e10vk
UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C.
20549
Form 10-K
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the fiscal year ended
December 31, 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
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92656
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(Address of principal executive
offices)
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(Zip Code)
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Registrants telephone number, including area code:
(949) 461-6000
Securities registered pursuant to Section 12(b) of the
Act:
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Title of Each Class
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Name of Each Exchange on Which Registered
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Common stock, $.01 par value (Including
associated preferred stock purchase rights)
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New York Stock Exchange
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Securities registered pursuant to Section 12(g) of the
Act:
None
Indicate by check mark if the Registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes þ No o
Indicate by check mark if the Registrant is not required to file
reports pursuant to Section 13 or Section 15(d) of the
Act. Yes o No þ
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 if disclosure of delinquent filers
pursuant to Item 405 of
Regulation S-K
is not contained herein, and will not be contained, to the best
of Registrants knowledge, in definitive proxy or
information statements incorporated by reference in
Part III of this
Form 10-K
or any amendment to this
Form 10-K. þ
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 aggregate market value of the Registrants voting stock
held by non-affiliates of the Registrant on June 30, 2008,
the last business day of the Registrants most recently
completed second fiscal quarter based on the closing price of
the common stock on the New York Stock Exchange on such
date, was approximately $1,531,002,000.
The number of outstanding shares of the Registrants common
stock as of February 25, 2009 was 82,178,547.
DOCUMENTS
INCORPORATED BY REFERENCE
Certain information contained in Valeant Pharmaceuticals
Internationals definitive Proxy Statement for the 2009
annual meeting of stockholders is incorporated by reference into
Part III of this
Form 10-K.
Forward-Looking
Statements
In addition to current and historical information, this report
contains forward-looking statements. These statements relate to,
but are not limited to, our future operations, future alliance
revenue, prospects, potential products, developments and
business strategies. Words such as expects,
anticipates, intends, plans,
should, could, would,
may, will, believes,
estimates, potential, or
continue or similar language identify
forward-looking statements.
Forward-looking statements involve known and unknown risks and
uncertainties. Our actual results may differ materially from
those contemplated by the forward-looking statements. Factors
that might cause or contribute to these differences include, but
are not limited to, those discussed in the sections of this
report entitled Risk Factors and
Managements Discussion and Analysis of Financial
Condition and Results of Operations and sections in other
documents filed with the Securities and Exchange Commission
(SEC), under similar captions. You should consider
these in evaluating our prospects and future financial
performance. These forward-looking statements are made as of the
date of this report. We disclaim any obligation to update or
alter these forward-looking statements in this report or the
other documents in which they are found, whether as a result of
new information, future events or otherwise, or any obligation
to explain the reasons why actual results may differ.
Acanya, Atralin, Bedoyecta, Bisocard, CeraVe, Cloderm, Diastat,
Diastat AcuDial, Efudex/Efudix, Kinerase, Librax, Mestinon,
Migranal, M.V.I., Nyal, Virazole and Zelapar are trademarks or
registered trademarks of Valeant Pharmaceuticals International
or its related companies or are used under license. This annual
report also contains trademarks or trade names of other
companies and those trademarks and trade names are the property
of their respective owners.
PART I
Unless the context indicates otherwise, when we refer to
we, us, our,
Valeant or the Company in this
Form 10-K,
we are referring to Valeant Pharmaceuticals International and
its subsidiaries on a consolidated basis.
Introduction
We are a multinational specialty pharmaceutical company that
develops, manufactures and markets a broad range of
pharmaceutical products. Our specialty pharmaceutical and OTC
products are marketed under brand names and are sold in the
United States, Canada, Australia, and New Zealand, where we
focus most of our efforts on the dermatology and neurology
therapeutic classes. We also have branded generic and OTC
operations in Europe and Latin America which focus on
pharmaceutical products that are bioequivalent to original
products and are marketed under company brand names.
Business
Strategy
In March 2008, we announced a new company-wide restructuring
effort and new strategic initiatives (the 2008 Strategic
Plan). The restructuring was designed to streamline our
business, align our infrastructure to the scale of our
operations, maximize our pipeline assets and deploy our cash
assets to maximize shareholder value, while highlighting key
opportunities for growth.
We have built our current business infrastructure by executing
our multi-faceted strategy: 1) focus the business on core
geographies and therapeutic classes, 2) maximize pipeline
assets through strategic partnerships with other pharmaceutical
companies, and 3) deploy cash with an appropriate mix of
debt repurchases, share buybacks and selective acquisitions. We
believe our multi-faceted strategy will allow us to expand our
product offerings and upgrade our product portfolio with higher
growth, higher margin assets.
Prior to the start of the 2008 Strategic Plan, we reviewed our
portfolio for products and geographies that did not meet our
growth and profitability expectations and, as a result, divested
or discontinued certain non-strategic products. In September
2007, we decided to sell our rights to Infergen. We sold these
rights to Three Rivers
2
Pharmaceuticals, LLC in January 2008. In 2007, we also sold
product rights to Reptilase and Solcoseryl in Japan, our
ophthalmic business in the Netherlands, and certain other
products.
In March 2008, we sold certain assets in Asia to Invida
Pharmaceutical Holdings Pte. Ltd. (Invida) 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.
The assets sold to Invida were classified as held for
sale as of December 31, 2007 in accordance with
Statement of Financial Accounting Standards (SFAS)
No. 144, Accounting for the Impairment or Disposal of
Long-Lived Assets, (SFAS 144).
In June 2008, we sold our subsidiaries in Argentina and Uruguay.
In September 2008, we sold our business operations located 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 a result of these dispositions, the following information has
been adjusted to exclude the operations of Infergen and of the
WEEMEA business. The results of these operations have also been
classified as discontinued operations in our consolidated
financial statements for all periods presented in this report.
In October 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 develop
and commercialize retigabine, a
first-in-class
neuronal potassium channel opener for treatment of adult
epilepsy patients with refractory partial onset seizures.
In October 2008, we acquired Coria Laboratories Ltd.
(Coria), a privately-held specialty pharmaceutical
company focused on dermatology products in the United States. In
November 2008, we acquired DermaTech Pty Ltd
(DermaTech), an Australian specialty pharmaceutical
company focused on dermatology products marketed in Australia.
In December 2008, we acquired Dow Pharmaceutical Sciences, Inc.
(Dow), a privately-held dermatology company that
specializes in the development of topical products on a
proprietary basis, as well as for pharmaceutical and
biotechnology companies.
Segment
Information
In connection with the 2008 Strategic Plan and resulting
acquisitions and dispositions, we realigned our organization in
the fourth quarter of 2008 in order to improve our execution and
align our resources and product development efforts in the
markets in which we operate. We have realigned segment financial
data for the years ended December 31, 2007 and 2006 to
reflect changes in our organizational structure that occurred in
2008.
Our products are sold through three segments comprising
Specialty Pharmaceuticals, Branded Generics Europe
and Branded Generics Latin America. The Specialty
Pharmaceuticals segment includes product revenues primarily from
the United States, Canada, Australia and divested businesses
located in Argentina, Uruguay and Asia. The Branded
Generics Europe segment includes product revenues
from branded generic pharmaceutical products primarily in
Poland, Hungary, the Czech Republic and Slovakia. The Branded
Generics Latin America segment includes product
revenues from branded generic pharmaceutical products primarily
in Mexico and Brazil.
Additionally, we generate alliance revenue, including royalties
from the sale of ribavirin by Schering-Plough Ltd.
(Schering-Plough) and revenues associated with the
Collaboration Agreement with GSK. Effective January 1,
2009, we will also generate alliance and services revenue from
the development of dermatological products resulting from the
acquisition of Dow.
For information regarding the revenues, operating profits and
identifiable assets attributable to our operating segments, see
Note 16 of notes to consolidated financial statements in
Item 8 of this annual report on
Form 10-K.
3
Pharmaceutical
Products
Our current product portfolio comprises approximately 389
products, with approximately 982 stock keeping units. The
following table summarizes sales by major branded product for
each of the last three years (dollar amounts in thousands):
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% Increase
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Year Ended December 31,
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(Decrease)
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2008
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2007
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2006
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08/07
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07/06
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Efudex/Efudix
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$
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61,156
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$
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63,969
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$
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71,878
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(4
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)%
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(11
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)%
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Diastat AcuDial
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46,226
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51,264
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50,678
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(10
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)%
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1
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%
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Cesamet
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37,282
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26,710
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18,985
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40
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%
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41
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%
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Bedoyecta
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35,922
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42,384
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49,935
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(15
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(15
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Bisocard
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27,252
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22,414
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15,818
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22
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%
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42
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%
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Kinerase
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21,184
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26,684
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25,245
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(21
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6
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%
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Mestinon
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17,568
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21,266
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20,745
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(17
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)%
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3
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%
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M.V.I. (multi-vitamin infusion)
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13,413
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11,708
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13,350
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15
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%
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(12
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)%
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Migranal
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13,230
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13,534
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11,592
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(2
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)%
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17
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%
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Nyal
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12,340
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11,060
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10,216
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12
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%
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8
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%
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Virazole
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12,332
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11,091
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13,202
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11
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%
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(16
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)%
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Other products
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295,260
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300,967
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302,166
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(2
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(0
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)%
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Total product sales
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$
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593,165
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$
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603,051
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$
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603,810
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(2
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)%
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0
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%
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Efudex/Efudix |
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Efudex/Efudix is indicated for the treatment of multiple actinic
or solar keratoses and superficial basal cell carcinoma. It is
sold as a topical solution and cream under the Efudex/Efudix
brand name and as generic fluorouracil, and provides effective
therapy for multiple lesions. |
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Diastat/Diastat AcuDial |
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Diastat and Diastat AcuDial are gel formulations 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. Diastat and
Diastat AcuDial are the only products approved by the U.S. Food
and Drug Administration (FDA) for treatment of such
conditions outside of hospital situations. |
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Cesamet |
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Cesamet is a synthetic cannabinoid. It is indicated for the
management of severe nausea and vomiting associated with cancer
chemotherapy. |
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Bedoyecta |
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Bedoyecta is a brand of vitamin B complex (B1, B6 and B12
vitamins) products. Bedoyecta products act as energy improvement
agents for fatigue related to age or chronic diseases, and as
nervous system maintenance agents to treat neurotic pain and
neuropathy. |
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Bisocard |
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Bisocard is a Beta-blocker. It is indicated to treat
hypertension and angina pectoris. |
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Kinerase |
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Kinerase is a range of science-based, over-the-counter and
prescription cosmetic products that help skin look smoother,
younger and healthier. Kinerase contains the synthetic plant
growth factor
N6-furfuryladenine
which has been shown to slow the changes that naturally occur in
the cell aging process in plants. Kinerase helps to diminish the
appearance of fine lines and wrinkles. |
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Mestinon |
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Mestinon is an orally active cholinesterase inhibitor used in
the treatment of myasthenia gravis, a chronic neuromuscular,
autoimmune disorder that causes varying degrees of fatigable
weakness involving the voluntary muscles of the body. |
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M.V.I. |
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M.V.I., multi-vitamin infusion, is a hospital dietary supplement
used in treating trauma and burns. |
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Migranal |
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Migranal is a nasal spray formulation of dihydroergotamine
indicated for the treatment of acute migraine headaches. |
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Nyal |
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Nyal is a range of over-the-counter products covering an
extensive range of tablets, liquids and nasal sprays to treat
cough, cold, flu, sinus and hayfever symptoms. |
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Virazole |
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Virazole is our brand name for ribavirin, a synthetic nucleoside
with antiviral activity. It is indicated for the treatment of
hospitalized infants and young children with severe lower
respiratory tract infections due to respiratory syncytial virus.
Virazole has also been approved for various other indications in
countries outside the United States including herpes
zoster, genital herpes, chickenpox, hemorrhagic fever with renal
syndrome, measles and influenza. |
Alliance
Revenue and Service Revenue
Our royalties have historically been derived from sales of
ribavirin, a nucleoside analog that we discovered. In 1995,
Schering-Plough licensed from us all oral forms of ribavirin for
the treatment of chronic hepatitis C. We also licensed
ribavirin to Roche in 2003. Roche discontinued royalty payments
to us in June 2007 when the European Patent Office revoked a
ribavirin patent which would have provided protection through
2017.
Ribavirin royalty revenues were $59.4 million,
$67.2 million and $81.2 million for the years ended
December 31, 2008, 2007 and 2006, respectively, and
accounted for 9%, 10% and 12% of our total revenues in 2008,
2007 and 2006, respectively. Royalty revenues in 2008, 2007 and
2006 were substantially lower than those in prior years. This
decrease had been expected and relates to: 1) Roches
discontinuation of royalty payments to us in June 2007,
2) Schering-Ploughs market share losses in ribavirin
sales, 3) reduced Schering-Plough sales in Japan from a
peak in 2005 driven by the launch of combination therapy and
4) further market share gains by generic competitors in the
United States since they entered the market in April 2004.
We expect ribavirin royalties to decline significantly in 2009
in that royalty payments from Schering-Plough will continue for
European sales only until the ten-year anniversary of the launch
of the product, which varied by European country and started in
May 1999. We expect that royalties from Schering-Plough in Japan
will continue after 2009.
Beginning in January 2009, we will receive royalties from patent
protected formulations developed by Dow and licensed to third
parties. In 2008, Dow had royalties of approximately
$20.0 million.
Beginning in January 2009, we will receive revenue from contract
research services performed by Dow in the areas of dermatology
and topical medication. The services are primarily focused on
contract research for external development and clinical research
in areas such as formulations development, in vitro
drug penetration studies, analytical sciences and consulting
in the areas of labeling, and regulatory affairs. In 2008, Dow
had revenue from contract research services of approximately
$25.0 million.
Business
Acquisitions
In December 2008, we acquired Dow for an agreed price of
$285.0 million, subject to certain closing adjustments. We
paid $242.5 million in cash, net of cash acquired, and
incurred transaction costs of $5.4 million. We paid
$5.6 million in January 2009. We have remaining payment
obligations of $36.0 million, $35.0 million of which
we will pay by June 30, 2009 into an escrow account for the
benefit of the Dow common stockholders, subject
5
to any indemnification claims made by us for a period of
eighteen months following the acquisition closing. We have
granted a security interest to the Dow common stockholders in
certain royalties to be paid to us until we satisfy our
obligation to fund the $35.0 million escrow account. The
accounting treatment for the acquisition requires the
recognition of an additional $95.9 million of conditional
purchase consideration because the fair value of the net assets
acquired exceeded the total amount of the acquisition price.
Contingent consideration of up to $235.0 million may be incurred
for future milestones related to certain pipeline products still
in development. Over 85% of this contingent consideration is
dependent upon the achievement of approval and commercial
targets. Future contingent consideration paid in excess of the
$95.9 million will be treated as an additional cost of the
acquisition and result in the recognition of goodwill.
In November 2008, we acquired DermaTech for aggregate cash
consideration of $15.5 million, including transaction costs
and working capital adjustments.
In October 2008, we acquired Coria for aggregate cash
consideration of $96.9 million, including transaction costs
and working capital adjustments. As a result of the acquisition,
we acquired an assembled sales force and a suite of dermatology
products which enhanced our existing product base.
For information regarding these acquisitions, see Note 3 of
notes to consolidated financial statements in Item 8 of
this annual report on
Form 10-K.
Collaboration
Agreement
In October 2008, we closed 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, a
first-in-class
neuronal potassium channel opener for treatment of adult
epilepsy patients with refractory partial onset seizures.
Pursuant to the terms of the Collaboration Agreement, we granted
co-development rights and worldwide commercialization rights to
GSK. We 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 $125.0 million in upfront fees pursuant to the
Collaboration Agreement. In addition, GSK has agreed to pay us
up to $545.0 million 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 $150.0 million 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 in the
Collaboration Territory. Our share of such expenses in the
Collaboration Territory is limited to $100.0 million,
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 operating
expenses equally with respect to retigabine in the Collaboration
Territory. We expect to complete our research and development
and pre-commercialization obligations by mid to late 2010.
GSK has the right to terminate the Collaboration Agreement at
any time prior to the receipt of the approval by the FDA 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
$90.0 million of the upfront fee; however, the refundable
portion will decline over the time the Collaboration Agreement
is in effect. In February 2009, the Collaboration Agreement was
amended to, among other
6
matters, reduce the maximum amount that we would be required to
refund to GSK to $40.0 million through March 31, 2010,
with additional reductions over the time 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
$8.0 million upon acceptance of the filing of an NDA and
$6.0 million upon approval of the NDA for retigabine. We are
also required to pay royalty rates which, depending on 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 $5.3 million depending on certain licensing
activity. As a result of entering into the Collaboration
Agreement with GSK, we paid Meda Pharma a milestone payment of
$3.8 million in October 2008. An additional payment of
$1.5 million could become due if a certain indication for
retigabine is developed and licensed to GSK.
During the three months ended December 31, 2008, the
combined research and development expenses and
pre-commercialization expenses incurred under the Collaboration
Agreement by us and GSK were $13.1 million as outlined in
the table below. We recorded a credit of $4.1 million
against our share of the expenses to equalize our expenses with
GSK.
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Three Months Ended
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December 31, 2008
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Valeant selling, general and administrative
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$
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483
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Valeant research and development costs
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10,193
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10,676
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GSK expenses
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2,394
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Total spending for Collaboration Agreement
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$
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13,070
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|
Equalization (difference between individual partner costs and
50% of total)
|
|
$
|
4,141
|
|
|
|
|
|
|
7
The table below outlines the alliance revenue, expenses
incurred, associated credits against the expenses incurred, and
the remaining upfront payment for the Collaboration Agreement
during the following period:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended December 31, 2008
|
|
|
|
|
|
|
|
|
|
Selling,
|
|
|
Research
|
|
|
|
Balance
|
|
|
Alliance
|
|
|
General and
|
|
|
and
|
|
Collaboration Accounting Impact
|
|
Sheet
|
|
|
Revenue
|
|
|
Administrative
|
|
|
Development
|
|
|
Upfront payment from GSK
|
|
$
|
125,000
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
Incurred cost
|
|
|
|
|
|
|
|
|
|
|
483
|
|
|
|
10,193
|
|
Incurred cost offset
|
|
|
(6,535
|
)
|
|
|
|
|
|
|
(483
|
)
|
|
|
(6,052
|
)
|
Recognize alliance revenue
|
|
|
(4,374
|
)
|
|
|
(4,374
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Release from upfront payment
|
|
|
(10,909
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Remaining upfront payment from GSK
|
|
|
114,091
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equalization receivable from GSK
|
|
|
4,141
|
|
|
|
|
|
|
|
|
|
|
|
(4,141
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total equalization receivable from GSK
|
|
$
|
4,141
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expense and revenue
|
|
|
|
|
|
$
|
(4,374
|
)
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued liabilities
|
|
$
|
35,581
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other liabilities
|
|
|
52,297
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred revenue short-term
|
|
|
14,566
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred revenue long-term
|
|
|
11,647
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Remaining upfront payment from GSK
|
|
$
|
114,091
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research
and Development
Our research and development organization focuses on the
development of products through clinical trials. We currently
have two compounds in late-stage clinical development,
retigabine and taribavirin, as well as several other product
candidates in development that were acquired as part of our Dow
acquisition.
Our research and development expenses for the years ended
December 31, 2008, 2007 and 2006 were $87.0 million,
$98.0 million and $105.4 million, respectively. The
reduction in research and development expenses in 2008 compared
with 2007 is primarily due to the offset of expenses
attributable to the Collaboration Agreement with GSK. The
reduction in research and development expenses in 2007 compared
with 2006 is primarily due to the discontinuation of our
discovery operations and the sale of the pradefovir rights to
Schering-Plough, partly offset by the increase in clinical
development expense for retigabine.
As of December 31, 2008, there were 171 employees
involved in our research and development efforts.
Products
in Development
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 statistically significant reduction in monthly
seizure rates of 23% to 35% as adjunctive therapy in patients
with partial seizures.
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
(United States, 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
8
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 > 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, tremor, and nausea. Results of
the study were presented at the 8th European Congress on
Epileptology, Berlin, Germany in September 2008.
On May 13, 2008, we announced clinical data results for
RESTORE 2. RESTORE 2 evaluated the 600 and 900 mg daily
doses of retigabine versus placebo in patients taking stable
doses of one to three additional 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 > 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 the
1200 mg dose in the RESTORE 1 trial. Results of the study
were presented at the 62nd American Epilepsy Society annual
meeting, Seattle, WA in December 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 completed enrollment
at the end of 2008.
As discussed in more detail in the subsection
Collaboration Agreement above, in October 2008, we
completed a worldwide Collaboration Agreement with GSK for the
continued development and pre-commercialization of retigabine
and its backup compounds and received $125.0 million in
upfront fees from GSK. We will jointly develop and commercialize
retigabine in the Collaboration Territory and GSK will develop
and commercialize retigabine in the rest of the world. To the
extent that our expected development and pre-commercialization
expenses under the Collaboration Agreement are less than
$100.0 million, the difference will be recognized as
alliance revenue over the period prior to the launch of a
retigabine product. We expect to complete our development
efforts by mid to late 2010.
External research and development expenses for retigabine, net
of Collaboration Agreement credits in 2008, were
$41.8 million and $49.2 million in 2008 and 2007,
respectively.
9
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 Viramidine Safety and Efficacy Versus Ribavirin
(VISER) 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 of a reduced incidence of anemia
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 by significantly reducing
the number of subjects who developed anemia, but that it was not
comparable to ribavirin in efficacy at the fixed dose of
600 mg which was 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 and to deliver doses of taribavirin derived ribavirin
comparable to the doses of ribavirin that are used as standard
of care.
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, 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. Diarrhea was approximately twice as common
in taribavirin patients as ribavirin patients. However, the
diarrhea was not treatment limiting for taribavirin or ribavirin
patients.
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 Association for the Study of
Liver Disease, San Francisco, CA in November 2008. On
November 24, 2008, we published the 48-week end of
treatment results in a press release, and these are the subject
of a platform presentation at the upcoming European Association
for Study of Liver Disease (EASL) meeting in
Copenhagen in April 2009. These results and the week 60 follow
up results continue to demonstrate a consistent and similar
viral response rate for both taribavirin and ribavirin at all
doses studied, while the beneficial effect of taribavirin on
anemia has been maintained throughout the duration of therapy.
We are actively seeking potential partners for the taribavirin
program. External research and development expenses for
taribavirin were $8.5 million and $8.1 million in 2008
and 2007, respectively.
10
Dermatology
Products
A number of late stage dermatology product candidates in
development were acquired as part of the acquisition of Dow on
December 31, 2008. These include, but are not limited to:
IDP-107: IDP-107 is an antibiotic for the
treatment of moderate to severe acne vulgaris. Acne is a
disorder of the pilosebaceous unit and can be identified by the
presence of inflammatory and non-inflammatory lesions, pustules,
papules, or pimples. Acne vulgaris is a common skin disorder
that affects about 85% of people at some point in their lives.
IDP-107 is currently in Phase II studies.
IDP-108: IDP-108 is an antifungal targeted to
treat Onychomycosis. It is an investigational topical drug for
nail, hair, and skin fungal infections. The mechanism of
antifungal activity appears similar to other antifungal
triazoles, i.e. ergosterol synthesis inhibition. IDP-108, in a
non-lacquer formulation, is currently in Phase II studies.
IDP-113: IDP-113 has the same active
pharmaceutical ingredient as IDP-108. IDP-113 is a topical
therapy in solution form for the treatment of tinea capitis,
which is a fungal infection of the scalp characterized by bald
patches. IDP-113 is currently in Phase II studies.
IDP-115: IDP-115 is a product that combines an
active ingredient with sunscreen agents providing SPF for the
treatment of rosacea. IDP-115 has completed Phase II
clinical trials. Rosacea is characterized by erythema that
begins on the central face and can spread to the cheeks, nose,
and forehead and less commonly affect the neck, chest, ears, and
scalp.
Other
Development Projects
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 had initiated the development of
a novel intranasal delivery of diazepam. Our external research
and development expenses for Diastat Intranasal were
$3.0 million and $1.4 million for 2008 and 2007,
respectively. In February 2009, we decided to terminate this
development program.
Licenses
and Patents (Proprietary Rights)
Data
and Patent Exclusivity
We rely on a combination of regulatory and patent rights to
protect the value of our investment in the development of our
products.
A patent is the grant of a property right which allows its
holder to exclude others from, among other things, selling the
subject invention in, or importing such invention into, the
jurisdiction that granted the patent. In both the United States
and the European Union, patents expire 20 years from the
date of application.
In the United States, the Hatch Waxman Act provides nonpatent
regulatory exclusivity for five years from the date of the first
FDA approval of a new drug compound in an NDA. The FDA is
prohibited during those five years from approving a generic, or
Abbreviated New Drug Application (ANDA), that
references the NDA.
A similar data exclusivity scheme exists in the European Union,
whereby only the pioneer drug company can use data obtained at
the pioneers expense for up to eight years from the date
of the first approval of a drug by the EMEA and no generic drug
can be marketed for ten years from the approval of the innovator
product. Under both the United States and the European Union
data exclusivity programs, products without patent protection
can be marketed by others so long as they repeat the clinical
trials necessary to show safety and efficacy.
Exclusivity
Rights with Respect to Retigabine and Taribavirin
We own a United States composition of matter patent (which will
expire in 2013) directed to retigabine without regard to
crystalline form; we anticipate that this patent will be
extended to 2018 upon approval of retigabine pursuant to the
patent term restoration provisions of the Hatch-Waxman Act. We
also own two United States patents
11
(both of which will expire in 2018) that are directed to
specific crystalline forms of retigabine. In addition, we own a
number of United States patents and pending applications, with
expiration dates ranging from 2016 to 2023, directed to the use
of retigabine to treat a variety of disease indications. We also
own several patents and pending applications in foreign
countries with expiration dates ranging from 2012 to 2024.
We own a United States patent (which will expire in
2018) directed to a method of treating a viral infection
using a genus of compounds that includes taribavirin. We also
own a United States patent (which will expire in 2020) that
specifically claims the use of taribavirin to treat
hepatitis C infection. If taribavirin receives regulatory
approval, these patents may be eligible for patent term
extensions. To the extent permitted in foreign jurisdictions, we
are pursuing the foreign patent rights that correspond to our
United States patents.
Upon regulatory approval, we expect to obtain five years of data
exclusivity in the United States and eight years in Europe for
retigabine and taribavirin. We have various issued patents or
pending applications in foreign countries. These patents or
patent applications, if issued, have expiration dates ranging
from 2012 to 2023.
Exclusivity
with Respect to Ribavirin
Royalty payments from Schering-Plough do not depend on the
existence of a patent. We expect ribavirin royalties to continue
to decline significantly in 2009 in that royalty payments from
Schering-Plough will continue for European sales only until the
ten-year anniversary of the launch of the product, which varied
by European country and started in May 1999. Royalties from
Schering-Plough in Japan will continue after 2009.
Generic ribavirin was launched in the United States in the first
half of 2004. Under our agreement with Roche, upon the entry of
generics into the United States, Roche ceased paying royalties
on sales in the United States. Roche discontinued paying
royalties to us for ribavirin sales in Europe in June 2007 when
the Opposition Division of the European Patent Office revoked a
patent covering ribavirin.
Government
Regulations
Government authorities in the United States, at the federal,
state and local level, and in other countries extensively
regulate, among other things, the research, development,
testing, approval, manufacturing, labeling, post-approval
monitoring and reporting, packaging, promotion, storage,
advertising, distribution, marketing and export and import of
pharmaceutical products. The process of obtaining regulatory
approvals and the subsequent compliance with appropriate
federal, state, local and foreign statutes and regulations
require the expenditure of substantial time and financial
resources. FDA approval must be obtained in the United States,
EMEA approval must be obtained for countries that are part of
the European Union and approval must be obtained from comparable
agencies in other countries prior to marketing or manufacturing
new pharmaceutical products for use by humans.
Obtaining FDA approval for new products and manufacturing
processes can take a number of years and involve the expenditure
of substantial resources. To obtain FDA approval for the
commercial sale of a therapeutic agent, the potential product
must undergo testing programs on animals, the data from which is
used to file an IND with the FDA. In addition, there are three
phases of human testing: Phase I consists of safety tests for
human clinical experiments, generally in normal, healthy people;
Phase II programs expand safety tests and are conducted in
people who are sick with the particular disease condition that
the drug is designed to treat; and Phase III programs are
greatly expanded clinical trials to determine the effectiveness
of the drug at a particular dosage level in the affected patient
population. The data from these tests is combined with data
regarding chemistry, manufacturing and animal toxicology and is
then submitted in the form of a New Drug Application or NDA to
the FDA. The preparation of an NDA requires the expenditure of
substantial funds and the commitment of substantial resources.
The review by the FDA can take up to several years. If the FDA
determines that the drug is safe and effective, the NDA is
approved. A similar process exists in the European Union and in
other countries. See Item 1A Risk Factors for
risks associated with government regulation of our business.
Failures to comply with the applicable legal requirements at any
time during the product development process, approval process or
after approval may result in administrative or judicial
sanctions. These sanctions could include the FDAs
imposition of a hold on clinical trials, refusal to approve
pending applications, withdrawal of an approval, warning
letters, product recalls, product seizures, total or partial
suspension of production or distribution,
12
injunctions, fines, civil penalties or criminal prosecution. Any
agency or judicial enforcement action could have a material
adverse effect on us. In addition, newly discovered or developed
safety or effectiveness data may require changes to a
products approved labeling, including the addition of new
warnings, precautions and contraindications.
Manufacturers of drug products are required to comply with
manufacturing regulations, including current good manufacturing
regulations enforced by the FDA and similar regulations enforced
by regulatory agencies outside the United States. In addition,
we are subject to price control restrictions on our
pharmaceutical products in many countries in which we operate.
We are also subject to extensive health care marketing and fraud
and abuse regulation by the federal and state governments and
foreign countries in which we may conduct our business. If our
operations are found to be in violation of any of these laws,
regulations, rules or policies or any other law or governmental
regulation, or if interpretations of the foregoing change, we
may be subject to civil and criminal penalties, damages, fines,
exclusion from the Medicare and Medicaid programs and the
curtailment or restructuring of our operations.
Environmental
Regulation
We are subject to national, state, and local environmental laws
and regulations, including those governing the handling and
disposal of hazardous wastes, wastewater, solid waste and other
environmental matters. Our development and manufacturing
activities involve the controlled use of hazardous materials.
Marketing
and Customers
Our four major geographic markets are: the United States,
Mexico, Poland and Canada. During the year ended
December 31, 2008, we derived approximately 77% of our
sales from these markets. U.S. sales represented 37% of our
total consolidated product net sales in 2008, 2007 and 2006.
Poland accounted for 19%, 15% and 12% of our total consolidated
net sales in 2008, 2007 and 2006, respectively, while Mexico
accounted for 18%, 21% and 26%, respectively. Sales to McKesson
Corporation and its affiliates in the United States, Canada and
Mexico for the years ended December 31, 2008, 2007 and 2006
were 24%, 24% and 27%, respectively, of our total consolidated
product net sales. Sales to Cardinal Healthcare in the United
States for the years ended December 31, 2008, 2007 and 2006
were 17%, 12% and 12% respectively, of our total consolidated
product net sales. No other country, or single customer,
generated over 10% of our total product net sales.
We currently promote our pharmaceutical products to physicians,
hospitals, pharmacies and wholesalers through our own sales
force and sell through wholesalers. In some limited markets, we
additionally sell directly to physicians, hospitals and large
drug store chains and we sell through distributors in countries
where we do not have our own sales staff. As part of our
marketing program for pharmaceuticals, we use direct mailings,
advertise in trade and medical periodicals, exhibit products at
medical conventions and sponsor medical education symposia.
In October 2008, we signed an agreement with GSK, for the
promotion of Diastat and Diastat AcuDial. Under the terms of the
agreement, GSK has exclusive rights to 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.
Competition
Our competitors include specialty and large pharmaceutical
companies, biotechnology companies, OTC companies, academic and
other research and development institutions and generic
manufacturers, both in the United States and abroad. In
addition, our cosmeceutical Kinerase and CeraVe products also
face competition from manufacturers of non-prescription cosmetic
products. The dermatology competitive landscape is highly
fragmented, with a large number of mid size and smaller
companies competing in both the prescription sector and the OTC
and cosmeceutical sectors. Our competitors are pursuing the
development of pharmaceuticals and OTC products that target the
same diseases and conditions that we are targeting in neurology,
infectious disease and dermatology.
13
Products being developed by our competitors to treat epilepsy
include, but are not limited to:
|
|
|
|
|
Eisais rufinamide, which was approved by the FDA in
November 2008 for the treatment of Lennox-Gastaut Syndrome
(LGS), and is under review for the treatment of partial onset
seizures;
|
|
|
|
UCBs lacosamide (previously Schwarz) was approved by the
FDA for the treatment of partial onset seizures in October 2008;
|
|
|
|
An extended release version of Keppra, Keppra XR, was approved
by the FDA in September 2008, and an extended release version of
Lamictal is currently under review; and
|
|
|
|
Anti-epileptic drugs (AEDs) in Phase III development for
the treatment of epilepsy include carisbamate by Ortho-McNeil,
Inc. and brivaracetam by UCB. There are many AEDs in
Phase II development for the treatment of epilepsy.
|
Products being developed by our competitors to treat
hepatitis C include, but are not limited to:
|
|
|
|
|
Interferons or immunomodulators being developed by
Novartis/Human Genome Sciences, Intarcia, Anadys, and SciClone;
|
|
|
|
IMPDH inhibitors being developed by Roche, Vertex and others;
|
|
|
|
Protease or polymerase inhibitors being developed by InterMune,
Vertex/Johnson & Johnson, Schering-Plough, Novartis,
Wyeth/Viropharma and Idenix; and
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NS-5A inhibitors being developed by Bristol Myers Squibb and
others.
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The success of any of our competitors products or products
in development could adversely affect our expected revenues for
retigabine and taribavirin, if approved.
We sell a broad range of products, and competitive factors vary
by product line and geographic area in which the products are
sold.
We also face increased competition from manufacturers of generic
pharmaceutical products when patents covering certain of our
currently marketed products expire or are successfully
challenged. We currently have one significant product, Cesamet,
which does not currently have generic competition and which is
not protected by patent or regulatory exclusivity. Sales of
Cesamet were $37.3 million and $26.7 million in 2008
and 2007, respectively. In mid 2008 the first generic competitor
to Efudex, which is not protected by patent or regulatory
exclusivity, was launched. Sales of Efudex were
$61.2 million and $64.0 million in 2008 and 2007,
respectively.
On October 12, 2007, we settled a patent infringement
lawsuit with Kali Laboratories, Inc. regarding Kalis
submission of an ANDA with the FDA seeking approval for a
generic version of Diastat (a diazepam rectal gel). Under the
terms of this settlement, we agreed that Valeant would allow
Barr Laboratories, with whom Kali has a marketing agreement, to
introduce a generic version of Diastat and Diastat AcuDial on or
after September 1, 2010, or earlier under certain
circumstances.
Manufacturing
We currently operate four manufacturing plants. We reduced the
number of manufacturing sites in our global manufacturing and
supply chain network from 15 sites in 2003. In June 2007, we
sold our former manufacturing facilities in Basel, Switzerland
and Puerto Rico to Legacy Pharmaceuticals International,
reducing the number of sites in our network to four.
All of our manufacturing facilities that require certification
from the FDA or foreign agencies have obtained such approval.
We also subcontract the manufacturing of certain of our
products, including products manufactured under the rights
acquired from other pharmaceutical companies. Generally,
acquired products continue to be produced for a specific period
of time by the selling company. During that time, we integrate
the products into our own manufacturing facilities or initiate
toll manufacturing agreements with third parties.
14
In 2009, we estimate that approximately 61% of our products and
approximately 63% of our product sales will be produced by third
party manufacturers under toll manufacturing arrangements.
The principal raw materials used by us for our various products
are purchased in the open market. Most of these materials are
available from several sources. We have not experienced any
significant shortages in supplies of such raw materials.
Employees
As of December 31, 2008, we had 2,331 employees.
These employees include 788 in production, 991 in sales and
marketing, 171 in research and development, 99 in service
related positions, and 282 in general and administrative
positions. Collective bargaining exists for some employees in a
number of markets. We currently consider our relations with our
employees to be good and have not experienced any work
stoppages, slowdowns or other serious labor problems that have
materially impeded our business operations.
Product
Liability Insurance
We have had product liability insurance to cover damages
resulting from the use of our products since March 2005. Prior
to 2005, we obtained product liability insurance coverage only
for certain products. We have in place clinical trial insurance
in the major markets where we conduct clinical trials.
Foreign
Operations
Approximately 63%, 63% and 67% of our revenues from continuing
operations, which includes royalties, for the years ended
December 31, 2008, 2007 and 2006, respectively, were
generated from operations or otherwise earned outside the United
States. All of our foreign operations are subject to risks
inherent in conducting business abroad, including price and
currency exchange controls, fluctuations in the relative values
of currencies, political instability and restrictive
governmental actions including possible nationalization or
expropriation. Changes in the relative values of currencies may
materially affect our results of operations.
Available
Information
Our Internet address is www.valeant.com. We post
links on our website to the following filings as soon as
reasonably practicable after they are electronically filed or
furnished to the SEC: annual reports on
Form 10-K,
quarterly reports on
Form 10-Q,
current reports on
Form 8-K,
and any amendment to those reports filed or furnished pursuant
to Section 13(a) or 15(d) of the Securities Act of 1934.
All such filings are available through our website free of
charge. The information on our Internet website is not
incorporated by reference into this Annual Report on
Form 10-K
or our other securities filings and is not a part of such
filings.
Our filings may also be read and copied at the SECs Public
Reference Room at 100 F. Street, NE, Washington, DC 20549.
Information on the operation of the Public Reference Room may be
obtained by calling the SEC at
1-800-SEC-0330.
The SEC also maintains an Internet website at www.sec.gov
that contains reports, proxy and information statements, and
other information regarding issuers, including us, that file
electronically with the SEC.
You should consider carefully the following risk factors,
together with all of the other information included or
incorporated in this annual report on
Form 10-K.
Each of these risk factors, either alone or taken together,
could adversely affect our business, operating results and
financial condition, as well as adversely affect the value of an
investment in our securities. There may be additional risks that
we do not presently know of or that we currently believe are
immaterial which could also impair our business and financial
position.
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 challenges faced in
15
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 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.
Due to
the large portion of our business conducted outside the United
States, we have significant foreign currency risk.
We sell products in many countries that are susceptible to
significant foreign currency risk. In some of these markets we
sell products for U.S. Dollars. While this eliminates our
direct currency risk in such markets, it increases our risk that
we could lose market share to competitors because if a local
currency is devalued significantly, it becomes more expensive
for customers in that market to purchase our products in
U.S. Dollars.
If
retigabine, taribavirin and other product candidates in
development do not become approved and commercially successful
products, our ability to generate future growth in revenue and
earnings will be adversely affected.
We focus our development activities on areas in which we have
particular strengths. The outcome of any development program is
highly uncertain. Products in clinical trials may fail to yield
a commercial product, or a product may be approved by the FDA
yet not be a commercial success. Success in preclinical and
early stage clinical trials may not necessarily translate into
success in large-scale clinical trials.
In addition, we or a partner will need to obtain and maintain
regulatory approval in order to market retigabine, taribavirin
and other product candidates. Even if they appear promising in
large-scale Phase III clinical trials, regulatory approval
may not be achieved. The results of clinical trials are
susceptible to varying interpretations that may delay, limit or
prevent approval or result in the need for post-marketing
studies. In addition, changes in regulatory policy for product
approval during the period of product development and FDA review
of a new application may cause delays or rejection. Even if we
receive regulatory approval, this approval may include
limitations on the indications for which we can market a product
or onerous risk management programs, thereby reducing the size
of the market that we would be able to address or our product
may not be chosen by physicians for use by their patients. There
is no guarantee that we will be able to satisfy the needed
regulatory requirements, and we may not be able to generate
significant revenue, if any, from retigabine, taribavirin and
other product candidates.
We may
be unable to identify, acquire and integrate acquisition targets
successfully.
In 2008, we made three acquisitions. Part of our strategy
includes acquiring and integrating complementary businesses,
products, technologies or other assets, and forming strategic
alliances, joint ventures and other business combinations, to
help drive future growth. Such acquisitions or arrangements may
be complex, time consuming and expensive, and may present
numerous challenges and risks including:
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difficulties in assimilating any acquired workforce and merging
operations;
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attrition and the loss of key personnel;
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an acquired business, product, technology or other asset or
arrangement may not further our business strategy as anticipated;
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we may overpay for a business, product technology or other asset
or arrangement, or the economic or market conditions or
assumptions underlying our strategic decision may change;
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we may encounter difficulties entering and competing in new
product or geographic markets, and we may face increased
competition;
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we may experience significant problems or liabilities, including
increased intellectual property and employment related
litigation exposure, associated with acquired business, product,
technology or other asset or arrangement;
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in connection with any such acquisition or arrangement, we may
need to use a significant portion of our available cash, issue
additional equity securities that would dilute the then-current
stockholders percentage ownership or incur substantial
debt or contingent liabilities, or we may not be able to
successfully finance such acquisition or arrangement; and
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the related purchase price may require us to record material
amounts of goodwill, charges and other intangible assets, which
could result in significant impairment and charges and
amortization expense in future periods.
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Any one of these challenges or risks could impair our ability to
realize any benefit from our acquisition or arrangement after we
have expended resources on them.
In addition, from time to time we may enter into negotiations
for acquisitions or arrangements that are not ultimately
consummated. We compete for acquisition candidates or
arrangements with other entities, some of which have financial
and other resources that greatly exceed ours. Negotiations for
acquisitions or arrangements that are not ultimately consummated
could result in significant diversion of management time, as
well as substantial out-of-pocket costs.
We cannot forecast the number, timing or size of future
acquisitions or arrangements, or the effect that any such
transactions might have on our operating or financial results.
Any such acquisition or arrangement could disrupt our business
and harm our operating results and financial condition. Our
failure to implement successfully our acquisition strategy would
limit our potential growth and could have a material adverse
effect on our business.
If our
products cause, or are alleged to cause, serious or widespread
personal injury, we may have to withdraw those products from the
market and/or incur significant costs, including payment of
substantial sums in damages.
Even in well designed clinical trials, the potential of a drug
to cause serious or widespread personal injury may not be
apparent. In addition, the existence of a correlation between
use of a drug and serious or widespread personal injury may not
be apparent until it has been in widespread use for some period
of time. Particularly when a drug is used to treat a disease or
condition which is complex and the patients are taking multiple
medications, such correlations may indicate, but do not
necessarily indicate, that the drug has caused the injury;
nevertheless we may decide to, or regulatory authorities may
require that we, withdraw the drug from the market
and/or we
may incur significant costs, including the potential of paying
substantial damages. Withdrawals of products from the market
and/or
incurring significant costs, including the requirement to pay
substantial damages in personal injury cases, would materially
affect our business and results of operation.
If we,
our partners or licensees cannot successfully develop or obtain
future products and commercialize those products, our growth
would be delayed.
Our future growth will depend, in large part, upon our ability
or the ability of our partners or licensees to develop or obtain
and commercialize new products and new formulations of, or
indications for, current products. We are engaged in an active
development program involving compounds which we may
commercially develop in the future. Partners or licensees may
also help us develop these and other product candidates in the
future and are responsible for developing other product
candidates that have been licensed to or acquired by them. The
process of
17
successfully commercializing products is time consuming,
expensive and unpredictable. There can be no assurance that we,
our partners or our licensees will be able to develop or acquire
new products, successfully complete clinical trials, obtain
regulatory approvals to use these products for proposed or new
clinical indications, manufacture the potential products in
compliance with regulatory requirements or in commercial
volumes, or gain market acceptance for such products. In
addition, changes in regulatory policy for product approval
during the period of product development and regulatory agency
review of each submitted new application may cause delays or
rejections. It may be necessary for us to enter into other
licensing arrangements with other pharmaceutical companies in
order to market effectively any new products or new indications
for existing products. There can be no assurance that we will be
successful in entering into such licensing arrangements on terms
favorable to us or at all.
There can be no assurance that the clinical trials of any of our
product candidates, including retigabine and taribavirin, will
be successful, that the product candidates will be granted
approval to be marketed for any of the indications being sought
or that any of the product candidates will result in a
commercially successful product.
If we
identify a material weakness in our internal control over
financial reporting in future periods, our stock price could be
adversely affected and our ability to prepare complete and
accurate financial statements in a timely manner could be
adversely affected.
We identified a material weakness in our internal control over
financial reporting as of December 31, 2007. The material
weakness, which arose primarily as a result of our lack of a
sufficient complement of personnel in our foreign locations and
monitoring controls at the corporate level, is further described
in Item 9A of our annual report on
Form 10-K
for the year ended December 31, 2007. Because of the
foregoing, we concluded that certain financial statements,
earnings press releases and similar communications should no
longer be relied upon and that certain of our financial
statements would need to be restated. We also concluded that our
disclosure controls and procedures were not effective as of
December 31, 2007. As more fully described in Item 9A
of the annual report on
Form 10-K,
during the year ended December 31, 2008, we took steps to
remediate this material weakness and to improve our disclosure
controls and procedures.
If we fail to maintain our disclosure controls and procedures at
the reasonable assurance level, our financial statements and
related disclosure could contain material misstatements, the
preparation and filing of our financial statements and related
filings could be delayed, and substantial costs and resources
may be required to remediate any weaknesses or deficiencies or
to improve our disclosure controls and procedures. If we cannot
produce reliable and timely financial statements, investors
could lose confidence in our reported financial information, the
market price of our stock could decline significantly or we may
be unable to obtain financing on acceptable terms, and our
business and financial condition could be harmed.
The
results from the interim analyses of our Phase IIb study for
taribavirin may not be predictive of the final results of the
72-week Phase IIb study or of any subsequent clinical trial
necessary for approval of taribavirin.
We have reported results of the interim analyses (week 12 and
week 48) of the 72-week taribavirin Phase IIb study (see
Part II, Item 7, Products in Development).
These results may not be predictive of the final results of the
full 72-week study or of any subsequent clinical trial necessary
for the 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 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.
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
18
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.
Third
parties may be able to sell generic forms of our products or
block the sales of our products if our intellectual property
rights or data exclusivity rights do not sufficiently protect
us; patent rights of third parties may also be asserted against
us.
Our success depends in part on our ability to obtain and
maintain meaningful exclusivity protection for our products and
product candidates in key markets throughout the world via
patent protection
and/or data
exclusivity protection. The patent positions of pharmaceutical,
biopharmaceutical and biotechnology companies can be highly
uncertain and involve complex legal and factual questions. We
will be able to protect our products from generic substitution
by third parties only to the extent that our technologies are
covered by valid and enforceable patents, effectively maintained
as trade secrets or protected by data exclusivity. However, our
currently 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 from producing
generic substitutes for our products. Lastly, data exclusivity
schemes vary from country to country and may be limited or
eliminated as governments seek to reduce pharmaceutical costs by
increasing the speed and ease of approval of generic products.
In order to protect or enforce patent
and/or data
exclusivity rights, we may initiate patent litigation against
third parties, and we may be similarly sued by others. We may
also become subject to interference proceedings conducted in the
patent and trademark offices of various countries to determine
the priority of inventions. The defense and prosecution, if
necessary, of intellectual property and data exclusivity actions
are costly and divert technical and management personnel from
their normal responsibilities. We may not prevail in any of
these suits. An adverse determination of any litigation or
defense proceeding, resulting in a finding of non-infringement
or invalidity of our patents, or a lack of protection via data
exclusivity, may allow the entry of generic substitutes for our
products.
Furthermore, because of the substantial amount of discovery
required in connection with such litigation, there is a risk
that some of our confidential information could be compromised
by disclosure during such litigation. In addition, during the
course of this kind of litigation, there could be public
announcements of the results of hearings, motions or other
interim proceedings or developments in the litigation. If
securities analysts or investors perceive these results to be
negative, it could have a substantial negative effect on the
trading price of our securities.
The existence of a patent will not necessarily protect us from
competition. Competitors may successfully challenge our patents,
produce similar drugs that do not infringe our patents or
produce drugs in countries that do not respect our patents. No
patent can protect its holder from a claim of infringement of
another patent. Therefore, our patent position cannot and does
not provide an assurance that the manufacture, sale or use of
products patented by us would not infringe a patent right of
another.
While we know of no actual or threatened claim of infringement
that would be material to us, there can be no assurance that
such a claim will not be asserted. If such a claim is asserted,
there can be no assurance that the resolution of the claim would
permit us to continue producing the relevant product on
commercially reasonable terms.
19
Products
representing a significant amount of our revenue are not
protected by patent or data exclusivity rights.
Some of the products we sell have no meaningful exclusivity
protection via patent or data exclusivity rights. These products
represent a significant amount of our revenues. Without
exclusivity protection, competitors face fewer barriers in
introducing competing products. The introduction of competing
products could adversely affect our results of operations and
financial condition.
We are
subject to uncertainty related to health care reform measures
and reimbursement policies.
The levels at which government authorities, private health
insurers, HMOs and other organizations reimburse the cost of
drugs and treatments related to those drugs will impact the
successful commercialization of our drugs. We cannot be sure
that reimbursement in the United States or elsewhere will be
available for any drugs we may develop or, if already available,
will not be decreased in the future. Also, we cannot be sure
that reimbursement amounts will not reduce the demand for, or
the price of, our drugs. If reimbursement is not available or is
available only on a limited basis, we may not be able to obtain
a satisfactory financial return on the manufacture and
commercialization of existing and future drugs. Third-party
payers may not establish and maintain price levels sufficient
for us to realize an appropriate return on our investment in
product development or our continued manufacture and sale of
existing drug products.
The
matters relating to the Special Committees review of our
historical stock option granting practices and the restatement
of our consolidated financial statements have resulted in
increased litigation and regulatory proceedings against us and
could have a material adverse effect on us.
In September 2006, our board of directors appointed a Special
Committee, which consisted solely of independent directors, to
conduct a review of our historical stock option granting
practices and related accounting during the period from 1982
through July 2006. The Special Committee identified a number of
occasions on which the exercise prices for stock options granted
to certain of our directors, officers and employees were set
using closing prices of our common stock with dates different
than the actual approval dates, resulting in additional
compensation charges.
To correct these and other accounting errors, we amended our
annual report on
Form 10-K
for the year ended December 31, 2005 and our quarterly
reports on
Form 10-Q
for the quarters ended March 31, 2006 and June 30,
2006 to restate the consolidated financial statements contained
in those reports.
Our historical stock option granting practices and the
restatement of our prior financial statements have exposed us to
greater risks associated with litigation and regulatory
proceedings. We are a nominal defendant in three shareholder
derivative lawsuits which assert claims related to our historic
stock option practices. In addition, the SEC has opened a formal
inquiry into our historical stock option grant practices. We
cannot assure you that this current litigation, the SEC inquiry
or any future litigation or regulatory action will result in the
same conclusions reached by the Special Committee. The conduct
and resolution of these matters will be time consuming,
expensive and distracting from the conduct of our business.
Furthermore, if we are subject to adverse findings in any of
these matters, we could be required to pay damages or penalties
or have other remedies imposed upon us which could have a
material adverse effect on our business, financial condition,
results of operations and cash flows.
If
competitors develop more effective or less costly drugs for our
target indications, our business could be seriously
harmed.
Many of our competitors, particularly large pharmaceutical
companies, have substantially greater financial, technical and
human resources than we do. Many of our competitors spend
significantly more on research and development related
activities than we do. Others may succeed in developing products
that are more effective than those currently marketed or
proposed for development by us. Progress by other researchers in
areas similar to those being explored by us may result in
further competitive challenges. In addition, academic
institutions, government agencies, and other public and private
organizations conducting research may seek patent protection
with respect to potentially competitive products. They may also
establish exclusive collaborative or licensing relationships
with our competitors.
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Obtaining
necessary government approvals is time consuming and not
assured.
FDA approval must be obtained in the United States and approval
must be obtained from comparable agencies in other countries
prior to marketing or manufacturing new pharmaceutical products
for use by humans. Obtaining FDA approval for new products and
manufacturing processes can take a number of years and involves
the expenditure of substantial resources. Numerous requirements
must be satisfied, including preliminary testing programs on
animals and subsequent clinical testing programs on humans, to
establish product safety and efficacy. No assurance can be given
that we will obtain approval in the United States, or any other
country, of any application we may submit for the commercial
sale of a new or existing drug or compound. Nor can any
assurance be given that if such approval is secured, the
approved labeling will not have significant labeling
limitations, or that those drugs or compounds will be
commercially successful.
Furthermore, changes in existing regulations or adoption of new
regulations could prevent or delay us from obtaining future
regulatory approvals or jeopardize existing approvals, which
could significantly increase our costs associated with obtaining
approvals and negatively impact our market position.
If we
or our third-party manufacturers are unable to manufacture our
products or the manufacturing process is interrupted due to
failure to comply with regulations or for other reasons, the
manufacture of our products could be interrupted.
We manufacture and have contracted with third parties to
manufacture some of our drug products, including products under
the rights acquired from other pharmaceutical companies.
Manufacturers are required to adhere to current good
manufacturing (cGMP) regulations enforced by the FDA
or similar regulations required by regulatory agencies in other
countries. Compliance with the FDAs cGMP requirements
applies to both drug products seeking regulatory approval and to
approved drug products. Our manufacturing facilities and those
of our contract manufacturers must be inspected and found to be
in full compliance with cGMP or similar standards before
approval for marketing.
Our dependence upon others to manufacture our products may
adversely affect our profit margins and our ability to develop
and obtain approval for our products on a timely and competitive
basis, if at all. Our failure or that of our contract
manufacturers to comply with cGMP regulations or similar
regulations outside of the United States can result in
enforcement action by the FDA or its foreign counterparts,
including, among other things, warning letters, fines,
injunctions, civil penalties, recall or seizure of products,
total or partial suspension of production, refusal of the
government to renew marketing applications and criminal
prosecution. In addition, delays or difficulties by us or with
our contract manufacturers in producing, packaging, or
distributing our products could adversely affect the sales of
our current products or introduction of other products.
In addition to regulatory compliance risks, our contract
manufacturers in the United States and in other countries are
subject to a wide range of business risks, such as seizure of
assets by governmental authorities, natural disasters, and
domestic and international economic conditions. Were we or any
of our contract manufacturers not able to manufacture our
products because of regulatory, business or any other reasons,
the manufacture of our products would be interrupted. This could
have a negative impact on our sales, financial condition and
competitive position.
Many
of our key processes, opportunities and expenses are a function
of existing national and/or local government regulation.
Significant changes in regulations could have a material adverse
impact on our business.
The process by which pharmaceutical products are approved is
lengthy and highly regulated. Our multi-year clinical trials
programs are planned and executed to conform to these
regulations, and once begun, can be difficult and expensive to
change should the regulations regarding approval of
pharmaceutical products significantly change.
In addition, we depend on patent law and data exclusivity to
keep generic products from reaching the market in our
evaluations of the development of our products. In assessing
whether we will invest in any development program, or license a
product from a third party, we assess the likelihood of patent
and/or data
exclusivity under the
21
laws and regulations then in effect. If those schemes
significantly change in a large market, or across many smaller
markets, our ability to protect our investment may be adversely
affected.
Appropriate tax planning requires that we consider the current
and prevailing national and local tax laws and regulations, as
well as international tax treaties and arrangements that we
enter into with various government authorities. Changes in
national/local tax regulations or changes in political
situations may limit or eliminate the effects of our tax
planning and could result in unanticipated tax expenses.
Our
business, financial condition and results of operations are
subject to risks arising from the international scope of our
operations.
We conduct a significant portion of our business outside the
United States. Including ribavirin royalties, approximately 63%
of our revenues from continuing operations were generated
outside the United States during the years ended
December 31, 2008 and 2007. We sell our pharmaceutical
products in more than 40 countries around the world and employ
approximately 1,834 individuals in countries other than the
United States. The international scope of our operations may
lead to volatile financial results and difficulties in managing
our operations because of, but not limited to, the following:
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difficulties and costs of staffing, severance and benefit
payments and managing international operations;
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exchange controls, currency restrictions and exchange rate
fluctuations;
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unexpected changes in regulatory requirements;
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price controls restrictions on products sold in the relevant
countries;
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the burden of complying with multiple and potentially
conflicting laws;
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the geographic, time zone, language and cultural differences
between personnel in different areas of the world;
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market share and product sales in certain markets being
dependent on actions by and relationships with key distributors;
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greater difficulty in collecting accounts receivables in and
moving cash out of certain geographic regions;
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the need for a significant amount of available cash from
operations to fund our business in a number of geographic and
economically diverse locations; and
|
|
|
|
political, social and economic instability in emerging markets
in which we currently operate.
|
If the
counterparties to our convertible notes hedge and warrant
transactions do not fulfill their obligations, if and when they
occur, such a failure could have a material adverse effect on
our financial position and results of operations, and result in
stockholder dilution.
In connection with the issuance of the convertible notes, we
entered into convertible notes hedge and warrant transactions
with certain financial institutions, each of which we refer to
as counterparty. The convertible notes hedge is comprised of
purchased call options that are expected to reduce our exposure
to the settlement value (potential cash payments or issuance of
common stock, or a combination thereof) required to be incurred
by us upon the conversion of the notes. The call options may be
settled in cash, shares, or a combination thereof, at the option
of the company. We have also entered into respective warrant
transactions with the counterparties pursuant to which we will
have sold to each counterparty warrants for the purchase of
shares of our common stock. Together, each of the note hedges
and warrant transactions are expected to provide us with some
protection against increases in our stock price over the
conversion price per share. Although we believe the
counterparties are highly rated financial institutions, there
are no assurances that the counterparties will be able to
perform their respective obligations under the agreements we
have with each of them. Any net exposure related to failure of
the counterparties to perform their obligations under the
agreements we have with them could have a material adverse
effect on our financial position and results of operations and
depending on how we settle our obligations, could result in
stockholder dilution.
22
We are
involved in various legal proceedings that could adversely
affect us.
We are involved in several legal proceedings, including those
described in Note 19 of notes to the consolidated financial
statements. Defending against claims and any unfavorable legal
decisions, settlements or orders could have a material adverse
effect on us.
Existing
and future audits by, or other disputes with, taxing authorities
may not be resolved in our favor.
Our income tax returns are subject to audit in various
jurisdictions. Existing and future audits by, or other disputes
with, tax authorities may not be resolved in our favor and could
have an adverse effect on our reported effective tax rate and
after-tax cash flows.
Our
stockholder rights plan and anti-takeover provisions of our
charter documents could provide our board of directors with the
ability to delay or prevent a change in control of
us.
Our stockholder rights plan, provisions of our certificate of
incorporation, bylaws and the Delaware General Corporation Law
provide our board of directors with the ability to deter hostile
takeovers or delay, deter or prevent a change in control of the
company, including transactions in which stockholders might
otherwise receive a premium for their shares over then current
market prices.
We are authorized to issue, without stockholder approval,
approximately 10 million shares of preferred stock,
200 million shares of common stock and securities
convertible into either shares of common stock or preferred
stock. The board of directors can also use issuances of
preferred or common stock to deter a hostile takeover or change
in control of the Company.
We are
subject to a consent order with the SEC.
We are subject to a consent order with the SEC, which
permanently enjoins us from violating securities laws and
regulations. The consent order also precludes protection for
forward-looking statements under the safe harbor provisions of
the Private Securities Litigation Reform Act of 1995 with
respect to forward-looking statements we made prior to
November 28, 2005. The existence of the permanent
injunction under the consent order, and the lack of protection
under the safe harbor with respect to forward-looking statements
we made prior to November 28, 2005 may limit our
ability to defend against future allegations.
We are
subject to fraud and abuse and similar laws and
regulations, and a failure to comply with such regulations or
prevail in any litigation related to noncompliance could harm
our business.
Pharmaceutical and biotechnology companies have faced lawsuits
and investigations pertaining to violations of health care
fraud and abuse laws, such as the federal False
Claims Act, the federal Anti-kickback Statute, the Foreign
Corrupt Practices Act and other state and federal laws and
regulations. Increasingly, states require pharmaceutical
companies to have comprehensive compliance programs and to
disclose certain payments made to healthcare providers or funds
spent on marketing and promotion of drug products. If we are in
violation of any of these requirements or any such actions are
instituted against us, and we are not successful in defending
ourselves or asserting our rights, those actions could have a
significant impact on our business, including the imposition of
significant fines or other sanctions.
If we
do not realize the expected benefits from our restructuring
plans, our business prospects may suffer and our operating
results and financial condition would be adversely
affected.
Our prior restructuring plans were 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.
|
|
Item 1B.
|
Unresolved
Staff Comments
|
None.
23
Our major facilities are in the following locations:
|
|
|
|
|
|
|
|
|
|
|
|
|
Owned or
|
|
Square
|
|
Location
|
|
Purpose
|
|
Leased
|
|
Footage
|
|
|
Aliso Viejo, California
|
|
Corporate headquarters
|
|
Leased
|
|
|
109,948
|
|
Specialty Pharmaceuticals
|
|
|
|
|
|
|
|
|
Montreal, Canada
|
|
Offices and manufacturing facility
|
|
Owned
|
|
|
93,519
|
|
Petaluma, California
|
|
Offices and laboratories
|
|
Leased
|
|
|
50,435
|
|
Fort Worth, Texas
|
|
Offices
|
|
Leased
|
|
|
11,235
|
|
Branded Generics Latin America
|
|
|
|
|
|
|
|
|
Mexico City, Mexico
|
|
Offices and manufacturing facility
|
|
Owned/Leased
|
|
|
232,387
|
|
Branded Generics Europe
|
|
|
|
|
|
|
|
|
Rzeszow, Poland
|
|
Offices and manufacturing facility
|
|
Owned
|
|
|
446,661
|
|
In our opinion, facilities occupied by us are more than adequate
for present requirements, and our current equipment is
considered to be in good condition and suitable for the
operations involved.
|
|
Item 3.
|
Legal
Proceedings
|
See Note 19 of notes to consolidated financial statements
in Item 8 of this annual report on
Form 10-K.
|
|
Item 4.
|
Submission
of Matters to a Vote of Security Holders
|
No matters were submitted for a vote of our stockholders during
the fourth quarter of the year ended December 31, 2008.
PART II
|
|
Item 5.
|
Market
for Registrants Common Equity, Related Stockholder Matters
and Issuer Purchases of Equity Securities
|
Price
Range of Common Stock
Our common stock is traded on the New York Stock Exchange
(symbol: VRX). As of February 25, 2009 there were 4,447
holders of record of our common stock.
The following table sets forth, for the periods indicated the
high and low sales prices of our common stock on the New York
Stock Exchange Composite Transactions reporting
system.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
Fiscal Quarters
|
|
High
|
|
|
Low
|
|
|
High
|
|
|
Low
|
|
|
First
|
|
$
|
14.63
|
|
|
$
|
11.00
|
|
|
$
|
18.16
|
|
|
$
|
16.62
|
|
Second
|
|
$
|
17.71
|
|
|
$
|
11.99
|
|
|
$
|
18.82
|
|
|
$
|
15.29
|
|
Third
|
|
$
|
21.00
|
|
|
$
|
16.00
|
|
|
$
|
17.75
|
|
|
$
|
15.17
|
|
Fourth
|
|
$
|
23.28
|
|
|
$
|
14.58
|
|
|
$
|
15.96
|
|
|
$
|
10.35
|
|
Performance
Graph
The following graph compares the cumulative total return on our
common stock with the cumulative return on the Standard and
Poors Mid Cap 400 Index (S&P Mid Cap 400
Index) and a 10-Stock Custom Composite Index (the
Custom Composite Index) for the five years ended
December 31, 2008. The Custom Composite consists of
Allergan, Inc., Biovail Corporation, Cephalon, Inc., Forest
Laboratories, Inc., Gilead Sciences, Inc., King Pharmaceuticals,
Inc., Medicis Pharmaceutical Corporation, Mylan Laboratories
Inc., Shire Pharmaceuticals Group plc and Watson
Pharmaceuticals, Inc.
24
Based on
reinvestment of $100 beginning on December 31,
2003
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dec-03
|
|
|
Dec-04
|
|
|
Dec-05
|
|
|
Dec-06
|
|
|
Dec-07
|
|
|
Dec-08
|
Valeant Pharmaceuticals International
|
|
|
|
100
|
|
|
|
|
106
|
|
|
|
|
74
|
|
|
|
|
71
|
|
|
|
|
50
|
|
|
|
|
95
|
|
S&P Mid Cap 400 Index
|
|
|
|
100
|
|
|
|
|
115
|
|
|
|
|
128
|
|
|
|
|
140
|
|
|
|
|
149
|
|
|
|
|
93
|
|
Custom Composite Index
|
|
|
|
100
|
|
|
|
|
91
|
|
|
|
|
112
|
|
|
|
|
127
|
|
|
|
|
126
|
|
|
|
|
108
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 $200.0 million of our outstanding common stock in a
24-month
period. In June 2008, our board of directors increased the
authorization to $300.0 million, over the original
24-month
period. This program was completed in November 2008. The total
number of shares repurchased pursuant to this program was
17,618,920 at an average price of $17.03 per share, including
transaction costs.
In October 2008, our board of directors authorized us to
repurchase up to $200.0 million of our outstanding common
stock or convertible subordinated notes in a
24-month
period ending October 2010, unless earlier terminated or
completed. 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 securities
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 securities repurchase
program may be modified or discontinued at any time. As of
December 31, 2008, we repurchased $32.6 million
aggregate principal amount of our 3.0% Convertible
Subordinated Notes due 2010 for $29.0 million in cash, in
addition to the repurchase of 298,961 shares of our common
stock for $6.1 million.
In addition, as of December, 31, 2008, we have sold 324,474
treasury shares to certain executives in connection with
purchase requirements set forth in their executive employment
agreements.
25
Set forth below is the information regarding shares repurchased
under the repurchase programs during the fourth quarter of the
year ended December 31, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Approximate Dollar
|
|
|
|
|
|
|
|
|
|
Total Number of
|
|
|
Value of Shares that
|
|
|
|
Total Number
|
|
|
Average
|
|
|
Shares Purchased
|
|
|
May Yet Be
|
|
|
|
of Shares
|
|
|
Price Paid
|
|
|
as Part of Publicly
|
|
|
Purchased under the
|
|
Period
|
|
Repurchased
|
|
|
Per Share
|
|
|
Announced Plan
|
|
|
Plans
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
|
10/1/08 10/31/08
|
|
|
5,327,184
|
|
|
$
|
17.53
|
|
|
|
5,327,184
|
|
|
$
|
215,516
|
|
11/1/08 11/30/08
|
|
|
825,136
|
|
|
$
|
18.76
|
|
|
|
825,136
|
|
|
$
|
171,039
|
|
12/1/08 12/31/08
|
|
|
298,961
|
|
|
$
|
20.38
|
|
|
|
298,961
|
|
|
$
|
164,941
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
6,451,281
|
|
|
$
|
17.70
|
|
|
|
6,451,281
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividend
Policy
We did not declare and did not pay dividends in 2008 or 2007.
Our board of directors reviews our dividend policy from time to
time.
26
|
|
Item 6.
|
Selected
Financial Data
|
The selected statement of operations and balance sheet data
shown below were derived from our consolidated financial
statements. The consolidated statement of operations data for
the years ended December 31, 2008, 2007 and 2006 and the
consolidated balance sheet data as of December 31, 2008 and
2007 have been derived from our audited financial statements
included elsewhere in this annual report on
Form 10-K.
The consolidated statement of operations data for the years
ended December 31, 2005 and 2004 and the consolidated
balance sheet data as of December 31, 2006, 2005 and 2004
have been derived from audited consolidated financial statements
which are not included in this annual report on
Form 10-K.
You should read this selected financial data together with our
consolidated financial statements and related notes, as well as
the discussion under the caption Managements
Discussion and Analysis of Financial Condition and Results of
Operations.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
(In thousands except per share data)
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product sales
|
|
$
|
593,165
|
|
|
$
|
603,051
|
|
|
$
|
603,810
|
|
|
$
|
546,429
|
|
|
$
|
431,436
|
|
Alliance revenue (including ribavirin royalties) (1)
|
|
|
63,812
|
|
|
|
86,452
|
|
|
|
81,242
|
|
|
|
91,646
|
|
|
|
76,427
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
656,977
|
|
|
|
689,503
|
|
|
|
685,052
|
|
|
|
638,075
|
|
|
|
507,863
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of goods sold (excluding amortization)
|
|
|
167,916
|
|
|
|
158,060
|
|
|
|
161,008
|
|
|
|
145,403
|
|
|
|
119,610
|
|
Selling, general and administrative
|
|
|
278,019
|
|
|
|
292,001
|
|
|
|
283,559
|
|
|
|
253,743
|
|
|
|
212,757
|
|
Research and development costs, net
|
|
|
86,967
|
|
|
|
97,957
|
|
|
|
105,443
|
|
|
|
113,770
|
|
|
|
89,567
|
|
Acquired in-process research and development (2)
|
|
|
186,300
|
|
|
|
|
|
|
|
|
|
|
|
126,399
|
|
|
|
11,770
|
|
Gain on litigation settlements (3)
|
|
|
|
|
|
|
|
|
|
|
(51,550
|
)
|
|
|
|
|
|
|
|
|
Restructuring, asset impairments and dispositions (4)
|
|
|
21,295
|
|
|
|
27,675
|
|
|
|
88,616
|
|
|
|
1,253
|
|
|
|
3,096
|
|
Amortization expense
|
|
|
49,973
|
|
|
|
55,985
|
|
|
|
51,295
|
|
|
|
49,335
|
|
|
|
42,629
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total costs and expenses
|
|
|
790,470
|
|
|
|
631,678
|
|
|
|
638,371
|
|
|
|
689,903
|
|
|
|
479,429
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations
|
|
|
(133,493
|
)
|
|
|
57,825
|
|
|
|
46,681
|
|
|
|
(51,828
|
)
|
|
|
28,434
|
|
Other income (expense), net including translation and exchange
|
|
|
2,063
|
|
|
|
1,659
|
|
|
|
766
|
|
|
|
(1,993
|
)
|
|
|
(3,682
|
)
|
Loss on early extinguishment of debt (5)
|
|
|
(11,555
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(19,892
|
)
|
Interest income
|
|
|
17,129
|
|
|
|
17,584
|
|
|
|
12,367
|
|
|
|
12,963
|
|
|
|
12,127
|
|
Interest expense
|
|
|
(30,486
|
)
|
|
|
(42,921
|
)
|
|
|
(43,470
|
)
|
|
|
(40,045
|
)
|
|
|
(48,964
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations before income taxes and
minority interest
|
|
|
(156,342
|
)
|
|
|
34,147
|
|
|
|
16,344
|
|
|
|
(80,903
|
)
|
|
|
(31,977
|
)
|
Provision for income taxes (6)
|
|
|
33,913
|
|
|
|
13,535
|
|
|
|
36,577
|
|
|
|
67,034
|
|
|
|
57,739
|
|
Minority interest
|
|
|
7
|
|
|
|
2
|
|
|
|
3
|
|
|
|
287
|
|
|
|
233
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations
|
|
|
(190,262
|
)
|
|
|
20,610
|
|
|
|
(20,236
|
)
|
|
|
(148,224
|
)
|
|
|
(89,949
|
)
|
Income (loss) from discontinued operations, net of tax (7)
|
|
|
166,548
|
|
|
|
(26,796
|
)
|
|
|
(37,332
|
)
|
|
|
(40,468
|
)
|
|
|
(63,960
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(23,714
|
)
|
|
$
|
(6,186
|
)
|
|
$
|
(57,568
|
)
|
|
$
|
(188,692
|
)
|
|
$
|
(153,909
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic income (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations
|
|
$
|
(2.17
|
)
|
|
$
|
0.22
|
|
|
$
|
(0.22
|
)
|
|
$
|
(1.61
|
)
|
|
$
|
(1.07
|
)
|
Income (loss) from discontinued operations
|
|
|
1.90
|
|
|
|
(0.29
|
)
|
|
|
(0.40
|
)
|
|
|
(0.45
|
)
|
|
|
(0.76
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per share
|
|
$
|
(0.27
|
)
|
|
$
|
(0.07
|
)
|
|
$
|
(0.62
|
)
|
|
$
|
(2.06
|
)
|
|
$
|
(1.83
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted income (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations
|
|
$
|
(2.17
|
)
|
|
$
|
0.22
|
|
|
$
|
(0.22
|
)
|
|
$
|
(1.61
|
)
|
|
$
|
(1.07
|
)
|
Income (loss) from discontinued operations
|
|
|
1.90
|
|
|
|
(0.29
|
)
|
|
|
(0.40
|
)
|
|
|
(0.45
|
)
|
|
|
(0.76
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per share
|
|
$
|
(0.27
|
)
|
|
$
|
(0.07
|
)
|
|
$
|
(0.62
|
)
|
|
$
|
(2.06
|
)
|
|
$
|
(1.83
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends declared per share of common stock
|
|
$
|
|
|
|
$
|
|
|
|
$
|
0.24
|
|
|
$
|
0.23
|
|
|
$
|
0.31
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
27
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Balance Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
199,582
|
|
|
$
|
287,728
|
|
|
$
|
311,012
|
|
|
$
|
208,397
|
|
|
$
|
208,517
|
|
Working capital(8)
|
|
|
177,843
|
|
|
|
416,552
|
|
|
|
353,159
|
|
|
|
226,062
|
|
|
|
440,344
|
|
Net assets of discontinued operations(7)
|
|
|
|
|
|
|
272,047
|
|
|
|
282,251
|
|
|
|
307,096
|
|
|
|
268,638
|
|
Total assets
|
|
|
1,187,352
|
|
|
|
1,494,262
|
|
|
|
1,505,692
|
|
|
|
1,515,539
|
|
|
|
1,522,160
|
|
Total debt(5)
|
|
|
448,529
|
|
|
|
784,207
|
|
|
|
780,255
|
|
|
|
776,674
|
|
|
|
779,591
|
|
Stockholders equity(1)(2)(3)(4)(5)(6)
|
|
|
203,425
|
|
|
|
414,103
|
|
|
|
430,390
|
|
|
|
435,558
|
|
|
|
471,538
|
|
Notes to
Selected Financial Data:
|
|
|
(1) |
|
Alliance revenue for the year ended December 31, 2008
included $4.4 million from the GSK Collaboration Agreement.
Alliance revenue for the year ended December 31 2007 included a
$19.2 million milestone payment received from
Schering-Plough related to the outlicensing of pradefovir.
Alliance revenue prior to 2007 consisted exclusively of
royalties from Schering-Plough and Roche on their sales of
ribavirin. |
|
(2) |
|
In connection with our acquisitions, portions of the purchase
price are allocated to acquired in-process research and
development on projects that, as of the acquisition date, had
not yet reached technological feasibility and had no alternative
future use. Such costs are charged to research and development
expense as of the date of the acquisition. In December 2008, we
acquired Dow for approximately $385.1 million of which
$185.8 million was allocated to in-process research and
development costs and charged to expense. In October 2008, we
acquired Coria for approximately $96.9 million of which
$0.5 million was allocated to in-process research and
development costs and charged to expense. In March 2005, we
acquired Xcel for approximately $280.0 million of which
$126.4 million was allocated to in-process research and
development costs and charged to expense. In February 2004, we
acquired from Amarin Corporation plc its
U.S.-based
subsidiary, Amarin Pharmaceuticals, Inc., and all of that
subsidiarys U.S. product rights. The total consideration
paid for Amarin was $40.0 million, of which
$11.8 million was allocated to in-process research and
development costs and charged to expense in the year ended
December 31, 2004. |
|
(3) |
|
In 2006, we recorded a gain on litigation settlement from
litigation with a former chief executive officer, Milan Panic,
of $17.6 million relating to Ribapharm bonuses. We also
recorded a gain on litigation settlement from litigation with
the Republic of Serbia of $34.0 million relating to the
ownership and operations of a joint venture we formerly
participated in known as Galenika. |
|
(4) |
|
In 2004, we incurred an expense of $3.1 million related to
our manufacturing and rationalization plan. In 2005, we made the
decision to dispose of another manufacturing plant in China
which resulted in an asset impairment charge of
$2.3 million. In 2005, we also recorded net gains of
approximately $1.8 million resulting from the sale of the
manufacturing plants in the United States, Argentina and Mexico. |
|
|
|
In 2006, we incurred an expense of $88.6 million relating
to the 2006 Restructuring. The expense included employee
severance costs of $11.6 million, abandoned software and
other capital assets of $22.2 million, asset impairment
charges relating to fixed assets at a manufacturing facility and
our former headquarters and research facility of
$53.2 million and contract cancellation and other cash
charges of $1.6 million. |
|
|
|
In 2007, we incurred restructuring expenses of
$27.7 million. In the first half of 2007, we incurred a
restructuring expense of $18.1 million relating to the
completion of the 2006 Restructuring, comprising employee
severance costs of $3.8 million, other cash costs of
$2.1 million, the elimination of accumulated foreign
currency translation adjustments of $2.8 million and asset
impairment charges relating to a manufacturing facility of
$9.4 million. In March 2008, we announced that a strategic
review initiated by our board of directors in October 2007
resulted in plans for a new restructuring program. Charges for
this restructuring program incurred in 2007 were
$9.6 million, comprising $1.0 million in executive
severances, $4.7 million for professional service expenses,
and $3.9 million for contract termination and transaction
costs associated with the sale of our Asia businesses. |
28
|
|
|
|
|
In 2008, we incurred restructuring expenses of
$21.3 million relating to the 2008 Restructuring Plan. The
expense included employee severance costs of $19.2 million,
professional service fees related to the strategic review of our
business of $10.4 million, contract cancellation and other
cash costs of $8.0 million, stock compensation expense for
the accelerated vesting of the stock options of our former chief
executive officer of $4.8 million, impairment charges
relating to the sale of certain subsidiaries and certain fixed
assets of $10.8 million, and the loss on sale of
subsidiaries in Argentina and Uruguay of $2.6 million,
offset in part by the gain on sale of certain assets and
subsidiaries in Asia of $34.5 million. |
|
(5) |
|
In November 2008, we repurchased $32.6 million aggregate
principal amount of our 3.0% Convertible Subordinated Notes
due 2010. In connection with this repurchase we recorded a gain
on early extinguishment of debt of $3.3 million for the
year ended December 31, 2008. In July 2008, we redeemed
$300.0 million aggregate principal amount of
7.0% Senior Notes due 2011. In connection with this
redemption, we recorded a loss on early extinguishment of debt
of $14.9 million for the year ended December 31, 2008.
In May and July 2004, we repurchased $326.0 million
aggregate principal amount of our
61/2% Convertible
Subordinated Notes due 2008. In connection with these
repurchases, we recorded a loss on early extinguishment of debt
of $19.9 million for the year ended December 31, 2004. |
|
(6) |
|
The tax provision in 2005 included a net charge of
$27.4 million associated with an Internal Revenue Service
examination of our U.S. tax returns for the years 1997 to 2001
(including interest). The tax provision in 2007 includes a net
credit of $21.5 million to partially reverse the 2005
charge, as a result of resolving many of the issues raised
during the examination through an appeals process. In 2007,
2006, 2005 and 2004, we recorded valuation allowance increases
of $53.1 million, $28.1 million, $39.9 million
and $85.4 million, respectively, against our deferred tax
asset to recognize the uncertainty of realizing the benefits of
our accumulated U.S. and state net operating losses and credits.
In 2007, the increase in the U.S. valuation allowance was offset
by liabilities for uncertain tax positions of
$60.1 million, with a net decrease of the valuation
allowance of $7.0 million. As of December 31, 2008,
the valuation allowances totaled $142.7 million. During
2008, based upon certain transactions including the sale of the
WEEMEA business and reversal of our intent to indefinitely
reinvest foreign earnings, we released $23.6 million and
$4.5 million of the valuation allowance through additional
paid-in capital and goodwill, respectively. Additionally, the
tax provisions in 2005 and 2008 do not reflect tax benefits for
acquired in-process research and development charged to expense. |
|
(7) |
|
In September 2008 and September 2007, we reclassified our WEEMEA
business and Infergen operations, respectively, as discontinued
operations. The consolidated financial statements have been
reclassified for all historical periods presented. In 2006, the
loss from discontinued operations was partly offset by the
partial release of $5.6 million from a reserve for our
environmental liability related to our former biomedical
facility. In December 2005, we acquired the U.S. and Canadian
rights to Infergen from InterMune. In this transaction, we
charged $47.2 million to acquired in-process research and
development. As a result of the reclassification of the Infergen
operations to discontinued operations, this charge was
classified as an expense within discontinued operations. The
loss from discontinued operations in 2004 includes
$33.5 million related to the disposition of our Russian
pharmaceuticals segment, biomedical segment, raw materials
business and manufacturing capability in Central Europe, our
photonics business and the Circe unit. |
|
(8) |
|
Working capital in 2007 and 2006 excludes $325.9 million
and $236.6 million, respectively, of assets held for sale. |
29
|
|
Item 7.
|
Managements
Discussion and Analysis of Financial Condition and Results of
Operations
|
Company
Overview
Introduction
We are a multinational specialty pharmaceutical company that
develops, manufactures and markets a broad range of
pharmaceutical products. Our specialty pharmaceutical and OTC
products are marketed under brand names and are sold in the
United States, Canada, Australia, and New Zealand where we focus
most of our efforts on the dermatology and neurology therapeutic
classes. We also have branded generic and OTC operations in
Europe and Latin America which focus on pharmaceutical products
that are bioequivalent to original products and are marketed
under company brand names.
Our products are sold through three segments comprising
Specialty Pharmaceuticals, Branded Generics Europe
and Branded Generics Latin America. The Specialty
Pharmaceuticals segment includes product revenues primarily from
the United States, Canada, Australia and divested businesses
located in Argentina, Uruguay and Asia. The Branded
Generics Europe segment includes product revenues
from branded generic pharmaceutical products primarily in
Poland, Hungary, the Czech Republic and Slovakia. The Branded
Generics Latin America segment includes product
revenues from branded generic pharmaceutical products primarily
in Mexico and Brazil.
Additionally, we generate alliance revenue, including royalties
from the sale of ribavirin by Schering-Plough Ltd.
(Schering-Plough) and revenues associated with the
worldwide License and Collaboration Agreement (the
Collaboration Agreement) with Glaxo Group Limited, a
wholly owned subsidiary of GlaxoSmithKline plc,
(GSK) entered into in 2008.
Business
Strategy
In March 2008, we announced a new company-wide restructuring
effort and new strategic initiatives (the 2008 Strategic
Plan). The restructuring was designed to streamline our
business, align our infrastructure to the scale of our
operations, maximize our pipeline assets and deploy our cash
assets to maximize shareholder value, while highlighting key
opportunities for growth.
We have built our current business infrastructure by executing
our multi-faceted strategy: 1) focus the business on core
geographies and therapeutic classes, 2) maximize pipeline
assets through strategic partnerships with other pharmaceutical
companies, and 3) deploy cash with an appropriate mix of
debt repurchases, share buybacks and selective acquisitions. We
believe our multi-faceted strategy will allow us to expand our
product offerings and upgrade our product portfolio with higher
growth, higher margin assets.
Prior to the start of the 2008 Strategic Plan, we reviewed our
portfolio for products and geographies that did not meet our
growth and profitability expectations and, as a result, divested
or discontinued certain non-strategic products. In September
2007, we decided to sell our rights to Infergen. We sold these
rights to Three Rivers Pharmaceuticals, LLC in January 2008. In
2007, we also sold product rights to Reptilase and Solcoseryl in
Japan, our ophthalmic business in the Netherlands, and certain
other products.
In March 2008, we sold certain assets in Asia to Invida
Pharmaceutical Holdings Pte. Ltd. (Invida) 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.
The assets sold to Invida were classified as held for
sale as of December 31, 2007 in accordance with
Statement of Financial Accounting Standards No. 144,
Accounting for the Impairment or Disposal of Long-Lived Asset
(SFAS 144).
In June 2008, we sold our subsidiaries in Argentina and Uruguay.
In September 2008, we sold our business operations located 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).
30
As a result of these dispositions, the following information has
been adjusted to exclude the operations of Infergen and of the
WEEMEA business. The results of these operations have also been
classified as discontinued operations in our consolidated
financial statements for all periods presented in this annual
report on
Form 10-K.
In October 2008, we completed a worldwide License and
Collaboration Agreement with Glaxo Group Limited to develop and
commercialize retigabine, a
first-in-class
neuronal potassium channel opener for treatment of adult
epilepsy patients with refractory partial onset seizures.
In October 2008, we also acquired Coria Laboratories Ltd.
(Coria), a privately-held specialty pharmaceutical
company focused on dermatology products in the United States. In
November 2008, we acquired DermaTech Pty Ltd
(DermaTech), an Australian specialty pharmaceutical
company focused on dermatology products marketed in Australia.
In December 2008, we acquired Dow Pharmaceutical Sciences, Inc.
(Dow), a privately-held dermatology company that
specializes in the development of topical products on a
proprietary basis, as well as for pharmaceutical and
biotechnology companies.
Pharmaceutical
Products
Product sales from our pharmaceutical segments accounted for 90%
of our total revenues from continuing operations for the year
ended December 31, 2008, compared to 87% for the year ended
December 31, 2007. Product sales decreased by
$9.9 million for the year ended December 31, 2008, as
compared to the year ended December 31, 2007.
Our current product portfolio comprises approximately 389
products, with approximately 982 stock keeping units. We market
our products globally through a marketing and sales force
consisting of approximately 991 employees. Our future
growth is expected to be driven primarily by the
commercialization of new products, growth of our existing
products, and business development.
We have experienced generic challenges and other competition to
our products, as well as pricing challenges, and expect these
challenges to continue in 2009 and beyond.
Alliance
Revenue and Service Revenue
Our royalties have historically been derived from sales of
ribavirin, a nucleoside analog that we discovered. In 1995,
Schering-Plough licensed from us all oral forms of ribavirin for
the treatment of chronic hepatitis C. We also licensed
ribavirin to Roche in 2003. Roche discontinued royalty payments
to us in June 2007 when the European Patent Office revoked a
ribavirin patent which would have provided protection through
2017.
Ribavirin royalty revenues were $59.4 million,
$67.2 million and $81.2 million for the years ended
December 31, 2008, 2007 and 2006, respectively, and
accounted for 9%, 10% and 12% of our total revenues in 2008,
2007 and 2006, respectively. Royalty revenues in 2008, 2007 and
2006 were substantially lower than those in prior years. This
decrease had been expected and relates to: 1) Roches
discontinuation of royalty payments to us in June 2007,
2) Schering-Ploughs market share losses in ribavirin
sales, 3) reduced sales in Japan from a peak in 2005 driven
by the launch of combination therapy and 4) further market
share gains by generic competitors in the United States since
they entered the market in April 2004.
We expect ribavirin royalties to decline significantly in 2009
because royalty payments from Schering-Plough will continue for
European sales only until the ten-year anniversary of the launch
of the product, which varied by European country and started in
May 1999. We expect that royalties from Schering-Plough in Japan
will continue after 2009.
Beginning in January 2009, we will receive royalties from patent
protected formulations developed by Dow and licensed to third
parties. During the year ended December 31, 2008, Dow had
royalties of approximately $20.0 million.
Beginning in January 2009, we will receive revenue from contract
research services performed by Dow in the areas of dermatology
and topical medication. The services are primarily focused on
contract research for external development and clinical research
in areas such as formulations development, in vitro
drug penetration studies,
31
analytical sciences and consulting in the areas of labeling, and
regulatory affairs. In 2008, Dow had revenue from contract
research services of approximately $25.0 million.
Research
and Development
We are developing product candidates, including two clinical
stage programs, retigabine and taribavirin, which target large
market opportunities. Retigabine is being developed in
partnership with GSK as an adjunctive treatment for
partial-onset seizures in patients with epilepsy. Taribavirin is
a pro-drug of ribavirin, for the treatment of chronic
hepatitis C in treatment-naive patients in conjunction with
a pegylated interferon. We are looking for potential partnering
opportunities for taribavirin.
Epilepsy
There are more than 50 million people worldwide who have
epilepsy, with approximately 6 million people afflicted
with the disease in the United States, the European Union and
Japan. The majority of all epilepsy patients are adequately and
appropriately treated with the first or second AED they try.
However approximately 30% of patients with epilepsy do not
respond adequately to existing therapies despite trying multiple
different AEDs. These patients are considered to have refractory
epilepsy, thus representing the greatest unmet need in epilepsy
treatment.
Chronic
Hepatitis C
Worldwide, approximately 170 million individuals are
infected with the hepatitis C virus. In the United States
alone, 3 to 4 million individuals are infected. Current
therapies consist of pegylated interferon alfa and ribavirin
with a sustained virological response ranging as high as 54% to
56%.
Business
Acquisitions
In December 2008, we acquired Dow for an agreed price of
$285.0 million, subject to certain closing adjustments. We
paid $242.5 million in cash, net of cash acquired, and
incurred transaction costs of $5.4 million. We paid
$5.6 million in January 2009. We have remaining payment
obligations of $36.0 million, $35.0 million of which
we will pay by June 30, 2009 into an escrow account for the
benefit of the Dow common stockholders, subject to any
indemnification claims made by us for a period of eighteen
months following the acquisition closing. We have granted a
security interest to the Dow common stockholders in certain
royalties to be paid to us until we satisfy our obligation to
fund the $35.0 million escrow account. The accounting
treatment for the acquisition requires the recognition of an
additional $95.9 million of conditional purchase
consideration because the fair value of the net assets acquired
exceeded the total amount of the acquisition price. Contingent
consideration of up to $235.0 million may be incurred for future
milestones related to certain pipeline products still in
development. Over 85% of this contingent consideration is
dependent upon the achievement of approval and commercial
targets. Future contingent consideration paid in excess of the
$95.9 million will be treated as an additional cost of the
acquisition and result in the recognition of goodwill.
In November 2008, we acquired DermaTech for aggregate cash
consideration of $15.5 million, including transaction costs
and working capital adjustments.
In October 2008, we acquired Coria for aggregate cash
consideration of $96.9 million, including transaction costs
and working capital adjustments. As a result of the acquisition,
we acquired an assembled sales force and a suite of dermatology
products which enhanced our existing product base.
For information regarding these acquisitions, see Note 3 of
notes to consolidated financial statements in Item 8 of
this annual report on
Form 10-K.
Results
of Operations
In connection with the 2008 Strategic Plan and resulting
acquisitions and dispositions, we realigned our organization in
the fourth quarter of 2008 in order to improve our execution and
align our resources and product development efforts in the
markets in which we operate. We have realigned segment financial
data for the years ended December 31, 2007 and 2006 to
reflect changes in our organizational structure that occurred in
2008.
32
Our products are sold through three operating segments
comprising Specialty Pharmaceuticals, Branded
Generics Europe and Branded
Generics Latin America. The Specialty
Pharmaceuticals segment includes product revenues primarily from
the United States., Canada, Australia and divested businesses
located in Argentina, Uruguay and Asia. The Branded
Generics Europe segment includes product revenues
from branded generic pharmaceutical products primarily in
Poland, Hungary, the Czech Republic and Slovakia. The Branded
Generics Latin America segment includes product
revenues from branded generic pharmaceutical products primarily
in Mexico and Brazil. Certain financial information for our
business segments is set forth below (in thousands). This
discussion of our results of operations should be read in
conjunction with the consolidated financial statements included
elsewhere in this annual report on
Form 10-K.
For additional financial information by business segment, see
Note 16 of notes to consolidated financial statements in
Item 8 of this annual report on
Form 10-K.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(In thousands)
|
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
Product sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
Specialty pharmaceuticals
|
|
$
|
303,723
|
|
|
$
|
326,682
|
|
|
$
|
318,321
|
|
Branded generics Europe
|
|
|
152,804
|
|
|
|
125,070
|
|
|
|
99,819
|
|
Branded generics Latin America
|
|
|
136,638
|
|
|
|
151,299
|
|
|
|
185,670
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total product sales
|
|
|
593,165
|
|
|
|
603,051
|
|
|
|
603,810
|
|
Alliances (including ribavirin royalties)
|
|
|
63,812
|
|
|
|
86,452
|
|
|
|
81,242
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated revenues
|
|
$
|
656,977
|
|
|
$
|
689,503
|
|
|
$
|
685,052
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Income (loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
Specialty pharmaceuticals
|
|
$
|
(596
|
)
|
|
$
|
(4,354
|
)
|
|
$
|
(27,134
|
)
|
Branded generics Europe
|
|
|
42,029
|
|
|
|
41,908
|
|
|
|
34,427
|
|
Branded generics Latin America
|
|
|
25,751
|
|
|
|
36,218
|
|
|
|
70,015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
67,184
|
|
|
|
73,772
|
|
|
|
77,308
|
|
Alliances
|
|
|
63,812
|
|
|
|
86,452
|
|
|
|
81,242
|
|
Corporate
|
|
|
(56,894
|
)
|
|
|
(74,724
|
)
|
|
|
(74,803
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal
|
|
|
74,102
|
|
|
|
85,500
|
|
|
|
83,747
|
|
Restructuring, asset impairments and dispositions
|
|
|
(21,295
|
)
|
|
|
(27,675
|
)
|
|
|
(88,616
|
)
|
Acquired in-process research and development
|
|
|
(186,300
|
)
|
|
|
|
|
|
|
|
|
Gain on litigation settlements
|
|
|
|
|
|
|
|
|
|
|
51,550
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated segment operating income (loss)
|
|
|
(133,493
|
)
|
|
|
57,825
|
|
|
|
46,681
|
|
Interest income
|
|
|
17,129
|
|
|
|
17,584
|
|
|
|
12,367
|
|
Interest expense
|
|
|
(30,486
|
)
|
|
|
(42,921
|
)
|
|
|
(43,470
|
)
|
Loss on early extinguishment of debt
|
|
|
(11,555
|
)
|
|
|
|
|
|
|
|
|
Other, net
|
|
|
2,063
|
|
|
|
1,659
|
|
|
|
766
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations before income taxes and
minority interest
|
|
$
|
(156,342
|
)
|
|
$
|
34,147
|
|
|
$
|
16,344
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year
Ended December 31, 2008 Compared to 2007
Computations of percentage change period over period are based
upon our results, as rounded and presented herein.
Product Sales Revenues: Total consolidated
revenues decreased $32.6 million for the year ended
December 31, 2008 compared with 2007. Total product sales
decreased $9.9 million (2%) to $593.2 million in 2008
from $603.1 million in 2007. Product sales in 2008 included
a 3% favorable impact from foreign exchange
33
rate fluctuations, offset by a 4% reduction in volume and a 1%
aggregate decrease in price. The decline in volume is primarily
a result of the divestment of operations in Asia, Argentina and
Uruguay, which resulted in aggregate revenue decreases of
$24.7 million in 2008 compared with 2007. This decline was
partially offset by revenues of $8.2 million in 2008
attributable to our Coria acquisition. The decrease in sales is
also attributable to the sales decline in Mexico, offset by
sales increases in Poland and Canada.
In our Specialty Pharmaceuticals segment, revenues for the year
ended December 31, 2008 decreased $23.0 million (7%)
to $303.7 million from $326.7 million in 2007. The
decrease in Specialty Pharmaceuticals sales for the year ended
December 31, 2008 was due to a 9% decrease in volume,
partially offset by a 2% increase in price. This decrease
reflects the divestment of operations in Asia, Argentina and
Uruguay, which resulted in aggregate revenue decreases of
$24.5 million in 2008 compared with 2007, partially offset
by revenues of $8.2 million attributable to our Coria
acquisition. The decrease in volume is also attributable to a
decrease in sales of Diastat, Kinerase and Efudex in the United
States.
In our Branded Generics Europe segment, revenues for
the year ended December 31, 2008 increased
$27.7 million (22%) to $152.8 million from
$125.1 million in 2007. Branded Generics Europe
sales in 2008 were impacted by a 14% positive contribution from
currency fluctuations and a 12% increase in volume, offset by a
4% aggregate reduction in prices. The increase in the value of
currencies in the region relative to the U.S. Dollar
contributed $17.9 million to revenues in the segment in
2008. The increase in volume includes a full year of sales in
2008 from products launched during 2007, resulting in a sales
increase of $3.9 million.
In our Branded Generics Latin America segment,
revenues for the year ended December 31, 2008 decreased
$14.6 million (10%) to $136.7 million from
$151.3 million in 2007. Branded Generics Latin
America sales in 2008 reflected a 5% decrease in price, a 4%
reduction in volume and a 1% reduction from foreign currency.
The decline in volume in 2008 is due in part to a planned
reduction of shipments to wholesaler customers in Mexico to
reduce the amount of product in the wholesale channel.
Alliance Revenue (including Ribavirin
royalties): Alliance revenue in the year ended
December 31, 2008 included $4.4 million attributable
to the GSK Collaboration Agreement. Alliance revenue in 2007
included a licensing payment of $19.2 million which we
received from Schering-Plough as a payment for the license to
pradefovir. In 2007, we announced an agreement with
Schering-Plough and Metabasis which returned all pradefovir
rights to Metabasis.
Ribavirin royalties for the year ended December 31, 2008
were $59.4 million compared with $67.2 million for
2007, a decrease of $7.8 million (12%). Ribavirin royalty
revenues decreased due to 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
significantly in 2009 because royalty payments from
Schering-Plough will continue for European sales only until the
ten-year anniversary of the launch of the product, which varied
by European country and started in May 1999. We expect royalties
from Schering-Plough in Japan will continue after 2009.
Gross Profit Margin: Gross profit margin was
negatively impacted for the year ended December 31, 2008 by
increases in reserves for returns, in addition to inventory
provisions and write offs in Mexico, the United States and
Europe resulting primarily from decisions to cease promotion of
or discontinue certain products, decisions to discontinue
certain manufacturing transfers, and product quality failures.
The following table sets forth a summary
34
of gross profit by segment, both excluding and including
amortization (discussed below), for the three years ended
December 31, 2008, 2007 and 2006 (dollar amounts in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% Increase
|
|
|
|
Year Ended December 31,
|
|
|
(Decrease)
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
08/07
|
|
|
07/06
|
|
|
Gross Profit (excluding amortization)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Specialty pharmaceuticals
|
|
$
|
239,695
|
|
|
$
|
260,093
|
|
|
$
|
248,814
|
|
|
|
(8
|
)%
|
|
|
5
|
%
|
% of product sales
|
|
|
79
|
%
|
|
|
80
|
%
|
|
|
78
|
%
|
|
|
|
|
|
|
|
|
Branded generics Europe
|
|
|
94,397
|
|
|
|
78,640
|
|
|
|
59,954
|
|
|
|
20
|
%
|
|
|
31
|
%
|
% of product sales
|
|
|
62
|
%
|
|
|
63
|
%
|
|
|
60
|
%
|
|
|
|
|
|
|
|
|
Branded generics Latin America
|
|
|
90,300
|
|
|
|
106,813
|
|
|
|
135,245
|
|
|
|
(15
|
)%
|
|
|
(21
|
)%
|
% of product sales
|
|
|
66
|
%
|
|
|
71
|
%
|
|
|
73
|
%
|
|
|
|
|
|
|
|
|
Corporate
|
|
|
857
|
|
|
|
(555
|
)
|
|
|
(1,211
|
)
|
|
|
(254
|
)%
|
|
|
(54
|
)%
|
% of product sales
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated gross profit
|
|
$
|
425,249
|
|
|
$
|
444,991
|
|
|
$
|
442,802
|
|
|
|
(4
|
)%
|
|
|
0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% of product sales
|
|
|
72
|
%
|
|
|
74
|
%
|
|
|
74
|
%
|
|
|
|
|
|
|
|
|
Amortization
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Specialty pharmaceuticals
|
|
$
|
38,723
|
|
|
$
|
39,218
|
|
|
$
|
33,415
|
|
|
|
(1
|
)%
|
|
|
17
|
%
|
Branded generics Europe
|
|
|
1,158
|
|
|
|
933
|
|
|
|
678
|
|
|
|
24
|
%
|
|
|
38
|
%
|
Branded generics Latin America
|
|
|
3,920
|
|
|
|
4,495
|
|
|
|
4,667
|
|
|
|
(13
|
)%
|
|
|
(4
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total amortization
|
|
$
|
43,801
|
|
|
$
|
44,646
|
|
|
$
|
38,760
|
|
|
|
(2
|
)%
|
|
|
15
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Profit (including amortization)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Specialty pharmaceuticals
|
|
$
|
200,972
|
|
|
$
|
220,875
|
|
|
$
|
215,399
|
|
|
|
(9
|
)%
|
|
|
3
|
%
|
% of product sales
|
|
|
66
|
%
|
|
|
68
|
%
|
|
|
68
|
%
|
|
|
|
|
|
|
|
|
Branded generics Europe
|
|
|
93,239
|
|
|
|
77,707
|
|
|
|
59,276
|
|
|
|
20
|
%
|
|
|
31
|
%
|
% of product sales
|
|
|
61
|
%
|
|
|
62
|
%
|
|
|
59
|
%
|
|
|
|
|
|
|
|
|
Branded generics Latin America
|
|
|
86,380
|
|
|
|
102,318
|
|
|
|
130,578
|
|
|
|
(16
|
)%
|
|
|
(22
|
)%
|
% of product sales
|
|
|
63
|
%
|
|
|
68
|
%
|
|
|
70
|
%
|
|
|
|
|
|
|
|
|
Corporate
|
|
|
857
|
|
|
|
(555
|
)
|
|
|
(1,211
|
)
|
|
|
(254
|
)%
|
|
|
(54
|
)%
|
% of product sales
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated gross profit
|
|
$
|
381,448
|
|
|
$
|
400,345
|
|
|
$
|
404,042
|
|
|
|
(5
|
)%
|
|
|
(1
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% of product sales
|
|
|
64
|
%
|
|
|
66
|
%
|
|
|
67
|
%
|
|
|
|
|
|
|
|
|
Selling, General and Administrative
Expenses: Selling, general and administrative
(SG&A) expenses were $278.0 million for the year ended
December 31, 2008 compared with $292.0 million for
2007, a decrease of $14.0 million (5%). As a percent of
product sales, SG&A expenses were 47% for the year ended
December 31, 2008 and 48% in 2007. The decrease in
SG&A expense primarily reflects the effects of our
restructuring initiatives, including a $10.1 million
reduction due to the divestment of our businesses in Asia,
Argentina and Uruguay, in addition to a reduction in stock-based
compensation expense of $4.5 million in 2008. The savings
from our restructuring initiatives were offset in part by the
recognition of an other-than temporary impairment of
$4.8 million in an investment in a publicly traded
investment fund, a $3.4 million reversal of a tax benefit
in Mexico and $3.5 million of expenses related to our
expansion into additional markets in Central Europe.
Research and Development: Research and
development expenses were $87.0 million for the year ended
December 31, 2008 compared with $98.0 million for
2007, a reduction of $11.0 million (11%). The decrease in
research and development expenses was primarily due to
$10.2 million of expense offsets attributable to the GSK
Collaboration Agreement, which was effective in October 2008.
35
Acquired In-Process Research and
Development: Acquired in-process research and
development (IPR&D) expense represents the
estimate of the fair value of in-process technology for projects
that, as of the acquisition date, had not yet reached
technological feasibility and had no alternative future use. In
2008 we incurred IPR&D expense of $185.8 million
related to the acquisition of Dow and $0.5 million related
to the acquisition of Coria for IPR&D assets acquired that
we determined were not yet complete and had no future uses in
their current state. The major risks and uncertainties
associated with the timely and successful completion of the
acquired in-process research and development assets consist of
the ability to confirm the safety and efficacy of the product
based upon the data from clinical trials and obtaining the
necessary approval from the FDA.
The IPR&D assets of Dow are comprised of the following
items; IDP-107 for the treatment of acne,
IDP-108 for
fungal infections and IDP-115 for rosacea, which were valued at
$107.3 million, $49.0 million and $29.5 million,
respectively. All of these IPR&D assets had not yet
received approval from the FDA as of the acquisition date.
IDP-107 is
an antibiotic targeted to treat moderate to severe inflammatory
acne and is in Phase II studies. IDP-108 is an
investigational topical drug for nail, hair and skin fungal
infections and is in Phase II studies. IDP-115 is a topical
treatment for rosacea and has completed Phase II studies.
The estimated fair value of the IPR&D assets was determined
based upon the use of a discounted cash flow model for each
asset. The estimated after-tax cash flows were probability
weighted to take into account the stage of completion and the
risks surrounding the successful development and
commercialization of each asset. The cash flows for each asset
were then discounted to a present value using a discount rate of
15%. Material net cash inflows were estimated to begin in 2013
for IDP-107, IDP-108 and IDP-115. Gross margins and expense
levels were estimated to be consistent with Dows
historical results. Solely for the purpose of estimating the
fair value of these assets, we assumed we would incur future
research and development costs of $26.6 million,
$29.6 million and $20.1 million to complete IDP-107,
IDP-108 and IDP-115, respectively.
Amortization: Amortization expense was
$50.0 million for the year ended December 31, 2008
compared with $56.0 million for 2007, a decrease of
$6.0 million (11%). The decrease is the result of the
declining amortization of the rights to the ribavirin royalty
intangible, which was amortized using an accelerated method and
was fully amortized in the third quarter of 2008. Amortization
expense in 2008 includes a $1.6 million intangible asset
impairment charge related to a product sold in the United States.
Restructuring Charges, Asset Impairments and
Dispositions: In 2008 and 2007 we incurred
$21.3 million and $27.7 million, respectively, in
restructuring charges, asset impairments and subsidiary
dispositions.
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 of employees, 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. 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. In
March 2008, we completed this strategic review and announced a
strategic plan designed to streamline our business, align our
infrastructure to the scale of our operations, maximize our
pipeline assets and deploy our cash assets to maximize
shareholder value. The strategic plan includes a restructuring
program (the 2008 Restructuring), which is expected
to reduce our
36
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, the
Czech Republic and Slovakia) and Latin America (Mexico and
Brazil). The 2008 Restructuring includes actions to divest our
operations in markets outside of these core geographic areas
through sales of subsidiaries or assets or other strategic
alternatives.
In December 2007, we signed an agreement with Invida
Pharmaceutical Holdings Pte. Ltd. (Invida) to sell
to Invida certain assets 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 in March 2008. The assets sold to
Invida were classified as held for sale as of
December 31, 2007. During the year ended December 31, 2008,
we received proceeds of $37.9 million and recorded a gain
of $34.5 million, net of charges for closing costs, on this
transaction. We expect to receive additional proceeds of
approximately $3.4 million subject to net asset settlement
provisions in the agreement.
In June 2008, we sold our subsidiaries in Argentina and Uruguay,
and recorded a loss on the sale of $2.6 million, in
addition to an impairment charge of $7.9 million related to
the anticipated sale. These subsidiaries are classified as
held for sale in accordance with SFAS 144 as of
December 31, 2007. Total proceeds received from the sale of
these subsidiaries were $13.5 million.
In December 2008, as part of our efforts to align our
infrastructure to the scale of our operations, we exercised our
option to terminate the lease of our Aliso Viejo, California
corporate headquarters as of December 2011 and, as a result,
recorded a restructuring charge of $3.8 million for the
year ended December 31, 2008. The charge consisted of a
lease termination penalty of $3.2 million, which will be
payable in October 2011, and $0.6 million for certain fixed
assets.
The net restructuring, asset impairments and dispositions charge
of $21.3 million in the year ended December 31, 2008
included $19.2 million of employee severance costs for a
total of 389 affected employees who were part of the supply,
selling, general and administrative and research and development
workforce in the United States, Mexico, Brazil and the Czech
Republic. The charges also included $10.4 million for
professional service fees related to the strategic review of our
business, $7.7 million of contract cancellation costs and
$0.3 million 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 $4.8 million, impairment charges
relating to the sale of our subsidiaries in Argentina and
Uruguay and certain fixed assets in Mexico of
$10.8 million, and the loss of $2.6 million in the
sale of our subsidiaries in Argentina and Uruguay, offset in
part by the gain of $34.5 million in the transaction with
Invida.
37
The following table summarizes the restructuring costs recorded
in the years ended December 31, 2008 and 2007 (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
Cumulative
|
|
|
|
2008
|
|
|
2007
|
|
|
Total Incurred
|
|
|
2008 Restructuring Program
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee severances (392 employees cumulatively)
|
|
$
|
19,239
|
|
|
$
|
957
|
|
|
$
|
20,196
|
|
Professional services, contract cancellation and other cash costs
|
|
|
18,406
|
|
|
|
8,644
|
|
|
|
27,050
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal: cash charges
|
|
|
37,645
|
|
|
|
9,601
|
|
|
|
47,246
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock compensation
|
|
|
4,778
|
|
|
|
|
|
|
|
4,778
|
|
Impairment of long-lived assets
|
|
|
10,758
|
|
|
|
|
|
|
|
10,758
|
|
Loss on sale of long-lived assets
|
|
|
2,652
|
|
|
|
|
|
|
|
2,652
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal: non-cash charges
|
|
|
18,188
|
|
|
|
|
|
|
|
18,188
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal: restructuring expenses
|
|
|
55,833
|
|
|
|
9,601
|
|
|
|
65,434
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain on Invida transaction
|
|
|
(34,538
|
)
|
|
|
|
|
|
|
(34,538
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restructurings, asset impairments and dispositions
|
|
$
|
21,295
|
|
|
$
|
9,601
|
|
|
$
|
30,896
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In the year ended December 31, 2008, we recorded inventory
obsolescence charges of $21.0 million 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 Emerging Issues Task Force (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 IIb 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 $36.8 million.
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.
38
The following table summarizes the restructuring costs recorded
in the years ended December 31, 2007 and 2006 (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
Cumulative
|
|
|
|
2007
|
|
|
2006
|
|
|
Total Incurred
|
|
|
2006 Restructuring Program
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee severances (408 employees cumulatively)
|
|
$
|
3,788
|
|
|
$
|
11,584
|
|
|
$
|
15,372
|
|
Contract cancellation and other cash costs
|
|
|
2,076
|
|
|
|
1,633
|
|
|
|
3,709
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal: cash charges
|
|
|
5,864
|
|
|
|
13,217
|
|
|
|
19,081
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Abandoned software and other capital assets
|
|
|
|
|
|
|
22,178
|
|
|
|
22,178
|
|
Write-off of accumulated foreign currency translation adjustments
|
|
|
2,782
|
|
|
|
|
|
|
|
2,782
|
|
Impairment of manufacturing and research facilities
|
|
|
9,428
|
|
|
|
53,221
|
|
|
|
62,649
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal: non-cash charges
|
|
|
12,210
|
|
|
|
75,399
|
|
|
|
87,609
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restructurings, asset impairments and dispositions
|
|
$
|
18,074
|
|
|
$
|
88,616
|
|
|
$
|
106,690
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Aggregate restructuring charges for the 2008 and 2006
restructuring programs, by reportable segment, were as follows
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Specialty pharmaceuticals
|
|
$
|
(16,755
|
)
|
|
$
|
10,445
|
|
|
$
|
42,720
|
|
Branded generics Europe
|
|
|
(8,011
|
)
|
|
|
|
|
|
|
635
|
|
Branded generics Latin America
|
|
|
8,328
|
|
|
|
|
|
|
|
231
|
|
Unallocated corporate
|
|
|
37,733
|
|
|
|
17,230
|
|
|
|
45,030
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
21,295
|
|
|
$
|
27,675
|
|
|
$
|
88,616
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 December 31, 2008, the restructuring
accrual for the 2006 Restructuring was $0.6 million 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.
39
As of December 31, 2008, the restructuring accrual for the
2008 Restructuring was $10.3 million and relates to
severance, professional service fees and other obligations and
is expected to be paid primarily during the remainder of 2009,
except for the lease termination penalty which will be paid in
2011. 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
|
|
|
|
|
Opening balance, commencement of restructuring
|
|
$
|
|
|
Charges to earnings
|
|
|
13,217
|
|
Cash paid
|
|
|
(9,002
|
)
|
|
|
|
|
|
Restructuring accrual, December 31, 2006
|
|
|
4,215
|
|
|
|
|
|
|
Charges to earnings
|
|
|
5,864
|
|
Cash paid
|
|
|
(8,579
|
)
|
|
|
|
|
|
Restructuring accrual, December 31, 2007
|
|
|
1,500
|
|
|
|
|
|
|
Cash paid
|
|
|
(875
|
)
|
|
|
|
|
|
Restructuring accrual, December 31, 2008
|
|
$
|
625
|
|
|
|
|
|
|
2008 Restructuring: Reconciliation of Cash Payments and
Accruals
|
|
|
|
|
Opening balance, commencement of restructuring
|
|
$
|
|
|
Charges to earnings
|
|
|
9,601
|
|
Cash paid
|
|
|
(1,128
|
)
|
|
|
|
|
|
Restructuring accrual, December 31, 2007
|
|
|
8,473
|
|
|
|
|
|
|
Charges to earnings
|
|
|
37,645
|
|
Cash paid
|
|
|
(35,817
|
)
|
|
|
|
|
|
Restructuring accrual, December 31, 2008
|
|
$
|
10,301
|
|
|
|
|
|
|
Certain additional costs under the 2008 Restructuring are
expected to be incurred in 2009, including, but not limited to,
one-time employee severance costs of $1.1 million related
to severance plans approved in 2008 for which the costs are
spread over the service period in accordance with SFAS 146.
Other Income, Net, Including Translation and
Exchange: Other income, net, including
translation and exchange was income of $2.1 million for the
year ended December 31, 2008 compared with income of
$1.7 million for 2007. In 2008, the amount represents
primarily the effects of translation gains in Europe. In 2007,
the amounts represent primarily the effects of translation gains
and losses in Europe and Latin America. Translation and exchange
gains are primarily related to U.S. Dollar denominated
assets and liabilities at our foreign currency denominated
subsidiaries.
Loss on Early Extinguishment of Debt: Loss on
early extinguishment of debt in the year ended December 31,
2008 includes a loss of $14.9 million as a result of the
July 2008 redemption of our 7.0% Senior Notes and includes
redemption premium of $10.5 million, unamortized loan costs
of $2.9 million and an interest rate swap agreement
termination fee of $1.5 million. This loss was partially
offset by a $3.3 million gain, net of unamortized loan
costs of $0.3 million, as a result of the November 2008
repurchase of $32.6 million aggregate principal amount of
our 3.0% Convertible Subordinated Notes for an aggregate
purchase price of $29.0 million.
Interest Expense and Income: Interest income
decreased $0.5 million during the year ended
December 31, 2008 compared to 2007. Interest expense
decreased $12.4 million during the year ended
December 31, 2008 compared to 2007, due primarily to lower
interest expense resulting from the July 2008 redemption of the
7.0% Senior Notes, and to a lesser extent to the November
2008 repurchase of a portion of the 3.0% Convertible
Subordinated Notes.
Income Taxes: In 2008 and 2007, we recorded
tax expense of $33.9 million and $13.5 million
respectively. The 2008 tax provision amount is the result of no
tax benefits being recorded for the in-process research and
40
development charge, the U.S. operating losses and credits.
Additionally, as a result of utilizing a portion of our net
operating loss carryforward in 2008, we released a portion of
our valuation allowance against additional paid-in capital
resulting in an increased income tax provision. The 2007 tax
provision amount related primarily to the fact that no tax
benefits were recorded for the U.S. operating losses and
credits.
In 2008 and 2007, we recorded valuation allowances against the
deferred tax assets associated with the U.S. tax benefits
we will receive as income tax loss carryforwards and credits are
offset against U.S. tax liability in future years. As of
December 31, 2008 the valuation allowance against deferred
tax assets totaled $142.7 million compared to
$151.9 million as of December 31, 2007. The valuation
allowance also has the effect of deferring certain amounts that
would normally impact the effective tax rate. See Note 9 of
notes to consolidated financial statements in Item 8 of this
annual report on Form 10-K for further information.
Income/Loss from Discontinued Operations: The
income from discontinued operations was $166.5 million in
2008 compared with a loss of $26.8 million for 2007. The
discontinued operations amounts in 2008 and 2007 relate
primarily to our WEEMEA business and Infergen operations that
were sold in 2008. In 2008, the loss from discontinued
operations before income taxes of the WEEMEA business and
Infergen operations was $1.8 million and
$11.4 million, respectively. The income in 2008 includes
the gain on sale of the WEEMEA business of $158.9 million.
In 2007, the $31.5 million loss before income taxes from
our Infergen operations was partially offset by income before
income taxes of $17.1 million related to the WEEMEA
business.
Year
Ended December 31, 2007 Compared to 2006
Computations of percentage change period over period are based
upon our results, as rounded and presented herein.
Product Sales Revenues: Total consolidated
revenues increased $4.6 million for the year ended
December 31, 2007 compared with 2006. Total product sales
decreased $0.7 million to $603.1 million in 2007 from
$603.8 million in 2006. Product sales in 2007 included a 4%
favorable impact from foreign exchange rate fluctuations and a
2% aggregate increase in price, partly offset by a 6% reduction
in volume. A significant factor that contributed to this
reduction was the sales decline in Mexico, partly offset by
sales increases in Central Europe and Canada. The sales declines
in Mexico were also impacted by reserves for product returns and
credits memos. The reported sales for the year ended
December 31, 2007 include $4.1 million for products
divested in 2007 (Reptilase and Solcoseryl in Japan and our
former ophthalmic business in the Netherlands), compared with
$15.4 million of revenue reported for these products in
2006.
In our Specialty Pharmaceuticals segment, revenues for the year
ended December 31, 2007 increased $8.4 million (3%) to
$326.7 million in 2007 from $318.3 million in 2006.
The increase in Specialty Pharmaceuticals sales for the year
ended December 31, 2007 was due to a 5% percent increase in
price and a 2% positive contribution from the appreciation of
the Canadian and Australian Dollar, offset by a 4% decline in
volume. This increase reflects the growth in Cesamet sales in
Canada, a full year of Zelapar sales in the United States, and
sales increases in Librax, Kinerase, and Migranal. Cesamet sales
were primarily in Canada. These sales increases were offset by
sales decreases of Efudex and Imovane. Decreases in Efudex sales
were expected and were a result of our launch of an authorized
generic in December 2006.
In our Branded Generics Europe segment, revenues for
the year ended December 31, 2007 increased
$25.3 million (25%) to $125.1 million from
$99.8 million in 2006. Branded Generics Europe
sales in 2007 were impacted by a 14% positive contribution from
currency fluctuations and a 15% increase in volume, offset by a
4% aggregate reduction in prices. The increase in the value of
currencies in the region relative to the U.S. Dollar
contributed $14.3 million to revenues in the segment in
2007.
In our Branded Generics Latin America segment,
revenues for the year ended December 31, 2007 decreased
$34.4 million (19%) to $151.3 million from
$185.7 million in 2006. Branded Generics Latin
America sales in 2007 reflected a 20% reduction in volume,
partly offset by a 1% benefit from foreign currency. The
decrease was due to the reduced shipments to our largest
wholesalers in Mexico who had ceased making payments to us
because they felt disadvantaged by changes we made in our
distribution channel in 2006. This situation affected most of
our products in Mexico. Results in Mexico were also impacted by
increased reserves for returns and
41
discounts. Reptilase sales in 2007 decreased $5.3 million
because we stopped selling Reptilase with the sale of our Basel,
Switzerland manufacturing plant in June 2007.
Alliance Revenue (including Ribavirin
royalties): Alliance revenue in the year ended
December 31, 2007 included a licensing payment of
$19.2 million which we received in the first quarter of
2007 from Schering-Plough as a payment for the license to
pradefovir. In September 2007, we announced an agreement with
Schering-Plough and Metabasis which returned all pradefovir
rights to Metabasis. Alliance revenue in 2006 consisted
exclusively of ribavirin royalties.
Ribavirin royalties for the year ended December 31, 2007
were $67.2 million compared with $81.2 million for
2006, a decrease of $14.0 million (17%). Ribavirin royalty
revenues decreased due to (i) Roches discontinuation
of royalty payments to us in June 2007,
(ii) Schering-Ploughs market share losses in
ribavirin sales, and (iii) reduced sales in Japan from a
peak in 2005 driven by the launch of combination therapy.
Gross Profit Margin: Gross profit margin,
excluding amortization, was unchanged in 2007 compared to 2006.
Gross profit margin was negatively impacted in 2007 by increases
in reserves for returns and discounts in Mexico, offset by
product cost favorability in Central Europe.
Selling, General and Administrative
Expenses: SG&A expenses were
$292.0 million for the year ended December 31, 2007
compared with $283.6 million for 2006, an increase of
$8.4 million (3%). As a percent of product sales, SG&A
expenses were 48% for the year ended December 31, 2007 and
47% in 2006. The increase in SG&A expense reflects
increased promotional activities related to the newly launched
products in our Branded Generics Europe segment.
SG&A expense in 2007 included a $2.8 million bad debt
provision for Mexico. SG&A expenses included
$11.1 million in stock-based compensation expenses, a
reduction of $5.5 million from the corresponding expenses
recorded in SG&A expenses in 2006. SG&A expenses in
2007 included information technology improvements, legal, and
business development costs, professional service fees, and a
payroll tax withholding charge related to a former executive.
Research and Development: Research and
development expenses were $98.0 million for the year ended
December 31, 2007 compared with $105.4 million for
2006, a reduction of $7.4 million (7%). The decrease in
research and development expenses was primarily attributable to
the completion of the VISER clinical trials for taribavirin and
savings from our strategic restructuring program including the
divestment of our discovery operations in December 2006. In
January 2007, we licensed the development and commercialization
rights to pradefovir to Schering-Plough, who subsequently
returned these rights to Metabasis after the results of a
long-term preclinical study was released. In December 2006, we
sold our HIV and cancer development programs and certain
discovery and preclinical assets to Ardea, with an option for us
to reacquire rights outside of the United States and Canada to
commercialize the compound being developed in the HIV program
upon Ardeas completion of Phase IIb trials. Research and
development expenses in 2006 included a $7.0 million
milestone payment related to the development of retigabine.
Amortization: Amortization expense was
$56.0 million for the year ended December 31, 2007
compared with $51.3 million for 2006, an increase of
$4.7 million (9%). The increase was primarily due to
amortization of intangibles acquired with the acquisition of the
Kinerase product rights, offset in part by a decrease in the
amortization of the ribavirin royalty intangible which is being
amortized on an accelerated basis.
Gain on Litigation Settlement: The gain on
litigation settlement in 2006 included the settlement with the
Republic of Serbia relating to the ownership and operations of a
joint venture we formerly participated in known as Galenika of
$34.0 million of which $28.0 million was received in
2006, and the settlement of litigation with a former chief
executive officer, Milan Panic relating to Ribapharm bonuses,
for which we received $20.0 million and recorded a gain
from litigation of $17.6 million in 2006.
Restructuring Charges and Asset
Impairments: In 2007 and 2006, we incurred
$27.7 million and $88.6 million, respectively, in
restructuring charges relating primarily to severance charges,
contract cancellations, and asset impairments. See above for a
detailed discussion of the charges in each year.
Other Income, Net, Including Translation and
Exchange: Other income, net, including
translation and exchange was income of $1.7 million for the
year ended December 31, 2007 compared with income of
$0.8 million for 2006. In both 2007 and 2006, the amounts
represent primarily the effects of translation gains and losses
in
42
Europe and Latin America. Translation and exchange gains are
primarily related to U.S. Dollar denominated assets and
liabilities at our foreign currency denominated subsidiaries.
Interest Expense and Income: Interest income
increased $5.2 million during the year ended
December 31, 2007 compared to 2006 due to higher cash
balances. Interest expense decreased $0.6 million during
the year ended December 31, 2007 compared to 2006, due to
lower interest rates associated with our variable rate debt.
Income Taxes: In 2007 and 2006, we recorded
tax expense of $13.5 million and $36.6 million
respectively. The 2007 and 2006 tax provisions are the result of
no tax benefits being recorded for the U.S. operating
losses, credits and temporary items.
In 2007 and 2006, we recorded valuation allowances against the
deferred tax assets associated with the U.S. tax benefits
we will receive as income tax loss carryforwards and credits are
offset against U.S. tax liability in future years. As of
December 31, 2007 the valuation allowance against deferred
tax assets totaled $151.9 million compared to
$158.7 million as of December 31, 2006. The valuation
allowance also has the effect of deferring certain amounts that
would normally impact the effective tax rate. See Note 9 of
notes to consolidated financial statements in Item 8 of
this annual report on
Form 10-K
for further information.
Loss from Discontinued Operations: The loss
from discontinued operations was $26.8 million in 2007
compared with a loss of $37.3 million for 2006. The net
losses in 2007 and 2006 related primarily to our WEEMEA and
Infergen businesses that were sold in 2008. In 2007, the
$31.5 million loss before income taxes from our Infergen
operations was partially offset by income before income taxes of
$17.1 million related to the WEEMEA business. The cost of
goods sold of discontinued operations in 2007 included a
technology transfer payment of $5.3 million made to the
future manufacturer of Infergen. In 2006, the loss before income
taxes related to the WEEMEA and Infergen operations of
$38.9 million and $8.3 million, respectively, was
offset in part by the reduction of $5.6 million in an
environmental reserve for the discontinued biomedical facility.
The loss incurred by the WEEMEA business in 2006 included
restructuring and asset impairment charges totaling
$49.6 million.
Liquidity
and Capital Resources
Cash and cash equivalents and marketable securities totaled
$218.8 million at December 31, 2008 compared with
$339.0 million at December 31, 2007. The decrease of
$120.2 million resulted in part from $310.5 million
paid to redeem the 7.0% Senior Notes, $251.0 million
paid for the purchase of Dow, treasury stock purchases of
$206.5 million, $95.0 million paid for the purchase of
Coria, $29.0 million paid to repurchase a portion the
3.0% Convertible Subordinated Notes, $14.6 million
paid for the purchase of DermaTech and other cash flow items,
offset in part by the receipt of $428.4 million from Meda
as payment for the sale of the WEEMEA business,
$125.0 million from GSK for payment of upfront fees
pursuant to the Collaboration Agreement, $106.0 million of
cash from operations, $70.8 million from Three Rivers
Pharmaceuticals, LLC as the initial payment for our Infergen
rights, $49.1 million from stock option exercises and
employee stock purchases, and $37.9 million received from
Invida for the sale of certain of our businesses in Asia.
Working capital (excluding assets held for sale and discontinued
operations) was $177.8 million at December 31, 2008,
compared with $416.6 million at December 31, 2007. The
decrease in working capital of $238.8 million primarily
resulted from the decrease in cash and cash equivalents and
marketable securities and an increase in trade payables and
accrued liabilities.
Cash provided by operating activities in continuing operations
is expected to be our primary source of funds for operations in
2009. During the year ended December 31, 2008, cash
provided by operating activities in continuing operations
totaled $206.8 million, compared with $100.6 million
in 2007. The cash provided by operating activities in continuing
operations for 2008 included receipt from GSK of
$125.0 million in upfront fees pursuant to the
Collaboration Agreement. The cash provided by operating
activities in continuing operations for 2007 included receipt of
$19.2 million related to the pradefovir licensing payment
from Schering-Plough and $6.0 million from the Republic of
Serbia.
Cash used in investing activities in continuing operations was
$277.2 million for the year ended December 31, 2008,
compared with cash used in investing activities in continuing
operations of $47.9 million in 2007. In 2008, cash used in
investing activities in continuing operations consisted
primarily of the acquisition of businesses and product rights of
$355.3 million, the purchase of investments of
$155.7 million, and capital expenditures of
$16.6 million,
43
offset in part by proceeds from investments of
$200.8 million and proceeds from the sale of businesses of
$48.6 million. Cash provided by investing activities in
discontinued operations in 2008 of $447.1 million consisted
primarily of the net proceeds of $379.3 million from the
sale of the WEEMEA business to Meda and $70.8 million 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
consisted of the purchase of investments of $72.5 million,
capital expenditures of $29.1 million and the purchase of
product rights for $22.5 million, offset in part by
proceeds from the sale of assets of $38.6 million and
proceeds from investments of $35.2 million.
Cash used in financing activities in continuing operations was
$475.0 million in the year ended December 31, 2008,
compared with $86.0 million in 2007 and primarily consisted
of payments on long-term debt and notes payable of
$329.9 million and the purchase of treasury stock for
$206.5 million, offset in part by proceeds from stock
option exercises and employee stock purchases of
$49.1 million and excess tax deductions from stock options
exercised of $12.3 million. In 2007, cash flows used in
financing activities in continuing operations consisted of
purchase of treasury stock of $99.6 million and payments on
long-term debt and notes payable of $3.5 million, offset in
part by proceeds from stock option exercises and employee stock
purchases of $15.3 million.
If GSK terminates the Collaboration Agreement prior to the
expiration of the Review Period, we would be required to refund
to GSK up to $40.0 million of the upfront fee through
March 31, 2010; however, the refundable portion will be
reduced over the time the Collaboration Agreement is in effect.
Historically, our primary sources of liquidity have been our
cash, cash flow from operations and issuances of long-term debt
securities. Strengthening our balance sheet was one of the six
strategic initiatives that management set for 2008. Solid cash
flow from operations and proceeds from the sale of various
assets in 2008 enabled us to achieve this strategic goal. Cash
generated from operations was more than sufficient to meet our
operating requirements and in addition, we retired
$332.6 million of debt, repurchased $206.5 million of
our common stock and financed various acquisitions totaling
$352.7 million (Dow $242.5 million, Coria
$95.6 million, and DermaTech $14.6 million). Our cash
on hand is currently not sufficient to cover all of our
outstanding debt but we do not face short-term debt maturities.
We believe that cash generated from operations, along with our
existing cash, will be sufficient to meet our operating
requirements at least through December 31, 2009, to fund
capital expenditures, and our clinical development program. We
may seek additional debt financing or issue additional equity
securities or sell assets to finance future acquisitions or for
other purposes.
We review our investments routinely with members of our Board of
Directors and continue to invest our cash conservatively given
the ongoing credit crisis and turmoil in overall markets. As of
December 31, 2008, we have over two-thirds of our domestic
cash balances invested in money market funds that are guaranteed
by the U.S. government. Our foreign cash balances are
invested mostly in short dated time deposits, government
securities and highly rated industrial commercial paper.
We did not declare and did not pay dividends in 2008 or 2007.
Contractual
Obligations
The following table summarizes our contractual obligations as of
December 31, 2008, and the effect such obligations are
expected to have on our liquidity and cash flow in future
periods:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less than
|
|
|
|
|
|
|
|
|
More than
|
|
|
|
Total
|
|
|
1 Year
|
|
|
1-3 Years
|
|
|
3-5 Years
|
|
|
5 Years
|
|
|
|
(In thousands)
|
|
Long-term debt obligations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3% Convertible Subordinated Notes due 2010
|
|
$
|
207,360
|
|
|
$
|
|
|
|
$
|
207,360
|
|
|
$
|
|
|
|
$
|
|
|
4% Convertible Subordinated Notes due 2013
|
|
|
240,000
|
|
|
|
|
|
|
|
|
|
|
|
240,000
|
|
|
|
|
|
Interest payments
|
|
|
60,441
|
|
|
|
15,820
|
|
|
|
25,421
|
|
|
|
19,200
|
|
|
|
|
|
Lease obligations
|
|
|
28,901
|
|
|
|
8,403
|
|
|
|
17,895
|
|
|
|
2,449
|
|
|
|
154
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cash obligations
|
|
$
|
536,702
|
|
|
$
|
24,223
|
|
|
$
|
250,676
|
|
|
$
|
261,649
|
|
|
$
|
154
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
We have no material commitments for purchases of property, plant
and equipment.
44
In addition to the commitments in the table above, we are
required to make milestone payments of $8.0 million and
$6.0 million related to retigabine under the terms of the
Meda Pharma Agreement, which we believe will occur in 2009 and
2010, respectively. Additional contingent obligations of up to
$5.3 million and $1.5 million under the Meda Pharma
Agreement are not included in the table above as the likelihood
and timing of payments, if any, are uncertain.
Due to the uncertainty with respect to the timing of future cash
flows associated with our unrecognized tax benefits at
December 31, 2008, we are unable to make reasonably
reliable estimates of the period of cash settlement with the
respective taxing authorities. Therefore, 54.0 million of
unrecognized tax benefits have been excluded from the
contractual obligations table above. See Note 9 of notes to
consolidated financial statements in Item 8 of this annual
report on
Form 10-K
for a discussion of income taxes. Contingent consideration of up
to $235.0 million may be incurred for future milestones related
to certain pipeline products still in development, as a result
of the Dow acquisition. Over 85% of this contingent
consideration is dependent upon the achievement of approval and
commercial targets. We are unable to make reasonably reliable
estimates of the timing and the amount of payments, if any, for
these milestones. No amount for such contingent consideration
has been included in the above table of contractual obligations.
Off-Balance
Sheet Arrangements
We do not use special purpose entities or other off-balance
sheet financing techniques except for operating leases disclosed
in the table contained in the Contractual
Obligations section above. Our 3.0% and
4.0% Convertible Notes include conversion features that are
considered as off-balance sheet arrangements under SEC
requirements.
Products
in Development
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 statistically significant reduction in monthly
seizure rates of 23% to 35% as adjunctive therapy in patients
with partial seizures.
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
(United States, 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 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 > 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, tremor, and nausea. Results of
the study were presented at the 8th European Congress on
Epileptology, Berlin, Germany in September 2008.
45
On May 13, 2008, we announced clinical data results for
RESTORE 2. RESTORE 2 evaluated the 600 and 900 mg daily
doses of retigabine versus placebo in patients taking stable
doses of one to three additional 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 > 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 the
1200 mg dose in the RESTORE 1 trial. Results of the study
were presented at the 62nd American Epilepsy Society annual
meeting, Seattle, WA in December 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 completed enrollment
at the end of 2008.
In October 2008, we completed a worldwide Collaboration
Agreement with GSK for the continued development and
pre-commercialization of retigabine and its backup compounds and
received $125.0 million in upfront fees from GSK. We will
jointly develop and commercialize retigabine in the
Collaboration Territory and GSK will develop and commercialize
retigabine in the rest of the world. To the extent that our
expected development and pre-commercialization expenses under
the Collaboration Agreement are less than $100.0 million,
the difference will be recognized as alliance revenue over the
period prior to the launch of a retigabine product. We expect to
complete our development efforts by mid to late 2010. For
information regarding the Collaboration Agreement with GSK, see
Note 3 of notes to consolidated financial statements in
Item 8 of this annual report on
Form 10-K.
External research and development expenses for retigabine, net
of Collaboration Agreement credits in 2008, were
$41.8 million and $49.2 million for the years ended
December 31, 2008 and 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 Viramidine Safety and Efficacy Versus Ribavirin
(VISER) 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 of a reduced incidence of anemia
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 by significantly reducing
the number of subjects who developed anemia, but that it was not
comparable to ribavirin in efficacy at the fixed dose of
600 mg which was 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
46
those studied in the VISER program may be necessary to achieve
our efficacy objectives and to deliver doses of taribavirin
derived ribavirin comparable to the doses of ribavirin that are
used as standard of care.
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, 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. Diarrhea was approximately twice as common
in taribavirin patients as ribavirin patients. However, the
diarrhea was not treatment limiting for taribavirin or ribavirin
patients.
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 Association for the Study of
Liver Disease, San Francisco, CA in November 2008. On
November 24, 2008, we published the 48-week end of
treatment results in a press release, and these are the subject
of a platform presentation at the upcoming European Association
for Study of Liver Disease (EASL) meeting in
Copenhagen in April 2009. These results and the week 60 follow
up results continue to demonstrate a consistent and similar
viral response rate for both taribavirin and ribavirin at all
doses studied, while the beneficial effect of taribavirin on
anemia has been maintained throughout the duration of therapy.
We are actively seeking potential partners for the taribavirin
program. External research and development expenses for
taribavirin were $8.5 million and $8.1 million for the
years ended December 31, 2008 and 2007, respectively.
Dermatology
Products
A number of late stage dermatology product candidates in
development were acquired as part of the acquisition of Dow on
December 31, 2008. These include, but are not limited to:
IDP-107: IDP-107 is an antibiotic for the
treatment of moderate to severe acne vulgaris. Acne is a
disorder of the pilosebaceous unit and can be identified by the
presence of inflammatory and non-inflammatory lesions, pustules,
papules, or pimples. Acne vulgaris is a common skin disorder
that affects about 85% of people at some point in their lives.
IDP-107 is currently in Phase II studies.
IDP-108: IDP-108 is an antifungal targeted to
treat Onychomycosis. It is an investigational topical drug for
nail, hair, and skin fungal infections. The mechanism of
antifungal activity appears similar to other antifungal
triazoles, i.e. ergosterol synthesis inhibition. IDP-108, in a
non-lacquer formulation, is currently in Phase II studies.
IDP-113: IDP-113 has the same active
pharmaceutical ingredient as IDP-108. IDP-113 is a topical
therapy in solution form for the treatment of tinea capitis,
which is a fungal infection of the scalp characterized by bald
patches. IDP-113 is currently in Phase II studies.
IDP-115: IDP-115 is a product that combines an
active ingredient with sunscreen agents providing SPF for the
treatment of rosacea. IDP-115 has completed Phase II
clinical trials. Rosacea is characterized by
47
erythema that begins on the central face and can spread to the
cheeks, nose, and forehead and less commonly affect the neck,
chest, ears, and scalp.
Other
Development Projects
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 had initiated the development of
a novel intranasal delivery of diazepam. Our external research
and development expenses for Diastat Intranasal were
$3.0 million and $1.4 million for 2008 and 2007,
respectively. In February 2009, we decided to terminate this
development program.
Foreign
Operations
Approximately 63% of our revenues from continuing operations,
which includes royalties, for the years ended December 31,
2008 and 2007 were generated from operations or otherwise earned
outside the United States. All of our foreign operations are
subject to risks inherent in conducting business abroad. For a
discussion of these risks, see Item 1A, Risk Factors in
this annual report on
Form 10-K.
Inflation
and Changing Prices
We experience the effects of inflation through increases in the
costs of labor, services and raw materials. We are subject to
price control restriction on our pharmaceutical products in the
majority of countries in which we operate. While we attempt to
raise selling prices in anticipation of inflation, we operate in
some markets which have price controls that may limit our
ability to raise prices in a timely fashion.
Recent
Accounting Pronouncements
In September 2006, the Financial Accounting Standards Board
(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 us 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 13 of notes
to consolidated financial statements in Item 8 of this
annual report on
Form 10-K.
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 us
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.
48
In June 2007, the FASB ratified the consensus reached by the
EITF in EITF Issue
No. 07-3,
Accounting for Nonrefundable Advance Payments for Goods or
Services Received for Use in Future Research and Development
Activities
(EITF 07-3).
EITF 07-3
requires that nonrefundable advance payments for goods and
services that will be used in future research and development
activities be deferred and capitalized until the related service
is performed or the goods are delivered.
EITF 07-3
became effective for us as of January 1, 2008. The
implementation of
EITF 07-3
did not have a material impact on our consolidated financial
statements.
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, requires
capitalization of in-process research and development assets
acquired, 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 issued SFAS No. 160,
Noncontrolling Interests in Consolidated Financial
Statements an amendment of ARB No. 51
(SFAS 160). SFAS 160 establishes
accounting and reporting standards for the noncontrolling
interest in a subsidiary and for the deconsolidation of a
subsidiary. It clarifies that a noncontrolling interest in a
subsidiary is an ownership interest in the consolidated entity
that should be reported as equity in the consolidated financial
statements. SFAS 160 is effective for fiscal years
beginning on or after December 15, 2008. We do not expect
the adoption of SFAS 160 to have a material impact on our
consolidated financial statements.
In December 2007, the FASB ratified the consensus reached by the
EITF in EITF Issue
No. 07-1,
Accounting for Collaborative Arrangements
(EITF 07-1).
EITF 07-1
defines collaborative arrangements and establishes reporting
requirements for transactions between participants in a
collaborative arrangement and between participants in the
arrangement and third parties.
EITF 07-1
also establishes the appropriate income statement presentation
and classification for joint operating activities and payments
between participants, as well as the sufficiency of the
disclosures related to these arrangements.
EITF 07-1
is effective for fiscal years beginning after December 15,
2008, and interim periods within those fiscal years.
Retrospective application to all prior periods presented is
required for all collaborative arrangements existing as of the
effective date. We do not expect the adoption of
EITF 07-1
to have a material impact on our consolidated financial
statements.
In March 2008, the FASB issued SFAS No. 161,
Disclosures about Derivative Instruments and Hedging
Activities an amendment of FASB Statement
No. 133 (SFAS 161). SFAS 161
requires enhanced disclosures about an entitys derivative
and hedging activities, including (i) how and why an entity
uses derivative instruments, (ii) how derivative
instruments and related hedged items are accounted for under
SFAS 133, and (iii) how derivative instruments and
related hedged items affect an entitys financial position,
financial performance and cash flows. This standard became
effective for us 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 statement disclosures.
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
became effective for us on January 1, 2009. We are
currently assessing the impact that FSP
FAS 142-3
may have on our financial statements.
49
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 Valeant beginning on January 1, 2009 and will
be applied retrospectively. A cumulative effect adjustment will
be reflected in the carrying amounts of our assets and
liabilities as of the beginning of the first period presented.
FSP APB 14-1
will have an impact on our financial position and reduce our
results of operations, but will not have an impact on our cash
flows. After adopting FSP APB-14-1, we estimate that we will
record additional non-cash interest expense of approximately
$14.0 million to $16.0 million in 2009, based on
currently outstanding convertible debt balances.
Critical
Accounting Estimates
The consolidated financial statements appearing elsewhere in
this document have been prepared in conformity with accounting
principles generally accepted in the United States of America.
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 ongoing basis, we evaluate our estimates,
including those related to product returns, rebates,
collectability of receivables, inventories, intangible assets,
income taxes and contingencies and litigation. The actual
results could differ materially from those estimates.
We believe the following critical accounting policies affect our
more significant judgments and estimates used in the preparation
of our consolidated financial statements.
Revenue
Recognition
We recognize revenues from product sales when title and risk of
ownership transfers to the customer. Revenues are recorded net
of provisions for rebates, discounts and returns, which are
estimated and recorded at the time of sale. Allowances for
future returns of products sold to our direct and indirect
customers, who include wholesalers, retail pharmacies and
hospitals, are calculated as a percent of sales based on
historical return percentages taking into account additional
available information on competitive products and contract
changes. Sales revenue in certain countries is recognized on a
consignment or cash basis.
Our product sales are subject to a variety of deductions,
primarily representing rebates and discounts to government
agencies, wholesalers and managed care organizations. These
deductions represent estimates of the related obligations and,
as such, judgment is required when estimating the impact of
these sales deductions on revenues for a reporting period.
In the United States we record provisions for Medicaid, Medicare
and contract rebates based upon our actual experience ratio of
rebates paid and actual prescriptions written during prior
quarters. We apply the experience ratio to the respective
periods sales to determine the rebate accrual and related
expense. This experience ratio is evaluated regularly and
adjusted if necessary to ensure that the historical trends are
as current as practicable. We adjust the ratio to better match
our current experience or our expected future experience, as
appropriate. In developing this ratio, we consider current
contract terms, such as changes in formulary status and discount
rates. If our ratio is not indicative of future experience, our
results could be materially affected.
Outside of the United States, the majority of our rebates are
contractual or legislatively mandated and our estimates are
based on actual invoiced sales within each period; both of these
elements help to reduce the risk of variations in the estimation
process. Some European countries base their rebates on the
governments unbudgeted pharmaceutical spending and we use
an estimated allocation factor against our actual invoiced sales
to project the expected level of reimbursement. We obtain third
party information that helps us to monitor the adequacy of these
accruals. If our estimates are not indicative of actual
unbudgeted spending, our results could be materially affected.
The sensitivity of our estimates can vary by program, type of
customer and geographic location. However, estimates associated
with U.S. Medicaid and contract rebates are most at-risk
for material adjustment because of the extensive time delay
between the recording of the accrual and its ultimate
settlement. This interval can range up to
50
one year. Because of this time lag, in any given quarter, our
adjustments to actual can incorporate revisions of several prior
quarters. Significant changes in estimate related to prior
periods are discussed following the table below.
We record sales incentives as a reduction of revenues at the
time the related revenues are recorded or when the incentive is
offered, whichever is later. We estimate the cost of our sales
incentives based on our historical experience with similar
incentives programs.
We use third-party data to estimate the level of product
inventories, expiration dating, and product demand at our major
wholesalers. Actual results could be materially different from
our estimates, resulting in future adjustments to revenue. We
conduct a review of the current methodology and assess the
adequacy of the allowance for returns on a quarterly basis,
adjusting for changes in assumptions, historical results and
business practices, as necessary.
The following table summarizes deductions from gross sales and
related accruals for the three years ended December 31,
2008, 2007 and 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision
|
|
|
|
|
|
|
|
|
Changes in
|
|
|
|
|
|
|
Balance at
|
|
|
Related to
|
|
|
|
|
|
|
|
|
Estimates
|
|
|
Balance at
|
|
|
|
Beginning of
|
|
|
Current Period
|
|
|
Credits and
|
|
|
|
|
|
Related to Prior
|
|
|
End of
|
|
|
|
Year
|
|
|
Sales
|
|
|
Payments
|
|
|
Acquisitions
|
|
|
Years
|
|
|
Year
|
|
|
|
(In thousands)
|
|
|
Year ended December 31, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales Return Accruals
|
|
$
|
33,170
|
|
|
$
|
28,166
|
|
|
$
|
(24,462
|
)
|
|
$
|
4,484
|
|
|
$
|
7,282
|
|
|
$
|
48,640
|
|
Rebates
|
|
|
16,972
|
|
|
|
23,032
|
|
|
|
(22,931
|
)
|
|
|
151
|
|
|
|
|
|
|
|
17,224
|
|
Discounts
|
|
|
7,006
|
|
|
|
17,842
|
|
|
|
(23,000
|
)
|
|
|
105
|
|
|
|
|
|
|
|
1,953
|
|
Chargebacks
|
|
|
2,685
|
|
|
|
21,456
|
|
|
|
(20,224
|
)
|
|
|
541
|
|
|
|
467
|
|
|
|
4,925
|
|
IMA Fees
|
|
|
2,446
|
|
|
|
9,187
|
|
|
|
(10,339
|
)
|
|
|
478
|
|
|
|
|
|
|
|
1,772
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Sales Deduction Accruals
|
|
$
|
62,279
|
|
|
$
|
99,683
|
|
|
$
|
(100,956
|
)
|
|
$
|
5,759
|
|
|
$
|
7,749
|
|
|
$
|
74,514
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales Return Accruals
|
|
$
|
27,709
|
|
|
$
|
22,302
|
|
|
$
|
(19,221
|
)
|
|
$
|
|
|
|
$
|
2,380
|
|
|
$
|
33,170
|
|
Rebates
|
|
|
19,845
|
|
|
|
23,246
|
|
|
|
(24,718
|
)
|
|
|
|
|
|
|
(1,401
|
)
|
|
|
16,972
|
|
Discounts
|
|
|
4,352
|
|
|
|
22,095
|
|
|
|
(19,441
|
)
|
|
|
|
|
|
|
|
|
|
|
7,006
|
|
Chargebacks
|
|
|
4,059
|
|
|
|
14,807
|
|
|
|
(16,181
|
)
|
|
|
|
|
|
|
|
|
|
|
2,685
|
|
IMA Fees
|
|
|
2,907
|
|
|
|
8,325
|
|
|
|
(8,786
|
)
|
|
|
|
|
|
|
|
|
|
|
2,446
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Sales Deduction Accruals
|
|
$
|
58,872
|
|
|
$
|
90,775
|
|
|
$
|
(88,347
|
)
|
|
$
|
|
|
|
$
|
979
|
|
|
$
|
62,279
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales Return Accruals
|
|
$
|
18,743
|
|
|
$
|
15,163
|
|
|
$
|
(12,922
|
)
|
|
$
|
|
|
|
$
|
6,725
|
|
|
$
|
27,709
|
|
Rebates
|
|
|
18,895
|
|
|
|
29,988
|
|
|
|
(29,267
|
)
|
|
|
|
|
|
|
229
|
|
|
|
19,845
|
|
Discounts
|
|
|
3,789
|
|
|
|
16,995
|
|
|
|
(16,432
|
)
|
|
|
|
|
|
|
|
|
|
|
4,352
|
|
Chargebacks
|
|
|
2,664
|
|
|
|
14,550
|
|
|
|
(13,155
|
)
|
|
|
|
|
|
|
|
|
|
|
4,059
|
|
IMA Fees
|
|
|
1,816
|
|
|
|
8,394
|
|
|
|
(7,303
|
)
|
|
|
|
|
|
|
|
|
|
|
2,907
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Sales Deduction Accruals
|
|
$
|
45,907
|
|
|
$
|
85,090
|
|
|
$
|
(79,079
|
)
|
|
$
|
|
|
|
$
|
6,954
|
|
|
$
|
58,872
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales return accruals are recorded based on historical
experience, estimated customer inventory levels and forecasted
sales patterns. Rebates include various managed care sales
rebate and other incentive programs, the largest of which
relates to Medicaid and Medicare. Discounts include cash
discounts that are provided to customers that pay within a
specific period and volume discounts. The provision for cash
discounts is estimated based upon invoice billings, utilizing
historical customer payment experience. Chargebacks represent
amounts payable in the future to a wholesaler for the difference
between the invoice prices paid to the Company by our wholesale
customers for a particular product and the negotiated contract
price that the wholesalers customer pays for that product.
Our
51
chargeback provision and related reserve varies with changes in
product mix, changes in customer pricing and changes to
estimated wholesaler inventories. Inventory Management Agreement
(IMA) Fees are deductions from gross sales, recorded
pursuant to agreements with certain of our wholesale customers.
We estimate product returns at the time of sale based on
historical patterns and rates of return of our products. This
estimation methodology relies upon a historical model to
calculate sales return accruals, with a comparison to historical
experience, including the historical rate of actual returns.
These comparisons are reviewed quarterly, with adjustments made
when trends are identified. A more detailed review of our
returns model is undertaken on an annual basis.
In 2004, as a result of changes related to our product sales in
the United States, including adoption of inventory management
agreements with our major wholesaler customers, changes in our
specific returns policy with respect to certain products,
changes in the expiration dating of certain of our products, and
reduction of estimated inventory levels at our major wholesaler
customers, we reduced our estimated rates of future product
returns for prospective sales. During 2005, our actual realized
rates of product returns were consistent with our reduced
estimates developed in 2004. However, in 2006, the Company began
to experience higher actual product returns in the United States
than had been originally estimated. These increases were
experienced in many of our products in the United States,
including Efudex, Oxsoralen-Ultra, and Migranal. As a result, as
part of our review of our returns reserve, we adjusted our
reserve for product returns to reflect the increased experienced
level of returns. This adjustment resulted in an increase of
$7.4 million in our returns reserve in the third quarter of
2006. Approximately $0.7million of this amount relates to our
discontinued operations in Western Europe.
As part of our review of our returns reserve in the third
quarter of 2007, we recognized that we had experienced higher
actual product returns in the United States and certain other
countries than had been previously estimated. As a result of
this review of our returns reserve, we adjusted our reserve for
product returns. This adjustment resulted in an increase of
$2.8 million in our returns reserve in the third quarter of
2007, resulting most notably from returns of Permax and Cesamet
in the United States. Approximately $0.4 million of this
amount relates to our discontinued operations in Western Europe.
As part of our review of our returns reserve in the third
quarter of 2008, we recognized that recent experience of actual
product returns in the United States was higher than had
previously been estimated under our methodology for certain
products. As a result of this review of our returns reserve, we
adjusted our reserve for product returns. This adjustment
resulted in an increase of $7.3 million in 2008 resulting
most notably from returns of Diastat and Migranal. Diastat in
2005 experienced two changes in product characteristics which
included longer dating (average shelf life at the time of sale
approximately doubled) along with the replacement of four fixed
dosage products with two variable dosage products. As a result,
we reduced our estimated rates of future product returns for
prospective sales. In 2008 the Company began to experience
actual returns on these products which were higher than
estimated using our methodology resulting in a revision of the
previous estimate of returns reserves. In addition, Migranal has
been sold in two new trade sizes since its acquisition in 2005
with the returns estimate for these launches utilizing the
returns experience of the previous trade sizes. In 2008, the
more recent trade size product experienced a higher level of
returns than estimated using our methodology which resulted in
an adjustment in the returns reserve.
We earn ribavirin royalties as a result of sales of products by
Schering-Plough. Ribavirin royalties are earned at the time the
products subject to the royalty are sold by the third party and
are reduced by an estimate for discounts and rebates that will
be paid in subsequent periods for those products sold during the
current period. We rely on a limited amount of financial
information provided by Schering-Plough to estimate the amounts
due to us under the royalty agreements.
Sales
Incentives
In the U.S. market, our current practice is to offer sales
incentives primarily in connection with launches of new products
or changes of existing products where demand has not yet been
established. We monitor and restrict sales in the
U.S. market in order to limit wholesaler purchases in
excess of their ordinary-course-of-business inventory levels. We
operate IMAs with major wholesalers in the United States.
However, specific events such as the case of sales incentives
described above or seasonal demand (e.g. antivirals during an
outbreak) may justify larger
52
purchases by wholesalers. We may offer sales incentives
primarily in international markets, where typically no right of
return exists except for goods damaged in transit, product
recalls or replacement of existing products due to packaging or
labeling changes. Our revenue recognition policy on these types
of purchases and on incentives in international markets is
consistent with the policies described above.
Collaboration
Agreement
In October 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, a
first-in-class
neuronal potassium channel opener for treatment of adult
epilepsy patients with refractory partial onset seizures and its
backup compounds. Pursuant to the terms of the Collaboration
Agreement, we granted co-development rights and worldwide
commercialization rights to GSK.
We agreed to share equally with GSK the development and
pre-commercialization expenses of retigabine in the United
States, Australia, New Zealand, Canada and Puerto Rico (the
Collaboration Territory). Our share of such expenses
in the Collaboration Territory is limited to
$100.0 million, provided that GSK will be entitled to
credit our share of any such expenses in excess of such amount
against future payments owed to us under the Collaboration
Agreement. Following the launch of a retigabine product, we will
share equally in the profits of retigabine in 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 will be responsible for all expenses
outside of the Collaboration Territory and will solely fund the
development of any backup compound. We will receive up to a 20%
royalty on net sales of retigabine outside of the Collaboration
Territory. 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.
Pursuant to the Collaboration Agreement, GSK paid us
$125.0 million in upfront fees in October 2008. 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 (FDA) 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 $90.0 million of the
upfront fee; however, the refundable portion will decline over
the time the Collaboration Agreement is in effect. In February
2009, the Collaboration Agreement was amended to, among other
matters, reduce the maximum amount that we would be required to
refund to GSK to $40.0 million through March 31, 2010,
with additional reductions over the time 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.
Under terms of the Collaboration Agreement, GSK has agreed to
pay us up to an additional $545.0 million 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
$150.0 million if certain regulatory and commercialization
milestones are achieved for backup compounds to retigabine.
The Collaboration Agreement contains multiple elements and
requires evaluation pursuant to EITF Issue
No. 00-21,
Accounting for Revenue Arrangements with Multiple
Deliverables
(EITF 00-21).
The Collaboration Agreement includes a provision for us to
participate on a joint steering committee. We evaluated the
facts and circumstances of the Collaboration Agreement to
determine whether our participation is protective of our
interests or if it constitutes a deliverable to be included in
our evaluation of the arrangement under
EITF 00-21.
We have concluded the participation in the joint steering
committee is a deliverable until certain regulatory approval is
obtained. In addition, we have determined that completion of our
development and pre-commercialization efforts during the time
prior to the launch of a retigabine product (the
Pre-Launch Period) is also a deliverable under the
Collaboration Agreement. As a result, pursuant to
EITF 00-21,
we will recognize alliance revenue during the Pre-Launch Period
as we complete our performance obligations using the
proportional performance model, which requires us to determine
and measure the completion of our expected development and
pre-commercialization costs, in addition to our participation in
the joint steering committee. We will also record a credit to
our development
53
and pre-commercialization costs from the upfront payment based
upon our proportional performance against our expected
development and pre-commercialization costs during the
Pre-Launch Period. The determination of such credit to our
development and pre-commercialization costs is limited to the
amount that is no longer potentially refundable to GSK should
they elect to terminate the Collaboration Agreement. To the
extent that our expected development and pre-commercialization
costs are less than $100.0 million, the difference will be
recorded as alliance revenue and earned based upon the
proportional performance model during the Pre-Launch Period.
Determination of our expected development and
pre-commercialization costs and measurement of our completion of
those costs requires the use of managements judgment.
Significant factors considered in our evaluation of our expected
development and pre-commercialization costs include, but are not
limited to, our experience, along with GSKs experience, in
completing clinical trials and costs of completing similar
development and commercialization programs. We expect to
complete our research and development and pre-commercialization
obligations by mid to late 2010.
Impairment
of Property, Plant and Equipment
We evaluate the carrying value of property, plant and equipment
when conditions indicate a potential impairment. We determine
whether there has been impairment by comparing the anticipated
undiscounted future cash flows expected to be generated by the
property, plant and equipment with its carrying value. If the
undiscounted cash flows are less than the carrying value, the
amount of the asset impairment, if any, is then determined by
comparing the carrying value of the property, plant and
equipment with its fair value. Fair value is generally based on
a discounted cash flows analysis, independent appraisals or
preliminary offers from prospective buyers.
Valuation
of Intangible Assets
We periodically review intangible assets for impairment using an
undiscounted net cash flows approach. We determine whether there
has been impairment by comparing the anticipated undiscounted
future operating cash flows of the products associated with the
intangible asset with its carrying value. If the undiscounted
operating cash flows are less than the carrying value, the
amount of the asset impairment, if any, will be determined by
comparing the value of each intangible asset with its fair
value. Fair value is generally based on a discounted cash flows
analysis.
We use a discounted cash flow model to value intangible assets
acquired and for the assessment of impairment. The discounted
cash flow model requires assumptions about the timing and amount
of future cash inflows and outflows, risk, the cost of capital,
and terminal values. Each of these factors can significantly
affect the value of the intangible asset.
The estimates of future cash flows, based on reasonable and
supportable assumptions and projections, require
managements judgment. Any changes in key assumptions about
our businesses and their prospects, or changes in market
conditions, could result in an impairment charge. Some of the
more significant estimates and assumptions inherent in the
intangible asset impairment estimation process include: the
timing and amount of projected future cash flows; the discount
rate selected to measure the risks inherent in the future cash
flows; and the assessment of the assets life cycle and the
competitive trends impacting the asset, including consideration
of any technical, legal or regulatory factors.
An impairment analysis was performed in the fourth quarter of
2008. As a result of the impairment analysis we recorded an
impairment charge of $1.6 million, which is included in
amortization expense for the year ended December 31, 2007.
In 2008 and 2007, we capitalized purchased software from a third
party vendor and software development costs incurred under the
provisions of American Institute of Certified Public Accountants
Statement of Position (SOP)
98-1,
Accounting for the Cost of Computer Software Developed or
Obtained for Internal Use. Capitalized costs include only
(1) external direct costs of materials and services
incurred in developing or obtaining internal use software,
(2) payroll and payroll-related costs for employees who are
directly associated with and who devote substantial time to the
internal-use software project, and (3) interest costs
incurred, while developing internal-use software. Amortization
began in certain countries when portions of the project were
completed, were ready for their
54
intended purpose and were placed in service. Training and
computer software maintenance costs are expensed as incurred.
Software development costs are being amortized using the
straight-line method over the expected life of the product which
is estimated to be five to seven years depending on when it is
placed in service.
Valuation
of Goodwill
We evaluate the recoverability of goodwill at least annually and
also in the event of an impairment indicator. The evaluation is
based on a two-step impairment test. The first step compares the
fair value of the reporting unit with its carrying amount
including goodwill. If the carrying amount exceeds fair value,
then the second step of the impairment test is performed to
measure the amount of any impairment loss. Fair value is
computed based on estimated future cash flows discounted at a
rate that approximates our cost of capital. Such estimates are
subject to change, and we may be required to recognize
impairment losses in the future. Our analysis of recoverability
of goodwill performed in the fourth quarter of 2008 did not
result in an impairment charge.
Purchase
Price Allocation Including Acquired In-Process Research and
Development
The purchase prices for the Dow, DermaTech and Coria
acquisitions were allocated to the tangible and identifiable
intangible assets acquired and liabilities assumed based on
their estimated fair values at the acquisition date. Such a
valuation requires significant estimates and assumptions,
including but not limited to: determining the timing and
expected costs to complete the in-process projects; projecting
regulatory approvals; estimating future cash flows from product
sales resulting from completed products and in-process projects;
and developing appropriate discount rates and probability rates
by project. We believe the fair values assigned to the assets
acquired and liabilities assumed are based on reasonable
assumptions, however, these assumptions may be incomplete or
inaccurate, and unanticipated events and circumstances may occur.
We value in-process research and development
(IPR&D) acquired in a business combination
based on an approach consistent with the AICPA Practice Aid,
Assets Acquired in Business Combinations to be Used in
Research and Development Activities: A Focus in Software,
Electronic Devices and Pharmaceutical Industries. The
amounts expensed as acquired IPR&D represents an estimate
of the fair value of purchased in-process technology for
projects that, as of the acquisition date, had not yet reached
technological feasibility and had no alternative future use. The
data used to determine fair value requires significant judgment.
The estimated fair values were based on our use of a discounted
cash flow model. For each project, the estimated after-tax cash
flows were probability weighted to take account of the stage of
completion and the risks surrounding the successful development
and commercialization. The assumed tax rates are our estimate of
the effective tax rates that will apply to the expected cash
flows. These cash flows were then discounted to a present value
using discount rates between 14% and 22%. The discount rates
represent our weighted-average cost of capital for each of the
acquisitions. See Note 3 of notes to consolidated financial
statements in Item 8 of this annual report on
Form 10-K
for a discussion of acquisitions.
The major risks and uncertainties associated with the timely and
successful completion of these projects include the uncertainty
of our ability to confirm the safety and efficacy of product
candidates based on the data from clinical trials and of
obtaining necessary regulatory approvals. In addition, no
assurance can be given that the underlying assumptions we used
to forecast the cash flows or the timely and successful
completion of these projects will materialize as estimated. For
these reasons, among others, actual results may vary
significantly from the estimated results.
Contingencies
We are exposed to contingencies in the ordinary course of
business, such as legal proceedings and business-related claims,
which range from product and environmental liabilities to tax
matters. In accordance with SFAS No. 5, Accounting
for Contingencies, we record accruals for such contingencies
when it is probable that a liability will be incurred and the
amount of loss can be reasonably estimated. The estimates are
refined each accounting period, as additional information is
known. See Note 19 of notes to consolidated financial
statements in Item 8 of this annual report on
Form 10-K
for a discussion of contingencies.
55
Income
Taxes
Our income tax returns are subject to audit in various
jurisdictions. Existing and future audits by, or other disputes
with, tax authorities may not be resolved favorably for us and
could have a material adverse effect on our reported effective
tax rate and after-tax cash flows. We record liabilities based
on the recognition and measurement criteria of FASB
Interpretation No. 48, Accounting for Uncertainty in
Income Taxes, an Interpretation of FASB Statement No. 109
(FIN 48), which involves significant
management judgment. New laws and new interpretations of laws
and rulings by tax authorities may affect the liability for
uncertain tax positions. Due to the subjectivity and complex
nature of the underlying issues, actual payments or assessments
may differ from our estimates. To the extent that our estimates
differ from amounts eventually assessed and paid our income and
cash flows can be materially and adversely affected.
In 2008, we settled the examination of our U.S. income tax
returns for the years 2002 through 2004 with the Internal
Revenue Service. As a result of this settlement, the related
unrecognized tax benefits were reversed in 2008. The provision
for income tax was reduced by $2.3 million related to
interest and penalties. In addition, the following accounts were
affected; income taxes payable increased $2.7 million,
income tax liability for uncertain tax positions decreased
$14.0 million and net deferred tax assets decreased
$9.0 million. All other unrecognized tax benefit amounts
arose in years in which we generated a tax loss and are offset
by the valuation allowance.
We assess whether it is more likely than not that we will
realize the tax benefits associated with our deferred tax assets
and establish a valuation allowance for assets that are not
expected to result in a realized tax benefit. A significant
amount of judgment is used in this process, including
preparation of forecasts of future taxable income and evaluation
of tax planning initiatives. If we revise these forecasts or
determine that certain planning events will not occur, an
adjustment to the valuation allowance will be made to tax
expense in the period such determination is made.
|
|
Item 7A.
|
Quantitative
and Qualitative Disclosures about Market Risk
|
Our business and financial results are affected by fluctuations
in world financial markets. We evaluate our exposure to such
risks on an ongoing basis, and seek ways to manage these risks
to an acceptable level, based on managements judgment of
the appropriate trade-off between risk, opportunity and cost. We
do not hold any significant amount of market risk sensitive
instruments whose value is subject to market price risk. Our
significant foreign currency exposure relates to the Euro, the
Polish Zloty, the Mexican Peso, the Swiss Franc and the Canadian
Dollar. We believe the sale of the WEEMEA business will reduce
our exposure to the Euro and Swiss Franc. During 2007 and 2008,
we entered into various forward currency contracts to
a) reduce our exposure to forecasted 2008 Euro and Japanese
Yen denominated royalty revenue, b) hedge our net
investment in our Polish and Brazilian subsidiaries,
c) utilize fair value hedges to reduce our exposure to
various currencies as a result of repetitive short-term
intercompany investments and obligations and d) utilize a
fair value hedge to reduce our Canadian subsidiarys
exposure to its investment in U.S. Dollar denominated
securities. In the aggregate, an unrealized gain of
$0.2 million was recorded in the financial statements at
December 31, 2008. In the normal course of business, we
also face risks that are either non-financial or
non-quantifiable. Such risks principally include country risk,
credit risk and legal risk and are not discussed or quantified
in the following analysis. At December 31, 2008 and 2007,
the fair value of our derivatives was (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives and Hedging Activity
|
|
|
|
December 31, 2008
|
|
|
December 31, 2007
|
|
|
|
Notional
|
|
|
Fair
|
|
|
Notional
|
|
|
Fair
|
|
Description
|
|
Amount
|
|
|
Value
|
|
|
Amount
|
|
|
Value
|
|
|
Undesignated Hedges
|
|
$
|
3,916
|
|
|
$
|
157
|
|
|
$
|
78,595
|
|
|
$
|
834
|
|
Net Investment Hedges
|
|
$
|
18,779
|
|
|
$
|
13
|
|
|
$
|
35,000
|
|
|
$
|
(441
|
)
|
Cash Flow Hedges
|
|
$
|
|
|
|
$
|
|
|
|
$
|
17,788
|
|
|
$
|
323
|
|
Fair Value Hedges
|
|
$
|
|
|
|
$
|
|
|
|
$
|
26,000
|
|
|
$
|
490
|
|
Interest Rate Swap
|
|
$
|
|
|
|
$
|
|
|
|
$
|
150,000
|
|
|
$
|
715
|
|
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
56
affecting our financial instruments would not have had a
material effect on our 2008 pretax earnings. In addition, we had
$447.4 million of fixed rate debt as of December 31,
2008 that requires U.S. Dollar repayment. To the extent
that we require, as a source of debt repayment, earnings and
cash flow from some of our units located in foreign countries,
we are subject to risk of changes in the value of certain
currencies relative to the U.S. Dollar.
|
|
Item 8.
|
Financial
Statements and Supplementary Data
|
Quarterly
Financial Data
Following is a summary of quarterly financial data for the years
ended December 31, 2008 and 2007 (in thousands, except per
share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First
|
|
|
Second
|
|
|
Third
|
|
|
Fourth
|
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
|
|
|
|
(Unaudited)
|
|
|
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
151,981
|
|
|
$
|
153,558
|
|
|
$
|
168,424
|
|
|
$
|
183,014
|
|
Gross profit on product sales (excluding amortization)
|
|
|
103,455
|
|
|
|
90,877
|
|
|
|
110,483
|
|
|
|
120,434
|
|
Income (loss) from continuing operations(a)
|
|
|
6,157
|
|
|
|
(48,291
|
)
|
|
|
(3,466
|
)
|
|
|
(144,662
|
)
|
Income (loss) from discontinued operations, net of tax(b)
|
|
|
3,293
|
|
|
|
(26,313
|
)
|
|
|
210,154
|
|
|
|
(20,586
|
)
|
Net income (loss)
|
|
|
9,449
|
|
|
|
(74,603
|
)
|
|
|
206,688
|
|
|
|
(165,248
|
)
|
Basic earnings (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
$
|
0.07
|
|
|
$
|
(0.54
|
)
|
|
$
|
(0.04
|
)
|
|
$
|
(1.75
|
)
|
Discontinued operations
|
|
|
0.04
|
|
|
|
(0.29
|
)
|
|
|
2.39
|
|
|
|
(0.25
|
)
|
Basic earnings (loss) per share
|
|
$
|
0.11
|
|
|
$
|
(0.83
|
)
|
|
$
|
2.35
|
|
|
$
|
(2.00
|
)
|
Diluted earnings (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
$
|
0.07
|
|
|
$
|
(0.54
|
)
|
|
$
|
(0.04
|
)
|
|
$
|
(1.75
|
)
|
Discontinued operations
|
|
|
0.03
|
|
|
|
(0.29
|
)
|
|
|
2.39
|
|
|
|
(0.25
|
)
|
Diluted earnings (loss) per share
|
|
$
|
0.10
|
|
|
$
|
(0.83
|
)
|
|
$
|
2.35
|
|
|
$
|
(2.00
|
)
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues(c)
|
|
$
|
163,332
|
|
|
$
|
172,973
|
|
|
$
|
164,258
|
|
|
$
|
188,940
|
|
Gross profit on product sales (excluding amortization)
|
|
|
95,286
|
|
|
|
114,357
|
|
|
|
108,333
|
|
|
|
127,015
|
|
Income (loss) from continuing operations(d)
|
|
|
9,992
|
|
|
|
13,723
|
|
|
|
(5,191
|
)
|
|
|
2,086
|
|
Income (loss) from discontinued operations, net of tax(b)
|
|
|
(667
|
)
|
|
|
3,187
|
|
|
|
(6,897
|
)
|
|
|
(22,419
|
)
|
Net income (loss)
|
|
|
9,325
|
|
|
|
16,910
|
|
|
|
(12,088
|
)
|
|
|
(20,333
|
)
|
Basic earnings (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
$
|
0.11
|
|
|
$
|
0.14
|
|
|
$
|
(0.06
|
)
|
|
$
|
0.02
|
|
Discontinued operations
|
|
|
(0.01
|
)
|
|
|
0.04
|
|
|
|
(0.07
|
)
|
|
|
(0.24
|
)
|
Basic earnings (loss) per share
|
|
$
|
0.10
|
|
|
$
|
0.18
|
|
|
$
|
(0.13
|
)
|
|
$
|
(0.22
|
)
|
Diluted earnings (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
$
|
0.10
|
|
|
$
|
0.14
|
|
|
$
|
(0.06
|
)
|
|
$
|
0.02
|
|
Discontinued operations
|
|
|
|
|
|
|
0.04
|
|
|
|
(0.07
|
)
|
|
|
(0.24
|
)
|
Diluted earnings (loss) per share
|
|
$
|
0.10
|
|
|
$
|
0.18
|
|
|
$
|
(0.13
|
)
|
|
$
|
(0.22
|
)
|
|
|
|
(a) |
|
In the first, second, third and fourth quarters of 2008, we
incurred expenses of $(12.6) million, $13.4 million,
$3.5 million and $17.0 million, respectively relating
to the 2008 restructuring program. These restructuring charges
included employee severance costs (392 employees
cumulatively), professional service fees, contract cancellation
costs, asset impairment charges and loss on sale of assets,
partially offset by the gain on sale of our Asia businesses. |
57
|
|
|
|
|
In the fourth quarter of 2008, we incurred IPR&D expense
related to the Dow and Coria acquisitions, of
$185.8 million and $0.5 million, respectively. |
|
(b) |
|
Discontinued operations in 2008 and 2007 related primarily to
our WEEMEA business and Infergen operations. |
|
(c) |
|
In the first quarter of 2007, we recorded alliance revenue of
$36.5 million, of which $19.2 million related to the
licensing of pradefovir to Schering-Plough. |
|
(d) |
|
In the first and second quarters of 2007, we incurred expenses
of $5.1 million and $13.0 million, respectively,
relating to our 2006 restructuring program. These restructuring
charges included employee severance costs (408 employees
cumulatively), professional service fees, contract cancellation
costs, accumulated foreign currency translation adjustments, and
asset impairment charges. We did not incur a restructuring
expense in the third quarter of 2007. In the fourth quarter of
2007, we incurred expenses related to the 2008 restructuring
program, comprising $1.0 million for executive severances,
$4.7 million for professional service expenses for
management consultants assisting with the Strategic Plan, and
the $3.9 million contract termination and transaction costs
associated with the sale of our Asia businesses. |
58
VALEANT
PHARMACEUTICALS INTERNATIONAL
INDEX TO
CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULE
|
|
|
|
|
|
|
Page
|
|
|
|
|
60
|
|
Financial statements:
|
|
|
|
|
|
|
|
62
|
|
For the years ended December 31, 2008, 2007 and 2006:
|
|
|
|
|
|
|
|
63
|
|
|
|
|
64
|
|
|
|
|
65
|
|
|
|
|
66
|
|
Financial statement schedule for the years ended
December 31, 2008, 2007 and 2006:
|
|
|
|
|
|
|
|
114
|
|
All other schedules are omitted because they are not applicable
or the required information is shown in the consolidated
financial statements or notes thereto.
59
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and
Stockholders of Valeant Pharmaceuticals International:
In our opinion, the consolidated financial statements listed in
the accompanying index present fairly, in all material respects,
the financial position of Valeant Pharmaceuticals International
and its subsidiaries at December 31, 2008 and 2007, and the
results of their operations and their cash flows for each of the
three years in the period ended December 31, 2008 in
conformity with accounting principles generally accepted in the
United States of America. In addition, in our opinion, the
financial statement schedule listed in the accompanying index
presents fairly, in all material respects, the information set
forth therein when read in conjunction with the related
consolidated financial statements. Also in our opinion, the
Company maintained, in all material respects, effective internal
control over financial reporting as of December 31, 2008,
based on criteria established in Internal Control
Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO). The
Companys management is responsible for these financial
statements and financial statement schedule, for maintaining
effective internal control over financial reporting and for its
assessment of the effectiveness of internal control over
financial reporting, included in Managements Annual Report
on Internal Control over Financial Reporting appearing under
Item 9A. Our responsibility is to express opinions on these
financial statements, on the financial statement schedule, and
on the Companys internal control over financial reporting
based on our integrated audits. We conducted our audits in
accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we
plan and perform the audits to obtain reasonable assurance about
whether the financial statements are free of material
misstatement and whether effective internal control over
financial reporting was maintained in all material respects. Our
audits of the financial statements included examining, on a test
basis, evidence supporting the amounts and disclosures in the
financial statements, assessing the accounting principles used
and significant estimates made by management, and evaluating the
overall financial statement presentation. Our audit of internal
control over financial reporting included obtaining an
understanding of internal control over financial reporting,
assessing the risk that a material weakness exists, and testing
and evaluating the design and operating effectiveness of
internal control based on the assessed risk. Our audits also
included performing such other procedures as we considered
necessary in the circumstances. We believe that our audits
provide a reasonable basis for our opinions.
As discussed in Note 1 to the consolidated financial
statements, the Company changed the manner in which it accounts
for uncertain tax positions in 2007.
A companys internal control over financial reporting is a
process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
generally accepted accounting principles. A companys
internal control over financial reporting includes those
policies and procedures that (i) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the
company; (ii) provide reasonable assurance that
transactions are recorded as necessary to permit preparation of
financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the
company are being made only in accordance with authorizations of
management and directors of the company; and (iii) provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the
companys assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
60
As described in Managements Annual Report on Internal
Control Over Financial Reporting appearing under Item 9A,
management has excluded Dow Pharmaceutical Sciences, Inc.
(Dow), Coria Laboratories, Ltd. (Coria)
and DermaTech Pty Ltd. (DermaTech) from its
assessment of internal control over financial reporting as of
December 31, 2008 because they were acquired by the Company
in purchase business combinations during 2008. We have also
excluded Dow, Coria and DermaTech from our audit of internal
control over financial reporting. The total assets and total
revenues of Dow, Coria and DermaTech, wholly-owned subsidiaries,
represent 18% and 0%, 11% and 1%, and 2% and 0%, respectively,
of the related consolidated financial statement amounts as of
and for the year ended December 31, 2008.
/s/ PricewaterhouseCoopers
LLP
Orange County, California
February 27, 2009
61
VALEANT
PHARMACEUTICALS INTERNATIONAL
CONSOLIDATED BALANCE SHEETS
December 31,
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
|
(In thousands)
|
|
|
ASSETS
|
Current Assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
199,582
|
|
|
$
|
287,728
|
|
Marketable securities
|
|
|
19,193
|
|
|
|
51,292
|
|
Accounts receivable, net
|
|
|
144,509
|
|
|
|
147,863
|
|
Inventories, net
|
|
|
72,972
|
|
|
|
80,150
|
|
Assets held for sale and assets of discontinued operations
|
|
|
|
|
|
|
325,906
|
|
Prepaid expenses and other current assets
|
|
|
17,605
|
|
|
|
19,119
|
|
Current deferred tax assets, net
|
|
|
16,179
|
|
|
|
13,092
|
|
Income taxes
|
|
|
|
|
|
|
25,684
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
470,040
|
|
|
|
950,834
|
|
Property, plant and equipment, net
|
|
|
90,228
|
|
|
|
109,991
|
|
Deferred tax assets, net
|
|
|
14,850
|
|
|
|
58,887
|
|
Goodwill
|
|
|
114,634
|
|
|
|
80,346
|
|
Intangible assets, net
|
|
|
467,795
|
|
|
|
261,166
|
|
Other assets
|
|
|
29,805
|
|
|
|
33,038
|
|
|
|
|
|
|
|
|
|
|
Total non-current assets
|
|
|
717,312
|
|
|
|
543,428
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,187,352
|
|
|
$
|
1,494,262
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY
|
Current Liabilities:
|
|
|
|
|
|
|
|
|
Trade payables
|
|
$
|
41,638
|
|
|
$
|
34,385
|
|
Accrued liabilities
|
|
|
231,451
|
|
|
|
118,834
|
|
Notes payable and current portion of long-term debt
|
|
|
666
|
|
|
|
1,655
|
|
Deferred revenue
|
|
|
15,415
|
|
|
|
|
|
Income taxes payable
|
|
|
2,497
|
|
|
|
276
|
|
Current deferred tax liabilities, net
|
|
|
52
|
|
|
|
2,252
|
|
Liabilities held for sale and liabilities of discontinued
operations
|
|
|
|
|
|
|
50,358
|
|
Current liabilities for uncertain tax positions
|
|
|
478
|
|
|
|
616
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
292,197
|
|
|
|
208,376
|
|
Long-term debt, less current portion
|
|
|
447,862
|
|
|
|
782,552
|
|
Deferred revenue
|
|
|
11,841
|
|
|
|
|
|
Deferred tax liabilities, net
|
|
|
3,206
|
|
|
|
4,878
|
|
Liabilities for uncertain tax positions
|
|
|
53,425
|
|
|
|
68,749
|
|
Other liabilities
|
|
|
175,396
|
|
|
|
15,604
|
|
|
|
|
|
|
|
|
|
|
Total non-current liabilities
|
|
|
691,730
|
|
|
|
871,783
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
983,927
|
|
|
|
1,080,159
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies
|
|
|
|
|
|
|
|
|
Stockholders Equity:
|
|
|
|
|
|
|
|
|
Common stock, $0.01 par value; 200,000 shares
authorized; 81,753 (December 31, 2008) and 89,286
(December 31, 2007) shares outstanding (after
deducting shares in treasury of 18,688 as of December 31,
2008 and 7,585 as of December 31, 2007)
|
|
|
818
|
|
|
|
893
|
|
Additional capital
|
|
|
1,067,758
|
|
|
|
1,192,559
|
|
Accumulated deficit
|
|
|
(883,273
|
)
|
|
|
(859,559
|
)
|
Accumulated other comprehensive income
|
|
|
18,122
|
|
|
|
80,210
|
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
203,425
|
|
|
|
414,103
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,187,352
|
|
|
$
|
1,494,262
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
62
VALEANT
PHARMACEUTICALS INTERNATIONAL
For the
Years Ended December 31,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(In thousands, except per share data)
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
Product sales
|
|
$
|
593,165
|
|
|
$
|
603,051
|
|
|
$
|
603,810
|
|
Alliances (including ribavirin royalties)
|
|
|
63,812
|
|
|
|
86,452
|
|
|
|
81,242
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
656,977
|
|
|
|
689,503
|
|
|
|
685,052
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of goods sold (excluding amortization)
|
|
|
167,916
|
|
|
|
158,060
|
|
|
|
161,008
|
|
Selling, general and administrative
|
|
|
278,019
|
|
|
|
292,001
|
|
|
|
283,559
|
|
Research and development costs, net
|
|
|
86,967
|
|
|
|
97,957
|
|
|
|
105,443
|
|
Acquired in-process research and development
|
|
|
186,300
|
|
|
|
|
|
|
|
|
|
Gain on litigation settlements
|
|
|
|
|
|
|
|
|
|
|
(51,550
|
)
|
Restructuring, asset impairments and dispositions
|
|
|
21,295
|
|
|
|
27,675
|
|
|
|
88,616
|
|
Amortization expense
|
|
|
49,973
|
|
|
|
55,985
|
|
|
|
51,295
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total costs and expenses
|
|
|
790,470
|
|
|
|
631,678
|
|
|
|
638,371
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations
|
|
|
(133,493
|
)
|
|
|
57,825
|
|
|
|
46,681
|
|
Other income, net including translation and exchange
|
|
|
2,063
|
|
|
|
1,659
|
|
|
|
766
|
|
Loss on early extinguishment of debt
|
|
|
(11,555
|
)
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
17,129
|
|
|
|
17,584
|
|
|
|
12,367
|
|
Interest expense
|
|
|
(30,486
|
)
|
|
|
(42,921
|
)
|
|
|
(43,470
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations before income taxes and
minority interest
|
|
|
(156,342
|
)
|
|
|
34,147
|
|
|
|
16,344
|
|
Provision for income taxes
|
|
|
33,913
|
|
|
|
13,535
|
|
|
|
36,577
|
|
Minority interest, net
|
|
|
7
|
|
|
|
2
|
|
|
|
3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations
|
|
|
(190,262
|
)
|
|
|
20,610
|
|
|
|
(20,236
|
)
|
Income (loss) from discontinued operations, net of tax
|
|
|
166,548
|
|
|
|
(26,796
|
)
|
|
|
(37,332
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(23,714
|
)
|
|
$
|
(6,186
|
)
|
|
$
|
(57,568
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic income (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations
|
|
$
|
(2.17
|
)
|
|
$
|
0.22
|
|
|
$
|
(0.22
|
)
|
Income (loss) from discontinued operations
|
|
|
1.90
|
|
|
|
(0.29
|
)
|
|
|
(0.40
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per share
|
|
$
|
(0.27
|
)
|
|
$
|
(0.07
|
)
|
|
$
|
(0.62
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted income (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations
|
|
$
|
(2.17
|
)
|
|
$
|
0.22
|
|
|
$
|
(0.22
|
)
|
Income (loss) from discontinued operations
|
|
|
1.90
|
|
|
|
(0.29
|
)
|
|
|
(0.40
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per share
|
|
$
|
(0.27
|
)
|
|
$
|
(0.07
|
)
|
|
$
|
(0.62
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares used in per share computation Basic
|
|
|
87,480
|
|
|
|
93,029
|
|
|
|
93,387
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares used in per share computation Diluted
|
|
|
87,480
|
|
|
|
93,976
|
|
|
|
93,387
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
63
VALEANT
PHARMACEUTICALS INTERNATIONAL
For the
Years Ended December 31, 2008, 2007, and 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
Common Stock
|
|
|
Additional
|
|
|
Accumulated
|
|
|
Comprehensive
|
|
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Deficit
|
|
|
Income (Loss)
|
|
|
Total
|
|
|
|
(In thousands)
|
|
|
Balance at January 1, 2006
|
|
|
92,760
|
|
|
$
|
928
|
|
|
$
|
1,224,907
|
|
|
$
|
(772,692
|
)
|
|
$
|
(17,585
|
)
|
|
$
|
435,558
|
|
Comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(57,568
|
)
|
|
|
|
|
|
|
(57,568
|
)
|
Foreign currency translation adjustments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
34,791
|
|
|
|
34,791
|
|
Unrealized gain on marketable equity securities and other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
91
|
|
|
|
91
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(22,686
|
)
|
Net effect of adopting new accounting standard for pensions
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
643
|
|
|
|
643
|
|
Exercise of stock options
|
|
|
1,592
|
|
|
|
16
|
|
|
|
16,435
|
|
|
|
|
|
|
|
|
|
|
|
16,451
|
|
Employee stock purchase plan
|
|
|
64
|
|
|
|
|
|
|
|
938
|
|
|
|
|
|
|
|
|
|
|
|
938
|
|
Stock compensation expense
|
|
|
|
|
|
|
|
|
|
|
20,270
|
|
|
|
|
|
|
|
|
|
|
|
20,270
|
|
Stock compensation in discontinued operations
|
|
|
|
|
|
|
|
|
|
|
768
|
|
|
|
|
|
|
|
|
|
|
|
768
|
|
Dividends
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(21,552
|
)
|
|
|
|
|
|
|
(21,552
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2006
|
|
|
94,416
|
|
|
|
944
|
|
|
|
1,263,318
|
|
|
|
(851,812
|
)
|
|
|
17,940
|
|
|
|
430,390
|
|
Comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(6,186
|
)
|
|
|
|
|
|
|
(6,186
|
)
|
Foreign currency translation adjustments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
66,791
|
|
|
|
66,791
|
|
Pension liability adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4,471
|
)
|
|
|
(4,471
|
)
|
Unrealized loss on marketable equity securities and other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(50
|
)
|
|
|
(50
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
56,084
|
|
Exercise of stock options
|
|
|
1,283
|
|
|
|
12
|
|
|
|
14,417
|
|
|
|
|
|
|
|
|
|
|
|
14,429
|
|
Employee stock purchase plan
|
|
|
78
|
|
|
|
2
|
|
|
|
857
|
|
|
|
|
|
|
|
|
|
|
|
859
|
|
Share repurchase
|
|
|
(6,491
|
)
|
|
|
(65
|
)
|
|
|
(99,492
|
)
|
|
|
|
|
|
|
|
|
|
|
(99,557
|
)
|
Stock compensation expense
|
|
|
|
|
|
|
|
|
|
|
12,419
|
|
|
|
|
|
|
|
|
|
|
|
12,419
|
|
Stock compensation in discontinued operations
|
|
|
|
|
|
|
|
|
|
|
1,040
|
|
|
|
|
|
|
|
|
|
|
|
1,040
|
|
Net effect of adopting new accounting standard for uncertain tax
positions
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,561
|
)
|
|
|
|
|
|
|
(1,561
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2007
|
|
|
89,286
|
|
|
|
893
|
|
|
|
1,192,559
|
|
|
|
(859,559
|
)
|
|
|
80,210
|
|
|
|
414,103
|
|
Comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(23,714
|
)
|
|
|
|
|
|
|
(23,714
|
)
|
Foreign currency translation adjustments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(66,228
|
)
|
|
|
(66,228
|
)
|
Pension liability adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,671
|
|
|
|
2,671
|
|
Unrealized gain on marketable equity securities and other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,469
|
|
|
|
1,469
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(85,802
|
)
|
Exercise of stock options and issuance of other stock awards
|
|
|
3,496
|
|
|
|
35
|
|
|
|
47,634
|
|
|
|
|
|
|
|
|
|
|
|
47,669
|
|
Employee stock purchase plan
|
|
|
74
|
|
|
|
1
|
|
|
|
753
|
|
|
|
|
|
|
|
|
|
|
|
754
|
|
Share repurchase
|
|
|
(11,427
|
)
|
|
|
(114
|
)
|
|
|
(206,403
|
)
|
|
|
|
|
|
|
|
|
|
|
(206,517
|
)
|
Issuance of treasury shares
|
|
|
324
|
|
|
|
3
|
|
|
|
5,407
|
|
|
|
|
|
|
|
|
|
|
|
5,410
|
|
Stock compensation expense
|
|
|
|
|
|
|
|
|
|
|
5,064
|
|
|
|
|
|
|
|
|
|
|
|
5,064
|
|
Stock compensation in discontinued operations
|
|
|
|
|
|
|
|
|
|
|
(845
|
)
|
|
|
|
|
|
|
|
|
|
|
(845
|
)
|
Tax benefit related to convertible debt
|
|
|
|
|
|
|
|
|
|
|
11,286
|
|
|
|
|
|
|
|
|
|
|
|
11,286
|
|
Tax benefit related to stock options
|
|
|
|
|
|
|
|
|
|
|
12,303
|
|
|
|
|
|
|
|
|
|
|
|
12,303
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2008
|
|
|
81,753
|
|
|
$
|
818
|
|
|
$
|
1,067,758
|
|
|
$
|
(883,273
|
)
|
|
$
|
18,122
|
|
|
$
|
203,425
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
64
VALEANT
PHARMACEUTICALS INTERNATIONAL
For the
Years Ended December 31,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(In thousands)
|
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(23,714
|
)
|
|
$
|
(6,186
|
)
|
|
$
|
(57,568
|
)
|
Income (loss) from discontinued operations
|
|
|
166,548
|
|
|
|
(26,796
|
)
|
|
|
(37,332
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations
|
|
|
(190,262
|
)
|
|
|
20,610
|
|
|
|
(20,236
|
)
|
Adjustments to reconcile income (loss) from continuing
operations to net cash provided by operating activities in
continuing operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
66,480
|
|
|
|
71,634
|
|
|
|
70,027
|
|
Provision for losses on accounts receivable and inventory
|
|
|
21,665
|
|
|
|
6,488
|
|
|
|
13,657
|
|
Stock compensation expense
|
|
|
5,064
|
|
|
|
12,419
|
|
|
|
20,270
|
|
Excess tax deduction from stock options exercised
|
|
|
(12,303
|
)
|
|
|
|
|
|
|
|
|
Translation and exchange gains, net
|
|
|
(2,063
|
)
|
|
|
(1,659
|
)
|
|
|
(766
|
)
|
Impairment charges and other non-cash items
|
|
|
(5,650
|
)
|
|
|
16,035
|
|
|
|
73,896
|
|
Acquired in-process research and development
|
|
|
186,300
|
|
|
|
|
|
|
|
|
|
Deferred income taxes
|
|
|
(24,438
|
)
|
|
|
18,122
|
|
|
|
8,600
|
|
Loss on extinguishment of debt
|
|
|
(485
|
)
|
|
|
|
|
|
|
|
|
Change in assets and liabilities, net of effects of acquisitions:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
11,038
|
|
|
|
23,440
|
|
|
|
(24,158
|
)
|
Inventories
|
|
|
(22,369
|
)
|
|
|
7,609
|
|
|
|
(13,153
|
)
|
Prepaid expenses and other assets
|
|
|
9,517
|
|
|
|
(7,839
|
)
|
|
|
(4,329
|
)
|
Trade payables and accrued liabilities
|
|
|
49,111
|
|
|
|
(9,768
|
)
|
|
|
(9,445
|
)
|
Income taxes
|
|
|
32,842
|
|
|
|
(57,350
|
)
|
|
|
(11,402
|
)
|
Other liabilities
|
|
|
82,323
|
|
|
|
824
|
|
|
|
(475
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flow from operating activities in continuing operations
|
|
|
206,770
|
|
|
|
100,565
|
|
|
|
102,486
|
|
Cash flow from operating activities in discontinued operations
|
|
|
9,759
|
|
|
|
(8,044
|
)
|
|
|
22,575
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
216,529
|
|
|
|
92,521
|
|
|
|
125,061
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures
|
|
|
(16,575
|
)
|
|
|
(29,140
|
)
|
|
|
(35,625
|
)
|
Proceeds from sale of assets
|
|
|
971
|
|
|
|
38,627
|
|
|
|
9,949
|
|
Proceeds from sale of businesses
|
|
|
48,575
|
|
|
|
2,453
|
|
|
|
3,123
|
|
Proceeds from investments
|
|
|
200,802
|
|
|
|
35,248
|
|
|
|
27,945
|
|
Purchase of investments
|
|
|
(155,653
|
)
|
|
|
(72,518
|
)
|
|
|
(26,500
|
)
|
Acquisition of businesses, license rights and product lines, net
of cash acquired
|
|
|
(355,303
|
)
|
|
|
(22,520
|
)
|
|
|
(3,148
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flow from investing activities in continuing operations
|
|
|
(277,183
|
)
|
|
|
(47,850
|
)
|
|
|
(24,256
|
)
|
Cash flow from investing activities in discontinued operations
|
|
|
447,101
|
|
|
|
8,508
|
|
|
|
(7,897
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) investing activities
|
|
|
169,918
|
|
|
|
(39,342
|
)
|
|
|
(32,153
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments on long-term debt and notes payable
|
|
|
(329,919
|
)
|
|
|
(3,494
|
)
|
|
|
(399
|
)
|
Proceeds from capitalized lease financing, long-term debt and
notes payable
|
|
|
118
|
|
|
|
1,799
|
|
|
|
2,841
|
|
Stock option exercises and employee stock purchases
|
|
|
49,054
|
|
|
|
15,288
|
|
|
|
17,389
|
|
Excess tax deduction from stock options exercised
|
|
|
12,303
|
|
|
|
|
|
|
|
|
|
Purchase of treasury stock
|
|
|
(206,517
|
)
|
|
|
(99,557
|
)
|
|
|
|
|
Dividends paid
|
|
|
|
|
|
|
|
|
|
|
(21,552
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flow from financing activities in continuing operations
|
|
|
(474,961
|
)
|
|
|
(85,964
|
)
|
|
|
(1,721
|
)
|
Cash flow from financing activities in discontinued operations
|
|
|
(43
|
)
|
|
|
(7,353
|
)
|
|
|
(5,089
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in financing activities
|
|
|
(475,004
|
)
|
|
|
(93,317
|
)
|
|
|
(6,810
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes on cash and cash equivalents
|
|
|
(21,226
|
)
|
|
|
23,924
|
|
|
|
15,140
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents
|
|
|
(109,783
|
)
|
|
|
(16,214
|
)
|
|
|
101,238
|
|
Cash and cash equivalents at beginning of period
|
|
|
309,365
|
|
|
|
325,579
|
|
|
|
224,341
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period
|
|
|
199,582
|
|
|
|
309,365
|
|
|
|
325,579
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents classified as part of discontinued
operations
|
|
|
|
|
|
|
(21,637
|
)
|
|
|
(14,567
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents of continuing operations
|
|
$
|
199,582
|
|
|
$
|
287,728
|
|
|
$
|
311,012
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
65
VALEANT
PHARMACEUTICALS INTERNATIONAL
(all
amounts in thousands, except share and per share amounts, unless
otherwise indicated)
|
|
1.
|
Organization
and Summary of Significant Accounting Policies
|
In these financial statements and this annual report,
we, us, our,
Valeant and the Company refers to
Valeant Pharmaceuticals International and its subsidiaries.
Organization: We are a multinational specialty
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).
As a result of the December 31, 2008 acquisition of Dow
Pharmaceutical Sciences, Inc. (Dow), beginning in
January 2009, we will receive royalties from patent protected
formulations licensed to third parties and revenue from contract
research services performed by Dow.
Principles of Consolidation: The accompanying
consolidated financial statements include the accounts of
Valeant Pharmaceuticals International, its wholly owned
subsidiaries and its majority-owned subsidiary in Poland.
Minority interest in results of operations of consolidated
subsidiaries represents the minority stockholders share of
the income or loss of these consolidated subsidiaries. All
significant intercompany account balances and transactions have
been eliminated.
Cash and Cash Equivalents: Cash equivalents
include short-term commercial paper, time deposits and money
market funds which, at the time of purchase, have maturities of
three months or less. For purposes of the consolidated
statements of cash flows, we consider highly liquid investments
with a maturity of three months or less at the time of purchase
to be cash equivalents. The carrying amount of these assets
approximates fair value due to the short-term maturity of these
investments.
Marketable Securities: Marketable securities
include short-term commercial paper, government agency
securities and corporate bonds 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 December 31, 2008 and 2007, the fair value of
these marketable securities approximated cost. At
December 31, 2008, corporate bonds are categorized as
available for sale and are carried at fair value.
Allowance for Doubtful Accounts: We evaluate
the collectability of accounts receivable on a regular basis.
The allowance is based upon various factors including the
financial condition and payment history of major customers, an
overall review of collections experience on other accounts and
economic factors or events expected to affect our future
collections experience.
Inventories: Inventories, which include
material, direct labor and factory overhead, are stated at the
lower of cost or market. Cost is determined on a
first-in,
first-out (FIFO) basis. Inventories consist of
currently marketed products and certain products awaiting
regulatory approval. We evaluate the carrying value of
inventories on a regular basis, taking into account such factors
as historical and anticipated future sales compared with
quantities on hand, the price we expect to obtain for products
in their respective markets compared with historical cost and
the remaining shelf life of goods on hand. In evaluating the
recoverability of inventories produced in preparation for
product launches, we consider the probability that revenue will
be obtained from the future sale of the related inventory
together with the status of the product within the regulatory
approval process.
Property, Plant and Equipment: Property, plant
and equipment are stated at cost. We primarily use the
straight-line method for depreciating property, plant and
equipment over their estimated useful lives. Buildings are
depreciated up to 40 years, machinery and equipment are
depreciated from 3-11 years, furniture and fixtures from
2-13 years and leasehold improvements and capital leases
are amortized over their useful lives, limited to the life of
the related lease. We follow the policy of capitalizing
expenditures that materially increase the lives of the related
assets and charge maintenance and repairs to expense. Upon sale
or retirement, the costs and related accumulated depreciation or
amortization are eliminated from the respective accounts and the
resulting gain or loss is included in
66
VALEANT
PHARMACEUTICALS INTERNATIONAL
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
income. From time to time, if there is an indication of possible
asset impairment, we evaluate the carrying value of property,
plant and equipment. We determine if there has been asset
impairment by comparing the anticipated undiscounted future cash
flows expected to be generated by the property, plant and
equipment with its carrying value. If the undiscounted cash
flows are less than the carrying value, the amount of the asset
impairment, if any, is determined by comparing the carrying
value of the property, plant and equipment with its fair value.
Fair value is generally based on a discounted cash flows
analysis, appraisals or preliminary offers from prospective
buyers. In the years ended December 31, 2008, 2007 and
2006, we recorded asset impairment charges of $2.9 million,
$9.4 million and $53.2 million, respectively, on
certain of our fixed assets. See Note 2.
Capitalized Software Costs: In 2008 and 2007,
we capitalized software purchased from third party vendors and
software development costs incurred under the provisions of
American Institute of Certified Public Accountants Statement of
Position (SOP)
98-1,
Accounting for the Cost of Computer Software Developed or
Obtained for Internal Use. Capitalized costs include only
(1) external direct costs of materials and services
incurred in developing or obtaining internal use software,
(2) payroll and payroll-related costs for employees who are
directly associated with and who devote substantial time to the
internal-use software project, and (3) interest costs
incurred, while developing internal-use software. Amortization
began in certain countries when portions of the project were
completed, were ready for their intended purpose and were placed
in service. Training and computer software maintenance costs are
expensed as incurred. Software development costs are being
amortized using the straight-line method over the expected life
of the product which is estimated to be five to seven years
depending on when it is placed in service.
Acquired In-Process Research and
Development: We charge the costs associated with
acquired in-process research and development
(IPR&D) to expense. These amounts represent an
estimate of the fair value of purchased in-process technology
for projects that, as of the acquisition date, had not yet
reached technological feasibility and had no alternative future
use. The estimation of fair value requires significant judgment.
Differences in those judgments would have the impact of changing
our allocation of purchase price to goodwill, which is an
intangible asset that is not amortized. We incurred IPR&D
expense of $186.3 million related to acquisitions in 2008.
See Note 3.
The major risks and uncertainties associated with the timely and
successful completion of IPR&D projects consist of the
ability to confirm the safety and efficacy of the technology
based on the data from clinical trials and obtaining necessary
regulatory approvals. In addition, no assurance can be given
that the underlying assumptions used to forecast the cash flows
or the timely and successful completion of such projects will
materialize as estimated. For these reasons, among others,
actual results may vary significantly from the estimated results.
Goodwill and Intangible Assets: Our intangible
assets comprise customer relationships, product marketing
rights, related patents and trademarks for pharmaceutical
products, and rights under the ribavirin license agreements. The
product rights primarily relate to either 1) mature
pharmaceutical products without patent protection, or
2) patented products. The mature products display a stable
and consistent revenue stream over a relatively long period of
time. The patented products generally have steady growth rates
up until the point of patent expiration when revenues decline
due to the introduction of generic competition. We amortize the
mature products using the straight-line method over the
estimated remaining life of the product (ranging from
5-19 years for current products) where the pattern of
revenues is generally flat over the remaining life. We amortize
patented products using the straight-line method over the
remaining life of the patent because the revenues are generally
growing until patent expiration.
We amortize the license rights for ribavirin on an accelerated
basis because of the significant decline in royalties which
started in 2003 upon the expiration of a U.S. patent;
amortization was completed in the third quarter of 2008.
Certain intangible assets acquired in 2008 were determined to
have indefinite lives. Intangible assets with indefinite lives
are not amortized but are tested for impairment annually.
67
VALEANT
PHARMACEUTICALS INTERNATIONAL
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Goodwill and intangible assets are tested for impairment
annually and also in the event of an impairment indicator. The
annual impairment test is a fair value test, which includes
assumptions such as growth and discount rates. We recorded an
intangible asset impairment charge, included in amortization
expense, of $1.6 million in 2008 related to a product sold
in the United States. We recorded asset impairment charges for
intangible assets of $0.3 million and $1.1 million in
2007 and 2006, respectively, related to two products in Spain,
which is included in loss from discontinued operations.
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 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 the sale of our WEEMEA business to
Meda which we completed in September 2008, the sale of certain
subsidiaries and assets in Asia to Invida Pharmaceutical
Holdings Pte. Ltd which we completed in March 2008 and the sale
of our Infergen operations to Three Rivers Pharmaceuticals, LLC
which we completed in January 2008.
Discontinued Operations: The results of
operations and the related financial position for Infergen and
the WEEMEA business have been reflected as discontinued
operations in our consolidated 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
(EITF 03-13).
For more details regarding our discontinued operations see
Note 4.
Revenue Recognition: We recognize revenues
from product sales when title and risk of ownership transfers to
the customer and all required elements as described in
Securities and Exchange Commission (SEC) Staff
Accounting Bulletin No. 104 have been addressed. We
record revenues net of provisions for rebates, discounts and
returns, which are established at the time of sale. We calculate
allowances for future returns of products sold to our direct and
indirect customers, who include wholesalers, retail pharmacies
and hospitals, as a percent of sales based on our historical
return percentages and taking into account additional available
information on competitive products and contract changes. Where
we do not have data sharing agreements, we use third-party data
to estimate the level of product inventories, expiration dating,
and product demand at our major wholesalers and in retail
pharmacies. We have data sharing agreements with the three
largest wholesalers in the U.S. Based upon this
information; adjustments are made to the allowance accrual if
deemed necessary. Actual results could be materially different
from our estimates, resulting in future adjustments to revenue.
We review our current methodology and assess the adequacy of the
allowance for returns on a quarterly basis, adjusting for
changes in assumptions, historical results and business
practices, as necessary.
In the United States, we record provisions for Medicaid,
Medicare and contract rebates based upon our actual experience
ratio of rebates paid and actual prescriptions during prior
quarters. We apply the experience ratio to the respective
periods sales to determine the rebate accrual and related
expense. This experience ratio is evaluated regularly and
compared to industry data and claims made by states and other
contract organizations to ensure that the historical trends are
representative of current experience and that our accruals are
adequate.
Our reserve for rebates, product returns and allowances is
included in accrued liabilities and was $66.0 million and
$50.1 million at December 31, 2008 and 2007,
respectively.
We earn ribavirin royalties as a result of our license of
product rights and technologies to Schering-Plough. Ribavirin
royalties are earned at the time the products subject to the
royalty are sold by Schering-Plough. We rely on a limited amount
of financial information provided by Schering-Plough to estimate
the amounts due to us under the royalty agreements.
Stock-Based Compensation: We adopted Statement
of Financial Accounting Standards (SFAS)
No. 123(R), Share-Based Payment
(SFAS 123(R)) on January 1, 2006.
SFAS 123(R) requires companies to
68
VALEANT
PHARMACEUTICALS INTERNATIONAL
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
recognize compensation expense for the fair value of all share
based incentive programs including employee stock options and
our employee stock purchase plan.
In order to estimate the fair value of stock options under the
provisions of SFAS 123(R) we use the Black-Scholes option
valuation model. Option valuation models such as Black-Scholes
require the input of subjective assumptions which can vary over
time. Additional information about our stock incentive programs
and the assumptions used in determining the fair value of stock
options are contained in Note 15.
Stock compensation expense was $5.1 million,
$12.4 million and $20.3 million for the years ended
December 31, 2008, 2007 and 2006, respectively.
Income Taxes: Income taxes are calculated in
accordance with SFAS No. 109, Accounting for Income
Taxes (SFAS 109). SFAS 109 requires
that we recognize deferred tax assets and liabilities for the
expected future tax consequences of events that have been
recognized in our financial statements or tax returns. A
valuation allowance is established to reduce our deferred tax
assets to the amount expected to be realized when, in
managements opinion, it is more likely than not, that some
portion of the deferred tax asset will not be realized. In
estimating the future tax consequences of any transaction, we
consider all expected future events under presently existing tax
laws and rates.
Foreign Currency Translation: The assets and
liabilities of our foreign operations are translated at end of
period exchange rates. Revenues and expenses are translated at
the average exchange rates prevailing during the period. The
effects of unrealized exchange rate fluctuations on translating
foreign currency assets and liabilities into U.S. Dollars
are accumulated as a separate component of stockholders
equity.
Derivative Financial Instruments: We account
for derivative financial instruments 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 or accrued liabilities. Depending
on the nature of the hedge, changes in the fair value of a
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.
Accumulated Other Comprehensive Income: The
components of accumulated other comprehensive income at year end
were as follows:
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
Foreign currency translation adjustments
|
|
$
|
19,278
|
|
|
$
|
85,506
|
|
Unrealized loss on marketable equity securities
|
|
|
|
|
|
|
(1,084
|
)
|
Defined benefit pension plan liabilities
|
|
|
(1,156
|
)
|
|
|
(3,827
|
)
|
Other
|
|
|
|
|
|
|
(385
|
)
|
|
|
|
|
|
|
|
|
|
Accumulated other comprehensive income
|
|
$
|
18,122
|
|
|
$
|
80,210
|
|
|
|
|
|
|
|
|
|
|
Per Share Information: We compute basic
earnings per share by dividing income or loss available to
common stockholders by the weighted-average number of common
shares outstanding. We compute diluted earnings per share by
adjusting the weighted-average number of common shares
outstanding to reflect the effect of potentially dilutive
securities including options, warrants, and convertible debt or
preferred stock. We adjust income available to common
stockholders in these computations to reflect any changes in
income or loss that would result from the issuance of the
dilutive common shares.
Out of Period Adjustments: In 2008, we
recorded an adjustment related to value-added tax in Mexico that
increased selling, general and administrative expenses and
reduced income from continuing operations before income taxes by
approximately $1.8 million, comprised of approximately
$0.4 million, $0.4 million and $1.0 million
related to 2002, 2003 and 2004, respectively. This correction
was to write off unrecoverable
69
VALEANT
PHARMACEUTICALS INTERNATIONAL
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
value-added tax receivables arising in the years affected. Also
in 2008, we recorded adjustments related to stock compensation
expense and foreign taxes that affected cost of goods sold,
research and development expenses and selling, general and
administrative expenses, and that in the aggregate increased
income from continuing operations before income taxes by
approximately $1.9 million related to 2007 and 2006. These
corrections were a reversal of stock compensation expense to
adjust our historical estimated forfeiture rate for actual
forfeitures which occurred in 2006 and 2007, and a foreign tax
error recorded in 2007. Correcting the stock compensation error
increased income from continuing operations before income taxes
by $3.6 million and correcting the foreign tax error
decreased income from continuing operations before income taxes
by $1.7 million. Correcting the stock compensation error
also increased income from discontinued operations by
$0.1 million.
Because these errors, both individually and in the aggregate,
were not material to any of the prior years or current
years financial statements, we recorded the correction of
these errors in the 2008 financial statements.
Use of Estimates: The preparation of financial
statements in conformity with accounting principles generally
accepted in the United States of America requires management to
make estimates and assumptions that affect the reported amount
of assets and liabilities, the disclosure of contingent assets
and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting
periods. Actual results could differ materially from those
estimates.
Recent
Accounting Pronouncements:
Effective January 1, 2007, we adopted Financial Accounting
Standards Board Interpretation No. 48, Accounting for
Uncertainty in Income Taxes An Interpretation of
FASB Statement No. 109 (FIN 48).
FIN 48 applies to all income tax positions taken on
previously filed tax returns or expected to be taken on a future
tax return. FIN 48 prescribes a benefit recognition model
with a two-step approach, a more-likely-than-not recognition
criterion and a measurement attribute that measures the position
as the largest amount of tax benefit that is greater than 50%
likely of being ultimately realized upon final settlement. If it
is not more likely than not that the benefit will be sustained
on its technical merits, no benefit will be recorded. Uncertain
tax positions that relate only to timing of when an item is
included on a tax return are considered to have met the
recognition threshold for purposes of applying FIN 48.
Therefore, if it can be established that the only uncertainty is
when an item is taken on a tax return, such positions have
satisfied the recognition step for purposes of FIN 48 and
uncertainty related to timing should be assessed as part of
measurement. FIN 48 also requires that the amount of
interest expense and income to be recognized related to
uncertain tax positions be computed by applying the applicable
statutory rate of interest to the difference between the tax
position recognized in accordance with FIN 48 and the
amount previously taken or expected to be taken in a tax return.
The change in net assets as a result of applying this
pronouncement was recorded as a change in accounting principle
with the cumulative effect of the change required to be treated
as an adjustment to the opening balance of retained earnings. As
a result of the adoption of FIN 48, we recognized an
increase of $1.6 million to the beginning balance of
accumulated deficit on the balance sheet.
In September 2006, the Financial Accounting Standards Board
(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
70
VALEANT
PHARMACEUTICALS INTERNATIONAL
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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 13.
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 June 2007, the FASB ratified the consensus reached by the
Emerging Issues Task Force (EITF) in EITF Issue
No. 07-3,
Accounting for Nonrefundable Advance Payments for Goods or
Services Received for Use in Future Research and Development
Activities
(EITF 07-3).
EITF 07-3
requires that nonrefundable advance payments for goods and
services that will be used in future research and development
activities be deferred and capitalized until the related service
is performed or the goods are delivered.
EITF 07-3
became effective for Valeant as of January 1, 2008. The
implementation of
EITF 07-3
did not have a material impact on our consolidated financial
statements.
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, requires
capitalization of in-process research and development assets
acquired, 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 issued SFAS No. 160,
Noncontrolling Interests in Consolidated Financial
Statements an amendment of ARB No. 51
(SFAS 160). SFAS 160 establishes
accounting and reporting standards for the noncontrolling
interest in a subsidiary and for the deconsolidation of a
subsidiary. It clarifies that a noncontrolling interest in a
subsidiary is an ownership interest in the consolidated entity
that should be reported as equity in the consolidated financial
statements. SFAS 160 is effective for fiscal years
beginning on or after December 15, 2008. We do not expect
the adoption of SFAS 160 to have a material impact on our
consolidated financial statements.
In December 2007, the FASB ratified the consensus reached by the
EITF in EITF Issue
No. 07-1,
Accounting for Collaborative Arrangements
(EITF 07-1).
EITF 07-1
defines collaborative arrangements and establishes reporting
requirements for transactions between participants in a
collaborative arrangement and between participants in the
arrangement and third parties.
EITF 07-1
also establishes the appropriate income statement presentation
and classification for joint operating activities and payments
between participants, as well as the sufficiency of the
disclosures related to these arrangements.
EITF 07-1
is effective for fiscal years beginning after December 15,
2008, and interim periods within those fiscal years.
Retrospective application to all prior periods presented is
required for all collaborative arrangements existing as of the
effective date. We do not expect the adoption of
EITF 07-1
to have a material impact on our consolidated financial
statements.
71
VALEANT
PHARMACEUTICALS INTERNATIONAL
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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 statement disclosures.
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 Valeant beginning on January 1, 2009 and will
be applied retrospectively. A cumulative effect adjustment will
be reflected in the carrying amounts of our assets and
liabilities as of the beginning of the first period presented.
FSP APB 14-1
will have an impact on our financial position and reduce our
results of operations, but will not have an impact on our cash
flows. After adopting FSP APB
14-1, we
estimate that we will record additional non-cash interest
expense of approximately $14.0 million to
$16.0 million in 2009, based on currently outstanding
convertible debt balances.
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 of employees, 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. 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. In
March 2008, we completed this strategic review and announced a
strategic plan designed to streamline our business, align our
infrastructure to the scale of our operations, maximize our
pipeline assets and deploy our cash assets to maximize
shareholder value. The
72
VALEANT
PHARMACEUTICALS INTERNATIONAL
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
strategic plan includes a restructuring program (the 2008
Restructuring), which 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, the
Czech Republic and Slovakia) and Latin America (Mexico and
Brazil). The 2008 Restructuring plan includes actions to divest
our operations in markets outside of these core geographic areas
through sales of subsidiaries or assets or other strategic
alternatives.
In December 2007, we signed an agreement with Invida
Pharmaceutical Holdings Pte. Ltd. (Invida) to sell
to Invida certain assets 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 in March 2008. The assets sold to
Invida were classified as held for sale as of
December 31, 2007. During the year ended December 31,
2008, we received proceeds of $37.9 million and recorded a
gain of $34.5 million, net of charges for closing costs, on
this transaction. We expect to receive additional proceeds of
approximately $3.4 million subject to net asset settlement
provisions in the agreement.
In June 2008, we sold our subsidiaries in Argentina and Uruguay,
and recorded a loss on the sale of $2.6 million, in
addition to an impairment charge of $7.9 million related to
the anticipated sale. These subsidiaries were classified as
held for sale in accordance with SFAS 144 as of
December 31, 2007. Total proceeds from the sale of these
subsidiaries were $13.5 million.
In December 2008, as part of our efforts to align our
infrastructure to the scale of our operations, we exercised our
option to terminate the lease of our Aliso Viejo, California
corporate headquarters as of December 2011 and, as a result,
recorded a restructuring charge of $3.8 million for the
year ended December 31, 2008. The charge consisted of a
lease termination penalty of $3.2 million, which will be
payable in October 2011, and $0.6 million for certain fixed
assets.
The net restructuring, asset impairments and dispositions charge
of $21.3 million in the year ended December 31, 2008
included $19.2 million of employee severance costs for a
total of 389 affected employees who were part of the supply,
selling, general and administrative and research and development
workforce in the United States, Mexico, Brazil and the Czech
Republic. The charges also included $10.4 million for
professional service fees related to the strategic review of our
business, $7.7 million of contract cancellation costs and
$0.3 million 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 $4.8 million, impairment charges
relating to the sale of our subsidiaries in Argentina and
Uruguay and certain fixed assets in Mexico of
$10.8 million, and the loss of $2.6 million in the
sale of our subsidiaries in Argentina and Uruguay, offset in
part by the gain of $34.5 million in the transaction with
Invida.
73
VALEANT
PHARMACEUTICALS INTERNATIONAL
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following table summarizes the restructuring costs recorded
in the years ended December 31, 2008 and 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
Cumulative
|
|
|
|
2008
|
|
|
2007
|
|
|
Total Incurred
|
|
|
2008 Restructuring Program
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee severances (392 employees cumulatively)
|
|
$
|
19,239
|
|
|
$
|
957
|
|
|
$
|
20,196
|
|
Professional services, contract cancellation and other cash costs
|
|
|
18,406
|
|
|
|
8,644
|
|
|
|
27,050
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal: cash charges
|
|
|
37,645
|
|
|
|
9,601
|
|
|
|
47,246
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock compensation
|
|
|
4,778
|
|
|
|
|
|
|
|
4,778
|
|
Impairment of long-lived assets
|
|
|
10,758
|
|
|
|
|
|
|
|
10,758
|
|
Loss on sale of long-lived assets
|
|
|
2,652
|
|
|
|
|
|
|
|
2,652
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal: non-cash charges
|
|
|
18,188
|
|
|
|
|
|
|
|
18,188
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal: restructuring expenses
|
|
|
55,833
|
|
|
|
9,601
|
|
|
|
65,434
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain on Invida transaction
|
|
|
(34,538
|
)
|
|
|
|
|
|
|
(34,538
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restructurings, asset impairments and dispositions
|
|
$
|
21,295
|
|
|
$
|
9,601
|
|
|
$
|
30,896
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In the year ended December 31, 2008, we recorded inventory
obsolescence charges of $21.0 million 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 IIb 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 $36.8 million.
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.
74
VALEANT
PHARMACEUTICALS INTERNATIONAL
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following table summarizes the restructuring costs recorded
in the years ended December 31, 2007 and 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
Cumulative
|
|
|
|
2007
|
|
|
2006
|
|
|
Total Incurred
|
|
|
2006 Restructuring Program
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee severances (408 employees cumulatively)
|
|
$
|
3,788
|
|
|
$
|
11,584
|
|
|
$
|
15,372
|
|
Contract cancellation and other cash costs
|
|
|
2,076
|
|
|
|
1,633
|
|
|
|
3,709
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal: cash charges
|
|
|
5,864
|
|
|
|
13,217
|
|
|
|
19,081
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Abandoned software and other capital assets
|
|
|
|
|
|
|
22,178
|
|
|
|
22,178
|
|
Write-off of accumulated foreign currency translation adjustments
|
|
|
2,782
|
|
|
|
|
|
|
|
2,782
|
|
Impairment of manufacturing and research facilities
|
|
|
9,428
|
|
|
|
53,221
|
|
|
|
62,649
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal: non-cash charges
|
|
|
12,210
|
|
|
|
75,399
|
|
|
|
87,609
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restructurings, asset impairments and dispositions
|
|
$
|
18,074
|
|
|
$
|
88,616
|
|
|
$
|
106,690
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Aggregate restructuring charges for the 2008 and 2006
restructuring programs, by reportable segment, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Specialty pharmaceuticals
|
|
$
|
(16,755
|
)
|
|
$
|
10,445
|
|
|
$
|
42,720
|
|
Branded generics Europe
|
|
|
(8,011
|
)
|
|
|
|
|
|
|
635
|
|
Branded generics Latin America
|
|
|
8,328
|
|
|
|
|
|
|
|
231
|
|
Unallocated corporate
|
|
|
37,733
|
|
|
|
17,230
|
|
|
|
45,030
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
21,295
|
|
|
$
|
27,675
|
|
|
$
|
88,616
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 December 31, 2008, the restructuring
accrual for the 2006 Restructuring was $0.6 million 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.
75
VALEANT
PHARMACEUTICALS INTERNATIONAL
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
As of December 31, 2008, the restructuring accrual for the
2008 Restructuring was $10.3 million and relates to
severance, professional service fees and other obligations and
is expected to be paid primarily during the remainder of 2009,
except for the lease termination penalty which will be paid in
2011. A summary of accruals and expenditures of restructuring
costs which will be paid in cash is as follows:
|
|
|
|
|
2006 Restructuring: Reconciliation of Cash Payments and
Accruals
|
|
|
|
|
Opening balance, commencement of restructuring
|
|
$
|
|
|
Charges to earnings
|
|
|
13,217
|
|
Cash paid
|
|
|
(9,002
|
)
|
|
|
|
|
|
Restructuring accrual, December 31, 2006
|
|
|
4,215
|
|
|
|
|
|
|
Charges to earnings
|
|
|
5,864
|
|
Cash paid
|
|
|
(8,579
|
)
|
|
|
|
|
|
Restructuring accrual, December 31, 2007
|
|
|
1,500
|
|
|
|
|
|
|
Cash paid
|
|
|
(875
|
)
|
|
|
|
|
|
Restructuring accrual, December 31, 2008
|
|
$
|
625
|
|
|
|
|
|
|
2008 Restructuring: Reconciliation of Cash Payments and
Accruals
|
|
|
|
|
Opening balance, commencement of restructuring
|
|
$
|
|
|
Charges to earnings
|
|
|
9,601
|
|
Cash paid
|
|
|
(1,128
|
)
|
|
|
|
|
|
Restructuring accrual, December 31, 2007
|
|
|
8,473
|
|
|
|
|
|
|
Charges to earnings
|
|
|
37,645
|
|
Cash paid
|
|
|
(35,817
|
)
|
|
|
|
|
|
Restructuring accrual, December 31, 2008
|
|
$
|
10,301
|
|
|
|
|
|
|
Certain additional costs under the 2008 Restructuring are
expected to be incurred in 2009, including, but not limited to,
one-time employee severance costs of $1.1 million related
to severance plans approved in 2008 for which the costs are
spread over the service period in accordance with SFAS 146.
|
|
3.
|
Acquisitions
and Collaboration Agreement
|
Dow
Acquisition
On December 31, 2008, we completed the purchase of all of
the outstanding common stock of Dow Pharmaceutical Sciences,
Inc. (Dow), a privately held healthcare company that
provides biopharmaceutical development services primarily in the
United States. The services provided include formulation and
process development, analytical chemistry and methods
development, skin biology laboratory testing, clinical product
manufacturing, clinical labeling and distribution, clinical
consulting and research services, regulatory consulting
submission preparation, regulatory compliance consulting and
quality assurance services. Dow also acquires and develops
selected topical, primarily dermatological, products and
technologies for license to others, as well as for its own
portfolio of products. The Dow acquisition will allow us to gain
additional expertise in formulation and process development,
clinical trial services and compliance related services. Because
the acquisition was completed on December 31, 2008, our
Consolidated Statements of Operations do not include any results
from Dow.
We acquired Dow for an agreed price of $285.0 million,
subject to certain closing adjustments. We paid
$242.5 million in cash, net of cash acquired, and incurred
transaction costs of $5.4 million. We paid
$5.6 million in January 2009. We have remaining payment
obligations of $36.0 million, $35.0 million of which
we will pay by
76
VALEANT
PHARMACEUTICALS INTERNATIONAL
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
June 30, 2009 into an escrow account for the benefit of the
Dow common stockholders, subject to any indemnification claims
made by us for a period of eighteen months following the
acquisition closing. We have granted a security interest to the
Dow common stockholders in certain royalties to be paid to us
until we satisfy our obligation to fund the $35.0 million
escrow account. The accounting treatment for the acquisition
requires the recognition of an additional $95.9 million of
conditional purchase consideration because the fair value of the
net assets acquired exceeded the total amount of the acquisition
price. Contingent consideration of up to $235.0 million may be
incurred for future milestones related to certain pipeline
products still in development. Over 85% of this contingent
consideration is dependent upon the achievement of approval and
commercial targets. Future contingent consideration paid in
excess of the $95.9 million will be treated as an
additional cost of the acquisition and result in the recognition
of goodwill.
We accrued the $95.9 million as a liability for conditional
purchase consideration, in accordance with paragraph 46 of
SFAS No. 141, Business Combinations.
The following table summarizes the Dow acquisition purchase
price:
|
|
|
|
|
Cash consideration, net of cash acquired
|
|
$
|
283,894
|
|
Conditional purchase consideration
|
|
|
95,854
|
|
Transaction costs
|
|
|
5,381
|
|
|
|
|
|
|
Total purchase price
|
|
$
|
385,129
|
|
|
|
|
|
|
The Dow acquisition purchase price was allocated to tangible and
intangible assets acquired and liabilities assumed based upon
their estimated fair value at the acquisition date. We have
completed our evaluation of the fair value of asset acquired or
liabilities assumed, except for certain intangible assets, which
we expect to complete in the first quarter of 2009. We believe
the estimated fair values assigned to the Dow assets acquired
and liabilities assumed were based upon reasonable assumptions.
The following table summarizes the estimated fair value of the
net assets acquired:
|
|
|
|
|
Current assets
|
|
$
|
17,999
|
|
Property, plant and equipment
|
|
|
3,515
|
|
Other long-term assets
|
|
|
158
|
|
Identifiable intangible assets
|
|
|
184,400
|
|
In-process research and development
|
|
|
185,800
|
|
Current and long-term liabilities
|
|
|
(6,743
|
)
|
|
|
|
|
|
Net assets acquired
|
|
$
|
385,129
|
|
|
|
|
|
|
The acquired intangible assets consisted of outlicensed
technology, customer relationships and developed formulations.
Developed formulations include Dows U.S. Food and
Drug Administration (FDA) approved product, Acanya,
a topical treatment for acne scheduled to launch in the first
quarter of 2009. Outlicensed technology has been licensed to
third parties and will generate future royalty revenue. Customer
relationships are from Dows contract research services.
The weighted-average amortization period for such intangible
assets acquired is outlined in the table below:
|
|
|
|
|
|
|
|
|
|
|
Value of
|
|
|
|
|
|
|
Intangible
|
|
|
Weighted-Average
|
|
|
|
Assets
|
|
|
Amortization
|
|
|
|
Acquired
|
|
|
Period
|
|
|
Developed formulations
|
|
$
|
104,500
|
|
|
|
6.1 years
|
|
Outlicensed technology
|
|
|
74,000
|
|
|
|
9.6 years
|
|
Customer relationships
|
|
|
5,900
|
|
|
|
7.0 years
|
|
|
|
|
|
|
|
|
|
|
Total indentifiable intangible assets
|
|
$
|
184,400
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
77
VALEANT
PHARMACEUTICALS INTERNATIONAL
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
We recorded a charge of $185.8 million to acquired
in-process research and development for in-process research and
development assets acquired that we determined were not yet
complete and had no future uses in their current state. The
major risks and uncertainties associated with the timely and
successful completion of the acquired in-process research and
development assets consist of the ability to confirm the safety
and efficacy of the product based upon the data from clinical
trials and obtaining the necessary approval from the FDA.
The in-process research and development assets are comprised of
the following items; IDP-107 for the treatment of acne, IDP-108
for fungal infections and IDP-115 for rosacea, which were valued
at $107.3 million, $49.0 million and
$29.5 million, respectively. All of these in-process
research and development assets had not yet received approval
from the FDA as of the acquisition date. IDP-107 is an
antibiotic targeted to treat moderate to severe inflammatory
acne and is in Phase II studies. IDP-108 is an
investigational topical drug for nail, hair and skin fungal
infections and is in Phase II studies. IDP-115 is a topical
treatment for rosacea and has completed Phase II studies.
The estimated fair value of the in-process research and
development assets was determined based upon the use of a
discounted cash flow model for each asset. The estimated
after-tax cash flows were probability weighted to take into
account the stage of completion and the risks surrounding the
successful development and commercialization of each asset. The
cash flows for each asset were then discounted to a present
value using a discount rate of 15%. Material net cash inflows
were estimated to begin in 2013 for IDP-107, IDP-108 and
IDP-115. Gross margins and expense levels were estimated to be
consistent with Dows historical results. Solely for the
purpose of estimating the fair value of these assets, we assumed
we would incur future research and development costs of
$26.6 million, $29.6 million and $20.1 million to
complete IDP-107, IDP-108 and IDP-115, respectively.
DermaTech
Acquisition
On November 14, 2008, we completed the purchase of all of
the outstanding common stock of DermaTech Pty Ltd.
(DermaTech), a privately held healthcare company,
based in Australia that develops, manufactures and markets
dermatology products. Our Consolidated Statements of Operations
include the results of DermaTech since the acquisition date. The
DermaTech acquisition purchase price was allocated to tangible
and intangible assets acquired and liabilities assumed based
upon their estimated fair value at the acquisition date. As of
December 31, 2008, cash paid totaled $14.6 million.
The purchase price is summarized below:
|
|
|
|
|
Cash consideration, net of cash acquired
|
|
$
|
14,865
|
|
Transaction costs
|
|
|
603
|
|
|
|
|
|
|
Total purchase price
|
|
$
|
15,468
|
|
|
|
|
|
|
We have completed our evaluation of the assets acquired and
liabilities assumed. The excess of the purchase price over the
estimated fair value of net assets acquired was allocated to
goodwill. The goodwill acquired is not deductible for tax
purposes. We believe the estimated fair values assigned to the
DermaTech assets acquired and liabilities assumed were based
upon reasonable assumptions. The following table summarizes the
estimated fair value of the net assets acquired:
|
|
|
|
|
Current and long-term assets
|
|
$
|
3,426
|
|
Identifiable intangible assets
|
|
|
8,260
|
|
Goodwill
|
|
|
7,440
|
|
Current and long-term liabilities
|
|
|
(3,658
|
)
|
|
|
|
|
|
Net assets acquired
|
|
$
|
15,468
|
|
|
|
|
|
|
78
VALEANT
PHARMACEUTICALS INTERNATIONAL
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The acquired intangible assets consisted principally of trade
names and customer relationships. The weighted-average
amortization period for such intangible assets acquired is
outlined in the table below:
|
|
|
|
|
|
|
|
|
|
|
Value of
|
|
|
|
|
|
|
Intangible
|
|
|
Weighted-Average
|
|
|
|
Assets
|
|
|
Amortization
|
|
|
|
Acquired
|
|
|
Period
|
|
|
Trade names
|
|
$
|
5,653
|
|
|
|
Indefinite
|
|
Customer relationships
|
|
|
2,211
|
|
|
|
10.0 years
|
|
Licensed products
|
|
|
396
|
|
|
|
6.4 years
|
|
|
|
|
|
|
|
|
|
|
Total indentifiable intangible assets
|
|
$
|
8,260
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Coria
Acquisition
On October 15, 2008, we completed the purchase of all of
the outstanding common stock of Coria Laboratories, Ltd.
(Coria), a privately held healthcare company that
develops, manufactures and markets dermatology products in the
United States. As a result of the acquisition, we acquired an
assembled sales force and a suite of dermatology products which
enhanced our existing product base. Our Consolidated Statements
of Operations include the results of Coria since the acquisition
date.
The Coria acquisition purchase price was allocated to tangible
and intangible assets acquired and liabilities assumed based
upon their estimated fair value at the acquisition date. The
following table summarizes the purchase price:
|
|
|
|
|
Cash consideration, net of cash acquired
|
|
$
|
96,292
|
|
Transaction costs
|
|
|
607
|
|
|
|
|
|
|
Total purchase price
|
|
$
|
96,899
|
|
|
|
|
|
|
We have completed our evaluation of the assets acquired and
liabilities assumed. The excess of the purchase price over the
fair value of net assets acquired was allocated to goodwill. The
goodwill acquired is not deductible for tax purposes. We believe
the fair values assigned to the Coria assets acquired and
liabilities assumed were based upon reasonable assumptions. As
of December 31, 2008, cash paid totaled $95.6 million.
The following table summarizes the fair value of the net assets
acquired:
|
|
|
|
|
Current assets
|
|
$
|
12,097
|
|
Identifiable intangible assets
|
|
|
74,900
|
|
In-process research and development
|
|
|
500
|
|
Goodwill
|
|
|
30,951
|
|
Other assets
|
|
|
3,260
|
|
Current liabilities
|
|
|
(7,217
|
)
|
Deferred tax liabilities
|
|
|
(17,592
|
)
|
|
|
|
|
|
Net assets acquired
|
|
$
|
96,899
|
|
|
|
|
|
|
79
VALEANT
PHARMACEUTICALS INTERNATIONAL
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The acquired intangible assets consisted of developed technology
for approved indications of currently marketed products. The
acquired intangible assets principally relate to the CeraVe,
Cloderm and Atralin products. The weighted-average amortization
period for such intangible assets acquired is outlined in the
table below:
|
|
|
|
|
|
|
|
|
|
|
Value of
|
|
|
|
|
|
|
Intangible
|
|
|
Weighted-Average
|
|
|
|
Assets
|
|
|
Amortization
|
|
|
|
Acquired
|
|
|
Period
|
|
|
Developed technology-CeraVe
|
|
$
|
42,700
|
|
|
|
Indefinite
|
|
Developed technology-All other products
|
|
|
32,200
|
|
|
|
6.4 years
|
|
|
|
|
|
|
|
|
|
|
Total indentifiable intangible assets
|
|
$
|
74,900
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill represents the excess of the purchase price over the
sum of the amounts assigned to the fair value of assets acquired
less liabilities assumed. The Coria acquisition will allow us to
gain additional expertise and intellectual property for the next
generation of patented delivery technology, an expanded and
complimentary product mix and an assembled sales force, which we
believe supports the amount of goodwill recognized.
The following unaudited pro forma results of operations for the
year ended December 31, 2008, assume the Dow acquisition
had occurred on January 1, 2008 and for the year ended
December 31, 2007, assume the acquisition had occurred on
January 1, 2007. These pro forma results include charges
for in-process research and development of $185.8 million
related to the Dow acquisition. The pro forma adjustments have
no impact on the effective income tax rate used due to the
valuation allowance on deferred tax assets in the United States.
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
(Unaudited)
|
|
|
Product sales
|
|
$
|
593,165
|
|
|
$
|
603,051
|
|
Alliance revenue
|
|
$
|
80,423
|
|
|
$
|
101,841
|
|
Service revenue
|
|
$
|
38,763
|
|
|
$
|
29,184
|
|
Loss from continuing operations
|
|
$
|
(223,969
|
)
|
|
$
|
(210,479
|
)
|
Net loss
|
|
$
|
(57,421
|
)
|
|
$
|
(237,275
|
)
|
Basic net loss per share
|
|
$
|
(0.66
|
)
|
|
$
|
(2.55
|
)
|
Diluted net loss per share
|
|
$
|
(0.66
|
)
|
|
$
|
(2.55
|
)
|
The pro forma information is not necessarily indicative of the
actual results that would have been achieved had the Dow
acquisition occurred on the dates indicated, or the results that
may be achieved in the future.
We do not consider the historical results of operations of Coria
or DermaTech to be material to our historical consolidated
results of operations, either individually or in the aggregate.
Accordingly, the supplemental pro forma information presented
above does not include any adjustments related to these two
acquisitions.
With respect to each of the business acquisitions discussed
above, our allocations of the purchase prices are largely
dependent on discounted cash flow analyses of projects and
products of the acquired companies. The major risks and
uncertainties associated with the timely and successful
completion of these projects consist of the ability to confirm
the safety and efficacy of the compound based on the data from
clinical trials and obtaining necessary regulatory approvals. In
addition, we cannot provide assurance that the underlying
assumptions used to forecast the cash flows or the timely and
successful completion of such projects will materialize as we
estimated. For these reasons, among others, our actual results
may vary significantly from the estimated results.
80
VALEANT
PHARMACEUTICALS INTERNATIONAL
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Collaboration
Agreement
In October 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, a
first-in-class
neuronal potassium channel opener for treatment of adult
epilepsy patients with refractory partial onset seizures and its
backup compounds. Pursuant to the terms of the Collaboration
Agreement, we granted co-development rights and worldwide
commercialization rights to GSK.
We agreed to share equally with GSK the development and
pre-commercialization expenses of retigabine in the United
States, Australia, New Zealand, Canada and Puerto Rico (the
Collaboration Territory). Our share of such expenses
in the Collaboration Territory is limited to
$100.0 million, provided that GSK will be entitled to
credit our share of any such expenses in excess of such amount
against future payments owed to us under the Collaboration
Agreement. Following the launch of a retigabine product, we will
share equally in the profits of retigabine in 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 will be responsible for all expenses
outside of the Collaboration Territory and will solely fund the
development of any backup compound. We will receive up to a 20%
royalty on net sales of retigabine outside of the Collaboration
Territory. 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.
Pursuant to the Collaboration Agreement, GSK paid us
$125.0 million in upfront fees in October 2008. 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 (FDA) 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 $90.0 million of the
upfront fee; however, the refundable portion will decline over
the time the Collaboration Agreement is in effect. In February
2009, the Collaboration Agreement was amended to, among other
matters, reduce the maximum amount that we would be required to
refund to GSK to $40.0 million through March 31, 2010,
with additional reductions over the time 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.
Under terms of the Collaboration Agreement, GSK has agreed to
pay us up to an additional $545.0 million 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
$150.0 million if certain regulatory and commercialization
milestones are achieved for backup compounds to retigabine.
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
$8.0 million upon acceptance of the filing of an NDA and
$6.0 million upon approval of the NDA for retigabine. We
are also required to pay royalty rates which, depending on 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 $5.3 million depending on certain licensing
activity. As a result of entering into the Collaboration
Agreement with GSK, we paid Meda Pharma a milestone payment of
$3.8 million in October 2008, which was not a shared
expense under the Collaboration Agreement. An additional payment
of $1.5 million could become due if a certain indication
for retigabine is developed and licensed to GSK.
81
VALEANT
PHARMACEUTICALS INTERNATIONAL
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The Collaboration Agreement contains multiple elements and
requires evaluation pursuant to EITF Issue
No. 00-21,
Accounting for Revenue Arrangements with Multiple
Deliverables
(EITF 00-21).
The Collaboration Agreement includes a provision for us to
participate on a joint steering committee. We evaluated the
facts and circumstances of the Collaboration Agreement to
determine whether our participation is protective of our
interests or if it constitutes a deliverable to be included in
our evaluation of the arrangement under
EITF 00-21.
We have concluded the participation in the joint steering
committee is a deliverable until certain regulatory approval is
obtained. In addition, we have determined that completion of our
development and pre-commercialization efforts during the time
prior to the launch of a retigabine product (the
Pre-Launch Period) is also a deliverable under the
Collaboration Agreement. As a result, pursuant to
EITF 00-21,
we will recognize alliance revenue during the Pre-Launch Period
as we complete our performance obligations using the
proportional performance model, which requires us to determine
and measure the completion of our expected development and
pre-commercialization costs, in addition to our participation in
the joint steering committee. We will also record a credit to
our development and pre-commercialization costs from the upfront
payment based upon our proportional performance against our
expected development and pre-commercialization costs during the
Pre-Launch Period. The determination of such credit to our
development and pre-commercialization costs is limited to the
amount that is no longer potentially refundable to GSK should
they elect to terminate the Collaboration Agreement. To the
extent that our expected development and pre-commercialization
costs are less than $100.0 million, the difference will be
recorded as alliance revenue and earned based upon the
proportional performance model during the Pre-Launch Period.
Determination of our expected development and
pre-commercialization costs and measurement of our completion of
those costs requires the use of managements judgment.
Significant factors considered in our evaluation of our expected
development and pre-commercialization costs include, but are not
limited to, our experience, along with GSKs experience, in
completing clinical trials and costs of completing similar
development and commercialization programs. We expect to
complete our research and development and pre-commercialization
obligations by mid to late 2010.
During the three months ended December 31, 2008, the
combined research and development expenses and
pre-commercialization expenses incurred under the Collaboration
Agreement by us and GSK were $13.1 million as outlined in
the table below. We recorded a credit of $4.1 million
against our share of the expenses to equalize our expenses with
GSK.
|
|
|
|
|
|
|
Three Months
|
|
|
|
Ended December 31,
|
|
|
|
2008
|
|
|
Valeant selling, general and administrative
|
|
$
|
483
|
|
Valeant research and development costs
|
|
|
10,193
|
|
|
|
|
|
|
|
|
|
10,676
|
|
GSK expenses
|
|
|
2,394
|
|
|
|
|
|
|
Total spending for Collaboration Agreement
|
|
$
|
13,070
|
|
|
|
|
|
|
Equalization (difference between individual partner costs and
50% of total)
|
|
$
|
4,141
|
|
|
|
|
|
|
82
VALEANT
PHARMACEUTICALS INTERNATIONAL
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The table below outlines the alliance revenue, expenses
incurred, associated credits against the expenses incurred, and
remaining upfront payment for the Collaboration Agreement during
the following period:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended December 31, 2008
|
|
|
|
|
|
|
|
|
|
Selling,
|
|
|
Research
|
|
|
|
Balance
|
|
|
Alliance
|
|
|
General and
|
|
|
and
|
|
Collaboration Accounting Impact
|
|
Sheet
|
|
|
Revenue
|
|
|
Administrative
|
|
|
Development
|
|
|
Upfront payment from GSK
|
|
$
|
125,000
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
Incurred cost
|
|
|
|
|
|
|
|
|
|
|
483
|
|
|
|
10,193
|
|
Incurred cost offset
|
|
|
(6,535
|
)
|
|
|
|
|
|
|
(483
|
)
|
|
|
(6,052
|
)
|
Recognize alliance revenue
|
|
|
(4,374
|
)
|
|
|
(4,374
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Release from upfront payment
|
|
|
(10,909
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Remaining upfront payment from GSK
|
|
|
114,091
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equalization receivable from GSK
|
|
|
4,141
|
|
|
|
|
|
|
|
|
|
|
|
(4,141
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total equalization receivable from GSK
|
|
$
|
4,141
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expense and revenue
|
|
|
|
|
|
$
|
(4,374
|
)
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued liabilities
|
|
$
|
35,581
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other liabilities
|
|
|
52,297
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred revenue short-term
|
|
|
14,566
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred revenue long-term
|
|
|
11,647
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Remaining upfront payment from GSK
|
|
$
|
114,091
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4.
|
Discontinued
Operations
|
In September 2008, we entered into an agreement to sell our
business operations located in Western and Eastern Europe,
Middle East and Africa to Meda. Meda acquired our operating
subsidiaries in those markets, and the rights to all products
and licenses marketed by us in those divested regions as of the
divestiture date. Excluded from this transaction are our Central
European operations, defined as the business in Poland, Hungary,
the Czech Republic and Slovakia. Under the terms of the
agreement, we received initial cash proceeds of
$428.4 million, which will be reduced by
$11.8 million, paid to Meda in January 2009, based upon the
estimated levels of cash, indebtedness and working capital as of
the closing date. We recorded a net gain on this sale of
$158.9 million 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 in January 2008. We received
$70.8 million as the initial payment for our Infergen
product rights, with additional payments due of up to
$20.5 million. We recorded a net gain from this transaction
of $39.4 million after deducting the carrying value of the
net assets sold from the proceeds received.
As a result of these dispositions, the results of the WEEMEA
business and the Infergen operations have been reflected as
discontinued operations in our consolidated statements of
operations in accordance with SFAS 144 and
EITF 03-13.
In addition, any assets and liabilities related to these
discontinued operations are presented separately on the
consolidated balance sheet, and any cash flows related to these
discontinued operations are presented separately in the
consolidated statements of cash flows. All prior period
information has been reclassified to conform with the current
period presentation.
83
VALEANT
PHARMACEUTICALS INTERNATIONAL
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Summarized selected financial information for discontinued
operations for the years ended December 31, 2008, 2007, and
2006 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
WEEMEA Business:
|
|
|
|
|
|
|
|
|
|
|
|
|
Product sales
|
|
$
|
138,831
|
|
|
$
|
182,719
|
|
|
$
|
177,753
|
|
Costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of goods sold (excluding amortization)
|
|
|
58,444
|
|
|
|
75,034
|
|
|
|
77,133
|
|
Selling, general and administrative
|
|
|
66,862
|
|
|
|
79,044
|
|
|
|
76,293
|
|
Research and development costs, net
|
|
|
365
|
|
|
|
69
|
|
|
|
|
|
Restructuring, asset impairments and dispositions
|
|
|
1,309
|
|
|
|
(4,499
|
)
|
|
|
49,565
|
|
Amortization expense
|
|
|
14,372
|
|
|
|
15,582
|
|
|
|
13,980
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total costs and expenses
|
|
|
141,352
|
|
|
|
165,230
|
|
|
|
216,971
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense)
|
|
|
744
|
|
|
|
(347
|
)
|
|
|
325
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from discontinued operations before income taxes,
WEEMEA
|
|
|
(1,777
|
)
|
|
|
17,142
|
|
|
|
(38,893
|
)
|
Infergen:
|
|
|
|
|
|
|
|
|
|
|
|
|
Product sales
|
|
|
1,000
|
|
|
|
32,085
|
|
|
|
42,716
|
|
Costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of goods sold (excluding amortization)
|
|
|
2,007
|
|
|
|
24,897
|
|
|
|
18,838
|
|
Selling, general and administrative
|
|
|
624
|
|
|
|
27,295
|
|
|
|
21,392
|
|
Research and development costs, net
|
|
|
9,752
|
|
|
|
6,476
|
|
|
|
4,176
|
|
Amortization expense
|
|
|
|
|
|
|
4,950
|
|
|
|
6,600
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total costs and expenses
|
|
|
12,383
|
|
|
|
63,618
|
|
|
|
51,006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from discontinued operations before income taxes, Infergen
|
|
|
(11,383
|
)
|
|
|
(31,533
|
)
|
|
|
(8,290
|
)
|
Other discontinued operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income
|
|
|
1,559
|
|
|
|
|
|
|
|
5,648
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated discontinued operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from discontinued operations before income taxes
|
|
|
(11,601
|
)
|
|
|
(14,391
|
)
|
|
|
(41,535
|
)
|
Provision (benefit) for income taxes
|
|
|
20,101
|
|
|
|
11,696
|
|
|
|
(1,798
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from discontinued operations
|
|
|
(31,702
|
)
|
|
|
(26,087
|
)
|
|
|
(39,737
|
)
|
Disposal of discontinued operations, net
|
|
|
198,250
|
|
|
|
(709
|
)
|
|
|
2,405
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from discontinued operations, net
|
|
$
|
166,548
|
|
|
$
|
(26,796
|
)
|
|
$
|
(37,332
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
84
VALEANT
PHARMACEUTICALS INTERNATIONAL
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The assets and liabilities of discontinued operations are stated
separately as of December 31, 2007 on the accompanying
consolidated balance sheet and are comprised of the following
amounts:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
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
|
|
|
|
|
|
|
194,859
|
|
Other assets
|
|
|
|
|
|
|
2,305
|
|
|
|
|
|
|
|
|
|
|
Assets of discontinued operations
|
|
$
|
|
|
|
$
|
320,108
|
|
|
|
|
|
|
|
|
|
|
|
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 $325.9 million, which
included the assets of the discontinued operations of the WEEMEA
business of $259.7 million, $60.4 million related to
the assets of the Infergen discontinued operations and
$5.8 million of assets sold to Invida in March 2008.
The liabilities held for sale and liabilities of discontinued
operations as of December 31, 2007 were $50.4 million,
which included the liabilities of discontinued operations of the
WEEMEA business of $46.2 million, $1.9 million related
to the liabilities of the discontinued biomedicals business and
$2.3 million of liabilities sold to Invida in March 2008.
85
VALEANT
PHARMACEUTICALS INTERNATIONAL
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following table sets forth the computation of basic and
diluted earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Income:
|
|
|
|
|
|
|
|
|
|
|
|
|
Numerator for basic and diluted earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations
|
|
$
|
(190,262
|
)
|
|
$
|
20,610
|
|
|
$
|
(20,236
|
)
|
Income (loss) from discontinued operations
|
|
|
166,548
|
|
|
|
(26,796
|
)
|
|
|
(37,332
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(23,714
|
)
|
|
$
|
(6,186
|
)
|
|
$
|
(57,568
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares:
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for basic earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted shares outstanding
|
|
|
87,183
|
|
|
|
92,841
|
|
|
|
93,251
|
|
Vested stock equivalents (not issued)
|
|
|
297
|
|
|
|
188
|
|
|
|
136
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for basic earnings per share
|
|
|
87,480
|
|
|
|
93,029
|
|
|
|
93,387
|
|
Denominator for diluted earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee stock options
|
|
|
|
|
|
|
894
|
|
|
|
|
|
Other dilutive securities
|
|
|
|
|
|
|
53
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dilutive potential common shares
|
|
|
|
|
|
|
947
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for diluted earnings per share
|
|
|
87,480
|
|
|
|
93,976
|
|
|
|
93,387
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic income (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations
|
|
$
|
(2.17
|
)
|
|
$
|
0.22
|
|
|
$
|
(0.22
|
)
|
Income (loss) from discontinued operations
|
|
|
1.90
|
|
|
|
(0.29
|
)
|
|
|
(0.40
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per share
|
|
$
|
(0.27
|
)
|
|
$
|
(0.07
|
)
|
|
$
|
(0.62
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted income (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations
|
|
$
|
(2.17
|
)
|
|
$
|
0.22
|
|
|
$
|
(0.22
|
)
|
Income (loss) from discontinued operations
|
|
|
1.90
|
|
|
|
(0.29
|
)
|
|
|
(0.40
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per share
|
|
$
|
(0.27
|
)
|
|
$
|
(0.07
|
)
|
|
$
|
(0.62
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The 3.0% Convertible Subordinated Notes due 2010 and the
4.0% Convertible Subordinated Notes due 2013, discussed in
Note 8, allow us to settle any conversion by remitting to
the note holder the principal amount of the note in cash, while
settling the conversion spread (the excess conversion value over
the accreted value) in shares of our common stock. The
accounting for convertible debt with such settlement features is
addressed in EITF Issue
No. 90-19,
Convertible Bonds with Issuer Option to Settle for Cash upon
Conversion
(EITF 90-19).
It is our intent to settle the notes conversion
obligations consistent with Instrument C of
EITF 90-19.
Only the conversion spread, which will be settled in stock,
results in potential dilution in our
earnings-per-share
computations as the accreted value of the notes will be settled
for cash upon the conversion. The calculation of diluted
earnings per share was not affected by the conversion spread in
the years ended December 31, 2008, 2007, and 2006.
For the years ended December 31, 2008 and 2006, options to
purchase 1,286,715 and 1,863,000 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 years ended December 31, 2008, 2007 and 2006,
options to purchase 6,506,317, 8,989,578 and 9,118,262
weighted-average shares of common stock, respectively, were also
not included in the computation of earnings per share because
the exercise prices of the options were greater than the average
market price of our common stock and, therefore, the effect
would have been anti-dilutive.
86
VALEANT
PHARMACEUTICALS INTERNATIONAL
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
6.
|
Detail of
Certain Accounts
|
The following tables present the details of certain amounts
included in the consolidated balance sheet at December 31,
2008 and 2007:
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
Accounts receivable, net:
|
|
|
|
|
|
|
|
|
Trade accounts receivable
|
|
$
|
93,796
|
|
|
$
|
118,696
|
|
Royalties receivable
|
|
|
21,774
|
|
|
|
18,620
|
|
Other receivables
|
|
|
33,038
|
|
|
|
19,301
|
|
|
|
|
|
|
|
|
|
|
|
|
|
148,608
|
|
|
|
156,617
|
|
Allowance for doubtful accounts
|
|
|
(4,099
|
)
|
|
|
(8,754
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
144,509
|
|
|
$
|
147,863
|
|
|
|
|
|
|
|
|
|
|
Inventories, net:
|
|
|
|
|
|
|
|
|
Raw materials and supplies
|
|
$
|
16,742
|
|
|
$
|
24,337
|
|
Work-in-process
|
|
|
8,506
|
|
|
|
11,667
|
|
Finished goods
|
|
|
61,641
|
|
|
|
56,622
|
|
|
|
|
|
|
|
|
|
|
|
|
|
86,889
|
|
|
|
92,626
|
|
Allowance for inventory obsolescence
|
|
|
(13,917
|
)
|
|
|
(12,476
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
72,972
|
|
|
$
|
80,150
|
|
|
|
|
|
|
|
|
|
|
Property, plant and equipment, net:
|
|
|
|
|
|
|
|
|
Land
|
|
$
|
1,160
|
|
|
$
|
1,417
|
|
Buildings
|
|
|
48,748
|
|
|
|
56,084
|
|
Machinery and equipment
|
|
|
93,516
|
|
|
|
99,790
|
|
Furniture and fixtures
|
|
|
19,131
|
|
|
|
24,752
|
|
Leasehold improvements
|
|
|
5,113
|
|
|
|
6,402
|
|
|
|
|
|
|
|
|
|
|
|
|
|
167,668
|
|
|
|
188,445
|
|
Accumulated depreciation and amortization
|
|
|
(87,928
|
)
|
|
|
(92,586
|
)
|
Construction in progress
|
|
|
10,488
|
|
|
|
14,132
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
90,228
|
|
|
$
|
109,991
|
|
|
|
|
|
|
|
|
|
|
Accrued Liabilities:
|
|
|
|
|
|
|
|
|
Accrued returns, rebates and allowances
|
|
|
66,005
|
|
|
|
50,142
|
|
Dow acquisition payment obligations
|
|
|
41,595
|
|
|
|
|
|
GSK research and development cost offset
|
|
|
35,581
|
|
|
|
|
|
WEEMEA sale-related liabilities
|
|
|
27,575
|
|
|
|
|
|
Payroll and related items
|
|
|
23,381
|
|
|
|
17,746
|
|
Accrued research and development costs
|
|
|
10,245
|
|
|
|
18,586
|
|
Legal and professional fees
|
|
|
9,816
|
|
|
|
6,599
|
|
Interest
|
|
|
3,562
|
|
|
|
4,860
|
|
Accrued royalties payable
|
|
|
2,509
|
|
|
|
2,446
|
|
Environmental accrual
|
|
|
705
|
|
|
|
1,354
|
|
Other
|
|
|
10,477
|
|
|
|
17,101
|
|
|
|
|
|
|
|
|
|
|
Total accrued liabilities
|
|
$
|
231,451
|
|
|
$
|
118,834
|
|
|
|
|
|
|
|
|
|
|
87
VALEANT
PHARMACEUTICALS INTERNATIONAL
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
Other Liabilities:
|
|
|
|
|
|
|
|
|
Dow conditional purchase consideration
|
|
|
95,854
|
|
|
|
|
|
GSK research and development cost offset
|
|
|
52,297
|
|
|
|
|
|
Other
|
|
|
27,245
|
|
|
|
15,604
|
|
|
|
|
|
|
|
|
|
|
Total other liabilities
|
|
$
|
175,396
|
|
|
$
|
15,604
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2008, construction in progress primarily
includes costs incurred in plant improvements and construction
of equipment. At December 31, 2007, construction in
progress primarily includes costs incurred in plant expansion
projects and costs associated with the installation of an
enterprise resource planning information system.
|
|
7.
|
Intangible
Assets and Goodwill
|
The components of intangible assets at December 31, 2008
and 2007 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
December 31, 2008
|
|
|
December 31, 2007
|
|
|
|
Average
|
|
|
Gross
|
|
|
Accumulated
|
|
|
Net
|
|
|
Gross
|
|
|
Accumulated
|
|
|
Net
|
|
|
|
Lives (years)
|
|
|
Amount
|
|
|
Amortization
|
|
|
Amount
|
|
|
Amount
|
|
|
Amortization
|
|
|
Amount
|
|
|
Product rights Neurology
|
|
|
12
|
|
|
$
|
276,229
|
|
|
$
|
(147,745
|
)
|
|
$
|
128,484
|
|
|
$
|
281,327
|
|
|
$
|
(122,622
|
)
|
|
$
|
158,705
|
|
Dermatology
|
|
|
8
|
|
|
|
232,332
|
|
|
|
(54,906
|
)
|
|
|
177,426
|
|
|
|
108,491
|
|
|
|
(52,067
|
)
|
|
|
56,424
|
|
Other
|
|
|
14
|
|
|
|
72,956
|
|
|
|
(41,970
|
)
|
|
|
30,986
|
|
|
|
96,845
|
|
|
|
(56,980
|
)
|
|
|
39,865
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total product rights
|
|
|
10
|
|
|
|
581,517
|
|
|
|
(244,621
|
)
|
|
|
336,896
|
|
|
|
486,663
|
|
|
|
(231,669
|
)
|
|
|
254,994
|
|
Developed technology-CeraVe
|
|
|
Indefinite
|
|
|
|
42,700
|
|
|
|
|
|
|
|
42,700
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outlicensed technology
|
|
|
10
|
|
|
|
74,000
|
|
|
|
|
|
|
|
74,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer relationships
|
|
|
8
|
|
|
|
8,242
|
|
|
|
(30
|
)
|
|
|
8,212
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trade names
|
|
|
Indefinite
|
|
|
|
5,987
|
|
|
|
|
|
|
|
5,987
|
|
|
|
|
|
|
|
|
|
|
|
|
|
License agreement
|
|
|
5
|
|
|
|
67,376
|
|
|
|
(67,376
|
)
|
|
|
|
|
|
|
67,376
|
|
|
|
(61,204
|
)
|
|
|
6,172
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total intangible assets
|
|
|
|
|
|
$
|
779,822
|
|
|
$
|
(312,027
|
)
|
|
$
|
467,795
|
|
|
$
|
554,039
|
|
|
$
|
(292,873
|
)
|
|
$
|
261,166
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Future amortization of intangible assets at December 31,
2008 is scheduled as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Scheduled Future Amortization Expense
|
|
|
|
2009
|
|
|
2010
|
|
|
2011
|
|
|
2012
|
|
|
2013
|
|
|
Thereafter
|
|
|
Total
|
|
|
Product rights
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Neurology
|
|
$
|
25,288
|
|
|
$
|
23,829
|
|
|
$
|
19,049
|
|
|
$
|
17,830
|
|
|
$
|
16,813
|
|
|
$
|
25,675
|
|
|
$
|
128,484
|
|
Dermatology
|
|
|
28,564
|
|
|
|
31,669
|
|
|
|
31,658
|
|
|
|
26,630
|
|
|
|
25,007
|
|
|
|
33,897
|
|
|
|
177,425
|
|
Other
|
|
|
4,952
|
|
|
|
4,913
|
|
|
|
5,035
|
|
|
|
4,870
|
|
|
|
4,841
|
|
|
|
6,375
|
|
|
|
30,986
|
|
Outlicensed technology
|
|
|
6,827
|
|
|
|
6,827
|
|
|
|
8,713
|
|
|
|
8,174
|
|
|
|
8,174
|
|
|
|
35,285
|
|
|
|
74,000
|
|
Customer relationships
|
|
|
1,709
|
|
|
|
1,498
|
|
|
|
1,288
|
|
|
|
1,077
|
|
|
|
866
|
|
|
|
1,775
|
|
|
|
8,213
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
67,340
|
|
|
$
|
68,736
|
|
|
$
|
65,743
|
|
|
$
|
58,581
|
|
|
$
|
55,701
|
|
|
$
|
103,007
|
|
|
$
|
419,108
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In 2008, we acquired the rights to a number of branded generic
products in Poland for aggregate consideration of
$3.6 million, of which $2.6 million was cash
consideration.
88
VALEANT
PHARMACEUTICALS INTERNATIONAL
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
In 2007, we acquired product rights in the United States,
Europe, and Argentina for aggregate consideration of
$27.1 million, of which $22.5 million was cash
consideration. In the United States, we acquired a
paid-up
license to Kinetin and Zeatin, the active ingredients in the
Kinerase product line, for cash consideration of
$21.0 million and other consideration of $4.2 million.
We acquired the rights to certain products in Poland and
Argentina for $1.5 million in cash consideration and
$0.4 million in other consideration.
Goodwill arose primarily from the acquisitions of DermaTech,
Coria and Xcel and totaled $114.6 million and
$80.3 million at December 31, 2008 and 2007,
respectively. Goodwill increased $34.3 million in 2008,
with $7.4 million related to the DermaTech acquisition,
$30.9 million related to the Coria acquisition and $0.5
attributable to foreign exchange fluctuations. Additionally in
2008, we recorded a decrease in goodwill of $4.5 million
related to the release of a deferred tax asset valuation
allowance established in purchase accounting for the acquisition
of Xcel. In 2007, we made a $5.0 million contingent
milestone payment to InterMune related to Infergen which we
recorded as goodwill. We reclassified $4.8 million of
goodwill to discontinued operations based on the relative fair
value of Infergen in comparison with the North America segment.
|
|
8.
|
Debt and
lease obligations
|
As of December 31, 2008 and 2007, long-term debt consists
of the following:
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
3% Convertible Subordinated Notes due 2010
|
|
$
|
207,360
|
|
|
$
|
240,000
|
|
4% Convertible Subordinated Notes due 2013
|
|
|
240,000
|
|
|
|
240,000
|
|
7% Senior Notes due 2011
|
|
|
|
|
|
|
300,716
|
|
Other
|
|
|
1,168
|
|
|
|
3,310
|
|
|
|
|
|
|
|
|
|
|
|
|
|
448,528
|
|
|
|
784,026
|
|
Less: current portion
|
|
|
(666
|
)
|
|
|
(1,474
|
)
|
|
|
|
|
|
|
|
|
|
Total long-term debt
|
|
$
|
447,862
|
|
|
$
|
782,552
|
|
|
|
|
|
|
|
|
|
|
In December 2003, we issued $300.0 million aggregate
principal amount of 7.0% Senior Notes due 2011 (the
7.0% Senior Notes). We could, at our option,
redeem some or all of the 7.0% 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
$150.0 million in principal amount of the 7.0% Senior
Notes. See Note 12 for a description of the interest rate
swap agreement.
In July 2008, we redeemed the 7.0% Senior Notes at an
aggregate redemption price of $310.5 million. In connection
with this redemption, we recorded a $14.9 million loss on
early extinguishment of debt in 2008, including a redemption
premium of $10.5 million, unamortized loan costs of
$2.9 million and an interest rate swap agreement
termination fee of $1.5 million.
In November 2003, we issued $240.0 million aggregate
principal amount of 3.0% Convertible Subordinated Notes due
2010 (the 3.0% Notes) and $240.0 million
aggregate principal amount of 4.0% Convertible Subordinated
Notes due 2013 (the 4.0% Notes), which were
issued as two series of notes under a single indenture. Interest
on the 3.0% Notes is payable semi-annually on February 16
and August 16 of each year. Interest on the 4.0% Notes is
payable semi-annually on May 15 and November 15 of each year. We
have the right to redeem the 4.0% Notes, in whole or in
part, at their principal amount on or after May 20, 2011.
The 3.0% Notes and 4.0% Notes are convertible into our
common stock at an initial conversion rate of
31.6336 shares per each $1,000 principal amount of notes,
subject to adjustment. Upon conversion, we will have the right
to satisfy the conversion obligations by delivery, at our option
in shares of our common stock, in cash or in a combination
thereof. It is our intent to settle
89
VALEANT
PHARMACEUTICALS INTERNATIONAL
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
the principal amount of the 3.0% Notes and 4.0% Notes
in cash. The 3.0% Notes and 4.0% Notes are
subordinated unsecured obligations, ranking in right of payment
behind our senior debt, if any.
In connection with the offering of the 3.0% Notes and the
4.0% Notes, we entered into convertible note hedge and
written call option transactions with respect to our common
stock (the Convertible Note Hedge). The Convertible
Note Hedge consisted of purchasing a call option on
12,653,440 shares of our common stock at a strike price of
$31.61 per share and selling a written call option on the
identical number of shares at $39.52 per share. The number of
shares covered by the Convertible Note Hedge is the same number
of shares underlying the conversion of $200.0 million
principal amount of the 3.0% Notes and $200.0 million
principal amount of the 4.0% Notes. The Convertible Note
Hedge is expected to reduce the potential dilution from
conversion of the notes. The written call option sold offset, to
some extent, the cost of the call option purchased. The net cost
of the Convertible Note Hedge of $42.9 million was recorded
as the sale of a permanent equity instrument pursuant to
guidance in EITF Issue
No. 00-19,
Accounting for Derivative Financial Instruments Indexed to,
and Potentially Settled in, a Companys Own Stock.
Subsequently, as a result of the cessation of our common
dividend, the strike price on the Convertible Note Hedge was
adjusted during 2007, with the new strike prices becoming $34.61
per share and $35.36 per share for the 3.0% Notes and the
4.0% Notes, respectively.
The total number of shares applicable to the Convertible Note
Hedge remains the same at 12,653,440, with 6,326,720 shares
still allocated to each set of purchased call options in
connection with the 3.0% Notes and the 4.0% Notes,
respectively.
In November 2008, we repurchased $32.6 million aggregate
principal amount of the 3.0% Notes for an aggregate
purchase price of $29.0 million. In connection with this
purchase, we recorded a $3.3 million gain on early
extinguishment of debt in 2008, net of unamortized loan costs of
$0.3 million.
Aggregate annual maturities of long-term debt are as follows:
|
|
|
|
|
2009
|
|
|
666
|
|
2010
|
|
|
207,645
|
|
2011
|
|
|
172
|
|
2012
|
|
|
45
|
|
2013
|
|
|
240,000
|
|
|
|
|
|
|
Total
|
|
$
|
448,528
|
|
|
|
|
|
|
The estimated fair value of our public debt, based on quoted
market prices or on current interest rates for similar
obligations with like maturities, was approximately
$409.4 million and $714.8 million compared to its
carrying value of $447.4 million and $780.7 million at
December 31, 2008 and 2007, respectively.
We maintain no lines of credit in the U.S. and have
short-term lines of credit of $0.2 million in the aggregate
outside the U.S., under which there were no amounts outstanding
at December 31, 2008. The lines of credit provide for
short-term borrowings and bear interest at the banks rate
of interest or a variable rate based upon LIBOR or an equivalent
index.
We lease certain administrative and laboratory facilities and
certain automobiles under non-cancelable operating lease
agreements that expire through 2014. Additionally, we lease
certain automobiles and computer
90
VALEANT
PHARMACEUTICALS INTERNATIONAL
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
software under lease agreements that qualify as capital leases.
The following table summarizes our lease commitments at
December 31, 2008:
|
|
|
|
|
|
|
|
|
|
|
Operating
|
|
|
Capital
|
|
|
|
Leases
|
|
|
Leases
|
|
|
2009
|
|
$
|
7,613
|
|
|
$
|
790
|
|
2010
|
|
|
6,915
|
|
|
|
346
|
|
2011
|
|
|
10,442
|
|
|
|
192
|
|
2012
|
|
|
1,315
|
|
|
|
45
|
|
2013
|
|
|
1,089
|
|
|
|
|
|
Thereafter
|
|
|
154
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
27,528
|
|
|
|
1,373
|
|
|
|
|
|
|
|
|
|
|
Amounts representing interest
|
|
|
|
|
|
|
(205
|
)
|
|
|
|
|
|
|
|
|
|
Amounts of lease obligations recorded as debt
|
|
|
|
|
|
$
|
1,168
|
|
|
|
|
|
|
|
|
|
|
The components of income (loss) from continuing operations
before income taxes and minority interest for each of the years
ended December 31, 2008, 2007 and 2006 consist of the
following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Domestic
|
|
$
|
(265,920
|
)
|
|
$
|
(65,557
|
)
|
|
$
|
(80,266
|
)
|
Foreign
|
|
|
109,578
|
|
|
|
99,704
|
|
|
|
96,610
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(156,342
|
)
|
|
$
|
34,147
|
|
|
$
|
16,344
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The income tax provision from continuing operations for each of
the years ended December 31, 2008, 2007 and 2006 consists
of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Current:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
3,090
|
|
|
$
|
(17,981
|
)
|
|
$
|
398
|
|
State
|
|
|
133
|
|
|
|
397
|
|
|
|
1,226
|
|
Foreign
|
|
|
43,468
|
|
|
|
27,366
|
|
|
|
34,114
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
46,691
|
|
|
|
9,782
|
|
|
|
35,738
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
(11,408
|
)
|
|
|
168
|
|
|
|
254
|
|
State
|
|
|
(1,657
|
)
|
|
|
28
|
|
|
|
42
|
|
Foreign
|
|
|
287
|
|
|
|
3,557
|
|
|
|
543
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(12,778
|
)
|
|
|
3,753
|
|
|
|
839
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
33,913
|
|
|
$
|
13,535
|
|
|
$
|
36,577
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
91
VALEANT
PHARMACEUTICALS INTERNATIONAL
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Our effective tax rate from continuing operations differs from
the applicable United States statutory federal income tax rate
due to the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Statutory rate
|
|
|
35
|
%
|
|
|
35
|
%
|
|
|
35
|
%
|
Foreign source income taxes at other effective rates
|
|
|
5
|
%
|
|
|
91
|
%
|
|
|
212
|
%
|
APB 23 reversal
|
|
|
−28
|
%
|
|
|
0
|
%
|
|
|
0
|
%
|
Change in valuation allowance
|
|
|
11
|
%
|
|
|
−87
|
%
|
|
|
−31
|
%
|
Prepaid amortization
|
|
|
−5
|
%
|
|
|
0
|
%
|
|
|
0
|
%
|
Net operating loss and examination adjustments
|
|
|
1
|
%
|
|
|
0
|
%
|
|
|
0
|
%
|
State tax and other, net
|
|
|
1
|
%
|
|
|
1
|
%
|
|
|
8
|
%
|
Effect of IPR&D, not deductible for tax
|
|
|
−42
|
%
|
|
|
0
|
%
|
|
|
0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effective rate
|
|
|
−22
|
%
|
|
|
40
|
%
|
|
|
224
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Our effective tax rates for the years ended December 31,
2008, 2007 and 2006 were significantly affected by recording
valuation allowances to recognize the uncertainty of realizing
the benefits of net operating losses and credits in the United
States and foreign locations. Additionally, our tax rate was
impacted in 2008 by acquisition-related IPR&D expense
totaling $186.3 million, which provided no tax benefits,
and by the change in our position regarding unremitted earnings
of foreign subsidiaries. Additionally, as a result of utilizing
a portion of our net operating loss carryforward in 2008, we
released a portion of our valuation allowance against additional
paid-in capital resulting in an increased income tax provision.
Pursuant to paragraph 17(e) of SFAS 109, the valuation
allowances are recorded because we determined that it was not
more likely than not that such net operating losses and credits
could be utilized. Ultimate realization of the benefit of these
deferred tax assets is dependent upon us generating sufficient
taxable income in the United States and other locations prior to
their expiration. Given our history of pre-tax losses within the
U.S. and the inherent uncertainties in forecasting future
profitability resulting from the successful commercialization of
product candidates, we determined, pursuant to
paragraphs 23, 24 and 25 of SFAS 109 that these
forecasts were insufficient objective evidence of future taxable
income.
During the second quarter of 2008, we reversed our position that
all unremitted earnings of our foreign subsidiaries would be
indefinitely reinvested and we are now required to provide
U.S. tax on these earnings. As of December 31, 2008,
all repatriated earnings from our foreign subsidiaries are being
offset by current U.S. operating losses and tax credits. As
part of the repatriation during 2008 we paid $7.8 million
of withholding tax.
At December 31, 2008 a valuation allowance of
$142.7 million had been recorded primarily to offset
U.S. deferred tax assets. Due to the various transactions
we entered into in 2008, a portion of the U.S. valuation
allowance was released, of which $23.6 million was recorded
as an increase to additional paid-in capital and
$4.5 million was recorded as a reduction of goodwill.
As of December 31, 2007, we experienced a change in
ownership as defined under Internal Revenue Code
section 382 and as a result certain limitations will apply
to the utilization of net operating losses and credits.
Additionally, our use of the tax attributes of Coria and Dow
will be subject to similar limitations. We do not expect such
limitations to have a material effect on the utilization of such
net operating losses.
During 2007, the IRS examination of the U.S. income tax
returns for the years ended December 31, 1997 through 2001
was resolved. As a result, the 2007 provision for income taxes
was reduced by $21.5 million, primarily related to
resolution of a gain recognition issue which arose for the year
ended December 31, 1999. In addition to the reduction in
the provision for income taxes, the following accounts were
affected; income taxes payable increased $6.3 million,
income tax liability for uncertain tax positions decreased
$73.8 million, deferred income taxes decreased
$28.2 million, and the valuation allowance on deferred tax
assets increased $17.8 million.
92
VALEANT
PHARMACEUTICALS INTERNATIONAL
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
In 2007, gains were realized by certain of our subsidiaries
related to intercompany transfers of intangible property rights.
These gains were recorded in the books of the subsidiaries and
are subject to tax in the subsidiaries jurisdictions, but
they were eliminated in consolidation for financial reporting
purposes. The purchasing subsidiaries have recorded
corresponding tax basis increases, which in most cases can be
amortized and deducted for tax purposes. In 2007, tax
liabilities of $2.1 million created by these transactions
were recorded. Additional amounts were recorded in prior years
for similar transactions. However, because these are
intercompany transactions, the associated expense was deferred
and recorded as prepaid tax. Amortization of the prepaid tax
balances of $7.1 million, $0.6 million and
$0.2 million was recorded as tax expense during 2008, 2007
and 2006, respectively.
The primary components of our net deferred tax asset at
December 31, 2008 and 2007 are as follows:
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
NOL and capital loss carryforwards
|
|
$
|
77,008
|
|
|
$
|
108,945
|
|
Inventory and other reserves
|
|
|
30,899
|
|
|
|
33,055
|
|
Tax credit carryforwards
|
|
|
47,309
|
|
|
|
24,240
|
|
Intangibles
|
|
|
42,485
|
|
|
|
30,915
|
|
Prepaid tax on intercompany transaction
|
|
|
|
|
|
|
7,096
|
|
Deferred gain
|
|
|
48,445
|
|
|
|
|
|
Other
|
|
|
28,567
|
|
|
|
19,615
|
|
Valuation allowance
|
|
|
(142,692
|
)
|
|
|
(151,887
|
)
|
|
|
|
|
|
|
|
|
|
Total deferred tax asset, net of valuation allowance
|
|
|
132,021
|
|
|
|
71,979
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Fixed assets and other
|
|
|
(981
|
)
|
|
|
(4,714
|
)
|
Intangibles
|
|
|
(103,269
|
)
|
|
|
(2,416
|
)
|
|
|
|
|
|
|
|
|
|
Total deferred tax liability
|
|
|
(104,250
|
)
|
|
|
(7,130
|
)
|
|
|
|
|
|
|
|
|
|
Net deferred tax asset
|
|
$
|
27,771
|
|
|
$
|
64,849
|
|
|
|
|
|
|
|
|
|
|
Deferred tax assets and liabilities are recorded in the
following captions in the consolidated balance sheets as of
December 31, 2008 and 2007:
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
Current deferred tax assets, net
|
|
$
|
16,179
|
|
|
$
|
13,092
|
|
Deferred tax assets, net
|
|
|
14,850
|
|
|
|
58,887
|
|
Current deferred tax liabilities, net
|
|
|
52
|
|
|
|
2,252
|
|
Deferred tax liabilities, net
|
|
|
3,206
|
|
|
|
4,878
|
|
In 2008 and 2007 the valuation allowance primarily relates to
U.S. federal and state losses and credits as well as
foreign net operating losses.
At December 31, 2008, we had U.S. federal and state
net operating losses of approximately $75.0 million and
$163.2 million, respectively. Our U.S. federal net
operating losses will begin to expire in 2027. The state net
operating losses will begin to expire in 2014. We also had a
state capital loss of $11.1 million that will begin to
expire in 2010. We also had U.S. federal and state credits
of $122.5 million and $2.2 million that will begin to
expire in 2015, which includes $80.0 million of federal
credits relating to unrepatriated foreign earnings.
Tax benefits associated with the exercise of employee stock
options and with the convertible note hedge (see
Note 8) were not recognized during 2007 and 2006 due
to the application of SFAS 123(R) and the valuation
allowance. These amounts were included in our net operating
losses for tax reporting purposes. During 2008,
93
VALEANT
PHARMACEUTICALS INTERNATIONAL
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
$23.6 million of the valuation allowance was released; with
the tax benefit associated being credited to additional paid-in
capital as a result of employee stock option deductions and
convertible note hedge deductions. Additionally, approximately
$4.5 million of valuation allowance related to our
acquisition of Xcel was released during 2008 with the tax
benefit associated being credited to goodwill. Future releases
of the valuation allowance in the amount of $12.1 million
related to the Xcel acquisition will be accounted for as a
reduction of income tax expense in accordance with
SFAS No. 141(R), which is effective January 1,
2009. SFAS 141(R) provides that any reduction to the
valuation allowance established in purchase accounting is to be
accounted for as a reduction to income tax expense. In addition,
future releases of valuation allowances related to stock option
deductions in the amount of $1.9 million will be credited
to additional paid-in capital.
During 2008, in connection with the acquisitions of Coria and
Dow (see Note 3), we recorded approximately
$101.2 million of deferred tax liabilities related to the
recorded fair value of intangible assets in excess of the tax
bases. Approximately $83.6 million of this amount was
recorded as a reduction of the valuation allowance and a
corresponding reduction to goodwill (Coria) or increase to
conditional purchase obligation (Dow) in the respective purchase
price allocations. Approximately $17.6 million was recorded
as a deferred tax liability with no offsetting reduction to the
valuation allowance because it is associated with
indefinite-lived intangibles and, therefore, the future reversal
cannot be assured.
We adopted the provisions of FASB Interpretation No. 48,
Accounting for Uncertainty in Income Taxes, an Interpretation
of FASB Statement No. 109 (FIN 48), on
January 1, 2007. A reconciliation of the beginning and
ending amount of unrecognized tax benefits is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
|
|
|
|
|
|
|
Accrued
|
|
|
Unrecognized
|
|
|
|
Federal, State
|
|
|
Interest and
|
|
|
Income Tax
|
|
|
|
and Foreign Tax
|
|
|
Penalties
|
|
|
Benefits
|
|
|
Balance at January 1, 2007
|
|
$
|
122,697
|
|
|
$
|
18,529
|
|
|
$
|
141,226
|
|
Additions for current year tax positions
|
|
|
1,214
|
|
|
|
88
|
|
|
|
1,302
|
|
Additions for prior year tax positions
|
|
|
8,337
|
|
|
|
2,449
|
|
|
|
10,786
|
|
Settlements
|
|
|
(10,754
|
)
|
|
|
(10,767
|
)
|
|
|
(21,521
|
)
|
Lapse of statute of limitations
|
|
|
(235
|
)
|
|
|
|
|
|
|
(235
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2007
|
|
|
121,259
|
|
|
|
10,299
|
|
|
|
131,558
|
|
Additions for current year tax positions
|
|
|
362
|
|
|
|
9
|
|
|
|
371
|
|
Additions for prior year tax positions
|
|
|
(5,468
|
)
|
|
|
(2,603
|
)
|
|
|
(8,071
|
)
|
Settlements
|
|
|
(67,062
|
)
|
|
|
(2,818
|
)
|
|
|
(69,880
|
)
|
Lapse of statute of limitations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2008
|
|
$
|
49,091
|
|
|
$
|
4,887
|
|
|
$
|
53,978
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The total amount of unrecognized tax benefits that, if
recognized, would affect the effective tax rate is approximately
$9.5 million. We do not believe that it is reasonably
possible that any unrecognized tax benefits will be settled
within the next twelve months as a result of concluding various
tax matters.
Our continuing practice is to recognize interest and penalties
related to income tax matters in income tax expense. Interest
and penalties included in income tax expense for the years ended
December 31, 2008 and 2007 was $(8.2) million and
$(5.4) million, respectively, due to the resolution of
certain tax audits. As of December 31, 2008 and 2007, we
had approximately $4.9 million and $10.3 million,
respectively, of accrued interest and penalties related to
uncertain tax positions.
We are currently under audit by the IRS for the 2005 and 2006
tax years. In 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 2008. The provision for income tax was
reduced by $2.3 million related
94
VALEANT
PHARMACEUTICALS INTERNATIONAL
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
to interest and penalties. In addition, the following accounts
were affected; income taxes payable increased $2.7 million,
income tax liability for uncertain tax positions decreased
$14.0 million and net deferred tax assets decreased
$9.0 million. In 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.
|
Pension
and Postretirement Employee Benefit Plans
|
We operate a 401(k) defined contribution retirement plan for our
employees in the United States. Under this plan employees are
allowed to contribute up to 50% of their income and we match
such contributions with 50% of the amount contributed up to 3%
of salary. Our contributions to this defined contribution plan
were $1.0 million, $1.2 million and $1.2 million
in the years ended December 31, 2008, 2007 and 2006,
respectively.
Outside the United States certain groups of our employees are
covered by defined benefit retirement plans. In 2006, the FASB
issued SFAS No. 158, Employers Accounting for
Defined Benefit Pension and Other Postretirement Plans
(SFAS 158), which was effective for Valeant on
December 31, 2006 and required that we recognize the net
over-funded or under-funded financial position of our defined
benefit retirement plans in our balance sheet. The difference
between the overall funded status of each plan and the amounts
of assets and liabilities recorded in our financial statements
is charged to accumulated other comprehensive income and
represents pension costs and benefits that will be recorded in
the income statement in future years under currently effective
pension accounting rules.
Below is a summary of the activity in our defined benefit
pension plans which have projected pension obligations in excess
of plan assets for the years ended December 31, 2008 and
2007:
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
Changes in benefit obligation:
|
|
|
|
|
|
|
|
|
Balance at beginning of the year
|
|
$
|
5,666
|
|
|
$
|
5,268
|
|
Service cost
|
|
|
567
|
|
|
|
785
|
|
Interest cost
|
|
|
399
|
|
|
|
271
|
|
Plan curtailments
|
|
|
(583
|
)
|
|
|
|
|
Total benefits paid
|
|
|
(3,445
|
)
|
|
|
(2,041
|
)
|
Actuarial (gains) losses
|
|
|
2,697
|
|
|
|
1,320
|
|
Currency exchange and other
|
|
|
(914
|
)
|
|
|
63
|
|
|
|
|
|
|
|
|
|
|
Balance at end of the year
|
|
$
|
4,387
|
|
|
$
|
5,666
|
|
|
|
|
|
|
|
|
|
|
Changes in plan assets:
|
|
|
|
|
|
|
|
|
Balance at beginning of the year
|
|
$
|
638
|
|
|
$
|
920
|
|
Actual return on plan assets
|
|
|
32
|
|
|
|
(166
|
)
|
Employer contributions
|
|
|
3,298
|
|
|
|
1,934
|
|
Benefits paid from plan assets
|
|
|
(3,445
|
)
|
|
|
(2,041
|
)
|
Currency exchange and other
|
|
|
(108
|
)
|
|
|
(9
|
)
|
|
|
|
|
|
|
|
|
|
Balance at end of the year
|
|
$
|
415
|
|
|
$
|
638
|
|
|
|
|
|
|
|
|
|
|
Projected benefit obligations in excess of plan assets
|
|
$
|
3,972
|
|
|
$
|
5,028
|
|
|
|
|
|
|
|
|
|
|
95
VALEANT
PHARMACEUTICALS INTERNATIONAL
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Below is a summary of the activity in our defined benefit
pension plans which have plan assets in excess of projected
pension obligations for the years ended December 31, 2008
and 2007:
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
Changes in benefit obligation:
|
|
|
|
|
|
|
|
|
Balance at beginning of the year
|
|
$
|
4,886
|
|
|
$
|
4,618
|
|
Interest cost
|
|
|
245
|
|
|
|
235
|
|
Total benefits paid
|
|
|
(175
|
)
|
|
|
(325
|
)
|
Actuarial (gains) losses
|
|
|
(668
|
)
|
|
|
(397
|
)
|
Currency exchange and other
|
|
|
(834
|
)
|
|
|
755
|
|
|
|
|
|
|
|
|
|
|
Balance at end of the year
|
|
$
|
3,454
|
|
|
$
|
4,886
|
|
|
|
|
|
|
|
|
|
|
Changes in plan assets:
|
|
|
|
|
|
|
|
|
Balance at beginning of the year
|
|
$
|
5,400
|
|
|
$
|
4,709
|
|
Actual return on plan assets
|
|
|
(786
|
)
|
|
|
192
|
|
Employer contributions
|
|
|
|
|
|
|
23
|
|
Benefits paid from plan assets
|
|
|
(175
|
)
|
|
|
(325
|
)
|
Currency exchange and other
|
|
|
(884
|
)
|
|
|
801
|
|
|
|
|
|
|
|
|
|
|
Balance at end of the year
|
|
$
|
3,555
|
|
|
$
|
5,400
|
|
|
|
|
|
|
|
|
|
|
Plan assets in excess of projected benefit obligations
|
|
$
|
101
|
|
|
$
|
514
|
|
|
|
|
|
|
|
|
|
|
The funded status of the defined benefit pension plans at
December 31, 2008 and 2007 are as follows:
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
Surplus on plans with assets in excess of obligations
|
|
$
|
101
|
|
|
$
|
514
|
|
Deficit on plans with obligations in excess of assets
|
|
|
(3,972
|
)
|
|
|
(5,028
|
)
|
|
|
|
|
|
|
|
|
|
Net surplus/(deficit)
|
|
$
|
(3,871
|
)
|
|
$
|
(4,514
|
)
|
|
|
|
|
|
|
|
|
|
At December 31, 2008 and 2007, the accumulated benefit
obligations of our defined benefit pension plans totaled
$7.6 million and $9.1 million, respectively, including
$4.1 million and $4.2 million, respectively, for plans
with accumulated benefit obligations in excess of plan assets.
Amounts recognized in our consolidated balance sheet and in
accumulated other comprehensive income at December 31, 2008
and 2007 that are related to defined benefit pension plans are
as follows:
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
Amounts recognized in the consolidated balance sheets:
|
|
|
|
|
|
|
|
|
Non-current assets
|
|
$
|
101
|
|
|
$
|
514
|
|
Current liabilities
|
|
|
(232
|
)
|
|
|
|
|
Non-current liabilities
|
|
|
(3,740
|
)
|
|
|
(5,028
|
)
|
|
|
|
|
|
|
|
|
|
Net amount recognized
|
|
$
|
(3,871
|
)
|
|
$
|
(4,514
|
)
|
|
|
|
|
|
|
|
|
|
Amounts recognized in accumulated other comprehensive
income:
|
|
|
|
|
|
|
|
|
Transition obligation
|
|
$
|
(22
|
)
|
|
$
|
(60
|
)
|
Prior service cost
|
|
|
(185
|
)
|
|
|
(313
|
)
|
Net actuarial loss
|
|
|
(950
|
)
|
|
|
(919
|
)
|
|
|
|
|
|
|
|
|
|
Net amount recognized
|
|
$
|
(1,157
|
)
|
|
$
|
(1,292
|
)
|
|
|
|
|
|
|
|
|
|
96
VALEANT
PHARMACEUTICALS INTERNATIONAL
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Changes in plan assets and benefit obligations recognized in
accumulated other comprehensive income during 2008 and 2007 are
as follows:
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
Balance at beginning of the year
|
|
$
|
(1,292
|
)
|
|
$
|
(1,520
|
)
|
Actuarial (losses)/gains
|
|
|
(300
|
)
|
|
|
349
|
|
Effect of exchange rate changes and other
|
|
|
435
|
|
|
|
(121
|
)
|
|
|
|
|
|
|
|
|
|
Balance at end of the year
|
|
$
|
(1,157
|
)
|
|
$
|
(1,292
|
)
|
|
|
|
|
|
|
|
|
|
Pension expense related to these plans in 2008, 2007 and 2006
included the following components:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Service cost
|
|
$
|
567
|
|
|
$
|
785
|
|
|
$
|
726
|
|
Interest cost
|
|
|
644
|
|
|
|
506
|
|
|
|
475
|
|
Expected return on plan assets
|
|
|
(361
|
)
|
|
|
(366
|
)
|
|
|
(326
|
)
|
Amortization of net transition obligation
|
|
|
25
|
|
|
|
24
|
|
|
|
24
|
|
Amortization of prior service cost
|
|
|
28
|
|
|
|
31
|
|
|
|
12
|
|
Amortization of net loss
|
|
|
65
|
|
|
|
83
|
|
|
|
202
|
|
Net settlement and curtailment costs
|
|
|
2,326
|
|
|
|
1,379
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic benefit cost
|
|
$
|
3,294
|
|
|
$
|
2,442
|
|
|
$
|
1,113
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The weighted-average actuarial assumptions related to the
determination of pension liabilities and expense are as follows:
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
Expected return on plan assets
|
|
|
6.74
|
%
|
|
|
6.87
|
%
|
Discount rate for determining pension benefit obligations
|
|
|
7.70
|
%
|
|
|
6.91
|
%
|
Salary increase rate
|
|
|
4.50
|
%
|
|
|
4.50
|
%
|
The amounts of pension costs included in accumulated other
comprehensive income which are expected to be recorded in income
in 2009 are as follows:
|
|
|
|
|
Unrecognized net transition obligation
|
|
$
|
(18
|
)
|
Unrecognized prior service cost
|
|
|
(21
|
)
|
Unrecognized net actuarial loss
|
|
|
(91
|
)
|
|
|
|
|
|
Total
|
|
$
|
(130
|
)
|
|
|
|
|
|
We expect to contribute approximately $0.8 million to our
defined benefit pension plans in 2009.
The benefits expected to be paid from our pension benefit plans
in the years ending December 31 are as follows:
|
|
|
|
|
2009
|
|
$
|
724
|
|
2010
|
|
|
693
|
|
2011
|
|
|
720
|
|
2012
|
|
|
665
|
|
2013
|
|
|
714
|
|
2014 2018
|
|
|
3,942
|
|
97
VALEANT
PHARMACEUTICALS INTERNATIONAL
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
11.
|
Supplemental
Cash Flow Disclosures
|
The following table sets forth the amounts of interest and
income taxes paid related to continuing operations during 2008,
2007 and 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Interest paid
|
|
$
|
28,516
|
|
|
$
|
37,800
|
|
|
$
|
38,054
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income taxes paid
|
|
$
|
36,743
|
|
|
$
|
57,199
|
|
|
$
|
38,345
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12.
|
Derivatives
and Hedging Activities
|
We use derivative financial instruments to hedge foreign
currency and interest rate exposures. We do not speculate in
derivative instruments in order to profit from foreign currency
exchange or interest rate fluctuations; nor do we enter into
trades for which there is no underlying exposure.
Interest Rate Swap Agreement: In January 2004,
we entered into an interest rate swap agreement with respect to
$150.0 million principal amount of the 7.0% Senior
Notes due 2011 (the Interest Rate Swap), with the
objective of initially lowering our effective interest rate by
exchanging fixed rate payments for floating rate payments. The
agreement provided that we would exchange our 7.0% fixed-rate
payment obligation for variable-rate payments of six-month LIBOR
plus 2.409%. The Interest Rate Swap was designated as a fair
value hedge and was deemed perfectly effective. The counterparty
to the swap could, at its option, terminate the swap, in whole
or in part, on or after December 15, 2007, at a premium of
3.50%, 1.75% and 0.00% of the notional amount during the
twelve-month period beginning December 15, 2007, 2008, and
2009 and thereafter, respectively. At December 31, 2007,
the fair value of the Interest Rate Swap was an asset of
$0.7 million and this amount was offset against long-term
debt as a fair value adjustment. The underlying portion of the
hedged debt was also marked to market through the profit and
loss account. In support of our obligation under the Interest
Rate Swap, we were required to maintain a minimum level of cash
and investment collateral depending on the fair market value of
the Interest Rate Swap. As of December 31, 2007,
$5.1 million is recorded on the balance sheet in other
assets related to collateral on the Interest Rate Swap. The
Interest Rate Swap was terminated in July 2008 in connection
with the redemption of the 7.0% Senior Notes (see
Note 8).
Foreign Currency Hedge Transactions: During
2007 and 2008, we entered into various forward currency
contracts to a) reduce our exposure to forecasted 2008 Euro
and Japanese Yen denominated royalty revenue, b) hedge our
net investment in our Polish and Brazilian subsidiaries,
c) utilize fair value hedges to reduce our exposure to
various currencies as a result of repetitive short-term
intercompany investments and obligations and d) utilize a
fair value hedge to reduce our Canadian subsidiarys
exposure to its investment in U.S. Dollar denominated
securities. In the aggregate, as a result of all of these
activities, an unrealized gain of $0.2 million was recorded
in the financial statements at December 31, 2008. A more
detailed description of the accounting treatment of these
activities follows:
Beginning in March 2004, we entered into a series of forward
contracts to reduce exposure to variability in the Euro compared
to the U.S. Dollar (the Cash Flow Hedges). The
Cash Flow Hedges cover the Euro and Japanese Yen denominated
royalty payments on forecasted Euro and Japanese Yen royalty
revenue. The Cash Flow Hedges were designated as cash flow
hedges. The Cash Flow Hedges were consistent with our risk
management policy, which allows for the hedging of risk
associated with fluctuations in foreign currency for anticipated
future transactions. The Cash Flow Hedges were determined to be
fully effective as a hedge in reducing the risk of the
underlying transactions. We recorded losses of $1.2 million
related to the Cash Flow Hedges in earnings for the year ended
December 31, 2008. There are no Cash Flow Hedges
outstanding at December 31, 2008.
At December 31, 2008, the notional amount of the Polish
Zloty contracts utilized to hedge currency exposure (the
Poland Net Investment Hedge) was $18.8 million.
The Poland Net Investment Hedge has been determined to be fully
effective in reducing the risk of currency rate fluctuations
with the Polish Zloty. We recorded total losses of
98
VALEANT
PHARMACEUTICALS INTERNATIONAL
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
$1.3 million related to the Poland Net Investment Hedge in
other comprehensive income for the year ended December 31,
2008.
At December 31, 2008, the notional amount of various
currency contracts utilized to hedge currency exposure in our
Treasury Center (the Treasury Center Hedges) was
$1.0 million. We have chosen not to seek hedge accounting
treatment for the Treasury Center Hedges as these contracts are
short term (less than 30 days in duration) and offset
matching intercompany exposures in selected Valeant
subsidiaries. We recorded an insignificant loss related to the
Treasury Center Hedges in earnings for the year ended
December 31, 2008.
At December 31, 2008, the notional amount of the Brazilian
Real contracts utilized to hedge currency exposure in our
Brazilian subsidiary (the Brazil Hedge) was
$2.9 million. We have chosen not to seek hedge accounting
treatment for the Brazil Hedge as any gain or loss on these
contracts offset closely any gain or loss on matching
intercompany exposures in our Brazil subsidiary. We recorded an
insignificant loss related to the Brazil Hedge in earnings for
the year ended December 31, 2008.
At December 31, 2008, there were no outstanding Canadian
Dollar contracts utilized to hedge currency exposure for our
Canadian subsidiary. Contracts outstanding during 2008 had
related to an investment denominated in U.S. Dollars (the
Fair Value Hedge). The Fair Value Hedge was
determined to be fully effective in reducing the risk of
currency rate fluctuations with the Canadian Dollar. We recorded
a total loss of $0.5 million related to the Fair Value
Hedge in earnings for the year ended December 31, 2008.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives and Hedging Activity
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
Notional
|
|
|
Fair
|
|
|
Notional
|
|
|
Fair
|
|
Description
|
|
Amount
|
|
|
Value
|
|
|
Amount
|
|
|
Value
|
|
|
Undesignated Hedges
|
|
$
|
3,916
|
|
|
$
|
157
|
|
|
$
|
78,595
|
|
|
$
|
834
|
|
Net Investment Hedges
|
|
$
|
18,779
|
|
|
$
|
13
|
|
|
$
|
35,000
|
|
|
$
|
(441
|
)
|
Cash Flow Hedges
|
|
$
|
|
|
|
$
|
|
|
|
$
|
17,788
|
|
|
$
|
323
|
|
Fair Value Hedges
|
|
$
|
|
|
|
$
|
|
|
|
$
|
26,000
|
|
|
$
|
490
|
|
Interest Rate Swap
|
|
$
|
|
|
|
$
|
|
|
|
$
|
150,000
|
|
|
$
|
715
|
|
|
|
13.
|
Fair
Value Measurements
|
We adopted SFAS 157 as of January 1, 2008, with the
exception of the application of the statement to nonfinancial
assets and liabilities that are recognized or disclosed at fair
value in the financial statements on a nonrecurring basis
including those measured at fair value in goodwill impairment
testing, indefinite-lived intangible assets measured at fair
value for impairment testing and those initially measured at
fair value in a business combination. We are currently assessing
the impact SFAS 157 will have on such nonfinancial assets
and liabilities upon adoption on January 1, 2009.
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.
99
VALEANT
PHARMACEUTICALS INTERNATIONAL
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following table provides the assets and liabilities carried
at fair value measured on a recurring basis as of
December 31, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2008
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Available-for-sale securities
|
|
$
|
6,646
|
|
|
|
|
|
|
|
|
|
Undesignated hedges
|
|
|
|
|
|
$
|
157
|
|
|
|
|
|
Net investment derivative contracts
|
|
|
|
|
|
$
|
13
|
|
|
|
|
|
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
December 31, 2008, consist of corporate bonds classified as
marketable securities and an investment in a publicly traded
investment fund, which is included in other assets, carried at
fair value of $3.3 million and $3.3 million,
respectively. During the year ended December 31, 2008, we
recorded in selling, general and administrative expenses an
other-than-temporary impairment of $4.8 million related to
this investment due to sustained declines in the value of the
fund.
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.
|
|
14.
|
Concentrations
of Credit Risk
|
We are exposed to concentrations of credit risk related to our
cash deposits and marketable securities. We place our cash and
cash equivalents with respected financial institutions. Our cash
and cash equivalents and marketable securities totaled
$218.8 million and $339.0 million at December 31,
2008 and 2007, respectively, and consisted of time deposits,
commercial paper and money market funds through less than ten
major financial institutions.
Other financial instruments that potentially subject us to
credit risk principally consist of royalties receivable from
Schering-Plough and trade receivables. Royalties receivable from
Schering-Plough totaled $16.4 million and
$18.2 million at December 31, 2008 and 2007,
respectively. Concentrations of credit risk from trade
receivables are limited due to the number of customers
comprising our customer base, and their dispersion across
geographic areas. At December 31, 2008, accounts receivable
balances from two major customers were $20.7 million and
$13.2 million, representing 22% and 14%, respectively, of
trade receivables, net. At December 31, 2007, the accounts
receivable balance from one major customer was
$26.4 million, representing 22% of trade receivables, net.
Ongoing credit evaluations of customers financial
condition are performed and, generally, no collateral is
required. We maintain reserves for potential credit losses and
such losses, in the aggregate, have not exceeded
managements estimates.
|
|
15.
|
Stock and
Stock Incentive Programs
|
Stock and Securities Repurchase Programs: In
June 2007, our board of directors authorized a stock repurchase
program. This program authorized us to repurchase up to
$200.0 million of our outstanding common stock in a
24-month
period. In June 2008, our board of directors increased the
authorization to $300.0 million, over the original
24-month
period. This program was completed in November 2008. The total
number of shares repurchased pursuant to this program was
17,618,920 at an average price of $17.03 per share, including
transaction costs. During the years ended December 31, 2008
and 2007, we repurchased 11,128,230 and 6,490,690 shares of
our common stock, respectively, for a total of approximately
$200.4 million and $99.6 million, respectively.
In October 2008, our board of directors authorized us to
repurchase up to $200.0 million of our outstanding common
stock or convertible subordinated notes in a
24-month
period ending October 2010, unless earlier
100
VALEANT
PHARMACEUTICALS INTERNATIONAL
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
terminated or completed. 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 securities 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
securities repurchase program may be modified or discontinued at
any time. As of December 31, 2008, we repurchased
$32.6 million aggregate principal amount of our
3.0% Convertible Subordinated Notes due 2010 for
$29.0 million in cash (see Note 8), in addition to the
repurchase of 298,961 shares of our common stock for
$6.1 million.
In addition, as of December, 31, 2008, we have sold 324,474
treasury shares to certain executives in connection with
purchase requirements set forth in their executive employment
agreements.
Equity Incentive Plan: In May 2006, our
stockholders approved our 2006 Equity Incentive Plan (the
Incentive Plan), which is an amendment and
restatement of our 2003 Equity Incentive Plan. The number of
shares of common stock authorized for issuance under the
Incentive Plan was 22,304,000 in the aggregate, with 10,112,000
remaining available for grant at December 31, 2008. The
Incentive Plan provides for the grant of incentive stock
options, nonqualified stock options, stock appreciation rights,
restricted stock awards, restricted stock unit awards and stock
bonuses to our key employees, officers, directors, consultants
and advisors. We issue new shares for stock option exercises and
restricted stock grants. Options granted under the Incentive
Plan must have an exercise price that is not less than 100% of
the fair market value of the common stock on the date of grant
and a term not exceeding 10 years. Under the Incentive
Plan, other than with respect to options and stock appreciation
rights awards, shares may be issued as awards for which a
participant pays less than the fair market value of the common
stock on the date of grant. Generally, options vest ratably over
a four-year period from the date of grant.
101
VALEANT
PHARMACEUTICALS INTERNATIONAL
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following table sets forth information relating to the
Incentive Plan (in thousands, except per share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Average
|
|
|
|
Number of
|
|
|
Exercise
|
|
|
|
Shares
|
|
|
Price
|
|
|
Shares under option, January 1, 2006
|
|
|
14,632
|
|
|
$
|
17.80
|
|
Granted
|
|
|
2,014
|
|
|
$
|
18.54
|
|
Exercised
|
|
|
(1,592
|
)
|
|
$
|
10.34
|
|
Canceled
|
|
|
(1,703
|
)
|
|
$
|
21.81
|
|
|
|
|
|
|
|
|
|
|
Shares under option, December 31, 2006
|
|
|
13,351
|
|
|
$
|
18.28
|
|
Granted
|
|
|
1,094
|
|
|
$
|
15.12
|
|
Exercised
|
|
|
(1,241
|
)
|
|
$
|
11.63
|
|
Canceled
|
|
|
(2,312
|
)
|
|
$
|
21.11
|
|
|
|
|
|
|
|
|
|
|
Shares under option, December 31, 2007
|
|
|
10,892
|
|
|
$
|
18.13
|
|
Granted
|
|
|
1,354
|
|
|
$
|
13.12
|
|
Exercised
|
|
|
(3,323
|
)
|
|
$
|
13.55
|
|
Canceled
|
|
|
(2,679
|
)
|
|
$
|
20.27
|
|
|
|
|
|
|
|
|
|
|
Shares under option, December 31, 2008
|
|
|
6,244
|
|
|
$
|
18.57
|
|
|
|
|
|
|
|
|
|
|
Exercisable at December 31, 2006
|
|
|
8,374
|
|
|
$
|
18.00
|
|
|
|
|
|
|
|
|
|
|
Exercisable at December 31, 2007
|
|
|
7,846
|
|
|
$
|
18.26
|
|
|
|
|
|
|
|
|
|
|
Exercisable at December 31, 2008
|
|
|
4,381
|
|
|
$
|
20.45
|
|
|
|
|
|
|
|
|
|
|
Awards available for grant at December 31, 2006
|
|
|
4,376
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Awards available for grant at December 31, 2007
|
|
|
5,004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Awards available for grant at December 31, 2008
|
|
|
10,112
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The schedule below reflects the number of outstanding and
exercisable options as of December 31, 2008 (in thousands,
except per share and life data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
|
|
|
Exercisable
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
Weighted
|
|
|
Weighted
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
Average
|
|
|
Average
|
|
|
|
Number
|
|
|
Exercise
|
|
|
Number
|
|
|
Exercise
|
|
|
Remaining
|
|
Range of Exercise Prices
|
|
of Shares
|
|
|
Price
|
|
|
of Shares
|
|
|
Price
|
|
|
Life (years)
|
|
|
$ 8.12 - $17.32
|
|
|
2,105
|
|
|
$
|
13.49
|
|
|
|
527
|
|
|
$
|
13.78
|
|
|
|
7.97
|
|
$17.56 - $18.68
|
|
|
2,130
|
|
|
$
|
18.31
|
|
|
|
1,850
|
|
|
$
|
18.30
|
|
|
|
3.44
|
|
$18.75 - $29.59
|
|
|
2,009
|
|
|
$
|
24.17
|
|
|
|
2,004
|
|
|
$
|
24.18
|
|
|
|
2.79
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,244
|
|
|
|
|
|
|
|
4,381
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
102
VALEANT
PHARMACEUTICALS INTERNATIONAL
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The fair value of options granted in 2008, 2007 and 2006 was
estimated at the date of grant using the Black-Scholes
option-pricing model with the following assumptions:
|
|
|
|
|
|
|
|
|
2008
|
|
2007
|
|
2006
|
|
Average life of option (years)
|
|
5.7
|
|
5.7
|
|
4.1 - 5.7
|
Stock price volatility
|
|
36% - 39%
|
|
35% - 37%
|
|
37 - 39%
|
Expected dividend per share
|
|
$0.00
|
|
$0.00
|
|
$0.00 - 0.31
|
Risk-free interest rate
|
|
3.23 - 3.91%
|
|
4.15 - 4.76%
|
|
4.54 - 4.80%
|
Weighted-average fair value of options
|
|
$5.28
|
|
$6.21
|
|
$7.83
|
Estimated forfeiture rate
|
|
35%
|
|
35%
|
|
5%
|
The aggregate intrinsic value of the stock options that are
outstanding and exercisable at December 31, 2008 was
$29.8 million and $13.6 million, respectively. The
weighted-average life of options outstanding and exercisable at
December 31, 2008 is 4.8 and 3.0 years, respectively.
During the years ended December 31, 2008, 2007 and 2006,
stock options with an aggregate intrinsic value of
$18.4 million, $7.2 million and $14.4 million,
respectively, were exercised. Intrinsic value is the in
the money valuation of the options or the difference
between market and exercise prices. The fair value of options
that vested in the years ended December 31, 2008, 2007 and
2006, as determined using the Black-Scholes valuation model, was
$12.7 million, $14.4 million and $26.9 million,
respectively.
The variables used in our share-based compensation expense
calculations include our estimation of the forfeiture rate
related to share-based payments. In 2006, 2007 and continuing
into 2008, we experienced significant turnover at both the
executive and management levels, which affected our actual
forfeiture rate. We increased the estimated forfeiture rate in
the three months ended December 31, 2007 from 5% to 35%. As
described in Note 1, during 2008, we recorded a correction
to adjust our historical estimated forfeiture rate for actual
forfeitures which took place in 2006 and 2007. The correction
recorded in 2008 resulted in a $3.7 million decrease in
stock compensation expense comprising a $0.7 million
reduction in cost of goods sold, a $1.7 million reduction
in selling, general and administrative expenses, a
$1.2 million reduction in research and development expenses
and a $0.1 increase in income from discontinued operations.
Also in 2008, we recognized a change in estimate related to our
estimated forfeiture rate for share-based payments of
$2.8 million. This change in estimate related to
forfeitures which occurred in the second quarter of 2008
resulted in a $0.2 million reduction in cost of goods sold,
a $2.6 million reduction in selling, general and
administrative expenses and an insignificant reduction in
research and development expenses.
Restricted Stock Units: Non-employee members
of our board of directors receive compensation in the form of
restricted stock units, cash retainers and meeting fees for each
meeting they attend during the year. During 2008, 2007 and 2006,
we granted our non-employee directors 63,518, 63,132 and 72,194
restricted stock units, respectively. The restricted stock units
issued to non-employee directors in these periods had a fair
value of $1.0 million, $1.0 million and
$1.2 million, respectively. Each restricted stock unit
granted to non-employee directors vests over one year or less,
is entitled to dividend equivalent shares and is exchanged for a
share of our common stock one year after the director ceases to
serve as a member of our Board.
During 2005 we granted certain officers of the company
restricted stock units. Each restricted stock unit vests
50 percent three years after grant with the balance vesting
equally in years four and five after grant, is entitled to
dividend equivalent shares and is exchanged for a share of our
common stock upon vesting.
During 2008 and 2007, we granted certain officers of the company
additional restricted stock units under a market performance
award. Shares of this restricted stock unit award may vest based
upon three years of service and certain stock price appreciation
conditions. In addition, during 2008 and 2007, we granted
certain officers and employees of the company restricted stock
units. Each share of these restricted stock awards includes a
service
103
VALEANT
PHARMACEUTICALS INTERNATIONAL
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
requirement of three years. As of December 31, 2008 and
December 31, 2007, there were 1,939,603 and 858,076
restricted stock units outstanding, respectively.
In 2008, certain executives who purchased shares of our common
stock were granted restricted stock units to match the number of
shares purchased, up to a maximum aggregate number of restricted
stock units based upon a proportion of their salary. These
restricted stock units vest equally on each of the first four
anniversary dates of the grant, provided the executive remains
employed by us on the vesting date.
The following table sets forth information relating to our
restricted stock unit awards during the years ended
December 31, 2008, 2007, and 2006 (in thousands, except per
share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
Grant
|
|
|
|
Number of
|
|
|
Date Fair
|
|
|
|
Shares
|
|
|
Value
|
|
|
Nonvested awards at January 1, 2006
|
|
|
137
|
|
|
$
|
18.76
|
|
Granted
|
|
|
70
|
|
|
$
|
16.88
|
|
Vested
|
|
|
(47
|
)
|
|
$
|
20.14
|
|
Forfeited
|
|
|
(47
|
)
|
|
$
|
17.99
|
|
|
|
|
|
|
|
|
|
|
Nonvested awards at December 31, 2006
|
|
|
113
|
|
|
$
|
17.34
|
|
Granted
|
|
|
679
|
|
|
$
|
14.01
|
|
Vested
|
|
|
(55
|
)
|
|
$
|
16.37
|
|
Forfeited
|
|
|
(59
|
)
|
|
$
|
14.71
|
|
|
|
|
|
|
|
|
|
|
Nonvested awards at December 31, 2007
|
|
|
678
|
|
|
$
|
14.31
|
|
Granted
|
|
|
1,665
|
|
|
$
|
14.54
|
|
Vested
|
|
|
(333
|
)
|
|
$
|
15.24
|
|
Forfeited
|
|
|
(285
|
)
|
|
$
|
15.03
|
|
|
|
|
|
|
|
|
|
|
Nonvested awards at December 31, 2008
|
|
|
1,725
|
|
|
$
|
15.31
|
|
|
|
|
|
|
|
|
|
|
2003 Employee Stock Purchase Plan: In May
2003, our stockholders approved the Valeant Pharmaceuticals
International 2003 Employee Stock Purchase Plan (the
ESPP). The ESPP provides eligible employees with an
opportunity to purchase common stock at a price equal to 85% of
the lesser of the fair market value of common stock at the
beginning or end of each semi-annual stock purchase period.
Under the ESPP, shares are issued each May 10 and
November 10. There were 7,000,000 shares of common
stock initially reserved for issuance under the ESPP, plus an
annual increase on the first day of our fiscal year, commencing
on January 1, 2005, equal to the lower of (i) 1.5% of
the shares of common stock outstanding on each calculation date,
(ii) 1,500,000 shares of common stock, or (iii) a
number of shares that may be determined by the Compensation
Committee. The ESPP was terminated effective November 11,
2008. During the years ended December 31, 2008, 2007 and
2006, 74,000, 78,000 and 64,000 shares of common stock were
issued for proceeds of $0.8 million, $0.9 million and
$0.9 million, respectively.
104
VALEANT
PHARMACEUTICALS INTERNATIONAL
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
A summary of stock compensation expense in continuing operations
for our stock incentive plans is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Employee stock options
|
|
$
|
(2,364
|
)
|
|
$
|
10,211
|
|
|
$
|
17,954
|
|
Employee stock purchase plan
|
|
|
182
|
|
|
|
224
|
|
|
|
309
|
|
Phantom and restricted stock units
|
|
|
7,246
|
|
|
|
1,984
|
|
|
|
2,007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stock-based compensation expense
|
|
$
|
5,064
|
|
|
$
|
12,419
|
|
|
$
|
20,270
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock compensation expense in continuing operations was charged
to the following accounts:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Cost of goods sold
|
|
$
|
(859
|
)
|
|
$
|
555
|
|
|
$
|
1,212
|
|
Selling, general and administrative
|
|
|
6,545
|
|
|
|
11,087
|
|
|
|
16,613
|
|
Research and development costs
|
|
|
(622
|
)
|
|
|
777
|
|
|
|
2,445
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stock-based compensation expense
|
|
$
|
5,064
|
|
|
$
|
12,419
|
|
|
$
|
20,270
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In addition to the above amounts we recorded stock compensation
expense in discontinued operations related to employee stock
options of $(0.1) million, $1.0 million, and
$0.8 million, in 2008, 2007 and 2006, respectively.
Future stock compensation expense for restricted stock units and
stock option incentive awards outstanding at December 31,
2008 is $18.7 million. This expense is expected to be
recognized over a weighted-average period of 1.96 years.
Dividends: We did not declare and did not pay
dividends in 2008 or 2007.
In connection with the 2008 Strategic Plan and resulting
acquisitions and dispositions, we realigned our organization in
the fourth quarter of 2008 in order to improve our execution and
align our resources and product development efforts in the
markets in which we operate. We have realigned segment financial
data for the years ended December 31, 2007 and 2006 to
reflect changes in our organizational structure that occurred in
2008.
Our products are sold through three segments comprising
Specialty Pharmaceuticals, Branded Generics Europe
and Branded Generics Latin America. The Specialty
Pharmaceuticals segment includes product revenues primarily from
the U.S., Canada, Australia and divested businesses located in
Argentina, Uruguay and Asia. The Branded Generics
Europe segment includes product revenues from branded generic
pharmaceutical products primarily in Poland, Hungary, the Czech
Republic and Slovakia. The Branded Generics Latin
America segment includes product revenues from branded generic
pharmaceutical products primarily in Mexico and Brazil.
Additionally, we generate alliance revenue, including royalties
from the sale of ribavirin by Schering-Plough Ltd. and revenues
associated with the Collaboration Agreement with GSK entered
into in 2008.
105
VALEANT
PHARMACEUTICALS INTERNATIONAL
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following tables set forth the amounts of segment revenues,
operating income, non-cash charges and capital expenditures for
the years ended December 31, 2008, 2007 and 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(In thousands)
|
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
Product sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
Specialty pharmaceuticals
|
|
$
|
303,723
|
|
|
$
|
326,682
|
|
|
$
|
318,321
|
|
Branded generics Europe
|
|
|
152,804
|
|
|
|
125,070
|
|
|
|
99,819
|
|
Branded generics Latin America
|
|
|
136,638
|
|
|
|
151,299
|
|
|
|
185,670
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total product sales
|
|
|
593,165
|
|
|
|
603,051
|
|
|
|
603,810
|
|
Alliances (including ribavirin royalties)
|
|
|
63,812
|
|
|
|
86,452
|
|
|
|
81,242
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated revenues
|
|
$
|
656,977
|
|
|
$
|
689,503
|
|
|
$
|
685,052
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Income (loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
Specialty pharmaceuticals
|
|
$
|
(596
|
)
|
|
$
|
(4,354
|
)
|
|
$
|
(27,134
|
)
|
Branded generics Europe
|
|
|
42,029
|
|
|
|
41,908
|
|
|
|
34,427
|
|
Branded generics Latin America
|
|
|
25,751
|
|
|
|
36,218
|
|
|
|
70,015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
67,184
|
|
|
|
73,772
|
|
|
|
77,308
|
|
Alliances
|
|
|
63,812
|
|
|
|
86,452
|
|
|
|
81,242
|
|
Corporate
|
|
|
(56,894
|
)
|
|
|
(74,724
|
)
|
|
|
(74,803
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal
|
|
|
74,102
|
|
|
|
85,500
|
|
|
|
83,747
|
|
Restructuring, asset impairments and dispositions
|
|
|
(21,295
|
)
|
|
|
(27,675
|
)
|
|
|
(88,616
|
)
|
Acquired in-process reseach and development
|
|
|
(186,300
|
)
|
|
|
|
|
|
|
|
|
Gain on litigation settlements
|
|
|
|
|
|
|
|
|
|
|
51,550
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated segment operating income (loss)
|
|
|
(133,493
|
)
|
|
|
57,825
|
|
|
|
46,681
|
|
Interest income
|
|
|
17,129
|
|
|
|
17,584
|
|
|
|
12,367
|
|
Interest expense
|
|
|
(30,486
|
)
|
|
|
(42,921
|
)
|
|
|
(43,470
|
)
|
Loss on early extinguishment of debt
|
|
|
(11,555
|
)
|
|
|
|
|
|
|
|
|
Other, net
|
|
|
2,063
|
|
|
|
1,659
|
|
|
|
766
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations before income taxes and
minority interest
|
|
$
|
(156,342
|
)
|
|
$
|
34,147
|
|
|
$
|
16,344
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
106
VALEANT
PHARMACEUTICALS INTERNATIONAL
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Depreciation and Amortization
|
|
|
|
|
|
|
|
|
|
|
|
|
Specialty pharmaceuticals
|
|
$
|
45,747
|
|
|
$
|
53,377
|
|
|
$
|
52,542
|
|
Branded generics Europe
|
|
|
9,985
|
|
|
|
7,737
|
|
|
|
6,398
|
|
Branded generics Latin America
|
|
|
7,224
|
|
|
|
6,865
|
|
|
|
7,175
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
62,956
|
|
|
|
67,979
|
|
|
|
66,115
|
|
Corporate
|
|
|
3,524
|
|
|
|
3,655
|
|
|
|
3,912
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
66,480
|
|
|
$
|
71,634
|
|
|
$
|
70,027
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital Expenditures
|
|
|
|
|
|
|
|
|
|
|
|
|
Specialty pharmaceuticals
|
|
$
|
5,288
|
|
|
$
|
4,649
|
|
|
$
|
10,296
|
|
Branded generics Europe
|
|
|
7,063
|
|
|
|
12,080
|
|
|
|
4,191
|
|
Branded generics Latin America
|
|
|
4,085
|
|
|
|
10,391
|
|
|
|
3,400
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16,436
|
|
|
|
27,120
|
|
|
|
17,887
|
|
Corporate
|
|
|
139
|
|
|
|
2,020
|
|
|
|
17,738
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
16,575
|
|
|
$
|
29,140
|
|
|
$
|
35,625
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restructuring and asset impairment charges and IPR&D are
not included in the applicable segments as management excludes
these items in assessing the financial performance of these
segments, primarily due to their non-operational nature. Stock
and stock option compensation is considered a corporate cost
since the amount of such charges depends on corporate-wide
performance rather than the operating performance of any single
segment.
U.S. sales represented 37% of our total consolidated
product net sales in 2008, 2007 and 2006. Poland accounted for
19%, 15% and 12% of our total consolidated net sales in 2008,
2007 and 2006, respectively, while Mexico accounted for 18%, 21%
and 26%, respectively. Sales to McKesson Corporation and its
affiliates in the U.S., Canada and Mexico for the years ended
December 31, 2008, 2007 and 2006 were 24%, 24% and 27%,
respectively, of our total consolidated product net sales. Sales
to Cardinal Healthcare in the U.S. for the years ended
December 31, 2008, 2007 and 2006 were 17%, 12% and 12%
respectively, of our total consolidated product net sales. No
other country, or single customer, generated over 10% of our
total product net sales.
107
VALEANT
PHARMACEUTICALS INTERNATIONAL
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following table sets forth total assets and long-lived
assets by segment as of December 31, 2008 and 2007:
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
Total Assets
|
|
|
|
|
|
|
|
|
Specialty pharmaceuticals
|
|
$
|
692,734
|
|
|
$
|
505,163
|
|
Branded generics Europe
|
|
|
219,234
|
|
|
|
493,452
|
|
Branded generics Latin America
|
|
|
103,573
|
|
|
|
158,104
|
|
Alliances
|
|
|
16,436
|
|
|
|
18,205
|
|
Corporate
|
|
|
155,375
|
|
|
|
319,338
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,187,352
|
|
|
$
|
1,494,262
|
|
|
|
|
|
|
|
|
|
|
Long-term Assets
|
|
|
|
|
|
|
|
|
Specialty pharmaceuticals
|
|
$
|
566,677
|
|
|
$
|
321,463
|
|
Branded generics Europe
|
|
|
65,733
|
|
|
|
80,564
|
|
Branded generics Latin America
|
|
|
31,332
|
|
|
|
46,045
|
|
Corporate
|
|
|
53,570
|
|
|
|
95,356
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
717, 312
|
|
|
$
|
543,428
|
|
|
|
|
|
|
|
|
|
|
Goodwill is included in long-term assets of the Specialty
Pharmaceuticals segment.
The following table summarizes sales by major product for each
of the last three years:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% Increase
|
|
|
|
Year Ended December 31,
|
|
|
(Decrease)
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
08/07
|
|
|
07/06
|
|
|
Efudex/Efudix
|
|
$
|
61,156
|
|
|
$
|
63,969
|
|
|
$
|
71,878
|
|
|
|
(4
|
)%
|
|
|
(11
|
)%
|
Diastat AcuDial
|
|
|
46,226
|
|
|
|
51,264
|
|
|
|
50,678
|
|
|
|
(10
|
)%
|
|
|
1
|
%
|
Cesamet
|
|
|
37,282
|
|
|
|
26,710
|
|
|
|
18,985
|
|
|
|
40
|
%
|
|
|
41
|
%
|
Bedoyecta
|
|
|
35,922
|
|
|
|
42,384
|
|
|
|
49,935
|
|
|
|
(15
|
)%
|
|
|
(15
|
)%
|
Bisocard
|
|
|
27,252
|
|
|
|
22,414
|
|
|
|
15,818
|
|
|
|
22
|
%
|
|
|
42
|
%
|
Kinerase
|
|
|
21,184
|
|
|
|
26,684
|
|
|
|
25,245
|
|
|
|
(21
|
)%
|
|
|
6
|
%
|
Mestinon
|
|
|
17,568
|
|
|
|
21,266
|
|
|
|
20,745
|
|
|
|
(17
|
)%
|
|
|
3
|
%
|
M.V.I. (multi-vitamin infusion)
|
|
|
13,413
|
|
|
|
11,708
|
|
|
|
13,350
|
|
|
|
15
|
%
|
|
|
(12
|
)%
|
Migranal
|
|
|
13,230
|
|
|
|
13,534
|
|
|
|
11,592
|
|
|
|
(2
|
)%
|
|
|
17
|
%
|
Nyal
|
|
|
12,340
|
|
|
|
11,060
|
|
|
|
10,216
|
|
|
|
12
|
%
|
|
|
8
|
%
|
Virazole
|
|
|
12,332
|
|
|
|
11,091
|
|
|
|
13,202
|
|
|
|
11
|
%
|
|
|
(16
|
)%
|
Other products
|
|
|
295,260
|
|
|
|
300,967
|
|
|
|
302,166
|
|
|
|
(2
|
)%
|
|
|
(0
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total product sales
|
|
$
|
593,165
|
|
|
$
|
603,051
|
|
|
$
|
603,810
|
|
|
|
(2
|
)%
|
|
|
0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In 1995, we entered into an exclusive license and supply
agreement with Schering-Plough (the License
Agreement). Under the License Agreement, Schering-Plough
licensed all oral forms of ribavirin for the treatment of
chronic hepatitis C. The FDA granted Schering-Plough
approval for Peg-Intron (pegylated interferon alfa-2b) for use
in Combination Therapy with Rebetol for the treatment of chronic
hepatitis C in patients with compensated liver disease who
are at least 18 years of age. Schering-Plough markets the
Combination Therapy in the United States, Europe, Japan, and
many other countries around the world based on the U.S. and
European Union regulatory
108
VALEANT
PHARMACEUTICALS INTERNATIONAL
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
approvals. Schering-Plough has launched a generic version of
ribavirin. Under the license and supply agreement,
Schering-Plough is obligated to pay us royalties for sales of
their generic ribavirin.
In November 2000, we entered into an agreement that provides
Schering-Plough with certain rights to license various products
we may develop (the 2000 Schering-Plough Agreement).
Under the terms of the 2000 Schering-Plough Agreement,
Schering-Plough has the option to exclusively license on a
worldwide basis up to three compounds that we may develop for
the treatment of hepatitis C on terms specified in the
agreement. The option does not apply to taribavirin. The option
is exercisable as to a particular compound at any time prior to
the start of Phase II clinical studies for that compound.
Once it exercises the option with respect to a compound,
Schering-Plough is required to take over all developmental costs
and responsibility for regulatory approval for that compound.
Under the agreement, we would receive royalty revenues based on
the sales of licensed products.
Under the terms of the 2000 Schering-Plough Agreement, we also
granted Schering-Plough and an affiliate rights of first/last
refusal to license compounds relating to the treatment of
infectious disease (other than hepatitis C) or cancer
or other oncology indications as well as rights of first/last
refusal with respect to taribavirin (collectively, the
Refusal Rights). Under the terms of the Refusal
Rights, if we intend to offer a license or other rights with
respect to any of these compounds to a third party, we are
required to notify Schering-Plough. At Schering-Ploughs
request, we are required to negotiate in good faith with
Schering-Plough on an exclusive basis the terms of a mutually
acceptable exclusive worldwide license or other form of
agreement on commercial terms to be mutually agreed upon. If we
cannot reach an agreement with Schering-Plough, we are permitted
to negotiate a license agreement or other arrangement with a
third party. Prior to entering into any final arrangement with
the third party, we are required to offer substantially similar
terms to Schering-Plough, which terms Schering-Plough has the
right to match.
If Schering-Plough does not exercise its option or Refusal
Rights as to a particular compound, we may continue to develop
that compound or license that compound to other third parties.
The 2000 Schering-Plough Agreement will terminate the later of
12 years from the date of the agreement or the termination
of the 1995 License Agreement with Schering-Plough. The 2000
Schering-Plough Agreement was entered into as part of the
resolution of claims asserted by Schering-Plough against us,
including claims regarding our alleged improper hiring of former
Schering-Plough research and development personnel and claims
that we were not permitted to conduct hepatitis C research.
In January 2007, we executed a licensing agreement with
Schering-Plough for the assignment and license of development
and commercialization rights to pradefovir, which we licensed
from Metabasis Therapeutics, Inc. (Metabasis).
Schering-Ploughs license of these rights from us was
negotiated pursuant to the 2000 Schering-Plough Agreement.
Schering-Plough returned these rights to Metabasis in September
2007 after the results of a long-term preclinical study were
released.
Alliance revenue includes the royalties received from the sale
of ribavirin, licensing payments received and revenues
associated with the Collaboration Agreement with GSK entered
into in 2008. The following table provides the details of our
alliance revenue in 2008, 2007, and 2006, respectively:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Ribavirin royalty
|
|
$
|
59,388
|
|
|
$
|
67,202
|
|
|
$
|
81,242
|
|
Licensing payment
|
|
|
|
|
|
|
19,200
|
|
|
|
|
|
GSK Collaboration
|
|
|
4,374
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
50
|
|
|
|
50
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total alliance revenue
|
|
$
|
63,812
|
|
|
$
|
86,452
|
|
|
$
|
81,242
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
109
VALEANT
PHARMACEUTICALS INTERNATIONAL
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
We received a licensing payment of $19.2 million in 2007
from Schering-Plough as a payment for the licensing of
pradefovir.
|
|
19.
|
Commitments
and Contingencies
|
We are involved in several legal proceedings, including, but not
limited to, 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. 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 $1.3 million, which amount is
covered by insurance and remains subject to court approval. The
Court conducted two hearings, on October 27, 2008 and
November 24, 2008, to consider preliminary approval of the
settlement. The Court preliminarily approved the settlement on
November 24, 2008 and ordered publication of notice of the
proposed settlement to shareholders. Any shareholder wishing to
comment on or object to the proposed settlement must do so by
March 2, 2009. A hearing regarding final approval of the
settlement is scheduled for March 23, 2009.
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
110
VALEANT
PHARMACEUTICALS INTERNATIONAL
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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 was removed to federal court in
the Southern District of Mississippi. On December 24, 2008,
the parties agreed to settle the matter in full. 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 (the California
Actions). The California Actions were consolidated under
the heading of Branson v. Eli Lilly and Company et al. 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. In addition to the lawsuits described above, we have
received, and from time to time receive, communications from
third parties relating to potential claims that may be asserted
with respect to Permax.
Eli Lilly: On January 12, 2009, we were
served a complaint in a case captioned Eli Lilly and
Company v. Valeant Pharmaceuticals International, Case
No. 1:08-cv-1720DFH-TAB
in the U.S. District Court for the Southern District of
Indiana, Indianapolis Division (the Lilly Action).
In the Lilly Action, Lilly brings a claim for breach of contract
and seeks a declaratory judgment arising out of a
February 25, 2004 letter agreement between and among Lilly,
Valeant and Amarin plc related to cost-sharing for product
liability claims related to the pharmaceutical Permax. We
believe this case is without merit and are vigorously defending
ourselves in this matter.
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 executed and submitted by the parties on
August 12, 2008. In settlement of Alfas alleged
claims, we paid Alfa $10.4 million and agreed to pay a 10%
royalty on future product sales until the expiration of
Alfas patent in
111
VALEANT
PHARMACEUTICALS INTERNATIONAL
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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. On September 23, 2008, we filed an Amended
Complaint under the Administrative Procedure Act challenging the
FDAs initial decision to approve Spears ANDA, the
FDAs re-affirmance of Spears ANDA and the FDAs
denial of Valeants Citizens Petition.
Paddock Litigation: By way of letter dated
November 24, 2008, Paddock Laboratories, Inc.
(Paddock) notified Galderma Laboratories L.P.
(Galderma), Dermalogix Partners, Inc.
(Dermalogix), Panda Pharmaceuticals, L.L.C.
(Panda), and The University of Tennessee Research
Foundation (UT) that it had submitted Abbreviated
New Drug Application (ANDA)
No. 90-898
with the FDA seeking approval for a generic version of
Clobex®
(a clobetasol propionate spray, .05%) prior to expiration of
U.S. Patent Nos. 5,972,920 (the 920
patent) and 5,990,100 (the 100 patent).
The ANDA contains a Paragraph IV assertion by Paddock that
the claims of the 920 and 100 patents will not be
infringed by Paddocks proposed formulation and that the
920 and 100 patents are invalid
and/or
unenforceable. On January 7, 2009, Galderma, Galderma S.A.,
and Dermalogix (collectively, Plaintiffs) filed a
complaint against Paddock for patent infringement of the
920 patent Civil Case
No. 4-09CV-002-Y
pending in the United States District Court for the Northern
District of Texas, Fort Worth Division. Dow, which we
acquired on December 31, 2008, is a party to licenses
involving the 920 patent. The 920 patent is owned by
Dermalogix. Plaintiffs complaint alleges that
Paddocks filing of ANDA
No. 90-898
is an act of infringement of the 920 patent under
35 U.S.C. § 271(e)(2). On January 29, 2009,
Paddock filed an answer and counterclaims. In its answer,
Paddock denied the allegations of the complaint and asserted the
following affirmative defenses with respect to the 920
patent: non-infringement, invalidity, unenforceability, failure
to state a claim, estoppel, unclean hands, and patent misuse.
Paddocks counterclaims included a declaratory judgment
action against not only Plaintiffs, but also
112
VALEANT
PHARMACEUTICALS INTERNATIONAL
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Panda, UT, and Dow. Paddock counterclaimed for a declaratory
judgment of non-infringement, invalidity, and unenforceability
(due to alleged inequitable conduct) of the 920 patent and
of the 100 patent. Dow is a party to licenses involving
the 100 patent. The 100 patent is owned by Panda and
The University of Tennessee Research Corporation (now known as
The University of Tennessee Research Foundation, which we have
abbreviated UT). Our reply to the counterclaims is
not yet due. We will vigorously defend ourselves against
Paddocks allegations. No trial date has been set.
Plaintiffs filed this suit within forty-five days of
Paddocks Paragraph IV certification. As a result, The
Drug Price Competition and Patent Restoration Act of 1984 (the
Hatch-Waxman Act) provides an automatic stay on the
FDAs approval of Paddocks ANDA for thirty months,
which will expire in May, 2011.
Tolmar Matter: By way of letter dated
January 19, 2009, Tolmar, Inc. (Tolmar)
notified Galderma Laboratories, L.P. (Galderma) and
Valeant Pharmaceuticals International that it had submitted an
ANDA,
No. 090-903,
with the FDA seeking approval for its Metronidazole Topical Gel,
1% (Tolmar Product). Tolmar seeks to obtain approval
to engage in commercial manufacture, use and sale of the Tolmar
Product prior to the expiration of U.S. Patent Nos.
6,881,726 (the 726 patent) and 7,348,317
(the 317 patent). The 726 and 317
patents are owned by Dow Pharmaceuticals Sciences, Inc., which
we acquired on December 31, 2008. The ANDA contains a
Paragraph IV assertion by Tolmar that the claims of the
726 and 317 patents will not be infringed by the
manufacture, use, importation, sale or offer for sale of the
Tolmar Product.
If suit is filed within forty-five days of Tolmars
Paragraph IV certification, an automatic stay on the
FDAs approval of Tolmars ANDA for thirty months will
be provided pursuant to the Hatch-Waxman Act. At this time, no
suit has been filed. The deadline for filing suit is, at the
earliest, March 5, 2009.
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.
On February 10, 2009, the Collaboration Agreement with GSK
was amended to, among other matters, reduce the maximum amount
that we would be required to refund to GSK, if GSK terminates
the Collaboration Agreement prior to the expiration of the
Review Period, from $90.0 million to $40.0 million
through March 31, 2010, with additional reductions over the
time the Collaboration Agreement is in effect. See Note 3
for additional details of the Collaboration Agreement.
113
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
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Additions
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Balance at
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Charged to
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Charged to
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Balance
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Beginning
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Costs and
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Other
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at End
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of Year
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Expenses
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Accounts
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Deductions
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of Year
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(In thousands)
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Year ended December 31, 2008
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Allowance for doubtful accounts
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$
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8,754
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$
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644
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$
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344
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$
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(5,643
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)
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$
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4,099
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Allowance for inventory obsolescence
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$
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12,476
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$
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21,021
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$
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1,720
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$
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(21,300
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)
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$
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13,917
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Deferred tax asset valuation allowance
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$
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151,887
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$
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(17,092
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)
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$
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7,897
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$
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$
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142,692
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Year ended December 31, 2007
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Allowance for doubtful accounts
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$
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4,926
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$
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3,947
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$
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326
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$
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(445
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)
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$
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8,754
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Allowance for inventory obsolescence
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$
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9,778
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$
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2,541
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$
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10,751
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$
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(10,594
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)
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$
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12,476
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Deferred tax asset valuation allowance
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$
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151,829
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$
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25,166
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$
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(25,108
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)
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$
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$
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151,887
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Year ended December 31, 2006
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Allowance for doubtful accounts
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$
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3,795
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$
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1,342
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$
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314
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$
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(525
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)
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$
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4,926
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Allowance for inventory obsolescence
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$
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8,262
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$
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12,315
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$
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1,155
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$
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(11,954
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)
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$
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9,778
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Deferred tax asset valuation allowance
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$
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132,173
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$
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25,696
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$
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(6,040
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)
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$
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151,829
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Item 9.
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Changes
in and Disagreements with Accountants on Accounting and
Financial Disclosure
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None.
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Item 9A.
|
Controls
and Procedures
|
Disclosure
Controls and Procedures
We maintain disclosure controls and procedures that are designed
to provide reasonable assurance 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 (CEO) and Chief Financial
Officer (CFO), as appropriate, to allow timely
decisions regarding required disclosure. In designing and
evaluating the disclosure controls and procedures, management
recognizes that any controls and procedures, no matter how well
designed and operated, can provide only reasonable assurance of
achieving the desired control objectives, and management
necessarily is required to apply its judgment in evaluating the
cost-benefit relationship of possible controls and procedures.
Our management, with the participation of our CEO and CFO,
evaluated the effectiveness of our disclosure controls and
procedures. Based on their evaluation, our CEO and CFO concluded
that the Companys disclosure controls and procedures were
effective to provide reasonable assurance as of
December 31, 2008.
Managements
Annual Report on Internal Control over Financial
Reporting
Our management is responsible for establishing and maintaining
adequate internal control over financial reporting, as such term
is defined in Exchange Act
Rule 13a-15(f).
Our management, with the participation of our CEO and CFO,
conducted an evaluation of the effectiveness, as of
December 31, 2008, of our internal control over financial
reporting using the criteria set forth by the Committee of
Sponsoring Organizations of the Treadway Commission
(COSO) in Internal Control Integrated
Framework. Management concluded that our internal control
over financial reporting as of December 31, 2008, was
effective based on criteria in Internal Control
Integrated Framework issued by the COSO.
114
We excluded Dow Pharmaceutical Sciences, Inc. (Dow),
Coria Laboratories, Ltd. (Coria) and DermaTech Pty
Ltd. (DermaTech) from our assessment of internal
control over financial reporting as of December 31, 2008
because they were acquired by the Company in purchase business
combinations during 2008. The total assets and total revenues of
Dow, Coria and DermaTech, wholly-owned subsidiaries, represent
18% and 0%, 11% and 1%, and 2% and 0%, respectively, of the
related consolidated financial statement amounts as of and for
the year ended December 31, 2008.
The effectiveness of our internal control over financial
reporting as of December 31, 2008 has been audited by
PricewaterhouseCoopers LLP, an independent registered public
accounting firm, as stated in their report included in this
annual report on
Form 10-K.
Managements
Remediation Efforts
A material weakness is a deficiency, or a combination of
deficiencies, in internal control over financial reporting, such
that there is a reasonable possibility that a material
misstatement of the Companys annual or interim financial
statements will not be prevented or detected on a timely basis.
As described in Item 9A 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 the Companys 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.
During 2008, we sold our subsidiaries in Argentina, Western and
Eastern Europe, Middle East and Africa, thereby reducing the
number of foreign locations where remediation actions were
required. In the quarter ended December 31, 2008 we
completed the following actions to remediate the material
weakness described above:
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We engaged professional actuarial and accounting consultants to
review our calculation of assets and liabilities under, and
accounting for, our foreign pension plans. We also modified our
controls with regard to our accounting for pension obligations.
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We designed and implemented enhancements to our accounting for
product returns and credit memos in foreign markets.
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We 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
were retrained or new accounting staff was recruited. We
assigned qualified accounting staff from our corporate
headquarters and our North American offices to review accounting
procedures in certain foreign countries and have replaced and
supplemented our accounting personnel in certain foreign locales.
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We implemented revised review procedures over tax accounting.
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We implemented revised enhancements to our entity level controls
including supplemental review procedures, processes and controls
to facilitate identification of potential misstatements.
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We implemented direct oversight at the corporate level of our
Mexico financial operations.
|
Management was committed to the remediation and continued
improvement of our internal control over financial reporting. We
dedicated, and will continue to dedicate, significant resources
to this effort and, as such, believe we reestablished effective
internal control over financial reporting associated with our
foreign locations, as
115
well as achieving an appropriate complement of personnel in our
foreign locations combined with oversight from our corporate
headquarters. We believe that the controls that have been
implemented have improved the effectiveness of our internal
control over financial reporting and effectively remediated the
material weakness that existed at December 31, 2007.
Changes
in Internal Control over Financial Reporting
As more fully described above, there were changes to remediate
the material weakness in our internal control over financial
reporting during the quarter ended December 31, 2008 that
have materially affected, or are reasonably likely to materially
affect, our internal control over financial reporting.
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Item 9B.
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Other
Information
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None.
116
PART III
|
|
Item 10.
|
Directors
and Executive Officers of the Registrant
|
The information required under this Item is set forth in our
definitive proxy statement to be filed in connection with our
2009 annual meeting of stockholders (the Proxy
Statement) and is incorporated by reference.
We have adopted a code of ethics that applies to our principal
executive officer, principal financial officer and principal
accounting officer. The code of ethics has been posted on our
Internet website found at www.valeant.com. We intend to
satisfy the Securities and Exchange Commission disclosure
requirements regarding amendments to, or waivers from, any
provisions of our code of ethics on our website.
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|
Item 11.
|
Executive
Compensation
|
The information required under this Item is set forth in the
Proxy Statement and is incorporated by reference.
|
|
Item 12.
|
Security
Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters
|
The information required under this Item is set forth in the
Proxy Statement and is incorporated by reference.
|
|
Item 13.
|
Certain
Relationships and Related Transactions
|
The information required under this Item is set forth in the
Proxy Statement and is incorporated by reference.
|
|
Item 14.
|
Principal
Accounting Fees and Services
|
The information required under this Item is set forth in the
Proxy Statement and is incorporated by reference.
117
PART IV
|
|
Item 15.
|
Exhibits
and Financial Statement Schedules
|
1. Financial Statements
Financial Statements of the Registrant are listed in the index
to Consolidated Financial Statements and filed under
Item 8, Financial Statements and Supplementary
Data, in this
Form 10-K.
2. Financial Statement Schedule
Financial Statement Schedule of the Registrant is listed in the
index to Consolidated Financial Statements and filed under
Item 8, Financial Statements and Supplementary
Data, in this
Form 10-K.
Schedules not listed have been omitted because the information
required therein is not applicable or is shown in the financial
statements and the notes thereto.
3. Exhibits
|
|
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|
|
Exhibit
|
|
|
Number
|
|
Description
|
|
|
3
|
.1
|
|
Restated Certificate of Incorporation, as amended to date,
previously filed as Exhibit 3.1 to the Registrants Form
10-Q for the quarter ended September 30, 2003, which is
incorporated herein by reference.
|
|
3
|
.2
|
|
Certificate of Designation, Preferences and Rights of Series A
Participating Preferred Stock previously filed as Exhibit 3.1 to
the Registrants Current Report on Form 8-K, dated October
6, 2004, which is incorporated herein by reference.
|
|
3
|
.3
|
|
Certificate of Correction to Restated Certificate of
Incorporation, dated April 3, 2006, previously filed as Exhibit
3.3 to the Registrants Form 10-Q for the quarter ended
September 30, 2007, which is incorporated herein by reference.
|
|
3
|
.4
|
|
Amended and Restated Bylaws of the Registrant previously filed
as Exhibit 3.1 to the Registrants Current Report on Form
8-K, dated February 25, 2008, which is incorporated herein by
reference.
|
|
4
|
.1
|
|
Form of Rights Agreement, dated as of November 2, 1994, between
the Registrant and American Stock Transfer & Trust Company,
as trustee, previously filed as Exhibit 4.3 to the
Registrants Registration Statement on Form 8-A, dated
November 10, 1994, which is incorporated herein by reference.
|
|
4
|
.2
|
|
Amended Rights Agreement, dated as of October 5, 2004,
previously filed as Exhibit 4.1 to the Registrants Current
Report on Form 8-K, dated October 5, 2004, which is incorporated
herein by reference.
|
|
4
|
.3
|
|
Amendment No. 2 to Rights Agreement, dated as of June 5, 2008,
by and between Valeant Pharmaceuticals International and
American Transfer & Trust Company as Rights Agent,
previously filed as Exhibit 4.3 to the Registrants
Amendment No. 4 to Form 8-A/A, filed June 6, 2008, which is
incorporated herein by reference.
|
|
10
|
.1
|
|
Valeant Pharmaceuticals International 1992 Non-Qualified Stock
Plan, previously filed as Exhibit 10.57 to the
Registrants Annual Report on Form 10-K for the year ended
December 31, 1992, which is incorporated herein by reference.
|
|
10
|
.2
|
|
Valeant Pharmaceuticals International 1994 Stock Option Plan,
previously filed as Exhibit 10.30 to the Registrants Form
10-K for the year ended December 31, 1995, which is incorporated
herein by reference.
|
|
10
|
.3
|
|
Valeant Pharmaceuticals International 1998 Stock Option Plan,
previously filed as Exhibit 10.20 to the Registrants Form
10-K for the year ended December 31, 1998, which is incorporated
herein by reference.
|
|
10
|
.4
|
|
Valeant Pharmaceuticals International 2003 Equity Incentive
Plan, previously filed as Annex B to the Registrants Proxy
Statement on Schedule 14A filed on April 25, 2003, which is
incorporated herein by reference.
|
|
10
|
.5
|
|
Valeant Pharmaceuticals International 2006 Equity Incentive
Plan, as amended, previously filed as Annex E to the
Registrants Proxy Statement on Schedule 14A filed on April
4, 2008, which is incorporated herein by reference.
|
118
|
|
|
|
|
Exhibit
|
|
|
Number
|
|
Description
|
|
|
**10
|
.6
|
|
Exclusive License and Supply Agreement between Valeant
Pharmaceuticals International and Schering-Plough Ltd. dated
July 28, 1995 previously filed as Exhibit 10 to the
Registrants Amendment 3 to the Quarterly Report on Form
10-Q for the quarter ended September 30, 1996, which is
incorporated herein by reference.
|
|
**10
|
.7
|
|
Amendment to Exclusive License and Supply Agreement between
Valeant Pharmaceuticals International and Schering-Plough Ltd.,
previously filed as Exhibit 10.32 to the Registrants
Annual Report on Form 10-K for the year ended December 31, 2000,
as amended by
Form 10-K/A,
which is incorporated herein by reference.
|
|
**10
|
.8
|
|
Amendment to Exclusive License and Supply Agreement between
Valeant Pharmaceuticals International and Schering-Plough Ltd.
Dated July 16, 1998, previously filed as Exhibit 10.33 to the
Registrants Annual Report on Form 10-K for the year ended
December 31, 2000, as amended by Form 10-K/A, which is
incorporated herein by reference.
|
|
**10
|
.9
|
|
Agreement among Schering-Plough Corporation, Valeant
Pharmaceuticals International and Ribapharm Inc. dated as of
November 14, 2000, previously filed as Exhibit 10.34 to the
Registrants Annual Report on Form 10-K for the year ended
December 31, 2000, as amended by Form 10-K/A, which is
incorporated herein by reference.
|
|
**10
|
.10
|
|
Form 10-K/A, which is incorporated herein by reference.
Agreement among Valeant Pharmaceuticals International, Ribapharm
Inc., Hoffmann-La Roche, and F. Hoffmann-La Roche Ltd,
dated January 3, 2003, previously filed as Exhibit 10.19 to the
Registrants Annual Report on Form 10-K for the year ended
December 31, 2002, which is incorporated herein by reference.
|
|
**10
|
.11
|
|
Asset Purchase Agreement, dated as of January 22, 2004, by and
between Xcel Pharmaceuticals, Inc. and VIATRIS GmbH and Co. KG.,
previously filed as Exhibit 10.7 to the Registrants
Quarterly Report on Form 10-K for the quarter ended March 31,
2005, which is incorporated herein by reference.
|
|
10
|
.12
|
|
Indenture, dated as of December 12, 2003, among Valeant
Pharmaceuticals International as issuer, Ribapharm Inc. as
co-obligor and The Bank of New York as Trustee, previously filed
as Exhibit 4.1 to the Registrants Registration Statement
No. 333-112906 on Form S-4 and incorporated herein by reference.
|
|
10
|
.13
|
|
Form of 7.0% Senior Notes due 2011, previously filed as
Exhibit A-1 to Exhibit 4.1 to the Registrants Registration
Statement No. 333-112906 on Form S-4 and incorporated herein by
reference.
|
|
10
|
.14
|
|
Indenture, dated as of November 19, 2003, among Valeant
Pharmaceuticals International as issuer, Ribapharm Inc. as
co-obligor and The Bank of New York as Trustee, previously filed
as to Exhibit 4.1 to the Registrants Current Report on
Form 8-K dated November 25, 2003 and incorporated by reference.
|
|
10
|
.15
|
|
Form of 3.0% Convertible Subordinated Notes due 2010,
previously filed as Exhibit A-1 to Exhibit 4.1 to the
Registrants Current Report on Form 8-K dated November 25,
2003 and incorporated herein by reference.
|
|
10
|
.16
|
|
Form of 4.0% Convertible Subordinated Notes due 2013,
previously filed as Exhibit A-2 to Exhibit 4.1 to the
Registrants Current Report on Form 8-K dated November 25,
2003 and incorporated herein by reference.
|
|
10
|
.17
|
|
Valeant Pharmaceuticals International 2003 Employee Stock
Purchase Plan, previously filed as Annex C to the Proxy
Statement filed on Schedule 14A on April 25, 2003, which is
incorporated herein by reference.
|
|
10
|
.18
|
|
Amended and Restated Executive Employment Agreement between
Valeant Pharmaceuticals International and Timothy C. Tyson,
dated March 21, 2005, previously filed as Exhibit 10.1 to the
Registrants Current Report on Form 8-K/A dated March 25,
2005, which is incorporated herein by reference.
|
|
10
|
.19
|
|
Form of Executive Severance Agreement between Valeant
Pharmaceuticals International and each of the following persons:
Eileen C. Pruette (entered into on April 22, 2005), Charles
Bramlage (entered into on June 16, 2005) and Peter J. Blott
(entered into on March 28, 2007), previously filed, with respect
to Ms. Pruette, as Exhibit 10.1 to the Registrants Current
Report on Form 8-K dated April 27, 2005, which is incorporated
herein by reference, and previously filed, with respect to
Messrs. Bramlage and Blott, as Exhibit 10.1 to the
Registrants Current Report on Form 8-K dated June 16,
2005, which is incorporated herein by reference.
|
119
|
|
|
|
|
Exhibit
|
|
|
Number
|
|
Description
|
|
|
10
|
.20
|
|
Form of Restricted Stock Unit Award Agreement under the 2003
Equity Incentive Plan, previously filed as Exhibit 99.1 to the
Current Report on Form 8-K filed on June 27, 2006, which is
incorporated herein by reference.
|
|
10
|
.21
|
|
Description of Registrants Executive Incentive Plan,
previously described in Item 5.02 of Registrants Current
Report on Form 8-K, dated May 27, 2008, which is incorporated
herein by reference.
|
|
10
|
.22
|
|
Form of Restricted Stock Unit Award Grant Notice for Directors
under the 2006 Equity Incentive Plan, previously filed as
Exhibit 10.1 to the Registrants Form 10-Q for the quarter
ended June 30, 2007, which is incorporated herein by reference.
|
|
10
|
.23
|
|
Form of Restricted Stock Unit Award Agreement for Directors
under the 2006 Equity Incentive Plan, previously filed as
Exhibit 10.2 to the Registrants Form 10-Q for the quarter
ended June 30, 2007, which is incorporated herein by reference.
|
|
**10
|
.24
|
|
Asset Purchase Agreement dated December 19, 2007 between Three
Rivers Pharmaceuticals, LLC and Valeant Pharmaceuticals North
America, previously filed as of Exhibit 10.27 to the
Registrants Annual Report on Form 10-K for the year ended
December 31, 2007 and incorporated herein by reference.
|
|
**10
|
.25
|
|
Side Letter dated January 11, 2008 between Three Rivers
Pharmaceuticals, LLC and Valeant Pharmaceuticals North America,
previously filed as of Exhibit 10.28 to the Registrants
Annual Report on Form 10-K for the year ended December 31, 2007
and incorporated herein by reference.
|
|
10
|
.26
|
|
Employment Agreement dated as of February 1, 2008 between
Valeant Pharmaceuticals International and J. Michael Pearson,
previously filed as of Exhibit 10.1 to the Registrants
Current Report on
Form 8-K
dated February 6, 2008 and incorporated herein by reference.
|
|
10
|
.27
|
|
Separation Agreement dated as of February 1, 2008 between
Valeant Pharmaceuticals International and Timothy C. Tyson,
previously filed as of Exhibit 10.2 to the Registrants
Current Report on
Form 8-K
dated February 6, 2008 and incorporated herein by reference.
|
|
10
|
.28
|
|
Release Agreement dated as of February 1, 2008 between Valeant
Pharmaceuticals International and Timothy C. Tyson, previously
filed as of Exhibit 10.3 to the Registrants Current Report
on Form 8-K dated February 6, 2008 and incorporated herein by
reference.
|
|
10
|
.29
|
|
Separation and Release Agreement dated as of December 31, 2007,
between Valeant Pharmaceuticals International and Wesley P.
Wheeler, previously filed as Exhibit 10.32 to the
Registrants Annual Report on Form 10-K for the year ended
December 31, 2007, which is incorporated herein by reference.
|
|
10
|
.30
|
|
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
|
.31
|
|
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
|
.32
|
|
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
|
.33
|
|
Performance Restricted Stock Unit and Matching RSU Award
Agreement between Valeant Pharmaceuticals International and
Peter J. Blott, previously filed as Exhibit 99.1 to the
Registrants Current Report on Form 8-K, dated August 27,
2008, which is incorporated herein by reference.
|
|
**10
|
.34
|
|
License and Collaboration Agreement, dated August 27, 2008
between Valeant Pharmaceuticals North America and Glaxo
Group Limited (the GSK Retigabine Agreement),
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
|
.35
|
|
First Amendment to the GSK Retigabine Agreement, dated February
10, 2009, between Valeant Pharmaceuticals North America and
Glaxo Group Limited.
|
120
|
|
|
|
|
Exhibit
|
|
|
Number
|
|
Description
|
|
|
**10
|
.36
|
|
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
Acquisition Corp. (the Coria Merger Agreement),
previously filed as Exhibit 10.6 to the Registrants
Quarterly Report on Form 10-Q for the quarter ended September
30, 2008, which is incorporated herein by reference.
|
|
**10
|
.37
|
|
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
Acquisition Corp., previously filed as Exhibit 10.7 to the
Registrants Quarterly Report on Form 10-Q for the quarter
ended September 30, 2008, which is incorporated herein by
reference.
|
|
**10
|
.38
|
|
Agreement and Plan of Merger, dated December 9, 2008, by and
among Valeant Pharmaceuticals International, Descartes
Acquisition Corp., Dow Pharmaceutical Sciences, Inc., and Harris
Goodman, as Stockholder Representative, previously filed as
Exhibit 2.1 to the Registrants Current Report on Form 8-K,
dated January 5, 2009, which is incorporated herein by reference.
|
|
10
|
.39
|
|
Employment letter agreement, dated September 2, 2008, between
the Registrant and Steve T. Min.
|
|
10
|
.40
|
|
Employment letter agreement, dated August 25, 2008, between the
Registrant and Elisa Karlson.
|
|
10
|
.41
|
|
Employment letter agreement, dated December 17, 2008, between
the Registrant and Rajiv De Silva.
|
|
21
|
|
|
Subsidiaries of the Registrant.
|
|
23
|
|
|
Consent of PricewaterhouseCoopers LLP.
|
|
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
|
|
|
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.
|
|
|
|
* |
|
None of the other indebtedness of the Registrant exceeds 10% of
its total consolidated assets. The Registrant will furnish
copies of the instruments relating to such other indebtedness
upon request. |
|
** |
|
Portions of this exhibit have been omitted pursuant to a request
for confidential treatment. |
|
|
|
Management contract or compensatory plan or arrangement. |
121
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, as amended, the Registrant has
duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Valeant Pharmaceuticals
International
|
|
|
|
By
|
/s/ J.
Michael Pearson
|
J. Michael Pearson
Chairman and Chief Executive Officer
Date: February 27, 2009
Pursuant to the requirements of the Securities Exchange Act of
1934, as amended, this Report has been signed below by the
following persons on behalf of the Registrant and in the
capacities and on the dates indicated.
|
|
|
|
|
|
|
Name
|
|
Title
|
|
Date
|
|
|
|
|
|
|
/s/ J.
Michael Pearson
J.
Michael Pearson
|
|
Chief Executive Officer and Chairman of the Board (Principal
Executive Officer)
|
|
Date: February 27, 2009
|
|
|
|
|
|
/s/ Peter
J. Blott
Peter
J. Blott
|
|
Executive Vice President and Chief Financial Officer (Principal
Financial and Accounting Officer)
|
|
Date: February 27, 2009
|
|
|
|
|
|
/s/ Robert
A. Ingram
Robert
A. Ingram
|
|
Lead Director
|
|
Date: February 27, 2009
|
|
|
|
|
|
/s/ Richard
H. Koppes
Richard
H. Koppes
|
|
Director
|
|
Date: February 27, 2009
|
|
|
|
|
|
/s/ Lawrence
N. Kugelman
Lawrence
N. Kugelman
|
|
Director
|
|
Date: February 27, 2009
|
|
|
|
|
|
/s/ Theo
Melas-Kyriazi
Theo
Melas-Kyriazi
|
|
Director
|
|
Date: February 27, 2009
|
|
|
|
|
|
/s/ G.
Mason Morfit
G.
Mason Morfit
|
|
Director
|
|
Date: February 27, 2009
|
|
|
|
|
|
/s/ Norma
A. Provencio
Norma
A. Provencio
|
|
Director
|
|
Date: February 27, 2009
|
|
|
|
|
|
/s/ Anders
Lonner
Anders
Lonner
|
|
Director
|
|
Date: February 27, 2009
|
122
EXHIBIT INDEX
|
|
|
|
|
Exhibit
|
|
|
Number
|
|
Description
|
|
|
3
|
.1
|
|
Restated Certificate of Incorporation, as amended to date,
previously filed as Exhibit 3.1 to the Registrants Form
10-Q for the quarter ended September 30, 2003, which is
incorporated herein by reference.
|
|
3
|
.2
|
|
Certificate of Designation, Preferences and Rights of Series A
Participating Preferred Stock previously filed as Exhibit 3.1 to
the Registrants Current Report on Form 8-K, dated October
6, 2004, which is incorporated herein by reference.
|
|
3
|
.3
|
|
Certificate of Correction to Restated Certificate of
Incorporation, dated April 3, 2006, previously filed as Exhibit
3.3 to the Registrants Form 10-Q for the quarter ended
September 30, 2007, which is incorporated herein by reference.
|
|
3
|
.4
|
|
Amended and Restated Bylaws of the Registrant previously filed
as Exhibit 3.1 to the Registrants Current Report on Form
8-K, dated February 25, 2008, which is incorporated herein by
reference.
|
|
4
|
.1
|
|
Form of Rights Agreement, dated as of November 2, 1994, between
the Registrant and American Stock Transfer & Trust Company,
as trustee, previously filed as Exhibit 4.3 to the
Registrants Registration Statement on Form 8-A, dated
November 10, 1994, which is incorporated herein by reference.
|
|
4
|
.2
|
|
Amended Rights Agreement, dated as of October 5, 2004,
previously filed as Exhibit 4.1 to the Registrants Current
Report on Form 8-K, dated October 5, 2004, which is incorporated
herein by reference.
|
|
4
|
.3
|
|
Amendment No. 2 to Rights Agreement, dated as of June 5, 2008,
by and between Valeant Pharmaceuticals International and
American Transfer & Trust Company as Rights Agent,
previously filed as Exhibit 4.3 to the Registrants
Amendment No. 4 to Form 8-A/A, filed June 6, 2008, which is
incorporated herein by reference.
|
|
10
|
.1
|
|
Valeant Pharmaceuticals International 1992 Non-Qualified Stock
Plan, previously filed as Exhibit 10.57 to the
Registrants Annual Report on Form 10-K for the year ended
December 31, 1992, which is incorporated herein by reference.
|
|
10
|
.2
|
|
Valeant Pharmaceuticals International 1994 Stock Option Plan,
previously filed as Exhibit 10.30 to the Registrants Form
10-K for the year ended December 31, 1995, which is incorporated
herein by reference.
|
|
10
|
.3
|
|
Valeant Pharmaceuticals International 1998 Stock Option Plan,
previously filed as Exhibit 10.20 to the Registrants Form
10-K for the year ended December 31, 1998, which is incorporated
herein by reference.
|
|
10
|
.4
|
|
Valeant Pharmaceuticals International 2003 Equity Incentive
Plan, previously filed as Annex B to the Registrants Proxy
Statement on Schedule 14A filed on April 25, 2003, which is
incorporated herein by reference.
|
|
10
|
.5
|
|
Valeant Pharmaceuticals International 2006 Equity Incentive
Plan, as amended, previously filed as Annex E to the
Registrants Proxy Statement on Schedule 14A filed on April
4, 2008, which is incorporated herein by reference.
|
|
**10
|
.6
|
|
Exclusive License and Supply Agreement between Valeant
Pharmaceuticals International and Schering-Plough Ltd. dated
July 28, 1995 previously filed as Exhibit 10 to the
Registrants Amendment 3 to the Quarterly Report on Form
10-Q for the quarter ended September 30, 1996, which is
incorporated herein by reference.
|
|
**10
|
.7
|
|
Amendment to Exclusive License and Supply Agreement between
Valeant Pharmaceuticals International and Schering-Plough Ltd.,
previously filed as Exhibit 10.32 to the Registrants
Annual Report on Form 10-K for the year ended December 31, 2000,
as amended by
Form 10-K/A,
which is incorporated herein by reference.
|
|
**10
|
.8
|
|
Amendment to Exclusive License and Supply Agreement between
Valeant Pharmaceuticals International and Schering-Plough Ltd.
Dated July 16, 1998, previously filed as Exhibit 10.33 to the
Registrants Annual Report on Form 10-K for the year ended
December 31, 2000, as amended by Form 10-K/A, which is
incorporated herein by reference.
|
123
|
|
|
|
|
Exhibit
|
|
|
Number
|
|
Description
|
|
|
**10
|
.9
|
|
Agreement among Schering-Plough Corporation, Valeant
Pharmaceuticals International and Ribapharm Inc. dated as of
November 14, 2000, previously filed as Exhibit 10.34 to the
Registrants Annual Report on Form 10-K for the year ended
December 31, 2000, as amended by Form 10-K/A, which is
incorporated herein by reference.
|
|
**10
|
.10
|
|
Agreement among Valeant Pharmaceuticals International, Ribapharm
Inc., Hoffmann-La Roche, and F. Hoffmann-La Roche Ltd,
dated January 3, 2003, previously filed as Exhibit 10.19 to the
Registrants Annual Report on Form 10-K for the year ended
December 31, 2002, which is incorporated herein by reference.
|
|
**10
|
.11
|
|
Asset Purchase Agreement, dated as of January 22, 2004, by and
between Xcel Pharmaceuticals, Inc. and VIATRIS GmbH and Co. KG.,
previously filed as Exhibit 10.7 to the Registrants
Quarterly Report on Form 10-K for the quarter ended March 31,
2005, which is incorporated herein by reference.
|
|
10
|
.12
|
|
Indenture, dated as of December 12, 2003, among Valeant
Pharmaceuticals International as issuer, Ribapharm Inc. as
co-obligor and The Bank of New York as Trustee, previously filed
as Exhibit 4.1 to the Registrants Registration Statement
No. 333-112906 on Form S-4 and incorporated herein by reference.
|
|
10
|
.13
|
|
Form of 7.0% Senior Notes due 2011, previously filed as
Exhibit A-1 to Exhibit 4.1 to the Registrants Registration
Statement No. 333-112906 on Form S-4 and incorporated herein by
reference.
|
|
10
|
.14
|
|
Indenture, dated as of November 19, 2003, among Valeant
Pharmaceuticals International as issuer, Ribapharm Inc. as
co-obligor and The Bank of New York as Trustee, previously filed
as to Exhibit 4.1 to the Registrants Current Report on
Form 8-K dated November 25, 2003 and incorporated by reference.
|
|
10
|
.15
|
|
Form of 3.0% Convertible Subordinated Notes due 2010,
previously filed as Exhibit A-1 to Exhibit 4.1 to the
Registrants Current Report on Form 8-K dated November 25,
2003 and incorporated herein by reference.
|
|
10
|
.16
|
|
Form of 4.0% Convertible Subordinated Notes due 2013,
previously filed as Exhibit A-2 to Exhibit 4.1 to the
Registrants Current Report on Form 8-K dated November 25,
2003 and incorporated herein by reference.
|
|
10
|
.17
|
|
Valeant Pharmaceuticals International 2003 Employee Stock
Purchase Plan, previously filed as Annex C to the Proxy
Statement filed on Schedule 14A on April 25, 2003, which is
incorporated herein by reference.
|
|
10
|
.18
|
|
Amended and Restated Executive Employment Agreement between
Valeant Pharmaceuticals International and Timothy C. Tyson,
dated March 21, 2005, previously filed as Exhibit 10.1 to the
Registrants Current Report on Form 8-K/A dated March 25,
2005, which is incorporated herein by reference.
|
|
10
|
.19
|
|
Form of Executive Severance Agreement between Valeant
Pharmaceuticals International and each of the following persons:
Eileen C. Pruette (entered into on April 22, 2005), Charles
Bramlage (entered into on June 16, 2005) and Peter J. Blott
(entered into on March 28, 2007), previously filed, with respect
to Ms. Pruette, as Exhibit 10.1 to the Registrants Current
Report on Form 8-K dated April 27, 2005, which is incorporated
herein by reference, and previously filed, with respect to
Messrs. Bramlage and Blott, as Exhibit 10.1 to the
Registrants Current Report on Form 8-K dated June 16,
2005, which is incorporated herein by reference.
|
|
10
|
.20
|
|
Form of Restricted Stock Unit Award Agreement under the 2003
Equity Incentive Plan, previously filed as Exhibit 99.1 to the
Current Report on Form 8-K filed on June 27, 2006, which is
incorporated herein by reference.
|
|
10
|
.21
|
|
Description of Registrants Executive Incentive Plan,
previously described in Item 5.02 of Registrants Current
Report on Form 8-K, dated May 27, 2008, which is incorporated
herein by reference.
|
|
10
|
.22
|
|
Form of Restricted Stock Unit Award Grant Notice for Directors
under the 2006 Equity Incentive Plan, previously filed as
Exhibit 10.1 to the Registrants Form 10-Q for the quarter
ended June 30, 2007, which is incorporated herein by reference.
|
|
10
|
.23
|
|
Form of Restricted Stock Unit Award Agreement for Directors
under the 2006 Equity Incentive Plan, previously filed as
Exhibit 10.2 to the Registrants Form 10-Q for the quarter
ended June 30, 2007, which is incorporated herein by reference.
|
124
|
|
|
|
|
Exhibit
|
|
|
Number
|
|
Description
|
|
|
**10
|
.24
|
|
Asset Purchase Agreement dated December 19, 2007 between Three
Rivers Pharmaceuticals, LLC and Valeant Pharmaceuticals North
America, previously filed as of Exhibit 10.27 to the
Registrants Annual Report on Form 10-K for the year ended
December 31, 2007 and incorporated herein by reference.
|
|
**10
|
.25
|
|
Side Letter dated January 11, 2008 between Three Rivers
Pharmaceuticals, LLC and Valeant Pharmaceuticals North America,
previously filed as of Exhibit 10.28 to the Registrants
Annual Report on Form 10-K for the year ended December 31, 2007
and incorporated herein by reference.
|
|
10
|
.26
|
|
Employment Agreement dated as of February 1, 2008 between
Valeant Pharmaceuticals International and J. Michael Pearson,
previously filed as of Exhibit 10.1 to the Registrants
Current Report on
Form 8-K
dated February 6, 2008 and incorporated herein by reference.
|
|
10
|
.27
|
|
Separation Agreement dated as of February 1, 2008 between
Valeant Pharmaceuticals International and Timothy C. Tyson,
previously filed as of Exhibit 10.2 to the Registrants
Current Report on Form 8-K dated February 6, 2008 and
incorporated herein by reference.
|
|
10
|
.28
|
|
Release Agreement dated as of February 1, 2008 between Valeant
Pharmaceuticals International and Timothy C. Tyson, previously
filed as of Exhibit 10.3 to the Registrants Current Report
on Form 8-K dated February 6, 2008 and incorporated herein by
reference.
|
|
10
|
.29
|
|
Separation and Release Agreement dated as of December 31, 2007,
between Valeant Pharmaceuticals International and Wesley P.
Wheeler, previously filed as Exhibit 10.32 to the
Registrants Annual Report on Form 10-K for the year ended
December 31, 2007, which is incorporated herein by reference.
|
|
10
|
.30
|
|
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
|
.31
|
|
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
|
.32
|
|
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
|
.33
|
|
Performance Restricted Stock Unit and Matching RSU Award
Agreement between Valeant Pharmaceuticals International and
Peter J. Blott, previously filed as Exhibit 99.1 to the
Registrants Current Report on Form 8-K, dated August 27,
2008, which is incorporated herein by reference.
|
|
**10
|
.34
|
|
License and Collaboration Agreement, dated August 27, 2008
between Valeant Pharmaceuticals North America and Glaxo
Group Limited (the GSK Retigabine Agreement),
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
|
.35
|
|
First Amendment to the GSK Retigabine Agreement, dated February
10, 2009, between Valeant Pharmaceuticals North America and
Glaxo Group Limited.
|
|
**10
|
.36
|
|
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
Acquisition Corp. (the Coria Merger Agreement),
previously filed as Exhibit 10.6 to the Registrants
Quarterly Report on Form 10-Q for the quarter ended September
30, 2008, which is incorporated herein by reference.
|
|
**10
|
.37
|
|
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 Acquisition Corp., previously filed as Exhibit 10.7 to
the Registrants Quarterly Report on Form 10-Q for the
quarter ended September 30, 2008, which is incorporated herein
by reference.
|
|
**10
|
.38
|
|
Agreement and Plan of Merger, dated December 9, 2008, by and
among Valeant Pharmaceuticals International, Descartes
Acquisition Corp., Dow Pharmaceutical Sciences, Inc., and Harris
Goodman, as Stockholder Representative, previously filed as
Exhibit 2.1 to the Registrants Current Report on Form 8-K,
dated January 5, 2009, which is incorporated herein by reference
|
|
10
|
.39
|
|
Employment letter agreement, dated September 2, 2008, between
the Registrant and Steve T. Min.
|
|
10
|
.40
|
|
Employment letter agreement, dated August 25, 2008, between the
Registrant and Elisa Karlson.
|
125
|
|
|
|
|
Exhibit
|
|
|
Number
|
|
Description
|
|
|
10
|
.41
|
|
Employment letter agreement, dated December 17, 2008, between
the Registrant and Rajiv De Silva.
|
|
21
|
|
|
Subsidiaries of the Registrant.
|
|
23
|
|
|
Consent of PricewaterhouseCoopers LLP.
|
|
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
|
|
|
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.
|
|
|
|
* |
|
None of the other indebtedness of the Registrant exceeds 10% of
its total consolidated assets. The Registrant will furnish
copies of the instruments relating to such other indebtedness
upon request. |
|
** |
|
Portions of this exhibit have been omitted pursuant to a request
for confidential treatment. |
|
|
|
Management contract or compensatory plan or arrangement. |
126