e10vq
UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C.
20549
Form 10-Q
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(Mark One)
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þ
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the quarterly period ended
September 30, 2008
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or
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o
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the transition period
from to
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Commission file
number: 1-11397
Valeant Pharmaceuticals
International
(Exact name of registrant as
specified in its charter)
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Delaware
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33-0628076
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(State or other jurisdiction
of
incorporation or organization)
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(I.R.S. Employer
Identification No.)
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One Enterprise
Aliso Viejo, California
(Address of principal
executive offices)
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92656
(Zip
Code)
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(949) 461-6000
(Registrants telephone
number, including area code)
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of
the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been
subject to such filing requirements for the past
90 days. Yes þ No o
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, 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):
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Large
accelerated
filer þ
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Accelerated
filer o
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Non-accelerated
filer o
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Smaller
reporting
company o
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(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, $0.01 par value, as of November 3, 2008
was 81,497,493.
VALEANT
PHARMACEUTICALS INTERNATIONAL
INDEX
1
PART I
FINANCIAL INFORMATION
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|
Item 1.
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Financial
Statements
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VALEANT
PHARMACEUTICALS INTERNATIONAL
CONSOLIDATED
CONDENSED BALANCE SHEETS
As of
September 30, 2008 and December 31, 2007
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September 30,
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December 31,
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2008
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2007
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(Unaudited)
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(In thousands, except par value data)
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ASSETS
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Current Assets:
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Cash and cash equivalents
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$
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521,263
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$
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287,728
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Marketable securities
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49,749
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51,292
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Accounts receivable, net
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121,161
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147,863
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Inventories, net
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73,478
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80,150
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Assets held for sale and assets of discontinued operations
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326,270
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Prepaid expenses and other current assets
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14,518
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19,119
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Current deferred tax assets, net
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16,811
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13,092
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Income taxes
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15,350
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25,684
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Total current assets
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812,330
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951,198
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Property, plant and equipment, net
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103,279
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109,991
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Deferred tax assets, net
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35,927
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58,887
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Goodwill
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76,798
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80,346
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Intangible assets, net
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214,761
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260,802
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Other assets
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32,032
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33,038
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|
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Total non-current assets
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462,797
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543,064
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$
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1,275,127
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$
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1,494,262
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LIABILITIES AND STOCKHOLDERS EQUITY
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Current Liabilities:
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Trade payables
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$
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55,732
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|
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$
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34,385
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Accrued liabilities
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132,817
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118,834
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Notes payable and current portion of long-term debt
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586
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1,655
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Income taxes payable
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20,532
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|
276
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Current deferred tax liabilities, net
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2,326
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|
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2,252
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Liabilities held for sale and liabilities of discontinued
operations
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50,358
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Current liabilities for uncertain tax positions
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445
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616
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Total current liabilities
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212,438
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208,376
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Long-term debt, less current portion
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481,060
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782,552
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Deferred tax liabilities, net
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|
215
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4,878
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Liabilities for uncertain tax positions
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54,739
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68,749
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Other liabilities
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27,323
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15,604
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Total non-current liabilities
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563,337
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871,783
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Total liabilities
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775,775
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1,080,159
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Commitments and contingencies
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Stockholders Equity:
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Common stock, $0.01 par value; 200,000 shares
authorized; 85,873 (September 30, 2008) and 89,286
(December 31, 2007) shares outstanding (after
deducting shares in treasury of 12,236 as of September 30,
2008 and 7,585 as of December 31, 2007)
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859
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893
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Additional capital
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1,134,279
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1,192,559
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Accumulated deficit
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(718,025
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)
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(859,559
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)
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Accumulated other comprehensive income
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82,239
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80,210
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Total stockholders equity
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499,352
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414,103
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$
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1,275,127
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$
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1,494,262
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|
|
|
|
|
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|
The accompanying notes are an integral part of these
consolidated condensed financial statements.
2
VALEANT
PHARMACEUTICALS INTERNATIONAL
CONSOLIDATED
CONDENSED STATEMENTS OF OPERATIONS
For the
three and nine months ended September 30, 2008 and
2007
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Three Months Ended
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Nine Months Ended
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September 30,
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September 30,
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2008
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2007
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2008
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2007
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(Unaudited, in thousands, except per share data)
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Revenues:
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Product sales
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$
|
153,181
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|
$
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150,181
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$
|
431,142
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|
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$
|
431,060
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Alliance revenue (including ribavirin royalties)
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|
15,243
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14,078
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42,821
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69,503
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|
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Total revenues
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168,424
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164,259
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473,963
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500,563
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Costs and expenses:
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Cost of goods sold (excluding amortization)
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42,698
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41,848
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|
|
|
126,327
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|
|
|
113,084
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Selling expenses
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|
45,343
|
|
|
|
46,950
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|
134,040
|
|
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|
142,892
|
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General and administrative expenses
|
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|
26,114
|
|
|
|
26,534
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|
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|
77,629
|
|
|
|
77,631
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|
Research and development costs
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23,239
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|
|
|
24,865
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75,100
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|
68,528
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Restructuring, asset impairments and dispositions
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3,527
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|
|
|
|
|
|
|
4,294
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|
|
|
18,074
|
|
Amortization expense
|
|
|
11,488
|
|
|
|
14,024
|
|
|
|
37,616
|
|
|
|
42,547
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
Total costs and expenses
|
|
|
152,409
|
|
|
|
154,221
|
|
|
|
455,006
|
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|
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462,756
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
16,015
|
|
|
|
10,038
|
|
|
|
18,957
|
|
|
|
37,807
|
|
Other income (expense), net including translation and exchange
|
|
|
(1,555
|
)
|
|
|
(887
|
)
|
|
|
(3,384
|
)
|
|
|
2,503
|
|
Loss on early extinguishment of debt
|
|
|
(14,882
|
)
|
|
|
|
|
|
|
(14,882
|
)
|
|
|
|
|
Interest income
|
|
|
3,066
|
|
|
|
3,545
|
|
|
|
13,026
|
|
|
|
12,748
|
|
Interest expense
|
|
|
(6,255
|
)
|
|
|
(10,395
|
)
|
|
|
(25,585
|
)
|
|
|
(32,221
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations before income taxes and
minority interest
|
|
|
(3,611
|
)
|
|
|
2,301
|
|
|
|
(11,868
|
)
|
|
|
20,837
|
|
Provision (benefit) for income taxes
|
|
|
(146
|
)
|
|
|
7,491
|
|
|
|
33,727
|
|
|
|
2,311
|
|
Minority interest, net
|
|
|
1
|
|
|
|
1
|
|
|
|
5
|
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Income (loss) from continuing operations
|
|
|
(3,466
|
)
|
|
|
(5,191
|
)
|
|
|
(45,600
|
)
|
|
|
18,524
|
|
Income (loss) from discontinued operations
|
|
|
210,154
|
|
|
|
(6,899
|
)
|
|
|
187,134
|
|
|
|
(4,377
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
206,688
|
|
|
$
|
(12,090
|
)
|
|
$
|
141,534
|
|
|
$
|
14,147
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic income (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations
|
|
$
|
(0.04
|
)
|
|
$
|
(0.06
|
)
|
|
$
|
(0.51
|
)
|
|
$
|
0.20
|
|
Income (loss) from discontinued operations
|
|
|
2.39
|
|
|
|
(0.07
|
)
|
|
|
2.10
|
|
|
|
(0.05
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per share
|
|
$
|
2.35
|
|
|
$
|
(0.13
|
)
|
|
$
|
1.59
|
|
|
$
|
0.15
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted income (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations
|
|
$
|
(0.04
|
)
|
|
$
|
(0.06
|
)
|
|
$
|
(0.51
|
)
|
|
$
|
0.19
|
|
Income (loss) from discontinued operations
|
|
|
2.39
|
|
|
|
(0.07
|
)
|
|
|
2.10
|
|
|
|
(0.04
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per share
|
|
$
|
2.35
|
|
|
$
|
(0.13
|
)
|
|
$
|
1.59
|
|
|
$
|
0.15
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares used in per share computation Basic
|
|
|
87,988
|
|
|
|
91,889
|
|
|
|
89,123
|
|
|
|
93,896
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares used in per share computation Diluted
|
|
|
87,988
|
|
|
|
91,889
|
|
|
|
89,123
|
|
|
|
95,003
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated condensed financial statements.
3
VALEANT
PHARMACEUTICALS INTERNATIONAL
CONSOLIDATED
CONDENSED STATEMENTS OF COMPREHENSIVE INCOME
For the
three and nine months ended September 30, 2008 and
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
|
(Unaudited, in thousands)
|
|
|
Net income (loss)
|
|
$
|
206,688
|
|
|
$
|
(12,090
|
)
|
|
$
|
141,534
|
|
|
$
|
14,147
|
|
Other comprehensive income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustments
|
|
|
(75,089
|
)
|
|
|
25,257
|
|
|
|
21
|
|
|
|
37,307
|
|
Unrealized gain (loss) on marketable equity securities
|
|
|
|
|
|
|
(1,088
|
)
|
|
|
1,084
|
|
|
|
(458
|
)
|
Unrealized gain (loss) on hedges
|
|
|
2,731
|
|
|
|
(174
|
)
|
|
|
(1,813
|
)
|
|
|
6,833
|
|
Pension liability adjustment
|
|
|
2,576
|
|
|
|
638
|
|
|
|
2,737
|
|
|
|
(1,345
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
$
|
136,906
|
|
|
$
|
12,543
|
|
|
$
|
143,563
|
|
|
$
|
56,484
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated condensed financial statements.
4
VALEANT
PHARMACEUTICALS INTERNATIONAL
CONSOLIDATED
CONDENSED STATEMENTS OF CASH FLOWS
For the
nine months ended September 30, 2008 and 2007
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
(Unaudited, in thousands)
|
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
141,534
|
|
|
$
|
14,147
|
|
Income (loss) from discontinued operations
|
|
|
187,134
|
|
|
|
(4,377
|
)
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations
|
|
|
(45,600
|
)
|
|
|
18,524
|
|
Adjustments to reconcile income (loss) from continuing
operations to net cash provided by operating activities in
continuing operations:
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
51,798
|
|
|
|
53,924
|
|
Provision for losses on accounts receivable and inventory
|
|
|
20,293
|
|
|
|
5,815
|
|
Stock compensation expense
|
|
|
1,341
|
|
|
|
10,104
|
|
Translation and exchange (gains) losses, net
|
|
|
3,384
|
|
|
|
(2,503
|
)
|
Impairment charges and other non-cash items
|
|
|
(12,167
|
)
|
|
|
15,151
|
|
Deferred income taxes
|
|
|
(22,582
|
)
|
|
|
14,522
|
|
Loss on extinguishment of debt
|
|
|
2,842
|
|
|
|
|
|
Change in assets and liabilities, net of effects of acquisitions:
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
30,723
|
|
|
|
26,606
|
|
Inventories
|
|
|
(17,620
|
)
|
|
|
(608
|
)
|
Prepaid expenses and other assets
|
|
|
8,859
|
|
|
|
992
|
|
Trade payables and accrued liabilities
|
|
|
(1,935
|
)
|
|
|
(20,545
|
)
|
Income taxes
|
|
|
36,626
|
|
|
|
(43,581
|
)
|
Other liabilities
|
|
|
2,684
|
|
|
|
119
|
|
|
|
|
|
|
|
|
|
|
Cash flow from operating activities in continuing operations
|
|
|
58,646
|
|
|
|
78,520
|
|
Cash flow from operating activities in discontinued operations
|
|
|
9,632
|
|
|
|
6,467
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
68,278
|
|
|
|
84,987
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
Capital expenditures
|
|
|
(9,456
|
)
|
|
|
(22,368
|
)
|
Proceeds from sale of assets
|
|
|
728
|
|
|
|
37,918
|
|
Proceeds from sale of businesses
|
|
|
48,575
|
|
|
|
2,453
|
|
Proceeds from investments
|
|
|
151,047
|
|
|
|
18,598
|
|
Purchase of investments
|
|
|
(139,722
|
)
|
|
|
(22,100
|
)
|
Acquisition of businesses, license rights and product lines
|
|
|
(1,306
|
)
|
|
|
(22,091
|
)
|
|
|
|
|
|
|
|
|
|
Cash flow from investing activities in continuing operations
|
|
|
49,866
|
|
|
|
(7,590
|
)
|
Cash flow from investing activities in discontinued operations
|
|
|
462,418
|
|
|
|
7,388
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) investing activities
|
|
|
512,284
|
|
|
|
(202
|
)
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
Payments on long-term debt and notes payable
|
|
|
(300,712
|
)
|
|
|
(1,545
|
)
|
Proceeds from capitalized lease financing, long-term debt and
notes payable
|
|
|
125
|
|
|
|
1,716
|
|
Stock option exercises and employee stock purchases
|
|
|
18,589
|
|
|
|
14,517
|
|
Purchase of treasury stock
|
|
|
(91,422
|
)
|
|
|
(79,599
|
)
|
|
|
|
|
|
|
|
|
|
Cash flow from financing activities in continuing operations
|
|
|
(373,420
|
)
|
|
|
(64,911
|
)
|
Cash flow from financing activities in discontinued operations
|
|
|
(43
|
)
|
|
|
(6,610
|
)
|
|
|
|
|
|
|
|
|
|
Net cash used in financing activities
|
|
|
(373,463
|
)
|
|
|
(71,521
|
)
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes on cash and cash equivalents
|
|
|
4,799
|
|
|
|
15,475
|
|
|
|
|
|
|
|
|
|
|
Net increase in cash and cash equivalents
|
|
|
211,898
|
|
|
|
28,739
|
|
Cash and cash equivalents at beginning of period
|
|
|
309,365
|
|
|
|
325,579
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period
|
|
|
521,263
|
|
|
|
354,318
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents classified as part of discontinued
operations
|
|
|
|
|
|
|
(31,244
|
)
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents of continuing operations
|
|
$
|
521,263
|
|
|
$
|
323,074
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated condensed financial statements.
5
VALEANT
PHARMACEUTICALS INTERNATIONAL
NOTES TO
CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
September 30, 2008
(Unaudited)
In the consolidated condensed financial statements included
herein, we, us, our,
Valeant and the Company refer to Valeant
Pharmaceuticals International and its subsidiaries. The
consolidated condensed financial statements have been prepared
by us, without audit, pursuant to the rules and regulations of
the Securities and Exchange Commission (the SEC).
Certain information and footnote disclosures normally included
in financial statements prepared on the basis of accounting
principles generally accepted in the United States of America
have been condensed or omitted pursuant to such rules and
regulations. The results of operations presented herein are not
necessarily indicative of the results to be expected for a full
year. Although we believe that all adjustments (consisting only
of normal, recurring adjustments) necessary for a fair
presentation of the interim periods presented are included and
that the disclosures are adequate to make the information
presented not misleading, these consolidated condensed financial
statements should be read in conjunction with the consolidated
financial statements and notes thereto included in our annual
report on
Form 10-K
for the year ended December 31, 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 alliance revenue, including royalties 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, government agency
securities and variable rate demand notes (VRDNs)
which, at the time of purchase, have maturities of greater than
three months. Short-term commercial paper and government agency
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 September 30, 2008 and December 31,
2007, the fair value of these marketable securities approximated
cost. VRDNs are categorized as available for sale and are
carried at fair value.
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.
6
VALEANT
PHARMACEUTICALS INTERNATIONAL
NOTES TO
CONSOLIDATED CONDENSED FINANCIAL
STATEMENTS (Continued)
Stock-Based Compensation Expense: We have
adopted SFAS No. 123 (revised 2004), Share-Based
Payment, (SFAS 123(R)) which requires the
measurement and recognition of compensation expense for all
share-based payment awards made to employees and directors
including employee stock options and employee stock purchases
under our Employee Stock Purchase Plan based on estimated fair
values. In order to estimate the fair value of stock options, we
use the Black-Scholes option valuation model, which was
developed for use in estimating the fair value of publicly
traded options which have no vesting restrictions and are fully
transferable. Option valuation models require the input of
subjective assumptions which can vary over time.
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).
We have reclassified our consolidated condensed balance sheet as
of December 31, 2007 to reflect the sale of certain assets
and the capital stock of certain subsidiaries in Western and
Eastern Europe, Middle East and Africa (the WEEMEA
business) to Meda AB, an international specialty
pharmaceutical company located in Stockholm, Sweden
(Meda). As of December 31, 2007, assets and
liabilities held for sale included amounts related to our sale
of our WEEMEA business to Meda which we completed on
September 11, 2008, our sale of certain subsidiaries and
assets in Asia to Invida Pharmaceutical Holdings Pte. Ltd which
we completed on March 3, 2008, and our sale of our Infergen
operations to Three Rivers Pharmaceuticals, LLC which we
completed on January 14, 2008.
Discontinued Operations: We have reclassified
our consolidated condensed financial statements for all fiscal
periods presented to reflect the sale of the WEEMEA business to
Meda. The results of operations and the related financial
position for Infergen and the WEEMEA business have been
reflected as discontinued operations in our consolidated
condensed financial statements in accordance with SFAS 144
and Emerging Issues Task Force (EITF) Issue
No. 03-13,
Applying the Conditions in Paragraph 42 of FASB
Statement No. 144 in Determining Whether to Report
Discontinued Operations. For more details regarding our
discontinued operations see Note 5, Discontinued Operations.
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 third
quarter of 2008, we recorded an adjustment related to
value-added tax in Mexico that increased general and
administrative expenses and reduced income from continuing
operations before income taxes by approximately $1,789,000,
comprised of approximately $434,000, $408,000 and
$947,000 related to 2002, 2003 and 2004, respectively. This
correction was to write off unrecoverable
value-added
tax receivables arising in the years affected. Because this
error was not material to any of the prior years financial
statements, and the impact of correcting this error in the
current year is not expected to be material to the full year
2008 financial statements, we recorded the correction of this
error in the third quarter of 2008 financial statements.
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 $786,000, comprising an increase
of $1,925,000 related to 2007 and 2006 and a decrease of
$1,139,000 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 $3,740,000 and correcting the foreign tax error decreased
income from continuing operations before income taxes by
$2,954,000. Correcting the stock compensation error also
increased income from discontinued operations by $130,000.
Because these errors, both individually and in the aggregate,
were not material to any of the prior years financial
statements, and the impact of
7
VALEANT
PHARMACEUTICALS INTERNATIONAL
NOTES TO
CONSOLIDATED CONDENSED FINANCIAL
STATEMENTS (Continued)
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:
In September 2006, the Financial Accounting Standards Board (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 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 regarding
our implementation of SFAS 157, see Note 3, Fair Value
Measurements.
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 tax valuation allowance
established in purchase accounting that does not qualify as a
measurement period adjustment 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
8
VALEANT
PHARMACEUTICALS INTERNATIONAL
NOTES TO
CONSOLIDATED CONDENSED FINANCIAL
STATEMENTS (Continued)
adoption of
EITF 07-1
to have a material impact on our accounting for any
collaborative arrangements existing as of September 30,
2008 in our consolidated condensed 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 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
9
VALEANT
PHARMACEUTICALS INTERNATIONAL
NOTES TO
CONSOLIDATED CONDENSED FINANCIAL
STATEMENTS (Continued)
accounting for impairment of long-lived assets under
SFAS 144, see Note 1, Organization and Summary of
Significant Accounting Policies, in our annual report on
Form 10-K
for the year ended December 31, 2007. 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, Canada and Australia and on
the branded generics markets in Europe (Poland, Hungary, Czech
Republic and Slovakia) and Latin America (Mexico and Brazil).
Our restructuring plans include actions 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. During the third quarter of 2008, we
completed the sale of the WEEMEA business operations to Meda, as
discussed in Note 5, Discontinued Operations. In the fourth
quarter of 2008, we also completed a worldwide License and
Collaboration Agreement with Glaxo Group Limited to develop and
commercialize retigabine and completed an Agreement and Plan of
Merger with Coria Laboratories Ltd., as discussed in
Note 14, Subsequent Events.
On August 4, 2008, we signed an agreement to sell the
WEEMEA business to Meda and completed the sale on
September 11, 2008. We recorded a gain of $178,506,000 in
discontinued operations from the sale of the WEEMEA business,
net of charges for professional fees, severance costs and income
taxes.
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 and the three months
ended September 30, 2008, we recorded $1,017,000 and
$829,000, respectively, of net asset adjustments and additional
closing costs resulting in a reduced gain of $35,076,000 on the
transaction. We expect to receive additional proceeds of
approximately $3,841,000 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 $3,527,000 in the three months ended September 30, 2008
included the $829,000 of net asset adjustments and additional
closing costs recorded as reductions of the gain originally
recorded in the three months ended March 31, 2008 in the
Invida transaction and $220,000 of severance charges for a total
of 16 affected employees. The charge also included $1,511,000
for professional service fees related to the strategic review of
our business, $694,000 of contract termination costs and
$273,000 of other cash costs.
The net restructuring, asset impairments and dispositions charge
of $4,294,000 in the nine months ended September 30, 2008
included $12,290,000 of employee severance costs for a total of
160 affected employees who were part of the supply, selling,
general and administrative and research and development
workforce in the United States, Mexico and Brazil. The charges
also included $9,774,000 for professional service fees related
to our strategic review of our business, $694,000 of contract
termination costs and $562,000 of other cash costs.
10
VALEANT
PHARMACEUTICALS INTERNATIONAL
NOTES TO
CONSOLIDATED CONDENSED FINANCIAL
STATEMENTS (Continued)
Additional amounts incurred included 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 $35,076,000
in the transaction with Invida.
The following table summarizes the restructuring costs recorded
in the three and nine months ended September 30, 2008 (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
Three Months
|
|
|
Nine Months
|
|
|
|
Ended
|
|
|
Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
2008 Restructuring Program
|
|
2008
|
|
|
2008
|
|
|
Cash-related charges:
|
|
|
|
|
|
|
|
|
Employee severances (160 employees, cumulatively)
|
|
$
|
220
|
|
|
$
|
12,290
|
|
Professional services, contract cancellation and other cash costs
|
|
|
2,478
|
|
|
|
11,030
|
|
|
|
|
|
|
|
|
|
|
Subtotal: cash charges
|
|
|
2,698
|
|
|
|
23,320
|
|
Stock compensation
|
|
|
|
|
|
|
4,778
|
|
Impairment of long-lived assets
|
|
|
|
|
|
|
8,346
|
|
Loss on sale of long-lived assets
|
|
|
|
|
|
|
2,926
|
|
|
|
|
|
|
|
|
|
|
Subtotal: non-cash charges
|
|
|
|
|
|
|
16,050
|
|
|
|
|
|
|
|
|
|
|
Subtotal: restructuring expenses
|
|
|
2,698
|
|
|
|
39,370
|
|
|
|
|
|
|
|
|
|
|
Gain on Invida transaction
|
|
|
829
|
|
|
|
(35,076
|
)
|
|
|
|
|
|
|
|
|
|
Restructurings, asset impairments and dispositions
|
|
$
|
3,527
|
|
|
$
|
4,294
|
|
|
|
|
|
|
|
|
|
|
In the three and nine months ended September 30, 2008, we
recorded inventory obsolescence charges of $2,216,000 and
$20,214,000, respectively, resulting primarily from decisions to
cease promotion of or discontinue certain products, decisions to
discontinue certain manufacturing transfers and product quality
failures. These inventory obsolescence charges were recorded in
cost of goods sold, in accordance with EITF Issue
No. 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 2006 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 2006 Restructuring 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.
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)
We did not record a restructuring provision in the three months
ended September 30, 2007. In the nine months ended
September 30, 2007, we recorded charges of $18,074,000
related to the 2006 Restructuring.
The following table summarizes the restructuring costs recorded
in the three and nine months ended September 30, 2007 (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
Three Months
|
|
|
Nine Months
|
|
|
|
Ended
|
|
|
Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
2006 Restructuring Program
|
|
2007
|
|
|
2007
|
|
|
Employee severances (417 employees, cumulatively)
|
|
$
|
|
|
|
$
|
3,788
|
|
Contract cancellation and other cash costs
|
|
|
|
|
|
|
2,076
|
|
|
|
|
|
|
|
|
|
|
Subtotal: cash charges
|
|
|
|
|
|
|
5,864
|
|
Write-off of accumulated foreign currency translation adjustments
|
|
|
|
|
|
|
2,891
|
|
Impairment of manufacturing and research facilities
|
|
|
|
|
|
|
9,319
|
|
|
|
|
|
|
|
|
|
|
Subtotal: non-cash charges
|
|
|
|
|
|
|
12,210
|
|
|
|
|
|
|
|
|
|
|
Restructurings, asset impairments and dispositions
|
|
$
|
|
|
|
$
|
18,074
|
|
|
|
|
|
|
|
|
|
|
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. As of September 30, 2008, the
restructuring accrual for the 2006 Restructuring was $1,000,000
and relates to ongoing contractual payments to Legacy
Pharmaceuticals International relating to the sale of our former
site in Puerto Rico. These payment obligations last until
June 30, 2009.
As of September 30, 2008, the restructuring accrual for the
2008 Restructuring was $13,243,000 and 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, June 30, 2008
|
|
$
|
1,375
|
|
Cash paid
|
|
|
(375
|
)
|
|
|
|
|
|
Restructuring accrual, September 30, 2008
|
|
$
|
1,000
|
|
|
|
|
|
|
2008 Restructuring: Reconciliation of Cash Payments and
Accruals
|
|
|
|
|
Restructuring accrual, June 30, 2008
|
|
$
|
11,799
|
|
Charges to earnings in continuing operations
|
|
|
2,698
|
|
Charges to earnings in discontinued operations
|
|
|
11,202
|
|
Cash paid
|
|
|
(12,456
|
)
|
|
|
|
|
|
Restructuring accrual, September 30, 2008
|
|
$
|
13,243
|
|
|
|
|
|
|
|
|
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
12
VALEANT
PHARMACEUTICALS INTERNATIONAL
NOTES TO
CONSOLIDATED CONDENSED FINANCIAL
STATEMENTS (Continued)
business combination. We are currently assessing the impact
SFAS 157 will have on such nonfinancial assets and
liabilities. 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
September 30, 2008 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2008
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Available-for-sale securities
|
|
$
|
44,142
|
|
|
|
|
|
|
|
|
|
Undesignated hedges
|
|
|
|
|
|
$
|
(213
|
)
|
|
|
|
|
Net investment derivative contracts
|
|
|
|
|
|
$
|
1,592
|
|
|
|
|
|
Cash flow derivative contracts
|
|
|
|
|
|
$
|
63
|
|
|
|
|
|
Available-for-sale securities are measured at fair value using
quoted market prices and are classified within Level 1 of
the valuation hierarchy. Available-for-sale securities at
September 30, 2008, include VRDNs classified as marketable
securities and an investment in a publicly traded investment
fund, which is included in other assets, carried at fair value
of $39,676,000 and $4,466,000, respectively. 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 nine months ended September 30, 2008, we acquired
product rights in Poland for $1,306,000 in cash and $256,000 in
other consideration.
In the nine months ended September 30, 2007, we acquired
product rights in the United States, Europe and Argentina for
aggregate consideration of $26,388,000. In the nine months ended
September 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; and (ii) we acquired the
rights to certain products in Poland and Argentina for
$1,218,000.
|
|
5.
|
Discontinued
Operations
|
In the three and nine months ended September 30, 2008 and
2007, the results of the WEEMEA business and the Infergen
operations have been reflected as discontinued operations in our
consolidated condensed financial statements in accordance with
SFAS 144 and EITF Issue
No. 03-13,
Applying the Conditions in Paragraph 42 of FASB
Statement No. 144 in Determining Whether to Report
Discontinued Operations.
13
VALEANT
PHARMACEUTICALS INTERNATIONAL
NOTES TO
CONSOLIDATED CONDENSED FINANCIAL
STATEMENTS (Continued)
On August 4, 2008, we entered into an agreement to sell our
business operations located in Western and Eastern Europe,
Middle East and Africa to Meda and completed the sale on
September 11, 2008. Meda acquired our operating
subsidiaries in those markets, and the rights to all products
and licenses currently marketed by Valeant in those divested
regions. Excluded from this transaction are Valeants
Central European operations, defined as the business in Poland,
Hungary, Slovakia and the Czech Republic. Under the terms of the
agreement, we received initial cash proceeds of $428,432,000,
which will be reduced by approximately $11,757,000 based upon
the estimated levels of cash, indebtedness and working capital
as of the closing date, subject to certain further
post-closing
adjustments. We recorded a net gain on this sale of $178,506,000
after deducting the carrying value of the net assets sold,
transaction-related expenses and income taxes.
In September 2007, we decided to divest our Infergen product
rights. 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.
The $682,000 credit to general and administrative expense in the
nine months ended September 30, 2007 relates to
an insurance recovery for damaged Infergen inventory. Other
expense of discontinued operations in the nine months ended
September 30, 2007 was primarily related to a legal
judgment with respect to the discontinued biomedicals business.
Summarized selected financial information for discontinued
operations for the three and nine months ended
September 30, 2008 and 2007, respectively, is as follows
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
WEEMEA Business:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product sales
|
|
$
|
40,856
|
|
|
$
|
42,796
|
|
|
$
|
136,767
|
|
|
$
|
131,436
|
|
Costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of goods sold (excluding amortization)
|
|
|
15,640
|
|
|
|
16,015
|
|
|
|
56,380
|
|
|
|
49,295
|
|
Selling expenses
|
|
|
13,352
|
|
|
|
17,448
|
|
|
|
48,052
|
|
|
|
47,590
|
|
General and administrative expenses
|
|
|
2,734
|
|
|
|
2,625
|
|
|
|
18,807
|
|
|
|
6,386
|
|
Research and development costs
|
|
|
142
|
|
|
|
21
|
|
|
|
365
|
|
|
|
85
|
|
Restructuring, asset impairments and dispositions
|
|
|
50
|
|
|
|
|
|
|
|
1,309
|
|
|
|
(4,499
|
)
|
Amortization expense
|
|
|
4,322
|
|
|
|
4,106
|
|
|
|
14,372
|
|
|
|
11,730
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total costs and expenses
|
|
|
36,240
|
|
|
|
40,215
|
|
|
|
139,285
|
|
|
|
110,587
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income
|
|
|
1,983
|
|
|
|
711
|
|
|
|
744
|
|
|
|
209
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from discontinued operations, WEEMEA
|
|
|
6,599
|
|
|
|
3,292
|
|
|
|
(1,774
|
)
|
|
|
21,058
|
|
Infergen:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product sales
|
|
|
|
|
|
|
8,636
|
|
|
|
1,000
|
|
|
|
26,959
|
|
Costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of goods sold (excluding amortization)
|
|
|
|
|
|
|
8,365
|
|
|
|
2,007
|
|
|
|
14,523
|
|
Selling expenses
|
|
|
|
|
|
|
6,586
|
|
|
|
1,306
|
|
|
|
19,619
|
|
General and administrative expenses
|
|
|
|
|
|
|
679
|
|
|
|
(682
|
)
|
|
|
1,367
|
|
Research and development costs
|
|
|
|
|
|
|
1,279
|
|
|
|
9,752
|
|
|
|
5,279
|
|
Amortization expense
|
|
|
|
|
|
|
1,650
|
|
|
|
|
|
|
|
4,950
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total costs and expenses
|
|
|
|
|
|
|
18,559
|
|
|
|
12,383
|
|
|
|
45,738
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from discontinued operations, Infergen
|
|
|
|
|
|
|
(9,923
|
)
|
|
|
(11,383
|
)
|
|
|
(18,779
|
)
|
14
VALEANT
PHARMACEUTICALS INTERNATIONAL
NOTES TO
CONSOLIDATED CONDENSED FINANCIAL
STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
Other discontinued operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense)
|
|
|
376
|
|
|
|
|
|
|
|
1,168
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated discontinued operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from discontinued operations
|
|
|
6,975
|
|
|
|
(6,631
|
)
|
|
|
(11,989
|
)
|
|
|
2,279
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision (benefit) for income taxes
|
|
|
(3,479
|
)
|
|
|
218
|
|
|
|
18,685
|
|
|
|
6,225
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from discontinued operations
|
|
|
10,454
|
|
|
|
(6,849
|
)
|
|
|
(30,674
|
)
|
|
|
(3,946
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Disposal of discontinued operations, net
|
|
|
199,700
|
|
|
|
(50
|
)
|
|
|
217,808
|
|
|
|
(431
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from discontinued operations, net
|
|
$
|
210,154
|
|
|
$
|
(6,899
|
)
|
|
$
|
187,134
|
|
|
$
|
(4,377
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The assets and liabilities of discontinued operations are stated
separately as of September 30, 2008 and December 31,
2007 on the accompanying consolidated condensed balance sheets.
The major assets and liabilities categories are as follows (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
ASSETS
|
Cash
|
|
$
|
|
|
|
$
|
21,637
|
|
Marketable securities
|
|
|
|
|
|
|
830
|
|
Accounts receivable, net
|
|
|
|
|
|
|
43,933
|
|
Inventories, net
|
|
|
|
|
|
|
36,078
|
|
Prepaid expenses and other current assets
|
|
|
|
|
|
|
2,594
|
|
Current deferred tax assets, net
|
|
|
|
|
|
|
(1,273
|
)
|
Income taxes
|
|
|
|
|
|
|
749
|
|
Property, plant and equipment, net
|
|
|
|
|
|
|
6,517
|
|
Deferred tax assets, net
|
|
|
|
|
|
|
7,063
|
|
Goodwill
|
|
|
|
|
|
|
4,816
|
|
Intangible assets, net
|
|
|
|
|
|
|
195,223
|
|
Other assets
|
|
|
|
|
|
|
2,305
|
|
|
|
|
|
|
|
|
|
|
Assets of discontinued operations
|
|
$
|
|
|
|
$
|
320,472
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
|
Trade payables
|
|
$
|
|
|
|
$
|
14,818
|
|
Accrued liabilities
|
|
|
|
|
|
|
22,817
|
|
Income taxes
|
|
|
|
|
|
|
7,711
|
|
Deferred tax liabilities, net
|
|
|
|
|
|
|
459
|
|
Other liabilities
|
|
|
|
|
|
|
2,256
|
|
|
|
|
|
|
|
|
|
|
Liabilities of discontinued operations
|
|
$
|
|
|
|
$
|
48,061
|
|
|
|
|
|
|
|
|
|
|
The assets held for sale and assets of discontinued operations
as of December 31, 2007 were $326,270,000, which included
the assets of the discontinued operations of the WEEMEA business
of $260,023,000, $60,449,000 related to assets of the
Infergen discontinued operations and $5,798,000 of assets sold
to Invida on March 3, 2008.
15
VALEANT
PHARMACEUTICALS INTERNATIONAL
NOTES TO
CONSOLIDATED CONDENSED FINANCIAL
STATEMENTS (Continued)
The liabilities held for sale and liabilities of discontinued
operations as of December 31, 2007 were $50,358,000, which
included the liabilities of discontinued operations of the
WEEMEA business of $46,164,000, $1,897,000 related to the
liabilities of the discontinued biomedicals business and
$2,297,000 of liabilities sold to Invida on March 3, 2008.
The following table sets forth the computation of basic and
diluted earnings per share for the three and nine months ended
September 30, 2008 and 2007 (in thousands, except per share
data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
Income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Numerator for basic and diluted earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations
|
|
$
|
(3,466
|
)
|
|
$
|
(5,191
|
)
|
|
$
|
(45,600
|
)
|
|
$
|
18,524
|
|
Income (loss) from discontinued operations
|
|
|
210,154
|
|
|
|
(6,899
|
)
|
|
|
187,134
|
|
|
|
(4,377
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
206,688
|
|
|
$
|
(12,090
|
)
|
|
$
|
141,534
|
|
|
$
|
14,147
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for basic earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted shares outstanding
|
|
|
87,703
|
|
|
|
91,705
|
|
|
|
88,800
|
|
|
|
93,705
|
|
Vested stock equivalents (not issued)
|
|
|
285
|
|
|
|
184
|
|
|
|
323
|
|
|
|
191
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for basic earnings per share
|
|
|
87,988
|
|
|
|
91,889
|
|
|
|
89,123
|
|
|
|
93,896
|
|
Denominator for diluted earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee stock options
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,046
|
|
Other dilutive securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
61
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dilutive potential common shares
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,107
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for diluted earnings per share
|
|
|
87,988
|
|
|
|
91,889
|
|
|
|
89,123
|
|
|
|
95,003
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic income (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations
|
|
$
|
(0.04
|
)
|
|
$
|
(0.06
|
)
|
|
$
|
(0.51
|
)
|
|
$
|
0.20
|
|
Income (loss) from discontinued operations
|
|
|
2.39
|
|
|
|
(0.07
|
)
|
|
|
2.10
|
|
|
|
(0.05
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per share
|
|
$
|
2.35
|
|
|
$
|
(0.13
|
)
|
|
$
|
1.59
|
|
|
$
|
0.15
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted income (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations
|
|
$
|
(0.04
|
)
|
|
$
|
(0.06
|
)
|
|
$
|
(0.51
|
)
|
|
$
|
0.19
|
|
Income (loss) from discontinued operations
|
|
|
2.39
|
|
|
|
(0.07
|
)
|
|
|
2.10
|
|
|
|
(0.04
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per share
|
|
$
|
2.35
|
|
|
$
|
(0.13
|
)
|
|
$
|
1.59
|
|
|
$
|
0.15
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three and nine months ended September 30, 2008 and
three months ended September 30, 2007, options to purchase
1,393,000, 898,000 and 840,000 weighted average shares of common
stock, respectively, were not included in the computation of
earnings per share because we incurred a loss from continuing
operations and the effect would have been anti-dilutive. For the
three months ended September 30, 2008 and 2007, options to
purchase 5,041,000 and 8,669,000 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 nine months ended September 30,
16
VALEANT
PHARMACEUTICALS INTERNATIONAL
NOTES TO
CONSOLIDATED CONDENSED FINANCIAL
STATEMENTS (Continued)
2008 and 2007, options to purchase 7,173,000 and 9,093,000
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.
|
|
7.
|
Detail of
Certain Accounts
|
The following tables present the details of certain amounts
included in our consolidated balance sheet as of
September 30, 2008 and December 31, 2007 (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
Accounts receivable, net:
|
|
|
|
|
|
|
|
|
Trade accounts receivable
|
|
$
|
82,305
|
|
|
$
|
118,696
|
|
Royalties receivable
|
|
|
14,872
|
|
|
|
18,620
|
|
Other receivables
|
|
|
28,534
|
|
|
|
19,301
|
|
|
|
|
|
|
|
|
|
|
|
|
|
125,711
|
|
|
|
156,617
|
|
Allowance for doubtful accounts
|
|
|
(4,550
|
)
|
|
|
(8,754
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
121,161
|
|
|
$
|
147,863
|
|
|
|
|
|
|
|
|
|
|
Inventories, net:
|
|
|
|
|
|
|
|
|
Raw materials and supplies
|
|
$
|
20,680
|
|
|
$
|
24,337
|
|
Work-in-process
|
|
|
12,470
|
|
|
|
11,667
|
|
Finished goods
|
|
|
61,724
|
|
|
|
56,622
|
|
|
|
|
|
|
|
|
|
|
|
|
|
94,874
|
|
|
|
92,626
|
|
Allowance for inventory obsolescence
|
|
|
(21,396
|
)
|
|
|
(12,476
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
73,478
|
|
|
$
|
80,150
|
|
|
|
|
|
|
|
|
|
|
Property, plant and equipment, net:
|
|
|
|
|
|
|
|
|
Property, plant and equipment, at cost
|
|
$
|
205,183
|
|
|
$
|
202,577
|
|
Accumulated depreciation and amortization
|
|
|
(101,904
|
)
|
|
|
(92,586
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
103,279
|
|
|
$
|
109,991
|
|
|
|
|
|
|
|
|
|
|
The increase in other receivables includes receivables of
$7,000,000 and $3,975,000 related to the transactions with Three
Rivers Pharmaceuticals, LLC and Invida, respectively.
Intangible assets: As of September 30,
2008 and December 31, 2007, intangible assets were as
follows (in thousands, except life data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
September 30, 2008
|
|
|
December 31, 2007
|
|
|
|
Average
|
|
|
Gross
|
|
|
Accumulated
|
|
|
Net
|
|
|
Gross
|
|
|
Accumulated
|
|
|
Net
|
|
|
|
Lives (Years)
|
|
|
Amount
|
|
|
Amortization
|
|
|
Amount
|
|
|
Amount
|
|
|
Amortization
|
|
|
Amount
|
|
|
Product rights
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Neurology
|
|
|
12
|
|
|
$
|
278,265
|
|
|
$
|
(141,087
|
)
|
|
$
|
137,178
|
|
|
$
|
281,327
|
|
|
$
|
(122,622
|
)
|
|
$
|
158,705
|
|
Dermatology
|
|
|
13
|
|
|
|
95,213
|
|
|
|
(51,533
|
)
|
|
|
43,680
|
|
|
|
108,491
|
|
|
|
(52,067
|
)
|
|
|
56,424
|
|
Other
|
|
|
17
|
|
|
|
79,249
|
|
|
|
(45,346
|
)
|
|
|
33,903
|
|
|
|
94,321
|
|
|
|
(54,820
|
)
|
|
|
39,501
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total product rights
|
|
|
14
|
|
|
|
452,727
|
|
|
|
(237,966
|
)
|
|
|
214,761
|
|
|
|
484,139
|
|
|
|
(229,509
|
)
|
|
|
254,630
|
|
License agreement
|
|
|
5
|
|
|
|
67,376
|
|
|
|
(67,376
|
)
|
|
|
|
|
|
|
67,376
|
|
|
|
(61,204
|
)
|
|
|
6,172
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total intangible assets
|
|
|
|
|
|
$
|
520,103
|
|
|
$
|
(305,342
|
)
|
|
$
|
214,761
|
|
|
$
|
551,515
|
|
|
$
|
(290,713
|
)
|
|
$
|
260,802
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
17
VALEANT
PHARMACEUTICALS INTERNATIONAL
NOTES TO
CONSOLIDATED CONDENSED FINANCIAL
STATEMENTS (Continued)
Estimated future amortization expenses are as follows (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Scheduled Future Amortization Expense
|
|
|
|
Remaining
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Months of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
2011
|
|
|
2012
|
|
|
Thereafter
|
|
|
Total
|
|
|
Product rights
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Neurology
|
|
$
|
6,529
|
|
|
$
|
26,115
|
|
|
$
|
24,787
|
|
|
$
|
19,284
|
|
|
$
|
17,866
|
|
|
$
|
42,597
|
|
|
$
|
137,178
|
|
Dermatology
|
|
|
2,232
|
|
|
|
8,929
|
|
|
|
8,929
|
|
|
|
8,918
|
|
|
|
3,890
|
|
|
|
10,782
|
|
|
|
43,680
|
|
Other
|
|
|
1,202
|
|
|
|
5,107
|
|
|
|
5,145
|
|
|
|
4,861
|
|
|
|
4,715
|
|
|
|
12,873
|
|
|
|
33,903
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
9,963
|
|
|
$
|
40,151
|
|
|
$
|
38,861
|
|
|
$
|
33,063
|
|
|
$
|
26,471
|
|
|
$
|
66,252
|
|
|
$
|
214,761
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization expense for the three and nine months ended
September 30, 2008 was $11,488,000 and $37,616,000,
respectively, of which $10,043,000 and $31,444,000,
respectively, related to amortization of acquired product rights.
In December 2003, we issued $300,000,000 aggregate principal
amount of 7.0% Senior Notes due 2011 (the
7% Senior Notes). At the Companys option,
the Company could redeem some or all of the 7% Senior Notes
at any time on or after December 15, 2007, at a redemption
price of 103.50%, 101.75% and 100.00% of the principal amount
during the twelve-month period beginning December 15, 2007,
2008 and 2009 and thereafter, respectively. In January 2004, we
entered into an interest rate swap agreement with respect to
$150,000,000 in principal amount of the 7% Senior Notes,
with the objective of initially lowering our effective interest
rate by exchanging fixed rate payments for floating rate
payments. The interest rate swap agreement provided that we
would exchange our 7.0% fixed-rate payment obligation for
variable-rate payments of six-month London Interbank Offer Rate
(LIBOR) plus 2.409%.
In July 2008, we redeemed the 7% Senior Notes at an
aggregate redemption price of $310,500,000. In connection with
this redemption, we recorded a $14,882,000 loss on early
extinguishment of debt during the three months ended
September 30, 2008, including a redemption premium of
$10,500,000, unamortized loan costs of $2,842,000 and an
interest rate swap agreement termination fee of $1,540,000.
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 U.S. deferred tax assets.
During the quarter 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
September 30, 2008, we repatriated $260,000,000 of these
earnings which is being offset by current U.S. operating
losses and foreign tax credits. We paid $7,782,000 of
withholding tax on the repatriation of these earnings. As of
September 30, 2008, a deferred tax liability of $38,202,000
was established to provide tax on unrepatriated earnings which
includes $2,914,000 of withholding tax that will be due upon
repatriation. Setting up the deferred tax liability has allowed
the Company to release $35,308,000 of its U.S. valuation
allowance. The release of valuation allowance includes
$9,242,000 and $3,548,000 in benefits that were credited to
additional paid-in capital
18
VALEANT
PHARMACEUTICALS INTERNATIONAL
NOTES TO
CONSOLIDATED CONDENSED FINANCIAL
STATEMENTS (Continued)
and goodwill, respectively. As of September 30, 2008, there
is insufficient objective evidence as to the timing and amount
of future U.S. 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 United States. Based on our historic
losses, we could not demonstrate that we would utilize these tax
benefits with sufficient objective evidence.
Our effective tax rate for the nine months ended
September 30, 2008 was affected by taxes provided on
repatriated and 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 and the sale of the WEEMEA business of $187,336,000
which we do not expect to be subject to tax in certain
jurisdictions. A benefit for income taxes of $146,000 was
recorded for the three months ended September 30, 2008,
comprising the following amounts (in thousands):
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
September 30,
|
|
|
|
2008
|
|
|
Release of reserves for U.S. liabilities upon settlement of
I.R.S. examination
|
|
$
|
(2,356
|
)
|
Reduction to withholding tax on unremitted earnings due to
restructuring
|
|
|
(1,997
|
)
|
Tax provision on current earnings outside the U.S
|
|
|
9,504
|
|
Benefit of current U.S. losses
|
|
|
(5,297
|
)
|
|
|
|
|
|
|
|
$
|
(146
|
)
|
|
|
|
|
|
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 United States. During the quarter
ended September 30, 2008, we recorded a pre-tax gain from
discontinued operations from the sale of our the WEEMEA
business. These gains were considered in determining the amount
of income tax benefit to be allocated to current year losses
from continuing operations in the United States. As a result, we
recorded income tax expense of $18,113,000 in discontinued
operations for the nine months ended September 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,
$16,924,000 was included in the provision for income taxes in
continuing operations for the nine months ended
September 30, 2008 based on an allocation of the full year
impact to the nine months ended September 30, 2008.
As of September 30, 2008, we had $45,688,000 of
unrecognized tax benefits (FIN 48), of which
$5,994,000 would reduce our effective tax rate, if
recognized. Of the total unrecognized tax benefits, $4,873,000
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. We believe it is
reasonably possible that $200,000 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
September 30, 2008, we had recorded $5,586,000 for interest
and $1,109,000 for penalties. We reversed $2,836,000 of accrued
interest and penalties during the quarter ended
September 30, 2008.
We are currently under audit by the IRS for the 2005 and 2006
tax years. In the third quarter of 2008, the
IRS examination of the U.S. income tax returns for the
years ended December 31, 2002 through 2004 was resolved. As
a result, the related unrecognized tax benefits were reversed in
the third quarter. The provision for income tax
19
VALEANT
PHARMACEUTICALS INTERNATIONAL
NOTES TO
CONSOLIDATED CONDENSED FINANCIAL
STATEMENTS (Continued)
was reduced by $2,356,000 related to interest and penalties. In
addition, the following accounts were affected: taxes payable
increased $2,678,000, income tax liability for uncertain tax
positions decreased $14,031,000 and net deferred tax assets
decreased $8,997,000. 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 United States. Our significant subsidiaries are open to
tax examinations for years ending in 2001 and later.
|
|
10.
|
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 September 30, 2008, we purchased
4,563,921 shares, for a total of $84,602,000. In total, we
have used $190,979,000 of the $300,000,000 authorized to
repurchase 11,466,600 shares as of September 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, Organization and Summary of
Significant Accounting Policies, 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 of 2008 resulted in a
$3,870,000 decrease in stock compensation expense comprising a
$782,000 reduction in cost of goods sold, a $987,000 reduction
in selling expenses, a $1,190,000 reduction in research and
development expenses, a $781,000 reduction in general and
administrative expenses and a $130,000 increase in income from
discontinued operations.
Also during the second quarter of 2008, we recognized a change
in estimate related to our estimated forfeiture rate for
share-based payments of $2,835,000 for forfeitures which
occurred in the second quarter of 2008. This change in estimate
related to forfeitures which occurred in the second quarter of
2008 resulted in a $218,000 reduction in cost of goods
sold, a $715,000 reduction in selling expenses, an $11,000
reduction in research and development expenses and a $1,891,000
reduction in general and administrative expenses.
20
VALEANT
PHARMACEUTICALS INTERNATIONAL
NOTES TO
CONSOLIDATED CONDENSED FINANCIAL
STATEMENTS (Continued)
A summary of stock compensation expense for our stock incentive
plans for the three and nine months ended September 30,
2008 and 2007, is presented below (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
Employee stock options
|
|
$
|
638
|
|
|
$
|
2,714
|
|
|
$
|
(3,484
|
)
|
|
$
|
8,854
|
|
Restricted stock units
|
|
|
1,693
|
|
|
|
368
|
|
|
|
3,416
|
|
|
|
1,092
|
|
Performance stock units
|
|
|
641
|
|
|
|
|
|
|
|
1,219
|
|
|
|
|
|
Employee stock purchase plan
|
|
|
57
|
|
|
|
79
|
|
|
|
190
|
|
|
|
158
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stock-based compensation expense
|
|
$
|
3,029
|
|
|
$
|
3,161
|
|
|
$
|
1,341
|
|
|
$
|
10,104
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Future stock compensation expense for restricted stock units and
stock option incentive awards outstanding as of
September 30, 2008 is as follows (in thousands):
|
|
|
|
|
Remainder of 2008
|
|
$
|
3,365
|
|
2009
|
|
|
8,360
|
|
2010
|
|
|
5,217
|
|
2011 and thereafter
|
|
|
1,119
|
|
|
|
|
|
|
|
|
$
|
18,061
|
|
|
|
|
|
|
|
|
11.
|
Commitments
and Contingencies
|
We are involved in several legal proceedings, including the
following matters:
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 in March 2006, 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.
21
VALEANT
PHARMACEUTICALS INTERNATIONAL
NOTES TO
CONSOLIDATED CONDENSED FINANCIAL
STATEMENTS (Continued)
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.
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 was removed to federal court in the Northern
District of Illinois, alleged 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. Valeant has been
dismissed from this case, which subsequently was settled by Eli
Lilly. 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 in the Circuit Court
of Jefferson Davis County, Mississippi, which has been removed
to federal court in the Southern District of Mississippi. On
August 27, 2008, we were served complaints in six separate
cases by plaintiffs Prentiss and Carol Harvey; Robert and
Barbara Branson; Dan and Mary Ellen Leach; Eugene and Bertha
Nelson; Beverly Polin; and Ira and Michael Price v. Eli
Lilly and Company and Valeant Pharmaceuticals International in
Superior Court, Orange County, California. On September 15,
2008, we were served a complaint in a case captioned Linda R.
OBrien v. Eli Lilly and Company, Valeant
Pharmaceuticals International, Amarin Corporation, plc, Amarin
Pharmaceuticals, Inc., Elan Pharmaceuticals, Inc., Athena
Neurosciences, Inc., Teva Pharmaceutical Industries, Ltd.,
Par Pharmaceutical Companies, Inc., and Ivax Corporation in
the Circuit Court of the 11th Judicial Circuit, Miami-Dade
County, Florida. We are in the process of defending these
matters. Eli Lilly, holder of the right granted by the Food and
Drug Administration (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 the settlement documents have
been duly
22
VALEANT
PHARMACEUTICALS INTERNATIONAL
NOTES TO
CONSOLIDATED CONDENSED FINANCIAL
STATEMENTS (Continued)
executed and submitted by the parties on August 12, 2008.
In settlement of Alfas alleged claims, we paid Alfa
$10,448,000 and agreed to pay a 10% royalty on future product
sales until the expiration of Alfas patent in 2009. On
October 14, 2008, this matter was resolved with the
approval of the joint writ/settlement by the Barcelona Court of
Appeal.
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 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 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 for the Central District of
California, 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 nine months
ended September 30, 2008 and 2007 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North America
|
|
$
|
63,740
|
|
|
$
|
65,295
|
|
|
$
|
190,723
|
|
|
$
|
196,504
|
|
International
|
|
|
49,011
|
|
|
|
54,290
|
|
|
|
123,536
|
|
|
|
145,394
|
|
Europe
|
|
|
40,430
|
|
|
|
30,596
|
|
|
|
116,883
|
|
|
|
89,162
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total product sales
|
|
|
153,181
|
|
|
|
150,181
|
|
|
|
431,142
|
|
|
|
431,060
|
|
Alliance revenue (including ribavirin royalties)
|
|
|
15,243
|
|
|
|
14,078
|
|
|
|
42,821
|
|
|
|
69,503
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated revenues
|
|
$
|
168,424
|
|
|
$
|
164,259
|
|
|
$
|
473,963
|
|
|
$
|
500,563
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North America
|
|
$
|
18,182
|
|
|
$
|
21,139
|
|
|
$
|
53,629
|
|
|
$
|
64,934
|
|
International
|
|
|
10,624
|
|
|
|
12,726
|
|
|
|
15,039
|
|
|
|
21,340
|
|
Europe
|
|
|
15,688
|
|
|
|
8,855
|
|
|
|
31,639
|
|
|
|
29,275
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
44,494
|
|
|
|
42,720
|
|
|
|
100,307
|
|
|
|
115,549
|
|
Corporate expenses(1)
|
|
|
(16,432
|
)
|
|
|
(20,220
|
)
|
|
|
(40,078
|
)
|
|
|
(55,706
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal
|
|
|
28,062
|
|
|
|
22,500
|
|
|
|
60,229
|
|
|
|
59,843
|
|
Restructuring, asset impairments and dispositions
|
|
|
(3,527
|
)
|
|
|
|
|
|
|
(4,294
|
)
|
|
|
(18,074
|
)
|
Research and development(2)
|
|
|
(8,520
|
)
|
|
|
(12,462
|
)
|
|
|
(36,978
|
)
|
|
|
(3,962
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated segment operating income
|
|
|
16,015
|
|
|
|
10,038
|
|
|
|
18,957
|
|
|
|
37,807
|
|
Interest income
|
|
|
3,066
|
|
|
|
3,545
|
|
|
|
13,026
|
|
|
|
12,748
|
|
Interest expense
|
|
|
(6,255
|
)
|
|
|
(10,395
|
)
|
|
|
(25,585
|
)
|
|
|
(32,221
|
)
|
Loss on early extinguishment of debt
|
|
|
(14,882
|
)
|
|
|
|
|
|
|
(14,882
|
)
|
|
|
|
|
Other, net
|
|
|
(1,555
|
)
|
|
|
(887
|
)
|
|
|
(3,384
|
)
|
|
|
2,503
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations before income taxes and
minority interest
|
|
$
|
(3,611
|
)
|
|
$
|
2,301
|
|
|
$
|
(11,868
|
)
|
|
$
|
20,837
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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 expense above represents the
operating 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
September 30, 2008 and December 31, 2007 (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
December 31,
|
|
Total Assets
|
|
2008
|
|
|
2007
|
|
|
North America
|
|
$
|
331,391
|
|
|
$
|
353,395
|
|
International
|
|
|
142,095
|
|
|
|
200,955
|
|
Europe
|
|
|
274,758
|
|
|
|
247,903
|
|
Corporate
|
|
|
486,503
|
|
|
|
319,336
|
|
Research and development division
|
|
|
40,380
|
|
|
|
52,201
|
|
Discontinued operations
|
|
|
|
|
|
|
320,472
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,275,127
|
|
|
$
|
1,494,262
|
|
|
|
|
|
|
|
|
|
|
During the three and nine months ended September 30, 2008
and 2007, two customers each accounted for more than 10% of
consolidated product sales. Sales to McKesson Corporation and
its affiliates and to Cardinal Health in the United States,
Canada and Mexico are detailed in the following table (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
Sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
McKesson
|
|
$
|
29,280
|
|
|
$
|
30,760
|
|
|
$
|
78,533
|
|
|
$
|
109,949
|
|
Cardinal
|
|
|
15,887
|
|
|
|
17,638
|
|
|
|
47,973
|
|
|
|
53,236
|
|
Percentage of total product sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
McKesson
|
|
|
19
|
%
|
|
|
20
|
%
|
|
|
18
|
%
|
|
|
26
|
%
|
Cardinal
|
|
|
10
|
%
|
|
|
12
|
%
|
|
|
11
|
%
|
|
|
12
|
%
|
We report the royalties received from the sale of ribavirin by
Schering-Plough and Roche separately from our 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 nine months ended
September 30, 2008 and 2007 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
Ribavirin royalty
|
|
$
|
15,243
|
|
|
$
|
14,078
|
|
|
$
|
42,771
|
|
|
$
|
50,253
|
|
Licensing payment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
19,200
|
|
Other
|
|
|
|
|
|
|
|
|
|
|
50
|
|
|
|
50
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total alliance revenue
|
|
$
|
15,243
|
|
|
$
|
14,078
|
|
|
$
|
42,821
|
|
|
$
|
69,503
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In the nine months ended September 30, 2007, we received
$19,200,000 from Schering-Plough for the licensing of
pradefovir. Alliance revenue for the nine months ended
September 30, 2008 and 2007 also included $50,000 payments
for a license to certain intellectual property assets.
25
VALEANT
PHARMACEUTICALS INTERNATIONAL
NOTES TO
CONSOLIDATED CONDENSED FINANCIAL
STATEMENTS (Continued)
On October 15, 2008, Valeant and its wholly owned
subsidiary, CL Acquisition Corp., completed an Agreement and
Plan of Merger (the Merger Agreement) with Coria
Laboratories, Ltd. (Coria), DFB Pharmaceuticals,
Inc. and the other shareholders of Coria. Under the terms of the
Merger Agreement, Valeant paid $95,000,000 in cash at the
closing, a portion of which was deposited into escrows for
certain potential liabilities, for all outstanding shares of
capital stock of Coria. The purchase price is subject to certain
post-closing adjustments. We will account for the acquisition as
a business combination under SFAS No. 141, Business
Combinations. In the fourth quarter of 2008, we will
allocate the purchase price to the net assets acquired.
Goodwill, if any, arising from the acquisition will not be
deductible for tax purposes.
On August 27, 2008, we entered into a worldwide License and
Collaboration Agreement (the Collaboration
Agreement) with Glaxo Group Limited, a wholly owned
subsidiary of GlaxoSmithKline plc, (GSK), to
collaborate with GSK to develop and commercialize retigabine, an
investigational drug for treatment of adult epilepsy patients
with refractory partial onset seizures (retigabine).
The Collaboration Agreement became effective on October 17,
2008.
Pursuant to the terms of the Collaboration Agreement, we granted
co-development rights and worldwide commercialization rights to
GSK. We have agreed to collaborate with GSK on the development
and marketing of retigabine in the United States, Australia, New
Zealand, Canada and Puerto Rico (the Collaboration
Territory). In addition, we granted GSK an exclusive
license to develop and commercialize retigabine in countries
outside of the Collaboration Territory and certain backup
compounds to retigabine worldwide.
GSK paid us $125,000,000 in upfront fees upon effectiveness of
the transaction. In addition, GSK has agreed to pay us up to
$545,000,000 based upon the achievement of certain regulatory,
commercialization and sales milestones and the development of
additional indications for retigabine. GSK has also agreed to
pay us up to an additional $150,000,000 if certain regulatory
and commercialization milestones are achieved for backup
compounds to retigabine. We will share up to 50% of net profits
within the United States, Australia, New Zealand, Canada and
Puerto Rico, and will receive up to a 20% royalty on net sales
of retigabine outside those regions. In addition, if backup
compounds are developed and commercialized by GSK, GSK will pay
us royalties of up to 20% of net sales of products based
upon such backup compounds.
We will jointly fund research and development and
pre-commercialization expenses for retigabine with GSK. Our
share of such expenses in the Collaboration Territory is limited
to $100,000,000, provided that GSK will be entitled to credit
our share of any such expenses in excess of such amount against
payments owed to us under the Collaboration Agreement. GSK will
solely fund the development of any backup compound and will be
responsible for all expenses outside of the Collaboration
Territory. Following the launch of a retigabine product, we will
share equally operating expenses with respect to retigabine in
the Collaboration Territory.
GSK has the right to terminate the Collaboration Agreement at
any time prior to the receipt of the approval by the United
States Food and Drug Administration of a new drug application
(NDA) for a retigabine product, which right may be
irrevocably waived at any time by GSK. The period of time prior
to such termination or waiver is referred to as the Review
Period. If GSK terminates the Collaboration Agreement
prior to the expiration of the Review Period, we would be
required to refund to GSK up to $95,000,000 of the upfront fee;
however, the refundable portion will be reduced for every
quarter that the Collaboration Agreement is in effect. Unless
otherwise terminated, the Collaboration Agreement will continue
on a
country-by-country
basis until GSK has no remaining payment obligations with
respect to such country.
Our rights to retigabine are subject to an Asset Purchase
Agreement between Meda Pharma GmbH & Co.
KG (Meda Pharma), the successor to Viatris
GmbH & Co. KG, and Xcel Pharmaceuticals, Inc., which
was acquired by Valeant in 2005 (the Meda Pharma
Agreement). Under the terms of the Meda Pharma Agreement,
we are required to pay Meda Pharma milestone payments of
$8,000,000 upon acceptance of the filing of an NDA and
$6,000,000 upon approval of the NDA for retigabine. We are also
required to pay royalty rates which, depending on
26
VALEANT
PHARMACEUTICALS INTERNATIONAL
NOTES TO
CONSOLIDATED CONDENSED FINANCIAL
STATEMENTS (Continued)
the geographic market and sales levels, vary from 3% to 8% of
net sales. Under the Collaboration Agreement with GSK, these
royalties will be treated in the Collaboration Territory as an
operating expense and shared by GSK and the Company pursuant to
the profit sharing percentage then in effect. In the rest of the
world, we will be responsible for the payment of these royalties
to Meda Pharma from the royalty payments we receive from GSK. We
are required to make additional milestone payments to Meda
Pharma of up to $5,250,000 depending on certain licensing
activity. Upon effectiveness of the Collaboration Agreement with
GSK, we paid Meda Pharma a milestone payment of $3,750,000 on
October 30, 2008. An additional payment of $1,500,000 could
become due if a certain indication for retigabine is developed
and licensed to GSK.
We anticipate that up to $100,000,000 of the upfront payment
will be recognized as an offset to the cost of our research and
development and pre commercialization obligations, subject to
the limitations imposed by GSKs right to terminate the
Collaboration Agreement during the Review Period. We expect to
complete our research and development and pre commercialization
obligations by mid to late 2010. The remainder of the upfront
payment will be recognized as alliance revenue over the same
period.
On October 24, 2008, we signed an agreement with GSK, for
the promotion of
Diastat®
and
Diastat®
AcuDial. Under the terms of the agreement, GSK will exclusively
promote Diastat and Diastat AcuDial to U.S. physicians in
2009, with an option to extend the term by mutual agreement. We
will continue to record the sales of Diastat and Diastat AcuDial
and will be responsible for ongoing brand development.
In October 2008, our board of directors approved a plan to
further eliminate 174 employee positions in the
U.S. in connection with the 2008 Restructuring Plan across
commercial, research and development and general and
administrative positions. Severance costs of approximately
$6 million will be recorded in connection with this phase
of the restructuring.
In October 2008, our board of directors authorized us to
repurchase up to $200 million of our outstanding common
stock or debt. This securities repurchase program is in addition
to the share repurchase program authorized in June 2007 and June
2008 to repurchase up to $300 million of outstanding common
stock.
As of November 3, 2008, we have used a total of
$275,922,000 to purchase 16,293,784 shares in the stock
repurchase program authorized by our board of directors in June
2007. For more details on this program, see Note 10, Common
Stock and Share Compensation.
27
|
|
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 second quarter of 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 Europe, formerly EMEA (Europe,
Middle East and Africa), prior to the sale of the WEEMEA
business (Western and Eastern 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, Canada and Australia and
on the branded generics markets in Europe (Poland, Hungary,
Czech Republic and Slovakia) and Latin America (Mexico and
Brazil).
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. On October 17, 2008, we completed a
worldwide License and Collaboration Agreement (the
Collaboration Agreement) with Glaxo Group Limited, a
wholly owned subsidiary of GlaxoSmithKline plc,
(GSK), to collaborate with GSK to develop and
commercialize retigabine. See further discussion of the
Collaboration Agreement in Products in Development section
below. We are identifying potential partnering opportunities for
taribavirin.
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.
28
On September 11, 2008, we sold our business operations
located in Western and Eastern Europe, Middle East and Africa to
Meda AB, an international specialty pharmaceutical company
located in Stockholm, Sweden (Meda). Meda acquired
our operating 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 our
business in Poland, Hungary, Slovakia and the Czech Republic.
Under the terms of the agreement, we received initial cash
proceeds of $428,432,000, which will be reduced by approximately
$11,757,000 based upon the estimated levels of cash,
indebtedness and working capital as of the closing date, subject
to certain further post-closing adjustments.
On October 15, 2008, we completed an Agreement and Plan of
Merger with Coria Laboratories, Ltd. (Coria), DFB
Pharmaceuticals, Inc. and the other shareholders of Coria. We
paid $95,000,000 in cash at the closing, a portion of which was
deposited into escrows for certain potential liabilities, for
all outstanding shares of capital stock of Coria. The purchase
price is subject to certain post-closing adjustments.
Pharmaceutical
Products
Product sales from our pharmaceutical segments accounted for 91%
of our total revenue from continuing operations for the three
and nine months ended September 30, 2008, compared with 91%
and 86% for the corresponding periods in 2007, and increased
$3,000,000 (2%) and $82,000 (0%) for the three and nine months
ended September 30, 2008, respectively, compared with the
corresponding periods in 2007.
The 2% increase in pharmaceutical sales for the three months
ended September 30, 2008 was due to a 7% benefit
from currency fluctuations, offset in part by a 1% reduction in
volume and a 4% price decrease. Pharmaceutical sales for the
nine months ended September 30, 2008 were flat due to an 8%
benefit from currency fluctuations offset by an 8% decline in
volume. The decline in volume in the nine months ended
September 30, 2008 resulted in part 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 volume is also a result of the
divestment of operations in Asia, Argentina and Uruguay, which
resulted in revenue decreases of $6,357,000 and $17,334,000 in
the three and nine months ended September 30, 2008,
respectively. Product price increases in the three and
nine-month periods were offset by a $7,665,000 increase in
estimated reserves for future product returns to reflect the
effect of recent actual product returns attributable to product
changes implemented 3 to 4 years ago.
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 for the Central District of
California, 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.
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 $23,239,000 and $75,100,000 for the
three and nine months ended September 30, 2008,
respectively, compared
29
with $24,865,000 and $68,528,000 for the corresponding periods
in 2007, reflecting a decrease of $1,626,000 (7%) in the three
months ended September 30, 2008 and an increase of
$6,572,000 (10%) in the nine months ended September 30,
2008. The decrease in the three-month period is primarily due to
the completion of the retigabine clinical trials in the first
half of 2008, offset in part by expenditures for the retigabine
New Drug Application (NDA) submission and the
retigabine open label study. The increase in the nine-month
period resulted from the expenditures for the retigabine NDA
submission, clinical development program and inventory
production for validation testing. See the Products in
Development section below for further discussion of the
retigabine clinical development program.
Alliance
Revenue
Alliance revenue for the three months and nine months ended
September 30, 2008 was $15,243,000 and $42,821,000,
respectively, compared with $14,078,000 and $69,503,000 for the
corresponding periods in 2007. Alliance revenue in the three
months ended September 30, 2008 and 2007 consisted
exclusively of ribavirin royalty revenue. Alliance revenue for
the nine months ended September 30, 2007 included a
$19,200,000 pradefovir licensing payment from Schering-Plough.
Alliance revenue in the nine months ended September 30,
2008 and 2007 included licensing payments of $50,000
for a license to certain intellectual property assets.
Ribavirin royalty revenues increased $1,165,000 (8%) and
accounted for 9% of our total revenues from continuing
operations for the three months ended September 30, 2008
and 2007. Ribavirin royalty revenues decreased $7,482,000 (15%)
and accounted for 9% of our total revenues from continuing
operations for the nine months ended September 30,
2008 as compared with 10% for the corresponding period in 2007.
The increase in ribavirin royalties in the three-month period
ended September 30, 2008 reflects
Schering-Ploughs
increase in market share in ribavirin sales in Japan. The
decrease in ribavirin royalties in the nine-month period
reflects Schering-Ploughs global 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, Canada, and Australia and the
branded generics markets in Europe (Poland, Hungary, Czech
Republic and Slovakia) and Latin America (Mexico and Brazil) and
intend to stop organizing our company by geographic regions. In
the three and nine months ended September 30, 2008;
however, we were still operating in our three reportable
pharmaceutical segments, comprising pharmaceuticals operations
in North America, International, and Europe. 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 12, Business Segments, of the notes to consolidated
condensed financial statements included elsewhere in this
quarterly report.
30
The following tables compare 2008 and 2007 revenues by
reportable segments and operating expenses for the three and
nine months ended September 30, 2008 and 2007 (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
Increase/
|
|
|
Percent
|
|
|
|
2008
|
|
|
2007
|
|
|
(Decrease)
|
|
|
Change
|
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North America
|
|
$
|
63,740
|
|
|
$
|
65,295
|
|
|
$
|
(1,555
|
)
|
|
|
(2
|
)%
|
International
|
|
|
49,011
|
|
|
|
54,290
|
|
|
|
(5,279
|
)
|
|
|
(10
|
)%
|
Europe
|
|
|
40,430
|
|
|
|
30,596
|
|
|
|
9,834
|
|
|
|
32
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total product sales
|
|
|
153,181
|
|
|
|
150,181
|
|
|
|
3,000
|
|
|
|
2
|
%
|
Alliance revenue (including ribavirin royalties)
|
|
|
15,243
|
|
|
|
14,078
|
|
|
|
1,165
|
|
|
|
8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
168,424
|
|
|
|
164,259
|
|
|
|
4,165
|
|
|
|
3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs and Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of goods sold (excluding amortization)
|
|
|
42,698
|
|
|
|
41,848
|
|
|
|
850
|
|
|
|
2
|
%
|
Selling expenses
|
|
|
45,343
|
|
|
|
46,950
|
|
|
|
(1,607
|
)
|
|
|
(3
|
)%
|
General and administrative expenses
|
|
|
26,114
|
|
|
|
26,534
|
|
|
|
(420
|
)
|
|
|
(2
|
)%
|
Research and development costs
|
|
|
23,239
|
|
|
|
24,865
|
|
|
|
(1,626
|
)
|
|
|
(7
|
)%
|
Restructuring, asset impairments and dispositions
|
|
|
3,527
|
|
|
|
|
|
|
|
3,527
|
|
|
|
|
|
Amortization expense
|
|
|
11,488
|
|
|
|
14,024
|
|
|
|
(2,536
|
)
|
|
|
(18
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
$
|
16,015
|
|
|
$
|
10,038
|
|
|
$
|
5,977
|
|
|
|
60
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit on product sales (excluding amortization)
|
|
$
|
110,483
|
|
|
$
|
108,333
|
|
|
$
|
2,150
|
|
|
|
2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin on product sales, excluding amortization
|
|
|
72
|
%
|
|
|
72
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit on product sales (net of amortization)
|
|
$
|
100,440
|
|
|
$
|
97,114
|
|
|
$
|
3,326
|
|
|
|
3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin on product sales, net of amortization
|
|
|
66
|
%
|
|
|
65
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
31
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
Increase/
|
|
|
Percent
|
|
|
|
2008
|
|
|
2007
|
|
|
(Decrease)
|
|
|
Change
|
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North America
|
|
$
|
190,723
|
|
|
$
|
196,504
|
|
|
$
|
(5,781
|
)
|
|
|
(3
|
)%
|
International
|
|
|
123,536
|
|
|
|
145,394
|
|
|
|
(21,858
|
)
|
|
|
(15
|
)%
|
Europe
|
|
|
116,883
|
|
|
|
89,162
|
|
|
|
27,721
|
|
|
|
31
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total product sales
|
|
|
431,142
|
|
|
|
431,060
|
|
|
|
82
|
|
|
|
0
|
%
|
Alliance revenue (including ribavirin royalties)
|
|
|
42,821
|
|
|
|
69,503
|
|
|
|
(26,682
|
)
|
|
|
(38
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
473,963
|
|
|
|
500,563
|
|
|
|
(26,600
|
)
|
|
|
(5
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs and Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of goods sold (excluding amortization)
|
|
|
126,327
|
|
|
|
113,084
|
|
|
|
13,243
|
|
|
|
12
|
%
|
Selling expenses
|
|
|
134,040
|
|
|
|
142,892
|
|
|
|
(8,852
|
)
|
|
|
(6
|
)%
|
General and administrative expenses
|
|
|
77,629
|
|
|
|
77,631
|
|
|
|
(2
|
)
|
|
|
0
|
%
|
Research and development costs
|
|
|
75,100
|
|
|
|
68,528
|
|
|
|
6,572
|
|
|
|
10
|
%
|
Restructuring, asset impairments and dispositions
|
|
|
4,294
|
|
|
|
18,074
|
|
|
|
(13,780
|
)
|
|
|
(76
|
)%
|
Amortization expense
|
|
|
37,616
|
|
|
|
42,547
|
|
|
|
(4,931
|
)
|
|
|
(12
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
$
|
18,957
|
|
|
$
|
37,807
|
|
|
$
|
(18,850
|
)
|
|
|
(50
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit on product sales (excluding amortization)
|
|
$
|
304,815
|
|
|
$
|
317,976
|
|
|
$
|
(13,161
|
)
|
|
|
(4
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin on product sales, excluding amortization
|
|
|
71
|
%
|
|
|
74
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit on product sales (net of amortization)
|
|
$
|
273,371
|
|
|
$
|
284,404
|
|
|
$
|
(11,033
|
)
|
|
|
(4
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin on product sales, net of amortization
|
|
|
63
|
%
|
|
|
66
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues: In the North America pharmaceuticals
segment, revenues for the three months ended September 30,
2008 were $63,740,000, compared with $65,295,000 for the
corresponding period in 2007, representing a decrease of
$1,555,000 (2%). Revenues for the nine months ended
September 30, 2008 were $190,723,000 compared with
$196,504,000 for the corresponding period in 2007, a decrease of
$5,781,000 (3%). In the three-month period ended
September 30, 2008, the 2% decrease in North America
pharmaceuticals sales resulted from a 1% reduction in volume and
a 1% price decrease, partly offset by a negligible benefit from
the appreciation of the Canadian dollar. In the nine-month
period ended September 30, 2008, the 3% decrease in sales
resulted from a 8% decrease in volume, partly offset by a 3%
price increase and a 2% benefit from the appreciation of the
Canadian dollar. The reported decline in volume in the nine
months ended September 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 revenue reduction in the three-month period was
primarily attributable to reductions in net sales of Diastat and
Efudex, partly offset by increases in net sales of Kinerase and
Cesamet, which is sold exclusively in Canada. The decrease in
Efudex revenue is attributable to the introduction of a
competing generic product in 2008. The revenue reduction in the
nine-month period included reductions in net sales of Diastat,
Kinerase and other products, offset in part by increases in
Cesamet and Efudex. Price increases in the three and nine months
ended September 30, 2008, were offset by a $7,665,000
increase in estimated reserves for future product returns to
reflect the effect of recent actual product returns attributable
to product changes implemented 3 to 4 years ago. The
increased strength of the Canadian dollar relative to the
U.S. dollar resulted in revenue increases of $107,000 and
$3,224,000 in the three and nine months ended September 30,
2008, respectively.
In the International pharmaceuticals segment, revenues for the
three months ended September 30, 2008 were $49,011,000
compared with $54,290,000 for the corresponding period in 2007,
a decrease of $5,279,000 (10%).
32
Revenues for the nine months ended September 30, 2008 were
$123,536,000 compared with $145,394,000 for the corresponding
period in 2007, representing a decrease of $21,858,000 (15%). In
the three-month period ended September 30, 2008, the 10%
decrease in International pharmaceuticals sales resulted from an
8% decrease in volume and an 8% price decrease, partly offset by
a 6% benefit from currency fluctuations. In the nine-month
period ended September 30, 2008, the 15% decrease in sales
resulted from an 18% decrease in volume and a 2% price decrease,
partly offset by a 5% benefit from currency. The volume decline
in the International segment in the three and nine-month periods
relates primarily 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 sale of these subsidiaries resulted in
revenue decreases of $6,357,000 and $17,334,000 in the three and
nine-month periods, respectively. The reported decline in volume
in the nine months ended September 30, 2008 also resulted
in part from a planned reduction of shipments to wholesaler
customers in Mexico to reduce the amount of product in the
wholesale channel. The positive effects of foreign currency
exchange rates resulted in revenue increases of $3,135,000 and
$7,843,000 in the three and nine months ended September 30,
2008, respectively.
In the Europe pharmaceuticals segment, revenues for the three
months ended September 30, 2008 were $40,430,000, compared
with $30,596,000 for the corresponding period in 2007, an
increase of $9,834,000 (32%). Revenues for the nine months ended
September 30, 2008 were $116,883,000 compared with
$89,162,000 for the corresponding period in 2007, an increase of
$27,721,000 (31%). In the three-month period ended
September 30, 2008, the 32% increase in Europe revenues
resulted from a 24% benefit from currency and an 11% increase in
volume, partly offset by a 3% decrease in prices. In the
nine-month period ended September 30, 2008, the
31% increase in revenues resulted from a 25% benefit from
currency and a 7% increase in volume, partly offset by a 1%
decrease in price. The appreciation of foreign currencies
relative to the U.S. Dollar contributed $7,443,000 and
$22,431,000 to the reported increase in sales revenue in the
three and nine months ended September 30, 2008,
respectively.
Gross Profit Margin: Gross profit margin on
product sales, net of pharmaceutical product amortization, was
66% and 63% for the three and nine months ended
September 30, 2008, respectively, compared with 65% and
66% for the corresponding periods in 2007, respectively.
The pharmaceutical product amortization included in this
calculation of gross margin excluded the amortization of the
ribavirin intangible. The pharmaceutical product amortization
was $10,043,000 and $31,444,000 for the three and nine months
ended September 30, 2008, respectively, compared with
$11,219,000 and $33,572,000 for the corresponding periods in
2007, respectively.
Gross profit margin on product sales (excluding pharmaceutical
product amortization) was 72% and 71% for the three and nine
months ended September 30, 2008, respectively, compared
with 72% and 74% for the three months and nine months ended
September 30, 2007, respectively.
In the three and nine months ended September 30, 2008, we
recorded inventory obsolescence charges of $2,216,000 and
$20,214,000, respectively, resulting primarily from decisions to
cease promotion of or discontinue certain products, decisions to
discontinue certain manufacturing transfers, and product quality
failures. These inventory obsolescence charges were recorded in
cost of goods sold, in accordance with EITF Issue
No. 96-9,
Classification of Inventory Markdowns and Other Costs
Associated with a Restructuring.
Declining gross margins in the nine months ended
September 30, 2008 were offset in part by the reduction in
costs of goods sold related to a $782,000 credit from our
historical underestimation of stock option forfeitures and a
$218,000 credit related to the stock option forfeitures
recognized in the second quarter of 2008.
Selling Expenses: Selling expenses were
$45,343,000 and $134,040,000 for the three and nine months ended
September 30, 2008, respectively, compared with $46,950,000
and $142,892,000 for the corresponding periods in 2007,
respectively, resulting in decreases of $1,607,000 (3%) and
$8,852,000 (6%), respectively. As a percent of product sales,
selling expenses were 30% and 31% in the three and nine months
ended September 30, 2008, respectively, compared with 31%
and 33% for the corresponding periods in 2007, respectively. The
decrease in selling expenses for the three and nine months ended
September 30, 2008 primarily reflects savings from our
restructuring initiatives. Selling expenses in the nine months
ended September 30, 2008 were also favorably impacted by
the $987,000 credit related to our historical underestimation of
stock option forfeitures and the $715,000 credit related to
stock option forfeitures recognized in the second quarter of
2008.
33
General and Administrative Expenses: General
and administrative expenses were $26,114,000 and $77,629,000 for
the three and nine months ended September 30, 2008,
respectively, compared with $26,534,000 and $77,631,000 for the
corresponding periods in 2007, respectively, resulting in
decreases of $420,000 (2%) and $2,000 (0%), respectively. The
decreases in the three and nine months ended
September 30, 2008 primarily reflects savings from our
restructuring initiatives, offset in the three and nine-month
periods by a $1,789,000 write off of unrecoverable value-added
tax receivable in Mexico arising in 2002 through 2004. The
restructuring initiatives were additionally offset in the
nine-month period by the recognition of an
other-than-temporary
impairment of $3,587,000 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 Pharmaceuticals ANDA matter, offset in part by a
$2,672,000 credit related to stock-based compensation
forfeitures. This $2,672,000 credit is primarily due to a
reduction of $781,000 in expenses related to forfeitures which
occurred in 2006, 2007 and the first quarter of 2008 and a
$1,891,000 reduction in expenses related to forfeitures which
occurred in the second quarter of 2008. As a percent of product
sales, general and administrative expenses were 17% and 18% for
the three and nine months ended September 30, 2008,
respectively, compared with 18% in the corresponding periods in
2007.
Research and Development Costs: Research and
development expenses were $23,239,000 and $75,100,000 for
the three and nine months ended September 30, 2008,
respectively, compared with $24,865,000 and $68,528,000 for the
corresponding periods in 2007, respectively, reflecting a
decrease of $1,626,000 (7%) in the three months ended
September 30, 2008 and an increase of $6,572,000 (10%) in
the nine months ended September 30, 2008. The decrease in
the three-month period is primarily due to the completion of the
retigabine clinical trials in the first half of 2008, offset in
part by expenditures for the retigabine NDA submission. The
increase in the nine-month period resulted from the expenditures
for the retigabine NDA submission, clinical development program
and 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 nine months ended September 30,
2008 were also offset in part by a $1,190,000 credit related to
our historical underestimation of stock option forfeitures and
an $11,000 credit related to stock option forfeitures recognized
in the second quarter of 2008.
Restructuring, Asset Impairments and Dispositions:
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, Canada and Australia and on
the branded generics markets in Europe (Poland, Hungary, Czech
Republic and Slovakia) and Latin America (Mexico and Brazil).
Our restructuring plans include actions 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. During the third quarter of 2008, we
completed the sale of the WEEMEA business operations to Meda, as
discussed in Note 5, Discontinued Operations. In the fourth
quarter of 2008, we also completed a worldwide License and
Collaboration Agreement with Glaxo Group Limited to develop and
commercialize retigabine and completed an Agreement and Plan of
Merger with Coria Laboratories Ltd., as discussed in
Note 14, Subsequent Events.
On August 4, 2008, we signed an agreement to sell the
WEEMEA business to Meda and completed the sale on
September 11, 2008. We recorded a gain of $178,506,000 in
discontinued operations from the sale of the WEEMEA business,
net of charges for professional fees, severance costs and income
taxes.
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
34
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 and the three months ended September 30,
2008, we recorded $1,017,000 and $829,000, respectively, of net
asset adjustments and additional closing costs resulting in a
reduced gain of $35,076,000 on the transaction. We expect to
receive additional proceeds of approximately $3,841,000 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 $3,527,000 in the three months ended September 30, 2008
included the $829,000 of net asset adjustments and additional
closing costs recorded as reductions of the gain originally
recorded in the three months ended March 31, 2008 in the
Invida transaction and $220,000 of severance charges for a total
of 16 affected employees. The charge also included $1,511,000
for professional service fees related to the strategic review of
our business, $694,000 of contract termination costs and
$273,000 of other cash costs.
The net restructuring, asset impairments and dispositions charge
of $4,294,000 in the nine months ended September 30, 2008
included $12,290,000 of employee severance costs for a total of
160 affected employees who were part of the supply, selling,
general and administrative and research and development
workforce in the United States, Mexico and Brazil. The
charges also included $9,774,000 for professional service fees
related to our strategic review of our business, $694,000 of
contract termination costs and $562,000 of other cash costs.
Additional amounts incurred included 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 $35,076,000
in the transaction with Invida.
The following table summarizes the restructuring costs recorded
in the three and nine months ended September 30, 2008 (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
Three Months
|
|
|
Nine Months
|
|
|
|
Ended
|
|
|
Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
2008 Restructuring Program
|
|
2008
|
|
|
2008
|
|
|
Cash-related charges:
|
|
|
|
|
|
|
|
|
Employee severances (160 employees, cumulatively)
|
|
$
|
220
|
|
|
$
|
12,290
|
|
Professional services, contract cancellation and other cash costs
|
|
|
2,478
|
|
|
|
11,030
|
|
|
|
|
|
|
|
|
|
|
Subtotal: cash charges
|
|
|
2,698
|
|
|
|
23,320
|
|
Stock compensation
|
|
|
|
|
|
|
4,778
|
|
Impairment of long-lived assets
|
|
|
|
|
|
|
8,346
|
|
Loss on sale of long-lived assets
|
|
|
|
|
|
|
2,926
|
|
|
|
|
|
|
|
|
|
|
Subtotal: non-cash charges
|
|
|
|
|
|
|
16,050
|
|
|
|
|
|
|
|
|
|
|
Subtotal: restructuring expenses
|
|
|
2,698
|
|
|
|
39,370
|
|
|
|
|
|
|
|
|
|
|
Gain on Invida transaction
|
|
|
829
|
|
|
|
(35,076
|
)
|
|
|
|
|
|
|
|
|
|
Restructurings, asset impairments and dispositions
|
|
$
|
3,527
|
|
|
$
|
4,294
|
|
|
|
|
|
|
|
|
|
|
In the three and nine months ended September 30, 2008, we
recorded inventory obsolescence charges of $2,216,000 and
$20,214,000, respectively, resulting primarily from decisions to
cease promotion of or discontinue certain products, decisions to
discontinue certain manufacturing transfers and product quality
failures. These inventory obsolescence charges were recorded in
cost of goods sold, in accordance with EITF Issue
No. 96-9,
Classification of Inventory Markdowns and Other Costs
Associated with a Restructuring.
35
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 2006 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 2006 Restructuring 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.
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.
We did not record a restructuring provision in the three months
ended September 30, 2007. In the nine months ended
September 30, 2007, we recorded charges of $18,074,000
related to the 2006 Restructuring.
The following table summarizes the restructuring costs recorded
in the three and nine months ended September 30, 2007 (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
Three Months
|
|
|
Nine Months
|
|
|
|
Ended
|
|
|
Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
2006 Restructuring Program
|
|
2007
|
|
|
2007
|
|
|
Employee severances (417 employees, cumulatively)
|
|
$
|
|
|
|
$
|
3,788
|
|
Contract cancellation and other cash costs
|
|
|
|
|
|
|
2,076
|
|
|
|
|
|
|
|
|
|
|
Subtotal: cash charges
|
|
|
|
|
|
|
5,864
|
|
Write-off of accumulated foreign currency translation adjustments
|
|
|
|
|
|
|
2,891
|
|
Impairment of manufacturing and research facilities
|
|
|
|
|
|
|
9,319
|
|
|
|
|
|
|
|
|
|
|
Subtotal: non-cash charges
|
|
|
|
|
|
|
12,210
|
|
|
|
|
|
|
|
|
|
|
Restructurings, asset impairments and dispositions
|
|
$
|
|
|
|
$
|
18,074
|
|
|
|
|
|
|
|
|
|
|
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. As of September 30, 2008, the
restructuring accrual for the 2006 Restructuring was $1,000,000
and relates to ongoing contractual payments to Legacy
Pharmaceuticals International relating to the sale of our former
site in Puerto Rico. These payment obligations last until
June 30, 2009.
36
As of September 30, 2008, the restructuring accrual for the
2008 Restructuring was $13,243,000 and 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, June 30, 2008
|
|
$
|
1,375
|
|
Cash paid
|
|
|
(375
|
)
|
|
|
|
|
|
Restructuring accrual, September 30, 2008
|
|
$
|
1,000
|
|
|
|
|
|
|
2008 Restructuring: Reconciliation of Cash Payments and
Accruals
|
|
|
|
|
Restructuring accrual, June 30, 2008
|
|
$
|
11,799
|
|
Charges to earnings in continuing operations
|
|
|
2,698
|
|
Charges to earnings in discontinued operations
|
|
|
11,202
|
|
Cash paid
|
|
|
(12,456
|
)
|
|
|
|
|
|
Restructuring accrual, September 30, 2008
|
|
$
|
13,243
|
|
|
|
|
|
|
Amortization: Amortization expense was
$11,488,000 and $37,616,000 for the three and nine months ended
September 30, 2008, respectively, compared with $14,024,000
and $42,547,000 for the corresponding periods in 2007,
respectively, resulting in decreases of $2,536,000 (18%) and
$4,931,000 (12%), 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 was fully amortized as of
September 30, 2008.
Other Income (Expense), Net, Including Translation and
Exchange: Other income (expense), net, including
translation and exchange was expense of $1,555,000 and
$3,384,000 for the three and nine months ended
September 30, 2008, respectively, compared with expense of
$887,000 and income of $2,503,000 for the corresponding periods
in 2007, respectively. These increases in expense resulted
primarily from the depreciation of the U.S. Dollar relative
to the Polish Zloty and other foreign currencies.
Loss on Early Extinguishment of Debt: Loss on
early extinguishment of debt of $14,882,000 in the three and
nine months ended September 30, 2008 resulted from the July
2008 redemption of our 7% Senior Notes and includes
redemption premium of $10,500,000, unamortized loan costs of
$2,842,000 and an interest rate swap agreement termination fee
of $1,540,000.
Interest Expense, Net: Interest expense, net
of interest income was $3,189,000 and $12,559,000 in the three
and nine months ended September 30, 2008, respectively,
compared with $6,850,000 and $19,473,000 for the corresponding
periods in 2007, respectively. Interest expense net of interest
income decreased $3,661,000 (53%) and $6,914,000 (36%) during
the three and nine months ended September 30, 2008,
respectively, compared with the corresponding periods in 2007,
respectively, due primarily to lower interest expense resulting
from the July 2008 redemption of the 7% Senior
Notes.
Income Taxes: The income tax provisions in the
three months ended September 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 United
States. In addition, during the second quarter of 2008 we
reversed our APB 23 representation with respect to
unrepatriated foreign earnings and have provided U.S. tax
on these earnings. As of September 30, 2008, we repatriated
$260,000,000 of these earnings which were offset by cumulative
U.S. operating losses and related foreign tax credits. We
paid $7,782,000 of withholding tax on the repatriation of these
earnings. As of September 30, 2008, a deferred tax
liability equal to $38,202,000 was established to provide for
taxes on these unrepatriated earnings. Setting up the deferred
tax liability has allowed us to benefit 2008 U.S. losses,
release $35,308,000 of U.S. valuation allowance, which
includes $9,242,000 and $3,548,000 in benefits that were
credited to additional paid-in capital and goodwill,
respectively. At this time, there is insufficient objective
evidence as to the timing and amount of future U.S. taxable
income to allow for the release of the remaining
U.S. valuation allowance which is primarily offsetting
future benefits of foreign tax credits.
37
Income (Loss) from Discontinued Operations, Net of
Taxes: The results from discontinued operations
relate primarily to the WEEMEA business and our Infergen
operations, and include the gain on sale of the WEEMEA business
of $178,506,000 in the three and nine months ended
September 30, 2008.
Liquidity
and Capital Resources
On June 20, 2008, we announced that we would redeem all of
our $300,000,000 aggregate principal amount 7.0% Senior
Notes due 2011 (the 7% Senior Notes). We
completed this redemption on July 21, 2008, paying
$300,000,000 to redeem the aggregate principal amount of the
7% Senior Notes and $10,500,000 as a redemption premium.
The redemption premium was recorded as loss on early
extinguishment of debt in the three months ending
September 30, 2008. We terminated the interest rate swap
agreement with respect to the 7% 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
$571,012,000 as of September 30, 2008 compared with
$339,020,000 as of December 31, 2007. The increase of
$231,992,000 resulted in part from the receipt of $428,432,000
from Meda as payment for the sale of the WEEMEA business,
$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, offset in part by $310,500,000
paid to redeem the 7% Senior Notes and treasury stock
purchases of $91,422,000. Working capital (excluding assets held
for sale and assets of discontinued operations) was $599,892,000
as of September 30, 2008 compared with $416,552,000 as of
December 31, 2007. The increase in working capital of
$183,430,000 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 nine months ended September 30, 2008, cash
provided by operating activities in continuing operations
totaled $58,646,000 compared with $78,520,000 for the
corresponding period in 2007, representing a decrease of
$19,874,000. 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, offset in
part by the redemption premium of $10,500,000, termination of
the swap agreement of $1,540,000 and an increase in inventories.
The cash provided by operating activities in continuing
operations for the nine months ended September 30, 2007
included receipt of $19,200,000 related to the pradefovir
licensing payment from Schering-Plough and $6,000,000 from the
Republic of Serbia.
Cash provided by investing activities in continuing operations
was $49,866,000 for the nine months ended September 30,
2008 compared with cash used in investing of $7,590,000 for the
corresponding period in 2007, representing an increase of
$57,456,000. The cash provided by investing activities in
continuing operations for the nine months ended
September 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, and net proceeds from investments
of $11,325,000, offset in part by capital expenditures of
$9,456,000. Cash provided by investing activities in
discontinued operations of $462,418,000 consisted primarily of
the net proceeds of $394,591,000 from the sale of the WEEMEA
business to Meda and $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 used in
investing activities in continuing operations was $7,590,000 and
included cash used for product acquisitions of $22,091,000 and
capital expenditures of $22,368,000, offset in part by proceeds
from the sale of assets of $37,918,000, primarily related to the
sale of our former headquarters building in California.
Cash used in financing activities in continuing operations was
$373,420,000 in the nine months ended September 30, 2008
and principally consisted of the payment of debt and notes
payable of $300,712,000 and purchase of treasury stock of
$91,422,000, offset in part by proceeds from stock option
exercises and employee stock purchases of $18,589,000. Cash used
in financing activities in continuing operations was $64,911,000
in the nine months ended September 30, 2007 and principally
consisted of the purchase of treasury stock of $79,599,000,
offset in part by proceeds from stock option exercises and
employee stock purchases of $14,517,000.
38
If GSK terminates the Collaboration Agreement prior to the
expiration of the Review Period, we would be required to refund
to GSK up to $95,000,000 of the upfront fee; however, the
refundable portion will be reduced for every quarter that the
Collaboration Agreement is in effect.
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 September 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. There can
be no assurance we would be able to secure such financing on
acceptable terms, if at all, especially in light of current
economic and market conditions. 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.
We did not pay dividends for either the first nine months of
2008 or 2007. 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 ceased with the redemption of those notes on July 21,
2008. We do not intend to pay dividends for the foreseeable
future.
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: Subject to the terms of the
Collaboration Agreement with GSK, 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 indicated 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 with
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 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=153) and 17.5% (n=152) 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 compared with the baseline period,
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,
39
tremor, and nausea. Results of the study were presented at the
8th European
Congress on Epileptology, Berlin, Germany in September 2008.
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. RESTORE 2 evaluated the 600 and 900 mg daily doses of
retigabine versus placebo in patients taking stable doses of one
to three additional
anti-epileptic
drugs (AEDs). Retigabine at both the 600 mg and
900 mg doses demonstrated highly statistically significant
results on the primary efficacy endpoints important for
regulatory review by both the FDA and the EMEA.
The 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
15.9% (n=179), 27.9% (n=181) and 39.9% (n=178) for the placebo,
retigabine 600 mg and retigabine 900 mg arms of the
trial, respectively. The responder rate, defined as
³
a 50% reduction in
28-day total
partial seizure frequency compared with the baseline period,
during maintenance (the dual primary efficacy endpoint required
for the EMEA submission) was 18.9% (n=164), 38.6%
(n=158) and 47.0% (n=149) for the placebo,
retigabine 600 mg and retigabine 900 mg and placebo
arms of the trial, respectively.
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 will present
comprehensive efficacy and safety results from RESTORE 2 at an
upcoming scientific meeting in the United States.
A number of standard supportive Phase I trials necessary for
successful registration of retigabine were completed in 2008. In
March 2007, we initiated development of a modified release
formulation of retigabine. In addition, in November 2007, we
began 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.
In August 2008, we entered into a worldwide Collaboration
Agreement with GSK for the continued development and
commercialization of retigabine and its backup compounds. The
Collaboration Agreement became effective on October 17,
2008. We received $125,000,000 upon effectiveness of this
transaction of which, up to $100,000,000 will be used to fund
our commitments to the collaboration, which are expected to be
incurred through mid to late 2010. The parties will jointly
develop and commercialize retigabine in the Collaboration
Territory (U.S., Canada, Australia, New Zealand and Puerto Rico)
and GSK will develop and commercialize in the rest of the world.
If GSK terminates the Collaboration Agreement prior to the
expiration of the Review Period, we would be required to refund
to GSK up to $95,000,000 of the upfront fee; however, the
refundable portion will be reduced for every quarter that the
Collaboration Agreement is in effect. Under the Collaboration
Agreement, we could receive up to $545,000,000 in additional
milestone payments on the development and launch of retigabine
worldwide. In the Collaboration Territory, we will receive a
share of the profits from retigabine starting at 50% at launch
and adjusting downward and upward based on the achievement of
certain development and commercial milestones. GSK will pay us
royalties of up to 20% on net sales outside the Collaboration
Territory. We could receive up to $150,000,000 in milestones and
royalties of up to 20% on the development and commercialization
of the retigabine backup compounds.
Our rights to retigabine are subject to the Asset Purchase
Agreement between Meda Pharma GmbH & Co KG (Meda
Pharma) (as successor to Viatris GmbH & Co KG)
and Xcel Pharmaceuticals, Inc., which we acquired in 2005. 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 for retigabine. In addition, earn out
payments are due to Meda Pharma on sales of retigabine.
Depending on the geographic market and sales levels, royalty
rates vary from 3% to 8% of net sales. Under the Collaboration
Agreement with GSK, these royalties will be treated in the
Collaboration Territory as an operating expense and shared by
GSK and the Company pursuant to the profit sharing percentage
then in effect. In the rest of the world, we will be responsible
for the payment of these royalties to Meda Pharma from the
royalty payments we receive from GSK. Upon effectiveness of the
Collaboration Agreement with GSK,
40
we paid Meda Pharma a milestone payment of $3,750,000 on
October 30, 2008. An additional payment of $1,500,000 could
become due if a certain indication for retigabine is developed
and licensed to GSK.
External research and development expenses for retigabine for
the three and nine months ended September 30, 2008 were
$11,925,000 and $40,545,000, respectively, compared with
$12,964,000 and $33,168,000 for the corresponding periods in
2007, respectively.
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.
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.
We presented treatment week 24 results from our Phase IIb 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 the
59th annual
American Academy for the Study of Liver Diseases,
San Francisco, CA in November 2008. While the treatment
week 24 data continues to support our belief that weight based
dosing of taribavirin is a key component in the program, the
timeline and path to regulatory approval of taribavirin remains
uncertain at this time. We are identifying potential partnering
opportunities for taribavirin. For the three and nine months
ended September 30, 2008, external research and development
expenses for taribavirin were
41
$1,303,000 and $6,398,000, respectively, compared with
$1,911,000 and $5,433,000 for the corresponding periods in 2007,
respectively.
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 a novel intranasal delivery of diazepam. Our external
research and development expenses for Diastat Intranasal were
$266,000 and $2,685,000 for the three and nine months ended
September 30, 2008, respectively, compared with $189,000
and $532,000 for the corresponding periods in 2007, respectively.
Foreign
Operations
Approximately 69% of our revenues from continuing operations,
which includes royalties, for the nine months ended
September 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. See
Item 7, Managements Discussion and Analysis of
Financial Condition and Results of Operations in our annual
report on
Form 10-K
for the year ended December 31, 2007 for a discussion of
our critical accounting estimates.
Other
Financial Information
With respect to the unaudited consolidated condensed financial
information of Valeant Pharmaceuticals International for the
three and nine months ended September 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
November 7, 2008, appearing herein, states that they did
not audit and they do not express an opinion on that unaudited
consolidated condensed 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, as amended (the Act) for their report
on the unaudited consolidated condensed financial information
because that report is not a report or a
part of a registration statement prepared or
certified by PricewaterhouseCoopers LLP within the meaning of
Sections 7 and 11 of the Act.
Forward-Looking
Statements
Except for the historical information contained herein, the
matters addressed in Managements Discussion and
Analysis of Financial Condition and Results of Operations
and elsewhere in this quarterly report on
Form 10-Q
constitute forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933, as
amended and Section 21E of the Securities Exchange Act of
1934, as amended. These forward-looking statements are subject
to a variety of risks and uncertainties, including those
discussed below and elsewhere in this quarterly report on
Form 10-Q,
which could cause actual results to differ materially from those
anticipated by our
42
management. Readers are cautioned not to place undue reliance on
any of these forward-looking statements, which speak only as of
the date of this report. We undertake no obligation to update
any of these forward-looking statements to reflect events or
circumstances after the date of this report or to reflect actual
outcomes.
Forward-looking statements may be identified by the use of the
words anticipates, expects,
intends, plans, and variations or
similar expressions. You should understand that various
important factors and assumptions, including those set forth
below, could cause our actual results to differ materially from
those anticipated in this report.
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|
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|
|
The results from the initial 12 and 24 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.
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|
|
|
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.
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|
|
|
We are involved in several legal proceedings, including the
current SEC investigation and those other proceedings described
in Note 11, Commitments and Contingencies, of the notes to
consolidated condensed financial statements included elsewhere
in this quarterly report, any of which could result in
substantial cost and divert managements attention and
resources.
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|
Adverse U.S and international economic and market conditions may
adversely affect our product sales and business.
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|
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.
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|
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|
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.
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|
We can protect our products from generic substitution by third
parties only to the extent that our technologies are covered by
valid and enforceable patents, are effectively maintained as
trade secrets or are protected by data exclusivity. However, our
pending or future patent applications may not issue as patents.
Any patent issued may be challenged, invalidated, held
unenforceable or circumvented. Furthermore, our patents may not
be sufficiently broad to prevent third parties competing
products. The expiration of patent protection for ribavirin has
resulted in significant competition from generic substitutes and
declining royalty revenues and may negatively impact future
financial results.
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|
Trade secret protection is less effective than patent protection
because competitors may discover our technology or develop
parallel technology.
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|
|
|
The scope of protection afforded by a patent can be highly
uncertain. A pending claim or a result unfavorable to us in a
patent dispute may preclude development or commercialization of
products or impact sales of existing products, result in
cessation of royalty payments to us
and/or
result in payment of monetary damages.
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|
|
|
Obtaining drug approval in the United States and other countries
is costly and time consuming. Uncertainties and delays inherent
in the process can preclude or delay development and
commercialization of our products.
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|
|
|
Our restructuring plans are intended to improve operational
efficiencies and our competitiveness. If we are unable to
realize the benefits from our restructuring plans, our business
prospects may suffer and our operating results and financial
condition would be adversely affected.
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43
|
|
|
|
|
We and our competitors are always striving to develop products
that are more effective, safer, more easily tolerated or less
costly. If our competitors succeed in developing better
alternatives to our current products before we do, we will lose
sales and revenues to their alternative products. If vaccines
are introduced to prevent the diseases treated by our products,
our potential sales and revenues will decrease.
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|
|
|
The pharmaceutical industry is subject to substantial government
regulation, including the approval of new pharmaceutical
products, labeling, advertising and, in most countries, pricing,
as well as inspection and approval of manufacturing facilities.
The costs of complying with these regulations are high, and
failure to comply could result in fines or interruption in our
business.
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|
|
|
We collect and pay a substantial portion of our sales and
expenditures in currencies other than the U.S. dollar. As a
result, fluctuations in foreign currency exchange rates affect
our operating results. Additionally, future exchange rate
movements, inflation or other related factors may have a
material adverse effect on our sales, gross profit or operating
expenses. As of September 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.
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|
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|
A significant part of our revenue is derived from products
manufactured by third parties. We rely on their quality level,
compliance with the FDA regulations or similar regulatory
requirements enforced by regulatory agencies in other countries
and continuity of supply. Any failure by them in these areas
could disrupt our product supply and negatively impact our
revenues.
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|
Our flexibility in maximizing commercialization opportunities
for our compounds may be limited by our obligations to
Schering-Plough. In November 2000, we entered into an agreement
that provides Schering-Plough with an option to acquire the
rights to up to three of our products intended to treat
hepatitis C that Schering-Plough designates prior to our
entering Phase 2 clinical trials and a right for first/last
refusal to license various compounds we may develop and elect to
license to others. Taribavirin was not subject to the option of
Schering-Plough, but it would be subject to their right of
first/last refusal if we elected to license it to a third party.
The interest of potential collaborators in obtaining rights to
our compounds or the terms of any agreement we ultimately enter
into for these rights may be hindered by our agreement with
Schering-Plough.
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|
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|
To purchase our products, many patients rely on reimbursement by
third party payors such as insurance companies, HMOs and
government agencies. These third party payors are increasingly
attempting to contain costs by limiting both coverage and the
level of reimbursement of new drug products. The reimbursement
levels established by third party payors in the future may not
be sufficient for us to realize an appropriate return on our
investment in product development and our continued manufacture
and sale of existing drugs.
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|
All drugs have potential harmful side effects and can expose
drug manufacturers and distributors to liability. In the event
one or more of our products is found to have harmed an
individual or individuals, we may be responsible for paying all
or substantially all damages awarded. A successful product
liability claim against us could have a material negative impact
on our financial position and results of operations.
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|
|
|
Our stockholder rights plan, provisions of our certificate of
incorporation and provisions of the Delaware General Corporation
Law could provide our Board of Directors with the ability to
deter hostile takeovers or delay, deter or prevent a change in
control of our company, including transactions in which
stockholders might otherwise receive a premium for their shares
over then current market prices.
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|
|
We are authorized to issue, without stockholder approval,
approximately 10,000,000 shares of preferred stock,
200,000,000 shares of common stock and securities
convertible into either shares of common stock or preferred
stock. If we issue additional equity securities, the price of
our securities may be materially and adversely affected. The
Board of Directors can also use issuances of preferred or common
stock to deter a hostile takeover or change in control of our
company.
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|
|
|
We are subject to a consent order with the Securities and
Exchange Commission, which permanently enjoins us from violating
securities laws and regulations. The consent order also
precludes protection for forward-looking statements under the
safe harbor provisions of the Private Securities Litigation
Reform Act of 1995
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44
|
|
|
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|
with respect to forward-looking statements we made prior to
November 28, 2005. The existence of the permanent
injunction under the consent order, and the lack of protection
under the safe harbor with respect to forward-looking statements
made prior to November 28, 2005 may limit our ability
to defend against future allegations.
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|
|
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,
Mexican Peso, Polish Zloty, Swiss Franc and Canadian Dollar. We
believe the sale of the WEEMEA business will reduce our exposure
to the Euro and Swiss Franc. 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. As of
September 30, 2008, the fair values of our derivative
contracts and fixed-rate debt were as follows (in thousands):
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|
|
|
|
|
|
|
|
|
|
|
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|
|
Notional/
|
|
|
Assets (Liabilities)
|
|
|
|
Contract
|
|
|
Carrying
|
|
|
Fair
|
|
Description
|
|
Amount
|
|
|
Value
|
|
|
Value
|
|
|
Undesignated hedges
|
|
$
|
94,200
|
|
|
$
|
(213
|
)
|
|
$
|
(213
|
)
|
Net investment hedges
|
|
$
|
24,695
|
|
|
$
|
1,592
|
|
|
$
|
1,592
|
|
Cash flow hedges
|
|
$
|
750
|
|
|
$
|
63
|
|
|
$
|
63
|
|
Outstanding fixed-rate debt
|
|
$
|
480,000
|
|
|
$
|
(480,000
|
)
|
|
$
|
(444,446
|
)
|
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 third quarter 2008 pretax earnings. We had $480,000,000 of
fixed rate debt as of September 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 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
$13,900,000 as of September 30, 2008.
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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.
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
45
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 September 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 our 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:
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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.
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We have implemented enhancements to our accounting for product
returns and credit memos in foreign markets.
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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.
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|
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.
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|
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|
We have implemented revised review procedures over tax
accounting.
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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. On September 11,
2008, we completed the sale of our business operations located
in Western and Eastern Europe, Middle East and Africa to Meda.
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 internal control over financial reporting and implement
remediation measures, we may determine to supplement or modify
the remediation measures described above.
46
Changes
in Internal Control over Financial Reporting
There have been no changes in our internal control over
financial reporting during the quarter ended September 30,
2008 that have materially affected, or are reasonably likely to
materially affect, our internal control over financial reporting.
PART II
OTHER INFORMATION
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|
Item 1.
|
Legal
Proceedings
|
See Note 11, Commitments and Contingencies, of the 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 March 2006. 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.
Adverse
U.S. and international economic and market conditions may
adversely affect our product sales and business.
Current U.S. and international economic and market
conditions are uncertain. Our revenues and operating results may
be affected by uncertain or changing economic and market
conditions, including the recent crisis in the credit markets
and financial services industry. If domestic and global economic
and market conditions remain uncertain or persist or deteriorate
further, we may experience material impacts on our business,
operating results and financial condition. Adverse economic
conditions impacting our customers, including among others,
increased taxation, higher unemployment, lower customer
confidence in the economy, higher customer debt levels, lower
availability of customer credit, higher interest rates and
hardships relating to declines in the stock markets, could cause
purchases of our products to decline, which could adversely
affect our revenues and operating results.
Moreover, our projected revenues and operating results are based
on assumptions concerning certain levels of customer spending.
Any failure to attain our projected revenues and operating
results as a result of adverse
47
economic or market conditions estimated by us, our investors or
the securities analysts that follow our common stock, could have
a material adverse effect on our business and result in a
decline in the price of our common stock.
Adverse economic and market conditions could also negatively
impact our business by negatively impacting the parties with
whom we do business, including among others, our business
partners (including our customers as well as our alliance
partners from whom we receive royalties and milestone payments),
our manufacturers and our suppliers.
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|
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 11,466,600 as of
September 30, 2008. We have used $190,979,000 to repurchase
these shares. In addition, as of September 30, 2008, we
have sold 324,474 treasury shares to certain executives pursuant
to executive employment agreements.
Set forth below is the information regarding shares repurchased
under the stock repurchase program during the three months ended
September 30, 2008:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Approximate Dollar
|
|
|
|
|
|
|
|
|
|
Total Number of
|
|
|
Value of Shares that
|
|
|
|
|
|
|
|
|
|
Shares Purchased as
|
|
|
may yet be
|
|
|
|
Total Number of
|
|
|
Average Price
|
|
|
Part of Publicly
|
|
|
Purchased under the
|
|
Period
|
|
Shares Repurchased
|
|
|
Paid per Share
|
|
|
Announced Plan
|
|
|
Plan
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
|
7/1/08 - 7/31/08
|
|
|
1,361,641
|
|
|
$
|
17.43
|
|
|
|
8,264,320
|
|
|
$
|
169,858
|
|
8/1/08 - 8/31/08
|
|
|
1,732,825
|
|
|
$
|
18.88
|
|
|
|
9,997,145
|
|
|
$
|
137,108
|
|
9/1/08 - 9/30/08
|
|
|
1,469,455
|
|
|
$
|
19.09
|
|
|
|
11,466,600
|
|
|
$
|
109,020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
4,563,921
|
|
|
$
|
18.52
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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.
|
|
10
|
.1
|
|
Separation and Release Agreement dated as of July 11, 2008
between Valeant Pharmaceuticals International and Charles J.
Bramlage, previously filed as Exhibit 99.1 to the
Registrants Current Report on
Form 8-K,
dated July 16, 2008, which is incorporated herein by
reference.
|
|
10
|
.2
|
|
Acquisition Agreement dated August 4, 2008 between Valeant
Pharmaceuticals International, and Meda AB, previously filed as
Exhibit 99.1 to the Registrants Current Report on
Form 8-K,
dated August 5, 2008, which is incorporated herein by
reference.
|
48
|
|
|
|
|
Exhibit
|
|
|
|
|
10
|
.3
|
|
Asset Transfer and License Agreement dated August 4, 2008
between Valeant Pharmaceuticals International, and Meda AB,
previously filed as Exhibit 99.2 to the Registrants
Current Report on
Form 8-K,
dated August 5, 2008, which is incorporated herein by
reference.
|
|
10
|
.4
|
|
Performance Restricted Stock Unit and Matching RSU Award
Agreement between Valeant Pharmaceuticals International and
Peter J. Blott, previously filed as Exhibit 99.2 to the
Registrants Current Report on
Form 8-K,
dated August 27, 2008, which is incorporated herein by
reference.
|
|
10
|
.5**
|
|
License and Collaboration Agreement, dated August 27, 2008
between Valeant Pharmaceuticals North America and Glaxo
Group Limited, previously filed as Exhibit 10.1 to the
Registrants Current Report on
Form 8-K/A,
dated August 29, 2008, which is incorporated herein by
reference.
|
|
10
|
.6**
|
|
Agreement and Plan of Merger, dated as of September 16,
2008, among Coria Laboratories, Ltd., the Shareholders of Coria
Laboratories, Ltd., Valeant Pharmaceuticals International and CL
Acquistion Corp. (the Coria Merger Agreement).
|
|
10
|
.7
|
|
Amendment to the Coria Merger Agreement, dated as of
October 15, 2008, among Coria Laboratories, Ltd., the
Shareholders of Coria Laboratories, Ltd., Valeant
Pharmaceuticals International and CL Acquistion Corp.
|
|
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. |
49
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: November 7, 2008
Peter J. Blott
Executive Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)
Date: November 7, 2008
50
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.
|
|
10
|
.1
|
|
Separation and Release Agreement dated as of July 11, 2008
between Valeant Pharmaceuticals International and Charles J.
Bramlage, previously filed as Exhibit 99.1 to the
Registrants Current Report on
Form 8-K,
dated July 16, 2008, which is incorporated herein by
reference.
|
|
10
|
.2
|
|
Acquisition Agreement dated August 4, 2008 between Valeant
Pharmaceuticals International, and Meda AB, previously filed as
Exhibit 99.1 to the Registrants Current Report on
Form 8-K,
dated August 5, 2008, which is incorporated herein by
reference.
|
|
10
|
.3
|
|
Asset Transfer and License Agreement dated August 4, 2008
between Valeant Pharmaceuticals International, and Meda AB,
previously filed as Exhibit 99.2 to the Registrants
Current Report on
Form 8-K,
dated August 5, 2008, which is incorporated herein by
reference.
|
|
10
|
.4
|
|
Performance Restricted Stock Unit and Matching RSU Award
Agreement between Valeant Pharmaceuticals International and
Peter J. Blott, previously filed as Exhibit 99.2 to the
Registrants Current Report on
Form 8-K,
dated August 27, 2008, which is incorporated herein by
reference.
|
|
10
|
.5**
|
|
License and Collaboration Agreement, dated August 27, 2008
between Valeant Pharmaceuticals North America and Glaxo
Group Limited, previously filed as Exhibit 10.1 to the
Registrants Current Report on
Form 8-K/A,
dated August 29, 2008, which is incorporated herein by
reference.
|
|
10
|
.6**
|
|
Agreement and Plan of Merger, dated as of September 16,
2008, among Coria Laboratories, Ltd., the Shareholders of Coria
Laboratories, Ltd., Valeant Pharmaceuticals International and CL
Acquistion Corp. (the Coria Merger Agreement).
|
|
10
|
.7
|
|
Amendment to the Coria Merger Agreement, dated as of
October 15, 2008, among Coria Laboratories, Ltd., the
Shareholders of Coria Laboratories, Ltd., Valeant
Pharmaceuticals International and CL Acquistion Corp.
|
|
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. |