e10vq
UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C.
20549
Form 10-Q
|
|
|
(Mark One)
|
|
|
þ
|
|
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
|
|
|
For the quarterly period ended
June 30, 2008
|
or
|
o
|
|
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
|
|
|
For the transition period
from to
|
Commission file
number: 1-11397
Valeant Pharmaceuticals
International
(Exact name of registrant as
specified in its charter)
|
|
|
Delaware
(State or other jurisdiction
of
incorporation or organization)
|
|
33-0628076
(I.R.S. Employer
Identification No.)
|
|
|
|
One Enterprise
Aliso Viejo, California
(Address of principal
executive offices)
|
|
92656
(Zip
Code)
|
(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, a non-accelerated
filer, or a smaller reporting company. See the definitions of
large accelerated filer, accelerated
filer and smaller reporting company in
Rule 12b-2
of the Exchange Act. (Check one):
|
|
|
|
|
|
|
Large
accelerated filer þ
|
|
Accelerated filer o
|
|
Non-accelerated filer o
|
|
Smaller reporting company o
|
|
|
|
|
(Do not check if a smaller reporting company)
|
|
|
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 August 6, 2008 was
88,066,534.
VALEANT
PHARMACEUTICALS INTERNATIONAL
INDEX
1
PART I
FINANCIAL INFORMATION
|
|
Item 1.
|
Financial
Statements
|
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
(Unaudited)
|
|
|
|
|
|
ASSETS
|
Current Assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
466,300
|
|
|
$
|
309,365
|
|
Marketable securities
|
|
|
83,684
|
|
|
|
52,122
|
|
Accounts receivable, net
|
|
|
169,143
|
|
|
|
191,796
|
|
Inventories, net
|
|
|
119,185
|
|
|
|
115,177
|
|
Assets held for sale and assets of discontinued operations
|
|
|
|
|
|
|
66,247
|
|
Prepaid expenses and other current assets
|
|
|
19,594
|
|
|
|
21,713
|
|
Current deferred tax assets, net
|
|
|
12,655
|
|
|
|
11,819
|
|
Income taxes
|
|
|
13,753
|
|
|
|
26,433
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
884,314
|
|
|
|
794,672
|
|
Property, plant and equipment, net
|
|
|
123,518
|
|
|
|
116,376
|
|
Deferred tax assets, net
|
|
|
91,845
|
|
|
|
65,950
|
|
Goodwill
|
|
|
73,138
|
|
|
|
80,346
|
|
Intangible assets, net
|
|
|
376,484
|
|
|
|
401,575
|
|
Other assets
|
|
|
42,223
|
|
|
|
35,343
|
|
|
|
|
|
|
|
|
|
|
Total non-current assets
|
|
|
707,208
|
|
|
|
699,590
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,591,522
|
|
|
$
|
1,494,262
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY
|
Current Liabilities:
|
|
|
|
|
|
|
|
|
Trade payables
|
|
$
|
54,178
|
|
|
$
|
49,203
|
|
Accrued liabilities
|
|
|
151,626
|
|
|
|
139,754
|
|
Notes payable and current portion of long-term debt
|
|
|
818
|
|
|
|
1,655
|
|
Income taxes payable
|
|
|
9,827
|
|
|
|
7,987
|
|
Deferred tax liabilities, net
|
|
|
50,766
|
|
|
|
2,252
|
|
Liabilities held for sale and liabilities of discontinued
operations
|
|
|
|
|
|
|
4,194
|
|
Liabilities for uncertain tax positions
|
|
|
8,965
|
|
|
|
616
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
276,180
|
|
|
|
205,661
|
|
Long-term debt, less current portion
|
|
|
780,963
|
|
|
|
782,552
|
|
Deferred tax liabilities, net
|
|
|
10,472
|
|
|
|
5,337
|
|
Liabilities for uncertain tax positions
|
|
|
60,319
|
|
|
|
68,749
|
|
Other liabilities
|
|
|
26,545
|
|
|
|
17,860
|
|
|
|
|
|
|
|
|
|
|
Total non-current liabilities
|
|
|
878,299
|
|
|
|
874,498
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
1,154,479
|
|
|
|
1,080,159
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies
|
|
|
|
|
|
|
|
|
Stockholders Equity:
|
|
|
|
|
|
|
|
|
Common stock, $0.01 par value; 200,000 shares
authorized; 89,480 (June 30, 2008) and 89,286
(December 31, 2007) shares outstanding (after
deducting shares in treasury of 7,737 as of June 30, 2008
and 7,585 as of December 31, 2007)
|
|
|
895
|
|
|
|
893
|
|
Additional capital
|
|
|
1,208,840
|
|
|
|
1,192,559
|
|
Accumulated deficit
|
|
|
(924,713
|
)
|
|
|
(859,559
|
)
|
Accumulated other comprehensive income
|
|
|
152,021
|
|
|
|
80,210
|
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
437,043
|
|
|
|
414,103
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,591,522
|
|
|
$
|
1,494,262
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated condensed financial statements.
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
|
Six Months Ended June 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product sales
|
|
$
|
191,958
|
|
|
$
|
201,587
|
|
|
$
|
373,871
|
|
|
$
|
369,520
|
|
Alliance revenue (including ribavirin royalties)
|
|
|
14,805
|
|
|
|
18,955
|
|
|
|
27,578
|
|
|
|
55,425
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
206,763
|
|
|
|
220,542
|
|
|
|
401,449
|
|
|
|
424,945
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of goods sold (excluding amortization)
|
|
|
69,479
|
|
|
|
57,614
|
|
|
|
124,369
|
|
|
|
104,515
|
|
Selling expenses
|
|
|
59,606
|
|
|
|
67,645
|
|
|
|
123,396
|
|
|
|
126,085
|
|
General and administrative expenses
|
|
|
41,482
|
|
|
|
28,743
|
|
|
|
67,588
|
|
|
|
54,858
|
|
Research and development costs
|
|
|
22,692
|
|
|
|
22,737
|
|
|
|
52,084
|
|
|
|
43,727
|
|
Restructuring, asset impairments and dispositions
|
|
|
17,583
|
|
|
|
6,337
|
|
|
|
4,919
|
|
|
|
13,575
|
|
Amortization expense
|
|
|
18,112
|
|
|
|
18,666
|
|
|
|
36,178
|
|
|
|
36,147
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total costs and expenses
|
|
|
228,954
|
|
|
|
201,742
|
|
|
|
408,534
|
|
|
|
378,907
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations
|
|
|
(22,191
|
)
|
|
|
18,800
|
|
|
|
(7,085
|
)
|
|
|
46,038
|
|
Other income (expense), net including translation and exchange
|
|
|
(137
|
)
|
|
|
1,682
|
|
|
|
(3,389
|
)
|
|
|
2,818
|
|
Interest income
|
|
|
5,359
|
|
|
|
4,769
|
|
|
|
10,305
|
|
|
|
9,280
|
|
Interest expense
|
|
|
(9,634
|
)
|
|
|
(10,882
|
)
|
|
|
(19,353
|
)
|
|
|
(21,834
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations before income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
taxes and minority interest
|
|
|
(26,603
|
)
|
|
|
14,369
|
|
|
|
(19,522
|
)
|
|
|
36,302
|
|
Provision (benefit) for income taxes
|
|
|
46,850
|
|
|
|
(7,511
|
)
|
|
|
54,501
|
|
|
|
899
|
|
Minority interest, net
|
|
|
2
|
|
|
|
|
|
|
|
4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations
|
|
|
(73,455
|
)
|
|
|
21,880
|
|
|
|
(74,027
|
)
|
|
|
35,403
|
|
Income (loss) from discontinued operations
|
|
|
(1,149
|
)
|
|
|
(4,966
|
)
|
|
|
8,873
|
|
|
|
(9,166
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(74,604
|
)
|
|
$
|
16,914
|
|
|
$
|
(65,154
|
)
|
|
$
|
26,237
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic income (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations
|
|
$
|
(0.82
|
)
|
|
$
|
0.23
|
|
|
$
|
(0.83
|
)
|
|
$
|
0.37
|
|
Income (loss) from discontinued operations
|
|
|
(0.01
|
)
|
|
|
(0.05
|
)
|
|
|
0.10
|
|
|
|
(0.09
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per share:
|
|
$
|
(0.83
|
)
|
|
$
|
0.18
|
|
|
$
|
(0.73
|
)
|
|
$
|
0.28
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted income (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations
|
|
$
|
(0.82
|
)
|
|
$
|
0.23
|
|
|
$
|
(0.83
|
)
|
|
$
|
0.37
|
|
Income (loss) from discontinued operations
|
|
|
(0.01
|
)
|
|
|
(0.05
|
)
|
|
|
0.10
|
|
|
|
(0.10
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per share:
|
|
$
|
(0.83
|
)
|
|
$
|
0.18
|
|
|
$
|
(0.73
|
)
|
|
$
|
0.27
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares used in per share computations Basic
|
|
|
89,802
|
|
|
|
95,049
|
|
|
|
89,696
|
|
|
|
94,911
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares used in per share computation Diluted
|
|
|
89,802
|
|
|
|
96,154
|
|
|
|
89,696
|
|
|
|
96,090
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated condensed financial statements.
3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
|
Six Months Ended June 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
Net income (loss)
|
|
$
|
(74,604
|
)
|
|
$
|
16,914
|
|
|
$
|
(65,154
|
)
|
|
$
|
26,237
|
|
Other comprehensive income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustments
|
|
|
16,131
|
|
|
|
11,932
|
|
|
|
75,110
|
|
|
|
12,050
|
|
Unrealized gain on marketable equity securities
|
|
|
2,958
|
|
|
|
72
|
|
|
|
1,084
|
|
|
|
630
|
|
Unrealized gain (loss) on hedges
|
|
|
1,461
|
|
|
|
7,338
|
|
|
|
(4,544
|
)
|
|
|
7,007
|
|
Pension liability adjustment
|
|
|
147
|
|
|
|
(2,426
|
)
|
|
|
161
|
|
|
|
(1,983
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income (loss)
|
|
$
|
(53,907
|
)
|
|
$
|
33,830
|
|
|
$
|
6,657
|
|
|
$
|
43,941
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated condensed financial statements.
4
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(65,154
|
)
|
|
$
|
26,237
|
|
Income (loss) from discontinued operations
|
|
|
8,873
|
|
|
|
(9,166
|
)
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations
|
|
|
(74,027
|
)
|
|
|
35,403
|
|
Adjustments to reconcile income (loss) from continuing
operations to net cash
|
|
|
|
|
|
|
|
|
provided by operating activities in continuing operations:
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
46,495
|
|
|
|
43,826
|
|
Provision for losses on accounts receivable and inventory
|
|
|
19,354
|
|
|
|
5,385
|
|
Stock compensation expense
|
|
|
(1,634
|
)
|
|
|
7,365
|
|
Translation and exchange (gains) losses, net
|
|
|
3,389
|
|
|
|
(2,818
|
)
|
Impairment charges and other non-cash items
|
|
|
(19,024
|
)
|
|
|
4,483
|
|
Deferred income taxes
|
|
|
47,765
|
|
|
|
13,397
|
|
Change in assets and liabilities, net of effects of acquisitions:
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
38,441
|
|
|
|
17,664
|
|
Inventories
|
|
|
(17,529
|
)
|
|
|
(7,309
|
)
|
Prepaid expenses and other assets
|
|
|
781
|
|
|
|
(2,202
|
)
|
Trade payables and accrued liabilities
|
|
|
8,590
|
|
|
|
(17,185
|
)
|
Income taxes
|
|
|
13,689
|
|
|
|
(37,488
|
)
|
Other liabilities
|
|
|
(1,121
|
)
|
|
|
1,551
|
|
|
|
|
|
|
|
|
|
|
Cash flow from operating activities in continuing operations
|
|
|
65,169
|
|
|
|
62,072
|
|
Cash flow from operating activities in discontinued operations
|
|
|
(13,466
|
)
|
|
|
(7,434
|
)
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
51,703
|
|
|
|
54,638
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
Capital expenditures
|
|
|
(8,254
|
)
|
|
|
(15,332
|
)
|
Proceeds from sale of assets
|
|
|
418
|
|
|
|
37,282
|
|
Proceeds from sale of businesses
|
|
|
48,575
|
|
|
|
29,486
|
|
Proceeds from investments
|
|
|
77,904
|
|
|
|
15,122
|
|
Purchase of investments
|
|
|
(100,172
|
)
|
|
|
(17,100
|
)
|
Acquisition of businesses, license rights and product lines
|
|
|
(1,554
|
)
|
|
|
(35,287
|
)
|
|
|
|
|
|
|
|
|
|
Cash flow from investing activities in continuing operations
|
|
|
16,917
|
|
|
|
14,171
|
|
Cash flow from investing activities in discontinued operations
|
|
|
70,800
|
|
|
|
(266
|
)
|
|
|
|
|
|
|
|
|
|
Net cash provided by investing activities
|
|
|
87,717
|
|
|
|
13,905
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
Payments on long-term debt and notes payable
|
|
|
(595
|
)
|
|
|
(8,970
|
)
|
Proceeds from capitalized lease financing, long-term debt and
notes payable
|
|
|
101
|
|
|
|
1,252
|
|
Stock option exercises and employee stock purchases
|
|
|
7,867
|
|
|
|
10,251
|
|
Purchase of treasury stock
|
|
|
(6,819
|
)
|
|
|
(27,507
|
)
|
|
|
|
|
|
|
|
|
|
Cash flow from financing activities in continuing operations
|
|
|
554
|
|
|
|
(24,974
|
)
|
Cash flow from financing activities in discontinued operations
|
|
|
|
|
|
|
73
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities
|
|
|
554
|
|
|
|
(24,901
|
)
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes on cash and cash equivalents
|
|
|
16,961
|
|
|
|
7,547
|
|
|
|
|
|
|
|
|
|
|
Net increase in cash and cash equivalents
|
|
|
156,935
|
|
|
|
51,189
|
|
Cash and cash equivalents at beginning of period
|
|
|
309,365
|
|
|
|
325,579
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period
|
|
$
|
466,300
|
|
|
$
|
376,768
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated condensed financial statements.
5
In the consolidated condensed financial statements included
herein, we, us, our,
Valeant and the Company refer to Valeant
Pharmaceuticals International and its subsidiaries. The
condensed consolidated financial statements have been prepared
by us, without audit, pursuant to the rules and regulations of
the Securities and Exchange Commission. Certain information and
footnote disclosures normally included in financial statements
prepared on the basis of accounting principles generally
accepted in the United States of America have been condensed or
omitted pursuant to such rules and regulations. The results of
operations presented herein are not necessarily indicative of
the results to be expected for a full year. Although we believe
that all adjustments (consisting only of normal, recurring
adjustments) necessary for a fair presentation of the interim
periods presented are included and that the disclosures are
adequate to make the information presented not misleading, these
consolidated condensed financial statements should be read in
conjunction with the consolidated financial statements and notes
thereto included in our annual report on
Form 10-K
for the year ended December 31, 2007. The year-end
condensed balance sheet data was derived from audited financial
statements, but does not include all disclosures required by
accounting principles generally accepted in the United States of
America.
|
|
1.
|
Organization
and Summary of Significant Accounting Policies
|
Organization: We are a multinational
pharmaceutical company that develops, manufactures and markets a
broad range of pharmaceutical products. Additionally, we
generate 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: Marketable securities
include short-term commercial paper and government agency
securities which, at the time of purchase, have maturities of
greater than three months. 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. As of June 30, 2008 and December 31, 2007, the
fair 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, net investment or fair value
hedges. Our derivative instruments are recorded at fair value
and are included in other current assets, other assets, and
accrued liabilities. Depending on the nature of the hedge,
changes in the fair value of the hedged item are either offset
against the change in the fair value of the hedged item through
earnings or recognized in other comprehensive income until the
hedged item is recognized in earnings.
Comprehensive Income: We have adopted the
provisions of Statement of Financial Accounting Standards
(SFAS) No. 130, Reporting Comprehensive
Income. Accumulated other comprehensive income consists of
accumulated foreign currency translation adjustments, unrealized
losses on marketable equity securities, pension funded status
and changes in the fair value of derivative financial
instruments.
Per Share Information: Basic earnings per
share are computed by dividing income available to common
stockholders by the weighted-average number of common shares
outstanding. In computing diluted earnings per share, the
weighted-average number of common shares outstanding is adjusted
to reflect the effect of potentially dilutive securities
including options, warrants, and convertible debt; income
available to common stockholders is adjusted to reflect any
changes in income or loss that would result from the issuance of
the dilutive common shares.
Stock-Based Compensation Expense: We have
adopted SFAS No. 123 (revised 2004), Share-Based
Payment, (SFAS 123(R)) which requires the
measurement and recognition of compensation expense for all
share-based payment awards made to employees and directors
including employee stock options and employee stock purchases
6
VALEANT
PHARMACEUTICALS INTERNATIONAL
NOTES TO
CONSOLIDATED CONDENSED FINANCIAL
STATEMENTS (Continued)
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.
Assets Held for Sale: We have classified
certain assets as assets held for sale in accordance with
SFAS No. 144, Accounting for the Impairment or
Disposal of Long-lived Assets (SFAS 144).
At December 31, 2007, assets held for sale included the
assets related to our Infergen operations and the assets
included in the sale of certain business subsidiaries and assets
in Asia to Invida Pharmaceutical Holdings Pte. Ltd.
(Invida). We sold the assets related to our Infergen
operations to Three Rivers Pharmaceuticals, LLC on
January 14, 2008. We completed the transaction with Invida
on March 3, 2008. At March 31, 2008, assets held for
sale included the assets related to our subsidiaries in
Argentina and Uruguay. We sold these subsidiaries on
June 5, 2008.
Discontinued Operations: 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 and
EITF 03-13,
Applying the Conditions in Paragraph 42 of FASB
Statement No. 144 in Determining Whether to Report
Discontinued Operations. 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 5.
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 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. Actual results could differ materially from those
estimates.
Out of Period Adjustments: In the second
quarter of 2008 we recorded adjustments related to stock
compensation expense and foreign taxes that affected costs of
goods sold, selling expenses, research and development expenses
and general and administrative expenses and that in the
aggregate increased income from continuing operations before
income taxes by approximately $916,000, comprising an increase
of $1,988,000 related to 2007 and 2006 and a decrease of
$1,072,000 related to the first quarter of 2008. These
corrections were a reversal of stock compensation expense to
adjust our historical estimated forfeiture rate for actual
forfeitures which occurred in 2006, 2007 and the first quarter
of 2008 and a foreign tax error recorded in 2007 and the first
quarter of 2008. Correcting the stock compensation error
increased income from continuing operations before income taxes
by $3,870,000 and correcting the foreign tax error decreased
income from continuing operations before income taxes by
$2,954,000. Because these errors, both individually and in the
aggregate, were not material to any of the prior years
financial statements, and the impact of correcting these errors
is not expected to be material to the full year 2008 financial
statements, we recorded the correction of these errors in the
second quarter of 2008 financial statements.
Recent
Accounting Pronouncements:
SFAS No. 157. In September 2006, the
FASB issued SFAS No. 157, Fair Value Measurements
(SFAS 157). SFAS 157 defines fair
value, establishes a framework for measuring fair value and
expands disclosures about fair value measurements but does not
change the requirements to apply fair value in existing
accounting standards. Under SFAS 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 became effective
for Valeant as of January 1, 2008. In February 2008, the
FASB issued FASB Staff Positions (FSP)
157-1 and
157-2.
FSP 157-1
amends SFAS 157 to exclude SFAS No. 13,
Accounting for Leases, (SFAS 13) and its
related interpretive accounting pronouncements that address
leasing transactions, while
FSP 157-2
delays the effective date of the application of SFAS 157 to
fiscal years beginning after
7
VALEANT
PHARMACEUTICALS INTERNATIONAL
NOTES TO
CONSOLIDATED CONDENSED FINANCIAL
STATEMENTS (Continued)
November 15, 2008 for all nonfinancial assets and
nonfinancial liabilities that are recognized or disclosed at
fair value in the financial statements on a nonrecurring basis.
For more details about our implementation of SFAS 157, see
Note 3.
SFAS No. 159. In February 2007 the
FASB issued SFAS No. 159, The Fair Value Option for
Financial Assets and Financial Liabilities,
(SFAS 159) which provides companies with an
option to report selected financial assets and liabilities at
fair value. The objective of SFAS 159 is to reduce both
complexity in accounting for financial instruments and the
volatility in earnings caused by measuring related assets and
liabilities differently. SFAS 159 also establishes
presentation and disclosure requirements designed to facilitate
comparisons between companies that choose different measurement
attributes for similar types of assets and liabilities.
SFAS 159 does not eliminate any disclosure requirements
included in other accounting standards. SFAS 159 permitted
us to choose to measure many financial instruments and certain
other items at fair value and established presentation and
disclosure requirements. SFAS 159 became effective for
Valeant as of January 1, 2008. The implementation of
SFAS 159 did not have a material effect on our financial
statements as we did not elect the fair value option for any new
financial instruments or other assets and liabilities.
In December 2007, the FASB issued SFAS No. 141
(revised 2007), Business Combinations
(SFAS 141(R)). SFAS 141(R) establishes
principles and requirements for how the acquirer of a business
recognizes and measures in its financial statements the
identifiable assets acquired, the liabilities assumed, and any
noncontrolling interest in the acquiree. SFAS 141(R) also
provides guidance for recognizing and measuring goodwill
acquired in the business combination and determines what
information to disclose to enable users of the financial
statements to evaluate the nature and financial effects of the
business combination. Among other requirements, SFAS 141(R)
expands the definition of a business combination, requires
acquisitions to be accounted for at fair value, and requires
transaction costs and restructuring charges to be expensed.
SFAS 141(R) is effective for fiscal years beginning on or
after December 15, 2008. When implemented, SFAS 141(R)
will require that any reduction to a valuation allowance
established in purchase accounting will be accounted for as a
reduction to income tax expense, rather than a reduction of
goodwill.
In December 2007, the FASB ratified the consensus reached by the
EITF in EITF Issue
No. 07-1,
Accounting for Collaborative Arrangements
(EITF 07-1).
EITF 07-1
defines collaborative arrangements and establishes reporting
requirements for transactions between participants in a
collaborative arrangement and between participants in the
arrangement and third parties.
EITF 07-1
also establishes the appropriate income statement presentation
and classification for joint operating activities and payments
between participants, as well as the sufficiency of the
disclosures related to these arrangements.
EITF 07-1
is effective for fiscal years beginning after December 15,
2008, and interim periods within those fiscal years.
Retrospective application to all prior periods presented is
required for all collaborative arrangements existing as of the
effective date. We do not expect the adoption of
EITF 07-1
to have a material impact on our accounting for any existing
collaborative arrangements in our consolidated financial
statements.
In March 2008, the FASB issued SFAS No. 161,
Disclosures about Derivative Instruments and Hedging
Activities an amendment of FASB Statement
No. 133 (SFAS 161). SFAS 161
requires enhanced disclosures about an entitys derivative
and hedging activities, including (i) how and why an entity
uses derivative instruments, (ii) how derivative
instruments and related hedged items are accounted for under
SFAS 133, and (iii) how derivative instruments and
related hedged items affect an entitys financial position,
financial performance, and cash flows. This standard becomes
effective for Valeant on January 1, 2009. Earlier adoption
of SFAS 161 and, separately, comparative disclosures for
earlier periods at initial adoption are encouraged. We are
currently assessing the impact that SFAS 161 may have on
our financial statements.
In April 2008, the FASB issued FASB Statement of Position
No. FAS 142-3,
Determination of the Useful Life of Intangible Assets,
(FSP
FAS 142-3).
FSP
FAS 142-3
amends the factors that should be considered in developing
renewal or extension assumptions used to determine the useful
life of a recognized intangible asset under FASB Statement
No. 142, Goodwill and Other Intangible Assets,
(SFAS 142) in order to improve the
8
VALEANT
PHARMACEUTICALS INTERNATIONAL
NOTES TO
CONSOLIDATED CONDENSED FINANCIAL
STATEMENTS (Continued)
consistency between the useful life of a recognized intangible
asset under SFAS 142 and the period of expected cash flows
used to measure the fair value of the asset under
SFAS 141(R). FSP
FAS 142-3
becomes effective for Valeant on January 1, 2009. We are
currently assessing the impact that FSP
FAS 142-3
may have on our financial statements.
In May 2008, the FASB issued FASB Statement of Position
No. APB
14-1,
Accounting for Convertible Debt Instruments That May Be
Settled in Cash upon Conversion (Including Partial Cash
Settlement), (FSP APB
14-1).
FSP APB 14-1
requires 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. FSP APB
14-1 is
effective for financial statements issued for fiscal years
beginning after December 15, 2008 and interim periods
within those fiscal years. The guidance in FSP APB
14-1 will be
applied retrospectively to all periods presented. The
implementation of FSP APB
14-1 will
materially increase our reported interest expense.
In May 2008, the FASB issued SFAS No. 162, The
Hierarchy of Generally Accepted Accounting Principles
(SFAS 162). SFAS 162 identifies the
sources of accounting principles and the framework for selecting
the principles used (order of authority) in the preparation of
financial statements that are presented in conformity with
generally accepted accounting principles in the United States.
SFAS 162 is effective 60 days following the SECs
approval of the Public Company Accounting Oversight Board
amendments to AU Section 411, The Meaning of Present Fairly
in Conformity with Generally Accepted Accounting Principles. We
do not expect the adoption of SFAS 162 to have a material
impact on our financial statements.
Our restructuring charges include severance costs, contract
cancellation costs, the abandonment of capitalized assets such
as software systems, the impairment of manufacturing and
research facilities, and other associated costs, including legal
and professional costs. We have accounted for statutory and
contractual severance obligations when they are estimable and
probable, pursuant to SFAS No. 112, Employers
Accounting for Postemployment Benefits. For one-time
severance arrangements, we have applied the methodology defined
in SFAS No. 146, Accounting for Costs Associated
with Exit or Disposal Activities
(SFAS 146). Pursuant to these requirements,
these benefits are detailed in an approved severance plan, which
is specific as to number, position, location, and timing. In
addition, the benefits are communicated in specific detail to
affected employees and it is unlikely that the plan will change
when the costs are recorded. If service requirements exceed a
minimum retention period, the costs are spread over the service
period, otherwise they are recognized when they are communicated
to the employees. Contract cancellation costs are recorded in
accordance with SFAS 146. We have followed the requirements
of SFAS No. 144, Accounting for the Impairment or
Disposal of Long-lived Assets (SFAS 144),
in recognizing the abandonment of capitalized assets such as
software and the impairment of manufacturing and research
facilities. For a further description of the accounting for
impairment of long-lived assets under SFAS 144, see
Note 1, Organization and Summary of Significant
Accounting Policies. Other associated costs, such as legal
and professional fees, have been expensed as incurred, pursuant
to SFAS 146.
2008
Restructuring
In October 2007, our board of directors initiated a strategic
review of our business direction, geographic operations, product
portfolio, growth opportunities and acquisition strategy. As
announced on March 27, 2008, we have completed this
strategic review and announced a strategic plan which includes a
restructuring program (the 2008 Restructuring). The
2008 Restructuring is expected to reduce our geographic
footprint and product focus by restructuring our business in
order to focus on the pharmaceutical markets in our core
geographies of the United States, Mexico, Canada, Brazil and
Australia. We are pursuing plans to divest our operations in
markets outside of these core geographic areas through sales of
subsidiaries or assets or other strategic alternatives, to seek
partners for taribavirin and retigabine and to make selective
acquisitions.
9
VALEANT
PHARMACEUTICALS INTERNATIONAL
NOTES TO
CONSOLIDATED CONDENSED FINANCIAL
STATEMENTS (Continued)
In December 2007, we signed an agreement with Invida
Pharmaceutical Holdings Pte. Ltd. (Invida) to sell
to Invida certain Valeant subsidiaries and product rights in
Asia in a transaction that included certain of our subsidiaries,
branch offices and commercial rights in Singapore, the
Philippines, Thailand, Indonesia, Vietnam, Taiwan, Korea, China,
Hong Kong, Malaysia and Macau. This transaction also included
certain product rights in Japan. We closed this transaction on
March 3, 2008. The assets sold to Invida were classified as
held for sale as of December 31, 2007 in
accordance with SFAS 144. During the three months ended
March 31, 2008, we received initial proceeds of $37,855,000
and recorded a gain of $36,922,000 in this transaction. During
the three months ended June 30, 2008 we recorded $257,000
of additional closing costs and $760,000 of net asset
adjustments resulting in a reduced gain of $35,905,000 on the
transaction. We expect to receive additional proceeds in 2008 of
approximately $4,825,000 subject to net asset settlement
provisions in the agreement.
As of March 31, 2008, we classified our subsidiaries in
Argentina and Uruguay as held for sale in accordance
with SFAS 144. In the three months ended March 31,
2008, we recorded an impairment charge of $7,852,000 related to
this anticipated sale. We sold these subsidiaries on
June 5, 2008 and recorded a loss on the sale of $2,926,000.
The net restructuring, asset impairments and dispositions charge
of $17,583,000 in the three months ended June 30, 2008
included the $257,000 of additional closing costs and $760,000
of net asset adjustments recorded as reductions of the gain
originally recorded in the three months ended March 31,
2008 in the Invida transaction, $6,497,000 of severance charges
for a total of 134 affected employees, professional service fees
and other cash costs of $6,649,000, a $494,000 impairment charge
related to certain fixed assets in Mexico and the $2,926,000
loss on the sale of our subsidiaries in Argentina and Uruguay.
The net restructuring, asset impairments and dispositions charge
of $4,919,000 in the six months ended June 30, 2008
included $13,239,000 of employee severance costs for a total of
151 affected employees who were part of the supply, selling,
general and administrative and research and development
workforce in the United States, Mexico, Brazil and Europe,
professional service fees and other cash costs of $11,535,000, a
stock compensation charge for the accelerated vesting of the
stock options of our former chief executive officer of
$4,778,000, impairment charges relating to the sale of our
subsidiaries in Argentina and Uruguay and certain fixed assets
in Mexico of $8,346,000, and the loss of $2,926,000 in the sale
of our subsidiaries in Argentina and Uruguay, offset in part by
the gain of $35,905,000 in the transaction with Invida.
The $17,583,000 restructuring charges for the three months ended
June 30, 2008 represent charges of $21,790,000 and $733,000
in the Corporate division and the EMEA segment, respectively,
offset by the gain of $4,940,000 in the International segment.
The $4,919,000 restructuring charges for the six months ended
June 30, 2008 represent charges of $26,017,000 and
$2,213,000 in the Corporate division and the International
segment, respectively, offset in part by gains of $11,807,000
and $11,504,000 in the North America and EMEA segments,
respectively. The gains relate to the ownership of assets sold
in the transaction with Invida.
10
VALEANT
PHARMACEUTICALS INTERNATIONAL
NOTES TO
CONSOLIDATED CONDENSED FINANCIAL
STATEMENTS (Continued)
The following table summarizes the restructuring costs recorded
in the three and six months ended June 30, 2008 (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
Three Months
|
|
|
Six Months
|
|
|
|
Ended
|
|
|
Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
2008 Restructuring Program
|
|
2008
|
|
|
2008
|
|
|
Cash-related charges:
|
|
|
|
|
|
|
|
|
Employee severances (151 employees, cumulatively)
|
|
$
|
6,497
|
|
|
$
|
13,239
|
|
Professional services and other cash costs
|
|
|
6,649
|
|
|
|
11,535
|
|
|
|
|
|
|
|
|
|
|
Subtotal: cash charges
|
|
|
13,146
|
|
|
|
24,774
|
|
Stock compensation
|
|
|
|
|
|
|
4,778
|
|
Impairment of long-lived assets
|
|
|
494
|
|
|
|
8,346
|
|
Loss on sale of long-lived assets
|
|
|
2,926
|
|
|
|
2,926
|
|
|
|
|
|
|
|
|
|
|
Subtotal: non-cash charges
|
|
|
3,420
|
|
|
|
16,050
|
|
|
|
|
|
|
|
|
|
|
Subtotal: restructuring expenses
|
|
|
16,566
|
|
|
|
40,824
|
|
|
|
|
|
|
|
|
|
|
Gain on Invida transaction
|
|
|
1,017
|
|
|
|
(35,905
|
)
|
|
|
|
|
|
|
|
|
|
Total: Restructurings, asset impairments and dispositions
|
|
$
|
17,583
|
|
|
$
|
4,919
|
|
|
|
|
|
|
|
|
|
|
In the three and six months ended June 30, 2008, we
recorded inventory obsolescence charges of $15,029,000 and
$22,351,000, resulting primarily from decisions to cease
promotion or discontinue certain products, discontinue certain
manufacturing transfers, and product quality failures. These
inventory obsolescence charges were recorded in costs of goods
sold, in accordance with
EITF 96-9,
Classification of Inventory Markdowns and Other Costs
Associated with a Restructuring.
2006
Restructuring
In April 2006, we announced a restructuring program (the
2006 Restructuring) which 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 retigabine and taribavirin, our two late stage
projects in development. The restructuring program was designed
to rationalize our investments in research and development
efforts in line with our financial resources. In December 2006
we sold our HIV and cancer development programs and certain
discovery and pre-clinical assets to Ardea Biosciences, Inc.
(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.
In the three and six months ended June 30, 2007, we
recorded charges of $6,337,000 and $13,575,000 related to the
2006 Restructuring, respectively. Severance charges recorded in
the three and six months ended June 30, 2007 for employees
whose positions were eliminated in the restructuring totaled
$1,350,000 and $5,130,000, respectively.
The objective of the 2006 Restructuring 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. The
impairment charges included the charges related to estimated
future losses expected upon the disposition of specific assets
related to our manufacturing operations in Switzerland and
Puerto Rico. We completed the 2006 Restructuring in June 2007
with the sale of our former manufacturing facilities in Humacao,
Puerto Rico and Basel, Switzerland to Legacy Pharmaceuticals
International.
11
VALEANT
PHARMACEUTICALS INTERNATIONAL
NOTES TO
CONSOLIDATED CONDENSED FINANCIAL
STATEMENTS (Continued)
The following table summarizes the restructuring costs recorded
in the three and six months ended June 30, 2007 (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
Three Months
|
|
|
Six Months
|
|
|
|
Ended
|
|
|
Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
2006 Restructuring Program
|
|
2007
|
|
|
2007
|
|
|
Employee severances (490 employees, cumulatively)
|
|
$
|
1,350
|
|
|
$
|
5,130
|
|
Contract cancellation and other cash costs
|
|
|
1,034
|
|
|
|
3,115
|
|
|
|
|
|
|
|
|
|
|
Subtotal: cash charges
|
|
|
2,384
|
|
|
|
8,245
|
|
Abandoned software and other capital assets
|
|
|
|
|
|
|
|
|
Write-off of accumulated foreign currency translation adjustments
|
|
|
2,891
|
|
|
|
2,891
|
|
Impairment of manufacturing and research facilities
|
|
|
1,062
|
|
|
|
2,439
|
|
|
|
|
|
|
|
|
|
|
Subtotal: non-cash charges
|
|
|
3,953
|
|
|
|
5,330
|
|
|
|
|
|
|
|
|
|
|
Total:
|
|
$
|
6,337
|
|
|
$
|
13,575
|
|
|
|
|
|
|
|
|
|
|
Reconciliation
of Cash Restructuring Payments with Restructuring
Accrual
Cash-related charges in the above tables 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. The $3,432,000 restructuring accrual for the
2006 Restructuring, accrued as of June 30, 2008, relates to
ongoing contractual payments to Legacy Pharmaceuticals
International relating to the sale of our former sites in Basel,
Switzerland and Puerto Rico. These payment obligations last
until June 30, 2009. The $12,513,000 restructuring accrual
for the 2008 Restructuring, accrued as of June 30, 2008,
relates to severance, professional service fees and other
obligations and is expected to be paid primarily during the
remainder of 2008. A summary of accruals and expenditures of
restructuring costs which will be paid in cash is as follows (in
thousands):
|
|
|
|
|
2006 Restructuring: Reconciliation of Cash Payments and
Accruals
|
|
|
|
|
|
|
|
|
|
Restructuring accrual, March 31, 2008
|
|
$
|
3,766
|
|
Charges to earnings
|
|
|
|
|
Cash paid
|
|
|
(334
|
)
|
|
|
|
|
|
Restructuring accrual, June 30, 2008
|
|
$
|
3,432
|
|
|
|
|
|
|
|
|
|
|
|
2008 Restructuring: Reconciliation of Cash Payments and
Accruals
|
|
|
|
|
|
|
|
|
|
Restructuring accrual, March 31, 2008
|
|
$
|
13,223
|
|
Charges to earnings
|
|
|
13,146
|
|
Cash paid
|
|
|
(13,856
|
)
|
|
|
|
|
|
Restructuring accrual, June 30, 2008
|
|
$
|
12,513
|
|
|
|
|
|
|
|
|
3.
|
Fair
Value Measurements
|
We adopted SFAS 157 as of January 1, 2008, with the
exception of the application of the statement to nonfinancial
assets and liabilities that are recognized or disclosed at fair
value in the financial statements on a nonrecurring basis
including those measured at fair value in goodwill impairment
testing, indefinite-lived intangible assets measured at fair
value for impairment testing and those initially measured at
fair value in a business combination. We are currently assessing
the impact SFAS 157 will have on such nonfinancial assets
and liabilities.
12
VALEANT
PHARMACEUTICALS INTERNATIONAL
NOTES TO
CONSOLIDATED CONDENSED FINANCIAL
STATEMENTS (Continued)
SFAS 157 establishes a valuation hierarchy for disclosure
of the inputs to valuation used to measure fair value. This
hierarchy prioritizes the inputs into three broad levels as
follows.
Level 1 Quoted market prices in active markets
for identical assets or liabilities.
Level 2 Inputs, other than quoted prices in
active markets, that are observable, either directly or
indirectly.
Level 3 Unobservable inputs that are not
corroborated by market data.
The following table provides the assets and liabilities carried
at fair value measured on a recurring basis as of June 30,
2008 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2008
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Available-for-Sale
Securities
|
|
$
|
5,424
|
|
|
|
|
|
|
|
|
|
Interest rate swap
|
|
|
|
|
|
$
|
(312
|
)
|
|
|
|
|
Undesignated hedges
|
|
|
|
|
|
$
|
309
|
|
|
|
|
|
Net investment derivative contracts
|
|
|
|
|
|
$
|
(2,726
|
)
|
|
|
|
|
Cash flow derivative contracts
|
|
|
|
|
|
$
|
(290
|
)
|
|
|
|
|
Available for sale securities are measured at fair value using
quoted market prices and are classified within Level 1 of
the valuation hierarchy. Derivative contracts used as hedges are
valued based on observable inputs such as changes in interest
rates and currency fluctuations and are classified within
Level 2 of the valuation hierarchy.
For a derivative instrument in an asset position, we analyze the
credit standing of the counterparty and factor it into the fair
value measurement. SFAS 157 states that the fair value
measurement of a liability must reflect the nonperformance risk
of the reporting entity. Therefore, the impact of our
creditworthiness has also been factored into the fair value
measurement of the derivative instruments in a liability
position.
In the three months ended June 30, 2008, we acquired
product rights in Poland and Germany for $1,050,000 in cash and
$405,000 in other consideration. In the six months ended
June 30, 2008, we acquired product rights in Poland and
Germany for $1,554,000 in cash and $812,000 in other
consideration.
In the six months ended June 30, 2007, we acquired product
rights in the United States, Europe, and Argentina for aggregate
consideration of $39,510,000. In the six months ended
June 30, 2007, (i) in the United States we acquired a
paid-up
license to Kinetin and Zeatin, the active ingredients of
Kinerase, for cash consideration of $21,000,000 and other
consideration of $4,170,000; (ii) in Europe we acquired the
rights to Nabilone, the product we currently market as Cesamet
in Canada and in the U.S., for $13,396,000; and (iii) we
acquired the rights to certain products in Poland and Argentina
for $944,000.
|
|
5.
|
Discontinued
Operations
|
In September 2007, we decided 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 No. 144, Accounting for the
Impairment or Disposal of Long-lived Assets
(SFAS 144). The consolidated financial
statements have been reclassified to conform to discontinued
operations presentation for all historical periods presented.
We sold these Infergen rights to Three Rivers Pharmaceuticals,
LLC on January 14, 2008. We received $70,800,000 as the
initial payment for our Infergen product rights, with additional
payments due of up to $20,500,000. We recorded a net gain in
this transaction of $27,536,000 after deducting the carrying
value of the net assets sold from the proceeds received.
13
VALEANT
PHARMACEUTICALS INTERNATIONAL
NOTES TO
CONSOLIDATED CONDENSED FINANCIAL
STATEMENTS (Continued)
In the three and six months ended June 30, 2008 and 2007,
the results from discontinued operations primarily related to
Infergen and the release of an environmental reserve in our
discontinued biomedicals business. The $682,000 credit to
general and administrative expense in the three and six months
ended June 30, 2008 relates to an insurance recovery for
damaged Infergen inventory. The loss on disposal of discontinued
operations in 2007 primarily related to a legal judgment with
respect to the discontinued biomedical business.
Summarized selected financial information for discontinued
operations for the three and six months ended June 30, 2008
and 2007, respectively, is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
Infergen:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product sales
|
|
$
|
(50
|
)
|
|
$
|
9,353
|
|
|
$
|
1,000
|
|
|
$
|
18,323
|
|
Costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of goods sold (excluding amortization)
|
|
|
(69
|
)
|
|
|
2,888
|
|
|
|
2,007
|
|
|
|
6,158
|
|
Selling expenses
|
|
|
(59
|
)
|
|
|
7,039
|
|
|
|
1,306
|
|
|
|
13,033
|
|
General and administrative expenses
|
|
|
(682
|
)
|
|
|
543
|
|
|
|
(682
|
)
|
|
|
688
|
|
Research and development costs
|
|
|
68
|
|
|
|
1,880
|
|
|
|
9,752
|
|
|
|
4,000
|
|
Amortization expense
|
|
|
|
|
|
|
1,650
|
|
|
|
|
|
|
|
3,300
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total costs and expenses
|
|
|
(742
|
)
|
|
|
14,000
|
|
|
|
12,383
|
|
|
|
27,179
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from discontinued operations, Infergen
|
|
|
692
|
|
|
|
(4,647
|
)
|
|
|
(11,383
|
)
|
|
|
(8,856
|
)
|
Other discontinued operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income
|
|
|
792
|
|
|
|
|
|
|
|
792
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated discontinued operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from discontinued operations
|
|
|
1,484
|
|
|
|
(4,647
|
)
|
|
|
(10,591
|
)
|
|
|
(8,856
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision (benefit) for income taxes
|
|
|
237
|
|
|
|
(63
|
)
|
|
|
1,536
|
|
|
|
(71
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from discontinued operations
|
|
|
1,247
|
|
|
|
(4,584
|
)
|
|
|
(12,127
|
)
|
|
|
(8,785
|
)
|
Disposal of discontinued operations, net
|
|
|
(2,396
|
)
|
|
|
(382
|
)
|
|
|
21,000
|
|
|
|
(381
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from discontinued operations, net
|
|
$
|
(1,149
|
)
|
|
$
|
(4,966
|
)
|
|
$
|
8,873
|
|
|
$
|
(9,166
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14
VALEANT
PHARMACEUTICALS INTERNATIONAL
NOTES TO
CONSOLIDATED CONDENSED FINANCIAL
STATEMENTS (Continued)
The assets and liabilities of discontinued operations are stated
separately as of June 30, 2008 and December 31, 2007
on the accompanying consolidated condensed balance sheets. The
major assets and liabilities categories are as follows (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
ASSETS
|
Inventories, net
|
|
$
|
|
|
|
$
|
1,051
|
|
Property, plant and equipment, net
|
|
|
|
|
|
|
132
|
|
Goodwill
|
|
|
|
|
|
|
4,816
|
|
Intangible assets, net
|
|
|
|
|
|
|
54,450
|
|
|
|
|
|
|
|
|
|
|
Assets of discontinued operations
|
|
$
|
|
|
|
$
|
60,449
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
|
Accrued liabilities
|
|
|
|
|
|
|
1,897
|
|
|
|
|
|
|
|
|
|
|
Liabilities of discontinued operations
|
|
$
|
|
|
|
$
|
1,897
|
|
|
|
|
|
|
|
|
|
|
The assets held for sale and assets of discontinued operations
as of December 31, 2007 had a total value of $66,247,000,
which included the assets of discontinued operations of
$60,449,000 detailed above and other assets held for sale, which
consisted of the assets sold to Invida on March 3, 2008.
The liabilities held for sale and liabilities of discontinued
operations as of December 31, 2007 had a total value of
$4,194,000, which included the liabilities of discontinued
operations of $1,897,000 detailed above and other liabilities
held for sale, which consisted of the liabilities sold to Invida
on March 3, 2008.
15
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 June 30,
|
|
|
Six Months Ended June 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
Income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Numerator for basic and diluted earnings per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations
|
|
$
|
(73,455
|
)
|
|
$
|
21,880
|
|
|
$
|
(74,027
|
)
|
|
$
|
35,403
|
|
Income (loss) from discontinued operations
|
|
|
(1,149
|
)
|
|
|
(4,966
|
)
|
|
|
8,873
|
|
|
|
(9,166
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(74,604
|
)
|
|
$
|
16,914
|
|
|
$
|
(65,154
|
)
|
|
$
|
26,237
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for basic earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted shares outstanding
|
|
|
89,424
|
|
|
|
94,868
|
|
|
|
89,355
|
|
|
|
94,722
|
|
Vested stock equivalents (not issued)
|
|
|
378
|
|
|
|
181
|
|
|
|
341
|
|
|
|
189
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for basic earnings per share
|
|
|
89,802
|
|
|
|
95,049
|
|
|
|
89,696
|
|
|
|
94,911
|
|
Denominator for diluted earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee stock options
|
|
|
|
|
|
|
1,068
|
|
|
|
|
|
|
|
1,159
|
|
Other dilutive securities
|
|
|
|
|
|
|
37
|
|
|
|
|
|
|
|
20
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dilutive potential common shares
|
|
|
|
|
|
|
1,105
|
|
|
|
|
|
|
|
1,179
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for diluted earnings per share:
|
|
|
89,802
|
|
|
|
96,154
|
|
|
|
89,696
|
|
|
|
96,090
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic income (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations
|
|
$
|
(0.82
|
)
|
|
$
|
0.23
|
|
|
$
|
(0.83
|
)
|
|
$
|
0.37
|
|
Income (loss) from discontinued operations
|
|
|
(0.01
|
)
|
|
|
(0.05
|
)
|
|
|
0.10
|
|
|
|
(0.09
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per share
|
|
$
|
(0.83
|
)
|
|
$
|
0.18
|
|
|
$
|
(0.73
|
)
|
|
$
|
0.28
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted income (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations
|
|
$
|
(0.82
|
)
|
|
$
|
0.23
|
|
|
$
|
(0.83
|
)
|
|
$
|
0.37
|
|
Income (loss) from discontinued operations
|
|
|
(0.01
|
)
|
|
|
(0.05
|
)
|
|
|
0.10
|
|
|
|
(0.10
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per share
|
|
$
|
(0.83
|
)
|
|
$
|
0.18
|
|
|
$
|
(0.73
|
)
|
|
$
|
0.27
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three months and six months ended June 30, 2008,
options to purchase 829,000 and 652,000 weighted average shares
of common stock, respectively, were not included in the
computation of earnings per share because we incurred a loss and
the effect would have been anti-dilutive. For the three months
ended June 30, 2008 and 2007, options to purchase 7,590,000
and 9,202,000 weighted average shares of common stock,
respectively, were also not included in the computation of
earnings per share because the option exercise prices were
greater than the average market price of our common stock and,
therefore, the effect would have been anti-dilutive. For the six
months ended June 30, 2008 and 2007, options to purchase
8,553,000 and 9,269,000 weighted average shares of common stock,
respectively, were also not included in the computation of
earnings per share because the option exercise prices were
greater than the average market price of our common stock and,
therefore, the effect would have been anti-dilutive.
16
VALEANT
PHARMACEUTICALS INTERNATIONAL
NOTES TO
CONSOLIDATED CONDENSED FINANCIAL
STATEMENTS (Continued)
|
|
7.
|
Detail of
Certain Accounts
|
The following tables present the details of certain amounts
included in the consolidated balance sheet at June 30, 2008
and December 31, 2007 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
Accounts receivable, net:
|
|
|
|
|
|
|
|
|
Trade accounts receivable
|
|
$
|
131,377
|
|
|
$
|
162,591
|
|
Royalties receivable
|
|
|
15,416
|
|
|
|
18,620
|
|
Other receivables
|
|
|
34,969
|
|
|
|
23,513
|
|
|
|
|
|
|
|
|
|
|
|
|
|
181,762
|
|
|
|
204,724
|
|
Allowance for doubtful accounts
|
|
|
(12,619
|
)
|
|
|
(12,928
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
169,143
|
|
|
$
|
191,796
|
|
|
|
|
|
|
|
|
|
|
Inventories, net:
|
|
|
|
|
|
|
|
|
Raw materials and supplies
|
|
$
|
28,887
|
|
|
$
|
30,935
|
|
Work-in-process
|
|
|
13,493
|
|
|
|
13,707
|
|
Finished goods
|
|
|
111,270
|
|
|
|
89,363
|
|
|
|
|
|
|
|
|
|
|
|
|
|
153,650
|
|
|
|
134,005
|
|
Allowance for inventory obsolescence
|
|
|
(34,465
|
)
|
|
|
(18,828
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
119,185
|
|
|
$
|
115,177
|
|
|
|
|
|
|
|
|
|
|
Property, plant and equipment, net:
|
|
|
|
|
|
|
|
|
Property, plant and equipment, at cost
|
|
$
|
238,251
|
|
|
$
|
215,172
|
|
Accumulated depreciation and amortization
|
|
|
(114,733
|
)
|
|
|
(98,796
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
123,518
|
|
|
$
|
116,376
|
|
|
|
|
|
|
|
|
|
|
The increase in other receivables includes receivables of
$7,000,000 and $4,825,000 related to the transactions with Three
Rivers Pharmaceuticals, LLC and Invida, respectively.
Other assets totaled $42,223,000 as of June 30, 2008, an
increase of $6,880,000 from $35,343,000, reported as of
December 31, 2007. This increase primarily related to the
$11,222,000 note receivable from Three Rivers Pharmaceuticals,
LLC, offset in part by a reduction of $1,550,000 in the value of
an investment in a publicly traded investment fund and a
reduction of $1,262,000 in deferred loan costs. In the three
months ended June 30, 2008, we recognized an
other-than-temporary impairment loss of $3,233,000 in an
investment in a publicly traded investment fund.
17
VALEANT
PHARMACEUTICALS INTERNATIONAL
NOTES TO
CONSOLIDATED CONDENSED FINANCIAL
STATEMENTS (Continued)
Intangible assets: As of June 30, 2008
and December 31, 2007, intangible assets were as follows
(in thousands, except life data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
June 30, 2008
|
|
|
December 31, 2007
|
|
|
|
Lives
|
|
|
Gross
|
|
|
Accumulated
|
|
|
Net
|
|
|
Gross
|
|
|
Accumulated
|
|
|
Net
|
|
|
|
(Years)
|
|
|
Amount
|
|
|
Amortization
|
|
|
Amount
|
|
|
Amount
|
|
|
Amortization
|
|
|
Amount
|
|
|
Product rights
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Neurology
|
|
|
12
|
|
|
$
|
307,006
|
|
|
$
|
(143,674
|
)
|
|
$
|
163,332
|
|
|
$
|
306,398
|
|
|
$
|
(128,267
|
)
|
|
$
|
178,131
|
|
Dermatology
|
|
|
13
|
|
|
|
98,811
|
|
|
|
(51,848
|
)
|
|
|
46,963
|
|
|
|
111,934
|
|
|
|
(54,178
|
)
|
|
|
57,756
|
|
Other products
|
|
|
17
|
|
|
|
387,862
|
|
|
|
(223,118
|
)
|
|
|
164,744
|
|
|
|
365,823
|
|
|
|
(206,307
|
)
|
|
|
159,516
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total product rights
|
|
|
14
|
|
|
|
793,679
|
|
|
|
(418,640
|
)
|
|
|
375,039
|
|
|
|
784,155
|
|
|
|
(388,752
|
)
|
|
|
395,403
|
|
License agreement
|
|
|
5
|
|
|
|
67,376
|
|
|
|
(65,931
|
)
|
|
|
1,445
|
|
|
|
67,376
|
|
|
|
(61,204
|
)
|
|
|
6,172
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total intangible assets
|
|
|
|
|
|
$
|
861,055
|
|
|
$
|
(484,571
|
)
|
|
$
|
376,484
|
|
|
$
|
851,531
|
|
|
$
|
(449,956
|
)
|
|
$
|
401,575
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated future amortization expenses are as follows (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Scheduled Future Amortization Expense
|
|
|
|
Remaining
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
2011
|
|
|
2012
|
|
|
Thereafter
|
|
|
Total
|
|
|
Product rights
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Neurology
|
|
$
|
14,715
|
|
|
$
|
29,429
|
|
|
$
|
28,670
|
|
|
$
|
22,609
|
|
|
$
|
21,214
|
|
|
$
|
46,695
|
|
|
$
|
163,332
|
|
Dermatology
|
|
|
4,766
|
|
|
|
9,423
|
|
|
|
9,184
|
|
|
|
8,918
|
|
|
|
3,890
|
|
|
|
10,782
|
|
|
|
46,963
|
|
Other products
|
|
|
10,757
|
|
|
|
22,191
|
|
|
|
21,516
|
|
|
|
21,033
|
|
|
|
20,944
|
|
|
|
68,303
|
|
|
|
164,744
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total product rights
|
|
|
30,238
|
|
|
|
61,043
|
|
|
|
59,370
|
|
|
|
52,560
|
|
|
|
46,048
|
|
|
|
125,780
|
|
|
|
375,039
|
|
License agreement
|
|
|
1,445
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,445
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
31,683
|
|
|
$
|
61,043
|
|
|
$
|
59,370
|
|
|
$
|
52,560
|
|
|
$
|
46,048
|
|
|
$
|
125,780
|
|
|
$
|
376,484
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization expense for the three and six months ended
June 30, 2008 was $18,112,000 and $36,178,000,
respectively, of which $15,749,000 and $31,451,000,
respectively, related to amortization of acquired product rights.
We incur losses in the United States, where our research and
development activities are conducted and our corporate offices
are located. We anticipate that we will realize the tax benefits
associated with these losses by offsetting such losses against
future taxable income resulting from products in our development
pipeline, further growth in U.S. product sales, dividends
paid by our foreign subsidiaries, the sale of our foreign
subsidiaries or assets, 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 these benefits.
During the three months ended June 30, 2008, the company
reversed its position that all unremitted earnings of its
foreign subsidiaries would be indefinitely reinvested and is now
required to provide U.S. tax on these earnings. As of
June 30, 2008, a deferred tax liability of $97,075,000 was
established to provide tax on these earnings which includes
$12,693,000 of withholding tax that will be due upon
repatriation. Setting up the deferred tax liability has allowed
the company to benefit its 2008 U.S. losses and release
$67,256,000 of its U.S. valuation allowance which includes
the recognition of $19,876,000 of U.S. uncertain tax
benefits which were settled as of June 30, 2008. The
release of valuation allowance also includes $12,328,000 and
$7,209,000 in benefits that were credited to additional
18
VALEANT
PHARMACEUTICALS INTERNATIONAL
NOTES TO
CONSOLIDATED CONDENSED FINANCIAL
STATEMENTS (Continued)
paid-in capital and goodwill, respectively. As of June 30,
2008, there is insufficient objective evidence as to the timing
and amount of future US taxable income to allow for the release
of the remaining U.S. valuation allowance which is
primarily offsetting future benefits of foreign tax credits. The
valuation allowance was recorded because it is more likely than
not that such benefits could not be utilized. Ultimate
realization of these tax benefits is dependent upon generating
sufficient taxable income in the U.S. Based on
Valeants historic losses, the Company could not
demonstrate that it would utilize these tax benefits with
sufficient objective evidence.
Our effective tax rate for the six months ended June 30,
2008 was affected by deferred taxes provided on unrepatriated
foreign earnings, net of the benefit of releasing a portion of
the U.S. valuation allowance, pre-tax losses resulting from the
sale of our Argentina subsidiaries of $9,602,000 for which we do
not expect to realize income tax benefits, and pre-tax income
resulting from restructuring associated with the sale of assets
in Asia of $8,962,000 which we do not expect to be subject to
tax in certain jurisdictions. A provision for income taxes of
$46,850,000 was recorded for the three months ended
June 30, 2008, comprising the following amounts:
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
June 30,
|
|
|
|
2008
|
|
|
Deferred U.S. tax on unrepatriated foreign earnings
|
|
$
|
44,393
|
|
Foreign withholding tax on unrepatriated foreign earnings
|
|
|
12,693
|
|
Tax provision on current earnings outside the U.S.
|
|
|
5,306
|
|
Benefit of current U.S. losses
|
|
|
(15,542
|
)
|
|
|
|
|
|
|
|
$
|
46,850
|
|
|
|
|
|
|
Due to ownership changes in the stock of the company, the
benefit of U.S. losses are subject to a yearly limitation.
However, the limitation is sufficient to allow for utilization
of all losses through the reversal of taxable temporary
differences.
During the quarter ended March 31, 2008, we recorded a net
pre-tax gain from discontinued operations from the sale of our
Infergen product line in the U.S. This gain was considered
in determining the amount of income tax benefit to be allocated
to current year losses from continuing operations in the
U.S. As a result, we recorded income tax expense of
$6,498,000 in discontinued operations for the six months ended
June 30, 2008 and this same amount will be recorded as an
income tax benefit in continuing operations for the full year
2008. Of this amount, $4,345,000 was included in the provision
for income taxes in continuing operations for the six months
ended June 30, 2008 based on an allocation of the full year
impact to the six months ended June 30, 2008.
At June 30, 2008 we had $100,235,000 of unrecognized tax
benefits (FIN 48), of which $5,793,000 would reduce our
effective tax rate, if recognized. Of the total unrecognized tax
benefits, $24,256,000 was recorded as an offset against a
valuation allowance. 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.
Based on current discussions with the IRS, we believe it is
reasonably possible that $40,649,000 of unrecognized tax
benefits will be reversed within the next twelve months.
Our continuing practice is to recognize interest and penalties
related to income tax matters in income tax expense. As of
June 30, 2008, we had recorded $7,241,000 for interest and
$2,184,000 for penalties. We accrued an additional $102,000 of
interest during the quarter ended June 30, 2008.
We are currently under audit by the IRS for the 2005 and 2006
tax years. We are appealing adjustments that were proposed
during the audit of the 2002 through 2004 tax years in the
U.S. In the second quarter of 2007, the IRS examination of
the U.S. income tax returns for the years ended
December 31, 1997 through 2001 was resolved. All years
prior to 1997 are closed under the statute of limitations in the
U.S. Our significant subsidiaries are open to tax
examinations for years ending in 2001 and later.
19
VALEANT
PHARMACEUTICALS INTERNATIONAL
NOTES TO
CONSOLIDATED CONDENSED FINANCIAL
STATEMENTS (Continued)
|
|
9.
|
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 million of our outstanding common stock in a
24-month
period. In June 2008, our board of directors increased the
authorization to $300 million, over the original
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 are subject to
various factors, which may include the price of our common
stock, general market conditions, corporate requirements, and
alternate investment opportunities. The share repurchase program
may be modified or discontinued at any time. In the three months
ended June 30, 2008, we purchased 411,989 shares, for
a total amount of $6,819,000. In total, we have used
$106,377,000 to repurchase 6,902,679 shares as of
June 30, 2008.
We apply SFAS 123(R), Share-Based Payment 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. We estimate the fair value of employee
stock options on the date of grant using the Black-Scholes
model. The determination of the fair value of share-based
payments 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.
The variables used in our share-based compensation expense
calculations include our estimation of the forfeiture rate
related to share-based payments. In 2006, 2007 and continuing
into 2008, we experienced significant turnover at both the
executive and management levels, which affected our actual
forfeiture rate. We increased the estimated forfeiture rate in
the three months ended December 31, 2007 from 5% to 35%. As
described in Note 1, during the second quarter of 2008, we
recorded a correction to adjust our historical estimated
forfeiture rate for actual forfeitures which took place in 2006,
2007 and the first quarter of 2008. The correction recorded in
the second quarter resulted in a $3,870,000 decrease in stock
compensation expense comprising a $778,000 reduction in cost of
goods sold, a $1,068,000 reduction in selling expenses, a
$1,231,000 reduction in research and development expenses and a
$793,000 reduction in general and administrative expenses.
Also during the second quarter of 2008, we recognized a change
in estimate related to our estimated forfeiture rate for
share-based payments of $3,048,000 for forfeitures which
occurred in the three months ended June 30, 2008. This
change in estimate related to forfeitures which occurred in the
three months ended June 30, 2008 comprised a $214,000
reduction in cost of goods sold, an $802,000 reduction in
selling expenses, a $53,000 reduction in research and
development expenses and a $1,979,000 reduction in general and
administrative expenses.
A summary of stock compensation expense for our stock incentive
plans is presented below (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
|
Six Months Ended June 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
Employee stock options
|
|
$
|
(5,534
|
)
|
|
$
|
3,128
|
|
|
$
|
(4,152
|
)
|
|
$
|
6,562
|
|
Restricted stock units
|
|
|
961
|
|
|
|
267
|
|
|
|
1,805
|
|
|
|
724
|
|
Performance stock units
|
|
|
356
|
|
|
|
|
|
|
|
579
|
|
|
|
|
|
Employee stock purchase plan
|
|
|
67
|
|
|
|
53
|
|
|
|
133
|
|
|
|
79
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stock-based compensation expense
|
|
$
|
(4,150
|
)
|
|
$
|
3,448
|
|
|
$
|
(1,635
|
)
|
|
$
|
7,365
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
20
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 June 30, 2008
is as follows (in thousands):
|
|
|
|
|
Remainder of 2008
|
|
$
|
5,490
|
|
2009
|
|
|
6,085
|
|
2010
|
|
|
3,913
|
|
2011 and thereafter
|
|
|
752
|
|
|
|
|
|
|
|
|
$
|
16,240
|
|
|
|
|
|
|
|
|
10.
|
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:
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 III
trial for taribavirin, statements made in connection with the
public release of data and matters regarding our stock option
grants since January 1, 2000 and our restatement of certain
historical financial statements announced in March 2008. 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. On July 10, 2008, the parties in the Pronko
action reached an agreement in principle to settle the
plaintiffs claims. The agreement, which is intended to
resolve the claims raised in the Pronko and Lawson actions,
requires us to adopt certain corporate governance reforms aimed
at improving our process for granting stock options. It also
provides for an award of fees to counsel for the plaintiffs of
$1,300,000, which amount is covered by insurance and remains
subject to court approval.
We are also 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.
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
21
VALEANT
PHARMACEUTICALS INTERNATIONAL
NOTES TO
CONSOLIDATED CONDENSED FINANCIAL
STATEMENTS (Continued)
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. On
June 5, 2008, we sold our Argentine subsidiary. The former
Argentine subsidiary, as transferred to the buyer, retains any
liability associated with this claim.
Permax Product Liability Cases: On
February 8, 2007, we were served a complaint in a case
captioned Kathleen M. OConnor v. Eli
Lilly & Company, Valeant Pharmaceuticals
International, Amarin Corporation plc, Amarin Pharmaceuticals,
Inc., Elan Pharmaceuticals, Inc., and Athena Neurosciences,
Inc., Case No. 07 L 47 in the Circuit Court of the
17th Judicial Circuit, Winnebago County, Illinois. This
case, which has been removed to federal court in the Northern
District of Illinois, alleges that the use of Permax for
restless leg syndrome caused the plaintiff to have valvular
heart disease, and as a result, she suffered damages, including
extensive pain and suffering, emotional distress and mental
anguish. On August 6, 2008, the court granted
Valeants motion for summary judgment on all claims,
finding that plaintiff did not use Permax after
February 25, 2004, when Valeant acquired the right to
market and sell Permax in the United States. We expect Valeant
to be dismissed with prejudice shortly. However, Valeants
acquired subsidiary Amarin Pharmaceuticals Inc. remains a
defendant in this case. On April 23, 2008, we were served a
complaint in a case captioned Barbara M. Shows v. Eli Lilly
and Company, Elan Corporation, PLC, Amarin Corporation, PLC, and
Valeant Pharmaceuticals International, Case
No. 2008-24P
in the Circuit Court of Jefferson Davis County, Mississippi. We
are in the process of defending this matter. 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 suits.
Under an agreement between Valeant and Eli Lilly, Eli Lilly will
bear a portion of the liability, if any, associated with these
claims. Product liability insurance exists with respect to these
claims. Although it is expected that the insurance proceeds will
be sufficient to cover any material liability which might arise
from these claims, 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 effect on our consolidated financial position,
results of operation or liquidity.
Alfa Wasserman: On December 29, 2005,
Alfa Wassermann (Alfa) filed suit against our
Spanish subsidiary in the Commercial Court of Barcelona, Spain,
alleging that our Calcitonina Hubber Nasal 200 UI Monodosis
product infringes Alfas European patent EP 363.876 (ES
2.053.905) and demanded that we cease selling our product in the
Spanish market and pay damages for lost profits caused by
competition in the amount of approximately 9 million Euros.
We filed a successful counter-claim; however, Alfa filed an
appeal. The Court of Appeals held a hearing in February 2008 and
on July 14, 2008 ruled that we infringed Alfas
patent. Pursuant to the ruling, we would be required to:
(i) cease manufacturing and selling certain Calcitonina
products, (ii) withdraw such products from the market,
(iii) pay Alfas legal costs and (iv) pay damages
suffered by Alfa between January 1, 2001 through the date
that the applicable products are withdrawn from the market. The
specific amount of damages to be paid would be determined in
separate enforcement proceedings. We have filed a writ to the
Court of Appeals announcing our intention to appeal to the
Supreme Court. In late July 2008, the parties agreed in
principle to settle the matter and are in the process of
finalizing formal settlement documents. In settlement of
Alfas alleged claims, we agreed to pay Alfa $11,029,000
and a 10% royalty on future product sales until the expiration
of Alfas patent in 2009.
Spear Pharmaceuticals, Inc.: On
December 17, 2007, Spear Pharmaceuticals, Inc. and Spear
Dermatology Products, Inc. filed a complaint in federal court
for the District of Delaware, Case
No. 07-821,
against Valeant and investment firm William Blair &
Company, LLC. Plaintiffs allege that while William Blair was
engaged in connection with the possible sale of plaintiffs
generic tretinoin business, plaintiffs disclosed to William
Blair the development of generic Efudex in their product
pipeline. Plaintiffs further allege that William Blair, while
under confidentiality obligations to plaintiffs, shared such
information with Valeant and that Valeant then filed a Citizen
Petition with the FDA requesting that any abbreviated new drug
application for generic Efudex include a study on superficial
basal cell carcinoma. Arguing that Valeants Citizen
Petition caused the FDA to delay approval of their
22
VALEANT
PHARMACEUTICALS INTERNATIONAL
NOTES TO
CONSOLIDATED CONDENSED FINANCIAL
STATEMENTS (Continued)
generic Efudex, plaintiffs seek damages for Valeants
alleged breach of contract, trade secret misappropriation and
unjust enrichment, in addition to other causes of action against
William Blair. We believe this case is without merit and are
vigorously defending ourselves in this matter.
On April 11, 2008, the Food and Drug Administration (FDA)
approved an Abbreviated New Drug Application (ANDA)
for a 5% fluorouracil cream sponsored by Spear Pharmaceuticals.
On April 11, 2008, the FDA also responded to our Citizen
Petition that was filed on December 21, 2004 and denied our
request that the FDA refrain from approving any ANDA for a
generic version of Efudex unless the application contains data
from an adequately designed comparative clinical study conducted
in patients with superficial basal cell carcinoma. On
April 25, 2008, Valeant filed an application for a
temporary restraining order (TRO) against Michael O. Leavitt and
Andrew C. Von Eschenbach, in their official capacities at the
FDA, in the United States District Court seeking to suspend the
FDAs approval of Spears ANDA. On May 1, 2008,
the Court granted the FDAs request to stay proceedings on
Valeants application for a TRO until May 14, 2008. On
May 14, 2008, the FDA entered an administrative order
staying the approval of the Spear ANDA and initiating a process
for reconsidering the approval of the Spear ANDA. Spear
Pharmaceuticals agreed to the stay and to the prohibition on
marketing, sale and shipment of its product until May 30,
2008. On May 31, 2008, the Court granted our application
for a TRO suspending approval of the Spear ANDA. On
June 18, 2008 the Court denied our request for a
preliminary injunction to continue the suspension of the Spear
ANDA and extinguished the TRO. The stay on the Spear ANDA has
been removed and the Spear product may be marketed, sold and
shipped. Our case against Messrs. Leavitt and Von
Eschenbach remains pending before the court.
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.
23
VALEANT
PHARMACEUTICALS INTERNATIONAL
NOTES TO
CONSOLIDATED CONDENSED FINANCIAL
STATEMENTS (Continued)
The following table sets forth the amounts of our segment
revenues and operating income for the three and six months ended
June 30, 2008 and 2007 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Specialty pharmaceuticals
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North America
|
|
$
|
54,706
|
|
|
$
|
68,610
|
|
|
$
|
126,982
|
|
|
$
|
131,209
|
|
International
|
|
|
45,662
|
|
|
|
55,829
|
|
|
|
74,813
|
|
|
|
91,104
|
|
EMEA
|
|
|
91,590
|
|
|
|
77,148
|
|
|
|
172,076
|
|
|
|
147,207
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total specialty pharmaceuticals
|
|
|
191,958
|
|
|
|
201,587
|
|
|
|
373,871
|
|
|
|
369,520
|
|
Alliance revenues (including ribavirin royalties)
|
|
|
14,805
|
|
|
|
18,955
|
|
|
|
27,578
|
|
|
|
55,425
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated revenues
|
|
$
|
206,763
|
|
|
$
|
220,542
|
|
|
$
|
401,449
|
|
|
$
|
424,945
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Specialty pharmaceuticals
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North America
|
|
$
|
8,035
|
|
|
$
|
26,464
|
|
|
$
|
35,448
|
|
|
$
|
43,795
|
|
International
|
|
|
7,357
|
|
|
|
8,341
|
|
|
|
4,704
|
|
|
|
8,614
|
|
EMEA
|
|
|
(1,247
|
)
|
|
|
15,902
|
|
|
|
9,840
|
|
|
|
34,611
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14,145
|
|
|
|
50,707
|
|
|
|
49,992
|
|
|
|
87,020
|
|
Corporate expenses(1)
|
|
|
(8,272
|
)
|
|
|
(19,948
|
)
|
|
|
(23,699
|
)
|
|
|
(35,908
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total specialty pharmaceuticals
|
|
|
5,873
|
|
|
|
30,759
|
|
|
|
26,293
|
|
|
|
51,112
|
|
Restructuring, asset impairments and dispositions
|
|
|
(17,583
|
)
|
|
|
(6,337
|
)
|
|
|
(4,919
|
)
|
|
|
(13,575
|
)
|
Research and development(2)
|
|
|
(10,481
|
)
|
|
|
(5,622
|
)
|
|
|
(28,459
|
)
|
|
|
8,501
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated segment operating income (loss)
|
|
|
(22,191
|
)
|
|
|
18,800
|
|
|
|
(7,085
|
)
|
|
|
46,038
|
|
Interest income
|
|
|
5,359
|
|
|
|
4,769
|
|
|
|
10,305
|
|
|
|
9,280
|
|
Interest expense
|
|
|
(9,634
|
)
|
|
|
(10,882
|
)
|
|
|
(19,353
|
)
|
|
|
(21,834
|
)
|
Other, net
|
|
|
(137
|
)
|
|
|
1,682
|
|
|
|
(3,389
|
)
|
|
|
2,818
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations before income taxes and
minority interest
|
|
$
|
(26,603
|
)
|
|
$
|
14,369
|
|
|
$
|
(19,522
|
)
|
|
$
|
36,302
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
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 research and development income (expense) above represents
the operating profit (loss) of the research and development
segment. |
24
VALEANT
PHARMACEUTICALS INTERNATIONAL
NOTES TO
CONSOLIDATED CONDENSED FINANCIAL
STATEMENTS (Continued)
The following table sets forth our total assets by segment as of
June 30, 2008 and December 31, 2007 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
December 31,
|
|
Total Assets
|
|
2008
|
|
|
2007
|
|
|
North America
|
|
$
|
323,514
|
|
|
$
|
367,869
|
|
International
|
|
|
155,951
|
|
|
|
200,955
|
|
EMEA
|
|
|
673,223
|
|
|
|
493,452
|
|
Corporate
|
|
|
396,661
|
|
|
|
319,335
|
|
Research and Development Division
|
|
|
42,173
|
|
|
|
52,202
|
|
Discontinued operations
|
|
|
|
|
|
|
60,449
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,591,522
|
|
|
$
|
1,494,262
|
|
|
|
|
|
|
|
|
|
|
In the three months ended June 30, 2008, we discontinued
our historical practice of reporting sales of products treating
infectious diseases as a separate classification of products.
The following table summarizes the largest of our product lines
by therapeutic class based on sales for the three and six months
ended June 30, 2008 and 2007 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
Therapeutic
Area/Product
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
Neurology
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mestinon®
|
|
$
|
12,754
|
|
|
$
|
14,014
|
|
|
$
|
24,285
|
|
|
$
|
24,552
|
|
Diastat
AcuDialtm
|
|
|
8,833
|
|
|
|
12,386
|
|
|
|
21,012
|
|
|
|
23,458
|
|
Cesamet®
|
|
|
9,678
|
|
|
|
6,859
|
|
|
|
19,674
|
|
|
|
12,770
|
|
Librax®
|
|
|
3,832
|
|
|
|
4,455
|
|
|
|
7,414
|
|
|
|
8,122
|
|
Other Neurology
|
|
|
30,797
|
|
|
|
28,670
|
|
|
|
53,792
|
|
|
|
53,446
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Neurology
|
|
|
65,894
|
|
|
|
66,384
|
|
|
|
126,177
|
|
|
|
122,348
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dermatology
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Efudix/Efudex®
|
|
|
11,972
|
|
|
|
17,515
|
|
|
|
35,166
|
|
|
|
29,992
|
|
Kinerase®
|
|
|
5,849
|
|
|
|
8,133
|
|
|
|
11,459
|
|
|
|
16,511
|
|
Other Dermatology
|
|
|
15,068
|
|
|
|
16,977
|
|
|
|
28,304
|
|
|
|
31,644
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Dermatology
|
|
|
32,889
|
|
|
|
42,625
|
|
|
|
74,929
|
|
|
|
78,147
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other therapeutic classes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bisocard
|
|
|
7,258
|
|
|
|
5,575
|
|
|
|
14,083
|
|
|
|
10,269
|
|
Bedoyectatm
|
|
|
9,604
|
|
|
|
12,237
|
|
|
|
13,591
|
|
|
|
16,798
|
|
Solcoseryl
|
|
|
6,754
|
|
|
|
8,448
|
|
|
|
13,039
|
|
|
|
13,795
|
|
Virazole®
|
|
|
3,361
|
|
|
|
3,045
|
|
|
|
8,857
|
|
|
|
8,564
|
|
Other products
|
|
|
66,198
|
|
|
|
63,273
|
|
|
|
123,195
|
|
|
|
119,599
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other therapeutic classes
|
|
|
93,175
|
|
|
|
92,578
|
|
|
|
172,765
|
|
|
|
169,025
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total product sales
|
|
$
|
191,958
|
|
|
$
|
201,587
|
|
|
$
|
373,871
|
|
|
$
|
369,520
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During the three and six months ended June 30, 2008 and
2007 one customer, McKesson Corporation, accounted for more than
10% of consolidated product sales. Sales to McKesson Corporation
and its affiliates in the
25
VALEANT
PHARMACEUTICALS INTERNATIONAL
NOTES TO
CONSOLIDATED CONDENSED FINANCIAL
STATEMENTS (Continued)
United States, Canada, and Mexico were $19,550,000 and
$49,377,000 in the three and six months ended June 30,
2008, respectively, representing 10% and 13% of our total
product sales, respectively.
We report the royalties received from the sale of ribavirin
Schering-Plough and Roche separately from our specialty
pharmaceuticals product sales revenue. Roche discontinued paying
royalties to us in June 2007. In 2007, we began 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 six months
ended June 30, 2008 and 2007 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
Ribavirin royalty
|
|
$
|
14,805
|
|
|
$
|
18,955
|
|
|
$
|
27,528
|
|
|
$
|
36,175
|
|
Licensing payment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
19,200
|
|
Other
|
|
|
|
|
|
|
|
|
|
|
50
|
|
|
|
50
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total alliance revenue
|
|
$
|
14,805
|
|
|
$
|
18,955
|
|
|
$
|
27,578
|
|
|
$
|
55,425
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The licensing payment of $19,200,000 was received from
Schering-Plough as a payment to us in the licensing of
pradefovir. Alliance revenue for the six months ended
June 30, 2008 and 2007 also included $50,000 payments from
an unrelated third party for a license to certain intellectual
property assets.
We announced on June 20, 2008 that we would redeem all of
the $300,000,000 aggregate principal amount 7.0% Senior
Notes due 2011 (7.0% Senior Notes). We completed this
redemption on July 21, 2008 by paying $300,000,000 to
redeem all of the outstanding principal amount, together with
$2,100,000 in accrued interest thereon and $10,500,000 in
redemption premium. The redemption premium will be recorded as
an expense from extinguishment of debt in the three months
ending September 30, 2008. We terminated the interest rate
swap agreement related to the 7.0% Senior Notes with a
payment of $1,540,000, the fair value of the swap on its
termination date. We also released the collateral related to the
swap of $4,513,000 with the termination of the swap agreement.
We announced on August 4, 2008 that we had agreed to sell
our business operations located in Western Europe, Eastern
Europe including Russia, and certain export markets to Meda AB
(Meda), an international specialty pharmaceutical
company located in Stockholm, Sweden. Under the terms of the
agreement, Meda will pay $392 million in cash for the
Valeant subsidiaries in those markets, and the rights to all
products and licenses currently marketed by Valeant in the
divested region. Excluded from this transaction are
Valeants Central European operations, defined as the
business in Poland, Hungary, Slovakia and Czech Republic. The
transaction is subject to customary closing conditions including
antitrust review.
On August 7, 2008, we announced we intend to enter into
joint ventures with Meda in Australia, Canada and Mexico to
develop, market and commercialize certain of Medas current
and future products.
As of August 6, 2008, we have used a total of $137,191,000
to purchase 8,664,320 shares in the stock repurchase
program authorized by our board of directors in June 2007. For
more details on this program, see Note 9, Common Stock
and Share Compensation.
26
|
|
Item 2.
|
Managements
Discussion and Analysis of Financial Condition and Results of
Operations
|
This discussion of our results of operations should be read in
conjunction with our consolidated condensed financial statements
included elsewhere in this quarterly report.
Overview
We are a multinational pharmaceutical company that develops,
manufactures and markets a broad range of pharmaceutical
products.
Although historically we have focused most of our efforts on
neurology, dermatology, and infectious disease, our prescription
products also treat, among other things, neuromuscular
disorders, cancer, cardiovascular disease, diabetes and
psychiatric disorders. In the three months ended June 30,
2008, we discontinued our historical practice of reporting sales
of products treating infectious disease as a separate
classification of products. Our products are sold through three
pharmaceutical segments comprising: North America, International
(Latin America and Australia) and EMEA (Europe, Middle East and
Africa). In addition, we receive alliance revenue in the form of
royalties from the sale of ribavirin by Schering-Plough. We
expect that this royalty revenue will decline significantly in
2009 in that royalty payments from Schering-Plough continue for
European sales only until the
ten-year
anniversary of the launch of the product, which varied by
country and started in May 1999. We expect that royalties from
Schering-Plough in Japan will continue after 2009.
Company
Strategy and Restructuring
In October 2007, our board of directors initiated a strategic
review (the 2008 Strategic Review) of our business
direction, geographic and commercial operations, product and
business portfolio, growth opportunities and acquisition
strategy. On March 26, 2008, our board of directors
approved a new strategic plan for our company. The key elements
of this strategy include the following:
Focus the business. We are restructuring our
business in order to focus on the pharmaceutical markets in our
core geographies of the United States, Mexico, Canada, Brazil
and Australia. We are pursuing plans to divest our operations in
markets outside of these core geographic areas, through sales of
subsidiaries, assets, or other strategic alternatives.
Maximize the pipeline. We expect to find
strategic partners to help us optimize the value of our 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. We are identifying potential opportunities
for taribavirin in niche indications where there are significant
unmet medical needs and expect to utilize a partner if we pursue
a large phase III clinical development program in
hepatitis C.
Rebase and grow. With our focus on the
therapeutic areas of neurology and dermatology in our core
geographies, we plan to invest in our business and pursue
selective acquisitions in order to deliver returns to our
shareholders. Our strategic plan is designed to streamline our
business, reduce expenses and align our infrastructure with the
reduced scale of our operations.
Prior to the start of the 2008 Strategic Review, we reviewed our
portfolio for products and geographies that did not meet our
growth and profitability expectations and divested or
discontinued certain non-strategic products as a result. We sold
our rights to Infergen to Three Rivers Pharmaceuticals, LLC on
January 14, 2008. In 2007, we also sold product rights to
Reptilase, Solcoseryl in Japan, our opthalmic business in
Holland, and certain other products. On March 3, 2008, we
sold certain of our subsidiaries and product rights in Asia to
Invida Pharmaceutical Holdings Pte. Ltd. in a transaction that
included certain of our subsidiaries, branch offices and
commercial rights in Singapore, the Philippines, Thailand,
Indonesia, Vietnam, Korea, China, Hong Kong, Malaysia and Macau.
This transaction also included certain product rights in Japan.
On June 5, 2008 we sold our subsidiaries in Argentina and
Uruguay.
We announced on August 4, 2008 that we had agreed to sell
our business operations located in Western Europe, Eastern
Europe including Russia, and certain export markets to Meda AB
(Meda), an international specialty pharmaceutical
company located in Stockholm, Sweden. Under the terms of the
agreement, Meda will pay
27
$392,000,000 in cash for the Valeant subsidiaries in those
markets, and the rights to all products and licenses currently
marketed by Valeant in the divested region. Excluded from this
transaction are Valeants Central European operations,
defined as the business in Poland, Hungary, Slovakia and Czech
Republic. The transaction is subject to customary closing
conditions including antitrust review.
Specialty
Pharmaceuticals
Product sales from our pharmaceutical segments accounted for 93%
of our total revenue from continuing operations for the three
and six months ended June 30, 2008, compared with 91% and
87% for the corresponding periods in 2007, and decreased
$9,629,000 (5%) and increased $4,351,000 (1%) for the three and
six months ended June 30, 2008, respectively, compared with
the corresponding periods in 2007.
The 5% decrease in specialty pharmaceutical sales for the three
months ended June 30, 2008 was due to a 15% reduction in
volume, offset in part by an 8% benefit from currency
fluctuations and a 2% price increase. The 1% increase in
specialty pharmaceutical sales for the six months ended
June 30, 2008 was due to an 8% benefit from currency
fluctuations and a 1% price increase, partly offset by a 9%
decline in volume. The reported decline in volume in the three
months ended June 30, 2008 resulted from a planned
reduction of shipments to wholesaler customers in North America
of $17,400,000 to reduce the amount of product in the wholesale
channel. The decline in revenue is also a result of the
divestment of operations in Asia, Argentina and Uruguay. The
operations divested in Asia, Argentina and Uruguay contributed
revenue of $9,642,000 and $16,761,000 in the three and six
months ended June 30, 2007, respectively.
On April 11, 2008, the Food and Drug Administration (FDA)
approved an Abbreviated New Drug Application (ANDA)
for a 5% fluorouracil cream sponsored by Spear Pharmaceuticals.
On April 11, 2008, the FDA also responded to our Citizen
Petition that was filed on December 21, 2004 and denied our
request that the FDA refrain from approving any ANDA for a
generic version of Efudex unless the application contains data
from an adequately designed comparative clinical study conducted
in patients with superficial basal cell carcinoma. On
April 25, 2008, Valeant filed an application for a
temporary restraining order (TRO) against Michael O. Leavitt and
Andrew C. Von Eschenbach, in their official capacities at the
FDA, in the United States District Court seeking to suspend the
FDAs approval of Spears ANDA. On May 1, 2008,
the Court granted the FDAs request to stay proceedings on
Valeants application for a TRO until May 14, 2008. On
May 14, 2008, the FDA entered an administrative order
staying the approval of the Spear ANDA and initiating a process
for reconsidering the approval of the Spear ANDA. Spear
Pharmaceuticals agreed to the stay and to the prohibition on
marketing, sale and shipment of its product until May 30,
2008. On May 31, 2008, the Court granted our application
for a TRO suspending approval of the Spear ANDA. On
June 18, 2008 the Court denied our request for a
preliminary injunction to continue the suspension of the Spear
ANDA and extinguished the TRO. The stay on the Spear ANDA has
been removed and the Spear product may be marketed, sold and
shipped.
Clinical
Development
We seek to develop and commercialize innovative products for the
treatment of significant unmet medical needs, principally in the
areas of neurology and infectious disease. Research and
development expenses were $22,692,000 and $52,084,000 for the
three and six months ended June 30, 2008, compared to
$22,737,000 and $43,727,000 for the same periods in 2007,
reflecting a decrease of $45,000 (0%) in the three months ended
June 30, 2008 and an increase of $8,357,000 (19%) in the
six months ended June 30, 2008. The increase in the
six-month period resulted from the expenditures for the
retigabine clinical development program and retigabine inventory
production for validation testing. See the Products in
Development section below for further discussion of the
retigabine clinical development program.
Alliance
Revenues
Alliance revenue for the three months and six months ended
June 30, 2008 was $14,805,000 and $27,578,000, compared
with $18,955,000 and $55,425,000 for the comparable periods in
2007. Alliance revenue in the three months ended June 30,
2008 and 2007 consisted exclusively of ribavirin royalty
revenue. Alliance revenue for the six months ended June 30,
2007 included a $19,200,000 pradefovir licensing payment from
Schering-Plough.
28
Alliance revenue in the six months ended June 30, 2008 and
2007 separate licensing payments of $50,000 from an unrelated
third party for a license to certain intellectual property
assets.
Ribavirin royalty revenues decreased $4,150,000 (22%) and
accounted for 7% of our total revenues from continuing
operations for the three months ended June 30, 2008 as
compared to 9% in the similar three-month period in 2007.
Ribavirin royalty revenues decreased $8,647,000 (24%) and
accounted for 7% of our total revenues from continuing
operations for the six months ended June 30, 2008 as
compared to 9% in the similar six-month period in 2007.
The decrease in ribavirin royalties reflects
Schering-Ploughs market share losses in ribavirin sales
and Roches discontinuation of royalty payments to us in
June 2007. We expect ribavirin royalties to continue to decline
in 2008. The royalty will decline significantly in 2009 in that
royalty payments from Schering-Plough continue for European
sales only until the ten-year anniversary of the launch of the
product, which varied by country and started in May 1999. We
expect that royalties from Schering-Plough in Japan will
continue after 2009.
Results
of Operations
As part of the 2008 Strategic Review, we announced on
March 27, 2008 that we would focus on the pharmaceutical
markets in the United States, Mexico, Canada, Brazil, and
Australia and intend to stop organizing our company by
geographic regions. In the three and six months ended
June 30, 2008, however, we were still operating in our
three reportable pharmaceutical segments, comprising
pharmaceuticals operations in North America, International, and
Europe, Middle East, and Africa. In addition, we have a research
and development division. Certain financial information for our
business segments is set forth below. For additional financial
information by business segment, see Note 11 of notes to
consolidated condensed financial statements included elsewhere
in this quarterly report.
29
The following tables compare 2008 and 2007 revenues by
reportable segments and operating expenses for the three and six
months ended June 30, 2008 and 2007 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
Increase/
|
|
|
Percent
|
|
|
|
2008
|
|
|
2007
|
|
|
(Decrease)
|
|
|
Change
|
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Specialty pharmaceuticals
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North America
|
|
$
|
54,706
|
|
|
$
|
68,610
|
|
|
$
|
(13,904
|
)
|
|
|
(20
|
)%
|
International
|
|
|
45,662
|
|
|
|
55,829
|
|
|
|
(10,167
|
)
|
|
|
(18
|
)%
|
EMEA
|
|
|
91,590
|
|
|
|
77,148
|
|
|
|
14,442
|
|
|
|
19
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total specialty pharmaceuticals
|
|
|
191,958
|
|
|
|
201,587
|
|
|
|
(9,629
|
)
|
|
|
(5
|
)%
|
Alliance revenues (including ribavirin royalties)
|
|
|
14,805
|
|
|
|
18,955
|
|
|
|
(4,150
|
)
|
|
|
(22
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
206,763
|
|
|
|
220,542
|
|
|
|
(13,779
|
)
|
|
|
(6
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs and Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of goods sold (excluding amortization)
|
|
|
69,479
|
|
|
|
57,614
|
|
|
|
11,865
|
|
|
|
21
|
%
|
Selling expenses
|
|
|
59,606
|
|
|
|
67,645
|
|
|
|
(8,039
|
)
|
|
|
(12
|
)%
|
General and administrative expenses
|
|
|
41,482
|
|
|
|
28,743
|
|
|
|
12,739
|
|
|
|
44
|
%
|
Research and development costs
|
|
|
22,692
|
|
|
|
22,737
|
|
|
|
(45
|
)
|
|
|
0
|
%
|
Restructuring charges, asset impairments and dispositions
|
|
|
17,583
|
|
|
|
6,337
|
|
|
|
11,246
|
|
|
|
NM
|
|
Amortization expense
|
|
|
18,112
|
|
|
|
18,666
|
|
|
|
(554
|
)
|
|
|
(3
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
$
|
(22,191
|
)
|
|
$
|
18,800
|
|
|
$
|
(40,991
|
)
|
|
|
NM
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit on product sales (excluding amortization)
|
|
$
|
122,479
|
|
|
$
|
143,973
|
|
|
$
|
(21,494
|
)
|
|
|
(15
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin, excluding amortization
|
|
|
64
|
%
|
|
|
71
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit on product sales (net of amortization)
|
|
$
|
106,730
|
|
|
$
|
128,393
|
|
|
$
|
(21,663
|
)
|
|
|
(17
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin, net of amortization
|
|
|
56
|
%
|
|
|
64
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
30
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
Increase/
|
|
|
Percent
|
|
|
|
2008
|
|
|
2007
|
|
|
(Decrease)
|
|
|
Change
|
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Specialty pharmaceuticals
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North America
|
|
$
|
126,982
|
|
|
$
|
131,209
|
|
|
$
|
(4,227
|
)
|
|
|
(3
|
)%
|
International
|
|
|
74,813
|
|
|
|
91,104
|
|
|
|
(16,291
|
)
|
|
|
(18
|
)%
|
EMEA
|
|
|
172,076
|
|
|
|
147,207
|
|
|
|
24,869
|
|
|
|
17
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total specialty pharmaceuticals
|
|
|
373,871
|
|
|
|
369,520
|
|
|
|
4,351
|
|
|
|
1
|
%
|
Alliance revenues (including ribavirin royalties)
|
|
|
27,578
|
|
|
|
55,425
|
|
|
|
(27,847
|
)
|
|
|
(50
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
401,449
|
|
|
|
424,945
|
|
|
|
(23,496
|
)
|
|
|
(6
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs and Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of goods sold (excluding amortization)
|
|
|
124,369
|
|
|
|
104,515
|
|
|
|
19,854
|
|
|
|
19
|
%
|
Selling expenses
|
|
|
123,396
|
|
|
|
126,085
|
|
|
|
(2,689
|
)
|
|
|
(2
|
)%
|
General and administrative expenses
|
|
|
67,588
|
|
|
|
54,858
|
|
|
|
12,730
|
|
|
|
23
|
%
|
Research and development costs
|
|
|
52,084
|
|
|
|
43,727
|
|
|
|
8,357
|
|
|
|
19
|
%
|
Restructuring, asset impairments and dispositions
|
|
|
4,919
|
|
|
|
13,575
|
|
|
|
(8,656
|
)
|
|
|
NM
|
|
Amortization expense
|
|
|
36,178
|
|
|
|
36,147
|
|
|
|
31
|
|
|
|
0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
$
|
(7,085
|
)
|
|
$
|
46,038
|
|
|
$
|
(53,123
|
)
|
|
|
NM
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit on product sales (excluding amortization)
|
|
$
|
249,502
|
|
|
$
|
265,005
|
|
|
$
|
(15,503
|
)
|
|
|
(6
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin, excluding amortization
|
|
|
67
|
%
|
|
|
72
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit on product sales (net of amortization)
|
|
$
|
218,051
|
|
|
$
|
235,029
|
|
|
$
|
(16,978
|
)
|
|
|
(7
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin, net of amortization
|
|
|
58
|
%
|
|
|
64
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NM Not Meaningful
In the North America pharmaceuticals segment, revenues for the
three months ended June 30, 2008 were $54,706,000, compared
to $68,610,000 for the same period in 2007, representing a
decrease of $13,904,000 (20%). Revenues for the six months ended
June 30, 2008 were $126,982,000 compared to $131,209,000
for 2007, a decrease of $4,227,000 (3%). The reported decline in
volume in the three months ended June 30, 2008 principally
resulted from a planned reduction of shipments to wholesaler
customers of $17,400,000 to reduce the amount of product in the
wholesale channel. The volume reduction in the three-month
period included reductions in most products sold in North
America, including Efudex, Diastat and Kinerase, partly offset
by increases in sales of Cesamet. The volume reduction in the
six-month period included reductions in Kinerase, Diastat
AcuDial and other products, offset in part by increases in
Cesamet and Efudex. The reported increases in Cesamet sales were
exclusively in Canada. Product sales in the North America region
were 28% and 34% of total product sales in the three and six
months ended June 30, 2008, respectively, compared to 34%
and 36% of total product sales for the same periods in 2007. In
the three-month period ended June 30, 2008, the 20%
decrease in North America pharmaceuticals sales resulted from a
26% reduction in volume, offset in part by a 4% price increase
and a 2% benefit from the appreciation of the Canadian dollar.
In the six-month period ended June 30, 2008, the 3%
decrease in sales resulted from a 10% decrease in volume, partly
offset by a 5% price increase and a 2% benefit from the
appreciation of the Canadian dollar. The increased strength of
the Canadian dollar relative to the U.S. dollar contributed
$1,168,000 and $3,117,000 in the three months and six months
ended June 30, 2008, respectively.
In the International pharmaceuticals segment, revenues for the
three months ended June 30, 2008 were $45,662,000 compared
to $55,829,000 for 2007, a decrease of $10,167,000 (18%). The
decline in the International segment relates to our sale of
certain subsidiaries and business operations in Asia to Invida
on March 3, 2008 and our sale of our subsidiaries in
Argentina and Uruguay on June 5, 2008. The reported decline
in volume in the three
31
months ended June 30, 2008 resulted in part from a planned
reduction of shipments to wholesaler customers in Mexico to
reduce the amount of product in the wholesale channel. Revenues
for the six months ended June 30, 2008 were $74,813,000
compared to $91,104,000 in the six months ended June 30,
2007, representing a decrease of $16,291,000 (18%). In the
three-month period ended June 30, 2008, the 18% decrease in
the International pharmaceuticals sales resulted from a 25%
decrease in volume, offset by a 5% benefit from currency
fluctuations and a 2% price increase. In the six-month period
ended June 30, 2008, the 18% decrease in sales resulted
from a 23% decrease in volume, offset by a 5% benefit from
currency and a negligible price increase.
In the EMEA pharmaceuticals segment, revenues for the three
months ended June 30, 2008 were $91,590,000, compared to
$77,148,000 for the same period in 2007, an increase of
$14,442,000 (19%). Revenues for the six months ended
June 30, 2008 were $172,076,000 compared to $147,207,000
for 2007, an increase of $24,869,000 (17%). The appreciation of
foreign currencies relative to the U.S. Dollar contributed
$12,569,000 and $22,911,000 to the reported increase in sales
revenue in the three and six months ended June 30, 2008,
respectively. Much of the reported growth was in Central and
Eastern Europe. In the three-month period ended June 30,
2008, the 19% increase in EMEA sales resulted from a 17% benefit
from currency and a 3% increase in volume, offset by a 1%
decrease in prices. In the six-month period ended June 30,
2008, the 17% increase in sales resulted from a 16% benefit from
currency and a 2% increase in volume, offset by a 1% aggregate
decrease in price.
Gross Profit Margin: Gross profit margin on
product sales, net of specialty pharmaceutical product
amortization, was 56% and 58% for the three and six months ended
June 30, 2008, respectively, compared with 64% for the
three and six months ended June 30, 2007. The specialty
pharmaceutical product amortization included in this calculation
of gross margin excluded the amortization of the ribavirin
intangible. The specialty pharmaceutical product amortization
was $15,749,000 and $31,451,000 for the three and six months
ended June 30, 2008, respectively, compared with
$15,580,000 and $29,976,000 for the corresponding periods in
2007, respectively.
Gross profit margin on product sales (excluding specialty
pharmaceutical product amortization) was 64% and 67% for the
three and six months ended June 30, 2008, compared with 71%
and 72% for the three months and six months ended June 30,
2007, respectively.
In the three and six months ended June 30, 2008, we
recorded inventory obsolescence charges of $15,029,000 and
$22,351,000, resulting primarily from decisions to cease
promotion or discontinue certain products, discontinue certain
manufacturing transfers, and product quality failures. These
inventory obsolescence charges were recorded in costs of goods
sold, in accordance with
EITF 96-9,
Classification of Inventory Markdowns and Other Costs
Associated with a Restructuring.
Declining gross margins in the three and six months ended
June 30, 2008 were offset in part by the reduction in costs
of goods sold related to a $778,000 credit from our historical
underestimation of stock option forfeitures and a $214,000
credit related to the stock option forfeitures recognized in the
three months ended June 30, 2008.
Selling Expenses: Selling expenses were
$59,606,000 and $123,396,000 for the three and six months ended
June 30, 2008, respectively, compared to $67,645,000 and
$126,085,000 for the same periods in 2007, resulting in
decreases of $8,039,000 (12%) and $2,689,000 (2%), respectively.
As a percent of product sales, selling expenses were 31% and 33%
in the three and six months ended June 30, 2008,
respectively, compared to 34% for the three and six months ended
June 30, 2007. The decrease in selling expenses for the
three and six months ended June 30, 2008 primarily reflects
savings from our restructuring initiatives. Selling expenses in
the three and six months ended June 30, 2008 were also
offset in part by the $1,068,000 credit related to our
historical underestimation of stock option forfeitures and the
$802,000 credit related to stock option forfeitures recognized
in the three months ended June 30, 2008.
General and Administrative Expenses: General
and administrative expenses were $41,482,000 and $67,588,000 for
the three and six months ended June 30, 2008, respectively,
compared to $28,743,000 and $54,858,000 for the same periods in
2007, resulting in an increase of $12,739,000 (44%) in the
three-month period and an increase of $12,730,000 (23%) in the
six-month period. The increase in the three and six months ended
June 30, 2008 relates to the charges for the settlement of
the Alfa Wasserman case of $9,030,000, the recognition of an
other-than-temporary impairment of $3,233,000 in an investment
in a publicly traded investment fund, a $2,954,000 reversal of a
tax benefit in Mexico and an expense of $800,000 we recorded in
the Spear
32
Pharmaceuticals ANDA matter, offset in part by a $3,022,000
credit related to stock-based compensation forfeitures. This
$3,022,000 credit is primarily due to a reduction of $793,000 in
expenses related to forfeitures which occurred in 2006, 2007 and
the first quarter of 2008 and a $1,979,000 reduction in expenses
related to forfeitures which occurred in the three months ended
June 30, 2008. As a percent of product sales, general and
administrative expenses were 22% and 18% for the three and six
months ended June 30, 2008, respectively, compared to 14%
and 15% for the same periods in 2007, respectively.
Research and Development: Research and
development expenses were $22,692,000 and $52,084,000 for the
three and six months ended June 30, 2008, compared to
$22,737,000 and $43,727,000 for the same periods in 2007,
reflecting a decrease of $45,000 (0%) in the three months ended
June 30, 2008 and an increase of $8,357,000 (19%) in the
six months ended June 30, 2008. The increase in the
six-month period resulted from the expenditures for the
retigabine clinical development program and retigabine inventory
production for validation testing. See the Products in
Development section below for further discussion of the
retigabine clinical development program. Research and
development expenses in the three and six months ended
June 30, 2008 were also offset in part by a $1,231,000
credit related to our historical underestimation of stock option
forfeitures and a $53,000 credit related to stock option
forfeitures recognized in the three months ended June 30,
2008.
Restructuring
Charges:
2008
Restructuring
In October 2007, our board of directors initiated a strategic
review of our business direction, geographic operations, product
portfolio, growth opportunities and acquisition strategy. As
announced on March 27, 2008, we have completed this
strategic review and announced a strategic plan which includes a
restructuring program (the 2008 Restructuring). The
2008 Restructuring is expected to reduce our geographic
footprint and product focus by restructuring our business in
order to focus on the pharmaceutical markets in our core
geographies of the United States, Mexico, Canada, Brazil and
Australia. We are pursuing plans to divest our operations in
markets outside of these core geographic areas through sales of
subsidiaries or assets or other strategic alternatives, to seek
partners for taribavirin and retigabine and to make selective
acquisitions.
In December 2007, we signed an agreement with Invida
Pharmaceutical Holdings Pte. Ltd. (Invida) to sell
to Invida certain Valeant subsidiaries and product rights in
Asia in a transaction that included certain of our subsidiaries,
branch offices and commercial rights in Singapore, the
Philippines, Thailand, Indonesia, Vietnam, Taiwan, Korea, China,
Hong Kong, Malaysia and Macau. This transaction also included
certain product rights in Japan. We closed this transaction on
March 3, 2008. The assets sold to Invida were classified as
held for sale as of December 31, 2007 in
accordance with SFAS 144. During the three months ended
March 31, 2008, we received initial proceeds of $37,855,000
and recorded a gain of $36,922,000 in this transaction. During
the three months ended June 30, 2008 we recorded $257,000
of additional closing costs and $760,000 of net asset
adjustments resulting in a reduced gain of $35,905,000 on the
transaction. We expect to receive additional proceeds in 2008 of
approximately $4,825,000 subject to net asset settlement
provisions in the agreement.
As of March 31, 2008, we classified our subsidiaries in
Argentina and Uruguay as held for sale in accordance
with SFAS 144. In the three months ended March 31,
2008, we recorded an impairment charge of $7,852,000 related to
this anticipated sale. We sold these subsidiaries on
June 5, 2008 and recorded a loss on the sale of $2,926,000.
The net restructuring, asset impairments and dispositions charge
of $17,583,000 in the three months ended June 30, 2008
included the $257,000 of additional closing costs and $760,000
of net asset adjustments recorded as reductions of the gain
originally recorded in the three months ended March 31,
2008 in the Invida transaction, $6,497,000 of severance charges
for a total of 134 affected employees, professional service fees
and other cash costs of $6,649,000, a $494,000 impairment charge
related to certain fixed assets in Mexico and the $2,926,000
loss on the sale of our subsidiaries in Argentina and Uruguay.
The net restructuring, asset impairments and dispositions charge
of $4,919,000 in the six months ended June 30, 2008
included $13,239,000 of employee severance costs for a total of
151 affected employees who were part of the supply, selling,
general and administrative and research and development
workforce in the United States, Mexico, Brazil and Europe,
professional service fees and other cash costs of $11,535,000, a
stock compensation charge for the accelerated vesting of the
stock options of our former
33
chief executive officer of $4,778,000, abandoned software costs
of $189,000, impairment charges relating to the sale of our
subsidiaries in Argentina and Uruguay and certain fixed assets
in Mexico of $8,346,000, and the loss of $2,926,000 in the sale
of our subsidiaries in Argentina and Uruguay, offset in part by
the gain of $35,905,000 in the transaction with Invida.
The $17,583,000 restructuring charges for the three months ended
June 30, 2008 represent charges of $21,790,000 and $733,000
in the Corporate division and the EMEA segment, respectively,
offset by the gain of $4,940,000 in the International segment.
The $4,919,000 restructuring charges for the six months ended
June 30, 2008 represent charges of $26,017,000 and
$2,213,000 in the Corporate division and the International
segment, respectively, offset in part by gains of $11,807,000
and $11,504,000 in the North America and EMEA segments,
respectively. The gains relate to the ownership of assets sold
in the transaction with Invida.
The following table summarizes the restructuring costs recorded
in the three and six months ended June 30, 2008 (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
Three Months
|
|
|
Six Months
|
|
|
|
Ended
|
|
|
Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2008
|
|
|
2008
|
|
|
2008 Restructuring Program
|
|
|
|
|
|
|
|
|
Cash-related charges:
|
|
|
|
|
|
|
|
|
Employee severances (151 employees, cumulatively)
|
|
$
|
6,497
|
|
|
$
|
13,239
|
|
Professional services and other cash costs
|
|
|
6,649
|
|
|
|
11,535
|
|
|
|
|
|
|
|
|
|
|
Subtotal: cash charges
|
|
|
13,146
|
|
|
|
24,774
|
|
Stock compensation
|
|
|
|
|
|
|
4,778
|
|
Impairment of long-lived assets
|
|
|
494
|
|
|
|
8,346
|
|
Loss on sale of long-lived assets
|
|
|
2,926
|
|
|
|
2,926
|
|
|
|
|
|
|
|
|
|
|
Subtotal: non-cash charges
|
|
|
3,420
|
|
|
|
16,050
|
|
|
|
|
|
|
|
|
|
|
Subtotal: restructuring expenses
|
|
|
16,566
|
|
|
|
40,824
|
|
|
|
|
|
|
|
|
|
|
Gain on Invida transaction
|
|
|
1,017
|
|
|
|
(35,905
|
)
|
|
|
|
|
|
|
|
|
|
Total: Restructurings, asset impairments and dispositions
|
|
$
|
17,583
|
|
|
$
|
4,919
|
|
|
|
|
|
|
|
|
|
|
In the three and six months ended June 30, 2008, we
recorded inventory obsolescence charges of $15,029,000 and
$22,351,000, resulting primarily from decisions to cease
promotion or discontinue certain products, discontinue certain
manufacturing transfers, and product quality failures. These
inventory obsolescence charges were recorded in costs of goods
sold, in accordance with
EITF 96-9,
Classification of Inventory Markdowns and Other Costs
Associated with a Restructuring.
As of the date of filing of this quarterly report on
Form 10-Q,
we are not able to estimate the total restructuring charges that
will occur in the 2008 Restructuring.
2006
Restructuring
In April 2006, we announced a restructuring program (the
2006 Restructuring) which 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 retigabine and taribavirin, our two late stage
projects in development. The restructuring program was designed
to rationalize our investments in research and development
efforts in line with our financial resources. In December 2006
we sold our HIV and cancer development programs and certain
discovery and pre-clinical assets to Ardea Biosciences, Inc.
(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.
34
In the three and six months ended June 30, 2007, we
recorded charges of $6,337,000 and $13,575,000 related to the
2006 Restructuring, respectively. Severance charges recorded in
the three and six months ended June 30, 2007 for employees
whose positions were eliminated in the restructuring totaled
$1,350,000 and $5,130,000, respectively.
The objective of the 2006 Restructuring 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. The
impairment charges included the charges related to estimated
future losses expected upon the disposition of specific assets
related to our manufacturing operations in Switzerland and
Puerto Rico. We completed the 2006 Restructuring in June 2007
with the sale of our former manufacturing facilities in Humacao,
Puerto Rico and Basel, Switzerland to Legacy Pharmaceuticals
International.
The following table summarizes the restructuring costs recorded
in the three and six months ended June 30, 2007 (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
Three Months
|
|
|
Six Months
|
|
|
|
Ended
|
|
|
Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2007
|
|
|
2007
|
|
|
2006 Restructuring Program
|
|
|
|
|
|
|
|
|
Employee severances (490 employees, cumulatively)
|
|
$
|
1,350
|
|
|
$
|
5,130
|
|
Contract cancellation and other cash costs
|
|
|
1,034
|
|
|
|
3,115
|
|
|
|
|
|
|
|
|
|
|
Subtotal: cash charges
|
|
|
2,384
|
|
|
|
8,245
|
|
Abandoned software and other capital assets
|
|
|
|
|
|
|
|
|
Write-off of accumulated foreign currency translation adjustments
|
|
|
2,891
|
|
|
|
2,891
|
|
Impairment of manufacturing and research facilities
|
|
|
1,062
|
|
|
|
2,439
|
|
|
|
|
|
|
|
|
|
|
Subtotal: non-cash charges
|
|
|
3,953
|
|
|
|
5,330
|
|
|
|
|
|
|
|
|
|
|
Total:
|
|
$
|
6,337
|
|
|
$
|
13,575
|
|
|
|
|
|
|
|
|
|
|
Reconciliation
of Cash Restructuring Payments with Restructuring
Accrual
Cash-related charges in the above tables 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. The $3,432,000 restructuring accrual for the
2006 Restructuring, accrued as of June 30, 2008, relates to
ongoing contractual payments to Legacy Pharmaceuticals
International relating to the sale of our former sites in Basel,
Switzerland and Puerto Rico. These payment obligations last
until June 30, 2009. The $12,513,000 restructuring accrual
for the 2008 Restructuring, accrued as of June 30, 2008,
relates to severance, professional service fees and other
obligations and is expected to be paid primarily during the
remainder of 2008. A summary of accruals and expenditures of
restructuring costs which will be paid in cash is as follows (in
thousands):
|
|
|
|
|
|
2006 Restructuring: Reconciliation of Cash Payments and
Accruals
|
|
|
|
|
|
|
|
|
|
Restructuring accrual, March 31, 2008
|
|
$
|
3,766
|
|
Charges to earnings
|
|
|
|
|
Cash paid
|
|
|
(334
|
)
|
|
|
|
|
|
Restructuring accrual, June 30, 2008
|
|
$
|
3,432
|
|
|
|
|
|
|
|
|
|
|
|
2008 Restructuring: Reconciliation of Cash Payments and
Accruals
|
|
|
|
|
|
|
|
|
|
Restructuring accrual, March 31, 2008
|
|
$
|
13,223
|
|
Charges to earnings
|
|
|
13,146
|
|
Cash paid
|
|
|
(13,856
|
)
|
|
|
|
|
|
Restructuring accrual, June 30, 2008
|
|
$
|
12,513
|
|
|
|
|
|
|
35
Amortization: Amortization expense was
$18,112,000 and $36,178,000 for the three and six months ended
June 30, 2008, respectively, compared to $18,666,000 and
$36,147,000 for the same periods in 2007, resulting in a
decrease of $554,000 (3%) and an increase of $31,000 (0%),
respectively. The decrease is the result of the declining
amortization of the rights to the ribavirin royalty intangible,
which has been amortized using an accelerated method and will be
fully amortized in September 2008.
Other Income (expense), Net, Including Translation and
Exchange: Other income (expense), net, including
translation and exchange was expense of $137,000 and $3,389,000
for the three and six months ended June 30, 2008,
respectively, compared to income of $1,682,000 and $2,818,000
for the same periods in 2007. These declines resulted primarily
from the depreciation of the U.S. Dollar relative to the
Euro and other foreign currencies.
Interest Expense, net: Interest expense net of
interest income decreased $1,838,000 and $3,506,000 during the
three and six months ended June 30, 2008, respectively,
compared to the same periods in 2007, primarily as a result of
higher interest income resulting from higher cash and investment
securities balances.
Income Taxes: The tax provisions in the three
months ended June 30, 2008 and 2007 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. In addition, during the second
quarter of 2008 we reversed our APB 23 representation with
respect to unrepatriated foreign earnings and are required to
provide U.S. tax on these earnings. As of June 30,
2008 a deferred tax liability equal to $97,075,000 was
established to provide for taxes on these earnings. Setting up
the deferred tax liability has allowed us to benefit 2008
U.S. losses, release $67,256,000 of U.S. valuation
allowance, which includes the recognition of $19,876,000 of
U.S. uncertain tax benefits which were settled as of
June 30, 2008. At this time, there is insufficient
objective evidence as to the timing and amount of future US
taxable income to allow for the release of the remaining
U.S. valuation allowance which is primarily offsetting
future benefits of foreign tax credits.
Loss from Discontinued Operations, Net of
Taxes: The results from discontinued operations
relate primarily to our Infergen operations.
Liquidity
and Capital Resources
We announced on June 20, 2008 that we would redeem all of
the $300,000,000 aggregate principal amount 7.0% Senior
Notes due 2011 (7.0% Senior Notes). We completed this
redemption on July 21, 2008 with a $300,000,000 payment to
redeem the 7.0% Senior Notes and $10,500,000 paid as a
redemption premium which will be recorded as an expense from
extinguishment of debt in the three months ending
September 30, 2008. We terminated the interest rate swap
agreement with respect to the 7.0% Senior Notes upon their
redemption. This swap agreement was terminated for $1,540,000,
the fair value of the swap as of the termination date . We also
released the collateral related to the swap of $4,513,000 with
the termination of the swap agreement.
Cash and cash equivalents and marketable securities totaled
$549,984,000 at June 30, 2008 compared to $361,487,000 at
December 31, 2007. The increase of $188,497,000 resulted in
part from the receipt of $70,800,000 from Three Rivers
Pharmaceuticals, LLC as the initial payment for our Infergen
rights, $37,855,000 received from Invida for the sale of certain
of our businesses in Asia, and cash flow from operations.
Working capital (excluding assets held for sale and assets of
discontinued operations) was $608,134,000 at June 30, 2008
compared to $522,764,000 at December 31, 2007. The increase
in working capital of $85,370,000 primarily resulted from the
increase in cash and marketable securities, offset in part by a
decrease in accounts receivable and income taxes receivable and
an increase in income taxes payable and trade payables and
accrued liabilities.
Cash provided by operating activities in continuing operations
is expected to be a sufficient source of funds for operations in
2008. During the six months ended June 30, 2008, cash
provided by operating activities in continuing operations
totaled $65,169,000 compared to $62,072,000 in the same period
in 2007, representing an increase of $3,097,000. The cash
provided by operating activities in continuing operations was a
result of the reduction in accounts receivable and the increase
in income taxes payable, trade payables and accrued liabilities,
offset in part by an increase in inventories. The cash provided
by operating activities in continuing operations for the six
months ended June 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.
36
Cash provided by investing activities in continuing operations
was $16,917,000 for the six months ended June 30, 2008
compared to $14,171,000 for the same period in 2007,
representing an increase of $2,746,000. The cash provided by
investing activities in continuing operations for the six months
ended June 30, 2008 included the net proceeds of
$48,575,000 we received in aggregate from the Invida transaction
and the sale of Argentina and Uruguay, offset in part by the net
purchase of investments of $22,268,000 and capital expenditures
of $8,254,000. Cash provided by investing activities in
discontinued operations consisted of the $70,800,000 of cash
proceeds received as the initial payment in the sale of our
Infergen operations to Three Rivers Pharmaceuticals LLC. In
2007, cash provided by investing activities in continuing
operations was $14,171,000 and included $36,758,000 from the
sale of our former Costa Mesa headquarters and research
facility, $29,500,000 from the sale of manufacturing facilities
in Puerto Rico and Switzerland and $1,686,000 for the sale of an
ophthalmics business in Europe, offset in part by cash used for
product acquisitions of $35,287,000, capital expenditures of
$15,332,000 and a net purchase of investments of $1,978,000.
Cash provided by financing activities in continuing operations
was $554,000 in the six months ended June 30, 2008 and
principally consisted of the proceeds from stock option
exercises and employee stock purchases of $7,867,000, offset by
the purchase of treasury stock of $6,819,000. Cash used in
financing activities in continuing operations was $24,974,000 in
the six months ended June 30, 2007 and principally
consisted of the purchase of treasury stock of $27,507,000 and
payment of debt and notes payable of $8,970,000, offset in part
by proceeds from stock option exercises and employee stock
purchases of $10,251,000. We did not pay dividends on common
stock in the six months ended June 30, 2008 and 2007.
We believe that our existing cash and cash equivalents and funds
generated from operations will be sufficient to meet our
operating requirements at least through June 30, 2009, 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 operating cash requirements primarily from cash provided by
operating activities. Our sources of liquidity are cash and cash
equivalent balances, cash flow from operations, and cash
provided by investing activities. As announced in our 2008
Restructuring, we intend to sell parts of our company and
partner elements of our pipeline. We expect to use the proceeds
to invest in an appropriate mix of internal investment, share
repurchases, acquisitions and debt reductions.
We did not pay dividends for either the first six months of 2008
or 2007. Our board of directors will continue to review our
dividend policy. The amount and timing of any future dividends
will depend upon our financial condition and profitability, the
need to retain earnings for use in the development of our
business, contractual restrictions, including covenants and
other factors. The contractual limitations on our ability to pay
dividends under the terms of the indenture governing our
7% senior notes due 2011 ceased with the redemption of
these notes on July 21, 2008.
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 stabilizes hyper-excited neurons primarily
by opening neuronal potassium channels. The results of the key
Phase II 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 III trials of retigabine were initiated in 2005. One
Phase III trial (RESTORE 1; RESTORE stands for Retigabine
Efficacy and Safety Trial for partial Onset
37
Epilepsy) was conducted at approximately 50 sites, mainly in the
Americas (U.S., Central/South America); the second
Phase III trial (RESTORE 2) was conducted at
approximately 70 sites, mainly in Europe.
We announced clinical data results for RESTORE 1 on
February 12, 2008. RESTORE 1 evaluated the 1200 mg
daily dose of retigabine (the highest dose in the RESTORE
program) versus placebo in patients taking stable doses of one
to three additional anti-epileptic drugs (AEDs).
Retigabine demonstrated statistically significant
(p < 0.001) results on the primary efficacy
endpoints important for regulatory review by both the FDA and
the European Medicines Evaluation Agency (EMEA).
The intent-to-treat (ITT) median reduction in
28-day total
partial seizure frequency from baseline to the end of the
double-blind period (the FDA primary efficacy endpoint), was
44.3% (n=151) and 17.5% (n=150) for the retigabine arm and
placebo arm of the trial, respectively. The responder rate,
defined as
³
a 50% reduction in
28-day total
partial seizure frequency during maintenance (the dual primary
efficacy endpoint required for the EMEA submission) was 55.5%
(n=119) and 22.6% (n=137) for the retigabine arm and the placebo
arm of the trial, respectively.
During RESTORE 1, 26.8% of patients in the retigabine arm and
8.6% of patients in the placebo arm withdrew due to adverse
events. The most common side effects associated with retigabine
in RESTORE 1 included dizziness, somnolence, fatigue, confusion,
dysarthria (slurring of speech), ataxia (loss of muscle
coordination), blurred vision, tremor, and nausea. More details
on the RESTORE 1 data announcement are provided in our annual
report on
Form 10-K
for the year ended December 31, 2007, filed on
March 17, 2008. See Item 7, Products in
Development.
We announced clinical data results for RESTORE 2 on May 13,
2008. This announcement included the following summary efficacy
data:
SUMMARY
EFFICACY DATA
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Placebo
|
|
RTG 600 mg
|
|
RTG 900 mg
|
|
Median reduction in
28-day total
partial seizure frequency* (ITT)
|
|
|
15.9%
|
|
|
|
27.9%
|
|
|
|
39.9%
|
|
|
|
|
n=179
|
|
|
|
n=181
|
|
|
|
n=178
|
|
Median reduction in
28-day total
partial seizure frequency during Maintenance Phase
|
|
|
17.4%
|
|
|
|
35.3%
|
|
|
|
44.3%
|
|
|
|
|
n=164
|
|
|
|
n=158
|
|
|
|
n=149
|
|
Responder Rate (ITT)
|
|
|
17.3%
|
|
|
|
31.5%
|
|
|
|
39.3%
|
|
|
|
|
n=179
|
|
|
|
n=181
|
|
|
|
n=178
|
|
Responder Rate during Maintenance Phase**
|
|
|
18.9%
|
|
|
|
38.6%
|
|
|
|
47.0%
|
|
|
|
|
n=164
|
|
|
|
n=158
|
|
|
|
n=149
|
|
ITT population defined as all subjects taking at least 1 dose of
study medication
|
|
|
* |
|
FDA endpoint |
|
** |
|
Endpoint per EU Committee for Human Medicinal Products (CHMP) |
|
|
|
p <0.01 compared to placebo |
|
|
|
Responder Rate defined as
³
50% reduction in
28-day total
partial seizure frequency |
During RESTORE 2, 14.4% and 25.8% of patients in the retigabine
600 mg and 900 mg arms, respectively, and 7.8% of
patients in the placebo arm withdrew due to adverse events. As
expected, the most common side effects associated with
retigabine in RESTORE 2 included dizziness, somnolence, and
fatigue and were generally seen at much lower rates than at a
1200 mg dose in the RESTORE 1 trial. We plan to present
comprehensive efficacy and safety results from RESTORE 2 at
upcoming scientific meetings in the United States and the
European Union.
Assuming timely regulatory submission and approval, we hope to
launch retigabine in the first market by the end of 2009. We are
seeking a partner to share the investment and risk in the
development of retigabine. A number of standard supportive Phase
I trials necessary for successful registration of retigabine
started in 2007. In March 2007 we initiated development of a
modified release formulation of retigabine. In addition, in
November 2007 we began
38
enrolling patients into a randomized, double-blind,
placebo-controlled phase IIa study to evaluate the efficacy and
tolerability of retigabine as a treatment for neuropathic pain
resulting from post-herpetic neuralgia. We anticipate completing
enrollment at the end of 2008.
External research and development expenses for retigabine for
the three and six months ended June 30, 2008 were
$12,629,000 and $28,620,000, compared with $11,163,000 and
$20,204,000 for the corresponding periods in 2007.
Our rights to retigabine are subject to the Asset Purchase
Agreement between Meda Pharma Gmbh & Co KG (as
successor to Viatris Gmbh & Co KG) and Xcel
Pharmaceuticals, Inc. by which Xcel acquired the rights to
retigabine. The provisions of that agreement require milestone
payments of $8,000,000 upon acceptance of filing of the NDA and
$6,000,000 upon approval of the NDA. In addition, earn out
payments are due to Meda on sales of retigabine. Depending on
the geographic market and the presence or absence of competitive
products containing retigabine, royalty rates vary but are in
all cases less than 10%. We are actively looking for a partner
to help us continue the development and commercialization of
retigabine. In the event that we enter into arrangements whereby
we receive milestone or other payments from partners regarding
retigabine, we may also be liable to Meda for as much as
$5,250,000.
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 prodrug of
ribavirin, has antiviral and immunological activities
(properties) similar to ribavirin. In 2006, we reported the
results of two pivotal Phase III 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% of
patients treated with taribavirin achieved SVR and that the drug
has a 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 led 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 IIb study to
evaluate the efficacy of taribavirin at 20, 25 and 30 mg/kg
in combination with pegylated interferon, as compared with
ribavirin in combination with pegylated interferon. In the VISER
program, taribavirin was administered in a fixed dose of
600 mg BID (approximately equivalent to
13-18 mg/kg).
The Phase IIb study is a U.S. multi-center, randomized,
parallel, open-label study in 278 treatment naïve, genotype
1 patients evaluating taribavirin at 20 mg/kg,
25 mg/kg, and 30 mg/kg per day in combination with
pegylated interferon alfa-2b. The control group is being
administered weight-based dosed ribavirin
(800/1,000/1,200/1,400 mg daily) and pegylated interferon
alfa-2b. Overall treatment duration will be 48 weeks with a
post-treatment
follow-up
period of 24 weeks. The primary endpoints for this study
are viral load reduction at treatment week 12 and anemia rates
throughout the study.
On March 17, 2008 we reported the results of the 12-week
analysis of the taribavirin Phase IIb study. The
12-week
early viral response (EVR) data from the Phase IIb study showed
comparable reductions in viral load for weight-based doses of
taribavirin and ribavirin. The anemia rate was statistically
significantly lower for patients receiving taribavirin in the
20mg/kg and 25mg/kg arms versus the ribavirin control arm. The
most common adverse events were fatigue, nausea, flu-like
symptoms, headache and diarrhea. The incidence rates among
treatment arms were generally comparable except with respect to
diarrhea, where diarrhea was approximately twice as common in
taribavirin patients as ribavirin patients. However, the
diarrhea was not treatment limiting for taribavirin or ribavirin
patients.
39
More details on the 12-week analysis of the taribavirin Phase
IIb study are provided in our annual report on
Form 10-K
for the year ended December 31, 2007, filed on
March 17, 2008. See Item 7, Products in
Development.
Valeant intends to present treatment week 24 results from its
phase II b study evaluating weight-based dosing with
taribavirin vs. weight-based ribavirin (both in combination with
Peginterferon alfa-2b in naïve, chronic hepatitis C,
genotype 1 patients) at a medical meeting towards the end
of the year. While the treatment week 24 data continues to
support our belief that weight based dosing of taribavirin is a
key component in the program, no new information will be
disclosed until after this presentation.
The timeline and path to regulatory approval of taribavirin
remains uncertain at this time. We are using the Phase IIB data
to explore options for potential partnering. For the three and
six months ended June 30, 2008, external research and
development expenses for taribavirin were $2,349,000 and
$5,095,000, compared with $1,935,000 and $3,522,000 for the
comparable periods in 2007.
Other
Development Activities
Diastat Intranasal: Our product Diastat
AcuDial is a gel formulation of diazepam administered rectally
in the management of selected, refractory patients with
epilepsy, who require intermittent use of diazepam to control
bouts of increased seizure activity. In order to improve the
convenience of this product, we have initiated the development
of an intranasal delivery of diazepam. Our external research and
development expenses for Diastat Intranasal were $1,094,000 and
$2,419,000 for the three and six months ended June 30,
2008, respectively, compared with $297,000 and $343,000 for the
comparable periods in 2007, respectively.
Foreign
Operations
Approximately 75% of our revenues from continuing operations,
which includes royalties, for the six months ended June 30,
2008 and 2007, 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.
Other
Financial Information
With respect to the unaudited condensed consolidated financial
information of Valeant Pharmaceuticals International for the
three and six months ended June 30, 2008 and 2007,
PricewaterhouseCoopers LLP reported that they have applied
limited procedures in accordance with professional standards for
a review of such information. However, their report dated
August 11, 2008, appearing herein, states that they did not
audit and they do not express an opinion on that unaudited
condensed consolidated financial information. Accordingly, the
degree of reliance on their report on such information should be
restricted in light of the limited nature of the review
procedures applied. PricewaterhouseCoopers LLP is not subject to
the liability provisions of Section 11 of the Securities
Act of 1933 (the Act) for their report on the
unaudited condensed consolidated financial information because
that report is not a report or a part of
a registration statement prepared or certified by
PricewaterhouseCoopers LLP within the meaning of Sections 7
and 11 of the Act.
40
Forward-Looking
Statements
Except for the historical information contained herein, the
matters addressed in Managements Discussion and
Analysis of Financial Condition and Results of Operations
and elsewhere in this quarterly report on
Form 10-Q
constitute forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933, as
amended and Section 21E of the Securities Exchange Act of
1934, as amended. These forward-looking statements are subject
to a variety of risks and uncertainties, including those
discussed below and elsewhere in this quarterly report on
Form 10-Q,
which could cause actual results to differ materially from those
anticipated by our management. Readers are cautioned not to
place undue reliance on any of these forward-looking statements,
which speak only as of the date of this report. We undertake no
obligation to update any of these forward-looking statements to
reflect events or circumstances after the date of this report or
to reflect actual outcomes.
Forward-looking statements may be identified by the use of the
words anticipates, expects,
intends, plans, and variations or
similar expressions. You should understand that various
important factors and assumptions, including those set forth
below, could cause our actual results to differ materially from
those anticipated in this report.
|
|
|
|
|
The results from the initial 12 weeks of our Phase IIb
study for taribavirin may not be predictive of the final results
of the Phase IIb study or of any subsequent clinical trial
necessary for approval of taribavirin. Thus we give no assurance
that taribavirin will ultimately meet its clinical efficacy or
safety endpoints, that we will conduct additional trials
necessary for approval of taribavirin or that, if we conduct
such additional trials, the results will lead to approval of
taribavirin by the FDA or similar authority or any foreign
government.
|
|
|
|
We have identified a material weakness in our internal control
over financial reporting that could adversely affect our stock
price and ability to prepare complete and accurate financial
statements in a timely manner.
|
|
|
|
We are involved in several legal proceedings, including the
current SEC investigation and those other proceedings described
in Note 10 to notes to consolidated condensed financial
statements, any of which could result in substantial cost and
divert managements attention and resources.
|
|
|
|
We may have to withdraw those products that cause, or are
alleged to cause, serious or widespread personal injury from the
market
and/or incur
significant costs, including payment of substantial sums in
damages.
|
|
|
|
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 can protect our products from generic substitution by third
parties only to the extent that our technologies are covered by
valid and enforceable patents, are effectively maintained as
trade secrets or are protected by data exclusivity. However, our
pending or future patent applications may not issue as patents.
Any patent issued may be challenged, invalidated, held
unenforceable or circumvented. Furthermore, our patents may not
be sufficiently broad to prevent third parties competing
products. The expiration of patent protection for ribavirin has
resulted in significant competition from generic substitutes and
declining royalty revenues and may negatively impact future
financial results.
|
|
|
|
Trade secret protection is less effective than patent protection
because competitors may discover our technology or develop
parallel technology.
|
|
|
|
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.
|
|
|
|
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.
|
|
|
|
Our prior restructuring plan was, and the restructuring plan
resulting from our 2008 Strategic Review is, intended to improve
operational efficiencies and our competitiveness. If we are
unable to realize the benefits
|
41
|
|
|
|
|
from our restructuring plans, our business prospects may suffer
and our operating results and financial condition would be
adversely affected.
|
|
|
|
|
|
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.
|
|
|
|
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.
|
|
|
|
We collect and pay a substantial portion of our sales and
expenditures in currencies other than the U.S. dollar. As a
result, fluctuations in foreign currency exchange rates affect
our operating results. Additionally, future exchange rate
movements, inflation or other related factors may have a
material adverse effect on our sales, gross profit or operating
expenses. At June 30, 2008 we have in place foreign
currency hedge transactions to reduce our exposure to
variability in the Polish Zloty. We continue to evaluate the
possibility of entering into additional hedge arrangements.
|
|
|
|
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.
|
|
|
|
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.
|
|
|
|
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.
|
|
|
|
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.
|
|
|
|
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.
|
|
|
|
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.
|
42
|
|
|
|
|
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.
|
|
|
Item 3.
|
Quantitative
and Qualitative Disclosures About Market Risk
|
Our business and financial results are affected by fluctuations
in world financial markets. We evaluate our exposure to such
risks on an ongoing basis, and seek ways to manage these risks
to an acceptable level, based on managements judgment of
the appropriate trade-off between risk, opportunity and cost. We
do not hold any significant amount of market risk sensitive
instruments whose value is subject to market price risk. Our
significant foreign currency exposure relates to the Euro, the
Mexican Peso, the Polish Zloty, the Swiss Franc and the Canadian
Dollar. We seek to manage our foreign currency exposure through
operational means by managing local currency revenues in
relation to local currency costs. We take steps to mitigate the
impact of foreign currency on the income statement, which
include hedging our foreign currency exposure.
In the normal course of business, we also face risks that are
either non-financial or non-quantifiable. Such risks principally
include country risk, credit risk and legal risk and are not
discussed or quantified in the following analysis. At
June 30, 2008, the fair values of our financial instruments
were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets (Liabilities)
|
|
|
|
Notional/Contract
|
|
|
Carrying
|
|
|
Fair
|
|
Description
|
|
Amount
|
|
|
Value
|
|
|
Value
|
|
|
Undesignated hedges
|
|
$
|
29,165
|
|
|
$
|
309
|
|
|
$
|
309
|
|
Net investment hedges
|
|
$
|
59,534
|
|
|
$
|
(2,726
|
)
|
|
$
|
(2,726
|
)
|
Cash flow hedges
|
|
$
|
6,629
|
|
|
$
|
(290
|
)
|
|
$
|
(290
|
)
|
Interest rate swap
|
|
$
|
150,000
|
|
|
$
|
(312
|
)
|
|
$
|
(312
|
)
|
Outstanding fixed-rate debt
|
|
$
|
780,000
|
|
|
$
|
(780,000
|
)
|
|
$
|
(743,495
|
)
|
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. A
100 basis-point increase in interest rates affecting our
financial instruments would not have had a material effect on
our second quarter 2008 pretax earnings. We had $780,000,000 of
fixed rate debt as of June 30, 2008 that required
U.S. dollar repayment. We completed the redemption of all
of our $300,000,000 aggregate principal amount 7.0% Senior
Notes due 2011 (7.0% Senior Notes) on July 21, 2008.
To the extent that we access foreign earnings, 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
$17,500,000 as of June 30, 2008. On July 21, 2008 we
terminated the interest rate swap agreement.
|
|
Item 4.
|
Controls
and Procedures
|
Disclosure
Controls and Procedures
We maintain disclosure controls and procedures that are designed
to ensure that information required to be disclosed in our
Exchange Act reports is recorded, processed, summarized and
reported within the time periods specified in the SECs
rules and forms, and that such information is accumulated and
communicated to our management, including our 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, management
recognizes that any controls and procedures, no matter how well
designed and operated, can provide only reasonable assurance of
achieving the desired control objectives, and management is of
necessity required to apply its judgment in evaluating the
cost-benefit relationship of possible controls and procedures.
43
Our management, with the participation of our chief executive
officer and chief financial officer, evaluated the effectiveness
of our disclosure controls and procedures. Based on their
evaluation, our chief executive officer and chief financial
officer concluded that as a result of the unremediated material
weakness discussed below, our disclosure controls and procedures
were not effective as of the end of the period covered by this
report.
As of June 30, 2008, management determined that we had an
unremediated material weakness in internal control over
financial reporting identified in the preparation of our annual
report on
Form 10-K
for the year ended December 31, 2007. We did not maintain a
sufficient complement of personnel in our foreign locations with
the appropriate skills, training and experience to identify and
address the application of generally accepted accounting
principles and effective controls with respect to locations
undergoing change or experiencing staff turnover. Further, the
monitoring controls over accounting for pension plans and
product returns in foreign locations did not operate at a
sufficient level of precision to identify the accounting errors
in the foreign operations on a timely basis and did not include
a process for obtaining corroborating information to support the
analysis and conclusions regarding individually significant
transactions. This control deficiency resulted in the
restatement of our consolidated financial statements as of and
for the years ended December 31, 2006, 2005, 2004 and 2003
and for each of the three quarters in the period ended
September 30, 2007 affecting the completeness and accuracy
of revenues, accounts receivable, cost of goods sold, inventory,
general and administrative expenses, cash and cash equivalents,
marketable securities, other assets, income taxes, deferred
taxes, other liabilities, other comprehensive income,
discontinued operations, and accumulated deficit. Additionally,
this control deficiency could result in misstatements of the
aforementioned accounts and disclosures that would result in a
material misstatement of the consolidated financial statements
that would not be prevented or detected.
Remediation
Plan
We are in the process of identifying and implementing a plan to
address the material weakness in internal control over financial
reporting described above. Elements of our remediation plan are
expected to be accomplished over time. We are taking the
following actions to remediate the material weakness described
above:
|
|
|
|
|
We engaged professional actuarial and accounting consultants to
review our accounting for our foreign pension plans. Such review
was conducted for the first quarter of 2008 and will continue
for the foreseeable future. We have also developed modified
controls with regard to our accounting for pension obligations.
|
|
|
|
We have implemented enhancements to our accounting for product
returns and credit memos in foreign markets.
|
|
|
|
We have reviewed the qualifications and performance of our
accounting staff in key roles in our foreign locations and
identified some critical roles in certain foreign markets where
accounting staff will be retrained or new accounting staff will
be recruited. We have assigned qualified accounting staff from
Corporate and our North American offices to review accounting
procedures in certain foreign countries and have begun to
enhance our accounting staff in various foreign locales.
|
|
|
|
We have modified our revenue recognition procedures in Italy and
other locations in order to ensure that, when required by
specific circumstances, we recognize revenue on a cash basis.
|
|
|
|
We have implemented revised review procedures over tax
accounting.
|
In addition, we have completed a comprehensive strategic review
and announced a strategic plan. As announced on March 27,
2008, this strategic plan is expected to involve a significant
reduction in our geographic footprint and product focus, which
will have the effect of reducing the number of foreign locations
where remediation actions are required. We announced on
August 4, 2008 that we had agreed to sell our business
operations located in Western Europe, Eastern Europe including
Russia, and certain export markets to Meda AB, an international
specialty pharmaceutical company located in Stockholm, Sweden.
Management has developed a plan for the implementation of the
remediation procedures described above (to the extent not
already implemented), which has been discussed with our Finance
and Audit Committee. This committee will monitor our
implementation of remediation measures. We believe that the
controls that we are implementing will improve the effectiveness
of our internal control over financial reporting. As we improve
our
44
internal control over financial reporting and implement
remediation measures, we may determine to supplement or modify
the remediation measures described above.
Changes
in Internal Control over Financial Reporting
There have been no changes in our internal control over
financial reporting during the quarter ended June 30, 2008
that have materially affected, or are reasonably likely to
materially affect, our internal control over financial reporting.
PART II
OTHER INFORMATION
|
|
Item 1.
|
Legal
Proceedings
|
See Note 10 of notes to consolidated condensed financial
statements in Item 1 of Part I of this quarterly
report, which is incorporated herein by reference.
Our annual report on
Form 10-K
for the year ended December 31, 2007 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.
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 III
trial for taribavirin. In addition, the SEC requested
information regarding our restatement of certain historical
financial statements announced in March 2008, 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, a 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.
|
|
Item 2.
|
Purchases
of Equity Securities by the Issuer and Affiliated
Purchasers
|
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. In June 2008, our board of directors increased the
authorization to $300 million, over the original
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 are subject to
various factors, which may include the price of our common
stock, general market conditions, corporate requirements 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 6,902,679 as of
June 30, 2008. We have used $106,377,000 to repurchase
these shares. In addition, as of June 30, 2008, we have
sold 259,399 treasury shares to certain executives pursuant to
executive employment agreements.
45
Set forth below is the information regarding shares repurchased
under the stock repurchase program during the three months ended
June 30, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Number
|
|
|
|
|
|
|
|
|
|
|
|
|
of Shares
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchased as
|
|
|
Approximate Dollar Value
|
|
|
|
Total Number of
|
|
|
Average Price
|
|
|
Part of Publicly
|
|
|
of Shares that May Yet Be
|
|
Period
|
|
Shares Purchased
|
|
|
Paid per Share
|
|
|
Announced Plan
|
|
|
Purchased under the Plan
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
|
4/1/08 4/30/08
|
|
|
|
|
|
|
|
|
|
|
6,490,690
|
|
|
$
|
100,443
|
|
5/1/08 5/31/08
|
|
|
|
|
|
|
|
|
|
|
6,490,690
|
|
|
$
|
100,443
|
|
6/1/08 6/30/08
|
|
|
411,989
|
|
|
$
|
16.53
|
|
|
|
6,902,679
|
|
|
$
|
193,623
|
|
|
|
Item 4.
|
Submission
of Matters to a Vote of Security Holders
|
At our 2008 Annual Meeting of Stockholders held on May 20,
2008 (the Annual Meeting), our stockholders elected
Richard H. Koppes and G. Mason Morfit as directors to serve
until our 2011 annual meeting of stockholders or until such
directors respective successor is elected and qualified.
The term of office for the following directors whose terms
expire at our 2009 annual meeting continued after the Annual
Meeting: Robert A. Ingram, Lawrence N. Kugelman and Theo
Melas-Kyriazi. The term of office for the following directors
whose terms expire at our 2010 annual meeting continued after
the Annual Meeting: Norma Ann Provencio and J. Michael Pearson.
At the Annual Meeting, our stockholders approved an amendment to
the 2006 Equity Incentive Plan to increase the number of shares
of common stock available for issuance under the 2006 Equity
Incentive Plan by 4,840,000. In addition, at the Annual Meeting,
our stockholders voted to ratify the appointment of
PricewaterhouseCoopers LLP as our independent registered public
accounting firm for our fiscal year ending December 31,
2008.
Voting at the Annual Meeting was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Votes Cast
|
|
|
Votes Cast
|
|
|
Votes
|
|
|
Votes
|
|
Matter
|
|
For
|
|
|
Against
|
|
|
Withheld
|
|
|
Abstain
|
|
|
Election of Richard H. Koppes
|
|
|
78,661,811
|
|
|
|
|
|
|
|
3,411,041
|
|
|
|
|
|
Election of G. Mason Morfit
|
|
|
79,518,411
|
|
|
|
|
|
|
|
2,554,441
|
|
|
|
|
|
Approval of An Amendment To Our 2006 Equity Incentive Plan to
Increase The Share Reserve By 4,840,000 Shares
|
|
|
71,493,427
|
|
|
|
4,168,034
|
|
|
|
|
|
|
|
21,921
|
|
Ratification of Appointment of PricewaterhouseCoopers LLP
|
|
|
81,413,032
|
|
|
|
609,839
|
|
|
|
|
|
|
|
49,981
|
|
46
|
|
|
|
|
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 to Restated Certificate of
Incorporation, dated April 3, 2006, previously filed as
Exhibit 3.3 to the Registrants
Form 10-Q
for the quarter ended September 30, 2007, which is
incorporated herein by reference.
|
|
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 February 25, 2008, which is incorporated herein by
reference.
|
|
4
|
.1
|
|
Amendment No. 2 to Rights Agreement, dated as of
June 5, 2008, by and between Valeant Pharmaceuticals
International and American Transfer &
Trust Company as Rights Agent, previously filed as
Exhibit 4.3 to the Registrants Amendment No. 4
to
Form 8-A/A,
filed June 6, 2008, 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.
|
|
|
|
** |
|
Portions of this exhibit have been omitted pursuant to a request
for confidential treatment. |
|
|
|
|
|
Management contract or compensatory plan or arrangement. |
47
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this quarterly report on
Form 10-Q
to be signed on its behalf by the undersigned thereunto duly
authorized.
Valeant Pharmaceuticals
International
Registrant
J. Michael Pearson
Chairman and Chief Executive Officer
Date: August 11, 2008
Peter J. Blott
Executive Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)
Date: August 11, 2008
48
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 to Restated Certificate of
Incorporation, dated April 3, 2006, previously filed as
Exhibit 3.3 to the Registrants
Form 10-Q
for the quarter ended September 30, 2007, which is
incorporated herein by reference.
|
|
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 February 25, 2008, which is incorporated herein by
reference.
|
|
4
|
.1
|
|
Amendment No. 2 to Rights Agreement, dated as of
June 5, 2008, by and between Valeant Pharmaceuticals
International and American Transfer &
Trust Company as Rights Agent, previously filed as
Exhibit 4.3 to the Registrants Amendment No. 4
to
Form 8-A/A,
filed June 6, 2008, 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.
|
|
|
|
** |
|
Portions of this exhibit have been omitted pursuant to a request
for confidential treatment. |
|
|
|
Management contract or compensatory plan or arrangement. |