BAXTER INTERNATIONAL INC 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 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 months ended March 31, 2021 and 2020. RESULTS OF OPERATIONS 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 months ended March 31, 2021 and 2020. Three months ended March 31, (in millions) 2021 2020 Gross Margin Intangible asset amortization expense $ (64) $ (52) Business optimization items 1 (21) (10) Acquisition and integration expenses 2 — (7) European medical devices regulation 3 (8) (6) Investigation and related costs 4 — (3) Total Special Items $ (93) $ (78) Impact on Gross Margin Ratio (3.1 pts) (2.8 pts) Selling, General and Administrative (SG&A) Expenses Business optimization items 1 $ 6 $ 21 Acquisition and integration expenses 2 1 3 Investigation and related costs 4 11 14 Total Special Items $ 18 $ 38 Impact on SG&A Ratio 0.6 pts 1.3 pts Research and Development (R&D) Expenses Business optimization items 1 $ — $ 1 Acquisition and integration expenses 2 — 21 Investigation and related costs 4 — 1 Total Special Items $ — $ 23 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 — (3) Total Special Items $ — $ (20) Income Tax Expense Tax effects of special items 5 $ (23) $ (26) Total Special Items $ (23) $ (26) Impact on Effective Tax Rate (1.5 pts) (2.4 pts) 27 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. Additional special items are identified above because they are highly variable, difficult to predict and of a size that may substantially impact our reported results of operations for the period. 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 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 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. 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. 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. 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. NET SALES Three Months Ended March 31, Percent change (in millions) 2021 2020 At actual currency rates At constant currency rates United States $ 1,180 $ 1,217 (3) % (3) % International $ 1,766 1,585 11 % 5 % Total net sales $ 2,946 $ 2,802 5 % 1 % 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. This measure provides information on the change in net sales assuming that foreign currency exchange rates had not changed between the prior and the current period. 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 28 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. In addition to travel restrictions put in place in early 2020, governments have closed borders, imposed prolonged quarantines and may continue those measures or implement other restrictions and requirements in light of the continuing spread of the pandemic. 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 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. • Medication Delivery includes sales of our intravenous (IV) therapies, infusion pumps, administration sets and drug reconstitution devices. • Pharmaceuticals includes sales of our premixed and oncology drug platforms, inhaled anesthesia and critical care products and pharmacy compounding services. • Clinical Nutrition includes sales of our parenteral nutrition (PN) therapies and related products. • Advanced Surgery includes sales of our biological products and medical devices used in surgical procedures for hemostasis, tissue sealing and adhesion prevention. • Acute Therapies includes sales of our continuous renal replacement therapies (CRRT) and other organ support therapies focused in the intensive care unit (ICU). • 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 Renal Care $ 922 $ 870 6 % 2 % Medication Delivery 652 678 (4) % (6) % Pharmaceuticals 552 516 7 % 1 % Clinical Nutrition 234 217 8 % 3 % Advanced Surgery 217 224 (3) % (6) % Acute Therapies 207 156 33 % 28 % BioPharma Solutions 135 114 18 % 11 % Other 27 27 0 % (4) % Total Baxter $ 2,946 $ 2,802 5 % 1 % 29 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 March 31, 2021 % of net sales 2020 % of net sales $ change % change Gross margin $ 1,145 38.9 % $ 1,163 41.5 % $ (18) (1.5) % SG&A $ 627 21.3 % $ 628 22.4 % $ (1) (0.2) % R&D $ 128 4.3 % $ 146 5.2 % $ (18) (12.3) % Gross Margin 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 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. 30 SG&A 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 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. R&D 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 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 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. 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. We currently expect to incur additional pre-tax costs of approximately $12 million through the completion of the initiatives that are currently underway, primarily related to implementation costs. We continue to pursue cost savings initiatives and, to the extent further cost savings opportunities are identified, we may incur additional restructuring charges and costs to implement business optimization programs in future periods. The reductions in our cost base from these actions in the aggregate are expected to provide cumulative annual pre-tax savings of more than $1.2 billion once the remaining actions are complete. The savings from these actions will impact cost of sales, SG&A expenses, and R&D expenses. 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 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 $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. 31 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. Income Taxes 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 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. Segment Results 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 March 31, Three months ended March 31, (in millions) 2021 2020 2021 2020 Americas $ 1,560 $ 1,565 $ 599 $ 588 EMEA 738 688 135 117 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 Americas 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 32 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. EMEA 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. APAC 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 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 three-month periods ended March 31, 2021 and 2020. Three months ended March 31, (in millions) 2021 2020 Cash flows from operations - continuing operations $ 377 $ 274 Cash flows from investing activities (538) (604) Cash flows from financing activities (358) 1,170 Cash Flows from Operations — Continuing Operations 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 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 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 33 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. In July 2012, the Board of Directors authorized the repurchase of up to $2.0 billion of our common stock. 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 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 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 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 $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 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. Our ability to generate cash flows from operations, issue debt or enter into other financing arrangements on acceptable terms could be adversely affected if there is a material decline in the demand for our products or in the solvency of our customers or suppliers, deterioration in our key financial ratios or credit ratings or other significantly unfavorable changes in conditions. 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. 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 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). 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. Our credit facilities include a provision specifying that we and the lenders will negotiate in good faith for the determination of a successor LIBOR rate. CRITICAL ACCOUNTING POLICIES The preparation of financial statements in accordance with U.S. GAAP requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. 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 34 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 three months of 2021. RECENT 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. LEGAL CONTINGENCIES Refer to Note 6 within Item 1 for a discussion of our legal contingencies. Upon resolution of any of these uncertainties, we may incur charges in excess of presently established liabilities. While our liability in connection with certain claims cannot be estimated with any certainty, and although the resolution in any reporting period of one or more of these matters could have a significant impact on our results of operations and cash flows for that period, the outcome of these legal proceedings is not expected to have a material adverse effect on our consolidated financial position. While we believe that we have valid defenses in these matters, litigation is inherently uncertain, excessive verdicts do occur, and we may in the future incur material judgments or enter into material settlements of claims. CERTAIN REGULATORY MATTERS 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). 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 FORWARD-LOOKING INFORMATION This quarterly report on Form 10-Q includes forward-looking statements. 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. 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 , Seprafilm, certain outside of the U.S. (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 35 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: • demand for and market acceptance risks for and competitive pressures related to new and existing products (including challenges with our ability to accurately predict these pressures and the resulting impact on customer inventory levels and the impact of reduced hospital admission rates and elective surgery volumes), and the impact of those products on quality and patient safety concerns; • product development risks, including satisfactory clinical performance, the ability to manufacture at appropriate scale, and the general unpredictability associated with the product development cycle; • our ability to finance and develop new products or enhancements on commercially acceptable terms or at all; • our ability to identify business development and growth opportunities and to successfully execute on business development strategies; • 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, 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; • inability to create additional production capacity in a timely manner or the occurrence of other manufacturing, sterilization or supply difficulties (including as a result of natural disaster, public health crises and epidemics/pandemics, regulatory actions or otherwise); • breaches or failures of our information technology systems or products, including by cyber-attack, data leakage, unauthorized access or theft (as a result of increased remote working arrangements or otherwise); • 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; • developments that would require the correction of additional misstatements in our previously issued financial statements; • failures with respect to our quality, compliance or ethics programs; 36 • future actions of third parties, including third-party payers, the impact of healthcare reform and its implementation, suspension, repeal, replacement, amendment, modification and other similar actions undertaken by the United States or foreign governments, including with respect to pricing, reimbursement, taxation and rebate policies; legislation, regulation and other governmental pressures in the United States or globally, including the cost of compliance and potential penalties for purported noncompliance thereof, all of which may affect pricing, reimbursement, taxation and rebate policies of government agencies and private payers or other elements of our business, including new or amended laws, rules and regulations (such as the California Consumer Privacy Act of 2018, the European Union’s General Data Protection Regulation and proposed regulatory changes of the U.S. Department of Health and Human Services in kidney health policy and reimbursement, which may substantially change the U.S. end stage renal disease market and demand for our peritoneal dialysis products, necessitating significant multi-year capital expenditures, which are difficult to estimate in advance); • the outcome of pending or future litigation, including the opioid litigation and litigation related to the investigation of foreign exchange gains and losses ; • failure to achieve our long-term financial improvement goals; • the impact of competitive products and pricing, including generic competition, drug reimportation and disruptive technologies; • global regulatory, trade and tax policies; • the ability to protect or enforce our owned or in-licensed patent or other proprietary rights (including trademarks, copyrights, trade secrets and know-how) or patents of third parties preventing or restricting our manufacture, sale or use of affected products or technology; • the impact of any goodwill or other intangible asset impairments on our operating results; • any failure by Baxalta or Shire to satisfy its obligations under the separation agreements, including the tax matters agreement, or that certain letter agreement entered into with Shire and Baxalta; • fluctuations in foreign exchange and interest rates; • any changes in law concerning the taxation of income (whether with respect to current or future tax reform), including income earned outside the United States and potential taxes associated with the Base Erosion and Anti-Abuse Tax; • actions by tax authorities in connection with ongoing tax audits; • loss of key employees or inability to identify and recruit new employees; • other factors identified elsewhere in this report and other filings with the SEC, including those factors described in Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2020, all of which are available on our website. Actual results may differ materially from those projected in the forward-looking statements. We do not undertake to update our forward-looking statements. 37