What changed in this filing

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Item 7. Management’s Discussion and Analysis

2023-02-16 compared with 2022-02-16 · 138 added, 209 removed, 295 unchanged (54% of the section changed)

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A detailed discussion of our 2020 financial condition and results of operations, and of 2021 year-over-year changes as compared to 2020, can be found in “Item 7—Management’s Discussion and Analysis of Financial Condition and Results of Operations” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021, which was filed with the SEC on February 16, 2022.

We have a portfolio of proprietary products that we manufacture, market and sell in the U.S.

—VIVITROL, ARISTADA, ARISTADA INITIO and most recently, LYBALVI, which we launched commercially in October 2021.

We have a portfolio of proprietary products that we manufacture, market and sell in the U.S.—VIVITROL, ARISTADA, ARISTADA INITIO and most recently, LYBALVI, which we launched commercially in October 2021.

We also earn manufacturing and/or royalty revenues on net sales of products commercialized by our licensees, the most significant of which in 2022 were the long-acting INVEGA products and VUMERITY.

We expect VIVITROL, ARISTADA, ARISTADA INITIO, LYBALVI and VUMERITY to generate significant revenues for us in the near‑ and medium‑term as we believe these products are singular or competitively advantaged products in their classes.

In 2021, we incurred an operating loss of $29.3 million, as compared to $112.4 million in 2020.

The decrease in the operating loss was primarily due to an increase in revenues of $135.0 million, partially offset by an increase in expenses of $51.9 million.

In 2022, we incurred an operating loss of $142.3 million, as compared to an operating loss of $29.3 million in 2021.

The increase in the operating loss was primarily due to an increase in operating expenses of $51.0 million and a decrease in revenues of $62.0 million.

These items are discussed in further detail within the “Results of Operations” section below.

In November 2021, we received notice of the partial termination by Janssen of our license agreement in respect of INVEGA SUSTENNA, INVEGA TRINZA and INVEGA HAFYERA, which termination is expected to impact know-how royalties related to sales of INVEGA SUSTENNA, INVEGA TRINZA and INVEGA HAFYERA in the U.S.

beginning in February 2022.

In 2021, we recognized $192.2 million in royalty revenue related to net sales of INVEGA SUSTENNA, INVEGA TRINZA and INVEGA HAFYERA in the U.S.

For more information about our agreement with Janssen in respect of the long-acting INVEGA products, see “Collaborative Arrangements—Janssen” in “Item 1—Business” in this Annual Report.

For information about risks relating to this notice of partial termination and our collaborative arrangements more broadly, see “Item 1A—Risk Factors” in this Annual Report and specifically that section entitled “We rely heavily on our licensees in the commercialization and continued development of products from which we receive revenue and, if our licensees are not effective, or if disputes arise in respect of our contractual arrangements, our revenues could be materially adversely affected.”

In November 2022, we announced our intent, as approved by our board of directors, to separate our neuroscience business and oncology business.

We are exploring a separation of the oncology business into an independent, publicly-traded company as part of an ongoing review of strategic alternatives for the oncology business.

Following the planned separation, we would focus on driving growth of our proprietary commercial products:

LYBALVI, ARISTADA, ARISTADA INITIO and VIVITROL and on advancing the development of pipeline programs focused on neurological disorders.

We also expect to retain manufacturing and royalty revenues related to our licensed products and third-party products using our proprietary technologies under license.

would focus on the discovery and development of cancer therapies, including the continued development of nemvaleukin alfa and our portfolio of novel, preclinical, engineered cytokines.

The separation, if consummated, is expected to be completed in the second half of 2023 and is subject to customary closing conditions, including final approval by our board of directors and, if sought, receipt of a private letter ruling from the IRS and/or tax opinion from our tax advisors.

COVID-19 Update

In March 2020, COVID-19 was declared a global pandemic by the World Health Organization.

To date, COVID-19 has surfaced in nearly all regions around the world and resulted in travel restrictions and business slowdowns and/or shutdowns in affected areas.

Ireland, all U.S.

states, and many local jurisdictions and countries around the world have, at times during the pandemic, issued and implemented quarantines, vaccine and masking mandates, restrictive executive orders and other similar government orders, restrictions, and recommendations for their residents to help control the spread of COVID-19, and may continue to do so while the pandemic persists.

Such orders, mandates, restrictions and/or recommendations, and/or the perception that additional orders, mandates, restrictions or recommendations could occur, have, at times during the pandemic, resulted in widespread interruptions and closures of businesses, including healthcare systems that serve people living with addiction and serious mental illness, work stoppages, slowdowns and/or delays, remote work policies and travel restrictions, among other effects.

We continue to closely monitor and respond to the ongoing impact of COVID-19 on our employees, our communities and our business operations, and have adopted, and adapted as needed, a series of precautionary measures in an effort to protect our employees and mitigate the potential spread of COVID-19 in a community setting.

For example, at the start of the pandemic, we instituted a global remote work policy for those of our employees who were able to work remotely.

At the same time, we worked to continue our critical business functions, including operation of our manufacturing facilities and our laboratories, and continued to conduct our discovery efforts and supply our medicines.

For those of our employees who continued to work on-site in our laboratories and manufacturing facilities, we instituted additional safety precautions, including increased sanitization of our facilities, use of personal protective equipment, implementation of a daily health screening application and physical distancing practices.

We provided employees with COVID-19 vaccine information and sponsored vaccine clinics in Massachusetts and Ohio for our employees and their families.

We also took actions to support people living with opioid dependence, alcohol dependence, schizophrenia and bipolar I disorder to help facilitate their access to information, resources and medicines that may assist in their treatment.

Certain of our field-based employees have resumed in-person interactions, and certain of our office-based employees have returned to the office, in each case on a voluntary basis and in accordance with location-specific guidance.

We are planning for a larger-scale return to the office and have developed flexible work arrangement guidelines to help balance business needs, employee

health, wellbeing and safety and the evolving work environment.

We will continue to monitor guidance from local health authorities as we increase in-person interactions.

A number of the marketed products from which we derive revenue, including manufacturing and royalty revenue, are injectable medications administered by healthcare professionals.

Given developments that have transpired to date, and may continue to transpire, in response to the pandemic, including business closures, travel restrictions, quarantine, testing and/or vaccine mandates and other protocol, labor shortages, and other restrictive measures, commercial sales of these marketed products have been adversely impacted to varying degrees during the pandemic and may continue to be adversely impacted while the pandemic persists.

The COVID-19 pandemic has caused, and we expect may continue to cause, varying degrees of disruption to our employees and our business operations.

While we have continued to operate our manufacturing facilities and supply our medicines without interruption throughout the pandemic, we have at times during the pandemic experienced labor or supply chain disruptions at our manufacturing facilities, and may continue to experience such disruptions while the pandemic persists.

The COVID-19 pandemic has impacted, and may continue to impact, many aspects of society, including the operation of healthcare systems, global travel, supply and labor markets and other business and economic activity worldwide.

A number of the marketed products from which we derive revenue, including manufacturing and royalty revenue, are injectable medications administered by healthcare professionals, which have been, and may continue to be, adversely impacted to varying degrees as a result of COVID-19 related closures, restrictions, labor shortages and other disruptions that have transpired, and may continue to transpire, while the pandemic persists.

The COVID-19 pandemic has caused, and may continue to cause, varying degrees of disruption to our employees and our business operations.

While we have continued to operate our manufacturing facilities and supply our medicines throughout the pandemic, we have at times during the pandemic experienced labor or supply chain disruptions at our manufacturing facilities and may continue to experience such disruptions while the pandemic persists, which could impact our ability to manufacture our products and the third-party products from which we receive revenue in a timely matter or at all.

In addition, while we have continued to conduct R&D activities, including our ongoing clinical trials, the COVID-19 pandemic has at times impacted the timelines of certain of our early-stage discovery efforts and clinical trials, and may continue to impact such timelines while the pandemic persists.

We work with our internal teams, our clinical investigators, R&D vendors and critical supply chain vendors to continually assess, and mitigate, the potential impact of COVID-19 on our manufacturing operations and R&D activities.

Due to numerous uncertainties surrounding the ongoing COVID-19 pandemic, the actual impact of the pandemic on our financial condition and operating results may differ from our current projections.

These uncertainties include, among other things, the ultimate severity and duration of the pandemic and the manner in which it continues to evolve, including the emergence, prevalence and severity of new COVID-19 variants, and future developments in response thereto, which are highly uncertain and cannot be predicted as of the date of this Annual Report and which may include, among other things, governmental, business or other actions that have been, are being, or will be, taken in response to the pandemic, including restrictions on travel and mobility, business closures and operating restrictions, including the imposition of vaccine and masking mandates and/or mandatory testing policies;

impacts of the pandemic and of imposition of such mandates and protocols in response to the pandemic on our employees, including with regard to their health, safety, wellbeing and job performance, on the labor market more broadly and on our ability to attract and retain employees;

impacts of the pandemic on the vendors or distribution channels in our supply chain and on our ability to continue to manufacture our products;

impacts of the pandemic on the conduct of our clinical trials, including with respect to enrollment rates, availability of investigators and clinical trial sites, and monitoring of data;

impacts of the pandemic on healthcare systems that serve people living with opioid dependence, alcohol dependence, schizophrenia and bipolar I disorder;

impacts of the pandemic on the regulatory agencies with which we interact in the development, review, approval and commercialization of our medicines;

impacts of the pandemic on reimbursement for our products, including our Medicaid rebate liability, and for services related to the use of our products;

and impacts of the pandemic on the Irish, U.S.

and global economies more broadly.

The degree to which the COVID-19 pandemic may continue to impact our employees, business, financial condition and results of operations will depend on the ultimate severity and duration of the pandemic and the manner in which it continues to evolve, including the emergence, prevalence and severity of new COVID-19 variants, and future developments in response thereto.

Due to these and numerous other uncertainties surrounding the ongoing COVID-19 pandemic, the actual impact of the pandemic on our financial condition and operating results may differ from our current projections.

For additional information about risks and uncertainties related to the COVID-19 pandemic that may impact our business, our financial condition or our results of operations, see “Item 1A—Risk Factors” in this Annual Report and specifically the section entitled “Our business, financial condition and results of operations have been, and may continue to be, adversely affected by the ongoing COVID-19 pandemic or other similar outbreaks of contagious diseases.”

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Product sales, net

Our product sales, net for VIVITROL, ARISTADA and ARISTADA INITIO, and LYBALVI in 2021 were $343.9 million, $275.4 million, and $8.2 million, respectively, as compared to $310.7 million, $241.1 million and none in 2020, respectively.

VIVITROL product sales, gross, increased by 14 % in 2021, as compared to 2020 , primarily due to a 10 % increase in the number of VIVITROL units sold due, in part, to a reduction in COVID-19-related disruptions that began in the second quarter of 2020 and a 2% increase in the selling price of VIVITROL that went into effect in April 2021.

ARISTADA and ARISTADA INITIO product sales, gross, increased by 15 % in 2021, as compared to 2020 , primarily due to a n 11% increase in the number of ARISTADA and ARISTADA INITIO units sold and a 3% increase in the selling price of ARISTADA and ARISTADA INITIO that went into effect in April 2021.

Product sales, net during the years ended December 31, 2022 and 2021 were as follows:

Year Ended December 31,

(In millions)

ARISTADA and ARISTADA INITIO

Product sales, net

VIVITROL product sales, gross, increased by 7% in 2022 which was primarily due to an increase of 2% in the number of VIVITROL units sold and a 6% increase in the selling price of VIVITROL that went into effect in April 2022.

ARISTADA and ARISTADA INITIO product sales, gross, increased by 11% in 2022 which was primarily due to an increase of 8% in the number of ARISTADA and ARISTADA INITIO units sold and a 3% increase in the selling price of ARISTADA and ARISTADA INITIO that went into effect in April 2022.

The increase in LYBALVI during 2022, as compared to 2021, was due to the product having a full year of sales in 2022 following its commercial launch in October 2021.

The decrease in Medicaid rebates as a percentage of sales was primarily due to actual Medicaid utilization rates related to VIVITROL being lower than original estimates as such rates normalize from initial pandemic levels and due to the increased sales of LYBALVI, which had lower Medicaid utilization than VIVITROL and ARISTADA.

A number of companies are working to develop products to treat addiction, including alcohol and opioid dependence, that may compete with, and negatively impact, future sales of VIVITROL.

Increased competition may lead to reduced unit sales of VIVITROL and increased pricing pressure.

The latest to expire of our patents covering VIVITROL in the U.S.

will expire in 2029 and the latest to expire of our patents covering VIVITROL in Europe expired in 2021.

The latest to expire of our patents covering VIVITROL will expire in 2029 in the U.S.

and expired in Europe in 2021.

Under the terms of a settlement and license agreement, we granted Amneal a license under certain patents covering VIVITROL, including the latest to expire patent covering VIVITROL in the U.S., to market and sell a generic formulation of VIVITROL in the U.S.

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We are currently engaged in Paragraph IV litigation with certain Teva entities in respect of the last to expire patent covering VIVITROL in the U.S.

For a discussion of these legal proceedings, see Note 19, Commitments and Contingent Liabilities in the “Notes to Consolidated Financial Statements” in this Annual Report and for information regarding the risks relating to these legal proceedings, see “Risks Related to our Intellectual Property—We or our licensees may face claims against IP rights covering our products and competition from generic drug manufacturers”.

For a discussion of these legal proceedings, see Note 17, Commitments and Contingent Liabilities in the “Notes to Consolidated Financial Statements” in this Annual Report and for information regarding the risks relating to these legal proceedings, see “Item 1A—Risk Factors” in this Annual Report and specifically the section entitled “Risks Related to our Intellectual Property—We or our licensees may face claims against IP rights covering our products and competition from generic drug manufacturers”.

A number of companies currently market and/or are developing products to treat schizophrenia and/or bipolar I disorder that may compete with and negatively impact future sales of ARISTADA, ARISTADA INITIO and LYBALVI.

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and, as such, we do not anticipate any generic versions of these products to enter the market in the near term.

We expect our product sales, net will continue to grow as VIVITROL continues to penetrate the opioid and alcohol dependence markets in the U.S., as ARISTADA and ARISTADA INITIO continue to gain market share in the U.S., and as we continue the commercial launch of LYBALVI.

We expect our product sales, net will continue to grow as VIVITROL continues to penetrate the alcohol dependence and opioid dependence markets in the U.S., as ARISTADA and ARISTADA INITIO continue to gain market share in the U.S., and as we continue the commercial launch of LYBALVI.

Manufacturing and Royalty Revenues

Manufacturing revenue from RISPERDAL CONSTA and VUMERITY are recognized at the point in time that the product has been fully manufactured.

Manufacturing revenues for third-party products using our proprietary technologies are mostly recognized over time as products move through the manufacturing process, using an input method based on costs as a measure of progress.

Manufacturing revenue from RISPERDAL CONSTA and VUMERITY are recognized at the point in time the product has been fully manufactured.

Royalties earned on our licensees’ net sales of third-party products using our proprietary technologies are generally recognized in the period such products are sold by our licensees.

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RISPERDAL CONSTA

AMPYRA/FAMPYRA

Manufacturing and royalty revenues

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and 7.5% on calendar year net sales exceeding $500 million.

The know-how royalty rate resets to 3.5% at the beginning of each calendar year and is payable until 15 years from the first commercial sale of a product in each individual country.

The increase in royalty revenues from the long-acting INVEGA products was due to an increase in Janssen’s net sales of these products.

Janssen’s net sales of the long-acting INVEGA products were $4.0 billion and $3.7 billion during the years ended December 31, 2021 and 2020, respectively.

The latest of the patents subject to our license agreement with Janssen covering INVEGA SUSTENNA/XEPLION expires in 2030 in the U.S.

and certain other countries and in 2022 in the EU.

The latest of the licensed patents covering INVEGA TRINZA/TREVICTA expired in 2017 in the U.S.

and will expire in 2022 in the EU.

In addition, Janssen has other patents not subject to our license agreement, including one that covers INVEGA SUSTENNA in the U.S.

and expires in 2031 and one that covers INVEGA TRINZA in the U.S.

and expires in 2036.

We expect revenues from net sales of XEPLION, TREVICTA and BYANNLI to decrease over time.

The amount and timing of revenues from sales of INVEGA SUSTENNA, INVEGA TRINZA and INVEGA HAFYERA depend upon the outcome of our dispute with Janssen related to the basis for its partial termination of our license agreement in respect of these products.

In November 2021, we received notice of the partial termination of our license agreement with Janssen in respect of INVEGA SUSTENNA, INVEGA TRINZA and INVEGA HAFYERA, which termination is expected to impact the know-how royalty related to sales of INVEGA SUSTENNA, INVEGA TRINZA and INVEGA HAFYERA in the U.S.

beginning in February 2022.

The know-how royalty rate resets to 3.5% at the beginning of each calendar year and is payable until 15 years from the first commercial sale of a product in each individual country, subject to expiry of the agreement.

For more information about the license agreement with Janssen in respect of the long-acting INVEGA products, see “Collaborative Arrangements—Janssen” in “Item 1—Business” in this Annual Report.

In November 2021, we received notice of partial termination of our license agreement with Janssen under which we provided Janssen with rights to, and know-how, training and technical assistance in respect of, our small particle pharmaceutical compound technology, known as NanoCrystal technology, which was used to develop INVEGA SUSTENNA/XEPLION, INVEGA TRINZA/TREVICTA, and INVEGA HAFYERA/BYANNLI.

The partial termination became effective in February 2022, at which time Janssen ceased paying royalties related to sales of INVEGA SUSTENNA, INVEGA TRINZA and INVEGA HAFYERA in the U.S.

In April 2022, we commenced binding arbitration proceedings related to, among other things, Janssen’s partial termination of this license agreement and Janssen’s royalty and other obligations under the agreement.

On December 21, 2022, we received the Interim Award for these proceedings from the Tribunal, in which the Tribunal agreed with our position that, while Janssen may terminate the agreement, it may not continue to sell Products (as defined in the agreement) developed during the term of the agreement without paying royalties pursuant to the term of the agreement.

This award is not yet final.

We will engage with Janssen and the Tribunal in additional proceedings prior to the Tribunal’s issuance of a final award.

Accordingly, we have not recognized royalty revenue related to U.S.

sales of long-acting INVEGA products since February 2022.

For additional information regarding the arbitration proceedings with Janssen, see Note 17, Commitments and Contingent Liabilities in the “Notes to Consolidated Financial Statements” in this Annual Report.

For information about risks relating to the notice of partial termination and our collaborative arrangements more broadly, see “Item 1A—Risk Factors” in this Annual Report and specifically the section entitled “We rely heavily on our licensees in the commercialization and continued development of products from which we receive revenue and, if our licensees are not effective, or if disputes arise in respect of our contractual arrangements, our revenues could be materially adversely affected.”

The decrease in royalty revenues from the long-acting INVEGA products was primarily due to Janssen’s partial termination of our license agreement related to such products.

When the partial termination of the license agreement became effective in February 2022, Janssen ceased paying royalties related to sales of INVEGA SUSTENNA, INVEGA TRINZA and INVEGA HAFYERA in the U.S.

and we stopped recognizing royalty revenue related to net sales of these products.

During 2022, Janssen’s rest of world net sales were $1,426.0 million, as compared to $1,472.0 million during 2021.

We expect royalty revenues from net sales of XEPLION, TREVICTA and BYANNLI to decrease over time.

The amount, timing and duration of royalty revenues from sales of INVEGA SUSTENNA, INVEGA TRINZA and INVEGA HAFYERA depend upon the outcome of our dispute with Janssen related to the impact of its partial termination of our license agreement on its obligations to continue to pay us know-how royalties in accordance with the terms of the agreement.

In addition, each of INVEGA SUSTENNA and INVEGA TRINZA are currently subject to Paragraph IV litigation in response to companies seeking to market generic versions of such products.

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For a discussion of these legal proceedings, see Note 17, Commitments and Contingent Liabilities in the “Notes to Consolidated Financial Statements” in this Annual Report, and for information about risks relating to these legal proceedings, see “Item 1A—Risk Factors” in this Annual Report, and specifically the section entitled “We or our licensees may face claims against IP rights covering our products and competition from generic drug manufacturers.”

We record manufacturing revenue, equal to 7.5% of Janssen’s unit net sales price of RISPERDAL CONSTA, at the point in time when RISPERDAL CONSTA has been fully manufactured, which is deemed to have occurred when the product is approved for shipment by both us and Janssen.

We record royalty revenue, equal to 2.5% of end-market net sales, in the period that the end-market sale of RISPERDAL CONSTA occurs.

The decrease in RISPERDAL CONSTA revenue was due to a 29% decrease in manufacturing revenue and a 28% decrease in royalty revenue.

The decrease in manufacturing revenue was primarily due to a 35% decrease in the number of units of RISPERDAL CONSTA manufactured for Janssen.

The decrease in royalty revenue was due to a decline in Janssen’s end-market net sales of RISPERDAL CONSTA.

Janssen’s end‑market net sales of RISPERDAL CONSTA were $592.0 million and $642.0 million during the years ended December 31, 2021 and 2020, respectively.

We expect revenue from RISPERDAL CONSTA to decrease over time.

The latest to expire patent covering RISPERDAL CONSTA expired in 2021 in the EU and will expire in 2023 in the U.S., and we are aware of potential generic competition for RISPERDAL CONSTA that may lead to reduced unit sales and increased pricing pressure.

For a discussion of legal proceedings related to patents covering RISPERDAL CONSTA, see Note 19, Commitments and Contingent Liabilities in the “Notes to Consolidated Financial Statements” in this Annual Report, and for risks relating to such legal proceedings, see “Item 1A—Risk Factors” in this Annual Report and specifically the section entitled “We or our licensees may face claims against IP rights covering our products and competition from generic drug manufacturers.”

We record manufacturing revenue for VUMERITY at cost plus 15% upon release for bulk batches of VUMERITY and upon shipment for packaged batches of VUMERITY.

We record a 15% royalty on worldwide net sales of VUMERITY when the end-market sale of VUMERITY occurs.

VUMERITY manufacturing revenue increased by 192%, which was primarily due to a 310% and 430% increase in the amount of bulk batches and packaged lots of VUMERITY, respectively, manufactured for Biogen.

Royalty revenues increased by 350%, which was primarily due to an increase in end-market sales of VUMERITY.

Net end-market sales of VUMERITY were $410.0 million in the year ended December 31, 2021, as compared to $64.0 million in the year ended December 31, 2020.

We record manufacturing revenue for FAMPYRA as the product is being manufactured and record royalty revenue when the end-market sale of FAMPYRA occurs.

We record both manufacturing and royalty revenue for AMPYRA as the product is being manufactured, rather than when it is shipped to Acorda.

FAMPYRA manufacturing and royalty revenues increased by 6% and 4%, respectively, primarily due to an increase in the amount of FAMPYRA manufactured and an increase in end-market sales.

AMPYRA manufacturing and royalty revenues both decreased by 10% primarily due to a decrease in AMPYRA demand due to the entry of generic forms of AMPYRA into the U.S.

market in 2018.

We expect revenues from AMPYRA to continue to decline due to the availability of generic forms of AMPYRA in the U.S.

The latest of the patents covering FAMPYRA expires in 2025 in the EU.

We recognize manufacturing revenue for RISPERDAL CONSTA at the point in time when RISPERDAL CONSTA has been fully manufactured, which is deemed to have occurred when the product is approved for shipment by both us and Janssen.

We record royalty revenue, equal to 2.5% of Janssen’s end-market net sales, in the period that the end-market sales of RISPERDAL CONSTA occur.

The decrease in revenue from RISPERDAL CONSTA was primarily due to a decrease of $3.2 million in royalty revenue, partially offset by a $2.2 million increase in manufacturing revenue.

This decrease in royalty revenue was due to a decrease in end-market sales of RISPERDAL CONSTA, which was $485.0 million during 2022, as compared to $592.0 million during 2021.

The increase in manufacturing revenue was primarily due to an increase in the number of units approved for shipment to Janssen.

We expect revenues from RISPERDAL CONSTA to decrease over time.

The latest to expire patent covering RISPERDAL CONSTA expired in 2021 in the EU and expired in January 2023 in the U.S., and we are aware of potential generic competition for RISPERDAL CONSTA that may lead to reduced unit sales and increased pricing pressure.

We receive a 15% royalty on worldwide net sales of VUMERITY for product manufactured and packaged by us, subject to increases for VUMERITY manufactured and/or packaged by Biogen or its designees, in the period that the end-market sales of VUMERITY occur.

We also recognize manufacturing revenue related to VUMERITY at cost plus 15%, upon making available bulk batches of VUMERITY to Biogen and, to the extent we package such product, then also when packaged batches of VUMERITY are made available to Biogen.

The increase in revenue from VUMERITY was due to increases of $6.7 million and $21.4 million in manufacturing revenue and royalty revenue, respectively.

The increase in manufacturing revenue was due to an increase in the number of packaged batches that were manufactured for Biogen, partially offset by a manufacturing issue related to VUMERITY, which, for a period during 2022, negatively impacted the number of commercial batches we were able to manufacture.

The increase in royalty revenue was due to an increase in net sales of VUMERITY, which were $553.4 million during 2022, as compared to $410.0 million during 2021.

The decrease in other manufacturing and royalty revenue was primarily due to the decision from an arbitration panel in October 2022, which found that we must return to Acorda $16.5 million (inclusive of prejudgment interest and administrative fees) previously paid by Acorda under a license agreement between the Company and Acorda.

In November 2022, the panel found that we must pay to Acorda an additional $1.8 million (inclusive of prejudgment interest).

These amounts represent a portion of the royalty revenue paid to us by Acorda since July 2020 related to AMPYRA.

We paid the $16.5 million in October 2022 and paid the additional $1.8 million in December 2022.

In addition, during the three months ended June 30, 2022, we had recorded $3.2 million of royalty revenue related to AMPYRA as we believed that we had met the necessary revenue recognition criteria under the Financial Accounting Standards Board Accounting Standards Codification 606, Revenue from Contracts with Customers (“Topic 606”).

However, as a result of the arbitration ruling, we reversed the $3.2 million as the panel found that we were no longer entitled to be paid those royalties.

During the three months ended September 30, 2022, we recorded both the approximately $18.3 million in repayments and the $3.2 million reversal as reversals of royalty revenue within “Manufacturing and royalty revenue” in the accompanying consolidated statements of operations and comprehensive loss.

As a result of the arbitration ruling, we no longer have a contractual obligation to manufacture and supply AMPYRA or a contractual right to receive future manufacturing or royalty revenue related to AMPYRA.

In January 2023, Acorda filed a petition with the U.S.

District Court for the Southern District of New York asking the court to confirm in part and modify in part the final arbitral award rendered by the arbitration panel in October 2022 and, as part of the requested modification, seeking an additional approximately $66.0 million in damages.

We intend to contest this petition and believe it is without merit.

Certain of our manufacturing and royalty revenues are earned in countries outside of the U.S.

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Cost of goods manufactured and sold

The increase in cost of goods manufactured and sold was primarily due to a 320% increase in VUMERITY cost of goods manufactured and a 24% increase in VIVITROL cost of goods manufactured and sold, partially offset by a decrease in RISPERDAL CONSTA cost of goods manufactured of 23%.

The increase in VUMERITY cost of goods manufactured was due to increased manufacturing activity, as discussed above.

The increase in VIVITROL cost of goods manufactured and sold was primarily due to an increase in the number of VIVITROL units sold, as discussed above.

The decrease in cost of goods manufactured for RISPERDAL CONSTA was due to a decrease in end-market sales for this product, as discussed above.

The increase in cost of goods manufactured and sold was primarily due to increases of $6.4 million and $4.8 million, respectively, in the cost of goods manufactured for VUMERITY and RISPERDAL CONSTA and increases of $5.6 million and $10.2 million, respectively, in the cost of goods sold for VIVITROL and LYBALVI.

The increases related to VUMERITY and RISPERDAL CONSTA were primarily due to increased manufacturing activity, as discussed above.

The increase related to LYBALVI was primarily due to the increase in sales activity, as discussed above.

The increase related to VIVITROL was primarily due to an increase in costs incurred for out-of-specification batches, as well as an increase in sales activity, as discussed above.

Research and Development Expenses

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In an effort to allocate our spending most effectively, we continually evaluate our products under development based on the performance of such products in preclinical and/or clinical trials, our expectations regarding the likelihood of their regulatory approval and our view of their future potential commercial viability, among other factors.

The increase in expenses related to nemvaleukin was primarily due to the advancement of the ARTISTRY development program for the product, including increased patient enrollment in ongoing clinical studies and the initiation of the ARTISTRY-6 and ARTISTRY-7 studies.

For additional detail on the status of the ARTISTRY development program for nemvaleukin, see “Item 1—Business” in this Annual Report and specifically the section entitled “Key Development Program – nemvaleukin alfa”.

The increase in expenses related to ALKS 1140, our novel CoREST-selective HDAC inhibitor candidate for the treatment of neurodegenerative and neurologic disorders, was primarily due to a $25.0 million development milestone payment made to the former shareholders of Rodin Therapeutics, Inc.

(“Rodin”) in 2021 related to the submission of an IND or equivalent for ALKS 1140.

The decrease in expenses related to LYBALVI was primarily due to the approval of the LYBALVI NDA by the FDA in May 2021 and its commercial launch in October 2021.

The decrease in employee-related expenses was primarily due to a decrease in R&D headcount of 7% from December 31, 2020 to December 31, 2021.

The decrease in expenses related to nemvaleukin was primarily due to decreased spend on the ARTISTRY-1 study, partially offset by increased spend on the ARTISTRY-7 study.

For additional detail on the ARTISTRY development program for nemvaleukin, see “Item 1—Business” in this Annual Report and specifically the section entitled “Key Development Program – nemvaleukin alfa”.

The decrease in expenses related to LYBALVI was primarily due to decreased R&D activities for the product in light of its commercial launch in October 2021, partially offset by continued spend on ongoing clinical studies.

The decrease in expenses related to ALKS 1140 was primarily due to the termination of the ALKS 1140 clinical development program in the second quarter of 2022, as the initial data did not support further clinical development, and a $25.0 million development milestone in the third quarter of 2021 related to the submission of a clinical trial authorization for ALKS 1140.

The increase in other external R&D expenses was primarily due to an increase of $10.2 million related to our early-stage development programs.

The increase in employee-related expense was primarily related to an increase of $5.5 million in labor and benefits, primarily due to increases in recruitment costs and temporary labor and an increase of $3.2 million in R&D-related share-based compensation, primarily due to an increase in the fair value of the awards granted in 2022.

Selling, General and Administrative Expenses

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Selling, general and administrative expense

The increase in selling and marketing expense was primarily due to a 22% increase in marketing expense and a 33% increase in professional service fees.

The increases in both marketing expense and professional service fees were primarily related to commercial launch activities for LYBALVI, including increases in consumer promotional materials and product samples.

The decrease in general and administrative expense was primarily due to a 59% decrease in new product planning activities following the commercial launch of LYBALVI in October 2021 and a 29% decrease in IT related costs, primarily due to decreases in external software license costs and maintenance costs.

The increase in selling and marketing expense was primarily due to a $14.6 million increase in employee-related expenses due to an increase in selling-and-marketing-related salaries and benefits and an increase of $10.0 million in marketing activity related to the commercial launch of LYBALVI.

The increase in general and administrative expense was primarily due to a $9.9 million increase in professional service fees, primarily due to increased spend on legal fees and fees related to the proposed separation of the Company’s oncology business.

We also had a $3.5 million increase in our branded prescription drug fee due to an increase in sales of our commercialized products and a $1.9 million increase in travel and expense, primarily due to resuming in-person meetings as travel restrictions loosened.

Amortization of Acquired Intangible Assets

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We amortize our amortizable intangible assets using the economic use method, which reflects the pattern that the economic benefits of the intangible assets are consumed as revenue is generated from the underlying patent or contract.

Based on our most recent analysis, amortization of intangible assets included within our consolidated balance sheet at December 31, 2021 is expected to be approximately $35.0 million, $35.0 million and $1.0 million in the years ending December 31, 2022 through 2024, respectively.

Other (Expense) Income, Net

Based on our most recent analysis, amortization of intangible assets included within our consolidated balance sheet at December 31, 2022 is expected to be approximately $35.0 million and $1.0 million in the years ending December 31, 2023 and 2024, respectively.

Other Expense, Net

Year Ended December 31,

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Other income, net

Total other (expense) income, net

The decrease in interest income was primarily due to a decrease in interest rates.

Interest income consists of interest earned on our available-for-sale investments.

The increase in interest expense was due to the Term Loan Refinancing completed in March 2021.

The Term Loan Refinancing is discussed in greater detail in Note 11, Long-Term Debt in the “Notes to Consolidated Financial Statements” in this Annual Report.

In April 2015, we sold certain of our business assets to Recro Pharma, Inc.

(“Recro”) and Recro Gainesville LLC, which included as part of the purchase price contingent consideration tied to low double digit royalties on net sales of the IV/IM and parenteral forms of Meloxicam and any other product with the same active ingredient as Meloxicam IV/IM that is discovered or identified using certain of our IP to which Recro was provided a right of use, through license or transfer (such products, the “Meloxicam Products”), and milestone payments to be paid upon the achievement of certain regulatory and sales milestones related to the Meloxicam Products (such transaction, the “Gainesville Transaction”).

In November 2019, Recro spun out its acute care segment to Baudax Bio, Inc.

(“Baudax”) and assigned and/or transferred to Baudax Recro’s obligations to pay certain contingent consideration from the Gainesville Transaction.

The change in the fair value of contingent consideration was primarily due to the approval of the NDA for ANJESO by the FDA in February 2020, which increased the probability of success in our valuation approach and increased the value of the contingent consideration.

In the fourth quarter of 2020, following Baudax’s disclosure regarding its ability to continue as a going concern, we modified our valuation model to incorporate a greater risk of non-payment.

The valuation approach used to determine the fair value of the contingent consideration is discussed in greater detail in Note 5, Fair Value , in the “Notes to Consolidated Financial Statements” in this Annual Report.

The decrease in other income, net was primarily due to $11.1 million of income in 2020 representing our proportional share of the proceeds from the sale of two companies within the Fountain Healthcare Partners II (“Fountain”) portfolio.

The transactions were

accounted for under the cumulative earnings approach whereby the return on investment of $8.3 million was recorded as a gain within “Other (expense) income, net” in the accompanying consolidated statements of operations and comprehensive loss and the return of investment of $2.8 million was recorded as a reduction in the net investment in Fountain.

Our investment in Fountain is discussed in greater detail in Note 4, Investments , in the “Notes to Consolidated Financial Statements” in this Annual Report .

Income Tax Provision

Total other expense, net

The increase in total other expense, net was primarily due to the change in the fair value of contingent consideration and an increase in interest expense, partially offset by increases in interest income and other income, net.

The change in the fair value of the contingent consideration was due to the determination that it was unlikely that we would collect any further contingent consideration proceeds from Baudax Bio, Inc.

(“Baudax”), and accordingly, we reduced the fair value of the contingent consideration to zero, as discussed in Note 5, Fair Value , in the “Notes to Consolidated Financial Statements” in this Annual Report.

Interest expense consists primarily of interest incurred on our 2026 Term Loans.

Interest income consists primarily of interest earned on our available-for-sale investments.

The increases in interest income and interest expense were primarily due to increases in interest rates.

The increase in interest expense was partially offset by a decrease in certain financing costs related to the Term Loan Refinancing completed in March 2021.

The Term Loan Refinancing is discussed in Note 11, Long-Term Debt in the “Notes to Consolidated Financial Statements” in this Annual Report.

The increase in other income, net was primarily due to proceeds received in connection with the Company’s investment in Fountain Healthcare Partners II, L.P.

of Ireland (“Fountain”) in March 2022, partially offset by the write down of certain construction in progress due to the determination that certain construction in progress related to our agreement with Baudax had no future value, as discussed in Note 7, Property, Plant and Equipment , in the “Notes to Consolidated Financial Statements” in this Annual Report.

The Fountain investment is discussed in Note 4, Investments , in the “Notes to Consolidated Financial Statements” in this Annual Report.

Income Tax (Benefit) Provision

Year Ended December 31,

(In millions)

Income tax provision

The income tax provision in 2021 and 2020 were primarily due to U.S.

Income tax (benefit) provision

The income tax benefit in 2022 was primarily due to an enhanced foreign derived intangible income deduction that resulted from a change to Section 174 of the Tax Cuts and Jobs Act in relation to capitalization and amortization of R&D expenses.

The income tax provision in 2021 was primarily due to U.S.

federal and state taxes on income earned in the U.S.

and the tax impact of employee equity activity.

No provision for income tax has been provided on undistributed earnings of the Company’s foreign subsidiaries because such earnings are indefinitely reinvested in the foreign operations.

No provision for income tax has been provided on undistributed earnings of our foreign subsidiaries because such earnings are indefinitely reinvested in the foreign operations.

Cumulative unremitted earnings of overseas subsidiaries totaled approximately $812.8 million at December 31, 2022.

In the event of a repatriation of those earnings in the form of dividends or otherwise, the Company may be liable for income taxes, subject to adjustment, if any, for foreign tax credits and foreign withholding taxes payable to foreign tax authorities.

The Company estimates that approximately $45.0 million of income taxes would be payable on the repatriation of the unremitted earnings to Ireland.

As of December 31, 2021, the Company had $1.5 billion of Irish NOL carryforwards, $17.1 million of U.S.

In the event of a repatriation of those earnings in the form of dividends or otherwise, we may be liable for income taxes, subject to adjustment, if any, for foreign tax credits and foreign withholding taxes payable to foreign tax authorities.

We estimate that approximately $55.0 million of income taxes would be payable on the repatriation of the unremitted earnings to Ireland.

As of December 31, 2022, we had $1.7 billion of Irish NOL carryforwards, $15.1 million of U.S.

federal NOL carryforwards, $43.2 million of state NOL carryforwards, $5.7 million of federal R&D credits and $29.0 million of state tax credits which will either expire on various dates through 2042 or can be carried forward indefinitely.

These loss and credit carryforwards are available to reduce certain future Irish and foreign taxable income and tax.

These loss and credit carryforwards are subject to review and possible adjustment by the appropriate taxing authorities and may be subject to limitations based upon changes in the ownership of the Company's ordinary shares.

As discussed in “Item 1A—Risk Factors” in this Annual Report and specifically the section entitled “Changes in tax rules and regulations, or interpretations thereof, may adversely affect our financial condition”, effective in 2022, the Tax Cuts and Jobs Act of 2017 requires us to capitalize, and subsequently amortize R&D expenses over five years for research activities conducted in the U.S.

and over fifteen years for research activities conducted outside of the U.S.

This will result in a material increase to our U.S.

In 2022, this resulted in a material increase to our U.S.

income tax liability and net deferred tax assets and a material decrease to our cash flows provided from operations.

The actual impact will depend on multiple factors, including the amount of R&D expenses incurred and whether the research activities are performed within or outside of the U.S.

In 2021, Ireland joined the Organization for Economic Co-operation and Development’s (“OECD”) inclusive framework two-pillar solution to address the tax challenges arising from the digitalization of the economy.

The OECD’s draft Pillar Two legislation outlines the rules to assist in the implementation of an international tax system that would ensure that certain companies in the relevant jurisdictions are subject to a minimum tax rate of 15%.

Ireland may incorporate these rules into its domestic legislation, which may become effective in 2023.

We are assessing the application and potential impact of these proposed rules.

We expect an impact from this legislative change throughout the amortization period.

In December 2022, the EU agreed to implement a corporate minimum tax rate of 15% on companies with combined annual revenue of at least €750.0 million.

The Irish government will be required to transpose these rules into Irish legislation.

The new rules are expected to come into effect on January 1, 2024.

The Company is currently monitoring these developments and assessing the potential impact.

Liquidity and Capital Resources

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Sources and Uses of Cash

We generated $101.7 million and $82.8 of cash from operating activities during the years ended December 31, 2021 and 2020, respectively.

We generated $21.0 million and $101.7 million of cash from operating activities during the years ended December 31, 2022 and 2021, respectively.

We expect that our existing cash, cash equivalents and investments will be sufficient to finance our anticipated working capital and other cash requirements, such as capital expenditures and principal and interest payments on our long‑term debt, for at least the twelve months following the date from which our financial statements were issued.

Subject to market conditions, interest rates and other factors, we may pursue opportunities to obtain additional financing in the future, including debt and equity offerings, corporate collaborations, bank borrowings, arrangements relating to assets or other financing methods or structures.

In addition, the 2026 Term Loans have an incremental facility capacity in an amount of $175.0 million, plus additional amounts as long as we meet certain conditions, including a specified leverage ratio.

In addition, the 2026 Term Loans have an incremental facility capacity in an amount of $175.0 million, plus additional potential amounts provided that we meet certain conditions, including a specified leverage ratio.

Our investment objectives are, first, to preserve liquidity and conserve capital and, second, to generate investment income.

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We have the intent and ability to hold these investments until recovery, which may be at maturity, and it is more‑likely‑than‑not that we would not be required to sell these securities before recovery of their amortized cost.

At December 31, 2021, we performed an analysis of our investments with unrealized losses for impairment and determined that the loss on one of our corporate debt securities was other-than-temporary and, during the year ended December 31, 2021, recorded a $0.9 million impairment charge within “Other (expense) income, net” in the accompanying consolidated statements of operations and comprehensive loss.

We have no off-balance sheet arrangements that are reasonably likely to have a material effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures, or capital resources in the next twelve months.

As discussed above, we made a $25.0 million development milestone payment to the former shareholders of Rodin in 2021.

As discussed above, we made a $25.0 million development milestone payment to the former shareholders of Rodin Therapeutics, Inc.

(“Rodin”) during the year ended December 31, 2021.

We are obligated to make up to $825.0 million in future payments, $225.0 million of which would be triggered upon achievement of certain specified clinical milestones, $300.0 million of which would be triggered by the achievement of certain regulatory milestones and $325.0 million of which would be triggered upon the attainment of certain sales thresholds.

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Cash flows used in investing activities

Cash flows provided by (used in) financing activities

Cash flows (used in) provided by financing activities

Cash and cash equivalents, end of period

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Operating cash flow is derived by adjusting our net loss for non-cash operating items such as depreciation, amortization and share-based compensation as well as changes in operating assets and liabilities, which reflect timing differences between the receipt and payment of cash associated with transactions and when they are recognized in our results of operations.

The increase in cash flows provided by operating activities was primarily due to a decrease in our net loss of $62.7 million.

This was partially offset by a decrease in the cash provided from working capital, primarily due to a decrease in cash provided by receivables of $20.0 million and from accounts payable and accrued expenses of $20.7 million.

The decrease in cash flows provided by operating activities was primarily due to an increase in our net loss of $110.1 million and an increase in cash used for our lease liabilities of $15.3 million related to an early payment of our lease of approximately 231,000 square feet of office and laboratory space located at 900 Winter Street in Waltham, Massachusetts.

Please refer to Note 9, Leases , in the “Notes to Consolidated Financial Statements” in this Annual Report for additional information related to such early payment.

These were partially offset by an increase in the cash provided by working capital, primarily due to an increase in cash provided by receivables of $63.3 million and from accounts payable and accrued expenses of $4.0 million.

Investing Activities

The increase in cash flows used in investing activities was primarily due to a $68.9 million increase in net purchase of investments, partially offset by a $14.2 million decrease in cash paid for property, plant and equipment and a $4.1 million increase in payments received in connection with the contingent consideration resulting from the Gainesville Transaction.

The decrease in cash flows used in investing activities was primarily due to a $17.4 million decrease in net purchase of investments and a $6.7 million decrease in payments received in connection with the contingent consideration resulting from the Gainesville Transaction, partially offset by a $10.2 million increase in capital expenditures.

We expect to spend approximately $35.0 million to $40.0 million during the year ending December 31, 2023 for capital expenditures.

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Financing Activities

The increase in cash flows provided by financing activities was primarily due to the $23.6 million in proceeds from the Term Loan Refinancing and an $8.1 million increase in the amount of cash we received upon exercises of employee stock options, net of employee taxes.

The change in cash flows from financing activities was primarily due to $23.6 million in proceeds from the Term Loan Refinancing, which we received in 2021, and a $7.3 million decrease in the amount of cash that we received upon the exercise of employee stock options, net of employee taxes.

At December 31, 2022, our borrowings consisted of $294.8 million outstanding under the 2026 Term Loans.

The 2026 Term Loans bear interest at LIBOR plus 2.5%, with a LIBOR floor of 0.5%.

Principal payments of $0.8 million are made quarterly through 2025, with a final payment of $285.8 million due in March 2026.

Principal payments of $0.8 million are to be made quarterly through 2025, with a final payment of $285.8 million due in March 2026.

Please refer to Note 11, Long‑Term Debt , in the “Notes to Consolidated Financial Statements” in this Annual Report for a discussion of our outstanding term loans.

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Our consolidated financial statements are prepared in accordance with GAAP.

In connection with the preparation of our financial statements, we are required to make assumptions and estimates about future events, and apply judgments on historical experience, current trends and other factors that management believes to be relevant at the time our consolidated financial statements are prepared.

In connection with the preparation of our financial statements, we are required to make assumptions and estimates about future events, and apply judgments based on historical experience, current trends and other factors that management believes to be relevant at the time our consolidated financial statements are prepared.

On a regular basis, we review these accounting policies, assumptions, estimates and judgments to ensure that our financial statements are presented fairly and in accordance with GAAP.

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Revenues from product sales are recorded net of reserves established for applicable discounts and allowances that are offered within contracts with our customers, healthcare providers or payers.

Our process for estimating reserves established for these variable

consideration components does not differ materially from historical practices.

Our process for estimating reserves established for these variable consideration components does not differ materially from historical practices.

The transaction price, which includes variable consideration reflecting the impact of discounts and allowances, may be subject to constraint and is included in the net sales price only to the extent that it is probable that a significant reversal of the amount of the cumulative revenues recognized will not occur in a future period.

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The manufacturing process is considered fully complete once the finished goods have been approved for shipment by both us and Janssen.

We record manufacturing revenue for VUMERITY at the point in time when control of the product passes to Biogen, since Biogen does not control the product during the manufacturing process and, in the event Biogen terminates the commercial supply agreement, we would only be reimbursed for costs incurred for performance completed to date for product not yet fully manufactured.

Control of the product passes to Biogen when the manufacturing process is considered fully complete, which is upon quality release for bulk batches of VUMERITY and upon shipment for packaged lots of VUMERITY.

We recognize manufacturing revenue related to VUMERITY at cost plus 15%, upon making available bulk batches of VUMERITY to Biogen and, to the extent we package such product, then also when packaged batches of VUMERITY are made available to Biogen.

Control of the product passes to Biogen when VUMERITY, in either bulk or finished form, is made available to Biogen.

The sales price for certain of our manufacturing revenues is based on the end-market sales price earned by our licensees.

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Differences between actual royalty revenues and estimated royalty revenues are reconciled and adjusted for in the period in which they become known, which is generally within the same quarter.

The differences between our actual and estimated royalty revenues have not been material to date.

The difference s between our actual and estimated royalty revenues ha ve not been material to date .

Research and Development Revenue and License Revenue

Under a license and collaboration agreement with Biogen, which we entered into in November 2017 and amended in October 2018, January 2019 and October 2019, we granted Biogen a worldwide, exclusive, sublicensable license to develop, manufacture and commercialize VUMERITY and other products covered by patents licensed to Biogen under the agreement.

Under the November 2017 license and collaboration agreement, we received an up-front cash payment and additional payments upon achievement of certain milestones with respect to VUMERITY, including a payment of $150.0 million in November 2019 following FDA approval of the NDA for VUMERITY and transfer of such NDA to Biogen.

We are also eligible to receive additional payments upon achievement of other milestones, including development milestones with respect to the first two products other than VUMERITY covered by patents licensed to Biogen under the license and collaboration agreement.

In January 2018, Biogen became responsible for all VUMERITY development costs we incurred, subject to annual budget limitations.

Following FDA approval of the NDA for VUMERITY in October 2019, the NDA and any further development responsibilities with respect to VUMERITY were transferred to Biogen.

We evaluated the license and collaboration agreement under Topic 606 and determined that it had four deliverables:

(i) the grant of a distinct, right-to-use license of IP to Biogen;

(ii) future development services;

(iii) clinical supply;

and (iv) participation on a joint steering committee with Biogen.

Our participation on the joint steering committee was considered to be perfunctory and thus not recognized as a performance obligation.

The deliverables, aside from the participation in the joint steering committee which was considered to be perfunctory, were determined to be separate performance obligations as the license is separately identifiable from the development services and clinical supply, and the development services are not expected to significantly modify or customize the IP.

We allocated the arrangement consideration to each performance obligation using the standalone selling prices based on our estimate of selling price for the license and other deliverables.

We used a discounted cash flow model to estimate the standalone selling price of the license in order to allocate the consideration to the performance obligations.

To estimate the standalone selling price of the license, we assessed the likelihood of the FDA’s approval of VUMERITY and estimated the expected future cash flows assuming FDA approval and maintenance of the IP protecting VUMERITY.

We then discounted these cash flows using a discount rate of 8.0%, which we believed captured a market participant’s view of the risk associated with the expected cash flows.

The estimate of selling price of the development services and clinical supply were determined through third-party evidence.

We believe that a change in the assumptions used to determine our estimate of selling price for the license most likely would not have a significant effect on the allocation of consideration transferred.

We allocated the $150.0 milestone payment received in November 2019 to the relevant performance obligations as follows:

$144.8 million was allocated to the delivery of the license;

and $5.2 million was allocated to future development services and clinical supply.

The amounts allocated to the license were recognized upon receipt of the payments as delivery of the license occurred upon entry into the agreement in 2017.

The amounts allocated to the development services and clinical supply were recognized over the course of the development work and as clinical supply was delivered to Biogen in 2020.

In addition, we receive a 15% royalty on worldwide net sales of VUMERITY, subject to, under certain circumstances, minimum annual payments for the first five years following FDA approval of VUMERITY.

We are also entitled to receive royalties on net sales of products other than VUMERITY covered by patents licensed to Biogen under the license and collaboration agreement, at tiered royalty rates calculated as percentages of net sales ranging from high-single digits to sub-teen double digits.

All royalties are payable on a product-by-product and country-by-country basis until the later of (i) the last-to-expire patent right covering the applicable product in the applicable country and (ii) a specified period of time from the first commercial sale of the applicable product in the applicable country.

Royalties for all products and the minimum annual payments for VUMERITY are subject to customary reductions, as set forth in the license and collaboration agreement.

We determined that the future development milestones and sales-based royalties that we may be entitled to receive are variable consideration.

We are using the most likely amount method for estimating the variable consideration to be received related to the milestones under this arrangement.

The royalties are subject to the sales-based exception and are recorded when the corresponding sale occurs.

Under the license and collaboration agreement, Biogen appointed us as the toll manufacturer of clinical and commercial supplies of VUMERITY, subject to Biogen’s right to manufacture or have manufactured commercial supplies as a back-up manufacturer and subject to good faith agreement by the parties on the terms of such manufacturing arrangements.

In October 2019, we entered into a commercial supply agreement with Biogen for the commercial supply of VUMERITY, an amendment to such commercial supply agreement and an amendment to the November 2017 license and collaboration agreement with Biogen.

Under these agreements, Biogen has elected to initiate a technology transfer relating to the manufacture of VUMERITY (the “Tech Transfer”) and, following a transition period, assume responsibility for the manufacture (itself or through a designee) of clinical supplies of VUMERITY and up to 100% of commercial supplies of VUMERITY in exchange for an increase in the royalty rate to be paid by Biogen to us on net sales of that portion of product that is manufactured by Biogen or its designee.

We evaluated the commercial supply agreement and the related amendments under Topic 606 and determined that these agreements should be combined and accounted for as a separate contract since the commercial supply agreement and amendment to the November 2017 license and collaboration agreement were negotiated together to achieve a common economic objective and the additional performance obligations under the commercial supply agreement are considered distinct obligations priced at their standalone selling prices.

We determined that we had two separate performance obligations, the commercial supply of VUMERITY and services to be performed by us in connection with the Tech Transfer.

There are other deliverables under the agreements that were determined to be perfunctory or immaterial.

In connection with the entry into the commercial supply agreement and the related amendments, we received payments in the aggregate amount of $5.8 million in the fourth quarter of 2019 and we will be eligible to receive an additional $5.0 million payment upon the earlier of successful completion of the Tech Transfer or a date in the fourth quarter of 2022.

The $5.8 million received in the fourth quarter of 2019 were allocated, and the amounts to be received in connection with the Tech Transfer will be allocated, to each of the performance obligations using the standalone selling prices based on our estimate of selling price for the commercial supply of VUMERITY and the services related to the Tech Transfer, and this additional arrangement consideration will be recognized as we deliver commercial supply of VUMERITY and/or provide services relating to the Tech Transfer.

We began performing under this commercial supply agreement in the first quarter of 2020.

Research and development revenue consists of funding that compensates us for formulation, preclinical and clinical testing under research and development arrangements with our partners.

We generally bill our partners under such arrangements using a full-time equivalent or hourly rate, plus direct external costs, if any.

Revenue is recognized as the obligations under the arrangements are performed.

We recognize revenue from the grant of distinct, right-to-use licenses of IP when control of the license is transferred to our licensee, which is the point in time that the licensee is able to direct the use of and obtain substantially all of the benefits from the license.

Amortization and Impairment of Long‑Lived Assets

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These factors involve known and unknown risks and uncertainties, many of which are beyond our control and could cause the actual economic benefits of these intangible assets to be materially different from our estimates.

Based on our most recent analysis, amortization of intangible assets included within our consolidated balance sheet at December 31, 2021, is expected to be approximately $35.0 million, $35.0 million and $1.0 million in the years ending December 31, 2022 through 2024, respectively.

Based on our most recent analysis, amortization of intangible assets included within our consolidated balance sheet at December 31, 2022, is expected to be approximately $35.0 million and $1.0 million in the years ending December 31, 2023 and 2024, respectively.

Although we believe such available information and assumptions are reasonable, given the inherent risks and uncertainties underlying our expectations regarding such future revenues, there is the potential for our actual results to vary significantly from such expectations.

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We evaluate goodwill for impairment for our reporting units annually, as of October 31, and whenever events or changes in circumstances indicate the carrying value of the reporting units may not be recoverable.

A reporting unit is an operating segment, as defined by the segment reporting accounting standards, or a component of an operating segment.

A reporting unit is an operating segment, as defined by GAAP, or a component of an operating segment.

A component of an operating segment is a reporting unit if the component constitutes a business for which discrete financial information is available and is reviewed by management.

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Alternatively, we may elect to not first assess qualitative factors and instead immediately perform the quantitative impairment test.

In 2017, we elected to early adopt guidance issued by the Financial Accounting Standards Board that simplifies the test for goodwill impairment.

This guidance removed Step 2 of the goodwill impairment test, which required a hypothetical purchase price allocation.

A goodwill impairment charge is now recognized for the amount by which the carrying value of a reporting unit exceeds its fair value, not to exceed the carrying amount of goodwill.

On October 31, 2022, we elected to perform a qualitative impairment test and determined that based on the weight of all available evidence, the fair value of the reporting unit more-likely-than-not exceeded its carrying value.

Contingent Consideration

We record contingent consideration we receive related to the sale of a business at fair value on the acquisition date.

We estimate the fair value of contingent consideration through valuation models that incorporate probability-adjusted assumptions related to the achievement of milestones and thus likelihood of receiving related payments.

We record contingent consideration that we are entitled to receive related to the sale of a business at fair value on the acquisition date.

We revalue our contingent consideration each reporting period, with changes in the fair value of contingent consideration recognized within the consolidated statements of operations and comprehensive loss.

Changes in the fair value of contingent consideration can result from changes to one or multiple assumptions, including adjustments to the discount rates, changes in the amount and timing of cash flows, changes in the assumed achievement and timing of any development and sales-based milestones and changes in the assumed probability associated with regulatory approval.

The period over which we discount contingent consideration is based on the current development stage of the product candidates, the specific development plan for that product candidate adjusted for the probability of completing the development step, and the date on which contingent payments would be triggered.

In estimating the probability of success, we utilize data regarding similar milestone events from several sources, including industry studies and our own experience.

These fair value measurements are based on significant inputs not observable in the market.

Changes in the fair value of contingent consideration can result from changes to one or multiple assumptions, including adjustments to the discount rates, changes in the amount and timing of cash flows, changes in the assumed achievement and timing of any development and sales-based milestones, changes in the assumed probability associated with regulatory approval and changes in the probability of collection or default on portions of the contingent consideration due to us.

These fair value measurements are based on significant inputs, including inputs not observable in the market.

Significant judgment was employed in determining the appropriateness of these assumptions at the acquisition date and for each subsequent period.

Accordingly, changes in assumptions described above could have a material impact on the increase or decrease in the fair value of contingent consideration recorded in any given period.

At December 31, 2021, our contingent consideration related to consideration to be received as part of the Gainesville Transaction.

In accordance with the accounting standard for fair value measurements, our contingent consideration has been classified as a Level 3 asset as its fair value is based on significant inputs not observable in the market.

The fair value of the contingent consideration was determined as follows:

We have received $23.1 million in milestone payments to date related to the FDA approval in February 2020 of the NDA for ANJESO, the first Meloxicam Product, and we are due to receive an additional $38.6 million in six equal, annual installments on each anniversary of such approval from February 2022 through February 2027;

We are entitled to receive future royalties on net sales of Meloxicam Products;

We are entitled to receive payments of up to $80.0 million upon achieving certain sales milestones on future sales of the Meloxicam Products.

The fair value of the sales milestones was determined through the use of a real options approach, where net sales are simulated in a risk-neutral world.

To employ this methodology, we used a risk-adjusted expected growth rate based on Baudax’s assessments of expected growth in net sales of the approved Meloxicam Product, adjusted by an appropriate factor capturing such assessment’s respective correlation with the market.

In order to address the substantial doubt about Baudax’s ability to continue as a going concern, we split our fair value analysis into two scenarios.

In the first scenario, the amounts above were all discounted using a rate which we believe captures a market participant’s view of the risk associated with the expected payments assuming Baudax is able to continue as a going concern.

This scenario received a weighting of 45%.

In the second scenario, we used the undiscounted values derived from the amounts summarized above and applied a recovery rate of 18%, based largely on an analysis performed by Moody’s Investor Service regarding recoveries in a pandemic-driven default cycle.

This scenario received a weighting of 55%.

Significant judgment was employed in determining the appropriateness of these assumptions at the acquisition date and for each subsequent period.

Accordingly, changes in assumptions described above could have a material impact on the increase or decrease in the fair value of contingent consideration we record in any given period.

Valuation of Deferred Tax Assets

19 unchanged sentences

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What changed 10-K

Item 7. Management’s Discussion and Analysis