2012 LTIP.
Elan stock options and RSUs outstanding amounts at close of business on December 20, 2012 were subject to an adjustment in connection with the separation and distribution of the Prothena Business. In line with the terms of our employee equity plans (2006 LTIP, 1996 LTIP and 1999 Stock Option Plan) the total number of RSUs outstanding on that day was increased by 3.24165%, the number of options outstanding was also increased and the corresponding exercise prices decreased to reflect the changes in the Company’s share price across the transaction date.
Stock Options
Stock options are granted at the price equal to the market value at the date of grant and will expire on a date not later than 10 years after their grant. Options generally vest between one and three years from the grant date.
Options outstanding at December 31 of each year consisted of the following (in thousands):
| 2012 | 2011 | |||||||
| 1996 Plan |
2,629 | 3,663 | ||||||
| 1998 Plan |
— | 123 | ||||||
| 1999 Plan |
1,489 | 3,364 | ||||||
| 2006 LTIP |
14,079 | 12,301 | ||||||
|
|
|
|
|
|||||
| Total |
18,197 | 19,451 | ||||||
|
|
|
|
|
|||||
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Elan Corporation, plc
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The total employee and non-employee stock options outstanding, vested and expected to vest, and exercisable are summarized as follows:
| No. of Options |
WAEP(1) | Weighted Average Remaining Contractual Life |
Aggregate Intrinsic Value |
|||||||||||||
| (In thousands) | (In years) | (In millions) | ||||||||||||||
| Outstanding at December 31, 2010 |
18,208 | $ | 13.14 | |||||||||||||
| Exercised |
(713 | ) | 6.22 | |||||||||||||
| Granted |
4,241 | 7.62 | ||||||||||||||
| Forfeited |
(489 | ) | 8.84 | |||||||||||||
| Expired |
(1,796 | ) | 32.01 | |||||||||||||
|
|
|
|
|
|||||||||||||
| Outstanding at December 31, 2011 |
19,451 | $ | 10.55 | |||||||||||||
| Exercised |
(3,278 | ) | 5.65 | |||||||||||||
| Granted |
5,182 | 12.23 | ||||||||||||||
| Forfeited |
(1,023 | ) | 11.24 | |||||||||||||
| Expired |
(2,135 | ) | 17.82 | |||||||||||||
|
|
|
|
|
|||||||||||||
| Outstanding at December 31, 2012 |
18,197 | $ | 10.77 | 6.2 | $ | 29.0 | ||||||||||
|
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|
|
|
|
|
|||||||||
| Vested and expected to vest at December 31, 2012 |
17,399 | $ | 10.76 | 6.1 | $ | 28.1 | ||||||||||
|
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|
|||||||||
| Exercisable at December 31, 2012 |
12,522 | $ | 11.06 | 5.0 | $ | 21.6 | ||||||||||
|
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|
|||||||||
| (1) |
Weighted-average exercise price |
The aggregate intrinsic value in the table above represents the total pre-tax intrinsic value (the difference between our closing stock price on the last trading day of 2012 and the exercise price, multiplied by the number of in-the-money options) that would have been received by the option holders had all option holders exercised their options on December 31, 2012. This amount changes based on the fair market value of our stock. The total intrinsic value of options exercised in 2012 was $21.0 million (2011: $2.9 million; 2010: $0.7 million). The total fair value expensed over the vesting terms of options that vested in 2012 was $11.0 million (2011: $21.6 million; 2010: $13.4 million).
At December 31, 2012, the range of exercise prices and weighted-average remaining contractual life of outstanding and exercisable options were as follows:
| Options Outstanding | Options Exercisable | |||||||||||||||||||||||
| Options Outstanding |
Weighted- Average Remaining Contractual Life |
WAEP | Options Outstanding |
Weighted- Average Remaining Contractual Life |
WAEP | |||||||||||||||||||
| (In thousands) | (In years) | (In thousands) | (In years) | |||||||||||||||||||||
| $2.70-$10.00 |
8,707 | 6.3 | $ | 6.89 | 6,298 | 5.6 | $ | 6.78 | ||||||||||||||||
| $10.01-$24.98 |
9,203 | 6.2 | 13.98 | 5,937 | 4.5 | 14.90 | ||||||||||||||||||
| $24.99-$34.68 |
287 | 3.1 | 25.72 | 287 | 3.1 | 25.72 | ||||||||||||||||||
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|
|||||||||||||
| $2.70-$34.68 |
18,197 | 6.2 | $ | 10.77 | 12,522 | 5.0 | $ | 11.06 | ||||||||||||||||
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Equity-settled share-based payments made to employees have been recognized in the financial statements based on the fair value of the awards measured at the date of grant. We use the graded-vesting attribution method for recognizing share-based compensation expense over the requisite service period for each separately vesting tranche of award as though the awards were, in substance, multiple awards.
162
Elan Corporation, plc
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Equity-settled share-based payments made to non-employees have been recognized in the financial statements based on the fair value of the awards on the vest date; which is the date at which the commitment for performance by the non-employees to earn the awards is reached and also the date at which the non-employees’ performance is complete.
The fair value of stock options is calculated using a binomial option-pricing model and the fair value of options issued under our EEPP is calculated using the Black-Scholes option-pricing model, taking into account the relevant terms and conditions. The binomial option-pricing model is used to estimate the fair value of our stock options because it better reflects the possibility of exercise before the end of the options’ life. The binomial option-pricing model also integrates possible variations in model inputs, such as risk-free interest rates and other inputs, which may change over the life of the options. Options issued under our EEPP have relatively short contractual lives, or must be exercised within a short period of time after the vesting date, and the input factors identified above do not apply. Therefore, the Black-Scholes option-pricing model produces a fair value that is substantially the same as a more complex binomial option-pricing model for our EEPP. The amount recognized as an expense is adjusted each period to reflect actual and estimated future levels of vesting.
We use the implied volatility for traded options on our stock with remaining maturities of at least one year to determine the expected volatility assumption required in the binomial model. The risk-free interest rate assumption is based upon observed interest rates appropriate for the term of our stock option awards. The dividend yield assumption is based on the history and expectation of dividend payouts.
As share-based compensation expense recognized in the Consolidated Statement of Operations is based on awards ultimately expected to vest, it has been reduced for estimated forfeitures. Forfeitures are estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from estimates. Forfeitures were estimated based on historical experience and our estimate of future turnover.
The estimated weighted-average grant date fair values of the individual options granted during the years ended December 31, 2012, 2011 and 2010 were $6.24, $3.53 and $3.73, respectively. The fair value of options granted during these years was estimated using the binomial option-pricing model with the following weighted-average assumptions:
| 2012 | 2011 | 2010 | ||||||||||
| Risk-free interest rate |
0.86 | % | 1.56 | % | 2.04 | % | ||||||
| Expected volatility |
59.2 | % | 52.4 | % | 65.4 | % | ||||||
| Expected dividend yield |
— | — | — | |||||||||
| Expected life (1) |
— | — | — | |||||||||
| (1) | The expected lives of options granted in 2012, as derived from the output of the binomial model, ranged from 4.9 years to 6.8 years (2011: 4.8 years to 7.5 years; 2010: 4.8 years to 7.5 years). The contractual life of the options, which is not later than 10 years from the date of grant, is used as an input into the binomial model. |
Restricted Stock Units
RSUs generally vest between one and three years from the grant date, and shares are issued to RSU holders as soon as practicable following vesting. The fair value of services received in return for the RSUs is measured by reference to the fair value of the underlying shares at grant date, for directors and employees, and as services are rendered for non-employees. The total fair value expensed over the vesting terms of RSUs that vested in 2012 was $19.0 million (2011: $28.8 million; 2010: $10.8 million).
163
Elan Corporation, plc
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The non-vested RSUs are summarized as follows:
| No. of RSUs | Weighted- Average Grant Date Fair Value |
|||||||
| (In thousands) | ||||||||
| Non-vested at December 31, 2010 |
4,642 | $ | 9.38 | |||||
| Granted |
3,312 | 6.82 | ||||||
| Vested |
(3,052 | ) | 9.47 | |||||
| Forfeited |
(1,000 | ) | 7.45 | |||||
|
|
|
|||||||
| Non-vested at December 31, 2011 |
3,902 | $ | 7.63 | |||||
| Granted |
2,303 | 13.00 | ||||||
| Vested |
(2,145 | ) | 8.91 | |||||
| Forfeited |
(695 | ) | 10.24 | |||||
|
|
|
|||||||
| Non-vested at December 31, 2012 |
3,365 | $ | 9.95 | |||||
|
|
|
|||||||
Employee Equity Purchase Plan
During 2012, we operated an EEPP for eligible employees based in the United States and, from January 1, 2012 for eligible employees based in Ireland. The EEPP for U.S. based employees is a qualified plan under Sections 421 and 423 of the IRC. The EEPP allows eligible employees to purchase shares at 85% of the lower of the fair market value at the beginning of the offering period or the fair market value on the last trading day of the offering period. Purchases were limited to $25,000 (fair market value) per calendar year; 2,000 shares per six-month offering period and, for U.S. based employees, subject to certain IRC restrictions.
In May 2012, our shareholders approved the Elan Corporation, plc Employee Equity Purchase Plan (2012 Restatement), which provides for an additional 1,500,000 Ordinary Shares to be issued under the EEPP. In total, 4,500,000 shares have been made available for issuance under the EEPP. In 2012, 146,357 shares (2011: 237,631 shares; 2010: 470,412 shares) were issued under the EEPP. As of December 31, 2012, 1,497,404 shares (2011: 143,761 shares) were available for future issuance under the EEPP.
The weighted-average fair value of options granted under the EEPP during the 12 months ended December 31, 2012 was $4.46 (2011: $2.30; 2010: $1.84). The estimated fair values of these options were charged to expense over the respective six-month offering periods. The estimated fair values of options granted under the EEPP in the years ended December 31, were calculated using the following inputs into the Black-Scholes option-pricing model:
| 2012 | 2011 | 2010 | ||||||||||
| Weighted-average share price |
$ | 13.97 | $ | 8.00 | $ | 5.61 | ||||||
| Weighted-average exercise price |
$ | 11.88 | $ | 6.80 | $ | 4.77 | ||||||
| Expected volatility(1) |
60.5% | 49.7% | 63.9% | |||||||||
| Expected life |
6 months | 6 months | 6 months | |||||||||
| Expected dividend yield |
— | — | — | |||||||||
| Risk-free interest rate |
0.09% | 0.16% | 0.21% | |||||||||
| (1) | The expected volatility was determined based on the implied volatility of traded options on our stock. |
Share-based Compensation Expense
As part of the Johnson & Johnson transaction in September 2009, we grant annual equity and equity-based compensation awards under the 2006 LTIP (and any successor or replacement or additional plan) to each transferred employee, once they remain as an employee of Janssen AI. Beginning in 2010, these awards are granted at the same time as such awards are granted to Elan employees;
164
Elan Corporation, plc
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
on terms and conditions, including vesting, that are no less favorable than those granted to similarly situated Elan employees; and with a grant date fair value that is equal to similarly situated Elan employees who received the same performance rating from Elan as the transferred employees received from Janssen AI. The total amount of expense in 2012 relating to equity-settled share-based awards held by former Elan employees that transferred to Janssen AI was $1.5 million (2011: $2.4 million; 2010: $0.4 million). This expense has been recognized in the R&D expense line item in the Consolidated Statement of Operations.
In connection with the separation and distribution of the Prothena Business on December 20, 2012, our Leadership Development and Compensation Committee made adjustments to awards made under the Elan equity incentive plans as a result of the market value of Elan ordinary shares and Elan ADSs immediately prior to the separation and distribution being higher than the market value of Elan ordinary shares and Elan ADSs immediately after the separation and distribution. All such adjustments were applied equally to all outstanding Elan awards (including, options to purchase Elan ordinary shares or Elan ADSs held by employees of Elan who become employees of Prothena, that had vested prior to December 20, 2012, or vested upon the separation and distribution) and were in accordance with the terms of the applicable Elan equity incentive plan. These adjustments did not, and will not, have an impact on the financial statements, as there were no differences between the fair values of the adjusted awards immediately before and immediately after they were modified.
The total net expense of $45.9 million (2011: $35.3 million; 2010: $31.5 million) relating to equity-settled share-based compensation has been recognized in the following line items in the Consolidated Statement of Operations at December 31 of each year (in millions):
| 2012 | 2011 | 2010 | ||||||||||
| Continuing Operations: |
||||||||||||
| Cost of sales |
$ | — | $ | — | $ | — | ||||||
| Selling, general and administrative expenses |
21.2 | 12.7 | 12.2 | |||||||||
| Research and development expenses |
8.1 | 8.9 | 6.4 | |||||||||
| Other net charges |
6.0 | 0.6 | 1.0 | |||||||||
|
|
|
|
|
|
|
|||||||
| Share based compensation expense — continuing operations |
35.3 | 22.2 | 19.6 | |||||||||
|
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|
|
|
|
|
|||||||
| Discontinued Operations: |
||||||||||||
| Cost of sales |
0.2 | 1.1 | 1.6 | |||||||||
| Selling, general and administrative expenses |
1.7 | 3.9 | 5.1 | |||||||||
| Research and development expenses |
7.9 | 6.0 | 5.2 | |||||||||
| Other net charges |
— | 0.5 | — | |||||||||
| Net (loss)/gain on divestment of business |
0.8 | 1.6 | — | |||||||||
|
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|
|||||||
| Share based compensation expense — discontinued operations |
10.6 | 13.1 | 11.9 | |||||||||
|
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|
|||||||
| Total |
$ | 45.9 | $ | 35.3 | $ | 31.5 | ||||||
|
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|
|
|
|||||||
Share-based compensation arose under the following awards at December 31 of each year (in millions):
| 2012 | 2011 | 2010 | ||||||||||
| Stock options |
$ | 22.6 | $ | 14.0 | $ | 13.4 | ||||||
| RSUs |
22.7 | 20.7 | 17.2 | |||||||||
| EEPP |
0.6 | 0.6 | 0.9 | |||||||||
|
|
|
|
|
|
|
|||||||
| Total |
$ | 45.9 | $ | 35.3 | $ | 31.5 | ||||||
|
|
|
|
|
|
|
|||||||
The total equity-settled share-based compensation expense related to unvested awards not yet recognized, adjusted for estimated forfeitures, is $12.6 million at December 31, 2012. This expense is expected to be recognized over a weighted-average of 1.2 years.
165
Elan Corporation, plc
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
31. Fair Value Measurements
Assets Measured at Fair Value on a Recurring Basis
As of December 31, 2012, with the exception of $0.3 million (2011: $Nil) of foreign exchange forward contract derivative liabilities, we did not hold any financial liabilities that are recognized at fair value in the financial statements on a recurring or non-recurring basis. The derivative liability of $0.3 million is measured using quoted prices in active markets. The following tables set forth the fair value of our financial assets measured at fair value on a recurring basis, as of December 31, of each year (in millions):
2012
| Quoted Prices in Active Markets (Level 1) |
Other Observable Inputs (Level 2) |
Unobservable Inputs (Level 3) |
Total | |||||||||||||
| Cash and cash equivalents |
$ | 431.3 | $ | — | $ | — | $ | 431.3 | ||||||||
| Restricted cash and cash equivalents — current |
2.6 | — | — | 2.6 | ||||||||||||
| Restricted cash and cash equivalents — non-current |
13.7 | — | — | 13.7 | ||||||||||||
| Available-for-sale equity securities — current |
167.9 | — | — | 167.9 | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Total |
$ | 615.5 | $ | — | $ | — | $ | 615.5 | ||||||||
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|
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|
|||||||||
2011
| Quoted Prices in Active Markets (Level 1) |
Other Observable Inputs (Level 2) |
Unobservable Inputs (Level 3) |
Total | |||||||||||||
| Cash and cash equivalents |
$ | 271.7 | $ | — | $ | — | $ | 271.7 | ||||||||
| Restricted cash — current |
2.6 | — | — | 2.6 | ||||||||||||
| Restricted cash — non-current |
13.7 | — | — | 13.7 | ||||||||||||
| Available-for-sale equity securities — current |
0.3 | — | — | 0.3 | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Total |
$ | 288.3 | $ | — | $ | — | $ | 288.3 | ||||||||
|
|
|
|
|
|
|
|
|
|||||||||
As of December 31, 2012, the fair value of our Level 1 assets was $615.5 million (2011: $288.3 million), primarily consisting of bank deposits, holdings in U.S. Treasuries funds, restricted cash, and marketable equity securities in Alkermes plc, Prothena and emerging pharmaceutical and biotechnology companies. Included in this amount were net unrealized gains of $17.5 million (2011: $Nil) related to marketable equity securities.
As of December 31, 2012, we held $Nil (2011: $Nil) investments, which were measured using unobservable (Level 3) inputs.
166
Elan Corporation, plc
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The following table sets forth a summary of the changes in the fair value of our Level 3 financial assets, which were measured at fair value on a recurring basis, during 2011 (in millions):
2011
| Auction Rate Securities |
||||
| Beginning balance at January 1, 2011 |
$ | 0.2 | ||
| Realized gains included in net investment gains |
— | |||
| Unrealized losses included in other comprehensive income |
— | |||
| Disposals |
(0.2 | ) | ||
|
|
|
|||
| Ending balance at December 31, 2011 |
$ | — | ||
|
|
|
|||
We disposed of the Auction Rate Securities (ARS) during 2011. Prior to disposal, ARS were valued by a third-party valuation firm, which primarily used a discounted cash flow model (expected cash flows of the ARS were discounted using a yield that incorporates compensation for illiquidity) in combination with a market comparables method, where the ARS were valued based on indications (from the secondary market) of what discounts buyers demand when purchasing similar collateral debt obligations. The secondary market indications were given less weight in this approach due to the lack of data on trades in securities that are substantially similar to the ARS.
Assets Measured at Fair Value on a Non-recurring Basis
We measure certain assets, including equity investments in privately held companies, at fair value on a nonrecurring basis. These assets are recognized at fair value when they are deemed to be other-than-temporarily impaired. We did not recognize any impairment charges relating to these assets during 2012 (2011: $Nil).
Debt Instruments
Principal amounts and fair values (based on unadjusted quoted prices (Level1)) of our debt instruments at December 31 consisted of the following (in millions):
| 2012 | 2011 | |||||||||||||||
| Principal | Fair | Principal | Fair | |||||||||||||
| Amount | Value | Amount | Value | |||||||||||||
| 6.25% Notes |
$ | 600.0 | $ | 628.1 | $ | — | $ | — | ||||||||
| 2016 Notes issued October 2009 |
— | — | 472.1 | 503.4 | ||||||||||||
| 2016 Notes issued August 2010 |
— | — | 152.4 | 161.7 | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Total debt instruments |
$ | 600.0 | $ | 628.1 | $ | 624.5 | $ | 665.1 | ||||||||
|
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|
|
|
|
|
|
|
|||||||||
Refer to Note 24 for a reconciliation of the aggregate principal amount of the debt to the carrying amount.
32. Leases
Operating Leases
We lease certain of our facilities under non-cancelable operating lease agreements that expire at various dates through 2020. The major components of our operating leases that were in effect at December 31, 2012 are as described below.
167
Elan Corporation, plc
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
We have lease agreements for 260,000 square feet of space in South San Francisco which has been utilized for R&D, administration and other corporate functions. The lease term for 55,000 square feet of this space expires in November 2014, with the lease term for the remainder of the leased space expiring between March 2019 and January 2020, with an option to renew for one additional five-year period. We have sub-leased 55,000 square feet of this space which was no longer being utilized by R&D, sales and administrative functions to Janssen AI. As a result of the planned closure of our facilities in South San Francisco in early 2013, following the separation of the Prothena Business and cessation of the remaining early stage research activities, we will no longer utilize the remaining 205,000 square feet of space in South San Francisco.
We also leased approximately 26,000 square feet of space in South San Francisco which was utilized for our Prothena R&D function. As part of the separation of the Prothena Business, we assigned this lease to Prothena. We agreed to indemnify the landlord for all matters related to the leases through the expiry of the lease in 2020. For further information on the fair value of this operating lease guarantee, refer to Note 31.
We have lease agreements for 41,000 square feet of space for our corporate headquarters located in the Treasury Building, Dublin, Ireland. This lease expires in July 2014, with an option to renew for two additional 10-year periods. We have sub-leased a portion of this space that we no longer utilize to Janssen AI. This sub-lease expires in July 2014.
We closed the New York office in March 2009 and have entered into sub-lease agreements for this space. The lease period expires in February 2015.
During 2012, we entered into a lease agreement for 11,830 square feet of space in Cambridge, Massachusetts which is being utilized by our R&D, sales and administrative functions. The lease period expires in 2017.
In December 2011, we closed the 113,000 square feet EDT facility located in King of Prussia, Pennsylvania. The two leases expire between April 2019 and May 2020. The future rental commitments relating to the leases are included in the table below. Approximately 50,000 square feet of this space was sublet by December 2012.
In addition, we also have various operating leases for equipment and vehicles, with lease terms that range from three to five years.
We recorded expense under operating leases of $19.2 million in 2012 (2011: $23.8 million; 2010: $27.9 million). We recorded income under our operating subleasing agreement of $2.8 million in 2012 (2011: $2.8 million; 2010: $2.3 million).
As of December 31, 2012, our future minimum rental commitments for operating leases with non-cancelable terms in excess of one year are as follows (in millions):
| Due in: |
||||
| 2013 |
$ | 21.3 | ||
| 2014 |
20.4 | |||
| 2015 |
14.1 | |||
| 2016 |
14.4 | |||
| 2017 |
14.6 | |||
| 2018 and thereafter |
24.4 | |||
|
|
|
|||
| Total |
$ | 109.2 | (1) | |
|
|
|
| (1) | The future minimum rental commitments include the commitments in respect of lease contracts where the future lease commitments exceeds the future expected economic benefit that we expect to derive from the leased asset which has resulted in the recognition of an onerous lease accrual. |
The total amount of future minimum sublease payments expected to be received at December 31, 2012 is $10.4 million (2011: $6.4 million).
168
Elan Corporation, plc
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Capital Leases
There were no capital leases in place at December 31, 2012 or 2011. In 2010, the net book value of assets acquired under capital leases was $1.5 million, which included $71.8 million of accumulated depreciation. The depreciation expense related to assets under capital leases for 2011 and 2010 was $0.3 million and $1.4 million respectively.
In prior years, we disposed of plant and equipment and subsequently leased them back and also entered into an arrangement with a third-party bank, the substance of which allows us a legal right to require a net settlement of our obligations under the leases. The cash and borrowings relating to the previous sale and leaseback transactions were offset in the 2010 Consolidated Financial Statements in the amount of $31.2 million. These arrangements were terminated during 2011. We incurred a charge of $0.1 million in the termination of the leases.
33. Commitments and Contingencies
As of December 31, 2012, the directors had authorized capital commitments for the purchase of property, plant and equipment of $0.1 million (2011: $3.0 million).
At December 31, 2012, we had commitments to invest $2.0 million (2011: $2.6 million) in healthcare managed funds.
For information on lease commitments, refer to Note 32. For information on our contingent commitments as a result of our in-substance guarantee over Prothena’s commitments under its lease of the facilities at 650 Gateway Boulevard in South San Francisco, refer to Note 28. For litigation and administrative proceedings related to contingencies, refer to Note 34. For information on commitments in relation to our collaboration arrangements, where applicable, refer to Note 36.
34. Litigation
We are involved in legal and administrative proceedings that could have a material adverse effect on us.
Zonegran matter
In January 2006, we received a subpoena from the U.S. Department of Justice and the Department of Health and Human Services, Office of Inspector General, asking for documents and materials primarily related to our marketing practices for Zonegran, an antiepileptic prescription medicine that we divested to Eisai Inc. in April 2004.
In December 2010, we finalized our agreement with the U.S. Attorney’s Office for the District of Massachusetts to resolve all aspects of the U.S. Department of Justice’s investigation of sales and marketing practices for Zonegran. In addition, we pleaded guilty to a misdemeanor violation of the Federal Food, Drug, and Cosmetic (FD&C) Act and entered into a Corporate Integrity Agreement with the Office of Inspector General of the Department of Health and Human Services to promote our compliance with the requirements of U.S. federal healthcare programs and the Food and Drug Administration (FDA). If we materially fail to comply with the requirements of U.S. federal healthcare programs or the FDA, or otherwise materially breach the terms of the Corporate Integrity Agreement, such as by a material breach of the compliance program or reporting obligations of the Corporate Integrity Agreement, severe sanctions could be imposed upon us.
In March 2011, we paid $203.5 million pursuant to the terms of a global settlement resolving all U.S. federal and related state Medicaid claims. During 2010, we recorded a $206.3 million charge for the settlement, interest and related costs.
This resolution of the Zonegran investigation could give rise to other investigations or litigation by state government entities or private parties.
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Securities matters
In March 2005, we received a letter from the U.S. Securities and Exchange Commission (SEC) stating that the SEC’s Division of Enforcement was conducting an informal inquiry into actions and securities trading relating to Tysabri events. The SEC’s inquiry primarily relates to events surrounding the February 28, 2005 announcement of the decision to voluntarily suspend the marketing and clinical dosing of Tysabri. We have provided materials to the SEC in connection with the inquiry but have not received any additional requests for information or interviews relating to the inquiry.
The SEC notified us in January 2009 that the SEC was conducting an informal inquiry primarily relating to the July 31, 2008 announcement concerning the initial two Tysabri-related progressive multifocal leukoencephalopathy (PML) cases that occurred subsequent to the resumption of marketing Tysabri in 2006. We have provided the SEC with materials in connection with the inquiry.
On September 24, 2009, we received a subpoena from the SEC’s New York Regional Office requesting records relating to an investigation captioned In the Matter of Elan Corporation, plc. The subpoena requested records and information relating to the July 31, 2008 announcement of the two Tysabri-related PML cases as well as records and information relating to the July 29, 2008 announcement at the International Conference of Alzheimer’s Disease concerning the Phase 2 trial data for bapineuzumab. In July 2011 and throughout 2012, we received supplemental requests for documents from the SEC and/or the U.S. Department of Justice (DOJ) related to this matter. We have provided the SEC and the DOJ with materials in connection with the investigation.
We and some of our officers and directors were named as defendants in five putative class action lawsuits filed in the U.S. District Court for the Southern District of New York in 2008. The cases were consolidated as In Re: Elan Corporation Securities Litigation. The plaintiffs’ Consolidated Amended Complaint was filed on August 17, 2009, and alleged claims under the U.S. federal securities laws and sought damages on behalf of all purchasers of our stock during periods ranging between May 21, 2007 and October 21, 2008. The complaints alleged that we issued false and misleading public statements concerning the safety and efficacy of bapineuzumab. On July 23, 2010, a securities case was filed in the U.S. District Court for the Southern District of New York. This case was accepted by the court as a “related case” to the existing 2008 matter. The 2010 case purported to be filed on behalf of all purchasers of Elan call options during the period from June 17, 2008 to July 29, 2008. On August 10, 2011, the court dismissed the class action lawsuits with prejudice. The “related case” plaintiffs appealed the dismissal to the U.S. Court of Appeals for the Second Circuit which dismissed the appeal on February 1, 2013.
Tysabri product liability lawsuits
We and our collaborator Biogen Idec are co-defendants in product liability lawsuits arising out of the occurrence of PML and other serious adverse events, including deaths, which occurred in patients taking Tysabri. We expect additional product liability lawsuits related to Tysabri to be filed. While we intend to vigorously defend these lawsuits, we cannot predict how these cases will be resolved. Adverse results in one or more of these lawsuits could result in substantial monetary judgments against us.
35. Related Parties
Janssen AI
Janssen AI, a newly formed subsidiary of Johnson & Johnson, acquired substantially all of the assets and rights related to the AIP with Wyeth (which has been acquired by Pfizer) in September 2009. In consideration for the transfer of these assets and rights, we received a 49.9% equity interest in Janssen AI which was recorded as an equity method investment. For additional information relating to our equity method investment, refer to Note 9.
Following the divestment of the AIP business to Janssen AI in September 2009, we provided administrative, I.T., and R&D transition services to Janssen AI, and recorded fees of $3.7 million in 2010 related to these transition services. These activities ceased in December 2010, with the exception of I.T. related services which ceased in 2011. We received sublease rental income of $2.4 million in 2012 (2011: $2.2 million, 2010: $2.3 million) from Janssen AI in respect of agreements for office and laboratory space in South San Francisco and office space in Dublin. The total expense in 2012 relating to equity-settled share based awards held by former Elan employees that transferred to Janssen AI was $1.5 million (2011: $2.4 million; 2010: $0.4 million).
170
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Alkermes plc
In connection with the divestment of our EDT business on September 16, 2011, we received $500.0 million in cash consideration and 31.9 million ordinary shares of Alkermes plc, which represented approximately 25% of the equity of Alkermes plc at the close of the transaction. Our equity interest in Alkermes plc was recorded as an equity method investment on the Consolidated Balance Sheet at an initial carrying value of $528.6 million, based on the closing share price of $16.57 of Alkermes, Inc. shares on the date of the transaction.
On March 13, 2012, we announced that we had sold 24.15 million of the ordinary shares that we held in Alkermes plc for net proceeds of $380.9 million after deduction of underwriter and other fees. Following this sale, we continued to own 7.75 million ordinary shares of Alkermes plc, representing approximately 6% of the ordinary shares of Alkermes plc.
On January 31, 2013, we announced that we had agreed to sell all of our remaining 7.75 million ordinary shares of Alkermes plc. The sale closed on February 6, 2013 and we received proceeds of $169.7 million.
Following the divestment of the EDT business to Alkermes plc, we provided administrative and I.T. transition services to Alkermes plc, and recorded fees of $0.3 million in 2012 (2011: $1.1 million) related to these transition services. At December 31, 2012, there was no balance owing to us from Alkermes plc (2011: $1.9 million).
Prothena Corporation, plc
On December 20, 2012, we completed the separation of the Prothena Business, into a new, publicly traded company incorporated in Ireland. The issued share capital of Prothena was admitted to trading on the NASDAQ Global Market on December 21, 2012. The separation of the Prothena Business from Elan was completed through a demerger under Irish law. The demerger was effected by Elan transferring our wholly-owned subsidiaries that comprised the Prothena Business to Prothena, in exchange for Prothena issuing Prothena ordinary shares directly to Elan shareholders, on a pro rata basis. Prothena’s issuance of its outstanding shares constituted a deemed in specie distribution by Elan to its shareholders. Each Elan shareholder received one Prothena ordinary share for every 41 Elan ordinary shares or Elan ADSs held.
Immediately following the separation of the Prothena Business, a wholly owned subsidiary of Elan subscribed for 3.2 million newly-issued ordinary shares of Prothena, representing 18% of the outstanding ordinary shares of Prothena. This investment has been recorded as an available-for-sale investment on the Consolidated Balance Sheet at an initial fair value of $22.9 million. In connection with the separation of the Prothena Business, we made a cash distribution Prothena, which together with the consideration for 18% of Prothena’s outstanding ordinary shares, totaled $125.0 million. See Note 17 for further details of the available for sale investment.
On December 20, 2012, we entered into a Transition Services Agreement for a period of six months post separation and in no event later than December 31, 2013, with Prothena pursuant to which Prothena and we will provide each other with specified services, including Chemistry Manufacturing and Controls (CMC)/quality assurance, information services, IT services, facilities services, company secretarial services, finance services, legal services, compliance services and human relations services. We also entered a Research and Development Services Agreement with Prothena under which Prothena will provide certain research and development services to Elan for a minimum of two years and for a minimum fixed charge of $0.5 million per annum.
We did not earn or incur any fees related to the Transition Services Agreement or the Research and Development Services Agreement during 2012.
171
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Transactions with Directors
Except as set out below, there are no service contracts in existence between any of the directors and Elan:
Non-Executive Directors’ Terms of Appointment
| Period |
Three-year term which can be extended by mutual consent, contingent on satisfactory performance and re-election at the Annual General Meeting (AGM). | |||||
| Termination |
By the director or the Company at each party’s discretion without compensation. | |||||
| Fees |
Board Membership Fees | |||||
| Chairman’s Fee | $ | 150,000 | (1) | |||
| Director’s Fee | $ | 55,000 | (2) | |||
| Additional Board/Committee Fees | ||||||
| Lead Independent Director’s Fee | $ | 20,000 | ||||
| Audit Committee Chairman’s Fee | $ | 25,000 | (3) | |||
| Audit Committee Member’s Fee | $ | 15,000 | ||||
| Other Committee Chairman’s Fee | $ | 20,000 | (3) | |||
| Other Committee Member’s Fee | $ | 12,500 | ||||
| Equity |
Non-executive directors are entitled to be considered for an annual equity award, based on the recommendation of the LDCC and supported by the advice of the LDCC’s compensation consultants. Such equity awards are normally granted in February of each year and are currently made in the form of RSUs. The awards to be made in February 2013 will have the following grant date fair values: | |||||
| Chairman | $ | 400,000 | (1) | |||
| Other non-executive directors | $ | 200,000 | (2) | |||
| Expenses |
Reimbursement of travel and other expenses reasonably incurred in the performance of their duties. | |||||
|
Time commitment |
Five scheduled in-person board meetings, the AGM and relevant committee meetings depending upon board/committee requirements and general corporate activity. | |||||
| Non-executive board members are also expected to be available for a number of unscheduled board and committee meetings, where applicable, as well as to devote appropriate preparation time ahead of each meeting. | ||||||
| Confidentiality |
Information acquired by each director in carrying out their duties is deemed confidential and cannot be publicly released without prior clearance from the chairman of the board. | |||||
| (1) | The chairman’s compensation for 2013 consists of a fee of $150,000 (2012: $150,000) and RSUs with a grant date fair value of $400,000 (2012:$400,000), amounting to a total value of $550,000 in 2013 (2012: $550,000). The chairman does not receive additional compensation for sitting on board committees. |
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| (2) | Non-executive directors can elect to receive their fee payments in the form of RSUs, which will vest on the earlier of 90 days after their retirement from the Board or 10 years. In 2012, Dr. Ekman (retired December 7, 2012), Mr. McGowan, Mr. McLaughlin and Dr. von Eschenbach elected to receive all or part of their fee payments in the form of RSUs. |
| (3) | Inclusive of committee membership fee. |
Mr. Martin
On January 7, 2003, we and Elan Pharmaceuticals, Inc. (EPI) entered into an agreement with Mr. Martin such that Mr. Martin was appointed president and CEO effective February 3, 2003.
Effective December 7, 2005, we and EPI entered into a new employment agreement with Mr. Martin, under which Mr. Martin continued to serve as our CEO with an initial base annual salary of $798,000. Under the 2003 agreement, Mr. Martin was eligible to participate in our annual bonus plan, performance-based stock awards and merit award plans. Under the new agreement, Mr. Martin was granted an option to purchase 750,000 Ordinary Shares with an exercise price per share of $12.03, vesting in three equal annual instalments (the 2005 Options). Mr. Martin’s employment agreement was amended on December 19, 2008 to comply with the requirements of Section 409A of the IRC.
On June 2, 2010, Elan and Mr. Martin agreed to amend his 2005 employment contract from an open-ended agreement to a fixed term agreement. Under this 2010 agreement, Mr. Martin committed to remain in his current role as CEO and director of the Company through to May 1, 2012. It was agreed that upon the completion of this fixed term Mr. Martin would then serve the board as executive adviser through to January 31, 2013. Under this amendment, Mr. Martin’s base salary was increased from $800,000 to $1,000,000 per year effective June 1, 2010, and when Mr. Martin moved to the role of executive adviser, his base salary was to be reduced to $750,000 per year, he would not be eligible for a bonus and he would resign from the board. However, as 2012 represented a significant transformational period for the Company, it was decided by the board that the Company and our shareholders would be best served by Mr. Martin continuing his leadership through this critical period and strategic inflection point. To that end, the board requested that Mr. Martin extend his tenure as the Elan CEO creating continuity and an opportunity to achieve further clarity for Elan’s strategic and financial path forward. Mr. Martin agreed to this request and the extension.
Effective April 30, 2012, we, EPI and Mr. Martin amended and restated Mr. Martin’s employment agreement. Under the amended and restated agreement, Mr. Martin’s term as CEO was extended indefinitely while his base salary remained at $1,000,000 per year, the vesting of his equity awards that were granted in February 2012 was accelerated to October 2012, the vesting of any equity awards granted in 2013 would receive partial acceleration upon termination of Mr. Martin’s employment, and Mr. Martin was awarded an option to purchase 486,000 shares (subsequently adjusted to 501,754 shares on December 20, 2012, in connection with the separation and distribution of the Prothena Business. Refer to Note 30 for additional information on the December 20, 2012, equity adjustments), with an exercise price per share of $13.79 (subsequently adjusted to $13.36 on December 20, 2012), and an RSU grant covering 81,000 shares (subsequently adjusted to 83,626 shares on December 20, 2012). The equity awards granted in April 2012 vest over a two year period.
In general, the amended and restated agreement, continues until Mr. Martin resigns, is involuntarily terminated, is terminated for cause or dies, or is disabled. Subject to certain conditions, if Mr. Martin’s employment is involuntarily terminated (other than for cause, death or disability), Mr. Martin leaves for good reason or Mr. Martin resigns on or after April 2, 2013, we will pay Mr. Martin a lump sum equal to two (three, in the event of a change in control) times his salary and target bonus. Similarly, most options will be exercisable until the earlier of (i) two years from the date of termination or (ii) tenth anniversary of the date of grant, or in the event of a change in control, the earlier of (i) three years from the date of termination or (ii) the tenth anniversary of the date of grant of the stock option.
In the event of such an involuntary termination (other than as the result of a change in control), Mr. Martin will, for a period of two years (three years in the event of a change in control), or, if earlier, the date Mr. Martin obtains other employment, continue to participate in our health and medical plans and we shall pay Mr. Martin a lump sum of $50,000 to cover other costs and expenses. Mr. Martin will also be entitled to career transition assistance and the use of an office and the services of a full-time secretary for a reasonable period of time not to exceed two years (three years in the event of a change in control).
173
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In addition, if it is determined that any payment or distribution to Mr. Martin would be subject to excise tax under Section 4999 of the IRC, or any interest or penalties are incurred by Mr. Martin with respect to such excise tax, then Mr. Martin shall be entitled to an additional payment in an amount such that after payment by Mr. Martin of all taxes on such additional payment, Mr. Martin retains an amount of such additional payment equal to such excise tax amount.
The agreement also obligates us to indemnify Mr. Martin if he is sued or threatened with suit as the result of serving as our officer or director. We will be obligated to pay Mr. Martin’s attorney’s fees if he has to bring an action to enforce any of his rights under the employment agreement.
Mr. Martin is eligible to participate in the retirement, medical, disability and life insurance plans applicable to senior executives in accordance with the terms of those plans. He may also receive financial planning and tax support and advice from the provider of his choice at a reasonable and customary annual cost.
Mr. McLaughlin
In 2012, 2011 and 2010, Davy, an Irish based stock broking, wealth management and financial advisory firm, of which Mr. McLaughlin is deputy chairman, provided advisory services to the company. The total invoiced value of these services in 2012 was $1.3 million (2011: $0.2 million, 2010: $0.3 million), of which $1.1 million related to services rendered in relation to the offering of the 6.25% Notes.
In November 2011, the Company engaged an adult son of Mr. McLaughlin as a consultant in relation to the Company’s investor relations programs for a fixed period. The amount invoiced for these services in 2012 was €70,800 (2011: €11,800). Mr. McLaughlin’s son was not an executive officer of Elan and did not have a key strategic role within Elan. The consultancy arrangement terminated on June 30, 2012.
Dr. Selkoe
In July 2009, EPI entered into a consultancy agreement with Dr. Selkoe under which Dr. Selkoe agreed to provide consultant services with respect to the treatment and/or prevention of neurodegenerative and autoimmune diseases. Under the agreement we paid Dr. Selkoe a fee of $12,500 per quarter. The agreement was effective for three years unless terminated by either party upon 30 days written notice and superseded all prior consulting agreements between Dr. Selkoe and Elan. In July 2012, EPI and Dr. Selkoe agreed an amendment to the 2009 agreement which extended the term of the agreement to July 1, 2015 and increased the fee payable to $18,000 per quarter. Under the consultancy agreements, Dr. Selkoe received $61,000 in 2012 (2011: $50,000; 2010: $50,000).
Dr. Selkoe serves as a Company-nominated director of Janssen AI, a subsidiary of Johnson & Johnson in which Elan holds a 49.9% equity interest. In December 2010, Dr Selkoe entered into a consulting agreement with Johnson & Johnson Pharmaceutical Research & Development LLC. This agreement was amended in November 2011 to extend it until December 31, 2012. During 2011, Dr. Selkoe received a fee of $1,600 in respect of services provided under this agreement. On February 2, 2012, this consulting agreement was terminated.
Arrangements with Former Directors
Dr. Ekman
Effective December 31, 2007, Dr. Lars Ekman resigned from his operational role as president of R&D and continued to serve as a member of the board of directors of Elan in a non-executive capacity. Dr. Ekman retired from the board on December 7, 2012 in contemplation of his appointment as chairman of Prothena Corporation plc.
174
Elan Corporation, plc
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
As part of Dr. Ekman’s retirement from executive duties, we agreed to make payments if we achieve certain milestones in respect of our Alzheimer’s disease program. To date none of the required milestones have been triggered and no payments have been made.
Mr. Schuler, Mr. Bryson and Crabtree Partners L.L.C.
On September 17, 2010, we entered into agreements with Mr. Schuler and Mr. Bryson whereby we agreed to pay to Mr. Schuler and Mr. Bryson the aggregate amount of $300,000 in settlement of all costs, fees and expenses incurred by them in respect of any and all matters relating to the Irish High Court litigation and the U.S. Securities and Exchange Commission (SEC) investigation of Mr. Schuler. Under the agreements, Mr. Schuler and Mr. Bryson agreed to resign from the board, and they subsequently resigned on October 29, 2010.
On June 8, 2009, we entered into an agreement with Mr. Schuler, Mr. Bryson and Crabtree Partners L.L.C. (an affiliate of Mr. Schuler and a shareholder of the Company) (collectively “the Crabtree Group”). Pursuant to this Agreement, we agreed to nominate Mr. Schuler and Mr. Bryson for election as directors of the Company at the 2009 AGM. Mr. Schuler and Mr. Bryson irrevocably agreed to resign as directors of the Company effective on the first date on which Mr. Schuler, Mr. Bryson and Crabtree Partners L.L.C. cease to beneficially own, in aggregate, at least 0.5% of the Company’s issued share capital. The Agreement also included a standstill provision providing that, until the later of December 31, 2009, amended to January 1, 2012, pursuant to the 2010 agreement, and the date that was three months after the date on which Mr. Schuler and Mr. Bryson cease to be directors of the Company, none of Mr. Schuler, Mr. Bryson, Crabtree Partners L.L.C. or any of their respective affiliates would, among other things, acquire any additional equity interest in the Company if, after giving effect to the acquisition, Mr. Schuler, Mr. Bryson, Crabtree Partners L.L.C. and their affiliates would own more than 3% of the Company’s issued share capital. Finally, we agreed to reimburse the Crabtree Group for $500,000 of documented out-of-pocket legal expenses incurred by their outside counsel in connection with the Agreement and the matters referenced in the Agreement.
Dr. Bloom
On July 17, 2009, EPI entered into a consultancy agreement with Dr. Bloom under which Dr. Bloom agreed to provide consultant services to Elan with respect to the treatment and/or prevention of neurodegenerative diseases and to act as an advisor to the science and technology committee (the “2009 Agreement”). Effective July 17, 2011, the 2009 Agreement was extended for a further year (“the Amended Agreement”) and under which we would pay Dr. Bloom a fee of $12,500 per quarter. Effective July 17, 2012, Dr. Bloom’s Amended Agreement was renewed for a further 12 month period. As with its predecessor, this agreement can be terminated by either party upon 30 days written notice. Under the consultancy agreements, Dr. Bloom received $50,000 in 2012 (2011: $44,674).
Mr. Hasler
Effective October 1, 2012, Elan Pharmaceuticals GmbH entered into an employment agreement with Mr. Hasler under which Mr. Hasler was appointed our chief operating officer with an initial base annual salary of 600,000 CHF. Mr. Hasler is eligible to participate in our annual bonus plan. Mr. Hasler was awarded an option to purchase 375,000 shares vesting in three annual instalments. Mr. Hasler resigned from the board in October 2012 in connection with his appointment as chief operating officer.
External Appointments and Retention of Fees
The Company recognizes that executive directors (and senior management) may be invited to take up non-executive directorships, public sector and/or not-for-profit appointments, and that these can broaden the experience and knowledge of the individual, from which the Company can benefit. Executive directors (and senior management) may, subject to approval, accept external appointments as non-executive directors of other companies and retain any related fees paid to them.
175
Elan Corporation, plc
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
36. Development and Marketing Collaboration Agreements
Biogen Idec
In August 2000, we entered into a development and marketing Collaboration Agreement with Biogen Idec, successor to Biogen, Inc., to collaborate in the development and commercialization of Tysabri for MS and Crohn’s disease, with Biogen Idec acting as the lead party for MS and Elan acting as the lead party for Crohn’s disease.
In November 2004, Tysabri received regulatory approval in the United States for the treatment of relapsing forms of MS. In February 2005, Elan and Biogen Idec voluntarily suspended the commercialization and dosing in clinical trials of Tysabri. This decision was based on reports of serious adverse events involving cases of PML, a rare and potentially fatal, demyelinating disease of the central nervous system.
In June 2006, the FDA approved the reintroduction of Tysabri for the treatment of relapsing forms of MS. Approval for the marketing of Tysabri in the European Union was also received in June 2006 and has subsequently been received in a number of other countries. The distribution of Tysabri in both the United States and the European Union commenced in July 2006. Global in-market net sales of Tysabri in 2012 were $1,631.1 million (2011: $1,510.6 million; 2010: $1,230.0 million), consisting of $886.0 million (2011: $746.5 million; 2010: $593.2 million) in the U.S. market and $745.1 million (2011: $764.1 million; 2010: $636.8 million) in the ROW.
In January 2008, the FDA approved the supplemental Biologics License Application (sBLA) for Tysabri for the treatment of patients with Crohn’s disease, and Tysabri was launched in this indication at the end of the first quarter of 2008. In July 2008, we made an optional payment of $75.0 million to Biogen Idec in order to maintain our approximate 50% share of Tysabri for annual global in-market net sales of Tysabri that are in excess of $700.0 million. In addition, in December 2008, we exercised our option to pay a further $50.0 million milestone to Biogen Idec in order to maintain our percentage share of Tysabri at approximately 50% for annual global in-market net sales of Tysabri that are in excess of $1.1 billion. There are no further milestone payments required for us to retain our approximate 50% profit share.
On February 6, 2013, we announced that we have entered into an asset purchase agreement with Biogen Idec to transfer to Biogen Idec all Tysabri IP and other assets related to Tysabri. As a result of this transaction, Biogen Idec will have sole authority over and exclusive worldwide rights to the development, manufacturing and commercialization of Tysabri. In accordance with the terms of the transaction, upon consummation of the transaction, the existing collaboration arrangements with Biogen Idec will be terminated and Biogen Idec will pay to us an upfront payment of $3.25 billion and continuing royalties on Tysabri in-market sales. We will earn a royalty of 12% of global net sales of Tysabri during the first 12 months following the closing of the transaction. Thereafter, we will earn a royalty of 18% of global net sales up to $2.0 billion each year, and a 25% royalty on annual global net sales above $2.0 billion. The transaction is expected to close in the first half of 2013, subject to the satisfaction of certain conditions, including customary regulatory approvals.
Tysabri was developed in collaboration with Biogen Idec. Until the Tysabri Transaction closes, Tysabri continues to be marketed in collaboration with Biogen Idec and, subject to certain limitations imposed by the parties, we share with Biogen Idec most development and commercialization costs. Upon consummation of the Tysabri Transaction, Biogen Idec will be responsible for all development and commercialization costs. Biogen Idec is responsible for manufacturing the product. In the United States, we purchase Tysabri from Biogen Idec and are responsible for distribution. Consequently, we record as revenue the net sales of Tysabri in the U.S. market. We purchase product from Biogen Idec as required at a price, which includes the cost of manufacturing, plus Biogen Idec’s gross profit on Tysabri and this cost, together with royalties payable to other third parties, is included in cost of sales.
In the ROW markets, Biogen Idec is responsible for distribution and we record as revenue our share of the profit or loss on ROW sales of Tysabri, plus our directly incurred expenses on these sales. In 2012, we recorded ROW revenue of $316.6 million (2011: $317.6 million; 2010: $258.3 million).
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Elan Corporation, plc
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If the Tysabri Transaction is not consummated, the Collaboration Agreement will expire in November 2019, but may be extended by mutual agreement of the parties. If the agreement is not extended, then each of Biogen Idec and Elan has the option to buy the other party’s rights to Tysabri upon expiration of the term. Each party has a similar option to buy the other party’s rights to Tysabri if the other party undergoes a change of control (as defined in the Collaboration Agreement); however in some circumstances this option will terminate if the Tysabri Transaction fails to complete. In addition, each of Biogen Idec and Elan can terminate the agreement for convenience or material breach by the other party, in which case, among other things, certain licenses, regulatory approvals and other rights related to the manufacture, sale and development of Tysabri are required to be transferred to the party that is not terminating for convenience or is not in material breach of the agreement.
For additional information relating to Tysabri, refer to Note 12.
Johnson & Johnson AIP Agreements
On September 17, 2009, Janssen AI, a newly formed subsidiary of Johnson & Johnson, completed the acquisition of substantially all of our assets and rights related to the AIP. In addition, Johnson & Johnson, through its affiliate Janssen Pharmaceutical, invested $885.0 million in exchange for newly issued American Depositary Receipts (ADRs) of Elan, representing 18.4% of our outstanding Ordinary Shares at the time.
Under the terms of the transaction, Johnson & Johnson provided an initial $500.0 million of funding to Janssen AI for the development and commercialization of the AIP and Elan has a 49.9% shareholding in Janssen AI. The AIP is a collaboration between Janssen AI and Pfizer, which control all operational aspects of the AIP, including bapineuzumab. Through its shareholding in Janssen AI, Elan has an approximate 25.0% economic interest in the AIP, together with certain royalty rights on any future commercialization of the AIP. Any required additional expenditures in respect of Janssen AI’s obligations under the AIP collaboration in excess of the initial $500.0 million funded by Johnson & Johnson will be required to be funded by Johnson & Johnson and Elan in proportion to their respective shareholdings in Janssen AI, up to a maximum additional funding commitment of $400.0 million in total. During 2012, we provided $76.9 million of our proportionate funding commitment and in January 2013, we provided an additional $29.9 million of our funding commitment. Following the provision of this funding in January 2013, our remaining funding commitment to Janssen AI is $93.2 million. In the event that the AIP collaboration requires expenditures in excess of the additional $400.0 million pro rata commitment, the funding for such expenditures will be on terms determined by the board of directors of Janssen AI, with Johnson & Johnson and Elan each having a right of first refusal to provide such funding. If we fail to provide our share of the $400.0 million commitment or any additional funding that is required for the development of the AIP, and if Johnson & Johnson elects to fund such an amount, our interest in Janssen AI could, at the option of Johnson & Johnson, be commensurately reduced.
On August 6, 2012, Johnson & Johnson issued a press release announcing that Janssen AI and Pfizer had determined to discontinue the development of bapineuzumab intravenous in mild to moderate Alzheimer’s disease based on the co-primary clinical endpoints not being met in the Janssen AI-led Phase 3 clinical studies (Study 301 and 302). We subsequently recorded a non-cash impairment charge of $117.3 million on our equity method investment in Janssen AI, representing the full initial estimated value of our 49.9% share of the Janssen AI AIP assets.
Under the terms of the Johnson & Johnson Transaction, if we undergo a change of control, an affiliate of Johnson & Johnson will be entitled to purchase our 49.9% interest in Janssen AI at the then fair value.
Transition Therapeutics Collaboration Agreement
In September 2006, we entered into an exclusive, worldwide collaboration with Transition for the joint development and commercialization of a novel therapeutic agent for Alzheimer’s disease. The small molecule, ELND005, is a beta amyloid anti-aggregation agent that has been granted fast track designation by the FDA. In December 2007, the first patient was dosed in a Phase 2 clinical study. This 18-month, randomized, double-blind, placebo-controlled, dose-ranging study was designed to evaluate the safety and efficacy of ELND005 in approximately 340 patients with mild to moderate Alzheimer’s disease. In December 2009, we announced that patients would be withdrawn from the two highest dose groups due to safety concerns. In August 2010, Elan and Transition announced the top-line summary results of the Phase 2 clinical study and in September 2011, the Phase 2 clinical study data was published in the journal Neurology. The study’s cognitive and functional co-primary endpoints did not achieve statistical significance. The 250mg twice daily dose demonstrated a biological effect on amyloid-beta protein in the cerebrospinal fluid (CSF), in a subgroup of patients who provided CSF samples. This dose achieved targeted drug levels in the CSF and showed some effects on clinical endpoints in an exploratory analysis.
177
Elan Corporation, plc
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
In December 2010, we modified our Collaboration Agreement with Transition and, in connection with this modification, Transition elected to exercise its opt-out right under the original agreement. Under this amendment, we paid Transition $9.0 million in 2010 and Transition received a further $11.0 million payment upon our commencement of an ELND005 Phase 2 clinical trial in 2012. Transition will no longer be eligible to receive a $25.0 million milestone that would have been due upon the commencement of a Phase 3 trial for ELND005 under the terms of the original agreement.
As a consequence of Transition’s decision to exercise its opt-out right, it no longer funds the development or commercialization of ELND005 and has relinquished its 30% ownership of ELND005 to us. Consistent with the terms of the original agreement, following its opt-out decision, Transition will be entitled to receive milestone payments of up to $93.0 million, along with tiered royalty payments ranging in percentage from a high single digit to the mid teens (subject to offsets) based on net sales of ELND005 should the drug receive the necessary regulatory approvals for commercialization. The term of the Collaboration Agreement runs until we are no longer developing or commercializing ELND005. We may terminate the Collaboration Agreement upon not less than 90 days notice to Transition and either party may terminate the Collaboration Agreement for material breach or because of insolvency of the other party.
In 2012, we initiated two Phase 2 clinical trials of ELND005. The first Phase 2 clinical trial is a safety and efficacy study of ELND005 as an adjunctive treatment of Bipolar Disease (Study BPD201) and the second Phase 2 trial studies ELND005 for the treatment of agitation/aggression in patients with moderate to severe Alzheimer’s disease (Study AG201).
37. Supplemental Guarantor Information
As part of the offering and sale of the 6.25% Notes, Elan Corporation, plc and certain of its subsidiaries have guaranteed these notes.
Each subsidiary that has guaranteed our 6.25% Notes will be released from its guarantee in the event:
| • | there is a legal defeasance of the 6.25% Notes; |
| • | there is a sale or other disposition of the shares or assets of the subsidiary if, after such sale or disposition, the subsidiary is no longer “restricted” for debt covenant purposes; or |
| • | the subsidiary is designated as “unrestricted” for debt covenant purposes; |
provided that any transaction is carried out in accordance with the provisions of the indenture governing the 6.25% Notes.
Presented below is condensed consolidating information for Elan Finance plc, the issuer of the debt, Elan Corporation, plc, the parent guarantor of the debt, the guarantor subsidiaries of Elan Corporation, plc, and the non-guarantor subsidiaries of Elan Corporation, plc. All of the subsidiary guarantors are wholly owned subsidiaries of Elan Corporation, plc.
178
Elan Corporation, plc
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Condensed Consolidating Statements of Operations
For the Year Ended December 31, 2012
| Non- | ||||||||||||||||||||||||||||
| Elan | Parent | Guarantor | Guarantor | Elimination | Discontinued | |||||||||||||||||||||||
| Finance plc | Company | Subsidiaries | Subsidiaries | Adjustments | Operations | Consolidated | ||||||||||||||||||||||
| (In millions) | ||||||||||||||||||||||||||||
| Continuing Operations |
||||||||||||||||||||||||||||
| Revenue |
$ | — | $ | — | $ | 2,247.6 | $ | 0.7 | $ | (1,045.5 | ) | $ | (1,202.6 | ) | $ | 0.2 | ||||||||||||
| Cost of sales |
— | — | 1,406.0 | — | (750.3 | ) | (655.5 | ) | 0.2 | |||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
| Gross margin |
— | — | 841.6 | 0.7 | (295.2 | ) | (547.1 | ) | — | |||||||||||||||||||
| Operating expenses: |
||||||||||||||||||||||||||||
| Selling, general and administrative expenses |
— | 51.6 | 226.7 | 6.2 | (55.7 | ) | (115.2 | ) | 113.6 | |||||||||||||||||||
| Research and development expenses |
— | — | 402.8 | 25.0 | (239.5 | ) | (93.3 | ) | 95.0 | |||||||||||||||||||
| Other net charges/(gains) |
— | — | 172.8 | 0.3 | — | (4.2 | ) | 168.9 | ||||||||||||||||||||
| Net loss on divestment of business |
— | 17.1 | 0.8 | — | — | (17.9 | ) | — | ||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
| Total operating expenses |
— | 68.7 | 803.1 | 31.5 | (295.2 | ) | (230.6 | ) | 377.5 | |||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
| Operating (loss)/income |
— | (68.7 | ) | 38.5 | (30.8 | ) | — | (316.5 | ) | (377.5 | ) | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
| Share of net losses of subsidiaries |
— | (304.0 | ) | — | — | 304.0 | — | — | ||||||||||||||||||||
| Net interest and investment (gains)/losses |
(0.7 | ) | — | 366.4 | 10.5 | — | (20.5 | ) | 355.7 | |||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
| Income/(loss) before provision for income taxes |
0.7 | (372.7 | ) | (327.9 | ) | (41.3 | ) | 304.0 | (296.0 | ) | (733.2 | ) | ||||||||||||||||
| Provision for/(benefit from) income taxes |
0.2 | — | (300.0 | ) | — | — | (60.7 | ) | (360.5 | ) | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
| Net income/(loss) from continuing operations |
$ | 0.5 | $ | (372.7 | ) | $ | (27.9 | ) | $ | (41.3 | ) | $ | 304.0 | $ | (235.3 | ) | $ | (372.7 | ) | |||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
| Discontinued Operations |
||||||||||||||||||||||||||||
| Net income from discontinued operations (net of tax) |
— | 235.3 | — | — | (235.3 | ) | 235.3 | 235.3 | ||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
| Net income/(loss) for the year |
$ | 0.5 | $ | (137.4 | ) | $ | (27.9 | ) | $ | (41.3 | ) | $ | 68.7 | $ | — | $ | (137.4 | ) | ||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
179
Elan Corporation, plc
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Condensed Consolidating Statements of Operations
For the Year Ended December 31, 2011
| Non- | ||||||||||||||||||||||||||||
| Elan | Parent | Guarantor | Guarantor | Elimination | Discontinued | |||||||||||||||||||||||
| Finance plc | Company | Subsidiaries | Subsidiaries | Adjustments | Operations | Consolidated | ||||||||||||||||||||||
| (In millions) | ||||||||||||||||||||||||||||
| Continuing Operations |
||||||||||||||||||||||||||||
| Revenue |
$ | — | $ | — | $ | 2,083.4 | $ | — | $ | (837.4 | ) | $ | (1,242.0 | ) | $ | 4.0 | ||||||||||||
| Cost of sales |
— | — | 1,277.8 | — | (638.1 | ) | (638.9 | ) | 0.8 | |||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
| Gross margin |
— | — | 805.6 | — | (199.3 | ) | (603.1 | ) | 3.2 | |||||||||||||||||||
| Operating expenses: |
||||||||||||||||||||||||||||
| Selling, general and administrative expenses |
— | 43.5 | 235.3 | 5.1 | (55.2 | ) | (121.5 | ) | 107.2 | |||||||||||||||||||
| Research and development expenses |
— | — | 352.6 | 22.8 | (142.9 | ) | (125.7 | ) | 106.8 | |||||||||||||||||||
| Net gain on divestment of businesses |
— | — | (585.9 | ) | (67.0 | ) | — | 652.9 | — | |||||||||||||||||||
| Other net (gains)/charges |
— | — | (41.0 | ) | — | (1.2 | ) | 66.5 | 24.3 | |||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
| Total operating expenses |
— | 43.5 | (39.0 | ) | (39.1 | ) | (199.3 | ) | 472.2 | 238.3 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
| Operating (loss)/income |
— | (43.5 | ) | 844.6 | 39.1 | — | (1,075.3 | ) | (235.1 | ) | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
| Share of net gains/(losses) of subsidiaries |
— | (410.0 | ) | — | — | 410.0 | — | — | ||||||||||||||||||||
| Net interest and investment losses/(gains) |
0.1 | — | 243.0 | (11.0 | ) | — | (1.7 | ) | 230.4 | |||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
| (Loss)/income before provision for income taxes |
(0.1 | ) | (453.5 | ) | 601.6 | 50.1 | 410.0 | (1,073.6 | ) | (465.5 | ) | |||||||||||||||||
| (Benefit from)/provision for income taxes |
(0.1 | ) | — | 47.7 | — | — | (59.6 | ) | (12.0 | ) | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
| Net income/(loss) from continuing operations |
$ |
— |
|
$ | (453.5 | ) | $ | 553.9 | $ | 50.1 | $ | 410.0 | $ | (1,014.0 | ) | $ | (453.5 | ) | ||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
| Discontinued Operations |
||||||||||||||||||||||||||||
| Net income from discontinued operations (net of tax) |
— | 1,014.0 | — | — | (1,014.0 | ) | 1,014.0 | 1,014.0 | ||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
| Net income/(loss) for the year |
$ |
— |
|
$ | 560.5 | $ | 553.9 | $ | 50.1 | $ | (604.0 | ) | $ | — | $ | 560.5 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
180
Elan Corporation, plc
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Condensed Consolidating Statements of Operations
For the Year Ended December 31, 2010
| Non- | ||||||||||||||||||||||||||||
| Elan | Parent | Guarantor | Guarantor | Elimination | Discontinued | |||||||||||||||||||||||
| Finance plc | Company | Subsidiaries | Subsidiaries | Adjustments | Operations | Consolidated | ||||||||||||||||||||||
| (In millions) | ||||||||||||||||||||||||||||
| Continuing Operations |
||||||||||||||||||||||||||||
| Revenue |
$ | — | $ | — | $ | 1,891.8 | $ | — | $ | (722.1 | ) | $ | (1,125.6 | ) | $ | 44.1 | ||||||||||||
| Cost of sales |
— | — | 1,071.6 | — | (488.3 | ) | (571.1 | ) | 12.2 | |||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
| Gross margin |
— | — | 820.2 | — | (233.8 | ) | (554.5 | ) | 31.9 | |||||||||||||||||||
| Operating expenses: |
||||||||||||||||||||||||||||
| Selling, general and administrative expenses |
— | 62.8 | 239.8 | 5.2 | (53.1 | ) | (130.5 | ) | 124.2 | |||||||||||||||||||
| Research and development expenses |
— | — | 429.8 | 9.1 | (180.2 | ) | (130.2 | ) | 128.5 | |||||||||||||||||||
| Settlement reserve charge |
— | — | 206.3 | — | — | — | 206.3 | |||||||||||||||||||||
| Net gain on divestment of businesses |
— | — | (1.0 | ) | — | — | — | (1.0 | ) | |||||||||||||||||||
| Other net charges/(gains) |
— | 0.9 | 56.4 | (0.5 | ) | (0.5 | ) | (3.5 | ) | 52.8 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
| Total operating expenses |
— | 63.7 | 931.3 | 13.8 | (233.8 | ) | (264.2 | ) | 510.8 | |||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
| Operating (loss)/income |
— | (63.7 | ) | (111.1 | ) | (13.8 | ) | — | (290.3 | ) | (478.9 | ) | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
| Share of net gains/(losses) of subsidiaries |
— | (497.6 | ) | — | — | 497.6 | — | — | ||||||||||||||||||||
| Net interest and investment (gains)/losses |
(1.2 | ) | — | 141.0 | (5.8 | ) | — | 0.6 | 134.6 | |||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
| Income/(loss) before provision for income taxes |
1.2 | (561.3 | ) | (252.1 | ) | (8.0 | ) | 497.6 | (290.9 | ) | (613.5 | ) | ||||||||||||||||
| Provision for/(benefit from) income taxes |
0.3 | — | 1.8 | — | — | (54.3 | ) | (52.2 | ) | |||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
| Net income/(loss) from continuing operations |
$ | 0.9 | $ | (561.3 | ) | $ | (253.9 | ) | $ | (8.0 | ) | $ | 497.6 | $ | (236.6 | ) | $ | (561.3 | ) | |||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
| Discontinued Operations |
||||||||||||||||||||||||||||
| Net income from discontinued operations (net of tax) |
— | 236.6 | — | — | (236.6 | ) | 236.6 | 236.6 | ||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
| Net income/(loss) for the year |
$ | 0.9 | $ | (324.7 | ) | $ | (253.9 | ) | $ | (8.0 | ) | $ | 261.0 | $ | — | $ | (324.7 | ) | ||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
181
Elan Corporation, plc
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Condensed Consolidating Balance Sheets
For the Year Ended December 31, 2012
| Non- | ||||||||||||||||||||||||
| Elan | Parent | Guarantor | Guarantor | Elimination | ||||||||||||||||||||
| Finance plc | Company | Subsidiaries | Subsidiaries | Adjustments | Consolidated | |||||||||||||||||||
| (In millions) | ||||||||||||||||||||||||
| ASSETS |
| |||||||||||||||||||||||
| Current Assets: |
||||||||||||||||||||||||
| Cash and cash equivalents |
$ | 2.7 | $ | 0.1 | $ | 412.3 | $ | 16.2 | $ | — | $ | 431.3 | ||||||||||||
| Restricted cash — current |
— | — | 2.6 | — | — | 2.6 | ||||||||||||||||||
| Accounts receivable, net |
— | — | 193.5 | — | — | 193.5 | ||||||||||||||||||
| Assets held for sale |
— | — | 113.8 | — | 106.3 | 220.1 | ||||||||||||||||||
| Investment securities — current |
— | — | 1.1 | 166.8 | — | 167.9 | ||||||||||||||||||
| Inventory |
— | — | 25.1 | — | (25.1 | ) | — | |||||||||||||||||
| Intercompany receivables |
5.3 | 2,979.0 | 4,308.2 | 638.7 | (7,931.2 | ) | — | |||||||||||||||||
| Deferred tax assets — current |
0.2 | — | 380.7 | — | — | 380.9 | ||||||||||||||||||
| Prepaid and other current assets |
— | — | 13.2 | — | — | 13.2 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
| Total current assets |
8.2 | 2,979.1 | 5,450.5 | 821.7 | (7,850.0 | ) | 1,409.5 | |||||||||||||||||
| Property, plant and equipment, net |
— | — | 12.7 | — | — | 12.7 | ||||||||||||||||||
| Goodwill and other intangible assets, net |
— | — | 3.0 | — | 96.0 | 99.0 | ||||||||||||||||||
| Equity method investment |
— | — | — | 14.0 | — | 14.0 | ||||||||||||||||||
| Investment securities — non-current |
— | — | 8.6 | — | — | 8.6 | ||||||||||||||||||
| Investments in subsidiaries |
— | — | 12,545.2 | — | (12,545.2 | ) | — | |||||||||||||||||
| Restricted cash — non-current |
— | — | 13.7 | — | — | 13.7 | ||||||||||||||||||
| Intercompany receivables |
588.0 | — | 7,241.9 | 1.1 | (7,831.0 | ) | — | |||||||||||||||||
| Deferred tax assets — non-current |
0.3 | — | 64.3 | — | — | 64.6 | ||||||||||||||||||
| Other assets |
11.8 | — | 6.3 | — | — | 18.1 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
| Total assets |
$ | 608.3 | $ | 2,979.1 | $ | 25,346.2 | $ | 836.8 | $ | (28,130.2 | ) | $ | 1,640.2 | |||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
| LIABILITIES AND SHAREHOLDERS’ EQUITY/(DEFICIT) |
| |||||||||||||||||||||||
| Current Liabilities: |
||||||||||||||||||||||||
| Accounts payable |
$ | — | $ | — | $ | 45.6 | $ | — | $ | — | $ | 45.6 | ||||||||||||
| Accrued and other current liabilities |
9.6 | 0.1 | 302.7 | 0.1 | 1.6 | 314.1 | ||||||||||||||||||
| Intercompany payables |
0.1 | 2,147.2 | 6,268.0 | 160.5 | (8,575.8 | ) | — | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
| Total current liabilities |
9.7 | 2,147.3 | 6,616.3 | 160.6 | (8,574.2 | ) | 359.7 | |||||||||||||||||
| Long term debts |
600.0 | — | — | — | — | 600.0 | ||||||||||||||||||
| Intercompany payables |
— | 174.5 | 11,834.8 | — | (12,009.3 | ) | — | |||||||||||||||||
| Other liabilities |
— | 39.1 | 23.2 | — | — | 62.3 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
| Total liabilities |
609.7 | 2,360.9 | 18,474.3 | 160.6 | (20,583.5 | ) | 1,022.0 | |||||||||||||||||
| Shareholders’ equity/(deficit) |
(1.4 | ) | 618.2 | 6,871.9 | 676.2 | (7,546.7 | ) | 618.2 | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
| Total liabilities and shareholders’ equity/(deficit) |
$ | 608.3 | $ | 2,979.1 | $ | 25,346.2 | $ | 836.8 | $ | (28,130.2 | ) | $ | 1,640.2 | |||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
182
Elan Corporation, plc
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Condensed Consolidating Balance Sheets
For the Year Ended December 31, 2011
| Non- | ||||||||||||||||||||||||
| Elan | Parent | Guarantor | Guarantor | Elimination | ||||||||||||||||||||
| Finance plc | Company | Subsidiaries | Subsidiaries | Adjustments | Consolidated | |||||||||||||||||||
| (In millions) | ||||||||||||||||||||||||
| ASSETS |
| |||||||||||||||||||||||
| Current Assets: |
||||||||||||||||||||||||
| Cash and cash equivalents |
$ | 1.8 | $ | 0.8 | $ | 265.7 | $ | 3.4 | $ | — | $ | 271.7 | ||||||||||||
| Restricted cash — current |
— | — | 2.6 | — | — | 2.6 | ||||||||||||||||||
| Accounts receivable, net |
— | — | 167.7 | — | — | 167.7 | ||||||||||||||||||
| Investment securities — current |
— | — | 0.3 | — | — | 0.3 | ||||||||||||||||||
| Inventory |
— | — | 42.2 | — | (18.4 | ) | 23.8 | |||||||||||||||||
| Intercompany receivables |
22.8 | 2,964.0 | 3,646.3 | 140.3 | (6,773.4 | ) | — | |||||||||||||||||
| Deferred tax assets — current |
0.1 | — | 26.1 | — | — | 26.2 | ||||||||||||||||||
| Prepaid and other current assets |
— | — | 25.7 | — | — | 25.7 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
| Total current assets |
24.7 | 2,964.8 | 4,176.6 | 143.7 | (6,791.8 | ) | 518.0 | |||||||||||||||||
| Property, plant and equipment, net |
— | — | 83.2 | — | — | 83.2 | ||||||||||||||||||
| Goodwill and other intangible assets, net |
— | — | 107.0 | — | 202.9 | 309.9 | ||||||||||||||||||
| Equity method investment |
— | — | 130.6 | 545.2 | — | 675.8 | ||||||||||||||||||
| Investment securities — non-current |
— | — | 9.8 | — | — | 9.8 | ||||||||||||||||||
| Investments in subsidiaries |
— | — | 12,545.6 | — | (12,545.6 | ) | — | |||||||||||||||||
| Restricted cash — non-current |
— | — | 13.7 | — | — | 13.7 | ||||||||||||||||||
| Intercompany receivables |
588.4 | — | 7,021.6 | 1.1 | (7,611.1 | ) | — | |||||||||||||||||
| Deferred tax assets — non-current |
0.6 | — | 123.5 | — | (5.2 | ) | 118.9 | |||||||||||||||||
| Other assets |
11.1 | — | 13.3 | — | 0.1 | 24.5 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
| Total assets |
$ | 624.8 | $ | 2,964.8 | $ | 24,224.9 | $ | 690.0 | $ | (26,750.7 | ) | $ | 1,753.8 | |||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
| LIABILITIES AND SHAREHOLDERS’ EQUITY/(DEFICIT) |
| |||||||||||||||||||||||
| Current Liabilities: |
||||||||||||||||||||||||
| Accounts payable |
$ | — | $ | — | $ | 46.4 | $ | — | $ | — | $ | 46.4 | ||||||||||||
| Accrued and other current liabilities |
11.4 | 0.1 | 210.6 | — | 7.8 | 229.9 | ||||||||||||||||||
| Intercompany payables |
0.2 | 1,975.4 | 5,446.6 | 5.7 | (7,427.9 | ) | — | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
| Total current liabilities |
11.6 | 1,975.5 | 5,703.6 | 5.7 | (7,420.1 | ) | 276.3 | |||||||||||||||||
| Long term debts |
615.0 | — | — | — | — | 615.0 | ||||||||||||||||||
| Intercompany payables |
— | 175.3 | 11,614.9 | — | (11,790.2 | ) | — | |||||||||||||||||
| Other liabilities |
— | 12.2 | 53.7 | — | (5.2 | ) | 60.7 | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
| Total liabilities |
626.6 | 2,163.0 | 17,372.2 | 5.7 | (19,215.5 | ) | 952.0 | |||||||||||||||||
| Shareholders’ equity/(deficit) |
(1.8 | ) | 801.8 | 6,852.7 | 684.3 | (7,535.2 | ) | 801.8 | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
| Total liabilities and shareholders’ equity/(deficit) |
$ | 624.8 | $ | 2,964.8 | $ | 24,224.9 | $ | 690.0 | $ | (26,750.7 | ) | $ | 1,753.8 | |||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
183
Elan Corporation, plc
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Condensed Consolidating Statements of Cash Flows
For the Year Ended December 31, 2012
| Non- | ||||||||||||||||||||||||
| Elan | Parent | Guarantor | Guarantor | Elimination | ||||||||||||||||||||
| Finance plc | Company | Subsidiaries | Subsidiaries | Adjustments | Consolidated | |||||||||||||||||||
| (In millions) | ||||||||||||||||||||||||
| Cash flows from operating activities: |
||||||||||||||||||||||||
| Net cash provided by/(used in) operating activities |
$ | 95.5 | $ | (21.5 | ) | $ | 36.5 | $ | (55.2 | ) | $ | — | $ | 55.3 | ||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
| Cash flows from investing activities: |
||||||||||||||||||||||||
| Purchase of property, plant and equipment |
— | — | (10.3 | ) | — | — | (10.3 | ) | ||||||||||||||||
| Purchase of intangible assets |
— | — | (1.8 | ) | — | — | (1.8 | ) | ||||||||||||||||
| Purchase of investment securities |
— | — | (0.7 | ) | — | — | (0.7 | ) | ||||||||||||||||
| Funding of equity method investment in Janssen AI |
— | — | (76.9 | ) | — | — | (76.9 | ) | ||||||||||||||||
| Receipt of deferred consideration |
— | — | 12.0 | — | — | 12.0 | ||||||||||||||||||
| Proceeds from sale of equity method investment |
— | — | — | 380.9 | — | 380.9 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
| Net cash (used in)/provided by investing activities |
— | — | (77.7 | ) | 380.9 | — | 303.2 | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
| Cash flows from financing activities: |
||||||||||||||||||||||||
| Cash distribution to Prothena Corporation, plc |
— | (99.0 | ) | — | (26.0 | ) | — | (125.0 | ) | |||||||||||||||
| Proceeds from employee stock issuances |
— | 20.8 | — | — | — | 20.8 | ||||||||||||||||||
| Repayment of loans |
(682.5 | ) | — | — | — | — | (682.5 | ) | ||||||||||||||||
| Net proceeds from debt issuances |
587.9 | — | — | — | — | 587.9 | ||||||||||||||||||
| Loans to group undertakings |
— | 99.0 | 187.9 | (286.9 | ) | — | — | |||||||||||||||||
| Repayment of government grants |
— | — | — | — | — | — | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
| Net cash (used in)/provided by financing activities |
(94.6 | ) | 20.8 | 187.9 | (312.9 | ) | — | (198.8 | ) | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
| Effect of exchange rate changes on cash |
— | — | (0.1 | ) | — | — | (0.1 | ) | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
| Net increase/(decrease) in cash and cash equivalents |
0.9 | (0.7 | ) | 146.6 | 12.8 | — | 159.6 | |||||||||||||||||
| Cash and cash equivalents at beginning of year |
1.8 | 0.8 | 265.7 | 3.4 | — | 271.7 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
| Cash and cash equivalents at end of year |
$ | 2.7 | $ | 0.1 | $ | 412.3 | $ | 16.2 | $ | — | $ | 431.3 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
184
Elan Corporation, plc
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Condensed Consolidating Statements of Cash Flows
For the Year Ended December 31, 2011
| Non- | ||||||||||||||||||||||||
| Elan | Parent | Guarantor | Guarantor | Elimination | ||||||||||||||||||||
| Finance plc | Company | Subsidiaries | Subsidiaries | Adjustments | Consolidated | |||||||||||||||||||
| (In millions) | ||||||||||||||||||||||||
| Cash flows from operating activities: |
||||||||||||||||||||||||
| Net cash provided by/(used in) operating activities |
$ | 697.4 | $ | (5.8 | ) | $ | (826.2 | ) | $ | 14.4 | $ | — | $ | (120.2 | ) | |||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
| Cash flows from investing activities: |
||||||||||||||||||||||||
| Decrease in restricted cash |
— | — | 206.8 | — | — | 206.8 | ||||||||||||||||||
| Proceeds from disposal of property, plant and equipment |
— | — | 1.3 | — | — | 1.3 | ||||||||||||||||||
| Purchase of property, plant and equipment |
— | — | (27.3 | ) | — | — | (27.3 | ) | ||||||||||||||||
| Purchase of intangible assets |
— | — | (2.5 | ) | — | — | (2.5 | ) | ||||||||||||||||
| Purchase of equity method investment |
— | — | — | (20.0 | ) | — | (20.0 | ) | ||||||||||||||||
| Purchase of non-current investment securities |
— | — | (0.6 | ) | — | — | (0.6 | ) | ||||||||||||||||
| Sale of investment securities |
— | — | 2.8 | — | — | 2.8 | ||||||||||||||||||
| Proceeds from business disposals |
— | — | 500.0 | — | — | 500.0 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
| Net cash used in investing activities |
— | — | 680.5 | (20.0 | ) | — | 660.5 | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
| Cash flows from financing activities: |
||||||||||||||||||||||||
| Proceeds from employee stock issuances |
— | 6.3 | — | — | — | 6.3 | ||||||||||||||||||
| Repayment of loans |
(697.3 | ) | — | — | — | — | (697.3 | ) | ||||||||||||||||
| Net proceeds from debt issuances |
— | — | — | — | — | — | ||||||||||||||||||
| Loans to group undertakings |
— | — | 132.1 | (132.1 | ) | — | — | |||||||||||||||||
| Repayment of government grants |
— | — | — | — | — | — | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
| Net cash provided by/(used in) financing activities |
(697.3 | ) | 6.3 | 132.1 | (132.1 | ) | — | (691.0 | ) | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
| Effect of exchange rate changes on cash |
— | — | (0.1 | ) | — | — | (0.1 | ) | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
| Net increase/(decrease) in cash and cash equivalents |
0.1 | 0.5 | (13.7 | ) | (137.7 | ) | — | (150.8 | ) | |||||||||||||||
| Cash and cash equivalents at beginning of year |
1.7 | 0.3 | 279.4 | 141.1 | — | 422.5 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
| Cash and cash equivalents at end of year |
$ | 1.8 | $ | 0.8 | $ | 265.7 | $ | 3.4 | $ | — | $ | 271.7 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
185
Elan Corporation, plc
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Condensed Consolidating Statements of Cash Flows
For the Year Ended December 31, 2010
| Non- | ||||||||||||||||||||||||
| Elan | Parent | Guarantor | Guarantor | Elimination | ||||||||||||||||||||
| Finance plc | Company | Subsidiaries | Subsidiaries | Adjustments | Consolidated | |||||||||||||||||||
| (In millions) | ||||||||||||||||||||||||
| Cash flows from operating activities: |
||||||||||||||||||||||||
| Net cash provided by/(used in) operating activities |
$ | 259.8 | $ | (5.0 | ) | $ | (176.2 | ) | $ | (10.4 | ) | $ | — | $ | 68.2 | |||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
| Cash flows from investing activities: |
||||||||||||||||||||||||
| Decrease in restricted cash |
— | — | (191.4 | ) | — | — | (191.4 | ) | ||||||||||||||||
| Proceeds from disposal of property, plant and equipment |
— | — | 0.1 | — | — | 0.1 | ||||||||||||||||||
| Purchase of property, plant and equipment |
— | — | (40.9 | ) | — | — | (40.9 | ) | ||||||||||||||||
| Purchase of intangible assets |
— | — | (3.6 | ) | — | — | (3.6 | ) | ||||||||||||||||
| Purchase of non-current investment securities |
— | — | (0.9 | ) | — | — | (0.9 | ) | ||||||||||||||||
| Sale of investment securities |
— | — | 16.4 | — | — | 16.4 | ||||||||||||||||||
| Proceeds from business disposals |
— | — | 4.3 | — | — | 4.3 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
| Net cash used in investing activities |
— | — | (216.0 | ) | — | — | (216.0 | ) | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
| Cash flows from financing activities: |
||||||||||||||||||||||||
| Proceeds from employee stock issuances |
— | 1.8 | — | — | — | 1.8 | ||||||||||||||||||
| Repayment of loans |
(455.0 | ) | — | — | — | — | (455.0 | ) | ||||||||||||||||
| Net proceeds from debt issuances |
187.1 | — | — | — | — | 187.1 | ||||||||||||||||||
| Intercompany investments/capital contributions |
— | — | (0.9 | ) | 0.9 | — | — | |||||||||||||||||
| Loans to group undertakings |
— | — | 251.0 | (251.0 | ) | — | — | |||||||||||||||||
| Repayment of government grants |
— | — | — | — | — | — | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
| Net cash provided by/(used in) financing activities |
(267.9 | ) | 1.8 | 250.1 | (250.1 | ) | — | (266.1 | ) | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
| Effect of exchange rate changes on cash |
— | — | (0.1 | ) | — | — | (0.1 | ) | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
| Net increase/(decrease) in cash and cash equivalents |
(8.1 | ) | (3.2 | ) | (142.2 | ) | (260.5 | ) | — | (414.0 | ) | |||||||||||||
| Cash and cash equivalents at beginning of year |
9.8 | 3.5 | 421.6 | 401.6 | — | 836.5 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
| Cash and cash equivalents at end of year |
$ | 1.7 | $ | 0.3 | $ | 279.4 | $ | 141.1 | $ | — | $ | 422.5 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
38. Subsequent Events
On February 6, 2013, we announced that we have entered into an asset purchase agreement with Biogen Idec to transfer to Biogen Idec all Tysabri IP and other assets related to Tysabri. As a result of this transaction, Biogen Idec will have sole authority over and exclusive worldwide rights to the development, manufacturing and commercialization of Tysabri. In accordance with the terms of the transaction, upon consummation of the transaction, the existing collaboration arrangements with Biogen Idec will be terminated and Biogen Idec will pay to us an upfront payment of $3.25 billion and continuing royalties on Tysabri in-market sales. We will earn a royalty of 12% of global net sales of Tysabri during the first 12 months following the closing of the transaction. Thereafter, we will earn a royalty of 18% of global net sales up to $2.0 billion each year, and a 25% royalty on annual global net sales above $2.0 billion. The transaction is expected to close in the first half of 2013, subject to the satisfaction of certain conditions, including customary regulatory approvals.
186
Elan Corporation, plc
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
On January 31, 2013, we announced that we had agreed to sell all of our remaining 7.75 million ordinary shares of Alkermes plc. The sale closed on February 6, 2013 and we received proceeds of $169.7 million. We will recognize a realized gain on the disposal of the Alkermes plc available-for-sale investment of $43.2 million.
187
| Exhibit Number |
Description | |
| 1.1 | Memorandum and Articles of Association of Elan Corporation, plc. (incorporated by reference to Exhibit 4.1 of Elan Corporation plc’s Registration Statement on Form S-8 (Registration No. 333-181973 filed with the Securities and Exchange Commission (Commission) on June 7, 2012). | |
| 2(a)(1) | Amended and Restated Deposit Agreement by and among Elan Corporation, plc, Citibank, N.A., as Depositary and the holders and beneficial owners of American Depositary Shares (incorporated by reference to Exhibit 4.2 to the Elan Corporation, plc Registration Statement on Form S-8 (registration No. 333-181971) filed with the Commission on June 7, 2012). | |
| 2(b)(1) | Registration Rights Agreement dated October 1, 2012 among Elan Finance Public Limited Company, Elan Finance Corp. Elan Corporation, plc. certain Subsidiary Guarantors and Morgan Stanley & Co. LLC (incorporated by reference to Exhibit 99.2 of the Report of Foreign Issuer on Form 6-K of Elan Corporation, plc filed with the Commission on October 4, 2012). | |
| 2(c)(1) | Indenture dated as of October 1, 2012, among Elan Finance public limited company, Elan Finance Corp., Elan Corporation, plc, the Subsidiary Note Guarantors party thereto and BNY Mellon Corporate Trustee Services Limited, as Trustee and the Bank of New York Mellon, as Registrar and Paying Agent (incorporated by reference to Exhibit 99.1 of the Report of Foreign Issuer on Form 6-K of Elan Corporation, plc filed with the Commission on October 4, 2012 Commission File No. 001-13896). | |
| 2(c)(2) | First Supplemental Indenture dated as of November 19, 2012, among Elan Finance public limited company, Elan Finance Corp., Elan Corporation, plc, Neotope Biosciences Limited, Onclave Therapeutics Limited, Prothena Biosciences Inc and each other Note Guarantor under the Indenture and The Bank of New York Mellon, as successor Trustee (incorporated by reference to Exhibit 99.1 of the Report of Foreign Issuer on Form 6-K of Elan Corporation, plc filed with the Commission on November 27, 2012). | |
| 2(c)(3) | Second Supplemental Indenture dated as of January 11, 2013 among Elan Finance public limited company, Elan Finance Corp., Elan Corporation, plc, Elan Pharmaceuticals GmbH and each other Note Guarantor under the Indenture and The Bank of New York Mellon, as successor Trustee (incorporated by reference to Exhibit 99.1 of the Report of Foreign Issuer on Form 6-K of Elan Corporation, plc filed with the Commission on January 11, 2013). | |
| 4(a)(1) | Antegren Development and Marketing Collaboration Agreement, dated as of August 15, 2000, by and between Biogen, Inc. and Elan Pharma International Limited (incorporated by reference to Exhibit 4(a)(1) of Elan Corporation, plc’s Annual Report on Form 20-F for the fiscal year ended December 31, 2002 — confidential treatment has been granted for portions of this exhibit). | |
| 4(a)(2) | Asset Purchase Agreement, dated as of July 2, 2009, among Janssen Pharmaceutical, Juno Neurosciences, Elan Corporation, plc and the other Parties identified therein (incorporated by reference to Exhibit 4(a)(3) of Elan Corporation, plc’s Annual Report on Form 20-F for the year ended December 31, 2009). | |
| 4(a)(3) | Subscription and Transfer Agreement, dated as of July 2, 2009, among Elan Corporation, plc, Keavy Holdings plc and Janssen Pharmaceutical (incorporated by reference to Exhibit 4(a)(4) of Elan Corporation, plc’s Annual Report on Form 20-F for the year ended December 31, 2009). | |
| 4(a)(4) | Letter Agreement dated September 14, 2009 among Elan Corporation, plc, Athena Neurosciences, Inc., Crimagua Limited, Elan Pharmaceuticals, Inc., Elan Pharma International Limited, Keavy Finance plc, Janssen Pharmaceutical and Janssen Alzheimer Immunotherapy (incorporated by reference to Exhibit 4(a)(5) of Elan Corporation, plc’s Annual Report on Form 20-F for the year ended December 31, 2009). | |
| 4(a)(5) | Investment Agreement, dated as of September 17, 2009, between Elan Corporation, plc and Janssen Pharmaceutical (incorporated by reference to Exhibit 4(a)(6) of Elan Corporation, plc’s Annual Report on Form 20-F for the year ended December 31, 2009). | |
| 4(a)(6) | Shareholders’ Agreement, dated as of September 17, 2009 by and among Janssen Pharmaceutical, Janssen Alzheimer Immunotherapy (Holding) Limited, Latam Properties Holdings, JNJ Irish Investments ULC, Elan Corporation, plc, Crimagua Limited, Elan Pharma International Limited and Janssen Alzheimer Immunotherapy (incorporated by reference to Exhibit 4(a)(6) of Elan Corporation, plc’s Annual Report on Form 20-F for the year ended December 31, 2010). | |
| 4(a)(7) | Royalty Agreement dated as of September 17, 2009 among Janssen Alzheimer Immunotherapy, Janssen Alzheimer Immunotherapy (Holding) Limited and Elan Pharma International Limited (incorporated by reference to Exhibit 4(a)(8) of Elan Corporation, plc’s Annual Report on Form 20-F for the year ended December 31, 2009). | |
| 4(a)(8) | Corporate Integrity Agreement between the Office of Inspector General of the Department of Health and Human Services and Elan Corporation, plc (incorporated by reference to Exhibit 4(a)(8) of Elan Corporation, plc’s Annual Report on Form 20-F for the year ended December 31, 2010). | |
| 4(a)(9) | Plea Agreement, dated December 8, 2010, between the United States Attorney for the District of Massachusetts, the United States Department of Justice and Elan Pharmaceuticals, Inc. (incorporated by reference to Exhibit 10.1 of the Report of Foreign Issuer on Form 6-K of Elan Corporation, plc filed with the Commission on February 28, 2011). | |
188
| Exhibit Number |
Description | |
| 4(a)(10) | Settlement Agreement, effective December 15, 2010, among the United States of America, acting through the United States Department of Justice and on behalf of the Office of Inspector General of the Department of Health and Human Services, the TRICARE Management Activity, and the United States Office of Personnel Management; Elan Corporation, plc; and Lee R. Chartock, M.D. (incorporated by reference to Exhibit 10.2 of the Report of Foreign Issuer on Form 6-K of Elan Corporation, plc filed with the Commission on February 28, 2011). | |
| 4(a)(11) | Business Combination Agreement And Plan Of Merger, dated as of May 9, 2011, by and among Elan Corporation, plc, Antler Science Two Limited, Elan Science Four Limited, EDT Pharma Holdings Limited, EDT US Holdco Inc., Antler Acquisition Corp. and Alkermes, Inc. (incorporated by reference to Exhibit 2.1 of the Report of Foreign Issuer on Form 6-K of Elan Corporation, plc filed with the Commission on May 9, 2011). | |
| 4(a)(12) | Shareholder’s Agreement, dated as of September 16, 2011, by and among Alkermes, plc, Elan Corporation, plc, and Elan Science Three Limited (incorporated by reference to Exhibit 4(a)(12) of Elan Corporation, plc’s Annual Report on Form 20-F for the fiscal year ended December 31, 2011, as amended). | |
| 4(b)(1) | Lease dated as of June 1, 2007 between Chamberlin Associates 180 Oyster Point Blvd., LLC and Elan Pharmaceuticals, Inc. (incorporated by reference to Exhibit 4(b)(1) of Elan Corporation, plc’s Annual Report on Form 20-F for the fiscal year ended December 31, 2007). | |
| 4(b)(2) | Lease dated as of December 17, 2007 between Chamberlin Associates 200 Oyster Point, L.P. and Elan Pharmaceuticals, Inc. (incorporated by reference to Exhibit 4(b)(2) of Elan Corporation, plc’s Annual Report on Form 20-F for the fiscal year ended December 31, 2007). | |
| 4(b)(3) | Lease dated September 1, 2004 among Ambiorix Limited, Elan Management Limited and Elan Corporation, plc. | |
| 4(b)(4) | Lease dated April 30, 2008 among Ambiorix Limited, Elan Management Limited and Elan Corporation, plc. | |
| 4(b)(5) | Lease Agreement made as of May 16, 2012 between ARE-TECH Square and Elan Pharmaceuticals, Inc., as amended by First Amendment to lease dated November 21, 2012. | |
| 4(c)(1) | Elan Corporation, plc 1999 Stock Option Plan (2001 Amendment) (incorporated by reference to Exhibit 4(c)(1) of Elan Corporation, plc’s Annual Report on Form 20-F for the fiscal year ended December 31, 2001). | |
| 4(c)(2) | Elan Corporation, plc 1998 Long-Term Incentive Plan (2001 Restatement) (incorporated by reference to Exhibit 4(c)(2) of Elan Corporation, plc’s Annual Report on Form 20-F for the fiscal year ended December 31, 2001). | |
| 4(c)(3) | Elan Corporation, plc 1996 Long-Term Incentive Plan (2001 Restatement) (incorporated by reference to Exhibit 4(c)(3) of Elan Corporation, plc’s Annual Report on Form 20-F for the fiscal year ended December 31, 2001). | |
| 4(c)(4) | Elan Corporation, plc 1996 Consultant Option Plan (2001 Restatement) (incorporated by reference to Exhibit 4(c)(4) of Elan Corporation, plc’s Annual Report on Form 20-F for the fiscal year ended December 31, 2001). | |
| 4(c)(5) | Elan Corporation, plc Employee Equity Purchase Plan, (2012 Restatement) (incorporated by reference to Exhibit 4.4 of Elan Corporation, plc’s Registration Statement on Form S-8 (Registration No. 333-181971 filed with the Commission on June 7, 2012). | |
| 4(c)(6) | Elan Corporation, plc 2004 Restricted Stock Unit Plan (incorporated by reference to Exhibit 4(c)(8) of Elan Corporation, plc’s Annual Report on Form 20-F for the fiscal year ended December 31, 2005). | |
| 4(c)(7) | Letter Agreement, dated as of June 8, 2009, among Elan Corporation, plc, Jack W. Schuler, Vaughn D. Bryson and Crabtree Partners L.C.C. (incorporated by reference to Exhibit 10.3 of the Report of Foreign Issuer on Form 6-K of Elan Corporation, plc filed with the Commission on September 29, 2009). | |
| 4(c)(8) | Consulting Agreement, dated as of July 1, 2009, between Dr. Dennis J. Selkoe and Elan Pharmaceuticals, Inc. (incorporated by reference to Exhibit 10.4 of the Report of Foreign Issuer on Form 6-K of Elan Corporation, plc filed with the Commission on September 29, 2009). | |
| 4(c)(9) | Consulting Agreement Amendment No. 1 between Dr. Dennis J. Selkoe and Elan Pharmaceuticals, Inc. made as of July 1, 2012 (incorporated by reference to Exhibit 10.1 of the Report of Foreign Issuer on Form 6-K of Elan Corporation, plc filed with the Commission on July 5, 2012). | |
| 4(c)(10) | 2012 Amended and Restated Employment Agreement, dated as of April 30, 2012, among Elan Pharmaceuticals, Inc., Elan Corporation, plc and G. Kelly Martin. (incorporated by reference to Exhibit 99.1 of the Report of Foreign Issuer on Form 6-K of Elan Corporation, plc filed with the Commission on May 1, 2012). | |
| 4(c)(11) | July 18, 2007 Letter Agreement between Dr. Lars Ekman and Elan Pharmaceuticals, Inc. (incorporated by reference to Exhibit 4(c)(12) of Elan Corporation, plc’s Annual Report on Form 20-F for the fiscal year ended December 31, 2007). | |
| 4(c)(12) | Elan Corporation, plc Cash Bonus Plan effective January 1, 2006, and revised as of January 1, 2009. (incorporated by reference to Exhibit 4(c)(13) of Elan Corporation, plc’s Annual Report on Form 20-F for the fiscal year ended December 31, 2008). | |
| 4(c)(13) | Elan Corporation, plc Profit Sharing Scheme 2006 (incorporated by reference to Exhibit 4(c)(16) of Elan Corporation, plc’s Annual Report on Form 20-F for the fiscal year ended December 31, 2005). | |
189
| Exhibit Number |
Description | |
| 4(c)(14) | Elan Corporation, plc 2006 Long Term Incentive Plan (2009 Amendment and Restatement). (incorporated by reference to Exhibit 4(c)(15) of Elan Corporation, plc’s Annual Report on Form 20-F for the fiscal year ended December 31, 2008). | |
| 4(c)(15) | Elan Corporation, plc 2012 Long Term Incentive Plan (incorporated by reference to Exhibit 4.4 of Elan Corporation, plc’s Registration Statement on Form S-8 (Registration No. 333-181973 filed with the Commission on June 7, 2012). | |
| 4(c)(16) | Letter Agreement dated as of September 16, 2011 between Elan Corporation, plc and Shane Cooke (incorporated by reference to Exhibit 2.3 of the Report of Foreign Issuer of Elan Corporation, plc filed with the Commission on September 16, 2011). | |
| 4(c)(17) | Form of Deed of Indemnity between Elan Corporation, plc and directors and certain officers of Elan Corporation, plc (incorporated by reference to Exhibit 99.2 of the Report of Foreign Issuer on Form 6-K of Elan Corporation, plc filed with the Commission on November 15, 2006). | |
| 4(c)(18) | Elan U.S. Severance Plan, amended and restated effective as of April 1, 2011 (incorporated by reference to Exhibit 99.1 of the Report of Foreign Issuer of Elan Corporation, plc filed with the Commission on April 19, 2011). | |
| 4(c)(19) | Form of Memo Agreement dated May 17, 2007 amending certain outstanding grant agreements for restricted stock units and stock option agreements held by senior officers who are members of the Operating Committee of Elan Corporation, plc. (incorporated by reference to Exhibit 4(c)(19) of Elan Corporation, plc’s Annual Report on Form 20-F for the fiscal year ended December 31, 2007). | |
| 4(c)(20) | Form of Restricted Stock Unit Agreement under the Elan Corporation, plc 2006 Long Term Incentive Plan (2009 Amendment and Restatement) for certain senior officers who are members of the Operating Committee of Elan Corporation, plc. (incorporated by reference to Exhibit 4(c)(20) of Elan Corporation, plc’s Annual Report on Form 20-F for the fiscal year ended December 31, 2008). | |
| 4(c)(21) | Form of Nonstatutory Stock Option Agreement under the Elan Corporation, plc 2006 Long Term Incentive Plan (2009 Amendment and Restatement) for certain senior officers who are members of the Operating Committee of Elan Corporation, plc. (incorporated by reference to Exhibit 4(c)(21) of Elan Corporation, plc’s Annual Report on Form 20-F for the fiscal year ended December 31, 2008). | |
| 4(c)(22) | Form of Nonstatutory Stock Option Agreement under the Elan Corporation, plc 2006 Long Term Incentive Plan (2009 Amendment and Restatement) for new members of the Board of Directors of Elan Corporation, plc. (incorporated by reference to Exhibit 4(c)(22) of Elan Corporation, plc’s Annual Report on Form 20-F for the fiscal year ended December 31, 2008). | |
| 4(c)(23) | Form of Nonstatutory Stock Option Agreement under the Elan Corporation, plc 2006 Long Term Incentive Plan (2009 Amendment and Restatement) for members of the Board of Directors of Elan Corporation, plc. (incorporated by reference to Exhibit 4(c)(23) of Elan Corporation, plc’s Annual Report on Form 20-F for the fiscal year ended December 31, 2008). | |
| 4(c)(24) | Form of Restricted Stock Unit Agreement under the Elan Corporation, plc 2006 Long Term Incentive Plan (2009 Amendment and Restatement) for non-executive members of the Board of Directors of Elan Corporation, plc. (incorporated by reference to Exhibit 4(c)(24) of Elan Corporation, plc’s Annual Report on Form 20-F for the fiscal year ended December 31, 2008). | |
| 4(c)(25) | Letter Agreement dated as of March 10, 2011 between Elan Pharmaceuticals, Inc. and Dr. Carlos Paya (incorporated by reference to Exhibit 10.1 of the Report of Foreign Issuer on Form 6-K of Elan Corporation, plc filed with the Commission on March 15, 2011). | |
| 4(c)(26) | Memorandum of Understanding dated 17 September 2010 among Elan Corporation, plc, Jack Schuler and Vaughn Bryson (incorporated by reference to Exhibit 4(c)(27) of Elan Corporation plc’s Annual Report on Form 20-F for the fiscal year ended December 31, 2010). | |
| 4(c)(27) | Binding Fee Letter Dated 17 September 2010 among Elan Corporation, plc, Jack Schuler and Vaughn Bryson (incorporated by reference to Exhibit 4(c)(28) of Elan Corporation plc’s Annual Report on Form 20-F for the fiscal year ended December 31, 2010). |
190
| Exhibit Number |
Description | |
| 4(c)(28) | Amendment 2011-1 to Elan U.S. Severance Plan effective as of July 14, 2011 (Incorporated by reference to Exhibit 4(c)(27) of Elan Corporation’s Annual Report on Form 20-F for the year ended December 31, 2011, as amended). | |
| 4(c)(29) | Chairman’s Letter of Appointment dated February 9, 2011 (incorporated by reference to Exhibit 99.1 of the Report of Foreign Issuer on Form 6-K of Elan Corporation, plc filed with the Commission on February 10, 2011). | |
| 4(c)(30) | Employment Agreement between Hans Peter Hasler and Elan Pharmaceuticals GmbH effective as of October 1, 2012 (incorporated by reference to Exhibit 99.1 of the Report of Foreign Issuer on Form 6-K of Elan Corporation, plc filed with the Commission on October 19, 2012). | |
| 4(c)(31) | Asset Purchase Agreement, dated as of February 5, 2013, by and among Elan Pharma International Limited, Elan Pharmaceuticals, Inc. and Biogen Idec International Holding Ltd (confidential treatment has been requested for portions of this exhibit). | |
| 8.1 | Subsidiaries of Elan Corporation, plc. | |
| 12.1 | Certification of G. Kelly Martin pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
| 12.2 | Certification of Nigel Clerkin pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
| 13.1 | Certification of G. Kelly Martin pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | |
| 13.2 | Certification of Nigel Clerkin pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | |
| 15.1 | Consent of Independent Registered Public Accounting Firm, KPMG. | |
| 101 | XBRL (Extensible Business Reporting Language) The following materials from Elan’s Annual Report on Form 20-F for the fiscal year-ended December 31, 2012, formatted in XBRL: (i) Consolidated Statements of Operations, (ii) Consolidated Balance Sheets, (iii) Statements of Consolidated Comprehensive Income, (iv) Consolidated Statements of Shareholders’ Equity (v) Consolidated Statements of Cash Flows, (vi) Notes to the Consolidated Financial Statements, and (vii) Schedule II — Valuation and Qualifying Accounts and Reserves. |
191
The Registrant hereby certifies that it meets all of the requirements for filing on Form 20-F and has duly caused and authorized the undersigned to sign this Annual Report on its behalf.
| Elan Corporation, plc |
| /s/ NIGEL CLERKIN |
| Nigel Clerkin |
| Executive Vice President and Chief Financial Officer |
Date: February 12, 2013
192
Valuation and Qualifying Accounts and Reserves
Years ended December 31, 2012, 2011 and 2010
| Description |
Balance at Beginning of Year |
Additions(1) | Deductions(2) | Balance at End of Year |
||||||||||||
| (In millions) | ||||||||||||||||
| Allowance for doubtful accounts: |
||||||||||||||||
| Year ended December 31, 2012 |
$ | — | $ | — | $ | — | $ | — | ||||||||
| Year ended December 31, 2011 |
$ | 0.4 | $ | — | $ | (0.4 | ) | $ | — | |||||||
| Year ended December 31, 2010 |
$ | 0.4 | $ | 0.4 | $ | (0.4 | ) | $ | 0.4 | |||||||
| Sales returns and allowances, discounts, chargebacks and rebates:(3) |
||||||||||||||||
| Year ended December 31, 2012 |
$ | 45.5 | $ | 265.9 | $ | (260.9 | ) | $ | 50.5 | |||||||
| Year ended December 31, 2011 |
$ | 37.9 | $ | 188.8 | $ | (181.2 | ) | $ | 45.5 | |||||||
| Year ended December 31, 2010 |
$ | 26.5 | $ | 127.5 | $ | (116.1 | ) | $ | 37.9 | |||||||
| (1) | Additions to allowance for doubtful accounts are recorded as an expense. |
| (2) | Represents amounts written off or returned against the allowance or reserves, or returned against earnings. Deductions to sales discounts and allowances relate to sales returns and payments. |
| (3) | Additions to sales discounts and allowances are recorded as a reduction of revenue. |
193
| This ‘20-F’ Filing | Date | Other Filings | ||
|---|---|---|---|---|
 | ||||
| 10/25/22 | ||||
| 7/26/22 | ||||
| 4/29/22 | ||||
| 4/27/22 | ||||
| 2/9/22 | ||||
| 2/8/22 | ||||
| 10/28/21 | ||||
| 7/28/21 | ||||
| 4/21/21 | ||||
| 2/9/21 | ||||
| 2/8/21 | ||||
| 5/26/20 | ||||
| 2/10/20 | ||||
| 10/15/19 | ||||
| 9/17/19 | ||||
| 2/11/19 | ||||
| 2/10/19 | ||||
| 5/21/18 | ||||
| 2/14/18 | ||||
| 2/13/18 | ||||
| 9/12/17 | ||||
| 2/20/17 | ||||
| 1/31/16 | ||||
| 12/6/15 | ||||
| 10/15/15 | ||||
| 7/1/15 | ||||
| 5/25/15 | ||||
| 3/9/15 | ||||
| 2/9/15 | ||||
| 9/17/14 | ||||
| 7/1/14 | ||||
| 3/9/14 | ||||
| 2/9/14 | ||||
| 12/31/13 | ||||
| 11/12/13 | 425 | |||
| 4/30/13 | ||||
| 4/2/13 | 6-K, SC TO-I/A | |||
| Filed on: | 2/12/13 | 6-K | ||
| 2/11/13 | ||||
| 2/9/13 | ||||
| 2/8/13 | SC 13D/A | |||
| 2/7/13 | ||||
| 2/6/13 | 6-K | |||
| 2/5/13 | ||||
| 2/4/13 | ||||
| 2/1/13 | 6-K | |||
| 1/31/13 | 6-K | |||
| 1/11/13 | 6-K | |||
| For Period end: | 12/31/12 | 20-F/A | ||
| 12/21/12 | 6-K | |||
| 12/20/12 | 3, 6-K | |||
| 12/7/12 | ||||
| 12/6/12 | 6-K | |||
| 11/27/12 | 6-K | |||
| 11/21/12 | ||||
| 11/19/12 | ||||
| 10/25/12 | ||||
| 10/22/12 | ||||
| 10/19/12 | 6-K | |||
| 10/5/12 | ||||
| 10/4/12 | 6-K | |||
| 10/1/12 | 6-K | |||
| 9/24/12 | 6-K | |||
| 8/6/12 | ||||
| 7/26/12 | ||||
| 7/23/12 | ||||
| 7/19/12 | ||||
| 7/17/12 | ||||
| 7/5/12 | 6-K | |||
| 7/1/12 | ||||
| 6/30/12 | ||||
| 6/7/12 | S-8 | |||
| 5/24/12 | ||||
| 5/16/12 | ||||
| 5/1/12 | 6-K | |||
| 4/30/12 | 6-K | |||
| 4/27/12 | 6-K | |||
| 3/18/12 | ||||
| 3/13/12 | 4, 6-K | |||
| 2/29/12 | ||||
| 2/14/12 | SC 13G/A | |||
| 2/9/12 | ||||
| 2/3/12 | ||||
| 2/2/12 | ||||
| 1/1/12 | ||||
| 12/31/11 | 20-F, 20-F/A | |||
| 11/3/11 | UPLOAD | |||
| 10/28/11 | ||||
| 10/20/11 | 6-K | |||
| 10/14/11 | ||||
| 9/16/11 | 3, 6-K | |||
| 9/15/11 | 6-K | |||
| 9/8/11 | ||||
| 8/11/11 | CORRESP | |||
| 8/10/11 | ||||
| 7/28/11 | 425 | |||
| 7/17/11 | ||||
| 7/14/11 | ||||
| 5/9/11 | 425, 6-K | |||
| 4/21/11 | CORRESP | |||
| 4/19/11 | 6-K | |||
| 4/1/11 | ||||
| 3/15/11 | 6-K | |||
| 3/10/11 | 6-K | |||
| 2/28/11 | 6-K | |||
| 2/11/11 | F-6 POS | |||
| 2/10/11 | 6-K | |||
| 2/9/11 | 6-K | |||
| 1/26/11 | ||||
| 1/1/11 | ||||
| 12/31/10 | 20-F | |||
| 12/15/10 | 6-K | |||
| 12/8/10 | ||||
| 12/3/10 | ||||
| 10/29/10 | ||||
| 9/17/10 | 6-K | |||
| 7/23/10 | ||||
| 6/3/10 | 6-K | |||
| 6/2/10 | 6-K | |||
| 6/1/10 | 6-K | |||
| 5/26/10 | ||||
| 2/11/10 | ||||
| 1/27/10 | 6-K | |||
| 1/1/10 | ||||
| 12/31/09 | 20-F | |||
| 9/29/09 | 6-K | |||
| 9/24/09 | ||||
| 9/18/09 | ||||
| 9/17/09 | 6-K, CORRESP, UPLOAD | |||
| 9/14/09 | 6-K | |||
| 8/26/09 | 6-K | |||
| 8/17/09 | ||||
| 7/17/09 | ||||
| 7/16/09 | ||||
| 7/2/09 | 6-K | |||
| 7/1/09 | CORRESP | |||
| 6/8/09 | 6-K | |||
| 5/22/09 | ||||
| 3/31/09 | ||||
| 2/21/09 | ||||
| 2/14/09 | ||||
| 2/11/09 | ||||
| 1/29/09 | ||||
| 1/1/09 | ||||
| 12/31/08 | 20-F | |||
| 12/19/08 | ||||
| 10/21/08 | S-8 | |||
| 9/13/08 | ||||
| 9/10/08 | ||||
| 7/31/08 | 6-K | |||
| 7/29/08 | 6-K | |||
| 6/17/08 | 6-K | |||
| 6/13/08 | ||||
| 5/22/08 | 6-K | |||
| 4/30/08 | ||||
| 2/21/08 | ||||
| 2/14/08 | SC 13G/A | |||
| 2/1/08 | ||||
| 1/31/08 | ||||
| 12/31/07 | 20-F, 6-K | |||
| 12/17/07 | ||||
| 9/13/07 | ||||
| 7/18/07 | ||||
| 6/1/07 | ||||
| 5/26/07 | ||||
| 5/24/07 | 6-K | |||
| 5/21/07 | 6-K | |||
| 5/17/07 | ||||
| 2/21/07 | ||||
| 1/1/07 | ||||
| 12/31/06 | 20-F, 6-K | |||
| 11/15/06 | 6-K | |||
| 2/1/06 | ||||
| 1/1/06 | ||||
| 12/31/05 | 20-F, 6-K | |||
| 12/7/05 | 6-K | |||
| 9/9/05 | 20-F/A, F-4 | |||
| 5/26/05 | 6-K | |||
| 3/10/05 | ||||
| 2/28/05 | 6-K | |||
| 1/1/05 | ||||
| 12/6/04 | 8-A12B/A, S-8 | |||
| 9/1/04 | ||||
| 3/10/04 | ||||
| 1/1/04 | ||||
| 12/31/03 | 11-K, 20-F, 20-F/A | |||
| 11/13/03 | ||||
| 5/1/03 | ||||
| 2/6/03 | 6-K | |||
| 2/4/03 | 6-K | |||
| 2/3/03 | ||||
| 1/7/03 | 6-K | |||
| 1/1/03 | ||||
| 12/31/02 | 11-K, 20-F, 6-K, NT 20-F | |||
| 11/4/02 | 6-K | |||
| 5/31/02 | ||||
| 3/1/02 | 6-K | |||
| 12/31/01 | 20-F, 20-F/A, 4, 6-K | |||
| 8/15/00 | ||||
| 12/1/98 | ||||
| 1/30/98 | ||||
| 7/1/96 | S-8 | |||
| 12/31/92 | ||||
| List all Filings | ||||
As Of Filer Filing For·On·As Docs:Size Issuer Filing Agent 2/27/24 Perrigo Co. plc 10-K 12/31/23 150:22M 2/28/23 Perrigo Co. plc 10-K 12/31/22 149:25M 3/01/22 Perrigo Co. plc 10-K 12/31/21 145:25M 3/01/21 Perrigo Co. plc 10-K 12/31/20 144:25M 2/03/21 Perrigo Co. plc 8-K:8,9 2/03/21 10:143K Donnelley … Solutions/FA 7/12/13 SEC UPLOAD¶ 10/10/17 1:33K Elan Corp. plc 6/21/13 SEC UPLOAD¶ 10/10/17 1:38K Elan Corp. plc 5/31/13 SEC UPLOAD¶ 10/10/17 1:158K Elan Corp. plc 4/25/13 SEC UPLOAD¶ 10/10/17 1:164K Elan Corp. plc |