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, 2017
 
 
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”, “smaller reporting company”, and “emerging growth company” in Rule 12b-2 of the Exchange Act. (check one):
Large accelerated filer þ
 
 Accelerated filer o
Non-accelerated filer o (Do not check if a smaller reporting company)
 
Smaller reporting company  o
 Emerging growth company  o
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  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, 2017 was approximately $2,318.7 million based on the closing market price of $33.54 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 16, 2018 was 125,258,177.

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," “would,” “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.




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 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 and Cranbury, New Jersey. In the fourth quarter of 2017, we moved our previous R&D center from Copiague, New York to Cranbury, New Jersey. We maintain other corporate offices in Ann Arbor, Michigan and Gurgaon, Haryana, India.
 
During the years ended December 31, 2017, 2016 and 2015, 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.

Merger Agreement: On April 24, 2017, the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Fresenius Kabi AG, a German stock corporation (“Parent”), Quercus Acquisition, Inc., a Louisiana corporation and wholly-owned subsidiary of Parent (“Merger Sub”) and, solely for purposes of Article VIII thereof, Fresenius SE & Co. KGaA, a German partnership limited by shares.  The Merger Agreement, which has been adopted by the Board of Directors of the Company, provides for the merger of Merger Sub with and into the Company (the “Merger”), with the Company surviving the Merger as a wholly-owned subsidiary of Parent. On July 19, 2017, the Company's shareholders voted to approve the Merger Agreement.

Subject to the terms and conditions set forth in the Merger Agreement, at the effective time of the Merger (the “Effective Time”), each of the Company’s issued and outstanding shares of common stock, no par value per share (the “Shares”) (other than Shares owned by the Company or by Parent, Merger Sub or any direct or indirect wholly-owned subsidiary of the Company or of Parent (other than Merger Sub) immediately prior to the Effective Time), will be converted into the right to receive $34.00 in cash per Share (the “Merger Consideration”), without interest.

Completion of the Merger is subject to customary closing conditions, including (1) there being no judgment or law enjoining or otherwise prohibiting the consummation of the Merger and (2) the expiration of the waiting period applicable to the Merger under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended.  The obligation of each of the Company and Parent to consummate the Merger is also conditioned on the other party’s representations and warranties being true and correct (subject to certain materiality exceptions) and the other party having performed in all material respects its obligations under the Merger Agreement.

The Merger Agreement contains representations and warranties and covenants of the parties customary for a transaction of this nature.  Among other things, Parent has agreed to promptly take all actions necessary to obtain antitrust approval of the Merger, including (i) entering into consent decrees or undertakings with a regulatory authority, (ii) divesting or holding separate any assets or businesses of Parent or the Company, (iii) terminating existing contractual relationships or entering into new contractual relationships, (iv) effecting any other change or restructuring of Parent or the Company and (v) defending through litigation any claim asserted by a regulatory authority that would prevent the closing of the Merger.
 
Our Strategy
 

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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.
 
Prior to entering the Merger Agreement, we also sought to grow our business inorganically through strategic mergers, acquisitions, business development and licensing activities that provided the ability to move into new product areas or to build out 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;
(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 2017. 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
 

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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 focus primarily 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 market a portfolio of branded and generic companion animal prescription pharmaceutical products under the Akorn Animal Health label. Our 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 and Cranbury, New Jersey. In 2017, the Company consolidated its Copiague, New York R&D facility into its R&D facility in Cranbury, New Jersey. 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, 2017, we had 152 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 complement our existing product offerings, but for which we may lack the expertise to develop, or the capability, capacity or cost-efficiencies to 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 $80.5 million, $42.6 million and $40.7 million for the years ended December 31, 2017, 2016 and 2015, 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, 2017, we submitted five new Abbreviated New Drug Application (“ANDA”) filings to the FDA. In the prior year ended December 31, 2016, we submitted 12 ANDA filings and three Abbreviated New Animal Drug Application (“ANADA”) filings while in 2015 we submitted 18 ANDA filings and one New Drug Application (“NDA”) filing to the FDA.
 
Akorn and its partners received 26 new-to-Akorn ANDA product approvals and one NDA approval from the FDA in the year ended December 31, 2017; seven ANDA approvals and three tentative ANDA approvals in 2016 and finally, 11 ANDA approvals, two ANADA approvals, one NDA product approvals, one supplemental ANDA approval and two tentative ANDA approvals in 2015.
 
As of December 31, 2017, we had 68 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
 
Prior to entering into the Merger Agreement, we regularly evaluated and, where appropriate, executed opportunities to expand through the acquisition of products and companies in areas that we believed offer attractive opportunities for growth. Below is a

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summary of strategic business acquisitions that we made from 2014 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, which developed, manufactured and marketed generic and branded prescription and OTC drug products, and specialized in liquid and semi-solid dosage forms (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’s ECR Pharmaceuticals subsidiary (“ECR”), which marketed branded prescription products, 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 Acquisition added branded OTC products in the categories of cough and cold, nasal sprays and topicals to our TheraTears® brand of eye care 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 2013 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;

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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. 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 Segments
 
The Company has identified two reportable segments with which we operate our business. These segments are 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 91.9% of our net revenue in 2017. 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®, 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.

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.

Our Products
 
Our major products are listed alphabetically below.
 
AK-FLUOR® (fluorescein injection, USP). We market our branded fluorescein injection as AK-FLUOR® 10% (100 mg/mL) and 25% (250 mg/mL). AK-FLUOR® is indicated in diagnostic fluorescein angiography or angioscopy of the retina and iris vasculature.

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. 

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.

Dehydrated Alcohol Injection. We began marketing Dehydrated Alcohol Injection, USP in 1997. Our Dehydrated Alcohol Injection is not an FDA approved product and to date our product has not been found by the FDA to be safe and effective.

Ephedrine Sulfate Injection. We originally began marketing Ephedrine Sulfate Injection, USP, 50 mg/mL in 1 mL single-dose ampules in 1997 as an unapproved product. In March 2017, we received FDA approval of our NDA for Ephedrine Sulfate Injection.

Myorisan™ (isotretinoin capsules, USP). 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.
    

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Nembutal® Sodium Solution (pentobarbital sodium injection, USP). We market our pentobarbital sodium injection as Nembutal® Sodium Solution. Nembutal® is a DEA 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.

TheraTears® Dry Eye Therapy Lubricant Eye Drops. TheraTears® is an over-the-counter eye drop that is used as a lubricant to relieve dryness of the eye. TheraTears® unique hypotonic and electrolyte balanced formula replicates healthy tears.

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. In the year ended December 31, 2017, Ephedrine Sulfate Injection represented approximately 10%, of the Company’s total net revenue. None of the Company’s other products represented 10% or more of total net revenue.
 
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:

(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, 2017, we utilized a sales force of 84 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 - “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

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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 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 which 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, 2017, 2016 and 2015, 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 revenue and accounts receivable in both of our segments. The three large wholesale drug distributors are:
 
AmerisourceBergen Corporation (“Amerisource”);
Cardinal Health, Inc. (“Cardinal”); and
McKesson Corporation (“McKesson”).
 
On a combined basis, these three wholesale drug distributors accounted for approximately 80.2% of our total gross sales and 63.5% of our net revenue in the year ended December 31, 2017, and 86.0% of our gross accounts receivable as of December 31, 2017. 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, 2017, 2016 and 2015, respectively:
 
 
2017
 
2016
 
2015
 
 
 
Gross
Sales
 
 
Net
Revenue
 
Gross
Accounts
Receivable
 
 
Gross
Sales
 
 
Net
Revenue
 
Gross
Accounts
Receivable
 
 
Gross
Sales
 
 
Net
Revenue
 
Gross
Accounts
Receivable
Amerisource
23.6%
 
19.1%
 
26.3%
 
29.5%
 
23.3%
 
35.6%
 
28.0%
 
23.2%
 
28.8%
Cardinal
17.5%
 
17.9%
 
21.1%
 
15.4%
 
16.3%
 
15.1%
 
19.7%
 
19.5%
 
26.1%
McKesson
39.1%
 
26.5%
 
38.6%
 
32.5%
 
24.2%
 
33.2%
 
30.1%
 
27.3%
 
27.9%
Combined Total
80.2%
 
63.5%
 
86.0%
 
77.4%
 
63.8%
 
83.9%
 
77.8%
 
70.0%
 
82.8%

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.


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Backorders
 
As of December 31, 2017, we had approximately $12.2 million of products on backorder as compared to approximately $15.5 million of backorders as of December 31, 2016 and $9.6 million as of December 31, 2015. We generally expect to fulfill all open backorders during 2018.
 
Foreign Sales
 
During the years ended December 31, 2017, 2016 and 2015, approximately $25.5 million, $26.3 million, and $37.0 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 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, 2017, 2016 or 2015.  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” and "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" 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, 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 liquids, 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 products TheraTears®, SinusBuster®, Mag-Ox®, Multi-betic® and Zostrix®. We are committed to maintaining and defending these trade names as they

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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. For more information, 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."
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 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 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 2017, all of our FDA approved facilities were inspected and are in good standing with 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, 2017, 2016 and 2015.
 
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 April 2017 at our Decatur, Illinois and March 2017 at our Amityville, New York facilities resulted in no regulatory actions.

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See Item 1A. Risk Factors - Risk factors under the "Risks Related to Regulations" category for more information.
 
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 United States. 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 more information. 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.

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 healthcare 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 United States. The regulatory agencies outside of the United States. 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

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As of December 31, 2017 we had a total of 2,308 employees globally, consisting of 2,284 permanent, full-time employees and 24 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
 
1,706

 
3

 
India
 
425

 

 
Switzerland
 
153

 
21

 
Total
 
2,284

 
24

 
 
We believe we have good relations with our employees. Our full-time and part-time employees are not represented by collective bargaining agreements. All U.S. 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, 2017, 2016 and 2015, plan-related expense totaled approximately $2.6 million, $2.2 million and $1.8 million, respectively. The Company's matching contribution 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.
 
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 the Proposed Merger.
 
There are material uncertainties and risks associated with the proposed Merger Agreement and Merger.
 
On April 24, 2017, we signed the Merger Agreement with Fresenius Kabi. Below are material uncertainties and risks associated with the Merger Agreement and the proposed Merger. If any of the risks develop into actual events, then our business, financial condition, results and ongoing operations, stock price or prospects could be materially adversely affected.
The announcement and pendency of the Merger may impede Akorn’s ability to retain and hire key personnel, its ability to maintain relationships with its customers, suppliers and others with whom it does business, or its operating results and business generally;
The attention of our employees and management may be diverted due to activities related to the Merger, which may affect our business operations;
Matters relating to the Merger (including integration planning) may require substantial commitments of time and resources by Akorn management, which could harm our relationships with our employees, customers, distributors, suppliers or other business partners, and may result in a loss of or a substantial decrease in purchases by our customers;
The Merger Agreement restricts us from engaging in certain actions without the approval of Fresenius Kabi, which could prevent us from pursuing certain business opportunities outside the ordinary course of business that arise prior to the closing of the Merger;
Shareholder litigation in connection with the transactions contemplated by the Merger Agreement may result in significant costs of defense, indemnification and liability; and
The outcome of the Company’s and Fresenius Kabi’s investigations into alleged breaches of FDA data integrity requirements relating to product development at the Company, and any actions taken by the Company, Fresenius Kabi, third parties or the FDA as a result of such investigations may result in significant costs.

 The proposed Merger may not be completed in a timely manner or at all.
 
Completion of the Merger is subject to customary closing conditions, including but not limited to (1) there being no judgment or law enjoining or otherwise prohibiting the consummation of the Merger, (2) the expiration of the waiting period applicable to the Merger under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, as well as (3) the other party’s representations and warranties being true and correct (subject to certain materiality exceptions) and the other party having performed in all material respects its obligations under the Merger Agreement. There is no assurance that the required regulatory approvals will be obtained, nor that the required closing conditions will be satisfied, and no assurance can be given as to the terms, conditions and timing of any approvals. Lawsuits have been filed and threatened against Akorn relating to the Merger and an adverse ruling in any such lawsuit may prevent the Merger from being completed in the time frame expected or at all. If the Merger is delayed or not completed, we may suffer a number of consequences, including a decline in our share price to the extent that the current price of our common stock reflects an assumption that the merger will be completed; negative publicity and a negative impression of us in the investment community and loss of business opportunities. Further, we have incurred, and will continue to incur, significant costs, expenses and fees for professional advisors and other transaction costs in connection with the Merger, and these fees and costs are payable by us regardless of whether the Merger is consummated. In addition, Akorn could be subject to litigation related to any failure to consummate the Merger or any related action that could be brought to enforce a party's obligation under the Merger Agreement.

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

15



meet our anticipated time schedule for the filing of new applications or may decide not to pursue applications that we have already submitted or had anticipated 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.

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 revenue, 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 revenue and accounts receivable. The following three wholesalers — Amerisource, Cardinal and McKesson — accounted for approximately 80% of total gross sales and 64% of total net revenue in 2017, and constituted 86% of gross trade receivables as of December 31, 2017. 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 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

16



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 price of our common stock.

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.

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 price of our common stock to decline.
 
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 price of our common stock could decline.

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.
 
We become involved in legal proceedings and governmental investigations from time to time, any of which may result in substantial losses, government enforcement actions, 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. The restatement of our previously issued 2014 financial statements and the previous delay in our filing of 2015 financial statements resulted in various governmental investigations and shareholder lawsuits requiring our management to devote significant time and attention to these matters. This and any other substantial litigation may result in verdicts against us and government enforcement actions 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. See Part II, Item 8, Note 20 - "Legal Proceedings.

Charges to earnings resulting from acquisitions could have a material adverse effect on our business, financial position and results of operations.
 

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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 price of our common stock to decline.
 
As of December 31, 2017, we had recorded $285.3 million and $569.5 million of Goodwill and Intangible assets, net, respectively on our consolidated balance sheet.

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.
 
We operate a manufacturing campus in Paonta Sahib, India, which we acquired through a business combination in 2012. The manufacturing site has not yet received approval 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.
 
John N. Kapoor, Ph.D., through his stock ownership and his right to nominate up to three directors, could have an adverse effect on the price of our common stock and have substantial influence over our business strategies and policies.

John N. Kapoor, Ph.D., is a principal shareholder. As of December 31, 2017, Dr. Kapoor beneficially owns approximately 23% 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. Mr. Brian Tambi was nominated for these purposes. The other seats for nomination are vacant. Nomination of any directors to our Board or any trading of our common stock by Dr. Kapoor and his related parties could have an adverse effect on the price of our common stock and an adverse effect on our business.

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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 revenue 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.
 
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.

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.

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.
 
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.

19



 
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 that 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. Failure to comply with regulations that require prescription drug manufacturers, including us, to label prescription products with a unique serial number at the saleable unit level could 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 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 that 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

20



unapproved product after receipt of a Warning Letter in October 2012. During 2017, we marketed six such unapproved products, generating net revenue of approximately $132.4 million. Of the six products marketed during 2017, none were approved through either an ANDA or an NDA except Ephedrine Sulfate Injection which received NDA approval in March 2017. 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.
 
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: (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.
 

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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. Zioptan™ currently faces challenges from 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 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.

Our indebtedness reduces our financial and operating flexibility.
 

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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, 2017, 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.

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, which was $831.9 million as of December 31, 2017, 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 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.
 
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, 2017, holders of our outstanding options would receive 4.1 million shares of our common stock at a weighted average exercise price of $28.95 per share, and holders of unvested restricted stock units would receive 0.9 million shares of our common stock should all their restricted stock units vest.

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") that would allow the Company to effect repurchases from time to time in the open market, in privately negotiated transactions or otherwise, including accelerated stock repurchase arrangements. During 2016, the Company repurchased a total of approximately 1.8 million shares at an average price of $24.89 per share of common stock. The timing and actual number of shares repurchased under the Stock Repurchase Program has depended on a variety of factors, including the timing of open trading windows, price, corporate and regulatory requirements and other market conditions. Pursuant to the terms of the Merger Agreement, the Company is generally not permitted to repurchase shares, however, any 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

23



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, without further action by holders of our common stock. Pursuant to the terms of the Merger Agreement, we are generally not permitted to issue such preferred stock, however, if we did 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, 2017, 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 Company also owns approximately 7 acres of additional currently undeveloped land adjacent to the Wyckles facility.  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 has a 58,199 square-foot office and laboratory expansion under construction adjacent to the Grand Avenue facility. The Decatur facilities support the Prescription Pharmaceuticals and Consumer Health segments.
 
The Company owns five buildings in Hettlingen, Switzerland which support the Prescription Pharmaceuticals and Consumer Health segments 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,
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 with mixed office and laboratory space.
 
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 383,000 square feet of pharmaceutical manufacturing, warehousing and distribution facilities situated on approximately 14 acres of land in Paonta Sahib, Himachal Pradesh, India.  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 48,000 square feet used for research and development activities and a 3,143 square-foot laboratory space in Winterthur, Switzerland.

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 used for research and development activities.

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.


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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 16, 2018.  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”)
51
2009
Duane A. Portwood
Chief Financial Officer (“CFO”)
51
2015
Joseph Bonaccorsi
Executive Vice President, General Counsel, and Secretary (“General Counsel”)
53
2009
Bruce Kutinsky
Chief Operating Officer (“COO”)
52
2011
Steven Lichter
Executive Vice President, Pharmaceutical Operations
59
2015
Randall E. Pollard
Senior Vice President, Finance, and Chief Accounting Officer ("CAO")
46
2015
Jonathan Kafer
Executive Vice President, Sales and Marketing
54
2016

Raj Rai.  Mr. Rai was appointed Interim Chief Executive Officer in 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 in 2015 as the Chief Financial Officer. He previously worked for 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 Price Waterhouse LLP, where he held numerous leadership positions in their audit and transaction support practices. Mr. Portwood, previously a Certified Public Account, 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.
 
Joseph Bonaccorsi.  Mr. Bonaccorsi, Executive Vice President, Secretary and General Counsel, joined Akorn in 2009. 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 roles at Option Care, Inc. 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.

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Steve Lichter. Mr. Lichter joined Akorn in 2015 as Executive Vice President, Pharmaceutical Operations. Mr. Lichter joined 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 2015 as Vice President, Corporate Controller and is currently serving as Senior Vice President, Finance, and 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 2015 as Executive Vice President, Sales and Marketing. Mr. Kafer joined 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.

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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”.

 
High
 
Low
Year Ended December 31, 2017
 
 
 
4th Quarter (October 1, 2017 - December 31, 2017)
$
33.55

 
$
31.75

3rd Quarter (July 1, 2017 - September 30, 2017)
33.73

 
31.82

2nd Quarter (April 1, 2017 - June 30, 2017)
34.00

 
23.17

1st Quarter (January 1, 2017 - March 31, 2017)
25.13

 
17.74

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


As of February 16, 2018, there were 125,258,177 shares of our common stock outstanding, held by 260 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 16, 2018 was $31.85 per share.

The Company did not pay cash dividends in 2017, 2016 or 2015 and does not expect to pay dividends on its 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”).

The Company did not repurchase any of its common stock during 2017 or 2015. During 2016, the Company repurchased a total of approximately $1.8 million shares at an average price of $24.89 per share of common stock. See Item 8, Note 21 - "Share Repurchases" for further information. The following table sets forth the summary of the Company's repurchase activity during each quarter in 2016.

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
September 1-30, 2016
901,382

$
27.74

901,382

$
174,995,663.32

November 1-30, 2016
906,451

$
22.06

1,807,833

$
154,999,354.26

Total
1,807,833

$
24.89

1,807,833

$
154,999,354.26





28



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, 2017.  The graph assumes $100 was invested in our common stock, as well as the two indices presented, at the end of December 2012 and that all dividends were reinvested during the subsequent five-year period. 

http://api.tenkwizard.com/cgi/image?quest=1&rid=23&ipage=12095065&doc=14

Total Return Chart
2012

 
2013

 
2014

 
2015

 
2016

 
2017

NASDAQ Composite Index (^IXIC)
100

 
138

 
157

 
166

 
178

 
212

NASDAQ Health Care Index (^IXHC)
100

 
157

 
202

 
216

 
179

 
217

Akorn, Inc. (AKRX)
100

 
184

 
271

 
279

 
163

 
241



29



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, 2017.  Our consolidated financial statements upon which the selected summary historical financial data is derived were audited by BDO USA, LLP (“BDO”), independent registered public accounting firm, during each of the five years ended December 31, 2017, 2016, 2015, 2014 and 2013. 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.

 
Years Ended December 31,
 
2017
 
2016
 
2015 (1)
 
2014 (1)
 
2013
(In thousands, except per share data)
 
 
 
 
 
 
 
 
 
Revenues
$
841,045

 
$
1,116,843

 
$
985,076

 
$
555,048

 
$
317,711

Gross profit
433,147

 
674,271

 
596,012

 
261,360

 
171,904

Operating (loss) income
(17,656
)
 
327,571

 
294,611

 
60,816

 
88,204

Interest expense, net, amortization of deferred financing costs and other non-operating income (expense), net
(41,542
)
 
(56,271
)
 
(62,455
)
 
(35,474
)
 
(5,309
)
Pretax (loss) income from continuing operations
(59,198
)
 
271,300

 
232,156

 
25,342

 
82,895

Income tax (benefit) provision from continuing operations
(34,648
)
 
87,057

 
81,358

 
10,954

 
30,533

(Loss) income from continuing operations
$
(24,550
)
 
$
184,243

 
$
150,798

 
$
14,388

 
$
52,362

Weighted average shares outstanding:
 
 
 

 
 

 
 

 
 

Basic
124,790

 
122,869

 
116,980

 
103,480

 
96,181

Diluted
124,790

 
125,801

 
125,762

 
109,588

 
113,898

PER SHARE:
 
 
 

 
 

 
 

 
 

Equity, per diluted share
$
6.66

 
$
6.51

 
$
4.94

 
$
3.25

 
$
2.28

(Loss) income from continuing operations per share:
 
 
 

 
 

 
 

 
 

Basic
$
(0.20
)
 
$
1.50

 
$
1.29

 
$
0.14

 
$
0.54

Diluted
$
(0.20
)
 
$
1.47

 
$
1.22

 
$
0.13

 
$
0.46

Share Price: High
$
34.00

 
$
39.46

 
$
57.10

 
$
45.25

 
$
26.16

  Low
$
17.74

 
$
17.57

 
$
19.08

 
$
20.52

 
$
12.44

BALANCE SHEET DATA:
 
 
 

 
 

 
 

 
 

Current assets
$
730,151

 
$
685,811

 
$
708,132

 
$
437,750

 
$
169,108

Net property, plant & equipment
$
313,418

 
$
238,404

 
$
179,614

 
$
144,196

 
$
82,108

Total assets
$
1,909,511

 
$
1,973,720

 
$
2,042,545

 
$
1,832,150

 
$
426,129

Current liabilities
$
171,089

 
$
175,555

 
$
231,376

 
$
150,853

 
$
61,245

Long-term obligations, less current installments
$
907,177

 
$
978,981

 
$
1,189,604

 
$
1,324,990

 
$
104,704

Shareholders’ equity
$
831,245

 
$
819,184

 
$
621,565

 
$
356,307

 
$
260,180

CASH FLOW DATA:
 
 
 

 
 

 
 

 
 

Cash provided by operating activities
$
249,264

 
$
167,759

 
$
297,648

 
$
40,442

 
$
57,326

Cash used in investing activities
$
(90,555
)
 
$
(72,922
)
 
$
(53,718
)
 
$
(966,874
)
 
$
(66,874
)
Cash provided by (used in) financing activities
$
7,594

 
$
(240,333
)
 
$
31,908

 
$
963,116

 
$
3,118

Effect of changes in exchange rates
$
1,044

 
$
2

 
$
(251
)
 
$
(183
)
 
$
(173
)
Increase/(decrease) in cash and cash equivalents
$
167,347

 
$
(145,494
)
 
$
275,587

 
$
36,501

 
$
(6,603
)


30



(1) Years 2014 and 2015 include the effects of acquisitions such as Akorn AG, VersaPharm and Hi-Tech Pharmacal Co., Inc.


31



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, 2017, we submitted five new Abbreviated New Drug Application (“ANDA”) filings to the FDA. In the prior year ended December 31, 2016, we submitted 12 ANDA filings and three Abbreviated New Animal Drug Application (“ANADA”) filings while in 2015 we submitted 18 ANDA filings and one New Drug Application (“NDA”) filing to the FDA. Akorn and its partners received 26 new-to-Akorn ANDA product approvals and one NDA approval from the FDA in the year ended December 31, 2017; seven ANDA approvals and three tentative ANDA approvals in 2016 and finally, 11 ANDA approvals, two ANADA approvals, one NDA product approvals, one supplemental ANDA approval and two tentative ANDA approvals in 2015. As of December 31, 2017, we had 68 ANDA filings under FDA review. 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 we would not intend to manufacture

32



ourselves. Our R&D expense in the year ended December 31, 2017 was $80.5 million as compared to $42.6 million in the prior year ended December 31, 2016.

Revenue & Gross Profit:

Net revenue was $841.0 million for the twelve-month period ended December 31, 2017, representing a decrease of $275.8 million, or 24.7%, as compared to net revenue of $1,116.8 million for the twelve-month period ended December 31, 2016.  The decrease in net revenue in the period was primarily due to $279.1 million decline in organic revenue. The $279.1 million decline in organic revenue was due to approximately $192 million and $87 million declines in volume declines and price erosion, respectively. Consolidated gross profit for the twelve-month period ended December 31, 2017 was $433.1 million, or 51.5% of revenue, compared to $674.3 million, or 60.4% of revenue, for the twelve-month period ended December 31, 2016.  The decline in the gross profit percentage was principally due to unfavorable product mix shifts driven by the effect of competition on one of our major products.

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 2017, 2016 and 2015, 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).  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, 2017, 2016 and 2015 (dollar amounts in thousands):


33



 
2017
 
2016
 
2015
 
Amount
 
% of Revenue
 
Amount
 
% of Revenue
 
Amount
 
% of Revenue
Revenues:
 
 
 
 
 
 
 
 
 
 
 
Prescription Pharmaceuticals
$
772,524

 
91.9
 %
 
$
1,053,579

 
94.3
%
 
$
924,472

 
93.8
%
Consumer Health
68,521

 
8.1
 %
 
63,264

 
5.7
%
 
60,604

 
6.2
%
Total revenues
841,045

 
100.0
 %
 
1,116,843

 
100.0
%
 
985,076

 
100.0
%
Gross profit and gross margin percentage:
 

 
 

 
 

 
 

 
 
 
 
Prescription Pharmaceuticals
403,023

 
52.2
 %
 
645,078

 
61.2
%
 
566,298

 
61.3
%
Consumer Health
30,124

 
44.0
 %
 
29,193

 
46.1
%
 
29,714

 
49.0
%
Total gross profit
433,147

 
51.5
 %
 
674,271

 
60.4
%
 
596,012

 
60.5
%
Operating expenses:
 

 
 

 
 

 
 

 
 
 
 
Selling, general & administrative expenses
216,086

 
25.7
 %
 
197,501

 
17.7
%
 
162,205

 
16.5
%
Acquisition-related costs
159

 
 %
 
364

 
%
 
1,841

 
0.2
%
Research and development expenses
80,502

 
9.6
 %
 
42,603

 
3.8
%
 
40,707

 
4.1
%
Amortization of intangibles
61,443

 
7.3
 %
 
65,713

 
5.9
%
 
66,272

 
6.7
%
Impairment of intangible assets
92,613

 
11.0
 %
 
40,519

 
3.6
%
 
30,376

 
3.1
%
Operating (loss) income
$
(17,656
)
 
(2.1
)%
 
$
327,571

 
29.3
%
 
$
294,611

 
29.9
%
(Loss) income from continuing operations
(24,550
)
 
(2.9
)%
 
184,243

 
16.5
%
 
150,798

 
15.3
%
Net (loss) income
$
(24,550
)
 
(2.9
)%
 
$
184,243

 
16.5
%
 
$
150,798

 
15.3
%

COMPARISON OF YEARS ENDED DECEMBER 31, 2017 AND 2016

Net revenue was $841.0 million for the twelve-month period ended December 31, 2017, representing a decrease of $275.8 million, or 24.7%, as compared to net revenue of $1,116.8 million for the twelve-month period ended December 31, 2016.  The decrease in net revenue in the period was primarily due to $279.1 million decline in organic revenue. The $279.1 million decline in organic revenue was due to approximately $192 million and $87 million declines in volume and price erosion, respectively. The organic revenue decline was principally due to the effect of competition on Ephedrine Sulfate Injection, as well as Lidocaine Ointment. Additionally, other key products, such as Progesterone and Clobetasol Ointment, experienced more significant than expected declines in net revenue as a result of increased competition consistent with observed industry trends in 2017.  In addition, the Company experienced more than normal supply disruptions for certain products during the year, resulting in lower net revenue. While the Company received 26 new-to-Akorn ANDA product approvals and launched 21 new products during 2017, it was unable to offset the overall net revenue decline through new product launches or new business opportunities.
 
The Prescription Pharmaceuticals segment revenues of $772.5 million for the twelve-month period ended December 31, 2017 represented a decrease of $281.1 million, or 26.7%, as compared to revenues of $1,053.6 million for twelve-month period ended December 31, 2016.

The Consumer Health segment revenues of $68.5 million for the twelve-month period ended December 31, 2017 represented an increase of $5.3 million, or 8.3%, as compared to revenues of $63.3 million for twelve-month period ended December 31, 2016.
 
The net revenue for the twelve-month period ended December 31, 2017 of $841.0 million was net of adjustments totaling $1,510.0 million for chargebacks, rebates, administrative fees and others, product returns, discounts and allowances and advertising, promotions and other.  Chargeback expenses for 2017 were $953.3 million, or 40.5% of gross sales, compared to $1,218.6 million, or 42.1% of gross sales, in 2016.  The $265.2 million decrease in chargeback expense was due to lower gross sales in the current year as compared to prior year. Rebates, administrative fees and other expenses for the twelve-month period ended December 31, 2017 were $476.6 million, or 20.3% of gross sales, compared to $463.7 million, or 16.0% for twelve-month period ended December 31, 2016. The $12.9 million increase in rebates, administrative fees and other expenses was due to the impact of product and customer mix. Our product returns provision for the twelve-month period ended December 31, 2017 was $26.9 million, or 1.1% of gross sales, compared to $28.3 million, or 1.0% of gross sales, for twelve-month period ended December 31, 2016.  Discounts and allowances were $45.3 million or 1.9% of gross sales for the twelve-month period ended December 31, 2017, compared to $55.5 million, or 1.9% of gross sales for the twelve-month period ended

34



December 31, 2016. Advertisement and promotion expenses were $7.9 million or 0.3% of gross sales for the twelve-month period ended December 31, 2017, compared to $8.4 million, or 0.3% of gross sales for the twelve-month period ended December 31, 2016.

Consolidated gross profit for the twelve-month period ended December 31, 2017 was $433.1 million, or 51.5% of revenue, compared to $674.3 million, or 60.4% of revenue, for the twelve-month period ended December 31, 2016.  The decline in the gross profit percentage was principally due to unfavorable product mix shifts primarily driven by the effect of competition on one of our major products.
 
Total operating expenses were $450.8 million in the twelve-month period ended December 31, 2017, an increase of $104.1 million, or 30.0%, from the comparative prior year period amount of $346.7 million. The $104.1 million increase was primarily driven by respective increases of $52.1 million, $37.9 million and $18.6 million in Impairment of intangible assets, Research and development (“R&D”) expenses and Selling, general and administrative (“SG&A”) expenses that were partially offset by a decrease of $4.3 million in Amortization of intangibles. The following is a discussion of the main drivers of the increase:
 
During 2017, the Company impaired eight currently marketed products licensing rights primarily due to price erosion, while in 2016, the Company impaired eight currently marketed products licensing rights due to market dynamics. The total impairment expense in 2017 was $92.6 million, or 11.0%, of sales as compared to $40.5 million, or 3.6% of sales, in 2016.

R&D expenses were $80.5 million in 2017, an increase of $37.9 million or 89.0% over the prior year expenses of $42.6 million.  The $37.9 million increase was primarily due to IPR&D and Product licensing rights impairments of $35.5 million during 2017 compared to IPR&D impairments of $3.9 million during 2016.

SG&A expenses were $216.1 million in 2017, an increase of $18.6 million, or 9.4%, over the prior year expenses of $197.5 million. The primary drivers of the $18.6 million increase were $15.4 million in marketing and advertising expenses in 2017, of which $13.1 million was related to the TheraTears® direct-to-consumer ("DTC") advertising campaign, $7.9 million expenses related to the proposed Merger between Fresenius Kabi and Akorn, Inc., $7.5 million of net increase in Other SG&A expenses and $4.2 million increase in legal and audit expenses, which are being partially offset by a $16.9 million decrease in restatement related expenses.
 
 During 2017, the Company incurred non-operating expenses totaling $41.5 million compared to $56.3 million during 2016.  The $14.8 million decrease was primarily driven by respective decreases of $5.6 million, $4.7 million and $4.5 million in amortization of deferred financing costs, interest expense, net and other non-operating income (expense), net. The main drivers of the net decrease were comprised of the following:
 
Amortization of deferred financing costs totaled approximately $5.2 million in 2017, a decrease of $5.6 million as compared to the $10.8 million recognized in 2016.  The decrease in deferred financing costs in the year was principally due to 2016 expense including a deferred financing fee write-down associated with $200.0 million principal repayment of the Term loans in February 2016.
 
Interest expense, net was $38.1 million in 2017, compared to $42.7 million in 2016.  The decrease in 2017 was primarily due to increased capitalized interest and the effects of the conversion of the Convertible Notes on June 1, 2016.
 
Income tax benefit was $34.6 million based on an effective tax provision rate of approximately 58.5% in 2017, compared to an income tax expense of $87.1 million in 2016 based on an effective tax provision rate of approximately 32.1%. The change in the tax rate experienced by the company was driven principally by $26.9 million tax benefit resulting from the re-measurement of U.S. deferred tax assets and liabilities at the lower enacted corporate tax rate included in the Tax Cuts and Jobs Act (the “ Tax Act”). In the absence of the changes in the Tax Act, our tax benefit for 2017 would have been $7.7 million, with an effective tax provision rate of approximately 13.1%. The Company’s foreign subsidiaries do not have accumulated earnings that they can distribute; therefore, the provisions of the Act that related to the repatriation of foreign earnings are not applicable to the Company at December 31, 2017. The benefit resulting from the re-measurement of U.S. deferred tax assets and liabilities was partially offset by an accrual of $15.7 million of penalties and interest that could result from adverse results of income tax examinations. Absent the effects of both the reduction in our Deferred tax liability and the accrual of the penalties and interest, the income tax rate would have been approximately 39.5%.
 
The Company reported a net loss of $24.6 million for the twelve-month period ended December 31, 2017, or 2.9% of net revenue, compared to net income of $184.2 million, for the twelve-month period ended December 31, 2016 or 16.5% of net revenue.

35




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 Akorn AG 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.
 
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

36



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.

FINANCIAL CONDITION AND LIQUIDITY

Cash and Cash Equivalents

As of December 31, 2017, we had cash and cash equivalents of $368.1 million, which is $167.3 million higher than our cash and cash equivalents balance of $200.8 million as of December 31, 2016.  This increase in 2017 in cash and cash equivalents was driven by operating cash inflows of $249.3 million and financing cash inflows of $7.6 million, partially offset by investing cash outflows of $90.6 million.  Our net working capital was $559.1 million at December 31, 2017, compared to $510.3 million at December 31, 2016, an increase of $48.8 million.

Operating Cash Flows

37



 
Year ended December 31,
 
2017
 
2016
 
2015
OPERATING ACTIVITIES:
 
 
 
 
 
Consolidated net (loss) income
$
(24,550
)
 
$
184,243

 
$
150,798

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


 


 


Depreciation and amortization
85,173

 
87,963

 
86,924

Impairment of intangible assets
128,127

 
44,369

 
33,003

Amortization of deferred financing fees
5,216

 
10,760

 
4,350

Amortization of favorable contracts

 

 
71

Amortization of inventory step-up

 

 
4,681

Non-cash stock compensation expense
21,018

 
15,412

 
12,997

Non-cash interest expense

 
777

 
2,778

Non-cash gain on bargain purchase

 

 
(849
)
Income from available-for-sale securities
(3,032
)
 

 

Deferred income taxes, net
(115,249
)
 
(32,934
)
 
(46,130
)
Excess tax benefit from stock compensation

 

 
(47,997
)
Loss on extinguishment of debt

 

 
1,243

Gain on sale of available-for-sale security
199

 
45

 
237

Other
(307
)
 
(4,888
)
 

Changes in operating assets and liabilities:
 

 
 

 
 

Trade accounts receivable, net
141,979

 
(132,617
)
 
40,287

Inventories, net
(8,367
)
 
10,208

 
(50,729
)
Prepaid expenses and other current assets
(14,120
)
 
(6,494
)
 
17,574

Trade accounts payable
(9,223
)
 
6,139

 
(4,819
)
Accrued expenses and other liabilities
42,400

 
(15,224
)
 
93,229

NET CASH PROVIDED BY OPERATING ACTIVITIES
249,264

 
167,759

 
297,648


During 2017, we generated $249.3 million in cash flow from operations.  This positive operating cash flow was primarily driven by a decrease of $142.0 million in trade accounts receivable, net, add backs of impairment of intangible assets of 128.1 million and add backs of depreciation and amortization of 85.2 million, partially offset by a net loss of $24.6 million and a reduction in net deferred tax liabilities of $115.2 million.

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.

During 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.






38






Investing Cash Flows
 
Year ended December 31,
 
2017
 
2016
 
2015
INVESTING ACTIVITIES:
 

 
 

 
 

Payments for acquisitions and equity investments, net of cash acquired

 

 
(24,408
)
Proceeds from disposal of assets
4,815

 
5,966

 
2,459

Payments for other intangible assets
(200
)
 
(3,950
)
 
(3,835
)
Purchases of property, plant and equipment
(95,170
)
 
(74,938
)
 
(27,934
)
NET CASH USED IN INVESTING ACTIVITIES
(90,555
)
 
(72,922
)
 
(53,718
)

During 2017, we used $90.6 million of cash in investing activities.  Of this total, $95.2 million was used to acquire property, plant and equipment. This use of cash was partially offset by $4.8 million of inflows from the sales of investments in available-for-sale securities and disposal of fixed assets.  The increase in net cash used in investing activities during 2017 compared to 2016, was primarily driven by an increase of approximately $18.0 million in capital spending related to our ongoing effort to comply with the Drug Supply Chain Security Act ("DSCSA").

During 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 $4.0 million was used for the payment for 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.

During 2015, 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.

Financing Cash Flows
 
Year ended December 31,
 
2017
 
2016
 
2015
FINANCING ACTIVITIES:
 

 
 

 
 

Proceeds under stock option and stock purchase plans
7,594

 
9,795

 
11,916

Payments of contingent acquisition liabilities

 

 
(8,991
)
Debt financing costs

 
(5,128
)
 
(8,564
)
Excess tax benefits from stock compensation

 

 
47,997

Common stock repurchases

 
(45,000
)
 

Debt repayment

 
(200,000
)
 
(10,450
)
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES
7,594

 
(240,333
)
 
31,908


During 2017, financing activities generated $7.6 million of cash from the employee stock option exercise proceeds. 

During 2016, financing activities used $240.3 million of cash. $200.0 million was specifically 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.


39



Liquidity and Capital Needs

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 the Company’s manufacturing plant in Paonta Sahib, Himachal Pradesh, India. Furthermore, the Company expects to expend significant amounts in order to comply with the DSCSA. 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, 2017, 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.
 
Refer to Item 8, Note 7 - “Financing Arrangements” for further detail of debt obligations as of and for the year ended December 31, 2017.

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, 2017, our principal outstanding debt obligation was related to our Term Loans.  We had no outstanding loan balance under our JPM Credit Agreement at December 31, 2017, 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, 2017 (in thousands):

Description 
 
Total
 
2018
 
2019
 
2020
 
2021
 
2022
 
2023 and
beyond
Term Loans due 2021 (1)
 
$
831,938

 
$

 
$

 
$

 
$
831,938

 
$

 
$

Interest Payable – 5.875% existing and incremental term loan (2)
 
160,884

 
48,876

 
48,876

 
48,876

 
14,256

 

 

Contingent consideration – acquisitions
 
3,901

 
3,901

 

 

 

 

 

Inventory purchase commitments
 
6,876

 
3,916

 
1,053

 
693

 
315

 
225

 
674

Leases
 
27,948

 
4,016

 
3,818

 
3,731

 
3,524

 
3,210

 
9,649

Strategic partners – contingent payments (3)
 
19,134

 
11,139

 
5,545

 
1,500

 
650

 
300

 

Total:
 
$
1,050,681

 
$
71,848

 
$
59,292

 
$
54,800

 
$
850,683

 
$
3,735

 
$
10,323



40



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 current comprehensive rate of 5.875% as of December 31, 2017. The calculated interest payable amounts above assume the current comprehensive rate of 5.875% remains unchanged across the remaining 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 2018 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

As of December 31, 2017, 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, 2017, 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, 2017, we had no outstanding loans under the JPM Credit Agreement and no outstanding letter of credit under the JPM Credit Agreement.
 
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.
 

41



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 that prevent us from selling until a set period of time has elapsed.
 
At December 31, 2017, the majority of our cash and cash equivalents balance of $368.1 million was invested in overnight instruments, the interest rates of which may change daily.

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, 2017 and 2016
Consolidated Statements of Comprehensive Income (Loss) for the years ended December 31, 2017, 2016 and 2015
Consolidated Statements of Shareholders’ Equity for the years ended December 31, 2017, 2016 and 2015
Consolidated Statements of Cash Flows for the years ended December 31, 2017, 2016 and 2015
Notes to Consolidated Financial Statements

42


Report of Independent Registered Public Accounting Firm
 
Shareholders and Board of Directors
Akorn, Inc.
Lake Forest, Illinois
 
Opinion on the Consolidated Financial Statements

We have audited the accompanying consolidated balance sheets of Akorn, Inc. (the “Company”) and subsidiaries as of December 31, 2017 and 2016, the related consolidated statements of comprehensive (loss) income, shareholders’ equity, and cash flows for each of the three years in the period ended December 31, 2017, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company and subsidiaries at December 31, 2017 and 2016, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2017, in conformity with accounting principles generally accepted in the United States of America.
 
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the Company's internal control over financial reporting as of December 31, 2017, 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 February 28, 2018 expressed an unqualified opinion thereon.

Basis for Opinion

These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
  
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud.

Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
  
/s/ BDO USA, LLP
We have served as the Company's auditor since 2016.
Chicago, Illinois
February 28, 2018


43


Report of Independent Registered Public Accounting Firm

Shareholders and Board of Directors
Akorn, Inc.
Lake Forest, Illinois
 
Opinion on Internal Control Over Financial Reporting

We have audited Akorn, Inc.’s (the “Company’s”) internal control over financial reporting as of December 31, 2017, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (the “COSO criteria”). In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2017, based on the COSO criteria.
 
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the consolidated balance sheets of the Company and subsidiaries as of December 31, 2017 and 2016, the related consolidated statements of comprehensive (loss) income, shareholders’ equity, and cash flows for each of the three years in the period ended December 31, 2017, and the related notes and our report dated February 28, 2018, expressed an unqualified opinion thereon.

Basis for Opinion
 
A company’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 are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
 
We conducted our audit of internal control over financial reporting in accordance with the standards of the PCAOB. 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.

Definition and Limitations of Internal Control over Financial Reporting
 
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.


/s/ BDO USA, LLP
Chicago, Illinois
February 28, 2018

44


AKORN, INC.
CONSOLIDATED BALANCE SHEETS
(In Thousands,
Except Share Data)
 
December 31,
 
2017
 
2016
ASSETS
 
 
 
CURRENT ASSETS
 
 
 
Cash and cash equivalents
$
368,119

 
$
200,772

Trade accounts receivable, net
141,383

 
283,154

Inventories, net
183,568

 
174,793

Available-for-sale securities

 
1,106

Prepaid expenses and other current assets
37,081

 
25,986

TOTAL CURRENT ASSETS
730,151

 
685,811

PROPERTY, PLANT AND EQUIPMENT, NET
313,418

 
238,404

OTHER LONG-TERM ASSETS
 

 
 

Goodwill
285,310

 
284,293

Intangible assets, net
569,484

 
758,854

Deferred tax assets
6,521

 
5,286

Long-term investments

 
9

Other non-current assets
4,627

 
1,063

TOTAL OTHER LONG-TERM ASSETS
865,942

 
1,049,505

TOTAL ASSETS
$
1,909,511

 
$
1,973,720

LIABILITIES AND SHAREHOLDERS’ EQUITY
 

 
 

CURRENT LIABILITIES
 

 
 

Trade accounts payable
$
51,976

 
$
59,534

Purchase consideration payable
3,901

 
4,994

Income taxes payable
15,775

 
16,198

Accrued royalties
5,902

 
15,044

Accrued compensation
12,286

 
19,113

Accrued administrative fees
38,598

 
36,436

Accrued expenses and other liabilities
42,651

 
24,236

TOTAL CURRENT LIABILITIES
171,089

 
175,555

LONG-TERM LIABILITIES
 

 
 

Long-term debt (net of non-current deferred financing costs)
815,195

 
809,979

Deferred tax liability
43,404

 
157,607

Other long-term liabilities
48,578

 
11,395

TOTAL LONG-TERM LIABILITIES
907,177

 
978,981

TOTAL LIABILITIES
1,078,266

 
1,154,536

SHAREHOLDERS’ EQUITY
 

 
 

Common stock, no par value — 150,000,000 shares authorized; 125,090,522 and 124,390,217 shares issued and outstanding at December 31, 2017 and 2016
550,472

 
521,860

Retained earnings
294,741

 
319,291

Accumulated other comprehensive loss
(13,968
)
 
(21,967
)
TOTAL SHAREHOLDERS’ EQUITY
831,245

 
819,184

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY
$
1,909,511

 
$
1,973,720


See notes to the consolidated financial statements.

45


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

 
Year ended December 31,
 
2017
 
2016
 
2015
REVENUES
$
841,045

 
$
1,116,843

 
$
985,076

Cost of sales (exclusive of amortization of intangibles, included within operating expenses below)
407,898

 
442,572

 
389,064

GROSS PROFIT
433,147

 
674,271

 
596,012

Selling, general and administrative expenses
216,086

 
197,501

 
162,205

Acquisition-related costs
159

 
364

 
1,841

Research and development expenses
80,502

 
42,603

 
40,707

Amortization of intangibles
61,443

 
65,713

 
66,272

Impairment of intangible assets
92,613

 
40,519

 
30,376

TOTAL OPERATING EXPENSES
450,803

 
346,700

 
301,401

OPERATING (LOSS) INCOME
(17,656
)
 
327,571

 
294,611

Amortization of deferred financing costs
(5,216
)
 
(10,791
)
 
(4,283
)
Interest expense, net
(38,070
)
 
(42,734
)
 
(51,973
)
Bargain purchase gain

 

 
849

Other non-operating income (expense), net
1,744

 
(2,746
)
 
(7,048
)
(LOSS) INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES
(59,198
)
 
271,300

 
232,156

Income tax (benefit) provision
(34,648
)
 
87,057

 
81,358

(LOSS) INCOME FROM CONTINUING OPERATIONS
$
(24,550
)
 
$
184,243

 
$
150,798

CONSOLIDATED NET (LOSS) INCOME
$
(24,550
)
 
$
184,243

 
$
150,798

CONSOLIDATED NET (LOSS) INCOME PER COMMON SHARE:
 

 
 

 
 

(Loss) income from continuing operations, basic
$
(0.20
)
 
$
1.50

 
$
1.29

CONSOLIDATED NET (LOSS) INCOME, BASIC
$
(0.20
)
 
$
1.50

 
$
1.29

(Loss) income from continuing operations, diluted
$
(0.20
)
 
$
1.47

 
$
1.22

CONSOLIDATED NET (LOSS) INCOME, DILUTED
$
(0.20
)
 
$
1.47

 
$
1.22

SHARES USED IN COMPUTING CONSOLIDATED NET (LOSS) INCOME PER COMMON SHARE:
 

 
 

 
 

BASIC
124,790

 
122,869

 
116,980

DILUTED
124,790

 
125,801

 
125,762

COMPREHENSIVE (LOSS) INCOME:
 

 
 

 
 

Consolidated net (loss) income
$
(24,550
)
 
$
184,243

 
$
150,798

Unrealized holding gain on available-for-sale securities, net of tax
of ($157), ($436) and ($61) for the years ended December 31,
2017, 2016 and 2015, respectively.
267

 
740

 
104

Foreign currency translation gain (loss) for the years ended December 31, 2017, 2016 and 2015, respectively.
6,150

 
(1,941
)
 
(2,051
)
Pension liability adjustment, net of tax of ($403) and $694 for the year ended December 31, 2017 and 2016, respectively.
1,582

 
(3,624
)
 

COMPREHENSIVE (LOSS) INCOME
$
(16,551
)
 
$
179,418

 
$
148,851


See notes to the consolidated financial statements.

46


AKORN, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2015, 2016 AND 2017
(In Thousands)
 
Common Stock
 
Retained
Earnings
 
Other
Compre-hensive Loss
 
Total
 
Shares
 
Amount
 
 
 
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

 

 

 
1,413

Restricted stock units
16

 
3,814

 

 

 
3,814

Stock-based compensation expense

 
9,183

 

 

 
9,183

Foreign currency translation loss

 

 

 
(2,051
)
 
(2,051
)
Excess tax benefit – stock compensation

 
47,997

 

 

 
47,997

Unrealized holding loss on available-for-sale  securities

 

 

 
104

 
104

Convertible note conversions
5,096

 
43,497

 

 

 
43,497

Exercise of warrants


 


 

 

 

BALANCES AT DECEMBER 31, 2015
119,427

 
$
458,659

 
$
180,048

 
$
(17,142
)
 
$
621,565

Consolidated net income

 

 
184,243

 

 
184,243

Common stock repurchases
(1,808
)
 

 
(45,000
)
 

 
(45,000
)
Exercise of stock options
1,792

 
13,953

 

 

 
13,953

Restricted stock units
184

 
4,091

 

 

 
4,091

Stock-based compensation expense

 
11,321

 

 

 
11,321

Foreign currency translation loss

 

 

 
(1,941
)
 
(1,941
)
Excess tax benefit – stock compensation
(138
)
 
(4,158
)
 

 

 
(4,158
)
Unrealized holding loss on available-for-sale  securities

 

 

 
740

 
740

Convertible note conversions
4,933

 
43,215

 

 

 
43,215

Akorn AG pension liability adjustment

 

 

 
(3,624
)
 
(3,624
)
Other

 
$
(5,221
)
 
$

 
$

 
$
(5,221
)