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Item 2. Management’s Discussion and Analysis

2021-04-29 compared with 2020-10-29 · 156 added, 250 removed, 171 unchanged (70% of the section changed)

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Refer to our Annual Report on Form 10-K for the year ended December 31, 2020 (2020 Annual Report) for management’s discussion and analysis of our financial condition and results of operations.

The following is management’s discussion and analysis of our financial condition and results of operations for the three and nine months ended September 30, 2020 and 2019.

The following is management’s discussion and analysis of our financial condition and results of operations for the three months ended March 31, 2021 and 2020.

RESULTS OF OPERATIONS

Net income attributable to Baxter stockholders for the three and nine months ended September 30, 2020 totaled $356 million, or $0.69 per diluted share, and $934 million, or $1.81 per diluted share, compared to $369 million, or $0.71 per diluted share, and $1.0 billion, or $1.97 per diluted share, for the three and nine months ended September 30, 2019.

Net income for the three and nine months ended September 30, 2020 included special items which decreased net income by $75 million and $251 million, respectively, or $0.14 and $0.49 per diluted share, respectively, as further discussed below.

Net income for the three and nine months ended September 30, 2019 included special items which decreased net income by $17 million and $192 million, respectively, or $0.03 and $0.37 per diluted share, respectively, as further discussed below.

Net income attributable to Baxter stockholders for the three months ended March 31, 2021 totaled $298 million, or $0.58 per diluted share, compared to $332 million, or $0.64 per diluted share for the three months ended March 31, 2020.

Net income for the three months ended March 31, 2021 included special items which decreased net income by $88 million, or $0.18 per diluted share, as further discussed below.

Net income for the three months ended March 31, 2020 included special items which decreased net income by $93 million, or $0.18 per diluted share, as further discussed below.

Special Items

The following table provides a summary of our special items and the related impact by line item on our results for the three and nine months ended September 30, 2020 and 2019.

The following table provides a summary of our special items and the related impact by line item on our results for the three months ended March 31, 2021 and 2020.

Three months ended

September 30, Nine months ended

September 30,

(in millions) 2021 2020

Intangible asset amortization expense $ (64) $ (52)

Intangible asset impairments 1

— — (17) (31)

Business optimization items 1

(6) (10) (24) (39)

Acquisition and integration expenses 2

— (8) (11) (25)

European medical devices regulation 3

(8) (7) (22) (17)

Investigation and related costs 4

Total Special Items $ (93) $ (78)

Impact on Gross Margin Ratio (2.4 pts) (2.6 pts) (2.8 pts) (3.0 pts)

Impact on Gross Margin Ratio (3.1 pts) (2.8 pts)

Selling, General and Administrative (SG&A) Expenses

Business optimization items 1

$ 25 $ 10 $ 53 $ 50

Acquisition and integration expenses 2

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Total Special Items $ 18 $ 38

Impact on SG&A Ratio 0.9 pts 0.5 pts 0.9 pts 0.7 pts

Impact on SG&A Ratio 0.6 pts 1.3 pts

Research and Development (R&D) Expenses

Business optimization items 1

$ 1 $ 8 $ — $ 42

Acquisition and integration expenses 2

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Total Special Items $ — $ 23

Impact on R&D Ratio 0.0 pts 0.4 pts 0.2 pts 0.6 pts

Other Operating Expense (Income), net

Impact on R&D Ratio 0.0 pts 0.8 pts

Other Operating Income, net

Business optimization items 1

$ — $ — $ (17) $ —

Acquisition and integration expenses 2

Insurance recoveries from a legacy product-related matter 6

Hurricane Maria insurance recoveries 7

— (40) — (40)

Total Special Items $ — $ (20)

Income Tax Expense

Tax effects of special items and impact of U.S.

Tax effects of special items 5

$ (23) $ (26)

Total Special Items $ (23) $ (26)

Impact on Effective Tax Rate (2.2 pts) (4.5 pts) (2.2 pts) (3.1 pts)

Impact on Effective Tax Rate (1.5 pts) (2.4 pts)

Intangible asset amortization expense is identified as a special item to facilitate an evaluation of current and past operating performance and is consistent with how management and our Board of Directors assess performance.

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Management believes that providing the separate impact of those items may provide a more complete understanding and facilitate a fuller analysis of our results of operations, particularly in evaluating performance from one period to another.

1 In 2020 and 2019, our results included charges of $17 million and $31 million for asset impairments related to developed-technology intangible assets.

Refer to Note 4 in Item 1 of this Quarterly Report on Form 10-Q for further information regarding these asset impairments.

2 In 2020 and 2019, our results were impacted by costs associated with our execution of programs to optimize our organization and cost structure on a global basis.

1 In 2021 and 2020, our results were impacted by costs associated with our execution of programs to optimize our organization and cost structure.

These actions included streamlining our international operations, rationalizing our manufacturing facilities, reducing our general and administrative infrastructure, re-aligning certain R&D activities and cancelling certain R&D programs.

Our results in 2020 included business optimization charges of $32 million in the third quarter and $77 million in the first nine months.

Our results in 2019 included business optimization charges of $28 million in the third quarter and $131 million in the first nine months.

Additionally, we recognized a gain of $17 million in the first nine months of 2020 for property we sold in conjunction with our business optimization initiatives.

Our results in 2021 and 2020 included business optimization charges of $27 million and $32 million, respectively.

Additionally, we recognized a gain of $17 million in 2020 for property we sold in conjunction with our business optimization initiatives.

Refer to Note 10 in Item 1 of this Quarterly Report on Form 10-Q for further information regarding these charges and related liabilities.

3 Our results in 2020 included $1 million in the third quarter and $38 million in the first nine months of acquisition and integration expenses.

This included acquisition and integration expenses related to our acquisitions of Cheetah Medical Inc.

(Cheetah) and Seprafilm and the purchase of in-process R&D assets in the first nine months.

Additionally, the change in the estimated fair value of contingent consideration liabilities in 2020 was an expense in the third quarter and a benefit in the first nine months.

Our results in 2019 included $13 million in the third quarter and $37 million in the first nine months of acquisition and integration expenses.

This included acquisition and integration expenses related to our acquisitions of Claris and the Recothrom and Preveleak products in prior periods and the purchase of in-process R&D assets in the third quarter and first nine months, partially offset by the change in the estimated fair value of contingent consideration liabilities in the first nine months.

2 Our results in 2021 included $1 million of integration expenses related to our acquisition of the rights to Caelyx and Doxil for specified territories outside of the U.S.

Our results in 2020 included $28 million of acquisition and integration expenses related to our acquisitions of Cheetah Medical Inc.

(Cheetah), Seprafilm and in-process R&D assets, partially offset by the change in the estimated fair value of contingent consideration liabilities.

Refer to Note 2 in Item 1 of this Quarterly Report on Form 10-Q for further information regarding business development activities.

4 Our results in 2020 included $8 million in the third quarter and $22 million in the first nine months of costs related to updating our quality systems and product labeling to comply with the new medical device reporting regulation and other requirements of the European Union’s regulations for medical devices that are scheduled to become effective in 2021.

Our results in 2019 included $7 million in the third quarter and $17 million in the first nine months of costs related to these requirements.

5 Our results in 2020 included costs of $2 million in the third quarter and $22 million in the first nine months for investigation and related costs.

This included $2 million in the third quarter and $14 million in the first nine months of costs related to our investigation of foreign exchange gains and losses associated with certain intra-company transactions and related legal matters.

Additionally, we recorded incremental stock compensation expense of $8 million in the first nine months as we extended the term of certain stock options that were scheduled to expire in the first quarter of 2020.

Refer to Notes 6 and 7 in Item 1 of this Quarterly Report on Form 10-Q for further information regarding the investigation and stock compensation expense.

6 Our results in 2019 included a benefit of $4 million in the third quarter and $37 million in the first nine months for our allocation of insurance proceeds received pursuant to a settlement and cost-sharing arrangement for a legacy product-related matter.

Refer to Note 6 in Item 1 of this Quarterly Report on Form 10-Q for further information.

7 Our results in 2019 included benefits of $40 million related to insurance recoveries as a result of losses incurred due to Hurricane Maria.

Refer to Note 6 in Item 1 of this Quarterly Report on Form 10-Q for further information.

3 Our results in 2021 and 2020 included $8 million and $6 million, respectively, related to updating our quality systems and product labeling to comply with the new medical device reporting regulation and other requirements of the European Union’s regulations for medical devices that are scheduled to become effective in stages beginning in 2021.

4 Our results in 2021 and 2020 included charges of $11 million and $18 million, respectively, for investigation and related costs.

This included $2 million in 2021 and $10 million in 2020 of costs related to our investigation of foreign exchange gains and losses associated with certain intra-company transactions and related legal matters.

We also recorded a charge of $9 million in the first quarter of 2021 for a proposed settlement of shareholder litigation related to that investigation.

Additionally, we recorded incremental stock compensation expense of $8 million in 2020 as we extended the term of certain stock options that were scheduled to expire in the first quarter of 2020.

Refer to Notes 6 and 7 in Item 1 of this Quarterly Report on Form 10-Q for further information regarding the investigation and related legal charge and stock compensation expense.

5 Reflected in this item is the income tax impact of the special items identified in this table.

Additionally, our results in 2019 included a benefit of $16 million related to an adjustment for U.S.

The tax effect of each special item is based on the jurisdiction in which the item was incurred and the tax laws in effect for each such jurisdiction.

Three months ended

September 30, Percent change

(in millions) 2020 2019 At actual

currency rates At constant currency rates

United States $ 1,244 $ 1,224 2 % 2 %

International $ 1,728 1,627 6 % 5 %

Total net sales $ 2,972 $ 2,851 4 % 4 %

Nine months ended

September 30, Percent change

Three Months Ended March 31, Percent change

(in millions) 2021 2020 At actual

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Total net sales $ 2,946 $ 2,802 5 % 1 %

Foreign currency had an insignificant impact on net sales during the third quarter of 2020 compared to the prior-year as the strengthening of the U.S.

Dollar relative to the Brazilian Real, Mexican Peso and Colombian Peso was offset by the weakening of the U.S.

Dollar relative to the Euro, Australian Dollar and British Pound.

Foreign currency unfavorably impacted net sales by 1 percentage point during the first nine months of 2020 compared to the prior-year period principally due to the strengthening of the U.S.

Dollar relative to the Mexican Peso, Australian Dollar, Brazilian Real, Chinese Renminbi and Colombian Peso.

Foreign currency favorably impacted net sales by 4 percentage points during the first quarter of 2021 compared to the prior-year period principally due to the weakening of the U.S.

Dollar relative to the Euro, Australian Dollar, British Pound and Chinese Renminbi.

The comparisons presented at constant currency rates reflect local currency sales at the prior period’s foreign exchange rates.

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We believe that the non-GAAP measure of change in net sales at constant currency rates, when used in conjunction with the U.S.

GAAP measure of change in net sales at actual currency rates, may provide a more complete understanding and facilitate a fuller analysis of our results of operations, particularly in evaluating performance from one period to another.

Our global operations expose us to risks associated with public health crises and epidemics/pandemics, such as the novel strain of coronavirus (COVID-19).

COVID-19 has had, and we expect will continue to have, an adverse impact on our operations, supply chains and distribution systems and has increased and will continue to increase our expenses, including as a result of impacts associated with preventive and precautionary measures that we, other businesses and governments are taking.

GAAP measure of change in

net sales at actual currency rates, may provide a more complete understanding and facilitate a fuller analysis of our results of operations, particularly in evaluating performance from one period to another.

Our global operations expose us to risks associated with public health crises and epidemics/pandemics, such as the COVID-19 pandemic.

COVID-19 has had, and we expect will continue to have, an adverse impact on our operations, supply chains and distribution systems and has increased and we expect will continue to increase our expenses, including as a result of impacts associated with preventive and precautionary measures that we, other businesses and governments are taking.

These measures have led to unprecedented restrictions on, disruptions in, and other related impacts on businesses and personal activities.

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We expect that these evolving restrictions and requirements, as well as the corresponding need to adapt to new methods of conducting business remotely, will continue to have an adverse effect on our business.

For further discussion, refer to the Global Business Unit Net Sales Reporting section below, Item 1A.

Risk Factors in our Annual Report on Form 10-K for the year ended December 31, 2019 and Part II, Item 1A.

Risk Factors of this Quarterly Report on Form 10-Q.

Global Business Unit Net Sales Reporting

Our global business units (GBUs) include the following:

For further discussion, refer to the Product Category Net Sales Reporting section below and Item 1A.

Risk Factors in our 2020 Annual Report.

Product Category Net Sales Reporting

Beginning in the first quarter of 2021, our product category net sales disclosures (previously referred to as global business units (GBUs)) separately present net sales from our BioPharma Solutions business, which was previously included within Other.

Concurrent with that disaggregation of net sales from our BioPharma Solutions business, we have also allocated certain previously unallocated sales deductions from Other to various categories, primarily based on their respective net sales.

Net sales for the first quarter of 2020 have been recast to conform to the current period presentation.

Our product categories include the following:

• Renal Care includes sales of our peritoneal dialysis (PD), hemodialysis (HD) and additional dialysis therapies and services.

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• Acute Therapies includes sales of our continuous renal replacement therapies (CRRT) and other organ support therapies focused in the intensive care unit (ICU).

• Other primarily includes sales of contract manufacturing services from our pharmaceutical partnering business.

The following is a summary of net sales by GBU.

Three months ended September 30, Percent change

(in millions) 2020 2019 At actual currency rates At constant currency rates

$ 955 $ 918 4 % 4 %

Medication Delivery

680 701 (3) % (3) %

Pharmaceuticals

540 527 2 % 1 %

Clinical Nutrition

237 219 8 % 5 %

Advanced Surgery

236 216 9 % 9 %

Acute Therapies

177 130 36 % 35 %

147 140 5 % 4 %

Total Baxter $ 2,972 $ 2,851 4 % 4 %

Nine months ended September 30, Percent change

• BioPharma Solutions includes sales of contracted services we provide to various pharmaceutical and biopharmaceutical companies.

• Other includes sales of other miscellaneous product and service offerings.

The following is a summary of net sales by product category:

Three Months Ended March 31, Percent change

(in millions) 2021 2020 At actual currency rates At constant currency rates

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207 156 33 % 28 %

BioPharma Solutions 135 114 18 % 11 %

27 27 0 % (4) %

Total Baxter $ 2,946 $ 2,802 5 % 1 %

Renal Care net sales increased 4% in the third quarter and 2% in the first nine months of 2020, as compared to the prior-year periods.

The increase in the third quarter and first nine months was driven by global patient growth in PD.

Changes in foreign exchange rates had an insignificant impact on Renal Care net sales in the third quarter and a negative impact of 3% in the first nine months of 2020, as compared to the prior-year periods.

Medication Delivery net sales decreased 3% in the third quarter and 2% in the first nine months of 2020, as compared to the prior-year periods.

The decrease in the third quarter and first nine months was primarily driven by lower demand for our infusion systems and related IV administration sets and solutions due to lower hospital admission rates and a reduction in elective surgeries resulting from the COVID-19 pandemic, including the impact from shelter in place initiatives as well as patient safety concerns related to potential COVID-19 infection risk.

Changes in foreign exchange rates had an insignificant impact on Medication Delivery net sales in the third quarter and a negative impact of 1% in the first nine months of 2020, as compared to the prior-year periods.

Pharmaceuticals net sales increased 2% in the third quarter and decreased 1% in the first nine months of 2020, as compared to the prior-year periods.

The increase in the third quarter was driven by increased demand for our international pharmacy compounding services along with a significant nonrecurring purchase from the U.S.

government and a 1% positive impact from foreign exchange rate changes, compared to the prior-year period.

Those increases were partially offset by lower demand for inhaled anesthesia products as a result of lower hospital admission rates and reduced elective surgeries resulting from the COVID-19 pandemic.

The decrease in the first nine months of 2020 was driven by lower demand for inhaled anesthesia products resulting from the COVID-19 pandemic and new competitive entrants for TransDerm Scop.

Those impacts were partially offset by increased demand for our international pharmacy compounding services along with certain generic injectables and the nonrecurring purchase from the U.S.

Clinical Nutrition net sales increased 8% in the third quarter and 6% in the first nine months of 2020, as compared to the prior-year periods.

The increase in the third quarter and first nine months of 2020 was driven by increased demand for our PN therapies and related products, recent product launches and competitor shortages for amino acids.

Additionally, foreign exchange rate changes had a positive impact on net sales of 3% in the third quarter and a negative impact of 1% for the first nine months of 2020, as compared to the prior-year periods.

Advanced Surgery net sales increased 9% in the third quarter and decreased 3% in the first nine months of 2020, as compared to the prior-year periods.

The increase in the third quarter was due to the acquisition of Seprafilm, which contributed $30 million in net sales during the third quarter.

The decrease in the first nine months of 2020 was driven by the impact of the COVID-19 pandemic as many elective surgeries were postponed and a 1% negative impact from foreign exchange rate changes, as compared to the prior-year period.

Partially offsetting the decrease was the acquisition of Seprafilm, which contributed $66 million in net sales during the first nine months of 2020, and a benefit from increased demand for our hemostats and sealants early in the year due, in part, to competitive supply disruptions.

Acute Therapies net sales increased 36% in the third quarter and 33% in the first nine months of 2020, as compared to the prior-year periods.

The increase in the third quarter and first nine months was driven by increased global demand for our CRRT systems to treat acute kidney injuries.

Additionally, foreign exchange rate changes had a positive impact on net sales of 1% in the third quarter and a negative impact of 2% for the first nine months of 2020, as compared to the prior-year periods.

The COVID-19 pandemic drove the increases in demand for those products in the third quarter and first nine months of 2020.

Other net sales increased 5% in the third quarter and 6% in the first nine months of 2020, as compared to the prior-year periods.

The increase in the third quarter and first nine months of 2020 was driven by increased demand for our contract manufacturing services.

Additionally, foreign exchange rate changes had a positive impact on net sales of 1% in the third quarter and a negative impact of 1% for the first nine months of 2020, as compared to the prior-year periods.

Renal Care net sales increased 6% in the first quarter of 2021, as compared to the prior-year period.

That increase was driven by global patient growth in PD and a 4% positive impact from foreign exchange rate changes, as compared to the prior-year period.

Medication Delivery net sales decreased 4% in the first quarter of 2021, as compared to the prior-year period.

That decrease was primarily driven by lower demand for our infusion systems and related IV administration sets and solutions due to lower hospital admission rates and a reduction in elective surgeries resulting from the COVID-19 pandemic.

Additionally, the prior-year period benefited from additional sales as our customers prepared for the impact of COVID-19.

Those decreases were partially offset by changes in foreign exchange rates which had a favorable impact on Medication Delivery net sales of 2% in the first quarter of 2021, as compared to the prior-year period.

Pharmaceuticals net sales increased 7% in the first quarter of 2021, as compared to the prior-year period.

That increase was driven by a 6% positive impact from foreign exchange rate changes, compared to the prior-year period.

Additionally, the acquisition of the rights to Caelyx and Doxil for specified territories outside of the U.S.

contributed $13 million of net sales in the first quarter of 2021.

Those increases were partially offset by lower demand for inhaled anesthesia products resulting from the COVID-19 pandemic.

Additionally, the prior-year period benefited from additional sales as our customers prepared for the impact of COVID-19.

Clinical Nutrition net sales increased 8% in the first quarter of 2021, as compared to the prior-year period.

That increase was driven by a 5% positive impact from foreign exchange rate changes, compared to the prior-year period.

Additionally, Clinical Nutrition net sales increased due to higher demand for our PN therapies and related products.

Advanced Surgery net sales decreased 3% in the first quarter of 2021, as compared to the prior-year period.

That decrease was driven by the impact of the COVID-19 pandemic as many elective surgeries were postponed.

Additionally, contributing to the decrease compared to the prior-year period was increased demand for our hemostats and sealants in the first quarter of 2020 due, in part, to competitive supply disruptions.

Partially offsetting those decreases was the acquisition of Seprafilm in February of 2020, which contributed $8 million of incremental sales in the first quarter of 2021, and a 3% positive impact from foreign exchange rate changes, as compared to the prior-year period.

Acute Therapies net sales increased 33% in the first quarter of 2021, as compared to the prior-year period.

That increase was driven by increased global demand for our CRRT systems to treat acute kidney injury during the COVID-19 pandemic and a 5% positive impact from foreign exchange rate changes, as compared to the prior-year period.

BioPharma Solutions net sales increased 18% in the first quarter of 2021, as compared to the prior-year period.

That increase was driven by manufacturing services and supply packaging related to the production of COVID-19 vaccines on behalf of multiple pharmaceutical companies and a 7% positive impact from foreign exchange rate changes, as compared to the prior-year period.

Gross Margin and Expense Ratios

Three months ended September 30,

2020 % of net sales 2019 % of net sales $ change % change

Gross margin $ 1,195 40.2 % $ 1,230 43.1 % $ (35) (2.8) %

SG&A $ 601 20.2 % $ 627 22.0 % $ (26) (4.1) %

R&D $ 123 4.1 % $ 144 5.1 % $ (21) (14.6) %

Nine months ended September 30,

Three months ended March 31,

2021 % of net sales 2020 % of net sales $ change % change

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R&D $ 128 4.3 % $ 146 5.2 % $ (18) (12.3) %

The gross margin ratio was 40.2% and 40.0% in the third quarter and first nine months of 2020, respectively.

The special items identified above had an unfavorable impact of approximately 2.4 and 2.8 percentage points on the gross margin ratio in the third quarter and first nine months of 2020, respectively.

The gross margin ratio was 43.1% and 41.6% in the third quarter and first nine months of 2019, respectively.

The special items identified above had an unfavorable impact of approximately 2.6 and 3.0 percentage points on the gross margin ratio in the third quarter and first nine months of 2019, respectively.

The gross margin ratio was 38.9% and 41.5% in the first quarter of 2021 and 2020, respectively.

The special items identified above had an unfavorable impact of approximately 3.1 and 2.8 percentage points on the gross margin ratio in the first quarter of 2021 and 2020, respectively.

Refer to the Special Items caption above for additional detail.

Excluding the impact of the special items, the gross margin ratio decreased in the third quarter and first nine months of 2020 compared to the prior year due to an unfavorable product mix, additional compensation costs, primarily for our manufacturing employees, reduced manufacturing efficiencies and incremental logistics costs, all in response to the COVID-19 pandemic.

We expect the gross margin ratio for full year 2020 to be negatively impacted by those same factors.

The SG&A expenses ratio was 20.2% and 21.4% in the third quarter and first nine months of 2020, respectively.

The special items identified above had an unfavorable impact of approximately 0.9 percentage points on the SG&A expenses ratio in each of the third quarter and first nine months of 2020.

The SG&A expenses ratio was 22.0% and 22.5% in the third quarter and first nine months of 2019, respectively.

The special items identified above had an

unfavorable impact of approximately 0.5 and 0.7 percentage points on the SG&A expenses ratio in the third quarter and first nine months of 2019, respectively.

Excluding the impact of the special items, the gross margin ratio decreased in the first quarter of 2021 compared to the prior-year period due to an unfavorable product mix and higher manufacturing and supply chain costs resulting from the COVID-19 pandemic.

The SG&A expenses ratio was 21.3% and 22.4% in the first quarter of 2021 and 2020, respectively.

The special items identified above had an unfavorable impact of approximately 0.6 and 1.3 percentage points on the SG&A expenses ratio in the first quarter of 2021 and 2020, respectively.

Refer to the Special Items caption above for additional detail.

Excluding the impact of the special items, the SG&A expenses ratio decreased in the third quarter and first nine months of 2020 primarily due to lower bonus accruals under our annual employee incentive compensation plans, actions we took to restructure our cost position and focus on expense management and reduced travel and related expenses due to the COVID-19 pandemic.

The R&D expenses ratio was 4.1% and 4.5% in the third quarter and first nine months of 2020, respectively.

The special items identified above had no impact and an unfavorable impact of approximately 0.2 percentage points on the R&D expenses ratio in the third quarter and first nine months of 2020, respectively.

The R&D expenses ratio was 5.1% and 5.3% in the third quarter and first nine months of 2019, respectively.

The special items identified above had an unfavorable impact of approximately 0.4 and 0.6 percentage points on the R&D expenses ratio in the third quarter and first nine months of 2019, respectively.

Excluding the impact of the special items, the SG&A expenses ratio decreased in the first quarter of 2021 compared to the prior-year period primarily due to actions we took to restructure our cost position and focus on expense management and reduced travel and related expenses due to the COVID-19 pandemic.

The R&D expenses ratio was 4.3% and 5.2% in the first quarter of 2021 and 2020, respectively.

The special items identified above had no impact and an unfavorable impact of approximately 0.8 percentage points on the R&D expenses ratio in the first quarter of 2021 and 2020, respectively.

Refer to the Special Items caption above for additional detail.

Excluding the impact of the special items, the R&D expenses ratio decreased in the third quarter and first nine months of 2020 as a result of the timing of project-related expenditures compared to the prior year and actions we took to restructure our cost position and focus on expense management.

Due to a change in the timing and amount of projected cash flows associated with $140 million of acquired in-process R&D intangible assets from a historical acquisition, we updated the estimated fair values of these assets.

While no impairment has been recorded because the estimated fair values of those assets exceeded their carrying values, the estimated fair values of these assets declined and are at risk of future impairment should the estimated timing or amount of projected cash flows further deteriorate.

Excluding the impact of the special items, the R&D expenses ratio decreased in the first quarter of 2021 compared to the prior-year period as a result of actions we took to restructure our cost position and focus on expense management and reduced travel and related expenses due to the COVID-19 pandemic.

Business Optimization Items

Beginning in the second half of 2015, we have undertaken actions to transform our cost structure and enhance operational efficiency.

In recent years, we have undertaken actions to transform our cost structure and enhance operational efficiency.

These efforts include restructuring the organization, optimizing our manufacturing footprint, R&D operations and supply chain network, employing disciplined cost management, and centralizing and streamlining certain support functions.

Through September 30, 2020, we have incurred cumulative pre-tax costs of $1.1 billion related to these actions.

From the commencement of our business optimization actions in the second half of 2015 through March 31, 2021, we have incurred cumulative pre-tax costs of $1.1 billion related to these actions.

The costs consisted primarily of employee termination costs, implementation costs, contract termination costs, asset impairments, and accelerated depreciation.

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Approximately 99 percent of the expected annual pre-tax savings are expected to be realized by the end of 2021, with the remainder by the end of 2023.

Other Operating Expense (Income), Net

Other operating expense (income), net was an expense of $1 million and income of $19 million in the third quarter and first nine months of 2020, respectively.

In the third quarter and first nine months of 2020, we recognized an expense of $1 million and a benefit of $2 million, respectively, as a result of the change in the estimated fair value of contingent consideration liabilities.

Additionally, in the first nine months of 2020 we recognized a $17 million gain on the sale of property in conjunction with our business optimization initiatives.

Other operating expense (income), net was income of $44 million and $81 million in the third quarter and first nine months of 2019, respectively.

In the third quarter of 2019, we recognized a benefit of $40 million related to insurance recoveries as a result of losses incurred due to Hurricane Maria.

In the three and nine months ended September 30, 2019, we recognized gains of $4 million and $37 million, respectively, when our share of the proceeds under a cost-sharing agreement became realizable following the resolution of a dispute with an insurer related to a legacy product-related matter.

Additionally, in the first nine months

of 2019 we recognized a benefit of $4 million as a result of the change in the estimated fair value of contingent consideration liabilities.

Other Operating Income, Net

Other operating income, net was $20 million in the first quarter of 2020 as we recognized a $17 million gain on the sale of property in conjunction with our business optimization initiatives and a $3 million gain as a result of a change in the estimated fair value of contingent consideration liabilities.

In September 2013, we entered into an agreement with Celerity Pharmaceutical, LLC (Celerity) to develop certain acute care generic injectable premix and oncolytic products through regulatory approval.

We transferred our rights in these products to Celerity and Celerity assumed ownership and responsibility for development of the products.

We are obligated to purchase the individual product rights from Celerity if the products obtain regulatory approval.

In December 2020, we entered into an agreement with a third party to divest one of the products that is currently being developed by Celerity if that product receives regulatory approval in the U.S.

and/or European Union.

If regulatory approval is obtained, we would incur a loss ranging from $30 million to $60 million for the difference between our purchase price and the divestiture proceeds in connection with that transaction.

Interest Expense, Net

Interest expense, net was $39 million and $96 million in the third quarter and first nine months of 2020, respectively, and $13 million and $51 million in the third quarter and first nine months of 2019, respectively.

The increase in the third quarter and first nine months of 2020 was primarily driven by higher average debt outstanding as a result of the March 2020 issuance of $750 million of 3.75% senior notes due October 2025 and $500 million of 3.95% senior notes due April 2030.

Additionally, interest expense, net increased in the first nine months of 2020 due to the May 2019 issuance of €750 million of 0.40% senior notes due May 2024 and €750 million of 1.3% senior notes due May 2029.

We expect that interest expense, net will increase by more than $60 million in 2020 compared to 2019 primarily due to reduced interest income as a result of lower interest rates on cash balances and higher interest expense as a result of the $1.25 billion of senior notes issued in March 2020.

Other (Income) Expense, Net

Other (income) expense, net was an expense of $16 million and $32 million in the third quarter and first nine months of 2020, respectively, and an expense of $9 million and income of $8 million in the third quarter and first nine months of 2019, respectively.

The increase in expense in the third quarter and first nine months of 2020 compared to the prior year was primarily due to lower pension benefits as a result of the annuitization of our U.S.

pension plans in the fourth quarter of 2019.

Additionally, we recognized an unrealized gain of $9 million on a marketable equity security in the third quarter of 2020.

In September 2020, we offered certain former U.S.

employees with a vested pension benefit a limited-time option to take a lump sum distribution in lieu of future monthly payments.

Those accepting the option will be paid from the assets of the pension plan in December 2020.

This action will accelerate the satisfaction of future pension obligations and could result in a non-cash pre-tax settlement loss in the fourth quarter of 2020, which will be determined based on the rate of acceptance.

The settlement loss, if triggered, would be recognized as a non-operating benefit cost.

Our effective income tax rate was 13.5% and 22.0% in the third quarter and 13.2% and 13.7% in the first nine months of 2020 and 2019, respectively.

Interest expense, net was $34 million and $21 million in the first quarter of 2021 and 2020, respectively.

The increase in 2021 was primarily driven by higher average debt outstanding and lower interest income due to lower interest rates.

Other Expense, Net

Other expense, net was $5 million and $10 million in the first quarter of 2021 and 2020, respectively.

The decrease in the first quarter of 2021 compared to the prior year was primarily due to a foreign exchange net gain in the current year compared to a net loss in the prior year, partially offset by an investment impairment in the current year.

In the first quarter of 2021, we began to wind down our operations in Argentina.

Upon substantial liquidation of those operations in the future, we expect to reclassify currency translation adjustments (CTA) from accumulated other comprehensive (loss) income to other expense, net and recognize a non-cash charge.

As of March 31, 2021, the CTA for our Argentina operations was in excess of $60 million.

Our effective income tax rate was 14.5% and 11.9% in the first quarter of 2021 and 2020, respectively.

Our effective income tax rate can differ from the 21% U.S.

federal statutory rate due to a number of factors, including foreign rate differences, tax incentives, increases or decreases in valuation allowances and liabilities for uncertain tax positions and excess tax benefits on stock compensation awards.

For the three months ended September 30, 2020, the difference between our effective income tax rate and the U.S.

federal statutory rate was primarily attributable to a favorable geographic earnings mix and changes related to our ability to realize foreign tax credits.

For the nine months ended September 30, 2020, the difference between our effective income tax rate and the U.S.

For the three months ended March 31, 2021, the difference between our effective income tax rate and the U.S.

federal statutory rate was primarily attributable to decreases in accrued withholding taxes in several foreign jurisdictions and a favorable geographic earnings mix.

As of March 31, 2021, we had an uncertain tax position under appeal in a foreign jurisdiction for which we did not record income tax expense because we believed that the position had a more-likely-than-not chance of being sustained based on its technical merits under the applicable tax laws.

On April 23, 2021, we received an unfavorable court decision related to this matter.

As a result of that decision, we will record a discrete income tax expense of $22 million to reflect the resolution of this tax matter in the second quarter of 2021.

For the three months ended March 31, 2020, the difference between our effective income tax rate and the U.S.

federal statutory rate was primarily attributable to a favorable geographic earnings mix and excess tax benefits on stock compensation awards.

For the three months ended September 30, 2019, our effective income tax rate was substantially consistent with the 21% U.S.

federal statutory rate as unfavorable return-to-provision adjustments in various jurisdictions were offset by excess tax benefits on stock compensation awards.

For the nine months ended September 30, 2019, the difference between our effective tax rate and the U.S.

federal statutory rate was primarily attributable to excess tax benefits on stock compensation awards and the recognition of tax benefits associated with a favorable tax ruling.

Segment Results

We use operating income on a segment basis to make resource allocation decisions and assess the ongoing performance of our segments.

We use net sales and operating income on a segment basis to make resource allocation decisions and assess the ongoing performance of our segments.

In the first quarter of 2021, the information provided to our Chief Executive Officer for purposes of allocating resources and assessing performance was updated to reallocate contracted services activities performed at a German manufacturing facility from our EMEA segment to our Americas segment.

The contracted services performed at that facility are part of our BioPharma Solutions business, which is managed as part of the Americas segment.

Accordingly, the reported financial results of the Americas segment now include the contracted services activities performed at that facility.

Segment results for the first quarter of 2020 have been recast to conform to the current period presentation.

The following is a summary of financial information for our reportable segments:

Net sales Operating income (loss)

Three months ended

September 30, Nine months ended

September 30, Three months ended

September 30, Nine months ended

September 30,

Three months ended March 31, Three months ended March 31,

(in millions) 2021 2020 2021 2020

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APAC 648 549 138 128

Total segments 2,946 2,802 872 833

Corporate and other — — (482) (424)

Total $ 2,946 $ 2,802 $ 390 $ 409

Segment net sales and operating income were $1.5 billion and $577 million, respectively, in the third quarter and $4.5 billion and $1.6 billion, respectively, in the first nine months of 2020.

Segment net sales and operating income were $1.5 billion and $595 million, respectively, in the third quarter and $4.5 billion and $1.7 billion, respectively, in the first nine months of 2019.

The decrease in operating profit in the third quarter was due to lower gross profit as a result of an unfavorable product mix and incremental logistics costs due to the impact of the COVID-19 pandemic.

The decrease in operating profit in the first nine months of 2020 was primarily driven by decreased sales in multiple GBUs, particularly Medication Delivery, Pharmaceuticals and Advanced Surgery, and lower gross profit as a result of an unfavorable product mix and incremental logistics costs due primarily to the impact of the COVID-19 pandemic.

The decreases were partially offset by favorable performance in Acute Therapies and Clinical Nutrition as well as the acquisition of Seprafilm.

Segment net sales and operating income were $777 million and $160 million, respectively, in the third quarter and $2.3 billion and $480 million, respectively, in the first nine months of 2020.

Segment net sales and operating income were $730 million and $162 million, respectively, in the third quarter and $2.2 billion and $465 million, respectively, in the first nine months of 2019.

The change in foreign exchange rates had a positive impact on results in the third quarter of 2020 as compared to 2019.

On a constant currency basis, operating profit increased in both the third quarter and first nine months of 2020 due to increased sales in Acute Therapies, Clinical Nutrition, Pharmaceuticals and Renal Care.

For the first nine months of 2020, favorable results were partially offset by decreased sales in Advanced Surgery.

Segment net sales and operating income were $646 million and $161 million, respectively, in the third quarter and $1.8 billion and $432 million, respectively, in the first nine months of 2020.

Segment net sales and operating income were $587 million and $138 million, respectively, in the third quarter and $1.7 billion and $394 million, respectively, in the first nine months of 2019.

The increases operating profit in the third quarter and first nine months of 2020 were primarily driven by increased sales in multiple GBUs, particularly Renal Care, Acute Therapies and Pharmaceuticals.

The acquisition of Seprafilm also positively contributed to results in 2020.

Segment net sales and operating income were $1.6 billion and $599 million, respectively, in the first quarter of 2021 and $1.6 billion and $588 million, respectively, in the first quarter of 2020.

The increase in operating profit in the first

quarter was due to favorable sales performance in our Acute Therapies, BioPharma Solutions, Renal Care and Clinical Nutrition product categories, partially offset by unfavorable performance in Pharmaceuticals, Advanced Surgery and Medication Delivery.

Segment net sales and operating income were $738 million and $135 million, respectively, in the first quarter of 2021 and $688 million and $117 million, respectively, in the first quarter of 2020.

The increase in operating profit in the first quarter was due to the favorable impact of foreign exchange rates on results in the first quarter of 2021 as compared to 2020 and the acquisition of the rights to Caelyx and Doxil for specified territories outside of the U.S.

which contributed $10 million of net sales and operating profit to the region.

Segment net sales and operating income were $648 million and $138 million, respectively, in the first quarter of 2021 and were $549 million and $128 million, respectively, in the first quarter of 2020.

The increase in operating profit in the first quarter was due to the favorable impact of foreign exchange rates on results in the first quarter of 2021 as compared to 2020 and favorable sales performance in Acute Therapies.

Corporate and Other

Certain items are maintained at Corporate and are not allocated to a segment.

They primarily include certain foreign currency hedging activities, corporate headquarters costs, certain R&D costs, certain GBU support costs, stock compensation expense, certain employee benefit plan costs, and certain gains, losses, and other charges (such as business optimization, acquisition and integration costs, intangible asset amortization and asset impairments).

The operating loss in the third quarter was higher than the prior-year period primarily due to higher intangible asset amortization expenses and business optimization charges in the current year and prior-year gains recognized for Hurricane Maria insurance recoveries.

The operating loss in the first nine months of 2020 was lower than the prior-year period due to lower business optimization charges and lower intangible asset impairment charges in the current-year period, partially offset by insurance recoveries received in 2019 from a legacy product-related matter and Hurricane Maria, as well as higher investigation and related costs and intangible asset amortization in the current year.

They primarily include corporate headquarters costs, certain R&D costs, certain product category support costs, stock compensation expense, certain employee benefit plan costs, certain foreign currency hedging activities, and certain gains, losses, and other charges (such as business optimization, acquisition and integration costs, intangible asset amortization and asset impairments).

The operating loss in the first quarter of 2021 was higher than the prior-year period primarily due to higher intangible asset amortization expense, restructuring charges and employee benefits expenses in the current year that were partially offset by higher acquisition and integration expenses in the prior year.

LIQUIDITY AND CAPITAL RESOURCES

The following table is a summary of the statement of cash flows for the nine-month periods ended September 30, 2020 and 2019.

Nine months ended September 30,

The following table is a summary of the statement of cash flows for the three-month periods ended March 31, 2021 and 2020.

Three months ended March 31,

(in millions) 2021 2020

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Cash Flows from Operations — Continuing Operations

In the first nine months of 2020, cash provided by operating activities was $1.2 billion, as compared to cash provided by operating activities of $1.3 billion in the first nine months of 2019, a decrease of $123 million.

The decrease was primarily due to a more significant increase in inventory levels in the current year, the timing of customer payments and insurance recoveries received in 2019 from a legacy product-related matter and Hurricane Maria, partially offset by the timing of vendor payments and lower restructuring and employee incentive compensation payments in the current year.

Additionally in the third quarter of 2020, we terminated an interest rate derivative contract which negatively impacted operating cash flows by $7 million for the nine months ended September 30, 2020.

In October 2020, we terminated additional interest rate derivative contracts with a notional balance of $350 million and a liability fair value of $109 million as of September 30, 2020 for $100 million in cash payments, which will be reflected as operating cash outflows in the fourth quarter of 2020.

While we did not experience significant collection issues related to our receivables during the first nine months of 2020, the timing of collection of our receivables may be adversely impacted by the COVID-19 pandemic during the remainder of 2020 and into 2021.

In the first three months of 2021, cash provided by operating activities was $377 million, as compared to cash provided by operating activities of $274 million in the first three months of 2020, an increase of $103 million.

The increase was primarily due to favorable accounts receivable collections and lower employee incentive compensation payments in the current year compared to the prior year, partially offset by a higher increase in inventories in the current year and the timing of vendor payments.

Cash Flows from Investing Activities

In the first nine months of 2020, cash used for investing activities included payments for acquisitions of $466 million, primarily related to Seprafilm and rights to multiple products we acquired, and capital expenditures of $472 million.

In the first nine months of 2019, cash used for investing activities included capital expenditures of $505 million and payments for acquisitions of $186 million, primarily related to the U.S.

rights to multiple products we acquired.

In the first three months of 2021, cash used for investing activities included payments for acquisitions of $381 million, primarily related to Caelyx and Doxil and Transderm Scop, and capital expenditures of $171 million.

In the first three months of 2020, cash used for investing activities included payments for acquisitions of $443 million, primarily related to Seprafilm and rights to multiple products we acquired, and capital expenditures of $172 million.

Cash Flows from Financing Activities

In the first nine months of 2020, cash generated from financing activities included $1.2 billion of net proceeds from the issuance of $750 million of senior notes due in 2025 and $500 million of senior notes due in 2030.

We have used the net proceeds from the senior notes issuances for general corporate purposes, including to strengthen our balance sheet as a precautionary measure in light of the COVID-19 pandemic.

Cash generated from financing activities in the nine months ended September 30, 2020 also included stock issued under employee benefit plans of $180 million and was partially offset by the repayment of borrowings under our Euro-denominated credit facility of €200 million ($225 million) and dividend payments of $348 million.

In the first nine months of 2019, cash generated from financing activities included $1.7 billion of net proceeds from the issuance of €750 million of senior notes due in 2024 and €750 million of senior notes due in 2029 along with stock issued under employee benefit plans of $334 million, partially offset by payments for treasury stock repurchases of $1.0 billion and dividend payments of $310 million.

In the first three months of 2021, cash used in financing activities included payments for treasury stock repurchases of $253 million and dividend payments of $125 million, partially offset by proceeds from stock issued under employee benefit plans of $48 million.

In the first three months of 2020, cash generated from financing activities included $1.2

billion of net proceeds from the issuance of $1.25 billion of senior notes.

Financing activities in the three months ended March 31, 2020 also included receipts from stock issued under employee benefit plans of $66 million and dividend payments of $111 million.

As authorized by the Board of Directors, we repurchase our stock depending upon our cash flows, net debt levels and market conditions.

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The Board of Directors increased this authority by an additional $1.5 billion in each of November 2016 and February 2018, by an additional $2.0 billion in November 2018 and by an additional $1.5 billion in October 2020.

We did not repurchase any shares under this authority in the first nine months of 2020 and had $897 million remaining available under this authorization as of September 30, 2020.

After giving effect to the October 2020 approval, we had $2.4 billion remaining under this authority as of October 29, 2020.

We expect to recommence our share repurchase activity in the fourth quarter of 2020.

We paid $253 million in cash to repurchase approximately 3.6 million shares under this authority pursuant to a Rule 10b5-1 plan in the first three months of 2021 and recognized a liability within accrued expenses and other current liabilities of $47 million for share repurchases that settled in April 2021.

We had $1.6 billion remaining available under this authorization as of March 31, 2021.

Credit Facilities and Access to Capital and Credit Ratings

Credit Facilities

As of September 30, 2020, our U.S.

As of March 31, 2021, our U.S.

dollar-denominated revolving credit facility and Euro-denominated senior revolving credit facility had a maximum capacity of $2.0 billion and €200 million, respectively.

There was no amount outstanding under our U.S.

dollar-denominated and Euro-denominated credit facilities as of September 30, 2020.

There was €200 million ($224 million) outstanding at a 0.91% interest rate under our Euro-denominated credit facility and no amount outstanding under our U.S.

dollar-denominated credit facility as of December 31, 2019.

As of September 30, 2020, we were in compliance with the financial covenants in these agreements.

The non-performance of any financial institution supporting either of the credit facilities would reduce the maximum capacity of these facilities by each institution’s respective commitment.

There were no borrowings outstanding under our U.S.

dollar-denominated and Euro-denominated credit facilities as of March 31, 2021 or December 31, 2020.

As of March 31, 2021, we were in compliance with the financial covenants in these agreements.

The non-performance of any financial institution supporting either of the credit facilities would reduce the maximum capacity of these facilities by the institution’s respective commitment.

Access to Capital and Credit Ratings

We intend to fund short-term and long-term obligations as they mature through cash on hand, future cash flows from operations or by issuing additional debt.

We had $4.4 billion of cash and cash equivalents as of September 30, 2020, with adequate cash available to meet operating requirements in each jurisdiction in which we operate.

We had $3.2 billion of cash and cash equivalents as of March 31, 2021, with adequate cash available to meet operating requirements in each jurisdiction in which we operate.

We invest our excess cash in money market and other funds and diversify the concentration of cash among different financial institutions.

As of September 30, 2020, we had approximately $6.5 billion of long-term debt and finance lease obligations, including current maturities.

As of March 31, 2021, we had approximately $6.1 billion of long-term debt and finance lease obligations, including current maturities.

Subject to market conditions, we regularly evaluate opportunities with respect to our capital structure.

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However, we believe we have sufficient financial flexibility to issue debt, enter into other financing arrangements and attract long-term capital on acceptable terms to support our growth objectives.

Between March and July 2020, Standard & Poor’s, Fitch, and Moody’s reaffirmed our investment grade credit ratings that we disclosed in our 2019 Annual Report.

There have been no changes to our investment grade credit ratings that we disclosed in our 2020 Annual Report.

In 2017, the United Kingdom’s Financial Conduct Authority announced that after 2021 it would no longer compel banks to submit the rates required to calculate the London Interbank Offered Rate (LIBOR) and other interbank offered rates, which have been widely used as reference rates for various securities and financial contracts, including loans, debt and derivatives.

This announcement indicates that the continuation of LIBOR on the current basis is not guaranteed after 2021.

This announcement indicates that the continuation of LIBOR on the current basis was not guaranteed after 2021.

Regulators in the U.S.

and other jurisdictions have been working to replace these rates with alternative reference interest rates that are supported by transactions in liquid and observable markets, such as the Secured Overnight Financing Rate (SOFR).

Currently, our credit facilities and certain of our derivative instruments reference LIBOR-based rates.

In 2020, it was announced that certain U.S.

dollar LIBOR tenors would not cease until 2023.

Currently, our credit facilities reference LIBOR-based rates.

The discontinuation of LIBOR will require these arrangements to be modified in order to replace LIBOR with an alternative reference interest rate, which could impact our cost of funds.

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A summary of our significant accounting policies is included in Note 1 to our consolidated financial statements in our 2020 Annual Report.

Certain of our accounting policies are considered critical, as these policies are the most important to the depiction of our financial statements and require significant, difficult or complex judgments, often employing the use of estimates about the effects of matters that are inherently uncertain.

Certain of our accounting policies are considered critical, as these policies are the most important to the depiction of our

financial statements and require significant, difficult or complex judgments, often employing the use of estimates about the effects of matters that are inherently uncertain.

Such policies are summarized in the Management’s Discussion and Analysis of Financial Condition and Results of Operations section in our 2020 Annual Report.

There have been no significant changes in the application of our critical accounting policies during the first nine months of 2020.

There have been no significant changes in the application of our critical accounting policies during the first three months of 2021.

RECENT ACCOUNTING PRONOUNCEMENTS

Refer to Note 1 in Item 1 of this Quarterly Report on Form 10-Q for information regarding recently adopted accounting pronouncements.

There are no accounting standards issued but not yet effective that we believe will have a material impact on our condensed consolidated financial statements.

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CERTAIN REGULATORY MATTERS

Food and Drug Administration (FDA) commenced an inspection of Claris’ facilities in Ahmedabad, India in July 2017, immediately prior to the closing of the Claris acquisition.

Immediately prior to the closing of our acquisition of Claris Injectables Limited (Claris), the U.S.

Food and Drug Administration (FDA) commenced an inspection of Claris’ facilities in Ahmedabad, India in July 2017.

FDA completed the inspection and subsequently issued a Warning Letter based on observations identified in the 2017 inspection (Claris Warning Letter).

While FDA has not yet re-inspected the facilities, we are continuing to implement corrective and preventive actions to address FDA’s prior observations and other items identified in connection with integrating Claris into our quality systems.

While management cannot speculate on when the Claris Warning Letter will be lifted, management continues to pursue and implement other manufacturing locations, including contract manufacturing organizations, to support the production of new products for distribution in the U.S.

in the meantime.

As of December 31, 2019, we have secured alternative locations to produce a majority of the planned new products for distribution into the U.S.

On May 6, 2019, we received a Show Cause Notice under the Drugs & Cosmetics Act, 1940 and Rules thereunder (Show Cause Notice) from the Commissioner of the Food & Drugs Control Administration in the Gujarat State in Gandhinagar, India (Commissioner).

The Show Cause Notice was issued regarding an April 9, 2019 inspection of our Claris facilities in Ahmedabad, India by the Commissioner.

The Show Cause Notice contained a number of observations of alleged Good Manufacturing Practice related issues across a variety of areas, some of which overlap with the areas covered in the Claris Warning Letter.

We responded to the Show Cause Notice and a follow up inspection occurred in July 2019.

This matter resulted in a two-day suspension order for certain manufacturing operations, which occurred on March 19 and 20, 2020.

This matter is now closed.

In June 2013, we received a Warning Letter from FDA regarding operations and processes at our North Cove, North Carolina and Jayuya, Puerto Rico facilities.

We attended Regulatory Meetings with FDA regarding one or both of these facilities in October 2014, November 2015, July 2017, April 2018 and October 2018.

The Warning Letter addresses observations related to Current Good Manufacturing Practice violations at the two facilities.

The Warning Letter was closed out in September 2019.

As previously disclosed, in the fourth quarter of 2012, we received two investigative demands from the United States Attorney for the Western District of North Carolina for information regarding our quality and manufacturing practices and procedures at our North Cove facility.

In January 2017, the parties resolved the matter by entering into a deferred prosecution agreement and a civil settlement whereby we agreed to pay approximately $18 million and implement certain enhanced compliance measures.

In July 2019, the deferred prosecution agreement expired and, based on our fulfillment of the terms of the agreement, the court dismissed the criminal information previously filed in the case with prejudice.

1 FDA has not yet re-inspected the facilities and management cannot speculate on when the Claris Warning Letter will be lifted.

However, we are continuing to implement corrective and preventive actions to address FDA’s prior observations and other items we identified and management continues to pursue and implement other manufacturing locations, including contract manufacturing organizations, to support the production of new products for distribution in the U.S.

As December 31, 2020, we have secured alternative locations to produce a majority of the planned new products to be manufactured in Ahmedabad for distribution into the U.S.

1 Available online at https://www.fda.gov/ICECI/EnforcementActions/WarningLetters/ucm613538.htm

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This quarterly report on Form 10-Q includes forward-looking statements.

“objective,” “designed,” “priorities,” “goal,” or the negative of those words or other similar expressions is intended to identify forward-looking statements that represent our current judgment about possible future events.

These forward-looking statements may include statements with respect to accounting estimates and assumptions, impacts of the COVID-19 pandemic, litigation-related matters including outcomes, impacts of the internal investigation related to foreign exchange gains and losses and the material weakness identified as a result thereof, future regulatory filings and our R&D pipeline, strategic objectives, sales from new product offerings, credit exposure to foreign governments, potential developments with respect to credit ratings, investment of foreign earnings, estimates of liabilities including those related to uncertain tax positions, contingent payments, future pension plan contributions, costs, discount rates and rates of return, our exposure to financial market volatility and foreign currency and interest rate risks, potential tax liabilities associated with the separation of our biopharmaceuticals business from our medical products businesses, the impact of competition, future sales growth, business development activities (including the acquisitions of Cheetah and Seprafilm), business optimization initiatives, cost saving initiatives, future capital and R&D expenditures, future debt issuances, manufacturing expansion, the sufficiency of our facilities and financial flexibility, the adequacy of credit facilities, tax provisions and reserves, the effective tax rate and all other statements that do not relate to historical facts.

Use of the words “may,” “will,” “would,” “could,” “should,” “believes,” “estimates,” “projects,” “potential,” “expects,” “plans,” “seeks,” “intends,” “evaluates,” “pursues,” “anticipates,” “continues,” “designs,” “impacts,” “affects,” “forecasts,” “target,” “outlook,” “initiative,” “objective,” “designed,” “priorities,” “goal,” or the negative of those words or other similar expressions is intended to identify forward-looking statements that represent our current judgment about possible future events.

(OUS) rights to Caelyx and Doxil, and full U.S.

and specific OUS rights to Transderm Scop), business optimization initiatives, cost saving initiatives, future capital and R&D expenditures, future debt issuances, manufacturing expansion, the adequacy of credit facilities, tax provisions and reserves, the effective tax rate and all other statements that do not relate to historical facts.

These forward-looking statements are based on certain assumptions and analyses made in light of our experience and perception of historical trends, current conditions, and expected future developments as well as other factors that we believe are appropriate in the circumstances.

While these statements represent our judgment on what the future may hold, and we believe these judgments are reasonable, these statements are not guarantees of any events or financial results.

While these statements represent our judgment on what the future may hold, and we believe these judgments are reasonable, these statements are not guarantees of any events or

financial results.

Whether actual future results and developments will conform to expectations and predictions is subject to a number of risks and uncertainties, including the following factors, many of which are beyond our control:

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product quality or patient safety issues, leading to product recalls, withdrawals, launch delays, warning letters, import bans, sanctions, seizures, litigation, or declining sales;

the impact of global economic conditions (including potential trade wars) and continuing public health crises and epidemics, such as the novel strain of coronavirus (COVID-19), including related resurgences, on us and our customers and suppliers, including foreign governments in countries in which we operate;

the impact of global economic conditions (including potential trade wars) and continuing public health crises, pandemics and epidemics, such as the COVID-19 pandemic, including related resurgences, on us and our customers and suppliers, including foreign governments in countries in which we operate;

the continuity, availability and pricing of acceptable raw materials and component supply, and the related continuity of our manufacturing and distribution;

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future actions of (or failures to act or delays in acting by) FDA, the European Medicines Agency or any other regulatory body or government authority (including the SEC, DOJ or the Attorney General of any State) that could delay, limit or suspend product development, manufacturing or sale or result in seizures, recalls, injunctions, monetary sanctions or criminal or civil liabilities, including the continued delay in lifting the warning letter at our Ahmedabad facility or proceedings related to the misstatements in previously reported non-operating income related to foreign exchange gains and losses;

the impacts of the material weakness identified as a result of the internal investigation related to foreign exchange gains and losses and our remediation efforts, including the risk that we may experience additional material weaknesses;

developments that would require the correction of additional misstatements in our previously issued financial statements;

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis