Lantheus Holdings, Inc. 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations Cautionary Note Regarding Forward-Looking Statements Some of the statements contained in this Quarterly Report on Form 10-Q are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). These forward-looking statements, including, in particular, statements about our plans, strategies, prospects and industry estimates are subject to risks and uncertainties. These statements identify prospective information and include words such as “anticipates,” “intends,” “plans,” “seeks,” “believes,” “estimates,” “expects,” “should,” “could,” “predicts,” “hopes” and similar expressions. Examples of forward-looking statements include statements we make relating to our outlook and expectations including, without limitation, in connection with: (i) the impact of the global COVID-19 pandemic on our business, financial conditions or prospects, or on the timing and enrollment of our clinical trials; (ii) continued market expansion and penetration for our commercial products, particularly DEFINITY, in the face of segment competition and potential generic competition as a result of patent and regulatory exclusivity expirations; (iii) the global Molybdenum-99 (“Mo-99”) supply; (iv) our products manufactured at Jubilant HollisterStier (“JHS”) and our plans to develop a modified formulation of DEFINITY (“DEFINITY RT”) with Samsung Biologics (“SBL”); (v) our efforts in new product development, including for PyL, the Progenics prostate cancer diagnostic imaging agent, including our ability to obtain FDA approval of PyL in 2021, and new clinical applications for our products; (vi) our dependence upon third parties for the manufacture and supply of PyL and the timing of that manufacturing capacity becoming available; (vii) the continued integration of the Progenics product and product candidate portfolio following the consummation of the Progenics transaction (the “Progenics Transaction”); (viii) our capacity to use in-house manufacturing; (ix) our ability to commercialize our products in new ex-U.S. markets; (x) the expected timing for commercialization of products we or our strategic partners may develop, including flurpiridaz F 18; and (xi) our ability to develop highly contextualized assessments of disease burden using PSMA AI. Forward-looking statements are based on our current expectations and assumptions regarding our business, the economy and other future conditions. Because forward-looking statements relate to the future, such statements are subject to inherent uncertainties, risks and changes in circumstances that are difficult to predict. Our actual results may differ materially from those contemplated by the forward-looking statements. These statements are neither statements of historical fact nor guarantees or assurances of future performance. The matters referred to in the forward-looking statements contained in this Quarterly Report on Form 10-Q may not in fact occur. We caution you, therefore, against relying on any of these forward-looking statements. Important factors that could cause actual results to differ materially from those in the forward-looking statements include regional, national or global political, economic, business, competitive, market and regulatory conditions and the following: • The impact of the on-going global COVID-19 pandemic on our business, financial condition or prospects, including a decline in the volume of procedures and treatments using our products, potential delays and disruptions to global supply chains, manufacturing activities, logistics, operations, clinical development programs, employees and contractors, the business activities of our suppliers, distributors, customers and other business partners, as well as the effects on worldwide economies, financial markets, social institutions, labor markets and healthcare systems; • Our ability to continue to grow the appropriate use of DEFINITY in suboptimal echocardiograms in the face of segment competition from other echocardiography contrast agents, including Optison from GE Healthcare Limited (“GE Healthcare”) and Lumason from Bracco Diagnostics Inc. (“Bracco”), and potential generic competition as a result of patent and regulatory exclusivity expirations; • The instability of the global Mo-99 supply, including (i) periodic outages at the NTP Radioisotopes (“NTP”) processing facility in South Africa in 2017, 2018 and 2019, and (ii) a recently resolved production volume limitations at the Australian Nuclear Science and Technology Organisation’s (“ANSTO”) new Mo-99 processing facility in Australia, in each case resulting in our inability to fill some or all of the demand for our TechneLite generators on certain manufacturing days during the outage periods; • Our dependence upon third parties for the manufacture and supply of a substantial portion of our products, raw materials and components, including DEFINITY at JHS; • Risks related to the continued integration of the Progenics Transaction, including: • The integration of the Progenics Transaction may involve unexpected costs, liabilities or delays; • The ability of our combined business to retain and hire key personnel and maintain relationships with customers, suppliers and others with whom we or Progenics do business, • Unanticipated risks to our integration plan including in connection with timing, talent, and the potential need for additional resources; • New or previously unidentified manufacturing, regulatory, or research and development issues in the Progenics business; 26 Table of Contents • Risks that the anticipated benefits of the Progenics Transaction or other commercial opportunities may otherwise not be fully realized or may take longer to realize than expected; • Risks that contractual contingent value rights (“CVRs”) we issued as part of the Progenics Transaction may result in substantial future payments and could divert the attention of our management; and • The impact of legislative, regulatory, competitive and technological changes on the combined business; • Risks related to the commercialization of AZEDRA, including in connection with market acceptance and reimbursement, that may cause the product not to meet revenue or operating income expectations; • Risks related to RELISTOR, commercialized by Bausch, and that the revenues generated for us thereby may not meet expectations; • Risks associated with our lead agent in development, PyL, for which we filed a New Drug Application (“NDA”) with the U.S. Food and Drug Administration (“FDA”) on September 29, 2020, including: • Our ability to obtain FDA approval of PyL in 2021; and • Our ability to successfully gain post-approval market acceptance and adequate reimbursement for PyL in the U.S. and on a global basis (other than Europe, where the agent has been previously out-licensed to Curium, and in Australia and New Zealand, where we do not have commercialization rights); • Our dependence upon third parties for the manufacture and supply of PyL and the timing of that manufacturing capacity becoming available; • Risks associated with flurpiridaz F 18, which in 2017 we out-licensed to GE Healthcare, including: • GE Healthcare’s ability to successfully complete the Phase 3 development program, including delays in enrollment that have resulted from the COVID-19 pandemic; • GE Healthcare’s ability to obtain FDA approval; and • GE Healthcare’s ability to gain post-approval market acceptance and adequate reimbursement; • Risks associated with our DEFINITY RT candidate, including our ability to obtain FDA approval and gain post-approval market acceptance and adequate reimbursement; • Risks associated with 1095, including delays in enrollment that have resulted from the COVID-19 pandemic and our ability to successfully complete the Phase 2 study in metastatic castrate-resistant prostate cancer (“mCRPC”); • Our ability to identify and acquire or in-license additional products, businesses or technologies to drive our future growth; • Our ability to protect our intellectual property and the risk of claims that we have infringed on the intellectual property of others; • Risks associated with the technology transfer programs to secure production of our products at additional contract manufacturer sites, including DEFINITY RT at Samsung BioLogics (“SBL”) in South Korea; • Risks associated with our investment in, and construction of, additional specialized manufacturing capabilities at our North Billerica, Massachusetts facility, including our ability to bring the new capabilities online by 2021; • Our dependence on key customers for certain of our products, and our ability to maintain and profitably renew our contracts with those key customers, including GE Healthcare, Cardinal Health (“Cardinal”), United Pharmacy Partners (“UPPI”), Jubilant Radiopharma formerly known as Triad Isotopes, Inc. (“Jubilant Radiopharma”) and PharmaLogic Holdings Corp (“PharmaLogic”); • Risks associated with the manufacturing and distribution of our products and the regulatory requirements related thereto; • The dependence of certain of our customers upon third-party healthcare payors and the uncertainty of third-party coverage and reimbursement rates; • The existence and market success of competitor products; • Uncertainties regarding the impact of U.S. and state healthcare reform measures and proposals on our business, including measures and proposals related to reimbursement for our current and potential future products, controls over drug pricing, drug pricing transparency and generic drug competition; • Our being subject to extensive government regulation and oversight, our ability to comply with those regulations and the costs of compliance; • Potential liability associated with our marketing and sales practices; 27 Table of Contents • The occurrence of any serious or unanticipated side effects with our products; • Our exposure to potential product liability claims and environmental, health and safety liability; • Our ability to introduce new products and adapt to an evolving technology and medical practice landscape; • Risks associated with prevailing economic or political conditions and events and financial, business and other factors beyond our control; • Risks associated with our international operations, including potential global disruptions in air transport due to COVID-19, which could adversely affect our international supply chains for radioisotopes and other critical materials as well as international distribution channels for our commercial products; • Our ability to adequately qualify, operate, maintain and protect our facilities, equipment and technology infrastructure; • Our ability to hire or retain skilled employees and key personnel; • Our ability to utilize, or limitations in our ability to utilize, net operating loss carryforwards to reduce our future tax liability; • Risks related to our outstanding indebtedness and our ability to satisfy those obligations; • Costs and other risks associated with the Sarbanes-Oxley Act and the Dodd-Frank Act, including in connection with becoming a large accelerated filer as of December 31, 2019; • Risks related to the ownership of our common stock; and • Other factors that are described in Part I, Item 1A. “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2019, in Part II, Item 1A. “Risk Factors” in our Quarterly Reports on Form 10-Q for the periods ended March 31, 2020 and June 30, 2020, and in Part II, Item 1A. “Risk Factors” in this Quarterly Report on Form 10-Q. Factors that could cause or contribute to such differences include, but are not limited to, those that are discussed in other documents we file with the SEC. Any forward-looking statement made by us in this Quarterly Report on Form 10-Q speaks only as of the date on which it is made. Factors or events that could cause our actual results to differ may emerge from time to time, and it is not possible for us to predict all of them. We undertake no obligation to publicly update any forward-looking statement, whether as a result of new information, future developments or otherwise, except as may be required by law. Available Information Our global Internet site is www.lantheus.com. We routinely make available important information, including copies of our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act, as soon as reasonably practicable after those reports are electronically filed with, or furnished to, the SEC, free of charge on our website at www.investor.lantheus.com. We recognize our website as a key channel of distribution to reach public investors and as a means of disclosing material non-public information to comply with our disclosure obligations under SEC Regulation FD. Information contained on our website shall not be deemed incorporated into, or to be part of this Quarterly Report on Form 10-Q, and any website references are not intended to be made through active hyperlinks. Our reports filed with, or furnished to, the SEC are also available on the SEC’s website at www.sec.gov, and for Annual Reports on Form 10-K and Quarterly Reports on Form 10-Q, in an iXBRL (Inline Extensible Business Reporting Language) format. iXBRL is an electronic coding language used to create interactive financial statement data over the Internet. The information on our website is neither part of nor incorporated by reference in this Quarterly Report on Form 10-Q. The following discussion and analysis of our financial condition and results of operations should be read together with the condensed consolidated financial statements and the related notes included in Item 1 of this Quarterly Report on Form 10-Q as well as the other factors described in Part I, Item 1A. “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2019, in Part II, Item 1A. “Risk Factors” in our Quarterly Reports on Form 10-Q for the periods ended March 31, 2020 and June 30, 2020, and in Part II, Item 1A. “Risk Factors” in this Quarterly Report on Form 10-Q. Overview Our Business We are a global leader in the development, manufacture and commercialization of innovative diagnostic and therapeutic agents and products that assist clinicians in the diagnosis and treatment of heart disease, cancer and other diseases. For our diagnostic agents, we believe that the resulting improved diagnostic information enables healthcare providers to better detect and characterize, or rule out, disease, potentially achieving improved patient outcomes, reducing patient risk and limiting overall costs for payers and the entire healthcare system. 28 Table of Contents Our commercial products are used by cardiologists, nuclear physicians, radiologists, oncologists, internal medicine physicians, technologists and sonographers working in a variety of clinical settings. We sell our products to radiopharmacies, integrated delivery networks, hospitals, clinics and group practices. We sell our products globally and operate our business in two reportable segments, which are further described below: • U.S. Segment produces and markets our agents and products throughout the U.S. In the U.S., we primarily sell to radiopharmacies, integrated delivery networks, hospitals, clinics and group practices. • International Segment operations consist of production and distribution activities in Puerto Rico and some direct distribution activities in Canada. Additionally, within our International Segment, we have established and maintain third-party distribution relationships under which different products are marketed and sold in Europe, Canada, Australia, Asia-Pacific and Latin America. Acquisition of Progenics On June 19, 2020, we completed the acquisition of Progenics. Progenics is an oncology company focused on developing and commercializing innovative targeted medicines and artificial intelligence to find, fight and follow cancer. Progenics’ portfolio of products and product candidates includes therapeutic agents designed to target cancer (AZEDRA, 1095 and PSMA TTC), as well as imaging agents designed to target PSMA for prostate cancer (PyL and 1404). Progenics’ current revenue is generated from two principal sources: first AZEDRA sales, and second, royalties, development and commercial milestones from strategic partnerships, in particular royalties from Bausch from sales of RELISTOR. Holdings issued 26,844,877 shares of Holdings common stock and 86,630,633 CVRs to former Progenics stockholders in connection with the Merger. Holdings also assumed 34,000 in-the-money Progenics stock options and 6,507,342 out-of-the-money Progenics stock options, each converted into Lantheus Stock Options at an exchange ratio of 0.31. As a result of the Progenics Transaction, Lantheus added the following products and product candidates to its portfolio: 29 Table of Contents Product / Product Candidate Description Status Market Rights Ultra-Orphan Therapeutic AZEDRA (iobenguane I 131) 555 MBq/mL injection Unresectable, locally advanced or metastatic pheochromocytoma or paraganglioma Approved U.S Progenics Prostate Cancer Diagnostics and Therapeutics PyL (18F-DCFPyL) PSMA-targeted PET/CT imaging agent for prostate cancer NDA filed on September 29, 2020 Worldwide (ex. EU, AU, & NZ) Progenics PyL (18F-DCFPyL) PSMA-targeted PET/CT imaging agent for prostate cancer Discussions with European Medicines Agency (EMA) Europe Curium 1095 (I 131 1095) PSMA-targeted small molecule therapeutic for treatment of metastatic prostate cancer Phase 2 Worldwide Progenics PSMA TTC (BAY 2315497) PSMA-targeted antibody conjugate therapeutic for treatment of metastatic prostate cancer Phase 1 Worldwide Bayer 1404 Technetium-99m PSMA-targeted SPECT/CT imaging agent for prostate cancer Discussions with EMA Europe ROTOP Digital Solutions PSMA AI Imaging analysis technology that uses artificial intelligence and machine learning to assist readers in the quantification and standardized reporting of PSMA-targeted imaging Investigational Use Only Worldwide Progenics Automated Bone Scan Index (aBSI) Automated reading and quantification of bone scans of prostate cancer patients using artificial intelligence and deep learning Approved in the U.S. and E.U. 510(k) cleared in the U.S. CE marked (E.U. countries) Worldwide Progenics Automated Bone Scan Index (BONENAVI) Automated reading and quantification of bone scans of prostate cancer patients using artificial intelligence and deep learning Approved Japan FUJIFILM Other Partnerships RELISTOR Subcutaneous Injection (methylnaltrexone bromide) OIC in adults with chronic non-cancer pain or advanced-illness adult patients Approved Worldwide Bausch RELISTOR Tablets (methylnaltrexone bromide) OIC in adults with chronic non-cancer pain Approved U.S. Bausch Leronlimab (PRO 140) HIV Infection CytoDyn is working to provide information required by the FDA in order to resubmit a BLA U.S. CytoDyn See Part I, 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” in our Quarterly Reports on Form 10-Q for the periods ended March 31, 2020 and June 30, 2020 for information regarding certain risks associated with our acquisition of Progenics. Our Expanded Portfolio Our commercial products now include the following: • DEFINITY is a microbubble contrast agent used in ultrasound exams of the heart, also known as echocardiography exams. DEFINITY contains perflutren-containing lipid microspheres and is indicated in the U.S. for use in patients with suboptimal echocardiograms to assist in imaging the left ventricular chamber and left endocardial border of the heart in ultrasound procedures. We believe we are currently the leading provider of ultrasound microbubble contrast agents in the world. • TechneLite is a Technetium (“Tc-99m”) generator that provides the essential nuclear material used by radiopharmacies to radiolabel Cardiolite, Neurolite and other Tc-99m-based radiopharmaceuticals used in nuclear medicine procedures. TechneLite uses Mo-99 as its active ingredient. • Neurolite is an injectable, Tc-99m-labeled imaging agent used with SPECT technology to identify the area within the brain where blood flow has been blocked or reduced due to stroke. 30 Table of Contents • Xenon Xe 133 Gas (“Xenon”) is a radiopharmaceutical gas that is inhaled and used to assess pulmonary function and also to image cerebral blood flow. Our Xenon is manufactured by a third party as a bi-product of Mo-99 production and is processed and finished by us. We believe we are currently the leading provider of Xenon in the U.S. • RELISTOR (methylnaltrexone bromide) is a treatment for opioid-induced constipation (“OIC”) that decreases the constipating side effects induced by opioid pain medications such as morphine and codeine without diminishing their ability to relieve pain. RELISTOR is approved in two forms: a subcutaneous injection (12 mg and 8 mg) and an oral tablet (450 mg once daily). • FDG is an injectable, fluorine-18-radiolabeled imaging agent used with PET technology to identify and characterize tumors in patients undergoing oncologic diagnostic procedures. We manufacture and distribute FDG from our Puerto Rico radiopharmacy. • Cardiolite, also known by its generic name sestamibi, is an injectable, Tc-99m-labeled imaging agent used in myocardial perfusion imaging (“MPI”) procedures to assess blood flow to the muscle of the heart using SPECT. Cardiolite was approved by the FDA in 1990 and its market exclusivity expired in July 2008. Included in Cardiolite revenues are branded Cardiolite and generic sestamibi revenues. • Thallium TI 201 is an injectable radiopharmaceutical imaging agent used in MPI studies to detect cardiovascular disease. We manufacture Thallium using cyclotron technology. • Gallium (Ga 67) is an injectable radiopharmaceutical imaging agent used to detect certain infections and cancerous tumors, especially lymphoma. We manufacture Gallium using cyclotron technology. • AZEDRA (iobenguane I 131) is a radiotherapeutic, approved for the treatment of adult and pediatric patients 12 years and older with iobenguane scan positive, unresectable, locally advanced or metastatic pheochromocytoma or paraganglioma who require systemic anticancer therapy. AZEDRA is the first and only FDA-approved therapy for this indication. • Quadramet is an injectable radiopharmaceutical used to treat severe bone pain associated with osteoblastic metastatic bone lesions. We serve as the direct manufacturer and supplier of Quadramet in the U.S. • Automated Bone Scan Index (“aBSI”) calculates the disease burden of prostate cancer by quantifying the hotspots on bone scans and automatically calculating the bone scan index value, representing the disease burden of prostate cancer shown on the bone scan. This quantifiable and reproducible calculation of the bone scan index value is intended to aid in the diagnosis and treatment of men with prostate cancer and may have utility in monitoring the course of the disease. The Japanese rights to the stand-alone aBSI have been transferred and sold to FUJIFILM Toyama Chemical Co. Ltd. (“FUJIFILM”) under the name BONENAVI ® . The cloud based aBSI was cleared by the FDA for clinical use in the U.S. on August 5, 2019. In February 2020, Progenics received CE marking for the standalone workstation model of aBSI, meeting the quality standards set by the European Economic Area. In September 2020, the FDA granted 510(k) clearance for the use of aBSI on a GE Healthcare system. • Cobalt (Co 57) is a non-pharmaceutical radiochemical used in the manufacture of sources for the calibration and maintenance of SPECT imaging cameras. Sales of our microbubble contrast agent, DEFINITY, are made in the U.S. and Canada through a DEFINITY direct sales team. In the U.S., our nuclear imaging products, including TechneLite, Xenon, Neurolite and Cardiolite, are primarily distributed through commercial radiopharmacies, the majority of which are controlled by or associated with GE Healthcare, Cardinal, UPPI, Jubilant Radiopharma and PharmaLogic. A small portion of our nuclear imaging product sales in the U.S. are made through our direct sales force to hospitals and clinics that maintain their own in-house radiopharmaceutical preparation capabilities. We own one radiopharmacy in Puerto Rico where we sell our own products as well as products of third parties to end-users. AZEDRA is also sold in the U.S. through an AZEDRA direct sales team. RELISTOR was licensed to Bausch, and we collect quarterly royalties based on those sales. We also maintain our own direct sales force in Canada for certain of our products. In Europe, Australia, Asia-Pacific and Latin America, we generally rely on third-party distributors to market, sell and distribute our nuclear imaging and contrast agent products, either on a country-by-country basis or on a multi-country regional basis. Our headquarters are located in North Billerica, MA with offices in New York, NY, Somerset, NJ, San Juan, PR, Montreal, Canada and Lund, Sweden. Product Candidates In addition to our commercial products, we now have an extensive portfolio of product candidates in clinical development, including: 31 Table of Contents • PyL (also known as 18F-DCFPyL) is a fluorine 18-based PSMA-targeted PET imaging agent that enables visualization of primary tumors as well as bone and soft tissue metastases, with potential high clinical utility in the detection of recurrent and/or metastatic prostate cancer. Progenics has completed a clinical development program that consisted of two pivotal clinical studies, which were designed to provide robust, prospective, well-controlled, and pathology- or composite truth standard-verified data to establish the safety and diagnostic performance of PyL across the disease continuum of prostate cancer. The results from these studies provide data in support of the potential of PyL to reliably detect and localize disease, including in patients with low PSA values, and may help enable appropriate disease management, thus supporting the potential use for detection of recurrent or metastatic prostate cancer. We filed the PyL NDA with the FDA on September 29, 2020, requesting priority review. • Flurpiridaz F 18 is a fluorine 18-based PET MPI agent designed to assess blood flow to the heart. On April 25, 2017, we announced entering into a definitive, exclusive Collaboration and License Agreement with GE Healthcare for the agent’s continued Phase 3 development and worldwide commercialization. The second Phase 3 trial is now underway; however, because of the COVID-19 pandemic, enrollment in the global clinical development program had been delayed and has now resumed at a slower recruiting pace. GE Healthcare now expects to complete enrollment by mid-2021 and, assuming regulatory approval, begin commercialization in early 2023. • LMI 1195 is a fluorine 18-based PET imaging agent for the norepinephrine pathway. We are currently designing two Phase 3 clinical trials for the use of LMI 1195 for the diagnosis and management of neuroendocrine tumors in pediatric and adult populations, respectively. The FDA has granted an Orphan Drug designation for the use of LMI 1195 in the management indication. We have also received notice of eligibility for a rare pediatric disease priority review voucher for a subsequent human drug application so long as LMI 1195 is approved by the FDA for its rare pediatric disease indication prior to September 30, 2022. • 1095 (also known as I-131-1095) is a PSMA-targeted iodine-131 labeled small molecule that is designed to deliver a dose of beta radiation directly to prostate cancer cells with minimal impact on the surrounding healthy tissues. Following the removal of the import alert on Centre for Probe Development & Commercialization (“CPDC”), Progenics initiated eleven clinical sites in the U.S. along with the six active sites in Canada to support enrollment in the Company’s multicenter, randomized, controlled, ARROW Phase 2 study in mCRPC. Because of the COVID-19 pandemic, Progenics new enrollment in the Phase 2 trial was paused to minimize the risk to subjects and healthcare providers during the pandemic. For subjects who are active and have been randomized for the study, they continue to receive treatment doses and are being monitored for safety and efficacy in a manner that is permissible by each clinical site. New enrollment in the ARROW Phase 2 study restarted in October 2020. • PSMA TTC is a thorium-227 labeled PSMA-targeted antibody therapeutic. PSMA TTC is designed to deliver a dose of alpha radiation directly to prostate cancer cells with minimal impact on the surrounding healthy tissues. Bayer AG (“Bayer”) has exclusive worldwide rights to develop and commercialize products using our PSMA antibody platform in combination with Bayer’s alpha-emitting radionuclides. Bayer is conducting a Phase 1 trial of PSMA TTC in subjects with mCRPC. • 1404 is a Tc-99m labeled small molecule which binds to PSMA and is used as a SPECT/CT imaging agent to diagnose and detect localized prostate cancer as well as soft tissue and bone metastases. ROTOP has exclusive rights to develop, manufacture and commercialize 1404 in Europe. • PSMA AI is an imaging analysis technology that uses artificial intelligence and machine learning to assist readers in the quantification and standardized reporting of PSMA-targeted imaging. Progenics recently completed a performance study of automated segmentation algorithms with PyL/CT images from our PyL research access initiative. The study demonstrated the efficiency and effectiveness of a fully automated segmentation algorithm of the 49 bones and 12 soft tissue regions of the whole body from PyL-PSMA PET/CT images. This technology provides automated generation of lesion quantification, localization and staging. We believe this leads to highly contextualized assessments of disease burden. • Leronlimab (PRO 140) is an investigational humanized IgG4 mAb that blocks CCR5, a cellular receptor that is important in HIV infection, tumor metastases, and other diseases including certain liver diseases. It is owned by CytoDyn Inc. (“CytoDyn”) pursuant to our agreement with CytoDyn, as described below. In May 2020, CytoDyn announced it submitted a Biologics License Application (“BLA”) to the FDA for approval of Leronlimab in combination therapy for HIV infection. On July 13, 2020, CytoDyn announced that it had received a refusal to file letter from the FDA for the BLA. On August 20, 2020, CytoDyn announced that the FDA recommended that CytoDyn conduct its Type A meeting in writing with the FDA. In September 2020, CytoDyn submitted its questions to the FDA, received written responses from the FDA, and held a telephonic meeting with the FDA to obtain further clarity on what additional information was required by the FDA with respect to CytoDyn’s BLA filing. CytoDyn reports that it is currently working to provide the information required by the FDA in order to resubmit its BLA, which it anticipates will occur by the end of calendar year 2020. Strategic Partnerships In connection with our commercial products and product candidates, we now have a number of strategic partnerships, including: 32 Table of Contents • Bausch Agreement -- Under its agreement with Salix Pharmaceuticals, Inc., a wholly-owned subsidiary of Bausch, Progenics received a $40.0 million development milestone upon U.S. marketing approval for subcutaneous RELISTOR in non-cancer pain patients in 2014, a $50.0 million development milestone for the U.S. marketing approval of an oral formulation of RELISTOR in July 2016, and a $10.0 million sales milestone for RELISTOR achieving U.S. net sales in excess of $100.0 million in 2019. We are also eligible to receive additional one-time sales milestone payments upon achievement of specified U.S. net sales targets, including: U.S. Net Sales Levels in any Single Calendar Year Payment ($) (In thousands) In excess of $150 million 15,000 In excess of $200 million 20,000 In excess of $300 million 30,000 In excess of $750 million 50,000 In excess of $1 billion 75,000 Each sales milestone payment is payable one time only, regardless of the number of times the condition is satisfied, and all six payments could be made within the same calendar year. We are also eligible to receive royalties from Bausch and its affiliates based on the following royalty scale: 15% on worldwide net sales up to $100.0 million, 17% on the next $400.0 million in worldwide net sales, and 19% on worldwide net sales over $500.0 million each calendar year, and 60% of any upfront, milestone, reimbursement or other revenue (net of costs of goods sold, as defined, and territory-specific research and development expense reimbursement) Bausch receives from sublicensees outside the U.S. • GE Healthcare Agreement – Under our April 2017 Collaboration and License Agreement, GE Healthcare will complete the worldwide development of flurpiridaz F 18, pursue worldwide regulatory approvals, and, if successful, lead a worldwide launch and commercialization of the agent, with us collaborating on both development and commercialization through a joint steering committee. We also have the right to co-promote the agent in the U.S. GE Healthcare’s development plan initially focuses on obtaining regulatory approval in the U.S., Japan, Europe and Canada. Under the agreement, we received an upfront cash payment of $5.0 million and are eligible to receive up to $60.0 million in regulatory and sales milestone payments, tiered double-digit royalties on U.S. sales, and mid-single digit royalties on sales outside of the U.S. • Curium Agreement – Curium has licensed exclusive rights to develop and commercialize PyL in Europe. Under the terms of the collaboration, Curium is responsible for the development, regulatory approvals and commercialization of PyL in Europe, and we are entitled to royalties on net sales of PyL. Curium is in discussions with EMA regarding the development path in Europe. • Bayer Agreement – Under Progenics’ April 2016 agreement with a subsidiary of Bayer granting Bayer exclusive worldwide rights to develop and commercialize products using our PSMA antibody platform, in combination with Bayer’s alpha-emitting radionuclides, Progenics received an upfront payment of $4.0 million and milestone payments totaling $5.0 million. We could receive up to an additional $44.0 million in potential clinical and development milestones. We are also entitled to single-digit royalties on net sales, and potential net sales milestone payments up to an aggregate of $130.0 million. In addition, in October 2020, Progenics entered into a PyL Clinical Supply Agreement with Bayer to include PyL in their clinical trial for prostate cancer. PyL will be used by Bayer to assess PSMA expression levels at baseline and during treatment. • CytoDyn Agreement -- Leronlimab (PRO 140) is an investigational humanized IgG4 mAb that blocks CCR5, a cellular receptor that is important in HIV infection, tumor metastases, and other diseases including certain liver diseases. Progenics sold Leronlimab to CytoDyn in 2012, which sale included milestone and royalty payment obligations to Progenics. Under the 2012 agreement, CytoDyn is responsible for all development, manufacturing and commercialization efforts. Pursuant to such agreement, Progenics received $5.0 million in upfront and milestone payments, and we have the right to receive an additional $5.0 million upon the first U.S. or E.U. approval for the sale of the drug, and a 5% royalty on the net sales of approved products. • ROTOP Agreement -- In May 2019, Progenics entered into an exclusive license agreement with ROTOP, a Germany-based developer of radiopharmaceuticals for nuclear medicine diagnostics, to develop, manufacture and commercialize 1404 in Europe. Under the terms of the collaboration, ROTOP is responsible for the development, regulatory approvals and commercialization of 1404 in Europe while we are entitled to double-digit, tiered royalties on net sales of 1404 in Europe. ROTOP is in discussions with EMA regarding the development path in Europe. 33 Table of Contents • FUJIFILM Agreement -- In June 2019, Progenics entered into a transfer agreement with FUJIFILM for the rights to the aBSI product in Japan for use under the name BONENAVI. Under the terms of the transfer agreement, FUJIFILM acquired, by a combination of purchase and license, the Japanese software, source code, supporting data and all Japanese patents associated with the aBSI product from Progenics for use in Japan. In exchange, Progenics received $4.0 million in an upfront payment and FUJIFILM agreed to pay Progenics support and service fees for aBSI and other AI products over the next three years in Japan. BONENAVI has been licensed to FUJIFILM for use in Japan since 2011. • Regeneron Agreement – In June 2020, Progenics entered into a PyL Clinical Supply Agreement with Regeneron Pharmaceuticals, Inc. (“Regeneron”) under which Progenics will supply PyL to Regeneron as an imaging agent to evaluate and follow subjects for a Phase 1/2 clinical study of Regeneron’s PSMA-targeted mCRPC therapeutic candidate. Key Factors Affecting Our Results Our business and financial performance have been, and continue to be, affected by the following: COVID-19 Pandemic The global COVID-19 pandemic has had, and will continue to have, a material impact on our business. Towards the end of the first quarter of 2020 we began to experience, and through the date of this filing we are continuing to experience, impacts to our business and operations related to the COVID-19 pandemic, including the impact of stay-at-home mandates and advisories, and a decline in the volume of procedures and treatments using our products. For example, there has been a substantial reduction in pulmonary ventilation studies in which our Xenon-133 gas is used because of institutional concerns and professional society guidelines relating to a hospital’s ability to adequately decontaminate examination rooms and related equipment used to administer those studies during the COVID-19 pandemic, thereby reducing Xenon-133 sales. We cannot predict the magnitude or duration of the pandemic’s impact on our business. As a result of the COVID-19 pandemic, we undertook a thorough analysis of all of our discretionary expenses. In the first quarter of 2020 we implemented certain cost reduction initiatives. For most of the second quarter of 2020, we reduced our work week from five days to four days and reduced the pay for our personnel by varying amounts, depending on level of seniority. We can give no assurances that we will not have to take additional cost reduction measures if the pandemic continues to adversely affect the volume of procedures and treatments using our products. During the second quarter of 2020, Progenics also implemented certain cost reduction initiatives, and new enrollment in the Phase 2 trial of 1095 in mCRPC patients was paused to minimize the risk to subjects and healthcare providers during the pandemic. New enrollment in that study restarted in October 2020. GE Healthcare, our development and commercialization partner for flurpiridaz F 18, also delayed enrollment in the second Phase 3 clinical trial because of the pandemic and resumed enrollment in the third quarter of 2020. While we are currently unable to estimate the impact of COVID-19 on our overall 2020 operations and financial results, we ended the third quarter of 2020 with $88.0 million of cash and cash equivalents. With our available liquidity and prudent expense management, we believe we will be able to maintain a state of preparedness to resume full business activities to support our customers as external conditions allow, although we can give no assurances that we will have sufficient liquidity if the pandemic continues to adversely affect the volume of procedures and treatments using our products for an extended period of time. Anticipated Continued Growth of DEFINITY and Expansion of Our Ultrasound Microbubble Franchise We believe the market opportunity for our ultrasound microbubble contrast agent, DEFINITY, continues to be significant. DEFINITY is our fastest growing and highest margin commercial product. We anticipate DEFINITY sales will continue to grow over the longer term. As we continue to educate the physician and healthcare provider community about the benefits and risks of DEFINITY, we believe we will be able to continue to grow the appropriate use of DEFINITY in suboptimal echocardiograms. In a U.S. market with three echocardiography contrast agents approved by the FDA, we estimate that DEFINITY had over 80% of the market as of December 31, 2019. As we continue to pursue expanding our microbubble franchise, our activities include: • Patents - We continue to actively pursue additional patents in connection with DEFINITY, both in the U.S. and internationally. In the U.S., three of our recently issued method of use patents covering DEFINITY were listed in the Orange Book. We now have a total of four Orange Book-listed method of use patents, one of which expires in 2035 and three of which expire in 2037, as well as additional manufacturing patents that are not Orange Book-listed expiring in 2021, 2023 and 2037. Outside of the U.S., while our DEFINITY patent protection and regulatory exclusivity have generally expired, we are 34 Table of Contents currently prosecuting additional patents to try to obtain similar method of use and manufacturing patent protection as granted in the U.S. Hatch-Waxman Act - Even though our longest duration Orange Book-listed DEFINITY patent extends until March 2037, because our Orange Book-listed composition of matter patent expired in June 2019, we may face generic DEFINITY challengers in the near to intermediate term. Under the Hatch-Waxman Act, the FDA can approve Abbreviated New Drug Applications (“ANDAs”) for generic versions of drugs if the ANDA applicant demonstrates, among other things, that (i) its generic candidate is the same as the innovator product by establishing bioequivalence and providing relevant chemistry, manufacturing and product data, and (ii) the marketing of that generic candidate does not infringe an Orange Book-listed patent. With respect to any Orange Book-listed patent covering the innovator product, the ANDA applicant must give a notice to the innovator (a “Notice”) that the ANDA applicant certifies that its generic candidate will not infringe the innovator’s Orange Book-listed patent or that the Orange Book-listed patent is invalid. The innovator can then challenge the ANDA applicant in court within 45 days of receiving that Notice, and FDA approval to commercialize the generic candidate will be stayed (that is, delayed) for up to 30 months (measured from the date on which a Notice is received) while the patent dispute between the innovator and the ANDA applicant is resolved in court. The 30 month stay could potentially expire sooner if the courts determine that no infringement had occurred or that the challenged Orange Book-listed patent is invalid or if the parties otherwise settle their dispute. As of the date of filing of this Quarterly Report on Form 10-Q, we have not received any Notice from an ANDA applicant. If we were to (i) receive any such Notice in the future, (ii) bring a patent infringement suit against the ANDA applicant within 45 days of receiving that Notice, and (iii) successfully obtain the full 30 month stay, then the ANDA applicant would be precluded from commercializing a generic version of DEFINITY prior to the expiration of that 30 month stay period and, potentially, thereafter, depending on how the patent dispute is resolved. Solely by way of example and not based on any knowledge we currently have, if we received a Notice from an ANDA applicant in November 2020 and the full 30 month stay was obtained, then the ANDA applicant would be precluded from commercialization until at least May 2023. If we received a Notice some number of months in the future and the full 30 month stay was obtained, the commercialization date would roll forward in the future by the same calculation. • Modified Formulation - We are developing DEFINITY RT, a modified formulation of DEFINITY, at SBL. We believe DEFINITY RT will provide an enhanced product profile enabling storage as well as shipment at room temperature (DEFINITY’s current formulation requires refrigerated storage), will give clinicians additional choice, and will allow for greater utility of this formulation in broader clinical settings. We have a composition of matter patent on DEFINITY RT which runs through 2035. If DEFINITY RT is approved by the FDA, then this patent would be eligible to be listed in the Orange Book. We currently believe that, if approved by the FDA, DEFINITY RT could become commercially available in early 2021, although that timing cannot be assured. Given its physical characteristics, DEFINITY RT may also be well suited for inclusion in kits requiring microbubbles for other indications and applications (including in kits developed by third parties of the type described in the next paragraph). • Vialmix RFID – In August 2020, the FDA approved a supplemental NDA for our next-generation activation device designed specifically for both DEFINITY and DEFINITY RT product candidate. The activation rate and time are controlled by Vialmix RFID through the use of radio-frequency identification technology (“RFID”) to ensure reproducible activation of DEFINITY. The RFID tag, which is affixed to the vial label, enables the DEFINITY vial to be appropriately activated when utilized with the Vialmix RFID activation device. A U.S. issued patent on the use of the new Vialmix RFID with an expiration date of 2037 has been listed in the Orange Book, and additional patent applications have been submitted in major markets throughout the world. • New Clinical Applications - As we continue to look for other opportunities to expand our microbubble franchise, we are evaluating new indications and clinical applications beyond echocardiography and contrast imaging generally. • In April 2019, we announced a strategic development and commercial collaboration with Cerevast Medical, Inc. (“Cerevast”) in which our microbubble will be used in connection with Cerevast’s ocular ultrasound device to target improving blood flow in occluded retinal veins in the eye. Retinal vein occlusion is one of the most common causes of vision loss worldwide. • In December 2019, we announced a strategic commercial supply agreement with CarThera for the use of our microbubbles in combination with SonoCloud, a proprietary implantable device in development for the treatment of recurrent glioblastoma. Glioblastoma is a lethal and devastating form of brain cancer with median survival of 15 months after diagnosis. • In October 2020, we announced a strategic collaboration with Insightec Ltd., an Israeli company (“Insightec”) which will use our microbubbles in connection with Insightec’s transcranial guided focused ultrasound device for the treatment of glioblastoma as well as other neurodegenerative conditions. 35 Table of Contents • In-House Manufacturing - We have completed construction of specialized, in-house manufacturing capabilities at our North Billerica, Massachusetts facility for DEFINITY and, potentially, other sterile vial products. We believe the investment in these efforts will allow us to better control DEFINITY manufacturing and inventory, reduce our costs in a potentially more price competitive environment, and provide us with supply chain redundancy. We currently expect to be in a position to use this in-house manufacturing capability in 2021, although that timing cannot be assured. • DEFINITY in China - On March 19, 2020 in connection with our Chinese development and distribution arrangement with Double Crane Pharmaceutical Company, we filed an Import Drug License application with the National Medical Products Administration, or the NMPA, for the use of DEFINITY for the echocardiography indication. We believe this is an important milestone in our efforts to commercialize DEFINITY in China. Double Crane is also in the process of analyzing the clinical results relating to the liver and kidney indications and will also work with us to prepare an Import Drug License application for those indications. Global Mo-99 Supply We currently have Mo-99 supply agreements with Institute for Radioelements (“IRE”), running through December 31, 2022, and renewable by us on a year-to-year basis thereafter, and with NTP and ANSTO, running through December 31, 2021. We also have a Xenon supply agreement with IRE which runs through June 30, 2022, and which is subject to further extension. Although we have a globally diverse Mo-99 supply with IRE in Belgium, NTP in South Africa, and ANSTO in Australia, we still face supplier and logistical challenges in our Mo-99 supply chain. The NTP processing facility had periodic outages in 2017, 2018 and 2019. When NTP was not producing, we relied on Mo-99 supply from both IRE and ANSTO to limit the impact of the NTP outages. In the second quarter of 2019, ANSTO experienced technical issues in its existing Mo-99 processing facility which resulted in a decrease in Mo-99 available to us. In addition, as ANSTO transitioned from its existing Mo-99 processing facility to its new Mo-99 processing facility in the second quarter of 2019, ANSTO experienced start-up and transition challenges, which also resulted in a decrease in Mo-99 available to us. Further, starting in late June 2019 until April 2020, ANSTO’s new Mo-99 processing facility had production volume limitations imposed on it by the Australian Radiation Protection and Nuclear Safety Agency which limited our ability to receive Mo-99 from ANSTO. During that time we relied on IRE and NTP to limit the impact of those ANSTO outages and volume limitations. As ANSTO increases its production volume over the course of 2020, we expect to receive increasing supply from ANSTO. Because of the COVID-19 pandemic, in the second quarter of 2020 we experienced challenges receiving regularly scheduled orders of Mo-99 from our global suppliers due to the partial or complete delay or cancellation of international flights by our airfreight carriers. As of the filing of this report, these COVID-19-related transportation challenges have been largely eliminated. Because of these various supply chain constraints, depending on reactor and processor schedules and operations, we have historically not been able to fill some or all of the demand for our TechneLite generators on certain manufacturing days. ANSTO’s new Mo-99 processing facility could eventually increase ANSTO’s Mo-99 production capacity from approximately 2,000 curies per week to 3,500 curies per week with additional committed financial and operational resources. At full ramp-up capacity, ANSTO’s new facility could provide incremental supply to our globally diversified Mo-99 supply chain and therefore mitigate some risk among our Mo-99 suppliers, although we can give no assurances to that effect. In addition, we also have a strategic arrangement with SHINE Medical Technologies, Inc. (“SHINE”), a Wisconsin-based company, for the future supply of Mo-99. Under the terms of that agreement, SHINE will provide us Mo-99 once SHINE’s facility becomes operational and receives all necessary approvals, which SHINE now estimates will occur in 2022. Inventory Supply We obtain a substantial portion of our imaging agents from a third-party supplier. JHS is currently our sole source manufacturer of DEFINITY, Neurolite, Cardiolite and evacuation vials, the latter being an ancillary component for our TechneLite generators. We are currently seeking approval from certain foreign regulatory authorities for JHS to manufacture certain of our products. Until we receive these approvals, we will face continued limitations on where we can sell those products outside of the U.S. In addition to JHS, we are also currently working to secure additional alternative suppliers for our key products as part of our ongoing supply chain diversification strategy. We have ongoing development and technology transfer activities for DEFINITY RT with SBL, which is located in South Korea. We currently believe that if approved by the FDA, DEFINITY RT could be commercially available in 2021, although that timing cannot be assured. We have also completed construction of specialized, in-house manufacturing capabilities at our North Billerica, Massachusetts facility, as part of a larger strategy to create a competitive advantage in specialized manufacturing, which will also allow us to optimize our costs and reduce our supply chain risk. We can give no assurance as to when or if we will be successful in these efforts or that we will be able to successfully manufacture any additional commercial products at our North Billerica, Massachusetts facility. 36 Table of Contents Radiopharmaceuticals are decaying radioisotopes with half-lives ranging from a few hours to several days. These products cannot be kept in inventory because of their limited shelf lives and are subject to just-in-time manufacturing, processing and distribution, which takes place at our North Billerica, Massachusetts facility. Research and Development Expenses To remain a leader in the marketplace, we have historically made substantial investments in new product development, including, among other things, our flurpiridaz F 18 clinical development program, the expenses of which are now being borne by GE Healthcare. The Progenics Transaction brings additional and substantial clinical development expense. We filed the PyL NDA with the FDA on September 29, 2020, requesting priority review. For 1095, the ARROW Phase 2 study in mCRPC patients had been paused to minimize risk to subjects and healthcare providers during the pandemic, and new enrollment in that study restarted in October 2020. In addition, the Company’s development activities for PSMA AI are on-going. Our investments in these additional clinical activities will increase our operating expenses and impact our results of operations and cash flow, and we can give no assurances as to whether any of these clinical development candidates will be approved. New Initiatives In addition to integrating the new assets and programs resulting from the Progenics Transaction, we continue to seek ways to further expand our portfolio of products and product candidates and how best to optimize the value of our current assets, evaluating a number of different opportunities to collaborate with others or to acquire or in-license additional products, product candidates, businesses and technologies to drive our future growth. As the Progenics Transaction indicates, we are particularly interested in expanding our presence in oncology, in both radiotherapeutics and diagnostics. In May 2019, we commenced an initiative to build out our Pharma Services capabilities by entering into a strategic collaboration and license agreement with NanoMab Technology Limited, a privately-held biopharmaceutical company focusing on the development of next generation radiopharmaceuticals for cancer precision medicine. We believe this collaboration will provide the first broadly-available PD-L1 imaging biomarker research tool to pharmaceutical companies and academic centers conducting clinical trials on immuno-oncology treatments, including combination therapies. We have also expanded our Pharma Services offering to include PyL for pharmaceutical companies developing PSMA-targeted therapies and have entered into PyL clinical supply agreements with both Regeneron and Bayer for use of PyL in prostate cancer clinical trials. We can give no assurance as to when or if any of these Pharma Services collaborations will be successful or accretive to earnings. Results of Operations The following is a summary of our consolidated results of operations: Three Months Ended September 30, Nine Months Ended September 30, (in thousands) 2020 2019 2020 2019 Revenues $ 88,544 $ 85,776 $ 245,258 $ 257,991 Cost of goods sold 52,284 44,187 145,148 127,745 Gross profit 36,260 41,589 100,110 130,246 Operating expenses Sales and marketing 11,609 10,151 28,044 31,496 General and administrative 18,217 18,061 55,586 43,943 Research and development 11,684 4,860 20,150 15,584 Total operating expenses 41,510 33,072 103,780 91,023 Operating (loss) income (5,250) 8,517 (3,670) 39,223 Interest expense 2,808 2,356 6,668 11,491 Loss on extinguishment of debt — — — 3,196 Other (income) loss (596) 804 (1,702) (1,695) (Loss) income before income taxes (7,462) 5,357 (8,636) 26,231 Income tax (benefit) expense (1,076) 501 1,425 5,014 Net (loss) income $ (6,386) $ 4,856 $ (10,061) $ 21,217 37 Table of Contents Comparison of the Periods Ended September 30, 2020 and 2019 Revenues Segment revenues are summarized by product as follows: Three Months Ended September 30, Nine Months Ended September 30, (in thousands) 2020 2019 Change $ Change % 2020 2019 Change $ Change % U.S. DEFINITY $ 53,792 $ 50,917 $ 2,875 5.6 % $ 148,346 $ 154,099 $ (5,753) (3.7) % TechneLite 17,652 18,281 (629) (3.4) % 52,599 55,204 (2,605) (4.7) % Other nuclear 11,571 9,355 2,216 23.7 % 26,437 28,006 (1,569) (5.6) % Rebates and allowances (5,540) (3,903) (1,637) 41.9 % (13,763) (12,035) (1,728) 14.4 % Total U.S. revenues 77,475 74,650 2,825 3.8 % 213,619 225,274 (11,655) (5.2) % International DEFINITY 1,637 1,478 159 10.8 % 4,239 4,036 203 5.0 % TechneLite 3,837 3,466 371 10.7 % 10,897 10,794 103 1.0 % Other nuclear 5,596 6,186 (590) (9.5) % 16,507 17,901 (1,394) (7.8) % Rebates and allowances (1) (4) 3 (75.0) % (4) (14) 10 (71.4) % Total International revenues 11,069 11,126 (57) (0.5) % 31,639 32,717 (1,078) (3.3) % Worldwide DEFINITY 55,429 52,395 3,034 5.8 % 152,585 158,135 (5,550) (3.5) % TechneLite 21,489 21,747 (258) (1.2) % 63,496 65,998 (2,502) (3.8) % Other nuclear 17,167 15,541 1,626 10.5 % 42,944 45,907 (2,963) (6.5) % Rebates and allowances (5,541) (3,907) (1,634) 41.8 % (13,767) (12,049) (1,718) 14.3 % Total revenues $ 88,544 $ 85,776 $ 2,768 3.2 % $ 245,258 $ 257,991 $ (12,733) (4.9) % The increase in the U.S. segment revenues for the three months ended September 30, 2020, as compared to the prior year period is primarily due to a $2.9 million increase in DEFINITY revenue as a result of higher unit volumes and a $2.2 million increase in Other nuclear revenue driven by the addition of the Progenics revenue portfolio, offset in part by lower Xenon volume as a result of COVID-19. TechneLite revenue was $0.6 million lower driven by COVID-19 impact, partially offset by supplier disruptions in 2019. Rebate and allowance provisions drove an additional decrease of $1.6 million. The decrease in the U.S. segment revenues for the nine months ended September 30, 2020, as compared to the prior year period is primarily due to a $5.8 million decrease in DEFINITY revenue as a result of lower unit volumes as a result of COVID-19 that was concentrated in the second quarter, offset, in part, by third quarter performance. TechneLite revenue was $2.6 million lower driven by COVID-19, partially offset by supplier disruptions in 2019. Other Nuclear revenue was lower than the prior year primarily associated with lower Xenon volume as a result of COVID-19, offset, in part, by the addition of Progenics revenue portfolio. The decrease in the International segment revenues for the three months ended September 30, 2020, as compared to the prior year period is primarily due to $0.6 million lower revenue in Other nuclear product as a result of COVID-19, offset, in part, by $0.4 million higher TechneLite revenue driven by supplier disruptions in 2019 and $0.2 million higher DEFINITY revenue driven by increased volume. The decrease in the International segment revenues for the nine months ended September 30, 2020, as compared to the prior year period is primarily due to lower volume as a result of COVID-19. Offsetting these decreases was an increase in DEFINITY revenue of $0.2 million driven by volume. 38 Table of Contents Rebates and Allowances Estimates for rebates and allowances represent our estimated obligations under contractual arrangements with third parties. Rebate accruals and allowances are recorded in the same period the related revenue is recognized, resulting in a reduction to revenue and the establishment of a liability which is included in accrued expenses. These rebates and allowances result from performance-based offers that are primarily based on attaining contractually specified sales volumes and growth, Medicaid rebate programs for our products, administrative fees of group purchasing organizations and certain distributor related commissions. The calculation of the accrual for these rebates and allowances is based on an estimate of the third-party’s buying patterns and the resulting applicable contractual rebate to be earned over a contractual period. An analysis of the amount of, and change in, reserves is summarized as follows: (in thousands) Rebates and Allowances Balance, January 1, 2020 $ 6,985 Provision related to current period revenues 13,816 Adjustments relating to prior period revenues (49) Payments or credits made during the period (13,266) Balance, September 30, 2020 $ 7,486 Gross Profit Gross profit is summarized by segment as follows: Three Months Ended September 30, Nine Months Ended September 30, (in thousands) 2020 2019 Change $ Change % 2020 2019 Change $ Change % U.S. $ 33,282 $ 38,614 $ (5,332) (13.8) % $ 93,042 $ 122,198 $ (29,156) (23.9) % International 2,978 2,975 3 0.1 % 7,068 8,048 (980) (12.2) % Total gross profit $ 36,260 $ 41,589 $ (5,329) (12.8) % $ 100,110 $ 130,246 $ (30,136) (23.1) % The decrease in the U.S. segment gross profit for the three months ended September 30, 2020, as compared to the prior year period is primarily due to lower Xenon, TechneLite and other nuclear product unit volumes due to COVID-19, along with a decrease driven by rebate and allowance provisions. These decreases were offset, in part, by and increase in DEFINITY gross profit driven by an increase in volume over the prior year period. The decrease in the U.S. segment gross profit for the nine months ended September 30, 2020, as compared to the prior year period is primarily due to lower DEFINITY, TechneLite, and Xenon unit volumes due to COVID-19 and an asset impairment loss on other nuclear products. The decrease in the International segment gross profit for the nine months ended September 30, 2020, as compared to the prior year period is primarily due to lower other nuclear product unit volumes due to COVID-19. Sales and Marketing Sales and marketing expenses consist primarily of salaries and other related costs for personnel in field sales, marketing and customer service functions. Other costs in sales and marketing expenses include the development and printing of advertising and promotional material, professional services, market research and sales meetings. Sales and marketing expense is summarized by segment as follows: 39 Table of Contents Three Months Ended September 30, Nine Months Ended September 30, (in thousands) 2020 2019 Change $ Change % 2020 2019 Change $ Change % U.S. $ 11,176 $ 9,571 $ 1,605 16.8 % $ 26,613 $ 29,909 $ (3,296) (11.0) % International 433 580 (147) (25.3) % 1,431 1,587 (156) (9.8) % Total sales and marketing $ 11,609 $ 10,151 $ 1,458 14.4 % $ 28,044 $ 31,496 $ (3,452) (11.0) % The increase in the U.S. segment sales and marketing expenses for the three months ended September 30, 2020, as compared to the prior year period is primarily due to the addition of the Progenics business and increase in market research which was partially offset by reduced marketing promotional programs and travel due to COVID-19 and lower employee related costs. The Progenics business contributed approximately $2.7 million of expense to the U.S. segment for the three months ended September 30, 2020. The decrease in the U.S. segment sales and marketing expenses for the nine months ended September 30, 2020, as compared to the prior year period is primarily due to reduced marketing promotional programs and travel due to COVID-19, as well as lower employee-related costs offset by the addition of the Progenics business. The Progenics business contributed approximately $3.0 million of expense to the U.S. segment for the nine months ended September 30, 2020. The decrease in the International segment sales and marketing expenses for the three and nine months ended September 30, 2020, as compared to the prior year period is primarily due to lower marketing promotional activities. General and Administrative General and administrative expenses consist of salaries and other related costs for personnel in executive, finance, legal, information technology and human resource functions. Other costs included in general and administrative expenses are professional fees for information technology services, external legal fees, consulting and accounting services as well as bad debt expense, certain facility and insurance costs, including director and officer liability insurance. General and administrative expense is summarized by segment as follows: Three Months Ended September 30, Nine Months Ended September 30, (in thousands) 2020 2019 Change $ Change % 2020 2019 Change $ Change % U.S. $ 17,873 $ 17,926 $ (53) (0.3) % $ 54,950 $ 43,597 $ 11,353 26.0 % International 344 135 209 154.8 % 636 346 290 83.8 % Total general and administrative $ 18,217 $ 18,061 $ 156 0.9 % $ 55,586 $ 43,943 $ 11,643 26.5 % The U.S. segment general and administrative expenses decreased for the three months ended September 30, 2020 as compared to the prior year period. The primary driver in the current year was lower acquisition-related costs associated with the acquisition of Progenics offset by unrealized losses related to changes in fair value of contingent consideration liabilities and the addition of the Progenics business. The Progenics business contributed approximately $3.4 million of expense to the U.S. segment for the three months ended September 30, 2020. The U.S. segment general and administrative expenses increased for the nine months ended September 30, 2020 as compared to the prior year period. The primary driver was an increase in acquisition-related costs associated with the acquisition of Progenics and the addition of the Progenics business offset by lower medical insurance costs. The Progenics business contributed approximately $6.3 million of expense to the U.S. segment for the nine months ended September 30, 2020. The International segment general and administrative expenses increased for the three and nine months ended September 30, 2020 as compared to the prior year period driven primarily by the addition of the Progenics business and an insurance benefit received in 2019 which was partially offset by lower employee related costs in 2020. The Progenics business contributed approximately $0.2 million of expense to the International segment for each of the three and nine months ended September 30, 2020. 40 Table of Contents Research and Development Research and development expenses relate primarily to the development of new products to add to our portfolio and costs related to our medical affairs, medical information and regulatory functions. We do not allocate research and development expenses incurred in the U.S. to our International segment. Research and development expense is summarized by segment as follows: Three Months Ended September 30, Nine Months Ended September 30, (in thousands) 2020 2019 Change $ Change % 2020 2019 Change $ Change % U.S. $ 10,856 $ 4,729 $ 6,127 129.6 % $ 19,114 $ 15,031 $ 4,083 27.2 % International 828 131 697 532.1 % 1,036 553 483 87.3 % Total research and development $ 11,684 $ 4,860 $ 6,824 140.4 % $ 20,150 $ 15,584 $ 4,566 29.3 % The increase in the U.S. segment research and development expenses for the three and nine months ended September 30, 2020, as compared to the prior year is primarily driven by the addition of the Progenics business, including the PyL NDA filing fee, partially offset by clinical research expenses related to DEFINITY studies completing and lower employee related expenses. The Progenics business contributed approximately $7.6 million and $8.7 million of expense to the U.S. segment for the three and nine months ended September 30, 2020, respectively. The increase in the International segment research and development expenses for the three and nine months ended September 30, 2020, as compared to the prior year period is primarily driven by the addition of the Progenics business partially offset by regulatory costs related to Brexit matters. The Progenics business contributed approximately $0.6 million of expense to the International segment for the three and nine months ended September 30, 2020. Interest Expense Interest expense decreased by approximately $4.8 million for the nine months ended September 30, 2020 as compared to the prior year period due to the refinancing of our existing indebtedness in the second quarter of 2019 which reduced our underlying principal amount and decreased interest rates on our long-term debt. Income Tax (Benefit) Expense Income tax (benefit) expense is summarized as follows: Three Months Ended September 30, Nine Months Ended September 30, (in thousands) 2020 2019 Change $ Change % 2020 2019 Change $ Change % Income tax (benefit) expense $ (1,076) $ 501 $ (1,577) (314.8) % $ 1,425 $ 5,014 $ (3,589) (71.6) % The income tax benefit recorded for the three months ended September 30, 2020 was primarily due to the pre-tax losses incurred during the quarter, partially offset by the accrual of interest associated with uncertain tax positions. The income tax expense recorded for the nine months ended September 30, 2020 was primarily due to the recording of non-deductible transaction costs and the accrual of interest associated with uncertain tax positions, partially offset by the income tax benefit recorded due to the pre-tax losses incurred during the nine month period. We regularly assess our ability to realize our deferred tax assets. Assessing the realizability of deferred tax assets requires significant management judgment. In determining whether our deferred tax assets are more-likely-than-not realizable, we evaluate all available positive and negative evidence, and weigh the objective evidence and expected impact. As of September 30, 2020, we recorded valuation allowances of $3.2 million against the net deferred tax assets of certain foreign subsidiaries, as well as a valuation allowance of $0.7 million against net U.S. deferred tax assets due to the potential expiration of certain tax losses and state tax credits prior to utilization. On June 19, 2020, we acquired the stock of Progenics Pharmaceuticals, Inc. in a transaction that is expected to qualify as a tax-deferred reorganization under Section 368 of the Internal Revenue Code of 1986, as amended. The transaction resulted in an 41 Table of Contents ownership change of Progenics under Section 382 and a limitation on the utilization of Progenics’ pre-transaction tax attributes. All of Progenics’ pre-transaction research credits and Orphan drug credits have been removed from the balance sheet, and the gross carrying value of the tax loss carryforwards reduced to their realizable value on the opening balance sheet, in accordance with the Section 382 limitation. Our effective tax rate for each reporting period is presented as follows: Nine Months Ended September 30, 2020 2019 Effective tax rate (16.5)% 19.1% Our effective tax rate in fiscal 2020 differs from the U.S. statutory rate of 21% principally due to the impact of U.S. state taxes, non-deductible transaction costs, and the accrual of interest on uncertain tax positions. The decrease in the effective income tax rate for the nine months ended September 30, 2020 as compared to the prior year period is primarily due to the lower amount of pre-tax income and a lower tax benefit of stock compensation deductions in the current nine month period. 42 Table of Contents Liquidity and Capital Resources Cash Flows The following table provides information regarding our cash flows: Nine Months Ended September 30, (in thousands) 2020 2019 Net cash provided by operating activities $ 15,827 $ 57,963 Net cash used in investing activities $ (1,127) $ (17,320) Net cash used in financing activities $ (17,488) $ (76,058) Net Cash Provided by Operating Activities Net cash provided by operating activities of $15.8 million in the nine months ended September 30, 2020 was driven primarily by $16.3 million of depreciation, amortization and accretion expense, stock-based compensation expense of $10.5 million, and impairment of long-lived assets of $7.3 million. These net sources of cash were offset by a net loss of $10.1 million and a net decrease of $11.7 million related to movements in our working capital accounts during the period. The overall decreases in cash from our working capital accounts were primarily driven by the payment of prior year annual bonuses as well as change in inventory related to the COVID-19 impact on products and the timing of batch processes and accruals related to G&A expenses in connection with the acquisition of Progenics. Net cash provided by operating activities of $58.0 million in the nine months ended September 30, 2019 was driven primarily by net income of $21.2 million plus $9.8 million of depreciation, amortization and accretion expense, stock-based compensation expense of $9.5 million, changes in deferred taxes of $3.8 million and debt extinguishment expense of $3.2 million. These net sources of cash were further increased by a net increase of $7.3 million related to movements in our working capital accounts during the period. The overall increases in cash from our working capital accounts were primarily driven by improved collections related to our accounts receivables and the timing of purchases. Net Cash Used in Investing Activities Net cash used in investing activities during the nine months ended September 30, 2020 reflected $10.0 million in lending on a note receivable to Progenics prior to the acquisition and $8.7 million in capital expenditures offset by $17.6 million of acquired cash related to the non-cash acquisition of Progenics. Net cash used in investing activities during the nine months ended September 30, 2019 reflected $17.3 million in capital expenditures. Net Cash Used in Financing Activities Net cash used in financing activities during the nine months ended September 30, 2020 is primarily attributable to the payments on long-term debt and other borrowings of $11.2 million related to the 2019 Term Facility and Royalty-Backed Loan, equity issuance costs related to the acquisition of Progenics of $3.8 million, and payments for minimum statutory tax withholding related to net share settlement of equity awards of $2.1 million. Net cash used in financing activities during the nine months ended September 30, 2019 is primarily attributable to the net cash outflow of approximately $73.0 million in connection with the refinancing of our previous 2017 Facility, payments on long-term debt of $2.5 million related to the 2019 Term Facility and payments for minimum statutory tax withholding related to net share settlement of equity awards of $2.4 million. Starting in 2019, we require certain senior executives to cover tax liabilities resulting from the vesting of their equity awards pursuant to sell-to-cover transactions under 10b5-1 plans. External Sources of Liquidity In June 2019, we refinanced our 2017 $275.0 million five-year term loan facility with the 2019 Term Facility. In addition, we replaced our $75.0 million revolving facility with the 2019 Revolving Facility. The terms of the 2019 Facility are set forth in the Credit Agreement, dated as of June 27, 2019, by and among us, the lenders from time to time party thereto and Wells Fargo Bank, N.A., as administrative agent and collateral agent (the “2019 Credit Agreement”). We have the right to request an increase to the 2019 Term Facility or request the establishment of one or more new incremental term loan facilities, in an aggregate principal amount of up to $100.0 million, plus additional amounts, in certain circumstances. 43 Table of Contents We are permitted to voluntarily prepay the 2019 Term Loans, in whole or in part, without premium or penalty. The 2019 Term Facility requires us to make mandatory prepayments of the outstanding 2019 Term Loans in certain circumstances. The 2019 Term Facility amortizes at 5.00% per year through September 30, 2022 and 7.5% thereafter, until its June 27, 2024 maturity date. Under the terms of the 2019 Revolving Facility, the lenders thereunder agreed to extend credit to us from time to time until June 27, 2024 consisting of revolving loans in an aggregate principal amount not to exceed $200.0 million at any time outstanding. The 2019 Revolving Facility includes a $20.0 million sub-facility for the issuance of Letters of Credit. The 2019 Revolving Facility includes a $10.0 million sub-facility for Swingline Loans. The Letters of Credit, Swingline Loans and the borrowings under the 2019 Revolving Facility are expected to be used for working capital and other general corporate purposes. Please refer to our Form 10-K for fiscal year ended December 31, 2019 for further details on the 2019 Facility. On June 19, 2020, we amended our 2019 Credit Agreement (“the Amendment”) as a result of the impact of the COVID-19 pandemic on our business and operations and the near-term higher level of indebtedness resulting from our decision not to immediately repay the Progenics debt secured by the RELISTOR royalties following our acquisition of Progenics. The Amendment provides for, among other things, modifications to our financial maintenance covenants. The covenant related to Total Net Leverage Ratio (as defined in the Amended Credit Agreement) has been waived from the date of the Amendment through December 31, 2020. The maximum total net leverage ratio and interest coverage ratio permitted by the financial covenant is displayed in the table below: 2020 Amended Credit Agreement Period Total Net Leverage Ratio Q1 2021 5.50 to 1.00 Q2 2021 3.75 to 1.00 Thereafter 3.50 to 1.00 Period Interest Coverage Ratio Q3 2020 to Q1 2021 2.00 to 1.00 Thereafter 3.00 to 1.00 The Amendment also introduces a new financial covenant requiring Consolidated Liquidity (as defined in the Amended Credit Agreement) to be no less than $150.0 million. The Consolidated Liquidity covenant is tested on a continuing basis beginning on the date of the Amendment and ending on the date on which we deliver a compliance certificate for the fiscal quarter ending March 31, 2021. For the period beginning on the date of the Amendment and ending on the Adjustment Date (as defined in the Amended Credit Agreement) for the fiscal quarter ending March 31, 2021, loans under the Amended Credit Agreement bear interest at LIBOR plus 3.25% or the Base Rate plus 2.25%. On and after the Adjustment Date for the fiscal quarter ending on March 31, 2021, loans bear interest at LIBOR plus a spread that ranges from 1.50% to 3.00% or the Base Rate plus a spread that ranges from 0.50% to 2.00%, in each case based on our Total Net Leverage Ratio. The commitment fee applicable to the Revolving Facility is 0.50% until the Adjustment Date for the fiscal quarter ending March 31, 2021. On and after the Adjustment Date for the fiscal quarter ending on March 31, 2021, the commitment fee ranges from 0.15% to 0.40% based on our Total Net Leverage Ratio. On June 19, 2020, as a result of the Progenics Transaction, we assumed Progenics outstanding debt as of such date in the amount of $40.2 million. Progenics, through a wholly-owned subsidiary MNTX Royalties Sub LLC (“MNTX Royalties”), entered into a $50.0 million loan agreement (the “Royalty-Backed Loan”) with a fund managed by HealthCare Royalty Partners III, L.P. (“HCRP”) on November 4, 2016. Under the terms of the Royalty-Backed Loan, the lenders have no recourse to Progenics or any of its assets other than the right to receive royalty payments from the commercial sales of RELISTOR products owed under Progenics’ license agreement with Salix Pharmaceuticals, Inc., a wholly-owned subsidiary of Bausch. The RELISTOR royalty payments will be used to repay the principal and interest on the loan. The Royalty-Backed Loan bears interest at a per annum rate of 9.5% and matures on June 30, 2025. On June 22, 2020, HCRP waived the automatic acceleration of the Royalty-Backed Loan that otherwise would have been triggered by the consummation of the Progenics Transaction and MNTX Royalties agreed not to prepay the loan until after December 31, 2020. 44 Table of Contents Under the terms of the loan agreement, payments of interest and principal, if any, are made on the last day of each calendar quarter out of RELISTOR royalty payments received since the immediately-preceding payment date. On each payment date, 50% of RELISTOR royalty payments received since the immediately-preceding payment date in excess of accrued interest on the loan are used to repay the principal of the loan, with the balance retained by us. Starting on September 30, 2021, all of the RELISTOR royalties received since the immediately-preceding payment date will be used to repay the interest and outstanding principal balance until the balance is fully repaid. Our ability to fund our future capital needs will be affected by our ability to continue to generate cash from operations and may be affected by our ability to access the capital markets, money markets or other sources of funding, as well as the capacity and terms of our financing arrangements. We may from time to time repurchase or otherwise retire our debt and take other steps to reduce our debt or otherwise improve our balance sheet. These actions may include prepayments of our term loans or other retirements or refinancing of outstanding debt, privately negotiated transactions or otherwise. The amount of debt that may be retired, if any, could be material and would be decided at the sole discretion of our Board of Directors and will depend on market conditions, our cash position and other considerations. Funding Requirements Our future capital requirements will depend on many factors, including: • The level of product sales and the pricing environment of our currently marketed products, particularly DEFINITY and any additional products that we may market in the future, including decreased product sales resulting from the COVID-19 pandemic; • Revenue mix shifts and associated volume and selling price changes that could result from contractual status changes with key customers and additional competition; • The costs of acquiring or in-licensing, developing, obtaining regulatory approval for, and commercializing, new products, businesses or technologies, together with the costs of pursuing opportunities that are not eventually consummated; • Our investment in the further clinical development and commercialization of products and development candidates, including the newly acquired Progenics assets AZEDRA, PyL, 1095 and PSMA AI; • The costs of investing in our facilities, equipment and technology infrastructure; • The costs and timing of establishing manufacturing and supply arrangements for commercial supplies of our products and raw materials and components; • Our ability to have product manufactured and released from JHS and other manufacturing sites in a timely manner in the future; • The costs of further commercialization of our existing products, particularly in international markets, including product marketing, sales and distribution and whether we obtain local partners to help share such commercialization costs; • The extent to which we choose to establish collaboration, co-promotion, distribution or other similar arrangements for our marketed products; • The legal costs relating to maintaining, expanding and enforcing our intellectual property portfolio, pursuing insurance or other claims and defending against product liability, regulatory compliance or other claims; and • The cost of interest on any additional borrowings which we may incur under our financing arrangements. Until we successfully become dual sourced for our principal products, we are vulnerable to future supply shortages. Disruption in our financial performance could also occur if we experience significant adverse changes in product or customer mix, broad economic downturns, adverse industry or company conditions or catastrophic external events, including pandemics such as COVID-19, natural disasters and political or military conflict. If we experience one or more of these events in the future, we may be required to implement further expense reductions, such as a delay or elimination of discretionary spending in all functional areas, as well as scaling back select operating and strategic initiatives. If our capital resources become insufficient to meet our future capital requirements, we would need to finance our cash needs through public or private equity offerings, debt financings, assets securitizations, sale-leasebacks or other financing or strategic alternatives, to the extent such transactions are permissible under the covenants of our Credit Agreement. Additional equity or debt financing, or other transactions, may not be available on acceptable terms, if at all. If any of these transactions require an amendment or waiver under the covenants in our Credit Agreement, which could result in additional expenses associated with obtaining the amendment or waiver, we will seek to obtain such a waiver to remain in compliance with those covenants. However, we cannot be assured that such an amendment or waiver would be granted, or that additional capital will be available on acceptable terms, if at all. 45 Table of Contents At September 30, 2020, our only current committed external source of funds is our borrowing availability under our 2019 Revolving Facility. We had $88.0 million of cash and cash equivalents at September 30, 2020. Our 2019 Facility, as amended, contains a number of affirmative, negative, reporting and financial covenants, in each case subject to certain exceptions and materiality thresholds. Incremental borrowings under the 2019 Revolving Facility, as amended, may affect our ability to comply with the covenants in the 2019 Facility, as amended, including the financial covenants restricting consolidated net leverage and interest coverage. Accordingly, we may be limited in utilizing the full amount of our 2019 Revolving Facility, as amended, as a source of liquidity. In addition, in connection with the Progenics Transaction, which we closed in June 2020, we incurred legal, accounting, financial advisory, consulting and printing fees, and transition, integration and other costs which we funded from our available cash and the available cash of Progenics. The CVRs we issued in the Progenics Transaction entitle holders thereof to future cash payments of 40% of PyL net sales over (i) $100.0 million in 2022 and (ii) $150.0 million in 2023, which, if payable, we currently intend to fund from our then-available cash. In no event will our aggregate payments under the CVRs, together with any other non-stock consideration treated as paid in connection with the Progenics Transaction, exceed 19.9% (which we estimate could be approximately $100.0 million) of the total consideration we pay in the Progenics Transaction. Refer to Note 4, “Fair Value of Financial Instruments”, for further details on contingent consideration liabilities. Based on our current operating plans, including our prudent expense management in response to the COVID-19 pandemic, we believe that our existing cash and cash equivalents, results of operations and availability under our 2019 Revolving Facility, as amended, will be sufficient to continue to fund our liquidity requirements for the foreseeable future. Critical Accounting Policies and Estimates The discussion and analysis of our financial condition and results of operations are based on our condensed consolidated financial statements, which have been prepared in accordance with U.S. GAAP. The preparation of these condensed consolidated financial statements require us to make estimates and judgments that affect our reported assets and liabilities, revenues and expenses, and other financial information. Actual results may differ materially from these estimates under different assumptions and conditions. In addition, our reported financial condition and results of operations could vary due to a change in the application of a particular accounting standard. There have been no other significant changes to our critical accounting policies or in the underlying accounting assumptions and estimates used in such policies in the nine months ended September 30, 2020, except as set forth below. For further information, refer to our summary of significant accounting policies and estimates in our Annual Report on Form 10-K filed for the year ended December 31, 2019. Business Combinations We account for business combinations using the acquisition method of accounting. We recognize the assets acquired and liabilities assumed in business combinations on the basis of their fair values at the date of acquisition. We assess the fair value of assets acquired, including intangible assets, and liabilities assumed using a variety of methods. Each asset acquired and liability assumed is measured at fair value from the perspective of a market participant. The method used to estimate the fair values of intangible assets incorporates significant assumptions regarding the estimates a market participant would make in order to evaluate an asset, including a market participant’s use of the asset and the appropriate discount rates. Acquired in-process research and development (“IPR&D”) is recognized at fair value and initially characterized as an indefinite-lived intangible asset, irrespective of whether the acquired IPR&D has an alternative future use. Any excess purchase price over the fair value of the net tangible and intangible assets acquired is allocated to goodwill. Transaction costs and restructuring costs associated with a business combination are expensed as incurred. The fair values assigned to tangible and intangible assets acquired and liabilities assumed are based on our estimates and assumptions, as well as other information we have compiled, including valuations that utilize customary valuation procedures and techniques. If the actual results differ from the estimates and assumptions used in these estimates, it could result in a possible impairment of the intangible assets and goodwill, a required acceleration of the amortization expense of finite-lived intangible assets or the recognition of additional consideration, which would be expensed. During the measurement period, which extends no later than one year from the acquisition date, we may record certain adjustments to the carrying value of the assets acquired and liabilities assumed with the corresponding offset to goodwill. After the measurement period, all adjustments are recorded in the condensed consolidated statements of operations as operating expenses or income. Intangible and Long-Lived Assets 46 Table of Contents We test intangible and long-lived assets for recoverability whenever events or changes in circumstances suggest that the carrying value of an asset or group of assets may not be recoverable. We measure the recoverability of assets to be held and used by comparing the carrying amount of the asset to future undiscounted net cash flows expected to be generated by the asset. If those assets are considered to be impaired, the impairment equals the amount by which the carrying amount of the assets exceeds the fair value of the assets. Any impairments are recorded as permanent reductions in the carrying amount of the assets. Long-lived assets, other than goodwill and other intangible assets, that are held for sale are recorded at the lower of the carrying value or the fair market value less the estimated cost to sell. Intangible assets, consisting of trademarks, customer relationships, currently marketed products, licenses and developed technology are amortized in a method equivalent to the estimated utilization of the economic benefit of the asset. Our IPR&D represents intangible assets acquired in a business combination that are used in research and development activities but have not yet reached technological feasibility, regardless of whether they have alternative future use. The primary basis for determining the technological feasibility or completion of these projects is whether we have obtained regulatory approval to market the underlying products in an applicable geographic region. Because obtaining regulatory approval can include significant risks and uncertainties, the eventual realized value of the acquired IPR&D projects may vary from their fair value at the date of acquisition. We classify IPR&D acquired in a business combination as an indefinite-lived intangible asset until the completion or abandonment of the associated research and development efforts. Upon completion of the associated research and development efforts, we will determine the useful life and begin amortizing the assets to reflect their use over their remaining lives. Upon permanent abandonment, we write-off the remaining carrying amount of the associated IPR&D intangible asset. We test our IPR&D assets at least annually or when a triggering event occurs that could indicate a potential impairment and we recognize any impairment loss in our condensed consolidated statements of operations. Off-Balance Sheet Arrangements We are required to provide the U.S. Nuclear Regulatory Commission and Massachusetts Department of Public Health financial assurance demonstrating our ability to fund the decommissioning of our North Billerica, Massachusetts production facility upon closure, though we do not intend to close the facility. We have provided this financial assurance in the form of a $28.2 million surety bond. Since inception, we have not engaged in any other off-balance sheet arrangements, including structured finance, special purpose entities or variable interest entities.