Document


UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Form 10-K
þ
Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 
 
 
For the fiscal year ended December 31, 2016
 
 
o
Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Commission File Number: 001-32360
AKORN, INC.
(Exact name of registrant as specified in its charter)
LOUISIANA
72-0717400
(State or other jurisdiction of
(I.R.S. Employer Identification No.)
incorporation or organization)
 
1925 W. Field Court, Suite 300, Lake Forest, Illinois 60045
(Address of principal executive offices and zip code)
Registrant’s telephone number, including area code: (847) 279-6100
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
Title of each class 
 
Name of each exchange on which registered 
Common Stock, No Par Value
 
The NASDAQ Global Select Market
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
(None)
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes þ No o
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o No þ
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes þ No o
Indicate by check mark if disclosure of delinquent filers in response to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “large accelerated filer”, “accelerated filer”, and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (check one):
Large accelerated filer: þ
Accelerated filer: o
Non-accelerated filer: o
Smaller reporting company: o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes o No þ
The aggregate market value of the voting stock of the registrant held by non-affiliates (affiliates being, for these purposes only, directors, executive officers and holders of more than 5% of the registrant’s common stock) of the registrant as of June 30, 2016 was approximately $2,410.5 million based on the closing market price of $28.49 reported on the NASDAQ Global Select Market.

The number of shares of the registrant’s common stock, no par value per share, outstanding as of February 17, 2017 was 124,415,759.
Documents Incorporated by Reference:




Portions of the Registrant's 2017 definitive proxy statement for use in connection with its 2017 Annual Meeting are incorporated by reference into Part III, Items 10-14 of this Form 10-K.




Cautionary Statement Regarding Forward-Looking Statements

Unless otherwise indicated or except where the context otherwise requires, the terms “we,” “us” and “our” or other similar terms in this Annual Report on Form 10-K refer to Akorn, Inc. and its wholly owned subsidiaries.

Certain statements in this Form 10-K are forward-looking in nature and are intended to be “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. These statements relate to future events or future financial performance.  In some cases, you can identify forward-looking statements by terminology such as “may,” “should,” "will," “could,” “expects,” “plans,” “intends,” “anticipates,” “believes,” “estimates,” “predicts,” “potential,” “continue” or the negative of such terms or other comparable terminology.  Any forward-looking statements, including statements regarding our intent, beliefs or expectations are not guarantees of future performance. These statements are subject to risks and uncertainties and actual results, levels of activity, performance or achievements and may differ materially from those in the forward-looking statements as a result of various factors. See “Item 1A - Risk Factors.” As a result, you should not place undue reliance on any forward-looking statements. You should read this report completely with the understanding that our actual results may differ materially from what we expect. Unless required by law, we undertake no obligation to update publicly any forward-looking statements, whether as a result of new information, future events or otherwise.

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FORM 10-K TABLE OF CONTENTS

 
 
Page 
PART I
PART II
PART III
PART IV

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PART I


Item 1. Business

Akorn, Inc., together with its wholly-owned subsidiaries (collectively “Akorn,” the “Company,” “we,” “our” or “us”) is a specialty generic pharmaceutical company that develops, manufactures and markets generic and branded prescription pharmaceuticals, branded as well as private-label over-the-counter consumer health products and animal health pharmaceuticals. We are an industry leader in the development, manufacturing and marketing of specialized generic pharmaceutical products in alternative dosage forms. We focus on difficult-to-manufacture sterile and non-sterile dosage forms including, but not limited to, ophthalmics, injectables, oral liquids, otics, topicals, inhalants and nasal sprays.
 
Akorn is a Louisiana corporation founded in 1971 in Abita Springs, Louisiana. In 1997, we relocated our corporate headquarters to the Chicago, Illinois area and currently maintain our principal corporate offices in Lake Forest, Illinois. We operate pharmaceutical manufacturing facilities in Decatur, Illinois; Somerset, New Jersey; Amityville, New York; Hettlingen, Switzerland; and Paonta Sahib, Himachal Pradesh, India. We also operate a central distribution warehouse in Gurnee, Illinois and additional distribution facilities in Amityville, New York and Decatur, Illinois. Our research and development (“R&D”) centers are located in Vernon Hills, Illinois; Copiague, New York and Cranbury, New Jersey. In the fourth quarter of 2016, we moved our previous R&D center in Warminster, Pennsylvania to Copiague, New York. We also have other corporate offices in Ann Arbor, Michigan and Gurgaon, Haryana, India.
 
During the years ended December 31, 2016, 2015 and 2014, the Company reported results for two reportable segments: Prescription Pharmaceuticals and Consumer Health. For further detail concerning our reportable segments please see Part II, Item 8, Note 12 - “Segment Information.”
 
Our common shares are traded on The NASDAQ Global Select Market under the ticker symbol AKRX. Our principal corporate office is located at 1925 West Field Court Suite 300, Lake Forest, Illinois 60045 with telephone number (847) 279-6100.
 
Our Strategy
 
Our strategy is focused on continuing to strengthen our leadership position in the development and marketing of specialized generic and branded pharmaceuticals, over-the-counter (“OTC”) drug products and animal health products. Through an efficient operational model, we strive to maximize shareholder value by quickly adapting to market conditions, patient demands and customer needs.
 
We believe we can generate growth and maintain attractive margins through: new product launches resulting from research and development successes, improving execution on our core strengths, optimizing our cash flow and leveraging our customer relationships and market leadership. We remain committed to research and development with a focus on our core product areas of ophthalmics, injectables, oral liquids, otics, topicals, inhalants and nasal sprays.
 
We also seek to grow our business inorganically through strategic mergers, acquisitions, business development and licensing activities that provide the ability to move into new product areas that are strategically attractive to us or continue to build out our product or R&D portfolio in our existing product areas.
 
Our Competitive Strengths
 
In order to successfully execute our strategy, we must continue to capitalize on our core strengths:
 
Research and development expertise in alternative dosage forms. Our R&D efforts are primarily focused on the development of multisource generic products that are in dosage forms other than oral solid dose. We consider dosage forms outside of oral solid dose to be “alternative dosage forms.” These products typically have fewer competitors in mature markets, are more difficult to develop and manufacture and can carry higher profitability over time than oral solid dose products.  The alternative dosage form products that we focus on are primarily those that we can manufacture, namely: ophthalmics, injectables, oral liquids, otics, topicals, inhalants and nasal sprays.
 
Alternative dosage form manufacturing expertise. Our manufacturing network specializes in alternative dosage form products. Four of our five manufacturing facilities are Food and Drug Administration (“FDA”) approved, including:
 
(1)         Our Decatur, Illinois facility, which specializes in sterile products, primarily injectables;

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(2)         Our Somerset, New Jersey facility, which specializes primarily in sterile ophthalmic products;
(3)         Our Amityville, New York facility, which specializes in topical creams, gels and ointments, oral liquids, otic liquids, nasal sprays and unit dose oral liquid products; and
(4)         Our Hettlingen, Switzerland facility, which specializes primarily in sterile ophthalmic products.
 
All of our FDA approved facilities were inspected by the FDA in 2016. Our Paonta Sahib, Himachal Pradesh, India facility is not yet FDA approved. The Paonta Sahib facility is a sterile injectable facility with separate areas dedicated to general injectable products, carbapenem injectable products, cephalosporin injectable products and hormonal injectable products. In addition, the cephalosporin area of the facility has the ability to produce non-sterile oral cephalosporin products. We are actively pursuing FDA approval of this facility.
 
Established portfolio of generic, branded, OTC and animal health products. We market a diverse portfolio of generic prescription pharmaceutical products, branded prescription pharmaceutical products, OTC brands, various formulations of private-label OTC pharmaceutical products and a number of prescription animal health products. For our human prescription products, our diverse portfolio of alternative dosage form products sets us apart from our larger competitors and allows us to provide a single source of these products for our customers. Our OTC and animal health portfolios are largely complementary to our human prescription products, allowing us to leverage our manufacturing and development expertise.
 
Targeted sales and marketing infrastructure. We maintain a targeted sales and marketing infrastructure to promote our branded, generic, OTC and animal health products. We leverage our sales and marketing infrastructure to not only promote our branded portfolio, but also to sell our multisource generic products directly into physician offices, hospital systems and group purchasing organizations.
 
Significant management expertise. Our senior management team has a demonstrated track record of building and operating high-growth healthcare and pharmaceutical companies through product development, in-licensing and acquisitions.
 
Our Areas of Focus
 
Alternative dosage form generics. Our core area of focus is generic prescription pharmaceutical products in alternative dosage forms. We market a portfolio of multisource prescription pharmaceutical products in injectable, ophthalmic, topical, oral and inhaled liquid, nasal spray and otic dosage forms. We also market select oral solid dose formulations.
 
Specialty brands. Alongside our generic prescription pharmaceutical products, we market a portfolio of branded prescription pharmaceutical products, primarily in the ophthalmology area. While we continue to primarily focus on generic products, our branded portfolio allows us to leverage our sales and manufacturing infrastructure and deepen our relationships with customers.
 
OTC products. Our Akorn Consumer Health division (“ACH”) markets a portfolio of OTC brands and various formulations of private-label OTC pharmaceutical products. Our flagship OTC brand is TheraTears® Therapy for Your Eyes®, which is a family of therapeutic eye care products including dry eye therapy lubricating eye drops, eyelid and eyelash cleansing foam and eye nutrition supplements. We also market several specialty OTC products including; Zostrix®, Sinus Buster®, MagOx®, Maginex®, Multi-betic®, Diabetic Tussin® and Dia-Derm®.

Specialized Animal Health Products. We also market a portfolio of branded and generic companion animal prescription pharmaceutical products under the Akorn Animal Health label. Major animal health products include Anased® and VetaKet®, veterinary sedatives; Tolazine® and Yobine®, sedative reversing agents; and Butorphic®, a pain reliever.
 
Research & Development
 
We seek to continually grow our business by developing new products.  Internal R&D projects are carried out at our R&D facilities located in Vernon Hills, Illinois, Copiague, New York and Cranbury, New Jersey. In 2016, the Company moved the Warminster, Pennsylvania R&D facility to Copiague, New York. The majority of our product development activity takes place at our R&D facilities, while our manufacturing facilities provide support for the later phases of product development and exhibit batch production.  We believe that having our own dedicated R&D facilities allows us to significantly increase the size of our product pipeline as well as shorten the time between project start and filing with the FDA. As of December 31, 2016, we had 157 full-time employees directly involved in product R&D activities.
 
In addition to our internal development work, we strategically partner with drug development and contract manufacturing companies (“CMOs”) throughout the world for the development of drug products that we believe will be complementary to our existing product offerings, but for which we may lack the expertise to develop, or the capability, capacity or cost-efficiencies to

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manufacture.  We may owe payments to these partners from time to time based on their achievement of milestones, up to and including launch of the subject development product.  Our development partners are typically responsible for manufacturing or sourcing of the finished product and may receive a royalty or a profit split from the sales of the product.
 
R&D costs are expensed as incurred. Such costs amounted to $42.6 million, $40.7 million and $31.3 million for the years ended December 31, 2016, 2015 and 2014, respectively, and include internal R&D expenses, milestone fees paid to our strategic partners and impairment expenses of in-process research and development projects (“IPR&D”).
 
During the year ended December 31, 2016, we submitted 12 new Abbreviated New Drug Application (“ANDA”) filings, one New Drug Application ("NDA") and three Abbreviated New Animal Drug Application (“ANADA”) filings to the FDA. In the prior year ended December 31, 2015, we submitted 18 ANDA filings and one NDA filing while in 2014 we submitted 23 ANDA filings to the FDA.
 
Akorn and its partners received seven new-to-Akorn ANDA product approvals and three tentative ANDA approvals from the FDA in the year ended December 31, 2016; 11 ANDA approvals, two ANADA approvals, one NDA product approval, one supplemental ANDA approval and two tentative ANDA approvals in 2015 and finally, 14 ANDA approvals, one NDA product approval and two tentative ANDA approvals in 2014.
 
As of December 31, 2016, we had 92 ANDA filings under FDA review. We plan to continue to regularly submit additional filings based on perceived market opportunities and our R&D pipeline.
 
See “Government Regulation” and Item 1A - Risk Factors — “Our growth depends on our ability to timely and efficiently develop and successfully launch and market new pharmaceutical products.”
 
Strategic Mergers and Acquisitions
 
We regularly evaluate and, where appropriate, execute opportunities to expand through the acquisition of products and companies in areas that we believe offer attractive opportunities for growth. Below is a summary of strategic business acquisitions that we made from 2012 to 2017. See Item 1A - Risk Factors for a description of risks that accompany our business and acquisitions.
 
Akorn AG (formerly Excelvision AG). To expand our ophthalmic manufacturing capacity, our Luxembourg subsidiary, Akorn International S.à r.l., closed a share purchase agreement on January 2, 2015 with Fareva SA to acquire all of the issued and outstanding shares of capital stock of Excelvision AG, a Swiss company (“Excelvision AG”). Excelvision AG was a contract manufacturer located in Hettlingen, Switzerland specializing in ophthalmic products. On April 1, 2016 the name of Excelvision AG was changed to Akorn AG.
 
VersaPharm. On August 12, 2014, we completed the acquisition of VPI Holdings Corp. (“VPI”), the parent company of VersaPharm Incorporated, a Georgia corporation (“VersaPharm”) (the “VersaPharm Acquisition”). VersaPharm was a developer and marketer of multi-source prescription pharmaceuticals. We believe the acquisition complements and expands our product portfolio by diversifying our offering to niche dermatology markets. VersaPharm’s product portfolio, pipeline and development capabilities were complementary to the Hi-Tech Pharmacal Co., Inc. (“Hi-Tech”) acquisition, described below, through which we acquired manufacturing capabilities needed for many of VersaPharm’s marketed and pipeline products. The VersaPharm Acquisition also enhanced our new product pipeline as VersaPharm had significant R&D experience and knowledge and numerous IPR&D products that were under active development.
 
Hi-Tech Pharmacal Co., Inc. On April 17, 2014, we completed the acquisition of Hi-Tech (the “Hi-Tech Acquisition”). The acquisition was approved by the shareholders of Hi-Tech on December 19, 2013, and was approved by the FTC on April 11, 2014 following review pursuant to provisions of the Hart-Scott Rodino Act (“HSR”). Hi-Tech was a specialty pharmaceutical company which developed, manufactured and marketed generic and branded prescription and OTC drug products. Hi-Tech specialized in liquid and semi-solid dosage forms and produced and marketed a range of oral solutions and suspensions, topical ointments and creams, nasal sprays, otics, sterile ophthalmics and sterile ointment and gel products. Hi-Tech’s Health Care Products division was a developer and marketer of OTC products, and their ECR Pharmaceuticals subsidiary (“ECR”) marketed branded prescription products. ECR was divested during the year ended December 31, 2014.
 
The Hi-Tech Acquisition complemented and expanded our manufacturing capabilities and product portfolio by diversifying our offerings to our retail customers beyond ophthalmics to other niche dosage forms such as oral liquids, topical creams and ointments, nasal sprays and otics. The Hi-Tech Acquisition also enhanced our new product pipeline. Further, the Hi-Tech

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Acquisition added branded OTC products in the categories of cough and cold, nasal sprays and topicals to our TheraTears® brand of eye care products.
  
Kilitch Drugs (India) Limited. On February 28, 2012, we acquired selected assets of Kilitch Drugs (India) Limited (“Kilitch”) pursuant to a Business Transfer Agreement (“BTA”) between our subsidiary, Akorn India Private Limited (“AIPL”) and Kilitch. The primary assets acquired were Kilitch’s pharmaceutical manufacturing facility in Paonta Sahib, Himachal Pradesh, India and its ongoing contract manufacturing business, which we now refer to as AIPL. Pursuant to the BTA, we also acquired selected assets of NBZ Pharma Limited, a company affiliated with Kilitch, from which we acquired the rights to manufacture and distribute certain pharmaceutical products.
 
Business Development and Licensing
 
Supplemental to our strategic mergers and acquisitions strategy, we also seek to enhance our current generic and branded product lines through the acquisition or licensing of on-market or in-development products that expand or complement our current branded and generic product portfolio. Below is a summary of product acquisition and licensing transactions that we made from 2012 to 2017. See Item 1A - Risk Factors for a description of risks that accompany our business development.
 
Lloyd Products Acquisition. To expand our animal health product portfolio, our wholly-owned subsidiary, Akorn Animal Health, Inc. entered into a definitive product acquisition agreement on October 2, 2014 with Lloyd, Inc. to acquire certain rights and inventory related to a portfolio of animal health injectable products used in pain management and anesthesia.
 
Xopenex Product Acquisition. To expand our prescription product portfolio of respiratory products, we entered into a definitive product acquisition agreement with Sunovion Pharmaceuticals Inc., on October 1, 2014 to acquire certain rights and inventory related to Xopenex® Inhalation Solution (levalbuterol hydrochloride).
 
Zioptan Product Acquisition. To expand our branded ophthalmology portfolio, we acquired the rights to the U.S. NDA for Zioptan™, a prescription ophthalmic eye drop indicated for reducing elevated intraocular pressure in patients with open-angle glaucoma or ocular hypertension, from Merck, Sharp and Dohme Corp. (“Merck”) on April 1, 2014.
 
Betimol Product Acquisition. To expand our branded ophthalmology portfolio, we acquired the rights to the U.S. NDA for Betimol®, a prescription ophthalmic eye drop for the reduction of eye pressure in glaucoma patients, from Santen Pharmaceutical Co., Ltd., (“Santen”) on January 2, 2014.
 
Merck Products Acquisition.  On November 15, 2013, we acquired three ophthalmic U.S. NDAs from Merck:
 
AzaSite® — (azithromycin ophthalmic solution), a prescription sterile eye drop solution used to treat bacterial conjunctivitis;
Cosopt® — (dorzolamide hydrochloride and timolol maleate ophthalmic solution), a prescription sterile eye drop solution that is used to reduce intraocular pressure in patients with open-angle glaucoma or ocular hypertension; and
Cosopt® PF, supplied in sterile, single-use containers.
 
This acquisition expanded our line of prescription ophthalmic products to include additional branded products.  Upon entering into the product acquisition agreement, we entered into supply agreements with Merck and a third party to ensure continued supply of the three products.  The acquisition included our acquisition of a Merck subsidiary corporation, Inspire Pharmaceuticals, Inc. (“Inspire”), which was and continues to be the holder of the product rights to AzaSite®.
 
Our Products
 
The Company has identified two reportable segments with which we operate our business. These segments include the Prescription Pharmaceuticals Segment and the Consumer Health Segment.
 
Prescription Pharmaceuticals Segment. Our Prescription Pharmaceuticals segment primarily consists of generic and branded prescription pharmaceuticals in a variety of dosage forms including sterile ophthalmics, injectables and inhalants and non-sterile oral liquids, topicals, nasal sprays and otics. We also market a number of pain management drugs, including drugs subject to the Controlled Substances Act. The segment represented 94.3% of our net revenues in 2016. Please see Part II, Item 8, Note 12 - “Segment Information” for further detail of the Prescription Pharmaceuticals segment.
 
While the majority of sales within the prescription pharmaceuticals segment are derived from generic products, Akorn markets a line of branded ophthalmic and respiratory products including brands such as Akten®, a topical ocular anesthetic gel, AzaSite®,

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an antibiotic used to treat bacterial conjunctivitis, Cosopt®, Cosopt® PF, Betimol® and Zioptan™, which are used in the treatment of glaucoma and Xopenex® Inhalation Solution, used in the treatment or prevention of bronchospasm.
 
The major products in our Prescription Pharmaceuticals segment are listed alphabetically below.
 
Atropine Sulfate Ophthalmic Solution. We received approval of our NDA for Atropine Sulfate Ophthalmic Solution, USP, 1% in July 2014. We had previously been marketing this product as an unapproved product.  Following our NDA approval, competitors marketing unapproved products discontinued distribution of their products.

Clobetasol Propionate Cream. We acquired Clobetasol Propionate Cream through the Hi-Tech Acquisition. In the acquisition the Company also acquired other dosage forms of Clobetasol Propionate including a gel, emollient cream, ointment and a topical solution.

Clobetasol Propionate Ointment. We acquired Clobetasol Propionate Ointment through the Hi-Tech Acquisition. In the acquisition the Company also acquired other dosage forms of Clobetasol Propionate including a gel, cream, emollient cream and a topical solution.

Ephedrine Sulfate Injection. We began marketing Ephedrine Sulfate Injection, USP 50 mg/mL in 1 mL single-dose ampules in 1997. Our Ephedrine Sulfate Injection is not an FDA approved product and to date our product has not been found by the FDA to be safe and effective. In 2015, we filed a NDA seeking approval of our Ephedrine Sulfate Injection.

Lidocaine Ointment. We acquired marketing rights to Lidocaine Ointment USP, 5% through the Hi-Tech Acquisition.  Beyond Lidocaine Ointment, we also market other Lidocaine-containing products including Lidocaine Hydrochloride Jelly USP 2% and Lidocaine Hydrochloride Oral Topical Solution USP, 2%.
 
Methylene Blue Injection. We began marketing Methylene Blue Injection, USP, 10 mg/mL in 1 mL and 10 mL vials in 2009. Our Methylene Blue Injection is not an FDA approved product and to date our product has not been found by the FDA to be safe and effective.
 
Myorisan™ Soft Gelatin Capsules. We acquired Myorisan™ (isotretinoin capsules, USP) in 10 mg, 20 mg and 40 mg strengths through the VersaPharm Acquisition. We subsequently received approval for the 30 mg strength in 2015.
 
Nembutal® Sodium Solution. We acquired Nembutal® Sodium Solution from H. Lundbeck A/S. Nembutal® Sodium Solution (pentobarbital sodium injection, USP) is a Schedule II controlled drug.

Phenylephrine Hydrochloride Ophthalmic Solution. We began marketing Phenylephrine Hydrochloride Ophthalmic Solution, USP, 2.5% shortly after FDA approval of our NDA in January 2015.

Zioptan™. We acquired the rights to the U.S. NDA for Zioptan™ (tafluprost ophthalmic solution) 0.0015%, a preservative-free prescription ophthalmic eye drop indicated for reducing elevated intraocular pressure in patients with open-angle glaucoma or ocular hypertension, from Merck, in April 2014. 
 
Most of the products discussed above have several generic equivalent competitors.
 
Consumer Health Segment. Our Consumer Health segment primarily consists of branded and private-label OTC products and animal health products dispensed by veterinary professionals. Our branded and private-label OTC products are primarily focused on ophthalmics including a leading dry eye treatment TheraTears® Therapy for Your Eyes®. We also market other OTC consumer health products including Mag-Ox®, a magnesium supplement, and the Diabetic Tussin® line of cough and cold products. Our animal health portfolio is focused on products complementary to our human health prescription portfolio, leveraging our R&D and manufacturing capabilities for alternative dosage form products. Major products within our animal health portfolio include Anased® and VetaKet® veterinary sedatives; Tolazine® and Yobine®, sedative reversing agents; and Butorphic®, a pain reliever. Please see Part II, Item 8, Note 12 “Segment Information” for further detail of the Consumer Health segment.
 
Sales and Marketing
 
We rely on our sales and marketing teams to help us maintain and, where possible, increase market share for our products.  Our sales organization is structured as follows:


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(1)
field sales teams focused on branded prescription pharmaceutical products;
(2)
field sales teams focused on institutional markets;
(3)
inside sales team focused on customers in smaller markets, and;
(4)
national accounts sales team focused on wholesalers, distributors, retail pharmacy chain and group purchasing organizations (“GPOs”).
 
Our field sales representatives promote ophthalmic products directly to retinal surgeons and ophthalmologists, and other pharmaceutical products directly to local hospitals in order to support compliance and pull-through against existing contracts. Our inside sales team augments our outside sales teams to sell products in markets where field sales would not be cost effective. Our national accounts sales team seeks to establish and maintain contracts with wholesalers, distributors, retail pharmacy chains and GPOs. As of the year ended December 31, 2016, we utilized a sales force of 90 field and inside sales representatives to promote our product portfolio. To support our sales efforts, we also have a customer service team and a marketing department focused on promoting and raising awareness about our product offerings.
 
Competition
 
Prescription Pharmaceuticals. The sourcing, marketing and manufacturing of pharmaceutical products is highly competitive, with many established manufacturers, suppliers and distributors actively engaged in all phases of the business. We compete principally on the quality of our products and services, reliability of our supply, breadth of our portfolio, depth of our customer relationships and price. Many of our competitors have substantially greater financial and other resources, including greater sales volume, larger sales forces and greater manufacturing capacity. See Item 1A - Risk Factors - “Changes in technology could render our products obsolete” and “Our branded products may become subject to increased generic competition” for more information.
 
Generic Pharmaceuticals. Companies that compete with our generic pharmaceuticals portfolio include Teva Pharmaceutical Ltd., Apotex Inc., Fresenius Kabi AG, Hikma Pharmaceuticals plc, Novartis International AG (through their Sandoz and Alcon subsidiaries), Perrigo Company plc, Pfizer Inc., Mylan N.V., Taro Pharmaceutical Industries Ltd. and Valeant Pharmaceuticals International, Inc. (principally through their Bausch + Lomb subsidiary), among others.
 
Branded Pharmaceuticals. Companies that compete with our branded pharmaceuticals portfolio include Allergan plc, Novartis International AG (through their Alcon subsidiary), Pfizer Inc. and Valeant Pharmaceuticals International, Inc. (through their Bausch + Lomb subsidiary), among others. Additionally, potential generic entrants with equivalent products referencing our branded products present an additional competitive threat.
 
Consumer Health. Like our Prescription Pharmaceuticals segment, the sourcing, manufacturing and marketing of Consumer Health products is highly competitive, with many established manufacturers, suppliers and distributors actively engaged in all phases of the business. With the Company’s relatively small OTC and animal health product portfolio many of our competitors have substantially greater financial and other resources, including greater sales volume, larger sales forces and greater manufacturing capacity. Within this market, we compete primarily on product offering, as well as price and service.
 
The companies that compete with our Consumer Health segment include both generic and name brand companies such as Allergan plc, Johnson & Johnson, Perrigo Company plc., Pfizer Inc., and Valeant Pharmaceuticals International, Inc., among others.
 
Seasonality
 
The majority of our products do not experience significant seasonality.  We do market certain prescription pharmaceutical and consumer health products for the treatment of allergies that typically generate consumer demand in the warmer months as well as cough and cold products which typically generate higher consumer demand in the colder months, but we do not believe these products materially impact our overall sales trends. Additionally, we market various antidote products through our Prescription Pharmaceuticals segment, the sales of which are largely timed to the expiration of existing stock held by our customers.
 
Major Customers
 
For the years ended December 31, 2016, 2015 and 2014, a high percentage of our sales were to the three large wholesale drug distributors noted below.  These three wholesale drug distributors account for a significant portion of our gross sales, net revenues and accounts receivable in both of our segments. The three large wholesale drug distributors are:
 
AmerisourceBergen Corporation (“Amerisource”);
Cardinal Health, Inc. (“Cardinal”); and

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McKesson Corporation (“McKesson”).
 
On a combined basis, these three wholesale drug distributors accounted for approximately 77.4% of our total gross sales and 63.8% of our net revenue in the year ended December 31, 2016, and 83.9% of our gross accounts receivable as of December 31, 2016. The difference between gross sales and net revenue is that gross sales is calculated before allowances for chargebacks, rebates, administrative fees and others, promotions and product returns (See Part II, Item 8, Note 2 - “Summary of Significant Accounting Policies” for more information).
 
The table below presents the percentages of our total gross sales, net revenue and gross trade accounts receivable attributed to each of these three wholesale drug distributors as of and for the years ended December 31, 2016, 2015 and 2014, respectively:
 
 
2016
 
2015
 
2014
 
 
 
Gross
Sales
 
 
Net
Revenue
 
Gross
Accounts
Receivable
 
 
Gross
Sales
 
 
Net
Revenue
 
Gross
Accounts
Receivable
 
 
Gross
Sales
 
 
Net
Revenue
 
Gross
Accounts
Receivable
Amerisource
29.5%
 
23.3%
 
35.6%
 
28.0%
 
23.2%
 
28.8%
 
38.3%
 
29.2%
 
45.4%
Cardinal
15.4%
 
16.3%
 
15.1%
 
19.7%
 
19.5%
 
26.1%
 
15.9%
 
13.6%
 
16.9%
McKesson
32.5%
 
24.2%
 
33.2%
 
30.1%
 
27.3%
 
27.9%
 
22.7%
 
19.1%
 
22.7%
Combined Total
77.4%
 
63.8%
 
83.9%
 
77.8%
 
70.0%
 
82.8%
 
76.9%
 
61.9%
 
85.0%

Amerisource, Cardinal and McKesson are key distributors of our products, as well as a broad range of healthcare products for many other companies. None of these distributors is an end user of our products. Generally speaking, if sales to any one of these distributors were to diminish or cease, we believe that the end users of our products would likely find little difficulty obtaining our products from another distributor. However, the loss of one or more of these distributors, together with a delay or inability to secure an alternative distribution source for end users, could have a material negative impact on our revenue, business, financial condition and results of operations.
 
We consider our business relationships with Amerisource, Cardinal and McKesson to be in good standing and we currently have fee for services contracts with each of them. However, a change in purchasing patterns, a decrease in inventory levels, an increase in returns of our products, delays in purchasing products and delays in payment for products by one or more of these distributors could have a material negative impact on our revenue, business, financial condition and results of operations. See Item 1A - Risk Factors — “We depend on a small number of wholesalers to distribute our products, the loss of any of which could have a material adverse effect on our business” for more information.

Backorders
 
As of December 31, 2016, we had approximately $15.5 million of products on backorder as compared to approximately $9.6 million of backorders as of December 31, 2015 and $19.2 million as of December 31, 2014. We generally expect to fulfill all open backorders during 2017.
 
Foreign Sales
 
During the years ended December 31, 2016, 2015 and 2014, approximately $26.3 million, $37.0 million, and $16.6 million of our net revenue, respectively, was related to sales to customers in foreign countries.
 
Our worldwide business is subject to risks of currency fluctuations, governmental actions and other governmental proceedings abroad. We do not regard these risks as a deterrent to further expansion of our operations abroad. However, we closely review our methods of operations and seek to adopt strategies responsive to changing economic and political conditions.
 
Suppliers
 
We require raw materials and components to manufacture and package pharmaceutical products. The principal components of our products are active and inactive pharmaceutical ingredients and certain packaging materials. Many of these materials are available from only a single source and, in the case of many of our products, only one supplier of raw materials has been identified and qualified. Because FDA approval of drugs requires manufacturers to specify their proposed suppliers of active ingredients and certain packaging materials in their applications, FDA approval of any new supplier would be required if such active ingredients or such packaging materials were no longer available from the specified supplier. The qualification of a new supplier could delay our

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development and marketing efforts. If for any reason we are unable to obtain sufficient quantities of any of the raw materials or components required to produce and package our products, we may not be able to manufacture our products as planned. In addition, certain of the pharmaceutical products that we market are manufactured by third parties that serve as our only supplier of those products.  Any delays or failure of a contract manufacturing partner to supply finished goods timely or in adequate volume could impede our marketing of those products.
 
No supplier represented 10% or more of our purchases in the years ended December 31, 2016, 2015 or 2014.  See Item 1A - Risk Factors - “Many of the raw materials and components used in our products come from a single source, the loss of any of which could have a material adverse effect on our business” for more information.
 
Manufacturing
 
We operate manufacturing facilities in Decatur, Illinois; Somerset, New Jersey; Amityville, New York; Hettlingen, Switzerland and Paonta Sahib, Himachal Pradesh, India. See Item 2 - Properties, for more information. Through these manufacturing facilities we manufacture a diverse assortment of sterile and non-sterile pharmaceutical products including oral liquids and suspensions, otics, nasal sprays, liquid injectables, lyophilized injectables, topical gels, creams and ointments; and ophthalmic solutions and ointments for both of our reportable segments. By location, these include:
 
Somerset, New Jersey — sterile ophthalmic solutions, ointments and gels
Decatur, Illinois — sterile liquid and lyophilized injectables and sterile ophthalmic solutions
Amityville, New York — sterile ophthalmic and otic solutions, sterile gels, and non-sterile nasal sprays, topical ointments and creams, oral syrups and solutions, and liquid unit dose cups
Hettlingen, Switzerland — sterile ophthalmic solutions, suspensions, gels and ointments
Paonta Sahib, Himachal Pradesh, India — sterile liquid injectables including cephalosporins, carbapenems, hormones and general injectables, as well as oral cephalosporins
 
Patents, Trademarks and Proprietary Property
 
We consider the protection of our patents, trademarks and proprietary rights important to maintaining and growing our business.  Through our acquisitions, we have increased the number and importance of trademarks related to our products and product lines.  Through acquisitions, we also acquired rights to the trade names for the branded, prescription ophthalmic products AzaSite®, Betimol®, Cosopt® PF, and Zioptan®, respiratory product Xopenex®, as well as OTC eye care products TheraTears®, SinusBuster®, Mag-Ox®, Multi-betic® and Zostrix®. We are committed to maintaining and defending these trade names as they are important in supporting the success and growth of this business. In addition, we maintain and defend trademarks related to a number of internally-developed products, as well as others licensed from third parties.

We have sought, and intend to continue to seek, patent protection in the United States and selected foreign countries where deemed appropriate and advantageous to us.  The importance of these patents does not vary among our business segments.  
We also rely upon trade secrets, unpatented proprietary know-how and continuing technological innovation to maintain and develop our competitive position. We enter into confidentiality agreements with certain of our employees pursuant to which such employees agree to assign to us any inventions relating to our business made by them while in our employ. However, there can be no assurance that others may not acquire or independently develop similar technology or, if patents are not issued with respect to products arising from research, that we will be able to maintain information pertinent to such research as proprietary technology or trade secrets. See Item 1A. “Risk Factors - "Third parties may claim that we infringe their proprietary rights and may prevent or delay us from manufacturing and selling some of our new products" and "Our patents and proprietary rights may be challenged, circumvented or otherwise compromised by competitors, which may result in our protected products losing their market exclusivity and becoming subject to generic competition before their patents expire" for more information.
Government Regulation
 
Pharmaceutical manufacturers and distributors are subject to extensive regulation by government agencies, including the FDA, the Drug Enforcement Administration (“DEA”), the FTC and other federal, state and local agencies. The development, testing, manufacturing, processing, quality, safety, efficacy, packaging, labeling, recordkeeping, distribution, storage and advertising of our products, and disposal of waste products arising from such activities, are subject to regulation by the FDA, DEA, FTC, the Consumer Product Safety Commission, the Occupational Safety and Health Administration and the Environmental Protection Agency. Similar state and local agencies also have jurisdiction over these activities. Noncompliance with applicable United States and/or state or local regulatory requirements can result in fines, injunctions, penalties, mandatory recalls or seizures, suspensions of production, recommendations by the FDA against governmental contracts and criminal prosecution. In addition, we are subject to

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oversight from federal and state government benefit programs, healthcare fraud and abuse laws and international regulations in jurisdictions in which we manufacture or sell our pharmaceutical products.
 
FDA. The Federal Food, Drug and Cosmetic Act (the “FDC Act”), the Controlled Substance Act and other federal statutes and regulations govern or influence the development, testing, manufacture, labeling, storage and promotion of products that we manufacture and market. The FDA inspects drug manufacturers and storage facilities to determine compliance with its current Good Manufacturing Practices (“cGMP”) regulations, non-compliance with which can result in fines, recall and seizure of products, total or partial suspension of production, refusal to approve NDAs and ANDAs and criminal prosecution. Under the FDC Act, the federal government has extensive administrative and judicial enforcement authority over the activities of finished drug product manufacturers to ensure compliance with FDA regulations. This authority includes, but is not limited to, the authority to initiate judicial action to seize unapproved or non-complying products, to enjoin non-complying activities, to halt manufacturing operations that are not in compliance with cGMP, to recall products, to seek civil and monetary penalties and to criminally prosecute violators. Other enforcement activities include refusal to approve product applications, withdrawal of previously approved applications or prohibition on marketing of certain unapproved products.
 
FDA approval is required before any prescription drug products can be marketed. New drugs require the filing of an NDA, including clinical studies demonstrating the safety and efficacy of the drug. Generic drugs, which are therapeutic equivalents of existing, brand name drugs, require the filing of an ANDA. An ANDA does not, for the most part, require clinical studies since safety and efficacy have already been demonstrated by the product originator. However, the ANDA must, for example, provide data to support the bioequivalence of the generic drug product. The time required by the FDA to review and approve NDAs and ANDAs is variable and, to a large extent, beyond our control.

In 2016, all of our FDA approved facilities were inspected and ultimately received satisfactory status from the FDA.
 
DEA. We manufacture and distribute several controlled drug substances, the distribution and handling of which are regulated by the DEA, which imposes, among other things, certain licensing, security and record-keeping requirements, as well as quotas for the manufacture, purchase, storage and sale of controlled substances. Failure to comply with DEA regulations (and similar state regulations) can result in fines or seizure of product. There have not been any material fines, seizures or interruptions resulting from DEA inspections in any of the years ended December 31, 2016, 2015 and 2014.
 
We are subject to periodic inspections by the DEA in facilities where we manufacture, process or distribute controlled substances.  Our most recent DEA inspections conducted in July 2016 at our Decatur, Illinois and May 2016 at our Amityville, New York facilities resulted in no regulatory actions.
 
Government Benefit Programs. We sell products that can be subject to the statutory and regulatory requirements for Medicaid, Medicare, TRICARE and other government healthcare programs. These regulations govern access and reimbursement levels, including that all pharmaceutical companies pay rebates to individual states based on a percentage of sales arising from Medicaid-reimbursed products. We are also subject to price ceilings for select products sold through the military TRICARE program. U.S. Federal and state governments may continue to enact legislation and other measures aimed at containing or reducing payment levels for prescription pharmaceuticals paid for in whole or in part with government funds. We cannot predict the nature of such potential future measures or the impact on our profitability.

Healthcare Fraud and Abuse Laws. We are subject to various federal, state and local laws targeting fraud and abuse in the healthcare industry. In the U.S. there are various federal and state anti-kickback laws that prohibit payment or receipt of kickbacks, bribes or other remuneration intended to induce the purchase or recommendation of healthcare products and services or reward past purchases or recommendations. Violations of these anti-kickback laws can lead to civil and/or criminal penalties, including fines, imprisonment and exclusion from participation in government healthcare programs. See Item 1A - Risk Factors - “Any failure to comply with the complex reporting and payment obligations under Medicare, Medicaid and other government programs may result in litigation or sanctions,” for further discussion on anti-kickback laws. We are also subject to other healthcare laws, notably:
 
Federal Civil False Claims Act. We are also subject to the provisions of the federal civil False Claims Act and, in particular, actions brought pursuant to the False Claims Act’s whistleblower or qui tam provisions. The civil False Claims Act imposes liability on any person or entity that, among other things, knowingly presents, or causes to be presented, a false or fraudulent claim for payment by a federal healthcare program. The qui tam provisions of the False Claims Act allow a private individual to bring civil actions on behalf of the federal government alleging that the defendant has submitted or caused the submission of a false claim to the federal government, and to share in any monetary recovery. In recent years, the number of suits brought by private individuals has increased dramatically. In addition, various states have enacted false claim laws analogous to the False Claims Act. Many of these state laws apply where a claim is submitted to any third-party payer and not merely a federal healthcare program.

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HIPAA. Fraud provisions in the Health Insurance Portability and Accountability Act (“HIPAA”) of 1996 prohibits knowingly and willingly executing a scheme to defraud any healthcare benefit program, including those of private third-party payers. Also, false statement provisions within HIPAA prohibits knowingly and willingly falsifying, concealing or covering up a material fact or making any materially false, fictitious or fraudulent statement in connection with the delivery of or payment for healthcare benefits, items or services.

Federal Physician Payments Sunshine Act. The Federal Physician Payments Sunshine Act mandates annual reporting of various types of payments to physicians and teaching hospitals. Under the regulations, applicable drug, biological, device, and medical supply manufacturers are required to report to CMS payments or other transfers of value made to Health Care Professionals and teaching hospitals, and the regulations also require the manufacturers and GPOs to report ownership and investment interests held by physicians or their immediate family members. The rule sets forth a reporting process that permits physicians, teaching hospitals, and physician owners and investors to dispute information reported by applicable manufacturers and GPOs. Under the regulations, information that is the subject of a dispute not resolved within the initial allotted 60-day review and dispute resolution period will be posted on CMS’s public website in the manner in which it was submitted by the manufacturer or GPO, rather than in a manner that includes the version provided by the disputing physician, teaching hospital, or physician owner or investor. Failure to comply with required reporting requirements could subject pharmaceutical manufacturers and others to substantial civil monetary penalties.
 
International Regulations. The Company and its employees are subject to the Foreign Corrupt Practices Act (“FCPA”). In addition, we have two international manufacturing facilities that are subject to laws and regulations that differ from those under which we operate in the U.S. The regulatory agencies outside of the U.S. that we interact with include Swissmedic in Switzerland and the Central Drugs Standard Control Organization in India.
 
Government Contracts
 
We maintain distribution contracts with the U.S. Federal Government, including the U.S. Department of Veterans Affairs, among others. A number of these contracts allow the U.S. Federal Government to terminate such contracts upon written notice. We do not believe that any single termination is likely or would be material to our operations.

Employees
 
As of December 31, 2016 we had a total of 2,388 employees globally, consisting of 2,261 permanent, full-time employees and 127 part-time or temporary employees. Our full and part time or temporary employees worked in the following locations:
 
Country
 
Full Time
 
Part Time or Temp
 
United States of America
 
1,639

 
15

 
India
 
462

 
112

 
Switzerland
 
160

 

 
Total
 
2,261

 
127

 
 
We believe we have good relations with our employees. Our U.S. full-time and part-time employees are not represented by collective bargaining agreements. All full-time Akorn employees are eligible to participate in the Company’s 401(k) Plan. The Company matches the employee contribution to 50% of the first 6% of an employee's eligible compensation.  Company matching contributions vest 50% after two years of credited service and 100% after three years of credited service. During the years ended December 31, 2016, 2015 and 2014, plan-related expense totaled approximately $2.2 million, $1.8 million and $1.3 million, respectively. The Company provides a matching contribution based on a percentage of the amount contributed by each employee, which is funded on a current basis.
 
Environment
 
Our operations are subject to foreign, federal, state and local environmental laws and regulations concerning, among other matters, the generation, handling, storage, transport, treatment and disposal of, or exposure to, prescription drugs and toxic and hazardous substances. Violation of these laws and regulations, which frequently change, can lead to substantial fines and penalties. Some of our operations require environmental permits and controls to prevent and limit pollution. We believe that our facilities are in compliance with applicable environmental laws and regulations and we do not anticipate any material adverse effect from compliance with foreign, federal, state and local provisions that have been enacted or adopted regulating the discharge of materials into the environment, or otherwise relating to the protection of the environment.

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Available Information
 
Our internet address is http://www.akorn.com. The contents of our website are not part of this Annual Report on Form 10-K, and our internet address is included in this document as an inactive textual reference only. We make our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and all amendments to those reports available free of charge on our website as soon as reasonably practicable after we file such reports with, or furnish such reports to, the SEC.
 
Materials filed with the SEC can also be read and copied at the SEC’s Public Reference Room at 100 F Street, NE, Washington, DC 20549.  Information on the operation of the Public Reference Room may be obtained by calling the SEC at 1-800-SEC-0330.  The SEC maintains an Internet web site that contains reports, proxy and information statements and other information regarding issuers that file electronically with the SEC.



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Item 1A. Risk Factors.

An investment in our common stock involves a high degree of risk. In addition to the other information included in this Annual Report on Form 10-K, you should carefully consider each of the risks described below before purchasing shares of our common stock. The risk factors set forth below are not the only risks that may affect our business. Our business could also be affected by additional risks not currently known to us or that we currently deem to be immaterial. If any of the following risks actually occur, our business, financial condition and results of operations could materially suffer. As a result, the trading price of our common stock could decline, and you may lose all or part of your investment.
 

Risks Related to Our Business.
 
Our growth depends on our ability to timely and efficiently develop and successfully launch and market new pharmaceutical products.
 
Our strategy for growth is dependent upon our ability to develop products that can be promoted through current marketing and distribution channels and, when appropriate, the enhancement of such marketing and distribution channels. We may fail to meet our anticipated time schedule for the filing of new applications or may decide not to pursue applications that we have already submitted or anticipate submitting. Our internal development of new pharmaceutical products is dependent upon the research and development capabilities of our personnel and our strategic business alliance infrastructure. We and our strategic business alliance partners might fail to develop new pharmaceutical products or acquired IPR&D or, if developed, we might fail to commercialize these new pharmaceutical products. In addition, we might not receive all necessary regulatory approvals or such approvals might involve delays, which may adversely affect the commercial success of our products. Our failure to develop new products or to receive regulatory approval of applications could have a material adverse effect on our business, financial condition and results of operations. Even if successfully developed and launched, no assurance can be given as to the actual size of the market for any product or the level of profitability and sales of the product.

We could experience business interruptions at our manufacturing facilities, which may have a material adverse effect on our business, financial position and results of operations.
 
We manufacture drug products at two international and three domestic manufacturing facilities, and we have contracted with third parties to provide other manufacturing, finishing, and packaging services. Any one or more of these facilities may be forced to shut down or may be unable to operate at full capacity as a result of hurricanes, tornadoes, earthquakes, fire, contamination, power shortages, strikes, terrorist acts, governmental regulation or natural or man-made catastrophic events or other business interruptions.  For example, our manufacturing facility in Somerset, New Jersey was shut down for approximately two weeks in October and November 2012 as a result of power outages and related business disruptions caused by Superstorm Sandy. A significant disruption at any of these facilities, even on a short-term basis, could impair our ability to produce and ship drug products to the market on a timely basis, which may have a material adverse effect on our business, financial position and results of operations.

We may be subject to significant disruptions or failures in our information technology systems and network infrastructures that could have a material adverse effect on our business.
 
We rely on the efficient and uninterrupted operation of complex information technology systems and network infrastructures to operate our business. We also hold data in various data center facilities upon which our business depends. Although we have experienced occasional, actual or attempted breaches of our cybersecurity, none of these breaches has had a material effect on our business, operations or reputation.  Any significant disruption, infiltration or failure of our information technology systems or any of our data centers as a result of software or hardware malfunctions, system implementations or upgrades, computer viruses, third-party security breaches, employee error, theft, misuse or malfeasance could cause breaches of data security, loss of intellectual property and critical data and the release and misappropriation of sensitive competitive information. Any of these events could result in the loss of key information, impair our production and supply chain processes, damage our reputation in the marketplace, deter people from purchasing our products, cause us to incur significant costs to remedy any damages, subject us to significant civil and criminal liability and require us to incur significant technical, legal and other expenses, and ultimately materially and adversely affect our business, results of operations, financial condition and value of our common stock.

Our inability to effectively manage or support our growth may have a material adverse effect on our business, financial position, results of operations and liquidity and could cause the market value of our common stock to decline.
 

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We have grown rapidly as a result of several acquisitions, and additional growth through acquisitions is possible in the future. This growth has put significant demands on our processes, systems and people. Attracting, retaining and motivating key employees in various departments and locations to support our growth are critical to our business, and competition for these people can be significant. If we are unable to hire and retain qualified employees and if we do not effectively invest in systems and processes to manage and support our growth and the challenges and difficulties associated with managing a larger, more complex business, and if we cannot effectively manage and integrate our increasingly diverse and global platform, there could be a material adverse effect on our business, financial position, results of operations or cash flows, and the market value of our common stock could decline.

A significant portion of our revenues are generated through the sale of products manufactured by third parties, the loss or failure of any of which may have a material adverse effect on our business, financial position and results of operations.
 
Certain of the pharmaceutical products that we market, representing a significant portion of our net revenues, are manufactured by third parties that serve as our only supplier of those products. Any delays or failure of a contract manufacturing partner to supply finished goods timely or in adequate volume could impede our marketing of those products. We expect this risk to become more significant as we receive approvals for new products to be manufactured through our strategic partnerships and as we seek additional growth opportunities beyond the capacity and capabilities of our current manufacturing facilities. If we are unable to obtain or retain third-party manufacturers for these products on commercially acceptable terms, we may not be able to distribute such products as planned.  Any delays or difficulties with third-party manufacturers could adversely affect the marketing and distribution of certain of our products, which could have a material adverse effect on our business, financial condition and results of operations.

We depend on a small number of wholesalers to distribute our products, the loss of any of which could have a material adverse effect on our business.
 
A small number of large wholesale drug distributors account for a significant portion of our gross sales, net revenues and accounts receivable. The following three wholesalers — Amerisource, Cardinal and McKesson — accounted for approximately 77% of total gross sales and 64% of total net revenues in 2016, and constituted 84% of gross trade receivables as of December 31, 2016. In addition to acting as distributors of our products, these three companies also distribute a broad range of healthcare products on behalf of many other companies. The loss of our relationship with one or more of these wholesalers, together with a delay or inability to secure an alternative distribution source for our hospital, retail and other customers, could have a material adverse impact on our revenue and results of operations.  A change in purchasing patterns or inventory levels, an increase in returns of our products, delays in purchasing products and delays in payment for products by one or more of these wholesale drug distributors also could have a material adverse impact on our revenue, results of operations and cash flows.

We depend on our employees and must continue to attract and retain key personnel in order to compete successfully, and any failure to do so could hinder successful execution of our business and development plans and have a material adverse effect on our financial position and results of operation.
 
Our performance depends, to a large extent, on the continued service of our key R&D personnel, other technical employees, managers and sales personnel and our ability to continue to attract and retain such personnel. Competition for such personnel is intense, particularly for highly motivated and experienced R&D and other technical personnel. We are facing increasing competition from companies with greater financial resources for such personnel. As a result, we might not be able to attract and retain sufficient numbers of highly skilled personnel in the future, and the inability to do so could have a material adverse effect on our business, and on our results of operations and financial condition.
 
We have entered into several strategic business alliances that may not result in marketable products and may have a material adverse effect on our business, financial position, results of operations and liquidity.
 
We have entered into several strategic business alliances that are designed to provide products that can be marketed through our marketing and distribution channels. These agreements might not result in additional FDA approved products, and we might not be able to market any such additional products at a profit. In addition, any costs that we may incur in connection with these strategic business alliances may negatively impact our financial results.
 
Failure to obtain regulatory certification of our manufacturing facility in India for production of pharmaceutical products for export to the United States, as well as other regulated world markets, could impair our ability to grow and adversely affect our business, financial condition and results of operations.

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We operate a manufacturing campus in Paonta Sahib, India, which we acquired through a business combination in 2012. The manufacturing site is not currently approved by the FDA to manufacture products for export to the United States. It is our intention to obtain certification from the FDA and other regulatory authorities to allow this facility to manufacture products for export to the United States and other regulated world markets.  An inability to obtain or maintain such certification could restrict our ability to achieve our growth objectives, which would adversely affect our business, financial condition and results of operations.

We may not achieve the anticipated benefits from our acquisitions and we may face integration difficulties, which could adversely affect our operating results, increase costs and place a significant strain on our management.
 
If we fail to manage the integration of our acquisitions and fail to achieve expected synergies and revenue growth, our business could be disrupted and our operating results could be negatively impacted. The operating success of our acquisitions involves the integration of products, processes and personnel into our business. In addition, the integration of acquisitions may require establishing or training a local management team and overseeing the operations remotely, and can involve cultural, monetary and systems challenges. Our personnel, systems, procedures, or controls may not be adequate to support both our ongoing business and the acquired businesses. If any newly-acquired businesses or assets require a disproportionate share of our resources and management’s attention, our overall financial results may suffer.

We become involved in legal proceedings from time to time, any of which may result in substantial losses, damage to our business and reputation and place a strain on our internal resources.
 
In the ordinary course of our business, we become involved in legal proceedings with both private parties and certain government agencies, including the FDA. Any substantial litigation may result in verdicts against us, which may include significant monetary awards, judgments that certain of our intellectual property rights are invalid or unenforceable and injunctions preventing the manufacture, marketing and sale of our products. If disputes are resolved unfavorably, our business, financial condition and results of operations may be adversely affected. Any litigation, whether or not successful, may damage our reputation. Furthermore, we are likely to incur substantial expense in defending these lawsuits and the time demands of such lawsuits could divert management’s attention from ongoing business concerns and interfere with our normal operations.

Charges to earnings resulting from acquisitions could have a material adverse effect on our business, financial position and results of operations.
 
Under accounting principles generally accepted in the United States of America (“GAAP”) business acquisition accounting standards, we recognize the identifiable assets acquired, the liabilities assumed, and any noncontrolling interests in acquired companies generally at their acquisition date fair values and, in each case, separately from goodwill. Goodwill as of the acquisition date is measured as the excess amount of consideration transferred, which is also generally measured at fair value, and the net of the acquisition date amounts of the identifiable assets acquired and the liabilities assumed. Our estimates of fair value are based upon assumptions believed to be reasonable, but which are inherently uncertain. After we complete an acquisition, the following factors could result in material charges and adversely affect our operating results and may adversely affect our cash flow:
 
costs incurred to combine the operations of companies we acquire, such as transitional employee expenses and employee retention, redeployment or relocation expenses;
impairment of goodwill or intangible assets, including acquired IPR&D;
amortization of intangible assets acquired;
a reduction in the useful lives of intangible assets acquired;
identification of or changes to assumed contingent liabilities, including, but not limited to, contingent purchase price consideration, income tax contingencies and other non-income tax contingencies, after our final determination of the amounts for these contingencies or the conclusion of the measurement period (generally up to one year from the acquisition date), whichever comes first;
charges to our operating results to eliminate certain duplicative pre-acquisition activities, to restructure our operations or to reduce our cost structure;
charges to our operating results resulting from expenses incurred to effect the acquisition;
changes to contingent consideration liabilities, including accretion and fair value adjustments. A significant portion of these adjustments could be accounted for as expenses that will decrease our net income and earnings per share for the periods in which those costs are incurred. Such charges could cause a material adverse effect on our business, financial position, results of operations and/or cash flow, and could cause the market value of our common stock to decline.
 

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As of December 31, 2016, we had recorded $284.3 million of goodwill on our consolidated balance sheet.
 
The Chairman of our Board of Directors, through his stock ownership and his right to nominate up to two other directors, could have an adverse effect on the market value of our stock and have substantial influence over our business strategies and policies.

John N. Kapoor, Ph.D., the Chairman of our Board of Directors, is a principal shareholder. As of December 31, 2016, Dr. Kapoor beneficially controls approximately 25% of our common stock. In addition, through the Kapoor Trust and EJ Financial, Dr. Kapoor is entitled to nominate up to three persons to serve on our Board. Dr. Kapoor and Mr. Brian Tambi were nominated for these purposes. The other seat for nomination has remained vacant. Nomination of another director to our Board or any trading of our common stock by Dr. Kapoor and his related parties could have an adverse effect on the market value of our common stock and an adverse effect on our business.


Risks Related to Our Industry.
 
Many of the raw materials and components used in our products come from a single source, the loss of any of which could have a material adverse effect on our business.
 
We require raw materials and components to manufacture and package pharmaceutical products. The principal components of our products are active and inactive pharmaceutical ingredients and certain packaging materials. Many of these materials are available from only a single source and, in the case of many of our products, only one supplier of raw materials has been identified and qualified. Because FDA approval of drugs requires manufacturers to specify their proposed suppliers of active ingredients and certain packaging materials in their applications, FDA approval of any new supplier would be required if such active ingredients or such packaging materials were no longer available from the specified supplier. The qualification of a new supplier could delay our development and marketing efforts. If for any reason we are unable to obtain sufficient quantities of any of the raw materials or components required to produce and package our products, we may not be able to manufacture our products as planned.
 
Sales of our products may be adversely affected by the continuing consolidation of our customer base, which may have a material adverse effect on our business plans, financial position and results of operations.
 
Drug wholesalers, drug retailers, and group purchasing organizations have undergone, and are continuing to undergo, significant consolidation. Such consolidation has provided and may continue to provide them with additional purchasing leverage, and consequently may increase the pricing pressures that we face. Our net revenues and quarterly growth comparisons may be affected by fluctuations in the buying patterns of retail chains, major distributors and other trade buyers, whether resulting from seasonality, pricing, wholesaler buying decisions or other factors. In addition, since such a significant portion of our revenues is derived from relatively few customers, any financial difficulties experienced by a single customer, or any delay in receiving payments from a single customer, could have a material adverse effect on our business, results of operations and financial condition.
 
Changes in technology could render our products obsolete.
 
The pharmaceutical industry is characterized by rapid technological change. The products that we sell today and their drug delivery methods may be replaced by more effective methods to deliver the same care, rendering our current products obsolete. Further, the technologies that we invest in for future use may not become the preferred method of delivery.

Our branded products may become subject to increased generic competition.
 
Trends moving toward increased substitution and reimbursement of generics for cost-containment purposes may reduce and limit the sales of our off-patent branded products. Additionally, increased focus by the FDA on approval of generics may accelerate this trend.
 

Risks Related to Regulations.
 
We are subject to extensive government regulations which if they change and or we are not in compliance with, could increase our costs, subject us to various obligations and fines, or prevent us from selling our products or operating our facilities.

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New, modified and additional regulations, statutes or legal interpretation, if any, could, among other things, require changes to manufacturing methods, expanded or different labeling, recall, replacement or discontinuation of certain products, additional recordkeeping procedures, expanded documentation of the properties of certain products and additional scientific substantiation. Such changes or new legislation could have a material adverse effect on our business, financial condition and results of operations.  Certain of the regulatory risks that we are subject to are outlined below:
 
We must obtain approval from the FDA for each prescription pharmaceutical product that we market and the timing of such approval process is unknown and uncertain. The FDA approval process is typically lengthy, and approval is never certain. Our new products could take a significantly longer time than we expect to gain regulatory approval and may never gain approval. Even if the FDA or another regulatory agency approves a product, the approval may limit the indicated uses for a product, may otherwise limit our ability to promote, sell and distribute a product or may require post-marketing studies or impose other post-marketing obligations, which could have a material adverse effect on marketability and profitability of the new products.
 
We and our third-party manufacturers are subject to periodic inspection by the FDA to assure regulatory compliance regarding the manufacturing, distribution, and promotion of pharmaceutical products. The FDA imposes stringent mandatory requirements on the manufacture and distribution of pharmaceutical products to ensure their safety and efficacy. The FDA also regulates drug labeling and the advertising of prescription drugs. A finding by a governmental agency or court that we are not in compliance with FDA requirements could have a material adverse effect on our business, financial condition and results of operations.
 
We are subject to recalls and other enforcement actions by the FDA. The FDA or other government agencies having regulatory authority over pharmaceutical products may request us to voluntarily or involuntarily conduct product recalls due to disputed labeling claims, manufacturing issues, quality defects or for other reasons. Restriction or prohibition on sales, halting of manufacturing operations, recalls of our pharmaceutical products or other enforcement actions could have a material adverse effect on our business, financial condition and results of operations. Further, such actions, in certain circumstances, may constitute an event of default under the terms of our various financing arrangements.
 
If the FDA changes its regulatory policies, it could force us to delay or suspend our manufacturing, distribution or sales of certain products. FDA interpretations of existing or pending regulations and standards may change over time with the advancement of associated technologies, industry trends, or prevailing scientific rationale. If the FDA changes its regulatory policies due to such factors, it could result in delay or suspension of the manufacturing, distribution or sales of certain of our products. In addition, modifications or enhancements of approved products are in many circumstances subject to additional FDA approvals which may or may not be granted and which may be subject to a lengthy application process. Any change in the FDA’s enforcement policy or any decision by the FDA to require an approved application for one of our products not currently subject to the approved application requirements or any delay in the FDA approving an application for one of our products could have a material adverse effect on our business, financial condition and results of operations.
 
We are subject to extensive DEA regulation, which could result in our being fined or otherwise penalized if we are in non-compliance. The DEA could limit or reduce the amount of controlled substances which we are permitted to manufacture and market or issue fines and penalties against us for non-compliance with DEA regulations, which could have a material adverse effect on our business, financial condition and results of operations.
 
We are subject to the Federal Drug Supply Chain Security Act (“DSCSA”) that requires development of an electronic pedigree to track and trace each prescription drug at the salable unit level through the distribution system, which will become incrementally effective over a 10-year period. Beginning in November 2017, all prescription drug manufacturers, including us, must label prescription products with a unique serial number at the saleable unit level. Failure to meet this deadline would likely have a significant adverse impact on our business.

Changes in healthcare law and policy changes may adversely affect our business plans and results of operations.
 
The sales of our products depend in part on the availability of reimbursement from third-party payers such as government health administration authorities, private health insurers, health maintenance organizations including Pharmacy Benefit Managers (“PBMs”) and other healthcare-related organizations. We expect both federal and state governments in the U.S. and foreign governments to continue to propose and pass new legislation, rules and regulations designed to contain or reduce the cost of healthcare. Existing regulations that affect the price of pharmaceutical and other medical products may also change before any of our products are approved for marketing. Cost control initiatives could decrease the price that we receive for any product we develop in the future. In addition, PBMs and other third-party payers are increasingly challenging the price and

19



cost-effectiveness of medical products and services. Significant uncertainty exists as to the reimbursement status of newly approved pharmaceutical products. Our products may not be considered cost effective, or adequate third-party reimbursement may not be available to enable us to maintain price levels sufficient to realize a return on our investments. Any such changes in healthcare law or policy may harm our ability to market our products and generate profits.
 
The FDA may require us to stop marketing certain unapproved drugs, which could have a material adverse effect on our business, financial position and results of operations.
 
We market several generic prescription products which do not have formal FDA approvals. These products are non-application drugs that are manufactured and marketed without FDA approved filings on the basis of their having been marketed by the pharmaceutical industry prior to the 1962 Amendments of the FDC Act.  The FDA has increased its efforts to require companies to file and seek FDA approval for unapproved products, and when a product is approved, the FDA has typically increased its effort to remove other unapproved products from the market by issuing notices to companies currently manufacturing these products to cease its distribution of said products. In 2013, we discontinued marketing of a previously unapproved product after receipt of a Warning Letter in October 2012. During 2016, we marketed six such unapproved products, generating net sales revenue of approximately $277.5 million. Of the six products marketed during 2016, none were approved through either an ANDA or an NDA. If the FDA issues Warning Letters or notices with respect to one or more of our unapproved products, we may be forced to discontinue manufacture and marketing of the affected products, which could have an adverse effect on our revenues and results of operations.
  
Any failure to comply with the complex reporting and payment obligations under Medicare, Medicaid and other government programs may result in litigation or sanctions.
 
We are subject to various federal and state laws pertaining to healthcare fraud and abuse, including anti-kickback, false claims, marketing and pricing laws. We are also subject to Medicaid and other government reporting and payment obligations that are highly complex and at times ambiguous. Violations of these laws and reporting obligations are punishable by criminal or civil sanctions and exclusion from participation in federal and state healthcare programs such as Medicare and Medicaid. If our past, present or future operations are found to be in violation of any of the laws described above or other similar governmental regulations, we may be subject to the applicable penalty associated with the violation, which could adversely affect our ability to operate our business and negatively impact our financial results. Further, if there is a change in laws, regulations or administrative or judicial interpretations, we may have to change our business practices or our existing business practices could be challenged as unlawful, which could materially adversely affect our business, financial position and results of operations.

Failure to comply with the U.S. Foreign Corrupt Practices Act could subject us to, among other things, penalties and legal expenses that could harm our reputation and have a material adverse effect on our business, financial condition and operating results.
 
The Company and its employees are subject to the FCPA, which generally prohibits covered entities and their intermediaries from engaging in bribery or making other prohibited payments to foreign officials for the purpose of obtaining or retaining business or other benefits. In addition, the FCPA imposes recordkeeping standards and requirements on publicly traded U.S. corporations and their foreign affiliates, which are intended to prevent the diversion of corporate funds to the payment of bribes and other improper payments, and to prevent the establishment of “off books” slush funds from which such improper payments can be made. If our employees, third-party sales representatives or other agents are found to have engaged in such practices, we could suffer severe penalties, including criminal and civil penalties, disgorgement and other remedial measures, including further changes or enhancements to our procedures, policies and controls, as well as potential personnel changes and disciplinary actions.

The FDA may authorize sales of some prescription pharmaceuticals on a non-prescription basis, which may reduce the profitability of our prescription products.
 
The FDA may change the designation of some prescription pharmaceuticals we currently sell to non-prescription. If we are unable to gain approval of our product on a non-prescription designation we may experience an adverse effect on our business.
 

Risks Related to Our Intellectual Property.
 
Third parties may claim that we infringe their proprietary rights and may prevent or delay us from manufacturing and selling some of our new products.

20



 
The manufacture, use and sale of new products that are the subject of conflicting patent rights have been the subject of substantial litigation in the pharmaceutical industry. Pharmaceutical companies with patented brand products frequently sue companies that file applications to produce generic equivalents of their patented brand products for alleged patent infringement or other violations of intellectual property rights, which may delay or prevent the entry of such generic products into the market. Generally, a generic drug may not be marketed until the applicable patent(s) on the brand name drug expire or are held to be not infringed, invalid, or unenforceable. When we or our development partners submit a filing to the FDA for approval of a generic drug, we or our development partners must certify either (i) that there is no patent listed by the FDA as covering the relevant brand product, (ii) that any patent listed as covering the brand product has expired, (iii) that the patent listed as covering the brand product will expire prior to the marketing of the generic product, in which case the filing will not be finally approved by the FDA until the expiration of such patent, or (iv) that any patent listed as covering the brand drug is invalid or will not be infringed by the manufacture, sale or use of the generic product for which the filing is submitted.
 
Under any circumstance in which an act of infringement is alleged to occur, there is a risk that a brand pharmaceutical company may sue us for alleged patent infringement or other violations of intellectual property rights. Also, competing pharmaceutical companies may file lawsuits against us or our strategic partners alleging patent infringement or may file declaratory judgment actions of non-infringement, invalidity, or unenforceability against us relating to our own patents. We have been sued for patent infringement related to several of our filings and we anticipate that we may be sued once we file for other products in our pipeline. Such litigation is often costly and time-consuming and could result in a substantial delay in, or prevent the introduction and/or marketing of our products, which could have a material adverse effect on our business, financial condition and results of operations.
 
Even if the parties settle their intellectual property disputes through licensing or similar arrangements, the costs associated with these arrangements may be substantial and could include ongoing royalties, and the necessary licenses might not be available to us on terms we believe to be acceptable.
 
Our patents and proprietary rights may be challenged, circumvented or otherwise compromised by competitors, which may result in our protected products losing their market exclusivity and becoming subject to generic competition before their patents expire.
 
The patent and proprietary rights position of competitors in the pharmaceutical industry generally is highly uncertain, involves complex legal and factual questions, and is the subject of much litigation. There can be no assurance that any patent applications or other proprietary rights, including licensed rights, relating to our potential products or processes will result in patents being issued or other proprietary rights secured, or that the resulting patents or proprietary rights, if any, will provide protection against competitors who: (i) successfully challenge our patents or proprietary rights; (ii) obtain patents or proprietary rights that may have an adverse effect on our ability to conduct business; or (iii) are able to circumvent our patent or proprietary rights position. It is possible that other parties have conducted or are conducting research and could make discoveries of pharmaceutical formulations or processes that would precede any discoveries made by us, which could prevent us from obtaining patent or other protection for these discoveries or marketing products developed therefrom. Consequently, others could independently develop pharmaceutical products similar to or rendering obsolete those that we are planning to develop, or duplicate any of our products. Our inability to obtain patents for, or other proprietary rights in, our products and processes or the ability of competitors to circumvent or cause to be obsolete our patents or proprietary rights could have a material adverse effect on our business, financial condition and results of operations.  Additionally, our inability to successfully defend the existing patents on our products against Paragraph IV challenges by competing drug companies could have a material adverse effect on our business, financial condition and results of operations. For example, the patents that protect Azasite® were challenged by two generic competitors. We settled with one competitor and the courts found in our favor with the other. Another product, Zioptan™ currently faces challenges from two generic competitors.
 
Further, the majority of the drug products that we market are generics, with essentially no patent or proprietary rights attached. While this fact allowed us the opportunity to obtain FDA approval to market our generic products, it also allows competing drug companies to do the same. Should multiple additional drug companies choose to develop and market the same generic products that we actively market, our profit margins could decline, which would have a material adverse effect on our business, financial condition and results of operations.
 

Risks Related to Material Weakness.
 
We have identified a material weakness in our internal control over financial reporting. If our remedial measures are insufficient to address the material weakness, or if we otherwise fail to establish and maintain an effective system of

21



internal control over financial reporting, we may not be able to accurately report our financial results, timely file our periodic reports, maintain our reporting status or prevent fraud.

In connection with our assessment of the effectiveness of our internal control over financial reporting as of December 31, 2016, we concluded there was a material weakness in internal control over financial reporting. See Item 9A — “Controls and Procedures.”  Our management or our independent registered public accounting firm may identify other material weaknesses in our internal control over financial reporting in the future. The existence of an internal control material weakness may result in current and potential stockholders losing confidence in our financial reporting, which could harm our business, the market price of our common stock, and our ability to retain our current, or obtain new, alliance and collaboration agreements’ partners.  In addition, the existence of a material weakness in our internal control over financial reporting may affect our ability to timely file periodic reports under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). The inability to timely file periodic reports could result in the SEC revoking the registration of our common stock, which would prohibit us from listing or having our stock quoted on The NASDAQ Global Select Market or any other stock exchange. This would have an adverse effect on our business and stock price by limiting the publicly available information regarding us and greatly reducing the ability of our stockholders to sell or trade our common stock.
 
The restatement of our previously issued 2014 financial statements and the previous delay in our filing of 2015 financial statements has resulted in various governmental investigations and shareholder lawsuits and could result in government enforcement actions, which could have a material adverse impact on our results of operations, financial condition, liquidity, and cash flows.
 
The restatement of our previously issued 2014 financial statements and the previous delay in our filing of 2015 financial statements has resulted in various governmental investigations and shareholder lawsuits. See Part II, Item 8, Note 20 - "Legal Proceedings — Shareholder and Derivative Litigation” and our management may be required to devote significant time and attention to these matters, and these and additional matters that arise from the restatement, any of which could result in government enforcement actions and could have a material adverse impact on our results of operations, financial condition, liquidity and cash flows. We cannot predict the outcome of these matters or estimate the potential exposure at this time.


Risks Related to Financing.

We may need to obtain additional capital to continue to grow our business.
 
We may require additional funds in order to materially grow our business. We require substantial liquidity to implement long-term cost savings and productivity improvement plans, continue capital spending to improve our manufacturing facilities to increase capacity and support product development programs, meet scheduled term debt and lease maturities, to effect acquisitions and to run our normal business operations. We may seek additional funds through public and private financing, including equity and debt offerings. However, adequate funds through the financial markets or from other sources may not be available to us when needed or on favorable terms. Without sufficient additional capital funding, we may be required to delay, scale back or abandon some or all of our product development, manufacturing, acquisition, licensing and marketing initiatives, or operations. Further, such additional financing, if obtained, may require the granting of rights, preferences or privileges senior to those of the common stock and result in substantial dilution of the existing ownership interests of the common stockholders and could include covenants and restrictions that limit our ability to operate or expand our business in a manner that we deem to be in our best interest.

We may not generate cash flow sufficient to pay interest and make required principal repayments on our Term Loans.
 
On April 17, 2014, upon completing the Hi-Tech Acquisition, we entered into a $600.0 million term loan with certain other lenders with JPMorgan Chase Bank, N.A. acting as the administrative agent (the “Existing Term Loan”) and on August 12, 2014, upon completing the VersaPharm Acquisition, we entered into a $445.0 million term loan with certain other lenders with JPMorgan Chase Bank, N.A. acting as the administrative agent (the “Incremental Term Loan”). The Existing Term loan and Incremental Term Loan are collectively the “Term Loans.” The Term Loans significantly increased our debt obligations. The Term Loans bear interest at a variable rate at a margin above prime or LIBOR, at our election. The outstanding balance of the Term Loans is due and payable on April 17, 2021. If we do not generate sufficient operating cash flows to fund these payments or obtain additional funding from external sources at acceptable terms, we may not have sufficient funds to satisfy our principal and interest payment obligations when those obligations are due, which would place us into default under the terms of the Existing Term Loan and the Incremental Term Loan. Such default would have a material adverse effect on our business, financial condition and results of operations. Further, our borrowings are secured by all or substantially all of the Company’s

22



assets. If the Company defaults on its obligations under the Existing Term Loan or the Incremental Term Loans, the lenders may be able to foreclose upon its security interest and otherwise be entitled to obtain or control Company assets.

Our indebtedness reduces our financial and operating flexibility.
 
We have entered into various credit arrangements to fund certain of our operations and activities, principally business combinations. During the year ended December 31, 2014 we significantly increased our debt obligations through new term loans. As of December 31, 2016, our debt includes Term Loans with a remaining principal balance of $831.9 million. We also have available borrowing capacity under our credit facilities (See Part II, Item 8, Note 7 - “Financing Arrangements” for definitions and descriptions of our Term Loans and our credit facilities). A high level of indebtedness subjects us to a number of risks. In particular, a significant portion of our current indebtedness has variable interest terms meaning we are subject to the risks associated with higher interest rates, and moreover, a high level of indebtedness may impair our ability to obtain additional financing in the future and increases the risk that we may default on our debt obligations. In addition, our current debt arrangements require that we devote a significant portion of our cash flows to service amounts outstanding under those debt arrangements. We also are subject to various covenants with respect to our indebtedness, including the obligation to meet certain defined financial ratios and our ability to pay distributions to our shareholders is restricted. Further, our indebtedness may restrict or otherwise impair our ability to raise additional capital through other debt financing, which could restrict our ability to grow our business. Our ability to meet our debt obligations, to comply with all required covenants, and to reduce our level of indebtedness depends on our future performance. General economic conditions and financial, business and other factors affect our operations and our future performance. Many of these factors are beyond our control. If we do not have sufficient funds on hand to pay our debt when due, we may be required to seek a waiver or amendment from our lenders, refinance our indebtedness, incur additional indebtedness, sell assets or sell additional shares of securities. We may not be able to complete such transactions on terms acceptable to us, or at all. Our failure to generate sufficient funds to pay our debts or to undertake any of these actions successfully could result in a default on our debt obligations, which would materially adversely affect our business, results of operations and financial condition.
 

Risks Related to Our Common Stock.
 
Exercise of options and granting of restricted stock units, may have a substantial dilutive effect on our common stock.
 
If the price per share of our common stock at the time of exercise of any stock options is in excess of the various exercise prices of such options, exercise of such options would have a dilutive effect on our common stock. As of December 31, 2016, holders of our outstanding options would receive 4.8 million shares of our common stock at a weighted average exercise price of $27.27 per share.

Our announced stock repurchase program could affect the price of our common stock and increase volatility and may be suspended or terminated at any time, which may result in a decrease in the trading price of our common stock.

In July 2016, the Board authorized a stock repurchase program (the "Stock Repurchase Program"). The Company may effect repurchases under the Stock Repurchase Program from time to time in the open market, in privately negotiated transactions or otherwise, including accelerated stock repurchase arrangements. The timing and actual number of shares repurchased under the Stock Repurchase Program depends on a variety of factors, including the timing of open trading windows, price, corporate and regulatory requirements and other market conditions. Repurchases pursuant to such program could affect our stock price and increase its volatility. The existence of a stock repurchase program could also cause our stock price to be higher than it would be in the absence of such a program and could potentially reduce the market liquidity for our stock. There can be no assurance that any stock repurchases will occur or that if they do, that they will enhance stockholder value as the market price of our common stock may decline below the levels at which we repurchased shares of common stock. In addition, short-term stock price fluctuations could reduce the program’s effectiveness.
 
We may issue preferred stock and the terms of such preferred stock may reduce the market value of our common stock.
 
We are authorized to issue up to a total of 5 million shares of preferred stock in one or more series. Subject to certain limitations, our Board of Directors may authorize issuance of shares of preferred stock and the terms of such preferred stock without further action by holders of our common stock. If we issue shares of preferred stock, it could affect the rights or reduce the market value of our common stock. In particular, specific rights granted to future holders of preferred stock could be used to restrict our ability to merge with or sell our assets to a third party. These terms may include voting rights, preferences as to dividends and liquidation, conversion and redemption rights and sinking fund provisions.

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Item 1B. Unresolved Staff Comments.

None.

Item 2. Properties.

Owned Locations

As of December 31, 2016 the Company owns three facilities in Decatur, Illinois.  The Wyckles Road facility, which consists of 76,000 square feet of building space, is used for packaging, warehousing, distribution, and office space.  The Grand Avenue facility is a 65,000 square-foot manufacturing facility. A third facility is a 750 square-foot storage unit. The Company also owns less than one acre of land adjacent to the Grand Avenue facility, which is available for expansion.  The Decatur facilities support the Prescription Pharmaceuticals and Consumer Health segments.
 
The Company owns five buildings in Hettlingen, Switzerland which support the Prescription Pharmaceuticals segment with approximately 17,500 square feet of manufacturing, office and storage space and approximately 1.5 acres of additional currently undeveloped land.
 
The Company owns seven facilities in Amityville and Copiague, New York, with a total of approximately 225,000 square-feet. These facilities support the Prescription Pharmaceuticals and Consumer Health segments:

42,000 square-foot facility dedicated to liquid and semi-solid production,
28,000 square-foot facility housing a sterile manufacturing facility, DEA manufacturing, chemistry and microbiology laboratories,
72,000 square-foot facility used for warehousing finished goods which also houses our Health Care Products division,
22,000 square-foot facility with 4,000 square feet of office space and 18,000 square feet of warehouse space,
8,000 square-foot office building utilized for administrative functions,
35,000 square-foot facility with mixed office, laboratory and manufacturing space,
18,000 square-foot building used for research and development activities.
 
Our manufacturing facilities in Decatur, Illinois, Amityville, New York and Hettlingen, Switzerland are expected to be adequate to accommodate our current manufacturing needs. 

The Company owns and operates approximately 350,000 square feet of pharmaceutical manufacturing, warehousing and distribution facilities situated on approximately 14 acres of land in Paonta Sahib, Himachal Pradesh, India.  This facility manufactures drugs primarily for contract customers in India and for export to various unregulated world markets. The Company will gain additional capacity to support continued growth if the manufacturing facility in Paonta Sahib, India receives FDA approval to manufacture products for shipment to the U.S. market.

Leased Locations
 
The Company leases four facilities in Somerset, New Jersey. One is a 50,000 square-foot facility used for drug manufacturing, research and development and administrative activities related to our Prescription Pharmaceuticals segment. The second facility is a 15,000 square foot facility used for a quality laboratory and additional office space. The third facility is a 6,600 square foot on-site warehouse, and the fourth facility is a 52,000 square-foot warehouse. The Company also leases a facility in Cranbury, New Jersey that is approximately 23,000 square feet used for research and development activities.

Our corporate headquarters and administrative offices consist of 58,000 square feet of leased space in two office buildings in Lake Forest, Illinois.  In Gurnee, Illinois, we lease approximately 161,000 square feet of space for our product warehousing and distribution needs.  In Vernon Hills, Illinois, the Company leases approximately 28,000 square feet across 4 facilities used for research and development activities. Additionally, the Company leases 30,000 square feet and 49,000 square feet of warehouse space in Decatur, Illinois and Champaign, Illinois, respectively.

Our subsidiary, Akorn Consumer Health, maintains its corporate offices in a 3,200-square foot leased facility in Ann Arbor, Michigan.

In India, the Company leases approximately 14,000 square feet of warehouse and office space.


24



Item 3. Legal Proceedings.

Legal proceedings which may have a material effect on the Company have been further disclosed in Part II, Item 8, Note 20 - “Legal Proceedings” and are herein incorporated by reference.

Item 4. Mine Safety Disclosures.

Not applicable.

Executive Officers  of the Company

The following table identifies our current executive officers, the positions they hold, and the year in which they became an officer, as of February 17, 2017.  Our officers are appointed by the Board to hold office until their successors are elected and qualified.

Name
Position
Age
Year Became
Officer
 
 
 
 
Raj Rai
Chief Executive Officer (“CEO”)
50
2009
Duane A. Portwood
Chief Financial Officer (“CFO”)
50
2015
Joseph Bonaccorsi
Executive Vice President, General Counsel, and Secretary (“General Counsel”)
52
2009
Bruce Kutinsky
Chief Operating Officer (“COO”)
51
2010
Steven Lichter
Executive Vice President, Pharmaceutical Operations
58
2015
Randall E. Pollard
Senior Vice President, Corporate Controller and Chief Accounting Officer ("CAO")
45
2015
Jonathan Kafer
Executive Vice President, Sales and Marketing
53
2016

Raj Rai.  Mr. Rai was appointed Interim Chief Executive Officer in June 2009, and appointed Chief Executive Officer in May 2010.  He had been appointed Strategic Consultant to the Special Committee of the Board in February 2009, following the departure of our former President and Chief Executive Officer.  Prior to joining Akorn, Mr. Rai was the President and CEO of Option Care, Inc., a leading provider of home infusion pharmacy and specialty pharmacy services, which was acquired by Walgreen Co. (now known as Walgreens Boots Alliance, Inc.) in August 2007.  Mr. Rai previously served on the board of directors of SeQual Technologies Inc.
 
Duane A. Portwood.  Mr. Portwood joined Akorn from The Home Depot, Inc., where he was their Vice President & Corporate Controller since 2006. In that role, he was responsible for all of Home Depot’s accounting and financial reporting functions, as well as its financial operations and internal controls. Prior to Home Depot, Mr. Portwood served with the Wm. Wrigley Jr. Company from 1999 to 2006 in a number of accounting and finance leadership roles of increasing responsibility, most recently as Corporate Controller. Mr. Portwood began his career with PricewaterhouseCoopers LLP, where he held numerous leadership positions in their audit and transaction support practices. Mr. Portwood holds an M.B.A. with Honors from the University of Chicago Booth School of Business and a B.S. in Business Administration from the University of Montana. Mr. Portwood is a Certified Public Accountant.
 
Joseph Bonaccorsi.  Mr. Bonaccorsi joined Akorn in 2009 as Senior Vice President, Secretary and General Counsel and was named Executive Vice President, Secretary and General Counsel in 2016.  Mr. Bonaccorsi came to Akorn from Walgreen Co., where he served as Senior Vice President Mergers & Acquisition and Counsel for the Walgreens-Option Care Home Care division. Mr. Bonaccorsi joined Option Care, Inc. in 2002, where he served as Senior Vice President, General Counsel, Secretary and Corporate Compliance Officer through 2007. Prior to joining Option Care, Inc., he was in private law practice in Chicago, Illinois.  He received his B.S. degree from Northwestern University and his Juris Doctorate from Loyola University School of Law, Chicago.
 
Bruce Kutinsky, Pharm.D.  Dr. Kutinsky joined Akorn in 2010 as Senior Vice President of Corporate Strategy and was named President, Consumer Health Division following the Company’s acquisition of Advanced Vision Research, Inc. in May 2011.  In September 2012, Dr. Kutinsky was appointed to serve as Akorn’s Chief Operating Officer.  Before joining Akorn, Dr. Kutinsky was Vice President — Strategic Solutions for Walgreens.  Prior to that, Dr. Kutinsky served in various

25



roles at Option Care from 1997 to 2007, the most recent of which was as Executive Vice President, Specialty Pharmacy.  Dr. Kutinsky holds a Doctor of Pharmacy degree from the University of Michigan.
 
Steve Lichter. Mr. Lichter joined Akorn in early 2015 as Executive Vice President, Pharmaceutical Operations. Mr. Lichter joins Akorn from Abbott Laboratories, where he served in various leadership roles over 32 years, most recently as Corporate Vice President, Operations, for Abbott’s Established Pharmaceutical Division in Switzerland. In this role, Mr. Lichter was responsible for the division’s global supply chain operations including active and finished drug product manufacturing, procurement, manufacturing, engineering and commercial operations. Mr. Lichter holds a B.S. in Business Management and an M.B.A. from Northern Illinois University.
 
Randall E. Pollard.  Mr. Pollard joined Akorn in April 2015 as Vice President, Corporate Controller and is currently serving as Senior Vice President, Chief Accounting Officer. Mr. Pollard joined Akorn from Novartis Pharmaceuticals, where he most recently served as the head of accounting and reporting for Novartis’ generic division, Sandoz. During his tenure at Novartis, Mr. Pollard also served as Controller of the Sandoz division. Prior to Novartis/Sandoz, he had served in various financial leadership roles at Wyeth Pharmaceutics and Mayne Pharma. Mr. Pollard began his career in public accounting at Arthur Andersen. Mr. Pollard is a Certified Public Accountant and holds a B.S. in Accounting from Pennsylvania State University and an M.B.A. from Fairleigh Dickinson University.
 
Jonathan Kafer. Mr. Kafer joined Akorn in April 2015 as Executive Vice President, Sales and Marketing. Mr. Kafer joins Akorn from Allergan, Inc., where he was previously the Vice President, Account Management. At Allergan, Mr. Kafer was responsible for all trade activity within Allergan’s wholesale, retail specialty pharmacy, e-Solutions and managed market channels for all of Allergan’s business units. Prior to Allergan, Mr. Kafer was the Vice President of Sales and Marketing for Health Systems at Teva Pharmaceuticals. Mr. Kafer has also served in various senior management roles at aaiPharma, Xanodyne Pharmaceuticals, HealthNexis and Novartis. Mr. Kafer holds a B.A. in Organizational Communications from The Ohio State University.

26



PART II

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.

The following table sets forth, for the fiscal periods indicated, the high and low sales prices for our common stock for the two most recent fiscal years.  From February 7, 2007 to the date of this report, our common stock has been listed on the NASDAQ Global Select Market under the symbol “AKRX”.  Previously, from November 24, 2004 until February 6, 2007, our common stock was listed on the American Stock Exchange (currently known as the NYSE MKT) under the symbol “AKN.”

 
High
 
Low
Year Ended December 31, 2016
 
 
 
4th Quarter (October 1, 2016 - December 31, 2016)
$
28.42

 
$
17.61

3rd Quarter (July 1, 2016 - September 30, 2016)
35.40

 
26.07

2nd Quarter (April 1, 2016 - June 30, 2016)
31.92

 
19.18

1st Quarter (January 1, 2016 - March 31, 2016)
39.46

 
17.57

Year Ended December 31, 2015
 

 
 

4th Quarter (October 1, 2015 - December 31, 2015)
$
37.86

 
$
19.08

3rd Quarter (July 1, 2015 - September 30, 2015)
47.35

 
26.30

2nd Quarter (April 1, 2015 - June 30, 2015)
57.10

 
38.63

1st Quarter (January 1, 2015 - March 31, 2015)
55.86

 
35.45


As of February 17, 2017, there were 124,415,759 shares of our common stock outstanding, held by 299 stockholders of record. This number does not include stockholders for which shares are held in a “nominee” or “street” name. The closing price of our common stock on February 17, 2017 was $21.78 per share.

We did not pay cash dividends in 2016, 2015 or 2014 and do not expect to pay dividends on our common stock in the foreseeable future. Moreover, we may be restricted or limited from making dividend payments pursuant to the terms of our financing arrangements with certain other financial institutions (see Item 8, Note 7 - "Financing Arrangements”).

During the quarter ended December 31, 2016, the Company repurchased a total of approximately 0.9 million shares at an average price of $22.06 per share of common stock. See Item 8, Note 21 - "Share Repurchases" for further information. The Company did not repurchase any of our common stock during the years 2015 or 2014. The Company's activity during the quarter is summarized in the following table:


Period
Total Number of Shares Repurchased
Average Price Paid per Share (including commission costs)
Cumulative Number of Shares Purchased as Part of Publicly Announced Plans or Programs
Dollar Value of Shares that may yet be Purchased under the Plans or Programs
October 1-31, 2016

$

901,382

$
174,995,663.32

November 1-30, 2016
906,451

$
22.06

1,807,833

$
154,999,354.26

December 1-31, 2016

$

1,807,833

$
154,999,354.26

Quarterly Total
906,451

 
 
 




27



PERFORMANCE GRAPH

The following Stock Performance Graph and related information shall not be deemed “soliciting material” or “filed” with the Securities and Exchange Commission, nor should such information be incorporated by reference into any future filings under the Securities Act of 1933 or the Securities Exchange Act of 1934, each as amended, except to the extent that we specifically incorporate it by reference in such filing.

The graph below compares the cumulative shareholder return on our common stock with the NASDAQ Composite Index (ticker symbol: ^IXIC) and the NASDAQ Health Care Index (ticker symbol: ^IXHC) over the last five years through December 31, 2016.  The graph assumes $100 was invested in our common stock, as well as the two indices presented, at the end of December 2011 and that all dividends were reinvested during the subsequent five-year period. 

http://api.tenkwizard.com/cgi/image?quest=1&rid=23&ipage=11438105&doc=14

Total Return Chart
2011

 
2012

 
2013

 
2014

 
2015

 
2016

NASDAQ Composite Index (^IXIC)
100

 
116

 
160

 
182

 
192

 
207

NASDAQ Health Care Index (^IXHC)
100

 
127

 
200

 
257

 
274

 
228

Akorn, Inc. (AKRX)
100

 
120

 
221

 
326

 
336

 
196



28



Item 6. Selected Financial Data

The following table sets forth selected summary historical financial data.  We have prepared this table using our consolidated financial statements for the five years ended December 31, 2016, 2015, 2014, 2013 and 2012.  Our consolidated financial statements upon which the selected summary historical financial data is derived were audited by Ernst & Young LLP, independent registered public accounting firm, during the year ended December 31, 2012 and were audited by BDO USA, LLP (“BDO”), independent registered public accounting firm, during each of the four years ended December 31, 2016, 2015, 2014 and 2013.  Certain prior-period amounts have been reclassified to conform to current-period presentation including current and non-current deferred tax assets and liabilities and short-term and long-term deferred financing fee and debt disclosure on the consolidated balance sheet. This summary should be read in conjunction with our audited Consolidated Financial Statements and Notes thereto, and "Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations" and other financial information included herein.


29



 
Years Ended December 31,
 
2016
 
2015
 
2014
 
2013
 
2012
(In thousands, except per share data)
 
 
 
 
 
 
 
 
 
Revenues
$
1,116,843

 
$
985,076

 
$
555,048

 
$
317,711

 
$
256,158

Gross profit
674,271

 
596,012

 
261,360

 
171,904

 
148,692

Operating income
327,571

 
294,611

 
60,816

 
88,204

 
68,756

Interest and other non-operating income (expense)
(56,271
)
 
(62,455
)
 
(35,474
)
 
(5,309
)
 
(11,256
)
Pretax income from continuing operations
271,300

 
232,156

 
25,342

 
82,895

 
57,500

Income tax provision (benefit) from continuing operations
87,057

 
81,358

 
10,954

 
30,533

 
22,122

Income from continuing operations
$
184,243

 
$
150,798

 
$
14,388

 
$
52,362

 
$
35,378

Weighted average shares outstanding:
 
 
 

 
 

 
 

 
 

Basic
122,869

 
116,980

 
103,480

 
96,181

 
95,189

Diluted
125,801

 
125,762

 
109,588

 
113,898

 
110,510

PER SHARE:
 
 
 

 
 

 
 

 
 

Equity, per diluted share
$
6.51

 
$
4.94

 
$
3.25

 
$
2.28

 
$
1.82

Income from continuing operations per share:
 
 
 

 
 

 
 

 
 

Basic
$
1.50

 
$
1.29

 
$
0.14

 
$
0.54

 
$
0.37

Diluted
$
1.47

 
$
1.22

 
$
0.13

 
$
0.46

 
$
0.32

Share Price: High
$
39.46

 
$
57.10

 
$
45.25

 
$
26.16

 
$
16.87

  Low
$
17.57

 
$
19.08

 
$
20.52

 
$
12.44

 
$
10.52

BALANCE SHEET DATA:
 
 
 

 
 

 
 

 
 

Current assets
$
685,811

 
$
708,132

 
$
437,750

 
$
169,108

 
$
156,716

Net property, plant & equipment
$
238,404

 
$
179,614

 
$
144,196

 
$
82,108

 
$
80,679

Total assets
$
1,973,720

 
$
2,042,545

 
$
1,832,150

 
$
426,129

 
$
364,496

Current liabilities
$
175,555

 
$
231,376

 
$
150,853

 
$
61,245

 
$
43,291

Long-term obligations, less current installments
$
978,981

 
$
1,189,604

 
$
1,324,990

 
$
104,704

 
$
120,124

Shareholders’ equity
$
819,184

 
$
621,565

 
$
356,307

 
$
260,180

 
$
201,081

CASH FLOW DATA:
 
 
 

 
 

 
 

 
 

Cash provided by operating activities
$
167,759

 
$
297,648

 
$
40,442

 
$
57,326

 
$
26,244

Cash used in investing activities
$
(72,922
)
 
$
(53,718
)
 
$
(966,874
)
 
$
(66,874
)
 
$
(75,501
)
Cash provided by (used in) financing activities
$
(240,333
)
 
$
31,908

 
$
963,116

 
$
3,118

 
$
6,366

Effect of changes in exchange rates
$
2

 
$
(251
)
 
$
(183
)
 
$
(173
)
 
$
(290
)
(Decrease)/increase in cash and cash equivalents
$
(145,494
)
 
$
275,587

 
$
36,501

 
$
(6,603
)
 
$
(43,181
)


30



Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

OVERVIEW

We, together with our wholly-owned subsidiaries, are a specialty generic pharmaceutical company that develops, manufactures and markets generic and branded prescription pharmaceuticals, branded and private-label OTC consumer health products and animal health pharmaceuticals. We are an industry leader in the development, manufacturing and marketing of specialized generic pharmaceutical products. As such, we specialize in difficult-to-manufacture sterile and non-sterile dosage forms including, but not limited to, ophthalmics, injectables, oral liquids, otics, topicals, inhalants and nasal sprays.
 
We have identified two reportable segments:
 
Prescription Pharmaceuticals, we manufacture and market generic and branded prescription pharmaceuticals including ophthalmics, injectables, oral liquids, otics, topical, inhalants, and nasal sprays.
Consumer Health, we manufacture and market branded and private-label animal health and OTC products.
 
For a more detailed description of the products and customers that comprise our reportable segments, see Part I, Item 1 - Business.
 
Acquisitions:
 
In previous years, we have completed several business, asset and product acquisitions, including the various acquisitions described below. As a result of purchase accounting, we generally only reflect the results of an acquired business from the date of acquisition, which significantly affects the comparability of our financial results from period to period.
 
We made several acquisitions of businesses that we believe complement our existing business and strategy. On January 2, 2015, we completed the Akorn AG acquisition, a Swiss contract manufacturer specializing in ophthalmic products. The purchase price of this acquisition was $28.4 million, which was net of certain working capital and inventory adjustments. On August 12, 2014, we completed the VersaPharm acquisition, a developer and marketer of multi-source prescription pharmaceuticals. The purchase price of this acquisition was approximately $433.0 million, subject to net working capital adjustments. On April 17, 2014, we completed the Hi-Tech acquisition, a specialty pharmaceutical company which develops, manufactures and markets generic and branded prescription and OTC products. The purchase price of this acquisition was approximately $650.0 million.
 
Similarly, we have made several acquisitions of products and assets that we believe complement our existing product offerings. On October 2, 2014, we acquired certain rights and inventory related to a suite of animal health injectable products formerly owned by Lloyd, Inc. These products have uses in pain management and anesthesia. The aggregate upfront and deferred purchase price of this product acquisition was $18.0 million. On October 1, 2014, we acquired certain rights and inventory related to the branded product Xopenex® Inhalation Solution. This product is indicated for the treatment or prevention of bronchospasm in adults, adolescents and certain children with reversible obstructive airway disease. The purchase price of this product acquisition was $45.0 million, partially offset by acquired reserves. On April 1, 2014 and January 2, 2014, we acquired certain rights to Zioptan™ and Betimol® respectively. Both products are prescription ophthalmic eye drops indicated for treatment of intraocular hypertension. The purchase price of the Zioptan™ product acquisition was $11.2 million. The total consideration of the Betimol® product acquisition was $12.2 million. There is also the potential of a $2.0 million increase to the total consideration should net sales of Betimol® exceed a sizable threshold in any one of the first five years following the acquisition, but the Company has not assessed value to this contingent consideration as it is unlikely.
 

New Product Development:

During the year ended December 31, 2016, we submitted 12 new ANDA filings, one NDA and three ANADA filings to the FDA. In the prior year ended December 31, 2015, we submitted 18 ANDA filings and one NDA filing while in 2014 we submitted 23 ANDA filings to the FDA. Akorn and its partners received seven ANDA product approvals and 3 tentative ANDA approvals from the FDA in the year ended December 31, 2016; 11 ANDA approvals, two ANADA approvals, one NDA product approval, one supplemental ANDA approval and two tentative ANDA approvals in 2015 and finally, 14 ANDA approvals, one NDA product approval and two tentative ANDA approvals in 2014. As of December 31, 2016, we had 92 ANDA filings under review by the FDA. We plan to continue to regularly submit additional filings based on perceived market opportunities and our R&D pipeline. We continue to develop new products internally; as well as partner with other drug companies for products that

31



we would not intend to manufacture ourselves. Our R&D expense in the year ended December 31, 2016 was $42.6 million as compared to $40.7 million in the prior year ended December 31, 2015.

Revenue & Gross Profit:

Our revenue increased to $1,116.8 million in 2016, an increase of 13.4% over revenue of $985.1 million in 2015.  Of this $131.8 million increase, $135.3 million or 102.7% was related to organic product growth, principally through volume increases. Our 2016 gross profit increased by $78.3 million, or 13.1% over gross profit of $596.0 million in 2015. Our overall 2016 gross profit margin of 60.4% was essentially flat compared to 60.5% in 2015.

Sales Practices:
 
We have, often late in a fiscal quarter, offered to certain customers, incentives, such as extended payment terms or discounts, primarily in an effort to increase customer orders during that quarter and achieve sales targets and goals, which may have impacted sales in subsequent quarterly periods. We also from time to time offer incentives with respect to the launch of new products. We believe these practices are consistent with industry practice. For all sales under which these incentives were provided during the periods presented in this Management’s Discussion & Analysis, revenue received from such sales was properly accounted for in accordance with ASC 605 — “Revenue Recognition” and was recognized in the proper applicable accounting period.

RESULTS OF OPERATIONS

For the years 2016, 2015 and 2014, we have identified and reported operating results for two distinct business segments:  Prescription Pharmaceuticals and Consumer Health. Our reported results by segment are based upon various internal financial reports that disaggregate certain operating information. Our Chief Operating Decision Maker (CODM), as defined in Accounting Standards Codification (“ASC”) Topic 280, Segment Reporting, is our Chief Executive Officer (CEO), Raj Rai.  Our CEO oversees operational assessments and resource allocations based upon the results of our reportable segments, all of which have available discrete financial information (See Item 8, Note 12 – “Segment Information” for further discussion).

The following table sets forth amounts and percentages of total revenue for certain items from our Consolidated Statements of Comprehensive Income and our segment reporting information for the years ended December 31, 2016, 2015 and 2014 (dollar amounts in thousands):


32



 
2016
 
2015
 
2014
 
Amount
 
% of Revenue
 
Amount
 
% of Revenue
 
Amount
 
% of Revenue
Revenues:
 
 
 
 
 
 
 
 
 
 
 
Prescription Pharmaceuticals
$
1,053,579

 
94.3
%
 
$
924,472

 
93.8
%
 
$
504,688

 
90.9
 %
Consumer Health
63,264

 
5.7
%
 
60,604

 
6.2
%
 
50,360

 
9.1
 %
Total revenues
1,116,843

 
100.0
%
 
985,076

 
100.0
%
 
555,048

 
100.0
 %
Gross profit and gross margin percentage:
 

 
 

 
 

 
 

 
 
 
 
Prescription Pharmaceuticals
645,078

 
61.2
%
 
566,298

 
61.3
%
 
233,833

 
46.3
 %
Consumer Health
29,193

 
46.1
%
 
29,714

 
49.0
%
 
27,527

 
54.7
 %
Total gross profit
674,271

 
60.4
%
 
596,012

 
60.5
%
 
261,360

 
47.1
 %
Operating expenses:
 

 
 

 
 

 
 

 
 
 
 
Selling, general & administrative expenses
197,501

 
17.7
%
 
162,205

 
16.5
%
 
92,955

 
16.7
 %
Acquisition-related costs
364

 
%
 
1,841

 
0.2
%
 
32,840

 
5.9
 %
Research and development expenses
42,603

 
3.8
%
 
40,707

 
4.1
%
 
31,256

 
5.6
 %
Amortization of intangibles
65,713

 
5.9
%
 
66,272

 
6.7
%
 
43,493

 
7.8
 %
Impairment of intangible assets
40,519

 
3.6
%
 
30,376

 
3.1
%
 

 
 %
Operating income
$
327,571

 
29.3
%
 
$
294,611

 
29.9
%
 
$
60,816

 
11.0
 %
Income from continuing operations
184,243

 
16.5
%
 
150,798

 
15.3
%
 
14,388

 
2.6
 %
Loss from discontinued operations

 
%
 

 
%
 
(504
)
 
(0.1
)%
Net income
$
184,243

 
16.5
%
 
$
150,798

 
15.3
%
 
$
13,884

 
2.5
 %

COMPARISON OF YEARS ENDED DECEMBER 31, 2016 AND 2015

Our revenues were $1,116.8 million in 2016, an increase of $131.8 million, or 13.4%, as compared to 2015.  The increase in revenue in the period was primarily due to $135.3 million of organic revenue growth and $22.2 million of growth from new and re-launched products in comparison to the prior year, partially offset by a $17.0 million reduction due to discontinued products and $8.7 million reduction in Akorn AG revenues due primarily to lower revenues from contract manufacturing.  The $135.3 million organic revenue growth was due to approximately $96 million volume increases and $39 million from price changes principally due to increased pricing growth for an unapproved product and the competitive nature of our business and industry.
 
2016 revenues from our Prescription Pharmaceuticals segment were $1,053.6 million, an increase of $129.1 million, or 14.0%, from the prior year.  This increase was primarily related to organic growth which generated $132.6 million of the change and sales of new and re-launched products, which accounted for $22.2 million of the increase. These increases were partially offset by a decrease in revenues from products divested or discontinued in the current or prior year which reduced comparative period revenues by $17.0 million and a decrease in acquisition revenues from the Hettlingen acquisition of $8.7 million.  

The Consumer Health segment revenues were $63.3 million, an increase of $2.7 million, or 4.4%, from the prior year due solely to organic revenue growth.
 
Our 2016 revenues of $1,116.8 million were net of adjustments totaling $1,774.4 million for chargebacks, rebates, administrative fees and others, product returns, discounts and allowances and advertising, promotions and other.  Chargeback expenses for 2016 were $1,218.6 million, or 42.1% of gross sales, compared to $1,065.2 million, or 42.4% of gross sales, in 2015.  The $153.3 million increase in chargeback expense was due to the impact of product and customer mix. Rebates, administrative fees and other expenses in 2016 were $463.7 million, or 16.0% of gross sales, compared to $367.5 million, or 14.6% in the prior year. The $96.2 million increase in rebates, administrative fees and other expenses was due to the impact of product and customer mix. Our product returns provision in 2016 was $28.3 million, or 1.0% of gross sales, compared to $34.3 million, or 1.4% of gross sales, in 2015.  Discounts and allowances increased from $50.4 million in 2015, or 2.0% of gross sales, to $55.5 million, or 1.9% of gross sales in 2016 while advertisement and promotion expense decreased from $9.2 million, or 0.4% of gross sales in 2015 to $8.4 million, or 0.3% of gross sales in 2016.
 

33



Our consolidated gross profit for 2016 was $674.3 million, or 60.4% of revenue, compared to $596.0 million, or 60.5% of revenue, in 2015.  This $78.3 million, or 13.1%, increase in gross profit was principally due to increased volume and price for an unapproved product, partially offset by price declines within the generic product portfolio and costs associated with price changes.  
 
The Prescription Pharmaceuticals segment gross profit for 2016 was $645.1 million, or 61.2% of the 2016 segment revenue, compared to $566.3 million, or 61.3% of the 2015 segment revenue.  The increase in the gross profit was due to increased volume and price for an unapproved product, partially offset by price declines within the generic product portfolio, unfavorable product mix shifts, write-offs related to excess inventory and costs associated with price changes.  

The Consumer Health segment gross profit for 2016 and 2015 were essentially identical at $29.2 million and $29.7 million, respectively.
 
Total operating expenses were $346.7 million in 2016, an increase of $45.3 million, or 15.0%, over the prior year 2015. The main drivers of the variance were increases of $35.3 million and $10.1 million in selling, general and administrative (“SG&A”) expenses and impairment of intangible assets, respectively. The following is a discussion of the main drivers of the increase:
 
Selling, general and administrative (“SG&A”) expenses were $197.5 million in 2016, an increase of $35.3 million, or 21.8%, over the prior year expense of $162.2 million. The primary drivers of the increase were $13.0 million increase in consulting and outside service expenses, $10.9 million increased wages and other costs, $6.8 million increase in restatement related expenses and $3.3 million increase in management bonus and $2.3 million in restricted stock awards, partially offset by a decrease in accounting, audit and legal fees of $2.2 million.
 
 During 2016, the Company impaired eight currently marketed products licensing rights due to specific recent events in that market, while in 2015, the Company impaired one currently marketed product licensing rights given trends in customer concentration and market dynamics. The total impairment expense in 2016 was $40.5 million or 3.6% of sales as compared to $30.4 million or 3.1% of sales in 2015.
 
Other expenses, net were $56.3 million in 2016, a decrease of $6.2 million, or 9.9%, from the prior year that was primarily due to decreases of $9.2 million in interest expense and $4.3 million in other non-operating expenses, net, partially offset by an increase of $6.5 million in amortization of deferred financing costs. The main drivers of the net decrease were comprised of the following fluctuations:
 
Total interest expense was $42.7 million in 2016, compared to $52.0 million in the prior year.  The decrease in the year is primarily due to the reduced term loan principal as a result of the $200.0 million interim principal repayment in February 2016.
 
Other non-operating expense was $2.7 million in 2016, compared to $7.0 million in the prior year.  The decrease in the year is primarily due to $1.8 million decrease in litigation losses, $1.2 million loss in the prior year on conversion of the convertible notes and $1.1 million impact of the bonus clawback of certain employee bonuses.

Amortization of deferred financing costs totaled approximately $10.8 million in 2016, an increase of $6.5 million as compared to the $4.3 million recognized in 2015.  The increase in deferred financing fees expense in the year was principally due to deferred financing fee write-offs associated with the $200.0 million interim principal repayment in February 2016.

Income tax expense was $87.1 million based on an effective tax provision rate of approximately 32.1% in 2016, compared to $81.4 million in the prior year based on an effective tax provision rate of approximately 35.0%. This reduction in the tax rate experienced by the Company was principally the result of the adoption of ASU 2016-09 as discussed in "Recent Accounting Pronouncements" below, partially offset by non-deductible losses at foreign subsidiaries.
 
We reported a net income of $184.2 million in 2016, or 16.5% of revenues, compared to net income of $150.8 million, or 15.3% of revenues in 2015.

COMPARISON OF YEARS ENDED DECEMBER 31, 2015 AND 2014

Our revenues were $985.1 million in 2015, an increase of $430.1 million, or 77.5%, as compared to 2014.  The increase in revenue was primarily due to the full year effect of acquisitions completed during the prior year including Hi-Tech, which

34



generated $324.5 million of revenue in the year and VersaPharm, which generated $63.9 million of revenue in the year, in comparison to prior year revenues of $150.7 million for Hi-Tech and $24.5 million for VersaPharm, and other product acquisitions which generated $75.1 million in the year compared to $24.9 million in the prior year. Of the remaining $166.6 million increase, existing Akorn organic revenues increased $138.7 million from 2014. With $29.0 million, or 20.9% of the change from increased volumes and $109.7 million from price changes due to the competitive nature of our business and industry, $31.2 million related to new or recently re-launched products, partially offset by a $3.3 million decline in yearly revenues due to products which were either divested or discontinued during the year.
 
2015 revenues from our Prescription Pharmaceuticals segment were $924.5 million, an increase of $419.8 million, or 83.2%, from the prior year.  This increase was primarily related to the full year impact of acquisitions completed in the prior year which generated $256.9 million of the change, sales of new and re-launched products, which accounted for $31.2 million of the increase, and increased sales of existing products which accounted for $135.0 million. These increases were partially offset by declining revenues from products divested or discontinued in the current or prior year which reduced comparative period revenues by $3.3 million.  The Consumer Health segment revenues were $60.6 million, an increase of $10.3 million, or 20.5%, from the prior year.  Of the increase, $6.5 million was related to the full year effect of Consumer Health revenues generated through the prior year acquisition of Hi-Tech and Lloyd Products, while $3.8 million was related to increased sales of existing products.
 
Our 2015 revenues of $985.1 million were net of adjustments totaling $1,526.6 million for chargebacks, rebates, administrative fees and others, returns, discounts and allowances and advertising, promotions and other.  Chargeback expense for 2015 was $1,065.2 million, or 42.4% of gross sales, compared to $643.0 million, or 44.9% of gross sales, in 2014.  The $422.2 million increase in chargeback expense was due to the full year effect of acquisitions completed during 2014, pricing changes on certain products, a shift to more indirect contract sales, and customer consolidation in the industry.  Rebates, administrative fees and other expenses were $367.5 million, or 14.6% of gross sales in 2015, compared to $177.5 million, or 12.4% of gross revenues in 2014. The increase in rebates, administrative fees and other expenses as a percentage of gross sales was attributable to higher overall rebate expenses as a percent of gross sales from the acquisitions consummated in 2014.  Our products returns provision in 2015 was $34.3 million, or 1.4% of gross sales, compared to $21.0 million, or 1.5% of gross sales, in 2014.  Discounts and allowances increased from $30.8 million in 2014, or 2.1% of gross sales, to $50.4 million in 2015, or 2.0% of gross sales while advertisement and promotion expense increased from $6.3 million, or 0.4% of gross sales in 2014 to $9.2 million, or 0.4% of gross sales in 2015.
 
Our consolidated gross profit for 2015 was $596.0 million, or 60.5% of revenue, compared to $261.4 million, or 47.1% of revenue, in 2014.  This $334.7 million, or 128.0%, increase in gross profit was principally due to the full year impact of our revenue growth from acquisitions entered into during the prior year.  The increase in our overall gross profit margin was primarily due to the effect of price changes due to the competitive nature of our business and industry and volume gains as the Company integrated businesses acquired in the prior year. Partially offsetting these gains were fees incurred to effect price increases and inventory step-up amortization resulting from acquisitions.
 
The gross profit margin from sales of Prescription Pharmaceuticals segment was 61.3% in 2015 compared to 46.3% in 2014.  The 15.0% increase in the gross margin percentage was due to the full year effect of the acquisitions consummated in the prior year and diminished fees incurred to effect price increases on various products in comparison to the prior year.  The gross profit margin on Consumer Health segment sales was 49.0% in 2015 compared to 54.7% in the prior year.  This decrease was due to product mix shifts due to acquisitions consummated through the prior year and decreasing margins in our private label and OTC products.
 
Total operating expenses were $301.4 million in 2015, an increase of $100.9 million, or 50.3%, over the prior year, which was primarily due to the full year effect of acquisitions entered into during the prior year and the additional costs associated with the operations of those businesses and other expenses associated with the restatement of 2014 financials. The main drivers of the increase were comprised of the following fluctuations:
 
Selling, general and administrative (“SG&A”) expenses were $162.2 million in 2015, an increase of $69.3 million, or 74.5%, over the prior year expense of $93.0 million. Significant increases in SG&A expenses in comparison to the prior year included $27.4 million of costs associated with the restatement and remediation efforts incurred in the year, a $8.8 million increase in wages and related costs, a $6.2 million increase in accounting, audit and legal expenses and a $4.8 million increase in stock option and restricted stock grant expenses. As a percentage of sales, SG&A expenses decreased to 16.5% in 2015 compared to 16.7% in the prior year.
 
We recorded $1.8 million of acquisition-related costs during 2015, compared to $32.8 million in 2014, a decrease of $31.0 million or 94.4%.  The current year expenses were primarily related to the Akorn AG acquisition and small amounts

35



of remaining spend at Hi-Tech and VersaPharm, while expenses in the prior year were principally focused on the Hi-Tech and VersaPharm acquisitions and other product acquisitions including Betimol®, Zioptan™, Xopenex® and Lloyd Products. As a percentage of sales, acquisition expenses decreased to 0.2% in 2015 compared to 5.9% in the prior year.
 
R&D expense was $40.7 million in 2015, an increase of $9.4 million or 30.2% over the R&D expense of $31.3 million recorded in the prior year.  This increase was principally related to the full year effect of Hi-Tech and VersaPharm acquisitions consummated in the prior year which included the addition of R&D facilities in Copiague, New York and Warminster, Pennsylvania and other planned expansions of existing Akorn locations. In addition, the Company recognized $2.6 million related to the write-off of IPR&D associated with two projects acquired in the VersaPharm acquisition. As a percentage of sales, R&D expenses decreased to 4.1% in 2015 compared to 5.6% in the prior year.
 
Amortization of intangibles consisted of the amortization of drug acquisition costs over the anticipated market lives of the acquired products, as well as the amortization of other intangible assets acquired through acquisitions.  Amortization of intangibles was $66.3 million in 2015, compared to $43.5 million in 2014.  This increase of $22.8 million or 52.4% was wholly related to the full year effect of acquisitions consummated during the prior year, principally Hi-Tech, VersaPharm and Xopenex. As a percentage of sales, amortization expenses decreased to 6.7% in 2015 compared to 7.8% in the prior year.
 
During 2015 the Company impaired one currently marketed product given recent trends in customer concentration and market dynamics. The total impairment expense in 2015 was $30.4 million or 3.1% of sales.
 
Amortization of deferred financing costs totaled approximately $4.3 million in 2015, a decrease of $5.7 million as compared to the $10.0 million recognized in 2014.  The decrease in deferred financing fees expense in the year was principally the result of financing fees incurred in 2014 partially offset by the amortization of consent waivers incurred in 2015 and a full year impact of financing amortization for debt entered into during 2014.
 
Total interest expense was $52.0 million in 2015, compared to $35.7 million in the prior year.  The increase in the year is primarily due to the full year impact of the addition of the Term Loans entered into upon the consummation of the Hi-Tech and VersaPharm acquisitions, respectively during 2014.
 
Income tax expense was $81.4 million based on an effective tax provision rate of approximately 35.0% in 2015, compared to $11.0 million in the prior year based on an effective tax provision rate of approximately 43.2%.  The decrease in comparison to the prior year provision rate was principally due to tax benefits due to domestic production credits.
 
We reported a net income of $150.8 million in 2015, or 15.3% of revenues, compared to net income of $13.9 million, or 2.5% of revenues in 2014.

FINANCIAL CONDITION AND LIQUIDITY

Cash and Cash Equivalents

As of December 31, 2016, we had cash and cash equivalents of $200.8 million, which is $145.5 million lower than our cash and cash equivalents balance of $346.3 million as of December 31, 2015.  This decrease in 2016 cash and cash equivalents was primarily related to financing cash outflows of $240.3 million and investing cash outflows of $72.9 million, partially offset by operating cash inflows of $167.8 million.  Our net working capital was $510.3 million at December 31, 2016, compared to $476.8 million at December 31, 2015, an increase of $33.5 million.

Operating Cash Flows

36



 
Year ended December 31,
 
2016
 
2015
 
2014
OPERATING ACTIVITIES:
 
 
 
 
 
Consolidated net income
$
184,243

 
$
150,798

 
$
13,884

Loss from discontinued operations, net of tax
 
 

 
504

Adjustments to reconcile consolidated net income to net cash provided by operating activities:


 


 


Depreciation and amortization
87,963

 
86,924

 
57,831

Impairment of intangible assets
44,369

 
33,003

 

Amortization of deferred financing fees
10,760

 
4,350

 
9,984

Amortization of favorable (unfavorable) contracts

 
71

 
71

Amortization of inventory step-up

 
4,681

 
20,798

Non-cash stock compensation expense
15,412

 
12,997

 
7,752

Non-cash interest expense
777

 
2,778

 
4,871

Non-cash gain on bargain purchase

 
(849
)
 

Gain from product divestiture

 

 
(9,329
)
Deferred income taxes, net
(32,934
)
 
(46,130
)
 
(17,511
)
Excess tax benefit from stock compensation

 
(47,997
)
 
(29,517
)
Loss on extinguishment of debt

 
1,243

 
990

Gain (loss) on sale of available-for-sale security
45

 
237

 
(7
)
Other
(4,888
)
 

 

Changes in operating assets and liabilities:
 

 
 

 
 

Trade accounts receivable, net
(132,617
)
 
40,287

 
(72,796
)
Inventories, net
10,208

 
(50,729
)
 
(19,385
)
Prepaid expenses and other current assets
(6,494
)
 
17,574

 
30,372

Trade accounts payable
6,139

 
(4,819
)
 
13,963

Accrued expenses and other liabilities
(15,224
)
 
93,229

 
27,967

NET CASH PROVIDED BY OPERATING ACTIVITIES
167,759

 
297,648

 
40,442


During 2016, we generated $167.8 million in cash flow from operations.  This positive operating cash flow was primarily driven by net income of $184.2 million, add-backs of depreciation and amortization of $88.0 million, intangible asset impairments of $44.4 million and amortization of deferred financing fees of $10.8 million, non-cash stock compensation expense of $15.4 million and a $10.2 million decrease in inventories, net, partially offset by a $132.6 million increase in trade accounts receivable, net, a $32.9 million decrease in deferred income taxes, net and $15.2 million related to a decrease in accrued expenses and other liabilities.

In 2015, we generated $297.6 million in cash flow from operations.  This positive operating cash flow was primarily the result of our net income of $150.8 million, add-backs of depreciation and amortization of $86.9 million and impairment expense of $33.0 million, an increase in accrued expenses and other liabilities of $93.2 million, a decrease in accounts receivable balances of $40.3 million, a decrease in prepaid expenses and other assets of $17.6 million and other aggregating operating cash inflows of $26.3 million, partially offset by a $50.7 million increase in ending inventories, $48.0 million related to excess tax benefits from stock compensation, a $46.1 million cash outflow relating to deferred tax assets and other aggregating operating cash outflows of $5.7 million.

During 2014, we generated $40.4 million in cash flow from operations.  This positive operating cash flow was primarily the result of depreciation and amortization add-backs of $57.8 million, our net income of $13.9 million, a $30.4 million increase in prepaid expenses and other assets, a $14.0 million increase in accounts payable, an add-back of amortization of inventory step-up acquired throughout the year of $20.8 million, an add-back of deferred financing costs of $10.0 million, and other aggregating operating cash inflows of $42.2 million, partially offset by a $72.8 million increase in accounts receivable primarily due to an increase in revenues in the fourth quarter of 2014, $29.5 million related to excess tax benefits from stock compensation, a $19.4 million increase in ending inventories and other aggregating operating cash outflows of $26.8 million.

Investing Cash Flows

37



 
Year ended December 31,
 
2016
 
2015
 
2014
INVESTING ACTIVITIES:
 

 
 

 
 

Payments for acquisitions and equity investments, net of cash acquired

 
(24,408
)
 
(987,428
)
Proceeds from disposal of assets
5,966

 
2,459

 
59,361

Payments for other intangible assets
(3,950
)
 
(3,835
)
 
(8,908
)
Purchases of property, plant and equipment
(74,938
)
 
(27,934
)
 
(29,899
)
NET CASH USED IN INVESTING ACTIVITIES
(72,922
)
 
(53,718
)
 
(966,874
)

In 2016, we used $72.9 million of cash in investing activities.  Of this total, $74.9 million was used to acquire property, plant and equipment and another $4.0 million was used for the purchase of other intangible assets.  These uses of cash were partially offset by $6.0 million received in proceeds related to the disposition of assets during the year.

In the prior year, we used $53.7 million of cash in investing activities.  Of this total, $27.9 million was used to acquire property, plant and equipment, $24.4 million was used for the initial consideration for the acquisition of Akorn AG in Hettlingen, Switzerland and $3.8 million was used for the payment for other intangible assets.  These uses of cash were partially offset by $2.5 million received in proceeds related to the disposition of assets during the year.

In 2014, we used $966.9 million of cash in investing activities.  Of this total, $987.4 million was used for the acquisition of Hi-Tech and VersaPharm and other product acquisitions. Additionally, $29.9 million was used to acquire property, plant and equipment and $8.9 million was used to acquire other intangible assets.  These uses of cash were partially offset by $59.4 million received in proceeds related to the disposition of assets during the year.

Financing Cash Flows
 
Year ended December 31,
 
2016
 
2015
 
2014
FINANCING ACTIVITIES:
 

 
 

 
 

Proceeds from issuances of debt

 

 
1,045,000

Proceeds under stock option and stock purchase plans
9,795

 
11,916

 
8,842

Payments of contingent acquisition liabilities

 
(8,991
)
 
(15,000
)
Debt financing costs
(5,128
)
 
(8,564
)
 
(28,365
)
Proceeds from warrant exercises

 

 
8,171

Excess tax benefits from stock compensation

 
47,997

 
29,517

Common stock repurchases
(45,000
)
 

 

Debt repayment
(200,000
)
 
(10,450
)
 
(85,049
)
NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES
(240,333
)
 
31,908

 
963,116


Financing activities used $240.3 million of cash during 2016. Specifically, $200.0 million was used to repay debt, $45.0 million was used to purchase Akorn shares of common stock under our Stock Repurchase Program and $5.1 million was spent on debt financing costs. These uses were partially offset by $9.8 million of proceeds under stock option and stock purchase plans. 

During 2015, we generated $31.9 million in cash, which represents $59.9 million generated from stock option and warrant exercises, participation in the ESPP and excess tax benefits from stock compensation, partially offset by $10.5 million in debt repayment related to the Term Loans, $9.0 million related to the payment of contingent acquisition liabilities and $8.6 million in deferred financing costs paid during the year as a result of the consents entered into due to the restatement of the 2014 financials.

In 2014, financing activities generated $963.1 million in cash, which included $1,045.0 million generated from proceeds under borrowing arrangements related to the Hi-Tech and VersaPharm acquisitions and $46.5 million generated from stock option and warrant exercises, participation in the employee stock purchase plan (“ESPP”) and excess tax benefits from stock compensation, partially offset by $85.0 million in debt repayment related to existing VersaPharm debt acquired, $28.4 million in deferred financing costs paid during the year and $15.0 million related to the payment of contingent liabilities.

Liquidity and Capital Needs


38



We require certain capital resources in order to maintain and expand our business.  Our future capital expenditures may include substantial projects undertaken to upgrade, expand and improve our manufacturing facilities, in the U.S., India and Switzerland. Most notably we have previously, and continue to expend significant amounts in order to gain compliance with FDA requirements at AIPL. Furthermore, the Company expects to expend significant amounts in order to comply with the DSCSA by the implementation date in November 2017 and also intends to increase research and development spend through greater headcount. Our cash obligations include the principal and interest payments due on our Term Loans and any amount we may borrow under the JPMorgan Facility (as both described throughout this report) and the amount required to effect the repurchase of shares of our common stock in accordance with the Stock Repurchase Program discussed in Item 8, Note 21 - "Share Repurchases." As of the year ended December 31, 2016, the Company had $155.0 million remaining under the repurchase authorization. We believe that our cash reserves, operating cash flows, and availability under our credit facilities will be sufficient to finance any future expansions and meet our cash needs for the foreseeable future.
 
We continue to evaluate opportunities to grow and expand our business through the acquisition of new businesses, manufacturing facilities, or pharmaceutical product rights.  Such acquisitions may require us to obtain additional sources of capital.  We cannot predict the amount of capital that may be required to complete such acquisitions, and there is no assurance that sufficient financing for these activities would be available on terms acceptable to us, if at all.
 
Refer to Item 8, Note 7 - “Financing Arrangements” for further detail of debt obligations as of and for the year ended December 31, 2016.

CONTRACTUAL OBLIGATIONS

In order to support the continued increase in the number of relevant and marketable pharmaceutical products that we market and sell, we will from time to time partner with outside firms for the development of selected products.  These development agreements frequently call for the payment of “milestone payments” as various steps in the process are completed in relation to product development and submission to the FDA for approval.  The dollar amount of these payments is generally fixed contractually, assuming that the required milestones are achieved.  However, the timing of such payments is contingent based on a variety of factors and is therefore subject to change.  The amounts disclosed in the below table under the caption “Strategic partners - contingent payments” represents our best estimate of the amount and expected timing of the “milestone payments” and other fees we expect to pay to outside development partners based on our current contractual agreements with them.  These milestone payments are accrued as liabilities on our balance sheets once the milestones have been achieved.
 
As more fully described under Part I, Item 2 - Properties, we currently lease the facilities that we occupy in Gurnee, Illinois, Lake Forest, Illinois and Vernon Hills, Illinois, as well as in Ann Arbor, Michigan, Somerset, New Jersey, Cranbury, New Jersey and India.  We also lease various pieces of office equipment at these facilities, as well as at our manufacturing facilities in Decatur, Illinois and Amityville, New York.  Our remaining obligations under these leases are summarized in the table below.
 
As of December 31, 2016, our principal outstanding debt obligation was related to our Term Loans.  We had no outstanding loans under our JPM Credit Agreement at December 31, 2016, or any time since we entered into this agreement on April 17, 2014.

The following table details our future contractual obligations as of December 31, 2016 (in thousands):


39



Description 
 
Total
 
2017
 
2018
 
2019
 
2020
 
2021
 
2022 and
beyond
5.25% Term Loans due 2021 (1)
 
$
831,938

 
$

 
$

 
$

 
$

 
$
831,938

 
$

Interest Payable – 5.25% existing and incremental term loan (2)
 
187,447

 
43,677

 
43,677

 
43,677

 
43,677

 
12,739

 

Contingent consideration – acquisitions
 
4,994

 
4,994

 

 

 

 

 

Inventory purchase commitments
 
8,320

 
3,601

 
3,601

 
739

 
379

 

 

Leases
 
23,678

 
3,760

 
2,755

 
2,640

 
2,596

 
2,399

 
9,528

Strategic partners – contingent payments (3)
 
13,500

 
9,462

 
3,788

 
250

 

 

 

Total:
 
$
1,069,877

 
$
65,494

 
$
53,821

 
$
47,306

 
$
46,652

 
$
847,076

 
$
9,528


1.
As discussed further in Item 8, Note 7 - “Financing Arrangements,” on February 16, 2016 the Company voluntarily prepaid $200.0 million of cumulative Term Loans principal which eliminated any further interim principal repayment obligations.

2.
Interest on borrowings under these facilities are variable as calculated at our election, on an ABR rate or an adjusted LIBOR rate, plus a margin of 3.25% to 4.50% for ABR loans, and 4.25% to 5.50% for LIBOR loans with a minimum comprehensive rate of 5.25%. The calculated interest payable amounts above assume the minimum comprehensive rate of 5.25% across the term of the associated loan.

3.
Note the strategic partner payments include our best estimates regarding if and when various contingencies and market opportunities will occur in 2017 and beyond.


OFF BALANCE SHEET ARRANGEMENTS

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


CRITICAL ACCOUNTING POLICIES

Our significant accounting policies and critical accounting estimates are described in Item 8, Note 2 - “Summary of significant accounting policies” to the Consolidated Financial Statements and are herein incorporated by reference.

RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
 
Recently issued accounting pronouncements which may have an effect on the Company are described in Item 8, Note 15 - “Recently issued and adopted accounting pronouncements” to the Consolidated Financial Statements and are herein incorporated by reference.
 
RECENTLY ADOPTED ACCOUNTING PRONOUNCEMENTS
 
Recently adopted accounting pronouncements which have had an effect on the Company are described in Item 8, Note 15 - “Recently issued and adopted accounting pronouncements” to the Consolidated Financial Statements and are herein incorporated by reference.


Item 7A. Quantitative and Qualitative Disclosures about Market Risk


40



As of December 31, 2016, our principal debt obligations included the Term Loans with outstanding debt of $831.9 million. As of the date of the filing of this Form 10-K until the maturity of the term loans, our spread will be based upon the Ratings Level applicable on such date as documented below.

Ratings Level
 
Index Ratings (Moody's/S&P)
 
Eurodollar Spread
 
ABR Spread
Level I
 
B1/B+ or higher
 
4.25%
 
3.25%
Level II
 
B2/B
 
4.75%
 
3.75%
Level III
 
B3/B- or lower
 
5.50%
 
4.50%

As of December 31, 2016, we were party to the $150.0 million JPM Credit Agreement with JPMorgan providing for a revolving credit facility. Interest on borrowings under the JPM Credit Agreement were to be calculated at a premium above either the current prime rate or current LIBOR rates plus a margin determined in accordance with the Company’s consolidated fixed charge coverage ratio (earnings before interest, taxes, depreciation and amortization ("EBITDA") to fixed charges), exposing us to interest rate risk on such borrowings. As of December 31, 2016 and throughout the year ended, we had no outstanding loans under the JPM Credit Agreement and one outstanding letter of credit under the JPM Credit Agreement for $2.2 million.
 
We acquired the principal manufacturing facility and ongoing business of Akorn AG, a Swiss pharmaceutical manufacturing company on January 2, 2015.  Accordingly, we are subject to foreign exchange risk based on changes in the exchange rate between U.S. dollars and Swiss Francs.
 
We acquired the principal manufacturing facility and ongoing business of Kilitch, an Indian pharmaceutical company on February 28, 2012.  Accordingly, we are subject to foreign exchange risk based on changes in the exchange rate between U.S. dollars and Indian rupees.  Additionally, the business we acquired from Kilitch is itself subject to foreign exchange risk related to certain of its export sales to unregulated markets in Africa, Asia and elsewhere, which are typically denominated in U.S. dollars rather than the local currency, Indian rupees.
 
Our financial instruments include cash and cash equivalents, accounts receivable, available for sale securities and accounts payable. The fair values of cash and cash equivalents, accounts receivable and accounts payable approximate book value because of the short maturity of these instruments.  Available for sale securities are stated at fair value adjusted for certain lock-up provisions which prevent us from selling until a set period of time has elapsed. As of December 31, 2016, we hold available for sale securities in shares of Nicox S.A., an international company whose shares are publicly traded on the Euronext Paris exchange. The fair value of these securities at December 31, 2016 was $1.1 million and we monitor these investments for other than temporary declines in market value, and charge impairment losses to income when an other than temporary decline in value occurs.
 
At December 31, 2016, the majority of our cash and cash equivalents balance of $200.8 million was invested in overnight instruments, the interest rates of which may change daily.


41



Item 8. Financial Statements and Supplementary Data

The following financial statements are included in Part II, Item 8 of this Form 10-K.

INDEX:

Reports of Independent Registered Public Accounting Firm
Consolidated Balance Sheets as of December 31, 2016 and 2015
Consolidated Statements of Comprehensive Income for the years ended December 31, 2016, 2015 and 2014
Consolidated Statements of Shareholders’ Equity for the years ended December 31, 2016, 2015 and 2014
Consolidated Statements of Cash Flows for the years ended December 31, 2016, 2015 and 2014
Notes to Consolidated Financial Statements

42


Report of Independent Registered Public Accounting Firm
 
Board of Directors and Shareholders
Akorn, Inc.
Lake Forest, Illinois
 
We have audited the accompanying consolidated balance sheets of Akorn, Inc. as of December 31, 2016 and 2015 and the related consolidated statements of comprehensive income, shareholders’ equity, and cash flows for each of the three years in the period ended December 31, 2016.  These financial statements are the responsibility of the Company’s management.  Our responsibility is to express an opinion on these financial statements based on our audits.
 
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Akorn, Inc. at December 31, 2016 and 2015 , and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2016, in conformity with accounting principles generally accepted in the United States of America.
  
As discussed in Note 15 to the consolidated financial statements, the Company has changed its method of accounting for the tax effects related to stock based compensation in 2016 due to the adoption of FASB ASU 2016-09 - Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting and has also changed the presentation of its deferred tax assets and liabilities in its consolidated balance sheets due to the adoption of FASB ASU 2015-17 - Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Akorn, Inc.’s internal control over financial reporting as of December 31, 2016, based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) and our report dated March 1, 2017 expressed an adverse opinion thereon.
  
/s/ BDO USA, LLP
Chicago, Illinois
March 1, 2017


43


Report of Independent Registered Public Accounting Firm

Board of Directors and Shareholders
Akorn, Inc.
Lake Forest, Illinois
 
We have audited Akorn, Inc.’s internal control over financial reporting as of December 31, 2016, based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). Akorn, Inc.’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Item 9A - Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the company’s internal control over financial reporting based on our audit.
 
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
 
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
 
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
 
A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the company’s annual or interim financial statements will not be prevented or detected on a timely basis. A material weakness regarding management’s failure to design and maintain effective internal controls over the accounting for IPR&D (in process research and development) indefinite-lived intangible assets has been identified and described in management’s assessment and is included in the accompanying Item 9A, Management’s Report on Internal Control Over Financial Reporting.

The material weakness was considered in determining the nature, timing, and extent of audit tests applied in our audit of the 2016 financial statements, and this report does not affect our report dated March 1, 2017 on those financial statements.

In our opinion, Akorn, Inc. did not maintain, in all material respects, effective internal control over financial reporting as of December 31, 2016, based on the COSO criteria. We do not express an opinion or any other form of assurance on management’s statements referring to any corrective actions taken by the company after the date of management’s assessment.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Akorn, Inc. as of December 31, 2016 and 2015, and the related consolidated statements of comprehensive income, stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2016 and our report dated March 1, 2017 expressed an unqualified opinion thereon.

 
/s/ BDO USA, LLP
Chicago, Illinois
March 1, 2017

44


AKORN, INC.
CONSOLIDATED BALANCE SHEETS
(In Thousands,
Except Share Data)
 
December 31,
 
2016
 
2015
ASSETS
 
 
 
CURRENT ASSETS
 
 
 
Cash and cash equivalents
$
200,772

 
$
346,266

Trade accounts receivable, net
283,154

 
150,621

Inventories, net
174,793

 
185,316

Available-for-sale securities
1,106

 
5,941

Prepaid expenses and other current assets
25,986

 
19,988

TOTAL CURRENT ASSETS
685,811

 
708,132

PROPERTY, PLANT AND EQUIPMENT, NET
238,404

 
179,614

OTHER LONG-TERM ASSETS
 

 
 

Goodwill
284,293

 
284,710

Intangible assets, net
758,854

 
864,989

Deferred tax assets
5,286

 
4,207

Long-term investments
9

 
129

Other non-current assets
1,063

 
764

TOTAL OTHER LONG-TERM ASSETS
1,049,505

 
1,154,799

TOTAL ASSETS
$
1,973,720

 
$
2,042,545

LIABILITIES AND SHAREHOLDERS’ EQUITY
 

 
 

CURRENT LIABILITIES
 

 
 

Trade accounts payable
$
59,534

 
$
46,019

Purchase consideration payable
4,994

 
4,967

Income taxes payable
16,198

 
23,670

Accrued royalties
15,044

 
19,378

Accrued compensation
19,113

 
15,866

Current maturities of long-term debt (net of current deferred financing costs)

 
52,779

Accrued administrative fees
36,436

 
37,094

Accrued expenses and other liabilities
24,236

 
31,603

TOTAL CURRENT LIABILITIES
175,555

 
231,376

LONG-TERM LIABILITIES
 

 
 

Long-term debt (net of non-current deferred financing costs)
809,979

 
994,033

Deferred tax liability
157,607

 
188,808

Other long-term liabilities
11,395

 
6,763

TOTAL LONG-TERM LIABILITIES
978,981

 
1,189,604

TOTAL LIABILITIES
1,154,536

 
1,420,980

SHAREHOLDERS’ EQUITY
 

 
 

Common stock, no par value — 150,000,000 shares authorized; 124,390,217 and 119,427,471 shares issued and outstanding at December 31, 2016 and 2015
521,860

 
458,659

Retained earnings
319,291

 
180,048

Accumulated other comprehensive loss
(21,967
)
 
(17,142
)
TOTAL SHAREHOLDERS’ EQUITY
819,184

 
621,565

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY
$
1,973,720

 
$
2,042,545


See notes to the consolidated financial statements.

45


AKORN, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In Thousands, Except Per Share Data)

 
Year ended December 31,
 
2016
 
2015
 
2014
REVENUES
$
1,116,843

 
$
985,076

 
$
555,048

Cost of sales (exclusive of amortization of intangibles, included within operating expenses below)
442,572

 
389,064

 
293,688

GROSS PROFIT
674,271

 
596,012

 
261,360

Selling, general and administrative expenses
197,501

 
162,205

 
92,955

Acquisition-related costs
364

 
1,841

 
32,840

Research and development expenses
42,603

 
40,707

 
31,256

Amortization of intangibles
65,713

 
66,272

 
43,493

Impairment of intangible assets
40,519

 
30,376

 

TOTAL OPERATING EXPENSES
346,700

 
301,401

 
200,544

OPERATING INCOME
327,571

 
294,611

 
60,816

Amortization of deferred financing costs
(10,791
)
 
(4,283
)
 
(9,985
)
Interest expense, net
(42,734
)
 
(51,973
)
 
(35,657
)
Bargain purchase gain

 
849

 

Gain from product divestiture

 

 
9,297

Other non-operating (expense) income, net
(2,746
)
 
(7,048
)
 
871

INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES
271,300

 
232,156

 
25,342

Income tax provision
87,057

 
81,358

 
10,954

INCOME FROM CONTINUING OPERATIONS
$
184,243

 
$
150,798

 
$
14,388

Loss from discontinued operations, net of tax

 

 
(504
)
CONSOLIDATED NET INCOME
$
184,243

 
$
150,798

 
$
13,884

CONSOLIDATED NET INCOME PER COMMON SHARE:
 

 
 

 
 

Income from continuing operations, basic
$
1.50

 
$
1.29

 
$
0.14

Loss from discontinued operations, basic

 

 
(0.01
)
CONSOLIDATED NET INCOME, BASIC
$
1.50

 
$
1.29

 
$
0.13

Income from continuing operations, diluted
$
1.47

 
$
1.22

 
$
0.13

Loss from discontinued operations, diluted

 

 

CONSOLIDATED NET INCOME, DILUTED
$
1.47

 
$
1.22

 
$
0.13

SHARES USED IN COMPUTING CONSOLIDATED NET INCOME PER COMMON SHARE:
 

 
 

 
 

BASIC
122,869

 
116,980

 
103,480

DILUTED
125,801

 
125,762

 
109,588

COMPREHENSIVE INCOME:
 

 
 

 
 

Consolidated net income
$
184,243

 
$
150,798

 
$
13,884

Unrealized holding gain (loss) on available-for-sale securities, net of tax
of ($436), ($61) and $663 for the years ended December 31,
2016, 2015 and 2014, respectively.
740

 
104

 
(1,124
)
Foreign currency translation loss for the years ended December 31, 2016, 2015 and 2014, respectively.
(1,941
)
 
(2,051
)
 
(1,704
)
Pension liability adjustment, net of tax of $694 for the year ended
December 31, 2016.
(3,624
)
 

 

COMPREHENSIVE INCOME
$
179,418

 
$
148,851

 
$
11,056


See notes to the consolidated financial statements.

46


AKORN, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2014, 2015 AND 2016
(In Thousands)
 
Common Stock
 
Warrants
to acquire
Common Stock
 
Retained
Earnings
 
Other
Compre-hensive Loss
 
Total
 
Shares
 
Amount
 
 
 
 
BALANCES AT DECEMBER 31, 2013
96,569

 
$
239,235

 
$
17,946

 
$
15,366

 
$
(12,367
)
 
$
260,180

Consolidated net income

 

 

 
13,884

 

 
13,884

Exercise of stock options
4,226

 
8,013

 

 

 

 
8,013

Employee stock purchase plan issuances
73

 
829

 

 

 

 
829

Restricted stock units
16

 
1,188

 

 

 

 
1,188

Stock-based compensation expense

 
6,564

 

 

 

 
6,564

Foreign currency translation loss

 

 

 

 
(1,704
)
 
(1,704
)
Excess tax benefit – stock compensation

 
29,517

 

 

 

 
29,517

Unrealized holding loss on available-for-sale  securities

 

 

 

 
(1,124
)
 
(1,124
)
Convertible note conversions
3,659

 
30,789

 

 

 

 
30,789

Exercise of warrants
7,192

 
26,117

 
(17,946
)
 

 

 
8,171

BALANCES AT DECEMBER 31, 2014
111,735

 
$
342,252

 
$

 
$
29,250

 
$
(15,195
)
 
$
356,307

Consolidated net income

 

 

 
150,798

 

 
150,798

Exercise of stock options
2,514

 
10,503

 

 

 

 
10,503

Employee stock purchase plan issuances
66

 
1,413