e10vq
UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C.
20549
Form 10-Q
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(Mark One)
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þ
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the quarterly period ended
June 30, 2007
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or
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o
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the transition period
from to
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Commission file number: 1-11397
Valeant Pharmaceuticals
International
(Exact name of registrant as
specified in its charter)
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|
|
Delaware
(State or other
jurisdiction of
incorporation or organization)
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|
33-0628076
(I.R.S. Employer
Identification No.)
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|
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|
One Enterprise,
Aliso Viejo, California
(Address of principal
executive offices)
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|
92656
(Zip
Code)
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(949) 461-6000
(Registrants telephone
number, including area code)
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of
the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been
subject to such filing requirements for the past
90 days. Yes o No þ
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, or a non-accelerated
filer. See definition of accelerated filer and large accelerated
filer in
Rule 12b-2
of the Exchange Act. (Check one):
Large accelerated
filer þ Accelerated
filer o Non-accelerated
filer o
Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2
of the Exchange
Act). Yes o No þ
The number of outstanding shares of the registrants Common
Stock, $0.01 par value, as of July 31, 2007 was
91,943,461.
VALEANT
PHARMACEUTICALS INTERNATIONAL
INDEX
1
PART I
FINANCIAL INFORMATION
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|
Item 1.
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Financial
Statements
|
|
|
|
|
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|
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June 30,
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(Unaudited)
|
|
|
|
|
|
ASSETS
|
Current Assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
377,411
|
|
|
$
|
326,002
|
|
Marketable securities
|
|
|
9,239
|
|
|
|
9,743
|
|
Accounts receivable, net
|
|
|
212,115
|
|
|
|
227,452
|
|
Inventories, net
|
|
|
126,249
|
|
|
|
142,679
|
|
Assets held for sale
|
|
|
|
|
|
|
48,515
|
|
Prepaid expenses and other current
assets
|
|
|
16,882
|
|
|
|
16,398
|
|
Current deferred tax assets, net
|
|
|
6,283
|
|
|
|
8,071
|
|
Income taxes
|
|
|
5,817
|
|
|
|
2,526
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
753,996
|
|
|
|
781,386
|
|
Property, plant and equipment, net
|
|
|
101,997
|
|
|
|
94,279
|
|
Deferred tax assets, net
|
|
|
63,886
|
|
|
|
21,514
|
|
Goodwill
|
|
|
80,162
|
|
|
|
80,162
|
|
Intangible assets, net
|
|
|
479,488
|
|
|
|
474,315
|
|
Other assets
|
|
|
51,475
|
|
|
|
53,555
|
|
Assets of discontinued operations
|
|
|
|
|
|
|
226
|
|
|
|
|
|
|
|
|
|
|
Total non-current assets
|
|
|
777,008
|
|
|
|
724,051
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,531,004
|
|
|
$
|
1,505,437
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND
STOCKHOLDERS EQUITY
|
Current Liabilities:
|
|
|
|
|
|
|
|
|
Trade payables
|
|
$
|
52,510
|
|
|
$
|
60,621
|
|
Accrued liabilities
|
|
|
127,191
|
|
|
|
142,532
|
|
Notes payable and current portion
of long-term debt
|
|
|
2,249
|
|
|
|
9,237
|
|
Income taxes
|
|
|
5,311
|
|
|
|
39,818
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
187,261
|
|
|
|
252,208
|
|
Long-term debt, less current portion
|
|
|
776,475
|
|
|
|
778,196
|
|
Deferred tax liabilities, net
|
|
|
1,447
|
|
|
|
3,255
|
|
Liabilities for uncertain tax
positions
|
|
|
56,176
|
|
|
|
|
|
Other liabilities
|
|
|
24,417
|
|
|
|
18,182
|
|
Liabilities of discontinued
operations
|
|
|
16,956
|
|
|
|
18,343
|
|
|
|
|
|
|
|
|
|
|
Total non-current liabilities
|
|
|
875,471
|
|
|
|
817,976
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
1,062,732
|
|
|
|
1,070,184
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies
|
|
|
|
|
|
|
|
|
Stockholders Equity:
|
|
|
|
|
|
|
|
|
Common stock, $0.01 par value;
200,000 shares authorized; 93,732 (June 30,
2007) and 94,415 (December 31, 2006) shares
outstanding (after deducting shares in treasury of 2,694 as of
June 30, 2007 and 1,094 as of December 31, 2006)
|
|
|
937
|
|
|
|
944
|
|
Additional capital
|
|
|
1,253,562
|
|
|
|
1,263,318
|
|
Accumulated deficit
|
|
|
(825,010
|
)
|
|
|
(848,467
|
)
|
Accumulated other comprehensive
income
|
|
|
38,783
|
|
|
|
19,458
|
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
468,272
|
|
|
|
435,253
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,531,004
|
|
|
$
|
1,505,437
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated condensed financial statements.
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product sales
|
|
$
|
212,052
|
|
|
$
|
208,757
|
|
|
$
|
388,944
|
|
|
$
|
390,157
|
|
Alliance revenue (including
ribavirin royalties)
|
|
|
18,955
|
|
|
|
21,635
|
|
|
|
55,425
|
|
|
|
39,726
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
231,007
|
|
|
|
230,392
|
|
|
|
444,369
|
|
|
|
429,883
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of goods sold (excluding
amortization)
|
|
|
62,116
|
|
|
|
65,759
|
|
|
|
114,214
|
|
|
|
124,360
|
|
Selling expenses
|
|
|
74,684
|
|
|
|
66,270
|
|
|
|
139,118
|
|
|
|
130,545
|
|
General and administrative expenses
|
|
|
28,963
|
|
|
|
30,668
|
|
|
|
55,150
|
|
|
|
59,114
|
|
Research and development costs
|
|
|
24,617
|
|
|
|
26,867
|
|
|
|
47,727
|
|
|
|
56,421
|
|
Gain on litigation settlements
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(34,000
|
)
|
Restructuring charges and asset
impairment
|
|
|
6,337
|
|
|
|
53,083
|
|
|
|
13,575
|
|
|
|
79,549
|
|
Amortization expense
|
|
|
20,316
|
|
|
|
17,514
|
|
|
|
39,447
|
|
|
|
35,037
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total costs and expenses
|
|
|
217,033
|
|
|
|
260,161
|
|
|
|
409,231
|
|
|
|
451,026
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations
|
|
|
13,974
|
|
|
|
(29,769
|
)
|
|
|
35,138
|
|
|
|
(21,143
|
)
|
Other income (loss), net,
including translation and exchange
|
|
|
1,682
|
|
|
|
756
|
|
|
|
2,818
|
|
|
|
1,694
|
|
Interest income
|
|
|
4,769
|
|
|
|
2,715
|
|
|
|
9,280
|
|
|
|
5,372
|
|
Interest expense
|
|
|
(10,882
|
)
|
|
|
(10,861
|
)
|
|
|
(21,834
|
)
|
|
|
(21,298
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing
operations before income taxes
|
|
|
9,543
|
|
|
|
(37,159
|
)
|
|
|
25,402
|
|
|
|
(35,375
|
)
|
Provision (benefit) for income
taxes
|
|
|
(7,289
|
)
|
|
|
5,163
|
|
|
|
3
|
|
|
|
12,706
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing
operations
|
|
|
16,832
|
|
|
|
(42,322
|
)
|
|
|
25,399
|
|
|
|
(48,081
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from discontinued operations
|
|
|
(382
|
)
|
|
|
(197
|
)
|
|
|
(381
|
)
|
|
|
(409
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
16,450
|
|
|
$
|
(42,519
|
)
|
|
$
|
25,018
|
|
|
$
|
(48,490
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic income (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing
operations
|
|
$
|
0.18
|
|
|
$
|
(0.46
|
)
|
|
$
|
0.27
|
|
|
$
|
(0.52
|
)
|
Loss from discontinued operations
|
|
|
(0.01
|
)
|
|
|
|
|
|
|
(0.01
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic income (loss) per share:
|
|
$
|
0.17
|
|
|
$
|
(0.46
|
)
|
|
$
|
0.26
|
|
|
$
|
(0.52
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted income (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing
operations
|
|
$
|
0.18
|
|
|
$
|
(0.46
|
)
|
|
$
|
0.26
|
|
|
$
|
(0.52
|
)
|
Loss from discontinued operations
|
|
|
(0.01
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted income (loss) per share:
|
|
$
|
0.17
|
|
|
$
|
(0.46
|
)
|
|
$
|
0.26
|
|
|
$
|
(0.52
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares used in per share
computations
|
|
|
94,868
|
|
|
|
92,818
|
|
|
|
94,722
|
|
|
|
92,794
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares used in per share
computation Diluted
|
|
|
96,154
|
|
|
|
92,818
|
|
|
|
96,091
|
|
|
|
92,794
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends paid per share of common
stock
|
|
$
|
|
|
|
$
|
0.08
|
|
|
$
|
|
|
|
$
|
0.16
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends declared per share of
common stock
|
|
$
|
|
|
|
$
|
0.08
|
|
|
$
|
|
|
|
$
|
0.16
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated condensed financial statements.
3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
Net income (loss)
|
|
$
|
16,450
|
|
|
$
|
(42,519
|
)
|
|
$
|
25,018
|
|
|
$
|
(48,490
|
)
|
Other comprehensive income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation
adjustments
|
|
|
12,027
|
|
|
|
8,280
|
|
|
|
11,912
|
|
|
|
10,626
|
|
Unrealized gain (loss) on
marketable equity securities and other
|
|
|
7,410
|
|
|
|
(1,415
|
)
|
|
|
7,637
|
|
|
|
(972
|
)
|
Pension liability adjustment
|
|
|
(217
|
)
|
|
|
(263
|
)
|
|
|
(223
|
)
|
|
|
(295
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income (loss)
|
|
$
|
35,670
|
|
|
$
|
(35,917
|
)
|
|
$
|
44,344
|
|
|
$
|
(39,131
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated condensed financial statements.
4
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
Cash flows from operating
activities:
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
25,018
|
|
|
$
|
(48,490
|
)
|
Loss from discontinued operations
|
|
|
(381
|
)
|
|
|
(409
|
)
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing
operations
|
|
|
25,399
|
|
|
|
(48,081
|
)
|
Adjustments to reconcile net loss
to net cash provided by operating activities:
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
47,339
|
|
|
|
47,071
|
|
Provision for losses on accounts
receivable and inventory
|
|
|
5,385
|
|
|
|
7,671
|
|
Stock compensation expense
|
|
|
7,494
|
|
|
|
10,697
|
|
Translation and exchange gains, net
|
|
|
(2,818
|
)
|
|
|
(1,694
|
)
|
Impairment charges and other
non-cash items
|
|
|
4,483
|
|
|
|
67,806
|
|
Deferred income taxes
|
|
|
12,826
|
|
|
|
(3,787
|
)
|
Change in assets and liabilities,
net of effects of acquisitions:
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
15,950
|
|
|
|
(11,428
|
)
|
Inventories
|
|
|
(4
|
)
|
|
|
(12,435
|
)
|
Prepaid expenses and other assets
|
|
|
(2,287
|
)
|
|
|
376
|
|
Trade payables and accrued
liabilities
|
|
|
(20,737
|
)
|
|
|
3,015
|
|
Income taxes
|
|
|
(37,730
|
)
|
|
|
(11,314
|
)
|
Other liabilities
|
|
|
1,190
|
|
|
|
1,732
|
|
|
|
|
|
|
|
|
|
|
Cash flow from operating
activities in continuing operations
|
|
|
56,490
|
|
|
|
49,629
|
|
Cash flow from operating
activities in discontinued operations
|
|
|
(1,852
|
)
|
|
|
(418
|
)
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating
activities
|
|
|
54,638
|
|
|
|
49,211
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing
activities:
|
|
|
|
|
|
|
|
|
Capital expenditures
|
|
|
(15,598
|
)
|
|
|
(19,840
|
)
|
Proceeds from sale of assets
|
|
|
37,282
|
|
|
|
8,037
|
|
Proceeds from sale of businesses
|
|
|
29,486
|
|
|
|
|
|
Proceeds from investments
|
|
|
15,122
|
|
|
|
8,165
|
|
Purchase of investments
|
|
|
(17,100
|
)
|
|
|
(8,900
|
)
|
Acquisition of businesses, license
rights and product lines
|
|
|
(35,287
|
)
|
|
|
(2,932
|
)
|
|
|
|
|
|
|
|
|
|
Cash flow from investing
activities in continuing operations
|
|
|
13,905
|
|
|
|
(15,470
|
)
|
Cash flow from investing
activities in discontinued operations
|
|
|
|
|
|
|
(1
|
)
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in)
investing activities
|
|
|
13,905
|
|
|
|
(15,471
|
)
|
|
|
|
|
|
|
|
|
|
Cash flows from financing
activities:
|
|
|
|
|
|
|
|
|
Proceeds from issuance of
long-term debt
|
|
|
1,518
|
|
|
|
|
|
Payments on long-term debt and
notes payable
|
|
|
(9,163
|
)
|
|
|
(6,137
|
)
|
Proceeds capitalized lease
financing and long-term debt
|
|
|
|
|
|
|
578
|
|
Stock option exercises and
employee stock purchases
|
|
|
10,251
|
|
|
|
2,395
|
|
Purchase of treasury stock
|
|
|
(27,507
|
)
|
|
|
|
|
Dividends paid
|
|
|
|
|
|
|
(14,354
|
)
|
|
|
|
|
|
|
|
|
|
Net cash used in financing
activities
|
|
|
(24,901
|
)
|
|
|
(17,518
|
)
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes on
cash and cash equivalents
|
|
|
7,564
|
|
|
|
3,501
|
|
|
|
|
|
|
|
|
|
|
Net increase in cash and cash
equivalents
|
|
|
51,206
|
|
|
|
19,723
|
|
Cash and cash equivalents at
beginning of period
|
|
|
326,205
|
|
|
|
224,903
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end
of period
|
|
|
377,411
|
|
|
|
244,626
|
|
Cash and cash equivalents
classified as part of discontinued operations
|
|
|
|
|
|
|
(19
|
)
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents of
continuing operations
|
|
$
|
377,411
|
|
|
$
|
244,607
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated condensed financial statements.
5
In the consolidated condensed financial statements included
herein, we, us, our,
Valeant, and the Company refer to
Valeant Pharmaceuticals International and its subsidiaries. The
condensed consolidated financial statements have been prepared
by us, without audit, pursuant to the rules and regulations of
the Securities and Exchange Commission (SEC).
Certain information and footnote disclosures normally included
in financial statements prepared on the basis of accounting
principles generally accepted in the United States of America
have been condensed or omitted pursuant to such rules and
regulations. The results of operations presented herein are not
necessarily indicative of the results to be expected for a full
year. Although we believe that all adjustments (consisting only
of normal, recurring adjustments) necessary for a fair
presentation of the interim periods presented are included and
that the disclosures are adequate to make the information
presented not misleading, these consolidated condensed financial
statements should be read in conjunction with the consolidated
financial statements and notes thereto included in our annual
report on
Form 10-K
for the year ended December 31, 2006.
|
|
1.
|
Organization
and Summary of Significant Accounting Policies
|
Organization: We are a global specialty
pharmaceutical company that develops, manufactures and markets a
broad range of pharmaceutical products. In addition, we generate
alliance revenue from out-licensed products, including royalty
revenues from the sale of ribavirin by Schering-Plough Ltd.
(Schering-Plough) and F. Hoffman-LaRoche
(Roche).
Principles of Consolidation: The accompanying
consolidated condensed financial statements include the accounts
of Valeant Pharmaceuticals International, its wholly owned
subsidiaries and its majority-owned subsidiary in Poland. All
significant intercompany account balances and transactions have
been eliminated.
Marketable Securities: We invest in investment
grade securities and classify these securities as
available-for-sale as they typically have maturities of one year
or less and are highly liquid. As of June 30, 2007 and
December 31, 2006, the fair market value of these
securities approximated cost.
Derivative Financial Instruments: Our
accounting policies for derivative instruments are based on
whether they meet our criteria for designation as hedging
transactions, either as cash flow or fair value hedges. Our
derivative instruments are recorded at fair value and are
included in other current assets, other assets, accrued
liabilities or debt. Depending on the nature of the hedge,
changes in the fair value of the hedged item are either offset
against the change in the fair value of the hedged item through
earnings or recognized in other comprehensive income until the
hedged item is recognized in earnings.
Comprehensive Income: We have adopted the
provisions of Statement of Financial Accounting Standards
(SFAS) No. 130, Reporting Comprehensive
Income. Accumulated other comprehensive income consists of
accumulated foreign currency translation adjustments, unrealized
losses on marketable equity securities, pension funded status
and changes in the fair value of derivative financial
instruments. We have revised the presentation of other
comprehensive income for the three months ended June 30,
2006 to correct the amount reported.
Per Share Information: Basic earnings per
share are computed by dividing income available to common
stockholders by the weighted-average number of common shares
outstanding. In computing diluted earnings per share, the
weighted-average number of common shares outstanding is adjusted
to reflect the effect of potentially dilutive securities
including options, warrants, and convertible debt; income
available to common stockholders is adjusted to reflect any
changes in income or loss that would result from the issuance of
the dilutive common shares.
Stock-Based Compensation Expense: We have
adopted SFAS No. 123 (revised 2004), Share-Based
Payment, (SFAS 123(R)) which requires the
measurement and recognition of compensation expense for all
share-based payment awards made to employees and directors
including employee stock options and employee stock purchases
under our Employee Stock Purchase Plan based on estimated fair
values.
6
VALEANT
PHARMACEUTICALS INTERNATIONAL
NOTES TO
CONSOLIDATED CONDENSED FINANCIAL
STATEMENTS (Continued)
In order to estimate the fair value of stock options we use the
Black-Scholes option valuation model, which was developed for
use in estimating the fair value of publicly traded options
which have no vesting restrictions and are fully transferable.
Option valuation models require the input of subjective
assumptions which can vary over time. Additional information
about our stock option programs and the assumptions used in
determining the fair value of stock-based compensation are
contained in Note 8.
Assets Held for Sale: In June 2007, we
completed the sale of our manufacturing plants in Puerto Rico
and Basel, Switzerland. At December 31, 2006 the net book
values of these facilities were classified as assets held for
sale in the accompanying consolidated condensed financial
statements.
Use of Estimates: The preparation of financial
statements in conformity with accounting principles generally
accepted in the United States of America requires us to make
estimates and assumptions that affect the reported amount of
assets and liabilities, the disclosure of contingent assets and
liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting
periods. Actual results could differ materially from those
estimates.
Treasury Stock. We have recorded the
repurchase of treasury stock by reducing the common stock
account for the par value of the shares repurchased and
adjusting paid-in capital for the balance. As of
December 31, 2006 and June 30, 2007, these adjustments
to paid-in capital were $18,561,000 and $46,052,000,
respectively, which correspond to 1,094,000 and 2,694,000
treasury shares, respectively.
Recent
Accounting Pronouncements:
FIN 48. In June 2006, the Financial
Accounting Standards Board (the FASB) issued FASB
Interpretation No. 48, Accounting for Uncertainty in
Income Taxes an interpretation of FASB Statement
No. 109 (FIN 48), which clarifies
the accounting for uncertainty in income taxes recognized in
accordance with SFAS No. 109, Accounting for
Income Taxes. FIN 48 applies to all income tax
positions taken on previously filed tax returns or expected to
be taken on a future tax return. FIN 48 prescribes a
benefit recognition model with a two-step approach, a
more-likely-than-not recognition criterion and a measurement
attribute that measures the position as the largest amount of
tax benefit that is greater than 50% likely of being realized
upon ultimate settlement. If it is not more likely than not that
the benefit will be sustained on its technical merits, no
benefit will be recorded. FIN 48 also requires that the
amount of interest expense and income to be recognized related
to uncertain tax positions be computed by applying the
applicable statutory rate of interest to the difference between
the tax position recognized in accordance with FIN 48 and
the amount previously taken or expected to be taken in a tax
return. Our continuing practice is to record interest and
penalties related to income tax matters in income tax expense.
FIN 48 became effective for Valeant as of January 1,
2007. The change in net assets as a result of applying this
pronouncement is recorded as a change in accounting principle
with the cumulative effect of the change required to be treated
as an adjustment to the opening balance of accumulated deficit.
As a result of the adoption of FIN 48, we recognized an
increase of $1,560,000 to the beginning balance of accumulated
deficit on the balance sheet.
SFAS No. 157. In September 2006, the
FASB issued SFAS No. 157, Fair Value
Measurements (SFAS No. 157).
SFAS No. 157 defines fair value, establishes a
framework for measuring fair value and expands disclosures about
fair value measurements but does not change the requirements to
apply fair value in existing accounting standards. Under
SFAS No. 157, fair value refers to the price that
would be received to sell an asset or paid to transfer a
liability in an orderly transaction between market participants
in the market in which the reporting entity transacts. The
standard clarifies that fair value should be based on the
assumptions market participants would use when pricing the asset
or liability. SFAS No. 157 will be effective for
Valeant as of January 1, 2008 and we are currently
assessing the impact that SFAS No. 157 may have on our
financial statements.
SFAS 159. In February 2007 the FASB
issued SFAS No. 159, The Fair Value Option for
Financial Assets and Financial Liabilities,
(SFAS 159) which provides companies with
an option to report selected financial assets and liabilities at
fair value. The objective of SFAS 159 is to reduce both
complexity in accounting for financial instruments
7
VALEANT
PHARMACEUTICALS INTERNATIONAL
NOTES TO
CONSOLIDATED CONDENSED FINANCIAL
STATEMENTS (Continued)
and the volatility in earnings caused by measuring related
assets and liabilities differently. SFAS 159 also
establishes presentation and disclosure requirements designed to
facilitate comparisons between companies that choose different
measurement attributes for similar types of assets and
liabilities. SFAS 159 does not eliminate any disclosure
requirements included in other accounting standards. We have not
yet determined if we will elect to apply the options presented
in SFAS 159, the earliest effective date that we can make
such an election is January 1, 2008.
EITF 06-3. In
June 2006, the FASB ratified the Emerging Issues Task
Forces Issue
No. 06-3,
How Sales Taxes Collected from Customers and Remitted to
Governmental Authorities Should Be Presented in the Income
Statement (That Is, Gross Versus Net Presentation)
(EITF 06-3).
EITF 06-3
provides guidance on disclosing the accounting policy for the
income statement presentation of any tax assessed by a
governmental authority that is directly imposed on a
revenue-producing transaction between a seller and a customer on
either a gross (included in revenues and costs) or a net
(excluded from revenues) basis. In addition,
EITF 06-3
requires disclosure of any such taxes that are reported on a
gross basis as well as the amounts of those taxes in interim and
annual financial statements for each period for which an income
statement is presented.
EITF 06-3
was effective for Valeant as of January 1, 2007. Valeant
presents revenue net of sales taxes. The adoption of this
standard did not have a material impact on Valeant.
On April 3, 2006, we announced a restructuring program to
reduce costs and accelerate earnings growth. With the sale of
our manufacturing plants in Basel, Switzerland and Puerto Rico
in June 2007, we have completed this restructuring program.
The program was primarily focused on our research and
development and manufacturing operations. The objective of the
restructuring program as it related to research and development
activities was to focus our efforts and expenditures on two late
stage projects currently in development. In December 2006 we
sold our HIV and cancer development programs and certain
discovery and pre-clinical assets to Ardea Biosciences, Inc.
(formerly IntraBiotics Pharmaceuticals) (Ardea),
with an option for us to reacquire rights to commercialize the
HIV program outside of the United States and Canada upon
Ardeas completion of Phase 2b trials. In March 2007, we
sold our former headquarters building in Costa Mesa, California,
where our former research laboratories were located, for net
proceeds of $36,758,000.
The objective of the restructuring program as it related to
manufacturing was to further rationalize our manufacturing
operations to reflect the regional nature of our existing
products and further reduce our excess capacity after
considering the delay in the development of taribavirin. In
December 2006, we transferred our former factories in Basel,
Switzerland and Puerto Rico to a held for sale
classification in accordance with SFAS 144,
Accounting for the Impairment or Disposal of Long-Lived
Assets. In June 2007, we sold these manufacturing
facilities and the related inventories to Legacy Pharmaceuticals
International for aggregate proceeds of $29,500,000, of which
$12,000,000 was received as consideration for inventories sold
to Legacy Pharmaceuticals International and $17,500,000 was
received as consideration for the manufacturing facilities.
Under certain supply agreements, Legacy Pharmaceuticals
International will continue to supply us with the products
manufactured in these facilities, with this future supply to
include certain of the inventories transferred to Legacy. The
transaction also included transition payment obligations of
$6,000,000 to be paid by Valeant to Legacy Pharmaceuticals
International over a
24-month
period as well as capital expenditure obligations of $650,000 to
be incurred by us. In addition, a working capital and inventory
adjustment payment is to be made for changes in value between
initial estimates and final balances which is still pending
between the parties.
Our restructuring charges have included impairment charges
resulting from the sale of our former headquarters facility,
discovery and pre-clinical operations equipment, and our former
manufacturing facilities in Puerto Rico and Basel, Switzerland.
The restructuring included the reduction of approximately
850 employees, the majority of whom work in the two
manufacturing facilities which have been sold to Legacy
Pharmaceuticals International. As of June 30, 2007,
employee severance costs have been recorded for approximately
490 employees and no severance payments have been recorded
for the remaining employees who transferred to Legacy
Pharmaceuticals International.
8
VALEANT
PHARMACEUTICALS INTERNATIONAL
NOTES TO
CONSOLIDATED CONDENSED FINANCIAL
STATEMENTS (Continued)
The restructuring program also rationalized selling, general and
administrative expenses primarily through consolidation of the
management functions in fewer administrative groups to achieve
greater economies of scale. Management and administrative
responsibilities for our regional operations in Australia,
Africa and Asia, which had previously been managed as a separate
business unit, were combined in 2006 with those of other regions.
In this restructuring program, we recorded provisions of
$6,337,000 and $13,575,000 in the three months and six months
ended June 30, 2007, respectively, compared with
$53,082,000 and $79,548,000 for the corresponding periods in
2006. Severance charges recorded in the three months and six
months ended June 30, 2007 total $1,350,000 and $5,130,000
and relate to employees whose positions were eliminated in the
restructuring.
Restructuring
Charge Details (in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months
|
|
|
Six Months
|
|
|
Year
|
|
|
|
Ended
|
|
|
Ended
|
|
|
Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2006
|
|
|
2006
|
|
|
Employee severances
|
|
$
|
5,369
|
|
|
$
|
12,013
|
|
|
$
|
16,997
|
|
Contract cancellation and other
cash costs
|
|
|
992
|
|
|
|
992
|
|
|
|
1,662
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal: cash charges
|
|
|
6,361
|
|
|
|
13,005
|
|
|
|
18,659
|
|
Abandoned software and other
capital assets
|
|
|
3,031
|
|
|
|
22,853
|
|
|
|
22,178
|
|
Impairment of manufacturing and
research facilities
|
|
|
43,690
|
|
|
|
43,690
|
|
|
|
97,344
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal: non-cash charges
|
|
|
46,721
|
|
|
|
66,543
|
|
|
|
119,522
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total:
|
|
$
|
53,082
|
|
|
$
|
79,548
|
|
|
$
|
138,181
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months
|
|
|
Six Months
|
|
|
Cumulative
|
|
|
|
Ended
|
|
|
Ended
|
|
|
Total
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
Incurred
|
|
|
|
2007
|
|
|
2007
|
|
|
|
|
|
Employee severances (approximately
490 employees)
|
|
$
|
1,350
|
|
|
$
|
5,130
|
|
|
$
|
22,127
|
|
Contract cancellation and other
cash costs
|
|
|
1,034
|
|
|
|
3,115
|
|
|
|
4,777
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal: cash charges
|
|
|
2,384
|
|
|
|
8,245
|
|
|
|
26,904
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Abandoned software and other
capital assets
|
|
|
|
|
|
|
|
|
|
|
22,178
|
|
Write-off of accumulated foreign
currency translation adjustments
|
|
|
2,891
|
|
|
|
2,891
|
|
|
|
2,891
|
|
Impairment of manufacturing and
research facilities
|
|
|
1,062
|
|
|
|
2,439
|
|
|
|
99,783
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal: non-cash charges
|
|
|
3,953
|
|
|
|
5,330
|
|
|
|
124,852
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total:
|
|
$
|
6,337
|
|
|
$
|
13,575
|
|
|
$
|
151,756
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reconciliation
of Cash Restructuring Payments with Restructuring
Accrual
Cash-related charges in the above table relate to severance
payments and other costs which have been either paid with cash
expenditures or have been accrued and will be paid with cash in
future quarters. The accrued restructuring reserve of $9,977,000
at June 30, 2007 includes the cash restructuring charge of
$2,384,000, a $6,000,000 working capital commitment previously
recognized as an impairment charge, and a capital expenditure
9
VALEANT
PHARMACEUTICALS INTERNATIONAL
NOTES TO
CONSOLIDATED CONDENSED FINANCIAL
STATEMENTS (Continued)
commitment of $650,000 which was also previously recorded as an
impairment charge. A summary of accruals and expenditures of
restructuring costs which will be paid in cash is as follows (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
Three Months
|
|
|
Three Months
|
|
|
|
Ended
|
|
|
Ended
|
|
|
|
March 31,
|
|
|
June 30,
|
|
|
|
2007
|
|
|
2007
|
|
|
Opening accrual
|
|
$
|
5,216
|
|
|
$
|
5,931
|
|
Charges to earnings
|
|
|
5,861
|
|
|
|
2,384
|
|
Transition and capital expenditure
payment obligations
|
|
|
163
|
|
|
|
6,650
|
|
Cash paid
|
|
|
(5,309
|
)
|
|
|
(4,988
|
)
|
|
|
|
|
|
|
|
|
|
Closing accrual
|
|
$
|
5,931
|
|
|
$
|
9,977
|
|
|
|
|
|
|
|
|
|
|
In the six months ended June 30, 2007, we acquired product
rights in the United States, Europe, and Argentina for aggregate
consideration of $39,510,000. In the United States we acquired a
paid-up
license to Kinetin and Zeatin, the active ingredients of
Kinerase, for cash consideration of $21,000,000 and other
consideration of $4,170,000. In Europe we acquired the rights to
nabilone, the product we currently market as Cesamet in the
United States and Canada, for $13,396,000. We acquired the
rights to certain products in Poland and Argentina for $944,000.
In the six months ended June 30, 2006, we acquired certain
product rights in smaller transactions. The aggregate cash
consideration for these product rights was $2,932,000.
|
|
4.
|
Discontinued
Operations
|
In the three months and the six months ended June 30, 2007,
the loss on disposal of discontinued operations was primarily
related to a legal judgment. In the three months and the six
months ended June 30, 2006, the losses from discontinued
operations primarily consisted of the wind down of
administrative activities and the costs of environmental
remediation at one facility. Summarized selected financial
information for discontinued operations for the three and six
months ended June 30, 2007 and 2006 is as follows (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
Revenue
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
|
$
|
|
|
|
$
|
(82
|
)
|
|
$
|
|
|
|
$
|
(325
|
)
|
Income tax provision
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from discontinued
operations, net
|
|
|
|
|
|
|
(82
|
)
|
|
|
|
|
|
|
(325
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) on disposal of
discontinued operations
|
|
|
(382
|
)
|
|
|
(114
|
)
|
|
|
(381
|
)
|
|
|
(83
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from discontinued
operations
|
|
$
|
(382
|
)
|
|
$
|
(196
|
)
|
|
$
|
(381
|
)
|
|
$
|
(408
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10
VALEANT
PHARMACEUTICALS INTERNATIONAL
NOTES TO
CONSOLIDATED CONDENSED FINANCIAL
STATEMENTS (Continued)
The assets and liabilities of discontinued operations are stated
separately as of June 30, 2007 and December 31, 2006
on the accompanying consolidated condensed balance sheets. The
major assets and liabilities categories are as follows (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
Cash
|
|
$
|
|
|
|
$
|
203
|
|
Accounts receivable, net
|
|
|
|
|
|
|
21
|
|
Deferred taxes and other assets
|
|
|
|
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
Assets of discontinued operations
|
|
$
|
|
|
|
$
|
226
|
|
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
|
|
|
$
|
|
|
Accrued liabilities
|
|
|
11,340
|
|
|
|
12,777
|
|
Other liabilities
|
|
|
5,616
|
|
|
|
5,566
|
|
|
|
|
|
|
|
|
|
|
Liabilities of discontinued
operations
|
|
$
|
16,956
|
|
|
$
|
18,343
|
|
|
|
|
|
|
|
|
|
|
Environmental contamination has been identified in the soil
under a facility built by the Company which housed operations of
the discontinued biomedicals segment and is currently vacant.
Remediation of the site involves excavation and disposal of the
waste at appropriately licensed sites. Environmental reserves
have been provided for remediation and related costs that we can
reasonably estimate. Remediation costs are applied against these
environmental reserves as they are incurred. As assessments and
remediation progress, these liabilities will be reviewed and
adjusted to reflect additional information that becomes
available. Total environmental reserves for this site were
$11,250,000 and $12,660,000 as of June 30, 2007 and
December 31, 2006, respectively, and are included in the
liabilities of discontinued operations. Although we believe that
the reserves are adequate, there can be no assurance that the
amount of expenditures and other expenses, which will be
required relating to remediation actions and compliance with
applicable environmental laws will not exceed the amounts
reflected in reserves or will not have a material adverse effect
on our consolidated financial condition, results of operations
or cash flows. Any possible loss that may be incurred in excess
of amounts provided for as of June 30, 2007 cannot be
reasonably estimated.
11
VALEANT
PHARMACEUTICALS INTERNATIONAL
NOTES TO
CONSOLIDATED CONDENSED FINANCIAL
STATEMENTS (Continued)
The following table sets forth the computation of basic and
diluted earnings per share (in thousands, except per share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
Income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Numerator for basic and dilutive
earnings per share Income (loss) from continuing operations
|
|
$
|
16,832
|
|
|
$
|
(42,322
|
)
|
|
$
|
25,399
|
|
|
$
|
(48,081
|
)
|
Loss from discontinued operations
|
|
|
(382
|
)
|
|
|
(197
|
)
|
|
|
(381
|
)
|
|
|
(409
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
16,450
|
|
|
$
|
(42,519
|
)
|
|
$
|
25,018
|
|
|
$
|
(48,490
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for basic earnings per
share weighted-average shares outstanding
|
|
|
94,868
|
|
|
|
92,818
|
|
|
|
94,722
|
|
|
|
92,794
|
|
Employee stock options
|
|
|
1,068
|
|
|
|
|
|
|
|
1,159
|
|
|
|
|
|
Other dilutive securities
|
|
|
218
|
|
|
|
|
|
|
|
210
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dilutive potential common shares
|
|
|
1,286
|
|
|
|
|
|
|
|
1,369
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for diluted earnings
per share adjusted weighted- average shares after
assumed conversions
|
|
|
96,154
|
|
|
|
92,818
|
|
|
|
96,091
|
|
|
|
92,794
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing
operations
|
|
$
|
0.18
|
|
|
$
|
(0.46
|
)
|
|
$
|
0.27
|
|
|
$
|
(0.52
|
)
|
Discontinued operations, net of
taxes
|
|
|
(0.01
|
)
|
|
|
|
|
|
|
(0.01
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net income (loss) per share
|
|
$
|
0.17
|
|
|
$
|
(0.46
|
)
|
|
$
|
0.26
|
|
|
$
|
(0.52
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing
operations
|
|
$
|
0.18
|
|
|
$
|
(0.46
|
)
|
|
$
|
0.26
|
|
|
$
|
(0.52
|
)
|
Discontinued operations, net of
taxes
|
|
|
(0.01
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted net income (loss) per share
|
|
$
|
0.17
|
|
|
$
|
(0.46
|
)
|
|
$
|
0.26
|
|
|
$
|
(0.52
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three months and the six months ended June 30,
2006, options to purchase 1,723,000 and 1,733,000 weighted
average shares of common stock, respectively, were not included
in the computation of earnings per share because we incurred a
loss and the effect would have been anti-dilutive.
For the three months ended June 30, 2007 and 2006, options
to purchase 9,202,000 and 9,246,000 weighted average shares of
common stock, respectively, were also not included in the
computation of earnings per share because the option exercise
prices were greater than the average market price of our common
stock and, therefore, the effect would have been anti-dilutive.
For the six months ended June 30, 2007 and 2006, options to
purchase 9,269,000 and 9,277,000 weighted average shares of
common stock, respectively, were also not included in the
computation of earnings per share because the option exercise
prices were greater than the average market price of our common
stock and, therefore, the effect would have been anti-dilutive.
12
VALEANT
PHARMACEUTICALS INTERNATIONAL
NOTES TO
CONSOLIDATED CONDENSED FINANCIAL
STATEMENTS (Continued)
|
|
6.
|
Detail of
Certain Accounts
|
The following tables present the details of certain amounts
included in the consolidated balance sheet at June 30, 2007
and December 31, 2006 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
Accounts receivable,
net:
|
|
|
|
|
|
|
|
|
Trade accounts receivable
|
|
$
|
175,055
|
|
|
$
|
180,767
|
|
Royalties receivable
|
|
|
20,806
|
|
|
|
22,212
|
|
Other receivables
|
|
|
23,957
|
|
|
|
31,486
|
|
|
|
|
|
|
|
|
|
|
|
|
|
219,818
|
|
|
|
234,465
|
|
Allowance for doubtful accounts
|
|
|
(7,703
|
)
|
|
|
(7,013
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
212,115
|
|
|
$
|
227,452
|
|
|
|
|
|
|
|
|
|
|
Inventories, net:
|
|
|
|
|
|
|
|
|
Raw materials and supplies
|
|
$
|
23,496
|
|
|
$
|
37,045
|
|
Work-in-process
|
|
|
21,434
|
|
|
|
21,477
|
|
Finished goods
|
|
|
95,251
|
|
|
|
98,454
|
|
|
|
|
|
|
|
|
|
|
|
|
|
140,181
|
|
|
|
156,976
|
|
Allowance for inventory
obsolescence
|
|
|
(13,932
|
)
|
|
|
(14,297
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
126,249
|
|
|
$
|
142,679
|
|
|
|
|
|
|
|
|
|
|
Property, plant and equipment,
net:
|
|
|
|
|
|
|
|
|
Property, plant and equipment, at
cost
|
|
$
|
198,348
|
|
|
$
|
183,794
|
|
Accumulated depreciation and
amortization
|
|
|
(96,351
|
)
|
|
|
(89,515
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
101,997
|
|
|
$
|
94,279
|
|
|
|
|
|
|
|
|
|
|
Intangible assets: As of June 30, 2007
and December 31, 2006, intangible assets were as follows
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
June 30, 2007
|
|
|
December 31, 2006
|
|
|
|
Average
|
|
|
Gross
|
|
|
Accumulated
|
|
|
Net
|
|
|
Gross
|
|
|
Accumulated
|
|
|
Net
|
|
|
|
Lives
|
|
|
Amount
|
|
|
Amortization
|
|
|
Amount
|
|
|
Amount
|
|
|
Amortization
|
|
|
Amount
|
|
|
Product rights
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Neurology
|
|
|
13
|
|
|
$
|
307,089
|
|
|
$
|
(115,568
|
)
|
|
$
|
191,521
|
|
|
$
|
292,339
|
|
|
$
|
(100,990
|
)
|
|
$
|
191,349
|
|
Infectious diseases
|
|
|
11
|
|
|
|
72,480
|
|
|
|
(13,500
|
)
|
|
|
58,980
|
|
|
|
72,480
|
|
|
|
(10,020
|
)
|
|
|
62,460
|
|
Dermatology
|
|
|
19
|
|
|
|
112,062
|
|
|
|
(48,976
|
)
|
|
|
63,086
|
|
|
|
85,337
|
|
|
|
(42,786
|
)
|
|
|
42,551
|
|
Other products
|
|
|
11
|
|
|
|
332,432
|
|
|
|
(177,871
|
)
|
|
|
154,561
|
|
|
|
325,470
|
|
|
|
(165,025
|
)
|
|
|
160,445
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total product rights
|
|
|
14
|
|
|
|
824,063
|
|
|
|
(355,915
|
)
|
|
|
468,148
|
|
|
|
775,626
|
|
|
|
(318,821
|
)
|
|
|
456,805
|
|
License agreement
|
|
|
5
|
|
|
|
67,376
|
|
|
|
(56,036
|
)
|
|
|
11,340
|
|
|
|
67,376
|
|
|
|
(49,866
|
)
|
|
|
17,510
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total intangible assets
|
|
|
|
|
|
$
|
891,439
|
|
|
$
|
(411,951
|
)
|
|
$
|
479,488
|
|
|
$
|
843,002
|
|
|
$
|
(368,687
|
)
|
|
$
|
474,315
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13
VALEANT
PHARMACEUTICALS INTERNATIONAL
NOTES TO
CONSOLIDATED CONDENSED FINANCIAL
STATEMENTS (Continued)
Estimated future amortization expenses are as follows (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Scheduled Future Amortization Expense
|
|
|
|
Remaining
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
2011
|
|
|
Thereafter
|
|
|
Product rights
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Neurology
|
|
$
|
14,413
|
|
|
$
|
28,808
|
|
|
$
|
28,662
|
|
|
$
|
28,495
|
|
|
$
|
21,978
|
|
|
$
|
65,647
|
|
Infectious diseases
|
|
|
3,480
|
|
|
|
6,960
|
|
|
|
6,960
|
|
|
|
6,960
|
|
|
|
6,960
|
|
|
|
27,660
|
|
Dermatology
|
|
|
5,091
|
|
|
|
10,181
|
|
|
|
10,088
|
|
|
|
9,976
|
|
|
|
9,894
|
|
|
|
17,806
|
|
Other products
|
|
|
10,146
|
|
|
|
19,859
|
|
|
|
19,252
|
|
|
|
17,735
|
|
|
|
18,224
|
|
|
|
72,913
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total product rights
|
|
|
33,130
|
|
|
|
65,808
|
|
|
|
64,962
|
|
|
|
63,166
|
|
|
|
57,056
|
|
|
|
184,026
|
|
License agreement
|
|
|
5,168
|
|
|
|
6,172
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
38,298
|
|
|
$
|
71,980
|
|
|
$
|
64,962
|
|
|
$
|
63,166
|
|
|
$
|
57,056
|
|
|
$
|
184,026
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization expense for the three and six months ended
June 30, 2007 was $20,316,000 and $39,447,000,
respectively, of which $16,980,000 and $33,276,000,
respectively, related to amortization of acquired product rights.
We incur losses in the United States, where our research and
development activities are conducted and our corporate offices
are located. We anticipate that we will realize the tax benefits
associated with these losses by offsetting such losses against
future taxable income resulting from products in our development
pipeline, further growth in U.S. product sales and other
measures. However, at this time, there is insufficient objective
evidence of the timing and amounts of such future
U.S. taxable income to assure realization of the tax
benefits, and valuation allowances have been established to
reserve those benefits. A benefit for income taxes of $7,289,000
was recorded for the three months ended June 30, 2007,
comprising the following amounts (in thousands):
|
|
|
|
|
|
|
Three Months
|
|
|
|
Ended
|
|
|
|
June 30, 2007
|
|
|
Taxes payable on earnings in tax
jurisdictions outside the U.S.
|
|
$
|
11,556
|
|
Release of reserves for U.S.
liabilities recorded in conjunction with settlement of the
1997 2001 IRS examination
|
|
|
(21,521
|
)
|
Interest and penalties on U.S.
liabilities, state taxes and other
|
|
|
2,676
|
|
|
|
|
|
|
|
|
$
|
(7,289
|
)
|
|
|
|
|
|
In June 2006, the FASB issued FASB Interpretation No. 48,
Accounting for Uncertainty in Income Taxes an
interpretation of FASB Statement No. 109
(FIN 48), which clarifies the accounting for
uncertainty in income taxes recognized in accordance with
SFAS No. 109, Accounting for Income Taxes.
FIN 48 became effective for Valeant as of January 1,
2007. As a result of the adoption of FIN 48, we recognized
an increase of $1,560,000 to the beginning balance of
accumulated deficit on the balance sheet. At January 1,
2007 we had $122,697,000 of unrecognized benefits, of which
$32,225,000 (inclusive of $18,432,000 interest and $2,602,000
penalties) would reduce our effective tax rate, if recognized.
As of June 30, 2007, unrecognized benefits were reduced to
$113,722,000, of which $8,960,000 (inclusive of $6,812,000
interest and $1,456,000 penalties) would reduce our effective
rate, if recognized. We are not aware of any amounts which we
believe are reasonably possible of reversing in the next twelve
months.
14
VALEANT
PHARMACEUTICALS INTERNATIONAL
NOTES TO
CONSOLIDATED CONDENSED FINANCIAL
STATEMENTS (Continued)
Of the total unrecognized tax benefits, $26,956,000 is recorded
as an offset against a valuation allowance as of June 30,
2007. To the extent such portion of unrecognized tax benefits is
recognized at a time when a valuation allowance no longer
exists, the recognition would affect our tax rate.
Our continuing practice is to recognize interest and penalties
related to income tax matters in income tax expense. As of
March 31, 2007, we had $78,872,000 of unrecognized tax
benefits which had resulted from the IRS examination of the
U.S. income tax returns for the years ended
December 31, 1997 through 2001. The most significant
adjustments proposed by the IRS for this period resulted from a
transaction in 1999, when the Company restructured its
operations by contributing the stock of several
non-U.S. subsidiaries
to a wholly owned Dutch company. At the time of the
restructuring, the Company intended to avail itself of the
non-recognition provisions of the Internal Revenue Code to avoid
generating taxable income on the intercompany transfer. One of
the requirements under the non-recognition provisions was to
file Gain Recognition Agreements with the Companys timely
filed 1999 U.S. Income Tax Return. We discovered and
voluntarily informed the IRS that the Gain Recognition
Agreements had been inadvertently omitted from the 1999 tax
return. The IRS denied our request to rule that reasonable cause
existed for the failure to provide the agreements and proposed
an adjustment that would increase taxable income by
approximately $120,000,000.
As of June 30, 2007, the IRS examination of the
U.S. income tax returns for the years ended
December 31, 1997 through 2001 was resolved. As a result,
the related unrecognized benefits were reversed in the second
quarter. The provision for income taxes was reduced by
$21,521,000, primarily related to resolution of the gain
recognition issue which arose for the year ended
December 31, 1999. As a result of the reversal of these
unrecognized tax benefits, in addition to the reduction in the
provision for income taxes the following accounts were effected:
income taxes payable increased $6,314,000, income tax liability
for uncertain tax positions decreased $73,814,000, deferred
income taxes decreased $28,229,000, and the valuation allowance
on deferred tax assets increased $17,749,000.
We are currently under audit by the IRS for the 2002 through
2004 tax years. Additional unrecognized tax benefits of
$69,897,000 ($41,751,000 of which are temporary differences)
were identified for the three months ended June 30, 2007
related to issues arising during this examination. Of these
amounts, $19,005,000 was recorded as an addition to non-current
liability for uncertain tax positions. Deferred tax assets were
increased by $16,403,000, and $2,602,000 was recorded as income
tax expense. All other unrecognized tax benefit amounts arose in
years in which we generated a tax loss and are offset by the
valuation allowance. Although the examination process is
expected to be completed in 2007, we expect to begin a formal
appeal for proposed adjustments with which we do not agree.
For the U.S., all years prior to 1997 are closed under the
statute of limitations. Our significant subsidiaries are open to
tax examinations for years ending in 2001 and later.
|
|
8.
|
Common
Stock and Share Compensation
|
In May 2006, our stockholders approved our 2006 Equity Incentive
Plan (the Incentive Plan), which is an amendment and
restatement of our 2003 Equity Incentive Plan. The number of
shares of common stock under the Incentive Plan was 22,304,000
in the aggregate at June 30, 2007. The Incentive Plan
provides for the grant of incentive stock options, nonqualified
stock options, stock appreciation rights, restricted stock
awards, phantom stock awards and stock bonuses to our key
employees, officers, directors, consultants and advisors.
Options granted under the Incentive Plan must have an exercise
price that is not less than 100% of the fair market value of the
common stock on the date of grant and a term not exceeding
10 years. Under the Incentive Plan, other than with respect
to options and stock appreciation rights awards, shares may be
issued as awards for which a participant pays less than the fair
market value of the common stock on the date of grant.
Generally, options vest ratably over a four-year period from the
date of grant.
15
VALEANT
PHARMACEUTICALS INTERNATIONAL
NOTES TO
CONSOLIDATED CONDENSED FINANCIAL
STATEMENTS (Continued)
The following table sets forth information relating to the
Incentive Plan (in thousands, except per share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Average
|
|
|
|
Number of
|
|
|
Exercise
|
|
|
|
Shares
|
|
|
Price
|
|
|
Shares under option,
December 31, 2005
|
|
|
14,632
|
|
|
$
|
17.80
|
|
Granted
|
|
|
2,014
|
|
|
$
|
18.54
|
|
Exercised
|
|
|
(1,592
|
)
|
|
$
|
19.38
|
|
Canceled
|
|
|
(1,703
|
)
|
|
$
|
21.81
|
|
|
|
|
|
|
|
|
|
|
Shares under option,
December 31, 2006
|
|
|
13,351
|
|
|
$
|
18.28
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
89
|
|
|
$
|
17.13
|
|
Exercised
|
|
|
(853
|
)
|
|
$
|
17.67
|
|
Canceled
|
|
|
(934
|
)
|
|
$
|
21.68
|
|
|
|
|
|
|
|
|
|
|
Shares under option, June 30,
2007
|
|
|
11,653
|
|
|
$
|
18.49
|
|
|
|
|
|
|
|
|
|
|
Exercisable at December 31,
2005
|
|
|
7,197
|
|
|
$
|
17.82
|
|
|
|
|
|
|
|
|
|
|
Exercisable at December 31,
2006
|
|
|
8,374
|
|
|
$
|
18.00
|
|
|
|
|
|
|
|
|
|
|
Exercisable at June 30, 2007
|
|
|
7,620
|
|
|
$
|
18.12
|
|
|
|
|
|
|
|
|
|
|
Awards available for grant at
December 31, 2006
|
|
|
4,376
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Awards available for grant at
June 30, 2007
|
|
|
5,168
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The schedule below reflects the number of outstanding and
exercisable options as of June 30, 2007 segregated by price
range (in thousands, except per share and life data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
|
|
|
Exercisable
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
Weighted
|
|
|
Weighted
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
Average
|
|
|
Average
|
|
|
|
Number
|
|
|
Exercise
|
|
|
Number
|
|
|
Exercise
|
|
|
Remaining
|
|
Range of Exercise Prices
|
|
of Shares
|
|
|
Price
|
|
|
of Shares
|
|
|
Price
|
|
|
Life (Years)
|
|
|
$ 8.10 to $17.72
|
|
|
4,515
|
|
|
$
|
13.53
|
|
|
|
3,193
|
|
|
$
|
11.87
|
|
|
|
6.22
|
|
$18.01 to $19.10
|
|
|
3,898
|
|
|
$
|
18.62
|
|
|
|
1,906
|
|
|
$
|
18.56
|
|
|
|
6.48
|
|
$19.60 to $46.25
|
|
|
3,240
|
|
|
$
|
25.26
|
|
|
|
2,521
|
|
|
$
|
25.70
|
|
|
|
5.13
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11,653
|
|
|
|
|
|
|
|
7,620
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SFAS No. 123(R) Assumptions and Fair
Value: The fair value of options granted in 2007
and 2006 was estimated at the date of grant using the
Black-Scholes option-pricing model with the following
assumptions:
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
Average life of option (years)
|
|
|
5.73
|
|
|
|
4.10-5.80
|
|
Stock price volatility
|
|
|
35%-36%
|
|
|
|
37%-39%
|
|
Expected dividend per share
|
|
$
|
0.00
|
|
|
$
|
0.00-$0.31
|
|
Risk-free interest rate
|
|
|
4.52%-4.76%
|
|
|
|
4.54%-4.80%
|
|
Weighted-average fair value of
options
|
|
$
|
7.28
|
|
|
$
|
7.83
|
|
The aggregate intrinsic value of the stock options outstanding
at June 30, 2007 was $15,942,000. The aggregate intrinsic
value of the stock options that are both outstanding and
exercisable at June 30, 2007 was $15,878,000. During the
six months ended June 30, 2007 stock options with an
aggregate intrinsic value of
16
VALEANT
PHARMACEUTICALS INTERNATIONAL
NOTES TO
CONSOLIDATED CONDENSED FINANCIAL
STATEMENTS (Continued)
$5,177,000 were exercised. Intrinsic value is the in the
money valuation of the options or the difference between
market and exercise prices. The fair value of options that
vested in the six months ended June 30, 2007, as determined
using the Black-Scholes valuation model, was $3,309,000.
2003 Employee Stock Purchase Plan: In May
2003, our stockholders approved the Valeant Pharmaceuticals
International 2003 Employee Stock Purchase Plan (the
ESPP). The ESPP provides employees with an
opportunity to purchase common stock at a 15% discount. There
are 7,000,000 shares of common stock reserved for issuance
under the ESPP, plus an annual increase on the first day of our
fiscal year for a period of ten years, commencing on
January 1, 2005 and ending on January 1, 2015, equal
to the lower of (i) 1.5% of the shares of common stock
outstanding on each calculation date,
(ii) 1,500,000 shares of common stock, or (iii) a
number of shares that may be determined by the Compensation
Committee. In 2006, we issued 64,000 shares of common stock
for proceeds of $938,000 under the ESPP. In the six months ended
June 30, 2007, 24,703 shares were issued for proceeds
of $359,000.
Restricted Stock Units: Non-employee members
of our board of directors receive compensation in the form of
restricted stock units, cash retainers and meeting fees for each
meeting they attend during the year. Directors also have the
option to receive restricted stock units in lieu of fees
otherwise payable in cash. During the six months ended
June 30, 2007, the six months ended June 30, 2006 and
the year ended December 31, 2006, we granted our
non-employee directors 63,132, 57,146 and 69,874 restricted
stock units, respectively. The restricted stock units issued to
non-employee directors in these periods had a fair value of
$998,000, $960,000 and $1,179,000, respectively. Each restricted
stock unit granted to non-employee directors vests over one year
or less, is entitled to dividend equivalent shares and is
exchanged for a share of our common stock one year after the
director ceases to serve as a member of our Board. Each share of
restricted stock units granted to certain officers of the
company in 2005 vests 50 percent three years after grant
with the balance vesting equally in years four and five after
grant is entitled to dividend equivalent shares and is exchanged
for a share of our common stock upon vesting. As of
June 30, 2007 and December 31, 2006, there were
299,736 and 268,524 restricted stock units outstanding,
respectively. In prior years we assumed outstanding employee
stock options in connection with the Ribapharm acquisition.
Stock compensation expense recorded in connection with these
stock options totaled $116,000 for the six months ended
June 30, 2007 and $771,000 for the year ended
December 31, 2006.
A summary of stock compensation expense for our stock incentive
plans is presented below (amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months
|
|
|
|
Three Months Ended
|
|
|
Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
Employee stock options
|
|
$
|
3,193
|
|
|
$
|
4,544
|
|
|
$
|
6,691
|
|
|
$
|
9,405
|
|
Employee stock purchase plan
|
|
|
53
|
|
|
|
149
|
|
|
|
79
|
|
|
|
269
|
|
Restricted stock units
|
|
|
267
|
|
|
|
386
|
|
|
|
724
|
|
|
|
1,023
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stock-based compensation
expense
|
|
$
|
3,513
|
|
|
$
|
5,079
|
|
|
$
|
7,494
|
|
|
$
|
10,697
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
17
VALEANT
PHARMACEUTICALS INTERNATIONAL
NOTES TO
CONSOLIDATED CONDENSED FINANCIAL
STATEMENTS (Continued)
Stock compensation expense was charged to the following accounts
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months
|
|
|
|
Three Months Ended
|
|
|
Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
Cost of goods sold
|
|
|
163
|
|
|
|
365
|
|
|
|
353
|
|
|
|
800
|
|
Selling expenses
|
|
|
949
|
|
|
|
860
|
|
|
|
1,942
|
|
|
|
1,712
|
|
General and administrative expenses
|
|
|
2,220
|
|
|
|
3,069
|
|
|
|
4,713
|
|
|
|
6,601
|
|
Research and development costs
|
|
|
181
|
|
|
|
785
|
|
|
|
486
|
|
|
|
1,583
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stock compensation expense
|
|
$
|
3,513
|
|
|
$
|
5,079
|
|
|
$
|
7,494
|
|
|
$
|
10,696
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Future stock compensation expense for restricted stock units and
stock option incentive awards outstanding at June 30, 2007
is as follows (in thousands):
|
|
|
|
|
Remainder of 2007
|
|
$
|
5,632
|
|
2008
|
|
|
6,003
|
|
2009
|
|
|
2,342
|
|
2010 and thereafter
|
|
|
728
|
|
|
|
|
|
|
|
|
$
|
14,705
|
|
|
|
|
|
|
Dividends: We did not pay dividends for either
the first or second quarter of 2007. We declared and paid
quarterly cash dividends of $0.0775 per share for the first and
second quarters of 2006.
|
|
9.
|
Commitments
and Contingencies
|
We have an obligation to make a milestone payment of four
million Euros to the future third party supplier of Infergen as
part of the transfer of manufacturing technology when certain
production and testing is completed in accordance with testing
specifications. It is reasonably possible that these conditions
will be met in the third quarter of 2007.
We are involved in several legal proceedings, including the
following matters (Valeant was formerly known as ICN
Pharmaceuticals, Inc.):
Securities
Class Actions:
Derivative Actions Related to Ribapharm
Bonuses: We were a nominal defendant in a
shareholder derivative lawsuit pending in state court in Orange
County, California, styled James Herrig, IRA v. Milan Panic
et al. This lawsuit, which was filed on June 6, 2002,
purported to assert derivative claims on our behalf against
certain of our current
and/or
former officers and directors. The lawsuit asserted claims for
breach of fiduciary duties, abuse of control, gross
mismanagement and waste of corporate assets. The plaintiff
sought, among other things, damages and a constructive trust
over cash bonuses paid to the officer and director defendants in
connection with the Ribapharm offering. In March 2007, the
complaint was dismissed, with prejudice. The court has retained
jurisdiction to consider an application for attorneys fees
and expenses by plaintiffs counsel. On May 4, 2007,
plaintiff filed a motion seeking $1.3 million in fees. We
opposed the motion, and on July 9, 2007, the court held a
hearing. The court deferred ruling on plaintiffs motion
and ordered supplemental briefing. A second hearing is currently
scheduled for October 1, 2007.
On October 1, 2002, several of our former and current
directors, as individuals, as well as Valeant, as a nominal
defendant, were named as defendants in a second
shareholders derivative complaint filed in the Delaware
Court of Chancery, styled Paul Gerstley v. Norman
Barker, Jr. et al. The original complaint in the
Delaware action purported
18
VALEANT
PHARMACEUTICALS INTERNATIONAL
NOTES TO
CONSOLIDATED CONDENSED FINANCIAL
STATEMENTS (Continued)
to state causes of action for violation of Delaware General
Corporation Law Section 144, breach of fiduciary duties and
waste of corporate assets in connection with the
defendants management of our company.
We settled the litigation with respect to ten of the defendants
prior to trial. The claims with respect to defendants Milan
Panic and Adam Jerney, who received Ribapharm Bonuses of
$33,050,000 and $3,000,000, respectively, were tried in Delaware
Chancery Court in a one-week trial beginning February 27,
2006. On July 28, 2006, we entered into a settlement
agreement with Mr. Panic, which was amended on
October 6, 2006. Pursuant to that settlement,
Mr. Panic paid us $20,000,000. We recorded a $17,550,000
gain resulting from this settlement. The amount reflects the
settlement proceeds net of related costs associated with the
litigation and settlement arrangement.
On March 1, 2007, the Delaware Court of Chancery issued an
opinion finding Mr. Jerney liable for breach of fiduciary
duty and on March 14, 2007, entered an order requiring
Mr. Jerney to pay us a total of $6,983,085. On May 30,
2007 the Delaware Supreme Court dismissed Mr. Jerneys
pro se appeal. On May 22, 2007, we filed a motion
requesting that the Court hold Mr. Jerney in contempt for
failure to comply with an order compelling discovery and
imposing sanctions for Mr. Jerneys failure to comply
with discovery requests. On June 11, 2007, the Delaware
Court of Chancery entered an order holding Mr. Jerney in
contempt.
SEC Investigation: We are the subject of a
Formal Order of Investigation with respect to events and
circumstances surrounding trading in our common stock, the
public release of data from our first pivotal Phase 3 trial for
taribavirin, and statements made in connection with the public
release of data and matters regarding our stock option grants
since January 1, 2000. In September 2006, our board of
directors established a Special Committee to review our
historical stock option practices and related accounting, and
informed the SEC of these efforts. We have cooperated fully and
will continue to cooperate with the SEC in its investigation. We
cannot predict the outcome of the investigation.
Derivative Actions Related to Stock
Options: We are a nominal defendant in two
shareholder derivative lawsuits pending in state court in Orange
County, California, styled (i) Michael Pronko v.
Timothy C. Tyson et al., and (ii) Kenneth Lawson v.
Timothy C. Tyson et al. These lawsuits, which were filed on
October 27, 2006 and November 16, 2006, respectively,
purport to assert derivative claims on our behalf against
certain of our current
and/or
former officers and directors. The lawsuits assert claims for
breach of fiduciary duties, abuse of control, gross
mismanagement, waste of corporate assets, unjust enrichment, and
violations of the California Corporations Code related to the
purported backdating of employee stock options. The plaintiffs
seek, among other things, damages, an accounting, the rescission
of stock options, and a constructive trust over amounts acquired
by the defendants who have exercised Valeant stock options. On
January 16, 2007, the court issued an order consolidating
the two cases before Judge Ronald L. Bauer. On February 6,
2007, the court issued a further order abating the Lawson action
due to a procedural defect while the Pronko action proceeds to
conclusion. The plaintiff in the Pronko action filed an amended
complaint on April 11, 2007. On June 11, 2007, the
defendants filed a demurrer to the amended complaint,
challenging the sufficiency of the plaintiffs allegations
pertaining to his failure to make a pre-suit demand on our Board
of Directors. A hearing on the defendants motion is
currently scheduled for August 20, 2007.
We are a nominal defendant in a shareholder derivative action
pending in the Court of Chancery of the state of Delaware,
styled Sherwood v. Tyson, et. al., filed on March 20,
2007. This complaint also purports to assert derivative claims
on the Companys behalf for breach of fiduciary duties,
gross mismanagement and waste, constructive fraud and unjust
enrichment related to the alleged backdating of employee stock
options. The plaintiff seeks, among other things, damages, an
accounting, disgorgement, rescission
and/or
repricing of stock options, and imposition of a constructive
trust for the benefit of the Company on amounts by which the
defendants were unjustly enriched. On July 16, 2007, the
defendants filed a motion to stay or dismiss the action in favor
of the derivative action proceeding in California. A hearing on
the defendants motion has not yet been scheduled.
Patent Oppositions: Our two patents covering
ribavirin have been revoked by the Opposition Division of the
European Patent Office (E.P.O.). The first was revoked on
November 25, 2005. We are appealing this decision and
19
VALEANT
PHARMACEUTICALS INTERNATIONAL
NOTES TO
CONSOLIDATED CONDENSED FINANCIAL
STATEMENTS (Continued)
expect a decision on the appeal in the fall or winter of 2007.
Additionally, on June 12, 2007, the Opposition Board of the
E.P.O. revoked our second patent on ribavirin. We are currently
reviewing our appeal options with respect to this patent. Roche
has notified us that it has discontinued its royalty payment
effective the date of revocation. Since royalty payments from
Schering, our other licensee of ribavirin, do not depend on the
existence of a patent, we expect that payments from Schering
will continue until 2010.
Argentina Antitrust Matter: In July 2004, we
were advised that the Argentine Antitrust Agency had issued a
notice unfavorable to us in a proceeding against our Argentine
subsidiary. The proceeding involves allegations that the
subsidiary in Argentina abused a dominant market position in
1999 by increasing its price on Mestinon in Argentina and not
supplying the market for approximately two months. The
subsidiary filed documents with the agency offering an
explanation justifying its actions, but the agency has now
rejected the explanation. The agency is collecting evidence
prior to issuing a new decision. Argentinean law permits a fine
to be levied of up to $5,000,000 plus 20% of profits realized
due to the alleged wrongful conduct. Counsel in the matter
advises that the size of the transactions alleged to have
violated the law will unlikely draw the maximum penalty.
Permax Product Liability Cases: On
February 8, 2007, we were served a complaint in a case
captioned Kathleen M. OConnor v. Eli
Lilly & Company, Valeant Pharmaceuticals
International, Amarin Corporation plc, Amarin Pharmaceuticals,
Inc., Elan Pharmaceuticals, Inc., and Athena Neurosciences,
Inc., Case No. 07 L 47 in the Circuit Court of the
17th Judicial Circuit, Winnebago County, Illinois. This
case, which has been removed to federal court in the Northern
District of Illinois, alleges that the use of Permax for
restless leg syndrome caused the plaintiff to have valvular
heart disease, and as a result, she suffered damages, including
extensive pain and suffering, emotional distress and mental
anguish. Eli Lilly, holder of the right granted by the FDA to
market and sell Permax in the United States, which right was
licensed to Amarin and the source of the manufactured product,
has also been named in the suit. Under an agreement between
Valeant and Eli Lilly, Eli Lilly will bear a portion of the
liability, if any, associated with this claim. Product liability
insurance exists with respect to this claim. Although it is
expected that the insurance proceeds will be sufficient to cover
any material liability which might arise from this claim, there
can be no assurance that defending against any future similar
claims and any resulting settlements or judgments will not,
individually or in the aggregate, have a material adverse affect
on our consolidated financial position, results of operation or
liquidity.
Kali Litigation: On June 28, 2007, we
settled a patent infringement lawsuit with Kali Laboratories,
Inc. In March 2004, Kali submitted Abbreviated New Drug
Application (ANDA)
No. 76-843
with the FDA seeking approval for a generic version of
Diastat®
(a diazepam rectal gel). In July 2004, Xcel Pharmaceuticals,
Inc., which we acquired on March 1, 2005, filed a complaint
against Kali for patent infringement of
U.S. Patent No. 5,462,740 Civil Case
No. 04-3238
(JCL) in the United States District Court of New Jersey. The
complaint alleged that Kalis filing of
ANDA No. 76-843
is an act of infringement under 35 U.S.C.
§ 271(e)(4) of one or more claims of
U.S. Patent No. 5,462,740.
Under the terms of a settlement reached June 28, 2007, the
companies agreed in principle that Valeant would allow Kali to
introduce a generic version of Diastat and Diastat AcuDial no
earlier than September 1, 2010. The parties are working on
finalizing the settlement agreement.
Trademark Litigation: Valent U.S.A.
Corporation and its wholly owned subsidiary Valent Biosciences
Corporation (together Valent Biosciences) have
expressed concerns regarding the possible confusion between
Valent Biosciences VALENT trademark registered in
connection with various chemical and agricultural products and
our VALEANT trademark. Valent Biosciences has opposed the
registration of the VALEANT trademark by us in certain
jurisdictions and in other jurisdictions cancellations had been
filed. We have entered into an agreement with Valent Biosciences
pursuant to which all pending opposition and cancellation
matters are to be withdrawn, and the parties have filed papers
with the relevant authorities to accomplish these withdrawals.
Former ICN Yugoslavia Employees: In December
2003, sixteen former employees of ICN Yugoslavia filed a
complaint in state court in Orange County, California.
Plaintiffs allege that we breached a promise by Milan Panic,
20
VALEANT
PHARMACEUTICALS INTERNATIONAL
NOTES TO
CONSOLIDATED CONDENSED FINANCIAL
STATEMENTS (Continued)
who allegedly offered plaintiffs full pay and benefits if they
boycotted the management installed by the Yugoslavian government
following its takeover of ICN Yugoslavia. Plaintiffs
initial complaint and first amended complaint were both
dismissed by the judge in March and October 2004, respectively.
However, plaintiffs appealed and the Court of Appeals reversed
the trial courts dismissal. Plaintiffs filed their second
amended complaint in January 2006, alleging only unjust
enrichment and constructive fraud. Discovery has closed. The
parties have agreed to submit this matter to binding
arbitration. An arbitration date has not been set.
Xcel Pharmaceuticals: On June 13, 2007,
we settled an arbitration proceeding relating to our claim for
indemnification from the former Xcel stockholders with respect
to certain breaches of representation and warranties made by
Xcel under the Xcel purchase agreement and certain third-party
claims. Under the settlement, Valeant received $700,000 from the
escrow fund that was set up to provide funds for any
indemnification claims by Valeant. The remaining escrow funds
were released to the former Xcel shareholders and their
representatives.
Other: We are a party to other pending
lawsuits and subject to a number of threatened lawsuits. While
the ultimate outcome of pending and threatened lawsuits or
pending violations cannot be predicted with certainty, and an
unfavorable outcome could have a negative impact on us, at this
time in the opinion of management, the ultimate resolution of
these matters will not have a material effect on our
consolidated financial position, results of operations or
liquidity.
21
VALEANT
PHARMACEUTICALS INTERNATIONAL
NOTES TO
CONSOLIDATED CONDENSED FINANCIAL
STATEMENTS (Continued)
The following table sets forth the amounts of our segment
revenues and operating income for the three and six months ended
June 30, 2007 and 2006 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Specialty pharmaceuticals
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North America
|
|
$
|
77,962
|
|
|
$
|
72,304
|
|
|
$
|
149,532
|
|
|
$
|
148,160
|
|
International
|
|
|
56,784
|
|
|
|
64,472
|
|
|
|
92,241
|
|
|
|
109,661
|
|
EMEA
|
|
|
77,306
|
|
|
|
71,981
|
|
|
|
147,171
|
|
|
|
132,336
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total specialty pharmaceuticals
|
|
|
212,052
|
|
|
|
208,757
|
|
|
|
388,944
|
|
|
|
390,157
|
|
Alliance revenues (including
ribavirin royalties)
|
|
|
18,955
|
|
|
|
21,635
|
|
|
|
55,425
|
|
|
|
39,726
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated revenues
|
|
$
|
231,007
|
|
|
$
|
230,392
|
|
|
$
|
444,369
|
|
|
$
|
429,883
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Income
(Loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Specialty pharmaceuticals
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North America
|
|
$
|
22,407
|
|
|
$
|
14,089
|
|
|
$
|
39,154
|
|
|
$
|
37,225
|
|
International
|
|
|
9,322
|
|
|
|
22,934
|
|
|
|
9,797
|
|
|
|
32,106
|
|
EMEA
|
|
|
16,060
|
|
|
|
12,393
|
|
|
|
31,129
|
|
|
|
16,609
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
47,789
|
|
|
|
49,416
|
|
|
|
80,080
|
|
|
|
85,940
|
|
Corporate expenses(1)(2)
|
|
|
(19,974
|
)
|
|
|
(15,418
|
)
|
|
|
(35,867
|
)
|
|
|
(38,560
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total specialty pharmaceuticals
|
|
|
27,815
|
|
|
|
33,998
|
|
|
|
44,213
|
|
|
|
47,380
|
|
Restructuring charges and asset
impairment(3)
|
|
|
(6,337
|
)
|
|
|
(53,083
|
)
|
|
|
(13,575
|
)
|
|
|
(79,549
|
)
|
Gain on litigation settlement
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
34,000
|
|
Research and development
|
|
|
(7,504
|
)
|
|
|
(10,684
|
)
|
|
|
4,500
|
|
|
|
(22,974
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated segment operating
income (loss)
|
|
|
13,974
|
|
|
|
(29,769
|
)
|
|
|
35,138
|
|
|
|
(21,143
|
)
|
Interest income
|
|
|
4,769
|
|
|
|
2,715
|
|
|
|
9,280
|
|
|
|
5,372
|
|
Interest expense
|
|
|
(10,882
|
)
|
|
|
(10,861
|
)
|
|
|
(21,834
|
)
|
|
|
(21,298
|
)
|
Other, net
|
|
|
1,682
|
|
|
|
756
|
|
|
|
2,818
|
|
|
|
1,694
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing
operations before provision for income taxes
|
|
$
|
9,543
|
|
|
$
|
(37,159
|
)
|
|
$
|
25,402
|
|
|
$
|
(35,375
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
All stock-based compensation expense has been considered a
corporate cost as management excludes this item in assessing the
financial performance of individual business segments and
considers it a function of valuation factors that pertain to
overall corporate stock performance. |
|
(2) |
|
The corporate expense total above includes certain corporate
marketing expenses in 2007 for our products in development. In
the three months and the six months ended June 30, 2006,
$4,700,000 of similar costs were allocated out of the corporate
segment and reassigned to the research and development division,
due to the ownership of certain intellectual property by a
foreign subsidiary within this division. This foreign subsidiary
no longer owns this intellectual property and the corresponding
costs in 2007 are recognized as corporate expenses. |
|
(3) |
|
Restructuring charges are not included in the applicable
segments as management excludes these items in assessing the
financial performance of these segments, primarily due to their
non-operational nature. |
22
VALEANT
PHARMACEUTICALS INTERNATIONAL
NOTES TO
CONSOLIDATED CONDENSED FINANCIAL
STATEMENTS (Continued)
The following table sets forth our total assets by segment as of
June 30, 2007 and December 31, 2006 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
December 31,
|
|
Total Assets
|
|
2007
|
|
|
2006
|
|
|
North America
|
|
$
|
421,180
|
|
|
$
|
457,504
|
|
International
|
|
|
211,005
|
|
|
|
202,369
|
|
EMEA
|
|
|
458,061
|
|
|
|
515,267
|
|
Corporate
|
|
|
370,522
|
|
|
|
207,803
|
|
Research and Development Division
|
|
|
70,236
|
|
|
|
122,268
|
|
Discontinued operations
|
|
|
|
|
|
|
226
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,531,004
|
|
|
$
|
1,505,437
|
|
|
|
|
|
|
|
|
|
|
The following table sets forth our long-term assets by segment
as of June 30, 2007 and December 31, 2006 (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
December 31,
|
|
Long-term Assets
|
|
2007
|
|
|
2006
|
|
|
North America
|
|
$
|
348,632
|
|
|
$
|
353,264
|
|
International
|
|
|
78,861
|
|
|
|
58,763
|
|
EMEA
|
|
|
205,210
|
|
|
|
201,188
|
|
Corporate
|
|
|
115,473
|
|
|
|
75,505
|
|
Research and Development Division
|
|
|
28,832
|
|
|
|
35,105
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
777,008
|
|
|
$
|
723,825
|
|
|
|
|
|
|
|
|
|
|
23
VALEANT
PHARMACEUTICALS INTERNATIONAL
NOTES TO
CONSOLIDATED CONDENSED FINANCIAL
STATEMENTS (Continued)
The following table summarizes the largest of our product lines
by therapeutic class based on sales for the three months and six
months ended June 30, 2007 and 2006 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
Therapeutic Area/Product
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
Neurology
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mestinon®(P)
|
|
$
|
14,031
|
|
|
$
|
12,326
|
|
|
$
|
24,582
|
|
|
$
|
22,143
|
|
Diastat
AcuDialtm(P)
|
|
|
12,386
|
|
|
|
11,709
|
|
|
|
23,458
|
|
|
|
23,731
|
|
Cesamet®(P)
|
|
|
6,860
|
|
|
|
4,042
|
|
|
|
12,772
|
|
|
|
7,345
|
|
Librax®
|
|
|
4,455
|
|
|
|
5,005
|
|
|
|
8,122
|
|
|
|
7,924
|
|
Migranal®(P)
|
|
|
3,745
|
|
|
|
2,701
|
|
|
|
6,781
|
|
|
|
5,816
|
|
Dalmane®/Dalmadorm®(P)
|
|
|
2,757
|
|
|
|
2,544
|
|
|
|
5,092
|
|
|
|
5,010
|
|
Tasmar®(P)
|
|
|
2,371
|
|
|
|
1,666
|
|
|
|
4,353
|
|
|
|
2,851
|
|
Melleril(P)
|
|
|
1,813
|
|
|
|
1,365
|
|
|
|
3,354
|
|
|
|
2,773
|
|
Zelapar®(P)
|
|
|
1,381
|
|
|
|
|
|
|
|
1,576
|
|
|
|
|
|
Other Neurology
|
|
|
16,401
|
|
|
|
15,528
|
|
|
|
31,993
|
|
|
|
30,220
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Neurology
|
|
|
66,200
|
|
|
|
56,886
|
|
|
|
122,083
|
|
|
|
107,813
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dermatology
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Efudix/Efudex®(P)
|
|
|
17,518
|
|
|
|
14,979
|
|
|
|
29,994
|
|
|
|
30,560
|
|
Kinerase®(P)
|
|
|
8,145
|
|
|
|
9,024
|
|
|
|
16,526
|
|
|
|
15,884
|
|
Oxsoralen-Ultra®(P)
|
|
|
4,053
|
|
|
|
3,593
|
|
|
|
7,936
|
|
|
|
7,101
|
|
Dermatixtm(P)
|
|
|
3,565
|
|
|
|
2,977
|
|
|
|
6,338
|
|
|
|
4,811
|
|
Other Dermatology
|
|
|
9,616
|
|
|
|
12,181
|
|
|
|
17,455
|
|
|
|
20,578
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Dermatology
|
|
|
42,897
|
|
|
|
42,754
|
|
|
|
78,249
|
|
|
|
78,934
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Infectious Disease
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Infergen®(P)
|
|
|
9,353
|
|
|
|
11,309
|
|
|
|
18,323
|
|
|
|
25,014
|
|
Virazole®(P)
|
|
|
3,084
|
|
|
|
3,780
|
|
|
|
8,611
|
|
|
|
9,581
|
|
Other Infectious Disease
|
|
|
5,235
|
|
|
|
4,891
|
|
|
|
10,394
|
|
|
|
9,622
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Infectious
Disease
|
|
|
17,672
|
|
|
|
19,980
|
|
|
|
37,328
|
|
|
|
44,217
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other therapeutic
classes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bedoyectatm(P)
|
|
|
12,587
|
|
|
|
12,512
|
|
|
|
17,210
|
|
|
|
23,092
|
|
Solcoseryl(P)
|
|
|
8,448
|
|
|
|
4,597
|
|
|
|
13,795
|
|
|
|
7,974
|
|
Bisocard(P)
|
|
|
5,575
|
|
|
|
3,912
|
|
|
|
10,269
|
|
|
|
7,477
|
|
Nyal(P)
|
|
|
3,991
|
|
|
|
4,803
|
|
|
|
5,754
|
|
|
|
6,557
|
|
MVI (multi-vitamin infusion)(P)
|
|
|
2,756
|
|
|
|
3,500
|
|
|
|
5,249
|
|
|
|
5,767
|
|
Espaven(P)
|
|
|
2,247
|
|
|
|
2,983
|
|
|
|
4,114
|
|
|
|
4,285
|
|
Protamin(P)
|
|
|
1,353
|
|
|
|
1,773
|
|
|
|
3,424
|
|
|
|
3,325
|
|
Other products
|
|
|
48,326
|
|
|
|
55,057
|
|
|
|
91,469
|
|
|
|
100,716
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other therapeutic classes
|
|
|
85,283
|
|
|
|
89,137
|
|
|
|
151,284
|
|
|
|
159,193
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total product sales
|
|
$
|
212,052
|
|
|
$
|
208,757
|
|
|
$
|
388,944
|
|
|
$
|
390,157
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total promoted product sales
|
|
$
|
128,019
|
|
|
$
|
116,095
|
|
|
$
|
229,511
|
|
|
$
|
221,097
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(P) |
|
Promoted Products represent products promoted in at least one
major territory with estimated global annual sales greater than
$5 million. |
24
VALEANT
PHARMACEUTICALS INTERNATIONAL
NOTES TO
CONSOLIDATED CONDENSED FINANCIAL
STATEMENTS (Continued)
|
|
|
(a) |
|
Infergen®
is a registered trademark of Amgen, Inc. and Valeant
Pharmaceuticals North America is the exclusive licensee from
Amgen of this mark in the U.S. market. |
During the three months and the six months ended June 30,
2007 one customer, McKesson Corporation, accounted for more than
10% of consolidated product sales. Sales to McKesson Corporation
and its affiliates in the United States, Canada, and Mexico were
$40,340,000 and $69,213,000 in the three months and the six
months ended June 30, 2007, respectively, representing 19%
and 18% of our total product sales, respectively.
We have reported the royalties received from the sale of
ribavirin by Schering-Plough and Roche separately from our
specialty pharmaceuticals product sales revenue since these
royalties were first received in 1998. In 2007, we have begun
presenting these royalty revenues within a new category of
revenues, alliance revenue. The following table
provides the details of our alliance revenue in the three and
six months ended June 30, 2007 and June 30, 2006,
respectively (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended
|
|
|
For the Six Months Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
Ribavirin royalty
|
|
$
|
18,955
|
|
|
$
|
21,635
|
|
|
$
|
36,175
|
|
|
$
|
39,726
|
|
Licensing payment
|
|
|
|
|
|
|
|
|
|
|
19,200
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
|
|
|
|
50
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total alliance revenue
|
|
$
|
18,955
|
|
|
$
|
21,635
|
|
|
$
|
55,425
|
|
|
$
|
39,726
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
A licensing payment of $19,200,000 was received in the first
quarter of 2007 from Schering-Plough as a payment to us in the
licensing of pradefovir. Alliance revenue for the six months
ended June 30, 2007 also included a $50,000 payment from an
unrelated third party for a license to certain intellectual
property assets.
In June 2007, we revised our estimate of ribavirin royalties
receivable from Schering-Plough, to incorporate certain
historical data and payment patterns. This revision increased
the royalties recorded in the three months and the six months
ended June 30, 2007 by $620,000.
In June 2007, our Board of Directors authorized a stock
repurchase program. This program authorized us to repurchase up
to $200 million of our outstanding common stock in a
24-month
period. Under the program, purchases may be made from time to
time on the open market, in privately negotiated transactions,
and in amounts as we see appropriate. The number of shares to be
purchased and the timing of such purchases is subject to various
factors, which may include the price of our common stock,
general market conditions, corporate requirements, including
restrictions in our debt covenants, and alternate investment
opportunities. As of July 31, 2007, we have used a total of
$63,137,000 to purchase 3.7 million shares in this stock
repurchase program.
In January 2007, we licensed development and commercial rights
to pradefovir to Schering-Plough. Under the terms of the
assignment and license agreement, Schering-Plough made an
upfront cash payment of $19,200,000 to Valeant and $1,800,000 to
Metabasis Therapeutics, Inc., or Metabasis, the original
developer of pradefovir, and agreed to pay additional cash fees
to Valeant and Metabasis upon the achievement of certain
development and regulatory milestones. Based on preliminary
results of a
24-month
oral carcinogenicity study in mice and rats submitted to
Schering-Plough, we agreed in April 2007, at
Schering-Ploughs request, to discontinue dosing of all
patients in the pradefovir extension study as a precautionary
measure, pending further analysis of the data by the
Schering-Plough team. We notified the appropriate health
authorities and clinical investigators and will be initiating a
follow-up
registry. In July 2007, Schering-Plough notified us of their
intent to terminate this agreement and thereby return all
pradefovir development and marketing rights to Metabasis.
25
|
|
Item 2.
|
Managements
Discussion and Analysis of Financial Condition and Results of
Operations
|
Overview
We are a global specialty pharmaceutical company that develops,
manufactures and markets a broad range of pharmaceutical
products. We focus our greatest resources and attention
principally in the therapeutic areas of neurology, infectious
disease and dermatology. Our marketing and promotion efforts
focus on our Promoted Products, which include products marketed
globally, regionally and locally with annual sales in excess of
$5 million. Our products are currently sold in more than
100 markets around the world, with our primary focus on the
United States, Canada, Mexico, the United Kingdom, France,
Italy, Poland, Germany, and Spain.
Our primary value driver is a specialty pharmaceutical business
with a global platform. We believe that our global reach and
marketing agility make us unique among specialty pharmaceutical
companies, and provide us with the ability to leverage compounds
in the clinical stage and commercialize them in major markets
around the world. In addition, we receive royalties from the
sale of ribavirin by Schering-Plough and Roche, although such
royalties currently represent a much smaller contribution to our
revenues than they have in the past.
Company
Strategy and Restructuring
The key elements of our strategy, as refined by the
restructuring program announced on April 3, 2006, include
the following:
Targeted Growth Opportunities. We focus our
business on key markets, across three therapeutic areas and on
products we have or may acquire where we can leverage our local
market resources and particular brand recognition. We believe
that our targeted core therapeutic areas are positioned for
further growth and that it is possible for a mid-sized company
to attain a leadership position within these categories. In
addition, we intend to continue to pursue life-cycle management
strategies for our regional and local brands.
Product Acquisitions. We plan to selectively
license or acquire from third parties products, technologies and
businesses that complement our existing business and provide for
effective life cycle management of key products.
Efficient Manufacturing and Supply Chain
Organization. The objective of the restructuring
program as it related to manufacturing was to further
rationalize our manufacturing operations and further reduce our
excess capacity. With the sale of our manufacturing facilities
in Basel, Switzerland and Puerto Rico in June 2007, we have
completed this restructuring program. Under our global
manufacturing strategy, we also seek to minimize our costs of
goods sold by increasing capacity utilization in our
manufacturing facilities or by outsourcing and by other actions
to improve efficiencies. We have undertaken major process
improvement initiatives and implemented process improvements,
affecting all phases of our operations, from raw material and
supply logistics, to manufacturing, warehousing and distribution.
Clinical Development Activities. We are
focusing efforts and expenditures on two late stage development
projects: retigabine, a potential treatment for partial onset
seizures in patients with epilepsy and for neuropathic pain, and
taribavirin, a potential treatment for hepatitis C. The
restructuring program was designed in part to rationalize our
investments in research and development efforts in line with our
financial resources. We previously announced our intention to
sell rights to, out-license, or secure partners to share the
costs of our major clinical projects and discovery programs. On
January 9, 2007, we licensed the development and
commercialization rights to pradefovir to Schering-Plough, who
subsequently has communicated its intention to return these
rights to Metabasis after the results of a long-term
carcinogenicity study were released. On December 21, 2006,
we sold our HIV and cancer development programs and certain
discovery and preclinical assets to Ardea, with an option for us
to reacquire rights to commercialize the HIV program outside of
the United States and Canada upon Ardeas completion of
Phase 2b trials. We continue to pursue partnering opportunities
for retigabine and taribavirin to share the costs of
development, and look to acquire rights to additional compounds
in the clinic to diversify our opportunities and the inherent
risks associated with product development.
26
Results
of Operations
Our three reportable pharmaceutical segments comprise
pharmaceutical operations in North America; International; and
Europe, Middle East, and Africa. In addition, we have a research
and development division. Certain financial information for our
business segments is set forth below. This discussion of our
results of operations should be read in conjunction with our
consolidated condensed financial statements included elsewhere
in this quarterly report. For additional financial information
by business segment, see Note 10 of notes to consolidated
condensed financial statements included elsewhere in this
quarterly report.
Product sales from our specialty pharmaceutical segments
increased $3,295,000 (2%) for the three months ended
June 30, 2007 and decreased $1,213,000 (0.3%) for the six
months ended June 30, 2007, respectively, compared with the
same periods in 2006. Product sales from our Promoted Products
increased $11,924,000 (10%) and $8,414,000 (4%) for the three
and six months ended June 30, 2007, respectively, over the
same periods from 2006. Product sales in the three and six
months ended June 30, 2007 were impacted by distribution
issues which resulted in reduced sales to certain wholesalers in
Mexico. We believe these distribution issues were resolved in
June 2007 and expect that our sales in Mexico will return to
normal growth levels in 2007. The increase in product sales in
the three months ended June 30, 2007 included increases in
the sales of
Efudex®,
Cesamet®,
Mestinon®,
Solcoseryltm,
Bisocardtm,
and
Zelapar®,
offset in part by a decline in
Infergen® sales.
In the three months ended June 30, 2007, the 2% increase in
product sales compared to the corresponding period in 2006 was
due to a 2% increase in price and a 4% benefit from currency
fluctuations, offset by a 4% reduction in volume. In the six
months ended June 30, 2007, the reduction in product sales
of $1,213,000 (0.3%) compared to the corresponding period in
2006 was due to a 2% increase in price and a 3% benefit from
currency fluctuations, offset by a 5% reduction in volume.
The following tables compare 2007 and 2006 revenues by
reportable segments and operating expenses for the three months
and six months ended June 30, 2007 and 2006 (in thousands,
except percentages):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
Increase/
|
|
|
Percent
|
|
|
|
2007
|
|
|
2006
|
|
|
(Decrease)
|
|
|
Change
|
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Specialty pharmaceuticals
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North America
|
|
$
|
77,962
|
|
|
$
|
72,304
|
|
|
$
|
5,658
|
|
|
|
8
|
%
|
International
|
|
|
56,784
|
|
|
|
64,472
|
|
|
|
(7,688
|
)
|
|
|
(12
|
)%
|
EMEA
|
|
|
77,306
|
|
|
|
71,981
|
|
|
|
5,325
|
|
|
|
7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total specialty pharmaceuticals
|
|
|
212,052
|
|
|
|
208,757
|
|
|
|
3,295
|
|
|
|
2
|
%
|
Alliance revenue (including
ribavirin royalties)
|
|
|
18,955
|
|
|
|
21,635
|
|
|
|
(2,680
|
)
|
|
|
(12
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
231,007
|
|
|
|
230,392
|
|
|
|
615
|
|
|
|
0.3
|
%
|
Costs and Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of goods sold (excluding
amortization)
|
|
|
62,116
|
|
|
|
65,759
|
|
|
|
(3,643
|
)
|
|
|
(6
|
)%
|
Selling expenses
|
|
|
74,684
|
|
|
|
66,270
|
|
|
|
8,414
|
|
|
|
13
|
%
|
General and administrative expenses
|
|
|
28,963
|
|
|
|
30,668
|
|
|
|
(1,705
|
)
|
|
|
(6
|
)%
|
Research and development costs
|
|
|
24,617
|
|
|
|
26,867
|
|
|
|
(2,250
|
)
|
|
|
(8
|
)%
|
Restructuring charges
|
|
|
6,337
|
|
|
|
53,083
|
|
|
|
(46,746
|
)
|
|
|
(88
|
)%
|
Amortization expense
|
|
|
20,316
|
|
|
|
17,514
|
|
|
|
2,802
|
|
|
|
16
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
$
|
13,974
|
|
|
$
|
(29,769
|
)
|
|
$
|
43,743
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit on product sales
(excluding amortization)
|
|
$
|
149,936
|
|
|
$
|
142,998
|
|
|
$
|
6,938
|
|
|
|
5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit margin on product
sales
|
|
|
71
|
%
|
|
|
68
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
27
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
Increase/
|
|
|
Percent
|
|
|
|
2007
|
|
|
2006
|
|
|
(Decrease)
|
|
|
Change
|
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Specialty pharmaceuticals
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North America
|
|
$
|
149,532
|
|
|
$
|
148,160
|
|
|
$
|
1,372
|
|
|
|
1
|
%
|
International
|
|
|
92,241
|
|
|
|
109,661
|
|
|
|
(17,420
|
)
|
|
|
(16
|
)%
|
EMEA
|
|
|
147,171
|
|
|
|
132,336
|
|
|
|
14,835
|
|
|
|
11
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total specialty pharmaceuticals
|
|
|
388,944
|
|
|
|
390,157
|
|
|
|
(1,213
|
)
|
|
|
|
%
|
Alliance revenue (including
ribavirin royalties)
|
|
|
55,425
|
|
|
|
39,726
|
|
|
|
15,699
|
|
|
|
40
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
444,369
|
|
|
|
429,883
|
|
|
|
14,486
|
|
|
|
3
|
%
|
Costs and Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of goods sold (excluding
amortization)
|
|
|
114,214
|
|
|
|
124,360
|
|
|
|
(10,146
|
)
|
|
|
(8
|
)%
|
Selling expenses
|
|
|
139,118
|
|
|
|
130,545
|
|
|
|
8,573
|
|
|
|
7
|
%
|
General and administrative expenses
|
|
|
55,150
|
|
|
|
59,114
|
|
|
|
(3,964
|
)
|
|
|
(7
|
)%
|
Research and development costs
|
|
|
47,727
|
|
|
|
56,421
|
|
|
|
(8,694
|
)
|
|
|
(15
|
)%
|
Gain on litigation settlement
|
|
|
|
|
|
|
(34,000
|
)
|
|
|
34,000
|
|
|
|
NM
|
|
Restructuring charges
|
|
|
13,575
|
|
|
|
79,549
|
|
|
|
(65,974
|
)
|
|
|
(83
|
)%
|
Amortization expense
|
|
|
39,447
|
|
|
|
35,037
|
|
|
|
4,410
|
|
|
|
13
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
$
|
35,138
|
|
|
$
|
(21,143
|
)
|
|
$
|
56,281
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit on product sales
(excluding amortization)
|
|
$
|
274,730
|
|
|
$
|
265,797
|
|
|
$
|
8,933
|
|
|
|
3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit margin on product
sales
|
|
|
71
|
%
|
|
|
68
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NM Not Meaningful
In the North America pharmaceuticals segment, revenues for the
three months ended June 30, 2007 were $77,962,000, compared
to $72,304,000 for the same period in 2006, representing an
increase of $5,658,000 (8%). Revenues for the six months ended
June 30, 2007 were $149,532,000 compared to $148,160,000
for 2006, an increase of $1,372,000 (1%). The increases in the
three-month period is primarily related to increases in Cesamet,
Efudex, Zelapar, Migranal, and Kinerase, partly offset by a
decline in sales of Infergen, Mestinon, and Mysoline. The
increase in the six-month period is primarily related to
increases in the sales of Cesamet, Librax, Kinerase, and
Zelapar, partly offset by a decline in sales of Infergen. The
launch of Zelapar contributed $1,381,000 in revenue in the three
months ended June 30, 2007 and $1,576,000 in the six months
ended June 30, 2007. We launched Zelapar in the third
quarter of 2006. The reported increases in Cesamet sales were
primarily in Canada. Product sales in the North America region
were 37% and 38% of total product sales in the three and six
months ended June 30, 2007, respectively, compared to 35%
and 38% of total product sales for the same periods in 2006. In
the three-month period ended June 30, 2007, the 8% increase
in North America pharmaceuticals sales resulted from a 9%
increase in price, offset by a 1% decrease in volume. In the
six-month period ended June 30, 2007, the 1% increase in
sales resulted from a 9% increase in price, offset by an 8%
decrease in volume. The increased strength of the Canadian
dollar relative to the U.S. dollar contributed $261,000 and
$84,000 in the three months and six months ended June 30,
2007, respectively.
In the International pharmaceuticals segment, revenues for the
three months ended June 30, 2007 were $56,784,000 compared
to $64,472,000 for 2006, a decrease of $7,688,000 (12%). The
decrease was due to the reduced shipments of product to certain
wholesalers in Mexico who had ceased making payments to us
because they felt disadvantaged by changes we made in our
distribution operations in 2006. We believe this matter was
resolved in June 2007. These wholesalers have resumed paying us
and we have resumed shipping product to them. Revenues for the
six months ended June 30, 2007 were $92,241,000 compared to
$109,661,000, representing a decrease of $17,420,000 (16%). In
the three-month period ended June 30, 2007, the 12%
decrease in the International
28
pharmaceuticals sales resulted from a 16% decrease in volume,
offset by a 4% benefit from currency fluctuations and a
negligible impact from price changes. In the six-month period
ended June 30, 2007, the 16% decrease in sales resulted
from a 20% decrease in volume, offset by a 2% benefit from
currency and a 2% price increase.
In the EMEA pharmaceuticals segment, revenues for the three
months ended June 30, 2007 were $77,306,000, compared to
$71,981,000 for the same period in 2006, an increase of
$5,325,000 (7%). Revenues for the six months ended June 30,
2007 were $147,171,000 compared to $132,336,000 for 2006, an
increase of $14,835,000 (11%). The EMEA region reported
increased sales in the second quarter of Solcoseryl, Bisocard,
Dermatix, and Mestinon, partly offset by declined in Kinerase,
Librax, and Calcitonin. Sales of new products, including
Cesamet, contributed approximately $2,517,000 to the
regions growth in the quarter. Much of the growth was in
Central and Eastern Europe. In the three-month period ended
June 30, 2007, the 7% increase in EMEA sales resulted from
a 3% increase in volume and an 8% benefit from currency, offset
by a 4% aggregate decrease in prices. In the six-month period
ended June 30, 2007, the 11% increase in sales resulted
from a 9% increase in volume and an 8% benefit from currency,
offset by a 6% aggregate decrease in price.
Alliance Revenue (including Ribavirin
royalties): In the three months ended
June 30, 2007 and the six months ended June 30, 2006,
our ribavirin royalties from Schering-Plough and Roche
represented all of our alliance revenues. Alliance revenues for
the six months ended June 30, 2007 included a payment from
Schering-Plough of $19,200,000 which we received in the first
quarter of 2007 as a payment for the license to pradefovir. We
do not expect any future alliance revenue relating to pradefovir.
Royalties from Schering-Plough and Roche and decreased
$2,680,000 (12%) and accounted for 8% of our total revenues from
continuing operations for the three months ended June 30,
2007 as compared to 9% in the similar three-month period in
2006. Ribavirin royalty revenues decreased $3,551,000 (9%) and
accounted for 8% of our total revenues from continuing
operations for the six months ended June 30, 2007 as
compared to 9% in the similar six-month period in 2006. The
year-to-date decrease in ribavirin royalties reflects reduced
ribavirin sales in Japan and competitive dynamics between Roche
and Schering-Plough in Europe. Such royalties are expected to
decline as a result of market competition, price reductions, and
the eventual loss of exclusivity in Europe and Japan.
The European Patent Office announced in June 2007 that it has
revoked a ribavirin patent which would have provided protection
through 2017. We are currently reviewing our appeal options with
respect to this patent. Our royalties from Roche in Europe are
contingent upon the European Patent Offices recognition of
this patent. Roche has notified us that it has discontinued its
royalty payment effective the date of revocation. Royalties from
Roche have represented approximately 10% of our historical
ribavirin royalties.
Alliance revenues in the six months ended June 30, 2007
included a licensing payment of $19,200,000 which we received in
the first quarter of 2007 from Schering-Plough as a payment for
the license to pradefovir. In July 2007, Schering-Plough
notified us of their intent to terminate this agreement and
thereby return all pradefovir development and marketing rights
to Metabasis. Alliance revenue in the six months ended
June 30, 2007 also included $50,000 paid to us by an
unrelated third party in the first quarter of 2007 for certain
intellectual property rights.
In June 2007, we revised our estimate of ribavirin royalties
receivable from Schering-Plough, to incorporate certain
historical data and payment patterns. This revision increased
the royalties recorded in the three months and the six months
ended June 30, 2007 by $620,000.
Gross Profit Margin (excluding
amortization): Gross profit margin on product
sales increased from 68% to 71% for the three months and six
months ended June 30, 2007, compared with the corresponding
periods in 2006. The increase in gross profit margin is the
result of reduced product royalty expenses, reduced inventory
write-offs, product mix, and efficiencies resulting from our
strategic restructuring program. Our gross margin in 2007
benefited from our purchase of a
paid-up
license to Kinetin and Zeatin, the active ingredients in
Kinerase, as we are no longer required to pay royalties on this
product line. Our gross margin also benefited in 2007 from a
negotiated reduction in the royalty rate that we pay on sales of
Infergen.
We have an obligation to make a milestone payment to the future
third party supplier of Infergen as part of the transfer of
manufacturing technology when certain production and testing is
completed in accordance with testing
29
specifications. We anticipate making this milestone payment of
four million Euros in the third quarter of 2007, which will
reduce our gross margin.
Selling Expenses: Selling expenses were
$74,684,000 and $139,118,000 for the three and six months ended
June 30, 2007, respectively, compared to $66,270,000 and
$130,545,000 for the same periods in 2006, resulting in
increases of $8,414,000 (13%) and $8,573,000 (7%), respectively.
As a percent of product sales, selling expenses were 35% and 36%
for the three and six months ended June 30, 2007,
respectively, compared to 32% and 33%, respectively, for the
same periods in 2006. The increase in selling expenses primarily
reflects higher selling expenses in the International and EMEA
segments, including a television advertising campaign in
Australia, launch activities in Central Europe, and initiatives
to reestablish our distribution channels in Mexico.
General and Administrative Expenses: General
and administrative expenses were $28,963,000 and $55,150,000 for
the three and six months ended June 30, 2007, respectively,
compared to $30,668,000 and $59,114,000 for the same periods in
2006, resulting in decreases of $1,705,000 (6%) and $3,964,000
(7%), respectively. As a percent of product sales, general and
administrative expenses were 14% for the three and six months
ended June 30, 2007 compared to 15% for the same periods in
2006. General and administrative expense in the three months and
six months ended June 30, 2006 included $2,355,000 in
damages awarded against us in the Caleel + Hayden case.
Research and Development: Research and
development expenses were $24,617,000 and $47,727,000 for the
three and six months ended June 30, 2007, respectively,
compared to $26,867,000 and $56,421,000 for the same periods in
2006, resulting in a decrease of $2,250,000 (8%) in the
three-month period and a decrease of $8,694,000 (15%) in the
six-month period, respectively. This decrease reflects the
completion of the VISER clinical trials for taribavirin and
savings from our strategic restructuring program relating to the
divestment of our discovery operations in December 2006. On
January 9, 2007, we licensed the development and
commercialization rights to pradefovir to Schering-Plough, who
has subsequently informed us of its intent to terminate this
license and thereby return these rights to Metabasis. On
December 21, 2006, we sold our HIV and cancer development
programs and certain discovery and preclinical assets to Ardea,
with an option for us to reacquire rights to commercialize the
HIV program outside of the United States and Canada upon
Ardeas completion of Phase 2b trials.
Gain on Litigation Settlement: In March 2006
we settled a long standing dispute with the Republic of Serbia
relating to the ownership and operations of a joint venture we
formerly participated in known as Galenika for $34,000,000. We
received a payment of $28,000,000 in March 2006 and received the
remaining amount in February 2007.
Restructuring
Charges:
The sale of the Basel, Switzerland and Puerto Rico manufacturing
sites concludes the restructuring plan announced in April 2006.
In December 2006, we transferred our former factories in Basel,
Switzerland and Puerto Rico to a held for sale
classification in accordance with SFAS 144,
Accounting for the Impairment or Disposal of Long-Lived
Assets. In June 2007, we sold these manufacturing
facilities and the related inventories to Legacy Pharmaceuticals
International for aggregate proceeds of $29,500,000, of which
$12,000,000 was received as consideration for inventories sold
to Legacy Pharmaceuticals International and $17,500,000 was
received as consideration for the manufacturing facilities.
Under certain supply agreements, Legacy Pharmaceuticals
International will continue to supply us with the products
manufactured in these facilities, with this future supply to
include certain of the inventories transferred to Legacy. The
transaction also included transition payment obligations of
$6,000,000 to be paid by Valeant to Legacy Pharmaceuticals
International over a
24-month
period as well as capital expenditure obligations of $650,000 to
be incurred by us. In addition, a working capital and inventory
adjustment payment is to be made for changes in value between
initial estimates and final balances which is still pending
between the parties.
Our restructuring charges have included impairment charges
resulting from the sale of our former headquarters facility,
discovery and pre-clinical operations equipment, and our former
manufacturing facilities in Puerto Rico and Basel, Switzerland.
The restructuring included the reduction of approximately
850 employees, the majority of whom work in the two
manufacturing facilities which we have sold to Legacy
Pharmaceuticals International. As of June 30, 2007,
employee severance costs have been recorded for approximately
490 employees, and no severance payments have been recorded
for the remaining employees who transferred to Legacy
Pharmaceuticals International.
30
The restructuring program also rationalized selling, general and
administrative expenses primarily through consolidation of the
management functions in fewer administrative groups to achieve
greater economies of scale. Management and administrative
responsibilities for our regional operations in Australia,
Africa and Asia, which had previously been managed as a separate
business unit, were combined in 2006 with those of other regions.
In this restructuring program, we recorded provisions of
$6,337,000 and $13,575,000 in the three months and six months
ended June 30, 2007, respectively, compared with
$53,083,000 and $79,549,000 for the corresponding periods in
2006. Severance charges recorded in the three months and six
months ended June 30, 2007 total $1,350,000 and $5,130,000
and relate to employees whose positions were eliminated in the
restructuring.
Restructuring
Charge Details (in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months
|
|
|
Six Months
|
|
|
Year
|
|
|
|
Ended
|
|
|
Ended
|
|
|
Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2006
|
|
|
2006
|
|
|
Employee Severances
|
|
$
|
5,369
|
|
|
$
|
12,013
|
|
|
$
|
16,997
|
|
Contract cancellation and other
cash costs
|
|
|
992
|
|
|
|
992
|
|
|
|
1,662
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal: Cash Charges
|
|
|
6,361
|
|
|
|
13,005
|
|
|
|
18,659
|
|
Abandoned software and other
capital assets
|
|
|
3,031
|
|
|
|
22,853
|
|
|
|
22,178
|
|
Impairment of manufacturing and
research facilities
|
|
|
43,690
|
|
|
|
43,690
|
|
|
|
97,344
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal: Non-cash charges
|
|
|
46,721
|
|
|
|
66,543
|
|
|
|
119,522
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total:
|
|
$
|
53,082
|
|
|
$
|
79,548
|
|
|
$
|
138,181
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months
|
|
|
Six Months
|
|
|
|
|
|
|
Ended
|
|
|
Ended
|
|
|
Cumulative
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
Total
|
|
|
|
2007
|
|
|
2007
|
|
|
Incurred
|
|
|
Employee Severances (approximately
490 employees)
|
|
$
|
1,350
|
|
|
$
|
5,130
|
|
|
$
|
22,127
|
|
Contract cancellation and other
cash costs
|
|
|
1,034
|
|
|
|
3,115
|
|
|
|
4,777
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal: Cash Charges
|
|
|
2,384
|
|
|
|
8,245
|
|
|
|
26,904
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Abandoned software and other
capital assets
|
|
|
|
|
|
|
|
|
|
|
22,178
|
|
Write-off of accumulated foreign
currency translation adjustments
|
|
|
2,891
|
|
|
|
2,891
|
|
|
|
2,891
|
|
Impairment of manufacturing and
research facilities
|
|
|
1,062
|
|
|
|
2,439
|
|
|
|
99,783
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal: Non-cash charges
|
|
|
3,953
|
|
|
|
5,330
|
|
|
|
124,852
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total:
|
|
$
|
6,337
|
|
|
$
|
13,575
|
|
|
$
|
151,756
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reconciliation
of Cash Restructuring Payments with Restructuring
Accrual
Cash-related charges in the above table relate to severance
payments and other costs which have been either paid with cash
expenditures or have been accrued and will be paid with cash in
future quarters. The accrued restructuring reserve of $9,967,000
at June 30, 2007 includes the cash restructuring charge of
$2,384,000, a $6,000,000 working capital commitment previously
recognized as an impairment charge, and a capital expenditure
31
commitment of $650,000 which was also previously recorded as an
impairment charge. A summary of accruals and expenditures of
restructuring costs which will be paid in cash is as follows (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
Three Months
|
|
|
Three Months
|
|
|
|
Ended
|
|
|
Ended
|
|
|
|
March 31,
|
|
|
June 30,
|
|
|
|
2007
|
|
|
2007
|
|
|
Opening accrual
|
|
$
|
5,216
|
|
|
$
|
5,931
|
|
Charges to earnings
|
|
|
5,861
|
|
|
|
2,384
|
|
Transition and capital expenditure
payment obligations
|
|
|
163
|
|
|
|
6,650
|
|
Cash paid
|
|
|
(5,309
|
)
|
|
|
(4,988
|
)
|
|
|
|
|
|
|
|
|
|
Closing accrual
|
|
$
|
5,931
|
|
|
$
|
9,977
|
|
|
|
|
|
|
|
|
|
|
Amortization: Amortization expense was
$20,316,000 and $39,447,000 for the three and six months ended
June 30, 2007, respectively, compared to $17,514,000 and
$35,037,000 for the same periods in 2006, resulting in increases
of $2,802,000 (16%) and $4,410,000 (13%), respectively. The
increase is the result of the acquisition of product rights for
Kinerase, nabilone, Melleril, and certain products in Europe,
offset in part by a declining amortization expense for the
rights to the ribavirin royalty. The impairment of a product in
Spain contributed $310,000 in amortization expense in the three
months and the six months ended June 30, 2007.
Other Income (expense), Net, Including Translation and
Exchange: Other income, net, including
translation and exchange was $1,682,000 and $2,818,000 for the
three and six months ended June 30, 2007, respectively,
compared to income of $756,000 and $1,694,000 for the same
periods in 2006. In the second quarter of 2007, translation
gains principally consisted of a translation and exchange gain
of $2,501,000 in EMEA, partly offset by a loss of $294,000 in
International. In the six months ended June 30, 2007,
translation gains principally consisted of gains of $3,239,000
in EMEA and $329,000 in International.
Interest Expense, net: Interest expense net of
interest income decreased $2,033,000 (25%) and $3,372,000 (21%)
during the three and six months ended June 30, 2007,
respectively, compared to the same periods in 2006, primarily as
a result of higher interest income resulting from higher cash
and investment securities balances.
Income Taxes: The tax provisions in the second
quarters of both 2007 and 2006 relate to the profits of our
foreign operations, foreign withholding taxes, penalties and
interest associated with U.S. liabilities and state and
local taxes in the U.S. Our U.S. operations, which
include our research and development activities, generate
substantial net operating losses for U.S. income tax
reporting purposes. Since, at this time, there is insufficient
objective evidence that we will generate sufficient
U.S. taxable income to utilize these net operating loss
benefits, a valuation allowance has been provided against the
tax benefits associated with U.S. operating losses. The
provision for income taxes in the three months ended
June 30, 2007 was reduced by $21,521,000, primarily related
to resolution of the IRS examination of our tax returns for the
years 1997 through 2001.
Loss from Discontinued Operations, Net of
Taxes: Our loss from discontinued operations was
$382,000 and $381,000 for the three and six-month periods ended
June 30, 2007 compared with $197,000 and $409,000 for the
three and six-month periods ended June 30, 2006,
respectively. The loss in 2007 related to a legal judgment. The
losses in 2006 relate to closure and wind up of our remaining
administrative activities associated with the discontinued
operations in Central Europe and a discontinued Biomedicals
facility in Irvine, California.
Liquidity
and Capital Resources
Cash and marketable securities totaled $386,650,000 at
June 30, 2007 compared to $335,745,000 at December 31,
2006, an increase of $50,905,000. Working capital was
$566,735,000 at June 30, 2007 compared to $529,768,000 at
December 31, 2006. The increase in working capital of
$36,967,000 was primarily the result of the increase in cash of
$51,409,000, the reduction in current tax liabilities of
$34,507, and the reduction in accrued liabilities of
$15,341,000, partly offset by the reduction in accounts
receivable of $15,337,000 and the sale of $12,000,000 of
inventory in the Puerto Rico and Switzerland manufacturing plant
sales.
Cash provided by operating activities is expected to be our
primary source of funds in 2007. During the six months ended
June 30, 2007, cash provided by operating activities
totaled $54,638,000 compared to $49,211,000 in
32
the same period in 2006, an increase of $5,427,000. The cash
provided by operating activities for the six months ended
June 30, 2007 included receipt of $19,200,000 related to
the pradefovir licensing payment from Schering-Plough and
$6,000,000 from the Republic of Serbia. The cash provided by
operating activities for the six months ended June 30, 2006
included receipt of $28,000,000 from the Republic of Serbia. The
sale of $12,000,000 of inventory in the Basel, Switzerland and
Puerto Rico manufacturing plant sales reduced cash provided by
operating activities, as the cash received for this inventory
has been reported in cash flows from investing activities. Other
than the impact of these events, the increase in cash provided
by operating activities resulted from our income from continuing
operations.
Cash provided by investing activities was $13,905,000 for the
six months ended June 30, 2007 compared to cash used in
investing activities of $15,470,000 for the six months ended
June 30, 2006. In 2007 cash provided by investing
activities consisted primarily of proceeds from the sale of
assets of $37,282,000 and proceeds from the sale of businesses
of $29,486,000, offset by the use of $35,287,000 used for
product acquisitions and $15,598,000 used for capital
expenditures. In the six months ended June 30, 2006, net
cash used in investing activities consisted of capital
expenditures on corporate programs and existing facilities of
$19,840,000, partially offset by proceeds from the sale of
assets, including the Warsaw manufacturing facility, of
$8,037,000.
Cash used in financing activities was $24,901,000 in the six
months ended June 30, 2007 and principally consisted of the
repurchase of our common stock for $27,507,000 and payments of
long-term debt and notes payable of $9,163,000, offset by
proceeds from stock option exercises and employee stock
purchases of $10,251,000. Cash used in financing activities was
$17,518,000 in the six months ended June 30, 2006 and
principally consisted of dividends paid on common stock of
$14,354,000 and debt retirements of $6,137,000.
In January 2005, the Company entered into an interest rate swap
agreement with respect to $150,000,000 principal amount of its
7.0% Senior Notes due 2011. The interest rate on the swap
is variable at LIBOR plus 2.41%. The effect of this transaction
was to initially lower our effective interest rate by exchanging
fixed rate payments for floating rate payments. On a prospective
basis, the effective interest rate will float and correlate to
the variable interest earned on our cash held.
We have collateral requirements on the interest rate swap
agreement. The amount of collateral varies monthly depending on
the fair value of the underlying swap contract. As of
June 30, 2007, we have collateral of $10,506,000 comprising
marketable securities and included in other assets in the
accompanying balance sheet.
Management believes that the Companys existing cash and
cash equivalents and funds generated from operations will be
sufficient to meet the Companys operating requirements at
least through June 30, 2008, and to provide cash needed to
fund capital expenditures and its clinical development program.
While we have no current intent to issue additional debt or
equity securities, we may seek additional debt financing or
issue additional equity securities to finance future
acquisitions or for other purposes. We fund our cash
requirements primarily from cash provided by operating
activities. Our sources of liquidity are cash and cash
equivalent balances and cash flow from operations.
We did not pay dividends for the first and second quarters of
2007. We declared and paid quarterly cash dividends of $0.0775
per share for the first and second quarters of 2006. Our board
of directors will continue to review our dividend policy. The
amount and timing of any future dividends will depend upon our
financial condition and profitability, the need to retain
earnings for use in the development of our business, contractual
restrictions, including covenants, and other factors. There are
significant contractual limitations on our ability to pay
dividends under the terms of the indenture governing our
7% senior notes due 2011.
In June 2007, our board of directors authorized a stock
repurchase program. This program authorized us to repurchase up
to $200 million of our outstanding common stock in a
24-month
period. Under the program, purchases may be made from time to
time on the open market, in privately negotiated transactions,
and in amounts
33
as we see appropriate. The number of shares to be purchased and
the timing of such purchases is subject to various factors,
which may include the price of our common stock, general market
conditions, corporate requirements, including restrictions in
our debt covenants, and alternate investment opportunities. The
share repurchase program may be modified or discontinued at any
time. The total number of shares repurchased pursuant to this
program was 1,600,000 as of June 30, 2007 and 3,700,000 as
of July 31, 2007.
We have contractual obligations for long-term debt, interest on
long-term debt, and operating lease obligations that were
summarized in a table of Contractual Obligations in our Annual
Report on
Form 10-K
for the year ended December 31, 2006. Since
December 31, 2006, there have been no material changes to
the table of Contractual Obligations of the Company, outside of
the ordinary course of business, except for the presentation of
our liability for unrecognized tax benefits. As discussed in
Note 1 in the Notes to Consolidated Financial Statements,
we adopted the provisions of Financial Accounting Standards
Board (FASB) Interpretation No. 48, Accounting
for Uncertainty in Income Taxes, as of January 1, 2007. As
of the adoption date, we had a liability of
$109,567,000 million for unrecognized tax benefits,
including related interest and penalties. At June 30, 2007,
we had a liability of $56,176,000 million for unrecognized
tax benefits, including related interest and penalties, which is
expected to be paid after one year. We are unable to determine
when cash settlement with a taxing authority will occur.
Off-Balance
Sheet Arrangements
We do not use special purpose entities or other off-balance
sheet financing techniques except for operating leases disclosed
in our annual report on
Form 10-K.
Our 3% and 4% convertible subordinated notes include conversion
features that are considered off-balance sheet arrangements
under SEC requirements.
Products
in Development
Late
Stage Development of New Chemical Entities
Retigabine: We are developing retigabine as an
adjunctive treatment for partial-onset seizures in patients with
epilepsy. Retigabine is believed to have a unique mechanism of
action. Retigabine stabilizes hyper-excited neurons primarily by
opening neuronal potassium channels. Retigabine has undergone
several Phase 2 clinical trials which included more than
600 patients in several dose-ranging studies compared to
placebo. We successfully completed an End-of-Phase 2 meeting
concerning retigabine with the Food and Drug Administration in
November 2005. The results of the key Phase 2 study indicate
that the compound is potentially efficacious with a demonstrated
reduction in monthly seizure rates of 23% to 35% as adjunctive
therapy in patients with partial seizures. Response rates in the
two higher doses were statistically significant compared to
placebo (p<0.001).
Following a Special Protocol Assessment by the FDA, two Phase 3
trials of retigabine were initiated in 2005. One Phase 3 trial
(RESTORE1; RESTORE stands for Retigabine Efficacy and Safety
Trial for partial Onset Epilepsy) is being conducted at
approximately 50 sites, mainly in the Americas (U.S.,
Central/South America); the second Phase 3 trial (RESTORE2) is
being conducted at approximately 70 sites, mainly in Europe. The
first patient in the RESTORE1 trial was enrolled in September
2005. RESTORE1 is fully enrolled and we expect to complete the
enrollment of RESTORE2 in the fall of 2007.
A number of standard supportive Phase 1 trials necessary for
successful registration of retigabine will start in 2007. In
March 2007 we initiated development of a sustained release
formulation of retigabine. In addition, in April 2007 we filed
an IND for the treatment of post herpetic neuralgia, a common
form of neuropathic pain. Following review, the FDA has allowed
Valeant to proceed with this Phase 2a clinical trial. We
anticipate that we will begin enrolling patients in September
2007.
Assuming successful completion of the Phase 3 trials and
approval by the FDA and European Medicines Agency, we expect to
launch retigabine in the United States and Europe in 2009. We
plan to seek a partner to share the investment and risk in the
development of retigabine. For the three months and six months
ended June 30, 2007, external research and development
expenses for retigabine were $10,494,000 and $19,196,000,
compared with $5,173,000 and $9,188,000 for the corresponding
periods in 2006.
34
Taribavirin: Taribavirin (formerly referred to
as Viramidine) is a nucleoside (guanosine) analog that is
converted into ribavirin by adenosine deaminase in the liver and
intestine. We are developing taribavirin in oral form for the
treatment of hepatitis C.
Preclinical studies indicated that taribavirin, a
liver-targeting analog of ribavirin, has antiviral and
immunological activities (properties) similar to ribavirin. In
2006, we reported the results of two pivotal Phase 3 trials for
taribavirin. The VISER (Viramidine Safety and Efficacy Versus
Ribavirin) trials included two co-primary endpoints: one for
safety (superiority to ribavirin in incidence of anemia) and one
for efficacy (non-inferiority to ribavirin in sustained viral
response, SVR). The results of the VISER trials met the safety
endpoint but did not meet the efficacy endpoint.
The studies demonstrated that
38-40 percent
of patients treated with taribavirin achieved SVR and that the
drug has a clear safety advantage over ribavirin, but that it
was not comparable to ribavirin in efficacy at the doses
studied. We believe that the results of the studies were
significantly impacted by the dosing methodology which employed
a fixed dose of taribavirin for all patients and a variable dose
of ribavirin based on a patients weight. Our analysis of
the study results leads us to believe that the dosage of
taribavirin, like ribavirin, likely needs to be based on a
patients weight to achieve efficacy equal or superior to
that of ribavirin. Additionally we think that higher doses of
taribavirin than those studied in the VISER program may be
necessary to achieve our efficacy objectives.
Based on our analysis, we initiated a Phase 2b study to evaluate
the efficacy of taribavirin at 20, 25 and 30 mg/kg in
combination with pegylated interferon. A ribavirin control arm
also is included in the study. The primary endpoint for the
study will be the week 12 analysis. If the results of the
12-week analysis are positive, we plan to select a dose and
initiate a large Phase 3 study. If we initiate a Phase 3 study,
we may seek a partner to share the investment and risk of this
larger development program.
The timeline and path to regulatory approval of taribavirin
remains uncertain at this time. The completion of another Phase
3 trial would add significantly to the drugs development
cost and the time it takes to complete development, whether or
not we are able to secure a development partner, thereby
delaying the commercial launch of taribavirin and possibly
weakening its position in relation to competing treatments. Our
external research and development expenses for taribavirin were
$1,935,000 and $3,522,000 for the three months and the six
months ended June 30, 2007, respectively, compared with
$4,548,000 and $11,238,000 for the corresponding periods in
2006, respectively.
Pradefovir: Pradefovir is a compound that we
licensed from Metabasis Therapeutics, Inc., or Metabasis, in
October 2001. We had been engaged in the development of this
compound into an oral
once-a-day
monotherapy for patients with chronic hepatitis B infection. We
completed Phase 1 and Phase 2 clinical trials of pradefovir. We
are in the process of collecting and analyzing data from a Phase
2 extension study in which we have discontinued dosing patients.
In January 2007, we licensed development and commercial rights
to pradefovir to Schering-Plough. Under the terms of the
assignment and license agreement, Schering-Plough made a cash
payment of $19,200,000 to Valeant and $1,800,000 to Metabasis
and agreed to pay additional cash fees to Valeant and Metabasis
upon the achievement of certain development and regulatory
milestones. Based on preliminary results of a
24-month
oral carcinogenicity study in mice and rats submitted to
Schering-Plough, we agreed in April 2007, at
Schering-Ploughs request, to discontinue dosing of all
patients in the pradefovir extension study as a precautionary
measure, pending further analysis of the data by the
Schering-Plough team. We notified the appropriate health
authorities and clinical investigators and will be initiating a
follow-up
registry. In July 2007, Schering-Plough notified us of their
intent to terminate this agreement and thereby return all
pradefovir development and marketing rights to Metabasis.
Other
Development Activities
Infergen: On December 30, 2005, we
completed the acquisition of the United States and Canadian
rights to the hepatitis C drug Infergen (interferon
alfacon-1) from InterMune. Infergen, or consensus interferon, is
a bio-optimized, selective and highly potent type 1 interferon
alpha originally developed by Amgen and launched in the United
States in 1997. It is indicated as monotherapy for the treatment
of adult patients suffering from chronic hepatitis C viral
infections with compensated liver disease who have not responded
to other treatments or have
35
relapsed after such treatment. Infergen is the only interferon
with data in the label regarding use in patients following
relapse or non-response to certain previous treatments.
In connection with this transaction, we acquired patent rights
and rights to a clinical trial then underway to expand the
labeled indications of Infergen. In the DIRECT trial (IHRC-001)
which started in the second quarter of 2004, 514 patients
were enrolled. All patients have now completed treatment and
follow-up.
Data analysis is still in process. We plan to present
preliminary results in late 2007. We reported 24-week and
48-week data from the trial at a scientific meeting in October
2006. The percent of patients who were virus negative at
end-of-treatment (treatment week 48) for the Infergen 9 mcg
and 15 mcg groups were 16 percent and 19 percent,
respectively (TMA Assay). Response rates at end-of-treatment
using the bDNA assay were 22 percent and 25 percent
for the Infergen 9 mcg and 15 mcg groups, respectively.
The second DIRECT trial (IHRC-002) has enrolled
144 patients of the possible 171. All patients have
completed the
follow-up
phase. The data is currently being processed in preparation for
analysis. We expect to report and publish the results from these
studies sometime in late 2007.
In March 2007, we initiated a Phase 4 study to evaluate the use
of Infergen 15 mcg/day plus ribavirin (1.0-1.2 g/day) in
patients who did not have an optimal response at 12 weeks
of treatment with pegylated interferon and ribavirin. The
multi-center, randomized U.S. study will enroll patients
who received initial treatment with pegylated interferon and
ribavirin and achieve a >2log 10 decline in HCV RNA at week
12 but still have detectable virus (partial
responders). The patients will be immediately randomized
to receive Infergen 15 mcg/day plus ribavirin (1.0-1.2 g/day)
for 36 or 48 weeks or continue on their pegylated
interferon and ribavirin regimen for an additional 36 weeks
of therapy. All treatment groups will have a 24-week follow up
period to measure sustained virologic response. Enrollment into
this study has now started.
For the three months and the six months ended June 30,
2007, external research and development expenses for Infergen
were $1,880,000 and $4,000,000, respectively, compared with
$889,000 and $2,750,000 for the corresponding periods in 2006,
respectively.
Cesamet: Cesamet (nabilone), a synthetic
cannabinoid, was approved by the FDA on May 15, 2006 for
the treatment of cancer chemotherapy-induced nausea and vomiting
(CINV) in patients who have failed to respond adequately to
conventional antiemetic treatments. We also market the product
in Canada for CINV. In recent years, there has been increasing
scientific and clinical evidence regarding the efficacy of
cannabinoids in different types of pain, including chronic
neuropathic pain. Certain chemotherapy regimens result in
neuropathic pain, with more than 90% of patients being affected.
We submitted an Investigational New Drug Application to the FDA
in January 2007, to evaluate Cesamet in the treatment of chronic
neuropathic pain associated with cancer chemotherapy. Study
start-up
activities are currently ongoing. We plan to start enrollment in
the fourth quarter of 2007.
Foreign
Operations
Approximately 72% and 70% of our revenues from continuing
operations, which includes royalties, for the six months
ended June 30, 2007 and 2006, respectively, were generated
from operations outside the United States. All of our foreign
operations are subject to risks inherent in conducting business
abroad, including possible nationalization or expropriation,
price and currency exchange controls, fluctuations in the
relative values of currencies, political instability and
restrictive governmental actions. Changes in the relative values
of currencies occur from time to time and may, in some
instances, materially affect our results of operations. The
effect of these risks remains difficult to predict.
Critical
Accounting Estimates
The consolidated condensed financial statements appearing
elsewhere in this quarterly report have been prepared in
conformity with accounting principles generally accepted in the
United States. The preparation of these statements requires us
to make estimates and assumptions that affect the reported
amounts of assets and liabilities, the disclosure of contingent
assets and liabilities at the date of the financial statements
and the reported amounts of revenues and expenses during the
reporting periods. On an on-going basis, we evaluate our
estimates, including
36
those related to product returns, collectibility of receivables,
inventories, intangible assets, income taxes and contingencies
and litigation. The actual results could differ materially from
those estimates.
We believe the following critical accounting policies affect our
more significant judgments and estimates used in the preparation
of our consolidated condensed financial statements.
Revenue
Recognition
We recognize revenues from product sales when title and risk of
ownership transfers to the customer. Revenues are recorded net
of provisions for rebates, discounts and returns, which are
estimated and recorded at the time of sale. Allowances for
future returns of products sold to our direct and indirect
customers, who include wholesalers, retail pharmacies and
hospitals, are calculated as a percent of sales based on
historical return percentages taking into account additional
available information on competitive products and contract
changes.
Our product sales are subject to a variety of deductions,
primarily representing rebates and discounts to government
agencies, wholesalers and managed care organizations. These
deductions represent estimates of the related obligations and,
as such, judgment is required when estimating the impact of
these sales deductions on revenues for a reporting period.
In the United States we record provisions for Medicaid and
contract rebates based upon our actual experience ratio of
rebates paid and actual prescriptions written during prior
quarters. We apply the experience ratio to the respective
periods sales to determine the rebate accrual and related
expense. This experience ratio is evaluated regularly and
adjusted if necessary to ensure that the historical trends are
as current as practicable. We adjust the ratio to better match
our current experience or our expected future experience, as
appropriate. In developing this ratio, we consider current
contract terms, such as changes in formulary status and discount
rates. Because our revenues in the United States include newly
acquired products and have increased significantly in the last
few years, ratios based on our historical experience may not be
indicative of future experience. If our ratio is not indicative
of future experience, our results could be materially affected.
Outside of the United States, the majority of our rebates are
contractual or legislatively mandated and our estimates are
based on actual invoiced sales within each period; both of these
elements help to reduce the risk of variations in the estimation
process. Some European countries base their rebates on the
governments unbudgeted pharmaceutical spending and we use
an estimated allocation factor against our actual invoiced sales
to project the expected level of reimbursement. We obtain third
party information that helps us to monitor the adequacy of these
accruals. If our estimates are not indicative of actual
unbudgeted spending, our results could be materially affected.
Historically, our adjustments to actual have not been material;
on a quarterly basis, they generally have been less than 5% of
product sales. The sensitivity of our estimates can vary by
program, type of customer and geographic location. However,
estimates associated with U.S. Medicaid, Medicare and
contract rebates are most at-risk for material adjustment
because of the extensive time delay between the recording of the
accrual and its ultimate settlement. This interval can exceed
twelve months. Because of this time lag, in any given quarter,
our adjustments to actual can incorporate revisions of several
prior quarters.
We record sales incentives as a reduction of revenues at the
time the related revenues are recorded or when the incentive is
offered, whichever is later. We estimate the cost of our sales
incentives based on our historical experience with similar
incentives programs.
In some markets customers have the right to return products to
us under certain conditions. Historically and in the three and
six-month periods ended June 30, 2007 and 2006, the
provision for sales returns was less than 3% of product sales.
We conduct a review of the current methodology and assess the
adequacy of the allowance for returns on a quarterly basis,
adjusting for changes in assumptions, historical results and
business practices, as necessary. We use third-party data, when
available, to estimate the level of product inventories,
expiration dating, and product demand at our major wholesalers.
Actual results could be materially different from our estimates,
resulting in future adjustments to revenue.
We earn ribavirin royalties as a result of sales of products by
third-party licensees, Schering-Plough and Roche. Ribavirin
royalties are earned at the time the products subject to the
royalty are sold by the third party and are
37
reduced by an estimate for discounts and rebates that will be
paid in subsequent periods for those products sold during the
current period. We rely on a limited amount of financial
information provided by Schering-Plough and Roche to estimate
the amounts due to us under the royalty agreements. In June
2007, we revised our estimate of ribavirin royalties receivable
from Schering-Plough, to incorporate certain historical data and
payment patterns. This revision increased the royalties recorded
in the three months and the six months ended June 30, 2007
by $620,000.
Sales
Incentives
In the U.S. market, our current practice is to offer sales
incentives primarily in connection with launches of new products
or changes of existing products where demand has not yet been
established. We monitor and restrict sales in the
U.S. market in order to limit wholesaler purchases in
excess of their ordinary-course-of-business inventory levels. We
operate Inventory Management Agreements (IMAs) with major
wholesalers in the United States. However, specific events such
as the case of sales incentives described above or seasonal
demand (e.g. antivirals during an outbreak) may justify larger
purchases by wholesalers. We may offer sales incentives
primarily in international markets, where typically no right of
return exists except for goods damaged in transit, product
recalls or replacement of existing products due to packaging or
labeling changes. Our revenue recognition policy on these types
of purchases and on incentives in international markets is
consistent with the policies described above.
Income
Taxes
Our income tax returns are subject to audit in various
jurisdictions. Existing and future audits by, or other disputes
with, tax authorities may not be resolved favorably for us and
could have a material adverse effect on our reported effective
tax rate and after-tax cash flows. We record liabilities based
on the recognition and measurement criteria of FIN 48,
which involves significant management judgment. New laws and new
interpretations of laws and rulings by tax authorities may
affect the liability for uncertain tax positions. Due to the
subjectivity and complex nature of the underlying issues, actual
payments or assessments may differ from our estimates. To the
extent that our estimates differ from amounts eventually
assessed and paid our income and cash flows can be materially
and adversely affected.
We assess whether it is more likely than not that we will
realize the tax benefits associated with our deferred tax assets
and establish a valuation allowance for assets that are not
expected to result in a realized tax benefit. A significant
amount of judgment is used in this process, including
preparation of forecasts of future taxable income and evaluation
of tax planning initiatives. If we revise these forecasts or
determine that certain planning events will not occur, an
adjustment to the valuation allowance will be made to tax
expense in the period such determination is made. We have
increased the valuation allowance significantly since 2004 to
recognize the uncertainty of realizing the benefits of the
U.S. net operating losses and research credits.
Impairment
of Property, Plant and Equipment
We evaluate the carrying value of property, plant and equipment
when conditions indicate a potential impairment. We determine
whether there has been impairment by comparing the anticipated
undiscounted future cash flows expected to be generated by the
property, plant and equipment with its carrying value. If the
undiscounted cash flows are less than the carrying value, the
amount of the impairment, if any, is then determined by
comparing the carrying value of the property, plant and
equipment with its fair value. Fair value is generally based on
a discounted cash flows analysis, independent appraisals or
preliminary offers from prospective buyers.
Valuation
of Intangible Assets
We periodically review intangible assets for impairment using an
undiscounted net cash flows approach. We determine whether there
has been impairment by comparing the anticipated undiscounted
future operating cash flows of the products associated with the
intangible asset with its carrying value. If the undiscounted
operating income is less than the carrying value, the amount of
the impairment, if any, will be determined by comparing the
value of each intangible asset with its fair value. Fair value
is generally based on a discounted cash flows analysis.
38
We use a discounted cash flow model to value acquired intangible
assets and for the assessment of impairment. The discounted cash
flow model requires assumptions about the timing and amount of
future cash inflows and outflows, risk, the cost of capital, and
terminal values. Each of these factors can significantly affect
the value of the intangible asset.
The estimates of future cash flows, based on reasonable and
supportable assumptions and projections, require
managements judgment. Any changes in key assumptions about
our businesses and their prospects, or changes in market
conditions, could result in an impairment charge. Some of the
more significant estimates and assumptions inherent in the
intangible asset impairment estimation process include: the
timing and amount of projected future cash flows; the discount
rate selected to measure the risks inherent in the future cash
flows; and the assessment of the assets life cycle and the
competitive trends impacting the asset, including consideration
of any technical, legal or regulatory trends.
Stock-based
Compensation Expense
We apply SFAS 123(R), which requires the measurement and
recognition of compensation expense for all share-based payment
awards made to our employees and directors, including employee
stock options and employee stock purchases related to the
Employee Stock Purchase Plan, based on estimated fair values.
Stock-based compensation expense recognized under
SFAS 123(R) for the six months ended June 30, 2007 was
$7,494,000, compared with $10,696,000 for the similar time
period in 2006. We adopted SFAS 123(R)on a prospective
basis and have not restated financial statements for prior years.
We estimate the value of employee stock options on the date of
grant using the Black-Scholes model. The determination of fair
value of share-based payment awards on the date of grant using
an option-pricing model is affected by our stock price as well
as assumptions regarding a number of highly complex and
subjective variables. These variables include, but are not
limited to the expected stock price volatility over the term of
the awards, and actual and projected employee stock option
exercise behaviors. The weighted-average estimated value of
employee stock options granted during the six months ended
June 30, 2007 and 2006 was $7.28 and $7.83, respectively,
determined using the Black-Scholes model and the following
weighted-average assumptions:
|
|
|
|
|
|
|
2007
|
|
2006
|
|
Average life of option (years)
|
|
5.73
|
|
4.10 - 5.80
|
Stock price volatility
|
|
35% - 36%
|
|
37% - 39%
|
Expected dividend per share
|
|
$0.00
|
|
$0.00 - $0.31
|
Risk-free interest rate
|
|
4.52% - 4.76%
|
|
4.54% - 4.80%
|
Weighted-average fair value of
options
|
|
$7.28
|
|
$7.83
|
As stock-based compensation expense recognized in the
consolidated statement of operations in 2007 and 2006 is based
on awards ultimately expected to vest, it has been reduced for
estimated forfeitures. SFAS 123(R) requires forfeitures to
be estimated at the time of grant and revised, if necessary, in
subsequent periods if actual forfeitures differ from those
estimates. Forfeitures were estimated based on historical
experience.
The total future compensation costs associated with employee
stock options and restricted stock awards that were outstanding
at June 30, 2007 is $17,960,000. This will be amortized to
expense as follows: $5,632,000 in the remaining quarters of
2007, $6,003,000 in 2008, $2,342,000 in 2009 and $728,000 in
2010 and thereafter.
If factors change and we employ different assumptions in the
application of SFAS 123(R) in future periods, the
compensation expense that we record under SFAS 123(R) may
differ significantly from what we have recorded in the current
period.
Contingencies
We are exposed to contingencies in the ordinary course of
business, such as legal proceedings and business-related claims
which range from product and environmental liabilities to tax
matters. In addition, we may have indemnification obligations,
including commitments to current and former directors in certain
circumstances. In accordance, with SFAS No. 5,
Accounting for Contingencies, we record accruals for such
contingencies when it is
39
probable that a liability will be incurred and the amount of
loss can be reasonably estimated. The estimates are refined each
accounting period, as additional information is known. See
Notes 10 and 12 of notes to consolidated condensed
financial statements for a discussion of contingencies.
We have purchase commitments to purchase inventory from certain
third party manufacturers and suppliers. These purchase
commitments include our agreements to purchase approximately
$20,000,000 in inventory of Infergen in the next 24 months.
These inventory purchases may exceed the amount of inventory
required to support the demand for the product, which may lead
to future inventory obsolescence charges.
Other
Financial Information
With respect to the unaudited condensed consolidated financial
information of Valeant Pharmaceutical International for the
three and six months ended June 30, 2007 and 2006,
PricewaterhouseCoopers LLP reported that they have applied
limited procedures in accordance with professional standards for
a review of such information. However, their report dated
August 7, 2007, appearing herein, states that they did not
audit and they do not express an opinion on that unaudited
condensed consolidated financial information. Accordingly, the
degree of reliance on their report on such information should be
restricted in light of the limited nature of the review
procedures applied. PricewaterhouseCoopers is not subject to the
liability provisions of Section 11 of the Securities Act of
1933 (the Act) for their report on the unaudited
condensed consolidated financial information because that report
is not a report or a part of a
registration statement prepared or certified by
PricewaterhouseCoopers within the meaning of Sections 7 and
11 of the Act.
Forward-Looking
Statements
Except for the historical information contained herein, the
matters addressed in Managements Discussion and
Analysis of Financial Condition and Results of Operations
and elsewhere in this quarterly report on
Form 10-Q
constitute forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933, as
amended and Section 21E of the Securities Exchange Act of
1934, as amended. These forward-looking statements are subject
to a variety of risks and uncertainties, including those
discussed below and elsewhere in this quarterly report on
Form 10-Q,
which could cause actual results to differ materially from those
anticipated by our management. Readers are cautioned not to
place undue reliance on any of these forward-looking statements,
which speak only as of the date of this report. We undertake no
obligation to update any of these forward-looking statements to
reflect events or circumstances after the date of this report or
to reflect actual outcomes.
Forward-looking statements may be identified by the use of the
words anticipates, expects,
intends, plans, and variations or
similar expressions. You should understand that various
important factors and assumptions, including those set forth
below, could cause our actual results to differ materially from
those anticipated in this report.
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The future growth of our business depends on the development and
approval of new products by us and our licensees, including
taribavirin and retigabine. The process of developing new drugs
has an inherent risk of failure. For example, product candidates
may turn out to be ineffective or unsafe in clinical testing;
their patent protection may become compromised; other therapies
may prove safer or more effective; or the prevalence of the
disease for which they are being developed may decrease. Our
inability to develop our products due to these or other factors
could have a material adverse effect on future revenues.
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We can protect our products from generic substitution by third
parties only to the extent that our technologies are covered by
valid and enforceable patents, are effectively maintained as
trade secrets or are protected by data exclusivity. However, our
pending or future patent applications may not issue as patents.
Any patent issued may be challenged, invalidated, held
unenforceable or circumvented. Furthermore, our patents may not
be sufficiently broad to prevent third parties competing
products. The expiration of patent protection for ribavirin has
resulted in significant competition from generic substitutes and
declining royalty revenues and may negatively impact future
financial results.
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Trade secret protection is less effective than patent protection
because competitors may discover our technology or develop
parallel technology.
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40
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The scope of protection afforded by a patent can be highly
uncertain. A pending claim or a result unfavorable to us in a
patent dispute may preclude development or commercialization of
products or impact sales of existing products, result in
cessation of royalty payments to us
and/or
result in payment of monetary damages.
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Obtaining drug approval in the United States and other countries
is costly and time consuming. Uncertainties and delays inherent
in the process can preclude or delay development and
commercialization of our products.
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Our relationships with wholesale distributors, including those
in Mexico, can affect sales results and, if there is a change in
any of these relationships, our results may not meet our
expectations.
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The successful commercialization of product candidates and the
conduct of clinical trials are subject to many risks, including
the ability to complete enrollment of the requisite number of
patients in clinical trials and to conclude clinical trials
within expected timeframes, adverse events that would require
clinical trials to be prematurely terminated, clinical results
that indicate continuing clinical and commercial pursuit of
clinical candidates is not advisable, and the fact that Phase 2
clinical trial results are not always indicative of those seen
in Phase 3 clinical trials.
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Our current business plan includes targeted expansion through
acquisitions of compatible businesses and product lines and the
formation of strategic alliances, joint ventures and other
business combinations, in addition to the development of new
products. If we are unable to successfully execute on our
expansion plans to find attractive acquisition candidates at
appropriate prices, and to integrate successfully any acquired
companies or products, the expected growth of our business may
be negatively affected.
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We and our competitors are always striving to develop products
that are more effective, safer, more easily tolerated or less
costly. If our competitors succeed in developing better
alternatives to our current products before we do, we will lose
sales and revenues to their alternative products. If vaccines
are introduced to prevent the diseases treated by our products,
our potential sales and revenues will decrease.
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The pharmaceutical industry is subject to substantial government
regulation, including the approval of new pharmaceutical
products, labeling, advertising and, in most countries, pricing,
as well as inspection and approval of manufacturing facilities.
The costs of complying with these regulations are high, and
failure to comply could result in fines or interruption in our
business.
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We collect and pay a substantial portion of our sales and
expenditures in currencies other than the U.S. dollar. As a
result, fluctuations in foreign currency exchange rates affect
our operating results. Additionally, future exchange rate
movements, inflation or other related factors may have a
material adverse effect on our sales, gross profit or operating
expenses.
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A significant part of our revenue is derived from products
manufactured by third parties. We rely on their quality level,
compliance with the FDA regulations or similar regulatory
requirements enforced by regulatory agencies in other countries
and continuity of supply. Any failure by them in these areas
could disrupt our product supply and negatively impact our
revenues.
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Our flexibility in maximizing commercialization opportunities
for our compounds may be limited by our obligations to
Schering-Plough. In November 2000, we entered into an agreement
that provides Schering-Plough with an option to acquire the
rights to up to three of our products intended to treat
hepatitis C that Schering-Plough designates prior to our
entering Phase 2 clinical trials and a right for first/last
refusal to license various compounds we may develop and elect to
license to others. Taribavirin was not subject to the option of
Schering-Plough, but it would be subject to their right of
first/last refusal if we elected to license it to a third party.
The interest of potential collaborators in obtaining rights to
our compounds or the terms of any agreement we ultimately enter
into for these rights may be hindered by our agreement with
Schering-Plough.
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To purchase our products, many patients rely on reimbursement by
third party payors such as insurance companies, HMOs and
government agencies. These third party payors are increasingly
attempting to contain costs by limiting both coverage and the
level of reimbursement of new drug products. The reimbursement
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41
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levels established by third party payors in the future may not
be sufficient for us to realize an appropriate return on our
investment in product development and our continued manufacture
and sale of existing drugs.
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All drugs have potential harmful side effects and can expose
drug manufacturers and distributors to liability. In the event
one or more of our products is found to have harmed an
individual or individuals, we may be responsible for paying all
or substantially all damages awarded. A successful product
liability claim against us could have a material negative impact
on our financial position and results of operations.
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Our debt agreements permit us to incur additional debt, subject
to certain restrictions, but there is no guaranty that we will
actually be able to borrow any money should the need for it
arise.
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We are involved in several legal proceedings, including those
described in Note 9 to notes to consolidated condensed
financial statements, any of which could result in substantial
cost and divert managements attention and resources.
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Our stockholder rights plan, provisions of our certificate of
incorporation and provisions of the Delaware General Corporation
Law could provide our Board of Directors with the ability to
deter hostile takeovers or delay, deter or prevent a change in
control of our company, including transactions in which
stockholders might otherwise receive a premium for their shares
over then current market prices.
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We are authorized to issue, without stockholder approval,
approximately 10,000,000 shares of preferred stock,
200,000,000 shares of common stock and securities
convertible into either shares of common stock or preferred
stock. If we issue additional equity securities, the price of
our securities may be materially and adversely affected. The
Board of Directors can also use issuances of preferred or common
stock to deter a hostile takeover or change in control of our
company.
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We are subject to a consent order with the Securities and
Exchange Commission, which permanently enjoins us from violating
securities laws and regulations. The consent order also
precludes protection for forward-looking statements under the
safe harbor provisions of the Private Securities Litigation
Reform Act of 1995 with respect to forward-looking statements we
made prior to November 28, 2005. The existence of the
permanent injunction under the consent order, and the lack of
protection under the safe harbor with respect to forward-looking
statements made prior to November 28, 2005 may limit
our ability to defend against future allegations.
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Item 3.
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Quantitative
and Qualitative Disclosures About Market Risk
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Our business and financial results are affected by fluctuations
in world financial markets. We evaluate our exposure to such
risks on an ongoing basis, and seek ways to manage these risks
to an acceptable level, based on managements judgment of
the appropriate trade-off between risk, opportunity and cost. We
do not hold any significant amount of market risk sensitive
instruments whose value is subject to market price risk. Our
significant foreign currency exposure relates to the Euro, the
Mexican Peso, the Polish Zloty, the Swiss Franc, the Canadian
Dollar, and the Japanese Yen. We seek to manage our foreign
currency exposure through operational means by managing local
currency revenues in relation to local currency costs. We take
steps to mitigate the impact of foreign currency on the income
statement, which include hedging our foreign currency exposure.
In the normal course of business, we also face risks that are
either non-financial or non-quantifiable. Such risks principally
include country risk, credit risk and legal risk and are not
discussed or quantified in the following analysis. At
June 30, 2007, the fair values of the Companys
financial instruments were as follows (in thousands):
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Notional/
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Assets (Liabilities)
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Contract
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Carrying
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Fair
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Description
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Amount
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Value
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Value
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Forward contracts
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$
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68,939
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$
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208
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$
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208
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Interest rate swaps
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150,000
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(6,006
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)
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(6,006
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)
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Outstanding fixed-rate debt
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|
780,000
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|
(780,000
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)
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(741,438
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)
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42
In June 2007, we established hedges of the net investment in our
Mexico based subsidiaries in a total amount of approximately
$27 million USD equivalent. These hedges reduce the impact
of potential translation on USD denominated cash and investments
held by these Mexico based subsidiaries.
We currently do not hold financial instruments for trading or
speculative purposes. Our financial assets are not subject to
significant interest rate risk due to their short duration. At
June 30, 2007, we did not have foreign denominated variable
rate debt that would be subject to both interest rate and
currency risks. A 100 basis-point increase in interest rates
affecting our financial instruments would not have had a
material effect on our second quarter 2007 pretax earnings. In
addition, we have $780,000,000 of fixed rate debt as of
June 30, 2007, that requires U.S. dollar repayment. To
the extent that we require, as a source of debt repayment,
earnings and cash flow from some of our subsidiary units located
in foreign countries, we are subject to risk of changes in the
value of certain currencies relative to the U.S. dollar.
However, the increase of 100 basis-points in interest rates
would have reduced the fair value of our remaining fixed-rate
debt instruments by approximately $23,300,000 as of
June 30, 2007.
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Item 4.
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Controls
and Procedures
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We maintain disclosure controls and procedures that are designed
to ensure that information required to be disclosed in our
Exchange Act reports is recorded, processed, summarized and
reported within the time periods specified in the SECs
rules and forms and that such information is accumulated and
communicated to our management, including the Chief Executive
Officer and Chief Financial Officer, as appropriate, to allow
timely decisions regarding required disclosure. In designing and
evaluating the disclosure controls and procedures, we recognize
that any controls and procedures, no matter how well designed
and operated, can provide only reasonable assurance of achieving
the desired control objectives, and that we necessarily are
required to apply our judgment in evaluating the cost-benefit
relationship of possible controls and procedures.
As of June 30, 2007, we conducted an evaluation of the
effectiveness of the design and operation of our disclosure
controls and procedures (as defined in
Rule 13a-15(c)
under the Securities Exchange Act of 1934). This evaluation was
carried out under the supervision and with the participation of
our management, including the Chief Executive Officer and Chief
Financial Officer. Based upon the foregoing, our Chief Executive
Officer and Chief Financial Officer concluded that our
disclosure controls and procedures were effective at the
reasonable assurance level.
There has been no change in our internal controls over financial
reporting that occurred during the six months ended
June 30, 2007 that has materially affected, or is
reasonably likely to materially affect, the internal controls
over financial reporting.
PART II
OTHER INFORMATION
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Item 1.
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Legal
Proceedings
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See Note 9 of notes to consolidated condensed financial
statements in Item 1 of Part I of this quarterly
report, which is incorporated herein by reference.
Our Annual Report on
Form 10-K
for the year ended December 31, 2006 includes a detailed
discussion of our risk factors. Pursuant to the instructions to
Form 10-Q,
we have provided below only those risk factors that are new or
that have been materially amended since the time that we filed
our most recent Annual Report on
Form 10-K.
Accordingly, the information presented below should be read in
conjunction with the risk factors and information disclosed in
our most recent
Form 10-K
and the other risks described in this
Form 10-Q.
If we,
our partners or licensees cannot successfully develop or obtain
future products and commercialize those products, our growth
would be delayed.
Our future growth will depend, in large part, upon our ability
or the ability of our partners or licensees to develop or obtain
and commercialize new products and new formulations of, or
indications for, current products.
43
We are engaged in an active development program involving
compounds owned by us or licensed from others which we may
commercially develop in the future. We are in clinical trials
for taribavirin and retigabine. Partners or licensees may also
help us develop these and other product candidates in the future
and are responsible for developing other product candidates,
such as pradefovir, that have been licensed to them. The process
of successfully commercializing products is time consuming,
expensive and unpredictable. There can be no assurance that we,
our partners or our licensees will be able to develop or acquire
new products, successfully complete clinical trials, obtain
regulatory approvals to use these products for proposed or new
clinical indications, manufacture the potential products in
compliance with regulatory requirements or in commercial
volumes, or gain market acceptance for such products. In
addition, changes in regulatory policy for product approval
during the period of product development and regulatory agency
review of each submitted new application may cause delays or
rejections. It may be necessary for us to enter into other
licensing arrangements, similar to our ribavirin arrangements
with Schering-Plough and Roche, with other pharmaceutical
companies in order to market effectively any new products or new
indications for existing products. There can be no assurance
that we will be successful in entering into such licensing
arrangements on terms favorable to us or at all.
There can be no assurance that the clinical trials of any of our
product candidates, including taribavirin and retigabine, or
those of our licensees, including pradefovir, will be
successful, that the product candidates will be granted approval
to be marketed for any of the indications being sought or that
any of the product candidates will result in a commercially
successful product.
The
current SEC investigation could adversely affect our business
and the trading price of our securities.
The SEC is conducting an investigation regarding events and
circumstances surrounding trading in our common stock and the
public release of data from our first pivotal Phase 3 trial for
taribavirin. In addition, the SEC requested data regarding our
stock option grants since January 1, 2000 and information
about our pursuit in the Delaware Chancery Court of the return
of certain bonuses paid to Milan Panic, the former chairman and
chief executive officer, and others. In September 2006, our
board of directors established the Special Committee to review
our historical stock option practices and related accounting.
The Special Committee concluded its investigation in January
2007. We have briefed the SEC with the results of the Special
Committees investigation. We have cooperated fully and
will continue to cooperate with the SEC on its investigation. We
cannot predict the outcome of the investigation. In the event
that the investigation leads to SEC action against any current
or former officer or director, our business (including our
ability to complete financing transactions) and the trading
price of our securities may be adversely impacted. In addition,
if the SEC investigation continues for a prolonged period of
time, it may have an adverse impact on our business or the
trading price of our securities regardless of the ultimate
outcome of the investigation. In addition, the SEC inquiry has
resulted in the incurrence of significant legal expenses and the
diversion of managements attention from our business, and
this may continue, or increase, until the investigation is
concluded.
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Item 4.
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Submission
of Matters to a Vote of Security Holders
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At our 2007 Annual Meeting of Stockholders held on May 22,
2007 (the Annual Meeting), our stockholders elected
Norma Ann Provencio, Timothy C. Tyson and Elaine Ullian as
directors to serve until our 2010 annual meeting of stockholders
or until his or her respective successor is elected and
qualified. The term of office for the following directors whose
terms expire at our 2008 annual meeting continued after the
Annual Meeting: Richard H. Koppes and G. Mason Morfit.
The term of office for the following directors whose terms
expire at our 2009 annual meeting continued after the Annual
Meeting: Robert A. Ingram, Lawrence N. Kugelman and
Theo Melas-Kyriazi.
44
In addition, at the Annual Meeting, our stockholders voted to
ratify the appointment of PricewaterhouseCoopers LLP as our
independent registered public accounting firm for our fiscal
year ending December 31, 2007.
Voting at the Annual Meeting was as follows:
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Votes Cast
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Votes Cast
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|
Votes
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|
Votes
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|
Matter
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|
For
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Against
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Withheld
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Abstain
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Election of Norma Ann Provencio
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83,821,014
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4,103,730
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Election of Timothy C. Tyson
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76,418,928
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11,505,815
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Election of Elaine Ullian
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74,359,310
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13,565,433
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|
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|
|
|
Ratification of Appointment of
Pricewaterhouse Coopers LLP
|
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|
77,800,833
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|
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|
10,081,356
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|
|
|
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42,553
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Exhibit
|
|
|
|
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3
|
.1
|
|
Restated Certificate of
Incorporation, as amended to date, previously filed as
Exhibit 3.1 to the Registrants
Form 10-Q
for the quarter ended September 30, 2003, which is
incorporated herein by reference.
|
|
3
|
.2
|
|
Certificate of Designation,
Preferences and Rights of Series A Participating Preferred
Stock previously filed as Exhibit 3.1 to the
Registrants Current Report on
Form 8-K,
dated October 6, 2004, which is incorporated herein by
reference.
|
|
3
|
.3
|
|
Amended and Restated Bylaws of the
Registrant previously filed as Exhibit 3.1 to the
Registrants Current Report on
Form 8-K,
dated November 6, 2006, which is incorporated herein by
reference.
|
|
10
|
.1
|
|
Form of Restricted Stock Unit
Award Grant Notice for Directors
|
|
10
|
.2
|
|
Form of Restricted Stock Unit
Award Agreement for Directors
|
|
15
|
.1
|
|
Review Report of Independent
Registered Public Accounting Firm.
|
|
15
|
.2
|
|
Awareness Letter of Independent
Registered Public Accounting Firm.
|
|
31
|
.1
|
|
Certification of Chief Executive
Officer pursuant to
Rule 13a-14(a)
under the Exchange Act and Section 302 of the
Sarbanes-Oxley Act of 2002.
|
|
31
|
.2
|
|
Certification of Chief Financial
Officer pursuant to
Rule 13a-14(a)
under the Exchange Act and Section 302 of the
Sarbanes-Oxley Act of 2002.
|
|
32
|
.1
|
|
Certification of Chief Executive
Officer and Chief Financial Officer of Periodic Financial
Reports pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002, 18 U.S.C. § 1350.
|
45
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this quarterly report on
Form 10-Q
to be signed on its behalf by the undersigned thereunto duly
authorized.
Valeant Pharmaceuticals
International
Registrant
Timothy C. Tyson
President and Chief Executive Officer
Date: August 7, 2007
Peter J. Blott
Executive Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)
Date: August 7, 2007
46
EXHIBIT INDEX
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|
|
|
|
Exhibit
|
|
|
|
|
3
|
.1
|
|
Restated Certificate of
Incorporation, as amended to date, previously filed as
Exhibit 3.1 to the Registrants
Form 10-Q
for the quarter ended September 30, 2003, which is
incorporated herein by reference.
|
|
3
|
.2
|
|
Certificate of Designation,
Preferences and Rights of Series A Participating Preferred
Stock previously filed as Exhibit 3.1 to the
Registrants Current Report on
Form 8-K,
dated October 6, 2004, which is incorporated herein by
reference.
|
|
3
|
.3
|
|
Amended and Restated Bylaws of the
Registrant previously filed as Exhibit 3.1 to the
Registrants Current Report on
Form 8-K,
dated November 6, 2006, which is incorporated herein by
reference.
|
|
10
|
.1
|
|
Form of Restricted Stock Unit
Award Grant Notice for Directors
|
|
10
|
.2
|
|
Form of Restricted Stock Unit
Award Agreement for Directors
|
|
15
|
.1
|
|
Review Report of Independent
Registered Public Accounting Firm.
|
|
15
|
.2
|
|
Awareness Letter of Independent
Registered Public Accounting Firm.
|
|
31
|
.1
|
|
Certification of Chief Executive
Officer pursuant to Rule
13a-14(a)
under the Exchange Act and Section 302 of the
Sarbanes-Oxley Act of 2002.
|
|
31
|
.2
|
|
Certification of Chief Financial
Officer pursuant to Rule
13a-14(a)
under the Exchange Act and Section 302 of the
Sarbanes-Oxley Act of 2002.
|
|
32
|
.1
|
|
Certification of Chief Executive
Officer and Chief Financial Officer of Periodic Financial
Reports pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002, 18 U.S.C. § 1350.
|