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
September 30, 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
(State or other jurisdiction
of
incorporation or organization)
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33-0628076
(I.R.S. Employer
Identification No.)
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One Enterprise,
Aliso Viejo, California
(Address of principal
executive offices)
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92656
(Zip
Code)
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(949) 461-6000
(Registrants telephone
number, including area code)
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of
the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been
subject to such filing requirements for the past
90 days. Yes 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 November 5, 2007 was
90,988,591.
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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VALEANT
PHARMACEUTICALS INTERNATIONAL
CONSOLIDATED CONDENSED BALANCE SHEETS
As of September 30, 2007 and December 31, 2006
(In thousands, except par value data)
|
|
|
|
|
|
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September 30,
|
|
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December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(Unaudited)
|
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|
|
|
|
ASSETS
|
Current Assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
354,996
|
|
|
$
|
326,002
|
|
Marketable securities
|
|
|
13,833
|
|
|
|
9,743
|
|
Accounts receivable, net
|
|
|
200,742
|
|
|
|
227,452
|
|
Inventories, net
|
|
|
117,105
|
|
|
|
130,747
|
|
Assets held for sale and assets of discontinued operations
|
|
|
65,395
|
|
|
|
124,821
|
|
Prepaid expenses and other current assets
|
|
|
14,831
|
|
|
|
16,398
|
|
Current deferred tax assets, net
|
|
|
6,561
|
|
|
|
8,071
|
|
Income taxes receivable
|
|
|
8,365
|
|
|
|
2,526
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
781,828
|
|
|
|
845,760
|
|
Property, plant and equipment, net
|
|
|
110,591
|
|
|
|
94,121
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|
Deferred tax assets, net
|
|
|
65,824
|
|
|
|
21,514
|
|
Goodwill
|
|
|
80,346
|
|
|
|
75,346
|
|
Intangible assets, net
|
|
|
411,414
|
|
|
|
414,915
|
|
Other assets
|
|
|
46,408
|
|
|
|
53,555
|
|
Assets of discontinued operations
|
|
|
|
|
|
|
226
|
|
|
|
|
|
|
|
|
|
|
Total non-current assets
|
|
|
714,583
|
|
|
|
659,677
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,496,411
|
|
|
$
|
1,505,437
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY
|
Current Liabilities:
|
|
|
|
|
|
|
|
|
Trade payables
|
|
$
|
39,476
|
|
|
$
|
60,621
|
|
Accrued liabilities
|
|
|
142,009
|
|
|
|
142,532
|
|
Notes payable and current portion of long-termdebt
|
|
|
2,842
|
|
|
|
9,237
|
|
Income taxes
|
|
|
6,424
|
|
|
|
39,818
|
|
Current liabilities of discontinued operations
|
|
|
6,380
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Total current liabilities
|
|
|
197,131
|
|
|
|
252,208
|
|
Long-term debt, less current portion
|
|
|
780,318
|
|
|
|
778,196
|
|
Deferred tax liabilities, net
|
|
|
1,610
|
|
|
|
3,255
|
|
Liabilities for uncertain tax positions
|
|
|
59,242
|
|
|
|
|
|
Other liabilities
|
|
|
20,145
|
|
|
|
18,182
|
|
Liabilities of discontinued operations
|
|
|
2,104
|
|
|
|
18,343
|
|
|
|
|
|
|
|
|
|
|
Total non-current liabilities
|
|
|
863,419
|
|
|
|
817,976
|
|
|
|
|
|
|
|
|
|
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Total liabilities
|
|
|
1,060,550
|
|
|
|
1,070,184
|
|
|
|
|
|
|
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|
|
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Commitments and contingencies
|
|
|
|
|
|
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Stockholders Equity:
|
|
|
|
|
|
|
|
|
Common stock, $0.01 par value; 200,000 shares
authorized; 90,964 (September 30, 2007) and 94,415
(December 31, 2006) shares outstanding (after
deducting shares in treasury of 5,817 as of September 30,
2007 and 1,094 as of December 31, 2006)
|
|
|
910
|
|
|
|
944
|
|
Additional capital
|
|
|
1,209,194
|
|
|
|
1,263,318
|
|
Accumulated deficit
|
|
|
(837,029
|
)
|
|
|
(848,467
|
)
|
Accumulated other comprehensive income
|
|
|
62,786
|
|
|
|
19,458
|
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
435,861
|
|
|
|
435,253
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,496,411
|
|
|
$
|
1,505,437
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated condensed financial statements.
2
VALEANT
PHARMACEUTICALS INTERNATIONAL
CONSOLIDATED
CONDENSED STATEMENTS OF OPERATIONS
For the three months and nine months ended September 30,
2007 and 2006
(Unaudited, in thousands, except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product sales
|
|
$
|
194,545
|
|
|
$
|
189,872
|
|
|
$
|
565,166
|
|
|
$
|
555,015
|
|
Alliance revenue (including ribavirin royalties)
|
|
|
14,078
|
|
|
|
20,968
|
|
|
|
69,503
|
|
|
|
60,694
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
208,623
|
|
|
|
210,840
|
|
|
|
634,669
|
|
|
|
615,709
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of goods sold (excluding amortization)
|
|
|
59,033
|
|
|
|
57,326
|
|
|
|
167,089
|
|
|
|
173,804
|
|
Selling expenses
|
|
|
64,396
|
|
|
|
62,634
|
|
|
|
190,482
|
|
|
|
183,254
|
|
General and administrative expenses
|
|
|
29,276
|
|
|
|
26,621
|
|
|
|
83,738
|
|
|
|
85,084
|
|
Research and development costs
|
|
|
24,886
|
|
|
|
20,328
|
|
|
|
68,612
|
|
|
|
73,999
|
|
Gain on litigation settlements
|
|
|
|
|
|
|
(17,550
|
)
|
|
|
|
|
|
|
(51,550
|
)
|
Restructuring charges and asset impairment
|
|
|
|
|
|
|
17,139
|
|
|
|
13,575
|
|
|
|
96,687
|
|
Amortization expense
|
|
|
18,130
|
|
|
|
16,774
|
|
|
|
54,277
|
|
|
|
48,511
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total costs and expenses
|
|
|
195,721
|
|
|
|
183,272
|
|
|
|
577,773
|
|
|
|
609,789
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
12,902
|
|
|
|
27,568
|
|
|
|
56,896
|
|
|
|
5,920
|
|
Other income (loss), net, including translation and exchange
|
|
|
(262
|
)
|
|
|
(454
|
)
|
|
|
2,556
|
|
|
|
1,240
|
|
Interest income
|
|
|
3,601
|
|
|
|
3,209
|
|
|
|
12,881
|
|
|
|
8,581
|
|
Interest expense
|
|
|
(10,365
|
)
|
|
|
(10,960
|
)
|
|
|
(32,199
|
)
|
|
|
(32,258
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations before income taxes
|
|
|
5,876
|
|
|
|
19,363
|
|
|
|
40,134
|
|
|
|
(16,517
|
)
|
Provision for income taxes
|
|
|
8,081
|
|
|
|
11,659
|
|
|
|
8,154
|
|
|
|
24,360
|
|
Minority interest, net
|
|
|
1
|
|
|
|
1
|
|
|
|
2
|
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations
|
|
|
(2,206
|
)
|
|
|
7,703
|
|
|
|
31,978
|
|
|
|
(40,879
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from discontinued operations
|
|
|
(9,813
|
)
|
|
|
6,004
|
|
|
|
(18,979
|
)
|
|
|
6,097
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(12,019
|
)
|
|
$
|
13,707
|
|
|
$
|
12,999
|
|
|
$
|
(34,782
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic income (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations
|
|
$
|
(0.02
|
)
|
|
$
|
0.08
|
|
|
$
|
0.34
|
|
|
$
|
(0.44
|
)
|
Income (loss) from discontinued operations
|
|
|
(0.11
|
)
|
|
|
0.07
|
|
|
$
|
(0.20
|
)
|
|
$
|
0.07
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic income (loss) per share:
|
|
$
|
(0.13
|
)
|
|
$
|
0.15
|
|
|
$
|
0.14
|
|
|
$
|
(0.37
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted income (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations
|
|
$
|
(0.02
|
)
|
|
$
|
0.08
|
|
|
$
|
0.34
|
|
|
$
|
(0.44
|
)
|
Income (loss) from discontinued operations
|
|
|
(0.11
|
)
|
|
|
0.06
|
|
|
|
(0.20
|
)
|
|
|
0.07
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted income (loss) per share:
|
|
$
|
(0.13
|
)
|
|
$
|
0.14
|
|
|
$
|
0.14
|
|
|
$
|
(0.37
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares used in per share computations
|
|
|
91,705
|
|
|
|
93,093
|
|
|
|
93,705
|
|
|
|
92,907
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares used in per share computation Diluted
|
|
|
91,705
|
|
|
|
95,265
|
|
|
|
95,003
|
|
|
|
92,907
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends paid per share of common stock
|
|
$
|
|
|
|
$
|
0.08
|
|
|
$
|
|
|
|
$
|
0.24
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends declared per share of common stock
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
0.16
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated condensed financial statements.
3
VALEANT
PHARMACEUTICALS INTERNATIONAL
CONSOLIDATED
CONDENSED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
For the three months and nine months ended September 30,
2007 and 2006
(Unaudited, in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
Net income (loss)
|
|
$
|
(12,019
|
)
|
|
$
|
13,707
|
|
|
$
|
12,999
|
|
|
$
|
(34,782
|
)
|
Other comprehensive income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustments
|
|
|
25,454
|
|
|
|
4,745
|
|
|
|
37,365
|
|
|
|
15,371
|
|
Unrealized gain (loss) on marketable equity securities and other
|
|
|
(1,262
|
)
|
|
|
155
|
|
|
|
6,375
|
|
|
|
(817
|
)
|
Pension liability adjustment
|
|
|
(189
|
)
|
|
|
(57
|
)
|
|
|
(412
|
)
|
|
|
(352
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income (loss)
|
|
$
|
11,984
|
|
|
$
|
18,550
|
|
|
$
|
56,327
|
|
|
$
|
(20,580
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated condensed financial statements.
4
VALEANT
PHARMACEUTICALS INTERNATIONAL
CONSOLIDATED CONDENSED STATEMENTS OF CASH
FLOWS
For the nine months ended September 30, 2007 and 2006
(Unaudited, in thousands)
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
12,999
|
|
|
$
|
(34,782
|
)
|
Income (loss) from discontinued operations
|
|
|
(18,979
|
)
|
|
|
6,097
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations
|
|
|
31,978
|
|
|
|
(40,879
|
)
|
Adjustments to reconcile net income (loss) to net cash provided
by operating activities:
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
66,170
|
|
|
|
64,987
|
|
Provision for losses on accounts receivable and inventory
|
|
|
6,953
|
|
|
|
11,697
|
|
Stock compensation expense
|
|
|
10,729
|
|
|
|
16,229
|
|
Translation and exchange gains, net
|
|
|
(2,556
|
)
|
|
|
(1,240
|
)
|
Impairment charges and other non-cash items
|
|
|
6,445
|
|
|
|
83,578
|
|
Deferred income taxes
|
|
|
14,889
|
|
|
|
7,610
|
|
Change in assets and liabilities, net of effects of acquisitions:
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
29,086
|
|
|
|
(17,928
|
)
|
Inventories
|
|
|
2,879
|
|
|
|
(11,886
|
)
|
Prepaid expenses and other assets
|
|
|
(2,049
|
)
|
|
|
(2,203
|
)
|
Trade payables and accrued liabilities
|
|
|
(17,520
|
)
|
|
|
(14,949
|
)
|
Income taxes
|
|
|
(40,130
|
)
|
|
|
(17,744
|
)
|
Other liabilities
|
|
|
208
|
|
|
|
1,742
|
|
|
|
|
|
|
|
|
|
|
Cash flow from operating activities in continuing operations
|
|
|
107,082
|
|
|
|
79,014
|
|
Cash flow from operating activities in discontinued operations
|
|
|
(22,095
|
)
|
|
|
1,050
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
84,987
|
|
|
|
80,064
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
Capital expenditures
|
|
|
(24,683
|
)
|
|
|
(26,177
|
)
|
Proceeds from sale of assets
|
|
|
37,923
|
|
|
|
8,337
|
|
Proceeds from sale of businesses
|
|
|
30,120
|
|
|
|
|
|
Proceeds from investments
|
|
|
19,967
|
|
|
|
20,501
|
|
Purchase of investments
|
|
|
(22,100
|
)
|
|
|
(20,200
|
)
|
Acquisition of businesses, license rights and product lines
|
|
|
(35,487
|
)
|
|
|
(4,129
|
)
|
|
|
|
|
|
|
|
|
|
Cash flow from investing activities in continuing operations
|
|
|
5,740
|
|
|
|
(21,668
|
)
|
Cash flow from investing activities in discontinued operations
|
|
|
(5,942
|
)
|
|
|
(459
|
)
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) investing activities
|
|
|
(202
|
)
|
|
|
(22,127
|
)
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
Proceeds from issuance of long-term debt
|
|
|
1,923
|
|
|
|
|
|
Payments on long-term debt and notes payable
|
|
|
(8,935
|
)
|
|
|
(6,372
|
)
|
Proceeds capitalized lease financing and long-term debt
|
|
|
|
|
|
|
120
|
|
Stock option exercises and employee stock purchases
|
|
|
14,517
|
|
|
|
7,898
|
|
Purchase of treasury stock
|
|
|
(79,599
|
)
|
|
|
|
|
Dividends paid
|
|
|
|
|
|
|
(21,550
|
)
|
|
|
|
|
|
|
|
|
|
Cash flow from financing activities in continuing operations
|
|
|
(72,094
|
)
|
|
|
(19,904
|
)
|
|
|
|
|
|
|
|
|
|
Cash flow from financing activities in discontinued operations
|
|
|
573
|
|
|
|
408
|
|
|
|
|
|
|
|
|
|
|
Net cash used in financing activities
|
|
|
(71,521
|
)
|
|
|
(19,496
|
)
|
Effect of exchange rate changes on cash and cash equivalents
|
|
|
15,527
|
|
|
|
4,679
|
|
|
|
|
|
|
|
|
|
|
Net increase in cash and cash equivalents
|
|
|
28,791
|
|
|
|
43,120
|
|
Cash and cash equivalents at beginning of period
|
|
|
326,205
|
|
|
|
224,903
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period
|
|
|
354,996
|
|
|
|
268,023
|
|
Cash and cash equivalents classified as part of discontinued
operations
|
|
|
|
|
|
|
(136
|
)
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents of continuing operations
|
|
$
|
354,996
|
|
|
$
|
267,887
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated condensed financial statements.
5
VALEANT
PHARMACEUTICALS INTERNATIONAL
NOTES TO CONSOLIDATED CONDENSED FINANCIAL
STATEMENTS
September 30, 2007
(Unaudited)
In the consolidated condensed financial statements included
herein, we, us, our,
Valeant, and the Company refer to
Valeant Pharmaceuticals International and its subsidiaries. The
condensed consolidated financial statements have been prepared
by us, without audit, pursuant to the rules and regulations of
the Securities and Exchange Commission (SEC).
Certain information and footnote disclosures normally included
in financial statements prepared on the basis of 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 royalty
revenues from the sale of ribavirin by Schering-Plough Ltd.
(Schering-Plough).
Principles of Consolidation: The accompanying
consolidated condensed financial statements include the accounts
of Valeant Pharmaceuticals International, its wholly owned
subsidiaries and its majority-owned subsidiary in Poland. All
significant intercompany account balances and transactions have
been eliminated.
Marketable Securities: Investments in
marketable securities are categorized as either being expected
to be held-to-maturity or available-for-sale. Marketable
securities are generally categorized as held-to-maturity and are
thus carried at amortized cost, because we have both the intent
and the ability to hold these investments until they mature.
Investments categorized as available-for-sale are marked to
market based on quoted market values of the securities, with the
resulting adjustments, net of deferred taxes, reported as a
component of other comprehensive income (loss) in
stockholders equity until realized. As of
September 30, 2007 and December 31, 2006, the fair
market value of our marketable 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 (Loss): 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
gains and losses on marketable 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, restricted stock units, and shares purchased
in the employee stock purchase program. 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
6
VALEANT
PHARMACEUTICALS INTERNATIONAL
NOTES TO
CONSOLIDATED CONDENSED FINANCIAL
STATEMENTS (Continued)
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.
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 announced our
plan to divest our Infergen product rights. In accordance with
SFAS No. 144, Accounting for the Impairment or
Disposal of Long-lived Assets (SFAS 144),
we have classified the intangible asset value, the Infergen
inventory, and certain long-lived assets associated with
Infergen as assets held for sale as of September 30, 2007.
In June 2007, we completed the sale of our manufacturing plants
in Puerto Rico and Basel, Switzerland. At December 31, 2006
the net book values of these facilities were classified as
assets held for sale in our consolidated condensed financial
statements.
Discontinued Operations: In September 2007, we
made a strategic decision to divest our Infergen product rights.
The results of the Infergen operations and the related financial
position have been reflected as discontinued operations in the
consolidated financial statements in accordance with
SFAS 144. The consolidated financial statements have been
reclassified to conform to discontinued operations presentation
for all historical periods presented. More details on
discontinued operations are available in Note 4.
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.
Treasury Stock: We have recorded the
repurchase of treasury stock by reducing the common stock
account for the par value of the shares repurchased and
adjusting paid-in capital for the balance. As of
December 31, 2006 and September 30, 2007, these
adjustments to paid-in capital were $18,561,000 and $98,113,000,
respectively, which correspond to 1,094,000 and 5,817,000
treasury shares, respectively.
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.
SFAS No. 157. In September 2006, the
FASB issued SFAS No. 157, Fair Value
Measurements (SFAS 157).
SFAS No. 157 defines fair value, establishes a
framework for measuring fair value and expands
7
VALEANT
PHARMACEUTICALS INTERNATIONAL
NOTES TO
CONSOLIDATED CONDENSED FINANCIAL
STATEMENTS (Continued)
disclosures about fair value measurements but does not change
the requirements to apply fair value in existing accounting
standards. Under SFAS 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 157 will be effective for Valeant as of
January 1, 2008 and we are currently assessing the impact
that SFAS 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
complexity in accounting for financial instruments and the
volatility in earnings caused by measuring related assets and
liabilities differently. SFAS 159 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 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.
FASB Proposed Statement of Position APB
14-a (not
yet implemented). In August 2007, the FASB issued
for comment FASB Statement of Position APB
14-a
(FSP APB
14-a)
for a comment period that ended in October 2007. If the proposed
FSP APB 14-a
is implemented, it would require the liability and equity
components of convertible debt instruments that may be settled
in cash upon conversion (including partial cash settlement) to
be separately accounted for in a manner that reflects the
issuers nonconvertible debt borrowing rate. The proposed
FSP APB 14-a
would be effective for financial statements issued for fiscal
years beginning after December 15, 2007, and interim
periods within those fiscal years. The guidance in the proposed
FSP APB 14-a
would be applied retrospectively to all periods presented. If
this proposal is implemented as currently drafted, it will
materially increase our reported interest expense.
On April 3, 2006, we announced a restructuring program to
reduce costs and accelerate earnings growth. We completed this
restructuring program in June 2007 with the sale of our
manufacturing plants in Basel, Switzerland and Puerto Rico.
The program was primarily focused on our research and
development and manufacturing operations. The objective of the
restructuring program as it related to research and development
activities was to focus our efforts and expenditures on two late
stage projects currently in development. 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 objective of the restructuring program as it related to
manufacturing was 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. In
December 2006, we transferred our former factories in Basel,
Switzerland and Puerto Rico to a held for sale
classification in accordance with SFAS 144,
Accounting for the Impairment or Disposal of Long-Lived
Assets. In June 2007, we sold these manufacturing
facilities and the related inventories to Legacy Pharmaceuticals
International for aggregate proceeds of $29,500,000, of which
$12,000,000 was received as consideration for inventories sold
to Legacy Pharmaceuticals International and $17,500,000 was
received as consideration for the manufacturing facilities. The
transaction also included transition payment obligations of
$6,000,000 to be paid by Valeant to Legacy Pharmaceuticals
International over a
24-month
period as well as capital expenditure obligations of $650,000 to
be incurred by us. In the
8
VALEANT
PHARMACEUTICALS INTERNATIONAL
NOTES TO
CONSOLIDATED CONDENSED FINANCIAL
STATEMENTS (Continued)
three months ended September 30, 2007, Legacy
Pharmaceuticals International agreed to pay us $1,818,000 and
$385,000 for inventory and working capital adjustments,
respectively, pursuant to the site sale agreements.
Our restructuring charges have included impairment charges
resulting from the sale of our former headquarters facility,
discovery and pre-clinical operations equipment, and our former
manufacturing facilities in Puerto Rico and Basel, Switzerland.
The restructuring included the reduction of approximately
850 employees, the majority of whom work in the two
manufacturing facilities sold to Legacy Pharmaceuticals
International. As of September 30, 2007, employee severance
costs in this restructuring program have been recorded for
approximately 490 employees and no severance payments have
been recorded for the remaining employees who transferred to
Legacy Pharmaceuticals International.
The restructuring program also rationalized 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 previously been managed as a separate
business unit, were combined in 2006 with those of other regions.
We did not record a restructuring provision in the three months
ended September 30, 2007. We recorded a provision of
$17,139,000 in the three months ended September 30, 2006.
We recorded a provision of $13,575,000 in the nine months ended
September 30, 2007, compared with $96,687,000 for the nine
months ended September 30, 2006. Severance charges recorded
as part of this restructuring program in the nine months ended
September 30, 2007 total $5,130,000 and relate to employees
whose positions were eliminated in the restructuring.
Restructuring
Charge Details (in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months
|
|
|
Nine Months
|
|
|
Year
|
|
|
|
Ended
|
|
|
Ended
|
|
|
Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2006
|
|
|
2006
|
|
|
Employee severances
|
|
$
|
1,922
|
|
|
$
|
13,935
|
|
|
$
|
16,997
|
|
Contract cancellation and other cash costs
|
|
|
665
|
|
|
|
1,657
|
|
|
|
1,662
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal: cash charges
|
|
|
2,587
|
|
|
|
15,592
|
|
|
|
18,659
|
|
Abandoned software and other capital assets
|
|
|
193
|
|
|
|
21,546
|
|
|
|
22,178
|
|
Impairment of manufacturing and research facilities
|
|
|
14,359
|
|
|
|
59,549
|
|
|
|
97,344
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal: non-cash charges
|
|
|
14,552
|
|
|
|
81,095
|
|
|
|
119,522
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total:
|
|
$
|
17,139
|
|
|
$
|
96,687
|
|
|
$
|
138,181
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months
|
|
|
Nine Months
|
|
|
Cumulative
|
|
|
|
Ended
|
|
|
Ended
|
|
|
Total
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
Incurred
|
|
|
|
2007
|
|
|
2007
|
|
|
|
|
|
Employee severances (approximately 490 employees)
|
|
$
|
|
|
|
$
|
5,130
|
|
|
$
|
22,127
|
|
Contract cancellation and other cash costs
|
|
|
|
|
|
|
3,115
|
|
|
|
4,777
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal: cash charges
|
|
|
|
|
|
|
8,245
|
|
|
|
26,904
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Abandoned software and other capital assets
|
|
|
|
|
|
|
|
|
|
|
22,178
|
|
Write-off of accumulated foreign currency translation adjustments
|
|
|
|
|
|
|
2,891
|
|
|
|
2,891
|
|
Impairment of manufacturing and research facilities
|
|
|
|
|
|
|
2,439
|
|
|
|
99,783
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal: non-cash charges
|
|
|
|
|
|
|
5,330
|
|
|
|
124,852
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total:
|
|
$
|
|
|
|
$
|
13,575
|
|
|
$
|
151,7561
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9
VALEANT
PHARMACEUTICALS INTERNATIONAL
NOTES TO
CONSOLIDATED CONDENSED FINANCIAL
STATEMENTS (Continued)
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
|
|
|
|
September 30,
|
|
|
|
2007
|
|
|
Opening accrual
|
|
$
|
9,977
|
|
Charges to earnings
|
|
|
|
|
Cash paid
|
|
|
(4,771
|
)
|
|
|
|
|
|
Closing accrual
|
|
$
|
5,206
|
|
|
|
|
|
|
In the nine months ended September 30, 2007, we acquired
product rights in the United States, Europe, and Argentina for
aggregate consideration of $39,784,000. In the United States we
acquired a
paid-up
license to Kinetin and Zeatin, the active ingredients in the
Kinerase product line, 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 $13,396,000. We acquired
the rights to certain products in Poland and Argentina for
$1,218,000.
In the nine months ended September 30, 2006, we acquired
certain product rights in smaller transactions. The aggregate
cash consideration for these product rights was $4,129,000.
|
|
4.
|
Discontinued
Operations
|
In September 2007, we made a strategic decision to divest our
Infergen product rights. The results of the Infergen operations
and the related financial position have been reflected as
discontinued operations in the consolidated condensed financial
statements in accordance with SFAS 144. The consolidated
condensed financial statements have been reclassified to conform
to discontinued operations presentation for all historical
periods presented.
In the three months and the nine months ended September 30,
2007, the loss from discontinued operations related to Infergen.
In the three months and the nine months ended September 30,
2006, the income from discontinued operations was primarily
related to the reduction of an environmental reserve for the
discontinued biomedicals facility, offset in part by the loss
from our Infergen operations. The loss on disposal of
discontinued operations in the nine months ended
September 30, 2007 was primarily related to a legal
judgment with respect to the discontinued biomedicals business.
The cost of goods sold of discontinued operations in the three
months and the nine months ended September 30, 2007 include
a technology transfer payment of $5,259,000 made to the future
manufacturer of Infergen.
10
VALEANT
PHARMACEUTICALS INTERNATIONAL
NOTES TO
CONSOLIDATED CONDENSED FINANCIAL
STATEMENTS (Continued)
Summarized selected financial information for discontinued
operations for the three and nine months ended
September 30, 2007 and 2006 is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30
|
|
|
September 30
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
Infergen:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product sales
|
|
$
|
8,636
|
|
|
$
|
9,134
|
|
|
$
|
26,959
|
|
|
$
|
34,148
|
|
Costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of goods sold (excluding amortization)
|
|
|
8,365
|
|
|
|
2,978
|
|
|
|
14,523
|
|
|
|
10,860
|
|
Selling expenses
|
|
|
6,586
|
|
|
|
4,948
|
|
|
|
19,619
|
|
|
|
14,874
|
|
General and administrative expenses
|
|
|
679
|
|
|
|
591
|
|
|
|
1,367
|
|
|
|
1,241
|
|
Research and development costs
|
|
|
1,279
|
|
|
|
521
|
|
|
|
5,279
|
|
|
|
3,271
|
|
Amortization expense
|
|
|
1,650
|
|
|
|
1,650
|
|
|
|
4,950
|
|
|
|
4,950
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total costs and expenses
|
|
|
18,559
|
|
|
|
10,688
|
|
|
|
45,738
|
|
|
|
35,196
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from discontinued operations, Infergen
|
|
|
(9,923
|
)
|
|
|
(1,554
|
)
|
|
|
(18,779
|
)
|
|
|
(1,048
|
)
|
Other discontinued operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income
|
|
|
|
|
|
|
6,064
|
|
|
|
|
|
|
|
5,738
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated discontinued operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from discontinued operations
|
|
|
(9,923
|
)
|
|
|
4,510
|
|
|
|
(18,779
|
)
|
|
|
4,690
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefit for income taxes
|
|
|
160
|
|
|
|
12
|
|
|
|
231
|
|
|
|
9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from discontinued operations
|
|
|
(9,763
|
)
|
|
|
4,522
|
|
|
|
(18,548
|
)
|
|
|
4,699
|
|
Disposal of discontinued operation, net
|
|
|
(50
|
)
|
|
|
1,482
|
|
|
|
(431
|
)
|
|
|
1,398
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from discontinued operations, net
|
|
$
|
(9,813
|
)
|
|
$
|
6,004
|
|
|
$
|
(18,979
|
)
|
|
$
|
6,097
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The assets and liabilities of discontinued operations are stated
separately as of September 30, 2007 and December 31,
2006 on the accompanying consolidated condensed balance sheet.
All of the assets of discontinued operations as of
September 30, 2007 relate to the Infergen business. The
Infergen assets which are classified in discontinued operations
are reclassified as assets held for sale on the accompanying
consolidated condensed balance sheets as of September 30,
2007. In the three months ended September 30, 2007, we made
a $5,000,000 contingent milestone payment to InterMune which we
recorded as goodwill. We subsequently reclassified $4,816,000 of
goodwill to discontinued operations based on the relative fair
value of Infergen in comparison with the North America segment.
11
VALEANT
PHARMACEUTICALS INTERNATIONAL
NOTES TO
CONSOLIDATED CONDENSED FINANCIAL
STATEMENTS (Continued)
The major assets and liabilities categories of discontinued
operations are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(Unaudited)
|
|
|
|
|
|
ASSETS
|
Cash and cash equivalents
|
|
$
|
|
|
|
$
|
203
|
|
Accounts receivable, net
|
|
|
|
|
|
|
21
|
|
Inventories, net
|
|
|
5,986
|
|
|
|
11,932
|
|
Prepaid expenses and other current assets
|
|
|
|
|
|
|
2
|
|
Property, plant and equipment, net
|
|
|
143
|
|
|
|
158
|
|
Goodwill
|
|
|
4,816
|
|
|
|
4,816
|
|
Intangible assets, net
|
|
|
54,450
|
|
|
|
59,400
|
|
|
|
|
|
|
|
|
|
|
Assets of discontinued operations
|
|
$
|
65,395
|
|
|
$
|
76,532
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
|
Current Liabilities:
|
|
|
|
|
|
|
|
|
Accrued liabilities
|
|
$
|
6,380
|
|
|
$
|
12,777
|
|
Other liabilities
|
|
|
2,104
|
|
|
|
5,566
|
|
|
|
|
|
|
|
|
|
|
Liabilities of discontinued operations
|
|
$
|
8,484
|
|
|
$
|
18,343
|
|
|
|
|
|
|
|
|
|
|
Environmental contamination had previously been identified in
the soil under a facility which housed operations of the
discontinued biomedicals segment and is currently vacant.
Remediation of the site involved excavation and disposal of the
waste at appropriately licensed sites. Environmental reserves
have been provided for remediation and related costs.
Remediation costs have been applied against these environmental
reserves as they have been incurred. As assessments and
remediation have progressed, these liabilities have been
reviewed and adjusted to reflect additional information. The
environmental reserves were reduced in the third quarter of 2006
based upon contractual agreements for remediation work which
totaled less than the amounts previously accrued for projects.
We have substantially completed this environmental remediation
work. Total environmental reserves for this site were $6,289,000
and $12,660,000 as of September 30, 2007 and
December 31, 2006, respectively, and are included in the
current 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 environmental remediation
actions and compliance with applicable environmental laws will
not exceed the amounts reflected in reserves or will not have a
material adverse effect on our consolidated financial condition,
results of operations or cash flows. Any possible loss that may
be incurred in excess of amounts provided for as of
September 30, 2007 cannot be reasonably estimated.
12
VALEANT
PHARMACEUTICALS INTERNATIONAL
NOTES TO
CONSOLIDATED CONDENSED FINANCIAL
STATEMENTS (Continued)
The following table sets forth the computation of basic and
diluted earnings per share (in thousands, except per share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
Income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Numerator for basic and dilutive earnings (loss) per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations
|
|
$
|
(2,206
|
)
|
|
$
|
7,703
|
|
|
$
|
31,978
|
|
|
$
|
(40,879
|
)
|
Income (loss) from discontinued operations
|
|
|
(9,813
|
)
|
|
|
6,004
|
|
|
|
(18,979
|
)
|
|
|
6,097
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(12,019
|
)
|
|
$
|
13,707
|
|
|
$
|
12,999
|
|
|
$
|
(34,782
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for basic earnings (loss) per share
weighted-average shares outstanding
|
|
|
91,705
|
|
|
|
93,093
|
|
|
|
93,705
|
|
|
|
92,907
|
|
Employee stock options
|
|
|
|
|
|
|
1,939
|
|
|
|
1,046
|
|
|
|
|
|
Other dilutive securities
|
|
|
|
|
|
|
233
|
|
|
|
252
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dilutive potential common shares
|
|
|
|
|
|
|
2,172
|
|
|
|
1,298
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for diluted earnings (loss) per share
adjusted weighted-average shares after assumed conversions
|
|
|
91,705
|
|
|
|
95,265
|
|
|
|
95,003
|
|
|
|
92,907
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations
|
|
$
|
(0.02
|
)
|
|
$
|
0.08
|
|
|
$
|
0.34
|
|
|
$
|
(0.44
|
)
|
Discontinued operations, net of taxes
|
|
|
(0.11
|
)
|
|
|
0.07
|
|
|
$
|
(0.20
|
)
|
|
|
0.07
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net income (loss) per share
|
|
$
|
(0.13
|
)
|
|
$
|
0.15
|
|
|
$
|
0.14
|
|
|
$
|
(0.37
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations
|
|
$
|
(0.02
|
)
|
|
$
|
0.08
|
|
|
$
|
0.34
|
|
|
$
|
(0.44
|
)
|
Discontinued operations, net of taxes
|
|
|
(0.11
|
)
|
|
|
0.06
|
|
|
$
|
(0.20
|
)
|
|
|
0.07
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted net income (loss) per share
|
|
$
|
(0.13
|
)
|
|
$
|
0.14
|
|
|
$
|
0.14
|
|
|
$
|
(0.37
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three months ended September 30, 2007 and the nine
months ended September 30, 2006, options to purchase
840,000 and 1,799,000 shares of common stock, respectively,
were not included in the computation of earnings per share
because we incurred a loss and the effect would have been
anti-dilutive.
For the three months ended September 30, 2007 and 2006,
options to purchase 8,669,000 and 8,570,000 shares of
common stock, respectively, were also not included in the
computation of earnings per share because the option exercise
prices were greater than the average market price of our common
stock and, therefore, the effect would have been anti-dilutive.
For the nine months ended September 30, 2007 and 2006,
options to purchase 9,093,000 and 9,061,000 shares of
common stock, respectively, were also not included in the
computation of earnings per share because the option exercise
prices were greater than the average market price of our common
stock and, therefore, the effect would have been anti-dilutive.
13
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 September 30,
2007 and December 31, 2006 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
Accounts receivable, net:
|
|
|
|
|
|
|
|
|
Trade accounts receivable
|
|
$
|
166,199
|
|
|
$
|
180,767
|
|
Royalties receivable
|
|
|
15,272
|
|
|
|
22,212
|
|
Other receivables
|
|
|
27,311
|
|
|
|
31,486
|
|
|
|
|
|
|
|
|
|
|
|
|
|
208,782
|
|
|
|
234,465
|
|
Allowance for doubtful accounts
|
|
|
(8,040
|
)
|
|
|
(7,013
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
200,742
|
|
|
$
|
227,452
|
|
|
|
|
|
|
|
|
|
|
Inventories, net:
|
|
|
|
|
|
|
|
|
Raw materials and supplies
|
|
$
|
30,932
|
|
|
$
|
37,045
|
|
Work-in-process
|
|
|
16,087
|
|
|
|
21,477
|
|
Finished goods
|
|
|
85,306
|
|
|
|
86,522
|
|
|
|
|
|
|
|
|
|
|
|
|
|
132,325
|
|
|
|
145,044
|
|
Allowance for inventory obsolescence
|
|
|
(15,220
|
)
|
|
|
(14,297
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
117,105
|
|
|
$
|
130,747
|
|
|
|
|
|
|
|
|
|
|
Property, plant and equipment, net:
|
|
|
|
|
|
|
|
|
Property, plant and equipment, at cost
|
|
$
|
214,124
|
|
|
$
|
183,597
|
|
Accumulated depreciation and amortization
|
|
|
(103,533
|
)
|
|
|
(89,476
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
110,591
|
|
|
$
|
94,121
|
|
|
|
|
|
|
|
|
|
|
Intangible assets: The Infergen product
intangible rights have been reclassified to assets of
discontinued operations for all time periods reported. As of
September 30, 2007 and December 31, 2006, intangible
assets were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
September 30, 2007
|
|
|
December 31, 2006
|
|
|
|
Average
|
|
|
Gross
|
|
|
Accumulated
|
|
|
Net
|
|
|
Gross
|
|
|
Accumulated
|
|
|
Net
|
|
|
|
Lives
|
|
|
Amount
|
|
|
Amortization
|
|
|
Amount
|
|
|
Amount
|
|
|
Amortization
|
|
|
Amount
|
|
|
Product rights
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Neurology
|
|
|
13
|
|
|
$
|
305,624
|
|
|
$
|
(121,016
|
)
|
|
$
|
184,608
|
|
|
$
|
292,339
|
|
|
$
|
(100,990
|
)
|
|
$
|
191,349
|
|
Infectious diseases
|
|
|
11
|
|
|
|
6,480
|
|
|
|
(3,690
|
)
|
|
|
2,790
|
|
|
|
6,480
|
|
|
|
(3,420
|
)
|
|
|
3,060
|
|
Dermatology
|
|
|
19
|
|
|
|
111,879
|
|
|
|
(51,553
|
)
|
|
|
60,326
|
|
|
|
85,337
|
|
|
|
(42,786
|
)
|
|
|
42,551
|
|
Other products
|
|
|
11
|
|
|
|
347,419
|
|
|
|
(192,264
|
)
|
|
|
155,155
|
|
|
|
325,470
|
|
|
|
(165,025
|
)
|
|
|
160,445
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total product rights
|
|
|
14
|
|
|
|
771,402
|
|
|
|
(368,523
|
)
|
|
|
402,879
|
|
|
|
709,626
|
|
|
|
(312,221
|
)
|
|
|
397,405
|
|
License agreement
|
|
|
5
|
|
|
|
67,376
|
|
|
|
(58,841
|
)
|
|
|
8,535
|
|
|
|
67,376
|
|
|
|
(49,866
|
)
|
|
|
17,510
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total intangible assets
|
|
|
|
|
|
$
|
838,778
|
|
|
$
|
(427,364
|
)
|
|
$
|
411,414
|
|
|
$
|
777,002
|
|
|
$
|
(362,087
|
)
|
|
$
|
414,915
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14
VALEANT
PHARMACEUTICALS INTERNATIONAL
NOTES TO
CONSOLIDATED CONDENSED FINANCIAL
STATEMENTS (Continued)
Estimated future amortization expenses are as follows (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Scheduled Future Amortization Expense
|
|
|
|
Remaining
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
2011
|
|
|
Thereafter
|
|
|
Product rights
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Neurology
|
|
$
|
7,349
|
|
|
$
|
29,262
|
|
|
$
|
29,262
|
|
|
$
|
29,178
|
|
|
$
|
22,593
|
|
|
$
|
66,964
|
|
Infectious diseases
|
|
|
90
|
|
|
|
360
|
|
|
|
360
|
|
|
|
360
|
|
|
|
360
|
|
|
|
1,260
|
|
Dermatology
|
|
|
2,580
|
|
|
|
10,439
|
|
|
|
10,110
|
|
|
|
9,798
|
|
|
|
9,672
|
|
|
|
17,728
|
|
Other products
|
|
|
4,708
|
|
|
|
19,145
|
|
|
|
18,392
|
|
|
|
17,802
|
|
|
|
17,300
|
|
|
|
77,808
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total product rights
|
|
|
14,726
|
|
|
|
59,206
|
|
|
|
58,124
|
|
|
|
57,138
|
|
|
|
49,925
|
|
|
|
163,760
|
|
License agreement
|
|
|
2,363
|
|
|
|
6,172
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
17,089
|
|
|
$
|
65,378
|
|
|
$
|
58,124
|
|
|
$
|
57,138
|
|
|
$
|
49,925
|
|
|
$
|
163,760
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization expense for the three and nine months ended
September 30, 2007 was $18,130,000 and $54,277,000,
respectively, of which $15,326,000 and $45,302,000,
respectively, related to amortization of acquired product
rights. These reported amortization expenses exclude the
amortization of the Infergen product rights which have been
classified as assets of discontinued operations.
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, 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. A
provision for income taxes of $8,081,000 was recorded for the
three months ended September 30, 2007, comprising the
following amounts (in thousands):
|
|
|
|
|
|
|
Three Months
|
|
|
|
Ended
|
|
|
|
September 30, 2007
|
|
|
Taxes payable on earnings in tax jurisdictions outside the
U.S.
|
|
$
|
8,521
|
|
Interest and penalties on U.S. liabilities, state taxes and other
|
|
|
(440
|
)
|
|
|
|
|
|
|
|
$
|
8,081
|
|
|
|
|
|
|
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 (inclusive of $18,432,000 interest and $2,602,000
penalties) would reduce our effective tax rate, if recognized.
As of September 30, 2007, unrecognized benefits were
reduced to $113,586,000, of which $9,010,000 (inclusive of
$6,492,000 interest and $1,456,000 penalties) would reduce our
effective rate, if recognized. Based on current discussions with
the IRS related to its exam of tax years 2003 and 2004, we
believe that it is reasonably possible that certain amounts will
be reversed within the next twelve months. However, such changes
are not expected to have any material effect on our statement of
financial position or results of operations.
15
VALEANT
PHARMACEUTICALS INTERNATIONAL
NOTES TO
CONSOLIDATED CONDENSED FINANCIAL
STATEMENTS (Continued)
Of the total unrecognized tax benefits, $26,843,000 is recorded
as an offset against a valuation allowance as of
September 30, 2007. To the extent such portion of
unrecognized tax benefits is recognized at a time when a
valuation allowance no longer exists, the recognition would
affect our tax rate.
The tax provision in the nine months ended September 30,
2007 benefited from the release of $21,521,000 in reserves. In
June 2007, the IRS examination of the U.S. income tax
returns for the years ended December 31, 1997 through 2001
was resolved. As a result, the related unrecognized benefits
were reversed in the second quarter of 2007. The provision for
income taxes was reduced by $21,521,000, primarily related to
resolution of the gain recognition issue which arose for the
year ended December 31, 1999.
As of September 30, 2007, an IRS examination of the 2002
through 2004 tax years was completed and we began a formal
appeal with the IRS to protest adjustments with which we do not
agree. During the three months ended September 30, 2007,
there were no material changes to the unrecognized tax benefit
relating to issues arising during this examination.
Our continuing practice is to recognize interest and penalties
related to income tax matters in income tax expense.
For the U.S., all years prior to 1997 are closed under the
statute of limitations. Years subsequent to 1996 are open, with
2002 to 2004 under current tax examination. Our significant
foreign subsidiaries are open to tax examinations for years
ending in 2001 and later.
|
|
8.
|
Common
Stock and Share Compensation
|
In June 2007, our Board of Directors authorized a stock
repurchase program. This program authorized us to repurchase up
to $200,000,000 of our outstanding common stock in a
24-month
period. Under the program, purchases may be made from time to
time on the open market, in privately negotiated transactions,
and in amounts as we see appropriate. The number of shares to be
purchased and the timing of such purchases is subject to various
factors, which may include the price of our common stock,
general market conditions, corporate requirements, including
restrictions in our debt covenants, and alternate investment
opportunities. As of September 30, 2007, we had purchased
4,723,000 shares, for a total amount of $79,599,000.
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 authorized for issuance under the
Incentive Plan was 22,304,000 in the aggregate, with 5,742,000
remaining available for grant at September 30, 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
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, other than
with respect to options and stock appreciation rights awards,
shares may be issued as 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.
16
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
|
|
|
185
|
|
|
$
|
16.66
|
|
Exercised
|
|
|
(1,208
|
)
|
|
$
|
17.49
|
|
Canceled
|
|
|
(1,604
|
)
|
|
$
|
21.78
|
|
|
|
|
|
|
|
|
|
|
Shares under option, September 30, 2007
|
|
|
10,724
|
|
|
$
|
18.47
|
|
|
|
|
|
|
|
|
|
|
Exercisable at December 31, 2005
|
|
|
7,197
|
|
|
$
|
17.82
|
|
|
|
|
|
|
|
|
|
|
Exercisable at December 31, 2006
|
|
|
8,374
|
|
|
$
|
18.00
|
|
|
|
|
|
|
|
|
|
|
Exercisable at September 30, 2007
|
|
|
6,854
|
|
|
$
|
18.08
|
|
|
|
|
|
|
|
|
|
|
Awards available for grant at December 31, 2006
|
|
|
4,376
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Awards available for grant at September 30, 2007
|
|
|
5,742
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The schedule below reflects the number of outstanding and
exercisable options as of September 30, 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 - $17.72
|
|
|
4,158
|
|
|
$
|
13.63
|
|
|
|
2,871
|
|
|
$
|
11.88
|
|
|
|
6.40
|
|
$18.55 - $18.75
|
|
|
3,589
|
|
|
$
|
18.61
|
|
|
|
1,700
|
|
|
$
|
18.55
|
|
|
|
6.43
|
|
$18.84 - $46.25
|
|
|
2,977
|
|
|
$
|
25.07
|
|
|
|
2,283
|
|
|
$
|
25.52
|
|
|
|
5.23
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,724
|
|
|
|
|
|
|
|
6,854
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
Average life of option (years)
|
|
5.73
|
|
4.10 - 5.80
|
Stock price volatility
|
|
35% - 37%
|
|
37% - 39%
|
Expected dividend per share
|
|
$0.00
|
|
$0.00 - $0.31
|
Risk-free interest rate
|
|
4.24% - 4.76%
|
|
4.54% - 4.80%
|
Weighted-average fair value of options
|
|
$7.00
|
|
$7.83
|
The aggregate intrinsic value of the stock options outstanding
at September 30, 2007 was $11,459,000. The aggregate
intrinsic value of the stock options that are both outstanding
and exercisable at September 30, 2007 was $11,459,000.
During the nine months ended September 30, 2007 stock
options with an aggregate intrinsic value of
17
VALEANT
PHARMACEUTICALS INTERNATIONAL
NOTES TO
CONSOLIDATED CONDENSED FINANCIAL
STATEMENTS (Continued)
$6,974,000 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 nine months ended September 30, 2007, as
determined using the Black-Scholes valuation model, was
$4,082,000.
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 nine months
ended September 30, 2007, 24,703 shares were issued
for proceeds of $359,000.
Restricted Stock Units: Non-employee members
of our board of directors receive compensation in the form of
restricted stock units, cash retainers and meeting fees for each
meeting they attend during the year. Directors also have the
option to receive restricted stock units in lieu of fees
otherwise payable in cash. During the nine months ended
September 30, 2007, the nine months ended
September 30, 2006 and the year ended December 31,
2006, we granted our non-employee directors 63,132, 69,575 and
72,302 restricted stock units, respectively. The restricted
stock units issued to non-employee directors in these periods
had a fair value of $998,000, $1,172,000, and $1,222,000,
respectively. Each restricted stock unit granted to non-employee
directors vests over one year or less, is entitled to dividend
equivalent shares and is exchanged for a share of our common
stock one year after the director ceases to serve as a member of
our Board. Each share of restricted stock units granted to
certain officers of the company in 2005 vests 50 percent
three years after grant with the balance vesting equally in
years four and five after grant, is entitled to dividend
equivalent shares and is exchanged for a share of our common
stock upon vesting. As of September 30, 2007 and
December 31, 2006, there were 299,736 and 268,524
restricted stock units outstanding, respectively.
A summary of stock compensation expense for our stock incentive
plans is presented below (amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months
|
|
|
|
Three Months Ended
|
|
|
Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
Employee stock options
|
|
$
|
2,916
|
|
|
$
|
5,086
|
|
|
$
|
9,479
|
|
|
$
|
14,407
|
|
Employee stock purchase plan
|
|
|
79
|
|
|
|
69
|
|
|
|
158
|
|
|
|
337
|
|
Restricted stock units
|
|
|
368
|
|
|
|
462
|
|
|
|
1,092
|
|
|
|
1,485
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stock-based compensation expense
|
|
$
|
3,363
|
|
|
$
|
5,617
|
|
|
$
|
10,729
|
|
|
$
|
16,229
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock compensation expense was charged to the following accounts
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months
|
|
|
|
Three Months Ended
|
|
|
Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
Cost of goods sold
|
|
|
151
|
|
|
|
226
|
|
|
|
504
|
|
|
|
1,026
|
|
Selling expenses
|
|
|
846
|
|
|
|
707
|
|
|
|
2,660
|
|
|
|
2,335
|
|
General and administrative expenses
|
|
|
2,219
|
|
|
|
4,151
|
|
|
|
6,932
|
|
|
|
10,752
|
|
Research and development costs
|
|
|
147
|
|
|
|
533
|
|
|
|
633
|
|
|
|
2,116
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stock-based compensation expense
|
|
$
|
3,363
|
|
|
$
|
5,617
|
|
|
$
|
10,729
|
|
|
$
|
16,229
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
18
VALEANT
PHARMACEUTICALS INTERNATIONAL
NOTES TO
CONSOLIDATED CONDENSED FINANCIAL
STATEMENTS (Continued)
Future stock compensation expense for restricted stock units and
stock option incentive awards outstanding at September 30,
2007 is as follows (in thousands):
|
|
|
|
|
Remainder of 2007
|
|
$
|
2,153
|
|
2008
|
|
|
6,036
|
|
2009
|
|
|
2,394
|
|
2010 and thereafter
|
|
|
800
|
|
|
|
|
|
|
|
|
$
|
11,383
|
|
|
|
|
|
|
Dividends: We did not declare and did not pay
dividends in the nine months ended September 30, 2007. We
declared and paid cash dividends of $0.0775 per share for the
first and second quarters of 2006. We also paid cash dividends
of $0.0775 per share in the first quarter of 2006 for the
dividend declared in the fourth quarter of 2005.
|
|
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 May 4, 2007,
plaintiff filed a motion seeking $1.3 million in fees. We
opposed the motion, and on October 1, 2007, the court held
a hearing. The court has not yet issued its ruling.
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 in the third quarter of
2006. The 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. On May 30,
2007 the Delaware Supreme Court dismissed Mr. Jerneys
pro se appeal. On May 22, 2007, we filed a motion
requesting that the Court hold Mr. Jerney in contempt for
failure to comply with an order compelling discovery and
imposing sanctions for Mr. Jerneys failure to comply
with discovery requests. On June 11, 2007, the Delaware
Court of Chancery entered an order holding Mr. Jerney in
contempt.
19
VALEANT
PHARMACEUTICALS INTERNATIONAL
NOTES TO
CONSOLIDATED CONDENSED FINANCIAL
STATEMENTS (Continued)
SEC Investigation: We are the subject of a
Formal Order of Investigation with respect to events and
circumstances surrounding trading in our common stock, the
public release of data from our first pivotal Phase 3 trial for
taribavirin, and statements made in connection with the public
release of data and matters regarding our stock option grants
since January 1, 2000. 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. On August 20, 2007, the
court overruled a demurrer challenging the amended complaint
based on the plaintiffs failure to make a pre-suit demand
on our board of directors. The plaintiff intends to dismiss
certain defendants from the action and to file a second amended
complaint in January 2008.
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 plaintiff has agreed to a
stay pending resolution of the Pronko action in California.
Patent Oppositions: Our two European patents
covering ribavirin have been revoked by the Opposition Division
of the European Patent Office (E.P.O.). The first was revoked on
November 25, 2005. We are appealing this decision and
expect a decision on the appeal in late 2007. Additionally, on
June 12, 2007, the Opposition Board of the E.P.O. revoked
our second patent on ribavirin. Roche has discontinued its
royalty payment for ribavirin sales in Europe effective the date
of revocation of the second patent. In addition, Roche has
notified us that, given the current state of the issued patents
in Japan, it does not believe that any royalties are due with
respect to ribavirin sales in Japan under the terms of our
license agreement with Roche. Since royalty payments from
Schering, our other licensee of ribavirin, do not depend on the
existence of a patent, we expect that payments from Schering
will continue until 2009 in Europe and 2010 in Japan.
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. Based upon the size of the
transactions alleged to have violated the law, we do not expect
this matter to 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,
20
VALEANT
PHARMACEUTICALS INTERNATIONAL
NOTES TO
CONSOLIDATED CONDENSED FINANCIAL
STATEMENTS (Continued)
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 any material liability which might arise from this claim,
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: On June 28, 2007, we
reached a settlement in principle with respect to a patent
infringement lawsuit with Kali Laboratories, Inc. In March 2004,
Kali 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) in the United States District Court of New Jersey. The
complaint alleged 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.
We executed a settlement agreement on October 12, 2007, to
allow Kali to introduce a generic version of Diastat and Diastat
AcuDial on or after September 1, 2010, or earlier under
certain circumstances, and the lawsuit has been dismissed.
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 Appeals 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 submitted this matter to binding arbitration.
Arbitration commenced on October 23, 2007 with an
evidentiary hearing on certain threshold issues, and is expected
to conclude in December 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.
21
VALEANT
PHARMACEUTICALS INTERNATIONAL
NOTES TO
CONSOLIDATED CONDENSED FINANCIAL
STATEMENTS (Continued)
The following table sets forth the amounts of our segment
revenues and operating income for the three months and nine
months ended September 30, 2007 and 2006 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
Revenues from continuing operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Specialty pharmaceuticals
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North America
|
|
$
|
65,295
|
|
|
$
|
62,091
|
|
|
$
|
196,504
|
|
|
$
|
185,237
|
|
International
|
|
|
54,273
|
|
|
|
60,530
|
|
|
|
146,514
|
|
|
|
170,191
|
|
EMEA
|
|
|
74,977
|
|
|
|
67,251
|
|
|
|
222,148
|
|
|
|
199,587
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total specialty pharmaceuticals
|
|
|
194,545
|
|
|
|
189,872
|
|
|
|
565,166
|
|
|
|
555,015
|
|
Alliance revenues (including ribavirin royalties)
|
|
|
14,078
|
|
|
|
20,968
|
|
|
|
69,503
|
|
|
|
60,694
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated revenues
|
|
$
|
208,623
|
|
|
$
|
210,840
|
|
|
$
|
634,669
|
|
|
$
|
615,709
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss) from continuing operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Specialty pharmaceuticals
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North America
|
|
$
|
21,179
|
|
|
$
|
17,429
|
|
|
$
|
65,060
|
|
|
$
|
51,313
|
|
International
|
|
|
12,689
|
|
|
|
18,589
|
|
|
|
22,486
|
|
|
|
50,695
|
|
EMEA
|
|
|
11,890
|
|
|
|
10,658
|
|
|
|
43,019
|
|
|
|
27,268
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
45,758
|
|
|
|
46,676
|
|
|
|
130,565
|
|
|
|
129,276
|
|
Corporate expenses(1)(2)
|
|
|
(20,394
|
)
|
|
|
(16,674
|
)
|
|
|
(56,132
|
)
|
|
|
(55,150
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total specialty pharmaceuticals
|
|
|
25,364
|
|
|
|
30,002
|
|
|
|
74,433
|
|
|
|
74,126
|
|
Restructuring charges and asset impairment(3)
|
|
|
|
|
|
|
(17,139
|
)
|
|
|
(13,575
|
)
|
|
|
(96,687
|
)
|
Gain on litigation settlement
|
|
|
|
|
|
|
17,550
|
|
|
|
|
|
|
|
51,550
|
|
Research and development
|
|
|
(12,462
|
)
|
|
|
(2,845
|
)
|
|
|
(3,962
|
)
|
|
|
(23,069
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated segment operating income
|
|
|
12,902
|
|
|
|
27,568
|
|
|
|
56,896
|
|
|
|
5,920
|
|
Interest income
|
|
|
3,601
|
|
|
|
3,209
|
|
|
|
12,881
|
|
|
|
8,581
|
|
Interest expense
|
|
|
(10,365
|
)
|
|
|
(10,960
|
)
|
|
|
(32,199
|
)
|
|
|
(32,258
|
)
|
Other, net
|
|
|
(262
|
)
|
|
|
(454
|
)
|
|
|
2,556
|
|
|
|
1,240
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations before provision for
income taxes
|
|
$
|
5,876
|
|
|
$
|
19,363
|
|
|
$
|
40,134
|
|
|
$
|
(16,517
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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) |
|
The corporate expense total above includes certain corporate
marketing expenses in 2007 for our products in development. In
the three months and the nine months ended September 30,
2006, $1,700,000 and $6,400,000 of similar costs were allocated
out of the corporate segment and reassigned to the research and
development division, due to the ownership of certain
intellectual property by a foreign subsidiary within this
division. This foreign subsidiary no longer owns this
intellectual property and the corresponding costs in 2007 are
recognized as corporate expenses. |
|
(3) |
|
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. |
22
VALEANT
PHARMACEUTICALS INTERNATIONAL
NOTES TO
CONSOLIDATED CONDENSED FINANCIAL
STATEMENTS (Continued)
The following table sets forth our total assets by segment as of
September 30, 2007 and December 31, 2006 (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
December 31,
|
|
Total Assets
|
|
2007
|
|
|
2006
|
|
|
North America
|
|
$
|
351,233
|
|
|
$
|
381,198
|
|
International
|
|
|
220,525
|
|
|
|
202,369
|
|
EMEA
|
|
|
481,815
|
|
|
|
515,267
|
|
Corporate
|
|
|
329,633
|
|
|
|
207,803
|
|
Research and Development Division
|
|
|
47,810
|
|
|
|
122,268
|
|
Discontinued operations
|
|
|
65,395
|
|
|
|
76,532
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,496,411
|
|
|
$
|
1,505,437
|
|
|
|
|
|
|
|
|
|
|
The following table sets forth our long-term assets by segment
as of September 30, 2007 and December 31, 2006 (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
December 31,
|
|
Long-term Assets
|
|
2007
|
|
|
2006
|
|
|
North America
|
|
$
|
286,144
|
|
|
$
|
288,889
|
|
International
|
|
|
78,537
|
|
|
|
58,763
|
|
EMEA
|
|
|
213,163
|
|
|
|
201,188
|
|
Corporate
|
|
|
110,056
|
|
|
|
75,506
|
|
Research and Development Division
|
|
|
26,683
|
|
|
|
35,105
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
714,583
|
|
|
$
|
659,451
|
|
|
|
|
|
|
|
|
|
|
The table above excludes $226,000 in non-current assets of
discontinued operations as of December 31, 2006.
23
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 and
nine months ended September 30, 2007 and 2006 (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
Therapeutic Area/Product
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
Neurology
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diastat
AcuDialtm(P)
|
|
$
|
15,676
|
|
|
$
|
14,802
|
|
|
$
|
39,134
|
|
|
$
|
38,533
|
|
Mestinon®(P)
|
|
|
13,820
|
|
|
|
11,449
|
|
|
|
38,402
|
|
|
|
33,592
|
|
Cesamet®(P)
|
|
|
7,279
|
|
|
|
6,487
|
|
|
|
20,051
|
|
|
|
13,832
|
|
Librax®
|
|
|
4,301
|
|
|
|
3,002
|
|
|
|
12,423
|
|
|
|
10,926
|
|
Migranal®(P)
|
|
|
2,614
|
|
|
|
1,133
|
|
|
|
9,395
|
|
|
|
6,949
|
|
Dalmane®/Dalmadorm®(P)
|
|
|
3,046
|
|
|
|
2,538
|
|
|
|
8,138
|
|
|
|
7,548
|
|
Tasmar®(P)
|
|
|
2,714
|
|
|
|
1,635
|
|
|
|
7,067
|
|
|
|
4,487
|
|
Melleril(P)
|
|
|
1,972
|
|
|
|
1,567
|
|
|
|
5,326
|
|
|
|
4,340
|
|
Zelapar®(P)
|
|
|
1,825
|
|
|
|
3,824
|
|
|
|
3,401
|
|
|
|
3,824
|
|
Other Neurology
|
|
|
15,264
|
|
|
|
16,092
|
|
|
|
47,257
|
|
|
|
46,311
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Neurology
|
|
|
68,511
|
|
|
|
62,529
|
|
|
|
190,594
|
|
|
|
170,342
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dermatology
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Efudix/Efudex®(P)
|
|
|
16,997
|
|
|
|
15,502
|
|
|
|
46,991
|
|
|
|
46,061
|
|
Kinerase®(P)
|
|
|
5,729
|
|
|
|
6,622
|
|
|
|
22,255
|
|
|
|
22,506
|
|
Dermatixtm(P)
|
|
|
4,056
|
|
|
|
2,553
|
|
|
|
10,394
|
|
|
|
7,364
|
|
Oxsoralen-Ultra®(P)
|
|
|
1,032
|
|
|
|
613
|
|
|
|
8,968
|
|
|
|
7,714
|
|
Other Dermatology
|
|
|
9,231
|
|
|
|
10,315
|
|
|
|
26,686
|
|
|
|
30,894
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Dermatology
|
|
|
37,045
|
|
|
|
35,605
|
|
|
|
115,294
|
|
|
|
114,539
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Infectious Disease
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Virazole®(P)
|
|
|
2,453
|
|
|
|
2,142
|
|
|
|
11,064
|
|
|
|
11,723
|
|
Other Infectious Disease
|
|
|
5,916
|
|
|
|
4,448
|
|
|
|
16,310
|
|
|
|
14,069
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Infectious Disease
|
|
|
8,369
|
|
|
|
6,590
|
|
|
|
27,374
|
|
|
|
25,792
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other therapeutic classes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bedoyectatm(P)
|
|
|
14,268
|
|
|
|
13,879
|
|
|
|
31,478
|
|
|
|
36,970
|
|
Solcoseryl(P)
|
|
|
4,993
|
|
|
|
4,908
|
|
|
|
18,788
|
|
|
|
12,882
|
|
Bisocard(P)
|
|
|
5,864
|
|
|
|
4,045
|
|
|
|
16,133
|
|
|
|
11,522
|
|
Nyal(P)
|
|
|
3,340
|
|
|
|
2,134
|
|
|
|
9,094
|
|
|
|
8,691
|
|
MVI (multi-vitamin infusion)(P)
|
|
|
3,176
|
|
|
|
3,629
|
|
|
|
8,425
|
|
|
|
9,396
|
|
Espaven(P)
|
|
|
1,841
|
|
|
|
3,340
|
|
|
|
5,955
|
|
|
|
7,625
|
|
Protamin(P)
|
|
|
1,532
|
|
|
|
1,397
|
|
|
|
4,956
|
|
|
|
4,722
|
|
Other products
|
|
|
45,606
|
|
|
|
51,816
|
|
|
|
137,075
|
|
|
|
152,534
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other therapeutic classes
|
|
|
80,620
|
|
|
|
85,148
|
|
|
|
231,904
|
|
|
|
244,342
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total product sales
|
|
$
|
194,545
|
|
|
$
|
189,872
|
|
|
$
|
565,166
|
|
|
$
|
555,015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total promoted product sales
|
|
$
|
114,227
|
|
|
$
|
104,199
|
|
|
$
|
325,415
|
|
|
$
|
300,281
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(P) |
|
Promoted Products represent products promoted in at least one
major territory with estimated global annual sales greater than
$5 million. |
24
VALEANT
PHARMACEUTICALS INTERNATIONAL
NOTES TO
CONSOLIDATED CONDENSED FINANCIAL
STATEMENTS (Continued)
During the three months and the nine months ended
September 30, 2007 one customer, McKesson Corporation,
accounted for more than 10% of consolidated product sales. Sales
to McKesson Corporation and its affiliates in the United States,
Canada, and Mexico were $30,760,000 and $109,949,000 in the
three months and the nine months ended September 30, 2007,
respectively.
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 and
the nine months ended September 30, 2007 and
September 30, 2006, respectively (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended
|
|
|
For the Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
Ribavirin royalty
|
|
$
|
14,078
|
|
|
$
|
20,968
|
|
|
$
|
50,253
|
|
|
$
|
60,694
|
|
Licensing payment
|
|
|
|
|
|
|
|
|
|
|
19,200
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
|
|
|
|
50
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total alliance revenue
|
|
$
|
14,078
|
|
|
$
|
20,968
|
|
|
$
|
69,503
|
|
|
$
|
60,694
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
A licensing payment of $19,200,000 was received in the first
quarter of 2007 from Schering-Plough as a payment to us in the
licensing of pradefovir. Alliance revenue for the nine months
ended September 30, 2007 also included a $50,000 payment
from an unrelated third party for a license to certain
intellectual property assets.
In June 2007, we revised our estimate of ribavirin royalties
receivable from Schering-Plough, to incorporate certain
historical data and payment patterns. This revision increased
the royalties recorded in the nine months ended
September 30, 2007 by $404,000.
25
|
|
Item 2.
|
Managements
Discussion and Analysis of Financial Condition and Results of
Operations
|
Overview
We are a global specialty pharmaceutical company that develops,
manufactures and markets a broad range of pharmaceutical
products. We focus our greatest resources and attention
principally in the therapeutic areas of neurology, infectious
disease and dermatology. Our marketing and promotion efforts
focus on our Promoted Products, which include products marketed
globally, regionally and locally with annual sales in excess of
$5 million. Our products are currently sold in more than
100 markets around the world, with our primary focus on the
United States, Canada, Mexico, the United Kingdom, France,
Italy, Poland, Germany, and Spain.
Our primary value driver is a specialty pharmaceutical business
with a global platform. We believe that our global reach and
marketing agility make us unique among specialty pharmaceutical
companies, and provide us with the ability to leverage compounds
in the clinical stage and commercialize them in major markets
around the world. In addition, we receive royalties from the
sale of ribavirin, although such royalties currently represent a
much smaller contribution to our revenues than they have in the
past and are expected to continue to decline in the future. We
expect that royalty payments from Schering will continue until
2009 in Europe and 2010 in Japan.
Company
Strategy and Restructuring
The key elements of our strategy, as refined by the
restructuring program announced on April 3, 2006, include
the following:
Targeted Growth Opportunities. We focus our
business on key markets, across three therapeutic areas and on
products we have or may acquire where we can leverage our local
market resources and particular brand 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. We also review our
product portfolio for products and geographies that do not meet
our growth and profitability expectations and have divested or
discontinued certain non-strategic products as a result of this
ongoing review. In September 2007, we made the strategic
decision to sell our rights to Infergen. In 2007, we have also
sold product rights to Reptilase, Solcoseryl in Japan, and our
opthalmic business in Holland.
Product Acquisitions. We plan to selectively
license or acquire from third parties products, technologies and
businesses that complement our existing business and provide for
effective life cycle management of key products.
Efficient Manufacturing and Supply Chain
Organization. The objective of the restructuring
program as it related to manufacturing was to further
rationalize our manufacturing operations and further reduce our
excess capacity. We completed this restructuring program with
the sale of our manufacturing facilities in Basel, Switzerland
and Puerto Rico in June 2007. 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: retigabine, a potential treatment for partial onset
seizures in patients with epilepsy and for neuropathic pain, and
taribavirin, a potential treatment for hepatitis C. The
restructuring program was designed in part to rationalize our
investments in research and development efforts in line with our
financial resources. We had previously completed Phase 1 and
Phase 2 clinical trials with pradefovir, a compound that we
licensed from Metabasis Therapeutics, Inc.
(Metabasis) in 2001. On January 9, 2007, we
licensed the development and commercialization rights to
pradefovir to Schering-Plough, who subsequently has returned
these rights to Metabasis after the results of a long-term
carcinogenicity study were released. 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 retigabine and taribavirin to share the costs of
development, and look to acquire rights to additional compounds
in the clinic to diversify our opportunities and the inherent
risks associated with product development.
26
Results
of Operations
Our three reportable pharmaceutical segments comprise
pharmaceutical 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 consolidated condensed
financial statements included elsewhere in this quarterly report.
Product sales from our specialty pharmaceutical segments
increased $4,673,000 (2%) for the three months ended
September 30, 2007 and increased $10,151,000 (2%) for the
nine months ended September 30, 2007, compared with the
same periods in 2006. Product sales from our Promoted Products
increased $10,028,000 (10%) and $25,134,000 (8%) for the three
and nine months ended September 30, 2007, respectively,
over the same periods from 2006. Product sales in the nine
months ended September 30, 2007 were impacted by
distribution issues which resulted in reduced sales to our
primary two wholesalers in Mexico. The increase in product sales
in the three months ended September 30, 2007 included
increases in the sales of
Mestinon®,
Bisocardtm,
Efudex®,
Migranal®,
and
Cesamet®,
offset in part by a decline in Zelapar and Kinerase sales. The
increase in product sales in the nine months ended
September 30, 2007 included increases in the sales of
Cesamet, Solcoseryl, and
Bisocardtm,
offset in part by a decline in
Bedoyectatm
and Espaven sales.
In the three months ended September 30, 2007, the increase
in product sales of $4,673,000 (2%) compared to the
corresponding period in 2006 was due to a 4% benefit from
currency fluctuations and a 3% increase in price, offset in part
by a 5% reduction in volume. In the nine months ended
September 30, 2007, the increase in product sales of
$10,151,000 (2%) compared to the corresponding period in 2006
was due to a 4% benefit from currency fluctuations and 1%
increase in price, offset in part by a 3% reduction in volume.
The following tables compare 2007 and 2006 revenues by
reportable segments and operating expenses for the three months
and nine months ended September 30, 2007 and 2006 (in
thousands, except percentages):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
Increase/
|
|
|
Percent
|
|
|
|
2007
|
|
|
2006
|
|
|
(Decrease)
|
|
|
Change
|
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Specialty pharmaceuticals
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North America
|
|
$
|
65,295
|
|
|
$
|
62,091
|
|
|
$
|
3,204
|
|
|
|
5
|
%
|
International
|
|
|
54,273
|
|
|
|
60,530
|
|
|
|
(6,257
|
)
|
|
|
(10
|
)%
|
EMEA
|
|
|
74,977
|
|
|
|
67,251
|
|
|
|
7,726
|
|
|
|
11
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total specialty pharmaceuticals
|
|
|
194,545
|
|
|
|
189,872
|
|
|
|
4,673
|
|
|
|
2
|
%
|
Alliance revenue (including ribavirin royalties)
|
|
|
14,078
|
|
|
|
20,968
|
|
|
|
(6,890
|
)
|
|
|
(33
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
208,623
|
|
|
|
210,840
|
|
|
|
(2,217
|
)
|
|
|
(1
|
)%
|
Costs and Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of goods sold (excluding amortization)
|
|
|
59,033
|
|
|
|
57,326
|
|
|
|
1,707
|
|
|
|
3
|
%
|
Selling expenses
|
|
|
64,396
|
|
|
|
62,634
|
|
|
|
1,762
|
|
|
|
3
|
%
|
General and administrative expenses
|
|
|
29,276
|
|
|
|
26,621
|
|
|
|
2,655
|
|
|
|
10
|
%
|
Research and development costs
|
|
|
24,886
|
|
|
|
20,328
|
|
|
|
4,558
|
|
|
|
22
|
%
|
Gain on litigation settlement
|
|
|
|
|
|
|
(17,550
|
)
|
|
|
17,550
|
|
|
|
NM
|
|
Restructuring charges
|
|
|
|
|
|
|
17,139
|
|
|
|
(17,139
|
)
|
|
|
(100
|
)%
|
Amortization expense
|
|
|
18,130
|
|
|
|
16,774
|
|
|
|
1,356
|
|
|
|
8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
$
|
12,902
|
|
|
$
|
27,568
|
|
|
$
|
(14,666
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit on product sales (excluding amortization)
|
|
$
|
135,512
|
|
|
$
|
132,546
|
|
|
$
|
2,966
|
|
|
|
2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit margin on product sales
|
|
|
70
|
%
|
|
|
70
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
27
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
Increase/
|
|
|
Percent
|
|
|
|
2007
|
|
|
2006
|
|
|
(Decrease)
|
|
|
Change
|
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Specialty pharmaceuticals
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North America
|
|
$
|
196,504
|
|
|
$
|
185,237
|
|
|
$
|
11,267
|
|
|
|
6
|
%
|
International
|
|
|
146,514
|
|
|
|
170,191
|
|
|
|
(23,677
|
)
|
|
|
(14
|
)%
|
EMEA
|
|
|
222,148
|
|
|
|
199,587
|
|
|
|
22,561
|
|
|
|
11
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total specialty pharmaceuticals
|
|
|
565,166
|
|
|
|
555,015
|
|
|
|
10,151
|
|
|
|
2
|
%
|
Alliance revenue (including ribavirin royalties)
|
|
|
69,503
|
|
|
|
60,694
|
|
|
|
8,809
|
|
|
|
15
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
634,669
|
|
|
|
615,709
|
|
|
|
18,960
|
|
|
|
3
|
%
|
Costs and Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of goods sold (excluding amortization)
|
|
|
167,089
|
|
|
|
173,804
|
|
|
|
(6,715
|
)
|
|
|
(4
|
)%
|
Selling expenses
|
|
|
190,482
|
|
|
|
183,254
|
|
|
|
7,228
|
|
|
|
4
|
%
|
General and administrative expenses
|
|
|
83,738
|
|
|
|
85,084
|
|
|
|
(1,346
|
)
|
|
|
(2
|
)%
|
Research and development costs
|
|
|
68,612
|
|
|
|
73,999
|
|
|
|
(5,387
|
)
|
|
|
(7
|
)%
|
Gain on litigation settlement
|
|
|
|
|
|
|
(51,550
|
)
|
|
|
51,550
|
|
|
|
NM
|
|
Restructuring charges
|
|
|
13,575
|
|
|
|
96,687
|
|
|
|
(83,112
|
)
|
|
|
(86
|
)%
|
Amortization expense
|
|
|
54,277
|
|
|
|
48,511
|
|
|
|
5,766
|
|
|
|
12
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
$
|
56,896
|
|
|
$
|
5,920
|
|
|
$
|
50,976
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit on product sales (excluding amortization)
|
|
$
|
398,077
|
|
|
$
|
381,211
|
|
|
$
|
16,866
|
|
|
|
4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit margin on product sales
|
|
|
70
|
%
|
|
|
69
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NM Not Meaningful
In the North America pharmaceuticals segment, revenues for the
three months ended September 30, 2007 were $65,295,000,
compared to $62,091,000 for the same period in 2006,
representing an increase of $3,204,000 (5%). Revenues for the
nine months ended September 30, 2007 were $196,504,000
compared to $185,237,000 for the corresponding period in 2006,
an increase of $11,267,000 (6%). The increase in the three-month
period is primarily related to increases in Migranal, Diastat
AcuDial, and Efudex, partly offset by a decline in sales of
Zelapar and Kinerase. Sales of Zelapar were lower due to the
products wholesaler stocking for the launch in the third
quarter of 2006. We introduced Bedoyecta in the United States in
September 2007, resulting in $242,000 of sales. The increase in
the nine-month period is primarily related to increases in the
sales of Cesamet, Migranal, and Librax, partly offset by a
decline in sales of Mysoline. Cesamet sales in North America
were essentially flat, due to wholesaler purchases in the United
States in anticipation of the August 2006 launch. Product sales
in the North America region were 34% and 35% of total product
sales in the three and nine months ended September 30,
2007, respectively, compared to 33% and 33% of total product
sales for the same periods in 2006. In the three-month period
ended September 30, 2007, the 5% increase in North America
pharmaceuticals sales resulted from an 8% increase in price and
a 1% benefit from currency, offset by a 4% decrease in volume.
In the nine-month period ended September 30, 2007, the 6%
increase in sales resulted from a 6% increase in price and a 1%
benefit from currency, offset by a 1% decrease in volume. The
increased strength of the Canadian dollar relative to the
U.S. dollar contributed $925,000 and $1,009,000 in the
three months and nine months ended September 30, 2007,
respectively.
In the International pharmaceuticals segment, revenues for the
three months ended September 30, 2007 were $54,273,000
compared to $60,530,000 for the corresponding period in 2006, a
decrease of $6,257,000 (10%). The decrease was due to the
reduced shipments of product to certain wholesalers in Mexico
who had ceased making payments to us because they felt
disadvantaged by changes we made in our distribution operations
in 2006. This affected most of our products in Mexico. Nyal
sales increased 57 percent in the three months ended
September 30, 2007 compared with the three months ended
September 30, 2006, due to improving demand and a late
winter season
28
in Australia in 2006. Reptilase sales were $1,563,000 in the
three months ended September 30, 2006. We did not sell
Reptilase in the three months ended September 30, 2007
because we divested this product with the sale of the Basel,
Switzerland manufacturing plant to Legacy in June 2007. Revenues
for the nine months ended September 30, 2007 were
$146,514,000 compared to $170,191,000 for the corresponding
period in 2006, representing a decrease of $23,677,000 (14%). In
the three-month period ended September 30, 2007, the 10%
decrease in the International pharmaceuticals sales resulted
from a 14% decrease in volume, partly offset by a 2% benefit
from currency fluctuations and a 2% price increase. In the
nine-month period ended September 30, 2007, the 14%
decrease in sales resulted from an 18% decrease in volume,
partly offset by a 2% benefit from currency and a 2% price
increase.
In the EMEA pharmaceuticals segment, revenues for the three
months ended September 30, 2007 were $74,977,000, compared
to $67,251,000 for the same period in 2006, an increase of
$7,726,000 (11%). Revenues for the nine months ended
September 30, 2007 were $222,148,000 compared to
$199,587,000 for the corresponding period in 2006, an increase
of $22,561,000 (11%). The EMEA region reported increased sales
in the third quarter of Bisocard, Mestinon, and Dermatix, partly
offset by declines in Eldoquin, Vision Care, Tepilta, and
Calcitonin. Cesamet contributed $919,000 and $2,283,000 in the
three months and the nine months ended September 30, 2007,
respectively. We acquired the rights to Cesamet in the United
Kingdom in January 2007. Sales of new products, including
Cesamet, contributed approximately $2,632,000 to the
regions growth in the quarter. Much of the segments
growth was in Central and Eastern Europe and resulted from
foreign currency. In the three-month period ended
September 30, 2007, the 11% increase in EMEA sales resulted
from a 9% benefit from currency and a 2% increase in volume,
with a negligible impact from price changes. In the nine-month
period ended September 30, 2007, the 11% increase in sales
resulted from an 8% benefit from currency and a 7% increase in
volume, offset by a 4% aggregate decrease in price.
Alliance Revenue (including Ribavirin
royalties): In the three months ended
September 30, 2007 and the nine months ended
September 30, 2006, our ribavirin royalties from
Schering-Plough and Roche represented all of our alliance
revenues. Royalties from sales of ribavirin decreased $6,890,000
(33%) and accounted for 7% of our total revenues from continuing
operations for the three months ended September 30, 2007 as
compared to 10% in the similar three-month period in 2006.
Ribavirin royalty revenues decreased $10,441,000 (17%) and
accounted for 8% of our total revenues from continuing
operations for the nine months ended September 30, 2007 as
compared to 10% in the similar nine-month period in 2006. The
year-to-date decrease in ribavirin royalties reflects
Schering-Ploughs market share losses in ribavirin sales
and Roches discontinuation of royalty payments to us in
June 2007. Such royalties are expected to decline as a result of
market competition, price reductions and the eventual loss of
exclusivity in Europe and Japan. We expect that royalty payments
from Schering will continue until 2009 in Europe and 2010 in
Japan.
The European Patent Office announced in June 2007 that it has
revoked a ribavirin patent which would have provided protection
through 2017. Roche has discontinued its royalty payment for
ribavirin sales in Europe effective the date of revocation of
the patent. In addition, Roche has notified us that, given the
current state of the issued patents in Japan, it does not
believe that any royalties are due with respect to ribavirin
sales in Japan under the terms our of license agreement with
Roche. Royalties from Roche have represented approximately 10%
of our historical ribavirin royalties.
Alliance revenues in the nine months ended September 30,
2007 included a licensing payment of $19,200,000 which we
received in the first quarter of 2007 from Schering-Plough as a
payment for the license to pradefovir. In September 2007, we
announced an agreement with Schering-Plough and Metabasis which
returned all pradefovir rights to Metabasis. We retained the
right to this $19,200,000 licensing payment but expect to
receive no future income from pradefovir. Alliance revenue in
the nine months ended September 30, 2007 also included
$50,000 paid to us by an unrelated third party in the first
quarter of 2007 for certain intellectual property rights.
In June 2007, we revised our estimate of ribavirin royalties
receivable from Schering-Plough, to incorporate certain
historical data and payment patterns. This revision increased
the royalties recorded in the nine months ended
September 30, 2007 by $404,000.
Gross Profit Margin (excluding
amortization): Gross profit margin on product
sales was 70% for the three months ended September 30, 2007
and the three months ended September 30, 2006. Gross profit
margin on product sales was 70% for the nine months ended
September 30, 2007 and 69% for the nine months ended
September 30,
29
2006. Our gross margin in 2007 benefited from our purchase of a
paid-up
license to Kinetin and Zeatin, the active ingredients in
Kinerase, as we are no longer required to pay royalties on this
product line.
Selling Expenses: Selling expenses were
$64,396,000 and $190,482,000 for the three and nine months ended
September 30, 2007, respectively, compared to $62,634,000
and $183,254,000 for the same periods in 2006, resulting in
increases of $1,762,000 (3%) and $7,228,000 (4%), respectively.
As a percent of product sales, selling expenses were 33% for the
three months ended September 30, 2007, and
September 30, 2006 and 34% for the nine months ended
September 30, 2007 compared with 33% for the corresponding
period in 2006. The increase in selling expenses includes sales
force severance costs of $2,680,000 in Germany, Italy, and Latin
America.
General and Administrative Expenses: General
and administrative expenses were $29,276,000 and $83,738,000 for
the three and nine months ended September 30, 2007,
respectively, compared to $26,621,000 and $85,084,000 for the
same periods in 2006, resulting in an increase of $2,655,000
(10%) and a decrease of $1,346,000 (2%), respectively. As a
percent of product sales, general and administrative expenses
were 15% for the three and nine months ended September 30,
2007, respectively, compared to 14% and 15% for the same periods
in 2006. General and administrative expenses in the three months
ended September 30, 2007 included information technology
improvements, legal, and business development costs.
Research and Development: Research and
development expenses were $24,886,000 and $68,612,000 for the
three and nine months ended September 30, 2007,
respectively, compared to $20,328,000 and $73,999,000 for the
same periods in 2006, resulting in an increase of $4,558,000
(22%) in the three-month period and a decrease of $5,387,000
(7%) in the nine-month period. This increase in the three-month
period reflects the clinical development costs for retigabine.
The decrease in the nine-month period resulted from the
completion of the VISER clinical trial for taribavirin and
savings from our strategic restructuring program relating to the
divestment of our discovery operations in December 2006. On
January 9, 2007, we licensed the development and
commercialization rights to pradefovir to Schering-Plough, who
subsequently has returned these rights to Metabasis after the
results of a long-term carcinogenicity study were released. 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. In the three months ended
September 30, 2006, we settled litigation with the former
chief executive officer, Milan Panic, for $20,000,000, which was
paid to us. The $17,550,000 gain reflected the settlement
proceeds net of related costs associated with the litigation and
settlement arrangement.
Restructuring
Charges:
The sale of the Basel, Switzerland and Puerto Rico manufacturing
sites concluded the restructuring plan announced in April 2006.
In December 2006, we transferred our former factories in Basel,
Switzerland and Puerto Rico to a held for sale
classification in accordance with SFAS 144,
Accounting for the Impairment or Disposal of Long-Lived
Assets. In June 2007, we sold these manufacturing
facilities and the related inventories to Legacy Pharmaceuticals
International for aggregate proceeds of $29,500,000, of which
$12,000,000 was received as consideration for inventories sold
to Legacy Pharmaceuticals International and $17,500,000 was
received as consideration for the manufacturing facilities. The
transaction also included transition payment obligations of
$6,000,000 to be paid by Valeant to Legacy Pharmaceuticals
International over a
24-month
period as well as capital expenditure obligations of $650,000 to
be incurred by us. In the three months ended September 30,
2007, Legacy Pharmaceuticals International agreed to pay us
$1,818,000 and $385,000 for inventory and working capital
adjustments, respectively, pursuant to the site sale agreements.
Our restructuring charges have included impairment charges
resulting from the sale of our former headquarters facility,
discovery and pre-clinical operations equipment, and our former
manufacturing facilities in Puerto Rico and Basel, Switzerland.
The restructuring included the reduction of approximately
850 employees, the majority of whom work in the two
manufacturing facilities sold to Legacy Pharmaceuticals
International. As of September 30,
30
2007, employee severance costs in this restructuring program
have been recorded for approximately 490 employees and no
severance payments have been recorded for the remaining
employees who transferred to Legacy Pharmaceuticals
International.
The restructuring program also rationalized 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 previously been managed as a separate
business unit, were combined in 2006 with those of other regions.
We did not record a restructuring provision in the three months
ended September 30, 2007. We recorded a provision of
$17,139,000 in the three months ended September 30, 2006.
We recorded a provision of $13,575,000 in the nine months ended
September 30, 2007, compared with $96,687,000 for the nine
months ended September 30, 2006. Severance charges recorded
as part of this restructuring program in the nine months ended
September 30, 2007 total $5,130,000 and relate to employees
whose positions were eliminated in the restructuring.
Restructuring
Charge Details (in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months
|
|
|
Nine Months
|
|
|
Year
|
|
|
|
Ended
|
|
|
Ended
|
|
|
Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2006
|
|
|
2006
|
|
|
Employee severances
|
|
$
|
1,922
|
|
|
$
|
13,935
|
|
|
$
|
16,997
|
|
Contract cancellation and other cash costs
|
|
|
665
|
|
|
|
1,657
|
|
|
|
1,662
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal: cash charges
|
|
|
2,587
|
|
|
|
15,592
|
|
|
|
18,659
|
|
Abandoned software and other capital assets
|
|
|
193
|
|
|
|
21,546
|
|
|
|
22,178
|
|
Impairment of manufacturing and research facilities
|
|
|
14,359
|
|
|
|
59,549
|
|
|
|
97,344
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal: non-cash charges
|
|
|
14,552
|
|
|
|
81,095
|
|
|
|
119,522
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total:
|
|
$
|
17,139
|
|
|
$
|
96,687
|
|
|
$
|
138,181
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months
|
|
|
Nine Months
|
|
|
|
|
|
|
Ended
|
|
|
Ended
|
|
|
Cumulative
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
Total
|
|
|
|
2007
|
|
|
2007
|
|
|
Incurred
|
|
|
Employee severances (approximately 490 employees)
|
|
$
|
|
|
|
$
|
5,130
|
|
|
$
|
22,127
|
|
Contract cancellation and other cash costs
|
|
|
|
|
|
|
3,115
|
|
|
|
4,777
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal: cash charges
|
|
|
|
|
|
|
8,245
|
|
|
|
26,904
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Abandoned software and other capital assets
|
|
|
|
|
|
|
|
|
|
|
22,178
|
|
Write-off of accumulated foreign currency translation adjustments
|
|
|
|
|
|
|
2,891
|
|
|
|
2,891
|
|
Impairment of manufacturing and research facilities
|
|
|
|
|
|
|
2,439
|
|
|
|
99,783
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal: non-cash charges
|
|
|
|
|
|
|
5,330
|
|
|
|
124,852
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total:
|
|
$
|
|
|
|
$
|
13,575
|
|
|
$
|
151,756
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
31
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
|
|
|
|
September 30,
|
|
|
|
2007
|
|
|
Opening accrual
|
|
$
|
9,977
|
|
Charges to earnings
|
|
|
|
|
Cash paid
|
|
|
(4,771
|
)
|
|
|
|
|
|
Closing accrual
|
|
$
|
5,206
|
|
|
|
|
|
|
Amortization: Amortization expense was
$18,130,000 and $54,277,000 for the three and nine months ended
September 30, 2007, respectively, compared to $16,774,000
and $48,511,000 for the same periods in 2006, resulting in
increases of $1,356,000 (8%) and $5,766,000 (12%), respectively.
The increase is the result of the acquisition of product rights
for Kinerase, nabilone, Melleril, and certain products in
Europe, 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 an expense of $262,000 and income
of $2,556,000 for the three and nine months ended
September 30, 2007, respectively, compared to an expense of
$454,000 and income of $1,240,000 for the same periods in 2006.
In the third quarter of 2007, translation gains consisted of
translation and exchange gains of $268,000 in EMEA and $30,000
in International, partly offset by a loss of $69,000 in North
America. In the nine months ended September 30, 2007,
translation gains principally consisted of gains of $3,506,000
in EMEA and $358,000 in International, offset by a loss of
$43,000 in North America.
Interest Expense, net: Interest expense net of
interest income decreased $987,000 (13%) and $4,359,000 (18%)
during the three and nine months ended September 30, 2007,
respectively, compared to the same periods in 2006, primarily as
a result of higher interest income resulting from higher cash
and investment securities balances.
Income Taxes: The tax provisions in the third
quarters of both 2007 and 2006 relate to the profits of our
foreign operations, foreign withholding taxes, penalties and
interest associated with U.S. liabilities and state and
local taxes in the U.S. Our U.S. operations, which
include our research and development activities, generate
substantial net operating losses for U.S. 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. The
provision for income taxes in the nine months ended
September 30, 2007 was reduced by $21,521,000, primarily
related to resolution of the IRS examination of our tax returns
for the years 1997 through 2001.
Income (loss) from Discontinued Operations, Net of
Taxes: Our loss from discontinued operations was
$9,813,000 in the three months ended September 30, 2007,
compared with income of $6,004,000 in the three months ended
September 30, 2006. The loss from discontinued operations
was $18,979,000 in the nine months ended September 30,
2007, compared with compared with income of $6,097,000 for the
nine-month period ended September 30, 2006. The losses in
2007 relate to our Infergen business and the income in 2006
relates to the reduction in the environmental reserve for the
discontinued biomedicals facility. The cost of goods sold of
discontinued operations in the three months and the nine months
ended September 30, 2007 include a technology transfer
payment of $5,259,000 made to the future manufacturer of
Infergen. We made this milestone payment of $5,259,000 in the
third quarter of 2007, which has been classified as an expense
in discontinued operations.
Liquidity
and Capital Resources
Cash and marketable securities totaled $368,829,000 at
September 30, 2007 compared to $335,745,000 at
December 31, 2006. The increase in cash resulted from cash
from operations of $84,987,000, the sale of our former
headquarters building in Costa Mesa, California for $36,758,000,
the sale of our manufacturing facilities and
32
inventories in Basel, Switzerland and Puerto Rico for gross
consideration of $29,500,000, and the collection of the
$6,000,000 settlement payment from the Republic of Serbia,
offset in part by the use of $79,598,000 in the repurchase of
our common stock.
Working capital was $584,697,000 at September 30, 2007
compared to $593,552,000 at December 31, 2006. The
reduction in working capital of $8,855,000 was primarily the
result of the reduction assets held for sale of $59,426,000, the
reduction in accounts receivable of $26,710,000 and the
reduction in inventories of $13,642,000, offset in part by the
increase in cash and marketable securities of $33,084,000, the
reduction in income tax liabilities of $33,394,000, and the
reduction in accounts payable of $21,145,000.
Cash provided by operating activities is expected to be our
primary source of funds in 2007. During the nine months ended
September 30, 2007, cash provided by operating activities
in continuing operations totaled $107,082,000 compared to
$79,014,000 in the same period in 2006, an increase of
$28,068,000. The cash provided by operating activities for the
nine months ended September 30, 2007 included receipt of
$19,200,000 related to the pradefovir licensing payment from
Schering-Plough and $6,000,000 from the Republic of Serbia. The
cash provided by operating activities for the nine months ended
September 30, 2006 included receipt of $28,000,000 from the
Republic of Serbia. The sale of $13,818,000 of inventory in the
Basel, Switzerland and Puerto Rico manufacturing plant sales
reduced cash provided by operating activities, as the cash
received for this inventory has been reported in cash flows from
investing activities. Other than the impact of these events, the
increase in cash provided by operating activities resulted from
our income from continuing operations.
Cash provided by investing activities in continuing operations
was $5,740,000 for the nine months ended September 30, 2007
compared to cash used in investing activities of $21,668,000 for
the nine months ended September 30, 2006. In 2007 cash
provided by investing activities consisted primarily of proceeds
from the sale of assets of $37,923,000 and proceeds from the
sale of businesses of $30,120,000, offset by the use of
$35,487,000 used for product acquisitions and $24,683,000 used
for capital expenditures. In the nine months ended
September 30, 2006, net cash used in investing activities
in continuing operations consisted of capital expenditures on
corporate programs and existing facilities of $26,177,000,
partially offset by proceeds from the sale of assets, including
the Warsaw manufacturing facility, of $8,337,000.
Cash used in financing activities in continuing operations was
$72,094,000 in the nine months ended September 30, 2007 and
principally consisted of the repurchase of our common stock for
$79,598,000 and payments of long-term debt of $8,935,000, offset
by proceeds from stock option exercises and employee stock
purchases of $14,516,000. Cash used in financing activities in
continuing operations was $19,904,000 in the nine months ended
September 30, 2006 and principally consisted of dividends
paid on common stock of $21,550,000 and debt retirements of
$6,372,000, offset by proceeds from stock option exercises.
In January 2005, the Company entered into an interest rate swap
agreement with respect to $150,000,000 principal amount of its
7.0% Senior Notes due 2011. The interest rate on the swap
is variable at LIBOR plus 2.41%. The effect of this transaction
was to initially lower our effective interest rate by exchanging
fixed rate payments for floating rate payments. On a prospective
basis, the effective interest rate will float and correlate to
the variable interest earned on our cash held.
We have collateral requirements on the interest rate swap
agreement. The amount of collateral varies monthly depending on
the fair value of the underlying swap contract. As of
September 30, 2007, we have collateral of $6,756,000
comprising marketable securities and included in other assets in
the accompanying balance sheet.
Management believes that the Companys existing cash and
cash equivalents and funds generated from operations will be
sufficient to meet the Companys operating requirements at
least through September 30, 2008, and to provide cash
needed to fund capital expenditures and our 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 did not declare and did not pay dividends in the nine months
ended September 30, 2007. We declared and paid cash
dividends of $0.0775 per share for the first and second quarters
of 2006. We also paid cash dividends of
33
$0.0775 per share in the first quarter of 2006 for the dividend
declared in the fourth quarter of 2005. 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.
In June 2007, our board of directors authorized a stock
repurchase program. This program authorized us to repurchase up
to $200 million of our outstanding common stock in a
24-month
period. Under the program, purchases may be made from time to
time on the open market, in privately negotiated transactions,
and in amounts as we see appropriate. The number of shares to be
purchased and the timing of such purchases is subject to various
factors, which may include the price of our common stock,
general market conditions, corporate requirements, including
restrictions in our debt covenants, and alternate investment
opportunities. The share repurchase program may be modified or
discontinued at any time. The total number of shares repurchased
pursuant to this program was 4,723,000 as of September 30,
2007. We have used $79,599,000 to repurchase these shares.
We have contractual obligations for long-term debt, interest on
long-term debt, and operating lease obligations that were
summarized in a table of Contractual Obligations in our Annual
Report on
Form 10-K
for the year ended December 31, 2006. Since
December 31, 2006, there have been no material changes to
the table of Contractual Obligations of the Company, outside of
the ordinary course of business, except for the presentation of
our liability for unrecognized tax benefits. As discussed in
Note 1 in the Notes to Consolidated Financial Statements,
we adopted the provisions of Financial Accounting Standards
Board (FASB) Interpretation No. 48, Accounting
for Uncertainty in Income Taxes, as of January 1, 2007. As
of the adoption date, we had a liability of
$109,567,000 million for unrecognized tax benefits,
including related interest and penalties. At September 30,
2007, we had a liability of $59,242,000 million for
unrecognized tax benefits, including related interest and
penalties, which is expected to be paid after one year. We are
unable to determine when cash settlement with a taxing authority
will occur.
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
Retigabine: We are developing retigabine as an
adjunctive treatment for partial-onset seizures in patients with
epilepsy. Retigabine is believed to have a unique mechanism of
action. Retigabine stabilizes hyper-excited neurons primarily by
opening neuronal potassium channels. Retigabine has undergone
several Phase 2 clinical trials which 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 Food and Drug Administration 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 approximately 70 sites, mainly in Europe. The
first patient in the RESTORE1 trial was enrolled in September
2005. RESTORE1 is fully enrolled and we expect to complete the
enrollment of RESTORE2 in November 2007.
A number of standard supportive Phase 1 trials necessary for
successful registration of retigabine have started 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, a common
form of neuropathic pain.
34
Following review, the FDA has allowed Valeant to proceed with
this Phase 2a clinical trial. We expect to begin enrolling
patients in November 2007.
Assuming successful completion of the Phase 3 trials and
approval by the FDA and European Medicines Agency, we expect to
launch retigabine in the United States and Europe in 2009. We
may seek a partner to share the investment and risk in the
development of retigabine. For the three months and nine months
ended September 30, 2007, external research and development
expenses for retigabine were $11,506,000 and $30,702,000,
compared with $5,460,000 and $14,648,000 for the corresponding
periods in 2006.
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
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.
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. Enrollment into this study
was completed in October 2007. 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. We will also
need to determine whether or not we desire to secure a
development partner for taribavirin, the selection of which
could delay the commercial launch of taribavirin and possibly
weaken its position in relation to competing treatments. Our
external research and development expenses for taribavirin were
$1,911,000 and $5,433,000 for the three months and the nine
months ended September 30, 2007, respectively, compared
with $2,204,000 and $13,443,000 for the corresponding periods in
2006, respectively.
Other
Development Activities
Infergen (Reported in Discontinued
Operations): 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. In connection with this transaction,
we acquired patent rights and rights to two clinical trials to
expand the labeled indications of Infergen. Results were
presented at AASLD in November 2007. According to the
intent-to-treat analysis, sustained viral response (SVR) rates
for the Infergen 9 mcg and 15 mcg groups were 5.3 percent
and 9.3 percent, respectively (TMA Assay).
For the three months and the nine months ended
September 30, 2007, external research and development
expenses for Infergen were $1,279,000 and $5,279,000,
respectively, compared with $521,000 and $3,271,000 for the
corresponding periods in 2006, respectively. In September 2007,
we decided to divest our Infergen product rights. The results of
the Infergen operation and the related financial position have
been reflected as discontinued operations in the consolidated
financial statements in accordance with SFAS 144.
35
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. We submitted an
Investigational New Drug Application to the FDA in January 2007
to evaluate Cesamet in the treatment of pain. Study initiation
activities are currently ongoing. We plan to start enrollment of
patients with cancer pain in early 2008.
Foreign
Operations
Approximately 75% of our revenues from continuing operations,
which includes royalties, for the nine months ended
September 30, 2007 and 2006 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
36
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 settlement. This interval can exceed
twelve months. Because of this time lag, in any given quarter,
our adjustments to actual can incorporate revisions of several
prior quarters.
We record sales incentives as a reduction of revenues at the
time the related revenues are recorded or when the incentive is
offered, whichever is later. We estimate the cost of our sales
incentives based on our historical experience with similar
incentives programs.
In some markets customers have the right to return products to
us under certain conditions. Historically and in the three and
nine-month periods ended September 30, 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. 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 to estimate
the amounts due to us under the royalty agreements. In June
2007, we revised our estimate of ribavirin royalties receivable
from Schering-Plough, to incorporate certain historical data and
payment patterns. This revision increased the royalties recorded
in the nine months ended September 30, 2007 by $404,000.
Sales
Incentives
In the U.S. market, our current practice is to offer sales
incentives primarily in connection with launches of new products
or changes of existing products where demand has not yet been
established. We monitor and restrict sales in the
U.S. market in order to limit wholesaler purchases in
excess of their ordinary-course-of-business inventory levels. We
operate Inventory Management Agreements (IMAs) with major
wholesalers in the United States. However, specific events such
as the case of sales incentives described above or seasonal
demand (e.g. antivirals during an outbreak) may justify larger
purchases by wholesalers. We may offer sales incentives
primarily in international markets, where typically no right of
return exists except for goods damaged in transit, product
recalls or replacement of existing products due to packaging or
labeling changes. Our revenue recognition policy on these types
of purchases and on incentives in international markets is
consistent with the policies described above.
Income
Taxes
Our income tax returns are subject to audit in various
jurisdictions. Existing and future audits by, or other disputes
with, tax authorities may not be resolved favorably for us and
could have a material adverse effect on our reported effective
tax rate and after-tax cash flows. We record liabilities 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.
37
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 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 nine months ended September 30,
2007 was $10,729,000, compared with $16,229,000 for the
corresponding time period in 2006. We adopted SFAS 123(R)
on a prospective basis.
We estimate the value of employee stock options on the date of
grant using the Black-Scholes model. The determination of fair
value of share-based payment awards on the date of grant using
an option-pricing model is affected by our stock price as well
as assumptions regarding a number of highly complex and
subjective variables. These variables include, but are not
limited to, the expected stock price volatility over the term of
the awards, and actual and projected employee stock option
exercise behaviors. The weighted-average estimated value of
employee stock options granted during the nine months ended
September 30, 2007 and the twelve months ended 2006 was
38
$7.00 and $7.83, respectively, determined using the
Black-Scholes model and the following weighted-average
assumptions:
|
|
|
|
|
|
|
2007
|
|
2006
|
|
Average life of option (years)
|
|
5.73
|
|
4.10 - 5.80
|
Stock price volatility
|
|
35% - 37%
|
|
37% - 39%
|
Expected dividend per share
|
|
$0.00
|
|
$0.00 - $0.31
|
Risk-free interest rate
|
|
4.24% - 4.76%
|
|
4.54% - 4.80%
|
Weighted-average fair value of options
|
|
$7.00
|
|
$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 September 30, 2007 is $11,383,000. This will be
amortized to expense as follows: $2,153,000 in the fourth
quarter of 2007, $6,036,000 in 2008, $2,394,000 in 2009 and
$800,000 in 2010 and thereafter.
If factors change and we employ different assumptions in the
application of SFAS 123(R) in future periods, the
compensation expense that we record under SFAS 123(R) may
differ significantly from what we have recorded in the current
period.
Contingencies
We are exposed to contingencies in the ordinary course of
business, such as legal proceedings and business-related claims
which range from product and environmental liabilities to tax
matters. In addition, we may have indemnification obligations,
including commitments to current and former directors in certain
circumstances. In accordance, with SFAS No. 5,
Accounting for Contingencies, we record accruals for such
contingencies when it is probable that a liability will be
incurred and the amount of loss can be reasonably estimated. The
estimates are refined each accounting period, as additional
information is known. See notes 10 and 12 to consolidated
condensed financial statements for a discussion of contingencies.
We have purchase commitments to purchase inventory from certain
third party manufacturers and suppliers. These purchase
commitments include our agreements to purchase approximately
$20,000,000 in inventory of Infergen in the next 24 months.
These inventory purchases may exceed the amount of inventory
required to support the demand for the product, which may lead
to future inventory obsolescence charges in discontinued
operations.
Other
Financial Information
With respect to the unaudited condensed consolidated financial
information of Valeant Pharmaceutical International for the
three and nine months ended September 30, 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
November 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 is not subject to the
liability provisions of Section 11 of the Securities Act of
1933 (the Act) for their report on the unaudited
condensed consolidated financial information because that report
is not a report or a part of a
registration statement prepared or certified by
PricewaterhouseCoopers within the meaning of Sections 7 and
11 of the Act.
Forward-Looking
Statements
Except for the historical information contained herein, the
matters addressed in Managements Discussion and
Analysis of Financial Condition and Results of Operations
and elsewhere in this quarterly report on
Form 10-Q
constitute forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933, as
39
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 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 ribavirin has
resulted in significant competition from generic substitutes and
declining royalty revenues and has negatively impacted future
financial results.
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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 relationships with wholesale distributors, including those
in Mexico, can affect sales results and, if there is a change in
any of these relationships, our results may not meet our
expectations.
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The successful commercialization of product candidates and the
conduct of clinical trials are subject to many risks, including
the ability to complete enrollment of the requisite number of
patients in clinical trials and to conclude clinical trials
within expected timeframes, adverse events that would require
clinical trials to be prematurely terminated, clinical results
that indicate continuing clinical and commercial pursuit of
clinical candidates is not advisable, and the fact that Phase 2
clinical trial results are not always indicative of those seen
in Phase 3 clinical trials.
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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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Although we expect to divest assets held for sale, we may not be
able to sell such assets or may receive less consideration than
expected.
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40
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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.
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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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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 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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41
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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.
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Quantitative
and Qualitative Disclosures About Market Risk
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Our business and financial results are affected by fluctuations
in world financial markets. We evaluate our exposure to such
risks on an ongoing basis, and seek ways to manage these risks
to an acceptable level, based on managements judgment of
the appropriate trade-off between risk, opportunity and cost. We
do not hold any significant amount of market risk sensitive
instruments whose value is subject to market price risk. Our
significant foreign currency exposure relates to the Euro, the
Mexican Peso, the Polish Zloty, the Swiss Franc, the Canadian
Dollar, and the Japanese Yen. We seek to manage our foreign
currency exposure through operational means by managing local
currency revenues in relation to local currency costs. We take
steps to mitigate the impact of foreign currency on the income
statement, which include hedging our foreign currency exposure.
In the normal course of business, we also face risks that are
either non-financial or non-quantifiable. Such risks principally
include country risk, credit risk and legal risk and are not
discussed or quantified in the following analysis. At
September 30, 2007, the fair values of the Companys
financial instruments were as follows (in thousands):
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Notional/
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Assets (Liabilities)
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Contract
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Carrying
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Fair
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Description
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Amount
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Value
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Value
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Forward contracts
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$
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89,050
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$
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1,440
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$
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1,440
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Interest rate swaps
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150,000
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|
(2,648
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)
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(2,648
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)
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Outstanding fixed-rate debt
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780,000
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|
(780,000
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)
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(732,553
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)
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In June 2007, we established hedges of the net investment in our
Mexico based subsidiaries in a total amount of approximately
$27 million USD equivalent. These hedges reduce the impact
of potential translation on USD denominated cash and investments
held by these Mexico based subsidiaries.
We currently do not hold financial instruments for trading or
speculative purposes. Our financial assets are not subject to
significant interest rate risk due to their short duration. At
September 30, 2007, we did not have foreign denominated
variable rate debt that would be subject to both interest rate
and currency risks. A 100 basis-point increase in interest rates
affecting our financial instruments would not have had a
material effect on our third quarter 2007 pretax earnings. In
addition, we have $780,000,000 of fixed rate debt as of
September 30, 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
$27,300,000 as of September 30, 2007.
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Item 4.
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Controls
and Procedures
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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.
42
As of September 30, 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 at the
reasonable assurance level.
During the quarter ended September 30, 2007, we implemented
a new enterprise resource planning system in certain countries
which will enable greater efficiencies in financial reporting
and will provide enhanced controls and analytical capabilities.
There has been no other change in our internal controls over
financial reporting that occurred during the nine months ended
September 30, 2007 that has materially affected, or is
reasonably likely to materially affect, our internal controls
over financial reporting.
PART II
OTHER INFORMATION
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Item 1.
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Legal
Proceedings
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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.
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 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 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 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, 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
current 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
43
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.
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Item 2.
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Purchases
of Equity Securities by the Issuer and Affiliated
Purchasers
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In June 2007, our board of directors authorized a stock
repurchase program. This program authorized us to repurchase up
to $200 million of our outstanding common stock in a
24-month
period. Under the program, purchases may be made from time to
time on the open market, in privately negotiated transactions,
and in amounts as we see appropriate. The number of shares to be
purchased and the timing of such purchases is subject to various
factors, which may include the price of our common stock,
general market conditions, corporate requirements, including
restrictions in our debt covenants, and alternate investment
opportunities. The share repurchase program may be modified or
discontinued at any time. The total number of shares repurchased
pursuant to this program was 4,723,000 as of September 30,
2007. We have used $79,599,000 to repurchase these shares.
Set forth below is the information regarding shares repurchased
under the stock repurchase program during the three months ended
September 30, 2007:
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Approximate
|
|
|
|
|
|
|
|
|
|
Dollar Value
|
|
|
|
|
|
|
|
|
|
of Shares that
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|
|
|
|
|
|
Average
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|
|
May Yet Be
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|
|
Total Number
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|
|
Price Paid
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|
|
Purchased
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|
Period
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|
of Shares Purchased
|
|
|
per Share
|
|
|
(in thousands)
|
|
|
7/2/07 - 7/31/07
|
|
|
2,100,000
|
|
|
$
|
16.95
|
|
|
$
|
136,863
|
|
8/1/07 - 8/17/07
|
|
|
1,022,600
|
|
|
$
|
16.08
|
|
|
|
120,401
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Share Repurchases
|
|
|
3,122,600
|
|
|
$
|
16.68
|
|
|
$
|
120,401
|
|
|
|
|
|
|
|
|
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|
|
|
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44
|
|
|
|
|
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
|
|
Certificate of Correction, dated April 3, 2006.
|
|
3
|
.4
|
|
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.
|
|
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.
|
45
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: November 8, 2007
Peter J. Blott
Executive Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)
Date: November 8, 2007
46
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
|
|
Certificate of Correction, dated April 3, 2006.
|
|
3
|
.4
|
|
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.
|
|
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.
|