e10vq
UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C.
20549
Form 10-Q
|
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(Mark One)
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|
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þ
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
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|
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For the quarterly period ended
September 30, 2006
|
or
|
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o
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
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For the transition period
from to
|
Commission file number: 1-11397
Valeant Pharmaceuticals
International
(Exact name of registrant as
specified in its charter)
|
|
|
Delaware
|
|
33-0628076
|
(State or other jurisdiction
of
incorporation or organization)
|
|
(I.R.S. Employer Identification No.)
|
One Enterprise
Aliso Viejo, California
(Address of principal
executive offices)
|
|
92656
(Zip Code)
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|
|
|
(949) 461-6000
(Registrants telephone
number, including area code)
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 o No þ
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, or a non-accelerated
filer. See definition of accelerated filer and large accelerated
filer in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated
filer þ Accelerated
filer o Non-accelerated
filer o
Indicate by check mark whether the registrant is a shell company
(as defined in Rule 12b-2 of the Exchange
Act). Yes o No þ
The number of outstanding shares of the registrants Common
Stock, $0.01 par value, as of January 16, 2007 was 94,414,465.
VALEANT
PHARMACEUTICALS INTERNATIONAL
INDEX
1
PART I
FINANCIAL INFORMATION
|
|
Item 1.
|
Financial
Statements
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
|
(Unaudited)
|
|
|
(Restated)(1)
|
|
|
ASSETS
|
Current Assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
267,887
|
|
|
$
|
224,856
|
|
Marketable securities
|
|
|
9,563
|
|
|
|
10,210
|
|
Accounts receivable, net
|
|
|
211,823
|
|
|
|
187,987
|
|
Inventories, net
|
|
|
148,578
|
|
|
|
136,034
|
|
Assets held for sale
|
|
|
44,412
|
|
|
|
|
|
Prepaid expenses and other current
assets
|
|
|
30,207
|
|
|
|
40,354
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
712,470
|
|
|
|
599,441
|
|
Property, plant and equipment, net
|
|
|
122,109
|
|
|
|
230,126
|
|
Deferred tax assets, net
|
|
|
16,636
|
|
|
|
25,342
|
|
Goodwill
|
|
|
80,123
|
|
|
|
79,486
|
|
Intangible assets, net
|
|
|
489,452
|
|
|
|
536,319
|
|
Other assets
|
|
|
44,836
|
|
|
|
43,176
|
|
Assets of discontinued operations
|
|
|
660
|
|
|
|
127
|
|
|
|
|
|
|
|
|
|
|
Total non-current assets
|
|
|
753,816
|
|
|
|
914,576
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,466,286
|
|
|
$
|
1,514,017
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND
STOCKHOLDERS EQUITY
|
Current Liabilities:
|
|
|
|
|
|
|
|
|
Trade payables
|
|
$
|
50,429
|
|
|
$
|
55,279
|
|
Accrued liabilities
|
|
|
142,778
|
|
|
|
140,838
|
|
Notes payable and current portion
of long-term debt
|
|
|
474
|
|
|
|
495
|
|
Income taxes
|
|
|
34,355
|
|
|
|
47,324
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
228,036
|
|
|
|
243,936
|
|
Long-term debt, less current
portion
|
|
|
782,821
|
|
|
|
788,439
|
|
Deferred tax liabilities, net
|
|
|
2,939
|
|
|
|
8,208
|
|
Other liabilities
|
|
|
19,081
|
|
|
|
16,372
|
|
Liabilities of discontinued
operations
|
|
|
17,347
|
|
|
|
23,118
|
|
|
|
|
|
|
|
|
|
|
Total non-current liabilities
|
|
|
822,188
|
|
|
|
836,137
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies
|
|
|
|
|
|
|
|
|
Stockholders Equity:
|
|
|
|
|
|
|
|
|
Common stock, $0.01 par
value; 200,000 shares authorized; 92,873 (June 30,
2006) and 92,760 (December 31, 2005) shares
outstanding (after deducting shares in treasury of 1,094 as of
September 30, 2006 and December 31, 2005)
|
|
|
934
|
|
|
|
928
|
|
Additional capital
|
|
|
1,249,149
|
|
|
|
1,224,907
|
|
Accumulated deficit
|
|
|
(826,682
|
)
|
|
|
(770,350
|
)
|
Accumulated other comprehensive
income (loss)
|
|
|
(7,339
|
)
|
|
|
(21,541
|
)
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
416,062
|
|
|
|
433,944
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,466,286
|
|
|
$
|
1,514,017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
See Note 2, Restatement of Consolidated Financial
Statements. |
The accompanying notes are an integral part of these
consolidated condensed financial statements.
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2006
|
|
|
2005
|
|
|
2006
|
|
|
2005
|
|
|
|
|
|
|
(Restated)(1)
|
|
|
|
|
|
(Restated)(1)
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product sales
|
|
$
|
199,006
|
|
|
$
|
183,442
|
|
|
$
|
589,163
|
|
|
$
|
526,166
|
|
Ribavirin royalties
|
|
|
20,968
|
|
|
|
21,953
|
|
|
|
60,694
|
|
|
|
65,494
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
219,974
|
|
|
|
205,395
|
|
|
|
649,857
|
|
|
|
591,660
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of goods sold (excluding
amortization)
|
|
|
60,305
|
|
|
|
54,637
|
|
|
|
184,665
|
|
|
|
156,423
|
|
Selling expenses
|
|
|
67,582
|
|
|
|
59,052
|
|
|
|
198,127
|
|
|
|
173,391
|
|
General and administrative expenses
|
|
|
27,212
|
|
|
|
26,792
|
|
|
|
86,325
|
|
|
|
77,607
|
|
Research and development costs
|
|
|
20,849
|
|
|
|
28,961
|
|
|
|
77,270
|
|
|
|
82,421
|
|
Acquired in-process research and
development
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
126,399
|
|
Gain on litigation settlement
|
|
|
(17,550
|
)
|
|
|
|
|
|
|
(51,550
|
)
|
|
|
|
|
Restructuring charges
|
|
|
17,139
|
|
|
|
135
|
|
|
|
96,687
|
|
|
|
506
|
|
Amortization expense
|
|
|
18,424
|
|
|
|
15,782
|
|
|
|
53,461
|
|
|
|
46,961
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total costs and expenses
|
|
|
193,961
|
|
|
|
185,359
|
|
|
|
644,985
|
|
|
|
663,708
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations
|
|
|
26,013
|
|
|
|
20,036
|
|
|
|
4,872
|
|
|
|
(72,048
|
)
|
Other income (loss), net,
including translation and exchange
|
|
|
(454
|
)
|
|
|
(1,207
|
)
|
|
|
1,240
|
|
|
|
(5,629
|
)
|
Interest income
|
|
|
3,209
|
|
|
|
3,193
|
|
|
|
8,582
|
|
|
|
9,327
|
|
Interest expense
|
|
|
(10,960
|
)
|
|
|
(10,077
|
)
|
|
|
(32,259
|
)
|
|
|
(29,821
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing
operations before income taxes and minority interest
|
|
|
17,808
|
|
|
|
11,945
|
|
|
|
(17,565
|
)
|
|
|
(98,171
|
)
|
Provision for income taxes
|
|
|
11,646
|
|
|
|
15,569
|
|
|
|
24,351
|
|
|
|
42,340
|
|
Minority interest, net
|
|
|
1
|
|
|
|
184
|
|
|
|
2
|
|
|
|
489
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing
operations
|
|
|
6,161
|
|
|
|
(3,808
|
)
|
|
|
(41,918
|
)
|
|
|
(141,000
|
)
|
Income (loss) from discontinued
operations
|
|
|
7,546
|
|
|
|
1,123
|
|
|
|
7,137
|
|
|
|
(2,368
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
13,707
|
|
|
$
|
(2,685
|
)
|
|
$
|
(34,781
|
)
|
|
$
|
(143,368
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic income (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing
operations
|
|
$
|
0.07
|
|
|
$
|
(0.04
|
)
|
|
$
|
(0.45
|
)
|
|
$
|
(1.54
|
)
|
Income (loss) from discontinued
operations
|
|
|
0.08
|
|
|
|
0.01
|
|
|
|
0.08
|
|
|
|
(0.03
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
0.15
|
|
|
$
|
(0.03
|
)
|
|
$
|
(0.37
|
)
|
|
$
|
(1.57
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing
operations
|
|
$
|
0.06
|
|
|
$
|
(0.04
|
)
|
|
$
|
(0.45
|
)
|
|
$
|
(1.54
|
)
|
Income (loss) from discontinued
operations
|
|
|
0.08
|
|
|
|
0.01
|
|
|
|
0.08
|
|
|
|
(0.03
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
0.14
|
|
|
$
|
(0.03
|
)
|
|
$
|
(0.37
|
)
|
|
$
|
(1.57
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares used in per share
computation Basic
|
|
|
93,093
|
|
|
|
92,626
|
|
|
|
92,907
|
|
|
|
91,357
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares used in per share
computation Diluted
|
|
|
95,265
|
|
|
|
92,626
|
|
|
|
92,907
|
|
|
|
91,357
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends paid per share of common
stock
|
|
$
|
0.08
|
|
|
$
|
0.08
|
|
|
$
|
0.24
|
|
|
$
|
0.24
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends declared per share of
common stock
|
|
$
|
|
|
|
$
|
0.08
|
|
|
$
|
0.16
|
|
|
$
|
0.24
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
See Note 2, Restatement of Consolidated Financial
Statements. |
The accompanying notes are an integral part of these
consolidated condensed financial statements.
3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2006
|
|
|
2005
|
|
|
2006
|
|
|
2005
|
|
|
|
|
|
|
(Restated)(1)
|
|
|
|
|
|
(Restated)(1)
|
|
|
Net income (loss)
|
|
$
|
13,707
|
|
|
$
|
(2,683
|
)
|
|
$
|
(34,781
|
)
|
|
$
|
(143,368
|
)
|
Other comprehensive income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation
adjustments
|
|
|
4,745
|
|
|
|
3,177
|
|
|
|
15,371
|
|
|
|
(28,563
|
)
|
Unrealized losses on marketable
equity securities and other
|
|
|
(99
|
)
|
|
|
(1,058
|
)
|
|
|
(1,169
|
)
|
|
|
5,193
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive (loss)
|
|
$
|
18,551
|
|
|
$
|
(564
|
)
|
|
$
|
(20,579
|
)
|
|
$
|
(166,738
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
See Note 2, Restatement of Consolidated Financial
Statements. |
The accompanying notes are an integral part of these
consolidated condensed financial statements.
4
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
|
|
|
|
(Restated)(1)
|
|
|
Cash flows from operating
activities:
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(34,781
|
)
|
|
$
|
(143,368
|
)
|
Income (loss) from discontinued
operations
|
|
|
7,137
|
|
|
|
(2,368
|
)
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations
|
|
|
(41,918
|
)
|
|
|
(141,000
|
)
|
Adjustments to reconcile net loss
to net cash provided by operating activities:
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
70,024
|
|
|
|
68,321
|
|
Provision for losses on accounts
receivable and inventory obsolescence
|
|
|
11,697
|
|
|
|
6,299
|
|
Stock compensation expense
|
|
|
16,351
|
|
|
|
2,451
|
|
Translation and exchange (gains)
losses, net
|
|
|
(1,240
|
)
|
|
|
5,629
|
|
Impairment charges and other
non-cash items
|
|
|
83,578
|
|
|
|
697
|
|
Acquired in-process research and
development
|
|
|
|
|
|
|
126,399
|
|
Deferred income taxes
|
|
|
7,610
|
|
|
|
(18,275
|
)
|
Change in assets and liabilities,
net of effects of acquisitions:
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(21,955
|
)
|
|
|
8,157
|
|
Inventories
|
|
|
(18,461
|
)
|
|
|
(18,216
|
)
|
Prepaid expenses, assets held for
sale and other assets
|
|
|
(2,203
|
)
|
|
|
1,058
|
|
Trade payables and accrued
liabilities
|
|
|
(8,320
|
)
|
|
|
8,842
|
|
Income taxes
|
|
|
(17,744
|
)
|
|
|
15,104
|
|
Other liabilities
|
|
|
1,742
|
|
|
|
2,035
|
|
|
|
|
|
|
|
|
|
|
Cash flow from operating
activities in continuing operations
|
|
|
79,161
|
|
|
|
67,501
|
|
Cash flow from operating
activities in discontinued operations
|
|
|
903
|
|
|
|
(1,522
|
)
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating
activities
|
|
|
80,064
|
|
|
|
65,979
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing
activities:
|
|
|
|
|
|
|
|
|
Capital expenditures
|
|
|
(26,635
|
)
|
|
|
(27,206
|
)
|
Proceeds from sale of assets
|
|
|
8,337
|
|
|
|
7,279
|
|
Proceeds from investments
|
|
|
20,501
|
|
|
|
527,708
|
|
Purchase of investments
|
|
|
(20,200
|
)
|
|
|
(304,714
|
)
|
Cash acquired in connection with
acquisition
|
|
|
|
|
|
|
11,198
|
|
Acquisition of businesses, license
rights and product lines
|
|
|
(4,129
|
)
|
|
|
(300,129
|
)
|
|
|
|
|
|
|
|
|
|
Cash flow from investing
activities in continuing operations
|
|
|
(22,126
|
)
|
|
|
(85,864
|
)
|
Cash flow from investing
activities in discontinued operations
|
|
|
(1
|
)
|
|
|
5,539
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing
activities
|
|
|
(22,127
|
)
|
|
|
(80,325
|
)
|
|
|
|
|
|
|
|
|
|
Cash flows from financing
activities:
|
|
|
|
|
|
|
|
|
Payments on long-term debt and
notes payable
|
|
|
(6,422
|
)
|
|
|
(759
|
)
|
Proceeds from issuance of
long-term debt
|
|
|
578
|
|
|
|
|
|
Stock option exercises and
employee stock purchases
|
|
|
7,898
|
|
|
|
2,205
|
|
Proceeds from stock offering
|
|
|
|
|
|
|
189,030
|
|
Dividends paid
|
|
|
(21,550
|
)
|
|
|
(20,804
|
)
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in)
financing activities
|
|
|
(19,496
|
)
|
|
|
169,672
|
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes on
cash and cash equivalents
|
|
|
4,679
|
|
|
|
(8,136
|
)
|
|
|
|
|
|
|
|
|
|
Net increase in cash and cash
equivalents
|
|
|
43,120
|
|
|
|
147,190
|
|
Cash and cash equivalents at
beginning of period
|
|
|
224,903
|
|
|
|
222,719
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end
of period
|
|
|
268,023
|
|
|
|
369,909
|
|
Cash and cash equivalents
classified as part of discontinued operations
|
|
|
(136
|
)
|
|
|
(91
|
)
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents of
continuing operations
|
|
$
|
267,887
|
|
|
$
|
369,818
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
See Note 2, Restatement of Consolidated Financial
Statements. |
The accompanying notes are an integral part of these
consolidated condensed financial statements.
5
VALEANT
PHARMACEUTICALS INTERNATIONAL
September 30, 2006
(Unaudited)
In the consolidated condensed financial statements included
herein, we, us, our,
Valeant and the Company refer to Valeant
Pharmaceuticals International and its subsidiaries. The
condensed consolidated financial statements have been prepared
by the Company, without audit, pursuant to the rules and
regulations of the Securities and Exchange Commission
(SEC). Certain information and footnote disclosures
normally included in financial statements prepared on the basis
of generally accepted accounting principles in the United States
of America (GAAP)have been condensed or omitted
pursuant to such rules and regulations. The results of
operations presented herein are not necessarily indicative of
the results to be expected for a full year. Although we believe
that all adjustments (consisting only of normal, recurring
adjustments) necessary for a fair presentation of the interim
periods presented are included and that the disclosures are
adequate to make the information presented not misleading, these
consolidated condensed financial statements should be read in
conjunction with the consolidated financial statements and notes
thereto included in our annual report on
Form 10-K/A
for the year ended December 31, 2005.
|
|
1.
|
Organization
and Summary of Significant Accounting Policies
|
Organization: We are a global specialty
pharmaceutical company that develops, manufactures and markets a
broad range of pharmaceutical products, primarily in the areas
of neurology, infectious disease and dermatology. In addition,
we generate royalty revenues from the sale of ribavirin by
Schering-Plough Ltd. (Schering-Plough) and F.
Hoffman-LaRoche (Roche).
Principles of Consolidation: The accompanying
consolidated condensed financial statements include the accounts
of Valeant Pharmaceuticals International, its wholly owned
subsidiaries and all of its majority-owned subsidiaries.
Minority interest in results of operations of consolidated
subsidiaries represents the minority stockholders share of
the income or loss of the consolidated subsidiaries. All
significant intercompany account balances and transactions have
been eliminated.
Marketable Securities: We invest in
investment-grade securities and classify these securities as
available-for-sale
as they typically have maturities of one year or less and are
highly liquid. As of September 30, 2006 and
December 31, 2005, the fair market value of these
securities approximated cost.
Intangible Assets and Goodwill: Our intangible
assets comprise product marketing rights, related patents and
trademarks for pharmaceutical products, and rights under the
ribavirin license agreement. The product rights primarily relate
to either 1) mature pharmaceutical products without patent
protection, or 2) patented products. The mature products
display a stable and consistent revenue stream over a relatively
long period of time. The patented products generally have steady
growth rates up until the point of patent expiration when
revenues decline due to the introduction of generic competition.
We amortize the mature products using the straight-line method
over the estimated remaining life of the product (ranging from 5
-19 years for current products) because the pattern of
revenues is generally flat over the remaining life. We amortize
patented products using the straight-line method over the
remaining life of the product because the revenues are generally
growing until patent expiration.
We amortize the license rights for ribavirin on an accelerated
basis because of the significant decline in royalties starting
in 2003 upon the expiration of a U.S. patent, with
amortization to be completed in 2008.
Acquired In-Process Research and Development
(IPR&D): We value IPR&D
acquired in a business combination based on an approach
consistent with the AICPA Practice Aid, Assets Acquired in a
Business Combination to Be Used in Research and Development
Activities: A Focus on Software, Electronic Devices, and
Pharmaceutical Industries. Amounts expensed as IPR&D
represent an estimate of the fair value of purchased in-process
technology for projects that, as of the acquisition date, had
not yet reached technological feasibility and had no alternative
future use. The data used to determine fair value requires
significant judgment. Differences in these judgments would have
the impact of changing the allocation of purchase price to
goodwill, which is an intangible asset that is not amortized.
6
VALEANT
PHARMACEUTICALS INTERNATIONAL
NOTES TO
CONSOLIDATED CONDENSED FINANCIAL
STATEMENTS (Continued)
The estimated fair value of these projects is based on the use
of a discounted cash flow model (based on an estimate of future
sales). For each project, the estimated after-tax cash flows are
probability-weighted to take account of the stage of completion
and the risks surrounding successful development and
commercialization. These cash flows are then discounted to a
present value using a discount rate which is estimated from our
after-tax, adjusted weighted average cost of capital.
The major risks and uncertainties associated with the timely and
successful completion of these projects consist of the ability
to confirm the safety and efficacy of the technology based on
the data from clinical trials and obtaining necessary regulatory
approvals. In addition, no assurance can be given that the
underlying assumptions used to forecast the cash flows or the
timely and successful completion of such projects will
materialize as estimated. For these reasons, among others,
actual results may vary significantly from the estimated results.
Derivative Financial Instruments: Our
accounting policies for derivative instruments are based on
whether they meet our criteria for designation as hedging
transactions, either as cash flow or fair value hedges. Our
derivative instruments are recorded at fair value and are
included in other current assets, other assets, accrued
liabilities or debt. For hedging transactions, changes in the
fair value of the hedged item are either offset against the
change in the fair value of the hedged item through earnings or
recognized in other comprehensive income until the hedged item
is recognized in earnings.
Comprehensive Income: We have adopted the
provisions of Statement of Financial Accounting Standards
(SFAS) No. 130, Reporting Comprehensive
Income. Accumulated other comprehensive loss consists of
accumulated foreign currency translation adjustments, unrealized
losses on marketable equity securities, minimum pension
liability and changes in the fair value of derivative financial
instruments.
Per Share Information: Basic earnings per
share are computed by dividing income available to common
stockholders by the weighted-average number of common shares
outstanding. In computing diluted earnings per share, the
weighted-average number of common shares outstanding is adjusted
to reflect the effect of potentially dilutive securities
including options, warrants, and convertible debt; income
available to common stockholders is adjusted to reflect any
changes in income or loss that would result from the issuance of
the dilutive common shares.
Stock-Based Compensation Expense: In December
2004, the Financial Accounting Standards Board
(FASB) issued a revision of SFAS No. 123,
Accounting for Stock-Based Compensation. The
revision is referred to as FAS 123R
Share-Based Payment (or FAS 123R), which
supersedes APB Opinion No. 25, Accounting for Stock
Issued to Employees, (or APB 25) and
requires companies to recognize compensation expense, using a
fair-value based method, for costs related to share-based
payments including stock options and stock issued under our
employee stock plans.
We adopted SFAS 123R using the modified prospective basis
effective January 1, 2006.
Prior to the adoption of FAS 123R on January 1, 2006,
we followed APB 25 to account for employee stock options.
Under APB 25, using the intrinsic value method of
accounting, compensation expense is recognized over the vesting
period of the option in the amount that the exercise price of
our employee stock options is less than the market price of the
underlying stock on the date of grant. Prior to January 1,
2006 we have also applied the disclosure provisions of
FAS 123 which illustrate, on a pro forma basis, the effect
on our reported earnings as if we recorded stock option expense
based on the fair value of stock options.
In order to estimate the fair value of stock options we use the
Black-Scholes option valuation model, which was developed for
use in estimating the fair value of publicly traded options
which have no vesting restrictions and are fully transferable.
Option valuation models require the input of subjective
assumptions which can vary over time. Additional information
about our stock option programs and the assumptions used in
developing the pro forma amounts below are contained in
Note 9.
See Note 2 for information associated with the restatement
of our consolidated financial statements which resulted from an
investigation into our stock-option granting practices. A
Special Committee of our board of
7
VALEANT
PHARMACEUTICALS INTERNATIONAL
NOTES TO
CONSOLIDATED CONDENSED FINANCIAL
STATEMENTS (Continued)
directors determined that there were differences between the
historical market price of the our common stock at the dates
that stock options were officially awarded and the stock option
exercise prices. These differences resulted in substantial
additional stock compensation expense as determined in
accordance with APB 25 and related interpretations.
Further, these differences impacted the calculation of the fair
values of our stock options as determined under FAS 123,
since fair value is determined based, in part, on both the
market price of a stock at the date of grant and the grant
exercise price. Our historical consolidated financial statements
and the pro forma information below have been restated to
reflect these differences.
Stock compensation expense was $5,654,000 and $16,351,000 in the
three month and nine month periods ended September 30,
2006, respectively. The following table illustrates the effect
of applying SFAS 123R on our financial results in 2005.
|
|
|
|
|
|
|
|
|
|
|
Periods Ended
|
|
|
|
September 30, 2005
|
|
|
|
Three Months
|
|
|
Nine Months
|
|
|
|
(In thousands, except
|
|
|
|
per share amounts)
|
|
|
|
(Restated)
|
|
|
(Restated)
|
|
|
Net loss as reported
|
|
$
|
(2,685
|
)
|
|
$
|
(143,368
|
)
|
Stock compensation expense
recorded at intrinsic value for stock incentive plans
|
|
|
799
|
|
|
|
2,451
|
|
Stock compensation expense
determined under fair value method for stock incentive plans
|
|
|
(5,564
|
)
|
|
|
(16,738
|
)
|
|
|
|
|
|
|
|
|
|
Pro forma net loss
|
|
$
|
(7,450
|
)
|
|
$
|
(157,655
|
)
|
|
|
|
|
|
|
|
|
|
Net loss per share:
|
|
|
|
|
|
|
|
|
Basic and diluted as
reported
|
|
$
|
(0.03
|
)
|
|
$
|
(1.57
|
)
|
|
|
|
|
|
|
|
|
|
Basic and diluted pro
forma
|
|
$
|
(0.08
|
)
|
|
$
|
(1.73
|
)
|
|
|
|
|
|
|
|
|
|
Recent Accounting Pronouncements: In June
2006, the FASB issued FASB Interpretation No. 48,
Accounting for Uncertainty in Income Taxes
an interpretation of FASB Statement No. 109
(FIN 48), which prescribes accounting for
and disclosure of uncertainty in tax positions. This
interpretation defines the criteria that must be met for the
benefits of a tax position to be recognized in the financial
statements and the measurement of tax benefits recognized. The
provisions of FIN 48 are effective as of the beginning of
our 2007 fiscal year, with the cumulative effect of the change
in accounting principle recorded as an adjustment to opening
retained earnings. We are currently evaluating the impact of
adopting FIN 48 on our consolidated financial statements.
In September 2006, the FASB issued SFAS No. 158
Employers Accounting for Defined Benefit Pension
and Other Postretirement Plans, an amendment of FASB Statements
No. 87, 88, 106, and 132(R). The standard, among
other things, requires us to: 1) recognize the funded
status of our defined benefit plans in our consolidated
financial statements, and 2) recognize as a component of
other comprehensive loss the actuarial gains and losses and the
prior service costs and credits that arise during the period but
are not immediately recognized as components of net periodic
benefit cost.
The standard is effective for fiscal years ending after
December 15, 2006. As of December 31, 2005, the
required adjustment to our balance sheet would increase the
liability for pension and postretirement benefits and increase
accumulated comprehensive loss by approximately $6,000,000.
Dividends: We paid quarterly cash dividends of
$0.0775 per share for the first three quarters in 2005 and
for the first two quarters in 2006. Although we paid a dividend
during the third quarter for the second quarter of 2006, we
announced in October 2006 that we will not pay a dividend for
the third quarter of 2006. We will not be able to pay future
dividends unless permitted under the terms of the indenture
governing our 7% senior notes.
8
VALEANT
PHARMACEUTICALS INTERNATIONAL
NOTES TO
CONSOLIDATED CONDENSED FINANCIAL
STATEMENTS (Continued)
Use of Estimates: The preparation of financial
statements in conformity with accounting principles generally
accepted in the United States of America requires us to make
estimates and assumptions that affect the reported amount of
assets and liabilities, the disclosure of contingent assets and
liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting
periods. Actual results could differ materially from those
estimates.
|
|
2.
|
Restatement
of Consolidated Financial Statements
|
We have filed an amendment to our annual report on
Form 10-K
for the year ended December 31, 2005 (the 2005
10-K),
originally filed on March 16, 2006, to restate our
consolidated balance sheets as of December 31, 2005 and
2004, our consolidated statements of operations and
comprehensive loss for the years ended December 31, 2005,
2004 and 2003, our consolidated statements of cash flows for the
years ended December 31, 2005, 2004 and 2003, our
consolidated statements of changes in stockholders equity
for the years ended December 31, 2005, 2004 and 2003, and
the related disclosures.
We will file amended quarterly reports on
Form 10-Q
for the quarters ended March 31 and June 30, 2006,
originally filed on May 9, 2006 and August 8, 2006,
respectively, to restate our condensed consolidated financial
statements and the related disclosures for the three-month and
six- month periods ended March 31, 2006 and 2005 and
June 30, 2006 and 2005, respectively. We have also restated
our condensed consolidated financial statements for the periods
ended September 30, 2005 included in this quarterly report
on
Form 10-Q
for the quarter ended September 30, 2006.
In July 2006, we were contacted by the Securities and Exchange
Commission, or SEC, with respect to an informal inquiry
regarding events and circumstances surrounding trading in our
common stock and the public release of data from our first
pivotal Phase 3 trial for
Viramidine®
(taribavirin). In addition, on August 22, 2006, the SEC
requested data regarding our stock option grants and exercises
since January 1, 2000. The SEC has also requested
information about our pursuit in the Delaware Chancery Court of
the return of certain bonuses paid to Milan Panic, the former
chairman and chief executive officer, and others, in connection
with the Ribapharm initial public offering. We commenced an
internal review by our finance department of stock option grants
from 1982 to July 2006. In September 2006, our board of
directors appointed a special committee of the board composed
solely of independent directors (the Special
Committee) to conduct a review of our historic stock
option practices and related accounting. The Special Committee,
with the assistance of outside legal counsel, undertook a
comprehensive review of the stock option grants to our officers,
directors and employees from 1982 to July 2006 under our various
stock option plans in effect during this period. The Special
Committee has concluded its investigation and has reported its
findings to our board of directors.
On October 20, 2006, our board of directors concluded that
certain of our consolidated financial statements should be
restated to record the additional non-cash stock-based
compensation expense items and certain other items that had been
incorrectly accounted for under accounting principles generally
accepted in the United States, or GAAP.
Continuing the work done in September, the Special Committee
analyzed in detail stock option grants awarded between November
1994 and July 2006 and analyzed supporting documentation for
awards granted between 1982 and 1994. For the period between
November 1994 and July 2006, the Special Committees
analysis included an extensive review of paper and electronic
documents supporting or related to our stock option grants, the
accounting for those grants, compensation-related financial and
securities disclosures and
e-mail
communications as well as interviews with numerous current and
former employees and current and former members of our board of
directors. While the Special Committee concluded that there were
some errors as late as January 2006, the majority of errors in
accounting for options pertain to those options granted prior to
the change in our board of directors and management in mid-2002
(the Change in Control). None of the errors
occurring in periods after the Change in Control related to
options granted to the chief executive officer, chief financial
officer or members of our board of directors.
9
VALEANT
PHARMACEUTICALS INTERNATIONAL
NOTES TO
CONSOLIDATED CONDENSED FINANCIAL
STATEMENTS (Continued)
The Special Committee made a determination, based on the
available evidence, of measurement dates for each affected
grant. If the grants were approved at a meeting of the
compensation committee of the board of directors and there was
no actual evidence of a change in the approved list of
individual awards, the measurement date selected was the date of
the compensation committee meeting. If there was actual evidence
of a change in the list of individual awards and evidence of
when the list became final, the measurement date selected was
the date when the list became final. If there was actual
evidence of a change in the list but evidence of when the list
became final was not definitive, the measurement date was
reconstructed using the best available evidence to ensure that
an adequate amount of compensation expense was recorded in the
restatement.
In total we recorded $31,111,000 of additional pre-tax,
non-cash, stock-based compensation expense in the restatement to
correct errors for awards granted from 1982 to date. Of this,
$28,651,000 related to awards granted prior to the Change in
Control and $2,460,000 to awards granted after the Change in
Control. None of these changes affected our previously reported
revenues, cash, or cash equivalents. As explained below,
however, we also reported corrections for certain other items
which impact our reported revenues and cash flow presentations.
Options
Granted Prior to the Change in Control
The Special Committee found that the recorded grant dates for
the majority of stock options awarded prior to the Change in
Control differed from the actual grant dates for those
transactions. In connection with that finding, the Special
Committee concluded that, with respect to many broad-based
grants of stock options prior to the Change in Control, prior
management used a methodology of selecting a recorded grant date
based on the lowest closing price during some time period (e.g.,
quarter, ten trading days) preceding the actual grant date.
While the Special Committee did not reach a conclusion as to how
prior management selected other recorded grant dates for
broad-based or individual grants that did not use the lowest
closing price methodology, there is some evidence that dates
were selected based on the occurrence of an event or when the
former chief executive officer, Milan Panic, agreed in principle
to the grant. While these and similar practices resulted in the
grant of
in-the-money
options, and the Special Committee identified evidence that two
pre-Change in Control directors may have been aware of these
backdating practices, it does not appear that prior management
pre-Change in Control attempted to conceal that the stock option
grants were discounted using the backdating methodology.
Between November 1994 and the June 2002 Change in Control, eight
broad-based grants were made. All of the 908 individual awards
of options to purchase 6.9 million shares comprising those
grants had recorded grant dates that differed from the actual
grant dates for those transactions and each resulted in
additional compensation charges that are reflected in our
restated financial statements. Of those eight broad-based
grants, six appear to have been annual grants that used the
lowest closing price methodology and two appear to have been
event-related (in those instances, there are lower prices
between the recorded grant date and actual grant date). These
eight broad-based option grants accounted for $11,488,000 of the
$31,111,000 in pre-tax compensation charges.
During this period, options to directors to purchase a total of
334,000 shares were also found to have recorded grant dates
earlier than the dates when the board of directors acted to
approve the grants. The grants were dated in accordance with the
1994 Stock Option Plan which provided expressly that the grants
were to be dated as of November 11, 1994. The board of
directors, however, did not approve that stock option plan until
January 1995. Accordingly, we are taking additional non-cash
compensation charges equal to the difference between the closing
stock price on the date of approval and November 11, 1994.
These option grants to directors accounted for $148,000 of the
$31,111,000 in pre-tax compensation charges.
Also during this period, there were 114 other individual grants
of options to purchase a total of 2.0 million shares with
stipulated grant dates earlier than the dates the compensation
committee acted to approve these awards. The Special Committee
could not determine whether the date of those grants were based
on an event or when the former chief executive officer, Milan
Panic, agreed in principle to the award. These individual option
grants accounted for $4,538,000 of the $31,111,000 in additional
compensation charges.
10
VALEANT
PHARMACEUTICALS INTERNATIONAL
NOTES TO
CONSOLIDATED CONDENSED FINANCIAL
STATEMENTS (Continued)
The restatement also includes a pre-tax charge of $997,000
related to a stock option grant to a former chief financial
officer, who left in 2002. This grant of options to purchase
100,000 shares was granted to him with a recorded grant
date a few days before he joined the Company in May 1998. The
Special Committee concluded that this award of options was
effectively amended in December 1998 to lower its exercise
price. There is evidence which suggests that certain members of
former management knew or should have known that this
transaction and one other transaction (resulting in a pre-tax
charge of $450,000) had accounting, tax, and disclosure
consequences and that they failed to take appropriate action.
These options have been accounted for as variable awards in
accordance with FASB Interpretation No. 44, Accounting
for Certain Transactions involving Stock Compensation
(FIN 44) in the restated financial
statements. Variable accounting ceased in 2002 when these
options were surrendered.
We also recorded $1,375,000 of additional pre-tax, non-cash,
stock-based compensation expense in the restatement for awards
granted between 1982 and 1994.
In total 1,038 individual awards of options to purchase a total
of 9.2 million shares granted before the Change in Control
were found to have been granted
in-the-money,
representing 71% of total awards granted in the period November
1994 through June 11, 2002. This included 87 awards of
options to purchase 4.5 million shares awarded to ten
executive officers, including the former chief executive
officer, Milan Panic. These
in-the-money
awards to executive officers accounted for $10,507,000, or 34%
of the total pre-tax accounting charge of additional stock-based
compensation expense in the restatement.
Cash
Surrender of Options at Change in Control in 2002
The election of certain persons as directors at the annual
meeting of our stockholders on May 29, 2002 caused a Change
in Control under our stock option plans. Our 1998 Stock Option
Plan (the 1998 Plan) provided that all outstanding
options vested immediately upon the Change in Control and that
an option holder had 60 days following the Change in
Control to surrender his or her non-incentive stock options for
a cash payment equal to the excess of the highest closing price
of the stock during the 90 days preceding the Change in
Control, which was $32.50 per share, or the closing price
on the day preceding the date of surrender, whichever was
higher, over the exercise price for the surrendered options.
During the year ended December 31, 2002, we recorded a
pre-tax charge of $61,400,000 related to our cash payment
obligation under the 1998 Plan. The findings of the Special
Committee relating to
in-the-money
options that were affected by the Change in Control require that
we recognize the remaining grant date intrinsic value resulting
from the acceleration of vesting for a number of these options
and the value that certain other options could have been
surrendered for cash under APB 25 and FIN 44. As a
result, an additional compensation charge of $10,105,000 has
been recorded in fiscal year 2002.
Options
Granted After the Change in Control
The Special Committee also found that, due to flaws in the
processes relied on to make our annual broad-based grants after
the Change in Control, we did not correctly apply the
requirements of APB 25 through December 2005. These option
accounting errors, however, differ significantly from those made
prior to the Change in Control. Unlike the broad-based grants
made prior to the Change in Control, for which the recorded
grant dates were selected from a period prior to the approval
dates, the broad-based grants after the Change in Control were
approved at either regularly scheduled meetings of the
compensation committee or at meetings of the board of directors,
and the exercise price for each of these grants was the closing
price on the date of such meetings.
The stock option accounting errors after the Change in Control
resulted from allocation adjustments to the list of grants to
individual non-executives after the compensation committee or
the board of directors had approved the allocation of an
aggregate number of shares to be available to non-executive
employees. In no event did the adjustments result in shares
being granted in excess of the aggregate number of shares
approved by the
11
VALEANT
PHARMACEUTICALS INTERNATIONAL
NOTES TO
CONSOLIDATED CONDENSED FINANCIAL
STATEMENTS (Continued)
compensation committee or the board of directors. Further, none
of those adjustments related to the chief executive officer,
chief financial officer, or any member of the board of
directors. The Special Committee concluded that there was no
evidence that management operating since the Change in Control
were aware that the processes used to grant and account for
broad-based grants were flawed or that the process employed was
for the purpose of granting
in-the-money
stock options. In reaching this conclusion, the Special
Committee took note that that process had been consistently
employed even for the November 2005 grants in which the process
resulted in stock option grants at higher exercise prices than
the closing price of our common stock on the date of
finalization of the allocation list for non-executives. The
Special Committee also concluded that there was no evidence that
current management was aware of any financial statement impact,
tax consequences or disclosure implications of its flawed
processes.
Between May 2003 and November 2005, we made four broad-based
grants (May 2003, November 2003, November 2004 and November
2005). The May 2003 grants were made to non-executive employees.
The November 2003, 2004 and 2005 grants were made to a broad
base of employees, including senior executives (the
November Grants). With respect to each of the
November Grants, the granting authority (either the compensation
committee or the board of directors) made specific grants to
specific members of executive management, including, among
others, the chief executive officer, the chief operating
officer, and the chief financial officer. Additionally, the
broad-based grants made after the Change in Control were
approved either at regularly scheduled meetings of the
compensation committee or at meetings of the board of directors.
The stock option accounting errors that affected 164 individual
grants of options to purchase 1.5 million shares resulted
from slight adjustments to the non-executive grant lists after
the relevant compensation committee or board meetings. In no
event did the adjustments result in shares being granted in
excess of the number of options approved by the compensation
committee or the board of directors. As a result of its work,
the Special Committee made a determination of new measurement
dates for each affected grant. With respect to three of the four
broad-based grants (May 2003, November 2003 and November 2005),
the measurement date selected was the date on which the rank and
file list became final. With respect to the remaining
broad-based grant (November 2004), there was actual evidence of
a change in the rank and file list but inconclusive evidence
when the list became final. The measurement date for that grant
was reconstructed using the best available evidence to ensure
that an adequate amount of compensation expense was recorded in
the restatement. A total of 14 other individual awards
(0.1 million shares) made to
rank-and-file
employees since the change of control were also found to contain
administrative stock option accounting errors.
To correct these errors, we recorded $2,460,000 of additional
pre-tax, non-cash, stock-based compensation expense in the
restatement for the period July 1, 2002 through
June 30, 2006. These non-cash charges have no impact on
previously reported revenues, cash or cash equivalents. As
explained below, however, we also reported corrections for
certain other items which do have an impact on reported revenues
and cash flow presentations.
New
Hire Grant Practices
The Special Committee investigated our new hire stock option
grant practices and concluded that the new hire grants were
appropriately accounted for under the applicable accounting
principles. Until January 2004, our practice was to set forth,
in a prospective employees offer letter a specific number
of options, specifying that the strike price would be equal to
the closing price on the new employees first date of
employment pending approval of the compensation committee.
Beginning in January 2004, the offer letters set the strike
price equal to the closing price of our stock on the later of
compensation committee approval or the employees start
date.
With respect to our new hire grant practices prior to January
2004, the Special Committee reviewed each offer letter and
related grant during the period June 2002 to January 2004 and a
sample of offer letters and related grants prior to June 2002.
The Special Committee also questioned relevant individuals about
the option-related new hire practices and procedures. This
intensive review confirmed that in each instance reviewed, the
number of options approved was equal to the number of options
set forth in the applicable offer letter, and that no material
terms of the options were changed by the compensation committee
in its approval process. Accordingly, the Special Committee
12
VALEANT
PHARMACEUTICALS INTERNATIONAL
NOTES TO
CONSOLIDATED CONDENSED FINANCIAL
STATEMENTS (Continued)
concluded that, with respect to new hire grants prior to January
2004, compensation committee approval was a mere formality and
that there had been finality with respect to the new hire grants
upon the first day of employment, which had been used as the
measurement date. Based upon the investigation, the Special
Committee concluded that new hire grants were accounted for
appropriately.
Income
Tax Effects
Incremental, stock-based, pre-tax compensation charges resulted
in tax benefits of $7,920,000. These tax benefits through 2000
were $1,940,000, recorded as an increase in the deferred tax
assets with a corresponding increase in retained earnings. For
2001 through 2003, deferred tax assets increased by $5,980,000
and income tax expense decreased by the same amount. In 2004,
the deferred tax asset was fully reserved with a valuation
allowance.
As a result of the review of our stock option granting
practices, management determined that the limitation of tax
benefits for executive compensation imposed by
Section 162(m) of the Internal Revenue Code (the
IRC) was not considered in the income tax returns or
financial statements prior to the Change in Control. The amount
of this limitation has been impacted by the determination that
many of the stock options were granted at prices below fair
market value on the date of grant. As a result of correctly
applying the Section 162(m) limitations, retained earnings
have been decreased by $1,896,000 as of December 31, 2000
and income tax expense has been increased by $702,000, $518,000
and $748,000 in 2001, 2002 and 2003, respectively. Adjustments
of ($205,000) and $122,000 for 2004 and 2005 respectively, did
not affect tax expense due to the valuation allowance. Also, the
cumulative impact on income tax of $3,864,000 was reversed in
2004. This occurred because the valuation allowance for the
deferred tax assets decreased with the Section 162(m)
reductions to the net operating loss.
As a result of our determination that the exercise prices of
certain option grants were below the closing price of our common
stock on the actual grant date, we evaluated whether the
affected employees would have any adverse tax consequences under
Section 409A of the IRC. It was determined that certain of
these options were unvested as of December 31, 2004, and
may be subject to Section 409A unless further action is
taken. None of these options belong to persons who, as of the
date of grant, were subject to the disclosure requirements of
Section 16(a) of the Securities Exchange Act of 1934.
Therefore, transition relief is available with respect to these
options through December 31, 2007. Additional guidance may
be available before that time that will allow us to determine
whether Section 409A will apply to the circumstances under
which these options were granted. Depending upon the
determination about the correct treatment of these options for
Section 409A purposes, the recipients of these options may
make an election to exercise the options in a way that excludes
them from Section 409A treatment. This election is
available through December 31, 2007.
13
VALEANT
PHARMACEUTICALS INTERNATIONAL
NOTES TO
CONSOLIDATED CONDENSED FINANCIAL
STATEMENTS (Continued)
Summary
and Other Items
In addition, we have restated the aforementioned financial
statements to correct certain accounting errors which were
previously identified but not considered to be material through
December 31, 2005. These corrections related to accounting
for employee tax withholding on certain compensation
transactions, elimination of an intercompany difference,
accounting for product exchanges (resulting in a revenue
adjustment), and certain income tax adjustments. The income tax
adjustments include reducing the charge taken to increase the
valuation allowance in 2004 by $11,566,000 as a result of
recording less U.S. deferred tax assets in prior periods,
which had originated from administrative errors in the
preparation of tax returns in earlier periods and were
immaterial to each of those prior periods. The cumulative effect
of these errors on retained earnings as of December 31,
2005 was $4,714,000. The restatement impact through
June 30, 2006 of these other corrections and of the
non-cash charges for stock-based compensation that have resulted
from the review of the Special Committee are summarized in the
table below (amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
Cumulative
|
|
|
Additional
|
|
|
|
Six Months Ended June 30,
|
|
|
December 31,
|
|
|
Effect
|
|
|
Expense
|
|
|
|
2006
|
|
|
2005
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
1982 -2002
|
|
|
(Income)
|
|
|
Stock option grants prior to 2002
Change in Control:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Broad-based option grants with
improper measurement dates
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
11,488
|
|
|
$
|
11,488
|
|
Option grants to directors with
improper measurement dates
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
148
|
|
|
|
148
|
|
Other option grants with improper
measurement dates
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,538
|
|
|
|
4,538
|
|
Re-priced Option grant
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
997
|
|
|
|
997
|
|
Improper measurement dates for
option grants
1982-1994
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,375
|
|
|
|
1,375
|
|
Incremental charge in connection
with change of control
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,105
|
|
|
|
10,105
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sub total pre Change in Control
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
28,651
|
|
|
|
28,651
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock option grants after 2002
Change in Control:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company-wide option grants with
improper measurement dates
|
|
|
(3
|
)
|
|
|
587
|
|
|
|
1,171
|
|
|
|
1,085
|
|
|
|
172
|
|
|
|
|
|
|
|
2,425
|
|
Other stock option matters after
June 2002
|
|
|
|
|
|
|
13
|
|
|
|
22
|
|
|
|
(7
|
)
|
|
|
20
|
|
|
|
|
|
|
|
35
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sub total post Change in Control
|
|
|
(3
|
)
|
|
|
600
|
|
|
|
1,193
|
|
|
|
1,078
|
|
|
|
192
|
|
|
|
|
|
|
|
2,460
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total impact of additional stock
compensation on operating income
|
|
|
(3
|
)
|
|
|
600
|
|
|
|
1,193
|
|
|
|
1,078
|
|
|
|
192
|
|
|
|
28,651
|
|
|
|
31,111
|
|
Other items corrected in
connection with restatement
|
|
|
(1,772
|
)
|
|
|
(67
|
)
|
|
|
(2,273
|
)
|
|
|
(1,265
|
)
|
|
|
(90
|
)
|
|
|
7,766
|
|
|
|
2,366
|
|
Tax effects of above and other tax
items
|
|
|
(1,170
|
)
|
|
|
344
|
|
|
|
963
|
|
|
|
(14,957
|
)
|
|
|
1,785
|
|
|
|
3,357
|
|
|
|
(10,022
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income decrease (increase)
resulting from all restatement items
|
|
$
|
(2,945
|
)
|
|
$
|
877
|
|
|
$
|
(117
|
)
|
|
$
|
(15,144
|
)
|
|
$
|
1,887
|
|
|
$
|
39,774
|
|
|
$
|
23,455
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14
VALEANT
PHARMACEUTICALS INTERNATIONAL
NOTES TO
CONSOLIDATED CONDENSED FINANCIAL
STATEMENTS (Continued)
The pre-tax effect of the correction for stock-based
compensation was $157,000, $206,000, $792,000, $2,503,000,
$2,690,000, $3,491,000, $4,492,000 and $12,945,000 for 1995,
1996, 1997, 1998, 1999, 2000, 2001 and 2002, respectively. The
cumulative pre-tax effect of the correction for stock-based
compensation between 1982 and 1994 was $1,375,000.
The effects of the restatement on the Consolidated Statement of
Operations for the three month and nine month periods ended
September 30, 2005 are summarized below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30, 2005
|
|
|
September 30, 2005
|
|
|
|
As Previously
|
|
|
|
|
|
|
|
|
As Previously
|
|
|
|
|
|
|
|
|
|
reported
|
|
|
Adj.
|
|
|
As Restated
|
|
|
Reported
|
|
|
Adj.
|
|
|
As Restated
|
|
|
|
(In thousands, except per share data)
|
|
|
(In thousands, except per share data)
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product sales
|
|
$
|
183,004
|
|
|
$
|
438
|
|
|
$
|
183,442
|
|
|
$
|
525,635
|
|
|
$
|
531
|
|
|
$
|
526,166
|
|
Ribavirin royalties
|
|
|
21,953
|
|
|
|
|
|
|
|
21,953
|
|
|
|
65,494
|
|
|
|
|
|
|
|
65,494
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
204,957
|
|
|
|
438
|
|
|
|
205,395
|
|
|
|
591,129
|
|
|
|
531
|
|
|
|
591,660
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of goods sold (excluding
amortization)
|
|
|
55,694
|
|
|
|
(1,057
|
)
|
|
|
54,637
|
|
|
|
157,355
|
|
|
|
(932
|
)
|
|
|
156,423
|
|
Selling expenses
|
|
|
59,017
|
|
|
|
35
|
|
|
|
59,052
|
|
|
|
173,286
|
|
|
|
105
|
|
|
|
173,391
|
|
General and administrative expenses
|
|
|
26,665
|
|
|
|
127
|
|
|
|
26,792
|
|
|
|
77,227
|
|
|
|
380
|
|
|
|
77,607
|
|
Research and development costs
|
|
|
28,883
|
|
|
|
78
|
|
|
|
28,961
|
|
|
|
82,166
|
|
|
|
255
|
|
|
|
82,421
|
|
Acquired in-process research and
development
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
126,399
|
|
|
|
|
|
|
|
126,399
|
|
Restructuring charges
|
|
|
135
|
|
|
|
|
|
|
|
135
|
|
|
|
506
|
|
|
|
|
|
|
|
506
|
|
Amortization expense
|
|
|
15,782
|
|
|
|
|
|
|
|
15,782
|
|
|
|
46,961
|
|
|
|
|
|
|
|
46,961
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total costs and expenses
|
|
|
186,176
|
|
|
|
(817
|
)
|
|
|
185,359
|
|
|
|
663,900
|
|
|
|
(192
|
)
|
|
|
663,708
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations
|
|
|
18,781
|
|
|
|
1,255
|
|
|
|
20,036
|
|
|
|
(72,771
|
)
|
|
|
723
|
|
|
|
(72,048
|
)
|
Other income (loss), net, including
translation and exchange
|
|
|
(1,207
|
)
|
|
|
|
|
|
|
(1,207
|
)
|
|
|
(5,629
|
)
|
|
|
|
|
|
|
(5,629
|
)
|
Interest income
|
|
|
3,193
|
|
|
|
|
|
|
|
3,193
|
|
|
|
9,327
|
|
|
|
|
|
|
|
9,327
|
|
Interest expense
|
|
|
(10,077
|
)
|
|
|
|
|
|
|
(10,077
|
)
|
|
|
(29,821
|
)
|
|
|
|
|
|
|
(29,821
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing
operations before income taxes and minority interest
|
|
|
10,690
|
|
|
|
1,255
|
|
|
|
11,945
|
|
|
|
(98,894
|
)
|
|
|
723
|
|
|
|
(98,171
|
)
|
Provision for income taxes
|
|
|
15,319
|
|
|
|
250
|
|
|
|
15,569
|
|
|
|
41,745
|
|
|
|
595
|
|
|
|
42,340
|
|
Minority interest, net
|
|
|
184
|
|
|
|
|
|
|
|
184
|
|
|
|
489
|
|
|
|
|
|
|
|
489
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations
|
|
|
(4,813
|
)
|
|
|
1,005
|
|
|
|
(3,808
|
)
|
|
|
(141,128
|
)
|
|
|
128
|
|
|
|
(141,000
|
)
|
Income (loss) from discontinued
operations
|
|
|
1,123
|
|
|
|
|
|
|
|
1,123
|
|
|
|
(2,368
|
)
|
|
|
|
|
|
|
(2,368
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(3,690
|
)
|
|
$
|
1,005
|
|
|
$
|
(2,685
|
)
|
|
$
|
(143,496
|
)
|
|
$
|
128
|
|
|
$
|
(143,368
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted income (loss) per
share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations
|
|
$
|
(0.05
|
)
|
|
$
|
0.01
|
|
|
$
|
(0.04
|
)
|
|
$
|
(1.54
|
)
|
|
$
|
|
|
|
$
|
(1.54
|
)
|
Income (loss) from discontinued
operations
|
|
|
0.01
|
|
|
|
|
|
|
|
0.01
|
|
|
|
(0.03
|
)
|
|
|
|
|
|
|
(0.03
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted net loss per share
|
|
$
|
(0.04
|
)
|
|
$
|
0.01
|
|
|
$
|
(0.03
|
)
|
|
$
|
(1.57
|
)
|
|
$
|
|
|
|
$
|
(1.57
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted shares used in
per share computation
|
|
|
92,626
|
|
|
|
|
|
|
|
92,626
|
|
|
|
91,357
|
|
|
|
|
|
|
|
91,357
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15
VALEANT
PHARMACEUTICALS INTERNATIONAL
NOTES TO
CONSOLIDATED CONDENSED FINANCIAL
STATEMENTS (Continued)
The effects of the restatement on Valeants consolidated
Condensed Statement of Cash Flows for operating activities is
presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
|
2005
|
|
|
|
|
|
2005
|
|
|
|
As Previously
|
|
|
Adjustments
|
|
|
As Restated
|
|
|
|
Reported
|
|
|
|
|
|
|
|
|
Cash flows from operating
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(143,496
|
)
|
|
$
|
128
|
|
|
$
|
(143,368
|
)
|
Income (loss) from discontinued
operations
|
|
|
(2,368
|
)
|
|
|
|
|
|
|
(2,368
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations
|
|
|
(141,128
|
)
|
|
|
128
|
|
|
|
(141,000
|
)
|
Adjustments to reconcile net loss
to net cash provided by operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
68,321
|
|
|
|
|
|
|
|
68,321
|
|
Provision for losses on accounts
receivable and inventory obsolescence
|
|
|
6,299
|
|
|
|
|
|
|
|
6,299
|
|
Stock compensation expense
|
|
|
1,562
|
|
|
|
889
|
|
|
|
2,451
|
|
Translation and exchange (gains)
losses, net
|
|
|
5,629
|
|
|
|
|
|
|
|
5,629
|
|
Impairment charges and other
non-cash items
|
|
|
697
|
|
|
|
|
|
|
|
697
|
|
Acquired in-process research and
development
|
|
|
126,399
|
|
|
|
|
|
|
|
126,399
|
|
Deferred income taxes
|
|
|
(18,275
|
)
|
|
|
|
|
|
|
(18,275
|
)
|
Change in assets and liabilities,
net of effects of acquisitions:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
8,157
|
|
|
|
|
|
|
|
8,157
|
|
Inventories
|
|
|
(18,216
|
)
|
|
|
|
|
|
|
(18,216
|
)
|
Prepaid expenses and other assets
|
|
|
2,178
|
|
|
|
(1,120
|
)
|
|
|
1,058
|
|
Trade payables and accrued
liabilities
|
|
|
9,334
|
|
|
|
(492
|
)
|
|
|
8,842
|
|
Income taxes
|
|
|
14,509
|
|
|
|
595
|
|
|
|
15,104
|
|
Other liabilities
|
|
|
2,035
|
|
|
|
|
|
|
|
2,035
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flow from operating
activities in continuing operations
|
|
|
67,501
|
|
|
|
|
|
|
|
67,501
|
|
Cash flow from operating
activities in discontinued operations
|
|
|
(1,522
|
)
|
|
|
|
|
|
|
(1,522
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating
activities
|
|
$
|
65,979
|
|
|
$
|
|
|
|
$
|
65,979
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16
VALEANT
PHARMACEUTICALS INTERNATIONAL
NOTES TO
CONSOLIDATED CONDENSED FINANCIAL
STATEMENTS (Continued)
Below is a summary of Valeants Consolidated Balance Sheet
as of December 31, 2005 and the adjustments thereto which
result from the restatement:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2005
|
|
|
|
As Previously
|
|
|
|
|
|
|
|
|
|
reported
|
|
|
Adjustments
|
|
|
As Restated
|
|
|
|
(Amounts in Thousands)
|
|
|
ASSETS
|
Current Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
224,856
|
|
|
$
|
|
|
|
$
|
224,856
|
|
Marketable securities
|
|
|
10,210
|
|
|
|
|
|
|
|
10,210
|
|
Accounts receivable, net
|
|
|
187,987
|
|
|
|
|
|
|
|
187,987
|
|
Inventories, net
|
|
|
136,034
|
|
|
|
|
|
|
|
136,034
|
|
Prepaid expenses and other current
assets
|
|
|
36,652
|
|
|
|
3,702
|
|
|
|
40,354
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
595,739
|
|
|
|
3,702
|
|
|
|
599,441
|
|
Property, plant and equipment, net
|
|
|
230,126
|
|
|
|
|
|
|
|
230,126
|
|
Deferred tax assets, net
|
|
|
45,904
|
|
|
|
(20,562
|
)
|
|
|
25,342
|
|
Goodwill
|
|
|
79,486
|
|
|
|
|
|
|
|
79,486
|
|
Intangible assets, net
|
|
|
536,319
|
|
|
|
|
|
|
|
536,319
|
|
Other assets
|
|
|
43,176
|
|
|
|
|
|
|
|
43,176
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-current assets
|
|
|
935,011
|
|
|
|
(20,562
|
)
|
|
|
914,449
|
|
Assets of discontinued operations
|
|
|
127
|
|
|
|
|
|
|
|
127
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,530,877
|
|
|
$
|
(16,860
|
)
|
|
$
|
1,514,017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND
STOCKHOLDERS EQUITY
|
Current Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Trade payables
|
|
$
|
55,279
|
|
|
$
|
|
|
|
$
|
55,279
|
|
Accrued liabilities
|
|
|
136,701
|
|
|
|
4,137
|
|
|
|
140,838
|
|
Notes payable and current portion
of long-term debt
|
|
|
495
|
|
|
|
|
|
|
|
495
|
|
Income taxes
|
|
|
42,452
|
|
|
|
4,872
|
|
|
|
47,324
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
234,927
|
|
|
|
9,009
|
|
|
|
243,936
|
|
Long-term debt, less current
portion
|
|
|
788,439
|
|
|
|
|
|
|
|
788,439
|
|
Deferred tax liabilities, net
|
|
|
28,770
|
|
|
|
(20,562
|
)
|
|
|
8,208
|
|
Other liabilities
|
|
|
16,372
|
|
|
|
|
|
|
|
16,372
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-current liabilities
|
|
|
833,581
|
|
|
|
(20,562
|
)
|
|
|
813,019
|
|
Liabilities of discontinued
operations
|
|
|
23,118
|
|
|
|
|
|
|
|
23,118
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders Equity:
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock
|
|
|
928
|
|
|
|
|
|
|
|
928
|
|
Additional capital
|
|
|
1,203,814
|
|
|
|
21,093
|
|
|
|
1,224,907
|
|
Accumulated deficit
|
|
|
(743,950
|
)
|
|
|
(26,400
|
)
|
|
|
(770,350
|
)
|
Accumulated other comprehensive
income (loss)
|
|
|
(21,541
|
)
|
|
|
|
|
|
|
(21,541
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
439,251
|
|
|
|
(5,307
|
)
|
|
|
433,944
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,530,877
|
|
|
$
|
(16,860
|
)
|
|
$
|
1,514,017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
17
VALEANT
PHARMACEUTICALS INTERNATIONAL
NOTES TO
CONSOLIDATED CONDENSED FINANCIAL
STATEMENTS (Continued)
On April 3, 2006, we announced a restructuring program to
reduce costs and accelerate earnings growth.
The program is primarily focused on our research and development
and manufacturing operations. The objective of the restructuring
program as it relates to research and development activities is
to focus our efforts and expenditures on two late stage projects
currently in development. The restructuring program is designed
to rationalize our investments in research and development
efforts in line with our financial resources. We intend to sell
rights to, out-license or secure partners to share the costs of
other major clinical projects and discovery programs that the
research and development division has underway. Also as a result
of the restructuring of our research and development activities,
we are actively marketing for sale our former headquarters
facility where our former research laboratories were located. We
classified this facility as held for sale in
September 2006 in accordance with SFAS 144,
Accounting for the Impairment or Disposal of Long-lived
Assets. Fixed asset impairment charges in the three
months ended September 30, 2006 included: $8,788,000 for
the impairment of our former headquarters facility and
$1,996,000 for the impairment of fixed assets in our research
and development segment.
The restructuring program is also expected to reduce selling,
general and administrative expenses primarily through
consolidation of the management functions in fewer
administrative groups to achieve greater economies of scale.
Management and administrative responsibilities for our regional
operations in Australia, Africa and Asia (AAA),
which had been managed as a separate business unit, have been
combined with those of other regions.
We recorded charges of $17,139,000 and $96,687,000 in the three
and nine months ended September 30, 2006, respectively, in
connection with our decision to implement the restructuring
program. Severance charges recorded in the three and nine months
ended September 30, 2006 total $1,922,000 and $13,935,000,
respectively, and relate to employees whose positions were
eliminated in the restructuring.
The objective of the restructuring program as it relates to
manufacturing is to further rationalize our manufacturing
operations to reflect the regional nature of our existing
products and further reduce our excess capacity after
considering the delay in the launch of Viramidine (taribavirin).
The impairment charges include the charges related to estimated
future losses that may occur upon the disposition of specific
assets related to our manufacturing operations in Switzerland
and Puerto Rico. These restructuring charges also include
employee severance costs resulting from a reduction of 200
employees in the first nine months of 2006. When completed, we
anticipate that approximately 750 employees in total will be
impacted by the restructuring, the majority of whom work in the
two manufacturing facilities selected for disposition. The
following table summarizes the restructuring costs incurred in
the three and nine months ended September 30, 2006.
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
Restructuring Charge Details
|
|
September 30, 2006
|
|
|
September 30, 2006
|
|
|
|
(In thousands)
|
|
|
Employee Severances (200 Employees)
|
|
$
|
1,922
|
|
|
$
|
13,935
|
|
Contract cancellation and other
cash costs
|
|
|
665
|
|
|
|
1,657
|
|
|
|
|
|
|
|
|
|
|
Subtotal: Cash-related Charges
|
|
|
2,587
|
|
|
|
15,592
|
|
|
|
|
|
|
|
|
|
|
Abandoned software and other
capital assets
|
|
|
193
|
|
|
|
21,546
|
|
Impairment of fixed assets
|
|
|
14,359
|
|
|
|
59,549
|
|
|
|
|
|
|
|
|
|
|
Subtotal: Non-cash charges
|
|
|
14,552
|
|
|
|
81,095
|
|
|
|
|
|
|
|
|
|
|
Total:
|
|
$
|
17,139
|
|
|
$
|
96,687
|
|
|
|
|
|
|
|
|
|
|
18
VALEANT
PHARMACEUTICALS INTERNATIONAL
NOTES TO
CONSOLIDATED CONDENSED FINANCIAL
STATEMENTS (Continued)
The restructuring charges for the three months ended
September 30, 2006 represent charges of $2,557,000,
$2,571,000, $230,000, $1,628,000 and $10,153,000 in respect of
the North America, EMEA, International, R&D and Corporate
reporting segments respectively. For the nine months ended
September 30, 2006 these amounts are $21,134,000,
$31,763,000, $230,000, $1,628,000 and $41,932,000, respectively.
Cash-related charges in the above table relate to severance
payments and other costs which have been either paid with cash
expenditures or have been accrued and will be paid with cash in
future quarters. A summary of accruals and expenditures of
restructuring costs which will be paid in cash for each quarter
in 2006 follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
March 31, 2006
|
|
|
June 30, 2006
|
|
|
September 30, 2006
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
Opening accrual
|
|
$
|
|
|
|
$
|
5,425
|
|
|
$
|
8,551
|
|
Charges to earnings
|
|
|
6,644
|
|
|
|
6,361
|
|
|
|
2,587
|
|
Cash paid
|
|
|
(1,219
|
)
|
|
|
(3,235
|
)
|
|
|
(6,685
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Closing accrual
|
|
$
|
5,425
|
|
|
$
|
8,551
|
|
|
$
|
4,453
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
We have recorded impairment charges of $21,134,000 related to
our manufacturing plant in Humacao, Puerto Rico and $27,631,000
related to a manufacturing plant in Birsfelden, Switzerland in
the nine months ended September 30, 2006. We are continuing
to develop specific plans for the sale of these facilities which
are expected to be completed within 12 months.
Restructuring charges in the three and nine months period ended
September 30, 2005 relate to the sale of manufacturing
plants in Mexico and China.
Infergen: On December 30, 2005, we
acquired the United States and Canadian rights to the Infergen
business of InterMune, Inc. Infergen is indicated for the
treatment of hepatitis C in patients who have not responded
to other treatments or have relapsed after such treatment. In
connection with this transaction we acquired the rights to the
Infergen product as currently approved by the FDA and rights to
a clinical trial underway to expand the clinical applications of
Infergen. We also employed certain individuals from InterMune
and acquired third party contracts for the manufacture of
Infergen. We paid InterMune consideration of $120,000,000 in
cash at the closing. Additionally, we have agreed to pay up to
an additional $22,400,000 of which $20,000,000 is contingent on
certain milestones being reached. As part of the transaction, we
assumed a contract with Amgen for the manufacture of Infergen
which requires that we acquire specific levels of supply through
the term of the agreement. As a result of the timing of these
required purchases, we expect to see an increase in the level of
our finished goods inventories through 2006. In addition, we
assumed a contract for transfer of Infergen manufacturing. Under
the contract, we are obligated to pay a new third party supplier
up to approximately $12,400,000 upon the attainment of separate
milestones tied to the manufacturing process transfer.
Xcel Pharmaceuticals, Inc.: On March 1,
2005, we acquired Xcel, a specialty pharmaceutical company
focused on the treatment of disorders of the central nervous
system for $280,000,000 in cash and transaction costs of
approximately $5,400,000. Under the terms of the purchase
agreement, we paid an additional $7,470,000 for a working
capital adjustment. Xcels portfolio consisted of four
products that are sold within the United States, and retigabine,
a late-stage clinical product candidate that is an adjunctive
treatment for partial-onset seizures in patients with epilepsy.
Approximately $44,000,000 of the cash consideration was used to
retire Xcels outstanding long-term debt.
In connection with the Xcel acquisition, we completed an
offering of 8,280,000 shares of our common stock in
February 2005. After underwriting discounts and commissions, we
received net proceeds of $189,393,000, which
19
VALEANT
PHARMACEUTICALS INTERNATIONAL
NOTES TO
CONSOLIDATED CONDENSED FINANCIAL
STATEMENTS (Continued)
were used to partially fund the Xcel acquisition. The remainder
of the funds required for the Xcel acquisition was provided by
existing cash on hand and other investments.
A portion of the purchase price for the Xcel acquisition was
placed in an escrow account to cover potential claims under the
purchase agreement that would arise within one year of the
acquisition date. Prior to such date, we filed a claim for
indemnification from the former Xcel stockholders with respect
to certain breaches of representation and warranties made by
Xcel under the Xcel purchase agreement relating to Medicaid
rebates on preacquisition sales and certain third-party claims.
As of September 30, 2006, approximately $5,172,000 of the
Xcel purchase price was in an escrow fund to pay indemnification
claims.
The following unaudited pro forma financial information presents
the combined results of operations of Valeant, Infergen and Xcel
for the three- and nine- month periods ended September 30,
2005 as if the acquisitions had occurred as of January 1,
2005. The unaudited pro forma financial information is not
intended to represent or be indicative of our consolidated
results of operations or financial condition that would have
been reported had the acquisitions been completed as of
January 1, 2005, and should not be taken as representative
of our future consolidated results of operations or financial
condition (in thousands, except per share information).
|
|
|
|
|
|
|
|
|
|
|
Three Months
|
|
|
Nine Months
|
|
|
|
Ended
|
|
|
Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2005
|
|
|
2005
|
|
|
|
(Restated)
|
|
|
(Restated)
|
|
|
Net revenues
|
|
$
|
215,557
|
|
|
$
|
628,533
|
|
Loss from continuing operations
|
|
|
(10,252
|
)
|
|
|
(167,301
|
)
|
Net loss
|
|
|
(9,129
|
)
|
|
|
(169,666
|
)
|
Basic and diluted net loss per
share:
|
|
|
|
|
|
|
|
|
Loss from continuing operations
|
|
$
|
(0.11
|
)
|
|
$
|
(1.81
|
)
|
Net loss
|
|
$
|
(0.10
|
)
|
|
$
|
(1.83
|
)
|
The above pro forma financial information includes charges for
acquired in-process research and development of $126,399,000
with respect to Xcel and $47,200,000 with respect to Infergen
and adjustments for amortization of identifiable intangible
assets acquired and interest expense as a result of the
retirement of Xcels long-term debt. The effect of the
IPR&D charges of Xcel and Infergen on the pro forma loss per
share is $1.89.
|
|
5.
|
Discontinued
Operations
|
In the second half of 2002, we made a strategic decision to
divest our Photonics business, Circe unit, Russian
Pharmaceuticals segment, biomedicals segment, raw materials
businesses, and manufacturing facilities in Central Europe.
During 2003, we disposed of the Russian Pharmaceuticals segment,
biomedicals segment, Photonics business and Circe unit. During
2004, we disposed of one of the raw materials businesses and
manufacturing facilities in Central Europe. During 2005 we
completed the sale of the remaining raw materials business and
manufacturing facility in Central Europe. In 2006 discontinued
operations primarily consist of disposal of one facility
requiring environmental remediation and the wind down of
administrative activities associated with these operations.
20
VALEANT
PHARMACEUTICALS INTERNATIONAL
NOTES TO
CONSOLIDATED CONDENSED FINANCIAL
STATEMENTS (Continued)
Summarized selected financial information for discontinued
operations for the three and nine months ended
September 30, 2006 and 2005 is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2006
|
|
|
2005
|
|
|
2006
|
|
|
2005
|
|
|
Revenues
|
|
$
|
|
|
|
$
|
1,319
|
|
|
$
|
|
|
|
$
|
9,041
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
|
$
|
6,064
|
|
|
$
|
(192
|
)
|
|
$
|
5,739
|
|
|
$
|
(3,898
|
)
|
Provision for income taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from discontinued
operations, net
|
|
|
6,064
|
|
|
|
(192
|
)
|
|
|
5,739
|
|
|
|
(3,898
|
)
|
Income (loss) on disposal of
discontinued operations
|
|
|
1,482
|
|
|
|
1,315
|
|
|
|
1,398
|
|
|
|
1,530
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from discontinued
operations
|
|
$
|
7,546
|
|
|
$
|
1,123
|
|
|
$
|
7,137
|
|
|
$
|
(2,368
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The assets and liabilities of discontinued operations are stated
separately as of September 30, 2006 and December 31,
2005 on the accompanying consolidated condensed balance sheets.
The major assets and liabilities categories are as follows (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
Cash
|
|
$
|
136
|
|
|
$
|
47
|
|
Accounts receivable, net
|
|
|
524
|
|
|
|
45
|
|
Property, plant and equipment, net
|
|
|
|
|
|
|
18
|
|
Other assets
|
|
|
|
|
|
|
17
|
|
|
|
|
|
|
|
|
|
|
Assets of discontinued operations
|
|
$
|
660
|
|
|
$
|
127
|
|
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
7
|
|
|
$
|
13
|
|
Accrued liabilities
|
|
|
13,134
|
|
|
|
19,118
|
|
Other liabilities
|
|
|
4,206
|
|
|
|
3,987
|
|
|
|
|
|
|
|
|
|
|
Liabilities of discontinued
operations
|
|
$
|
17,347
|
|
|
$
|
23,118
|
|
|
|
|
|
|
|
|
|
|
Environmental contamination has been identified in the soil
under a facility which housed operations of the discontinued
biomedicals segment and is currently vacant. Remediation of the
site will involve excavation and disposal of the waste at
appropriately licensed sites. Environmental reserves have been
provided for remediation and related costs that we can
reasonably estimate. Remediation costs are applied against these
environmental reserves as they are incurred. As assessments and
remediation progress, these liabilities are reviewed and
adjusted to reflect additional information that becomes
available. Total environmental reserves for this site were
$13,001,000 and $19,023,000 as of September 30, 2006 and
December 31, 2005, respectively, and are included in the
liabilities of discontinued operations. The environmental
reserves were reduced in the third quarter of 2006 based upon
contractual agreements for remedial work with contractors at
costs which total less than the amounts previously accrued for
these projects. Although we believe that the reserves are
adequate, there can be no assurance that the amount of
expenditures and other expenses, which will be required relating
to remediation actions and compliance with applicable
environmental laws will not exceed the amounts reflected in
reserves or will not have a material adverse effect on our
consolidated financial condition, results of operations or cash
flows. Any possible loss that may be incurred in excess of
amounts provided for as of September 30, 2006 cannot be
reasonably estimated.
21
VALEANT
PHARMACEUTICALS INTERNATIONAL
NOTES TO
CONSOLIDATED CONDENSED FINANCIAL
STATEMENTS (Continued)
The following table sets forth the computation of basic and
diluted earnings per share (in thousands, except per share
information):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2006
|
|
|
2005
|
|
|
2006
|
|
|
2005
|
|
|
|
|
|
|
(Restated)
|
|
|
|
|
|
(Restated)
|
|
|
Income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Numerator for basic and diluted
earnings per share income (loss) to stockholders
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
$
|
6,161
|
|
|
$
|
(3,808
|
)
|
|
$
|
(41,918
|
)
|
|
$
|
(141,000
|
)
|
Discontinued operations
|
|
|
7,546
|
|
|
|
1,123
|
|
|
|
7,137
|
|
|
|
(2,368
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
13,707
|
|
|
$
|
(2,685
|
)
|
|
$
|
(34,781
|
)
|
|
$
|
(143,368
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for basic earnings per
share weighted-average shares outstanding
|
|
|
93,093
|
|
|
|
92,626
|
|
|
|
92,907
|
|
|
|
91,357
|
|
Effect of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee stock options
|
|
|
1,939
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other dilutive securities
|
|
|
232
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dilutive potential common shares
|
|
|
2,171
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for diluted earnings
per share adjusted weighted average shares after
assumed conversions
|
|
|
95,264
|
|
|
|
92,626
|
|
|
|
92,907
|
|
|
|
91,357
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic income (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing
operations
|
|
$
|
0.07
|
|
|
$
|
(0.04
|
)
|
|
$
|
(0.45
|
)
|
|
$
|
(1.54
|
)
|
Income (loss) from discontinued
operations
|
|
|
0.08
|
|
|
|
0.01
|
|
|
|
0.08
|
|
|
|
(0.03
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net income (loss) per share
|
|
$
|
0.15
|
|
|
$
|
(0.03
|
)
|
|
$
|
(0.37
|
)
|
|
$
|
(1.57
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted net income (loss) per
share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing
operations
|
|
$
|
0.06
|
|
|
$
|
(0.04
|
)
|
|
$
|
(0.45
|
)
|
|
$
|
(1.54
|
)
|
Income (loss) from discontinued
operations
|
|
|
0.08
|
|
|
|
0.01
|
|
|
|
0.08
|
|
|
|
(0.03
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted net income (loss) per share
|
|
$
|
0.14
|
|
|
$
|
(0.03
|
)
|
|
$
|
(0.37
|
)
|
|
$
|
(1.57
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three months ended September 30, 2005, options to
purchase 2,536,000 weighted average shares of common stock were
not included in the computation of earnings per share because we
incurred a loss and the effect would have been anti-dilutive.
For the nine months ended September 30, 2006 and 2005,
options to purchase 1,799,000 and 3,123,000 weighted average
shares of common stock, respectively, were not included in the
computation of earnings per share because we incurred a loss and
the effect would have been anti-dilutive.
For the three months ended September 30, 2006 and 2005,
options to purchase 8,570,000 and 4,505,000 weighted average
shares of common stock, respectively, were also not included in
the computation of earnings per share because the option
exercise prices were greater than the average market price of
our Companys common stock and, therefore, the effect would
have been anti-dilutive. For the nine months ended
September 30, 2006 and 2005, options to purchase 9,061,000
and 4,395,000 weighted average shares of common stock,
respectively, were also not included in the computation of
earnings per share because the option exercise prices were
greater than the average market price of our common stock and,
therefore, the effect would have been anti-dilutive.
22
VALEANT
PHARMACEUTICALS INTERNATIONAL
NOTES TO
CONSOLIDATED CONDENSED FINANCIAL
STATEMENTS (Continued)
|
|
7.
|
Detail of
Certain Accounts
|
The following tables present the details of certain amounts
included in the consolidated balance sheet at September 30,
2006 and December 31, 2005 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
|
|
|
|
(Restated)
|
|
|
Accounts receivable,
net:
|
|
|
|
|
|
|
|
|
Trade accounts receivable
|
|
$
|
153,717
|
|
|
$
|
153,497
|
|
Royalties receivable
|
|
|
20,236
|
|
|
|
27,306
|
|
Other receivables
|
|
|
44,573
|
|
|
|
12,669
|
|
|
|
|
|
|
|
|
|
|
|
|
|
218,526
|
|
|
|
193,472
|
|
Allowance for doubtful accounts
|
|
|
(6,703
|
)
|
|
|
5,485
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
211,823
|
|
|
$
|
187,987
|
|
|
|
|
|
|
|
|
|
|
Inventories, net:
|
|
|
|
|
|
|
|
|
Raw materials and supplies
|
|
$
|
38,637
|
|
|
$
|
34,931
|
|
Work-in-process
|
|
|
25,384
|
|
|
|
28,726
|
|
Finished goods
|
|
|
102,375
|
|
|
|
85,152
|
|
|
|
|
|
|
|
|
|
|
|
|
|
166,396
|
|
|
|
148,809
|
|
Allowance for inventory
obsolescence
|
|
|
(17,818
|
)
|
|
|
(12,775
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
148,578
|
|
|
$
|
136,034
|
|
|
|
|
|
|
|
|
|
|
Intangible assets: The following table presents
intangible assets as of September 30, 2006 and
December 31, 2005 and estimates of future amortization
expense (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2006
|
|
|
December 31, 2005:
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
|
|
|
Accumulated
|
|
|
Net
|
|
|
Gross
|
|
|
Accumulated
|
|
|
Net
|
|
|
Average
|
|
|
Estimated Amortization Expense
|
|
|
|
Amount
|
|
|
Amortization
|
|
|
Amount
|
|
|
Amount
|
|
|
Amortization
|
|
|
Amount
|
|
|
Lives
|
|
|
2006
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
2011
|
|
|
Neurology
|
|
$
|
237,489
|
|
|
$
|
(71,736
|
)
|
|
$
|
165,753
|
|
|
$
|
236,813
|
|
|
$
|
(54,111
|
)
|
|
$
|
182,702
|
|
|
|
13
|
|
|
$
|
23,188
|
|
|
$
|
23,188
|
|
|
$
|
23,188
|
|
|
$
|
23,147
|
|
|
$
|
21,758
|
|
|
$
|
17,467
|
|
Infectious Disease
|
|
|
72,480
|
|
|
|
(8,280
|
)
|
|
|
64,200
|
|
|
|
72,480
|
|
|
|
(3,060
|
)
|
|
|
69,420
|
|
|
|
11
|
|
|
|
6,960
|
|
|
|
6,960
|
|
|
|
6,960
|
|
|
|
6,960
|
|
|
|
6,960
|
|
|
|
6,960
|
|
Dermatology
|
|
|
83,852
|
|
|
|
(41,473
|
)
|
|
|
42,379
|
|
|
|
84,013
|
|
|
|
(38,045
|
)
|
|
|
45,968
|
|
|
|
19
|
|
|
|
4,671
|
|
|
|
4,671
|
|
|
|
4,671
|
|
|
|
4,670
|
|
|
|
4,666
|
|
|
|
7,097
|
|
Other Products
|
|
|
377,430
|
|
|
|
(180,905
|
)
|
|
|
196,525
|
|
|
|
370,347
|
|
|
|
(162,164
|
)
|
|
|
208,183
|
|
|
|
11
|
|
|
|
22,938
|
|
|
|
23,560
|
|
|
|
22,799
|
|
|
|
21,992
|
|
|
|
22,133
|
|
|
|
16,909
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Product Rights
|
|
|
771,251
|
|
|
|
(302,394
|
)
|
|
|
468,857
|
|
|
|
763,653
|
|
|
|
(257,380
|
)
|
|
|
506,273
|
|
|
|
14
|
|
|
|
57,757
|
|
|
|
58,379
|
|
|
|
57,618
|
|
|
|
56,769
|
|
|
|
55,517
|
|
|
|
48,433
|
|
License Agreements
|
|
|
67,376
|
|
|
|
(46,781
|
)
|
|
|
20,595
|
|
|
|
67,376
|
|
|
|
(37,330
|
)
|
|
|
30,046
|
|
|
|
5
|
|
|
|
12,536
|
|
|
|
11,338
|
|
|
|
6,172
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
838,627
|
|
|
$
|
(349,175
|
)
|
|
$
|
489,452
|
|
|
$
|
831,029
|
|
|
$
|
(294,710
|
)
|
|
$
|
536,319
|
|
|
|
|
|
|
$
|
70,293
|
|
|
$
|
69,717
|
|
|
$
|
63,790
|
|
|
$
|
56,769
|
|
|
$
|
55,517
|
|
|
$
|
48,433
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization expense for the three and nine months ended
September 30, 2006 was $18,424,000 and $53,461,000,
respectively, of which $15,274,000 and $44,011,000,
respectively, related to amortization of acquired product rights.
23
VALEANT
PHARMACEUTICALS INTERNATIONAL
NOTES TO
CONSOLIDATED CONDENSED FINANCIAL
STATEMENTS (Continued)
We incur losses in the U.S. where our research and
development activities are conducted and our corporate offices
are located. We anticipate that we will realize the tax benefits
associated with these losses through offsetting such losses
against future taxable income resulting from products in our
development pipeline, further growth in US product sales
and other measures. However, at this time, there is insufficient
objective evidence of the timing and amounts of such future
U.S. taxable income to assure realization of the tax
benefits, and valuation allowances have been established to
reserve those benefits. The increase in the valuation allowance
for the nine months ended September 30, 2006 was
approximately $20,268,000 resulting in a provision for income
taxes of $24,351,000 for this period. The income tax provision
primarily represents the taxes payable on earnings in tax
jurisdictions outside the U.S., foreign withholding taxes,
interest on U.S. liabilities recorded in connection with
the 1997 through 2001 IRS examination and state and local taxes.
Our effective tax rate for the nine months ended
September 30, 2005 was affected by pre-tax losses resulting
from a restructuring charge of $2,038,000 and the write-off of
acquired IPR&D expenses in connection with the Xcel
acquisition of $126,399,000. These charges are not deductible
for income tax purposes. The tax provision in the nine months
ended September 30, 2005 relates to the expected taxes on
earnings in tax jurisdictions outside the U.S., net of valuation
allowance adjustments, plus recording a liability for the 1997
through 2001 IRS examination.
Certain of the adjustments related to the 1997 through 2001 IRS
examination are being challenged through the IRS appeals process.
|
|
9.
|
Common
Stock and Share Compensation
|
We have two stockholder-approved programs designed for the
purpose of providing equity incentives to our directors,
officers and employees. Both programs are designed to align the
incentives of our management and employees with increasing
shareholder value.
2006 Equity Incentive Plan: The 2006 Equity
Incentive Plan (the 2006 Plan) was approved by
stockholders in May 2006 and is the successor to and
continuation of our 2003 Equity Incentive Plan. The 2006 Plan
increased the number of shares of common stock available for
issuance by 4,200,000 shares. The 2006 Plan provides for
the grant of incentive stock options, nonqualified stock
options, restricted stock awards, restricted stock unit awards,
stock appreciation rights, performance stock awards and other
forms of equity compensation, as well as performance cash awards
to employees (including officers), consultants, and directors of
our Company and our affiliates. Options granted under the 2006
Plan must have an exercise price that is not less than 100% of
the fair market value of the common stock on the date of grant
and a term not exceeding 10 years (except that in certain
cases, the maximum term is five years). Generally, options vest
ratably over a four-year period from the date of grant. Under
the 2006 Plan, 500,000 shares may be issued as phantom
stock awards or restricted stock awards for which a participant
pays less than the fair market value of the common stock on the
date of grant.
24
VALEANT
PHARMACEUTICALS INTERNATIONAL
NOTES TO
CONSOLIDATED CONDENSED FINANCIAL
STATEMENTS (Continued)
Stock Options Issued Under our Equity Incentive
Plans: The following table sets forth information
relating to stock options issued under our equity incentive
plans (in thousands, except per share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Average
|
|
|
|
Number of
|
|
|
Exercise
|
|
|
|
Shares
|
|
|
Price
|
|
|
Shares under option,
December 31, 2004
|
|
|
13,336
|
|
|
$
|
17.93
|
|
Granted
|
|
|
2,192
|
|
|
|
18.16
|
|
Exercised
|
|
|
(160
|
)
|
|
|
20.10
|
|
Canceled
|
|
|
(736
|
)
|
|
|
22.28
|
|
|
|
|
|
|
|
|
|
|
Shares under option,
December 31, 2005
|
|
|
14,632
|
|
|
|
17.80
|
|
Granted
|
|
|
187
|
|
|
|
17.15
|
|
Exercised
|
|
|
(520
|
)
|
|
|
13.54
|
|
Canceled
|
|
|
(1,233
|
)
|
|
|
20.57
|
|
|
|
|
|
|
|
|
|
|
Shares Under Option,
September 30, 2006
|
|
|
13,066
|
|
|
$
|
17.60
|
|
|
|
|
|
|
|
|
|
|
Exercisable at December 31,
2005
|
|
|
7,197
|
|
|
$
|
17.82
|
|
|
|
|
|
|
|
|
|
|
Exercisable at September 30,
2006
|
|
|
8,114
|
|
|
$
|
17.14
|
|
|
|
|
|
|
|
|
|
|
Options available for grant at
December 31, 2005
|
|
|
513
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options available for grant at
September 30, 2006
|
|
|
5,742
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The schedule below reflects the number of outstanding and
exercisable options as of September 30, 2006 segregated by
price range (in thousands, except per share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
|
|
|
Exercisable
|
|
|
Weighted
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
Weighted
|
|
|
Average
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
Average
|
|
|
Remaining
|
|
|
|
Number
|
|
|
Exercise
|
|
|
Number
|
|
|
Exercise
|
|
|
Contractual
|
|
Range of Exercise Prices
|
|
of Shares
|
|
|
Price
|
|
|
of Shares
|
|
|
Price
|
|
|
Life (Years)
|
|
|
$8.10 to $13.83
|
|
|
4,445
|
|
|
$
|
10.20
|
|
|
|
3,660
|
|
|
$
|
10.10
|
|
|
|
6.26
|
|
$14.99 to $18.55
|
|
|
4,624
|
|
|
$
|
17.99
|
|
|
|
1,895
|
|
|
$
|
18.18
|
|
|
|
7.89
|
|
$18.70 to $46.25
|
|
|
3,997
|
|
|
$
|
25.39
|
|
|
|
2,559
|
|
|
$
|
26.44
|
|
|
|
6.65
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13,066
|
|
|
|
|
|
|
|
8,114
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The fair value of options granted in 2006 and 2005 was estimated
at the date of grant using the Black-Scholes option-pricing
model with the following assumptions:
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
Weighted-average life (years)
|
|
|
4.1
|
|
|
|
4.1
|
|
Volatility
|
|
|
38
|
%
|
|
|
41
|
%
|
Expected dividend per share
|
|
$
|
0.31
|
|
|
$
|
0.31
|
|
Risk-free interest rate
|
|
|
4.88
|
%
|
|
|
4.33
|
%
|
Weighted-average fair value of
options (restated)
|
|
$
|
5.33
|
|
|
$
|
6.10
|
|
The aggregate intrinsic value of the stock options outstanding
at September 30, 2006 was $50,992,000. The aggregate
intrinsic value of the stock options that are both outstanding
and exercisable at September 30, 2006 was $38,527,000.
During the nine months ended September 30, 2006 stock
options with an aggregate intrinsic value of $2,748,000 were
exercised. Intrinsic value is the in the money
valuation of the options or the difference between
25
VALEANT
PHARMACEUTICALS INTERNATIONAL
NOTES TO
CONSOLIDATED CONDENSED FINANCIAL
STATEMENTS (Continued)
market and exercise prices. The fair value of options that
vested in the nine months ended September 30, 2006 as
determined using the Black Scholes valuation model, was
$12,003,000.
Restricted Stock Units Issued Under our Incentive
Plan: During 2006 and 2005, pursuant to our
approved director compensation plan, we granted our non-employee
directors 57,416 and 41,764 shares of restricted stock
units, respectively. Additionally in 2005 we granted certain
officers of our company, in the aggregate, 90,000 restricted
stock units. The restricted stock units issued had a fair value
(equal to the market price of our stock on the grant date) of
$960,000 and $880,000 in 2006 and 2005, respectively. Each
restricted stock unit granted to non-employee directors vests
over one year, is entitled to dividend equivalent shares and is
exchanged for a share of our common stock one year after the
director ceases to serve as a member of our board. Each
restricted stock unit granted to certain officers of our company
vests 50 percent three years after grant with the balance
vesting equally in years four and five after grant, is entitled
to dividend-equivalent shares and is exchanged for a share of
our common stock upon vesting. In the nine months ended
September 30, 2006, 46,948 restricted stock units were
cancelled. As of September 30, 2006 and December 31,
2005, there were 265,906 and 242,442 restricted stock units
outstanding, respectively.
2003 Employee Stock Purchase Plan: In
May 2003, our stockholders approved the Valeant Pharmaceuticals
International 2003 Employee Stock Purchase Plan (the
ESPP). The ESPP provides employees with an
opportunity to purchase common stock at a 15% discount to market
price. Additionally, the market prices under the ESPP program
are the lower of our stock price at the beginning or end of each
six-month ESPP enrollment period. There are
7,000,000 shares of common stock reserved for issuance
under the Purchase Plan, plus an annual increase on the first
day of our fiscal year for a period of ten years, ending on
January 1, 2015, equal to the lower of (i) 1.5% of the
shares of common stock outstanding on each calculation date,
(ii) 1,500,000 shares of common stock, or (iii) a
number of shares that may be determined by the Compensation
Committee. In the year ending 2005, we issued
100,000 shares of common stock for proceeds of $1,644,000.
In the nine month period ended September 30, 2006,
63,880 shares were issued for proceeds of $938,000. Under
SFAS 123(R) we recorded $69,000 and $337,000 as
compensation expense in the three and nine months ended
September 30, 2006, respectively, for shares expected to be
purchased under this plan. This amount consists of the 15%
discount to market price offered to participating employees
under the ESPP plus the additional value, determined under the
Black-Scholes model, of the plan feature allowing purchased
share price to be based on the lower of our share price at the
beginning or end of each ESPP enrollment period.
The components of stock compensation expense and the amounts of
future expense that relate to outstanding but unvested stock
options and restricted stock awards are set forth in the table
below (amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2006
|
|
|
2005
|
|
|
2006
|
|
|
2005
|
|
|
|
|
|
|
(Restated)
|
|
|
|
|
|
(Restated)
|
|
|
Employee stock options
|
|
$
|
5,123
|
|
|
$
|
289
|
|
|
$
|
14,529
|
|
|
$
|
889
|
|
Phantom and restricted stock units
|
|
|
462
|
|
|
|
510
|
|
|
|
1,485
|
|
|
|
1,562
|
|
Employee stock purchase plan
|
|
|
69
|
|
|
|
|
|
|
|
337
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stock compensation expense
|
|
$
|
5,654
|
|
|
$
|
799
|
|
|
$
|
16,351
|
|
|
$
|
2,451
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
26
VALEANT
PHARMACEUTICALS INTERNATIONAL
NOTES TO
CONSOLIDATED CONDENSED FINANCIAL
STATEMENTS (Continued)
Stock compensation expense for the three months and nine months
ended September 30, 2006 and 2005 was recorded in the
following expense classifications (amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2006
|
|
|
2005
|
|
|
2006
|
|
|
2005
|
|
|
|
|
|
|
(Restated)
|
|
|
|
|
|
(Restated)
|
|
|
Cost of goods sold
|
|
$
|
225
|
|
|
$
|
63
|
|
|
$
|
1,026
|
|
|
$
|
188
|
|
Selling expenses
|
|
|
745
|
|
|
|
35
|
|
|
|
2,458
|
|
|
|
105
|
|
General and administrative expenses
|
|
|
4,151
|
|
|
|
480
|
|
|
|
10,751
|
|
|
|
1,485
|
|
Research and development costs
|
|
|
533
|
|
|
|
221
|
|
|
|
2,116
|
|
|
|
673
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
5,654
|
|
|
$
|
799
|
|
|
$
|
16,351
|
|
|
$
|
2,451
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The amounts of future stock compensation expense associated with
outstanding stock options and restricted stock units is
scheduled to be charged to expense as follows (in thousands):
|
|
|
|
|
Amortization of Stock Compensation
Expense
|
|
|
|
|
Remainder of 2006
|
|
$
|
3,043
|
|
2007
|
|
|
7,227
|
|
2008
|
|
|
2,800
|
|
2009 and thereafter
|
|
|
747
|
|
|
|
|
|
|
|
|
$
|
13,817
|
|
|
|
|
|
|
|
|
10.
|
Legal
Proceedings and Contingencies
|
We are involved in several legal proceedings, including the
following matters (Valeant was formerly known as ICN
Pharmaceuticals, Inc.):
Securities
Class Actions:
Derivative Actions Related to Ribapharm
Bonuses: We are a nominal defendant in a
shareholder derivative lawsuit pending in state court in Orange
County, California, styled James Herrig, IRA v. Milan
Panic et al. This lawsuit, which was filed on
June 6, 2002, purports to assert derivative claims on our
behalf against certain of our current
and/or
former officers and directors. The lawsuit asserts claims for
breach of fiduciary duties, abuse of control, gross
mismanagement and waste of corporate assets. The plaintiff
seeks, among other things, damages and a constructive trust over
cash bonuses paid to the officer and director defendants in
connection with the Ribapharm offering.
On October 1, 2002, several of our former and current
directors, as individuals, as well as Valeant, as a nominal
defendant, were named as defendants in a second
shareholders derivative complaint filed in the Delaware
Court of Chancery, styled Paul Gerstley v. Norman
Barker, Jr. et al. The original complaint in the
Delaware action purported to state causes of action for
violation of Delaware General Corporation Law Section 144,
breach of fiduciary duties and waste of corporate assets in
connection with the defendants management of our company.
The allegations in the Delaware action were similar to those
contained in the derivative lawsuit filed in Orange County,
California, but included additional claims asserting that the
defendants breached their fiduciary duties by disseminating
materially misleading and inaccurate information.
We established a Special Litigation Committee to evaluate the
plaintiffs claims in both derivative actions. The Special
Litigation Committee concluded that it would not be in the best
interest of our shareholders to pursue many of the claims in
these two lawsuits, but decided to pursue, through litigation or
settlement, claims arising from the April 2002 decision of the
Board to approve the payment of approximately $50,000,000 in
bonuses to various
27
VALEANT
PHARMACEUTICALS INTERNATIONAL
NOTES TO
CONSOLIDATED CONDENSED FINANCIAL
STATEMENTS (Continued)
members of the Board and management in connection with the
initial public offering of Ribapharm (the Ribapharm
Bonuses). The Court granted our motion to stay the
California proceedings in favor of the similar Delaware
proceedings.
We have settled the litigation with respect to ten of the
defendants, nine of whom each received Ribapharm Bonuses of
$330,500, and one who received a Ribapharm Bonus of $500,000. On
May 18, 2005, the Delaware Court of Chancery approved all
of the settlements and dismissed all claims except those related
to the Ribapharm Bonuses. Three of the settling
defendants were first elected to our Board of Directors in 2001
(the 2001 Directors), only one of whom
currently serves on the Board of Directors. Pursuant to the
settlements, the 2001 Directors forfeited their 2003 annual
Board of Directors stipend and all of their restricted
stock units in exchange for a release from further liability in
the lawsuit (the 2001 Director Settlement). The
2001 Director Settlement further provides that, in the
event we negotiate a settlement with certain defendants on
financial terms that are materially better than those set forth
in the settlement agreements with the 2001 Directors, we
agree to adjust the 2001 Directors settlement payment
by a comparable proportion. Following court-sponsored mediation
in the Delaware Court of Chancery, we entered into settlement
agreements with seven other defendants. Pursuant to these
settlements, six of these defendants (the Outside Director
Defendants) are required to pay to us $150,000 in exchange
for a release from further liability in the lawsuit. The Outside
Director Defendants will receive an offset credit of $50,000 for
release of their claimed right to payments for the automatic
conversion of stock options that were not issued to them in
2002. As provided in the settlement agreements, six of the
Outside Director Defendants have each paid $100,000 in cash to
us in settlement payments. The seventh settling former director
has paid $80,000 to us pursuant to his settlement agreement with
us in exchange for a release from further liability in the
lawsuit. Following the mediated settlement agreements with the
Outside Director Defendants, counsel for the 2001 Directors
notified us that, in the 2001 Directors opinion, the
settlement agreements with the Outside Director Defendants are
on financial terms that are materially better than those set
forth in the settlements with the 2001 Directors and have
demanded that we pay to the 2001 Directors the sum of
$50,000 each. We have advised the 2001 Directors that the
settlement agreements reached with the other defendants do not
trigger this provision. If it is deemed that the financial terms
of the settlement with the Outside Director Defendants are on
financial terms that are materially better than those set forth
in the settlement with the 2001 Directors, the
2001 Directors settlement payment will be adjusted by
a comparable proportion.
The claims with respect to defendants Milan Panic and Adam
Jerney, who received Ribapharm Bonuses of $33,050,000 and
$3,000,000, respectively, were tried in Delaware Chancery Court
in a one-week trial beginning February 27, 2006. On
July 28, 2006, we settled the claims with respect to
Mr. Panic for $20 million, which amount has been paid
to us. We recorded a $17,550,000 gain resulting from this
settlement. The amount reflects the settlement proceeds net of
related costs associated with the litigation and settlement
arrangement.
Derivative Actions Related to Stock
Options: We are a nominal defendant in two
shareholder derivative lawsuits pending in state court in Orange
County, California, styled (i) Michael Pronko v.
Timothy C. Tyson et al., and (ii) Kenneth
Lawson v. Timothy C. Tyson et al. These lawsuits,
which were filed on October 27, 2006 and November 16,
2006 respectively, purport to assert derivative claims on our
behalf against certain of our current
and/or
former officers and directors. The lawsuits assert claims for
breach of fiduciary duties, abuse of control, gross
mismanagement, waste of corporate assets, unjust enrichment, and
violations of the California Corporations Code related to the
purported backdating of employee stock options. The plaintiffs
seek, among other things, damages, an accounting, the rescission
of stock options, and a constructive trust over amounts acquired
by the defendants who have exercised Valeant stock options. The
defendants have not yet responded to the complaints. We expect
the actions to be consolidated before a single judge after which
the plaintiffs will file a single consolidated complaint. We
will evaluate the consolidated complaint and respond accordingly.
Patent Oppositions: Various parties are
opposing our ribavirin patents in actions before the European
Patent Office (E.P.O.), and we are responding to these
oppositions. One patent has been revoked by the Opposition
Division of the E.P.O., and we have filed an appeal within the
E.P.O. The revoked patent benefited from patent
28
VALEANT
PHARMACEUTICALS INTERNATIONAL
NOTES TO
CONSOLIDATED CONDENSED FINANCIAL
STATEMENTS (Continued)
extensions in the major European countries that provided market
protection until 2010. A second European patent is also the
subject of an opposition proceeding in the E.P.O. Oral
proceedings in this opposition are scheduled to take place on
June 12, 2007.
Should the opponents ultimately prevail against both of our
ribavirin patents, the ribavirin component of the combination
therapies marketed by Schering-Plough and Roche would lose
patent protection in Europe. Although data exclusivity applies
to these products until 2010, if no ribavirin patent remains in
force in Europe, we will no longer receive royalties from Roche.
Argentina Antitrust Matter: In July 2004, we
were advised that the Argentine Antitrust Agency had issued a
notice unfavorable to us in a proceeding against our Argentine
subsidiary. The proceeding involves allegations that the
subsidiary in Argentina abused a dominant market position in
1999 by increasing its price on Mestinon in Argentina and not
supplying the market for approximately two months. The
subsidiary filed documents with the agency offering an
explanation justifying its actions, but the agency has now
rejected the explanation. The agency is collecting evidence
prior to issuing a new decision. Argentinean law permits a fine
to be levied of up to $5,000,000 plus 20% of profits realized
due to the alleged wrongful conduct. Counsel in the matter
advises that the size of the transactions alleged to have
violated the law will unlikely draw the maximum penalty.
Permax Product Liability Cases. On
July 18, 2005, we were served a complaint in a case
captioned Barbara E. Hermansen and Robert B.
Wilcox, Jr. v. Eli Lilly & Company, Elan
Corporation, plc, Amarin Corporation plc and Valeant
Pharmaceuticals International, Case No. 05 L 007276 in the
Circuit Court of Cook County, Illinois, which case has
subsequently been removed to federal court. This case alleged
that the use of Permax caused the plaintiff to become a
compulsive gambler, and as a result, she suffered significant
economic loss and severe emotional and mental distress. The
parties settled this case on September 7, 2006, with
neither Valeant nor Eli Lilly admitting liability or
responsibility for the claims. The settlement did not have a
material impact on our consolidated financial position, results
of operation or liquidity.
Kali Litigation: In March 2004, Kali
Laboratories, Inc. submitted Abbreviated New Drug Application
(ANDA)
No. 76-843
with the FDA seeking approval for a generic version of
Diastat®
(a diazepam rectal gel). In July 2004, Xcel Pharmaceuticals,
Inc., which we acquired on March 1, 2005, filed a complaint
against Kali for patent infringement of U.S. Patent
No. 5,462,740 Civil Case
No. 04-3238
(JCL) pending in the United States District Court of New Jersey.
The complaint alleges that Kalis filing of ANDA
No. 76-843
is an act of infringement under 35 U.S.C. §271(e)(4)
of one or more claims of U.S. Patent No. 5,462,740.
Kali has filed an answer and counterclaims, denying all
allegations of the complaint and asserting affirmative defenses
and counterclaims for non-infringement, invalidity and
unenforceability under the doctrine of patent misuse due to
improper filing of the lawsuit. Xcel filed a reply to the
counterclaims, denying all allegations. In October 2005, Kali
filed an amended answer and counterclaims asserting affirmative
defenses and counterclaims for non-infringement, invalidity,
unenforceability due to inequitable conduct during prosecution
of the patent, and unenforceability under the doctrine of patent
misuse due to improper filing of the lawsuit. In November 2005,
we filed a reply to the amended counterclaims, denying all
allegations. We will vigorously defend ourselves against
Kalis allegations. Fact and expert discovery has closed.
The parties attended a pretrial conference on June 12,
2006. No trial date has been set.
Xcel filed this suit within forty-five days of Kalis
Paragraph IV certification. As a result, The Drug Price
Competition and Patent Restoration Act of 1984 (the
Hatch-Waxman Act) provided an automatic stay on the
FDAs approval of Kalis ANDA for thirty months, which
expired on November 28, 2006.
Trademark litigation: Valent U.S.A.
Corporation and its wholly owned subsidiary Valent Biosciences
Corporation (together Valent Biosciences) have
expressed concerns regarding the possible confusion between
Valent Biosciences VALENT trademark registered in
connection with various chemical and agricultural products and
the companys VALEANT trademark. Valent Biosciences has
opposed the registration of the VALEANT trademark by us in
certain jurisdictions, including Argentina, Australia, Brazil,
Canada, Chile, Colombia, Czech Republic, European Union, France,
Germany, Indonesia, Israel, Japan, Malaysia, New Zealand,
Romania, Slovak
29
VALEANT
PHARMACEUTICALS INTERNATIONAL
NOTES TO
CONSOLIDATED CONDENSED FINANCIAL
STATEMENTS (Continued)
Republic, Spain, Switzerland, Turkey, Taiwan, Venezuela, the
United Kingdom and the United States. Valent Biosciences
oppositions in Colombia, Czech Republic, France, Indonesia,
Japan, New Zealand, Romania, Slovak Republic, Spain,
Switzerland, and Turkey have been denied. Valent Biosciences is
appealing the denial of their opposition in Turkey. We are
appealing the Chilean ruling in Valents favor. Also, we
have initiated actions to cancel trademark registrations owned
by Valent Biosciences in Germany, Israel, South Korea and the
United Kingdom and have opposed Valents application to
register the VALENT mark in Switzerland in connection with
pharmaceuticals. We have responded or will respond to all
opposition proceedings that have been filed and discovery is
ongoing in the opposition proceeding in the United States.
Valent Biosciences has also filed for cancellation of the
VALEANT trademark in Austria. If the cancellation filing or any
of the opposition proceedings are successful, we would have no
trademark registration for the VALEANT mark in that particular
jurisdiction and, in addition, in those jurisdictions where
trademark rights accrue solely through the registration process,
may have no trademark rights in the VALEANT mark those
particular jurisdictions.
Former ICN Yugoslavia Employees: In December
2003, sixteen former employees of ICN Yugoslavia filed a
complaint in state court in Orange County, California.
Plaintiffs allege that we breached a promise by Milan Panic, who
allegedly offered plaintiffs full pay and benefits if they
boycotted the company while under the management installed
following the Yugoslavian governments takeover of ICN
Yugoslavia. Plaintiffs initial complaint and first amended
complaint were both dismissed by the judge in March and October
2004, respectively. However, plaintiffs appealed and the Court
of Appeal reversed the trial courts dismissal. Plaintiffs
filed their second amended complaint in January 2006, alleging
only unjust enrichment and constructive fraud. Discovery has
been proceeding and is scheduled to close on January 31,
2007. Our summary judgment motion is scheduled to be heard on
February 9, 2007 and trial has been set to begin on
March 19, 2007.
Republic of Serbia litigation: In March 2006
we settled a long standing dispute with the Republic of Serbia
relating to the ownership and operations of a joint venture we
formerly participated in known as Galenika for $34,000,000. We
received a payment of $28,000,000 in March 2006 and will receive
an additional $6,000,000 in 2007, with respect to which we have
received a bank letter of credit.
Other: We are a party to other pending
lawsuits and subject to a number of threatened lawsuits. While
the ultimate outcome of pending and threatened lawsuits or
pending violations cannot be predicted with certainty, and an
unfavorable outcome could have a negative impact on us, at this
time in the opinion of management, the ultimate resolution of
these matters will not have a material effect on our
consolidated financial position, results of operations or
liquidity.
In the 2006 strategic restructuring, the pharmaceutical segment
formerly described as Asia, Africa, and Australia (AAA) was
eliminated for segment reporting purposes, with the operations
in this former segment combined with the remaining three
segments. We thus now have three reportable pharmaceutical
segments, which comprise our pharmaceutical operations in:
|
|
|
|
|
North America, comprising the United States and Canada.
|
|
|
|
International. The Latin America, Asia, and Australasia regions
are now described as International.
|
|
|
|
Europe, Middle East, and Africa (EMEA).
|
In addition, we have a research and development division. As
part of the restructuring announced on April 3, 2006, our
discovery and pre-clinical development operations were sold on
December 21, 2006 to Ardea Biosciences, Inc.
The segment information below for the three and nine months
ended September 30, 2005 has been restated from our
previous presentations to reflect our new segment structure as
described above.
30
VALEANT
PHARMACEUTICALS INTERNATIONAL
NOTES TO
CONSOLIDATED CONDENSED FINANCIAL
STATEMENTS (Continued)
The following table sets forth the amounts of our segment
revenues and operating income for the three and nine months
ended September 30, 2006 and 2005 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2006
|
|
|
2005
|
|
|
2006
|
|
|
2005
|
|
|
|
|
|
|
(Restated)
|
|
|
|
|
|
(Restated)
|
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Specialty pharmaceuticals
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North America
|
|
$
|
71,225
|
|
|
$
|
60,962
|
|
|
$
|
219,385
|
|
|
$
|
170,396
|
|
International
|
|
|
60,530
|
|
|
|
56,178
|
|
|
|
170,191
|
|
|
|
152,524
|
|
EMEA
|
|
|
67,251
|
|
|
|
66,302
|
|
|
|
199,587
|
|
|
|
203,246
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total specialty pharmaceuticals
|
|
|
199,006
|
|
|
|
183,442
|
|
|
|
589,163
|
|
|
|
526,166
|
|
Ribavirin royalties
|
|
|
20,968
|
|
|
|
21,953
|
|
|
|
60,694
|
|
|
|
65,494
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated revenues
|
|
$
|
219,974
|
|
|
$
|
205,395
|
|
|
$
|
649,857
|
|
|
$
|
591,660
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Income
(Loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Specialty pharmaceuticals
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North America
|
|
|
16,433
|
|
|
|
16,555
|
|
|
|
53,658
|
|
|
|
49,893
|
|
International
|
|
|
18,589
|
|
|
|
17,235
|
|
|
|
50,695
|
|
|
|
42,996
|
|
EMEA
|
|
|
10,658
|
|
|
|
10,566
|
|
|
|
27,268
|
|
|
|
31,448
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
45,680
|
|
|
|
44,356
|
|
|
|
131,621
|
|
|
|
124,337
|
|
Corporate expenses(1)
|
|
|
(16,712
|
)
|
|
|
(15,257
|
)
|
|
|
(55,272
|
)
|
|
|
(44,594
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total specialty pharmaceuticals
|
|
|
28,968
|
|
|
|
29,099
|
|
|
|
76,349
|
|
|
|
79,743
|
|
Restructuring charges(2)
|
|
|
(17,139
|
)
|
|
|
(135
|
)
|
|
|
(96,687
|
)
|
|
|
(506
|
)
|
Gain on litigation settlement
|
|
|
17,550
|
|
|
|
|
|
|
|
51,550
|
|
|
|
|
|
Research and development
|
|
|
(3,366
|
)
|
|
|
(8,930
|
)
|
|
|
(26,340
|
)
|
|
|
(24,887
|
)
|
Acquired IPR&D(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(126,399
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated segment operating
income (loss)
|
|
|
26,013
|
|
|
|
20,034
|
|
|
|
4,872
|
|
|
|
(72,049
|
)
|
Interest income
|
|
|
3,209
|
|
|
|
3,194
|
|
|
|
8,582
|
|
|
|
9,327
|
|
Interest expense
|
|
|
(10,960
|
)
|
|
|
(10,078
|
)
|
|
|
(32,259
|
)
|
|
|
(29,821
|
)
|
Other, net
|
|
|
(454
|
)
|
|
|
(1,207
|
)
|
|
|
1,240
|
|
|
|
(5,629
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing
operations before provision for income taxes and minority
interest
|
|
$
|
17,808
|
|
|
$
|
11,943
|
|
|
$
|
(17,565
|
)
|
|
$
|
(98,172
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
All stock-based compensation expense has been considered a
corporate cost as management excludes this item in assessing the
financial performance of individual business segments and
considers it a function of valuation factors that pertain to
overall corporate stock performance. |
|
(2) |
|
Restructuring charges and IPR&D are not included in the
applicable segments as management excludes these items in
assessing the financial performance of these segments, primarily
due to their non-operational nature. |
31
VALEANT
PHARMACEUTICALS INTERNATIONAL
NOTES TO
CONSOLIDATED CONDENSED FINANCIAL
STATEMENTS (Continued)
The following table sets forth our total assets by segment as of
September 30, 2006 and December 31, 2005 (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
|
|
|
|
(Restated)
|
|
|
North America
|
|
$
|
482,850
|
|
|
$
|
502,895
|
|
International
|
|
|
290,220
|
|
|
|
289,427
|
|
EMEA
|
|
|
399,049
|
|
|
|
373,709
|
|
Corporate
|
|
|
184,724
|
|
|
|
235,190
|
|
Research and Development Division
|
|
|
108,783
|
|
|
|
112,669
|
|
Discontinued operations
|
|
|
660
|
|
|
|
127
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,466,286
|
|
|
$
|
1,514,017
|
|
|
|
|
|
|
|
|
|
|
The following table sets forth our long-term assets by segment
as of September 30, 2006 and December 31, 2005 (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
Long Term Assets
|
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
|
|
|
|
(Restated)
|
|
|
North America
|
|
$
|
382,441
|
|
|
$
|
426,745
|
|
International
|
|
|
156,566
|
|
|
|
167,036
|
|
EMEA
|
|
|
115,147
|
|
|
|
129,952
|
|
Corporate
|
|
|
61,049
|
|
|
|
138,239
|
|
Research and Development Division
|
|
|
37,953
|
|
|
|
52,477
|
|
Discontinued operations
|
|
|
660
|
|
|
|
127
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
753,816
|
|
|
$
|
914,576
|
|
|
|
|
|
|
|
|
|
|
The following table summarizes the largest of our product lines
by therapeutic class based on sales for the three and nine
months ended September 30, 2006 and 2005 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2006
|
|
|
2005
|
|
|
2006
|
|
|
2005
|
|
|
|
|
|
|
(Restated)
|
|
|
|
|
|
(Restated)
|
|
|
Dermatology
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Efudix/Efudex®(P)
|
|
$
|
15,502
|
|
|
$
|
14,365
|
|
|
$
|
46,061
|
|
|
$
|
45,872
|
|
Kinerase®(P)
|
|
|
6,622
|
|
|
|
5,921
|
|
|
|
22,506
|
|
|
|
16,177
|
|
Oxsoralen-Ultra®(P)
|
|
|
613
|
|
|
|
449
|
|
|
|
7,714
|
|
|
|
7,544
|
|
Dermatixtm(P)
|
|
|
2,553
|
|
|
|
2,249
|
|
|
|
7,364
|
|
|
|
6,711
|
|
Eldoquin(P)
|
|
|
1,935
|
|
|
|
2,000
|
|
|
|
4,688
|
|
|
|
4,521
|
|
Other Dermatology
|
|
|
8,380
|
|
|
|
8,590
|
|
|
|
26,206
|
|
|
|
23,100
|
|
Infectious Disease
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Infergen®(P)(a)
|
|
|
9,134
|
|
|
|
|
|
|
|
34,148
|
|
|
|
|
|
Virazole®(P)
|
|
|
2,142
|
|
|
|
3,377
|
|
|
|
11,723
|
|
|
|
11,704
|
|
Other Infectious Disease
|
|
|
4,448
|
|
|
|
4,952
|
|
|
|
14,069
|
|
|
|
15,049
|
|
32
VALEANT
PHARMACEUTICALS INTERNATIONAL
NOTES TO
CONSOLIDATED CONDENSED FINANCIAL
STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2006
|
|
|
2005
|
|
|
2006
|
|
|
2005
|
|
|
|
|
|
|
(Restated)
|
|
|
|
|
|
(Restated)
|
|
|
Neurology
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diastat(P)(b)
|
|
|
14,802
|
|
|
|
17,525
|
|
|
|
38,533
|
|
|
|
36,993
|
|
Mestinon®(P)
|
|
|
11,449
|
|
|
|
12,206
|
|
|
|
33,592
|
|
|
|
32,500
|
|
Cesamet(P)
|
|
|
6,487
|
|
|
|
2,919
|
|
|
|
13,832
|
|
|
|
6,893
|
|
Librax(P)
|
|
|
3,002
|
|
|
|
4,042
|
|
|
|
10,926
|
|
|
|
9,792
|
|
Dalmane/Dalmadorm(P)
|
|
|
2,538
|
|
|
|
2,597
|
|
|
|
7,548
|
|
|
|
8,568
|
|
Migranal(P)(b)
|
|
|
1,133
|
|
|
|
3,744
|
|
|
|
6,949
|
|
|
|
8,648
|
|
Tasmar®(P)
|
|
|
1,721
|
|
|
|
1,430
|
|
|
|
4,548
|
|
|
|
4,348
|
|
Limbitrol(P)
|
|
|
1,635
|
|
|
|
1,438
|
|
|
|
4,487
|
|
|
|
3,910
|
|
Zelapar(P)
|
|
|
3,824
|
|
|
|
|
|
|
|
3,824
|
|
|
|
|
|
Other Neurology
|
|
|
15,938
|
|
|
|
10,958
|
|
|
|
46,103
|
|
|
|
37,050
|
|
Other Therapeutic
Classes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bedoyectatm(P)
|
|
|
13,879
|
|
|
|
14,549
|
|
|
|
36,970
|
|
|
|
34,769
|
|
Solcoseryl(P)
|
|
|
4,908
|
|
|
|
5,837
|
|
|
|
12,882
|
|
|
|
13,942
|
|
Bisocard(P)
|
|
|
4,045
|
|
|
|
3,284
|
|
|
|
11,522
|
|
|
|
9,303
|
|
Nyal(P)
|
|
|
2,134
|
|
|
|
4,191
|
|
|
|
8,691
|
|
|
|
12,031
|
|
Espaven(P)
|
|
|
3,340
|
|
|
|
2,324
|
|
|
|
7,625
|
|
|
|
5,395
|
|
Calcitonin(P)
|
|
|
1,149
|
|
|
|
1,835
|
|
|
|
5,227
|
|
|
|
7,154
|
|
Espacil(P)
|
|
|
1,235
|
|
|
|
1,909
|
|
|
|
4,092
|
|
|
|
4,000
|
|
Aclotin(P)
|
|
|
1,364
|
|
|
|
1,379
|
|
|
|
3,956
|
|
|
|
4,269
|
|
Other Pharmaceutical Products
|
|
|
53,094
|
|
|
|
49,372
|
|
|
|
153,377
|
|
|
|
155,923
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total product sales
|
|
$
|
199,006
|
|
|
$
|
183,442
|
|
|
$
|
589,163
|
|
|
$
|
526,166
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Promoted Product sales(P)
|
|
$
|
117,146
|
|
|
$
|
109,570
|
|
|
$
|
349,408
|
|
|
$
|
295,044
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
Infergen was acquired from InterMune on December 30, 2005. |
|
(b) |
|
Diastat and Migranal were acquired with the Xcel transaction on
March 1, 2005. |
|
(P) |
|
Promoted Products represent products promoted in at least one
major territory with estimated global annual sales greater than
$5 million. |
During the three months ended September 30, 2006 one
customer, McKesson Corporation, accounted for more than 10% of
consolidated product sales. Sales to McKesson Corporation and
its affiliates in the United States, Canada, and Mexico were
$35,569,000 in the three-month period ended September 30,
2006, representing 18% of our product sales. In the nine-month
period ended September 30, 2006, sales to McKesson
Corporation were $108,372,000, representing 18% of our product
sales. In prior years no single customer accounted for more than
10% of product sales in any period.
The restatement of our financial statements caused us to delay
the filing of our quarterly report on
Form 10-Q
for the quarter ended September 30, 2006. On
December 12, 2006, we received a notice of default from The
Bank of New York, as trustee for the holders of our
3% Convertible Notes due 2010, asserting that a default
occurred under
33
VALEANT
PHARMACEUTICALS INTERNATIONAL
NOTES TO
CONSOLIDATED CONDENSED FINANCIAL
STATEMENTS (Continued)
our indenture dated as of November 19, 2003, governing the
3.0% Convertible Notes and our 4.0% Convertible Notes
due 2013. The notice of default asserts that a default occurred
under the indenture when we failed to timely file our quarterly
report on
Form 10-Q
for the quarter ended September 30, 2006.
In the event that The Bank of New York is successful in
asserting that our failure to timely file this quarterly report
is a default under the indenture, such default will become an
Event of Default under the indenture unless we cure
the default within 60 days of receipt of the notice of
default. The filing of this
Form 10-Q
cures this asserted default.
On December 13, 2006, we entered into agreements to assign
and license the development and commercial rights to pradefovir
to Schering-Plough. The transaction closed on January 9,
2007. Under the terms of the agreements, Schering-Plough made an
upfront payment of $19.2 million to Valeant and will pay up
to an additional $65 million in aggregate fees upon the
achievement of certain development and regulatory milestones.
Schering-Plough will also pay royalties to us in the event
pradefovir is commercialized.
On December 21, 2006 we sold certain of our discovery and
preclinical assets to Ardea Biosciences, Inc. (formerly
IntraBiotics Pharmaceuticals) (Ardea). The sale
includes the rights to Valeants HIV and cancer development
programs. Under the terms of the agreement, Ardea will make
payments to Valeant upon the achievement of clinical milestones
relating to the HIV and cancer programs. Valeant has an option,
exercisable upon the completion of Phase 2b studies by
Ardea, to reacquire rights to commercialize its HIV program
outside of the United States and Canada upon Ardeas
completion of Phase 3 trials. Ardea will pay Valeant
development milestones and royalties upon its commercialization
of the HIV and cancer programs. Valeant would make milestone and
royalty payments to Ardea related to the clinical advancement
and commercialization of the HIV program should Valeant exercise
its option to acquire rights to this program outside the United
States and Canada.
We moved into our new worldwide corporate headquarters in Aliso
Viejo, California, effective December 22, 2006.
34
|
|
Item 2.
|
Managements
Discussion and Analysis of Financial Condition and Results of
Operations
|
Restatement
of Consolidated Financial Statements
We have filed an amendment to our annual report on
Form 10-K
for the year ended December 31, 2005 (the 2005
10-K),
originally filed on March 16, 2006, to restate our
consolidated balance sheets as of December 31, 2005 and
2004, our consolidated statements of operations and
comprehensive loss for the years ended December 31, 2005,
2004 and 2003, our consolidated statements of cash flows for the
years ended December 31, 2005, 2004 and 2003, our
consolidated statements of changes in stockholders equity
for the years ended December 31, 2005, 2004 and 2003, and
the related disclosures. The
Form 10-K/A
also includes the restatement of selected financial data as of
and for the years ended December 31, 2005, 2004, 2003, 2002
and 2001.
We will file amended quarterly reports on
Form 10-Q
for the quarters ended March 31 and June 30, 2006,
originally filed on May 9, 2006 and August 8, 2006,
respectively, to restate our condensed consolidated financial
statements and the related disclosures for the three month and
six month periods ended March 31, 2006 and 2005 and
June 30, 2006 and 2005, respectively. We have also restated
our condensed consolidated financial statements for the periods
ended September 30, 2005 included in this quarterly report
on
Form 10-Q
for the quarter ended September 30, 2006.
In July 2006, we were contacted by the Securities and Exchange
Commission, or SEC, with respect to an informal inquiry
regarding events and circumstances surrounding trading in our
common stock and the public release of data from our first
pivotal Phase 3 trial for
Viramidine®
(taribavirin). In addition, on August 22, 2006, the SEC
requested data regarding our stock option grants and exercises
since January 1, 2000. The SEC has also requested
information about our pursuit in the Delaware Chancery Court of
the return of certain bonuses paid to Milan Panic, the former
chairman and chief executive officer, and others, in connection
with the Ribapharm initial public offering. We commenced an
internal review by our finance department of stock option grants
from 1982 to July 2006. In September 2006, our board of
directors appointed a special committee of the board composed
solely of independent directors (the Special
Committee) to conduct a review of our historic stock
option practices and related accounting. The Special Committee,
with the assistance of outside legal counsel, undertook a
comprehensive review of the stock option grants to our officers,
directors and employees from 1982 to July 2006 under our various
stock option plans in effect during this period. The Special
Committee has concluded its investigation and has reported its
findings to our board of directors.
On October 20, 2006, our board of directors concluded that
certain of our consolidated financial statements should be
restated to record the additional non-cash stock-based
compensation expense items and certain other items that had been
incorrectly accounted for under accounting principles generally
accepted in the United States, or GAAP.
Continuing the work done in September, the Special Committee
analyzed in detail stock option grants awarded between November
1994 and July 2006 and analyzed supporting documentation for
awards granted between 1982 and 1994. For the period between
November 1994 and July 2006, the Special Committees
analysis included an extensive review of paper and electronic
documents supporting or related to our stock option grants, the
accounting for those grants, compensation-related financial and
securities disclosures and
e-mail
communications as well as interviews with numerous current and
former employees and current and former members of our board of
directors. While the Special Committee concluded that there were
some errors as late as January 2006, the majority of errors in
accounting for options pertain to those options granted prior to
the change in our board of directors and management in mid-2002
(the Change in Control). None of the errors
occurring in periods after the Change in Control related to
options granted to the chief executive officer, chief financial
officer or members of our board of directors.
The Special Committee made a determination, based on the
available evidence, of measurement dates for each affected
grant. If the grants were approved at a meeting of the
compensation committee of the board of directors and there was
no actual evidence of a change in the approved list of
individual awards, the measurement date selected was the date of
the compensation committee meeting. If there was actual evidence
of a change in the list of individual awards and evidence of
when the list became final, the measurement date selected was
the date when the list became final. If there was actual
evidence of a change in the list but evidence of when the list
became final was not definitive, the measurement date was
reconstructed using the best available evidence to ensure that
an adequate amount of compensation expense was recorded in the
restatement.
35
In total we recorded $31,111,000 of additional pre-tax,
non-cash, stock-based compensation expense in the restatement to
correct errors for awards granted from 1982 to date. Of this,
$28,651,000 related to awards granted prior to the Change in
Control and $2,460,000 to awards granted after the Change in
Control. None of these changes affected our previously reported
revenues, cash, or cash equivalents. As explained below,
however, we also reported corrections for certain other items
which impact our reported revenues and cash flow presentations.
Options
Granted Prior to the Change in Control
The Special Committee found that the recorded grant dates for
the majority of stock options awarded prior to the Change in
Control differed from the actual grant dates for those
transactions. In connection with that finding, the Special
Committee concluded that, with respect to many broad-based
grants of stock options prior to the Change in Control, prior
management used a methodology of selecting a recorded grant date
based on the lowest closing price during some time period (e.g.,
quarter, ten trading days) preceding the actual grant date.
While the Special Committee did not reach a conclusion as to how
prior management selected other recorded grant dates for
broad-based or individual grants that did not use the lowest
closing price methodology, there is some evidence that dates
were selected based on the occurrence of an event or when the
former chief executive officer, Milan Panic, agreed in principle
to the grant. While these and similar practices resulted in the
grant of
in-the-money
options, and the Special Committee identified evidence that two
pre-Change in Control directors may have been aware of these
backdating practices, it does not appear that prior management
pre-Change in Control attempted to conceal that the stock option
grants were discounted using the backdating methodology.
Between November 1994 and the June 2002 Change in Control, eight
broad-based grants were made. All of the 908 individual awards
of options to purchase 6.9 million shares comprising those
grants had recorded grant dates that differed from the actual
grant dates for those transactions and each resulted in
additional compensation charges that are reflected in our
restated financial statements. Of those eight broad-based
grants, six appear to have been annual grants that used the
lowest closing price methodology and two appear to have been
event-related (in those instances, there are lower prices
between the recorded grant date and actual grant date). These
eight broad-based option grants accounted for $11,488,000 of the
$31,111,000 in pre-tax compensation charges.
During this period, options to directors to purchase a total of
334,000 shares were also found to have recorded grant dates
earlier than the dates when the board of directors acted to
approve the grants. The grants were dated in accordance with the
1994 Stock Option Plan which provided expressly that the grants
were to be dated as of November 11, 1994. The board of
directors, however, did not approve that stock option plan until
January 1995. Accordingly, we are taking additional non-cash
compensation charges equal to the difference between the closing
stock price on the date of approval and November 11, 1994.
These option grants to directors accounted for $148,000 of the
$31,111,000 in pre-tax compensation charges.
Also during this period, there were 114 other individual grants
of options to purchase a total of 2.0 million shares with
stipulated grant dates earlier than the dates the compensation
committee acted to approve these awards. The Special Committee
could not determine whether the date of those grants were based
on an event or when the former chief executive officer, Milan
Panic, agreed in principle to the award. These individual option
grants accounted for $4,538,000 of the $31,111,000 in additional
compensation charges.
The restatement also includes a pre-tax charge of $997,000
related to a stock option grant to a former chief financial
officer, who left in 2002. This grant of options to purchase
100,000 shares was granted to him with a recorded grant
date a few days before he joined us in May 1998. The Special
Committee concluded that this award of options was effectively
amended in December 1998 to lower its exercise price. There is
evidence which suggests that certain members of former
management knew or should have known that this transaction and
one other transaction (resulting in a pre-tax charge of
$450,000) had accounting, tax, and disclosure consequences and
that they failed to take appropriate action. These options have
been accounted for as variable awards in accordance with FASB
Interpretation No. 44, Accounting for Certain
Transactions involving Stock Compensation
(FIN 44) in the restated financial
statements. Variable accounting ceased in 2002 when these
options were surrendered.
We also recorded $1,375,000 of additional pre-tax, non-cash,
stock-based compensation expense in the restatement for awards
granted between 1982 and 1994.
In total 1,038 individual awards of options to purchase a total
of 9.2 million shares granted before the Change in Control
were found to have been granted
in-the-money,
representing 71% of total awards granted in the period
36
November 1994 through June 11, 2002. This included 87
awards of options to purchase 4.5 million shares awarded to
ten executive officers, including the former chief executive
officer, Milan Panic. These
in-the-money
awards to executive officers accounted for $10,507,000, 34% of
the total pre-tax accounting charge of additional stock-based
compensation expense in the restatement.
Cash
Surrender of Options at Change in Control in 2002
The election of certain persons as directors at the annual
meeting of our stockholders on May 29, 2002 caused a Change
in Control under our stock option plans. Our 1998 Stock Option
Plan (the 1998 Plan) provided that all outstanding
options vested immediately upon the Change in Control and that
an option holder had 60 days following the Change in
Control to surrender his or her non-incentive stock options for
a cash payment equal to the excess of the highest closing price
of the stock during the 90 days preceding the Change in
Control, which was $32.50 per share, or the closing price
on the day preceding the date of surrender, whichever was
higher, over the exercise price for the surrendered options.
During the year ended December 31, 2002, we recorded a
pre-tax charge of $61,400,000 related to our cash payment
obligation under the 1998 Plan. The findings of the Special
Committee relating to
in-the-money
options that were affected by the Change in Control require that
we recognize the remaining grant date intrinsic value resulting
from the acceleration of vesting for a number of these options
and the value that certain other options could have been
surrendered for cash under APB 25 and FIN 44. As a
result, an additional compensation charge of $10,105,000 has
been recorded in fiscal year 2002.
Options
Granted After the Change in Control
The Special Committee also found that, due to flaws in the
processes relied on to make our annual broad-based grants after
the Change in Control, we did not correctly apply the
requirements of APB 25 through December 2005. These option
accounting errors, however, differ significantly from those made
prior to the Change in Control. Unlike the broad-based grants
made prior to the Change in Control, for which the recorded
grant dates were selected from a period prior to the approval
dates, the broad-based grants after the Change in Control were
approved at either regularly scheduled meetings of the
compensation committee or at meetings of the board of directors,
and the exercise price for each of these grants was the closing
price on the date of such meetings.
The stock option accounting errors after the Change in Control
resulted from allocation adjustments to the list of grants to
individual non-executives after the compensation committee or
the board of directors had approved the allocation of an
aggregate number of shares to be available to non-executive
employees. In no event did the adjustments result in shares
being granted in excess of the aggregate number of shares
approved by the compensation committee or the board of
directors. Further, none of those adjustments related to the
chief executive officer, chief financial officer, or any member
of the board of directors. The Special Committee concluded that
there was no evidence that management operating since the Change
in Control were aware that the processes used to grant and
account for broad-based grants were flawed or that the process
employed was for the purpose of granting
in-the-money
stock options. In reaching this conclusion, the Special
Committee took note that that process had been consistently
employed even for the November 2005 grants in which the process
resulted in stock option grants at higher exercise prices than
the closing price of our common stock on the date of
finalization of the allocation list for non-executives. The
Special Committee also concluded that there was no evidence that
current management was aware of any financial statement impact,
tax consequences or disclosure implications of its flawed
processes.
Between May 2003 and November 2005, we made four broad-based
grants (May 2003, November 2003, November 2004 and November
2005). The May 2003 grants were made to non-executive employees.
The November 2003, 2004 and 2005 grants were made to a broad
base of employees, including senior executives (the
November Grants). With respect to each of the
November Grants, the granting authority (either the compensation
committee or the board of directors) made specific grants to
specific members of executive management, including, among
others, the chief executive officer, the chief operating
officer, and the chief financial officer. Additionally, the
broad-based grants made after the Change in Control were
approved either at regularly scheduled meetings of the
Compensation Committee or at meetings of the board of directors.
The stock option accounting errors that affected 164 individual
grants of options to purchase 1.5 million shares resulted
from slight adjustments to the non-executive grant lists after
the relevant compensation committee or board meetings. In no
event did the adjustments result in shares being granted in
excess of the number of options approved by the compensation
committee or the board of directors. As a result of its
37
work, the Special Committee made a determination of new
measurement dates for each affected grant. With respect to three
of the four broad-based grants (May 2003, November 2003 and
November 2005), the measurement date selected was the date on
which the rank and file list became final. With respect to the
remaining broad-based grant (November 2004), there was actual
evidence of a change in the rank and file list but inconclusive
evidence when the list became final. The measurement date for
that grant was reconstructed using the best available evidence
to ensure that an adequate amount of compensation expense was
recorded in the restatement. A total of 14 other individual
awards (0.1 million shares) made to
rank-and-file
employees since the change of control were also found to contain
administrative stock option accounting errors.
To correct these errors, we recorded $2,460,000 of additional
pre-tax, non-cash, stock-based compensation expense in the
restatement for the period July 1, 2002 through
December 31, 2005. These non-cash charges have no impact on
previously reported revenues, cash or cash equivalents. As
explained below, however, we also reported corrections for
certain other items which do have an impact on reported revenues
and cash flow presentations.
New
Hire Grant Practices
The Special Committee investigated our new hire stock option
grant practices and concluded that the new hire grants were
appropriately accounted for under the applicable accounting
principles. Until January 2004, our practice was to set forth,
in a prospective employees offer letter a specific number
of options, specifying that the strike price would be equal to
the closing price on the new employees first date of
employment pending approval of the compensation committee.
Beginning in January 2004, the offer letters set the strike
price equal to the closing price of our stock on the later of
compensation committee approval or the employees start
date.
With respect to our new hire grant practices prior to January
2004, the Special Committee reviewed each offer letter and
related grant during the period June 2002 to January 2004 and a
sample of offer letters and related grants prior to June 2002.
The Special Committee also questioned relevant individuals about
the option-related new hire practices and procedures. This
intensive review confirmed that in each instance reviewed, the
number of options approved was equal to the number of options
set forth in the applicable offer letter, and that no material
terms of the options were changed by the compensation committee
in its approval process. Accordingly, the Special Committee
concluded that, with respect to new hire grants prior to January
2004, compensation committee approval was a mere formality and
that there had been finality with respect to the new hire grants
upon the first day of employment, which had been used as the
measurement date. Based upon the investigation, the Special
Committee concluded that new hire grants were accounted for
appropriately.
Income
Tax Effects
Incremental, stock-based, pre-tax compensation charges resulted
in tax benefits of $7,920,000. These tax benefits through 2000
were $1,940,000, recorded as an increase in the deferred tax
assets with a corresponding increase in retained earnings. For
2001 through 2003, deferred tax assets increased by $5,980,000
and income tax expense decreased by the same amount. In 2004,
the deferred tax asset was fully reserved with a valuation
allowance.
As a result of the review of our stock option granting
practices, management determined that the limitation of tax
benefits for executive compensation imposed by
Section 162(m) of the Internal Revenue Code (the
IRC) was not considered in the income tax returns or
financial statements prior to the Change in Control. The amount
of this limitation has been impacted by the determination that
many of the stock options were granted at prices below fair
market value on the date of grant. As a result of correctly
applying the Section 162(m) limitations, retained earnings
have been decreased by $1,896,000 as of December 31, 2000
and income tax expense has been increased by $702,000, $518,000
and $748,000 in 2001, 2002 and 2003, respectively. Adjustments
of ($205,000) and $122,000 for 2004 and 2005 respectively, did
not affect tax expense due to the valuation allowance. Also, the
cumulative impact on income tax of $3,864,000 was reversed in
2004. This occurred because the valuation allowance for the
deferred tax assets decreased with the Section 162(m)
reductions to the net operating loss.
As a result of our determination that the exercise prices of
certain option grants were below the closing price of our common
stock on the actual grant date, we evaluated whether the
affected employees would have any adverse tax consequences under
Section 409A of the IRC. It was determined that certain of
these options were unvested as of December 31, 2004, and
may be subject to Section 409A unless further action is
taken. None of these options belong to persons who, as of the
date of grant, were subject to the disclosure requirements of
Section 16(a) of the Securities
38
Exchange Act of 1934. Therefore, transition relief is available
with respect to these options through December 31, 2007.
Additional guidance may be available before that time that will
allow us to determine whether Section 409A will apply to
the circumstances under which these options were granted.
Depending upon the determination about the correct treatment of
these options for Section 409A purposes, the recipients of
these options may make an election to exercise the options in a
way that excludes them from Section 409A treatment. This
election is available through December 31, 2007.
Summary
and Other Items
In addition, we have restated the aforementioned financial
statements to correct certain accounting errors which were
previously identified but not considered to be material through
December 31, 2005. These corrections related to accounting
for employee tax withholding on certain compensation
transactions, elimination of an intercompany difference,
accounting for product exchanges (resulting in a revenue
adjustment), and certain income tax adjustments. The income tax
adjustments include reducing the charge taken to increase the
valuation allowance in 2004 by $11,566,000 as a result of
recording less U.S. deferred tax assets in prior periods,
which had originated from administrative errors in the
preparation of tax returns in earlier periods and were
immaterial to each of those prior periods. The cumulative effect
of these errors on retained earnings as of December 31,
2005 was $4,714,000. The restatement impact through
June 30, 2006 of these other corrections and of the
non-cash charges for stock-based compensation that have resulted
from the review of the Special Committee are summarized in the
table below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
Ended
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative
|
|
|
Additional
|
|
|
|
June 30,
|
|
|
Year Ended December 31,
|
|
|
Effect
|
|
|
Expense
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
2002
|
|
|
2001
|
|
|
1982-2000
|
|
|
(Income)
|
|
|
|
(In thousands)
|
|
|
Stock option grants prior to 2002
Change in Control:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Broad-based option grants with
improper measurement dates
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
2,657
|
|
|
$
|
2,701
|
|
|
$
|
6,130
|
|
|
$
|
11,488
|
|
Option grants to directors with
improper measurement dates
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
119
|
|
|
|
9
|
|
|
|
20
|
|
|
|
148
|
|
Other option grants with improper
measurement dates
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
546
|
|
|
|
999
|
|
|
|
2,993
|
|
|
|
4,538
|
|
Repriced option grant
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(482
|
)
|
|
|
783
|
|
|
|
696
|
|
|
|
997
|
|
Improper measurement dates for
option grants
1982-1994
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,375
|
|
|
|
1,375
|
|
Incremental charge in connection
with Change in Control
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,105
|
|
|
|
|
|
|
|
|
|
|
|
10,105
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sub-total
pre-Change in Control
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12,945
|
|
|
|
4,492
|
|
|
|
11,214
|
|
|
|
28,651
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock option grants after 2002
Change in Control:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company-wide option grants with
improper measurement dates
|
|
|
(3
|
)
|
|
|
1,171
|
|
|
|
1,085
|
|
|
|
172
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,425
|
|
Other stock option matters after
June 2002
|
|
|
|
|
|
|
22
|
|
|
|
(7
|
)
|
|
|
20
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
35
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sub total post-Change in Control
|
|
|
(3
|
)
|
|
|
1,193
|
|
|
|
1,078
|
|
|
|
192
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,460
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total impact of additional stock
compensation on operating income
|
|
|
(3
|
)
|
|
|
1,193
|
|
|
|
1,078
|
|
|
|
192
|
|
|
|
12,945
|
|
|
|
4,492
|
|
|
|
11,214
|
|
|
|
31,111
|
|
Other items corrected in connection
with restatement
|
|
|
(1,772
|
)
|
|
|
(2,273
|
)
|
|
|
(1,265
|
)
|
|
|
(90
|
)
|
|
|
1,209
|
|
|
|
(1,184
|
)
|
|
|
7,741
|
|
|
|
2,366
|
|
Tax effects of above and other tax
items
|
|
|
(1,170
|
)
|
|
|
963
|
|
|
|
(14,957
|
)
|
|
|
1,785
|
|
|
|
(4,461
|
)
|
|
|
(2,471
|
)
|
|
|
10,289
|
|
|
|
(10,022
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income decrease (increase)
resulting from all restatement items
|
|
$
|
(2,945
|
)
|
|
$
|
(117
|
)
|
|
$
|
(15,144
|
)
|
|
$
|
1,887
|
|
|
$
|
9,693
|
|
|
$
|
837
|
|
|
$
|
29,244
|
|
|
$
|
23,455
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
39
The cumulative effect for errors in 2002 and prior years of
$39,774,000 was recorded as a reduction of retained earnings at
December 31, 2002.
The pre-tax effect of the correction for stock-based
compensation was $157,000, $206,000, $792,000, $2,503,000,
$2,690,000, and $3,491,000 for 1995, 1996, 1997, 1998, 1999, and
2000, respectively. The cumulative pre-tax effect of the
correction for stock-based compensation between 1982 and 1994
was $1,375,000.
In light of the conclusions of the Special Committees
review of our stock option granting practices, we have
re-evaluated the Managements Report on Internal Control
Over Financial Reporting as of December 31, 2005 in the
2005
Form 10-K.
The restated report is set forth in the
Form 10-K/A.
Based on this analysis, we have determined that there was a
material weakness in our internal control over financial
reporting relating to the accounting and disclosure of our
stock-based compensation expense as of December 31, 2005
and as of September 30, 2006. We implemented remedial
controls in 2006.
40
The effects of the restatement on the Consolidated Statement of
Operations for the three months and nine months ended
September 30, 2005 are summarized below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30, 2005
|
|
|
September 30, 2005
|
|
|
|
As
|
|
|
|
|
|
|
|
|
As
|
|
|
|
|
|
|
|
|
|
Previously
|
|
|
|
|
|
|
|
|
Previously
|
|
|
|
|
|
|
|
|
|
Reported
|
|
|
Adj.
|
|
|
As Restated
|
|
|
Reported
|
|
|
Adj.
|
|
|
As Restated
|
|
|
|
(In thousands, except per share data)
|
|
|
(In thousands, except per share data)
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product sales
|
|
$
|
183,004
|
|
|
$
|
438
|
|
|
$
|
183,442
|
|
|
$
|
525,635
|
|
|
$
|
531
|
|
|
$
|
526,166
|
|
Ribavirin royalties
|
|
|
21,953
|
|
|
|
|
|
|
|
21,953
|
|
|
|
65,494
|
|
|
|
|
|
|
|
65,494
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
204,957
|
|
|
|
438
|
|
|
|
205,395
|
|
|
|
591,129
|
|
|
|
531
|
|
|
|
591,660
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of goods sold (excluding
amortization)
|
|
|
55,694
|
|
|
|
(1,057
|
)
|
|
|
54,637
|
|
|
|
157,355
|
|
|
|
(932
|
)
|
|
|
156,423
|
|
Selling expenses
|
|
|
59,017
|
|
|
|
35
|
|
|
|
59,052
|
|
|
|
173,286
|
|
|
|
105
|
|
|
|
173,391
|
|
General and administrative expenses
|
|
|
26,665
|
|
|
|
127
|
|
|
|
26,792
|
|
|
|
77,227
|
|
|
|
380
|
|
|
|
77,607
|
|
Research and development costs
|
|
|
28,883
|
|
|
|
78
|
|
|
|
28,961
|
|
|
|
82,166
|
|
|
|
255
|
|
|
|
82,421
|
|
Acquired in-process research and
development
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
126,399
|
|
|
|
|
|
|
|
126,399
|
|
Restructuring charges
|
|
|
135
|
|
|
|
|
|
|
|
135
|
|
|
|
506
|
|
|
|
|
|
|
|
506
|
|
Amortization expense
|
|
|
15,782
|
|
|
|
|
|
|
|
15,782
|
|
|
|
46,961
|
|
|
|
|
|
|
|
46,961
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total costs and expenses
|
|
|
186,176
|
|
|
|
(817
|
)
|
|
|
185,359
|
|
|
|
663,900
|
|
|
|
(192
|
)
|
|
|
663,708
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations
|
|
|
18,781
|
|
|
|
1,255
|
|
|
|
20,036
|
|
|
|
(72,771
|
)
|
|
|
723
|
|
|
|
(72,048
|
)
|
Other income (loss), net,
including translation and exchange
|
|
|
(1,207
|
)
|
|
|
|
|
|
|
(1,207
|
)
|
|
|
(5,629
|
)
|
|
|
|
|
|
|
(5,629
|
)
|
Interest income
|
|
|
3,193
|
|
|
|
|
|
|
|
3,193
|
|
|
|
9,327
|
|
|
|
|
|
|
|
9,327
|
|
Interest expense
|
|
|
(10,077
|
)
|
|
|
|
|
|
|
(10,077
|
)
|
|
|
(29,821
|
)
|
|
|
|
|
|
|
(29,821
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing
operations before income taxes and minority interest
|
|
|
10,690
|
|
|
|
1,255
|
|
|
|
11,945
|
|
|
|
(98,894
|
)
|
|
|
723
|
|
|
|
(98,171
|
)
|
Provision for income taxes
|
|
|
15,319
|
|
|
|
250
|
|
|
|
15,569
|
|
|
|
41,745
|
|
|
|
595
|
|
|
|
42,340
|
|
Minority interest, net
|
|
|
184
|
|
|
|
|
|
|
|
184
|
|
|
|
489
|
|
|
|
|
|
|
|
489
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations
|
|
|
(4,813
|
)
|
|
|
1,005
|
|
|
|
(3,808
|
)
|
|
|
(141,128
|
)
|
|
|
128
|
|
|
|
(141,000
|
)
|
Income (loss) from discontinued
operations
|
|
|
1,123
|
|
|
|
|
|
|
|
1,123
|
|
|
|
(2,368
|
)
|
|
|
|
|
|
|
(2,368
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(3,690
|
)
|
|
$
|
1,005
|
|
|
$
|
(2,685
|
)
|
|
$
|
(143,496
|
)
|
|
$
|
128
|
|
|
$
|
(143,368
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted income (loss)
per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations
|
|
$
|
(0.05
|
)
|
|
$
|
0.01
|
|
|
$
|
(0.04
|
)
|
|
$
|
(1.54
|
)
|
|
$
|
|
|
|
$
|
(1.54
|
)
|
Income (loss) from discontinued
operations
|
|
|
0.01
|
|
|
|
|
|
|
|
0.01
|
|
|
|
(0.03
|
)
|
|
|
|
|
|
|
(0.03
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted net loss per
share
|
|
$
|
(0.04
|
)
|
|
$
|
0.01
|
|
|
$
|
(0.03
|
)
|
|
$
|
(1.57
|
)
|
|
$
|
|
|
|
$
|
(1.57
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted shares used in
per share computation
|
|
|
92,626
|
|
|
|
|
|
|
|
92,626
|
|
|
|
91,357
|
|
|
|
|
|
|
|
91,357
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
41
Below is a summary of the restatements effect on cash flows from
operating activities for the nine months ended
September 30, 2005.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
|
2005
|
|
|
|
|
|
2005
|
|
|
|
As Previously
|
|
|
|
|
|
|
|
|
|
Reported
|
|
|
Adjustments
|
|
|
As Restated
|
|
|
Cash flows from operating
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(143,496
|
)
|
|
$
|
128
|
|
|
$
|
(143,368
|
)
|
Income (loss) from discontinued
operations
|
|
|
(2,368
|
)
|
|
|
|
|
|
|
(2,368
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations
|
|
|
(141,128
|
)
|
|
|
128
|
|
|
|
(141,000
|
)
|
Adjustments to reconcile net loss
to net cash provided by operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
68,321
|
|
|
|
|
|
|
|
68,321
|
|
Provision for losses on accounts
receivable and inventory obsolescence
|
|
|
6,299
|
|
|
|
|
|
|
|
6,299
|
|
Stock compensation expense
|
|
|
1,562
|
|
|
|
889
|
|
|
|
2,451
|
|
Translation and exchange (gains)
losses, net
|
|
|
5,629
|
|
|
|
|
|
|
|
5,629
|
|
Impairment charges and other
non-cash items
|
|
|
697
|
|
|
|
|
|
|
|
697
|
|
Acquired in-process research and
development
|
|
|
126,399
|
|
|
|
|
|
|
|
126,399
|
|
Deferred income taxes
|
|
|
(18,275
|
)
|
|
|
|
|
|
|
(18,275
|
)
|
Change in assets and liabilities,
net of effects of acquisitions:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
8,157
|
|
|
|
|
|
|
|
8,157
|
|
Inventories
|
|
|
(18,216
|
)
|
|
|
|
|
|
|
(18,216
|
)
|
Prepaid expenses and other assets
|
|
|
2,178
|
|
|
|
(1,120
|
)
|
|
|
1,058
|
|
Trade payables and accrued
liabilities
|
|
|
9,334
|
|
|
|
(492
|
)
|
|
|
8,842
|
|
Income taxes
|
|
|
14,509
|
|
|
|
595
|
|
|
|
15,104
|
|
Other liabilities
|
|
|
2,035
|
|
|
|
|
|
|
|
2,035
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flow from operating
activities in continuing operations
|
|
|
67,501
|
|
|
|
|
|
|
|
67,501
|
|
Cash flow from operating
activities in discontinued operations
|
|
|
(1,522
|
)
|
|
|
|
|
|
|
(1,522
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating
activities
|
|
$
|
65,979
|
|
|
$
|
|
|
|
$
|
65,979
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
42
Below is a summary of Valeants Consolidated Balance Sheet
as of December 31, 2005 and the adjustments thereto which
result from the restatement:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2005
|
|
|
|
As Previously
|
|
|
|
|
|
|
|
|
|
Reported
|
|
|
Adjustments
|
|
|
As Restated
|
|
|
|
(Amounts in thousands)
|
|
|
ASSETS
|
Current Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
224,856
|
|
|
$
|
|
|
|
$
|
224,856
|
|
Marketable securities
|
|
|
10,210
|
|
|
|
|
|
|
|
10,210
|
|
Accounts receivable, net
|
|
|
187,987
|
|
|
|
|
|
|
|
187,987
|
|
Inventories, net
|
|
|
136,034
|
|
|
|
|
|
|
|
136,034
|
|
Prepaid expenses and other current
assets
|
|
|
36,652
|
|
|
|
3,702
|
|
|
|
40,354
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
595,739
|
|
|
|
3,702
|
|
|
|
599,441
|
|
Property, plant and equipment, net
|
|
|
230,126
|
|
|
|
|
|
|
|
230,126
|
|
Deferred tax assets, net
|
|
|
45,904
|
|
|
|
(20,562
|
)
|
|
|
25,342
|
|
Goodwill
|
|
|
79,486
|
|
|
|
|
|
|
|
79,486
|
|
Intangible assets, net
|
|
|
536,319
|
|
|
|
|
|
|
|
536,319
|
|
Other assets
|
|
|
43,176
|
|
|
|
|
|
|
|
43,176
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-current assets
|
|
|
935,011
|
|
|
|
(20,562
|
)
|
|
|
914,449
|
|
Assets of discontinued operations
|
|
|
127
|
|
|
|
|
|
|
|
127
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,530,877
|
|
|
$
|
(16,860
|
)
|
|
$
|
1,514,017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND
STOCKHOLDERS EQUITY
|
Current Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Trade payables
|
|
$
|
55,279
|
|
|
$
|
|
|
|
$
|
55,279
|
|
Accrued liabilities
|
|
|
136,701
|
|
|
|
4,137
|
|
|
|
140,838
|
|
Notes payable and current portion
of long-term debt
|
|
|
495
|
|
|
|
|
|
|
|
495
|
|
Income taxes
|
|
|
42,452
|
|
|
|
4,872
|
|
|
|
47,324
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
234,927
|
|
|
|
9,010
|
|
|
|
243,936
|
|
Long-term debt, less current
portion
|
|
|
788,439
|
|
|
|
|
|
|
|
788,439
|
|
Deferred tax liabilities, net
|
|
|
28,770
|
|
|
|
(20,562
|
)
|
|
|
8,208
|
|
Other liabilities
|
|
|
16,372
|
|
|
|
|
|
|
|
16,372
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-current liabilities
|
|
|
833,581
|
|
|
|
(20,562
|
)
|
|
|
813,019
|
|
Liabilities of discontinued
operations
|
|
|
23,118
|
|
|
|
|
|
|
|
23,118
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders Equity:
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock
|
|
|
928
|
|
|
|
|
|
|
|
928
|
|
Additional capital
|
|
|
1,203,814
|
|
|
|
21,093
|
|
|
|
1,224,907
|
|
Accumulated deficit
|
|
|
(743,950
|
)
|
|
|
(26,400
|
)
|
|
|
(770,350
|
)
|
Accumulated other comprehensive
income (loss)
|
|
|
(21,541
|
)
|
|
|
|
|
|
|
(21,541
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
439,251
|
|
|
|
(5,308
|
)
|
|
|
433,944
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,530,877
|
|
|
$
|
(16,860
|
)
|
|
$
|
1,514,017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
43
Overview
We are a global specialty pharmaceutical company that develops,
manufactures and markets a broad range of pharmaceutical
products, primarily in the areas of neurology, infectious
disease, and dermatology. We focus our greatest resources and
attention principally in the therapeutic areas of neurology,
infectious disease and dermatology. Our marketing and promotion
efforts focus on our Promoted Products, which include products
marketed globally, regionally and locally with annual sales in
excess of $5 million. Our products are currently sold in
more than 100 markets around the world, with our primary focus
on the United States, Canada, Mexico, the United Kingdom,
France, Italy, Poland, Germany, and Spain.
Our primary value driver is a specialty pharmaceutical business
with a global platform. We believe that our global reach and
marketing agility make us unique among specialty pharmaceutical
companies, and provide us with the ability to leverage compounds
in the clinical stage and commercialize them in major markets
around the world. In addition, we receive royalties from the
sale of ribavirin by Schering-Plough and Roche, although such
royalties are expected to decline gradually as a result of
market competition and ultimately the eventual loss of patents
and data exclusivity in European markets and Japan.
Specialty
Pharmaceuticals
Specialty Pharmaceutical Revenues: Product
sales from our specialty pharmaceutical segments increased
$15,564,000 (8%) and $62,997,000 (12%) for the three and nine
months ended September 30, 2006, respectively, over the
same periods in 2005. The increase in specialty pharmaceutical
sales for the three months ended September 30, 2006 was due
to a 9% increase in selling prices and a 1% positive impact from
foreign exchange fluctuations, offset by a 1% decrease in
volume. The increase in specialty pharmaceutical sales for the
nine months ended September 30, 2006 was due to a 7%
increase in volume and a 5% increase in selling prices, with a
negligible impact from foreign exchange fluctuations. Sales from
products related to the acquisition of Xcel in March 2005
contributed $18,794,000 and $54,599,000 to product sales in the
three and nine months ended September 30, 2006,
respectively, reflecting declines in non-promoted products
acquired from Xcel and lower sales of Diastat and Migranal in
the third quarter than in the same period in the prior year.
Sales from Infergen, acquired on December 30, 2005,
contributed $9,134,000 and $34,148,000 in the three and nine
months ended September 30, 2006, respectively. Product
sales from our Promoted Products increased $7,576,000 (7%) and
$54,364,000 (18%) for the three and nine months ended
September 30, 2006, respectively, over the same period from
2005.
Clinical
Development
We seek to develop and commercialize innovative products for the
treatment of significant unmet medical needs, principally in the
areas of infectious diseases and neurology. Research and
development expenses were $20,849,000 and $77,270,000 for the
three and nine months ended September 30, 2006,
respectively, compared to $28,961,000 and $82,421,000 for the
same periods in 2005, resulting in decreases of $8,112,000 (28%)
in the three-month period and $5,151,000 (6%) in the nine-month
period, respectively.
In April 2006 we announced a major restructuring program which
will result in a reduction of the size and scope of our research
and development activities. See Company Strategy and
Restructuring below.
Ribavirin
Royalties
Ribavirin royalty revenues decreased $985,000 (4%) and accounted
for 9% of our total revenues from continuing operations for the
three months ended September 30, 2006 as compared to 12% in
the similar three-month period in 2005. Ribavirin royalty
revenues decreased $4,800,000 (7%) and accounted for 9% of our
total revenues from continuing operations for the nine months
ended September 30, 2006 as compared to 11% in the similar
nine-month period in 2005. The
year-to-date
decrease in ribavirin royalties includes the effects of generic
competition in the United States, partially offset by increased
royalties in Japan.
Company
Strategy and Restructuring
The key elements of our strategy, as refined by the
restructuring program announced on April 3, 2006, include
the following:
Targeted Growth Opportunities. We focus our
business on key markets, across three therapeutic areas and on
products we have or may acquire where we can leverage our local
market resources and particular brand
44
recognition. We believe that our targeted core therapeutic areas
are positioned for further growth and that it is possible for a
mid-sized company to attain a leadership position within these
categories. In addition, we intend to continue to pursue
life-cycle management strategies for our regional and local
brands.
Product Acquisitions. We plan to selectively
license or acquire product candidates, technologies and
businesses from third parties which complement our existing
business and provide for effective life cycle management of key
products. We believe that our drug development and
commercialization expertise will allow us to recognize licensing
opportunities and to capitalize on research initially conducted
and funded by others.
Efficient Manufacturing and Supply Chain
Organization. The objective of the restructuring
program as it relates to manufacturing is to further rationalize
our manufacturing operations and further reduce our excess
capacity. Under our global manufacturing strategy, we also seek
to minimize our costs of goods sold by increasing capacity
utilization in our manufacturing facilities or by outsourcing
and by other actions to improve efficiencies. We have undertaken
major process improvement initiatives and the deployment of lean
six sigma process improvements, affecting all phases of our
operations, from raw material and supply logistics, to
manufacturing, warehousing and distribution.
Clinical Development Activities. We are
focusing efforts and expenditures on two late stage development
projects: Viramidine (taribavirin), a potential treatment for
hepatitis C and retigabine, a potential treatment for
partial onset seizures in patients with epilepsy. The
restructuring program is designed to rationalize our investments
in research and development efforts in line with our financial
resources. As previously announced, we intend to sell rights to,
out-license, or secure partners to share the costs of our major
clinical projects and discovery programs. On January 9,
2007, we licensed the development and commercialization rights
to the hepatitis B compound pradefovir to Schering-Plough. On
December 21, 2006, we sold our HIV and cancer development
programs and certain discovery and preclinical assets to Ardea
Biosciences, Inc. (formerly IntraBiotics Pharmaceuticals),
(Ardea), with an option for us to reacquire rights
to commercialize the HIV program outside of the United States
and Canada upon Ardeas completion of Phase 3 trials.
We continue to pursue partnering opportunities for Viramidine
and retigabine to share the costs of development, and look to
license in additional compounds in the clinic to diversify our
opportunities and the inherent risks associated with product
development.
The restructuring program will also result in reduced selling,
general and administrative expenses primarily through
consolidation of our management functions into fewer
administrative groups to achieve greater economies of scale.
Management and administrative responsibilities for our regional
operations in Asia, Africa and Australia, (AAA),
which were formerly managed as a separate business unit, have
been combined with those of other regions. As a result we now
have three reportable pharmaceutical segments, which comprise
our pharmaceutical operations in:
|
|
|
|
|
North America, comprising the United States and Canada.
|
|
|
|
International. The Latin America, Asia, and Australasia regions
are now described as International.
|
|
|
|
Europe, Middle East, and Africa (EMEA).
|
We anticipate that the total restructuring program will result
in charges that will range between $90,000,000 and $125,000,000.
These charges include impairment charges resulting from the
planned sale of our manufacturing facilities in Puerto Rico and
Switzerland, our former headquarters facility and discovery and
pre-clinical operations equipment. The anticipated charges also
include employee severance costs resulting from a total
reduction of approximately 750 employees, the majority of whom
work in the manufacturing facilities which will be sold.
We recorded provisions of $17,139,000 and $96,687,000 in the
three and nine months ended September 30, 2006,
respectively, in connection with the restructuring program.
During the third quarter of 2006 as a result of the
restructuring of our research and development activities, we
began actively marketing for sale our former headquarters
facility where our former research laboratories were located. We
classified this facility as held for sale in
September 2006 in accordance with SFAS 144,
Accounting for the Impairment or Disposal of Long-lived
Assets. Fixed asset impairment charges in the three
months ended September 30, 2006 included: $8,788,000 for
the impairment of our former headquarters facility and
$1,996,000 for the impairment of fixed assets in our research
and development segment. Severance charges recorded in the three
and nine months ended September 30,
45
2006 total $1,922,000 and $13,935,000, respectively, and relate
to employees whose positions were eliminated in the
restructuring. Amounts recorded in the first and second quarter
of 2006 are largely comprised of the impairment charges for our
manufacturing sites in Puerto Rico and Switzerland of
$21,134,000 and $27,631,000, respectively. The fair value of
these sites was determined based on independent appraisals. The
restructuring charges also consist of other costs as detailed
below.
We believe we will sell our factories in Basel, Switzerland and
Puerto Rico in the first half of 2007. We expect that these
factories will be transferred to held for sale
classification in accordance with FAS 144, Accounting
for the Impairment or Disposal of Long-Lived Assets, in
December 2006. Recent negotiations for the sale of these
facilities lead us to believe that additional impairment charges
in the fourth of approximately $17,000,000 in the fourth quarter
of 2006 are likely.
Restructuring
Charge Details
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
Anticipated Total
|
|
|
|
September 30, 2006
|
|
|
September 30, 2006
|
|
|
Restructuring Change
|
|
|
|
(In thousands)
|
|
|
Employee Severances (200 Employees)
|
|
$
|
1,922
|
|
|
$
|
13,935
|
|
|
$
|
15,000 - 20,000
|
|
Contract cancellation and other
cash costs
|
|
|
665
|
|
|
|
1,657
|
|
|
|
1,000 - 2,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal: Cash-related Charges
|
|
|
2,587
|
|
|
|
15,592
|
|
|
|
16,000 - 22,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Abandoned software and other
capital assets
|
|
|
193
|
|
|
|
21,546
|
|
|
|
23,000 - 26,000
|
|
Impairment of fixed assets
|
|
|
14,359
|
|
|
|
59,549
|
|
|
|
51,000 - 77,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal: Non-cash charges
|
|
|
14,552
|
|
|
|
81,095
|
|
|
|
74,000 - 103,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total:
|
|
$
|
17,139
|
|
|
$
|
96,687
|
|
|
$
|
90,000 - 125,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The restructuring charges for the three months ended
September 30, 2006 represent charges of $2,557,000,
$2,571,000, $230,000, $1,628,000 and $10,153,000 in respect of
the North America, EMEA, International, R&D and Corporate
reporting segments respectively. For the nine months ended
September 30, 2006 these amounts are $21,134,000,
$31,763,000, $230,000, $1,628,000 and $41,932,000, respectively.
Reconciliation
of Cash Restructuring Payments with Restructuring
Accrual
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
March 31, 2006
|
|
|
June 30, 2006
|
|
|
September 30, 2006
|
|
|
|
(In thousands)
|
|
|
Opening accrual
|
|
$
|
|
|
|
$
|
5,425
|
|
|
$
|
8,551
|
|
Charges to earnings
|
|
|
6,644
|
|
|
|
6,361
|
|
|
|
2,587
|
|
Cash paid
|
|
|
(1,219
|
)
|
|
|
(3,235
|
)
|
|
|
(6,685
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Closing accrual
|
|
$
|
5,425
|
|
|
$
|
8,551
|
|
|
$
|
4,453
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Results
of Operations
Our three reportable pharmaceutical segments comprise
pharmaceuticals operations in North America; International; and
Europe, Middle East, and Africa. In addition, we have a research
and development division. Certain financial information for our
business segments is set forth below. This discussion of our
results of operations should be read in conjunction with our
consolidated condensed financial statements included elsewhere
in this quarterly report. For additional financial information
by business segment, see Note 11 of notes to consolidated
condensed financial statements included elsewhere in this
quarterly report.
46
The following tables compare 2006 and 2005 revenues by
reportable segments and operating expenses for the three and
nine months ended September 30, 2006 and 2005 (in
thousands, except percentages):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
Increase/
|
|
|
Percent
|
|
|
|
2006
|
|
|
2005
|
|
|
(Decrease)
|
|
|
Change
|
|
|
|
(Restated)
|
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Specialty pharmaceuticals
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North America
|
|
$
|
71,225
|
|
|
$
|
60,962
|
|
|
$
|
10,263
|
|
|
|
17
|
%
|
International
|
|
|
60,530
|
|
|
|
56,178
|
|
|
|
4,352
|
|
|
|
8
|
|
EMEA
|
|
|
67,251
|
|
|
|
66,302
|
|
|
|
949
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total specialty pharmaceuticals
|
|
|
199,006
|
|
|
|
183,442
|
|
|
|
15,564
|
|
|
|
8
|
|
Ribavirin royalties
|
|
|
20,968
|
|
|
|
21,953
|
|
|
|
(985
|
)
|
|
|
(4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
219,974
|
|
|
|
205,395
|
|
|
|
14,579
|
|
|
|
7
|
|
Costs and Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of goods sold (excluding
amortization)
|
|
|
60,305
|
|
|
|
54,637
|
|
|
|
5,668
|
|
|
|
10
|
|
Selling expenses
|
|
|
67,582
|
|
|
|
59,052
|
|
|
|
8,530
|
|
|
|
14
|
|
General and administrative expenses
|
|
|
27,212
|
|
|
|
26,792
|
|
|
|
420
|
|
|
|
2
|
|
Research and development costs
|
|
|
20,849
|
|
|
|
28,961
|
|
|
|
(8,112
|
)
|
|
|
(28
|
)
|
Gain on litigation settlement
|
|
|
(17,550
|
)
|
|
|
|
|
|
|
(17,550
|
)
|
|
|
NM
|
|
Restructuring charges
|
|
|
17,139
|
|
|
|
135
|
|
|
|
17,004
|
|
|
|
NM
|
|
Amortization expense
|
|
|
18,424
|
|
|
|
15,782
|
|
|
|
2,642
|
|
|
|
17
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
$
|
26,013
|
|
|
$
|
20,036
|
|
|
$
|
5,977
|
|
|
|
(30
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit on product sales
(excluding amortization)
|
|
$
|
138,701
|
|
|
$
|
128,805
|
|
|
$
|
9,896
|
|
|
|
8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit margin on product
sales
|
|
|
70
|
%
|
|
|
70
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
Increase/
|
|
|
Percent
|
|
|
|
2006
|
|
|
2005
|
|
|
(Decrease)
|
|
|
Change
|
|
|
|
(Restated)
|
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Specialty pharmaceuticals
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North America
|
|
$
|
219,385
|
|
|
$
|
170,396
|
|
|
$
|
48,989
|
|
|
|
29
|
%
|
International
|
|
|
170,191
|
|
|
|
152,524
|
|
|
|
17,667
|
|
|
|
12
|
|
EMEA
|
|
|
199,587
|
|
|
|
203,246
|
|
|
|
(3,659
|
)
|
|
|
(2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total specialty pharmaceuticals
|
|
|
589,163
|
|
|
|
526,166
|
|
|
|
62,997
|
|
|
|
12
|
|
Ribavirin royalties
|
|
|
60,694
|
|
|
|
65,494
|
|
|
|
(4,800
|
)
|
|
|
(7
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
649,857
|
|
|
|
591,660
|
|
|
|
58,197
|
|
|
|
10
|
|
Costs and Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of goods sold (excluding
amortization)
|
|
|
184,665
|
|
|
|
156,423
|
|
|
|
28,242
|
|
|
|
18
|
|
Selling expenses
|
|
|
198,127
|
|
|
|
173,391
|
|
|
|
24,736
|
|
|
|
14
|
|
General and administrative expenses
|
|
|
86,325
|
|
|
|
77,607
|
|
|
|
8,718
|
|
|
|
11
|
|
Research and development costs
|
|
|
77,270
|
|
|
|
82,421
|
|
|
|
(5,151
|
)
|
|
|
(6
|
)
|
IPR&D
|
|
|
|
|
|
|
126,399
|
|
|
|
(126,399
|
)
|
|
|
NM
|
|
Gain on litigation settlement
|
|
|
(51,550
|
)
|
|
|
|
|
|
|
(51,550
|
)
|
|
|
NM
|
|
Restructuring charges
|
|
|
96,687
|
|
|
|
506
|
|
|
|
96,181
|
|
|
|
NM
|
|
Amortization expense
|
|
|
53,461
|
|
|
|
46,961
|
|
|
|
6,500
|
|
|
|
14
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating loss
|
|
$
|
4,872
|
|
|
$
|
(72,048
|
)
|
|
$
|
76,920
|
|
|
|
(107
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit on product sales
(excluding amortization)
|
|
$
|
404,498
|
|
|
$
|
369,743
|
|
|
$
|
34,755
|
|
|
|
9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit margin on product
sales
|
|
|
69
|
%
|
|
|
70
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
47
In the North America pharmaceuticals segment, revenues for the
three months ended September 30, 2006 were $71,225,000,
compared to $60,962,000 for the same period in 2005,
representing an increase of $10,263,000 (17%). The increase is
primarily related to the acquisition of Infergen which
contributed $9,134,000 and $34,148,000 in the three and nine
months ended September 30, 2006, respectively. The launch
of Zelapar in the United States contributed $3,824,000 in the
three months ended September 30, 2006. Revenues for the
nine months ended September 30, 2006 were $219,385,000
compared to $170,396,000 for the same period in 2005,
representing an increase of $48,989,000 (29%). The sales for the
nine months ended September 30, 2006 also benefited from
the full nine months of Xcel products compared with only seven
months in 2005. The region reported increased sales in the third
quarter of Cesamet and Kinerase, which were offset by declines
in sales of Efudex, Diastat and Mestinon in the period, along
with decreased sales of non-promoted products. Product sales in
the North America region were 37% and 37% of total product sales
in the three and nine months ended September 30, 2006,
respectively, compared to 33% and 32% of total product sales for
the same periods in 2005. Canadian sales benefited from the
increased strength of the Canadian dollar relative to the
U.S. dollar, which contributed $734,000 and $2,141,000 to
sales in the three and nine months ended September 30,
2006, respectively.
In the International pharmaceuticals segment, revenues for the
three months ended September 30, 2006 were $60,530,000
compared to $56,178,000 for the same period in 2005, an increase
of $4,352,000 (8%). The increase was due to the acquisition of
Melleril in Brazil and an increase in sales of Efudex and
several other products. Revenues for the nine months ended
September 30, 2006 were $170,191,000 compared to
$152,524,000 for the same period in 2005, representing an
increase of $17,667,000 (12%). The impact of currency in
International decreased reported revenue by $538,000 in the
three months ended September 30, 2006 but increased revenue
by $300,000 in the nine months ended September 30, 2006.
In the EMEA pharmaceuticals segment, revenues for the three
months ended September 30, 2006 were $67,251,000, compared
to $66,302,000 for the same period in 2005, representing an
increase of $949,000 (1%). Revenues for the nine months ended
September 30, 2006 were $199,587,000 compared to
$203,246,000, a decrease of $3,659,000 (2%). The EMEA region
reported increased sales in the third quarter of Kinerase,
Solcoseryl, and Mestinon, which were offset in part by declines
in Calcitonin and certain other products. The impact of currency
in EMEA increased reported revenue by $2,207,000 in the three
months ended September 30, 2006 but decreased revenue by
$877,000 in the nine months ended September 30, 2006.
Europe continues to be impacted by government imposed price
reductions and lower sales volume of non-promoted products.
Ribavirin Royalties: Ribavirin royalties
represent amounts earned under the license and supply agreements
with Schering-Plough and Roche. Under a license and supply
agreement, Schering-Plough licensed all oral forms of ribavirin
for the treatment of chronic hepatitis C. We receive
royalty fees from Roche under a license agreement on sale of
Roches version of ribavirin, Copegus, for use in
combination with interferon alfa or pegylated interferon alfa.
Ribavirin royalties from Schering-Plough and Roche for the three
and nine months ended September 30, 2006 were $20,968,000
and $60,694,000, respectively, compared to $21,953,000 and
$65,494,000 for the same periods in 2005, representing decreases
of $985,000 and $4,800,000, respectively. Such royalties are
expected to decline gradually as a result of market competition
and price reductions.
Gross Profit Margin (excluding
amortization): Gross profit margin on product
sales was 70% for the third quarters of 2006 and 2005. Gross
profit margin on product sales for the nine months ended
September 30, 2006 was 69% compared to 70% for the same
period in 2005. The decrease in gross profit margin is primarily
due to inventory write offs, product mix, and certain
manufacturing inefficiencies. Cost of goods sold in 2006
includes a provision of $225,000 and $1,026,000 related to
employee stock options and purchase programs following the
implementation of SFAS 123(R) in the three and six months
ended September 30, 2006, respectively.
Selling Expenses: Selling expenses were
$67,582,000 and $198,127,000 for the three and nine months ended
September 30, 2006, respectively, compared to $59,052,000
and $173,391,000 for the same periods in 2005, resulting in
increases of $8,530,000 (14%) and $24,736,000 (14%),
respectively. As a percent of product sales, selling expenses
were 34% and 34% for the three and nine months ended
September 30, 2006, respectively, compared to 32% and 33%
for the same periods in 2005, respectively. The quarterly
increase in selling expenses primarily reflects the additional
sales force associated with the acquisition of Infergen and
includes costs related to the launch of line extensions and new
products. Selling expenses in 2006 includes a provision of
$745,000 and
48
$2,458,000 related to employee stock options and purchase
programs following the implementation of SFAS 123(R) in the
three and nine months ended September 30, 2006,
respectively.
General and Administrative Expenses: General
and administrative expenses were $27,212,000 and $86,711,000 for
the three and nine months ended September 30, 2006,
respectively, compared to $26,792,000 and $77,607,000 for the
same periods in 2005, resulting in increases of $420,000 (2%)
and $8,718,000 (11%), respectively. As a percent of product
sales, general and administrative expenses were 14% and 15% for
the three and nine months ended September 30, 2006,
respectively, compared to 15% for the same periods in 2005.
General and administrative expense in the three and nine months
ended September 30, 2006 included provisions of $4,151,000
and $10,751,000 related to employee stock options and purchase
programs following the implementation of SFAS 123(R).
Research and Development: Research and
development expenses were $20,849,000 and $77,270,000 for the
three and nine months ended September 30, 2006,
respectively, compared to $28,961,000 and $82,421,000 for the
same periods in 2005, resulting in decreases of $8,112,000 (28%)
and $5,151,000 (6%), respectively. Research and development
costs are expected to decrease in 2006 due to the restructuring
program. Research and development expenses include provisions of
$533,000 and $2,116,000 related to employee stock options and
purchase programs following the implementation of
SFAS 123(R) in the three and nine months ended
September 30, 2006, respectively.
Acquired In-Process Research and
Development: In the nine months ended
September 30, 2005, we incurred an expense of $126,399,000,
associated with IPR&D related to the acquisition of Xcel
Pharmaceuticals, Inc. The amount expensed as IPR&D
represents our estimate of fair value of purchased in-process
technology for projects that, as of the acquisition date, had
not yet reached technological feasibility and had no alternative
future use.
Gain on Litigation Settlement: In
March 2006 we settled a long standing dispute with the
Republic of Serbia relating to the ownership and operations of a
joint venture we formerly participated in known as Galenika for
$34,000,000. We received a payment of $28,000,000 in
March 2006 and will receive an additional $6,000,000 in
2007, with respect to which we have received a bank letter of
credit. In July 2006 we settled litigation with the former
CEO of the Company, Milan Panic, for $20,000,000 which has been
paid to us. The $17,550,000 gain on litigation settlement
in the three months ended September 30, 2006 reflects the
settlement proceeds net of related costs associated with the
litigation and settlement arrangement.
Restructuring Charges: In the three and nine
months ended September 30, 2006, we incurred restructuring
charges of $17,139,000 and $96,687,000, respectively. This
program is discussed in more detail in the Company Strategy and
Restructuring above. These restructuring charges comprised the
write-off of costs related to assets to be abandoned, including
abandoned software projects, a portion of the severance costs of
the employees who will be terminated in the program, and
impairment charges on our manufacturing sites in Puerto Rico and
Switzerland, our former corporate headquarters and the equipment
of our discovery and preclinical operations.
Amortization: Amortization expense was
$18,424,000 and $53,461,000 for the three and nine months ended
September 30, 2006, respectively, compared to $15,782,000
and $46,961,000 for the same periods in 2005, resulting in
increases of $2,642,000 (17%) and $6,500,000 (14%),
respectively. The increase was primarily due to amortization of
the intangible assets acquired in the Infergen acquisition.
Other Income (expense), Net, Including Translation and
Exchange: Other income (expense), net, including
translation and exchange was an expense of $454,000 and income
of $1,240,000 in the three months and nine months ended
September 30, 2006, respectively, compared to expenses of
$1,207,000 and $5,629,000 for the same periods in 2005. In the
third quarter of 2006, translation gains principally consisted
of translation exchange losses of $403,000 in International and
a gain of $46,000 in EMEA. In the nine months ended
September 30, 2006, translation gains principally consisted
of gains of $1,101,000 in International and $286,000 in EMEA.
Interest Expense, net: Interest expense net of
interest income increased $867,000 (13%) and $3,183,000 (16%)
during the three and nine months ended September 30, 2006,
respectively, compared to the same periods in 2005, primarily as
a result of higher interest rates on variable rate debt and
lower interest income as a result of lower cash and investment
securities balances.
Income Taxes: The tax provisions in the third
quarters of both 2006 and 2005 relate to the profits of our
foreign operations, foreign withholding taxes, liabilities
associated with the 1997 through 2001 IRS examination and, state
and local taxes in the U.S. Our U.S. operations, which
include our research and development activities,
49
generate substantial net operating losses for US income tax
reporting purposes. Since, at this time, there is insufficient
objective evidence that we will generate sufficient
U.S. taxable income to utilize these net operating loss
benefits, a valuation allowance has been provided against the
tax benefits associated with U.S. operating losses. In 2005
a significant portion of the loss relates to a charge for
IPR&D associated with the Xcel acquisition that will not be
deductible for tax purposes since that acquisition was
structured as a stock purchase.
Income from Discontinued Operations, Net of
Taxes: Our income from discontinued operations
was $7,546,000 and $7,137,000 for the three and nine months
ended September 30, 2006, respectively. These gains compare
to a gain of $1,126,000 and a loss of $2,368,000 in the three-
and nine-month periods ended September 30, 2005,
respectively. The income from discontinued operations in 2006
relates principally to a reduction in the environmental reserve
for the discontinued biomedicals facility. The loss from
discontinued operations in 2005 relate to closure and wind up of
discontinued manufacturing operations in Central Europe.
Liquidity
and Capital Resources
Cash and marketable securities totaled $277,450,000 at
September 30, 2006 compared to $235,066,000 at
December 31, 2005. Working capital was $484,433,000 at
September 30, 2006 compared to $355,505,000 at
December 31, 2005. The increase in working capital of
$128,928,000 was benefited by the settlement of litigation
claims, reclassification of certain assets held for sale and was
further benefited by operations, partially offset by cash used
in inventory purchase commitments, research and development
activities, severance, and other restructuring costs.
Cash provided by operating activities is expected to be our
primary source of funds in 2006. During the nine months ended
September 30, 2006, cash provided by operating activities
totaled $80,064,000 compared to $65,979,000 in the same period
in 2005, representing an increase of $14,085,000. The increase
in cash provided by operating activities is primarily due to
increases in sales and gross profits offset in part by a
reduction in royalty revenues.
Cash used in investing activities was $22,127,000 for the nine
months ended September 30, 2006 compared to $80,325,000 for
2005. In 2006 cash used in investing activities consisted
primarily of capital expenditures on corporate programs and
existing facilities, offset in part by cash proceeds from sales
of assets, including the Warsaw manufacturing facility. In 2005,
net cash used in investing activities consisted of payments for
the acquisition of Xcel and various other product rights of
$288,931,000 and capital expenditures of $27,206,000, partially
offset by net proceeds from investments of $222,994,000 and
proceeds from the sale of assets of $7,279,000.
Cash used in financing activities was $19,496,000 in the nine
months ended September 30, 2006 and principally consisted
of dividends paid on common stock of $21,550,000. and debt
retirements of $6,422,000. Cash generated from financing
activities for the nine months ended September 30, 2005 was
$169,672,000, which includes proceeds from our stock offering in
connection with the Xcel acquisition of $189,030,000, partially
offset by cash dividends paid on common stock of $20,804,000.
In January 2005, we entered into an interest rate swap agreement
with respect to $150,000,000 principal amount of its
7.0% Senior Notes due 2011. The interest rate on the swap
is variable at LIBOR plus 2.41%. The effect of this transaction
was to initially lower our effective interest rate by exchanging
fixed rate payments for floating rate payments. On a prospective
basis, the effective interest rate will float and correlate to
the variable interest earned on our cash held.
We have collateral requirements on the interest rate swap
agreement. The amount of collateral varies monthly depending on
the fair value of the underlying swap contract. As of
September 30, 2006, we have collateral of $12,200,000
comprising marketable securities and included in other assets in
the accompanying balance sheet.
The restatement of our financial statements caused us to delay
the filing of this quarterly report on
Form 10-Q
for the quarter ended September 30, 2006. On
December 12, 2006, we received a notice of default from The
Bank of New York, as trustee for the holders of our
3% Convertible Notes due 2010, asserting that a default
occurred under our indenture dated as of November 19, 2003,
governing the 3.0% Convertible Notes and our
4.0% Convertible Notes due 2013. The notice of default
asserts that a default occurred under the indenture when we
failed to timely file our quarterly report on
Form 10-Q
for the quarter ended September 30, 2006.
In the event that The Bank of New York is successful in
asserting that our failure to timely file the quarterly report
is a default under the indenture, such default will become an
Event of Default under the indenture unless we cure
the default within 60 days of receipt of the notice of
default. The filing of this
Form 10-Q
cures this asserted default.
50
Management believes that its existing cash and cash equivalents
and funds generated from operations will be sufficient to meet
its operating requirements at least through September 30,
2007, and to provide cash needed to fund capital expenditures
and its clinical development program. While we have no current
intent to issue additional debt or equity securities, we may
seek additional debt financing or issue additional equity
securities to finance future acquisitions or for other purposes.
We fund our cash requirements primarily from cash provided by
operating activities. Our sources of liquidity are cash and cash
equivalent balances and cash flow from operations.
While we have historically paid quarterly cash dividends, we did
not pay a dividend in the fourth quarter of 2006. We will not be
able to pay future dividends unless permitted under the terms of
the indenture governing our 7% senior notes.
Off-Balance
Sheet Arrangements
We do not use special purpose entities or other off-balance
sheet financing techniques except for operating leases disclosed
in our annual report on
Form 10-K.
Our 3% and 4% convertible subordinated notes include
conversion features that are considered off-balance sheet
arrangements under SEC requirements.
Products
in Development
Late
Stage Development of New Chemical Entities
Viramidine (taribavirin): Viramidine is a
nucleoside (guanosine) analog that is converted into ribavirin
by adenosine deaminase in the liver and intestine. We are
developing Viramidine (taribavirin), in oral form, for
administration in combination with pegylated interferon for the
treatment of chronic hepatitis C in treatment-naïve
patients.
In 2006, we reported the results of two pivotal Phase 3
trials for Viramidine (taribavirin). The VISER (VISER stands for
Viramidine Safety and Efficacy Versus Ribavirin) trials included
two co-primary endpoints: one for safety (superiority to
ribavirin in incidence of anemia) and one for efficacy
(non-inferiority to ribavirin in sustained viral response, SVR).
The results of the VISER trials met the safety criteria but did
not meet the efficacy criteria.
The studies demonstrated that
38-40 percent
of patients treated with Viramidine achieved SVR and that the
drug has a clear safety advantage over ribavirin. We believe
that the results of the studies were significantly impacted by
the dosing methodology which was a fixed dose of Viramidine
(taribavirin) for all patients and a variable dose of ribavirin
based on a patients weight. Our analysis of the study
results leads us to believe that the dosage of Viramidine
(taribavirin), like ribavirin, likely needs to be based on a
patients weight to achieve efficacy equal or superior to
that of ribavirin. Additionally, we think that higher doses of
taribavirin than those studied in the VISER program may be
necessary to achieve our efficacy objectives.
Based on our analysis, we initiated a Phase 2b study to
evaluate the efficacy of Viramidine at 20, 25 and
30 mg/kg
in combination with pegylated interferon. A ribavirin control
arm also is included in the study. We will conduct interim
reviews at weeks four and 12.
The Phase 2b protocol was submitted to the FDA for review.
We are discussing the final protocol for the Phase 2b study
design with the FDA. If the results of the
12-week
interim analysis are positive, we plan to select a dose and
initiate a large Phase 3 study. If we initiate a
Phase 3 study, we plan to seek a partner to share the
investment and risk of this larger development program.
The timeline and path to regulatory approval remains uncertain
at this time. The completion of another Phase 3 trial could
add significantly to the drugs development cost and the
time it takes to complete development, whether or not we are
able to secure a development partner, thereby delaying the
commercial launch of Viramidine (taribavirin) and possibly
weakening its position in relation to competing treatments. Our
external research and development expenses for Viramidine
(taribavirin) were $2,204,000 and $13,443,000 for the three and
the nine months ended September 30, 2006, respectively. For
the three and the nine months ended September 30, 2005,
these external research and development expenses for Viramidine
(taribavirin) were $8,900,000 and $27,069,000, respectively.
Retigabine: We are developing retigabine as
adjunctive treatment for partial-onset seizures in patients with
epilepsy. Retigabine is believed to have a unique, dual-acting
mechanism and has undergone several Phase 2 clinical
trials. The Phase 2 trials included more than
600 patients in several dose-ranging studies compared to
placebo. We successfully completed an
End-of-Phase 2
meeting concerning retigabine with the FDA in November 2005. The
results of the key Phase 2 study indicate that the compound
is potentially efficacious with a demonstrated
51
reduction in monthly seizure rates of 23% to 35% as adjunctive
therapy in patients with partial seizures. Response rates in the
two higher doses were statistically significant compared to
placebo (p<0.001).
Following a Special Protocol Assessment by the FDA two
Phase 3 trials of retigabine were initiated in 2005. One
Phase 3 trial (RESTORE1; RESTORE stands for Retigabine
Efficacy and Safety Trial for partial Onset Epilepsy) will be
conducted at approximately 50 sites, mainly in the Americas
(U.S., Central/South America); the second Phase 3 trial
(RESTORE2) will be conducted at 60 sites, mainly in Europe. The
first patient in the RESTORE1 trial was enrolled in September
2005. Enrollment of the first patient in the RESTORE2 trial
occurred in December 2005. The enrollment period in epilepsy
studies can be lengthy, frequently requiring twelve to eighteen
months to complete. Supportive Phase 1 trials for
retigabine in healthy volunteers started in 2006.
Assuming successful completion of the Phase 3 trials, we
expect availability of the trials results in 2008.
Assuming approval by the FDA, we expect to launch retigabine in
2009. We also plan to evaluate a sustained release formulation
of the drug and intend to investigate a new indication for use
in treating neuropathic pain. We plan to seek a partner to share
the investment and risk in the development of retigabine. For
the three and nine months ended September 30, 2006, the
external research and development expenses for retigabine were
$5,460,000 and $14,648,000, respectively. For the three and nine
months ended September 30, 2005, the external research and
development expenses for retigabine were $2,389,000 and
$5,445,000, respectively.
Other
Development Activities
Infergen: On December 30, 2005, we
completed the acquisition of the United States and Canadian
rights to the hepatitis C drug Infergen (interferon
alfacon-1) from InterMune. Infergen, or consensus interferon, is
a bio-optimized, selective and highly potent type 1 interferon
alpha originally developed by Amgen and launched in the United
States in 1997. It is currently indicated as monotherapy for the
treatment of adult patients suffering from chronic
hepatitis C viral infections with compensated liver disease
who have not responded to other treatments or have relapsed
after such treatment. Infergen is the only interferon with data
in the label regarding use in patients following relapse or
non-response to certain previous treatments.
In connection with this transaction, we acquired patent rights
and rights to a clinical trial underway to expand the
applications of Infergen. In the DIRECT trial (IHRC-001) which
started in the second quarter of 2004, 514 patients were
enrolled. Of these 514 patients, 343 were assigned to the
two treatment arms whereas 171 were assigned to the no-treatment
group. In the later case, when these patients reached
week 24, they were allowed to enter IRHC-002, the same
trial as IRHC-001 except it omits the no-treatment arm. As of
September 30, 2006, 22 patients remained in IRHC-001.
We reported
24-week and
48-week data
from the trial at a scientific meeting in October 2006. The
percent of patients who were virus negative at
end-of-treatment
(treatment week 48) for the Infergen 9 g and 15 g groups
were 16 percent and 19 percent, respectively (TMA
Assay). Response rates at
end-of-treatment
using the bDNA assay were 22 percent and 25 percent
for the Infergen 9 g and 15 g groups, respectively.
The second DIRECT trial (IHRC-002) has enrolled
144 patients of the possible 171 and is still ongoing. As
of September 30, 2006, 32 patients remained in this
trial. Both of the DIRECT trials are reviewed on a regular basis
by an independent Data Monitoring Committee to monitor the
safety of each trial. Post-treatment
follow-up
for the DIRECT trials are expected to be completed (i.e., last
patient visit) in the first and third quarters of 2007,
respectively. We expect to report and publish the results from
these studies sometime in late 2007.
In the first quarter of 2007, we are initiating a Phase 4
study to evaluate the use of Infergen 15 /day plus ribavirin
(1.0-1.2 g/day) in patients who did not have an optimal response
at 12 weeks of treatment with pegylated interferon and
ribavirin. The multi-center, randomized U.S. study will
enroll patients who received initial treatment with pegylated
interferon and ribavirin and achieve a
>2log10
decline in HCV RNA at week 12 but still have detectable virus.
The patients will be immediately randomized to receive Infergen
15 g/day plus ribavirin (1.0-1.2 g/day) for 36 or 48 weeks
or continue on their pegylated interferon and ribavirin regimen
for an additional 36 weeks of therapy. All treatment groups
will have a
24-week
follow up period to measure sustained virologic response.
Zelapar: Zelapar was approved by the FDA on
June 14, 2006 as an adjunct treatment in the management of
patients with Parkinsons disease being treated with
levodopa/carbidopa. Zelapar is the first Parkinsons
disease treatment to use the patented
Zydis®
fast-dissolving technology, which allows the tablets to dissolve
within seconds in the mouth and deliver more active drug at a
lower dose. We launched Zelapar in the U.S. market on
July 18, 2006.
Pradefovir (formerly called
remofovir): Pradefovir is a compound that we
licensed from Metabasis Therapeutics, Inc., or Metabasis, in
October 2001. We have been engaged in the development of this
compound
52
into an oral
once-a-day
monotherapy for patients with chronic hepatitis B infection. The
active molecule in this compound exhibits anti-hepatitis B
activity against both the wild type and lamivudine
drug-resistant hepatitis B. We have completed Phase 1 and
Phase 2 clinical trials of pradefovir.
On December 13, 2006, we announced the signing of
definitive agreements for the assignment and license of
development and commercial rights to pradefovir to
Schering-Plough Corporation. The transaction closed on
January 9, 2007.
Under the terms of the agreements, Schering-Plough made an
upfront payment of $19,200,000 to Valeant and $1,800,000 to
Metabasis and will pay up to an additional $90,000,000 in
aggregate fees to Valeant and Metabasis upon the achievement of
certain development and regulatory milestones. Approximately
$65,000,000 of the additional fees would be paid to Valeant and
$25,000,000 to Metabasis. The amount to be paid to Metabasis
includes the remaining $16,000,000 in milestone payments that
could have been realized by Metabasis under the previous
agreement between Metabasis and Valeant. Schering-Plough also
will pay royalties to Valeant and Metabasis in the event
pradefovir is commercialized.
Foreign
Operations
Approximately 70% and 75% of our revenues from continuing
operations, which includes royalties, for the nine months ended
September 30, 2006 and 2005, respectively, were generated
from operations outside the United States. All of our foreign
operations are subject to risks inherent in conducting business
abroad, including possible nationalization or expropriation,
price and currency exchange controls, fluctuations in the
relative values of currencies, political instability and
restrictive governmental actions. Changes in the relative values
of currencies occur from time to time and may, in some
instances, materially affect our results of operations. The
effect of these risks remains difficult to predict.
In January 2006, the parent company of one of our toll
manufacturers in Europe filed for bankruptcy. Sales of products
obtained from this manufacturer are estimated to be
approximately $60 million in 2006. The manufacturer has
developed a business plan to continue to successfully operate
and we have developed plans to respond to a disruption should it
occur. The manufacturer has submitted a proposal to emerge from
the bankruptcy to the bankruptcy court and its creditors. The
requisite creditors have approved the plan and the manufacturer
is awaiting court approval to emerge from bankruptcy. To date,
this bankruptcy has had no significant effect on our operations.
Critical
Accounting Estimates
The consolidated condensed financial statements appearing
elsewhere in this quarterly report have been prepared in
conformity with accounting principles generally accepted in the
United States. The preparation of these statements requires us
to make estimates and assumptions that affect the reported
amounts of assets and liabilities, the disclosure of contingent
assets and liabilities at the date of the financial statements
and the reported amounts of revenues and expenses during the
reporting periods. On an on-going basis, we evaluate our
estimates, including those related to product returns,
collectibility of receivables, inventories, intangible assets,
income taxes and contingencies and litigation. The actual
results could differ materially from those estimates.
We believe the following critical accounting policies affect our
more significant judgments and estimates used in the preparation
of our consolidated condensed financial statements.
Revenue
Recognition
We recognize revenues from product sales when title and risk of
ownership transfers to the customer. Revenues are recorded net
of provisions for rebates, discounts and returns, which are
estimated and recorded at the time of sale. Allowances for
future returns of products sold to our direct and indirect
customers, who include wholesalers, retail pharmacies and
hospitals, are calculated as a percent of sales based on
historical return percentages taking into account additional
available information on competitive products and contract
changes.
Our product sales are subject to a variety of deductions,
primarily representing rebates and discounts to government
agencies, wholesalers and managed care organizations. These
deductions represent estimates of the related obligations and,
as such, judgment is required when estimating the impact of
these sales deductions on revenues for a reporting period.
In the United States we record provisions for Medicaid and
contract rebates based upon our actual experience ratio of
rebates paid and actual prescriptions written during prior
quarters. We apply the experience ratio to the respective
periods sales to determine the rebate accrual and related
expense. This experience ratio is evaluated
53
regularly and adjusted if necessary to ensure that the
historical trends are as current as practicable. We adjust the
ratio to better match our current experience or our expected
future experience, as appropriate. In developing this ratio, we
consider current contract terms, such as changes in formulary
status and discount rates. Because our revenues in the United
States include newly acquired products and have increased
significantly in the last few years, ratios based on our
historical experience may not be indicative of future
experience. If our ratio is not indicative of future experience,
our results could be materially affected.
Outside of the United States, the majority of our rebates are
contractual or legislatively mandated and our estimates are
based on actual invoiced sales within each period; both of these
elements help to reduce the risk of variations in the estimation
process. Some European countries base their rebates on the
governments unbudgeted pharmaceutical spending and we use
an estimated allocation factor against our actual invoiced sales
to project the expected level of reimbursement. We obtain third
party information that helps us to monitor the adequacy of these
accruals. If our estimates are not indicative of actual
unbudgeted spending, our results could be materially affected.
Historically, our adjustments to actual have not been material;
on a quarterly basis, they generally have been less than 2% of
product sales. The sensitivity of our estimates can vary by
program, type of customer and geographic location. However,
estimates associated with U.S. Medicaid, Medicare and
contract rebates are most at-risk for material adjustment
because of the extensive time delay between the recording of the
accrual and its ultimate settlement. This interval can range up
to one year. Because of this time lag, in any given quarter, our
adjustments to actual can incorporate revisions of several prior
quarters.
We record sales incentives as a reduction of revenues at the
time the related revenues are recorded or when the incentive is
offered, whichever is later. We estimate the cost of our sales
incentives based on our historical experience with similar
incentives programs.
In some markets customers have the right to return products to
us under certain conditions. Historically and in the three and
nine months ended September 30, 2006 and 2005, the
provision for sales returns was less than 2% of product sales.
We conduct a review of the current methodology and assess the
adequacy of the allowance for returns on a quarterly basis,
adjusting for changes in assumptions, historical results and
business practices, as necessary. We use third-party data, when
available, to estimate the level of product inventories,
expiration dating, and product demand at our major wholesalers.
Actual results could be materially different from our estimates,
resulting in future adjustments to revenue.
We earn ribavirin royalties as a result of sales of products by
third-party licensees, Schering-Plough and Roche. Ribavirin
royalties are earned at the time the products subject to the
royalty are sold by the third party and are reduced by an
estimate for discounts and rebates that will be paid in
subsequent periods for those products sold during the current
period. We rely on a limited amount of financial information
provided by Schering-Plough and Roche to estimate the amounts
due to us under the royalty agreements.
Sales
Incentives
In the U.S. market, our current practice is to offer sales
incentives primarily in connection with launches of new products
or changes of existing products where demand has not yet been
established. We monitor and restrict sales in the
U.S. market in order to limit wholesaler purchases in
excess of their
ordinary-course-of-business
inventory levels. We operate Inventory Management Agreements
(IMAs) with major wholesalers in the United States. However,
specific events such as the case of sales incentives described
above or seasonal demand (e.g. antivirals during an outbreak)
may justify larger purchases by wholesalers. We may offer sales
incentives primarily in international markets, where typically
no right of return exists except for goods damaged in transit,
product recalls or replacement of existing products due to
packaging or labeling changes. Our revenue recognition policy on
these types of purchases and on incentives in international
markets is consistent with the policies described above.
Income
Taxes
Our income tax returns are subject to audit in various
jurisdictions. Existing and future audits by, or other disputes
with, tax authorities may not be resolved favorably for us and
could have a material adverse effect on our reported effective
tax rate and after-tax cash flows. We record liabilities for
potential tax assessments based on our estimate of the potential
exposure. New laws and new interpretations of laws and rulings
by tax authorities may affect the liability for potential tax
assessments. Due to the subjectivity and complex nature of the
underlying issues,
54
actual payments or assessments may differ from our estimates. To
the extent that our estimates differ from amounts eventually
assessed and paid our income and cash flows can be materially
and adversely affected.
We assess whether it is more likely than not that we will
realize the tax benefits associated with our deferred tax assets
and establish a valuation allowance for assets that are not
expected to result in a realized tax benefit. A significant
amount of judgment is used in this process, including
preparation of forecasts of future taxable income and evaluation
of tax planning initiatives. If we revise these forecasts or
determine that certain planning events will not occur, an
adjustment to the valuation allowance will be made to tax
expense in the period such determination is made. We have
increased the valuation allowance significantly since 2004 to
recognize the uncertainty of realizing the benefits of the
U.S. net operating losses and research credits.
The tax provisions in the third quarters of both 2006 and 2005
relate to the profits of our foreign operations, foreign
withholding taxes, liabilities associated with the 1997 through
2001 IRS examination and, state and local taxes in the
U.S. Our US operations, which include our research and
development activities, generate substantial net operating
losses for US income tax reporting purposes. Since, at this
time, there is insufficient objective evidence that we will
generate sufficient U.S. taxable income to utilize these
net operating loss benefits, the tax benefits associated with
U.S. operating losses have been fully reserved.
Additionally, in 2005 a significant portion of the loss relates
to a charge for IPR&D associated with the Xcel acquisition
that is not deductible for tax purposes since that acquisition
was structured as a stock purchase.
We operate in numerous countries where our income tax returns
are subject to audit. Internal and external tax professionals
are employed to minimize tax audit adjustments where possible.
We consider the expected outcome of these audits in the
calculation of our tax provision.
Impairment
of Property, Plant and Equipment
We evaluate the carrying value of property, plant and equipment
when conditions indicate a potential impairment. We determine
whether there has been impairment by comparing the anticipated
undiscounted future cash flows expected to be generated by the
property, plant and equipment with its carrying value. If the
undiscounted cash flows are less than the carrying value, the
amount of the impairment, if any, is then determined by
comparing the carrying value of the property, plant and
equipment with its fair value. Fair value is generally based on
a discounted cash flows analysis, independent appraisals or
preliminary offers from prospective buyers.
Valuation
of Intangible Assets
We periodically review intangible assets for impairment using an
undiscounted net cash flows approach. We determine whether there
has been impairment by comparing the anticipated undiscounted
future operating cash flows of the products associated with the
intangible asset with its carrying value. If the undiscounted
operating income is less than the carrying value, the amount of
the impairment, if any, will be determined by comparing the
value of each intangible asset with its fair value. Fair value
is generally based on a discounted cash flows analysis.
We use a discounted cash flow model to value acquired intangible
assets and for the assessment of impairment. The discounted cash
flow model requires assumptions about the timing and amount of
future cash inflows and outflows, risk, the cost of capital, and
terminal values. Each of these factors can significantly affect
the value of the intangible asset.
The estimates of future cash flows, based on reasonable and
supportable assumptions and projections, require
managements judgment. Any changes in key assumptions about
our businesses and their prospects, or changes in market
conditions, could result in an impairment charge. Some of the
more significant estimates and assumptions inherent in the
intangible asset impairment estimation process include: the
timing and amount of projected future cash flows; the discount
rate selected to measure the risks inherent in the future cash
flows; and the assessment of the assets life cycle and the
competitive trends impacting the asset, including consideration
of any technical, legal or regulatory trends.
Purchase
Price Allocation Including Acquired In-Process Research and
Development
The purchase price for the Infergen, Xcel, Amarin, and Ribapharm
acquisitions were allocated to the tangible and identifiable
intangible assets acquired and liabilities assumed based on
their estimated fair values at the acquisition date. Such a
valuation requires significant estimates and assumptions,
including but not limited to:
55
determining the timing and expected costs to complete the
in-process projects; projecting regulatory approvals; estimating
future cash flows from product sales resulting from completed
products and in-process projects; and developing appropriate
discount rates and probability rates by project. We believe the
fair values assigned to the assets acquired and liabilities
assumed are based on reasonable assumptions. However, these
assumptions may be incomplete or inaccurate, and unanticipated
events and circumstances may occur. Additionally, estimates for
the purchase price allocations may change as subsequent
information becomes available.
We value IPR&D acquired in a business combination based on
an approach consistent with the AICPA Practice Aid, Assets
Acquired in Business Combinations to be Used in Research and
Development Activities: A Focus in Software, Electronic Devices
and Pharmaceutical Industries. The amounts expensed as
acquired IPR&D represents an estimate of the fair value of
purchased in-process technology for projects that, as of the
acquisition date, had not yet reached technological feasibility
and had no alternative future use. The data used to determine
fair value requires significant judgment. The estimated fair
values were based on our use of a discounted cash flow model.
For each project, the estimated after-tax cash flows were
probability weighted to take account of the stage of completion
and the risks surrounding the successful development and
commercialization. The assumed tax rates are our estimate of the
effective tax rates that will apply to the expected cash flows.
These cash flows were then discounted to a present value using
discount rates between 15% and 20%.
The major risks and uncertainties associated with the timely and
successful completion of these projects include the uncertainty
of our ability to confirm the safety and efficacy of product
candidates based on the data from clinical trials and of
obtaining necessary regulatory approvals. In addition, no
assurance can be given that the underlying assumptions we used
to forecast the cash flows or the timely and successful
completion of these projects will materialize as estimated. For
these reasons, among others, actual results may vary
significantly from the estimated results.
Stock-based
Compensation Expense
On January 1, 2006, we adopted Statement of Financial
Accounting Standards No. 123 (revised 2004),
Share-Based Payment, (SFAS 123(R))
which requires the measurement and recognition of compensation
expense for all share-based payment awards made to our employees
and directors, including employee stock options and employee
stock purchases related to the Employee Stock Purchase Plan,
based on estimated fair values. Stock-based compensation expense
recognized under SFAS 123(R) for the nine months ended
September 30, 2006 was $16,929,000, which consisted of
stock-based compensation expense related to employee stock
options and the Employee Stock Purchase Plan of $15,444,000, and
stock-based compensation expense related to restricted stock
awards and acquisitions of $1,243,000. We adopted
SFAS 123(R) on a prospective basis and have not restated
financial statements for prior years. Stock-based compensation
expense of $2,253,000 for the nine months ended
September 30, 2005, was related to restricted stock awards
and acquisitions which we had been recognizing under previous
accounting standards (see Note 1 to Consolidated Condensed
Financial Statements) and the intrinsic value of stock options
with grant prices at other than the market price of the stock on
the grant measurement date (see Note 2 to the Consolidated
Condensed Financial Statements). If we had recognized stock
compensation expense for stock options and the Employee Stock
Purchase Plan in 2005 under the provisions of SFAS 123R,
the net loss for the nine months ended September 30, 2005
would have been $157,655,000 or $1.73 per share, an
increase of $15,176,000 or $0.17 per share from the amounts
reported.
We estimate the value of employee stock options on the date of
grant using the Black-Scholes model. The determination of fair
value of share-based payment awards on the date of grant using
an option-pricing model is affected by our stock price as well
as assumptions regarding a number of highly complex and
subjective variables. These variables include, but are not
limited to the expected stock price volatility over the term of
the awards, and actual and projected employee stock option
exercise behaviors. The weighted-average estimated value of
employee
56
stock options granted during the nine months ended
September 30, 2006 was $5.47 determined using the Black
Scholes model and the following weighted-average assumptions:
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
Weighted-average life (years)
|
|
|
4.1
|
|
|
|
4.1
|
|
Volatility
|
|
|
38
|
%
|
|
|
41
|
%
|
Expected dividend per share
|
|
$
|
0.31
|
|
|
$
|
0.31
|
|
Risk-free interest rate
|
|
|
4.88
|
%
|
|
|
4.33
|
%
|
Weighted-average fair value of
options (restated)
|
|
$
|
5.33
|
|
|
$
|
6.10
|
|
As stock-based compensation expense recognized in the
consolidated statement of operations in 2006 is based on awards
ultimately expected to vest, it has been reduced for estimated
forfeitures. SFAS 123(R) requires forfeitures to be
estimated at the time of grant and revised, if necessary, in
subsequent periods if actual forfeitures differ from those
estimates. Forfeitures were estimated based on historical
experience.
The total future compensation costs associated with employee
stock options and restricted stock awards that were outstanding
at September 30, 2006 is $13,786,000. This will be
amortized to expense as follows: $2,344,000 in the remaining
quarter of 2006, $7,586,000 in 2007, $3,022,000 in 2008 and
$834,000 in 2009 and thereafter.
If factors change and we employ different assumptions in the
application of SFAS 123(R) in future periods, the
compensation expense that we record under SFAS 123(R) may
differ significantly from what we have recorded in the current
period.
Contingencies
We are exposed to contingencies in the ordinary course of
business, such as legal proceedings and business-related claims
which range from product and environmental liabilities to tax
matters. In addition, we may have indemnification obligations,
including commitments to current and former directors in certain
circumstances. In accordance, with SFAS No. 5,
Accounting for Contingencies, we record accruals for such
contingencies when it is probable that a liability will be
incurred and the amount of loss can be reasonably estimated. The
estimates are refined each accounting period, as additional
information is known. See Note 10 of notes to consolidated
condensed financial statements for a discussion of contingencies.
Other
Financial Information
With respect to the unaudited condensed consolidated financial
information of Valeant Pharmaceutical International for the
three and nine months ended September 30, 2006 and 2005,
PricewaterhouseCoopers LLP reported that they have applied
limited procedures in accordance with professional standards for
a review of such information. However, their report dated
January 22, 2007, appearing herein, states that they did
not audit and they do not express an opinion on that unaudited
condensed consolidated financial information. Accordingly, the
degree of reliance on their report on such information should be
restricted in light of the limited nature of the review
procedures applied. PricewaterhouseCoopers is not subject to the
liability provisions of Section 11 of the Securities Act of
1933 (the Act) for their report on the unaudited
condensed consolidated financial information because that report
is not a report or a part of a
registration statement prepared or certified by
PricewaterhouseCoopers within the meaning of Sections 7 and
11 of the Act.
Forward-Looking
Statements
Except for the historical information contained herein, the
matters addressed in Managements Discussion and
Analysis of Financial Condition and Results of Operations
and elsewhere in this quarterly report on
Form 10-Q
constitute forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933, as
amended and Section 21E of the Securities Exchange Act of
1934, as amended. Forward-looking statements may be identified
by the use of the words anticipates,
expects, intends, plans, and
variations or similar expressions. Forward-looking statements
include, among other things, statements regarding the effects
and success of our restructuring program, our products in
development, the information and expectations concerning our
future financial performance, business strategy, projected plans
and objectives, and our estimates with respect to future
operating results. These forward-looking statements are subject
to a variety of risks and uncertainties, including those
discussed below and elsewhere in this quarterly report on
Form 10-Q,
which could cause actual results to
57
differ materially from those anticipated by our management. You
should consider these in evaluating our prospects and future
financial performance. In addition, the information set forth in
our annual report on
Form 10-K/A
for the fiscal year ended December 31, 2005 and this
quarterly report on
Form 10-Q
describes certain additional risks and uncertainties that could
cause actual results to vary materially from the future results
covered in such forward-looking statements. Readers are
cautioned not to place undue reliance on any of these
forward-looking statements, which speak only as of the date of
this report. We undertake no obligation to update any of these
forward-looking statements to reflect events or circumstances
after the date of this report or to reflect actual outcomes or
any obligation to explain the reasons why actual results may
differ.
Our actual results could differ materially from these
anticipated in this report as a result of various factors,
including those set forth below.
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|
The future growth of our business depends on the development,
approval, and commercialization of new products, including
Viramidine (taribavirin) and retigabine. The process of
developing new drugs has an inherent risk of failure. For
example, product candidates may turn out to be ineffective or
unsafe in clinical testing; their patent protection may become
compromised; other therapies may prove safer or more effective;
or the prevalence of the disease for which they are being
developed may decrease. Our inability to successfully develop
our products due to these or other factors could have a material
adverse effect on future revenues.
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|
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|
We can protect our products from generic substitution by third
parties only to the extent that our technologies are covered by
valid and enforceable patents, are effectively maintained as
trade secrets or are protected by data exclusivity. However, our
pending or future patent applications may not issue as patents.
Any patent issued may be challenged, invalidated, held
unenforceable or circumvented. Furthermore, our patents may not
be sufficiently broad to prevent third parties competing
products. The expiration of patent protection for ribavirin has
resulted in significant competition from generic substitutes and
declining royalty revenues and may negatively impact future
financial results.
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|
Trade secret protection is less effective than patent protection
because competitors may discover the technology or develop
parallel technology.
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|
The scope of protection afforded by a patent can be highly
uncertain. A pending claim or a result unfavorable to us in a
patent dispute may preclude development or commercialization of
products or impact sales of existing products, result in
cessation of royalty payments to us
and/or
result in payment of monetary damages.
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|
Obtaining drug approval in the United States and other countries
is costly and time consuming. Uncertainties and delays inherent
in the process can preclude or delay development and
commercialization of our products.
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|
Our current business plan includes targeted expansion through
acquisitions of compatible businesses and product lines and the
formation of strategic alliances, joint ventures and other
business combinations, in addition to the development of new
products. If we are unable to successfully execute on our
expansion plans to find attractive acquisition candidates at
appropriate prices, and to integrate successfully any acquired
companies or products, the expected growth of our business may
be negatively affected.
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|
We and our competitors are always striving to develop products
that are more effective, safer, more easily tolerated or less
costly. If our competitors succeed in developing better
alternatives to our current products before we do, we will lose
sales and revenues to their alternative products. If vaccines
are introduced to prevent the diseases treated by our products,
our potential sales and revenues will decrease.
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|
The pharmaceutical industry is subject to substantial government
regulation, including the approval of new pharmaceutical
products, labeling, advertising and, in most countries, pricing,
as well as inspection and approval of manufacturing facilities.
The costs of complying with these regulations are high, and
failure to comply could result in fines or interruption in our
business.
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|
We collect and pay a substantial portion of our sales and
expenditures in currencies other than the U.S. dollar. As a
result, fluctuations in foreign currency exchange rates affect
our operating results. Additionally, future exchange rate
movements, inflation or other related factors may have a
material adverse effect on our sales, gross profit or operating
expenses. At September 30, 2006 we have in place foreign
currency hedge
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58
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|
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|
transactions to reduce our exposure to variability in the Polish
Zloty. We continue to evaluate the possibility of entering into
additional hedge arrangements.
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|
A significant part of our revenue is derived from products
manufactured by third parties. We rely on their quality level,
compliance with the FDA regulations or similar regulatory
requirements enforced by regulatory agencies in other countries
and continuity of supply. Any failure by them in these areas
could disrupt our product supply and negatively impact our
revenues.
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|
Our flexibility in maximizing commercialization opportunities
for our compounds may be limited by our obligations to
Schering-Plough. In November 2000, we entered into an agreement
that provides Schering-Plough with an option to acquire the
rights to up to three of our products intended to treat
hepatitis C that Schering-Plough designates prior to our
entering Phase 2 clinical trials and a right for first/last
refusal to license various compounds we may develop and elect to
license to others. Viramidine (taribavirin) was not subject to
the option of Schering-Plough, but it would be subject to their
right of first/last refusal if we elected to license it to a
third party. The interest of potential collaborators in
obtaining rights to our compounds or the terms of any agreement
we ultimately enter into for these rights may be hindered by our
agreement with Schering-Plough.
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|
To purchase our products, many patients rely on reimbursement by
third party payors such as insurance companies, HMOs and
government agencies. These third party payors are increasingly
attempting to contain costs by limiting both coverage and the
level of reimbursement of new drug products. The reimbursement
levels established by third party payors in the future may not
be sufficient for us to realize an appropriate return on our
investment in product development and our continued manufacture
and sale of existing drugs.
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All drugs have potential harmful side effects and can expose
drug manufacturers and distributors to liability. In the event
one or more of our products is found to have harmed an
individual or individuals, we may be responsible for paying all
or substantially all damages awarded. A successful product
liability claim against us could have a material negative impact
on our financial position and results of operations.
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|
Our debt agreements permit us to incur additional debt, subject
to certain restrictions, but there is no guaranty that we will
actually be able to borrow any money should the need for it
arise.
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|
We are involved in several legal proceedings, including those
described in Note 10 to notes to consolidated condensed
financial statements, any of which could result in substantial
cost and divert managements attention and resources.
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|
Dependence on key personnel leaves us vulnerable to a negative
impact if they leave. Our continued success will depend, to a
significant extent, upon the efforts and abilities of the key
members of management. The loss of their services could have a
negative impact on us.
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|
Our research and development activities involve the controlled
use of potentially harmful biological materials as wells as
hazardous materials, chemicals and various radioactive
compounds. We cannot completely eliminate the risk of accidental
contamination or injury from the use, storage, handling or
disposal of these materials. In the event of contamination or
injury, we could be held liable for damages that result. Any
liability could exceed our resources.
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|
Our stockholder rights plan, provisions of our certificate of
incorporation and provisions of the Delaware General Corporation
Law could provide our Board of Directors with the ability to
deter hostile takeovers or delay, deter or prevent a change in
control of our company, including transactions in which
stockholders might otherwise receive a premium for their shares
over then current market prices.
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|
We are authorized to issue, without stockholder approval,
approximately 10,000,000 shares of preferred stock,
200,000,000 shares of common stock and securities
convertible into either shares of common stock or preferred
stock. If we issue additional equity securities, the price of
our securities may be materially and adversely affected. The
Board of Directors can also use issuances of preferred or common
stock to deter a hostile takeover or change in control of our
company.
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|
We are subject to a consent order with the Securities and
Exchange Commission, which permanently enjoins us from violating
securities laws and regulations. The consent order also
precludes protection for forward-looking statements under the
safe harbor provisions of the Private Securities Litigation
Reform Act of 1995
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59
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|
with respect to forward-looking statements we made prior to
November 28, 2005. The existence of the permanent
injunction under the consent order, and the lack of protection
under the safe harbor with respect to forward-looking statements
made prior to November 28, 2005 may limit our ability to
defend against future allegations.
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60
|
|
Item 3.
|
Quantitative
and Qualitative Disclosures About Market Risk
|
Our business and financial results are affected by fluctuations
in world financial markets. We evaluate our exposure to such
risks on an ongoing basis, and seek ways to manage these risks
to an acceptable level, based on managements judgment of
the appropriate trade-off between risk, opportunity and cost. We
do not hold any significant amount of market risk sensitive
instruments whose value is subject to market price risk. Our
significant foreign currency exposure relates to the Euro, the
Mexican Peso, the Polish Zloty, the Swiss Franc, the Canadian
Dollar, and the Japanese Yen. We seek to manage our foreign
currency exposure through operational means by managing local
currency revenues in relation to local currency costs. We take
steps to mitigate the impact of foreign currency on the income
statement, which include hedging our foreign currency exposure.
In the normal course of business, we also face risks that are
either non-financial or non-quantifiable. Such risks principally
include country risk, credit risk and legal risk and are not
discussed or quantified in the following analysis. At
September 30, 2006, the fair values of our financial
instruments were as follows (in thousands):
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|
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|
|
|
|
|
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|
|
|
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|
|
Notional/
|
|
|
Assets (Liabilities)
|
|
|
|
Contract
|
|
|
Carrying
|
|
|
Fair
|
|
Description
|
|
Amount
|
|
|
Value
|
|
|
Value
|
|
|
Forward contracts
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|
$
|
48,793
|
|
|
|
336
|
|
|
|
336
|
|
Interest rate swaps
|
|
|
150,000
|
|
|
|
(4,617
|
)
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|
|
(4,617
|
)
|
Outstanding fixed-rate debt
|
|
|
780,000
|
|
|
|
(780,000
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)
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|
|
(747,800
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)
|
We currently do not hold financial instruments for trading or
speculative purposes. Our financial assets are not subject to
significant interest rate risk due to their short duration. At
September 30, 2006, we had $7,000,000 of foreign
denominated variable rate debt that would subject it to both
interest rate and currency risks. A 100 basis-point increase in
interest rates affecting our financial instruments would not
have had a material effect on our third quarter 2006 pretax
earnings. In addition, we have $780,000,000 of fixed rate debt
as of September 30, 2006, that requires U.S. dollar
repayment. To the extent that we require, as a source of debt
repayment, earnings and cash flow from some of our subsidiary
units located in foreign countries, we are subject to risk of
changes in the value of certain currencies relative to the
U.S. dollar. However, the increase of 100 basis-points in
interest rates would have reduced the fair value of our
remaining fixed-rate debt instruments by approximately
$33,300,000 as of September 30, 2006.
We estimated the sensitivity of the fair value of our derivative
foreign exchange contracts to a hypothetical 10% strengthening
and 10% weakening of the spot exchange rates for the
U.S. dollar against the Zloty at September 30, 2006.
The analysis showed that a 10% strengthening of the
U.S. dollar would have resulted in a gain from a fair value
change of $4,435,000 and a 10% weakening of the U.S. dollar
would have resulted in a loss from a fair value change of
$5,421,000 in these instruments. Losses and gains on the
underlying transactions being hedged would have largely offset
any gains and losses on the fair value of derivative contracts.
These offsetting gains and losses are not reflected in the above
analysis.
61
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|
Item 4.
|
Controls
and Procedures
|
As disclosed in the Note 2 of this
Form 10-Q,
we announced on September 11, 2006 that a Special Committee
consisting solely of independent members of the board of
directors had been formed to conduct an internal review of our
historic stock option practices and related accounting.
The Special Committee, with the assistance of outside legal
counsel, undertook a comprehensive review of the stock option
grants to our officers, directors and employees from 1982 to
July 2006 under our various stock option plans in effect during
this period. The Special Committee has concluded its
investigation and has reported its findings to our board of
directors. On October 20, 2006, our board of directors
concluded that our consolidated financial statements should be
restated to record the additional non-cash stock-based
compensation expense items and certain other items that had been
incorrectly accounted for under GAAP.
The Special Committee analyzed in detail stock option grants
awarded between November 1994 and July 2006 and analyzed
supporting documentation for awards granted between 1982 and
1994. For the period between November 1994 and July 2006, the
Special Committees analysis included an extensive review
of paper and electronic documents supporting or related to our
stock option grants, the accounting for or impacted by those
grants, compensation-related financial and securities
disclosures and
e-mail
communications as well as interviews with numerous current and
former employees and current and former members of our board of
directors. While the Special Committee concluded that there were
some errors as late as January 2006, the majority of errors in
accounting for options pertain to those options granted prior to
the change in our board of directors and management in mid-2002
(Change in Control). None of the errors occurring in
periods after the Change in Control related to options granted
to the chief executive officer (CEO), chief
financial officer (CFO), or members of our board of
directors.
Disclosure
Controls and Procedures
We maintain disclosure controls and procedures that are designed
to ensure that information required to be disclosed in our
Exchange Act reports is recorded, processed, summarized and
reported within the time periods specified in the SECs
rules and forms, and that such information is accumulated and
communicated to our management, including our CEO and CFO, as
appropriate, to allow timely decisions regarding required
disclosure. In designing and evaluating the disclosure controls
and procedures, management recognizes that any controls and
procedures, no matter how well designed and operated, can
provide only reasonable assurance of achieving the desired
control objectives, and management necessarily is required to
apply its judgment in evaluating the cost-benefit relationship
of possible controls and procedures.
At the time that our annual report on
Form 10-K
for the year ended December 31, 2005 was filed on
March 15, 2006, our CEO and CFO concluded that our
disclosure controls and procedures were effective as of
December 31, 2005. Subsequent to that evaluation, our CEO
and CFO concluded that our disclosure controls and procedures
were not effective at a reasonable level of assurance as of
December 31, 2005 because of the material weakness in our
internal control over financial reporting discussed below.
Notwithstanding the material weakness described below, our
management has concluded that our consolidated condensed
financial statements included in this quarterly report have been
properly prepared pursuant to the rules and regulations of the
SEC.
A material weakness is a control deficiency, or combination of
control deficiencies, that results in more than a remote
likelihood that a material misstatement of the annual or interim
financial statements will not be prevented or detected.
As of December 31, 2005, we did not maintain effective
controls over the accounting for and disclosure of stock-based
compensation expense. Specifically, effective controls,
including monitoring, were not maintained to ensure the accuracy
and valuation of our stock-based compensation transactions
related to the granting of our stock options. This control
deficiency resulted in the misstatement of stock-based
compensation expense and additional paid-in capital accounts and
related financial disclosures, and in the restatement of our
consolidated financial statements for the years 2005, 2004, and
2003, each of the quarters of 2005 and 2004, and the first two
quarters of 2006. Additionally, this control deficiency could
result in misstatements of the aforementioned accounts and
disclosures that would result in a material misstatement of the
annual or interim consolidated financial statements that would
not be prevented or detected. Accordingly, our management has
determined that this control deficiency constitutes a material
weakness in our internal control over financial reporting.
62
Remediation
Plan
Subsequent to the initiation of our investigation into our stock
option granting practices in September 2006, we considered the
effectiveness of both the design and operation of our internal
control over financial reporting as they relate to the granting
of stock-based compensation. We implemented several improvements
during the fourth quarter of 2006. In particular, we developed
and implemented specific procedures and controls to ensure
compensation committee approval of the final specific awards to
all individual recipients at the time of the compensation
committee meeting. As of December 31, 2006, management has
implemented these additional procedures and controls.
Additionally, we have evaluated the design of these new
controls, which have been placed into operation for a sufficient
period of time. We will test their operating effectiveness in
connection with our assessment of internal control over
financial reporting as of December 31, 2006. We believe
that the controls that have been implemented have improved the
effectiveness of our internal control over financial reporting.
Changes
in Internal Control over Financial Reporting
There were changes in our internal control over financial
reporting during the most recently completed fiscal quarter as
discussed in the Remediation Plan section above that have
materially affected, or are reasonably likely to materially
affect, our internal control over financial reporting.
63
PART II
OTHER INFORMATION
|
|
Item 1.
|
Legal
Proceedings
|
See Note 10 of notes to consolidated condensed financial
statements in Item 1 of Part I of this quarterly
report, which is incorporated herein by reference.
Our annual report on
Form 10-K/A
for the year ended December 31, 2005 includes a detailed
discussion of our risk factors. Pursuant to the instructions to
Form 10-Q,
we have provided below only those risk factors that are new or
that have been materially amended since the time that we filed
our most recent annual report on
Form 10-K/A.
Accordingly, the information presented below should be read in
conjunction with the risk factors and information disclosed in
our most recent
Form 10-K/A
and the other risks described in this
Form 10-Q.
If we
do not realize the expected benefits from the restructuring plan
we announced in April 2006, our operating results and financial
conditions would be negatively impacted.
In April 2006, we announced a strategic restructuring of our
company designed to focus our resources on programs and products
that have the greatest opportunity for success. Accordingly, we
elected to rationalize certain of our assets, including our
discovery program and certain manufacturing facilities. We have
sold and out licensed pradefovir and certain discovery programs,
and any future compensation relating thereto is contingent upon
the transferees successful development of the applicable
product
and/or
program. Such success is subject to the risks inherent in
developing and obtaining approval for pharmaceutical products.
Accordingly, it is possible that we may not receive any
financial benefit from the sale or out license of these assets.
In addition, if we are unable to realize the expected
operational efficiencies from our restructuring plan, our
operating results and financial condition would be adversely
affected.
If we
or our third-party manufacturers are unable to manufacture our
products or the manufacturing process is interrupted due to
failure to comply with regulations or for other reasons, the
manufacture of our products could be interrupted.
We manufacture and have contracted with third parties to
manufacture some of our drug products, including products under
the rights acquired from other pharmaceutical companies.
Manufacturers are required to adhere to current good
manufacturing (cGMP) regulations enforced by the FDA
or similar regulations required by regulatory agencies in other
countries. Compliance with the FDAs cGMP requirements
applies to both drug products seeking regulatory approval and to
approved drug products. Our manufacturing facilities and those
of our contract manufacturers must be inspected and found to be
in full compliance with cGMP standards before approval for
marketing. We and contract manufacturers of our approved
products are subject to ongoing regulation by the FDA, including
compliance with cGMP requirements, and to similar regulatory
requirements enforced by regulatory agencies in other countries.
Our dependence upon others to manufacture our products may
adversely affect our profit margins and our ability to develop
and obtain approval for our products on a timely and competitive
basis, if at all. Our failure or that of our contract
manufacturers to comply with cGMP regulations or similar
regulations outside of the United States can result in
enforcement action by the FDA or its foreign counterparts,
including, among other things, warning letters, fines,
injunctions, civil penalties, recall or seizure of products,
total or partial suspension of production, refusal of the
government to renew marketing applications and criminal
prosecution. In addition, delays or difficulties with our
contract manufacturers in producing, packaging, or distributing
our products could adversely affect the sales of our current
products or introduction of other products.
Schering-Plough manufactures and sells ribavirin under license
from us. In May 2002, Schering-Plough signed a consent decree of
permanent injunction with the FDA, agreeing to measures to
assure that the drug products manufactured at their Puerto Rico
plant are made in compliance with FDAs current good
manufacturing practice regulations. While Schering-Plough has
advised us that the deficiencies were not specifically
applicable to the production of ribavirin, the consent decree
covers the facility producing ribavirin. Schering-Ploughs
ability to manufacture and ship ribavirin could be affected by
temporary interruption of some production lines to install
system upgrades and further enhance compliance, and other
technical production and equipment qualification
64
issues. If the FDA is not satisfied with Schering-Ploughs
compliance under the consent decree, the FDA could take further
regulatory actions against Schering-Plough, including the
seizure of products, an injunction against further manufacture,
a product recall or other actions that could interrupt
production of ribavirin. Interruption of ribavirin production
for a sustained period of time could materially reduce our
royalty revenue.
In addition to regulatory compliance risks, our contract
manufacturers in the United States and in other countries are
subject to a wide range of business risks, such as seizure of
assets by governmental authorities, natural disasters, and
domestic and international economic conditions. Were any of our
contract manufacturers not able to manufacture our products
because of regulatory, business or any other reasons, the
manufacture of our products would be interrupted. This could
have a negative impact on our sales, financial condition and
competitive position. In January 2006, the parent company of one
of our toll manufacturers in Europe filed for bankruptcy. Sales
of products obtained from this manufacturer are estimated to be
approximately $60 million in 2006. Although the
manufacturer has received court approval to emerge from
bankruptcy and we have developed plans to respond to a
disruption in supply by this manufacturer, there can be no
assurance that, should a disruption in supply occur, we will be
able to respond in time with alternative sources of supply or
have sufficient levels of inventory to prevent a material
negative impact on revenues. In addition, we cannot assure you
that the supplier will be able to meet our supply needs after it
emerges from bankruptcy.
The
matters relating to the Special Committees review of our
historical stock option granting practices and the restatement
of our consolidated financial statements have resulted in
increased litigation and regulatory proceedings against us and
could have a material adverse effect on us.
In September 2006, our board of directors appointed a Special
Committee, which consists solely of independent directors, to
conduct a review of our historical stock option granting
practices and related accounting during the period from 1982
through July 2006. As described in Item 7,
Managements Discussion and Analysis of Financial
Condition and Results of Operations Restatement of
Consolidated Financial Statements, Special Committee and Company
Findings, the Special Committee has identified a number of
occasions on which the exercise prices for stock options granted
to certain of our directors, officers, and employees were set
using closing prices for our common stock with dates different
than the actual grant approval dates, resulting in additional
compensation charges. To correct these and other accounting
errors, we have amended the 2005
10-K and our
quarterly reports on
Form 10-Q
for the quarters ended March 31, 2006 and June 30,
2006 to restate the consolidated financial statements contained
in those reports. The review of our historical stock option
granting practices and the related accounting, as well as the
resulting restatements, have required us to incur substantial
expenses for legal, accounting, tax and other professional
services and have diverted our managements attention from
our business and could adversely affect our business, financial
condition, results of operations and cash flows.
Our historical stock option granting practices and the
restatement of our prior financial statements have exposed us to
greater risks associated with litigation and regulatory
proceedings. We are a named defendant in two shareholder
derivative lawsuits pending in the state court in Orange County,
California, which assert claims related to our historic stock
option practices. In addition, the SEC has opened an informal
inquiry into our historical stock option grant practices. We
cannot assure you that this current litigation, the SEC inquiry
or any future litigation or regulatory action will result in the
same conclusions reached by the Special Committee. The conduct
and resolution of these matters will be time consuming,
expensive and distracting from the conduct of our business.
Furthermore, if we are subject to adverse findings in any of
these matters, we could be required to pay damages or penalties
or have other remedies imposed upon us which could have a
material adverse effect on our business, financial condition,
results of operations and cash flows.
The
delay in filing this quarterly report on
Form 10-Q
may increase the resources to file registration
statements.
As a result of our delayed filing of our quarterly report on
Form 10-Q
for the quarter ended September 30, 2006, we will be
ineligible to register our securities on
Form S-3
for sale by us or resale by others until we have timely filed
all material required to be filed pursuant to
Section 13, 14, or 15(d) of the Securities Exchange
Act of 1934 for a period of least 12 calendar months. We may use
other registration statement forms to raise capital or complete
acquisitions, but such use would increase our transaction costs
and may adversely impact our ability to raise capital or
complete acquisitions of other companies in a timely manner.
65
The
pending SEC inquiry could adversely affect our business and the
trading price of our securities.
In July 2006, we were contacted by the SEC, with respect to an
informal inquiry regarding events and circumstances surrounding
trading in our common stock and the public release of data from
our first pivotal Phase 3 trial for
Viramidine®
(taribavirin). In addition, the SEC later requested data
regarding our stock option grants since January 1, 2000 and
information about our pursuit in the Delaware Chancery Court of
the return of certain bonuses paid to Milan Panic, the former
chairman and chief executive officer, and others. In September
2006, our board of directors established the Special Committee
to review our historical stock option practices and related
accounting, and informed the SEC of these efforts. We have
cooperated fully and will continue to cooperate with the SEC on
its informal inquiry. We cannot predict the outcome of the
inquiry. In the event that the inquiry leads to SEC action
against any current or former officer or director, our business
(including our ability to complete financing transactions) and
the trading price of our securities may be adversely impacted.
In addition, if the SEC inquiry continues for a prolonged period
of time, it may have an adverse impact on our business or the
trading price of our securities regardless of the ultimate
outcome of the investigation. In addition, the SEC inquiry has
resulted in the incurrence of significant legal expenses and the
diversion of managements attention from our business, and
this may continue, or increase, until the inquiry is concluded.
|
|
|
|
|
Exhibit
|
|
|
Number
|
|
Description
|
|
|
15
|
.1
|
|
Review Report of Independent
Registered Public Accounting Firm.
|
|
31
|
.1
|
|
Certification of Chief Executive
Officer pursuant to
Rule 13a-14(a)
under the Exchange Act and Section 302 of the
Sarbanes-Oxley Act of 2002.
|
|
31
|
.2
|
|
Certification of Chief Financial
Officer pursuant to
Rule 13a-14(a)
under the Exchange Act and Section 302 of the
Sarbanes-Oxley Act of 2002.
|
|
32
|
.1
|
|
Certification of Chief Executive
Officer and Chief Financial Officer of Periodic Financial
Reports pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002, 18 U.S.C. § 1350.
|
66
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this quarterly report on
Form 10-Q
to be signed on its behalf by the undersigned thereunto duly
authorized.
Valeant Pharmaceuticals
International
Registrant
Timothy C. Tyson
President and Chief Executive Officer
Date: January 22, 2007
Bary G. Bailey
Executive Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)
Date: January 22, 2007
67
EXHIBIT INDEX
|
|
|
|
|
Exhibit
|
|
|
Number
|
|
Description
|
|
|
15
|
.1
|
|
Review Report of Independent
Registered Public Accounting Firm.
|
|
31
|
.1
|
|
Certification of Chief Executive
Officer pursuant to
Rule 13a-14(a)
under the Exchange Act and Section 302 of the
Sarbanes-Oxley Act of 2002.
|
|
31
|
.2
|
|
Certification of Chief Financial
Officer pursuant to
Rule 13a-14(a)
under the Exchange Act and Section 302 of the
Sarbanes-Oxley Act of 2002.
|
|
32
|
.1
|
|
Certification of Chief Executive
Officer and Chief Financial Officer of Periodic Financial
Reports pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002, 18 U.S.C. § 1350.
|
68