# Alkermes plc. (ALKS) FY 2021 MD&A

Verbatim Item 7 Management's Discussion and Analysis from Alkermes plc.'s 10-K for fiscal year 2021.

SEC filing source: https://www.sec.gov/Archives/edgar/data/1520262/000156459022005304/alks-10k_20211231.htm
Accession: 0001564590-22-005304
Filing date: 2022-02-16
Report date: 2021-12-31
Extracted structurally from real Item 7 body heading to real Item 7A/8 boundary. Published MD&A gate trimmed front/tail over-capture.
Confidence: high

Company profile: /company/ALKS/
All MD&A years: /company/ALKS/mda/
Next year: /company/ALKS/mda/fy2022/ (FY 2022)

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

The following should be read in conjunction with our consolidated financial statements and related notes beginning on page F‑1 of this Annual Report. The following discussion contains forward‑looking statements. Actual results may differ significantly from those projected in the forward‑looking statements. See “Cautionary Note Concerning Forward‑Looking Statements” on page 3 of this Annual Report. Factors that might cause future results to differ materially from those projected in the forward‑looking statements also include, but are not limited to, those discussed in “Item 1A—Risk Factors” and elsewhere in this Annual Report. A detailed discussion of our 2019 financial condition and results of operations, and of 2020 year-over-year changes as compared to 2019, can be found in “Item 7—Management’s Discussion and Analysis of Financial Condition and Results of Operations” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2020, which was filed with the SEC on February 11, 2021.

Overview

We have a portfolio of proprietary products that we manufacture, market and sell in the U.S. —VIVITROL, ARISTADA, ARISTADA INITIO and most recently, LYBALVI, which we launched commercially in October 2021. We also earn manufacturing and/or royalty revenues on net sales of products commercialized by our licensees, the most significant of which in 2021 were the long-acting INVEGA products and VUMERITY. We expect VIVITROL, ARISTADA, ARISTADA INITIO, LYBALVI and VUMERITY to generate significant revenues for us in the near‑ and medium‑term as we believe these products are singular or competitively advantaged products in their classes.

In 2021, we incurred an operating loss of $29.3 million, as compared to $112.4 million in 2020. The decrease in the operating loss was primarily due to an increase in revenues of $135.0 million, partially offset by an increase in expenses of $51.9 million. These items are discussed in further detail within the “Results of Operations” section below.

In November 2021, we received notice of the partial termination by Janssen of our license agreement in respect of INVEGA SUSTENNA, INVEGA TRINZA and INVEGA HAFYERA, which termination is expected to impact know-how royalties related to sales of INVEGA SUSTENNA,  INVEGA TRINZA and INVEGA HAFYERA in the U.S. beginning in February 2022. In 2021, we recognized $192.2 million in royalty revenue related to net sales of INVEGA SUSTENNA, INVEGA TRINZA and INVEGA HAFYERA in the U.S. For more information about our agreement with Janssen in respect of the long-acting INVEGA products, see “Collaborative Arrangements—Janssen” in “Item 1—Business” in this Annual Report. For information about risks relating to this notice of partial termination and our collaborative arrangements more broadly, see “Item 1A—Risk Factors” in this Annual Report and specifically that section entitled “We rely heavily on our licensees in the commercialization and continued development of products from which we receive revenue and, if our licensees are not effective, or if disputes arise in respect of our contractual arrangements, our revenues could be materially adversely affected.”

COVID-19 Update

In March 2020, COVID-19 was declared a global pandemic by the World Health Organization. To date, COVID-19 has surfaced in nearly all regions around the world and resulted in travel restrictions and business slowdowns and/or shutdowns in affected areas. Ireland, all U.S. states, and many local jurisdictions and countries around the world have, at times during the pandemic, issued and implemented quarantines, vaccine and masking mandates, restrictive executive orders and other similar government orders, restrictions, and recommendations for their residents to help control the spread of COVID-19, and may continue to do so while the pandemic persists. Such orders, mandates, restrictions and/or recommendations, and/or the perception that additional orders, mandates, restrictions or recommendations could occur, have, at times during the pandemic, resulted in widespread interruptions and closures of businesses, including healthcare systems that serve people living with addiction and serious mental illness, work stoppages, slowdowns and/or delays, remote work policies and travel restrictions, among other effects.

We continue to closely monitor and respond to the ongoing impact of COVID-19 on our employees, our communities and our business operations, and have adopted, and adapted as needed, a series of precautionary measures in an effort to protect our employees and mitigate the potential spread of COVID-19 in a community setting. For example, at the start of the pandemic, we instituted a global remote work policy for those of our employees who were able to work remotely. At the same time, we worked to continue our critical business functions, including operation of our manufacturing facilities and our laboratories, and continued to conduct our discovery efforts and supply our medicines. For those of our employees who continued to work on-site in our laboratories and manufacturing facilities, we instituted additional safety precautions, including increased sanitization of our facilities, use of personal protective equipment, implementation of a daily health screening application and physical distancing practices. We provided employees with COVID-19 vaccine information and sponsored vaccine clinics in Massachusetts and Ohio for our employees and their families. We also took actions to support people living with opioid dependence, alcohol dependence, schizophrenia and bipolar I disorder to help facilitate their access to information, resources and medicines that may assist in their treatment.

Certain of our field-based employees have resumed in-person interactions, and certain of our office-based employees have returned to the office, in each case on a voluntary basis and in accordance with location-specific guidance. We are planning for a larger-scale return to the office and have developed flexible work arrangement guidelines to help balance business needs, employee

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health, wellbeing and safety and the evolving work environment. We will continue to monitor guidance from local health authorities as we increase in-person interactions.

A number of the marketed products from which we derive revenue, including manufacturing and royalty revenue, are injectable medications administered by healthcare professionals. Given developments that have transpired to date, and may continue to transpire, in response to the pandemic, including business closures, travel restrictions, quarantine, testing and/or vaccine mandates and other protocol, labor shortages, and other restrictive measures, commercial sales of these marketed products have been adversely impacted to varying degrees during the pandemic and may continue to be adversely impacted while the pandemic persists.

The COVID-19 pandemic has caused, and we expect may continue to cause, varying degrees of disruption to our employees and our business operations. While we have continued to operate our manufacturing facilities and supply our medicines without interruption throughout the pandemic, we have at times during the pandemic experienced labor or supply chain disruptions at our manufacturing facilities, and may continue to experience such disruptions while the pandemic persists. In addition, while we have continued to conduct R&D activities, including our ongoing clinical trials, the COVID-19 pandemic has at times impacted the timelines of certain of our early-stage discovery efforts and clinical trials, and may continue to impact such timelines while the pandemic persists. We work with our internal teams, our clinical investigators, R&D vendors and critical supply chain vendors to continually assess, and mitigate, the potential impact of COVID-19 on our manufacturing operations and R&D activities.

Due to numerous uncertainties surrounding the ongoing COVID-19 pandemic, the actual impact of the pandemic on our financial condition and operating results may differ from our current projections. These uncertainties include, among other things, the ultimate severity and duration of the pandemic and the manner in which it continues to evolve, including the emergence, prevalence and severity of new COVID-19 variants, and future developments in response thereto, which are highly uncertain and cannot be predicted as of the date of this Annual Report and which may include, among other things, governmental, business or other actions that have been, are being, or will be, taken in response to the pandemic, including restrictions on travel and mobility, business closures and operating restrictions, including the imposition of vaccine and masking mandates and/or mandatory testing policies; impacts of the pandemic and of imposition of such mandates and protocols in response to the pandemic on our employees, including with regard to their health, safety, wellbeing and job performance, on the labor market more broadly and on our ability to attract and retain employees; impacts of the pandemic on the vendors or distribution channels in our supply chain and on our ability to continue to manufacture our products; impacts of the pandemic on the conduct of our clinical trials, including with respect to enrollment rates, availability of investigators and clinical trial sites, and monitoring of data; impacts of the pandemic on healthcare systems that serve people living with opioid dependence, alcohol dependence, schizophrenia and bipolar I disorder; impacts of the pandemic on the regulatory agencies with which we interact in the development, review, approval and commercialization of our medicines; impacts of the pandemic on reimbursement for our products, including our Medicaid rebate liability, and for services related to the use of our products; and impacts of the pandemic on the Irish, U.S. and global economies more broadly. For additional information about risks and uncertainties related to the COVID-19 pandemic that may impact our business, our financial condition or our results of operations, see “Item 1A—Risk Factors” in this Annual Report and specifically the section entitled “Our business, financial condition and results of operations have been, and may continue to be, adversely affected by the ongoing COVID-19 pandemic or other similar outbreaks of contagious diseases.”

Results of Operations

Product Sales, Net

Our product sales, net consist of sales in the U.S. of VIVITROL, ARISTADA, ARISTADA INITIO, and following its commercial launch in October 2021, LYBALVI, primarily to wholesalers, specialty distributors and pharmacies. The following table presents the adjustments deducted from product sales, gross to arrive at product sales, net for sales of VIVITROL, ARISTADA, ARISTADA INITIO and LYBALVI in the U.S. during the years ended December 31, 2021 and 2020:

[[GREPCENT_TABLE]]
[["","Year Ended December 31,"],["(In millions, except for % of Sales)","2021","","","% of Sales","","","","2020","","","% of Sales"],["Product sales, gross","$","1,315.1","","","","100.0","","%","","$","1,136.2","","","","100.0","","%"],["Adjustments to product sales, gross:"],["Medicaid rebates","","(331.9",")","","","(25.2",")","%","","","(291.1",")","","","(25.6",")","%"],["Chargebacks","","(129.1",")","","","(9.8",")","%","","","(100.0",")","","","(8.8",")","%"],["Product discounts","","(107.0",")","","","(8.1",")","%","","","(88.2",")","","","(7.8",")","%"],["Medicare Part D","","(59.8",")","","","(4.5",")","%","","","(56.6",")","","","(5.0",")","%"],["Other","","(59.9",")","","","(4.6",")","%","","","(48.5",")","","","(4.2",")","%"],["Total adjustments","","(687.7",")","","","(52.2",")","%","","","(584.4",")","","","(51.4",")","%"],["Product sales, net","$","627.4","","","","47.8","","%","","$","551.8","","","","48.6","","%"]]
[[/GREPCENT_TABLE]]

Our product sales, net for VIVITROL, ARISTADA and ARISTADA INITIO, and LYBALVI in 2021 were $343.9 million, $275.4 million, and $8.2 million, respectively, as compared to $310.7 million, $241.1 million and none in 2020, respectively.

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VIVITROL product sales, gross, increased by 14% in 2021, as compared to 2020, primarily due to a 10% increase in the number of VIVITROL units sold due, in part, to a reduction in COVID-19-related disruptions that began in the second quarter of 2020 and a 2% increase in the selling price of VIVITROL that went into effect in April 2021. ARISTADA and ARISTADA INITIO product sales, gross, increased by 15% in 2021, as compared to 2020, primarily due to an 11% increase in the number of ARISTADA and ARISTADA INITIO units sold and a 3% increase in the selling price of ARISTADA and ARISTADA INITIO that went into effect in April 2021.

A number of companies are working to develop products to treat addiction, including alcohol and opioid dependence, that may compete with, and negatively impact, future sales of VIVITROL. Increased competition may lead to reduced unit sales of VIVITROL and increased pricing pressure. The latest to expire of our patents covering VIVITROL in the U.S. will expire in 2029 and the latest to expire of our patents covering VIVITROL in Europe expired in 2021. Under the terms of a settlement and license agreement, we granted Amneal a license under certain patents covering VIVITROL, including the latest to expire patent covering VIVITROL in the U.S., to market and sell a generic formulation of VIVITROL in the U.S. beginning sometime in 2028 or earlier under certain circumstances. We are currently engaged in Paragraph IV litigation with certain Teva entities in respect of the last to expire patent covering VIVITROL in the U.S. For a discussion of these legal proceedings, see Note 19, Commitments and Contingent Liabilities in the “Notes to Consolidated Financial Statements” in this Annual Report and for information regarding the risks relating to these legal proceedings, see “Risks Related to our Intellectual Property—We or our licensees may face claims against IP rights covering our products and competition from generic drug manufacturers”. A number of companies currently market and/or are developing products to treat schizophrenia and/or bipolar I disorder that may compete with and negatively impact future sales of ARISTADA, ARISTADA INITIO and LYBALVI. Increased competition may lead to reduced unit sales of ARISTADA, ARISTADA INITIO and LYBALVI and increased pricing pressure. The latest to expire of our patents covering ARISTADA, ARISTADA INITIO and LYBALVI in the U.S. will expire in 2035, 2035 and 2032, respectively; and, as such, we do not anticipate any generic versions of these products to enter the market in the near term. We expect our product sales, net will continue to grow as VIVITROL continues to penetrate the opioid and alcohol dependence markets in the U.S., as ARISTADA and ARISTADA INITIO continue to gain market share in the U.S., and as we continue the commercial launch of LYBALVI.

Manufacturing and Royalty Revenues

Manufacturing revenues for third-party products using our proprietary technologies are mostly recognized over time as products move through the manufacturing process, using an input method based on costs as a measure of progress. Manufacturing revenue from RISPERDAL CONSTA and VUMERITY are recognized at the point in time the product has been fully manufactured. Royalties earned on our licensees’ net sales of third-party products using our proprietary technologies are generally recognized in the period such products are sold by our licensees. The following table compares manufacturing and royalty revenues earned in the years ended December 31, 2021 and 2020:

[[GREPCENT_TABLE]]
[["","Year Ended December 31,"],["(In millions)","2021","","","2020","","","Change"],["Manufacturing and royalty revenues:"],["Long-acting INVEGA products","$","303.1","","","$","274.2","","","$","28.9"],["VUMERITY","","87.4","","","","22.5","","","","64.9"],["RISPERDAL CONSTA","","50.9","","","","71.4","","","","(20.5",")"],["AMPYRA/FAMPYRA","","47.9","","","","47.9","","","","\u2014"],["Other","","52.5","","","","68.0","","","","(15.5",")"],["Manufacturing and royalty revenues","$","541.8","","","$","484.0","","","$","57.8"]]
[[/GREPCENT_TABLE]]

Our agreements with Janssen related to the long-acting INVEGA products provide for tiered royalty payments, which consist of a patent royalty and a know-how royalty, both of which are determined on a country-by-country basis. The patent royalty, which equals 1.5% of net sales, is payable in each country until the expiration of the last of the patents with valid claims applicable to the product in such country. The know-how royalty is a tiered royalty of 3.5% on calendar year net sales up to $250 million; 5.5% on calendar year net sales of between $250 million and $500 million; and 7.5% on calendar year net sales exceeding $500 million. The know-how royalty rate resets to 3.5% at the beginning of each calendar year and is payable until 15 years from the first commercial sale of a product in each individual country. The increase in royalty revenues from the long-acting INVEGA products was due to an increase in Janssen’s net sales of these products. Janssen’s net sales of the long-acting INVEGA products were $4.0 billion and $3.7 billion during the years ended December 31, 2021 and 2020, respectively. The latest of the patents subject to our license agreement with Janssen covering INVEGA SUSTENNA/XEPLION expires in 2030 in the U.S. and certain other countries and in 2022 in the EU. The latest of the licensed patents covering INVEGA TRINZA/TREVICTA expired in 2017 in the U.S. and will expire in 2022 in the EU. In addition, Janssen has other patents not subject to our license agreement, including one that covers INVEGA SUSTENNA in the U.S. and expires in 2031 and one that covers INVEGA TRINZA in the U.S. and expires in 2036.

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We expect revenues from net sales of XEPLION, TREVICTA and BYANNLI to decrease over time. The amount and timing of revenues from sales of INVEGA SUSTENNA, INVEGA TRINZA and INVEGA HAFYERA depend upon the outcome of our dispute with Janssen related to the basis for its partial termination of our license agreement in respect of these products. In November 2021, we received notice of the partial termination of our license agreement with Janssen in respect of INVEGA SUSTENNA, INVEGA TRINZA and INVEGA HAFYERA, which termination is expected to impact the know-how royalty related to sales of INVEGA SUSTENNA,  INVEGA TRINZA and INVEGA HAFYERA in the U.S. beginning in February 2022. For more information about the license agreement with Janssen in respect of the long-acting INVEGA products, see “Collaborative Arrangements—Janssen” in “Item 1—Business” in this Annual Report. For information about risks relating to this notice of partial termination and our collaborative arrangements more broadly, see “Item 1A—Risk Factors” in this Annual Report and specifically that section entitled “We rely heavily on our licensees in the commercialization and continued development of products from which we receive revenue and, if our licensees are not effective, or if disputes arise in respect of our contractual arrangements, our revenues could be materially adversely affected.”

In addition, each of INVEGA SUSTENNA and INVEGA TRINZA are currently subject to Paragraph IV litigation in response to companies seeking to market generic versions of such products. Increased competition from new products or generic versions of these products may lead to reduced unit sales of such products and increased pricing pressure. For a discussion of these legal proceedings, see Note 19, Commitments and Contingent Liabilities in the “Notes to Consolidated Financial Statements” in this Annual Report, and for information about risks relating to these legal proceedings, see “Item 1A—Risk Factors” in this Annual Report, and specifically the section entitled “We or our licensees may face claims against IP rights covering our products and competition from generic drug manufacturers.”

We record manufacturing revenue, equal to 7.5% of Janssen’s unit net sales price of RISPERDAL CONSTA, at the point in time when RISPERDAL CONSTA has been fully manufactured, which is deemed to have occurred when the product is approved for shipment by both us and Janssen. We record royalty revenue, equal to 2.5% of end-market net sales, in the period that the end-market sale of RISPERDAL CONSTA occurs. The decrease in RISPERDAL CONSTA revenue was due to a 29% decrease in manufacturing revenue and a 28% decrease in royalty revenue. The decrease in manufacturing revenue was primarily due to a 35% decrease in the number of units of RISPERDAL CONSTA manufactured for Janssen. The decrease in royalty revenue was due to a decline in Janssen’s end-market net sales of RISPERDAL CONSTA. Janssen’s end‑market net sales of RISPERDAL CONSTA were $592.0 million and $642.0 million during the years ended December 31, 2021 and 2020, respectively. We expect revenue from RISPERDAL CONSTA to decrease over time. The latest to expire patent covering RISPERDAL CONSTA expired in 2021 in the EU and will expire in 2023 in the U.S., and we are aware of potential generic competition for RISPERDAL CONSTA that may lead to reduced unit sales and increased pricing pressure. For a discussion of legal proceedings related to patents covering RISPERDAL CONSTA, see Note 19, Commitments and Contingent Liabilities in the “Notes to Consolidated Financial Statements” in this Annual Report, and for risks relating to such legal proceedings, see “Item 1A—Risk Factors” in this Annual Report and specifically the section entitled “We or our licensees may face claims against IP rights covering our products and competition from generic drug manufacturers.”

We record manufacturing revenue for VUMERITY at cost plus 15% upon release for bulk batches of VUMERITY and upon shipment for packaged batches of VUMERITY. We record a 15% royalty on worldwide net sales of VUMERITY when the end-market sale of VUMERITY occurs. VUMERITY manufacturing revenue increased by 192%, which was primarily due to a 310% and 430% increase in the amount of bulk batches and packaged lots of VUMERITY, respectively, manufactured for Biogen. Royalty revenues increased by 350%, which was primarily due to an increase in end-market sales of VUMERITY. Net end-market sales of VUMERITY were $410.0 million in the year ended December 31, 2021, as compared to $64.0 million in the year ended December 31, 2020.

We record manufacturing revenue for FAMPYRA as the product is being manufactured and record royalty revenue when the end-market sale of FAMPYRA occurs. We record both manufacturing and royalty revenue for AMPYRA as the product is being manufactured, rather than when it is shipped to Acorda. FAMPYRA manufacturing and royalty revenues increased by 6% and 4%, respectively, primarily due to an increase in the amount of FAMPYRA manufactured and an increase in end-market sales. AMPYRA manufacturing and royalty revenues both decreased by 10% primarily due to a decrease in AMPYRA demand due to the entry of generic forms of AMPYRA into the U.S. market in 2018. We expect revenues from AMPYRA to continue to decline due to the availability of generic forms of AMPYRA in the U.S. The latest of the patents covering FAMPYRA expires in 2025 in the EU.

Certain of our manufacturing and royalty revenues are earned in countries outside of the U.S. and are denominated in currencies in which the product is sold. See “Item 7A—Quantitative and Qualitative Disclosures about Market Risk” in this Annual Report for information on currency exchange rate risk related to our revenues and “Item 1A—Risk Factors” in this Annual Report, and specifically the section entitled “Currency exchange rates may affect revenues and expenses” for risks related to currency exchange rates.

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Costs and Expenses

Cost of Goods Manufactured and Sold

[[GREPCENT_TABLE]]
[["","Year Ended December 31,","","","Change"],["(In millions)","2021","","","2020","","","2021 - 2020"],["Cost of goods manufactured and sold","$","197.4","","","$","178.3","","","$","19.1"]]
[[/GREPCENT_TABLE]]

The increase in cost of goods manufactured and sold was primarily due to a 320% increase in VUMERITY cost of goods manufactured and a 24% increase in VIVITROL cost of goods manufactured and sold, partially offset by a decrease in RISPERDAL CONSTA cost of goods manufactured of 23%. The increase in VUMERITY cost of goods manufactured was due to increased manufacturing activity, as discussed above. The increase in VIVITROL cost of goods manufactured and sold was primarily due to an increase in the number of VIVITROL units sold, as discussed above. The decrease in cost of goods manufactured for RISPERDAL CONSTA was due to a decrease in end-market sales for this product, as discussed above.

Research and Development Expenses

For each of our R&D programs, we incur both external and internal expenses. External R&D expenses include fees for clinical and non-clinical activities performed by CROs, consulting fees, and costs related to laboratory services, the purchase of drug product materials and third-party manufacturing development activities. Internal R&D expenses include employee-related expenses, occupancy costs, depreciation and general overhead. We track external R&D expenses for each of our development programs; however, internal R&D expenses are not tracked by individual program as they can benefit multiple programs or our technologies in general.

The following table sets forth our external R&D expenses for the years ended December 31, 2021 and 2020 relating to our then-current development programs and our internal R&D expenses, listed by the nature of such expenses:

[[GREPCENT_TABLE]]
[["","","Year Ended December 31,","","","Change"],["(In millions)","","2021","","","2020","","","2021 - 2020"],["External R&D expenses:"],["Development programs:"],["nemvaleukin","","$","80.1","","","$","74.6","","","$","5.5"],["ALKS 1140","","","29.3","","","","6.0","","","","23.3"],["LYBALVI","","","26.0","","","","35.3","","","","(9.3",")"],["Other external R&D expenses","","","65.7","","","","66.6","","","","(0.9",")"],["Total external R&D expenses","","","201.1","","","","182.5","","","","18.6"],["Internal R&D expenses:"],["Employee-related","","","148.6","","","","158.8","","","","(10.2",")"],["Occupancy","","","19.5","","","","20.8","","","","(1.3",")"],["Depreciation","","","12.2","","","","15.1","","","","(2.9",")"],["Other","","","25.1","","","","17.4","","","","7.7"],["Total internal R&D expenses","","","205.4","","","","212.1","","","","(6.7",")"],["Research and development expenses","","$","406.5","","","$","394.6","","","$","11.9"]]
[[/GREPCENT_TABLE]]

These amounts are not necessarily predictive of future R&D expenses. In an effort to allocate our spending most effectively, we continually evaluate our products under development, based on the performance of such products in preclinical and/or clinical trials, our expectations regarding the likelihood of their regulatory approval and our view of their future potential commercial viability, among other factors.

The increase in expenses related to nemvaleukin was primarily due to the advancement of the ARTISTRY development program for the product, including increased patient enrollment in ongoing clinical studies and the initiation of the ARTISTRY-6 and ARTISTRY-7 studies. For additional detail on the status of the ARTISTRY development program for nemvaleukin, see “Item 1—Business” in this Annual Report and specifically the section entitled “Key Development Program – nemvaleukin alfa”. The increase in expenses related to ALKS 1140, our novel CoREST-selective HDAC inhibitor candidate for the treatment of neurodegenerative and neurologic disorders, was primarily due to a $25.0 million development milestone payment made to the former shareholders of Rodin Therapeutics, Inc. (“Rodin”) in 2021 related to the submission of an IND or equivalent for ALKS 1140. The decrease in expenses related to LYBALVI was primarily due to the approval of the LYBALVI NDA by the FDA in May 2021 and its commercial launch in October 2021.

The decrease in employee-related expenses was primarily due to a decrease in R&D headcount of 7% from December 31, 2020 to December 31, 2021.

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Selling, General and Administrative Expenses

[[GREPCENT_TABLE]]
[["","","Year Ended December 31,","","","Change"],["(In millions)","","2021","","","2020","","","2021 - 2020"],["Selling and marketing expense","","$","365.9","","","$","338.5","","","$","27.4"],["General and administrative expense","","","195.1","","","","200.3","","","","(5.2",")"],["Selling, general and administrative expense","","$","561.0","","","$","538.8","","","$","22.2"]]
[[/GREPCENT_TABLE]]

The increase in selling and marketing expense was primarily due to a 22% increase in marketing expense and a 33% increase in professional service fees. The increases in both marketing expense and professional service fees were primarily related to commercial launch activities for LYBALVI, including increases in consumer promotional materials and product samples.

The decrease in general and administrative expense was primarily due to a 59% decrease in new product planning activities following the commercial launch of LYBALVI in October 2021 and a 29% decrease in IT related costs, primarily due to decreases in external software license costs and maintenance costs.

Amortization of Acquired Intangible Assets

[[GREPCENT_TABLE]]
[["","","Year Ended December 31,"],["(In millions)","","2021","","","2020","","","Change"],["Amortization of acquired intangible assets","","$","38.1","","","$","39.5","","","$","(1.4",")"]]
[[/GREPCENT_TABLE]]

Our amortizable intangible assets consist of technology and collaborative arrangements acquired as part of the acquisition of EDT in September 2011, which are being amortized over 12 to 13 years. We amortize our amortizable intangible assets using the economic use method, which reflects the pattern that the economic benefits of the intangible assets are consumed as revenue is generated from the underlying patent or contract.

Based on our most recent analysis, amortization of intangible assets included within our consolidated balance sheet at December 31, 2021 is expected to be approximately $35.0 million, $35.0 million and $1.0 million in the years ending December 31, 2022 through 2024, respectively.

Other (Expense) Income, Net

[[GREPCENT_TABLE]]
[["","","Year Ended December 31,","","","Change"],["(In millions)","","2021","","","2020","","","2021 - 2020"],["Interest income","","$","2.4","","","$","7.0","","","$","(4.6",")"],["Interest expense","","","(11.2",")","","","(8.7",")","","","(2.5",")"],["Change in the fair value of contingent consideration","","","(1.4",")","","","3.9","","","","(5.3",")"],["Other income, net","","","0.2","","","","13.7","","","","(13.5",")"],["Total other (expense) income, net","","$","(10.0",")","","$","15.9","","","$","(25.9",")"]]
[[/GREPCENT_TABLE]]

The decrease in interest income was primarily due to a decrease in interest rates. Interest income consists of interest earned on our available-for-sale investments. The increase in interest expense was due to the Term Loan Refinancing completed in March 2021. The Term Loan Refinancing is discussed in greater detail in Note 11, Long-Term Debt in the “Notes to Consolidated Financial Statements” in this Annual Report.

In April 2015, we sold certain of our business assets to Recro Pharma, Inc. (“Recro”) and Recro Gainesville LLC, which included as part of the purchase price contingent consideration tied to low double digit royalties on net sales of the IV/IM and parenteral forms of Meloxicam and any other product with the same active ingredient as Meloxicam IV/IM that is discovered or identified using certain of our IP to which Recro was provided a right of use, through license or transfer (such products, the “Meloxicam Products”), and milestone payments to be paid upon the achievement of certain regulatory and sales milestones related to the Meloxicam Products (such transaction, the “Gainesville Transaction”). In November 2019, Recro spun out its acute care segment to Baudax Bio, Inc. (“Baudax”) and assigned and/or transferred to Baudax Recro’s obligations to pay certain contingent consideration from the Gainesville Transaction. The change in the fair value of contingent consideration was primarily due to the approval of the NDA for ANJESO by the FDA in February 2020, which increased the probability of success in our valuation approach and increased the value of the contingent consideration. In the fourth quarter of 2020, following Baudax’s disclosure regarding its ability to continue as a going concern, we modified our valuation model to incorporate a greater risk of non-payment. The valuation approach used to determine the fair value of the contingent consideration is discussed in greater detail in Note 5, Fair Value, in the “Notes to Consolidated Financial Statements” in this Annual Report.

The decrease in other income, net was primarily due to $11.1 million of income in 2020 representing our proportional share of the proceeds from the sale of two companies within the Fountain Healthcare Partners II (“Fountain”) portfolio. The transactions were

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accounted for under the cumulative earnings approach whereby the return on investment of $8.3 million was recorded as a gain within “Other (expense) income, net” in the accompanying consolidated statements of operations and comprehensive loss and the return of investment of $2.8 million was recorded as a reduction in the net investment in Fountain. Our investment in Fountain is discussed in greater detail in Note 4, Investments, in the “Notes to Consolidated Financial Statements” in this Annual Report.

Income Tax Provision

[[GREPCENT_TABLE]]
[["","","Year Ended December 31,"],["(In millions)","","2021","","","2020","","","Change"],["Income tax provision","","$","8.9","","","$","14.3","","","$","(5.4",")"]]
[[/GREPCENT_TABLE]]

The income tax provision in 2021 and 2020 were primarily due to U.S. federal and state taxes on income earned in the U.S. and the tax impact of employee equity activity. No provision for income tax has been provided on undistributed earnings of the Company’s foreign subsidiaries because such earnings are indefinitely reinvested in the foreign operations. Cumulative unremitted earnings of overseas subsidiaries totaled approximately $452.0 million at December 31, 2021. In the event of a repatriation of those earnings in the form of dividends or otherwise, the Company may be liable for income taxes, subject to adjustment, if any, for foreign tax credits and foreign withholding taxes payable to foreign tax authorities. The Company estimates that approximately $45.0 million of income taxes would be payable on the repatriation of the unremitted earnings to Ireland.

As of December 31, 2021, the Company had $1.5 billion of Irish NOL carryforwards, $17.1 million of U.S. federal NOL carryforwards, $43.2 million of state NOL carryforwards, $46.8 million of federal R&D credits and $25.6 million of state tax credits which will either expire on various dates through 2041 or can be carried forward indefinitely. These loss and credit carryforwards are available to reduce certain future Irish and foreign taxable income and tax. These loss and credit carryforwards are subject to review and possible adjustment by the appropriate taxing authorities and may be subject to limitations based upon changes in the ownership of the Company's ordinary shares.

As discussed in “Item 1A—Risk Factors” in this Annual Report and specifically the section entitled “Changes in tax rules and regulations, or interpretations thereof, may adversely affect our financial condition”, effective in 2022, the Tax Cuts and Jobs Act of 2017 requires us to capitalize, and subsequently amortize R&D expenses over five years for research activities conducted in the U.S. and over fifteen years for research activities conducted outside of the U.S. This will result in a material increase to our U.S. income tax liability and net deferred tax assets and a material decrease to our cash flows provided from operations. The actual impact will depend on multiple factors, including the amount of R&D expenses incurred and whether the research activities are performed within or outside of the U.S.

In 2021, Ireland joined the Organization for Economic Co-operation and Development’s (“OECD”) inclusive framework two-pillar solution to address the tax challenges arising from the digitalization of the economy. The OECD’s draft Pillar Two legislation outlines the rules to assist in the implementation of an international tax system that would ensure that certain companies in the relevant jurisdictions are subject to a minimum tax rate of 15%. Ireland may incorporate these rules into its domestic legislation, which may become effective in 2023. We are assessing the application and potential impact of these proposed rules.

Liquidity and Capital Resources

Our financial condition is summarized as follows:

[[GREPCENT_TABLE]]
[["","","December 31, 2021","","","December 31, 2020"],["(In millions)","","U.S.","","","Ireland","","","Total","","","U.S.","","","Ireland","","","Total"],["Cash and cash equivalents","","$","88.6","","","$","248.9","","","$","337.5","","","$","152.8","","","$","120.2","","","$","273.0"],["Investments\u2014short-term","","","144.5","","","","54.3","","","","198.8","","","","293.5","","","","68.5","","","","362.0"],["Investments\u2014long-term","","","163.0","","","","66.4","","","","229.4","","","","23.2","","","","1.6","","","","24.8"],["Total cash and investments","","$","396.1","","","$","369.6","","","$","765.7","","","$","469.5","","","$","190.3","","","$","659.8"],["Outstanding borrowings\u2014short and long-term","","$","295.8","","","$","\u2014","","","$","295.8","","","$","275.0","","","$","\u2014","","","$","275.0"]]
[[/GREPCENT_TABLE]]

At December 31, 2021, our investments consisted of the following:

[[GREPCENT_TABLE]]
[["","","","","","","Gross"],["","","Amortized","","","Unrealized","","","Allowance for","","","Estimated"],["(In millions)","","Cost","","","Gains","","","Losses","","","Credit Losses","","","Fair Value"],["Investments\u2014short-term available-for-sale","","$","198.6","","","$","0.3","","","$","(0.1",")","","$","\u2014","","","$","198.8"],["Investments\u2014long-term available-for-sale","","","229.0","","","","\u2014","","","","(1.4",")","","","\u2014","","","","227.6"],["Investments\u2014long-term held-to-maturity","","","1.8","","","","\u2014","","","","\u2014","","","","\u2014","","","","1.8"],["Total","","$","429.4","","","$","0.3","","","$","(1.5",")","","$","\u2014","","","$","428.2"]]
[[/GREPCENT_TABLE]]

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Sources and Uses of Cash

We generated $101.7 million and $82.8 of cash from operating activities during the years ended December 31, 2021 and 2020, respectively. We expect that our existing cash, cash equivalents and investments will be sufficient to finance our anticipated working capital and other cash requirements, such as capital expenditures and principal and interest payments on our long‑term debt, for at least the twelve months following the date from which our financial statements were issued. Subject to market conditions, interest rates and other factors, we may pursue opportunities to obtain additional financing in the future, including debt and equity offerings, corporate collaborations, bank borrowings, arrangements relating to assets or other financing methods or structures. In addition, the 2026 Term Loans have an incremental facility capacity in an amount of $175.0 million, plus additional amounts as long as we meet certain conditions, including a specified leverage ratio.

Our investment objectives are, first, to preserve liquidity and conserve capital and, second, to generate investment income. We mitigate credit risk in our cash reserves by maintaining a well-diversified portfolio that limits the amount of investment exposure as to institution, maturity and investment type. However, the value of these securities may be adversely affected by the instability of the global financial markets, which could, in turn, adversely impact our financial position and our overall liquidity. Our available-for-sale investments consist primarily of short and long-term U.S. government and agency debt securities, corporate debt securities and debt securities issued and backed by non-U.S. governments. Our held-to-maturity investments consist of investments that are held as collateral under certain letters of credit related to certain of our lease agreements.

We classify available‑for‑sale investments in an unrealized loss position that do not mature within 12 months as long‑term investments. We have the intent and ability to hold these investments until recovery, which may be at maturity, and it is more‑likely‑than‑not that we would not be required to sell these securities before recovery of their amortized cost. At December 31, 2021, we performed an analysis of our investments with unrealized losses for impairment and determined that the loss on one of our corporate debt securities was other-than-temporary and, during the year ended December 31, 2021, recorded a $0.9 million impairment charge within “Other (expense) income, net” in the accompanying consolidated statements of operations and comprehensive loss.

We have no off-balance sheet arrangements that are reasonably likely to have a material effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures, or capital resources in the next twelve months. As discussed above, we made a $25.0 million development milestone payment to the former shareholders of Rodin in 2021. We are obligated to make up to $825.0 million in future payments, $225.0 million of which would be triggered upon achievement of certain specified clinical milestones, $300.0 million of which would be triggered by the achievement of certain regulatory milestones and $325.0 million of which would be triggered upon the attainment of certain sales thresholds. At December 31, 2021, we had not recorded a liability related to these milestone payments as none of the future events that would trigger a milestone payment were considered probable of occurring.

Information about our cash flows, by category, is presented in the accompanying consolidated statements of cash flows. The following table summarizes our cash flows for the years ended December 31, 2021 and 2020:

[[GREPCENT_TABLE]]
[["","","Year Ended December 31,"],["(In millions)","","2021","","","2020"],["Cash and cash equivalents, beginning of period","","$","273.0","","","$","203.8"],["Cash flows provided by operating activities","","","101.7","","","","82.8"],["Cash flows used in investing activities","","","(66.2",")","","","(11.5",")"],["Cash flows provided by (used in) financing activities","","","29.0","","","","(2.1",")"],["Cash and cash equivalents, end of period","","$","337.5","","","$","273.0"]]
[[/GREPCENT_TABLE]]

Operating Activities

Cash flows from operating activities represent the cash receipts and disbursements related to all of our activities other than investing and financing activities. We expect cash provided from operating activities will continue to be our primary source of funds to finance operating needs and capital expenditures for the foreseeable future. Operating cash flow is derived by adjusting our net loss for non-cash operating items such as depreciation, amortization and share-based compensation as well as changes in operating assets and liabilities, which reflect timing differences between the receipt and payment of cash associated with transactions and when they are recognized in our results of operations.

The increase in cash flows provided by operating activities was primarily due to a decrease in our net loss of $62.7 million. This was partially offset by a decrease in the cash provided from working capital, primarily due to a decrease in cash provided by receivables of $20.0 million and from accounts payable and accrued expenses of $20.7 million.

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Investing Activities

The increase in cash flows used in investing activities was primarily due to a $68.9 million increase in net purchase of investments, partially offset by a $14.2 million decrease in cash paid for property, plant and equipment and a $4.1 million increase in payments received in connection with the contingent consideration resulting from the Gainesville Transaction.

We expect to spend approximately $35.0 million to $40.0 million during the year ending December 31, 2022 for capital expenditures. We continue to evaluate our manufacturing capacity based on expectations of demand for the products that we manufacture and will continue to record such amounts within construction in progress until such time as the underlying assets are placed into service, or we determine we have sufficient existing capacity and the assets are no longer required, at which time we would recognize an impairment charge. We continue to periodically evaluate whether facts and circumstances indicate that the carrying value of these long‑lived assets to be held and used may not be recoverable.

Financing Activities

The increase in cash flows provided by financing activities was primarily due to the $23.6 million in proceeds from the Term Loan Refinancing and an $8.1 million increase in the amount of cash we received upon exercises of employee stock options, net of employee taxes.

Debt

At December 31, 2021, our borrowings consisted of $295.8 million outstanding under the 2026 Term Loans. The 2026 Term Loans bear interest at LIBOR plus 2.5%, with a LIBOR floor of 0.5%. Principal payments of $0.8 million are made quarterly through 2025, with a final payment of $285.8 million due in March 2026. Please refer to Note 11, Long‑Term Debt, in the “Notes to Consolidated Financial Statements” in this Annual Report for a discussion of our outstanding term loans.

Critical Accounting Estimates

Our consolidated financial statements are prepared in accordance with GAAP. In connection with the preparation of our financial statements, we are required to make assumptions and estimates about future events, and apply judgments on historical experience, current trends and other factors that management believes to be relevant at the time our consolidated financial statements are prepared. On a regular basis, we review these accounting policies, assumptions, estimates and judgments to ensure that our financial statements are presented fairly and in accordance with GAAP. However, because future events and their effects cannot be determined with certainty, actual results could differ from our assumptions and estimates, and such differences could be material.

Our significant accounting policies are discussed in Note 2, Summary of Significant Accounting Policies, of the “Notes to Consolidated Financial Statements” in this Annual Report. We believe that the following accounting estimates are the most critical to aid in fully understanding and evaluating our reported financial results, and they require our most difficult, subjective or complex judgments, resulting from the need to make estimates about the effects of matters that are inherently uncertain. We have reviewed these critical accounting estimates and related disclosures with the audit and risk committee of our board of directors.

Revenue from Contracts with Customers

When entering into arrangements with customers, we identify whether our performance obligations under each arrangement represent a distinct good or service or a series of distinct goods or services. If a contract contains more than one performance obligation, we allocate the total transaction price to each performance obligation in an amount based on the estimated relative standalone selling prices of the promised goods or services underlying each performance obligation. The fair value of performance obligations under each arrangement may be derived using an estimate of selling price if we do not sell the goods or services separately.

We recognize revenue when or as we satisfy a performance obligation by transferring an asset or providing a service to a customer. Management judgment is required in determining the consideration to be earned under an arrangement and the period over which we are expected to complete our performance obligations under an arrangement. Steering committee services that are not inconsequential or perfunctory and that are determined to be performance obligations are combined with other research services or performance obligations required under an arrangement, if any, in determining the level of effort required in an arrangement and the period over which we expect to complete our aggregate performance obligations.

Product Sales, Net

Our product sales, net consist of sales in the U.S. of VIVITROL, ARISTADA, ARISTADA INITIO and, following its commercial launch in October 2021, LYBALVI, primarily to wholesalers, specialty distributors and pharmacies. Product sales, net are recognized when the customer obtains control of the product, which is when the product has been received by the customer.

Revenues from product sales are recorded net of reserves established for applicable discounts and allowances that are offered within contracts with our customers, healthcare providers or payers. Our process for estimating reserves established for these variable

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consideration components does not differ materially from historical practices. The transaction price, which includes variable consideration reflecting the impact of discounts and allowances, may be subject to constraint and is included in the net sales price only to the extent that it is probable that a significant reversal of the amount of the cumulative revenues recognized will not occur in a future period. Actual amounts may ultimately differ from our estimates. If actual results vary, we adjust these estimates, which could have an effect on earnings in the period of adjustment. The following are our significant categories of sales discounts and allowances:

[[GREPCENT_TABLE]]
[["","\u2022","Medicaid Rebates\u2014we record accruals for rebates to U.S. states under the Medicaid Drug Rebate Program as a reduction of sales when the product is shipped into the distribution channel using the expected value. We rebate individual U.S. states for all eligible units purchased under the Medicaid program based on a rebate per unit calculation, which is based on our average manufacturer prices. We estimate expected unit sales to individuals covered by Medicaid and rebates per unit under the Medicaid program and adjust our rebate accrual based on actual unit sales and rebates per unit and changes in trends in Medicaid utilization. To date, actual Medicaid rebates have not differed materially from our estimates;"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","\u2022","Chargebacks\u2014discounts that occur when contracted indirect customers purchase directly from wholesalers and specialty distributors. Contracted customers generally purchase a product at its contracted price. The wholesaler or specialty distributor, in turn, then generally charges back to us the difference between the wholesale acquisition cost and the contracted price paid to the wholesaler or specialty distributor by the customer. The allowance for chargebacks is made using the expected value and is based on actual and expected utilization of these programs. Chargebacks could exceed historical experience and our estimates of future participation in these programs. To date, actual chargebacks have not differed materially from our estimates;"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","\u2022","Product Discounts\u2014cash consideration, including sales incentives, given by us under agreements with a number of wholesaler, distributor, pharmacy, and treatment provider customers that provide them with a discount on the purchase price of products. The reserve is made using the expected value and to date, actual product discounts have not differed materially from our estimates;"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","\u2022","Product Returns\u2014we record an estimate for product returns at the time our customers take control of our product. We estimate this liability using the expected returns of product sold based on our historical return levels and specifically identified anticipated returns due to known business conditions and product expiry dates. Return amounts are recorded as a reduction of sales. Once product is returned, it is destroyed; and"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","\u2022","Medicare Part D\u2014we record accruals for Medicare Part D liabilities under the Medicare Coverage Gap Discount Program (\u201cCGDP\u201d) as a reduction of sales. Under the CGDP, patients reaching the annual coverage gap threshold are eligible for reimbursement coverage for out-of-pocket costs for covered prescription drugs. Under an agreement with the Centers for Medicare and Medicaid Services, manufacturers are responsible for reimbursement of prescription plan sponsors for the portion of out-of-pocket expenses not covered under their Medicare plans."]]
[[/GREPCENT_TABLE]]

A rollforward of our provisions for sales and allowances is as follows:

[[GREPCENT_TABLE]]
[["(In millions)","","Medicaid Rebates","","","Chargebacks","","","Product Discounts","","","Product Returns","","","Medicare Part D","","","Other","","","Total"],["Balance, December 31, 2019","","$","126.0","","","$","3.5","","","$","11.6","","","$","24.6","","","$","9.2","","","$","8.5","","","$","183.4"],["Provision:"],["Current year","","","296.1","","","","100.0","","","","88.2","","","","6.6","","","","56.6","","","","42.6","","","","590.1"],["Prior year","","","(5.0",")","","","\u2014","","","","\u2014","","","","(0.6",")","","","\u2014","","","","\u2014","","","","(5.6",")"],["Total","","","291.1","","","","100.0","","","","88.2","","","","6.0","","","","56.6","","","","42.6","","","","584.5"],["Actual:"],["Current year","","","(125.6",")","","","(96.4",")","","","(69.7",")","","","(6.9",")","","","(39.8",")","","","(33.4",")","","","(371.8",")"],["Prior year","","","(109.5",")","","","(2.8",")","","","(15.7",")","","","\u2014","","","","(13.1",")","","","(7.7",")","","","(148.8",")"],["Total","","","(235.1",")","","","(99.2",")","","","(85.4",")","","","(6.9",")","","","(52.9",")","","","(41.1",")","","","(520.6",")"],["Balance, December 31, 2020","","$","182.0","","","$","4.3","","","$","14.4","","","$","23.7","","","$","12.9","","","$","10.0","","","$","247.3"],["Provision:"],["Current year","","","344.3","","","","129.1","","","","107.0","","","","11.4","","","","59.8","","","","49.5","","","","701.1"],["Prior year","","","(12.4",")","","","\u2014","","","","\u2014","","","","(1.0",")","","","\u2014","","","","\u2014","","","","(13.4",")"],["Total","","","331.9","","","","129.1","","","","107.0","","","","10.4","","","","59.8","","","","49.5","","","","687.7"],["Actual:"],["Current year","","","(173.5",")","","","(124.4",")","","","(85.1",")","","","(9.7",")","","","(47.6",")","","","(39.3",")","","","(479.6",")"],["Prior year","","","(145.0",")","","","(3.4",")","","","(17.8",")","","","\u2014","","","","(10.8",")","","","(10.6",")","","","(187.6",")"],["Total","","","(318.5",")","","","(127.8",")","","","(102.9",")","","","(9.7",")","","","(58.4",")","","","(49.9",")","","","(667.2",")"],["Balance, December 31, 2021","","$","195.4","","","$","5.6","","","$","18.5","","","$","24.4","","","$","14.3","","","$","9.6","","","$","267.8"]]
[[/GREPCENT_TABLE]]

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Manufacturing Revenue

We recognize manufacturing revenues from the sale of products we manufacture for resale by our licensees. Manufacturing revenues for our partnered products, with the exception of those from Janssen related to RISPERDAL CONSTA and from Biogen related to VUMERITY, are recognized over time as products move through the manufacturing process, using a standard cost-based model as a measure of progress, which represents a faithful depiction of the transfer of control of the goods. We recognize manufacturing revenue from these products over time as we determined, in each instance, that we would have a right to payment for performance completed to date if our customer were to terminate the manufacturing agreement for reasons other than our non-performance and the products have no alternative use. We invoice our licensees upon shipment with payment terms between 30 to 90 days.

We are the exclusive manufacturer of RISPERDAL CONSTA for commercial sale under our manufacturing and supply agreement with Janssen. We determined that it is appropriate to record revenue under this agreement at the point in time when control of the product passes to Janssen, which is determined to be when the product has been fully manufactured, since Janssen does not control the product during the manufacturing process and, in the event Janssen terminates the manufacturing and supply agreement, it is uncertain whether, and at what amount, we would be reimbursed for performance completed to date for product not yet fully manufactured. The manufacturing process is considered fully complete once the finished goods have been approved for shipment by both us and Janssen.

We record manufacturing revenue for VUMERITY at the point in time when control of the product passes to Biogen, since Biogen does not control the product during the manufacturing process and, in the event Biogen terminates the commercial supply agreement, we would only be reimbursed for costs incurred for performance completed to date for product not yet fully manufactured. Control of the product passes to Biogen when the manufacturing process is considered fully complete, which is upon quality release for bulk batches of VUMERITY and upon shipment for packaged lots of VUMERITY.

The sales price for certain of our manufacturing revenues is based on the end-market sales price earned by our licensees. As end-market sales generally occur after we have recorded manufacturing revenue, we estimate the sales price for such products based on information supplied to us by our licensees, our historical transaction experience and other third-party data. Differences between actual manufacturing revenues and estimated manufacturing revenues are reconciled and adjusted for in the period in which they become known, which is generally within the same quarter. The differences between our actual and estimated manufacturing revenues have not been material to date.

Royalty Revenue

We recognize royalty revenues related to the sale by our licensees of products that incorporate our technology. Substantially all of our royalties qualify for the sales-and-usage exemption under Topic 606 as (i) such royalties are based strictly on the sales-and-usage by the licensee; and (ii) a license of IP is the sole or predominant item to which such royalties relate. Based on this exemption, such royalties are earned in the period the products are sold by our licensee and we have a present right to payment.

Certain of our royalty revenues are recognized based on information supplied to us by our licensees and require estimates to be made. Differences between actual royalty revenues and estimated royalty revenues are reconciled and adjusted for in the period in which they become known, which is generally within the same quarter. The differences between our actual and estimated royalty revenues have not been material to date.

Research and Development Revenue and License Revenue

Under a license and collaboration agreement with Biogen, which we entered into in November 2017 and amended in October 2018, January 2019 and October 2019, we granted Biogen a worldwide, exclusive, sublicensable license to develop, manufacture and commercialize VUMERITY and other products covered by patents licensed to Biogen under the agreement. Under the November 2017 license and collaboration agreement, we received an up-front cash payment and additional payments upon achievement of certain milestones with respect to VUMERITY, including a payment of $150.0 million in November 2019 following FDA approval of the NDA for VUMERITY and transfer of such NDA to Biogen. We are also eligible to receive additional payments upon achievement of other milestones, including development milestones with respect to the first two products other than VUMERITY covered by patents licensed to Biogen under the license and collaboration agreement. In January 2018, Biogen became responsible for all VUMERITY development costs we incurred, subject to annual budget limitations. Following FDA approval of the NDA for VUMERITY in October 2019, the NDA and any further development responsibilities with respect to VUMERITY were transferred to Biogen.

We evaluated the license and collaboration agreement under Topic 606 and determined that it had four deliverables: (i) the grant of a distinct, right-to-use license of IP to Biogen; (ii) future development services; (iii) clinical supply; and (iv) participation on a joint steering committee with Biogen. Our participation on the joint steering committee was considered to be perfunctory and thus not recognized as a performance obligation. The deliverables, aside from the participation in the joint steering committee which was considered to be perfunctory, were determined to be separate performance obligations as the license is separately identifiable from the development services and clinical supply, and the development services are not expected to significantly modify or customize the IP.

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We allocated the arrangement consideration to each performance obligation using the standalone selling prices based on our estimate of selling price for the license and other deliverables. We used a discounted cash flow model to estimate the standalone selling price of the license in order to allocate the consideration to the performance obligations. To estimate the standalone selling price of the license, we assessed the likelihood of the FDA’s approval of VUMERITY and estimated the expected future cash flows assuming FDA approval and maintenance of the IP protecting VUMERITY. We then discounted these cash flows using a discount rate of 8.0%, which we believed captured a market participant’s view of the risk associated with the expected cash flows. The estimate of selling price of the development services and clinical supply were determined through third-party evidence. We believe that a change in the assumptions used to determine our estimate of selling price for the license most likely would not have a significant effect on the allocation of consideration transferred.

We allocated the $150.0 milestone payment received in November 2019 to the relevant performance obligations as follows: $144.8 million was allocated to the delivery of the license; and $5.2 million was allocated to future development services and clinical supply. The amounts allocated to the license were recognized upon receipt of the payments as delivery of the license occurred upon entry into the agreement in 2017. The amounts allocated to the development services and clinical supply were recognized over the course of the development work and as clinical supply was delivered to Biogen in 2020.

In addition, we receive a 15% royalty on worldwide net sales of VUMERITY, subject to, under certain circumstances, minimum annual payments for the first five years following FDA approval of VUMERITY. We are also entitled to receive royalties on net sales of products other than VUMERITY covered by patents licensed to Biogen under the license and collaboration agreement, at tiered royalty rates calculated as percentages of net sales ranging from high-single digits to sub-teen double digits. All royalties are payable on a product-by-product and country-by-country basis until the later of (i) the last-to-expire patent right covering the applicable product in the applicable country and (ii) a specified period of time from the first commercial sale of the applicable product in the applicable country. Royalties for all products and the minimum annual payments for VUMERITY are subject to customary reductions, as set forth in the license and collaboration agreement.

We determined that the future development milestones and sales-based royalties that we may be entitled to receive are variable consideration. We are using the most likely amount method for estimating the variable consideration to be received related to the milestones under this arrangement. The royalties are subject to the sales-based exception and are recorded when the corresponding sale occurs.

Under the license and collaboration agreement, Biogen appointed us as the toll manufacturer of clinical and commercial supplies of VUMERITY, subject to Biogen’s right to manufacture or have manufactured commercial supplies as a back-up manufacturer and subject to good faith agreement by the parties on the terms of such manufacturing arrangements. In October 2019, we entered into a commercial supply agreement with Biogen for the commercial supply of VUMERITY, an amendment to such commercial supply agreement and an amendment to the November 2017 license and collaboration agreement with Biogen.

Under these agreements, Biogen has elected to initiate a technology transfer relating to the manufacture of VUMERITY (the “Tech Transfer”) and, following a transition period, assume responsibility for the manufacture (itself or through a designee) of clinical supplies of VUMERITY and up to 100% of commercial supplies of VUMERITY in exchange for an increase in the royalty rate to be paid by Biogen to us on net sales of that portion of product that is manufactured by Biogen or its designee. We evaluated the commercial supply agreement and the related amendments under Topic 606 and determined that these agreements should be combined and accounted for as a separate contract since the commercial supply agreement and amendment to the November 2017 license and collaboration agreement were negotiated together to achieve a common economic objective and the additional performance obligations under the commercial supply agreement are considered distinct obligations priced at their standalone selling prices. We determined that we had two separate performance obligations, the commercial supply of VUMERITY and services to be performed by us in connection with the Tech Transfer. There are other deliverables under the agreements that were determined to be perfunctory or immaterial.

In connection with the entry into the commercial supply agreement and the related amendments, we received payments in the aggregate amount of $5.8 million in the fourth quarter of 2019 and we will be eligible to receive an additional $5.0 million payment upon the earlier of successful completion of the Tech Transfer or a date in the fourth quarter of 2022. The $5.8 million received in the fourth quarter of 2019 were allocated, and the amounts to be received in connection with the Tech Transfer will be allocated, to each of the performance obligations using the standalone selling prices based on our estimate of selling price for the commercial supply of VUMERITY and the services related to the Tech Transfer, and this additional arrangement consideration will be recognized as we deliver commercial supply of VUMERITY and/or provide services relating to the Tech Transfer. We began performing under this commercial supply agreement in the first quarter of 2020.

Amortization and Impairment of Long‑Lived Assets

Long‑lived assets, other than goodwill which is separately tested for impairment, are evaluated for impairment whenever events or changes in circumstances indicate the carrying value of an asset may not be recoverable. When evaluating long‑lived assets for potential impairment, we first compare the carrying value of the asset to the asset’s estimated future cash flows (undiscounted and without interest charges). If the estimated future cash flows are less than the carrying value of the asset, we calculate an impairment loss. The impairment loss calculation compares the carrying value of the asset to the asset’s estimated fair value, which may be based on estimated future cash flows (discounted and with interest charges). We recognize an impairment loss if the amount of the asset’s carrying value exceeds the asset’s estimated fair value. If we recognize an impairment loss, the adjusted carrying amount of the asset becomes its new cost basis. For a depreciable long‑lived asset, the new cost basis will be depreciated over the remaining useful life of that asset.

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When reviewing long‑lived assets for impairment, we group long‑lived assets with other assets and liabilities at the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities. Our impairment loss calculations contain uncertainties because they require management to make assumptions and to apply judgment to estimate future cash flows and asset fair values, including forecasting useful lives of the assets and selecting the discount rate that reflects the risk inherent in future cash flows.

Our amortizable intangible assets consist of IP and are being amortized as revenue is generated from products utilizing the IP, which we refer to as the economic benefit amortization model. This amortization methodology involves calculating a ratio of actual current period sales to total anticipated sales for the life of the product and applying this ratio to the carrying amount of the intangible asset.

In order to determine the pattern in which the economic benefits of our intangible assets are consumed, we estimated the future revenues to be earned by products utilizing the capitalized IP from the date of acquisition to the end of their respective useful lives. The factors used to estimate such future revenues included: (i) our and our licensees’ projected future sales of the existing commercial products based on these intangible assets; (ii) our projected future sales of new products based on these intangible assets which we anticipate will be launched commercially; (iii) the patent lives of the technologies underlying such existing and new products; and (iv) our expectations regarding the entry of generic and/or other competing products into the markets for such existing and new products. These factors involve known and unknown risks and uncertainties, many of which are beyond our control and could cause the actual economic benefits of these intangible assets to be materially different from our estimates.

Based on our most recent analysis, amortization of intangible assets included within our consolidated balance sheet at December 31, 2021, is expected to be approximately $35.0 million, $35.0 million and $1.0 million in the years ending December 31, 2022 through 2024, respectively. Although we believe such available information and assumptions are reasonable, given the inherent risks and uncertainties underlying our expectations regarding such future revenues, there is the potential for our actual results to vary significantly from such expectations. If revenues are projected to change, the related amortization of the intangible asset will change in proportion to the change in revenue.

If there are any indications that the assumptions underlying our most recent analysis would be different than those utilized within our current estimates, our analysis would be updated and may result in a significant change in the anticipated lifetime revenue of the products associated with our amortizable intangible assets. For example, the occurrence of an adverse event could substantially increase the amount of amortization expense associated with our acquired intangible assets as compared to previous periods or our current expectations, which may result in a significant negative impact on our future results of operations.

Goodwill

We evaluate goodwill for impairment for our reporting units annually, as of October 31, and whenever events or changes in circumstances indicate the carrying value of the reporting units may not be recoverable. A reporting unit is an operating segment, as defined by the segment reporting accounting standards, or a component of an operating segment. A component of an operating segment is a reporting unit if the component constitutes a business for which discrete financial information is available and is reviewed by management. Two or more components of an operating segment may be aggregated and deemed a single reporting unit for goodwill impairment testing purposes if the components have similar economic characteristics. As of December 31, 2021, we have one operating segment and two reporting units. Our goodwill, which solely relates to the Business Combination, has been assigned to one reporting unit which consists of the former EDT business.

We have the option to first assess qualitative factors to determine whether it is necessary to perform a quantitative impairment test. If we elect this option and determine, as a result of the qualitative assessment, that it is more likely than not that the fair value of a reporting unit is less than its carrying amount, the quantitative impairment test is required; otherwise, no further testing is required. Among other relevant events and circumstances that affect the fair value of reporting units, we consider individual factors, such as microeconomic conditions, changes in the industry and the markets in which we operate as well as historical and expected future financial performance. Alternatively, we may elect to not first assess qualitative factors and instead immediately perform the quantitative impairment test.

In 2017, we elected to early adopt guidance issued by the Financial Accounting Standards Board that simplifies the test for goodwill impairment. This guidance removed Step 2 of the goodwill impairment test, which required a hypothetical purchase price allocation. A goodwill impairment charge is now recognized for the amount by which the carrying value of a reporting unit exceeds its fair value, not to exceed the carrying amount of goodwill.

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On October 31, 2021, we elected to perform a qualitative impairment test and determined that based on the weight of all available evidence, the fair value of the reporting unit more-likely-than-not exceeded its carrying value.

Contingent Consideration

We record contingent consideration we receive related to the sale of a business at fair value on the acquisition date. We estimate the fair value of contingent consideration through valuation models that incorporate probability-adjusted assumptions related to the achievement of milestones and thus likelihood of receiving related payments. We revalue our contingent consideration each reporting period, with changes in the fair value of contingent consideration recognized within the consolidated statements of operations and comprehensive loss. Changes in the fair value of contingent consideration can result from changes to one or multiple assumptions, including adjustments to the discount rates, changes in the amount and timing of cash flows, changes in the assumed achievement and timing of any development and sales-based milestones and changes in the assumed probability associated with regulatory approval.

The period over which we discount contingent consideration is based on the current development stage of the product candidates, the specific development plan for that product candidate adjusted for the probability of completing the development step, and the date on which contingent payments would be triggered. In estimating the probability of success, we utilize data regarding similar milestone events from several sources, including industry studies and our own experience. These fair value measurements are based on significant inputs not observable in the market. Significant judgment was employed in determining the appropriateness of these assumptions at the acquisition date and for each subsequent period. Accordingly, changes in assumptions described above could have a material impact on the increase or decrease in the fair value of contingent consideration recorded in any given period.

At December 31, 2021, our contingent consideration related to consideration to be received as part of the Gainesville Transaction. In accordance with the accounting standard for fair value measurements, our contingent consideration has been classified as a Level 3 asset as its fair value is based on significant inputs not observable in the market. The fair value of the contingent consideration was determined as follows:

[[GREPCENT_TABLE]]
[["","\u2022","We have received $23.1 million in milestone payments to date related to the FDA approval in February 2020 of the NDA for ANJESO, the first Meloxicam Product, and we are due to receive an additional $38.6 million in six equal, annual installments on each anniversary of such approval from February 2022 through February 2027;"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","\u2022","We are entitled to receive future royalties on net sales of Meloxicam Products; and"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","\u2022","We are entitled to receive payments of up to $80.0 million upon achieving certain sales milestones on future sales of the Meloxicam Products. The fair value of the sales milestones was determined through the use of a real options approach, where net sales are simulated in a risk-neutral world. To employ this methodology, we used a risk-adjusted expected growth rate based on Baudax\u2019s assessments of expected growth in net sales of the approved Meloxicam Product, adjusted by an appropriate factor capturing such assessment\u2019s respective correlation with the market."]]
[[/GREPCENT_TABLE]]

In order to address the substantial doubt about Baudax’s ability to continue as a going concern, we split our fair value analysis into two scenarios. In the first scenario, the amounts above were all discounted using a rate which we believe captures a market participant’s view of the risk associated with the expected payments assuming Baudax is able to continue as a going concern. This scenario received a weighting of 45%. In the second scenario, we used the undiscounted values derived from the amounts summarized above and applied a recovery rate of 18%, based largely on an analysis performed by Moody’s Investor Service regarding recoveries in a pandemic-driven default cycle. This scenario received a weighting of 55%.

Significant judgment was employed in determining the appropriateness of these assumptions at the acquisition date and for each subsequent period. Accordingly, changes in assumptions described above could have a material impact on the increase or decrease in the fair value of contingent consideration we record in any given period.

Valuation of Deferred Tax Assets

We evaluate the need for deferred tax asset valuation allowances based on a more‑likely‑than‑not standard. The ability to realize deferred tax assets depends on the ability to generate sufficient taxable income within the carryback or carryforward periods provided for in the tax law for each applicable tax jurisdiction. We consider the following possible sources of taxable income when assessing the realization of deferred tax assets:

[[GREPCENT_TABLE]]
[["","\u2022","future reversals of existing taxable temporary differences;"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","\u2022","future taxable income exclusive of reversing temporary differences and carryforwards;"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","\u2022","taxable income in prior carryback years; and"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","\u2022","tax\u2011planning strategies."]]
[[/GREPCENT_TABLE]]

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The assessment regarding whether a valuation allowance is required or should be adjusted also considers all available positive and negative evidence factors including, but not limited to:

[[GREPCENT_TABLE]]
[["","\u2022","nature, frequency and severity of recent losses;"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","\u2022","duration of statutory carryforward periods;"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","\u2022","historical experience with tax attributes expiring unused; and"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","\u2022","near\u2011 and medium\u2011term financial outlook."]]
[[/GREPCENT_TABLE]]

We utilize a rolling three years of actual and current year anticipated results as the primary measures of cumulative losses in recent years.

The evaluation of deferred tax assets requires judgment in assessing the likely future tax consequences of events that have been recognized in our financial statements or tax returns and future profitability. Our accounting for deferred tax consequences represents our best estimate of those future events. Changes in our current estimates, due to unanticipated events or otherwise, could have a material effect on our financial condition and results of operations. For information related to risks surrounding our deferred tax assets, see “Item 1A—Risk Factors” in this Annual Report and specifically the section entitled “Our deferred tax assets may not be realized.”

Recent Accounting Pronouncements

Please refer to Note 2, Summary of Significant Accounting Policies, “New Accounting Pronouncements” in our “Notes to Consolidated Financial Statements” in this Annual Report for a discussion of new accounting standards.