e10vq
UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C.
20549
Form 10-Q
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(Mark One)
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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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For the quarterly period ended
March 31, 2007
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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
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Commission file number: 1-11397
Valeant Pharmaceuticals
International
(Exact name of registrant as
specified in its charter)
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Delaware
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33-0628076
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(State or other jurisdiction
of
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(I.R.S. Employer
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incorporation or
organization)
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Identification No.)
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One Enterprise
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92656
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Aliso Viejo,
California
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(Zip Code)
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(Address of principal executive
offices)
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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 þ No o
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 May 1, 2007 was 95,023,955.
VALEANT
PHARMACEUTICALS INTERNATIONAL
INDEX
1
PART I
FINANCIAL INFORMATION
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Item 1.
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Financial
Statements
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March 31,
|
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December 31,
|
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|
|
2007
|
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|
2006
|
|
|
|
(Unaudited)
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ASSETS
|
Current Assets:
|
|
|
|
|
|
|
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Cash and cash equivalents
|
|
$
|
355,432
|
|
|
$
|
326,002
|
|
Marketable securities
|
|
|
8,321
|
|
|
|
9,743
|
|
Accounts receivable, net
|
|
|
185,384
|
|
|
|
227,452
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|
Inventories, net
|
|
|
142,111
|
|
|
|
142,679
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|
Assets held for sale
|
|
|
11,441
|
|
|
|
49,104
|
|
Prepaid expenses and other current
assets
|
|
|
18,601
|
|
|
|
16,398
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|
Current deferred tax assets, net
|
|
|
84,107
|
|
|
|
8,071
|
|
Income taxes
|
|
|
12,078
|
|
|
|
2,526
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|
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|
|
|
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|
|
|
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Total current assets
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|
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817,475
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|
|
|
781,975
|
|
Property, plant and equipment, net
|
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|
93,456
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|
|
|
94,279
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|
Deferred tax assets, net
|
|
|
21,353
|
|
|
|
21,514
|
|
Goodwill
|
|
|
80,162
|
|
|
|
80,162
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|
Intangible assets, net
|
|
|
490,918
|
|
|
|
474,315
|
|
Other assets
|
|
|
48,402
|
|
|
|
52,966
|
|
Assets of discontinued operations
|
|
|
|
|
|
|
226
|
|
|
|
|
|
|
|
|
|
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Total non-current assets
|
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|
734,291
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|
|
|
723,462
|
|
|
|
|
|
|
|
|
|
|
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$
|
1,551,766
|
|
|
$
|
1,505,437
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|
|
|
|
|
|
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LIABILITIES AND
STOCKHOLDERS EQUITY
|
Current Liabilities:
|
|
|
|
|
|
|
|
|
Trade payables
|
|
$
|
39,762
|
|
|
$
|
60,621
|
|
Accrued liabilities
|
|
|
126,198
|
|
|
|
142,532
|
|
Notes payable and current portion
of long-term debt
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|
2,908
|
|
|
|
9,237
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|
Current deferred tax liabilities,
net
|
|
|
4,722
|
|
|
|
39,818
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Current liabilities for uncertain
tax positions
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|
|
80,413
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|
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|
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|
|
|
|
|
|
|
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Total current liabilities
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|
254,003
|
|
|
|
252,208
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|
Long-term debt, less current portion
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778,756
|
|
|
|
778,196
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Deferred tax liabilities, net
|
|
|
3,177
|
|
|
|
3,255
|
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Liabilities for uncertain tax
positions
|
|
|
29,154
|
|
|
|
|
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Other liabilities
|
|
|
18,004
|
|
|
|
18,182
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Liabilities of discontinued
operations
|
|
|
18,112
|
|
|
|
18,343
|
|
|
|
|
|
|
|
|
|
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Total non-current liabilities
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|
847,203
|
|
|
|
817,976
|
|
|
|
|
|
|
|
|
|
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Total liabilities
|
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|
1,101,206
|
|
|
|
1,070,184
|
|
|
|
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Commitments and contingencies
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Stockholders Equity:
|
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|
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Common stock, $0.01 par value;
200,000 shares authorized; 94,786 (March 31,
2007) and 94,416 (December 31, 2006) shares
outstanding (after deducting shares in treasury of 1,094 as of
March 31, 2007 and December 31, 2006)
|
|
|
949
|
|
|
|
945
|
|
Additional capital
|
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|
1,271,508
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|
|
|
1,263,317
|
|
Accumulated deficit
|
|
|
(841,460
|
)
|
|
|
(848,467
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)
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Accumulated other comprehensive
income
|
|
|
19,563
|
|
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19,458
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|
|
|
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|
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Total stockholders equity
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450,560
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|
435,253
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|
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|
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$
|
1,551,766
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|
|
$
|
1,505,437
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|
|
|
|
|
|
|
|
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|
The accompanying notes are an integral part of these
consolidated condensed financial statements.
2
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Three Months Ended
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March 31,
|
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|
2007
|
|
|
2006
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
Product sales
|
|
$
|
176,892
|
|
|
$
|
181,400
|
|
Alliance revenue (including
ribavirin royalties)
|
|
|
36,470
|
|
|
|
18,091
|
|
|
|
|
|
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|
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Total revenues
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|
|
213,362
|
|
|
|
199,491
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|
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|
|
|
|
|
|
|
|
Costs and expenses:
|
|
|
|
|
|
|
|
|
Cost of goods sold (excluding
amortization)
|
|
|
52,098
|
|
|
|
58,601
|
|
Selling expenses
|
|
|
64,434
|
|
|
|
64,275
|
|
General and administrative expenses
|
|
|
26,187
|
|
|
|
28,446
|
|
Research and development costs
|
|
|
23,110
|
|
|
|
29,554
|
|
Gain on litigation settlements
|
|
|
|
|
|
|
(34,000
|
)
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Restructuring charges and asset
impairment
|
|
|
7,238
|
|
|
|
26,466
|
|
Amortization expense
|
|
|
19,131
|
|
|
|
17,523
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|
|
|
|
|
|
|
|
|
|
Total costs and expenses
|
|
|
192,198
|
|
|
|
190,865
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
21,164
|
|
|
|
8,626
|
|
Other income, net, including
translation and exchange
|
|
|
1,136
|
|
|
|
938
|
|
Interest income
|
|
|
4,511
|
|
|
|
2,657
|
|
Interest expense
|
|
|
(10,952
|
)
|
|
|
(10,437
|
)
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
before income taxes
|
|
|
15,859
|
|
|
|
1,784
|
|
Provision for income taxes
|
|
|
7,292
|
|
|
|
7,543
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing
operations
|
|
|
8,567
|
|
|
|
(5,759
|
)
|
Income (loss) from discontinued
operations
|
|
|
1
|
|
|
|
(212
|
)
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
8,568
|
|
|
$
|
(5,971
|
)
|
|
|
|
|
|
|
|
|
|
Basic and diluted income (loss)
per share:
|
|
|
|
|
|
|
|
|
Income (loss) from continuing
operations
|
|
$
|
0.09
|
|
|
$
|
(0.06
|
)
|
Income (loss) from discontinued
operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted net income
(loss) per share:
|
|
$
|
0.09
|
|
|
$
|
(0.06
|
)
|
|
|
|
|
|
|
|
|
|
Shares used in per share
computations Basic
|
|
|
94,574
|
|
|
|
92,770
|
|
|
|
|
|
|
|
|
|
|
Shares used in per share
computations Diluted
|
|
|
96,012
|
|
|
|
92,770
|
|
|
|
|
|
|
|
|
|
|
Dividends paid per share of common
stock
|
|
$
|
|
|
|
$
|
0.08
|
|
|
|
|
|
|
|
|
|
|
Dividends declared per share of
common stock
|
|
$
|
|
|
|
$
|
0.08
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated condensed financial statements.
3
|
|
|
|
|
|
|
|
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|
|
Three Months Ended
|
|
|
|
March 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
Net income (loss)
|
|
$
|
8,568
|
|
|
$
|
(5,971
|
)
|
Other comprehensive income (loss):
|
|
|
|
|
|
|
|
|
Foreign currency translation
adjustments
|
|
|
(116
|
)
|
|
|
2,346
|
|
Unrealized gain on marketable
equity securities and other
|
|
|
226
|
|
|
|
443
|
|
Pension liability adjustment
|
|
|
(5
|
)
|
|
|
(32
|
)
|
|
|
|
|
|
|
|
|
|
Comprehensive income (loss)
|
|
$
|
8,673
|
|
|
$
|
(3,214
|
)
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated condensed financial statements.
4
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
Cash flows from operating
activities:
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
8,568
|
|
|
$
|
(5,971
|
)
|
Income (loss) from discontinued
operations
|
|
|
1
|
|
|
|
(212
|
)
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing
operations
|
|
|
8,567
|
|
|
|
(5,759
|
)
|
Adjustments to reconcile net
income (loss) to net cash provided by operating activities:
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
23,195
|
|
|
|
23,482
|
|
Provision for losses on accounts
receivable and inventory
|
|
|
1,568
|
|
|
|
3,597
|
|
Stock compensation expense
|
|
|
3,981
|
|
|
|
5,618
|
|
Translation and exchange (gains)
losses, net
|
|
|
(1,136
|
)
|
|
|
(937
|
)
|
Impairment charges and other
non-cash items
|
|
|
(447
|
)
|
|
|
20,378
|
|
Deferred income taxes
|
|
|
31,910
|
|
|
|
5,577
|
|
Changes in assets and liabilities,
net of effects of acquisitions:
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
41,517
|
|
|
|
13,778
|
|
Inventories
|
|
|
(311
|
)
|
|
|
(3,736
|
)
|
Prepaid expenses and other assets
|
|
|
(3,176
|
)
|
|
|
963
|
|
Trade payables and accrued
liabilities
|
|
|
(34,641
|
)
|
|
|
(10,513
|
)
|
Income taxes payable
|
|
|
(44,373
|
)
|
|
|
(12,452
|
)
|
Other liabilities
|
|
|
532
|
|
|
|
842
|
|
|
|
|
|
|
|
|
|
|
Cash flow from operating
activities in continuing operations
|
|
|
27,186
|
|
|
|
40,838
|
|
Cash flow from operating
activities in discontinued operations
|
|
|
(211
|
)
|
|
|
(281
|
)
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating
activities
|
|
|
26,975
|
|
|
|
40,557
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing
activities:
|
|
|
|
|
|
|
|
|
Capital expenditures
|
|
|
(4,566
|
)
|
|
|
(13,351
|
)
|
Proceeds from sale of assets
|
|
|
38,493
|
|
|
|
135
|
|
Proceeds from investments
|
|
|
8,631
|
|
|
|
2,260
|
|
Purchase of investments
|
|
|
(6,800
|
)
|
|
|
(3,900
|
)
|
Acquisition of businesses, license
rights and product lines
|
|
|
(31,325
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flow from (used in) investing
activities in continuing operations
|
|
|
4,433
|
|
|
|
(14,856
|
)
|
Cash flow from investing
activities in discontinued operations
|
|
|
|
|
|
|
(1
|
)
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in)
investing activities
|
|
|
4,433
|
|
|
|
(14,857
|
)
|
|
|
|
|
|
|
|
|
|
Cash flows from financing
activities:
|
|
|
|
|
|
|
|
|
Payments on long-term debt and
notes payable
|
|
|
(7,750
|
)
|
|
|
(157
|
)
|
Proceeds from long-term debt
|
|
|
530
|
|
|
|
|
|
Stock option exercises and
employee stock purchases
|
|
|
4,214
|
|
|
|
430
|
|
Dividends paid
|
|
|
|
|
|
|
(7,173
|
)
|
|
|
|
|
|
|
|
|
|
Net cash used in financing
activities
|
|
|
(3,006
|
)
|
|
|
(6,900
|
)
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes on
cash and cash equivalents
|
|
|
825
|
|
|
|
728
|
|
|
|
|
|
|
|
|
|
|
Net increase in cash and cash
equivalents
|
|
|
29,227
|
|
|
|
19,528
|
|
Cash and cash equivalents at
beginning of period
|
|
|
326,205
|
|
|
|
224,903
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end
of period
|
|
|
355,432
|
|
|
|
244,431
|
|
Cash and cash equivalents
classified as part of discontinued operations
|
|
|
|
|
|
|
(69
|
)
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents of
continuing operations
|
|
$
|
355,432
|
|
|
$
|
244,362
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated condensed financial statements.
5
VALEANT
PHARMACEUTICALS INTERNATIONAL
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 us, without audit, pursuant to the rules and regulations of
the Securities and Exchange Commission. Certain information and
footnote disclosures normally included in financial statements
prepared on the basis of accounting principles generally
accepted in the United States of America 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
for the year ended December 31, 2006.
|
|
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. In addition, we generate
alliance revenue from out-licensed products, including milestone
payments from Schering-Plough Ltd. (Schering-Plough)
related to pradefovir and royalty revenues from the sale of
ribavirin by 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. 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 March 31, 2007 and December 31,
2006, the fair market value of these securities approximated
cost.
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. Depending on the nature of the hedge,
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 income consists of
accumulated foreign currency translation adjustments, unrealized
losses on marketable equity securities, pension funded status
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: We have
adopted SFAS 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 employees and directors
including employee stock options and employee stock purchases
under our Employee Stock Purchase Plan based on estimated fair
values.
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.
6
VALEANT
PHARMACEUTICALS INTERNATIONAL
NOTES TO
CONSOLIDATED CONDENSED FINANCIAL
STATEMENTS (Continued)
Additional information about our stock option programs and the
assumptions used in determining the fair value of stock-based
compensation are contained in Note 8.
Assets Held for Sale: We have entered into a
letter of intent for the sale for our manufacturing plants in
Puerto Rico and Birsfelden, Switzerland. At March 31, 2007
the net book values of these facilities are classified as assets
held for sale in the accompanying consolidated condensed
financial statements.
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.
Recent
Accounting Pronouncements:
FIN 48. In June 2006, the Financial
Accounting Standards Board (the FASB) issued FASB
Interpretation No. 48, Accounting for Uncertainty in
Income Taxes an interpretation of FASB Statement
No. 109 (FIN 48), which clarifies
the accounting for uncertainty in income taxes recognized in
accordance with SFAS No. 109, Accounting for
Income Taxes. FIN 48 applies to all income tax
positions taken on previously filed tax returns or expected to
be taken on a future tax return. FIN 48 prescribes a
benefit recognition model with a two-step approach: a
more-likely-than-not recognition criterion and a measurement
attribute that measures the position as the largest amount of
tax benefit that is greater than 50% likely of being realized
upon ultimate settlement. If it is not more likely than not that
the benefit will be sustained on its technical merits, no
benefit will be recorded. FIN 48 also requires that the
amount of interest expense and income to be recognized related
to uncertain tax positions be computed by applying the
applicable statutory rate of interest to the difference between
the tax position recognized in accordance with FIN 48 and
the amount previously taken or expected to be taken in a tax
return. Our continuing practice is to record interest and
penalties related to income tax matters in income tax expense.
FIN 48 became effective for Valeant as of January 1,
2007. The change in net assets as a result of applying this
pronouncement is recorded as a change in accounting principle
with the cumulative effect of the change required to be treated
as an adjustment to the opening balance of accumulated deficit.
As a result of the adoption of FIN 48, we recognized an
increase of $1,560,000 to the beginning balance of accumulated
deficit on the balance sheet. Additional information about the
adoption of FIN 48 and its effect on our financial
statements is contained in Note 7.
SFAS No. 155. In February 2006, the
FASB issued SFAS No. 155, Accounting for Certain
Hybrid Financial Instruments, amendment of FASB Statements
No. 133 and 140 (SFAS No. 155).
SFAS No. 155 gives entities the option of applying
fair value accounting to certain hybrid financial instruments in
their entirety if they contain embedded derivatives that would
otherwise require bifurcation under SFAS No. 133.
SFAS No. 155 became effective for Valeant as of
January 1, 2007. The adoption of this standard did not have
a material impact on our financial statements.
SFAS No. 157. In September 2006, the
FASB issued SFAS No. 157, Fair Value
Measurements (SFAS No. 157).
SFAS No. 157 defines fair value, establishes a
framework for measuring fair value and expands disclosures about
fair value measurements but does not change the requirements to
apply fair value in existing accounting standards. Under
SFAS No. 157, fair value refers to the price that
would be received to sell an asset or paid to transfer a
liability in an orderly transaction between market participants
in the market in which the reporting entity transacts. The
standard clarifies that fair value should be based on the
assumptions market participants would use when pricing the asset
or liability. SFAS No. 157 will be effective for
Valeant as of January 1, 2008 and we are currently
assessing the impact that SFAS No. 157 may have on our
financial statements.
SFAS 159. In February 2007 the FASB
issued SFAS No. 159, The Fair Value Option
for Financial Assets and Financial Liabilities,
(SFAS 159) which provides companies with an option
to report selected financial assets and liabilities at fair
value. The objective of SFAS 159 is to reduce both
complexity in accounting for financial
7
VALEANT
PHARMACEUTICALS INTERNATIONAL
NOTES TO
CONSOLIDATED CONDENSED FINANCIAL
STATEMENTS (Continued)
instruments and the volatility in earnings caused by measuring
related assets and liabilities differently. SFAS 159 also
establishes presentation and disclosure requirements designed to
facilitate comparisons between companies that choose different
measurement attributes for similar types of assets and
liabilities. SFAS 159 does not eliminate any disclosure
requirements included in other accounting standards. We have not
yet determined if we will elect to apply the options presented
in SFAS 159, the earliest effective date that we can make
such an election is January 1, 2008.
EITF
06-3. In
June 2006, the FASB ratified the Emerging Issues Task
Forces Issue
No. 06-3,
How Sales Taxes Collected from Customers and Remitted to
Governmental Authorities Should Be Presented in the Income
Statement (That Is, Gross Versus Net Presentation)
(EITF
06-3).
EITF 06-3
provides guidance on disclosing the accounting policy for the
income statement presentation of any tax assessed by a
governmental authority that is directly imposed on a
revenue-producing transaction between a seller and a customer on
either a gross (included in revenues and costs) or a net
(excluded from revenues) basis. In addition, EITF
06-3
requires disclosure of any such taxes that are reported on a
gross basis as well as the amounts of those taxes in interim and
annual financial statements for each period for which an income
statement is presented. EITF
06-3 was
effective for Valeant as of January 1, 2007. Valeant
presents revenue net of sales taxes. The adoption of this
standard did not have a material impact on Valeant.
Reclassifications: Certain prior year items
have been reclassified to conform to the current year
presentation, with no effect on previously reported net income
or stockholders equity.
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. In December 2006
we sold our HIV and cancer development programs and certain
discovery and pre-clinical 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 2b trials. In March 2007,
we sold our former headquarters building in Costa Mesa,
California, where our former research laboratories were located,
for net proceeds of $36,758,000.
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, which had been managed
as a separate business unit, have been combined with those of
other regions.
We recorded a charge of $7,238,000 in the three months ended
March 31, 2007, in connection with our decision to
implement the restructuring program. Severance charges recorded
in the three months ended March 31, 2007 total $3,781,000
and relate to employees whose positions were eliminated in the
restructuring. When completed, we anticipate that approximately
850 employees in total will be impacted by the restructuring,
the majority of whom work in the two manufacturing facilities
selected for disposition. The charge in the three months ended
March 31, 2007 included $2,050,000 related to 202 employees
at our manufacturing facility in Humacao, Puerto Rico and
$895,000 related to 10 employees in our sales and marketing
operations in Spain. Currently, employee severance charges have
been accrued for 480 employees.
8
VALEANT
PHARMACEUTICALS INTERNATIONAL
NOTES TO
CONSOLIDATED CONDENSED FINANCIAL
STATEMENTS (Continued)
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 development of 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. The following table summarizes the
restructuring costs incurred in 2006 and during the three months
ended March 31, 2007:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months
|
|
|
|
|
|
Three Months
|
|
|
Cumulative
|
|
|
|
Ended
|
|
|
Year Ended
|
|
|
Ended
|
|
|
Total
|
|
|
|
March 31,
|
|
|
December 31,
|
|
|
March 31,
|
|
|
Incurred
|
|
|
|
2006
|
|
|
2006
|
|
|
2007
|
|
|
|
|
|
|
(In thousands)
|
|
|
Employee severances (approximately
480 employees)
|
|
$
|
6,644
|
|
|
$
|
16,997
|
|
|
$
|
3,781
|
|
|
$
|
20,778
|
|
Contract cancellation and other
cash costs
|
|
|
|
|
|
|
1,662
|
|
|
|
2,081
|
|
|
|
3,743
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal: cash charges
|
|
|
6,644
|
|
|
|
18,659
|
|
|
|
5,862
|
|
|
|
24,521
|
|
Abandoned software and other
capital assets
|
|
|
19,822
|
|
|
|
22,178
|
|
|
|
|
|
|
|
22,178
|
|
Impairment of manufacturing and
research facilities
|
|
|
|
|
|
|
97,344
|
|
|
|
1,376
|
|
|
|
98,720
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal: non-cash charges
|
|
|
19,822
|
|
|
|
119,522
|
|
|
|
1,376
|
|
|
|
120,898
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total:
|
|
$
|
26,466
|
|
|
$
|
138,181
|
|
|
$
|
7,238
|
|
|
$
|
145,419
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The restructuring charges for the three months ended
March 31, 2007 represent charges of $3,042,000, $2,177,000
and $2,019,000 in respect of the North America, EMEA and
Corporate reporting segments 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 is as follows (in
thousands):
|
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|
|
|
|
|
|
|
|
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Three Months
|
|
|
|
|
|
|
Ended
|
|
|
Three Months
|
|
|
|
December 31,
|
|
|
Ended
|
|
|
|
2006
|
|
|
March 31, 2007
|
|
|
Opening accrual
|
|
$
|
4,453
|
|
|
$
|
5,216
|
|
Charges to earnings
|
|
|
3,699
|
|
|
|
6,024
|
|
Cash paid
|
|
|
(2,936
|
)
|
|
|
(5,309
|
)
|
|
|
|
|
|
|
|
|
|
Closing accrual
|
|
$
|
5,216
|
|
|
$
|
5,931
|
|
|
|
|
|
|
|
|
|
|
We have recorded impairment charges of $534,000 related to our
manufacturing plant in Humacao, Puerto Rico and $615,000 related
to our manufacturing plant in Birsfelden, Switzerland in the
three months ended March 31, 2007. We have entered into a
letter of intent to sell these facilities and expect to complete
this sale within three months. Included within this charge is
$162,000 of cash-related charges.
In the three months ended March 31, 2007, we acquired
product rights in the United States, Europe, and Argentina. In
the United States we acquired a
paid-up
license to Kinetin and Zeatin, the active ingredients of
Kinerase, for cash consideration of $21,000,000 and other
consideration of $4,170,000. In Europe we acquired the rights to
nabilone, the product we currently market as Cesamet in the
United States and Canada, for $9,659,000. We acquired the rights
to two products in Poland and certain products in Argentina. The
aggregate cash consideration for these transactions was
$31,325,000.
9
VALEANT
PHARMACEUTICALS INTERNATIONAL
NOTES TO
CONSOLIDATED CONDENSED FINANCIAL
STATEMENTS (Continued)
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|
4.
|
Discontinued
Operations
|
In the second half of 2002, we made a strategic decision to
divest our Russian pharmaceuticals segment, biomedicals segment,
Photonics business, raw materials businesses and manufacturing
facilities in Central Europe and Circe unit. 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 the three months
ended March 31, 2007 and 2006, losses from discontinued
operations consisted of the disposal of remaining real estate
facilities and the wind down of administrative activities
associated with these operations.
Summarized selected financial information for discontinued
operations for the three months ended March 31, 2007 and
2006 is as follows (in thousands):
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|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
Revenue
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
Loss before income taxes
|
|
$
|
|
|
|
|
(243
|
)
|
Income tax provision
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from discontinued operations,
net
|
|
|
|
|
|
|
(243
|
)
|
|
|
|
|
|
|
|
|
|
Income on disposal of discontinued
operations
|
|
|
1
|
|
|
|
31
|
|
Income tax provision
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income on disposal of discontinued
operations, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from discontinued
operations
|
|
$
|
1
|
|
|
$
|
(212
|
)
|
|
|
|
|
|
|
|
|
|
The assets and liabilities of discontinued operations are stated
separately as of March 31, 2007 and December 31, 2006
on the accompanying consolidated condensed balance sheets. The
major assets and liabilities categories are as follows (in
thousands):
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|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
Cash
|
|
$
|
|
|
|
$
|
203
|
|
Accounts receivable, net
|
|
|
|
|
|
|
21
|
|
Property, plant and equipment, net
|
|
|
|
|
|
|
|
|
Deferred taxes and other assets
|
|
|
|
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
Assets of discontinued operations
|
|
$
|
|
|
|
$
|
226
|
|
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
|
|
|
$
|
|
|
Accrued liabilities
|
|
|
12,562
|
|
|
|
12,777
|
|
Other liabilities
|
|
|
5,550
|
|
|
|
5,566
|
|
|
|
|
|
|
|
|
|
|
Liabilities of discontinued
operations
|
|
$
|
18,112
|
|
|
$
|
18,343
|
|
|
|
|
|
|
|
|
|
|
Environmental contamination has been identified in the soil
under a facility built by the Company 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 some distance from the
facility. 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
10
VALEANT
PHARMACEUTICALS INTERNATIONAL
NOTES TO
CONSOLIDATED CONDENSED FINANCIAL
STATEMENTS (Continued)
remediation progress, these liabilities will be reviewed and
adjusted to reflect additional information that becomes
available. We expect that the major work on these projects will
be completed in 2007. Total environmental reserves for this site
were $12,471,000 and $12,660,000 as of March 31, 2007 and
December 31, 2006, respectively, and are included in the
liabilities of discontinued operations. 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 March 31, 2007 cannot be
reasonably estimated.
The following table sets forth the computation of basic and
diluted earnings per share (in thousands, except per share data):
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|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
Income:
|
|
|
|
|
|
|
|
|
Numerator for basic and dilutive
earnings per share
|
|
|
|
|
|
|
|
|
Income (loss) from continuing
operations
|
|
$
|
8,567
|
|
|
$
|
(5,759
|
)
|
|
|
|
|
|
|
|
|
|
Income (loss) from discontinued
operations
|
|
|
1
|
|
|
|
(212
|
)
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
8,568
|
|
|
$
|
(5,971
|
)
|
|
|
|
|
|
|
|
|
|
Shares:
|
|
|
|
|
|
|
|
|
Denominator for basic earnings per
share weighted-average shares outstanding
|
|
|
94,574
|
|
|
|
92,770
|
|
Effect of dilutive securities:
|
|
|
|
|
|
|
|
|
Employee stock options
|
|
|
1,232
|
|
|
|
|
|
Other dilutive securities
|
|
|
206
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dilutive potential common shares
|
|
|
1,438
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for diluted earnings
per share adjusted weighted- average shares after
assumed conversions
|
|
|
96,012
|
|
|
|
92,770
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted earnings (loss)
per share:
|
|
|
|
|
|
|
|
|
Income (loss) from continuing
operations
|
|
$
|
0.09
|
|
|
$
|
(0.06
|
)
|
Discontinued operations, net of
taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted net income
(loss) per share
|
|
$
|
0.09
|
|
|
$
|
(0.06
|
)
|
|
|
|
|
|
|
|
|
|
For the three months ended March 31, 2006, options to
purchase 1,746,000 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 three months ended March 31, 2007 and 2006, options
to purchase 9,659,000 and 9,324,000 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 the
Companys common stock and, therefore, the effect would
have been anti-dilutive.
11
VALEANT
PHARMACEUTICALS INTERNATIONAL
NOTES TO
CONSOLIDATED CONDENSED FINANCIAL
STATEMENTS (Continued)
|
|
6.
|
Detail of
Certain Accounts
|
The following tables present the details of certain amounts
included in the consolidated balance sheet at March 31,
2007 and December 31, 2006 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
Accounts receivable,
net:
|
|
|
|
|
|
|
|
|
Trade accounts receivable
|
|
$
|
152,347
|
|
|
$
|
180,767
|
|
Royalties receivable
|
|
|
16,885
|
|
|
|
22,212
|
|
Other receivables
|
|
|
23,637
|
|
|
|
31,486
|
|
|
|
|
|
|
|
|
|
|
|
|
|
192,869
|
|
|
|
234,465
|
|
Allowance for doubtful accounts
|
|
|
(7,485
|
)
|
|
|
(7,013
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
185,384
|
|
|
$
|
227,452
|
|
|
|
|
|
|
|
|
|
|
Inventories, net:
|
|
|
|
|
|
|
|
|
Raw materials and supplies
|
|
$
|
36,193
|
|
|
$
|
37,045
|
|
Work-in-process
|
|
|
23,146
|
|
|
|
21,477
|
|
Finished goods
|
|
|
96,834
|
|
|
|
98,454
|
|
|
|
|
|
|
|
|
|
|
|
|
|
156,173
|
|
|
|
156,976
|
|
Allowance for inventory
obsolescence
|
|
|
(14,062
|
)
|
|
|
(14,297
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
142,111
|
|
|
$
|
142,679
|
|
|
|
|
|
|
|
|
|
|
Property, plant and equipment,
net:
|
|
|
|
|
|
|
|
|
Property, plant, and equipment, at
cost
|
|
$
|
184,986
|
|
|
$
|
183,794
|
|
Accumulated depreciation and
amortization
|
|
|
(91,530
|
)
|
|
|
(89,515
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
93,456
|
|
|
$
|
94,279
|
|
|
|
|
|
|
|
|
|
|
Intangible assets: As of March 31, 2007
and December 31, 2006, intangible assets were as follows
(in thousands, except life data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
March 31, 2007
|
|
|
December 31, 2006
|
|
|
|
Average
|
|
|
Gross
|
|
|
Accumulated
|
|
|
Net
|
|
|
Gross
|
|
|
Accumulated
|
|
|
Net
|
|
|
|
Lives (Years)
|
|
|
Amount
|
|
|
Amortization
|
|
|
Amount
|
|
|
Amount
|
|
|
Amortization
|
|
|
Amount
|
|
|
Product rights
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Neurology
|
|
|
13
|
|
|
$
|
301,546
|
|
|
$
|
(110,161
|
)
|
|
$
|
191,385
|
|
|
$
|
292,339
|
|
|
$
|
(100,990
|
)
|
|
$
|
191,349
|
|
Infectious diseases
|
|
|
11
|
|
|
|
72,480
|
|
|
|
(11,760
|
)
|
|
|
60,720
|
|
|
|
72,480
|
|
|
|
(10,020
|
)
|
|
|
62,460
|
|
Dematology
|
|
|
19
|
|
|
|
110,315
|
|
|
|
(45,217
|
)
|
|
|
65,098
|
|
|
|
85,337
|
|
|
|
(42,786
|
)
|
|
|
42,551
|
|
Other products
|
|
|
11
|
|
|
|
325,899
|
|
|
|
(166,860
|
)
|
|
|
159,039
|
|
|
|
318,065
|
|
|
|
(157,620
|
)
|
|
|
160,445
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total product rights
|
|
|
14
|
|
|
|
810,240
|
|
|
|
(333,998
|
)
|
|
|
476,242
|
|
|
|
768,221
|
|
|
|
(311,416
|
)
|
|
|
456,805
|
|
License agreement
|
|
|
5
|
|
|
|
67,376
|
|
|
|
(52,700
|
)
|
|
|
14,676
|
|
|
|
67,376
|
|
|
|
(49,866
|
)
|
|
|
17,510
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total intangible assets
|
|
|
|
|
|
$
|
877,616
|
|
|
$
|
(386,698
|
)
|
|
$
|
490,918
|
|
|
$
|
835,597
|
|
|
$
|
(361,282
|
)
|
|
$
|
474,315
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12
VALEANT
PHARMACEUTICALS INTERNATIONAL
NOTES TO
CONSOLIDATED CONDENSED FINANCIAL
STATEMENTS (Continued)
Estimated future amortization expenses are as follows (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Scheduled Future Amortization Expense
|
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
2011
|
|
|
Thereafter
|
|
|
Product rights
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Neurology
|
|
$
|
21,680
|
|
|
$
|
28,765
|
|
|
$
|
28,623
|
|
|
$
|
27,706
|
|
|
$
|
21,933
|
|
|
$
|
63,120
|
|
Infectious diseases
|
|
|
5,220
|
|
|
|
6,960
|
|
|
|
6,960
|
|
|
|
6,960
|
|
|
|
6,960
|
|
|
|
27,660
|
|
Dermatology
|
|
|
7,494
|
|
|
|
9,992
|
|
|
|
9,990
|
|
|
|
9,982
|
|
|
|
9,877
|
|
|
|
17,902
|
|
Other products
|
|
|
19,770
|
|
|
|
18,885
|
|
|
|
18,007
|
|
|
|
16,945
|
|
|
|
16,049
|
|
|
|
68,802
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total product rights
|
|
|
54,164
|
|
|
|
64,602
|
|
|
|
63,580
|
|
|
|
61,593
|
|
|
|
54,819
|
|
|
|
177,484
|
|
License agreement
|
|
|
8,504
|
|
|
|
6,172
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
62,668
|
|
|
$
|
70,774
|
|
|
$
|
63,580
|
|
|
$
|
61,593
|
|
|
$
|
54,819
|
|
|
$
|
177,484
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization expense for the three months ended March 31,
2007 and 2006 was $19,131,000 and $17,523,000, respectively, of
which $16,296,000 and $14,364,000, respectively, related to
amortization of acquired product rights.
We incur losses in the United States, 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 by offsetting such losses against
future taxable income resulting from products in our development
pipeline, further growth in U.S. 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 three months ended March 30, 2007 was insignificant
since the U.S. loss was insignificant. Our effective tax
rate for the three months ended March 31, 2007 was affected
by pre-tax losses resulting from a restructuring charge of
$3,042,000 in Puerto Rico for which we do not expect to realize
income tax benefits. A provision for income taxes of $7,292,000
was recorded for this period which primarily represents the
taxes payable on earnings in tax jurisdictions outside the
United States, interest on U.S. liabilities recorded in
conjunction with the 1997 - 2001 IRS examination and state and
local taxes.
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 clarifies the accounting for
uncertainty in income taxes recognized in accordance with
SFAS No. 109, Accounting for Income Taxes.
FIN 48 became effective for Valeant as of January 1,
2007. As a result of the adoption of FIN 48, we recognized
an increase of $1,560,000 to the beginning balance of
accumulated deficit on the balance sheet. At January 1,
2007 we had $122,697,000 of unrecognized benefits, of which
$32,225,000 would reduce our effective tax rate, if recognized.
Of the total unrecognized tax benefits at the adoption date,
$24,799,000 was recorded as an offset against a valuation
allowance. To the extent such portion of unrecognized tax
benefits is recognized at the time when a valuation allowance no
longer exists, the recognition would affect our tax rate.
Our continuing practice is to recognize interest and penalties
related to income tax matters in income tax expense. As of
January 1, 2007, we had recorded $18,432,000 for interest
and $2,602,000 for penalties. We accrued additional $862,000 of
interest during the quarter ended March 31, 2007.
In 2005, we recorded $57,092,000 as an estimate of additional
tax expense expected to result from the IRS examination of the
U.S. income tax returns for the years ended
December 31, 1997 through 2001. The net impact to the tax
provision was $22,153,000 after reversal of the valuation
allowance for losses that would be recognized if
13
VALEANT
PHARMACEUTICALS INTERNATIONAL
NOTES TO
CONSOLIDATED CONDENSED FINANCIAL
STATEMENTS (Continued)
these examination adjustments were realized. Interest and
penalties have also been accrued which bring the balance of the
reserve for these items to $27,000,000.
The most significant adjustments proposed by the IRS for this
period resulted from a transaction in 1999, when the Company
restructured its operations by contributing the stock of several
non-U.S. subsidiaries
to a wholly owned Dutch company. At the time of the
restructuring, the Company intended to avail itself of the
non-recognition provisions of the Internal Revenue Code to avoid
generating taxable income on the intercompany transfer. One of
the requirements under the non-recognition provisions was to
file Gain Recognition Agreements with the Companys timely
filed 1999 U.S. Income Tax Return. We discovered and
voluntarily informed the IRS that the Gain Recognition
Agreements had been inadvertently omitted from the 1999 tax
return. The IRS denied our request to rule that reasonable cause
existed for the failure to provide the agreements and proposed
an adjustment that would increase taxable income by
approximately $120,000,000.
We have been pursuing resolution of the IRS examination of the
U.S. income tax returns for the years ended
December 31, 1997 through 2001 through a formal appeals
process which we expect to be completed in the next six months.
As a result, it is reasonably possible that $78,872,000 of the
unrecognized benefits will reverse within the next twelve
months, which will reduce the liability for uncertain tax
positions by $80,413,000 (including the effect on deferred tax
assets, interest and penalties). The provision for income taxes
is expected to be reduced by $20,000,000 to $25,000,000,
primarily related to resolution of the gain recognition issue
which arose for the year ended December 31, 1999. The
difference will adjust the deferred tax assets and the valuation
allowance.
We are currently under audit by the IRS for the 2002 through
2004 tax years. For the U.S., all years prior to 1997 are closed
under the statute. Although the examination process is expected
to be completed in 2007, we expect to begin a formal appeal for
proposed adjustments with which we do not agree. Our significant
subsidiaries are open to tax examinations for years ending in
2001 and later.
|
|
8.
|
Common
Stock and Share Compensation
|
In May 2006, our stockholders approved our 2006 Equity Incentive
Plan (the Incentive Plan), which is an amendment and
restatement of our 2003 Equity Incentive Plan. The number of
shares of common stock under the Incentive Plan was 22,304,000
in the aggregate at March 31, 2007. The Incentive Plan
provides for the grant of incentive stock options, nonqualified
stock options, stock appreciation rights, restricted stock
awards, phantom stock awards and stock bonuses (collectively,
awards) to our key employees, officers, directors,
consultants and advisors. Options granted under the Incentive
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. Under the Incentive Plan
shares may be issued as phantom stock awards or restricted stock
unit awards for which a participant pays less than the fair
market value of the common stock on the date of grant.
Generally, options vest ratably over a four-year period from the
date of grant.
14
VALEANT
PHARMACEUTICALS INTERNATIONAL
NOTES TO
CONSOLIDATED CONDENSED FINANCIAL
STATEMENTS (Continued)
The following table sets forth information relating to the
Incentive Plan (in thousands, except per share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Average
|
|
|
|
Number of
|
|
|
Exercise
|
|
|
|
Shares
|
|
|
Price
|
|
|
Shares under option,
December 31, 2005
|
|
|
14,632
|
|
|
$
|
17.80
|
|
Granted
|
|
|
2,014
|
|
|
$
|
18.54
|
|
Exercised
|
|
|
(1,592
|
)
|
|
$
|
19.38
|
|
Canceled
|
|
|
(1,703
|
)
|
|
$
|
21.81
|
|
|
|
|
|
|
|
|
|
|
Shares under option,
December 31, 2006
|
|
|
13,351
|
|
|
$
|
18.28
|
|
Granted
|
|
|
79
|
|
|
$
|
17.32
|
|
Exercised
|
|
|
(347
|
)
|
|
$
|
17.32
|
|
Canceled
|
|
|
(353
|
)
|
|
$
|
20.58
|
|
|
|
|
|
|
|
|
|
|
Shares under option,
March 31, 2007
|
|
|
12,730
|
|
|
$
|
18.41
|
|
|
|
|
|
|
|
|
|
|
Exercisable at December 31,
2005
|
|
|
7,197
|
|
|
$
|
17.82
|
|
|
|
|
|
|
|
|
|
|
Exercisable at December 31,
2006
|
|
|
8,374
|
|
|
$
|
18.00
|
|
|
|
|
|
|
|
|
|
|
Exercisable at March 31, 2007
|
|
|
8,020
|
|
|
$
|
18.15
|
|
|
|
|
|
|
|
|
|
|
Awards available for grant at
December 31, 2006
|
|
|
4,376
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Awards available for grant at
March 31, 2007
|
|
|
4,643
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The schedule below reflects the number of outstanding and
exercisable options as of March 31, 2007 segregated by
price range (in thousands, except per share and life data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
|
|
|
Exercisable
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
Weighted
|
|
|
Weighted
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
Average
|
|
|
Average
|
|
|
|
Number
|
|
|
Exercise
|
|
|
Number
|
|
|
Exercise
|
|
|
Remaining
|
|
Range of Exercise Prices
|
|
of Shares
|
|
|
Price
|
|
|
of Shares
|
|
|
Price
|
|
|
Life (Years)
|
|
|
$ 8.10 to $17.72
|
|
|
5,102
|
|
|
$
|
13.44
|
|
|
|
3,395
|
|
|
$
|
11.77
|
|
|
|
6.85
|
|
$18.01 to $22.11
|
|
|
4,283
|
|
|
$
|
18.70
|
|
|
|
2,047
|
|
|
$
|
18.68
|
|
|
|
7.84
|
|
$22.66 to $46.25
|
|
|
3,345
|
|
|
$
|
25.61
|
|
|
|
2,578
|
|
|
$
|
26.12
|
|
|
|
6.18
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12,730
|
|
|
|
|
|
|
|
8,020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SFAS No. 123(R) Assumptions and Fair
Value: The fair value of options granted in 2007
and 2006 was estimated at the date of grant using the
Black-Scholes option-pricing model with the following
assumptions:
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
Weighted-average life (years)
|
|
|
5.73
|
|
|
|
4.10-5.80
|
|
Stock price volatility
|
|
|
36%-37%
|
|
|
|
37%-39%
|
|
Expected dividend per share
|
|
$
|
0.00
|
|
|
$
|
0.00-$0.31
|
|
Risk-free interest rate
|
|
|
4.52-4.70
|
%
|
|
|
4.54-4.80
|
%
|
Weighted-average fair value of
options
|
|
$
|
7.37
|
|
|
$
|
7.83
|
|
The aggregate intrinsic value of the stock options outstanding
at March 31, 2007 was $20,327,000. The aggregate intrinsic
value of the stock options that are both outstanding and
exercisable at March 31, 2007 was $18,933,000. During the
three months ended March 31, 2007 stock options with an
aggregate intrinsic value of
15
VALEANT
PHARMACEUTICALS INTERNATIONAL
NOTES TO
CONSOLIDATED CONDENSED FINANCIAL
STATEMENTS (Continued)
$2,150,000 were exercised. Intrinsic value is the in the
money valuation of the options or the difference between
market and exercise prices. The fair value of options that
vested in the three months ended March 31, 2007, as
determined using the Black-Scholes valuation model, was
$1,442,000.
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. There
are 7,000,000 shares of common stock reserved for issuance
under the ESPP, plus an annual increase on the first day of our
fiscal year for a period of ten years, commencing on
January 1, 2005 and 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 2006, we issued 64,000 shares of common stock
for proceeds of $938,000 under the ESPP. In the three-month
period ended March 31, 2007, 24,703 shares were issued
for proceeds of $359,000.
Phantom Stock Awards: Non-employee members of
our board of directors receive compensation in the form of
phantom stock grants, cash retainers and meeting fees for each
meeting they attend during the year. Directors also have the
option to receive phantom stock awards in lieu of fees otherwise
payable in cash. During the three months ended March 31,
2007 and the year ended December 31, 2006, we granted our
non-employee directors 6,614 and 69,874 shares of phantom
stock, respectively. The phantom stock issued to non-employee
directors in these periods had a fair value of $118,000 and
$1,179,000, respectively. Each share of phantom stock granted to
non-employee directors vests over one year or less, is entitled
to dividend equivalent shares and is exchanged for a share of
the Companys common stock one year after the director
ceases to serve as a member of the Companys Board. Each
share of phantom stock granted to certain officers of the
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 the Companys common stock upon vesting. During
2007 and 2006, the Company recorded non-cash charges related to
the vesting of phantom stock of $341,000 and $1,235,000,
respectively. As of March 31, 2007 and December 31,
2006, there were 275,138 and 268,524 shares of phantom
stock outstanding, respectively. In prior years the Company
assumed outstanding employee stock options in connection with
the Ribapharm acquisition. Stock compensation expense recorded
in connection with these stock options totaled $117,000 and
$771,000 for the year ended December 31, 2006.
A summary of stock compensation expense for our stock incentive
plans is presented below (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Recorded as
|
|
|
To be Recorded
|
|
|
|
Expense Through
|
|
|
as Expense in
|
|
|
|
March 31, 2007
|
|
|
Future Periods
|
|
|
Employee stock options
|
|
$
|
3,498
|
|
|
$
|
19,706
|
|
Employee stock purchase plan
|
|
|
26
|
|
|
|
|
|
Phantom and restricted stock units
|
|
|
457
|
|
|
|
911
|
|
|
|
|
|
|
|
|
|
|
Total stock-based compensation
expense
|
|
$
|
3,981
|
|
|
$
|
20,617
|
|
|
|
|
|
|
|
|
|
|
16
VALEANT
PHARMACEUTICALS INTERNATIONAL
NOTES TO
CONSOLIDATED CONDENSED FINANCIAL
STATEMENTS (Continued)
Stock compensation expense was charged to the following accounts
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
Cost of goods sold
|
|
$
|
190
|
|
|
$
|
434
|
|
Selling expenses
|
|
|
993
|
|
|
|
854
|
|
General and administrative expenses
|
|
|
2,493
|
|
|
|
3,532
|
|
Research and development costs
|
|
|
305
|
|
|
|
798
|
|
|
|
|
|
|
|
|
|
|
Total stock compensation expense
|
|
$
|
3,981
|
|
|
$
|
5,618
|
|
|
|
|
|
|
|
|
|
|
Future stock compensation expense for restricted stock and stock
option incentive awards outstanding at March 31, 2007 is as
follows (in thousands):
|
|
|
|
|
Remainder of 2007
|
|
$
|
11,188
|
|
2008
|
|
|
6,132
|
|
2009
|
|
|
2,520
|
|
2010 and thereafter
|
|
|
777
|
|
|
|
|
|
|
|
|
$
|
20,617
|
|
|
|
|
|
|
Dividends: We declared and paid quarterly cash
dividends of $0.0775 per share for the first quarter of
2006. We did not pay dividends for the first quarter of 2007.
|
|
9.
|
Commitments
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 were 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, purported to assert derivative claims on our
behalf against certain of our current
and/or
former officers and directors. The lawsuit asserted claims for
breach of fiduciary duties, abuse of control, gross
mismanagement and waste of corporate assets. The plaintiff
sought, among other things, damages and a constructive trust
over cash bonuses paid to the officer and director defendants in
connection with the Ribapharm offering. In March 2007, the
complaint was dismissed, with prejudice. The court has retained
jurisdiction to consider an application for attorneys fees
and expenses by plaintiffs counsel.
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.
We settled the litigation with respect to ten of the defendants
prior to trial. 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 entered into a settlement
agreement with Mr. Panic, which was amended on
October 6, 2006. Pursuant to that settlement,
Mr. Panic paid us $20,000,000. We recorded a $17,550,000
gain resulting from this settlement. The
17
VALEANT
PHARMACEUTICALS INTERNATIONAL
NOTES TO
CONSOLIDATED CONDENSED FINANCIAL
STATEMENTS (Continued)
amount reflects the settlement proceeds net of related costs
associated with the litigation and settlement arrangement.
On March 1, 2007, the Delaware Court of Chancery issued an
opinion finding Mr. Jerney liable for breach of fiduciary
duty and on March 14, 2007 entered an order requiring
Mr. Jerney to pay us a total of $6,983,085. Mr. Jerney
purported to file a pro se appeal on April 12, 2007. The
Company has filed a motion to dismiss the appeal.
SEC Investigation: We are the subject of a
Formal Order of Investigation with respect to events and
circumstances surrounding trading in our common stock and the
public release of data from our first pivotal Phase 3 trial
for taribavirin, matters 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 a 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 in its investigation. We cannot predict
the outcome of the investigation.
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. On
January 16, 2007, the court issued an order consolidating
the two cases before Judge Ronald L. Bauer. On February 6,
2007, the court issued a further order abating the Lawson
action due to a procedural defect while the Pronko
action proceeds to conclusion. The plaintiff in the
Pronko action filed an amended complaint on
April 11, 2007. The defendants have not yet responded to
the complaint. We will evaluate the amended complaint and
respond accordingly.
We are a nominal defendant in a shareholder derivative action
pending in the Court of Chancery of the state of Delaware,
styled Sherwood v. Tyson, et. al., filed on
March 20, 2007. This complaint also purports to assert
derivative claims on the Companys behalf for breach of
fiduciary duties, gross mismanagement and waste, constructive
fraud and unjust enrichment related to the alleged backdating of
employee stock options. The plaintiff seeks, among other things,
damages, an accounting, disgorgement, rescission
and/or
repricing of stock options, and imposition of a constructive
trust for the benefit of the Company on amounts by which the
defendants were unjustly enriched. The defendants have not yet
responded to the complaint. We will evaluate the 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, which benefited from patent extensions
in the major European countries that provided market protection
until 2010, has been revoked by the Opposition Division of the
E.P.O. We have filed an appeal within the E.P.O., and a decision
on this appeal is expected in the fall of 2007. A second
European patent, whose term extends to 2017, is the subject of a
current opposition proceeding in the E.P.O. The 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. Under the terms of our license
agreement with Roche, loss of patent protection would result in
the cessation of royalty payments from Roche. However, since
royalty payments from Schering-Plough, our other licensee of
ribavirin, do
18
VALEANT
PHARMACEUTICALS INTERNATIONAL
NOTES TO
CONSOLIDATED CONDENSED FINANCIAL
STATEMENTS (Continued)
not depend on the existence of a patent, payments from
Schering-Plough would continue whatever the outcome of the
Opposition Oral Proceeding. In either case, data exclusivity
applies to these products until 2010.
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
February 8, 2007, we were served a complaint in a case
captioned Kathleen M. OConnor v. Eli
Lilly & Company, Valeant Pharmaceuticals
International, Amarin Corporation plc, Amarin Pharmaceuticals,
Inc., Elan Pharmaceuticals, Inc., and Athena Neurosciences,
Inc., Case No. 07 L 47 in the Circuit Court of the
17th Judicial Circuit, Winnebago County, Illinois. This
case, which has been removed to federal court in the Northern
District of Illinois, alleges that the use of Permax for
restless leg syndrome caused the plaintiff to have valvular
heart disease, and as a result, she suffered damages, including
extensive pain and suffering, emotional distress and mental
anguish. Eli Lilly, holder of the right granted by the FDA to
market and sell Permax in the United States, which right was
licensed to Amarin and the source of the manufactured product,
has also been named in the suit. Under an agreement between
Valeant and Eli Lilly, Eli Lilly will bear a portion of the
liability, if any, associated with this claim. Product liability
insurance exists with respect to this claim. Although it is
expected that the insurance proceeds will be sufficient to cover
existing claims against us, there can be no assurance that
defending against any future similar claims and any resulting
settlements or judgments will not, individually or in the
aggregate, have a material adverse affect 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
our VALEANT trademark. Valent Biosciences has opposed the
registration of the VALEANT trademark by us in certain
jurisdictions, including Argentina, Australia, Brazil, Canada,
Chile, China, Colombia, Czech Republic, European Union, France,
Germany, Indonesia, Israel, Japan, Korea (for the VALEANT
trademark in Korean characters), Malaysia, New Zealand, Romania,
Slovak Republic, Spain, Switzerland, Turkey, Taiwan, Venezuela,
19
VALEANT
PHARMACEUTICALS INTERNATIONAL
NOTES TO
CONSOLIDATED CONDENSED FINANCIAL
STATEMENTS (Continued)
the United Kingdom and the United States. Valent
Biosciences oppositions in Chile, 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. 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 the opposition proceeding in the United
States is currently stayed. Valent Biosciences has also filed
for cancellation of the VALEANT trademark registration in
Austria. If Valents cancellation filing or any of its
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 in 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 management installed by the Yugoslavian government
following its 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 closed. The
parties have agreed to submit this matter to binding
arbitration. An arbitration date has not been set.
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 an
additional $6,000,000 in February 2007. We recorded a gain
resulting from this settlement of $34,000,000 in 2006.
Xcel Pharmaceuticals: In February 2005, 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
and certain third-party claims. Part of the Xcel purchase price
was placed in an escrow fund to provide funds for any
indemnification claims by Valeant. As of March 31, 2007
approximately $5,300,000 of the Xcel purchase price remained in
the escrow fund. The indemnification claim is subject to
arbitration, and a partial final ruling has been issued awarding
the amount of the escrow fund in excess of approximately
$1,500,000 to the former Xcel stockholders, who have filed for a
motion to confirm the partial final order. We are evaluating our
options regarding this matter, including to seek vacatur of the
partial final order. We have taken a charge of $3,800,000 for
this matter in the three months ended March 31, 2007. The
final arbitration hearings are scheduled for June 2007.
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 April 2006 strategic restructuring, the pharmaceutical
segment formerly described as Asia, Africa, and Australia 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).
|
20
VALEANT
PHARMACEUTICALS INTERNATIONAL
NOTES TO
CONSOLIDATED CONDENSED FINANCIAL
STATEMENTS (Continued)
In addition, we have a research and development division. As
part of the restructuring announced on April 3, 2006,
certain of our discovery and pre-clinical development assets
were sold on December 21, 2006 to Ardea.
The segment information below for the three months ended
March 31, 2006 has been restated from our previous
presentations to reflect our new segment structure as described
above.
The following table sets forth the amounts of our segment
revenues and operating income for the three months ended
March 31, 2007 and 2006 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
Revenues
|
|
|
|
|
|
|
|
|
Specialty pharmaceuticals
|
|
|
|
|
|
|
|
|
North America
|
|
$
|
71,570
|
|
|
$
|
75,856
|
|
International
|
|
|
35,457
|
|
|
|
45,189
|
|
EMEA
|
|
|
69,865
|
|
|
|
60,355
|
|
|
|
|
|
|
|
|
|
|
Total specialty pharmaceuticals
|
|
|
176,892
|
|
|
|
181,400
|
|
Alliance revenue (including
Ribavirin royalties)
|
|
|
36,470
|
|
|
|
18,091
|
|
|
|
|
|
|
|
|
|
|
Consolidated revenues
|
|
$
|
213,362
|
|
|
$
|
199,491
|
|
|
|
|
|
|
|
|
|
|
Operating Income
(Loss)
|
|
|
|
|
|
|
|
|
Specialty pharmaceuticals
|
|
|
|
|
|
|
|
|
North America
|
|
$
|
16,747
|
|
|
$
|
23,136
|
|
International
|
|
|
475
|
|
|
|
9,172
|
|
EMEA
|
|
|
15,069
|
|
|
|
4,216
|
|
|
|
|
|
|
|
|
|
|
|
|
|
32,291
|
|
|
|
36,524
|
|
Corporate expenses(1)
|
|
|
(15,893
|
)
|
|
|
(23,142
|
)
|
|
|
|
|
|
|
|
|
|
Total specialty pharmaceuticals
|
|
|
16,398
|
|
|
|
13,382
|
|
Restructuring charges(2)
|
|
|
(7,238
|
)
|
|
|
(26,466
|
)
|
Gain on litigation settlement
|
|
|
|
|
|
|
34,000
|
|
Research and development
|
|
|
12,004
|
|
|
|
(12,290
|
)
|
|
|
|
|
|
|
|
|
|
Consolidated segment operating
income
|
|
|
21,164
|
|
|
|
8,626
|
|
Interest income
|
|
|
4,511
|
|
|
|
2,657
|
|
Interest expense
|
|
|
(10,952
|
)
|
|
|
(10,437
|
)
|
Other, net
|
|
|
1,136
|
|
|
|
938
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
before provision for income taxes and minority interest
|
|
$
|
15,859
|
|
|
$
|
1,784
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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 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. |
21
VALEANT
PHARMACEUTICALS INTERNATIONAL
NOTES TO
CONSOLIDATED CONDENSED FINANCIAL
STATEMENTS (Continued)
The following table sets forth our total assets by segment as of
March 31, 2007 and December 31, 2006 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
December 31,
|
|
Total Assets
|
|
2007
|
|
|
2006
|
|
|
North America
|
|
$
|
442,341
|
|
|
$
|
457,503
|
|
International
|
|
|
202,618
|
|
|
|
202,369
|
|
EMEA
|
|
|
526,035
|
|
|
|
515,268
|
|
Corporate
|
|
|
291,073
|
|
|
|
207,803
|
|
Research and Development Division
|
|
|
89,699
|
|
|
|
122,268
|
|
Discontinued operations
|
|
|
|
|
|
|
226
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,551,766
|
|
|
$
|
1,505,437
|
|
|
|
|
|
|
|
|
|
|
The following table sets forth our long-term assets by segment
as of March 31, 2007 and December 31, 2006 (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
December 31,
|
|
Long-Term Assets
|
|
2007
|
|
|
2006
|
|
|
North America
|
|
$
|
357,230
|
|
|
$
|
353,264
|
|
International
|
|
|
74,344
|
|
|
|
58,763
|
|
EMEA
|
|
|
202,549
|
|
|
|
201,003
|
|
Corporate
|
|
|
68,191
|
|
|
|
75,101
|
|
Research and Development Division
|
|
|
31,977
|
|
|
|
35,105
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
734,291
|
|
|
$
|
723,236
|
|
|
|
|
|
|
|
|
|
|
22
VALEANT
PHARMACEUTICALS INTERNATIONAL
NOTES TO
CONSOLIDATED CONDENSED FINANCIAL
STATEMENTS (Continued)
The following table summarizes the largest of our product lines
by therapeutic class based on sales for the three months ended
March 31, 2007 and 2006 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
Therapeutic Area/Product
|
|
2007
|
|
|
2006
|
|
|
Neurology
|
|
|
|
|
|
|
|
|
Diastat AcuDial(P)
|
|
$
|
11,072
|
|
|
$
|
12,022
|
|
Mestinon(P)
|
|
|
10,551
|
|
|
|
9,817
|
|
Cesamet(P)
|
|
|
5,912
|
|
|
|
3,303
|
|
Librax
|
|
|
3,667
|
|
|
|
2,919
|
|
Dalmane/Dalmadorm(P)
|
|
|
2,335
|
|
|
|
2,466
|
|
Migranal(P)
|
|
|
3,036
|
|
|
|
3,115
|
|
Tasmar(P)
|
|
|
1,982
|
|
|
|
1,185
|
|
Melleril(P)
|
|
|
1,541
|
|
|
|
1,408
|
|
Zelapar(P)
|
|
|
195
|
|
|
|
|
|
Other Neurology
|
|
|
15,592
|
|
|
|
14,692
|
|
|
|
|
|
|
|
|
|
|
Total Neurology
|
|
|
55,883
|
|
|
|
50,927
|
|
|
|
|
|
|
|
|
|
|
Dermatology
|
|
|
|
|
|
|
|
|
Efudix/Efudex(P)
|
|
|
12,476
|
|
|
|
15,581
|
|
Kinerase(P)
|
|
|
8,381
|
|
|
|
6,860
|
|
Oxsoralen-Ultra(P)
|
|
|
3,883
|
|
|
|
3,508
|
|
Dermatix(P)
|
|
|
2,773
|
|
|
|
1,834
|
|
Other Dermatology
|
|
|
7,839
|
|
|
|
8,397
|
|
|
|
|
|
|
|
|
|
|
Total Dermatology
|
|
|
35,352
|
|
|
|
36,180
|
|
|
|
|
|
|
|
|
|
|
Infectious Disease
|
|
|
|
|
|
|
|
|
Infergen(P)
|
|
|
8,970
|
|
|
|
13,705
|
|
Virazole(P)
|
|
|
5,527
|
|
|
|
5,801
|
|
Other Infectious Disease
|
|
|
5,159
|
|
|
|
4,731
|
|
|
|
|
|
|
|
|
|
|
Total Infectious
Disease
|
|
|
19,656
|
|
|
|
24,237
|
|
|
|
|
|
|
|
|
|
|
Other Therapeutic
Classes
|
|
|
|
|
|
|
|
|
Solcoseryl(P)
|
|
|
5,347
|
|
|
|
3,377
|
|
Bisocard(P)
|
|
|
4,694
|
|
|
|
3,565
|
|
Bedoyecta(P)
|
|
|
4,623
|
|
|
|
10,580
|
|
MVI (multi-vitamin infusion)(P)
|
|
|
2,493
|
|
|
|
2,267
|
|
Protamin(P)
|
|
|
2,071
|
|
|
|
1,552
|
|
Espaven(P)
|
|
|
1,867
|
|
|
|
1,302
|
|
Nyal(P)
|
|
|
1,763
|
|
|
|
1,754
|
|
Other products
|
|
|
43,143
|
|
|
|
45,659
|
|
|
|
|
|
|
|
|
|
|
Total Other therapeutic classes
|
|
|
66,001
|
|
|
|
70,056
|
|
|
|
|
|
|
|
|
|
|
Total product sales
|
|
$
|
176,892
|
|
|
$
|
181,400
|
|
|
|
|
|
|
|
|
|
|
Total promoted product sales
|
|
$
|
101,492
|
|
|
$
|
105,002
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(P) |
|
Promoted Products represent products promoted in at least one
major territory with estimated global annual sales greater than
$5 million. |
23
VALEANT
PHARMACEUTICALS INTERNATIONAL
NOTES TO
CONSOLIDATED CONDENSED FINANCIAL
STATEMENTS (Continued)
During the three months ended March 31, 2007 two customers
accounted for more than 10% of consolidated product sales.
During this period, sales to McKesson Corporation and its
affiliates were $28,873,000 in the United States, Canada,
and Mexico and sales to Cardinal Health were $18,649,000 in the
United States. In the three months ended March 31, 2006,
sales to McKesson Corporation and its affiliates were
$23,068,000 and sales to Cardinal Health were $18,112,000.
We have reported the royalties received from the sale of
ribavirin by Schering-Plough and Roche separately from our
specialty pharmaceuticals product sales revenue since these
royalties were first received in 1998. In 2007, we have begun
presenting these royalty revenues within a new category of
revenues, alliance revenue. The following table
provides the details of our alliance revenue in the three months
ended March 31, 2007 and the three months ended
March 31, 2006 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended
|
|
|
|
March 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
Ribavirin royalty
|
|
$
|
17,220
|
|
|
$
|
18,091
|
|
Licensing payment
|
|
|
19,200
|
|
|
|
|
|
Other
|
|
|
50
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total alliance revenue
|
|
$
|
36,470
|
|
|
$
|
18,091
|
|
|
|
|
|
|
|
|
|
|
The licensing payment of $19,200,000 was received from
Schering-Plough as the initial payment to us in the licensing of
pradefovir. Alliance revenue for the three months ended
March 31, 2007 also included a $50,000 payment from an
unrelated third party for a license to certain intellectual
property assets.
24
|
|
Item 2.
|
Managements
Discussion and Analysis of Financial Condition and Results of
Operations
|
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. Our marketing and promotion efforts
focus on our Promoted Products, which include products marketed
globally, regionally or 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 alliance revenue in
the form of pradefovir licensing payments from Schering-Plough
and royalties from the sale of ribavirin by Schering-Plough and
Roche, although such royalties are expected to decline as a
result of market competition and ultimately the loss of patents
and data exclusivity in European markets and Japan.
Specialty
Pharmaceuticals
Product sales from our specialty pharmaceutical segments
accounted for 83% of our total revenue from continuing
operations for the three months ended March 31, 2007,
compared with 91% for the corresponding period in 2006, and
decreased $4,508,000 (2%) for the three months ended
March 31, 2007 over the same period in 2006. Product sales
in the three months ended March 31, 2007 were impacted by
reduced sales to certain wholesalers in Mexico and by lower
sales of Infergen and Efudex in the United States, compared with
the same period in 2006. The reduced sales in Mexico resulted
from a competitive reaction to our 2006 distribution channel
restructuring in Mexico which we consider to be transitory and
not reflective of underlying demand for our products. The
decrease in specialty pharmaceutical sales for the three months
ended March 31, 2007 was due to a 9% reduction in volume,
partly offset by a 5% price increase and a 2% benefit from
foreign exchange fluctuations. Product sales from our Promoted
Products decreased $3,510,000 (3%) for the three months ended
March 31, 2007 over the same period in 2006.
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 $23,110,000 for the three months ended
March 31, 2007, compared to $29,554,000 for the same period
in 2006, resulting in a decrease of $6,444,000 (22%). In April
2006 we announced a major restructuring program which has
resulted in a reduction of the size and scope of our research
and development activities.
Alliance
Revenues
Alliance revenue for the three months ended March 31, 2007
comprised the $19,200,000 pradefovir licensing payment from
Schering-Plough, $17,220,000 of ribavirin royalties, and a
separate licensing payment of $50,000. Ribavirin royalty
revenues decreased $871,000 (5%) and accounted for 8% of our
total revenues from continuing operations for the three months
ended March 31, 2007 as compared to 9% in the similar
three-month period in 2006. The decrease in ribavirin royalties
reflects: competitive dynamics between Roche and Schering-Plough
in Europe, as Roches version of ribavirin, Copegus, gained
market share over Schering-Ploughs version of ribavirin,
Rebetol, and reduced sales in Japan. We expect ribavirin
royalties to continue to decline as a result of market
competition between Schering-Plough and Roche and government
pricing policies. Valeant is not able to predict when or whether
future possible milestones or royalties on pradefovir will be
paid.
25
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 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 from third parties product candidates,
technologies and businesses that 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 implemented 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: taribavirin, a potential treatment for
hepatitis C, and retigabine, a potential treatment for
partial onset seizures in patients with epilepsy and for
neuropathic pain. The restructuring program is designed to
rationalize our investments in research and development efforts
in line with our financial resources. We previously announced
our intentions 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, 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 2b trials. We continue to
pursue partnering opportunities for taribavirin 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.
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 10 of notes to consolidated
condensed financial statements included elsewhere in this
quarterly report.
26
The following tables compare 2007 and 2006 revenues by
reportable segments and operating expenses for the three months
ended March 31, 2007 and 2006 (in thousands, except
percentages):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
Increase/
|
|
|
Percent
|
|
|
|
2007
|
|
|
2006
|
|
|
(Decrease)
|
|
|
Change
|
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Specialty pharmaceuticals
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North America
|
|
$
|
71,570
|
|
|
$
|
75,856
|
|
|
$
|
(4,286
|
)
|
|
|
(6
|
)%
|
International
|
|
|
35,457
|
|
|
|
45,189
|
|
|
|
(9,732
|
)
|
|
|
(22
|
)%
|
EMEA
|
|
|
69,865
|
|
|
|
60,355
|
|
|
|
9,510
|
|
|
|
16
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total specialty pharmaceuticals
|
|
|
176,892
|
|
|
|
181,400
|
|
|
|
(4,508
|
)
|
|
|
(2
|
)%
|
Alliance revenue (including
Ribavirin royalties)
|
|
|
36,470
|
|
|
|
18,091
|
|
|
|
18,379
|
|
|
|
102
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
213,362
|
|
|
|
199,491
|
|
|
|
13,871
|
|
|
|
7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs and Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs of goods sold (excluding
amortization)
|
|
|
52,098
|
|
|
|
58,601
|
|
|
|
(6,503
|
)
|
|
|
(11
|
)%
|
Selling expenses
|
|
|
64,434
|
|
|
|
64,275
|
|
|
|
159
|
|
|
|
0
|
%
|
General and administrative expenses
|
|
|
26,187
|
|
|
|
28,446
|
|
|
|
(2,259
|
)
|
|
|
(8
|
)%
|
Research and development costs
|
|
|
23,110
|
|
|
|
29,554
|
|
|
|
(6,444
|
)
|
|
|
(22
|
)%
|
Gain on litigation settlement
settlement
|
|
|
|
|
|
|
(34,000
|
)
|
|
|
|
|
|
|
|
|
Restructuring charges and asset
impairment
|
|
|
7,238
|
|
|
|
26,466
|
|
|
|
(19,228
|
)
|
|
|
(73
|
)%
|
Amortization expense
|
|
|
19,131
|
|
|
|
17,523
|
|
|
|
1,608
|
|
|
|
9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
$
|
21,164
|
|
|
$
|
8,626
|
|
|
$
|
12,538
|
|
|
|
145
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit on product sales
(excluding amortization)
|
|
$
|
124,794
|
|
|
$
|
122,799
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin
|
|
|
71
|
%
|
|
|
68
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In the North America pharmaceuticals segment, revenues for the
three months ended March 31, 2007 were $71,570,000,
compared to $75,856,000 for the same period in 2006,
representing a decrease of $4,286,000 (6%). The region reported
declines in sales of Infergen, Efudex, and Diastat AcuDial,
along with decreased sales of certain non-promoted products,
which were partly offset by increased sales in the first quarter
of Cesamet, Librax, and Kinerase. The decrease in sales of
Infergen reflected a decline in the overall market for
interferon products in the United States resulting from changes
in the treatment of hepatitis C patients. The decline in
Efudex sales primarily reflects the pull-through of inventory
from our launch of an authorized generic version of Efudex at
the end of 2006. The reported growth of Cesamet reflects strong
demand for Cesamet in Canada. Product sales in the North America
region were 41% of total product sales in the three months ended
March 31, 2007, respectively, compared to 42% of total
product sales for the same period in 2006. The North America
sales decrease of 6% resulted from a volume decrease of 16%
offset by a price increase of 10%, with minimal impact from
currency fluctuations in Canada.
In the International pharmaceuticals segment, revenues for the
three months ended March 31, 2007 were $35,457,000 compared
to $45,189,000 for the same period in 2006, a decrease of
$9,732,000 (22%). The decline was driven by a significant
reduction in sales in Mexico, which was precipitated by a
negotiating tactic by two major wholesalers, who felt
disadvantaged by changes we made in our distribution operations
in 2006. This impacted Bedoyecta and nearly all products in
Mexico. We view this as a transitory issue and believe it does
not impact underlying demand for our products in Mexico. The
region reported increased sales in the first quarter of Espaven
and M.V.I., which were offset by declines in sales of Bedoyecta,
Mestinon and Reptilase along with decreased sales of
non-promoted products. The International sales decrease of 22%
resulted from a 26% decrease in volume and a 1% negative impact
from currency fluctuations, partially offset by a 5% price
increase.
In the EMEA pharmaceuticals segment, revenues for the three
months ended March 31, 2007 were $69,865,000, compared to
$60,355,000 for the same period in 2006, representing an
increase of $9,510,000
27
(16%). The EMEA sales increase resulted from an 11% increase in
volume and an 8% benefit from currency fluctuations, offset by a
3% reduction in aggregate prices, and increased sales in the
first quarter of Solcoseryl, Tasmar, Mestinon and Dermatix,
which were offset by declines in sales of Tepilta and
Calcitonin, along with decreased sales of non-promoted products.
Also contributing $492,000 to the sales increase was the
acquisition of the European rights to nabilone, the product we
sell as Cesamet in the United States and Canada. Sales in
Germany for the three months ended March 31, 2006 were
negatively impacted by wholesaler buying patterns. Europe
continues to be impacted by government-imposed price reductions
and lower sales volume of non-promoted products.
Alliance Revenue (including Ribavirin
royalties): Ribavirin royalties represent amounts
earned under the ribavirin 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 months
ended March 31, 2007 were $17,220,000, compared to
$18,091,000 for the same period in 2006. Such royalties are
expected to decline as a result of market competition, price
reductions and the eventual loss of exclusivity in Europe and
Japan. Alliance revenues in the three months ended
March 31, 2007 included a licensing payment of $19,200,000
which we received from Schering-Plough as an initial payment for
the license to pradefovir. Valeant is not able to predict when
or whether future possible milestones or royalties on pradefovir
will be paid. Alliance revenue in the three months ended
March 31, 2007 also included $50,000 paid to us by an
unrelated third party for certain intellectual property rights.
Gross Profit Margin (excluding
amortization): Gross profit margin on product
sales was 71% for the first quarter of 2007, compared with 68%
for the same period in 2006. The increase in gross profit margin
primarily reflects reduced inventory write-offs and a temporary
shut-down in the first three months of 2006 of our manufacturing
facility in Mexico. Our purchase of a
paid-up
license to Kinetin and Zeatin, the active ingredients in
Kinerase, also benefited our gross margin as we no longer are
required to pay royalties on this product line.
Selling Expenses: Selling expenses were
$64,434,000 for the three months ended March 31, 2007,
compared to $64,275,000 for the same period in 2006. As a
percent of product sales, selling expenses were 36% for the
three months ended March 31, 2007, compared to 35% for the
same period in 2006, with the increase in percentage being
primarily due to the lower level of product sales in the first
three months of 2007.
General and Administrative Expenses: General
and administrative expenses were $26,187,000 for the three
months ended March 31, 2007, compared to $28,446,000 for
the same period in 2006, resulting in a decrease of $2,259,000
(8%). The decrease in general and administrative expenses
reflects savings from our strategic restructuring program. As a
percent of product sales, general and administrative expenses
were 15% for the three months ended March 31, 2007,
compared to 16% for the same period in 2006. Included in general
and administrative expenses in the three months ended
March 31, 2007 was a $3,800,000 expense for the arbitration
loss on the indemnification claim we had against the former
shareholders of Xcel Pharmaceuticals associated with sales of
Xcel products prior to our acquisition of the company. This was
partially offset by a $2,200,000 gain on the sale of an
ophthalmic business in Europe.
Research and Development: Research and
development expenses were $23,110,000 for the three months ended
March 31, 2007, compared to $29,554,000 for the same period
in 2006, resulting in a decrease of $6,444,000 (22%). This
decrease reflects the completion of the VISER clinical trials
for taribavirin and savings from our strategic restructuring
program. We have significantly reduced the scope of our research
and development activities. On January 9, 2007, we licensed
the development and commercialization rights to pradefovir to
Schering-Plough. On December 21, 2006, we sold our HIV and
cancer development programs and certain discovery and
preclinical assets to 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 2b trials.
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 received the
remaining amount in February 2007.
28
Restructuring
Charges:
We have revised our estimate of the total costs of the
restructuring program that we initiated in 2006. We anticipate
that the total restructuring program will result in charges that
will range between $145,000,000 and $155,000,000. These charges
include impairment charges resulting from the sale of our former
headquarters facility and discovery and pre-clinical operations
equipment and from the planned sale of our manufacturing
facilities in Puerto Rico and Switzerland. The anticipated
charges also include employee severance costs resulting from a
total reduction of approximately 850 employees, the majority of
whom work in the manufacturing facilities which will be sold. As
of March 31, 2007, employee severance costs have been
accrued for 480 employees.
We recorded provisions of $7,238,000 in the three months ended
March 31, 2007, in connection with the restructuring
program, compared with $26,466,000 for the same period in 2006.
Severance charges recorded in the three months ended
March 31, 2007 total $3,781,000 and relate to employees
whose positions were eliminated in the restructuring. The
restructuring charges for the three months ended March 31,
2007 represent charges of $3,042,000, $2,177,000 and $2,019,000
in respect of the North America, EMEA and Corporate reporting
segments, respectively.
We expect to sell our factories in Basel, Switzerland and Puerto
Rico in the next three months. We transferred these factories to
held for sale classification in accordance with
FAS 144, Accounting for the Impairment or Disposal of
Long-Lived Assets, in December 2006.
Restructuring
Charge Details (in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months
|
|
|
Year
|
|
|
Three Months
|
|
|
|
|
|
|
|
|
|
Ended
|
|
|
Ended
|
|
|
Ended
|
|
|
Cumulative
|
|
|
Estimated
|
|
|
|
March 31,
|
|
|
December 31,
|
|
|
March 31,
|
|
|
Total
|
|
|
Total Upon
|
|
|
|
2006
|
|
|
2006
|
|
|
2007
|
|
|
Incurred
|
|
|
Completion
|
|
|
Employee Severances (approximately
480 employees)
|
|
$
|
6,644
|
|
|
$
|
16,997
|
|
|
$
|
3,781
|
|
|
$
|
20,778
|
|
|
$
|
20,000-$23,000
|
|
Contract cancellation and other
cash costs
|
|
|
|
|
|
|
1,662
|
|
|
|
2,081
|
|
|
|
3,743
|
|
|
$
|
3,000-$5,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal: Cash Charges
|
|
|
6,644
|
|
|
|
18,659
|
|
|
|
5,862
|
|
|
|
24,521
|
|
|
$
|
23,000-$28,000
|
|
Abandoned software and other
capital assets
|
|
|
19,822
|
|
|
|
22,178
|
|
|
|
|
|
|
|
22,178
|
|
|
$
|
22,000-$23,000
|
|
Impairment of manufacturing and
research facilities
|
|
|
|
|
|
|
97,344
|
|
|
|
1,376
|
|
|
|
98,720
|
|
|
$
|
100,000-$104,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal: Non-cash charges
|
|
|
19,822
|
|
|
|
119,522
|
|
|
|
1,376
|
|
|
|
120,898
|
|
|
$
|
122,000-$127,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total:
|
|
$
|
26,466
|
|
|
$
|
138,181
|
|
|
$
|
7,238
|
|
|
$
|
145,419
|
|
|
$
|
145,000-$155,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reconciliation
of Cash Restructuring Payments with Restructuring
Accrual
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 is as follows (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
Three Months
|
|
|
|
|
|
|
Ended
|
|
|
Three Months
|
|
|
|
December 31,
|
|
|
Ended
|
|
|
|
2006
|
|
|
March 31, 2007
|
|
|
Opening accrual
|
|
$
|
4,453
|
|
|
$
|
5,216
|
|
Charges to earnings
|
|
|
3,699
|
|
|
|
6,024
|
|
Cash paid
|
|
|
(2,936
|
)
|
|
|
(5,309
|
)
|
|
|
|
|
|
|
|
|
|
Closing accrual
|
|
$
|
5,216
|
|
|
$
|
5,931
|
|
|
|
|
|
|
|
|
|
|
29
We have recorded impairment charges of $534,000 related to our
manufacturing plant in Humacao Puerto Rico and $615,000 related
to our manufacturing plant in Birsfelden, Switzerland in the
three months ended March 31, 2007. Included within these
charges is $162,000 of cash-related charges.
Amortization: Amortization expense was
$19,131,000 for the three months ended March 31, 2007,
compared to $17,523,000 for the same period in 2006, resulting
in an increase of $1,608,000 (9%). The increase is the result of
the acquisition of product rights for Kinerase, nabilone and
Melleril, offset in part by a declining amortization expense for
the rights to the ribavirin royalty.
Other Income (expense), Net, Including Translation and
Exchange: Other income (expense), net, including
translation and exchange was income of $1,136,000 in the three
months ended March 31, 2007, compared to income of $938,000
for the same period in 2006.
Interest Expense, net: Interest expense net of
interest income decreased $1,339,000 (17%) during the three
months ended March 31, 2007, compared to the same period in
2006, primarily as a result of higher interest income on higher
cash and investment securities balances.
Income Taxes: The tax provisions in the first
quarter of both 2007 and 2006 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 United States. Our U.S. operations,
which include our research and development activities, generate
substantial net operating losses for United States 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.
Income from Discontinued Operations, Net of
Taxes: Our income from discontinued operations
was $1,000 for the three months ended March 31, 2007. This
compares to a loss of $212,000 in the three-month period ended
March 31, 2006. The loss from discontinued operations
relates to closure and wind up of discontinued manufacturing
operations in Central Europe and a discontinued Biomedicals
facility in Irvine, California.
Liquidity
and Capital Resources
Cash and marketable securities totaled $363,753,000 at
March 31, 2007 compared to $335,745,000 at
December 31, 2006. The increase in cash of $28,008,000
resulted from the sale of the former headquarters building in
Costa Mesa, California for $36,758,000, the $19,200,000
pradefovir licensing payment from Schering-Plough, the
collection of the $6,000,000 settlement payment from the
Republic of Serbia, offset in part by the reduction in trade
payables and accrued liabilities. Working capital was
$536,742,000 at March 31, 2007 compared to $529,767,000 at
December 31, 2006. The increase in working capital of
$6,975,000 primarily resulted from the increase in cash and
decrease in trade payables and accrued liabilities, partly
offset by a reduction in accounts receivable.
Cash provided by operating activities is expected to be our
primary source of funds in 2007. During the three months ended
March 31, 2007, cash provided by operating activities
totaled $27,186,000 compared to $40,838,000 in the same period
in 2006, representing a decrease of $13,652,000. The cash
provided by operating activities for the three months ended
March 31, 2007 included receipt of $19,200,000 related to
the pradefovir licensing payment from Schering-Plough. The cash
provided by operating activities for the three months ended
March 31, 2006 included receipt of $28,000,000 from the
Republic of Serbia. Other than the impact of these two
individual receipts the decline in cash provided by operating
activities was a result of a reduction of accounts payable and
income tax liabilities, offset by a reduction of accounts
receivable.
Cash provided by investing activities was $4,433,000 for the
three months ended March 31, 2007 compared with cash used
in investing activities of $14,857,000 for the same period in
2006. In 2007, cash provided by investing activities included
$36,758,000 from the sale of our former Costa Mesa headquarters
and research facility, and $1,686,000 for the sale of an
ophthalmics business in Europe, offset in part by cash used for
product acquisitions of $31,325,000 and cash used to purchase
marketable securities of $6,800,000. 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.
30
Cash used in financing activities was $3,006,000 in the three
months ended March 31, 2007 and principally consisted of
payments of long-term debt of $7,750,000, including the
extinguishment of a mortgage in Switzerland, partly offset by
proceeds from stock options of $3,855,000 and proceeds from the
employee stock purchase plan of $359,000. We did not pay
dividends on common stock in the three months ended
March 31, 2007. Cash used in financing activities was
$6,900,000 in the three months ended March 31, 2006 and
principally consisted of dividends paid on common stock of
$7,173,000 offset in part by cash proceeds for employee stock
option exercises.
In January 2005, we entered into an interest rate swap agreement
with respect to $150,000,000 principal amount of our
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
March 31, 2007, we have collateral of $8,060,000 comprising
marketable securities and included in other assets in the
accompanying balance sheet.
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 March 31, 2008,
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.
We declared and paid quarterly cash dividends of
$0.0775 per share for the first quarter of 2006. We did not
pay dividends for the first quarter of 2007. Our board of
directors will continue to review our dividend policy. The
amount and timing of any future dividends will depend upon our
financial condition and profitability, the need to retain
earnings for use in the development of our business, contractual
restrictions, including covenants, and other factors. There are
significant contractual limitations on our ability to pay
dividends under the terms of the indenture governing our
7% senior notes due 2011.
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
Taribavirin: Taribavirin (formerly referred to
as Viramidine) is a nucleoside (guanosine) analog that is
converted into ribavirin by adenosine deaminase in the liver and
intestine. We are developing taribavirin in oral form for the
treatment of hepatitis C.
Preclinical studies indicated that taribavirin, a
liver-targeting analog of ribavirin, has antiviral and
immunological activities (properties) similar to ribavirin. In
an animal model of acute hepatitis, taribavirin showed biologic
activity similar to ribavirin. The liver-targeting properties of
taribavirin were also confirmed in two animal models. Short-term
toxicology studies showed that taribavirin may be safer than
ribavirin at the same dosage levels. This data suggested that
taribavirin, as a liver-targeting analog of ribavirin, could
potentially be as effective and have a lower incidence of anemia
than ribavirin.
In 2006, we reported the results of two pivotal Phase 3
trials for taribavirin. The VISER (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 endpoint but did not meet the efficacy endpoint.
31
The studies demonstrated that
38-40 percent
of patients treated with taribavirin achieved SVR and that the
drug has a clear safety advantage over ribavirin, but that it
was not comparable to ribavirin in efficacy at the doses
studied. We believe that the results of the studies were
significantly impacted by the dosing methodology which employed
a fixed dose of 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
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 taribavirin at 20, 25 and
30 mg/kg in combination with pegylated interferon. A
ribavirin control arm also is included in the study. The primary
endpoint for the study will be the week 12 analysis. If the
results of the
12-week
analysis are positive, we plan to select a dose and initiate a
large Phase 3 study. If we initiate a Phase 3 study,
we may seek a partner to share the investment and risk of this
larger development program.
The timeline and path to regulatory approval of taribavirin
remains uncertain at this time. The completion of another
Phase 3 trial would 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 taribavirin and
possibly weakening its position in relation to competing
treatments. Our external research and development expenses for
taribavirin were $1,587,000 for the three months ended
March 31, 2007, compared with $6,693,000 for the same
period in 2006.
Retigabine: We are developing retigabine as an
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 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) is being
conducted at approximately 50 sites, mainly in the Americas
(U.S., Central/South America); the second Phase 3 trial
(RESTORE2) is being 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. Both RESTORE1 and RESTORE2 are
approximately 80% enrolled.
A number of standard supportive Phase 1 trials necessary
for successful registration of retigabine will start in 2007. In
March 2007 we initiated development of a sustained release
formulation of retigabine. In addition, in April 2007 we filed
an IND for the treatment of post herpetic neuralgia (PHN), a
common form of neuropathic pain.
Assuming successful completion of the Phase 3 trials and
approval by the FDA and EMEA, we expect to launch retigabine in
the United States and Europe in 2009. We plan to seek a partner
to share the investment and risk in the development of
retigabine. For the three months ended March 31, 2007,
external research and development expenses for retigabine were
$8,703,000, compared with $4,015,000 for the same period in 2006.
Pradefovir: Pradefovir is a compound that we
licensed from Metabasis Therapeutics, Inc., or Metabasis, in
October 2001. We had been engaged in the development of this
compound 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.
In January 2007, we licensed development and commercial rights
to pradefovir to Schering-Plough. Under the terms of the
assignment and license agreement, Schering-Plough made an
upfront cash 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 cash 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 if pradefovir
successfully completes development. The amount to be paid to
Metabasis includes the remaining $16,000,000 in milestone
32
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. Valeant is not able
to predict when or whether future possible milestones or
royalties on pradefovir will be paid.
Based on preliminary results of a
24-month
oral carcinogenicity study in mice and rats submitted to
Schering-Plough,
we have agreed, at Schering-Ploughs request, to
discontinue dosing of all patients in the pradefovir extension
study as a precautionary measure, pending further analysis of
the data by the Schering-Plough team. We have notified the
appropriate health authorities and clinical investigators.
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 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 then underway to expand the
labeled indications of Infergen. In the DIRECT trial (IHRC-001)
which started in the second quarter of 2004, 514 patients
were enrolled. As of March 31, 2007, this study has been
completed. 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 mcg and 15 mcg
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 mcg and 15 mcg groups, respectively.
The second DIRECT trial (IHRC-002) has enrolled
144 patients of the possible 171 and is still ongoing. As
of March 31, 2007, five 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
(i.e., last patient visit) for IHRC-002 is expected to be
completed in the third quarter of 2007. We expect to report and
publish the results from these studies sometime in late 2007.
In March 2007, we initiated a Phase 4 study to evaluate the
use of Infergen 15 mcg/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 >2log 10 decline in HCV RNA at week
12 but still have detectable virus (partial
responders). The patients will be immediately randomized
to receive Infergen 15 mcg/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.
For the three months ended March 31, 2007, external
research and development expenses for Infergen were $2,120,000,
compared with $1,861,000 for the same period in 2006.
Cesamet: Cesamet (nabilone), a synthetic
cannabinoid, was approved by the FDA on May 15, 2006 for
the treatment of cancer chemotherapy-induced nausea and vomiting
(CINV) in patients who have failed to respond adequately to
conventional antiemetic treatments. We also market the product
in Canada for CINV. In recent years, there has been increasing
scientific and clinical evidence regarding the efficacy of
cannabinoids in different types of pain, including chronic
neuropathic pain. Certain chemotherapy regimens result in
neuropathic pain, with more than 90% of patients being affected.
We submitted an Investigational New Drug Application to the FDA
in January 2007, to evaluate Cesamet in the treatment of chronic
neuropathic pain associated with cancer chemotherapy. We expect
to start this development program in 2007.
33
Foreign
Operations
Approximately 63% and 66% of our revenues from continuing
operations, which includes royalties, for the three months ended
March 31, 2007 and 2006, 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.
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 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 5% 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
34
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 rights to return products to
us under certain conditions. Historically and in the three month
periods ended March 31, 2007 and 2006, the provision for
sales returns was less than 3% 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.
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 based
on the recognition and measurement criteria of FIN 48,
which involves significant management judgment. New laws and new
interpretations of laws and rulings by tax authorities may
affect the liability for uncertain tax positions. Due to the
subjectivity and complex nature of the underlying issues, 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.
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
35
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.
Stock-based
Compensation Expense
We apply 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 three months ended March 31, 2007
was $3,981,000, compared with $5,618,000 for the similar time
period in 2006. We adopted SFAS 123(R) on a prospective
basis and have not restated financial statements for prior years.
We estimate the value of employee stock options on the date of
grant using the Black-Sholes 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 stock options granted during the three months ended
March 31, 2007 and 2006 was $7.37 and $7.83, respectively,
determined using the Black Sholes model and the following
weighted-average assumptions:
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|
|
|
|
|
|
2007
|
|
2006
|
|
Weighted-average life (years)
|
|
5.73
|
|
4.10 - 5.80
|
Stock price volatility
|
|
36% - 37%
|
|
37% - 39%
|
Expected dividend per share
|
|
$0.00
|
|
$0.00 - $0.31
|
Risk-free interest rate
|
|
4.52 - 4.70%
|
|
4.54 - 4.80%
|
Weighted-average fair value of
options (per share)
|
|
$7.37
|
|
$7.83
|
As stock-based compensation expense recognized in the
consolidated statement of operations in 2007 and 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 March 31, 2007 is $20,617,000. This will be amortized to
expense as follows: $11,188,000 in the remaining quarters of
2007, $6,132,000 in 2008, $2,520,000 in 2009 and $777,000 in
2010 and thereafter.
36
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
non-income tax matters. 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 9 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 months ended March 31, 2007 and 2006,
PricewaterhouseCoopers LLP reported that they have applied
limited procedures in accordance with professional standards for
a review of such information. However, their report dated
May 8, 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 LLP 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 LLP 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. 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 differ materially from those
anticipated by our management. 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.
Forward-looking statements may be identified by the use of the
words anticipates, expects,
intends, plans, and variations or
similar expressions. You should understand that various
important factors and assumptions, including those set forth
below, could cause our actual results to differ materially from
those anticipated in this report.
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|
|
The future growth of our business depends on the development and
approval of new products by us and our licensees, including
taribavirin, pradefovir 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 develop our products
due to these or other factors could have a material adverse
effect on future revenues.
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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
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37
|
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|
|
|
ribavirin has resulted in significant competition from generic
substitutes and declining royalty revenues and may negatively
impact future financial results.
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|
|
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|
Trade secret protection is less effective than patent protection
because competitors may discover our 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 March 31, 2007 we have in place foreign
currency hedge 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. 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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38
|
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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 9 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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|
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 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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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 and the Canadian
Dollar. 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
March 31, 2007, the fair values of our financial
instruments were as follows (in thousands):
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|
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|
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|
|
|
|
|
|
|
|
|
|
Notional/
|
|
|
Assets (Liabilities)
|
|
|
|
Contract
|
|
|
Carrying
|
|
|
Fair
|
|
Description
|
|
Amount
|
|
|
Value
|
|
|
Value
|
|
|
Forward contracts
|
|
$
|
114,000
|
|
|
$
|
(434
|
)
|
|
$
|
(434
|
)
|
Interest rate swaps
|
|
|
150,000
|
|
|
|
(3,681
|
)
|
|
|
(3,681
|
)
|
Outstanding debt
|
|
|
780,000
|
|
|
|
(780,000
|
)
|
|
|
(724,000
|
)
|
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
March 31, 2007, we had $679,000 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 first quarter
39
2007 pretax earnings. In addition, we have $780,000,000 of fixed
rate debt as of March 31, 2007 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
$29,500,000 as of March 31, 2007.
We estimated the sensitivity of the fair value of our derivative
Polish Zloty to U.S. Dollar exchange contracts to a
hypothetical 10% strengthening and 10% weakening of the spot
exchange rates for the U.S. Dollar against the Zloty at
March 31, 2007. The analysis showed that a 10%
strengthening of the U.S. Dollar would have resulted in a
gain from a fair value change of $6,683,000 and a 10% weakening
of the U.S. Dollar would have resulted in a loss from a
fair value change of $8,169,000 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.
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Item 4.
|
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 the Chief Executive
Officer and Chief Financial Officer, as appropriate, to allow
timely decisions regarding required disclosure. In designing and
evaluating the disclosure controls and procedures, we recognize
that any controls and procedures, no matter how well designed
and operated, can provide only reasonable assurance of achieving
the desired control objectives, and that we necessarily are
required to apply our judgment in evaluating the cost-benefit
relationship of possible controls and procedures.
As of March 31, 2007, we conducted an evaluation of the
effectiveness of the design and operation of our disclosure
controls and procedures (as defined in
Rule 13a-15(c)
under the Securities Exchange Act of 1934). This evaluation was
carried out under the supervision and with the participation of
our management, including the Chief Executive Officer and Chief
Financial Officer. Based upon the foregoing, our Chief Executive
Officer and Chief Financial Officer concluded that our
disclosure controls and procedures were effective.
There has been no change in our internal controls over financial
reporting that occurred during the three months ended
March 31, 2007 that has materially affected, or is
reasonably likely to materially affect, the internal controls
over financial reporting.
PART II
OTHER INFORMATION
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|
Item 1.
|
Legal
Proceedings
|
See Note 9 of notes to consolidated condensed financial
statements in Item 1 of Part I of this quarterly
report, which is incorporated herein by reference.
Item 1A. Risk
Factors
Our Annual Report on
Form 10-K
for the year ended December 31, 2006 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.
Accordingly, the information presented below should be read in
conjunction with the risk factors and information disclosed in
our most recent
Form 10-K
and the other risks described in this
Form 10-Q.
If we,
our partners or licensees cannot successfully develop or obtain
future products and commercialize those products, our growth
would be delayed.
Our future growth will depend, in large part, upon our ability
or the ability of our partners or licensees to develop or obtain
and commercialize new products and new formulations of, or
indications for, current products. We are engaged in an active
development program involving compounds owned by us or licensed
from others which
40
we may commercially develop in the future. We are in clinical
trials for taribavirin and retigabine. Partners or licensees may
also help us develop these and other product candidates in the
future and are responsible for developing other product
candidates, such as pradefovir, that have been licensed to them.
The process of successfully commercializing products is time
consuming, expensive and unpredictable. There can be no
assurance that we, our partners or our licensees will be able to
develop or acquire new products, successfully complete clinical
trials, obtain regulatory approvals to use these products for
proposed or new clinical indications, manufacture the potential
products in compliance with regulatory requirements or in
commercial volumes, or gain market acceptance for such products.
In addition, changes in regulatory policy for product approval
during the period of product development and regulatory agency
review of each submitted new application may cause delays or
rejections. It may be necessary for us to enter into other
licensing arrangements, similar to our ribavirin arrangements
with Schering-Plough and Roche, with other pharmaceutical
companies in order to market effectively any new products or new
indications for existing products. There can be no assurance
that we will be successful in entering into such licensing
arrangements on terms favorable to us or at all.
There can be no assurance that the clinical trials of any of our
product candidates, including taribavirin and retigabine, or
those of our licensees, including pradefovir, will be
successful, that the product candidates will be granted approval
to be marketed for any of the indications being sought or that
any of the product candidates will result in a commercially
successful product.
The
pending SEC investigation could adversely affect our business
and the trading price of our securities.
The SEC is conducting an investigation regarding events and
circumstances surrounding trading in our common stock and the
public release of data from our first pivotal Phase 3 trial
for taribavirin. In addition, the SEC 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. The Special Committee concluded its investigation in
January 2007. We have briefed the SEC with the results of the
Special Committees investigation. We have cooperated fully
and will continue to cooperate with the SEC on its
investigation. We cannot predict the outcome of the
investigation. In the event that the investigation 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 investigation
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 investigation is concluded.
41
|
|
|
|
|
Exhibit
|
|
|
|
|
3
|
.1
|
|
Restated Certificate of
Incorporation, as amended to date, previously filed as
Exhibit 3.1 to the Registrants
Form 10-Q
for the quarter ended September 30, 2003, which is
incorporated herein by reference.
|
|
3
|
.2
|
|
Certificate of Designation,
Preferences and Rights of Series A Participating Preferred
Stock previously filed as Exhibit 3.1 to the
Registrants Current Report on
Form 8-K,
dated October 6, 2004, which is incorporated herein by
reference.
|
|
3
|
.3
|
|
Amended and Restated Bylaws of the
Registrant previously filed as Exhibit 3.1 to the
Registrants Current Report on
Form 8-K,
dated November 6, 2006, which is incorporated herein by
reference.
|
|
10
|
.1
|
|
Description of Registrants
Executive Incentive Plan, previously filed as Item 5.02 in
the Registrants Current Report on
Form 8-K,
dated March 28, 2007, which is incorporated herein by
reference.
|
|
15
|
.1
|
|
Review Report of Independent
Registered Public Accounting Firm.
|
|
15
|
.2
|
|
Awareness Letter 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.
|
42
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: May 8, 2007
Peter J. Blott
Executive Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)
Date: May 8, 2007
43
EXHIBIT INDEX
|
|
|
|
|
Exhibit
|
|
|
|
|
3
|
.1
|
|
Restated Certificate of
Incorporation, as amended to date, previously filed as
Exhibit 3.1 to the Registrants
Form 10-Q
for the quarter ended September 30, 2003, which is
incorporated herein by reference.
|
|
3
|
.2
|
|
Certificate of Designation,
Preferences and Rights of Series A Participating Preferred
Stock previously filed as Exhibit 3.1 to the
Registrants Current Report on
Form 8-K,
dated October 6, 2004, which is incorporated herein by
reference.
|
|
3
|
.3
|
|
Amended and Restated Bylaws of the
Registrant previously filed as Exhibit 3.1 to the
Registrants Current Report on
Form 8-K,
dated November 6, 2006, which is incorporated herein by
reference.
|
|
10
|
.1
|
|
Description of Registrants
Executive Incentive Plan, previously filed as Item 5.02 in
the Registrants Current Report on
Form 8-K,
dated March 28, 2007, which is incorporated herein by
reference.
|
|
15
|
.1
|
|
Review Report of Independent
Registered Public Accounting Firm.
|
|
15
|
.2
|
|
Awareness Letter 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.
|
44